UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 T), CHAMBERSBURG,PA 17201-0819
(Address of principal executive officer)
717/264-6116
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court. Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
There were 2,794,960 outstanding shares of the Registrant's common stock as
of June 30, 1999.
INDEX
PART I
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
SIGNATURE PAGE
Management's Discussion and Analysis of
Results of Operations and Financial Condition
for the Three Month Period
Ended March 31, 1999
Part 1, Item 2
Results of Operations
The Corporation reported net earnings of $1,279,000 for
the first quarter ended March 31, 1999, versus net earnings
of $1,233,000 for the same quarter in 1998, reflecting an
increase of 3.7%. Basic earnings per share for the quarter
ended March 31, 1999, increased 4.4% to $.47 from $.45 for
the first quarter of 1998. Diluted earnings per share were
$.46 and $.45, respectively, for the same two periods.
Per share earnings are weighted to reflect the impact of the
stock repurchase program. Book value per share equaled
$14.10 at March 31, 1999, compared to $13.40 at March 31,
1998.
The Corporation's annualized return on average assets
(ROA) and return on average equity (ROE) for the first
quarter of 1999 were 1.24% and 13.10%, respectively,
compared to 1.41% and 13.54%, respectively, for the first
quarter of 1998. The decline in ROA can be attributed
primarily to a fourth quarter 1998 increase in assets of
approximately $36.1 million versus a $35.0 million decrease
in assets in the fourth quarter of 1997. The changes in
total assets for both years carried over into the first
quarter of the subsequent years causing a negative impact
on first quarter 1999 ROA and a positive impact on first
quarter 1998 ROA. The decrease in ROE for the first quarter
of 1999 compared to the first quarter of 1998 was primarily
the result of the impact of significant changes in
shareholders' equity. Additional cash dividends declared in
the fourth quarter of 1997 which totaled $2.3 million
contributed to lower average equity during the first
quarter of 1998 versus the first quarter 1999. Average
equity during the first quarter of 1999 equaled $39.6
million compared to $36.9 million for the first quarter of
1998. The effect of the changes in equity, when comparing
first quarter to first quarter was an inflated ROE in the
first quarter of 1998 due to the lower level of average
equity. Both measurements in the first quarter of 1998 were
positively impacted by the recovery of interest and expense
totaling approximately $103,000 related to nonaccrual
loans.
Net interest income remained stable at $3.6 million for
both quarters ended March 31, 1999 and 1998. Interest
income for the first quarter ended March 31, 1999, totaled
$7.16 million versus $6.71 million for the first quarter
ended March 31, 1998, an increase of $450,000.
Interest expense for the same period ended March 31, 1999,
totaled $3.57 million versus $3.12 million for the quarter
ended March 31, 1998, an increase of $451,000. Average
interest-earning assets grew approximately $63.0 million to
$396.0 million in the first quarter of 1999 versus 1998 and
average interest-bearing liabilities grew approximately
$61.0 million to $334.0 million for the same period of 1999
versus 1998. Despite the growth of interest-earning assets
out pacing the growth of interest-bearing liabilities, the
Corporation's net interest margin narrowed to 3.96% (tax-
equivalent) at March 31, 1999, from 4.61% (tax-equivalent)
at March 31, 1998. The growth in interest-earning assets
over the twelve-month period from March 31, 1998 to March
31, 1999, occurred more in lower-yielding tax-exempt
investments than in higher- yielding loans, contracting the
net interest margin. Loan growth trailing behind deposit
growth has also been a contributing factor to the narrowed
net interest margin. The slower loan growth was due mainly
to competitive pressures in attracting new quality loan
business. Growth in interest-bearing liabilities over the
twelve-month period from March 31, 1998 to March 31, 1999,
occurred mostly in deposits and other borrowings. The
strategy of paying close to market rates on money market
type deposits resulted in an increase of almost $20.0
million in interest-bearing deposits from March 31, 1998 to
March 31, 1999, and contributed to a squeezed net interest
margin. A $15.0 million investment securities leverage
transaction implemented in the fourth quarter of 1998
contributed to the increase in other borrowings as well as
investment securities.
The Corporation expensed $195,000 for possible loan
losses in the first quarter of 1999 compared to $365,000 for
the first quarter of 1998. Net charge-offs totaled $121,000
for the quarter ended March 31, 1999 compared to $363,000
for the quarter ended March 31, 1998. Charge-offs for both
periods were primarily from the Corporation's consumer loan
portfolio.
Total noninterest income, excluding securities gains,
equaled $1.05 million for the three months ended March 31,
1999, versus $882,000 for the three months ended March 31,
1998. An 8.0% growth in the market value of trust assets
under management to $402.1 million over the twelve-month
period from March 31, 1998, contributed to the growth in
trust fee income. Trust fee income totaled $634,000 for the
first quarter of 1999 compared to $477,000 for the same
period in 1998, accounting for most of the increase in total
noninterest income.
The Corporation realized no net securities gains for
the three months ended March 31, 1999, versus $299,000
realized in the comparable period in 1998. Securities gains
realized in the first quarter of 1998 were entirely form the
Corporation's available for sale equity securities
portfolio.
Total noninterest expense recorded a moderate increase
of $94,000, or 3.4%, to $2.9 million for the first quarter
of 1999 versus $2.8 million for the first quarter of 1998
and was spread over all expense line items. Salaries and
benefits recorded the largest increase at $99,000, or 7.0%,
to $1.5 million due mainly to general merit increases. The
largest decrease occurred in other expense. Costs
associated with real estate write downs and building
demolition in the first quarter of 1998 were primarily
responsible for the $99,000 decrease in other expense in the
first quarter of 1999, offsetting the increase in salaries
and benefits.
Federal income tax expense for the first quarter ended
March 31, 1999, totaled $296,000 compared to $394,000 for
the same quarter in 1998. The Corporation's effective tax
rate for the quarter ended March 31, 1999 was 18.8% compared
to 24.2% for the quarter ended March 31, 1998. The decrease
in the effective tax rate quarter versus quarter is due
almost entirely to an increase in tax-exempt income relative
to pretax income.
Year 2000
At March 31, 1999, the Corporation determined its Year
2000 state of readiness to be 85% complete for all mission
critical equipment and systems. Phase III, the testing and
validation phase, is currently underway and is expected to
be completed by August 31, 1999. The Corporation continues
to maintain ongoing contact with companies that are
commercial borrowers and who are not yet fully compliant
with their Year 2000 issues. To date, the Corporation does
not know of any commercial business borrower whose Year 2000
status has caused concern for the Corporation's management.
There has not been any Year 2000 costs incurred or reflected
in first quarter 1999 net income. Aggregate Year 2000 costs
for the Corporation are expected to be less than $200,000.
The Corporation's Year 2000 contingency plan is in process
with completion expected by August 31, 1999.
Financial Condition
Total assets were down $11.6 million, or 2.7 %, to
$413.4 million at March 31, 1999, compared to $425.0 million
at year-end 1998. Driving the net decrease in assets was a
decrease of $9.9 million in deposits, primarily time
deposits, and a decrease of $2.2 million in Repo accounts
(securities sold under agreements to repurchase).
Corresponding decreases in assets are reflected in interest-
bearing deposits in other banks, down $9.0 million and
investment securities, down $7.5 million. The decrease in
investment securities reflects maturities within the
portfolio; the decrease in deposits was primarily related to
deposits of a local area school district. Cash and due
from banks and net loans were up, partially offsetting
decreases in the aforementioned asset categories. Net loans
recorded a small increase of $2.8 million to $261.3 million
at March 31, 1999, compared to $258.5 million at December
31, 1998. Activities in the commercial and mortgage loan
portfolios were primarily responsible for the moderate
increase in net loans. Other liabilities increased $1.1
million to $4.5 million at March 31, 1998 versus $3.4
million at December 31, 1998, primarily due to recognizing
a special $.40 cash dividend declared by the Board of
Directors in March and paid to shareholders on April 15,
1999. As a result of recognizing the special cash dividend
declared in March 1999 in retained earnings, a decrease in
net unrealized gains and an increase in treasury stock from
repurchased common shares, total shareholders' equity
declined $666,000 to $39.2 million at March 31, 1999 from
$39.9 million at December 31, 1998. The Corporation's Tier
1 leverage ratio and risk-based capital ratio at March 31,
1999, were 8.63% and 13.00 %, respectively, compared to
9.16% and 12.73%, respectively, at December 31, 1998.
Net charge-offs for the first quarter ended March 31,
1999, totaled $121,000 compared to $363,000 for the first
quarter of 1998. As discussed in the Corporation's 1998
Annual Report, personal bankruptcies of loan customers
continue to have an adverse impact on the Corporation.
Although improvement has occurred in the first quarter of
1999, management remains alert to any signs that would
indicate problems ahead. To date, the Corporation has
experienced no charge-offs from new loans booked after more
stringent underwriting standards were implemented and
intense consumer loan training for all consumer loan
personnel was in progress and/or completed. The annualized
ratio of net charge-offs to average loans was .19% at March
31, 1999, compared to .32% and .60% at December 31, 1998
and March 31, 1998, respectively.
Nonperforming loans were up slightly to $1.7 million at
March 31, 1999, from $1.6 million at December 31, 1998.
Included in nonperforming loans at March 31, 1999, were
nonaccrual loans totaling $1.2 million and loans past due 90
days or more totaling $512,000 compared to $1.3 million and
$314,000, respectively, at December 31, 1998. The
Corporation recorded other real estate owned equaling
$541,000 at March 31, 1999, and $527,000 at December 31,
1998. Nonperforming assets represented .54% of total assets
at March 31, 1999 compared to .51% at December 31, 1998.
The allowance for possible loan losses totaled $3.6
million at March 31, 1999, compared to $3.5 million at
December 31, 1998. The allowance represented 1.38% and
1.35% of total loans at March 31, 1999 and December 31,
1998, respectively and provided coverage for nonperforming
loans of 2.1 times at March 31, 1999.
Unemployment in the Franklin County area remained low
at around 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 29.4% at March 31, 1998. The
Corporation had advances outstanding totaling $30.7 million
with the Federal Home Loan Bank of Pittsburgh (FHLB) at
March 31, 1999. All advances outstanding with FHLB were
term borrowings with stated maturities. The Corporation has
the ability to borrow overnight funds through FHLB.
Currently, the maximum borrowing capacity for the
Corporation with FHLB is approximately $89 million.
Management believes that liquidity is adequate to meet the
borrowing and deposit withdrawal needs of its customers.
Capital Adequacy
Total shareholders' equity decreased $666,000 to $39.2
million at March 31, 1999, from $39.9 million at December
31, 1998. Cash dividends declared totaling $1.1 million
were recorded in the first quarter of 1999 versus none
recorded in the first quarter of 1998. Cash dividends
declared in the first quarter of 1999 included a regular
cash dividend of $.16 per share and a special cash dividend
of $.40 per share.
Capital adequacy is currently defined by banking
regulatory agencies through the use of several minimum
required ratios. At March 31, 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 March 31, 1999,
were 8.63%, 13.00% and 14.22 %, respectively. For more
information on the Corporation's capital ratios refer to
Footnote 2 in the accompanying financial statements.
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
July 27, 1999 /s/ William E. Snell, Jr.
-----------------------------------
William E. Snell, Jr.
President and Chief Executive Officer
July 27, 1999 /s/ Elaine G. Meyers
----------------------------------
Elaine G. Meyers
Treasurer and Chief Financial Officer
