Franklin Financial Services Corporation
Annual Report 2008

Plain-text annual report

9021FMT_AnnualReport_Cover_FINAL:Layout 1 3/12/09 4:10 PM Page 1 2 0 0 8 A N N U A L R E P O R T 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 P O B o x 6 0 1 0 C h a m b e r s b u r g , P A 1 7 2 0 1 8 8 8 - 2 6 4 - 6 1 1 6 w w w . f r a n k l i n f i n . c o m 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 NO POCKET HERE. TRIM AND DISPOSE. Contents Consolidated Financial Highlights Summary of Selected Financial Data A Message to Our Shareholders FFSC Directors and Officers F&M Trust Company Officers Office and ATM Locations FFSC Shareholders’ Information Market and Dividend Information 2 3 4 18 19 22 23 24 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-five community offices in Franklin, Cumberland, Fulton and Huntingdon Counties. Consolidated Financial Highlights (dollar s in thousands, except per share) 2008 2007 % 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) $ 8,595 $ 9,256 (7) 10.99% 1.01% 13.19% 1.05% 12.62% 1.14% 15.41% 1.18% $ 2.24 1.07 19.10 18.25 0.96 8.15 $ 2.40 1.03 20.18 24.95 1.2 4 10.40 5.92% 4.17% 7.84% 11.02% 0.44% 1.09% 0.19% 8.18% 12.28% 0.73% 1.29% 0.09% $902,460 $820,371 154,041 668,860 691,653 73,059 497,215 168,906 564,256 674,434 77,642 507,920 (7) 4 (5) (27) 10 (9) 19 3 (6) (2) Per share information has been adjusted retroactively to reflect all stock splits and dividends. *Excludes core deposit intangible assets, goodwill and intangible asset amortization. 2 Summary of Selected Financial Data (dollar s in thousands, except per share) 2008 2007 2006 2005 2004 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 Market value Balance Sheet Data (end of year) Total assets Loans, net Deposits Long-term debt Shareholders’ equity Trust assets under management (market value) 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 $ 46,156 $ 49,487 $ 40,902 $ 29,711 $ 24,809 16,037 30,119 1,193 28,926 6,538 23,189 12,275 3,680 23,796 25,691 990 24,701 10,107 22,793 12,015 2,759 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 $ 8,595 $ 9,256 $ 7,570 $ 6,112 $ 5,192 $ 2.24 2.24 1.07 18.25 $ 2.41 2.40 1.03 24.95 $ 2.11 2.10 0.99 27.30 $ 1.82 1.81 0.95 25.25 $ 1.54 1.54 0.88 27.25 $ 902,460 $820,371 $799,333 $621,357 $ 563,268 668,860 627,341 106,141 73,059 497,215 1.01% 10.99% 1.05% 13.19% 47.66% 9.18% 61.25% 4.03% 564,256 606,277 59,714 77,642 507,920 1.14% 12.62% 1.18% 15.41% 42.77% 8.98% 61.35% 3.67% 521,684 595,295 38,449 71,614 391,788 456,799 48,546 55,670 343,130 399,896 52,359 54,643 538,152 411,165 410,491 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% *Excludes core deposit intangible assets, goodwill and intangible asset amortization. 3 A Message to Our Shareholders Dear Shareholder: Franklin Financial reported earnings of $8,595,000 in 2008 representing a 7.1% decrease from our record net income of $9,256,000 in 2007. Diluted earnings per share decreased from $2.40 per share in 2007 to $2.24 per share in 2008. By many traditional performance measurements including growth in loans outstanding and net interest income, loan quality, as well as net interest margin, your company again produced excellent results in a very difficult environment. However, we are in the midst of what has been described as “the second worst deterioration of credit, liquidity, and asset valuation the world has ever seen” and Franklin Financial was not immune from the impact of declining interest rates and falling stock prices. Four non-core charges negated our otherwise strong performance in 2008: (cid:129) A Mortgage Servicing Rights impairment charge in the amount of $500,000 as of December 31, 2008. Mortgage Servicing Rights, which represent the future value of servicing income on mortgages sold in the secondary market, are capitalized as an asset on our balance sheet and subsequently amortized over the life of the associated loans sold. Capitalized Mortgage Servicing Rights are then evaluated at the end of each quarter for potential impairment based upon the probability that the underlying loans will be prepaid through refinancing as interest rates fall. (cid:129) A loss in the amount of $707,000 on a Washington Mutual (WAMU) bond. Prior to the end of the third quarter, we elected to sell this bond at a loss in light of WAMU’s rapidly deteriorating financial condition. Subsequent to this sale, WAMU filed bankruptcy. (cid:129) Other Than Temporarily Impaired charges throughout the year in the amount of $888,000 on financial services stocks in our investment portfolio. (cid:129) A valuation adjustment in the amount of $1,205,000 to the cost of First Chester County Corporation common stock (FCEC) received pursuant to the acquisition of American Home Bank, N.A. (AHB) by FCEC which was announced on September 19, 2008 and closed on December 31, 2008. Subject to the terms of the Definitive Merger Agreement, AHB shareholders could elect to receive either .7000 shares of FCEC common stock or cash equal to $11.00 per share of AHB common stock. Shareholder elections were subject to allocation procedures intended to ensure that approximately 90% of the consideration to be paid by FCEC would be in the form of common stock and approximately 10% of the consideration would be in cash. 4 As of the September 19th announcement date of this transaction, the market value of a share of FCEC common stock was $15.25 which equated to $10.675 per common share of AHB when adjusted for the .7000 exchange ratio. This pricing held relatively constant until early November, at which time the market value of many community banks, including FCEC, began to decline further. As of December 31, 2008, the closing date for the acquisition of AHB by FCEC, the market value of a common share of FCEC was $10.00 which equated to $7.00 per common share of AHB when adjusted for the .7000 exchange ratio. In accordance with the current Financial Accounting Standards Board guidance, we recorded a $1,205,000 valuation adjustment at December 31, 2008 on 209,062 shares of FCEC common stock received for 298,660 AHB common shares as a result of the merger transaction to their “fair value” of $10.00 per share (i.e. $7.00 per share of AHB). We also received $639,000 for 58,048 shares of AHB common stock exchanged for $11.00 in cash as of the same date. The total impact of these four non-core items was $3,300,000 on a pretax basis. Excluding these items, Franklin Financial’s Net Income would have increased by 22.8% on a comparable basis from 2007 to 2008. As a shareholder, you received a 3.9% increase in regular cash dividends from $1.03 in 2007 to $1.07 in 2008. Regular cash dividends have grown at an average rate of 5.6% over the past five years. The market value of a share of Franklin Financial stock decreased 26.9% from a closing price of $24.95 at year- end 2007 to $18.25 at December 31, 2008. Although the vast majority of community banks continue to be among the safest and strongest financial institutions in our nation’s financial system, we are not optimistic that financial services stocks will show a significant recovery until investors regain confidence in the solvency of our 25 largest banks. (continued) 5 Bill Snell President & CEO Total Assets as dollars in millions Net Loans as dollars in millions Total Deposits & Repos as dollars in millions 1000 900 800 700 600 500 400 2 0 9 0 2 8 9 9 7 1 2 6 3 6 5 2004 2005 2006 2007 2008 700 650 600 550 500 450 400 350 300 9 6 6 4 6 5 2 2 5 2 9 3 3 4 3 2004 2005 2006 2007 2008 700 650 600 550 500 450 400 350 300 4 7 6 4 7 6 2 9 6 9 0 5 2 4 4 2004 2005 2006 2007 2008 Franklin Financial’s total assets reached $902,460,000 at December 31, 2008 representing a 10% increase over 2007. Net loans grew by 18.5% on a year-over-year basis. Average loan outstandings increased by $64,105,000 or 11.5% in 2008. Our continued focus on commercial loan growth resulted in $246,820,000 of closed commercial loan transactions which increased the average outstanding balance in the portfolio by $70,562,000 or 21.2%. Average consumer loan outstandings increased 9.2% to $132,571,000 as a result of two home equity loan promotions. Residential mortgage closings in 2008 declined dramatically to $27,800,000 from $35,080,000 in 2007. Average residential mortgage outstandings declined by 17.4% or $17,667,000 as we continue to hold fewer mortgage originations in our portfolio. 6 Net Income as dollars in thousands Regular Cash Dividends Paid as dollars per share ROE/ROA as percentage values 10000 9000 8000 7000 6000 5000 4000 6 5 2 9 , 5 9 5 8 , 0 7 5 7 , 2 1 1 6 , 2 9 1 5 , 2004 2005 2006 2007 2008 1.1 1.0 0.9 0.8 0.7 7 0 . 1 3 0 . 1 9 9 . 0 5 9 . 0 8 8 . 0 16.0 14.5 13.0 11.5 10.0 8.5 15.41 Tangible ROE 13.42 13.19 11.13 11.92 12.62 9.77 11.13 ROE 10.99 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 8 1 . 1 A O R T 4 1 . 1 A O R 5 0 . 1 A O R T 1 0 . 1 A O R 2004 2005 2006 2007 2008 2004 2005 2006 2007 2008 1.25 1.00 0.75 0.50 Deposit growth in 2008 was negatively impacted by both the significant decline in short-term rates throughout the year as well as a “national rate war” among financial institutions for deposit funding. This intense competition was exacerbated by those financial institutions that had lost access to brokered deposits and other wholesale funding as a result of a change in their “well-capitalized” regulatory status. Total deposits and repurchase agreements as measured at year-end increased 2.6% to $691,653,000. Average core deposits (i.e. checking, savings, and interest bearing checking) increased 1.5% while we experienced some shift in depositor funds from the Money Management Account into higher yielding Certificates of Deposit. In lieu of (continued) F&M Trust Management team (left to right): Sandy Small Ron Cekovich Ken Ditzler Bill Snell Mike Kugler Karen Carmack Mark Hollar Thomas Peterson Olaf Hasse 7 Allen Distribution – Carlisle, PA With 2.5 million square feet of storage space and state-of-the-ar t logistic ser vices, Carlisle-based Allen Distribution continues to produce, package and deliver “reliability” to their clients. That’s why Gary (center left) and Ryan Heishman (center right) prefer to work with Dianne Cornm an CTP, VP/Cash Management Specialist (far left) and Brian Weikert, VP/Commercial Ser vices, Cumberland County Region of F&M Trust (far right). Allen Distribution relies on the instant flexibility of Franklin Busine$$Link, eDeposit, fast financing decisions, and local convenience. And best of all, F&M Trust’s great customer ser vice frees up the Heishmans to attend to their own clients better. That’s what a solid financial par tnership is all about. competing against exorbitantly high Certificate of Deposit rates for maturities of less than one year, we opted to utilize lower cost Federal Home Loan Bank term borrowings, which increased from $59,714,000 at year-end 2007 to $106,141,000 at December 31, 2008. Net interest income increased by 15% on a tax equivalent basis to $31,488,000 from $27,374,000 in 2007, driven by both the growth in average interest earning assets as well as an increase from 3.67% to 4.03% on a tax equivalent basis in our net interest margin. The growth in our net interest margin was counter to the trend within our industry. Our financial condition remains strong as evidenced by a Total Risk-Based Capital Ratio of 11.02% and a Leverage Capital Ratio of 7.84%. These ratios remain above the levels that federal regulators require for an institution to be considered “well capitalized”. Our Tangible Capital Ratio, which measures Total Equity net of Accumulated Other Comprehensive Income, Goodwill and Intangible Assets as a percentage of Total Assets excluding Goodwill and Intangible Assets, stands at 7.72% at year-end. This ratio has increasingly become the focus of investors seeking to measure true capital adequacy. Franklin Financial’s safety and soundness indicators continue to compare favorably to peers, reflecting our conservative posture. In 2008, we increased our provision for loan losses by $203,000 in response to both an increase in net charge-offs from .09% to .19% as well as our exceptional loan growth. The ratio of nonperforming assets/total assets declined from .73% to .44% at year-end 2008 while our Allowance for Loan Losses as a percentage of both total loans and total nonperforming loans was 1.09% and 183.93% respectively. The market value of assets under management by our Investment & Trust Services Department totaled $497,215,000 at December 31, 2008. This figure includes approximately $61,600,000 of assets under management added as a result of our acquisition of Community Financial, Inc. and its subsidiary, Community Trust Company, in November 2008. Excluding the effect of this acquisition, assets under management declined $72,305,000 or 14.2% from the $507,920,000 valuation at December 31, 2007 as a result of turmoil in the financial markets. Assets under management as reported does not include approximately $72,000,000 in assets held at third- party brokers at December 31, 2008 compared to $83,000,000 at year-end 2007. (continued) Lynn Waite, Small Business Relationship Manager–Southern Franklin County, works from her office in Greencastle to ensure small businesses in the region have access to all the necessary financial tools to manage growth properly — and transform into medium or large businesses if they choose. 9 Investment & Trust Services fee income, including revenue generated through the Personal Investment Centers, declined from $4,129,000 in 2007 to $3,500,000 in 2008. As I discussed in last year’s Message to Shareholders, our 2007 revenues included $617,000 of nonrecurring fee income relating to two estates that were distributed during the year. As noted above, Franklin Financial completed the acquisition of Community Financial, Inc. (Community), headquartered in Camp Hill on November 29, 2008. As part of this transaction, Community’s wholly owned subsidiary, Community Trust Company, merged with F&M Trust. Shareholders of Community had approved the merger with an affirmative vote of 85.3% of outstanding shares of common stock entitled to vote. Under the terms of the Agreement and Plan of merger dated June 7, 2008, each share of Community common stock outstanding at the time of the merger will be exchanged for cash. The total amount paid by Franklin Financial in connection with this transaction was $1,130,000. In addition to adding approximately $61,600,000 in assets under management, we believe that this transaction enhances the presence of our Investment and Trust Services Department on the West Shore and presents us with an exciting opportunity for future growth. Susan Russell, Community’s President & CEO, joined us as a Vice President and Relationship Manager, and we plan to continue to service Community Trust’s clients from our new Camp Hill location. 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 30% and 125% respectively. An ongoing initiative to recruit new members in order to increase volume resulted in one additional bank commencing production in 2008. Mortgages originated by F&M Trust and insured by Bankers Settlement Services accounted for approximately 13.7% of the agency’s total net premium revenue in 2008. The lending officers of F&M Trust achieved an overall penetration rate of 51% on residential mortgages closed. Our investment in BankersRe Insurance Group, SPC a captive insurance company owned by nine Pennsylvania banks, generated dividends and fee income of approximately $118,000 (continued) Susan Russell, Vice President and Relationship Manager, joined F&M Trust in late 2008 when Community Financial merged with FFSC. Sue will continue to support her investment and trust clients — enhancing F&M Trust’s commitment to Cumberland County. Her office is located at 3907 Market Street in Camp Hill. 10 Turkeyfoot Equipment LLC – Chambersburg, PA While Turkeyfoot Equipment LLC is based locally, co-owners Lyle (left) and Wanda Diller (not pictured) have the drive to reach customers well beyond the Franklin County line. In fact, since 1998 they’ve grown their pre-owned construction and farm equipment business to yield nearly $4 million in annual sales. What helps make this possible? Just ask Phil Pantano, Commercial Ser vices Relationship Manager (right). Phil and his F&M Trust team have designed a well-balanced package of financial tools to allow the Dillers to dig into even more oppor tunities. George S. Hann & Son, Inc. – For t Littleton, PA Since 1968, George S. Hann & Son, Inc. has grown to be a steady force in commercial construction. Co-owners Jodie (far right) and Geor ge Hann, Jr. (far left), lead their work crews and subcontractors to build commercial facilities, bridges, sewers and more — major projects which require extensive working capital. That’s why Dianne Cornm an CTP, VP/Cash Management Specialist at F&M Trust (center left), and Don Trego, AVP/Small Business Relationship Manager at F&M Trust (center right), work with the Hanns to ensure deposits are maximized and commercial financing tools are in place — working together to build an even stronger business. 12 during 2008. As of year-end, our portfolio of residential mortgage loans with private mortgage insurance in force exceeded $21,800,000 while our portfolio of consumer loans with “protected balances” by Debt Protections Coverage exceeded $12,300,000. We continue to introduce products and services providing added convenience to our customers and prospective customers. During the fourth quarter of 2007, 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 our pricing. Although residential mortgage origination activity was relatively slow during 2008, we have been pleased with the quality of service and turnaround time provided by American Home Bank during the current “refi boom” which began in late December. By the end of the first quarter, we will have the capability of accepting both residential mortgage and home equity loan and line of credit applications online. In addition to the ability to review our current interest rates and programs as well as to be notified electronically as interest rates change, this system will feature a Resource Guide to answer questions about various programs, a “Check Status” feature enabling the applicant(s) to determine the status of an in process application and the capability of issuing a pre- qualification approval letter online. We are also excited about our recent approval as a lender for the mortgage programs offered by the Farmers Home Administration (FHA). The mission of the FHA is to provide mortgage insurance to private lenders to encourage the flow of first-time and minority homebuyers. The FHA’s product line accommodates purchases and refinances with a current maximum loan limit of $271,000. Almost 20% of all mortgages are currently originated under the FHA’s programs. We are confident that our approval as an FHA lender will enable us to build many new customer relationships. Our small business initiative continues to gain momentum. F&M Trust has renewed its partnerships with the Small Business Development Centers (SBDCs) 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. We will (continued) Dave Zimmerman, Vice President, Commercial Services — Cumberland County, joined the F&M Trust team during 2008 and provides clients with 15 years of solid commercial banking experience. 13 continue to be the exclusive sponsor of the “First Step” and “Business Planning” workshops conducted by the SBDCs during 2009, plus other seminars on special topics. F&M Trust’s Small Business Relationship Managers participate in each workshop, presenting a segment focused on financing options. We believe that these partnerships provide entrepreneurs with education, information, and tools to build and sustain successful businesses which will directly benefit our local economy while providing F&M Trust with an opportunity to increase our penetration of the small business market. Our approval as a designated lender for the loan guaranty programs offered by the U.S. Small Business Administration (SBA) during early 2008 has enabled us to assist existing or start-up businesses in the early states of 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. F&M Trust also introduced the Money Clinic to provide basic financial information and to increase the “money skills” and “Financial IQ” of customers, clients, and prospective customers. Money Clinic, while geared toward Generation X and Generation Y consumers, is more than just an introduction to money. The information web site is packed with fundamentals of finance to help consumers— whether they’re saving money, investing it, borrowing it, or spending it—handle money more wisely. The web site (www.mymoneyclinic.com) includes calculators and other resources in addition to informational articles. The information provided on the web site is general, and visitors can be directed to an F&M Trust professional about financial solutions for their specific situation. During the fourth quarter of 2008, we added a “cash rewards” feature to our popular FranklinBusine$$ Card (MasterCard Debit Card). We also introduced Franklin Busine$$ eDeposit (Remote Deposit Capture) which will save businesses of all sizes both time and money. Customers have the ability to scan their checks and transmit them to a secure website. The items are then processed and automatically credited to the business’ bank account, eliminating the need to travel to the bank to make the deposit. The initial customer response to this service has been very positive. (continued) Doug Corl, Mortgage Originator– Southern Franklin County, relies on his real estate and banking experience to connect mortgage clients in his region with financing solutions that fit well — ensuring the mortgages he writes are safe, solid solutions for both the homeowner and the bank. That’s just “business as usual” at F&M Trust. 14 Gold’s Gym – Carlisle & Chambersburg, PA When co-owners Tori (left) and John Spayd (right) expanded their Gold’s Gym presence beyond Carlisle to Chambersburg, they looked to Ken Brookens, AVP/Commercial Ser vices of F&M Trust (center), for a powerful solution. They wanted the personal attention of a community bank combined with reliable cash management ser vices that had the strength to handle both locations — rivaling what bigger banks offer. YMCA – Waynesboro, PA When Alan Smith, Executive Director of the Waynesboro YMCA (right), was ready to build a better way to ser ve the community, he included Debbie Michael, VP/Commercial Services at F&M Trust (left), in his plans. As a community-based bank, F&M Trust was quick to customize a financing package that suppor ted more than a third of the overall redevelopment project. Thanks to expanded fitness capabilities, as well as new rooms and workspace, Alan’s community ser vice team at the YMCA has seen a very healthy increase in membership. The newly-remodeled Orchard Park office. The new Norland Avenue office. We made an additional investment in expanding and upgrading our community office network during 2008. In March, we opened an ATM at the entrance to Northgate Commons on the Northfield Campus of Menno Haven. Extensive renovations to expand the lobby and reconfigure the drive-up at our Orchard Park Office were completed in October and we are delighted with the feedback from our customers. Our twenty-fifth community office, at the corner of Norland Avenue and Parkwood Drive, opened in August. This new office is already one of our busiest from a transactional standpoint. Finally, renovations to our Philadelphia Avenue Office were started in October and recently completed. Our ATM network will expand again in 2009 with new drive-up units at Ayr Town Center in McConnellsburg and in the Riverview Business Center in Mt. Union. We will also be expanding our Carlisle Crossing office to accommodate the growth of our Cumberland County Commercial Services staff. Finally, renovations to the former Community Trust office on Market Street in Camp Hill to add a drive-up and banking lobby are planned to begin in the second quarter. Before concluding, I would like to take this opportunity to recognize and thank Huber McCleary, who retired from the Franklin Financial Board of Directors at the end of 2008, for his eighteen years of dedicated service. Huber was elected to the Boards of Franklin Financial and F&M Trust in 1990. His insight, wisdom, and support will be missed. I anticipate that 2009 will again be a challenging year for financial institutions. Your interest and support as Franklin Financial shareholders is sincerely appreciated. Sincerely, William E. Snell, Jr. President & CEO 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 Offices of Stanley J. Kerlin H. Huber McCleary* President – McCleary Oil Company Jeryl C. Miller Vice President and Secretary – Charles W. Karper, Inc. Stephen E. Patterson, Esq. Principal – Salzmann Hughes 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. Partner – 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 *Retired from the Board effective 12/31/08. 18 Management William E. Snell, Jr. President and Chief Executive Officer 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 Services Market Manager Sandra G. Small, Esq. Senior Vice President Risk Management Officer Olaf R. Hasse Vice President Retail Services Market Manager Thomas L. Peterson, LUTCF Vice President Investment & Trust Services Market Manager F&M Trust Company Officers Relationship Management Division Memorial Square Office Summer Franzoni Assistant Vice President and Manager Commercial Services Dianne L. Cornman, CTP Vice President Cash Management Specialist Debra K. Michael Vice President Brian E. Weikert Vice President David P. Zimmerman Vice President Kenneth W. Brookens Assistant Vice President Philip A. Pantano Commercial Services Relationship Manager Kathleen M. Bloss Credit Department Manager Jeramy D. Culler Credit Analyst Retail Services L. Kay Estep Assistant Vice President GO Club Coordinator CHAMBERSBURG MARKET OFFICES Patricia A. Hanks Assistant Vice President Chambersburg Market Manager David S. Campbell Small Business Relationship Manager Lincoln Way East Office Kim S. McKenrick Assistant Vice President and Manager Marlana K. Snider Assistant Financial Services Officer and Assistant 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 Bonita C. Yocum Assistant Vice President and Manager Orchard Park Office Antonia L. Diffenderfer Assistant Vice President and Manager Christina L. Yoder Assistant Financial Services Officer and Assistant Manager St. Thomas Office Melanie D. Gordon Financial Services Officer and Manager Norland Avenue Office Desirae N. Fleagle Financial Services Officer and Manager 19 F&M Trust Company Officers (continued) SOUTHERN FRANKLIN COUNTY MARKET OFFICES CUMBERLAND COUNTY MARKET OFFICES Kathy J. Miller Assistant Vice President Southern Franklin County Market Manager Lynn A. Waite Small Business Relationship Manager Vickie L. Broughton Assistant Vice President Cumberland County Market Manager Lindsay Reisinger Small Business Relationship Manager Greencastle and Marion Offices Carlisle Plaza, Boiling Springs, and Carlisle Crossing Offices Karen S. Showalter Assistant Vice President and Manager David R. Winters Assistant Vice President and Manager Deborah K. Whaley Assistant Financial Services Officer and Assistant Manager Kevin M. Stoner Financial Services Officer and Assistant Manager 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 Natasha A. Carmack Financial Services Officer and Manager Chastity L. Wantz Assistant Financial Services Officer and Assistant Manager Newville Office Ellen L. Ile Financial Services Officer and Manager Shippensburg Office Barbara A. Hoover Financial Services Officer and Manager Ritner Highway and Hanover Street Offices I. Edward Bidelspach Assistant Vice President and Manager FULTON & HUNTINGDON COUNTIES 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 20 Warfordsburg Office B. Jay True Financial Services Officer and Manager Penns Village Office Penny J. Koser Financial Services Officer and Manager Hustontown Office Denise M. Doyle Assistant Financial Services Officer and Assistant Manager Consumer Lending Services Susan E. Michael Vice President Penni L. Strait Dealer Center Relationship Manager Investment & Trust Services Carole L. Crist Vice President Investment & Trust Services Officer Ronald R. Froeschle, QPA, QKA Vice President Employee Benefits Officer Warren M. Hurt Vice President Senior Investment Portfolio Manager Charles R. Porter Vice President Business Development James P. Probst Vice President Investment & Trust Services Officer Allen C. Rebok Vice President Investment & Trust Services Officer Susan A. Russell Vice President Relationship Manager F&M Trust Company Officers (continued) Dennis L. Wilson Vice President Investment & Trust Services Officer Diana L. Sponseller Vice President Investment & Trust Services Officer Mark P. Bernier Investment Portfolio Manager Heather C. Hershey Estate Administration Officer Robin L. Murray Trust Operations Manager James R. Ifert II Assistant Investment and Trust Services Officer Personal Investment Counselor Avis M. Graham, 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 Risk Management William A. Pryor 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 Norland Avenue 870 Norland Avenue Chambersburg 717-262-2085 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 Trust Services Location Camp Hill 3907 Market Street Camp Hill 717-731-9604 Star ®/Cirrus® ATM Locations 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 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 Philadelphia Avenue 2405 Philadelphia Avenue, Chambersburg Norland Avenue 870 Norland Avenue, Chambersburg Marion 5293 Main Street, Marion Mont Alto 8 Park Street, Mont Alto Penn Hall 1425 Philadelphia Avenue, Chambersburg Waynesboro 200 East Main Street, Waynesboro Menno Village 2075 Scotland Avenue, Chambersburg 22 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 FFSC Shareholders’ Information Dividend Reinvestment Plan Stock Information Franklin Financial Services Corporation offers a The following brokers are registered as market dividend reinvestment program whereby shareholders makers of Franklin Financial Services Corporation’s with stock registered in their own names may reinvest common stock: 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 Boenning & Scattergood, Inc. 4 Tower Bridge 200 Bar Harbor Drive, Suite 300 West Conshohocken, PA 19428 800-883-1212 Morgan Keegan & Co., Inc. 3050 Peachtree Road, NW, Suite 704 Atlanta, GA 30305 866-353-7522 RBC Dain Rauscher 2101 Oregon Pike Lancaster, PA 17601 866-604-1471 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 The Annual Shareholders’ Meeting will be held Services Corporation is Fulton Financial Advisors, N.A., Tuesday, April 28, 2009 at The Orchards Restaurant, One Penn Square, PO Box 4887, Lancaster, PA 17602, 1580 Orchard Drive, Chambersburg. The Business telephone 717-291-2546. Meeting will begin at 10:30 a.m. and will be followed by a luncheon. If interested in attending, please complete and return the reservation form reply card by April 13th. Web site: www.franklinfin.com 23 Market and Dividend Information The Corporation’s common stock is not actively traded in There were 2,123 shareholders of record as of the over-the-counter market. The Corporation’s stock is December 31, 2008. The range of high and low bid listed under the symbol “FRAF” on the O.T.C. Electronic prices, as reported by local sources is shown below for Bulletin Board, an automated quotation service. Current the years 2008 and 2007. Also shown are the regular price information is available from account executives at quarterly cash dividends paid for the same years. most brokerage firms as well as the registered market makers of Franklin Financial Services Corporation common stock as listed above under Shareholders’ Information. 2008 Per Share High Low Cash Dividends Paid 2007 Per Share High Low Cash Dividends Paid First quarter $24.80 $23.10 $0.26 First quarter $27.23 $26.93 $0.25 Second quarter Third quarter Fourth quarter 24.15 23.00 21.51 23.00 20.30 16.50 0.27 0.27 0.27 $1.07 Second quarter Third quarter Fourth quarter 27.23 27.08 25.80 26.74 24.60 24.25 0.26 0.26 0.26 $1.03 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, 2008, in each case assuming an initial investment of $100 on December 31, 2003 and the reinvestment of all dividends. E U L A V X E D N I 140 130 120 110 100 90 80 70 CUMULATIVE TOTAL RETURN FOR THE FIVE-YEAR PERIOD ENDING DECEMBER 31, 2008 12/31/03 12/31/04 12/31/05 12/31/06 12/31/07 12/31/08 Franklin Financial Services NASDAQ Composite SNL Northeast OTC-BB & Pink Banks Period Ended Index 12/31/03 12/31/04 12/31/05 12/31/06 12/31/07 12/31/08 Franklin Financial Services Corporation NASDAQ Composite SNL Northeast OTC-BB & Pink Banks 100.00 100.00 100.00 101.98 108.59 116.50 98.04 110.08 116.15 110.12 120.56 120.03 104.66 132.39 116.89 80.23 78.72 95.21 24 9021FMT_AnnualReport_Cover_FINAL:Layout 1 3/12/09 4:10 PM Page 1 2 0 0 8 A N N U A L R E P O R T 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 P O B o x 6 0 1 0 C h a m b e r s b u r g , P A 1 7 2 0 1 8 8 8 - 2 6 4 - 6 1 1 6 w w w . f r a n k l i n f i n . c o m 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 NO POCKET HERE. TRIM AND DISPOSE. 

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