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Section 1: 10-Q (10-Q)

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

¨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 001-38884

FRANKLIN FINANCIAL SERVICES CORPORATION

(Exact name of registrant as specified in its charter)

Pennsylvania

25-1440803

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

20 South Main Street, Chambersburg, PA

17201-0819

(Address of principal executive offices)

(Zip Code)

(717) 264-6116

(Registrant's telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:



Title of class

Symbol

Name of exchange on which registered

Common stock

FRAF

Nasdaq Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ Smaller reporting company x Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes ¨ No x

There were 4,340,837 outstanding shares of the Registrant’s common stock as of April 30, 2020.



INDEX

         

Part I - FINANCIAL INFORMATION

Item 1

Financial Statements

Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019 (unaudited)

1

Consolidated Statements of Income for the Three Months ended March 31, 2020

2

and 2019 (unaudited)

Consolidated Statements of Comprehensive Income for the Three Months ended

3

March 31, 2020 and 2019 (unaudited)

Consolidated Statements of Changes in Shareholders’ Equity for the Three Months

3

ended March 31, 2020 and 2019 (unaudited)

Consolidated Statements of Cash Flows for the Three Months ended March 31, 2020

4

and 2019 (unaudited)

Notes to Consolidated Financial Statements (unaudited)

5

Item 2

Management’s Discussion and Analysis ofResults of Operations and Financial Condition

24

Item 3

Quantitative and Qualitative Disclosures about Market Risk

41

Item 4

Controls and Procedures 

41

Part II - OTHER INFORMATION

Item 1

Legal Proceedings

43

Item 1A

Risk Factors

43

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

44

Item 3

Defaults Upon Senior Securities

44

Item 4

Mine Safety Disclosures

44

Item 5

Other Information

45

Item 6

Exhibits

45

SIGNATURE PAGE

46


Part I FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets

(Dollars in thousands, except share and per share data) (unaudited)

March 31,

December 31,

2020

2019

Assets

Cash and due from banks

$

12,848

$

15,336

Short-term interest-bearing deposits in other banks

40,502

68,492

Total cash and cash equivalents

53,350

83,828

Long-term interest-bearing deposits in other banks

10,738

8,746

Debt securities available for sale, at fair value

208,040

187,433

Equity securities

313

440

Restricted stock

465

465

Loans held for sale

2,751

2,040

Loans

936,386

934,575

Allowance for loan losses

(14,730)

(11,966)

Net Loans

921,656

922,609

Premises and equipment, net

13,717

13,851

Right of use asset

5,118

5,126

Bank owned life insurance

20,955

23,748

Goodwill

9,016

9,016

Deferred tax asset, net

3,570

4,003

Other assets

12,437

7,852

Total assets

$

1,262,126

$

1,269,157

Liabilities

Deposits

Noninterest-bearing checking

$

198,384

$

192,108

Money management, savings, and interest checking

835,208

843,936

Time

83,841

89,348

Total deposits

1,117,433

1,125,392

Lease liability

5,159

5,161

Other liabilities

10,529

11,076

Total liabilities

1,133,121

1,141,629

Commitments and contingent liabilities

 

 

Shareholders' equity

Common stock, $1 par value per share,15,000,000 shares authorized with

4,710,822 shares issued and 4,337,520 shares outstanding at March 31, 2020 and

4,709,849 shares issued and 4,352,753 shares outstanding at December 31, 2019

4,711

4,710

Capital stock without par value, 5,000,000 shares authorized with no

shares issued and outstanding

Additional paid-in capital

42,390

42,268

Retained earnings

95,359

94,946

Accumulated other comprehensive loss

(4,360)

(5,986)

Treasury stock, 373,302 shares at March 31, 2020 and 357,096 shares at

December 31, 2019, at cost

(9,095)

(8,410)

Total shareholders' equity

129,005

127,528

Total liabilities and shareholders' equity

$

1,262,126

$

1,269,157

The accompanying notes are an integral part of these unaudited financial statements. 

1


Consolidated Statements of Income

For the Three Months Ended

(Dollars in thousands, except per share data) (unaudited)

March 31,

2020

2019

Interest income

Loans, including fees

$

10,168

$

11,009

Interest and dividends on investments:

Taxable interest

1,062

540

Tax exempt interest

171

338

Dividend income

6

5

Deposits and obligations of other banks

258

97

Total interest income

11,665

11,989

Interest expense

Deposits

1,413

1,624

Short-term borrowings

36

Total interest expense

1,413

1,660

Net interest income

10,252

10,329

Provision for loan losses

3,000

399

Net interest income after provision for loan losses

7,252

9,930

Noninterest income

Investment and trust services fees

1,445

1,452

Loan service charges

285

203

Deposit service charges and fees

565

545

Other service charges and fees

347

353

Debit card income

418

402

Increase in cash surrender value of life insurance

124

127

Life insurance gain

812

Net (losses)/gains on sales of debt securities

(10)

24

Change in fair value of equity securities

(127)

3

Other

30

56

Total noninterest income

3,889

3,165

Noninterest Expense

Salaries and employee benefits

5,535

5,442

Net occupancy

830

856

Marketing and advertising

455

402

Legal and professional

395

430

Data processing

806

705

Pennsylvania bank shares tax

175

243

FDIC Insurance

60

65

ATM/debit card processing

264

258

Telecommunications

105

105

Other

903

906

Total noninterest expense

9,528

9,412

Income before federal income taxes

1,613

3,683

Federal income tax (benefit) expense

(106)

446

Net income

$

1,719

$

3,237

Per share

Basic earnings per share

$

0.40

$

0.73

Diluted earnings per share

$

0.39

$

0.73

The accompanying notes are an integral part of these unaudited financial statements. 

2


Consolidated Statements of Comprehensive Income

For the Three Months Ended

March 31,

(Dollars in thousands) (unaudited)

2020

2019

Net Income

$

1,719

$

3,237

Debt Securities:

Unrealized gains arising during the period

2,048

1,414

Reclassification adjustment for losses (gains) included in net income (1) (2)

10

(24)

Net unrealized gains

2,058

1,390

Tax effect

(432)

(291)

Net of tax amount

1,626

1,099

Total other comprehensive income

1,626

1,099

Total Comprehensive Income

$

3,345

$

4,336

(1) Reclassified to net gains on sales of debt securities

(2) Net of the reclassification of $(2) and $5 to Federal income tax (benefit) expense

The accompanying notes are an integral part of these unaudited financial statements.

 

Consolidated Statements of Changes in Shareholders’ Equity

For the three months ended March 31, 2020 and 2019

Accumulated

Additional

Other

Common

Paid-in

Retained

Comprehensive

Treasury

(Dollars in thousands, except per share data) (unaudited)

Stock

Capital

Earnings

Loss

Stock

Total

Balance at January 1, 2020

$

4,710 

$

42,268 

$

94,946 

$

(5,986)

$

(8,410)

$

127,528 

Net income

1,719 

1,719 

Other comprehensive income

1,626 

1,626 

Cash dividends declared, $0.30 per share

(1,306)

(1,306)

Acquisition of 36,401 shares of treasury stock

(1,172)

(1,172)

Treasury shares issued under dividend reinvestment plan, 20,124 shares

75 

485 

560 

Stock Compensation Plans:

Treasury shares issued (71 shares)

1 

2 

3 

Common shares issued (973 shares)

1 

15 

16 

Compensation expense

31 

31 

Balance at March 31, 2020

$

4,711 

$

42,390 

$

95,359 

$

(4,360)

$

(9,095)

$

129,005