UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 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        

Commission file number 0-12126

FRANKLIN FINANCIAL SERVICES CORPORATION
(Exact name of registrant as specified in its charter)

 

 

20 SOUTH MAIN STREET (P.O. BOX 6010), CHAMBERSBURG,PA 17201-0819
(Address of principal executive offices)

717/264-6116
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x   No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.

Large accelerated filer o                            Accelerated filer x                            Non-accelerated filer o

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

There were 3,836,060 outstanding shares of the Registrant’s common stock as of September 30, 2006.

INDEX

PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
	Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005
	Consolidated Statements of Income for the Three and Nine Months ended September 30, 2006 and 2005
	Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months ended September 30, 2006 and 2005
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006 and 2005
	Notes to Consolidated Financial Statements
Item 2 - Management’s Discussion and Analysis of
	Financial Condition and Results of Operations
Item 3 – Quantitative and Qualitative Disclosures about Market Risk
Item 4 – Controls and Procedures
PART II - OTHER INFORMATION
SIGNATURE PAGE
EXHIBITS

 

2

Part I FINANCIAL INFORMATION

Item 1 Financial Statements

Franklin Financial Services Corporation

Consolidated Balance Sheets

(Amounts in thousands, except per share data)

 

		September 30			December 31
		2006			2005
		(unaudited)
Assets
Cash and due from banks		$	19,091		$	19,706
Fed funds sold		6,825			4,000
Interest bearing deposits in other banks and fed funds sold		3,415			1,032
Total cash and cash equivalents		29,331			24,738
Investment securities available for sale		183,652			164,060
Restricted stock		2,693			3,184
Loans held for sale		4,154			1,328
Loans		513,621			397,190
Allowance for loan losses		(6,940		)	(5,402		)
Net Loans		506,681			391,788
Premises and equipment, net		12,815			8,897
Bank owned life insurance		17,403			11,249
Goodwill		9,113			—
Other intangible assets		3,177			139
Other assets		18,124			15,974
Total Assets		$	787,143		$	621,357
Liabilities
Deposits
Demand (non-interest bearing)		$	90,818		$	77,354
Savings and interest checking		330,321			254,722
Time		175,541			124,723
Total Deposits		596,680			456,799
Securities sold under agreements to repurchase		73,152			52,069
Short term borrowings		—			4,000
Long term debt		39,151			48,546
Other liabilities		6,809			4,273
Total Liabilities		715,792			565,687
Shareholders’ equity
Common stock $1 par value per share, 15,000 shares authorized with 4,299 and 3,806 shares issued and 3,836 and 3,352 shares outstanding at September 30, 2006 and December 31, 2005 , respectively.		4,299			3,806
Capital stock without par value, 5,000 shares authorized with no shares issued or outstanding		—			—
Additional paid in capital		32,179			19,907
Retained earnings		41,516			38,638
Accumulated other comprehensive income		1,135			801
Treasury stock, 463 shares and 436 shares at cost at September 30, 2006 and December 31, 2005, respectively		(7,778		)	(7,482		)
Total shareholders’ equity		71,351			55,670
Total Liabilities and Shareholders’ Equity		$	787,143		$	621,357

 

The accompanying notes are an integral part of these financial statements

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Franklin Financial Services Corporation

Consolidated Statements of Income (unaudited)

(Amounts in thousands, except per share data)

 

		For the Three Months Ended						For the Nine Months Ended
		September 30						September 30
		2006			2005			2006			2005
Interest Income
Loans		$	9,165		$	6,018		$	22,911		$	16,681
Interest and dividends on investments:
Taxable interest		1,459			1,115			3,944			3,114
Tax exempt interest		509			445			1,487			1,330
Dividend income		85			56			230			189
Federal funds sold		309			83			504			176
Deposits and obligations of other banks		17			3			37			10
Total interest income		11,544			7,720			29,113			21,500
Interest Expense
Deposits		4,234			2,032			9,950			5,317
Securities sold under agreements to repurchase		968			464			2,288			1,001
Short term borrowings		—			5			27			58
Long term debt		522			736			1,669			2,159
Total interest expense		5,724			3,237			13,934			8,535
Net interest income		5,820			4,483			15,179			12,965
Provision for loan losses		—			120			240			306
Net interest income after provision for loan losses		5,820			4,363			14,939			12,659
Noninterest Income
Investment and trust services fees		753			756			2,367			2,168
Service charges and fees		1,013			828			2,792			2,360
Mortgage banking activities		26			176			244			356
Increase in cash surrender value of life insurance		166			112			397			348
Equity method investments		85			(52		)	71			(563		)
Other		61			112			75			115
Securities gains		—			5			95			224
Total noninterest income		2,104			1,937			6,041			5,008
Noninterest Expense
Salaries and benefits		2,673			2,179			7,127			6,637
Net occupancy expense		371			295			977			882
Furniture and equipment expense		263			173			608			541
Advertising		272			252			816			706
Legal and professional fees		192			178			671			609
Data processing		355			277			964			770
Pennsylvania bank shares tax		167			120			415			362
Intangible Amortization		136			46			229			139
Other		817			717			2,207			2,028
Total noninterest expense		5,246			4,237			14,014			12,674
Income before Federal income taxes		2,678			2,063			6,966			4,993
Federal income tax expense		577			421			1,498			509
Net income		$	2,101		$	1,642		$	5,468		$	4,484
Per share data
Basic earnings per share		$	0.55		$	0.49		$	1.56		$	1.33
Diluted earnings per share		$	0.55		$	0.49		$	1.55		$	1.33
Cash dividends declared		$	0.25		$	0.24		$	0.74		$	0.71

 

The accompanying notes are an integral part of these financial statements.

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Franklin Financial Services Corporation

Consolidated Statements of Changes in Shareholders’ Equity (unaudited)

for the nine months ended September 30, 2006 and 2005

											Accumulated
					Additional						Other
		Common			Paid-in			Retained			Comprehensive			Treasury
(Dollars in thousands, except per share data)		Stock			Capital			Earnings			Income			Stock			Total
Balance at December 31, 2004		$	3,806		$	19,864		$	35,723		$	2,175		($6,925		)	$	54,643
Comprehensive income:
Net income		—			—			4,484			—			—			4,484
Unrealized loss on securities, net of reclassification adjustments		—			—			—			(1,340		)	—			(1,340		)
Unrealized gain on hedging activities, net of reclassification adjustments								—			259						259
Total Comprehensive income																	3,403
Cash dividends declared, $.71 per share		—			—			(2,390		)	—			—			(2,390		)
Acquisition of 15,000 shares of treasury stock		—			—			—			—			(381		)	(381		)
Common stock issued under stock option plans		—			43			—			—			139			182
Balance at September 30, 2005		$	3,806		$	19,907		$	37,817		$	1,094		$	(7,167	)	$	55,457
Balance at December 31, 2005		$	3,806		$	19,907		$	38,638		$	801		($7,482		)	$	55,670
Comprehensive income:
Net income		—			—			5,468			—			—			5,468
Unrealized gain on securities, net of reclassification adjustments		—			—			—			281			—			281
Unrealized gain on hedging activities, net of reclassification adjustments		—			—			—			53			—			53
Total Comprehensive income																	5,802
Acquisition of Fulton County Bancshares		493			12,069												12,562
Cash dividends declared, $.74 per share		—			—			(2,590		)	—			—			(2,590		)
Acquisition of 24,192 shares of treasury stock		—			—			—			—			(621		)	(621		)
Common stock issued under stock option plans		—			76			—			—			325			401
Stock option compensation		—			127			—			—			—			127
Balance at September 30, 2006		$	4,299		$	32,179		$	41,516		$	1,135		$	(7,778	)	$	71,351

 

The accompanying notes are an integral part of these financial statements.

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Franklin Financial Services Corporation

Consolidated Statements of Cash Flows

(unaudited)

 

		For the Nine Months Ended September 30
(Amounts in thousands)		2006			2005
Cash flows from operating activities
Net income		$	5,468		$	4,484
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		738			851
Net (accretion) amortization of investment securities		(18		)	289
Stock option compensation expense		127			—
Amortization and write down of mortgage servicing rights		185			111
Amortization of intangibles		229			139
Provision for loan losses		240			306
Securities gains, net		(95		)	(224		)
Loans originated for sale		(19,223		)	(39,116		)
Proceeds from sale of loans		16,580			41,827
Gain on sales of loans		(183		)	(249		)
Gain on sale of premises and equipment		—			(44		)
Increase in cash surrender value of life insurance		(397		)	(348		)
Increase in interest receivable and other assets		(1,347		)	(293		)
Increase in interest payable and other liabilities		(166		)	186
Other, net		57			(139		)
Net cash provided by operating activities, net of acquisition		2,195			7,780
Cash flows from investing activities
Proceeds from sales of investment securities available for sale		537			8,234
Proceeds from maturities of investment securities available for sale		35,492			29,414
Net decrease in restricted stock		501			451
Purchase of investment securities available for sale		(55,219		)	(42,074		)
Net increase in loans		(42,158		)	(42,639		)
Investment in joint venture		—			(186		)
Proceeds from sale of premises and equipment		240			289
Cash and cash equivalents acquired from Fulton Bancshares		3,725			—
Cash paid in acquisition of Fulton Bancshares		(11,286		)	—
Settlement of receivables related to investments acquired in acquisition		33,591			—
Capital expenditures		(1,735		)	(361		)
Net cash used in investing activities		(36,312		)	(46,872		)
Cash flows from financing activities
Net increase in demand deposits, NOW accounts and savings accounts		37,434			30,897
Net (decrease) increase in certificates of deposit		(3,526		)	4,755
Net increase in short term borrowings		17,083			8,776
Long term debt advances		—			5,000
Long term debt payments		(9,395		)	(3,967		)
Dividends paid		(2,590		)	(2,390		)
Common stock issued under stock option plans		325			182
Purchase of treasury shares		(621		)	(381		)
Net cash provided by financing activities		38,710			42,872
Increase in cash and cash equivalents		4,593			3,780
Cash and cash equivalents as of January 1		24,738			10,209
Cash and cash equivalents as of September 30		$	29,331		$	13,989

 

The accompanying notes are an integral part of these statements.

 

6

FRANKLIN FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Basis of Presentation

The consolidated financial statements include the accounts of Franklin Financial Services Corporation (the Corporation), and its wholly-owned subsidiaries, Farmers and Merchants Trust Company of Chambersburg (the Bank), Franklin Financial Properties Corp., and Franklin Future Fund Inc.  Farmers and Merchants Trust Company of Chambersburg is a commercial bank that has one wholly-owned subsidiary, Franklin Realty Services Corporation.  Franklin Realty Services Corporation is an inactive real-estate brokerage company.  Franklin Financial Properties Corp. holds real estate assets that are leased by the Bank. Franklin Future Fund Inc. is a non-bank investment company. All significant intercompany transactions and account balances have been eliminated.

In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows at and as of September 30, 2006, and for all periods presented have been made.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted.  It is suggested that these consolidated financial statements be read in conjunction with the audited consolidated financial statements and notes thereto included in the Corporation’s 2005 Annual Report on Form 10-K.  The results of operations for the period ended September 30, 2006 are not necessarily indicative of the operating results for the full year.

For purposes of reporting cash flows, cash and cash equivalents include Cash and due from banks, Interest-bearing deposits in other banks and Federal funds sold.  Generally, Federal funds are purchased and sold for one-day periods.

Earnings per share is computed based on the weighted average number of shares outstanding during each period end.  A reconciliation of the weighted average shares outstanding used to calculate basic earnings per share and diluted earnings per share follows:

		For the three months ended				For the nine months ended
		September 30				September 30
(Amounts in thousands)		2006		2005		2006		2005
Weighted average shares outstanding (basic)		3,840		3,368		3,516		3,369
Impact of common stock equivalents		7		6		7		8
Weighted average shares outstanding (diluted)		3,847		3,374		3,523		3,377

 

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Note 2 – Comprehensive Income

The components of other comprehensive income (loss) are as follows:

		Three months ended						Nine months ended
		September 30						September 30
(Amounts in thousands)		2006			2005			2006			2005
Investment Securities:
Unrealized holding gains (losses) arising during the period		$	1,273		$	(721	)	$	522		$	(1,807	)
Reclassification adjustments for gains included in net income		—			(5		)	(95		)	(224		)
Cash-flow Hedges:
Unrealized holding (losses) gains arising during the period		(36		)	98			48			163
Reclassification adjustments for losses included in net income		4			59			33			230
Other comprehensive income (loss)		1,241			(569		)	508			(1,638		)
Tax Effect		(422		)	193			(174		)	557
Other comprehensive income (loss), net of tax		$	819		$	(376	)	$	334		$	(1,081	)

 

Note 3 – Guarantees

The Corporation does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit.  Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party.  Generally, all letters of credit, when issued have expiration dates within one year.  The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers.  The Bank, generally, holds collateral and/or personal guarantees supporting these commitments.  The Bank had $15.9 million standby letters of credit as of September 30, 2006 and $9.7 million as of December 31, 2005. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees.

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Note 4 – Stock Based Compensation

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123 (R), “Share-Based Payment.”  Statement No. 123(R) revised Statement No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related implementation guidance.  Statement No. 123(R) requires compensation costs related to share-based payment transactions to be recognized in the financial statements (with limited exceptions).  The amount of compensation cost is measured on the grant-date fair value of the equity or liability instruments issued.  Compensation cost is recognized over the period that an employee provides services in exchange for the award.

The Corporation implemented Statement No. 123(R) in the first quarter of 2006. For the third quarter of 2006, $89 thousand was recognized as compensation expense and $127 thousand has been recognized as compensation expense year-to-date.   This expense is related to options granted in February 2006 under the Corporation’s Incentive Stock Option Plan of 2002 and for options issued in July under the Corporation’s Employee Stock Purchase Plan. The compensation expense for both plans has been fully expensed as of September 30, 2006.

Prior to the implementation of FASB Statement No. 123(R), stock options were accounted for under Accounting Principal Bulletin (APB) No. 25.  Under APB 25, no compensation expense was recognized related to these options. Had compensation expense for the plans been recognized in accordance with Statement No. 123(R) in 2005, the Corporation’s net income and per share amounts would have been reduced to the following pro-forma amounts.

				Three Months Ended			Nine Months Ended
(Amounts in thousands, except per share)				September 30, 2005			September 30, 2005
Net Income:		As reported		$	1,642		$	4,484
		Compensation not expensed		(45		)	(92		)
		Pro-forma		$	1,597		$	4,392
Basic earnings per share:		As reported		$	0.49		$	1.33
		Pro-forma		0.47			1.30
Diluted earnings per share:		As reported		$	0.49		$	1.33
		Pro-forma		0.47			1.30

 

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Note 5 – Pensions

The components of pension expense for the periods presented are as follows:

		Three months ended						Nine months ended
		September 30						September 30
(Amounts in thousands)		2006			2005			2006			2005
Components of net periodic benefit cost:
Service cost		$	91		$	107		$	275		$	321
Interest cost		172			175			517			525
Expected return on plan assets		(219		)	(218		)	(660		)	(654		)
Amortization of prior service cost		22			22			66			145
Net periodic benefit cost		$	66		$	86		$	198		$	337

 

Note 6 – Recent Accounting Pronouncements

SFAS 157

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. SFAS No. 157 applies to other accounting pronouncements that require or permit fair value measurements. The new guidance is effective for financial statements issued for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years. We are currently evaluating the potential impact, if any, of the adoption of FASB Statement No. 157 on our consolidated financial position, results of operations and cash flows.

SFAS 158

On September 29, 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, which amends SFAS 87 and SFAS 106 to require recognition of the overfunded or underfunded status of pension and other postretirement benefit plans on the balance sheet. Under SFAS 158, gains and losses, prior service costs and credits, and any remaining transition amounts under SFAS 87 and SFAS 106 that have not yet been recognized through net periodic benefit cost will be recognized in accumulated other comprehensive income, net of tax effects, until they are amortized as a component of net periodic cost. The measurement date — the date at which the benefit obligation and plan assets is measured — is required to be the company’s fiscal year end. SFAS 158 is effective for publicly held companies for fiscal years ending after December 15, 2006. We are currently evaluating the potential impact, if any, of the adoption of FASB Statement 158 on our consolidated financial position, results of operations and cash flows.

Note 7 – Reclassification

Certain prior period amounts may have been reclassified to conform to the current year presentation.  Such reclassifications did not affect reported net income.

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Note 8 – Acquisition

On July 1, 2006, Franklin Financial Services Corporation completed its acquisition of Fulton Bancshares Corporation.  In connection with the transaction, The Fulton County National Bank and Trust Company, a subsidiary of Fulton Bancshares was merged with and into Farmers and Merchants Trust Company of Chambersburg, a subsidiary of Franklin Financial Services Corporation.  The acquisition added approximately $123 million in assets and 6 community-banking offices in Fulton and Huntingdon counties to Franklin Financial Services Corporation. Management believes that the acquisition gave it access to a contiguous market, via an established network, that could be expanded with the product offerings of the Corporation.

 In accordance with the terms of the merger agreement, the shareholders of Fulton Bancshares Corporation were entitled to receive, for each share of Fulton Bancshares common stock they own, (a) $48.00 cash, (b) 1.864 shares of Franklin common stock, or (c) a mix of Franklin common stock and cash.  As a result of the transaction, Franklin Financial issued 492,611 shares of its common stock to former shareholders of Fulton Bancshares.

The following table summarizes the preliminary purchase price allocation based on estimated fair values of the assets and liabilities assumed at the date of the acquisition:

(in thousands)
Assets:
Cash and cash equivalents		$	3,725
Investment securities		148
Net loans		73,154
Core deposit intangible		3,252
Premises and equipment		3,173
Bank owned life insurance		5,465
Receivables related to investments		33,591
Other assets		1,303
Total identifiable assets		$	123,811
Liabilities:
Total deposits		$	105,974
Short-term borrowings		400
Other liabilities		2,702
Total liabilities		$	109,076

 

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In accordance with SFAS 141, Franklin Financial Services Corporation used the purchase method of accounting to record this transaction. The $9.1 million of goodwill recorded from the acquisition is calculated below. The goodwill recorded was allocated to the banking subsidiary as all of the assets and liabilities acquired are related to the banking subsidiary, in accordance with SFAS 142. The goodwill acquired will not be amortized in accordance with SFAS 142.

(dollars in thousands, except per share amounts)
Franklin Financial common stock issued		492,611
Average purchase price of Franklin Financial common share		$	25.50
Purchase price of acquired Fulton shares					$	12,562
Cash paid to Fulton shareholders					10,969
Transaction costs					317
Total Purchase Price					23,848
Net Assets Acquired:
Fulton Bancshares shareholders’ equity					13,244
Adjustments to reflect assets acquired at fair value:
Loans		(1,047		)
Core deposit intangible		3,252
Bank premises		(14		)
Adjustments to reflect liabilities acquired at fair value:
Time deposits		(821		)
Other liabilities		754
Deferred tax liabilities		767
Net Assets Acquired					14,735
Goodwill resulting from acquisition					$	9,113

 

The following pro forma combined results of operations for the periods shown below give effect to the merger as if the merger had been completed on January 1, 2006 and 2005, respectively. The pro forma results show the combination of Fulton Bancshares’ results into Franklin Financial Services Corporation’s consolidated statements of income. While adjustments have been made for the estimated effect of purchase accounting, the pro forma results do not reflect the actual result the combined company would have achieved had the combination occurred at the beginning of the periods presented.

		Pro forma
		Three months
		ended			Nine months ended
		September 30			September 30
(in thousands, except per share)		2005			2006			2005
Net interest income		$	6,878		$	17,378		$	16,179
Other income		2,254			6,380			5,484
Net income		1,823			3,980			3,833
Diluted earnings per share		0.47			1.13			1.00

 

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PART I, Item 2

Management’s Discussion and Analysis of Results of Operations and Financial Condition

For the Three and Nine Month Periods Ended September 30, 2006 and 2005

Forward Looking Statements

Certain statements appearing herein which are not historical in nature are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Such forward-looking statements refer to a future period or periods, reflecting management’s current views as to likely future developments, and use words such as “may,” “will,” “expect,” “believe,” “estimate,” “anticipate,” or similar terms.  Because forward-looking statements involve certain risks, uncertainties and other factors over which the Corporation has no direct control, actual results could differ materially from those contemplated in such statements.  These factors include (but are not limited to) the following: general economic conditions, changes in interest rates, changes in the Corporation’s cost of funds, changes in government monetary policy, changes in government regulation and taxation of financial institutions, changes in the rate of inflation, changes in technology, the intensification of competition within the Corporation’s market area, and other similar factors.

Critical Accounting Policies

Management has identified critical accounting policies for the Corporation to include Allowance for Loan Losses, Mortgage Servicing Rights, Financial Derivatives, Temporary Investment Impairment and Stock-based Compensation. The Corporation implemented Financial Accounting Standards Board (FASB) Statement No. 123(R), “Share-Based Payment” in the first quarter of 2006.  During the third quarter, the Corporation implemented Financial Accounting Standards Board Statement No. 142, “Goodwill and Other Intangible Assets”.  There were no other changes to the critical accounting policies disclosed in the 2005 Annual Report on Form 10-K in regards to application or related judgements and estimates used.  Please refer to Item 7 on pages 14 - 17 of the Corporation’s 2005 Annual Report on Form 10-K for a more detailed disclosure of the critical accounting policies.

Results of Operations

Summary

The Corporation reported net income for the third quarter of $2.1 million and $5.5 million for the nine months ended September 30, 2006.  For the quarter, net income increased 28% versus net income of $1.6 million during the third quarter of 2005. Year-to-date net income increased 22% from $4.5 million in 2005.  Diluted earnings per share also increased from $.49 for the third quarter of 2005 to $.55 in 2006. Year-to-date diluted earnings per share were $1.55 in 2006 compared to $1.33 in 2005.

Total assets increased $166 million from year-end 2005 with approximately $123 million of the growth attributable to the acquisition of Fulton Bancshares Corporation (Fulton) on July 1, 2006. At September 30, 2006, total assets were $787.1 million.

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Other key performance ratios as of, or for the nine months ended September 30 are listed below:

		2006		2005
Return on average equity (ROE)		11.77	%	10.72	%
Return on average assets (ROA)		1.05	%	1.01	%
Return on average tangible average equity(1)		13.02	%	10.72	%
Return on average tangible average assets(1)		1.09	%	1.01	%

 

(1)These are Non-GAAP disclosures used to show the effect of purchase accounting of the results of the Corporation. These ratios exclude core deposit intangibles, goodwill and intangible amortization

A more detailed discussion of the operating results for the three and nine months ended September 30, 2006 follows:

Net Interest Income

Comparison of the three months ended September 30, 2006 to the three months ended September 30, 2005:

Net interest income for the quarter was $5.8 million and represents and increase of $1.3 million over net interest income of $4.5 million in the third quarter of 2005. The acquisition of Fulton Bancshares Corporation (Fulton) added approximately $625 thousand to net interest income during the third quarter.  Interest income increased $3.8 million during the quarter with the Fulton acquisition adding approximately $1.4 million of interest income, primarily in the loan portfolio.  The majority of the increase in interest income occurred in the loan portfolio and was the result of an increase of $127 million in average outstanding loans quarter over quarter. The increase in the loan portfolio occurred primarily in the commercial loan portfolio. Interest on Fed funds sold was up $226 thousand as the result of higher balances.  The increase in the balance of Fed funds sold was the result of Fulton liquidating its investment portfolio prior to July 1, 2006 and the resulting receivable converting to cash in the beginning of the third quarter.

Interest expense was $5.7 million for the quarter, an increase of $2.5 million from the prior year quarter. Of the increase, approximately $800 thousand is attributable to interest-bearing liabilities obtained from Fulton.  The largest other contributor to the increase in interest expense was the Money Management product which is a money market product indexed to short-term interest rates.  Interest expense on this product increased $1.2 million quarter over quarter as average balances increased $65 million.

Comparison of the nine months ended September 30, 2006 to the nine months ended September  30, 2005:

Net interest income for the first nine months of 2006 was $15.2 million, an increase of  $2.2 (17.1%) over the prior year.  With the acquisition of Fulton effective July 1, 2006, its contribution to net interest income year-to-date is the same as that for the third quarter mentioned above. Interest income recorded an increase of 35.4% over the prior year and totaled $29.1 million. Interest income on commercial loans continues to be the largest driver of the increase. Average commercial loan balances were up $52.6 million in 2006 as compared to 2005.  Total loans increased $75.7 million on average year over year.

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