FRANKLIN FINANCIAL SERVICES CORPORATION
1995 ANNUAL REPORT
CONSOLIDATED FINANCIAL HIGHLIGHTS
% increase
(amounts in thousands, except per share) 1995 1994 (decrease)
Performance
Net income $4,179 $3,760 11
Return on assets 1.34% 1.21%
Return on equity 12.50% 11.82%
Shareholders' Value (per share)*
Net income $2.17 $1.92 13
Dividends 0.72 0.65 11
Book value 18.02 16.21 11
Market value 27.25 22.59
Market value/book value ratio 151.22% 139.36%
Price/earnings multiple 12.56x 11.77x
Divident yield 2.64% 2.88%
Safety and Soundness
Shareholders' equity/asset ratio 11.07% 10.47%
Nonperforming assets/total assets 0.65% 0.72%
Allowance for loan loss as a % of loans 1.47% 1.54%
Net charge-offs/average loans 0.27% 0.10%
Allowance for loan loss/nonaccrual loans 468.11% 327.13%
Allowance for loan loss/nonperforming loans 175.08% 152.70%
Risk-based capital 16.80% 15.36%
Balance Sheet Highlights
Total assets $313,473 $310,554 1
Investment Securities 77,342 72,576 7
Loans, net unearned discount 213,208 222,736 (4)
Allowance for possible loan losses 3,141 3,425 (8)
Deposits 257,211 256,697 -
Shareholders' equity 34,956 32,873 6
Trust assets under management(market value) 224,163 184,483 22
* Per share information for 1994 has been adjusted retroactively to reflect a 3 for 2 stock
split issued in the form of a 50% stock dividend paid on December 29, 1995 to shareholders of
record December 8, 1995.
SUMMARY OF SELECTED FINANCIAL DATA
1995 1994 1993 1992 1991
(amounts in thousands, except per share data)
Summary of operations
Interest income $24,971 $22,028 $21,559 $23,245 $24,970
Interest expense 11,210 9,720 10,120 11,901 14,466
Net interest income 13,761 12,308 11,439 11,344 10,504
Provision for possible loan losses 302 48 701 1,281 2,325
Net interest income after provision
for possible loan losses 13,459 12,260 10,738 10,063 8,179
Other income 3,400 3,604 5,048 4,117 2,919
Other expenses 11,229 11,104 11,817 10,857 9,651
Income before income taxes and
cumulative effect of
accounting change 5,630 4,760 3,969 3,323 1,447
Income tax 1,451 1,000 897 617 276
Income before cumulative effect
of accounting change 4,179 3,760 3,072 2,706 1,171
Cumulative effect of
accounting change -- -- 250 -- --
Net income $4,179 $3,760 $3,322 $2,706 $1,171
Per common share*
Net income before cumulative effect
of accounting change $2.17 $1.92 $1.59 $1.41 $0.60
Cumulative effect of
accounting change -- -- 0.12 -- --
Net income $2.17 $1.92 $1.71 $1.41 $0.60
Cash dividends $0.72 $0.65 $0.61 $0.55 $0.53
Balance sheet data
End of year
Total assets $313,473 $310,554 $314,557 $307,252 $283,824
Deposits 257,211 256,697 262,707 266,836 256,225
Loans, net 210,067 219,311 210,663 210,870 194,094
Shareholders' equity 34,956 32,873 30,618 27,653 25,652
Performance yardsticks (unaudited)
Return on average assets 1.34% 1.21% 1.07% 0.92% 0.43%
Return on average equity 12.50% 11.82% 11.49% 10.16% 4.53%
Dividend payout ratio 33.98% 32.55% 32.54% 34.35% 77.63%
Average equity to average asset ratio 10.69% 10.26% 9.33% 9.02% 9.43%
Trust assets under management (market value)
Personal trusts $223,230 $183,872 $182,184 $157,537 $138,862
Corporate trusts 933 1,611 1,747 1,508 2,466
$224,163 $184,483 $183,931 $159,045 $138,849
* Net income per share computations have been adjusted retroactively to reflect a 3 for 2 stock split issued in the form of
a 50% stock dividend and paid on December 29, 1995 to shareholders of record on December 8, 1995 , a 10% stock dividend
paid on December 30, 1994 to shareholders of record December 9, 1994 and a 7% stock dividend paid on November 10, 1993 to
shareholders of record on October 22, 1993. Cash dividends per share have been adjusted to reflect the 3 for 2 stock split
paid on December 29, 1995
Market and Dividend Information
The Corporation's common stock is not actively traded in the
over-the-counter market. The Corporation's stock is listed under
the symbol "FRAF" on the O.T.C. Electronic Bulletin Board, an
automated quotation service, made available through, and governed by,
the NASDAQ system. Current price information is available from
account executives at most brokerage firms as well as the registered
market makers of Franklin Financial Services Corporation common stock.
(See a listing of market makers on page 63 of this report.) There
were 1,668 shareholders of record as of December 31, 1995. The range
of high and low bid prices, as reported by local sources, are shown
below for the years 1995 and 1994. Also shown are the quarterly cash
dividends paid for the same years.
Per share Per share
1995 High* Low* Cash div. 1994 High* Low* Cash div.
1st quarter . . . $22.83 $22.17 $0.17 1st quarter . . . $21.21 $20.30 $0.15
2nd quarter . . . 22.83 22.17 0.17 2nd quarter . . . 21.37 21.21 0.16
3rd quarter . . . 23.83 22.83 0.19 3rd quarter . . . 21.82 21.37 0.17
4th quarter . . . 26.25 23.83 0.19 4th quarter . . . 22.17 21.82 0.17
0.72 0.65
*Bid prices have been adjusted retroactively to reflect all stock splits
and dividends. Cash dividends per share have been adjusted to reflect
the 3 for 2 stock split issued in the form of a 50% stock dividend and
paid on December 29, 1995.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors, Franklin Financial Services
Corporation:
We have audited the accompanying consolidated balance sheets
of FRANKLIN FINANCIAL SERVICES CORPORATION (a Pennsylvania
corporation) and subsidiaries as of December 31, 1995 and 1994,
and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for each of the three years
in the period ended December 31, 1995. These financial
statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of FRANKLIN FINANCIAL SERVICES CORPORATION and subsidiaries as of
December 31, 1995 and 1994, and the results of their operations
and cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted
accounting principles.
As explained in Note 1 to the financial statements,
effective January 1, 1993 and December 31, 1993, the Corporation
changed its method of accounting for income taxes and investment
securities, respectively.
/s/ Arthur Andersen L.L.P.
Lancaster, PA
January 30, 1996
Consolidated Balance Sheets
(amounts in thousands, except per share data) December 31
1995 1994
Assets
Cash and due from banks (Note 3) $8,244 $8,290
Interest-bearing deposits in other banks 6,660 381
Investment securities held to maturity (market value of $35,563 and $57,340 at
December 31, 1995 and 1994, respectively) (Notes 1 and 4) 35,317 58,494
Investment securities available for sale (Notes 1 and 4) 42,025 14,082
Loans (Notes 1 and 5) 213,728 223,847
Less: Unearned discount (520) (1,111)
Allowance for possible loan losses (Notes 1 and 6) (3,141) (3,425)
Net Loans 210,067 219,311
Premises and equipment, net (Notes 1 and 7) 5,645 4,986
Other assets 5,515 5,010
Total assets $313,473 $310,554
Liabilities
Deposits (Note 8)
Demand (noninterest-bearing) $31,609 $29,323
Savings and interest checking 99,049 105,977
Time 126,553 121,397
Total Deposits 257,211 256,697
Securities sold under agreements to repurchase(Note 9) 13,611 9,612
Other borrowings (Note 9) 5,650 8,951
Other liabilities 2,045 2,421
Total liabilities 278,517 277,681
Commitments and contingencies (Notes 13 and 15)
Shareholders' equity (Notes 2, 12 and 14)
Common stock, $1 par value per share, 5,000 shares authorized with 2,030 and
1,353 shares issued and 1,940 and 1,352 outstanding at December 31, 1995
and 1994 respectively 2,030 1,353
Capital stock without par value, 5,000 shares authorized with no shares
issued and outstanding -
Additional paid-in capital 19,431 19,451
Retained earnings 14,966 12,884
Net unrealized gain(loss) on securities 677 (353)
Treasury stock (2,053) (36)
Unearned compensation (Note 11) (95) (426)
Total shareholders' equity 34,956 32,873
Total liabilities and shareholders' equity $313,473 $310,554
The accompanying notes are an integral part of these statements.
Consolidated Statements of Income
(Amounts in thousands, except per share data) Years ended December 31
1995 1994 1993
Interest income (Note 1)
Interest on loans $20,280 $17,723 $16,836
Interest on deposits and other obligations of other banks 683 45 17
Interest on Federal funds sold 9 3 27
Interest on investments:
U.S. Government obligations 283 322 399
Obligations of U.S. Government agencies and corporations 1,893 1,638 1,583
Obligations of states and political subdivisions 1,096 1,295 1,337
Other securities 585 876 1,195
Dividend income 142 126 165
Total interest income 24,971 22,028 21,559
Interest expense
Interest on deposits (Note 8) 10,119 8,824 9,513
Interest on securities sold under agreements to repurchase 639 212 80
Other borrowings 452 684 527
Total interest expense 11,210 9,720 10,120
Net interest income 13,761 12,308 11,439
Provision for possible loan losses (Notes 1 and 6) 302 48 701
Net interest income after provision for possible loan losses 13,459 12,260 10,738
Noninterest income
Trust commissions 1,166 1,038 943
Service charges, commissions and fees 1,930 1,948 1,962
Other 294 399 1,622
Securities gains 10 219 521
Total noninterest income 3,400 3,604 5,048
Noninterest expense
Salaries and employee benefits 6,100 5,774 5,649
Net occupancy expense 517 505 578
Furniture and equipment expense 762 750 814
FDIC insurance 323 580 601
Other 3,527 3,495 4,175
Total noninterest expense 11,229 11,104 11,817
Income before Federal income taxes and cumulative effect
of accounting change 5,630 4,760 3,969
Federal income tax expense (Note 10) 1,451 1,000 897
Income before cumulative effect of accounting change 4,179 3,760 3,072
Cumulative effect of accounting change (Note 1) - - 250
Net income $4,179 $3,760 $3,322
Earnings per share (Note 1)*
Income before cumulative effect of accounting change $2.17 $1.92 $1.59
Cumulative effect of accounting change - - 0.12
Net income per share $2.17 $1.92 $1.71
* Net income per share computations for all periods presented have been adjusted retroactively to reflect
all stock splits and dividends.
The accompanying notes are an integral part of these statements.
Consolidated Statements of Changes in Shareholders' Equity
For years ended December 31, 1995, 1994 and 1993:
Additional Net Unrealized
(amounts in thousands, Common Paid-in Retained Gain (Loss) on Treasury Unearned
except per share data) Stock Capital Earnings Securities Stock Compensation Total
Balance at December 31, 1992 $1,152 $12,919 $14,772 - ($350) ($840) $27,653
Year ended December 31, 1993 -
Net income - - 3,322 - - - 3,322
Cash dividend, $.61 per share - - (1,081) - - - (1,081)
7% stock dividend 79 2,576 (2,655) - - - -
Common stock issued under
stock option plans (Note 12) - (2) - - 206 - 204
Net unrealized gain on
securities (Note 1 and
Note 4) - - - 302 - - 302
Acquisition of 410 shares of
treasury stock at cost - - - - (10) - (10)
Amortization of unearned
compensation (Note 11) - - - - - 228 228
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 dividend, $.65 per share - - (1,224) - - - (1,224)
10% stock dividend 122 3,888 (4,010) - - - -
Common stock issued under
stock option plans (Note 12) - 70 - - 147 - 217
Change in net unrealized loss
on securities (Note 1 and
Note 4) - - - (655) - - (655)
Acquisition of 842 shares of
treasury stock at cost - - - - (29) - (29)
Amortization of unearned
compensation (Note 11) _ _ _ - _ 186 186
Balance at December 31, 1994 1,353 19,451 12,884 (353) (36) (426) 32,873
Year ended December 31, 1995
Net income - - 4,179 - - - 4,179
Cash dividend, $.72 per share - - (1,420) - - - (1,420)
50% stock dividend 677 - (677) - - - -
Common stock issued under -
stock option plans (Note 12) - (20) - - 218 - 198
Change in net unrealized gain
on securities (Note 1 and
Note 4) - - - 1,030 - - 1,030
Acquisition of 64,741shares of
treasury stock at cost - - - - (2,235) - (2,235)
Amortization of unearned
compensation (Note 11) - - - - - 331 331
Balance at December 31, 1995 $2,030 $19,431 $14,966 $677 ($2,053) ($95) $34,956
Cash dividends have been adjusted retroactively for the periods presented to reflect all stock splits and dividends.
The accompanying notes are an integral part of these statements.
Consolidated Statements of Cash Flows
Years ended December 31
1995 1994 1993
(amounts in thousands)
Cash flows from operating activities
Net income $4,179 $3,760 $3,322
Adjustments to reconcile net income to net cash provided
by operating activities:
Cumulative effect of accounting change (Note 1) - - (250)
Depreciation 627 620 639
Premium amortization on investment securities 74 264 329
Discount accretion on investment securities (173) (151) (120)
Provision for possible loan losses 302 48 701
Securities gains, net (10) (219) (521)
Proceeds from sale of mortgage loans 15,076 7,680 22,534
Principal gains on sales of mortgage loans (61) (47) (384)
Gain on sale of real estate and other assets (25) (116) -
Loan charge-offs, net of recoveries (586) (221) (536)
(Increase) Decrease in interest receivable (214) (165) 183
Increase (Decrease) in interest payable 169 155 (33)
(Decrease) Increase in unearned discount (591) 686 (50)
Decrease (Increase) in prepaid and other assets (615) 88 (299)
(Decrease)Increase in accrued expenses and other liabilities (893) 189 712
Other, net 366 180 228
Net cash provided by operating activities 17,625 12,751 26,455
Cash flows from investing activities
Proceeds from sales of investment securities available for sale - 757 -
Proceeds from sales of marketable equity securities - - 1,025
Proceeds from maturities of investment securities 24,805 26,643 26,760
Purchase of investment securities (27,901) (14,405) (35,663)
Net change in loans (4,896) (16,824) (22,028)
Capital expenditures (1,313) (421) (358)
Proceeds from sales of property, plant and equipment 158 216 138
Net cash (used in) investing activities (9,147) (4,034) (30,126)
Cash flows from financing activities
Net decrease in demand deposits, NOW accounts
and savings accounts (4,642) (8,278) (2,542)
Net increase in certificates of deposit 5,156 2,268 3,100
Dividends (1,420) (1,224) (1,081)
Common stock issued under stock option plans 198 217 204
Purchase of treasury shares, net (2,235) (29) (10)
Cash inflows (outflows) from other borrowings 698 (437) 2,978
Net cash used in provided by financing activities (2,245) (7,483) 2,649
Increase (Decrease) in cash and cash equivalents 6,233 1,234 (1,022)
Cash and cash equivalents as of January 1 8,671 7,437 8,459
Cash and cash equivalents as of December 31 $14,904 $8,671 $7,437
Supplemental Disclosures of Cash Flow Information
Cash paid during year for: 1995 1994 1993
Interest paid on deposits and other borrowed funds $11,041 $9,565 $10,502
Income tax paid 1,425 995 1,272
The accompanying notes are an integral part of these statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Summary of Significant Accounting Policies
The accounting policies of Franklin Financial Services
Corporation and its subsidiaries conform to generally accepted
accounting principles and to general industry practices. A
summary of the more significant accounting policies which have
been consistently applied in the preparation of the accompanying
consolidated financial statements follows:
Principles of Consolidation - The consolidated financial
statements include the accounts of Franklin Financial Services
Corporation (the Corporation) and its wholly-owned subsidiary,
Farmers and Merchants Trust Company, a commercial bank, (the
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. In addition, on
December 29, 1995, Franklin Founders Life Insurance Company, a
credit life reinsurance company and a subsidiary of the
Corporation was liquidated. All significant intercompany
transactions and account balances have been eliminated.
Nature of Operations - The Corporation conducts all of its
business through its subsidiary bank, Farmers and Merchants Trust
Company. The Bank serves its customer base through eight full
service offices located in Franklin County, Pennsylvania.
The Bank is a community-oriented commercial bank that
emphasizes quality customer service and convenience. As part of
its strategy, the Bank has sought to develop a variety of
products and services that meet the needs of both its retail and
commercial customers.
Use of Estimates in the Preparation of Financial Statements
- - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Statement of Cash Flows - For purposes of reporting cash
flows, cash and cash equivalents include Cash and due from banks,
Interest-bearing deposits in other banks and Federal funds sold.
Generally, Federal funds are purchased and sold for one-day
periods.
Investment Securities - The Corporation adopted Statement of
Financial Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" as of December 31,
1993 ("Statement No. 115"). In adopting Statement No. 115, the
Corporation has classified investment securities into two
categories: Held to Maturity and Available for Sale. The
corporation does not engage in trading activities.
Except as noted below, debt securities are acquired with the
intent to hold to maturity and are stated at cost adjusted for
amortization of premium and accretion of discount which are
recognized as adjustments of interest income. Certain specific
debt securities have been classified as available for sale to
serve as a potential source of liquidity. In addition, all
marketable equity securities are classified as available for
sale. Unrealized holding gains and losses for available for
sale securities are reported as a separate component of
shareholders' equity, net of tax, until realized. Realized
securities gains and losses are computed using the specific
identification method.
The effect of adopting Statement No. 115 resulted in an
increase to shareholders' equity and deferred taxes of $302,000
and $155,000, respectively, as of December 31, 1993. There was
no impact on earnings for year ended December 31, 1993 or
restatement of previously issued financial statements in
connection with the adoption of this new accounting standard.
Interest and dividends on investment securities are
recognized as income when earned. Gains or losses on the
disposition of investment securities are based on the net
proceeds and the adjusted carrying amount of the specific
securities sold. In the opinion of management, the Corporation
has the ability and intent to hold investment securities carried
at amortized cost to maturity.
In December, 1995, the Corporation reclassified investment
securities with a book value of $15,706,000 and a fair value of
$15,745,000 from held to maturity to available for sale. This
reclassification was allowable under Financial Accounting
Standards Board guidance which permitted institutions to make a
one-time reassessment of the appropriateness of investment
security reclassifications. As a result of this
reclassification, the unrealized gain on securities recorded as a
component of shareholders' equity increased approximately
$26,000, net of tax.
Loans - Interest on all loans is accrued over the term of
the loans based on the amount of principal outstanding. Unearned
interest on installment loans is recognized on a basis which
approximates the interest method.
Interest is not accrued on those loans where a default of
principal or interest exists if management considers the
collection of principal or interest to be doubtful.
Allowance for Possible Loan Losses - For financial reporting
purposes, the provision for loan losses charged to current
operating income is based on estimates, and ultimate losses may
vary from the current estimates. These estimates are reviewed
periodically and, as adjustments become necessary, they are
reported in earnings in the period in which they become known.
The adequacy of the level of the reserve is determined by a
continuing review of the composition of the loan portfolio,
overall portfolio quality, specific problem loans, prior loan
loss experience and current and prospective economic conditions
that may affect a borrower's ability to pay.
The Corporation adopted Statement of Financial Accounting
Standards No. 114, as amended, "Accounting by Creditors for
Impairment of a Loan" ("Statement No. 114") as of January 1,
1995. Statement No. 114 requires that impaired loans be measured
based on the present value of expected future cash flows
discounted at the loan's effective interest rate, or at the
loan's observable market price or fair value of the collateral if
the loan is collateral dependent, except for loans considered to
be homogeneous pools and leases for which this statement does not
apply. Management considers most consumer loans as homogeneous
pools. A loan is considered to be impaired when, based on
current information and events, it is probable that the
Corporation will be unable to collect all amounts due according
to the contractual terms of the loan agreement. Management has
determined that impaired loans are defined as nonaccrual loans.
Prior to the adoption of Statement No. 114, the allowance for
loan losses related to impaired loans was based on undiscounted
cash flows or the fair value of the collateral for collateral
dependent loans. Adoption of Statement No. 114 did not affect
the Corporation's financial statements.
Premises and Equipment - Premises and equipment are stated
at cost less accumulated depreciation and amortization.
Depreciation is computed using the straight-line method. When
assets are retired or sold, the asset cost and related
accumulated depreciation are eliminated from the respective
accounts, and any resultant gain or loss is included in net
income.
The cost of maintenance and repairs is charged to operating
expense as incurred, and the cost of major additions and
improvements is capitalized.
Federal Income Taxes - The Corporation and its subsidiaries
file a consolidated Federal income tax return. Effective January
1, 1993, the Corporation adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes."
Under this accounting standard, deferred tax assets or
liabilities are computed based on the difference between the
financial statement and income tax basis of assets and
liabilities using the applicable enacted marginal tax rate(s).
Deferred income tax expenses or benefits are based on the changes
in the deferred tax asset or liability from period to period.
Earnings per share - Earnings per share is computed based on
the weighted average number of shares outstanding during each
year, adjusted retroactively for stock splits and dividends.
Adjustments resulted from a 3 for 2 stock split issued in the form of
a 50% stock dividend paid on December 29, 1995 to shareholders of
record on December 8, 1995, a 10% stock dividend paid on December
30, 1994 to shareholders of record on December 9, 1994 and a 7%
stock dividend paid on November 10, 1993 to shareholders of
record on October 22, 1993. Stock options and restricted stock
are not reflected in the computation as there is no material
dilutive effect.
Reclassification - Certain prior period amounts have been
reclassified to conform with current year presentation.
Recent Accounting Pronouncements: Accounting for Mortgage
Servicing Rights - In May, 1995, the FASB issued Statement No.
122, "Accounting for Mortgage Servicing Rights," ("Statement No.
122"). This statement requires capitalization of the cost of the
rights to service mortgage loans when originated mortgages are
sold and servicing is retained. This statement also requires the
capitalized mortgage servicing rights to be amortized in
proportion to and over the period of estimated net servicing
income. In addition, the mortgage servicing rights must be
periodically evaluated for impairment based on their fair value.
Statement No. 122 was adopted prospectively on January 1, 1996.
There was no material financial statement impact upon adoption of
this standard.
Accounting for Stock-Based Compensation - In October 1995,
the FASB issued Statement No. 123, "Accounting for Stock-Based
Compensation" ("Statement 123"). Statement 123 defines a fair
value based method of accounting for stock based employee
compensation. The Statement encourages, but does not require,
the use of this method for financial statement purposes. At a
minimum however, companies are required to provide pro-forma
footnote disclosures of the impact on earnings and earnings per
share, as well as certain additional disclosures. Statement 123
is effective for the Corporation in 1996 and will be applicable
to all options granted after January 1, 1995. Adoption of the
Statement will not have an impact on the Corporation's financial
statements.
NOTE 2. Regulatory Matters
Certain restrictions exist under Federal law regarding the
ability of the Bank to transfer funds to the Corporation in the
form of cash dividends, loans, or advances. The dividend
limitation generally restricts dividend payments to the Bank's
retained net income in the current and preceding two calendar
years. Accordingly, under this limitation, as of December 31,
1995 approximately $5,510,000 of the undistributed earnings of
the Bank would be available for distribution to the Corporation
as dividends without prior regulatory approval. The Bank also is
limited as to the amount it may loan the Corporation, unless such
loans are collateralized by specific obligations.
The Board of Governors of the Federal Reserve System has
specified guidelines for purposes of evaluating a bank's capital
adequacy. Currently, banks must maintain a minimum Tier 1
leverage ratio of 3% ;however, under Pennsylvania Department
of Banking regulations, with which the Corporation must comply,
the minimum Tier 1 leverage ratio is 6%. Tier 1 capital
equals the Corporation's shareholders' equity less goodwill, any
other intangible assets and the effect of the unrealized gains or
losses on securities. The Corporation's Tier 1 leverage ratio
was 11.07% (unaudited) at December 31, 1995.
NOTE 3. Restricted Cash Balances
Aggregate cash reserves of $1,874,000 and $1,327,000 were
maintained to satisfy Federal regulatory requirements at December
31, 1995 and 1994, respectively. As compensation for check
clearing and other services, compensating balances are required
to be maintained with correspondent banks. At December 31, 1995
and 1994, these balances were approximately $600,000.
NOTE 4. Investment Securities
Included as Other in the Held to Maturity classification in the following schedules are common stock of
the Federal Home Loan Bank of Pittsburgh and Atlantic Central Bankers Bank which in the aggregate total
$1,139,000 and $1,162,000 at December 31, 1995 and 1994, respectively. Common stock of the
Federal Home Land Bank and Atlantic Central Bankers Bank represent ownership in institutions which
are wholly owned by other financial institutions.
The amortized cost and estimated market values of investment securities as of December 31, 1995 and
1994 are as follows:
Gross Gross Estimated
Amortized unrealized unrealized market
(Amounts in thousands) cost gains losses value
1995 Held to Maturity
U.S. Treasury securities and obligations of U.S.
Government agencies and corporations $849 $ - $ - $849
Obligations of state and political subdivisions 16,225 276 17 16,484
Corporate debt securities 6,795 21 26 6,790
Mortgage-backed securities 10,309 97 105 10,301
34,178 394 148 34,424
Other 1,139 - - 1,139
$35,317 $394 $148 $35,563
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
1995 Available for Sale
Equity securities $1,330 $826 $ - $2,156
U.S. Treasury securities and obligations of U.S.
Government agencies and corporations 25,717 212 6 25,923
Obligations of state and political subdivisions 2,417 14 11 2,420
Corporate debt securities 1,025 11 - 1,036
Mortgage-backed securities 10,511 28 49 10,490
$41,000 $1,091 $66 $42,025
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
1994 Held to Maturity
U.S. Treasury securities and obligations of U.S.
Government agencies and corporations $17,466 $3 $378 $17,091
Obligations of state and political subdivisions 18,909 217 409 18,717
Corporate debt securities 11,147 4 231 10,920
Mortgage-backed securities 9,810 3 363 9,450
57,332 227 1,381 56,178
Other 1,162 - - 1,162
$58,494 $227 $1,381 $57,340
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
1994 Available for Sale
Equity securities $1,213 $335 $ - $1,548
Obligations of state and political subdivisions 2,400 - 122 2,278
Mortgage-backed securities 11,004 - 748 10,256
$14,617 $335 $870 $14,082
At December 31, 1995 and 1994, investment securities pledged to secure public funds, trust balances
and other deposits and obligations totaled $41,547,000 and $49,075,000, respectively. Gross gains of $10,000
in 1995 were related entirely to calls on two municipal securities. Proceeds from the sale of available for sale
securities totaled approximately $757,000 for the year ended December 31, 1994. The gross gains realized
from these sales for the same period were $219,000.
The amortized cost and estimated market value of debt securities at December 31, 1995, by contractual
maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or prepayment penalties.
Estimated
Amortized market
cost value
Held to Maturity
Due in one year or less $3,634 $3,636
Due after one year through five years 15,888 16,059
Due after five years through ten years 3,212 3,261
Due after ten years 1,135 1,167
$23,869 $24,123
Mortgage-backed securities 10,309 10,301
$34,178 $34,424
Estimated
Amortized market
cost value
Available for Sale
Due in one year or less $3,979 $4,001
Due after one year through five years 25,180 25,378
$29,159 $29,379
Mortgage-backed securities 10,511 10,490
$39,670 $39,869
The amortized cost and estimated market value of mortgage backed securities by issuer as of December, 31 1995
and 1994 are as follows:
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
1995 Held to Maturity
Federal Home Loan Mortgage Corporation $4,771 $60 $21 $4,810
Federal National Mortgage Association 3,786 10 37 3,759
Government National Mortgage Association 622 27 - 649
Other Private 1,130 - 47 1,083
$10,309 $97 $105 $10,301
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
1995 Available for Sale
Federal Home Loan Mortgage Corporation $6,175 - $43 $6,132
Federal National Mortgage Association 3,601 6 6 3,601
Government National Mortgage Association 735 22 - 757
$10,511 $28 $49 $10,490
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
1994 Held to Maturity
Federal Home Loan Mortgage Corporation $4,272 $3 $71 $4,204
Federal National Mortgage Association 4,616 - 250 4,366
Government National Mortgage Association 298 - 13 285
Other Private 624 - 29 595
$9,810 $3 $363 $9,450
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
1994 Available for Sale
Federal Home Loan Mortgage Corporation $6,319 - $545 $5,774
Federal National Mortgage Association 1,505 - 64 1,441
Government National Mortgage Association 824 - 37 787
Other Private 2,356 - 102 2,254
$11,004 $0 $748 $10,256
NOTE 5. Loans
A summary of loans outstanding at the end of the reporting periods follows:
December 31
(Amounts in thousands) 1995 1994
Real estate (primarily first mortgage residential loans)$83,800 $92,481
Real estate - Construction 5,233 4,207
Commercial, industrial and agricultural 74,678 75,783
Consumer (including home equity lines of credit) 50,017 51,376
$213,728 $223,847
Loans to directors and executive officers and to their related interests and affiliated
enterprises amounted to approximately $1,116,000 and $1,535,000 at December 31, 1995 and
1994 respectively. Such loans are made in the ordinary course of business at the Banks'
normal credit terms and do not present more than a normal risk of collection. During 1995,
$253,000 of new loans were made and repayments totaled $672,000.
NOTE 6. Allowance for Possible Loan Losses
December 31
(Amounts in thousands) 1995 1994 1993
Balance at beginning of year $3,425 $3,598 $3,433
Charge-offs
Commercial, industrial and agricultural (89) (51) (447)
Consumer (511) (230) (219)
Real estate (76) (38) (34)
Total charge-offs (676) (319) (700)
Recoveries:
Commercial, industrial and agricultural 46 60 104
Consumer 43 19 60
Real estate 1 19 -
Total recoveries 90 98 164
Net charge-offs (586) (221) (536)
Provision for possible loan losses 302 48 701
Balance at end of year $3,141 $3,425 $3,598
Nonaccrual loans at December 31, 1995 and 1994 were approximately $671,000 and $1,047,000,
respectively. There were no restructured loans at December 31, 1995. Restructured loans totaled
$595,000 at December 31, 1994. The gross interest that would have been recorded if these loans had
been current in accordance with their original terms and the amounts actually recorded in income
were as follows:
(Amounts in thousands) 1995 1994
Gross interest due under terms $129 $133
Amount included in income (16) (18)
Interest income not recognized $103 $115
At December 31, 1995, the recorded investment in loans that were considered to be impaired
as defined by Statement 114 was $495,000. Included in this amount is $274,500 of impaired
loans for which the related allowance for credit losses is $123,500 and $220,500 of impaired
loans that as a result of writedowns do not have an allowance for credit losses. The average
recorded investment in impaired loans during the year ended December 31, 1995 was approximately
$857,400.
NOTE 7. Premises and Equipment
Premises and equipment consist of:
Estimated December 31
(Amounts in thousands) useful life 1995 1994
Land 841 $846
Buildings 18-40 years 6,846 6,305
Furniture, fixtures and equipment 3-13 years 4,215 3,618
Total cost 11,902 10,769
Less: Accumulated Depreciation (6,257) (5,783)
$5,645 $4,986
NOTE 8. Deposits
Deposits are summarized as follows:
December 31
(Amounts in thousands) 1995 1994
Demand $31,609 $29,323
Savings:
Interest-bearing checking 31,090 27,689
Money market accounts 22,694 30,558
Passbook and statement savings 45,265 47,730
99,049 105,977
Time:
Deposits of $100,000 and over 19,450 20,968
Other time deposits 107,103 100,429
126,553 121,397
Total deposits $257,211 $256,697
The interest expense on time deposits with denominations of $100,000 or more for the years
ended December 31, 1995, 1994 and 1993 was $1,185,000 and $825,000, and $817,000 respectively.
NOTE 9. Securities Sold Under Agreements to Repurchase and Other Borrowings
The Corporation enters into sales of securities under agreements to repurchase. Securities sold under
agreements to repurchase averaged $12,465,000 and $5,170,000 during 1995 and 1994, respectively,
and the maximum amounts outstanding at any month end during 1995 and 1994, were $16,212,000
and $11,260,000, respectively. The weighted average interest rate on these repurchase agreements was
5.12% and 4.11% for 1995 and 1994, respectively. At December 31, 1995, securities sold under
agreements to repurchase totaled $13,611,000 with interest rates ranging from 4.65% to 4.98%. The
securities that serve as collateral for securities sold under agreements to repurchase represent primarily
U.S. Government and U.S. Agency securities with a book and market value of $17,180,000 and $17,210,000
respectively, at December 31, 1995. The securities sold under agreements to repurchase are overnight
borrowings.
A summary of other borrowings at the end of the reporting period follows:
December 31
(Amounts in thousands) 1995 1994
Flexline (a) $ - $2,450
Term loans (b) 5,650 6,501
Total other borrowings $5,650 $8,951
(a) Flexline is a line of credit, renewable annually, with the Federal Home Loan Bank of Pittsburgh
(FHLB) used on an overnight basis. The total amount available under the line at December 31,1995
was approximately $ 32 million.
(b) Term loans with the FHLB bear interest at fixed rates ranging from 5.18% to 7.27% (weighted
average rate of 6.64%) with various maturities beginning August 1, 1996 to September 30, 2002.
All borrowings from the FHLB are collateralized by FHLB stock, mortgage-backed securities
and first mortgage loans.
The scheduled maturities of these borrowings are as follows:
1996 $2,809
1997 746
1998 687
1999 634
2000 and beyond 774
$5,650
NOTE 10. Federal Income Taxes
On January 1, 1993, the Corporation adopted Statement of Financial Accounting Standards No. 109 (SFAS 109).
As a result of adopting SFAS 109, the Corporation recognized a cumulative benefit of the change in accounting
principle of $250,000 as of January 1, 1993. The benefit is included under the caption "Cumulative effect of
accounting change" in the consolidated statements of income.
The temporary differences which give rise to significant portions of deferred tax assets and liabilities under
SFAS 109 are as follows (amounts in thousands):
Deferred Taxes (000's) December 31
Temporary Difference 1995 1994
Provision for loan loss $1,068 $1,165
Deferred compensation 180 164
Pensions 22 73
Restricted stock 164 125
Depreciation (243) (251)
Net unrealized (gain)loss on securities (349) 182
Deferred loan fees and costs,net 534 -
Other, net 123 123
Valuation allowance (118) (219)
Deferred taxes, net $1,381 $1,362
The Corporation has determined that a valuation allowance of $118,000 is required as of December 31, 1995
as the future realization of certain tax benefits is considered to be less likely than not through the combination
of carryback availability and expected future taxable income. Also, in determining the level of valuation reserves
required, the Corporation has determined, based upon its historical level of earnings, its interest margin and its
gap position, among other factors, that it is more likely than not that it will generate future taxable income at a
level which will allow the net deferred tax assets to be realized over a period approximating 5 years.
The components of the provision for Federal income taxes attributable to income from operations were
as follows:
Years ended December 31
(Amounts in thousands) 1995 1994 1993
Currently payable $1,488 $1,108 1,109
Deferred tax benefit (37) (108) (212)
Income tax provision $1,451 $1,000 $897
For the years ended December 31, 1995, 1994 and 1993, the income tax provisions are different from
the tax expense which would be computed by applying the Federal statutory rate to pretax operating
earnings. A reconciliation of "income before tax provision and cumulative effect of accounting change" to
the provision is as follows:
Years ended December 31
(Amounts in thousands) 1995 1994 1993
Tax provision at statutory rate $1,914 $1,618 1,350
Income on tax-exempt loans and securities (461) (530) (500)
Nondeductible interest expense relating to
carrying tax-exempt obligations 65 60 55
Dividends received exclusion (16) (30) (39)
Valuation allowance adjustment (101) (100) -
Other, net 50 (18) 31
Income tax expense $1,451 $1,000 $897
The tax provision in each year is applicable to
Years ended December 31
(Amounts in thousands) 1995 1994 1993
Operations $1,448 $926 $720
Securities gains (losses) 3 74 177
Income tax provision $1,451 $1,000 $897
NOTE 11. Employee Benefit Plans
The Corporation has a noncontributory retirement plan
covering all employees of F & M Trust who meet certain age and
service requirements. Benefits are based on years of service and
the employee's compensation during the highest five consecutive
years out of the last ten years of employment. The Banks'
funding policy is to contribute annually the amount required to
meet the minimum funding requirements of the Employee Retirement
Income Security Act of 1974. Contributions are intended to
provide not only for benefits attributed to service to date but
also for those expected to be earned in the future.
The following table sets forth the plan's funded status at
December 31, 1995 based on a September 30, 1995 actuarial
valuation together with comparative 1994 and 1993 amounts:
(Amounts in thousands) 1995 1994 1993
Actuarial present value of benefit obligations
Accumulated benefit obligation, including vested benefits
of $4,566, $3,845 and $3,939 in 1995, 1994 and 1993,
respectively $4,635 $3,886 $3,973
Projected benefit obligation for service rendered to date 6,550 5,208 5,483
Plan assets at fair value 7,023 5,720 4,993
Plan assets greater than (less than) projected benefit obligation 473 512 (490)
Unrecognized net (gain) loss (502) (512) 306
Unrecognized net asset at October 1, 1988 being recognized
over 12 years (194) (233) (271)
Unrecognized prior service costs 130 - -
Accrued pension cost included in other liabilities ($93) ($233) ($455)
Net pension cost included the following components:
Service cost - benefits earned during the period $236 $219 $191
Interest cost on projected benefit obligation 408 356 350
Actual return on plan assets (1,220) (511) (624)
Net amortization and deferral 718 115 231
Net periodic pension cost $142 $179 $148
*Plan assets are primarily invested in equities, general assets of insurance companies and insurance contracts
The assumed weighted-average discount rate and rate of
increase in future compensation levels used in determining the
actuarial present value of the projected benefit obligations were
7.25% and 6.00% in 1995. These rates were 7.75% and 5.75% and
7.00% and 6.00% in 1994 and 1993, respectively. The expected
long-term rate of return on assets was 8.00% in 1995, 1994 and
1993.
During the fourth quarter of 1993 the Corporation
established the Employee Voluntary Separation Plan ("Separation
Plan"). The Separation Plan was offered to all full-time
employees who met certain combined age and years of service
criteria as of October 1, 1993. The cost of the Separation Plan
totaled approximately $208,000 and is included in salary and
employee benefit expense for 1993.
The Corporation maintains a 401K plan covering all employees
who have completed one year of service. Employee contributions
to the plan are matched on a graduated basis with a minimum match
of 100% up to 3% of the participant's total compensation and a
maximum match of 87.5% up to 4% of the participant's total
compensation. The Corporation's match is subject to approval
annually by the Board of Directors. Under this plan, not more
than 15.00% of each participant's total compensation may be
contributed in any given plan year. The Corporation's
contribution in 1995, 1994 and 1993, as approved by the Board of
Directors, was $125,000, $107,000 and $55,000, respectively.
Under the terms of the Corporation's Long-Term Incentive
Plan of 1990 ("the Plan"), the Compensation Committee of the
Board of Directors (the Committee) is authorized to award up to
176,550 shares of presently authorized but unissued or reacquired
Common Stock to certain employees of the Corporation and its
subsidiaries. Awards may be granted in the form of Options,
Stock Appreciation Rights, Restricted Stock, Performance Units
and Performance Shares.
Pursuant to the Plan, in 1991 the Corporation implemented a
program known as the Senior Management Incentive Program (the
Program) and as of December 31, 1995 has awarded 44,916 (not
adjusted for stock splits or dividends) restricted shares of
$1.00 par value per share common stock of the Corporation to
certain employees at no cost to the employee participants. In
addition, subsequent to year-end, the Corporation awarded a
second block of 33,998 restricted shares under the Program. These
shares are issued subject to specific transfer restrictions,
including the passage of time, ranging from one to ten years; and
shall fully vest upon the expiration of ten years from the date
of the agreements, or earlier, dependent upon the Corporation
meeting certain income requirements established by the Board of
Directors.
The Committee has also granted 8,781 (not adjusted for stock
splits or dividends) restricted shares of the $1.00 par value per
share common stock of the Corporation to certain employees at no
cost to the participants. These shares also are issued subject
to certain transfer restrictions and will automatically vest upon
the expiration of ten years from the Agreement date (except for
one senior officer whose shares will vest in a shorter period).
Unearned compensation, representing the fair market value of
the shares at the date of issuance, will be charged to income
over the vesting period. The cost associated with the plan was
approximately $297,000 in 1995, $274,000 in 1994 and $246,000 in
1993. The total of restricted shares vested was 25,325, 12,682
and 10,486 in 1995, 1994 and 1993, respectively.
In addition to the restricted shares issued to the employee
participants of the Program, the employees could elect to receive
a portion of their award in cash. The payment of cash each year
is dependent upon the Corporation meeting certain income
requirements established by the Board of Directors. Incentive
compensation expense under this plan was $37,000, $31,000 and
$25,000 in 1995, 1994 and 1993, respectively.
NOTE 12. Stock Option Plans
On March 3, 1994, the Board of Directors of the Corporation
approved and adopted the Employee Stock Purchase Plan of 1994.
The Plan was adopted for the purpose of replacing the employee
stock purchase plan approved and adopted by the shareholders in
1984 and which by its terms expired in 1994. Under the 1994 Plan
132,000 shares of stock can be purchased by participating
employees over a 10-year period. The number of shares which can
be purchased by each participant is limited, as defined, and the
option price is to be set by the Board of Directors. However,
the option price cannot be less than the lesser of 90% of the
fair market value of the shares on the date the option to
purchase the shares is granted, or 90% of the fair market value
of the shares on the exercise date. These options must be
exercised one year from the date of grant. Any shares related to
unexercised options are available for future grant.
The following table summarizes the stock option activity
(stock options have been adjusted to reflect all stock
dividends):
Number of shares
1995 1994
Outstanding, beginning of year . . . . . . . . . . . . . . . . . . 11,222 10,146
Granted at:
$21.79 per share . . . . . . . . . . . . . . . . . . . . . . . 15,926 ---
$29.76 per share . . . . . . . . . . . . . . . . . . . . . . .. --- 11,231
Exercised at:
$21.79 per share . . . . . . . . . . . . . . . . . . . . . . .. . (618) ---
$29.76 per share . . . . . . . . . . . . . . . . . . . . . . . . (5,555) (9)
$30.55 per share . . . . . . . . . . . . . . . . . . . . . . . . --- (4,730)
Terminated at:
$29.76 per share . . . . . . . . . . . . . . . . . . . . . . . . (5,667) ---
$30.55 per share . . . . . . . . . . . . . . . . . . . . . . . . --- (5,416)
Outstanding, end of year, at an option price of $21.79 per share . . 15,308 11,222
===== =====
Exercisable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,308 11,222
Available for grant . . . . . . . . . . . . . . . . . . . . . . . . . 116,692 76,778
At December 31, 1995, the exercisable and available for
grant shares in the preceding table only reflect the 1994
Employee Stock Option Plan. The remaining shares from the 1984
Plan were terminated on October 6, 1994.
NOTE 13. Deferred Compensation Agreement
The Corporation has entered into deferred compensation
agreements with several officers and directors which provide for
the payment of benefits over a ten-year period, beginning at age
65. At inception, the present value of the obligations under
these deferred compensation agreements amounted to approximately
$600,000, which is being accrued over the estimated remaining
service period of these officers and directors. These
obligations are partially funded through life insurance covering
these individuals.
NOTE 14. Shareholders' Equity
On October 5, 1995, the Board of Directors approved a 3 for 2%
stock split issued in the form of a 50 % stock dividend, which was paid on
December 29, 1995 to shareholders of record on December 8, 1995.
The result was a transfer from retained earnings to common stock
of approximately $677,000. A cash amount of approximately $8,200
was paid in lieu of issuing fractional shares arising from the
stock dividend.
On October 6, 1994, the Board of Directors approved a 10%
stock dividend paid on December 30, 1994 to shareholders of
record on December 9, 1994. This resulted in a transfer from
undivided profits of approximately $122,500 to common stock and
$3,888,000 to additional paid in capital. A cash amount of
approximately $21,000 was paid in lieu of issuing fractional
shares arising from this dividend.
The Board of Directors has authorized the Corporation to
repurchase up to 50,000 shares of the Corporation's common stock
through March 1997.
Note 15. Commitments and Contingencies
In the normal course of business, the Bank is party to
financial instruments which are not reflected in the accompanying
financial statements and are commonly referred to as off-balance-sheet
instruments. These financial instruments are entered into
primarily to meet the financing needs of the Bank's customers and
include commitments to extend credit and standby letters of
credit. Those instruments involve, to varying degrees, elements
of credit and interest rate risk not recognized in the statement
of financial position.
The Corporation's exposure to credit loss in the event of
nonperformance by other parties to the financial instruments for
commitments to extend credit and standby letters of credit is
represented by the contract or notional amount of those
instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as they do for on-balance-sheet
instruments.
Unless noted otherwise, the Bank does not require collateral
or other security to support financial instruments with credit
risk.
Contract or
(Amounts in thousands) notional amount
Financial instruments whose contract amounts represent credit risk:
Commercial commitments to extend credit . . . . . . . . . . . . . . . . . . . $22,612
Consumer commitments to extend credit (secured) . . . . . . . . . . . . . . . $10,575
Consumer commitments to extend credit (unsecured) . . . . . . . . . . . . . . $10,587
Standby letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,143
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed
expiration dates or other termination clauses with the exception
of home equity lines and personal lines of credit and may require
payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Bank
evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral, obtained if deemed necessary by
the Bank upon extension of credit, is based on management's
credit evaluation of the counterparty. Collateral for most
commercial commitments varies but may include accounts
receivable, inventory, property, plant, and equipment and
income-producing commercial properties. Collateral for secured consumer
commitments consists of liens on residential real estate.
Standby letters of credit are instruments issued by the Bank
which guarantee the beneficiary payment by the Bank in the event
of default by the Bank's customer in the nonperformance of an
obligation or service. Most standby letters of credit are
extended for one-year periods. The credit risk involved in
issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. The Bank
holds collateral supporting those commitments for which
collateral is deemed necessary primarily in the form of
certificates of deposit and liens on real estate.
Most of the Bank's business activity is with customers
located within Franklin County, Pennsylvania and surrounding
counties and does not involve any significant concentrations of
credit to any one entity or industry.
The Bank has entered into various noncancellable operating
leases. Total rental expense on these leases was $378,000,
$155,000 and $202,000 in the years 1995, 1994 and 1993
respectively. Future minimum payments under these leases are as
follows:
1996 . . . . . . . . . . . . . . . . . $311,000
1997 . . . . . . . . . . . . . . . . . $276,000
1998 . . . . . . . . . . . . . . . . . $266,000
1999 . . . . . . . . . . . . . . . . . $264,000
In the normal course of business, the Corporation has
commitments, lawsuits, contingent liabilities and claims.
However, the Corporation does not expect that the outcome of
these matters will have a materially adverse effect on its
consolidated financial position or results of operations.
Note 16. Disclosures About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate
the fair value of each class of financial instruments for which
it is practicable to estimate that value:
Cash, Federal funds sold and Interest-bearing deposits:
For these short-term instruments, the carrying amount is a
reasonable estimate of fair value.
Investment securities and Investments available for sale:
For debt and marketable equity securities held for
investment purposes and available for sale, respectively, fair
values are based on quoted market prices or dealer quotes. If a
quoted market price is not available, fair value is estimated
using quoted market prices for similar securities.
Loans, net of allowance for possible loan losses:
The fair value of loans is estimated for each major type of
loan (e.g. real estate, commercial, industrial and agricultural
and consumer) by discounting the future cash flows associated
with such loans. The model considers scheduled principal
maturities, repricing characteristics, prepayment assumptions and
interest cash flows. The discount rates used are estimated based
upon consideration of a number of factors including the treasury
yield curve, credit quality factors, expense and service charge
factors.
Deposit liabilities and Other borrowings:
The fair market value of demand deposits, savings accounts,
and money market deposits is the amount payable on demand at the
reporting date. This fair value does not include the benefit
that results from the low cost of funding provided by these
deposits compared to the cost of borrowing funds in the market.
The fair value of fixed-maturity certificates of deposit and
long-term debt are estimated by discounting the future cash flows
using rates approximating those currently offered for
certificates of deposit and borrowings with similar remaining
maturities. The other borrowings consist of borrowings on a line
of credit with the FHLB at a variable interest rate and securities
sold under aggreements to repurchase for which the carrying value
approximates a reasonable estimate of the fair value.
Unrecognized Financial Instruments:
At December 31, 1995, the Corporation had outstanding
commitments to extend credit of $43,774,000 and commitments under
standby letters of credit of $4,143,000. Such commitments
include $982,000 and $8,349,000 of fixed-rate commercial and
consumer commitments, respectively, which represent a reasonable
estimate of fair value as the fees and rates charged are
approximately consistent with the amounts which would be charged
to enter into similar arrangements at year-end. The remaining
instruments provide for interest rates which vary with market and
represent a reasonable estimate of fair value at year-end.
NOTE 16. Disclosures About Fair Value of Financial Instruments
The estimated fair value of the Corporation's financial instruments are as follows:
1995 1994
Carrying Fair Carrying Fair
Amount Value Amount Value
(amounts in thousands)
Financial assets:
Cash and short-term investments $14,904 $14,904 $8,671 $8,671
Investment securities 35,317 35,563 58,494 57,343
Investment securities available for sale 42,025 42,025 14,082 14,082
Loans 213,208 - 222,736 -
Less: Allowance for loan losses (3,141) - (3,425) -
Net Loans 210,067 214,107 219,311 217,719
Total Financial Assets $302,313 $306,599 $300,558 $297,815
Financial liabilities:
Deposits $257,211 $257,495 $256,697 $250,371
Short-term borrowings 13,611 13,611 12,062 12,062
Long-term debt 5,650 5,716 6,501 5,277
Total Financial Liabilities $276,472 $276,822 $275,260 $267,710
The above values do not necessarily reflect the premium or discount that could result from offering for sale
at one time the Corporation's entire holdings of a particular instrument. In addition, these values, derived from
the methods and assumptions described above, do not consider the potential income taxes or other expenses that
would be incurred on an actual sale of an asset or settlement of a liability.
NOTE 17. Parent Company (Franklin Financial Services Corporation) Financial Information
Balance Sheets
December 31
(Amounts in thousands) 1995 1994
Assets:
Marketable securities $2,323 $1,566
Equity investment in subsidiaries 31,261 29,222
Premises 1,216 900
Other assets 473 1,199
Total assets $35,273 $32,887
Liabilities:
Accrued expenses $5 $14
Deferred tax liability 312 -
Shareholders' equity:
Common stock 2,030 1,353
Additional paid-in capital 19,431 19,451
Retained earnings 14,966 12,884
Net unrealized gain (loss) on securities 677 (353)
Treasury stock ( 90,064 and 1,829 shares, at cost,
at December 31, 1995 and 1994 respectively) (2,053) (36)
Unearned compensation (95) (426)
Total liabilities and shareholders' equity $35,273 $32,887
Statements of Income
Years ended
December 31
(Amounts in thousands) 1995 1994 1993
Income:
Dividends from Banks $3,325 $1,429 $1,065
Interest and dividend income 48 32 39
Gain on sale of securities 0 135 19
Other income 18 - -
Gain on sale of real estate - 117 -
3,391 1,713 1,123
Operating expenses 321 263 261
Income before equity in undistributed income of subsidiaries 3,070 1,450 862
Equity in undistributed income of subsidiaries 1,109 2,310 2,460
Net income $4,179 $3,760 $3,322
Statements of Cash Flows
Years ended
December 31
(Amounts in thousands) 1995 1994 1993
Cash flows from operating activities
Consolidated net income $4,179 $3,760 $3,322
Less: Equity in undistributed income of subsidaries (1,109) (2,310) (2,460)
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 36 35 37
Discount accretion on investment securities (3) - (1)
Premium amortization - 4 -
Gain on sale of real estate - (116) -
Securities (gains), net - (135) (19)
Decrease (Increase) in other assets 587 149 (419)
(Decrease) Increase in other liabilities (45) 12 (8)
Net cash provided by operating activities 3,645 1,399 452
Cash flows from investing activities
Proceeds from sales of investment securities - 290 47
Proceeds from maturities of investment securities 534 100 500
Purchase of investment securities (987) (967) (331)
Net change in loans 58 (150) -
Proceeds from sale of premises - 200 -
Capital expenditures (352) (23) (9)
Net cash (used in) provided by investing activities (747) (550) 207
Cash flows from financing activities
Dividends (1,420) (1,224) (1,081)
Proceeds from sales of common stock 198 145 204
Purchase of treasury shares (2,235) (29) (10)
Other, net 559 259 228
Net cash used in financing activities (2,898) (849) (659)
Increase in cash and cash equivalents - - -
Cash and cash equivalents as of January 1 - - -
Cash and cash equivalents as of December 31 $ - $ - $ -
NOTE 18. Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of consolidated operations of Franklin Financial for the
years ended December 31, 1995 and 1994:
(Amounts in thousands) Three months ended
1995 March 31 June 30 September 30 December 31
Interest income $6,009 $6,175 $6,555 $6,232
Interest expense 2,627 2,749 2,952 2,882
Net interest income 3,382 3,426 3,603 3,350
Provision for loan losses (39) (83) (90) (90)
Other noninterest income 910 892 751 837
Securities gains 0 0 0 10
Noninterest expense (2,801) (2,830) (2,942) (2,656)
Income before income taxes 1,452 1,405 1,322 1,451
Income taxes (365) (349) (296) (441)
Net Income $1,087 $1,056 $1,026 $1,010
Per share* $0.56 $0.55 $0.54 $0.53
1994
Interest income $5,366 $5,336 $5,500 $5,830
Interest expense 2,366 2,360 2,433 2,565
Net interest income 3,000 2,976 3,067 3,265
Provision for loan losses (35) (10) (2) (1)
Other noninterest income 879 834 836 836
Security gains, net 16 100 60 43
Noninterest expense (2,727) (2,827) (2,728) (2,822)
Income before income taxes 1,133 1,073 1,233 1,321
Income taxes (254) (197) (229) (320)
Net Income $879 $876 $1,004 $1,001
Per share** $0.43 $0.45 $0.51 $0.51
*Based on weighted-average shares outstanding during the period reported, adjusted retroactively for a 50% stock
dividend paid on December 29, 1995 for shareholders of record on December 8, 1995. Consequently, the
sum of the quarterly earnings per share amounts may not equal the annual per share amount.
**Based on weighted-average shares outstanding during the period reported, adjusted retroactively for a 50% and
10% stock dividend paid on December 29, 1995 and December 30, 1994, respectively. Consequently, the
sum of the quarterly earnings per share amounts may not equal the annual per share amount.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis is intended to assist the
reader in reviewing the financial information presented and should be
read in conjunction with the consolidated financial statements and
other financial data presented elsewhere herein.
All changes discussed below have been brought about by general
economic conditions unless otherwise noted.
Results of Operations: Summary
Franklin Financial Services Corporation achieved another
year of record earnings for 1995 as net income increased 11.1% to
$4,179,000 compared to $3,760,000 and $3,322,000 for 1994 and
1993, respectively. Per share earnings were $2.17 for 1995, up
13.0% over $1.92 for 1994. Per share earnings for 1993 were
$1.71 per share. Per share data has been restated to reflect a
3 for 2 stock split issued in the form of a 50 % stock dividend paid on
December 29, 1995, to shareholders of record on December 8, 1995,
and all prior year stock dividends. The Corporation's return on
average assets improved to 1.34% in 1995 from 1.21% and 1.07% in
1994 and 1993, respectively. Similarly, the Corporation's return
on average equity strengthened to 12.50% in 1995 from 11.82% and
11.49% in 1994 and 1993, respectively.
During 1995 average earning assets increased less than 1.0%
to $298.9 million while the net interest margin on a tax-
equivalent basis improved 41 basis points to 4.80% from 4.39% and
4.13% in 1994 and 1993, respectively. The Corporation continues
to maintain its high asset quality. The percentage of
nonperforming assets comprised of nonaccrual loans, restructured
loans, loans past due 90 days or more and other real estate
owned, represented .96% of total year-end loans and other real
estate owned, down from 1.01% at December 31, 1994. The ratio of
allowance for possible loan losses to total loans was 1.47% at
December 31, 1995, compared to 1.54% at December 31, 1994.
Nonperforming loans were covered 1.7 times by the allowance for
possible loan losses. Because the Corporation's net charge-offs
to average loans increased to .27% for 1995 from .10% for 1994,
the provision for possible loan losses was increased to $302,000
for the year ended December 31, 1995 from $48,000 for the same
period in 1994. Net interest income after the provision for
possible loan losses grew $1,200,000 or 9.8% to $13,459,000 at
December 31, 1995 from $12,260,000 and $10,738,000 at December
31, 1994 and 1993, respectively.
Noninterest income, other than securities gains, showed
slight improvement to $3,390,000 for 1995 compared to $3,385,000
and $4,527,000, for 1994 and 1993, respectively. Noninterest
income for 1993 includes approximately $900,000 in revenues from
Franklin Realty Services Corporation, a direct subsidiary of the
Bank that was divested in 1993. Securities gains from the sale
of available for sale securities for the years ended December 31,
1995, 1994 and 1993 were $10,000, $219,000 and $521,000,
respectively.
Noninterest expense increased $125,000, or 1.1%, to
$11,229,000 for the year ended December 31, 1995, compared to
$11,104,000 and $11,817,000 for the same periods in 1994 and
1993. Contributing to the very modest increase in noninterest
expense in 1995 was a Federal Deposit Insurance Corporation
(FDIC) premium refund totaling $132,000 which, along with a
corresponding reduction in premiums for the last seven months of
1995, resulted in a decrease of $257,000 for FDIC insurance
expense. Noninterest expense for 1993 includes approximately
$1,036,000 in expenses related to Franklin Realty Services
Corporation.
Total assets at December 31, 1995 were $313,473,000 compared
to $310,554,000 a year earlier. Total loans, net of discount,
decreased $9,528,000, or 4.3%, to $213,208,000 at December 31, 1995
from $222,736,000 at December 31, 1994. Concurrently, investment
securities increased $4,766,000 and interest-bearing deposits in
other banks increased $6,279,000. In 1995 the Corporation sold
approximately $2,500,000 of mortgage loans with servicing retained
to Federal National Mortgage Association (FNMA) and originated and
sold an additional $12,500,000 of mortgage loans with servicing released
to other secondary market providers resulting in fees and net
gains generated totaling approximately $350,000.
Total deposits were $257,211,000 compared to $256,697,000 for the
years ended December 31, 1995 and 1994, respectively. Securities sold
under agreements to repurchase increased $3,999,000, or 41.6% to
$13,611,000 at year-end 1995 versus $9,612,000 one year earlier. Other
borrowings with the Federal Home Loan Bank of Pittsburgh decreased
$3,301,000 to $5,650,000 at December 31, 1995 and consist
entirely of term loans. Other borrowings at December 31, 1994
equaled $8,951,000.
The Corporation's capital position remains strong with total
capital of $34,956,000 at December 31, 1995 up 6.3%, or
$2,083,000 over $32,873,000 at December 31, 1994. Earnings
retention continues to be the primary component in capital
growth. At December 31, 1995, the Corporation's average
shareholders' capital to average total assets ratio, Tier 1
leverage capital ratio and risk-based capital ratios were 10.69%,
11.07% and 16.80%, respectively, compared to 10.26%, 10.47% and
15.36%, respectively at December 31, 1994.
For the third consecutive year the Board of Directors
approved a stock dividend and increased cash dividends per share
paid to shareholders. On December 29, 1995, a 3 for 2 stock split
issued in the form of a 50% stock dividend was paid to shareholders of
record on December 8, 1995. In addition, in 1995 the Board
increased cash dividends per share 10.8% to $.72 from $.65 in
1994. When adjusted for the 10% stock dividend paid to
shareholders on December 30, 1994, cash dividends per share paid
to shareholders in 1995 actually increased 21.8%. Cash dividends
per share paid to shareholders in 1993 totaled $.61.
A more detailed discussion of those areas having the
greatest impact on the reported results for 1995 follows.
TABLE 1. Net Interest Income (unaudited)
Net interest income, defined as interest income less interest expense, is as shown in the following table
(Amounts in thousands) 1995 % Change 1994 % Change 1993
Interest income $24,971 13.36% $22,028 2.19% $21,559
Interest expense 11,210 15.33% 9,720 (3.91%) 10,120
Net interest income $13,761 11.81% $12,308 7.60% $11,439
Tax equivalent adjustment 599 689 640
Net interest income $14,360 10.49% $12,997 7.60% $12,079
(full taxable equivalent)
Net Interest Income
Net interest income is the primary component of the
Corporation's operating income. Net interest income is the
difference between interest earned on interest-earning assets and
interest paid on interest-bearing liabilities. Net interest
income is affected by changes in account balances (volume),
interest rates and the mix of earning assets and interest-bearing
liabilities. In the following discussion net interest income as
presented in Table 1 is adjusted to a tax-equivalent basis. This
adjustment facilitates performance comparison between taxable and
tax-exempt assets by increasing the tax-exempt income by an
amount equivalent to the Federal income taxes which would have
been paid if this income were taxable at the Corporation's 34%
Federal statutory rate.
Net interest income on a tax-equivalent basis grew
$1,363,000, or 10.5% to $14,360,000 in 1995 from $12,997,000 in
1994. Net interest income in 1994 was up 7.6% from $12,079,000
in 1993. Table 2 presents the Corporation's average balances on
its assets and liabilities and the average tax-equivalent yields
earned and the average rates paid on earning assets and interest-bearing
liabilities. Table 3 analyzes the changes attributable
to the volume and rate components of net interest income. In
1995 versus 1994 net interest income decreased $119,000 due to
changes in volume and increased $1,482,000 due to changes in
rates, resulting in a net increase of $1,363,000. In 1994 versus
1993 net interest income increased $621,000 due to changes in
volumes and increased $297,000 due to changes in rates to equal a
total increase of $918,000.
The Corporation's interest rate spread and net interest
margin as reflected in Table 2 were 4.00% and 4.80%,
respectively, for the year ended December 31, 1995. Interest
rate spread, which measures the absolute difference between
average rates earned and average rates paid increased 26 basis
points. Net interest margin, which reflects the interest spread
plus the effects of noninterest-bearing liabilities,
shareholders' equity and changes in the relationship of interest-earning
assets to interest-bearing liabilities, increased 41
basis points. Interest rate spread and net interest margin for
1994 were 3.74% and 4.39%, respectively, and 3.60% and 4.13%,
respectively, for 1993.
Average short-term interest rates rose in 1995 while long-term interest
rates remained steady. The average prime rate in 1995 was 8.83% and
the average Federal funds rate was 5.85% versus 7.14% and 4.23%, respectively
in 1994. The Corporation realized a favorable impact to net interest
income as a result of higher short-term rates in 1995 versus 1994.
Table 2 shows that average loans which make up 72.9% of total interest
earning assets produced an increase in yield of 113 basis points to 9.38%
from 8.25% and added $2,553,000 to interest income, primarily the
result of higher rates. Although average rates paid on interest-bearing
deposits rose to 4.47% for the year ended December 31,
1995, from 3.93% a year earlier, the Corporation was able to
improve its spread. Because longer term rates in 1995 were
higher than short-term rates customers moved money from lower
rate transaction and money market accounts to higher rate savings
and time deposit accounts. Average time deposits comprised 55.5%
of total interest-bearing deposits and cost an average rate of
5.71% in 1995 compared to 50.5% and 5.10%, respectively, in 1994.
Management's strong focus on the net interest margin and asset
liability management in the higher interest rate environment
during 1995 resulted in an improved interest spread and net
interest margin. In efforts to stimulate balance sheet growth,
management's strategy for 1996 and forward includes more
aggressive pricing for both assets and liabilities.
Consequently, this strategy along with a declining interest rate
environment could squeeze the Corporation's future spread and net
interest margin.
Table 2. Analysis of Net Interest Income (unaudited)
1995
Average Income or Average
(Amounts in thousands) balance expense yield/rate
Interest-earning assets:
Interest-bearing deposits in other banks $11,694 $683 5.84%
Federal funds sold 155 9 5.81%
Investment securities
Taxable 47,935 2,867 5.98%
Nontaxable 21,145 1,577 7.46%
Loans, net of unearned discount 217,932 20,434 9.38%
Total interest-earning assets 298,861 25,570 8.56%
Noninterest-earning assets 13,938
Total assets $312,799
Interest-bearing liabilities:
Deposits:
Interest-bearing checking $27,734 $564 2.03%
Money market deposit accounts 26,663 1,022 3.83%
Savings 46,183 1,345 2.91%
Time 125,780 7,188 5.71%
Total interest-bearing deposits 226,360 10,119 4.47%
Federal funds purchased and securities sold under
agreements to repurchase 12,454 639 5.13%
Other borrowings 7,032 452 6.43%
Total interest-bearing liabilities 245,846 11,210 4.56%
Noninterest-bearing liabilities 33,523
Shareholders' equity 33,430
Total liabilities and shareholders' equity $312,799
Net interest income/Net interest margin 14,360 4.80%
Tax equivalent adjustment (599)
Net interest income 13,761
All amounts have been adjusted to a tax-equivalent basis using a tax rate of 34%
Table 2. Analysis of Net Interest Income (unaudited)
1994
Average Income or Average
(Amounts in thousands) balance expense yield/rate
Interest-earning assets:
Interest-bearing deposits in other banks $1,026 $45 4.39%
Federal funds sold 69 3 4.35%
Investment securities
Taxable 54,851 2,947 5.37%
Nontaxable 23,636 1,841 7.79%
Loans, net of unearned discount 216,688 17,881 8.25%
Total interest-earning assets 296,270 22,717 7.67%
Noninterest-earning assets 13,571
Total assets $309,841
Interest-bearing liabilities:
Deposits:
Interest-bearing checking $28,115 $526 1.87%
Money market deposit accounts 33,416 1,041 3.12%
Savings 51,821 1,364 2.63%
Time 115,550 5,893 5.10%
Total interest-bearing deposits 228,902 8,824 3.85%
Federal funds purchased and securities sold under
agreements to repurchase 5,177 212 4.10%
Other borrowings 13,493 684 5.07%
Total interest-bearing liabilities 247,572 9,720 3.93%
Noninterest-bearing liabilities 30,468
Shareholders' equity 31,801
Total liabilities and shareholders' equity $309,841
Net interest income/Net interest margin 12,997 4.39%
Tax equivalent adjustment (689)
Net interest income 12,308
All amounts have been adjusted to a tax-equivalent basis using a tax rate of 34%
Table 2. Analysis of Net Interest Income (unaudited)
1993
Average Income or Average
(Amounts in thousands) balance expense yield/rate
Interest-earning assets:
Interest-bearing deposits in other banks $620 $17 2.74%
Federal funds sold 881 27 3.06%
Investment securities
Taxable 58,577 3,304 5.64%
Nontaxable 22,330 1,913 8.57%
Loans, net of unearned discount 210,031 16,938 8.06%
Total interest-earning assets 292,439 22,199 7.59%
Noninterest-earning assets 17,708
Total assets $310,147
Interest-bearing liabilities:
Deposits:
Interest-bearing checking $28,212 $620 2.20%
Money market deposit accounts 41,301 1,117 2.70%
Savings 51,462 1,515 2.94%
Time 118,785 6,261 5.27%
Total interest-bearing deposits 239,760 9,513 3.97%
Federal funds purchased and securities sold under
agreements to repurchase 2,917 80 2.74%
Other borrowings 11,044 527 4.77%
Total interest-bearing liabilities 253,721 10,120 3.99%
Noninterest-bearing liabilities 27,504
Shareholders' equity 28,922
Total liabilities and shareholders' equity $310,147
Net interest income/Net interest margin 12,079 4.13%
Tax equivalent adjustment (640)
Net interest income 11,439
All amounts have been adjusted to a tax-equivalent basis using a tax rate of 34%
Years ended December 31
1995 1994 1993
Rate Analysis:
Yield on total earning assets 8.56% 7.67% 7.59%
Cost of funds supporting earning assets 3.76% 3.28% 3.46%
Net rate on earning assets 4.80% 4.39% 4.13%
TABLE 3. Rate-Volume Analysis of Net Interest Income (unaudited)
Table 3 attributes increases and decreases in components of net interest income either to changes in
average volume or to changes in average rates for interest-earning assets and interest-bearing liabilities.
Numerous and simultaneous balance and rate changes occur during the year.
1995 Compared to 1994 1994 Compared to 1993
Increase (Decrease) due to: Increase (Decrease) due to:
(Amounts in thousands) Volume Rate Net Volume Rate Net
Interest earned on:
Interest-bearing deposits
in other banks $468 $170 $638 $11 $17 $28
Federal funds sold 4 2 6 (25) 1 (24)
Investment securities
Taxable (372) 292 (80) (210) (147) (357)
Nontaxable (194) (70) (264) 112 (184) (72)
Loans 103 2,450 2,553 537 406 943
Total net change in
interest income 9 2,844 2,853 425 93 518
Interest expense on:
Interest-bearing checki (7) 45 38 (2) (92) (94)
Money market deposit
accounts (210) 191 (19) (213) 137 (76)
Savings (148) 129 (19) 11 (163) (152)
Time 522 773 1,295 (171) (197) (368)
Federal funds purchased
and securities sold
under agreements to
repurchase 299 128 427 62 71 133
Other borrowings (328) 96 (232) 117 40 157
Total net change
in interest expense 128 1,362 1,490 (196) (204) (400)
Increase (Decrease) in net
interest income ($119) $1,482 $1,363 $621 $297 $918
Nonaccruing loans are included in the loan balances used to calculate the above rate volume analysis. The
interest associated with these nonaccruing loans is not shown in the loan income numbers. All nontaxable
interest income has been adjusted to a tax-equivalent basis, using a tax rate of 34%.
Provision for Possible Loan Losses
For the years ended December 31, 1995, 1994 and 1993 the
provision for possible loan losses charged to earnings was
$302,000, $48,000, and $701,000, respectively. The allowance for
possible loan losses was $3,141,000 at December 31, 1995 and
$3,425,000 and $3,598,000 at December 31, 1994 and 1993,
respectively, representing 1.47%, 1.54% and 1.68% of total year-end
loans, net of unearned discount. The allowance for possible
loan losses is established by management, and its adequacy is
monitored based on analysis of the loan portfolio, current
economic conditions and other relevant factors. For more
information, refer to the Loan Quality discussion.
Noninterest Income and Expense
Total noninterest income for 1995 decreased $204,000, or
5.7% to $3,400,000 compared to a decrease of $1,444,000, or 28.6%
in 1994. Excluding securities gains, noninterest income for 1995
remained level at $3,390,000 compared to $3,385,000 for 1994.
Trust commissions were up $128,000, or 12.3% to $1,166,000 for
the twelve months ended December 31, 1995 versus $1,038,000 in
1994, due primarily to account and volume growth. Other income
decreased $105,000, or 26.3% to $294,000 at year-end 1995
compared to $399,000 at year-end 1994 due to a $116,000 gain on
real estate sold in 1994. Securities gains on sales of available
for sale securities were down $209,000 to $10,000 for 1995 versus
$219,000 in 1994. In 1995 securities gains were the result of
bonds called at a premium.
Excluding net securities gains, total noninterest income
decreased $1,142,000, or 25.2% to $3,385,000 at year-end 1994
from $4,527,000 at year-end 1993. Trust commissions in 1994
increased 10.1% over the $943,000 for 1993 due to a general
growth in accounts. Other income in 1994 decreased $1,223,000 or
75.4% from $1,622,000 in 1993. Revenues from Franklin Realty
Services Corporation, a direct subsidiary of F & M divested in
1993, contributed approximately $900,000 to other income in 1993
and accounts for the significant decrease. In addition net gains
from the sale of mortgage loans to secondary markets dropped
significantly to approximately $65,000 for 1994 from $389,000 for
1993. Net securities gains were down to $219,000 in 1994 versus
$521,000 in 1993 largely the result of the sale of certain
available for sale equity securities.
Total noninterest expense increased $125,000, or 1.1% to
$11,229,000 for 1995 compared to $11,104,000 for 1994. Salaries
and benefits increased $326,000, or 5.6%, to $6,100,000 for the
year-ended December 31, 1995. Salaries increased $288,000, or
6.9% due to general merit increases and the addition of one
senior level officer while benefits increased $38,000 or 2.4%.
Full-time equivalent employees remained steady with 177 at
December 31, 1995 compared to 174 at December 31, 1994. Federal
Deposit Insurance Corporation (FDIC) expense showed a significant
decrease of 44.3% to $323,000 in 1995 compared to $580,000 in
1994. In 1989 Congress passed legislation to address the
financial problems of the financial services industry which
included a stated level that the FDIC funds [Bank Insurance Fund
(BIF) and Savings Association Insurance Fund (SAIF)] separately
should reach to be considered fully funded. In May 1995 the BIF
fund reached the legislated level of 1.25% of total insured
deposits. Consequently, the FDIC refunded excess assessments to
insured banks. Accordingly the Corporation received a refund of
$132,000 in the third quarter of 1995. In addition the $.23 per
$100 of deposits assessment was eliminated until the insurance
fund falls below the previously stated level. Because the
Corporation acquired a thrift branch, the deposits associated
with that branch are insured under the SAIF fund. The SAIF fund
has not reached its fully funded level; therefore, the Corporation
will continue to pay the $.23 per hundred assessment on these
deposits.
Total noninterest expense in 1994 decreased $713,000, or
6.0%, from $11,817,000 in 1993. Included in noninterest expense
in 1993 are operating expenses, totaling $1,036,000, associated
with Franklin Realty Services Corporation.
Income Taxes
Federal income tax expense totaled $1,451,000 in 1995,
compared to $1,000,000 and $897,000 in 1994 and 1993,
respectively. The Corporation's effective tax rate for the years
ended December 31, 1995, 1994 and 1993 was 25.8%, 21.0% and
22.6%, respectively. The increase in the effective tax rate in
1995 versus 1994 was largely due to lower tax-free income
relative to pretax income. The decrease in the effective tax
rate for 1994 versus 1993 was due primarily to an adjustment in
the valuation allowance,(refer to Note 10).
Table 4: Investment Securities at Amortized Cost (unaudited)
The following tables present amortized costs of investment securities by type at December 31 for the
past three years:
Amortized cost
(Amounts in thousands) 1995 1994 1993
Held to Maturity
U.S. Treasury securities and obligations of U.S. Government
agencies and corporations $849 $17,466 17,404
Obligations of state and political subdivisions 16,225 18,909 21,331
Debt securities issued by foreign governments - - 67
Corporate debt securities 6,795 11,147 14,741
Mortgage-backed securities 10,309 9,810 12,049
34,178 57,332 65,592
Other 1,139 1,162 1,314
$35,317 $58,494 $66,906
Amortized cost
1995 1994 1993
Available for Sale
Equity Securities $1,330 $1,213 $1,517
U.S. Treasury securities and obligations of U.S. Government
agencies and corporations 25,717 - -
Obligations of state and political subdivisions 2,417 2,400 2,383
Corporate debt securities 1,025 - 3,314
Mortgage-backed securities 10,511 11,004 11,859
$41,000 $14,617 $19,073
The Other Held to Maturity classification in the above schedule represents common stock of the Federal
Home Loan Bank of Pittsburgh and Atlantic Central Bankers Bank which in the aggregate total $1,139,000,
$1,162,000 and $1,314,000 at December 31, 1995, 1994 and 1993, respectively. Common stock of the
Federal Home Loan Bank and Atlantic Central Bankers Bank represents ownership in institutions which are wholly
owned by other financial institutions.
TABLE 5. Time Certificates of Deposit of $100,000 or More (unaudited)
The maturity of outstanding certificates of deposit of $100,000 or more at December 31, 1995 follows:
(Amounts in thousands) Amount
Maturity distribution:
Within three months $7,463
Over three through six months 3,941
Over six through twelve months 4,119
Over twelve months 3,927
Total $19,450
Financial Condition
Total assets at December 31, 1995 were $313,473,000, an
increase of $2,919,000, or .94%, from $310,554,000 at December
31, 1994. Earning assets represented $297,210,000, or 94.8%, of
total assets at December 31, 1995, compared to $295,693,000, or
95.2% at December 31, 1994. Earning assets yielded 8.56% in 1995
compared with 7.67% in 1994.
Investment securities held to maturity and available for
sale totaled $77,342,000 at December 31, 1995, compared to
$72,576,000 at December 31, 1994. Included in total investment
securities are mortgage-backed securities which represent 26.9%
and 27.6% of total investment securities at December 31, 1995 and
1994, respectively. At December 31, 1995, held to maturity
mortgage-backed securities equaled $10,309,000 and available for sale
mortgage-backed securities equaled $10,490,000 compared to
$9,810,000 and $10,256,000, respectively, at December 31, 1994.
As disclosed in Note 4 of the financial statements, the
Corporation invests primarily in mortgage-backed securities
issued by various agencies of the Federal government which carry
either an explicit or implied Federal guarantee. Of the
mortgage-backed securities issued by private issuers, the
majority were rated triple A by a nationally recognized rating
agency. None was rated lower than double A. Accordingly, the
credit risk associated with the Corporation's mortgage-backed
securities is low.
The interest rate risk accompanying the mortgage-backed
securities held by the Corporation is considered to be modest.
The current portfolio has an estimated duration of 2.3 years
suggesting that the market value of the mortgage-backed portfolio
would rise (or fall) approximately 2.3% given a 100 basis point
decrease (or increase) in market interest rates. However,
proportionately greater price volatility would be expected with a
larger change in market interest rates. The relatively short
duration of the mortgage-backed portfolio indicates that the
Corporation's exposure to prepayment of these assets in a lower
rate environment is modest. With the exception of one $800,000
mortgage-backed security, all collateralized mortgage obligations
(CMOs) pass the Federal Financial Institution Examination
Council's high-risk stress test.
The Corporation showed a net unrealized gain, net of tax, on
available for sale securities of $677,000 compared to a net
unrealized loss, net of tax, of $353,000 a year earlier.
Total loans, net of unearned discount, represented 68.0% of
total year-end 1995 assets compared to 72.1% a year earlier. All
loan categories, real estate, consumer and commercial, contracted
for the year, but real estate realized the largest decrease of
$7,655,000, or 7.9%. The Corporation originated and sold
approximately $15,000,000 mortgage loans to the secondary market,
primarily to Countrywide Funding Corporation. Nonperforming
assets to total assets improved to .65% at December 31, 1995 from
.72% a year earlier. The ratio of allowance for possible loan
loss to total loans was 1.47% at December 31, 1995 and covered
nonaccrual loans 4.7 times and nonperforming loans 1.7 times.
For a more in-depth analysis, refer to the loan quality
discussion.
Total deposits at December 31, 1995 remained flat at
$257,211,000 compared to $256,697,000 a year ago. Noninterest-bearing
checking and time deposits grew a total of $7,442,000
offset by a decrease of $6,928,000 in savings and interest-bearing checking.
Securities sold under agreements to repurchase
increased $3,999,000, or 41.6%, to $13,611,000 at December 31,
1995 from $9,612,000 at December 31, 1994 and represent customer
cash management accounts. Other borrowings at December 31, 1995
represent term borrowings with the Federal Home Loan Bank of
Pittsburgh (FHLB). While deposits remain the primary source of
funds for the Corporation, it does have the ability to borrow
under its flexible line of credit with FHLB to meet liquidity
needs or for other purposes. At December 31, 1995, the
Corporation had access to approximately $32,000,000 under the
FHLB flexible line of credit.
The Corporation maintains a strong capital position with the
December 31, 1995 leverage capital ratio of 11.07% and Tier 1 and
Tier 2 risk-based capital ratios of 16.80% and 18.06%,
respectively.
TABLE 6. Short-Term Borrowings (unaudited)
Federal funds purchased, Flexline, and Securities Sold Under Agreements to Repurchase
(Amounts in thousands) 1995 1994 1993
Ending balance $13,611 $12,062 $12,462
Average balance 12,990 11,948 7,419
Maximum month-end balance 16,212 16,695 23,304
Weighted-average interest rate on average balances 5.14% 4.11% 3.09%
Loan Quality
The Corporation's loan portfolio, net of unearned discount
and the allowance for possible loan losses, equaled $210,067,000
on December 31, 1995, or 4.2% less than on December 31, 1994.
The Corporation's strategy of selling certain types of
residential mortgages to secondary market investors resulted in
the real estate portfolio showing a decrease of $7,655,000, or
7.9%, to $89,033,000 at December 31, 1995 compared to $96,688,000
at December 31, 1994. The commercial, industrial and
agricultural loan portfolio showed a decrease of $1,105,000, or
1.5%, to $74,678,000 at December 31, 1995 from $75,783,000 at
December 31, 1994. The decrease in commercial, industrial and
agricultural loans was largely attributable to an uncertain local
economy and stiff competitive pricing. Likewise the consumer
loan portfolio which includes home equity lines of credit also
showed a decrease of $1,359,000, or 2.6% to $50,017,000 at year-end 1995
from $51,376,000 at year-end 1994. The decrease in
consumer loans is primarily due to the Corporation's focus on the
quality of consumer loan underwriting and the uncertainty of the
local economy. On a percentage of total loans basis, the real
estate portfolio represented 42% at December 31, 1995 compared to
43% one year earlier; the commercial portfolio represented 35% of
total loans at December 31, 1995 versus 34% one year earlier and
the consumer portfolio, at 23% represented the same proportion of
total loans as it did on December 31, 1994.
The Corporation's net charge-offs in 1995 totaled $586,000
(.27% of average loans), a 165.2% increase from the $221,000
(.10% of average loans) in net charge-offs in 1994. As Table 10
shows, the increase in net charge-offs in 1995 occurred primarily
in the consumer loan portfolio.
Table 9 shows that the Corporation's nonperforming assets
totaled $2,052,000 at December 31, 1995, an 8.5% decrease from
$2,243,000 in total nonperforming assets at December 31, 1994.
The ratio of nonperforming loans to total loans was .84% at
December 31, 1995, versus 1.00% a year earlier. The Corporation
continues to be successful in resolving nonaccrual loans by way
of partial and full payments as evidenced by a decrease of
$376,000 to $671,000 at year-end 1995 from year-end 1994. In
addition, restructured loans, which were comprised of two loans
renegotiated to include repayment terms more favorable than those
with which new loans would be granted were reduced via payments
100% to zero at December 31, 1995 from $595,000 at December 31,
1994. Offsetting the reductions in nonaccrual and restructured
loans were increases in loans past due 90 days or more and still
accruing interest and other real estate owned (OREO). The
increase in loans past due 90 days or more was concentrated in
the consumer loan portfolio which accounted for $342,000 of the
$522,000 increase in this category of nonperforming assets. As
reported last year, the Corporation's management has and will
continue to focus its loan quality control efforts on the
consumer loan portfolio to ensure that all lending activities are
adequately and uniformly supported by the quality assurance
structures and processes developed in recent years. OREO
increased to $258,000 at December 31, 1995 from zero a year
earlier, and includes four residential properties.
The allowance for possible loan losses was $3,141,000, or
1.47% of loans, net of unearned discount at December 31, 1995
compared to $3,425,000, or 1.54% of loans, net of unearned
discount at December 31, 1994. On December 31, 1995, the ratio
of the allowance for possible loan losses covered nonperforming
loans 1.7 times. This indicator of allowance adequacy has
improved from 1.5 times and .91 times for the years ended
December 31, 1994 and 1993, respectively. The increase in the
coverage ratio was achieved in 1995 through reductions in
nonperforming loans combined with increases in the allowance by
way of loss provisions charged to income. In 1994 and 1993 the
increase was driven by a significant reduction in nonperforming
loans from the prior year. The loan loss reserve analysis
utilized by management to establish the allowance considers
repayment capacity, collateral values, and guarantor strength for
individual problem commercial loans as well as loss history,
delinquency rates, and general economic conditions for general
portfolio loss reserve adequacy. (Refer to Tables 8 and 10 for
allocation of the reserve and loan loss activity as of December
31, 1995.) Management continuously monitors the adequacy of the
allowance for possible loan losses and maintains it within a
range which satisfactorily complies with loan portfolio
requirements. Management's assessment of loss reserve adequacy
is reviewed quarterly by the Loan Policy and Audit Committees of
the Board of Directors.
The maintenance of loan quality, because of its
contributions to the Corporation's financial performance, remains
a commitment of management. The continuing Loan Management
Committee system has contributed to the Corporation's growing
number of successes through earlier problem intervention; the
Corporation is better positioned to reach resolutions which are
less likely to produce liquidation-type losses. The success of
this process is also evident in the increased number of
commercial accounts that have been returned to line account
officers for future management.
In 1995, President Clinton approved the realignment of
Letterkenny Army Depot in the Chambersburg (Franklin County) area
and the closing of Fort Ritchie in nearby Maryland. The realignment
and closing of these two army bases eventually could cost the local
area between 3,000 and 3,500 government jobs and will be a gradual
decline through 1999. Letterkenny Army Depot is one of the area's largest
employers. The Franklin County Reuse Committee has been formed
by the Franklin County Commissioners to investigate and recruit
private industry to replace the loss of government jobs. Another
large employer, J. Schoeneman Co., a clothing manufacturer,
announced in 1995 that they would be closing in early 1996. The
original announcement included the loss of between 800 to 1,000
jobs, however, a subsequent announcement indicated there would
not be a complete shutdown and approximately 200 of those jobs
would be retained. The local Chamber of Commerce, Franklin
County Commissioners and others are actively seeking to attract
new businesses to the area. Chambers 5 Business Park continues
to attract new companies and provide expansion opportunities for
local companies which has resulted in new job opportunities. The
impact of the loss of jobs on the local economy and the
Corporation remains uncertain. The increase in loan
delinquencies experienced in 1995 is not related to the loss of
jobs.
TABLE 7. Loan Portfolio (unaudited)
The following table presents an analysis of the Banks' loan portfolio for each of the past five years:
December 31
(Amounts in thousands) 1995 1994 1993 1992 1991
Real estate (primarily first mortgage
residential loans) $83,800 $92,481 $95,918 $101,583 $81,725
Real estate - construction 5,233 4,207 4,232 4,607 4,812
Commercial, industrial and agricultural 74,678 75,783 72,537 69,071 70,987
Consumer (including home equity lines
of credit) 50,017 51,376 41,969 39,517 39,732
Total loans 213,728 223,847 214,656 214,778 197,256
Less: Unearned discount (520) (1,111) (425) (475) (480)
Allowance for possible loan losses (3,141) (3,425) (3,598) (3,433) (2,682)
Net loans $210,067 $219,311 $210,633 $210,870 $194,094
TABLE 8. Allocation of the Allowance for Possible Loan Losses (unaudited)
The following table shows allocation of the allowance for possible loan losses by major loan category and the
percentage of the loans in each category to total loans at year-end:
(Amounts in thousands) December 31
1995 1994 1993 1992 1991
Am't % Am't % Am't % Am't % Am't %
Real estate $583 42% $989 43% - 47% - 50% - 44%
Commercial
industrial and
agricultural 1,136 35% 1,520 34% 2,519 34% 2,403 32% 1,878 36%
Consumer 1,422 23% 916 23% 1,079 19% 1,030 18% 804 20%
$3,141 100% $3,425 100% $3,598 100% $3,433 100% $2,682 100%
TABLE 9. Nonperforming Assets (unaudited)
The following table presents an analysis of nonperforming assets for each of the past five years.
December 31
(Amounts in thousands) 1995 1994 1993 1992 1991
Nonaccrual loans $671 $1,047 $1,877 $2,574 $3,060
Loans past due 90 days or more
(not included above) 1,123 601 1,193 994 2,805
Restructured loans - 595 872 1,086 1,342
Total nonperforming loans 1,794 2,243 3,942 4,654 7,207
Other real estate 258 267 342 149
Total non performing assets $2,052 $2,243 $4,209 $4,996 $7,356
The Corporation has no foreign loans. The Bank's policy is to classify loans as nonaccrual when
the payment of principal or interest has not been made for a period of 90 days and management
considers the collection of principal and interest doubtful. Any interest accrued prior to the date of
nonaccrual classification is reversed. In most cases all subsequent payments are applied as a
reduction of principal until the loan is returned to accruing status.
Restructured loans occur when a borrower has experienced financial hardship and the loan
repayment terms are adjusted to be more favorable to the borrower than those with which new loans
would be granted.
TABLE 10. Allowance for Possible Loan Losses (unaudited)
The following table presents an analysis of the allowance for possible loan losses for each of the
past five years.
December 31
(Amounts in thousands) 1995 1994 1993 1992 1991
Balance at beginning of year $3,425 $3,598 $3,433 $2,682 $2,125
Charge-offs:
Commercial, industrial and agricultural (89) (51) (447) (685) (1,409)
Consumer (511) (230) (219) (213) (375)
Real estate (76) (38) (34) (7) (24)
Total charge-offs (676) (319) (700) (905) (1,808)
Recoveries:
Commercial, industrial and agricultu 46 60 104 166 19
Consumer 43 19 60 34 21
Real estate 1 19 - - -
Total recoveries 90 98 164 200 40
Net charge-offs (586) (221) (536) (705) (1,768)
Provision for possible loan losses 302 48 701 1,281 2,325
Waynesboro acquisition - - - 175 -
Balance at end of year $3,141 $3,425 $3,598 $3,433 $2,682
Ratios:
Net loans charged off as a percentage
of average loans 0.27% 0.10% 0.26% 0.35% 0.93%
Allowance as a percentage of net
loans (at December 31) 1.47% 1.54% 1.68% 1.60% 1.36%
Liquidity and Interest Rate Sensitivity
The Corporation must meet the financial needs of the
communities, which it serves, while providing a satisfactory
return on the shareholders' investment. In order to accomplish
this, Franklin Financial must maintain sufficient liquidity in
order to respond quickly to the changing level of funds required
for both loan and deposit activity. Liquidity is defined as the
ability to meet cash requirements, in the normal course of
business, and the flexibility to counter interruptions in the
flow of funds for reasons however unexpected. It means the
ability to borrow from a variety of sources, to redeploy assets
and to adjust the level and direction of operations to take
advantage of market opportunities. Historically, Franklin
Financial has satisfied its liquidity needs from the scheduled
repayment of loans and mortgage-backed securities, maturing
investment securities, deposit growth, its ability to borrow
through an existing line of credit, and its earnings.
Additionally, investments classified as available for sale
provide greater flexibility to meet changing economic conditions.
The principle sources of liquidity are: investment
securities maturing within one year, cash and due from banks, and
interest-bearing deposits with banks. These assets totaled
$23,678,000 and $21,151,000 at December 31, 1995 and 1994,
respectively. Other significant sources of liquidity are
scheduled repayment of loans and mortgage-backed investments.
The Corporation utilizes the secondary mortgage market to sell
newly originated loans. This has permitted the Corporation to
meet the customer's needs without increasing its interest rate
risk.
Growth in deposits generally provides the major portion of
funds required to meet increased loan demand. Total deposits
grew by $514,000 between year-end 1995 and 1994. The low
interest rate environment and the competition from nonbank
financial intermediaries make it difficult for the Corporation to
attract new deposits. The Corporation was able to meet the loan
and deposit withdrawal needs of its customers and therefore did
not aggressively pursue new deposit growth. Table 6 presents
specific information concerning Federal funds purchased and the
Federal Home Loan Flexline which provides significant sources for
short-term borrowings.
The Corporation's goal is to provide a relatively stable net
interest margin regardless of the volatility of interest rates.
Controlling interest rate risk is an important determinant.
Consideration of the repricing characteristics of interest-earning
assets and interest-bearing liabilities determines the
approach management should take to minimize the effect of
fluctuating rates on income. The interest sensitive gap, the
difference between repricing of the interest sensitive assets and
liabilities, provides management with an indication of how
interest income will be impacted by changing rate scenarios. For
example, an institution with more interest sensitive assets than
liabilities is said to have a positive gap. In this example, as
interest rates rise, the greater volume of assets should reprice
more rapidly than the liabilities. The net result should be an
increase in the net interest margin. Conversely, in a declining
rate environment the net interest margin should decline. If the
institution has a greater volume of interest sensitive
liabilities than assets, it is said to have a negative gap. In
this event, increased interest rates would cause the greater
volume of liabilities to reprice more rapidly than the assets.
The net result should be a decline in the net interest margin.
Conversely, in a declining rate environment the net interest
margin should increase.
Table 11 presents an interest sensitivity analysis of the
Corporation's assets and liabilities at December 31, 1995 for
several time periods. Given the positive gap presented in the
table, the Corporation's future earnings would be negatively
impacted in a falling rate environment. The Corporation
continuously monitors and adjusts the gap position in order to
maintain the flexibility needed to respond to changes in the
interest rate environment.
TABLE 11 Interest Rate Sensitivity (unaudited)
Repricing period
Fixed
December Immediately 1 to 90 91 to 180 181 to 365 1 to 5 beyond
(Amounts in thousands) 31, 1995 adjustable days days days years 5 years
Cash and cash equivalents $14,904 $ - $8,244 $ - $ - $ - $6,660
Loans:
Commercial, industrial and
agricultural 74,677 52,383 761 155 1,931 7,222 12,225
Consumer 50,017 14,725 13,857 1,712 3,424 15,429 870
Real estate* 83,801 - 7,952 11,319 29,986 11,880 22,664
Real estate - construction 5,233 2,278 466 1,512 977 - -
213,728 69,386 23,036 14,698 36,318 34,531 35,759
Investment securities 35,317 - 2,950 380 2,110 19,090 10,787
Investments available for sale 42,025 - 3,837 501 3,456 24,798 9,433
Other assets 7,499 - - - - - 7,499
Total assets 313,473 69,386 38,067 15,579 41,884 78,419 70,138
Savings/time deposits $225,602 $35,034 $26,937 $22,668 $24,854 $100,460 $15,649
Repurchase agreements 13,611 13,611 - - - - -
Other borrowings 5,650 - - - 2,809 2,659 182
Noninterest-bearing
liabilities and equity 68,610 - 15,901 - - 15,708 37,001
Total liabilities $313,473 $48,645 $42,838 $22,668 $27,663 $118,827 $52,832
Interest rate sensitivity $20,741 ($4,771) ($7,089) $14,221 ($40,408) $17,306
Cumulative gap $20,741 $15,970 $8,881 $23,102 ($17,306) $0
Note 1: Noninterest-bearing liabilities, representing demand deposit accounts and equity, reflect potential
fluctuations in demand deposit balances as of December 31, 1995
Note 2: Savings and N.O.W. accounts are presented according to guidance presented by the FDIC policy
for Measuring and Assessing Interest Rate Risk Exposure.
Note 3: Nonaccrual loans are presented in the 181 to 365 days time period.
*Primarily first mortgage residential loans
TABLE 12. Maturity Distribution of Invesment Portfolio (unaudited)
The following presents an analysis of investments in debt securities at December 31, 1995 by maturity,
and the weighted average yield for each maturity presented. Securities with "put options" have been
classified in the earliest period in which the options can be exercised. The yields in this table are
presented on a tax-equivalent basis.
After one year After five years
Within one but within but within After ten
year five years ten years years Total
Amortized Amortized Amortized Amortized Amortized
(Amounts in thousands) cost Yield cost Yield cost Yield cost Yield cost Yield
Held to Maturity
U.S. Treaury securities
& obligations of U.S.
Government agencies
& corporations $849 3.75% $ - - $ - - $ - - $849 3.75%
Obligations of state
& political
subdivisions 1,285 7.94% 12,183 7.39% 2,213 9.25% 544 10.05% 16,225 7.77%
Corporate debt
securities 1,500 4.90% 3,705 5.24% 999 5.66% 591 4.89% 6,795 5.23%
Mortgage-backed
securities 132 9.05% 3,395 6.02% 835 6.22% 5,947 6.68% 10,309 6.46%
$3,766 5.82% $19,283 6.74% $4,047 7.74% $7,082 6.79% $34,178 6.77%
After one year After five years
Within one but with but within After ten
year five years ten years years Total
Estimated Estimated Estimated Estimated Estimated
market market market market market
(Amounts in thousands) value Yield value Yield value Yield value Yield value Yield
Available for Sale
U.S. Treaury securities
& obligations of U.S.
Government agencies
& corporations $3,501 5.44% $22,422 5.55% $ - - $ - - $25,923 5.53%
Obligations of state
& political
subdivisions 500 5.21% 1,920 6.33% - - - - $2,420 6.10%
Corporate debt
securities - - 1036 5.34% - - - - $1,036 5.34%
Mortgage-backed
securities 1,007 6.04% - - 3,030 5.96% 6,453 6.05% $10,490 6.02%
$5,008 5.54% $25,378 5.60% $3,030 5.96% $6,453 6.05% $39,869 5.69%
TABLE 13. Maturites and Interest Rate Terms of Loans (unaudited)
Stated maturities (or earlier call dates) of loans as of December 31, 1995 are summarized in the table
below:
After
one year
Within but within After
(Amounts in thousands) one year five year five years Total
Loans:
Real estate (primarily first mortgage
residential loans) $3,949 $14,769 $65,082 $83,800
Real estate - construction 5,233 - - $5,233
Commercial, industrial and agricultural 25,386 21,552 27,740 $74,678
Consumer(including home equity lines of credit) 17,575 21,090 11,352 $50,017
$52,143 $57,411 $104,174 $213,728
The following table shows for the above loans the amounts which have predetermined interest rates
and the amounts which have variable intereset rates at December 31, 1995:
After
one year
Within but within After
one year five year five years Total
Loans with predetermined rates $17,103 $29,260 $36,449 $82,812
Loans with variable rates 35,040 28,151 67,725 $130,916
$52,143 $57,411 $104,174 $213,728
TABLE 14. Capital Ratios (unaudited)
December 31
1995 1994 1993
Risk-based ratios
Tier 1 16.80% 15.36% 14.68%
Tier 2 18.06% 16.62% 16.22%
Leverage Ratio 11.07% 10.47% 9.72%
Capital and Dividends
Total shareholders' equity on December 31, 1995 was
$34,956,000, representing an increase of $2,083,000, or 6.3%,
over $32,873,000 at December 31, 1994. Shareholders' equity grew
by 7.4% in 1994. The continued growth is primarily the result of
retained earnings or internal capital growth . The rate of
internal growth is measured as the percent of return on average
equity (ROE) multiplied by the percent of earnings retained. The
rate of internal capital growth was 8.2% for 1995 and exceeds the
growth rate of 8.0% and 7.8% for 1994 and 1993, respectively.
Additional capital of $198,000 and $217,000 was provided in 1995
and 1994, respectively, through the exercise of shares granted
under the Employee Stock Purchase Plan. Net unrealized gains on
investment securities available for sale, net of deferred taxes,
amounted to $677,000 at December 31, 1995 compared to a loss, net
of deferred taxes, of $353,000 at December 31, 1994.
In 1995 the Corporation announced that the Board of
Directors authorized the repurchase of up to 50,000 common shares
in open market transactions through brokers and dealers. Also in
1995, the Board authorized the repurchase of several larger
blocks of common shares. As a result during 1995 the Corporation
repurchased 64,741 common shares at a total cost of $2,235,000.
A strong capital position is important to the Corporation
and provides a solid foundation for the anticipated future growth
of the Corporation. A strong capital position also instills
confidence in the Bank by depositors, regulators and investors,
and is considered essential by management. Common measures of
adequate capitalization for banking institutions are ratios of
capital to assets. These ratios indicate the proportion of
permanently committed funds to the total asset base. Guidelines
issued by federal and state regulatory authorities require both
banks and bank holding companies to meet minimum leverage capital
ratios and risk-based capital ratios. Well capitalized banking
institutions are determined to have (1) Total Risk-Based Capital
ratios greater than or equal to 10% and (2) Tier 1 Risk-Based
Capital ratios greater than or equal to 6% and (3) Leverage
Capital ratios greater than or equal to 5%.
The Leverage ratio compares Tier 1 Capital to total balance
sheet assets while the risk-based ratio compares Tier I and Tier
II capital to risk-weighted assets and off-balance-sheet activity
in order to make capital levels more sensitive to the risk
profiles of individual banks.
The minimum Tier 1 leverage ratio, set by the Corporation's
state regulatory authorities is 6%. The Pennsylvania Department
of Banking requires a higher minimum Tier 1 leverage ratio than
the Federal (3%) regulatory authorities. The minimum Tier 1 and
Tier II risk-based capital ratios at December 31, 1995 were 4%
and 8%, respectively.
Risk-based capital guidelines redefine the components of
capital, categorize assets into different risk classes and
include certain off-balance-sheet items in the calculation of
capital requirements. The components of risk-based capital are
segregated as Tier I and Tier II capital. Tier I capital is
composed of common stock, additional paid-in capital and retained
earnings reduced by goodwill, other intangible assets and the
effect of net unrealized gains or losses. Tier II capital is
composed of Tier I capital plus the allowance for possible loan
losses. Table 14 presents the capital ratios for the Corporation
at December 31, 1995, 1994, and 1993. At year-end, the
Corporation and its banking subsidiary exceeded all capital
requirements.
The Corporation paid cash dividends of $.72 per common share
in 1995, an increase of 10.8% over $.65 per common share paid in
1994. When adjusted for the 10% stock dividend paid in December 1994,
the increase in cash dividends paid to shareholders in 1995 equaled 21.8%.
The ratio of cash dividends paid to net income in 1995 was
34.0% versus 32.6% in 1994.
For the third consecutive year the Board of Directors
approved and paid a stock dividend to its shareholders. On
October 5, 1995 the Board approved a 3 for 2 stock split issued in
the form of a 50% stock dividend to be paid on December 29, 1995 to
shareholders of record on December 8, 1995. This follows a 10%
and 7% stock dividend paid to shareholders in 1994 and 1993,
respectively.
Book value per common share was $18.02 at December 31, 1995,
compared with $16.21 at December 31, 1994. Market value per
common share was $27.25 at December 31, 1995, compared to $22.59 a
year earlier. As of year-end 1995, the Corporation's common
stock was trading at 151.2% of its book value compared to 139.4%
one year earlier; the price earnings multiple was 12.56x at
December 31, 1995, compared to 11.77x at December 31, 1994.