UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities

Exchange Act of 1934 (Amendment No.   )

Filed by the Registrant  ☒

Filed by a Party other than the Registrant  ☐

Check the appropriate box:

☐  Preliminary Proxy Statement

☐  CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY RULE 14A-6(E) (2))

☒  Definitive Proxy Statement

☐  Definitive Additional Materials

☐  Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12

 





 

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FRANKLIN FINANCIAL SERVICES CORPORATION



20 South Main Street

P.O. Box 6010

Chambersburg, PA   17201-6010

(717) 264-6116



NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

TO BE HELD April 25, 2017





TO THE SHAREHOLDERS OF FRANKLIN FINANCIAL SERVICES CORPORATION:





Notice is hereby given that, pursuant to the call of its directors, the regular Annual Meeting of Shareholders of FRANKLIN FINANCIAL SERVICES CORPORATION, Chambersburg, Pennsylvania, will be held on Tuesday, April 25, 2017, at 9:00 a.m. at The Orchards Restaurant, 1580 Orchard Drive, Chambersburg, Pennsylvania, for the purpose of considering and voting upon the following matters:



1. ELECTION OF DIRECTORS.  To elect the four nominees identified in the accompanying Proxy Statement as directors to Class A for three year terms.



2. SAY-ON-PAY.  To provide a non-binding advisory vote approving the compensation paid to our named executive officers in 2016.



3. SAY-ON-FREQUENCY.  To provide a non-binding advisory vote on the frequency of holding the Say-On-Pay vote.



4. RATIFICATION OF THE SELECTION OF AUDITORS.  To ratify the Audit Committee’s selection of BDO USA, LLP as Franklin Financial’s independent registered public accounting firm for 2017.



5. OTHER BUSINESS.  To consider other business, if any, as may properly be brought before the meeting and any adjournments thereof.



Your Board of Directors recommends that you vote:



FOR the election as directors to Class A of the four nominees identified in the accompanying Proxy Statement;



FOR approval of the compensation paid to our named executive officers in 2016;  



FOR holding the Say-On-Pay vote annually, and;



FOR the ratification of the selection of BDO USA, LLP as Franklin Financial’s independent registered public accounting firm for 2017.



Only those shareholders of record at the close of business on March 6, 2017 shall be entitled to notice of and to vote at the Annual Meeting.



This year we are taking advantage of the Securities and Exchange Commission Rule allowing companies to furnish proxy materials to their shareholders by the Internet.  We have mailed to our shareholders the Notice of Internet Availability of Proxy Materials containing instructions on how to access this Notice of Annual Meeting of Shareholders and the accompanying proxy statement, annual report and proxy card by the Internet.  The Notice of Internet Availability of Proxy Materials also contains instructions on how you may receive a paper copy of the proxy materials.



The Notice of Internet Availability of Proxy Materials was mailed to our shareholders on or about March 16, 2017.  This Notice of Annual Meeting of Shareholders and the accompanying proxy statement, annual report and proxy card are being made available to shareholders on or about March 16, 2017.



You may vote by completing and returning the enclosed Proxy Card, by internet, by phone or in person at the meeting.  If you attend the meeting and want to change your vote, you may withdraw your proxy and vote in person.







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You are cordially invited to attend the meeting and the breakfast which will precede the meeting.





Enclosures

March 16, 2017

 

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TABLE OF CONTENTS



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GENERAL INFORMATION



We are making this Proxy Statement, the Notice of Annual Meeting of Shareholders, Annual Report and proxy card available to our shareholders by the Internet.  On or about March 16, 2017, we mailed to our shareholders the Notice of Internet Availability of Proxy Materials containing instructions on how to access the Notice of Annual Meeting of Shareholders and this proxy statement, the annual report and proxy card by the Internet.  The Notice of Internet Availability of Proxy Materials also contains instructions on how you may receive a paper copy of the proxy materials.



Date, Time and Place of Meeting



The Annual Meeting of the shareholders of Franklin Financial Services Corporation (hereinafter, "Franklin Financial" or the "Company") will be held on Tuesday, April 25, 2017, at 9:00 a.m. at The Orchards Restaurant, 1580 Orchard Drive,  Chambersburg, Pennsylvania.



Shareholders Entitled to Vote



Shareholders of record at the close of business on March 6, 2017 are entitled to notice of and to vote at the meeting.



Purpose of Meeting



Shareholders will be asked to consider and vote upon the following matters at the Annual Meeting; (1) the election of four (4) directors to Class A for the term of three years; (2) to provide a non-binding advisory vote approving the compensation paid to our named executive officers in 2016 as disclosed in this proxy statement (“Say-On-Pay”); (3) to provide a non-binding advisory vote on the frequency of holding the Say-On-Pay vote (Say-On-Frequency); (4) to ratify the Audit Committee’s selection of BDO USA, LLP as Franklin Financial’s independent registered public accounting firm for 2017; and (5) such other business as may be properly brought before the meeting and any adjournments thereof.



Solicitation of Proxies



This Proxy Statement is furnished in connection with the solicitation of proxies, in the accompanying form, by the Board of Directors of Franklin Financial for use at the Annual Meeting and any adjournments thereof.



The expense of soliciting proxies will be borne by Franklin Financial. In addition to the use of the mails and the Internet, the directors, officers, and employees of Franklin Financial and of any subsidiary may, without additional compensation, solicit proxies personally or by telephone.



Farmers and Merchants Trust Company of Chambersburg (hereinafter, "F&M Trust") is a wholly owned subsidiary of Franklin Financial.  This Proxy Statement, while prepared in connection with the Annual Meeting of Shareholders of Franklin Financial, contains certain information relating to F&M Trust which will be identified where appropriate.



Revocability and Voting of Proxies



The execution and return of the enclosed proxy will not affect a shareholder's right to attend the meeting and to vote in person.  Any proxy given pursuant to this solicitation may be revoked by delivering written notice of revocation to Amanda M. Ducey, Corporate Secretary of Franklin Financial, at any time before the proxy is voted at the meeting.  Unless revoked, any proxy given pursuant to this solicitation will be voted at the meeting in accordance with the instructions thereon of the shareholder giving the proxy.  In the absence of instructions, all proxies will be voted



FOR the election of the four nominees identified in this Proxy Statement as directors to Class A for three year terms;  



FOR approval of the compensation paid to our named executive officers in 2016 as disclosed in this proxy statement;



FOR holding the Say-On-Pay vote annually; and



FOR the ratification of the Audit Committee’s selection of BDO USA, LLP as Franklin Financial’s independent registered public accounting firm for 2017.    



The enclosed proxy confers upon the persons named as proxies therein discretionary authority to vote the shares represented thereby on all matters that may come before the meeting in addition to the scheduled items of business, including unscheduled shareholder proposals and matters incident to the conduct of the meeting.  Although the Board of Directors knows of no other business

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to be presented, in the event that any other matters are brought before the meeting, the shares represented by any proxy given pursuant to this solicitation will be voted in accordance with the recommendations of the Board of Directors of Franklin Financial.



Shares held for the account of shareholders who participate in the Dividend Reinvestment Plan will be voted in accordance with the instructions of each shareholder as set forth in his proxy. If a shareholder who participates in the Dividend Reinvestment Plan does not return a proxy, the shares held for his account under the Dividend Reinvestment Plan will not be voted.



Voting of Shares and Principal Holders Thereof



At the close of business on December 31, 2016, Franklin Financial had issued and outstanding 4,316,836 shares of common stock.  There is no other class of stock outstanding.



A majority of the outstanding shares of common stock present in person or by proxy will constitute a quorum for the conduct of business at the Annual Meeting.  Each share is entitled to one vote on all matters submitted to a vote of the shareholders.  In the case of the election of directors, the four candidates receiving the highest number of votes shall be elected directors of Franklin Financial.  Accordingly, in the absence of a contested election, votes withheld from a particular nominee or nominees, abstentions and broker non-votes will not influence the outcome of the election.  A majority of the votes cast by shareholders present in person or by proxy and entitled to vote at a meeting at which a quorum is present is required to approve each of the other proposals.  Abstentions and broker non-votes will not be treated as votes cast and, therefore, will have no effect on whether or not a proposal is approved.



To the knowledge of Franklin Financial, no person owned of record or beneficially on December 31, 2016 more than five percent of the outstanding shares of common stock of Franklin Financial.



Shares Held in Street Name



If your shares are held in "street name" by your bank or broker or other intermediary, you will receive voting instructions from your intermediary which you must follow in order for your shares to be voted in accordance with your directions.  Many intermediaries permit their clients to vote via the internet or by telephone. Whether or not internet or telephone voting is available, you may vote your shares by returning the voting instruction card which you will receive from your intermediary.



Shareholder Proposals



Pursuant to Rule 14a-8 promulgated by the Securities and Exchange Commission (hereafter, the "SEC") and Section 2.4 of the Bylaws of Franklin Financial, shareholder proposals intended to be presented at the 2018 Annual Meeting of the shareholders of Franklin Financial must be received at the executive offices of Franklin Financial no later than November 15, 2017, nor earlier than October 16, 2017, in order to be eligible for inclusion in the proxy statement and proxy form to be prepared by Franklin Financial in connection with the 2018 Annual Meeting.  A shareholder proposal which does not satisfy the notice and other requirements of SEC Rule 14a-8 and the Bylaws of Franklin Financial is not required to be included in Franklin Financial’s proxy statement and proxy form and may not be presented at the 2018 Annual Meeting.  All shareholder proposals should be sent to:  Franklin Financial Services Corporation, Attention: President, 20 South Main Street, P.O. Box 6010, Chambersburg, Pennsylvania  17201-6010.



Availability of Proxy Materials for the Shareholders Meeting to Be Held on April 25, 2017. 



This Proxy Statement, the form of proxy and the 2016 Annual Report to Shareholders are available at:



www.edocumentview.com/fraf



Recommendations of the Board of Directors



The Board of Directors recommends that the shareholders vote:



FOR the election as directors to Class A for three year terms, the four nominees identified in this Proxy Statement.



FOR approval of the compensation paid to our named executive officers in 2016 as disclosed in this proxy statement.



FOR holding the Say-On-Pay vote annually.



FOR the ratification of the Audit Committee’s selection of BDO USA, LLP as Franklin Financial’s independent registered public accounting firm for 2017.





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CORPORATE GOVERNANCE POLICIES, PRACTICES AND PROCEDURES



Franklin Financial is and always has been committed to the highest ideals in the conduct of its business and to observing sound corporate governance policies, practices and procedures.



In order to comply with the requirements of the Sarbanes-Oxley Act and related SEC rules and regulations, Franklin Financial has taken a number of actions which are intended to strengthen and improve its commitment to sound corporate governance.  These actions include the following:











Pursuant to the terms of its Corporate Governance Guidelines, Franklin Financial’s "independent directors" meet at least quarterly in executive session (i.e., without the presence of the Chief Executive Officer or other members of Franklin Financial's management).

 

ELECTION OF DIRECTORS



General Information



The Bylaws of Franklin Financial provide that the Board of Directors shall consist of not less than five nor more than twenty-five persons and that the directors shall be classified with respect to the time they shall severally hold office by dividing them into three classes, each consisting as nearly as possible of one-third of the number of the whole Board of Directors. The Bylaws further provide that the directors of each class shall be elected for a term of three years so that the term of office of one class of directors shall expire in each year. Finally, the Bylaws provide that the number of directors in each class of directors shall be determined by the Board of Directors.



A majority of the Board of Directors may increase the number of directors between meetings of shareholders. Any vacancy occurring in the Board of Directors, whether due to an increase in the number of directors, resignation, retirement, death, or any other reason, may be filled by appointment by the remaining directors. Any director who is appointed to fill a vacancy shall hold office until his successor is duly elected by the shareholders at the next Annual Meeting at which directors in his class are elected.



Franklin Financial’s bylaws provide for the mandatory retirement of directors at the end of the calendar year in which a director reaches age 72.  The Corporate Governance Guidelines provide that no director may be nominated to a new term if he or she would be age 72 or older at the time of election.   



The Board of Directors has determined that the Board shall consist of twelve directors. There are four directors whose terms of office will expire at the 2017 Annual Meeting and eight continuing directors whose terms of office will expire at the 2018 or 2019 Annual Meeting. The Board of Directors has nominated the following persons for election to the Board of Directors at the 2017 Annual Meeting to the class and for the term specified below:



CLASS A

For a Term of Three Years





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In the event that any of the foregoing nominees are unable to accept nomination or election, the shares represented by any proxy given pursuant to this solicitation will be voted in favor of such other persons as the Board of Directors of Franklin Financial may recommend.  The Board of Directors, however, has no reason to believe that any of its nominees will be unable to accept nomination or to serve as a director if elected.



Nominations for Election of Directors



In accordance with Section 3.5 of the Bylaws of Franklin Financial, any shareholder of record entitled to vote for the election of directors who is a shareholder on the record date and on the date of the meeting at which directors are to be elected may nominate a candidate for election to the Board of Directors, provided that the shareholder has given proper written notice of the nomination, which notice must contain certain prescribed information and must be delivered to the President of Franklin Financial not less than 90 days nor more than 120 days prior to the anniversary date of the immediately preceding annual meeting. The Chairman of the meeting must determine whether a nomination has been made in accordance with the requirements of the Bylaws and, if he determines that a nomination is defective, such nomination and any votes cast for the nominee shall be disregarded.



Shareholders may also recommend qualified persons for consideration by the Nominating and Corporate Governance Committee to be included in Franklin Financial's proxy materials as a nominee of the Board of Directors. A shareholder who wishes to make such a recommendation must submit his recommendation in writing addressed to the Chairman of the Board, Franklin Financial Services Corporation, P.O. Box 6010, Chambersburg, Pennsylvania 17201-6010. The recommendation must include the proposed nominee's name and qualifications and must be delivered not less than 120 days prior to the anniversary date of the immediately preceding annual meeting.



Nominating and Corporate Governance Committee Process for the Selection and Evaluation of Nominees



Franklin Financial's Board of Directors has adopted a Job Description identifying the qualifications expected of a member of the Board of Directors and the criteria to be applied by the Nominating and Corporate Governance Committee in evaluating candidates who will be recommended to the Board of Directors as nominees for election to the Board. A candidate must possess good business judgment and must be free of any relationship which would compromise their ability to properly perform the duties of a director. A candidate must have sufficient financial background and experience to be able to read and understand financial statements and to evaluate financial performance. A candidate should have proven leadership skills and management experience and should be actively involved in the community served by Franklin Financial and its subsidiaries. A candidate must be willing and able to commit the time and attention necessary to actively participate in Board affairs. In addition, a candidate must be a person of integrity and sound character.  Although the Nominating and Corporate Governance Committee does not have a policy with regard to considering diversity in identifying nominees for director, the Nominating Committee does consider whether a candidate’s age, background, skills and experience will compliment or supplement those of other members of the Board of Directors in order to achieve an appropriate balance and diversity of such qualities and characteristics. 



The Nominating and Corporate Governance Committee uses a variety of methods for identifying and evaluating potential nominees for election to the Board of Directors. The Nominating and Corporate Governance Committee regularly assesses the appropriate size of the Board and whether any vacancies on the Board are expected due to retirement or otherwise. In the event that a vacancy is anticipated or otherwise arises, the Nominating and Corporate Governance Committee typically considers and interviews several potential candidates for appointment to fill the vacancy. Candidates may come to the attention of the Nominating and Corporate Governance Committee through current Board members, shareholders and other persons. These candidates are evaluated by the Nominating and Corporate Governance Committee and may be considered at any time during the year. In evaluating potential nominees, the Nominating and Corporate Governance Committee seeks to achieve a balance of knowledge, skills and experience on the Board. The Nominating and Corporate Governance Committee has not engaged third party consultants in connection with the identification or evaluation of potential nominees.



The Nominating and Corporate Governance Committee will consider persons recommended by shareholders as potential nominees for election to the Board of Directors, provided that recommendations are made in accordance with the procedures described above under the caption "Nominations for Election of Directors." A potential nominee who is recommended by a shareholder will be evaluated by the Nominating and Corporate Governance Committee in the same fashion as other persons who are considered by the Committee as potential candidates for election to the Board of Directors.



Director Independence



The Board of Directors has determined that each of the following directors is an "independent director," as such term is defined in the NASDAQ Stock Market Rules:  Martin R. Brown, Gregory A. Duffey, G. Warren Elliott, Daniel J. Fisher, Donald A. Fry, Allan E. Jennings, Jr., Richard E. Jordan III, Stanley J. Kerlin, Patricia D. Lacy, Donald H. Mowery, and Martha B. Walker.



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Information about Nominees, Continuing Directors and Executive Officers



Information concerning the four persons nominated for election to Class A of the Board of Directors of Franklin Financial at the 2017 Annual Meeting and concerning the eight continuing directors follows.



NOMINEES FOR CLASS A DIRECTORS (Term expires 2020)



G. Warren Elliott

Age:  62

Year Became Director:  1991

Chairman of the Board since 2012

Vice Chairman of the Board 2010-2011

Committees:  ALCO, Audit, Credit Risk Oversight, Executive (Chair), Nominating and Corporate Governance (Chair), and Personnel (Chair)



Mr. Elliott graduated with honors with a B.A. in Public Administration and an M.S. in Public Administration from Shippensburg University in 1976 and 1977 respectively.  He is a Distinguished Alumnus of Shippensburg University and in 2014 he was presented an honorary Doctoral degree in Public Service.  He is also a Distinguished Alumnus and Centennial Fellow of Penn State Mont Alto.



Mr. Elliott is currently President of Cardinal Crossings, Inc. and CCI Properties, LLC, municipal government consulting and real estate investment firms.  From 1991 to 1995 he served as an adjunct faculty member at Shippensburg University teaching state and local government.  Mr. Elliott also served Franklin County as a Commissioner for many years and as Chairman of the Board of Commissioners from 1996 to 2007.  Mr. Elliott has been recognized by a number of civic awards, most recently the Chambersburg Area Development Corp – Zane Miller Award received in 2010.  Mr. Elliott has served and continues to serve on the Boards of numerous organizations within the Company’s trade area.  He also serves as a commissioner on the Pennsylvania Fish and Boat Commission, and he is a member of the Chesapeake Bay Commission and the Mid-Atlantic Fisheries Management Council.



The Board of Directors values Mr. Elliott’s considerable knowledge regarding county and local government,  his entrepreneurial experience with business and sales, as well as the leadership skills he has developed through his service in Franklin County government and civic service.    



Tim Henry      

Age: 58

Year Became Director: 2016



Mr. Henry joined Franklin Financial and F&M Trust as President and as a Director on February 1, 2016. He became Chief Executive Officer on July 1, 2016.



Mr. Henry received a bachelor’s degree in dairy science from the Pennsylvania State University and an MBA from St. Joseph’s University in Philadelphia.



Mr. Henry has had a career of more than 30 years in the banking industry in central Pennsylvania and the Hagerstown and Frederick, Maryland areas.  He has extensive experience in managing branch networks, lending and private banking.  He served as Chief Executive Officer of Centra Bank, a start-up in Hagerstown, and as a senior officer of BlueRidge Bank, a start-up in Frederick, where he gained significant experience in risk management, compliance and operations.  Most recently, Mr. Henry served for the last three years as Susquehanna Bank’s Commercial Executive for its Washington County, Maryland region.



The Pennsylvania Banking Code requires that a bank president be a member of the bank’s board of directors.  In addition, the Board believes that it is important that the President serve as a Director so that the President may interact with his fellow Directors on a peer to peer basis.  The Board of Directors values Mr. Henry’s depth and breadth of experience in the banking industry.



Stanley J. Kerlin

Age: 63

Year Became Director: 2006

Committees: ALCO, Credit Risk Oversight and Trust



Mr. Kerlin graduated Cum Laude with a B.A. Degree in History from Elizabethtown College in 1976 and a J.D. Degree from Dickinson School of Law in 1979.



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Mr. Kerlin has engaged in the active practice of law for over 35 years and has owned and operated his own law practice as both a partner and a sole practitioner.  Mr. Kerlin is active in his church and in several community and political organizations within the Company's Fulton and Huntingdon County market area.



Mr. Kerlin's knowledge of business and management provide valuable insight to the Board.  The Board of Directors values Mr. Kerlin’s perspective as a lawyer and community leader in the Company’s Fulton and Huntingdon County market area.    

 

Martha B. Walker

Age: 70

Year Became Director: 1979

Committees: Credit Risk Oversight (Chair), Executive, Nominating and Corporate Governance, and Trust



Ms. Walker graduated from the Dickinson School of Law in 1972 with a J.D. degree.



She has been a practicing attorney for over 40 years handling domestic relations, estate administration, real estate transactions, small business and estate planning and has been a managing partner for law firms for over 30 years. Ms. Walker currently is a partner in the law firm of Walker, Connor and Spang, LLC.  She was a partner in the firm of Barley, Snyder, Senft & Cohen, LLC from 1998 to 2006.   Ms. Walker has been an Assistant Professor at Wilson College and Penn State Mont Alto. She was a business owner and director of Baum Publishing Company, Inc., a weekly newspaper in Bucks County, Pennsylvania, for 15 years.  Ms. Walker has been the Chairman or President of non-profit organizations and continues to serve on the Boards of a number of organizations in this Company's trade area.  Numerous honors and awards include being the first woman member of the Franklin County Bar Association, first woman President of the Franklin County Bar Association, and first woman in Franklin County named to a local bank Board of Directors.

 

Ms. Walker's wide range of experience as a lawyer and her leadership in the Franklin County community are valued by the Board of Directors. Her long tenure as a Director speaks to her high level of dedication to the Company, shareholders, and employees. 



CLASS C DIRECTORS (Term expires 2018)



Daniel J. Fisher

Age:  60

Year Became Director: 2010

Committees: ALCO (Chair), Audit, Nominating and Corporate Governance and Personnel



Mr. Fisher graduated from Muhlenberg College with a B.A. in Business Administration in 1978 and from Lehigh University with a MS in Management Science in 1986.



Mr. Fisher's career in manufacturing has spanned a 39-year period.  He has served as President and CEO of D. L. Martin Company since 1998.  The Board of Directors values Mr. Fisher’s manufacturing background and experience.  Mr. Fisher is active in his community and the Company’s Franklin County market area, where he has served and continues to serve on various boards. 



Donald A. Fry

Age: 67

Year Became Director: 1998

Committees:  Personnel and Trust



Mr. Fry graduated from Waynesburg University in 1973 with a B.A. in Accounting and Economics.



Mr. Fry currently serves as Chairman of the Board of ANDOCO, Inc. which trades as Cumberland Valley Rental.  Although retired from the day-to-day operations, Mr. Fry continues to be active in the company.  He has served and continues to serve on the Boards of organizations within the Company's Shippensburg, Pennsylvania market area.



The Board of Directors values Mr. Fry's entrepreneurial and business experience and his accounting background.  



Richard E. Jordan III

Age:  44

Year Became Director:  2012

Committees:  ALCO, Audit and Credit Risk Oversight



Mr. Jordan graduated from Dickinson College in 1995 with a B.A. in Spanish.



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Since 2003, Mr. Jordan has served as Vice President and C.O.O. of Smith Land & Improvement Corporation, located in Camp Hill, Pennsylvania, a commercial real estate development business with new and existing developments in Central Pennsylvania.  Mr. Jordan is involved in all facets of real estate development and management including selling, leasing, property management, and tenant relations.  Mr. Jordan was named as one of Central Penn Business Journal’s “Forty Under 40” in 2011.  Mr. Jordan serves on various Boards in the Company’s Cumberland County market area.  The Board of Directors values Mr. Jordan’s business and leadership experience and his community involvement.



Donald H. Mowery

Age: 65

Year Became Director: 2010

Committees: Audit, Credit Risk Oversight, and Nominating and Corporate Governance



Mr. Mowery, CEO and Chairman of the Board of R.S. Mowery & Sons, Inc. since November 2015, served as the third-generation President since 1984.  His career in the construction industry spans over 48 years, beginning as a laborer in 1968 and advancing through various positions over the years.  Additionally, as managing partner of RSM Associates, LP, Mr. Mowery has been involved in real estate development focusing on business parks and industrial parks.  He has served and continues to serve on various Boards in the Company’s Cumberland County market area.



Mr. Mowery received a B.S. in Civil Engineering in 1974 from Drexel University.  He has completed advanced level studies in engineering and construction management from the Pennsylvania State University.  Mr. Mowery is a registered Professional Engineer.



Mr. Mowery’s business and leadership expertise provide our Board with valuable insights, particularly pertaining to the construction industry, real estate development, and family businesses. 



CLASS B DIRECTORS (Term expires 2019)



Martin R. Brown

Age: 65

Year Became Director: 2006

Committees: Audit, Personnel and Trust (Chair)



Mr. Brown graduated with honors from the Pittsburgh Institute of Mortuary Science in 1973.



He is a licensed Pennsylvania Funeral Director who operates three family owned funeral homes within the Company's Fulton and Huntingdon County market area.  Additionally, Mr. Brown is President of M.R. Brown Management, Inc. where he is the managing general partner of Marymart Family LP, which owns Sandy Ridge Station Mall.  Along with his wife, Mr. Brown is the owner of the Sandy Ridge Market, a full service grocery store located at the Sandy Ridge Station Mall.  Mr. Brown has served and continues to serve on the Boards of organizations within the Company's Fulton and Huntingdon County market area.

 

The Board of Directors values Mr. Brown's entrepreneurial background and business management experience and his status as a business leader in the Company’s Fulton and Huntingdon County market area.  



Gregory A. Duffey

Age: 58

Year Became Director: 2015

Committees: ALCO, Nominating and Corporate Governance and Trust  



Mr. Duffey is President of CFPM Insurance, a divison of KSI Insurance. Mr. Duffey began his career in the insurance business in 1980 after attending Shippensburg University. 



The Board of Directors values Mr. Duffey’s experience as a business and community leader.  For more than thirty years, Mr. Duffey has been very active in the Company’s Franklin County market area having served on the Board or in a leadership position of non-profit and community development organizations.



Allan E. Jennings, Jr.

Age: 67

Year Became Director: 2002

Committees: ALCO, Audit (Chair), Personnel and Credit Risk Oversight



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Mr. Jennings graduated with honors from Lehigh University in 1971 with a B.S. in Industrial Engineering.  He has been President and COO of Jennings Automotive, Inc. (dba Jennings Chevrolet Buick GMC) since 1986.  Mr. Jennings is a former director and past Chairman of the Pennsylvania Automotive Association. 



The Board of Directors values Mr. Jennings' entrepreneurial background and business experience, including his knowledge of sales and marketing, and his leadership in the automotive industry.  His participation on local boards provides valuable information relative to the Franklin County market area.

 

Patrica D. Lacy

Age: 58

Year Became Director: 2015

Committees: Credit Risk Oversight, Nominating and Corporate Governance, Personnel and Trust



Ms. Lacy graduated from Temple University in 1980 with a B.A. in Sociology, and from Dickinson School of Law with a J.D. degree in 1983.



Ms. Lacy currently serves as President and a Director of the Beistle Company, a world renowned manufacturer of decorations and party goods. Her career with the Beistel Company began in 1989 and she has served in a number of positions including Director of Human Resources and General Counsel.  She has served as President since 2002 and as a Director since 1998.



The Board of Directors values Ms. Lacy’s leadership skills and her knowledge of business, human resources, and corporate governance.  Ms. Lacy is a business and community leader in the Company’s Cumberland County market area.



The following table includes information concerning shares of Franklin Financial common stock owned beneficially by directors, nominees, and the executive officers who are named in the Summary Compensation Table appearing elsewhere in this Proxy Statement and by all directors and executive officers as a group. There are no family relationships between or among any of the Company's executive officers, directors or nominees.





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Meetings of the Board of Directors



Franklin Financial's Corporate Governance Guidelines provide that directors are expected to attend meetings of the Board of Directors, meetings of the committees on which they serve, and the annual meeting of shareholders. The Boards of Directors of the Company and of F&M Trust met a total of 67 times, including committee meetings, during 2016.  All directors attended 75% or more of the aggregate number of meetings of the Boards of Directors and of the various committees of the Board of Directors on which they served, and all directors attended the annual meeting of shareholders in 2016.



2016 Director Compensation



The following table provides certain summary information concerning the total compensation paid or accrued by Franklin Financial and F&M Trust in 2016 to each non-employee member of the Board of Directors.



2016 DIRECTOR COMPENSATION



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Each director of Franklin Financial who is not a salaried officer of Franklin Financial or F&M Trust was paid by Franklin Financial an annual retainer fee of $10,480 and a fee of $525 for each committee meeting attended.  Each Director of F&M Trust who is not a salaried officer of Franklin Financial or F&M Trust was paid by F&M Trust an annual retainer fee of $17,520 and a fee of $525 for each committee meeting attended.  In addition to the foregoing annual retainer fees and meeting attendance fees, the Chairman of the Audit Committee received an annual retainer fee of $7,072.  The Chairman of the Board received an additional annual retainer fee of $26,208.  Each director of Franklin Financial is also a director of F&M Trust. 

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Director fees are set annually by the Personnel Committee.  The Committee receives peer reports and considers things such as Board structure, meeting frequency, retainer fees and committee fees.  The peer group review includes:





Director fees payable by F&M Trust are eligible to be deferred pursuant to the Farmers and Merchants Trust Company of Chambersburg Directors’ Deferred Compensation Plan (the “Director Deferred Compensation Plan”).  Participation in the Director Deferred Compensation Plan is voluntary and each participant may elect each year to defer all or a portion of their F&M Trust director’s fees.   Each participant directs the investment of his own account among various publicly available mutual funds designated by the Bank’s Investment and Trust Services department.  Growth of each participant’s account is a result of investment performance and is not the result of an interest factor or interest formula established by the participant or the Bank.  The balance in such director’s deferred benefit account is payable to a designated beneficiary within 60 days upon the first to occur of the director’s retirement from the Board or death. The director may select a lump sum payout or may elect to receive a payout over a period of up to five years.  Directors participating in this plan and amounts deferred for 2016 include Ms. Walker and Messrs. Brown, Fisher and Fry.  Each participating director deferred $17,520.



In January, 2008, the Board of Directors adopted the Director Pay for Performance Program (the "Pay for Performance Program") under the terms of which non-employee directors are eligible to receive an annual cash bonus if Franklin Financial achieves certain financial targets established in advance by the Board. The financial targets are expressed in terms of the average annual increase in diluted earnings per share over rolling measurement periods of three calendar years each. For 2016, the three-year measurement period consisted of calendar years 2014, 2015, and 2016.  The target bonus payable under the Pay for Performance Program is an amount equal to 10% of the total Franklin Financial and F&M Trust retainer fees earned by a participant during the third calendar year of the three year measurement period (2016).  A director may receive a bonus which is more or less than the target bonus, depending upon the extent to which Franklin Financial meets or exceeds the financial target established by the Board for the three-year measurement period. Bonuses earned under the Pay for Performance Program are paid in the second quarter of the calendar year following the third calendar year of the three-year measurement period.



The following table shows the potential payouts, as described above, under the Pay for Performance Program.





The Personnel Committee met in February 2016 to address the Directors Pay for Performance Program.  The Company’s average annual increase in diluted earnings per share for calendar years 2013 through 2015 was 22.3%.  This increase results in a payout equal to 150% of the 10% target bonus, or 15%.  Therefore, in accordance with the principles discussed above, there was a 15% directors’ Pay for Performance bonus payout in 2016 for 2015.



The Personnel Committee met in February 2017 to address the Directors Pay for Performance Program.  The Company’s average annual increase in diluted earnings per share for calendar years 2014 through 2016 was 10.3%.  This increase results in a payout equal to 150% of the 10% target bonus, or 15%.  Therefore, in accordance with the principles discussed above, there will be a 15% directors’ Pay for Performance bonus payout in 2017 for 2016.

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At the February 2017 meeting, the Personnel Committee also established financial targets applicable to payouts under the directors’ Pay for Performance Program for 2017.



Director fees payable by F&M Trust from 1982 to 1988 were eligible to be deferred under a deferred compensation arrangement known as the Brick Plan.  The components of the plan were life insurance policies on the lives of the participating directors with the Bank as beneficiary and an individual agreement between the Bank and each director that outlined future payments to the director commencing at age 65.  The director is to be paid a fixed amount monthly over a ten year period beginning at age 65.  Ms. Walker received a payout of $16,392 in 2016 and is the only current director in the plan.



BOARD STRUCTURE AND COMMITTEES

 

Leadership of the Board of Directors is placed in an independent Chairman.  The Board performs its risk management oversight role through its committee structure.  In addition to the Audit, Nominating and Corporate Governance, and Personnel committees described below, the Board also has Asset-Liability, Credit Risk Oversight, and Investment and Trust committees.  An independent director chairs each of these committees.  Board members are selected to serve on committees where it is believed that their knowledge and experience will be most beneficial to the Company.  Each board committee meets at least quarterly.



Audit Committee



Members of the Audit Committee during 2016 were Mr. Jennings – Chairman, Messrs. Brown, Elliott, Fisher, Jordan, and Mowery.  The Audit Committee assists the Board of Directors in fulfilling its responsibilities in providing oversight over the integrity of Franklin Financial's financial statements, Franklin Financial's compliance with applicable legal and regulatory requirements and the performance of Franklin Financial's internal audit function. The Audit Committee is responsible for the appointment, compensation, oversight and termination of Franklin Financial's independent auditors and regularly evaluates the independent auditors' independence from Franklin Financial and Franklin Financial's management. The Audit Committee reviews and approves the scope of the annual audit and is also responsible for, among other things, reporting to the Board on the results of the annual audit and reviewing the financial statements and related financial and nonfinancial disclosures included in Franklin Financial's Annual Report on Form 10-K and Quarterly Reports on Form 10-Q.  The Audit Committee also reviews Franklin Financial's disclosure controls and procedures and internal controls. The Audit Committee prepares the Audit Committee Report for inclusion in the annual proxy statement and oversees investigations into complaints concerning accounting and auditing matters. The Audit Committee also meets periodically with Franklin Financial's independent auditors and with Franklin Financial's internal auditors outside of the presence of management and has authority to retain outside legal, accounting and other professionals to assist it in meeting its responsibilities.



The Audit Committee operates under a charter adopted by the Board of Directors, which is posted on Franklin Financial's website at www.franklinfin.com.  All members of the Audit Committee were at all times during 2016 “independent directors” as such term is defined by the rules of the NASDAQ Stock Market. The Board of Directors has not designated an “audit committee financial expert” as such term is defined in the Sarbanes-Oxley Act and applicable SEC rules and regulations because it believes that each member of the Audit Committee is qualified in terms of background and experience to perform his duties as a member of that Committee and because it believes that an audit committee financial expert is not necessary in light of Franklin Financial's size, the nature of its business and the relative lack of complexity of its financial statements. The Audit Committee met four times during 2016.



Nominating and Corporate Governance Committee



Members of the Nominating and Corporate Governance Committee during 2016 were Mr. Elliott - Chairman, Mmes. Walker and Lacy, and Messrs. Duffey, Fisher and Mowery. The Nominating and Corporate Governance Committee is responsible, among other things, for recommending to the Board of Directors persons to be nominated for election to the Board, persons to be appointed to fill vacancies on the Board and persons to be elected as officers of the Board. The Nominating and Corporate Governance Committee operates under a charter adopted by the Board of Directors, which is posted on Franklin Financial's website at www.franklinfin.com. All members of the Nominating Committee were at all times during 2016 “independent directors” as such term is defined by the rules of the NASDAQ Stock Market.  The Nominating and Corporate Governance Committee met one time in 2016.



Personnel Committee



Members of the Personnel Committee during 2016 were Mr. Elliott - Chairman, Ms. Lacy and Messrs. Brown, Fisher, Fry and Jennings.  The Personnel Committee assists the Board of Directors in fulfilling its responsibilities in providing oversight over Franklin Financial's compensation policies and procedures. The Personnel Committee is responsible for, among other things, administering and making grants and awards under the Incentive Stock Option Plan of 2013 and the Employee Stock Purchase Plan. The Personnel Committee is also responsible for annually evaluating the compensation of Franklin Financial's Chief Executive Officer. The Personnel Committee also prepares the Compensation Committee Report on Executive Compensation for inclusion in the annual proxy statement. The Personnel Committee operates under a charter adopted by the Board of Directors, which is posted on

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Franklin Financial's website at www.franklinfin.com.  All members of the Personnel Committee were at all times during 2016 "independent directors" as such term is defined by the rules of the NASDAQ Stock Market. The Personnel Committee met seven times during 2016.



Compensation Committee Interlocks and Insider Participation



No member of the Personnel Committee is an employee or former employee of Franklin Financial or F&M Trust. There were no compensation committee “interlocks” at any time during 2016, which in general terms means that no executive officer or director of Franklin Financial served as a director or member of the compensation committee of another entity at the same time as an executive officer of such other entity served as a director of Franklin Financial.



EXECUTIVE COMPENSATION



Compensation Discussion and Analysis

Introduction



The Personnel Committee of the Company's Board of Directors administers the Company's executive compensation program. The Company currently has nine senior officers, including the President and Chief Executive Officer. The Personnel Committee, which is composed entirely of independent directors, is responsible for reviewing and approving senior officer compensation, for evaluating the President and Chief Executive Officer, for overseeing the administration of the Company's compensation program generally as it affects all other officers and employees, for administering the Company's incentive compensation programs (including the Incentive Stock Option Plan), for approving and overseeing the administration of the Company's employee benefits programs, for providing insight and guidance to management with respect to employee compensation generally, and for reviewing and making recommendations to the Board with respect to director compensation.



The Personnel Committee operates under a charter adopted by the Board of Directors. The Personnel Committee annually reviews the adequacy of its charter and recommends changes to the Board for approval. The Personnel Committee meets at scheduled times during the year and on an "as necessary" basis, The Chairman of the Personnel Committee reports on Committee activities and makes Committee recommendations at meetings of the Board of Directors.



At the Company’s annual meeting of shareholders held in 2016, the shareholders approved the compensation paid to our Named Executive Officers (as defined below) in 2015 in a non-binding advisory vote by a majority of the votes cast.  In consideration, in part, of that vote, the Personnel Committee did not make any material changes to its compensation policies, procedures or practices for 2016.

Compensation Philosophy



The Personnel Committee believes that executive compensation should be tied to individual performance, should vary with the Company's performance in achieving its financial and non-financial objectives, and should be structured so as to be closely aligned with the interests of the Company's shareholders. The Committee also believes that the compensation package of each senior officer should include an at-risk, performance-based component and that this component should increase as an officer's authority and responsibility increase. The Committee's philosophy is reflected in the Company's compensation objectives for its senior officers, which are as follows:





To the extent that established performance goals are exceeded, the Committee believes that the Company's senior executives should be financially rewarded. It should be noted that all employees, including the Company's executive officers, are employed at will and do not have employment contracts, severance pay agreements or "golden parachute" arrangements that would be triggered upon the occurrence of a change in control of the Company.



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Components of Compensation



The elements of total compensation paid by the Company to its senior officers, including the Chief Executive Officer (the "CEO") and the other executive officers (collectively, together with the CEO, the “Named Executive Officers”) identified in the Summary Compensation Table which appears following this Compensation Discussion and Analysis, include:





Base Salary



The base salaries of the Named Executive Officers are reviewed by the Personnel Committee annually in December of each year, as well as at the time of any promotion or significant change in job responsibilities. Base salaries for our senior officers are established based upon the scope of their responsibilities, taking into account compensation paid by comparable financial institutions for similar positions. Specifically, a salary range is determined for each position based upon published salary surveys.  These surveys report base salary ranges for comparable positions at similar financial institutions.  The following peer institutions were considered:





The Committee then establishes a "market value" for each position (defined as the mid-point of the approved salary range, plus ten percent and minus ten percent) in order to ensure that the base salary for each senior executive falls within the market value for that position. An adjustment to the executive's base salary, effective as of January 1 of each year, may (or may not) be approved by the Committee, based upon its assessment of the market value of the position involved.



Short-Term Incentive Compensation



The Company has adopted the Management Group Pay for Performance Program (the "PFP Program") for purposes of linking a portion of the compensation of its senior officers, including the Named Executive Officers, to the success of the Company in meeting certain financial targets which are established annually by the Personnel Committee. Under the terms of the PFP Program, the Committee establishes in February of each year five distinct financial targets for the following: (1) tax equivalent net interest income, (2) noninterest income, (3) noninterest expense, (4) loan quality, and (5) corporate net income.  Target (4) is measured against national peer group loan quality data published by the Federal Reserve System in the Bank Holding Company Performance Report.



Each PFP Program target is evaluated separately and is assigned a payout range expressed as a percentage of annual base salary. Payouts under the PFP Program are determined on the basis of the Company's performance relative to the targets established by the Committee.  The potential annual payout for targets one through four range from 0% to 2.5%, and from 0 – 10% for target five. The aggregate annual payout under the PFP Program ranges from 0 percent to 20 percent of an executive's annual base salary.  To earn a payout in any target category, the established target must be met or exceeded.  In addition, the PFP Program payout level is dependent upon the executive’s annual performance rating, receipt of the peer group data and review by the Personnel Committee.  The final 2016 PFP Program award will not be determined until April 2017.



The Personnel Committee met in February 2017 to establish financial targets applicable to payouts under the Pay for Performance Program for 2017. The financial targets remained unchanged, except the maximum payout under targe five was increased to 12%.  This increased the maximum potential payout for the PFP Program to 22% from 20%.

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Long-Term Incentive Compensation



The Company uses the grant of incentive stock options under its Incentive Stock Option Plan as the primary vehicle for providing long-term incentive compensation opportunities to its senior officers, including the Named Executive Officers. The Plan provides for the grant of incentive stock options to purchase shares of Company common stock at a per share exercise price which is not less than 100% of the fair market value of such shares on the date that the option is granted.  Incentive stock options are the only form of award provided for under the Plan.



The Personnel Committee has historically granted incentive stock options annually at its meeting in February of each year. In administering the Plan, the Committee establishes an annual option award target ranging from 500 to 2,500 shares for each of nine officer salary grade levels. The Committee has also established a target range for the Company's average annual increase in diluted earnings per share during the three most recently ended calendar year periods.  Options may be granted by the Committee for more or fewer shares than the established option award targets for a given salary grade depending upon the Company's growth in fully diluted earnings per share relative to the target range established by the Committee. The Committee’s philosophy in utilizing this performance measurement is that long term growth in fully diluted earnings per share is the primary driver of both the market value of the Company’s common stock and of the Company’s capacity to regularly increase the cash dividends which it pays to its shareholders.



The following table shows the potential incentive stock option award using a salary grade with a 1,000 shares award target for illustration.







The Personnel Committee met in February 2016 to address the Incentive Stock Option Plan.  The Company’s average annual increase in diluted earnings per share growth for the calendar years 2013 through 2015 was 22.3%.  As a result of this increase, the Committee granted an incentive stock option award in 2016 to the Named Executive Officers at 150% of the target level.



The Personnel Committee met in February 2017 to address the Incentive Stock Option Plan.  The Company’s average annual increase in diluted earnings per share growth for calendar years 2014 through 2016 was 10.3%.  As a result of this increase, the Committee granted in an incentive stock option award in 2017 to the Named Executive Officers at 150% of the target level.



Options are granted at an exercise price equal to the fair market value per share of the Company's common stock on the date of grant, which fair market value is determined in accordance with the terms of the Plan on the basis of the average of the average of the closing bid and asked quotations for the five trading days immediately preceding the applicable date as reported by two brokerage firms selected by the Committee which are then making a market in the Company's stock, except that if no closing bid or asked quotation is available on one or more of such trading days, fair market value is determined by reference to the five trading days immediately preceding the applicable date on which closing bid and asked quotations are available. Options granted under the Plan vest after the expiration of six months from the date of grant or upon the occurrence of a change in control of Franklin Financial if a change in control occurs prior to the expiration of such six month period. Neither the CEO nor any other Named Executive Officer has any role in selecting the date of grant of any stock option granted under the Plan. The options granted to the Named Executive Officers under the ISOP are reported in the Grants of Plan-Based Awards Table.



Information concerning the number of options held by each Named Executive Officer is set forth in the Outstanding Equity Awards at Fiscal Year-End Table which follows the Compensation Discussion and Analysis.



Employee Stock Purchase Plan



The Company established its Employee Stock Purchase Plan (ESPP) to encourage its employees to acquire a stake in the future of the Company by purchasing shares of its common stock.  All persons who are employed by the Company and its subsidiaries at the grant date and December 31 of the preceding year are eligible to be granted options under the plan, except that the Personnel Committee may exclude employees who customarily work twenty hours or less per week.  The number of shares subject to options

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each calendar year is allocated uniformly among the eligible employees based upon each employee’s qualifying compensation (base salary plus overtime pay) as compared to the aggregate qualifying compensation of all plan participants.  The Personnel Committee determines the exercise price of each option, which may not be less than 90 percent of the fair market value of the Company’s common stock on the grant date.  No option may have a term longer than one year from the grant date.  The options granted to the Named Executive Officers under the ESPP are reported in the Grants of Plan-Based Awards Table.



Retirement Plans



The senior officers of the Company are eligible to participate in the various retirement plans maintained by F&M Trust for the benefit of its employees. The F&M Trust Pension Plan is a defined benefit plan which provides retirement benefits based upon a career-average compensation formula. F&M Trust adopted, effective January 1, 2008, a Qualified Pension Supplemental Plan and a Nonqualified Deferred Compensation Plan. The Pension Plan was closed to new employees as of April 1, 2007 and as such new employees are eligible to participate only in the F&M Trust 401(k) Plan. The F&M Trust 401(k) Plan covers substantially all employees of F&M Trust who have completed one year and 1,000 hours of service. Employee contributions to the plan are matched at 100% up to 4% of each employee's deferrals, plus 50% of the next 2% of deferrals from participants' eligible compensation. Effective January 1, 2017 the time in service requirement for 401(k) eligibility was reduced from one year to four months, the hours of service requirement was removed and an auto- enrollment feature was added. In addition, a 100% discretionary profit sharing contribution of up to 2% of each employee's eligible compensation is possible, provided net income targets are achieved. The Personnel Committee of the Company's Board of Directors establishes the net income targets annually. Additional information relating to the Company's retirement plans is set forth in the Pension Benefits Table which follows the Compensation Discussion and Analysis and in the narrative that accompanies that Table.



Health and Welfare Employee Benefits Plans



The Company provides healthcare, life and disability insurance and other employee benefits programs to its employees, including its senior officers. The Personnel Committee is responsible for overseeing the administration of these programs and believes that its employee benefits programs should be comparable to those maintained by Central Pennsylvania financial institutions of comparable size so as to assure that the Company is able to maintain a competitive position in terms of attracting and retaining officers and other employees. The Company's employee benefits plans are provided on a nondiscriminatory basis to all employees.



Risk Profile of Compensation Programs



The Committee has determined that the Company’s compensation policies and practices do not present any risks that would be reasonably likely to have a material adverse effect on the Company.  All of the Company’s employees are either salaried employees or hourly wage employees.  The Committee does not believe that the salaries or wages paid to our employees present any risks that would be reasonably likely to have a material adverse effect on the Company.  The Management Group Pay for Performance Plan provides for the payment of cash bonuses to selected officers if the Company meets certain financial targets set annually by the Committee.  Because such targets relate to interrelated measures of return, asset quality and expense control, the incentives to maximize the Company’s performance with respect to any one target tend to be counterbalanced by the incentives to maximize one or more other targets, thereby minimizing the risks that otherwise might be presented by the Plan.  Grants of stock options are awarded at targeted numbers of shares from 500 to 2,500 shares depending upon officer salary grade levels and targeted ranges for the Company’s average annual increase in diluted earnings per share during the three most recent calendar years.  Because grants of stock options are limited to targeted numbers of shares and based upon the company’s average increase in diluted earnings per share over three years, there is little incentive to engage in conduct that would be reasonably likely to have a material adverse effect on the Company.



Procedure Followed by the Personnel Committee in Determining Executive Compensation



The Committee annually determines the compensation of each senior officer (base salary, payout under the PFP Program and stock option grant under the Incentive Stock Option Plan) in accordance with the factors discussed above. The CEO plays an important role in the compensation process, particularly as it applies to the other Named Executive Officers. Specifically, the CEO evaluates officer performance, provides input in connection with establishing individual performance targets and objectives, and makes recommendations as to base salary levels. The CEO participates in Committee meetings at the Committee's request in connection with the evaluation of the other Named Executive Officers and in order to provide background information.



The Committee, meeting in executive session, performs an annual performance evaluation of the CEO and determines his compensation in accordance with the factors discussed above.  Each member of the Committee independently evaluates the CEO by using a written performance evaluation form to prepare a formal evaluation. The evaluation form includes ratings for key accountabilities, including strategic leadership, business and organization knowledge, decision making, customer focus, personnel selection and development, vision/direction setting, adaptability and community involvement.



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Restatement of Financial Statements



The Personnel Committee is of the view that, to the extent permitted by law, it has authority to retroactively adjust any cash or equity-based incentive award paid to any senior officer (including any Named Executive Officer) where the award was based upon the achievement by the Company of specified financial goals and it is subsequently determined following a restatement of the Company's financial statements that the specified goals were not in fact achieved.



Stock Ownership Guidelines



The Board of Directors believes that the interests of its senior officers and its shareholders should be aligned and for this reason encourages its senior officers, including the Named Executive Officers, to acquire a meaningful investment position in the Company's common stock so as to have a meaningful personal financial stake in the success of the Company.  In December 2015, the Board of Directors adopted the Directors and Executive Officers Stock Ownership Policy that established a minimum number of shares to be held by Directors and Executive Officers. Under the policy, Executive Officers, other than the Chief Executive Officer and the Chief Financial Officer, shall hold no less than 1,000 shares of Company common stock, excluding options. Directors, and the Chief Executive Officer and Chief Financial Officer, shall hold no less than 3,000 shares of Company common stock, excluding options. Executive Officers, other than the Chief Executive Officer and the Chief Financial Officer must hold the required shares within five (5) years of first being appointed or hired into such position, or if already an Executive Officer as of the date the policy is adopted, within five (5) years after the adoption of the policy.  Directors, the Chief Executive Officer and Chief Financial Officer, must hold the required shares within five (5) years of first being elected or appointed to any such position or, if already holding such a position as of the date the policy is adopted, within three (3) years after the adoption of the policy.



Compensation Committee Report



In connection with the preparation of the disclosures set forth in this Proxy Statement, the Personnel Committee of the Board of Directors has reviewed and discussed the Compensation Discussion and Analysis set forth above with the management of Franklin Financial. Based upon this review and discussion, the Personnel Committee has recommended to the Board of Directors that this Compensation Discussion and Analysis be included in this Proxy Statement and that it be incorporated by reference in the Annual Report on Form 10-K for the year ended December 31, 2016 filed by Franklin Financial with the SEC.



This report is not intended to be "soliciting material," is not intended to be "filed" with the SEC, and is not intended to be incorporated by reference into any filing made by Franklin Financial with the SEC under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether such filing is made before or after the date hereof and notwithstanding any general incorporation language contained in any such filing.



The foregoing report is submitted by the Personnel Committee:

G. Warren Elliott, Chairman

Martin R. Brown

Daniel J. Fisher

Donald A. Fry

Allan E. Jennings, Jr.

Patricia D. Lacy



Compensation Tables and Additional Compensation Disclosure



Total Compensation



The following table provides certain summary information concerning total compensation paid or accrued by Franklin Financial and F&M Trust to Timothy G. Henry the President and Chief Executive Officer of Franklin Financial, William E. Snell, Jr. (Chief Executive Officer of Franklin Financial from January 1, 2016 to retirement on June 30, 2016), Mark R. Hollar, Senior Vice President and Chief Financial Officer of Franklin Financial, and to each of the three most highly compensated executive officers other than Messrs. Henry, Snell and Hollar whose total compensation in 2016 exceeded $100,000. 

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SUMMARY COMPENSATION TABLE





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ALL OTHER COMPENSATION TABLE







Plan-Based Compensation



The following table provides certain information concerning awards granted in 2016 under the Pay for Performance Plan, the Incentive Stock Option Plan and the Employee Stock Purchase Plan to the executive officers named in the Summary Compensation Table.



GRANTS OF PLAN-BASED AWARDS





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Outstanding Stock Option
and Other Equity Awards at Fiscal Year End



The following table provides certain information with respect to the executive officers named in the Summary Compensation Table appearing above concerning stock options and other equity awards which were outstanding on December 31,  2016.



OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2016



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Option Exercises and Stock Vested



The following table provides certain information with respect to the executive officers named in the Summary Compensation Table appearing above concerning options exercised and stock awards that vested in 2016.





2016 OPTION EXERCISES AND STOCK VESTED TABLE





Pension Benefits



The following table provides certain information with respect to the executive officers named in the Summary Compensation Table appearing above concerning pension benefits paid during the calendar year  or payable as of December 31, 2016 under tax qualified and non-tax qualified defined benefit plans.



PENSION BENEFITS AT AND FOR THE YEAR ENDED
DECEMBER 31, 2016
(MEASUREMENT DATE IS DECEMBER 31, 2016)



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F&M Trust maintains the Farmers and Merchants Trust Company of Chambersburg Pension Plan (the "Pension Plan"), a defined benefit plan, for employees of F&M Trust who meet certain age and service requirements.  Benefits are based on years of service and the employee’s compensation using a career average formula. The pension plan was closed to new participants on April 1, 2007. Compensation is defined generally as salary, bonus and non-equity incentive plan compensation as reported in the Summary Compensation Table appearing above, but excludes long-term disability payments, taxable fringe benefits, moving expenses, housing expenses, non-cash taxable amounts under any restricted stock program, restricted stock program cash dividend payments, and tax equalization payments. Section 401(a) (17) of the Internal Revenue Code of 1986, as amended (the "Code"), limits a participant's compensation for each calendar year. Retirement benefits under the Pension Plan are limited by the maximum benefit specified under Section 415 of the Code. Mr. Snell participated in the Pension Plan up to his retirement from the Company on June 30, 2016. Messrs. Hollar and Cekovich continue to participate in the Pension Plan.



In 2008, the Bank created the Farmers and Merchants Trust Company of Chambersburg Pension Supplemental Plan (the “Qualified Supplemental Plan”) and the Nonqualified Deferred Compensation Plan (the "Nonqualified Supplemental Plan"). The intent of both plans was to provide benefits to Pension Plan participants who were most severely affected by the 2008 change in the pension benefit formula to a career average formula from the prior benefit formula that calculated benefits based on the 5-year final average compensation. None of the named executive officers participate in the Qualified Supplemental Plan.

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Some individuals who were adversely impacted by the change in the Pension Plan benefit formula cannot participate in the Qualified Supplemental Plan due to compliance testing issues under the Code and the fact that these individuals are (or could become) "highly compensated employees" as defined under the Code. These participants are covered under the Nonqualified Deferred Compensation Plan. Mr. Snell participated in the Nonqualified Supplemental Plan up to his retirement from the Company on June 30, 2016. Messrs. Hollar and Cekovich continue to participate in this Plan. The Nonqualified Supplemental Plan is a defined contribution plan. Annual contributions are made by F&M Trust on behalf of plan participants ranging between 1% and 9% of the participant's compensation, depending upon the impact that the change in the pension plan benefit formula had on the participant's pension benefit.  Plan assets are invested as directed by each executive officer in one or more publicly available investment funds made available by the Bank’s Trust Department. Earnings are solely the result of fund performance.



The following table provides certain information with respect to the executive officers named in the Summary Compensation Table appearing above concerning nonqualified deferred compensation accrued during 2016 pursuant to the Nonqualified Supplemental Plan described above.



NONQUALIFIED DEFERRED COMPENSATION



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Employment Agreements And Potential Payments
Upon Termination Or Change In Control



All employees of the Company, including the Company's executive officers, are employed at will and do not have employment contracts, severance pay agreements or "golden parachute" arrangements that would be triggered upon the occurrence of a change in control of the Company.



Equity Compensation Plan Information



The following table summarizes share and exercise price information relating to Franklin Financial's equity compensation plans as of December 31, 2016:



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EQUITY COMPENSATION PLAN INFORMATION AT DECEMBER 31, 2016





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ADVISORY VOTE ON COMPENSATION PAID TO NAMED EXECUTIVE OFFICERS

(“Say-On-Pay”)



The Board of Directors recognizes the interest shareholders have in the compensation of our executives.  In recognition of this interest and as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), we are providing shareholders with the opportunity to cast a non-binding advisory vote to approve the compensation paid to our named executive officers as disclosed in this proxy statement.



As disclosed in our Compensation Discussion and Analysis, we believe that executive compensation should be tied to individual performance, should vary with the Company’s performance in achieving its financial and non-financial objectives, and should be structured so as to be closely aligned with the interests of the Company’s shareholders.  We also believe that executive compensation should include an at-risk, performance based component and that this component should increase as an officer’s authority and responsibility increase.  To the extent that established performance goals are exceeded, we believe that executive officers should be financially rewarded.



Base salaries for our executive officers are established based upon salary ranges for each position developed by reference to published salary surveys for comparable positions at similar financial institutions within central Pennsylvania to assure that base salaries fall within the “market value” for each position.



The Management Group Pay for Performance Program links a portion of executive compensation to the success of the Company in meeting certain financial targets established annually by the Personnel Committee of the Board of Directors.  The Pay for Performance Program awards reported in the Summary Compensation Table reflect that the Company met performance target levels with respect to four of the five targets in 2016.



The Company uses incentive stock options as the primary vehicle for providing long term incentive compensation.  Options are awarded based upon the Company’s annual increase in diluted earnings per share during the three most recent calendar year periods.  The Personnel Committee uses this performance measure because it believes that long term growth in diluted earnings per share is the primary driver of both market value of the Company’s common stock and of the Company’s capacity to increase the amount of cash dividends it is able to pay to its shareholders.  Because the annual increase in diluted earnings per share compared favorably to the target ranges established by the Committee, an incentive stock option award was made in 2016.



The Company also provides health and welfare benefits to all of its employees on a nondiscriminatory basis.  It also maintains a 401(k) plan for all employees and a defined benefit pension plan for persons employed prior to April 1, 2007.



Based upon the foregoing, and as discussed in greater detail in our Compensation Discussion and Analysis and disclosed in the compensation tables and related narrative, we believe that our executive compensation programs, executive compensation levels and individual compensation actions align with our executive compensation philosophy, support its goals and provide an appropriate balance between risk and reward.  For these reasons, we are asking our shareholders to approve the compensation paid to our named executive officers as disclosed in this proxy statement.

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Shareholder Resolution



“RESOLVED, that the compensation of the Named Executive Officers as disclosed in the Company’s proxy statement for the Annual Meeting to be held April 25, 2017 is hereby approved.”



The approval of a majority of the votes cast by shareholders present in person or by proxy and entitled to vote at the annual meeting, assuming a quorum is present, is required to approve this proposal.  Although the vote is advisory and not binding in any way, the Board of Directors and the Personnel Committee value the opinions of our shareholders and will carefully consider the result of the vote in connection with future compensation decisions for our named executive officers.



The Board of Directors recommends that you vote FOR approval of the compensation paid to our Named Executive Officers as disclosed in this proxy statement.



ADVISORY VOTE ON FREQUENCY OF SAY-ON-PAY VOTE (“Say-On-Frequency”)

We are required by the Dodd-Frank Act to provide to our shareholders every six years a non-binding advisory vote on how often the non-binding advisory vote to approve named executive officer compensation, commonly referred to as the “Say-On-Pay” vote, is to be presented to shareholders.  Shareholders may indicate whether they would prefer an advisory vote on the compensation paid to our Named Executive Officers every one, two or three years.



The Board of Directors believes that annual Say-On-Pay voting is most appropriate for the Company because it allows the Board of Directors to receive immediate feedback from our shareholders regarding our executive compensation programs and practices and, thereby, to be more responsive to related shareholder concerns.



Shareholder Resolution



“RESOLVED, that the Say-On-Pay vote required by Section 14A of the Securities Exchange Act of 1934, as amended, shall be held every 1, 2 or 3 years.”



The option of holding the Say-On-Pay vote every one, two or three years that receives the highest number of votes cast will be considered to be the option approved by the shareholders.  Because this vote is advisory and non-binding, the Board of Directors may determine that it is in the best interests of the Company to hold an advisory vote on named executive officer compensation more or less frequently than the option approved by the shareholders.



The Board of Directors recommends that you vote FOR holding the Say-On-Pay vote annually.



 

AUDIT COMMITTEE REPORT



The Audit Committee has reviewed the audited consolidated financial statements of Franklin Financial for the year ended December 31, 2016 and has discussed these financial statements with management and with Franklin Financial's independent registered public accounting firm, BDO USA, LLP ("BDO"). The Audit Committee also has discussed with BDO the matters required to be discussed by Statement of Auditing Standards No. 16, as amended.



The Audit Committee has received from BDO the written disclosures and letter required by the applicable requirements of the Public Company Accounting Oversight Board regarding, and has discussed with BDO, its independence from Franklin Financial and its management.



Based upon the review and discussions described above, the Audit Committee recommended to the Board of Directors that Franklin Financial's audited consolidated financial statements for the year ended December 31, 2016 be included in Franklin Financial's Annual Report on Form 10-K for that year.



In connection with the standards for accountant's independence adopted by the SEC, the Audit Committee considers in advance of the provision of any non-audit services by Franklin Financial's independent accountants whether the provision of such services is compatible with maintaining the independence of such accountants.



This report is not intended to be "soliciting material," is not intended to be "filed" with the SEC, and is not intended to be incorporated by reference into any filing made by Franklin Financial with the SEC under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether such filing is made before or after the date hereof and notwithstanding any general incorporation language contained in any such filing.

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The foregoing report is submitted by the Audit Committee:

Allan E. Jennings, Jr., Chairman

Martin R. Brown

G. Warren Elliott

Daniel J. Fisher

Richard E. Jordan III

Donald H. Mowery



 

RELATIONSHIP WITH INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS



General Information



For the year ended December 31, 2016, Franklin Financial engaged BDO to audit its consolidated financial statements.  Representatives of BDO are expected to be present at the Annual Meeting, will have an opportunity to make a statement if they desire to do so, and will be available to respond to appropriate questions.



Information About Fees



Aggregate fees billed to Franklin Financial by BDO USA,  LLP for services rendered are presented below:





Audit Fees include fees billed for professional services related to the audit of Franklin Financial’s annual consolidated financial statements, including audit of internal controls, and the review of the unaudited financial statements included in Franklin Financial’s Quarterly Reports on Form 10-Q.



Audit Related Fees include fees billed for professional audit related services consisting principally of employee benefit plan audits and consultation with respect to accounting matters.



Tax Fees include fees billed for professional tax related services consisting principally of the preparation of state and federal tax returns and assistance with tax matters.



All Other Fees include fees billed for services other than the services reported under the Audit Fees, Audit Related Fees, or Tax Fees sections of the table above. 



Audit Committee Pre-Approval Policies and Procedures



The Audit Committee pre-approves all audit and legally permissible non-audit services provided by the independent auditors. These services may include audit services, audit-related services, tax services and other services. The Audit Committee has adopted a policy for the pre-approval of services provided by the independent auditors. Under the policy, pre- approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is subject to a specific budget. In addition, the Audit Committee may also pre-approve particular services on a case-by-case basis. For each proposed service, the independent auditor is required to provide detailed back-up documentation at the time of approval or such other detailed information as the Audit Committee deems appropriate. The Audit Committee may delegate to subcommittees of one or more of its members the authority to pre-approve all auditing and permitted non-audit services (including the authority to approve non-audit services pursuant to the de minimis exception set forth in applicable SEC rules and regulations), provided that such decisions are presented to the full Committee at it next scheduled meeting. All audit and permissible non-audit services provided by BDO in 2016 were either pre-approved by the Audit Committee, or approved and reported under the de minimis exception set forth in the applicable SEC rules and regulations.

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RATIFICATION OF SELECTION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



Under the Audit Committee’s Charter, the Audit Committee is responsible for selecting the Company’s independent auditors.  The Audit Committee evaluates and monitors the auditors’ qualifications, performance and independence.  You can learn more about the Audit Committee’s responsibilities with respect to the independent auditors in the Audit Committee’s charter, which is posted on our website at www.franklinfin.com.



The Audit Committee presented its conclusions regarding the independent auditors to our Board of Directors.  Following this presentation, the Board voted to recommend that shareholders vote to ratify the Audit Committee’s selection of BDO USA, LLP as the Company’s independent registered public accounting firm for 2017.



The Audit Committee and Board have adopted a policy that if a majority of the votes cast at the annual meeting is against ratification, the Audit Committee will reconsider its selection of BDO USA, LLP.  The Audit Committee, however, will be under no obligation to select new independent auditors.  If the Audit Committee does select new independent auditors for 2017, the Company will not seek shareholder ratification of the Audit Committee’s new selection.



The Board of Directors recommends a vote FOR the ratification of the Audit Committee’s selection of BDO USA, LLP, as the independent registered public accounting firm for 2017.



 

ADDITIONAL INFORMATION



Key Employees



The following persons are key employees of Franklin Financial (some of whom are officers of F&M Trust):









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Transactions with Related Persons



Some of the directors and executive officers of Franklin Financial and the companies with which they are associated were customers of and had banking transactions with F&M Trust in the ordinary course of business during 2016. All loans and commitments to loans made to such persons and the companies with which they are associated were made on substantially the same terms, including interest rates, collateral, and repayment terms, as those prevailing at the time for comparable transactions with other persons and did not involve more than a normal risk of collectability or present other unfavorable features. It is anticipated that F&M Trust will enter into similar transactions in the future.



In accordance with the terms of Franklin Financial's Corporate Governance Guidelines (which are posted on Franklin Financial's website at www.franklinfin.com), any transaction involving Franklin Financial or any direct or indirect subsidiary of Franklin Financial and an executive officer, a director, a nominee for election to the Board of Directors, or a five percent or greater shareholder (or a member of his or her immediate family or a company or other entity in which he or she has, directly or indirectly, a financial interest) must be submitted for review by the Audit Committee, except that any proposed loan to any such person or entity is submitted to the entire Board of Directors for review. It is the policy of the Company not to engage in any such transition except upon full disclosure of the involvement of such persons and approval by a majority of the disinterested directors. Extensions of credit to such persons also may be subject to F&M Trust’s Regulation O policy.



F&M Trust, in the ordinary course of business, has entered into a real estate lease agreement with Smith Land & Improvement Corporation for a location on which the Bank has a community banking office. Director Jordan is the Vice-President of Smith Land & Improvement Company.   The initial term of the real estate lease, effective December 1, 2011, is 20 years, with one renewal option of 5 years, and one renewal option of 4 years and 11 months. Over the initial 20 year term of the lease, the Bank will make rental payments totaling $3.2 million to Smith Land & Improvement Corporation.  During 2016, F&M Trust made payments of $147,610 to Smith Land & Improvement Company under this lease.



Compliance with Section 16(a) of the Exchange Act



Section 16(a) of the Securities Exchange Act of 1934 requires that the directors and certain officers of Franklin Financial file with the SEC reports of ownership and changes in ownership with respect to shares of Franklin Financial common stock beneficially owned by them. Based solely upon its review of copies of such reports furnished to it and written representations made by its directors and those officers who are subject to such reporting requirements, Franklin Financial determined that Mr. Kerlin failed to file, on a timely basis, two transactions on Form 4 in 2016.  These transactions were reported on a Form 5 filed in 2016 upon discovery of the delinquent filings.



Shareholder Communication with the Board of Directors



Shareholders and other interested persons who wish to communicate with the Board of Directors (including, specifically, the non-management directors) may do so by letter addressed to Chairman of the Board, Franklin Financial Services Corporation, P.O. Box 6010, Chambersburg, Pennsylvania 17201-6010.



Shareholders and other interested persons who wish to express a concern relating to accounting or audit related matters may do so by letter addressed to Chairman of the Audit Committee, Franklin Financial Services Corporation, P.O. Box 6010, Chambersburg, Pennsylvania 17201-6010.



Householding of Proxy Materials



In accordance with a notice sent to all shareholders with the same last name who share the same address, only one copy of Franklin Financial's Notice of Internet Availability of Proxy Materials or annual report and proxy statement will be sent to that address, unless contrary instructions are given to Franklin Financial. This practice, known as "householding," is designed to reduce Franklin Financial's printing and postage costs. However, if any shareholder residing at such an address wishes to receive a separate Notice of Internet Availability of Proxy Materials, annual report and proxy statement in the future, the shareholder may call Franklin Financial's Corporate Secretary at (717) 261-3553 or write to Corporate Secretary, Franklin Financial Services Corp., P.O. Box 6010, Chambersburg, Pennsylvania 17201-6010, or communicate the request by E-mail addressed to a.ducey@f-mtrust.com. If a shareholder is receiving multiple copies of Franklin Financial's Notice of Internet Availability of Proxy Materials or annual report and proxy statement, the shareholder may request to receive only a single copy of these materials by contacting Franklin Financial's Corporate Secretary in the same manner.

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Annual Report on Form 10-K



A  copy of the annual report of Franklin Financial for the year ended December 31, 2016 on Form 10-K as filed with the SEC is available without charge to shareholders, depositors and other interested persons upon request addressed to Mark R. Hollar,  Senior Vice President and Chief Financial Officer, Franklin Financial Services Corporation, P.O. Box 6010, Chambersburg, Pennsylvania 17201-6010. Franklin Financial's Form 10-K, as well as its other periodic reports filed with the SEC pursuant to Section 15(d) of the Securities Exchange Act of 1934, are available on Franklin Financial's website at www.franklinfin.com.



 

OTHER MATTERS



The Board of Directors of Franklin Financial knows of no matters, other than those discussed in this Proxy Statement, which will be presented at the 2017 Annual Meeting. However, if any other matters are properly brought before the meeting, any proxy given pursuant to this solicitation will be voted in accordance with the recommendations of the Board of Directors of Franklin Financial.





Chambersburg, Pennsylvania

March 16, 2017