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 March 31, 2007, 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		(I.R.S. Employer
incorporation or organization)		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 – 173,172,000 shares outstanding as of April 30, 2007.

 

 

FULTON FINANCIAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2007

INDEX

Description		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
(a) Consolidated Balance Sheets — March 31, 2007 and December 31, 2006			3
(b) Consolidated Statements of Income — Three months ended March 31, 2007 and 2006			4
(c) Consolidated Statements of Shareholders’ Equity and Comprehensive Income — Three months ended March 31, 2007 and 2006			5
(d) Consolidated Statements of Cash Flows — Three months ended March 31, 2007 and 2006			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			27
Item 4. Controls and Procedures			30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			31
Item 1A. Risk Factors			31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			32
Item 3. Defaults Upon Senior Securities			32
Item 4. Submission of Matters to a Vote of Security Holders			32
Item 5. Other Information			32
Item 6. Exhibits			32
Signatures			33
Exhibit Index			34
Certifications			35
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
CERTIFICATION OF CHIEF FINANCIAL OFFICER
CERTIFICATION OF CEO PURSUANT TO 18 U.S.C. SECTION 1350
CERTIFICATION OF CFO PURSUANT TO 18 U.S.C. SECTION 1350

Item 1. Financial Statements

FULTON FINANCIAL CORPORATION

		March 31
		2007				December 31
		(unaudited)				2006
ASSETS
Cash and due from banks		$	344,969			$	355,018
Interest-bearing deposits with other banks			12,961				27,529
Federal funds sold			4,716				659
Loans held for sale			206,422				239,042
Investment securities:
Held to maturity (estimated fair value of $12,357 in 2007 and $12,534 in 2006)			12,424				12,524
Available for sale			2,609,184				2,865,714
Loans, net of unearned income			10,448,175				10,374,323
Less: Allowance for loan losses			(107,899	)			(106,884	)
Net Loans			10,340,276				10,267,439
Premises and equipment			190,442				191,401
Accrued interest receivable			67,580				71,825
Goodwill			626,335				626,042
Intangible assets			35,750				37,733
Other assets			219,277				224,038
Total Assets		$	14,670,336			$	14,918,964
LIABILITIES
Deposits:
Noninterest-bearing		$	1,795,265			$	1,831,419
Interest-bearing			8,440,315				8,401,050
Total Deposits			10,235,580				10,232,469
Short-term borrowings:
Federal funds purchased			442,362				1,022,351
Other short-term borrowings			696,081				658,489
Total Short-Term Borrowings			1,138,443				1,680,840
Accrued interest payable			63,484				61,392
Other liabilities			134,615				123,805
Federal Home Loan Bank advances and long-term debt			1,576,283				1,304,148
Total Liabilities			13,148,405				13,402,654
SHAREHOLDERS’ EQUITY
Common stock, $2.50 par value, 600 million shares authorized, 191.3 million shares issued in 2007 and 190.8 million shares issued in 2006			478,163				476,987
Additional paid-in capital			1,249,549				1,246,823
Retained earnings			108,423				92,592
Accumulated other comprehensive loss			(36,826	)			(39,091	)
Treasury stock, 18.2 million shares in 2007 and 17.1 million shares in 2006, at cost			(277,378	)			(261,001	)
Total Shareholders’ Equity			1,521,931				1,516,310
Total Liabilities and Shareholders’ Equity		$	14,670,336			$	14,918,964

See Notes to Consolidated Financial Statements

FULTON FINANCIAL CORPORATION AND SUBSIDIARIES

		Three Months Ended
		March 31
		2007				2006
INTEREST INCOME
Loans, including fees		$	195,557			$	161,114
Investment securities:
Taxable			24,619				22,539
Tax-exempt			4,281				3,533
Dividends			1,919				1,345
Loans held for sale			3,684				3,458
Other interest income			596				663
Total Interest Income			230,656				192,652
INTEREST EXPENSE
Deposits			71,208				50,190
Short-term borrowings			19,054				15,306
Long-term debt			18,619				12,113
Total Interest Expense			108,881				77,609
Net Interest Income			121,775				115,043
PROVISION FOR LOAN LOSSES			957				1,000
Net Interest Income After Provision for Loan Losses			120,818				114,043
OTHER INCOME
Investment management and trust services			9,810				10,032
Service charges on deposit accounts			10,627				10,247
Other service charges and fees			7,375				6,654
Gains on sales of mortgage loans			5,393				4,772
Investment securities gains			1,782				2,665
Other			4,078				2,237
Total Other Income			39,065				36,607
OTHER EXPENSES
Salaries and employee benefits			56,293				49,929
Net occupancy expense			10,196				8,589
Equipment expense			3,715				3,593
Data processing			3,202				2,909
Advertising			2,409				2,253
Intangible amortization			1,983				1,852
Other			23,107				18,891
Total Other Expenses			100,905				88,016
Income Before Income Taxes			58,978				62,634
INCOME TAXES			17,850				18,755
Net Income		$	41,128			$	43,879
PER-SHARE DATA:
Net income (basic)		$	0.24			$	0.26
Net income (diluted)			0.24				0.25
Cash dividends			0.1475				0.138

See Notes to Consolidated Financial Statements

FULTON FINANCIAL CORPORATION

																		Accumulated
		Number of								Additional								Other
		Shares				Common				Paid-in				Retained				Comprehensive				Treasury
		Outstanding				Stock				Capital				Earnings				Income (Loss)				Stock				Total
										(dollars in thousands)
Balance at December 31, 2006			173,648,000			$	476,987			$	1,246,823			$	92,592			$	(39,091	)		$	(261,001	)		$	1,516,310
Comprehensive income:
Net income															41,128												41,128
Unrealized gain on securities (net of $1.9 million tax effect)																			3,537								3,537
Unrealized loss on derivative financial instruments (net of $103,000 tax effect)																			(191	)							(191	)
Less — reclassification adjustment for gains included in net income (net of $624,000 tax expense)																			(1,158	)							(1,158	)
Amortization of unrecognized pension costs (net of $41,000 tax effect)																			77								77
Total comprehensive income																											43,393
Stock issued, including related tax benefits			474,000				1,176				2,218																3,394
Stock-based compensation awards											508																508
Cumulative effect of FIN 48 adoption															220												220
Acquisition of treasury stock			(1,039,000	)																			(16,377	)			(16,377	)
Cash dividends — $0.1475 per share															(25,517	)											(25,517	)
Balance at March 31, 2007			173,083,000			$	478,163			$	1,249,549			$	108,423			$	(36,826	)		$	(277,378	)		$	1,521,931
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															43,879												43,879
Unrealized loss on securities (net of $3.4 million tax effect)																			(6,297	)							(6,297	)
Unrealized loss on derivative financial instruments (net of $751,000 tax effect)																			(1,394	)							(1,394	)
Less — reclassification adjustment for gains included in net income (net of $933,000 tax expense)																			(1,733	)							(1,733	)
Total comprehensive income																											34,455
Stock issued, including related tax benefits			597,000				1,424				3,307																4,731
Stock-based compensation awards											344																344
Stock issued for acquisition of Columbia			8,619,000				20,523				133,608																154,131
Acquisition of treasury stock			(51,000	)																			(830	)			(830	)
Accelerated share repurchase settlement																							(3,423	)			(3,423	)
Cash dividends — $0.138 per share															(24,040	)											(24,040	)
Balance at March 31, 2006			174,033,000			$	452,774			$	1,133,967			$	158,368			$	(51,709	)		$	(245,061	)		$	1,448,339

See Notes to Consolidated Financial Statements

FULTON FINANCIAL CORPORATION

		Three Months Ended
		March 31
		2007				2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income		$	41,128			$	43,879
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			957				1,000
Depreciation and amortization of premises and equipment			4,336				4,009
Net amortization of investment security premiums			563				1,015
Investment securities gains			(1,782	)			(2,665	)
Net decrease in loans held for sale			32,620				40,627
Amortization of intangible assets			1,983				1,852
Stock-based compensation			508				344
Excess tax benefits from stock-based compensation			(114	)			(584	)
Decrease (increase) in accrued interest receivable			4,245				(228	)
Decrease (increase) in other assets			2,026				(24,109	)
Increase in accrued interest payable			2,092				6,441
Increase in other liabilities			8,594				17,180
Total adjustments			56,028				44,882
Net cash provided by operating activities			97,156				88,761
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale			271,483				64,225
Proceeds from maturities of securities held to maturity			220				4,355
Proceeds from maturities of securities available for sale			103,032				197,541
Purchase of securities held to maturity			(122	)			—
Purchase of securities available for sale			(109,428	)			(319,199	)
Decrease in short-term investments			10,511				13,129
Net increase in loans			(73,794	)			(228,950	)
Net cash paid for acquisition			—				(105,266	)
Net purchase of premises and equipment			(3,377	)			(7,966	)
Net cash provided by (used in) investing activities			198,525				(382,131	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in demand and savings deposits			(48,777	)			45,118
Net increase in time deposits			51,888				134,953
Additions to long-term debt			290,000				172,642
Repayments of long-term debt			(17,865	)			(54,323	)
(Decrease) increase in short-term borrowings			(542,397	)			47,336
Dividends paid			(25,596	)			(22,766	)
Net proceeds from issuance of common stock			3,280				4,147
Excess tax benefits from stock-based compensation			114				584
Acquisition of treasury stock			(16,377	)			(4,253	)
Net cash (used in) provided by financing activities			(305,730	)			323,438
Net (Decrease) Increase in Cash and Due From Banks			(10,049	)			30,068
Cash and Due From Banks at Beginning of Period			355,018				368,043
Cash and Due From Banks at End of Period		$	344,969			$	398,111
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest		$	106,789			$	71,168
Income taxes			1,117				2,500

See Notes to Consolidated Financial Statements

FULTON FINANCIAL CORPORATION

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 (U.S. GAAP) 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. GAAP for complete financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities as of the date of the financial statements as well as revenues and expenses during the period. Actual results could differ from those estimates. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.

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 2.2 million and 1.4 million anti-dilutive stock options for the three months ended March 31, 2007 and 2006, respectively.

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
		March 31
		2007				2006
		(in thousands)
Weighted average shares outstanding (basic)			173,273				170,869
Impact of common stock equivalents			1,605				2,297
Weighted average shares outstanding (diluted)			174,878				173,166

Total comprehensive income was $43.4 million and $34.5 million for the three months ended March 31, 2007 and 2006, respectively.

NOTE C – 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 thirteen separate banks as of March 31, 2007, 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 D – Income Taxes

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 adopted the provisions of FIN 48 on January 1, 2007. As a result of adoption, the Corporation recognized a $220,000 decrease in existing reserves for unrecognized tax positions, which was accounted for as an increase to the January 1, 2007 balance of retained earnings.

As of the adoption date, the Corporation had unrecognized income tax benefits of $4.1 million, all of which if recognized, would impact the effective tax rate. Also as of the adoption date, the Corporation had $1.4 million in accrued interest related to unrecognized tax benefits. The Corporation recognizes interest accrued related to unrecognized tax benefits as components of income tax expense. Penalties, if incurred, would also be recognized in income tax expense. There have been no material changes to unrecognized tax benefits as of March 31, 2007.

The Corporation, or one of its subsidiaries, files income tax returns in the U.S. federal jurisdiction, and various states. In many cases, uncertain tax positions are related to tax years that remain subject to examination by the relevant taxable authorities. With few exceptions, the Corporation is no longer subject to U.S. Federal, state and local examinations by tax authorities for years before 2003.

NOTE E – Stock-Based Compensation

As required by Statement of Financial Accounting Standards No. 123R, “Share-Based Payment”, the fair value of equity awards to employees is recognized as compensation expense over the period during which employees are required to provide service in exchange for such awards. 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
		March 31
		2007				2006
		(in thousands)
Compensation expense		$	508			$	344
Tax benefit			(70	)			(133	)
Net income effect		$	438			$	211

Under the Option Plans, options are granted to key employees 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 become fully vested after a three-year cliff-vesting period. Certain events, as specified in the Option Plans and agreements, would result in the acceleration of the vesting period. As of March 31, 2007, the Option Plans had 14.9 million shares reserved for the future grants through 2013.

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 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. Certain other 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 quarter ended March 31:

		Pension Plan								Post-retirement Plan
		2007				2006				2007				2006
		(in thousands)
Service cost		$	626			$	609			$	108			$	143
Interest cost			925				864				142				185
Expected return on plan assets			(1,137	)			(1,057	)			(1	)			(1	)
Net amortization and deferral			175				202				(57	)			(80	)
Net periodic benefit cost		$	589			$	618			$	192			$	247

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 Frederick, Howard, Montgomery, Prince George’s and Baltimore Counties and Baltimore City. The total purchase price was approximately $306.0 million, including $154.2 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 allocation of the total purchase price 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.

NOTE H – Derivative Financial Instruments

As of March 31, 2007, 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 are similar and were committed to simultaneously. Under the terms of the swap agreements, the Corporation is the fixed rate receiver and the floating rate payer (generally tied to the three-month London Interbank Offering Rate, or LIBOR, a common index used for setting rates between financial institutions).

The interest rate swaps are classified as fair value hedges and both the interest rate swaps and the certificates of deposit are recorded at fair value, with changes in the fair values during the period recorded to other income or expense. For interest rate swaps accounted for as fair value hedges, ineffectiveness is the difference between the changes in the fair value of the interest rate swaps and the hedged items, in this case the certificates of deposit. The Corporation’s analysis of hedge effectiveness indicated they were highly effective as of March 31, 2007. For the quarter ended March 31, 2007, a net loss of $96,000 was recorded in other expense, representing the net impact of the change in fair values of the interest rate swaps and the certificates of deposit, compared to a net loss of $61,000 recorded for the quarter ended March 31, 2006.

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. The Corporation settled this derivative on its contractual maturity date in January 2006 with a total payment of $5.5 million to the counterparty, including a $1.4 million charge to other comprehensive loss (net of $751,000 tax effect) recorded 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 $120,000.

In February 2007, the Corporation entered into a forward-starting interest swap with a notional amount of $100.0 million in anticipation of the issuance of subordinated debt in April 2007. 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 March 31, 2007, $221,000 had been recorded as an other comprehensive loss representing the estimated fair value of the swap on that date, net of a $119,000 tax effect. The Corporation settled this derivative on its contractual maturity date in April 2007 with a total payment of $232,000 to the counterparty that resulted in an increase of $70,000 to other comprehensive income (net of $38,000 tax effect). 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 $14,000.

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:

		March 31
		2007				2006
		(in thousands)
Commitments to extend credit		$	4,547,736			$	4,268,227
Standby letters of credit			719,028				689,842
Commercial letters of credit			27,023				26,334

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.

During the first quarter of 2007, the Corporation recorded a contingent loss of $5.5 million related to losses that may be incurred due to the potential repurchase of approximately $34 million of residential mortgage loans and home equity loans originated and sold in the secondary market by the Corporation’s Resource Bank affiliate. Certain residential mortgage loans and home equity loans are sold to secondary market purchasers under standard representations and warranties regarding the origination of the loans, as well as a standard agreement to repurchase the loans under specified circumstances, including failure of the borrower to timely make any of the first three payments following the sale of the loan.

NOTE J – Stock Repurchases

The Corporation periodically repurchases shares of its common stock under repurchase plans approved by the Board of Directors. These repurchases have historically been through open market transactions and have complied with all regulatory restrictions on the timing and amount of such repurchases. Shares may also be repurchased through an “Accelerated Share Repurchase” Program (ASR), which allows shares to be purchased immediately from an investment bank. The investment bank, in turn, repurchases shares on the open market over a period that is determined by the average daily trading volume of the Corporation’s shares, among other factors, with a purchase price adjustment made between the parties at the end of the program based on the cost of shares purchased by the investment bank. In 2006, the Corporation settled an ASR related to an approved stock repurchase plan by paying $3.4 million to an investment bank.

In 2006, the Corporation’s Board of Directors approved a stock repurchase plan for 2.1 million shares through June 30, 2007. During the first quarter of 2007, the Corporation repurchased 1.0 million shares, representing the remaining shares available under this plan.

In April 2007, the Corporation’s Board of Directors approved a stock repurchase plan for 1.0 million shares through December 31, 2007. Repurchases under this plan are expected to occur through open market acquisitions.

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 entered into in October 2005. 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.

In May 2007, the Corporation issued $100.0 million of ten-year subordinated notes, which mature on May 1, 2017 and carry a fixed rate of 5.75% and an effective rate of approximately 5.95% as a result of issuance costs. Interest is paid semi-annually in May and November of each year.

NOTE L – New Accounting Standards

In September 2006, the FASB ratified Emerging Issues Task Force (EITF) 06-4, “Accounting for Deferred Compensation and Post-retirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements ” (EITF 06-4). EITF 06-4 addresses accounting for endorsement split-dollar life insurance arrangements that provide a benefit to an employee that extends to post-retirement periods. EITF 06-4 would require that the post-retirement benefit aspects of an endorsement-type split-dollar life insurance arrangement be recognized as a liability by the employer and that the obligation is not settled upon entering into an insurance arrangement. EITF 06-4 is effective for fiscal years beginning after December 15, 2007, or January 1, 2008 for the Corporation. The Corporation is currently evaluating the impact of EITF 06-4 on the consolidated financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurement” (Statement 157). Statement 157 defines fair value, establishes a framework for measuring fair value in U.S. GAAP, and expands disclosure requirements for fair value measurements. Statement 157 does not require any new fair value measurements and is effective for financial statements issued for fiscal years beginning after November 15, 2007, or January 1, 2008 for the Corporation. The Corporation is currently evaluating the impact of Statement 157 on the consolidated financial statements.

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

In March 2007, the FASB ratified EITF 06-10, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Collateral Assignment Split-Dollar Life Insurance Arrangements ” (EITF 06-10). EITF 06-10 addresses accounting for collateral assignment split-dollar life insurance arrangements that provide a benefit to an employee that extends to postretirement periods. EITF 06-10 provides guidance for determining the liability for the postretirement benefit aspects of collateral assignment-type split-dollar life insurance arrangements, as well as the recognition and measurement of the associated asset on the basis of the terms of the collateral assignment agreement. EITF 06-10 is effective for fiscal years beginning after December 15, 2007, or January 1, 2008 for the Corporation. The Corporation is currently evaluating the impact of EITF 06-10 on the consolidated financial statements.

NOTE M – Reclassifications

Certain amounts in the 2006 consolidated financial statements and notes have been reclassified to conform to the 2007 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 Corporation’s provision for loan losses and may reduce the Corporation’s net income.

•

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

•

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 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 77% of revenues for the quarter ended March 31, 2007. Growth in net interest income is dependent upon balance sheet growth and/or maintaining or increasing the net interest margin, which is net interest income 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 following table presents a summary of the Corporation’s earnings and selected performance ratios:

		Three months ended
		March 31
		2007				2006
Net income (in thousands)		$	41,128			$	43,879
Diluted net income per share		$	0.24			$	0.25
Annualized return on average assets			1.12	%			1.32	%
Annualized return on average equity			11.06	%			12.83	%
Annualized return on average tangible equity (1)			20.34	%			23.01	%
Net interest margin (2)			3.74	%			3.88	%

The $2.8 million, or 6.3%, decline in net income for the quarter ended March 31, 2007 was due to an increase in other expenses of $12.9 million, or 14.6%, offset by an increase in net interest income of $6.7 million, or 5.9%, and an increase in other income of $2.5 million, or 6.7%. The increase in other expenses was due to a number of factors, most notably, a $5.5 million contingent loss recorded during the first quarter of 2007 related to losses that may be incurred due to the repurchase of residential mortgage loans and home equity loans that had been originated and sold in the secondary market.

The increase in net interest income was due to external growth through acquisitions and interest recoveries from previously charged off loans, offset by the 14 basis point decline in net interest margin. The decrease in net interest margin was caused, in part, by deposits shifting from lower cost core demand and savings accounts to higher cost certificates of deposit. Interest recoveries totaled $3.7 million and $493,000 for the three months ended March 31, 2007 and 2006, respectively. Interest recoveries in the first quarter of 2007 were almost entirely due to a $3.4 million interest recovery related to one commercial mortgage loan.

The following summarizes some of the more significant factors that influenced the Corporation’s results for the three months ended March 31, 2007.

Interest Rates – Changes in the interest rate environment can impact both the Corporation’s net interest income and its non-interest income. The term “interest rate environment” generally refers to both the level of interest rates and the shape of the U. S. Treasury yield curve, which is a plot of the yields on treasury issues over various maturity periods. Typically, the shape of the yield curve is upward sloping, with longer-term rates exceeding short-term rates. For the past twelve months, the yield curve has remained relatively flat, and at times, downward sloping, with minimal differences between long and short-term rates, resulting in a negative impact to the Corporation’s net interest income and net interest margin.

Floating rate loans, short-term borrowings and savings and time deposit rates are generally influenced by short-term rates. The Federal Reserve Board (FRB) raised the Federal funds rate twice since March 31, 2006, for a total increase of 50 basis points (from 4.75% to 5.25%). The Corporation’s prime lending rate had a corresponding increase, from 7.75% to 8.25%, resulting in an increase in the rates on floating rate loans. More significantly, the increase in short-term rates also resulted in increased funding costs, with short-term borrowings immediately repricing to higher rates and deposit rates – although more discretionary – increasing due to competitive pressures. Additionally, as rates have increased, customers

have shifted funds from lower rate core demand and savings accounts to fixed rate certificates of deposit in order to lock into higher rates.

With respect to longer-term rates, the 10-year treasury yield, which is a common benchmark for evaluating residential mortgage rates, decreased to 4.65% at March 31, 2007, as compared to 4.86% at March 30, 2006. The decreasing yield on longer-term investments and the increasing yields on short-term rates have resulted in an inversion of the yield curve.

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

Interest-bearing Deposits – The Corporation’s interest-bearing deposits increased from 2006 to 2007 through a combination of acquisitions and internal growth.

During the first quarter of 2007, the Corporation experienced a shift from lower cost interest-bearing demand and savings deposit accounts (47.0% of total interest-bearing deposits in 2007, compared to 51.3% in 2006) to higher cost certificates of deposit (53.0% in 2007, compared to 48.7% in 2006). The shift to higher cost deposits, as well as increasing deposit rates, has resulted in a decline in net interest margin.

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 for the first quarter of 2007, attributable to its credit culture and underwriting policies. The Corporation experienced annualized net recoveries to average loans of less than one basis point in the first quarter of 2007 in comparison to annualized net charge-offs of 0.03% in the first quarter of 2006.

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. Finally, decreases in the values of underlying collateral as a result of market or economic conditions could affect asset quality.

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. Declines in bank stock portfolio values could have a detrimental impact on the Corporation’s ability to recognize gains in the future.

Earning Assets – The Corporation’s interest-earning assets increased from 2006 to 2007 through a combination of acquisitions and internal loan growth.

During the first quarter of 2007, the Corporation experienced a slight shift in its composition of interest-earning assets from investments (21.1% of total average interest-earning assets in 2007, compared to 22.6% in 2006) to loans (77.0% in 2007, compared to 75.3% in 2006). 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.

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.

Results for the first quarter of 2007 in comparison to the first quarter of 2006 were impacted due to a full three-month contribution by Columbia in 2007, compared to a two-month contribution in 2006.

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

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

Net Interest Income

Net interest income increased $6.7 million, or 5.9%, to $121.8 million in 2007 from $115.0 million in 2006. The increase was due to average balance growth, with total interest-earning assets increasing 10.4%, offset by a lower net interest margin. The average FTE yield on interest-earning assets increased 54 basis points (an 8.4% increase) over 2006 while the cost of interest-bearing liabilities increased 75 basis points (a 24.2% increase).

The following table provides a comparative average balance sheet and net interest income analysis for the first quarter of 2007 as compared to the same period in 2006. 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 March 31
		2007												2006
		Average								Yield/				Average								Yield/
		Balance				Interest				Rate				Balance				Interest				Rate
ASSETS
Interest-earning assets:
Loans and leases (1)		$	10,414,698			$	196,558				7.65	%		$	9,227,642			$	161,883				7.11	%
Taxable investment securities (2)			2,190,230				24,619				4.50				2,186,073				22,539				4.13
Tax-exempt investment securities (2)			492,709				6,228				5.06				435,959				5,185				4.76
Equity securities (2)			178,488				2,129				4.79				145,011				1,559				4.33
Total investment securities			2,861,427				32,976				4.61				2,767,043				29,283				4.24
Loans held for sale			207,856				3,684				7.09				199,441				3,458				6.94
Other interest-earning assets			48,328				596				4.97				63,388				663				4.23
Total interest-earning assets			13,532,309				233,814				6.99	%			12,257,514				195,287				6.45	%
Noninterest-earning assets:
Cash and due from banks			315,969												358,481
Premises and equipment			192,002												177,761
Other assets			899,843												786,918
Less: Allowance for loan losses			(107,683	)											(101,999	)
Total Assets		$	14,832,440											$	13,478,675
LIABILITIES AND EQUITY
Interest-bearing liabilities:
Demand deposits		$	1,657,714			$	6,904				1.69	%		$	1,666,506			$	5,575				1.36	%
Savings deposits			2,295,822				13,811				2.44				2,272,771				10,561				1.88
Time deposits			4,457,363				50,493				4.59				3,744,503				34,054				3.69
Total interest-bearing deposits			8,410,899				71,208				3.43				7,683,780				50,190				2.65
Short-term borrowings			1,552,495				19,054				4.93				1,487,295				15,306				4.13
Long-term debt			1,450,016				18,619				5.14				995,478				12,113				4.93
Total interest-bearing liabilities			11,413,410				108,881				3.85	%			10,166,553				77,609				3.10	%
Noninterest-bearing liabilities:
Demand deposits			1,721,135												1,765,897
Other			189,297												159,401
Total Liabilities			13,323,842												12,091,851
Shareholders’ equity			1,508,598												1,386,824
Total Liabilities and Shareholders’ Equity		$	14,832,440											$	13,478,675
Net interest income/net interest margin (FTE)							124,933				3.74	%							117,678				3.88	%
Tax equivalent adjustment							(3,158	)											(2,635	)
Net interest income						$	121,775											$	115,043

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

		2007 vs. 2006
		Increase (decrease) due
		To change in
		Volume				Rate				Net
		(in thousands)
Interest income on:
Loans and leases		$	21,818			$	12,857			$	34,675
Taxable investment securities			43				2,037				2,080
Tax-exempt investment securities			708				335				1,043
Equity securities			391				179				570
Loans held for sale			151				75				226
Other interest-earning assets			(172	)			105				(67	)
Total interest income		$	22,939			$	15,588			$	38,527
Interest expense on:
Demand deposits		$	(29	)		$	1,358			$	1,329
Savings deposits			108				3,142				3,250
Time deposits			7,178				9,261				16,439
Short-term borrowings			697				3,051				3,748
Long-term debt			5,969				537				6,506
Total interest expense		$	13,923			$	17,349			$	31,272

Interest income increased $38.5 million, or 19.7%, due to increases in both average balances of interest-earning assets and rates. Interest income increased $22.9 million as a result of a $1.3 billion, or 10.4%, increase in average balances, while an increase of $15.6 million was realized from a 54 basis point increase in rates. Columbia contributed $11.4 million to the increase in interest income.

The increase in average interest-earning assets was primarily due to loan growth, and partially due to investment growth. The following summarizes the growth in average loans, by type:

		Three months ended
		March 31								Increase (decrease)
		2007				2006				$				%
						(dollars in thousands)
Commercial – industrial and financial		$	2,670,641			$	2,278,597			$	392,044				17.2	%
Commercial – agricultural			360,601				327,929				32,672				10.0
Real estate – commercial mortgage			3,239,179				2,944,676				294,503				10.0
Real estate – residential mortgage			701,918				589,665				112,253				19.0
Real estate – home equity			1,441,741				1,333,897				107,844				8.1
Real estate – construction			1,396,527				1,163,368				233,159				20.0
Consumer			516,335				518,330				(1,995	)			(0.4	)
Leasing and other			87,756				71,180				16,576				23.3
Total		$	10,414,698			$	9,227,642			$	1,187,056				12.9	%

Loan growth was particularly strong in the commercial loan and commercial mortgage loan categories, which together increased $719.2 million, or 13.0%, with the Columbia acquisition contributing $162.8 million to the increase. The Corporation experienced internal commercial loan growth throughout almost all commercial loan types, while the commercial mortgage loan growth was primarily in adjustable rate mortgages. Additional growth was due to an increase in construction loans due primarily to the Columbia acquisition, which contributed $161.8 million to the $233.2 million increase. Finally, residential mortgage loans and home equity loans increased $220.1 million, or 11.4%. This growth was primarily due to internal growth across both categories and partially due to the Columbia acquisition, which added $90.7 million to the increase.

The average yield on loans during the first quarter of 2007 was 7.65%, a 54 basis point, or 7.6%, increase over 2006. This mainly reflects the impact of floating and adjustable rate loans, which reprice to higher rates when interest rates rise, as they have over the past twelve months.

Average investment securities increased $94.4 million, or 3.4%. Excluding the impact of the Columbia acquisition, average investments decreased $51.6 million, or 1.9%. This decrease was due to the sale of approximately $250 million of lower yielding investment securities during the first quarter of 2007, at a total gain of $777,000, whose proceeds were used to repay higher cost Federal funds purchased. The average yield on investment securities increased 37 basis points from 4.24% in 2006 to 4.61% in 2007.

The increase in interest income (FTE) was largely offset by an increase in interest expense of $31.3 million, or 40.3%, to $108.9 million in the first quarter of 2007 from $77.6 million in the first quarter of 2006. The increase in interest expense was partially due to a 75 basis point, or 24.2%, increase in the cost of total interest-bearing liabilities in the first quarter of 2007 in comparison to the same period in 2006. The remaining increase was due to a $1.2 billion, or 12.3%, increase in interest-bearing liabilities, due primarily to internal growth and partially due to the Columbia acquisition contributing $6.8 million to the increase.

The following table summarizes the growth in average deposits, by type:

		Three months ended
		March 31								Increase (decrease)
		2007				2006				$				%
						(dollars in thousands)
Noninterest-bearing demand		$	1,721,135			$	1,765,897			$	(44,762	)			(2.5	)%
Interest-bearing demand			1,657,714				1,666,506				(8,792	)			(0.5	)
Savings			2,295,822				2,272,771				23,051				1.0
Time deposits			4,457,363				3,744,503				712,860				19.0
Total		$	10,132,034			$	9,449,677			$	682,357				7.2	%

The Corporation experienced significant growth in time deposits, of which $306.3 million was due to the Columbia acquisition. The remaining time deposit increase of $406.5 million was due to favorable interest rates making time deposits an attractive investment alternative for customers. The net decrease in noninterest-bearing and interest-bearing demand and savings accounts of $30.5 million, or 0.5%, was mitigated by a $135.9 million increase related to external growth from the Columbia acquisition. The internal decrease of $166.4 million in noninterest-bearing and interest-bearing demand and savings accounts was due to customers shifting from these accounts to higher yielding time deposits.

Average borrowings increased $519.7 million, or 20.9%, from the first quarter of 2006. Excluding the impact of the Columbia acquisition, average short-term borrowings decreased $20.8 million, or 1.5%, to $1.3 billion, while average long-term debt increased $432.2 million, or 44.1%, to $1.4 billion. The increase in long-term debt was primarily due to an increase in FHLB advances as longer-term rates were

locked, and partially due to the average balance impact of the January 2006 issuance of $154.6 million of junior subordinated deferrable interest debentures. See Note K, “Long-term Debt” in the Notes to Consolidated Financial Statements for further discussion.

Provision and Allowance for Loan Losses

The following table presents ending balances of loans outstanding (net of unearned income):

		March 31				December 31				March 31
		2007				2006				2006
		(in thousands)
Commercial – industrial and financial		$	2,730,456			$	2,603,224			$	2,412,836
Commercial – agricultural			365,036				361,962				325,140
Real-estate – commercial mortgage			3,257,914				3,213,809				3,020,376
Real-estate – residential mortgage			699,528				696,836				612,584
Real-estate – home equity			1,425,948				1,455,439				1,406,076
Real-estate – construction			1,377,791				1,428,809				1,343,364
Consumer			514,007				523,066				516,789
Leasing and other			77,495				91,178				81,545
		$	10,448,175			$	10,374,323			$	9,718,710

Approximately $4.6 billion, or 44.4%, of the Corporation’s loan portfolio was in commercial mortgage and construction loans at March 31, 2007, compared to 44.9% at March 31, 2006. While the Corporation does not have a concentration of credit risk with any single borrower, repayments on loans in these portfolios can be negatively influenced by decreases in real estate values. The Corporation mitigates this risk through stringent underwriting policies and procedures.

The following table presents the activity in the Corporation’s allowance for loan losses:

		Three months ended
		March 31
		2007				2006
		(dollars in thousands)
Loans outstanding at end of period (net of unearned)		$	10,448,175			$	9,718,710
Daily average balance of loans and leases		$	10,414,698			$	9,227,642
Balance at beginning of period		$	106,884			$	92,847
Loans charged off:
Commercial – financial and agricultural			361				879
Real estate – mortgage			42				81
Consumer			790				461
Leasing and other			167				79
Total loans charged off			1,360				1,500
Recoveries of loans previously charged off:
Commercial – financial and agricultural			770				381
Real estate – mortgage			64				94
Consumer			393				331
Leasing and other			191				51
Total recoveries			1,418				857
Net loans (recovered) charged off			(58	)			643
Provision for loan losses			957				1,000
Allowance purchased			—				12,991
Balance at end of period		$	107,899			$	106,195
Net (recoveries) charge-offs to average loans (annualized)			—				0.03	%
Allowance for loan losses to loans outstanding			1.03	%			1.09	%