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 March 31, 1998
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 2,796,975 outstanding shares of the Registrant's common stock as
of April 30, 1998.
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets 2
as of March 31, 1998 (Unaudited) and
December 31, 1997
Condensed Consolidated Statements of 3
Income for the Three Months ended
March 31, 1998 and 1997 (unaudited)
Condensed Consolidated Statements of 4
Changes in Shareholders' Equity for the
Twelve and Three Months ended December 31,
1997 and March 31, 1998 (unaudited)
Condensed Consolidated Statements of Cash 5
Flows for the Three Months Ended March 31,
1998 and 1997 (unaudited)
Notes to Condensed Consolidated Financial 6
Statements (unaudited)
Item 2 - Management's Discussion and Analysis of 12
Financial Condition and Results of Operations
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 17
SIGNATURE PAGE 18
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands)
March 31 December 31
1998 1997
(unaudited)
ASSETS
Cash and due from banks $11,196 $10,863
Interest bearing deposits in other banks 324 249
Investment securities held to maturity (Market value of $25,836 and $28,030 at
March 31, 1998 and December 31, 1997 respectively) (Note 3) 25,573 27,779
Investment securities available for sale (Note 3) 59,355 59,319
Loans, net 244,969 241,244
Premises and equipment, net 5,694 5,907
Other assets 8,522 8,504
Total Assets $355,633 $353,865
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits: (Note 4)
Demand (non-interest bearing) $40,722 $37,591
Savings and Interest checking 121,402 113,138
Time 123,110 123,826
Total Deposits 285,234 274,555
Securities sold under agreements to repurchase 16,549 16,075
Other borrowings 12,645 21,434
Other liabilities 3,633 5,496
Total Liabilities 318,061 317,560
Commitments and Contingencies - -
Shareholders' equity:
Common stock $1 par value per share, 5,000 shares authorized
with 3,045 shares issued and 2,797 and 2,795 shares
outstanding at March 31,1998 and December 31,1997,
respectively 3,045 3,045
Capital stock without par value, 5,000 shares authorized
with no shares issued or outstanding - -
Additional paid in capital 19,769 19,761
Retained earnings 18,305 17,087
Net unrealized gain on securities 1,915 1,935
Treasury stock (Note 6) (4,724) (4,760)
Unearned compensation (738) (763)
Total shareholders' equity 37,572 36,305
Total Liabilities and Shareholders' Equity $355,633 $353,865
The accompanying notes are an integral part of these statements
CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands, except per share)
(Unaudited)
For the Three Months Ended
March 31
1998 1997
INTEREST INCOME
Interest on loans $5,506 $5,074
Interest on deposits in other banks 4 17
Interest on Federal funds sold 0 0
Interest and dividends on investments (Note 3) 1,219 1,292
Total interest income 6,729 6,383
INTEREST EXPENSE
Interest on deposits 2,665 2,427
Interest on securities sold under agreements to
repurchase and other borrowings 451 426
Total interest expense 3,116 2,853
Net interest income 3,613 3,530
Provision for possible loan losses 365 193
Net-interest income after provision
for possible loan losses 3,248 3,337
NONINTEREST INCOME
Trust fees 477 339
Service charges, commissions and fees 478 505
Other 20 39
Securities gains 299 111
Total noninterest income 1,274 994
NONINTEREST EXPENSE
Salaries and benefits 1,520 1,564
Net occupancy expense 152 163
Furniture and equipment expense 216 204
Other 1,007 864
Total noninterest expense 2,895 2,795
Income before Federal income taxes 1,627 1,536
Federal income tax expense 394 401
Net income $1,233 $1,135
Basic earnings per share $0.45 $0.41
Weighted average shares outstanding (000's) 2,728 2,759
Diluted earnings per share $0.45 $0.41
Weighted average shares outstanding (000's) 2,756 2,787
The accompanying notes are an integral part of these statements.
Earnings per share for 1997 have been adjusted to reflect a 3 for 2 stock split issued
in the form of a 50% stock dividend distributed on February 3, 1998.
<C
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
for the year ended December 31, 1997 and the Three Months ended March 31, 1998
(Amounts in thousands, except per share )
Net
Additional Unrealized
Common Paid-in Retained Gain/(Loss) Treasury Unearned
Stock Capital Earnings on Securitie Stock Compensation Total
Balance at December 31, 1996 $2,030 $19,745 $17,590 $613 ($3,830) ($807) $35,341
Net Income - - 4,363 - - - 4,363
- - - - -
Cash dividends paid, $.56 per share - - (1,571) - - - (1,571)
Cash dividends declared, not paid
$ .81 per share - - (2,280) - - - (2,280)
50% stock split 1,015 - (1,015) - - - 0
Common stock issued under stock
option plans - 27 - - 294 - 321
Change in net unrealized gain
on securities - - - 1,322 - - 1,322
Restricted stock issued under long-term
incentive compensation plan - (11) - - 60 (73) (24)
Acquisition of treasury stock at cost - - - - (1,284) - (1,284)
Amortization of unearned compensation - - - - - 117 117
Balance at December 31, 1997 3,045 19,761 17,087 1,935 (4,760) (763) 36,3056
Net income - - 1,233 - - - 1,233
Cash in lieu of fractional shares
on 50% stock split - - (15) - - - (15)
Common stock issued under stock
option plans - 8 - - 36 - 44
Change in net unrealized gain
on securities - - - (20) - - (20)
Amortization of unearned compensation - - - - - 25 25
Balance at March 31, 1998 (unaudited) $3,045 $19,769 $18,305 $1,915 ($4,724) ($738) $37,572
The accompanying notes are an integral part of these statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
Unaudited
For the Three Months Ended
March 31
1998 1997
Cash flows from operating activities:
Net Income $1,233 $1,135
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 187 199
Premium amortization on investment securities 24 31
Discount accretion on investment securities (40) (36)
Provision for possible loan losses 365 193
Securities gains, net (299) (111)
Principal loss (gain) on sales of mortgage loans 25 (20)
(Gain) Loss on sale of premises and equipment (24) 3
Loan charge-offs, net of recoveries (363) (232)
Increase in interest receivable (33) (222)
Increase in interest payable 175 148
Decrease in unearned discount (12) (48)
Increase in prepaid and other assets (85) (387)
Increase (Decrease) in accrued expenses and other liabilities 353 (217)
Other, net 29 106
Net cash provided by operating activities $1,535 $542
Cash flows from investing activities:
Proceeds from sales of investment securities available for sale 420 3,458
Proceeds from maturities of investment securities held to maturity 2,206 2,600
Proceeds from maturities of investment securities available for sale2,257 4,727
Purchase of investment securities held to maturity 0 (140)
Purchase of investment securities available for sale (2,444) (7,450)
Net increase in loans (7,644) (6,718)
Proceeds from sale of mortgage loans 3,904 1,990
Capital expenditures (123) (153)
Proceeds from sales of premises and equipment 173 3
Net cash used in investing activities (1,251) (1,683)
Cash flows from financing activities:
Net increase in demand deposits,
NOW accounts and savings accounts 11,395 1,807
Net decrease in certificates of deposit (716) (2,025)
Dividends (2,284) (377)
Common stock issued under stock option plans 44 20
Purchase of treasury shares 0 (432)
Net (decrease) increase in other borrowings (8,315) 3,019
Net cash provided by financing activities 124 2,012
Increase in cash and cash equivalents 408 871
Cash and cash equivalents as of January 1 11,112 10,521
Cash and cash equivalents as of March 31 $11,520 $11,392
The accompanying notes are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The consolidated balance sheets as of March 31, 1998 and
December 31, 1997, the consolidated statements of income for the
three-month periods ended March 31, 1998 and 1997, the
consolidated statements of changes in shareholders' equity as of
December 31, 1997 and March 31, 1998 and the consolidated
statements of cash flows for the three-month periods ended March
31, 1998 and 1997 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 March 31, 1998, 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, a commercial bank (the Bank). 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 1997 Annual Report. The results of operations for
the period ended March 31, 1998, are not necessarily indicative
of the operating results for the full year.
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.
Supplemental disclosures of cash flows information are as
follows:
Cash paid for three months ended March 31: 1998 1997
Interest paid on deposits and
other borrowed funds . . . . . $2,941,000 $2,705,000
Income taxes paid $ 120,000 $ -
Earnings per share is computed based on the weighted average
number of shares outstanding during each quarter, adjusted
retroactively for stock splits and dividends. Adjustments for
1997 resulted from a 3 for 2 stock split issued in the form of a
50% stock dividend declared on November 13, 1997, and distributed
on February 3, 1998, to shareholders of record on January 13,
1998. A reconciliation of the weighted average shares
outstanding used to calculate basic earnings per share and
diluted earnings per share follows:
For the quarter ended
March 31
1998 1997
(Amounts in thousands)
Weighted average shares
outstanding (basic) 2,728 2,759
Impact of common stock equivalents 28 28
Weighted average shares
outstanding (diluted) 2,756 2,787
Note 2. Capital Adequacy
Quantitative measures established by regulation to ensure capital adequacy require financial
institutions to maintain minimum amounts and ratios of total and Tier I capital to risk-weighted
assets and of Tier I capital to average assets. The Capital ratios of the Corporation and its
bank subsidiary are as follows:
As of March 31, 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 $36,794 15.03% $19,582 8.00% $24,478 10.00%
Bank 32,528 13.47% 19,323 8.00% 24,154 10.00%
Tier I Capital (to Risk Weighted Assets)
Corporation $33,731 13.78% $9,791 4.00% $14,687 6.00%
Bank 29,505 12.22% 9,661 4.00% 14,492 6.00%
Tier I Capital (to Average Assets)
Corporation $33,731 9.57% $14,093 4.00% $17,616 5.00%
Bank 29,505 8.48% 13,924 4.00% 17,406 5.00%
Note 3 - Investment Securities
Amortized cost and estimated market values of investment securities as of March 31, 1998 (unaudited),
and December 31, 1997, were as follows (amounts in thousands):
Held to Maturity
March 31 December 31
1998 1997
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
U.S. Treasury securities and obligations
of U.S. Government agencies & corporations $1,025 $1,033 $1,030 $1,039
Obligations of state and political subdivisions 13,423 13,631 15,025 15,244
Corporate debt securities 2,287 2,296 2,343 2,348
Mortgage - backed securities 7,446 7,484 7,989 8,007
24,181 24,444 26,387 26,638
Other 1,392 1,392 1,392 1,392
$25,573 $25,836 $27,779 28,030
Available for sale
March 31 December 31
1998 1997
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
Equity securities $1,929 $3,920 $1,588 $3,638
U.S. Treasury securities and obligations
of U.S. Government agencies & corporations 19,471 19,654 20,967 21,136
Obligations of state and political subdivisions 14,934 15,585 14,926 15,600
Corporate debt securities 5,027 5,075 4,029 4,080
Mortgage - backed securities 15,092 15,121 14,877 14,865
$56,453 $59,355 $56,387 $59,319
Interest income and dividends received on investment securities for the three months
ended March 31, 1998 and 1997 are as follows (amounts in thousands):
Three Months
1998 1997
(Unaudited)
U.S. Government Obligations $68 $73
Obligations of U.S. Government
Agencies and Corporations 575 732
Obligations of States and
Political Subdivisions 383 262
Other Securities, primariy
Notes and Debentures 146 190
Common Stock 47 35
$1,219 $1,292
Note 4 - Deposits
Deposits are summarized as follows (amounts in thousands):
March 31 December 31
1998 1997
(Unaudited)
Demand $40,722 $37,591
Savings
Interest-bearing checking 32,095 32,770
Money Market Accounts 49,551 40,836
Passbook and Statement Savings 39,756 39,532
$121,402 $113,138
Time
Deposits of $100,000 and over 17,233 17,739
Other Time Deposits 105,877 106,087
123,110 123,826
Total Deposits $285,234 $274,555
NOTE 5 - Comprehensive Income
Effective January 1, 1998, the Corporation adopted Statement
of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" which requires disclosure of all changes in
equity that result from transactions and other economic events of
the period other than transactions with owners. Comprehensive
income is defined as the total of net income and all other
nonowner changes in equity. Reclassification of financial
statements for earlier periods that are presented for comparative
purposes is required. For the Corporation, total comprehensive
income consists of net income plus the net unrealized gains or
losses on available for sale investment securities. Total
comprehensive income for the quarters ended March 31, 1998 and
1997 was $1.2 million and $.8 million, respectively, net of tax.
NOTE 6 - Stock Repurchase Plan
On March 5, 1998, the Board of Directors authorized the
repurchase of up to 50,000 shares of the Corporation's $1.00 par
value common stock, representing approximately 1.79% of such
shares then issued and outstanding. The repurchases are
authorized to be made from time to time during the next 12 months
in open market or privately negotiated transactions. The
repurchased shares will be held as treasury shares available for
issuance in connection with future stock dividends and stock
splits, employee benefit plans, executive compensation plans, and
for issuance under the Dividend Reinvestment Plan and other
corporate purposes.
During the first quarter of 1998 there were no common stock
repurchase transactions under the above stock repurchase plan or
under the stock repurchase plan that was authorized in March 1997
and expired in March 1998.
NOTE 7 - Recent Accounting Pronouncements
On March 4, 1998, the American Institute of Certified Public
Accountants issued Statement of Position, (SOP) 98-1, "Accounting
for the Costs of Computed Software Developed or Obtained for
Internal Use." This Statement provides guidelines on accounting
for the costs of computer software developed or obtained for
internal use and is effective for financial statements for fiscal
years beginning after December 15, 1998. Adoption of this
Statement is not expected to have a significant impact on the
Corporation's financial condition or results of operations.
Management's Discussion and Analysis
Results of Operations and Financial Condition
for the Three Months Periods
Ended March 31, 1998
Part 1, Item 2
Results of Operations
The Corporation reported earnings of $1,233,000 for the
first quarter ended March 31, 1998, versus $1,135,000 for the
same quarter in 1997, reflecting an increase of 8.6%. Basic
earnings per share for the quarter increased 9.8% to $.45 from
$.41, for the first quarter of 1997. Per share earnings are
weighted to reflect the impact of the stock repurchase program.
Book value per share equaled $13.40 at March 31, 1998 compared to
$12.63 at March 31, 1997. Per share information for 1997 has
been adjusted to reflect a 3 for 2 stock split issued in the form
of a 50% stock dividend distributed to shareholders on February
3, 1998.
The Corporation's annualized return on average assets (ROA)
and return on average equity (ROE) for the first quarter of 1998
were 1.41% and 13.54%, respectively, compared to 1.37% and
12.98%, respectively, for the first quarter of 1997.
Net interest income showed marginal improvement for the
quarter ended March 31, 1998, reaching $3.6 million compared to
$3.5 million for the same quarter one year earlier. Despite an
$83,000 improvement in net interest income quarter over quarter,
the Corporation's net interest margin on a tax-equivalent basis
narrowed to 4.62% for the first quarter of 1998 from 4.67% for
the first quarter of 1997. The higher cost of interest-bearing
liabilities (up 21 basis points to 4.62% from 4.41%) outweighed
the improvement in the rate of return (up 8 basis points to 8.42%
from 8.34%) recorded on interest earning assets for the first
quarter ended March 31, 1998, versus the first quarter ended
March 31, 1997 and resulted in some shrinkage in net interest
margin. Increased volume rather than higher rates was primarily
responsible for the improvement in interest income to $6.7
million for the first quarter of 1998 from $6.4 million for the
same quarter in 1997. Increased volume and higher rates combined
accounted for the increase in interest expense to $3.1 million
for the first quarter of 1998 from $2.9 million for the same
quarter in 1997. The growth in interest expense for the first
quarter of 1998 over the first quarter of 1997 was driven largely
by a new money market deposit product introduced in the second
quarter of 1997.
As discussed in the Corporation's 1997 Annual Report, the
only market risk exposure for the Corporation is its normal
business operations in interest rate risk. For the quarter ended
March 31, 1998, the Corporation's interest rate risk remained
substantially unchanged from December 31, 1997.
The Corporation expensed $365,000 for possible loan losses
in the first quarter of 1998 compared to $193,000 in the first
quarter of 1997. The higher provision was required to offset an
increase in net charge-offs of $130,000 to $363,000 for the first
quarter of 1998 compared to $232,000 for the first quarter of
1997 and to maintain the adequacy of the allowance for possible
loan losses.
Total noninterest income excluding net securities gains
recorded an increase of $92,000, or 10.4% to $975,000 for the
three months ended March 31, 1998, compared to $883,000 for the
three months ended March 31, 1997. Trust fees increased
$138,000, or 40.7%, to $477,000 for the first quarter of 1998
compared to $339,000 for the same quarter one year earlier and
were largely due to a 38.6% increase in the market value of trust
assets under management. A strong economy as well as new
business contributed to the growth in trust assets.
Net securities gains equaled $299,000 for the three months
ended March 31, 1998, compared to $111,000 for the three months
ended March 31, 1997 and came entirely from the Corporation's
available for sale equities portfolio. The gains realized in the
first quarter of 1998 offset the additional loan loss provision
recorded and the write down of recently purchased real estate
that is scheduled for demolition. The Corporation is in the
planning stages for a future expansion of its headquarters and
accordingly, has plans to demolish some adjacent properties.
Total noninterest expense recorded a marginal increase of
$100,000, or 3.6%, to $2.9 million for the first quarter of 1998
compared to $2.8 million for the same quarter in 1997. Salaries
and benefits expense decreased $44,000, or 2.8%, to $1.52 million
for the three months ended March 31, 1998 compared to $1.56
million for the three months ended March 31, 1997. Salaries
expense grew $54,000, or 4.5%, to $1.24 million for the quarter
ended March 31, 1998, from $1.18 million for the same period in
1997 and reflects general merit increases and higher commissions
and incentives paid quarter over quarter. The increase in
salaries expense was more than offset by a decrease in the cost
of employee benefits. Benefits expense decreased $102,000, or
26.8%, to $278,000 for the first quarter of 1998 from $379,000
for the first quarter of 1997 primarily the result of a $110,000
swing from net periodic pension expense to net periodic pension
income. The Corporation's pension plan is over-funded and, as a
result, the Corporation will realize a credit to its pension
expense in 1998 that is expected to total approximately $500,000
for the year. Other expense recorded an increase of $143,000, or
16.5%, to $1.0 million for the first quarter of 1998 compared to
$864,000 for the first quarter of 1997 due to the net impact of a
combination of various expenses. Postage expense (up $30,000),
software expense (up $29,000), loan collection expense (up
$16,000), expense associated with the acquisition of property
($103,000) targeted for future demolition in a planned
headquarter's expansion and the timing of FDIC insurance expense
(up $11,000) were the primary contributors to the increase in
other expense. Offsetting these increases was a decrease of
$40,000 in stationary and supplies expense.
As reported in the Corporation's 1997 Annual Report,
management has determined that Year 2000 issues will impact daily
business operations and has developed and implemented a
comprehensive plan to evaluate all of its data processing
systems, software programs and providers to ensure their
readiness for the Year 2000. The process which began in early
1997 has resulted in over 30% of the software programs and data
processing systems achieving Year 2000 compliance as of March 31,
1998. Management expects that by December 31, 1998, over 90% of
its software programs and data processing systems will be Year
2000 compliant with the remaining 10% compliant by mid-1999.
In addition to evaluating the Corporation's Year 2000
readiness, management has also established a process to manage
the Year 2000 risks posed by its customers. As part of the
process currently underway, significant customers have been
identified and evaluated for Year 2000 preparedness. Personal
contact has been or will be made with identified, primarily
commercial, customers to assess their risk to the Corporation.
After assessment has been completed, where Year 2000 issues
exist, appropriate communication with the customer will be
established to manage and mitigate potential Year 2000-related
risk to the Corporation. Management expects that individual
customer assessments and follow-up communication will be
substantially complete by the end of the third quarter of 1998.
Costs associated with Year 2000 readiness have not been and
are not expected to be significant in any one year.
Federal income tax expense for the first quarter ended March
31, 1998, totaled $394,000 compared to $401,000 for the same
period ended March 31, 1997. The Corporation's effective tax
rate for the quarter ended March 31, 1998 was 24.2% versus 26.1%
a year earlier. The decrease in the effective tax rate quarter
versus quarter is due primarily to an increase in tax-free income
relative to pre-tax income.
Financial Condition
Total assets grew $1.8 million to $355.6 million at March
31, 1998, from $353.9 million at December 31, 1997. Most of the
asset growth in the first quarter of 1998 was recorded in earning
assets which increased $1.6 million to $330.2 million at March
31, 1998 from $328.6 million at December 31, 1997. Earning
assets represented 92.8% of total assets at March 31, 1998 and
December 31, 1997. Proceeds from the sale of available-for-sale
securities in the first quarter of 1998 totaled $420,000 and
included gains of $299,000. Despite the sale of some available-for-sale
equity securities in the first quarter of 1998, the market value of
available-for-sale securities remained stable at $59.3 million
at March 31, 1998 and December 31, 1997. Net unrealized gains on
available-for-sale securities equaled $1.9 million at March 31, 1998.
Net loans grew $3.7 million, or 1.5%, to $244.9 million at March 31, 1998,
from $241.2 million at December 31, 1997, despite the sale of approximately
$4.0 million in mortgage loans to the secondary market, primarily Federal
National Mortgage Association (FNMA). Commercial and mortgage
loan activity was robust during the first quarter of 1998 due to
the strong economy and the low interest rate environment.
Consumer loan volume remained steady and reflects the
implementation of tighter consumer underwriting standards
instituted in 1997 and the improved lending skills of our lending
staff, a result of an extensive lending training program provided
in 1997 and completed in the spring of 1998.
Net charge-offs for the first quarter of 1998 totaled
$363,000 and were primarily from the consumer loan portfolio. As
discussed in the Corporation's 1997 Annual Report, personal
bankruptcies of loan customers have had an adverse impact on the
Corporation and continued into the first quarter of 1998. The
consumer loan portfolio was responsible for 66.0% of the total
net charge-offs for the three months ended March 31, 1998, versus
91.4% for the three months ended March 31, 1997. Management
anticipates that the level of net charge-offs recorded after the
first quarter of 1998 will decline as the year progresses. The
annualized ratio of net charge-offs to average loans was .60% at
March 31, 1998, compared to .29% at December 31, 1997 and .43% at
March 31, 1997.
Nonperforming loans increased $192,000 to $1.9 million at
March 31, 1998 versus $1.7 million at December 31, 1997.
Included in nonperforming loans at March 31, 1998 were nonaccrual
loans totaling $1.8 million and loans past due more than ninety
days totaling $126,000 compared to $1.1 million and $564,000,
respectively, at December 31, 1997. The Corporation recorded
other real estate owned totaling $133,000 at March 31, 1998,
versus $185,000 at year-end 1997. Nonperforming assets
represented .58% of total assets at March 31, 1998, up from .54%
at December 31, 1997.
The allowance for possible loan losses totaled $3.3 million
at March 31, 1998, and December 31, 1997, and represented 1.34%
and 1.35%, respectively, of total loans. The allowance provided
coverage for nonperforming loans of 1.7 times at March 31, 1998,
compared to 1.9 times at December 31, 1997.
Total deposits grew $10.7 million, or 3.8%, to $285.2
million at March 31, 1998, from $274.5 million at December 31,
1997. Savings and interest checking realized most of the growth
with an increase of $8.2 million followed by noninterest bearing
demand which increased $3.1 million offset by a decrease in time
deposits of $.7 million. The Corporation has attracted new
deposit dollars with its new Money Management Account introduced
in the spring of 1997. This new deposit has continued to attract
deposit dollars into 1998 and is largely responsible for the
growth in deposits in the first quarter of 1998. As a result of
the deposit growth in the first quarter of 1998, the Corporation
reduced its other borrowings $8.7 million to $12.6 million at
March 31, 1998 from $21.4 million at December 31, 1997. Other
borrowings represent short and long-term borrowings from the
Federal Home Loan Bank of Pittsburgh(FHLB).
Unemployment in the Franklin County area remained low at
just over 4%. The local economy is strong and continues to be
fairly well diversified.
Liquidity
The Corporation's liquidity position (net cash, short-term
and marketable assets divided by net deposits and short-term
liabilities) was 20.3% at March 31, 1998. 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 approximately $4.0 million
mortgage loans to FNMA during the first quarter of 1998 and had
advances outstanding with FHLB totaling $12,645,000. The
Corporation's maximum borrowing capacity with FHLB equals
$82,000,000. 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 $37.6
million at March 31, 1998, from $36.3 million at December 31,
1997, primarily as a result of earnings retention from the first
quarter of 1998. As reported in the Corporation's 1997 Annual
Report, in November 1997, the Board of Directors approved a 3 for
2 stock split issued in the form of a 50% stock dividend to
shareholders of record at the close of business on January 13,
1998. The common stock certificates from this stock dividend
were distributed to shareholders on February 3, 1998.
In addition to the 50% stock dividend, the Board of
Directors also approved a special cash dividend of $1.00 per
share ($.66 per share adjusted for the 50% Stock Dividend) and a
$.15 per share first quarter cash dividend in November 1997.
Both of these cash dividends were reflected in the December 31,
1997 financial statements but were paid to shareholders in
January and February 1998, respectively. Cash dividends paid to
shareholders in the first quarter of 1998 totaled $2.3 million
and compare with $377,000 paid in the first quarter of 1997.
Capital adequacy is currently defined by banking regulatory
agencies through the use of several minimum required ratios. At
March 31, 1998 the Corporation was determined to be well
capitalized as defined by the banking regulatory agencies. The
Corporation's leverage ratio, Tier I and Tier II risk-based
capital ratios at March 31, 1998, were 9.57%, 13.78% and 15.03%,
respectively.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
A Form 8-K dated March 6, 1998 was filed in connection with a
stock repurchase program.
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
May 13, 1998 /s/ William E. Snell, Jr.
William E. Snell Jr.
President and Chief Executive Officer
May 13, 1998 /s/ Elaine G. Meyers
Elaine G. Meyers
Treasurer and Chief Financial Officer