UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20459

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2006,

or

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

For the transition period from                      to                     

FULTON FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

PENNSYLVANIA		23-2195389
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

One Penn Square, P.O. Box 4887 Lancaster, Pennsylvania		17604
(Address of principal executive offices)		(Zip Code)

(717) 291-2411

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

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

Large accelerated filer þ      Accelerated filer o      Non-accelerated filer o

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

Common Stock, $2.50 Par Value – 173,429,000 shares outstanding as of July 31, 2006.

 

 

FULTON FINANCIAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2006

INDEX

Description		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
(a) Consolidated Balance Sheets - June 30, 2006 and December 31, 2005			3
(b) Consolidated Statements of Income - Three and six months ended June 30, 2006 and 2005			4
(c) Consolidated Statements of Shareholders’ Equity and Comprehensive Income - Six months ended June 30, 2006 and 2005			5
(d) Consolidated Statements of Cash Flows - Six months ended June 30, 2006 and 2005			6
(e)Notes to Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
Item 3. Quantitative and Qualitative Disclosures about Market Risk			38
Item 4. Controls and Procedures			41
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			42
Item 1A. Risk Factors			42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			42
Item 3. Defaults Upon Senior Securities			42
Item 4. Submission of Matters to a Vote of Security Holders			42
Item 5. Other Information			43
Item 6. Exhibits			43
Signatures			44
Exhibit Index			45
Certifications			46

Item 1. Financial Statements
FULTON FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per-share data)

		June 30, 2006				December 31
		(unaudited)				2005
ASSETS
Cash and due from banks		$	410,563			$	368,043
Interest-bearing deposits with other banks			26,415				31 ,404
Federal funds sold			12,949				528
Loans held for sale			268,966				243,378
Investment securities:
Held to maturity (estimated fair value of $13,100 in 2006 and $18,317 in 2005)			13,142				18,258
Available for sale			2,730,635				2,543,887
Loans, net of unearned income			10,051,957				8,424,728
Less: Allowance for loan losses			(106,544	)			(92,847	)
Net Loans			9,945,413				8,331,881
Premises and equipment			185,677				170,254
Accrued interest receivable			63,589				53,261
Goodwill			622,470				418,735
Intangible assets			41,481				29,687
Other assets			240,245				192,239
Total Assets		$	14,561,545			$	12,401,555
LIABILITIES
Deposits:
Noninterest-bearing		$	1,910,565			$	1,672,637
Interest-bearing			8,236,087				7,132,202
Total Deposits			10,146,652				8,804,839
Short-term borrowings:
Federal funds purchased			1,236,941				939,096
Other short-term borrowings			528,782				359,866
Total Short-Term Borrowings			1,765,723				1,298,962
Accrued interest payable			48,717				38,604
Other liabilities			136,121				115,834
Federal Home Loan Bank advances and long-term debt			1,024,144				860,345
Total Liabilities			13,121,357				11,118,584
SHAREHOLDERS’ EQUITY
Common stock, $2.50 par value, 600 million shares authorized, 190.4 million shares issued in 2006 and 181.0 million shares issued in 2005			476,049				430,827
Additional paid-in capital			1,243,215				996,708
Retained earnings			48,735				138,529
Accumulated other comprehensive loss			(66,889	)			(42,285	)
Treasury stock, 17.1 million shares in 2006 and 16.1 million shares in 2005, at cost			(260,922	)			(240,808	)
Total Shareholders’ Equity			1,440,188				1,282,971
Total Liabilities and Shareholders’ Equity		$	14,561,545			$	12,401,555

See Notes to Consolidated Financial Statements

FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except per-share data)

		Three Months Ended								Six Months Ended
		June 30								June 30
		2006				2005				2006				2005
INTEREST INCOME
Loans, including fees		$	179,946			$	122,492			$	341,060			$	238,430
Investment securities:
Taxable			23,564				18,257				46,103				36,518
Tax-exempt			3,543				2,843				7,076				5,692
Dividends			1,555				1,155				2,900				2,239
Loans held for sale			4,006				3,516				7,464				6,018
Other interest income			592				348				1,255				524
Total Interest Income			213,206				148,611				405,858				289,421
INTEREST EXPENSE
Deposits			58,996				31,104				109,186				58,912
Short-term borrowings			18,427				7,914				33,733				14,738
Long-term debt			12,932				9,668				25,045				17,598
Total Interest Expense			90,355				48,686				167,964				91,248
Net Interest Income			122,851				99,925				237,894				198,173
PROVISION FOR LOAN LOSSES			875				725				1,875				1,525
Net Interest Income After Provision for Loan Losses			121,976				99,200				236,019				196,648
OTHER INCOME
Investment management and trust services			9,056				8,966				19,088				17,985
Service charges on deposit accounts			10,892				9,960				21,139				19,292
Other service charges and fees			6,576				7,142				13,230				12,698
Gains on sales of mortgage loans			5,187				6,290				9,959				11,947
Investment securities gains			1,409				1,418				4,074				4,733
Gain on sale of deposits			—				2,201				—				2,201
Other			2,882				2,338				5,119				5,312
Total Other Income			36,002				38,315				72,609				74,168
OTHER EXPENSES
Salaries and employee benefits			53,390				45,235				103,319				89,532
Net occupancy expense			9,007				6,549				17,596				14,047
Equipment expense			3,495				2,888				7,088				5,958
Data processing			3,165				3,321				6,074				6,490
Advertising			3,027				2,276				5,280				4,249
Intangible amortization			2,006				1,168				3,858				2,347
Other			16,703				16,752				35,594				29,393
Total Other Expenses			90,793				78,189				178,809				152,016
Income Before Income Taxes			67,185				59,326				129,819				118,800
INCOME TAXES			20,484				17,722				39,239				35,759
Net Income		$	46,701			$	41,604			$	90,580			$	83,041
PER-SHARE DATA:
Net income (basic)		$	0.27			$	0.26			$	0.53			$	0.51
Net income (diluted)			0.27				0.25				0.52				0.50
Cash dividends			0.1475				0.138				0.286				0.264

See Notes to Consolidated Financial Statements

FULTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2006 AND 2005
(dollars in thousands)

																		Accumulated
		Number of								Additional								Other Com-
		Shares				Common				Paid-in				Retained				prehensive				Treasury
		Outstanding				Stock				Capital				Earnings				(Loss) Income				Stock				Total
Balance at December 31, 2005			164,868,000			$	430,827			$	996,708			$	138,529			$	(42,285	)		$	(240,808	)		$	1,282,971
Comprehensive income:
Net income															90,580												90,580
Unrealized loss on securities (net of $11.1 million tax effect)																			(20,592	)							(20,592	)
Unrealized loss on derivative financial instrument (net of $735,000 tax effect)																			(1,364	)							(1,364	)
Less — reclassification adjustment for gains included in net income (net of $1.4 tax expense)																			(2,648	)							(2,648	)
Total comprehensive income																											65,976
Stock dividend - 5%							22,648				107,952				(130,600	)											-
Stock issued, including related tax benefits			763,000				2,051				4,261																6,312
Stock-based compensation awards			85,000								686																686
Stock issued for acquisition of Columbia Bancorp			8,619,000				20,523				133,608																154,131
Acquisition of treasury stock			(1,056,000	)																			(16,691	)			(16,691	)
Accelerated share repurchase settlement																							(3,423	)			(3,423	)
Cash dividends — $0.286 per share															(49,774	)											(49,774	)
Balance at June 30, 2006			173,279,000			$	476,049			$	1,243,215			$	48,735			$	(66,889	)		$	(260,922	)		$	1,440,188
Balance at December 31, 2004			165,007,500			$	335,604			$	1,018,403			$	60,924			$	(10,133	)		$	(160,711	)		$	1,244,087
Comprehensive income:
Net income															83,041												83,041
Unrealized loss on securities (net of $3.2 million tax effect)																			(5,954	)							(5,954	)
Less — reclassification adjustment for gains included in net income (net of $1.7 million tax expense)																			(3,076	)							(3,076	)
Total comprehensive income																											74,011
Stock split paid in the form of a 25% stock dividend							84,046				(84,114	)															(68	)
Stock issued, including tax related benefits			846,300				1,012				1,158												5,071				7,241
Stock-based compensation awards											179																179
Acquisition of treasury stock			(5,250,000	)																			(85,168	)			(85,168	)
Cash dividends — $0.264 per share															(43,463	)											(43,463	)
Balance at June 30, 2005			160,603,800			$	420,662			$	935,626			$	100,502			$	(19,163	)		$	(240,808	)		$	1,196,819

See Notes to Consolidated Financial Statements

FULTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)

		Six months ended
		June 30
		2006				2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income		$	90,580			$	83,041
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			1,875				1,525
Depreciation and amortization of premises and equipment			8,250				6,539
Net amortization of investment security premiums			1,939				2,682
Investment securities gains			(4,074	)			(4,733	)
Net increase in loans held for sale			(25,588	)			(56,852	)
Amortization of intangible assets			3,858				2,347
Stock-based compensation			686				179
Increase in accrued interest receivable			(3,672	)			(3,186	)
Increase in other assets			(20,248	)			(780	)
Increase in accrued interest payable			9,066				3,763
Increase (decrease) in other liabilities			1,569				(3,193	)
Total adjustments			(26,339	)			(51,709	)
Net cash provided by operating activities			64,241				31,332
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale			94,178				101,196
Proceeds from maturities of securities held to maturity			5,116				2,102
Proceeds from maturities of securities available for sale			322,336				311,054
Purchase of securities held to maturity			(7	)			(4,398	)
Purchase of securities available for sale			(447,397	)			(406,130	)
Decrease in short-term investments			9,422				26,551
Net increase in loans			(562,723	)			(299,700	)
Net cash paid for acquisitions			(105,413	)			—
Net purchase of premises and equipment			(15,769	)			(13,226	)
Net cash used in investing activities			(700,257	)			(282,551	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand and savings deposits			3,811				122,355
Net increase in time deposits			369,066				120,245
Additions to long-term debt			195,874				284,062
Repayment of long-term debt			(112,211	)			(16,553	)
Increase (decrease) in short-term borrowings			282,678				(59,941	)
Dividends paid			(46,880	)			(40,441	)
Net proceeds from issuance of common stock			6,312				7,176
Acquisition of treasury stock			(20,114	)			(85,168	)
Net cash provided by financing activities			678,536				331,735
Net Increase in Cash and Due From Banks			42,520				80,516
Cash and Due From Banks at Beginning of Period			368,043				278,065
Cash and Due From Banks at End of Period		$	410,563			$	358,581
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest		$	158,898			$	87,485
Income taxes			32,276				30,618

See Notes to Consolidated Financial Statements

FULTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE A – Basis of Presentation

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

NOTE B – Net Income Per Share and Comprehensive Income

The Corporation’s basic net income per share is calculated as net income divided by the weighted average number of shares outstanding. For diluted net income per share, net income is divided by the weighted average number of shares outstanding plus the incremental number of shares added as a result of converting common stock equivalents, calculated using the treasury stock method. The Corporation’s common stock equivalents consist solely of outstanding stock options. Excluded from the calculation were 1.4 million anti-dilutive options for the three and six months ended June 30, 2006.

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

		Three months ended								Six months ended
		June 30								June 30
		2006				2005				2006				2005
						(in thousands)
Weighted average shares outstanding (basic)			173,449				162,235				172,166				163,718
Impact of common stock equivalents			2,035				1,806				2,169				1,920
Weighted average shares outstanding (diluted)			175,484				164,041				174,335				165,638

Total comprehensive income was $31.5 million and $66.0 million for the three and six months ended June 30, 2006, respectively. Total comprehensive income was $54.9 million and $74.0 million for the three and six months ended June 30, 2005, respectively.

NOTE C – Stock Dividend

The Corporation declared a 5% stock dividend on April 18, 2006, which was paid on June 8, 2006 to shareholders of record on May 19, 2006. All share and per-share information has been restated to reflect the impact of this stock dividend.

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

The Corporation does not have any operating segments which require disclosure of additional information. While the Corporation owned fifteen separate banks as of June 30, 2006, each engaged in similar activities and provided similar products and services. The Corporation’s non-banking activities are immaterial and, therefore, separate information has not been disclosed.

NOTE E – Stock-Based Compensation

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

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

		Three months ended								Six months ended
		June 30								June 30
		2006				2005				2006				2005
						(in thousands)
Compensation expense		$	342			$	83			$	686			$	179
Tax expense (benefit)			14				(107	)			(119	)			(109	)
Net income effect		$	356			$	(24	)		$	567			$	70

Under the Option Plans, options are granted to key personnel for terms of up to ten years at option prices equal to the fair market value of the Corporation’s stock on the date of grant. Options are typically granted annually on July 1^st and, prior to the July 1, 2005 grant, had been 100% vested immediately upon grant. For the July 1, 2005 grant, a three-year cliff-vesting feature was added. Certain events, as specified in the Option Plans and agreements, would result in the acceleration of the vesting period. As of June 30, 2006, the Option Plans had 14.9 million shares reserved for the future grants through 2013. On July 1, 2006, the Corporation granted approximately 840,000 options under its Option Plans.

NOTE F – Employee Benefit Plans

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

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

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

		Pension Plan
		Three months ended								Six months ended
		June 30								June 30
		2006				2005				2006				2005
		(in thousands)
Service cost		$	606			$	621			$	1,215			$	1,245
Interest cost			865				842				1,729				1,685
Expected return on plan assets			(1,057	)			(819	)			(2,114	)			(1,637	)
Net amortization and deferral			201				221				403				443
Net periodic benefit cost		$	615			$	865			$	1,233			$	1,736

		Post-Retirement Plan
		Three months ended								Six months ended
		June 30								June 30
		2006				2005				2006				2005
		(in thousands)
Service cost		$	147			$	88			$	290			$	177
Interest cost			189				114				374				231
Expected return on plan assets			(1	)			(1	)			(2	)			(1	)
Net amortization and deferral			(82	)			(55	)			(162	)			(112	)
Net periodic benefit cost		$	253			$	146			$	500			$	295

NOTE G – Acquisitions

On February 1, 2006, the Corporation completed its acquisition of Columbia Bancorp (Columbia) of Columbia, Maryland. Columbia was a $1.3 billion bank holding company whose primary subsidiary was The Columbia Bank, which operates 20 full-service community-banking offices and five retirement community offices in Howard, Montgomery, Prince George’s and Baltimore Counties and Baltimore City.

Under the terms of the merger agreement, each of the approximately 6.9 million shares of Columbia’s common stock was acquired by the Corporation based on a “cash election merger” structure. Each Columbia shareholder elected to receive 100% of the merger consideration in stock, 100% in cash, or a combination of stock and cash.

As a result of Columbia shareholder elections, approximately 3.5 million of the Columbia shares outstanding on the acquisition date were converted into shares of the Corporation’s common stock, based upon a fixed exchange ratio of 2.441 shares of Corporation stock for each share of Columbia stock. The remaining 3.4 million shares of Columbia stock were purchased for $42.48 per share. In addition, each of the options to acquire Columbia’s stock was converted into options to purchase the Corporation’s stock or was settled in cash, based on the election of each option holder and the terms of the merger agreement. The total purchase price was approximately $305.9 million, including $154.1 million in stock issued and stock options assumed, $149.4 million of Columbia stock purchased and options settled for cash and $2.4 million for other direct acquisition costs. The purchase price for shares issued was determined based on the value of the Corporation’s stock on the date when the number of shares was fixed and determinable.

As a result of the acquisition, Columbia was merged into the Corporation, and The Columbia Bank became a wholly owned subsidiary. The acquisition was accounted for using purchase accounting, which requires the Corporation to allocate the total purchase price of the acquisition to the assets acquired and liabilities assumed, based on their respective fair values at the acquisition date, with any remaining purchase price

being recorded as goodwill. Resulting goodwill balances are then subject to an impairment review on at least an annual basis. The results of Columbia’s operations are included in the Corporation’s financial statements prospectively from the February 1, 2006 acquisition date.

The following is a summary of the purchase price allocation based on estimated fair values on the acquisition date (in thousands):

Cash and due from banks		$	46,407
Other earning assets			16,854
Investment securities available for sale			113,761
Loans, net of allowance			1,052,684
Premises and equipment			7,904
Core deposit intangible asset			14,689
Trade name intangible asset			964
Goodwill			202,321
Other assets			92,719
Total assets acquired			1,548,303
Deposits			968,936
Short-term borrowings			184,083
Long-term debt			80,136
Other liabilities			9,223
Total liabilities assumed			1,242,378
Net assets acquired		$	305,925

On July 1, 2005, the Corporation completed its acquisition of SVB Financial Services, Inc. (SVB). SVB was a $530 million bank holding company whose primary subsidiary was Somerset Valley Bank, which operates thirteen community-banking offices in Somerset, Hunterton and Middlesex Counties in New Jersey. The total purchase price was $90.4 million, including $66.6 million in stock issued and options assumed, $22.4 million in SVB stock purchased and options settled for cash and $1.4 million in other direct acquisition costs.

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

		Three months ended June 30								Six months ended June 30
		2006 (1)				2005				2006				2005
Net interest income		$	122,851			$	118,403			$	243,392			$	234,029
Other income			36,002				40,268				71,876				77,956
Net income			46,701				46,142				91,387				92,124
Per Share:
Net income (basic)		$	0.27			$	0.26			$	0.52			$	0.52
Net income (diluted)			0.27				0.26				0.52				0.52

NOTE H – Derivative Financial Instruments

As of June 30, 2006, interest rate swaps with a notional amount of $300.0 million were used to hedge certain long-term fixed rate certificates of deposit. The terms of the certificates of deposit and the interest rate swaps mirror each other and were committed to simultaneously. Under the terms of the swap agreements, the

Corporation is the fixed rate receiver and the floating rate payer (generally tied to the three month London Interbank Offering Rate, or LIBOR, a common index used for setting rates between financial institutions). The interest rate swaps are classified as fair value hedges and both the interest rate swaps and the certificates of deposit are recorded at fair value, with changes in the fair values during the period recorded as income or expense. For interest rate swaps accounted for as a fair value hedge, ineffectiveness is the difference between the changes in the fair value of the interest rate swap and the hedged item, in this case the certificates of deposit.

The Corporation’s analysis of hedge effectiveness indicated they were highly effective as of June 30, 2006. For the three and six months ended June 30, 2006, net charges of $94,000 and $155,000, respectively, were recorded to expense representing the net impact of the change in fair values of the interest rate swaps and the certificates of deposit.

The Corporation entered into a forward-starting interest rate swap with a notional amount of $150.0 million in October 2005 in anticipation of the issuance of $150.0 million of trust preferred securities in January 2006. This was accounted for as a cash flow hedge as it hedged the variability of interest payments attributable to changes in interest rates on the forecasted issuance of fixed-rate debt. As of December 31, 2005, $2.2 million had been recorded as an other comprehensive loss representing the estimated fair value of the swap on that date, net of a $1.2 million tax effect. The Corporation settled this derivative on its contractual maturity date in January 2006 with a total payment of $5.5 million to the counterparty that resulted in an additional $1.4 million charge to other comprehensive loss (net of $751,000 tax effect) during the first quarter of 2006. The total amount recorded in other comprehensive loss is being amortized to interest expense over the life of the related securities using the effective interest method. The total amount of net losses in accumulated other comprehensive income that will be reclassified into earnings during the next twelve months is expected to be approximately $185,000.

NOTE I – Commitments and Contingencies

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

The outstanding amounts of commitments to extend credit and letters of credit were as follows:

		June 30
		2006				2005
		(in thousands)
Commitments to extend credit			4,245,908				3,556,674
Standby letters of credit			726,944				548,713
Commercial letters of credit			30,181				21,471

From time to time, the Corporation and its subsidiary banks may be defendants in legal proceedings relating to the conduct of their banking business. Most of such legal proceedings are a normal part of the banking business and, in management’s opinion, the financial position and results of operations and cash flows of the Corporation would not be affected materially by the outcome of such legal proceedings.

NOTE J – Stock Repurchases

In 2005, the Corporation purchased 4.5 million shares of its common stock from an investment bank at a total cost of $73.6 million under an “Accelerated Share Repurchase” program (ASR), which allowed the shares to be purchased immediately rather than over time. The investment bank, in turn, repurchased shares on the

open market over a period that was determined by the average daily trading volume of the Corporation’s shares, among other factors. The Corporation completed the ASR in February 2006 and settled its position with the investment bank by paying $3.4 million, representing the difference between the initial payment and the actual total price of the shares repurchased.

In March 2006, the Corporation’s Board of Directors approved a stock repurchase plan for 2.1 million shares through December 31, 2006. Repurchases under this plan will occur through open market acquisitions. During the three and six months ended June 30, 2006, 1.0 million and 1.1 million shares were repurchased under this plan, respectively.

NOTE K – Long-Term Debt

In January 2006, the Corporation purchased all of the common stock of a subsidiary trust, Fulton Capital Trust I, which was formed for the purpose of issuing $150.0 million of trust preferred securities at a fixed rate of 6.29% and an effective rate of approximately 6.50% as a result of issuance costs and the settlement cost of the forward-starting interest rate swap. In connection with this transaction, $154.6 million of junior subordinated deferrable interest debentures were issued to the trust. These debentures carry the same rate and mature on February 1, 2036.

NOTE L – New Accounting Standard

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). The interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. Specifically, the interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Corporation is currently evaluating the impact of FIN 48 on the consolidated financial statements.

NOTE M – Reclassifications

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

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

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

FORWARD-LOOKING STATEMENTS

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

In addition to the factors identified herein, the following risk factors could cause actual results to differ materially from such forward-looking statements:

•

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

•

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

•

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

•

If the Corporation is unable to acquire additional banks on favorable terms or if it fails to successfully integrate or improve the operations of acquired banks, the Corporation may be unable to execute its growth strategies.

•

If the goodwill that the Corporation has recorded in connection with its acquisitions becomes impaired, it could have a negative impact on the Corporation’s profitability.

•

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

•

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

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

RESULTS OF OPERATIONS

Overview

The Corporation currently derives the majority of its earnings from traditional banking activities, with net interest income, or the difference between interest income earned on loans and investments and interest paid on deposits and borrowings, accounting for approximately 78% of revenues for the three and six months ended June 30, 2006. Growth in net interest income is dependent upon balance sheet growth or increasing the net interest margin, which is net interest income as a percentage of average interest-earning

assets. The Corporation also generates revenue through fees earned on the various services and products offered to its customers and through sales of assets, such as loans, investments, or properties. Offsetting these revenue sources are provisions for credit losses on loans, other operating expenses and income taxes.

The Corporation’s net income for the second quarter of 2006 increased $5.1 million, or 12.3%, from $41.6 million in 2005 to $46.7 million in 2006. Net income for the first half of 2006 increased $7.5 million, or 9.1%, from $83.0 million in 2005 to $90.6 million in 2006. Diluted net income per share for the second quarter increased $0.02, or 8.0%, from $0.25 in 2005 to $0.27 in 2006. For the first half of 2006, diluted net income per share increased $0.02 per share, or 4.0%, from $0.50 in 2005 to $0.52 in 2006. The Corporation realized annualized returns on average assets of 1.32% and average equity of 13.01% during the second quarter of 2006. For the first half of 2006, the Corporation realized annualized returns on average assets of 1.32% and average equity of 12.92%. The annualized return on average tangible equity, which is net income, as adjusted for intangible amortization (net of tax), divided by average shareholders’ equity, excluding goodwill and intangible assets, was 24.87% and 23.93% for the quarter and six months ended June 30, 2006, respectively.

The increase in net income compared to the second quarter of 2005 resulted from a $22.9 million, or 22.9%, increase in net interest income due primarily to external growth through acquisitions, offset by a decline in net interest margin. The increase in net interest income was also offset by a $2.3 million decrease in other income, a $12.6 million increase in other expenses and a $2.8 million increase in income taxes.

For the first half of 2006, the increase in net income compared to the first half of 2005 resulted from a $39.7 million, or 20.0%, increase in net interest income also due primarily to acquisitions, offset by a slight decline in net interest margin and an increase in other expenses of $26.8 million. The increase in earnings was further offset by a $3.5 million increase in income taxes and a $1.6 million decrease in other income.

The following summarizes some of the more significant factors that influenced the Corporation’s results for the three and six months ended June 30, 2006.

Interest Rates – Changes in the interest rate environment generally impact both the Corporation’s net interest income and certain components of its non-interest income. The interest rate environment refers to the level of rates and the slope of the U. S. Treasury yield curve, which plots the yields on treasury issues over various maturity periods. Typically, the shape of the yield curve is upward sloping, with longer-term rates exceeding short-term rates. However, during the three and six months ended June 30, 2006, the yield curve was relatively flat, with minimal differences between long and short-term rates, resulting in a negative impact to the Corporation’s net interest income.

Floating rate loans, short-term borrowings and savings and time deposit rates are generally influenced by short-term rates. The Federal Reserve Board (FRB) raised the Federal funds rate eight times since June 30, 2005, for a total increase of 200 basis points (from 3.25% to 5.25%). The Corporation’s prime lending rate had a corresponding increase, from 6.25% to 8.25%, resulting in an increase in the rates on floating rate loans as well as the rates on new fixed-rate loans. However, the increase in short-term rates also resulted in increased funding costs, with short-term borrowings immediately repricing to higher rates and deposit rates – although more discretionary – increasing due to competitive pressures. In addition, as rates have increased, customers have begun to shift funds from lower rate core demand and savings accounts to fixed rate certificates of deposit in order to lock into higher rates. The increase in rates on deposits and borrowings was more pronounced than loans and other earning assets and, as a result, the Corporation realized a decline in net interest margin in the three and six months ended June 30, 2006 compared to 2005.

With respect to longer-term rates, the 10-year treasury yield, which is a common benchmark for evaluating residential mortgage rates, increased to 5.15% at June 30, 2006, as compared to 3.94% at June 30, 2005. Higher mortgage rates have resulted in slower refinance activity, origination volumes and lower margins and, therefore, lower total net gains for the Corporation on fixed-rate residential mortgages which are generally sold in the secondary market.

The Corporation manages its risk associated with changes in interest rates through the techniques described in the “Market Risk” section of Management’s Discussion.

Acquisitions – In February 2006, the Corporation acquired Columbia Bancorp (Columbia), of Columbia, Maryland, a $1.3 billion bank holding company whose primary subsidiary was The Columbia Bank. In July 2005, the Corporation acquired SVB Financial Services, Inc. (SVB) of Somerville, New Jersey, a $530 million bank holding company whose primary subsidiary was Somerset Valley Bank. Results for 2006 in comparison to 2005 were impacted by these acquisitions, as documented in the appropriate sections of Management’s Discussion.

Acquisitions have long been a supplement to the Corporation’s internal growth. These recent acquisitions provide the opportunity for additional growth, as they will allow the Corporation’s existing products and services to be sold in new markets. The Corporation’s acquisition strategy focuses on high growth areas with strong market demographics and targets organizations that have a comparable corporate culture, strong performance and good asset quality, among other factors. Under the Corporation’s “super-community” banking philosophy, acquired organizations generally retain their status as separate legal entities, unless consolidation with an existing affiliate bank is practical. Back office functions are generally consolidated to maximize efficiencies.

Merger and acquisition activity in the financial services industry has been very competitive in recent years, as evidenced by the prices paid for certain acquisitions. While the Corporation has been an active acquirer, management is committed to basing its pricing on rational economic models. Management will continue to focus on generating growth in the most cost-effective manner.

Merger and acquisition activity has also impacted the Corporation’s capital and liquidity. In order to complete acquisitions, the Corporation implemented strategies to maintain appropriate levels of capital and to provide necessary cash resources. In January 2006, the Corporation issued $154.6 million of junior subordinated deferrable interest debentures in order to fund the Columbia acquisition. See additional information in the “Liquidity” section of Management’s Discussion.

Earning Assets – The Corporation’s interest-earning assets increased from 2005 to 2006 through a combination of acquisitions and internal loan growth.

During the second quarter of 2006, the Corporation experienced a slight shift in its composition of interest-earning assets from investments (21.8% of total average interest-earning assets in 2006, compared to 23.3% in 2005) to loans (76.1% in 2006, compared to 74.0% in 2005). For the six months ended June 30, 2006, a similar shift in the composition of interest-earning assets from investments (22.2% in 2006, compared to 23.6% in 2005) to loans (75.7% in 2006, compared to 74.1% in 2005) occurred. The movement to higher-yielding loans has mitigated some of the factors that have had a negative effect on the Corporation’s net interest income and net interest margin. Slower growth in loans could result in a future shift in the composition of interest-earning assets from loans to investments.

Asset Quality – Asset quality refers to the underlying credit characteristics of borrowers and the likelihood that defaults on contractual payments will result in charge-offs of account balances. Asset quality is influenced by economic conditions and other factors, but can be managed through conservative underwriting and sound collection policies and procedures.

The Corporation continued to maintain excellent asset quality throughout the first half of 2006, attributable to its credit culture and underwriting policies as well as general economic conditions.

Annualized net charge-offs to average loans were consistent at 0.02% in the second quarter and first half of 2006 and 2005. While overall asset quality has remained strong, deterioration in quality of one or several significant accounts could have a detrimental impact and result in losses that may not be foreseeable based on current information. In addition, rising interest rates could increase the total payments of borrowers and could have a negative impact on the ability of some to pay according to the terms of their loans.

Equity Markets – As noted in the “Market Risk” section of Management’s Discussion, equity valuations can have an impact on the Corporation’s financial performance. In particular, bank stocks account for a significant portion of the Corporation’s equity investment portfolio. Historically, gains on sales of these equities have been a recurring component of the Corporation’s earnings, although realized gains have decreased in recent periods. Declines in bank stock portfolio values could have a detrimental impact on the Corporation’s ability to recognize gains in the future.

Quarter Ended June 30, 2006 versus Quarter Ended June 30, 2005

Results for the second quarter of 2006 compared to the results of the second quarter of 2005 were impacted by the February 2006 acquisition of Columbia and the July 2005 acquisition of SVB, whose results are included in 2006 amounts, but not in 2005.

Net Interest Income

Net interest income increased $22.9 million, or 22.9%, to $122.9 million in 2006 from $99.9 million in 2005. The increase was due to average balance growth, with total interest-earning assets increasing 23.7%, offset by a slightly lower net interest margin. The average fully taxable-equivalent (FTE) yield on interest-earning assets increased 91 basis points (a 15.7% increase) over 2005 while the cost of interest-bearing liabilities increased 107 basis points (a 46.7% increase). Due to the more pronounced increase in costs of interest-bearing liabilities, the net interest margin decreased two basis points. The Corporation continues to manage its asset/liability position and interest rate risk through the methods as described in the “Market Risk” section of Management’s Discussion.

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

		Three months ended June 30
		2006												2005
		Average								Yield/				Average								Yield/
		Balance				Interest				Rate				Balance				Interest				Rate
ASSETS
Interest-earning assets:
Loans and leases (1)		$	9,846,025			$	181,019				7.37	%		$	7,743,791			$	123,263				6.38	%
Taxable investment securities (2)			2,242,945				23,564				4.20				1,966,738				18,257				3.72
Tax-exempt investment securities (2)			430,246				5,200				4.83				341,044				4,227				4.96
Equity securities (2)			152,210				1,740				4.58				131,002				1,341				4.11
Total investment securities			2,825,401				30,504				4.32				2,438,784				23,825				3.92
Loans held for sale			222,103				4,006				7.21				232,448				3,516				6.05
Other interest-earning assets			50,422				592				4.69				47,819				348				2.92
Total interest-earning assets			12,943,951				216,121				6.70	%			10,462,842				150,952				5.79	%
Noninterest-earning assets:
Cash and due from banks			335,009												342,592
Premises and equipment			183,587												152,123
Other assets			862,739												552,859
Less: Allowance for loan losses			(106,727	)											(91,209	)
Total Assets		$	14,218,559											$	11,419,207
LIABILITIES AND EQUITY
Interest-bearing liabilities:
Demand deposits		$	1,672,116			$	6,258				1.50	%		$	1,484,772			$	3,309				0.89	%
Savings deposits			2,386,287				12,113				2.03				1,986,909				5,859				1.18
Time deposits			4,082,429				40,625				3.99				3,014,871				21,936				2.92
Total interest-bearing deposits			8,140,832				58,996				2.91				6,486,552				31,104				1.92
Short-term borrowings			1,602,894				18,427				4.56				1,180,975				7,914				2.66
Long-term debt			1,010,744				12,932				5.13				843,727				9,668				4.60
Total interest-bearing liabilities			10,754,470				90,355				3.36	%			8,511,254				48,686				2.29	%
Noninterest-bearing liabilities:
Demand deposits			1,850,991												1,567,611
Other			173,213												139,921
Total Liabilities			12,778,674												10,218,786
Shareholders’ equity			1,439,885												1,200,421
Total Liabilities and Shareholders’ Equity		$	14,218,559											$	11,419,207
Net interest income/net interest margin (FTE)							125,766				3.90	%							102,266				3.92	%
Tax equivalent adjustment							(2,915	)											(2,341	)
Net interest income						$	122,851											$	99,925

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

		2006 vs. 2005
		Increase (decrease) due
		To change in
		Volume				Rate				Net
			(in thousands)
Interest income on:
Loans and leases		$	36,765			$	20,991			$	57,756
Taxable investment securities			2,766				2,541				5,307
Tax-exempt investment securities			1,088				(115	)			973
Equity securities			234				165				399
Loans held for sale			(162	)			652				490
Other interest-earning assets			20				224				244
Total interest income		$	40,711			$	24,458			$	65,169
Interest expense on:
Demand deposits		$	462			$	2,487			$	2,949
Savings deposits			1,376				4,878				6,254
Time deposits			9,168				9,521				18,689
Short-term borrowings			3,499				7,014				10,513
Long-term debt			2,054				1,210				3,264
Total interest expense		$	16,559			$	25,110			$	41,669

Interest income increased $65.2 million, or 43.2%, primarily due to increases in average balances of interest-earning assets and partially due to increases in rates. Interest income increased $40.7 million as a result of a $2.5 billion, or 23.7%, increase in average balances, while an increase of $24.5 million was realized from the 91 basis point increase in rates.

The increase in average interest-earning assets was primarily due to loan growth. Average loans increased $2.1 billion, or 27.1%. The following summarizes the growth in average loans, by type:

		Three months ended
		June 30								Increase
		2006				2005				$				%
						(dollars in thousands)
Commercial – industrial and financial		$	2,466,241			$	1,970,926			$	495,315				25.1	%
Commercial – agricultural			325,409				319,853				5,556				1.7
Real estate – commercial mortgage			3,039,417				2,537,606				501,811				19.8
Real estate – residential mortgage and home equity			2,046,953				1,678,623				368,330				21.9
Real estate – construction			1,373,038				691,509				681,529				98.6
Consumer			518,714				482,178				36,536				7.6
Leasing and other			76,253				63,096				13,157				20.9
Total		$	9,846,025			$	7,743,791			$	2,102,234				27.1	%

The acquisitions of Columbia and SVB contributed approximately $1.4 billion to the increase in average balances. The following table presents the average balance impact of acquisitions, by type:

		Three months ended
		June 30
		2006				2005
		(in thousands)
Commercial — industrial and financial		$	357,295			$	—
Real estate — commercial mortgage			274,592				—
Real estate — residential mortgage and home equity			273,542				—
Real estate — construction			459,666				—
Consumer			4,676				—
Leasing and other			1,231				—
Total		$	1,371,002			$	—