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 September 30, 1996
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 1,900,105 outstanding shares of the Registrant's common stock as of
November 5, 1996.
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets 2
as of September 30, 1996 (Unaudited) and
December 31, 1995
Condensed Consolidated Statements of 3
Income for the Nine Months ended
September 30, 1996 and 1995 (unaudited)
Condensed Consolidated Statements of 4
Changes in Shareholders' Equity for the
Twelve and Nine Months ended December 31,
1995 and September 30, 1996 (unaudited)
Condensed Consolidated Statements of Cash 5
Flows for the Nine Months Ended September
30, 1996 and 1995 (unaudited)
Notes to Condensed Consolidated Financial 6
Statements (unaudited)
Item 2 - Management's Discussion and Analysis of 11
Financial Condition and Results of Operations
PART II - OTHER INFORMATION
Item 5 - Other Information
Item 6 - Exhibits and Reports on Form 8-K 15
SIGNATURE PAGE 23
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands)
September 30 December 31
1996 1995
(unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $11,602 $8,244
Interest bearing deposits in other banks 347 6,660
Investment securities held to maturity (Market value of $36,935 and $35,563
at September 30, 1996 and December, 31 1995 respectively) (Note 2) 37,146 35,317
Investment securities available for sale (Note 2) 46,807 42,025
Loans 221,590 213,728
Less: Unearned discount (213) (520)
Allowance for possible loan losses (2,950) (3,141)
Net Loans 218,427 210,067
Premises and equipment, net 6,117 5,645
Other assets 6,192 5,515
Total Assets $326,638 $313,473
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits: (Note 3)
Demand (non-interest bearing) $33,587 $31,609
Savings and Interest checking 99,221 99,049
Time 128,169 126,553
Total Deposits 260,977 257,211
Securities sold under agreements to repurchase 16,785 13,611
Other borrowings 11,306 5,650
Other liabilities 2,560 2,045
Total Liabilities 291,628 278,517
Commitments and Contingencies - -
Shareholders' equity:
Common stock $1 par value per share, 5,000 shares authorized
with 2,030 shares issued and 1,903 and 1,940
outstanding at September 30, 1996 and December 31,1995
respectively 2,030 2,030
Capital stock without par value, 5,000 shares authorized
with no shares issued or outstanding - -
Additional paid in capital 19,583 19,431
Retained earnings 17,091 14,966
Net unrealized gain on securities 438 677
Treasury stock (Note 4) (3,389) (2,053)
Unearned compensation (743) (95)
Total shareholders' equity 35,010 34,956
Total Liabilities and Shareholders' Equity $326,638 $313,473
The accompanying notes are an integral part of these statements
</TABLE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands, except per share)
(Unaudited)
<S> <C> <C> <C> <C>
For the Three For the Nine
Months Ended Months Ended
September 30 September 30
1996 1995 1996 1995
INTEREST INCOME
Interest on loans $5,168 $5,276 $14,883 $15,317
Interest on deposits in other banks 3 318 199 446
Interest on Federal funds sold 0 1 0 6
Interest and dividends on investments (Note 2) 1,227 960 3,464 2,970
Total interest income 6,398 6,555 18,546 18,739
INTEREST EXPENSE
Interest on deposits 2,403 2,660 7,366 7,531
Interest on securities sold under repurchase
agreements and other borrowings 371 292 917 797
Total interest expense 2,774 2,952 8,283 8,328
Net interest income 3,624 3,603 10,263 10,411
Provision for possible loan loss 96 90 321 212
Net-interest income after provision
for possible loan losses 3,528 3,513 9,942 10,199
NONINTEREST INCOME
Trust commissions 289 282 880 934
Service charges, commissions and fees 349 407 1,373 1,440
Other 239 62 484 179
Net securities gains(losses) (1) 0 77 0
Total noninterest income 876 751 2,814 2,553
NONINTEREST EXPENSE
Salaries and benefits 1,636 1,543 4,877 4,548
Net occupancy expense 129 141 385 389
Furniture and equipment expense 187 179 548 568
FDIC insurance 136 161 163 449
Other 909 918 2,485 2,619
Total noninterest expense 2,997 2,942 8,458 8,573
Income before income tax provision 1,407 1,322 4,298 4,179
Income tax provision 345 296 1,050 1,010
Net income $1,062 $1,026 $3,248 $3,169
Earnings per share (Note 1)
Net income per share $0.60 $0.54 $1.72 $1.65
Net income per share for 1995 has been adjusted retroactively to reflect a 3 for 2 stock split issued in
the form of a 50% dividend distributed on December 29, 1995 to shareholders of record on December 8, 1995.
The accompanying notes are an intergral part of these statements.
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
for the year ended December 31, 1995 and the Nine Months ended September 30, 1996
(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, 1994 $1,353 $19,451 $12,884 ($353) ($36) ($426) $32,873
Year ended December 31, 1995
Net Income - - 4,179 - - - 4,179
- - - - -
Cash dividends, $.72 per share - - (1,420) - - - (1,420)
- - -
50% stock dividend 677 - (677) - - - -
Common stock issued under stock
option plans - (20) - - 218 - 198
Change in net unrealized gain on
securities - - - 1,030 - - 1,030
Acquisition of 64,741 shares of
treasury stock at cost - - - - (2,235) - (2,235)
Amortization of unearned compensation - - - - - 331 331
Balance at December 31, 1995 2,030 19,431 14,966 677 (2,053) (95) 34,956
Net income - - 3,248 - - - 3,248
Cash Dividends, $.58 per share - - (1,123) - - - (1,123)
Common stock issued under stock
option plans - (25) - - 172 - 147
Change in net unrealized gain on
securities - - - (239) - - (239)
Restricted stock issued under long-term
incentive compensation plan (35,033 shares) - 177 - - 799 (976) -
Restricted stock forfeited under long-term
incentive compensation plan (6,107 shares) - - - - (127) 127 -
Acquisition of 72,604 shares of
treasury stock at cost (Note 4) - - - - (2,180) - (2,180)
Amortization of unearned compensation - - - - - 201 201
Balance at September 30, 1996 (unaudited) $2,030 $19,583 $17,091 $438 ($3,389) ($743) $35,010
The accompanying notes are an integral part of these statements.
</TABLE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Amounts in Thousands)
Unaudited
For the Nine
Months Ended
September 30
<S> <C> <C>
1996 1995
Cash flows from operating activities:
Net Income $3,248 3,169
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation 549 469
Premium amortization on investment securities 78 55
Discount accretion on investment securities (93) (140)
Provision for loan losses 321 212
Securities gains, net (77) 0
Principal gains on sales of mortgage loans (47) (26)
Proceeds from sale of mortgage loans 11,702 2,296
Gain on sale of other assets (89) (6)
Loan charge-offs, net of recoveries (511) (318)
(Increase) in interest receivable (144) (138)
Increase in interest payable 200 256
Decrease in unearned discount (307) (451)
(Increase) Decrease in prepaid and other assets (533) 233
Increase (Decrease) in accrued expenses and other liabilities 439 (619)
Other, net 176 255
Net cash provided by operating activities $14,912 $5,247
Cash flows from investing activities:
Proceeds from sales of investment securities available for sale 118 -
Proceeds from maturities of investment securities 16,627 16,405
Purchase of investment securities (23,627) (13,807)
Net (Increase) Decrease in loans (19,517) 5,163
Capital expenditures (1,156) (909)
Proceeds from sales of other assets 223 16
Net cash (used) provided by investing activities (27,332) 6,868
Cash flows from financing activities:
Net Increase(Decrease) in demand deposits,
NOW accounts and savings accounts 2,150 (3,051)
Net Increase in certificates of deposit 1,616 8,523
Dividends (1,123) (1,050)
Common stock issued under stock option plans 172 101
Purchase of treasury shares , net. (2,180) (2,173)
Cash inflows from other borrowings 8,830 1,913
Net cash provided by financing activities 9,465 4,263
(Decrease)Increase in cash and cash equivalents (2,955) 16,378
Cash and cash equivalents as of January 1 14,904 8,670
Cash and cash equivalents as of September 30 $11,949 $25,048
The accompanying notes are an integral part of these statements.
</TABLE>
FRANKLIN FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The condensed consolidated balance sheets as of September
30, 1996 and December 31, 1995, the condensed consolidated
statements of income for the nine-month periods ended September
30, 1996 and 1995, the condensed consolidated statements of
changes in shareholders' equity as of December 31, 1995 and
September 30, 1996 and the condensed consolidated statements of
cash flows for the nine-month periods ended September 30, 1996
and 1995 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 September 30, 1996, 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 1995 Annual Report. The results of operations for
the period ended September 30, 1996, 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, 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 nine months ended September 30: 1996 1995
Interest paid on deposits and
other borrowed funds . . . . . $8,083,000 $8,072,000
Income taxes paid $ 935,000 $1,125,000
<TABLE>
<CAPTION>
Note 2 - Investment Securities
Amortized cost and estimated market values of investment securities as of September 30, 1996 (unaudited),
and December 31, 1995, were as follows (amounts in thousands):
Held to Maturity
September 30 December 31
1996 1995
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. Government agencies & corporations $1,055 $1,055 $849 $849
Obligations of state and political subdivisions 18,932 18,947 16,225 16,484
Corporate debt securities 4,404 4,368 6,795 6,790
Mortgage - backed securities 11,532 11,342 10,309 10,301
35,923 35,712 34,178 34,424
Other 1,223 1,223 1,139 1,139
$37,146 $36,935 $35,317 $35,563
Available for sale
September 30 December 31
1996 1995
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
Equity securities $1,290 $2,296 $1,330 $2,156
U.S. Treasury securities and obligations
of U.S. Government agencies & corporations $27,536 $27,436 25,717 25,923
Obligations of state and political subdivisions 1,930 1,917 2,417 2,420
Corporate debt securities 5,051 5,020 1,025 1,036
Mortgage - backed securities 10,337 10,138 10,511 10,490
$46,144 $46,807 $41,000 $42,025
</TABLE>
<TABLE>
<CAPTION>
Interest income and dividends received on investment securities for the three months
and nine months ended September 30, 1996 and 1995 are as follows (amounts in thousands):
Three Months Nine Months
1996 1995 1996 1995
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
U.S. Government Obligations $87 $66 $244 $206
Obligations of U.S. Government
Agencies and Corporations 646 452 1,873 1,348
Obligations of States and
Political Subdivisions 260 279 747 846
Other Securities, primariy
Notes and Debentures 199 129 498 462
Common Stock 35 34 102 108
$1,227 $960 $3,464 $2,970
</TABLE>
<TABLE>
<CAPTION>
Note 3 - Deposits
Deposits are summarized as follows (amounts in thousands):
September 30 December 31
1996 1995
(Unaudited)
<S> <C> <C>
Demand $33,587 $31,609
Savings
Interest-bearing checking 32,704 31,090
Money Market Accounts 21,180 22,694
Passbook and Statement Savings 45,337 45,265
$99,221 $99,049
Time
Deposits of $100,000 and over 25,285 19,450
Other Time Deposits 102,884 107,103
128,169 126,553
Total Deposits $260,977 $257,211
</TABLE>
NOTE 4 - Treasury Stock
Pursuant to the stock repurchase program approved by the
Board of Directors in the first quarter of 1996, the Corporation
acquired 72,604 common shares as of September 30, 1996 at a cost
of approximately $2,180,000. Under the program, the Corporation
is authorized to repurchase up to 100,000 shares in open market
transactions through dealers.
Management's Discussion and Analysis of
Results of Operations and Financial Condition
for the Three and Nine Month Periods
Ended September 30, 1996
Part 1, Item 2
Results of Operations
Consolidated net income for the third quarter and nine
months ended September 30, 1996, was $1,062,000 and $3,248,000,
respectively, compared to $1,026,000 and $3,169,000, respectively
for the comparable periods in 1995 and represents increases of
3.5% and 2.5%, respectively, for the third quarter and nine
months of 1996 versus 1995. Consolidated earnings per share
equaled $.60 and $1.72, respectively, for the third quarter and
nine months ended September 30, 1996, compared with $.54 and
$1.65, respectively for the same periods in 1995. The earnings
per share are weighted to reflect the impact of the stock
repurchase program. Book value per share equaled $18.39 at
September 30, 1996, up from $17.49 a year earlier. Per share
information for 1995 has been restated to reflect a 3 for 2 stock
split issued in the form of a 50% stock dividend and distributed
on December 29, 1995, to shareholders of record on December 8,
1995.
The Corporation's annualized return on average assets (ROA)
and return on average equity (ROE) for the first nine months of
1996 were 1.36% and 12.47%, respectively, compared to 1.35% and
12.69%, respectively, for the first nine months of 1995.
Net interest income for the third quarter remained flat at
$3,624,000 compared to $3,603,000 for the same period in 1995.
Net interest income for the nine month period ended September 30,
1996 versus 1995 realized a decline of $148,000, or 1.4%, to
$10,263,000 from $10,411,000. The squeeze on net interest income
is primarily the effect of competitive pricing for commercial
loans, lower volumes of mortgage and consumer loans and lower
returns in the investment portfolio due to lower market rates
coupled with the Corporation's fairly stable cost of funds during
the period. Overall, the decrease in earning asset yields out
paced the decrease in liability costs. The Corporation's net
interest margin on a tax-equivalent basis was 4.7% for the nine
months ended September 30, 1996, down from 4.8% for the same
period ended September 30, 1995. Net interest spread for the
same periods in 1996 versus 1995 was 3.90% and 4.06%,
respectively.
The Corporation expensed $96,000 and $321,000 for possible
loan losses in the third quarter and first nine months,
respectively, of 1996 versus $90,000 and $212,000 for the same
periods in 1995. Net charge-offs totaled $511,000 for the nine
month period ended September 30, 1996 versus $318,000 for the
same period in 1995 and were primarily responsible for the higher
provision expense in 1996. The annualized ratio of net charge-offs to
average loans increased to .31% at September 30, 1996
from .19% at September 30, 1995. Despite the increase in net
charge-offs, the level of nonperforming assets continues to
improve as reflected in the ratio of nonperforming assets to
total assets which moved to .57% at September 30, 1996 from .73%
at September 30, 1995. Although the allowance for possible loan
losses as a percentage of total loans shows a decrease to 1.33%
at September 30, 1996 from 1.54% a year earlier, the coverage
provided for nonaccrual loans and nonperforming loans is 2.9
times and 1.6 times, respectively.
Total noninterest income for the third quarter ended
September 30, 1996 increased $125,000 or 16.6% to $876,000 from
$751,000 at September 30, 1995. Other noninterest income
increased $177,000 to $239,000 for the third quarter ended
September 30, 1996 and was partially offset by a decrease of
$58,000 to $349,000 for service charges commissions and fees.
Total noninterest income for the nine months ended September 30,
1996 showed a net increase of $261,000 to $2,814,000. Trust
commissions for the nine months were down $54,000 to $880,000 in
1996 versus 1995 primarily due to a lower number of estates
settled in 1996 compared to 1995. In addition service charges,
commissions and fees were down $67,000 to $1,373,000 for the nine
months ended September 30, 1996 compared to the same period a
year earlier due to lower fees related to the Corporation's
mortgage business. More than offsetting the decreases in trust
commissions, service charges, commissions and fees for the nine
months ended September 30, 1996 was an increase of $305,000 to
$484,000 in other noninterest income. Nonrecurring events such
as gains on real estate sold and recognition of a deferred gain
were responsible for approximately $230,000 of the $305,000 increase.
The remainder was due primarily to gains on mortgages sold.
The Corporation also realized $77,000 in net securities gains from
its available for sale equities portfolio for the first nine months
of 1996 versus no securities gains for the same period in 1995.
Total noninterest expense increased $55,000 to $2,997,000
for the third quarter ended September 30, 1996. Salaries and
benefits increased $93,000, or 6.0%, to $1,636,000 for the
quarter ended September 30, 1996 versus the same quarter in 1996.
Salary expense (up $49,000) increased primarily due to general
merit increases and benefits (up $34,000) increased due to
general cost increases and one nonrecurring employee related
event. A decrease of $25,000 in Federal Deposit Insurance
Corporation (FDIC) assessments and a $12,000 decrease in net
occupancy expense offset the increase in salaries and benefits.
On September 30, 1996 Federal legislation was signed which
mandated a special industry-wide FDIC assessment for
recapitalization of the Savings Association Insurance Fund
(SAIF). All financial institutions which had SAIF-insured
deposits were assessed this one-time charge. The acquisition of
the Waynesboro branch office from a thrift in 1988 resulted in
the Corporation holding OAKKAR SAIF insured deposits which were
subject to the special assessment. The one-time charge to the
Corporation equaled approximately $123,000. Reflected in the
third quarter 1995 FDIC insurance expense of $161,000 is an
accrued expense, net of FDIC insurance refund, related to the
special assessment which was expected in the fourth quarter of
1995. The accrual was subsequently reversed at year end 1995
when it became evident that the special assessment would not be a
1995 event.
Total noninterest expense for the nine months ended
September 30, 1996 showed a net decrease of $115,000 to
$8,458,000 versus $8,573,000 for the same period a year earlier.
Salaries and benefits realized the only increase up $329,000, or
7.2%, to $4,877,000 for the first nine months of 1996. Salaries
were up $206,000 to $3.5 million due to general merit increases
and added personnel while benefits increased $123,000, or 10.1%,
to $1.3 million due to enhanced benefits and nonrecurring
employee related events. Offsetting the increase in salaries and
benefits were decreases in the FDIC deposit insurance expense and
other expense. FDIC deposit insurance assessments for the Bank
Insurance Fund (BIF) were eliminated in 1996 compared to $.23 per
hundred of deposits in 1995. Ninety percent of the Corporation's
deposits are insured under the BIF fund with the remaining
deposits insured under the SAIF fund. Consequently the
Corporation realized a significant drop (63.7%) in its FDIC
deposit insurance assessment. Other expense decreased $134,000,
or 5.1%, to $2.5 million at September 30, 1996, compared to $2.6
million at September 30, 1995, largely related to the
dissolution of the Franklin Founders Life Insurance subsidiary.
Federal income tax expense totaled $345,000 for the third
quarter and $1,050,000 for the nine months ended September 30,
1996 compared to $296,000 and $1,010,000, respectively, for the
comparable periods in 1995. The Corporation's effective tax
rates for the nine month periods ended September 30, 1996 and
1995 were 24.4% and 24.2%, respectively. The effective tax rates
are lower than the statutory tax rate of 34% due to interest
income earned on tax-free investments.
Financial Condition
Total assets grew to $326,638,000 , or 4.2%, at September
30, 1996 from $313,473,000 at December 31, 1995. Total assets at
September 30, 1995 were $318,819,000. Interest bearing deposits
in other banks showed a decrease of $6.3 million to $347,000 at
September 30, 1996 from $6,660,000 at December 31, 1995 which was
offset by an increase of $6.6 million in investment securities.
This movement reflects a management strategy to move from short-term
overnight assets to longer-term investment assets.
Investment securities available for sale reflect a net unrealized
gain of $663,000 at September 30, 1996 compared to a net
unrealized gain of $1,025,000 at December 31, 1995. Available
for sale equity securities sold in the first nine months of 1996
produced a realized gain of $77,000. Total loans, net of
discount, grew $8.2 million to $221,377,000 at September 30, 1996
from $213,208,000 at December 31, 1995 primarily the result of
commercial loan activity resulting from more aggressive
commercial loan pricing. Commercial loans grew $12.6 million to
$92,560,000 during the nine months ended September 30, 1996.
Mortgage origination activity improved in the third quarter
largely due to the redesign of the mortgage products offered.
Despite the higher volume of mortgage originations in the third
quarter compared to earlier in the year, mortgage volume
decreased approximately $4.5 million to $79,000,000 due to the
impact of selling $6.1 million in mortgage loans to the secondary
market during the nine month period ended September 30, 1996.
Consumer loans have remained flat due in large part to the
uncertainties in the local economy. Although individual
uncertainties do exist due to the realization of and the threat
of local employers downsizing and/or closing, the local
unemployment rate continues to remain under 5%. Earning assets
represented 93.6% of total earning assets at September 30, 1996
and equaled $305,677,000 compared to 93.8% and $294,069,000 at
December 31, 1995. The tax equivalent yield on average earning
assets for the nine month period ended September 30, 1996 was
8.4% compared to 8.6% for the same period one year earlier. The
allowance for possible loan losses decreased $191,000 to
$2,950,000 at September 30, 1996 from $3,141,000 at December 31,
1995. Despite the reduction in the allowance for possible loan
losses, the allowance represented a ratio of 1.33% of total loans
at September 30, 1996 and provided coverage for nonaccrual loans
and nonperforming loans 2.9 times and 1.6 times, respectively.
The corporation's loan to deposit ratio at September 30, 1996 was
84.8% compared to 82.9% at December 31, 1995.
The Corporation's nonperforming loans increased $35,000 to
$1,829,000 at September 30, 1996 compared to $1,794,000 at
December 31, 1995. Nonperforming loans at September 30, 1996
totaled $1,762,000. Included in nonperforming loans at September
30, 1996 were nonaccrual loans ($1,020,000) and loans past due 90
days or more. The Corporation had no restructured loans or other
real estate (ORE) at September 30, 1996. Nonperforming assets
represented .56% of total assets at September 30, 1996 versus
.65% and .73% at December 31, 1995 and September 30, 1995,
respectively. The Corporation recorded net charge-offs for the
nine months ended September 30, 1996 to total $511,000 compared
to $318,000 for the same period ended September 30, 1995. The
ratio of net charge-offs to average loans was .31% at September
30, 1996 compared to .27% and .19% at December 31, 1995 and
September 30, 1995, respectively. The increase in net charge-offs
has been related primarily to the consumer loan portfolio.
The Corporation's total deposits have remained stable but
showed a slight increase of $3.8 million, or 1.5%, to
$260,977,000 at September 30, 1996 from $257,211,000 at December
31, 1995. The increase in total deposits was almost evenly
divided between demand deposits and certificates of deposit.
Many banks within the Corporation's market area and the
competition from non-bank financial services providers makes it
increasingly difficult for the Corporation to grow deposits. The
Corporation offers repos to its eligible customers and utilizes
its alternative funding source with the Federal Home Loan Bank of
Pittsburgh (FHLB). At September 30, 1996 securities sold under
agreements to repurchase totaled $16,785,000 and borrowings with
FHLB totaled $11,306,000 compared to $13,611,000 and $5,650,000,
respectively at December 31, 1995.
Earlier in 1996, the Corporation announced the purchase of
four branch building from PNC Bank. The four bank buildings are
located in the communities of Boiling Springs, Newville,
Shippensburg and Chambersburg. With the exception of the
Chambersburg location, all the bank buildings are located in
adjoining Cumberland County. In addition to the bank buildings,
property and equipment, the Corporation also purchased a retail
customer list from PNC Bank for each location. No loans or
deposits were included in the purchase. The cost of the real
estate, equipment and customer lists totaled approximately $2.7
million. On September 20, 1996 settlement for Boiling Springs
location occurred and on Monday, September 23, 1996, a new
Farmers and Merchants Trust Company (F&M) community branch office
opened for business. On October 25, 1996 settlement for the
three remaining locations occurred and on Monday, October 28,
1996, two new additional F&M community branch offices opened in
Newville and Shippensburg. The Chambersburg location will not be
utilized as a branch office.
Liquidity
The Corporation's liquidity position (net cash, short-term
and marketable assets divided by net deposits and short-term
liabilities) was 19.2% at September 30, 1996. The Corporation
actively sells mortgage loans to the secondary market (FNMA) and
looks to its borrowing ability with FHLB to satisfy any liquidity
needs. The Corporation sold $6,076,000 loans to FNMA during the
nine month period ended September 30, 1996 and had advances
outstanding with FHLB totaling $11,306,000. The Corporation's
maximum borrowing capacity with FHLB equals $108,000,000.
Management believes that liquidity is adequate to meet the
borrowing and deposit withdrawal needs of its customers.
Capital Adequacy
Total shareholders' equity increased $54,000 to $35,010,000
at September 30, 1996 from $34,956,000 at December 31, 1995. As
part of management's strategic plan and under the Corporation's
stock repurchase program the Corporation repurchased FFSC common
shares at a cost of $2,180,000. In addition cash dividend
payments year-to-date totaled $1,123,000. These two factors
combined almost offset the Corporation's earnings of $3,248,000
for the nine month period ended September 30, 1996. For the
third quarter the Corporation paid cash dividends totaling
$384,000 or $.20 per common share. Cash dividends paid per
common share year-to date equaled $.58 and compares with $.53 for
the same period in 1995.
Capital adequacy is currently defined by banking regulatory
authorities through the use of several minimum required ratios.
The following table presents capital ratios for the Corporation
and its banking subsidiary at September 30, 1996, as well as
current minimum regulatory capital requirements. As the
following table indicates, the Corporation exceeds all minimum
capital requirements.
Farmers
& Current
Merchants FFSC Regulatory
Trust Company Consolidated Minimum
Tier I leverage ratio 9.79% 10.54% 6.00%
Risk-based capital ratio
Tier I 14.77% 15.85% 4.00%
Tier II 16.03% 17.10% 8.00%
PART II - OTHER INFORMATION
Item 5. - Other Information
On June 26, 1996, a form 8-K was filed in connection with an
agreement in principle by F&M Trust to purchase four branch bank
facilities and retail customer lists from PNC Bank. On September
20, 1996 settlement occurred for the branch bank facility located
in Boiling Springs, county of Cumberland, state of Pennsylvania.
On September 23, 1996, F&M Trust opened for business at this
location.
Subsequent to September 30, 1996, on October 25, 1996,
settlement for the three remaining branch facilities located in
the communities of Newville and Shippensburg, in the county of
Cumberland, and Chambersburg in the county of Franklin all in the
state of Pennsylvania occurred. On October 28, 1996, F&M Trust
opened for business at the Newville and Shippensburg locations.
The Chambersburg location will not be used as a branch bank.
The total purchase price for the properties, equipment and
customer lists approximated $2.7 million.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10 - Material Contracts
Exhibits 11 - Computation of earnings per share
(b) Reports on Form 8-K
There were no reports filed on Form 8-K for the quarter
ended September 30, 1996.
Exhibit 10
Material Contracts
Note to Exhibit 10
The attached Split Dollar Agreement was entered into in
substitution for and replacement of a similar arrangement entered
into by the Registrant for the benefit of Robert G. Zullinger.
Robert G. Zullinger
SPLIT DOLLAR AGREEMENT
THIS AGREEMENT is made and entered into this 17th day of
June, 1996 by and between Farmers and Merchants Trust Company of
Chambersburg, Pennsylvania (the "Company"), and the Robert G.
Zullinger Irrevocable Trust under Agreement dated February 29,
1996 (the "Trust"). This Agreement supplements the Split Dollar
Endorsement entered into on the 17th day of June, 1996 by and
between the aforementioned parties.
INTRODUCTION
WHEREAS, the Company wishes to provide Robert G. Zullinger
(the "Executive") with a life insurance fringe benefit in
recognition of the Executive's years of service and substantial
contributions to the success of the Company, under the terms of
which the Company will (a) acquire a policy of insurance on the
Executive's life, (b) pay the premiums on the policy from its
general assets, and (c) divide the death proceeds of the policy
with the trust, or its transferee, as hereinafter provided.
Article 1
General Definitions
The following terms shall have meanings specified:
1.1 "Insured" means the Executive.
1.2 "Insurer" means TMG Life Insurance Company
1.3 "Policy" means insurance policy number 597299 issued by
the Insurer.
1.4 "Trustee" means the trustee of the Trust
Article 2
Policy Ownership/Interests
2.1 Company Ownership. The Company is the sole owner of the
Policy and shall have the right to exercise all incidents of
ownership. The Company shall be the direct beneficiary of an
amount of death proceeds equal to the greater of (1) the cash
surrender value of the policy, or (2) the aggregate premiums paid
on the Policy by the Company less any outstanding indebtedness to
the Insurer.
2.2 Trust's Interest. The Trust shall have the right to any
remaining death proceeds of the Policy. The Trust shall also
have the right to elect and change settlement options that may be
permitted with respect to its share of the death proceeds of the
Policy.
2.3 Option to Purchase. The Company may at any time sell,
surrender or transfer ownership of the Policy, or terminate this
Agreement, without any liability or obligation to the Insured,
the Trust, or his, its, or their transferees, if any, after first
providing the Trust or its transferee with an opportunity to (a)
purchase the Policy for a cash payment equal to the Policy's cash
surrender value on the date of purchase (Transaction no.1), or
(b) purchase the Policy's net insurance benefit from the Insurer
in a transaction that will not reduce the Policy's cash surrender
value (Transaction no.2). For purposes of this Agreement, the
Policy's "net insurance benefit" means the Policy's total death
benefit less its cash surrender value on the date of
determination. In order to exercise either purchase option under
this provision, the Trust or its transferee must (a) notify all
parties to a proposed transaction of its intention to exercise a
purchase option within 30 days from the date on which the Company
notifies the Trust or its transferee of the Company's intention
to sell, surrender or transfer ownership of the Policy, or
terminate this Agreement (the "Plan Termination Notification
Date"), and (b) complete settlement on Transaction no. 1 or
Transaction no. 2, as elected by the Trust or its transferee,
within 90 days from the Plan Termination Notification Date. The
provisions of this Section shall not impair, impede or adversely
affect the Company's right to terminate this Agreement at any
time without any liability or obligation to the insured, the
Trust, or his, its or their transferee.
Article 3
Premiums
3.1 Premium Payment. During the term of this Agreement, the
Company shall pay the premiums due on the Policy.
3.2 Imputed Income. The Company shall impute income to the
Executive in the amount equal to the current term rate for the
Executive's age multiplied by the aggregate death benefit payable
to the Trust. The "current term rate" is the minimum amount
required to be imputed under Revenue Rulings 64-328 and 66-110,
or any subsequent applicable authority.
Article 4
Assignment
The Trust may assign without consideration all of its
interest in the Policy and in this Agreement to any person,
entity or trust. In the event the Trust assigns all of its
interest in the Policy and this Agreement, then all of the
Trust's interest in the Policy and in this Agreement shall be
vested in its transferee, who shall be substituted as a party
hereunder, and the Trust shall have no further interest in the
Policy and this Agreement, and substitution of a transferee or
assignee of the Trust as a party to this Agreement, shall be
conditioned and contingent upon prior written notification of the
transfer or assignment to the Company and the execution by the
Company, the Trust and its transferee or assignee of all
documents and instruments reasonably requested by the Company.
Article 5
Insurer
The Insurer shall be bound only by the terms of the Policy.
Any payments the Insurer makes or actions it takes in accordance
with the Policy shall fully discharge it from all claims, suits
and demands of all entities or persons. The Insurer shall not be
bound by or be deemed to have notice of the provisions of this
Agreement.
Article 6
Executive
The Executive is not party to this Agreement nor
corresponding Endorsement. Except as otherwise provided herein,
the Executive shall have no rights, title, and interest
hereunder.
Article 7
Claims Procedure
7.1 Claims Procedure. The Company shall notify the Trust
in writing, within ninety (90) days of its written application
for benefits, of its eligibility or noneligibility for benefits
under this Agreement. If the Company determines that the Trust
or its transferee or assignee, is not eligible for benefits or
full benefits, the notice shall set forth (1) the specific
reasons for such denial, (2) a specific reference to the
provisions of this Agreement on which the denial is based, (3) a
description of any additional information or material necessary
for the claimant to perfect his or her claim, a description of
why it is needed, and (4) an explanation of this Agreement's
claims review procedure and other appropriate information as to
the steps to be taken if the Trust or its transferee or assignee
wishes to have the claim reviewed. If the Company determines
that there are special circumstances requiring additional time to
make a decision, the Company shall notify the Trust of its
transferee or assignee of the special circumstances and the date
by which a decision is expected to be made, and may extend the
time for up to an additional ninety-day period.
7.2 Review Procedure. If the Trust or its transferee or
assignee is determined by the Company not to be eligible for
benefits, or if the Trust or its transferee or assignee believes
that he, she or its is entitled to greater or different benefits,
the Trust or its transferee or assignee shall have the
opportunity to have such claim reviewed by the Company by filling
a petition for review with the Company within sixty (60) days
after receipt of the notice issued by the Company. Said petition
shall state the specific reasons which the Trust or its
transferee or assignee believes entitle him, her or it to
benefits or to greater or different benefits. Within sixty (60)
days after receipt by the Company of the petition, the Company
shall afford the Trust or its transferee or assignee (and
counsel, if any) an opportunity to present his, her or its
position to the Company orally or in writing, and the Trust or
its transferee or assignee (or counsel) shall have the right to
review the pertinent documents. The Company shall notify the
Trust or its transferee or assignee of its decision in writing
within the sixty-day period, stating specifically the basis of
its decision, written in a manner calculated to be understood by
the Trust or its transferee or assignee and the specific
provisions of this Agreement on which the decision is based. The
Company's decision shall be final, and shall bind all parties to
the Agreement, and their respective successors, transferees,
assignees and beneficiaries. If, because of the need for a
hearing, the sixty-day period is not sufficient, the decision may
be deferred for up to another sixty-day period at the election of
the Company, but notice of this deferral shall be given to the
Trust or its transferee or assignee.
Article 8
Amendments and Termination
The Company may terminate this Agreement at any time upon
the expiration of 90 days from the Plan Termination Notification
Date as provided in Section 2.3 hereof. Upon termination of this
Agreement, the Company shall have no further liability or
obligation to the insured, the Trust, or to any of his, its or
their transferees or assignees.
This Agreement may be amended at any time and from time to
time by written agreement duly executed by the Company and the
Trust, or its or their transferees or assignees.
Article 9
Miscellaneous
9.1 Binding Effect. This Agreement shall bind the Trust
and the Company, and its and their beneficiaries, survivors,
executors, administrators, transferees and assignees, and all
Policy beneficiaries.
9.2 No Guaranty of Employment. This Agreement is not an
employment policy or contract. It does not give the Executive
the right to remain an employee of the Company, nor does it
interfere with the Company's right to discharge the Executive.
It also does not require the Executive to remain an employee nor
interfere with the Executive's right to terminate employment at
any time.
9.3 Applicable Law. The Agreement and all rights hereunder
shall be governed by and construed according to the laws of
Pennsylvania, except to the extent preempted by the laws of the
United States of America.
9.4 Notice. Any notice, consent or demand required or
permitted to be given under the provisions of this Split Dollar
Agreement by one party to another shall be in writing, shall be
signed by the party giving or making the same, and may be given
either by delivering the same to such other party personally, or
by mailing the same, by United States certified mail, postage
prepaid, to such party, addressed to his/her last known address
as shown on the records of the Company. The date of such mailing
shall be deemed the date of such mailed notice, consent or
demand.
IN WITNESS WHEREOF, the parties have executed this Agreement
the day and year first above written.
TRUST: COMPANY:
Robert G. Zullinger Farmers and Merchants Trust
Irrevocable Trust Company of Chambersburg
under Agreement, dated 2/29/96
Farmers and Merchants Trust
Company of Chambersburg, Trustee
By: /s/ Janet E. Eshelman By: /s/ William E. Snell, Jr.
Its: Assistant Trust Officer Its: President & CEO
<TABLE>
<CAPTION>
Exhibit 11
COMPUTATION OF EARNINGS PER SHARE
For the Three Months Ended September 30, 1996
Primary Primary Fully
Earnings Earnings Diluted
Per Share* Per Share* Earnings
As Reported As Adjusted Per Share
<S> <C> <C> <C>
Computation of earnings per
common share:
Shares
Weighted average shares
outstandiing 1,761,750 1,761,750 1,761,750
Equivalent shares from exercise
of dilutive common stock
equvalents - 17,367 24,392
1,761,750 1,779,117 1,786,142
Net Income $1,062,000 $1,062,000 $1,062,000
Earnings per common share
Net income $0.60 $0.60 $0.59
* Primary earnings per share "as reported" exclude the effect of the options issued un
the Employee Stock Purchase Plan and the restricted stock issued under the Long - Ter
Incentive Plan of 1990, as the effect of the equivalent shares on the earnings per sh
calculation is less than 3%. Primary earnings per share "as adjusted" include the effe
options and restricted stock.
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1996
Primary Primary Fully
Earnings Earnings Diluted
Per Share* Per Share* Earnings
As Reported As Adjusted Per Share
<S> <C> <C> <C>
Computation of earnings per
common share:
Shares
Weighted average shares
outstandiing 1,886,702 1,886,702 1,886,702
Equivalent shares from exercise
of dilutive common stock
equvalents - 21,414 24,392
1,886,702 1,908,116 1,911,094
Net Income $3,248,000 $3,248,000 $3,248,000
Earnings per common share**
Net income $1.72 $1.70 $1.70
* Primary earnings per share "as reported" exclude the effect of the options issued un
the Employee Stock Purchase Plan and the restricted stock issued under the Long - Ter
Incentive Plan of 1990, as the effect of the equivalent shares on the earnings per sh
calculation is less than 3%. Primary earnings per share "as adjusted" include the effe
options and restricted stock.
</TABLE>
<TABLE>
<CAPTION>
For the Three Months Ended September 30, 1995
Primary Primary Fully
Earnings Earnings Diluted
Per Share* Per Share* Earnings
As Reported As Adjusted Per Share
<S> <C> <C> <C>
Computation of earnings per
common share:
Shares**
Weighted average shares
outstandiing 1,902,889 1,902,889 1,902,889
Equivalent shares from exercise
of dilutive common stock
equvalents - 29,191 34,678
1,902,889 1,932,080 1,937,567
Net Income $1,026,000 $1,026,000 $1,026,000
Earnings per common share**
Net income $0.54 $0.53 $0.53
* Primary earnings per share "as reported" exclude the effect of the options issued un
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 sh
calculation is less than 3%. Primary earnings per share "as adjusted" include the effe
and restricted stock.
** Net income per share computations have been adjusted retroactively to reflect a 3 f
split issued in the form of a 50% stock dividend and distributed on December 29, 1995
shareholders of record on December 8, 1995.
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1995
Primary Primary Fully
Earnings Earnings Diluted
Per Share* Per Share* Earnings
As Reported As Adjusted Per Share
<S> <C> <C> <C>
Computation of earnings per
common share:
Shares**
Weighted average shares
outstandiing 1,925,266 1,925,266 1,925,266
Equivalent shares from exercise
of dilutive common stock
equvalents - 23,713 29,784
1,925,266 1,948,979 1,955,050
Net Income $3,169,000 $3,169,000 $3,169,000
Earnings per common share**
Net income $1.65 $1.63 $1.62
* Primary earnings per share "as reported" exclude the effect of the options issued un
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 sha
calculation is less than 3%. Primary earnings per share "as adjusted" include the effe
and restricted stock.
** Net income per share computations have been adjusted retroactively to reflect a 3 f
split issued in the form of a 50% stock dividend and distributed on December 29, 1995
shareholders of record on December 8, 1995.
</TABLE>
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: November 12, 1996 /s/ William E. Snell Jr.
William E. Snell Jr.
President and Chief Executive Officer
Date: November 12, 1996 /s/ Elaine G. Meyers
Elaine G. Meyers
Treasurer and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 11602
<INT-BEARING-DEPOSITS> 347
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 46807
<INVESTMENTS-CARRYING> 37146
<INVESTMENTS-MARKET> 36935
<LOANS> 221337
<ALLOWANCE> 2950
<TOTAL-ASSETS> 326638
<DEPOSITS> 260977
<SHORT-TERM> 24485
<LIABILITIES-OTHER> 2560
<LONG-TERM> 3606
0
0
<COMMON> 2030
<OTHER-SE> 32980
<TOTAL-LIABILITIES-AND-EQUITY> 326638
<INTEREST-LOAN> 14883
<INTEREST-INVEST> 3464
<INTEREST-OTHER> 199
<INTEREST-TOTAL> 18546
<INTEREST-DEPOSIT> 7366
<INTEREST-EXPENSE> 8283
<INTEREST-INCOME-NET> 10263
<LOAN-LOSSES> 321
<SECURITIES-GAINS> 77
<EXPENSE-OTHER> 8458
<INCOME-PRETAX> 4298
<INCOME-PRE-EXTRAORDINARY> 4298
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3248
<EPS-PRIMARY> 1.72
<EPS-DILUTED> 1.70
<YIELD-ACTUAL> 10.38
<LOANS-NON> 1020
<LOANS-PAST> 2465
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3141
<CHARGE-OFFS> 583
<RECOVERIES> 71
<ALLOWANCE-CLOSE> 2950
<ALLOWANCE-DOMESTIC> 2950
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 729
</TABLE>
