Franklin Financial Services Corporation
Annual Report 2007

Plain-text annual report

F R A N K L I N F I N A N C I A L S E R V I C E S C O R P O R A T I O N 2 0 0 7 A N N U A L R E P O R T Contents Consolidated Financial Highlights Summary of Selected Financial Data A Message to Our Shareholders FFSC Directors and Officers F&M Trust Officers Offices, ATMs and Access Information FFSC Shareholders’ Information 2 3 4 18 19 22 23 Franklin Financial Services Corporation (the Corporation) is a holding company with headquarters in Chambersburg, PA. The Corporation’s direct subsidiary is Farmers and Merchants Trust Company (the Bank). F&M Trust is a full-service bank offering investment, trust, commercial and retail services with twenty-four community offices in Franklin, Cumberland, Fulton and Huntingdon Counties. Consolidated Financial Highlights (amounts in thousands, except per share) 2007 2006 % increase (decrease) Performance Net income Return on average equity Return on average assets Return on average tangible equity* Return on average tangible assets* Shareholders’ Value (per share) Diluted earnings per share Regular cash dividends paid Book value Market value Market value/book value multiple Price earnings multiple Yield on cash dividends paid Safety and Soundness Leverage ratio (Tier 1) Risk-based capital ratio (Tier 1) Nonperforming assets/total assets Allowance for loan losses as a percentage of loans Net charge-offs/average loans Balance Sheet Highlights Total assets Investment Securities Loans, net Deposits and customer repurchase agreements Shareholders’ equity Trust assets under management (market value) $ 9,256 $ 7,570 22 $ 12.62% 1.14% 15.41% 1.18% 2.40 1.03 20.18 24.95 1.24x 10.40x 4.17% 8.18% 11.05% 0.73% 1.29% 0.09% 11.92% 1.07% 13.42% 1.09% $ 2.10 0.99 19.01 27.30 1.44x 13.00x 3.66% 7.60% 10.59% 0.29% 1.30% 0.04% $820,371 $799,333 168,906 564,256 674,434 77,642 507,920 192,487 521,684 673,705 71,614 538,152 14 4 6 (9) 3 (12) 8 8 (6) Per share information has been adjusted retroactively to reflect all stock splits and dividends. *Excludes core deposit intangibles, goodwill and intangible amortization. 2 Summary of Selected Financial Data (dollar s in thousands, except per share) 2007 2006 2005 2004 2003 Summary of Operations Interest income Interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Noninterest income Noninterest expense Income before income taxes Income tax Net income Per Common Share Basic earnings Diluted earnings Regular cash dividends paid Balance Sheet Data (end of year) Total assets Loans, net Deposits Long-term debt Shareholders’ equity $ 49,487 23,796 25,691 990 24,701 10,179 22,865 12,015 2,759 $ 40,902 $ 29,711 $ 24,809 $ 24,884 19,956 20,946 240 20,706 8,257 19,296 9,667 2,097 12,173 17,538 426 17,112 6,995 17,058 7,049 937 8,819 15,990 880 15,110 7,093 15,996 6,207 1,015 9,057 15,827 1,695 14,132 7,740 14,659 7,213 1,373 $ 9,256 $ 7,570 $ 6,112 $ 5,192 $ 5,840 $ 2.41 2.40 1.03 $ 2.11 2.10 0.99 $ 1.82 1.81 0.95 $ 1.54 1.54 0.88 $ 1.74 1.74 0.82 $820,371 $799,333 $621,357 $563,268 $ 549,702 564,256 606,277 59,714 77,642 521,684 595,295 38,449 71,614 538,152 391,788 456,799 48,546 55,670 343,130 399,896 52,359 54,643 330,196 372,431 56,467 51,858 411,165 410,491 337,796 Trust assets under management (market value) 507,920 Performance Measurements Return on average assets Return on average equity Return on average tangible assets* Return on average tangible equity* Dividend payout ratio Average equity to average asset ratio Efficiency ratio** Net interest margin 1.14% 12.62% 1.18% 15.41% 42.77% 8.98% 61.35% 3.67% 1.07% 11.92% 1.09% 13.42% 47.03% 8.96% 63.06% 3.45% 1.03% 11.13% 1.03% 11.13% 52.31% 9.28% 66.39% 3.45% 0.93% 9.77% 0.93% 9.77% 56.82% 9.47% 66.24% 3.34% 1.09% 11.80% 1.09% 11.80% 46.87% 9.25% 60.23% 3.45% *Excludes core deposit intangibles, goodwill and intangible amortization. **Includes regular and special dividends declared. 3 A Message to Our Shareholders Dear Shareholder: Franklin Financial reported record earnings of $9,256,000 in 2007, representing a 22.3% increase over net income of $7,570,000 in 2006 … a year in which we increased earnings by 23.9%. Diluted earnings per share increased 14.3% from $2.10 in 2006 to $2.40 in 2007. As shareholders, you received a 4% increase in regular cash dividends from $.99 in 2006 to $1.03 per share in 2007. Regular cash dividends have grown at an average rate of 6.51% over the past five years. In spite of our strong performance, the market value of a share of Franklin Financial stock decreased 8.6% from a closing price of $27.30 at year-end 2006 to $24.95 at December 31, 2007. Irrespective of individual fundamentals, virtually all stocks in the financial services sector seem to have been “painted with the same brush” by investors … reflecting the subprime mortgage “meltdown” in 2007 as well as concerns relative to the economy and deteriorating credit-quality issues. Although we are not pleased with the decline in our market value, the universe of publicly traded banks finished down an average of 21% while the American Banker Index (comprised of 225 banks) was down 26.6% in 2007. The performance of the financial services sector compared unfavorably to the DOW which finished the year up 6.4%, the NASDAQ which climbed 9.8%, and the S&P 500 which closed up 3.5%. It has been roughly seventeen years since investors last witnessed such a sector specific decline which, at that time, came about when the commercial real estate market unraveled. Right now there is more uncertainty than there is knowledge regarding the ultimate level of losses that will be realized in the financial services 4 sector. We do know that over $188 billion in write-downs have been taken by financial institutions globally with about 60% of these losses recorded in the U.S. and 40% abroad. We also know that banks are aggressively increasing their provision for loan losses, which is placing further pressure on their earnings and, potentially, cash dividend payouts. It may take another couple of quarters before investors have a more comprehensive view of the ultimate losses to be incurred and, therefore, before earnings for financial services companies begin to stabilize. Until investors gain confidence that the majority of losses have been quantified, we are not optimistic that financial services stocks will show a significant recovery. As I have stated emphatically in my quarterly Letter to Shareholders, your company has never engaged in offering “exotic” mortgage products such as certain subprime, option ARM, and non- documentation loans that were so popular in 2005 and 2006. Accordingly, the delinquency in our combined residential mortgage and home equity loan portfolios at December 31, 2007 remained at less than 1%. Further, we have no exposure in our investment portfolio to securities backed by subprime mortgages. Franklin Financial’s total assets at December 31, 2007 reached $820,371,000, a 2.6% increase over 2006. Total deposits and repurchase agreements as measured at year-end were flat. Average core deposits (i.e., checking, savings, and interest bearing checking) increased by 2.29%. Our Money Management Account, which is indexed to short-term interest rates, again recorded exceptional growth with a net increase of more than 900 accounts and a 40.7% Bill Snell President & CEO increase in average balances. Overall, average deposits and repurchase agreements increased by 16.3% during 2007. Net loans grew by 8.2% to $564,256,000 at year-end 2007. Average loan outstandings increased by 19.5% or $90,936,000. Our continued focus on commercial loan growth resulted in $155,287,000 of closed commercial loan transactions which increased the average outstanding balance in this portfolio by $68,193,000 or 25.7%. Average consumer loan outstandings increased by 27.5% or $26,181,000 as a result of two effectively promoted home equity loan specials. Residential mortgage closings in 2007 declined 3.9% to $35,080,000 from $36,500,000 in 2006. Average residential mortgage outstandings declined by $3,438,000 or 3.28%, as we continued to hold fewer mortgage originations in our portfolio. Net interest income increased by 21.6% on a tax equivalent basis to $27,374,000 from $22,509,000 in 2006, driven primarily by the growth in average interest earning assets. Our net interest margin in 2007 increased to 3.67% from 3.45% on a tax equivalent basis which was counter to the trend within our industry. Our financial condition remains strong as evidenced by a Total Risk-Based Capital Ratio of 12.28% and a Leverage Capital Ratio of 8.18%. These ratios remain above the levels that federal regulators require for an institution to be considered “well capitalized”. Franklin Financial’s safety and soundness indicators continue to reflect our conservative posture and compare favorably to peers. In 2007, we increased our provision for loan losses by $750,000 in response to both an increase in the ratio of nonperforming assets/total assets to .73%, as well as exceptional loan growth in order to maintain our Allowance for Loan Losses as a percentage of both total loans and total nonperforming loans at 1.29% and 127.86%. We have observed that many of our peers have permitted the Allowance for Loan Losses to fall below the 1.00% level or even further. F&M Trust Management team (left to right): Mark Hollar, Karen Carmack, Ron Cekovich, Bill Snell, Sandy Small, Allen Rebok, Mike Kugler, Olaf Hasse and Ken Ditzler 7 Total Assets as dollars in millions Net Income as dollars in thousands 850 750 650 550 820 799 10,000 8,000 9,256 7,570 621 550 563 6,000 5,840 6,112 5,192 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 Net Loans as dollars in millions Regular Cash Dividends Paid as dollars per share 564 522 600 500 400 392 343 330 1.03 0.99 0.95 1.05 0.95 0.88 0.85 0.82 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 Total Deposits & Repos as dollars in millions ROE/ROA as percentage values 674 674 750 650 550 450 509 411 442 15 13 11 9 11.80 13.42 11.13 11.92 9 0 . 1 A O R 9 0 . 1 A O R T 9.77 3 9 . 0 A O R 3 9 . 0 A O R T 7 0 . 1 A O R 9 0 . 1 A O R T 3 0 . 1 A O R 3 0 . 1 A O R T 15.41 12.62 4 1 . 1 A O R 8 1 . 1 A O R e l b i g n a T 1.75 1.50 1.25 1.00 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 ROE Tangible ROE 8 In last year’s Message to Shareholders, I commented that our mid-2006 merger with Fulton Bancshares Corporation had impacted our nonperforming assets/total assets ratio. I am pleased to report that this portfolio’s performance to date continues to reinforce the initial determination of our due diligence that many of Fulton County National Bank’s loan problems stemmed from improper loan structure as well as ineffective ongoing credit risk management rather than unsound lending practices. The majority of these loans are well-collateralized, and we continue to receive regular payments and/or unscheduled principal reductions. The market value of assets under management by our Investment & Trust Services Department declined by 5.6% to $507,920,000 at December 31, 2007 as compared to $538,152,000 at year-end 2006. As I noted in last year’s Shareholder Letter, our 2006 total included a $41,000,000 short-term deposit into a custody account during December of which $30,000,000 was paid out prior to year-end 2007. Additionally, two large estates were distributed during the year. Assets under management as reported does not include approximately $83,000,000 in assets held at third-party brokers at December 31, 2007. Fee income, including revenue generated through the Personal Investment Centers, increased by $816,000 or 24.6% during 2007, including $617,000 of nonrecurring fee income relating to the two estates distributed during the year. Revenues and profitability at Bankers Settlement Services – Capital Region, LLC, a bank-owned title insurance agency based in Harrisburg and affiliated with Investors Title Insurance Company, increased by 6% and 53% respectively. An ongoing initiative to recruit new members in order to increase volume resulted in two additional banks commencing production in 2007. Mortgages originated by F&M Trust and insured by Bankers Settlement Services accounted for approximately 14% of the agency’s total net premium revenue in 2007. The lending officers of F&M Trust achieved an overall penetration rate of 57% on residential mortgages closed. Our investment in BankersRe Insurance Group, SPC (formerly Pennbanks Insurance Company, SPC), a captive insurance company owned by nine Pennsylvania 9 community banks, generated dividends and fee income of approximately $115,000 during 2007. Our ownership enables Franklin Financial to participate in premium revenues on higher loan-to-value mortgage originations requiring private mortgage insurance (PMI) as well as fee income derived from Debt Protection Coverage on non-revolving consumer loans. Debt Protection is a program that extinguishes all or part of the debt in the event of death, disability, or involuntary unemployment for a maximum of ten years. As of year-end 2007, our portfolio of insured residential mortgage loans with PMI in force exceeded $22,500,000 while our portfolio of consumer loans with “protected balances” exceeded $11,500,000. Mortgage closings at American Home Bank, N.A. and its affiliates (AHB) increased 6.7% from $698,000,000 in 2006 to $745,000,000 in 2007. AHB recorded net income of $68,000 compared to a loss of $245,000 in 2006. Franklin Financial accounts for its investment in American Home Bank on the equity method of accounting. Accordingly, approximately 21% of AHB’s net income, which corresponds with Franklin Financial’s ownership position, is reported as non-interest income. American Home Bank’s lending philosophy is similar to ours … AHB has never engaged in offering “exotic” mortgage products. Accordingly, delinquency at December 31, 2007 was less than 3%. A number of products and services providing added convenience to our customers and prospective customers will be introduced during 2008. During the first quarter, we converted to “paperless” (book entry) certificates of deposit which will streamline processing, simplify the renewal process, and provide better documentation. Customers receive a paper receipt, but will no longer need to present the original document or visit the same office in order to redeem their certificate. Customers also gain the ability to add funds during the “grace period” without rewriting the certificate. We also provided customers with online access to check images, including the ability to view both checks paid and deposit tickets, as well as the capability to complete an application to open a deposit account online. 10 Chambersburg Area Development Corporation When a Louisiana-based company purchased Hirschmann Automation and Control (HAC) in Chambersburg, they determined the company needed a larger workforce and additional workspace. Dave Sciamanna (left), Executive Director of the Chambersburg Area Development Corporation (CADC) asked Ken Brookens (right), AVP/Commercial Ser vices, at F&M Trust to help. Ken prepared the best financing package to fit CADC and HAC’s needs. The new facility not only meets the company’s immediate needs, but is flexible enough to allow for future growth. Moe’s Southwest Grill – Chambersburg, PA Having worked for a global pizza franchise for twelve years, and then leading his own construction company for another fifteen, Troy King (right) decided he was ready for more. With guidance and financing from Phil Pantano (left), Commercial Ser vices Relationship Manager with F&M Trust, Troy and his brother opened a Moe’s Southwest Grill franchise in Chambersburg in September 2007. It has become a favorite destination for families and spor ts teams around Franklin County. In fact, Phil is already helping Troy open his second Moe’s location (in Maryland) by July 2008. At this pace, don’t be surprised to hear of a third one soon, too! 12 During the fourth quarter, we entered into a brokerage agreement with American Home Bank, N.A. in order to broaden our fixed-rate residential mortgage product offerings and enhance the competitiveness of our pricing. We are encouraged with the volume of mortgage originations in the early months of 2008. Later this year, we also anticipate adding the capability of accepting residential mortgage applications online. Our small business initiative continues to gain momentum. In December, we announced a partnership between F&M Trust and the Small Business Development Centers at Shippensburg University and St. Francis University to present educational programs and workshops for aspiring, as well as existing, small business owners throughout our marketplace. The eighteen Small Business Development Centers in Pennsylvania are supported with funding and other resources from the Commonwealth of Pennsylvania’s Department of Community & Economic Development and the U.S. Small Business Administration. Small business owners who receive low-cost assistance from a Small Business Development Center (SBDC) survive and grow, on average, at rates far greater than small business owners who do not. Under the terms of our partnership agreements, F&M Trust will be the exclusive sponsor of “First Step” and “Business Planning” workshops to be conducted by the SBDCs at Shippensburg University and St. Francis University during 2008, plus other seminars on special topics. F&M Trust’s Small Business Relationship Managers will participate in each workshop, presenting a segment focused on financing options. The Shippensburg University SBDC will conduct eighteen “First Step” and “Business Planning” workshops in After years of styling hair as an employee, Tessie Guyer decided that it was time to strike out and start her own business. By attending seminars conducted by the Small Business Development Center at Shippensburg University and working with F&M Trust’s Small Business Relationship Managers, she made all the proper plans, smartly avoiding common start-up pitfalls. The Touch Of Paradise Salon & Spa recently opened to realize a great early success. 13 Franklin and Cumberland Counties while the St. Francis University SBDC will conduct six of these workshops in Fulton and Huntingdon Counties. We believe that this initiative to provide entrepreneurs with education, information, and tools to build and sustain successful businesses will directly benefit our local economy while providing F&M Trust with an opportunity to increase our penetration of the small business market. In January of 2008, F&M Trust was approved as a designated lender for the loan guaranty programs offered by the U.S. Small Business Administration (SBA). These programs will assist us in supporting existing or start-up businesses in the early stages of their development. Lines of credit and term loans are available to small businesses meeting the eligibility requirements for an SBA guaranty for the purchase of real estate or machinery and equipment as well as for working capital. We also introduced two enhancements to Better Business Checking, a package account targeted at small businesses: Overdraft Protection, which utilizes an automated transfer from a line of credit; and Better Business Checking Payroll, a no- minimum-balance account that can be linked to sweep from the customer’s primary Better Business Checking account as payroll checks are presented. Remote Deposit Capture, to be rolled out later this year, will save businesses of all sizes both time and money. Customers will be able to scan their checks and transmit them to a secure website. The items are then processed and automatically credited to the business’s bank account, eliminating the need to travel to the bank to make the deposit. When the Kelso Cornelius Funeral Home was ready to upgrade exterior lighting and improve the entrance at their McConnellsburg location, Brett Cornelius (left), Funeral Director, walked down the street to talk with Don Trego (right), AVP/Small Business Relationship Manager, about financing for the planned improvements. It was important to Brett that, as a community-based business, he worked with a local bank that works hard to support businesses like his. 14 Mains Dairy – Newville, PA When Dan Mains (left), a dairy farm owner, wanted to buy a neighboring proper ty to expand his 850-cow dairy operation, Brian Weikert (right), VP/Commercial Ser vices at F&M Trust, was able to help make the deal happen in less than a month. As a businessowner, Dan really appreciates the personal assistance he gets from F&M Trust as well as smar t financial products, like the Sweep Account, that makes his money work better. Joe & Nina Yuhas – Mont Alto, PA After 35 years of teaching in the Washington, DC area, Joe and Nina Yuhas (left, center) decided to retire to southern Franklin County. They came to F&M Trust for a new home construction loan and were so pleased with the ser vice and assistance they received from Renee Preso (right), AVP/Manager, and the entire Mont Alto office, they moved all of their financial accounts to F&M Trust. During April, our twenty-fourth community office opened at Carlisle Crossing, between York and Trindle Roads in Cumberland County. This shopping center, which opened in 2006, includes several “draws” such as Target, Kohl’s, Pier One, PetSmart, Starbucks, Old Navy and Red Robin. We also constructed a new community office to replace our existing facility at Marion, which “reopened” in September. New ATM’s were opened at the Penn National Golf Course Clubhouse and the Carlisle Central Farmers Market. An additional investment to expand and upgrade our community office network is planned during 2008. Another ATM will be opened at Northgate Commons on the Northfield Campus of Menno Haven during the first quarter. Extensive renovations to expand the lobby and reconfigure the drive-up at our Orchard Park Community Office are planned for the second quarter. Our twenty-fifth community office at the corner of Norland Avenue and Parkwood Drive in Chambersburg is now scheduled to open in the third quarter, and renovations to our Philadelphia Avenue Community Office will also occur in the third quarter. As we start what will undoubtedly be a very challenging year, Franklin Financial is positioned for continued growth and performance. Your interest and support as a Franklin Financial shareholder is sincerely appreciated. Sincerely, William E. Snell, Jr. President & CEO Brian Wise (right) has been banking with F&M Trust for most of his life. The people who help him aren’t just bank employees, they’re his friends and neighbors. So it was only natural when it was time to begin planning for his retirement he contacted Denny Wilson (left), Investment and Trust Services Officer. F&M Trust also has the asset management experience Brian prefers – the investment and trust experts manage more than $500 million in total assets. 17 FFSC Board of Directors Charles S. Bender II Retired – F&M Trust Executive Vice President Martin R. Brown President – M.R. Brown Funeral Home, Inc. G. Warren Elliott Regional Representative – General Code Publishers; Former Franklin County Commissioner Donald A. Fry President – Cumberland Valley Rental and Towne Cleaners – ANDOCO, Inc. Allan E. Jennings, Jr. President – Jennings Chevrolet Oldsmobile Cadillac, Inc. Stanley J. Kerlin, Esq. Attorney – Law Office of Stanley J. Kerlin H. Huber McCleary Secretary – McCleary Oil Company, Inc. Jeryl C. Miller Vice President and Secretary – Charles W. Karper, Inc. Stephen E. Patterson, Esq. Shareholder – Patterson, Kiersz and Murphy, P.C. Charles M. Sioberg Chairman of the Board Vice President – Martin & Martin, Inc. William E. Snell, Jr. President and Chief Executive Officer Kurt E. Suter President – Carlisle Mobile Homes, Inc., and Eastern Motor Inns Martha B. Walker, Esq. Attorney – Walker, Connor and Johnson, LLC FFSC Officers Charles M. Sioberg Chairman of the Board Mark R. Hollar Treasurer and Chief Financial Officer Joyce A. Riley Assistant Corporate Secretary William E. Snell, Jr. President and Chief Executive Officer Catherine C. Angle Corporate Secretary 18 F&M Trust Company Officers Management Commercial Services Memorial Square Office William E. Snell, Jr. President and Chief Executive Officer Dianne L. Cornman, CTP Vice President – Cash Management Specialist Summer Franzoni Assistant Vice President and Manager Dana L. Kaiser Financial Services Officer and Assistant Manager Amanda A. Kegerreis Assistant Financial Services Officer Pamela J. Kolsun Assistant Financial Services Officer Dennis R. Love Assistant Financial Services Officer West Side Office N. Joy Weller Vice President and Manager Philadelphia Avenue Office Phyllis J. Amsley-Drawbaugh Assistant Vice President and Manager Penn Hall and Menno Village Offices Debra K. Michael Vice President Brian E. Weikert Vice President Kenneth W. Brookens Assistant Vice President Philip A. Pantano Commercial Services Relationship Manager Kathleen M. Bloss Credit Department Manager Retail Services L. Kay Estep Assistant Vice President GO Club Coordinator CHAMBERSBURG MARKET OFFICES Mark R. Hollar Senior Vice President Chief Financial Officer, Controller and Treasurer Karen C. Carmack Senior Vice President Human Resources Manager Affirmative Action and HIPPA Privacy Officer Ronald L. Cekovich Senior Vice President Technology Services Manager Kenneth C. Ditzler Senior Vice President Marketing and Corporate Communications Manager Michael E. Kugler Senior Vice President Commercial Service Market Manager Allen C. Rebok Senior Vice President Investment & Trust Services Manager Sandra G. Small, Esq. Senior Vice President Risk Management Officer Olaf R. Hasse Vice President Retail Services Market Manager Patricia A. Hanks Assistant Vice President Chambersburg Market Manager Bonita C. Yocum Assistant Vice President and Manager David S. Campbell Small Business Relationship Manager Orchard Park Office Lincoln Way East Office Kim S. McKenrick Financial Services Officer and Manager Marlana K. Snider Assistant Financial Services Officer and Assistant Manager Antonia L. Diffenderfer Assistant Vice President and Manager Christina L. Yoder Assistant Financial Services Officer and Assistant Manager St. Thomas Office Kimberly M. Smith Financial Services Officer and Manager 19 F&M Trust Company Officers (continued) SOUTHERN FRANKLIN COUNTY MARKET OFFICES Kathy J. Miller Assistant Vice President Southern Franklin County Market Manager Lynn A. Waite Small Business Relationship Manager Greencastle and Marion Offices Karen S. Showalter Assistant Vice President and Manager Deborah K. Whaley Assistant Financial Services Officer Vicky L. Carson Assistant Financial Services Officer and Assistant Manager Mont Alto Office Renee L. Preso Assistant Vice President and Manager Linda K. Stottlemyer Financial Services Officer and Assistant Manager Waynesboro Office Karen E. Davis Assistant Vice President and Manager Chastity L. Wantz Assistant Financial Services Officer and Assistant Manager CUMBERLAND COUNTY MARKET OFFICES Vickie L. Broughton Assistant Vice President Cumberland County Market Manager Carlisle Plaza, Boiling Springs, Carlisle Crossing and Hanover Street Offices David R. Winters Assistant Vice President and Manager Kevin M. Stoner Financial Services Officer and Assistant Manager Kathleen M. Grant Assistant Financial Services Officer and Assistant Manager Newville Office Ellen L. Ile Financial Services Officer and Manager Ritner Highway Office Rachel L. Freeburn Financial Services Officer and Manager Shippensburg Office Barbara A. Hoover Financial Services Officer and Manager FULTON & HUNTINGDON COUNTY MARKET OFFICES Paul M. Johnson Assistant Vice President Fulton County Market Manager Donald L. Trego Assistant Vice President Small Business Relationship Manager McConnellsburg Office Mary E. Wright Financial Services Officer and Manager Penns Village Office Penny J. Koser Financial Services Officer and Manager Warfordsburg Office B. Jay True Financial Services Officer and Manager Consumer Lending Services Susan E. Michael Vice President Penni L. Strait Dealer Center Relationship Manager Investment & Trust Services Ronald R. Froeschle, QPA, QKA Vice President Employee Benefits Officer Warren M. Hurt Vice President Senior Investment Portfolio Manager John D. Parson Vice President Investment & Trust Services Officer Thomas L. Peterson, LUTCF Vice President Market Manager Charles R. Porter Vice President Business Development James P. Probst Vice President Investment & Trust Services Officer 20 F&M Trust Company Officers (continued) Dennis L. Wilson Vice President Investment & Trust Services Officer Judy V. Shade Assistant Vice President Investment & Trust Services Officer Diana L. Sponseller Assistant Vice President Investment & Trust Services Officer Heather C. Etter Estate Administration Officer Mark P. Bernier Investment Portfolio Manager Robin L. Murray Trust Operations Manager James R. Ifert II Assistant Investment and Trust Services Officer Personal Investment Counselor Avis M. Polk, CFP Assistant Investment and Trust Services Officer Personal Investment Counselor Roderick C. Salter Assistant Investment and Trust Services Officer Personal Investment Counselor Gerald J. Slothower, Sr. Assistant Investment and Trust Services Officer Personal Investment Counselor Jack L. Turner Assistant Investment and Trust Services Officer Personal Investment Counselor Marketing Melissa D. Miller Marketing Officer Facilities Barry L. Shetter Assistant Vice President Facilities Manager Finance & Control Kim A. Diehl Financial Analyst Amy B. Herrold Assistant Controller Corporate Catherine C. Angle Corporate Secretary Joyce A. Riley Assistant Corporate Secretary Credit Administration Division Lorie M. Heckman Assistant Vice President Bank Secrecy Act, Compliance and Security Officer Linda K. Mowen Assistant Vice President Credit Recovery Manager John W. Olander Assistant Compliance Officer, Mary F. Cramer Bank Secrecy Act and OFAC Analyst Diana A. Crouse Loan Servicing Manager Peggy J. Elder Documentation Review Officer Rachel Jennings Assistant Documentation Review Officer Janet E. Stamper Assistant Documentation Review Officer Technology Services Division Barry R. Walter Vice President Matthew C. Clark Assistant Technology Services Officer Patricia R. Ganoe Assistant Vice President Deposit Operations Manager Stacey A. Stenger Data Operations Manager General Contact Information FFSC / F&M Trust Headquarters Local: 717-264-6116 Toll-free: 888-264-6116 Freedom Access Center (telephone banking service) Local: 717-261-3662 Toll-Free: 888-261-3662 24-Hour Online Access www.fmtrustonline.com 21 Community Office Locations Chambersburg Area Memorial Square 20 South Main Street, Chambersburg 717-264-6116 Lincoln Way East 1712 Lincoln Way East, Chambersburg 717-264-9414 West Side 1100 Lincoln Way West, Chambersburg 717-263-9168 Orchard Park 841 Wayne Avenue, Chambersburg 717-263-1801 Philadelphia Avenue 2405 Philadelphia Avenue, Chambersburg 717-264-5122 Penn Hall 1425 Philadelphia Avenue, Chambersburg 717-261-3660 Menno Village 2075 Scotland Avenue, Chambersburg 717-261-3697 St. Thomas 6962 Lincoln Way West, St. Thomas 717-369-3240 Southern Franklin County Greencastle 518 N. Antrim Way, Greencastle 717-597-2384 Marion 5293 Main Street, Marion 717-375-2200 Mont Alto 8 Park Street, Mont Alto 717-749-3161 Waynesboro 200 East Main Street, Waynesboro 717-762-2188 Cumberland County Boiling Springs 3 East First Street, Boiling Springs 717-241-4131 Newville 9 West Big Spring Avenue, Newville 717-776-2240 Shippensburg 13 Shippensburg Shopping Center 717-530-2100 Ritner Highway 1901 Ritner Highway, Carlisle 717-960-1400 Hanover Street 14 North Hanover Street, Carlisle 717-249-1331 Carlisle Plaza 800 East High Street, Carlisle 717-243-0526 Carlisle Crossing 214A Westminster Drive, Carlisle 717-243-2215 Fulton and Huntingdon Counties McConnellsburg 100 Lincoln Way East, McConnellsburg 717-485-3144 Penns Village 182 Buchanan Trail, McConnellsburg 717-485-3167 Hustontown 7781 Waterfall Road, Hustontown 717-987-3193 Warfordsburg 560 Great Cove Road, Warfordsburg 717-294-3288 Orbisonia 18810 Sandy Ridge Station, Orbisonia 814-447-3104 Star ®/Cirrus® ATM Locations ® I n d i c a t e s d r i v e - u p a c c e s s Chambersburg Area Downtown Drive-Up 150 Lincoln Way East, Chambersburg Lincoln Way East 1712 Lincoln Way East, Chambersburg West Side 1100 Lincoln Way West, Chambersburg Orchard Park 841 Wayne Avenue, Chambersburg Philadelphia Avenue 2405 Philadelphia Avenue, Chambersburg Norland Avenue 870 Norland Avenue, Chambersburg Penn Hall 1425 Philadelphia Avenue, Chambersburg Menno Village 2075 Scotland Avenue, Chambersburg St. Thomas 6962 Lincoln Way West, St. Thomas Fayetteville 4025 Lincoln Way East, Fayetteville Penn National Clubhouse 3720 Clubhouse Drive, Fayetteville Southern Franklin County Greencastle 518 North Antrim Way, Greencastle Marion 5293 Main Street, Marion Mont Alto 8 Park Street, Mont Alto Waynesboro 200 East Main Street, Waynesboro Waynesboro Market Place 11123 Buchanan Trail East, Waynesboro Zullinger 4884 Buchanan Trail East, Zullinger Cumberland County Boiling Springs 3 East First Street, Boiling Springs Newville 9 West Big Spring Avenue, Newville Shippensburg 13 Shippensburg Shopping Center Ritner Highway 1901 Ritner Highway, Carlisle Hanover Street 14 North Hanover Street, Carlisle Carlisle Farmers Market 117 North Hanover Street, Carlisle Carlisle Plaza 800 East High Street, Carlisle Carlisle Plaza Drive-Up 700 East High Street, Carlisle Carlisle Crossing 214A Westminster Drive, Carlisle Fulton and Huntingdon Counties McConnellsburg 100 Lincoln Way East, McConnellsburg Penns Village 182 Buchanan Trail, McConnellsburg Hustontown 7781 Waterfall Road, Hustontown Warfordsburg 560 Great Cove Road, Warfordsburg Orbisonia 18810 Sandy Ridge Station, Orbisonia 22 FFSC 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, PO Box 6010, Chambersburg, PA 17201-6010, telephone 717-264-6116. Dividend Direct Deposit Program Franklin Financial Services Corporation offers a dividend direct deposit program whereby shareholders with stock registered 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, PO Box 6010, Chambersburg, PA 17201-6010, telephone 717-264-6116. Annual Meeting The Annual Shareholders’ Meeting will be held Tuesday, April 29, 2008 at the Family Traditions Lighthouse Restaurant, 4301 Philadelphia Avenue, Chambersburg. The Business Meeting will begin at 10:30 a.m. and will be followed by a luncheon. Web site: www.franklinfin.com Stock Information The following brokers are registered as market makers of Franklin Financial Services Corporation’s common stock: Boenning & Scattergood, Inc. 4 Tower Bridge 200 Bar Harbor Drive, Suite 300 West Conshohocken, PA 19428 800-883-1212 Ferris Baker Watts 113 S. Potomac Street Hagerstown, MD 21740 800-344-4413 Morgan Keegan & Co., Inc. 3050 Peachtree Road, NW, Suite 704 Atlanta, GA 30305 866-353-7522 RBC Wealth Management 2101 Oregon Pike Lancaster, PA 17601 800-604-1471 Ryan, Beck & Co. 20 Ash Street, Suite 400 Conshohocken, PA 19428 800-223-6807 Registrar and Transfer Agent: The registrar and transfer agent for Franklin Financial Services Corporation is Fulton Financial Advisors, N.A., One Penn Square, PO Box 4887, Lancaster, PA 17602, telephone 717-291-2546. 23 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 above under Shareholders’ Information. There were 2,141 shareholders of record as of December 31, 2007. The range of high and low bid prices, as reported by local sources is shown below for the years 2007 and 2006. Also shown are the regular quarterly cash dividends paid for the same years. 2007 Per Share High Low Cash Dividends Paid 2006 Per Share High Low Cash Dividends Paid First quarter $27.23 $26.93 $0.25 First quarter $26.00 $24.40 $0.24 Second quarter Third quarter Fourth quarter 27.23 27.08 25.80 26.74 24.60 24.25 0.26 0.26 0.26 Second quarter Third quarter Fourth quarter 25.75 26.25 27.75 25.00 25.15 26.00 0.25 0.25 0.25 Total Return Performance Graph The Securities and Exchange Commission requires that a publicly held company include in its Annual Report a stock performance graph comparing its five-year cumulative total return to shareholders with the returns generated by an industry-specific index (or peer group index) and with the return generated by a broad market index. The following graph compares the cumulative total return to shareholders of Franklin Financial with the NASDAQ – Total U.S. Index (a broad market index prepared by the Center for Research in Security Prices at the University of Chicago Graduate School of Business) and with the Northeast OTC-BB and Pink Banks Index (an industry-specific index prepared by SNL Financial LC) for the five year period ended December 31, 2007, in each case assuming an initial investment of $100 on December 31, 2002 and the reinvestment of all dividends. CUMULATIVE TOTAL RETURN FOR THE FIVE-YEAR PERIOD ENDING DECEMBER 31, 2007 200 175 150 125 E U L A V X E D N I 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06 12/31/07 NASDAQ Composite Franklin Financial Services SNL Northeast OTC-BB & Pink Banks Period Ended Index 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06 12/31/07 SNL Northeast OTC-BB & Pink Banks Franklin Financial Services Corp. NASDAQ Composite 100.00 100.00 100.00 145.85 132.26 150.01 169.92 134.88 162.89 169.40 129.67 165.13 175.06 145.64 180.85 170.48 138.42 198.60 

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