UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 1,909,704 outstanding shares of the Registrant's common stock as of
August 3, 1998.
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets
as of June 30, 1998 (Unaudited) and
December 31, 1997
Condensed Consolidated Statements of
Income for the Three and Six Months
ended June 30, 1998 and 1997 (unaudited)
Condensed Consolidated Statements of
Changes in Shareholders' Equity for the
Twelve and Six Months ended December 31,
1997 and June 30, 1998 (unaudited)
Condensed Consolidated Statements of Cash
Flows for the Six Months Ended June 30,
1998 and 1997 (unaudited)
Notes to Condensed Consolidated Financial
Statements (unaudited)
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security
Holders
Item 6 - Exhibits and Reports on Form 8-K
SIGNATURE PAGE
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands)
June 30 December 31
1998 1997
----------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $11,086 $10,863
Interest bearing deposits in other banks 5,986 249
Investment securities held to maturity (Market value of $ 24,411and $28,030 at
June 30, 1998 and December 31, 1997 respectively) (Note 3) 24,162 27,779
Investment securities available for sale (Note 3) 62,452 59,319
Loans, net 247,641 241,244
Premises and equipment, net 5,788 5,907
Other assets 8,571 8,504
----------- ------------
Total Assets $365,686 $353,865
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits: (Note 4)
Demand (non-interest bearing) $41,470 $37,591
Savings and Interest checking 126,660 113,138
Time 124,181 123,826
----------- ------------
Total Deposits 292,311 274,555
Securities sold under agreements to repurchase 19,892 16,075
Other borrowings 11,901 21,434
Other liabilities 3,179 5,496
----------- ------------
Total Liabilities 327,283 317,560
Commitments and Contingencies - -
Shareholders' equity:
Common stock $1 par value per share, 5,000 shares authorized
with 3,045 shares issued and 2,798 and 2,795 shares
outstanding at June 30,1998 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 19,772 19,761
Retained earnings 19,128 17,087
Net unrealized gain on securities 1,862 1,935
Treasury stock (Note 6) (4,709) (4,760)
Unearned compensation (713) (763)
----------- ------------
Total shareholders' equity 38,385 36,305
----------- ------------
Total Liabilities and Shareholders' Equity $365,668 $353,865
=========== ============
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 Months Ended For the Six Months Ended
June 30 June 30
1998 1997 1998 1997
------------------------ --------------------------
INTEREST INCOME
Interest on loans $5,460 $5,228 $10,966 $10,302
Interest on deposits in other banks 59 4 63 21
Interest and dividends on investments (Note 3) 1,211 1,298 2,430 2,590
---------- ---------- ------------ ----------
Total interest income 6,730 6,530 13,459 12,913
---------- ---------- ------------ ----------
INTEREST EXPENSE
Interest on deposits 2,741 2,488 5,406 4,915
Interest on securities sold under agreements to
repurchase and other borrowings 447 503 898 929
---------- ---------- ------------ ----------
Total interest expense 3,188 2,991 6,304 5,844
---------- ---------- ------------ ----------
Net interest income 3,542 3,539 7,155 7,069
Provision for possible loan losses 190 192 555 385
---------- ---------- ------------ ----------
Net-interest income after provision
for possible loan losses 3,352 3,347 6,600 6,684
---------- ---------- ------------ ----------
NONINTEREST INCOME
Trust fees 411 329 888 668
Service charges, commissions and fees 627 533 1,105 1,038
Other 42 9 62 48
Securities gains 196 93 495 204
---------- ---------- ------------ ----------
Total noninterest income 1,276 964 2,550 1,958
---------- ---------- ------------ ----------
NONINTEREST EXPENSE
Salaries and benefits 1,455 1,573 2,975 3,137
Net occupancy expense 156 152 308 315
Furniture and equipment expense 176 175 392 379
Other 1,224 884 2,231 1,748
---------- ---------- ------------ ----------
Total noninterest expense 3,011 2,784 5,906 5,579
---------- ---------- ------------ ----------
Income before Federal income taxes 1,617 1,527 3,244 3,063
---------- ---------- ------------ ----------
Federal income tax expense 375 344 769 745
---------- ---------- ------------ ----------
Net income $1,242 $1,183 $2,475 $2,318
========== ========== ============ ==========
Basic earnings per share $0.46 $0.43 $0.91 $0.84
'Weighted average shares outstanding (000's) 2,729 2,741 2,728 2,750
Diluted earnings per share $0.45 $0.43 $0.89 $0.83
'Weighted average shares outstanding (000's) 2,768 2,770 2,767 2,779
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.
</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, 1997 and the Six Months ended June 30, 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) 36,305
--------- --------- --------- ---------- --------- ----------- ---------
Net income - - 2,475 - - - 2,475
Cash dividends declared, $.15 per share - - (420) - - - (420)
Cash in lieu of fractional shares
on 50% stock split - - (14) - - - (14)
Common stock issued under stock
option plans - 11 - - 51 - 62
Change in net unrealized gain
on securities - - - (73) - - (73)
Amortization of unearned compensation - - - - - 50 50
--------- --------- --------- ---------- --------- ----------- ---------
Balance at June 30, 1998 (unaudited) $3,045 $19,772 $19,128 $1,862 ($4,709) ($713) $38,385
========= ========= ========= ========== ========= =========== =========
The accompanying notes are an integral part of these statements.
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)
For the Six Months Ended
June 30
<S> <C> <C>
1998 1997
--------- ----------
Cash flows from operating activities:
Net Income $2,475 $2,318
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 375 391
Premium amortization on investment securities 49 60
Discount accretion on investment securities (70) (76)
Provision for possible loan losses 555 385
Securities gains, net (495) (204)
Principal loss (gain) on sales of mortgage loans 37 (21)
Loss on sale of premises and equipment 294 37
Loan charge-offs, net of recoveries (534) (345)
Decrease (increase) in interest receivable 89 (145)
Increase in interest payable 201 164
Decrease in unearned discount (21) (77)
(Increase) decrease in prepaid and other assets (256) 46
Decrease in accrued expenses and other liabilities (101) (211)
Other, net 79 59
--------- ----------
Net cash provided by operating activities $2,677 $2,381
--------- ----------
Cash flows from investing activities:
Proceeds from sales of investment securities available for sale 726 3,581
Proceeds from maturities of investment securities held to maturity 3,645 4,354
Proceeds from maturities of investment securities available for sale7,687 6,500
Purchase of investment securities held to maturity (28) (364)
Purchase of investment securities available for sale (11,162) (14,782)
Net increase in loans (19,792) (17,641)
Proceeds from sale of mortgage loans 13,359 4,822
Capital expenditures (758) (173)
Proceeds from sales of premises and equipment 207 132
--------- ----------
Net cash used in investing activities (6,116) (13,571)
--------- ----------
Cash flows from financing activities:
Net increase in demand deposits,
NOW accounts and savings accounts 18,747 7,938
Net increase (decrease) in certificates of deposit 355 (6,403)
Dividends (2,703) (752)
Common stock issued under stock option plans 62 122
Purchase of treasury shares 0 (769)
Net (decrease) increase in other borrowings (7,062) 13,456
--------- ----------
Net cash provided by financing activities 9,399 13,592
--------- ----------
Increase in cash and cash equivalents 5,960 2,402
Cash and cash equivalents as of January 1 11,112 10,521
--------- ----------
Cash and cash equivalents as of June 30 $17,072 $12,923
========= ==========
The accompanying notes are an integral part of these statements.
</TABLE>
Note 1 - Basis of Presentation
The consolidated balance sheets as of June 30, 1998 and
December 31, 1997, the consolidated statements of income for the
three and six month periods ended June 30, 1998 and 1997, the
consolidated statements of changes in shareholders' equity as of
December 31, 1997 and June 30, 1998 and the consolidated
statements of cash flows for the six month periods ended June 30,
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 June 30, 1998, and for all periods
presented have been made. Certain prior year amounts have been
reclassified to be consistent with the current year's reporting.
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 1997 Annual Report. The results of operations for
the period ended June 30, 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, due from banks, and federal funds sold.
Generally, Federal funds are purchased and sold for one-day
periods. Supplemental disclosures of cash flows information are
as follows:
Cash paid for six months ended June 30: 1998 1997
Interest paid on deposits and
other borrowed funds $6,103,000 $5,680,000
Income taxes paid $ 425,000 $ 350,000
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
June 30
1998 1997
(Amounts in thousands)
Weighted average shares
outstanding (basic) 2,729 2,741
Impact of common stock equivalents 39 29
------ ------
Weighted average shares
outstanding (diluted) 2,768 2,770
====== ======
For the six months ended
June 30
1998 1997
(Amounts in thousands)
Weighted average shares
outstanding (basic) 2,728 2,750
Impact of common stock equivalents 39 29
------ ------
Weighted average shares
outstanding (diluted) 2,767 2,779
====== ======
<TABLE>
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:
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1998 (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 $37,772 15.06% $20,069 8.00% $25,086 10.00%
Bank 33,545 13.53% 19,833 8.00% 24,791 10.00%
Tier I Capital (to Risk Weighted Assets)
----------------------------------
Corporation $34,634 13.81% $10,035 4.00% $15,052 6.00%
Bank 30,443 12.28% 9,916 4.00% 14,875 6.00%
Tier I Capital (to Average Assets)
----------------------------------
Corporation $34,634 9.61% $14,409 4.00% $18,011 5.00%
Bank 30,443 8.58% 14,188 4.00% 17,735 5.00%
</TABLE>
<TABLE>
<CAPTION>
Note 3 - Investment Securities
Amortized cost and estimated market values of investment securities as of June 30, 1998 (unaudited),
and December 31, 1997, were as follows (amounts in thousands):
Held to Maturity
--------------------------------------------
June 30 December 31
1998 1997
--------------------------- ---------------------------
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 $1,020 $1,028 $1,030 $1,039
Obligations of state and political subdivisions 13,278 13,465 15,025 15,244
Corporate debt securities 1,984 1,994 2,343 2,348
Mortgage - backed securities 6,460 6,504 7,989 8,007
--------- --------- --------- ---------
22,742 22,991 26,387 26,638
Other 1,420 1,420 1,392 1,392
--------- --------- --------- ---------
$24,162 $24,411 $27,779 $28,030
========= ========= ========== =========
Available for sale
--------------------------------------------
June 30 December 31
1998 1997
--------------------------- ---------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
--------- --------- --------- ---------
Equity securities $1,936 $3,692 $1,588 $3,638
U.S. Treasury securities and obligations
of U.S. Government agencies & corporations 16,975 17,169 20,967 21,136
Obligations of state and political subdivisions 16,410 17,199 14,926 15,600
Corporate debt securities 6,920 6,983 4,029 4,080
Mortgage - backed securities 17,391 17,409 14,877 14,865
--------- --------- --------- ---------
$59,632 $62,452 $56,387 $59,319
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Interest income and dividends received on investment securities for the three and six months
ended June 30, 1998 and 1997 are as follows (amounts in thousands):
Three Months Six Months
1998 1997 1998 1997
------------------ ------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
U.S. Government Obligations $68 $75 $136 $148
Obligations of U.S. Government
Agencies and Corporations 552 652 1,127 1,384
Obligations of States and
Political Subdivisions 373 351 756 613
Other Securities, primariy
Notes and Debentures 181 200 327 390
Common Stock 37 20 84 55
------------------ ------------------
$1,211 $1,298 $2,430 $2,590
================== ==================
</TABLE>
<TABLE>
<CAPTION>
Note 4 - Deposits
Deposits are summarized as follows (amounts in thousands):
June 30 December 31
1998 1997
------------- -------------
(Unaudited)
<S> <C> <C>
Demand $41,470 $37,591
Savings
Interest-bearing checking 38,208 32,770
Money Market Accounts 49,164 40,836
Passbook and Statement Savings 39,288 39,532
------------- -------------
$126,660 $113,138
============= =============
Time
Deposits of $100,000 and over 18,499 17,739
Other Time Deposits 105,682 106,087
------------- -------------
124,181 123,826
------------- -------------
Total Deposits $292,311 $274,555
============= =============
</TABLE>
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 change in unrealized gains or
losses on available for sale investment securities. Total
comprehensive income for the three and six months ended June 30,
1998 and 1997 was $1.2 million and $2.4 million, respectively,
and $1.9 million and $2.7 million, respectively, net of tax.
NOTE 6 - Stock Repurchase Program
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 second quarter and six months ended June 30,
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 Computer 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.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities." The
Statement establishes accounting and reporting standards
requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded
in the balance sheet as either an asset or liability measured at
its fair value. The Statement requires that changes in the
derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document,
designate, and assess the effectiveness of transactions that
receive hedge accounting treatment.
The Statement is effective for fiscal years beginning after June
15, 1999. A company may also implement the Statement as of the
beginning of any fiscal quarter after issuance. The Statement
cannot be applied retroactively. No material financial statement
impact is anticipated upon the adoption of Statement No. 133 in
2000
Management's Discussion and Analysis of
Results of Operations and Financial Condition
for the Three and Six Month Periods
Ended June 30, 1998 and 1997
Part 1, Item 2
Results of Operations
Net income for the second quarter and six months ended June
30, 1998, was $1.24 million and $ 2.47 million, respectively,
compared with $1.18 million and $2.32 million, respectively, for
the same periods in 1997. Earnings per share grew 6.5% to $.46
for the second quarter of 1998 from $.43 for the second quarter
of 1997. An increase in earnings per share of 8.3% to $.91 from
$.84 was recorded for the first six months of 1998 compared with
the same period one year earlier. Per share earnings are
weighted to reflect the impact of the stock repurchase program.
Book value per share equaled $13.72 at June 30, 1998, versus
$13.06 at June 30 1997.
The Corporation's annualized return on average assets (ROA)
and return on average equity(ROE) for the first six months of
1998 were 1.39% and 13.38%, respectively, compared to 1.38% and
13.14%, respectively for the same periods ended June 30, 1997
Net interest income for the second quarter of 1998 and 1997
remained steady at $3.5 million. Net interest income for the six
months ended June 30, 1998, recorded modest improvement
increasing $86,000 to $7.16 million compared to $7.07 million for
the six months ended June 30, 1997. Average interest-earning
assets during the six month period ended June 30, 1998, showed a
6.0% growth to $336.8 million with a yield of 8.29%, a 9 basis
point decline compared to the same period in 1997. Average
interest-bearing liabilities recorded a 4.4% growth to $276.4
million with a cost of 4.60%, a 15 basis point increase compared
to the same period in 1997. The result was a decline in the net
interest margin (tax-equivalent basis) to 4.52% at June 30, 1998,
compared to 4.67% at June 30, 1997.
The Corporation expensed a provision for possible loan
losses of $190,000 and $555,000, respectively for the second
quarter and first six months of 1998 versus $192,000 and
$385,000, respectively, for the same periods in 1997. The
provision was increased primarily to cover loan charge-offs while
maintaining the allowance for possible loan losses to total loan
ratio at 1.3%.
Total noninterest income excluding net securities gains
equaled $1.1 million and $2.1 million, respectively, for the
quarter and six months ended June 30, 1998, compared to $871,000
and $1.7 million, respectively, for the same periods ended June
30, 1997. Trust fees recorded strong growth for the second
quarter and six months of 1998 reflecting an increase of 24.9% to
$411,000 for the quarter and 32.9% to $888,000 for the six
months. The Corporation's ability to attract new trust business,
coupled with a strong investment market, were the primary factors
for the growth in trust fees. Service charges, commissions and
fees were up $94,000, or 17.6%, to $627,000 for the second
quarter of 1998 over the second quarter of 1997 due largely to a
significant increase in mortgage refinancing during the period.
Mortgage refinancing activity and commercial deposit fees
assessed contributed to the $67,000, or 6.4% increase to $1.1
million in service charge, commissions and fee income for the six
months ended June 30, 1998, compared to $1.0 million for the same
period in 1997.
The Corporation recorded $196,000 and $495,000,
respectively, in net securities gains for the second quarter and
six months ended June 30, 1998, compared to $93,000 and $204,000,
respectively, for the same periods in 1997. Net securities gains
recorded were from the available-for-sale equities portfolio.
Total noninterest expense increased $227,000, or 8.1%, to
$3.0 million for the second quarter of 1998 versus the second
quarter of 1997 and $327,000, or 5.9%, to $5.9 million for the
six months ended June 30, 1998, versus June 30, 1997. Salaries
and benefits were down $118,000, or 7.5%, to $1.4 million for the
second quarter of 1998 versus the second quarter of 1997 and
$162,000, or 5.1%, to $3.1 million for the first six months of
1998 versus the same period in 1997. The primary contributor to
the decrease in salaries and benefits for the quarter and six
months ended June 30, 1998, was a credit to pension expense of
$135,000 and $201,000, respectively, compared to pension expense
of $44,000 and $90,000, respectively, for the same periods in
1997. The reduction in pension expense was related to the
investment performance of pension plan assets and a change in the
benefit formula used to calculate individual employee benefits.
Other noninterest expense increased $340,000, or 38.4% to $1.2
million for the second quarter and $483,000, or 27.6%, for the
six months ended June 30, 1998, compared to the same periods in
1997. For the six months, higher postage costs ($37,000),
advertising costs ($64,000), software costs ($20,000), loan
collection costs ($41,000) and costs ($380,000) associated with
the acquisition and demolition of real property for a future
project designed to enlarge and renovate corporate headquarters
contributed to the increase in other expense. Offsetting a
portion of the higher costs were lower legal and professional
fees ($32,000), supplies ($13,000) and intangible amortization
($12,000).
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 30% of the software programs and data
processing systems achieving Year 2000 compliance as of June 30,
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.
Costs associated with Year 2000 readiness have not been and are
not expected to be material in any one year. Year 2000 costs are
recognized as they are incurred.
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 commercial customers have
been identified and evaluated for Year 2000 preparedness.
Personal contact has been made or will be made with all
commercial customers whose aggregate outstanding loans total
$250,000 (approximately 75% to 80% of the commercial loan
portfolio) or more, to assess their Year 2000 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 assessments and follow-up communication will be
substantially complete by the end of the third quarter of 1998.
Federal income tax expense for the second quarter and six
months ended June 30, 1998, was $375,000 and $769,000,
respectively, compared to $344,000 and $745,000, respectively,
for the same periods ended June 30, 1997. The effective tax
rates for the six month periods ended June 30, 1998 and 1997 were
23.7% and 24.3% versus a statutory rate of 34.0%. The variance
between the effective tax rate and the statutory tax rate is due
primarily to interest income earned on tax-free investments and
tax-free loans.
Financial Condition
Total assets grew $11.8 million, or 3.3% to $365.7 million
at June 30, 1998, from $353.9 million at December 31, 1997.
Interest-bearing deposits in other banks increased $5.7 million
to $5.9 million at June 30, 1998, from $249,000 at December 31,
1997, representing balances held at the Federal Home Loan Bank of
Pittsburgh (FHLB). Net loans during the six month period from
December 31, 1997, increased $6.4 million to $247.6 million at
June 30, 1998, from $241.2 million. The increase in loans for
the period was attributed largely to mortgage loan originations,
a strong economy and the low interest rate environment. Net loans
grew despite the sale of approximately $13.4 million in mortgage
loans to the secondary market, primarily Federal National
Mortgage Association (FNMA). Investment securities held-to-
maturity declined $3.6 million to $24.1 million due to scheduled
maturities and bond calls. Investment securities purchased were
classified as available-for-sale and contributed to a $3.1
million increase in available-for-sale investment securities
despite the sale of some available-for-sale equity securities.
Proceeds from the sale of these equities during the six months
ended June 30, 1998, equaled $726,000 and included $495,000 in
securities gains. Net unrealized gains on available-for-sale
securities at June 30, 1998 and December 31, 1997, was $1.9
million.
Net charge-offs for the second quarter and six months ended
June 30, 1998, totaled $171,000 and $534,000, respectively,
versus $112,000 and $345,000, respectively, for the same periods
in 1997. For the first six months of 1998, the consumer loan
portfolio recorded 78.6% of the total net charge-offs compared to
21.4% recorded for the commercial loan portfolio. As discussed
in the 1997 Annual Report, personal bankruptcies have contributed
to the Corporation's recent experience of high consumer charge-offs.
More stringent consumer lending guidelines implemented by
management in late 1997 and consumer lender training courses
completed by all lending staff in the spring of 1998 will serve
to greatly reduce the adverse impact consumer bankruptcies have
on the Corporation. The full impact of the new guidelines and
training will be evident some time in the future. The annualized
ratio of net charge-offs to average loans was .44% at June 30,
1998, compared to .29% at December 31, 1997, and .30% at June
30, 1997.
Nonperforming loans held steady at $1.7 million at June 30,
1998 and December 31, 1997. Included in nonperforming loans at
June 30, 1998, were nonaccrual loans totaling $1.5 million and
loans past due more than ninety days totaling $176,000 compared
to $1.1 million and $564,000, respectively, at December 31, 1997.
The Corporation recorded other real estate owned equaling
$197,000 at June 30, 1998, versus $185,000 at year-end 1997.
Nonperforming assets represented .42% of total assets at June 30,
1998, versus .54% at December 31, 1997.
The allowance for possible loan losses totaled $3.3 million
at June 30, 1998 and December 31, 1997, and represented 1.33% and
1.35%, respectively, of total loans. The allowance provided
coverage for nonperforming loans of 2.0 times compared to 1.9
times at December 31, 1997.
Total deposits grew $17.8 million, or 6.4%, to $292.3
million at June 30, 1998, from $274.5 million at December 31,
1997. Savings and interest checking registered the largest
increase of $13.5 million to $126.7 million at June 30, 1998,
from $113.1 million at December 31, 1997. A new product (Money
Management Account) introduced a year ago has been instrumental
in attracting and retaining new deposit dollars. Demand deposit
accounts realized strong growth with an increase of $3.9 million,
or 10.3%, to $41.5 million at June 30, 1998, from $37.6 million
at December 31, 1997. Securities sold under agreements to
repurchase increased $3.8 million to $19.9 million at June 30,
1998, from $16.1 million at December 31, 1997. The growth in
deposits enabled the Corporation to reduce its other borrowing
with the FHLB by $9.5 million to $11.9 million at June 30, 1998.
Other borrowing constitutes overnight and term borrowing with the
FHLB. In the first quarter of 1998, the Corporation paid a
special cash dividend and a regular cash dividend to shareholders
which totaled $2.3 million. The payment of these cash dividends,
which were declared in November 1997 and reflected in the
financial statements at year-end 1997, was primarily responsible
for the decrease in other liabilities to $3.2 million at June 30,
1998, from $5.5 million at December 31, 1997.
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 22.3% at June 30, 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. As reported earlier, the Corporation sold
approximately $13.4 million mortgage loans to FNMA during the
first six months of 1998 and had advances outstanding with FHLB
totaling $11.9 million. The Corporation's maximum borrowing
capacity with FHLB equals $82 million. Management believes that
liquidity is adequate to meet the borrowing and deposit
withdrawal needs of its customers.
Capital Adequacy
Total shareholders' equity increased $2.1 million to $38.4
million at June 30, 1998, from $36.3 million at December 31,
1997, primarily the result of earnings retention from the first
six months 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 the first
quarter of 1998. A regular second quarter cash dividend of $.15
per share was approved by the Board and paid to shareholders on
May 29, 1998. Cash dividends paid to shareholders in the second
quarter and six months ended June 30, 1998, totaled $420,000 and
$2.7 million, respectively, compared with $375,000 and $752,000
for the same periods ended June 30, 1997.
Capital adequacy is currently defined by banking regulatory
agencies through the use of several minimum required ratios. At
June 30, 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 June 30, 1998, were 9.61%, 13.81% and 15.06%,
respectively.
PART II - OTHER INFORMATION
Item 4. SUBMISSIONS OF MATTERS TO VOTE OF SECURITY HOLDERS
The 1998 Annual Meeting of Shareholders (the "Meeting") of
the Corporation was held on April 28, 1998. Notice of the
Meeting was mailed to shareholders on or about April 1, 1998,
together with proxy solicitation materials prepared in accordance
with Section 14(a) of the Securities Exchange Act of 1934, as
amended, and the regulations promulgated thereunder.
The Meeting was held for the following purpose:
1. To elect four Class B directors to hold office for 3
years from the date of election and until their
successors are elected and qualified.
There was no solicitation in opposition to the nominees of
the Board of Directors for election to the Board. All nominees
of the Board of Directors were elected. The number of votes cast
for as well as the number of votes withheld for each of the
nominees for election to the Board of Directors, were as follows:
Votes
Nominee Votes For Withheld
Charles S. Bender II 2,155,854.236 758.0012
Omer L. Eshleman 2,154,827.532 1,784.7052
Jeryl C. Miller 2,151,883.71 4,728.5278
Stephen E. Patterson 2,141,082.292 15,529.9457
Item 6. Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K
There were no reports filed on Form 8-K for the quarter
ended June 30, 1998
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 August 12, 1997 /s/ William E. Snell, Jr.
----------------------
William E. Snell, Jr.
President and Chief Executive Officer
Date August 12, 1997 /s/ Elaine G. Meyers
----------------
Elaine G. Meyers
Treasurer and Chief Financial Officer
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