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 September 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 1,416,090 outstanding shares of the Registrant's common stock as of November 3, 1995. FRANKLIN FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES INDEX PART I - FINANCIAL INFORMATION Item 1 - Financial Statements Page Condensed Consolidated Balance Sheets as of September 30, 1995 (Unaudited) and December 31, 1994 Condensed Consolidated Statements of Income for the Three and Nine Months ended September 30, 1995 and 1994 (unaudited) Condensed Consolidated Statements of Changes in Shareholders' Equity for the Nine Months ended September 30, 1995 (unaudited) Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 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 - Other Matter Item 6 - Exhibits and Reports on Form 8-K SIGNATURE PAGE CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in Thousands) September 30 December 1995 1994 (unaudited) ASSETS Cash and due from banks. . . . . . . . . . . . . . . . . . . . . . . $8,243 $8,290 Interest bearing deposits in other banks. . . . . . . . . . . . . . . 16,805 381 Investment securities (Maket value of $50,993 and $57,340 at September 30, 1995 and December, 31 1994 respectively) (Note 2). . 50,787 58,494 Investments available for sale (Note 2). . . . . . . . . . . . . . . 20,400 14,082 Loans: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216,414 223,847 Less: Unearned discount. . . . . . . . . . . . . . . . . . . . . . . (660) (1,111) Allowance for possible loan losses. . . . . . . . . . . . . (3,319) (3,425) Net Loans . . . . . . . . . . . . . . . . . . . . . . 212,435 219,311 Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . 5,416 4,986 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,733 5,010 Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $318,819 $310,554 LIABLITIES AND SHAREHOLDERS' EQUITY Deposits: (Note 3) Demand (non-interest bearing) . . . . . . . . . . . . . . . . . . . $33,087 $29,323 Savings and Interest checking . . . . . . . . . . . . . . . . . . . 99,162 105,977 Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129,920 121,397 Total Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . 262,169 256,697 Securities sold under agreements to repurchase . . . . . . . . . . . 13,975 9,612 Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . 6,501 8,951 Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 2,258 2,421 Total Liabilities 284,903 277,681 Commitments and Contingencies . . . . . . . . . . . . . . . . . . . . - - Shareholders' equity: Common stock $1 par value per share, 5000 shares authorized with 1,354 and 1,354 shares issued and 1,293 and 1,352 outstanding at September 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 . . . . . . . . . . . . . . . . . . . . . 19,441 19,451 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . 15,003 12,884 Net unrealized gain (loss)on securities . . . . . . . . . . . . . . . 389 (353) Treasury stock (Note 4) . . . . . . . . . . . . . . . . . . . . . . (2,108) (36) Unearned compensation . . . . . . . . . . . . . . . . . . . . . . . . (163) (426) Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . 33,916 32,873 Total Liabilities and Shareholders' Equity . . . . . . . . . . . . . 318,819 $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 Nine Months Ended Months Ended September 30 September 30 1995 1994 1995 1994 INTEREST INCOME Interest on loans. . . . . . . . . . . . . . . . . . . . $5,276 $4,479 $15,317 $12,982 Interest on deposits in other banks. . . . . . . . . . . 318 6 446 10 Interest on federal funds sold. . . . . . . . . . . . . 1 0 6 5 Interest and dividends on investments (Note 2). . . . . 960 1,015 2,970 3,205 Total interest income . . . . . . . . . . . . . . . . 6,555 5,500 18,739 16,202 INTEREST EXPENSE Interest on deposits . . . . . . . . . . . . . . . . . . 2,660 2,214 7,531 6,497 Interest on securities sold under repurchase agreements and other borrowings . . . . . . . . . . . 292 219 797 662 Total interest expense . . . . . . . . . . . . . 2,952 2,433 8,328 7,159 Net interest income . . . . . . . . . . . . . . . . . . 3,603 3,067 10,411 9,043 Provision for possible loan loss . . . . . . . . . . . . . (90) (2) (212) (47) Net-interest income after provision for possible loan losses . . . . . . . . . . . . . . . . 3,513 3,065 10,199 8,996 OTHER INCOME Trust commissions . . . . . . . . . . . . . . . . . . . 282 277 934 803 Service charges, commissions and fees . . . . . . . . . 407 521 1,440 1,420 Other . . . . . . . . . . . . . . . . . . . . . . . . . 62 38 179 326 Net securities gains. . . . . . . . . . . . . . . . . . 0 60 0 176 Total Other Income . . . . . . . . . . . . . . . . . . 751 896 2,553 2,725 OTHER EXPENSE Salaries and benefits . . . . . . . . . . . . . . . . . 1,543 1,456 4,548 4,370 Net occupancy expense . . . . . . . . . . . . . . . . . 141 113 389 387 Furniture and equipment expense . . . . . . . . . . . . 179 184 568 562 FDIC insurance . . . . . . . . . . . . . . . . . . . . . 161 141 449 438 Other . . . . . . . . . . . . . . . . . . . . . . . . . 918 834 2,619 2,525 Total Other Expenses . . . . . . . . . . . . . . . . . 2,942 2,728 8,573 8,282 Income before income tax provision . . . . . . . . . . . . 1,322 1,233 4,179 3,439 Income tax provision . . . . . . . . . . . . . . . . . . . (296) (229) (1,010) (680) Net income . . . . . . . . . . . . . . . . . . . . . . 1,026 1,004 3,169 2,759 Earnings per share (Note 1) Net income per share . . . . . . . . . . . . . . . . . $0.81 $0.77 $2.47 $2.11 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 intergral part of these statements CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY for the year ended December 31, 1994 and the Nine Months ended September 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) Acquisiton 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 - - 3,169 - - - 3,169 Cash Dividends, $.80 per share - - (1,050) - - - (1,050) Common stock issued under stock option plans 1 (10) - - 101 - 92 Change in net unrealized loss on securities - - - 742 - - 742 Acquisition of 62,246 shares of Treasury stock at cost - - - - (2,173) - (2,173) Amortization of unearned compensation - - - - - 263 263 Balance at September 30, 1995 $1,354 $19,441 $15,003 $389 ($2,108) ($163) $33,916 (unaudited) The accompanying notes are an integral part of these statements. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in Thousands) Unaudited For the Nine Months Ended September 30 1995 1994 Cash flows from operating activities: Net Income . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . $3,169 $2,759 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . 469 469 Premium amortization on investment securities . . . . . . . . . . . . . 55 222 Discount accretion on investment securities . . . . . . . . . . . . . . (140) (87) Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . 212 47 Securities gains, net . . . . . . . . . . . . . . . . . . . . . . . . . 0 (176) Principal gains on sales of mortgage loans . . . . .. . . . . . . . . . (26) (45) Gain on sale of other assets. . . . . . . . . . . . . . . . . . . . . . (6) (116) Loan charge-offs, net of recoveries . . . . . . . . . . . . . . . . . . (318) (157) (Increase) in interest receivable . . . . . . . . . . . . . . . . . . . (138) (1) Increase(Decrease) in interest payable . . . . . . .. . . . . . . . . . 256 (6) (Increase)Decrease in unearned income . . . . . . . . . . . . . . . . . (451) 442 Decrease(Increase) in prepaid and other assets . . .. . . . . . . . . . 233 (120) Decrease in accrued expenses and other liabilities .. . . . . . . . . . (619) (195) Net cash provided by operating activities . . . . . . .. . . . . . . . . . $2,696 $3,036 Cash flows from investing activities: Proceeds from sales of investment securities available. . . . . . . . . . 0 695 Proceeds from maturities of investment securities . . . . . . . . . . . . 16,405 17,501 Purchase of investment securities . . . . . . . . . . . . . . . . . . . . (13,807) (5,400) Net Decrease (Increase) in loans . . . . . . . . . . .. . . . . . . . . . 5,163 (13,612) Proceeds from sale of mortgage loans . . . . . . . . .. . . . . . . . . . 2,296 7,372 Capital expenditures . . . . . . . . . . . . . . . . .. . . . . . . . . . (909) (284) Proceeds from sales of other assets . . . . . . . . . . . . . . . . . . . 16 201 Net cash provided by investing activities . . . . . . .. . . . . . . . . . 9,164 6,473 Cash flows from financing activities: Net Increase(Decrease) in demand deposits, NOW accounts and savings accounts . . . . . . . . . .. . . . . . . . . . (3,051) (4,880) Net Increase (Decrease) in certificates of deposit . .. . . . . . . . . . 8,523 (766) Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,050) (894) Common stock issued under stock option plans . . . . .. . . . . . . . . . 101 99 Purchase of treasury shares . . . . . . . . . . . . . . . . . . . . . . . (2,173) (29) Cash inflows(outflows) from other borrowings . . . . .. . . . . . . . . . 1,913 (3,200) Other, net . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . 255 176 Net cash provided (used) by financing activities . . . . . . . . . . . . . 4,518 (9,494) Increase in cash and cash equivalents . . . . . . . . .. . . . . . . . . . 16,378 15 Cash and cash equivalents as of January 1 . . . . . . .. . . . . . . . . . 8,670 7,183 Cash and cash equivalents as of September 30 . . . . . . . . . . . . . . . $25,048 $7,198 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 September 30, 1995, the condensed consolidated statements of income for the three and nine-month period ended September 30, 1995 and 1994, the condensed consolidated statements of changes in shareholders' equity as of September 30, 1995 and the condensed consolidated statements of cash flows for the nine-month periods ended September 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 September 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 September 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, and Federal Funds Sold. Generally, Federal funds are purchased and sold for one-day periods. Supplemental disclosures of cash flow information are as follows: Cash paid for nine months ended 1995 1994 September 30 (unaudited): Interest paid on deposits and other borrowed funds . . . . . . . . . $8,072,000 $7,007,024 Income taxes paid . . . . . . . . . . . . $1,125,000 $ 755,000 Note 2 -- Investment Securities Amortized cost and estimated market values of investment securities as of September 30, 1995 (unaudited), and December 31, 1994, were as follows (amounts in thousands): Held to Maturity September 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 $18,202 $18,210 $17,466 $17,091 Obligations of state and political subdivisions 18,208 18,449 18,909 18,717 Corporate debt securities 6,492 6,447 11,147 10,920 Mortgage - backed securities 6,746 6,748 9,810 9,450 49,648 49,854 57,332 56,178 Other 1,139 1,139 1,162 1,162 $50,787 $50,993 $58,494 $57,340 Available for sale September 30 December 31 1995 1994 Estimated Estimated Amortized Market Amortized Market Cost Value Cost Value Equity securities $1,237 $1,991 $1,213 $1,548 U.S. Treasury securities and obligations of U.S. Government agencies & corporations $6,006 $5,996 - - Obligations of state and political subdivisions 2,413 2,404 2,400 2,278 Corporate debt securities 1,683 1,664 - - Mortgage - backed securities 8,472 8,345 11,004 10,256 $19,811 $20,400 $14,617 $14,082 Interest income earned and dividends recieved on investment securities for the three and nine months ended September 30, 1995 and 1994 are as follows (amounts in thousands): Three Months Nine Months 1995 1994 1995 1994 (Unaudited) (Unaudited) U.S. Government Obligations $66 $69 $206 $244 Obligations of U.S. Government Agencies and Corporations 452 396 1,348 1,193 Obligations of States and Political Subdivisions 279 320 846 998 Other Securities, primariy Notes and Debentures 129 214 462 674 Common Stock 34 16 108 96 $960 $1,015 $2,970 $3,205 Note 3 - Deposits Deposits are summarized as follows (amounts in thousands): September 30 December 31 1995 1994 (Unaudited) $33,087 $29,323 Demand Savings Interest-bearing checking 29,439 27,689 Money Market Accounts 24,015 30,558 Passbook and Statement Savings 45,708 47,730 $99,162 $105,977 Time Deposits of $100,000 and over 22,344 20,968 Other Time Deposits 107,576 100,429 129,920 121,397 Total Deposits $262,169 $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 23,469 common shares through September 30, 1995 at a cost of approximately $816,000. 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 separate blocks of common shares totaling 38,777 shares at a cost of $1,357,000. The block purchases occurred in each of the first three quarters of 1995. NOTE 5 - Accounting Standards Effective January 1, 1995 The Corporation adopted Statement of Financial Accounting Standards No. 114 titled "Accounting by Creditors for Impairment of a Loan" and Statement of Financial Accounting Standards No. 118 titled "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures" effective January 1, 1995. An analysis of these standards determined the impact to be immaterial to the Corporation's results. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 Part 1, Item 2 Results of Operations Consolidated net income for the third quarter and nine months ended September 30, 1995 was $1,026,000 and $3,169,000, respectively, compared to $1,004,000 and $2,759,000, respectively, for the comparable periods in 1994. These results represent increases in net income for the quarter and nine months of 2.1% and 14.9%, respectively. Consolidated earnings per share equaled $.81 and $2.47 for the quarter and nine months ended September 30, 1995, versus $.77 and $2.11, respectively for the same periods in 1994. Book value per share equaled $26.25 at September 30, 1995, up from $24.00 a year earlier. Per share information for September 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 nine months of 1995 was 1.35% and 12.69%, respectively, an improvement over 1.19% and 11.67%, respectively, for the first nine months of 1994. Net interest income for the third quarter of 1995 showed marked improvement increasing $536,000, or 17.5%, to $3,603,000 from $3,067,000 at September 30, 1994. Net interest income for the nine months ended September 30, 1995 reflected the same improvement reaching $10,411,000, an increase of $1,368,000 or 15.1% over $9,043,000 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 4.85% at September 30, 1995 compared to 4.38% a year earlier. Net interest spread for the same periods was 4.06% and 3.77%, respectively. The Corporation expensed $90,000 and $212,000 for possible loan losses in the third quarter and nine months of 1995, respectively versus $2,000 and $47,000, for the same periods in 1994. An increase in the ratio of net charge-offs to average loans for the first nine months of 1995 to .19% from .10% a year earlier was the primary factor driving the increase in loan loss provision expense. Other factors included the recent announcement that Franklin County jobs would be lost due to closure and realignment of a local Army depot and base. In June 1995, there was an announcement by the independent Defense Base Realignment and Closure Commission, which received subsequent approval from President Clinton, to realign Letterkenny Army Depot in the Chambersburg (Franklin County) area (2,000 - 2,500 jobs lost) and to close Fort Ritchie in Maryland (approximately 1,000 Franklin County jobs lost out of a total of 2,500). Letterkenny is one of the areas largest employers. In addition, another recent announcement by the management of J. Schoeneman Co., a mens clothing manufacturer, that they would close in early 1996 will result in the loss of another 800 to 1,000 jobs, primarily Franklin County residents. Although the impact of the loss of jobs on the local economy and the Corporation is uncertain, the expected result is that consumer delinquencies and possibly consumer charge-offs could increase. At September 30, 1995, the level of nonperforming assets continued to show improvement reflected in the ratio of nonperforming assets reaching .73% compared to .96% at September 30, 1994. The allowance for possible loan loss as a percentage of loans remained stable at 1.54% as of September 30, 1995, compared to 1.58% a year earlier. The coverage the allowance for possible loan loss provides for nonaccrual loans and nonperforming loans is adequate at 3.8 times and 1.5 times, respectively. Total other income excluding net securities gains realized an $85,000, or 10.2% decrease for the third quarter of 1995 to $751,000, driven primarily by lower secondary market sales. For the nine months period ended September 30, 1995 and 1994 total other income remained stable at $2,553,000 versus $2,549,000, respectively. An increase in trust commissions of $131,000 for the nine months in 1995 was more than offset by the $147,000 decrease in other income. Trust commissions were up due to business growth. Other income was down due to a realized gain ($116,000) from the sale of real estate in 1994 and a decrease in gains from the sale of loans to the secondary market in 1995. Total other expense increased $214,000, or 7.8%, to $2,942,000 for the third quarter of 1995 compared to the same quarter in 1994. Salaries and benefits were up $87,000, or 6.0%, to $1,543,000 for the third quarter of 1995 compared to the third quarter of 1994. Salaries grew $59,000 due to merit increases and added personnel while benefit expense grew $28,000. Net occupancy expense increased 25.0% to $141,000 for the third quarter of 1995 versus the same quarter in 1994. Costs associated with building repairs and maintenance and a decrease in rental income were primarily responsible for the $28,000 increase in net occupancy expense for the quarter. As a result of reduced premiums on FDIC insurance effective in May 1995, the Corporation received a premium refund in the third quarter totaling $132,000; however, a $152,000 reserve was established in the third quarter of 1995 in anticipation of a future FDIC special assessment expense related to the Savings Association Insurance Fund (SAIF) and OAKKAR deposits. The Corporation acquired $26 million in OAKKAR deposits in 1992 with a branch purchase from a thrift institution. The special assessment payment date is expected to be January 1, 1996. Other expense for the quarter was up $84,000, or 10.1%, primarily due to overall higher costs such as postage, travel, and telephone. Total other expense for the nine months ended September 30, 1995, grew moderately by $291,000, or 3.5% to $8,573,000 versus $8,282,000 a year earlier. Federal income tax expense totaled $296,000 for the third quarter and $1,010,000 for the nine months ended September 30, 1995 compared to $229,000 and $680,000, respectively, for the same periods in 1994. The Corporation's effective tax rates for the nine month periods ended September 30, 1995, and 1994 were 24% and 20%. 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 $318,819,000, or 2.7%, at September 30, 1995 from $310,554,000 at December 31, 1994. Total assets at September 30, 1994 were $307,165,000. Interest bearing deposits in other banks grew to $16,805,000 from $381,000 at December 31, 1994. A significant portion of the balance ($16.6 million) was invested in overnight funds with the Federal Home Loan Bank of Pittsburgh. Investment securities decreased $7.7 million to $50,787,000 while securities available for sale increased $6.3 million to $20,400,000. Loans, net of unearned discount decreased 3.1% to $215,754,000 at September 30, 1995 from year-end 1994. Commercial loan volume was up approximately $4.4 million since year-end while mortgage and other consumer loan volume was down approximately $11.4 million. Consumer loan demand from December 31, 1994, continues to be soft due to uncertainty in the local area economy relative to job losses. Mortgage loans sold on the secondary market to FNMA for the nine month period this year totaled $2.3 million compared to $7.3 million for the same period last year. Total deposits continue to show slow but steady growth to $262,169,000 at September 30, 1995, from $256,697,000 at December 31, 1995. Effective marketing programs for deposit products, primarily certificates of deposits, customer displeasure with a local bank merger and higher deposit rates are primarily responsible for the inflow of deposit funds. Securities sold under agreements to repurchase (Repo) realized significant growth to $13,975,000 at September 30, 1995, from $9,612,000 at year-end 1994. Other borrowings have decreased $2.4 million to $6,501,000 at September 30, 1995 from December 31, 1994. Average earning assets represented 96.0%, or $298 million of total assets and yielded 8.3% for the nine months ended September 30, 1995. The allowance for possible loan loss declined 3.0% to $3,319,000 at September 30, 1995 from $3,425,000 at December 31, 1994 and represented 1.54% and 1.65%, respectively, of net loans. The Corporation's loan-to- deposit ratio was 82.3% at September 30, 1995, versus 86.8% at December 31, 1994. The Corporation's nonperforming loans have decreased to $2,191,000 at September 30, 1995 from $2,243,000 at December 31, 1994. Nonperforming loans one year ago equaled $2,941,000. Nonaccrual loans totaled $874,000 at September 30, 1995, versus $1.0 million at December 31, 1994, and September 30, 1994. Loans past due 90 days or more and still accruing totaled $888,000 at third quarter end 1995 compared to $.6 million and $1.2 million at December 31, 1994, and September 30, 1994, respectively. Restructured loans equaled $429,000 at September 30, 1995. At September 30, 1995, OREO was $123,000 compared to $0 at year-end 1994. Nonperforming assets represented .73% of total assets at September 30, 1995, compared to .72% and .96% at December 31, 1994 and September 30, 1994, respectively. Net charge-offs to average loans were .19% at September 30, 1995, up from .10% at December 31, 1994, and September 30, 1994. Liquidity The Corporation's liquidity position remained strong at third 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 and the availability of borrowing up to $43,000,000 on a term basis. At September 30, 1995, the Corporation had no overnight borrowings and had term borrowings of $6,501,000. Currently management believes that liquidity is adequate to meet the borrowing and deposit withdrawal needs of its customers. Capital Adequacy Total shareholders' equity increased $1,043,000, or 3.2%, to $33,916,000 at September 30, 1995, from $32,873,000 at December 31, 1994. Earnings retention, the primary source of shareholder equity growth, has been off set through the repurchase of Franklin Financial common stock (treasury shares) and cash dividends paid to shareholders. At September 30, 1995, the cost of treasury shares equaled $2,173,000. (See Note 4 for more information on treasury stock.) For the third quarter and nine months ended September 30, 1995, the Corporation paid cash dividends to shareholders totaling $363,000 and $1,050,000, respectively, compared to $306,000 and $894,000, respectively, for the same periods in 1994. Dividends paid per share were $.28 and $.80, respectively, for the quarter and nine months ended September 30, 1995. The cash dividend paid to shareholders represents 33.0% of nine 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 subsidiary at September 30, 1995, as well as current minimum regulatory capital requirements (unaudited). As the following table indicates, the Corporation exceeds all minimum capital requirements. Farmers & Current Merchants FFSC Regulatory Trust Company Consolidated Minimum Tier I leverage ratio 9.75% 10.75% 6.00% Risk-based capital ratio Tier I 14.90% 16.21% 4.00% Tier II 16.16% 17.47% 8.00% PART II - OTHER INFORMATION Item 4. OTHER MATTERS On October 5, 1995, the Corporation's Board of Directors declared a 50% stock split issued in the form of a stock dividend payable on December 29, 1995, to shareholders of record on December 8, 1995. The September 30, 1995, financial statements do not reflect the effects of the stock dividend. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibits 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 September 30, 1995. Exhibit 11 COMPUTATION OF EARNINGS PER SHARE For the Three Months Ended September 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 outstandiing 1,268,593 1,268,593 1,268,593 Equivalent shares from exercise of dilutive common stock equvalents - 19,461 23,119 1,268,593 1,288,054 1,291,712 Net Income $1,026,000 $1,026,000 $1,026,000 Earnings per common share Net income $0.81 $0.80 $0.79 * Primary earnings per share "as reported" exclude the effect of the options issued under the Incentive Stock Option Plan, the Employee 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. For the Nine Months Ended September 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 outstandiing 1,283,511 1,283,511 1,283,511 Equivalent shares from exercise of dilutive common stock equvalents - 15,809 19,856 1,283,511 1,299,320 1,303,367 Net Income $3,169,000 $3,169,000 $3,169,000 Earnings per common share Net income $2.47 $2.44 $2.43 * Primary earnings per share "as reported" exclude the effect of the options issued under the Incentive Stock Option Plan, the Employee 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. For the Three Months Ended September 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 outstandiing 1,308,574 1,308,574 1,308,574 Equivalent shares from exercise of dilutive common stock equvalents - 20,344 24,260 1,308,574 1,328,918 1,332,834 Net Income $1,004,000 $1,004,000 $1,004,000 Earnings per common share** Net income $0.77 $0.76 $0.75 * Primary earnings per share "as reported" exclude the effect of the options issued under the Incentive Stock Option Plan, the Employee 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. For the Nine Months Ended September 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 outstandiing 1,305,116 1,305,116 1,305,116 Equivalent shares from exercise of dilutive common stock equvalents - 17,884 22,301 1,305,116 1,323,000 1,327,417 Net Income $2,759,000 $2,759,000 $2,759,000 Earnings per common share** Net income $2.11 $2.09 $2.08 * Primary earnings per share "as reported" exclude the effect of the options issued under the Incentive Stock Option Plan, the Employee 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 11/10/95 William E. Snell, Jr. President Date 11/10/95 Elaine G. Meyers Treasurer and Chief Financial Officer