ITEM 1. Business
General
Franklin Financial Services Corporation (the "Corporation") was organized as a Pennsylvania business corporation on June 1, 1983 and is a registered bank holding company under the Bank Holding Company Act of 1956, as amended (the "BHCA"). On January 16, 1984, pursuant to a plan of reorganization approved by the shareholders of Farmers and Merchants Trust Company of Chambersburg ("F&M Trust" or "the Bank") and the appropriate regulatory agencies, the Corporation acquired all the shares of F&M Trust and issued its own shares to former F&M Trust shareholders on a share-for-share basis.
On May 1, 1995, the Mont Alto State Bank, also a commercial bank and a subsidiary of the Corporation, was merged into Farmers and Merchants Trust Company. In addition, on December 29, 1995, Franklin Founders Life Insurance Company, a credit life reinsurance company and a subsidiary of the Corporation, was liquidated.
The Corporation conducts all of its business through its only direct subsidiary, F&M Trust, which is wholly-owned. F&M Trust, established in 1906, is a full-service, Pennsylvania-chartered commercial bank and trust company which is not a member of the Federal Reserve System. The bank, which operates twelve full service offices in Franklin and Cumberland Counties, Pennsylvania, engages in general commercial, retail banking and trust services normally associated with community banks and the 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, offering certificates of deposit in various forms and at various interest rates, providing mortgage 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 of F&M Trust in an adverse manner. Also, none of the Corporation's business is seasonal.
The Bank's lending activities consist primarily of commercial, agricultural and industrial loans, installment and revolving loans to consumers, residential mortgage loans, and construction loans. Secured and unsecured commercial and industrial loans, including accounts receivable, inventory financing and commercial equipment financing, are made to small and medium-sized businesses, individuals, governmental entities, and non-profit organizations. F&M Trust also participates in the Pennsylvania Higher Education Assistance Act student loan program and the Pennsylvania Housing Finance Agency program.
Installment loans involve both direct loans to consumers and the purchase of consumer obligations from dealers and others who have sold or financed the purchase of merchandise, including automobiles and mobile homes, to their customers on time. The Bank's mortgage loans include long-term loans to individuals and to businesses secured by mortgages on the borrower's real property. Construction loans are made to finance the purchase of land and the construction of buildings thereon, and are secured by short-term mortgages on real estate. In certain situations, the Bank acquires properties through foreclosure on delinquent loans. The Bank holds these properties until such time as they are in a marketable condition and a buyer can be obtained.
F&M Trust's Trust Department offers all of the personal and corporate trust services normally associated with trust departments of area banks, including estate planning and administration, corporate and personal trust fund management, pension, profit sharing and other employee benefits funds management, custodial services, and trustee services for publicly issued debentures.
Competition
The Corporation and its subsidiary operate in a competitive environment that has intensified in the past few years as they have been compelled to share their market with institutions that are not subject to the regulatory restrictions on domestic banks and bank holding companies. Profit margins in the traditional banking business of lending and deposit gathering have declined as deregulation has allowed nonbanking institutions to offer alternative services to many of F&M Trust's customers.
The principal market of F&M Trust is in Franklin County and western Cumberland County, Pennsylvania. Twelve commercial bank competitors of F&M Trust have offices in this region, in addition to credit unions, savings and loan associations, mortgage banks, brokerage firms and other competitors. F&M trust is the largest locally owned financial institution in Franklin County and had total assets of approximately $336,000,000 at December 31, 1996.
All of the local commercial bank competitors of the corporation are subsidiaries of bank holding companies. The Corporation would rank sixth in size of the thirteen consolidated bank holding companies having offices in Franklin County.
Staff
As of December 31, 1996, the Corporation and its subsidiary had 161 full-time employees and 50 part-time employees. Most employees participate in pension, profit sharing/bonus, and employee stock purchase plans and are provided with group life, health and major medical insurance. Management considers employee relations to be excellent.
Supervision and Regulation
Various requirements and restrictions under the laws of the United States and under Pennsylvania law affect the Corporation and its subsidiaries.
General
The Corporation is registered as a bank holding company subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") under the BHCA, as amended. As a bank holding company, the Corporation's activities and those of its banking and nonbanking subsidiaries are limited to the business of banking and activities closely related or incidental to banking. Bank holding companies are required to file periodic reports with and are subject to examination by the Federal Reserve Board. The Federal Reserve Board has issued regulations under the BHCA that require a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks. As a result, the Federal Reserve Board, pursuant to such regulations may require the Corporation to stand ready to use its resources to provide adequate capital funds to its banking subsidiaries during periods of financial stress or adversity.
The BHCA prohibits the Corporation from acquiring direct or indirect control of more than 5% of the outstanding shares of any class of voting stock or substantially all of the assets of any bank or merging or consolidating with another bank holding company without prior approval of the Federal Reserve Board. Similar restrictions currently apply to acquisition of control of shares of stock of the Corporation or its banking subsidiaries by other bank holding companies. Additionally, the BHCA prohibits the Corporation from engaging in or from acquiring ownership or control of more than 5% of the outstanding shares of any class of voting stock of any company engaged in a nonbanking business, unless such business is determined by the Federal Reserve Board to be so closely related to banking as to be a proper incident thereto.
F&M Trust is not a member of the Federal Reserve System. Accordingly, its operations are subject to regulation and examination by the FDIC and by the Pennsylvania Department of Banking (the "PDOB"). F&M Trust is subject to requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amount of loans that may be granted and the interest that may be charged thereon, and limitations on the types of investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of the Bank. In addition to the impact of regulation, commercial banks are affected significantly by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability in order to influence the economy.
Capital Adequacy Guidelines
Bank holding companies are required to comply with the Federal Reserve Board's risk-based capital guidelines. The required minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) is 8%. At least half of the total capital is required to be "Tier 1 capital," consisting principally of common shareholders' equity, less certain intangible assets. The remainder ("Tier 2 capital") may consist of certain preferred stock, a limited amount of subordinated debt, certain hybrid capital instruments and other debt securities, and a limited amount of the general loan loss allowance. The risk-based capital guidelines are required to take adequate account of interest rate risk, concentration of credit risk, and risks of nontraditional activities.
In addition to the risk-based capital guidelines, the Federal Reserve Board requires a bank holding company to maintain a leverage ratio of a minimum level of Tier 1 capital (as determined under the risk-based capital guidelines) equal to 3% of average total consolidated assets for those bank holding companies which have the highest regulatory examination ratings and are not contemplating or experiencing significant growth or expansion. All other bank holding companies are required to maintain a ratio of at least 1% to 2% above the stated minimum. The Bank is subject to almost identical capital requirements adopted by the FDIC.
The Bank is also subject to PDOB capital guidelines. Although not adopted in regulation form, the PDOB utilizes capital standards requiring a minimum of 6% leverage capital and 10% risk-based capital. The components of leverage and risk-based capital are substantially the same as those defined by the FDIC.
Prompt Corrective Action Rules
The Federal Deposit Insurance Act (the "FDIA") requires each Federal banking agency to specify by regulation the levels at which an insured institution would be considered "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized." The applicable federal bank regulator for a depository institution can, under certain circumstances, reclassify a "well capitalized" institution as "adequately capitalized" or require an "adequately capitalized" or "undercapitalized" institution to comply with supervisory actions as if it were in the next lower category. Such a reclassification could be made if the regulatory agency determines that the institution is in an unsafe or unsound condition (which could include unsatisfactory examination ratings). F&M Trust meets the criteria to be "well capitalized" within the meaning of applicable regulations.
Regulatory Restrictions on Dividends Dividend payments by the Bank to the Corporation are subject to the Pennsylvania Banking Code of 1965 (the "Banking Code"), the FDIA, and FDIC regulations. Under the Banking Code, no dividends may be paid except from "accumulated net earnings" (generally retained earnings). The Federal Reserve Board and the FDIC have formal and informal policies which provide that insured banks and bank holding companies should generally pay dividends only out of current operating earnings, with some exceptions. Under the FDIA, no dividends may be paid by an insured bank if the bank is in arrears in the payment of any insurance assessment due to the FDIC. The Prompt Corrective Action rules also limit the payment of dividends by banks which are not classified as well capitalized or adequately capitalized.
Under these policies and subject to the restrictions applicable to the Bank, the Bank could declare, during 1997, without prior regulatory approval, aggregate dividends of approximately $4.653 million, plus net profits earned to the date of such dividend declaration.
FDIC Insurance Assessments
The FDIC has implemented a risk-related premium schedule for all insured depository institutions that results in the assessment of premiums based on capital and supervisory measures. Under the risk-related premium schedule, the FDIC assigns, on a semiannual basis, each depository institution to one of three capital groups (well-capitalized, adequately capitalized or undercapitalized) and further assigns such institution to one of three subgroups within a capital group. The institution's subgroup assignment is based upon the FDIC's judgment of the institution's strength in light of supervisory evaluations, including examination reports, statistical analyses and other information relevant to measuring the risk posed by the institution. Only institutions with a total capital to risk-adjusted assets ratio of 10% or greater, a Tier 1 capital to risk-based assets ratio of 6% or greater, and a Tier 1 leverage ratio of 5% or greater, are assigned to the well-capitalized group. As of December 31, 1996, the Bank was well capitalized for purposes of calculating insurance assessments.
The Bank Insurance Fund ("BIF") is presently fully funded at more than the minimum amount required by law. Accordingly, the 1997 BIF assessment rates range from zero for those institutions with the least risk, to $0.27 for every $100 of insured deposits for institutions deemed to have the highest risk. The Bank is in the category of institutions that presently pay nothing for deposit insurance. The FDIC adjusts the rates every six months.
While the Bank presently pays no premiums for deposit insurance, it is subject to assessments to pay the interest on Financing Corporation ("FICO") bonds. FICO was created by Congress to issue bonds to finance the resolution of failed thrift institutions. Prior to 1997, only thrift institutions were subject to assessments to raise funds to pay the FICO bonds. On September 30, 1996, as part of the omnibus budget act, Congress enacted the Deposit Insurance Funds Act of 1996, which recapitalized the Savings Association Insurance Fund ("SAIF") and provided that BIF deposits would be subject to 1/5 of the assessment to which SAIF deposits are subject for FICO bond payments through 1999. Beginning in 2000, BIF deposits and SAIF deposits will be subject to the same assessment for FICO bonds. The FICO assessment for the Bank for the first six months of 1997 is $.0065 for each $100 of BIF deposits and $.0324 for each $100 of SAIF deposits.
New Legislation
The Deposit Insurance Funds Act of 1996 was a part of the larger Economic Growth and Regulatory Paperwork Reduction Act of 1996 ("EGRPRA"). EGRPRA is a lengthy Act that amends many different bank regulatory and consumer protection statutes. While EGRPRA does not contain any major changes to banking law (except for the FDIC and FICO assessments discussed above), it does contain a number of smaller provisions that are beneficial to the banking industry. In particular, certain routine regulatory application requirements and procedures have been reduced or eliminated, making it easier and less expensive for banks to comply with regulatory requirements. While the changes effected by EGRPRA are welcome, the direct effect on the Corporation and the Bank are expected to be minimal.
Proposed legislation is introduced in almost every legislative session that would dramatically affect the regulation of the banking industry. Whether or not such legislation will ever be enacted and what effect it may have on the Corporation and the Bank cannot be estimated at this time.
Interstate Banking
Prior to the passage of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking Act"), the BHCA prohibited a bank holding company located in one state from acquiring a bank located in another state, unless such an acquisition by an out-of-state bank holding company was specifically authorized by the law of the state where the bank to be acquired was located. Similarly, interstate branching was generally prohibited by the McFadden Act. The Interstate Banking Act permits an adequately capitalized and adequately managed bank holding company to acquire a bank in another state, whether or not the law of that other state permits the acquisition, subject to certain deposit concentration caps and the approval of the Federal Reserve Board. In addition, beginning on June 1, 1997, under the Interstate Banking Act, a bank can engage in interstate expansion by merging with a bank in another state or acquiring the assets and liabilities of a bank in another state and also may consolidate the acquired bank into new branch offices of the acquiring bank, unless the other state affirmatively opts out of the legislation before that date. A state may also opt into the legislation earlier than June 1, 1997 if it wishes to do so. The Interstate Banking Act also permits de novo interstate branching as of June 1, 1997, but only if a state affirmatively opts in by adopting appropriate legislation. Pennsylvania, Delaware, Maryland, and New Jersey, as well as other states, adopted "opt in" legislation which allows such transactions prior to the June 1, 1997 federal effective date.
Selected Statistical Information
Certain statistical information is included in the Corporation's 1996 Annual Report and is incorporated herein by reference
Description of Statistical Information Annual Incorporated by Reference from the Report 1996 Annual Report Page Net Interest Income 36 Analysis of Net Interest Income 37 Deposits by Major Classification 37 Rate-Volume Analysis of Net Interest Income 38 Investment Securities at Amortized Cost 40 Time Certificates of Deposit of $100,000 or More 41 Short-Term Borrowings 42 Loan Portfolio 44 Allocation of the Allowance for Possible Loan Losses 44 Non-Performing Assets 45 Allowance for Possible Loan Losses 45 Interest Rate Sensitivity 47 Maturity Distribution of Investment Portfolio 48 Maturities and Interest Rate Terms of Loans 49
Item 2.
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 eight properties throughout Franklin County which are held for future expansion and are currently leased to others or used for banking operations by F&M Trust.
In addition to the main office, F&M Trust owns eleven, and leases two properties which are used for banking offices and operations. F&M Trust also owns two properties which are held for expansion and are currently leased to others.
Item 3.
Item 3. Legal Proceedings None. Item 4.
Item 4. Submission of Matters to a Vote of Security Holders None.
PART II Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The information related to this item is incorporated by reference to the information appearing under Market and Dividend Information on Page 12 and Shareholders' Information on Page 55 of the Corporation's 1996 Annual Report to Shareholders.
Item 6.
Item 6. Selected Financial Data
The information related to this item is incorporated by reference to the information appearing under Summary of Selected Financial Data on Page 3 of the Corporation's 1996 Annual Report to Shareholders.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The information related to this item is incorporated by reference to the information appearing under Management's Discussion and Analysis on Pages 35 through 50 of the Corporation's 1996 Annual Report to Shareholders. Item 8.
Item 8. Financial Statements and Supplementary Data
The information related to this item is incorporated by reference to the information appearing under Financial Statements and Notes to Consolidated Financial Statements, including the Report of Independent Public Accountants, on Pages 13 through 34 of the Corporation's 1996 Annual Report to Shareholders.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.
PART III Item 10.
Item 10. Directors and Executive Officers of the Registrant
The information related to this item is incorporated by reference to the material set forth under the captions "Information about Nominees and Continuing Directors" on Pages 4 through 6, and "Executive Officers" on Page 7 of the Corporation's Proxy Statement for the 1997 Annual Meeting of Shareholders.
Item 11.
Item 11. Executive Compensation
The information related to this item is incorporated by reference to the material set forth under the captions "Compensation of Directors" on Page 7 and "Executive compensation and Related Matters" on Pages 8 through 13 of the Corporation's Proxy Statement for the 1997 Annual Meeting of Shareholders, except that information appearing under the captions "Compensation Committee Report on Executive Compensation" and "Stock Performance Graph" on pages 10 through 13 is not incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information related to this item is incorporated by reference to the material set forth under the captions "Voting of Shares and Principal Holders Thereof" on Page 2 and 3 and"Information about Nominees and Continuing Directors" on Pages 4 through 6 of the Corporation's Proxy Statement for the 1997 Annual Meeting of Shareholders.
Item 13.
Item 13. Certain Relationships and Related Transactions
The information related to this item is incorporated by reference to the material set forth under the caption "Transactions with Directors and Executive Officers" on Page 14 of the Corporation's Proxy Statement for the 1997 Annual Meeting of Shareholders.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) The following Consolidated Financial Statements of the Corporation are incorporated by reference to the 1995 Annual Report to Shareholders:
Report of Independent Public Accountants;
Consolidated Balance Sheets - December 31, 1996 and 1995;
Consolidated Statement of Income - Years ended December 31, 1996, 1995, and 1994;
Consolidated Statements of Changes in Shareholders' Equity - Years ended December 31, 1996, 1995, and 1994;
Notes to Consolidated Financial Statements.
(2) All financial statement schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and have therefore been omitted.
(3) The following exhibits are being filed as part of this report;
3.1 Articles of Incorporation of the Corporation. Filed as Exhibit 4 to Registration Statement on Form S-8 (No.33-36509) and incorporated herein by reference.
3.2 Bylaws of the Corporation. Filed as Exhibit 4 to Registration Statement on Form S-8 (No.33-36509) and incorporated herein by reference.
10.1 Deferred Compensation Agreements with Bank Directors. Filed as Exhibit 10.1 to the 1995 Form 10-K -- Annual Report of the Corporation and incorporated herein by reference.
10.2 Director's Deferred Compensation Plan. Filed as Exhibit 10.2 to the 1995 Form 10-K -- Annual Report of the Corporation and incorporated herein by reference.
10.3 Long-Term Incentive Plan of 1990. Filed as Exhibit 10.3 to the 1995 Form 10-K -- Annual Report of the Corporation and incorporated herein by reference.
10.4 Senior Management Incentive Program, as amended, October 15, 1992. Filed as Exhibit 10.5 to the 1993 Form 10-K -- Annual report of the Corporation and incorporated herein by reference.
11 Statements re: computation of per share earnings.
13 The 1996 Annual Report to Shareholders of the Corporation.
22 Subsidiaries of the Corporation.
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
(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.
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.
FINANCIAL SERVICES CORPORATION
By: /s/ William E. Snell, Jr. Date: March 13, 1997 President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Jay L. Benedict, Jr. Chairman of the Board March 13, 1997 Jay L. Benedict, Jr. and Director
/s/ Robert G. Zullinger Vice Chairman of the March 13, 1997 Robert G. Zullinger Board and Director
/s/ William E. Snell, Jr. President, William E. Snell, Jr. Chief Executive Officer March 13, 1997 and Director
/s/ Charles S. Bender II Executive Vice March 13, 1997 Charles S. Bender II President and Director
/s/ Frank S. Elliott Sr. Vice President March 13, 1997 Frank S. Elliott
/s/ Elaine G. Meyers Treasurer and Chief March 13, 1997 Elaine G. Meyers Financial Officer
/s/ Charles R. Diller Director March 13, 1997 Charles R. Diller
/s/ G. Warren Elliott Director March 13, 1997 G. Warren Elliott
/s/ John M. Hull III Director March 13, 1997 John M. Hull III
/s/ H. Huber McCLeary Director March 13, 1997 H. Huber McCleary
/s/ Jeryl C. Miller Director March 13, 1997 Jeryl C. Miller
/s/ Charles M. Sioberg Director March 13, 1997 Charles M. Sioberg
Form 10-K December 31, 1996 Signature Page (continued)
/s/ Director March 13, 1997 Martha B. Walker
/s/ Director March 13, 1997 Dennis W. Good, Jr.
/s/ Omer L. Eshleman Director March 13, 1997 Omer L. Eshleman
Exhibit Index for the Year Ended December 31, 1996
Item Description
3.1 Articles of Incorporation of the Corporation. Filed as Exhibit 4 Registration on Form S-8 (No. 33-36509) and incorporated herein by reference.
3.2 Bylaws of the Corporation. Filed as Exhibit 4 Registration on Form S-8 (No. 33-36509) and incorporated herein by reference.
10.1 Deferred Compensation Agreements with Bank Directors. Filed as Exhibit 10.1 to the 1995 Form 10-K -- Annual Report of the Corporation and incorporated herein by reference.
10.2 Director's Deferred Compensation Plan. Filed as Exhibit 10.2 to the 1995 Form 10-K -- Annual Report of the Corporation and incorporated herein by reference.
10.3 Long-Term Incentive Plan of 1990. Filed as Exhibit 10.3 to the 1995 Forom 10-K -- Annual Report of the Corporation and incorporated herein by reference.
10.4 Senior Management Incentive Program, as amended, October 15, 1992. Filed as Exhibit 10.5 to the 1993 Form 10-K -- Annual Report of the Corporation and incorporated herein by reference.
11 Statements re: computation of per share earnings
13 The 1996 Annual Report to Shareholders of the Corporation
22 Subsidiaries of Corporation
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule