UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
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 (I.R.S. Employer
of incorporation or organization) Identification No.)
20 SOUTH MAIN STREET (P.O. BOX T)
CHAMBERSBURG, PA 17201-0819
(Address of principal executive offices) (Zip Code)
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 1,300,818 outstanding shares of the Registrant's
common stock as of July 28, 1995.
FRANKLIN FINANCIAL SERVICES CORPORATION
AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 1995 (Unaudited) and December 31, 1994
Condensed Consolidated Statements of Income for the
Three and Six Months ended June 30, 1995 and 1994
(unaudited)
Condensed Consolidated Statements of Changes in
Shareholders' Equity for the Six Months ended
June 30, 1995 (unaudited)
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1995 and 1994
(unaudited)
Notes to Condensed Consolidated Financial
Statements (unaudited)
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
Item 6 - Exhibits and Reports on Form 8-K
SIGNATURE PAGE
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands)
June 30 December 31
1995 1994
--------- ----------
Unaudited
ASSETS
Cash and due from banks. . . . . . . . . . . . . . . . . . .. . . . . . . . . . $7,578 $8,290
Interest bearing deposits in other banks. . . . . . . . . . . . . . . . . . . . 13,659 381
Investment securities (Market value of $52,431 and $57,340 at
June 30, 1995 and December, 31 1994 respectively) (Note 2). . . . . . . . . . 52,344 58,494
Investments available for sale(Note 2). . . . . . . . . . .. . . . . . . . . . 13,950 14,082
Loans: . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . 219,898 223,847
Less: Unearned Discount. . . . . . . . . . . . . . . . . . .. . . . . . . . . . (842) (1,111)
Allowance for possible loan losses. . . . . . . . . . . . . . . . . . (3,379) (3,425)
------- -------
Net Loans . . . . . . . . . . . . . . . . . .. . . . . . . . . . 215,677 219,311
Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . 5,371 4,986
Other Assets . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . 4,821 5,010
--------- -------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . $313,400 $310,554
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits: (Note 3)
Demand (non-interest bearing) . . . . . . . . . . . . . . . . . . . . . . . . $30,821 $29,323
Savings and interest checking . . . . . . . . . . . . . . . . . . . . . . . . 100,252 105,977
Time . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . 127,653 121,397
-------- -------
Total Deposits . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . 258,726 256,697
Securities sold under agreements to repurchase . . . . . . .. . . . . . . . . . 12,729 9,612
Other borrowings . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . 6,501 8,951
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,016 2,421
--------- -------
Total Liabilities 279,972 277,681
Commitments and Contingencies . . . . . . . . . . . . . . . . . . . . . . . . . - -
Shareholders' Equity:
Common stock $1 par value per share, 5000 shares authorized
with 1,354 and 1,353 shares issued and 1,304 and 1,352
outstanding at June 30, 1995 and December 31,1994
respectively . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . 1,354 1,353
Capital stock without par value, 5,000 shares authorized
with no shares issued or outstanding . . . . . . . . . . .. . . . . . . . . . - -
Additional paid in capital . . . . . . . . . . . . . . . . .. . . . . . . . . . 19,451 19,451
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,341 12,884
Net unrealized gain on securities . . . . . . . . . . . . . . . . . . . . . . . 224 (353)
Treasury stock (Note 4) . . . . . . . . . . . . . . . . . .. . . . . . . . . . (1,694) (36)
Unearned compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (248) (426)
------- -------
Total Shareholders' Equity . . . . . . . . . . . . . . . . .. . . . . . . . . . 33,428 32,873
------- -------
Total Liabilities and Shareholders' Equity . . . . . . . . .. . . . . . . . . . $313,400 $310,554
======= =======
The accompanying notes are an integral part of these statements.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share)
(Unaudited)
For the Three For the Six
Months Ended Months Ended
June 30 June 30
---------------------- ----------------------
1995 1994 1995 1995
--------- --------- --------- ---------
INTEREST INCOME
Interest on loans. . . . . . . . . . . . . . . .. . . . $5,057 $4,260 $10,041 $8,503
Interest on deposits in other banks. . . . . . .. . . . 121 2 128 4
Interest on federal funds sold. . . . . . . . . . . . . 5 5 5 5
Interest and dividends on investments (Note 2). . . . . 992 1,069 2,010 2,190
--------- --------- --------- ---------
Total interest income . . . . . . . . . . . . . . . . 6,175 5,336 12,184 10,702
INTEREST EXPENSE
Interest on deposits . . . . . . . . . . . . . .. . . . 2,501 2,116 4,871 4,283
Interest on securities sold under repurchase
agreements and other borrowings . . . . . . . . . . . 248 244 505 443
--------- --------- --------- ---------
Total Interest Expense . . . . . . . . .. . . . 2,749 2,360 5,376 4,726
--------- --------- --------- ---------
Net interest income . . . . . . . . . . . . . . . . . . 3,426 2,976 6,808 5,976
Provision for possible loan loss . . . . . . . . .. . . . (83) (10) (122) (45)
--------- --------- --------- ---------
Net-interest income after provision
for possible loan losses . . . . . . . . . . . .. . . . 3,343 2,966 6,686 5,931
--------- --------- --------- ---------
OTHER INCOME
Trust commissions . . . . . . . . . . . . . . . . . . . 264 206 652 526
Service charges, commissions and fees . . . . . . . . . 540 462 1,033 899
Other . . . . . . . . . . . . . . . . . . . . . . . . . 88 166 117 288
Net securities gains(losses). . . . . . . . . . . . . . 0 100 0 116
--------- --------- --------- ---------
Total Other Income . . . . . . . . . . . . . .. . . . 892 934 1,802 1,829
--------- --------- --------- ---------
OTHER EXPENSE
Salaries and benefits . . . . . . . . . . . . . . . . . 1,487 1,486 3,005 2,914
Net occupancy expense . . . . . . . . . . . . . . . . . 125 139 248 274
Furniture and equipment expense . . . . . . . . . . . . 187 188 389 378
FDIC insurance . . . . . . . . . . . . . . . . .. . . . 144 149 288 297
Other . . . . . . . . . . . . . . . . . . . . . . . . . 887 865 1,701 1,691
--------- --------- --------- ---------
Total Other Expenses . . . . . . . . . . . . .. . . . 2,830 2,827 5,631 5,554
--------- --------- --------- ---------
Income before income tax provision . . . . . . . .. . . . 1,405 1,073 2,857 2,206
--------- --------- --------- ---------
Income tax provision . . . . . . . . . . . . . . .. . . . (349) (197) (714) (451)
--------- --------- --------- ---------
Net income . . . . . . . . . . . . . . . . . .. . . . $1,056 $876 $2,143 $1,755
========= ========= ========= =========
Earnings per share (Note 1)
Net income per share . . . . . . . . . . . . .. . . . $0.82 $0.67 $1.66 $1.35
========= ========= ========= =========
Net income per share computations for 1994 have been adjusted retroactively
to reflect a 10% stock dividend paid on December 30, 1994 to shareholders of
record on December 9, 1994.
The accompanying notes are an integral part of these statements.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
for the year ended December 31, 1994 and the Six Months ended June 30, 1995
(Amounts in thousands, except per share)
Net
Additional Unrealized
Common Paid-in Retained Gain/Loss Treasury Unearned
Stock Capital Earnings Securities Stock Compensation Total
------ ------ ------ ------ ------ -------- ------
Balance at December 31, 1993 1,231 15,493 14,358 302 (154) (612) 30,618
Year ended December 31, 1994
Net Income - - 3,760 - - - 3,760
- - - - -
Cash dividends, $.98 per share - - (1,224) - - - (1,224)
- - -
10% stock dividend 122 3,888 (4,010) - - - 0
Common stock issued under stock
option plans - 70 - - 147 - 217
Change in net unrealized loss on
securities (Note 1 and 4) - - - (655) - - (655)
Acquisition of 842 shares of
Treasury stock at cost - - - - (29) - (29)
Amortization of unearned compensation - - - - - 186 186
------ ------ ------ ------ ------ -------- ------
Balance at December 31, 1994 $1,353 $19,451 $12,884 ($353) ($36) ($426) $32,873
------ ------ ------ ------ ------ -------- ------
Net income - - 2,143 - - - 2,143
Cash Dividends, $.52 per share - - (687) - - - (687)
Common stock issued under stock
option plans 1 - - - 30 - 31
Change in net unrealized loss on
securities - - - 577 - - 577
Acquisition of 49,233 shares of Treasury
stock at cost - - - - (1,688) - (1,688)
Amortization of unearned compensation - - - - - 178 178
------ ------ ------ ------ ------ -------- ------
Balance at June 30, 1995 $1,354 $19,451 $14,340 $224 ($1,694) ($248) $33,427
====== ====== ====== ======= ======= ======== ======
The accompanying notes are an integral part of these statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)
For the Six
Months Ended
June 30
-----------------------
1995 1994
--------- ---------
Cash flows from operating activities:
Net Income . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . $2,143 1,755
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . 317 315
Premium amortization on investment securities . . . . . . . . . . . . . 35 167
Discount accretion on investment securities . . . . . . . . . . . . . . (111) (58)
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . 122 45
Securities gains, net . . . . . . . . . . . . . . . . . . . . . . . . . 0 (116)
Principal gains on sales of mortgage loans . . . . .. . . . . . . . . . (15) (29)
Gain on sale of other assets. . . . . . . . . . . . . . . . . . . . . . (5) (116)
Loan charge-offs, net of recoveries . . . . . . . . . . . . . . . . . . (168) (82)
(Increase) in interest receivable . . . . . . . . . . . . . . . . . . . (104) (140)
Increase(Decrease) in interest payable . . . . . . .. . . . . . . . . . 178 (52)
(Increase)Decrease in unearned income . . . . . . . . . . . . . . . . . (269) 241
Decrease(Increase) in prepaid and other assets . . .. . . . . . . . . . 111 (262)
Decrease in accrued expenses and other liabilities .. . . . . . . . . . (697) (278)
--------- ---------
Net cash provided by operating activities . . . . . . .. . . . . . . . . . $1,537 $1,390
--------- ---------
Cash flows from investing activities:
Proceeds from sales of investment securities available. . . . . . . . . . 0 491
Proceeds from maturities of investment securities . . . . . . . . . . . . 11,893 13,658
Purchase of investment securities . . . . . . . . . . . . . . . . . . . . (4,660) (3,961)
Net Decrease (Increase) in loans . . . . . . . . . . .. . . . . . . . . . 1,990 (7,407)
Proceeds from sale of mortgage loans . . . . . . . . .. . . . . . . . . . 1,974 5,619
Capital expenditures . . . . . . . . . . . . . . . . .. . . . . . . . . . (707) (195)
Proceeds from sales of other assets . . . . . . . . . . . . . . . . . . . 10 201
--------- ---------
Net cash used by investing activities . . . . . . . . .. . . . . . . . . . 10,500 8,406
--------- ---------
Cash flows from financing activities:
Net Increase(Decrease) in demand deposits,
NOW accounts and savings accounts . . . . . . . . . .. . . . . . . . . . (4,227) (5,313)
Net Increase (Decrease) in certificates of deposit . .. . . . . . . . . . 6,256 (8,073)
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (687) (588)
Common stock issued under stock option plans . . . . .. . . . . . . . . . 30 12
Purchase of treasury shares . . . . . . . . . . . . . . . . . . . . . . . (1,688) (29)
Cash inflows(outflows) from other borrowings . . . . .. . . . . . . . . . 667 3,874
Other, net . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . 178 87
--------- ---------
Net cash provided (used) by financing activities . . . . . . . . . . . . . 529 (10,030)
--------- ---------
Increase (Decrease) in cash and cash equivalents . . . . . . . .. . . . . . . . . . 12,566 (234)
Cash and cash equivalents as of January 1 . . . . . . .. . . . . . . . . . 8,671 7,437
--------- ---------
Cash and cash equivalents as of June 30 . . . . . . . .. . . . . . . . . . $21,237 $7,203
========= =========
The accompanying notes are an integral part of these statements.
FRANKLIN FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 -- Basis of Presentation
The condensed consolidated balance sheets as of June 30,
1995 and December 31, 1994, the condensed consolidated
statements of income for the three and six-month period ended June
30, 1995 and 1994, the condensed consolidated statements of
changes in shareholders' equity as of December 31, 1994 and June
30, 1995 and the condensed consolidated statements of cash flows
for the six-month periods ended June 30, 1995 and 1994, have
been prepared by the Corporation, without audit. 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, 1995, 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 subsidiaries. Subsidiaries include Franklin Founders
Life Insurance Company, a credit life reinsurance company and
Farmers and Merchants Trust Company, a commercial bank.
Effective May 1, 1995, The Mont Alto State Bank, also a
commercial bank and a subsidiary of the Corporation, was merged
into Farmers and Merchants Trust Company. 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 condensed consolidated financial statements
be read in conjunction with the audited financial statements and
notes thereto included in the Corporation's 1994 Annual Report.
The results of operations for the period ended
June 30, 1995, 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, Federal Funds Sold, and interest
bearing deposits in other banks. Generally, Federal funds are
purchased and sold for one-day periods. Supplemental disclosures of
cash flow information are as follows:
Cash paid for six months ended June 30: 1995 1994
Interest paid on deposits and
other borrowed funds . . . . . . . . . $5,198,000 $4,780,000
Income taxes paid . . . . . . . . . . $ 825,000 $ 615,000
Note 2 -- Investment Securities
Amortized cost and estimated market values of investment
securities as of June 30, 1995 (unaudited), and December 31,
1994, were as follows (amounts in thousands):
Held to Maturity
----------------
June 30 December 31
1995 1994
------------------- -------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
--------- --------- ------ ------
U.S. Treasury securities and obligations
of U.S. Government agencies & corporations $16,567 $16,560 $17,466 $17,091
Obligations of state and political subdivisions 17,893 18,062 18,909 18,717
Corporate debt securities 8,879 8,829 11,147 10,920
Mortgage - backed securities 7,864 7,839 9,810 9,450
-------- ------ ------ ------
51,203 51,290 57,332 56,178
Other 1,141 1,141 1,162 1,162
-------- ------ ------ ------
$52,344 $52,431 $58,494 $57,340
====== ====== ====== ======
Available for sale
------------------
June 30 December 31
1995 1994
------------------- ------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
--------- --------- ------ ------
Equity securities $1,220 $1,749 $1,213 $1,548
Obligations of state and political subdivisions 2,408 2,381 2,400 2,278
Corporate debt securities 752 732
Mortgage - backed securities 9,230 9,088 11,004 10,256
------ ------ ------ ------
$13,610 $13,950 $14,617 $14,082
====== ====== ====== ======
Interest income earned and dividends paid on investment securities
for the three and six months ended June 30, 1995 and 1994 are as follows
(amounts in thousands):
Three Months Six Months
1995 1994 1995 1994
Unaudited Unaudited
U.S. Government Obligations $73 $77 $140 $175
Obligations of U.S. Government
Agencies and Corporations 445 389 896 797
Obligations of States and
Political Subdivisions 280 337 567 678
Other Securities, primarily
Notes and Debentures 154 220 333 460
Common Stock 40 46 74 80
$992 $1,069 $2,010 $2,190
Note 3 -- Deposits
Deposits are summarized as follows (amounts in thousands):
June 30 December 31
1995 1994
Unaudited
Demand $30,821 $29,323
Savings
Interest-bearing checking 24,412 27,689
Money Market Accounts 28,993 30,558
Passbook and Statement Savings 46,847 47,730
$100,252 $105,977
Time
Deposits of $100,000 and over 19,986 20,968
Other Time Deposits 107,667 100,429
$127,653 $121,397
Total Deposits $258,726 $256,697
NOTE 4 - Treasury Stock
Pursuant to the stock repurchase program approved by the Board
of Directors on January 5, 1995, the Corporation acquired 19,233
common shares as of June 30, 1995 at a cost of approximately
$664,000. Under the program, the Corporation is authorized to
purchase up to 50,000 shares in open market transactions through
dealers.
In addition to the stock repurchase program, the Board has
authorized the repurchase of two separate blocks of common shares
totaling 30,000 shares at a cost of $1,024,000. These block
purchases occurred in February and June, 1995.
NOTE 5 - Accounting Standards Effective January 1, 1995
The Corporation adopted statement of Financial Accounting
Standard No. 114 titled "Accounting by Creditors for Impairment of
a Loan" and Statement of Financial Accounting Standard No. 118
titled "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures" effective January 1, 1995. The impact
is immaterial to the Corporation's results.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE THREE AND SIX MONTH PERIODS
ENDED JUNE 30, 1995
Part 1, Item 2
Results of Operations
Consolidated net income for the second quarter and six
months ended June 30, 1995 was $1,056,000 and $2,143,000,
respectively, compared to $876,000 and $1,755,000, respectively,
for the comparable periods in 1994. These results represent
increases in net income for the quarter and six months of 20.5% and
22.1%, respectively. Consolidated earnings per share equaled $.82
and $1.66 for the quarter and six months ended June 30, 1995,
respectively, versus $.67 and $1.35, respectively, for the same
periods in 1994 and are weighted to reflect the impact of the stock
repurchase program. Book value per share equaled $25.64 at June
30, 1995, up from $23.51 a year earlier. Per share information for
1994 has been restated to reflect a 10% stock dividend paid on
December 30, 1994 to shareholders of record on December 9,
1994.
The Corporation's annualized return on average assets (ROA)
and return on average equity (ROE) for the first six months of 1995
were 1.39% and 12.94%, respectively, an improvement over 1.13%
and 11.26%, respectively, for the first six months in 1994.
Net interest income for the second quarter of 1995 showed
marked improvement increasing $450,000, or 15.1% to $3,426,000
from $2,976,000 at June 30, 1994. Net interest income for the six
months ended June 30, 1995 reflected the same improvement
reaching $6,808,000, an increase of $832,000 or 13.9% over
$5,976,000 a year earlier. A consistent overall loan demand
coupled with higher loan yields and better managed deposit rates
continued to be the driver behind the improved net interest income.
Overall the increase in earning asset yields outpaced the increase in
rate related liability costs. The Corporation's net interest margin on
a tax-equivalent basis reached 4.91% at June 30, 1995 compared
to 4.26% a year earlier. Net interest spread for the same periods
was 4.12% and 3.73%, respectively.
The Corporation expensed $83,000 and $122,000 for
possible loan losses in the second quarter and six months of 1995,
respectively, versus $10,000 and $45,000, respectively, for the
same periods in 1994. A small increase in the ratio of net charge-
offs to average loans for the first six months of 1995 to .15% from
.10% a year earlier was primarily responsible for the moderate
increase in the loan provision expense. The level of nonperforming
assets continued its improvement reflected in the ratio of
nonperforming assets to total assets reaching a new low of .66% at
June 30, 1995 compared to 1.05% at June 30, 1994. Although
the allowance for loan loss as a percentage of loans shows a
decrease to 1.54% at June 30, 1995 from 1.65% a year earlier, the
coverage provided for nonaccrual loans and nonperforming loans is
more that adequate at 2.1 times and 1.6 times, respectively.
Total other income excluding net securities gains realized
moderate increases of 7.0% for the second quarter and 5.1% for the
six months ended June 30, 1995. Trust commissions showed
strong growth of $58,000, or 28.1%, for the quarter and $126,000,
or 23.9%, for the six months. A higher volume of estate fees and
approximately $11 million growth in trust assets under management
from June 30, 1994 to June 30, 1995 was largely responsible for
the increase in trust commission for the second quarter and six
months ended June 30, 1995. Service charges, commissions and
fees also showed strong growth of $78,000, or 16.9% to $540,000
for the second quarter and $134,000, or 14.9%, for the six months
over the same periods in 1994 due primarily to higher business
volume. Offsetting the increased revenues from trust commissions
and service charges, commissions and fees was a decrease in other
income of $78,000, or 46.9%, to $88,000 for the second quarter
and $171,000, or 59.3%, to $117,000 for the six months. A
nonrecurring gain ($117,000) on real property sold in 1994 and
lower volumes of mortgage loans sold with gains ($27,000) were
the primary factors for lower other income.
Total other expense remained flat for the second quarter of
1995 compared to the second quarter of 1994 and showed only a
slight increase of $77,000, or 1.4%, to $5,631,000 for the six
months ended June 30, 1995. Salaries and benefits showed no
change for the second quarter but did show an increase of $91,000,
or 3.1% to $3,005,000 for the six months. Salary expense was up
$121,000 or 5.9% due to merit increases and added personnel while
benefit expense saw a decrease of $34,000 or 3.9% due largely to
the completion of a major employee education program. Net
occupancy expense decreased approximately 10% for the second
quarter ($14,000) and six months ($26,000) due mainly to lower
depreciation expense and building maintenance related to snow
removal in 1994. Lower deposit volume resulted in lower FDIC
insurance premiums of $5,000, or 3.3%, for the second quarter and
$9,000, or 3.0%, for the six months compared to the same periods
in 1994. Other expense was up $22,000, or 2.5%, for the second
quarter and remained virtually unchanged for the six months versus
the comparable periods a year earlier.
Federal income tax expense totaled $349,000 for the second
quarter and $714,000 for the six months ended June 30, 1995
compared to $197,000 and $451,000, respectively, for the same
periods in 1994. The Corporation's effective tax rates for the six
month periods ended June 30, 1995 and June 30, 1994 were
25.0% and 20.4%, respectively. The increase in the effective tax
rate was largely due to lower tax free income relative to pretax
income.
Financial Condition
Total assets grew to $313,400,000 at June 30, 1995 from
$310,554,000 at December 31, 1994. Total assets at June 30,
1994 were $305,791,000. Interest bearing deposits in other banks
grew to $13,659,000 at June 30, 1995 from $381,000 at
December 31, 1994 due primarily to a growth in deposits and repos
(as discussed below) and shrinking investments. A significant
portion of this balance ($13.4 million) is invested in overnight funds
with the Federal Home Loan Bank of Pittsburgh. Investment
securities held to maturity decreased $6,150,000 to $52,344,000
since year-end primarily due to calls, maturities and principal
paydowns on mortgage-backed securities. Investment securities
available for sale have turned to show a net unrealized gain of
$224,000 at June 30, 1995 from a net unrealized loss of $353,000
at December 31, 1994. Net loans showed a reduction of $3.6
million to $215,677,000 at June 30, 1995 from $219,311,000 at
year-end 1994. Commercial loan volume was up approximately
$3.9 million since year end while mortgage and consumer loan
volume was down approximately $7.5 million. The softening in
consumer loan demand was primarily the result of uncertainty in the
local area economy. This uncertainty was due to the pending
decision of the Defense Department's Base Realignment and Closure
Commission and its potential effect on individuals employed at
Letterkenny Army Depot, one of Franklin County's largest
employers. (See Below) Mortgage loans sold on the secondary
market to FNMA for the six month period this year totaled $1.8
million compared to $5.0 million for the same period last year. In
June, the Corporation acquired a building adjacent to its Main Office
at a cost of $355,000. The building is to be used for future
expansion and will require significant renovation. Renovation most
likely will not begin until 1996.
Total deposits have shown slow but steady growth to
$258,726,000 at June 30, 1995 from $256,697,000 at
December 31, 1994 and $215,807,000 at June 30, 1994.
Effective marketing programs for deposit products, primarily
certificates of deposit, customer displeasure with a local bank
merger and higher rates are primarily responsible for the inflow of
deposit funds. Securities sold under agreements to repurchase
(Repo) realized substantial growth to $12,729,000 at June 30, 1995
from $9,612,000 at December 31, 1994 and $3,136,000 at June
30, 1994. Other borrowings, primarily overnight borrowings have
decreased significantly to $6,501,000 at June 30, 1995 from
$8,951,000 at December 31, 1994 and $19,738,000 at June 30,
1994 due to the increase in deposit funds and repo balances. The
Corporation has moved to an overnight funds sold position
($13.4 million) at June 30, 1995 from an overnight funds purchased
position ($19.7 million) at June 30, 1994.
Average earning assets represented 96.0%, or $294 million
of total assets and yielded 8.3% for the six months ended June 30,
1995. The allowance for possible loan losses declined slightly ($46
thousand) to $3,379,000 at June 30, 1995 from $3,425,000 at
December 31, 1994 and represented 1.54% and 1.65% of net
loans, respectively. The Corporation's loan-to-deposit ratio was
84.7% at June 30, 1995 versus 86.8% at December 31, 1994.
The Corporation's nonperforming loans have improved to
$2,046,000 at June 30, 1995 from $2,243,000 at December 31,
1994. Nonperforming loans one year ago totaled $3,052,000.
Nonaccrual loans equaled $1.1 million at June 30, 1995 compared
to $1.0 million at December 31, 1994 and June 30, 1994. Loans
past due 90 days or more and still accruing totaled $.5 million at
second quarter end 1995 compared to $.6 million and $1.3 million at
December 31, 1994 and June 30, 1994, respectively. Restructured
loans were $.5 million, $.6 million and $.7 million at June 30, 1995,
December 31, 1994 and June 30, 1994, respectively.
Nonperforming assets represented .66% of total assets at June 30,
1995 versus 1.05% one year earlier. Net charge-offs to average
loans were .15% and .10% at June 30, 1995 and 1994,
respectively.
The Defense Department's announcement in February, 1995
regarding military base realignment and closure included two large
area employers - Letterkenny Army Depot in the Chambersburg
(Franklin County) area and Fort Ritchie in Maryland. In late June
1995, the independent Defense Base Realignment and Closure
Commission (BRAC) presented its recommendation to President
Clinton which included the realignment of Letterkenny
(approximately 2,000 - 2,500 jobs lost) and the closing of Fort
Ritchie (approximately 1,000 Franklin County jobs lost out of a total
of 2,500 jobs lost). The impact of the loss of jobs on the local
economy and the Corporation is uncertain.
Liquidity
The Corporation's liquidity position remained strong at
second quarter-end 1995. The Corporation continues to sell
mortgage loans to the secondary market (FNMA) and looks to its
borrowing ability with the Federal Home Loan Bank of Pittsburgh to
satisfy any liquidity needs. The Corporation has an overnight
(Flexline) borrowing line of approximately $28,000,000 which had a
zero balance at June 30, 1995. Currently management believes that
liquidity is adequate to meet the borrowing and deposit withdrawal
needs of its customers.
Capital Adequacy
Total shareholders' equity increased slightly by $555,000 or
1.7% to $33,428,000 at June 30, 1995 from $32,873,000 at
December 31, 1994. Earnings retention, the primary source of
shareholder equity growth, has been negated through the repurchase
of Franklin Financial common stock (treasury shares) and cash
dividends paid to shareholders. At June 30, 1995, the cost of
treasury shares equaled $1,688,000. (See Note 4 for more
information on treasury stock.) For the second quarter and six
months ended June 30, 1995, the Corporation paid cash dividends
to shareholders of $336,000 and $687,000, respectively, which
represented $.26 and $.52, respectively, per common share. Cash
dividends paid for the same periods one year ago totaled $307,000
and $588,000, respectively, and represented cash dividends paid
per share of $.25 and $.48, respectively. The cash dividend payout
for 1995 represents 32.0% of six months earnings.
Capital adequacy is currently defined by banking regulatory
authorities through the use of several minimum required ratios. The
following table presents capital ratios for the Corporation and its
banking subsidiaries at June 30, 1995, as well as current minimum
regulatory capital requirements. As the following table indicates, the
Corporation exceeds all minimum capital requirements.
Farmers
& Current
Merchants FFSC Regulatory
Trust Company Consolidated Minimum
Tier I 9.89% 10.74% 6.00%
Leverage Ratio
Risk-based
Capital Ratio
Tier I 14.49% 15.70% 4.00%
Tier II 15.75% 16.96% 8.00%
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
The 1995 Annual Meeting of Shareholders (the "Meeting") of
the Corporation was held on April 25, 1995. Notice of the Meeting
was mailed to shareholders on or about March 30, 1995, 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. To elect four Class B 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
Charles S. Bender 1,067,651.056 541.2858
Charles R. Diller 1,066,361.056 1,831.2858
Omer L. Eshleman 1,067,651.056 541.2858
Jeryl C. Miller 1,067,651.056 541.2858
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10 - Material Contracts
Exhibit 11 - Computation of earnings per share.
(b) Reports on Form 8-K
There were no reports filed on Form 8-K for the quarter
ended June 30, 1995.
EXHIBIT 10
SEVERANCE AGREEMENT
MADE AS OF THIS 17th Day of April, 1995 by and
between WILLIAM E. SNELL, JR. ("Executive") and FARMERS AND
MERCHANTS TRUST COMPANY OF CHAMBERSBURG (the "Bank")
and FRANKLIN FINANCIAL SERVICES CORPORATION ("Franklin
Financial"). The Bank and Franklin Financial are sometimes
hereinafter referred to collectively as the "Employers."
Background:
The Bank and Franklin Financial have each agreed to engage
Executive as President effective April 17, 1995 and Executive has
agreed to accept such engagement. It is the intention of the parties
that Executive will serve as President of each of the Employers
during a transition period beginning on April 17, 1995 and ending on
the date of the expected retirement of Robert G. Zullinger, the
current Chief Executive Officer of the Employers, in the Fall of 1996.
It is anticipated that Executive will be appointed Chief Executive
Officer of each of the Employers upon Mr. Zullinger's retirement.
As an inducement to Executive to accept the foregoing
engagement, the Employers wish to provide to Executive a
severance benefit in the event that Executive's employment is
terminated under certain circumstances prior to the end of the
foregoing transition period, on the terms and subject to the
conditions hereinafter set forth.
WITNESSETH:
NOW, THEREFORE, in consideration of the acceptance by
Executive of his engagement as President of each of the Employers
and for other good and valuable consideration, the parties hereto,
intending to be legally bound, hereby agree as follows:
1. Obligation of the Employers. Executive shall be entitled
to receive from the Employers and the Employers shall pay to
Executive the severance benefit described in Section 3 below in the
event that Executive's employment is terminated by the Employers
for any reason other than Justifiable Cause (as defined in Section 2
below) at any time prior to his appointment to the position of Chief
Executive Officer of each of the Employers.
2. Justifiable Cause. For purpose of this Agreement, the
term "Justifiable Cause" shall mean:
(a) Serious and Willful Misconduct. Serious and willful
misconduct by Executive in the course of or connected with his
employment by the Employers;
(b) Incompetence and Gross Negligence. Substantial
incompetence or gross negligence in the course of or connected with
Executive's employment by the Employers;
(c) Failure to Perform. Material and persistent failure on
the part of Executive to perform the duties assigned to him by the
Employers; or
(d) Felony. Conviction of or the entry of a plea of guilty
or nolo contendere to a felony.
Notwithstanding any provision to the contrary set forth
herein, Executive shall not be entitled to receive the severance
benefit described in Section 3 below in the event that his
employment by the Employers is terminated by reason of his death
or disability or by reason of his resignation or other voluntary action
by Executive.
3. Severance Benefit.
(a) General. In the event that Executive's employment
is terminated by the Employers under circumstances which entitle
Executive to receive a severance benefit hereunder, the Employers
shall, at the election of Executive, either: (i) pay to Executive the
sum of $140,000 within 15 days following the date of termination,
or (ii) pay to Executive the sum of $10,000 per month for 14
months or until Executive obtains other employment, whichever shall
first occur. (The foregoing severance benefit is a collective
obligation of the Employers, e.g., if Executive elect to receive a lump
sum payment, he shall be entitled to receive from the Employers a
single payment of $140,000 and not a payment of $140,000 from
each of the Bank and Franklin Financial).
(b) Election. Executive shall notify the Employers in
writing within 10 days following the termination of his employment
under circumstances which entitle him to receive a severance benefit
hereunder whether he wishes to receive a lump sum payment in
accordance with Section 3(a)(i) above or to receive a series of up to
14 monthly payments in accordance with Section 3(a)(ii) above.
(c) Withholding. The Employers shall deduct from any
payment to be made to Executive hereunder all wage and
withholding taxes as may be required under applicable law.
4. Termination. This Agreement shall terminate and neither
Executive nor the Employers shall have any further rights or
obligations hereunder upon the appointment of Executive to the
position of Chief Executive Officer of each of the Employers.
5. No Effect on Employment. The parties acknowledge
that Executive's status upon the commencement of his employment
by the Employers will be that of an employee at will, that this
Agreement is not intended to confer upon Executive any right with
respect to the continuation of his employment by the Employers,
that Executive is free for any reason to resign at any time, and that
the Employers are free for any reason to terminate Executive's
employment at any time.
6. Miscellaneous Provisions.
(a) Parties in Interest. This Agreement shall be binding
upon and shall inure to the benefit of Executive and the Employers,
and their respective heirs, personal representatives, successors and
permitted assigns; provided, however, that Executive may not assign
this Agreement or any of his rights hereunder.
(b) Governing Law. This Agreement shall be governed
by and construed in accordance with the laws of the Commonwealth
of Pennsylvania, without reference to its law on the choice of laws.
(c) Amendment. No term or provision of this
Agreement may be changed, waived, amended, terminated or
otherwise modified, except by written instrument duly executed by
Executive and by each of the Employers.
(d) Entire Agreement. This Agreement constitutes the
entire agreement between Executive and the Employers concerning
the subject matter hereof and supersedes all prior written or oral
agreements or understandings between them.
IN WITNESS WHEREOF, this Agreement is executed as of the
day and year first above written.
/S/ William E. Snell, Jr. (SEAL)
William E. Snell, Jr
FARMERS AND MERCHANTS TRUST
COMPANY OF CHAMBERSBURG
By: /S/ Robert G. Zullinger
Robert G. Zullinger, President
and Chief Executive Officer
FRANKLIN FINANCIAL SERVICES
CORPORATION
By: /S/ Robert G. Zullinger
Robert G. Zullinger, President
and Chief Executive Officer
Exhibit 11
COMPUTATION OF EARNINGS PER SHARE
For the Three Months Ended June 30, 1995
----------------------------------------
Primary Primary Fully
Earnings Earnings Diluted
Per Share* Per Share* Earnings
As Reported As Adjusted Per Share
------- ------- -------
Computation of earnings per
common share:
Shares
----------------
Weighted average shares
outstanding 1,284,751 1,284,751 1,284,751
Equivalent shares from exercise
of dilutive common stock
equivalents - 17,576 17,842
------- ------- -------
1,284,751 1,302,327 1,302,593
======== ======== ========
Net Income $1,056,000 $1,056,000 $1,056,000
======== ======== ========
Earnings per common share
----------------
Net income $0.82 $0.81 $0.81
======== ======== ========
*Primary earnings per share "as reported" exclude the effect of the
options issued under the Incentive Stock Option Plan, the Employees Stock
Purchase Plan, and the restricted stock issued under the Long-Term
Incentive Plan of 1990, as the effect of the equivalent shares on the
earnings per share calculation is less than 3%. Primary earnings per share
"as adjusted" include the effect of the options and restricted stock.
Exhibit 11
COMPUTATION OF EARNINGS PER SHARE
For the Six Months Ended June 30, 1995
----------------------------------------
Primary Primary Fully
Earnings Earnings Diluted
Per Share* Per Share* Earnings
As Reported As Adjusted Per Share
------- ------- -------
Computation of earnings per
common share:
Shares
----------------
Weighted average shares
outstanding 1,291,312 1,291,312 1,291,312
Equivalent shares from exercise
of dilutive common stock
equivalents - 14,920 15,312
------- ------- -------
1,291,312 1,306,232 1,306,624
======== ======== ========
Net Income $2,143,000 $2,143,000 $2,143,000
======== ======== ========
Earnings per common share
----------------
Net income $1.66 $1.64 $1.64
======== ======== ========
*Primary earnings per share "as reported" exclude the effect of the
options issued under the Incentive Stock Option Plan, the Employees Stock
Purchase Plan, and the restricted stock issued under the Long-Term
Incentive Plan of 1990, as the effect of the equivalent shares on the
earnings per share calculation is less than 3%. Primary earnings per share
"as adjusted" include the effect of the options and restricted stock.
Exhibit 11
COMPUTATION OF EARNINGS PER SHARE
For the Three Months Ended June 30, 1994
----------------------------------------
Primary Primary Fully
Earnings Earnings Diluted
Per Share* Per Share* Earnings
As Reported As Adjusted Per Share
------- ------- -------
Computation of earnings per
common share:
Shares**
----------------
Weighted average shares
outstanding 1,307,359 1,307,359 1,307,359
Equivalent shares from exercise
of dilutive common stock
equivalents - 18,602 19,043
------- ------- -------
1,307,359 1,325,961 1,326,402
======== ======== ========
Net Income $876,000 $876,000 $876,000
======== ======== ========
Earnings per common share**
----------------
Net income $0.67 $0.66 $0.66
======== ======== ========
*Primary earnings per share "as reported" exclude the effect of the
options issued under the Incentive Stock Option Plan, the Employees Stock
Purchase Plan, and the restricted stock issued under the Long-Term
Incentive Plan of 1990, as the effect of the equivalent shares on the
earnings per share calculation is less than 3%. Primary earnings per share
"as adjusted" include the effect of the options and restricted stock.
** Net income per share computations have been adjusted retroactively to
reflect a 10% stock dividend paid on December 30, 1994 to shareholders of
record on December 9, 1994.
Exhibit 11
COMPUTATION OF EARNINGS PER SHARE
For the Six Months Ended June 30, 1994
-------------------------------------
Primary Primary Fully
Earnings Earnings Diluted
Per Share* Per Share* Earnings
As Reported As Adjusted Per Share
------- ------- -------
Computation of earnings per
common share:
Shares**
----------------
Weighted average shares
outstanding 1,303,358 1,303,358 1,303,358
Equivalent shares from exercise
of dilutive common stock
equivalents - 17,825 18,648
------- ------- -------
1,303,358 1,321,183 1,322,006
======== ======== ========
Net Income $1,755,000 $1,755,000 $1,755,000
======== ======== ========
Earnings per common share**
----------------
Net income $1.35 $1.33 $1.33
======== ======== ========
*Primary earnings per share "as reported" exclude the effect of the
options issued under the Incentive Stock Option Plan, the Employees Stock
Purchase Plan, and the restricted stock issued under the Long-Term
Incentive Plan of 1990, as the effect of the equivalent shares on the
earnings per share calculation is less than 3%. Primary earnings per share
"as adjusted" include the effect of the options and restricted stock.
** Net income per share computations have been adjusted retroactively to
reflect a 10% stock dividend paid on December 30, 1994 to shareholders of
record on December 9, 1994.
FRANKLIN FINANCIAL SERVICES CORPORATION
AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on behalf by
the undersigned thereunto duly authorized.
FRANKLIN FINANCIAL SERVICES CORPORATION
Date 8/10/95 /S/ William E. Snell, Jr.
William E. Snell, Jr.
President
Date 8/10/95 /S/ Elaine G. Meyers
Elaine G. Meyers
Treasurer and Chief Financial Officer