UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
_ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from__________ to___________
Commission file number 0-12126
FRANKLIN FINANCIAL SERVICES CORPORATION
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(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1440803
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
20 SOUTH MAIN STREET, PO BOX 6010, CHAMBERSBURG, PA 17201-0819
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(Address of principal executive offices) (Zip Code)
(717) 264-6116
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Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Names of each exchange on
NONE which registered
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK $1.00 PAR VALUE PER SHARE
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(Title of class)
Indicate by check mark whether the registrant has (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. ____X____
The aggregate market value of the 2,319,135 shares of the Registrant's
common stock held by nonaffiliates of the Registrant as of February 12, 2001,
based on the average of the bid and asked price for such shares, was
$38,845,511. There were 2,755,912 outstanding shares of the Registrant's
common stock as of February 12, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive annual proxy statement to be filed, pursuant
to Reg. 14A within 120 days after December 31, 2000, are incorporated into
Part III.
FRANKLIN FINANCIAL SERVICES CORPORATION
FORM 10-K
INDEX
PAGE
PART I
Item 1. Business.................................................................................3
Item 2. Properties...............................................................................7
Item 3. Legal Proceedings........................................................................7
Item 4. Submission of Matters to a Vote of Security Holders......................................7
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ..................8
Item 6. Selected Financial Data..................................................................10
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................................11
Item 7a. Quantitative and Qualitative Disclosures About Market Risk...............................26
Item 8. Financial Statements and Supplementary Data..............................................26
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..................................................................50
PART III
Item 10. Directors and Executive Officers of the Registrant......................................51
Item 11. Executive Compensation..................................................................51
Item 12. Security Ownership of Certain Beneficial Owners and Management..........................51
Item 13. Certain Relationships and Related Transactions..........................................51
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.........................51
Signatures.........................................................................................53
Index of Exhibits..................................................................................55
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PART I
ITEM 1. BUSINESS
GENERAL
Franklin Financial Services Corporation (the "Corporation") was
organized as a Pennsylvania business corporation on June 1, 1983 and is a
registered bank holding company under the Bank Holding Company Act of 1956,
as amended (the "BHCA"). On January 16, 1984, pursuant to a plan of
reorganization approved by the shareholders of Farmers and Merchants Trust
Company of Chambersburg ("F&M Trust" or "the Bank") and the appropriate
regulatory agencies, the Corporation acquired all the shares of F&M Trust and
issued its own shares to former F&M Trust shareholders on a share-for-share
basis.
The Corporation conducts all of its business through its only direct
subsidiary, F&M Trust, which is wholly owned. F&M Trust, established in 1906,
is a full-service, Pennsylvania-chartered commercial bank and trust company,
which is not a member of the Federal Reserve System. F&M Trust, which
operates 13 full service offices in Franklin and Cumberland Counties,
Pennsylvania, engages in general commercial, retail banking and trust
services normally associated with community banks and its deposits are
insured (up to applicable limits) by the Federal Deposit Insurance
Corporation (the "FDIC"). A wide variety of banking services are offered by
F&M Trust to businesses, individuals, and governmental entities. These
services include, but are not necessarily limited to, accepting and
maintaining checking, savings, and time deposit accounts, providing
investment and trust services, making loans and providing safe deposit
facilities.
The Corporation's subsidiary is not dependent upon a single customer or
a few customers for a material part of its business. Thus, the loss of any
customer or identifiable group of customers would not materially affect the
business of the Corporation or F&M Trust in an adverse manner. Also, none of
the Corporation's business is seasonal. The Bank's lending activities consist
primarily of commercial, agricultural and industrial loans, installment and
revolving loans to consumers, residential mortgage loans, and construction
loans. Secured and unsecured commercial and industrial loans, including
accounts receivable, inventory financing and commercial equipment financing,
are made to small and medium-sized businesses, individuals, governmental
entities, and non-profit organizations. F&M Trust also participates in
Pennsylvania Higher Education Assistance Act student loan programs and
Pennsylvania Housing Finance Agency programs.
Installment loans involve both direct loans to consumers and the
purchase of consumer obligations from dealers and others who have sold or
financed the purchase of merchandise, including automobiles and mobile homes,
to their customers. The Bank's mortgage loans include long-term loans to
individuals and to businesses secured by mortgages on the borrower's real
property. Construction loans are made to finance the purchase of land and the
construction of buildings thereon, and are secured by short-term mortgages on
real estate. In certain situations, the Bank acquires properties through
foreclosure on delinquent loans. The Bank holds these properties until such
time as they are in a marketable condition and a buyer can be obtained.
F&M Trust's Investment and Trust Services Department offers all of the
personal and corporate trust services normally associated with trust
departments of area banks including: estate planning and administration,
corporate and personal trust fund management, pension, profit sharing and
other employee benefits funds management, custodial services, and trustee
services for publicly issued debentures. F&M Trust's Personal Investment
center sells mutual fund, annuity and selected insurance products.
COMPETITION
The Corporation and its subsidiary operate in a competitive environment
that has intensified in the past few years as they have been compelled to
share their market with institutions that are not subject to the regulatory
restrictions on domestic banks and bank holding companies. Profit margins in
the traditional banking business of lending and gathering deposits have
declined as deregulation has allowed nonbanking institutions to offer
alternative services to many of F&M Trust's customers.
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The principal market of F&M Trust is in Franklin County and western
Cumberland County, Pennsylvania. Fourteen commercial bank competitors of F&M
Trust have offices in this region, in addition to credit unions, savings and
loan associations, mortgage banks, brokerage firms and other competitors. F&M
Trust is the largest financial institution headquartered in Franklin County
and had total assets of approximately $466.0 million on December 31, 2000.
All of the local commercial bank competitors of the Corporation are
subsidiaries of bank holding companies. The Corporation ranks eleventh in
size of the fifteen bank holding companies having offices in its primary
market.
STAFF
As of December 31, 2000, the Corporation and its subsidiary had 193
full-time equivalent employees. Most employees participate in pension, profit
sharing/bonus, and employee stock purchase plans and are provided with group
life, health and major medical insurance. Management considers employee
relations to be excellent.
SUPERVISION AND REGULATION
Various requirements and restrictions under the laws of the United
States and under Pennsylvania law affect the Corporation and its
subsidiaries. The Corporation is registered as a bank holding company and is
subject to supervision and regulation by the Board of Governors of the
Federal Reserve System under the Bank Holding Act of 1956, as amended. As a
bank holding company, the Corporation's activities and those of its bank
subsidiary are limited to the business of banking and activities closely
related or incidental to banking. Bank holding companies are required to file
periodic reports with and are subject to examination by the Federal Reserve
Board. The Federal Reserve Board has issued regulations under the Bank
Holding Company Act that require a bank holding company to serve as a source
of financial and managerial strength to its subsidiary banks. As a result,
the Federal Reserve Board, pursuant to such regulations, may require the
Corporation to stand ready to use its resources to provide adequate capital
funding to its bank subsidiary during periods of financial stress or
adversity.
The Bank Holding Company Act prohibits the Corporation from acquiring
direct or indirect control of more than 5% of the outstanding shares of any
class of voting stock, or substantially all of the assets of, any bank, or
from merging or consolidating with another bank holding company, without
prior approval of the Federal Reserve Board. Additionally, the Bank Holding
Company Act prohibits the Corporation from engaging in or from acquiring
ownership or control of more than 5% of the outstanding shares of any class
of voting stock of any company engaged in a non-banking business, unless such
business is determined by the Federal Reserve Board to be so closely related
to banking as to be a proper incident thereto. The types of businesses that
are permissible for bank holding companies to own have been expanded by
recent federal legislation.
As a Pennsylvania bank holding company for purposes of the Pennsylvania
Banking Code, the Corporation is subject to regulation and examination by the
Federal Reserve Board.
The Bank is a state chartered bank that is not a member of the Federal
Reserve System and its deposits are insured (up to applicable limits) by the
Federal Deposit Insurance Corporation (the "FDIC"). The Bank is subject to
regulation and examination by the FDIC and the Pennsylvania Department of
Banking. The Bank is also subject to requirements and restrictions under
federal and state law, including requirements to maintain reserves against
deposits, restrictions on the types and amounts of loans that may be granted
and the interest that may be charged thereon, and limitations on the types of
investments that may be made and the types of services that may be offered.
The Community Reinvestment Act requires the Bank to help meet the credit
needs of the entire community where the bank operates, including low and
moderate income neighborhoods. The Bank's rating under the Community
Reinvestment Act, assigned by the FDIC pursuant to an examination of the
Bank, is important in determining whether the bank may receive approval for,
or utilize certain streamlined procedures in, applications to engage in new
activities. Various consumer laws and regulations also affect the operations
of the Bank. In addition to the impact of regulation, commercial banks are
affected significantly by the actions of the Federal Reserve Board as it
attempts to control the money supply and credit availability in order to
influence the economy.
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CAPITAL ADEQUACY GUIDELINES
Bank holding companies are required to comply with the Federal Reserve
Board's risk-based capital guidelines. The required minimum ratio of total
capital to risk-weighted assets (including certain off-balance sheet
activities, such as stand-by letters of credit) is 8%. At least half of the
total capital is required to be "Tier 1 capital," consisting principally of
common shareholders' equity, less certain intangible assets. The remainder
("Tier 2 capital") may consist of certain preferred stock, a limited amount
of subordinated debt, certain hybrid capital instruments and other debt
securities, and a limited amount of the general loan loss allowance. The
risk-based capital guidelines are required to take adequate account of
interest rate risk, concentration of credit risk, and risks of nontraditional
activities.
In addition to the risk-based capital guidelines, the Federal Reserve
Board requires a bank holding company to maintain a leverage ratio of a
minimum level of Tier 1 capital (as determined under the risk-based capital
guidelines) equal to 3% of average total consolidated assets for those bank
holding companies which have the highest regulatory examination ratings and
are not contemplating or experiencing significant growth or expansion. All
other bank holding companies are required to maintain a ratio of at least 1%
to 2% above the stated minimum. The Bank is subject to almost identical
capital requirements adopted by the FDIC. Although not adopted in regulation
form, the Pennsylvania Department of Banking utilizes capital standards
requiring a minimum of 6% leverage capital and 10% risk-based capital,
defined substantially the same as those by the FDIC.
PROMPT CORRECTIVE ACTION RULES
The federal banking agencies have regulations defining the levels at
which an insured institution would be considered "well capitalized,"
"adequately capitalized," "significantly undercapitalized" and "critically
undercapitalized." The applicable federal bank regulator for a depository
institution could, under certain circumstances, reclassify a "well
capitalized" institution as "adequately capitalized" or require an
"adequately capitalized" or "undercapitalized" institution to comply with
supervisory actions as if it were in the next lower category. Such a
reclassification could be made if the regulatory agency determines that the
institution is in an unsafe or unsound condition (which could include
unsatisfactory examination ratings). The Corporation and the Bank each
satisfy the criteria to be classified as "well capitalized" within the
meaning of applicable regulations.
REGULATORY RESTRICTIONS ON DIVIDENDS
Dividend payments by the Bank to the Corporation are subject to the
Pennsylvania Banking Code, the Federal Deposit Insurance Act, and the
regulations of the FDIC. Under the Banking Code, no dividends may be paid
except from "accumulated net earnings" (generally, retained earnings). The
Federal Reserve Board and the FDIC have formal and informal policies which
provide that insured banks and bank holding companies should generally pay
dividends only out of current operating earnings, with some exceptions. The
Prompt Corrective Action Rules, described above, further limit the ability of
banks to pay dividends, because banks which are not classified as well
capitalized or adequately capitalized may not pay dividends.
FDIC INSURANCE ASSESSMENTS
The FDIC has implemented a risk-related premium schedule for all insured
depository institutions that results in the assessment of premiums based on
capital and supervisory measures. Under the risk-related premium schedule,
the FDIC assigns, on a semiannual basis, each depository institution to one
of three capital groups (well-capitalized, adequately capitalized or
undercapitalized) and further assigns such institutions to one of three
subgroups within a capital group. The institution's subgroup assignment is
based upon the FDIC's judgement of the institution's strength in light of
supervisory evaluations, including examination reports, statistical analyses
and other information relevant to measuring the risk posed by the
institution. Only institutions with a total capital to risk-adjusted assets
ratio of 10% or greater, a Tier 1 capital to risk-based assets ratio of 6% or
greater, and a Tier 1 leverage ratio of 5% or greater, are assigned to the
well-capitalized group. As of December 31, 2000, the Bank was well
capitalized for purposes of calculating insurance assessments.
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The Bank Insurance Fund is presently fully funded at more than the
minimum amount required by law. Accordingly, the 2001 Bank Insurance Fund
assessment rates range from zero for those institutions with the least risk,
to $.027 for every $100 of insured deposits for institutions deemed to have
the highest risk. The Bank is in the category of institutions that presently
pay nothing for deposit insurance. The FDIC adjusts the rates every six
months.
While the Bank presently pays no premiums for deposit insurance, it is
subject to assessments to pay the interest on Financing Corporation bonds.
The Financing Corporation was created by Congress to issue bonds to finance
the resolution of failed thrift institutions. Prior to 1997, only thrift
institutions were subject to assessments to raise funds to pay the Financing
Corporation bonds. On September 30, 1996, as part of the Omnibus Budget Act,
Congress enacted the Deposit Insurance Funds Act of 1996, which recapitalized
the Savings Association Insurance Fund and provided that commercial banks
would be subject to 1/5 of the assessment to which thrifts are subject for
Financing Corporation bond payments through 1999. Beginning in 2000,
commercial banks and thrifts are subject to the same assessment for Financing
Corporation bonds. The FDIC sets the Financing Corporation assessment rate
every quarter. The Financing Corporation assessment for the Bank (and all
other banks) for the first quarter of 2001 is an annual rate of $.0196 for
each $100 of deposits.
NEW LEGISLATION
Landmark legislation in the financial services area was signed into law
by the President on November 12, 1999. The Gramm-Leach-Bliley Act
dramatically changes certain banking laws that have been in effect since the
early part of the 20th century. The most radical changes are that the
separation between banking and the securities businesses mandated by the
Glass-Steagall Act has now been removed, and the provisions of any state law
that prohibits affiliation between banking and insurance entities have been
preempted. Accordingly, the new legislation now permits firms engaged in
underwriting and dealing in securities, and insurance companies, to own
banking entities, and permits bank holding companies (and in some cases,
banks) to own securities firms and insurance companies. The provisions of
federal law that preclude banking entities from engaging in non-financially
related activities, such as manufacturing, have not been changed. For
example, a manufacturing company cannot own a bank and become a bank holding
company, and a bank holding company cannot own a subsidiary that is not
engaged in financial activities, as defined by the regulators.
The new legislation creates a new category of bank holding company
called "financial holding company." In order to avail itself of the expanded
financial activities permitted under the new law, a bank holding company must
notify the Federal Reserve that it elects to be a financial holding company.
A bank holding company can make this election if it, and all of its bank
subsidiaries, are well capitalized, well managed, and have at least a
satisfactory Community Reinvestment Act rating, each in accordance with the
definitions prescribed by the Federal Reserve and the regulators of the
subsidiary banks. Once a bank holding company makes such an election, and
provided that the Federal Reserve does not object to such election by such
bank holding company, the financial holding company may engage in financial
activities (i.e., securities underwriting, insurance underwriting, and
certain other activities that are financial in nature as to be determined by
the Federal Reserve) by simply giving a notice to the Federal Reserve within
thirty days after beginning such business or acquiring a company engaged in
such business. This makes the regulatory approval process to engage in
financial activities much more streamlined than it was under prior law. The
Corporation believes it qualifies to become a financial holding company, but
has not filed to become treated as one at this time.
The new law also permits certain financial activities to be undertaken
by a subsidiary of a national bank. As the Bank is not a national bank, these
provisions do no apply directly to the Bank, but Pennsylvania law has
recently been amended to provide that Pennsylvania chartered banks have
"parity" powers with national banks in all areas of their business.
Therefore, the Bank can now avail itself of these provisions if it chooses to
do so. Federal law provides that, for financial activities that are conducted
as a principal, such as an underwriter or securities dealer holding an
inventory, a national bank must be one of the 100 largest banks in the United
States and have debt that is rated investment grade. National banks that are
not one of the 100 largest national banks in the United States are not
authorized under the new law to conduct financial activities as a principal.
However, such smaller national banks may own a securities broker or an
insurance agency and certain other financial agency entities under the new
law. Under prior law, national banks could only own an insurance agency if it
was located in a town of fewer than
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5,000 residents, or under certain other conditions. Under the new law, there
is no longer any restrictions on where the insurance agency subsidiary of a
national bank is located or does business. Even prior to the recent amendment
providing parity powers in Pennsylvania law, the Bank was permitted to own
and operate an insurance agency without restriction, and could also own and
operate a securities brokerage.
In addition to the foregoing provisions of the new law that make major
changes to the federal banking laws, the new legislation also makes a number
of additions and revisions to numerous federal laws that affect the business
of banking. For example, there is now a federal law on privacy with respect
to customer information held by banks. The federal banking regulators are
authorized to adopt rules regarding privacy for customer information. Banks
must establish a disclosure policy for non-public customer information,
disclose the policy to their customers, and give their customers the
opportunity to object to non-public information being disclosed to a third
party. Also, the Community Reinvestment Act has been amended by the new law
to provide that small banks (those under $250 million in assets) that
previously received an "outstanding" on their last CRA exam will not have to
undergo another CRA exam for five years, or for four years if their last exam
was "satisfactory." In addition, any CRA agreement entered into between a
bank and a community group must be disclosed, with both the bank and the
group receiving any grants from the bank detailing the amount of funding
provided and what it was used for. The new law also requires a bank's policy
on fees for transactions at ATM machines by non-customers to be conspicuously
posted on the ATM. Several other provisions affecting other general
regulatory requirements for banking institutions were also adopted.
Separately from the Gramm-Leach-Bliley Act, Congress is often
considering some financial industry legislation. The Corporation cannot
predict how any new legislation, or new rules adopted by the federal banking
agencies, may affect its business in the future.
SELECTED STATISTICAL INFORMATION
Certain statistical information is included in this report as part of
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
ITEM 2. PROPERTIES
The Corporation's headquarters is located in the main office of F&M
Trust at 20 South Main Street, Chambersburg Pennsylvania. The Corporation
owns one property in Franklin County, Pennsylvania that is used by F&M Trust
for bank operations.
In addition to its main office, F&M Trust owns thirteen properties and
leases one property, all of which are used for banking offices and
operations. F&M Trust also leases four locations for off-site ATM facilities.
The bank owns one property which is currently under construction as part of
an expansion of the headquarters facility. This project is tentatively
scheduled to be completed in 2001. All of the properties owned by the bank
are located in Franklin and Cumberland Counties, Pennsylvania.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET AND DIVIDEND INFORMATION
The Corporation's common stock is not actively traded in the
over-the-counter market. The Corporation's stock is listed under the symbol
"FRAF" on the O.T.C. Electronic Bulletin Board, an automated quotation
service. Current price information is available from account executives at
most brokerage firms as well as the registered market makers of Franklin
Financial Services Corporation common stock as listed below under
Shareholders' Information.
There were 1,929 shareholders of record as of December 31, 2000. The
range of high and low bid prices is shown below for the years 2000 and 1999.
Also shown are the cash dividends declared for the same years.
PER SHARE
CASH
DIVIDENDS
2000 HIGH LOW DECLARED
1ST QUARTER $20.25 $16.00 $0.18
2ND QUARTER 16.63 15.50 0.18
3RD QUARTER 16.75 16.38 0.20
4TH QUARTER 16.88 15.50 0.20
$0.76
PER SHARE
CASH
DIVIDENDS
1999 HIGH LOW DECLARED*
1st quarter $30.00 $28.00 $0.56
2nd quarter 31.25 29.75 0.16
3rd quarter 29.75 23.00 0.18
4th quarter 23.13 20.38 0.18
$1.08
* In the first quarter of 1999 the Board declared a special cash dividend of
$.40 per share in addition to a regular cash dividend of $.16 per share.
SHAREHOLDERS' INFORMATION
DIVIDEND REINVESTMENT PLAN
Franklin Financial Services Corporation offers a dividend reinvestment
program whereby shareholders with stock registered in their own names may
reinvest their dividends in additional shares of the Corporation. Information
concerning this optional program is available by contacting the Corporate
Secretary at 20 South Main Street, P.O. Box 6010, Chambersburg, PA
17201-6010, telephone 717/264-6116.
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DIVIDEND DIRECT DEPOSIT PROGRAM
Franklin Financial Services Corporation offers a dividend direct deposit
program whereby shareholders with registered stock in their own names may
choose to have their dividends deposited directly into the bank account of
their choice on the dividend payment date. Information concerning this
optional program is available by contacting the Corporate Secretary at 20
South Main Street, P.O. Box 6010, Chambersburg, PA 17201-6010, telephone
717/264-6116.
ANNUAL MEETING
The Annual Shareholders' Meeting will be held on Tuesday, April 24,
2001, at the Lighthouse Restaurant, 4301 Philadelphia Avenue, Chambersburg.
The Business Meeting will begin at 10:30 a.m. and will be followed by a
luncheon served at 12:00 noon.
STOCK INFORMATION
The following brokers are registered as market makers of Franklin
Financial Services Corporation's common stock:
Ferris Baker Watts 17 East Washington Street, Hagerstown, MD 21740.......................800/344-4413
Tucker Anthony Cleary Gull 2101 Oregon Pike, Lancaster, PA 17601.........................800/646-8647
(A DIVISION OF TUCKER ANTHONY INC.)
F.J. Morrissey & Co. Inc. 1700 Market Street, Suite 1420, Philadelphia, PA 19103-3913....215/563-3296
Ryan, Beck & Co. 3 Parkway, Philadelphia, PA 19102.......................................800/223-8969
REGISTRAR AND TRANSFER AGENT
The registrar and transfer agent for Franklin Financial Services
Corporation is Fulton Bank, P.O. Box 4887, Lancaster, PA 17604.
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ITEM 6. SELECTED FINANCIAL DATA
SUMMARY OF SELECTED FINANCIAL DATA
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
SUMMARY OF OPERATIONS
Interest income $32,446 $29,407 $27,463 $26,244 $24,908
Interest expense 17,916 15,002 13,151 12,225 11,087
--------- --------- --------- --------- ---------
Net interest income 14,530 14,405 14,312 14,019 13,821
Provision for possible loan losses 753 830 1,061 936 607
--------- --------- --------- --------- ---------
Net interest income after provision
for possible loan losses 13,777 13,575 13,251 13,083 13,214
Noninterest income 5,051 4,502 4,658 3,932 3,444
Noninterest expense 12,715 11,810 11,600 11,262 11,152
--------- --------- --------- --------- ---------
Income before income taxes 6,113 6,267 6,309 5,753 5,506
Income tax 1,106 1,183 1,504 1,390 1,379
--------- --------- --------- --------- ---------
Net income $5,007 $5,084 $4,805 $4,363 $4,127
========= ========= ========= ========= =========
PER COMMON SHARE*
Basic earnings $1.85 $1.86 $1.76 $1.59 $1.46
Diluted earnings $1.81 $1.84 $1.74 $1.58 $1.43
Cash dividends declared $0.76 $1.08 $0.47 $1.37 $0.52
Regular cash dividends paid $0.76 $0.68 $0.62 $0.56 $0.52
Special cash dividends paid $ - $0.40 $0.66 $ - $ -
========= ========= ========= ========= =========
BALANCE SHEET DATA
End of year
Total assets $465,985 $444,679 $425,001 $353,865 $336,120
Loans, net 297,307 284,084 258,488 241,244 221,166
Deposits 357,209 333,310 326,579 274,555 268,202
Long-term debt 29,477 29,695 30,744 10,284 14,891
Shareholders' equity 43,201 39,260 39,901 36,305 35,341
PERFORMANCE YARDSTICKS (UNAUDITED)
Return on average assets 1.10% 1.18% 1.29% 1.26% 1.29%
Return on average equity 12.57% 12.95% 12.58% 12.03% 11.83%
Dividend payout ratio 42.18% 59.38% ** 27.39% 88.27% ** 36.42%
Average equity to average asset ratio 8.77% 9.11% 10.24% 10.49% 10.87%
TRUST ASSETS UNDER MANAGEMENT (UNAUDITED)
Personal trusts (market value) $405,827 $418,723 $399,959 $349,647 $261,803
Corporate trusts (market value) 168 806 1,105 1,219 1,037
---------- ---------- ---------- ---------- ----------
$405,995 $419,529 $401,064 $350,866 $262,840
========== ========== ========== ========== ==========
* PER SHARE INFORMATION HAS BEEN ADJUSTED RETROACTIVELY TO REFLECT ALL STOCK
SPLITS AND DIVIDENDS.
** REFLECTS THE EFFECT OF SPECIAL CASH DIVIDENDS DECLARED.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis is intended to assist the reader in
reviewing the financial information presented and should be read in conjunction
with the consolidated financial statements and other financial data presented
elsewhere herein.
RESULTS OF OPERATIONS: SUMMARY
Franklin Financial Services Corporation reported a slight decline in
earnings for the year ended December 31, 2000 compared to the year ended
December 31, 1999. Net income slipped to $5,007,000 for 2000 from $5,084,000 for
1999, a decrease of $77,000, or 1.51%. Net income recorded for the year ended
December 31, 1998 was $4,805,000. Basic earnings per share were $1.85 for 2000
compared to $1.86 and $1.76 for 1999 and 1998, respectively. Return on average
assets and return on average equity dipped to 1.10% and 12.57%, respectively,
for 2000 from 1.18% and 12.95%, respectively, for 1999 and 1.29% and 12.58%,
respectively for 1998. The decline in earnings for the year is largely
attributable to net interest margin compression, higher salary and benefit
costs, higher loan collection expenses and a soft mortgage origination
environment.
A more detailed discussion of the areas that had the greatest impact on the
reported results for 2000 follows.
NET INTEREST INCOME
2000 VERSUS 1999:
The most important source of the Corporation's earnings is net interest
income which is defined as the difference between income on interest-earning
assets and the expense of interest-bearing liabilities supporting those assets.
Principal categories of interest-earning assets are loans and securities, while
deposits, securities sold under agreements to repurchase (Repos), short-term
borrowings and long term debt are the principal categories of interest-bearing
liabilities. For the purpose of this discussion, net interest income is adjusted
to a fully taxable equivalent basis. This adjustment facilitates performance
comparisons between taxable and tax-free assets by increasing the tax-free
income by an amount equivalent to the Federal income taxes that would have been
paid if this income were taxable at the Corporation's 34% Federal statutory
rate. Net interest income remained flat at $15.8 million for the years ended
December 31, 2000 and 1999. The net interest margin, which reflects interest
rate spread plus the contribution of assets funded by noninterest-bearing
sources, decreased to 3.71% for 2000 from 3.88% for 1999. A strong competitive
environment for loans and deposits, significant growth in repurchase agreements
and market-indexed deposit products as well as a steady rise in interest rates
during the year 2000 all contributed to the compression of the Corporation's net
interest margin. In June 2000, the Corporation purchase Bank Owned Life
Insurance (BOLI) which totaled $6.0 million. This transaction moved $6.0 million
from interest-earning assets to other assets. The Corporation recorded
approximately $219,000 in noninterest income from BOLI in 2000. Although the
BOLI purchase impacted the Corporation's net income favorably, it had an adverse
impact on net interest income and contributed to the decline in the net interest
margin.
TABLE 1. NET INTEREST INCOME
(UNAUDITED)
Net interest income, defined as interest income less interest expense, is as
shown in the following table:
(DOLLARS IN THOUSANDS) 2000 % CHANGE 1999 % Change 1998
--------- ---------- --------- ---------- ---------
Interest income $32,446 10.33% $29,407 7.08% $27,463
Interest expense 17,916 19.42% 15,002 14.07% 13,151
--------- ---------- --------- ----------
Net interest income 14,530 0.87% 14,405 0.65% 14,312
Tax equivalent adjustment 1,256 1,375 974
--------- --------- ---------
Net interest income/fully taxable equivalent $15,786 0.04% $15,780 3.23% $15,286
========= ========= =========
Net interest income is affected primarily by variations in the volume and
mix of the Corporation's earnings assets and interest-bearing liabilities as
well as by changes in the level of interest rates. Volume growth of average
- 11 -
interest-earning assets and average interest-bearing liabilities slowed
dramatically in 2000 versus 1999. Average interest-earnings assets increased
$18.8 million, or 4.63% to $425.1 million in 2000 from $406.3 million in 1999.
Average interest-earnings liabilities grew $22.9 million, or 6.63%, to $367.6
million in 2000 from $344.7 million in 1999. The slower average balance sheet
growth in 2000 versus 1999 was largely attributable to significantly less
investment portfolio activity funded by long-term Federal Home Loan Bank
borrowings that grew both sides of the balance sheet.
Short-term interest rates rose steadily during the first half of 2000
before they leveled off at mid-year. The average prime rate and Federal Funds
rate in 2000 were 9.23% and 6.24%, respectively, compared to 8.00% and 4.95%,
respectively, in 1999. The yield curve became inverted for much of the second
half of the year with short-term interest rates being higher than long-term
rates, which adversely affected the Corporation's net interest income. Many of
the Corporation's liabilities are linked to short-term rates while more of its
assets have longer-term fixed interest rates. The yield on interest-earning
assets increased 35 basis points to 7.93% for the year ended December 31, 2000,
compared to 7.58% for 1999. More than offsetting the higher yield on
interest-earning assets was an increase in the cost of interest-bearing
liabilities totaling 52 basis points to 4.87% for the year ended December 31,
2000, compared to 4.35% for 1999.
As reflected in Table 3, the higher yield plus the higher volume of
interest-earning assets was almost entirely offset by the higher cost and higher
volume of interest-bearing liabilities. Higher volumes of interest-earning
assets and interest-bearing liabilities produced an increase to net interest
income totaling $360,000 while higher interest rates offset that increase in
2000 versus 1999.
1999 VS. 1998:
Average short-term interest rates were lower in 1999 than in 1998. The
average prime rate and the average Federal Funds rate in 1999 were 8.00% and
4.95%, respectively, compared to 8.35% and 5.36%, respectively, in 1998. Net
interest income on a tax-equivalent basis rose $494,000 to $15.8 million in 1999
from $15.3 million in 1998. Average interest-earning assets grew $55.5 million
to $406.3 million for 1999 compared to $350.8 million in 1998 while the yield on
those assets decreased 53 basis points to 7.58%. Average interest-bearing
liabilities grew $55.0 million to $344.7 million in 1999 versus $289.7 million
in 1998 with the rate paid on those liabilities down 19 basis points to 4.35%.
- 12 -
TABLE 2. ANALYSIS OF NET INTEREST INCOME
(UNAUDITED)
2000 1999 1998
------------------------------ ------------------------------ ------------------------------
AVERAGE INCOME OR AVERAGE AVERAGE INCOME OR AVERAGE AVERAGE INCOME OR AVERAGE
(DOLLARS IN THOUSANDS) BALANCE EXPENSE YIELD/RATE BALANCE EXPENSE YIELD/RATE BALANCE EXPENSE YIELD/RATE
------- --------- ---------- ------- --------- ---------- ------- --------- ----------
Interest-earning assets:
Interest-bearing
deposits in
other banks $3,106 $201 6.47% $6,970 $354 5.08% $6,634 $359 5.41%
Investment securities
Taxable 82,726 5,437 6.57% 79,771 4,681 5.87% 60,676 3,641 6.00%
Nontaxable 42,189 3,074 7.29% 47,068 3,470 7.37% 30,859 2,248 7.28%
Loans, net of
unearned discount 297,078 24,990 8.41% 272,470 22,277 8.18% 252,596 22,189 8.78%
------- --------- ---------- ------- --------- ---------- ------- --------- ----------
Total interest-earning
assets 425,099 33,702 7.93% 406,279 30,782 7.58% 350,765 28,437 8.11%
------- --------- ---------- ------- --------- ---------- ------- --------- ----------
Other assets 29,124 24,428 22,266
-------- -------- --------
Total assets $454,223 $430,707 $373,031
======== ======== ========
Interest-bearing
liabilities:
Deposits:
Interest-bearing
checking $42,369 $731 1.73% $44,246 $887 2.00% $37,046 $801 2.16%
Money market deposit
accounts 86,061 4,618 5.37% 65,678 2,725 4.15% 49,933 2,125 4.26%
Savings 35,216 1,012 2.87% 38,305 1,079 2.82% 38,782 1,080 2.78%
Time 135,110 7,510 5.56% 138,265 7,250 5.24% 129,094 7,199 5.58%
------- --------- ---------- ------- --------- ---------- ------- --------- ----------
Total interest-bearing
deposits 298,756 13,871 4.64% 286,494 11,941 4.17% 254,855 11,205 4.40%
------- --------- ---------- ------- --------- ---------- ------- --------- ----------
Securities sold under
agreements to repurchase 34,872 2,125 6.09% 25,802 1,242 4.81% 20,205 1,053 5.21%
Short term borrowings 3,968 240 6.05% 510 29 5.69% 1,547 89 5.75%
Long term debt 30,009 1,680 5.60% 31,916 1,790 5.61% 13,091 804 6.14%
------- --------- ---------- ------- --------- ---------- ------- --------- ----------
Total interest-bearing
liabilities 367,605 17,916 4.87% 344,722 15,002 4.35% 289,698 13,151 4.54%
------- --------- ---------- ------- --------- ---------- ------- --------- ----------
Noninterest-bearing
deposits 43,332 43,262 41,237
Other liabilities 3,420 3,472 3,886
Shareholders' equity 39,866 39,251 38,210
------- ------- -------
Total liabilities
and shareholders'
equity $454,223 $430,707 $373,031
======== ======== ========
Net interest income/
Net interest spread 15,786 3.06% 15,780 3.23% 15,286 3.57%
--------- ---------
Tax equivalent adjustment (1,256) (1,375) (974)
--------- --------- ---------
Net interest income $14,530 $14,405 $14,312
========= ========= =========
All amounts have been adjusted to a tax-equivalent basis using a tax rate of 34%
Years ended December 31
--------------------------------------
2000 1999 1998
---------- ------------ ----------
Rate Analysis:
Yield on total earning assets 7.93% 7.58% 8.11%
Cost of funds supporting earning assets 4.22% 3.70% 3.75%
---------- ------------ ----------
Net rate on earning assets 3.71% 3.88% 4.36%
========== ============ ==========
- 13 -
TABLE 3. RATE-VOLUME ANALYSIS OF NET INTEREST INCOME
(UNAUDITED)
Table 3 attributes increases and decreases in components of net interest
income either to changes in average volume or to changes in average rates for
interest-earning assets and interest-bearing liabilities. Numerous and
simultaneous balance and rate changes occur during the year. The amount of
change that is not due solely to volume or rate is allocated proportionally to
both.
2000 COMPARED TO 1999 1999 Compared to 1998
INCREASE (DECREASE) DUE TO: Increase (Decrease) due to:
------------------------------------ ---------------------------------------
(AMOUNTS IN THOUSANDS) VOLUME RATE NET Volume Rate Net
---------- ---------- ---------- ----------- ---------- ------------
Interest earned on:
Interest-bearing deposits
in other banks ($232) $79 ($153) $18 ($23) ($5)
Investment securities
Taxable 178 578 756 1,122 (82) 1,040
Nontaxable (356) (40) (396) 1,195 27 1,222
Loans 2,056 657 2,713 1,682 (1,594) 88
---------- ---------- ---------- ----------- ---------- ------------
Total net change in
interest income 1,646 1,274 2,920 4,017 (1,672) 2,345
---------- ---------- ---------- ----------- ---------- ------------
Interest expense on:
Interest-bearing checking (36) (120) (156) 147 (61) 86
Money market deposit
accounts 973 920 1,893 655 (55) 600
Savings accounts (88) 21 (67) (13) 12 (1)
Time deposits (168) 428 260 495 (444) 51
Securities sold under
agreements
to repurchase 503 380 883 274 (85) 189
Short term borrowings 209 2 211 (59) (1) (60)
Long term borrowings (107) (3) (110) 1,062 (76) 986
---------- ---------- ---------- ----------- ---------- ------------
Total net change
in interest expense 1,286 1,628 2,914 2,561 (710) 1,851
---------- ---------- ---------- ----------- ---------- ------------
Increase (decrease) in net
interest income $360 ($354) $6 $1,456 ($962) $494
========== ========== ========== =========== ========== ============
Nonaccruing loans are included in the loan balances used to calculate the
above rate volume analysis. The interest associated with these nonaccruing loans
is not shown in the loan income numbers. All nontaxable interest income has been
adjusted to a tax-equivalent basis, using a tax rate of 34%.
PROVISION FOR POSSIBLE LOAN LOSSES
The provision for possible loan losses charged against earnings in 2000 was
$753,000 compared to $830,000 and $1.061 million in 1999 and 1998, respectively.
Net charge-offs totaled approximately $745,000 in 2000 versus $520,000 and
$816,000 in 1999 and 1998, respectively. Management performs a monthly analysis
of the loan portfolio considering current economic conditions and other relevant
factors to determine the adequacy of the allowance for possible loan losses. For
more information, refer to the asset quality discussion and Tables 11, 12 and
13.
NONINTEREST INCOME AND EXPENSE
2000 VERSUS 1999:
Noninterest income, excluding securities gains, grew $442,000, or 10.49%,
to $4.65 million for the year ended December 31, 2000, compared to the same
period ended December 31, 1999. Investment and trust services fees
- 14 -
recorded a small increase of $64,000 to $2.4 million for 2000 compared to $2.3
million for 1999. Lower market values and reduced estate fees in 2000 were the
primary contributors to the slow growth in investment and trust services fees.
Service charges and fees were up $175,000, or 9.60%, to almost $2.0 million for
the year ended December 31, 2000. Contributing to this increase was the
implementation of an ATM access fee for noncustomers which added $130,000,
higher debit card and point-of-sale activity added an extra $28,000 and a new
method of processing official checks added $17,000. Other income grew $203,000
to $268,000 in 2000 from $65,000 in 1999. The primary contributor to this
increase was income of $219,000 from bank-owned life insurance purchased in
2000. The Corporation realized securities gains totaling $396,000 for the year
ended December 31, 2000, compared to $289,000 for the same period ended December
31, 1999.
Total noninterest expense grew $905,000, or 7.66%, to $12.7 million for the
year ended December 31, 2000, from $11.8 million for the year ended December 31,
1999. Salaries and employee benefits, legal and professional fees and other
expense were the categories that recorded the largest increases. Salary expense,
which includes commissions, "pay for performance," and other incentives,
increased approximately $96,000, or 1.66%, to $5.9 million in 2000 versus $5.8
million in 1999. The increase in salary expense was partially offset by
outsourcing the Internal Audit Department in the second quarter of 2000.
Employee benefits expense was up approximately $95,000, or 7.27%, to $1.4
million in 2000 versus $1.3 million in 1999. A lower pension expense credit of
$77,000 was the primary contributor to the increase in employee benefits in 2000
versus 1999. Another significant factor contributing to higher salaries and
benefits expense was deferred costs related to loan originations. The
Corporation deferred approximately $215,000 less in loan origination costs in
2000 versus 1999. Such costs reduced salaries and benefits by $491,000 in 2000
compared with $706,000 in 1999. The reduction in deferred costs was due
primarily to a 25% decline in residential mortgage loan originations in 2000
versus 1999.
Legal and professional fees were up $63,000, or 19.20%, to $391,000 for the
year ended December 31, 2000, compared to $328,000 for the year ended December
31, 1999. The increase was primarily attributable to the outsourcing of internal
audit in the second quarter of 2000 and was partially offset by a corresponding
reduction in salaries and benefits.
Other noninterest expense increased $381,000, or 18.8%, to $2.4 million for
the year ended December 31, 2000 from $2.0 million for the year ended December
31, 1999. A loss on the sale of several nonperforming loans totaling
approximately $138,000, increases in OREO expense and loan collection expense
totaling $42,000 and $88,000, respectively, accounted for the majority of the
increase. An increase of $77,000 in ATM expense was the next largest contributor
to the increase in other noninterest expense. The remaining $36,000 was due to
general operating increases.
1999 VERSUS 1998:
Total noninterest income, excluding securities gains, grew 4.46%, or
$180,000 to $4.2 million for the year ended December 31, 1999, compared to the
same period ended December 31, 1998. Investment and trust service fees were up
$480,000 to $2.3 million in 1999 from $1.8 million in 1998. An aggressive sales
culture from traditional trust business contributed to the strong increase in
trust fee income. Other income was down $185,000, or 74.0%, to $65,000 in 1999
from $250,000 in 1998. The recognition of a deferred gain in 1998 from the 1993
sale of a real estate subsidiary accounted for the large variance in other
income between 1999 and 1998. The Corporation recognized securities gains
totaling $289,000 in 1999, down $336,000 from the $625,000 recognized in 1998.
Total noninterest expense was up $210,000 to $11.8 million in 1999 compared
to $11.6 in 1998. Higher salaries and benefits largely offset by reduced other
expense in 1999 accounted for the modest increase in noninterest expense year to
year. The reduction in other expense was related to amortization of intangibles
and real estate write-down and demolition expense incurred in 1998 associated
with the expansion of the corporate headquarters.
PROVISION FOR INCOME TAXES
Federal income tax expense equaled $1.10 million in 2000 compared to $1.18
million and $1.50 million in 1999 and 1998, respectively. The Corporation's
effective tax rate for the years ended December 31, 2000, 1999 and 1998 was
18.1%, 18.9% and 23.8%, respectively. An increase in tax-free income including
earnings on the bank-owned
- 15 -
life insurance over the past two years relative to pretax income was primarily
responsible for the declining effective tax rate over the three-year period. For
a more comprehensive analysis of Federal income tax expense refer to Note 10 of
the accompanying financial statements.
FINANCIAL CONDITION
One method of evaluating the Corporation's condition is in terms of its
uses and sources of funds. Assets represent uses of funds while liabilities
represent sources of funds. At December 31, 2000, total assets reached $465.99
million, an increase of $21.3 million, or 4.79%, compared to $444.68 million at
December 31, 1999. Table 2 presents average balances of the Corporation's assets
and liabilities over a three-year period. The following financial condition
discussion will reference the average balance sheet in Table 2 unless otherwise
noted.
INVESTMENT SECURITIES:
The Corporation invests in both taxable and tax-free securities as part of
its asset/liability management. All securities are classified as available for
sale at December 31, 2000. In 2000, investment securities averaged $124.9
million versus $126.8 million in 1999, a decrease of 1.51%. Average nontaxable
securities were down $4.8 million to $42.2 million in 2000 while average taxable
securities were up $2.9 million to $82.7 million. The decrease in average
nontaxable securities was due primarily to calls and maturities while the
increase in average taxable securities was primarily due to the purchase of
corporate notes. With the exception of two nonrated securities with a market
value of $1.2 million, the investment portfolio is made up entirely of
investment grade securities.
TABLE 4. INVESTMENT SECURITIES AT AMORTIZED COST
(UNAUDITED)
The following tables present amortized costs of investment securities by type at
December 31 for the past three years:
AMORTIZED COST
------------------------------------------------
2000 1999 1998
------------- ------------- ---------------
Equity Securities $5,469 $5,423 $3,404
U.S. Treasury securities and obligations of U.S. Government
agencies and corporations 10,459 13,982 13,992
Obligations of state and political subdivisions 43,832 48,271 48,490
Corporate debt securities 14,057 11,586 5,959
Mortgage-backed securities 30,157 31,320 25,572
Other 20,613 20,606 27,000
------------- ------------- ---------------
$124,587 $131,188 $124,417
============= ============= ===============
TABLE 5. MATURITY DISTRIBUTION OF INVESTMENT PORTFOLIO
(UNAUDITED)
The following presents an analysis of investment securities at December 31, 2000
by maturity, and the weighted average yield for each maturity presented. The
yields presented in this table are presented on a tax-equivalent basis and have
been calculated using the amortized cost.
After one year After five years After ten
One year or less through five years through ten years years Total
---------------- ------------------ ----------------- --------------- ----------------
Fair Fair Fair Fair Fair
(DOLLARS IN THOUSANDS) Value Yield Value Yield Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
U.S. Treasury securities &
obligations of
U.S. Government
agencies & corporations
Obligations of state & political
subdivisions $5,002 5.68% $4,552 6.59% $978 6.52% $ - -% $10,532 6.15%
Corporate debt securities 2,022 5.91% 4,173 6.37% 4,263 7.01% 33,325 7.21% 43,782 7.05%
Mortgage-backed securities 3,008 6.55% 6,531 6.84% 1,914 7.33% 2,668 8.32% 14,121 7.12%
Other 796 5.90% 4,545 6.17% 6,169 6.31% 18,604 6.53% 30,114 6.41%
Equity securities 2,978 6.59% 9,049 6.78% 4,936 6.86% 3,699 7.22% 20,662 6.85%
- - - - - - 5,963 6.20% 5,963 6.20%
----------------- ----------------- ----------------- --------------- ----------------
$13,806 6.00% $28,850 6.61% $18,260 6.74% $64,259 7.04% $125,174 6.78%
================= ================= ================= =============== ================
- 16 -
TABLE 6. LOAN PORTFOLIO
(UNAUDITED)
The following table presents an analysis of the Bank's loan portfolio
for each of the past five years:
December 31
-----------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS) 2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- ------------
Real estate (primarily first mortgage
residential loans) $102,771 $101,426 $92,293 $82,989 $79,478
Real estate - construction 1,909 3,670 3,567 2,480 3,727
Commercial, industrial and agricultural 134,413 123,021 108,540 103,471 91,244
Consumer (including home equity lines
of credit) 62,081 59,826 57,637 55,608 49,777
----------- ----------- ----------- ----------- ------------
TOTAL LOANS 301,174 287,943 262,037 244,548 224,226
Less: Allowance for possible loan losses (3,867) (3,859) (3,549) (3,304) (3,060)
----------- ----------- ----------- ----------- ------------
NET LOANS $297,307 $284,084 $258,488 $241,244 $221,166
=========== =========== =========== =========== ============
LOANS:
Total loans averaged $297.1 million in 2000 versus $272.5 million in 1999,
an increase of 9.03%. As reflected in Table 6, the growth in the loan portfolio
in 2000 occurred mostly in the commercial, industrial and agricultural category,
which was up $11.4 million to $134.4 million at December 31, 2000, compared to
$123.0 million at December 31, 1999. Growth in this arena has come from local
municipalities and small and medium sized businesses. In addition, the
Corporation has participated in commercial loans with other financial
institutions within the region. The uncertainty of the economy in 2000 and the
higher interest rate environment were factors contributing to the decrease in
real estate lending, primarily first mortgage residential loans. The Corporation
reported a slight decline of $416,000 to $104.7 million in real estate and real
estate construction loan balances at December 31, 2000 compared to $105.1
million at December 31, 1999. Consumer loans continued their steady annual
growth of just under 4.0% over the past three years. At December 31, 2000,
consumer loans totaled $62.0 million, an increase of $2.2 million, or 3.76%,
from $59.8 million at December 31, 1999.
TABLE 7. MATURITIES AND INTEREST RATE TERMS OF SELECTED LOANS
(UNAUDITED)
Stated maturities (or earlier call dates) of selected loans as of December
31, 2000 are summarized in the table below. Residential mortgages and consumer
loans are excluded from the presentation.
After
one year
Within but within After
(AMOUNTS IN THOUSANDS) one year five years five years Total
------------ ---------------- ---------------- ---------------
Loans:
Real estate - construction $1,909 $ - $ - $1,909
Commercial, industrial and agricultural 20,094 47,639 66,680 134,413
------------ ---------------- ---------------- ---------------
$22,003 $47,639 $66,680 $136,322
============ ================ ================ ===============
The following table shows for the above loans the amounts which have
predetermined interest rates and the amounts which have variable interest rates
at December 31, 2000:
After
one year
but within After
five years five years
---------------- ----------------
Loans with predetermined rates $18,019 $43,462
Loans with variable rates 29,620 23,218
---------------- ----------------
$47,639 $66,680
================ ================
- 17 -
OTHER ASSETS:
Average Other assets increased $4.7 million, or 19.22%, to $29.1 million in
2000. Included in average Other assets are Cash and Due from Banks, Premises and
Equipment and Other Assets. The growth in average Other assets in 2000 versus
1999 came primarily from increases in premises and equipment and the purchase of
Bank Owned Life Insurance (BOLI). Premises and equipment was up $1.7 million to
$7.2 million at December 31, 2000, from $5.5 million at December 31, 1999. This
increase is due primarily to ongoing construction of an addition to the
Corporation's headquarters, the construction of Ritner Commons, a professional
office complex in a new market which includes a new community office facility,
and land acquisitions for future branch banking and ATM sites. BOLI purchased in
June 2000 and recorded as an other asset totaled $6.0 million and contributed to
the growth in average Other assets. The BOLI was purchased in order to enhance
benefits to a designated group of officers and as an attractive tax-free
investment that will provide approximately $19.0 million in death benefit
coverage on the lives of those officers.
TABLE 8. TIME DEPOSITS OF $100,000 OR MORE
(UNAUDITED)
The maturity of outstanding time deposits of $100,000 or more at
December 31, 2000 is as follows:
(AMOUNTS IN THOUSANDS) Amount
----------
Maturity distribution:
Within three months $12,853
Over three through six months 12,440
Over six through twelve months 8,169
Over twelve months 1,622
----------
TOTAL $35,084
==========
DEPOSITS AND BORROWINGS:
Funding for asset growth in 2000 came from deposits, Securities sold under
agreements to repurchase (Repos) and short-term borrowings. Average
interest-bearing deposits grew $12.2 million, or 4.28%, to $298.8 million in
2000 from an average of $286.5 million in 1999. The growth in deposits came from
money market accounts, which were up $20.4 million in 2000 versus 1999. All
other interest-bearing deposit categories recorded decreases in volume in 2000
versus 1999. Average noninterest-bearing demand deposit volume remained steady
year over year. Average Repos grew $9.1 million, or 35.27%, to $34.9 million in
2000 from $25.8 million in 1999. Repos represent corporate and municipal cash
management accounts. The banking industry in general has experienced increased
difficulty in relying totally on deposit growth to fund the growth in assets.
The Corporation is no exception to this phenomenon and finds it necessary to
look to alternate funding sources. One source of alternate funding for the
Corporation is the Federal Home Loan Bank of Pittsburgh (FHLB). The Corporation
has entered into both short-term and long-term debt arrangements with the FHLB.
In 2000, short-term borrowings averaged $4.0 million and longer-term debt
averaged $30.0 million as compared to $.5 million and $31.9 million,
respectively, in 1999. As of December 31, 2000, the Corporation had the ability
to borrow a total of $142.9 million from the FHLB. At December 31, 2000, the
Corporation's outstanding debt with the FHLB was $29.5 million.
TABLE 9. SHORT-TERM BORROWINGS AND SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE (UNAUDITED)
(AMOUNTS IN THOUSANDS) 2000 1999 1998
---------------------------- --------------------------- ---------------------------
SHORT-TERM REPURCHASE Short-Term Repurchase Short-Term Repurchase
BORROWINGS AGREEMENTS Borrowings Agreements Borrowings Agreements
---------------------------- --------------------------- ---------------------------
Ending balance $ - $33,036 $12,500 $27,182 $ - $24,414
Average balance 3,968 34,872 510 25,802 1,547 20,205
Maximum month-end balance 15,800 41,728 12,500 33,496 8,350 24,414
Weighted-average interest rate
on average balances 6.05% 6.09% 5.69% 4.81% 5.75% 5.21%
- 18 -
SHAREHOLDERS' EQUITY:
Shareholders' equity totaled $43.2 million at December 31, 2000, an
increase of $3.9 million from $39.3 million at December 31, 1999. Increases of
$2.9 million and $1.2 million in retained earnings and accumulated other
comprehensive income were the primary contributors to the higher shareholders'
equity.
Cash dividends declared by the Board of Directors in 2000 and 1999 totaled
$.76 and $1.08 per common share, respectively, and reduced shareholders' equity
by $2.1 million and $3.0 million, respectively. Cash dividends in 1999 included
a special cash dividend of $.40 per common share and regular quarterly cash
dividends totaling $.68 per common share.
On March 2, 2000, the Board of Directors authorized the repurchase of up to
75,000 shares of the Corporation's common stock over a twelve-month period
ending in March 2001. Treasury stock repurchased is used for general corporate
purposes including stock dividends and splits, employee benefit and executive
compensation plans, and the dividend reinvestment plan. Under this program the
Corporation repurchased 35,577 shares for approximately $595,000. In March 1999,
the Board of Directors authorized a similar plan over a twelve-month period that
ended March 2000. Under this program, the Corporation repurchased 15,975 shares
for approximately $435,000. At December 31, 2000 and 1999, the Corporation held
Treasury shares totaling 287,373 and 252,830, respectively, that were acquired
through Board authorized stock repurchase programs.
On March 8, 2001, the Board of Directors approved a new stock repurchase
program which authorized the repurchase of up to 75,000 shares of the
Corporation's common stock over a twelve-month period ending in March 2002.
A strong capital position is important to the Corporation and provides a
solid foundation for the future growth of the Corporation. A strong capital
position also instills confidence in the Bank by depositors, regulators and
investors, and is considered essential by management.
Common measures of adequate capitalization for banking institutions are
capital ratios. These ratios indicate the proportion of permanently committed
funds to the total asset base. Guidelines issued by Federal and State regulatory
authorities require both banks and bank holding companies to meet minimum
leverage capital ratios and risk-based capital ratios.
The leverage ratio compares Tier 1 Capital to total balance sheet assets
while the risk-based ratio compares Tier 1 and total capital to risk-weighted
assets and off-balance-sheet activity in order to make capital levels more
sensitive to the risk profiles of individual banks.
Current regulatory capital guidelines call for a minimum leverage ratio of
4.0% and minimum Tier 1 and total capital ratios of 4.0% and 8.0%, respectively.
Well capitalized banking institutions are determined to have leverage capital
ratios greater than or equal to 5.0% and Tier 1 and total capital ratios greater
than or equal to 6.0% and 10.0%, respectively.
Tier 1 capital is composed of common stock, additional paid-in capital,
retained earnings and the effect of unrealized losses on available for sale
equity securities, reduced by goodwill and other intangible assets.
Total capital is composed of Tier 1 capital plus the includable portion of
the allowance for possible loan losses. Table 10 presents the capital ratios for
the consolidated Corporation at December 31, 2000, 1999 and 1998. At year-end,
the Corporation and its banking subsidiary exceeded all regulatory capital
requirements. For additional information on capital adequacy refer to Note 2 of
the accompanying financial statements.
TABLE 10. CAPITAL RATIOS
(UNAUDITED)
December 31
2000 1999 1998
---------- ----------- ----------
Risk-based ratios:
Tier 1 12.62% 12.65% 12.73%
Total capital 13.79% 13.89% 13.97%
Leverage Ratio 8.99% 8.72% 9.16%
- 19 -
LOCAL ECONOMY:
The economy in Franklin and Cumberland counties continues to be healthy. A
recent report produced by the Northeast Regional Center for Rural Economic
Development at Penn State University ranked Franklin County as the fifth-leading
rural economy in the Northeast - and the top rural economy in Pennsylvania.
Franklin County's unemployment rate in January was 4.4% - Cumberland County had
an unemployment rate of 2.5%. State and national unemployment rates for December
2000 were 4.9% and 4.7% respectively.
TABLE 11. ALLOCATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
(UNAUDITED)
The following table shows the allocation of the allowance for possible loan
losses by major loan category and the percentage of the loans in each category
to total loans at year-end:
December 31
-----------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------ ----------------- ----------------- ------------------ -------------------
(AMOUNTS IN THOUSANDS) $ % $ % $ % $ % $ %
-------- ------- -------- ------- -------- ------- -------- ------- -------- ---------
Real Estate 200 35 279 36 239 39 251 37 220 37
Commercial, industrial
and agricultural 2,667 44 2,480 43 1,779 39 1,489 40 1,326 41
Consumer 1,000 21 1,100 21 1,531 22 1,564 23 1,514 22
-------- ------- -------- ------- -------- ------- -------- ------- -------- ---------
$3,867 100% $3,859 100% $3,549 100% $3,304 100% $3,060 100%
======== ======= ======== ======= ======== ======= ======== ======= ======== =========
TABLE 12. NONPERFORMING ASSETS
(UNAUDITED)
The following table presents an analysis of nonperforming assets for each
of the past five years.
December 31
-----------------------------------------------------------------
(AMOUNTS IN THOUSANDS) 2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- ----------
Nonaccrual loans $576 $3,131 $1,325 $1,148 $856
Loans past due 90 days or more
(not included above) 369 451 314 564 874
Restructured loans - - - - -
----------- ----------- ----------- ----------- ----------
Total nonperforming loans 945 3,582 1,639 1,712 1,730
Other real estate 1,402 306 527 185 99
----------- ----------- ----------- ----------- ----------
Total non performing assets $2,347 $3,888 $2,166 $1,897 $1,829
=========== =========== =========== =========== ==========
Nonperforming loans to total loans 0.31% 1.24% 0.63% 0.71% 0.78%
Nonperforming assets to total assets 0.50% 0.87% 0.51% 0.54% 0.54%
Allowance for loan losses to
nonperforming loans 409.21% 107.73% 216.53% 192.99% 176.88%
It is the Corporation's policy to evaluate the probable collectibility of
principal and interest due under terms of loan contracts for all loans 90 days
or more past due or restructured loans. Further, it is the Corporation's policy
to discontinue accruing interest on loans that are not adequately secured and
not expected to be repaid in full or restored to current status. Upon
determination of nonaccrual status, the Corporation reverses any current year
accrued and unpaid interest from its income, and any prior year accrued and
unpaid interest from the Corporation's allowance for loan losses. The
Corporation has no foreign loans.
- 20 -
ASSET QUALITY:
Asset quality as measured by nonperforming assets improved at year-end 2000
from year-end 1999 (see Table 12). The two components of nonperforming assets
are nonperforming loans (nonaccrual loans, loans past due 90 days or more and
restructured loans) and other real estate acquired as a result of foreclosure or
"ORE".
Nonperforming assets decreased $1.54 million, or 39.63%, to $2.3 million at
year-end 2000 from $3.9 million at year-end 1999. Nonperforming assets as a
percentage of total assets decreased to .50% at December 31, 2000, from .87% at
December 31, 1999. With the exception of 1999, the levels of nonperforming
assets over the past five years have remained fairly constant as reflected in
the ratio of nonperforming assets to total assets which has stayed within a
range of .50% to .54%.
Total nonperforming loans decreased $2.6 million, or 73.6%, to $945,000 at
December 31, 2000, from $3.5 million at December 31, 1999. Nonaccrual loans
decreased $2.5 million, or 81.6%, to $576,000 at year-end 2000 from $3.1 million
at year-end 1999, due in large part to the foreclosure of two commercial
facilities that were transferred to ORE and the sale of a pool of nonperforming
loans. Loans past due 90 days or more decreased $82,000, or 18.2%, to $369,000
at December 31, 2000 compared to $451,000 at December 31, 1999. The Corporation
had no restructured loans at December 31, 2000.
Total nonperforming loans as a percentage of total loans decreased to .31%
at December 31, 2000 from 1.24% at December 31, 1999, due to the reduction in
nonperforming loans noted above and an increase in loan volume in 2000 versus
1999. With the exception of 1999 (which was driven by one large commercial
credit) nonperforming loans have trended downward.
Net charge-offs for the year ended December 31, 2000, totaled $745,000 and
represented an increase of $225,000, or 43.3% for 2000 versus 1999. Commercial
loan net charge-offs represented 23.7% of the total net charge-offs while
consumer and real estate net charge-offs represented 40.7% and 35.6%,
respectively.
As shown in Table 13, commercial and real estate net charge-offs were
higher in 2000 than in any of the prior years while consumer net charge-offs
were lower. The lower consumer net charge-offs were a result of management's
continuing effort to strengthen consumer loan quality through assessing
underwriting standards and conducting ongoing employee training.
Despite the fact that net charge-offs in 2000 totaled the second highest
($745,000, second only to $816,000 in 1998) of net charge-offs in five years,
the Corporation's net loans charged-off in 2000 as a percentage of average loans
was the second lowest in five years at .25% (1999 recorded .19%). This lower
percentage was primarily the result of the growth in average loans over the
five-year period.
The allowance for possible loan losses, which equaled $3.87 million at
December 31, 2000, versus $3.86 million at December 31, 1999, recorded little
growth. The allowance represented 1.28% and 1.34% of total loans at December 31,
2000 and 1999, respectively, and provided coverage for nonperforming loans of
4.1 times and 1.1 times, respectively.
Management utilizes a loan loss reserve analysis to establish the adequacy
of the allowance for possible loan losses. This analysis has two components,
specific and general allocations. A borrower's financial condition, repayment
capacity, collateral values and/or guarantors' support are all considered in
establishing specific allocations for identified credits. The Corporation's
historical loan loss experience, delinquency rates, and general economic
conditions are considered in establishing general allocations for the remainder
of the loan portfolio. Management monitors the adequacy of the allowance on a
monthly basis and reports its adequacy assessment to the Board of Directors
monthly. Management believes that the allowance for loan losses was adequate at
December 31, 2000.
Maintaining asset quality is an essential element of the Corporation's
financial performance. Accordingly, improving asset quality to reduce net
charge-offs is a strategic objective of the Corporation. Management continues to
reassess its underwriting standards and procedures. Additionally, 2001 will be
the first full year of management's implementation of a consumer loan review
function that will perform the same credit quality monitoring of the
Corporation's consumer loan portfolio as the Corporation's commercial loan
review function.
- 21 -
TABLE 13. ALLOWANCE FOR POSSIBLE LOAN LOSSES
(UNAUDITED)
The following table presents an analysis of the allowance for possible loan
losses for each of the past five years.
December 31
----------------------------------------------------------------
(AMOUNTS IN THOUSANDS) 2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ---------
Balance at beginning of year $3,859 $3,549 $3,304 $3,060 $3,141
Charge-offs:
Commercial, industrial and agricultural (222) (69) (189) (113) (183)
Consumer (371) (469) (688) (637) (582)
Real estate (289) (90) (84) (32) (12)
---------- ---------- ---------- ---------- ---------
Total charge-offs (882) (628) (961) (782) (777)
---------- ---------- ---------- ---------- ---------
Recoveries:
Commercial, industrial and agricultural 45 64 63 11 25
Consumer 68 44 82 79 64
Real estate 24 - - - -
---------- ---------- ---------- ---------- ---------
Total recoveries 137 108 145 90 89
---------- ---------- ---------- ---------- ---------
Net charge-offs (745) (520) (816) (692) (688)
---------- ---------- ---------- ---------- ---------
Provision for possible loan losses 753 830 1,061 936 607
---------- ---------- ---------- ---------- ---------
Balance at end of year $3,867 $3,859 $3,549 $3,304 $3,060
========== ========== ========== ========== =========
Ratios:
Net loans charged off as a percentage
of average loans 0.25% 0.19% 0.32% 0.29% 0.32%
Net loans charged off as a percentage of
the provision for possible loan losses 98.94% 62.65% 76.91% 73.93% 113.34%
Allowance as a percentage of loans 1.28% 1.34% 1.35% 1.35% 1.36%
LIQUIDITY
The Corporation must meet the financial services needs of the customers
that it serves, while providing a satisfactory return on the shareholders'
investment. In order to accomplish this, the Corporation must maintain
sufficient liquidity in order to respond quickly to the changing level of funds
required for both loan and deposit activity. The goal of liquidity management is
to meet the ongoing cash flow requirements of depositors who want to withdraw
funds and of borrowers who request loan disbursements. Historically, the
Corporation has satisfied its liquidity needs from earnings, repayment of loans
and amortizing investment securities, maturing investment securities, deposit
growth and its ability to borrow through existing lines of credit. All
investments are classified as available for sale which provides an additional
source of readily available liquidity.
Growth in deposits generally provides a major portion of the funds required
to meet increased loan demand. At December 31, 2000, total deposits reached
$357.2 million, an increase of $23.9 million, other borrowings decreased $12.7
million, securities sold under agreements to repurchase increased by $5.8
million - a net increase of $17.0 million to fund asset growth and meet
liquidity needs. Table 9 presents specific information concerning short-term
borrowings.
- 22 -
MARKET RISK
In the course of its normal business operations, the Corporation is exposed
to certain market risks. The Corporation has no foreign currency exchange rate
risk, no commodity price risk or material equity price risk. However, it is
exposed to interest rate risk. Financial instruments, which are sensitive to
changes in market interest rates, include fixed and variable-rate loans,
fixed-income securities, off-balance sheet derivatives, interest-bearing
deposits and other borrowings. All interest rate risk arises in connection with
financial instruments entered into for purposes other than trading.
Changes in interest rates can have an impact on the Corporation's net
interest income and the economic value of equity. The objective of interest rate
risk management is to identify and manage the sensitivity of net interest income
and economic value of equity to changing interest rates in order to achieve
consistent earnings that are not contingent upon favorable trends in interest
rates.
The Corporation uses several tools to measure and evaluate interest rate
risk. One tool is interest rate sensitivity or gap analysis. Gap analysis
classifies assets and liabilities into maturity and repricing time intervals.
The interest rate gap, the difference between maturing or repricing assets and
liabilities, provides management with an indication of how different interest
rate scenarios will impact net interest income. Table 14 presents a gap analysis
of the Corporation at December 31, 2000 and 1999. The negative gaps in the under
one-year time intervals suggest that the Corporation's near-term earnings would
decline in a higher interest rate environment.
Another tool for analyzing interest rate risk is financial simulation
modeling which captures the impact of not only changing interest rates but also
other sources of cash flow variability including loan and securities
prepayments, loan repricing, deposit repricing and customer preferences.
Financial simulation modeling forecasts both net interest income and the
economic value of equity under a variety of different interest rate
environments. Economic value of equity is defined as the estimated discounted
present value of assets minus the discounted present value of liabilities and is
a surrogate for long-term earnings. The Corporation regularly measures the
effects of an up or down 200-basis point "rate shock" which is deemed to
represent the outside limits of any reasonably probable movement in market
interest rates during a one-year time frame. As indicated in Table 15, the
financial simulation analysis revealed that as of December 31, 2000 prospective
net interest income over a one-year time period would be adversely affected by
either higher or lower market interest rates. The economic value of equity would
be adversely affected by lower market interest rates but favorably affected by
higher interest rates. The Corporation establishes tolerance guidelines for
these measures of interest rate sensitivity. As of December 31, 2000 the
Corporation was slightly outside the prescribed tolerance range for economic
value of equity sensitivity to lower market interest rates but within the
prescribed tolerance for net interest income sensitivity.
Computations of the prospective effects of hypothetical interest rate
changes are based on many assumptions, including relative levels of market
interest rates, loan prepayments and deposit decay. Certain shortcomings are
inherent in the computation of discounted present value and, if key
relationships do not unfold as assumed, actual values may differ from those
presented. Further, the computations do not contemplate any actions management
could undertake in response to changes in market interest rates.
During 1999, the Corporation entered into an interest rate cap transaction
with a notional amount of $5 million and term of five years. The cap was
purchased to hedge the Corporation's exposure to the impact of rate increases on
its variable-rate funding sources. At December 31, 2000, the fair value of the
cap was $76,000, compared to $238,000 at December 31, 1999. Of the $162,000
decline in fair value, $125,000 was reflected in other comprehensive income, net
of tax, and the remaining $37,000 was reflected in interest expense. The Board
of Directors has authorized bank management to enter into off-balance sheet
transactions including interest rate swaps, caps and flows, forward rate
agreements, options and future contracts in order to hedge interest rate risk.
Off-balance sheet transactions are not limited to their notional amount.
However, counterparties must have an investment grade long-term debt rating and
per-counterparty credit exposure is limited by Board established parameters.
Management is considering expanding its use of derivatives, specifically
interest rate swaps and caps, as permitted by its Board-approved policy, to
address interest rate risk.
- 23 -
TABLE 14. INTEREST RATE SENSITIVITY ANALYSIS
(UNAUDITED)
2000 INTEREST RATE SENSITIVITY GAPS
-----------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS) 1-90 91-181 182-365 1-5 BEYOND FAIR
DAYS DAYS DAYS YEARS 5 YEARS TOTAL VALUE
---- ---- ---- ----- ------- ----- -----
Interest-earning assets:
Interest -bearing deposits in other banks $2,650 $ - $ - $ - $ - $2,650 $2,650
Investment securities 35,107 6,270 12,620 31,140 40,037 125,174 125,174
Loans, net of unearned income 90,618 22,012 36,750 107,966 43,828 301,174 303,376
--------- --------- --------- ---------- --------- ---------- ----------
Total interest-earning assets $128,375 $28,282 $49,370 $139,106 $83,865 $428,998 $431,200
========= ========= ========= ========== ========= ========== ==========
Interest-bearing liabilities:
Interest-bearing checking $ - $ - $ - $ - $43,762 $ 43,762 43,762
Money market deposit accounts 100,079 - - - 3,314 103,393 103,393
Savings 2,092 - - - 29,745 31,837 31,837
Time 26,144 18,288 25,851 60,663 243 131,189 133,236
Federal funds purchased and securities
sold under agreement to repurchase 33,036 - - - - 33,036 33,036
Other borrowings 961 656 30 20,613 7,217 29,477 30,710
--------- --------- --------- ---------- --------- ---------- ----------
Total interest-bearing liabilities $162,312 $18,944 $25,881 $81,276 $84,281 $372,694 $375,974
========= ========= ========= ========== ========= ========== ==========
Interest rate cap 5,000 5,000
Interest rate gap ($28,937) $9,338 $23,489 $57,830 ($416) $56,304
Cumulative interest rate gap ($28,937) ($19,599) $3,890 $61,720 $61,304
1999 Interest Rate Sensitivity Gaps
------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS) 1-90 91-181 182-365 1-5 Beyond Fair
Days Days Days Years 5 Years Total Value
---- ---- ---- ----- ------- ----- -----
Interest-earning assets:
Interest -bearing deposits in
other banks $161 $ - $ - $ - $ - $161 $161
Investment securities 24,745 7,922 11,287 39,874 45,973 129,801 129,801
Loans, net of unearned income 70,872 14,066 24,721 81,736 96,548 287,943 283,404
--------- --------- --------- ---------- --------- ---------- ----------
Total interest-earning assets $95,778 $21,988 $36,008 $121,610 $142,521 $417,905 $413,366
========= ========= ========= ========== ========= ========== ==========
Interest-bearing liabilities:
Interest-bearing checking $293 $ - $ - $ - $43,552 $43,845 $43,845
Money market deposit accounts 70,950 - - - 4,407 75,357 75,357
Savings - - - - 35,335 35,335 35,335
Time 27,229 25,560 38,715 43,596 376 135,476 122,273
Federal funds purchased and securities
sold under agreement to repurchase 39,682 - - - - 39,682 39,682
Other borrowings - - 7,019 2,458 20,218 29,695 28,240
--------- --------- --------- ---------- --------- ---------- ----------
Total interest-bearing liabilities $138,154 $25,560 $45,734 $46,054 $103,888 $359,390 $344,732
========= ========= ========= ========== ========= ========== ==========
Interest rate cap 5,000 5,000
Interest rate gap ($37,376) ($3,572) ($9,726) $75,556 $38,633 $58,515
Cumulative interest rate gap ($37,376) ($40,948) ($50,674) $24,882 $63,515
Note 1: The maturity/repricing distribution of investment securities is
based on the maturity date for nonamortizing, noncallable securities;
probable exercise/non-exercise of call option for callable securities; and
estimated amortization based on industry experience for amortizing
securities.
Note 2: Distribution of loans is based on contractual repricing/repayment
terms adjusted for expected prepayments based on historical patterns.
Note 3: Interest-bearing checking, MMDA and savings accounts are
non-maturity deposits which are distributed in accordance with contractual
repricing terms and historical correlation to market interest rates.
- 24 -
TABLE 15. SENSITIVITY TO CHANGE IN MARKET INTEREST RATES
(UNAUDITED)
2000 Future Interest Rate Scenarios
------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS) -200 bps -100 bps Unchanged +100 bps +200 bps
------------- ----------- ------------- ----------- -----------
Prospective one-year net interest income (NII):
Projected net interest income $14,385 $14,718 $14,684 $14,359 $13,906
Percent change -2.0% 0.2% -2.2% -5.3%
Board policy limit -7.5% -3.8% -3.8% -7.5%
Economic value of portfolio equity (EVE):
Projected EVE $41,450 $47,017 $53,420 $55,928 $55,286
Percent change -22.4% -12.0% 4.7% 3.5%
Board policy limit -20.0% -10.0% -10.0% -20.0%
1999 Future Interest Rate Scenarios
------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS) -200 bps -100 bps Unchanged +100 bps +200 bps
-------- -------- --------- -------- --------
Prospective one-year net interest income (NII):
Projected net interest income $16,245 $15,786 $15,276 $14,669 $14,040
Percent change 6.3% 3.3% -4.0% -8.1%
Board policy limit -7.5% -3.8% -3.8% -7.5%
Economic value of portfolio equity (EVE):
Projected EVE $57,193 $54,499 $48,869 $45,397 $40,387
Percent change 17.0% 11.5% -7.1% -17.4%
Board policy limit -20.0% -10.0% -10.0% -20.0%
KEY ASSUMPTIONS:
1. RESIDENTIAL MORTGAGE LOANS AND MORTGAGE-BACKED SECURITIES PREPAY AT
RATE-SENSITIVE SPEEDS CONSISTENT WITH OBSERVED HISTORICAL PREPAYMENT
SPEEDS FOR POOLS OF RESIDENTIAL MORTGAGES.
2. FIXED-RATE COMMERCIAL AND CONSUMER LOANS PREPAY AT RATE-SENSITIVE
SPEEDS CONSISTENT WITH ESTIMATED PREPAYMENT SPEEDS FOR THESE TYPES OF
LOANS.
3. VARIABLE RATE LOANS AND VARIABLE RATE LIABILITIES REPRICE IN
ACCORDANCE WITH THEIR CONTRACTUAL TERMS, IF ANY. RATE CHANGES FOR
ADJUSTABLE RATE MORTGAGES ARE CONSTRAINED BY THEIR CONTRACTUAL CAPS
AND FLOORS.
4. INTEREST-BEARING NONMATURITY DEPOSITS REPRICE IN RESPONSE TO DIFFERENT
INTEREST RATE SCENARIOS CONSISTENT WITH THE CORPORATION'S HISTORICAL
RATE RELATIONSHIPS TO MARKET INTEREST RATES. NONMATURITY DEPOSITS RUN
OFF OVER VARIOUS FUTURE TIME PERIODS, RANGING FROM ONE MONTH TO TWENTY
YEARS, IN ACCORDANCE WITH ANALYSIS OF HISTORICAL DECAY RATES.
5. INTEREST RATE SCENARIOS ASSUME AN IMMEDIATE, SUSTAINED AND PARALLEL
SHIFT IN THE TERM STRUCTURE OF INTEREST RATES.
FORWARD-LOOKING STATEMENTS
Certain statements appearing herein which are not historical in nature are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements refer to a future
period or periods, reflecting management's current views as to likely future
developments, and use words "may," "will," "expect," "believe," "estimate,"
"anticipate," or similar terms. Because forward-looking statements involve
certain risks, uncertainties and other factors over which the Corporation has no
direct control, actual results could differ materially from those contemplated
in such statements. These factors include (but are not limited to) the
following: general economic conditions, changes in interest rates, change in the
Corporation's cost of funds, changes in government monetary policy, changes in
government regulation and taxation of financial institutions,
- 25 -
changes in the rate of inflation, changes in technology, the intensification of
competition within the Corporation's market area, and other similar factors.
IMPACT OF INFLATION
The impact of inflation upon financial institutions such as the Corporation
differs from its impact upon other commercial enterprises. Unlike most other
commercial enterprises, virtually all of the assets of the Corporation are
monetary in nature. As a result, interest rates have a more significant impact
on the Corporation's performance than do the effects of general levels of
inflation. Although inflation (and inflation expectations) may affect the
interest rate environment, it is not possible to measure with any precision the
impact of future inflation upon the Corporation.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information related to this item is included in Management's Discussion
and Analysis of Financial Condition and Results of Operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
Franklin Financial Services Corporation
Chambersburg, Pennsylvania
We have audited the accompanying consolidated balance sheets of Franklin
Financial Services Corporation and subsidiaries as of December 31, 2000 and
1999, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The consolidated financial statements of Franklin Financial Services
Corporation for the year ended December 31, 1998 were audited by other auditors
whose report, dated January 29, 1999, expressed an unqualified opinion on those
statements.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatements. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the 2000 and 1999 financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Franklin Financial Services Corporation as of December 31, 2000 and 1999, and
the results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Beard Miller Company LLP
Harrisburg, Pennsylvania
January 31, 2001
- 26 -
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) December 31
-----------------------------
2000 1999
-------------- ------------
ASSETS
Cash and due from banks (Note 3) $15,118 $14,956
Interest-bearing deposits in other banks 2,650 161
Investment securities available for sale (Notes 1 and 4) 125,174 129,801
Loans, net (Notes 1, 5 and 6) 297,307 284,084
Premises and equipment, net (Notes 1 and 7) 7,237 5,513
Other assets 18,499 10,164
----------- ------------
TOTAL ASSETS $465,985 $444,679
=========== ============
LIABILITIES
Deposits (Note 8)
Demand (noninterest-bearing) $47,028 $43,297
Savings and interest checking 178,992 154,537
Time 131,189 135,476
----------- ------------
Total Deposits 357,209 333,310
Securities sold under agreements to repurchase(Note 9) 33,036 27,182
Short term borrowings (Note 9) - 12,500
Long term debt (Note 9) 29,477 29,695
Other liabilities 3,062 2,732
----------- ------------
TOTAL LIABILITIES 422,784 405,419
----------- ------------
SHAREHOLDERS' EQUITY (NOTES 2, 13 AND 15)
Common stock, $1 par value per share,15,000 shares authorized with 3,045
shares issued and 2,758 and 2,792 outstanding at
December 31, 2000 and 1999, respectively 3,045 3,045
Capital stock without par value, 5,000 shares authorized with no
shares issued and outstanding - -
Additional paid-in capital 19,797 19,834
Retained earnings 25,522 22,627
Accumulated other comprehensive income (loss) (Note 11) 343 (876)
Treasury stock (5,506) (4,938)
Unearned compensation (Note 12) - (432)
---------- ------------
TOTAL SHAREHOLDERS' EQUITY 43,201 39,260
---------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $465,985 $444,679
========== ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
- 27 -
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) Years ended December 31
------------------------------------------
2000 1999 1998
---------- ---------- ---------
INTEREST INCOME (NOTE 1)
Loans $24,698 $21,997 $21,956
Deposits and other obligations of other banks 201 354 359
Interest and dividends on investments:
Taxable interest 5,081 4,454 3,372
Tax exempt interest 2,143 2,401 1,613
Dividend income 323 201 163
---------- ---------- ---------
TOTAL INTEREST INCOME 32,446 29,407 27,463
---------- ---------- ---------
INTEREST EXPENSE
Deposits 13,871 11,941 11,205
Securities sold under agreements to repurchase 2,125 1,242 1,053
Short term borrowings 240 29 89
Long term debt 1,680 1,790 804
---------- ---------- ---------
TOTAL INTEREST EXPENSE 17,916 15,002 13,151
---------- ---------- ---------
NET INTEREST INCOME 14,530 14,405 14,312
Provision for possible loan losses (Notes 1 and 6) 753 830 1,061
---------- ---------- ---------
Net interest income after provision for possible loan losses 13,777 13,575 13,251
---------- ---------- ---------
NONINTEREST INCOME
Investment and trust services fees 2,391 2,327 1,847
Service charges and fees 1,996 1,821 1,936
Other 268 65 250
Securities gains 396 289 625
---------- ---------- ---------
TOTAL NONINTEREST INCOME 5,051 4,502 4,658
---------- ---------- ---------
NONINTEREST EXPENSE
Salaries and employee benefits 6,818 6,412 5,615
Net occupancy expense 703 648 623
Furniture and equipment expense 613 655 656
Advertising 550 505 438
Legal and professional fees 391 328 358
Data processing 854 878 804
Pennsylvania bank shares tax 384 363 342
Other 2,402 2,021 2,764
---------- ---------- ---------
TOTAL NONINTEREST EXPENSE 12,715 11,810 11,600
---------- ---------- ---------
Income before Federal income taxes 6,113 6,267 6,309
Federal income tax expense (Note 10) 1,106 1,183 1,504
---------- ---------- ---------
NET INCOME $5,007 $5,084 $4,805
========== ========== =========
EARNINGS PER SHARE (NOTE 1)
BASIC EARNINGS PER SHARE $1.85 $1.86 $1.76
Weighted average shares outstanding 2,712 2,728 2,731
DILUTED EARNINGS PER SHARE $1.81 $1.84 $1.74
Weighted average shares outstanding 2,759 2,770 2,769
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
- 28 -
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For years ended December 31, 2000, 1999 and 1998:
Accumulated
Additional Other
Common Paid-in Retained Comprehensive Treasury Unearned
(DOLLARS IN THOUSANDS, EXCEPT Stock Capital Earnings Income Stock Compensation Total
PER SHARE DATA) (loss)
--------- ---------- ---------- -------------- ---------- ------------ --------
BALANCE AT DECEMBER 31, 1997 $3,045 $19,761 $17,087 $1,935 ($4,760) ($763) $36,305
Comprehensive income (Note 11):
Net income -- -- 4,805 -- -- -- 4,805
Unrealized holding gains arising
during current period, net of tax -- -- -- 302 -- -- 302
Reclassification adjustment for realized
gains included in net income, net of tax -- -- -- (454) -- -- (454)
--------
Total Comprehensive income 4,653
Cash dividends declared, $.47 per share -- -- (1,316) -- -- -- (1,316)
Cash in lieu of fractional shares
on 50% stock split -- -- (14) -- -- -- (14)
Common stock issued under
stock option plans (Note 13) -- 32 -- -- 140 -- 172
Amortization of unearned
compensation (Note 12) -- -- -- -- -- 101 101
--------- ---------- ---------- -------------- ---------- ------------ --------
BALANCE AT DECEMBER 31, 1998 3,045 19,793 20,562 1,783 (4,620) (662) 39,901
--------- ---------- ---------- -------------- ---------- ------------ --------
Comprehensive income (Note 11):
Net income -- -- 5,084 -- -- -- 5,084
Unrealized holding losses arising
during current period, net of tax -- -- -- (2,848) -- -- (2,848)
Reclassification adjustment for realized
gains included in net income, net of tax -- -- -- 151 -- -- 151
Unrealized gain on interest rate cap, net
of tax 38 38
--------
Total Comprehensive income 2,425
Cash dividends declared, $1.08 per share -- -- (3,019) -- -- -- (3,019)
Common stock issued under
stock option plans (Note 13) -- 31 -- -- 117 -- 148
Tax benefit of ESPP stock transaction -- 10 -- -- -- -- 10
Acquisition of 15,975 shares of -- -- -- -- (435) -- (435)
treasury stock
Amortization of unearned
compensation (Note 12) -- -- -- -- -- 230 230
--------- ---------- ---------- -------------- ---------- ------------ --------
BALANCE AT DECEMBER 31, 1999 3,045 19,834 22,627 (876) (4,938) (432) 39,260
--------- ---------- ---------- -------------- ---------- ------------ --------
Comprehensive income (Note 11):
Net income -- -- 5,007 -- -- -- 5,007
Unrealized holding losses arising
during current period, net of tax -- -- -- 1,668 -- -- 1,668
Reclassification adjustment for realized
gains included in net income, net of tax -- -- -- (367) -- -- (367)
Unrealized loss on interest rate cap,
net of tax (82) (82)
--------
Total Comprehensive income 6,226
Cash dividends declared, $.76 per share -- -- (2,112) -- -- -- (2,112)
Common stock issued under
stock option plans (Note 13) -- (21) -- -- 100 -- 79
Forfeiture of restricted stock -- (16) -- -- (73) 89 --
Acquisition of 35,577 shares of -- -- -- -- (595) -- (595)
treasury stock
Amortization of unearned
compensation (Note 12) -- -- -- -- -- 343 343
--------- ---------- ---------- -------------- ---------- ------------ --------
BALANCE AT DECEMBER 31, 2000 $3,045 $19,797 $25,522 $343 ($5,506) $0 $43,201
========= ========== ========== ============== ========== ============ ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
- 29 -
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31
-------------------------------------
2000 1999 1998
-------- --------- --------
(AMOUNTS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $5,007 $5,084 $4,805
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 938 969 1,129
Net accretion on investment securities (137) (285) (154)
Provision for possible loan losses 753 830 1,061
Securities gains, net (396) (289) (625)
Mortgage loans originated for sale (10,614) (14,084) (26,083)
Proceeds from sale of mortgage loans 10,698 14,204 26,048
Principal (gain) loss on sale of mortgage loans (84) (120) 35
Loss (gain) on sale of premises and equipment 3 (71) 294
Increase in cash surrender value of life insurance (219) - -
Increase in interest receivable and other assets (1,295) (643) (1,086)
Increase in interest payable and other liabilities 233 187 324
Other, net 252 233 50
-------- --------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,139 6,015 5,798
-------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale 6,993 940 945
Proceeds from maturities of investment securities held to maturity - - 5,579
Proceeds from maturities of investment securities available for sale 39,227 100,072 26,085
Purchase of investment securities available for sale (39,139) (107,206) (72,081)
Net increase in loans (15,499) (26,420) (18,237)
Purchase of bank owned life insurance (6,000) - -
Capital expenditures (2,477) (711) (1,246)
Proceeds from sales of premises and equipment 1 374 208
-------- --------- --------
NET CASH USED IN INVESTING ACTIVITIES (16,894) (32,951) (58,747)
-------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts
and savings accounts 28,186 14,133 32,972
Net (decrease) increase in certificates of deposit (4,287) (7,402) 19,052
Net (decrease) increase in short term borrowings (6,646) 15,268 (2,811)
Long term debt advances 4,561 5,186 22,147
Long term debt payments (4,780) (6,235) (1,687)
Dividends paid (2,112) (3,019) (3,599)
Common stock issued under stock option plans 79 148 172
Purchase of treasury shares (595) (435) -
-------- --------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 14,406 17,644 66,246
-------- --------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,651 (9,292) 13,297
CASH AND CASH EQUIVALENTS AS OF JANUARY 1 15,117 24,409 11,112
-------- --------- --------
CASH AND CASH EQUIVALENTS AS OF DECEMBER 31 $17,768 $15,117 $24,409
======== ========= ========
---------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID DURING THE YEAR FOR:
Interest paid on deposits and other borrowed funds $17,595 $14,995 $12,748
Income taxes 1,464 1,057 1,845
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS
- 30 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of Franklin Financial Services Corporation and its
subsidiaries conform to generally accepted accounting principles and to general
industry practices. A summary of the more significant accounting policies which
have been consistently applied in the preparation of the accompanying
consolidated financial statements follows:
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of Franklin Financial Services Corporation (the Corporation) and
its wholly-owned subsidiary, Farmers and Merchants Trust Company, a commercial
bank (the Bank) and the Bank's wholly owned subsidiary, Franklin Realty Services
Corporation. All significant intercompany transactions have been eliminated.
NATURE OF OPERATIONS - The Corporation conducts all of its business through
its subsidiary bank, Farmers and Merchants Trust Company. The Bank serves its
customer base through thirteen community offices located in Franklin and
Cumberland Counties in Pennsylvania.
The Bank is a community-oriented commercial bank that emphasizes customer
service and convenience. As part of its strategy, the Bank has sought to develop
a variety of products and services that meet the needs of both its retail and
commercial customers.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
STATEMENT OF CASH FLOWS - For purposes of reporting cash flows, cash and
cash equivalents include Cash and Due from banks, Interest-bearing deposits in
other banks and Federal funds sold. Generally, Federal funds are purchased and
sold for one-day periods.
INVESTMENT SECURITIES - Management classifies its securities at the time of
purchase as available for sale or held to maturity. At December 31, 2000 and
1999, all securities were classified as available for sale, meaning that the
Corporation intends to hold them for an indefinite period of time, but not
necessarily to maturity. Available for sale securities are stated at estimated
fair value, adjusted for amortization of premiums and accretion of discounts
which are recognized as adjustments of interest income through maturity. The
related unrealized holding gains and losses are reported as a separate component
of shareholders' equity, net of tax, until realized. Realized securities gains
and losses are computed using the specific identification method. Gains or
losses on the disposition of investment securities are based on the net proceeds
and the adjusted carrying amount of the specific security sold.
FINANCIAL DERIVATIVES - On October 1, 1998, the Corporation adopted
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." As permitted under Statement No. 133, the
Corporation transferred investment securities classified as "held to maturity"
with a book value of $22,961,000 to the "available for sale" classification. The
transfer resulted in an increase to Shareholders' equity of approximately
$985,000, net of tax.
Derivatives, which to date have been limited to one interest rate cap,
are recognized on the balance sheet at fair value in other assets or
liabilities, as appropriate. To the extent the derivatives are effective and
meet the requirements for hedge accounting, changes in fair value are
recognized in other comprehensive income with income statement reclassification
occurring as the hedged item affects earnings. Conversely, changes in fair value
attributable to ineffectiveness or attributable to derivatives that do not
qualify as hedges are recognized as they occur in the income statement interest
income or interest expense account associated with the hedged item.
On September 27, 1999, the Bank entered into an interest rate cap
transaction as a vehicle to partially hedge cash flows associated with
interest expense on variable rate deposit accounts. The interest rate cap has
a notional amount of $5,000,000, a term of five years, a strike rate of 6%
and is indexed to a 3-month LIBOR.
- 31 -
LOANS - Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are stated at their outstanding
unpaid principal balances, net of an allowance for loan losses and any deferred
fees. Interest income is accrued on the unpaid principal balance. Loan
origination fees are deferred and recognized as an adjustment of the yield
(interest income) of the related loans. The Corporation is generally amortizing
these amounts over the contractual life of the loan.
The accrual of interest is generally discontinued when the contractual
payment of principal or interest has become 90 days past due or management has
serious doubts about further collectibility of principal or interest, even
though the loan is currently performing. A loan may remain on accrual status if
it is in the process of collection and is either guaranteed or well secured.
When a loan is placed on nonaccrual status, unpaid interest credited to income
in the current year is reversed and unpaid interest accrued in prior years is
charged against the allowance for loan losses. Interest received on nonaccrual
loans generally is either applied against principal or reported as interest
income, according to management's judgement as to the collectibility of
principal. Generally, loans are restored to accrual status when the obligation
is brought current, has performed in accordance with the contractual terms for a
reasonable period of time and the ultimate collectibility of the total
contractual principal and interest is no longer in doubt.
ALLOWANCE FOR POSSIBLE LOAN LOSSES - The allowance for loan losses is
established through provisions for loan losses charged against income. Loans
deemed to be uncollectible are charged against the allowance for loan losses,
and subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is maintained at a level considered adequate
to provide for losses that can be reasonably anticipated. Management's periodic
evaluation of the adequacy of the allowance is based on the Bank's past loan
loss experience, known and inherent risks in the portfolio, adverse situations
that may affect the borrower's ability to repay, the estimated value of any
underlying collateral, composition of the loan portfolio, current economic
conditions and other relevant factors. This evaluation is inherently subjective
as it requires material estimates that may be susceptible to significant change,
including the amounts and timing of future cash flows expected to be received on
impaired loans.
A loan is considered impaired when, based on current information and
events, it is probable that the Bank will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms of
the loan agreement. Factors considered by management in determining impairment
include payment status, collateral value and the probability of collecting
scheduled principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not classified
as impaired. Management determines the significance of payment delays and
payment shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the
delay, the reasons for the delay, the borrower's prior payment record and the
amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis for commercial and construction
loans either by the present value of expected future cash flows discounted at
the loan's effective interest rate, the loan's obtainable market price, or the
fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Corporation does not separately
identify individual consumer and residential loans for impairment disclosures.
PREMISES AND EQUIPMENT - Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is computed using the
straight-line method over the estimated useful lines of the related assets. When
assets are retired or sold, the asset cost and related accumulated depreciation
are eliminated from the respective accounts, and any resultant gain or loss is
included in net income.
The cost of maintenance and repairs is charged to operating expense as
incurred, and the cost of major additions and improvements is capitalized.
INTANGIBLE ASSETS - Intangible assets, consisting primarily of a customer
list acquired through the purchase of several community offices, are stated at
cost, less accumulated amortization. Amortization is recognized over a ten-year
period. Intangible assets are reviewed periodically for impairment.
OTHER REAL ESTATE - Other real estate is comprised of property acquired
through a foreclosure proceeding or an acceptance of a deed in lieu of
foreclosure. Balances are carried at the estimated fair value less any estimated
- 32 -
disposition costs. Any losses realized upon disposition of the property, and
holding costs prior thereto, are charged against income.
FEDERAL INCOME TAXES - The Corporation and its subsidiary file a
consolidated Federal income tax return. Deferred tax assets or liabilities are
computed based on the difference between the financial statement and income tax
basis of assets and liabilities using the applicable enacted marginal tax rate.
Deferred income tax expenses or benefits are based on the changes in the
deferred tax asset or liability from period to period.
ADVERTISING EXPENSES - Advertising costs are expensed as incurred.
TREASURY STOCK - The acquisition of treasury stock is recorded under the
cost method. The subsequent disposition or sale of the treasury stock is
recorded using the average cost method.
TRUST ASSETS - Assets held in a fiduciary capacity are not assets of the
Corporation and therefore are not included in the consolidated financial
statements.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS - In the ordinary course of
business, the bank has entered into off-balance sheet financial instruments
consisting of commitments to extend credit and letters of credit. Such financial
instruments are recorded on the balance sheet when they are funded.
STOCK BASED COMPENSATION - Stock options are accounted for under Accounting
Principles Bulletin (APB) No. 25. Under APB 25, no compensation expense is
recognized related to these purchase options. The pro forma impact to net income
and earnings per share that would occur if compensation expense was recognized
based on the estimated fair value of the options on the date of the grant is
disclosed in the notes to the consolidated financial statements.
PENSION - The provision for pension expense was actuarially determined
using the projected unit credit actuarial cost method. The funding policy is to
contribute an amount sufficient to meet the requirements of ERISA, subject to
Internal Revenue Code contribution limitations.
EARNINGS PER SHARE - Earnings per share is computed based on the weighted
average number of shares outstanding during each year.
The Corporation's basic earnings per share is calculated as net income
divided by the weighted average number of shares outstanding. For diluted
earnings per share, net income is divided by the weighted average number of
shares outstanding plus the incremental number of shares added as a result of
converting common stock equivalents, calculated using the treasury stock method.
The Corporation's common stock equivalents consist of outstanding restricted
stock and stock options.
A reconciliation of the weighted average shares outstanding used to
calculate basic earnings per share and diluted earnings per share follows:
(IN THOUSANDS) 2000 1999 1998
-------------- ----- ----- -----
Weighted average shares outstanding (basic) 2,712 2,728 2,731
Impact of common stock equivalents 47 42 38
----- ----- -----
Weighted average shares outstanding (diluted) 2,759 2,770 2,769
===== ===== =====
RECLASSIFICATIONS - Certain prior period amounts have been reclassified
to conform with the current year presentation. Such reclassifications did not
affect reported net income.
SEGMENT REPORTING - The Bank acts as an independent community financial
service provider and offers traditional banking and related financial
services to individual, business and government customers. Through its
community office and automated teller machine network, the Bank offers a full
array of commercial and retail financial services, including the taking of
time, savings and demand deposits; the making of commercial, consumer and
mortgage loans; and the providing of safe deposit services. The Bank also
performs personal, corporate, pension and fiduciary services through its
Investment and Trust Services Department.
Management does not separately allocate expenses, including the cost of
funding loan demand, between the commercial, retail, mortgage banking and trust
operations of the Bank. As such, discrete information is not available and
segment reporting would not be meaningful.
- 33 -
COMPREHENSIVE INCOME - Comprehensive income is reflected in the
Consolidated Statements of Changes in Shareholders' Equity and includes net
income and unrealized gains or losses on investment securities and derivatives.
RECENT ACCOUNTING PRONOUNCEMENTS:
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES - In September 2000, the Financial Accounting
Standards Board issued Statement No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
Statement replaces SFAS No. 125 of the same name. It revises the standards of
securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but carries over most of the provisions of SFAS
No. 125 without reconsideration. SFAS No. 140 is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
March 31, 2001. The Statement is effective for recognition and reclassification
of collateral and for disclosures relating to securitization transactions and
collateral for fiscal years ending after December 15, 2000. This Statement is to
be applied prospectively with certain exceptions. Other than these exceptions,
earlier or retroactive application of its accounting provision is not permitted.
The adoption of the Statement is not expected to have a significant impact on
the Bank.
NOTE 2. REGULATORY MATTERS
The Bank is limited as to the amount it may lend to the Corporation, unless
such loans are collateralized by specific obligations. The Corporation and the
Bank are subject to various regulatory capital requirements administered by
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the
Corporation's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The capital amounts and classification are also subject to
qualitative judgements by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December 31,
2000 and 1999, that the Corporation and the Bank met all capital adequacy
requirements to which it is subject.
As of December 31, 2000, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.
The table that follows presents the total risk-based, Tier 1 risk-based and
Tier 1 leverage requirements for the Corporation and the Bank as defined by the
FDIC. Actual capital amounts and ratios are also presented.
- 34 -
As of December 31, 2000
---------------------------------------------------------------
To be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------- ----------------- -----------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
---------------------- ------- ----- ------- ----- ------- -----
TOTAL CAPITAL (TO RISK WEIGHTED ASSETS)
Corporation $45,517 13.79% $26,410 8.00% N/A
Bank 41,976 12.85% 26,134 8.00% $32,667 10.00%
TIER 1 CAPITAL (TO RISK WEIGHTED ASSETS)
Corporation $41,650 12.62% $13,205 4.00% N/A
Bank 38,109 11.67% 13,067 4.00% $19,600 6.00%
TIER 1 CAPITAL (TO AVERAGE ASSETS)
Corporation $41,650 8.99% $18,535 4.00% N/A
Bank 38,109 8.27% 18,438 4.00% $23,048 5.00%
As of December 31, 1999
---------------------------------------------------------------
To be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------- ----------------- -----------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
---------------------- ------- ----- ------- ----- ------- -----
TOTAL CAPITAL (TO RISK WEIGHTED ASSETS)
Corporation $42,494 13.89% $24,469 8.00% N/A
Bank 38,930 12.82% 24,298 8.00% $30,373 10.00%
TIER 1 CAPITAL (TO RISK WEIGHTED ASSETS)
Corporation $38,697 12.65% $12,235 4.00% N/A
Bank 35,133 11.57% 12,149 4.00% $18,224 6.00%
TIER 1 CAPITAL (TO AVERAGE ASSETS)
Corporation $38,697 8.72% $17,755 4.00% N/A
Bank 35,133 7.94% 17,698 4.00% $22,122 5.00%
Although not adopted in regulation form, the Pennsylvania Department of
Banking utilizes capital standards requiring a minimum of 6% leverage capital
and 10% risk-based capital, defined substantially the same as those by the FDIC.
- 35 -
NOTE 3. RESTRICTED CASH BALANCES
The Corporation's subsidiary bank is required to maintain reserves against
its deposit liabilities in the form of cash and balances with the Federal
Reserve Bank. At December 31, 2000 and 1999, required reserves held at the
Federal Reserve Bank for the bank subsidiary, were approximately $4,590,000 and
$4,965,000. In addition, as compensation for check clearing and other services,
a compensatory balance maintained at the Federal Reserve Bank at December 31,
2000 and 1999, equaled approximately $900,000.
NOTE 4. INVESTMENT SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated fair value of investment securities
available for sale as of December 31, 2000 and 1999 are as follows:
Gross Gross Estimated
Amortized unrealized unrealized fair
2000 cost gains losses value
---------------------------------------------------------- --------- ---------- ---------- ---------
EQUITY SECURITIES $5,469 $579 $85 $5,963
U.S. TREASURY SECURITIES AND OBLIGATIONS OF U.S.
GOVERNMENT AGENCIES AND CORPORATIONS 10,459 78 5 10,532
OBLIGATIONS OF STATE AND POLITICAL SUBDIVISIONS 43,832 790 840 43,782
CORPORATE DEBT SECURITIES 14,057 80 16 14,121
MORTGAGE-BACKED SECURITIES 30,157 62 105 30,114
OTHER 20,613 94 45 20,662
--------- ---------- ---------- ---------
$124,587 $1,683 $1,096 $125,174
========= ========== ========== =========
Gross Gross Estimated
Amortized unrealized unrealized fair
1999 cost gains losses value
---------------------------------------------------------- --------- ---------- ---------- ---------
Equity securities $5,423 $659 $244 $5,838
U.S. Treasury securities and obligations of U.S.
Government agencies and corporations 13,982 3 165 13,820
Obligations of state and political subdivisions 48,271 515 1,515 47,271
Corporate debt securities 11,586 46 76 11,556
Mortgage-backed securities 31,320 19 603 30,736
Other 20,606 79 105 20,580
--------- ---------- ---------- ---------
$131,188 $1,321 $2,708 $129,801
========= ========== ========== =========
At December 31, 2000 and 1999, the book value of investment securities
pledged to secure public funds, trust balances and other deposits and
obligations totaled $71,908,000 and $94,267,000, respectively.
The amortized cost and estimated fair value of debt securities at December
31, 2000, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
Estimated
Amortized fair
cost value
--------- ---------
Due in one year or less $13,023 $13,010
Due after one year through five years 24,173 24,306
Due after five years through ten years 12,101 12,091
Due after ten years 39,664 39,690
--------- ---------
$88,961 $89,097
Mortgage-backed securities 30,157 30,114
--------- ---------
$119,118 $119,211
========= =========
Gross gains of $396,000, $289,000 and $625,000 were realized on the sale of
securities for the years ended December 31, 2000, 1999 and 1998, respectively.
- 36 -
NOTE 5. LOANS
A summary of loans outstanding at the end of the reporting periods is as
follows:
December 31
-------------------
(AMOUNTS IN THOUSANDS) 2000 1999
---------------------- -------- --------
Real estate (primarily first mortgage residential loans) $102,771 $101,426
Real estate - Construction 1,909 3,670
Commercial real estate 62,559 67,352
Commercial, industrial and agricultural 71,854 55,669
Consumer (including home equity lines of credit) 62,081 59,826
-------- --------
301,174 287,943
Less: Allowance for possible loan losses (3,867) (3,859)
-------- --------
Net Loans $297,307 $284,084
======== ========
Loans to directors and executive officers and to their related interests
and affiliated enterprises amounted to approximately $1,044,000 and $1,185,000
at December 31, 2000 and 1999, respectively. Such loans are made in the ordinary
course of business at the Bank's normal credit terms and do not present more
than a normal risk of collection. During 2000 approximately $483,000 of new
loans were made and repayments totaled approximately $624,000.
NOTE 6. ALLOWANCE FOR POSSIBLE LOAN LOSSES
Years ended December 31
------------------------
(AMOUNTS IN THOUSANDS) 2000 1999 1998
---------------------- ------ ------ ------
Balance at beginning of year $3,859 $3,549 $3,304
Charge-offs (882) (628) (961)
Recoveries 137 108 145
------ ------ ------
Net charge-offs (745) (520) (816)
------ ------ ------
Provision for possible loan losses 753 830 1,061
------ ------ ------
Balance at end of year $3,867 $3,859 $3,549
====== ====== ======
At December 31, 2000 and 1999 the Corporation had no restructured loans.
Nonaccrual loans at December 31, 2000 and 1999 were approximately $576,000
and $3,131,000, respectively. The gross interest that would have been
recorded if these loans had been current in accordance with their original
terms and the amounts actually recorded in income were as follows:
(AMOUNTS IN THOUSANDS) 2000 1999 1998
---------------------- ---- ---- ----
Gross interest due under terms $116 $335 $159
Amount included in income (4) (98) (48)
---- ---- ----
Interest income not recognized $112 $237 $111
==== ==== ====
At December 31, 2000 and 1999, the recorded investment in loans that were
considered to be impaired, as defined by Statement No. 114, totaled $340,000 and
$2,982,000, respectively. Impaired loans have an allowance for credit losses of
$280,000 and $129,000 as of December 31, 2000 and 1999, respectively. The
Corporation does not recognize interest income on its impaired loans. Cash
receipts on impaired loans are credited to the earliest amount owed by the
borrower. The average recorded investment in impaired loans during the years
ended December 31, 2000, 1999 and 1998 was $990,000, $1,732,000 and $1,033,000,
respectively.
- 37 -
NOTE 7. PREMISES AND EQUIPMENT
Premises and equipment consist of:
December 31
---------------
(AMOUNTS IN THOUSANDS) 2000 1999
---------------------- ------ ------
Land $1,295 $802
Buildings 8,967 7,609
Furniture, fixtures and equipment 6,585 5,979
------ ------
Total cost 16,847 14,390
Less: Accumulated Depreciation (9,610) (8,877)
------ ------
$7,237 $5,513
====== ======
NOTE 8. DEPOSITS
Deposits are summarized as follows:
December 31
------------------
(AMOUNTS IN THOUSANDS) 2000 1999
---------------------- -------- --------
Demand, noninterest-bearing $47,028 $43,297
Savings:
Interest-bearing checking 43,762 43,845
Money market accounts 103,393 75,357
Passbook and statement savings 31,837 35,335
-------- --------
178,992 154,537
-------- --------
Time:
Deposits of $100,000 and over 35,084 34,933
Other time deposits 96,105 100,543
-------- --------
131,189 135,476
-------- --------
Total deposits $357,209 $333,310
======== ========
At December 31, 2000, the scheduled maturities of time deposits are as
follows:
2001 $70,282
2002 38,604
2003 15,653
2004 2,426
2005 3,943
2006 and beyond 281
--------
$131,189
========
- 38 -
NOTE 9. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE, SHORT TERM
BORROWINGS AND LONG TERM DEBT
The Corporation enters into sales of securities under agreements to
repurchase. Securities sold under agreements to repurchase averaged
$34,872,000 and $25,802,000 during 2000 and 1999, respectively, and the
maximum amounts outstanding at any month-end during 2000 and 1999, were
$41,728,000 and $33,496,000, respectively. The weighted average interest rate
on these repurchase agreements was 6.09% and 4.81% for 2000 and 1999,
respectively. At December 31, 2000, securities sold under agreements to
repurchase totaled $33,036,000 with interest rates ranging from 5.53% to
6.43%. At December 31, 1999, securities sold under agreements to repurchase
totaled $27,182,000 with interest rates ranging from 4.62% to 5.52%. The
securities that serve as collateral for securities sold under agreements to
repurchase consist primarily of U.S. Government and U.S. Agency securities
with a fair value of $41,678,000 at December 31, 2000. The securities sold
under agreements to repurchase are overnight borrowings.
A summary of short term borrowings and long term debt at the end of the
reporting period follows:
December 31
-----------------
(AMOUNTS IN THOUSANDS) 2000 1999
---------------------- ------- -------
Open Repo Plus (a) $ - $12,500
Term loans (b) 29,477 29,695
------- -------
Total other borrowings $29,477 $42,195
======= =======
(a) Open Repo Plus is a revolving term commitment with the Federal Home Loan
Bank of Pittsburgh (FHLB) used on an overnight basis. The term of these
commitments may not exceed 364 days and the outstanding balance reprices
daily at market rates.
(b) Term loans with the FHLB bear interest at fixed rates ranging from 5.08%
to 6.87% (weighted average rate of 5.69%) with various maturities
beginning January 29, 2001 to July 13, 2009. All borrowings from the FHLB
are collateralized by FHLB stock, mortgage-backed securities and first
mortgage loans.
The scheduled maturities of the term borrowings are as follows:
2001 $1,647
2002 153
2003 2,000
2004 2,898
2005 562
2006 and beyond 22,217
-------
$29,477
=======
The Corporation's maximum borrowing capacity at December 31, 2000, with the FHLB
was $142,927,000. The total amount available to borrow at year-end was
approximately $113,450,000.
- 39 -
NOTE 10. FEDERAL INCOME TAXES
The temporary differences which give rise to significant portions of
deferred tax assets and liabilities under Statement No.109 are as follows
(amounts in thousands):
DECEMBER 31
-----------------------
DEFERRED TAX ASSETS: 2000 1999
---------------------------------- -----------------------
Allowance for possible loan losses $1,315 $1,312
Deferred compensation 232 224
Restricted stock 366 241
Depreciation 188 140
Deferred loan fees and costs,net 176 188
Net unrealized loss on securities - 472
Other, net 83 157
----- -----
Total 2,360 2,734
----- -----
DEFERRED TAX LIABILITIES
---------------------------------
Pension 300 191
Mortgage servicing rights 161 154
Net unrealized gain on securities 200 0
----- -----
Total 661 345
----- -----
Net deferred tax asset $1,699 $2,389
===== =====
The components of the provision for Federal income taxes attributable to
income from operations were as follows:
YEARS ENDED DECEMBER 31
---------------------------------------
(AMOUNTS IN THOUSANDS) 2000 1999 1998
------ ------ ------
Currently payable $1,090 $1,320 $1,694
Deferred tax expense (benefit) 16 (137) (190)
------ ------ ------
Income tax provision $1,106 $1,183 $1,504
====== ====== ======
For the years ended December 31, 2000, 1999 and 1998, the income tax
provisions are different from the tax expense which would be computed by
applying the Federal statutory rate to pretax operating earnings. A
reconciliation between the tax provision at the statutory rate and the tax
provision at the effective tax rate is as follows:
YEARS ENDED DECEMBER 31
-----------------------------
(AMOUNTS IN THOUSANDS) 2000 1999 1998
------ ------ ------
Tax provision at statutory rate $2,078 $2,131 $2,145
Income on tax-exempt loans and securities (956) (983) (685)
Nondeductible interest expense relating to
carrying tax-exempt obligations 159 138 95
Dividends received exclusion (22) (18) (17)
Life insurance exemptions (77) (4) (6)
Other, net (76) (81) (28)
------ ------ ------
Income tax provision $1,106 $1,183 $1,504
====== ====== ======
The tax provision applicable to securities gains for the years ended
December 31, 2000, 1999 and 1998 was $135,000, $98,000 and $212,000,
respectively.
- 40 -
NOTE 11. COMPREHENSIVE INCOME
The components of comprehensive income not included in net income for 1998,
1999, and 2000 are as follows:
INTEREST RATE CAP SECURITIES GAINS/LOSSES TOTAL
----------------------- ----------------------- ----------------------
(AMOUNTS IN THOUSANDS) BEFORE TAX NET OF TAX BEFORE TAX NET OF TAX BEFORE TAX NET OF TAX
---------- ---------- ---------- ---------- ---------- ----------
DECEMBER 31, 1997 ACCUMULATED OTHER
COMPREHENSIVE INCOME $ - $ - $ 2,932 $ 1,935 $ 2,932 $1,935
Unrealized gains arising during the period 458 302 458 302
Reclassification adjustment for gains included in net
income (688) (454) (688) (454)
---------- ---------- ---------- ---------- ---------- ---------
DECEMBER 31, 1998 ACCUMULATED OTHER
COMPREHENSIVE INCOME - - 2,702 1,783 2,702 1,783
---------- ---------- ---------- ---------- ---------- ---------
Unrealized gains(losses) arising during the period 49 32 (4,315) (2,848) (4,266) (2,816)
Reclassification adjustment for losses included in
net income 9 6 229 151 238 157
---------- ---------- ---------- ---------- ---------- ---------
DECEMBER 31, 1999 ACCUMULATED
OTHER COMPREHENSIVE LOSS 58 38 (1,385) (914) (1,327) (876)
----------- ---------- ---------- ---------- ---------- ---------
UNREALIZED GAINS(LOSSES) ARISING DURING THE PERIOD (162) (107) 2,527 1,668 2,365 1,561
RECLASSIFICATION ADJUSTMENT FOR (GAINS)LOSSES
INCLUDED IN NET INCOME 37 25 (556) (367) (518) (342)
----------- ---------- ---------- ---------- ---------- ---------
DECEMBER 31, 2000 ACCUMULATED
OTHER COMPREHENSIVE INCOME ($67) ($44) $586 $387 $519 $343
=========== ========== ========== ========== ========== ==========
NOTE 12. EMPLOYEE BENEFIT PLANS
The Bank has a noncontributory pension plan covering substantially all
employees of F&M Trust who meet certain age and service requirements. Benefits
are based on years of service and the employee's compensation during the highest
five consecutive years out of the last ten years of employment. The Bank's
funding policy is to contribute annually the amount required to meet the minimum
funding requirements of the Employee Retirement Income Security Act of 1974.
Contributions are intended to provide not only for the benefits attributed to
service to date but also for those expected to be earned in the future.
- 41 -
The following table sets forth the plan's funded status at December 31,
2000, based on the September 30, 2000 actuarial valuation together with
comparative 1999 and 1998 amounts:
FOR THE YEARS ENDED DECEMBER 31
--------------------------------------
(AMOUNTS IN THOUSANDS) 2000 1999 1998
--------- -------- --------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 8,682 $ 8,433 $ 7,611
Service cost 335 314 266
Interest cost 568 527 531
Amendments 176 - -
Actuarial loss (gain) (472) (233) 380
Benefits paid (376) (359) (355)
-------- -------- --------
Benefit obligation at end of year 8,913 8,682 8,433
-------- -------- --------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year 11,889 11,541 11,223
Actual return on plan assets 795 707 673
Employer contribution - - -
Benefits Paid (376) (359) (355)
-------- -------- --------
Fair value of plan assets at end of year 12,308 11,889 11,541
-------- -------- --------
Funded Status 3,394 3,207 3,108
Unrecognized transitional gain - (39) (78)
Unrecognized net actuarial gain (2,684) (2,625) (2,893)
Unrecognized prior service cost 238 86 96
-------- -------- --------
Prepaid benefit cost $948 $629 $233
======== ======== ========
WEIGHTED-AVERAGE ASSUMPTIONS AS OF
DECEMBER 31 2000 1999 1998
-------- --------- --------
Discount rate 7.00% 6.50% 6.50%
Expected return on plan assets 8.00% 8.00% 8.00%
Rate of compensation increase 5.25% 5.25% 5.25%
FOR THE YEARS ENDED DECEMBER 31
------------------------------------
COMPONENTS OF NET PERIODIC BENEFIT COST 2000 1999 1998
------- ------ -------
Service cost $335 $314 $266
Interest cost 568 527 531
Expected return on plan assets (1,020) (987) (971)
Amortization of transitional asset (39) (39) (39)
Amortization of prior service cost 24 11 11
Recognized net actuarial gain (187) (222) (299)
------- ------- -------
Net periodic benefit cost ($319) ($396) ($501)
======= ======= =======
The Bank has a 401(k) plan covering substantially all employees of F&M
Trust who have completed one year and 1000 hours of service. In 2000, employee
contributions to the plan were matched at 100% up to 3% of each employee's
deferrals plus 50% of the next 2% of deferrals from participants eligible
compensation. In addition, a 100% discretionary profit sharing contribution of
up to 2% of each employee's eligible compensation was possible provided net
income targets were achieved. The Bank's Board of Directors approves the
established net income targets annually. Under this plan, not more than 19.00%
of each participants total compensation may be contributed
- 42 -
in any given year. The related expense for the 401(k) plan and the profit
sharing plan in 2000, 1999 and 1998, as approved by the Board of Directors, was
approximately $194,000, $209,000 and $266,000, respectively.
Under the terms of the Corporation's Long-Term Incentive Plan of 1990 ("the
Plan"), the Compensation Committee of the Board of Directors (the Committee) is
authorized to award up to 264,825 shares of presently authorized but unissued or
reacquired Common Stock to certain employees of the Corporation and its
subsidiary. Awards may be granted in the form of Options, Stock Appreciation
Rights, Restricted Stock, Performance Units and Performance Shares.
Pursuant to the Plan, in 1991 the Corporation implemented a program known
as the Senior Management Incentive Program (the Program) and, under the Program,
as of December 31, 2000, has awarded 165,021 restricted shares of $1.00 par
value per share common stock of the Corporation to certain employees at no cost
to the employee participants. These shares are issued subject to specific
transfer restrictions, including the passage of time, ranging from one to ten
years; and shall fully vest upon the expiration of ten years from the date of
the agreements, or earlier, dependent upon the Corporation meeting certain
income requirements established by the Board of Directors.
Also, under the Program, the Committee has awarded 18,345 restricted shares
of the $1.00 par value per share common stock of the Corporation to certain
employees at no cost to the participants. These shares also are issued subject
to certain transfer restrictions and will automatically vest upon the expiration
of ten years from the Agreement date (except for one senior officer whose shares
vested in a shorter period).
Unearned compensation, representing the fair market value of the shares at
the date of issuance, will be charged to income over the vesting period. The
cost associated with the Program was approximately $343,000 in 2000, $230,000 in
1999 and $101,000 in 1998.
In addition to the restricted shares issued to the employee participants of
the Program, the employees could elect to receive a portion of their award in
cash. The payment of cash each year is dependent upon the Corporation meeting
certain income requirements established by the Board of Directors. There were no
cash awards in the three year period ended 2000.
In June 2000, the Bank purchased Bank Owned Life Insurance (BOLI) totaling
$6.0 million. The BOLI was purchased in order to enhance benefits to a
designated group of officers and as an attractive tax-free investment that
provides approximately $19.0 million in death benefit coverage on the lives of
these officers.
- 43 -
NOTE 13. STOCK PURCHASE PLAN
In 1994, the Corporation adopted the Employee Stock Purchase Plan of 1994
(the Plan). Under the Plan, 198,000 shares of stock can be purchased by
participating employees over a 10-year period. The number of shares which can be
purchased by each participant is defined by the plan and the option price is
established by the Board of Directors. However, the option price cannot be less
than the lesser of 90% of the fair market value of the shares on the date the
option to purchase shares is granted, or 90% of the fair market value of the
shares on the exercise date. These options must be exercised within one year
from the date of grant. Any shares related to unexercised options are available
for future grant. As of December 31, 2000 there are 106,664 shares available for
future grant.
The following table summarizes the stock option activity:
OPTION PRICE PER SHARE
---------------------------
STOCK PRICE WEIGHTED
OPTIONS RANGE AVERAGE
----------- ----------- -----------
Balance at December 31, 1997 13,723 $23.08 $23.08
Granted 17,005 27.68 27.68
Exercised (7,206) 23.08 - 27.68 23.39
Canceled (7,014) 23.08 23.08
----------- ------------- -----------
Balance at December 31, 1998 16,508 27.68 27.68
Granted 20,106 23.27 23.27
Exercised (6,016) 19.94 - 27.68 24.61
Canceled (11,416) 27.68 27.68
----------- ------------- -----------
Balance at December 31, 1999 19,182 23.27 23.27
GRANTED 30,968 15.27 15.27
EXERCISED (5,167) 14.26 - 18.45 15.39
CANCELED (14,203) 23.27 23.27
----------- ------------- -----------
BALANCE AT DECEMBER 31, 2000 30,780 $14.18 $14.18
===========
The following table summarizes information concerning options outstanding at
December 31, 2000:
OUTSTANDING &
EXERCISABLE REMAINING
EXERCISE PRICE OPTIONS LIFE (YEARS)
----------------------------- --------------
$14.18 30,780 0.75
Had compensation cost for the Plan been recognized in accordance with Statement
No. 123, the Corporation's net income and net income per share amounts would
have been reduced to the following pro-forma amounts:
2000 1999 1998
-------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE)
Net Income: As reported $5,007 $5,084 $4,805
Proforma 4,972 5,026 4,780
Basic earnings per share: As reported $1.85 $1.86 $1.76
Proforma 1.83 1.84 1.75
Diluted earnings per share: As reported $1.81 $1.84 $1.74
Proforma 1.80 1.83 1.73
Weighted average fair value of options granted $3.97 $2.90 $3.81
The fair value of the options granted has been estimated using the following
assumptions for 2000, 1999 and 1998, respectively: risk-free interest rate of
5.32%, 5.98% and 4.53%, expected volatility of the Corporation's stock of
25.79%, 20.26% and 14.00% and an expected dividend yield of 5.24%, 3.10% and
2.08%. The expected life of the options in 2000,1999 and 1998 was .69 year, .74
year and .76 year, respectively.
- 44 -
NOTE 14. DEFERRED COMPENSATION AGREEMENT
The Corporation has entered into deferred compensation agreements with
several officers and directors which provide for the payment of benefits over a
ten-year period, beginning at age 65. At inception, the present value of the
obligations under these deferred compensation agreements amounted to
approximately $600,000, which is being accrued over the estimated remaining
service period of these officers and directors. These obligations are partially
funded through life insurance covering these individuals.
NOTE 15. SHAREHOLDERS' EQUITY
In March 2000, the Board of Directors authorized the repurchase of up to
75,000 shares of the Corporation's common stock over a twelve-month period
ending in March 2001. The Corporation uses the repurchased common stock
(Treasury stock) for general corporate purposes including stock dividends and
splits, employee benefit and executive compensation plans, and the dividend
reinvestment plan. Under this program, the Corporation repurchased 35,577 shares
for $595,000 in 2000. In March 1999, the Board of Directors authorized a similar
plan over a twelve-month period ended March, 2000. Under this program, the
Corporation repurchased 15, 975 shares for $434,700 in 1999. At December 31,
2000 and 1999, the Corporation held Treasury shares totaling 287,373 and
252,830, respectively, that were acquired through Board authorized stock
repurchase programs.
NOTE 16. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Bank is a party to financial
instruments which are not reflected in the accompanying financial statements and
are commonly referred to as off-balance-sheet instruments. These financial
instruments are entered into primarily to meet the financing needs of the Bank's
customers and include commitments to extend credit and standby letters of
credit. Those instruments involve, to varying degrees, elements of credit and
interest rate risk not recognized in the statement of financial position.
The Corporation's exposure to credit loss in the event of nonperformance by
other parties to the financial instruments for commitments to extend credit and
standby letters of credit is represented by the contract or notional amount of
those instruments. The Bank uses the same credit policies in making commitments
and conditional obligations as they do for on-balance-sheet instruments.
Unless noted otherwise, the Bank does not require collateral or other
security to support financial instruments with credit risk. The Bank had the
following outstanding commitments as of December 31:
(AMOUNTS IN THOUSANDS) 2000 1999
---- ----
Financial instruments whose contract amounts represent credit risk:
Commercial commitments to extend credit . . . . . . . . . . . . . . $ 48,290 $46,405
Consumer commitments to extend credit (secured) . . . . . . . . . . 18,601 17,291
Consumer commitments to extend credit (unsecured) . . . . . . . . 12,243 13,344
---------- --------
$ 79,134 $77,040
========== =========
Standby letters of credit . . . . . . . . . . . . . . . . . . . . . . . 1,105 2,544
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
with the exception of home equity lines and personal lines of credit and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank's extension of credit, is based on management's
credit evaluation of the counterparty. Collateral for most commercial
commitments varies but may include accounts receivable, inventory, property,
plant, and equipment, and income-producing commercial properties. Collateral for
secured consumer commitments consists of liens on residential real estate.
Standby letters of credit are instruments issued by the Bank which
guarantee the beneficiary payment by the Bank in the event of default by the
Bank's customer in the nonperformance of an obligation or service. Most
- 45 -
standby letters of credit are extended for one-year periods. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. The Bank holds collateral
supporting those commitments for which collateral is deemed necessary primarily
in the form of certificates of deposit and liens on real estate.
Most of the Bank's business activity is with customers located within
Franklin County, Pennsylvania and surrounding counties and does not involve any
significant concentrations of credit to any one entity or industry.
The Bank has entered into various noncancellable operating leases. Total
rental expense on these leases was $73,000, $53,000, and $50,000 in the years
2000, 1999 and 1998, respectively. Future minimum payments under these leases
are as follows:
2001..............................................$58,000
2002..............................................$30,000
2003..............................................$ 3,700
2004..............................................$ 3,700
2005 and beyond...................................$ 9,600
In the normal course of business, the Corporation has commitments,
lawsuits, contingent liabilities and claims. However, the Corporation does not
expect that the outcome of these matters will have a materially adverse effect
on its consolidated financial position or results of operations.
NOTE 17. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB Statement No. 107 requires disclosure of fair value information about
financial instruments, whether or not recognized in the balance sheet, for which
it is practicable to estimate that value. In cases where quoted market prices
are not available, fair value is based on estimates using present value or other
valuation techniques. These techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison with independent markets, and, in many cases, could not be
realized in immediate settlement of the instrument. Statement No. 107 excludes
certain financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts presented
do not represent the underlying value of the Corporation.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value.
CASH, FEDERAL FUNDS SOLD AND INTEREST-BEARING DEPOSITS:
For these short-term instruments, the carrying amount is a reasonable
estimate of fair value.
INVESTMENT SECURITIES:
For debt and marketable equity securities available for sale, fair values
are based on quoted market prices or dealer quotes. If a quoted market price is
not available, fair value is estimated using quoted market prices for similar
securities.
LOANS, NET:
The fair value of fixed-rate loans is estimated for each major type of loan
(e.g. real estate, commercial, industrial and agricultural and consumer) by
discounting the future cash flows associated with such loans using rates
currently offered for loans with similar terms to borrowers of comparable credit
quality. The model considers scheduled principal maturities, repricing
characteristics, prepayment assumptions and interest cash flows. The discount
rates used are estimated based upon consideration of a number of factors
including the treasury yield curve, credit quality factors, expense and service
charge factors. For variable rate loans that reprice frequently and have no
significant change in credit quality, carrying values approximate the fair
value.
DEPOSITS, SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER
BORROWINGS:
The fair market value of demand deposits, savings accounts, and money
market deposits is the amount payable on demand at the reporting date. The fair
value of fixed-rate certificates of deposit and long-term debt are estimated by
discounting the future cash flows using rates approximating those currently
offered for certificates of deposit and
- 46 -
borrowings with similar remaining maturities. Other borrowings consist of a line
of credit with the FHLB at a variable interest rate and securities sold under
agreements to repurchase, for which the carrying value approximates a reasonable
estimate of the fair value.
ACCRUED INTEREST RECEIVABLE AND PAYABLE:
The carrying amount is a reasonable estimate of fair value.
OFF BALANCE SHEET FINANCIAL INSTRUMENTS:
Outstanding commitments to extend credit and commitments under standby
letters of credit include fixed and variable rate commercial and consumer
commitments. The fair value of the commitments are estimated using the fees
currently charged to enter into similar agreements. The fair value of the
interest rate cap was based on current settlement value.
The estimated fair value of the Corporation's financial instruments at December
31 are as follows:
2000 1999
----------------------- -----------------------
CARRYING FAIR Carrying Fair
(Amounts in thousands) AMOUNT VALUE Amount Value
---------- ------- ---------- --------
Financial assets:
Cash and short-term investments $17,768 $17,768 $15,117 $15,117
Investment securities available for sale 125,174 125,174 129,801 129,801
Net Loans 297,307 307,243 284,084 279,545
Accrued interest receivable 3,169 3,169 2,809 2,809
Financial liabilities:
Deposits $357,209 $359,256 $333,310 $320,107
Securities sold under agreements to repurchase 33,036 33,036 27,182 27,182
Short term borrowings - - 12,500 12,500
Long term borrowings 29,477 30,710 29,695 28,240
Accrued interest payable 1,763 1,763 1,442 1,442
Off Balance Sheet financial instruments
Commitments to extend credit - - - -
Standby letters-of-credit - - - -
Interest rate cap 76 76 238 238
- 47 -
NOTE 18. PARENT COMPANY (FRANKLIN FINANCIAL SERVICES CORPORATION) FINANCIAL
INFORMATION
BALANCE SHEETS DECEMBER 31
----------------------
(AMOUNTS IN THOUSANDS) 2000 1999
------- --------
Assets:
Due from bank subsidiary $415 $571
Investment securities 2,270 2,149
Equity investment in subsidiary 40,245 36,204
Premises 176 186
Other assets 201 0240
------- --------
Total assets $43,307 $39,350
======= ========
Liabilities:
Deferred tax liability $102 $80
Other liabilities 4 10
------- --------
Total liabilities 106 90
Shareholders' equity 43,201 39,260
------- --------
Total liabilities and shareholders' equity $43,307 $39,350
======= =========
STATEMENTS OF INCOME YEARS ENDED DECEMBER 31
-------------------------------------
(AMOUNTS IN THOUSANDS) 2000 1999 1998
-------- -------- ---------
Income:
Dividends from Bank subsidiary $2,117 $2,270 $1,317
Interest and dividend income 71 62 57
Gain on sale of securities 357 285 464
Other income - 30 30
------- ------- ---------
2,545 2,647 1,868
Expenses:
Operating expenses 401 471 516
Loss on sale of premises - - 170
------- ------- ---------
Income before equity in undistributed income of subsidiary 2,144 2,176 1,182
Equity in undistributed income of subsidiary 2,863 2,908 3,623
------- ------- ---------
Net income $5,007 $5,084 $4,805
======== ======= =========
- 48 -
Years ended December 31
STATEMENTS OF CASH FLOWS ---------------------------------------
(AMOUNTS IN THOUSANDS) 2000 1999 1998
--------- --------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,007 $ 5,084 $ 4,805
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed income of subsidiary (2,863) (2,908) (3,623)
Depreciation 10 10 11
Loss (gain) on sale of premises - (25) 141
Securities gains (357) (285) (464)
Decrease in due from bank subsidiary 156 815 1,934
Decrease in other assets 39 33 66
(Decrease) increase in liabilities (6) 10 -
Other, net 343 236 234
--------- --------- ----------
Net cash provided by operating activities 2,329 2,970 3,104
--------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of investment securities 700 541 709
Purchase of investment securities (401) (429) (580)
Proceeds from sale of premises - 225 208
Capital expenditures - (1) (14)
--------- --------- ----------
Net cash provided by investing activities 299 336 323
--------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (2,112) (3,019) (3,599)
Proceeds from sales of common stock 79 148 172
Purchase of treasury shares (595) (435) -
--------- --------- ----------
Net cash used in financing activities (2,628) (3,306) (3,427)
--------- --------- ----------
Increase in cash and cash equivalents - - -
Cash and cash equivalents as of January 1 - - -
--------- --------- ----------
Cash and cash equivalents as of December 31 $ - $ - $ -
========= ========= ==========
- 49 -
NOTE 19. QUARTERLY RESULTS OF OPERATIONS
(UNAUDITED)
The following is a summary of the quarterly results of consolidated
operations for the years ended December 31, 2000 and 1999:
(AMOUNTS IN THOUSANDS) THREE MONTHS ENDED
-----------------------------------------------------------------------------
2000 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------------------------------------ --------------- --------- ------------ ------------
Interest income $7,838 $8,043 $8,207 $8,358
Interest expense 4,147 4,328 4,631 4,810
--------------- -------- --------- ------------
Net interest income 3,691 3,715 3,576 3,548
Provision for loan losses 272 120 180 181
Other noninterest income 1,085 1,081 1,211 1,278
Securities gains 107 110 21 158
Noninterest expense 3,137 3,399 3,020 3,159
--------------- -------- --------- ------------
Income before income taxes 1,474 1,387 1,608 1,644
Income taxes 263 234 292 317
--------------- -------- --------- ------------
Net Income $1,211 $1,153 $1,316 $1,327
=============== ======== ========= ============
Basic earnings per share* $0.44 $0.42 $0.49 $0.49
Diluted earnings per share* $0.44 $0.42 $0.48 $0.48
=============== ======== ========= ============
1999 March 31 June 30 September 30 December 31
----------------------------------------- ---------------- ------------- -------------- -------------
Interest income $7,163 $7,185 $7,400 $7,659
Interest expense 3,567 3,618 3,806 4,011
---------------- ------------- -------------- -------------
Net interest income 3,596 3,567 3,594 3,648
Provision for loan losses 195 200 180 255
Other noninterest income 1,054 1,046 1,074 1,039
Securities gains - - 188 101
Noninterest expense 2,880 2,864 3,106 2,960
---------------- ------------- -------------- -------------
Income before income taxes 1,575 1,549 1,570 1,573
Income taxes 296 304 290 293
---------------- ------------- -------------- -------------
Net Income $1,279 $1,245 $1,280 $1,280
================ ============= ============== =============
Basic earnings per share* $0.47 $0.46 $0.46 $0.47
Diluted earnings per share* $0.46 $0.45 $0.46 $0.46
================ ============= ============== =============
*BASED ON WEIGHTED-AVERAGE SHARES OUTSTANDING DURING THE PERIOD REPORTED.
CONSEQUENTLY, THE SUM OF THE QUARTERLY EARNINGS PER SHARE MAY NOT EQUAL THE
ANNUAL PER SHARE AMOUNT.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information related to this item is incorporated by reference to the
information appearing under the heading "Relationship with Independent Public
Accountants" on Page 15 of the Corporation's Proxy Statement for the 2001
Annual Meeting of Shareholders.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information related to this item is incorporated by reference to the
material set forth under the headings "Information about Nominees and
Continuing Directors" on Pages 4 though 6, and "Executive Officers" on Page 7
of the Corporation's Proxy Statement for the 2001 Annual Meeting of
Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
The information related to this item is incorporated by reference in the
material set forth under the headings "Compensation of Directors" on Page 7
and "Executive Compensation and Related Matters" on Pages 7 through 13 of the
Corporation's Proxy Statement for the 2001 Annual Meeting of Shareholders,
except that information appearing under the headings "Compensation Committee
Report on Executive Compensation" and "Stock Performance Graph" on Pages 10
through 13 is not incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information related to this item is incorporated by reference to the
material set forth under the headings "Voting of Shares and Principal Holders
Thereof" on Page 2, and "Information about Nominees and Continuing Directors"
on Pages 4 through 6 of the Corporation's Proxy Statement for the 2001 Annual
Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information related to this item is incorporated by reference to the
material set forth under the heading "Transactions with Directors and
Executive Officers" on Page 14 of the Corporation's Proxy Statement for the
2001 Annual Meeting of Shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) The following Consolidated Financial Statements of the Corporation:
Independent Auditor's Report
Consolidated Balance Sheets - December 31, 2000 and 1999,
Consolidated Statements of Income - Years ended December 31,
2000, 1999 and 1998,
Consolidated Statements of Changes in Shareholders'
Equity - Years ended December 31, 2000, 1999 and 1998,
Consolidated Statements of Cash Flows - Years ended
December 31, 2000, 1999 and 1998,
Notes to Consolidated Financial Statements
(2) All financial statement schedules for which provision is made in
the applicable accounting regulations of the Securities and
Exchange Commission are not required under the related instructions
or are inapplicable and have therefore been omitted.
(3) The following exhibits are filed as part of this report:
3.1 Articles of Incorporation of the Corporation.
Filed as Exhibit 3 to Form 10-Q Quarterly Report of the
Corporation for the quarter ended September 30, 1999
and incorporated herein by reference.
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3.2 Bylaws of the Corporation.
Filed as Exhibit 3 (i) to Current Report on Form 8-K,
filed December 3, 1999 and incorporated herein by
reference.
10.1 Deferred Compensation Agreements with Bank Directors.*
10.2 Directors' Deferred Compensation Plan.*
10.3 Long-Term Incentive Plan of 1990.*
10.4 Senior Management Incentive Program, as amended,
October 15, 1992.*
Filed as Exhibit 10.2 to Form 10-Q Quarterly Report of
the Corporation for the quarter ended June 30, 1999 and
incorporated herein by reference.
10.5 Severance Benefit Agreement between the Corporation and
Theodore D. McDowell.* Filed as Exhibit 10 to the Form
10-Q Quarterly Report of the Corporation for the
quarter ended September 30, 1999 and incorporated
herein by reference.
21 Subsidiaries of the Corporation
23.1 Consent of Beard Miller Company LLP
23.2 Consent of Arthur Andersen LLP
99 Report of Arthur Andersen LLP
* Identifies a management contract or a compensatory plan or arrangement.
(b) Reports on Form 8-K:
None.
(c) The exhibits required to be filed as part of this report are submitted
as a separate section of this report.
(d) Financial Statement Schedules: None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
FRANKLIN FINANCIAL SERVICES
CORPORATION
By: /s/ William E. Snell, Jr.
-------------------------
William E. Snell, Jr.
President and Chief Executive Officer
Dated: March 22, 2001
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
------------------------ ----------------------------- ---------------------
/s/ Robert G. Zullinger Chairman of the Board March 22, 2001
-----------------------
Robert G. Zullinger and Director
/s/ William E. Snell, Jr. President and Chief Executive March 22, 2001
-----------------------
William E. Snell, Jr. Officer and Director
/s/ Charles S. Bender II Executive Vice President March 22, 2001
-----------------------
Charles S. Bender II and Director
/s/ Elaine G. Meyers Treasurer and Chief Financial March 22, 2001
-----------------------
Elaine G. Meyers Officer (Principal Financial
And Accounting Officer)
/s/ G. Warren Elliott Director March 22, 2001
-----------------------
G. Warren Elliott
Director March 22, 2001
-----------------------
Omer L. Eshleman
/s/ Donald A. Fry Director March 22, 2001
-----------------------
Donald A. Fry
Director March 22, 2001
-----------------------
Dennis W. Good
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/s/ H. Huber Mccleary Director March 22, 2001
-----------------------
H. Huber McCleary
/s/ Jeryl C. Miller Director March 22, 2001
-----------------------
Jeryl C. Miller
/s/ Stephen E. Patterson Director March 22, 2001
-----------------------
Stephen E. Patterson
/s/ Charles m. Sioberg Director March 22, 2001
-----------------------
Charles M. Sioberg
/s/ Martha B. Walker Director March 22, 2001
-----------------------
Martha B. Walker
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EXHIBIT INDEX FOR THE YEAR
ENDED DECEMBER 31, 2000
ITEM DESCRIPTION
---- -----------
3.1 Articles of Incorporation of the Corporation.
Filed as Exhibit 3 to Form 10-Q Quarterly Report of the Corporation
for the quarter ended September 30, 1999 and incorporated by
reference.
3.2 Bylaws of the Corporation.
Filed as Exhibit 3 (i) to Current Report on Form 8-K filed on
December 3, 1999 and incorporated herein by reference.
10.1 Deferred Compensation Agreements with Bank Directors.*
10.2 Director's Deferred Compensation Plan.*
10.3 Long-Term Incentive Plan of 1990.*
10.4 Senior Management Incentive Program, as amended, October 15, 1992.*
Filed as Exhibit 10.2 to Form 10-Q Quarterly Report of the
Corporation for the quarter ended June 30, 1999 and incorporated
herein by reference.
10.5 Severance Benefit Agreement between the Corporation and Theodore D.
McDowell.*
Filed as Exhibit 10 to the Form 10-Q Quarterly Report of the Corporation
for the quarter ended September 30, 1999 and incorporated herein by
reference.
21 Subsidiaries of Corporation
23.1 Consent of Beard Miller Company LLP
23.2 Consent of Arthur Anderson LLP
27 Financial Data Schedule
99 Report of Arthur Anderson LLP
*Identifies a management contract or compensatory plan or arrangement.
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