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, 1999
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 6010), CHAMBERSBURG,PA 17201-0819
(Address of principal executive officer)
717/264-6116
(Registrant's telephone number, including area code)
_________________________________________________________________
__
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
There were 2,794,861 outstanding shares of the Registrant's
common stock as of November 4, 1999.
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets
as of September 30, 1999 (unaudited) and
December 31, 1998
Consolidated Statements of
Income for the Three and Nine Months ended
September 30, 1999 and 1998 (unaudited)
Consolidated Statements of Changes in
Shareholders' Equity for the Nine Months
ended September 30, 1999 and 1998 (unaudited)
Consolidated Statements of Cash
Flows for the Nine Months Ended September
30, 1999 and 1998 (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 3 Quantitative and Qualitative Disclosures about Market Risk
Item 6 - Exhibits and Reports on Form 8-K
SIGNATURE PAGE
PART I, ITEM 1
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands)
September 30 December 31
1999 1998
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $14,568 $12,895
Interest bearing deposits in other banks 2,497 11,514
Investment securities available for sale 129,069 127,118
Loans, net 273,256 258,488
Premises and equipment, net 5,351 5,889
Other assets 10,328 9,097
------------- ------------
Total Assets $435,069 $425,001
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits: (Note 3)
Demand (non-interest bearing) $42,772 $42,224
Savings and Interest checking 147,410 141,477
Time 143,543 142,878
------------- ------------
Total Deposits 333,725 326,579
Securities sold under agreements to repurchase 24,958 24,414
Other borrowings 34,636 30,744
Other liabilities 2,625 3,363
------------- ------------
Total Liabilities 395,944 385,100
Commitments and Contingencies - -
Shareholders' equity:
Common stock $1 par value per share, 15,000 shares authorized
with 3,045 shares issued and 2,796 and 2,802 shares
outstanding at June 30,1999 and December 31,1998,respectively. 3,045 3,045
Capital stock without par value, 5,000 shares authorized
with no shares issued or outstanding - -
Additional paid in capital 19,833 19,793
Retained earnings 21,850 20,562
Accumulated other comprehensive income (253) 1,783
Treasury stock (Note 5) (4,864) (4,620)
Unearned compensation (486) (662)
------------- ------------
Total shareholders' equity 39,125 39,901
------------- ------------
Total Liabilities and Shareholders' Equity $435,069 $425,001
============= ============
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 Nine Months Ended
September 30 September 30
1999 1998 1999 1998
---------------------------- -----------------------------
INTEREST INCOME
Interest on loans $5,506 $5,443 $16,330 $16,377
Interest on deposits in other banks 109 164 274 227
Interest and dividends on investments:
Taxable interest 1,129 816 3,202 2,406
Tax exempt interest 607 400 1,803 1,156
Dividends 48 40 139 123
------------ ----------- ------------ ------------
Total interest income 7,399 6,863 21,748 20,289
------------ ----------- ------------ ------------
INTEREST EXPENSE
Interest on deposits 3,035 2,835 8,830 8,241
Interest on securities sold under agreements to repurchase 307 307 847 766
Interest on other borrowings 463 193 1,314 631
------------ ----------- ------------ ------------
Total interest expense 3,805 3,335 10,991 9,638
------------ ----------- ------------ ------------
Net interest income 3,594 3,528 10,757 10,651
Provision for possible loan losses 180 165 575 720
------------ ----------- ------------ ------------
Net-interest income after provision
for possible loan losses 3,414 3,363 10,182 9,931
------------ ----------- ------------ ------------
NONINTEREST INCOME
Trust fees 571 484 1,727 1,373
Service charges, commissions and fees 439 450 1,350 1,368
Other 63 21 97 83
Securities gains 188 68 188 563
------------ ----------- ------------ ------------
Total noninterest income 1,261 1,023 3,362 3,387
------------ ----------- ------------ ------------
NONINTEREST EXPENSE
Salaries and benefits 1,755 1,421 4,747 4,177
Net occupancy expense 151 155 483 465
Furniture and equipment expense 155 161 485 469
Advertising 119 88 375 240
Legal & Professional Fees 101 149 269 285
Data processing 192 187 664 616
Pennsylvania capital shares tax 91 86 272 255
Other 541 546 1,555 1,973
------------ ----------- ------------ ------------
Total noninterest expense 3,105 2,793 8,850 8,480
------------ ----------- ------------ ------------
Income before Federal income taxes 1,570 1,593 4,694 4,838
------------ ----------- ------------ ------------
Federal income tax expense 290 416 890 1,185
------------ ----------- ------------ ------------
Net income $1,280 $1,177 $3,804 $3,653
============ =========== ============ ============
Basic earnings per share $0.47 $0.43 $1.39 $1.34
Weighted average shares outstanding (000's) 2,727 2,730 2,728 2,729
Diluted earnings per share $0.46 $0.43 $1.37 $1.32
Weighted average shares outstanding (000's) 2,766 2,768 2,767 2,767
The accompanying notes are an integral part of these statements.
</TABLE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Shareholders' Equity
for the nine months ended September 30, 1998 and 1999
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Accumulated
Additional Other
Common Paid-in Retained ComprehensiveTreasury Unearned
(Amounts in thousands, except per share d Stock Capital Earnings Income Stock Compensatio Total
---------------------------------------------------------------------------
Balance at December 31, 1997 $3,045 $19,761 $17,087 $1,935 ($4,760) ($763) $36,305
Comprehensive income:
Net income - - 3,653 - - - 3,653
Unrealized holding gains arising
during current period, net of tax - - - 340 - - 340
Reclassification adjustment for realized
gains included in net income, net of - - - (359) - - (359)
----------------
Total Comprehensive income 3,634
Cash dividends declared, $.31 per share - - (868) - - - (868)
Cash in lieu of fractional shares
on 50% stock split - - (14) - - - (14)
Common stock issued under
stock option plans - 17 - - 81 - 98
Amortization of unearned
compensation - - - - - 75 75
---------------------------------------------------------------------------
Balance at September 30, 1998 $3,045 $19,778 $19,858 $1,916 ($4,679) ($688) $39,230
======== ======== ======== =========== ======== ========== ========
Balance at December 31, 1998 $3,045 19,793 20,562 1,783 (4,620) (662) $39,901 $39,901
Comprehensive income:
Net income - - 3,804 - - - 3,804
Unrealized holding losses arising
during current period, net of tax - - - (2,122) - - (2,122)
Reclassification adjustment for realized
gains included in net income, net of - - - 83 - - 83
Other comprehensive income, net of tax - - - 3 - - 3
-----------------
Total Comprehensive income 1,768
Cash dividends declared, $.90 per share - - (2,516) - - - (2,516)
Common stock issued under
stock option plans - 30 - - 98 - 128
Tax benefit of restricted stock transacti - 10 - - - - 10
Acquisition of 11,975 shares of treasury - - - - (342) - (342)
Amortization of unearned
compensation - - - - - 176 176
------------------------------------------------------------------------------
Balance at September 30, 1999 $3,045 $19,833 $21,850 ($253) ($4,864) ($486) $39,125 $39,125
======== ======== ======== =========== ======== ========== ========
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>
1999 1998
------------------------------
Cash flows from operating activities:
Net Income 3,804 3,653
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 594 564
Net amortization of securities premiums and discounts (252) (24)
Provision for possible loan losses 575 720
Securities gains, net (188) (563)
Mortgage loans originated for sale (11,578) (18,273)
Proceeds from sale of mortgage loans 11,572 18,233
Principal loss on sales of mortgage loans 6 40
(Gain) loss on sale of premises and equipment (44) 294
Loan charge-offs, net of recoveries (327) (658)
(Increase) in interest receivable and other assets (926) (80)
(Decrease) increase in interest payable and other liabilities 179 (64)
------------------------------
Net cash provided by operating activities 3,415 3,842
------------------------------
Cash flows from investing activities:
Proceeds from sales of investment securities available for sale 777 851
Proceeds from maturities of investment securities held to maturit - 4,846
Proceeds from maturities of investment securities available for s 90,475 11,506
Purchase of investment securities available for sale (95,851) (20,776)
Net increase in loans (15,010) (29,323)
Capital expenditures (337) (980)
Proceeds from sales of premises and equipment 325 208
------------------------------
Net cash used in investing activities (19,621) (33,668)
------------------------------
Cash flows from financing activities:
Net increase in demand deposits,
NOW accounts and savings accounts 6,481 16,515
Net increase in certificates of deposit 665 18,039
Net increase (decrease) in other borrowings 4,436 (399)
Dividends paid (2,516) (3,151)
Common stock issued under stock option plans 138 98
Purchase of treasury shares (342) -
------------------------------
Net cash (used in) provided by financing activities 8,862 31,102
------------------------------
(Decrease) Increase in cash and cash equivalents (7,344) 19,093
Cash and cash equivalents as of January 1 24,409 11,112
------------------------------
Cash and cash equivalents as of September 30 17,065 30,205
======== ========
The accompanying notes are an integral part of these statements.
</TABLE>
FRANKLIN FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The consolidated balance sheets as of September 30, 1999 and
December 31, 1998, the consolidated statements of income for the
three-month and nine-month periods ended September 30, 1999 and
1998, the consolidated statements of changes in shareholders'
equity for the nine-month periods ended September 30, 1999 and
1998 and the consolidated statements of cash flows for the nine-
month periods ended September 30, 1999 and 1998 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, 1999, 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 1998 Annual Report. The results of operations for
the period ended September 30, 1999, 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: 1999 1998
interest paid on deposits and other
borrowed funds . . . . . $10,903,000 $9,252,000
Income taxes paid $1,032,000 $1,425,000
Earnings per share is computed based on the weighted average
number of shares outstanding during each quarter, adjusted
retroactively for stock splits and stock dividends. 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
September 30
1999 1998
(Amounts in thousands)
Weighted average shares outstanding (basic) 2,727 2,730
Impact of common stock equivalents 39 38
Weighted average shares outstanding (diluted) 2,766 2,768
====== ======
For the nine months ended
September 30
1999 1998
(Amounts in thousands)
Weighted average shares outstanding (basic) 2,728 2,729
Impact of common stock equivalents 39 38
Weighted average shares outstanding (diluted) 2,767 2,767
====== ======
<TABLE>
<CAPTION>
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 September 30, 1999 (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 $41,568 14.09% $23,599 8.00% N/A
Bank 37,988 12.97% 23,438 8.00% $29,297 10.00%
Tier I Capital (to Risk Weighted Assets)
Corporation $37,879 12.84% $11,800 4.00% N/A
Bank 34,324 11.72% 11,718 4.00% $17,578 6.00%
Tier I Capital (to Average Assets)
Corporation $37,879 8.76% $17,298 4.00% N/A
Bank 34,324 7.93% 17,324 4.00% $21,654 5.00%
As of December 31, 1998
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 $40,048 13.97% $22,940 8.00% N/A
Bank 35,708 12.58% 22,706 8.00% $28,383 10.00%
Tier I Capital (to Risk Weighted Assets)
Corporation $36,500 12.73% $11,470 4.00% N/A
Bank 32,160 11.33% 11,353 4.00% $17,030 6.00%
Tier I Capital (to Average Assets)
Corporation $36,500 9.16% $15,935 4.00% N/A
Bank 32,160 8.13% 15,826 4.00% $19,782 5.00%
</TABLE>
<TABLE>
<CAPTION>
Note 3 - Deposits
Deposits are summarized as follows (amounts in thousands):
September 30 December 31
1999 1998
---------- ----------
(Unaudited)
<S> <C> <C>
Demand $42,772 $42,224
Savings
Interest-bearing checking 40,504 46,707
Money Market Accounts 67,622 56,623
Passbook and Statement Savings 39,284 38,147
---------- ----------
$147,410 $141,477
---------- ----------
Time
Deposits of $100,000 and over 36,036 33,223
Other Time Deposits 107,507 109,655
---------- ----------
143,543 142,878
---------- ----------
Total Deposits $333,725 $326,579
========= =========
</TABLE>
NOTE 4 Interest Rate Cap
On September 27, 1999, the Corporation entered into an
interest rate cap transaction as a vehicle to partially hedge net
interest income against the effect of rising market interest
rates. The transaction was effective September 29, 1999, has a
notional amount of $5,000,000, a term of five years, a strike
rate of 6.00% and is indexed to 3-month LIBOR. The cost of the
transaction was $190,000 and at September 30, 1999, the fair
market value of the cap was $195,187. Accordingly, a gain of
$3,423(net of tax) was recorded as comprehensive income for the
third quarter and nine months ended September 30, 1999.
NOTE 5 Stock Repurchase Program
On March 4, 1999, 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 third quarter and nine months
ended September 30, 1999, 3,000 shares of the Corporation's
common stock were repurchased at a cost of approximately $82,500.
Under a similar plan authorized by the Board of Director in
March 1998, 8,975 shares of the Corporation's common stock were
repurchased at a cost of approximately $260,000 during the first
quarter of 1999.
NOTE 6 - 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. The Corporation adopted
SOP 98-1 on January 1, 1999; the adoption had no effect on the
Corporation's financial results.
Management's Discussion and Analysis of
Results of Operations and Financial Condition
for the Three and Nine Month Periods
Ended September 30, 1999 and 1998
PART 1, ITEM 2
Results of Operations
In the third quarter and nine months ended September 30,
1999, the Corporation earned $1.28 million and $3.8 million,
respectively, compared to $1.18 million and $3.65 million,
respectively, for the comparable periods ended September 30,
1998. Basic earnings per share equaled $.47 and $1.39,
respectively, for the third quarter and nine months in 1999
versus $.43 and $1.34, respectively, for the same periods in
1998. Book value per share equaled $13.99 at September 30, 1999,
compared to $14.01 at September 30, 1998.
The Corporation's annualized return on average assets (ROA)
and return on average equity (ROE) for the first nine months of
1999 were 1.19% and 12.92%, respectively, compared to 1.34% and
12.94%, respectively, for the same periods ended September 30,
1998. The decline in these two measurements reflects soft
earnings, a 12% growth in total assets over the twelve month
period and a strong capital position.
Net Interest Income
Net interest income recorded growth of 1.87% to $3.59
million for the third quarter of 1999 from $3.53 million for the
third quarter of 1998. The yields earned on interest-earning
assets for the third quarter of 1999 versus the third quarter of
1998 recorded bigger declines than the rates paid on interest-
bearing liabilities. Accordingly, smaller spreads and a squeeze
on the Corporation's net interest margin resulted. Interest-
earning assets were 17.9 % higher in the third quarter of 1999
versus the third quarter of 1998 and averaged $400.2 million;
interest-bearing liabilities were also 21.2% higher in the third
quarter of 1999 versus the third quarter of 1998 and averaged
$338.4 million. The growth in interest-bearing liabilities
exceeding the growth in interest-earning assets and the smaller
spreads dictated by a competitive market served to limit the
Corporation's growth in net interest income.
For the nine months ended September 30, 1999, net interest
income recorded an increase of $106,000, or .99%, to $10.76
million compared to $10.65 million for the same period ended
September 30, 1998. Interest-bearing liabilities growing at a
faster pace than interest-earning assets plus smaller spreads and
squeezed margins all contributed to limit the Corporations's
growth in net interest income for the nine-month period. The
Corporation'ss spread decreased 38 basis points to 3.23% at
September 30, 1999, versus 3.61% at September 30, 1998; net
interest margin declined 51 basis points to 3.90% at September
30, 1999, versus 4.41% at September 30, 1998.
Provision for Possible Loan Losses
The Corporation expensed $180,000 and $575,000 as a
provision for possible loan losses for the third quarter and
nine months, respectively, in 1999 versus $165,000 and $720,000,
respectively, for the same periods in 1998. The allowance as a
percentage of loans was 1.38% at September 30, 1999, versus 1.33%
at September 30, 1998. The provision reflects the level of loan
charge-off activity and growth in the loan portfolio.
Noninterest Income
Noninterest income, excluding securities gains, increased
$118,000, or 12.36%, to $1.07 million for the third quarter ended
September 30, 1999, compared to $955,000 for the third quarter
ended September 30, 1998. The primary contributors to
noninterest income for the quarter were trust fees, up $87,000,
and other income, up $42,000. The increase in trust fees was due
to new business and the market related appreciation in trust
assets. Other income for the quarter reflects a recognized gain
of $44,000 on real estate sold. Partially offsetting the
increase in trust fees and other income was a net decrease of
$11,000 in service charges, commissions and fees. This decrease
was attributable primarily to lower loan fees (down $58,000)
related to the lower volume of mortgage loans originated during
the third quarter of 1999 versus the third quarter of 1998. An
increase in deposit fees, up $13,800, miscellaneous fees, up
$13,900 and fees from the sales of mutual funds and annuities, up
$19,000 almost entirely offset the decrease in loan fees.
Noninterest income, excluding securities gains, for the nine
months ended September 30, 1999, grew $350,000, or 12.39%, to
$3.17 million compared to $2.82 million for the same period in
1998. The growth in noninterest income for the nine-month period
was due entirely to the growth in trust fee income which recorded
an increase of $354,000 to $1.7 million. New business and
appreciated trust assets are largely responsible for this strong
increase.
The Corporation recognized securities gains totaling
$188,000 for the quarter and nine months ended September 30, 1999
versus $68,000 and $563,000 for the third quarter and nine months
ended September 30, 1998, respectively. All of the securities
gains were taken from the Corporation's available for sale bank
stock portfolio.
Noninterest Expense
Noninterest expense for the third quarter of 1999 grew
$312,000, or 11.17%, to $3.1 million from $2.79 million for the
third quarter of 1998. Salaries and benefits grew $334,000, or
23.5%, to $1.76 million for the third quarter of 1999 versus
$1.42 million for the third quarter of 1998. Salaries and
commissions contributed $99,000 to the increase and benefits
contributed $235,000. Higher health insurance premiums, a
smaller pension credit and expense related to a long-term
incentive plan were primarily responsible for the increase in
benefits for the quarter.
Noninterest expense for the nine months ended September 30,
1999, was up $370,000, or 4.36%, to $8.85 compared to $8.48
million for the nine-month period ended September 30, 1998.
Salaries and commissions accounted for approximately $213,000 of
the increase; benefits accounted for approximately $357,000.
Higher health insurance premiums, higher payroll taxes, a smaller
pension credit and expense related to a long-term incentive plan
were the main contributors to the increase in benefit expense for
the nine months. Advertising expense was up $135,000, or 56.25%,
to $375,000 for the nine months ended September 30, 1999, versus
$240,000 for the nine months ended September 30, 1998. Costs
related to advertising in a new market and to promote a new line
of business ( sales of mutual funds, annuities and insurance
products) were primarily responsible for the increase in
advertising expense. Other expense recorded a decrease of
$418,000, or 21.19%, to $1.56 million for the nine months ended
September 30, 1999, from $1.97 million for the nine months ended
September 30, 1998. Nonrecurring expenses in 1998 related to the
write-down and demolition of bank-owned buildings largely
accounted for the decrease in other expense. For the nine months
ended September 30, 1999, the Corporation expensed $14,000 for
demolition expense compared to approximately $470,000 for these
expenses in the nine months ended September 30, 1998. Higher
expenses associated with occupancy, legal and professional fees,
data processing and Pennsylvania capital shares tax accounted for
the remaining $83,000 increase in noninterest expense for the
nine months ended September 30, 1999 versus the nine months ended
September 30, 1998.
Federal income tax expense for the third quarter and nine
months ended September 30, 1999, was $290,000 and $890,000,
respectively, compared to $416,000 and $1.2 million,
respectively, for the same periods ended September 30, 1998. The
effective tax rates for the nine month periods ended September
30, 1999 and 1998 were 18.96% and 24.49%, respectively, versus a
statutory rate of 34.0%. The decrease in the effective tax rate
for 1999 versus 1998 is primarily due to a larger portion of tax-
exempt income relative to pre-tax net income. The variance
between the effective tax rate and the statutory tax rate is due
primarily to interest income earned on tax-free investments, tax-
free loans and low income housing tax credits.
The Year 2000 Issue
The Corporation expects to be fully compliant with all
mission-critical systems for Year 2000. Some systems dependent
on third party compliance, namely public utilities such as
electric, water, sewer, gas and telephone, are out of our
control but management continues to monitor their status. In the
fourth quarter, the Corporation will continue with its final
mission-critical testing, communicate its Year 2000 Business
Resumption Plan and Cash Contingency Plans to employees on a need-
to-know basis and finalize media responses and event planning for
the period from midnight 12/31/99 until the next business day on
1/3/2000. The Corporation has remained in contact with companies
that are commercial borrowers to ascertain their Year 2000
compliance status. To date, the Corporation does not know of any
commercial borrower whose Year 2000 status is of concern for the
Corporation's management. No material Year 2000 costs have been
incurred or reflected in the third quarter and nine months
results. To date, Year 2000 costs have not been material nor do
they expect to be.
Financial Condition
Total assets grew $11.1 million, or 2.60%, to $435.1 million
at September 30, 1999, from $425.0 million at December 31, 1998.
Net loans recorded moderate growth increasing $14.8 million to
$273.3 million at September 30, 1999, from $258.5 million at
December 31, 1998. Mortgage loans recorded the highest growth
over the nine months, increasing $7.7 million. Commercial and
consumer loan growth followed with increases of $5.4 million and
$1.7 million, respectively, for the nine-month period. During
the first nine months of 1999 the Corporation sold approximately
$11.6 million in originated loans to the secondary market,
primarily FNMA; this compares with approximately $18.3 million
sold during the first nine months of 1998. Funding for the loan
growth came primarily from interest-bearing deposits in other
banks (Federal Home Loan Bank of Pittsburgh) and deposit growth.
Total deposits grew $7.1 million, or 2.19%, to $333.7 million.
Money market deposit accounts recorded an increase of
approximately $11.0 million to $67.6 million at September 30,
1999, and accounted for most of the growth in deposits.
Partially offsetting the increase in money market accounts was a
decrease of $6.2 million in interest-bearing checking accounts.
Competition from other local financial institutions and from
nonfinancial institutions continue to make deposit gathering a
challenge for the Corporation.
Net charge-offs for the third quarter and nine months ended
September 30, 1999, were $59,000 and $327,000, respectively,
compared to $121,000 and $658,000, respectively, for the same
periods ended September 30, 1998. The Corporation's consumer loan
portfolio was responsible for 98.2% of the net charge-offs year-
to-date. As discussed in the Corporation's 1998 Annual Report,
personal bankruptcies of loan customers continue to have an
adverse impact on the Corporation. Although significant
improvement has occurred in the first nine months of 1999,
management remains alert to any signs that would indicate
problems ahead. The implementation of more stringent
underwriting standards and the intense consumer loan training for
all consumer loan personnel is largely responsible for the
improvement achieved to date and will help to reverse the trend
in the future. The annualized rate of net charge-offs to average
loans was .16% at September 30, 1999, compared to .44% and .35%
at December 31, 1998 and September 30, 1998, respectively.
Nonperforming loans totaled $3.3 million at September 30,
1999, compared to $1.6 million and $1.1 million at December 31,
1998 and September 30, 1998, respectively. Included in
nonperforming loans at September 30, 1999, were nonaccrual loans
totaling $2.8 million and $558,000 in loans past due more than 90
days. Nonaccrual loans and loans past due more than 90 days
equaled $1.3 million and $314,000, respectively, at December 31,
1998. The significant increase in nonaccrual loans at September
30, 1999, was due to one large commercial credit.
The collateral behind this specific loan shows some deficiency
and, accordingly, has been considered in evaluating the adequacy
of the allowance for possible loan losses. The Corporation had
other real estate owned (OREO) totaling $492,000 at September 30,
1999, compared to $527,000 at year-end 1998. Nonperforming
assets represented .88% of total assets at September 30, 1999
compared to .51% at December 31, 1998.
The allowance for possible loan losses totaled $3.8 million
at September 30, 1999, compared to $3.5 million at December 31,
1998, and represented 1.38% and1.35%, respectively of total
loans. The allowance at September 30, 1999, provided coverage
for nonperforming loans at a rate of 1.35 times compared to 2.10
times at December 31, 1998.
Franklin County's economy has remained stable despite the
loss of more than 1,000 jobs in the past year, mostly in
manufacturing and mostly due to cutbacks at Letterkenny Army
Depot and closings at several local manufacturing plants. The
job losses have been partially offset by 700 additional jobs in
the hospitality and service sectors. Despite this shakeup of the
local job market, Franklin County has enjoyed a low unemployment
rate. Although the unemployment rate has edged up a bit to 4.5%,
it is still at the state and national averages (both 4.5%).
Local officials are continuously talking to and working with
companies who have expressed interest in Franklin County which is
located along the Interstate 81 corridor.
Liquidity
The Corporation's liquidity position (net cash, short-term
and marketable assets divided by net deposits and short-term
liabilities) was 38.3% at September 30, 1999. The Corporation
actively sells mortgage loans to the secondary market (
primarily FNMA) and looks to its borrowing ability with FHLB to
satisfy any liquidity needs. The Corporation sold approximately
$ 11.6 million in mortgage loans to the secondary market
(primarily FNMA) during the first nine months of 1999 and had
advances outstanding with FHLB totaling $34.6 million. The
Corporation's maximum borrowing capacity with FHLB equals $104.4
million. Management believes that liquidity is adequate to meet
the borrowing and deposit withdrawal needs of its customers.
Capital Adequacy
Total shareholders' equity decreased $776,000 to $39.1
million at September 30, 1999, from $39.9 million at December 31,
1998, primarily the result of unrealized securities losses and
cash dividends declared during the first nine months of 1999,
including a $.40 per share special cash dividend.
Cash dividends declared in the third quarter and nine months
ended September 30, 1999, totaled approximately $503,000 and $2.5
million, respectively. For the first nine months of 1998, cash
dividends declared totaled $868,000.
Capital adequacy is currently defined by banking regulatory
agencies through the use of several minimum required ratios. At
September 30, 1999, 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 September 30, 1999, were 8.76%, 12.84 % and
14.09 %, respectively. For more information refer to Note 2 of
the financial statements.
PART I, ITEM 3
Qualitative and Quantitative Disclosures about Market Risk
There were no material changes in the Corporation's exposure
to market risk during the nine months ended September 30, 1999.
However, in the third quarter the Corporation entered into an
interest rate cap as disclosed in Note 4. For more information
on market rate risk refer to the Corporation's 1998 10-K.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults by the Company on its Senior Securities
None
Item 4. Results of Votes of Security Holders
None
Item 5. Other Information
None
Item 6a. Exhibits and Reports on Form 8-K
(a) Exhibit 10 Material Contracts
10. Severance Benefit Agreement
(b) Reports on Form 8-K
A Form 8-K dated July 15, 1999 was filed in
connection with a change in Registrant's Certifying
Accountants.
Exhibit 10 Material Contracts
SEVERANCE BENEFIT AGREEMENT
MADE as of and effective this 28th day of July, 1999, by and
between FRANKLIN FINANCIAL SERVICES CORPORATION, a Pennsylvania
business corporation having its principal office at P.O. Box T,
20 South Main Street, Chambersburg, Pennsylvania 17201-0819 (the
"Company"), and THEODORE D. McDOWELL, an adult individual
("Executive").
Background:
The Company wishes to hire Executive as its Executive Vice
President for Sales and Service. As an inducement to Executive
to accept the Company's offer of employment, the Company is
entering into this Agreement in order to provide, on the terms
and subject to the conditions hereinafter set forth, a severance
benefit to Executive in the event that, following a change in
control of the Company, Executive's employment is terminated by
the Company without cause or in the event that Executive
terminates his employment for good reason.
WITNESSETH:
NOW, THEREFORE, in consideration of the undertakings
hereinafter set forth and intending to be legally bound, the
parties hereby agree as follows:
1. SEVERANCE BENEFIT
The Company of the Surviving Corporation (as
hereinafter defined) shall pay to
Executive the sum of $150,000 in the event that at any time
within 18 months following the occurrence of a Change in Control
(as hereinafter defined) of the Company and prior to the
termination of this Agreement:
(a) Termination of Employment without Cause. Executive's
employment is terminated without Cause
(as hereinafter defined); or
(b) Termination by Executive for Good Reason. Executive
terminates his employment for Good Reason
(as hereinafter defined).
The foregoing amount shall be paid in a lump sum, subject to
withholding by the Company of all applicable federal, state and
local withholding taxes (the Severance Payment), immediately
following the termination of Executive's employment.
2. CERTAIN DEFINITIONS
(a) Change in Control. As used in this Agreement, "Change in
Control" shall mean the first to occur of any of the
following events:
(i) Acquisition of Company Securities. Any "Person" (without
the meaning of such term as used in Sections 13(d) and
14(d) of the Securities and Exchange Act of 1934),
other than any employee benefit plan maintained by
the Company or by Farmers and Merchants Trust Company
of Chambersburg ("F&M Trust") or any entity holding the
Company's voting securities for, or pursuant to, the
terms of any such plan (a "Benefit Plan), is or becomes
the beneficial owner, directly or indirectly, of Company
securities representing 24.99% or more of the combined
voting power of the Company's then outstanding
securities;
(ii) Disposition of Assets. A binding written agreement is
executed providing for a sale, exchange, transfer or
other disposition of substantially all of the assets of
the Company (a sale of F&M Trust shall be deemed to be a
sale of substantially all of the Company's assets) or of
F&M Trust, to another entity, except to an entity
controlled directly or indirectly by the Company;
(iii)Merger, Consolidation or Reorganization. A binding
written agreement is executed providing for a merger,
consolidation, or other reorganization of the Company,
unless:
(A) Under the terms of the Agreement providing for such
merger, consolidation or reorganization: (1) the
shareholders of the Company immediately before such
merger, consolidation or reorganization will own,
directly or indirectly immediately following such
merger, consolidation or reorganization, more than
50% of the combined voting power of the outstanding
voting securities of the corporation resulting
from such merger,consolidation or reorganization,
(the "Surviving Corporation") in substantially the
same proportion as their ownership of the voting
securities of the Company immediately before such
merger,consolidation or reorganization;
and (2) the individuals who were members of the
Company's board of directors immediately prior to
the execution of such agreement will constitute more
than 50% of the members of the board of directors
of the Surviving Corporation after such merger,
consolidation or reorganization;or
(B) Both of the following apply; (1) under the terms of the
agreement providing for such merger, consolidation or
reorganization, the shareholders of the Company
immediately before such merger, consolidation or
reorganization will own, directly or indirectly
immediately following such merger, consolidation or
reorganization, not less than 45% of the combined
voting power of the outstanding voting securities of
the Surviving Corporation, and (2) the board of
directors of the Company, prior to the execution of
the agreement providing for such merger, consolidation
or reorganization, by the affirmative vote of not less
than 75% of the directors then in office, explicitly
designates such merger, consolidation or
reorganization as a transaction constituting a "merger
of equals
(iv) Liquidation or Dissolution. A plan of liquidation or
dissolution of the Company or F&M Trust, other than
pursuant to bankruptcy or insolvency laws, is adopted: or
(v) Change in Composition of Board of Directors. During any
period of two consecutive years, the individuals who at the
beginning of such period constituted the board of directors
of the Company cease for any reason to constitute at least
a majority of the board of directors of the Company,
unless the election (or the nomination for election by the
Company's shareholders) of each new director was approved
by a vote of at least two-thirds of the directors then in
office who were directors at the beginning of the period.
(b) Cause. As used in this Agreement, "Cause" shall mean: (i) a
documented,repeated and willful refusal or neglect on the part
of the Executive to perform his duties to the Company following
not less than 30 days' written notice to Executive specifying
the nature of such refusal or neglect and the failure of
Executive to correct such refusal or neglect within such 30 day
period, but only if such termination is approved by a vote of
a majority of the directors of the Company then in office, (ii)
Executive's conviction of or plea of guilty or nolo contendere
to a felony, a crime of falsehood or a crime involving moral
turpitude, (iii)conduct on the part of Executive involving
dishonesty or moral turpitude or conduct which is directly and
materially injurious to the Company or to F&M Trust, but only
if such termination is approved by a majority of the directors
of the Company then in office, or (iv) the issuance by any
federal or state regulator orthe Company or of F&M Trust of an
unappealable order to the effect that Executive be permanently
discharged.
(c) Good Reason. As used in this Agreement, "Good Reason" shall
mean: (i)a failure by the Company to require any Surviving
Corporation, in writing, to expressly assume and agree to
perform the obligations of the Company under this Agreement,
(ii) a reduction or change (or attempted reduction or change)
by the company (or by the Surviving Corporation, in any
material respect and without Executive's consent, of the
authority, duties, compensation,benefits or other terms and
conditions of Executive's employment,
(iii) a reassignment by the Company (or by the Surviving
Corporation) of Executive to a location outside of Franklin
County, Pennsylvania, or (iv) a determination by Executive in
good faith and in his sole and absolute discretion that he is
unable to work harmoniously and effectively with the new
management of the Company (or with the management of the
Surviving Company) or that he is otherwise unable effectively to
carry out his duties and to discharge his responsibilities to
the Company (or to the Surviving Corporation).
3. NO AFFECT ON EMPLOYMENT STATUS OR RIGHTS UNDER OTHER
PLANS
(a) Employment Status. Executive acknowledges that he is an
employee at will and that this Agreement is not an employment
contract and is not intended to confer upon him any right with
respect to the continuance of his employment by the Company or
to limit in any way the right of the Company to terminate his
employment at any time.
(b) Other Plans. This Agreement is not intended to reduce,
restrict or eliminate any benefit to which Executive may
otherwise be entitled at the time of the termination of his
employment under the terms of any employment benefit plan of
the Company (or the Surviving Corporation) or of F&M Trust then
in effect.
4. TERMINATION
(a) No Change in Control on or Before December 31, 2001.
Provided that a Change in Control of the Company does not
occur on or before December 31, 2001, this Agreement shall
terminate automatically on December 31, 2001, unless one of
the following events occurs before December 31, 2001, in which
case this Agreement shall terminate automatically upon the first
to occur of the following events;
(i) Grant of Long-Term Incentive Award. The grant to Executive
of an award pursuant to a long-term management incentive
program to be adopted by the Company following the vesting
or expiration of the currently outstanding restricted stock
awards (which awards are referred to by the Company as the
RSJP "96 Awards"), such award to be on such terms as the
board of directors of the Company may determine in the
exercise of its sole and absolute discretion to be
appropriate;
(ii) Termination of Employment. The termination of Executive's
employment for any reason; or
(iii)Mutual Consent. The execution by the Company and by
Executive of a written instrument consenting to the
termination of this Agreement.
(b) Change in Control on or Before December 31, 2001. In the
event that a Change in Control of the Company occurs on or
before December 31,2001 (and provided that this Agreement has
not been terminated pursuant to Section 4(a) above prior to the
occurrence of such Change in Control), this Agreement shall
terminate automatically upon the first to occur of the following
events:
(i) Expiration of 18 Months From Occurrence of Change in
Control.The expiration of 18 months from the date of the
occurrence of the Change in Control;
(ii) Termination of Employment. The termination of Executive's
employment for Cause or by reason of Executive's disability
or death;
(iii)Mutual Consent. The execution by the Company (or by
the Surviving Corporation) and by Executive of a written
instrument consenting to the termination of this Agreement;
or
(iv) Payment. Payment of the Severance Payment in full by the
Company (or by the Surviving Corporation) to Executive.
(c) Effect of Termination. All of Executive's rights hereunder
shall terminate upon termination of this Agreement, except that,
if Executive's employment is terminated prior to termination of
this Agreement under circumstances giving rise to the right to
receive the Severance Agreement as provided in Section 1 above
and if the Severance Payment has not then been paid in full to
Executive,termination of this Agreement shall not adversely
affect Executive's accrued right to enforce payment of the
Severance Payment.
5. ATTORNEYS' FEES AND RELATED EXPENSES
In the event, following the occurrence of a Change in Control of
the Company, Executive shall determine in the exercise of his
sole and absolute discretion that it is necessary to engage an
attorney for purposes of advising him of his rights under this
Agreement or for purposes of enforcing his rights hereunder, the
Company (or the Surviving Corporation) shall within 30 days
following receipt of written demand from Executive, pay all legal
fees and related expenses incurred by him in the connection with
such advice or enforcement.
6. PARTIES IN INTEREST
(a) The Company. This Agreement shall be binding upon and shall
inure to the benefit of the Company and its successors and
assigns, including, without limitation, any Successor
Corporation. The Company shall require any such successor
or assign, by written agreement, to expressly assume and agree
to perform the obligations of the Company hereunder and shall
promptly provide a copy of such written agreement to Executive.
(b) Executive. This Agreement shall inure to the benefit of
(and may be enforced by ) Executive and his heirs, executors,
administrators and assigns.
7. MISCELLANEOUS PROVISIONS
(a) Notices. All notices and other communications hereunder:
(i) shall be in writing and shall be deemed to have been
given or made: (A) on the date of delivery when hand delivered
or when sent by commercial courier service for next business day
delivery, or (B) three days after the date on which such notice
or other communication is mailed, certified mail, return receipt
requested, and (ii) shall be addressed, in the case of the
Company, to its address as it appears above and, in the case of
Executive, to his residence address as it appears in his
personnel file maintained by the Company, or to such other
address as a party may subsequently designate in writing and
deliver as provided in this Section 7(a). A notice or other
communication hereunder may be given or made to a party by first
class mail, telefax, teletype or electronic mail, but no such
notice or other communication shall be deemed to have been duly
given or made unless and until it is received by such party.
(b) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the Commonwealth
of Pennsylvania,without reference to its law on the choice of
laws.
(c) Amendment. No term or provision of this Agreement may be
modified or otherwise amended, except by means of a written
instrument executed by the Company and by Executive.
(d) Entire Agreement. This Agreement sets forth the entire
understanding of the parties hereto and supersedes all prior
written or oral agreements, arrangements and understandings
relating to the subject matter hereof.
IN WITNESS WHEREOF, this Agreement is executed as of
and effective the day and year first above written.
FRANKLIN FINANCIAL SERVICES
CORPORATION
By: /s/ William E. Snell, Jr. /s/ Theodore D. McDowell
(SEAL)
William E. Snell, Jr. (Theodore D.McDowell)
President and Chief
Executive Officer
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
November 5, 1999 /s/ William E. Snell,Jr.
William E. Snell, Jr.
President and Chief Executive Officer
November 5, 1999 /s/ Elaine G. Meyers
Elaine G. Meyers
Treasurer and Chief Financial Officer
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