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, 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 1,863,165 outstanding shares of the Registrant's common stock as of
November 6, 1997.
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets 2
as of September 30, 1997 (Unaudited) and
December 31, 1996
Consolidated Statements of 3
Income for the Nine Months ended
September 30, 1997 and 1996 (unaudited)
Condensed Consolidated Statements of 4
Changes in Shareholders' Equity for the
Twelve and Nine Months ended December 31,
1996 and September 30, 1997 (unaudited)
Consolidated Statements of Cash 5
Flows for the Nine Months Ended September
30, 1997 and 1996 (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 6 - Exhibits and Reports on Form 8-K 16
SIGNATURE PAGE 17
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands)
September 30 December 31
1997 1996
(unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $9,312 $10,265
Interest bearing deposits in other banks 305 256
Investment securities held to maturity (Market value of $29,695 and $36,199 at
September 30, 1997 and December 31, 1996 respectively) (Note 3) 29,479 36,290
Investment securities available for sale (Note 3) 61,082 53,502
Loans, net 236,669 221,166
Premises and equipment, net 6,133 6,698
Other assets 8,413 7,943
Total Assets $351,393 $336,120
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits: (Note 4)
Demand (non-interest bearing) $35,618 $34,847
Savings and Interest checking 111,738 104,763
Time 117,648 128,592
Total Deposits 265,004 268,202
Securities sold under agreements to repurchase 14,108 15,122
Other borrowings 31,701 14,891
Other liabilities 3,018 2,564
Total Liabilities 313,831 300,779
Commitments and Contingencies - -
Shareholders' equity:
Common stock $1 par value per share, 5,000 shares authorized
with 2,030 shares issued and 1,862 and 1,890
outstanding at September 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 19,744 19,745
Retained earnings 19,786 17,590
Net unrealized gain on securities 1,581 613
Treasury stock (Note 5) (4,787) (3,830)
Unearned compensation (792) (807)
Total shareholders' equity 37,562 35,341
Total Liabilities and Shareholders' Equity $351,393 $336,120
The accompanying notes are an integral part of these statements
</TABLE>
<TABLE>
<CAPTION>
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
1997 1996 1997 1996
INTEREST INCOME
Interest on loans $5,405 $5,168 $15,707 $14,883
Interest on deposits in other banks 4 3 25 199
Interest and dividends on investments (Note 2) 1,315 1,227 3,905 3,464
Total interest income 6,724 6,398 19,637 18,546
INTEREST EXPENSE
Interest on deposits 2,567 2,403 7,482 7,366
Interest on securities sold under repurchase
agreements and other borrowings 606 371 1,535 917
Total interest expense 3,173 2,774 9,017 8,283
Net interest income 3,551 3,624 10,620 10,263
Provision for possible loan loss 253 96 638 321
Net-interest income after provision
for possible loan losses 3,298 3,528 9,982 9,942
NONINTEREST INCOME
Trust commissions 354 289 1,022 880
Service charges, commissions and fees 366 349 1,404 1,373
Other 108 239 156 484
Net securities gains 189 (1) 393 77
Total noninterest income 1,017 876 2,975 2,814
NONINTEREST EXPENSE
Salaries and benefits 1,677 1,636 4,814 4,877
Net occupancy expense 153 129 468 385
Furniture and equipment expense 204 187 583 548
FDIC insurance 11 136 33 163
Other 940 909 2,666 2,485
Total noninterest expense 2,985 2,997 8,564 8,458
Income before income tax provision 1,330 1,407 4,393 4,298
Income tax provision 291 345 1,036 1,050
Net income $1,039 $1,062 $3,357 $3,248
Earnings per share
Net income per share $0.57 $0.60 $1.84 $1.72
Weighed avergage shares outstanding 1,819,015 1,761,750 1,828,437 1,886,702
The accompanying notes are an intergral part of these statements.
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
for the year ended December 31, 1996 and the Nine Months ended September 30, 1997
(Amounts in thousands, except per share )
Net
Additional Unrealized
Common Paid-in Retained Gain/(Loss) Treasury Unearned
Stock Capital Earnings on Securities Stock Compensation Total
Balance at December 31, 1995 $2,030 $19,431 $14,966 $677 ($2,053) ($95) $34,956
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 tranaction - 170 - - - - 170
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 - - 3,357 - - - 3,357
Cash Dividends, $.62 per share - - (1,161) - - - (1,161)
Common stock issued under stock
option plans - 10 - - 250 - 260
Change in net unrealized gain on - - - 968 - - 968
securities
Restricted stock issued under long-term
incentive compensation plan - (11) - - - (73) (84)
(2,174 shares)
Acquisition of 35,983 shares of
treasury stock at cost (Note 5) - - - - (1,207) - (1,207)
Amortization of unearned compensation - - - - - 88 88
Balance at September 30, 1997 $2,030 $19,744 $19,786 $1,581 ($4,787) ($792) $37,562
(unaudited)
The accompanying notes are an integral part of these statements.
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
Unaudited
For the Nine Months Ended
September 30
<S> <C> <C>
1997 1996
Cash flows from operating activities:
Net Income $3,357 $3,248
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation 583 549
Premium amortization on investment securities 90 78
Discount accretion on investment securities (117) (93)
Provision for possible loan losses 638 321
Securities gains, net (393) (77)
Principal gains on sales of mortgage loans (47) (47)
Proceeds from sale of mortgage loans 8,487 11,702
Loss (Gain) on sale of premises and equipment 37 (89)
Loan charge-offs, net of recoveries (445) (511)
Increase in interest receivable (390) (144)
Increase in interest payable 116 200
Decrease in unearned discount (99) (307)
Increase in prepaid and other assets (13) (533)
(Decrease) Increase in accrued expenses and other liabilities (160) 439
Other, net 95 176
Net cash provided by operating activities $11,739 $14,912
Cash flows from investing activities:
Proceeds from sales of investment securities available for sale 3,887 118
Proceeds from maturities of investment securities held to maturity 7,586 5,900
Proceeds from maturities of investment securities available for sale6,974 10,727
Purchase of investment securities held to maturity (775) (7,729)
Purchase of investment securities available for sale (16,582) (15,898)
Net increase in loans (24,037) (19,517)
Capital expenditures (332) (1,156)
Proceeds from sales of premises and equipment 146 223
Net cash (used) in investing activities (23,133) (27,332)
Cash flows from financing activities:
Net increase in demand deposits,
NOW accounts and savings accounts 7,746 2,150
Net (decrease) increase in certificates of deposit (10,944) 1,616
Dividends (1,161) (1,123)
Common stock issued under stock option plans 260 172
Purchase of treasury shares (1,207) (2,180)
Cash inflows from other borrowings 15,796 8,830
Net cash provided by financing activities 10,490 9,465
(Decrease) in cash and cash equivalents (904) (2,955)
Cash and cash equivalents as of January 1 10,521 14,904
Cash and cash equivalents as of September 30 $9,617 $11,949
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 consolidated balance sheets as of September 30, 1997 and
December 31, 1996, the consolidated statements of income for the three month
and nine-month periods ended September 30, 1997 and 1996, the condensed
consolidated statements of changes in shareholders' equity as of
December 31, 1996 and September 30, 1997 and the consolidated
statements of cash flows for the nine-month periods ended September
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 September 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 September 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, 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: 1997 1996
Interest paid on deposits and
other borrowed funds . . . . . $8,930,000 $8,083,000
Income taxes paid $ 775,000 $935,000
<TABLE>
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:
<S> <C> <C> <C> <C> <C> <C>
As of September 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 $36,948 15.62% $18,919 8.00% $23,648 10.00%
Bank 32,961 14.11% 18,689 8.00% 23,361 10.00%
Tier I Capital (to Risk Weighted Assets)
Corporation $33,988 14.37% $9,459 4.00% $14,189 6.00%
Bank 30,037 12.86% 9,344 4.00% 14,017 6.00%
Tier I Capital (to Average Assets)
Corporation $33,988 9.66% $14,071 4.00% $17,589 5.00%
Bank 30,037 8.70% 13,815 4.00% 17,268 5.00%
</TABLE>
<TABLE>
<CAPTION>
Note 3 - Investment Securities
Amortized cost and estimated market values of investment securities as of September 30, 1997 (unaudited),
and December 31, 1996, were as follows (amounts in thousands):
Held to Maturity
September 30 December 31
1997 1996
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 $1,035 $1,044 $1,051 $1,058
Obligations of state and political subdivisions 15,475 15,663 19,496 19,536
Corporate debt securities 2,404 2,412 3,688 3,677
Mortgage - backed securities 8,938 8,949 10,832 10,705
27,852 28,068 35,067 34,976
Other 1,627 1,627 1,223 1,223
$29,479 $29,695 $36,290 $36,199
Available for sale
September 30 December 31
1997 1996
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
Equity securities $1,412 $3,256 $1,380 $2,490
U.S. Treasury securities and obligations
of U.S. Government agencies & corporations 21,962 22,100 27,054 27,055
Obligations of state and political subdivisions 14,916 15,376 1,934 1,930
Corporate debt securities 5,032 5,059 5,046 5,058
Mortgage - backed securities 15,365 15,291 17,159 16,969
$58,687 $61,082 $52,573 $53,502
</TABLE>
<TABLE>
<CAPTION>
Interest income and dividends received on investment securities for the three and nine months
ended September 30, 1997 and 1996 are as follows (amounts in thousands):
Three Months Nine Months
1997 1996 1997 1996
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
U.S. Government Obligations $73 $87 $221 $244
Obligations of U.S. Government
Agencies and Corporations 631 646 2,015 1,873
Obligations of States and
Political Subdivisions 401 260 1,014 747
Other Securities, primariy
Notes and Debentures 152 199 542 498
Common Stock 58 35 113 102
$1,315 $1,227 $3,905 $3,464
</TABLE>
<TABLE>
<CAPTION>
Note 4 - Deposits
Deposits are summarized as follows (amounts in thousands):
September 30 December 31
1997 1996
(Unaudited)
<S> <C> <C>
Demand $35,618 $34,847
Savings
Interest-bearing checking 33,535 34,473
Money Market Accounts 36,200 25,288
Passbook and Statement Savings 42,003 45,002
$111,738 $104,763
Time
Deposits of $100,000 and over 15,211 30,345
Other Time Deposits 102,437 98,247
117,648 128,592
Total Deposits $265,004 $268,202
</TABLE>
NOTE 5 - Treasury Stock
The Corporation repurchased 12,500 shares of Franklin
Financial Services Corporation common stock during the third
quarter ended September 30, 1997. The cumulative total of common
shares repurchased during the nine-month period ended September 30,
1997 was 35,983 at a cost of approximately $1,207,000. 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.
Management's Discussion and Analysis of
Results of Operations and Financial Condition
for the Three and Nine Month Periods
Ended September 30, 1997
Part 1, Item 2
Results of Operations
Net income for the third quarter and nine months ended
September 30, 1997, was $1.0 million and $3.4 million,
respectively, compared to $1.1 million and $3.2 million,
respectively, for the same periods in 1996. Earnings per share
recorded a decrease of 5.0% to $.57 for the thrid quarter of 1997
and an increase of 7.0% to $1.84 for the nine months ended
September 30, 1997. Earnings per share reported for the third
quarter and nine months ended September 30, 1996 was $.60 and
$1.72, respectively. Per share earnings are weighted to reflect
the impact of the stock repurchase program. Book value per share
equaled $20.17 at September 30, 1997 versus $18.39 one year
earlier.
The Corporation's annualized return on average assets (ROA)
and return on average equity (ROE) for the first nine months of
1997 were 1.31% and 12.47%, respectively, compared to 1.36% and
12.47%, respectively, for the first nine months of 1996.
Net interest income decreased $73,000 for the third quarter
of 1997 to $3.5 million cmpared to the same quarter in 1996. The
decrease in net interest income for the third quarter of 1997
versus the third quarter of 1996 was driven primarily by changes
in rates paid on interest-bearing liabilities offset to a large
degree by increased volume in interest-earning assets. During
the third quarter of 1997, the yield on interest-earning assets
decreased 2 basis points while the average volume increased
approximately $26 million when compared to the same period in
1996; at the same time rates paid on interest-bearing liabilities
increased 18 basis points and the average volume increased
approximately $24 million. Commercial loan demand was strong
during the third quarter of 1997 versus the third quarter of 1996
as evidenced by increased average volume totaling approximately
$11 million followed by higher consumer loan volume totaling $6 million.
The average volume of investment securities grew approximately $6 million
period to period primarily the result of purchasing state and
municipal tax-exempt securities. Growth in interest-bearing
liabilities occurred mainly in money market deposit accounts and
overnight borrowings with the Federal Home Loan Bank of
Pittsburgh.
Net interest income for the nine-month period ended
September 30, 1997, increased 3.5%, or $357,000, to $10.6 million
from $10.3 million for the same period ended September 30, 1996.
The increase of $1.1 million in interest income and $.7 million
in interest expense for the nine-month period was driven
primarily by increases in volume of interest-earning assets and
interest-bearing liabilities rather than increases in interest
rates. Following the same trend as the third quarter, commercial
and consumer loan demand and purchases of investment securities
were the primary contributors to the growth in earning assets for
the nine month period ended September 30, 1997 compared to the
same period in 1996. For the nine-month period in 1997,
the growth in interest-bearing liabilities occurred
primarily in borrowings with the Federal Home Loan Bank.
The Corporation's yield on earning assets for the first nine
months of 1997 was 8.36% and the cost of funds for the same
period was 4.49%. This compares with 8.36% and 4.46%,
respectively, for the yield on earning assets and the cost of
funds for the first nine months of 1996. The interest spread and
net interest margin for the nine months ended September 30, 1997
were 3.87% and 4.62%, respectively, compared to 3.90% and 4.70%,
respectively, one year earlier.
The Corporation expensed $253,000 and $638,000 for possible
loan losses in the third quarter and first nine months,
respectively, of 1997 versus $96,000 and $321,000, 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 increased loan loss provision. Net
charge-offs for the third quarter and first nine months of 1997
were $100,000 and $445,000, respectively, compared to $94,000 and
$512,000, respectively, for the same periods in 1996.
Total noninterest income, excluding net securities gains,
decreased 5.6%, or $49,000 to $828,000 for the third quarter
ended September 30, 1997, from $877,000 for the third quarter
ended September 30, 1996. Other noninterest income decreased
$54.8%, or $131,000, to $108,000 largely offset by an increase of
$65,000, or 22.5%, to $354,000 in trust commissions for the
quarter. The decrease in other noninterest income was mainly due
to nonrecurring income recorded during the third quarter of
1996. Income from trust commissions was up primarily as a result
of significant growth in trust assets under management.
Total noninterest income, excluding net securities gains,
for the nine months ended September 30, 1997, decreased 5.6%, or
$155,000 to $2.6 million from $2.7 million at September 30, 1996.
Other noninterest income recorded a decrease of $328,000 to
$156,000 and was partially offset by increases in trust
commission income ($142,000) and income from service charges,
commissions and fees ($31,000). As reported above, the decrease
in other income for the first nine months of 1997 versus 1996 was
due primarily to nonrecurring income recorded in 1996. Also, the
increase in trust commission income is related to the 38.2%
growth in trust assets under management during the twelve month
period between September 30, 1996 and 1997.
Net securities gains for the third quarter and nine months
ended September 30, 1997, were $189,000 and $393,000,
respectively, compared to a net securities loss of $1,000 for the
third quarter of 1996 and a net securities gain of $77,000 for
the nine months ended September 30, 1996. The net securities
gains realized were from the available-for-sale equities
portfolio.
Total noninterest expense for the third quarter ended
September 30, 1997 recorded a slight decrease of $12,000 to $2.98
million compared to $2.99 million for the same quarter a year
earlier. Contributing to the decrease was a significant
reduction in FDIC insurance expense offset by increases in other
operating expenses. Net occupancy and funiture and equipment
expense were up a total of $41,000 for the third quarter related
primarily to higher costs associated with the opening of three
new branch offices in the fourth quarter of 1996. FDIC insurance
expense decreased $125,000 quarter to quarter largely due to a
third quarter 1996 one-time industry-wide assessment for
recapitalization of the Savings Association Insurance Fund
(SAIF).
Total noninterest expense for the nine months ended
September 30, 1997 increased 1.2%, or $106,000, to $8.6 million
from $8.5 million for the same period one year earlier.
Net occupancy and furniture and equipment expense
increased a total of $118,000 due to added costs related to the
opening of three new branch offices. FDIC insurance expense
decreased by $130,000 primarily due to the one time industry-wide
assessment to recapitalize SAIF. Other expense for the nine
months ended September 30, 1997 was up $181,000 to $2.7 million
versus the same period in 1996 largely due to higher costs
associated with legal and professional fees ($58,000), a loss on
real estate sold ($40,000), and a writedown of buildings slated
for demolition ($63,000).
Federal income tax expense for the third quarter and nine
months ended September 30, 1997 equaled $291,000 and $1.0
million, respectively, compared to $345,000 and $1.0 million,
respectively, for the same periods ended September 30, 1996. The
effective tax rate for the nine months ended September 30, 1997
and 1996 was 23.6% and 24.4%, respectively, compared to a
statuatory rate of 34.0%. The differential between the effective
tax rate and the statuatory rate is due primarily to interest
income earned on tax-free investments and tax-free loans.
Financial Condition
Total assets grew $15.3 million,or 4.5%, to $351.4 million
at September 30, 1997, from $336.1 million at December 31, 1996.
Total assets at September 30, 1996 were $326.6 million. The
growth in assets from year-end 1996 occurred primarily in loan
volume which reported an increase of $15.5 million, or 6.9%, to
$239.9 million at September 30, 1997. Commercial loan volume led
the growth with an increase of $10.0 million to $101.2 million in
outstanding loan balances. Consumer loans followed with an
increase of $4.9 million, or 9.8%, reaching $54.8 million in
outstanding loan balances at September 30, 1997.
Funding the increase in assets was an increase in borrowings
with the Federal Home Loan Bank of Pittsburgh (FHLB). Total
borrowings with FHLB increased $16.8 million, or 112.9%, to $31.7
million at September 30, 1997, from $14.9 million at December 31,
1996. Total deposits at September 30, 1997 declined $3.2 million
to $265.0 million from $268.2 million at December 31, 1996, and
reflects the industry-wide trend of deposit money fleeing to
alternative investment sources yielding a higher rate of return
and higher risk. Demand and savings deposits, which include
interest-bearing checking, money market accounts and passbook and
statement savings recorded an increase of $7.7 mllion but was
more than offset by a decrease in time deposits of $100,000 and
over totaling $15.1 million. Time deposits under $100,000
increased by $4.2 million during the nine month period ended
September 30, 1997.
Recognizing the trend of deposit flight from financial
institutions the Corporation continues to look to alternative
funding sources, namely the FHLB of Pittsburgh. At September 30,
1997, the Corporation had a Maximum Borrowing Capacity with the
FHLB equal to $93.4 million and unused borrowing capacity of
$61.7 million. The FHLB provides a reliable funding source with
attractive interest rates.
The Corporation's allowance for possible loan losses
recorded a balance of $3.3 million at September 30, 1997,
compared to $3.1 million at December 31, 1996. The allowance as
a percentage of total loans equaled 1.35% and 1.36%, at September
30, 1997 and December 31, 1996, respectively, and provided
coverage for nonaccrual loans and nonperforming loans 2.5 times
and 1.7 times, respectively, at September 30, 1997.
Nonperforming loans totaled $1.9 million at September 30,
1997, compared to $1.7 million at December 31, 1996. Included in
nonperforming loans at September 30, 1997, were $1.3 million and
$.6 mllion, respectively, in nonaccrual loans and loans past due
over 90 days. Nonaccrual loans and loans past due 90 days or
more equaled $856,000 and $874,000, respectively, at December 31,
1996. Loans past due 30-89 days decreased to $2.1 million at
September 30, 1997 from $2.2 million at December 31, 1996. The
Corporation had no restructured loans at September 30, 1997.
Other real estate owned (OREO) totaled $146,000 at September 30,
1997 compared to $99,000 at December 31, 1996. Nonperforming
assets, which includes nonperforming loans, restructured loans
and OREO totaled $2.1 million at September 30, 1997 and
represented .61% of total assets.
Net charge-offs recorded for the third quarter and nine
months ended September 30, 1997 totaled $100,000 and $445,000,
respectively, compared to $94,000 and $512,000, respectively, for
the same periods one year earlier. Net charge-offs for the first
nine months of 1997 were attributable 96.0% to consumer loans and
4.0% to commercial loans compared to 72.0% and 28.0%,
respectively, for the same period in 1996. Net charge-offs
represented .26% and .31%, respectively, of average loans for the
nine month periods ended September 30, 1997 and 1996.
The local economy remains stable with unemployment at or
below the national average. New jobs created in the past several
years by old and new businesses in Franklin County have to date
offset any potential negative impact to the local economy. A
recent study of job skills in the quad-state area along the
Interstate 81 corridor supports the fact that the region has a
higher concentration in manufacturing jobs than the rest of the
United States. Also reported in the study was that, on average,
jobs paid 16.3% less than the nation as a whole but was offset by
a lower than average cost of living(10% or less) and a good
quality of life. The study found that manufacturing skills
groups in the region are in metalworking, plastics, auto/truck
parts, woodworking, printing and publishing and electronics to
name a few. Letterkenny Industrial Development Authority (LIDA)
a group born out of the Base Realignment and Closing decision
which resulted in realignment and downsizing of the Letterkenny
Army Depot exists to attract and retain new business and
therefore create new jobs. Although LIDA is still in its
infancy, progress has been made in attracting two or three new
businesses. Men and women from the Franklin County area with
experience in business and government make up the authority. In
addition to LIDA, local Chambers of Commerce and other local
development authorities continue to work together to attract new
business to the Franklin County area and have experienced success
with their efforts.
Liquidity
The Corporation's liquidity position (net cash, short-term
and marketable assets divided by net deposits and short-term
liabilities) was 23.0% at September 30, 1997. The Corporation
actively sells mortgage loans to the secondary market (primairly
FNMA) and looks to its borrowing ability with FHLB to satisfy any
liquidity needs. The Corporation sold $18.8 million in mortgage
loans to the secondary market during the first nine months of
1997 and had advances outstanding with FHLB totaling $31.7
million. The Corporation's maximum borrowing capacity with FHLB
equals $93.4 million. Management believes that liquidity is
adequate to meet the borrowing and deposit withdrawal needs of
its customers.
Capital Adequacy
Total shareholders' equity increased $2.2 million to $37.6
million at September 30, 1997 from $35.3 million at December 31,
1996. Retained earnings recorded a net increase of $2.2 million
for the nine months ended September 30, 1997, to $19.8 million
after cash dividends totaling $1.2 million were paid to
shareholders. The market value of the Corporation's available-for-sale
securities improved at September 30, 1997 resulting in a
net unrealized gain recorded at $1.6 million compared to $613,000
at December 31, 1996, an increase of $1.0 million. Offsetting
the increases in retained earnings and the net unrealized gain on
securities was the repurchase of 35,983 shares of the
Corporation's common stock which increased the cost of treasury
stock by $.96 million to $4.8 million.
For the third quarter of 1997 the Corporation paid cash
dividends totaling $409,000, or $.22 per share. Cash dividends
paid per year-to-date totaled $1.2 million, or $.62
per share, and represented 34.5% of the recorded nine months
earnings for 1997.
Capital adequacy is currently defined by banking regulatory
authorities through the use of several minimum required ratios.
The Corporation's leverage ratio, Tier I and Tier II risk-based
capital ratios at September 30, 1997 were 9.66%, 14.37% and
15.62%, respectively. For more information refer to Note 2 of
the financial statements.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibits 11 - Computation of earnings per share
(b) Reports on Form 8-K
There were no reports filed on Form 8-K for the quarter
ended September 30, 1997.
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
/s/ William E. Snell, Jr.
William E. Snell, Jr.
President and Chief Executive Officer
/s/ Elaine G. Meyers
Elaine G. Meyers
Treasurer and Chief Financial Officer
<TABLE>
<CAPTION>
Exhibit 11
COMPUTATION OF PER SHARE EARNINGS
For the Three Months Ended September 30
1997 1996
<S> <C> <C> <C> <C> <C> <C>
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 1,819,015 1,819,015 1,819,015 1,761,750 1,761,750 1,761,750
Equivalent shares from
exercise of dilutive
stock equivalents -- 18,679 19,961 --- 17,367 24,392
1,819,015 1,837,694 1,838,976 1,761,750 1,779,117 1,786,142
Net Income $1,039,000 $1,039,000 $1,039,000 $1,062,000 $1,062,000 $1,062,000
Earnings per common share
Net Income $0.57 $0.57 $0.56 $0.60 $0.60 $0.59
(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.
</TABLE>
<TABLE>
<CAPTION>
Exhibit 11
COMPUTATION OF PER SHARE EARNINGS
For the Nine Months Ended September 30
1997 1996
<S> <C> <C> <C> <C> <C> <C>
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 1,828,437 1,828,437 1,828,437 1,886,702 1,886,702 1,886,702
Equivalent shares from
exercise of dilutive
stock equivalents -- 18,541 19,961 --- 21,414 24,392
1,828,437 1,846,978 1,848,398 1,886,702 1,908,116 1,911,094
Net Income $3,357,000 $3,357,000 $3,357,000 $3,248,000 $3,248,000 $3,248,000
Earnings per common share
Net Income $1.84 $1.82 $1.82 $1.72 $1.70 $1.70
(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.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 9312
<INT-BEARING-DEPOSITS> 305
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 61082
<INVESTMENTS-CARRYING> 29479
<INVESTMENTS-MARKET> 29695
<LOANS> 243181
<ALLOWANCE> 3253
<TOTAL-ASSETS> 351393
<DEPOSITS> 265004
<SHORT-TERM> 40750
<LIABILITIES-OTHER> 3018
<LONG-TERM> 7059
0
0
<COMMON> 2030
<OTHER-SE> 35532
<TOTAL-LIABILITIES-AND-EQUITY> 351393
<INTEREST-LOAN> 15707
<INTEREST-INVEST> 3905
<INTEREST-OTHER> 25
<INTEREST-TOTAL> 19637
<INTEREST-DEPOSIT> 7482
<INTEREST-EXPENSE> 9012
<INTEREST-INCOME-NET> 10620
<LOAN-LOSSES> 638
<SECURITIES-GAINS> 393
<EXPENSE-OTHER> 8564
<INCOME-PRETAX> 4393
<INCOME-PRE-EXTRAORDINARY> 4393
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3357
<EPS-PRIMARY> 1.84
<EPS-DILUTED> 1.82
<YIELD-ACTUAL> 8.35
<LOANS-NON> 1319
<LOANS-PAST> 591
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3060
<CHARGE-OFFS> 522
<RECOVERIES> 77
<ALLOWANCE-CLOSE> 3253
<ALLOWANCE-DOMESTIC> 3253
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 350
</TABLE>
