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, 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 2,795,093 outstanding shares of the Registrant's
common stock as of August 3, 1999.
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets as of
June 30, 1999 (Unaudited) and
December 31, 1998
Consolidated Statements of Income
for the Three and Six Months ended
June 30, 1999 and 1998 (unaudited)
Consolidated Statements of Changes
in Shareholders' Equity for the Twelve
and Six Months ended December 31, 1998
and June 30, 1999 (unaudited)
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1999
and 1998 (unaudited)
Notes to 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
1999 1998
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $10,884 $12,895
Interest bearing deposits in other banks 7,002 11,514
Investment securities available for sale (Note 3) 124,662 127,118
Loans, net 268,520 258,488
Premises and equipment, net 5,737 5,889
Other assets 9,576 9,097
------------- ------------
Total Assets $426,381 $425,001
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits: (Note 4)
Demand (non-interest bearing) $42,766 $42,224
Savings and Interest checking 149,708 141,477
Time 137,117 142,878
------------- ------------
Total Deposits 329,591 326,579
Securities sold under agreements to repurchase 24,009 24,414
Other borrowings 30,744 30,744
Other liabilities 2,794 3,363
------------- ------------
Total Liabilities 387,138 385,100
Commitments and Contingencies - -
Shareholders' equity:
Common stock $1 par value per share, 15,000 shares authorized
with 3,045 shares issued and 2,795 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 19,814 19,793
Retained earnings 21,073 20,562
Accumulated other comprehensive income 770 1,783
Treasury stock (Note 5) (4,851) (4,620)
Unearned compensation (608) (662)
------------- ------------
Total shareholders' equity 39,243 39,901
------------- ------------
Total Liabilities and Shareholders' Equity $426,381 $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 Six Months Ended
June 30 June 30
1999 1998 1999 1998
---------------------------- -----------------------------
INTEREST INCOME
Interest on loans $5,437 $5,443 $10,823 $10,934
Interest on deposits in other banks 91 59 165 63
Interest on Federal funds sold 0 0 0 0
Interest and dividends on investments (Note 3) 1,658 1,211 3,360 2,430
------------ ----------- ------------ ------------
Total interest income 7,186 6,713 14,348 13,427
------------ ----------- ------------ ------------
INTEREST EXPENSE
Interest on deposits 2,908 2,741 5,794 5,406
Interest on securities sold under agreements to
repurchase and other borrowings 710 446 1,391 898
------------ ----------- ------------ ------------
Total interest expense 3,618 3,187 7,185 6,304
------------ ----------- ------------ ------------
Net interest income 3,568 3,526 7,163 7,123
Provision for possible loan losses 200 190 395 555
------------ ----------- ------------ ------------
Net-interest income after provision
for possible loan losses 3,368 3,336 6,768 6,568
------------ ----------- ------------ ------------
NONINTEREST INCOME
Trust fees 522 412 1,157 888
Service charges, commissions and fees 506 521 910 918
Other 19 44 33 62
Securities gains 0 196 0 495
------------ ----------- ------------ ------------
Total noninterest income 1,047 1,173 2,100 2,363
------------ ----------- ------------ ------------
NONINTEREST EXPENSE
Salaries and benefits 1,482 1,346 2,991 2,756
Net occupancy expense 163 158 331 310
Furniture and equipment expense 187 174 427 390
Advertising 181 157 257 240
Data processing 167 154 375 348
Pennsylvania capital shares tax 91 86 181 169
Other 595 817 1,182 1,474
------------ ----------- ------------ ------------
Total noninterest expense 2,866 2,892 5,744 5,687
------------ ----------- ------------ ------------
Income before Federal income taxes 1,549 1,617 3,124 3,244
------------ ----------- ------------ ------------
Federal income tax expense 304 375 600 769
------------ ----------- ------------ ------------
Net income $1,245 $1,242 $2,524 $2,475
============ =========== ============ ============
Basic earnings per share $0.46 $0.46 $0.93 $0.91
Weighted average shares outstanding (000's) 2,727 2,729 2,729 2,728
Diluted earnings per share $0.45 $0.45 $0.91 $0.89
Weighted average shares outstanding (000's) 2,764 2,768 2,766 2,767
The accompanying notes are an integral part of these statements.
</TABLE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Shareholders' Equity
for the six months ended ended June 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 Stock Capital Earnings Income Stock Compensatio Total
share data) -----------------------------------------------------------------------
Balance at December 31, 1997 $3,045 $19,761 $17,087 $1,935 ($4,760) ($763) $36,305
Comprehensive income:
Net income - - 2,475 - - - 2,475
Unrealized holding gains arising
during current period, net of tax - - - 239 - - 239
Reclassification adjustment for realized
gains included in net income, net of tax - - - (312) - - (312)
----------
Total Comprehensive income 2,402
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
Amortization of unearned
compensation - - - - - 50 50
----------------------------------------------------------------------
Balance at June 30, 1998 $3,045 $19,772 $19,128 $1,862 ($4,709) ($713) $38,385
======== ======== ======== =========== ======== ========== ========
Balance at December 31, 1998 $3,045 19,793 20,562 1,783 (4,620) (662) $39,901
Comprehensive income:
Net income - - 2,524 - - - 2,524
Unrealized holding losses arising
during current period, net of tax - - - (1,013) - - (1,013)
Reclassification adjustment for realized
gains included in net income, net of tax - - - - - - 0
----------
Total Comprehensive income 1,511
Cash dividends declared, $.72 per share - - (2,013) - - - (2,013)
Common stock issued under
stock option plans - 11 - - 29 - 40
Tax benefit of restricted stock transactions - 10 - - - - 10
Acquisition of 8,975 treasury shares - - - - (260) - (260)
Amortization of unearned
compensation - - - - - 54 54
---------------------------------------------------------------------
Balance at June 30, 1999 $3,045 $19,814 $21,073 $770 ($4,851) ($608) $39,243
======== ======== ======== =========== ======== ========== ========
Cash dividends per share in 1998 have been adjusted to reflect a 3 for 2 stock split issued
in the form of a 50% stock dividend and distributed on February 3,1998.
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>
1999 1998
------------------------
Cash flows from operating activities:
Net Income 2,524 2,475
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 400 375
Net amortization of securities premiums and discounts (235) (21)
Provision for possible loan losses 395 555
Securities gains, net - (495)
Mortgage loans originated for sale (8,148) (13,322)
Proceeds from sale of mortgage loans 8,153 13,359
Principal (gain) loss on sales of mortgage loans (5) 37
Loss on sale of premises and equipment - 294
Loan charge-offs, net of recoveries (267) (534)
(Increase) interest receivable and other assets (421) (109)
(Decrease) increase in interest payable and other liabilities (47) 100
--------- -------
Net cash provided by operating activities 2,349 2,714
--------- -------
Cash flows from investing activities:
Proceeds from sales of investment securities available for sale - 726
Proceeds from maturities of investment securities held to maturit - 3,645
Proceeds from maturities of investment securities available for s 73,257 7,687
Purchase of investment securities available for sale (72,100) (11,190)
Net increase in loans (10,155) (6,470)
Capital expenditures (248) (758)
Proceeds from sales of premises and equipment - 207
---------- -------
Net cash used in investing activities (9,246) (6,153)
---------- -------
Cash flows from financing activities:
Net increase in demand deposits,
NOW accounts and savings accounts 8,773 18,747
Net (decrease) increase in certificates of deposit (5,761) 355
Dividends paid (2,013) (2,703)
Common stock issued under stock option plans 40 62
Purchase of treasury shares (260) -
Net (decrease) in other borrowings (405) (7,062)
---------- --------
Net cash (used in) provided by financing activities 374 9,399
---------- --------
(Decrease) Increase in cash and cash equivalents (6,523) 5,960
Cash and cash equivalents as of January 1 24,409 11,112
---------- --------
Cash and cash equivalents as of June 30 17,886 17,072
======== ========
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 June 30, 1999 and
December 31, 1998, the consolidated statements of income for the
three and six month periods ended June 30, 1999 and 1998, the
consolidated statements of changes in shareholders' equity for
the year ended of December 31, 1998 and the six months ended June
30, 1999 and the consolidated statements of cash flows for the
six month periods ended June 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 June 30, 1999,
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 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
June 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, 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: 1999 1998
---- ----
Interest paid on deposits and other borrowed funds $7,213,000 $6,103,000
Income taxes paid $ 732,000 $ 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 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
June 30
1999 1998
(Amounts in thousands)
Weighted average shares outstanding (basic) 2,727 2,729
Impact of common stock equivalents 37 39
------ ------
Weighted average shares outstanding (diluted) 2,764 2,768
====== ======
For the six months ended
June 30
1999 1998
(Amounts in thousands)
Weighted average shares outstanding (basic) 2,729 2,728
Impact of common stock equivalents 37 39
------ ------
Weighted average shares outstanding (diluted) 2,766 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 1 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, 1999 (unaudited)
To be well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy PurposesAction Provisions
(Amounts in thousands) Amount Ratio Amount Ratio Amount Ratio
Total Capital (to Risk Weighted Assets)
Corporation $40,488 14.23% $22,755 8.00% N/A
Bank 37,147 13.17% 22,567 8.00% 28,209 10.00%
Tier 1 Capital (to Risk Weighted Assets)
Corporation $36,931 12.98% $11,377 4.00% N/A
Bank 33,619 11.92% 11,284 4.00% 16,926 6.00%
Tier 1 Capital (to Average Assets)
Corporation $36,931 8.71% $16,952 4.00% N/A
Bank 33,619 8.00% 16,815 4.00% 21,019 5.00%
As of December 31, 1998
To be well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy PurposesAction 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 1 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 1 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 - Investment Securities
Amortized cost and estimated market values of available for sale investment securities as of June 30, 1999 (unaudited),
and December 31, 1998, were as follows (amounts in thousands):
<S> <C> <C> <C> <C>
March 31 December 31
1999 1998
-------------------------------------------------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
-------------------------------- -------------------------------
Equity securities $3,619 $4,768 $3,404 $4,674
U.S. Treasury securities and obligations
of U.S. Government agencies & corporations 14,987 15,006 13,992 14,243
Obligations of state and political subdivisions 49,225 49,517 48,490 49,452
Corporate debt securities 21,405 21,390 32,959 33,053
Mortgage - backed securities 34,259 33,981 25,572 25,696
-------------------------------- -------------------------------
$123,495 $124,662 $124,417 $127,118
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Interest income and dividends received on investment securities for the three and six months
ended June 30, 1999 and 1998 are as follows (amounts in thousands):
Three Months Six Months
1999 1998 1999 1998
------------------ ------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
U.S. Government Obligations $40 $68 $92 $136
Obligations of U.S. Government
Agencies and Corporations 625 552 1,128 1,127
Obligations of States and
Political Subdivisions 598 373 1,195 756
Other Securities, primariy
Notes and Debentures 350 181 854 327
Common Stock 45 37 91 84
------------------ --------------------
$1,658 $1,211 $3,360 $2,430
======== ====== ======== ======
</TABLE>
<TABLE>
<CAPTION>
Note 4 - Deposits
Deposits are summarized as follows (amounts in thousands):
June 30 December 31
1999 1998
---------- ----------
(Unaudited)
<S> <C> <C>
Demand $42,766 $42,224
Savings
Interest-bearing checking 45,057 46,707
Money Market Accounts 64,112 56,623
Passbook and Statement Savings 40,539 38,147
---------- ----------
$149,708 $141,477
---------- ----------
Time
Deposits of $100,000 and over 28,158 33,223
Other Time Deposits 108,959 109,655
---------- ----------
137,117 142,878
---------- ----------
Total Deposits $329,591 $326,579
========= =========
</TABLE>
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. No common shares were purchased under this
plan during the second quarter or six months ended June 30, 1999.
Under a similar plan authorized by the Board of Directors 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 impact of adoption was
immaterial.
Management's Discussion and Analysis of
Results of Operations and Financial Condition
for the Three and Six Month Periods
Ended June 30, 1999 and 1998
Part 1, Item 2
Results of Operations
In the second quarter and six months ended June 30, 1999,
the Corporation earned $1.24 million and $2.52 million,
respectively, compared to $1.24 million and $2.48 million,
respectively, for the comparable periods ended June 30, 1998.
Basic earnings per share equaled $.46 and $.93, respectively, for
the second quarter and six months in 1999 versus $.46 and $.91,
respectively, for the same periods in 1998. A squeeze on the net
interest margin is primarily responsible for the soft earnings
for the second quarter and six months ended June 30, 1999. Book
value per share equaled $14.04 at June 30, 1999, compared to
$13.72 at June 30, 1998.
The Corporation's annualized return on average assets (ROA)
and return on average equity (ROE) for the first six months of
1999 were 1.20% and 12.87%, respectively, compared to 1.39% and
13.38%, respectively, for the same periods ended June 30, 1998.
The decline in these two measurements reflect the soft earnings
mentioned above, a 17% growth in total assets over the twelve
month period and a strong capital position.
Net interest income remained steady at $3.57 million for the
second quarter of 1999 compared to $3.53 million for the second
quarter of 1998 due primarily to the growth (21.0%) in
interest-bearing liabilities out pacing the growth (17.7%) in
interest-earning assets. In addition, the squeeze on the net
interest margin due to local competition and general market rates
contributed to the lack of growth in net interest income during
the second quarter. The scenario is much the same for the six
months, with net interest income totaling $7.16 million for the
period ended June 30, 1999 versus $7.12 million for the period
ended June 30, 1998. For the six months, interest-earning assets
grew 18.2% and averaged $398.2 million while interest-bearing
liabilities grew 21.6% and averaged $336.4 million. Interest
spread for the six months ended June 30, 1999, was 3.26% versus
3.68% one year earlier; net interest margin was 3.93% and 4.50%,
respectively, for the same periods.
The Corporation expensed a provision for possible loan
losses of $200,000 and $395,000 for the second quarter and six
months, respectively, in 1999 versus $190,000 and $555,000,
respectively, for the same periods in 1998. The allowance as a
percentage of loans was 1.36% at June 30, 1999, versus 1.33% at
June 30, 1998. The provision reflects the level of loan
charge-off activity and growth in the loan portfolio.
Total noninterest income, excluding securities gains, grew
7.16%, or $70,000, to $1.05 million and 12.4%, or $232,000, to
$2.1 million for the second quarter and six months ended June 30,
1999, respectively. Higher trust fee income was primarily
responsible for the increase in noninterest income for both
periods presented. New trust business coupled with increased
market values of trust investments were the main contributors to
the growth in trust fees for the second quarter and six months of
1999.
The Corporation realized no securities gains for the second
quarter and six months ended June 30, 1999, compared to $196,000
and $495,000, respectively, for the same periods in 1998. Net
securities gains realized in 1998 were from the Corporation's
available-for-sale bank equities portfolio.
Total noninterest expense recorded a decrease of .89%, or
$26,000, to $2.87 million for the second quarter ended June 30,
1999, over the second quarter of 1998 and an increase of 1.0%, or
$57,000, to $5.74 million for the six months ended June 30, 1999,
over the comparable six months in 1998. Salaries and benefits
expense recorded an increase for the quarter ($136,000) and six
months ($235,000). Salaries expense recorded an increase of
$100,000, or 9.1%, to $1.2 million for the quarter and
approximately $176,000, or 7.9 %, to $2.2 million for the six
months. Benefits expense increased approximately $36,500, or
14.6%, to $ 287,000 for the quarter and approximately $59,000,or
11.3%, to $528,000 for the six months. General merit salary
increases and a lower pension credit than in the previous year
are primarily responsible for the higher salary and benefit
expense for the second quarter and six months. Other noninterest
expense was down $222,000, or 27.2% to $595,000 for the second
quarter and down $292,000, or 1.0%, to $1.2 million for the six
months ended June 30, 1999. The primary contributor to the
decrease in other expense were nonrecurring expenses related to
the write down and demolition of bank-owned buildings in 1998.
During the second quarter and six months ended June 30, 1998, the
Corporation expensed approximately $274,000 and $383,000,
respectively, for these expenses. No similar expense was
incurred in the second quarter and six months ended June 30,
1999.
Federal income tax expense for the second quarter and six
months ended June 30, 1999, was $304,000 and $600,000,
respectively, compared to $375,000 and $769,000, respectively,
for the same periods ended June 30, 1998. The effective tax
rates for the six month periods ended June 30, 1999 and 1998 were
19.2% and 23.7%, respectively, 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 plus low income housing tax
credits.
The Year 2000 Issue
At June 30, 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 underway and is expected to be complete 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. No
Year 2000 costs have been incurred or reflected in the second
quarter and six months net results. Aggregate Year 2000 costs
for the Corporation are expected to be significantly less than
$200,000. The Corporation's Year 2000 Business Resumption and
Cash Contingency Plans have been completed and forwarded to the
applicable regulatory agency.
Financial Condition
Total assets recorded little movement since year-end 1998
totaling $426.3 million at June 30, 1999, compared to $425.0
million at December 31, 1998. Net loans showed moderate growth
improving $10.0 million, or 3.9%, to $268.5 million at June 30,
1999, from $258.5 million at December 31, 1998. The growth in net
loans came primarily from the commercial loan portfolio which
recorded an increase of $14.7 million, or 14.5%, to $116.3
million at June 30, 1999. During the first six months of 1999
the Corporation sold $8.1 million in originated mortgage loans to
the secondary market, primarily FNMA; this compares with $13.4
million sold during the first six 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 $3.0 million to $329.6 million at
June 30, 1999, from $326.6 million at December 31, 1998. The
growth in deposits came primarily from the money market accounts
which recorded an increase of $7.5 million to $64.1 million at
June 30, 1999, from $56.6 million at December 31, 1998.
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 second quarter and six months ended
June 30, 1999, were $146,000 and $267,000, respectively, compared
to $171,000 and $534,000 for the same periods ended June 30,
1998. The Corporation's consumer loan portfolio was responsible
for 93.5% 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 six 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 serve
to reverse the trend in the future. The annualized ratio of net
charge-offs to average loans was .20% at June 30, 1999, compared
to .32% and .44% at December 31, 1998 and June 30, 1998,
respectively.
Nonperforming loans totaled $1.4 million at June 30, 1999,
compared to $1.6 million at December 31, 1998 and $1.7 million at
June 30, 1998. Included in nonperforming loans at June 30, 1999,
were nonaccrual loans totaling $ 1.1 million and $363,000 in
loans past due over 90 days. Nonaccrual loans and loans past due
over 90 days equaled $1.3 million and $314,000, respectively, at
December 31, 1998. The Corporation recorded other real estate
owned (OREO) totaling $390,000 at June 30, 1999, compared to
$527,000 at year-end 1998. Nonperforming assets represented .43%
of total assets at June 30, 1999 compared to .51% at December 31,
1998.
The allowance for possible loan losses totaled $3.7 million
at June 30, 1999 compared to $3.5 million at December 31, 1998,
and represented 1.36% and 1.35%, respectively, of total loans.
The allowance at June 30, 1999, provided coverage for
nonperforming loans at a rate of 2.54 times compared to 2.10
times at December 31, 1998.
The unemployment rate in Franklin County edged up a bit to
4.3% in June; the rate had been holding at around 4.0%.
Franklin County ranked 23 from the top in unemployment among
Pennsylvania's 67 counties. Neighboring Cumberland County ranked
ninth with an unemployment rate of 3.0%. Despite the small
increase in the unemployment rate, Franklin County has lower
unemployment than the nation (4.5%) and is in line with the state
(4.3%).
The Franklin County area has experienced some recent job
losses (450) with the closing of two manufacturing plants in the
area and the continued downsizing at the Letterkenny Army Depot.
Despite these job losses local officials are very optimistic
concerning the strength of the local economy. In addition to
small businesses adding jobs, area Development Authorities are
actively working to attract new business to the area.
Liquidity
The Corporation's liquidity position (net cash, short-term
and marketable assets divided by net deposits and short-term
liabilities) was 29.5% at June 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. As reported earlier, the Corporation sold
approximately $ 8.1 million in mortgage loans to the secondary
market (primarily FNMA) during the first six months of 1999 and
had advances outstanding with FHLB totaling $30.7 million. The
Corporation's maximum borrowing capacity with FHLB equals $ 91
million. Management believes that liquidity is adequate to meet
the borrowing and deposit withdrawal needs of its customers
Capital Adequacy
Total shareholders' equity decreased $658,000 to $39.2
million at June 30, 1999, from $39.9 million at December 31,
1998, primarily the result of unrealized securities losses and
cash dividends declared during the first six months of 1999,
including a special $.40 per share special cash dividend.
Cash dividends declared in the second quarter and six months
ended June 30, 1999, totaled $447,500 and $2.0 million,
respectively. For the first six months of 1998, cash dividends
declared totaled $420,000. In November, 1997, the Board of
Directors declared a special cash dividend of $1.00 per share
($.66 per share adjusted for a 3 for 2 stock split issued in the
form of a 50% stock dividend) and a $.15 per share first quarter
1998 dividend. Both of these cash dividends were paid to the
shareholders in the first quarter of 1998 and totaled $2.3
million.
Capital adequacy is currently defined by banking regulatory
agencies through the use of several minimum required ratios. At
June 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 June 30, 1999, were 8.71 %, 12.98 % and 14.23
%, respectively. For more information refer to Note 2 of the
financial statements.
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1999 Annual Meeting of Shareholders (the "Meeting") of
the Corporation was held on April 27, 1999. Notice of the
Meeting was mailed to shareholders on or about April 1, 1999,
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. Election of Directors. To elect four Class A
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
G. Warren Elliott 1,892,662.919 7,400.8027
Dennis W. Good, Jr. 1,894,455.169 5,608.5529
William E. Snell, Jr. 1,894,455.169 5,608.5529
Martha B. Walker 1,881,466.356 18,597.3651
Robert G. Zullinger 1,894,455.169 5,608.5529
2. Amendment of the Articles of Incorporation. To
consider and vote upon a proposal to amend the
Articles of Incorporation to increase the number of
authorized shares of common stock from 5,000,000 to
15,000,000 shares.
Votes
Votes For Withheld Abstentions
1,829,617.522 59,446.9483 10,999.2215
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 3 Articles of Incorporation and Bylaws
Exhibit 10 Material Contracts
10.1 Amendment to Consulting Agreement
10.2 Franklin Financial Services Corporation
Senior Management
Incentive Program
(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 3 Articles of Incorporation and Bylaws
ARTICLES OF INCORPORATION
FRANKLIN FINANCIAL SERVICES CORPORATION
Filed June 1, 1983
Amended May 2, 1986
Amended May 4, 1999
In compliance with the requirements of Section 204 of the
Business Corporation Law, Act of May 5, 1993 (P.L. 364) as
amended, the undersigned, desiring to be incorporated as a
business corporation, does hereby certify that:
1. The name of the corporation is:
FRANKLIN FINANCIAL SERVICES CORPORATION
2. The location and post office address of the
initial registered office of the corporation in this
Commonwealth is:
20 South Main Street
Chambersburg, Pennsylvania 17201
3. The corporation is incorporated under the Business
Corporation Law of the Commonwealth of Pennsylvania for
the following purpose or purposes:
To engage in and do any lawful act concerning
any and all lawful business for which a corporation may
be incorporated under the Business Corporation Law of
Pennsylvania and to do all things and exercise all
powers, rights and privileges which a business
corporation may now or hereafter be organized or
authorized to do or exercise under the laws of the
Commonwealth of Pennsylvania.
4. The term for which the corporation is to exists
is:
Perpetual
5. The aggregate number of shares which the
corporation shall have authority to issue is 20,000,000
shares, divided into 15,000,000 shares of common stock
of one and 00/100 dollar ($1.00) par value per share
and 5,000,000 shares of stock without par value. The
Board of Directors shall have authority to the full
extent now or hereafter permitted by law from time to
time to issue such stock without par value as a class
without series or in one or more series, to designate,
upon issuance, any or all shares of stock without par
value as common stock or preferred stock, and to fix by
resolution the voting rights (which may be full,
limited, multiple, fractional, or withheld altogether),
designations, preferences, qualifications, limitations,
restrictions, privileges, options, redemption rights,
conversion rights, and other special or relative rights
of such class or any series thereof.
6. The name and post office address of the
incorporator and the number and classes of shares
subscribed by him is:
Number and
Class of
Name Address Shares
Mr. Robert G. 131 Greenleaf Road One share
Zullinger Chambersburg, PA 17201 of common stock
7. The names and addresses of each of the first
directors who shall serve until their successors are
elected and shall qualify are:
Name Address
Mr. Jay L. Benedict, Jr. 688 Bowman Road
Chambersburg, PA 17201
Mr. John M. Hull, III 406 South Coldbrook Ave.
Chambersburg, PA 17201
Mr. Charles M. Sioberg 938 McKinley Street
Chambersburg, PA 17201
Mr. M. Dice Statler 369 Social Island Road
Chambersburg, PA 17201
Mr. Robert G. Zullinger 131 Greenleaf Road
Chambersburg, PA 17201
8. The shareholders of the corporation shall not have
the right to cumulate their votes for the election of
directors.
9. (A) Except as provided in Section (B) of
this Article, the affirmative vote of the holders
of two-thirds of the outstanding shares entitled
to vote shall be required in order to authorize
the following corporate actions:
(1) any merger or consolidation of
the corporation into another corporation.
(2) the dissolution of the
corporation.
(3) the amendment of the Articles
of Incorporation of the Corporation.
(B) The affirmative vote of the holders of a
majority of the shares entitled to vote shall be
required in order to authorize any of the
corporate actions described in Section (A) of this
Article if the Board of Directors shall approve
such corporate action by resolution adopted before
the shareholders are solicited to vote on such
corporate action.
10. (A) Except as provided in Section (B) of
this Article, in the event that any person or
corporation shall acquire beneficial ownership of
fifty percent (50%) or more than the outstanding
common stock of the corporation, the corporation
shall within thirty (30) days thereafter extend to
each shareholder of the corporation, other than
such person or corporation, an offer in writing to
redeem at any time within sixty (60) days of the
date of such offer all or any part of the common
stock owned by him at a redemption price equal to
the greatest of the following:
(1) the highest per share price
paid by such person or corporation to acquire
any shares of common stock of the corporation
within the 12 month period immediately
preceding the date of the offer; or
(2) the highest market price per
share of common stock of the corporation on
any trading day during the 12 month period
immediately preceding the date of the offer;
or
(3) the book value per share of
the common stock of the corporation as
reported in the statement of condition of the
corporation prepared in accordance with
generally accepted accounting principles, for
the quarterly period immediately preceding
the date of the offer.
(B) The corporation shall not be required to
extend a redemption offer to any shareholder
pursuant to the provisions of Section (A) of this
Article if the Board of Directors, by resolution
adopted before the person or corporation involved
has acquired, directly or indirectly, beneficial
ownership of five percent (5%) or more of the
outstanding common stock of the corporation, shall
have approved the acquisition by such person or
corporation of fifty percent (50%) or more of the
outstanding common stock of the corporation.
11. (A) The Board of Directors may, if it deems
advisable, oppose a tender, or other offer for the
corporation's securities, whether the offer is in
cash or in the securities of a corporation or
otherwise. When considering whether to oppose an
offer, the Board of Directors may, but is not
legally obligated to, consider any pertinent
issue. By way of illustration, but not of
limitation, the Board of Directors may, but shall
not be legally obligated to, consider any or all
of the following:
(1) whether the offer price is
acceptable based on the historical and
present operating results or financial
condition of the corporation;
(2) whether a more favorable price
could be obtained for the corporation's
securities in the future;
(3) the impact which an
acquisition of the corporation would have on
the employees, depositors and customers of
the corporation and its subsidiaries and the
community which they serve;
(4) the reputation, business
practices and experience of the offeror and
its management and affiliates as they would
affect the employees, depositors and
customers of the corporation and its
subsidiaries and the future value of the
corporation stock;
(5) the value of the securities
(if any) which the offeror is offering in
exchange for the corporation's securities,
based on an analysis of the worth of the
corporation as compared to the corporation or
other entity whose securities are being
offered;
(6) any antitrust or other legal
and regulatory issues that are raised by the
offer.
(B) If the Board of Directors determines
that an offer should be rejected, it may take any
awful action to accomplish its purpose including,
but not limited to, any or all of the following:
advising shareholders not to accept the offer;
litigation against the offeror; filing complaints
with governmental and regulatory authorities;
acquiring the corporation's securities; selling or
otherwise issuing authorized but unissued
securities or treasury stock or granting options
with respect thereto; and obtaining a more
favorable offer from another individual or entity.
12. The authority to make, amend, alter, change, or
repeal the Bylaws of the corporation is hereby
expressly and solely granted to and vested in the Board
of Directors, subject always to the power of the
shareholders to make, amend, alter, change, or repeal
the Bylaws of the corporation by the affirmative vote
of the holders of not less than two-thirds of the then
outstanding shares of stock of the corporation entitled
to vote generally in the election of directors, voting
together as a single class, at a meeting of the
shareholders duly convened after notice to the
shareholders of such purpose.
Exhibit 10.1 Amendment to Consulting Agreement
AMENDMENT TO CONSULTING AGREEMENT
MADE as of and effective this 1st day of July, 1999 by
and between FRANKLIN FINANCIAL SERVICES CORPORATION, a
Pennsylvania business corporation and registered bank holding
company with offices at 20 South Main Street, P.O. Box T,
Chambersburg, Pennsylvania 17201-0819 (the "Company"), and ROBERT
G. ZULLINGER, an adult individual who resides at 403 Franklin
Square Drive, Chambersburg, Pennsylvania 17201 ("Consultant").
Background
The Company and Consultant entered into a Consulting
Agreement dated July 8, 1996 (the "Consulting Agreement"), which
by its terms expires on July 7, 1999. The parties wish to amend
the Consulting Agreement for purposes of extending the Consulting
Period through January 31, 2000 and for purposes of reducing the
Consulting Fee to $1,750 per month.
Capitalized terms not otherwise defined in this
Amendment shall have the meaning given to them in the Consulting
Agreement.
WITNESSETH:
NOW, THEREFORE, in consideration of the mutual
covenants hereinafter set forth and intending to be legally
bound, the parties hereby agree as follows:
I. Extension of Consulting Period. Section 4(a)(1)
of the Consulting Agreement is hereby amended in its entirety to
read as follows:
(i) January 31, 2000. The close of business
on January 31, 2000;
2. Reduction of Consulting Fee. Section 3(a) of the
Consulting Agreement is amended in its entirety to read as
follows:
(a) Consulting Fee. Effective July 1, 1999,
the Company shall pay to Consultant during the
Consulting Period a consulting fee of $1,750 per month
(the "Consulting Fee"), payable monthly on or before
the fifteenth day of each month.
3. Effect of Amendment. The Consulting Agreement, as
amended by this Amendment, shall remain in full force and effect.
IN WITNESS WHEREOF, this Amendment is executed as of
and effective the day and year first above written.
FRANKLIN FINANCIAL SERVICES CORPORATION
By: /s/William E. Snell, Jr., President
William E. Snell, Jr., President
/s/Robert G. Zullinger (SEAL)
Robert G. Zullinger
Exhibit 10.2 Franklin Financial Services Corporation Senior
Management Incentive Program
FRANKLIN FINANCIAL SERVICES CORPORATION
SENIOR MANAGEMENT INCENTIVE PROGRAM
(AS AMENDED OCTOBER 15, 1992)
1. Purpose
The Senior Management Incentive Program (the Program)
is being adopted pursuant to the Long-Term Incentive Plan of
1990. The purpose of the Program is to provide selected
employees of Franklin Financial Services Corporation (the
Company) and its subsidiaries with an opportunity to receive cash
awards and shares of the Company's $1.00 par value per share
common stock (Common Stock) and to provide an additional
incentive for employees to enter into and remain in the employ of
the Company.
2. Administration
The Program shall be consistent with and subject to the
terms and conditions of the Long-Term Incentive Plan of 1990. In
the event of a discrepancy between the terms and conditions of
the Program with the terms and conditions of the Long-Term
Incentive Plan of 1990, the terms and conditions of the Long-Term
Incentive Plan of 1990 shall control. The Program shall be
administered by the Committee designated by the Board of
Directors of the Company to administer the Long-Term Incentive
Plan of 1990, and the Committee shall have the authority and
responsibilities set forth in the Long-Term Incentive Plan of
1990.
3. Eligibility
All employees of the Company and its subsidiaries who
are eligible to participate in the Long-Term Incentive Plan of
1990 shall also be eligible to participate in the Program. The
Committee shall select the employees to receive awards pursuant
to the Program.
4. Procedure for Awards
The Committee shall select the employees to whom an
award shall be granted pursuant to the Program, and shall
determine the incentive amount to be awarded to each such
employee.
The Committee shall express each award under the
Program in an aggregate dollar amount (the Award) that the Award
recipient is eligible to receive throughout a five (5) year
period after the Award is granted. The aggregate dollar amount
of each Award shall be divided into a Common Stock Award and a
Cash Award, pursuant to the election provisions of the Program.
Both the Common Stock Award and the Cash Award are subject to
vesting requirements, as provided in the Program. The Committee
shall give written notice of the grant of an Award to the Award
recipient.
5. Common Stock Election
Each employee shall make an election to receive a
portion of his or her Award in the form of Common Stock (the
Common Stock Award). The Common Stock Award shall be a
percentage evenly divisible by five (5), which shall not be less
than fifty (50%) percent. The written notice received by an
employee shall be accompanied by an election form to be completed
and signed by the employee, irrevocably electing the portion of
the Award to be received in Common Stock. The employee shall
promptly execute and deliver the election form to the Committee.
That portion of the total Award for which the employee
has not made an election to receive Common Stock shall be payable
in cash subject to the vesting requirements of the Program (the
Cash Award).
After the employee has elected the Common Stock Award,
the Committee shall calculate the number of shares of Common
Stock that may be received in respect of the Common Stock Award.
That number of shares shall be calculated by (i) dividing (x) the
dollar value of the Common Stock Award by (y) the Fair Market
Value (as defined in Section 3.9 of the Long-Term Incentive Plan
of 1990) of the Common Stock as of the date that the Restricted
Stock Award Agreement for such shares is entered into, and then
(ii) multiplying the remainder so calculated by one hundred
twenty percent (120%).
After the number of shares to be awarded to the
employee has been calculated, the Committee shall deliver a
Restricted Stock Award Agreement governing such shares, setting
forth the vesting requirements for the Common Stock Award and for
the Cash Award, and containing such other provisions that are not
inconsistent with this Program or with the Long-Term Incentive
Plan of 1990 as the Committee may determine.
6. Vesting of Common Stock
All shares of restricted stock awarded to an employee
under the Program shall fully vest upon the expiration of ten
(10) years from the date of the Restricted Stock Award Agreement;
provided, however, that the employee is an employee of the
Company or one of its subsidiaries at that time. The Committee
may accelerate the vesting of the restricted stock in accordance
with the provisions of the Plan.
With respect to each employee for whom the Committee
has determined to accelerate the vesting of the restricted stock,
the Committee shall set forth in the Restricted Stock Award
Agreement a five-year cumulative goal for the consolidated net
income of the Company, and annual goals for the consolidated net
income of the Company in each of the five applicable years. The
cumulative and annual net income goals for an employee of a
subsidiary of the Company may be set by reference to the net
income of such subsidiary. The Company's consolidated net income
shall be determined in accordance with generally accepted
accounting principles (GAAP) as set forth in the Company's annual
audited financial statements. A subsidiary's net income shall be
determined in accordance with GAAP as set forth in the
subsidiary's separate financial statements that are included in
the Company's annual audited consolidated financial statements;
and any adjustments made in consolidation which are allocable to
the subsidiary's net income shall be included in the
determination of the subsidiary's net income.
Shares of restricted stock will vest in any year if the
Company meets its net income goal for such year. The number of
shares that will vest in any year shall be determined as follows:
First: Determine the Company's net
income for the year in question, and add to
that number the Company's net income (or
loss) in each prior year in the five year
period (if any). That sum shall be known as
the "Cumulative Net Income."
Second: Divide the Company's
Cumulative Net Income by the cumulative
five-year goal for net income as set forth in
the Restricted Stock Award Agreement. That
remainder shall be known as the "Cumulative
Vesting Percentage."
Third: Multiply the Cumulative
Vesting Percentage by the total number of
shares of restricted stock awarded to the
employee as set forth in the Restricted Stock
Award Agreement. That product shall be known
as the "Cumulative Vested Shares."
Fourth: Subtract from the Cumulative
Vested Shares the number of shares (if any)
that vested in any prior year or years. The
remainder so determined shall be the number
of shares that shall vest in any year.
If the annual net income goal is not met in a
particular year, then no shares of restricted stock shall vest in
that year.
If, after the five-year period for which the net income
goals have been determined, not all the shares of restricted
stock have vested, then beginning in year six and continuing
annually thereafter the Cumulative Vesting Percentage shall
continue to be calculated and the number of vested shares shall
continue to be determined as provided above, except that no
annual net income goals shall apply in order for vesting to
occur. For illustration purposes only, an example of accelerated
vesting has been attached hereto as Exhibit "A."
7. Payment of the Cash Award
That portion of the total Award for which the employee
has not made an election to receive Common Stock shall be payable
in cash subject to the vesting requirements of the Program (the
Cash Award). For example, if an employee is granted an Award of
$100,000 and irrevocably elects to receive the Stock Award of
eighty percent (80%), the employee will receive a Cash Award of
twenty percent (20%), or $20,000.
An employee's Cash Award shall be payable in
installments over the five (5) year period of the Award. Payment
of a percentage of the Cash Award will be made in any year if the
Company meets its net income goal for that year. The applicable
percentage of the Cash Award to be paid in each year (the Cash
Vesting Percentage) shall be determined by the Committee and
shall be set forth in the Restricted Stock Award Agreement. The
amount of the Cash Award payable in each year shall equal the
Cash Vesting Percentage for such year multiplied by the total of
the Cash Award. No part of the Cash Award shall be paid in any
year in which the annual net income goal has not been met, nor
shall the Cash Award for such year be paid in any future year.
Any part of the Cash Award that has not been paid at the end of
the five-year Award period shall be forfeited and shall be
retained by the Company.
8. Termination of Employment
In accordance with Section 9.5C of the Long-Term
Incentive Plan of 1990, an employee who ceases to be an employee
of the Company or one of its subsidiaries prior to the expiration
of ten years from the date of the Restricted Stock Award
Agreement for reasons other than death or disability, shall
forfeit to the Company all shares of restricted stock which have
not vested prior to that time, and shall forfeit that part of the
cash portion of the employee's incentive amount which has not yet
been paid over to the employee. Provided, however, that in the .
event of an employee's retirement from the Company or one of its
subsidiaries, the Committee may determine that the employee shall
be permitted to continue to participate in the Program,
contingent upon the execution by the employee of an agreement not
to compete or a post-retirement consulting agreement with the
Company.
9. Death or Disability
In accordance with Section 9.5D of the Long-Term
Incentive Plan of 1990, in the event of an employee's death or
disability (as defined in the Long-Term Incentive Plan of 1990)
prior to the expiration of ten years from the date of the
Restricted Stock Award Agreement, the restrictions imposed
hereunder shall lapse and the employee shall receive a stock
certificate representing that number of shares of restricted
stock which have not vested prior to that time. However, no part
of the Cash Award which has not previously been paid to the
employee shall be paid to the employee as a result of the
employee's death or disability.
10. Non-Transferability
Awards granted under this Program may not be sold,
assigned, transferred, pledged or otherwise encumbered, except by
will or the laws of descent and distribution. No shares of
restricted stock awarded under this Program may be sold,
assigned, transferred, pledged or otherwise encumbered until such
time as any such shares become vested.
11. Amendment of Program
The non-management members of the Board of Directors of
the Company may amend this Program from time to time in such
manner as they may deem advisable; provided, however, that no
amendment to this Program shall adversely affect any outstanding
Restricted Stock Award Agreement without the consent of the
employee who has received such award.
12. No Continued Employment
An Award granted pursuant to this Program and the
Restricted Stock Award Agreement executed in connection therewith
shall not be construed to imply or constitute evidence of any
agreement, express or implied, on the part of the Company or any
subsidiary thereof to retain the employee in the employ of the
Company or any subsidiary thereof, and each such employee who
receives an award hereunder shall remain subject to discharge to
the same extent as if this Program had not been implemented.
13. Withholding of Taxes
Whenever shares of restricted stock vest or, if sooner,
whenever an employee must include the shares of restricted stock
in income for federal income tax purposes, the Company shall have
the right to (a) require the employee to remit or otherwise make
available to the Company an amount sufficient to satisfy all
federal, state and/or local withholding tax requirements prior to
the delivery of any certificates for such restricted stock, or
(b) take whatever action it deems necessary to protect its
interests with respect to tax liabilities, including, without
limitation, redeeming a portion of any restricted stock otherwise
deliverable pursuant to this Program with a then fair market
value equal to such tax liabilities. The Company's obligation to
make any delivery or transfer of vested restricted stock shall be
conditioned upon the employee's compliance with any withholding
requirement to the Company's satisfaction. The Company shall
also have the right to deduct from all amounts paid in cash to an
employee any taxes required by law to be withheld therefrom. The
Committee shall have the authority to establish rules with
respect to the Company's obligations in connection with the
withholding requirements described herein so as to ensure
compliance with Rule 16b-3(e) of the Securities Exchange Act of
1934.
14. Stock Certificates
Certificates issued in respect of shares of restricted
stock shall be registered in the name of the employee and
deposited by him, together with a stock power endorsed in blank,
with the Company. Such stock certificates may bear a legend
referring to the terms, conditions and restrictions applicable to
such shares. Upon the vesting of all or a portion of such
shares, or upon the expiration of ten years from the date of the
Restricted Stock Award Agreement, the Company shall deliver to
the employee or his legal representative stock certificates
representing such shares which have then vested.
15. Dividend and Voting Rights
An employee who has received restricted stock hereunder
shall have all of the rights of a shareholder of the Company,
including, but not limited to, the right to receive all dividends
paid on such shares and the right to vote such shares.
16. Effect on Other Benefits
The value of a Restricted Stock Award Agreement is not
includible for determining compensation or benefits under any
other Company compensation or benefit plan.
17. Change of Control
Notwithstanding anything to the contrary herein, in the
event of a "Change of Control" as defined in Section 10.2B of the
Long-Term Incentive Plan of 1990, all shares of restricted stock
awarded to employee pursuant to this Program which have not yet
vested nor been forfeited shall automatically vest simultaneously
with a "Change of Control", provided that the employee is an
employee of the Company or one of its subsidiaries immediately
prior to the "Change of Control."
EXHIBIT A
An employee of the Company has been granted an aggregate
Award for the next five years of $50,000. The employee has
irrevocably elected to receive 80% of his five-year Award in the
form of Common Stock of the Company. Thus, the Common Stock
Award is $40,000 and the Cash Award is $10,000. If the Fair
Market Value of the Common Stock on the date of the Restricted
Stock Award Agreement is $20.00, the employee will receive 2,400
shares of restricted stock ((i)(x) $40,000 Common Stock Award
dollar value divided by (y) $20.00 per share value and then
(ii) multiplied by 120% stock premium factor).
The five-year cumulative goal established by the
Committee for the net income of the Company is $15,000,000. The
annual target goals for the net income of the Company for each of
the next five years, as set forth in the employee's Restricted
Stock Award Agreement, and the corresponding Cash Award vesting
percentages, are as follows:
Annual Vesting
Annual Net Income Percentage
Year Levels of the Company for Cash Award
- ---- --------------------- --------------
1992 $2,000,000 10%
1993 2,500,000 15%
1994 3,000,000 20%
1995 3,500,000 25%
1996 4,000,000 30%
Assumption #1:
Assuming that at the end of the first year the Company has
net income of $2,500,000, the annual vesting percentage applied
to the employee's Cash Award would be 10%. The employee would
therefore be paid $1,000 (10% x $10,000), less applicable
withholdings.
Because this is the first year of the five-year Award
period, the Cumulative Net Income would equal $2,500,000. The
Cumulative Vesting Percentage is $2,500,000 ) $15,000,000 =
16.67%. The Cumulative Vested Shares are 16.67% x 2,400 shares =
400. Because no shares previously vested, the total 400 shares
will vest at the end of the first year, and the employee will
receive a stock certificate representing such shares.
Assumption #2:
If, however, at the end of the first year, the Company had a
net income of $1,800,000, no shares of the employee's restricted
stock would vest for that year and none of the Cash Award would
be paid to him.
Assumption #3:
Assume that the Company had net income of $2,500,000 for the
first year, and net losses of $1,000,000 for the second year. No
portion of the employee's restricted stock would vest and no
portion of his Cash Award would be paid in the second year.
If, in the third year, the Company had net income of
$3,250,000, the annual vesting percentage for the Cash Award
would apply, as set forth, at 20%. The employee would therefore
be paid $2,000 (20% x $10,000), less applicable withholdings.
The third-year Cumulative Net Income would equal $4,750,000
($2,500,000 - 1,000,000 + 3,250,000). The Cumulative Vesting
Percentage is $4,750,000 ) $15,000,000 = 31.67%. The Cumulative
Vested Shares are 31.67% x 2,400 shares = 760. Because 400
shares previously vested, an additional 360 shares will vest at
the end of the third year (760 - 400 = 360).
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 13 , 1999 /s/ William E.Snell, Jr.
------------------------
William E. Snell, Jr.
President and
Chief Executive Officer
Date August 13, 1999 /s/ Elaine G. Meyers
---------------------
Elaine G. Meyers
Treasurer and Chief Financial
Officer
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