10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

For Fiscal Year Ended December 31, 2006

Commission File Number 0-16421

PROVIDENT BANKSHARES CORPORATION

(Exact Name of Registrant as Specified in its Charter)

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

114 East Lexington Street, Baltimore, Maryland 21202

(Address of Principal Executive Offices)

(410) 277-7000

(Registrant’s Telephone Number, Including Area Code)

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

Title of each class

Common Stock, par value $1.00 per share

Name of each exchange on which registered

The Nasdaq Global Select Market

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  ¨    No  x

        Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this Chapter) 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.  ¨

        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 accelerate filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x Accelerated filer  ¨ Non-accelerated filer  ¨

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

        The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant upon the closing price of such common equity as of last business day of most recently completed second fiscal quarter was $1,172,270,917. For purposes of this calculation, officers and directors of the Registrant are considered affiliates.

        At February 26, 2007, the Registrant had 32,211,584 shares of $1.00 par value common stock outstanding.

Documents Incorporated by Reference

        Portions of the Proxy Statement for the 2007 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K.

TABLE OF CONTENTS

		Page
PART I
Item 1.	Business	3
Item 1A.	Risk Factors	10
Item 1B.	Unresolved Staff Comments	12
Item 2.	Properties	12
Item 3.	Legal Proceedings	12
Item 4.	Submission of Matters to a Vote of Security Holders	12
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	13
Item 6.	Selected Financial Data	14
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 8.	Financial Statements and Supplementary Data	37
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	75
Item 9A.	Controls and Procedures	75
Item 9B.	Other Information	76
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	76
Item 11.	Executive Compensation	76
Item 12.	Security Ownership of Certain Beneficial Owners and Management	77
Item 13.	Certain Relationships and Related Transactions, and Director Independence	78
Item 14.	Principal Accountant Fees and Services	78
PART IV
Item 15.	Exhibits and Financial Statement Schedules	79
Signatures		81

1

Forward-looking Statements

This report, as well as other written communications made from time to time by Provident Bankshares Corporation and its subsidiaries (the “Corporation”) (including, without limitation, the Corporation’s 2006 Annual Report to Stockholders) and oral communications made from time to time by authorized officers of the Corporation, may contain statements relating to the future results of the Corporation (including certain projections and business trends) that are considered “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). Such forward-looking statements may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “intend” and “potential.” Examples of forward-looking statements include, but are not limited to, possible or assumed estimates with respect to the financial condition, expected or anticipated revenue, and results of operations and business of the Corporation, including earnings growth determined using U.S. generally accepted accounting principles (“GAAP”); revenue growth in retail banking, lending and other areas; origination volume in the Corporation’s consumer, commercial and other lending businesses; asset quality and levels of non-performing assets; current and future capital management programs; non-interest income levels, including fees from services and product sales; tangible capital generation; market share; expense levels; and other business operations and strategies. For these statements, the Corporation claims the protection of the safe harbor for forward-looking statements contained in the PSLRA.

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

2

PART I

Item 1. Business

General

Provident Bankshares Corporation (“the Corporation”), a Maryland corporation, is the bank holding company for Provident Bank (“Provident” or “the Bank”), a Maryland chartered stock commercial bank. At December 31, 2006, the Bank is currently the second largest independent commercial bank (based on the FDIC market share report), in asset size, headquartered in Maryland, with $6.3 billion in assets. Provident is a regional bank serving Maryland and Virginia, with emphasis on the key urban centers serving the Baltimore, Washington, D.C. and Richmond metropolitan areas.

Provident’s principal business is to acquire deposits from individuals and businesses and to use these deposits to fund loans to individuals and businesses. Provident also offers related financial services through wholly owned subsidiaries. Securities brokerage, investment management and related insurance services are available through Provident Investment Company (“PIC”) and leases through Court Square Leasing and Provident Lease Corporation.

Available Information

The Corporation’s Internet website is www.provbank.com. The Corporation makes available free of charge on or through its website its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after the Corporation electronically files such material with, or furnishes it to, the Securities and Exchange Commission (“SEC”).

Market Area

With banking offices throughout central Maryland and a growing presence in Virginia, Provident serves one of the most vibrant regions in the country. As of June 30, 2006 (the most recently available statewide deposit share data report from the FDIC), Provident ranked eighth among commercial banks operating in Maryland with a 3.76% share of statewide deposits and twenty-fourth in Virginia with a 0.36% market share.

Metropolitan Baltimore is a regional center for the shipping and trucking industries given its deepwater harbor and proximity to Interstate 95. As a consequence, it is also a major provider of warehouse operations for retail distribution and logistics providers. More importantly, this metropolitan area is diversifying from a blue-collar to a white-collar business environment. It is gaining from such major employers as Johns Hopkins University and Health Systems, Northrop Grumman, Verizon, Constellation Energy and the University of Maryland Medical Systems.

To complement its presence in the attractive Maryland market, Provident has expanded into Virginia. Northern Virginia is the fastest growing area in Virginia and is home to nearly 2.4 million people. The technology sector, one of the largest in the United States, has been growing vigorously in the region. Residential construction continues to highlight Northern Virginia’s economic strengths. At nearly $73,500, the Northern Virginia region also has one of the highest median incomes in the country based on information obtained from the U.S. Bureau of the Census.

Important to both Maryland and Virginia is the accessibility to other key neighboring markets such as Philadelphia, New York City and Pittsburgh, as well as the ports in Baltimore and Norfolk. In addition, the Baltimore-Washington corridor gains from the presence and employment stability of the federal government and related service industries. The market has benefited from increased federal spending, particularly in the defense and homeland security sectors. In addition, the region stands to expand economically through anticipated growth in health care and educational spending in the near term.

Maryland’s economy is performing at or above national levels, based on the most current data on unemployment and job growth. As a result of the announcement of Base Realignment and Closure 2005 from the U.S. Department of Defense, Maryland would gain nearly 16,000 military and civilian relocations in the near future. In addition, Maryland has the third (U.S. Bureau of the Census) highest median family income at $56,763 in the country.

Business Strategy

Provident is well positioned in its region to provide the products and services of its largest competitors, while delivering the level of service provided by the best community banks. Over the past several years, the Corporation’s focus has been on the consistent execution of a group of fundamental business strategies: to broaden its presence and customer base in the Virginia and metropolitan Washington D.C. markets; to grow its commercial business in all of its markets; to focus its resources in core business lines; and to improve financial fundamentals.

3

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

Maximize Provident’s position as the right size bank in the marketplace. Provident’s position as the second largest bank headquartered in Maryland provides a unique opportunity as the “right size” bank in its market areas, or footprint. The Bank provides the service of a community bank combined with the convenience and wide array of products and services that a strong regional bank offers. In addition, the 64 in-store banking offices throughout its footprint reinforce its right size strategy through convenient locations, hours and a full line of products and services. Provident currently has 155 banking offices concentrated in the Baltimore-Washington, D.C. corridor and beyond to Richmond, Virginia. Of the 155 banking offices, 46% are located in the Greater Baltimore region and 54% are located in the Greater Washington, D.C. and Central Virginia regions, reflecting the successful development of the Bank into a highly competitive regional commercial bank. Provident also offers its customers 24-hour banking services through ATMs, telephone banking and the Internet. The Bank’s network of 252 ATMs enhances the banking office network by providing customers increased opportunities to access their funds. In addition, the Bank is a member of the MoneyPass network which provides more than 11,000 ATMs nationwide to our customers with free access.

Profitably grow and deepen customer relationships in all four key market segments: Commercial, Commercial Real Estate, Consumer and Small Business. Consumer banking continues to be an important component of the Bank’s strategic priorities. Consumer banking services include a broad array of consumer and small business loans, leases, deposits and investment products offered to consumer and commercial customers through Provident’s banking office network and ProvidentDirect, the Bank’s direct channel sales center. The small business segment is further supported by relationship managers who provide comprehensive business product and sales support to expand existing customer relationships and acquire new clients. Commercial banking is the other key component of the Corporation’s regional presence in its market area. The Commercial Banking group provides customized banking solutions to middle market commercial and real estate customers. The Bank has an experienced team of relationship managers with expertise in real estate and business lending to companies in various industries in the region. It also has a suite of cash management products managed by responsive account teams that deepen customer relationships through competitively priced deposit based services, responsive service and maintenance of frequent personal contact with each customer.

Consistently execute a higher-performance, customer relationship-focused sales culture. The Corporation’s transition to a customer relationship driven sales culture requires deepening relationships through cross-selling and the continuing emphasis on retention of valued customers. The Bank has segmented its customers to better understand and anticipate their financial needs and provide Provident’s sales force with a targeted approach to customers and prospects. The successful execution of this strategic priority will be centered on the right size bank commitment—providing the service of a community bank combined with the convenience and wide array of products and services that a strong regional bank offers.

Sustain a culture that attracts and retains employees who provide the differentiating “Provident Way” customer experience. Provident has always placed a high priority on its employees and has approached employee development and training with renewed emphasis. Employee development is viewed as a critical part of executing Provident’s strategic priority as the right size bank and transforming the Corporation’s sales culture with a focus on the employee’s development and approach with Provident’s customers.

Expand delivery (branch and non-branch) within the market Provident serves; supplement with acquisitions within a pricing discipline. Provident continues to evaluate expansion opportunities within the regions that it serves. In addition, Provident will supplement growth opportunities with acquisitions if it is a strategic fit and is within the Corporation’s pricing model.

The Corporation offers consumer and commercial banking products and services through the Consumer Banking group and the Commercial Banking group. Consumer Banking Group’s services include a broad array of consumer and small business loan, lease, deposit and investment products offered to retail and commercial customers through Provident’s banking office network and ProvidentDirect, the Bank’s direct channel sales center that serves consumers via the Internet and in-bound and out-bound telephone operations. The small business segment is further supported by relationship managers who provide comprehensive business product and sales support to expand existing customer relationships and acquire new clients. The Commercial Banking Group provides an array of commercial financial services to middle market commercial customers. The Bank has an experienced team of relationship officers with expertise in real estate and business lending to companies in various industries in the region. The Real Estate Lending Group provides the lending expertise for construction and permanent financing options for a variety of property types, including, office buildings, retail centers, apartment buildings, warehouse and flex space. The Bank also has a suite of cash management products managed by responsive account teams that deepen customer relationships through competitively priced deposit based services.

4

The cornerstone of the Bank’s ability to serve its customers is its banking office network, which consists of 91 traditional banking office locations and 64 in-store banking offices at December 31, 2006. Today, the network of 64 in-store banking offices is located in a broad range of supermarkets and national retail superstores. The Bank’s primary agreements are with four premier store partners: SUPERVALU to operate banking offices in their Shoppers Food Warehouse supermarkets in Maryland and Virginia, WalMart and BJs Wholesale Club to operate banking offices in selected Baltimore and Washington, D.C. metropolitan stores, and SuperFresh to operate banking offices in selected Maryland stores. During 2006, Provident opened three new in-store banking offices and one traditional banking office, while closing one traditional office. Additional banking office opportunities complementary to existing locations may be sought when the cost of entry is reasonable. The Bank has several new banking offices in various stages of planning. The consolidation or closure of branches will occur when limited growth opportunities are present.

Lending Activities

Loan Composition

Provident offers a diversified mix of residential and commercial real estate, business and consumer loans and leases. The following table sets forth information concerning the Bank’s loan portfolio by type of loan at December 31.

Loan Portfolio Summary:

(dollars in thousands)	2006		%		2005		%		2004		%		2003		%		2002		%
Residential real estate:
Originated & acquired residential mortgage	$	333,568	8.6	%	$	452,853	12.2	%	$	660,949	18.5	%	$	689,321	24.7	%	$	714,192	27.8	%
Home equity		991,327	25.7			900,985	24.4			705,126	19.8			505,465	18.2			373,317	14.6
Other consumer:
Marine		374,624	9.7			412,643	11.2			436,262	12.3			464,474	16.7			418,966	16.4
Other		28,455	0.7			32,793	0.9			42,121	1.2			49,721	1.8			88,868	3.5
Total consumer		1,727,974	44.7			1,799,274	48.7			1,844,458	51.8			1,708,981	61.4			1,595,343	62.3
Commercial real estate:
Commercial mortgage		445,563	11.5			485,743	13.1			483,636	13.6			318,436	11.4			231,079	9.0
Residential construction		599,275	15.5			414,803	11.2			242,246	6.8			161,932	5.8			119,732	4.7
Commercial construction		357,594	9.3			312,399	8.5			279,347	7.8			208,594	7.5			238,344	9.3
Commercial business		735,086	19.0			683,162	18.5			710,193	20.0			386,603	13.9			376,065	14.7
Total commercial		2,137,518	55.3			1,896,107	51.3			1,715,422	48.2			1,075,565	38.6			965,220	37.7
Total loans	$	3,865,492	100.0	%	$	3,695,381	100.0	%	$	3,559,880	100.0	%	$	2,784,546	100.0	%	$	2,560,563	100.0	%

Contractual Loan Principal Repayments

The following table presents contractual loan maturities and interest rate sensitivity at December 31, 2006. The cash flow from loans is expected to significantly exceed contractual maturities due to refinances and early payoffs.

Loan Maturities and Rate Sensitivity:

(dollars in thousands)	In One Year or Less		After One Year through Five Years		After Five Years		Total		Percent of Total
Loan maturities:
Consumer	$	101,012	$	409,011	$	1,217,951	$	1,727,974	44.7	%
Commercial real estate:
Commercial mortgage		93,327		190,749		161,487		445,563	11.5
Residential construction		332,224		266,086		965		599,275	15.5
Commercial construction		156,860		171,586		29,148		357,594	9.3
Commercial business		153,298		334,147		247,641		735,086	19.0
Total loans	$	836,721	$	1,371,579	$	1,657,192	$	3,865,492	100.0	%
Rate sensitivity:
Predetermined rate	$	192,617	$	521,812	$	983,708	$	1,698,137	43.9	%
Variable or adjustable rate		644,104		849,767		673,484		2,167,355	56.1
Total loans	$	836,721	$	1,371,579	$	1,657,192	$	3,865,492	100.0	%

5

Consumer Lending

A wide range of loans including installment loans secured by real estate, boats, or automobiles, home equity lines, and unsecured personal lines of credit are available to consumers. At December 31, 2006, consumer loans represented 44.7% of the total loan portfolio as compared to 48.7% at December 31, 2005. Of these loans, 76.7% are secured by residential real estate, 21.7% by boats, and 1.6% are unsecured.

The banking office network, ProvidentDirect and the internet are the origination sources for new home equity loans and lines and other direct consumer loans, represent 25.7% of total loans as compared to 24.4% at December 31, 2005. For the origination of marine loans, representing 9.7% of total loans, the Bank utilizes a network of correspondent brokers as the source of loan applications from key boating areas across the country. Provident individually underwrites each consumer loan, including both credit and loan to value considerations.

Over the past several years, the Bank has increased its credit quality requirements for new acquisitions and shifted its lien position focus from predominantly second lien position to entirely first lien position. At December 31, 2006, approximately 86% of the acquired portfolio was in first lien position. Over the past 12 months, the Bank purchased only $5.5 million in residential loans. Strategically, management intends to reduce this wholesale portfolio and replace it with internally generated loan production.

The residential real estate mortgage portfolio consists primarily of loans originated by a subsidiary of the Bank prior to 2001, or acquired through a merger in 2004. The Bank currently provides mortgages to its consumer customers through a third party loan processor, and retains only a small percentage of the mortgages originated from that process. At December 31, 2006, the portfolio of residential real estate mortgage loans represented 3.5% of consumer loans as compared to 3.8% at December 31, 2005.

Commercial Real Estate Lending

The Bank’s commercial real estate lending focus has been on financing commercial and residential construction, as well as on intermediate-term commercial mortgages. Properties securing these loans include office buildings, shopping centers, apartment complexes, warehouses, hotels and tract developments. These portfolios grew 15.6% in 2006 to $1.4 billion at December 31, 2006, or 36.3% of total loans compared to $1.2 billion at December 31, 2005. In 2006, the residential construction portfolio grew $184.5 million, or 44.0% and the commercial construction portfolio grew $45.2 million, or 4.5%. This growth was offset by the decline in the commercial mortgage portfolio of $40 million, or 8.3%.

Commercial Business Lending

Provident makes business loans primarily to small and medium sized businesses in the Greater Baltimore, Greater Washington, D.C. and Central Virginia regions. Within this context, the Bank is well diversified from an industry perspective with no major concentrations in any industry. At December 31, 2006, commercial business loans represent 19.0% of the Bank’s total loans as compared to 18.5% at December 31, 2005, and consist of term loans, equipment leases and revolving lines of credit for the purpose of current asset financing, equipment purchases, owner occupied real estate financing and business expansion. Commercial business loans are originated directly from offices in Baltimore City and Montgomery County, Maryland, Fairfax County and Richmond, Virginia, as well as the Bank’s banking office network. Leases originated by Court Square Leasing, which utilizes a network of vendors to source small equipment leases, and Provident Lease Corporation, which originates general equipment leases, represented 17.2% and 17.9% of the commercial business portfolio at December 31, 2006 and 2005, respectively.

Other Lending

At December 31, 2006, the Bank had $80.0 million of loans syndicated by other financial institutions, which qualified as a shared national credit, of which $54.9 million was included in commercial business loans and $25.1 million was included in commercial real estate loans. The Bank has no exposure to highly leveraged transactions (“HLTs”), which are loans to borrowers for the purpose of purchasing or recapitalizing a business in which the loans represent a majority of the borrower’s liabilities.

Non-Performing Assets and Delinquent Loans

Non-performing assets include non-accrual loans, renegotiated loans and real estate and other assets that have been acquired through foreclosure or repossession. The Corporation’s credit procedures require monitoring of commercial credits to determine the collectibility of contractually due principal and interest to assess the need for providing for inherent losses. If a loan is identified as impaired, it is placed on non-accrual status. At December 31, 2006, commercial loans totaling $11.8 million were considered to be impaired.

6

Delinquencies occur in the normal course of business. The Corporation focuses its efforts on the management of loans that are in various stages of delinquency. These include loans that are 90 days or more delinquent that are still accruing interest because they are well secured and in the process of collection. Closed-end consumer loans secured by non-residential collateral are generally charged off to the collateral’s fair value less costs to sell (“net fair value”) at 120 days delinquent. Unsecured open-end consumer loans are charged off in full at 180 days delinquent. Demand deposit overdrafts that have been reclassified as loans generally are charged off in full at 60 days delinquent. Loans secured by residential real estate are placed on non-accrual status at 120 days delinquent, unless well secured and in the process of collection. Any portion of an outstanding loan balance secured by residential real estate in excess of the net fair value is charged-off when it is no later than 180 days delinquent. Regardless of collateral value, with isolated exceptions, these loans are placed on non-accrual status at 210 days delinquent. Commercial loans are placed on non-accrual status at 90 days delinquent unless well secured and in the process of collection. Charge-offs of delinquent loans secured by commercial real estate are generally recognized when losses are reasonably estimable and probable.

Deposit Activities

The table below presents the average deposit balances and rates paid for the three years ended December 31, 2006.

Average Deposits:

	2006				2005				2004
(dollars in thousands)	Average Balance		Average Rate		Average Balance		Average Rate		Average Balance		Average Rate
Noninterest-bearing	$	773,369	—	%	$	808,137	—	%	$	730,889	—	%
Interest-bearing demand		550,528	0.50			574,631	0.37			494,729	0.20
Money market		590,723	2.81			582,547	1.85			568,776	0.99
Savings		657,722	0.39			737,251	0.29			750,587	0.29
Direct time deposits		973,396	3.86			815,082	2.64			799,679	2.01
Brokered time deposits		499,523	4.76			384,701	4.50			308,605	5.32
Total average balance/rate	$	4,045,261	2.06	%	$	3,902,349	1.38	%	$	3,653,265	1.13	%
Total year-end balance	$	4,140,112			$	4,124,467			$	3,779,987

Average deposits obtained from customers (rather than brokers) represented 87.7% of the Bank’s deposit funding for 2006, as compared to 90.1% for 2005. Customer deposits are generated by cross sales and calling efforts of the banking office and commercial cash management sales force. At December 31, 2006, deposits continued to be at a record high of $4.1 billion despite the challenging and competitive deposit environment. Approximately 38.4% of customer deposit balances at year-end were from the Greater Washington, D.C. and Central Virginia regions as compared to 39.9% at December 31, 2005. The percentage of commercial deposits declined slightly during the year, with commercial deposit balances representing 23.2%, of customer deposits at year-end compared to 25.5% at December 31, 2005. At December 31, 2006, 40.5% of the Bank’s deposits were time deposits compared to 32.8% at December 31, 2005. Over the past year, customers have been taking advantage of the higher time deposit rates and as a result, customer deposits have been shifting from lower yielding checking and savings accounts towards higher yielding certificates of deposit.

Transaction accounts remain a key part of the Bank’s deposit gathering strategy. Transaction accounts not only serve as an important cross-sell tool in terms of deepening customer relationships, but also are an important source of fee income to the Bank. “Totally Free Checking,” a product that Provident introduced to the Baltimore area in 1993, remains the Bank’s most popular checking account product. Management believes its checking account products, combined with the Bank’s service options available through both traditional and in-store banking offices, should ensure that Provident remain a regional leader in the deposit gathering process.

Provident has determined that it competes most effectively by seeking to be the “right size” bank. Management believes Provident is the “right size” bank because it continues to provide the products and services of its largest competitors, while seeking to deliver the level of service found in only the best community banks.

Treasury Activities

The Treasury Division manages the wholesale segments of the balance sheet, including investments, purchased funds, long-term debt and derivatives. Management’s objective is to achieve the maximum level of stable earnings over the long term, while controlling the level of interest rate and liquidity risk, and optimizing capital utilization. Treasury strategies and activities are overseen by the Bank’s Asset / Liability Committee (“the ALCO”), which also reviews all investment and funding transactions. ALCO activities are summarized and reviewed monthly with the Corporation’s Board of Directors.

7

Investments

At December 31, 2006, the investment securities portfolio was $1.7 billion, or 26.8% of total assets. The portfolio objective is to obtain the maximum sustainable interest margin over match-funded borrowings, subject to liquidity, credit and interest rate risk as well as capital, regulatory and economic considerations. Typically, management classifies securities as available for sale to maximize flexibility, although securities may be purchased with the intention of holding to maturity.

The following table sets forth information concerning the Corporation’s investment securities portfolio at December 31 for the periods indicated.

Investment Securities Summary:

(dollars in thousands)	2006			%		2005			%		2004			%		2003			%		2002			%
Securities available for sale:
U.S. Treasury and government agencies and corporations	$	71,411		4.2	%	$	77,230		4.1	%	$	114,381		5.0	%	$	110,632		5.3	%	$	54,273		2.7	%
Mortgage-backed securities		700,855		41.6			1,034,777		54.3			1,646,278		71.5			1,737,040		83.2			1,794,783		90.0
Municipal securities		101,373		6.0			58,317		3.1			14,042		0.6			18,226		0.9			21,127		1.1
Other debt securities		709,097		42.1			623,762		32.7			411,694		17.9			220,612		10.6			123,046		6.2
Total securities available for sale		1,582,736		93.9			1,794,086		94.2			2,186,395		95.0			2,086,510		100.0			1,993,229		100.0
Securities held to maturity:
Other debt securities		101,867		6.1			111,269		5.8			114,671		5.0			—		—			—		—
Total securities held to maturity		101,867		6.1			111,269		5.8			114,671		5.0			—		—			—		—
Total investment securities	$	1,684,603		100.0	%	$	1,905,355		100.0	%	$	2,301,066		100.0	%	$	2,086,510		100.0	%	$	1,993,229		100.0	%
Total portfolio yield		5.0	%				5.0	%				4.5	%				4.4	%				4.7	%

The following table presents the expected cash flows and interest yields of the Bank’s investment securities portfolio at December 31, 2006.

Investment Securities Portfolio:

	In One Year or Less				After One Year Through Five Years				After Five Years Through Ten Years				Over Ten Years				Unrealized Gain (Loss)			Total Amount		Yield*
(dollars in thousands)	Amount		Yield*		Amount		Yield*		Amount		Yield*		Amount		Yield*
Securities available for sale:
U.S. Treasury and government agencies and corporations	$	—	—	%	$	2,493	4.9	%	$	25,987	3.7	%	$	44,625	5.9	%	$	(1,694	)	$	71,411	5.1	%
Mortgage-backed securities		120,064	4.8			302,432	4.8			181,940	4.9			114,261	5.2			(17,842	)		700,855	4.9
Municipal securities		2,295	4.6			3,866	4.6			13,080	3.8			81,732	3.9			400			101,373	3.9
Other debt securities		100	5.4			400	4.0			—	—			706,248	5.0			2,349			709,097	5.0
Total securities available for sale		122,459	4.8			309,191	4.8			221,007	4.7			946,866	5.0			(16,787	)		1,582,736	4.9
Securities held to maturity:
Other debt securities		—	—			—	—			—	—			101,867	7.4			—			101,867	7.4
Total securities held to maturity		—	—			—	—			—	—			101,867	7.4			—			101,867	7.4
Total investment securities	$	122,459	4.8	%	$	309,191	4.8	%	$	221,007	4.7	%	$	1,048,733	5.2	%	$	(16,787	)	$	1,684,603	5.0	%

* Yields do not give effect to changes in fair value that are reflected as a component of stockholders’ equity.

Management invests primarily in fixed and floating rate mortgage-backed securities (MBS), asset-backed securities (ABS), corporate bonds, and municipal bonds to diversify the investment portfolio risks, maximize stable earnings, and manage the Bank’s interest rate sensitivity. Investment allocations as of December 31, 2006 include MBS (41.6%), ABS (40.4%), municipal (6.0%), Corporate (7.7%), and U.S. Government securities (4.3%). The MBS portfolio includes fixed rate and adjustable rate agency-backed passthroughs, as well as agency and non-agency collateralized mortgage obligations (CMOs). All of the non-agency CMOs are Aaa or Aa rated. The ABS portfolio consists of Aaa, Aa and single A rated pooled trust preferred securities, and Aa and single A rated home equity securities. The municipal bond portfolio consists of geographically diversified Aaa rated securities. Typically, management classifies securities as available for sale to maximize flexibility, although securities may be purchased with the intention of holding to maturity.

The primary risk in the investment portfolio is duration risk. Duration measures the expected change in the market value of an investment for a 100 basis point (or 1%) change in interest rates. The higher an investment’s duration, the longer the time until its rate is reset to current market rates. The Bank’s risk tolerance, as measured by the duration of the investment portfolio, is typically

8

between 2% and 3.5%. In the current economic environment, the duration is targeted for the middle of that range. Another risk in the investment portfolio is credit risk. At December 31, 2006, 55.9% of the entire investment portfolio was rated Aaa, 42.7% was investment grade below Aaa, and 1.4% was rated below investment grade or was not rated.

Investment securities are evaluated periodically to determine whether a decline in their value is other than temporary. Management utilizes criteria such as the magnitude and duration of the decline, in addition to the reasons underlying the decline, to determine whether the loss in value is other than temporary. If a decline in value is determined to be other than temporary, the value of the security is reduced and a corresponding charge to earnings is recognized. The Corporation had a limited number of securities in a continuous loss position for 12 months or more at December 31, 2006. Because the declines in fair value were due to changes in market interest rates, not in estimated cash flows, no other than temporary impairment was recorded at December 31, 2006. Management currently has the intent and ability to retain investment securities with unrealized losses until the decline in value has been recovered.

Borrowings

Provident’s funds management objectives are two-fold: to minimize the cost of borrowings while assuring sufficient funding availability to meet current and future customer requirements; and to contribute to interest rate risk management goals through match-funding loan or investment activity. Management utilizes a variety of sources to raise borrowed funds at competitive rates, including federal funds purchased (“fed funds”), Federal Home Loan Bank (“FHLB”) borrowings, securities sold under repurchase agreements (“repos”), and brokered and jumbo certificates of deposit (“CDs”). FHLB borrowings and repos typically are borrowed at rates approximating the LIBOR rate for the equivalent term because they are secured with investments or high quality real estate loans. Fed funds, which are generally overnight borrowings, are typically purchased at the Federal Reserve target rate. Brokered CDs are generally added when market conditions permit issuance at rates more favorable than other funding sources.

The Corporation formed wholly owned statutory business trusts in 1998, 2000 and 2003. In 2004, the Corporation acquired three wholly owned statutory business trusts from Southern Financial as part of the merger. In all cases, the trusts issued trust preferred securities that were sold to outside third parties. The junior subordinated debentures issued by the Corporation to the Trusts are presented net of unamortized issuance costs as long-term debt in the Consolidated Statements of Condition and are includable in Tier 1 capital for regulatory capital purposes, subject to certain limitations. See Note 11 to the Consolidated Financial Statements for a description of the remaining outstanding issuances. Any of the junior subordinated debentures are redeemable at any time in whole, but not in part, from the date of issuance on the occurrence of certain events. On March 31, 2005, the Corporation redeemed $30 million aggregate value of capital securities issued by Provident Trust II paying an annual dividend of 10%. On July 15, 2005, Provident redeemed Southern Financial Capital Trust I, a $5 million issuance paying an 11% annual dividend. There are no issuances callable in 2007.

Employees

At December 31, 2006, the Corporation and its subsidiaries had 1,901 full-time equivalent employees. The Corporation currently maintains what management considers to be a comprehensive, competitive employee benefits program. A collective bargaining unit does not represent employees and management considers its relationship with its employees to be good.

Competition

The Corporation encounters substantial competition in all areas of its business. There are twelve bank holding companies or other banking institutions in Maryland with commercial banks that have deposits in Maryland in excess of $1 billion, three are headquartered in Maryland and nine are headquartered in other states. There are nineteen bank holding companies or other banking institutions in Virginia with commercial banks that have deposits in Virginia in excess of $1 billion, eleven are headquartered in Virginia and eight are headquartered in other states. The Bank also faces competition from savings and loans, savings banks, mortgage banking companies, credit unions, insurance companies, consumer finance companies, money market and mutual fund firms and various other financial services institutions.

Current federal law allows the merger of banks by bank holding companies nationwide. Further, federal and Maryland laws permit interstate banking. Legislation has broadened the extent to which financial services companies, such as investment banks and insurance companies, may control commercial banks. As a consequence of these developments, competition in the Bank’s principal markets may increase, and a further consolidation of financial institutions in Maryland may occur.

Regulation

The Corporation is registered as a bank holding company under the Bank Holding Company Act of 1956 (“HOLA”). As such, the Corporation is subject to regulation and examination by the Federal Reserve Board, and is required to file periodic reports and any

9

additional information that the Federal Reserve Board may require. HOLA imposes certain restrictions upon the Corporation regarding the merger of substantially all of the assets, or direct or indirect ownership or control, of any bank of which it is not already the majority owner; or, with certain exceptions, of any company engaged in non-banking activities.

The Bank is subject to supervision, regulation and examination by the Commissioner of the Division of Financial Regulation of the State of Maryland and the Federal Deposit Insurance Corporation (“FDIC”). Asset growth, deposits, reserves, investments, loans, consumer law compliance, issuance of securities, payment of dividends, establishment of banking offices, mergers and consolidations, changes in control, electronic funds transfer, management practices and other aspects of operations are subject to regulation by the appropriate federal and state supervisory authorities. The Bank is also subject to various regulatory requirements of the Federal Reserve Board applicable to FDIC insured depository institutions.

The Gramm-Leach-Bliley Act of 1999 authorizes a bank holding company that meets specified conditions to become a “financial holding company” and thereby engage in a broader array of financial activities than previously permitted. Such activities may include insurance underwriting and investment banking. The Gramm-Leach-Bliley Act also authorizes banks to engage through “financial” subsidiaries in certain of the activities permitted for financial holding companies. To date, the Corporation has not elected financial holding company status.

Monetary Policy

The Corporation and the Bank are affected by fiscal and monetary policies of the federal government, including those of the Federal Reserve Board, which regulates the national money supply in order to mitigate recessionary and inflationary pressures. Among the techniques available to the Federal Reserve Board 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 governmental policies on the earnings of the Corporation and the Bank cannot be predicted.

Regulatory Capital

Banks are required to maintain a sufficient level of capital in order to sustain growth, absorb unforeseen losses and meet regulatory requirements. The standards used by federal bank regulators to evaluate capital adequacy are the leverage ratio and risk-based capital guidelines. The Corporation’s core (or tier 1) capital is equal to total stockholders’ equity less net Accumulated Other Comprehensive Income (Loss) (“OCI”) plus capital securities less intangible assets. Total regulatory capital consists of core capital plus the allowance for loan losses, subject to certain limitations. The trust preferred securities are considered capital securities, and accordingly, are includable as tier 1 capital, subject to certain limitations.

The leverage ratio represents core capital divided by quarterly average total assets. Guidelines for the leverage ratio require the ratio to be 100 to 200 basis points above a 3% minimum, depending on risk profiles and other factors. Risk-based capital ratios measure core and total regulatory capital against risk-weighted assets. Risk-weighted assets are determined by applying a weighting to asset categories as prescribed by regulation and certain off-balance sheet commitments based on the level of credit risk inherent in the assets. At December 31, 2006, the Corporation exceeded all regulatory capital requirements.

Item 1A. Risk Factors

Rising interest rates may reduce the Corporation’s net income and future cash flows.

Interest rates were recently at historically low levels. However, since June 30, 2004, the U.S. Federal Reserve has increased its target for the federal funds rate 425 basis points to 5.25%. While these short-term market interest rates (which the Corporation uses as a guide to price its loans and deposits) have increased, longer-term market interest rates (which the Corporation uses as a guide to price its longer-term loans and deposits) have not. If short-term market interest rates continue to rise, and if rates on the Corporation’s deposits and borrowings reprice upwards faster than the rates on the Corporation’s long-term loans and investments, the Corporation would experience compression of its interest rate spread and net interest margin, which would have a negative effect on the Corporation’s profitability.

Recent and possible future acquisitions could involve risks and challenges that could adversely affect the Corporation’s ability to achieve its profitability goals for acquired businesses or realize anticipated benefits of those acquisitions.

The Corporation has experienced moderate growth in the past several years and its strategy of future growth includes the possible acquisition of banking branches, other financial institutions and other financial services companies. The most recent acquisition was the Corporation’s merger with Southern Financial Bancorp, Inc. on April 30, 2004. However, the Corporation cannot assure

10

investors that it will be able to identify suitable future acquisition opportunities or finance and complete any particular acquisition, combination or other transaction on acceptable terms and prices. All acquisitions involve a number of risks and challenges that could adversely affect the Corporation’s ability to achieve anticipated benefits of acquisitions.

The Corporation’s allowance for loan losses may be inadequate, which may reduce the Corporation’s earnings.

The Corporation’s allowance for loan losses may not be adequate to cover actual loan losses and if the Corporation is required to increase its allowance, current earnings may be reduced. When borrowers default and do not repay the loans that the Bank makes to them, the Corporation may lose money. The Corporation’s experience shows that some borrowers either will not pay on time or will not pay at all, which will require the Corporation to cancel or “charge-off” the defaulted loan or loans. The Corporation provides for losses by reserving what it believes to be an adequate amount to absorb any probable inherent losses. A “charge-off” reduces the Corporation’s allowance for loan losses. If the Corporation’s allowance were insufficient, it would be required to increase the allowance by recording a larger provision for loan losses, which would reduce earnings for that period.

Changes in economic conditions could cause an increase in delinquencies and non-performing assets, including loan charge-offs, which in turn may negatively affect the Corporation’s income and growth.

The Corporation’s loan portfolio includes many real estate secured loans, demand for which may decrease during economic downturns as a result of, among other things, an increase in unemployment, a decrease in real estate values or increases in interest rates. These factors could depress the Corporation’s earnings and consequently its financial condition because:

• customers may not want or need the Corporation’s products and 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 cause an increase in delinquencies and non-performing assets or require the Corporation to “charge-off” a percentage of its loans and/or increase the Corporation’s provisions for loan losses, which would reduce the Corporation’s earnings.

Because the Corporation competes primarily on the basis of the interest rates it offers depositors and the terms of loans it offers borrowers, the Corporation’s margins could decrease if it were required to increase deposit rates or lower interest rates on loans in response to competitive pressure.

The Corporation faces intense competition both in making loans and attracting deposits. The Corporation competes primarily on the basis of its depository rates, the terms of the loans it originates and the quality of the Corporation’s financial and depository services. This competition has made it more difficult for the Corporation to make new loans and at times has forced the Corporation to offer higher deposit rates in its market area. The Corporation expects competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Technological advances, for example, have lowered barriers to market entry, enabled banks to expand their geographic reach by providing services over the Internet and enabled non-depository institutions to offer products and services that traditionally have been provided by banks. Federal banking law permits affiliation among banks, securities firms and insurance companies, which also may change the competitive environment in which the Corporation conducts business. Some of the institutions with which the Corporation competes are significantly larger than the Corporation and, therefore, have significantly greater resources.

The Corporation is at risk for events that could disrupt business activities.

The Corporation is subject to events that could impact or disrupt its business, although its goal is to ensure continuous service delivery to its customers. The Corporation has undertaken an enterprise-wide Business Continuity Plan in order to respond to and guard against this risk. However, no plan can fully eliminate such risk and there can be no assurance that the Corporation’s Plan will be successful.

Provident Bank operates in a highly regulated environment and may be adversely affected by changes in laws and regulations.

Provident Bank is subject to regulation, supervision and examination by the Commissioner of the Division of Financial Regulation of the State of Maryland, its chartering authority, and by the Federal Deposit Insurance Corporation, as insurer of its deposits. Such regulation and supervision governs the activities in which a commercial bank and its holding company may engage and is intended primarily for the protection of the deposit insurance funds and depositors. These regulatory authorities have extensive discretion in

11

connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of a bank, the classification of assets by a bank and the adequacy of a bank’s allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, or legislation, could have a material impact on Provident Bank, the Corporation and their operations.

The Corporation’s operations are also subject to extensive regulation by other federal, state and local governmental authorities and are subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of its operations. The Corporation believes that it is in compliance in all material respects with applicable federal, state and local laws, rules and regulations. Because its business is highly regulated, the Corporation may be subject to changes in such laws, rules and regulations that could have a material impact on its operations.

The Corporation is subject to security and operational risks relating to use of its technology that could damage its reputation and business.

Security breaches in the Corporation’s internet banking activities could expose it to possible liability and damage its reputation. Any compromise of the Corporation’s security also could deter customers from using its internet banking services that involve the transmission of confidential information. The Corporation relies on standard internet security systems to provide the security and authentication necessary to effect secure transmission of data and access to bank informational systems. These precautions may not protect its systems from compromises or breaches of its security measures that could result in damage to its reputation and business. Additionally, the Corporation outsources its data processing to a third party. If the Corporation’s third party provider encounters difficulties or if the Corporation has difficulty in communicating with such third party, it will significantly affect the Corporation’s ability to adequately process and account for customer transactions, which would significantly affect its business operations.

Various factors could hinder or prevent takeover attempts.

Provisions of the Corporation’s Articles of Incorporation and Bylaws and federal and state regulations may make it difficult and expensive to pursue a takeover attempt that management opposes. These provisions also may make the removal of the current board of directors or management, or the appointment of new directors, more difficult. For example, the Corporation’s Articles of Incorporation and Bylaws contain provisions that could impede a takeover or prevent the Corporation from being acquired, including a classified board of directors and limitations on the ability of the Corporation’s stockholders to remove a director from office without cause. The Corporation’s board of directors may issue additional shares of common stock or establish classes or series of preferred stock with rights, preferences and limitations as determined by the board of directors without stockholder approval. These factors provide the board of directors the ability to prevent, or render more difficult or costly, the completion of a takeover transaction that the Corporation’s stockholders might view as being in their best interests.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

The Corporation has 168 offices from which it conducts, or intends to conduct, business which are located in Maryland, the District of Columbia, Virginia, Delaware and southern Pennsylvania. The Bank owns 21 and leases 147 of these offices. Most of these leases provide for the payment of property taxes and other costs by the Bank, and include one or more renewal options ranging from one to fifteen years. Some of the leases also contain a purchase option.

Item 3. Legal Proceedings

Litigation

The Corporation is involved in various legal actions that arise in the ordinary course of its business. All active lawsuits entail amounts which management believes, individually and in the aggregate, are immaterial to the financial condition and the results of operations of the Corporation. In May 2006, the Corporation settled litigation with a former employee for alleged breach of an executed employment contract for $1.3 million. This expense is included in other non-interest expense in the Consolidated Statements of Income.

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

None.

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PART II

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

The common stock of Provident Bankshares Corporation is listed on the NASDAQ Global Select Market. Such over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. The NASDAQ symbol is “PBKS”. At February 26, 2007, there were approximately 3,129 holders of record of the Corporation’s common stock.

For the year ended 2006, the Corporation declared and paid dividends of $1.17 per share of common stock outstanding. Declarations or payments of dividends are subject to a determination by the Corporation’s Board of Directors, which takes into account the Corporation’s financial condition, results of operations, economic conditions and other factors, including the regulatory restrictions which affect the payment of dividends by the Bank to the Corporation. No assurances can be given, however, that any dividends will be paid or, if commenced, will continue to be paid. See “Item 7.—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition—Liquidity” for a future discussion of the restrictions on the Corporation’s paying of dividends.

As of December 31, 2006, the Corporation had 3,143 holders of record (excluding the number of persons or entities holding stock in street name through various brokerage firms), and 32,433,387 shares outstanding.

The following table sets forth high and low sales prices for each quarter during the years ended December 31, 2006 and 2005 for the Corporation’s common stock and the corresponding quarterly dividends paid per share.

	High		Low		Dividend Paid per Share
Year Ended December 31, 2006:
Fourth quarter	$	38.60	$	34.87	$	0.300
Third quarter		37.76		34.77		0.295
Second quarter		37.07		34.01		0.290
First quarter		36.96		34.74		0.285
Year Ended December 31, 2005:
Fourth quarter	$	36.35	$	32.54	$	0.280
Third quarter		34.98		32.01		0.275
Second quarter		32.67		29.10		0.270
First quarter		36.07		32.05		0.265

During 1998, the Corporation initiated a stock repurchase program for its outstanding stock. Under this plan, the Corporation approved the repurchase of a specific amount of shares without any specific expiration date. As the Corporation fulfilled each specified repurchase amount, additional amounts were approved. On June 17, 2005, the Corporation approved an additional stock repurchase of up to 1.3 million shares from time to time subject to market conditions. At December 31, 2006, the maximum number of shares remaining to be purchased under this plan is 146,112. All shares have been repurchased pursuant to the publicly announced plan. The repurchase plan will continue until completed or terminated by the Board of Directors. No plans expired during the three months ended December 31, 2006. On January 17, 2007, the Corporation approved the repurchase of up to 5% of the Corporation’s outstanding common stock, or approximately 1.6 million additional shares from time to time subject to market conditions.

The following table provides certain information with regard to shares repurchased by the Corporation in the fourth quarter of 2006.

Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased Under Plan	Maximum Number of Shares Remaining to be Purchased Under Plan
October 1 - October 31, 2006	—	$	—	—	481,112
November 1 - November 30, 2006	—		—	—	481,112
December 1 - December 31, 2006	335,000		35.68	335,000	146,112
Total	335,000	$	35.68	335,000	146,112

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Item 6. Selected Financial Data

The Corporation has derived the following selected consolidated financial and other data of the Corporation in part from the consolidated financial statements and notes appearing elsewhere in this Form 10-K and from consolidated financial statements previously filed.

	At or for the year ended December 31,
(dollars in thousands, except per share data)	2006			2005			2004			2003			2002
Interest income (tax-equivalent) (1)	$	368,389		$	315,567		$	273,809		$	240,793		$	277,837
Interest expense		162,231			116,092			90,818			91,239			135,522
Net interest income (tax-equivalent) (1)		206,158			199,475			182,991			149,554			142,315
Provision for loan losses		3,973			5,023			7,534			11,122			10,956
Net interest income after provision for loan losses		202,185			194,452			175,457			138,432			131,359
Non-interest income, excluding net gains (losses)		120,629			115,584			104,309			92,752			86,394
Net gains (losses)		(6,426	)		1,292			(5,773	)		(4,379	)		2,786
Derivative gains (losses)		(533	)		(4,367	)		2,432			—			—
Non-interest expense, excluding merger expense		214,579			200,737			180,187			157,261			149,730
Merger expense		—			—			3,541			—			—
Income before income taxes (tax-equivalent) (1)		101,276			106,224			92,697			69,544			70,809
Income tax expense (tax-equivalent) (1)		31,273			33,274			30,717			18,089			22,504
Net income	$	70,003		$	72,950		$	61,980		$	51,455		$	48,305
Tax-equivalent adjustment (1)	$	2,155		$	765		$	778		$	674		$	791
Per share amounts:
Basic - net income	$	2.14		$	2.21		$	2.05		$	2.10		$	1.94
Diluted - net income		2.12			2.17			2.00			2.05			1.88
Cash dividends paid		1.17			1.09			1.01			0.93			0.85
Book value per share		19.54			19.14			18.68			13.22			12.96
Total assets	$	6,295,893		$	6,355,926		$	6,571,416		$	5,207,848		$	4,890,722
Total loans		3,865,492			3,695,381			3,559,880			2,784,546			2,560,563
Total deposits		4,140,112			4,124,467			3,779,987			3,079,549			3,187,966
Total stockholders’ equity		633,631			630,495			618,423			324,765			315,635
Total common equity (2)		655,738			647,778			620,058			331,354			300,715
Total long-term debt		828,079			920,022			1,205,833			1,153,301			814,546
Return on average assets		1.09	%		1.14	%		1.02	%		1.03	%		1.00	%
Return on average equity		11.02			11.70			12.12			16.36			16.14
Return on average common equity		10.71			11.59			12.09			16.47			16.22
Efficiency ratio		65.66			63.39			62.72			64.90			65.47
Stockholders’ equity to assets		10.06			9.92			9.41			6.24			6.45
Average stockholders’ equity to average assets		10.26			9.86			8.46			6.26			6.15
Tier 1 leverage ratio		8.53			8.40			8.29			8.49			7.47
Tier 1 capital to risk-weighted assets		10.90			10.97			11.82			13.28			11.62
Total regulatory capital to risk-weighted assets		11.85			11.97			12.89			15.32			12.70
Dividend payout ratio		55.29			50.29			50.47			45.44			45.10

(1) Tax-advantaged income has been adjusted to a tax-equivalent basis using the combined statutory federal and state income tax rate in effect for all years presented.

(2) Common equity excludes net accumulated OCI.

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

FINANCIAL REVIEW

The principal objective of this Financial Review is to provide an overview of the financial condition and results of operations of Provident Bankshares Corporation and its subsidiaries for the three years ended December 31, 2006. This discussion and tabular presentations should be read in conjunction with the accompanying Consolidated Financial Statements and Notes as well as the other information herein, particularly the information regarding the Corporation’s business operations as described in Item 1.

Overview of Income and Expenses

Income

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

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

The Corporation recognizes gains or losses as a result of sales of investment securities or the disposition of loans, foreclosed property or fixed assets. In addition, the Corporation also recognizes gains or losses on its outstanding derivative financial instruments. These gains and losses are not a regular part of the Corporation’s primary source of income.

Expenses

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

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

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

Furniture and equipment and external processing include fees paid to third-party data processing services and expenses and depreciation charges related to office and banking equipment. Depreciation of premises and equipment is computed using the straight-line and accelerated methods based on the useful lives of related assets. Estimated lives range from 5 to 15 years for building and improvements, and 3 to 10 years for furniture and equipment.

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Discussion and analysis of the financial condition and results of operations are based on the consolidated financial statements of the Corporation, which are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities for the reporting periods. Management evaluates estimates on an on-going basis, and believes the following represent its more significant judgments and estimates used in preparation of its consolidated financial statements: allowance for loan losses, non-accrual loans, other real estate owned, estimates of fair value and intangible assets associated with mergers, other than temporary impairment of investment securities, pension and post-retirement benefits, asset prepayment rates, goodwill and intangible assets, stock-based compensation, derivative financial instruments, recourse liabilities, litigation and income taxes. Management bases its estimates on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. It is at least reasonably possible that each of the Corporation’s estimates could change in the near term and the effect of the change could be material to the Corporation’s Consolidated Financial Statements.

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Management believes the following critical accounting policies affect its most significant judgments and estimates used in preparation of its consolidated financial statements: allowance for loan losses, other than temporary impairment of investment securities, derivative financial instruments, goodwill and intangible assets, asset prepayment rates, and income taxes. Each estimate is discussed on pages 16-18. The financial impact of each estimate, to the extent significant to financial results, is discussed in the applicable sections of Management’s Discussion and Analysis.

Allowance for Loan Losses

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

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

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

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

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

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

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

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

Management believes that it uses relevant information available to make determinations about the allowance and that it has established its existing allowance in accordance with GAAP. If circumstances differ substantially from the assumptions used in

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making determinations, adjustments to the allowance may be necessary and results of operations could be affected. Because events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that increases to the allowance will not be necessary should the quality of any loans deteriorate.

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

Other Than Temporary Impairment of Investment Securities

Securities are evaluated periodically to determine whether a decline in their value is other than temporary. Management utilizes criteria such as the magnitude and duration of the decline, in addition to the reasons underlying the decline, to determine whether the loss in value is other than temporary. The term “other than temporary” is not intended to indicate that the decline in value is permanent. It indicates that the prospects for a near term recovery of value are not necessarily favorable, or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of the investment. Once a decline in value is determined to be other than temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.

Derivative Financial Instruments

The Corporation uses various derivative financial instruments as part of its interest rate risk management strategy to mitigate the exposure to changes in market interest rates. The derivative financial instruments used separately or in combination are interest rate swaps, caps and floors. Derivative financial instruments are required to be measured at fair value and recognized as either assets or liabilities in the financial statements. Fair value represents the payment the Corporation would receive or pay if the item were sold or bought in a current transaction. Fair values are generally based on market quotes. The accounting for changes in fair value (gains or losses) of a derivative is dependent on whether the derivative is designated and qualifies for “hedge accounting.” In accordance with Statement of Financial Accounting Standards No. 133, “ Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”), the Corporation assigns derivatives to one of these categories at the purchase date: fair value hedge, cash flow hedge or non-designated derivatives. SFAS No. 133 requires an assessment of the expected and ongoing hedge effectiveness of any derivative designated a fair value hedge or cash flow hedge. Derivatives are included in other assets and other liabilities in the Consolidated Statements of Condition.

Fair Value Hedges—For derivatives designated as fair value hedges, the derivative instrument and related hedged item are marked-to-market through the related interest income or expense, as applicable, except for the ineffective portion which is recorded in non-interest income.

Cash Flow Hedges—For derivatives designated as cash flow hedges, mark-to-market adjustments are recorded net of income taxes as a component of other comprehensive income (“OCI”) in stockholders’ equity, except for the ineffective portion which is recorded in non-interest income. Amounts recorded in OCI are recognized into earnings concurrent with the hedged items’ impact on earnings.

Non-Designated Derivatives—Certain economic hedges are not designated as cash flow or as fair value hedges for accounting purposes. As a result, changes in the fair value are recorded in non-interest income in the Consolidated Statements of Income. Interest income or expense related to non-designated derivatives is also recorded in non-interest income.

All qualifying relationships between hedging instruments and hedged items are fully documented by the Corporation. Risk management objectives, strategies and the projected effectiveness of the chosen derivatives to hedge specific risks are also documented. At inception of the hedging relationship and periodically as required under SFAS No. 133, the Corporation evaluates the effectiveness of its hedging instruments. For hedges qualifying for “short-cut” treatment at inception, the ongoing effectiveness testing includes a review of the hedge and the hedged item to determine if the hedge continues to qualify for short-cut treatment. An assumption of no hedge ineffectiveness is allowed for derivatives qualifying for short-cut treatment. For all other derivatives qualifying for hedge accounting, a quantitative assessment of the effectiveness of the hedge is required at each reporting date. The Corporation performs effectiveness testing quarterly for all of its hedges. The Corporation uses benchmark interest rates such as LIBOR to hedge the interest rate risk associated with interest-earning assets or interest-bearing liabilities. Using benchmark rates and complying with specific criteria set forth in SFAS No.133, the Corporation has concluded that for qualifying hedges, changes in fair value or cash flows that are attributable to risks being hedged will be highly effective at the hedge’s inception and on an ongoing basis.

When it is determined that a derivative is not, or ceases to be effective as a hedge, the Corporation discontinues hedge accounting prospectively. When a fair value hedge is discontinued due to ineffectiveness, the Corporation continues to carry the derivative on the Consolidated Statements of Condition at its fair value as a non-designated derivative, but discontinues marking-to-market the

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hedged asset or liability for changes in fair value. Any previous mark-to-market adjustments recorded to the hedged item are amortized over the remaining life of the asset or liability. All ineffective portions of fair value hedges are reported in and affect net income immediately. When a cash flow hedge is discontinued due to termination of the derivative, the Corporation continues to carry the previous mark-to-market adjustments in accumulated OCI and recognizes the amount into earnings in the same period or periods during which the hedged item affects earnings. If the cash flow hedge is discontinued due to ineffectiveness, the derivative would be considered a non-designated hedge and would continue to be marked-to-market in the Consolidated Statements of Condition as an asset or liability, in the Consolidated Statements of Income with any changes in the mark-to-market recorded through current period earnings and not through OCI.

Counter-party credit risk associated with derivatives is controlled by dealing with well-established brokers that are highly rated by credit rating agencies and by establishing exposure limits for individual counter-parties. Market risk on interest rate swaps is minimized by using these instruments as hedges and by continually monitoring the positions to ensure ongoing effectiveness. Credit risk is controlled by entering into bilateral collateral agreements with brokers, in which the parties pledge collateral to indemnify the counter-party in the case of default. The Corporation’s hedging activities and strategies are monitored by the Bank’s Asset / Liability Committee (“ALCO”) as part of its oversight of the treasury function.

Goodwill and Intangible Assets

For acquisitions, the Corporation records the assets acquired, including identified intangible assets, and liabilities assumed at their fair value, which in many instances involves estimates based on third party valuations, such as appraisals, or valuations based on discounted cash flow analyses or other valuation techniques. The determination of the useful lives of intangible assets is subjective, as is the appropriate amortization period for such intangible assets. These estimates also include the establishment of various accruals and allowances based on planned facilities dispositions and employee severance considerations, among other acquisition-related items. In addition, purchase acquisitions typically result in goodwill, which represents the excess of the purchase price over the fair value of the net assets acquired by the Corporation. The Corporation tests goodwill annually for impairment. Such tests involve the use of estimates and assumptions. Intangible assets other than goodwill, such as deposit-based intangibles which are determined to have finite lives, are amortized over their estimated useful lives, which is approximately 8 years.

Asset Prepayment Rates

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

Income Taxes

The Corporation accounts for income taxes under the asset/liability method. Deferred tax assets and liabilities are recognized for the future consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as operating loss and tax credit carry forwards. A valuation allowance is established against deferred tax assets when in the judgment of management, it is more likely than not that such deferred tax assets will not become realizable. It is at least reasonably possible that management’s judgment about the need for a valuation allowance for deferred taxes could change in the near term.

FINANCIAL CONDITION

The financial condition of the Corporation reflects the continued improvement in financial fundamentals through the consistent execution of the Bank’s strategic priorities and strengthening the balance sheet by growing loans and deposits in the Bank’s core business segments and key major markets of Greater Baltimore, Greater Washington and Central Virginia. Strong growth in relationship-based loan portfolios (loans other than the Corporation’s originated and acquired residential mortgage loans) was financed by proceeds from payments and maturities in the Bank’s wholesale assets (originated and acquired residential mortgages and investment securities). The expanded market presence the Corporation has experienced over the past few years has been successful in helping to grow and deepen customer relationships. These successful efforts have led to growth in average relationship based loans of $324.3 million, or 10.7%, and average deposits of $142.9 million, or 3.7%, over 2005. At December 31, 2006, total assets were $6.3 billion, while total loans and deposits were $3.9 billion and $4.1 billion, respectively.

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Over the past 12 months, strong growth in internally generated loan portfolios has replaced the decline in wholesale assets (originated and acquired residential mortgages and investment securities) as the Corporation continues to execute its strategy of strengthening the balance sheet by growing relationship based portfolios and de-emphasizing wholesale assets. In addition, capital growth has been a specific focus for the Corporation. Tangible common equity as a percentage of tangible assets has grown to 6.50% for the year ending December 31, 2006 compared to 6.27% at December 31, 2005. Tangible common equity ratio is a non-GAAP measure used to determine capital adequacy. Tangible common equity is total equity less net accumulated other comprehensive income, goodwill and deposit based intangibles. Tangible assets are total assets less goodwill and deposit based intangibles. Management and many stock analysts use the tangible common equity ratio in conjunction with more traditional bank capital ratios to compare the capital adequacy of banking organizations with significant amounts of goodwill or other intangible assets, typically stemming from the use of the “Purchase Accounting” method accounting for mergers and acquisitions.

Earning Assets

Total average earning asset balances of $5.7 billion in 2006 remained consistent to the Corporation’s average asset levels in 2005. The following table summarizes the composition of the Bank’s average earning assets for the periods indicated.

Average Earning Assets:

	Year ended December 31,
(dollars in thousands)	2006		2005		$ Variance			% Variance
Investments	$	1,896,460	$	2,044,417	$	(147,957	)	(7.2	)%
Other earning assets		18,317		14,897		3,420		23.0
Residential real estate:
Originated and acqured residential mortgage		389,836		565,693		(175,857	)	(31.1	)
Home equity		959,731		802,723		157,008		19.6
Other consumer:
Marine		392,182		425,571		(33,389	)	(7.8	)
Other		30,182		35,648		(5,466	)	(15.3	)
Total consumer		1,771,931		1,829,635		(57,704	)	(3.2	)
Commercial real estate:
Commercial mortgage		455,962		479,726		(23,764	)	(5.0	)
Residential construction		516,192		330,766		185,426		56.1
Commercial construction		312,770		298,780		13,990		4.7
Commercial business		697,050		666,552		30,498		4.6
Total commercial		1,981,974		1,775,824		206,150		11.6
Total loans		3,753,905		3,605,459		148,446		4.1
Total average earning assets	$	5,668,682	$	5,664,773	$	3,909		0.1

Total average loan balances increased to $3.8 billion in 2006, an increase of $148.4 million, or 4.1%, from 2005. Excluding originated and acquired residential mortgages, relationship based loans increased $324.3 million or 10.7%. Strong growth in the Greater Baltimore region, mainly in commercial loans, made up 70.1% of the increase in relationship based loans. The average loan growth of $148.4 million is comprised of $206.2 million, or 11.6%, in commercial loans offset by a decline of $57.7 million, or 3.2%, in consumer loans. The decline in consumer loans included the planned reductions in originated and acquired residential mortgages of $175.9 million. At December 31, 2006, there is a balanced mix of revenue sources between the two product segments with $2.0 billion, or 52.8%, in commercial loans and $1.8 billion, or 47.2%, in consumer loans.

Commercial banking, which is a key component to the Corporation’s regional presence in its market area, grew $206.2 million, or 11.6%, over 2005. Residential and commercial construction loans posted increases during the year of $185.4 million and $14.0 million, respectively, reflecting the strong regional demand for construction loans in the Bank’s markets. In addition, commercial business grew by $30.5 million, or 4.6%, while commercial mortgages decreased $23.8 million, or 5.0%.

The decline in average consumer loans of $57.7 million included the planned reductions in originated and acquired residential mortgages of $175.9 million. Excluding these loans, average relationship based consumer loans increased 9.3%, or $118.2 million. Home equity lending is the main contributor to this strong loan growth. An array of home equity loan products has been a key component of the Bank’s strategy to deepen its customer relationships. This market strategy resulted in the $157.0 million, or 19.6%, increase in home equity average balances. The production of direct consumer loans, primarily home equity loans and lines,

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are generated by the Bank’s retail banking offices, phone centers and internet unit. Origination of consumer loan and line commitments, primarily home equity, in the Greater Washington D.C. and Central Virginia regions, grew 15.7% from 2005 to 2006 while average consumer loan and line commitments from the Greater Baltimore market grew 7.3% in 2006. Other consumer loans, which make up 23.8% of consumer loans (mainly marine lending), had a $38.9 million decline in 2006. Management has chosen to restrict marine lending loan growth due to low pricing margins in the industry.

The Corporation’s portfolio of originated and acquired residential mortgage loans (consisting of first mortgages, home equity loans and lines) represented 10.4% of average total loans in 2006, compared to 15.7% in 2005. At December 31, 2006, approximately 86% of the acquired portfolio was in first lien position. In 2006, the Corporation purchased $5.5 million of residential mortgage loans compared to $10.2 million in 2005 as it continues to focus on internally generated loan production versus purchases of loan portfolios. Average balances in the originated residential mortgage portfolio continued to decline during 2006, to $63.3 million, since the Bank retains only a small percentage new residential mortgage loan originations.

The investment securities portfolio average balance declined by $148.0 million in 2006 as compared to 2005 as management continued executing its strategy of replacing wholesale investments with internally generated loans. From year-end 2005 to year-end 2006, Provident’s investment portfolio declined by $220.8 million, or from 30.0% to 26.8% of total assets. Investment purchases, which totaled $437.7 million, were concentrated in ABS, municipal bonds, and non-agency CMOs, which management believes exhibited superior value than traditional MBS or U.S. government securities in 2006. Investment purchases were funded through sales of MBS and floating rate ABS totaling $422.2 million, and maturities and paydowns of $241.2 million. In November 2006, management sold $182.9 million of fixed rate MBS yielding 4.26% at a loss of $6.9 million to improve future profitability and reduce the Bank’s investment in wholesale assets. Additionally, in December management sold $29.0 million of MBS at a slight gain to fund loan growth. Management currently has the intent and ability to retain investment securities with unrealized losses until the decline in value has been recovered.

Asset Quality

The following table presents information with respect to non-performing assets and 90-day delinquencies for the years indicated.

Asset Quality Summary:

	December 31,
(dollars in thousands)	2006			2005			2004			2003			2002
Non-performing assets:
Originated & acquired residential mortgage	$	7,202		$	7,340		$	10,327		$	18,961		$	20,023
Other consumer (1)		772			558			250			136			460
Commercial mortgage		1,335			1,437			1,612			—			—
Residential real estate construction		—			—			—			135			136
Commercial real estate construction		—			—			1,063			—			—
Commercial business		10,417			16,336			12,461			3,085			514
Total non-accrual loans		19,726			25,671			25,713			22,317			21,133
Total renegotiated loans		—			—			—			—			—
Non-real estate assets		1,865			1,223			261			1,221			597
Residential real estate		618			564			1,355			2,022			3,199
Total other assets and real estate owned		2,483			1,787			1,616			3,243			3,796
Total non-performing assets	$	22,209		$	27,458		$	27,329		$	25,560		$	24,929
90-day delinquencies:
Originated & acquired residential mortgage	$	3,030		$	5,249		$	9,097		$	8,850		$	13,485
Other consumer		2,061			1,320			1,234			498			1,023
Commercial business		97			1,551			1,883			544			320
Total 90-day delinquencies	$	5,188		$	8,120		$	12,214		$	9,892		$	14,828
Asset quality ratios:
Non-performing loans to loans		0.51	%		0.69	%		0.72	%		0.80	%		0.83	%
Non-performing assets to loans		0.57			0.74			0.77			0.92			0.97

(1) Consumer non-accrual loans are comprised entirely of credits secured by residential property and other secured loans, primarily purchased loans. Generally, closed-end consumer loans secured by non-residential collateral that become 120 days past due are charged-off down to their net fair value. Unsecured open-end consumer loans are charged-off in full at 180 days past due.

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The asset quality within the Corporation’s loan portfolios continued to remain strong throughout 2006. Strong asset quality within the Corporation’s loan portfolio is a reflection of management’s credit policies and strategy of shifting the balance sheet away from wholesale loans to relationship based loan portfolios. In addition, regional credit conditions were favorable in 2006. Non-performing assets were $22.2 million at December 31, 2006, down $5.2 million from December 31, 2005, and down as a percentage of loans, from 0.74% to 0.57%. The decline in non-performing assets was mainly a result of successful workout efforts relating to several long-standing non-performing commercial business loans in the fourth quarter 2006. Of the total non-performing loans, $8.0 million are in the consumer and residential mortgage loan portfolios, which are collateralized by 1 to 4 family residences, $10.4 million are in the commercial business portfolio and $1.3 million are in the commercial mortgage portfolio. Non-performing commercial business loans include $2.0 million of loans that have U.S. government guarantees. Management expects little further loss on those loans. Overall, asset quality ratios of the Corporation at December 31, 2006 remain favorable, but no assurances can be given regarding the level of non-performing assets in the future.

Total 90-day delinquencies decreased by $2.9 million in 2006 to $5.2 million, and as a result, total 90-day delinquencies as a percentage of total loans outstanding were 0.13% in 2006 compared to 0.22% in 2005. Presented below is interest income that would have been recorded on all non-accrual loans if such loans had been paid in accordance with their original terms and the interest income on such loans that was actually received and recorded for the year.

Interest Income Lost Due to Non-Accrual Loans:

	Year ended December 31,
(in thousands)	2006		2005		2004		2003		2002
Contractual interest income due on loans in non-accrual status during the year	$	1,951	$	1,665	$	1,407	$	1,190	$	1,548
Interest income actually received and recorded		30		41		91		124		171
Interest income lost on non-accrual loans	$	1,921	$	1,624	$	1,316	$	1,066	$	1,377

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Allowance for Loan Losses

The following table reflects the allowance for loan losses and the activity during each of the periods indicated.

Loan Loss Experience Summary:

(dollars in thousands)	2006			2005			2004			2003			2002
Balance at beginning of year	$	45,639		$	46,169		$	35,539		$	33,425		$	34,611
Provision for loan losses		3,973			5,023			7,534			11,122			10,956
Allowance of acquired bank		—			—			12,085			—			—
Transfer letters of credit allowance to other liabilities		—			—			—			(262	)		—
Loans charged-off:
Originated and acquired residential mortgage		1,930			2,535			6,139			7,658			11,850
Other consumer		3,506			2,565			2,980			3,602			3,454
Total consumer		5,436			5,100			9,119			11,260			15,304
Commercial real estate mortgage		—			107			207			—			—
Commercial real estate construction		—			—			712			—			—
Commercial business		2,413			5,841			3,443			986			1,680
Total charge-offs		7,849			11,048			13,481			12,246			16,984
Recoveries:
Originated and acquired residential mortgage		1,132			1,603			2,121			1,952			3,174
Other consumer		1,463			1,450			1,491			1,321			985
Total consumer		2,595			3,053			3,612			3,273			4,159
Commercial real estate mortgage		—			—			—			—			155
Residential real estate construction		—			32			—			—			—
Commercial real estate construction		—			67			—			—			—
Commercial business		845			2,343			880			227			528
Total recoveries		3,440			5,495			4,492			3,500			4,842
Net charge-offs		4,409			5,553			8,989			8,746			12,142
Balance at end of year	$	45,203		$	45,639		$	46,169		$	35,539		$	33,425
Balances:
Loans - year-end	$	3,865,492		$	3,695,381		$	3,559,880		$	2,784,546		$	2,560,563
Loans - average		3,753,905			3,605,459			3,285,928			2,596,302			2,658,839
Ratios:
Net charge-offs to average loans		0.12	%		0.15	%		0.27	%		0.34	%		0.46	%
Allowance for loan losses to year-end loans		1.17			1.24			1.30			1.28			1.31
Allowance for loan losses to non-performing loans		229.15			177.78			179.56			159.25			158.16

The following table reflects the allocation of the allowance at December 31 to the various loan categories. The entire allowance is available to absorb losses from any type of loan.

Allocation of Allowance for Loan Losses:

(dollars in thousands)	2006		%		2005		%		2004		%		2003		%		2002		%
Consumer	$	5,751	12.7	%	$	5,347	11.8	%	$	7,817	16.9	%	$	8,881	25.0	%	$	10,432	31.2	%
Commercial real estate mortgage		6,255	13.8			7,209	15.8			7,891	17.1			7,033	19.8			4,952	14.8
Residential real estate construction		10,386	23.0			5,905	12.9			4,438	9.6			3,568	10.0			2,673	8.0
Commercial real estate construction		6,050	13.4			5,215	11.4			5,347	11.6			4,618	13.0			5,169	15.5
Commercial business		15,664	34.7			15,466	33.9			14,591	31.6			6,139	17.3			7,199	21.5
Unallocated		1,097	2.4			6,497	14.2			6,085	13.2			5,300	14.9			3,000	9.0
Total allowance for loan losses	$	45,203	100.0	%	$	45,639	100.0	%	$	46,169	100.0	%	$	35,539	100.0	%	$	33,425	100.0	%

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The application of the Corporation’s collection and credit standards and the continuation of strong regional economic conditions resulted in lower net charge-offs compared to 2005. Net charge-offs for 2006 were $4.4 million compared to $5.6 million in 2005. For 2006, net charge-offs exceeded the provision for loan losses by $436 thousand. The allowance as a percentage of loans outstanding decreased from 1.24% at December 31, 2005 to 1.17% at December 31, 2006, while the allowance coverage increased to 229% of non-performing loans at December 31, 2006, compared to 178% at December 31, 2005. Portfolio-wide net charge-offs continued to show a year over year decline and was 0.12% of average loans in 2006, down from 0.15% in 2005. This decline is mainly driven by the $1.9 million decrease in net charge-offs in the commercial business portfolio.

During 2006, the unallocated portion of the allowance for loan losses declined by $5.4 million while the portion allocated to the residential real estate increased by $4.5 million. The increase in the allocation to the residential real estate construction is mainly a result of the $184.5 million year over year increase in this portfolio.

Management believes that the allowance at December 31, 2006 represents its best estimate of probable losses inherent in the portfolio and that it uses relevant information available to make such determinations. If circumstances differ substantially from the assumptions used in making determinations, future adjustments to the allowance may be necessary and results of operations could be affected. Based on information currently available to the Corporation, management believes it has established its existing allowance in accordance with GAAP. Because events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that increases to the allowance will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above.

Sources of Funds

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

Average Deposits and Borrowings:

	Year ended December 31,				$ Variance			% Variance
(dollars in thousands)	2006		2005
Deposits:
Noninterest-bearing	$	773,369	$	808,137	$	(34,768	)	(4.3	)%
Interest-bearing demand		550,528		574,631		(24,103	)	(4.2	)
Money market		590,723		582,547		8,176		1.4
Savings		657,722		737,251		(79,529	)	(10.8	)
Direct time deposits		973,396		815,082		158,314		19.4
Brokered time deposits		499,523		384,701		114,822		29.8
Total average deposits		4,045,261		3,902,349		142,912		3.7
Borrowings:
Fed funds		412,316		272,633		139,683		51.2
FHLB borrowings		772,759		1,021,169		(248,410	)	(24.3	)
Repos and other		312,878		373,392		(60,514	)	(16.2	)
Trust preferred securities		136,871		147,312		(10,441	)	(7.1	)
Total average borrowings		1,634,824		1,814,506		(179,682	)	(9.9	)
Total average deposits and borrowings	$	5,680,085	$	5,716,855	$	(36,770	)	(0.6	)
Deposits by source:
Consumer	$	2,697,565	$	2,684,128	$	13,437		0.5
Commercial		848,173		833,520		14,653		1.8
Brokered		499,523		384,701		114,822		29.8
Total deposits	$	4,045,261	$	3,902,349	$	142,912		3.7

Average deposits increased $142.9 million, or 3.7%, in 2006. The deposit growth came from all the deposit sources (consumer, commercial and brokered) in 2006 with the main growth occurring in brokered time deposits. Deposits from consumers grew $13.4 million, or 0.5%, while deposits from commercial businesses grew $14.7 million, or 1.8%. Brokered time deposits increased by $114.8 million, or 29.8%. As a result of the favorable pricing in the brokered certificates of deposit market, management increased the certificates of deposit portfolio and reduced the variable rate borrowing portfolio in 2006 as it was a less expensive form of

23

borrowing. The sum of the brokered deposits and borrowings was essentially unchanged year over year. Increased competition with non-banks in the current rising rate environment was the main reason for the moderate growth in customer deposits. In addition, during 2006, consumer and commercial customers have been shifting their deposits from low yielding checking and savings accounts to higher yielding certificates of deposit accounts or moving their deposits to alternative markets. This change is driven by the current rate environment and the intense level of competition. Disciplined deposit pricing by management has resulted in lower deposit costs compared to the industry.

In 2006, average borrowings declined by $179.7 million, or 9.9%, from 2005. As noted above, the decline was largely financed by the increase in brokered certificates of deposit production. Throughout much of 2006, brokered certificates of deposit were priced at rates below the LIBOR rate curve, while variable rate long-term borrowings were priced essentially flat to the LIBOR rate curve.

Liquidity

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

The Bank’s chief source of liquidity is the assets it possesses, which can either be pledged as collateral for secured borrowings or sold outright. The Bank’s primary sources for raising secured borrowings are the FHLB and securities broker/dealers. At December 31, 2006, $1.0 billion of secured borrowings were employed, with sufficient collateral available to immediately raise an additional $836.9 million. An excess liquidity position of $386.0 million remains after covering $450.8 million of unsecured funds that mature in the next three months. Additionally, over $300 million of assets are maintained as collateral with the Federal Reserve that are available as a contingent funding source.

The Bank also has several sources of unsecured funding that it uses routinely. At December 31, 2006, the Bank possessed over $1.0 billion of overnight borrowing capacity, of which only $320.0 million was in use at year-end. The brokered certificates of deposit and unsecured debt markets, which generally are more expensive than secured funds of similar maturity, are also viable funding alternatives. In 2006, the Bank issued $376.6 million of brokered certificates of deposit at favorable pricing levels.

As an alternative to raising secured funds, the Bank can raise liquidity through asset sales. At December 31, 2006, over $500.0 million of the Bank’s investment portfolio was immediately saleable at a market value equaling or exceeding its amortized cost basis. Investment portfolio liquidity has been enhanced by the addition of approximately $550 million of LIBOR floating rate securities primarily replacing fixed rate MBS. Additionally, over a 90-day time frame, a majority of the Bank’s $1.7 billion consumer and residential loan portfolios are saleable under normal conditions.

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

Contractual Obligations, Commitments and Off-Balance Sheet Arrangements

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

24

The following table summarizes significant contractual obligations and commitments at December 31, 2006 and the future periods in which such obligations are expected to be settled in cash. In addition, the table reflects the timing of principal payments on outstanding borrowings. Additional details regarding these obligations are provided in the Notes to the Consolidated Financial Statements, as referenced in the following table.

	Contractual Payments Due by Period
(in thousands)	Less than 1 Year		1-3 Years		4-5 Years		After 5 Years		Total
Lease commitments (Note 6)	$	13,474	$	23,486	$	16,338	$	24,479	$	77,777
Long-term debt (Note 11)		270,174		338,219		80,052		139,634		828,079
Total contractual payment obligations	$	283,648	$	361,705	$	96,390	$	164,113	$	905,856

Arrangements to fund credit products or guarantee financing take the form of loan commitments (including lines of credit on revolving credit structures) and letters of credit. Approvals for these arrangements are obtained in the same manner as loans. Generally, cash flows, collateral value and a risk assessment are considered when determining the amount and structure of credit arrangements. Commitments to extend credit in the form of consumer, commercial real estate and business loans at December 31, 2006 were as follows:

(in thousands)	2006
Commercial business and real estate	$	1,064,495
Consumer revolving credit		733,292
Residential mortgage credit		24,131
Performance standby letters of credit		126,568
Commercial letters of credit		1,520
Total loan commitments	$	1,950,006

Historically, many of the commitments expire without being fully drawn; therefore, the total commitment amounts do not necessarily represent future cash requirements. Obligations also take the form of commitments to purchase loans. At December 31, 2006, the Corporation did not have any firm commitments to purchase loans.

Contingencies and Risk

The Corporation enters into certain transactions that may either contain risks or represent contingencies. These risks or contingencies may take the form of concentrations of credit risk or litigation. Disclosure of these arrangements is found in Note 14 to the Consolidated Financial Statements.

Risk Management

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

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

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

25

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

The following table shows the anticipated effect on net interest income in parallel shift (up or down) interest rate scenarios. These shifts are assumed to begin on January 1, 2006 for the December 31, 2005 data and on January 1, 2007 for the December 31, 2006 data and evenly ramp-up or down over a six-month period. The effect on net interest income would be for the next twelve months.

	Projected Percentage Change in Net Interest Income at December 31
Interest Rate Scenario	2006		2005
-200 basis points	-3.20	%	-4.40	%
-100 basis points	-2.30	%	-3.40	%
No change	—		—
+100 basis points	+0.30	%	+1.80	%
+200 basis points	+1.00	%	+3.20	%

The projected outcomes presented below are based on a balance sheet growth forecast and parallel shifts in interest rates, i.e. all interest rates moving by the same amount. Management models many non-parallel rate change scenarios as well, including several yield-curve flattening and steepening scenarios. The results of each scenario differ; however, the results below are an accurate indication of the magnitude and direction of the Corporation’s interest rate risk.

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

The isolated modeling environment, assuming no action by management, shows that the Corporation’s net interest income volatility is less than 3.3% under probable single direction scenarios. The Corporation’s one-year forward earnings are slightly asset sensitive, which will result in net interest income moving in the same direction as future interest rates. The Corporation’s interest rate risk has been reduced from 2005 to 2006, reflecting management’s increased uncertainty with the direction of future interest rate changes following the Federal Reserve’s curtailment of fed funds rate increases in June 2006.

Management employs the investment, borrowing, and derivatives portfolios in implementing the Bank’s interest rate strategy. Mitigating yield curve inversion risk has been a significant element of interest rate risk management in 2006. To protect the Bank from rising short-term interest rates, over $550.0 million of the investment portfolio reprices semiannually or more frequently. In the borrowings portfolio, $220.0 million of funds reset their rates with long-term interest rates, such as the 10-year constant maturity swap rate, to protect the net interest margin from falling long-term interest rates. The interest expense associated with these borrowings declines when long-term interest rates decline. Additionally, $363.4 million of interest rate swaps were in force to reduce interest rate risk, and $140.0 million of interest rate caps were employed specifically to protect against rising interest rates in the future.

Capital Resources

Total stockholders’ equity was $633.6 million at December 31, 2006, an increase of $3.1 million from December 31, 2005. The change in stockholders’ equity for the year was attributable to $70.0 million in earnings that was partially offset by dividends declared or paid of $38.4 million. Net accumulated other comprehensive loss increased by $4.8 million during the year due to the accounting change relating to postretirement benefits and from the impact of changing interest rates on the market value of the debt securities portfolio and cash flow hedges. Capital was increased by $15.5 million associated with the exercise of vested stock options and share-based payments and was reduced by $39.2 million from the repurchase of 1,091,753 shares of the Corporation’s common stock at an average price of $35.93. At December 31, 2006, the Corporation is authorized to repurchase an additional 146,112 shares under its stock repurchase program. As previously disclosed, on January 17, 2007, the Board of Directors authorized the repurchase of up to an additional 1.6 million shares from time to time subject to market conditions.

26

The Corporation is required to maintain minimum amounts and ratios of core capital to adjusted quarterly average assets (“leverage ratio”) and of tier 1 and total regulatory capital to risk-weighted assets. The actual regulatory capital ratios and required ratios for capital adequacy purposes under the Financial Institutions Reform, Recovery and Enforcement Act (“FIRREA”) and the ratios to be categorized as “well capitalized” under prompt corrective action regulations are summarized in the following table.

(dollars in thousands)	December 31, 2006			December 31, 2005
Total equity capital per consolidated financial statements	$	633,631		$	630,495
Qualifying trust preferred securities		129,000			129,000
Minimum pension liability		—			(1,196	)
Accumulated other comprehensive loss		22,107			17,283
Adjusted capital		784,738			775,582
Adjustments for tier 1 capital:
Goodwill and disallowed intangible assets		(263,665	)		(265,794	)
Total tier 1 capital		521,073			509,788
Adjustments for tier 2 capital:
Allowance for loan losses		45,203			45,639
Allowance for letter of credit losses		534			467
Total tier 2 capital adjustments		45,737			46,106
Total regulatory capital	$	566,810		$	555,894
Risk-weighted assets	$	4,781,982		$	4,645,900		Minimum Regulatory Requirements		To be “Well Capitalized”
Quarterly regulatory average assets		6,108,492			6,070,270
Ratios:
Tier 1 leverage		8.53	%		8.40	%	4.00	%	5.00	%
Tier 1 capital to risk-weighted assets		10.90			10.97		4.00		6.00
Total regulatory capital to risk-weighted assets		11.85			11.97		8.00		10.00

As of December 31, 2006, the Corporation is considered “well capitalized” for regulatory purposes.

27

RESULTS OF OPERATIONS

For the Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

Comparative Summary Statements of Income:

	Year ended December 31,
(dollars in thousands)	2006			2005			$ Variance			% Variance
Interest income	$	366,234		$	314,802		$	51,432		16.3	%
Interest expense		162,231			116,092			46,139		39.7
Net interest income		204,003			198,710			5,293		2.7
Provision for loan losses		3,973			5,023			(1,050	)	(20.9	)
Net interest income after provision for loan losses		200,030			193,687			6,343		3.3
Non-interest income		119,726			112,072			7,654		6.8
Net gains (losses)		(6,426	)		1,292			(7,718	)	(597.4	)
Net derivative losses on swaps		(533	)		(4,367	)		3,834		(87.8	)
Net cash settlement on swaps		903			3,512			(2,609	)	(74.3	)
Total non-interest income		113,670			112,509			1,161		1.0
Non-interest expense		214,579			200,737			13,842		6.9
Income before income taxes		99,121			105,459			(6,338	)	(6.0	)
Income tax expense		29,118			32,509			(3,391	)	(10.4	)
Net income	$	70,003		$	72,950		$	(2,947	)	(4.0	)

Financial Highlights

The Corporation reported earnings of $70.0 million or $2.12 per diluted share for the year ended December 31, 2006 compared to $73.0 million and $2.17 per diluted share for the year ended December 31, 2005. Earnings for 2006 included a $5.0 million or $0.15 per diluted share charge to earnings associated with a securities and debt reduction transaction that occurred in the fourth quarter of 2006. Increases of $6.3 million in the net interest margin after provision for loan losses, a $1.2 million increase in non-interest income along with a $3.4 million decrease in income tax expense were offset by a $13.8 million increase in non-interest expense, resulting in a $3.0 million decrease in net income. For the year, return on assets decreased from 1.14% to 1.09% while return on common equity decreased from 11.6% to 10.7%. The decline in these key business measurements was mainly a result of the securities and debt reduction transaction discussed above. During 2006, the net interest margin increased to 3.64% from 3.52%; average loans increased $148.4 million or 4.1%; average customer deposits increased $28.1 million or 0.8% while asset quality remained strong as non-performing assets to loans were 0.57% and charge-offs to average loans were 0.12% for the year.

The financial results in 2006 reflect the consistent execution by all lines of business, which produced growth in relationship-based loans, deposits and fee income. The Corporation continues to be committed to produce positive core results through the execution of the key business strategies of broadening its presence and customer base in the Virginia and metropolitan Washington markets, growing commercial business in all markets, and enhancing core business results in all markets. As a result, relationship based loans grew $324.3 million in the Corporation’s business segments and enabled the Corporation to strengthen the balance sheet and to improve key business measurements.

Net Interest Income

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

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

	2006						2005						2004
(dollars in thousands) (tax-equivalent basis)	Average Balance		Income/ Expense (3)		Yield/ Rate		Average Balance		Income/ Expense (3)		Yield/ Rate		Average Balance		Income/ Expense (3)		Yield/ Rate
Assets:
Interest-earning assets: (3)
Loans: (1)(2)(4)
Originated and acquired residential	$	389,836	$	24,276	6.23	%	$	565,693	$	33,081	5.85	%	$	713,648	$	43,215	6.06	%
Home equity		959,731		64,943	6.77			802,723		45,214	5.63			599,515		28,631	4.78
Marine		392,182		20,830	5.31			425,571		22,187	5.21			448,833		23,206	5.17
Other consumer		30,182		2,318	7.68			35,648		2,984	8.37			47,021		3,603	7.66
Commercial mortgage		455,962		31,772	6.97			479,726		30,016	6.26			427,892		23,832	5.57
Residential construction		516,192		44,157	8.55			330,766		22,954	6.94			208,467		10,671	5.12
Commercial construction		312,770		24,204	7.74			298,780		18,693	6.26			255,845		11,066	4.33
Commercial business		697,050		50,981	7.31			666,552		43,341	6.50			584,707		34,270	5.86
Total loans		3,753,905		263,481	7.02			3,605,459		218,470	6.06			3,285,928		178,494	5.43
Loans held for sale		9,700		653	6.73			7,368		441	5.99			6,330		382	6.03
Short-term investments		8,617		418	4.85			7,529		219	2.91			9,195		151	1.64
Taxable investment securities		1,807,687		98,468	5.45			2,026,440		95,230	4.70			2,169,027		93,598	4.32
Tax-advantaged investment securities (2) (4)		88,773		5,369	6.05			17,977		1,207	6.71			16,097		1,184	7.36
Total investment securities		1,896,460		103,837	5.48			2,044,417		96,437	4.72			2,185,124		94,782	4.34
Total interest-earning assets		5,668,682		368,389	6.50			5,664,773		315,567	5.57			5,486,577		273,809	4.99
Less: allowance for loan losses		44,880						46,001						43,511
Cash and due from banks		122,406						139,643						133,544
Other assets		628,974						622,983						485,001
Total assets	$	6,375,182					$	6,381,398					$	6,061,611
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities: (3)
Interest-bearing demand deposits	$	550,528		2,760	0.50		$	574,631		2,118	0.37		$	494,729		977	0.20
Money market deposits		590,723		16,583	2.81			582,547		10,782	1.85			568,776		5,617	0.99
Savings deposits		657,722		2,598	0.39			737,251		2,135	0.29			750,587		2,188	0.29
Direct time deposits		973,396		37,594	3.86			815,082		21,485	2.64			799,679		16,034	2.01
Brokered time deposits		499,523		23,780	4.76			384,701		17,298	4.50			308,605		16,419	5.32
Short-term borrowings		783,988		35,551	4.53			765,239		21,326	2.79			711,751		9,037	1.27
Long-term debt		850,836		43,365	5.10			1,049,267		40,948	3.90			1,151,515		40,546	3.52
Total interest-bearing liabilities		4,906,716		162,231	3.31			4,908,718		116,092	2.37			4,785,642		90,818	1.90
Noninterest-bearing demand deposits		773,369						808,137						730,889
Other liabilities		41,273						35,189						32,227
Stockholders’ equity		653,824						629,354						512,853
Total liabilities and stockholders’ equity	$	6,375,182					$	6,381,398					$	6,061,611
Net interest-earning assets	$	761,966					$	756,055					$	700,935
Net interest income (tax-equivalent)				206,158						199,475						182,991
Less: tax-equivalent adjustment				2,155						765						778
Net interest income			$	204,003					$	198,710					$	182,213
Net yield on interest-earning assets (4)					3.64	%					3.52	%					3.34	%

Notes:

(1) Average non-accrual balances and related income are included in their respective categories.

(2) Tax-advantaged income has been adjusted to a tax-equivalent basis using the combined statutory federal and state income tax rate in effect for all years presented.

(3) Impact of designated hedging strategies on interest income and interest expense has been included in the appropriate classifications above.

(4) Tax-equivalent basis.

29

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

	2006/2005 Increase/(Decrease)										2005/2004 Increase/(Decrease)										2006/2005 Income/Expense Variance Due to Change In						2005/2004 Income/Expense Variance Due to Change In
(dollars in thousands) (tax-equivalent basis)	Average Balance			% Change		Income/ Expense			% Change		Average Balance			% Change		Income/ Expense			% Change		Average Rate			Average Volume			Average Rate			Average Volume
Assets:
Interest-earning assets: (3)
Loans: (1)(2)(4)
Originated and acquired residential	$	(175,857	)	(31.1	)%	$	(8,805	)	(26.6	)%	$	(147,955	)	(20.7	)%	$	(10,134	)	(23.5	)%	$	2,031		$	(10,836	)	$	(1,438	)	$	(8,696	)
Home equity		157,008		19.6			19,729		43.6			203,208		33.9			16,583		57.9			10,008			9,721			5,740			10,843
Marine		(33,389	)	(7.8	)		(1,357	)	(6.1	)		(23,262	)	(5.2	)		(1,019	)	(4.4	)		410			(1,767	)		193			(1,212	)
Other consumer		(5,466	)	(15.3	)		(666	)	(22.3	)		(11,373	)	(24.2	)		(619	)	(17.2	)		(233	)		(433	)		311			(930	)
Commercial mortgage		(23,764	)	(5.0	)		1,756		5.9			51,834		12.1			6,184		25.9			3,294			(1,538	)		3,121			3,063
Residential construction		185,426		56.1			21,203		92.4			122,299		58.7			12,283		115.1			6,219			14,984			4,637			7,646
Commercial construction		13,990		4.7			5,511		29.5			42,935		16.8			7,627		68.9			4,602			909			5,544			2,083
Commercial business		30,498		4.6			7,640		17.6			81,845		14.0			9,071		26.5			5,590			2,050			3,979			5,092
Total loans		148,446		4.1			45,011		20.6			319,531		9.7			39,976		22.4
Loans held for sale		2,332		31.7			212		48.1			1,038		16.4			59		15.4			60			152			(3	)		62
Short-term investments		1,088		14.5			199		90.9			(1,666	)	(18.1	)		68		45.0			163			36			99			(31	)
Taxable investment securities		(218,753	)	(10.8	)		3,238		3.4			(142,587	)	(6.6	)		1,632		1.7			14,179			(10,941	)		8,018			(6,386	)
Tax-advantaged investment securities (2)(4)		70,796		393.8			4,162		344.8			1,880		11.7			23		1.9			(132	)		4,294			(108	)		131
Total investment securities		(147,957	)	(7.2	)		7,400		7.7			(140,707	)	(6.4	)		1,655		1.7
Total interest-earning assets		3,909		0.1			52,822		16.7			178,196		3.2			41,758		15.3			52,604			218			32,639			9,119
Less: allowance for loan losses		(1,121	)	(2.4	)							2,490		5.7
Cash and due from banks		(17,237	)	(12.3	)							6,099		4.6
Other assets		5,991		1.0								137,982		28.4
Total assets	$	(6,216	)	(0.1	)						$	319,787		5.3
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities: (3)
Interest-bearing demand deposits	$	(24,103	)	(4.2	)		642		30.3		$	79,902		16.2			1,141		116.8			734			(92	)		961			180
Money market deposits		8,176		1.4			5,801		53.8			13,771		2.4			5,165		92.0			5,648			153			5,026			139
Savings deposits		(79,529	)	(10.8	)		463		21.7			(13,336	)	(1.8	)		(53	)	(2.4	)		712			(249	)		(14	)		(39	)
Direct time deposits		158,314		19.4			16,109		75.0			15,403		1.9			5,451		34.0			11,364			4,745			5,136			315
Brokered time deposits		114,822		29.8			6,482		37.5			76,096		24.7			879		5.4			1,066			5,416			(2,785	)		3,664
Short-term borrowings		18,749		2.5			14,225		66.7			53,488		7.5			12,289		136.0			13,690			535			11,562			727
Long-term debt		(198,431	)	(18.9	)		2,417		5.9			(102,248	)	(8.9	)		402		1.0			11,066			(8,649	)		4,178			(3,776	)
Total interest-bearing liabilities		(2,002	)	0.0			46,139		39.7			123,076		2.6			25,274		27.8			46,186			(47	)		22,884			2,390
Noninterest-bearing demand deposits		(34,768	)	(4.3	)							77,248		10.6
Other liabilities		6,084		17.3								2,962		9.2
Stockholders’ equity		24,470		3.9								116,501		22.7
Total liabilities and stockholders’ equity	$	(6,216	)	(0.1	)						$	319,787		5.3
Net interest-earning assets	$	5,911		0.8							$	55,120		7.9
Net interest income (tax-equivalent)							6,683		3.4								16,484		9.0		$	6,418		$	265		$	9,755		$	6,729
Less: tax-equivalent adjustment							1,390		181.7								(13	)	(1.7	)
Net interest income						$	5,293		2.7							$	16,497		9.1

Notes:

(1) Average non-accrual balances and related income are included in their respective categories.

(2) Tax-advantaged income has been adjusted to a tax-equivalent basis using the combined statutory federal and state income tax rate in effect for all years presented.

(3) Impact of designated hedging strategies on interest income and interest expense has been included in the appropriate classifications above.

(4) Tax-equivalent basis.

30

The net interest margin, on a tax-equivalent basis, increased 12 basis points to 3.64% from 3.52% in 2005 and was driven by the continued balance sheet transitioning away from wholesale assets to growth in core lending activities. In 2006, management’s strategy of replacing lower net interest-earning assets with higher net interest-earning assets continued to be successful. The Corporation experienced solid loan growth in its home equity and construction loan portfolios from the same period a year ago. Growth in these loan portfolios was offset by the planned declines in wholesale assets (acquired residential portfolios and investment securities). Overall, year over year average earning assets grew slightly to $5.7 billion as a result of strong internally generated loan growth being offset by the planned reductions in wholesale assets. The net loan growth of $324.3 million in relationship-based loans was offset by planned reductions of $175.9 million in originated and acquired loans and a $148.0 million reduction in investment securities. The yields on investments and loans grew 76 and 96 basis points, respectively. The yield increase in the loan and investment portfolios resulted from the increase in market interest rates and the Corporation’s balance sheet restructuring program, which placed greater emphasis on variable rate securities. Interest-bearing liabilities remained flat for the year while the average rate paid increased 94 basis points. The increase in the average rate paid was mainly due to rising interest rates that impacted all sources of deposits, short-term borrowings and long-term debt. Interest expense was also negatively impacted by a $34.8 million decline in average noninterest-bearing demand deposit balances during the year as customers shifted their deposits to interest-bearing demand deposits as a result of the rising rate environment.

The 6.50% yield on earning assets increased from 5.57% in 2005 as a result of rising interest rates and the continued strong demand for both commercial and consumer loans which more than offset the increased cost on total interest-bearing liabilities of 3.31%. Growth in these key banking segment loans, financed by a reduction in lower yielding investments were the primary drivers behind the $52.8 million increase year over year in total interest income. This activity, together with a shift in funding from long-term debt to deposits were the contributing factors to a $6.7 million growth in net-interest income and a 12 basis point expansion in net-interest margin.

The Corporation has an ongoing risk management strategy of using derivative transactions to maintain a stable net interest margin. As a result of derivative transactions undertaken to mitigate the affect of interest rate risk on the Corporation, interest income increased $48 thousand and interest expense increased by $740 thousand, for a total decrease of $691 thousand in net interest income relating to derivative transactions for the year ended December 31, 2006.

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

Provision for Loan Losses

The Corporation continued to emphasize quality underwriting as well as aggressive management of charge-offs and potential problem loans, resulting in a provision for loan losses of $4.0 million in 2006 compared to $5.0 million in 2005. Net charge-offs were $4.4 million, or 0.12% of average loans in 2006, compared to $5.6 million, or 0.15% of average loans, in 2005. The decline is mainly driven by the $1.9 million decrease in net charge-offs in the commercial business portfolio. Total consumer loan net charge-offs as a percentage of average total consumer loans were 0.09% in 2006 compared to 0.11% in 2005. Total commercial net charge-offs as a percentage of average commercial loans were 0.08%, a decrease from 0.20% in 2005. The decline in charge-offs in both the consumer and commercial portfolios is a reflection of management’s credit policies and strategy of shifting the balance sheet to relationship based loan portfolios. By historical standards, credit conditions for the Corporation, as well as for the industry as a whole have been superior. The sustainability of these conditions into the future for the industry is uncertain.

31

Non-Interest Income

The following table presents a comparative summary of the major components of non-interest income for years ended December 31.

Non-Interest Income Summary:

(dollars in thousands)	2006			2005			$ Variance			% Variance
Service charges on deposit accounts	$	94,032		$	88,534		$	5,498		6.2	%
Commissions and fees		6,132			5,003			1,129		22.6
Other non-interest income:
Other loan fees		4,066			4,314			(248	)	(5.7	)
Cash surrender value income		7,145			7,145			—		—
Mortgage banking fees and services		363			528			(165	)	(31.3	)
Other		7,988			6,548			1,440		22.0
Non-interest income before net gains (losses) and cash settlement on swaps		119,726			112,072			7,654		6.8
Net gains (losses):
Securities		(5,924	)		923			(6,847	)	—
Extinguishment of debt		(1,132	)		(156	)		(976	)	—
Asset sales		630			525			105		20.0
Net gains (losses)		(6,426	)		1,292			(7,718	)	(597.4	)
Net derivative gains (losses) on swaps		(533	)		(4,367	)		3,834		(87.8	)
Net cash settlement on swaps		903			3,512			(2,609	)	(74.3	)
Total non-interest income	$	113,670		$	112,509		$	1,161		1.0
Total non-interest income excluding net gains (losses) and net derivative gains (losses)	$	120,629		$	115,584		$	5,045		4.4	%

Total non-interest income increased $1.2 million to $113.7 million in 2006. Total non-interest income, excluding the net gains (losses) and net derivative gains (losses) described below, increased 4.4% to $120.6 million in 2006.

The improvement in non-interest income continues to be driven by deposit fee income, which increased $5.5 million, or 6.2%, to $94.0 million in 2006. The increase in deposit fee income resulted from an increase in consumer deposit fees of $4.4 million and commercial deposit fees of $1.3 million, that was partially offset by a decline in ATM fees of $231 thousand. The increase in consumer deposit fees resulted from the full year impact of the implementation of a number of fundamental processing changes made in 2005 along with the addition of new branches via de-novo expansion. De-novo expansion represented the full year effect of three new banking offices that were opened in 2005, as well as the impact from three new banking offices opened in 2006. This branch expansion increased deposit fees by $665 thousand over 2005. The remaining consumer deposit fee income increase of $3.8 million was a result of the full year of processing changes mentioned above.

Commissions and fees improved 22.6%, or $1.1 million, to $6.1 million in 2006 due mainly to an increase in official check fees and the increased sales by PIC, the Bank’s wholly owned subsidiary which offers securities through an affiliation with a securities broker-dealer, as well as insurance products as an agent. Other non-interest income increased $1.0 million to $19.6 million, due to income associated with operating lease income, bank owned life insurance, and a recovery in a lawsuit. These income items were partially offset by a decline in mortgage banking fees and other loan fees.

The Corporation recorded $6.4 million in net losses in 2006, compared to net gains of $1.3 million in 2005. In 2006, net securities losses included a $182.9 million fixed rate MBS sale in the fourth quarter at a loss of $6.9 million to improve future profitability and reduce the Corporation’s wholesale assets. This loss was partially offset by net securities gains of $1.0 million that occurred throughout 2006. In 2006, the Corporation extinguished debt that generated a net loss of $1.1 million and partially offset by gains of $630 thousand realized from the disposition of loans, foreclosed properties and fixed assets. The net gains in 2005 were composed primarily of $923 thousand in net gains on the sales of securities and $525 thousand in net gains from the disposition of loans, foreclosed property and fixed assets. In 2006 and 2005, certain derivative transactions did not qualify for hedge accounting treatment and as a result, the gains and losses associated with these derivatives were recorded in non-interest income. Derivative losses on swaps were $533 thousand for the year ending December 31, 2006, compared to a $4.4 million loss in 2005. Net cash

32

settlement on swaps, representing interest income and expense on non-designated interest rate swaps, was $3.5 million for the year ending December 31, 2005 and $903 thousand for 2006. The decline is mainly a result of the decline in the notional amount of swaps in 2006 and the financial impact from the change in interest rates.

Non-Interest Expense

The following table presents a comparative summary of the major components of non-interest expense for the years ended December 31.

Non-Interest Expense Summary:

(dollars in thousands)	2006		2005		$ Variance			% Variance
Salaries and employee benefits	$	111,873	$	101,338	$	10,535		10.4	%
Occupancy expense, net		23,217		22,554		663		2.9
Furniture and equipment		15,604		14,663		941		6.4
External processing fees		20,531		20,357		174		0.9
Advertising and promotion		11,495		9,540		1,955		20.5
Communication and postage		6,988		7,137		(149	)	(2.1	)
Printing and supplies		2,874		3,161		(287	)	(9.1	)
Regulatory fees		1,015		1,019		(4	)	(0.4	)
Professional services		5,293		7,230		(1,937	)	(26.8	)
Other non-interest expense		15,689		13,738		1,951		14.2
Total non-interest expense	$	214,579	$	200,737	$	13,842		6.9

Non-interest expense of $214.6 million for 2006 was $13.8 million or 6.9% greater than 2005. The main increase in non-interest expense is the growth in salaries and employee benefits expense of $10.5 million. The increase in salaries and benefits was driven by higher base salary expense of $5.7 million due to annual merit increases and the higher number of employees in the consumer banking group as a result of the Bank’s de-novo banking expansion in 2006 and the full year of expenses from branch expansion in 2005. Salary and employee benefits expense were also impacted by an increase in health care claims of $1.8 million over 2005. Stock-based payment increased $897 thousand due to the change in accounting rules for stock options and the increase number of restricted shares issued in 2006. Pension expense increased by $480 thousand, payroll taxes by $366 thousand and commissions and incentives by $726 thousand. In addition, other employee benefits increased by $700 thousand over 2005. In 2005, salaries and employee benefits included a reduction to salaries and employee benefits of $1.3 million related to the Corporation’s termination of a post-retirement benefit plan along with a mutual separation agreement of $1.1 million with an executive who departed the Corporation.

Occupancy expense increased $663 thousand due to higher energy costs, higher building and service repairs and additional rent expense from the increased branch network and rent escalation costs on existing leases. Occupancy expense for 2005 included a one-time charge of $1.0 million to account for escalating lease payments.

Furniture and equipment expense increased by $941 thousand due to the increase in fixed assets acquired in 2006 and the full year of depreciation of assets purchased in 2005. In addition, there was an increase in depreciation expense for assets the Corporation leases through its leasing subsidiaries.

Advertising and promotion expense increased by $2.0 million as a result of the Corporation’s efforts to increase brand awareness in all the markets in which it competes.

Professional services decreased by $1.9 million in 2006 as the costs related to legal, corporate governance compliance efforts, including Sarbanes-Oxley and other regulatory requirements, declined from 2005.

Other non-interest expense increased by $2.0 million from 2005 mainly as a result of a litigation settlement of $1.3 million and an early termination agreement with a vendor for $792 thousand.

Income Taxes

The Corporation accounts for income taxes under the asset/liability method. Deferred tax assets and liabilities are recognized for the future consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as operating loss and tax credit carry forwards. A valuation allowance is established against deferred tax assets when in the judgment of management, it is more likely than not that such deferred tax assets

33

will not become realizable. It is at least reasonably possible that management’s judgment about the need for a valuation allowance for deferred taxes could change in the near term. The valuation allowance was $2.7 million at December 31, 2006 versus $2.2 million at December 31, 2005. The valuation allowance relates to additional state net operating losses that are unlikely to be utilized in the foreseeable future.

In 2006, the Corporation recorded income tax expense of $29.1 million on pre-tax income of $99.1 million, an effective tax rate of 29.4%. In 2005, the Corporation recorded income tax expense of $32.5 million on pre-tax income of $105.5 million, an effective tax rate of 30.8%. The decline in the effective tax rate for 2006 was mainly due to the increase in tax-advantaged income along with increased credits relating to low income housing programs.

Consolidated Quarterly Summary Results of Operations for 2006 and 2005 (Unaudited):

	2006								2005
(in thousands, except per share data)	Fourth Quarter		Third Quarter		Second Quarter		First Quarter		Fourth Quarter		Third Quarter		Second Quarter		First Quarter
Interest income	$	94,860	$	94,812	$	90,578	$	85,984	$	83,147	$	79,195	$	77,273	$	75,187
Interest expense		45,580		43,724		38,191		34,736		32,639		29,102		27,880		26,471
Net interest income		49,280		51,088		52,387		51,248		50,508		50,093		49,393		48,716
Provision for loan losses		1,877		954		824		318		400		826		2,222		1,575
Net interest income after provision for loan losses		47,403		50,134		51,563		50,930		50,108		49,267		47,171		47,141
Non-interest income		22,414		31,626		31,405		28,225		28,544		27,737		33,184		23,044
Non-interest expense		55,379		52,614		53,795		52,791		51,657		50,649		50,957		47,474
Income before income taxes		14,438		29,146		29,173		26,364		26,995		26,355		29,398		22,711
Income tax expense		3,155		8,707		9,150		8,106		8,025		8,102		9,421		6,961
Net income	$	11,283	$	20,439	$	20,023	$	18,258	$	18,970	$	18,253	$	19,977	$	15,750
Per share amounts:
Net income - basic	$	0.35	$	0.63	$	0.61	$	0.55	$	0.58	$	0.55	$	0.61	$	0.48
Net income - diluted		0.34		0.62		0.60		0.55		0.57		0.54		0.60		0.47

34

RESULTS OF OPERATIONS

For the Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

Comparative Summary Statements of Income:

	Year ended December 31,
(dollars in thousands)	2005			2004			$ Variance			% Variance
Interest income	$	314,802		$	273,031		$	41,771		15.3	%
Interest expense		116,092			90,818			25,274		27.8
Net interest income		198,710			182,213			16,497		9.1
Provision for loan losses		5,023			7,534			(2,511	)	(33.3	)
Net interest income after provision for loan losses		193,687			174,679			19,008		10.9
Non-interest income		112,072			100,840			11,232		11.1
Net gains (losses)		1,292			(5,773	)		7,065		(122.4	)
Net derivative gains (losses) on swaps		(4,367	)		2,432			(6,799	)	(279.6	)
Net cash settlement on swaps		3,512			3,469			43		1.2
Total non-interest income		112,509			100,968			11,541		11.4
Non-interest expense		200,737			183,728			17,009		9.3
Income before income taxes		105,459			91,919			13,540		14.7
Income tax expense		32,509			29,939			2,570		8.6
Net income	$	72,950		$	61,980		$	10,970		17.7

Financial Highlights

Provident reported record earnings of $73.0 million or $2.17 per diluted share for the year ended December 31, 2005 compared to $62.0 million and $2.00 per diluted share for the year ended December 31, 2004. Earnings for 2005 included the negative impact of $0.02 per share associated with a change in lease accounting. Increases of $19 million in the net interest margin after provision for loan losses and $11.5 million in non-interest income more than offset a $17 million increase in non-interest expense and a $2.6 million increase in income tax expense, resulting in an $11.0 million increase in net income. Return on assets increased from 1.02% to 1.14% for 2005 while return on common equity decreased from 12.1% to 11.6% in 2005. The financial results in 2005 reflected the Corporation’s continued commitment to produce positive results by executing the business strategies of broadening its presence and customer base in the Virginia and metropolitan Washington markets, growing commercial business in all markets, and enhancing core business results in all markets.

Net Interest Income

The net interest margin, on a tax-equivalent basis, increased 18 basis points to 3.52% and was driven by the continuation of the balance sheet transitioning and by the solid growth in core lending activities. Management’s strategy to replace lower net interest-earning assets with higher net interest-earning assets was very successful. The Corporation had solid loan growth in its home equity and construction loan portfolios since the same period a year ago. Growth in these portfolios was offset by planned declines in non-core investments, originated and acquired residential portfolios. Overall, average earning assets increased $178.2 million to $5.7 billion, augmented by net loan growth of $319.5 million offset by a $140.7 million reduction in investment securities. The yields on investments and loans grew 38 and 63 basis points, respectively. The yield increase in the portfolio was the result of a balance sheet restructuring program which placed greater emphasis on variable rate securities, as well as a decline in prepayments. Interest-bearing liabilities increased $123.1 million while the average rate paid increased 47 basis points. The increase in the average rate paid was primarily due to rising interest rates that impacted interest-bearing demand deposits, money market deposits, short-term borrowings and long-term debt. Interest expense benefited from a $77 million increase in average noninterest-bearing deposit balances during the year.

The 5.57% yield on earning assets correspondingly increased as a result of rising interest rates and the product mix of loans that more than offset the increased funding costs of 2.37%. Net interest income on a tax-equivalent basis was $199 million in 2005, compared to $183 million in 2004. Total interest income increased $41.8 million and total interest expense increased $25.3 million resulting in the growth in net interest income of $16.5 million.

The Corporation had an ongoing risk management strategy of using derivative transactions to maintain a stable net interest margin. As a result of derivative transactions undertaken to mitigate the affect of interest rate risk on the Corporation, interest income

35

decreased by $583 thousand and interest expense increased by $896 thousand, for a total decrease of $1.5 million in net interest income relating to derivative transactions for the year ended December 31, 2005.

Provision for Loan Losses

The Corporation continued to emphasize quality underwriting as well as aggressive management of charge-offs and potential problem loans, resulting in a provision for loan losses of $5.0 million in 2005 compared to $7.5 million in 2004. Net charge-offs were $5.6 million, or 0.15% of average loans in 2005, compared to $9.0 million, or 0.27% of average loans, in 2004. Total consumer loan net charge-offs as a percentage of average total consumer loans were 0.11% in 2005 compared to 0.30% in 2004. During 2005, net charge-offs in the originated and acquired residential mortgage portfolio declined from 0.56% in 2004 to 0.16% in 2005. Other consumer loans net charge-offs declined from 0.14% in 2004 to 0.09% in 2005. Both consumer portfolios experienced an improvement in net charge-offs as a percentage of average loans in their respective portfolios. Total commercial net charge-offs as a percentage of average commercial loans were 0.20%, a decrease from 0.24% in 2004.

Non-Interest Income

Total non-interest income increased $11.5 million to $112.5 million in 2005. Total non-interest income, excluding the net gains (losses) and derivative gains (losses) described below, increased 10.8% to $115.6 million in 2005.

The improvement in non-interest income continued to be driven by deposit fee income, which increased $6.6 million, or 8.1%, to $88.5 million in 2005. The increase in deposit fee income is mainly in consumer deposit fees, which were a result of implementing a number of fundamental processing changes along with the addition of new branches via de-novo expansion and the acquisition of Southern Financial. Approximately $1.7 million of the increase in deposit fees was from the addition of Southern Financial for twelve months in 2005 compared to eight months in 2004. In addition, de-novo expansion represented the full year effect of one new banking office opened in 2004, as well as three new banking offices opened in 2005. This expansion increased deposit fees by $201 thousand over 2004. The remaining $4.7 million was a result of the processing changes mentioned above along with an increase in debit card usage.

Commissions and fees increased 9.1%, or $419 thousand, to $5.0 million in 2005 due to increased sales by PIC, the Bank’s wholly owned subsidiary which offers securities through an affiliation with a securities broker-dealer, as well as insurance products as an agent. Other non-interest income increased $4.2 million to $18.5 million, due to income associated with bank owned life insurance, mortgage banking fees and other fees.

The Corporation recorded $1.3 million in net gains in 2005, compared to net losses of $5.8 million in 2004. The net gains in 2005 were composed primarily of $818 thousand in net gains on the sales of securities and $525 thousand net gains from the disposition of loans, foreclosed property and fixed assets. The net losses in 2004 were composed of $2.4 million in losses on the extinguishment of debt and $3.2 million in losses on the sale of securities. The disposition of loans, foreclosed property and fixed assets that occur in the ordinary course of business had minimal impact in 2004. In 2005 and 2004, certain derivative transactions did not qualify for hedge accounting treatment and as a result, the gains and losses associated with the derivatives were recorded in non-interest income. Derivative losses on swaps were $4.4 million for the year ending December 31, 2005, compared to a $2.4 million gain in 2004.

Net cash settlement on swaps, representing interest income and expense on non-designated interest rate swaps was $3.5 million for each of the years ending December 31, 2004 and 2005.

Non-Interest Expense

Non-interest expense of $200.7 million for 2005 was $17.0 million higher than 2004. Approximately $4.6 million of this increase was attributable to the Corporation’s merger with Southern Financial in April 30, 2004, resulting in twelve months of expense in 2005 while 2004 included only eight months. In addition, 2004 included merger expenses of $3.5 million. The year ending December 31, 2005 included a reduction to employee benefits of $1.2 million related to the Corporation’s termination of a post-retirement benefit plan. This amount was offset by a $537 thousand non-recurring charge to the Corporation’s benefit plans relating to the Corporation’s 401K plan and the acceleration of stock option expense. In addition, occupancy expense for 2005 included a one-time charge of $1.0 million to account for escalating lease payments. The Bank’s de-novo banking expansion activity increased non-interest expense by $1.2 million in 2005, impacting salaries and employee benefits, occupancy and premises and equipment. Professional services included $4.1 million in costs related to corporate governance compliance efforts, including Sarbanes-Oxley and other regulatory requirements. External processing included a reduction of $1.6 million relating to renegotiated contracts with external processing vendors. Additional items contributing to this increase were employee incentives, a

36

mutual separation agreement with an executive who departed the Corporation along with costs associated with the infrastructure changes necessary to support the larger geographic region, as well as variable costs associated with loan and deposit growth.

Income Taxes

The Corporation accounts for income taxes under the asset/liability method. Deferred tax assets and liabilities are recognized for the future consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as operating loss and tax credit carry forwards. A valuation allowance is established against deferred tax assets when in the judgment of management, it is more likely than not that such deferred tax assets will not become realizable. It is at least reasonably possible that management’s judgment about the need for a valuation allowance for deferred taxes could change in the near term. The valuation allowance was $2.2 million at December 31, 2005 versus $1.7 million at December 31, 2004. The valuation allowance relates to additional state net operating losses that are unlikely to be utilized in the foreseeable future.

In 2005, the Corporation recorded income tax expense of $32.5 million on pre-tax income of $105.5 million, an effective tax rate of 30.8%. In 2004, the Corporation recorded income tax expense of $29.9 million on pre-tax income of $91.9 million, an effective tax rate of 32.6%. The decline in the effective tax rate for 2005 was mainly due to higher tax-advantaged income and low income housing tax credits.

RECENT ACCOUNTING DEVELOPMENTS

Refer to Note 1 of the Consolidated Financial Statements on page 44.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

See “Risk Factors” on page 10 and “Risk Management” on page 25 and refer to the disclosures on derivatives and investment securities in Item 8—Financial Statements and Supplementary Data contained below.

Item 8. Financial Statements and Supplementary Data

Index to Consolidated Financial Statements

Provident Bankshares Corporation and Subsidiaries

	Page
Reports of Independent Registered Public Accounting Firm	38
Consolidated Statements of Condition at December 31, 2006 and 2005	40
For the three years ended December 31, 2006, 2005 and 2004:
Consolidated Statements of Income	41
Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income	42
Consolidated Statements of Cash Flows	43
Notes to Consolidated Financial Statements	44

37

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Provident Bankshares Corporation:

We have audited the accompanying consolidated statements of condition of Provident Bankshares Corporation and subsidiaries (“Corporation”) as of December 31, 2006 and 2005 and the related consolidated statements of income, changes in stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2006. These consolidated financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Provident Bankshares Corporation and subsidiaries as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.

As discussed in the summary of significant accounting policies accompanying the consolidated financial statements, the Corporation changed its method of accounting for share-based compensation with the adoption, effective January 1, 2006, of Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment” and its method of accounting for defined benefit pension and other postretirement plans as of December 31, 2006, in accordance with SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.”

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 1, 2007 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

/s/ KPMG LLP

Baltimore, Maryland

March 1, 2007

38

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Provident Bankshares Corporation:

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting appearing under Item 9A, that Provident Bankshares Corporation and subsidiaries (“Corporation”) maintained effective internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The management of the Corporation is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Corporation’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that the Corporation maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the COSO. Also, in our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of condition of the Corporation as of December 31, 2006 and 2005, and the related consolidated statements of income, changes in stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2006, and our report dated March 1, 2007 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

Baltimore, Maryland

March 1, 2007

39

Provident Bankshares Corporation and Subsidiaries

Consolidated Statements of Condition

	December 31,
(dollars in thousands, except share amounts)	2006			2005
Assets:
Cash and due from banks	$	142,794		$	159,474
Short-term investments		7,118			3,992
Mortgage loans held for sale		10,615			8,169
Securities available for sale		1,582,736			1,794,086
Securities held to maturity		101,867			111,269
Loans		3,865,492			3,695,381
Less allowance for loan losses		45,203			45,639
Net loans		3,820,289			3,649,742
Premises and equipment, net		67,936			65,893
Accrued interest receivable		37,084			31,766
Goodwill		254,543			254,855
Intangible assets		8,965			10,765
Other assets		261,946			265,915
Total assets	$	6,295,893		$	6,355,926
Liabilities:
Deposits:
Noninterest-bearing	$	761,830		$	860,023
Interest-bearing		3,378,282			3,264,444
Total deposits		4,140,112			4,124,467
Short-term borrowings		658,887			647,752
Long-term debt		828,079			920,022
Accrued expenses and other liabilities		35,184			33,190
Total liabilities		5,662,262			5,725,431
Commitments and Contingencies (Notes 6 and 14)
Stockholders’ Equity:
Common stock (par value $1.00) authorized 100,000,000 shares; issued 32,433,387 and 32,933,118 shares at December 31, 2006 and 2005, respectively		32,433			32,933
Additional paid-in capital		370,425			393,555
Retained earnings		252,880			221,290
Net accumulated other comprehensive loss		(22,107	)		(17,283	)
Total stockholders’ equity		633,631			630,495
Total liabilities and stockholders’ equity	$	6,295,893		$	6,355,926

The accompanying notes are an integral part of these statements.

40

Provident Bankshares Corporation and Subsidiaries

Consolidated Statements of Income

	Year ended December 31,
(dollars in thousands, except per share data)	2006			2005			2004
Interest Income:
Loans, including fees	$	263,356		$	218,071		$	177,961
Investment securities		98,468			95,230			93,598
Tax-advantaged loans and securities		3,992			1,282			1,321
Short-term investments		418			219			151
Total interest income		366,234			314,802			273,031
Interest Expense:
Deposits		83,315			53,818			41,235
Short-term borrowings		35,551			21,326			9,037
Long-term debt		43,365			40,948			40,546
Total interest expense		162,231			116,092			90,818
Net interest income		204,003			198,710			182,213
Less provision for loan losses		3,973			5,023			7,534
Net interest income, after provision for loan losses		200,030			193,687			174,679
Non-Interest Income:
Service charges on deposit accounts		94,032			88,534			81,885
Commissions and fees		6,132			5,003			4,584
Net gains (losses)		(6,426	)		1,292			(5,773	)
Net derivative gains (losses) on swaps		(533	)		(4,367	)		2,432
Net cash settlement on swaps		903			3,512			3,469
Other non-interest income		19,562			18,535			14,371
Total non-interest income		113,670			112,509			100,968
Non-Interest Expense:
Salaries and employee benefits		111,873			101,338			90,024
Occupancy expense, net		23,217			22,554			18,871
Furniture and equipment expense		15,604			14,663			13,295
External processing fees		20,531			20,357			22,763
Merger expenses		—			—			3,541
Other non-interest expense		43,354			41,825			35,234
Total non-interest expense		214,579			200,737			183,728
Income before income taxes		99,121			105,459			91,919
Income tax expense		29,118			32,509			29,939
Net income	$	70,003		$	72,950		$	61,980
Net Income Per Share Amounts:
Basic	$	2.14		$	2.21		$	2.05
Diluted	$	2.12		$	2.17		$	2.00

The accompanying notes are an integral part of these statements.

41

Provident Bankshares Corporation and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income

(in thousands, except per share data)	Common Stock			Additional Paid-in Capital			Retained Earnings			Net Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
Balance at December 31, 2003	$	24,563		$	153,246		$	153,545		$	(6,589	)	$	324,765
Net income - 2004		—			—			61,980			—			61,980
Other comprehensive income (loss), net of tax:
Net unrealized gain on debt securities, net of reclassification adjustment		—			—			—			5,215			5,215
Net gain on derivatives		—			—			—			1,104			1,104
Minimum pension liability adjustment		—			—			—			(1,365	)		(1,365	)
Total comprehensive income														66,934
Dividends paid ($1.01 per share)		—			—			(31,456	)		—			(31,456	)
Exercise of stock options (423,466 shares)		423			9,423			—			—			9,846
Issuance of stock for acquisition of Southern Financial Bancorp (8,190,234 shares)		8,190			242,986			—			—			251,176
Purchase of treasury shares (116,900 shares)		(117	)		(4,103	)		—			—			(4,220	)
Common stock issued under dividend reinvestment plan (43,863 shares)		44			1,334			—			—			1,378
Balance at December 31, 2004		33,103			402,886			184,069			(1,635	)		618,423
Net income - 2005		—			—			72,950			—			72,950
Other comprehensive income (loss), net of tax:
Net unrealized loss on debt securities, net of reclassification adjustment		—			—			—			(17,099	)		(17,099	)
Net gain on derivatives		—			—			—			1,282			1,282
Minimum pension liability adjustment		—			—			—			169			169
Total comprehensive income														57,302
Dividends paid ($1.09 per share)		—			—			(35,729	)		—			(35,729	)
Exercise of stock options and restricted stock (440,001 shares, 31,550 restricted shares)		471			10,495			—			—			10,966
Revision of stock option vesting terms		—			609			—			—			609
Purchase of treasury shares (684,962 shares)		(685	)		(21,899	)		—			—			(22,584	)
Common stock issued under dividend reinvestment plan (44,144 shares)		44			1,464			—			—			1,508
Balance at December 31, 2005		32,933			393,555			221,290			(17,283	)		630,495
Net income - 2006		—			—			70,003			—			70,003
Other comprehensive income (loss), net of tax:
Net unrealized gain on debt securities, net of reclassification adjustment		—			—			—			5,783			5,783
Net loss on derivatives		—			—			—			(614	)		(614	)
Application of SFAS No. 158 to postretirement plans		—			—			—			(9,993	)		(9,993	)
Total comprehensive income														65,179
Dividends paid ($1.17 per share)		—			—			(38,413	)		—			(38,413	)
Exercise of stock options and restricted stock (530,001 shares, 62,021 restricted shares)		592			14,543			—			—			15,135
Application of SFAS No. 123(R) to stock-based compensation		—			463			—			—			463
Purchase of treasury shares (1,091,753 shares)		(1,092	)		(38,136	)		—			—			(39,228	)
Balance at December 31, 2006	$	32,433		$	370,425		$	252,880		$	(22,107	)	$	633,631

The accompanying notes are an integral part of these statements.

42

Provident Bankshares Corporation and Subsidiaries

Consolidated Statements of Cash Flows

	Year ended December 31,
(in thousands)	2006			2005			2004
Operating Activities:
Net income	$	70,003		$	72,950		$	61,980
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		23,082			26,423			26,261
Provision for loan losses		3,973			5,023			7,534
Provision for deferred income tax (benefit)		933			(9,740	)		4,594
Net (gains) losses		6,426			(1,292	)		5,773
Net derivative (gains) losses		533			4,367			(2,432	)
Originated loans held for sale		(106,186	)		(78,857	)		(74,871	)
Proceeds from sales of loans held for sale		104,315			77,849			73,846
Net decrease (increase) in accrued interest receivable and other assets		(19,976	)		2,144			(52,247	)
Net increase (decrease) in accrued expenses and other liabilities		1,994			(5,340	)		(492	)
Total adjustments		15,094			20,577			(12,034	)
Net cash provided by operating activities		85,097			93,527			49,946
Investing Activities:
Principal collections and maturities of securities available for sale		215,453			333,698			422,988
Principal collections and maturities of securities held to maturity		25,759			1,026			—
Proceeds from sales of securities available for sale		416,269			448,993			990,394
Purchases of securities available for sale		(418,707	)		(430,400	)		(1,056,567	)
Purchases of securities held to maturity		(19,016	)		—			—
Loan originations and purchases less principal collections		(176,750	)		(142,121	)		(109,748	)
Proceeds from business acquisition		—			—			27,872
Purchases of premises and equipment		(15,910	)		(15,058	)		(10,473	)
Net cash provided by investing activities		27,098			196,138			264,466
Financing Activities:
Net increase (decrease) in deposits		15,977			341,310			(318,781	)
Net increase (decrease) in short-term borrowings		11,135			(270,141	)		80,511
Proceeds from long-term debt		655,000			130,000			379,987
Payments and maturities of long-term debt		(748,485	)		(416,460	)		(425,540	)
Proceeds from issuance of stock		15,598			13,083			11,224
Tax benefits associated with share based payments		2,667			—			—
Purchase of treasury stock		(39,228	)		(22,584	)		(4,220	)
Cash dividends paid on common stock		(38,413	)		(35,729	)		(31,456	)
Net cash used by financing activities		(125,749	)		(260,521	)		(308,275	)
Increase (decrease) in cash and cash equivalents		(13,554	)		29,144			6,137
Cash and cash equivalents at beginning of period		163,466			134,322			128,185
Cash and cash equivalents at end of period	$	149,912		$	163,466		$	134,322
Supplemental Disclosures:
Interest paid, net of amount credited to deposit accounts	$	105,935		$	80,542		$	66,473
Income taxes paid		26,226			25,690			23,197
Stock issued for acquired company		—			—			251,176
Net securities available for sale transferred to held to maturity		—			—			115,442

The accompanying notes are an integral part of these statements.

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Provident Bankshares Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

The accounting and reporting policies of the Corporation conform with U.S. generally accepted accounting principles (“GAAP”) and prevailing practices within the banking industry. The following summary of significant accounting policies of the Corporation is presented to assist the reader in understanding the financial and other data presented in this report.

Principles of Consolidation and Basis of Presentation

The Consolidated Financial Statements include the accounts of the Corporation and its wholly owned subsidiary, Provident Bank and its subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation. Certain prior years’ amounts in the Consolidated Financial Statements have been reclassified to conform to the presentation used for the current year. These reclassifications have no effect on previously reported net income.

Use of Estimates

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

Asset Prepayment Rates

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

Investment Securities

The Corporation classifies investments as either held to maturity or available for sale at the time of purchase. Securities that the Corporation has the intent and ability to hold to maturity are classified as held to maturity and are carried at cost, adjusted for amortization of premiums and accretion of discounts using the interest method. Securities that the Corporation intends to hold for an indefinite period of time, but may sell to respond to changes in risk reward profiles, in interest rates, prepayment risks, liquidity needs or other similar factors, are classified as available for sale. Available for sale securities are reported at fair value with any unrealized appreciation or depreciation in value reported net of tax as a separate component of stockholders’ equity as net

44

accumulated other comprehensive income (loss) (“OCI”). Gains and losses from the sales of securities are recognized by the specific identification method and are reported in net gains (losses). Investment securities are evaluated periodically to determine whether a decline in their value is other than temporary.

Other Than Temporary Impairment of Investment Securities

Securities are evaluated periodically to determine whether a decline in their value is other than temporary. Management utilizes criteria such as the magnitude and duration of the decline, in addition to the reasons underlying the decline, to determine whether the loss in value is other than temporary. The term “other than temporary” is not intended to indicate that the decline in value is permanent. It indicates that the prospects for a near term recovery of value are not necessarily favorable, or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of the investment. Once a decline in value is determined to be other than temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.

Mortgage Loans Held for Sale

The Corporation underwrites and originates mortgage loans with the intent to sell them. A contract exists between the Corporation and a third party in which the third party processes the loan then purchases the settled loan at a set fee. Amounts reflected as loans held for sale bear no market risk with regard to their sale price as the third party purchases the loans at their face amount, and are carried at cost. Net fee income is recognized in net gains (losses). At December 31, 2006 and 2005, the Corporation did not retain any servicing on mortgage loans sold to third parties.

Loans

All interest on loans, including direct financing leases, is accrued at the contractual rate and credited to income based upon the principal amount outstanding. Loans are reported at the principal amount outstanding, net of unearned income. Unearned income includes deferred loan origination fees, net of deferred direct incremental loan origination costs. Purchased loans are reported at the principal amount outstanding net of purchase premiums or discounts. Unearned income associated with originated loans and premiums and discounts associated with purchased loans are amortized over the expected life of the loans using the interest method and recognized in interest income as a yield adjustment.

Management places a commercial loan on non-accrual status and discontinues the accrual of interest and reverses previously accrued but unpaid interest when the quality of a commercial credit has deteriorated to the extent that collectibility of all interest and/or principal cannot be reasonably expected, or when it is 90 days past due, unless the loan is well secured and in the process of collection.

Consumer credit secured by residential property is evaluated for collectibility at 120 days past due. If the loan is in a first lien position and the ratio of the loan balance to net fair value exceeds 84%, the loan is placed on non-accrual status and all accrued but unpaid interest is reversed against interest income. If the loan is in a junior lien position, all other liens are considered in calculating the loan to value ratio. With limited exceptions, no loan continues to accrue interest after reaching 210 days past due. Charge-offs of delinquent loans secured by residential real estate are recognized when losses are reasonably estimable and probable. Generally, no later than 180 days delinquent, any portion of an outstanding loan balance in excess of the collateral’s net fair value is charged-off. Subsequent to any partial charge-offs, loans are carried on non-accrual status until the collateral is liquidated or the loan is charged-off in its entirety. Properties with partial charge-offs are periodically evaluated to determine whether additional charge-offs are warranted. Upon liquidation of the property, any deficiencies between proceeds and the recorded balance of the loan result in additional charge-offs. Generally, closed-end consumer loans secured by non-residential collateral that become 120 days past due are charged-off down to their net fair value. Unsecured open-end consumer loans are charged-off in full at 180 days past due.

Individual loans are considered impaired when, based on available information, it is probable that the Corporation will be unable to collect principal and interest when due in accordance with the contractual terms of the loan agreement. All non-accrual loans are considered impaired loans. The measurement of impaired loans is based on the present value of expected cash flows discounted at the historical effective interest rate, the market price of the loan or the fair value of the underlying collateral. Impairment criteria are applied to the loan portfolio exclusive of smaller balance homogeneous loans, such as residential mortgage and consumer loans, which are evaluated collectively for impairment.

In cases where a borrower experiences financial difficulties and the Corporation makes certain concessionary modifications to contractual terms, the loan is classified as a restructured loan. Loans restructured at a rate equal to or greater than that of a new loan with comparable risk at the time the contract is modified may cease to be considered impaired loans in the calendar years subsequent to the restructuring. Generally, a non-accrual loan that is restructured remains on non-accrual status for a period of six

45

months to demonstrate that the borrower can meet the restructured terms. However, performance prior to the restructuring, or significant events that coincide with the restructuring, are included in assessing whether the borrower can meet the new terms and may result in being returned to accrual status at the time of restructuring or after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains classified as a non-accrual loan.

An analysis of impaired loans is incorporated in the evaluation of the allowance for loan losses. Collections of interest and principal on all impaired loans are generally applied as a reduction to the outstanding principal balance of the loan. Once future collectibility has been established, interest income may be recognized on a cash basis.

Allowance for Loan Losses

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

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

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

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

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

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

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

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

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

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

Residual Values

Lease financing provided by the Corporation involves the use of estimated residual values of the leased asset. Significant assumptions used in estimating residual values include estimated cash flows over the remaining lease term and results of future re-marketing. Periodically, the residual values associated with these leases are reviewed for impairment. Impairment losses, which are charged to interest income, are recognized if the carrying amount of the residual values exceeds the fair value and is not recoverable.

Premises and Equipment

Premises, equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets or, for leasehold improvements, the lives of the related leases, if shorter. Major improvements are capitalized, while maintenance and repairs are charged to expense as incurred.

The Corporation leases small office, medical and construction equipment to customers and accounts for the leases as operating leases. The equipment is reflected as premises and equipment on the Consolidated Statements of Condition. Operating lease rental income is recognized on a straight-line basis and reflected as other non-interest income in the Consolidated Statements of Income. Related depreciation expense is recorded on a straight-line basis over the life of the lease, taking into account the estimated residual value of the leased asset. On a periodic basis, leased assets are reviewed for impairment. Impairment losses are recognized if the carrying amount of leased assets exceeds fair value and is not recoverable and reflected as net gains (losses). The carrying amount of leased assets is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the lease payments and the estimated residual value upon the eventual disposition of the equipment.

Goodwill and Intangible Assets

For acquisitions, the Corporation records the assets acquired, including identified intangible assets, and liabilities assumed at their fair value, which in many instances involves estimates based on third party valuations, such as appraisals, or valuations based on discounted cash flow analyses or other valuation techniques. The determination of the useful lives of intangible assets is subjective, as is the appropriate amortization period for such intangible assets. These estimates also include the establishment of various accruals and allowances based on planned facilities dispositions and employee severance considerations, among other acquisition-related items. In addition, purchase acquisitions typically result in goodwill, which represents the excess of the purchase price over the fair value of the net assets acquired by the Corporation. Goodwill is tested at least annually for impairment. Such tests involve the use of estimates and assumptions. Intangible assets other than goodwill, such as deposit-based intangibles, which are determined to have finite lives are amortized over their estimated useful lives which are approximately 8 years.

Mortgage Servicing Rights

Mortgage servicing rights are reflected as a separate asset when the rights are acquired through the sale or purchase of financial assets, such as mortgage loans. Loans sold have a portion of the cost of originating the loan allocated to the servicing right based on the relative fair value which is based on the market prices for comparable mortgage servicing contracts or a valuation model that calculates the present value of estimated future servicing income. The valuation model incorporates assumptions such as cost to service, discount rate, ancillary income, prepayment speeds and default rates and losses. Capitalized servicing rights are reported in other assets and are amortized into non-interest income in proportion to, and over the period of, estimated future net servicing income of the underlying financial assets. Servicing fee income, which is fees earned for servicing loans, is based on a contractual percentage of the outstanding principal or a fixed amount per loan and is recorded as earned. The amortization of mortgage servicing rights is netted against loan servicing fee income. Servicing rights are evaluated for impairment on a periodic basis based on the fair value of the rights compared to the amortized cost. Impairment is recognized through a charge to non-interest income.

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Other Real Estate Owned

At the time a loan is determined to be uncollectible, the underlying collateral is repossessed. At the time of repossession, the loan is reclassified as other real estate owned and carried at lower of cost or fair market value of the collateral less cost to sell (“net fair value”), establishing a new cost basis. The difference between the loan balance and the net fair value at time of foreclosure is recorded as a charge-off. Management periodically performs valuations on these assets. Revenue and expenses from the operation of other real estate owned, if applicable, and changes in the valuation allowance are included in results of operations. Gains or losses on the eventual disposition of these assets are included in net gains (losses).

Variable Interest Entities

In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN No. 46”) effective for fiscal years ending after December 31, 2003. FIN No. 46 provides guidance on identifying a variable interest entity (“VIE”) and determining when a company must consolidate the assets, liabilities, and results of activities of a VIE in its financial statements. A company is required to consolidate a VIE if it is determined to be the primary beneficiary of the VIE. The primary beneficiary is the party that absorbs a majority of the VIE’s expected losses, receives a majority of its expected residual returns, or both. In December 2003, FIN No. 46 was revised (“FIN No. 46R”) by modifying and clarifying certain provisions of FIN No. 46.

The provisions of FIN No. 46R modified the Corporation’s status as the primary beneficiary of the trusts associated with the Corporation’s borrowing arrangements involving trust preferred securities. Accordingly, the Corporation deconsolidated these trusts as of January 1, 2004. The deconsolidation was not material to the Corporation’s Statements of Condition and did not affect net income.

The Corporation holds variable interests of less than 50% in certain special purpose entities formed to provide affordable housing. At December 31, 2006, the Corporation had invested $26.6 million in these entities. These investments in low income housing provide the Corporation with certain guaranteed tax credits and other related tax benefits which offset amortization of the invested amounts over the life of the tax credits. The Corporation completed an analysis of its low income housing investments and concluded that consolidation is not required under the provisions of FIN No. 46R, as the Corporation is not the primary beneficiary in these arrangements.

Income Taxes

The Corporation accounts for income taxes under the asset/liability method. Deferred tax assets and liabilities are recognized for the future consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period indicated by the enactment date. A valuation allowance is established against deferred tax assets when in the judgment of management, it is more likely than not that such deferred tax assets will not become realizable. The judgment about the level of future taxable income is dependent to a great extent on matters that may at least in part, be beyond the Bank’s control. It is at least reasonably possible that management’s judgment about the need for a valuation allowance for deferred taxes could change in the near term.

Derivative Financial Instruments

The Corporation uses various derivative financial instruments as part of its interest rate risk management strategy to mitigate the exposure to changes in market interest rates. The derivative financial instruments used separately or in combination are interest rate swaps, caps and floors. Derivative financial instruments are required to be measured at fair value and recognized as either assets or liabilities in the financial statements. Fair value represents the payment the Corporation would receive or pay if the item were sold or bought in a current transaction. Fair values are generally based on market quotes. The accounting for changes in fair value (gains or losses) of a derivative is dependent on whether the derivative is designated and qualifies for “hedge accounting.” In accordance with Statement of Financial Accounting Standards No. 133, “ Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”), the Corporation assigns derivatives to one of these categories at the purchase date: fair value hedge, cash flow hedge or non-designated derivative. SFAS No. 133 requires an assessment of the expected and ongoing hedge effectiveness of any derivative designated a fair value hedge or cash flow hedge. Derivatives are included in other assets and other liabilities in the Consolidated Statements of Condition.

Fair Value Hedges—For derivatives designated as fair value hedges, the derivative instrument and related hedged item are marked-to-market through the related interest income or expense, as applicable, except for the ineffective portion which is recorded in non-interest income.

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Cash Flow Hedges—For derivatives designated as cash flow hedges, mark-to-market adjustments are recorded net of income taxes as a component of other comprehensive income (“OCI”) in stockholders’ equity, except for the ineffective portion which is recorded in non-interest income. Amounts recorded in OCI are recognized into earnings concurrent with the hedged items’ impact on earnings.

Non-Designated Derivatives—Certain economic hedges are not designated as cash flow or as fair value hedges for accounting purposes. As a result, changes in the fair value are recorded in non-interest income in the Consolidated Statements of Income. Interest income or expense related to non-designated derivatives is also recorded in non-interest income.

All qualifying relationships between hedging instruments and hedged items are fully documented by the Corporation. Risk management objectives, strategies and the projected effectiveness of the chosen derivatives to hedge specific risks are also documented. At inception of the hedging relationship and periodically as required under SFAS No. 133, the Corporation evaluates the effectiveness of its hedging instruments. For hedges qualifying for “short-cut” treatment at inception, the ongoing effectiveness testing includes a review of the hedge and the hedged item to determine if the hedge continues to qualify for short-cut treatment. An assumption of no hedge ineffectiveness is allowed for derivatives qualifying for short-cut treatment. For all other derivatives qualifying for hedge accounting, a quantitative assessment of the effectiveness of the hedge is required at each reporting date. The Corporation performs effectiveness testing quarterly for all of its hedges. The Corporation uses benchmark interest rates such as LIBOR to hedge the interest rate risk associated with interest-earning assets or interest-bearing liabilities. Using benchmark rates and complying with specific criteria set forth in SFAS No.133, the Corporation has concluded that for qualifying hedges, changes in fair value or cash flows that are attributable to risks being hedged will be highly effective at the hedge’s inception and on an ongoing basis.

When it is determined that a derivative is not, or ceases to be effective as a hedge, the Corporation discontinues hedge accounting prospectively. When a fair value hedge is discontinued due to ineffectiveness, the Corporation continues to carry the derivative on the Consolidated Statements of Condition at its fair value as a non-designated derivative, but discontinues marking-to-market the hedged asset or liability for changes in fair value. Any previous mark-to-market adjustments recorded to the hedged item are amortized over the remaining life of the asset or liability. All ineffective portions of fair value hedges are reported in and affect net income immediately. When a cash flow hedge is discontinued due to termination of the derivative, the Corporation continues to carry the previous mark-to-market adjustments in accumulated OCI and recognizes the amount into earnings in the same period or periods during which the hedged item affects earnings. If the cash flow hedge is discontinued due to ineffectiveness, the derivative would be considered a non-designated hedge and would continue to be marked-to-market in the Consolidated Statements of Condition as an asset or liability, in the Consolidated Statements of Income with any changes in the mark-to-market recorded through current period earnings and not through OCI.

Counter-party credit risk associated with derivatives is controlled by dealing with well-established brokers that are highly rated by credit rating agencies and by establishing exposure limits for individual counter-parties. Market risk on interest rate swaps is minimized by using these instruments as hedges and by continually monitoring the positions to ensure ongoing effectiveness. Credit risk is controlled by entering into bilateral collateral agreements with brokers, in which the parties pledge collateral to indemnify the counter-party in the case of default. The Corporation’s hedging activities and strategies are monitored by the Bank’s Asset / Liability Committee (“ALCO”) as part of its oversight of the treasury function.

Off-Balance Sheet Credit Related Financial Instruments

In the ordinary course of business, the Corporation enters into commitments to extend credit, including commitments under financial letters of credit and performance standby letters of credit. Such financial instruments are recorded as loans when they are funded. A liability has been established for credit losses related to these letters of credit through a charge to earnings.

Pension Plan

The Corporation has a defined benefit pension plan that covers a majority of all employees. The cost of this non-contributory pension plan is computed and accrued using the projected unit credit method. The Corporation accounts for the defined benefit pension plan using an actuarial model required by SFAS No. 87, “Employers’ Accounting for Pensions” (“SFAS No. 87”) as amended by SFAS No. 158 “Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS No. 158”). This model allocates pension costs over the service period of employees in the plan. One of the principal components of the net periodic pension calculation is the expected long-term rate of return on plan assets. The use of an expected long-term rate of return on plan assets may cause recognition of plan income returns that are different than the actual returns of plan assets in any given year. The expected long-term rate of return is designed to approximate the actual long-term rate of return over time. To determine if the expected rate of return is reasonable, management considers the actual return earned on plan assets, historical rates

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of return on the various asset classes in the plan portfolio, projections of returns on various asset classes, and current/prospective capital market conditions and economic forecasts. Differences between actual and expected returns are monitored periodically to determine if adjustments are necessary.

The discount rate determines the present value of future benefit obligations. At December 31, 2006, the discount rate used for the 2006 year-end disclosure and the expense in the upcoming year was determined by constructing a hypothetical bond portfolio whose cash flows from coupons and maturities match the year-by-year projected benefit cash flow from the Corporation’s qualified pension plan. The hypothetical bond portfolio uses available bonds with a quality rating of AA or higher under either Moody’s or Standard & Poor’s. Callable bonds are eliminated with the exception of those that issuers may call at par plus a premium, as these bonds would be prohibitively expensive for an issuer to call. Cash flows from the bonds may exceed the projected benefits for a particular period. Such excesses are used to meet future cash flow needs in the succeeding year and are assumed to be reinvested at the one-year forward rates.

At December 31, 2006, the Corporation adopted the provisions of SFAS No. 158. Under the provisions of SFAS No. 158, the unrecognized prior service cost, unrealized net actuarial losses and unrecognized net obligations arising at transition associated with employee benefit plans were reflected as a component of OCI, net of taxes. Additionally, any excess of the fair market value of the plan assets over the projected benefit obligation of a plan was reflected as an asset in the Corporation’s Consolidated Statements of Condition. Projected benefit obligations in excess of the fair market value of plan assets are recognized as an accrued liability. Assets and liabilities from each separate plan may not be netted and must be reflected separately in the Corporation’s Consolidated Statements of Condition.

Share-Based Payment

Prior to January 1, 2006, the Corporation applied the intrinsic value based method of accounting for its fixed-plan stock options as prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), and related interpretations, and accordingly, did not record compensation costs for grants of stock options to employees when the initial exercise price equaled the fair market value on the grant date. However, the Corporation did record compensation costs for restricted share grants over the respective vesting periods equal to the fair market value of the common shares on the date of each grant.

Prior to January 1, 2006, the Corporation applied APB No. 25 to account for its stock-based awards, and the disclosure-only provisions of SFAS Statement No. 123, “Accounting for Stock-Based Compensation”, as amended (“SFAS 123”), to present stock-based compensation disclosure. The following table details the pro forma effects on net income and earnings per share for the two years ended December 31, 2005 had compensation expense been recorded based on the fair value method under SFAS No. 123, utilizing the Black-Scholes option valuation model:

	For the year ended December 31,
(dollars in thousands, except per share data)	2005			2004
Net Income:
Net income as reported	$	72,950		$	61,980
Addition for total stock-based compensation expense included in reported net income, net of tax		740			127
Deduction for total stock-based compensation expense determined under fair value based method for all awards, net of tax		(4,592	)		(2,075	)
Pro forma net income	$	69,098		$	60,032
Basic Earnings Per Share:
As reported	$	2.21		$	2.05
Pro forma		2.10			1.98
Diluted Earnings Per Share:
As reported	$	2.17		$	2.00
Pro forma		2.05			1.94

On December 30, 2005, the Corporation approved the accelerated vesting of all currently outstanding unvested stock options to purchase 612,732 shares of the Corporation’s common stock granted through 2005. As a result of the accelerated vesting, these stock options, which otherwise would have vested from time to time through February 2008, became immediately exercisable. The acceleration included options held by directors and executive officers as well as employees of the Corporation. Of the 612,732 stock options for which vesting was accelerated, all except 7,500 were “in the money” options having exercise prices from $27.46 to $33.66 per share. The options not “in the money” were issued under strike prices ranging from $35.11 to $36.06 per share.

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Based upon the closing price of the Corporation’s common stock as of December 30, 2005, the Corporation recognized a pre-tax charge of $158,000 in 2005. Due to the acceleration, the Corporation will not recognize any compensation cost associated with those stock options in periods subsequent to December 31, 2005. The acceleration of vesting was undertaken in an attempt to eliminate compensation expense that the Corporation would otherwise be required to recognize with respect to these unvested stock options upon adoption of SFAS No. 123(R). The accelerated vesting of these options eliminated potential pre-tax compensation expense recognition in future periods of approximately $2.7 million.

During the second quarter of 2005, as part of a voluntary separation agreement, the Corporation modified the terms of previously awarded stock options to an executive who left the Corporation. Under the provisions of FIN No. 44, these stock options were remeasured at the intrinsic value as of the date of separation. Accordingly, the Corporation recognized compensation expense of $525 thousand.

Effective January 1, 2006, the Corporation adopted SFAS No.123(R), “Share-Based Payment” (“SFAS No. 123R”) that requires companies to recognize the grant-date fair value of stock options and other equity-based compensation issued to employees and nonemployees in the income statement. Under the provisions of SFAS No. 123(R), the Corporation has applied the modified prospective method of adoption, and therefore, results for prior periods have not been restated.

Compensation cost for stock options granted after January 1, 2006 and restricted stock grants are recognized as non-interest expense in the Consolidated Statements of Income on a straight-line basis over the vesting period of each stock option and restricted share grant. Compensation cost for stock options includes the impact of an estimated forfeiture rate. The impact of forfeitures on the restricted stock grants is recorded as they occur.

At December 31, 2006, no stock options had vesting conditions linked to the performance of the Corporation. The tax benefits associated with tax deductions in excess of compensation costs are recognized as a financing activity in the Consolidated Statements of Cash Flows.

Statement of Cash Flows

For purposes of reporting cash flows, cash equivalents are composed of cash and due from banks and short-term investments.

Recent Accounting Developments

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS No. 154”), which was effective for accounting changes and corrections of errors made in years beginning after December 15, 2005. SFAS No. 154 provides guidance on the accounting for and reporting accounting changes and error corrections. SFAS No. 154 did not have any impact on the results of operations of the Corporation.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140” (“SFAS No. 155”), which will be effective for all financial instruments acquired and issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The statement eliminates the exemption from applying SFAS No. 133 to interests in securitized financial assets so that similar instruments will be accounted for on a similar basis regardless of the form of the financial instrument. It also provides for an election of fair value measurement on an instrument-by-instrument basis in cases where a derivative would otherwise have to be bifurcated. The adoption of SFAS No. 155 is not expected to have any impact on the results of operations of the Corporation. As of December 31, 2006, the Corporation did not have any hybrid financial instruments that are impacted by this statement.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140” (“SFAS No. 156”), which will be effective for an entity’s first fiscal year that begins after September 15, 2006. The statement establishes the accounting for all separately recognized servicing assets and liabilities which require that they be initially recorded at fair value. The statement permits, but does not require, subsequent measurement of the separately recognized servicing assets and liabilities at fair value. The adoption of SFAS No. 156 is not expected to have any impact on the results of operations of the Corporation. Currently, the Corporation does not retain servicing rights for loans it sells to third parties.

In April 2006, the FASB issued FASB Staff Position FIN No. 46(R)-6, “Determining the Variability to Be Considered in Applying FASB Interpretation No. 46(R)”, an interpretation of FIN No. 46(R) “Consolidation of Variable Based Entities”. This new interpretation is effective prospectively for all entities that the Corporation has initial involvement with beginning after June 15, 2006. Additionally, this guidance also applies to events requiring reconsideration of existing relationships maintained by the Corporation under FIN No. 46(R). The application of this guidance did not have any impact on the results of operations of the Corporation.

In June 2006, the FASB issued FASB Staff Position FIN No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN No. 48”), which will be effective as of the beginning of the first fiscal year beginning after December 15, 2006. This interpretation clarifies

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the accounting for uncertainty in income taxes recognized in financial statements. FIN No. 48 prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting for interim periods, disclosure and transition. The Corporation is currently evaluating the impact on the results of operations from the application of this recent guidance.

On September 13, 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108 (“SAB No. 108”). SAB No. 108 expresses the SEC Staff’s views regarding the process of quantifying financial statement misstatements. SAB No. 108 states that in evaluating the materiality of financial statement misstatements a corporation must quantify the impact of correcting misstatements, including both the carryover and reversing effects of prior year misstatements, on the current year financial statements. SAB No.108 is effective for the year ended December 31, 2006. Under certain circumstances, prior year financial statements will not have to be restated and the effects of initially applying SAB No. 108 on prior years will be recorded as a cumulative effect adjustment to beginning retained earnings on January 1, 2006, with disclosure of the items included in the cumulative effect. Management has evaluated the effect of SAB No. 108 on the Corporation’s financial condition and results of operations and determined that it did not impact the Corporation’s financial statements.

In September 2006, the Emerging Issues Task Force (“EITF”) issued EITF No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefits Aspects of Endorsement Split-Dollar Life Insurance Arrangements” (“EITF 06-4”), which will be effective for fiscal years beginning after December 15, 2007. The issue addresses the accounting for the liability and related compensation costs for endorsement split-dollar life insurance arrangements that provide benefits to employees that extend to postretirement periods. The Corporation has split-dollar arrangements that provide certain postretirement death benefits to certain employees. Under the provisions of EITF 06-4, the application of this guidance can be recognized through a cumulative adjustment of beginning retained earnings. Accordingly, this treatment will not have any impact on the Corporation’s results of operations. The Corporation is currently evaluating the impact on the financial condition of the Corporation from the application of this guidance.

In September 2006, the EITF issued EITF No. 06-5, “Accounting for Purchases of Life Insurance – Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4” (“EITF 06-5”), which will be effective for fiscal years beginning after December 15, 2006. The issue addresses the determination of which amounts should be included in the contractual terms of insurance policies, other than cash surrender values, and whether the impact of the contractual ability to surrender all of the policies at the same time should affect the amounts. The Corporation currently owns various cash surrender and bank owned life insurance policies. Under the provisions of EITF 06-5, the application of this guidance can be recognized through a cumulative adjustment to beginning retained earnings. If it is determined that certain amounts are not to be included as part of the life insurance policies or if surrender charges exist, these amounts should be deducted from the cash surrender values and an adjustment will be necessary. Accordingly, this treatment will not have any impact on the Corporation’s results of operations. The Corporation is currently evaluating the terms of each policy and determining the impact on the financial condition of the Corporation from the application of this recent guidance.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which will be effective for an entity’s financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those years. The statement provides enhanced guidance on the definition of fair value, the methods to measure fair value and the expanded disclosures about fair value measurements. The statement emphasizes that fair value is a market-based measurement and should be based on assumptions that market participants would use in pricing assets or liabilities. The Corporation is currently evaluating the implications of this guidance on the operations of the Corporation.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of SFAS Nos. 87, 88, 106 and 132(R)” (“SFAS No. 158”), which will be effective for fiscal years ending after December 15, 2006 for the recognition of the funded status of pension and other postretirement benefit plans and related disclosure provisions. Additional requirements to measure plan assets and benefit obligations as of the date of the Corporation’s fiscal year end will be effective for fiscal years ending after December 15, 2008. The statement requires employers to recognize the overfunded or underfunded status of a defined benefit postretirement plan as either an asset or liability in its statements of condition and to recognize the changes in the funded status in the year in which they occur through comprehensive income. The Corporation has implemented the guidance and the results are reflected in the Consolidated Statements of Condition in net accumulated other comprehensive loss. The implementation of this guidance did not have any impact on the results of operations for the Corporation in 2006 (see Note 20 to the Consolidated Financial Statements for further information).

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NOTE 2—RESTRICTIONS ON CASH AND DUE FROM BANKS

The Federal Reserve requires banks to maintain cash reserves against certain categories of deposit liabilities. Such reserves averaged $49.7 million and $66.9 million during the years ended December 31, 2006 and 2005, respectively.

In order to cover the cost of services provided by correspondent banks, the Corporation maintains compensating balance arrangements at these correspondent banks or elects to pay a fee in lieu of such arrangements. During 2006 and 2005, the Corporation maintained average compensating balances of $4.3 million and $3.3 million, respectively. In addition, the Corporation paid fees totaling $769 thousand in 2006, $829 thousand in 2005 and $874 thousand in 2004 in lieu of maintaining compensating balances.

NOTE 3—INVESTMENT SECURITIES

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

(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
December 31, 2006
Securities available for sale:
U.S. Treasury and government agencies and corporations	$	73,105	$	—	$	1,694	$	71,411
Mortgage-backed securities		718,697		1,105		18,947		700,855
Municipal securities		100,973		693		293		101,373
Other debt securities		706,748		3,619		1,270		709,097
Total securities available for sale		1,599,523		5,417		22,204		1,582,736
Securities held to maturity:
Other debt securities		101,867		2,223		1,140		102,950
Total securities held to maturity		101,867		2,223		1,140		102,950
Total investment securities	$	1,701,390	$	7,640	$	23,344	$	1,685,686
December 31, 2005
Securities available for sale:
U.S. Treasury and government agencies and corporations	$	78,936	$	—	$	1,706	$	77,230
Mortgage-backed securities		1,061,541		1,109		27,873		1,034,777
Municipal securities		58,736		129		548		58,317
Other debt securities		622,701		2,193		1,132		623,762
Total securities available for sale		1,821,914		3,431		31,259		1,794,086
Securities held to maturity:
Other debt securities		111,269		307		1,495		110,081
Total securities held to maturity		111,269		307		1,495		110,081
Total investment securities	$	1,933,183	$	3,738	$	32,754	$	1,904,167

The U.S. Treasury and government agencies and corporations amounts in the table above include FHLB stock of $44.6 million and $51.8 million at December 31, 2006 and 2005, respectively.

The aggregate amortized cost and fair values of the investment securities portfolio by contractual maturity at December 31 for the periods indicated are shown below. Expected cash flows on mortgage-backed securities may differ from the contractual maturities as borrowers have the right to prepay the obligation without prepayment penalties.

	2006				2005
(in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Securities available for sale:
In one year or less	$	2,395	$	2,401	$	3,791	$	3,802
After one year through five years		6,759		6,798		7,431		7,515
After five years through ten years		39,067		37,398		28,562		26,885
Over ten years		832,605		835,284		720,589		721,107
Mortgage-backed securities		718,697		700,855		1,061,541		1,034,777
Total securities available for sale		1,599,523		1,582,736		1,821,914		1,794,086
Securities held to maturity:
In one year or less		—		—		1,038		1,017
Over ten years		101,867		102,950		110,231		109,064
Total securities held to maturity		101,867		102,950		111,269		110,081
Total investment securities	$	1,701,390	$	1,685,686	$	1,933,183	$	1,904,167

53

The following table shows the unrealized gross losses and fair values of investment securities at December 31, 2006, by length of time that individual securities in each category have been in a continuous loss position.

	Less than Twelve Months					Twelve Months or Longer					Total
(in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Investment securities:
U.S. Treasury and government agencies and corporations	$	26,786	$	(1,694	)	$	—	$	—		$	26,786	$	(1,694	)
Mortgage-backed securities		544,989		(17,307	)		74,607		(1,640	)		619,596		(18,947	)
Municipal securities		39,103		(272	)		1,823		(21	)		40,926		(293	)
Other debt securities		160,074		(1,249	)		51,929		(1,161	)		212,003		(2,410	)
Total	$	770,952	$	(20,522	)	$	128,359	$	(2,822	)	$	899,311	$	(23,344	)

Management reviews the investment portfolio on a periodic basis to determine the cause of declines in the fair value of each security. Thorough evaluations of the causes of the unrealized losses are performed to determine whether the impairment is temporary or other than temporary in nature. Considerations such as recoverability of invested amount over a reasonable period of time, the length of time the security is in a loss position and receipt of amounts contractually due, for example, are applied in determining other than temporary impairment. Once a decline in value is determined to be other than temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.

At December 31, 2006, $899.3 million of the Corporation’s investment securities had unrealized losses that are considered temporary. Of this amount, 76% are Aaa rated and 21% are A or BBB rated. Seven securities, totaling $27.3 million, are unrated. The portfolio contained 24 securities, with a fair value of $128.4 million, that had unrealized losses for twelve months or longer. All of the investment securities with unrealized losses were mortgage-backed securities and asset-backed securities, which declined in value due to the interest rate environment during 2006. Because the declines in fair value were due to changes in market interest rates and not in estimated cash flows, no other than temporary impairment was recorded at December 31, 2006. Management currently has the intent and ability to retain investment securities with unrealized losses until the decline in value has been recovered.

The table below provides the sales proceeds and the components of net securities gains (losses) from the securities available for sale portfolio for each of the three years ended December 31. The net securities gains (losses) are included in net gains (losses) in the accompanying Consolidated Statements of Income.

(in thousands)	2006			2005		2004
Sales proceeds	$	416,657		$	448,993	$	990,394
Gross gains	$	2,020		$	2,824	$	7,298
Gross losses		7,944			1,901		10,529
Net securities gains (losses)	$	(5,924	)	$	923	$	(3,231	)

Net unrealized after-tax losses of $9.1 million and $14.9 million on the securities portfolio were reflected in net accumulated other comprehensive loss at December 31, 2006 and 2005, respectively.

Securities with a market value of $722.7 million and $927.3 million at December 31, 2006 and 2005, respectively, were pledged as collateral for public funds, certain short-term borrowings and for other purposes required by law.

54

NOTE 4—LOANS

A summary of loans outstanding at December 31 for each of the periods indicated is shown in the table below. Outstanding loan balances at December 31 are net of unearned income, including net deferred loan costs of $17.6 million and $18.1 million, respectively.

(in thousands)	2006		2005
Residential real estate:
Originated & acquired residential mortgage	$	333,568	$	452,853
Home equity		991,327		900,985
Other consumer:
Marine		374,624		412,643
Other		28,455		32,793
Total consumer		1,727,974		1,799,274
Commercial real estate:
Commercial mortgage		445,563		485,743
Residential construction		599,275		414,803
Commercial construction		357,594		312,399
Commercial business		735,086		683,162
Total commercial		2,137,518		1,896,107
Total loans	$	3,865,492	$	3,695,381

NOTE 5—ALLOWANCE FOR LOAN LOSSES

The following table reflects the activity in the allowance for loan losses during each of the three years ended December 31.

(in thousands)	2006			2005			2004
Balance at beginning of the year	$	45,639		$	46,169		$	35,539
Provision for loan losses		3,973			5,023			7,534
Allowance of acquired bank		—			—			12,085
Loans charged-off		(7,849	)		(11,048	)		(13,481	)
Less recoveries of loans previously charged-off		3,440			5,495			4,492
Net charge-offs		(4,409	)		(5,553	)		(8,989	)
Balance at end of the year	$	45,203		$	45,639		$	46,169

At December 31, 2006, 2005 and 2004, the recorded investment in commercial loans that were on non-accrual status, and therefore considered impaired, totaled $11.8 million, $17.8 million and $15.1 million, respectively. There was no additional allowance required for these loans. Had these loans performed in accordance with their original terms, interest income of $1.4 million in 2006, $1.2 million in 2005 and $659 thousand in 2004 would have been recorded. No interest income was recognized on these loans during 2006. The average recorded investment in impaired commercial loans was approximately $15.7 million in 2006 and $14.4 million in 2005.

NOTE 6—PREMISES AND EQUIPMENT

Premises and equipment at December 31 are presented in the table below. Real estate owned and used by the Corporation consists of 21 branch offices and other facilities in Maryland and Virginia that are used primarily for the operations of the Bank.

(dollars in thousands)	Estimated Life	2006		2005
Land	—	$	11,281	$	11,281
Buildings and leasehold improvements	2 – 40 years		53,846		48,607
Furniture and equipment	2 – 15 years		91,258		85,796
Total premises and equipment			156,385		145,684
Less accumulated depreciation and amortization			88,449		79,791
Net premises and equipment		$	67,936	$	65,893

55

In 2001, the Corporation, as lessor, entered into a land lease for the property adjacent to the Corporation’s headquarters with an initial lease term of six years supplemented by thirteen, seven year extensions. Under the agreement, the lessee constructed office and parking facilities on the property. The lease provides for discounted parking for the Corporation’s employees in addition to office space adequate to meet the Corporation’s future incremental operational requirements. The lease provides for annual payments of $391 thousand, with an annual escalation provision of 1% per annum.

In 1990, the Corporation entered into a sale and leaseback agreement whereby its headquarters building was sold to an unrelated third party that then leased the building back to the Corporation. During 2000, the lease was renegotiated and at December 31, 2006 has five years remaining on the term.

The Corporation also maintains non-cancelable operating leases associated with Bank premises. Most of the leases provide for the payment of property taxes and other costs by the Bank and include one or more renewal options ranging up to fifteen years. Annual rental commitments under all long-term non-cancelable operating lease agreements consisted of the following at December 31, 2006.

(in thousands)	Real Property Leases		Sublease Income		Equipment Leases		Total
2007	$	13,261	$	50	$	263	$	13,474
2008		12,484		14		153		12,623
2009		10,771		14		106		10,863
2010		8,759		14		41		8,786
2011		7,560		8		—		7,552
2012 and thereafter		24,479		—		—		24,479
Total	$	77,314	$	100	$	563	$	77,777

Rental expense for premises and equipment was $14.9 million in 2006, $14.4 million in 2005 and $12.4 million in 2004.

NOTE 7—INTANGIBLE ASSETS

The table below presents an analysis of the goodwill and deposit-based intangible activity for the years ended December 31, 2006 and 2005.

(in thousands)	Goodwill			Accumulated Amortization			Net Goodwill
Balance at January 1, 2005	$	256,863		$	(622	)	$	256,241
Adjustment of intangible related to 2004 merger with Southern Financial Bancorp	$	(1,281	)		—			(1,281	)
Adjustment of intangible related to 2000 merger with Harbor Federal Bancorp		(105	)		—			(105	)
Balance at December 31, 2005		255,477			(622	)		254,855
Adjustment of intangible related to 2004 merger with Southern Financial Bancorp		(312	)		—			(312	)
Balance at December 31, 2006	$	255,165		$	(622	)	$	254,543
(in thousands)	Deposit-based Intangible			Accumulated Amortization			Net Deposit-based Intangible
Balance at January 1, 2005	$	15,429		$	(2,780	)	$	12,649
Amortization expense		—			(1,884	)		(1,884	)
Balance at December 31, 2005		15,429			(4,664	)		10,765
Amortization expense		—			(1,800	)		(1,800	)
Balance at December 31, 2006	$	15,429		$	(6,464	)	$	8,965

Adjustments to goodwill during 2006 and 2005 were primarily due to the resolution of income tax uncertainties related to the respective mergers.

56

The following table reflects the expected amortization schedule for the deposit-based intangible at December 31, 2006.

(in thousands)
2007	$	1,706
2008		1,519
2009		1,519
2010		1,519
2011		1,519
After 2011		1,183
Total unamortized deposit-based intangible	$	8,965

The annual impairment evaluation of goodwill did not identify any impairment in 2006 or 2005.

NOTE 8—MORTGAGE BANKING ACTIVITIES

The following is an analysis of the mortgage loan servicing rights balance, net of accumulated amortization, during 2006. This balance is included in other assets.

(in thousands)	2006			2005
Balance at beginning of year	$	1,740		$	1,877
Amortization expense		(168	)		(137	)
Balance at end of year	$	1,572		$	1,740

Unpaid principal balances of loans serviced for others not included in the Consolidated Statements of Condition were $145.1 million and $173.4 million at December 31, 2006 and 2005, respectively.

NOTE 9—DEPOSITS

A comparative summary of deposits and respective weighted average rates at December 31 follows:

(dollars in thousands)	2006		Weighted Average Rate		2005		Weighted Average Rate
Noninterest-bearing	$	761,830	—	%	$	860,023	—	%
Interest-bearing demand		559,682	0.55			618,129	0.28
Money market		545,584	3.28			597,086	2.22
Savings		596,434	0.47			695,946	0.29
Direct time certificates of deposit		1,156,709	4.41			888,510	3.14
Brokered certificates of deposit		519,873	4.73			464,773	4.20
Total deposits	$	4,140,112	2.40	%	$	4,124,467	1.56	%

The contractual maturities of certificates of deposit at December 31, 2006 are shown in the following table.

(in thousands)
2007	$	1,187,245
2008		150,522
2009		73,966
2010		99,304
2011		43,049
After 2011		122,496
Total certificates of deposit	$	1,676,582

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Time deposits with a denomination of $100,000 or more were $390.5 million and $252.9 million at December 31, 2006 and 2005, respectively. The contractual maturities of these deposits at December 31, 2006 are shown in the following table.

(dollars in thousands)	Amount		%
Three months or less	$	180,851	46.3	%
After three months through six months		58,781	15.0
After six months through twelve months		108,486	27.8
After twelve months		42,399	10.9
Total	$	390,517	100.0	%

Demand deposit overdrafts that have been reclassified as loan balances were $5.0 million and $4.9 million at December 31, 2006 and 2005, respectively. Overdraft charge-offs and recoveries are reflected in the allowance for loan losses.

NOTE 10—SHORT-TERM BORROWINGS

At December 31, short-term borrowings were as follows:

(in thousands)	2006		2005
Securities sold under repurchase agreements	$	306,437	$	370,515
Federal funds purchased		320,000		185,000
Federal Home Loan Bank advances - variable rate		30,000		90,000
Other short-term borrowings		2,450		2,237
Total short-term borrowings	$	658,887	$	647,752

The following table sets forth various data on securities sold under repurchase agreements and federal funds purchased.

(dollars in thousands)	2006			2005			2004
Balance at December 31	$	626,437		$	555,515		$	725,763
Average balance during the year		722,843			631,246			602,942
Maximum month-end balance		790,701			716,143			725,763
Weighted average rate during the year		4.48	%		2.69	%		1.20	%
Weighted average rate at December 31		5.01			3.98			2.06

At December 31, 2006, the Corporation had $920 million in unused federal funds lines of credit. The weighted average rate on the variable rate Federal Home Loan Bank (“FHLB”) advances was 5.45% at December 31, 2006.

NOTE 11—LONG-TERM DEBT

Long-term debt at December 31 was as follows:

(dollars in thousands)	2006		Weighted Average Rate		2005		Weighted Average Rate
Federal Home Loan Bank advances - fixed rate	$	30,795	5.55	%	$	196,537	4.94	%
Federal Home Loan Bank advances - variable rate		660,427	4.41			585,520	3.69
Junior Subordinated Debentures		136,857	8.42			136,715	7.85
Term repurchase agreements		—	—			1,250	4.60
Total long-term debt	$	828,079	5.12	%	$	920,022	4.58	%

At December 31, 2006, investment securities and certain real estate loans with carrying values of $204.4 million and $655.9 million, respectively, collateralize the FHLB advances. At December 31, 2006, the Corporation had $139.4 million in unused lines of credit at the FHLB. Based upon the level of borrowing transactions with the FHLB, the Corporation is required to purchase FHLB stock. This amounts to $44.6 million and $51.8 million at December 31, 2006 and 2005, respectively, which was carried at cost.

58

The principal maturities of long-term debt at December 31, 2006 are presented below.

(in thousands)
2007	$	270,174
2008		165,107
2009		173,112
2010		80,052
2011		—
After 2011		139,634
Total long-term debt	$	828,079

Since 1997, the Corporation has formed three wholly owned statutory business trusts in addition to acquiring three additional trusts in the Southern Financial merger. As of December 31, 2006 there are four active trusts. These trusts issued securities that were sold to third parties. The sole purpose of the trusts was to invest the proceeds in junior subordinated debentures of the Corporation that have terms identical to the trust securities.

The junior subordinated debentures, which are the sole assets of the trusts, are subordinate and junior in right of payment to all present and future senior and junior subordinated indebtedness and certain other financial obligations of the Corporation. The Corporation fully and unconditionally guarantees each trust’s securities obligations. The junior subordinated debentures are includable in tier 1 capital for regulatory capital purposes, subject to certain limitations.

Under the provisions of the junior subordinated debentures, the Corporation has the right to defer payment of interest on the junior subordinated debentures at any time, or from time to time, for periods not exceeding five years. If interest payments on the junior subordinated debentures are deferred, the distributions on the applicable trust preferred securities are also deferred. Interest on the junior subordinated debentures is cumulative. The accrual of interest to be paid on the junior subordinated debentures held by the trusts is included in interest expense.

The securities are redeemable in whole or in part on or after their respective call dates. Any of the securities are redeemable at any time in whole, but not in part, from the date of issuance on the occurrence of certain events.

The amounts and terms of each respective issuance at December 31 were as follows:

2006
(dollars in thousands)	Junior Subordinated Debt		Trust Preferred Securities		Maturity Date	Call Date	Interest Rate	Cash Distribution Frequency
Provident Trust I	$	41,238	$	40,000	April 2028	April 2008	8.29% Fixed	Semi-Annual
Provident Trust III		73,196		71,000	December 2033	December 2008	8.21% Floating	Quarterly
Southern Financial Statutory Trust I		8,248		8,000	September 2030	September 2010	10.60% Fixed	Semi-Annual
Southern Financial Capital Trust III		10,310		10,000	April 2033	April 2008	8.62% Floating	Quarterly
	$	132,992	$	129,000
Deferred issuance costs and valuation adjustments		3,865
Total Junior Subordinated Debentures	$	136,857
2005
(dollars in thousands)	Junior Subordinated Debt		Trust Preferred Securities		Maturity Date	Call Date	Interest Rate	Cash Distribution Frequency
Provident Trust I	$	41,238	$	40,000	April 2028	April 2008	8.29% Fixed	Semi-Annual
Provident Trust III		73,196		71,000	December 2033	December 2008	7.35% Floating	Quarterly
Southern Financial Statutory Trust I		8,248		8,000	September 2030	September 2010	10.60% Fixed	Semi-Annual
Southern Financial Capital Trust III		10,310		10,000	April 2033	April 2008	7.50% Floating	Quarterly
	$	132,992	$	129,000
Deferred issuance costs and valuation adjustments		3,723
Total Junior Subordinated Debentures	$	136,715

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NOTE 12—STOCKHOLDERS’ EQUITY

During 1998, the Corporation initiated a stock repurchase program for its outstanding stock. The Corporation monitors the program and approves certain amounts to be repurchased on an annual basis. These purchases may occur in the open market from time to time and on an ongoing basis, depending upon market conditions. The Corporation repurchased 1,091,753 and 684,962 shares of common stock at a cost of $39.2 million and $22.6 million during 2006 and 2005, respectively. At December 31, 2006, the Corporation had remaining authority to repurchase up to 146,112 shares under its current authorization. During January 2007, the Corporation approved an extension of the repurchase program which enables the Corporation the repurchase up to 5% of the Corporation’s outstanding common stock, or approximately 1.6 million additional shares.

Share-Based Payment Plan Description

The Corporation issues nonqualified stock options and restricted share grants to certain of its employees and directors pursuant to the 2004 Equity Compensation Plan (“the Plan”), which has been approved by the shareholders. The Plan allows for a maximum of 12.5 million shares of common stock to be issued. At December 31, 2006, 4.7 million shares were available to be granted by the Corporation.

Stock Option Plan

Stock options (“options”) are granted with an exercise price equal to the market price of the Corporation’s stock at the date of the grant. Options granted subsequent to January 1, 2005 vest based on four years of continuous service and have eight year contractual terms. Options issued and prior to January 1, 2005 have contractual terms of ten years and a three year vesting period. As discussed in Note 1, the Corporation accelerated the vesting period for all options granted prior to December 30, 2005. Accordingly, no compensation expense relating to these options has been recognized in the year ended December 31, 2006.

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

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

• Dividend yield is based on the dividend rate of the Corporation’s stock at the date of the grant

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

• Expected volatility is based on the historical volatility of the Corporation’s stock price

• Expected life represents the period of time that granted options are expected to be outstanding based on historical trends

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

	2006			2005			2004
Dividend yield		3.15	%		3.47	%		3.33	%
Weighted average risk-free interest rate		4.61	%		4.29	%		3.28	%
Weighted average expected volatility		19.72	%		23.33	%		25.76	%
Weighted average expected life in years		5.25			5.50			7.00
Weighted average fair values of options granted	$	6.46		$	6.95		$	7.59

The Corporation recognized compensation expense related to options of $463 thousand for the year ended December 31, 2006. The intrinsic value of options exercised for the year ended December 31, 2006, 2005 and 2004 was $7.9 million, $7.3 million and $6.7 million, respectively. Unrecognized compensation cost related to non-vested options is $1.6 million at December 31, 2006 and is expected to be recognized over a weighted average period of 3.2 years.

60

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

	Common Shares		Weighted Average Exercise Price		Weighted Average Contractual Remaining Life (in years)	Aggregate Intrinsic Value (in thousands)
Options outstanding at January 1, 2006	2,345,870		$	25.65
Granted	314,440			36.10
Exercised	(530,001	)		21.67
Cancelled or expired	(16,938	)		24.01
Options outstanding at December 31, 2006	2,113,371			28.21	5.72	$	16,299
Options exercisable at December 31, 2006	1,812,458		$	26.91	5.47	$	16,346

Restricted Stock Grants

The Corporation issues restricted stock grants, in the form of new shares, to its directors and certain key employees. The restricted stock grants are issued at the fair market value of the common stock on the date of each grant. The fair value of grants vested during the years ended December 31, 2006, 2005 and 2004, was $530 thousand, $210 thousand and $209 thousand, respectively. The Corporation grants shares of restricted stock to directors of the Corporation as part of director compensation, as such, the restricted stock grants vest immediately. An expense of $253 thousand, $210 thousand and $209 thousand was recorded for restricted stock grants to the directors for the years ended December 31, 2006, 2005 and 2004, respectively. The restricted stock grants to the directors may only be exercised six months subsequent to their departure from the board of directors. The restricted stock grants to employees vest ratably over four years. The Corporation recorded expense related to the employee awards of $678 thousand and $246 thousand for the years ended December 31, 2006 and 2005, respectively. No awards of restricted stock were granted to employees prior to 2005.

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

	Common Shares		Weighted Average Grant Fair Value
Unvested at January 1, 2006	31,550		$	33.66
Awards granted	65,724			35.81
Vested	(14,974	)		35.37
Cancelled	(3,659	)		36.00
Unvested at December 31, 2006	78,641		$	35.06

At December 31, 2006, unrecognized compensation cost related to non-vested restricted stock grants was $2.1 million and is expected to be recognized over a weighted average period of 2.9 years.

NOTE 13—DERIVATIVE FINANCIAL INSTRUMENTS

Fair value hedges that meet the criteria for effectiveness have changes in the fair value of the derivative and the designated hedged item recognized in earnings. At and during all periods presented, the derivatives designated as fair value hedges were determined to be effective. Accordingly, the designated hedges and the associated hedged items were marked to fair value by an equal and offsetting amount of $280 thousand and $657 thousand for the years ended December 31, 2006 and 2005, respectively. Cash flow hedges have the effective portion of changes in the fair value of the derivative, net of taxes, recorded in net accumulated other comprehensive loss. At December 31, 2006, the Corporation recorded a decrease in the fair value of derivatives of $622 thousand compared to an increase of $1.3 million in 2005, net of taxes, in net accumulated other comprehensive loss to reflect the effective portion of cash flow hedges. Amounts recorded in net accumulated other comprehensive loss are recognized into earnings concurrent with the impact of the hedged item on earnings. For the year ended December 31, 2006 the Corporation recorded ineffectiveness of $16 thousand. The Corporation had no ineffective hedges for the year ended December 31, 2005.

Non-designated derivatives are marked to market and the gains or losses are recorded in non-interest income at the end of each reporting period. These non-designated derivatives represent interest rate protection on the net interest income but do not meet hedge accounting treatment. The Corporation recorded pre-tax net losses of $518 thousand and $4.4 million to reflect the decrease in value of non-designated interest rate swaps for the years ended December 31, 2005 and 2006, respectively. The net cash settlements on the interest rate swaps are recorded in non-interest income. Net cash settlements on interest rate swaps were $903 thousand in 2006 and $3.5 million in 2005.

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

(in thousands) Derivative Type	Objective	Notional Amount		Credit Risk Amount		Market Risk
December 31, 2006
Designated Derivatives
Interest rate swaps:
Receive fixed/pay variable	Hedge investment risk	$	293,450	$	471	$	(1,410	)
Receive fixed/pay variable	Hedge borrowing cost		29,900		—		(280	)
Interest rate caps/corridors	Hedge borrowing cost		140,000		615		615
Total designated derivatives			463,350		1,086		(1,075	)
Non-designated Derivatives
Interest rate swaps:
Receive fixed/pay variable			40,000		2,465		2,465
Total non-designated derivatives			40,000		2,465		2,465
Total derivatives		$	503,350	$	3,551	$	1,390
December 31, 2005
Designated Derivatives
Interest rate swaps:
Receive fixed/pay variable	Hedge borrowing cost	$	57,900	$	—	$	(657	)
Interest rate caps/corridors	Hedge borrowing cost		165,000		1,155		1,155
Total designated derivatives			222,900		1,155		498
Non-designated Derivatives
Interest rate swaps:
Pay fixed/receive variable			70,000		1,450		1,450
Receive fixed/pay variable			40,000		3,235		3,235
Total non-designated derivatives			110,000		4,685		4,685
Total derivatives		$	332,900	$	5,840	$	5,183

The fair value of cash flow hedges reflected in net accumulated other comprehensive loss (“OCI”) is determined using the projected cash flows of the derivatives over their respective lives. This amount may or may not exceed the amount expected to be recognized into earnings out of OCI in the next twelve months, depending on the remaining time to maturity of the position. The Corporation expects approximately $2.3 million before taxes to be recognized into expense out of OCI in the next twelve months. This amount represents amortization of $878 thousand for interest rate caps and corridors, and a $1.5 million loss recognized from interest rate swaps. The $1.5 million is projected based on the anticipated forward yield curve. The amount currently reflected in OCI represents the earnings impact over the life of the derivatives, or $673 thousand on interest rate caps and corridors and an $806 thousand loss on the interest rate swaps.

At December 31, 2006, the Corporation had deferred gains of $866 thousand and deferred losses of $1.1 million related to terminated contracts which are being amortized as a yield adjustment in various amounts through 2020, based on the lives of the underlying assets or liabilities. At December 31, 2005, the Corporation had deferred gains of $1.4 million and deferred losses of $1.6 million.

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NOTE 14—CONTINGENCIES AND OFF-BALANCE SHEET RISK

Commitments

Arrangements to fund credit products or guarantee financing take the form of loan commitments (including lines of credit on revolving credit structures) and letters of credit. Approvals for these arrangements are obtained in the same manner as loans. Generally, cash flows, collateral value and a risk assessment are considered when determining the amount and structure of credit arrangements. Commitments to extend credit in the form of consumer, commercial real estate and business loans at December 31 were as follows:

(in thousands)	2006		2005
Commercial business and real estate	$	1,064,495	$	861,556
Consumer revolving credit		733,292		669,878
Residential mortgage credit		24,131		12,497
Performance standby letters of credit		126,568		105,502
Commercial letters of credit		1,520		4,064
Total loan commitments	$	1,950,006	$	1,653,497

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

Litigation

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

In May 2006, the Corporation settled litigation with a former employee for alleged breach on an executed employment contract for $1.3 million. This expense is included in other non-interest expense in the Consolidated Statements of Income.

Concentrations of Credit Risk

Commercial construction and mortgage loan receivables from real estate developers represent $1.1 billion and $890.9 million of the total loan portfolio at December 31, 2006 and 2005, respectively. Substantially all such loans are collateralized by real property or other assets. These loans are expected to be repaid from the proceeds received by the borrowers from the retail sales or rentals of these properties to third parties. The majority of the Corporation’s lending activities and collateral are concentrated in Maryland and Virginia. Consumer loan receivables include $1.3 billion and $1.4 billion in originated and acquired residential and home equity loans at December 31, 2006 and 2005, respectively. Additionally, the consumer portfolio contains marine loans originated through brokers of $363.4 million and $405.0 million at December 31, 2006 and 2005, respectively.

The Corporation’s investment portfolio contains mortgage-backed securities totaling $700.9 million and $1.03 billion at December 31, 2006 and 2005, respectively. The underlying collateral for these securities is in the form of pools of mortgages on residential properties. U.S. Government agencies or corporations either directly or indirectly guarantee the majority of the securities. Management is of the opinion that credit risk is minimal.

NOTE 15—RELATED PARTY TRANSACTIONS

Loans to directors and members of executive management 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 normal risk of collectibility. The credit criteria used to evaluate each loan is the same as required of any Bank customer.

The schedule below presents information on these loans for the period indicated:

(in thousands)	Loan Activity
Balance at December 31, 2005	$	54,762
Additions		6,623
Reductions		(12,298	)
Balance at December 31, 2006	$	49,087

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NOTE 16—NET GAINS (LOSSES), OTHER NON-INTEREST INCOME AND EXPENSE

The components of net gains (losses), other non-interest income and other non-interest expense for the three years ended December 31 were as follows:

(in thousands)	2006			2005			2004
Net gains (losses):
Net gains (losses) on securities	$	(5,924	)	$	923		$	(3,231	)
Debt extinguishment		(1,132	)		(156	)		(2,362	)
Asset sales		630			525			(180	)
Net gains (losses)	$	(6,426	)	$	1,292		$	(5,773	)
Net derivative activity:
Net derivative gains (losses) on swaps	$	(533	)	$	(4,367	)	$	2,432
Net cash settlement on swaps		903			3,512			3,469
Total net deriviative activity	$	370		$	(855	)	$	5,901
Other non-interest income:
Other loan fees	$	4,066		$	4,314		$	3,698
Cash surrender value income		7,145			7,145			4,493
Mortgage banking fees and services		363			528			101
Other		7,988			6,548			6,079
Total other non-interest income	$	19,562		$	18,535		$	14,371
Other non-interest expense:
Advertising and promotion	$	11,495		$	9,540		$	9,407
Communication and postage		6,988			7,137			6,764
Printing and supplies		2,874			3,161			2,762
Regulatory fees		1,015			1,019			955
Professional services		5,293			7,230			3,385
Other		15,689			13,738			11,961
Total other non-interest expense	$	43,354		$	41,825		$	35,234

In the normal course of business, the Corporation may extinguish debt prior to its maturity. During 2006, 2005 and 2004, the Corporation extinguished $401 million, $36 million and $295 million of debt, respectively.

NOTE 17—INCOME TAXES

The components of income tax expense and the sources of deferred income taxes for the three years ended December 31 are presented below.

(in thousands)	2006		2005			2004
Current income tax expense:
Federal	$	28,151	$	42,188		$	25,297
State		34		61			48
Total current expense		28,185		42,249			25,345
Deferred income tax expense (benefit)		933		(9,740	)		4,594
Total income tax expense	$	29,118	$	32,509		$	29,939

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The combined federal and state effective income tax rate for each year is different than the statutory federal income tax rate. The table below is a reconciliation of the statutory federal income tax expense and rate to the effective income tax expense and rate for the years indicated.

	2006					2005					2004
(dollars in thousands)	Amount			%		Amount			%		Amount			%
Statutory federal income tax rate	$	34,692		35.0	%	$	36,911		35.0	%	$	32,173		35.0	%
Increases (decreases) in tax rate resulting from:
Tax-advantaged income		(3,661	)	(3.7	)		(2,406	)	(2.3	)		(1,799	)	(2.0	)
Disallowed interest expense		215		0.2			66		0.1			62		0.1
Employee benefits		(239	)	(0.3	)		(555	)	(0.5	)		(252	)	(0.3	)
Low income housing credit		(1,520	)	(1.5	)		(1,226	)	(1.2	)		(735	)	(0.8	)
State and local income taxes, net of federal income tax		(1,079	)	(1.1	)		(826	)	(0.8	)		214		0.2
Other		250		0.3			22		—			21		—
Change in valuation allowance		460		0.5			523		0.5			255		0.4
Total combined effective income tax rate	$	29,118		29.4	%	$	32,509		30.8	%	$	29,939		32.6	%

SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”) provides that a valuation allowance is established against deferred tax assets when, in the judgment of management, it is more likely than not that such tax assets will not become realizable. SFAS No. 109 further provides that upon the likelihood of realization, the valuation allowance associated with the deferred tax benefit would no longer be appropriate. During 2004, 2005 and 2006, the creation of additional state net operating losses required increases in the valuation allowance. At December 31, 2006 the valuation allowance of $2.7 million relates to state net operating losses that are unlikely to be utilized in the foreseeable future. Management believes that, except for that portion which is covered by the valuation allowance, the Corporation’s deferred tax assets at December 31, 2006 are more likely than not to be realized through the generation of sufficient future taxable income.

The net tax benefit recorded directly to stockholders’ equity related to exercised stock options was $2.7 million, $2.8 million and $2.6 million for 2006, 2005 and 2004, respectively.

Tax benefits associated with net realized investment securities losses were $2.0 million in 2006. Tax expense associated with net realized investment securities gains was $0.4 million in 2005. A tax benefit of $1.1 million associated with net realized investment securities losses was recorded in 2004.

The primary sources of temporary differences that give rise to significant portions of the deferred tax assets and liabilities, which are classified as other assets in the Consolidated Statements of Condition at December 31, 2006 and 2005 are presented below.

	2006				2005
(in thousands)	Deferred Assets		Deferred Liabilities		Deferred Assets		Deferred Liabilities
Loan loss reserve recapture	$	—	$	1,883	$	—	$	3,020
Reserve for loan loss		15,471		—		15,104		—
State operating loss carryforwards and other items		14,436		—		13,165		—
Loan costs		—		3,096		—		—
Depreciation		—		29,707		—		26,736
Unrealized losses on debt securities		5,016		—		8,032		—
Leasing activities		24,347		—		19,964		—
REIT dividend		518		—		—		177
Employee and other benefits		—		2,069		—		3,009
Pension costs (SFAS No. 158)		7,321		—		—		—
Purchase accounting adjustments		759		—		956		—
Write-down of property held for sale		700		—		700		—
Derivative related and mark-to-market adjustments		1,169		—		4,549		—
Deposit-based intangible		—		3,135		—		3,765
Cash flow derivatives		868		—		630		—
Federal net operating loss carryforwards		1,080		—		1,575		—
Minimum pension liability		—		—		644		—
Minimum tax credit carry forward		158		—		158		—
All other		2,329		1,100		2,293		1,203
Subtotal		74,172		40,990		67,770		37,910
Less valuation allowance		2,679		—		2,219		—
Total	$	71,493	$	40,990	$	65,551	$	37,910

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At December 31, 2006, the Corporation had state net operating loss carryforwards of $314 million that begin to expire in 2009 if not utilized. In addition to the state net operating loss carryforwards at December 31, 2006, the Corporation also had federal net operating loss carryforwards of $3.1 million that will begin to expire in 2009 if not utilized. These net operating losses are subject to Section 382 limitations resulting in a limitation on net operating loss deductions of $1.4 million per year.

NOTE 18—EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Basic earnings per share does not include the effect of any potentially dilutive transactions or conversions. Diluted earnings per share reflects the potential dilution of earnings per share which could occur under the treasury stock method if contracts to issue common stock, such as stock options, were exercised and shared in corporate earnings.

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

	Year ended December 31,
(dollars in thousands, except per share data)	2006		2005		2004
Net income	$	70,003	$	72,950	$	61,980
Basic EPS shares		32,727		32,956		30,299
Basic EPS	$	2.14	$	2.21	$	2.05
Dilutive shares		355		700		672
Diluted EPS shares		33,082		33,656		30,971
Diluted EPS	$	2.12	$	2.17	$	2.00
Antidilutive shares		31		456		434

NOTE 19—OTHER COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) is defined as net income plus transactions and other occurrences that are the result of non-owner changes in equity. For financial statements presented for the Corporation, non-owner equity changes are comprised of unrealized gains or losses on available for sale debt securities, unrealized gains or losses attributable to derivatives that will be accumulated with net income from operations, and any minimum pension liability adjustment. These do not have an impact on the Corporation’s results of operations. Below are the components of other comprehensive income (loss) and the related tax effects allocated to each component.

	Year ended December 31,
	2006									2005									2004
(in thousands)	Before Income Tax			Tax Expense (Benefit)			Net of Tax			Before Income Tax			Tax Expense (Benefit)			Net of Tax			Before Income Tax			Tax Expense (Benefit)			Net of Tax
Securities available for sale:
Net unrealized gains (losses) arising during the year	$	2,875		$	1,020		$	1,855		$	(25,383	)	$	(8,884	)	$	(16,499	)	$	4,791		$	1,676		$	3,115
Reclassification of net losses (gains) realized in net income		5,924			1,996			3,928			(923	)		(323	)		(600	)		3,231			1,131			2,100
Net unrealized gains (losses) on securities arising during the year		8,799			3,016			5,783			(26,306	)		(9,207	)		(17,099	)		8,022			2,807			5,215
Net unrealized gains (losses) from derivative activities arising during the year		(851	)		(237	)		(614	)		1,972			690			1,282			1,699			595			1,104
Employee benefit liability adjustment		(16,670	)		(6,677	)		(9,993	)		418			249			169			(2,259	)		(894	)		(1,365	)
Other comprehensive income (loss)	$	(8,722	)	$	(3,898	)	$	(4,824	)	$	(23,916	)	$	(8,268	)	$	(15,648	)	$	7,462		$	2,508		$	4,954

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The following table presents net accumulated other comprehensive income (loss) for the periods indicated:

(in thousands)	Net unrealized gains (losses) on Securities and Other Retained Interest			Net unrealized gains (losses) on Derivatives and Other Hedging Activities			Employee Benefit Liability Adjustment			Cumulative Other Comprehensive Income
Balance at December 31, 2003	$	(3,033	)	$	(3,556	)	$	—		$	(6,589	)
Net change in OCI		5,215			1,104			(1,365	)		4,954
Balance at December 31, 2004		2,182			(2,452	)		(1,365	)		(1,635	)
Net change in OCI		(17,099	)		1,282			169			(15,648	)
Balance at December 31, 2005		(14,917	)		(1,170	)		(1,196	)		(17,283	)
Net change in OCI		5,783			(614	)		(9,993	)		(4,824	)
Balance at December 31, 2006	$	(9,134	)	$	(1,784	)	$	(11,189	)	$	(22,107	)

NOTE 20—EMPLOYEE BENEFIT PLANS

Qualified Pension Plan

The Corporation’s non-contributory defined benefit pension plan covers a majority of all employees (with the exception of on-call, peak time, temporary or summer employees) with at least one year of service and provides an optional lump sum or monthly benefits upon retirement to participants based on average career earnings and length of service. The Corporation’s policy is to contribute amounts to the plan sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974 (“ERISA”), as amended, plus such additional amounts as the Corporation deems appropriate. On March 31, 2005, the Corporation communicated to employees that the pension plan would be frozen for new entrants effective May 1, 2005. Participants in the plan prior to May 1, 2005 were not affected by this change.

Postretirement Benefits

Prior to March 31, 2005 the Corporation provided certain health care and life insurance benefits to retired employees. The under age 65 health care plan was a contributory plan, in which the retirees were responsible for all premiums. The cost of life insurance benefits provided to the retirees is borne by the Corporation. These plans are unfunded. On March 31, 2005, the Corporation communicated to retirees under the age of 65 currently receiving postretirement health benefits that these benefits would be eliminated and no longer offered effective January 1, 2006. Postretirement life insurance benefits continue to be provided to retirees. This action resulted in the reversal of the actuarially determined liability of $1.2 million in 2005 associated with health care benefits.

Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans

Effective December 31, 2006, the Corporation adopted SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (SFAS No. 158”), an amendment of SFAS Nos. 87, 88, 106 and 132(R). This Statement requires employers to recognize the funded status of their defined benefit pension and other postretirement benefit plans measured as the difference between the fair value of plan assets and the benefit obligation in the Statements of Condition with a corresponding adjustment of OCI, net of tax. For defined benefit pension plans, the projected benefit obligation is used to determine the funded status of the plan, while all other plans use the accumulated benefit obligation to make the funded status determination.

SFAS No. 158 requires that, at the time of initial application, delayed gains or losses and prior service costs shall be recognized as a component of other comprehensive income (loss), net of tax. The initial application of SFAS No. 158 will have no affect on the net periodic benefit cost. Amounts initially recognized as a component of other comprehensive income (loss), net of tax, will be recognized as a component of periodic benefit cost in the future which is consistent with current practice under SFAS Nos. 87 and 106. Actuarial gains and losses that arise in subsequent periods but not included in net periodic benefit costs will be recognized in OCI.

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The adoption of SFAS No. 158 had no effect on the Corporation’s consolidated results of operations for the year ended December 31, 2006 or any prior year presented. Below is a summary presentation of the incremental adjustments for the defined benefit pension and other postretirement benefit plans made to individual line items of the Corporation’s Consolidated Statements of Condition for December 31, 2006 upon the adoption of SFAS No. 158:

	Before Application of SFAS No. 158			Adjustments			After Application of SFAS No. 158
Other Assets
Prepaid qualified plan cost/Excess qualified plan asset	$	17,764		$	(14,533	)	$	3,231
Deferred income taxes		644			6,676			7,320
Other asset-prior service cost		3,011			(3,011	)		—
Other Liabilities
Accrued benefit plan liability		10,342			(875	)		9,467
Net accumulated other comprehensive loss		(1,196	)		(9,993	)		(11,189	)

At December 31, 2005, accumulated other comprehensive income (loss) included $1.2 million, net of tax, associated with an additional liability in excess of prior service cost for the non-qualified pension plan. This amount was adjusted further due to the adoption of SFAS No. 158 and is reflected in the above adjustments. Adjustments to other assets represent prepaid amounts associated with the qualified pension plan, prior service costs and deferred tax amount

The following tables set forth the activity for each benefit plan’s projected benefit obligation, plan assets and funded status for the periods indicated:

	Qualified Pension Plan						Non-qualified Pension Plan						Postretirement Benefits
(in thousands)	2006			2005			2006			2005			2006			2005
Change in Benefit Obligation:
Projected benefit obligation at January 1,	$	43,770		$	39,848		$	9,131		$	7,477		$	594		$	1,914
Service cost		2,206			2,169			139			117			4			75
Interest cost		2,526			2,341			527			491			18			60
Benefit payments		(2,339	)		(2,315	)		(428	)		(344	)		(25	)		(42	)
Plan change		(1,141	)		—			—			1,725			(274	)		(1,177	)
Actuarial loss (gain)		4,789			1,727			(252	)		(335	)		33			(148	)
Curtailment		—			—			—			—			—			(88	)
Projected benefit obligation at December 31,	$	49,811		$	43,770		$	9,117		$	9,131		$	350		$	594
Change in Plan Assets:
Plan assets fair value at January 1,		49,087			44,617			—			—			—			—
Employer contributions		—			6,600			428			344			25			42
Benefit payments		(2,339	)		(2,315	)		(428	)		(344	)		(25	)		(42	)
Actual return on plan assets		6,294			185			—			—			—			—
Plan assets fair value at December 31,	$	53,042		$	49,087		$	—		$	—		$	—		$	—
Plan assets in excess of (less than) projected benefit obligation	$	3,231		$	5,317		$	(9,117	)	$	(9,131	)	$	(350	)	$	(594	)
Accumulated Benefit Obligation	$	46,455		$	40,025

The weighted average assumptions used in determining the actuarial present value of the projected benefit obligation at December 31 are as follows:

	Pension Plans						Postretirement Benefits
	2006		2005		2004		2006		2005		2004
Discount rate	5.93	%	5.88	%	6.00	%	5.93	%	5.88	%	6.00	%
Expected rate of increase in future compensation	4.00	%	4.00	%	4.00	%

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Components of Net Periodic Benefit Expense

The actuarially estimated net benefit cost for the years ended December 31 includes the following components.

	Qualified Pension Plan									Non-qualified Pension Plan						Postretirement Benefits
(in thousands)	2006			2005			2004			2006		2005		2004		2006			2005			2004
Service cost - benefits earned during the year	$	2,206		$	2,169		$	1,954		$	139	$	117	$	141	$	4		$	75		$	181
Interest cost on projected benefit obligation		2,526			2,341			2,205			527		491		395		18			60			114
Expected return on plan assets		(3,862	)		(3,722	)		(3,382	)		—		—		—		—			—			—
Net amortization and deferral of loss (gain)		735			302			194			656		585		166		(6	)		(111	)		24
Curtailment gain		—			—			—			—		—		—		—			(1,203	)		—
Net pension cost included in employee benefits expense	$	1,605		$	1,090		$	971		$	1,322	$	1,193	$	702	$	16		$	(1,179	)	$	319

Weighted average assumptions used in determining net periodic benefit cost for the three years ended December 31 are presented below:

	Qualified Pension Plan						Non-qualified Pension Plan						Postretirement Benefits
	2006		2005		2004		2006		2005		2004		2006		2005		2004
Discount rate	5.88	%	6.00	%	6.25	%	5.88	%	6.00	%	6.25	%	5.88	%	6.00	%	6.25	%
Expected rate of increase in future compensation	4.00	%	4.00	%	4.00	%	4.00	%	4.00	%	4.00	%
Expected long-term rate of return on plan assets	8.00	%	8.50	%	8.50	%

The Corporation revises the rates applied in the determination of the actuarial present value of the projected benefit obligation to reflect the anticipated performance of the plan and changes in compensation levels.

Qualified Pension Plan Assets

The investment objective for the qualified pension plan assets is to increase the market value of the pension fund by achieving above average results over time, within acceptable risk parameters. Guidelines are set to achieve a total return from investment income and capital appreciation that insure adequate asset protection. This is to be achieved by focusing on all market sectors and managing the asset mix between certain categories, reflecting specific plan requirements and market conditions. The upper and lower composition limits of the portfolio is covered by the following parameters—equities: 44-83%, fixed income: 27-37%, and cash and equivalents: 0-10%. No single equity or industry or group can constitute more than 20% of either portfolio. No single company or equity can constitute more than 5% of the total portfolio. No single equity may compose more than 10% of the equity portfolio. No single issue, with the exception of U.S. Government and Agency obligations, can constitute more than 5% of the total value of the cash and equivalents. Quarterly, the pension plan’s investment advisor, which is unaffiliated with the Corporation or investment management, reviews the asset mix and portfolio performance with management. Management periodically evaluates the long-term rate of return on the qualified pension plan assets by reviewing the actual returns on the assets for specific periods of time, in addition to averaging the actual returns over specific periods of time. Based on these reviews, the vast majority of the rates of return for the qualified plan assets were greater than or equal to 8.0% for 2006, 8.5% for 2005 and 8.5% for 2004.

The Corporation’s pension plan weighted-average asset allocations at December 31 by asset category were as follows:

	Qualified Pension Plan
	2006		2005
Equity securities	70.8	%	67.8	%
Debt securities	26.5	%	26.6	%
Cash	2.7	%	5.6	%
	100.0	%	100.0	%

Contributions

The minimum required contribution in 2006 for the qualified plan is estimated to be zero. The maximum contribution amount for the qualified plan is the maximum deductible contribution under the Internal Revenue Code, which is dependent on several factors

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including proposed legislation that will affect the interest rate used to determine the current liability. In addition, the decision to contribute the maximum amount is dependent on other factors including the actual investment performance of plan assets. Given these uncertainties, the Corporation is not able to reliably estimate the maximum deductible contribution or the amount that will be contributed in 2007 to the qualified plan. During 2005, the Corporation contributed $6.6 million to the qualified pension plan. For the unfunded non-qualified pension and postretirement benefit plans, the Corporation will contribute the minimum required amount in 2007, which is equal to the benefits paid under the plans.

Benefit Payments

Presented below are the estimated future benefit payments, which as appropriate, reflect expected future service.

(in thousands)	Qualified Pension Plan		Non-qualified Pension Plan		Post- retirement Benefits
2007	$	2,903	$	466	$	33
2008		2,758		462		33
2009		3,107		459		32
2010		2,892		521		31
2011		3,166		518		31
2012-2016		19,591		5,097		140

Retirement Savings Plan

The Retirement Savings Plan (the “Plan”) is a defined contribution plan that is qualified under Section 401(a) of the Internal Revenue Code of 1986. The Plan generally allows all employees who complete six months of employment and elect to participate, to receive matching funds from the Corporation for pre-tax retirement contributions made by the employee. The annual contribution to this Plan is at the discretion of, and determined by, the Board of Directors of the Corporation. Under provisions of the Plan, the maximum contribution is 75% of an employee’s contribution up to 4.5% of the individual’s salary. Contributions to this Plan amounted to $2.5 million, $2.5 million and $1.8 million for the years ended December 31, 2006, 2005 and 2004, respectively.

NOTE 21—REGULATORY CAPITAL

The Corporation and the Bank are subject to various capital adequacy guidelines imposed by federal and state regulatory agencies. Under these guidelines, the Corporation and the Bank must meet specific capital adequacy requirements that are quantitative measures of their respective assets, liabilities and certain off-balance sheet items calculated under regulatory accounting practices.

The Corporation’s and the Bank’s core (or tier 1) capital is equal to total stockholders’ equity less net accumulated OCI plus capital securities less intangible assets. Total regulatory capital consists of core capital plus the allowance for loan losses, subject to certain limitations. The trust preferred securities are considered capital securities, and accordingly, are includable as tier 1 capital of the Corporation subject to a 25% limitation. The leverage ratio represents core capital, as defined above, divided by average total assets. Risk-based capital ratios measure core and total regulatory capital against risk-weighted assets as prescribed by regulation. Risk-weighted assets are determined by applying a weighting to asset categories and certain off-balance sheet commitments based on the level of credit risk inherent in the assets.

The Corporation and the Bank exceeded all regulatory capital requirements as of December 31, 2006. The Corporation is a one-bank holding company that relies upon the Bank’s performance to generate capital growth through the Bank earnings. A portion of the Bank’s earnings is passed to the Corporation in the form of cash dividends.

As a commercial bank under the Maryland Financial Institution Law, the Bank may declare cash dividends from undivided profits or, with the prior approval of the Commissioner of Financial Regulation, out of additional paid-in capital in excess of 100% of its required capital stock, and after providing for due or accrued expenses, losses, interest and taxes.

The Corporation and the Bank, in declaring and paying dividends, are also limited insofar as minimum regulatory capital requirements must be maintained. The Corporation and the Bank comply with such capital requirements. If the Corporation or the Bank were unable to comply with the minimum capital requirements, it could result in regulatory actions that could have a material impact on the Corporation.

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The actual regulatory capital ratios and required ratios for capital adequacy purposes under FIRREA and the ratios to be categorized as “well capitalized” under prompt corrective action regulations are summarized in the following table for the periods indicated:

	Provident Bankshares December 31,						Provident Bank December 31,
(dollars in thousands)	2006			2005			2006			2005
Total equity capital per consolidated financial statements	$	633,631		$	630,495		$	504,082		$	503,920
Qualifying trust preferred securities		129,000			129,000			—			—
Minimum pension liability		—			(1,196	)		—			(1,196	)
Accumulated other comprehensive loss		22,107			17,283			22,183			17,283
Adjusted capital		784,738			775,582			526,265			520,007
Adjustments for tier 1 capital:
Goodwill and disallowed intangible assets		(263,665	)		(265,794	)		(9,122	)		(10,939	)
Total tier 1 capital		521,073			509,788			517,143			509,068
Adjustments for tier 2 capital:
Allowance for loan losses		45,203			45,639			45,203			45,639
Allowance for letter of credit losses		534			467			534			467
Total tier 2 capital adjustments		45,737			46,106			45,737			46,106
Total regulatory capital	$	566,810		$	555,894		$	562,880		$	555,174
													Minimum Regulatory Requirements		To be “Well Capitalized”
Risk-weighted assets	$	4,781,982		$	4,645,900		$	4,770,854		$	4,638,729
Quarterly regulatory average assets		6,108,492			6,070,270			6,089,222			6,063,671
Ratios:
Tier 1 leverage		8.53	%		8.40	%		8.49	%		8.40	%	4.00	%	5.00	%
Tier 1 capital to risk-weighted assets		10.90			10.97			10.84			10.97		4.00		6.00
Total regulatory capital to risk-weighted assets		11.85			11.97			11.80			11.97		8.00		10.00

NOTE 22—BUSINESS SEGMENT INFORMATION

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

The Corporation offers consumer and commercial banking products and services through its wholly owned subsidiary, Provident Bank. The Bank offers its services to customers in the key urban areas of Baltimore, Washington and Richmond through 91 traditional and 64 in-store banking offices in Maryland, Virginia and southern York County, Pennsylvania. Additionally, the Bank offers its customers 24-hour banking services through 252 ATMs, telephone banking and the Internet. Consumer banking services include a broad array of small business and consumer loan, deposit and investment products offered to retail and commercial customers through the retail branch network and direct channel sales center. Commercial Banking provides an array of commercial financial services including asset-based lending, equipment leasing, real estate financing, cash management and structured financing to middle market commercial customers. Treasury and Administration is comprised of balance sheet management activities that include managing the investment portfolio, discretionary funding, utilization of derivative financial instruments and optimizing the Corporation’s equity position.

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

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

(in thousands)	Commercial Banking		Consumer Banking		Treasury and Administration			Total
2006:
Net interest income	$	61,394	$	109,191	$	33,418		$	204,003
Provision for loan losses		1,283		2,328		362			3,973
Net interest income after provision for loan losses		60,111		106,863		33,056			200,030
Non-interest income		18,720		101,742		(6,792	)		113,670
Non-interest expense		26,101		154,879		33,599			214,579
Income (loss) before income taxes		52,730		53,726		(7,335	)		99,121
Income tax expense (benefit)		15,490		15,782		(2,154	)		29,118
Net income (loss)	$	37,240	$	37,944	$	(5,181	)	$	70,003
Total assets	$	2,163,576	$	3,068,326	$	1,063,991		$	6,295,893
2005:
Net interest income	$	57,029	$	102,124	$	39,557		$	198,710
Provision for loan losses		3,552		1,071		400			5,023
Net interest income after provision for loan losses		53,477		101,053		39,157			193,687
Non-interest income		15,476		95,999		1,034			112,509
Non-interest expense		23,505		145,758		31,474			200,737
Income before income taxes		45,448		51,294		8,717			105,459
Income tax expense		14,010		15,812		2,687			32,509
Net income	$	31,438	$	35,482	$	6,030		$	72,950
Total assets	$	1,937,459	$	3,116,892	$	1,301,575		$	6,355,926
2004:
Net interest income	$	46,555	$	85,522	$	50,136		$	182,213
Provision for loan losses		3,193		1,793		2,548			7,534
Net interest income after provision for loan losses		43,362		83,729		47,588			174,679
Non-interest income		13,012		88,086		(130	)		100,968
Non-interest expense		20,751		128,456		34,521			183,728
Income before income taxes		35,623		43,359		12,937			91,919
Income tax expense		11,602		14,122		4,215			29,939
Net income	$	24,021	$	29,237	$	8,722		$	61,980
Total assets	$	1,737,854	$	3,025,716	$	1,807,846		$	6,571,416

The following table discloses the net carrying amount of goodwill at December 31, 2006, 2005 and 2004 respectively by segment.

(in thousands)	2006		2005		2004
Commercial Banking	$	86,621	$	86,651	$	87,122
Consumer Banking		167,922		168,204		169,119
Total	$	254,543	$	254,855	$	256,241

NOTE 23—FAIR VALUE OF FINANCIAL INSTRUMENTS

SFAS No. 107, “Disclosure about Fair Value of Financial Instruments” (“SFAS No. 107”) requires all entities to disclose the fair value of recognized and unrecognized financial instruments on a prospective basis, where feasible, in an effort to provide financial statement users with information in making rational investment and credit decisions. To estimate the fair value of each class of financial instrument the Corporation applied the following methods using the indicated assumptions:

Cash and Due from Banks and Short-Term Investments

The amounts reported in the balance sheet approximate the fair values of these assets.

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Mortgage Loans Held for Sale

Fair values of mortgage loans held for sale are based on prices entered into between the Corporation and a third party.

Securities Available for Sale

Fair values of investment securities are based on quoted market prices.

Securities Held to Maturity

Fair values of investment securities are based on quoted market prices.

Loans

The fair value calculation of loans differentiates loans on their financial characteristics, such as product classification, loan category, pricing features and remaining maturity. Prepayment estimates are evaluated by product and loan rate. The fair value of commercial loans, commercial real estate loans and real estate construction loans is calculated by discounting contractual cash flows, using discount rates that are believed to reflect current credit quality and other related factors. Loans that have homogeneous characteristics, such as residential mortgages and installment loans, are valued using discounted cash flows.

Other Assets

Fair value of cash surrender value life insurance contracts are based upon cash values of the policies as provided by each insurance carrier.

Deposits

The fair value of demand deposits, savings accounts and money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposits is estimated using a discounted cash flow calculation that applies interest rates and remaining maturities for currently offered certificates of deposit.

Borrowings

Fair values of the borrowings are based on quoted market prices of borrowings and debt with similar terms and remaining maturities.

Derivative Financial Instruments

Interest rate swaps and cap/corridor arrangements are valued at quoted market prices.

The estimated fair values of the Corporation’s financial instruments at December 31 are as follows:

	2006				2005
(in thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Assets:
Cash and due from banks	$	142,794	$	142,794	$	159,474	$	159,474
Short-term investments		7,118		7,118		3,992		3,992
Mortgage loans held for sale		10,615		10,615		8,169		8,189
Securities available for sale		1,582,736		1,582,736		1,794,086		1,794,086
Securities held to maturity		101,867		102,950		111,269		110,081
Loans, net of allowance		3,820,289		3,747,850		3,649,742		3,560,292
Other assets - cash surrender value life insurance		160,822		160,822		155,438		155,438
Liabilities:
Deposits		4,140,112		3,847,677		4,124,467		3,837,264
Short-term borrowings		658,887		659,038		647,752		647,857
Long-term debt		828,079		835,127		920,022		924,377
Derivative financial instruments		1,390		1,390		5,183		5,183

The calculations represent estimates and do not represent the underlying value of the Corporation. These amounts are based on the relative economic environment at the respective year-ends; therefore, economic movements since year-end may have affected the valuations.

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NOTE 24—PARENT COMPANY FINANCIAL INFORMATION

The statements of income, condition and cash flows for Provident Bankshares Corporation (parent only) are presented below.

Statements of Income

	Year ended December 31,
(in thousands)	2006			2005			2004
Interest income from bank subsidiary	$	77		$	92		$	59
Interest income from investment securities		837			—			—
Net derivative losses on swaps		(669	)		(2,078	)		(1,090	)
Net cash settlement on swaps		912			1,821			3,965
Net losses		(83	)		—			—
Dividend income from subsidiaries		71,990			41,635			119,612
Total income		73,064			41,470			122,546
Operating expenses		11,437			11,668			11,495
Income before income taxes and equity in undistributed income of subsidiaries		61,627			29,802			111,051
Income tax benefit		3,627			4,029			2,443
		65,254			33,831			113,494
Equity in undistributed income (loss) of subsidiaries		4,749			39,119			(51,514	)
Net income	$	70,003		$	72,950		$	61,980

Statements of Condition

	December 31,
(in thousands)	2006			2005
Assets:
Interest-bearing deposit with bank subsidiary	$	1,535		$	932
Securities available for sale		15,116			—
Investment in subsidiaries		508,115			507,638
Other assets		259,179			260,112
Total assets	$	783,945		$	768,682
Liabilities:
Long-term debt	$	136,857		$	136,715
Other liabilities		13,457			1,472
Total liabilities		150,314			138,187
Stockholders’ equity:
Common stock		32,433			32,933
Additional paid-in capital		370,425			393,555
Retained earnings		252,880			221,290
Net accumulated other comprehensive loss		(22,107	)		(17,283	)
Total stockholders’ equity		633,631			630,495
Total liabilities and stockholders’ equity	$	783,945		$	768,682

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Statements of Cash Flows

	Year ended December 31,
(in thousands)	2006			2005			2004
Operating activities:
Net income	$	70,003		$	72,950		$	61,980
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Equity in undistributed (income) loss from subsidiaries		(4,749	)		(39,119	)		51,514
Other operating activities		12,253			6,430			3,059
Total adjustments		7,504			(32,689	)		54,573
Net cash provided by operating activities		77,507			40,261			116,553
Investing activities:
Cash paid in acquisition		—			—			(83,814	)
Purchases of securities available for sale		(15,080	)		—			—
Contributed from bank subsidiary		—			32,502			—
Net cash provided (used) by investing activities		(15,080	)		32,502			(83,814	)
Financing activities:
Proceeds from issuance of common stock		15,598			13,083			11,224
Purchase of treasury stock		(39,228	)		(22,584	)		(4,220	)
Cash dividends on common stock		(38,413	)		(35,729	)		(31,456	)
Redemption of junior subordinated debentures		—			(36,083	)		—
Other financing activities		219			(722	)		(261	)
Net cash used by financing activities		(61,824	)		(82,035	)		(24,713	)
Increase (decrease) in cash and cash equivalents		603			(9,272	)		8,026
Cash and cash equivalents at beginning of period		932			10,204			2,178
Cash and cash equivalents at end of period	$	1,535		$	932		$	10,204
Supplemental disclosures:
Income taxes refunded	$	2,351		$	4,212		$	2,558
Stock issued for acquired company		—			—			251,176

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Corporation’s management, including the Corporation’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Corporation’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Corporation’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Corporation files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Corporation’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting. The internal control over financial reporting process has been designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Corporation’s financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.

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Management conducted an assessment of the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2006, utilizing the framework established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has determined that the Corporation’s internal control over financial reporting as of December 31, 2006 is effective.

Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that accurately and fairly reflect, in reasonable detail, transactions and dispositions of assets; and provide reasonable assurances that (i) transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States; (ii) receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Corporation; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Corporation’s assets that could have a material effect on the Corporation’s financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management’s assessment of the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2006 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report. Accordingly, KPMG LLP has issued an attestation report on management’s assessment of the Corporation’s internal control over financial reporting. KPMG LLP’s report is included in “Item 8. Financial Statements and Supplementary Data”.

Changes in Internal Control over Financial Reporting

No change in the Corporation’s internal control over financial reporting occurred during the quarter ended December 31, 2006 that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

Compliance with Laws and Regulations

Management is also responsible for compliance with the federal and state laws and regulations concerning dividend restrictions and federal laws and regulations concerning loans to insiders designated by the FDIC as safety and soundness laws and regulations.

Management assessed its compliance with the designated laws and regulations relating to safety and soundness. Based on this assessment, management believes that Provident Bank, the wholly owned subsidiary of Provident Bankshares Corporation complied, in all significant respects, with the designated laws and regulations related to safety and soundness for the year ended December 31, 2006.

Item 9B. Other Information

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

The information relating to the directors and officers, corporate governance and compliance with Section 16(a) of the Exchange Act is incorporated herein by reference to the sections “Election of Directors,” “Corporate Governance” and “Other Information Relating to Directors and Executive Officers of Provident Bankshares” in the Corporation’s Proxy Statement for the 2007 Annual Meeting of Stockholders (the “Proxy Statement”).

The Corporation has adopted a Code of Business Conduct and Ethics which is available in the “Corporate Governance” section of the “Investor Relations” page of Provident’s website at www.provbank.com.

Item 11. Executive Compensation

The information regarding executive compensation is incorporated herein by reference to the text and tables under “Directors’ Compensation,” “Executive Compensation,” “Compensation Disclosure and Analysis” and “Compensation Committee Report” in the Corporation’s Proxy Statement.

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Item 12. Security Ownership of Certain Beneficial Owners and Management

The information relating to security ownership of certain beneficial owners and management is incorporated herein by reference to the text and tables under “Stock Ownership” in the Corporation’s Proxy Statement. The Corporation is not aware of any arrangement, including any pledge by any person of securities of the Corporation, the operation of which may at a subsequent date result in a change of control of the Corporation.

Equity Compensation Plan Information

The following table sets forth information, as of December 31, 2006, about Corporation equity securities that may be issued under all of Provident Bankshares’ equity compensation plans. The Corporation’s stockholders approved each of the Corporation’s equity compensation plans.

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column)
Equity compensation plans approved by security holders	2,113,371	$	28.21	4,676,594
Equity compensation plans not approved by security holders	N/A		N/A	N/A
Total	2,113,371	$	28.21	4,676,594

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Performance Graph

The SEC requires that Provident include in the Form 10-K statement a line-graph comparing cumulative shareholder returns as of December 31 for each of the last five years among the common stock, a broad market index and either a nationally-recognized industry standard or an index of peer companies selected by Provident, assuming in each case both an initial $100 investment and reinvestment of dividends. Consistent with past practice, the Corporation has selected the Nasdaq Market Index as the relevant broad market index because prices for the common stock are quoted on the Nasdaq National Market. Additionally, the Corporation has selected the Hemscott Group Index (formerly known as the Coredata Group Index) as the relevant industry standard because such index consist of financial institutions which are headquarter in the mid-Atlantic region and the board of directors believes that such institutions generally possess assets, liabilities and operations more similar to those Provident and its subsidiaries than other publicly-available indices.

COMPARE 5-YEAR CUMULATIVE TOTAL RETURN

AMONG PROVIDENT BANKSHARES CORP.,

NASDAQ MARKET INDEX AND HEMSCOTT GROUP INDEX

ASSUMES $100 INVESTED ON JAN. 1, 2002

ASSUMES DIVIDEND REINVESTED

FISCAL YEAR ENDING DEC. 31, 2006

	Fiscal Year Ending
Company/Index/Market	2001	2002	2003	2004	2005	2006
Provident Bankshares Corp	100.00	98.63	130.77	166.15	159.51	173.68
Regional Mid Atlantic Banks	100.00	95.63	121.89	139.01	140.08	157.76
NASDAQ Market Index	100.00	69.75	104.88	113.70	116.19	128.12

Item 13. Certain Relationships and Related Transactions, Director Independence

The information relating to certain relationships and related transactions and director independence is incorporated herein by reference to the sections “Corporate Governance,” “Election of Directors” and “Transactions with Management” in the Corporation’s Proxy Statement.

Item 14. Principal Accountant Fees and Services

The information regarding principal accountant fees and services is incorporated herein by reference to “Ratification of Appointment of the Independent Registered Public Accounting Firm” in the Corporation’s Proxy Statement.

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PART IV

Item 15. Exhibits and Financial Statement Schedules

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

(1) The Consolidated Financial Statements of Provident Bankshares Corporation and Subsidiaries are included in Item 8 and incorporated herein by reference.

(2) All financial statement schedules are omitted as the required information either is not applicable or is contained in the financial statements or related notes.

(3) Exhibits

The following is an index of the exhibits included in this report:

(3.1)	Articles of Incorporation of Provident Bankshares Corporation (1)
(3.2)	Articles of Amendment to the Articles of Incorporation of Provident Bankshares Corporation (1)
(3.3)	Sixth Amended and Restated Bylaws of Provident Bankshares Corporation (2)
(10.1)	Executive Incentive Plan (8)
(10.2)	Executive Vice Presidents’ Incentive Plan (8)
(10.3)	Amended and Restated Stock Option Plan of Provident Bankshares Corporation (3)
(10.4)	Form of Change in Control Agreement between Provident Bankshares Corporation and Certain Executive Officers (4)
(10.5)	Form of Change in Control Agreement between Provident Bank of Maryland and Certain Executive Officers (4)
(10.6)	Form of Deferred Compensation Plan for Outside Directors (5)
(10.7)	Provident Bankshares Corporation Non-Employee Directors’ Severance Plan (5)
(10.8)	Supplemental Retirement Income Agreement for Peter M. Martin (6)
(10.9)	Supplemental Retirement Income Agreement for Gary N. Geisel (6)
(10.10)	Provident Bankshares Corporation 2004 Equity Compensation Plan (9)
(10.11)	Consulting Agreement between Provident Bank and Enos K. Fry (10)
(10.12)	Form of Supplemental Retirement Income Agreement for Kevin G. Byrnes and Dennis A. Starliper.
(11.0)	Statement re: Computation of Per Share Earnings (7)
(21.0)	Subsidiaries of Provident Bankshares Corporation
(23.1)	Consent of Independent Registered Public Accounting Firm
(24.0)	Power of Attorney
(31.1)	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
(31.2)	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
(32.1)	Section 1350 Certification of Chief Executive Officer
(32.2)	Section 1350 Certification of Chief Financial Officer

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

(2) Incorporated by reference from Registrant’s Form 8-K (File No. 0-16421) filed with the Commission on January 17, 2006.

(3) Incorporated by reference from Registrant’s definitive 2001 Proxy Statement for the Annual Meeting of Stockholders held on April 18, 2001 (File No. 0-16421) filed with the Commission on March 14, 2001.

(4) Incorporated by reference from Registrant’s 1995 Annual Report on Form 10-K (File No. 0-16421) filed with the Commission on March 18, 1996.

(5) Incorporated by reference from Registrant’s 1998 Annual Report on Form 10-K (File No. 0-16421) filed with the Commission on March 3, 1999.

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(6) Incorporated by reference from Registrant’s 2002 Annual Report on Form 10-K (File No. 0-16421) filed with the Commission on March 7, 2003.

(7) Incorporated herein by reference to Note 18 in the Notes to Consolidated Financial Statements.

(8) Incorporated by reference from Registrant’s Form 8-K (File No. 0-16421) filed with the Commission on March 16, 2006.

(9) Incorporated herein by reference from Appendix F to the Registrant’s Form S-4, as amended, (File No. 333-112083) initially filed with the Commission on January 22, 2004.

(10) Incorporated by reference from Registrant’s June 2006 Quarterly Report on Form 10-Q (File No. 0-16421) filed with the Commission on August 9, 2006.

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Signatures

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

	PROVIDENT BANKSHARES CORPORATION (Registrant)
March 1, 2007	By	/s/    GARY N. GEISEL
		Gary N. Geisel
		Chairman of the Board and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacity and on the dates indicated.

	Principal Executive Officer:
March 1, 2007	By	/s/    GARY N. GEISEL
		Gary N. Geisel
		Chairman of the Board and Chief Executive Officer
	Principal Financial and Accounting Officer:
March 1, 2007	By	/s/    DENNIS A. STARLIPER
		Dennis A. Starliper
		Executive Vice President and Chief Financial Officer
		A Majority of the Board of Directors* Melvin A. Bilal, Thomas S. Bozzuto, Kevin G. Byrnes, Ward B. Coe, III, William J. Crowley, Jr., James G. Davis, Jr., Pierce B. Dunn, Enos K. Fry, Gary N. Geisel, Mark K. Joseph, Bryan J. Logan, Barbara B. Lucas, Peter M. Martin, Pamela J. Mazza, Frederick W. Meier, Jr., Dale B. Peck, Francis G. Riggs, Sheila K. Riggs, Donald E. Wilson

* Pursuant to the Power of Attorney incorporated by reference.

March 1, 2007	By	/s/    LAWRENCE J. BEYER
		Lawrence J. Beyer
		Attorney-in-fact

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EXHIBIT INDEX

EXHIBIT	DESCRIPTION
10.12	Form of Supplemental Retirement Income Agreement for Kevin G. Byrnes and Dennis A. Starliper.
21.0	Subsidiaries of Provident Bankshares Corporation
23.1	Consent of Independent Registered Public Accounting Firm
24.0	Power of Attorney
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1	Section 1350 Certification of Chief Executive Officer
32.2	Section 1350 Certification of Chief Financial Officer

EX-10.12

Exhibit 10.12

PROVIDENT BANK

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

Provident Bank, a Maryland corporation (the “Company”), hereby establishes this Supplemental Executive Retirement Plan (the “Plan”), effective as of August 1, 2004, for the purpose of attracting high quality executives and promoting in its key executives increased efficiency and an interest in the successful operation of the Company. The benefits provided under the Plan shall be provided in consideration for services to be performed after the effective date of the Plan, but prior to the executive’s retirement.

ARTICLE 1

Definitions

1.1    Administrator shall mean the person or persons appointed by the Board of Directors of the Company to administer the Plan pursuant to Article 9 of the Plan.

1.2     Beneficiary shall mean the person(s) or entity designated as such in accordance with Article 8 of the Plan.

1.3     Benefit Percentage shall have the meaning given to such term in the Participation Agreement with the Participant and may be different for each Participant

1.4     Change in Control shall mean either: (i) the dissolution or liquidation of the Company; (ii) a reorganization, merger or consolidation of the Company with one or more corporations as a result of which the Company is not the surviving corporation; (iii) approval by the stockholders of the Company of any sale, lease, exchange or other transfer (in one or a series of transactions) of all or substantially all of the assets of the Company; (iv) approval by the stockholders of the Company of any merger or consolidation of the Company in which the holders of voting stock of the Company immediately before the merger or consolidation will not own fifty percent (50%) or more of the voting shares of the continuing or surviving corporation immediately after such merger or consolidation; or (v) a change of fifty percent (50%) (rounded to the next whole person) in the membership of the Board of Directors of the Company within a twelve (12) month period, unless the election or nomination for election by stockholders of each new director within such period was approved by the vote of two-thirds (2/3) (rounded to the next whole person) of the directors then still in office who were in office at the beginning of the twelve (12) month period.

1.5     Company shall mean Provident Bank, a Maryland corporation.

1.6     Disability shall mean (i) the inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or (ii) by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, the Participant is receiving income replacement benefits for a period of not less than 3 months under an accident and health plan covering employees of the Company. The

1

Administrator may require that the Participant submit to an examination by a competent physician or medical clinic selected by the Administrator on an annual basis to confirm Disability.

1.7     Eligible Executive shall mean those senior executives of the Company as may be designated by the Administrator to be eligible to participate in the Plan.

1.8     ERISA shall mean the Employee Retirement Income Security Act of 1974, as amended.

1.9     Final Average Compensation shall mean the average annual base salary paid by the Company to the Participant during the thirty-six (36) month period ending immediately prior to the Participant’s Termination of Employment.

1.10     Participant shall mean an Eligible Executive who has begun participation in the Plan pursuant to Article 2 of the Plan. Participation shall commence on the first day of the month in which the executive is first classified as an Eligible Executive by the Administrator.

1.11     Participation Agreement shall mean the written agreement by and between the Company and Participant which specifies the terms under which benefits are provided to the Participant under the Plan in consideration for services performed on behalf of the Company.

1.12     Plan Year shall mean the calendar year, except that the initial Plan Year shall commence on August 1, 2004 and shall end on December 31, 2004.

1.13     Retirement shall mean Termination of Employment other than by reason of death, on or after the Retirement Eligibility Date.

1.14     Retirement Benefit(s) shall mean the benefits payable pursuant to the Participant on Retirement pursuant to Section 3.1.

1.15     Retirement Eligibility Date shall mean the date on which the Participant attains age sixty five (65) or such other age as may be specified in the Participation Agreement.

1.16     Settlement Date shall mean the date by which benefit payments shall commence. Unless otherwise specified, the Settlement Date shall be no later that the last day of January of the Plan Year following the Termination of Employment except that the Settlement Date for a “Key Employee” as defined in Section 416(i) of the Internal Revenue Code (without regard to paragraph (5) of that Section) shall be no earlier than six (6) months following Termination of Employment of any reason other than the Participant’s death.

1.17     Termination of Employment shall mean the date of the cessation of the Participant’s employment with the Company for any reason whatsoever, whether voluntary or involuntary, including as a result of the Participant’s Retirement, death or Disability.

1.18     Unreduced Retirement Benefit shall mean, with respect to a Participant, the Participant’s Retirement Benefit, calculated in accordance with Section 3.1, but disregarding clauses (2) and (3) thereof.

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1.19     Years of Participation shall mean the cumulative consecutive Plan Years the Participant has participated in the Plan, beginning with the first complete Plan Year coinciding with or beginning after the Participant is first enrolled in the Plan pursuant to Article 2 of the Plan.

ARTICLE 2

Participation

2.1     Automatic Enrollment. An Eligible Executive shall automatically be enrolled in the Plan as of the first day of the month in which he or she is first designated as an Eligible Executive by the Administrator.

ARTICLE 3

Calculation of Retirement and Termination Benefit

3.1     Retirement Benefit. The Retirement Benefit shall be an annual amount, commencing after Retirement, payable over the lifetime of the Participant, but for no less than fifteen (15) years, equal to:

(1) the product of (i) the Participant’s Benefit Percentage and (ii) the Participant’s Final Average Compensation, minus

(2) the annual amount payable to the Participant under the normal form of distribution under the Company’s qualified defined benefit plan, minus

(3) the annual amount of the normal Social Security benefit payable to the Participant.

3.2     Termination Benefit. The Termination Benefit shall be an annual amount, commencing after the Participant attains age 65, payable over the lifetime of the Participant, but no less than fifteen (15) years, determined in the same manner as the Retirement Benefit, except that each Participant’s Participation Agreement may provide for a reduced Benefit Percentage in the event that the Participant Terminates Employment prior to attaining age 65 with less than a stated number of Years of Participation. Notwithstanding the forgoing, each Participant shall be entitled to receive a benefit using the maximum Benefit Percentage set forth in the Participation Agreement, regardless of the Participant’s Years of Participation, in the event of Termination of Employment (i) by reason of the Participant’s Retirement, Disability or death, or (ii) after a Change in Control.

ARTICLE 4

Payment of Retirement and Termination Benefits

4.1     Retirement Benefit. In the event of the Participant’s Retirement, the Participant shall be entitled to receive a Retirement Benefit, in an amount calculated in accordance with Section 3.1. The benefit shall be paid in annual installments over the lifetime of

3

the Participant, but not less than fifteen (15) years, unless the Participant makes a timely election to receive actuarially adjusted benefits (based on reasonable actuarial assumptions established in advance by the Administrator pursuant to Section 11.5 of the Plan) payable over the joint lives of the Participant and his or her spouse. Payments shall begin on the Settlement Date following Retirement. An election to change the form of benefit payout may be made at any time prior to Retirement by submitting to the Administrator the form provided for such purpose but elections shall not be effective unless made no less than thirteen (13) calendar months prior to Termination of Employment.

4.2     Termination Benefit. In the event of the Participant’s Termination of Employment prior to the Retirement Eligibility Date (other than by reason of Disability or death), the Participant shall be entitled to receive a Termination Benefit, in an amount calculated in accordance with Section 3.2. The benefit shall be paid in annual installments over the lifetime of the Participant, but no less than fifteen (15) years, unless the Participant makes a timely election to receive actuarially adjusted benefits (based on reasonable actuarial assumptions established in advance by the Administrator pursuant to Section 11.5 of the Plan) payable over the joint lives of the Participant and his or her spouse. Payments shall begin on the Settlement Date following the Participant’s Retirement Eligibility Date. An election to change the form of benefit payout may be made at any time prior to Termination of Employment by submitting to the Administrator the form provided for such purpose but elections shall not be effective unless made no less than thirteen (13) calendar months prior to Termination of Employment.

ARTICLE 5

Death Benefits

5.1     Survivor Benefit Before Benefits Commence. If the Participant dies prior to commencement of benefits under Article 4 or 6, the Company shall pay to the Participant’s Beneficiary a death benefit equal to the Participant’s accrued benefit as of the date of death based on reasonable actuarial and mortality assumptions which have been selected at the discretion of the Administrator. The death benefit shall be paid in a single lump sum on the Settlement Date following the date the Participant’s death is established by reasonable documentation.

5.2     Survivor Benefit After Benefits Commence. If the Participant dies after benefits have commenced under Article 4 or 6 but prior to completion of the minimum (15) year payout period and the Participant has not elected to receive the benefits in the form of a joint annuity, benefit payments shall continue to be paid to the Survivor over the balance of the fifteen (15) year minimum benefit payout period. If the Participant has elected to receive the benefit in the form of a joint annuity, no death benefit shall be payable upon the death of the Participant unless that Participant predeceases the other person who’s life has been covered under the joint annuity, in which case the benefits shall be payable to the joint annuitant over the balance of his or her life.

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ARTICLE 6

Disability

6.1     Disability. In the event of Termination of Employment by reason of Disability prior to the Retirement Eligibility Date, the Participant shall be entitled to receive the Retirement Benefit provided under Sections 3.1, except that (i) the annual payments shall begin on the Settlement Date following Termination of Employment by reason of Disability; and (ii) the annual payments shall be paid over fifteen (15) years and not in the form of a single or joint life annuity.

ARTICLE 7

Amendment or Termination of Plan

7.1     Amendment or Termination of Plan. The Company may, at any time, direct the Administrator to amend or terminate the Plan, except that no such amendment or termination may reduce a Participant’s accrued benefit. If the Company terminates the Plan, the date of such termination shall be treated as a Termination of Employment for the purpose of calculating Plan benefits and the Company shall pay to each Participant the benefits such Participant would be entitled to receive under Section 4.1 of the Plan over the same period such benefits would otherwise have been payable under the terms of the Plan.

ARTICLE 8

Beneficiaries

8.1     Beneficiary Designation. The Participant shall have the right, at any time, to designate any person or persons as Beneficiary (both primary and contingent) to whom payment under the Plan shall be made in the event of the Participant’s death. The Beneficiary designation shall be effective when it is submitted in writing to and acknowledged by the Administrator during the Participant’s lifetime on a form prescribed by the Administrator.

8.2     Revision of Designation. The submission of a new Beneficiary designation shall cancel all prior Beneficiary designations. Any finalized divorce or marriage (other than a common law marriage) of a Participant subsequent to the date of a Beneficiary designation shall revoke such designation, unless in the case of divorce the previous spouse was not designated as Beneficiary and unless in the case of marriage the Participant’s new spouse has previously been designated as Beneficiary.

8.3     Successor Beneficiary. If the primary Beneficiary dies prior to complete distribution of the benefits provided in Article 5, the remaining Account balance shall be paid to the contingent Beneficiary elected by the Participant in the form of a lump sum payable no later than the last day of the month following the month in which the primary Beneficiary’s death is established.

8.4     Absence of Valid Designation. If a Participant fails to designate a Beneficiary as provided above, or if the Beneficiary designation is revoked by marriage, divorce,

5

or otherwise without execution of a new designation, or if every person designated as Beneficiary predeceases the Participant or dies prior to complete distribution of the Participant’s benefits, then the Administrator shall direct the distribution of such benefits to the Participant’s estate.

ARTICLE 9

Administration/Claims Procedures

9.1     Administration. The Plan shall be administered by the Administrator, which shall have the exclusive right and full discretion (i) to interpret the Plan, (ii) to decide any and all matters arising hereunder (including the right to remedy possible ambiguities, inconsistencies, or admissions), (iii) to make, amend and rescind such rules as it deems necessary for the proper administration of the Plan and (iv) to make all other determinations and resolve all questions of fact necessary or advisable for the administration of the Plan, including determinations regarding eligibility for benefits payable under the Plan. All interpretations of the Administrator with respect to any matter hereunder shall be final, conclusive and binding on all persons affected thereby. No member of the Administrator shall be liable for any determination, decision, or action made in good faith with respect to the Plan. The Company will indemnify and hold harmless the members of the Administrator from and against any and all liabilities, costs, and expenses incurred by such persons as a result of any act, or omission, in connection with the performance of such persons’ duties, responsibilities, and obligations under the Plan, other than such liabilities, costs, and expenses as may result from the bad faith, willful misconduct, or criminal acts of such persons.

9.2     Notice of Right to Claim Benefits. The Administrator shall be the “named fiduciary” and shall notify the Participant and, where appropriate, the Beneficiary, of a right to claim benefits under the Plan, shall make forms available for filing of such claims, and shall provide the name of the person or persons with whom such claim should be filed.

9.3     Claims Procedures. Any Participant, former Participant or Beneficiary may file a written claim with the Administrator setting forth the nature of the benefit claimed, the amount thereof, and the basis for claiming entitlement to such benefit. The Administrator shall determine the validity of the claim and communicate a decision to the claimant promptly and, in any event, not later than ninety (90) days after the date of the claim. The claim may be deemed by the claimant to have been denied for purposes of further review described below in the event a decision is not furnished to the claimant within such ninety (90) day period. If additional information is necessary to make a determination on a claim, the claimant shall be advised of the need for such additional information within forty-five (45) days after the date of the claim. The claimant shall have up to one hundred and eighty (180) days to supplement the claim information, and the claimant shall be advised of the decision on the claim within forty-five (45) days after the earlier of the date the supplemental information is supplied or the end of the one hundred and eighty (180) day period. Every claim for benefits which is denied shall be denied by written notice setting forth in a manner calculated to be understood by the claimant (i) the specific reason or reasons for the denial, (ii) specific reference to any provisions of the Plan (including any internal rules, guidelines, protocols, criteria, etc.) on which the denial is based, (iii) description of any additional material or information that is necessary to process the claim,

6

and (iv) an explanation of the procedure for further reviewing the denial of the claim (including applicable time limits and a statement of the claimant’s right to bring a civil action under section 502(a) of ERISA following an adverse determination on review).

9.4     Review Procedures. Within sixty (60) days after the receipt of a denial on a claim, a claimant or his/her authorized representative may file a written request for review of such denial. Such review shall be undertaken by the Administrator and shall be a full and fair review. The claimant shall have the right to review all pertinent documents. The Administrator shall issue a decision not later than sixty (60) days after receipt of a request for review from a claimant unless special circumstances, such as the need to hold a hearing, require a longer period of time, in which case a decision shall be rendered as soon as possible but not later than one hundred twenty (120) days after receipt of the claimant’s request for review. The decision on review shall be in writing and shall include specific reasons for the decision written in a manner calculated to be understood by the claimant with specific reference to any provisions of the Plan on which the decision is based.

ARTICLE 10

Conditions Related to Benefits

10.1     Nonassignability. The benefits provided under the Plan may not be alienated, assigned, transferred, pledged or hypothecated by any person, at any time, or to any person whatsoever. Those benefits shall be exempt from the claims of creditors or other claimants of the Participant or Beneficiary and from all orders, decrees, levies, garnishment or executions to the fullest extent allowed by law.

10.2     No Right to Company Assets. The benefits paid under the Plan shall be paid from the general funds of the Company, and the Participant and any Beneficiary shall be no more than unsecured general creditors of the Company with no special or prior right to any assets of the Company for payment of any obligations hereunder.

10.3     Protective Provisions. The Participant shall cooperate with the Company by furnishing any and all information requested by the Administrator, in order to facilitate the payment of benefits hereunder, taking such physical examinations as the Administrator may deem necessary and taking such other actions as may be requested by the Administrator. If the Participant refuses to so cooperate, the Company shall have no further obligation to the Participant under the Plan.

10.4     Withholding. The Participant shall make appropriate arrangements with the Company for satisfaction of any federal, state or local income tax with-holding requirements and Social Security or other employee tax requirements applicable to the payment of benefits under the Plan. If no other arrangements are made, the Company may provide, at its discretion, for such withholding and tax payments as may be required, including, without limitation, by the reduction of other amounts payable to the Participant.

10.5     Assumptions and Methodology. The Administrator shall establish the actuarial assumptions and method of calculation used in determining the present or future value

7

of benefits, earnings, payments, fees, expenses or any other amounts required to be calculated under the terms of the Plan. The Administrator shall also establish reasonable procedures regarding the form and timing of installment payments. Such assumptions and methodology shall be outlined in detail in procedures established by the Administrator and made available to Participants and may be changed from time to time by the Administrator.

10.6     Trust. The Company shall be responsible for the payment of all benefits under the Plan. At its discretion, the Company may establish one or more grantor trusts for the purpose of providing for payment of benefits under the Plan. Such trust or trusts may be irrevocable, but the assets thereof shall in all events be subject to the claims of the Company’s general creditors. Benefits paid to the Participant from any such trust or trusts shall be considered paid by the Company for purposes of meeting the obligations of the Company under the Plan.

ARTICLE 11

Miscellaneous

11.1     Successors of the Company. The rights and obligations of the Company under the Plan shall inure to the benefit of, and shall be binding upon, the successors and assigns of the Company.

11.2     Employment Not Guaranteed. Nothing contained in the Plan nor any action taken hereunder shall be construed as a contract of employment or as giving any Participant any right to continued employment with the Company.

11.3     Gender, Singular and Plural. All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine, or neuter, as the identity of the person or persons may require. As the context may require, the singular may be read as the plural and the plural as the singular.

11.4     Captions. The captions of the articles, paragraphs and sections of the Plan are for convenience only and shall not control or affect the meaning or construction of any of its provisions.

11.5     Validity. In the event any provision of the Plan is held invalid, void or unenforceable, the same shall not affect, in any respect whatsoever, the validity of any other provisions of the Plan.

11.6     Waiver of Breach. The waiver by the Company of any breach of any provision of the Plan shall not operate or be construed as a waiver of any subsequent breach by that Participant or any other Participant.

11.7     Notice. Any notice or filing required or permitted to be given to the Company or the Participant under this Agreement shall be sufficient if in writing and hand-delivered, or sent by registered or certified mail, in the case of the Company, to the principal office of the Company, directed to the attention of the Administrator, and in the case of the Participant, to the last known address of the Participant indicated on the employment records of

8

the Company. Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. Notices to the Company may be permitted by electronic communication according to specifications established by the Administrator.

11.8     Errors in Benefit Statement or Distributions. In the event an error is made in a benefit statement, such error shall be corrected on the next benefit statement following the date such error is discovered. In the event of an error in a distribution, the Participant’s Account shall, immediately upon the discovery of such error, be adjusted to reflect such under or over payment and, if possible, the next distribution shall be adjusted upward or downward to correct such prior error. If the remaining amounts payable to a Participant under this Plan are insufficient to cover an erroneous overpayment, the Company may, at its discretion, offset other amounts payable to the Participant from the Company (including but not limited to salary, bonuses, expense reimbursements, severance benefits or other employee compensation benefit arrangements, as allowed by law) to recoup the amount of such overpayment(s).

11.9     Inability to Locate Participant or Beneficiary. It is the responsibility of a Participant to apprise the Administrator of any change in address of the Participant or Beneficiary. In the event that the Administrator is unable to locate a Participant or Beneficiary for a period of three (3) years, the Participant’s Account shall be forfeited to the Company.

11.10     ERISA Plan. The Plan is intended to be an unfunded plan maintained primarily to provide deferred compensation benefits for a select group of “management or highly compensated employees” within the meaning of Sections 201, 301 and 401 of ERISA and therefore to be exempt from Parts 2, 3 and 4 of Title I of ERISA and shall be construed in a manner consistent therewith.

11.11     Applicable Law. The Plan shall be governed and construed in accordance with federal law. To the extent that any issue should arise with respect to the Plan in a context where state law is not preempted by ERISA, the laws of the State of Maryland shall govern.

IN WITNESS WHEREOF, the Company has caused this Plan to be executed this                      day of                     , 2004.

PROVIDENT BANK,

a Maryland corporation

By

Title

9

EX-21

Exhibit 21

SUBSIDIARIES OF PROVIDENT BANKSHARES CORPORATION

Subsidiaries	State of Incorporation
Provident Bank (1)	Maryland
Provident Mortgage Corp.	Maryland
Provident Financial Services, Inc.	Maryland
Provident Investment Center, Inc.	Maryland
Banksure Insurance Corporation	Maryland
PB Investment Corporation	Delaware
PB Investment Corporation II	Delaware
PB REIT, INC.	Delaware
PB MD REIT, INC.	Maryland
Provident Trust I	Delaware
Provident Trust III	Delaware
Southern Financial Capital Trust I	Delaware
Southern Financial Statutory Trust I	Delaware
Southern Financial Capital Trust III	Connecticut
Provident Lease Corp., Inc.	Maryland
Provident, LLC	Maryland
Lexington Properties Management, Inc.	Maryland
LPM Sub 1, Inc.	Maryland
LPM Sub 2, Inc.	Maryland
LPM Sub 3, Inc.	Maryland
LPM Sub 4, Inc.	Maryland
LPM Sub 5, Inc.	Maryland
LPM Sub 6, Inc.	Maryland
LPM Sub 7, Inc.	Maryland
LPM Sub 8, Inc.	Maryland
LPM Sub 9, Inc.	Maryland
LPM Sub 10, Inc.	Maryland
Court Square Leasing Corporation	Maryland

(1) Also doing business as Provident Bank of Maryland and Court Square Financial Services.

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

Provident Bankshares Corporation:

We consent to the incorporation by reference in the Registration Statement on Forms S-3 (Nos. 33-73162, 33-62859, and 333-30678) and Forms S-8 (Nos. 33-19352, 33-22552, 33-37502, 33-51462, 33-92510, 333-34409, 333-45651, 333-58881, 333-90520, 333-106158, 333-115176 and 333-115177) of Provident Bankshares Corporation of our reports dated March 1, 2007, with respect to the consolidated statements of condition of Provident Bankshares Corporation and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of income, changes in stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2006, management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2006 and the effectiveness of internal control over financial reporting as of December 31, 2006, which reports appear in the December 31, 2006 annual report on Form 10-K of Provident Bankshares Corporation.

The aforementioned report with respect to the consolidated financial statements, refers to changes in the Corporation’s method of accounting for share-based compensation with the adoption, effective January 1, 2006, of Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment” and its method of accounting for defined benefit pension and other postretirement plans as of December 31, 2006, in accordance with SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.”

/s/ KPMG LLP

Baltimore, Maryland

March 1, 2007

EX-24

Exhibit 24

PROVIDENT BANKSHARES CORPORATION

POWER OF ATTORNEY

Each of the undersigned persons, in his or her capacity as an officer or director, or both, of Provident Bankshares Corporation (the “Corporation”), hereby appoints Gary N. Geisel, Dennis A. Starliper and Lawrence J. Beyer, and each of them, with full power of substitution and resubstitution and with full power in each to act without the others, his or her attorney-in-fact and agent for the following purposes:

1. To sign for him or her, in his or her name and in his or her capacity as an officer or director, or both, of the Corporation, an Annual Report on Form 10-K for the Corporation pursuant to Section 13 of the Securities Exchange Act of 1934, and any amendments thereto (such report, together with all exhibits and documents therein and all such amendments, the “Form 10-K”).

2. To file or cause to be filed the Form 10-K with the Securities and Exchange Commission;

3. To take all such other action as any such attorney-in-fact, or his substitute, may deem necessary or desirable in connection with Form 10-K.

This power of attorney shall continue in full force and effect until revoked by the undersigned in a writing filed with the Secretary of the Corporation.

/S/    GARY N. GEISEL         Gary N. Geisel	December 20, 2006
/S/    DENNIS A. STARLIPER         Dennis A. Starliper	December 20, 2006
/S/    LAWRENCE J. BEYER         Lawrence J. Beyer	December 20, 2006
/S/    MELVIN A. BILAL         Melvin A. Bilal	December 20, 2006
/S/    THOMAS S. BOZZUTO         Thomas S. Bozzuto	December 20, 2006
/S/    KEVIN G. BYRNES         Kevin G. Byrnes	December 20, 2006
/S/    WARD B. COE, III         Ward B. Coe, III	December 20, 2006
/S/    WILLIAM J. CROWLEY, JR.         William J. Crowley, Jr.	December 20, 2006
/S/    JAMES G. DAVIS, JR.         James G. Davis	December 20, 2006
/S/    PIERCE B. DUNN         Pierce B. Dunn	December 20, 2006
/S/    ENOS K. FRY         Enos K. Fry	December 20, 2006
/S/    MARK K. JOSEPH         Mark K. Joseph	December 20, 2006

/S/    BRYAN J. LOGAN         Bryan J. Logan	December 20, 2006
/S/    BARBARA B. LUCAS         Barbara B. Lucas	December 20, 2006
/S/    PETER M. MARTIN         Peter M. Martin	December 20, 2006
/S/    PAMELA J. MAZZA         Pamela J. Mazza	December 20, 2006
/S/    FREDERICK W. MEIER, JR.         Frederick W. Meier, Jr.	December 20, 2006
/S/    DALE B. PECK         Dale B. Peck	December 20, 2006
/S/    FRANCIS G. RIGGS         Francis G. Riggs	December 20, 2006
/S/    SHEILA K. RIGGS         Sheila K. Riggs	December 20, 2006
/S/    DONALD E. WILSON         Donald E. Wilson	December 20, 2006

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Gary N. Geisel, certify that:

1. I have reviewed this annual report on Form 10-K of Provident Bankshares Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 1, 2007	/s/    Gary N. Geisel
	Gary N. Geisel Chief Executive Officer and Chairman of the Board

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Dennis A. Starliper, certify that:

1. I have reviewed this annual report on Form 10-K of Provident Bankshares Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 1, 2007	/s/    Dennis A. Starliper
	Dennis A. Starliper Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADDED BY

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Provident Bankshares Corporation (the “Company”) on Form 10-K for the period ended December 31, 2006 as filed with the Securities and Exchange Commission (the “Report”), I, Gary N. Geisel, Chief Executive Officer and Chairman of the Board of the Company, certify, pursuant to 18 U.S.C. §1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report.

/s/    Gary N. Geisel        

Gary N. Geisel

Chief Executive Officer and Chairman of the Board

March 1, 2007

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADDED BY

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Provident Bankshares Corporation (the “Company”) on Form 10-K for the period ended December 31, 2006 as filed with the Securities and Exchange Commission (the “Report”), I, Dennis A. Starliper, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report.

/s/    Dennis A. Starliper        

Dennis A. Starliper

Chief Financial Officer

March 1, 2007