UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ....... to .......
Commission file number 0-12126
FRANKLIN FINANCIAL SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1440803
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 SOUTH MAIN STREET (P.O. BOX T), CHAMBERSBURG,PA 17201-0819
(Address of principal executive officer)
717/264-6116
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
There were 1,909,704 outstanding shares of the Registrant's common stock as of
August 2, 1997.
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets 3
as of June 30, 1997 (Unaudited) and
December 31, 1996
Condensed Consolidated Statements of 4
Income for the Three and Six Months
ended June 30, 1997 and 1996 (unaudited)
Condensed Consolidated Statements of 5
Changes in Shareholders' Equity for the
Twelve and Six Months ended December 31,
1996 and June 30, 1997 (unaudited)
Condensed Consolidated Statements of Cash 6
Flows for the Six Months Ended June 30,
1997 and 1996 (unaudited)
Notes to Condensed Consolidated Financial 7
Statements (unaudited)
Item 2 - Management's Discussion and Analysis of 11
Financial Condition and Results of Operations
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of
Security Holders 17
Item 6 - Exhibits and Reports on Form 8-K 17
SIGNATURE PAGE
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands)
June 30 December 31
1997 1996
(unaudited)
ASSETS
Cash and due from banks $12,820 $10,265
Interest bearing deposits in other banks 103 256
Investment securities held to maturity (Market value of $32,294and $36,199 at
June 30, 1997 and December 31, 1996 respectively) (Note 3) 32,300 36,290
Investment securities available for sale (Note 3) 59,016 53,502
Loans, net 234,042 221,166
Premises and equipment, net 6,244 6,698
Other assets 8,042 7,943
Total Assets $352,567 $336,120
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits: (Note 4)
Demand (non-interest bearing) $37,569 $34,847
Savings and Interest checking 109,979 104,763
Time 122,189 128,592
Total Deposits 269,737 268,202
Securities sold under agreements to repurchase 13,353 15,122
Other borrowings 30,116 14,891
Other liabilities 2,724 2,564
Total Liabilities 315,930 300,779
Commitments and Contingencies - -
Shareholders' equity:
Common stock $1 par value per share, 5,000 shares authorized
with 2,030 shares issued and 1,870 and 1,890
outstanding at June 30, 1997 and December 31,1996,
respectively 2,030 2,030
Capital stock without par value, 5,000 shares authorized
with no shares issued or outstanding - -
Additional paid in capital 19,736 19,745
Retained earnings 19,156 17,590
Net unrealized gain on securities 1,015 613
Treasury stock (Note 5) (4,479) (3,830)
Unearned compensation (821) (807)
Total shareholders' equity 36,637 35,341
Total Liabilities and Shareholders' Equity $352,567 $336,120
The accompanying notes are an integral part of these statements
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands, except per share)
(Unaudited)
For the Three For the Six
Months Ended Months Ended
June 30 June 30
1997 1996 1997 1996
INTEREST INCOME
Interest on loans $5,228 $4,817 $10,302 $9,715
Interest on deposits in other banks 4 65 21 196
Interest on Federal funds sold 0 0 0 0
Interest and dividends on investments (Note 2) 1,298 1,150 2,590 2,237
Total interest income 6,530 6,032 12,913 12,148
INTEREST EXPENSE
Interest on deposits 2,488 2,420 4,915 4,963
Interest on securities sold under repurchase
agreements and other borrowings 503 305 929 546
Total interest expense 2,991 2,725 5,844 5,509
Net interest income 3,539 3,307 7,069 6,639
Provision for possible loan loss 192 131 385 225
Net-interest income after provision
for possible loan losses 3,347 3,176 6,684 6,414
NONINTEREST INCOME
Trust commissions 329 292 668 591
Service charges, commissions and fees 533 577 1,038 1,024
Other 9 157 48 245
Net securities gains 93 0 204 78
Total noninterest income 964 1,026 1,958 1,938
NONINTEREST EXPENSE
Salaries and benefits 1,573 1,581 3,137 3,241
Net occupancy expense 152 122 315 256
Furniture and equipment expense 252 185 525 361
FDIC insurance 11 14 22 27
Other 796 834 1,580 1,576
Total noninterest expense 2,784 2,736 5,579 5,461
Income before income tax provision 1,527 1,466 3,063 2,891
Income tax provision 344 330 745 705
Net income $1,183 $1,136 $2,318 $2,186
Earnings per share
Net income per share $0.65 $0.57 $1.26 $1.12
The accompanying notes are an intergral part of these statements.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
for the year ended December 31, 1996 and the Six Months ended June 30, 1997
(Amounts in thousands, except per share )
Net
Additional Unrealized
Common Paid-in Retained Gain/Loss Treasury Unearned
Stock Capital Earnings Securities Stock Compensation Total
Balance at December 31, 1995 $2,030 $19,431 $14,966 $677 ($2,053) ($95) $34,956
Year ended December 31, 1996
Net Income - - 4,127 - - - 4,127
Cash dividends, $.78 per share - - (1,503) - - - (1,503)
Common stock issued under stock
option plans - (33) - - 233 - 200
Change in net unrealized gain on - - - (64) - - (64)
securities
Restricted stock issued under long-term
incentive compensation plan
(28,926 shares, net of forfeitures) - 177 - - 672 (849) 0
Acquisition of 88,604 shares of
treasury stock at cost - - - - (2,682) - (2,682)
Tax benefit of restricted stock - 170 - - - - 170
tranaction
Amortization of unearned compensation - - - - - 137 137
Balance at December 31, 1996 2,030 19,745 17,590 613 (3,830) (807) 35,341
Net income - - 2,318 - - - 2,318
Cash Dividends, $.40 per share - - (752) - - - (752)
Common stock issued under stock
option plans - 2 - - 120 - 122
Change in net unrealized gain on - - - 402 - - 402
securities
Restricted stock issued under
long-term incentive compensation
plan (2,174 shares) - (11) - - - (73) (84)
Acquisition of 23,483 shares of
treasury stock at cost (Note 5) - - - - (769) - (769)
Amortization of unearned
compensation - - - - - 59 59
Balance at June 30,1997
(unaudited) $2,030 $19,736 $19,156 $1,015 ($4,479) ($821) $36,637
The accompanying notes are an integral part of these statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Amounts in Thousands)
Unaudited
For the Six Months Ended
June 30
1997 1996
Cash flows from operating activities:
Net Income $2,318 $2,186
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation 391 359
Premium amortization on investment securities 60 49
Discount accretion on investment securities (76) (58)
Provision for possible loan losses 385 225
Securities gains, net (204) (78)
Principal gains on sales of mortgage loans (21) (14)
Proceeds from sale of mortgage loans 4,822 7,663
Loss (Gain) on sale of premises and equipment 37 (89)
Loan charge-offs, net of recoveries (345) (418)
(Increase) in interest receivable (145) (358)
Increase in interest payable 164 92
Decrease in unearned discount (77) (225)
Decrease (Increase) in prepaid and other assets 46 (30)
(Decrease) Increase in accrued expenses and other liabilities (211) 286
Other, net 59 107
Net cash provided by operating activities $7,203 $9,697
Cash flows from investing activities:
Proceeds from sales of investment securities available for sale 3,581 118
Proceeds from maturities of investment securities held to maturity 4,354 4,262
Proceeds from maturities of investment securities available for sale 6,500 6,473
Purchase of investment securities held to maturity (364) (6,728)
Purchase of investment securities available for sale (14,782) (10,465)
Net change in loans (17,641) (12,410)
Capital expenditures (173) (488)
Proceeds from sales of premises and equipment 132 223
Net cash (used) in investing activities (18,393) (19,015)
Cash flows from financing activities:
Net increase in demand deposits,
NOW accounts and savings accounts 7,938 1,606
Net decrease in certificates of deposit (6,403) (9,661)
Dividends (752) (741)
Common stock issued under stock option plans 122 76
Purchase of treasury shares (769) (1,638)
Cash inflows from other borrowings 13,456 13,113
Net cash provided by financing activities 13,592 2,755
Increase (Decrease) in cash and cash equivalents 2,402 (6,563)
Cash and cash equivalents as of January 1 10,521 14,904
Cash and cash equivalents as of June 30 $12,923 $8,341
The accompanying notes are an integral part of these statements.
FRANKLIN FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The consolidated balance sheets as of June 30, 1997 and December 31, 1996,
the consolidated statements of income for the three and six month periods
ended June 30, 1997 and 1996, the consolidated statements of changes in
shareholders'equity as of December 31, 1996 and June 30, 1997 and the
consolidated statements of cash flows for the six month periods ended
June 30, 1997 and 1996 have been prepared by the Corporation, without audit
where indicated. In the opinion of management, all adjustments (which include
only normal recurring adjustments) necessary to present fairly the financial
position, results of operations, and cash flows at June 30, 1997, and for
all periods presented have been made.
The consolidated financial statements include the accounts of Franklin
Financial Services Corporation (the Corporation), and its wholly-owned
subsidiary, Farmers and Merchants Trust Company of Chambersburg. All
significant intercompany transactions and account balances have been
eliminated.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed
consolidated financial statements be read in conjunction with the audited
financial statements and notes thereto included in the Corporation's 1996
Annual Report. The results of operations for the period ended June 30, 1997,
are not necessarily indicative of the operating results for the full year.
For purposes of reporting cash flows, cash and cash equivalents include
cash, due from banks, and federal funds sold. Generally, Federal funds are
purchased and sold for one-day periods. Supplemental disclosures of cash flows
information are as follows:
Cash paid for six months ended June 30: 1997 1996
Interest paid on deposits and
other borrowed funds $5,680,000 $5,417,000
Income taxes paid $ 350,000 $ 630,000
Note 2. Capital Adequacy
Quantitative measures established by regulation to ensure capital adequacy require financial
minimum amounts and ratios of total and Tier I capital to risk-weighted assets and of Tier I
The Capital ratios of the Corporation and its bank subsidiary are as follows:
As of June 30, 1997 (unaudited)
To be well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
(Amounts in thousands) Amount Ratio Amount Ratio Amount Ratio
Total Capital (to Risk Weighted Assets)
Corporation $36,524 15.54% $18,797 8.00% $23,497 10.00%
Bank 33,096 14.25% 18,574 8.00% 23,218 10.00%
Tier I Capital (to Risk Weighted Assets)
Corporation $33,585 14.29% $9,399 4.00% $14,098 6.00%
Bank 30,191 13.00% 9,287 4.00% 13,931 6.00%
Tier I Capital (to Average Assets)
Corporation $33,585 9.85% $13,641 4.00% $17,051 5.00%
Bank 30,191 8.96% 13,471 4.00% 16,838 5.00%
Note 3 - Investment Securities
Amortized cost and estimated market values of investment securities as of June 30, 1997 (unaudited),
and December 31, 1996, were as follows (amounts in thousands):
Held to Maturity
June 30 December 31
1997 1996
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
U.S. Treasury securities and obligations
of U.S. Government agencies & corporations $1,040 $1,045 $1,051 $1,058
Obligations of state and political subdivisions 17,057 17,105 19,496 19,536
Corporate debt securities 2,975 2,967 3,688 3,677
Mortgage - backed securities 9,600 9,549 10,832 10,705
30,672 30,666 35,067 34,976
Other 1,628 1,628 1,223 1,223
$32,300 $32,294 $36,290 $36,199
Available for sale
June 30 December 31
1997 1996
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
Equity securities $1,531 $3,082 $1,380 $2,490
U.S. Treasury securities and obligations
of U.S. Government agencies & corporations $20,958 $20,959 27,054 27,055
Obligations of state and political subdivisions 14,104 14,307 1,934 1,930
Corporate debt securities 5,037 5,030 5,046 5,058
Mortgage - backed securities 15,848 15,638 17,159 16,969
$57,478 $59,016 $52,573 $53,502
Interest income and dividends received on investment securities for the three and six months
ended June 30, 1997 and 1996 are as follows (amounts in thousands):
Three Months Six Months
1997 1996 1997 1996
(Unaudited) (Unaudited)
U.S. Government Obligations $75 $81 $148 $157
Obligations of U.S. Government
Agencies and Corporations 652 609 1,384 1,227
Obligations of States and
Political Subdivisions 351 260 613 487
Other Securities, primariy
Notes and Debentures 200 168 390 299
Common Stock 20 32 55 67
$1,298 $1,150 $2,590 $2,237
Note 4 - Deposits
Deposits are summarized as follows (amounts in thousands):
June 30 December 31
1997 1996
(Unaudited)
Demand $37,569 $34,847
Savings
Interest-bearing checking 36,007 34,473
Money Market Accounts 28,937 25,288
Passbook and Statement Savings 45,035 45,002
$109,979 $104,763
Time
Deposits of $100,000 and over 18,677 30,345
Other Time Deposits 103,512 98,247
122,189 128,592
Total Deposits $269,737 $268,202
NOTE 5 - Treasury Stock
The Corporation repurchased 10,000 shares of Franklin Financial Services
Corporation common stock during the second quarter ended June 30, 1997. The
cumulative total of common shares repurchased during the six month period ended
June 30, 1997 was 23,483 at a cost of approximately $769,000. These shares
were acquired pursuant to the stock repurchase program approved by the Board of
Directors in the first quarter of 1997. Under the program the Corporation is
authorized to repurchase up to 100,000 shares in open market transactions
through dealers.
NOTE 6 - New Accounting Standards
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 128, "Earnings Per Share" effective for fiscal years ending on or
after December 15, 1997. This Statement establishes new standards for computing
and presenting earnings per share (EPS) and makes earnings per share comparable
to international standards. The Statement prohibits early application and
requires restatement of all prior-period EPS data presented after its effective
date. The EPS as currently reported is the same as the Basic EPS required by
the Statement. The newly required Diluted EPS is not expected to be materially
different than the Basic EPS.
In March 1997, the FASB issued Statement No. 129, "Disclosures of
Information about Capital Structure", effective for financial statements for
periods ending after December 15, 1997. This Statement did not change the
currently reported disclosures.
In July 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" effective for fiscal years beginning after December 15, 1997. This
Statement establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial
statements. The objective of Statement 130 is to report a measure of all
changes in equity that result from economic events of the period other than
transactions with owners. Comprehensive income is the total of net income and
all other non-owner changes in equity. Adoption of the Statement will require
the Corporation to include all non-owner changes in equity as components of
comprehensive income. Currently such non-owner changes include only unrealized
gains and losses on available for sale investment securities.
Management's Discussion and Analysis of
Results of Operations and Financial Condition
for the Three and Six Month Periods
Ended June 30, 1997
Part 1, Item 2
Results of Operations
Net income for the second quarter and six months ended June 30, 1997, was
$1.2 million and $2.3 million, respectively compared with $1.1 million and $2.2
million, respectively, for the same period in 1996. Earnings per share grew
14.0% to $.65 from $.57 for the second quarter of 1997 compared with the second
quarter of 1996. An increase in earnings per share of 12.5% to $1.26 from $1.12
was reported for the first six months of 1997 compared with the same period one
year earlier. Per share earnings are weighted to reflect the impact of the
stock repurchase program. Book value per share equaled $19.59 at June 30, 1997
versus $18.00 at June 30, 1996.
The Corporation's annualized return on average assets (ROA) and return on
average equity (ROE) for the first six months of 1997 were 1.38% and 13.14%,
respectively, compared to 1.40% and 12.82%, respectively, for the same period
ended June 30, 1996.
Net interest income for the second quarter of 1997 grew $232,000, or 7.0%,
to $3.5 million from $3.3 million for the second quarter of 1996. Similarly,
net interest income for the six months ended June 30, 1997, grew $430,000, or
6.5%, to $7.1 million from $6.6 million for the first six months ended June 30,
1996. The increase in net interest income for both periods was due primarily to
increased volume rather than any significant change in interest rates. The
average volume of interest-earning assets increased $16.7 million during the
twelve month period from June 30, 1996 through June 30, 1997 driven primarily
by commercial loan demand and the purchase of investment securities. The yield
on interest-earning assets increased two basis points to 8.36% at June 30, 1997
from 8.34% one year earlier. The average volume of interest bearing liabilities
grew $18.3 million during the same twelve month period driven primarily by
deposit growth ($5.2 million) and an increase in short-term borrowings
($12.9 million) with the Federal Home Loan Bank of Pittsburgh. The cost of
interest-bearing liabilities decreased four basis points to 4.45% for the six
months ended June 30, 1997 from $4.49% one year earlier. Consequently, the
Corporation's interest spread and net interest margin on a tax equivalent basis
moved to 3.91% and 4.65%, respectively, at June 30, 1997, from 3.85% and
4.66%, respectively, at June 30, 1996.
The Corporation expensed $192,000 and $385,000 for possible loan losses in
the second quarter and first six months, respectively, of 1997 versus $131,000
and $225,000, respectively, for the same periods in 1996. Continued consumer
loan charge-offs and the growth of the total loan portfolio are the two factors
responsible for the higher loan loss provision. Net charge-offs for the second
quarter and first six months of 1997 were $112,000 and $345,000, respectively,
versus $121,000 and $418,000, respectively, for the same periods in 1996.
Total noninterest income excluding net securities gains equaled $871,000
for the quarter ended June 30, 1997 and $1.8 million for the six months then
ended compared to $1.0 million and $1.9 million, respectively, for the same
periods in 1996. Trust commissions increased $37,000, or 12.6%, to $329,000
for the second quarter due primarily to a 30% growth in trust assets under
management since June 30, 1996. Service charges, commissions and fees were
down $44,000, or 7.6% to %533,000 for the second quarter ended June 30, 1997
versus June 30,1996 due primarily to fees associated with loan
originations during the quarter. Other income also recorded a decrease of
$148,000, or 94.2%, to $9,000 for the second quarter of 1997 versus the second
quarter of 1996. The largest contributor to this decrease were gains of
$119,000 realized through the sale of real estate and recorded in the second
quarter of 1996.
Trust commissions for the six month period recorded an increase of $77,000,
or 13.0%, to $668,000 at June 30, 1997 from June 30, 1996 due primarily to the
growth in trust assets. Other income for the six months ended June 30, 1997
recorded a decrease of $197,000, or 80.4%, to $48,000 from $245,000 one year
earlier. Nonrecurring items such as $119,000 gain from the sale of real estate,
$38,000 prior year expense refunds and $25,000 recovery of prior year costs
related to loan collections in the six months ended June 30, 1996 were the
primary factors contributing to lower other income for the six months ended
June 30, 1997.
The Corporation recorded $93,000 and $204,000 for net securities gains in the
second quarter and six months, respectively, ended June 30, 1997 compared to
zero and $78,000, respectively, for the same periods ended June 30, 1996. Net
securities gains recorded were from the available for sale portfolio.
Total noninterest expense grew $48,000, or 1.7%, to $2.8 million and
$118,000, or 2.1%, to $5.6 million for the second quarter and six months,
respectively, ended June 30, 1997 compared to $2.7 million and $5.5 million,
respectively, for the same periods one year earlier. Salaries and benefits
expense recorded decreases of $8,000 and $104,000 for the second quarter and
six months, respectively, ended June 30, 1997, related primarily to the
retirement of an executive officer and lower expense related to the long-term
incentive plan partially offset by higher personnel costs associated with the
addition of three new branches in Cumberland County. Salary and benefits
expense for the second quarter and six months ended June 30, 1997 equaled $1.6
million and $3.1 million, respectively, compared to $1.6 million and $3.2
million, respectively, one year earlier. Net occupancy and furniture and
equipment expense combined increased $97,000, or 31.6%, to $404,000 for the
second quarter and $223,000, or 36.1%, to $840,000 for the six months ended
June 30, 1997 versus $307,000 and $617,000, respectively, for the same periods
ended June 30, 1996. Added costs associated with the operation of three new
branches in Cumberland County was primarily responsible for the increase in net
occupany and furniture and equipment expense.
Federal income tax expense for the second quarter and six months ended June
30, 1997 totaled $344,000 and $745,000, respectively, compared to $330,000 and
$705,000, respectively, for the same periods in 1996. The effective tax rate for
the six month ended June 30, 1997 and 1996 was 24.3% compared to the statutory
tax rate of 34% due primarily to interest income earned on tax-free investments
and tax-free loans.
Financial Condition
Total assets grew $16.4 million, or 4.9%, to $352.6 million at June 30,
1997, from $336.1 million at December 31, 1996. Total assets at June 30, 1997
were $318.3 million. The growth in assets from December 31, 1996 was driven
primarily by loan volume. Commercial loan volume led the way with a $9.1 million
increase to $100.0 million in outstanding loan balances. Consumer loan volume
followed next with $3.5 million in growth reaching outstanding balances of $53.5
million. The increase in consumer loans has been primarily in secured
installment loans. Investment securities recorded a net increase of $1.5 million
and cash and due from banks was up $2.5 million to $12.8 million. Since year end
the Corporation has invested approximately $9.0 million in tax-free securities
in an effort to better manage its income tax expense. The increase in cash and
due from banks is related primarily to cash requirements at the three new
Cumberland County branches and higher reserve requirements with the Federal
Reserve.
Funding for the asset growth came primarily through other borrowings with
the Federal Home Loan Bank of Pittsburgh (FHLB). Other borrowings at June 30,
1997 were $30.1 million, up $15.2 million from $14.9 million at December 31,
1996. Deposit growth was flat during the six months from December 31, 1996
growing less than 1.0%, or $1.5 million, to $269.7 million at June 30, 1997. A
new money market account with a weekly rate indexed to the 91-day Treasury Bill
was introduced in early May to attract new money and to give current customers
a more attractively priced deposit product. Although this new product attracted
approximately $3.0 million in new money for the short sixty day period it has
been available to customers, the new volume was not enough to curb the flight of
deposit money to other investment vehicles. Consequently, the Corporation
looked to its relationship with FHLB to provide the funding needed for asset
growth.
The allowance for possible loan losses recorded a balance of $3.1 million
at June 30, 1997 and December 31, 1996. The allowance represented 1.32% of total
loans at June 30, 1997 and provided coverage for nonaccrual loans 2.0 times and
nonperforming loans 1.6 times. At December 31, 1996, the allowance represented
1.36% of total loans.
The Corporation's nonperforming loans increased $220,000 to $1.9 million
at June 30, 1997, from $1.7 million at year-end 1996. Included in nonperforming
loans at June 30, 1997 were nonaccrual loans totaling $1.5 million and loans
past-due 90 days or more totaling $412,000. Nonaccrual loans and loans past due
90 days or more totaled $856,000 and $874,000, respectively, at December 31,
1996. Although the Corporation recorded an increase in nonperforming loans,
loans past-due 30-89 days recorded a decrease of $512,000 to $1.7 million at
June 30, 1997 from $2.2 million at December 31, 1996. The Corporation had no
restructured loans at June 30, 1997. Other real estate owned (OREO) totaled
$54,000 at June 30, 1997 compared to $99,000 at December 31, 1996. Nonperforming
assets, which includes nonperforming loans, restructured loans and OREO totaled
$2.0 million at June 30, 1997, and represented .57% of total assets.
The Corporation recorded net charge-offs for the second quarter and six
months ended June 30, 1997 totaling $112,000 and $345,000, respectively,
compared to $121,000 and $418,000, respectively, for the same periods ended
June 30, 1996. Net charge-offs for the first six months of 1997 were
attributable 94.0% to consumer loans compared to 65.7% for the same period in
1996 and represented .30% and .39%, respectively, for average loans.
The local economy remains stable with low unemployment reported. For May
1997 unemployment in Franklin County was reported to be 5.6% up slightly from
the 5.5% reported in May 1996. A major company in neighboring Fulton County
announced in July 1997 their intentions to lay-off approximately 800 employees.
This lay-off could have some impact on Franklin County businesses due to the
loss of outsourcing businesses related to the company. New jobs created in the
past several years by new and old companies in Franklin County have offset any
potential adverse impact to the local economy. The area along the I-81 corridor,
which includes Franklin County, is still heavily dependent on manufacturing but
is becoming more diverse so the area is not as reliant on any one industry.
Liquidity
The Corporation's liquidity ratio (net cash, short-term and marketable
assets divided by net deposits and short-term liabilities ) was 22.0% at
June 30, 1997. The Corporation actively sells mortgage loans to the secondary
market (primarily FNMA) and looks to its borrowing ability with FHLB to satisfy
any liquidity needs. The Corporation sold $4.8 million in mortgage loans to FNMA
during the first six months of 1997 and had advances outstanding with FHLB
totaling $26.8 million. The Corporation's maximum borrowing capacity with FHLB
equals $97.5 million. Management believes that liquidity is adequate to meet the
borrowing and deposit withdrawal needs of its customers.
Capital Adequacy
Total shareholders' equity increased $1.3 million to $36.6 million at June
30, 1997 from $35.3 million at December 31, 1996. Retained earnings recorded a
net increase of $1.6 million for the six months ended June 30, 1997, to $19.1
million after cash dividends totaling $752,000 were paid to shareholders. The
market value of the Corporation's available for sale securities improved at June
30, 1997 resulting in a net unrealized gain recorded at $1.0 million compared to
$613,000 at December 31, 1996, an increase of $402,000. Offsetting the increases
in retained earnings and the net unrealized gain on securities was the
repurchase of 23,483 shares of the Corporation's common stock which increased
the cost of treasury stock by $649,000 to $4.5 million.
For the second quarter of 1997 the Corporation paid cash dividends totaling
$375,000, or $.20 per share. Cash dividends paid per common share year-to-date
totaled $752,000, or $.40 per share, and represented 32.4% of the recorded six
months earnings for 1997.
Capital adequacy is currently defined by banking regulatory agencies
through the use of several minimum required ratios. At June 30, 1997 the
Corporation was determined to be well capitalized as defined by banking
regulatory agencies. The Corporation's leverage ratio, Tier I and Tier II
risk-based capital ratios at June 30, 1997 were 9.85%, 14.29% and 15.54%,
respectively.
PART II - OTHER INFORMATION
Item 4. SUBMISSIONS OF MATTERS TO VOTE OF SECURITY HOLDERS
The 1997 Annual Meeting of Shareholders (the "Meeting") of the Corporation
was held on April 29, 1997. Notice of the Meeting was mailed to shareholders
on or about April 1, 1997, together with proxy solicitation materials prepared
in accordance with Section 14(a) of the Securities Exchange Act of 1934,
as amended, and the regulations promulgated thereunder.
The Meeting was held for the following purpose:
1. To elect four Class C directors to hold office for 3 years
from the date of election and until their successors are
elected and qualified.
There was no solicitation in opposition to the nominees of the Board of
Directors for election to the Board. All nominees of the Board of Directors
were elected. The number of votes cast for as well as the number of votes
withheld for each of the nominees for election to the Board of Directors,
were as follows:
Votes
Nominee Votes For Withheld
Jay L. Benedict, Jr. 1,180,836.777 8,048.888
John M. Hull III 1,177,901.777 10,983.888
H. Huber McCleary 1,182,936.665 5,949.000
Charles M. Sioberg 1,182,593.131 6,292.535
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11 - Computation of earnings per share
(b) Reports on Form 8-K
There were no reports filed on Form 8-K for the quarter ended June 30, 1997
Exhibit 11
COMPUTATION OF PER SHARE EARNINGS
For the Three Months Ended June 30
1997 1996
Fully Fully
Primary Earnings Primary Earnings Diluted Primary Earnings Primary Earnings Diluted
Per Share(1) Per Share(1) Earnings Per Share(1) Per Share(1) Earnings
as Reported as Adjusted Per Share as Reported as Adjusted Per Share
Computation of earnings
per common share:
Shares
Weighted average
shares outstanding 1,827,206 1,827,206 1,827,206 1,975,910 1,975,910 1,975,910
Equivalent shares from
exercise of dilutive
stock equivalents -- 19,223 19,244 --- 17,338 20,506
1,827,206 1,846,429 1,846,450 1,975,910 1,993,248 1,996,416
Net Income $1,183,340 $1,183,340 $1,183,340 $1,136,000 $1,136,000 $1,136,000
Earnings per common share
Net Income $0.65 $0.64 $0.64 $0.57 $0.57 $0.57
(1) Primary earnings per share "as reported" exclude the effect of the options issued under the Employee Stock Purchase Plan
and the restricted stock issued under the Long-Term Incentive Plan of 1990, as the effect of the equivalent shares on the
earnings per share calculation is less than 3%. Primary earnings per share "as adjusted" include the effect of the options
and restricted stock.
Exhibit 11
COMPUTATION OF PER SHARE EARNINGS
For the Six Months Ended June 30
1997 1996
Fully Fully
Primary Earnings Primary Earnings Diluted Primary Earnings Primary Earnings Diluted
Per Share(1) Per Share(1) Earnings Per Share(1) Per Share(1) Earnings
as Reported as Adjusted Per Share as Reported as Adjusted Per Share
Computation of earnings
per common share:
Shares
Weighted average
shares outstanding 1,833,225 1,833,225 1,833,225 1,949,710 1,949,710 1,949,710
Equivalent shares from
exercise of dilutive
stock equivalents -- 19,128 19,244 --- 25,966 20,506
1,833,225 1,852,353 1,852,469 1,949,710 1,975,676 1,970,216
Net Income $2,317,889 $2,317,889 $2,317,889 $2,186,000 $2,186,000 $2,186,000
Earnings per common share
Net Income $1.26 $1.25 $1.25 $1.12 $1.11 $1.11
(1) Primary earnings per share "as reported" exclude the effect of the options issued under the Employee Stock Purchase Plan
and the restricted stock issued under the Long-Term Incentive Plan of 1990, as the effect of the equivalent shares on the
earnings per share calculation is less than 3%. Primary earnings per share "as adjusted" include the effect of the options
and restricted stock.
FRANKLIN FINANCIAL SERVICES CORPORATION
and SUBSIDIARY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Franklin Financial Services Corporation
Date______________________ /s/ William E. Snell, Jr.
William E. Snell, Jr.
President and Chief Executive Officer
Date______________________ /s/ Elaine G. Meyers
Elaine G. Meyers
Treasurer and Chief Financial Officer