-----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, Pi4dghrJlx9ml7VCLlZhsk91EKd9qVdRZrWzPhiXzf7hr0oeRKkSbANDdIsyCpmj gXeufa9eg+l3ebj1dXcYiQ== 0000723646-98-000010.txt : 19980814 0000723646-98-000010.hdr.sgml : 19980814 ACCESSION NUMBER: 0000723646-98-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980813 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-Q SEC ACT: SEC FILE NUMBER: 000-12126 FILM NUMBER: 98685495 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-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ....... to ....... Commission file number 0-12126 FRANKLIN FINANCIAL SERVICES CORPORATION (Exact name of registrant as specified in its charter) PENNSYLVANIA 25-1440803 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 20 SOUTH MAIN STREET (P.O. BOX T), CHAMBERSBURG,PA 17201-0819 (Address of principal executive officer) 717/264-6116 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. There were 1,909,704 outstanding shares of the Registrant's common stock as of August 3, 1998. INDEX Page PART I - FINANCIAL INFORMATION Item 1 - Financial Statements Condensed Consolidated Balance Sheets as of June 30, 1998 (Unaudited) and December 31, 1997 Condensed Consolidated Statements of Income for the Three and Six Months ended June 30, 1998 and 1997 (unaudited) Condensed Consolidated Statements of Changes in Shareholders' Equity for the Twelve and Six Months ended December 31, 1997 and June 30, 1998 (unaudited) Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1998 and 1997 (unaudited) Notes to Condensed Consolidated Financial Statements (unaudited) Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations PART II - OTHER INFORMATION Item 4 - Submission of Matters to a Vote of Security Holders Item 6 - Exhibits and Reports on Form 8-K SIGNATURE PAGE
CONSOLIDATED BALANCE SHEETS (Amounts in Thousands) June 30 December 31 1998 1997 ----------- ------------ (unaudited) ASSETS Cash and due from banks $11,086 $10,863 Interest bearing deposits in other banks 5,986 249 Investment securities held to maturity (Market value of $ 24,411and $28,030 at June 30, 1998 and December 31, 1997 respectively) (Note 3) 24,162 27,779 Investment securities available for sale (Note 3) 62,452 59,319 Loans, net 247,641 241,244 Premises and equipment, net 5,788 5,907 Other assets 8,571 8,504 ----------- ------------ Total Assets $365,686 $353,865 =========== ============ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: (Note 4) Demand (non-interest bearing) $41,470 $37,591 Savings and Interest checking 126,660 113,138 Time 124,181 123,826 ----------- ------------ Total Deposits 292,311 274,555 Securities sold under agreements to repurchase 19,892 16,075 Other borrowings 11,901 21,434 Other liabilities 3,179 5,496 ----------- ------------ Total Liabilities 327,283 317,560 Commitments and Contingencies - - Shareholders' equity: Common stock $1 par value per share, 5,000 shares authorized with 3,045 shares issued and 2,798 and 2,795 shares outstanding at June 30,1998 and December 31,1997,respectively. 3,045 3,045 Capital stock without par value, 5,000 shares authorized with no shares issued or outstanding - - Additional paid in capital 19,772 19,761 Retained earnings 19,128 17,087 Net unrealized gain on securities 1,862 1,935 Treasury stock (Note 6) (4,709) (4,760) Unearned compensation (713) (763) ----------- ------------ Total shareholders' equity 38,385 36,305 ----------- ------------ Total Liabilities and Shareholders' Equity $365,668 $353,865 =========== ============ The accompanying notes are an integral part of these statements
CONSOLIDATED STATEMENTS OF INCOME (amounts in thousands, except per share) (Unaudited) For the Three Months Ended For the Six Months Ended June 30 June 30 1998 1997 1998 1997 ------------------------ -------------------------- INTEREST INCOME Interest on loans $5,460 $5,228 $10,966 $10,302 Interest on deposits in other banks 59 4 63 21 Interest and dividends on investments (Note 3) 1,211 1,298 2,430 2,590 ---------- ---------- ------------ ---------- Total interest income 6,730 6,530 13,459 12,913 ---------- ---------- ------------ ---------- INTEREST EXPENSE Interest on deposits 2,741 2,488 5,406 4,915 Interest on securities sold under agreements to repurchase and other borrowings 447 503 898 929 ---------- ---------- ------------ ---------- Total interest expense 3,188 2,991 6,304 5,844 ---------- ---------- ------------ ---------- Net interest income 3,542 3,539 7,155 7,069 Provision for possible loan losses 190 192 555 385 ---------- ---------- ------------ ---------- Net-interest income after provision for possible loan losses 3,352 3,347 6,600 6,684 ---------- ---------- ------------ ---------- NONINTEREST INCOME Trust fees 411 329 888 668 Service charges, commissions and fees 627 533 1,105 1,038 Other 42 9 62 48 Securities gains 196 93 495 204 ---------- ---------- ------------ ---------- Total noninterest income 1,276 964 2,550 1,958 ---------- ---------- ------------ ---------- NONINTEREST EXPENSE Salaries and benefits 1,455 1,573 2,975 3,137 Net occupancy expense 156 152 308 315 Furniture and equipment expense 176 175 392 379 Other 1,224 884 2,231 1,748 ---------- ---------- ------------ ---------- Total noninterest expense 3,011 2,784 5,906 5,579 ---------- ---------- ------------ ---------- Income before Federal income taxes 1,617 1,527 3,244 3,063 ---------- ---------- ------------ ---------- Federal income tax expense 375 344 769 745 ---------- ---------- ------------ ---------- Net income $1,242 $1,183 $2,475 $2,318 ========== ========== ============ ========== Basic earnings per share $0.46 $0.43 $0.91 $0.84 'Weighted average shares outstanding (000's) 2,729 2,741 2,728 2,750 Diluted earnings per share $0.45 $0.43 $0.89 $0.83 'Weighted average shares outstanding (000's) 2,768 2,770 2,767 2,779 The accompanying notes are an integral part of these statements. Earnings per share for 1997 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.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY for the year ended December 31, 1997 and the Six Months ended June 30, 1998 (Amounts in thousands, except per share ) Net Additional Unrealized Common Paid-in Retained Gain/(Loss) Treasury Unearned Stock Capital Earnings on Securitie Stock Compensation Total --------- --------- --------- ---------- --------- ----------- --------- Balance at December 31, 1996 $2,030 $19,745 $17,590 $613 ($3,830) ($807) $35,341 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 - 27 - - 294 - 321 Change in net unrealized gain on securities - - - 1,322 - - 1,322 Restricted stock issued under long-term incentive compensation plan - (11) - - 60 (73) (24) Acquisition of treasury stock at cost - - - - (1,284) - (1,284) Amortization of unearned compensation - - - - - 117 117 --------- --------- --------- ---------- --------- ----------- --------- Balance at December 31, 1997 3,045 19,761 17,087 1,935 (4,760) (763) 36,305 --------- --------- --------- ---------- --------- ----------- --------- Net income - - 2,475 - - - 2,475 Cash dividends declared, $.15 per share - - (420) - - - (420) Cash in lieu of fractional shares on 50% stock split - - (14) - - - (14) Common stock issued under stock option plans - 11 - - 51 - 62 Change in net unrealized gain on securities - - - (73) - - (73) Amortization of unearned compensation - - - - - 50 50 --------- --------- --------- ---------- --------- ----------- --------- Balance at June 30, 1998 (unaudited) $3,045 $19,772 $19,128 $1,862 ($4,709) ($713) $38,385 ========= ========= ========= ========== ========= =========== ========= The accompanying notes are an integral part of these statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in Thousands) (Unaudited) For the Six Months Ended June 30 1998 1997 --------- ---------- Cash flows from operating activities: Net Income $2,475 $2,318 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 375 391 Premium amortization on investment securities 49 60 Discount accretion on investment securities (70) (76) Provision for possible loan losses 555 385 Securities gains, net (495) (204) Principal loss (gain) on sales of mortgage loans 37 (21) Loss on sale of premises and equipment 294 37 Loan charge-offs, net of recoveries (534) (345) Decrease (increase) in interest receivable 89 (145) Increase in interest payable 201 164 Decrease in unearned discount (21) (77) (Increase) decrease in prepaid and other assets (256) 46 Decrease in accrued expenses and other liabilities (101) (211) Other, net 79 59 --------- ---------- Net cash provided by operating activities $2,677 $2,381 --------- ---------- Cash flows from investing activities: Proceeds from sales of investment securities available for sale 726 3,581 Proceeds from maturities of investment securities held to maturity 3,645 4,354 Proceeds from maturities of investment securities available for sale7,687 6,500 Purchase of investment securities held to maturity (28) (364) Purchase of investment securities available for sale (11,162) (14,782) Net increase in loans (19,792) (17,641) Proceeds from sale of mortgage loans 13,359 4,822 Capital expenditures (758) (173) Proceeds from sales of premises and equipment 207 132 --------- ---------- Net cash used in investing activities (6,116) (13,571) --------- ---------- Cash flows from financing activities: Net increase in demand deposits, NOW accounts and savings accounts 18,747 7,938 Net increase (decrease) in certificates of deposit 355 (6,403) Dividends (2,703) (752) Common stock issued under stock option plans 62 122 Purchase of treasury shares 0 (769) Net (decrease) increase in other borrowings (7,062) 13,456 --------- ---------- Net cash provided by financing activities 9,399 13,592 --------- ---------- Increase in cash and cash equivalents 5,960 2,402 Cash and cash equivalents as of January 1 11,112 10,521 --------- ---------- Cash and cash equivalents as of June 30 $17,072 $12,923 ========= ========== The accompanying notes are an integral part of these statements.
Note 1 - Basis of Presentation The consolidated balance sheets as of June 30, 1998 and December 31, 1997, the consolidated statements of income for the three and six month periods ended June 30, 1998 and 1997, the consolidated statements of changes in shareholders' equity as of December 31, 1997 and June 30, 1998 and the consolidated statements of cash flows for the six month periods ended June 30, 1998 and 1997 have been prepared by the Corporation, without audit where indicated. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows at June 30, 1998, and for all periods presented have been made. Certain prior year amounts have been reclassified to be consistent with the current year's reporting. The consolidated financial statements include the accounts of Franklin Financial Services Corporation (the Corporation), and its wholly-owned subsidiary, Farmers and Merchants Trust Company of Chambersburg. All significant intercompany transactions and account balances have been eliminated. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the audited financial statements and notes thereto included in the Corporation's 1997 Annual Report. The results of operations for the period ended June 30, 1998, are not necessarily indicative of the operating results for the full year. For purposes of reporting cash flows, cash and cash equivalents include cash, due from banks, and federal funds sold. Generally, Federal funds are purchased and sold for one-day periods. Supplemental disclosures of cash flows information are as follows: Cash paid for six months ended June 30: 1998 1997 Interest paid on deposits and other borrowed funds $6,103,000 $5,680,000 Income taxes paid $ 425,000 $ 350,000 Earnings per share is computed based on the weighted average number of shares outstanding during each quarter, adjusted retroactively for stock splits and dividends. Adjustments for 1997 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. A reconciliation of the weighted average shares outstanding used to calculate basic earnings per share and diluted earnings per share follows: For the quarter ended June 30 1998 1997 (Amounts in thousands) Weighted average shares outstanding (basic) 2,729 2,741 Impact of common stock equivalents 39 29 ------ ------ Weighted average shares outstanding (diluted) 2,768 2,770 ====== ====== For the six months ended June 30 1998 1997 (Amounts in thousands) Weighted average shares outstanding (basic) 2,728 2,750 Impact of common stock equivalents 39 29 ------ ------ Weighted average shares outstanding (diluted) 2,767 2,779 ====== ====== Note 2. Capital Adequacy Quantitative measures established by regulation to ensure capital adequacy require financial institutions to maintain minimum amounts and ratios of total and Tier I capital to risk-weighted assets and of Tier I capital to average assets. The Capital ratios of the Corporation and its bank subsidiary are as follows: As of June 30, 1998 (unaudited) -------------------------------------------------------- To be well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ------------------ --------------- ------------------ (Amounts in thousands) Amount Ratio Amount Ratio Amount Ratio ------------------ --------------- ------------------ Total Capital (to Risk Weighted Assets) ---------------------------------- Corporation $37,772 15.06% $20,069 8.00% $25,086 10.00% Bank 33,545 13.53% 19,833 8.00% 24,791 10.00% Tier I Capital (to Risk Weighted Assets) ---------------------------------- Corporation $34,634 13.81% $10,035 4.00% $15,052 6.00% Bank 30,443 12.28% 9,916 4.00% 14,875 6.00% Tier I Capital (to Average Assets) ---------------------------------- Corporation $34,634 9.61% $14,409 4.00% $18,011 5.00% Bank 30,443 8.58% 14,188 4.00% 17,735 5.00%
Note 3 - Investment Securities Amortized cost and estimated market values of investment securities as of June 30, 1998 (unaudited), and December 31, 1997, were as follows (amounts in thousands): Held to Maturity -------------------------------------------- June 30 December 31 1998 1997 --------------------------- --------------------------- Estimated Estimated Amortized Market Amortized Market Cost Value Cost Value --------- --------- --------- --------- U.S. Treasury securities and obligations of U.S. Government agencies & corporations $1,020 $1,028 $1,030 $1,039 Obligations of state and political subdivisions 13,278 13,465 15,025 15,244 Corporate debt securities 1,984 1,994 2,343 2,348 Mortgage - backed securities 6,460 6,504 7,989 8,007 --------- --------- --------- --------- 22,742 22,991 26,387 26,638 Other 1,420 1,420 1,392 1,392 --------- --------- --------- --------- $24,162 $24,411 $27,779 $28,030 ========= ========= ========== ========= Available for sale -------------------------------------------- June 30 December 31 1998 1997 --------------------------- --------------------------- Estimated Estimated Amortized Market Amortized Market Cost Value Cost Value --------- --------- --------- --------- Equity securities $1,936 $3,692 $1,588 $3,638 U.S. Treasury securities and obligations of U.S. Government agencies & corporations 16,975 17,169 20,967 21,136 Obligations of state and political subdivisions 16,410 17,199 14,926 15,600 Corporate debt securities 6,920 6,983 4,029 4,080 Mortgage - backed securities 17,391 17,409 14,877 14,865 --------- --------- --------- --------- $59,632 $62,452 $56,387 $59,319 ========= ========= ========= =========
Interest income and dividends received on investment securities for the three and six months ended June 30, 1998 and 1997 are as follows (amounts in thousands): Three Months Six Months 1998 1997 1998 1997 ------------------ ------------------ (Unaudited) (Unaudited) U.S. Government Obligations $68 $75 $136 $148 Obligations of U.S. Government Agencies and Corporations 552 652 1,127 1,384 Obligations of States and Political Subdivisions 373 351 756 613 Other Securities, primariy Notes and Debentures 181 200 327 390 Common Stock 37 20 84 55 ------------------ ------------------ $1,211 $1,298 $2,430 $2,590 ================== ==================
Note 4 - Deposits Deposits are summarized as follows (amounts in thousands): June 30 December 31 1998 1997 ------------- ------------- (Unaudited) Demand $41,470 $37,591 Savings Interest-bearing checking 38,208 32,770 Money Market Accounts 49,164 40,836 Passbook and Statement Savings 39,288 39,532 ------------- ------------- $126,660 $113,138 ============= ============= Time Deposits of $100,000 and over 18,499 17,739 Other Time Deposits 105,682 106,087 ------------- ------------- 124,181 123,826 ------------- ------------- Total Deposits $292,311 $274,555 ============= =============
NOTE 5 - Comprehensive Income Effective January 1, 1998, the Corporation adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" which requires disclosure of all changes in equity that result from transactions and other economic events of the period other than transactions with owners. Comprehensive income is defined as the total of net income and all other nonowner changes in equity. Reclassification of financial statements for earlier periods that are presented for comparative purposes is required. For the Corporation, total comprehensive income consists of net income plus the net change in unrealized gains or losses on available for sale investment securities. Total comprehensive income for the three and six months ended June 30, 1998 and 1997 was $1.2 million and $2.4 million, respectively, and $1.9 million and $2.7 million, respectively, net of tax. NOTE 6 - Stock Repurchase Program On March 5, 1998, the Board of Directors authorized the repurchase of up to 50,000 shares of the Corporation's $1.00 par value common stock, representing approximately 1.79% of such shares then issued and outstanding. The repurchases are authorized to be made from time to time during the next 12 months in open market or privately negotiated transactions. The repurchased shares will be held as treasury shares available for issuance in connection with future stock dividends and stock splits, employee benefit plans, executive compensation plans, and for issuance under the Dividend Reinvestment Plan and other corporate purposes. During the second quarter and six months ended June 30, 1998, there were no common stock repurchase transactions under the above stock repurchase plan or under the stock repurchase plan that was authorized in March 1997 and expired in March 1998. NOTE 7 - Recent Accounting Pronouncements On March 4, 1998, the American Institute of Certified Public Accountants issued Statement of Position, (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This Statement provides guidelines on accounting for the costs of computer software developed or obtained for internal use and is effective for financial statements for fiscal years beginning after December 15, 1998. Adoption of this Statement is not expected to have a significant impact on the Corporation's financial condition or results of operations. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting treatment. The Statement is effective for fiscal years beginning after June 15, 1999. A company may also implement the Statement as of the beginning of any fiscal quarter after issuance. The Statement cannot be applied retroactively. No material financial statement impact is anticipated upon the adoption of Statement No. 133 in 2000 Management's Discussion and Analysis of Results of Operations and Financial Condition for the Three and Six Month Periods Ended June 30, 1998 and 1997 Part 1, Item 2 Results of Operations Net income for the second quarter and six months ended June 30, 1998, was $1.24 million and $ 2.47 million, respectively, compared with $1.18 million and $2.32 million, respectively, for the same periods in 1997. Earnings per share grew 6.5% to $.46 for the second quarter of 1998 from $.43 for the second quarter of 1997. An increase in earnings per share of 8.3% to $.91 from $.84 was recorded for the first six months of 1998 compared with the same period one year earlier. Per share earnings are weighted to reflect the impact of the stock repurchase program. Book value per share equaled $13.72 at June 30, 1998, versus $13.06 at June 30 1997. The Corporation's annualized return on average assets (ROA) and return on average equity(ROE) for the first six months of 1998 were 1.39% and 13.38%, respectively, compared to 1.38% and 13.14%, respectively for the same periods ended June 30, 1997 Net interest income for the second quarter of 1998 and 1997 remained steady at $3.5 million. Net interest income for the six months ended June 30, 1998, recorded modest improvement increasing $86,000 to $7.16 million compared to $7.07 million for the six months ended June 30, 1997. Average interest-earning assets during the six month period ended June 30, 1998, showed a 6.0% growth to $336.8 million with a yield of 8.29%, a 9 basis point decline compared to the same period in 1997. Average interest-bearing liabilities recorded a 4.4% growth to $276.4 million with a cost of 4.60%, a 15 basis point increase compared to the same period in 1997. The result was a decline in the net interest margin (tax-equivalent basis) to 4.52% at June 30, 1998, compared to 4.67% at June 30, 1997. The Corporation expensed a provision for possible loan losses of $190,000 and $555,000, respectively for the second quarter and first six months of 1998 versus $192,000 and $385,000, respectively, for the same periods in 1997. The provision was increased primarily to cover loan charge-offs while maintaining the allowance for possible loan losses to total loan ratio at 1.3%. Total noninterest income excluding net securities gains equaled $1.1 million and $2.1 million, respectively, for the quarter and six months ended June 30, 1998, compared to $871,000 and $1.7 million, respectively, for the same periods ended June 30, 1997. Trust fees recorded strong growth for the second quarter and six months of 1998 reflecting an increase of 24.9% to $411,000 for the quarter and 32.9% to $888,000 for the six months. The Corporation's ability to attract new trust business, coupled with a strong investment market, were the primary factors for the growth in trust fees. Service charges, commissions and fees were up $94,000, or 17.6%, to $627,000 for the second quarter of 1998 over the second quarter of 1997 due largely to a significant increase in mortgage refinancing during the period. Mortgage refinancing activity and commercial deposit fees assessed contributed to the $67,000, or 6.4% increase to $1.1 million in service charge, commissions and fee income for the six months ended June 30, 1998, compared to $1.0 million for the same period in 1997. The Corporation recorded $196,000 and $495,000, respectively, in net securities gains for the second quarter and six months ended June 30, 1998, compared to $93,000 and $204,000, respectively, for the same periods in 1997. Net securities gains recorded were from the available-for-sale equities portfolio. Total noninterest expense increased $227,000, or 8.1%, to $3.0 million for the second quarter of 1998 versus the second quarter of 1997 and $327,000, or 5.9%, to $5.9 million for the six months ended June 30, 1998, versus June 30, 1997. Salaries and benefits were down $118,000, or 7.5%, to $1.4 million for the second quarter of 1998 versus the second quarter of 1997 and $162,000, or 5.1%, to $3.1 million for the first six months of 1998 versus the same period in 1997. The primary contributor to the decrease in salaries and benefits for the quarter and six months ended June 30, 1998, was a credit to pension expense of $135,000 and $201,000, respectively, compared to pension expense of $44,000 and $90,000, respectively, for the same periods in 1997. The reduction in pension expense was related to the investment performance of pension plan assets and a change in the benefit formula used to calculate individual employee benefits. Other noninterest expense increased $340,000, or 38.4% to $1.2 million for the second quarter and $483,000, or 27.6%, for the six months ended June 30, 1998, compared to the same periods in 1997. For the six months, higher postage costs ($37,000), advertising costs ($64,000), software costs ($20,000), loan collection costs ($41,000) and costs ($380,000) associated with the acquisition and demolition of real property for a future project designed to enlarge and renovate corporate headquarters contributed to the increase in other expense. Offsetting a portion of the higher costs were lower legal and professional fees ($32,000), supplies ($13,000) and intangible amortization ($12,000). As reported in the Corporation's 1997 Annual Report, management has determined that Year 2000 issues will impact daily business operations and has developed and implemented a comprehensive plan to evaluate all of its data processing systems, software programs and providers to ensure their readiness for the Year 2000. The process which began in early 1997 has resulted in 30% of the software programs and data processing systems achieving Year 2000 compliance as of June 30, 1998. Management expects that by December 31, 1998, over 90% of its software programs and data processing systems will be Year 2000 compliant with the remaining 10% compliant by mid-1999. Costs associated with Year 2000 readiness have not been and are not expected to be material in any one year. Year 2000 costs are recognized as they are incurred. In addition to evaluating the Corporation's Year 2000 readiness, management has also established a process to manage the Year 2000 risks posed by its customers. As part of the process currently underway, significant commercial customers have been identified and evaluated for Year 2000 preparedness. Personal contact has been made or will be made with all commercial customers whose aggregate outstanding loans total $250,000 (approximately 75% to 80% of the commercial loan portfolio) or more, to assess their Year 2000 risk to the Corporation. After assessment has been completed, where Year 2000 issues exist, appropriate communication with the customer will be established to manage and mitigate potential Year 2000 related risk to the Corporation. Management expects that individual assessments and follow-up communication will be substantially complete by the end of the third quarter of 1998. Federal income tax expense for the second quarter and six months ended June 30, 1998, was $375,000 and $769,000, respectively, compared to $344,000 and $745,000, respectively, for the same periods ended June 30, 1997. The effective tax rates for the six month periods ended June 30, 1998 and 1997 were 23.7% and 24.3% versus a statutory rate of 34.0%. The variance between the effective tax rate and the statutory tax rate is due primarily to interest income earned on tax-free investments and tax-free loans. Financial Condition Total assets grew $11.8 million, or 3.3% to $365.7 million at June 30, 1998, from $353.9 million at December 31, 1997. Interest-bearing deposits in other banks increased $5.7 million to $5.9 million at June 30, 1998, from $249,000 at December 31, 1997, representing balances held at the Federal Home Loan Bank of Pittsburgh (FHLB). Net loans during the six month period from December 31, 1997, increased $6.4 million to $247.6 million at June 30, 1998, from $241.2 million. The increase in loans for the period was attributed largely to mortgage loan originations, a strong economy and the low interest rate environment. Net loans grew despite the sale of approximately $13.4 million in mortgage loans to the secondary market, primarily Federal National Mortgage Association (FNMA). Investment securities held-to- maturity declined $3.6 million to $24.1 million due to scheduled maturities and bond calls. Investment securities purchased were classified as available-for-sale and contributed to a $3.1 million increase in available-for-sale investment securities despite the sale of some available-for-sale equity securities. Proceeds from the sale of these equities during the six months ended June 30, 1998, equaled $726,000 and included $495,000 in securities gains. Net unrealized gains on available-for-sale securities at June 30, 1998 and December 31, 1997, was $1.9 million. Net charge-offs for the second quarter and six months ended June 30, 1998, totaled $171,000 and $534,000, respectively, versus $112,000 and $345,000, respectively, for the same periods in 1997. For the first six months of 1998, the consumer loan portfolio recorded 78.6% of the total net charge-offs compared to 21.4% recorded for the commercial loan portfolio. As discussed in the 1997 Annual Report, personal bankruptcies have contributed to the Corporation's recent experience of high consumer charge-offs. More stringent consumer lending guidelines implemented by management in late 1997 and consumer lender training courses completed by all lending staff in the spring of 1998 will serve to greatly reduce the adverse impact consumer bankruptcies have on the Corporation. The full impact of the new guidelines and training will be evident some time in the future. The annualized ratio of net charge-offs to average loans was .44% at June 30, 1998, compared to .29% at December 31, 1997, and .30% at June 30, 1997. Nonperforming loans held steady at $1.7 million at June 30, 1998 and December 31, 1997. Included in nonperforming loans at June 30, 1998, were nonaccrual loans totaling $1.5 million and loans past due more than ninety days totaling $176,000 compared to $1.1 million and $564,000, respectively, at December 31, 1997. The Corporation recorded other real estate owned equaling $197,000 at June 30, 1998, versus $185,000 at year-end 1997. Nonperforming assets represented .42% of total assets at June 30, 1998, versus .54% at December 31, 1997. The allowance for possible loan losses totaled $3.3 million at June 30, 1998 and December 31, 1997, and represented 1.33% and 1.35%, respectively, of total loans. The allowance provided coverage for nonperforming loans of 2.0 times compared to 1.9 times at December 31, 1997. Total deposits grew $17.8 million, or 6.4%, to $292.3 million at June 30, 1998, from $274.5 million at December 31, 1997. Savings and interest checking registered the largest increase of $13.5 million to $126.7 million at June 30, 1998, from $113.1 million at December 31, 1997. A new product (Money Management Account) introduced a year ago has been instrumental in attracting and retaining new deposit dollars. Demand deposit accounts realized strong growth with an increase of $3.9 million, or 10.3%, to $41.5 million at June 30, 1998, from $37.6 million at December 31, 1997. Securities sold under agreements to repurchase increased $3.8 million to $19.9 million at June 30, 1998, from $16.1 million at December 31, 1997. The growth in deposits enabled the Corporation to reduce its other borrowing with the FHLB by $9.5 million to $11.9 million at June 30, 1998. Other borrowing constitutes overnight and term borrowing with the FHLB. In the first quarter of 1998, the Corporation paid a special cash dividend and a regular cash dividend to shareholders which totaled $2.3 million. The payment of these cash dividends, which were declared in November 1997 and reflected in the financial statements at year-end 1997, was primarily responsible for the decrease in other liabilities to $3.2 million at June 30, 1998, from $5.5 million at December 31, 1997. Unemployment in the Franklin County area remained low at just over 4%. The local economy is strong and continues to be fairly well diversified. Liquidity The Corporation's liquidity position (net cash, short-term and marketable assets divided by net deposits and short-term liabilities) was 22.3% at June 30, 1998. The Corporation actively sells mortgage loans to the secondary market ( primarily FNMA) and looks to its borrowing ability with FHLB to satisfy any liquidity needs. As reported earlier, the Corporation sold approximately $13.4 million mortgage loans to FNMA during the first six months of 1998 and had advances outstanding with FHLB totaling $11.9 million. The Corporation's maximum borrowing capacity with FHLB equals $82 million. Management believes that liquidity is adequate to meet the borrowing and deposit withdrawal needs of its customers. Capital Adequacy Total shareholders' equity increased $2.1 million to $38.4 million at June 30, 1998, from $36.3 million at December 31, 1997, primarily the result of earnings retention from the first six months of 1998. As reported in the Corporation's 1997 Annual Report, in November 1997, the Board of Directors approved a 3 for 2 stock split issued in the form of a 50% stock dividend to shareholders of record at the close of business on January 13, 1998. The common stock certificates from this stock dividend were distributed to shareholders on February 3, 1998. In addition to the 50% Stock Dividend, the Board of Directors also approved a special cash dividend of $1.00 per share ($.66 per share adjusted for the 50% Stock Dividend) and a $.15 per share first quarter cash dividend in November 1997. Both of these cash dividends were reflected in the December 31, 1997 financial statements but were paid to shareholders in the first quarter of 1998. A regular second quarter cash dividend of $.15 per share was approved by the Board and paid to shareholders on May 29, 1998. Cash dividends paid to shareholders in the second quarter and six months ended June 30, 1998, totaled $420,000 and $2.7 million, respectively, compared with $375,000 and $752,000 for the same periods ended June 30, 1997. Capital adequacy is currently defined by banking regulatory agencies through the use of several minimum required ratios. At June 30, 1998, the Corporation was determined to be well capitalized as defined by the banking regulatory agencies. The Corporation's leverage ratio, Tier I and Tier II risk-based capital ratios at June 30, 1998, were 9.61%, 13.81% and 15.06%, respectively. PART II - OTHER INFORMATION Item 4. SUBMISSIONS OF MATTERS TO VOTE OF SECURITY HOLDERS The 1998 Annual Meeting of Shareholders (the "Meeting") of the Corporation was held on April 28, 1998. Notice of the Meeting was mailed to shareholders on or about April 1, 1998, together with proxy solicitation materials prepared in accordance with Section 14(a) of the Securities Exchange Act of 1934, as amended, and the regulations promulgated thereunder. The Meeting was held for the following purpose: 1. To elect four Class B directors to hold office for 3 years from the date of election and until their successors are elected and qualified. There was no solicitation in opposition to the nominees of the Board of Directors for election to the Board. All nominees of the Board of Directors were elected. The number of votes cast for as well as the number of votes withheld for each of the nominees for election to the Board of Directors, were as follows: Votes Nominee Votes For Withheld Charles S. Bender II 2,155,854.236 758.0012 Omer L. Eshleman 2,154,827.532 1,784.7052 Jeryl C. Miller 2,151,883.71 4,728.5278 Stephen E. Patterson 2,141,082.292 15,529.9457 Item 6. Exhibits and Reports on Form 8-K (a) Reports on Form 8-K There were no reports filed on Form 8-K for the quarter ended June 30, 1998 FRANKLIN FINANCIAL SERVICES CORPORATION and SUBSIDIARY SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Franklin Financial Services Corporation Date August 12, 1997 /s/ William E. Snell, Jr. ---------------------- William E. Snell, Jr. President and Chief Executive Officer Date August 12, 1997 /s/ Elaine G. Meyers ---------------- Elaine G. Meyers Treasurer and Chief Financial Officer EX-27 2
9 1000 6-MOS DEC-31-1998 JUN-30-1998 11086 5986 0 0 62452 24162 25836 247641 3324 365686 292311 19892 3179 11901 0 0 3045 35340 0 10966 2430 63 13459 5406 898 7155 555 495 5906 3244 3244 0 0 2475 0.91 0.89 8.29 1486 1839 0 0 3304 534 39 3324 3324 0 433
-----END PRIVACY-ENHANCED MESSAGE-----