UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
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 (I.R.S. Employer
of incorporation or organization) Identification No.)
20 South Main Street, PO Box T, Chambersburg, PA 17201-0819
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (717) 264-6116
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Names of each exchange on
______NONE__________ which registered ____________
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $1.00 par value per share
(Title of class)
Indicate by check mark whether the registrant has (1)
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 periods that the
registrant was required to file such reports), and (2)
been subject to such filing requirements for the past 90
days. Yes_X_ No___
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. X_
The aggregate market value of the 2,329,411 shares of the
Registrant's common stock held by nonaffiliates of the
Registrant as of February 15, 2000, based on the average
of the bid and asked price for such shares, was
$40,910,281. There were 2,793,092 outstanding shares of
the Registrant's common stock as of February 15, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive annual proxy statement to
be filed, pursuant to Reg. 14A within 120 days after
December 31, 1999, are incorporated into Part III.
FRANKLIN FINANCIAL SERVICES CORPORATION
FORM 10-K
INDEX
Part I Page
Item 1. Business . . . .. . . . . . . . 3
Item 2. Properties . . .. . . . . . . . 7
Item 3. Legal Proceedings. . . . . . . . . . . 7
Item 4. Submission of Matters to a Vote of Security Holders 7
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters. . . . . . . . . . . . . . . . . 8
Item 6. Selected Financial Data. . . . . . . . . . . . . . . 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .. . . . . . . . 11
Item 7a. Quantitative and Qualitative Disclosures About
Market Risk . . . . . . . . . . . . . . . . . . . . 27
Item 8. Financial Statements and Supplementary Data. . . . . 27
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . . 49
Part III
Item 10. Directors and Executive Officers of the Registrant 49
Item 11. Executive Compensation. . . . . . . . . . . . . . 49
Item 12. Security Ownership of Certain Beneficial Owners
and Management. . . . . . . . . . . . . . . . . . 50
Item 13. Certain Relationships and Related Transactions. . 50
Part IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K. . . . . . . . . . . . . . . . 50
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . 52
Index of Exhibits . . . . . . . . . . . . . . . . . . . . . . 54
Part I
Item 1. Business
General
Franklin Financial Services Corporation (the "Corporation") was
organized as a Pennsylvania business corporation on June 1, 1983 and is
a registered bank holding company under the Bank Holding Company Act of
1956, as amended (the "BHCA"). On January 16, 1984, pursuant to a plan
of reorganization approved by the shareholders of Farmers and Merchants
Trust Company of Chambersburg ("F&M Trust" or "the Bank") and the
appropriate regulatory agencies, the Corporation acquired all the shares
of F&M Trust and issued its own shares to former F&M Trust shareholders
on a share-for-share basis.
On May 1, 1995, the Mont Alto State Bank, also a commercial bank and
a subsidiary of the Corporation, was merged into Farmers and Merchants
Trust Company. In addition, on December 29, 1995, Franklin Founders Life
Insurance Company, a credit life reinsurance company and a subsidiary of
the Corporation, was liquidated. The Corporation conducts all of its
business through its only direct subsidiary, F&M Trust, which is wholly
owned. F&M Trust, established in 1906, is a full-service, Pennsylvania
- -chartered commercial bank and trust company, which is not a member of
the Federal Reserve System. F&M Trust, which operates 12 full service
offices in Franklin and Cumberland Counties, Pennsylvania, engages in
general commercial, retail banking and trust services normally associated
with community banks and its deposits are insured (up to applicable limits)
by the Federal Deposit Insurance Corporation (the "FDIC"). A wide variety
of banking services are offered by F&M Trust to businesses, individuals,
and governmental entities. These services include, but are not necessarily
limited to, accepting and maintaining checking, savings, and time deposit
accounts, providing investment and trust services, making loans and
providing safe deposit facilities.
The Corporation's subsidiary is not dependent upon a single customer
or a few customers for a material part of its business. Thus, the loss of
any customer or identifiable group of customers would not materially affect
the business of the Corporation or F&M Trust in an adverse manner. Also,
none of the Corporation's business is seasonal. The Bank's lending
activities consist primarily of commercial, agricultural and industrial
loans, installment and revolving loans to consumers, residential mortgage
loans, and construction loans. Secured and unsecured commercial and
industrial loans, including accounts receivable, inventory financing and
commercial equipment financing, are made to small and medium-sized
businesses, individuals, governmental entities, and non-profit
organizations. F&M Trust also participates in Pennsylvania Higher
Education Assistance Act student loan programs and Pennsylvania Housing
Finance Agency programs.
Installment loans involve both direct loans to consumers and the
purchase of consumer obligations from dealers and others who have sold or
financed the purchase of merchandise, including automobiles and mobile
homes, to their customers. The Bank's mortgage loans include long-
term loans to individuals and to businesses secured by mortgages on the
borrower's real property. Construction loans are made to finance the
purchase of land and the construction of buildings thereon, and are
secured by short-term mortgages on real estate. In certain situations,
the Bank acquires properties through foreclosure on delinquent loans.
The Bank holds these properties until such time as they are in a
marketable condition and a buyer can be obtained.
F&M Trust's Investment and Trust Services Department offers all of
the personal and corporate trust services normally associated with trust
departments of area banks including: estate planning and administration,
corporate and personal trust fund management, pension, profit sharing
and other employee benefits funds management, custodial services, and
trustee services for publicly issued debentures. F&M Trust's Personal
Investment Center sells mutual fund, annuity and selected insurance
products.
Competition
The Corporation and its subsidiary operate in a competitive
environment that has intensified in the past few years as they have been
compelled to share their market with institutions that are not subject to
the regulatory restrictions on domestic banks and bank holding companies.
Profit margins in the traditional banking business of lending and
gathering deposits has declined as deregulation has allowed nonbanking
institutions to offer alternative services to many of F&M Trust's
customers.
The principal market of F&M Trust is in Franklin County and western
Cumberland County, Pennsylvania. Eleven commercial bank competitors of
F&M Trust have offices in this region, in addition to credit unions,
savings and loan associations, mortgage banks, brokerage firms and
other competitors. F&M Trust is the largest financial institution
headquartered in Franklin County and had total assets of approximately
$444,700,000 on December 31, 1999.
All of the local commercial bank competitors of the Corporation
are subsidiaries of bank holding companies. The Corporation ranks
seventh in size of the twelve bank holding companies having offices
in its primary market.
Staff
As of December 31, 1999, the Corporation and its subsidiary had 191
full-time equivalent employees. Most employees participate in pension,
profit sharing/bonus, and employee stock purchase plans and are provided
with group life, health and major medical insurance. Management considers
employee relations to be excellent.
Supervision and Regulation
Various requirements and restrictions under the laws of the United
States and under Pennsylvania law affect the Corporation and its
subsidiaries.
General
The Corporation is registered as a bank holding company and is subject
to supervision and regulation by the Board of Governors of the Federal
Reserve System under the Bank Holding Act of 1956, as amended. As a bank
holding company, the Corporation's activities and those of its bank
subsidiary are limited to the business of banking and activities closely
related or incidental to banking. Bank holding companies are required to
file periodic reports with and are subject to examination by the Federal
Reserve Board. The Federal Reserve Board has issued regulations under the
Bank Holding Company Act that require a bank holding company to serve as
a source of financial and managerial strength to its subsidiary banks.
As a result, the Federal Reserve Board, pursuant to such regulations,
may require the Corporation to stand ready to use its resources to provide
adequate capital funds to its bank subsidiary during periods of financial
stress or adversity.
The Bank Holding Company Act prohibits the Corporation from acquiring
direct or indirect control of more than 5% of the outstanding shares of any
class of voting stock, or substantially all of the assets of, any bank,
or from merging or consolidating with another bank holding company, without
prior approval of the Federal Reserve Board. Additionally, the Bank Holding
Company Act prohibits the Corporation from engaging in or from acquiring
ownership or control of more than 5% of the outstanding shares of any class
of voting stock of any company engaged in a non-banking business, unless
such business is determined by the Federal Reserve Board to be so closely
related to banking as to be a proper incident thereto. The types of
businesses that are permissible for bank holding companies to own have been
expanded by recent federal legislation.
As a Pennsylvania bank holding company for purposes of the Pennsylvania
Banking Code, the Corporation is subject to regulation and examination by
the Federal Reserve Board.
The Bank is a state chartered bank that is not a member of the Federal
Reserve System and its deposits are insured (up to applicable limits) by
the Federal Deposit Insurance Corporation (the "FDIC"). The Bank is
subject to regulation and examination by the FDIC the Federal Reserve
Board and the Pennsylvania Department of Banking., and to a lesser extent
by the FDIC. The Bank is also subject to requirements and restrictions
under federal and state law, including requirements to maintain reserves
against deposits, restrictions on the types and amounts of loans that
may be granted and the interest that may be charged thereon, and
limitations on the types of investments that may be made and the types of
services that may be offered. The Community Reinvestment Act requires
the Bank to help meet the credit needs of the entire community where the
Bank operates, including low and moderate income neighborhoods.
The Bank's rating under the Community Reinvestment Act, assigned by the
FDIC Federal Reserve Board pursuant to an examination of the Bank, is
important in determining whether the bank may receive approval for, or
utilize certain streamlined procedures in, applications to engage in
new activities. Various consumer laws and regulations also affect the
operations of the Bank. In addition to the impact of regulation,
commercial banks are affected significantly by the actions of the Federal
Reserve Board as it attempts to control the money supply and credit
availability in order to influence the economy.
Capital Adequacy Guidelines
Bank holding companies are required to comply with the Federal
Reserve Board's risk-based capital guidelines. The required minimum
ratio of total capital to risk-weighted assets (including certain
off-balance sheet activities, such as standby letters of credit)
is 8%. At least half of the total capital is required to be "Tier 1
capital," consisting principally of common shareholders' equity,
less certain intangible assets. The remainder ("Tier 2 capital")
may consist of certain preferred stock, a limited amount of
subordinated debt, certain hybrid capital instruments and other
debt securities, and a limited amount of the general loan loss
allowance. The riskbased capital guidelines are required to take
adequate account of interest rate risk, concentration of credit
risk, and risks of nontraditional activities.
In addition to the risk-based capital guidelines, the Federal
Reserve Board requires a bank holding company to maintain a leverage
ratio of a minimum level of Tier 1 capital (as determined under the
risk-based capital guidelines) equal to 3% of average total
consolidated assets for those bank holding companies which have the
highest regulatory examination ratings and are not contemplating
or experiencing significant growth or expansion. All other bank
holding companies are required to maintain a ratio of at least 1%
to 2% above the stated minimum. The Bank is subject to almost
identical capital requirements also adopted by the FDIC.
Although not adopted in regulation form, the Pennsylvania Department
of Banking utilizes capital standards requiring In addition
to Federal Reserve capital requirements, the Pennsylvania Department
of Banking also requires state chartered banks to maintain a minimum
of 6% leverage capital level and 10% risk-based capital, defined
substantially the same as those by the FDIC.as the federal regulations.
Prompt Corrective Action Rules
The federal banking agencies have regulations defining the levels
at which an insured institution would be considered "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized." The applicable
federal bank regulator for a depository institution could, under
certain circumstances, reclassify a "well-capitalized" institution as
"adequately capitalized" or require an "adequately capitalized" or
"undercapitalized" institution to comply with supervisory actions as if
it were in the next lower category. Such a reclassification could be
made if the regulatory agency determines that the institution is in an
unsafe or unsound condition (which could include unsatisfactory examination
ratings). The Corporation and the Bank each satisfy the criteria to be
classified as "well capitalized" within the meaning of applicable
regulations.
Regulatory Restrictions on Dividends
Dividend payments by the Bank to the Corporation are subject to the
Pennsylvania Banking Code, the Federal Deposit Insurance Act, and the
regulations of the FDIC Federal Reserve. Under the Banking Code, no
dividends may be paid except from "accumulated net earnings" (generally,
retained earnings). The Federal Reserve Board and the FDIC have
formal and informal policies which provide that insured banks and bank
holding companies should generally pay dividends only out of current
operating earnings, with some exceptions. The Prompt Corrective Action
Rules, described above, further limit the ability of banks to pay
dividends, because banks which are not classified as well capitalized
or adequately capitalized may not pay dividends.
FDIC Insurance Assessments
The FDIC has implemented a risk-related premium schedule for
all insured depository institutions that results in the assessment of
premiums based on capital and supervisory measures. Under the
risk-related premium schedule, the FDIC assigns, on a semiannual basis,
each depository institution to one of three capital groups (well
- -capitalized, adequately capitalized or undercapitalized) and further
assigns such institution to one of three subgroups within a capital
group. The institution's subgroup assignment is based upon the FDIC's
judgment of the institution's strength in light of supervisory evaluations,
including examination reports, statistical analyses and other information
relevant to measuring the risk posed by the institution. Only institutions
with a total capital to risk-adjusted assets ratio of 10% or greater, a
Tier 1 capital to risk-based assets ratio of 6% or greater, and a Tier 1
leverage ratio of 5% or greater, are assigned to the well-capitalized
group. As of December 31, 1999, the Bank was well capitalized for
purposes of calculating insurance assessments.
The Bank Insurance Fund is presently fully funded at more than the
minimum amount required by law. Accordingly, the 2000 Bank Insurance Fund
assessment rates range from zero for those institutions with the least
risk, to $0.27 for every $100 of insured deposits for institutions deemed
to have the highest risk. The Bank is in the category of institutions
that presently pay nothing for deposit insurance. The FDIC adjusts the
rates every six months.
While the Bank presently pays no premiums for deposit insurance, it
is subject to assessments to pay the interest on Financing Corporation
bonds. The Financing Corporation was created by Congress to issue
bonds to finance the resolution of failed thrift institutions. Prior to
1997, only thrift institutions were subject to assessments to raise funds
to pay the Financing Corporation bonds. On September 30, 1996, as part
of the Omnibus Budget Act, Congress enacted the Deposit Insurance Funds
Act of 1996, which recapitalized the Savings Association Insurance Fund
and provided that commercial banks would be subject to 1/5 of the
assessment to which thrifts are subject for Financing Corporation bond
payments through 1999. Beginning in 2000, commercial banks and thrifts
are subject to the same assessment for Financing Corporation bonds.
The FDIC sets the Financing Corporation assessment rate every quarter.
The Financing Corporation assessment for the Bank (and all other banks)
for the first quarter of 2000 is an annual rate of $.0212 for each
$100 of deposits.
New Legislation
Landmark legislation in the financial services area was signed
into law by the President on November 12, 1999. The Gramm-Leach-Bliley
Act dramatically changes certain banking laws that have been in effect
since the early part of the 20th century. The most radical changes are
that the separation between banking and the securities businesses
mandated by the Glass-Steagall Act has now been removed, and the
provisions of any state law that prohibits affiliation between banking
and insurance entities have been preempted. Accordingly, the new
legislation now permits firms engaged in underwriting and dealing in
securities, and insurance companies, to own banking entities, and
permits bank holding companies (and in some cases, banks) to own
securities firms and insurance companies. The provisions of federal
law that preclude banking entities from engaging in non- financially
related activities, such as manufacturing,have not been changed.
For example, a manufacturing company cannot own a bank and become a
bank holding company, and a bank holding company cannot own a subsidiary
that is not engaged in financial activities, as defined by the regulators.
The new legislation creates a new category of bank holding company
called a "financial holding company." In order to avail itself of the
expanded financial activities permitted under the new law, a bank holding
company must notify the Federal Reserve that it elects to be a financial
holding company. A bank holding company can make this election if it,
and all its bank subsidiaries, are well capitalized, well managed, and
have at least a satisfactory Community Reinvestment Act rating, each in
accordance with the definitions prescribed by the Federal Reserve and
the regulators of the subsidiary banks. Once a bank holding company
makes such an election, and provided that the Federal Reserve does not
object to such election by such bank holding company, the financial
holding company may engage in financial activities (i.e., securities
underwriting, insurance underwriting, and certain other activities
that are financial in nature as to be determined by the Federal
Reserve) by simply giving a notice to the Federal reserve within
thirty days after beginning such business or acquiring a company
engaged in such business. This makes the regulatory approval process
to engage in financial activities much more streamlined than it was
under prior law.
The Corporation believes it qualifies to become a financial holding
company, but has not yet determined whether it will file to become
treated as one. The Federal Reserve has only recently promulgated
rules implementing these provisions of the new legislation, and the
Corporation may wait to see what the experience of other companies
is under the new rules before it makes an election.
The new law also permits certain financial activities to be
undertaken by a subsidiary of a national bank. As the Bank is not
a national bank, these provisions do not apply directly to the Bank.
Generally, for financial activities that are conducted as a principal,
such as an underwriter or dealer holding an inventory, a national bank
must be one of the 100 largest national banks in the United States
and have debt that is rated investment grade. National banks that are
not one of the 100 largest national banks in the United States are not
authorized under the new law to conduct financial activities as a
principal. However, such smaller national banks may own a securities
broker or an insurance agency and certain other financial agency
entities under the new law. Under prior law, national banks could
only own an insurance agency if it was located in a town of fewer
than 5,000 residents, or under certain other conditions. Under the
new law, there is no longer any restriction on where the insurance
agency subsidiary of a national bank is located or does business.
As a Pennsylvania bank, the Bank is permitted under Pennsylvania
law to own and operate an insurance agency without restriction,
and could also own and operate a securities brokerage.
In addition to the foregoing provisions of the new law that make
major changes to the federal banking laws, the new legislation also
makes a number of additions and revisions to numerous federal laws
that affect the business of banking. For example, there is now a
federal law on privacy with respect to customer information held
by banks. The federal banking regulators are authorized to adopt
rules regarding privacy for customer information. Banks must
establish a disclosure policy for non-public customer information,
disclose the policy to their customers, and give their customers the
opportunity to object to non-public information being disclosed to a
third party. Also, the Community Reinvestment Act has been amended by
the new law to provide that small banks (those under $250 million in
assets) that previously received an "outstanding" on their last CRA
exam will not have to undergo another CRA exam for five years, or for
four years if their last exam was "satisfactory." In addition, any
CRA agreement entered into between a bank and a community group must
be disclosed, with both the bank and the group receiving any grants from
the bank detailing the amount of funding provided and what it was used
for. The new law also requires a bank's policy on fees for transactions
at ATM machines by non-customers to be conspicuously posted on the ATM.
Several other provisions affecting other general regulatory requirements
for banking institutions were also adopted.
It is too early to tell what effect the Gramm-Leach-Bliley Act may
have on the Corporation and the Bank. The intent and scope of the act
is positive for the financial industry, and is an attempt to modernize
federal banking laws and make U. S. institutions competitive with those
from other countries. While the legislation makes significant changes
in U. S. banking law, such changes may not directly affect the
Corporation's business unless it decides to avail itself of new
opportunities available under the new law. The Corporation does not
expect any of the provisions of the new Act to have a materially adverse
effect on its existing operations, or to significantly increase its costs.
Separately from the Gramm-Leach-Bliley Act, Congress is often
considering some financial industry legislation. The Corporation
cannot predict how any new legislation, or new rules adopted by
the federal banking agencies, may affect its business in the future.
Selected Statistical Information
Certain statistical information is included in this report as part
of Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Item 2. Properties
The Corporation's headquarters is located in the main office of F&M
Trust at 20 South Main Street, Chambersburg, Pennsylvania. The Corporation
owns one property in Franklin County, Pennsylvania that is used by F&M Trust
for bank operations.
In addition to its main office, F&M Trust owns eleven properties
and leases one property, all of which are used for banking offices and
operations. F&M Trust also leases three locations for off-site ATM
facilities. The bank owns one property slated for demolition as part
of an expansion of the headquarters facility. This project is scheduled
to begin in 2000. All of the properties owned by the bank are located
in Franklin and Cumberland Counties, Pennsylvania.
Item 3. Legal Proceedings
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Market and Dividend Information
The Corporation's common stock is not actively traded in the
overthe-counter market. The Corporation's stock is listed under
the symbol "FRAF" on the O.T.C. Electronic Bulletin Board, an
automated quotation service. Current price information is available
from account executives at most brokerage firms as well as the
registered market makers of Franklin Financial Services Corporation
common stock as listed below under Shareholders' Information.
There were 1,945 shareholders of record as of December 31, 1999.
The range of high and low bid prices, as reported by local sources is
shown below for the years 1999 and 1998. Also shown are the cash
dividends declared for the same years.
Per Share
1999 High Low Cash
dividends
declared*
First quarter $30.00 $28.00 $0.56
Second quarter 31.25 29.75 0.16
Third quarter 29.75 23.00 0.18
Fourth quarter 23.125 20.375 0.18
$1.08
Per Share
1998 High Low Cash
dividends
declared*
First quarter $36.00 $32.83 $-
Second quarter 37.75 36.00 0.15
Third quarter 37.00 30.00 0.16
Fourth quarter 30.00 29.00 0.16
$0.47
* In the first quarter of 1999 the Board declared a special cash
dividend of $.40 per share in addition to a regular cash dividend
of $.16 per share. In November, 1997, the Board declared the first
quarter 1998 cash dividend of $.15 per share.
Shareholders' Information
Dividend Reinvestment Plan
Franklin Financial Services Corporation offers a dividend
reinvestment program whereby shareholders with stock registered
in their own names may reinvest their dividends in additional shares
of the Corporation. Information concerning this optional program is
available by contacting the Corporate Secretary at 20 South Main
Street, P.O. Box 6010, Chambersburg, PA 17201-6010,
telephone 717/264-6116.
Dividend Direct Deposit Program
Franklin Financial Services Corporation offers a dividend direct
deposit program whereby shareholders with registered stock in their
own names may choose to have their dividends deposited directly into
the bank account of their choice on the dividend payment date.
Information concerning this optional program is available by
contacting the Corporate Secretary at 20 South Main Street,
P.O. Box 6010, Chambersburg, PA 17201-6010, telephone 717/264-6116.
Annual Meeting
The Annual Shareholders' Meeting will be held on Tuesday, April 25,
2000, at the Lighthouse Restaurant, 4301 Philadelphia Avenue, Chambersburg.
The Business Meeting will begin at 10:30 a.m. and will be followed by
a luncheon served at 12:00 noon.
Stock Information
The following brokers are registered as market makers of Franklin
Financial Services Corporation's common stock:
Ferris Baker Watts 17 East Washington Street
Hagerstown, MD 21740
800/344-4413
Tucker Anthony Cleary Gull
(A division of Tucker Anthony Inc.)
2101 Oregon Pike
Lancaster, PA 17601
800/646-8647
F.J. Morrissey & Co., Inc.
1700 Market Street, Suite 1420,
Philadelphia, PA 19103-3913
215/563-3296
Ryan, Beck & Co. 3 Parkway,
Philadelphia, Pa 19102
800/223-8969
Registar and Transfer Agent
The registrar and transfer agent for Franklin Financial Services
Corporation is Fulton Bank, P.O. Box 4887, Lancaster, PA 17604.
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
SUMMARY OF SELECTED FINANCIAL DATA
<S> <C> <C> <C> <C> <C>
1999 1998 1997 1996 1995
(amounts in thousands, except per share) ---------- ---------- ---------- ---------- ----------
Summary of operations
Interest income $29,407 $27,463 $26,244 $24,908 $24,853
Interest expense 15,002 13,151 12,225 11,087 11,210
---------- ---------- ---------- ---------- ----------
Net interest income 14,405 14,312 14,019 13,821 13,643
Provision for possible loan losses 830 1,061 936 607 302
Net interest income after provision ---------- ---------- ---------- ---------- ----------
for possible loan losses 13,575 13,251 13,083 13,214 13,341
Noninterest income 4,502 4,658 3,932 3,444 3,432
Noninterest expense 11,810 11,600 11,262 11,152 11,143
---------- ---------- ---------- ---------- ----------
Income before income taxes 6,267 6,309 5,753 5,506 5,630
Income tax 1,183 1,504 1,390 1,379 1,451
---------- ---------- ---------- ---------- ----------
Net income $5,084 $4,805 $4,363 $4,127 $4,179
======== ======== ======== ======== ========
Per common share*
Basic earnings per share $1.86 $1.76 $1.59 $1.46 $1.45
Cash dividends declared $1.08 $0.47 $1.37 $0.52 $0.48
======== ======== ======== ======== ========
Balance sheet data
End of year
Total assets $444,679 $425,001 $353,865 $336,120 $313,473
Deposits 333,310 326,579 274,555 268,202 257,211
Loans, net 284,084 258,488 241,244 221,166 210,067
Shareholders' equity 39,260 39,901 36,305 35,341 34,956
Performance yardsticks (unaudited)
Return on average assets 1.18% 1.29% 1.26% 1.29% 1.34%
Return on average equity 12.95% 12.58% 12.03% 11.83% 12.50%
Dividend payout ratio 59.38% 27.39% 88.27% 36.42% 33.98%
Average equity to average asset ratio 9.11% 10.24% 10.49% 10.87% 10.69%
Trust assets under management (unaudited)
Personal trusts (market value) $418,723 $399,959 $349,647 $261,803 $223,230
Corporate trusts (market value) 806 1,105 1,219 1,037 933
---------- ---------- ---------- ---------- ----------
$419,529 $401,064 $350,866 $262,840 $224,163
======== ======== ======== ======== ========
* Per share information has been adjusted retroactively to reflect all stock splits and dividends.
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion and analysis is intended to assist the
reader in reviewing the financial information presented and should be
read in conjunction with the consolidated financial statements and
other financial data presented elsewhere herein.
Results of Operations: Summary
Franklin Financial Services Corporation reported steady improvement
in earnings for 1999. Net income reached $5,084,000 for the year ended
December 31, 1999, an increase of $279,000, or 5.81%, over the $4,805,000
reported for the year ended December 31, 1998. Net income reported for
the year ended December 31, 1997, was $4,363,000. Basic earnings per
share for 1999 were $1.86 compared to $1.76 and $1.59 per share for
1998 and 1997, respectively. Return on average equity increased to
12.95% for 1999 compared to 12.58% and 12.03% for 1998 and 1997,
respectively. The improvement in net income came primarily from net
interest income, trust fee income and controlled noninterest expense.
Average interest-earning assets grew $55.5 million, or 15.82% to
$406.3 million for 1999 compared to $350.8 million for 1998. Average
interest- bearing liabilities grew $55.0 million, or 19.01%, to
$344.7 million for 1999 compared to $289.7 million for 1998 and
contributed to the decline in net interest margin to 3.88% in 1999 from
4.36% in 1998. Noninterest income, excluding securities gains, was up
4.46% to $4.2 million for 1999, primarily the result of a $400,000 growth
in trust fee income. Noninterest expense was up 1.81% to $11.8 million
due to higher salaries and employee benefits, higher advertising and
data processing expense, all of which were largely offset by lower
other expense related to nonrecurring demolition and real estate
write-down expenses occurring in 1998.
A more detailed discussion on the areas having the greatest
impact on the reported results for 1999 follows.
Net Interest Income
The most important source of the Corporation's earnings
is net interest income which is defined as the difference between
income on interest-earning assets and the expense of interest-bearing
liabilities supporting those assets. Principal categories of
interest-earning assets are loans and securities, while deposits,
securities sold under agreements to repurchase (Repos), short-term
borrowings and long-term debt are the principal categories of
interestbearing liabilities. For the purpose of this discussion
net interest income is adjusted to a tax-equivalent basis. This
adjustment facilitates performance comparisons between taxable and
tax-free assets by increasing the tax-free income an amount equivalent
to the Federal income taxes which would have been paid if this income
were taxable at the Corporation's 34% Federal statutory rate.
Net interest income increased $494,000 to $15.8 million in 1999 from
$15.3 million in 1998. The net interest margin, which reflects
interest rate spread plus the contribution of assets funded by
noninterest-bearing sources, decreased to 3.88% for the year ended
December 31, 1999, from 4.36% and 4.59% for the years ended December
31, 1998 and 1997, respectively. A strong competitive environment
for loans and deposits, market-indexed deposit products and a steady
rise in interest rates all contributed to the Corporation's
declining net interest margin.
Table 1 presents net interest income on a tax-equivalent
basis for each of the years in the three-year period ended December
31, 1999. Table 2 presents average balances (which will be used
in this discussion unless otherwise noted), tax equivalent interest
income and interest expense and average rates earned and paid on the
Corporation's interest-earning assets and interest-bearing liabilities.
Table 3 analyzes the changes attributable to the volume and rate
components of net interest income.
Table 1. Net Interest Income
(Unaudited)
<TABLE>
<CAPTION>
Net interest income, defined as interest income less interest expense, is as shown in the following table:
<S> <C> <C> <C> <C> <C>
(Amounts in thousands) 1999 % Change 1998 % Change 1997
------ ------ ------ ------ ------
Interest income $29,407 7.08% $27,463 4.64% $26,244
Interest expense 15,002 14.07% 13,151 7.57% 12,225
------ ------ ------
Net interest income $14,405 0.65% $14,312 2.09% $14,019
Tax equivalent adjustment 1,375 974 868
------ ------ ------
Net interest income/full taxable equivalent $15,780 3.23% $15,286 2.68% $14,887
===== ===== =====
</TABLE>
Net interest income is affected primarily by variations in the
volume and mix of the Corporation's assets and liabilities, as well as
by changes in the level of interest rates. Short-term interest rates
rose steadily during 1999 from lows at year-end 1998. The average
prime rate and Federal funds rate in 1999 were 8.00% and 4.95%,
respectively, versus 8.35% and 5.36%, respectively, in 1998.
Intermediate and long-term interest rates rose steadily throughout
the year as the credit markets became increasingly concerned about
the prospects of a tighter monetary policy. This concern caused
a significant reduction in mortgage origination volume which adversely
impacted the Corporation.
The volume of average interest-earning assets and average
interest-bearing liabilities each increased approximately $55.0 million
in 1999 over 1998. The yield on interest-earning assets declined 53
basis points to 7.58% for 1999 from 8.11% for 1998. Concurrently,
the rates paid on interest-bearing liabilities declined only 19 basis
points to 4.35% for 1999 from 4.54% in 1998. Table 3 indicates that,
although the decline in yields on interest-earning assets outpaced
the decline in rates paid on interest-bearing liabilities by 34 basis
points, the strong growth in asset volume helped to offset the adverse
impact to the net interest margin and net interest income from the
unequal decline in yields earned on earning assets and interest rates
paid on interest-bearing liabilities.
The growth in average earning assets came primarily from the
investment portfolio (up $35.3 million, or 38.6%) and the loan portfolio
(up $19.9 million, or 7.86%). Asset growth was funded primarily
from interest-bearing deposits (up $32.0 million, or 12.4%), Repos
(up $5.6 million, or 27.7%) and long-term debt (up $18.8 million or 143.8%).
Interest rates were marginally lower in 1998 versus 1997. The average
prime rate and the average Federal funds rates in 1998 were 8.35% and
5.36%, respectively, versus 8.44% and 5.48%, respectively, in 1997.
Net interest income on a tax-equivalent basis rose $401,000 to $15.3
million in 1998 from $14.9 million in 1997. Average earning assets
grew $26.4 million to $350.8 million for 1998 compared to $324.3 million
in 1997 while the yield decreased 25 basis points to 8.11%. Average
interest-bearing liabilities grew $20.3 million to $289.7 million
in 1998 versus $269.4 million in 1997 with the rate paid on those
liabilities remaining unchanged at 4.54%. The net interest margin
decreased to 4.36% for the year ended December 31, 1998 from
4.59% for the year ended December 31, 1997 and resulted more from
changes in volume than in changes in interest rates.
Table 2. Analysis of Net Interest Income
(Unaudited)
<TABLE>
<CAPTION>
1999
---------- ----------------------
Average Income or Average
(Amounts in thousands) balance expense yield/rate
----------------------------------
<S> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits in other banks $6,970 $354 5.08%
Investment securities
Taxable 79,771 4,681 5.87%
Nontaxable 47,068 3,470 7.37%
Loans, net of unearned discount 272,470 22,277 8.18%
----------------------------------
Total interest-earning assets 406,279 30,782 7.58%
---------------------------------
Noninterest-earning assets 24,428
------------
Total assets $430,707
=========
Interest-bearing liabilities:
Deposits:
Interest-bearing checking $44,246 $887 2.00%
Money market deposit accounts 65,678 2,725 4.15%
Savings 38,305 1,079 2.82%
Time 138,265 7,250 5.24%
----------------------------------
Total interest-bearing deposits 286,494 11,941 4.17%
----------------------------------
Securities sold under agreements to repurchase 25,802 1,242 4.81%
Short term borrowings 510 29 5.69%
Long term debt 31,916 1,790 5.61%
----------------------------------
Total interest-bearing liabilities 344,722 15,002 4.35%
----------------------------------
Noninterest-bearing liabilities 46,734
Shareholders' equity 39,251
------------
Total liabilities and shareholders' equity $430,707
========
Net interest income/Net interest margin 15,780 3.88%
----------
Tax equivalent adjustment (1,375)
----------
Net interest income $14,405
=======
All amounts have been adjusted to a tax-equivalent basis using a tax rate of 34%
</TABLE>
<TABLE>
<CAPTION>
Table 2. Analysis of Net Interest Income
1998
---------------------------------
Average Income or Average
(Amounts in thousands) balance expense yield/rate
----------------------------------
<S> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits in other banks $6,634 $359 5.41%
Investment securities
Taxable 60,676 3,641 6.00%
Nontaxable 30,859 2,248 7.28%
Loans, net of unearned discount 252,596 22,189 8.78%
----------------------------------
Total interest-earning assets 350,765 28,437 8.11%
---------------------------------
Noninterest-earning assets 22,266
------------
Total assets $373,031
=========
Interest-bearing liabilities:
Deposits:
Interest-bearing checking $37,046 $801 2.16%
Money market deposit accounts 49,933 2,125 4.26%
Savings 38,782 1,080 2.78%
Time 129,094 7,199 5.58%
----------------------------------
Total interest-bearing deposits 254,855 11,205 4.40%
----------------------------------
Securities sold under agreements to repurchase 20,205 1,053 5.21%
Short term borrowings 1,547 89 5.75%
Long term debt 13,091 804 6.14%
----------------------------------
Total interest-bearing liabilities 289,698 13,151 4.54%
----------------------------------
Noninterest-bearing liabilities 45,123
Shareholders' equity 38,210
------------
Total liabilities and shareholders' equity $373,031
========
Net interest income/Net interest margin 15,286 4.36%
----------
Tax equivalent adjustment (974)
----------
Net interest income $14,312
=======
All amounts have been adjusted to a tax-equivalent basis using a tax rate of 34%
</TABLE>
<TABLE>
<CAPTION>
Table 2. Analysis of Net Interest Income
1997
---------------------------------
Average Income or Average
(Amounts in thousands) balance expense yield/rate
----------------------------------
<S> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits in other banks $290 $28 9.66%
Investment securities
Taxable 61,998 3,869 6.24%
Nontaxable 26,744 1,981 7.41%
Loans, net of unearned discount 235,308 21,234 9.02%
----------------------------------
Total interest-earning assets 324,340 27,112 8.36%
---------------------------------
Noninterest-earning assets 21,357
------------
Total assets $345,697
========
Interest-bearing liabilities:
Deposits:
Interest-bearing checking
Money market deposit accounts $34,222 $730 2.13%
Savings 30,182 1,229 4.07%
Time 43,488 1,220 2.81%
123,121 6,878 5.59%
Total interest-bearing deposits ----------------------------------
231,013 10,057 4.35%
----------------------------------
Securities sold under under agreements to repurchase 14,685 750 5.11%
Short term borrowings 15,651 894 5.71%
Long term debt 8,087 524 6.48%
----------------------------------
Total interest-bearing liabilities 269,436 12,225 4.54%
----------------------------------
Noninterest-bearing liabilities 39,989
Shareholders' equity 36,272
------------
Total liabilities and shareholders' equity $345,697
========
Net interest income/Net interest margin 14,887 4.59%
-----------------------
Tax equivalent adjustment (868)
----------
Net interest income $14,019
=======
All amounts have been adjusted to a tax-equivalent basis using a tax rate of 34%
Years ended December 31
1999 1998 1997
---------------------------------
Rate Analysis: 7.58% 8.11% 8.36%
Yield on total earning assets 3.70% 3.75% 3.77%
Cost of funds supporting earning assets ---------------------------------
3.88% 4.36% 4.59%
Net rate on earning assets ======== ======= =======
</TABLE>
Table 3. Rate-Volume Analysis of Net Interest Income (Unaudited)
<TABLE>
<CAPTION>
Table 3 attributes increases and decreases in components of net interest income either to changes in
average volume or to changes in average rates for interest-earning assets and interest-bearing liabilities.
Numerous and simultaneous balance and rate changes occur during the year. The amount of change
that is not due solely to volume or rate is allocated proportionally to both.
1999 Compared to 1998 1998 Compared to 1997
Increase (Decrease) due to: Increase (Decrease) due to:
----------------------------- -----------------------------
(Amounts in thousands) Volume Rate Net Volume Rate Net
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Interest-bearing deposits
in other banks $18 ($23) ($5) $349 ($18) $331
Investment securities
Taxable 1,122 (82) 1,040 (81) (147) (228)
Nontaxable 1,195 27 1,222 300 (33) 267
Loans 1,682 (1,594) 88 1,530 (575) 955
------ ------ ------ ------ ------ ------
Total net change in
interest income 4,017 (1,672) 2,345 2,098 (773) 1,325
------ ------ ------ ------ ------ ------
Interest expense on:
Interest-bearing checking 147 (61) 86 61 10 71
Money market deposit
accounts 655 (55) 600 838 58 896
Savings accounts (13) 12 (1) (131) (9) (140)
Time deposits 495 (444) 51 333 (12) 321
Securities sold under
agreements to
repurchase 274 (85) 189 287 16 303
Short term borrowings (59) (1) (60) (811) 6 (805)
Long term borrowings 1,062 (76) 986 309 (29) 280
------ ------ ------ ------ ------ ------
Total net change in
interest expense 2,561 (710) 1,851 886 40 926
------ ------ ------ ------ ------ ------
Increase (Decrease) in net
interest income $1,456 ($962) $494 $1,212 ($813) $399
======= ======= ======= ======= ======= =======
Nonaccruing loans are included in the loan balances used to calculate the above rate volume analysis.The
interest associated with these nonaccruing loans is not shown in the loan income numbers. All nontaxable
interest income has been adjusted to a tax-equivalent basis, using a tax rate of 34%.
</TABLE>
Provision for Possible Loan Losses
The provision for possible loan losses charged against earnings in
1999 was $830,000 compared to $1.061 million and $936,000 in 1998 and
1997, respectively. The lower provision in 1999 versus 1998 was
directly related to lower net charge-offs in 1999 versus 1998.
Net charge-offs in 1999 totaled $520,000 compared to $816,000 and
$692,000 in 1998 and 1997, respectively. Management performs a
quarterly analysis of the loan portfolio considering current economic
conditions and other relevant factors to determine the adequacy of
the allowance for possible loan losses. For more information, refer
to the loan quality discussion and Table 13.
Noninterest Income and Expense
1999 versus 1998: Noninterest income, excluding securities gains,
grew 4.46%, or $180,000 to $4.2 million for the year ended December,
31, 1999, compared to the same period ended December 31, 1998. Trust
fee income was up $400,000 to $2.2 million in 1999 from $1.8 million in
1998. An aggressive sales culture from traditional trust business
contributed to the strong increase in trust fee income. Trust assets
were up $18.5 million to $419.5 million in market value at December
31, 1999 compared to $401.0 million at December 31, 1998.
Other income was down $185,000, or 74.0%, to $65,000 in 1999 from
$250,000 in 1998. The recognition of a deferred gain in 1998 from
the 1993 sale of a real estate subsidiary accounted for the large
variance in other income between 1999 and 1998.
The Corporation recognized securities gains totaling $289,000 in
1999, down $336,000 from the $625,000 recognized in 1998. Securities
gains produced from the sale of available for sale equity securities
offset expenses associated with an executive management long-term
incentive plan and loan loss provision expense.
Total noninterest expense was up $210,000, or 1.81% to $11.8
million for the year ended December 31, 1999 compared to $11.6 million
for the year ended December 31, 1998. Salaries and employee benefits,
advertising, data processing and other expense are the primary expense
categories related to the net increase. Salaries and benefits increased
$797,000, or 14.2%, largely from general merit increases and commissions
and incentives including a pay for performance pilot program, up
$305,000; a decrease of $105,000 in a pension expense credit year over
year; additional expense of $210,000 related to an executive long-term
incentive plan; and $185,000 less in deferred costs related to a lower
volume of loan originations. Advertising expense was up $67,000, or 15.3%
to $505,000 for 1999 compared to $438,000 in 1998 due to more intense
marketing in some newer markets. Data processing fees increased $74,000,
or 9.2%, to $878,000 in 1999 compared to $804,000 in 1998 largely because
of greater loan and deposit activity and the related processing fees
(up $38,500) associated with our service bureau, higher ATM and data
processing equipment maintenance and rental costs, up $22,100, and higher
software related costs, up $13,400. Other noninterest expense recorded
a decrease of $743,000, or 26.9%, to $2.0 million in 1999 compared to
$2.7 million in 1998. A decrease of $183,000 for amortization of
intangibles and $684,000 less in real estate writedown and demolition
expense associated with improved real estate held or acquired for a
planned headquarters expansion accounted for most of the decrease.
Higher expenses totaling $124,000 associated with normal everyday
operations offset a portion of the reduction in other expense from 1998
to 1999.
1998 versus 1997: Noninterest income, excluding securities gains,
increased $888,000, or 28.2%, to $4.0 million in 1998 compared to $3.1
million in 1997. Trust fees totaling $1.8 million, an increase of $416,000
accounted for half of the increase. Trust fees were up due to attracting
new business and the higher market value of trust assets. Service charges,
commissions and fees were up $222,000, largely due to higher loan fees
associated with an unusually high volume of mortgage refinancing in 1998.
Other income was up $250,000 due primarily to the recognition of a deferred
gain of approximately $207,000 from the 1993 sale of a real estate
subsidiary. Gains from the sale of available for sale equity securities
were down $162,000 to $625,000 in 1998 from $787,000 in 1997. In 1998,
gains realized offset expenses associated with the write-down and demolition
of improved real estate targeted in connection with a future expansion
of corporate headquarters.
Noninterest expense increased $338,000, or 3.0%, to $11.6 million in
1998 compared to $11.3 million in 1997. Salaries and benefits expense
decreased $381,000 in 1998 versus 1997 due primarily to salary expense,
up $90,500, commissions and incentives, up $162,000, offset by a decrease
of $676,000 in pension expense. The large decrease in pension expense
was related to the overfunded status of the Corporation's pension plan.
Other noninterest expense increased $680,000 primarily due to write-down
and demolition expense associated with improved real estate held or
acquired and targeted for demolition in connection with a future expansion
of corporate headquarters.
Year 2000
The Corporation successfully planned for the Year 2000 event and
did not experience system problems, deposit run-off or loan problems
related to our customer's Year 2000 readiness. In anticipation of the
potential for deposit run-off and as part of its cash contingency plan,
the Corporation purchased a sufficient amount of cash from the Federal
Reserve to add to the Bank's normal cash inventory. This cash was
used to increase the normal cash levels in the Bank's ATMs for a higher
volume of customer withdrawal activity via that medium and to have extra
cash on hand in the event of heavier than normal customer withdrawals.
Neither event occurred and the extra cash was sold back to the Federal
Reserve Bank of Philadelphia the week following December 31, 1999.
In the months following December 31, 1999, the Corporation has not
experienced any problems from customers or systems related to the Year
2000 event. The cost to the Corporation for Y2K preparations was
immaterial.
Provision for Income Taxes
Federal income tax expense equaled $1.2 million in 1999 compared
to $1.5 million and $1.4 million in 1998 and 1997, respectively.
The Corporation's effective tax rate for the years ended December 31,
1999, 1998 and 1997, was 18.9%, 23.8% and 24.2%, respectively. An
increase in tax-free income over the past three years relative to pretax
income was primarily responsible for the declining effective rate over
the three-year period. For a more comprehensive analysis of Federal
income tax expense refer to Note 10 of the accompanying financial
statements.
Financial Condition
One method of evaluating the Corporation's condition is in terms
of its sources and uses of funds. Liabilities represent sources of
funds while assets represent uses of funds. At December 31, 1999
total assets reached $444.7 million, an increase of $19.7 million,
or 4.63%, compared to $425.0 million at December 31, 1998. Table 2
presents average balances of the Corporation's assets and
liabilities over a three-year period. The following financial
condition discussion will reference the average balance sheet
presented in Table 2 unless otherwise noted.
Investment Securities: The Corporation invests in both taxable
and tax-free securities as part of its asset liability management.
In 1999, investment securities averaged $126.8 million versus
$91.5 million in 1998, an increase of 38.57%. Average taxable
securities in 1999 increased $19.0 million, or 31.5%. The increase
in taxable securities was comprised primarily of commercial paper,
mortgage-backed securities and asset-backed securities. Average
tax-free securities increased $16.2 million, or 52.5 %. A $15.0
million investment leverage transaction involving long-term callable
municipal securities occurring in the fourth quarter of 1998
primarily accounted for the $16.2 million increase in nontaxable
securities in 1999. As of October 1, 1998, the Corporation classified
all investment securities as available for sale (Refer to Note 1).
With the exception of two nonrated securities totaling $1.2 million,
the investment portfolio is made up entirely of investment grade
securities.
Table 4. Investment Securities at Amortized Cost (Unaudited)
<TABLE>
<CAPTION>
The following tables present amortized costs of investment securities by type at December 31 for the
past three years:
<S> <C> <C> <C>
Amortized cost
1999 1998 1997
------ ------ ------
Available for Sale
Equity Securities $5,423 $3,404 $1,588
U.S. Treasury securities and obligations of U.S. Government
agencies and corporations 13,982 13,992 20,967
Obligations of state and political subdivisions 48,271 48,490 14,926
Corporate debt securities 11,586 5,959 4,029
Other 20,606 27,000 -
Mortgage-backed securities 31,320 25,572 14,877
------ ------ ------
$131,188 $124,417 $56,387
======= ======= =======
Amortized cost
(Amounts in thousands) 1999 1998 1997
------ ------ ------
Held to Maturity
U.S. Treasury securities and obligations of U.S. Government
agencies and corporations $ - $ - $1,030
Obligations of state and political subdivisions - - 15,025
Corporate debt securities - - 2,343
Other - - 1,392
Mortgage-backed securities - - 7,989
------ ------ ------
$ - $ - $27,779
======= ======= =======
</TABLE>
Table 5. Maturity Distribution of Investment Portfolio (Unaudited)
<TABLE>
<CAPTION>
The following presents an analysis of investments in securities at December 31, 1999 by maturity, and the weighted
average yield for each maturity presented. The yields presented in this table are presented on a tax-equivalent basis
and have been calculated using the amortized cost.
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
After one year After five
year through years through After ten
One year or less five years ten years years Total
--------------- --------------- --------------- --------------- ---------------
Fair Fair Fair Fair Fair
(Amounts in thousands) Value Yield Value Yield Value Yield Value Yield Value Yield
Available for Sale
U.S. Treasury securities & obligations
of U.S. Government agencies &
corporations $2,999 6.05% $5,950 5.94% $4,871 7.13% - - $13,820 6.38%
Obligations of state & political
subdivisons 2,332 6.34% 6,778 6.27% 4,820 7.33% 33,341 7.30% 47,271 7.11%
Corporate debt securities 2,427 6.24% 6,447 6.52% - - 2,682 7.85% 11,556 6.77%
Mortgage-backed securities 2,809 6.10% 24,983 6.41% 1,947 6.09% 997 6.04% 30,736 6.35%
Other 2,037 6.09% 12,670 6.24% 2,716 6.88% 3,157 6.33% 20,580 6.32%
Equity securities - - - - - - 5,838 4.21% 5,838 4.21%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
$12,604 6.16% $56,828 6.32% $14,354 7.01% $46,015 6.85% $129,801 6.57%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
Loans: Total loans, net of unearned discount, averaged $272.4
million in 1999 compared to $252.6 million in 1998, an increase of
7.3%. As Table 6 reflects, the growth in the loan portfolio occurred
mostly in the commercial, industrial and agricultural category which
was up $14.5 million to $123.0 million at December 31, 1999 compared to
$108.5 million at December 31, 1998. Growth in this arena has come from
local municipalities and local small and medium sized businesses.
In addition, the Corporation has attracted corporate customers from
other area financial institutions who have become disenchanted as a
result of recent local bank mergers. Mortgage loan growth slowed
in 1999 versus 1998 due to a higher interest rate environment in 1999.
Mortgage loans at December 31, 1999, totaled $105.0 million compared
to $95.9 million at December 31, 1998, an increase of 9.6%. Consumer
loan growth, which includes home equity lines of credit, was slow in
1999, recording an increase of $2.2 million, or 3.8%, to $59.8 million
at December 31, 1999, from $57.6 million at December 31, 1998.
Lower consumer loan demand, tighter credit underwriting standards
and increased competition are primarily responsible for the slow
consumer loan growth.
Table 6. Loan Portfolio
(Unaudited)
<TABLE>
<CAPTION>
The following table presents an analysis of the Bank's loan portfolio for each of the past five years:
<S> <C> <C> <C> <C> <C>
December 31
---------------------------------------------------------------------------
(Amounts in thousands) 1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
Real estate (primarily first mortgage
residential loans) $101,426 $92,293 $82,989 $79,478 $83,800
Real estate - construction 3,670 3,567 2,480 3,727 5,233
Commercial, industrial and agricultural 123,021 108,540 103,471 91,244 74,678
Consumer (including home equity lines
of credit) 59,830 57,647 55,651 49,936 50,017
--------- --------- --------- --------- ---------
Total loans 287,947 262,047 244,591 224,385 213,728
--------- --------- --------- --------- ---------
Less: Unearned discount (4) (10) (43) (159) (520)
Allowance for possible loan losses (3,859) (3,549) (3,304) (3,060) (3,141)
--------- --------- --------- --------- ---------
Net loans $284,084 $258,488 $241,244 $221,166 $210,067
========== ========== ========== ========== ==========
</TABLE>
Table 7. Maturities and Interest Rate Terms of Selected Loans
(Unaudited)
<TABLE>
<CAPTION>
Stated maturities (or earlier call dates) of selected loans as of December 31, 1999 are summarized in
the table below. Residential mortgages and consumer loans are excluded from the presentation.
<S> <C> <C> <C> <C>
After
one year
Within but within After
(Amounts in thousands) one year five years five years Total
--------------------------- ---------
Loans:
Real estate - construction $3,670 $ - $ - $3,670
Commercial, industrial and agricultural 25,244 36,074 61,703 123,021
--------------------------- ---------
$28,914 $36,074 $61,703 $126,691
======= ======= ======= =======
The following table shows for the above loans the amounts which have predetermined interest rates
and the amounts which have variable interest rates at December 31, 1999:
After
one year
but within After
five years five years
-------------------
Loans with predetermined rates $25,824 $49,361
Loans with variable rates 10,250 12,342
-------------------
$36,074 $61,703
======= =======
</TABLE>
Table 8. Time Deposits of $100,000 or More (Unaudited)
<TABLE>
<CAPTION>
The maturity of outstanding time deposits of $100,000 or
more at December 31, 1999 is as follows:
<S> <C>
(Amounts in thousands) Amount
--------
Maturity distribution:
Within three months $9,755
Over three through six months 17,229
Over six through twelve months 7,242
Over twelve months 707
---------
Total $34,933
=========
</TABLE>
Table 9. Short-Term Borrowings and Securities Sold Under
Agreements to Repurchase
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
(Amounts in thousands) 1999 1998 1997
------------------------- ------------------------- -------------------------
Short-Term Repurchase Short-Term Repurchase Short-Term Repurchase
Borrowings Agreements Borrowings Agreements Borrowings Agreements
----------- ----------- ----------- ----------- ----------- -----------
Ending balance $12,500 $27,182 $ - $24,414 $11,150 $16,075
Average balance 510 25,802 1,547 20,205 15,651 14,685
Maximum month-end balance 12,500 33,496 8,350 24,414 23,900 18,538
Weighted-average interest rate on average balances 5.69% 4.81% 5.75% 5.21% 5.71% 5.11%
</TABLE>
Deposits and Borrowings: Funding for asset growth came from
deposits, Repos and long-term debt. Interest-bearing deposits
averaged $286.5 million in 1999 compared to $254.9 million in 1998.
Noninterest-bearing deposits averaged $43.0 million in 1999 versus
$39.9 million in 1998. Deposit growth in 1999 came primarily from
money-market deposits which averaged $65.7 million for the year, an
increase of $15.8 million, or 31.7%, over an average of $49.9 million
for 1998. At December 31, 1999, total deposits equaled $333.3 million
compared to $326.6 million at December 31, 1998. In 1999, Repos
averaged $25.8 million, an increase of 5.6 million from an average of
$20.2 million in 1998. Repos represent corporate customer cash
management accounts. The banking industry in general has experienced
increased difficulty in relying totally on deposit growth to fund the
growth in assets. The Corporation is no exception to this phenomenon
and finds it necessary to look to alternate funding sources. One
source of alternate funding for the Corporation is the Federal Home
Loan Bank of Pittsburgh (FHLB). The Corporation has entered into both
short-term and long-term debt arrangements with FHLB. In 1999,
short-term borrowings with FHLB averaged $.5 million compared to $1.5
million in 1998. Long-term debt with FHLB averaged $31.9 million in
1999 versus $13.1 million in 1998, an increase of 143.8%. Most of the
increase in long-term debt was used to fund a $15.0 million tax-free
investment leverage transaction. As of December 31, 1999, the
Corporation had the ability to borrow a total of $120.6 million from
FHLB. At December 31, 1999, the Corporation's total debt with FHLB was
$42.2 million - $12.5 million in short-term debt and $29.7 million in
long-term debt.
Shareholders' Equity: Total Shareholders' equity totaled $39.2
million at December 31, 1999, a decrease of $641,000, or 1.61% from
$39.9 million at December 31, 1998. A decrease of $2.7 million in
accumulated other comprehensive income (loss) was primarily responsible
for the decrease in Shareholders' equity and more than offset the $2.1
million increase in retained earnings for 1999. The large swing in
comprehensive income was related entirely to a net unrealized loss in
available for sale investment securities.
Cash dividends declared by the Board of Directors in 1999 totaled
$1.08 per common share and reduced Shareholders' equity by $3.0 million.
Included in cash dividends declared was a special cash dividend of $.40
per common share and regular quarterly cash dividends of $.68 per common
share. Cash dividends declared by the Board of Directors in 1998
totaled $.47 and reduced Shareholders' equity by $1.3 million. The ratio
of regular cash dividends declared to net income in 1999 was 36.56%;
including the special cash dividend, the ratio of cash dividends declared
to net income increased to 59.38%. In 1998, the ratio of cash dividends
declared to net income was 27.4%.
On March 4, 1999, the Board of Directors authorized the repurchase of
up to 50,000 shares of the Corporation's common stock for a twelve-month
period ending in March 2000. Treasury stock repurchased is used for general
corporate purposes including stock dividends and splits, employee benefit
and executive compensation plans, and the dividend reinvestment plan.
Under this program, the Corporation repurchased 7,000 shares for
approximately $175,000. In March 1998, the Board of Director authorized a
similar plan for a twelve-month period ended March, 1999. Under this
program, in 1999, the Corporation repurchased 8,975 common shares for a
cost of approximately $260,000. At December 31, 1999 and 1998, the
Corporation held a total of 252,830 and 242,871, respectively, in Treasury
shares acquired through Board authorized stock repurchase programs.
Subsequent to year-end, on March 2, 2000, the Board of Directors
approved a new stock repurchase program which authorizes the repurchase of
up to 75,000 shares during a one-year period beginning on the date of Board
approval.
A strong capital position is important to the Corporation and provides
a solid foundation for the future growth of the Corporation. A strong capital
position also instills confidence in the Bank by depositors, regulators and
investors, and is considered essential by management.
Common measures of adequate capitalization for banking institutions
are capital ratios. These ratios indicate the proportion of permanently
committed funds to the total asset base. Guidelines issued by Federal and
State regulatory authorities require both banks and bank holding companies
to meet minimum leverage capital ratios and risk-based capital ratios.
The leverage ratio compares Tier 1 Capital to total balance sheet assets
while the risk-based ratio compares Tier 1 and Tier 2 capital to
risk-weighted assets and off-balance-sheet activity in order to make capital
levels more sensitive to the risk profiles of individuals banks.
Current regulatory capital guidelines call for a minimum Tier 1 leverage
ratio of 4.0% and minimum Tier I and Tier 2 risk-based capital ratios of 4.0%
and 8.0%, respectively. Well capitalized banking institutions are determined
to have leverage capital ratios greater than or equal to 5.0% and Tier 1 and
Tier 2 risk-based capital ratios greater than or equal to 6.0% and 10.0%,
respectively.
Tier 1 capital is composed of common stock, additional paid-in capital
and retained earnings reduced by goodwill, other intangible assets and the
effect of unrealized losses on available for sale equity securities.
Total capital is composed of Tier 1 capital plus the includable portion
of the allowance for possible loan losses. Table 10 presents the capital
ratios for the consolidated Corporation at December 31, 1999, 1998 and
1997. At year-end, the Corporation and its banking subsidiary exceeded all
regulatory capital requirements. For additional information on capital
adequacy refer to Note 2 of the accompanying financial statements.
Table 10. Capital Ratios
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
December 31
1999 1998 1997
----------------------------------
Risk-based ratios
Tier 1 12.65% 12.73% 13.53%
Total capital 13.89% 13.97% 14.80%
Leverage Ratio 8.72% 9.16% 9.22%
Local Economy: The local economy continues to be healthy.
Franklin County's unemployment rate for December was 3.6% and identical
to the county's jobless rate one year earlier. The Cumberland Valley
Business Park, born from the Franklin County Reuse Committee for the
redevelopment of the Letterkenny Army Depot, has attracted 20 businesses
to the park and has prospects for more. Other business parks in the
area have also been successful in attracting new small to mid-sized
businesses. Franklin County, located along the I-81 corridor, had the
25th lowest unemployment rate among Pennsylvania's 67 counties.
Adjoining Cumberland and Fulton Counties had unemployment rates of 2.1%
and 4.1%, respectively, and ranked 3rd and 31st, respectively, in
the State.
Asset Quality
As reflected in Table 12, the Corporation's nonperforming assets
increased $1.7 million to $3.9 million at December 31, 1999, a 79.5%
increase from the $2.2 million in nonperforming assets reported at
December 31, 1998. Nonperforming loans, which increased $1.9 million
to $3.6 million at December 31, 1999, accounted for the increase in
nonperforming assets in 1999. Nonperforming loans had showed a
downward trend in each of the previous seven years, declining from
a high of $7.2 million at December 31, 1991. Included in nonperforming
loans are nonaccrual loans, loans past due 90 days or more and restructured
loans. Nonaccrual loans increased $1.8 million to $3.1 million at December
31, 1999, from $1.3 million at December 31, 1998. The increase in
nonaccrual loans at December 31, 1999, was related primarily to one
significant commercial credit relationship which added $1.8 million
to nonaccrual loans during the year. Otherwise, the overall condition
of the loan portfolio remained stable in 1999. Loans past due 90 days
or more increased $137,000 to $451,000 at December 31, 1999, up 43.6%
from $314,000 at December 31, 1998. For the fifth consecutive year,
the Corporation reported no restructured loans. The final component of
nonperforming assets, other real estate owned, decreased to $306,000
at December 31, 1999 from $527,000 one year earlier.
The Corporation's net charge-offs, shown in Table 13, decreased to
$520,000 in 1999, the lowest level recorded in the past five years. Net
charge-offs decreased 36.3% from $816,000 in 1998, and were reduced to
0.19% of average loans from 0.32% of average loans one year earlier.
As Table 13 illustrates, 81.7% of 1999 net charge-offs occurred within
the consumer loan portfolio. However, consumer net charge-offs decreased
29.9% to $425,000 in 1999, down from $606,000 in 1998. Commercial net
charge-offs were also reduced in 1999, falling 96.0% to $5,000 from
$126,000 one year earlier. Included in commercial net charge-offs was
a $50,000 recovery related to a 1991 charge-off. Real estate net
charge-offs increased to $90,000 in 1999 compared to $84,000 in 1998.
At $3.9 million as of year-end 1999, the allowance for possible
loan losses represented 1.34% of loans, net of unearned discounts,
and provided coverage over nonperforming loans of 107.7%. Management
utilizes loan loss reserve analysis to establish the adequacy of the
allowance by considering financial condition, repayment capacity,
payment performance, collateral values and support from guarantors
for specifically allocated credits, while examining historical losses,
delinquency rates and general economic conditions for the remainder of
the loan portfolio (refer to Tables 11 and 13 for reserve allocation
and loan loss activity for the years 1995 through 1999). Management
continuously monitors the adequacy of the allowance for possible loan
losses and maintains it within a range that complies with loan portfolio
requirements. Management's assessment of loan loss reserve adequacy is
reviewed quarterly by the Loan Policy and Audit Committees of the
Board of Directors.
</TABLE>
<TABLE>
<CAPTION>
Table 11. Allocation of the Allowance for Possible Loan Losses (Unaudited)
The following table shows allocation of the allowance for possible loan losses by major loan category and the
percentage of the loans in each category to total loans at year-end:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Amounts in thousands) December 31
-------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------- --------------- --------------- --------------- ---------------
$ % $ % $ % $ % $ %
--------------- --------------- --------------- --------------- ---------------
Real estate $279 36% $239 39% $251 37% $220 37% $583 42%
Commercial
industrial and
agricultural 2,480 43% 1,779 39% 1,489 40% 1,326 41% 1,136 35%
Consumer 1,100 21% 1,531 22% 1,564 23% 1,514 22% 1,422 23%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
$3,859 100% $3,549 100% $3,304 100% $3,060 100% $3,141 100%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
Because of its contribution to the Corporation's financial performance,
improving loan quality remains a top priority of management. In 1999,
management focused its loan quality control efforts on consumer lending,
which has experienced high losses in recent years. According to the American
Bankruptcy Institute (ABI), personal bankruptcy filings decreased 5.3%
nationally to 1.3 million, down from a record level of 1.4 million in
1998. Despite the decrease in bankruptcy filings nationally, the ABI
cautions that bankruptcy filings remain very high in historical terms.
Personal bankruptcies continue to be a concern in the Corporation's
consumer loan portfolio, and remain a significant factor in loan losses.
The central Pennsylvania region reported a 7.9% reduction in bankruptcy
filings in 1999 but the number of filings still remains high and the
trend has continued into 2000. To combat the issues surrounding
consumer loan losses, management made further revisions to the Consumer
Lending Policy in 1999 to tighten underwriting standards and to institute
annual reviews on consumer lines of credit. Additionally, ongoing lending
training programs verify management's emphasis on loan quality control.
As in prior years, the Corporation is prepared to maintain the
adequacy of the allowance for possible loan losses.
<TABLE>
<CAPTION>
Table 12. Nonperforming Assets (unaudited)
The following table presents an analysis of nonperforming assets for each of the past five years.
<S> <C> <C> <C> <C> <C>
December 31
------------------------------------------------------
(Amounts in thousands) 1999 1998 1997 1996 1995
------ ------ ------ ------ ------
Nonaccrual loans $3,131 $1,325 $1,148 $856 $671
Loans past due 90 days or more
(not included above) 451 314 564 874 1,123
Restructured loans - - - - -
------ ------ ------ ------ ------
Total nonperforming loans 3,582 1,639 1,712 1,730 1,794
Other real estate 306 527 185 99 258
------ ------ ------ ------ ------
Total non performing assets $3,888 $2,166 $1,897 $1,829 $2,052
====== ====== ====== ====== ======
Nonperforming loans to total loans 1.24% 0.63% 0.71% 0.78% 0.85%
Nonperforming assets to total assets 0.87% 0.51% 0.54% 0.54% 0.65%
Allowance for loan losses to
nonperforming loans 107.73% 216.53% 192.99% 176.88% 175.08%
The Corporation has no foreign loans. The Bank's policy is to classify loans as nonaccrual when
the payment of principal or interest has not been made for a period of 90 days and management
considers the collection of principal and interest doubtful. Any interest accrued prior to the date of
nonaccrual classification is reversed. Subsequent payments are applied as a reduction of
principal until the loan is returned to accruing status.
Restructured loans occur when a borrower has experienced financial hardship and the loan
repayment terms are adjusted to be more favorable to the borrower than those with which new loans
would be granted.
</TABLE>
Liquidity
The Corporation must meet the financial services needs of the customers
which it serves, while providing a satisfactory return on the shareholders'
investment. In order to accomplish this, the Corporation must maintain
sufficient liquidity in order to respond quickly to the changing level of
funds required for both loan and deposit activity. The goal of liquidity
management is to meet the ongoing cash flow requirements of depositors who
want to withdraw funds and of borrowers who request loan disbursements.
Historically, the Corporation has satisfied its liquidity needs from
earnings, repayment of loans and amortizing investment securities, maturing
investment securities, deposit growth and its ability to borrow through
existing lines of credit. Investments classified as available for sale
provide an additional source of readily available liquidity.
Growth in deposits generally provides a major portion of the funds
required to meet increased loan demand. During 1999, deposits grew by
$6.7 million while other borrowings increased by $11.5 million and
securities sold under agreements to repurchase increased by $2.8 million.
Funding from these sources together with decreased deposits in other
banks of $11.4 million were sufficient to meet the increased loan demand
and increased investments in securities. Table 9 presents specific
information concerning short-term borrowings.
<TABLE>
<CAPTION>
Table 13. Allowance for Possible Loan Losses (Unaudited)
The following table presents an analysis of the allowance for possible loan losses for each of the
past five years.
<S> <C> <C> <C> <C> <C>
December 31
--------------------------------------------------------
(Amounts in thousands) 1999 1998 1997 1996 1995
--------- -------- -------- ------- -------
Balance at beginning of year $3,549 $3,304 $3,060 $3,141 $3,425
Charge-offs:
Commercial,industrial and agricultural (69) (189) (113) (183) (89)
Consumer (469) (688) (637) (582) (511)
Real estate (90) (84) (32) (12) (76)
--------- -------- --------- ------- -------
Total charge-offs (628) (961) (782) (777) (676)
--------- -------- --------- ------- --------
Recoveries:
Commercial, industrial and agricultural 64 63 11 25 46
Consumer 44 82 79 64 43
Real estate 1
--------- -------- --------- ------- --------
Total recoveries 108 145 90 89 90
--------- -------- --------- ------- --------
Net charge-offs (520) (816) (692) (688) (586)
--------- -------- --------- ------- --------
Provision for possible loan losses 830 1,061 936 607 302
---------- -------- --------- ------- --------
Balance at end of year $3,859 $3,549 $3,304 $3,060 $3,141
======= ======= ======= ======= =======
Ratios:
Net loans charged off as a percentage
of average loans 0.19% 0.32% 0.29% 0.32% 0.27%
Net loans charged off as a percentage
provision for possible loan losses 62.65% 76.91% 73.93% 113.34% 194.04%
Allowance as a percentage of net
loans (at December 31) 1.34% 1.35% 1.35% 1.36% 1.47%
</TABLE>
Market Risk
In the course of its normal business operations, the Corporation is
exposed to certain market risks. The Corporation has no foreign currency
exchange rate risk, no commodity price risk or material equity price
risk. However, it is exposed to interest rate risk. Financial instruments,
which are sensitive to changes in market interest rates, include fixed
and variable-rate loans, fixed-income securities, interest-bearing deposits
and other borrowings. All interest rate risk arises in connection
with financial instruments entered into for purposes other than trading.
Changes in interest rates can have an impact on the Corporation's
net interest income and the economic value of equity. The objective of
interest rate risk management is to identify and manage the sensitivity
of net interest income and economic value of equity to changing interest
rates in order to achieve consistent earnings that are not contingent upon
favorable trends in interest rates. The Corporation uses several tools to
measure and evaluate interest rate risk. One tool is interest rate
sensitivity or gap analysis. Gap analysis classifies assets and liabilities
into maturity and repricing time intervals. The interest rate gap, the
difference between maturing or repricing assets and liabilities, provides
management with an indication of how net interest income will be impacted
by different interest rate scenarios. Table 14 presents a gap analysis of
the Corporation at December 31, 1998 and 1999. The negative gaps in the
under one-year time intervals suggest that the Corporation's near-term
earnings would decline in a higher interest rateenvironment. The larger
negative gap as of December 31, 1999 as compared to 1998 indicates that
the Corporation's exposure to rising interest rates increased during the
period.
Another tool for analyzing interest rate risk is financial simulation
modeling which captures the impact of not only changing interest rates but
also other sources of cash flow variability including loan and securities
prepayments, loan repricing, deposit pricing and customer preferences.
Financial simulation modeling forecasts both net interest income and the
economic value of equity under a variety of different interest rate
environments. Economic value of equity is defined as the estimated
discounted present value of assets minus the discounted present value of
liabilities and is a surrogate for long-term earnings. The Corporation
regularly measures the effects of an up or down 200-basis point "rate shock"
which is deemed to represent the outside limits of any reasonably probable
movement in market interest rates during a one-year time frame. As indicated
in Table 15, the financial simulation analysis revealed that both
prospective net interest income over a one-year time period and the economic
value of equity as of December 31, 1999 are adversely affected by higher
market interest rates and favorably affected by lower interest rates.
The 1999 analysis reveals that both measures of market interest rate
sensitivity indicate greater sensitivity than at December 31, 1998.
The Corporation establishes tolerance guidelines for these measures of
interest rate sensitivity. As of December 31, 1999 the Corporation was
slightly outside the prescribed tolerance range for net interest income
sensitivity to higher market interest rates but within the prescribed
tolerance for sensitivity of economic value of equity.
Computations of the prospective effects of hypothetical interest rate
changes are based on many assumptions, including relative levels of marke
t interest rates, loan prepayments and deposit decay. Certain shortcomings
are inherent in the computation of discounted present value and, if key
relationships do not unfold as assumed, actual values may differ from those
presented. Further, the computations do not contemplate any actions
management could undertake in response to changes in market interest
rates.
<TABLE>
<CAPTION>
Table 14. Interest Rate Sensitivity Analysis (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
1999 Interest Rate Sensitivity Gaps
--------------------------------------------------------------------------
(Amounts in Thousands) 1-90 91-181 182-365 1-5 Beyond
Days Days Days Years 5 Years Total
Interest-earning assets:
Interest-bearing deposits in other banks $161 $ $ $ $ $161
Federal funds sold
Investment securities 24,745 7,922 11,287 39,874 45,973 129,801
Loans, net of unearned income 70,872 14,066 24,721 81,736 96,548 287,943
--------- ------- -------- --------- -------- --------
Total interest-earning assets $95,778 $21,988 $36,008 $121,610 $142,521 $417,905
======== ======= ======== ======== ======== ========
Interest-bearing liabilities:
Interest-bearing checking $9,439 $436 $871 $6,968 $26,131 $43,845
Money market deposit accounts 72,311 39 77 616 2,314 75,357
Savings 10,910 309 2,099 4,636 17,381 35,335
Time 27,229 25,560 38,715 43,596 376 135,476
Federal funds purchased and securities sold
under agreement to repurchase 39,682 -- -- -- -- 39,682
Other borrowings -- -- 7,019 2,458 20,218 29,695
--------- ------- -------- --------- -------- --------
Total interest-bearing liabilities $159,571 $26,344 $48,781 $58,274 $66,420 $359,390
======== ======== ======== ======== ======== ========
Interest rate gap ($63,793) ($4,356) ($12,773) $63,336 $76,101 $58,515
Cumulative interest rate gap ($63,793) ($68,149) ($80,922) ($17,586) $58,515 $117,030
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1998 Interest Rate Sensitivity Gaps
-----------------------------------------------------------------------
(Dollars in Thousands) 1-90 91-181 182-365 1-5 Beyond
Days Days Days Years 5 Years Total
Interest-earning assets:
Interest -bearing deposits in other banks $11,514 $ $ $ $ $11,514
Investment securities 33,449 4,618 10,240 36,599 42,212 127,118
Loans, net of unearned income 72,020 14,703 28,625 79,395 67,294 262,037
--------- ------- -------- --------- -------- --------
Total interest-earning assets $116,983 $19,321 $38,865 $115,994 $109,506 $400,669
======== ======== ======== ======== ======== ========
Interest-bearing liabilities:
Interest-bearing checking $19,095 $350 $699 $5,592 $20,971 $46,707
Money market deposit accounts 55,439 759 425 -- -- 56,623
Savings 20,910 664 425 3,400 12,748 38,147
Time 36,906 18,462 35,698 51,710 102 142,878
Federal funds purchased and securities sold
under agreement to repurchase 24,414 -- -- -- -- 24,414
Other borrowings -- -- 5,635 11,580 13,529 30,744
--------- ------- -------- --------- -------- --------
Total interest-bearing liabilities $156,764 $20,235 $42,882 $72,282 $47,350 $339,513
======== ======== ======== ======== ======== ========
Interest rate gap ($39,781) ($914) ($4,017) $43,712 $62,156 $61,156
Cumulative interest rate gap ($39,781) ($40,695) ($44,712) ($1,000) $61,156 $122,312
Note 1: The maturity/repricing distribution of investment securities is based on the maturity date for nonamortizing,
noncallable securities; probable exercise/non-exercise of call option for callable securities; and estimated amortization
based on industry experience for amortizing securities.
Note 2: Distribution of loans is based on contractual repayment terms except for residential mortgages and fixed-rate
consumer loans where the scheduled maturities are accelerated based on estimated prepayments of approximately 25 percent
per year (constant prepayment rate).
Note 3: Interest-bearing checking, MMDA and savings accounts are non-maturity deposits which are distributed in accordance
with analyses of historical decay rates.
</TABLE>
<TABLE>
<CAPTION>
Table 15 Sensitivity to Change in Market Interest Rates (Unaudited)
1999 Interest Rate Scenarios
<S> <C> <C> <C> <C>
------------------------------------------------------
(Amounts in Thousands) -200 bps -100 bps +100 bps +200 bps
--------- --------- -------- --------
Prospective one-year net interest income (NII):
Projected NII $16,245 $15,786 $14,669 $14,040
Percent change 6.3% 3.3% -4.0% -8.1%
Board policy limit -7.5% -3.8% -3.8% -7.5%
Economic value of portfolio equity (EVE):
Projected EVE $57,193 $54,499 $45,397 $40,387
Percent change 17.0% 11.5% -7.1% -17.4%
Board policy limit -20.0% -10.0% -10.0% -20.0%
</TABLE>
<TABLE>
<CAPTION>
1998 Interest Rate Scenarios
<S> <C> <C> <C> <C>
-------------------------------------------------------
(Amounts in Thousands) -200 bps -100 bps +100 bps +200 bps
--------- -------- -------- ---------
Prospective one-year net interest income (NII):
Projected NII $14,890 $14,818 $14,349 $13,962
Percent change 1.7% 1.2% -2.0% -4.6%
Board policy limit -7.5% -3.8% -3.8% -7.5%
Economic value of portfolio equity(EVE):
Projected EVE $46,506 $47,878 $46,397 $43,069
Percent change -3.0% -0.2% -3.3% -10.2%
Board policy limit -20.0% -10.0% -10.0% -20.0%
Key assumptions:
1. Residential mortgage loans and mortgage-backed securities prepay at rate-sensitive speeds consistent
with observed historical prepayment speeds for pools of residential mortgages.
2. Variable rate loans and variable rate liabilities reprice in accordance with their contractual terms, if any.
Rate changes for adjustable rate mortgages are constrained by their contractual caps and floors.
3. Interest-bearing nonmaturity deposits reprice in response to different interest rate scenarios consistent
with the Corporation's historical rate relationships to market interest rates. Nonmaturity deposits run off
over various future time periods, ranging from one month to twenty years, in accordance with analysis
of historical decay rates.
4. Interest rate scenarios assume an immediate, sustained and parallel shift in the term structure of interest
rates.
</TABLE>
Forward-Looking Statement
Certain statements appearing herein which are not historical in
nature are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements refer to a future period or periods, reflecting managemen's
current views as to likely future developments, and use the words "may,"
"will," "expect," "believe," "estimate," "anticipate," or similar terms.
Because forward-looking statements involve certain risks, uncertainties
and other factors over which the Corporation has no direct control,
actual results could differ materially from those contemplated in such
statements. These factors include (but are not limited to) the following:
general economic conditions, changes in interest rates, change in the
Corporation's cost of funds, changes in government monetary policy, changes
in government regulation and taxation of financial institutions, changes
in the rate of inflation, changes in technology, the intensification of
competition within the Corporation's market area, and other similar factors.
Impact of Inflation
The impact of inflation upon financial institutions such as the
Corporation differs from its impact upon other commercial enterprises.
Unlike most other commercial enterprises, virtually all of the assets
and liabilities of the Corporation are monetary in nature. As a result,
interest rates have a more significant impact on the Corporation's
performances than do the effects of general levels of inflation.
Although inflation (and inflationary expectations) may affect the
interest rate environment, it is not possible to measure with any
precision the impact of future inflation upon the Corporation.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
The information related to this item is included in Management's
Discussion and Analysis of Financial Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
Franklin Financial Services Corporation
Chambersburg, Pennsylvania
We have audited the accompanying consolidated balance sheets of
Franklin Financial Services Corporation and subsidiary as of December
31, 1999, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for the year then ended.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audit. The consolidated financial
statements of Franklin Financial Services Corporation and subsidiary
for the years ended December 31, 1998 and 1997 were audited by other
auditors whose report, dated January 29, 1999, expressed an unqualified
opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 1999 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Franklin Financial Services Corporation and subsidiary as of December 31,
1999, and the results of their operations and their cash flows for the year
then ended in conformity with generally accepted accounting principles.
/s/ Beard & Company, Inc.
Harrisburg, Pennsylvania
January 28, 2000
<TABLE>
<CAPTION>
Consolidated Balance Sheets
(Amounts in thousands, except per share data) December 31
----------------------------
1999 1998
---------- ----------
<S> <C> <C>
Assets
Cash and due from banks (Note 3) $14,956 $12,895
Interest-bearing deposits in other banks 161 11,514
Investment securities available for sale (Notes 1 and 4) 129,801 127,118
Loans, net (Notes 1, 5 and 6) 284,084 258,488
Premises and equipment, net (Notes 1 and 7) 5,513 5,889
Other assets 10,164 9,097
---------- ----------
Total assets $444,679 $425,001
========== ==========
Liabilities
Deposits (Note 8)
Demand (noninterest-bearing) $43,297 $42,224
Savings and interest checking 154,537 141,477
Time 135,476 142,878
---------- ----------
Total Deposits 333,310 326,579
Securities sold under agreements to repurchase(Note 9) 27,182 24,414
Short term borrowings (Note 9) 12,500 -
Long term debt (Note 9) 29,695 30,744
Other liabilities 2,732 3,363
---------- ----------
Total liabilities 405,419 385,100
---------- ----------
Shareholders' equity (Notes 2, 12 and 14)
Common stock, $1 par value per share,15,000 shares authorized with
3,045 shares issued and 2,792 and 2,802 outstanding at
December 31, 1999 and 1998, respectively 3,045 3,045
Capital stock without par value, 5,000 shares authorized with no
shares issued and outstanding - -
Additional paid-in capital 19,834 19,793
Retained earnings 22,627 20,562
Accumulated other comprehensive (loss) income (876) 1,783
Treasury stock (4,938) (4,620)
Unearned compensation (Note 11) (432) (662)
---------- ----------
Total shareholders' equity 39,260 39,901
---------- ----------
Total liabilities and shareholders' equity $444,679 $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 data) Years ended December 31
---------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Interest income (Note 1)
Interest on loans $21,997 $21,956 $21,024
Interest on deposits and other obligations of other banks 354 359 28
Interest and dividends on investments:
Taxable interest 4,454 3,372 3,629
Tax exempt interest 2,401 1,613 1,407
Dividend income 201 163 156
------ ------ ------
Total interest income 29,407 27,463 26,244
------ ------ ------
Interest expense
Interest on deposits (Note 8) 11,941 11,205 10,057
Interest on securities sold under agreements to repurchase 1,242 1,053 750
Short term borrowings 29 89 894
Long term debt 1,790 804 524
------ ------ ------
Total interest expense 15,002 13,151 12,225
------ ------ ------
Net interest income 14,405 14,312 14,019
Provision for possible loan losses (Notes 1 and 6) 830 1,061 936
------ ------ ------
Net interest income after provision for possible loan losses 13,575 13,251 13,083
------ ------ ------
Noninterest income
Trust fees 2,247 1,847 1,431
Service charges, commissions and fees 1,901 1,936 1,714
Other 65 250 -
Securities gains 289 625 787
------ ------ ------
Total noninterest income 4,502 4,658 3,932
------ ------ ------
Noninterest expense
Salaries and employee benefits 6,412 5,615 5,996
Net occupancy expense 648 623 624
Furniture and equipment expense 655 656 776
Advertising 505 438 400
Legal and professional fees 328 358 369
Data processing 878 804 690
Pennsylvania capital shares tax 363 342 323
Other 2,021 2,764 2,084
------ ------ ------
Total noninterest expense 11,810 11,600 11,262
------ ------ ------
Income before Federal income taxes 6,267 6,309 5,753
Federal income tax expense (Note 10) 1,183 1,504 1,390
------ ------ ------
Net income $5,084 $4,805 $4,363
======= ======= =======
Earnings per share (Note 1)
Basic earnings per share $1.86 $1.76 $1.59
Weighted average shares outstanding (000's) 2,728 2,731 2,738
Diluted earnings per share $1.84 $1.74 $1.58
Weighted average shares outstanding (000's) 2,770 2,769 2,767
The accompanying notes are an integral part of these statements.
</TABLE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Shareholders' Equity
For years ended December 31, 1999, 1998 and 1997:
<S> <C> <C> <C> <C> <C> <C> <C>
Accumulated
Additional Other
Common Paid-in Retained Comprehensive Treasury Unearned
(Amounts in thousands, except per share data) Stock Capital Earnings Income (loss) Stock Compensation Total
-------- -------- --------- ------------- ------- ------------ -------
Balance at December 31, 1996 $2,030 $19,745 $17,590 $613 ($3,830) ($807) $35,341
Comprehensive income:
'Net income - - 4,363 - - - 4,363
Unrealized gains on securities, net of tax - - - 1,322 - - 1,322
----------
Total Comprehensive income 5,685
Cash dividends declared, $1.37 per share - - (3,851) - - - (3,851)
50% stock split 1,015 - (1,015) - - - -
Common stock issued under
stock option plans (Note 12) - 27 - - 294 - 321
Restricted stock issued under long-term
incentive compensation plan
(2,174 shares net of forfeitures) - (11) - - 60 (73) (24)
Acquisition of 56,974 shares of
treasury stock at cost (1,284) -1,284
Amortization of unearned
compensation (Note 11) - - - - - 117 117
--------- -------- -------- --------- --------- ------- -----
Balance at December 31, 1997 3,045 19,761 17,087 1,935 (4,760) (763) 36,305
--------- -------- -------- --------- --------- ------- -----
Comprehensive income:
Net income - - 4,805 - - - 4,805
Unrealized holding gains arising
during current period, net of tax - - - 302 - - 302
Reclassification adjustment for realized
gains included in net income, net of tax - - - (454) - - (454)
--------------
Total Comprehensive income 4,653
Cash dividends declared, $.47 per share - - (1,316) - - - (1,316)
Cash in lieu of fractional shares
on 50% stock split - - (14) - - - (14)
Common stock issued under
stock option plans (Note 12) - 32 - - 140 - 172
Amortization of unearned
compensation (Note 11) - - - - - 101 101
--------- -------- -------- --------- --------- ------- -----
Balance at December 31, 1998 3,045 19,793 20,562 1,783 (4,620) (662) 39,901
--------- -------- -------- --------- --------- ------- -----
Comprehensive income:
Net income - - 5,084 - - - 5,084
Unrealized holding losses arising
during current period, net of tax - - - (2,848) - - (2,848)
Reclassification adjustment for realized
gains included in net income, net of tax - - - 151 - - 151
Unrealized gain on interest rate cap, net of tax 38 38
----------
Total Comprehensive income 2,425
Cash dividends declared, $1.08 per share - - (3,019) - - - (3,019)
Common stock issued under
stock option plans (Note 12) - 31 - - 117 - 148
Tax benefit of ESPP stock transaction - 10 - - - - 10
Acquisition of 15,975 shares of treaury stock - - - - (435) - (435)
Amortization of unearned
compensation (Note 11) - - - - - 230 230
--------- -------- -------- --------- --------- ------- -----
Balance at December 31, 1999 $3,045 $19,834 $22,627 ($876) ($4,938) ($432) $39,260
======= ======= ======= ====== ======= ========= =======
The accompanying notes are an integral part of these statements.
</TABLE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Years ended December 31
------------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
(Amounts in thousands)
Cash flows from operating activities
Net income $5,084 $4,805 $4,363
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 784 761 775
Net accretion and amortization on investment securities (285) (154) (40)
Provision for possible loan losses 830 1,061 936
Securities gains, net (289) (625) (787)
Mortgage loans originated for sale (14,084) (26,083) (11,885)
Proceeds from sale of mortgage loans 14,204 26,048 11,947
Principal (gain) loss on sales of mortgage loans (120) 35 (62)
(Gain) loss on sale of premises and equipment (71) 294 37
Loan charge-offs, net of recoveries (520) (816) (692)
Increase in interest receivable and other assets (458) (718) (510)
Increase (decrease) in interest payable and other liabilities 187 324 (128)
Other , net 233 50 333
------ ------ ------
Net cash provided by operating activities 5,495 4,982 4,287
------ ------ ------
Cash flows from investing activities
Proceeds from sales of investment securities available for sale 940 945 4,364
Proceeds from maturities of investment securities held to
maturity - 5,579 10,088
Proceeds from maturities of investment securities available
for sale 100,072 26,085 9,515
Purchase of investment securities held to maturity - - (1,577)
Purchase of investment securities available for sale (107,206) (72,081) (16,905)
Net change in loans (25,900) (17,421) (20,206)
Capital expenditures (711) (1,246) (433)
Proceeds from sales of premises and equipment 374 208 143
------ ------ ------
Net cash used in investing activities (32,431) (57,931) (15,011)
------ ------ ------
Cash flows from financing activities
Net increase in demand deposits, NOW accounts
and savings accounts 14,133 32,972 11,119
Net increase (decrease) in certificates of deposit (7,402) 19,052 (4,766)
Cash inflows from other borrowings 14,219 17,649 7,496
Dividends paid (3,019) (3,599) (1,571)
Common stock issued under stock option plans 148 172 321
Purchase of treasury shares (435) - (1,284)
------ ------ ------
Net cash provided by financing activities 17,644 66,246 11,315
------ ------ ------
Increase (decrease) in cash and cash equivalents (9,292) 13,297 591
Cash and cash equivalents as of January 1 24,409 11,112 10,521
------ ------ ------
Cash and cash equivalents as of December 31 $15,117 $24,409 $11,112
======= ======= =======
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for: 1999 1998 1997
------ ------ ------
Interest paid on deposits and other borrowed funds $14,995 $12,748 $12,117
Income tax paid 1,057 1,845 1,200
The accompanying notes are an integral part of these statements
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
The accounting policies of Franklin Financial Services
Corporation and its subsidiary conform to generally accepted
accounting principles and to general industry practices. A
summary of the more significant accounting policies which have
been consistently applied in the preparation of the accompanying
consolidated financial statements follows:
Principles of Consolidation - The consolidated financial
statements include the accounts of Franklin Financial Services
Corporation (the Corporation) and its wholly- owned subsidiary,
Farmers and Merchants Trust Company, a commercial bank (the Bank).
All significant intercompany transactions and account balances
have been eliminated.
Nature of Operations - The Corporation conducts all of its business
through its subsidiary bank, Farmers and Merchants Trust Company.
The Bank serves its customer base through twelve community offices located
in Franklin and Cumberland Counties in Pennsylvania.
The Bank is a community-oriented commercial bank that emphasizes customer
service and convenience. As part of its strategy, the Bank has sought to
develop a variety of products and services that meet the needs of both its
retail and commercial customers.
Use of Estimates in the Preparation of Financial Statements - The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures
of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Statement of Cash Flows - For purposes of reporting cash flows, cash
and cash equivalents include Cash and due from banks, Interest-bearing
deposits in other banks and Federal funds sold. Generally, Federal funds
are purchased and sold for one-day periods.
Investment Securities - 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 a 3-month LIBOR. At December 31, 1999, the cost of the
cap was $180,000 and the fair value was $238,000. Accordingly, a gain
of $38,280 (net of tax) was recorded as other comprehensive income for
the year ended December 31, 1999.
On October 1, 1998, the Corporation adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." As permitted under Statement No. 133, the
Corporation transferred investment securities classified as "held to
maturity" with a book value of $22,961,000 to the "available for sale"
classification. The transfer resulted in an increase to Shareholders'
equity of approximately $985,000, net of tax.
Available for sale securities are stated at estimated fair value,
adjusted for amortization of premiums and accretion of discounts which
are recognized as adjustments of interest income. The related unrealize
d holding gains and losses are reported as a separate component of
shareholders' equity, net of tax, until realized. Realized securities
gains and losses are computed using the specific identification method.
Interest and dividends on investment securities are recognized as
income when earned. Gains or losses on the disposition of investment
securities are based on the net proceeds and the adjusted carrying amount
of the specific securities sold.
Loans - Interest on all loans is accrued over the term of the loans
based on the amount of principal outstanding. Unearned interest on
installment loans is recognized on a basis which approximates the interest
method.
Accrual of interest income is generally discontinued when a loan
becomes 90 days past due as to principal or interest and management
considers the collection of principal or interest to be doubtful.
When interest accruals are discontinued, interest credited to income
in the current year is reversed and interest accrued in any prior year
is charged to the allowance for loan losses.
Allowance for Possible Loan Losses - For financial reporting purposes,
the provision for loan losses charged to current operating income is based
on estimates, and ultimate losses may vary from the current estimates.
These estimates are reviewed periodically and, as adjustments become
necessary, they are reported in earnings in the period in which they
become known. The adequacy of the level of the reserve is determined by
a continuing review of the composition of the loan portfolio, overall
portfolio quality, specific problem loans, prior loan loss experience
and current and prospective economic conditions that may affect a
borrower's ability to pay.
Premises and Equipment - Premises and equipment are stated at cost
less accumulated depreciation and amortization. Depreciation is computed
using the straight-line method. When assets are retired or sold, the asset
cost and related accumulated depreciation are eliminated from the respective
accounts, and any resultant gain or loss is included in net income. The cost
of maintenance and repairs is charged to operating expense as incurred, and
the cost of major additions and improvements is capitalized.
Federal Income Taxes - The Corporation and its subsidiary file a
consolidated Federal income tax return. The Corporation accounts for income
taxes in accordance with Statement No. 109, "Accounting for Income Taxes."
Deferred tax assets or liabilities are computed based on the difference
between the financial statement and income tax bases of assets and
liabilities using the applicable enacted marginal tax rate. Deferred income
tax expenses or benefits are based on the changes in the deferred tax
asset or liability from period to period.
Earnings per share - Earnings per share is computed based on the
weighted average number of shares outstanding during each year, adjusted
retroactively for stock splits and dividends.
The Corporation's basic earnings per share is calculated as net income
divided by the weighted average number of shares outstanding. For diluted
earnings per share, net income is divided by the weighted average
number of shares outstanding plus the incremental number of shares added
as a result of converting common stock equivalents, calculated using the
treasury stock method. The Corporation's common stock equivalents consist
of outstanding restricted stock and stock options.
A reconciliation of the weighted average shares outstanding used to
calculate basic earnings per share and diluted earnings per share follows:
(In thousands)
1999 1998 1997
Weighted average shares outstanding (basic) 2,728 2,731 2,738
Impact of common stock equivalents 42 38 29
_____ _____ _____
Weighted average shares outstanding (diluted) 2,770 2,769 2,767
Reclassifications - Certain prior period amounts have been reclassified
to conform with the current year presentation.
Segment Reporting - The Bank acts as an independent community financial
service provider and offers traditional banking and related financial
services to individual, business and government customers. Through its
community office and automated teller machine network, the Bank offers a full
array of commercial and retail financial services, including the taking of
time, savings and demand deposits; the making of commercial, consumer and
mortgage loans; and the providing of safe deposit services. The Bank also
performs personal, corporate, pension and fiduciary services through its
Investment and Trust Services Department.
Management does not separately allocate expenses, including the
cost of funding loan demand, between the commercial, retail, mortgage
banking and trust operations of the Bank. As such, discrete information
is not available and segment reporting would not be meaningful.
Comprehensive Income - Comprehensive income is defined as the change
in equity of a business enterprise during a period from transactions and
other events and circumstances from nonowner sources. Comprehensive income
includes net income plus all other components of comprehensive income.
The only changes in equity that are excluded from comprehensive income are
those resulting from investments by owners and distributions to owners.
Comprehensive income is reflected in the Consolidated Statements of
Changes in Shareholders' Equity and includes net income, unrealized gains
on securities, and the unrealized gain on the interest rate cap.
Note 2. Regulatory Matters
The Bank is limited as to the amount it may loan the Corporation,
unless such loans are collateralized by specific obligations.
The Corporation's subsidiary Bank is subject to various regulatory
capital requirements administered by federal banking agencies.
Failure to meet minimum capital requirements can initiate certain
mandatory, and possibly additional discretionary, actions by regulators
that, if undertaken, could have a direct material effect on the
Corporation's financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Bank must
meet specific capital guidelines that involve quantitative measures of
the Bank's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Bank's capital
amounts and classification are also subject to qualitative judgments
by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier 1 capital (as defined
in the regulations) to risk-weighted assets (as defined), and of
Tier 1 capital (as defined) to average assets (as defined). Management
believes, as of December 31, 1999 and 1998, that the Bank met all capital
adequacy requirements to which it is subject.
As of December 31, 1999, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized,
the Bank must maintain minimum total risk-based, Tier 1 risk-based,
Tier 1 leverage ratios as set forth in the table. There are no conditions
or events since that notification that management believes have changed
the institution's category.
The table that follows presents the total risk-based, Tier 1 risk-
based and Tier 1 leverage requirements for the Corporation and the Bank
as defined by the FDIC. Actual capital amounts and ratios are also
presented.
Although not adopted in regulation form, the Pennsylvania Department
of Banking utilizes capital standards requiring a minimum of 6% leverage
capital and 10% risk-based capital, defined substantially the same as
those by the FDIC.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999
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 $42,494 13.89% $24,469 8.00% N/A
Bank 38,930 12.82% 24,298 8.00% $30,373 10.00%
Tier I Capital (to Risk Weighted Assets)
Corporation $38,697 12.65% $12,235 4.00% N/A
Bank 35,133 11.57% 12,149 4.00% $18,224 6.00%
Tier I Capital (to Average Assets)
Corporation $38,697 8.72% $17,755 4.00% N/A
Bank 35,133 7.94% 17,698 4.00% $22,122 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%
Although not adopted in regulation form, the Pennsylvania Department of Banking utilizes
capital standards requiring a minimum of 6% leverage capital and 10% risk-based capital,
defined substantially the same as those by the FDIC.
</TABLE>
Note 3. Restricted Cash Balances
The Corporation's subsidiary bank is required to maintain reserves
in the form of cash and balances with the Federal Reserve Bank, against
its deposit liabilities. At December 31, 1999 and 1998, required reserves
held at the Federal Reserve Bank for the bank subsidiary, were approximately
$4,965,000 and $3,225,000. In addition, as compensation for check clearing
and other services, a compensatory balance maintained at the Federal Reserve
Bank at December 31, 1999 and 1998, equaled approximately $900,000.
<TABLE>
<CAPTION>
Note 4. Investment Securities
The amortized cost and estimated fair values of investment securities as of
December 31, 1999 and 1998 are as follows:
<S> <C> <C> <C> <C>
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------- -------- -------- --------
1999 Available for Sale
Equity securities $5,423 $659 $244 $5,838
U.S. Treasury securities and obligations
of U.S.g overnment agencies and
corporations 13,982 3 165 13,820
Obligations of state and political
subdivisions 48,271 515 1,515 47,271
Corporate debt securities 11,586 46 76 11,556
Other 20,606 79 105 20,580
Mortgage-backed securities 31,320 19 603 30,736
-------- -------- -------- --------
$131,188 $1,321 $2,708 $129,801
======== ======== ======== ========
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
1998 Available for Sale -------- -------- -------- --------
Equity securities $3,404 $1,270 $ $4,674
U.S. Treasury securities and obligations
of U.S. Government agencies and
corporations 13,992 251 14,243
Obligations of state and political
subdivisions 48,490 1,341 379 49,452
Corporate debt securities 32,959 201 107 33,053
Mortgage-backed securities 25,572 166 42 25,696
-------- -------- -------- --------
$124,417 $3,229 $528 $127,118
======== ======== ======== ========
At December 31, 1999 and 1998, the book value of investment securities pledged to
secure public funds, trust balances and other deposits and obligations totaled
$94,267,000 and $59,350,000, respectively.
The amortized cost and estimated fair value of debt securities at December 31, 1999,
by contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Estimated
Amortized fair
cost value
Available for Sale -------- --------
Due in one year or less $9,821 $9,797
Due after one year through five years 32,011 31,845
Due after five years through ten years 12,513 12,413
Due after ten years 40,100 39,172
-------- --------
$94,445 $93,227
Mortgage-backed securities 31,320 30,736
-------- --------
$125,765 $123,963
======== ========
Gross gains of $289,000, $625,000 and $795,000 were realized on the sale of
securities for the years ended December 31, 1999, 1998 and 1997, respectively.
Gross losses of $8,000 were realized on the sale of securities
for the year ended December 31, 1997.
</TABLE>
<TABLE>
<CAPTION>
Note 5. Loans
A summary of loans outstanding at the end of the reporting periods is as follows:
<S> <C> <C>
December 31
-------------------------
(Amounts in thousands) 1999 1998
-------- --------
Real estate (primarily first mortgage
residential loans) $101,426 $92,293
Real estate - Construction 3,670 3,567
Commercial, industrial and agricultural 123,021 108,540
Consumer (including home equity lines of credit) 59,830 57,647
-------- --------
287,947 262,047
-------- --------
Less: Unearned discount (4) (10)
Allowance for possible loan losses (3,859) (3,549)
-------- --------
Net Loans $284,084 $258,488
====== ======
Loans to directors and executive officers and to their related interests and affiliated
enterprises amounted to approximately $1,185,000 and $1,264,000 at December 31, 1999 and
1998, respectively. Such loans are made in the ordinary course of business at the Bank's
normal credit terms and do not present more than a normal risk of collection. During 1999,
approximately $436,000 of new loans were made and repayments totaled approximately $515,000.
</TABLE>
<TABLE>
<CAPTION>
Note 6. Allowance for Possible Loan Losses
December 31
<S> <C> <C> <C>
(Amounts in thousands) 1999 1998 1997
------ ------ ------
Balance at beginning of year $3,549 $3,304 $3,060
Charge-offs (628) (961) (782)
Recoveries: 108 145 90
------ ------ ------
Net charge-offs (520) (816) (692)
------ ------ ------
Provision for possible loan losses 830 1,061 936
------ ------ ------
Balance at end of year $3,859 $3,549 $3,304
===== ===== =====
At December 31, 1999 and 1998 the Corporation had no restructured loans.
Nonaccrual loans at December 31, 1999 and 1998 were approximately $3,131,000 and $1,325,000,
respectively. The gross interest that would have been recorded if these loans had been current in
accordance with their original terms and the amounts actually recorded in income were as follows:
(Amounts in thousands) 1999 1998 1997
--------------------------------------
Gross interest due under terms $335 $159 $156
Amount included in income (98) (48) (19)
--------------------------------------
Interest income not recognized $237 $111 $137
======= ======= =======
At December 31, 1999 and 1998, the recorded investment in loans that were considered
to be impaired, as defined by Statement No. 114, totaled $2,982,000 and $1,041,500, respectively.
Impaired loans have an allowance for credit losses of $129,000 and $54,000 as of December 31,
1999 and 1998, respectively. The Corporation does not recognize interest income on its impaired
loans. Cash receipts on impaired loans are credited to the earliest amount owed by the
borrower. The average recorded investment in impaired loans during the years ended December 31,
1999,1998 and 1997 was $1,732,000 , $1,033,400 and $1,060,300, respectively.
</TABLE>
<TABLE>
<CAPTION>
Note 7. Premises and Equipment
Premises and equipment consist of:
<S> <C> <C> <C>
December 31
Estimated -----------------
(Amounts in thousands) useful life 1999 1998
------ ------ ------
Land $802 $930
Buildings 18-40 years 7,609 7,299
Furniture, fixtures and equipment 3-13 years 5,979 5,762
------ ------
Total cost 14,390 13,991
Less: Accumulated Depreciation (8,877) (8,102)
------ ------
$5,513 $5,889
===== =====
</TABLE>
<TABLE>
<CAPTION>
Note 8. Deposits
Deposits are summarized as follows:
<S> <C> <C>
December 31
-----------------
(Amounts in thousands) 1999 1998
------ ------
Demand $43,297 $42,224
Savings:
Interest-bearing checking 43,845 46,707
Money market accounts 75,357 56,623
Passbook and statement savings 35,335 38,147
------ ------
154,537 141,477
------ ------
Time:
Deposits of $100,000 and over 34,933 33,223
Other time deposits 100,543 109,655
------ ------
135,476 142,878
------ ------
Total deposits $333,310 $326,579
====== ======
</TABLE>
<TABLE>
<CAPTION>
Note 9. Securities Sold Under Agreements to Repurchase, Short Term Borrowings and
Long Term Debt
The Corporation enters into sales of securities under agreements to repurchase. Securities sold under
agreements to repurchase averaged $25,802,000 and $20,205,000 during 1999 and 1998, respectively,
and the maximum amounts outstanding at any month-end during 1999 and 1998, were $33,496,000
and $24,414,000, respectively. The weighted average interest rate on these repurchase agreements was
4.81% and 5.21% for 1999 and 1998, respectively. At December 31, 1999, securities sold under
agreements to repurchase totaled $27,182,000 with interest rates ranging from 4.62% to 5.52%.
At December 31, 1998, securities sold under agreements to repurchase totaled $24,414,000 with
interest rates ranging from 3.69% to 4.60%. The securities that serve as collateral for securities sold
under agreements to repurchase represent primarily U.S. Government and U.S. Agency securities
with a fair value of $34,780,000 at December 31, 1999. The securities sold under agreements to
repurchase are overnight borrowings.
A summary of short term borrowings and long term debt at the end of the reporting period follows:
<S> <C> <C>
December 31
-------------------
(Amounts in thousands) 1999 1998
-------- --------
Open Repo Plus (a) $12,500 $ -
Term loans (b) 29,695 30,744
--------- ---------
Total other borrowings $42,195 $30,744
======= =======
(a) Open Repo Plus is a revolving term commitment with the Federal Home Loan Bank of Pittsburgh
(FHLB) used on an overnight basis. The term of these commitments may not exceed 364 days
and the outstanding balance reprices daily at market rates.
(b) Term loans with the FHLB bear interest at fixed rates ranging from 4.72% to 6.87% (weighted
average rate of 5.56%) with various maturities beginning September 30, 2000 to July 12, 2010.
All borrowings from the FHLB are collateralized by FHLB stock, mortgage-backed securities
and first mortgage loans.
The scheduled maturities of the term borrowings are as follows:
2000 $ 7,019
2001 1,799
2002 -
2003 -
2004 659
2005 and beyond 20,218
---------
$29,695
=======
The Corporation's maximum borrowing capacity at December 31, 1999, with the FHLB was
$120,648,000. The total amount available to borrow at year-end was approximately
$78,000,000.
</TABLE>
<TABLE>
<CAPTION>
Note 10. Federal Income Taxes
The temporary differences which give rise to significant portions of deferred tax assets and liabilities
under Statement No.109 are as follows (amounts in thousands):
<S> <C> <C>
December 31
-------------
Deferred Tax Assets: 1999 1998
----------------------------------------- ------ ------
Allowance for possible loan losses $1,312 $1,206
Deferred compensation 224 212
Restricted stock 241 133
Depreciation 140 81
Deferred loan fees and costs,net 188 214
Nonaccrual loans 26 50
Property demolition & writedown 78 288
Net unrealized loss on securities 472 0
Other, net 53 56
------ ------
Total 2,734 2,240
------ ------
Deferred Tax Liabilities:
-----------------------------------------
Pensions 191 57
Mortgage Servicing Rights 154 132
Net unrealized gain on securities 0 918
------ ------
Total 345 1,107
------ ------
Deferred Taxes, net $2,389 $1,133
====== ======
In determining the level of valuation reserves required, the Corporation has determined based upon
its historical level of earnings, its interest margin, gap position and future taxable income that it is
more likely than not that the net deferred tax assets, will be realized over a period of approximately
5 years. Accordingly, no valuation allowance was established as of December 31, 1999 or 1998.
</TABLE>
<TABLE>
<CAPTION>
The components of the provision for Federal income taxes attributable to income from operations were
as follows:
<S> <C> <C> <C>
Years ended December 31
--------------------------
(Amounts in thousands) 1999 1998 1997
------ ------ ------
Currently payable $1,320 $1,694 $1,574
Deferred tax benefit (137) (190) (184)
------ ------ ------
Income tax provision $1,183 $1,504 $1,390
======= ======= =======
For the years ended December 31, 1999, 1998 and 1997, the income tax provisions are different from
the tax expense which would be computed by applying the Federal statutory rate to pretax operating
earnings. A reconciliation between the tax provision at the statutory rate and the tax provision at the
effective tax rate is as follows:
Years ended December 31
--------------------------
(Amounts in thousands) 1999 1998 1997
------ ------ ------
Tax provision at statutory rate $2,131 $2,145 $1,956
Income on tax-exempt loans and securities (983) (685) (590)
Nondeductible interest expense relating to
carrying tax-exempt obligations 138 95 81
Dividends received exclusion (18) (17) (16)
Other, net (85) (34) (41)
------ ------ ------
Income tax expense $1,183 $1,504 $1,390
====== ====== ======
The tax provision applicable to securities gains for the years ended December 31, 1999, 1998 and
1997 was $98,000, $212,000 and $268,000, respectively.
Note 11. Employee Benefit Plans
The Bank has a noncontributory pension plan covering substantially
all employees of F&M Trust who meet certain age and service requirements.
Benefits are based on years of service and the employee's compensation
during the highest five consecutive years out of the last ten years of
employment. The Bank's funding policy is to contribute annually the
amount required to meet the minimum funding requirements of the Employee
Retirement Income Security Act of 1974. Contributions are intended to
provide not only for benefits attributed to service to date but also for
those expected to be earned in the future.
The following table sets forth the plan's funded status at
December 31, 1999, based on a September 30, 1999, actuarial
valuation together with comparative 1998 and 1997 amounts:
(Amounts in thousands) 1999 1998 1997
Change in benefit obligation
Benefit obligation at beginning of year $8,433 $7,611 $7,261
Service cost 304 266 322
Interest cost 527 531 494
Actuarial loss (gain) (233) 380 (142)
Benefits paid (359) (355) (324)
_______ ______ ______
Benefit obligation at end of year 8,672 8,433 7,611
Change in plan assets
Fair value of plan assets at beginning of year* 11,541 11,223 7,816
Actual return on plan assets 707 673 3,731
Employer contribution 0 0 0
Benefits paid (358) (355) (324)
______ ______ ______
Fair value of plan assets at end of year 11,889 11,541 11,223
______ ______ ______
Funded status 3,207 3,108 3,612
Unrecognized transitional asset (39) (78) (115)
Unrecognized net actuarial gain (2,625) (2,893) (3,873)
Unrecognized prior service cost 86 96 108
______ ______ ______
Prepaid (accrued) benefit cost $629 $233 $(268)
====== ====== ======
Weighted-average assumptions as of December 31 1999 1998 1997
Discount rate 6.50% 6.50% 7.00%
Expected return on plan assets 8.00% 8.00% 8.00%
Rate of compensation increase 5.25% 5.25% 5.75%
Components of net periodic benefit cost 1999 1998 1997
Service cost $314 $266 $321
Interest cost 527 531 494
Expected return on plan assets (987) (971) (612)
Amortization of transitional (asset) obligation (39) (39) (39)
Amortization of prior service cost 11 11 11
Recognized net actuarial gain (222) (299) 0
______ ______ _____
Net periodic benefit cost $ (396) $ (501) $ 175
====== ====== ======
*Plan assets are primarily invested in equities, US Government Agencies,
corporate bonds and general assets of insurance companies.
The Bank has a 401(k) plan covering substantially all employees of
F&M Trust who have completed one year and 1000 hours of service. In 1999,
employee contributions to the plan were matched at 100% up to 3% of each
employee's deferrals plus 50% of the next 2% of deferrals from participants
eligible compensation. In addition, a 100% discretionary profit sharing
contribution of up to 2% of each employee's eligible compensation was
possible, provided established net income targets were achieved. Annually,
the Bank's Board of Directors approves the established net income targets.
Under this plan, not more than 19.00% of each participant's total
compensation may be contributed in any given plan year. The related expense
for the 401(k) plan and the profit sharing plan in 1999, 1998 and 1997, as
approved by the Board of Directors, was approximately $209,000, $266,000 and
$143,000, respectively.
Under the terms of the Corporation's Long-Term Incentive Plan of
1990 ("the Plan"), the Compensation Committee of the Board of Directors
(the Committee) is authorized to award up to 264,825 shares of presently
authorized but unissued or reacquired Common Stock to certain employees
of the Corporation and its subsidiary. Awards may be granted in the form
of Options, Stock Appreciation Rights, Restricted Stock, Performance Units
and Performance Shares.
Pursuant to the Plan, in 1991 the Corporation implemented a program
known as the Senior Management Incentive Program (the Program) and, under
the Program, as of December 31, 1999, has awarded 169,152 restricted shares
of $1.00 par value per share common stock of the Corporation to certain
employees at no cost to the employee participants. These shares are issued
subject to specific transfer restrictions, including the passage of time,
ranging from one to ten years; and shall fully vest upon the expiration
of ten years from the date of the agreements, or earlier, dependent upon
the Corporation meeting certain income requirements established by the
Board of Directors.
Also, under the Program, the Committee has awarded 18,345 restricted
shares of the $1.00 par value per share common stock of the Corporation
to certain employees at no cost to the participants. These shares also are
issued subject to certain transfer restrictions and will automatically
vest upon the expiration of ten years from the Agreement date (except
for one senior officer whose shares vested in a shorter period).
Unearned compensation, representing the fair market value of the
shares at the date of issuance, will be charged to income over the vesting
period. The cost associated with the Program was approximately $230,000 in
1999, $101,000 in 1998 and $117,000 in 1997. The total of restricted shares
vested was 847 in 1997. No restricted shares vested in 1998 or 1999.
In addition to the restricted shares issued to the employee participants
of the Program, the employees could elect to receive a portion of their
award in cash. The payment of cash each year is dependent upon the
Corporation meeting certain income requirements established by the Board
of Directors. There were no cash awards in 1999, 1998 or 1997.
Note 12. Stock Purchase Plan
In 1994, the Corporation adopted the Employee Stock Purchase
Plan of 1994 (the Plan). Under the Plan 198,000 shares of stock can
be purchased by participating employees over a 10-year period. The number
of shares which can be purchased by each participant is limited, as defined,
and the option price is to be set by the Board of Directors. However, the
option price cannot be less than the lesser of 90% of the fair market value
of the shares on the date the option to purchase shares is granted, or 90%
of the fair market value of the shares on the exercise date. These options
must be exercised one year from the date of grant. Any shares related to
unexercised options are available for future grant. As of December 31, 1999
there are 123,429 shares available for future grant.
The following table summarizes the stock option activity
(stock options have been adjusted to reflect all stock splits):
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Option Price Per Share
-------------------------
Price Weighted
Stock Options Range Average
--------------- --------------- ---------------
Balance at December 31, 1996 18,892 $19.24 $19.24
Granted 17,700 23.08 23.08
Exercised (15,305) 19.24 - 23.08 20.24
Canceled (7,564) 19.24 19.24
---------
Balance at December 31, 1997 13,723 $23.08 $23.08
Granted 17,005 27.68 27.68
Exercised (7,206) 23.08 - 27.68 23.39
Canceled (7,014) 23.08 23.08
---------
Balance at December 31, 1998 16,508 $27.68 $27.68
Granted 20,106 23.27 23.27
Exercised (6,016) 19.94 - 27.68 24.61
Canceled (11,416) 27.68 27.68
--------
Balance at December 31, 1999 19,182 $23.27 $23.27
========
</TABLE>
The following table summarizes information concerning options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Weighted Weighted
Unexercised Average Average
Stock Remaining Exercise
Exercise Price Options Life (Years) Price
-------- -------- -------- --------
$23.27 19,182 0.75 $23.27
</TABLE>
The Corporation has adopted Statement No. 123, "Accounting for Stock-Based
Compensation." As provided for in the Statement, the Corporation elected
to continue the intrinsic value method of expense recognition. Accordingly,
no compensation expense for the Plan has been recognized in the financial
statements of the Corporation. Had compensation cost for the Plan been
recognized in accordance with Statement No. 123, the Corporation's net
income and net income per share amounts would have been reduced to the
following pro-forma amounts:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(Amounts in thousands, except per share) 1999 1998 1997
------ ------ ------
Net Income: As reported $5,084 $4,805 $4,363
Proforma 5,026 4,780 4,334
Basic earnings per share: As reported $1.86 $1.76 $1.59
Proforma 1.84 1.75 1.58
Diluted earnings per share: As reported $1.84 $1.74 $1.58
Proforma 1.83 1.73 1.57
Weighted average fair value of options granted $2.90 $3.81 $4.50
</TABLE>
The fair value of the options granted has been estimated using the following
assumptions for 1999, 1998 and 1997, respectively: risk-free interest rate
of 5.98%, 4.53% and 5.49%, expected volatility of the Corporation's stock of
14.14%, 14.00% and 20.10% and an expected dividend yield of 3.09%, 2.08% and
3.67%. The expected life of the optionsin 1999,1998 and 1997 was
.74 year, .76 year and .81 year, respectively.
Note 13. Deferred Compensation Agreement
The Corporation has entered into deferred compensation agreements
with several officers and directors which provide for the payment
of benefits over a ten-year period, beginning at age 65. At inception,
the present value of the obligations under these deferred compensation
agreements amounted to approximately $600,000, which is being accrued
over the estimated remaining service period of these officers and directors.
These obligations are partially funded through life insurance covering
these individuals.
Note 14. Shareholders' Equity
In March, 1999, the Board of Directors authorized the repurchase of
up to 50,000 shares of the Corporation's common stock for a twelve month
period ending in March 2000. The Corporation uses the repurchased common
stock (Treasury stock) for general corporate purposes including stock
dividends and splits, employee benefit and executive compensation plans,
and the dividend reinvestment plan. Under this program, the Corporation
repurchased 15,975 shares for $434,700 in 1999. In March, 1998, the Board
of Directors authorized a similar plan for a twelve month period ended
March, 1999. No shares were repurchased under this plan. At December
31, 1999 and 1998, the Corporation held Treasury shares totaling 252,830
and 242,871, respectively, that were acquired through Board authorized
stock repurchase programs.
Note 15. Commitments and Contingencies
In the normal course of business, the Bank is party to financial
instruments which are not reflected in the accompanying financial
statements and are commonly referred to as off-balance-sheet
instruments. These financial instruments are entered into primarily
to meet the financing needs of the Bank's customers and include
commitments to extend credit and standby letters of credit. Those
instruments involve, to varying degrees, elements of credit and
interest rate risk not recognized in the statement of financial position.
The Corporation's exposure to credit loss in the event of
nonperformance by other parties to the financial instruments for
commitments to extend credit and standby letters of credit is represented
by the contract or notional amount of those instruments. The Bank uses
the same credit policies in making commitments and conditional obligations
as they do for on-balance-sheet instruments. Unless noted otherwise, th
e Bank does not require collateral or other security to support financial
instruments with credit risk. The Corporation had the following
outstanding commitments as of December 31:
(Amounts in thousands) 1999 1998
Financial instruments whose contract amounts
represent credit risk:
Commercial commitments to extend credit . . . . $46,405 $32,032
Consumer commitments to extend credit (secured) 17,291 15,767
Consumer commitments to extend credit (unsecured) 13,344 12,608
______ _______
$77,040 $60,407
Standby letters of credit . . . . . . . . . . . 2,544 2,547
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses with the exception of home equity lines and personal lines of
credit and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The
Bank evaluates each customer's creditworthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Bank upon
extension of credit, is based on management's credit evaluation of the
counterparty. Collateral for most commercial commitments varies but may
include accounts receivable, inventory, property, plant, and equipment
and incomeproducing commercial properties. Collateral for secured consumer
commitments consists of liens on residential real estate.
Standby letters of credit are instruments issued by the Bank which
guarantee the beneficiary payment by the Bank in the event of default by
the Bank's customer in the nonperformance of an obligation or service.
Most standby letters of credit are extended for one-year periods.
The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers. The Bank
holds collateral supporting those commitments for which collateral is
deemed necessary primarily in the form of certificates of deposit and
liens on real estate.
Most of the Bank's business activity is with customers located within
Franklin County, Pennsylvania and surrounding counties and does not involve
any significant concentrations of credit to any one entity or industry.
The Bank has entered into various noncancellable operating leases. Total
rental expense on these leases was $53,000, $50,000, and $36,000 in the
years 1999, 1998 and 1997, respectively. Future minimum payments under
these leases are as follows:
2000. . . . . . . . . $57,800
2001. . . . . . . . . $50,000
2002. . . . . . . . . $28,800
2003. . . . . . . . . $ 7,300
2004 and beyond . . . $27,700
In the normal course of business, the Corporation has commitments,
lawsuits, contingent liabilities and claims. However, the Corporation
does not expect that the outcome of these matters will have a materially
adverse effect on its consolidated financial position or results of
operations.
Note 16. Disclosures About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it is
practicable to estimate that value:
Cash, Federal funds sold and Interest-bearing deposits:
For these short-term instruments, the carrying amount is a
reasonable estimate of fair value.
Investment securities:
For debt and marketable equity securities available for sale fair
values are based on quoted market prices or dealer quotes. If a quoted
market price is not available, fair value is estimated using quoted
market prices for similar securities.
Loans, net:
The fair value of loans is estimated for each major type of loan
(e.g. real estate, commercial, industrial and agricultural and consumer)
by discounting the future cash flows associated with such loans.
The model considers scheduled principal maturities, repricing
characteristics, prepayment assumptions and interest cash flows.
The discount rates used are estimated based upon consideration of a
number of factors including the treasury yield curve, credit quality
factors, expense and service charge factors.
Deposits, Securities sold under agreements to repurchase and
Other borrowings:
The fair market value of demand deposits, savings accounts, and
money market deposits is the amount payable on demand at the reporting
date. This fair value does not include the benefit that results from
the low cost of funding provided by these deposits compared to the cost
of borrowing funds in the market. The fair value of fixed maturity
certificates of deposit and long-term debt are estimated by discounting
the future cash flows using rates approximating those currently offered
for certificates of deposit and borrowings with similar remaining
maturities. The other borrowings consist of borrowings on a line of
credit with the FHLB at a variable interest rate and securities sold
under agreements to repurchase for which the carrying value approximates
a reasonable estimate of the fair value.
Off balance sheet financial instruments:
Outstanding commitments to extend credit and commitments under standby
letters of credit include fixed and variable rate commercial and consumer
commitments. The fair value of the commitments are estimated using the
fees currently charged to enter into similar agreements. The fair value
of the interest rate cap was based on current settlement value. The
estimated fair value of the Corporation's financial instruments at
December 31 are as follows:
<TABLE>
<CAPTION>
The estimated fair value of the Corporation's financial instruments at
December 31 are as follows:
1999 1998
--------------- ---------------
Carrying Fair Carrying Fair
(Amounts in thousands) Amount Value Amount Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term investments $15,117 $15,117 $24,409 $24,409
Investment securities available for sale 129,801 129,801 127,118 127,118
Net Loans 284,084 279,545 258,488 267,937
Accrued interest receivable 2,809 2,809 2,540 2,540
Financial liabilities:
Deposits $333,310 $320,107 $326,579 $328,684
Securities sold under agreements to
repurchase 27,182 27,182 24,414 24,414
Short term borrowings 12,500 12,500 0 0
Long term borrowings 29,695 28,240 30,744 31,108
Accrued interest payable 1,442 1,442 1,435 1,435
Off Balance Sheet financial instruments
Commitments to extend credit - - - -
Standby letters-of-credit - - - -
Interest rate cap 180 238 - -
The above values do not necessarily reflect the premium or discount that could result
from offering for sale at one time the Corporation's entire holdings of a particular instrument.
In addition, these values, derived from the methods and assumptions described above, do not
consider the potential income taxes or other expenses that would be incurred on an actual sale
of an asset or settlement of a liability.
</TABLE>
The above values do not necessarily reflect the premium or discount
that could result from offering for sale at one time the Corporation's
entire holdings of a particular instrument. In addition, these values,
derived from the methods and assumptions described above, do not consider
the potential income taxes or other expenses that would be incurred on
an actual sale of an asset or settlement of a liability.
<TABLE>
<CAPTION>
Note 17. Parent Company (Franklin Financial Services Corporation) Financial Information
Balance Sheets
December 31
-----------------
(Amounts in thousands) 1999 1998
------- -------
<S> <C> <C> <C>
Assets:
Due from bank subsidiary $571 $1,386
Investment securities 2,149 2,735
Equity investment in subsidiary 36,204 35,454
Premises 186 395
Other assets 240 273
------- -------
Total assets $39,350 $40,243
====== ======
Liabilities:
Deferred tax liability $80 $342
Other liabilities 10 -
------- -------
Total liabilities 90 342
Shareholders' equity 39,260 39,901
------- -------
Total liabilities and shareholders' equity $39,350 $40,243
====== ======
Statements of Income
Years ended
December 31
-----------------
(Amounts in thousands) 1999 1998 1997
------- ------- -------
Income:
Dividends from Bank $2,270 $1,317 $6,020
Interest and dividend income 62 57 44
Gain on sale of securities 285 464 468
Other income 5 1 -
Gain on sale of premises 25 29 -
------- ------- -------
2,647 1,868 6,532
Expenses:
Operating expenses 471 516 566
Loss on sale of premises 0 170 40
------- ------- -------
Income before equity in undistributed income of subsidiary 2,176 1,182 5,926
Equity in (excess of ) undistributed income of subsidiary 2,908 3,623 (1,563)
------- ------- -------
Net income $5,084 $4,805 $4,363
====== ====== ======
Statements of Cash Flows
Years ended
December 31
----------------------------------
(Amounts in thousands) 1999 1998 1997
------- ------- -------
Cash flows from operating activities
Consolidated net income $5,084 $4,805 $4,363
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed income of subsidiary (2,908) (3,623) 1,563
Depreciation 10 11 31
Loss (gain) on sale of premises (25) 141 40
Securities gains, net (285) (464) (468)
Decrease (increase) in due from bank subsidiary 815 1,934 (3,142)
Decrease (increase) in other assets 33 66 (256)
(Decrease) increase in liabilities 10 - (87)
Other, net 236 234 278
------- ------- -------
Net cash provided by operating activities 2,970 3,104 2,322
------- ------- -------
Cash flows from investing activities
Proceeds from sales of investment securities 541 709 644
Purchase of investment securities (429) (580) (534)
Proceeds from sale of premises 225 208 129
Capital expenditures (1) (14) (27)
------- ------- -------
Net cash provided by investing activities 336 323 212
------- ------- -------
Cash flows from financing activities
Dividends paid (3,019) (3,599) (1,571)
Proceeds from sales of common stock 148 172 321
Purchase of treasury shares (435) - (1,284)
------- ------- -------
Net cash used in financing activities (3,306) (3,427) (2,534)
------- ------- -------
Increase in cash and cash equivalents - - -
Cash and cash equivalents as of January 1 - - -
Cash and cash equivalents as of December 31 $ - $ - $ -
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Note 18. Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of consolidated operations of Franklin Financial
for the years ended December 31, 1999 and 1998:
(Amounts in thousands) Three months ended
---------------------------------------------------------
<S> <C> <C> <C> <C>
1999 March 31 June 30 September 30 December 31
- ----------------------------------------- -------- -------- -------------- -------------
Interest income $7,163 $7,185 $7,400 $7,659
Interest expense 3,567 3,618 3,806 4,011
-------- -------- -------------- -------------
Net interest income 3,596 3,567 3,594 3,648
Provision for loan losses 195 200 180 255
Other noninterest income 1,054 1,046 1,074 1,039
Securities gains (losses) 0 0 188 101
Noninterest expense 2,880 2,864 3,106 2,960
-------- -------- -------------- -------------
Income before income taxes 1,575 1,549 1,570 1,573
Income taxes 296 304 290 293
-------- -------- -------------- -------------
Net Income $1,279 $1,245 $1,280 $1,280
======== ========= =========== ===========
Basic earnings per share $0.47 $0.48 $0.46 $0.47
Diluted earnings per share $0.46 $0.45 $0.46 $0.46
======== ========= =========== ===========
<C> <C> <C> <C>
1998 March 31 June 30 September 30 December 31
- ----------------------------------------- -------- -------- -------------- -------------
Interest income $6,729 $6,730 $6,879 $7,125
Interest expense 3,116 3,188 3,333 3,514
-------- -------- -------------- -------------
Net interest income 3,613 3,542 3,546 3,611
Provision for loan losses 365 190 165 341
Other noninterest income 975 1,080 1,050 928
Securities gains 299 196 68 62
Noninterest expense 2,896 3,011 2,905 2,788
-------- -------- -------------- -------------
Income before income taxes 1,626 1,617 1,594 1,472
Income taxes 394 375 416 319
-------- -------- -------------- -------------
Net Income $1,232 $1,242 $1,178 $1,153
======== ========= =========== ===========
Basic earnings per share* $0.45 $0.46 $0.43 $0.42
Diluted earnings per share* $0.45 $0.45 $0.43 $0.42
======== ========= =========== ===========
*Based on weighted-average shares outstanding during the period reported adjusted retroactively to reflect
stock splits and stock dividends. Consequently, the sum of the quarterly earnings per share mat not equal
the annual per share amount.
</TABLE>
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
The information related to this item is incorporated by
reference to the information appearing under the heading
"Relationship With Independent Public Accountants" on page
13 of the Corporation's Proxy Statement for the 2000 Annual Meeting
of Shareholders.
Part III
Item 10. Directors and Executive Officers of the Registrant
The information related to this item is incorporated by reference
to the material set forth under the headings "Information about
Nominees and Continuing Directors" on Pages 4 through 6, and
"Executive Officers" on Page 7 of the Corporation's Proxy Statement
for the 2000 Annual Meeting of Shareholders.
Item 11. Executive Compensation
The information related to this item is incorporated by reference
to the material set forth under the headings "Compensation of Directors"
on Page 7 and "Executive Compensation and Related Matters" on Pages 7
through 12 of the Corporation's Proxy Statement for the 2000 Annual
Meeting of Shareholders, except that information appearing under the
headings "Compensation Committee Report on Executive Compensation" and
"Stock Performance Graph" on Pages 10 through 12 is not incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information related to this item is incorporated by reference
to the material set forth under the headings "Voting of Shares and
Principal Holders Thereof" on Page 2 and 3, and "Information about Nominees
and Continuing Directors" on Pages 4 through 6 of the Corporation's
Proxy Statement for the 2000 Annual Meeting of Shareholders.
Item 13. Certain Relationships and Related Transactions
The information related to this item is incorporated by reference
to the material set forth under the heading "Transactions with Directors
and Executive Officers" on Page 13 of the Corporation's Proxy Statement
for the 2000 Annual Meeting of Shareholders.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) The following Consolidated Financial Statements of the Corporation:
Report of Independent Public Accountants,
Consolidated Balance Sheets - December 31, 1999 and 1998,
Consolidated Statements of Income - Years ended December 31,
1999, 1998 and 1997,
Consolidated Statements of Changes in Shareholders' Equity Years
ended December 31, 1999, 1998 and 1997,
Consolidated Statements of Cash Flows - Years ended December 31,
1999, 1998 and 1997,
Notes to Consolidated Financial Statements.
(2) All financial statement schedules for which provision is
made in the applicable accounting regulations of the Securities
and Exchange Commission are not required under the related
instructions or are inapplicable and have therefore been omitted.
(3) The following exhibits are filed as part of this report:
3.1 Articles of Incorporation of the Corporation.
Filed as Exhibit 3 to Form 10-Q Quarterly Report of the
Corporation for the quarter ended September 30, 1999
and incorporated herein by reference.
3.2 Bylaws of the Corporation.
Filed as Exhibit 3 (i) Current Report on Form 8-K, filed
December 3, 1999 and incorporated herein by reference.
10.1 Deferred Compensation Agreements with Bank Directors.*
Filed as Exhibit 10.1 to the 1995 Form 10-K -- Annual Report
of the Corporation and incorporated herein by reference.
10.2 Director's Deferred Compensation Plan.*
Filed as Exhibit 10.2 to the 1995 Form 10-K --Annual Report
of the Corporation and incorporated herein by reference.
10.3 Long-Term Incentive Plan of 1990.*
Filed as Exhibit 10.3 to the 1995 Form 10-K --Annual Report
of the Corporation and incorporated herein by reference.
10.4 Senior Management Incentive Program, as amended,
October 15, 1992.*
Filed as Exhibit 10.2 to Form 10-Q Quarterly Report of the
Corporation for the quarter ended June 30, 1999 and incorporated
herein by reference.
10.5 Severance Benefit Agreement between the Corporation and
Theodore D. McDowell*
Filed as Exhibit 10 to the Form 10-Q Quarterly Report of the
Corporation for the quarter ended September 30, 1999 and
incorporated herein by reference.
21 Subsidiaries of the Corporation.
23.1 Consent of Beard & Company, Inc.
23.2 Consent of Arthur Andersen LLP
27 Financial Data Schedule
99 Report of Arthur Andersen LLP
* Identifies a management contract or a compensatory plan or arrangement.
(b) Reports on Form 8-K:
A current report on Form 8-K, dated December 2, 1999 was filed
December 3, 1999 in conjunction with the filing of amendments to
the Bylaws of Farmers and Merchants Trust Company and to the Bylaws
of Franklin Financial Services Corporation.
(c) The exhibits required to be filed as part of this report are submitted
as a separate section of this report.
(d) Financial Statement Schedules: None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and 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
By:/s/William E. Snell, Jr.
------------------------
William E. Snell,Jr.
President and Chief Executive Officer
Date: March 23, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Robert G. Zullinger Chairman of the Board March 23, 2000
Robert G. Zullinger and Director
/s/William E. Snell, Jr. President and Chief Executive March 23, 2000
William E. Snell, Jr. Officer and Director
/s/ Charles S. Bender II Executive Vice President March 23, 2000
Charles S. Bender II and Director
/s/ Elaine G. Meyers Treasurer and Chief March 23, 2000
Elaine G. Meyers Financial Officer
(Principal Financial and
Accounting Officer)
/s/ G. Warren Elliott Director March 23, 2000
G. Warren Elliott
_________________ Director March 23, 2000
Omer L. Eshleman
/s/ Donald A. Fry Director March 23, 2000
Donald A. Fry
_________________ Director March 23, 2000
Dennis W. Good, Jr.
/s/ H. Huber McCleary Director March 23, 2000
H. Huber McCleary
/s/ Jeryl C. Miller Director March 23, 2000
Jeryl C. Miller
/s/ Stephen E. Patterson Director March 23, 2000
Stephen E. Patterson
/s/ Charles M. Sioberg Director March 23, 2000
Charles M. Sioberg
/s/ Martha B. Walker Director March 23, 2000
Martha B. Walker
Exhibit Index for the Year Ended
December 31, 1999
Item Description
3.1 Articles of Incorporation of the Corporation.
Filed as Exhibit 3 to Form 10-Q Quarterly Report of the Corporation
for the quarter ended September 30,1999 and incorporated by reference.
3.2 Bylaws of the Corporation.
Filed as Exhibit 3 (i) to Current Report on Form 8-K
Filed on December 3, 1999 and incorporated herein by reference.
10.1 Deferred Compensation Agreements with Bank Directors.
Filed as Exhibit 10.1 to the 1995 Form 10-K -- Annual Report of the
Corporation and incorporated herein by reference.
10.2 Director's Deferred Compensation Plan.
Filed as Exhibit 10.2 to the 1995 Form 10-K -- Annual Report of the
Corporation and incorporated herein by reference.
10.3 Long-Term Incentive Plan of 1990.
Filed as Exhibit 10.3 to the 1995 Form 10-K -- Annual Report of the
Corporation and incorporated herein by reference.
10.4 Senior Management Incentive Program, as amended, October 15, 1992.
Filed as Exhibit 10.2 to Form 10-Q Quarterly Report of the
Corporation for the quarter ended June 30, 1999 and incorporated
herein by reference.
10.5 Severance Benefit Agreement between the Corporation and
Theodore D. McDowell*
Filed as Exhibit 10 to the Form 10-Q Quarterly Report of the
Corporation for the quarter ended September 30, 1999 and
incorporated herein by reference.
21 Subsidiaries of Corporation
23.1 Consent of Beard & Company, Inc.
23.2 Consent of Arthur Andersen LLP
27 Financial Data Schedule
99 Report of Arthur Andersen LLP
* Identifies a management contract or a compensatory plan or arrangement.
Exhibit 21
Subsidiaries of
Franklin Financial Services Corporation
Farmers and Merchants Trust Company of Chambersburg - Direct
(A Pennsylvania Bank and Trust Company)
Exhibit 23.1
Consent of Beard & Company, Inc., Independent Auditors
Regarding:
Registration Statements, File No. 2-92212, No. 2-98880, No.
33-36509, No. 33-64294, 33-82420, and No. 333-82675.
We consent to the incorporation by reference in the above listed
Registration Statements of our report dated January 28, 2000, with
respect to the consolidated financial statements of Franklin Financial
Services Corporation included in this Annual Report (Form 10-K) for
the year ended December 31, 1999.
/s/ BEARD & COMPANY, INC.
Harrisburg, Pennsylvania
March 23, 2000
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report dated January 29, 1999, on the December 31, 1998, consolidated
financial statements of Franklin Financial Services Corporation, in this
Form 10-K, into the Corporation's previously filed Registration Statements;
File No. 2-92212, No. 2-98880, No. 33-36509, No. 33-64294, No. 33-82420,
and No. 333-82675. It should be noted that we have not audited any financial
statements of Franklin Financial Services Corporation subsequent to
December 31, 1998, or performed any procedures subsequent to the date of
our report.
/s/ Arthur Andersen LLP
Lancaster, PA
March 23, 2000
Exhibit 99
Report of Independent Public Accountants
To the Shareholders and Board of Directors, Franklin Financial
Services Corporation:
We have audited the accompanying consolidated balance sheet of
FRANKLIN FINANCIAL SERVICES CORPORATION (a Pennsylvania corporation)
and subsidiary as of December 31, 1998, and the related consolidated
statements of income, changes in shareholders' equity and cash flows
for each of the two years in the period ended December 31, 1998.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of
FRANKLIN FINANCIAL SERVICES CORPORATION and subsidiary as of December 31,
1998, and the consolidated results of their operations and cash flows for
each of the two years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Lancaster, PA
January 29, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 14956
<INT-BEARING-DEPOSITS> 161
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 129801
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 287943
<ALLOWANCE> 3859
<TOTAL-ASSETS> 444679
<DEPOSITS> 333310
<SHORT-TERM> 39682
<LIABILITIES-OTHER> 2732
<LONG-TERM> 29695
0
0
<COMMON> 3045
<OTHER-SE> 36215
<TOTAL-LIABILITIES-AND-EQUITY> 444679
<INTEREST-LOAN> 21997
<INTEREST-INVEST> 7056
<INTEREST-OTHER> 354
<INTEREST-TOTAL> 29407
<INTEREST-DEPOSIT> 11941
<INTEREST-EXPENSE> 3061
<INTEREST-INCOME-NET> 14405
<LOAN-LOSSES> 830
<SECURITIES-GAINS> 289
<EXPENSE-OTHER> 11810
<INCOME-PRETAX> 6267
<INCOME-PRE-EXTRAORDINARY> 6267
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5084
<EPS-BASIC> 1.86
<EPS-DILUTED> 1.84
<YIELD-ACTUAL> 7.57
<LOANS-NON> 3131
<LOANS-PAST> 451
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3549
<CHARGE-OFFS> 628
<RECOVERIES> 108
<ALLOWANCE-CLOSE> 3859
<ALLOWANCE-DOMESTIC> 3859
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
