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, 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 2,767,494 outstanding shares of the Registrant's common stock as of November 3, 2000. INDEX Page PART I - FINANCIAL INFORMATION Item 1 - Financial Statements Consolidated Balance Sheets 3 as of September 30, 2000 (unaudited) and December 31, 1999 Consolidated Statements of 4 Income for the Three and Nine Months ended September 30, 2000 and 1999 (unaudited) Consolidated Statements of Changes in 5 Shareholders' Equity for the Nine Months ended September 30, 2000 and 1999 (unaudited) Consolidated Statements of Cash 6 Flows for the Nine Months Ended September 30, 2000 and 1999 (unaudited) Notes to Condensed Consolidated Financial 7 Statements (unaudited) Item 2 - Management's Discussion and Analysis of 12 Financial Condition and Results of Operations Item 3 - Qualitative and Quantitative Disclosures About Market Risk 12 PART II - OTHER INFORMATION SIGNATURE PAGE 28 CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except per share) (Unaudited) September 30 December 31 2000 1999 ---------- ---------- (unaudited) ASSETS Cash and due from banks $11,813 $14,956 Interest bearing deposits in other banks 1,257 161 Investment securities available for sale 132,653 129,801 Loans, net 294,625 284,084 Premises and equipment, net 6,410 5,513 Other assets 19,044 10,164 -------- -------- Total Assets $465,802 $444,679 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand (non-interest bearing) $43,240 $43,297 Savings and Interest checking 166,098 154,537 Time 136,228 135,476 -------- -------- Total Deposits 345,566 333,310 Securities sold under agreements to repurchase 37,093 27,182 Short term borrowings 9,300 12,500 Long term debt 29,788 29,695 Other liabilities 2,943 2,732 -------- -------- Total Liabilities 424,690 405,419 Shareholders' equity: Common stock $1 par value per share, 15,000 shares authorized with 3,045 shares issued and 2,767 and 2,792 shares outstanding at September 30,2000 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 19,798 19,834 Retained earnings 24,749 22,627 Accumulated other comprehensive income (loss) (866) (876) Treasury stock (Note 4) (5,353) (4,938) Unearned compensation (261) (432) -------- -------- Total shareholders' equity 41,112 39,260 -------- -------- Total Liabilities and Shareholders' Equity $465,802 $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 Nine Months Ended September 30 September 30 2000 1999 2000 1999 ---------------------------- ---------------------------- INTEREST INCOME Interest on loans $6,278 $5,506 $18,359 $16,330 Interest on deposits in other banks 58 109 95 274 Interest on fed funds sold 0 1 - Interest and dividends on investments: Taxable interest 1,273 1,156 3,765 3,285 Tax exempt interest 522 580 1,634 1,720 Dividends 76 48 235 139 --------- --------- --------- --------- Total interest income 8,207 7,399 24,089 21,748 --------- --------- --------- --------- INTEREST EXPENSE Interest on deposits 3,552 3,035 10,111 8,830 Interest on securities sold under agreements to repurchase 630 307 1,524 847 Interest on short term borrowings 32 3 232 5 Interest on long term debt 417 460 1,239 1,309 --------- --------- --------- --------- Total interest expense 4,631 3,805 13,106 10,991 --------- --------- --------- --------- Net interest income 3,576 3,594 10,983 10,757 Provision for possible loan losses 180 180 573 575 --------- --------- --------- --------- Net-interest income after provision for possible loan losses 3,396 3,414 10,410 10,182 --------- --------- --------- --------- NONINTEREST INCOME Service charges on loans 130 112 327 416 Services charges on deposit accounts 244 225 715 665 Investment and trust services fees 591 590 1,776 1,780 Other service charges and fees 246 146 558 312 Securities gains 21 238 188 --------- --------- --------- --------- Total noninterest income 1,232 1,261 3,614 3,361 --------- --------- --------- --------- NONINTEREST EXPENSE Salaries and benefits 1,619 1,755 5,071 4,747 Net occupancy expense 181 151 531 483 Furniture and equipment expense 148 155 444 485 Advertising 151 119 398 375 Legal & professional fees 85 101 281 269 Data processing 175 192 693 664 Pennsylvania bank shares tax 96 91 288 272 Other 565 541 1,850 1,554 --------- --------- --------- --------- Total noninterest expense 3,020 3,105 9,556 8,849 --------- --------- --------- --------- Income before Federal income taxes 1,608 1,570 4,468 4,694 Federal income tax expense 292 290 788 890 --------- --------- --------- --------- Net income $1,316 $1,280 $3,680 $3,804 ======= ======= ======= ======= Basic earnings per share $0.49 $0.47 $1.36 $1.39 Weighted average shares outstanding (000's) 2,709 2,727 2,715 2,728 Diluted earnings per share $0.48 $0.46 $1.33 $1.37 Weighted average shares outstanding (000's) 2,754 2,766 2,757 2,767 The accompanying notes are an integral part of these statements. Consolidated Statements of Changes in Shareholders' Equity for the nine months ended September 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, except per share Stock Capital Earnings Income (loss) Stock Compensation Total -------------------------------------------------------------------------------------- Balance at December 31, 1998 $3,045 $19,793 $20,562 $1,783 ($4,620) ($662) $39,901 Comprehensive income: Net income - - 3,804 - - - 3,804 Unrealized holding losses arising during current period, net of tax - - - (2,122) - - (2,122) Reclassification adjustment for realized gains included in net income, net of tax - - - 83 - - 83 Other comprehensive income,net of tax - - - 3 - - 3 -------- Total Comprehensive income 1,765 Cash dividends declared, $.90 per share - - (2,516) - - - (2,516) Tax benefit of restricted stock transaction - 10 - - - - 10 Common stock issued under stock option plans - 30 - - 98 - 128 Acquisition of 11,975 shares of treasury stock - - - - (342) - (342) Amortization of unearned compensation - - - - - 176 176 -------------------------------------------------------------------------------------- Balance at September 30, 1999 $3,045 $19,833 $21,850 ($253) ($4,864) ($486) $39,125 ====== ====== ====== ====== ====== ====== ====== Balance at December 31, 1999 $3,045 19,834 22,627 (876) (4,938) (432) $39,260 Comprehensive income: Net income - - 3,680 - - - 3,680 Unrealized holding losses arising during current period, net of tax - - - (164) - - (164) Reclassification adjustment for realized gains included in net income, net of tax - - - 213 - - 213 Other comprehensive income, net of tax - - - -39 - - -39 --------- Total Comprehensive income 3,690 Cash dividends declared, $.56 per share - -- (1,558) - - - (1,558) Common stock issued under stock option plans - (20) - - 94 - 74 Forfeiture of restricted stock - (16) - - (73) 89 - Acquisition of 25,900 shares of treasury stock - - - - (436) - (436) Amortization of unearned compensation - - - - - 82 82 ----------------------------------------------------------------------------------------- Balance at September 30, 2000 $3,045 $19,798 $24,749 ($866) ($5,353) ($261) $41,112 ======= ======= ======= ======= ======= ======= ======= The accompanying notes are an integral part of these statements. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in Thousands) (Unaudited) For the Nine Months Ended September 30 2000 1999 ------- ------- Cash flows from operating activities: Net Income 3,680 3,804 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 556 594 Net amortization of securities premiums and discounts (59) (252) Provision for possible loan losses 573 575 Securities gains, net (238) (188) Mortgage loans originated for sale (6,116) (11,578) Proceeds from sale of mortgage loans 6,159 11,572 Principal gain on sales of mortgage loans (43) 6 Gain on sale of premises and equipment - (44) Increase in cash surrender value of life insurance (122) - Increase in interest receivable and other assets (1,362) (926) Increase in interest payable and other liabilities 247 179 Other, net 213 - -------- -------- Net cash provided by operating activities 3,488 3,742 -------- -------- Cash flows from investing activities: Proceeds from sales of investment securities available for sale 6,118 777 Proceeds from maturities of investment securities available for sale 13,991 90,475 Purchase of investment securities available for sale (22,591) (95,851) Net increase in loans (12,729) (15,337) Purchase of bank owned life insurance (6,000) - Capital expenditures (1,463) (337) Proceeds from sales of premises and equipment - 325 -------- -------- Net cash used in investing activities (22,674) (19,948) -------- -------- Cash flows from financing activities: Net increase in demand deposits, NOW accounts and savings accounts 11,505 6,481 Net increase in certificates of deposit 752 665 Net increase in other borrowings 6,804 4,436 Dividends paid (1,560) (2,516) Common stock issued under stock option plans 74 138 Purchase of treasury shares (436) (342) -------- -------- Net cash provided by financing activities 17,139 8,862 -------- -------- Decrease in cash and cash equivalents (2,047) (7,344) Cash and cash equivalents as of January 1 15,117 24,409 -------- -------- Cash and cash equivalents as of September 30 13,070 17,065 ======= ======= The accompanying notes are an integral part of these statements. FRANKLIN FINANCIAL SERVICES CORPORATION and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1 - Basis of Presentation The consolidated balance sheets as of September 30, 2000 and December 31, 1999, the consolidated statements of income for the three-month and nine-month periods ended September 30, 2000 and 1999, the consolidated statements of changes in shareholders' equity for the nine-month periods ended September 30, 2000 and 1999 and the consolidated statements of cash flows for the nine- month periods ended September 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 September 30, 2000, and for all periods presented have been made. The consolidated financial statements include the accounts of Franklin Financial Services Corporation (the Corporation), and its wholly-owned direct and indirect subsidiaries. Farmers and Merchants Trust Company of Chambersburg is a direct subsidiary; Franklin Realty Services Corporation (a Farmers and Merchants' subsidiary) is an indirect subsidiary. 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 September 30, 2000, are not necessarily indicative of the operating results for the full year. Earnings per share is computed based on the weighted average number of shares outstanding during each quarter, adjusted retroactively for stock splits and stock 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 September 30 2000 1999 ---- ---- (Amounts in thousands) Weighted average shares outstanding (basic) 2,709 2,727 Impact of common stock equivalents, primarily stock options 45 39 Weighted average shares outstanding (diluted) 2,754 2,766 ====== ====== For the nine months ended September 30 2000 1999 ---- ---- (Amounts in thousands) Weighted average shares outstanding (basic) 2,715 2,728 Impact of common stock equivalents, primarily stock options 42 39 Weighted average shares outstanding (diluted) 2,757 2,767 ====== ====== Note 2. Capital Adequacy Quantitative measures established by regulation to ensure capital adequacy require financial institutions to maintain minimum amounts and ratios of total and Tier I capital to risk-weighted assets and of Tier I capital to average assets. The Capital ratios of the Corporation and its bank subsidiary are as follows: As of September 30, 2000 (unaudited) To be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions (Amounts in thousands) Amount Ratio Amount Ratio Amount Ratio Total Capital (to Risk Weighted Assets) Corporation $44,698 13.41% $26,669 8.00% N/A Bank 41,471 12.57% 26,394 8.00% $32,992 10.00% Tier I Capital (to Risk Weighted Assets) Corporation $40,724 12.22% $13,334 4.00% N/A Bank 37,497 11.37% 13,197 4.00% $19,795 6.00% Tier I Capital (to Average Assets) Corporation $40,724 8.92% $18,253 4.00% N/A Bank 37,497 8.26% 18,163 4.00% $22,704 5.00% As of December 31, 1999 To be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions (Amounts in thousands) Amount Ratio Amount Ratio Amount Ratio Total Capital (to Risk Weighted Assets) Corporation $42,494 13.89% $24,469 8.00% N/A Bank 38,930 12.82% 24,298 8.00% $30,373 10.00% Tier I Capital (to Risk Weighted Assets) Corporation $38,697 12.65% $12,235 4.00% N/A Bank 35,133 11.57% 12,149 4.00% $18,224 6.00% Tier I Capital (to Average Assets) Corporation $38,697 8.72% $17,755 4.00% N/A Bank 35,133 7.94% 17,698 4.00% $22,122 5.00% 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, had 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 September 30, 2000, the amortized cost of the cap was $152,000; the fair market value of the cap at September 30, 2000 was $150,556. A loss of $39,000, net of tax was recorded as comprehensive income for the nine months ended September 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 nine months ended September 30, 2000, 25,900 shares of the Corporation's common stock were repurchased at a cost of approximately $436,000. NOTE 5 Bank Owned Life Insurance On June 5, 2000, the Bank 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 Bank 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 Bank's $6.0 million investment has been recorded as an Other Asset. At September 30, 2000, the carrying value of the investment was $6,121,677. NOTE 6 Recent Accounting Pronouncements In September 2000, The Financial Accounting Standards Board issued Statement No. 140 "Accounting for Transfers and Servicing of Assets and Extinguishments of Liabilities." Statement No.140 replaces Statement No. 125. This statement shall be effective for transfers and servicing of financial assets and extinguishments of liabilities occuring after March 31, 2001. The adoption of the statement is not expected to have a significant impact on the financial condition or results of operations of the Company. Management's Discussion and Analysis of Results of Operations and Financial Condition for the Three and Nine Month Periods Ended September 30, 2000 and 1999 PART 1, Item 2 Results of Operations In the third quarter and nine months ended September 30, 2000, the Corporation earned $1.32 million and $3.68 million, respectively, compared to $1.28 million and $3.80 million, respectively, for the comparable periods ended September 30, 1999. Basic earnings per share equaled $.49 and $1.36 for the third quarter and nine months, respectively, in 2000 versus $.47 and $1.39 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 nine months. Book value per share equaled $14.86 at September 30, 2000, compared to $13.99 at September 30, 1999. The Corporation's annualized return on average assets (ROA) and return on average equity (ROE) for the first nine months of 2000 were 1.09% and 12.48 %, respectively, compared to 1.19% and 12.92%, respectively, for the first nine months of 1999. Net Interest Income Net interest income recorded a decrease of $18,000 to $3.57 million for the third quarter ended September 30, 2000 compared to $3.59 million for the third quarter ended September 30, 1999. Net interest income for the nine months ended September 30, 2000 was up $226,000, or 2.1%, to $10.98 million from $10.76 million for the comparable period in 1999. Net interest margin for the nine months ended September 30, 2000 was 3.71% compared to 3.87% for the nine months ended September 30, 1999. Factors contributing to the tightening of the net interest margin are rising interest rates coupled with a negative gap position, a shifting deposit mix and the June purchase of $6.0 million in Bank Owned Life Insurance (BOLI). The interest earned on BOLI is recorded in other noninterest income and totaled approximately $95,000 for the third quarter and $122,000 for the nine months ended September 30, 2000. Provision for Possible Loan Losses For the third quarter and nine months ended September 30, 2000, the Corporation expensed $180,000 and $573,000, respectively, for possible loan losses. This compares with $180,000 and $575,000 for the third quarter and nine months, respectively, ended September 30, 1999. The provision reflects the level of charge-off activity for the periods. Management believes that the allowance for loan losses is adequately funded at September 30,2000. Noninterest Income Total noninterest income, excluding net securities gains, grew $138,000, or 12.86%, to $1.2 million for the third quarter ended September 30, 2000 compared to $1.1 million for the third quarter ended September 30, 1999. The primary factors contributing to this increase was an ATM access fee implemented earlier in 2000 which produced income of $49,000 for the quarter and interest earned on the BOLI which totaled approximately $95,000 for the third quarter. Total noninterest income, excluding net securities gains, grew $203,000, or 6.40%, to $3.37 million for the nine months ended September 30, 2000, compared to $3.17 million for the nine months ended September 30, 1999. Factors contributing to the increase in noninterest income for the nine months were growth in deposit accounts adding $50,000 more service charge income, the ATM access fee which added $87,000 and interest earned on BOLI which totaled $122,000. A decrease in mortgage origination activity in 2000 versus 1999 acted to partially offset these additions to income. Net securities gains for the third quarter ended September 30, 2000, totaled $21,000 versus $188,000 for the third quarter ended September 30, 1999. For the nine months ended September 30, 2000, net securities gains totaled $238,000 compared to $188,000 one year earlier and were used to offset expenses related to other real estate owned (OREO) and loan collections in the respective periods. Noninterest Expense Total noninterest expense was down $85,000, or 2.7%, to $3.02 million for the third quarter ended September 30, 2000, over the third quarter of 1999 and up $707,000, or 7.9%, to $9.56 million for the nine months ended September 30, 2000 over the comparable period in 1999. For the third quarter of 2000, lower expense related to a long-term incentive plan was the primary contributor to the decrease in noninterest expense. For the nine months ended September 30, 2000, salaries and benefits and other expense were the primary contributors to the higher noninterest expense. Salary expense, which includes commissions and a recently initiated pay for performance, was up approximately $230,000 to $4.5 million for the first nine months of 2000 compared to $4.3 million for the comparable period one year earlier. Benefits expense was up approximately $94,000 to $540,000 for the same nine-month period compared to the nine-month period ended September 30, 1999. Lower deferred costs for salaries and benefits related to a smaller volume of mortgage loan originations acted to increase salaries and benefits, $196,000, while other benefit expense acted to partially offset this increase. Other expense was up $296,000, or 19.0%, to $1.8 million for the nine months ended September 30, 2000, compared to $1.5 million for the same period in 1999. Primary contributors to the higher expense were losses of $137,000 on the sale of nonperforming loans held-for-sale and an increase in loan collection and OREO expense of $132,000. Federal income tax expense for the third quarter and nine months ended September 30, 2000, was $292,000 and $788,000, respectively, compared to $290,000 and $890,000, respectively, for the same periods ended September 30, 1999. The Corporation's effective tax rate for the nine months ended September 30, 2000, was 17.6% compared to 18.9% for the nine months ended September 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 $465.8 million at September 30, 2000, an increase of $21.1 million, or 4.7%, from $444.7 million at December 31,1999. Asset growth was concentrated primarily in net loans and other assets. Net loan growth totaled $10.5 million, or 3.71%, and was led by commercial loans with $5.7 million. New mortgage and consumer loans combined recorded less growth than commercial loans. Mortgage loan originations were down almost 40.0% in the first nine months of 2000 compared with the first nine months of 1999. Other asset growth was primarily the result of an addition of a significant foreclosed property to Other Real Estate Owned (OREO) and the purchase of $6.0 million in Bank Owned Life Insurance (BOLI). For more information on the BOLI transaction refer to Note 5. Deposit growth of $12.2 million and growth in Securities sold under agreements to repurchase totaling $9.9 million were the funding sources for the growth in assets over the nine month period ended September 30, 2000. Total deposits at September 30, 2000 were $345.6 million compared to $333.3 million at December 31, 1999. Growth in deposits occurred largely in one deposit product, the Money Management Account, with a total volume of $78.7 million at September 30, 2000 compared with $60.5 million at December 31, 1999. The money market rate attached to this product makes it very attractive to customers and largely the reason for its growth. Securities sold under agreements to repurchase (Repos) grew to $37.1 million at September 30, 2000 from $27.2 million at December 31, 1999. Repos, as part of a cash management product for business customers, also pay an attractive interest rate. Total shareholders' equity increased $1.8 million to $41.1 million at September 30, 2000 from $39.3 million at December31, 1999. Retained earnings of $2.1 million were the primary contributors to the growth in shareholders' equity. Cash dividends declared in the third quarter ended September 30, 2000 totaled $554,000 compared to $503,000 for the third quarter of 1999. For the nine months ended September 30, 2000, cash dividends declared totaled $1.6 million compared to $2.5 million for the nine months ended September 30, 1999. Cash dividends declared for the first nine 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 September 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 September 30, 2000 were 8.92%, 12.22% and 13.41%, respectively. For more information on capital ratios refer to Note 2 of the accompanying financial statements. Net charge-offs for the third quarter and nine months ended September 30, 2000 totaled $45,000 and $457,000, respectively, compared to $59,000 and $327,000, respectively, for the comparable periods in 1999. For the nine months ended September 30, 2000, 55.0% of net charge-offs were from the commercial loan portfolio versus the first nine months ended September 30, 1999, when 93.5% of net charge-offs were from the consumer portfolio. The increase in commercial net charge-offs for the first nine 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 0.21% at September 30, 2000, versus 0.19% at December 31, 1999. Nonperforming loans decreased 50.0% to $1.8 million at September 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 OREO earlier in the year. 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 of paid-off. Included in nonperforming loans at September 30, 2000, were nonaccrual loans totaling $824,000 and loans past due 90 days or more totaling $1.0 million compared to $3.1 million and $451,000, respectively, at December 31, 1999. The Corporation recorded OREO equaling $1.4 million at September 30, 2000, versus $306,000 at December 31, 1999. Nonperforming assets represented 0.69% of total assets at September 30, 2000 compared to 0.87% at December 31, 1999. The allowance for possible loan losses totaled $3.97 million at September 30, 2000, compared to $3.86 million at December 31, 1999 and represented 1.33% and 1.34% of total loans at September 30, 2000 and December 31, 1999, respectively. The coverage rate for the allowance to nonperforming loans was approximately 2.2 times at September 30, 2000. A series of local economic downturns occurring in the past several months contributed to the jump in Franklin County's jobless rate to 4% in September 2000 from 3.5% in June 2000. Two long-time employers announced layoffs, one of these employers affecting more than 400 workers. In September, a large national company reneged on its decision to operate a major distribution center in Chambersburg just days before its official opening date, affecting 280 workers. Although new jobs have been added in the past year that will help to offset the recent reduction in jobs, local officials are beginning to report that many employed workers are underemployed. The local Franklin County Area Development Corporation is stepping up to the challenge of bringing other jobs to Franklin County that would have the same economic impact as the lost jobs. The unemployment rate in neighboring Fulton and Cumberland Counties has changed little: Fulton's unemployment rate was 3.3%, ranking 17th lowest in the State and Cumberland County, ranking 4th lowest in the State, reported 2.3% unemployment in September. Pennsylvania's seasonally unadjusted jobless rate in September was 4%. Management is cautiously optimistic that the recent events in the local workforce will not have a significant negative impact on the Corporation. Liquidity The Corporation's liquidity position (net cash, short-term and marketable assets divided by net deposits and short-term liabilities) was 18.8% at September 30, 2000. The Corporation had advances outstanding totaling $39.1 million with the Federal Home Loan Bank of Pittsburgh (FHLB) at September 30, 2000. The Corporation has term and overnight borrowings with FHLB. Currently, the maximum borrowing capacity for the Corporation with FHLB is approximately $111 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 third quarter and nine months ended September 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. Results of Votes of Security Holders None Item 5. Other Information None Item 6a. 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 November 13, 2000 /s/ William E. Snell, Jr. --------------------------------- William E. Snell, Jr. President and Chief Executive Officer November 13, 2000 /s/ Elaine G. Meyers --------------------------------- Elaine G. Meyers Treasurer and Chief Financial Officer