-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O+DcANBuSZ3NhUn6uXsbYCN/HMYcCcFRtLWGXKbq6/+fNcvkt0xCT72qqGTUkrfV 48wnwySPM6Dgti4tQYDgYQ== 0000723646-98-000006.txt : 19980330 0000723646-98-000006.hdr.sgml : 19980330 ACCESSION NUMBER: 0000723646-98-000006 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRANKLIN FINANCIAL SERVICES CORP /PA/ CENTRAL INDEX KEY: 0000723646 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 251440803 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-12126 FILM NUMBER: 98576118 BUSINESS ADDRESS: STREET 1: 20 S MAIN ST STREET 2: P O BOX T CITY: CHAMBERSBURG STATE: PA ZIP: 17201-0819 BUSINESS PHONE: 7172646116 MAIL ADDRESS: STREET 1: P O BOX T CITY: CHAMBERSBURG STATE: PA ZIP: 17201 10-K405 1 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, 1997 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-12126 FRANKLIN FINANCIAL SERVICES CORPORATION (Exact name of registrant as specified in its charter) PENNSYLVANIA 25-1440803 (State or other jurisdiction of incorporation (I.R.S. Employer 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: Names of each exchange Title of each class on which registered NONE 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 (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements of 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 2,304,041 shares of the Registrant's common stock held by nonaffiliates of the Registrant as of February 6, 1998, based on the average of the bid and asked price for such shares, was $81,793,456. APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS; Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No (APPLICABLE ONLY TO CORPORATE REGISTRANTS) Indicate by the number of shares outstanding of each of the registrant's classes of common stock as of the latest practicable date. There were 2,796,082 outstanding shares of the Registrant's common stock as of February 6, 1998. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the annual report to stockholders for the year ended December 31, 1997, are incorporated by reference into Part I and Part II. (2) Portions of the definitive annual proxy statement to be filed, pursuant to Reg. 14A within 120 days after December 31, 1997, are incorporated into Part III. FRANKLIN FINANCIAL SERVICES CORPORATION FORM 10-K INDEX Part I Page Item 1. Business . . . . . . . . . . . . . . . . . . . . .2 Item 2. Properties . . . . . . . . . . . . . . . . . . . 10 Item 3. Legal Proceedings. . . . . . . . . . . . . . . . 10 Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . 10 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . 10 Item 6. Selected Financial Data. . . . . . . . . . . . . 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .11 Item 8. Financial Statements and Supplementary Data. . . 11 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. . . . .11 Part III Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . 11 Item 11. Executive Compensation. . . . . . . . . . . . . 11 Item 12. Security Ownership of Certain Beneficial Owners and Management. . . . . . . . . . . . . . . . . 12 Item 13. Certain Relationships and Related Transactions. 12 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . . . 12 Signatures. . . . . . . . . . . . . . . . . . . . . . . . 15 Index of Exhibits . . . . . . . . . . . . . . . . . . . . 17 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 their 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 the Pennsylvania Higher Education Assistance Act student loan program and the Pennsylvania Housing Finance Agency program. 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 on time. 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. 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 deposit gathering have 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. Twelve 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 locally owned financial institution in Franklin County and had total assets of approximately $354,000,000 at December 31, 1997. All of the local commercial bank competitors of the Corporation are subsidiaries of bank holding companies. The Corporation ranks sixth in size of the thirteen bank holding companies having offices in its primary market. Staff As of December 31, 1997, the Corporation and its subsidiary had 152 full-time employees and 51 part-time 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 subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") under the BHCA, as amended. As a bank holding company, the Corporation's activities and those of its banking and nonbanking subsidiaries 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 BHCA 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 banking subsidiaries during periods of financial stress or adversity. The BHCA 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 merging or consolidating with another bank holding company without prior approval of the Federal Reserve Board. Similar restrictions currently apply to acquisition of control of shares of stock of the Corporation or its banking subsidiaries by other bank holding companies. Additionally, the BHCA 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 nonbanking 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. F&M Trust is not a member of the Federal Reserve System. Accordingly, its operations are subject to regulation and examination by the FDIC and by the Pennsylvania Department of Banking ("PDOB"). F&M Trust is subject to requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amount 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. 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 risk-based 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 adopted by the FDIC. The Bank is also subject to PDOB capital guidelines. Although not adopted in regulation form, the PDOB utilizes capital standards requiring a minimum of 6% leverage capital and 10% risk-based capital. The components of leverage and risk-based capital are substantially the same as those defined by the FDIC. Prompt Corrective Action Rules The Federal Deposit Insurance Act (the "FDIA") requires each Federal banking agency to specify by regulation 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 can, 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). F&M Trust meets the criteria to be "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 of 1965 (the "Banking Code"), the FDIA, and FDIC regulations. 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. Under the FDIA, no dividends may be paid by an insured bank if the bank is in arrears in the payment of any insurance assessment due to the FDIC. The Prompt Corrective Action rules also limit the payment of dividends by banks which are not classified as well capitalized or adequately capitalized. Under these policies and subject to the restrictions applicable to the Bank, the Bank could declare, during 1998, without prior regulatory approval, aggregate dividends of approximately $1.032 million, plus retained net income to the date of such dividend declaration. 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, 1997, the Bank was well capitalized for purposes of calculating insurance assessments. The Bank Insurance Fund ("BIF") is presently fully funded at more than the minimum amount required by law. Accordingly, the 1998 BIF 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 ("FICO") bonds. FICO was created by Congress in 1989 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 FICO 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 ("SAIF") and provided that BIF deposits would be subject to 1/5 of the assessment to which SAIF deposits are subject for FICO bond payments through 1999. Beginning in 2000, BIF deposits and SAIF deposits will be subject to the same assessment for FICO bonds. The FICO assessment for 1998 for all depository institutions is expected to be $.0126 for each $100 of BIF deposits and $.063 for each $100 of SAIF deposits. The FDIC sets the FICO assessment rate every six months. New Legislation The Deposit Insurance Funds Act of 1996 was a part of the larger Economic Growth and Regulatory Paperwork Reduction Act of 1996 ("EGRPRA"). EGRPRA is a lengthy Act that amends many different bank regulatory and consumer protection statutes. While EGRPRA does not contain any major changes to banking law (except for the FDIC and FICO assessments discussed above), it does contain a number of smaller provisions that are beneficial to the banking industry. In particular, certain routine regulatory application requirements and procedures have been reduced or eliminated, making it easier and less expensive for banks to comply with regulatory requirements. While the changes effected by EGRPRA are welcome, the direct effect on the Corporation and the Bank are expected to be minimal. Proposed legislation is introduced in almost every legislative session that would dramatically affect the regulation of the banking industry. Whether or not such legislation will ever be enacted and what effect it may have on the Corporation and the Bank cannot be estimated at this time. Selected Statistical Information Certain statistical information is included in the Corporation's 1997 Annual Report and is incorporated herein by reference Description of Statistical Information Annual Incorporated by Reference from the Report 1997 Annual Report Page Net Interest Income 36 Analysis of Net Interest Income 37 Deposits by Major Classification 37 Rate-Volume Analysis of Net Interest Income 38 Investment Securities at Amortized Cost 41 Time Certificates of Deposit of $100,000 or More 41 Short-Term Borrowings 45 Loan Portfolio 45 Allocation of the Allowance for Possible Loan Losses 45 Non-Performing Assets 46 Allowance for Possible Loan Losses 46 Interest Rate Sensitivity 48 Sensitivity to Change in Market Interest Rates 49 Maturity Distribution of Investment Portfolio 49 Maturities and Interest Rate Terms of Loans 50 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 five properties throughout Franklin County which are held for future expansion and are currently used for banking operations by F&M Trust. In addition to its main office, F&M Trust owns eleven and leases one property, all of which are used for banking offices and operations. F&M Trust also owns three properties which are held for expansion and are currently leased to others. 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 The information related to this item is incorporated by reference to the information appearing under Market and Dividend Information on Page 12 and Shareholders' Information on Page 59 of the Corporation's 1997 Annual Report to Shareholders. Item 6. Selected Financial Data The information related to this item is incorporated by reference to the information under Summary of Selected Financial Data on Page 3 of the Corporation's 1997 Annual Report to Shareholders. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information related to this item is incorporated by reference to the information appearing under Management's Discussion and Analysis on Pages 35 through 53 of the Corporation's 1997 Annual Report to Shareholders. Item 7a. Quantitative and Qualitative Disclosures about Market Risk The information related to this item is incorporated by reference to the information appearing under Table 12 of Management's Discussion and Analysis on Page 49 of the Corporation's 1997 Annual Report to Shareholders. Item 8. Financial Statements and Supplementary Data The information related to this item is incorporated by reference to the information appearing under Financial Statements and Notes to Consolidated Financial Statements, including the Report of Independent Public Accountants, on Pages 13 through 30 of the Corporation's 1998 Annual Report to Shareholders. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 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 captions "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 1998 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 captions "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 1998 Annual Meeting of Shareholders, except that information appearing under the captions "Committee Report on Executive Compensation" and "Stock Performance Graph" on Pages 10 through 13 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 captions "Voting of Shares and Principal Holders Thereof" on Page 2 and "Information about Nominees and Continuing Directors" on Pages 4 through 6 of the Corporation's Proxy Statement for the 1998 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 caption "Transactions with Directors and Executive Officers" on Page 13 of the Corporation's Proxy Statement for the 1998 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 are incorporated by reference to the 1997 Annual Report to Shareholders: Report of Independent Public Accountants; Consolidated Balance Sheets - December 31, 1997 and 1996; Consolidated Statement of Income - Years ended December 31, 1997, 1996, and 1995; Consolidated Statements of Changes in Shareholders' Equity - Years ended December 31, 1997, 1996, and 1995; 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 being filed as part of this report; 3.1 Articles of Incorporation of the Corporation. Filed as Exhibit 4 to Registration Statement on Form S-8 (No.33-36509) and incorporated herein by reference. 3.2 Bylaws of the Corporation. Filed as Exhibit 4 to Registration Statement on Form S-8 (No.33-36509) 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 10.5 to the 1993 Form 10-K -- Annual report of the Corporation and incorporated herein by reference. 13 The 1997 Annual Report to Shareholders of the Corporation. 21 Subsidiaries of the Corporation. 23 Consent of Arthur Andersen LLP 27 Financial Data Schedule (b) Reports on Form 8-K: A current report on Form 8-K, dated November 13, 1997 was filed on November 17,1997 in conjunction with the declaration of a three for two stock split to be issued in the form of a 50% stock dividend. (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:______________________________________ William E. Snell, Jr. President and Chief Executive Officer Date: March 26, 1998 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 ______________________________ Chairman of the Board March 26, 1998 Jay L. Benedict, Jr. and Director ______________________________ Vice Chairman March 26, 1998 Robert G. Zullinger and Director ______________________________ President and Chief March 26, 1998 William E. Snell, Jr. Executive Officer and Director ______________________________ Executive Vice March 26, 1998 Charles S. Bender II President and Director ______________________________ Treasurer and Chief March 26, 1998 Elaine G. Meyers Financial Officer (Principal Financial and Accounting Officer) ______________________________ Director March 26, 1998 G. Warren Elliott ______________________________ Director March 26,1998 Omer L. Eshleman ______________________________ Director March 26,1998 Dennis W. Good, Jr. ______________________________ Director March 26,1998 H. Huber McCleary ______________________________ Director March 26,1998 Jeryl C. Miller ______________________________ Director March 26,1998 Stephen E. Patterson ______________________________ Director March 26,1998 Charles M. Sioberg ______________________________ Director March 26,1998 Martha B. Walker Exhibit Index for the Year Ended December 31, 1997 Item Description 3.1 Articles of Incorporation of the Corporation. Filed as Exhibit 4 Registration on Form S-8 (No. 33-36509) and incorporated herein by reference. 3.2 Bylaws of the Corporation. Filed as Exhibit 4 Registration on Form S-8 (No. 33-36509) 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 10.5 to the 1993 Form 10-K -- Annual Report of the Corporation and incorporated herein by reference. 13 The 1997 Annual Report to Shareholders of the Corporation 21 Subsidiaries of Corporation 23 Consent of Arthur Andersen LLP 27 Financial Data Schedule EX-13 2 FRANKLIN FINANCIAL SERVICES CORPORATION 1997 ANNUAL REPORT Table of Contents Consolidated Financia Highlights Summary of Selected Financial Data A Message to Shareholders Report of Independent Public Accountants Financial Statements Notes to Consolidated Financial Statements Managements' Discussion and Analysis Shareholders' Information
CONSOLIDATED FINANCIAL HIGHLIGHTS % increase (amounts in thousands, except per share) 1997 1996 (decrease) Performance Net income $4,363 $4,127 6 Return on assets 1.26% 1.29% Return on equity 12.03% 11.83% Shareholders' Value (per share)* Basic earnings per share $1.59 $1.46 9 Cash dividends paid 0.56 0.52 8 Cash dividends paid (unadjusted) 0.84 0.78 8 Cash dividends declared 1.37 0.52 163 Cash dividends declared (unadjusted) 1.99 0.78 155 Book value 12.99 12.47 4 Market value (mean of bid and ask) 34.16 21.42 59 Market value/book value ratio 262.97% 171.77% Price/earnings multiple 21.49x 14.57x Yield on cash dividends paid 1.64% 2.43% Safety and Soundness Leverage ratio (Tier 1) 9.22% 10.03% Nonperforming assets/total assets 0.54% 0.54% Allowance for loan loss as a % of loans 1.35% 1.36% Net charge-offs/average loans 0.29% 0.32% Allowance for loan loss/nonaccrual loans 287.70% 357.48% Allowance for loan loss/nonperforming loans 192.99% 176.88% Risk-based capital (Tier 1) 13.53% 14.75% Balance Sheet Highlights Total assets $353,865 $336,120 5 Investment Securities 87,098 89,792 -3 Loans, net 241,244 221,166 9 Deposits 274,555 268,202 2 Shareholders' equity 36,305 35,341 3 Trust assets under management (market value) 350,866 262,840 33 * Per share information, except where noted, for 1997 and 1996 has been adjusted to reflect a 3 for 2 stock split issued in the form of a 50% stock dividend declared on November 13, 1997, and distributed on February 3, 1998, to shareholders of record on January 13, 1998. Cash dividends per share declared include the regular quarterly cash paid to shareholders in 1997 plus the $1.00 per share special dividend and the regular first quarter 1998 dividend. The latter two were paid in 1998.
SUMMARY OF SELECTED FINANCIAL DATA 1997 1996 1995 1994 1993 (amounts in thousands, except per share) Summary of operations Interest income $26,308 $24,799 $24,971 $22,028 $21,559 Interest expense $12,225 11,087 11,210 9,720 10,120 Net interest income 14,083 13,712 13,761 12,308 11,439 Provision for possible loan losses 936 607 302 48 701 Net interest income after provision for possible loan losses 13,147 13,105 13,459 12,260 10,738 Noninterest income 4,306 3,683 3,351 3,569 5,020 Noninterest expense 11,700 11,282 11,180 11,069 11,789 Income before income taxes and cumulative effect of accounting change 5,753 5,506 5,630 4,760 3,969 Income tax 1,390 1,379 1,451 1,000 897 Income before cumulative effect of accounting change 4,363 4,127 4,179 3,760 3,072 Cumulative effect of accounting change - - - -- 250 Net income $4,363 $4,127 $4,179 $3,760 $3,322 Per common share* Basic earnings per share before cumulative effect of accounting change $1.59 $1.46 $1.45 $1.28 $1.06 Cumulative effect of accounting change - - - -- 0.09 Basic earnings per share $1.59 $1.46 $1.45 $1.28 $1.15 Cash dividends declared $1.37 $0.52 $0.48 $0.43 $0.41 Balance sheet data End of year Total assets $353,865 $336,120 $313,473 $310,554 $314,557 Deposits 274,555 268,202 257,211 256,697 262,707 Loans, net 241,244 221,166 210,067 219,311 210,663 Shareholders' equity 36,305 35,341 34,956 32,873 30,618 Performance yardsticks (unaudited) Return on average assets 1.26% 1.29% 1.34% 1.21% 1.07% Return on average equity 12.03% 11.83% 12.50% 11.82% 11.49% Dividend payout ratio 36.01% 36.42% 33.98% 32.55% 32.54% Average equity to average asset ratio 10.49% 10.87% 10.69% 10.26% 9.33% Trust assets under management (unaudited) Personal trusts (market value) $349,647 $261,803 $223,230 $182,872 $182,184 Corporate trusts (market value) 1,219 1,037 933 1,611 1,747 $350,866 $262,840 $224,163 $184,483 $183,931 * Per share information has been adjusted retroactively to reflect all stock splits and dividends.
President's Message Dear Shareholder, Franklin Financial earned $4,363,000 in 1997, representing a 5.7% improvement over 1996 earnings of $4,127,000 and a new record for your company. Our 1997 earnings performance included significant gains on the sale of investment securities which were offset by an increased provision for loan losses and other noninterest expenses. As shareholders, you received a 7.7% increase in dividends paid during the year as per share dividends increased from $.78 in 1996 to $.84 in 1997. On November 13, 1997, the board of directors declared a 3 for 2 stock split issued in the form of a 50% stock dividend plus a special $1 cash dividend which was paid to shareholders in January 1998. When adjusted to reflect the 50% stock dividend, cash dividends paid per share were $.52 during 1996 compared to $.56 in 1997. The 50% stock dividend that was declared on November 13, 1997, isn't an uncommon occurrence for Franklin Financial shareholders. In fact, this is the sixteenth stock dividend that has been declared since 1961 and, more recently, the fourth in five years. The 50% stock dividend was made possible by our strong financial position and reflected our continuing commitment to generating long-term value for our shareholders. The 50% stock dividend had the effect of lowering the current price of a single share of Franklin Financial stock after the "ex" date to a price that, in the $30-40 per share range, is more affordable thus improving the marketability and availability or our stock. Following the announcement of the 50% stock dividend and $1 special cash dividend, the market price of Franklin Financial stock continued to appreciate. By December 31, 1997, the market value (mean of bid and ask price) of a share of Franklin Financial stock reflected a 59.5% increase when compared to December 31, 1996. The book value of a single share of Franklin Financial stock improved as well, from $12.47 to $12.99, as adjusted for the 50% stock dividend. Continuing our stock repurchase program has been a part of your management's efforts to effectively manage our capital position in order to enhance long-term shareholder value. In 1997, we purchased 37,983 shares (56,974 shares as adjusted for the 50% stock dividend) at a cost of $1,283,551. In addition to the repurchase program, which analysts believe should be viewed as a strategic acquisition, the board of directors distributed accumulated capital through the special $1 cash dividend. This $1 dividend reflects the prior performance and strong capital position of your company, and is a means of distributing previous years' earnings to shareholders, as well as enhancing long-term shareholder value by leveraging the company which in the future should generate a higher Return on Equity (a key measurement of our performance). These initiatives have resulted in increased earnings per share reflected in the increase in basic earnings per share from $1.46 in 1996 to $1.59 in 1997 as adjusted for the 50% stock dividend, and return on equity, as well as potentially higher stock prices to the current shareholders. In last year's Annual Report to shareholders, I commented that earnings in 1996 were impacted by the market expansion of F&M Trust into the Cumberland County market during the fourth quarter with additional expenses for salaries and benefits, facilities, marketing and others. I am pleased to report that our community offices in Boiling Springs, Newville, and Shippensburg have continued to generate significant growth in both deposits and loans. We expect that our investment in these new markets will continue to provide us with the potential for an increase in earning assets and additional income generation capability. Asset growth of 5.3% to a record $353,865,000 was fueled by loan growth of 9.1%, reflecting a favorable economic environment and strong business development efforts. In addition to the expansion into the Cumberland County market, we believe that the responsiveness and flexibility that we can deliver as an independent community bank at a time of rapid consolidation within the financial services industry creates value in the minds of our customers, positioning us well for the future. While interest rates remained low to the benefit of borrowers, it has placed pressure on us to retain deposit dollars. The banking industry as a whole is faced with more and more customers turning to uninsured non-deposit products such as mutual funds, stocks, bonds, and annuities to earn a higher return on their investment while assuming the possibility of additional risk. Banks are no longer just competing with other banks and credit unions for deposits, but now face intense competition from non-banks including mutual fund companies, investment firms, and insurance companies. During 1997, we introduced the F&M Trust Money Management Account to attract and retain deposit dollars that may have eventually been attracted to the non-bank alternative investments. The Money Management Account pays a market rate of interest, coupled with the safety of FDIC insurance, and has been widely accepted, as evidenced by the approximately $25 million growth, including significant new deposit dollars, registered by this product in just seven months. Net interest income after the provision for loan losses remained relatively constant at $13,147,000, despite an increased provision for possible loan losses. We continue to be confronted by the trend of rising consumer bankruptcies that began in the fourth quarter of 1995. During 1997, management acted prudently to increase the loan loss provision expense accordingly to $936,000, representing a 54.2% increase above the provision for loan loss in 1996. We have implemented several strategic initiatives to combat this trend including consumer loan training, loan policy revisions, and an enhanced loan review function. However, there appears to be no quick-fix solution to this disturbing trend. It is our intention to closely monitor the credit quality of our loan portfolio to ensure that we remain adequately reserved. As we continue to evolve into a diversified financial services provider, nontraditional bank services are making a more significant contribution to our performance. Last year we introduced The Personal Investment Center at F&M Trust to integrate financial planning and investment services into the retail environment of our offices. Based upon the results achieved, an expansion of The Personal Investment Center concept to additional community office locations is planned during 1998. The market value of trust assets under management grew by 33.5% to $350,866,000 at year end 1997 boosting trust fee income to $1,431,000, representing a 21.8% increase over the previous year. This growth is attributable to both the volume of business generated as well as the increased market valuation. In addition to fee income contributed by The Personal Investment Center and the Investment and Trust Services Department, which portend the direction and focus the banking industry is taking, noninterest income was also augmented by debit card income and the sale of mortgages into the secondary market. During 1997, our noninterest expense increased by $418,000 or 3.7% to $11,700,000, reflecting our efforts to control costs. Included in this increase was an amount of $386,000 related to the sale of various properties and an adjustment in the carrying value of other properties held for future use. We made several investments in technology in preparation for future growth and service delivery including the introduction of a voice response unit accessed via telephone called the Freedom Access Center and the installation of a Marketing Customer Information File (MCIF) system. We have continued to make upgrades to our internal software and improvements in our operations to support the delivery of service to our internal and external customers. One of the hottest technology topics in our industry as well as most others is the "Year 2000 Problem." This issue basically deals with the future viability of computer software and systems that only use two digits in the date field. In order to handle the change from 1999 to 2000, one of the upgrades that must be made to ensure compatibility is a four-digit date field. In early 1997, we began to prepare for the Year 2000 in our Strategic Technology Plan with a target date of December 31, 1998 to ensure that all of our systems and the vendors that support our systems are Year 2000 compliant. Before concluding this letter, I would like to express my gratitude to Charles R. Diller for his years of service to Franklin Financial and F&M Trust Company. Charlie retired from the Board on December 31, 1997 after 25 years of service and commitment to our company. We will miss his experience, knowledge, and contributions to our deliberations and his determination to uphold the values that have guided our company for over 90 years. I extend my wishes to Charlie and his wife, Sarah, for a pleasant and healthy retirement. As stated in our mission statement and core values statement, it is our belief that the delivery of quality service by our employees to customers and our communities are the cornerstone for quality earnings to you our shareholders. Our past and future success ultimately is linked to successfully serving our constituencies --- our shareholders, our customers, our employees, and our communities. We are guided by our core values --- proactivity, honesty and integrity, teamwork, and a concern for the individual - --- as we focus upon achieving our mission as a good corporate citizen within our communities. Sincerely, William E. Snell, Jr. President and Chief Executive Officer Market and Dividend Information The Corporation's common stock is not actively traded in the over-the- counter market. The Corporatio's stock is listed under the symbol "FRAF" on the O.T.C. Electronic Bulletin Board, an automated quotation service, made available through, and governed by, the NASDAQ system. 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. (See a listing of market makers on page 59 of this report.) There were 1,823 shareholders of record as of December 31, 1997. The range of high and low bid prices, as reported by local sources, is shown below for the years 1997 and 1996. Also shown are the quarterly cash dividends paid for the same years.
Per share* 1997 High Low Cash div. 1996 High Low Cash div. 1st quarter . . . $22.00 $20.83 $0.133 1st quarter . . . $19.17 $17.50 $0.126 2nd quarter . . . 22.00 22.00 0.133 2nd quarter . . . 20.00 19.17 0.126 3rd quarter . . . 24.67 22.17 0.146 3rd quarter . . . 20.83 20.00 0.126 4th quarter . . . 32.83 24.83 0.146 4th quarter . . . 20.83 20.83 0.126 $0.558 $0.518
* Per share information has been adjusted to reflect a 3 for 2 stock split issued in the form of a 50% stock dividend distributed on February 3, 1998. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors, Franklin Financial Services Corporation: We have audited the accompanying consolidated balance sheets of FRANKLIN FINANCIAL SERVICES CORPORATION (a Pennsylvania corporation) and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. 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 financial position of FRANKLIN FINANCIAL SERVICES CORPORATION and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Lancaster, PA January 30, 1998
Consolidated Balance Sheets (Amounts in thousands) December 31 1997 1996 Assets Cash and due from banks (Note 3) $10,863 $10,265 Interest-bearing deposits in other banks 249 256 Investment securities held to maturity (market value of $28,030 and $36,199 at December 31, 1997 and 1996, respectively) (Notes 1 and 4) 27,779 36,290 Investment securities available for sale (Notes 1 and 4) 59,319 53,502 Loans, net (Notes 1 and 5) 241,244 221,166 Premises and equipment, net (Notes 1 and 7) 5,907 6,698 Other assets 8,504 7,943 Total assets $353,865 $336,120 Liabilities Deposits (Note 8) Demand (noninterest-bearing) $37,591 $34,847 Savings and interest checking 113,138 104,763 Time 123,826 128,592 Total Deposits 274,555 268,202 Securities sold under agreements to repurchase(Note 9) 16,075 15,122 Other borrowings (Note 9) 21,434 14,891 Other liabilities 5,496 2,564 Total liabilities 317,560 300,779 Commitments and contingencies (Notes 13 and 15) Shareholders' equity (Notes 2, 12 and 14) Common stock, $1 par value per share, 5,000 shares authorized with 3,045 and 2,030 shares issued and 2,795 and 1,890 outstanding at December 31, 1997 and 1996, respectively 3,045 2,030 Capital stock without par value, 5,000 shares authorized with no shares issued and outstanding - - Additional paid-in capital 19,761 19,745 Retained earnings 17,087 17,590 Net unrealized gain on securities 1,935 613 Treasury stock (4,760) (3,830) Unearned compensation (Note 11) (763) (807) Total shareholders' equity 36,305 35,341 Total liabilities and shareholders' equity $353,865 $336,120 The accompanying notes are an integral part of these statements.
Consolidated Statements of Income (Amounts in thousands, except per share data) Years ended December 31 1997 1996 1995 Interest income (Note 1) Interest on loans $21,088 $19,903 $20,280 Interest on deposits and other obligations of other banks 28 210 683 Interest on Federal funds sold - - 9 Interest on investments: U.S. Government obligations 293 311 283 Obligations of U.S. Government agencies and corporations 2,632 2,542 1,893 Obligations of states and political subdivisions 1,407 999 1,096 Other securities 704 695 585 Dividend income 156 139 142 Total interest income 26,308 24,799 24,971 Interest expense Interest on deposits (Note 8) 10,057 9,848 10,119 Interest on securities sold under agreements to repurchase 750 762 639 Other borrowings 1,418 477 452 Total interest expense 12,225 11,087 11,210 Net interest income 14,083 13,712 13,761 Provision for possible loan losses (Notes 1 and 6) 936 607 302 Net interest income after provision for possible loan losses 13,147 13,105 13,459 Noninterest income Trust fees 1,431 1,175 1,166 Service charges, commissions and fees 2,023 1,939 1,991 Other 65 403 184 Securities gains 787 166 10 Total noninterest income 4,306 3,683 3,351 Noninterest expense Salaries and employee benefits 6,434 6,276 6,100 Net occupancy expense 624 524 517 Furniture and equipment expense 776 751 762 FDIC insurance 43 163 323 Other 3,823 3,568 3,478 Total noninterest expense 11,700 11,282 11,180 Income before Federal income taxes 5,753 5,506 5,630 Federal income tax expense (Note 10) 1,390 1,379 1,451 Net income $4,363 $4,127 $4,179 Earnings per share (Note 1)* Basic earnings per share $1.59 $1.46 $1.45 Weighted average shares outstanding (000's) 2,738 2,818 2,882 Diluted earnings per share $1.58 $1.45 $1.43 Weighted average shares outstanding (000's) 2,767 2,838 2,921 *Earnings per share for all periods have been adjusted to reflect a 3 for 2 stock split issued in the form of a 50% stock dividend distributed on February 3, 1998. The accompanying notes are an integral part of these statements.
Consolidated Statements of Changes in Shareholders' Equity For years ended December 31, 1997, 1996 and 1995: Additional Net Unrealized Common Paid-in Retained Gain (Loss) Treasury Unearned (Amounts in thousands, except per share) Stock Capital Earnings Securities Stock Compensation Total Balance at December 31, 1994 $1,353 $19,451 $12,884 ($353) ($36) ($426) $32,873 Year ended December 31, 1995 Net income - - 4,179 - - - 4,179 Cash dividends paid, $.48 per share - (1,420) - - - (1,420) 50% stock split 677 - (677) - - - Common stock issued under stock option plans (Note 12) - (20) - - 218 - 198 Change in net unrealized loss on securities (Note 1 and Note 4) - - - 1,030 - - 1,030 Acquisition of 97,111 shares of treasury stock at cost - - - - (2,235) - (2,235) Amortization of unearned compensation (Note 11) - - - - - 331 331 Balance at December 31, 1995 2,030 19,431 14,966 677 (2,053) (95) 34,956 Year ended December 31, 1996 Net income - - 4,127 - - - 4,127 Cash dividends paid, $.52 per share - - (1,503) - - - (1,503) Common stock issued under stock option plans (Note 12) - (33) - - 233 - 200 Change in net unrealized gain on securities (Note 1 and Note 4) - - - (64) - - (64) Restricted stock issued under long-term incentive compensation plan (28,926 shares net of forfeitures) - 177 - - 672 (849) Acquisition of 132,906 shares of treasury stock at cost (2,682) (2,682) Tax benefit of restricted stock transaction - 170 - - - - 170 Amortization of unearned compensation (Note 11) - - - - - 137 137 Balance at December 31, 1996 $2,030 $19,745 $17,590 $613 ($3,830) ($807) $35,341 Year ended December 31, 1997 Net income - - 4,363 - - - 4,363 Cash dividends paid, $.56 per share - - (1,571) - - - (1,571) Cash dividends declared, not paid $.81 per share - - (2,280) - (2,280) 50% stock split 1,015 - (1,015) - - - 0 Common stock issued under stock option plans (Note 12) - 27 - - 294 - 321 Change in net unrealized gain on securities (Note 1 and Note 4) - - - 1,322 - - 1,322 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 Cash dividends in all periods have been adjusted to reflect a 3 for 2 stock split issued in the form of a 50% stock dividend and distributed on February 3,1998. The accompanying notes are an integral part of these statements.
Consolidated Statements of Cash Flows Years ended December 31 1997 1996 1995 (Amounts in thousands) Cash flows from operating activities Net income $4,363 $4,127 $4,179 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 775 741 627 Premium amortization on investment securities 116 107 74 Discount accretion on investment securities (156) (129) (173) Provision for possible loan losses 936 607 302 Securities gains, net (787) (166) (10) Proceeds from sale of mortgage loans 11,947 15,225 15,076 Principal gains on sales of mortgage loans (62) (71) (61) Loss (gain) on sale of premises and equipment 37 (196) (25) Loan charge-offs, net of recoveries (692) (688) (586) Increase in interest receivable (154) (138) (214) Increase in interest payable 108 117 169 Decrease in unearned discount (116) (361) (591) Increase in prepaid and other assets (240) (432) (615) (Decrease) increase in accrued expenses and other liabilities (236) 436 (893) Other , net 333 305 366 Net cash provided by operating activities 16,172 19,484 17,625 Cash flows from investing activities Proceeds from sales of investment securities available for sale 4,364 334 - Proceeds from maturities of investment securities held to maturity 10,088 11,026 18,172 Proceeds from maturities of investment securities available for sale 9,515 12,641 6,633 Purchase of investment securities held to maturity (1,577) (11,999) (9,250) Purchase of investment securities available for sale (16,905) (24,360) (18,651) Net change in loans (32,091) (25,811) (4,896) Acquisition of branch office and customer list - (2,667) - Capital expenditures (433) (1,120) (1,313) Proceeds from sales of premises and equipment 143 331 158 Net cash used in investing activities (26,896) (41,625) (9,147) Cash flows from financing activities Net increase (decrease) in demand deposits, NOW accounts and savings accounts 11,119 8,952 (4,642) Net (decrease) increase in certificates of deposit (4,766) 2,039 5,156 Dividends paid (1,571) (1,503) (1,420) Common stock issued under stock option plans 321 200 198 Purchase of treasury shares (1,284) (2,682) (2,235) Cash inflows from other borrowings 7,496 10,752 698 Net cash provided by (used in) financing activities 11,315 17,758 (2,245) Increase (decrease) in cash and cash equivalents 591 (4,383) 6,233 Cash and cash equivalents as of January 1 10,521 14,904 8,671 Cash and cash equivalents as of December 31 $11,112 $10,521 $14,904 Supplemental Disclosures of Cash Flow Information Cash paid during the year for: 1997 1996 1995 Interest paid on deposits and other borrowed funds $12,117 $10,970 $11,041 Income tax paid 1,200 1,335 1,425 The accompanying notes are an integral part of these statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. Summary of Significant Accounting Policies The accounting policies of Franklin Financial Services Corporation and its subsidiaries 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). Effective 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 dissolved. 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 quality 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 - Except as noted below, debt securities are acquired with the intent to hold to maturity and are stated at cost adjusted for amortization of premiums and accretion of discounts which are recognized as adjustments of interest income. Certain specific debt securities and all marketable equity securities have been classified as "available for sale" to serve as a potential source of liquidity. Available for sale securities are stated at estimated market value with the related unrealized holding gains and losses 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. In the opinion of management, the Corporation has the ability and intent to hold investment securities carried at amortized cost to maturity. In December 1995, the Corporation reclassified investment securities with a book value of $15,706,000 and a market value of $15,745,000 from held to maturity to available for sale. This reclassification was allowable under Financial Accounting Standards Board (FASB) guidance which permitted institutions to make a one-time reassessment of the appropriateness of investment security classifications. As a result of this reclassification, the unrealized gain on securities recorded as a component of shareholders' equity increased approximately $26,000, net of tax. 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. Adjustments resulted from a 3 for 2 stock split issued in the form of a 50% stock dividend declared on November 13, 1997, and distributed on February 3, 1998, to shareholders of record on January 13, 1998 and a 3 for 2 stock split issued in the form of a 50% stock dividend distributed on December 29, 1995 to shareholders of record on December 8, 1995. The Corporation adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (Statement 128), on December 31, 1997. Statement 128 requires dual presentation of basic and diluted earnings per share on the face of the income statement for all entities with complex capital structures. 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) 1997 1996 1995 Weighted average shares outstanding (basic) 2,738 2,818 2,882 Impact of common stock equivalents 29 20 39 Weighted average shares outstanding (diluted) 2,767 2,838 2,921 ===== ===== ===== Reclassification - Certain prior period amounts have been reclassified to conform with the current year presentation. Recent Accounting Pronouncements: Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities - In June 1996, the FASB issued Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities." This Statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities. Those standards are based on consistent application of a financial-components approach that focuses on control. Under that approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. This Statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. Statement No. 127 was also issued in 1996 and amended Statement No. 125 by deferring for one year the effective date for certain provisions of Statement No. 125. Statement No. 125, as amended, was adopted prospectively on January 1, 1997, and Statement No. 127 was adopted on January 1, 1998. There was no material financial statement impact from the adoption of Statement No. 125 in 1997 and none is anticipated upon the adoption of Statement No. 127 in 1998. NOTE 2. Regulatory Matters Certain restrictions exist under Federal law regarding the ability of the Bank to transfer funds to the Corporation in the form of cash dividends, loans, or advances. The dividend limitation generally restricts dividend payments to the Bank's retained net income in the current and preceding two calendar years. Accordingly, under this limitation, as of December 31, 1997 approximately $1,032,000 of the undistributed earnings of the Bank would be available for distribution to the Corporation as dividends without prior regulatory approval. The Bank also 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 judgements 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 I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 1997, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 1997, the most recent notification from Federal Deposit Insurance Corporation 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 I risk-based, Tier I 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 I risk-based and Tier I leverage requirements for the Corporation and the Bank. Actual capital amounts and ratios are also presented.
As of December 31, 1997 To be well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provision (Amounts in thousands) Amount Ratio Amount Ratio Amount Ratio Total Capital (to Risk Weighted Assets) Corporation $35,394 14.80% $19,133 8.00% $23,916 10.00% Bank 31,261 13.24% 18,889 8.00% 23,611 10.00% Tier I Capital (to Risk Weighted Assets) Corporation $32,401 13.53% $9,579 4.00% $14,368 6.00% Bank 28,305 11.99% 9,445 4.00% 14,167 6.00% Tier I Capital (to Average Assets) Corporation $32,401 9.22% $14,049 4.00% $17,562 5.00% Bank 28,305 8.18% 13,841 4.00% 17,301 5.00% As of December 31, 1996 To be Well Capitalized Under For Capital Prompt Corrective Adequacy Purposes Action Provision Total Capital (to Risk Weighted Assets) Amount Ratio Amount Ratio Amount Ratio Corporation $35,354 16.00% $17,676 8.00% $22,095 10.00% Bank 32,479 14.80% 17,554 8.00% 21,943 10.00% Tier I Capital (to Risk Weighted Assets) Corporation $32,588 14.75% $8,838 4.00% $13,257 6.00% Bank 29,732 13.55% 8,777 4.00% 13,166 6.00% Tier I Capital (to Average Assets) Corporation $32,588 10.03% $13,003 4.00% $16,253 5.00% Bank 29,732 9.23% 12,878 4.00% 16,098 5.00% Management believes that under the current and proposed regulations the Corporation and its Bank subsidiary will continue to meet the minimum capital requirements in the forseeable future. However, events beyond the control of the Corporation, such as increased interest rates or a downturn in the economy where the Bank subsidiary has a concentrartion of its loans, could adversely affect future earnings and consequently, the ability of the Corporation and its Bank subsidiary to meet future capital requirements.
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, 1997 and 1996, required reserves held at the Federal Reserve Bank,for the bank subsidiary, were approximately $2,879,000 and $2,624,000. In addition, as compensation for check clearing and other services, a compensatory balance maintained at the Federal Reserve Bank at December 31,1997 and 1996 equaled approximately $900,000.
NOTE 4. Investment Securities Included as Other in the Held to Maturity classification in the following schedules are common stoc of the Federal Home Loan Bank of Pittsburgh and Atlantic Central Bankers Bank which in the aggregate total $1,392,000 and $1,223,000 at December 31, 1997 and 1996, respectively. Common stock of the Federal Home Loan Bank and Atlantic Central Bankers Bank represent ownership in institutions which are wholly owned by other financial institutions. The amortized cost and estimated market values of investment securities as of December 31, 1997 1996 are as follows: Gross Gross Estimated Amortized unrealized unrealized market (Amounts in thousands) cost gains losses value 1997 Held to Maturity U.S. Treasury securities and obligations of U.S. Government agencies and corporations $1,030 $9 $ - $1,039 Obligations of state and political subdivisions 15,025 227 8 15,244 Corporate debt securities 2,343 12 7 2,348 Mortgage-backed securities 7,989 66 48 8,007 26,387 314 63 26,638 Other 1,392 -- -- 1,392 $27,779 $314 $63 $28,030 Gross Gross Estimated Amortized unrealized unrealized market cost gains losses value 1997 Available for Sale Equity securities $1,588 $2,050 $ - $3,638 U.S. Treasury securities and obligations of U.S. Government agencies and corporations 20,967 172 3 21,136 Obligations of state and political subdivisions 14,926 674 - 15,600 Corporate debt securities 4,029 51 - 4,080 Mortgage-backed securities 14,877 42 54 14,865 $56,387 $2,989 $57 $59,319 Gross Gross Estimated Amortized unrealized unrealized market cost gains losses value 1996 Held to Maturity U.S. Treasury securities and obligations of U.S. Government agencies and corporations $1,051 $7 $ - $1,058 Obligations of state and political subdivisions 19,496 142 102 19,536 Corporate debt securities 3,688 4 15 3,677 Mortgage-backed securities 10,832 41 168 10,705 35,067 194 285 34,976 Other 1,223 -- -- 1,223 $36,290 $194 $285 $36,199 Gross Gross Estimated Amortized unrealized unrealized market cost gains losses value 1996 Available for Sale Equity securities $1,380 $1,110 $ - $2,490 U.S. Treasury securities and obligations of U.S. Government agencies and corporations 27,054 89 88 27,055 Obligations of state and political subdivisions 1,934 8 12 1,930 Corporate debt securities 5,046 14 2 5,058 Mortgage-backed securities 17,159 17 207 16,969 $52,573 $1,238 $309 $53,502 At December 31, 1997 and 1996, investment securities pledged to secure public funds, trust balances and other deposits and obligations totaled $50,078,000 and $54,864,000, respectively. Proceeds from the sale of available for sale securities for the years ended December 31, 1997 and 1996, totaled approximately $4,364,000 and $334,000, respectively. The net gains realized from these sales were $787,000 and $166,000, for the same periods. The amortized cost and estimated market value of debt securities at December 31, 1997, 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 market cost value Held to Maturity Due in one year or less $2,553 $2,560 Due after one year through five years 11,633 11,721 Due after five years through ten years 2,568 2,610 Due after ten years 1,644 1,740 $18,398 $18,631 Mortgage-backed securities 7,989 8,007 $26,387 $26,638 Estimated Amortized market cost value Available for Sale Due in one year or less $3,998 $4,004 Due after one year through five years 16,330 16,481 Due after five years through ten years 4,992 5,065 Due after ten years 14,602 15,266 $39,922 $40,816 Mortgage-backed securities 14,877 14,865 $54,799 $55,681 The amortized cost and estimated market value of mortgage backed securities by issuer as of December 31, 1997 and 1996 are as follows: Gross Gross Estimated Amortized unrealized unrealized market cost gains losses value 1997 Held to Maturity Federal Home Loan Mortgage Corporation $2,662 $19 $7 $2,674 Federal National Mortgage Association 2,182 6 30 2,158 Government National Mortgage Association 430 11 -- 441 Other Private 2,715 30 11 2,734 $7,989 $66 $48 $8,007 Gross Gross Estimated Amortized unrealized unrealized market cost gains losses value 1997 Available for Sale Federal Home Loan Mortgage Corporation $9,843 $19 $46 $9,816 Federal National Mortgage Association 5,034 23 8 5,049 $14,877 $42 $54 $14,865 Gross Gross Estimated Amortized unrealized unrealized market cost gains losses value 1996 Held to Maturity Federal Home Loan Mortgage Corporation $4,028 $12 $41 $3,999 Federal National Mortgage Association 3,094 4 53 3,045 Government National Mortgage Association 530 13 -- 543 Other Private 3,180 12 74 3,118 $10,832 $41 $168 $10,705 Gross Gross Estimated Amortized unrealized unrealized market cost gains losses value 1996 Available for Sale Federal Home Loan Mortgage Corporation $10,995 $ -- $161 $10,834 Federal National Mortgage Association 5,556 5 46 5,515 Government National Mortgage Association 608 12 -- 620 $17,159 $17 $207 $16,969
NOTE 5. Loans A summary of loans outstanding at the end of the reporting periods is as follows: December 31 (Amounts in thousands) 1997 1996 Real estate (primarily first mortgage residential loans) $82,989 $79,478 Real estate - Construction 7,562 3,727 Commercial, industrial and agricultural 98,389 91,244 Consumer (including home equity lines of credit) 55,651 49,936 244,591 224,385 Less: Unearned discount (43) (159) Allowance for possible loan losses (3,304) (3,060) Net Loans $241,244 $221,166 Loans to directors and executive officers and to their related interests and affiliated enterprises amounted to approximately $1,154,000 and $1,416,000 at December 31, 1997 and 1996, 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 1997, $260,000 of new loans were made and repayments totaled $522,000.
NOTE 6. Allowance for Possible Loan Losses December 31 (Amounts in thousands) 1997 1996 1995 Balance at beginning of year $3,060 $3,141 $3,425 Charge-offs Commercial, industrial and agricultural (113) (183) (89) Consumer (637) (582) (511) Real estate (32) (12) (76) Total charge-offs (782) (777) (676) Recoveries: Commercial, industrial and agricultural 11 25 46 Consumer 79 64 43 Real estate -- -- 1 Total recoveries 90 89 90 Net charge-offs (692) (688) (586) Provision for possible loan losses 936 607 302 Balance at end of year $3,304 $3,060 $3,141 Nonaccrual loans at December 31, 1997 and 1996 were approximately $1,148,000 and $856,000, respectively. At December 31, 1997 and 1996 the Corporation had no restructured loans. 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) 1997 1996 Gross interest due under terms $156 $120 Amount included in income (19) (46) Interest income not recognized $137 $74 At December 31, 1997 and 1996, the recorded investment in loans that were considered to be impaired, as defined by Statement No. 114, totaled $1,104,600 and $789,300, respectively. Impaired loans have an allowance for credit losses of $67,000 and $14,000 as of December 31, 1997 and 1996, 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, 1997 and 1996, was $1,060,300 and $594,200 respectively.
NOTE 7. Premises and Equipment Premises and equipment consist of: Estimated December 31 (Amounts in thousands) useful life 1997 1996 Land $928 $1,088 Buildings 18-40 years 7,204 7,479 Furniture, fixtures and equipment 3-13 years 5,166 4,987 Total cost 13,298 13,554 Less: Accumulated Depreciation (7,391) (6,856) $5,907 $6,698
NOTE 8. Deposits Deposits are summarized as follows: December 31 (Amounts in thousands) 1997 1996 Demand $37,591 $34,847 Savings: Interest-bearing checking 32,770 34,473 Money market accounts 40,836 25,288 Passbook and statement savings 39,532 45,002 113,138 104,763 Time: Deposits of $100,000 and over 17,739 30,345 Other time deposits 106,087 98,247 123,826 128,592 Total deposits $274,555 $268,202 The interest expense on time deposits with denominations of $100,000 or more for the years ended December 31, 1997, 1996 and 1995 was $1,144,000, $1,179,000, and $1,185,000, respectively.
NOTE 9. Securities Sold Under Agreements to Repurchase and Other Borrowings The Corporation enters into sales of securities under agreements to repurchase. Securities sold under agreements to repurchase averaged $14,685,000 and $16,144,000 during 1997 and 1996, respectively, and the maximum amounts outstanding at any month end during 1997 and 1996, were $18,538,000 and $19,955,000, respectively. The weighted average interest rate on these repurchase agreements was 5.11% and 4.72% for 1997 and 1996, respectively. At December 31, 1997, securities sold under agreements to repurchase totaled $16,075,000 with interest rates ranging from 4.44% to 5.29%. 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 book and market value of $18,998,988 and $19,054,055, respectively, at December 31, 1997. The securities sold under agreements to repurchase are overnight borrowings. A summary of other borrowings at the end of the reporting period follows: December 31 (Amounts in thousands) 1997 1996 Open Repo Plus (a) $11,150 $7,050 Term loans (b) 10,284 7,841 Total other borrowings $21,434 $14,891 (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. The total amount available under the commitment in place on December 31, 1997 was $35,000,000 and the rate on the outstanding balance was 5.62%. (b) Term loans with the FHLB bear interest at fixed rates ranging from 5.87% to 7.27% (weighted average rate of 6.32%) with various maturities beginning September 30, 1998 to September 30, 2002. 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: 1998 687 1999 5,635 2000 3,780 2001 29 2002 153 $10,284
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): Deferred Taxes (000's) December 31 Temporary Difference 1997 1996 Allowance for possible loan losses $1,123 $1,034 Deferred compensation 183 182 Pensions 114 53 Restricted stock 101 91 Depreciation 42 (91) Net unrealized gain on securities (997) (316) Deferred loan fees and costs,net 314 387 Other, net (16) (36) Deferred taxes, net $864 $1,304 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 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, 1997 and 1996.
The components of the provision for Federal income taxes attributable to income from operations were as follows: Years ended December 31 (Amounts in thousands) 1997 1996 1995 Currently payable $1,574 $1,302 $1,488 Deferred tax expense (benefit) (184) 77 (37) Income tax provision $1,390 $1,379 $1,451 For the years ended December 31, 1997, 1996 and 1995, the income tax provisions are differently 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 provisi effective tax rate is as follows: Years ended December 31 (Amounts in thousands) 1997 1996 1995 Tax provision at statutory rate $1,956 $1,872 $1,914 Income on tax-exempt loans and securities (590) (418) (461) Nondeductible interest expense relating to carrying tax-exempt obligations 81 61 65 Dividends received exclusion (16) (15) (16) Valuation allowance adjustment - (118) (101) Other, net (41) (3) 50 Income tax expense $1,390 $1,379 $1,451 The tax provision in each year is applicable to: Years ended December 31 (Amounts in thousands) 1997 1996 1995 Operations $1,122 $1,323 $1,448 Securities gains (losses) 268 56 3 Income tax provision $1,390 $1,379 $1,451
NOTE 11. Employee Benefit Plans The Bank has a noncontributory retirement plan covering 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, 1997 based on a September 30, 1997 actuarial valuation together with comparative 1996 and 1995 amounts:
(Amounts in thousands) 1997 1996 1995 Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $5,636, $5,089 and $4,566 in 1997, 1996 and 1995, respectively $5,636 $5,182 $4,635 Projected benefit obligation for service rendered to date 7,611 7,261 6,550 Plan assets at fair value* 11,223 7,817 7,023 Plan assets greater than projected benefit obligation 3,612 556 473 Unrecognized net (gain) loss (3,872) (612) (502) Unrecognized net asset at October 1, 1988 being recognized over 12 years 116 (155) (194) Unrecognized prior service cost 108 119 130 Accrued pension cost included in other liabilities ($35) ($92) ($93) Net pension cost included the following components: Service cost - benefits earned during the period $321 $296 $236 Interest cost on projected benefit obligation 494 450 408 Actual return on plan assets (3,731) (1,180) (1,220) Net amortization and deferral 3,091 603 718 Net periodic pension cost $175 $169 $142 *Plan assets are primarily invested in equities, general assets of insurance companies and insurance contracts.
The assumed weighted-average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligations were 7.00% and 5.75% in 1997 and 1996 and 7.25% and 6.00%, respectively in 1995. The expected long-term rate of return on assets was 8.00% in 1997, 1996 and 1995. The Corporation maintains a 401K plan covering all employees who have completed one year of service. Employee contributions to the plan are matched on a graduated basis with a minimum match of 100% up to 3% of the participant's total compensation. In addition, a 100% discretionary match from 3.5% up to 5.0% of eligible salary and tied to achieving specific net income targets became effective in 1997. The Corporation's match is subject to approval annually by the Board of Directors. Under this plan, not more than 15.00% of each participant's total compensation may be contributed in any given plan year. The Corporation's match expense in 1997, 1996 and 1995, as approved by the Board of Directors, was $143,000, $132,500 and $125,000, 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 204,893 shares of presently authorized but unissued or reacquired Common Stock to certain employees of the Corporation and its subsidiaries. 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 as of December 31, 1997 has awarded 109,222 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. The Committee has also 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 plan was approximately $117,000 in 1997, $137,000 in 1996 and $297,000 in 1995. The total of restricted shares vested was 565, 1,035, and 25,325 in 1997, 1996 and 1995, respectively. 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 1997 or 1996. For 1995, the cash awards under the plan equaled $37,000. NOTE 12. Stock Purchase Plan In 1994, the Board of Directors of the Corporation approved and 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, 1997 there are 142,110 shares available for future grant. The following table summarizes the stock option activity (stock options have been adjusted to reflect all stock splits):
Option Price Per Share Price Weighted Stock Options Range Average Balance at December 31, 1994 25,250 $13.23 $13.23 Granted 23,888 14.53 14.53 Exercised (13,426) 13.23 - 14.53 13.32 Canceled (12,751) 13.23 13.23 Balance at December 31, 1995 22,961 14.53 14.53 Granted 19,572 19.24 19.24 Exercised (13,417) 14.53 - 19.24 14.77 Canceled (10,224) 14.53 14.53 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
The following table summarizes information concerning options outstanding at December 31, 1997:
Weighted Weighted Unexercised Average Average Stock Remaining Exercise Exercise Price Options Life (Years) Price $23.08 13,723 0.75 $23.08
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:
(Amounts in thousands, except per share) 1997 1996 Net Income: As reported $4,363 $4,127 Proforma 4,334 4,097 Basic earnings per share: As reported $1.59 $1.46 Proforma 1.58 1.45 Diluted earnings per share: As reported $1.58 $1.45 Proforma 1.57 1.44 Weighted average fair value of options granted $4.50 $3.97
The fair value of the options granted has been estimated using the following assumptions for both 1997 and 1996:risk-free interest rate of 5.49% , expected volatility of the Corporation's stock of 20.10% and an expected dividend yield of 3.67%. The expected life of the options in 1997 and 1996 was .81 year and 1 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 appoximately $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 On November 13, 1997, the Board of Directors declared a 3 for 2 stock split issued in the form of a 50% stock dividend to be distributed on February 3, 1998 to the Corporation's shareholders of record at the close of business on January 13, 1998. The result was a transfer from retained earnings to common stock of approximately $1,015,000. A cash amount of approximately $10,500 was paid in lieu of issuing fractional shares arising from the stock dividend. Also on November 13, 1997, the Board of Directors declared a special cash dividend of $.66 per share on the Corporation's common stock, payable January 21, 1998, to the Corporation's shareholders of record as of the close of business on January 7, 1998 and a regular cash dividend of $.15 per share payable February 27, 1998 to shareholders of record as of the close of business on February 12, 1998. In 1996, the Board of Directors authorized the repurchase of up to 100,000 shares (150,000 adjusted for the 50% stock dividend) of the Corporation's common stock through July 1997. In March, 1997, the Board of Directors extended the repurchase period from July, 1997 to March 5, 1998. On March 5, 1998, the Board of Directors authorized the repurchase of up to 50,000 shares of the Corporation's common stock for a twelve month period. Under this program, the Corporation repurchased 37,983 shares (56,974 adjusted for the 50% stock dividend) for $1.3 million and 88,604 shares (132,906 adjusted for the 50% stock dividend) for $2.7 million during 1997 and 1996, respectively. The Corporation will use the treasury shares acquired for general corporate purposes including stock dividends and stock splits, employee benefit and executive compensation plans and the dividend reinvestment plan. 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, the Bank does not require collateral or other security to support financial instruments with credit risk. The Corporation had the following outstanding commitments to fund loans as of December 31:
(Amounts in thousands) Financial instruments whose contract amounts represent credit risk: Commercial commitments to extend credit . . . . . . . . . . . . . . . . . . . . . . $28,681 $26,576 Consumer commitments to extend credit (secured) . . . . . . . . . . . . . . . . . . 14,716 12,595 Consumer commitments to extend credit (unsecured) . . . . . . . . . . . . . . . . . 11,317 11,049 $54,714 $50,220 Standby letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,053 905
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 income-producing 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 $299,000, $316,000, and $378,000 in the years 1997, 1996 and 1995, respectively. Future minimum payments under these leases are as follows: 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $287,400 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281,000 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,200 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,600 2002 and beyond . . . . . . . . . . . . . . . . . . . . . .. 40,300 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 and Investments available for sale: For debt and marketable equity securities held for investment purposes and available for sale, respectively, 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 of allowance for possible loan losses: 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. Deposit liabilities 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. Unrecognized Financial Instruments: At December 31, 1997 and 1996, the Corporation had outstanding commitments to extend credit of $54,714,000 and $50,220,000, respectively, and commitments under standby letters of credit of $1,053,000 and $905,000, respectively. Such commitments include fixed and variable rate commercial and consumer commitments. The value of the commitment is a reasonable estimate of the fair value as the fees and rates charged are approximately consistent with the amounts which would be charged to enter into similar arrangements at year-end.
The estimated fair value of the Corporation's financial instruments at December 31 are as follows: 1997 1996 Carrying Fair Carrying Fair (Amounts in thousands) Amount Value Amount Value Financial assets: Cash and short-term investments $11,112 $11,112 $10,521 $10,521 Investment securities held to maturity 27,779 28,030 36,290 36,199 Investment securities available for sale 59,319 59,319 53,502 53,502 Net Loans 241,244 246,819 221,166 224,888 Total Financial Assets $339,454 $345,280 $321,479 $325,110 Financial liabilities: Deposits $274,555 $275,021 $268,202 $268,478 Securities sold under agreements to repurchase 16,075 16,075 15,122 15,122 Other borrowimgs 21,434 21,452 14,891 14,947 Total Financial Liabilities $312,064 $312,548 $298,215 $298,547 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 asumptions 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.
NOTE 17. Parent Company (Franklin Financial Services Corporation) Financial Information Balance Sheets December 31 (Amounts in thousands) 1997 1996 Assets: Due from bank subsidiary $3,320 $178 Investment securities 2,999 1,761 Equity investment in subsidiaries 31,587 32,410 Premises 881 1,238 Other assets 340 84 Total assets $39,127 $35,671 Liabilities: Accrued expenses $0 $87 Deferred tax liability 542 243 Dividends payable 2,280 0 Total liabilities 2,822 330 Shareholders' equity: Common stock 3,045 2,030 Additional paid-in capital 19,761 19,745 Retained earnings 17,087 17,590 Net unrealized gain on securities 1,935 613 Treasury stock, at cost (4,760) (3,830) Unearned compensation (763) (807) Total shareholders' equity 36,305 35,341 Total liabilities and shareholders' equity $39,127 $35,671 Statements of Income Years ended December 31 (Amounts in thousands) 1997 1996 1995 Income: Dividends from Bank $6,020 $2,631 $3,325 Interest and dividend income 44 42 48 Gain on sale of securities 468 105 0 Other income - 37 18 Gain on sale of premises - 90 - 6,532 2,905 3,391 Expenses: Operating expenses 566 292 321 Loss on sale of premises 40 - - Income before equity in undistributed income of subsidiaries 5,926 2,613 3,070 Equity in undistributed income of subsidiaries (1,563) 1,514 1,109 Net income $4,363 $4,127 $4,179 Statements of Cash Flows Years ended December 31 (Amounts in thousands) 1997 1996 1995 Cash flows from operating activities Consolidated net income $4,363 $4,127 $4,179 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed income of subsidiaries 1,563 (1,514) (1,109) Depreciation 31 29 36 Discount accretion on investment securities - (1) (3) Loss (gain) on sale of premises 40 (90) - Securities gains, net (468) (105) - (Increase) decrease in due from bank subsidiary (3,142) 92 (134) (Increase) decrease in other assets (256) 119 779 Increase (decrease) in liabilities (87) 119 (45) Other, net 278 303 559 Net cash provided by operating activities 2,322 3,079 4,262 Cash flows from investing activities Proceeds from sales of investment securities 644 232 - Proceeds from maturities of investment securities - 850 534 Purchase of investment securities (534) (218) (987) Proceeds from sale of premises 129 225 - Capital expenditures (27) (183) (352) Net cash provided by (used in) investing activities 212 906 (805) Cash flows from financing activities Dividends (1,571) (1,503) (1,420) Proceeds from sales of common stock 321 200 198 Purchase of treasury shares (1,284) (2,682) (2,235) Net cash used in financing activities (2,534) (3,985) (3,457) Increase in cash and cash equivalents - - - Cash and cash equivalents as of January 1 - - - Cash and cash equivalents as of December 31 $- $- $-
NOTE 18. Quarterly Results of Operation (Unaudited) The following is a summary of the quarterly results of consolidated operations of Franklin Financi years ended December 31, 1997 and 1996: (Amounts in thousands) Three months ended 1997 March 31 June 30 September 30 December 31 Interest income $6,383 $6,530 $6,724 $6,671 Interest expense 2,853 2,991 3,173 3,208 Net interest income 3,530 3,539 3,551 3,463 Provision for loan losses 193 192 253 298 Other noninterest income 883 871 828 937 Securities gains (losses) 111 93 189 394 Noninterest expense 2,795 2,784 2,985 3,136 Income before income taxes 1,536 1,527 1,330 1,360 Income taxes 401 344 291 354 Net Income $1,135 $1,183 $1,039 $1,006 Basic earnings per share* $0.41 $0.43 $0.38 $0.37 Diluted earnings per share* $0.41 $0.43 $0.38 $0.37 1996 Interest income $6,116 $6,032 $6,398 $6,253 Interest expense 2,784 2,725 2,774 2,804 Net interest income 3,332 3,307 3,624 3,449 Provision for loan losses 94 131 96 286 Other noninterest income 823 1,018 814 862 Securities gains 78 - (1) 89 Noninterest expense 2,714 2,728 2,934 2,906 Income before income taxes 1,425 1,466 1,407 1,208 Income taxes 375 330 345 329 Net Income $1,050 $1,136 $1,062 $879 Basic earnings per share* $0.37 $0.38 $0.40 $0.31 Diluted earnings per share* $0.36 $0.38 $0.40 $0.31 *Based on weighted-average shares outstanding during the period reported adjusted retroactively to reflect a 3 for 2 stock split issue in the form of a 50% stock dividend and distributed on February 3, 1998, to shareholders of record on January 13,1998. Consequently, the sum of the quarterly earnings per share may not equal the annual per share amount.
Management's Discussion and Analysis 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 achieved record net income of $4.36 million for the year ended December 31, 1997, an increase of 5.7% over the $4.13 million recorded in 1996. Basic earnings per share for the year ended December 31, 1997, were $1.59 compared to $1.46 and $1.45 for the years ended December 31, 1996 and 1995, respectively. On November 13, 1997, the Board of Directors declared a 3 for 2 stock split issued in the form of a 50% stock dividend (the 50% Stock Dividend) which was distributed on February 3, 1998, to shareholders of record as of the close of business on January 13, 1998. All per share information in this discussion has been adjusted to reflect the 50% Stock Dividend. In addition to the 50% Stock Dividend, the Board of Directors also declared a special cash dividend of $1.00 ($.66 adjusted for the 50% Stock Dividend) which was paid on January 21, 1998, to shareholders of record as of the close of business on January 7, 1998. Return on average assets (ROA) and return on average equity (ROE) for 1997 were recorded at 1.26% and 12.03%, respectively, compared to 1.29% and 11.83%, respectively, one year earlier. Total assets grew approximately $17.8 million to $353.9 million at December 31, 1997 from $336.1 million at December 31, 1996. Net loans realized strong growth, increasing $20.1 million, or 9.1%, to $241.2 million at year-end 1997 over year-end 1996. The growth in deposits was moderate reflecting an increase of $6.4 million, or 2.4%, to $274.6 million at December 31, 1997, compared to $268.2 million at December 31, 1996. The Corporation's capital position remains strong at $36.3 million at December 31, 1997, compared to $35.3 million at December 31, 1996. The Corporation's Tier I capital to average assets ratio was 9.22% at December 31, 1997, compared to 10.03% at December 31, 1996. A more detailed discussion of the areas having the greatest impact on the reported results for 1997 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 cost of interest-bearing liabilities supporting those assets. The principal categories of interest-earning assets are loans and securities, while deposits and other borrowings are the principal interest-bearing liabilities. Net interest income, on a tax-equivalent basis, increased $570,000 or 4.0% to $14.8 million in 1997 from $14.2 million in 1996. The net interest margin which reflects the interest rate spread plus the contribution of assets funded by noninterest-bearing sources decreased to 4.56% for the year ended December 31, 1997, from 4.70% for the year ended December 31, 1996, as a result of an increasingly competitive environment for both loans and deposits. 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-exempt assets by increasing the tax-exempt income by 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. Table 1 presents net interest income on a tax-equivalent basis for each of the years in the three-year period ended December 31, 1997. Table 2 presents average balances, 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. The level of 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. Most short-term interest rates were relatively stable throughout 1997 with only a single 25 basis point increase in the Federal funds rate and the prime rate, late in the first quarter. The average prime rate in 1997 was 8.44% and the average Federal funds rate was 5.48% versus 8.27% and 5.31%, respectively, in 1996. Intermediate and long-term interest rates rose during the first few months of the year, then drifted lower during the remainder of the year. On average, most interest rates were marginally higher in 1997 than 1996, and the yield curve was slightly flatter. Tables 2 and 3 reveal that most of the change in interest income, interest expense and net interest income can be attributed to an increase in volume rather than changes in interest rates. Average interest-earning assets grew $21.7 million or 7.2% to $324.3 million for 1997 from $302.7 million for 1996 and represented 93.8% and 94.3% of total assets for the related years, respectively. Average loans comprised 72.5% of average interest-earning assets and contributed 78.7% of the total interest income in 1997. The growth in volume of average interest-earning assets, offset by a 3 basis point decrease in the average yield, resulted in a $1.7 million or 6.7% increase in interest income to $27.0 million for 1997 from $25.3 million in 1996. The growth in interest-earning assets was driven primarily by a $17.3 million increase in net loans, reflecting the Corporation's business development efforts and a healthy economic environment. The decrease in the average yield on interest-earning assets resulted from intensified competitive pressures for new loans and the runoff of higher yielding loans which produced a 15 basis point decline in the yield to 9.04% for 1997 versus 9.19% for 1996. The yield on investment securities for 1997 increased 16 basis points to 6.45% from 6.29% in 1996 due principally to the purchase of longer term securities at interest rates higher than those of maturing securities. Average interest-bearing deposits grew $5.1 million to $231.0 million in 1997 over 1996 and resulted in an increase in interest expense of $209,000 to $10.1 million for 1997 versus $9.8 million in 1996. The Corporation realized some movement from lower cost savings accounts to a new money market account, introduced in the second quarter of 1997, which contributed to the higher interest expense for the year. Other borrowings, comprised of overnight and long-term debt with the Federal Home Loan Bank of Pittsburgh, grew an average of $16.5 million during the year, reaching an average for the year of $23.7 million. The increase in other borrowings funded the growth in the loan and investment portfolios in excess of deposit growth and increased interest expense by $941,000 in 1997 versus 1996. The average rate paid on the other borrowings decreased 58 basis points to 5.97% in 1997 from 6.55% in 1996. Interest rates were generally lower in 1996 as compared to 1995. The average prime rate in 1996 was 8.27% and the average Federal Funds rate was 5.31% versus 8.83% and 5.85%, respectively, in 1995. Net interest income on a tax-equivalent basis declined $134,000 to $14.2 million in 1996 from $14.4 million in 1995. Average earning assets grew $3.8 million to $302.7 million for 1996 compared to 1995, and realized a decrease in the yield of 20 basis points to 8.36%. Average interest-bearing liabilities increased $3.7 million to $249.5 million for 1996 over 1995 and showed a decrease in the interest rates paid on those liabilities of 12 basis points to 4.44% for 1996 versus 4.56% for 1995. Provision for Possible Loan Losses The provision for loan losses charged against earnings was $936,000 in 1997 compared to $607,000 in 1996, an increase of 54.2%. The increase was mainly due to the rising trend of consumer bankruptcies and subsequent charge-offs. The provision for loan losses in 1995 was $302,000. The provision for loan losses is determined based on the adequacy of the allowance for possible loan losses from an analysis of the loan portfolio, current economic conditions and other relevant factors. For more information, refer to the loan quality discussion and Table 10. Noninterest Income and Expense Noninterest income totaled $4.3 million in 1997 and represents an increase of $623,000, or 16.9%, over the $3.7 million recorded in 1996. Noninterest income recorded in 1996 was $332,000, or 9.9%, over the $3.4 million recorded in 1995. The increase in noninterest income over the three year period is related primarily to the growth in trust fees and realized securities gains. Trust fees in 1997 reached a record level of $1.4 million, an increase of $256,000, or 21.8%, over 1996 at $1.2 million. Trust fees in 1995 also equaled $1.2 million. The growth in 1997 is largely related to consumer disenchantment with recent mergers of local banks into megabanks or large regionals, coupled with aggressive sales and marketing within the Corporation's Investment and Trust Services Department as well as the first full year of sales from the Personal Investment Center (PIC). Trust assets under management grew 33.5% to $350.9 million at December 31, 1997 from $262.8 million one year earlier and reflects both added volume and market appreciation and, accordingly, increased fees. Other noninterest income decreased $338,000, or 83.9%, to $65,000 in 1997 from $403,000 in 1996. The decrease year to year was related primarily to the sale of a former real estate brokerage subsidiary ($196,000 gain) in 1996 and a $67,000 swing to a loss for 1997 on the sale of foreclosed property. The remaining $75,000 decrease is related largely to various recoveries of prior year loan collection expense in 1996 versus no recoveries in 1997. Gains on investment securities increased $621,000 to $787,000 in 1997 versus $166,000 and $10,000 in 1996 and 1995, respectively. As a percentage of noninterest income, gains on investment securities, primarily available for sale equity securities, equaled 18.3%, 4.5% and less than 1.0% for the three years ended December 31, 1997, 1996, and 1995, respectively. Management reviews the performance and quality of available for sale securities along with current and expected market conditions to determine periodic sales of investments within the available for sale portfolio. During 1997, the gains realized from the sale of available for sale investment securities were used to offset expenses associated with the writedown of bank owned real estate targeted for demolition and the increase in the provision for loan losses. Noninterest expense increased $418,000, or 3.7%, to $11.7 million in 1997 compared to $11.3 million in 1996 and $11.2 million in 1995. Salaries and benefits expense rose $158,000, or 2.5%, to $6.4 million for the year ended December 31, 1997, compared to $6.3 million and $6.1 million for the same twelve month period in 1996 and 1995, respectively. Salaries and benefits expense represents approximately 54.9%, 55.6% and 54.6% of the Corporation's total noninterest expense for 1997, 1996 and 1995, respectively. Salary expense grew $302,000, or 6.3%, to $5.1 million in 1997 from $4.8 million and $4.4 million in 1996 and 1995, respectively. The increase in salaries was due primarily to a full year of additional staffing (approximately 18 employees) related to the opening of three new community offices in the fourth quarter of 1996. In addition, general merit salary adjustments also contributed to the increase. Partially offsetting the increase in salaries expense was a decrease of approximately $144,000 in benefits expense related primarily to reduced costs associated with the long-term incentive plan. Full-time equivalent employees totaled 191 at December 31, 1997 compared to 195 and 177 at year-end 1996 and 1995. Management has implemented strategies focused on controlling staffing levels and related salaries and benefits expense through the increased use of technology to enhance employee productivity and provide service delivery options to our customers. Net occupancy expense and furniture and equipment expense increased a total of $125,000 in 1997 compared to 1996 and is related to a full year's expense associated with the operation of three new community offices opened in the fourth quarter of 1996. Total net occupancy and furniture and equipment expense in 1997 equaled $1.4 million compared to $1.3 million in 1996 and 1995 Federal Deposit Insurance Corporation (FDIC) deposit insurance expensed in 1997 decreased $120,000, or 73.6%, to $43,000 in 1997 compared to $163,000 and $323,000 in 1996 and 1995, respectively. The FDIC insurance fund is comprised of two funds - the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF). Most of the Corporation's deposits are insured under BIF. The Corporation has SAIF insured deposits related to the acquisition of the Waynesboro office in 1992. SAIF deposits equaled approximately $20.0 million at December 31, 1997 and 1996. All BIF and SAIF financial institutions were required to pay premiums to the Financing Corporation (FICO) as legislated under the Deposit Insurance Funds Act of 1996 (DIFA). For the Corporation, BIF deposits were assessed an annual FICO rate of 1.296 basis points and SAIF deposits were assessed an annual rate of 6.48 basis points which resulted in FICO expense of $43,000 and $40,000 in 1997 and 1996, respectively. The Corporation was also assessed a one-time charge on its SAIF deposits in 1996 which equaled $123,000. This one-time assessment on all SAIF financial institutions brought the SAIF fund to its fully-funded level of 1.25% of total deposits as legislated by Congress in 1989. The BIF fund reached its fully funded level of 1.25% of total deposits in the second quarter of 1995 and, consequently, the FDIC reduced future assessments to zero. Management expects that future FDIC insurance expense will continue at the reduced level. Other expense increased $255,000, or 7.1%, to $3.8 million for 1997 compared to $3.6 million in 1996 and 1997, respectively. Other expense is comprised of costs related to advertising, insurance, legal and professional fees, data processing, supplies, postage, telephone loan collection, intangible amortization and similar expense. The increase in other noninterest expense in 1997 over 1996 was due primarily to higher legal and professional fees ($66,000), data processing ($59,000), telephone expense ($37,000), loan collection expense ($26,000), amortization of intangibles ($102,000), and other expenses associated with the sale of various properties previously held by the Corporation for possible expansion ($85,000) and the scheduled demolition of other properties ($301,000) to provide additional parking at the Corporation's headquarters location. Somewhat offsetting these increases in other noninterest expense were decreases primarily in advertising ($52,000), insurance ($36,000), supplies ($127,000) and other miscellaneous expense ($206,000). A majority of the increased expenses were due to a full year of operations for the three new community offices opened in the fourth quarter of 1996. Likewise, much of the decreased expenses in advertising, supplies and miscellaneous for 1997 were attributable to higher costs in 1996 associated with opening these three new branches. Other noninterest expense increased $90,000, or 2.6%, to $3.6 million in 1996 compared to 1995 and was largely due to normal cost increases. The Corporation utilizes numerous software programs that may be affected by the Year 2000. The majority of our data processing systems are operated by third party providers or have been acquired as "off-the-shelf" products. The Corporation operates no proprietary computer systems. In anticipation of the Year 2000, the Corporation has undertaken a comprehensive plan of evaluating all data processing systems, software programs and providers to ensure their compliance with the Year 2000. This action began in early 1997 and will be completed prior to December 31, 1998. As of December 31, 1997, many of the Corporation's data processing systems have been found to be Year 2000 compliant. The review of our largest data processing provider is not yet complete, but their compliance with the Year 2000 is expected prior to December 31, 1998. Although the expenses attributable to Year 2000 compliance cannot be precisely determined at this time, management has concluded that such expenses are unlikely to be significant in any one year. Provision for Income Taxes Federal income tax expense amounted to $1.4 million in 1997, compared to $1.4 million and $1.5 million in 1996 and 1995, respectively. The Corporation's effective tax rate for the years ended December 31, 1997, 1996 and 1995 was 24.2%, 25.0% and 25.8%, respectively. The decrease in the effective tax rate for the last three years was primarily due to an increase in tax-free income relative to pretax income. 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 financial condition is in terms of its sources and uses of funds. Liabilities represent sources of funds while assets reflect the uses of those funds. At December 31, 1997, total assets reached $353.9 million, an increase of $17.7 million, or 5.3%, compared to $336.1 million at December 31, 1996. Table 2 presents annual average balances of the Corporation's balance sheet assets and liabilities over a three year period to reflect the growth direction in those assets and liabilities. The following discussion will reference the average balances presented in Table 2 unless otherwise noted. Investment securities, comprised of both taxable and nontaxable securities, increased $8.2 million, or 10.2%, to an average of $88.7 million in 1997 over $80.5 million in 1996 and $69.1 million in 1995. The growth in investment securities, as reflected in Table 4, occurred primarily in nontaxable obligations of state and political subdivisions and equaled $8.3 million. This growth was a direct result of a strategy related to interest rate risk management. U.S. Government securities (Treasuries and Agencies), corporate debt securities and mortgage-backed securities decreased $6.1 million, $2.4 million and $5.1 million, respectively, at year-end 1997 from year-end 1996. The decrease in these investment categories was due largely to calls and maturities with the exception of the mortgage-backed securities. The decrease in mortgage-backed securities is due mainly to normal amortization. As disclosed in Note 4 of the accompanying financial statements, the Corporation's mortgage-backed securities portfolio consists primarily of mortgage-backed securities issued by various agencies of the Federal government which carry either an explicit or implied Federal guarantee. Of the mortgage-backed securities issued by private issuers, the majority were rated triple A by a nationally recognized rating agency. None was rated lower than double A. Accordingly, the credit risk associated with the Corporation's mortgage-backed securities is low. The interest rate risk accompanying the mortgage-backed securities held by the Corporation is considered to be moderate. The current portfolio has an estimated duration of 2.77 years, suggesting that the market value of the mortgage-backed portfolio would rise (or fall) approximately 2.8% given a 100 basis point decrease (or increase) in market interest rates. However, proportionately greater price volatility would be expected with a larger change in market interest rates. The relatively short duration of the mortgage-backed portfolio indicates that the Corporation's exposure to prepayment of these assets in a lower rate environment is moderate. All collateralized mortgage obligations (CMOs) pass the Federal Financial Institutions Examination Council's high-risk stress test. The Corporation held $59.3 million and $53.5 million in available for sale investment securities at December 31, 1997 and 1996, respectively. The net unrealized gain on available for sale securities was $1.9 million and $613,000 at December 31, 1997 and 1996, respectively. Total loans, net of unearned discount, grew to an average of $235.3 million in 1997 from an average of $218.0 million in 1996, an increase of $17.3 million, or 7.9%. As a result of the addition of three new community offices in the fourth quarter of 1996, as well as the Corporation's focus on loan growth, all loan categories reported growth in 1997. As Table 7 reflects, the real estate portfolio showed an increase of $7.3 million, or 8.8% to $90.6 million at December 31, 1997, from $83.2 million at December 31, 1996, and consists primarily of first mortgage residential loans. The Corporation originated and sold approximately $14.6 million in mortgage loans to the secondary market, primarily to Federal National Mortgage Association (FNMA) in 1997 compared to $15.2 million originated and sold in 1996. Growth in the commercial, industrial and agricultural loan portfolio slowed to 7.8%, or $98.4 million at December 31, 1997, after a 22.2% increase to $91.2 million at December 31, 1996. Consumer loans showed good growth to $55.7 million at December 31, 1997, compared to $49.9 million at December 31, 1996. The increase in consumer loans resulted primarily from significant growth in closed-end home equity loans and indirect auto loans, which recorded increases of 59.8% and 17.3 %, respectively, at December 31, 1997. Continued reductions in the direct installment, credit card and instant credit portfolio occurred during the year. As a percentage of total loans, the real estate, commercial and consumer portfolios remained relatively constant at 37.0%, 40.2% and 22.8%, respectively at December 31, 1997, compared to 37.1%, 40.7% and 22.3%, respectively one year earlier. The allowance for possible loan losses was $3.3 million at December 31, 1997, representing 1.35% of loans, net of unearned discount. On December 31, 1997, the ratio of the allowance for possible loan losses to nonperforming loans was 192.9%. This indicator of allowance adequacy improved significantly from 176.9% at December 31, 1996. Although nonperforming loans remained steady, the Corporation gradually increased the allowance for possible loan losses in 1997 to support inherent risk within the portfolio. At December 31, 1997, management determined the allowance to be adequate. A more detailed discussion on loan quality can be found immediately following the financial condition discussion. Funding for asset growth came from increased other borrowings followed by deposits. Other borrowings grew an average of $16.5 million for the year reaching an average of $23.7 million in 1997 compared to an average of $7.3 million in 1996. Other borrowings represent overnight and long-term borrowings from the Federal Home Loan Bank of Pittsburgh (FHLB). The banking industry has been losing deposit dollar market share and the Corporation has not been immune from this trend. As an alternative funding source, the Corporation looks to its borrowing ability with FHLB to meet loan demand and deposit withdrawal needs of customers when deposit growth falls short. At December 31, 1997, the Corporation increased its Open Repo Plus (overnight) and term borrowings by $4.1 million and $2.4 million, respectively, compared to December 31, 1996. Deposits recorded slow growth with an increase of $6.4 million, or 2.4%, year over year. Total deposits at December 31, 1997 equaled $274.6 million compared to $268.2 million at December 31, 1996. Time deposits of $100,000 and over recorded a decrease of $12.6 million but increases of 8.0% in all other interest-bearing and noninterest-bearing deposits more than offset the reduction in time deposits. In May of 1997 the Corporation's management, recognizing that the trend of consumers is to expect the payment of money market rates for deposits, introduced a new deposit product named the Money Management Account to compete more effectively with both money market mutual funds and the array of new bank deposit products that were introduced by the Corporation's competitors in the local market area. This new product has been successful at retaining deposits and attracting new deposits. A review of Note 8 in the accompanying financial statements shows that noninterest-bearing demand deposits grew $2.7 million, or 7.9%, and savings deposits (which includes the new money management account) grew $8.4 million, or 8.0%. In the spring of 1998, the Corporation will roll-out the Freedom Accounts, which are relationship accounts designed to meet all of the customer's financial needs through appropriate F&M Trust services and solutions. These accounts reward customers for their total financial relationship which includes consumer loan balances, investment and trust balances, mutual fund balances, residential mortgage balances and personal deposit balances. These relationship accounts are aimed at retaining current customers by creating value and loyalty and attracting new customers who are looking for the same value and loyalty. Funding sources will continue to be a challenge for the Corporation but through a well trained sales force, attention to customer service and product creativity management believes it can meet the challenge. Securities sold under agreements to repurchase (Repos) decreased approximately $1.7 million to an average for 1997 of $14.7 million compared to $16.4 million in 1996. Repos are another funding source for the Corporation and represent corporate cash management accounts. The local economy remains in good health. Unemployment in Franklin County declined to 4.1% in 1997, the lowest in eight years, and below the national average of 4.7%. In 1997, the Letterkenny Industrial Development Authority (LIDA) was formed by the Franklin County Commissioners under the provisions of the Economic Development Financing Law to implement the local redevelopment plan of the Franklin County Reuse Committee for the Letterkenny Army Depot, which was targeted for realignment under the 1995 Base Realignment and Closure (BRAC) decision. LIDA will have the responsibility of developing approximately 1500 acres of the Letterkenny Army Depot to be transferred in phases from the United States Army to the local community as an industrial park, known as the Letterkenny Opportunity Center. The county has a diverse and growing economy that has been enhanced as the Letterkenny Opportunity Center takes shape and other business parks develop. Planners are optimistic for 1998, indicating that as many as 100 small to moderate sized companies have shown interest in the Letterkenny Opportunity Center. In addition to the business parks, recreation continues to be a major area of growth in Franklin County with the addition of an Olympic-sized ice arena and further development of a local ski resort. With the positive direction the reuse of the Letterkenny Army Depot is taking and the entrance of new industry into the county, management of the Corporation does not anticipate any significant negative impact regarding deposit growth, loan demand or loan losses associated with the 1995 BRAC decision to realign the Letterkenny Army Depot. In the fourth quarter of 1996 the Corporation purchased four branch facilities. Three of these facilities are located in adjoining Cumberland County and were opened as F&M Trust community offices; the fourth location in Franklin County is being used for administrative offices. Included in the purchase price of $2.7 million was real estate, personal property and retail customer lists. Unlike most branch acquisitions, there were no loans acquired and no deposits assumed in the transaction. Management recognizes that the additional expense associated with the operation of these three new community offices will adversely impact earnings in the short-term, but believes that the long-term effect of the acquisition will result in a positive impact on earnings. Loan Quality As reflected in Table 9, loan quality remained stable in 1997 after the improvement realized in 1996. The Corporation's net charge-offs, shown in Table 10, totaled $692,000 (0.29% of average loans) in 1997, a 0.6% increase from the $688,000 (0.32% of average loans) in net charge-offs recorded in 1996. As Table 10 illustrates, 80.6% of 1997 net charge-offs occurred within the consumer loan portfolio. Consumer net charge-offs grew 7.7% to $558,000 in 1997 from $518,000 in 1996, and increased as a percentage of total net charge-offs from 75.3% in 1996. Commercial net charge-offs decreased $56,000, or 35.4%, to $102,000 in 1997, compared to $158,000 in 1996. Table 9 shows that the Corporation's nonperforming assets increased to $1.9 million at December 31, 1997, a 3.7% increase from the $1.8 million in nonperforming assets reported at December 31, 1996. Nonperforming loans remained steady at December 31, 1997, decreasing $18,000 to $1.7 million; however, the mix of nonperforming loans changed significantly at December 31, 1997. Nonaccrual loans increased 34.1% at December 31, 1997, to $1.1 million, compared to $856,000 one year earlier. The increase in nonaccruals was concentrated in the residential mortgage portfolio, which increased $283,000 at December 31, 1997, to $295,000, compared to $12,000 at December 31, 1996. Commercial nonaccrual loans increased $46,000 to $821,000 at December 31, 1997, up from $775,000 one year earlier. Offsetting the growth in nonaccrual loans was a decrease in loans past due 90 days or more and still accruing interest. Loans past due 90 days or more decreased $310,000 to $564,000 at December 31, 1997, down 35.5% from $874,000 at December 31, 1996. The reduction in loans past due 90 days or more was concentrated in the real estate and consumer loan portfolios. The final component of nonperforming assets, other real estate owned, increased to $185,000 at December 31, 1997, from $99,000 one year earlier, and includes two residential properties. For the third consecutive year, the Corporation recorded no restructured loans. At $3.3 million as of year-end 1997, the allowance for possible loan losses represented 1.35% of loans, net of unearned discounts and provided coverage of nonperforming loans at 192.9%. 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, as well as historical losses, delinquency rates and general economic conditions for the remainder of the loan portfolio (refer to Tables 8 and 10 for allocation of the reserve and loan loss activity as of December 31, 1997). Management continuously monitors the adequacy of the allowance for possible loan losses and maintains it within a range which 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. Because of its contribution to the Corporation's financial performance, improved loan quality remains a top priority of management. In 1997, management focused its loan quality control efforts on consumer lending, which has experienced higher delinquencies and losses over the past few years. Rising personal bankruptcies continue to be a concern in the Corporation's consumer loan portfolio. According to the American Bankruptcy Institute, the central Pennsylvania region recorded a 40% growth in personal bankruptcy filings in 1997, the third-highest rate of increase in the nation. Nationally, the increase was 19%. More consumers are filing for bankruptcy with little warning to creditors, as evidenced by higher loss rates versus delinquency rates. The Corporation's customers have not been immune from this trend, which has continued into 1998. In the first quarter ended March 31, 1998, net charge-offs for the Corporation are expected to equal approximately $360,000. However, management anticipates that the level of net charge-offs recorded after the first quarter of 1998 will decline as the year progresses. As in prior years, management is prepared to maintain the adequacy of the allowance for possible loan losses. During 1997, efforts undertaken to address the issues surrounding consumer loan losses include a revision of the Corporation's Consumer Loan Policy to institute tighter underwriting standards and an extensive consumer lending training program designed to improve the knowledge and skills of our lending staff, utilizing material developed by Omega Performance, a nationally recognized provider of bank training programs. Liquidity The Corporation must meet the financial needs of the communities which it serves, while providing a satisfactory return on the shareholders' investment. In order to accomplish this, Franklin Financial Services 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, Franklin Financial Services Corporation has satisfied its liquidity needs from earnings, repayment of loans and amortizing 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. Total deposits grew by $6.4 million between December 31, 1996 and 1997. In addition, the Corporation increased other borrowings by $6.5 million and securities sold under agreement to repurchase by $1.0 million. Funding from these sources together with a $2.7 million decrease in investments were sufficient to meet the increase in loan demand. Table 6 presents specific information concerning short-term borrowings. 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 11 presents a gap analysis of the Corporation at December 31, 1997. The positive gap in the under one-year time intervals would suggest that the Corporation's near-term earnings would increase in a higher interest rate environment. 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 discounted present value of assets minus the discounted present value of liabilities and is a surrogate for long-term earnings. The Corporation 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 market interest rates might make during a one-year time frame. The Corporation establishes tolerance ranges for these measures of interest rate sensitivity and manages within the ranges. As indicated on Table 12, the financial simulation analysis revealed that both prospective net interest income over a one-year time period and the economic value of equity are adversely affected by higher market interest rates and favorably affected by lower interest rate. Both measures are within the tolerance ranges established by the Board of Directors. Computations of the prospective effects of hypothetical interest rate changes are based on many assumptions, including relative levels of market interest rates, loan prepayments and deposits 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 certain actions management could undertake in response to changes in market interest rates. Capital and Dividends Total shareholders' equity equaled $36.3 million at December 31, 1997, representing an increase of $964,000 or 2.7% over $35.3 million at December 31, 1996. Most of the growth in equity year over year was from earnings retained ($512,000) plus an increase in the net unrealized gain on available for sale investment securities of $1.3 million offset by the repurchase of outstanding common stock totaling $1.3 million. In 1996, the Corporation retained earnings of $2.6 million which was offset by a decrease in the net unrealized gain on available for sale securities of $64,000 and the repurchase of $2.7 million in outstanding common stock. As a result, shareholders' equity in 1996 increased $385,000. In November 1997 the Board of Directors approved a 3 for 2 stock split issued in the form of a 50% stock dividend distributed on February 3, 1998, to shareholders of record at the close of business on January 13, 1998. The 50% Stock Dividend resulted in a transfer of $1.0 million from retained earnings to common stock. Cash dividends declared by the Board of Directors in 1997 totaled $1.99 per share ($1.37 adjusted for the 50% Stock Dividend) and represented an increase of 155.1% (163.4% adjusted for the 50% Stock Dividend) over the $.78 ($.52 adjusted for the 50% Stock Dividend) declared in 1996. Included in 1997 cash dividends declared are quarterly dividends paid to shareholders in 1997 totaling $.84 ($.56 adjusted for the 50% Stock Dividend) per share, a special cash dividend of $1.00 ($.66 adjusted for the 50% Stock Dividend) per share paid on January 21, 1998, to shareholders of record at the close of business on January 7, 1998 and a first quarter 1998 cash dividend of $.15 per share paid on February 27, 1998 to shareholders of record at the close of business on February 12, 1998. The ratio of cash dividends declared to net income in 1997 was 88.2% compared to 36.4% in 1996. In March 1997, the Board of Directors authorized the repurchase of up to 100,000 shares (150,000 adjusted for the 50% Stock Dividend) of the Corporation's outstanding common stock through March 1998. On March 5, 1998, the Board of Directors authorized the repurchase of up to 50,000 shares of the Corporation's outstanding common stock for a twelve month period. Treasury stock acquired is used for general corporate purposes including stock dividends and stock splits, employee benefit and executive compensation plans and the dividend reinvestment plan. Under these programs the Corporation repurchased 37,983 shares (56,974 shares adjusted for the 50% Stock Dividend) at a cost of $1.3 million and 88,604 shares (132,906 shares adjusted for the 50% Stock Dividend) at a cost of $2.7 million in 1997 and 1996, respectively. A strong capital position is important to the Corporation and provides a solid foundation for the anticipated 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 ratios of capital to assets. 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 I Capital to total balance sheet assets while the risk-based ratio compares Tier I and Tier II capital to risk-weighted assets and off-balance-sheet activity in order to make capital levels more sensitive to the risk profiles of individual banks. Current regulatory capital guidelines call for a minimum Tier I leverage ratio of 4.0% and minimum Tier I and Tier II 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 I and Tier II risk-based capital ratios greater than or equal to 6.0% and 10.0%, respectively. Tier I 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. Tier II capital is composed of Tier I capital plus the allowance for loan losses. Table 15 presents the capital ratios for the consolidated Corporation at December 31, 1997, 1996 and 1995. 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. Adjusted for the 50% Stock Dividend, book value per common share was $12.99 at December 31, 1997, versus $12.47 at December 31, 1996 and market value per common share was $34.16 versus $21.42, respectively. Market value disclosed in the financial highlights reflects the mean between the bid and ask prices for the last business day of the year. As of year-end 1997, the Corporation's common stock was trading at 262.97% of its December 31 book value compared to 171.77% at year-end 1996. The price earnings multiple was 21.5 times at December 31, 1997 compared to 14.6 times at December 31, 1996. Forward-Looking Statements 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, reflect management'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, changes 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.
TABLE 1. Net Interest Income (unaudited) Net interest income, defined as interest income less interest expense, is as shown in the following table: (Amounts in thousands) 1997 % Change 1996 % Change 1995 Interest income $26,308 6.08% $24,799 (0.69)% $24,971 Interest expense 12,225 10.26% 11,087 (1.10)% 11,210 Net interest income $14,083 2.71% $13,712 (0.36)% $13,761 Tax equivalent adjustment 713 514 599 Net interest income (full taxable equivalent) $14,796 4.01% $14,226 (0.93)% $14,360
Table 2. Analysis of Net Interest Income (unaudited) 1997 Average Income or Average (Amounts in thousands) balance expense yield/rate Interest-earning assets: Interest-bearing deposits in other banks $290 $28 9.66% Federal funds sold 0 0 0.00% Investment securities Taxable 61,998 3,869 6.24% Nontaxable 26,744 1,856 6.94% Loans, net of unearned discount 235,308 21,268 9.04% Total interest-earning assets 324,340 27,021 8.33% Noninterest-earning assets 21,357 Total assets $345,697 Interest-bearing liabilities: Deposits: Interest-bearing checking $34,222 $730 2.13% Money market deposit accounts 30,182 1,229 4.07% Savings 43,488 1,220 2.81% Time 123,121 6,878 5.59% Total interest-bearing deposits 231,013 10,057 4.35% Securities sold under agreements to repurchase 14,685 750 5.11% Other borrowings 23,738 1,418 5.97% Total interest-bearing liabilities 269,436 12,225 4.54% Noninterest-bearing liabilities 39,988 Shareholders' equity 36,272 Total liabilities and shareholders' equity $345,696 Net interest income/Net interest margin 14,796 4.56% Tax equivalent adjustment (713) Net interest income 14,083 All amounts have been adjusted to a tax-equivalent basis using a tax rate of 34%
1996 Average Income or Average (Amounts in thousands) balance expense yield/rate Interest-earning assets: Interest-bearing deposits in other banks $4,122 $210 5.09% Federal funds sold 0 0 0.00% Investment securities Taxable 60,317 3,640 6.03% Nontaxable 20,181 1,426 7.07% Loans, net of unearned discount 218,033 20,037 9.19% Total interest-earning assets 302,653 25,313 8.36% Noninterest-earning assets 18,164 Total assets $320,817 Interest-bearing liabilities: Deposits: Interest-bearing checking $32,006 $697 2.18% Money market deposit accounts 23,633 841 3.56% Savings 45,835 1,300 2.84% Time 124,411 7,010 5.63% Total interest-bearing deposits 225,885 9,848 4.36% Securities sold under agreements to repurchase 16,376 762 4.65% Other borrowings 7,280 477 6.55% Total interest-bearing liabilities 249,541 11,087 4.44% Noninterest-bearing liabilities 36,398 Shareholders' equity 34,878 Total liabilities and shareholders' equity $320,817 Net interest income/Net interest margin 14,226 4.70% Tax equivalent adjustment (514) Net interest income 13,712 All amounts have been adjusted to a tax-equivalent basis using a tax rate of 34%
1995 Average Income or Average (Amounts in thousands) balance expense yield/rate Interest-earning assets: Interest-bearing deposits in other banks $11,694 $683 5.84% Federal funds sold 155 9 5.81% Investment securities Taxable 47,935 2,867 5.98% Nontaxable 21,145 1,577 7.46% Loans, net of unearned discount 217,932 20,434 9.38% Total interest-earning assets 298,861 25,570 8.56% Noninterest-earning assets 13,938 Total assets $312,799 Interest-bearing liabilities: Deposits: Interest-bearing checking $27,734 $564 2.03% Money market deposit accounts 26,663 1,022 3.83% Savings 46,183 1,345 2.91% Time 125,780 7,188 5.71% Total interest-bearing deposits 226,360 10,119 4.47% Securities sold under under agreements to repurchase 12,454 639 5.13% Other borrowings 7,032 452 6.43% Total interest-bearing liabilities 245,846 11,210 4.56% Noninterest-bearing liabilities 33,523 Shareholders' equity 33,430 Total liabilities and shareholders' equity $312,799 Net interest income/Net interest margin 14,360 4.80% Tax equivalent adjustment (599) Net interest income 13,761 All amounts have been adjusted to a tax-equivalent basis using a tax rate of 34% Years ended December 31 1997 1996 1995 Rate Analysis: Yield on total earning assets 8.33% 8.36% 8.56% Cost of funds supporting earning assets 3.77% 3.66% 3.76% Net rate on earning assets 4.56% 4.70% 4.80%
TABLE 3. Rate-Volume Analysis of Net Interest Inc (unaudited) Table 3 attributes increases and decreases in components of net interest income either to changes average volume or to changes in average rates for interest-earning assets and interest-bearing liabiities. 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. 1997 Compared to 1996 1996 Compared to 1995 Increase (Decrease) due to: Increase (Decrease) due to: (Amounts in thousands) Volume Rate Net Volume Rate Net Interest earned on: Interest-bearing deposits in other banks ($284) $102 ($182) ($395) ($78) ($473) Federal funds sold 0 0 0 (9) 0 (9) Investment securities Taxable 103 126 229 747 26 773 Nontaxable 456 (26) 430 (70) (81) (151) Loans 1,566 (335) 1,231 9 (406) (397) Total net change in interest income 1,841 (133) 1,708 282 (539) (257) Interest expense on: Interest-bearing checking 47 (14) 33 91 42 133 Money market deposit accounts 255 133 388 (111) (70) (181) Savings (66) (14) (80) (10) (35) (45) Time (72) (60) (132) (78) (100) (178) Securities sold under agreements to repurchase (83) 71 (12) 174 (51) 123 Other borrowings 987 (46) 941 16 9 25 Total net change in interest expense 1,068 70 1,138 82 (205) (123) Increase (Decrease) in net interest income $773 ($203) $570 $200 ($334) ($134) 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 4. Investment Securities at Amortized Cost (unaudited) The following tables present amortized costs of investment securities by type at December 31 for the past three years: Amortized cost (Amounts in thousands) 1997 1996 1995 Held to Maturity U.S. Treasury securities and obligations of U.S. Government agencies and corporations $1,030 $1,051 $849 Obligations of state and political subdivisions 15,025 19,496 16,225 Corporate debt securities 2,343 3,688 6,795 Mortgage-backed securities 7,989 10,832 10,309 26,387 35,067 34,178 Other 1,392 1,223 1,139 $27,779 $36,290 $35,317 Amortized cost 1997 1996 1995 Available for Sale Equity Securities $1,588 $1,380 $1,330 U.S. Treasury securities and obligations of U.S. Government agencies and corporations 20,967 27,054 25,717 Obligations of state and political subdivisions 14,926 1,934 2,417 Corporate debt securities 4,029 5,046 1,025 Mortgage-backed securities 14,877 17,159 10,511 $56,387 $52,573 $41,000 The Other Held to Maturity classification in the above schedule represents common stock of the Federal Home Loan Bank of Pittsburgh and Atlantic Central Bankers Bank which in the aggregate total $1,392,000, $1,223,000 and $1,139,000 at December 31, 1997, 1996 and 1995, respectively. Common stock of the Federal Home Loan Bank and Atlantic Central Bankers Bank represents ownership in institutions which are wholly owned by other financial institutions and is a requirement for membership.
TABLE 5. Time Certificates of Deposit of $100,000 or More (unaudited) The maturity of outstanding certificates of deposit of $100,000 or more at December 31,1997 is as follows: (Amounts in thousands) Amount Maturity distribution: Within three months $6,901 Over three through six months 2,552 Over six through twelve months 2,295 Over twelve months 5,991 Total $17,739
TABLE 6. Short-Term Borrowings (unaudited) FHLB borrowings and Securities Sold Under Agreementsto Repurchase (Amounts in thousands) 1997 1996 1995 Ending balance $21,434 $22,172 $13,611 Average balance 23,738 18,639 12,990 Maximum month-end balance 31,701 26,724 16,212 Weighted-average interest rate on average balances 5.97% 4.84% 5.14%
TABLE 7. Loan Portfolio (unaudited) The following table presents an analysis of the Bank's loan portfolio for each of the past five years: December 31 (Amounts in thousands) 1997 1996 1995 1994 1993 Real estate (primarily first mortgage residential loans) $82,989 $79,478 $83,800 $92,481 $95,918 Real estate - construction 7,562 3,727 5,233 4,207 4,232 Commercial, industrial and agricultural 98,389 91,244 74,678 75,783 72,537 Consumer (including home equity lines of credit) 55,651 49,936 50,017 51,376 41,969 Total loans 244,591 224,385 213,728 223,847 214,656 Less: Unearned discount (43) (159) (520) (1,111) (425) Allowance for possible loan losses (3,304) (3,060) (3,141) (3,425) (3,598) Net loans $241,244 $221,166 $210,067 $219,311 $210,633
TABLE 8. 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: (Amounts in thousands) December 31 1997 1996 1995 1994 1993 $ % $ % $ % $ % $ % Real estate $251 37% $220 37% $583 42% $989 43% - 47% Commercial industrial and agricultural 1,489 40% 1,326 41% 1,136 35% 1,520 34% 2,519 34% Consumer 1,564 23% 1,514 22% 1,422 23% 916 23% 1,079 19% $3,304 100% $3,060 100% $3,141 100% $3,425 100% $3,598 100%
TABLE 9. Nonperforming Assets (unaudited) The following table presents an analysis of nonperforming assets for each of the past five years. December 31 (Amounts in thousands) 1997 1996 1995 1994 1993 Nonaccrual loans $1,148 $856 $671 $1,047 $1,877 Loans past due 90 days or more (not included above) 564 874 1,123 601 1,193 Restructured loans - - - 595 872 Total nonperforming loans 1,712 1,730 1,794 2,243 3,942 Other real estate 185 99 258 267 Total non performing assets $1,897 $1,829 $2,052 $2,243 $4,209 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 10. 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. December 31 (Amounts in thousands) 1997 1996 1995 1994 1993 Balance at beginning of year $3,060 $3,141 $3,425 $3,598 $3,433 Charge-offs: Commercial,industrial and agricultural (113) (183) (89) (51) (447) Consumer (637) (582) (511) (230) (219) Real estate (32) (12) (76) (38) (34) Total charge-offs (782) (777) (676) (319) (700) Recoveries: Commercial,industrial and agricultural 11 25 46 60 104 Consumer 79 64 43 19 60 Real estate 0 1 19 Total recoveries 90 89 90 98 164 Net charge-offs (692) (688) (586) (221) (536) Provision for possible loan losses 936 607 302 48 701 Balance at end of year $3,304 $3,060 $3,141 $3,425 $3,598 Ratios: Net loans charged off as a percentage of average loans 0.29% 0.32% 0.27% 0.10% 0.26% Allowance as a percentage of net loans (at December 31) 1.35% 1.36% 1.47% 1.54% 1.68%
Table 11. Interest Rate Sensitivity Analysis (Unaudited) 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 $249 $ -- $ -- $ -- $ -- $249 Federal funds sold Investment securities 9,428 5,530 8,501 37,954 22,755 84,168 Loans, net of unearned income 82,171 12,081 24,850 62,465 59,677 241,244 Total interest-earning assets $91,848 $17,611 $33,351 $100,419 $82,432 $325,661 Interest-bearing liabilities: Interest-bearing checking $2,960 $ $ 23,848 5,962 32,770 Money market deposit accounts 31,553 1,536 3,106 4,642 --- 40,837 Savings 0 0 0 31,625 7,906 39,531 Time 20,287 19,409 22,623 61,380 127 123,826 Federal funds purchased and securities sold under agreement to repurchase 16,075 --- --- --- --- 16,075 Other borrowings 11,150 --- 688 9,596 0 21,434 Total interest-bearing liabilities $82,025 $20,945 $26,417 $131,091 $13,995 $274,473 Interest rate gap $9,823 ($3,334) $6,934 ($30,672) $68,437 $51,188 Cumulative interest rate gap $9,823 $6,489 $13,423 ($17,249) $51,188 $102,376 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 where the scheduled maturities are accelerated based on estimated prepayments of approximately 15 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 guidelines provided by the FDIC.
TABLE 12 Sensitivity to Change in Market Interest Rates (unaudited) Interest Rate Scenarios (Amounts in Thousands) -200 bps -100 bps +100 bps +200 bps Prospective one-year net interest income: Change........................... $118 $69 ($88) ($210) Percent change................... 0.8% 0.5% -0.6% -1.5% Board policy limit............... -7.5% -3.8% -3.8% -7.5% Economic value of portfolio equity: Change........................... $5,448 $3,687 ($1,790) ($4,851) Percent change................... 13.2% 8.9% -4.3% -11.7% 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 historic 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 historic rate relationships to market interest rates. Nonmaturity deposits run off over various future time periods, ranging from one month to ten years, in accordance with guidelines suggested by the FDIC. 4. Interest rate scenarios assume an immediate, sustained and parallel shift in the term structure of interest rates.
Table 13. Maturity Distribution of Investment Portfolio (Unaudited) The following presents an analysis of investments in securities at December 31, 1997 by maturity, and the weighted average yield for each maturity presented. Securities with "put options" have been classified in the earliest period in which the options can be exercised. The yields in this table are presented on a tax-equivalent basis and have been calculated using the amortized cost. After one year After five years After ten One year or less through five years through ten years years Total Amortized Amortized Amortized Amortized Amortized (Amounts in thousands) Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield Held to Maturity U.S. Treasury securities & obligations of U.S. Government agencies & corporations $ --- --- $1,030 6.38% $ --- --- $ --- --- $1,030 6.38% Obligations of state & political subdivisions 2,313 6.54% 8,060 6.58% 3,008 6.54% 1,644 8.35% 15,025 6.76% Corporate debt securities --- --- 2,343 5.97% --- --- --- --- 2,343 5.97% Mortgage-backed securities 300 6.34% 1,113 6.13% 883 6.74% 5,693 6.77% 7,989 6.66% Other --- --- --- --- --- --- 1,392 6.28% 1,392 6.28% $2,613 6.52% $12,546 6.41% $3,891 6.59% $8,729 6.99% $27,779 6.63% Market Market Market Market Market Value Yield Value Yield Value Yield Value Yield Value Yield Available for Sale U.S. Treasury securities & obligations of U.S. Government agencies & corporations $3,502 6.04% $12,569 6.34% $5,065 7.16% $ --- $21,136 6.49% Obligations of state & political subdivisions --- --- 334 8.71% --- --- 15,266 8.02% 15,600 8.03% Corporate debt securities 502 6.61% 3,578 6.66% --- --- --- --- 4,080 6.65% Mortgage-backed securities --- --- 5,309 6.27% 5,391 6.27% 4,165 6.02% 14,865 6.20% Equity securities --- --- --- --- --- --- 3,638 2.33% 3,638 2.33% $4,004 6.11% $21,790 6.41% $10,456 6.70% $23,069 6.76% $59,319 6.58%
TABLE 14. Maturities and Interest Rate Terms of Selected Loans (unaudited) Stated maturities (or earlier call dates) of selected loans as of December 31, 1997 are summarized in the table below. Residential mortgages and consumer loans are excluded from the presentation. After one year Within but within After (Amounts in thousands) one year five year five years Total Loans: Real estate - construction 7,562 - - $7,562 Commercial, industrial and agricultural 16,780 32,039 49,570 $98,389 $24,342 $32,039 $49,570 $105,951 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, 1997: After one year but within After five year five years Total Loans with predetermined rates $16,028 $27,518 $43,546 Loans with variable rates 16,011 22,052 $38,063 $32,039 $49,570 $81,609
TABLE 15. Capital Ratios (unaudited) December 31 1997 1996 1995 Risk-based ratios Tier 1 13.53% 14.75% 16.41% Tier 2 14.80% 16.00% 17.66% Leverage Ratio 9.22% 10.03% 10.77%
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 T, Chambersburg, PA 17201-0819, 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 T, Chambersburg, PA 17201-0819, telephone 717/264-6116. Annual Meeting The Annual Shareholders' Meeting will be held on Tuesday, April 28, 1998, 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 Hopper Soliday & Co., Inc 17 East Washington Street 1703 Oregon Pike Hagerstown, MD 21740 Lancaster, PA 17601 800/344-4413 800/646-8647 F.J. Morrissey & Co., Inc. Ryan, Beck & Co. 1700 Market Street, Suite 1420 3 Parkway Philadelphia, PA 19103-3913 Philadelphia, PA 19102 215/563-3296 800/223-8969 Registrar and Transfer Agent The registrar and transfer agent for Franklin Financial Services Corporation is Fulton Bank, P.O. Box 4887, Lancaster, PA 17604. EX-21 3 Exhibit 21 Subsidiaries of Franklin Financial Services Corporation Farmers and Merchants Trust Company of Chambersburg - Direct (A Pennsylvania Bank and Trust Company) EX-24 4 ARTHUR ANDERSEN LLP CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in Franklin Financial Services Corporation 1997 annual report to shareholders incorporated by reference in this Form 10-K, into the Corproation's previously filed Registration Statements: File No. 2-92212, No. 2-98880, No. 33-36509, No. 33-64294, and No. 33-82420. /s/ Arthur Andersen LLP Lancaster, PA March 26, 1997 EX-27 5
9 1000 12-MOS DEC-31-1997 DEC-31-1997 10863 249 0 0 59319 27779 28030 244548 3304 353865 274555 27225 5496 10284 0 0 3045 33260 353865 21088 5192 28 26308 10057 12225 14083 936 787 11700 5753 5753 0 0 4363 1.59 1.58 8.34 1148 564 0 0 3060 782 90 3304 3304 0 0
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