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 June 30, 2000 OR __ 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) PENNSYLVANIA 25-1440803 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 20 SOUTH MAIN STREET (P.O. BOX 6010), CHAMBERSBURG,PA 17201-0819 (Address of principal executive officer) 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 APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No 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. There were 2,773,240 outstanding shares of the Registrant's common stock as of August 4, 2000. INDEX PART I - FINANCIAL INFORMATION Item 1 - Financial Statements Consolidated Balance Sheets as of June 30, 2000 (Unaudited) and December 31, 1999 Consolidated Statements of Income for the Three and Six Months ended June 30, 2000 and 1999 (unaudited) Consolidated Statements of Changes in Shareholders' Equity for the Six Months ended June 30, 1999 and June 30, 2000 (unaudited) Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2000 and 1999 (unaudited) Notes to Consolidated Financial Statements (unaudited) Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3 - Quantitative and Qualitative Disclosures about Market Risk PART II - OTHER INFORMATION SIGNATURE PAGE CONSOLIDATED BALANCE SHEETS (Unaudited) (Amounts in thousands, except per share) June 30 December 31 2000 1999 ---------- ---------- (unaudited) ASSETS Cash and due from banks $13,179 $14,956 Interest bearing deposits in other banks 816 161 Investment securities available for sale 118,867 129,801 Loans, net 296,254 284,084 Premises and equipment, net 6,225 5,513 Other assets 17,909 10,164 ---------- ---------- Total Assets $453,250 $444,679 ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand (non-interest bearing) $45,715 $43,297 Savings and Interest checking 158,760 154,537 Time 133,744 135,476 ---------- ---------- Total Deposits 338,219 333,310 Securities sold under agreements to repurchase 38,262 27,182 Short term borrowings 4,000 12,500 Long term debt 29,820 29,695 Other liabilities 2,760 2,732 ---------- ---------- Total Liabilities 413,061 405,419 Shareholders' equity: Common stock $1 par value per share, 15,000 shares authorized with 3,045 shares issued and 2,778 and 2,792 shares outstanding at March 31,2000 and December 31, 1999 respectively. 3,045 3,045 Capital stock without par value, 5,000 shares authorized with no shares issued or outstanding - - Additional paid in capital 19,819 19,834 Retained earnings 23,987 22,627 Accumulated other comprehensive income (loss) (1,127) (876) Treasury stock (Note 4) (5,182) (4,938) Unearned compensation (353) (432) ---------- ---------- Total shareholders' equity 40,189 39,260 ---------- ---------- Total Liabilities and Shareholders' Equity $453,250 $444,679 ====== ====== The accompanying notes are an integral part of these statements CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands, except per share) (Unaudited) For the Three Months Ended For the Six Months Ended June 30 June 30 2000 1999 2000 1999 ---------------------------- ---------------------------- INTEREST INCOME Interest on loans $6,166 $5,437 $12,081 $10,823 Interest on deposits in other banks 30 91 37 165 Interest on fed funds sold 1 - 1 - Interest and dividends on investments: Ta x able interest 1,227 1,042 2,492 2,129 Tax exempt interest 538 571 1,112 1,140 Dividends 81 45 159 91 ------ --------- --------- --------- Total interest income 8,043 7,186 15,882 14,348 ------ --------- --------- --------- INTEREST EXPENSE Interest on deposits 3,365 2,908 6,559 5,794 Interest on securities sold under agreements to repurchase 529 283 894 540 Interest on short term borrowings 23 0 200 1 Interest on long term debt 411 427 821 850 ----- --------- --------- --------- Total interest expense 4,328 3,618 8,474 7,185 ----- --------- --------- --------- Net interest income 3,715 3,568 7,408 7,163 Provision for possible loan losses 120 200 393 395 ----- --------- --------- --------- Net-interest income after provision for possible loan losses 3,595 3,368 7,015 6,768 ----- --------- --------- --------- NONINTEREST INCOME Service charges on loans 96 196 198 304 Services charges on deposit accounts 245 222 471 440 Investment and trust services fees 542 547 1,185 1,190 Other service charges and fees 198 82 312 166 Securities gains 110 217 ----- --------- --------- --------- Total noninterest income 1,191 1,047 2,383 2,100 ----- --------- --------- --------- NONINTEREST EXPENSE Salaries and benefits 1,706 1,482 3,451 2,991 Net occupancy expense 170 163 350 331 Furniture and equipment expense 143 162 297 330 Advertising 166 181 247 257 Legal & professional fees 119 69 196 168 Data processing 234 192 517 472 Pennsylvania bank shares tax 96 91 192 181 Other 765 526 1,287 1,014 ---- --------- --------- --------- Total noninterest expense 3,399 2,866 6,537 5,744 ----- --------- --------- --------- Income before Federal income taxes 1,387 1,549 2,861 3,124 Federal income tax expense 234 304 497 600 ----- --------- --------- --------- Net income $1,153 $1,245 $2,364 $2,524 ====== ========= ========= ========= Basic earnings per share $0.42 $0.46 $0.87 $0.92 Weighted average shares outstanding (000's) 2,716 2,727 2,720 2,729 Diluted earnings per share $0.42 $0.45 $0.86 $0.91 Weighted average shares outstanding (000's) 2,759 2,764 2,763 2,766 The accompanying notes are an integral part of these statements. Consolidated Statements of Changes in Shareholders' Equity for the six months ended June 30, 2000 and 1999 (Amounts in thousands, except per share data) (Unaudited) Accumulated Additional Other Common Paid-in Retained Comprehensive Treasury Unearned (Amounts in thousands, Stock Capital Earnings Income (loss) Stock Compensation Total except per share) --------------------------------------------------------------------------------- Balance at December 31, 1998 $3,045 $19,793 $20,562 $1,783 ($4,620) ($662) $39,901 Comprehensive income: Net income - - 2,524 - - - 2,524 Unrealized holding losses arising during current period, net of tax - - - (1,013) - - (1,013) Reclassification adjustment for realized gains included in net income, net of tax - - - - - - - ----------- Total Comprehensive income 1,511 Cash dividends declared, $.72 per share - - (2,013) - - - (2,013) Tax benefit of restricted stock transaction - 10 - - - - 10 Common stock issued under stock option plans - 11 - - 29 - 40 Acquisition of 8,975 shares of treasury stock - - - - (260 - (260) Amortization of unearned compensation - - - - - 54 54 ------- ------- ------- -------- -------- -------- -------- Balance at June 30, 1999 $3,045 $19,814 $21,073 $770 ($4,851) ($608) $39,243 ====== ====== ====== ====== ====== ====== ====== Balance at December 31, 1999 $3,045 19,834 22,627 (876) (4,938) (432) $39,260 Comprehensive income: Net income - - 2,364 - - - 2,364 Unrealized holding losses arising during current period, net of tax - - - (439) - - (439) Reclassification adjustment for realized gains included in net income, net of tax - - - 184 - - 184 Other comprehensive income, net of tax - - - 4 - - 4 ----------- Total Comprehensive income 2,113 Cash dividends declared, $.36 per share - - (1,004) - - - (1,004) Common stock issued under stock option plans - (11) - - 51 - 40 Forfeiture of restricted stock - (4) - - (20) 24 - Acquisition of 16,400 shares of treasury stock - - - - (275) - (275) Amortization of unearned compensation - - - - - 55 55 ------- ------- ------- -------- -------- -------- -------- Balance at June 30, 2000 $3,045 $19,819 $23,987 ($1,127) ($5,182) ($353) $40,189 ======= ======= ======= ======= ======= ======= ======= The accompanying notes are an integral part of these statements. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in Thousands) (Unaudited) For the Six Months Ended June 30 2000 1999 ------- ------- Cash flows from operating activities: Net Income 2,364 2,524 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 369 400 Net amortization of securities premiums and discounts (4) (235) Provision for possible loan losses 393 395 Securities gains, net (217) - Mortgage loans originated for sale (3,550) (8,148) Proceeds from sale of mortgage loans 3,574 8,153 Principal gain on sales of mortgage loans (24) (5) Increase in cash surrender value of life insurance (26) - Increase in interest receivable and other assets (373) (483) Increase (decrease) in interest payable and other liabilities 107 (47) Other, net (38) 62 -------- -------- Net cash (used in) provided by operating activities 2,575 2,616 -------- -------- Cash flows from investing activities: Proceeds from sales of investment securities available for sale 4,394 - Proceeds from maturities of investment securities available for sale 10,466 73,257 Purchase of investment securities available for sale (4,092) (72,100) Net increase in loans (13,758) (10,422) Purchase of bank owned life insurance (6,000) - Capital Expenditures (1,082) (248) -------- -------- Net cash used in investing activities (10,072) (9,513) -------- -------- Cash flows from financing activities: Net increase in demand deposits, NOW accounts and savings accounts 6,641 8,773 Net (decrease) in certificates of deposit (1,732) (5,761) Net increase (decrease) in other borrowings 2,705 (405) Dividends paid (1,004) (2,013) Common stock issued under stock option plans 40 40 Purchase of treasury shares (275) (260) -------- -------- Net cash provided by financing activities 6,375 374 -------- -------- Decrease in cash and cash equivalents (1,122) (6,523) Cash and cash equivalents as of January 1 15,117 24,409 -------- -------- Cash and cash equivalents as of June 30 13,995 17,886 ======= ======= The accompanying notes are an integral part of these statements. FRANKLIN FINANCIAL SERVICES CORPORATION and its SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1 - Basis of Presentation The consolidated balance sheets as of June 30, 2000 and December 31, 1999, the consolidated statements of income for the three and six month periods ended June 30, 2000 and 1999, the consolidated statements of changes in shareholders' equity for the six months ended June 30, 1999 and June 30, 2000 and the consolidated statements of cash flows for the six month periods ended June 30, 2000 and 1999 have been prepared by the Corporation, without audit where indicated. 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 June 30, 2000, and for all periods presented have been made. Certain prior year amounts have been reclassified to be consistent with the current year's reporting. The consolidated financial statements include the accounts of Franklin Financial Services Corporation (the Corporation), and its wholly-owned subsidiary, Farmers and Merchants Trust Company of Chambersburg. All significant intercompany transactions and account balances have been eliminated. 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 financial statements and notes thereto included in the Corporation's 1999 Annual Report. The results of operations for the period ended June 30, 2000, are not necessarily indicative of the operating results for the full year. For purposes of reporting cash flows, cash and cash equivalents include cash, due from banks, and federal funds sold. Generally, Federal funds are purchased and sold for one-day periods. Supplemental disclosures of cash flows information are as follows: Cash paid for six months ended June 30: 2000 1999 ---- ---- Interest paid on deposits and other borrowed funds $8,302,000 $7,213,000 Income taxes paid $ 679,000 $ 732,000 Earnings per share is computed based on the weighted average number of shares outstanding during each quarter, adjusted retroactively for stock splits and dividends. A reconciliation of the weighted average shares outstanding used to calculate basic earnings per share and diluted earnings per share follows: For the quarter ended June 30 ------- 2000 1999 ---- ---- (Amounts in thousands) Weighted average shares outstanding (basic) 2,716 2,727 Impact of common stock equivalents, primarily stock options 42 37 ----- ----- Weighted average shares outstanding (diluted) 2,758 2,764 ====== ====== For the six months ended June 30 ------- 2000 1999 ---- ---- (Amounts in thousands) Weighted average shares outstanding (basic) 2,720 2,729 Impact of common stock equivalents, primarily stock options 43 37 Weighted average shares outstanding (diluted) 2,763 2,766 ====== ====== NOTE 3 Interest Rate Cap On September 27, 1999, the Corporation entered into an interest rate cap transaction as a vehicle to partially hedge net interest income against the effect of rising market interest rates. The transaction was effective September 29, 1999, has a notional amount of $5,000,000, a term of five years, a strike rate of 6.00% and is indexed to 3-month LIBOR. At June 30, 2000, the cost of the cap was $161,500 and the fair value was $225,503. A gain of $4,242, net of tax, was recorded as other comprehensive income for the six months ended June 30, 2000. NOTE 4 - Stock Repurchase Program On March 2, 2000, the Board of Directors authorized the repurchase of up to 75,000 shares of the Corporation's $1.00 par value common stock. The repurchases are authorized to be made from time to time during the next 12 months in open market or privately negotiated transactions. The repurchased shares will be held as treasury shares available for issuance in connection with future stock dividends and stock splits, employee benefit plans, executive compensation plans, and for issuance under the Dividend Reinvestment Plan and other corporate purposes. During the first six months ended June 30, 2000, 16,400 shares of the Corporation's common stock were repurchased at a cost of approximately $275,000. NOTE 5 Bank Owned Life Insurance On June 5, 2000, the Corporation purchased Bank Owned Life Insurance (BOLI) in the amount of $6.0 million that will yield a return of approximately 6.4%, or tax equivalized, 9.8%. The Corporation paid a one-time single premium of $6.0 million, split between two insurance companies, to purchase approximately $19 million in death benefit coverage on the lives of a selected group of employees. The Corporation's $6.0 million investment has been recorded as an Other Asset. At June 30, 2000, the carrying value of the investment was $6,026,200. Management's Discussion and Analysis of Results of Operations and Financial Condition for the Three and Six Month Periods Ended June 30, 2000 and 1999 Part 1, Item 2 Results of Operations In the second quarter and six months ended June 30, 2000, the Corporation earned $1.15 million and $2.36 million, respectively, compared to $1.24 million and $2.52 million, respectively, for the comparable periods ended June 30, 1999. Basic earning per share equaled $.42 and $.87, respectively, for the second quarter and six months in 2000 versus $.46 and $.92, respectively, for the same periods in 1999. Lower fee income and deferred costs from loan originations, a tighter net interest margin, higher salary and benefit costs and higher loan collection expense are the primary factors contributing to the lower reported net income for the second quarter and six months. Book value per share equaled $14.47 at June 30, 2000, compared to $14.04 at June 30, 1999. The Corporation's annualized return on average assets (ROA) and return on average equity (ROE) for the first six months of 2000 were 1.06% and 12.17%, respectively, compared to 1.20% and 12.87%, respectively, for the first six months of 1999. A six percent growth in assets over the six month period ended June 30, 2000, versus the six month period ended June 30, 1999, coupled with a six percent decline in net income for the six months ended June 30, 2000, produced the lower ROA. The decline in earnings in the first six months of 2000 compared to the first six months of 1999 was the primary driver behind the lower ROE for the period. Net interest income recorded an increase of $147,000, or 4.1%, to $3.715 million for the second quarter ended June 30, 2000, compared to $3.568 million for the second quarter ended June 30, 1999. For the six months ended June 30, 2000, net interest income was up $244,000, or 3.4%, to $7.407 million from $7.163 million at June 30, 1999. Although net interest income increased in absolute dollars due to balance sheet growth, the Corporation's net interest spread and net interest margin have experience compression primarily due to the current rising interest rate environment. Interest spread and net interest margin for the six-month period ended June 30, 2000 was 3.10% and 3.79%, respectively, compared with 3.27% and 3.90%, respectively, for the same period ended June 30, 1999. For the second quarter and six months, the Corporation expensed $120,000 and $393,000, respectively, for possible loan losses. This compares with $200,000 and $395,000 for the second quarter and six months, respectively, ended June 30, 1999. A loss on the sale of nonperforming loans in the second quarter ended June 30, 2000 was offset by a reduction in provision for the quarter. Total noninterest income, excluding securities gains, was up $34,000, or 3.2%, to $1.081 million and $66,000, or 3.1%, to $2.166 million for the second quarter and six months, respectively, ended June 30, 2000. Revenues from fee income related to lending activities, primarily mortgage banking activities, were down $100,000 for the second quarter and $106,000 for the six months ended June 30, 2000. More than offsetting the decrease in lending activity fees was an increase in Other service charges and fees of $116,000 for the second quarter and $146,000 for the six months ended June 30, 2000. Contributing to this increase was a newly implemented ATM access fee, $37,000, the sale of the Merchant Card portfolio, $34,000, and income from the purchase of Bank Owned Life Insurance (BOLI), $26,000. All of these transactions occurred in the second quarter of 2000. The Corporation realized $110,000 and $217,000 in securities gains for the second quarter and six months, respectively, ended June 30, 2000. There were no securities gains realized in the second quarter or six months ended June 30, 1999. All realized gains in 2000 were produced from the Corporation's available-for- sale bank equities portfolio and were used to offset expenses related to other real estate owned (ORE) and loan collections in the respective periods. Total noninterest expense was up $533,000, or 18.6% to $3.399 million for the second quarter ended June 30, 2000, over the second quarter of 1999 and up $792,000, or 13.8%, to $6.536 million for the six months ended June 30, 2000, over the comparable period in 1999. For the second quarter and six months ended June 30, 2000, the two categories that were the primary contributors to the increase in noninterest expense were salaries and benefits and other expense. Salary expense, which includes commissions and a recently initiated pay for performance program, was up $132,149, or 9.55% for the second quarter and $258,141, or 9.29%, for the six months. An increase in full-time-equivalent (FTE) employees to 187 at June 30, 2000 from 183 at June 30, 1999 as well as a change to pay for performance in the second half of 1999 served to push salary expense up for the quarter and six months. The increase in FTEs is largely attributable to strategic initiatives in the Cumberland County markets. Benefits expense was up $27,439, or 9.34 %, to $323,910 for the second quarter and $71,284, or 11.94%, to $668,174 for the six months ended June 30, 2000. Higher health insurance costs, a smaller credit for pension expense and higher payroll taxes are the primary expense categories driving the increase. Lower deferred costs for salaries and benefits related to a smaller volume of loan originations, primarily mortgage originations, also acted to increase total salaries and benefits. The increase related to lower deferred costs for the second quarter of 2000 was approximately $62,000 and for the first six months of 2000 approximately $130,000 when compared to the second quarter and six months ended June 30, 1999. Other expense was up $239,000, or 45.4%, to $765,000 for the second quarter and up $272,000, or 26.8%, to $1.286 million for the six months ended June 30, 2000 compared to the same periods ended June 30, 1999. The primary contributors to the increase in other expense for the second quarter and six months ended June 30, 2000, were losses on the sale of nonperforming loans, $137,000, and higher loan collection expense $100,000, related to ORE. Federal income tax expense for the second quarter and six months ended June 30, 2000, was $234,000 and $497,000, respectively, compared to $304,000 and $600,000 for the same periods ended June 30, 1999. The Corporation's effective tax rate for the second quarter and six months ended June 30, 2000, was 16.9% and 17.4%, respectively, compared to 19.6% and 19.2%, respectively, for the second quarter and six months ended June 30, 1999. The decrease in the effective tax rate period over period is primarily due to an increase in tax-free income relative to pretax net income. Financial Condition Total assets were $453.2 million at June 30, 2000, an increase of $8.571 million, or 1.9%, from $444.7 million at December 31, 1999. Loan growth for the first six months of 2000 has been moderate, increasing $12.2 million, or 4.2%, to $300.1 million at June 30, 2000, from $287.9 at December 31, 1999. The Corporation has seen a 40% decline in its mortgage loan originations during the first six months of 2000 compared to the first six months of 1999. Commercial and consumer loans, up 6.2% and 6.0%, respectively, during the same period have helped to partially offset this decline. Premises and equipment recorded an increase of $712,000, or 12.9% to $6.2 million at June 30, 2000 from $5.5 million at December 31, 1999, largely due to the purchase of two parcels of land in two new markets. An ATM was installed on the one parcel and was operational on July 27; a community office will be built on the other parcel with an expected completion date of October 31, 2000. In June, the Corporation purchased $6.0 million of Bank Owned Life Insurance (BOLI) which is recorded in Other Assets and accounts for the substantial increase in this category. For more information on the BOLI purchase see Note 6. Funding the growth in assets from December 31, 1999, was deposit growth of $4.9 million, or 1.5%, and an increase of $11.2 million, or 40.8%, in securities sold under agreements to repurchase. Deposits and securities sold under agreements to repurchase totaled $338.2 million and $38.3 million, respectively at June 30, 2000. Total shareholders' equity increased $929,000, or 2.4%, to $40.2 million at June 30, 2000, from $39.2 million at December 31, 1999. The net effect of an increase in retained earnings offset by increased unrealized security losses and stock repurchase transactions during the six months accounted for the majority of the change in shareholders' equity. Cash dividends declared in the second quarter ended June 30, 2000, totaled $501,000 compared to $447,000 in the second quarter of 1999. For the six months ended June 30, 2000, cash dividends declared totaled $1.0 million versus $2.0 million for the same period in 1999. Cash dividends declared for the first six months of 1999 included a special cash dividend of $.40 per share. Capital adequacy is currently defined by regulatory agencies through the use of several minimum required ratios. At June 30, 2000, the Corporation was well capitalized as defined by the banking regulatory agencies. The Corporation's leverage ratio, Tier I and Tier II risk-based capital ratios at June 30, 2000 were 8.87%, 12.44% and 13.64%, respectively. For more information on capital ratios refer to Note 2 of the accompanying financial statements. Net charge-offs for the second quarter and six months ended June 30, 2000, totaled $307,000 and $412,000, respectively, compared to $146,000 and $267,000 for the same periods ended June 30, 1999. For the six months ended June 30, 2000, 60% of net charge-offs were from the commercial portfolio versus the first six months ended June 30, 1999, when 93.5% of the net charge-offs were from the consumer portfolio. The increase in commercial net charge-offs for the first six months of 2000 is related primarily to one large credit and is not indicative of the quality of the entire commercial portfolio. The annualized ratio of net charge-offs to average loans was .28% at June 30, 2000, versus .19% at December 31, 1999. Nonperforming loans were down $2.5 million to $1.1 million at June 30, 2000 from $3.6 million at December 31, 1999. Contributing to the decrease in nonperforming loans was a transfer of $1.2 million to ORE. In addition, $600,000 in nonperforming loans were sold to a third party, $203,000 was transferred to other repossessed assets and the remainder either charged-off or paid-off. Included in nonperforming loans at June 30, 2000, were nonaccrual loans totaling $586,000 and loans past due 90 days or more totaling $520,000 compared to $3.1 million and $451,000, respectively, at December 31, 1999. The Corporation recorded ORE equaling $1.5 million at June 30, 2000 versus $306,000 at December 31, 1999. Nonperforming assets represented .57% of total assets at June 30, 2000 compared to .87% at December 31, 1999. The allowance for possible loan losses totaled $3.8 million at June 30, 2000, compared to $3.9 million at December 31, 1999 and represented 1.28% and 1.34% of total loans at June 30, 2000 and December 31, 1999, respectively. The allowance provided coverage for nonperforming loans at a rate of 1.34 times at June 30, 2000. The local economy remains basically unchanged from year-end 1999. At 3.5%, the unemployment rate is near the 11-year low of 3.0% for the Franklin County area. Liquidity The Corporation's liquidity position (net cash, short-term and marketable assets divided by net deposits and short-term liabilities) was 20.2% at June 30, 2000. The Corporation had advances outstanding totaling $33.8 million with the Federal Home Loan Bank of Pittsburgh (FHLB) at June 30, 2000. The Corporation has term and overnight borrowings with FHLB. Currently, the maximum borrowing capacity for the Corporation with FHLB is approximately $108.7 million. Management believes that liquidity is adequate to meet the borrowing and deposit needs of its customers. Part I, Item 3 Qualitative and Quantitative Disclosures about Market Risk There were no material changes in the Corporation's exposure to market risk during the second quarter and six months ended June 30, 2000. For more information on market rate risk refer to the Corporation's 1999 10-K. PART II - OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities and Use of Proceeds None Item 3. Defaults by the Company on its Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders The 2000 Annual Meeting of Shareholders (the "Meeting") of the Corporation was held on April 25, 2000. Notice of the Meeting was mailed to shareholders on or about March 28, 2000, together with proxy solicitation materials prepared in accordance with Section 14(a) of the Securities Exchange Act of 1934, as amended, and the regulations promulgated thereunder. The Meeting was held for the following purpose: 1. Election of Directors. To elect three Class A directors to hold office for 3 years from the date of election and until their successors are elected and qualified. There was no solicitation in opposition to the nominees of the Board of Directors for election to the Board. All nominees of the Board of Directors were elected. The number of votes cast for as well as the number of votes withheld for each of the nominees for election to the Board of Directors, were as follows: Votes Nominee Votes For Withheld - ------- --------- -------- Donald A. Fry 2,096,326.7671 8,859.3422 H. Huber McCleary 2,097,101.3438 8,084.7655 Charles M. Sioberg 2,092,292.5621 12,893.5472 Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 27 Financial Data Schedule (b) Reports on Form 8-K There were no reports filed on Form 8-K for the period. FRANKLIN FINANCIAL SERVICES CORPORATION and SUBSIDIARY SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Franklin Financial Services Corporation August 11, 2000 /s/ William E. Snell, Jr. ------------------------- William E. Snell Jr. President and Chief Executive Officer August 11, 2000 /s/ Elaine G. Meyers -------------------- Elaine G. Meyers Treasurer and Chief Financial Officer