UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ....... to ....... Commission file number 0-12126 FRANKLIN FINANCIAL SERVICES CORPORATION (Exact name of registrant as specified in its charter) PENNSYLVANIA 25-1440803 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 20 SOUTH MAIN STREET (P.O. BOX 6010), CHAMBERSBURG, PA 17201-0819 (Address of principal executive office) 717/264-6116 (Registrant's telephone number, including area code) ------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. There were 2,723,551 outstanding shares of the Registrant's common stock as of May 4, 2001. INDEX Page PART I - FINANCIAL INFORMATION Item 1 - Financial Statements Consolidated Balance Sheets 2 as of March 31, 2001 (Unaudited) and December 31, 2000 Consolidated Statements of 3 Income for the Three Months ended March 31, 2001 and 2000 (unaudited) Consolidated Statements of 4 Changes in Shareholders' Equity for the Three Months ended March 31, 2000 and March 31, 2001 (unaudited) Consolidated Statements of Cash 5 Flows for the Three Months Ended March 31, 2001 and 2000 (unaudited) Notes to Consolidated Financial 6 Statements (unaudited) Item 2 - Management's Discussion and Analysis of 9 Financial Condition and Results of Operations Item 3 - Quantitative and Qualitative Disclosures about Market Risk 14 PART II - OTHER INFORMATION 14 SIGNATURE PAGE 15 <TABLE> <CAPTION> CONSOLIDATED BALANCE SHEETS (amounts in thousands) (unaudited) March 31 December 31 2001 2000 ---------- ---------- ASSETS <S> <C> <C> Cash and due from banks .............................................. $ 20,439 $ 15,118 Interest bearing deposits in other banks ............................. 9,453 2,650 Investment securities available for sale ............................. 131,784 125,174 Loans, net ........................................................... 298,938 297,307 Premises and equipment, net .......................................... 7,395 7,237 Other assets ......................................................... 18,473 18,499 --------- --------- Total Assets ......................................................... $ 486,482 $ 465,985 ========= ========= <CAPTION> LIABILITIES AND SHAREHOLDERS' EQUITY <S> <C> <C> Deposits: Demand (non-interest bearing) ...................................... $ 51,931 $ 47,028 Savings and Interest checking ...................................... 184,736 178,992 Time ............................................................... 127,429 131,189 --------- --------- Total Deposits ....................................................... 364,096 357,209 Securities sold under agreements to repurchase ....................... 36,522 33,036 Long term debt ....................................................... 37,814 29,477 Other liabilities .................................................... 3,493 3,062 --------- --------- Total Liabilities .................................................... 441,925 422,784 Shareholders' equity: Common stock $1 par value per share, 15,000 shares authorized with 3,045 shares issued and 2,739 and 2,758 shares outstanding at March 31, 2001 and December 31, 2000, respectively 3,045 3,045 Capital stock without par value, 5,000 shares authorized with no shares issued or outstanding ............................... -- -- Additional paid in capital ........................................... 19,793 19,797 Retained earnings .................................................... 26,305 25,522 Accumulated other comprehensive income ............................... 1,243 343 Treasury stock ....................................................... (5,829) (5,506) --------- --------- Total shareholders' equity ........................................... 44,557 43,201 --------- --------- Total Liabilities and Shareholders' Equity ........................... $ 486,482 $ 465,985 ========= ========= <FN> The accompanying notes are an integral part of these statements </FN> </TABLE> <TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF INCOME (amounts in thousands, except per share data) (unaudited) For the Three Months Ended March 31 ---------------- 2001 2000 <S> <C> <C> INTEREST INCOME Interest on loans $ 6,216 $ 5,915 Interest on deposits in other banks 125 6 Interest and dividends on investments: Taxable interest 1,287 1,266 Tax exempt interest 501 573 Dividends 75 78 -------- -------- Total interest income 8,204 7,838 -------- -------- INTEREST EXPENSE Interest on deposits 3,460 3,195 Interest on securities sold under agreements to repurchase 487 364 Interest on short term borrowings - 177 Interest on long term debt 423 411 -------- -------- Total interest expense 4,370 4,147 -------- -------- Net interest income 3,834 3,691 Provision for possible loan losses 209 272 Net-interest income after provision -------- -------- for possible loan losses 3,625 3,419 -------- -------- NONINTEREST INCOME Service charges and fees 529 424 Investment and trust services fees 557 644 Other 84 17 Securities gains 4 107 -------- -------- Total noninterest income 1,174 1,192 -------- -------- NONINTEREST EXPENSE Salaries and benefits 1,644 1,745 Net occupancy expense 192 180 Furniture and equipment expense 177 153 Advertising 123 81 Legal & professional fees 92 78 Data processing 235 284 Pennsylvania bank shares tax 101 96 Other 594 520 -------- -------- Total noninterest expense 3,158 3,137 -------- -------- Income before Federal income taxes 1,641 1,474 -------- -------- Federal income tax expense 307 263 Net income $ 1,334 $ 1,211 ======== ======== Basic earnings per share $ 0.50 $ 0.44 Weighted average shares outstanding (000's) 2,694 2,724 Diluted earnings per share $ 0.49 $ 0.44 Weighted average shares outstanding (000's) 2,741 2,768 <FN> The accompanying notes are an integral part of these financial statements. </FN> </TABLE> <TABLE> <CAPTION> Consolidated Statements of Changes in Shareholders' Equity for the three months ended March 31, 2000 and 2001 (unaudited) Accumulated Additional Other Common Paid-in Retained Comprehensive Treasury Unearned (Dollars in thousands, except per share data) Stock Capital Earnings Income (loss) Stock Compensation Total -------- -------- -------- ------------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> Balance at December 31, 1999 .....................$ 3,045 $ 19,834 $ 22,627 ($ 876) ($ 4,938) ($ 432) $ 39,260 Comprehensive income: Net income ..................................... -- -- 1,211 -- -- -- 1,211 Unrealized securities losses arising during current period, net of tax .............. -- -- -- (307) -- -- (307) Reclassification adjustment for realized gains included in net income, net of tax ....... -- -- -- 89 -- -- 89 Unrealized gain on interest rate cap, net of tax . -- -- -- 11 -- -- 11 -------- Total Comprehensive income ..................... 1,004 Cash dividends declared, $.18 per share .......... -- -- (503) -- -- -- (503) Common stock issued under stock option plans ..... -- (5) -- -- 30 -- 25 Acquisition of 7,900 shares of Treasury stock .... -- -- -- -- (136) -- (136) Amortization of unearned compensation ............ -- -- -- -- -- 27 27 -------- -------- -------- -------- -------- -------- -------- Balance at March 31, 2000 ........................$ 3,045 $ 19,829 $ 23,335 $ (1,083) $ (5,044) $ (405) $ 39,677 ======== ======== ======== ======== ======== ======== ======== Balance at December 31, 2000 .....................$ 3,045 $ 19,797 $ 25,522 $ 343 $ (5,506) -- $ 43,201 Comprehensive income: Net income ....................................... -- -- 1,334 -- -- -- 1,334 Unrealized securities gains arising during current period, net of tax .............. -- -- -- 911 -- -- 911 Reclassification adjustment for realized gains included in net income ................... -- -- -- 3 -- -- 3 Unrealized loss on interest rate cap, net of tax . (14) (14) -------- Total Comprehensive income ..................... 2,234 Cash dividends declared, $.20 per share .......... -- -- (551) -- -- -- (551) Common stock issued under stock option plans ..... -- (4) -- -- 18 -- 14 Acquisition of 20,275 shares of treasury stock ... -- -- -- -- (341) -- (341) -------- -------- -------- -------- -------- -------- -------- Balance at March 31, 2001 ........................$ 3,045 $ 19,793 $ 26,305 $ 1,243 $ (5,829) $ -- $ 44,557 ======== ======== ======== ======== ======== ======== ======== <FN> The accompanying notes are an integral part of these financial statements </FN> </TABLE> <TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF CASH FLOWS (amounts in thousands) (unaudited) For the Three Months Ended March 31 2001 2000 ------- ------- <S> <C> <C> Cash flows from operating activities: Net Income $ 1,334 $ 1,211 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 243 231 Net accretion of securities premiums and discounts (54) (3) Provision for possible loan losses 209 272 Securities gains, net (4) (107) Mortgage loans originated for sale (5,360) (1,723) Proceeds from sale of mortgage loans 5,379 1,736 Principal gain on sales of mortgage loans (19) (13) Increase in cash surrender value of life insurance (96) - Decrease (increase) in interest receivable and other assets 94 (601) (Decrease) increase in interest payable and other liabilities (39) 460 Other, net (13) 25 -------- -------- Net cash provided by operating activities 1,674 1,488 -------- -------- Cash flows from investing activities: Proceeds from sales of investment securities available for sale 828 1,317 Proceeds from maturities of investment securities available for sale 15,531 3,480 Purchase of investment securities available for sale (21,528) (2,154) Net increase in loans (1,859) (9,097) Capital expenditures (354) (256) -------- -------- Net cash used in investing activities (7,382) (6,710) -------- -------- Cash flows from financing activities: Net change in demand deposits, NOW accounts and savings accounts 10,647 1,446 Net change in certificates of deposit (3,760) 6,632 Net change in short term borrowings 3,486 (3,950) Long term debt advances 9,302 - Long term debt payments (965) - Dividends paid (551) (503) Common stock issued under stock option plans 14 25 Purchase of treasury shares (341) (136) -------- -------- Net cash provided by financing activities 17,832 3,514 -------- -------- Increase (decrease) in cash and cash equivalents 12,124 (1,708) Cash and cash equivalents as of January 1 17,768 15,117 -------- -------- Cash and cash equivalents as of March 31 $ 29,892 $ 13,409 ======= ======= <FN> The accompanying notes are an integral part of these statements. </FN> </TABLE> FRANKLIN FINANCIAL SERVICES CORPORATION and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1 - Basis of Presentation The consolidated balance sheets as of March 31, 2001 and December 31, 2000, the consolidated statements of income for the three-month periods ended March 31, 2001 and 2000, the consolidated statements of changes in shareholders' equity for the three month periods ended March 31, 2000 and March 31, 2001 and the consolidated statements of cash flows for the three-month periods ended March 31, 2001 and 2000 have been prepared by the Corporation, without audit where indicated. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows at March 31, 2001, and for all periods presented have been made. The consolidated financial statements include the accounts of Franklin Financial Services Corporation (the Corporation), and its wholly-owned subsidiary, Farmers and Merchants Trust Company of Chambersburg (the Bank) and the Bank's wholly-owned subsidiary, Franklin Realty Services Corporation. All significant intercompany transactions and account balances have been eliminated. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the audited financial statements and notes thereto included in the Corporation's 2000 Annual Report. The results of operations for the period ended March 31, 2001, are not necessarily indicative of the operating results for the full year. 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. Earnings per share is computed based on the weighted average number of shares outstanding during each quarter, adjusted retroactively for stock splits and dividends. A reconciliation of the weighted average shares outstanding used to calculate basic earnings per share and diluted earnings per share follows: For the quarter ended March 31 2001 2000 (Amounts in thousands) Weighted average shares outstanding (basic) 2,694 2,724 Impact of common stock equivalents, 47 44 primarily stock options Weighted average shares outstanding (diluted) 2,741 2,768 ====== ====== Note 2. Capital Adequacy Quantitative measures established by regulation to ensure capital adequacy require financial institutions to maintain minimum amounts and ratios of total and Tier I capital to risk-weighted assets and of Tier I capital to average assets. The Capital ratios of the Corporation and its bank subsidiary are as follows: <TABLE> <CAPTION> As of March 31, 2001 (unaudited) To be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions (Amounts in thousands) Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- <S> <C> <C> <C> <C> <C> <C> Total Capital (to Risk Weighted Assets) Corporation $46,327 13.75% $26,946 8.00% N/A Bank 42,271 12.64% 26,761 8.00% $33,683 10.00% Tier 1 Capital (to Risk Weighted Assets) Corporation $42,154 12.52% $13,473 4.00% N/A Bank 38,243 11.43% 13,381 4.00% $20,210 6.00% Tier 1 Capital (to Average Assets) Corporation $42,154 8.96% $18,827 4.00% N/A Bank 38,243 8.18% 18,707 4.00% $23,384 5.00% </TABLE> <TABLE> <CAPTION> As of December 31, 2000 To be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions (Amounts in thousands) Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- <S> <C> <C> <C> <C> <C> <C> 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% </TABLE> NOTE 3 - Stock Repurchase Program On March 8, 2001, the Board of Directors authorized the repurchase of up to 75,000 shares of the Corporation's $1.00 par value common stock. The repurchases are authorized to be made from time to time over the next 12 months in open market or privately negotiated transactions. The repurchased shares will be held as treasury shares available for issuance in connection with future stock dividends and stock splits, employee benefit plans, executive compensation plans, and for issuance under the Dividend Reinvestment Plan and other corporate purposes. During the first quarter ended March 31, 2001, 3,343 shares of the Corporation's common stock were repurchased at a cost of approximately $61,000. Under a similar program which expired on March 1, 2001, the Corporation repurchased 11,805 shares at a cost of approximately $195,000. In addition, the Corporation repurchased 5,127 shares of common stock from employees at a cost of $85,000. These shares had been granted to the employees as part of a restricted stock plan. Management's Discussion and Analysis of Results of Operations and Financial Condition For the Three Month Periods Ended March 31, 2001 and 2000 Part 1, Item 2 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, changes in the Corporation's cost of funds, changes in government monetary policy, changes in government regulation and taxation of financial institutions, changes in the rate of inflation, changes in technology, the intensification of competition within the Corporation's market area, and other similar factors. Results of Operations The Corporation reported earnings of $1,334,000 for the first quarter ended March 31, 2001, representing an increase of 10.2% over reported earnings of $1,211,000 for the first quarter of 2000. Basic earnings per share for the period ended March 31, 2001 was $.50 compared to $.44 for the same period one year earlier. Diluted earnings per share was $.49 and $.44 for the quarters ended March 31, 2001 and 2000, respectively. Per share earnings are weighted to reflect the impact of the stock repurchase program. Book value per share at March 31, 2001 equaled $16.27 versus $14.23 at March 31, 2000. The Corporation's annualized return on average assets (ROA) and return on average equity (ROE) for the first quarter of 2001 were 1.11% and 12.05%, respectively, compared to 1.09% and 12.55%, respectively, for the first quarter of 2000. The decline in ROE for the period is due primarily to the higher unrealized securities gains recorded at March 31 and reflected in Shareholders' equity as Accumulated other comprehensive income. Net Interest Income Net interest income improved to $3.8 million for the first quarter of 2001 versus $3.6 million for the first quarter of 2000, an increase of $143,000, or 3.9%. Interest income grew $366,000, or 4.7%, to $8.2 million while interest expense grew $223,000, or 5.38%, to $4.4 million. The reduction in market interest rates in December 2000 and in the first quarter of 2001, coupled with balance sheet growth, has buoyed the Corporation's net interest income. At March 31, 2001 interest spread and net interest margin (tax equivalent) were 3.18% and 3.75%, respectively, versus 3.12% and 3.79%, respectively, one year earlier. Provision for Possible Loan Losses The Corporation expensed $209,000 for possible loan losses in the first quarter of 2001 compared to $272,000 in the first quarter of 2000. A reduction in nonperforming loans, from March 31, 2000 to March 31, 2001, accounted for the lower provision expense for the first quarter. Noninterest Income Total noninterest income equaled $1.17 million for the three months ended March 31, 2001, a net decrease of $18,000, or 1.5% compared to $1.19 million for the same period ended March 31, 2000. The decrease in noninterest income was attributable to lower securities gains and Investment and Trust services fees which were almost entirely offset by increases in service charges and fees and other income. Securities gains decreased $103,000 to $4,000 for the first quarter of 2001 versus $107,000 for the first quarter of 2000. Investment and trust services fees declined $87,000 to $557,000 for the first quarter of 2001 versus $644,000 for the first quarter of 2000. The decline in Investment and trust services fees was due primarily to lower market values of trust assets under management and slower growth. Service charges and fees grew $105,000 to $529,000 in the first quarter ended March 31, 2001 versus $424,000 for the same period in 2000. Contributing to this increase were higher loan fees related to a larger volume of mortgage loan origination activity, growth in commercial checking service charges, a new ATM access fee, growth in customer usage of debit cards and the implementation of a new official check program. Other noninterest income was up $67,000 for the first quarter to $84,000 versus $17,000 for the three months ended March 31, 2000. Earnings from Bank Owned Life Insurance was the primary contributor to the increase in other income. Noninterest Expense Total noninterest expense held steady during the first quarter of 2001 compared to the first quarter of 2000 and equaled $3.16 million versus $3.14 million, an increase of $21,000, or .66%. Declines in the level of salaries and benefits and data processing costs offset increases in other categories of expense to result in the minimal increase in noninterest expense. Salaries and benefits recorded a decrease of $101,000, or 5.78%, to $1.64 million for the first quarter ended March 31, 2001 from $1.74 million for the first quarter ended March 31, 2000. Some vacant positions, a move to pay for performance compensation, the end of a restricted stock program that was fully expensed in 2000, and lower education and training expenses contributed to the lower salary and benefit expense in the first quarter of 2001. Data processing expense was down $49,000, or 17.25%, to $235,000 for the quarter ended March 31, 2001, compared to $284,000 for the same period in 2000. The timing of expenses related to data processing equipment maintenance was primarily responsible for this variance. All other expense categories recorded increases for the first quarter. The largest increases occurred in advertising and other expense. Advertising expense was up $42,000, or 51.8%, to $123,000 for the first quarter due to the timing of expenses for newspaper and radio advertising and additional costs for advertising in a new market. Other expense increased $74,000, or 14.2%, to $594,000 for the first quarter of 2001 compared to the first quarter of 2000. Higher costs associated with ATM activity, higher postage and telephone costs, and an increase in costs associated with other real estate owned and loan collection expense were the primary contributors to the increase in other expense quarter over quarter. The Corporation's efficiency ratio was 59.9% at March 31, 2001. Federal income tax expense for the quarter ended March 31, 2001, totaled $307,000 compared to $263,000 for the same quarter ended March 31, 2000. The Corporation's effective tax rate for the quarter ended March 31, 2001, was 18.7% compared to 17.8% for the quarter ended March 31, 2000. The increase in the effective tax rate quarter versus quarter was primarily due to a decrease in tax-free income relative to pretax income. All taxable income for the Corporation is taxed at a rate of 34%. Financial Condition Total assets were $486.48 million at March 31, 2001, an increase of $20.5 million, or 4.4% from $465.98 million at December 31, 2000. Cash and due from banks, interest-bearing deposits in other banks and investment securities available for sale were the asset categories that recorded more than 90% of the growth since year-end 2000. Loan growth during the first quarter of 2001 was flat. Commercial loan volume up almost $2.0 million from year-end reported the largest increase but was offset by volume decreases in mortgage and consumer loan categories. With the decrease in interest rates, mortgage origination activity picked up toward mid-quarter, however most of those mortgages were sold on the secondary market and did not impact the balance sheet. Funding the increase in assets over the first quarter of 2001 was an increase in total deposits, securities sold under agreements to repurchase (Repos) and long term debt with the Federal Home Loan Bank of Pittsburgh (FHLB). Total deposits were up $6.9 million to $364.1 million at March 31, 2001 from $357.2 million at December 31, 2000. Noninterest- bearing demand and savings and interest checking grew $10.6 million while time deposits declined $3.7 million. Included in savings and interest checking is a money management deposit product which grew $7.9 million from year-end and is the primary driver behind the continued growth in deposits. Repo volume was up $3.5 million, or 10.6%, to $36.5 million from $33.0 million and long-term debt increased $8.3 million, or 28.3% to $37.8 million from $29.5 million. The increase in long term debt was used to match-fund new and existing fixed rate loans and to extend the duration of the Corporation's liabilities. Total shareholders' equity increased $1.4 million to $44.6 million at March 31, 2001 from $43.2 million at year-end 2000. During the quarter shareholders' equity was favorably impacted by an approximate $900,000 increase in other comprehensive income. An increase of $783,000 in retained earnings during the quarter accounted for the rest of the increase. Capital adequacy is currently defined by regulatory agencies through the use of several minimum required ratios. At March 31, 2001, the Corporation was well capitalized as defined by the banking regulatory agencies. The Corporation's leverage ratio, Tier I and Tier II risk-based capital ratios at March 31, 2001 were 8.96%, 12.52%, and 13.75%, respectively. For more information on capital ratios refer to Note 2 of the accompanying financial statements. Loan Quality Net charge-offs for the first quarter ended March 31, 2001, totaled $128,000 compared to $105,000 for the first quarter of 2000. In the first quarter of 2001, 27% of the net charge-offs were related to the real estate loan portfolio, 30% to the commercial portfolio and 43% to the consumer portfolio. The annualized ratio of net charge-offs to average loans was .17% at March 31, 2001 compared to .14% at March 31, 2000. Nonperforming loans were up $105,000 to $1.05 million at March 31, 2001 from $945,000 at December 31, 2000. However, nonperforming loans at March 31, 2001 have significantly decreased from $3.2 million at March 31, 2000. Included in nonperforming loans at March 31, 2001, were nonaccrual loans totaling $536,000 and loans past due 90 days or more totaling $514,000 compared to $576,000 and $369,000, respectively at December 31, 2000. The Corporation held other real estate (ORE) equaling $1.2 million at March 31, 2001 compared to $1.4 million at December 31, 2000. Nonperforming assets represented .46% of total assets at March 31, 2001 compared to .50% at December 31, 2000. The allowance for possible loan losses totaled $3.95 million at March 31, 2001, compared to $3.87 million at December 31, 2000. The allowance represents 1.30% and 1.28%, of total loans at March 31, 2001 and December 31, 2000, respectively. The allowance provided coverage for nonperforming loans at a rate of 3.8 times at March 31, 2001. The local economy has slowed from a year ago. The unemployment rate reported by the Department of Labor and Industry for Franklin County for March was 5.1%, an increase from the 4.4% that was reported in January 2001. Local economists expect the rate to increase again once recent layoff announcements take effect in May and June. Although the unemployment rate has increased, unemployment remains close to what economic observers refer to as "full employment," or 5%. Liquidity The Corporation's liquidity ratio (net cash, short-term and marketable assets divided by net deposits and short-term liabilities) was 37.6% at March 31, 2001. The Corporation has the ability to borrow funds from the Federal Home Loan Bank of Pittsburgh, if necessary, to enhance its liquidity position. At March 31, 2001, the maximum borrowing capacity for the Corporation with FHLB is approximately $145 million. The Corporation is currently involved in the construction of an addition to its headquarters facility. Approximately $1.0 million of the $3.15 million project has been funded as of March 31, 2001. This project is expected to be completed during 2001. Management believes that liquidity is adequate to meet the borrowing and deposit needs of its customers as well as to fund other commitments. PART I, Item 3 Qualitative and Quantitative Disclosures about Market Risk There were no material changes in the Corporation's exposure to market risk during the first quarter ended March 31, 2001. For more information on market risk refer to the Corporation's 2000 10-K. PART II - Other Information Item 1. Legal Proceedings None Item 2. Changes in Securities and Use of Proceeds None Item 3. Defaults by the Company on its Senior Securities None Item 4. Results of Votes of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None (b) Reports on Form 8-K A Form 8-K dated March 8, 2001, was filed in connection with a stock repurchase program. FRANKLIN FINANCIAL SERVICES CORPORATION and SUBSIDIARY SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Franklin Financial Services Corporation May 10, 2001 /s/ William E. Snell, Jr. William E. Snell Jr. President and Chief Executive Officer May 10, 2001 /s/ Elaine G. Meyers Elaine G. Meyers Treasurer and Chief Financial Officer