**FORM 10-K**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

| x          | **Annual Report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934 for the fiscal year ended  December 31, 2005.**                                                                        |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | **or**                                                                                                                                                                                                                        |
| **o**      | **Transition Report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934 for the transition period  from              to** |

 

**Fulton Bancshares Corporation**

(Exactname of registrant as specified in its charter)

| **Pennsylvania**                                     |   | **33-85626**                  |   | **25-1598464**                         |
|------------------------------------------------------|--------|-------------------------------|--------|----------------------------------------|
| (State or other jurisdiction  of incorporation) |   | (Commission File Number) |   | (IRS Employer Identification No.) |

 

| **100 Lincoln Way East, McConnellsburg, Pennsylvania** |   | **17233**  |
|--------------------------------------------------------|--------|------------|
| (Address of  principal executive offices)              |   | (Zip Code) |

 

**(717)485-3144**(Registrant’stelephone number, including area code)

Securities registeredunder Section 12 (b) of the Exchange Act:**None**

Securities registeredunder Section 12 (g) of the Exchange Act:**Common Stock, $.625 par value**

Indicate by check mark if the registrant is a wellknown seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  o  No  x

Indicate by check mark if the registrant is notrequired to file report pursuant to Section 13 or 15(d) of the Act. Yes  o  No  x

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

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is notcontained herein and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K.  x

Indicate by check mark whether the Registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act. (Check one)

**Largeaccelerated filer****o     Accelerated filer****o     Non-accelerated filer****x**

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

The aggregate market value of voting stock held bynon-affiliates of the registrant is $18,159,311 as of December 31, 2005.

The number of shares ofthe Issuer’s common stock, par value $.625 per share, outstanding as of December 31,2005 was 492,790.

 

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**FULTON BANCSHARES CORPORATION**

**INDEX**

| **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                                                                                                  | 13 |
| Item 4.           | Submission of Matters to a Vote of Security Holders                                                                 | 13 |
| **Part II**  |                                                                                                                |
| Item 5.           | Market for Registrant’s Common Equity, Related  Stockholder Matters, and Issuer Purchases of Equity Securities | 13 |
| Item 6.           | Selected Financial Data                                                                                             | 13 |
| Item 7.           | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                         | 14 |
| Item 7A.          | Quantitative and Qualitative Disclosure About Market  Risk                                                          | 14 |
| Item 8.           | Financial Statements and Supplementary Data                                                                         | 14 |
| Item 9.           | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure                               | 14 |
| Item 9A.          | Controls and Procedures                                                                                             | 14 |
| Item  9B.         | Other  Information                                                                                                  | 14 |
| **Part III** |                                                                                                                |
| Item 10.          | Directors and Executive Officers of the Registrant                                                                  | 15 |
| Item 11.          | Executive Compensation                                                                                              | 16 |
| Item 12.          | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                     | 20 |
| Item 13.          | Certain Relationships and Related Transactions                                                                      | 21 |
| Item 14.          | Principal Accountant Fees and Services                                                                              | 21 |
| **Part IV**  |                                                                                                                |
| Item 15.          | Exhibits, Financial Statement Schedules                                                                             | 23 |
| Signatures        | 24                                                                                                                  |

 

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**PART I**

**Item 1. Business.**

**Description of the Corporation**

Fulton Bancshares Corporation (the “Corporation”), aPennsylvania business corporation, is a bank holding company registered withand supervised by the Board of Governors of the Federal Reserve System (the “FederalReserve Board”). The Corporation was incorporated on March 29, 1989 underthe business corporation law of the Commonwealth of Pennsylvania for thepurpose of becoming a bank holding company. Since commencing operations, theCorporation’s business has consisted primarily of managing and supervising theFulton County National Bank and Trust Company (the “Bank”), and its principalsource of income has been dividends paid by the Bank. The Corporation has twowholly-owned subsidiaries - the Bank, and Fulton County Community DevelopmentCorporation (“FCCDC”), which was formed on June 7, 1996 to support effortsof the local downtown business revitalization project by making low interestloans to eligible small businesses for the purpose of facade improvement. FCCDChad no activity in 2004 and 2005.

The principal executiveoffice of the Corporation is located at 100 Lincoln Way East, McConnellsburg,Fulton County, Pennsylvania 17233. The telephone number of the Company is (717) 485-3144.

**Description of the Bank**

The Bank was organized on February 24, 1887 as aPennsylvania state chartered banking institution. It converted to a nationalbanking association on September 5, 1933, and is presently under thesupervision of the Office of the Comptroller of the Currency (the “Comptroller”).The Bank is a member of the Federal Reserve System. Customers’ deposits held bythe Bank are insured by the FDIC to the maximum extent permitted by law. TheBank’s legal headquarters are located at 100 Lincoln Way East, McConnellsburg,Fulton County, Pennsylvania 17233.

The Bank engages in a full service commercial andconsumer banking business, including the acceptance of time and demand depositsand the making of secured and unsecured commercial and consumer loans, andoffers trust services through its affiliation with Sentry Trust Company. TheBank’s primary service area is located in Fulton County, Pennsylvania.Specifically, the main office of the Bank is located in McConnellsburg, thecounty seat. Within the defined service area of the Bank’s main office, thebanking business is highly competitive. In addition to local community banks,the Bank competes with regionally-based commercial banks, all of which havegreater assets, capital and lending limits. The Bank also competes with savingsbanks, savings and loan associations, money market funds, insurance companies,stock brokerage firms, regulated small loan companies, credit unions and withthe issuers of commercial paper and other securities.

In order to competeeffectively in this market and to obtain business from individuals, small andmedium-sized businesses and professionals, the Bank offers specialized servicessuch as extended hours of operation and personal and business checking accountsat competitive rates, in addition to traditional commercial and consumerbanking and trust services. The Bank accepts time, demand, and savingsdeposits, statement savings accounts, NOW accounts, money market accounts,certificates of deposit, and club accounts. The Bank makes secured andunsecured commercial, consumer, mortgage, and construction loans. Consumerloans include revolving credit lines. The following support services areoffered by the Bank to make financial management more efficient and convenientfor its customers: bank by mail, direct deposit, drive-in banking, Federal TaxDepository, automatic teller machines, night deposit services, notary publicservices, payroll deduction plan, bond coupon collections, safe deposit boxes,signature guarantees, travelers checks, cashiers checks, treasury securities,U.S. Savings Bonds, individual retirement accounts 

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(IRA’s),and utility and municipal payments. The Bank offers its customers access todiscount brokerage services, mutual funds, and other alternative investmentproducts through its affiliation with Sentry Trust Company. The Bank alsooffers telephone and internet banking to its customers. The Bank expects toexperience modest growth in 2006.

**Supervisionand Regulation—The Corporation**

The Corporation is subject to the provisions of theBank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”),and to supervision by the Federal Reserve Board. The Bank Holding Company Actrequires the Corporation to secure the prior approval of the Federal ReserveBoard before it owns or controls, directly or indirectly, more than fivepercent (5%) of the voting shares or substantially all of the assets of anyinstitution, including another bank. The Bank Holding Company Act prohibitsacquisition by the Corporation of more than five percent (5%) of the votingshares of, or interest in, all or substantially all of the assets of any banklocated outside of Pennsylvania unless such acquisition is specificallyauthorized by the laws of the state in which such bank is located.

A bank holding company is prohibited from engaging inor acquiring direct or indirect control of more than five percent (5%) of thevoting shares of any company engaged in nonbanking activities unless theFederal Reserve Board, by order or regulation, has found such activities to beso closely related to banking or managing or controlling banks as to be aproper incident thereto.

The Corporation is required to file an annual reportwith the Federal Reserve Board and any additional information that the FederalReserve Board may require pursuant to the Bank Holding Company Act. The FederalReserve Board may also make examinations of the Corporation and any or all ofits subsidiaries.

Federal law prohibits acquisitions of control of abank holding company without prior notice to certain federal bank regulators.Control is defined for this purpose as the power, directly or indirectly, todirect the Management or policies of the bank or bank holding company or tovote 25% or more of any class of voting securities of the bank holding company.A person or group holding revocable proxies to vote 25% or more of the stock ofa bank or its holding company would presumably be deemed to control theinstitution for purposes of this federal law.

Subsidiary banks of a bank holding company are subjectto certain restrictions imposed by the Federal Reserve Act on any extensions ofcredit to the bank holding company or any of its subsidiaries, on investmentsin the stock or other securities of the bank holding company and on taking ofsuch stock or securities as collateral for loans to any borrower.

The Federal Reserve Boardpermits bank holding companies to engage in activities so closely related tobanking or managing or controlling banks as to be a proper incident thereto.The Corporation does not at this time engage in any of the permissibleactivities described below, nor does the Corporation have any current plans toengage in these activities in the foreseeable future.

**Legislation and Regulatory Changes**

From time to time, legislationis enacted which has the effect of increasing the cost of doing business,limiting or expanding permissible activities or affecting the competitivebalance between banks and other financial institutions. Proposals to change thelaws and regulations governing the operations and taxation of banks, bankholding companies and other financial institutions are frequently made inCongress, and before various bank regulatory agencies. No prediction can bemade as to the likelihood of any major changes or the impact such changes mighthave on the Corporation and its subsidiary, the Bank. Certain changes ofpotential significance to the Corporation are discussed below.

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**Recent Legislation**

**USA PATRIOT ACT**

In October 2001, theUSA Patriot Act of 2001 was enacted in response to the terrorist attacks in NewYork, Pennsylvania and Washington, D.C., which occurred on September 11,2001. The Patriot Act is intended to strengthen U.S. law enforcement’s and theintelligence communities’ abilities to work cohesively to combat terrorism on avariety of fronts. The potential impact of the Patriot Act on financialinstitutions of all kinds is significant and wide ranging. The Patriot Actcontains sweeping anti-money laundering and financial transparency laws andimposes various regulations, including standards for verifying clientidentification at account opening, and rules to promote cooperation amongfinancial institutions, regulators and law enforcement entities in identifyingparties that may be involved in terrorism or money laundering

**SARBANES-OXLEY ACT**

On July 30, 2002,President Bush signed into law the Sarbanes-Oxley Act of 2002. TheSarbanes-Oxley Act represents a comprehensive revision of laws affectingcorporate governance, accounting obligations and corporate reporting. TheSarbanes-Oxley Act is applicable to all companies with equity securitiesregistered or that file reports under the Securities Exchange Act of 1934. Inparticular, the Sarbanes-Oxley Act establishes: (i) new requirements foraudit committees, including independence, expertise, and responsibilities; (ii) additionalresponsibilities regarding financial statements for the Chief Executive Officerand Chief Financial Officer of the reporting company; (iii) new standardsfor auditors and regulation of audits; (iv) increased disclosure andreporting obligations for the reporting company and its directors and executiveofficers; and (v) new and increased civil and criminal penalties forviolations of the securities laws. Many of the provisions were effectiveimmediately while other provisions become effective over a period of time andare subject to rulemaking by the SEC. Because the Corporation’s common stock isregistered with the SEC, it is currently subject to this Act.

**AMERICAN JOBS CREATION ACT**

In 2004, the American JobsCreation Act was enacted as the first major corporate tax act in years. The actaddresses a number of areas of corporate taxation including executive deferredcompensation restrictions. The impact of the act on the Corporation and theBank is not expected to be significant.

**Supervision and Regulation—The Bank**

The operations of the Bank are subject to federal andstate statutes applicable to banks chartered under the banking laws of theUnited States, to members of the Federal Reserve System and to banks whosedeposits are insured by the FDIC. The operations of the Bank are also subjectto regulations of the Comptroller, the Federal Reserve Board, and the FDIC. Theprimary supervisory authority of the Bank is the Comptroller, which regulatesand examines the Bank. The Comptroller has authority to prevent national banksfrom engaging in unsafe or unsound practices in conducting their businesses.

Federal and state banking laws and regulations govern,among other things, the scope of a bank’s business, the investments a bank maymake, the reserves against deposits a bank must maintain, loans a bank makesand collateral it takes, the maximum interest rates a bank may pay on deposits,the activities of a bank with respect to mergers and consolidations and theestablishment of branches. Under Pennsylvania law, the Bank may establish oracquire branch offices, subject to certain limitations, in any county of thestate. National bank branches, however, may be established within the permittedarea only after approval by the Comptroller.

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As a subsidiary bank of abank holding company, the Bank is subject to certain restrictions imposed bythe Federal Reserve Act on any extensions of credit to the bank holding companyor its subsidiaries, or investments in the stock or other securities ascollateral for loans. The Federal Reserve Act and Federal Reserve Boardregulations also place certain limitations and reporting requirements onextensions of credit by the Bank to principal shareholders of its parent holdingcompany, among others, and to related interests of such principal shareholders.In addition, such legislation and regulations may affect the terms upon whichany person becoming a principal shareholder of a holding company may obtaincredit from banks with which the subsidiary Bank maintains a correspondentrelationship.

**FDIC**

Under the Federal Deposit Insurance Act, theComptroller possesses the power to prohibit institutions regulated by it (suchas the Bank) from engaging in any activity that would be an unsafe and unsoundbanking practice or would otherwise be in violation of the law. Moreover, theFinancial Institutions Regulatory and Interest Rate Control Act of 1978 (“FIRA”)generally expanded the circumstances under which officers or directors of abank may be removed by the institution’s federal supervisory agency, restrictslending by a bank to its executive officers, directors, principal shareholdersor related interests thereof and restricts management personnel of a bank fromserving as directors or in other management positions with certain depositoryinstitutions whose assets exceed a specified amount or which have an officewithin a specified geographic area, and restricts management personnel fromborrowing from another institution that has a correspondent relationship withtheir bank.

Additionally, FIRArequires that no person may acquire control of a bank unless the appropriatefederal supervisory agency has been given sixty (60) days prior written noticeand within that time has not disapproved the acquisition or otherwise extendedthe period for disapproval. Control for purposes of FIRA, means the power,directly or indirectly, to direct the management or policies or to votetwenty-five percent (25%) or more of any class of outstanding stock of afinancial institution or its respective holding company. A person or groupholding revocable proxies to vote twenty-five percent (25%) or more of theoutstanding common stock of a financial institution or holding company such asthe Company, would presumably be deemed to control the institution for purposesof FIRA.

**CRA**

Under the CommunityReinvestment Act of 1977, as amended (“CRA”), the Comptroller is required toassess the record of all financial institutions regulated by it to determine ifthese institutions are meeting the credit needs of the community (including lowand moderate income neighborhoods) which they serve and to take this recordinto account in its evaluation of any application made by any of suchinstitutions for, among other things, approval of a branch or other depositfacility, office relocation, a merger or an acquisition of bank shares. TheFinancial Institutions Reform, Recovery and Enforcement Act of 1989 amended theCRA to require, among other things, that the Comptroller make publiclyavailable the evaluation of a bank’s record of meeting the credit needs of itsentire community, including low and moderate income neighborhoods. Thisevaluation will include a descriptive rating and a statement describing thebasis for the rating, which is publicly disclosed.

**BSA**

Under the Bank Secrecy Act (“BSA”), banks and otherfinancial institutions are required to report to the Internal Revenue Servicecurrency transactions of more than $ 10,000 or multiple transactions of whichthe Bank is aware in any one day that aggregate in excess of $ 10,000. Civiland criminal penalties are provided under the BSA for failure to file arequired report, for failure to supply information required by the BSA or forfiling a false or fraudulent report.

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**FDICIA**

**Capital Categories**

In December of1991 the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”)became law. Under FDICIA, institutions must be classified, based on theirrisk-based capital ratios into one of five defined categories, as illustratedbelow:

| ** **                      | ** ** | **Total Risk—  Based Ratio** | ** **  | **Tier 1  Risk-Based  Ratio** | ** ** | **Tier 1  Leverage  Ratio** | ** ** | **Under a  Capital  Order or  Directive** | ** ** |
|---------------------------------|------------|---------------------------------------------|-------------|------------------------------------|------------|----------------------------------|------------|-----------------------------------------------------|------------|
| CAPITAL CATEGORY                |       |                                        |        |                               |       |                             |       |                                                |       |   |   |   |   |   |   |   |   |
| Well capitalized                |       |                                        | 310.0  |                               |       |                             | 36.0  |                                                |       |   | 35.0 |   |   |   | No |   |   |
| Adequately  capitalized         |       |                                        | 3  8.0 |                               |       |                             | 34.0  |                                                |       |   | 34.0 |   |   |   | * |   |   |
| Undercapitalized                |       |                                        | <8.0     |                               |       |                             | <4.0    |                                                |       |   | <4.0 |   |   |   | * |   |   |
| Significantly  Undercapitalized |       |                                        | <6.0     |                               |       |                             | <3.0    |                                                |       |   | <3.0 |   |   |   |   |   |   |
| Critically  Undercapitalized    |       |                                        | < 2.0    |                               |       |                             |       |                                                |       |   |   |   |   |   |   |   |   |

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*                    3.0 for thosebanks having the highest available regulatory rating.

As of December 31, 2005, the most recentnotification from the Comptroller of the Currency categorizes the Bank asadequately capitalized under the regulatory framework for prompt correctiveaction.

Under FDICIA, financial institutions are subject to increasedregulatory scrutiny and must comply with certain operational, managerial andcompensation standards to be developed by Federal Reserve Board regulations.

FDICIA also requires the regulators to issue new rules establishingcertain minimum standards to which an institution must adhere includingstandards requiring a minimum ratio of classified assets to capital, minimumearnings necessary to absorb losses and minimum ratio of market value to bookvalue for publicly held institutions. Additional regulations are required to bedeveloped relating to internal controls, loan documentation, creditunderwriting, interest rate exposure, asset growth and excessive compensation,fees and benefits.

In addition to banking and securities laws,regulations and regulatory agencies, the Company also is subject to variousother laws, regulations, and regulatory agencies throughout the United States.Furthermore, various proposals, bills, and regulations have been and are beingconsidered in the United States Congress, and various other governmentalregulatory and legislative bodies, which could result in changes in theprofitability and governance of the Company. It cannot be predicted whether newlegislation or regulations will be adopted and, if so, how they would affectthe Company.

References under thecaption “Supervision and Regulation” to applicable statutes, regulations andorders are brief summaries of portions thereof which do not purport to becomplete and which are qualified in their entirety by reference thereto.

**Future Legislation**

Changes to the laws andregulations in the state where the Corporation and the Bank do business canaffect the operating environment of bank holding companies and theirsubsidiaries in substantial and unpredictable ways. The Corporation cannotaccurately predict whether those changes in laws and regulations will occur,and, if those changes occur, the ultimate effect they would have upon thefinancial condition or results of operations of the Corporation.

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**Effects of Inflation**

Inflation has some impacton the Corporation’s, the Bank’s, and FCCDC’s operating costs. Unlike manyindustrial companies, however, substantially all of the Bank’s and FCCDC’sassets and liabilities are monetary in nature. As a result, interest rates havea more significant impact on the Corporation’s, the Bank’s, and FCCDC’sperformance than the general level of inflation. Over short periods of time,interest rates may not necessarily move in the same direction or in the samemagnitude as prices of goods and services.

**Monetary Policy**

The earnings of the Corporation, the Bank, and FCCDCare affected by domestic economic conditions and the monetary and fiscalpolicies of the United States Government and its agencies. An importantfunction of the Federal Reserve System is to regulate the money supply andinterest rates. Among the instruments used to implement those objectives areopen market operations in United States government securities and changes inreserve requirements against member bank deposits. These instruments are usedin varying combinations to influence overall growth and distribution of bankloans, investments and deposits, and their use may also affect rates charged onloans or paid for deposits.

The Bank is a member ofthe Federal Reserve System and, therefore, the policies and regulations of theFederal Reserve Board have a significant effect on its deposits, loans andinvestment growth, as well as the rate of interest earned and paid, and areexpected to affect the Bank’s operations in the future. The effect of suchpolicies and regulations upon the future business and earnings of theCorporation, the Bank, and FCCDC cannot be predicted.

**Environmental Regulation**

There are several federaland state statutes which regulate the obligations and liabilities of financialinstitutions pertaining to environmental issues. In addition to the potentialfor attachment of liability resulting from its own actions, a bank may be heldliable under certain circumstances for the actions of its borrowers, or thirdparties, when such actions result in environmental problems on properties thatcollateralize loans held by the Bank. Further, the liability has the potentialto far exceed the original amount of the loan issued by the Bank. Currently,the Corporation, the Bank, and FCCDC are not party to any pending legalproceeding pursuant to any environmental statute, nor is the Corporation, theBank, or FCCDC aware of any circumstances which may give rise to liabilityunder any such statute.

**Concentrations**

The Bank is neitherdependent upon deposits from nor exposed to loan concentrations to a singlecustomer, the loss of which would have a material adverse effect on thefinancial condition of the Bank. Although the Bank has a diversified loanportfolio, a significant portion of its customers’ ability to honor theircontracts is dependent upon the agribusiness economic sector (approximately 20%of loan portfolio and****107% ofstockholders’ equity as of December 31, 2005).

**Competitive Business Conditions**

The Corporation’s current primaryservice area is generally characterized as Fulton County, Pennsylvania. Thebank competes with local commercial banks as well as numerous regionally basedcommercial banks, all of which have assets, capital, and lending limits largerthan the bank. The bank competes with respect to its lending activities as wellas in attracting demand, savings, and time deposits with other commercialbanks, savings banks, regulated small loan companies, credit unions and othermoney market funds. The business of the bank is not seasonal in nature.

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**Employees**

As of December 31,2005, the Corporation through its subsidiary had 50 full-time equivalentemployees. None of these employees are represented by a collective bargainingagreement, and the Company believes it enjoys good relations with itspersonnel.

**Available Information**

The Corporation’s reports, proxy statements and otherinformation are available for inspection and copying at the Public Reference Room atJudiciary Plaza, 450 Fifth Street, N.W., Washington, DC, 20549, at prescribedrates. The public may obtain information on the operation of the PublicReference Room by calling the Commission at 1-800-SEC-0330.The Corporation is an electronic filer with the Commission. The Commissionmaintains a website that contains reports, proxy and information statements andother information regarding registrants that file electronically with theCommission. The address of the Commission’s website is http://www.sec.gov.

Upon a stockholder’swritten request, a copy of the Corporation’s Annual Report on Form 10-K,Quarterly Reports on Form 10-Q and Current Reports on Form 8-K,as required to be filed with the SEC pursuant to Securities Exchange Act Rule 13a-1,may be obtained, without charge, from Debra Goodling, Fulton BancsharesCorporation, 100 Lincoln Way East, McConnellsburg, PA 17233. The Corporationhas not yet made arrangements to have these filings available on its website atwww.fnbctc.com.

**ImportantFactors relating to Forward Looking Statements**

The Private Securities Litigation Reform Act of 1995provides a “safe harbor” for forward-looking statements to encourage companiesto provide prospective information about their companies without fear oflitigation so long as those statements are identified as forward-looking andare accompanied by meaningful cautionary statements identifying importantfactors that could cause actual results to differ materially from thoseprojected in such statements. In connection with certain statements made inthis report and those that may be made in the future by or on behalf of theCorporation which are identified as forward-looking statements, the Corporationnotes that the following important factors, among others, could cause actualresults to differ materially from those set forth in any such forward-lookingstatement. Further, such forward- looking statements speak only as of the dateon which such statement or statements are made, and the Corporation undertakesno obligation to update any forward-looking statement or statements to reflectevents or circumstances after the date on which such statement is made or toreflect the occurrence of unanticipated events.

The business and profitability of a financial servicesorganization such as the Corporation is influenced by prevailing economicconditions and governmental policies. The actions and policy directives of theFRB determine to a significant degree the cost and the availability of fundsobtained from money market sources for lending and investing. FRB policies andregulations also influence, directly and indirectly, the rates of interest paidby commercial banks on their interest-bearing deposits and may also impact thevalue of financial instruments held by the Corporation. The nature and impacton the Corporation of future changes in economic and market conditions andmonetary and fiscal policies, both foreign and domestic, are not predictableand are beyond the Corporation’s control. In addition, these conditions andpolicies can impact the Corporation’s customers and counterparties which mayincrease the risk of default on their obligations to the Corporation and itsaffiliates. They can also affect the competitive conditions in the markets andproducts within which the Company operates, which can have an adverse impact onthe Corporation’s ability to maintain its revenue streams.

As part of its ongoing business, the Corporationassumes financial exposures to interest rates, currencies, equities and otherfinancial products. In doing so, the Corporation is subject to unforeseen eventswhich may not have been anticipated or which may have effects which exceedthose assumed within 

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its risk managementprocesses. This risk can be accentuated by volatility and reduction inliquidity and those markets which in turn can impact the Corporation’s abilityto hedge and trade the positions concerned. In addition, the Corporation isdependent on its ability to access the financial markets for its funding needs.

As noted in “Supervision and Regulation”, theCorporation is regulated by and subject to various regulators. The actions ofthese regulators can have an impact on the profitability and governance of theCorporation. Increases by regulatory authorities of minimum capital, reserve,deposit insurance and other financial viability requirements can also affectthe Corporation’s profitability.

The Corporation is subject to operational and controlrisk which is the potential for loss caused by a breakdown in communication,information, processing and settlement systems or processes or lack of compliancewith the procedures on which they rely either within the Corporation or withinthe broader financial systems infrastructure.

As with any financialinstitution, the Corporation and its affiliates are also subject to the risk oflitigation and to an unexpected or adverse outcome in such litigation.Competitive pressures in the marketplace and unfavorable or adverse publicityand news coverage can have the effect of lessening customer demand for theCorporation’s services. Ultimately, the Corporation’s businesses and theirsuccess are dependent on the Corporation’s ability to attract and retain highquality employees.

**Item 1A.**                RiskFactors 

*The Corporation is subject to the conditionsestablished in the Federal Reserve Bank’s Memorandum of Understanding (MOU) andthe Office of the Comptroller of the Currency’s (OCC) Stipulation and ConsentOrder.*

The Corporation and theBank are required to comply with the MOU and the Consent Order or face monetarypenalties and/or closure of the institution’s banking operation. The directcosts of compliance with the Consent Order and the MOU are legal and consultingfees, higher FDIC insurance rates, increased examination fees, and staffingcosts, which all decrease earnings and reduce the capital base. Other costsinclude significant dedication of resources that shift the focus of theorganization away from growing the customer base to ensuring that past problemsof noncompliance with laws and regulations are addressed and controls are putin place to prevent future noncompliance. In addition, the Corporation and theBank are required to maintain higher levels of capital than other financialinstitutions without similar regulatory issues. The management team has beenactively engaged in addressing the specific issues raised in the MOU and theConsent Order but has not yet received written documentation from itsregulators to indicate that the actions taken are sufficient.

*The Corporation’s business is subject to interest raterisk and variations in interest rates may negatively affect its financialperformance.*

Changes in the interestrate environment may reduce profits. The primary source of income for theCorporation is the differential or “spread” between the interest earned onloans, securities and other interest-earning assets, and interest paid ondeposits, borrowings and other interest-bearing liabilities. As prevailinginterest rates change, net interest spreads are affected by the differencebetween the maturities and repricing characteristics of interest-earning assetsand interest-bearing liabilities. In addition, loan volume and yields areaffected by market interest rates on loans, and rising interest rates generallyare associated with a lower volume of loan originations. An increase in thegeneral level of interest rates may also adversely affect the ability ofcertain borrowers to pay the interest on and principal of their obligations.Accordingly, changes in levels of market interest rates could materiallyadversely affect the Corporation’s net interest spread, asset quality, loanorigination volume and overall profitability.

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*The Corporation issubject to lending risk.*

As of December 31,2005, approximately 20% of the Corporation’s loan portfolio consisted ofagricultural and agricultural related loans. These types of loans are generallyviewed as having more risk of default than residential real estate loans orconsumer loans. These types of loans are also typically larger than residentialreal estate loans and consumer loans. Because the Corporation’s loan portfoliocontains a significant number of agricultural and agricultural related loanswith relatively large balances, the deterioration of one or a few of theseloans could cause a significant increase in non-performing loans. An increasein non-performing loans could result in a net loss of earnings from theseloans, an increase in the provision for possible loan losses and an increase inloan charge-offs, all of which could have a material adverse effect on theCorporation’s financial condition and results of operations.

*The Corporation’sallowance for possible loan losses may be insufficient.*

The Corporation maintainsan allowance for possible loan losses, which is a reserve established through aprovision for possible loan losses charged to expense, that representsmanagement’s best estimate of probable losses that have been incurred withinthe existing portfolio of loans. The allowance, in the judgment of management,is necessary to reserve for estimated loan losses and risks inherent in theloan portfolio. The level of the allowance reflects management’s continuingevaluation of industry concentrations; specific credit risks; loan lossexperience; current loan portfolio quality; present economic, political andregulatory conditions and unidentified losses inherent in the current loanportfolio. The determination of the appropriate level of the allowance forpossible loan losses inherently involves a high degree of subjectivity andrequires the Corporation to make significant estimates of current credit risksand future trends, all of which may undergo material changes. Changes ineconomic conditions affecting borrowers, new information regarding existingloans, identification of additional problem loans and other factors, bothwithin and outside of the Corporation’s control, may require an increase in theallowance for possible loan losses. In addition, bank regulatory agenciesperiodically review the Corporation’s allowance for loan losses and may requirean increase in the provision for possible loan losses or the recognition offurther loan charge-offs, based on judgments different than those ofmanagement. In addition, if charge-offs in future periods exceed the allowancefor possible loan losses, the Corporation will need additional provisions toincrease the allowance for possible loan losses. Any increases in the allowancefor possible loan losses will result in a decrease in net income and, possibly,capital, and may have a material adverse effect on the Corporation’s financialcondition and results of operations.

*The Corporation’sprofitability depends significantly on economic conditions in Fulton County,Pennsylvania.*

The Corporation’s success depends primarily on thegeneral economic conditions of the Commonwealth of Pennsylvania and thespecific local markets in which the Corporation operates. Unlike largernational or other regional banks that are more geographically diversified, theCorporation provides banking and financial services to customers primarily inFulton County, Pennsylvania. The local economic conditions in this area has asignificant impact on the demand for the Corporation’s products and services aswell as the ability of the Corporation’s customers to repay loans, the value ofthe collateral securing loans and the stability of the Corporation’s depositfunding sources. A significant decline in general economic conditions, causedby inflation, recession, acts of terrorism, outbreak of hostilities or otherinternational or domestic occurrences, unemployment, changes in securitiesmarkets or other factors could impact these local economic conditions and, inturn, have a material adverse effect on the Corporation’s financial conditionand results of operations.

11

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*There is noassurance that the Corporation will be able to successfully compete with othersfor business.*

The Corporation competesfor loans, deposits and investment dollars with other regional and nationalbanks and other community banking institutions, as well as other kinds offinancial institutions and enterprises, such as securities firms, insurancecompanies, savings associations, credit unions, mortgage brokers, and privatelenders. Many competitors have substantially greater resources than the Corporationdoes, and operate under less stringent regulatory environments. The differencesin resources and regulations may make it harder for the Corporation to competeprofitably, reduce the rates that it can earn on loans and investments,increase the rates it must offer on deposits and other funds, and adverselyaffect its overall financial condition and earnings.

*The Corporation’s ability to pay dividends dependsprimarily on dividends from the Bank, which is subject to regulatory limits.*

The Corporation is a bankholding company and its operations are conducted by the Bank. Its ability topay dividends depends on its receipt of dividends from the Bank. Dividendpayments from the Bank are subject to legal and regulatory limitations,generally based on net profits and retained earnings, imposed by the variousbanking regulatory agencies. The ability of the Bank to pay dividends is alsosubject to its profitability, financial condition, capital expenditures andother cash flow requirements. The payment of dividends has been temporarilysuspended without prior OCC approval and there is no assurance that the Bankwill be permitted to pay dividends in the future. The Corporation’s failure topay dividends on its common stock could have a material adverse effect on themarket price of its common stock.

*The Corporation maynot be able to attract and retain skilled people.*

The Corporation’s success depends, in large part, onits ability to attract and retain key people. Competition for the best peoplein most activities engaged in by the Corporation can be intense and theCorporation may not be able to hire people or to retain them. The unexpectedloss of services of one or more of the Corporation’s key personnel could have amaterial adverse impact on the Corporation’s business because of their skills,knowledge of the Corporation’s market, years of industry experience and thedifficulty of promptly finding qualified replacement personnel.

*The Corporation issubject to claims and litigation pertaining to fiduciary responsibility.*

From time to time,customers make claims and take legal action pertaining to the Corporation’sperformance of its fiduciary responsibilities. Whether customer claims andlegal action related to the Corporation’s performance of its fiduciary responsibilitiesare founded or unfounded, if such claims and legal actions are not resolved ina manner favorable to the Corporation they may result in significant financialliability and/or adversely affect the market perception of the Corporation andits products and services as well as impact customer demand for those productsand services. Any financial liability or reputation damage could have amaterial adverse effect on the Corporation’s business, which, in turn, couldhave a material adverse effect on the Corporation’s financial condition andresults of operations.

**Item 1B.**               UnresolvedStaff Comments

None.

**Item 2.**                        Properties

The main administrative office of the Bank, which alsoincludes a drive-up facility, is located in McConnellsburg, Pennsylvania. TheBank currently has seven branch offices one of which is located at Penn’sVillage on Route 16 at the east end of McConnellsburg, Pennsylvania. Thisbranch office opened 

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on May 11, 1981. Inaddition, the Bank installed an ATM at the Penn’s Village Shopping Center inMarch, 1989.

The Bank also serves the communities surrounding thePennsylvania/Maryland border through its branch office located in Warfordsburg,Pennsylvania. This branch opened for business on April 4, 1983. On thesame day, a third branch office was opened in Hustontown, Pennsylvania, whichservices northern Fulton County. Finally, to service the southern end ofHuntington County, the Bank acquired a branch in Shade Gap, Pennsylvania, on September 26,1988.

On July 15, 1999, the Bank opened a branch,including an ATM, at the Sandy Ridge Mall in Orbisonia, PA. To service thewestern portion of Franklin County, the Bank opened a branch, including an ATM,on Route 30 in St. Thomas, PA on November 15, 1999. On February 11,2002, the Bank opened a branch in Breezewood, Pennsylvania, including an ATM,to service eastern Bedford County.

On January 7, 1997ATM’s were opened at the Warfordsburg and Hustontown branches. In June, 1998the Bank opened an ATM at the Shade Gap branch and added an ATM to its mainoffice drive-up facility. The main office, Warfordsburg, Hustontown, Orbisoniaand Breezewood branches are owned by the Bank. The Penn’s Village branch isrented. The Shade Gap branch is still owned by the Bank, however the branch andATM are closed.

**Item 3.**                        LegalProceedings.

Fulton BancsharesCorporation is an occasional party to legal actions arising in the ordinarycourse of its business. In the opinion of the Corporation’s management, FultonBancshares Corporation has adequate legal defenses and/or insurance coveragerespecting any and each of these actions and does not believe that they willmaterially affect the Corporation’s operations or financial position.

**Item 4.**                        Submissionof Matters to Vote of Security Holders.

Not applicable.

**PART II**

**Item 5.**                        Marketfor Registrant’s Common Stock, Related Security Holder Matters and IssuerPurchases of Equity Securities.

The Corporation’s common stock is traded on a limitedbasis in the local over-the-counter market under the symbol FULB. As of December 31,2005, the approximate number of shareholders of record was 562. Market pricesat the end of each quarter are based on the latest sales prices.

The stock market analysis and dividends for 2005 and2004 on page 51 of the annual shareholders report for the year ended December 31,2005 is incorporated herein by reference**.**

Dividend restrictions are detailed in Note 14 of theannual shareholders report and are incorporated herein by reference.

The Corporation has no securities authorized forissuance under any equity compensation plans.

The Corporation made nosales of unregistered securities within the past three years****nor has the Corporation made any repurchases within thepast year.

**Item 6.**                        SelectedFinancial Data.

The selected five-yearfinancial data on page 31 of the annual shareholders’ report for the yearended December 31, 2005 is incorporated herein by reference.

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**Item 7.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operations.

Information required byItem 7 is included in “Management’s Discussion and Analysis of ConsolidatedFinancial Condition and Results of Operations”, on pages 35 through 51****of the annual shareholders’ report which are incorporatedherein by reference.

**Item 7A.**                Quantitativeand Qualitative Disclosure About Market Risk.

Information required byItem 7 is included in “Management’s Discussion and Analysis of ConsolidatedFinancial Condition and Results of Operations”, on page 50****of the annual shareholders’ report which are incorporatedherein by reference.

**Item 8.**                        FinancialStatements and Supplementary Data.

The financial statementsand supplementary data, some of which is required under Guide 3 (statisticaldisclosures by bank holding companies) are shown on pages 3 through 34 ofthe annual shareholders’ report for the year ended December 31, 2005 andare incorporated herein by reference. Additional required schedules areincluded in “Management’s Discussion and Analysis of Consolidated FinancialCondition and Results of Operations”, on pages 35 through 51****of the annual shareholders’ report which are incorporatedherein by reference.

**Item 9.**                        Disagreementson Accounting and Financial Disclosures.

Not applicable.

**Item 9A.**                Controlsand Procedures.

**Disclosure Controls and Procedures**

The Corporation’s PrincipalExecutive Officer and Chief Financial Officer have evaluated the effectivenessof the Corporation’s disclosure controls and procedures (as such term isdefined in Rules 13a-15(e) under the Securities Exchange Act of1934, as amended (the “Exchange Act”) as of December 31, 2005. Based onsuch evaluation, such officers have concluded that, as of December 31,2005, the Corporation’s disclosure controls and procedures are effective inalerting them on a timely basis to material information relating to the Corporation(including its consolidated subsidiaries) required to be included in theCorporation’s periodic filings under the Exchange Act.

**InternalControls Over Financial Reporting**

TheCorporation made no significant changes in its internal controls or in otherfactors that could significantly affect these controls during the fourthquarter of the year ended December 31, 2005, including any correctiveactions with regard to significant deficiencies and material weaknesses.

**Item 9B.**               OtherInformation.

Not applicable.

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**PART III**

**Item 10. Directors and Executive Officers of theRegistrant**

The Corporation hasadopted a code of ethics that applies to all directors, officers, and employees(including its chief executive officer, chief financial officer, and any personperforming similar functions). The Corporation has filed a copy of this Code ofEthics as Exhibit 14 to its Form 10-K for fiscal year ended December 31,2003. The Corporation has also made the Code of Ethics available on its websiteat http://www.fcnbtc.comhttp://www.fcnbtc.com.

**PrincipalOfficers of the Corporation**

Thefollowing table provides information, as of December 31, 2005, about theCorporation’s principal officers:

| ** **             | ** ** | ** ** | ** ** | **Principal Occupation for the Past Five Years** | ** ** |
|------------------------|------------|------------|------------|--------------------------------------------------------------------------------|------------|
| ** **             | ** ** | ** ** | ** ** | **And Position Held with Fulton Bancshares**          | ** ** |
| ** **             | **Name**   | ** ** | ** ** | **Age**                                                                        | ** ** | **and Subsidiaries** | ** ** |
| Martin R. Brown(1)     |       |       | 53         |                                                                           |       | Chairman of the Board of the Corporation and the  Bank. President, M. R. Brown Funeral Home, Inc., President, M. R. Brown  Management, Inc., Managing Partner, Sandy Ridge Market, LLC |   |
| Clair R. Miller (1)    |       |       | 69         |                                                                           |       | Vice Chairman of the Board of the Corporation and  the Bank. President, Clair R. Miller, Inc. and President, Fairview  Estates, Inc. |   |
| George W. Millward (1) |       |       | 56         |                                                                           |       | Interim President and Chief Executive Officer of the  Corporation and the Bank. President, Millward Consulting, LLC |   |
| Debra A. Goodling (1)  |       |       | 47         |                                                                           |       | Interim Chief Financial Officer of the Corporation  and the Bank. Former President, Shipley Stores, LLC, former Chief Financial  Officer, Shipley Group, LLC. |   |
| Alice Clark            |       |       | 43         |                                                                           |       | Vice President  and Secretary of the Corporation and the Bank. |   |
|                        |            |            |            |                                                                                |            |  |  |  |  |

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(1)          Messrs. Brown,Miller, Millward and Ms. Goodling are not employees of the Corporation.

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**Informationabout Continuing Directors**

| ** **                   | ** **                 | **Director of** | ** ** | ** **                                                          | ** ** |
|------------------------------|----------------------------|----------------------|------------|---------------------------------------------------------------------|------------|
| ** **                   | ** **                 | **Corporation**      | ** ** | **Principal Occupation for the Past Five** | ** ** |
| ** **                   | ** **                 | **and Bank**    | ** ** | **Years and Position Held with the**       | ** ** |
| ** **                   | **Name and Age** | ** **           | ** ** | **Since**                                                           | ** ** | **Corporation and the Bank** | ** ** |
| Martin R. Brown,  53         |                       |                 | 2003/2003  |                                                                |       | President,  M. R. Brown Funeral Home, Inc. President, M. R. Brown  Management, Inc., Managing Partner, Sandy Ridge Market, LLC, Chairman of  the Board of Directors Of the Corporation and the Bank |   |
| David L. Seiders,  66        |                       |                 | 1996/1996  |                                                                |       | Farmer |   |
| Robert L. Thomas,  51        |                       |                 | 2003/2003  |                                                                |       | Managing  Partner, Thomas Brothers Family Partnership, LLC, Franklin County  Commissioner, Chairman of the Audit Committee |   |
| Cecil B. Mellott,  69        |                       |                 | 1989/1986  |                                                                |       | President,  Mellott Wood Preserving, Inc., President, MELCO Lumber  Company, Inc. |   |
| Clair R. Miller,  69         |                       |                 | 1997/1997  |                                                                |       | President,  Clair R. Miller, Inc., President, Fairview Estates, Inc., Vice  Chairman of The Board of Directors of the Corporation And the Bank |   |
| Robert C. Snyder,  74        |                       |                 | 1989/1969  |                                                                |       | Retired  Insurance Agent |   |
| Ellis L.  Yingling, 73       |                       |                 | 1989/1974  |                                                                |       | Fulton  County Commissioner and Retired Service Station Owner |   |
| Stanley J. Kerlin, Esq.,  51 |                       |                 | 2005/2005  |                                                                |       | Attorney at Law |   |
|                              |                            |                      |            |                                                                     |            |  |  |  |  |

 

The Corporation has anAudit Committee comprised of directors who meet the NASDAQ standards forindependence. The Audit Committee operates under a written charter adopted bythe Board of Directors. Members of the Audit Committee, during 2005, wereRobert L. Thomas, Chairman, Robert C. Snyder, Ellis L. Yingling, and Stanley J.Kerlin, Esq. The principal duties of the Audit Committee, as set forth inits charter, include reviewing significant audit and accounting principles,policies and practices, reviewing performance of internal auditing procedures,reviewing reports of examination received from regulatory authorities, andrecommending, annually, to the Board of Directors the engagement of anindependent certified public accountant. The Corporation has no “auditcommittee financial expert”. The Corporation has not identified a potentialboard member that would qualify as an “audit committee financial expert” atthis time. However, the Board of Directors believes that each Audit Committeemember has sufficient knowledge in financial and auditing matters to serve onthe committee. The committee has the authority to engage legal counsel or otherexperts or consultants as it deems appropriate to carry out its responsibilities.

**Section 16(a) BeneficialOwnership Reporting Compliance**

Section 16(a) ofthe Securities Exchange Act of 1934 requires the Corporation’s directors,executive officers and shareholders who beneficially own more than 10% of theCorporation’s outstanding equity stock to file initial reports of ownership andreports of changes in ownership of common stock and other equity securities ofthe Corporation with the Securities and Exchange Commission. Based on a reviewof copies of the reports we received and on the statements of the reportingpersons, we believe that all Section 16(a) filing requirements werecomplied with in a timely fashion during 2005.

**Item 11. Executive Compensation**

Thefollowing table summarizes the total compensation for each of the last threeyears for the Corporation’s Chief Executive Officers:  Clyde H. Bookheimer served through March 4,2005; George W. Millward was hired as Interim President and CEO as of July 1,2005. Between the time that Clyde H. 

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Bookheimer left the Corporation and George W. Millwardwas hired, David W. Cathell was the acting senior executive officer for theCorporation, except during a brief period of time in April of 2005, whenRobert J. McCormack was consulting with the Corporation and seeking approval tobecome CEO.

|                                            | ** ** | ** **                   | ** ** | ** ** | ** ** | ** **   | ** ** | ** ** | ** ** | **Long Term  Compensation** | ** ** | ** **  | ** ** |
|--------------------------------------------|------------|------------------------------|------------|------------|------------|--------------|------------|------------|------------|----------------------------------|------------|-------------|------------|
| ** **                                 | ** ** | ** **                   | ** ** | ** ** | ** ** | ** **   | ** ** | ** ** | ** ** | **Awards**                       | ** ** | **Payouts** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | ** **                   | ** ** | ** ** | ** ** | ** **   | ** ** | ** ** | ** ** | **Securities**                   | ** ** | ** **  | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | ** **                   | ** ** | ** ** | ** ** | ** **   | ** ** | **Other**  | ** ** | **Underlying**                   | ** ** | ** **  | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **Annual Compensation** | ** ** | **Annual** | ** ** | **Options/** | ** ** | **LTIP**   | ** ** | **All Other**               | ** ** |
| Name and Principal Position | ** ** | ** **                   | ** ** | **Year**   | ** ** | **Salary**   | ** ** | **Bonus**  | ** ** | **Compensation**                 | ** ** | **SARs**    | ** ** | **Payouts** | ** ** | **Compensation** | ** ** |
| Clyde H. Bookheimer                        |       | 2005                         |       | $          | 28,080     |         |       | $          | 0          |                             |       |        | $          | 2,000 | (1) |   |   | $ | 0 |   |   |   | $ | 0 |   |   |   | $ | 15,937 | (2) |   |
| President and Chief Executive Officer      |       | 2004                         |       | 135,200    |       |         | 0          |       |       |                             | 9,235      | (1)         |       |   | 0 |   |   |   | 0 |   |   |   | 61,911 | (2) |   |
|                                            |       | 2003                         |       | 132,600    |       |         | 0          |       |       |                             | 937        | (1)         |       |   | 0 |   |   |   | 0 |   |   |   | 80,774 | (2) |   |
| David W. Cathell                           |       | 2005                         |       | 59,621     |       |         | 0          |       |       |                             | 11,444     | (3)         |       |   | 0 |   |   |   | 0 |   |   |   | 0 |   |   |
| Chief Financial Officer                    |       |                         |       |       |       |         |       |       |       |                             |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Robert J. McCormack                        |       | 2005                         |       | 0          |       |         | 0          |       |       |                             | 15,270     | (3)         |       |   | 0 |   |   |   | 0 |   |   |   | 0 |   |   |
| Consultant                                 |       |                         |       |       |       |         |       |       |       |                             |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| George W. Millward                         |       | 2005                         |       | 0          |       |         | 0          |       |       |                             | 165,772    | (4)         |       |   | 0 |   |   |   | 0 |   |   |   | 0 |   |   |
| Interim President and Chief                |       |                         |       |       |       |         |       |       |       |                             |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Executive Officer                          |       |                         |       |       |       |         |       |       |       |                             |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                            |            |                              |            |            |            |              |            |            |            |                                  |            |             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)             Other Annual Compensation for Mr. Bookheimerincludes use of bank owned vehicle and board fees.

(2)             All Other Compensation includes retirement plan andsupplemental retirement plan contributions.

(3)             Other Annual Compensation for Messrs. Cathell andMcCormack is consulting fees.

(4)             Other Annual Compensation for Mr. Millwardincludes $ 1,093 in reimbursement for meals, $ 6,619 in reimbursement for lodging,$ 5,066 in reimbursement for travel, and $153,000 in consulting fees.

**BoardCompensation Committee Report on Executive Compensation**

The Corporation seeks to offer competitivecompensation opportunities for all employees based on the individual’s contributionand person performance. The Compensation Committee, comprised of threenon-employee directors, administers the compensation program. The CompensationCommittee also seeks to establish a fair compensation policy to governexecutive officers’ base salaries and bonus plans and to attractive andmotivate competent, dedicated, and ambitious managers whose efforts willenhance the Corporation’s products and services, resulting in improvedprofitability.

The Compensation Committee annually reviews the compensationof the Bank’s President and Chief Executive Officer.

The Board of Directorsdoes not deem Section 162(m) of the Internal Revenue Code to beapplicable to the Corporation at this time.

*Chief ExecutiveOfficer Compensation*

On March 4, 2005, the Bank terminated itsPresident, Clyde H. Bookheimer. The Boards of Directors of Fulton BancsharesCorporation and The Fulton County National Bank and Trust Company entered intoa Settlement Agreement and General Release with the former President, whichbecame effective on June 15, 2005. Please see Note 14 in the financialstatements (Exhibit 13) for a summary of the terms of the SettlementAgreement.

In concert with the termination of the President andCEO, the Board of Directors entered a search process which culminated in thehiring of George W. Millward as Interim President and CEO on July 1, 2005,under a contract which pays him $1,500 per day for each day he is engaged onBank business and reimburses him for normal expenses of travel, lodging andmeals. Mr. Millward was approved by the Office 

17

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of the Comptroller of theCurrency (OCC) and Federal Reserve Bank as required under the Consent Order andMemorandum of Understanding (MOU). He will continue to serve in the role ofInterim President and CEO of the Corporation and the Bank until theconsummation of the merger with Franklin Financial.

Additionally, the former Chief Financial Officer,David W. Cathell, resigned effective September 30, 2005. Debra A. Goodlingwas hired as Interim CFO as of October 24, 2005, under a contract whichpays her $9,500 per month and reimburses her for normal expenses of travel,lodging and meals. Ms. Goodling was approved by the OCC and FederalReserve Bank as required under the Consent Order and MOU.

The Board of Directors metas a whole to handle the above situations. The Compensation Committee of theBoard did not meet separately during 2005. Members of the Board of Directorswho served as Compensation Committee were Cecil B. Mellott, Clair R. Miller,Robert C. Snyder, Ellis L. Yingling, Martin R. Brown, David L. Seiders, RobertL. Thomas, and Stanley J. Kerlin, Esq.

**DeferredCompensation and Other Benefit Programs**

The Corporation hasadopted several benefit programs, some of which result in a deferral ofpayments for services rendered:

(1)         The SupplementalExecutive Retirement Plan is funded by single premium life insurance on certainCorporation executives, with the Corporation as beneficiary. Payments to theexecutives will not begin until their retirement, except in the case of achange of control.

(2)         The Director EmeritusProgram, funded by life insurance, allowed the Corporation to reward directorsfor longevity of service to the Board. Directors who qualified were eligible atage 75 to receive $4,000 annually for up to 10 years under this program. Noadditional directors will be added to the Directors Emeritus program.

(3)         The Director DeferredCompensation Plan, also funded by life insurance, allows directors to defer upto 100% of directors fees annually. The amounts deferred will be paid out overa period of up to 10 years beginning when the director reaches the age of 75.

(4)         The Officer SupplementalLife Insurance Plan provides for officer life insurance coverage to named thirdparties of generally double their current salary level, and is also funded bysingle premium life insurance.

 

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**Directors’ Compensation**

The directors of the Corporation do not receive anyadditional compensation for their services, beyond the compensation paid tothem as directors of the Bank. All directors of the Corporation are directorsof the Bank. Clyde H. Bookheimer, who was also a salaried officer of theCorporation and the Bank before his resignation, received $2,000 in fees forattendance at board meetings in the first quarter of 2005.

In total, the non-employeedirectors of the Corporation and the Bank received $58,667 for all servicesrendered in 2005.

**Shareholder Return Performance Graph**

A line graph is set forth below. The graph comparesthe yearly changes in the cumulative total shareholder return on theCorporation’s common stock against the cumulative total return of the NASDAQStock Index and the Peer Group Index for the period of five fiscal yearscommencing January 1, 2000 and ending December 31, 2005. Theshareholder return shown on the graph below is not necessarily indicative offuture performance.

**Fulton BancsharesCorporation**

| ** **                           | ** ** | **Period Ending** | ** ** | ** **   |
|--------------------------------------|------------|------------------------|------------|--------------|
| **Index**                            | ** ** | **12/31/00**           | ** ** | **12/31/01** | ** ** | **12/31/02** | ** ** | **12/31/03** | ** ** | **12/31/04** | ** ** | **12/31/05** | ** ** | ** ** |
| Fulton Bancshares Corporation        |       | 100.00                 |       | 100.22       |   | 139.50 |   | 155.79 |   | 132.92 |   | 119.47 |   |   |
| NASDAQ Composite                     |       | 100.00                 |       | 79.18        |   | 54.44 |   | 82.09 |   | 89.59 |   | 91.54 |   |   |
| SNL All-OTC-BB and  Pink Banks Index |       | 100.00                 |       | 104.80       |   | 130.37 |   | 179.12 |   | 213.86 |   | 231.99 |   |   |

 

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**Item 12.**                 SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters

**BeneficialOwners of the Corporation’s Stock**

*Principal Owners*

The following table sets forth, as of December 31,2005, the name and address of each person who owns of record or who is known bythe Board of Directors to be the beneficial owner of more than five percent ofthe Corporation’s outstanding common stock, the number of shares beneficiallyowned by such persons and the percentage of the Corporation’s outstandingcommon stock so owned.

| Name and Address      | ** ** | ** ** | ** ** | **Shares  Beneficially  Owned (1)** | ** ** | **Percentage of  Outstanding  Common Stock  Beneficially Owned** | ** ** |
|---------------------------------|------------|------------|------------|------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| Raleigh V. and  Inez G. Barnett |       |       | 33,938     |                                     |       |                                                                            | 6.89       | % |   |
| Waterfall, PA 16689             |       |       |       |                                     |       |                                                                            |       |   |   |
| CEDE & Co.             |       |       | 164,754    |                                     |       |                                                                            | 33.43      | % |   |
| New York, NY 10274              |       |       |       |                                     |       |                                                                            |       |   |   |

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(1)          Seefootnote below for the definition of “beneficially owned”.

*BeneficialOwnership of Officers and Directors*

The following table sets forth as of December 31,2005, the amount and percentage of the common stock of the Corporationbeneficially owned by each director and all officers and directors of theCorporation as a group.

| **Name of Individual  Or Identity of Group** | ** ** | ** ** | ** ** | **Amount  and Nature  of Beneficial  Ownership(1)(2)** | ** ** | **Percentage  of Class (3)** | ** ** |
|-----------------------------------------------------------------------|------------|------------|------------|------------------------------------------------------------------|------------|----------------------------------------|------------|
| Cecil B. Mellott                                                      |       |       | 16,557     | (4)                                                              |       |                                   | 3.36       | % |   |
| Clair R. Miller                                                       |       |       | 5,000      | (5)                                                              |       |                                   | 1.01       | % |   |
| Robert C. Snyder                                                      |       |       | 6,000      |                                                             |       |                                   | 1.22       | % |   |
| Ellis L. Yingling                                                     |       |       | 8,000      | (6)                                                              |       |                                   | 1.62       | % |   |
| Martin R. Brown                                                       |       |       | 2,900      | (7)                                                              |       |                                   | —     |   |   |
| David L. Seiders                                                      |       |       | 1,178      |                                                             |       |                                   | —     |   |   |
| Robert L. Thomas                                                      |       |       | 500        | (8)                                                              |       |                                   | —     |   |   |
| Stanley J.  Kerlin, Esq.                                         |       |       | 1,700      | (9)                                                              |       |                                   | —     |   |   |
| All Officers and  Directors as A Group (9 persons)                    |       |       | 41,857     |                                                             |       |                                   | 8.49       | % |   |

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(1)          Thesecurities beneficially owned by an individual are determined in accordancewith the definitions of “beneficial ownership” set forth in the General Rules andRegulations of the Securities and Exchange Commission and may includesecurities owned by or for the individual’s spouse and minor children and anyother relative who has the same home, as well as securities that the individualhas, or shares, voting or investment power or has the right to acquirebeneficial ownership within 60 days after December 31, 2005. Beneficialownership may be disclaimed as to certain of the securities.

(2)          Informationfurnished by the directors, officers and the Corporation.

(3)          Lessthan 1% unless otherwise indicated.

(4)          Includes2,779 shares held individually by Mr. Mellott and 13,778 shares heldjointly with his spouse.

(5)          Includes660 shares held individually by Mr. Miller and 4,340 shares held jointlywith his spouse.

(6)          Includes1,936 shares held individually by Mr. Yingling and 6,064 shares heldjointly with his spouse.

(7)          Includes700 shares held individually by Mr. Brown and 2,200 shares held jointlywith his spouse.

(8)          Includes400 shares held individually by Mr. Thomas and 100 shares held jointlywith his brother.

(9)          Includes1,500 shares held individually by Mr. Kerlin and 200 shares heldindividually by his sons.

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**Item 13.**                 CertainRelationships and Related Transactions

**Certain Transactions**

There have been no material transactions between theCorporation and the Bank, nor any material transactions proposed, with anydirector or executive officer of the Corporation and the Bank, or any associateof the foregoing persons. The Corporation and the Bank have had and intend tocontinue to have banking and financial transactions in the ordinary course ofbusiness with directors and officers of the Corporation and the Bank and theirassociates on comparable terms and with similar interest rates as thoseprevailing from time to time for other customers of the Corporation and theBank.

Total loans outstandingfrom the Corporation and the Bank at December 31, 2005, to the Corporation’sand the Bank’s officers and directors as a group, and to members of theirimmediate families and companies in that they had an ownership interest of 10%or more was $4,533,652 or approximately 30.42% of the total equity capital ofthe Bank. Corporate policy requires that related party loans are made on substantiallythe same terms, including interest rates and collateral, as those prevailing atthe time for comparable transactions with unrelated persons and do not involvemore than normal risk of collectibility.

**Item 14.**                 PrincipalAccountant Fees and Services

Aggregatefees billed to Fulton Bancshares Corporation and its subsidiaries by SmithElliott Kearns & Company, LLC for services rendered are presentedbelow:

| ** **          | ** ** | **Years Ended December 31,**                                      | ** ** |
|---------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **          | ** ** | **      2005      ** | ** ** | **      2004      ** | ** ** |
| Audit fees          |       |                                                                             | $          | 41,776 |   |   |   | $ | 39,932 |   |   |
| Audit related  fees |       |                                                                             | 12,190     |   |   |   | 12,730 |   |   |
| Tax fees            |       |                                                                             | 7,980      |   |   |   | 5,025 |   |   |
| All other fees      |       |                                                                             | 9,983      |   |   |   | 4,135 |   |   |

 

Audit Fees include fees billed for professionalservices rendered for the audit of annual financial statement and fees billedfor the review of financial statements included in Fulton BancsharesCorporation Forms 10-Q or services that are normally provided by SmithElliott Kearns & Company, LLC in connection with the statutory andregulatory filings or engagements.

Audit related fees include fees billed for assuranceand related services by Smith Elliott Kearns & Company, LLC that arereasonably related to the performance of the audit or review of the registrant’sfinancial statements and are not reported under the Audit fees section of thetable above. These include fees for ACH and trust audits and agreed uponprocedures.

Tax fees include fees billed for professional servicesrendered by Smith Elliott Kearns & Company, LLC for tax compliance,tax advice, and tax planning. These include preparation of federal and statetax returns.

All other fees include fees billed for products andservices provided by Smith Elliott Kearns & Company, LLC, other thanthe services reported under the Audit fees, Audit related fees, or Tax feessections of the table above. These include fees for services related to theBank’s employee benefit programs.

The Audit Committee has a policy for the pre-approvalof services provided by the independent auditors. The policy requires the AuditCommittee to pre-approve all audit and permissible non-audit services providedby the independent auditors. These services may include audit services, auditrelated services, tax services, and other services. Under the policy,pre-approval is generally provided for up to one year and any pre-approval isdetailed as to the particular service or category of services and is subject toa specific budget. In addition, the Audit Committee may also pre-approveparticular services on a case by 

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case basis. For eachproposed service, the independent auditor is required to provide detailedback-up documentation at the time of approval. None of the services related tothe Audit related fees, Tax fees, or All other fees described above wasapproved by the Audit Committee pursuant to the waiver of pre-approvalprovisions set forth in applicable rules of the SEC. Smith Elliott Kearns &Company, LLC assisted the Corporation and the Bank with the preparation oftheir federal and state tax returns, and provided assistance in connection withregulatory matters, charging the Bank for such services at the customary hourlyrates. These non-audit services were approved by the Corporation’s and the Bank’sBoard of Directors after due consideration of the effect of the performancethereof on the independence of the accountants and after the conclusions of theBoard of Directors of the Corporation and the Bank that there was no effect onthe independence of the accountants.

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**PART IV**

**Item 15.**                 Exhibitsand Financial Statement Schedules

(a)  (1)—List ofFinancial Statements. The following consolidated financial statements of FultonBancshares Corporation and its subsidiaries, included in the annual report ofthe registrant to its shareholders for the year ended December 31, 2005,are incorporated by reference in Item 8:

Consolidated balancesheets—December 31, 2005 and 2004

Consolidated statements ofincome—Years ended December 31, 2005, 2004, and 2003

Consolidated statements ofstockholders’ equity—Years ended December 31, 2005, 2004, and 2003

Consolidatedstatements of cash flows—Years ended December 31, 2005, 2004, and 2003

Notesto consolidated financial statements—December 31, 2005

       (2) Listof Financial Statement Schedules. All financial statement schedules for whichprovision is made in the applicable accounting regulations of the Securitiesand Exchange Commission are not required under the related instructions or areinapplicable and therefore have been omitted.

(b) Listing ofExhibits

| 3      |   | (i)                                                                                                                                                                                                                                                                                         |   | Articles of Incorporation (Incorporated by reference  to the registrant’s Form 10-K/A for the year ended  December 31, 2004). |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------|
|   |   | (ii)                                                                                                                                                                                                                                                                                        |   | Bylaws (Incorporated by reference to the  registrant’s Form 10-K/A for the year ended December 31,  2004).                    |
| 10.1   |   | Salary Continuation Agreement/Supplemental Executive  Retirement Plan for the Chief Executive Officer: Clyde H. Bookheimer  (Incorporated by reference to the Registrant’s Form 10-K for the  year ended December 31, 2002).                                                 |
| 10.2   |   | Director Deferred Compensation Plan Agreement  applicable to Cecil B. Mellott, David L. Seiders, Clair R. Miller, Ellis L.  Yingling, Martin R. Brown and Robert C. Snyder (Incorporated by reference to  the Registrant’s Form 10-K for the year ended December 31,  2002). |
| 10.3   |   | Director Emeritus Retirement Agreement applicable to  Raleigh Barnett, K.G. Richards and Merill Kerlin (Incorporated by reference  to the registrant’s Form 10-K for the year ended December 31,  2002).                                                                     |
| 10.4   |   | Salary Continuation Agreement/Supplemental Executive  Retirement Plan for Alice Clark, Vice President (Incorporated by reference to  the registrant’s Form 10-K/A for the year ended December 31,  2004).                                                                    |
| 10.5   |   | Survivor Income Agreement for Sharon Sowers.                                                                                                                                                                                                                                                |
| 10.6   |   | Survivor Income Agreement for Alice Clark.                                                                                                                                                                                                                                                  |
| 10.7   |   | Survivor Income Agreement for Neil L. Berkstresser.                                                                                                                                                                                                                                         |
| 13     |   | Annual Report to security holders.                                                                                                                                                                                                                                                          |
| 14     |   | Code of Ethics (Incorporated by reference to the  Registrant’s Form 10-K for the year ended December 31, 2003).                                                                                                                                                              |
| 21     |   | Subsidiaries of the registrant                                                                                                                                                                                                                                                              |
| 23     |   | Consent of independent registered public accounting  firm                                                                                                                                                                                                                                   |
| 31.1   |   | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                    |
| 31.2   |   | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                    |
| 32.1   |   | Certification of Chief Executive Officer pursuant to  18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                                                |
| 32.2   |   | Certification of Chief Financial Officer pursuant to  18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                                                |

 

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

|                            | **FULTON BANCSHARES CORPORATION** |
|----------------------------|-----------------------------------|
| * *                   | (Registrant)                      |
|                            | *By*                              | */s/ GEORGE W. MILLWARD* |
|                       |                              | Interim Principal Executive Officer |
| Dated: March 13, 2006 |                              |   |
| * *                   | *By*                              | */s/ DEBRA A. GOODLING* |
|                       |                              | Interim Chief Financial Officer |

 

Inaccordance with the requirements of Section 13 or 15(d) of theSecurities Act of 1934, this report was signed by the following persons onbehalf of the Registrant in the capacities and on the dates indicated.

|                                     | **Signature** | ** **                         | ** ** |                      | **Title** | ** ** | ** ** |  | **Date** | ** ** |
|-------------------------------------|---------------|------------------------------------|------------|----------------------|-----------|------------|------------|--|----------|------------|
| */S/ DAVID  L. SEIDERS*             |          | Director                           |       | March 13,  2006 |
| David  L. Seiders                   |          |                               |       |                 |
| */S/ CECIL  B. MELLOTT*             |          | Director                           |       | March 13,  2006 |
| Cecil  B. Mellott                   |          |                               |       |                 |
| */S/ ROBERT  C. SNYDER*             |          | Director                           |       | March 13,  2006 |
| Robert  C. Snyder                   |          |                               |       |                 |
| */S/ ELLIS  L. YINGLING*            |          | Director                           |       | March 13,  2006 |
| Ellis  L. Yingling                  |          |                               |       |                 |
| */S/ CLAIR  R. MILLER*              |          | Director &  Vice Chairman |       | March 13,  2006 |
| Clair  R. Miller                    |          |                               |       |                 |
| */S/ MARTIN  R. BROWN*              |          | Director &  Chairman      |       | March 13,  2006 |
| Martin  R. Brown                    |          |                               |       |                 |
| */S/ ROBERT  L. THOMAS*             |          | Director                           |       | March 13,  2006 |
| Robert  L. Thomas                   |          |                               |       |                 |
| */S/ STANLEY  J. KERLIN, ESQ.* |          | Director                           |       | March 13,  2006 |
| Stanley J.  Kerlin, Esq.       |          |                               |       |                 |

 

 

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