Franklin Financial Services Corporation
Annual Report 2012

Plain-text annual report

2012 A nnual Re p or t High Tech High Touch Serving Franklin, Cumberland, Fulton and Huntingdon Counties |Contents Consolidated Financial Highlights Summary of Selected Financial Data A Message to Our Shareholders FFSC Directors and Officers F&M Trust Officers Community Office Locations 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 The Farmers and Merchants Trust Company of Chambersburg (the bank, F&M Trust). F&M Trust is a full-service bank offering investment, trust, commercial and retail services with twenty-six community offices in Franklin, Cumberland, Fulton and Huntingdon Counties. 1 2 3 1. Radle Electric, Camp Hill F RON T COVER IM AG ES: 4 7 2. Totem Pole Playhouse, Fayetteville 5 3. Cumberland-Franklin Joint Municipal Authority, Shippensburg 2 0 12 A n n u a l R e p o r t 4. F&M Trust mobile banking app introduced, 2012 6 8 9 5. 4-H Program, Claudia Hissong (left), Greencastle 6. M&C Lumber Co., Needmore 7. Franklin Business eDeposit remote check deposit unit 8. New F&M Trust website introduced, 2012 9. Chambersburg Waste Paper, Chambersburg High Tech High Touch 1 Consolidated Financial Highlights (d ollars in thous a nds , e xc ept p er s ha r e) 2012 2011 % increase (decrease) Performance Measurement Net income Return on average assets Return on average equity Return on average tangible assets1 Return on average tangible equity1 Efficiency ratio2 Net interest margin Current dividend yield Dividend payout ratio Balance Sheet Highlights Total assets Investment Securities (includes restricted stock) Loans, net Deposits and customer repurchase agreements Shareholders’ equity Shareholders’ Value (per common share) Diluted earnings per share Basic earnings per share Regular cash dividends paid Book value Tangible book value3 Market value Market value/book value ratio Price/earnings multiple Safety and Soundness Leverage ratio (Tier 1) Risk-based capital ratio (Tier 1) Common equity ratio Tangible common equity ratio4 Nonperforming loans/gross loans Nonperforming assets/total assets Allowance for loan losses as a percentage of loans Net charge-offs/average loans Average equity to average asset ratio Trust Assets $ 5,365 $ 6,569 (18) 0.51% 6.00% 0.55% 7.14% 70.44% 3.50% 4.86% 59.09% 0.66% 7.68% 0.70% 9.30% 63.46% 3.73% 8.74% 65.05% $ 1,027,363 136,899 743,200 916,649 91,634 $ 990,248 130,323 756,687 841,089 87,182 $ 1.32 1.32 0.78 22.31 19.84 14.00 62.75% 10.61 8.29% 12.60% 8.92% 8.01% 4.90% 4.10% 1.38% 0.60% 8.60% $ 1.66 1.66 1.08 21.67 19.04 12.35 56.99% 7.44 8.40% 12.14% 8.80% 7.82% 2.94% 2.60% 1.27% 0.86% 8.63% 4 5 (2) 9 5 (20) (20) (28) 3 4 13 Trust assets under management (market value) $ 520,434 $ 481,536 8 1 Excludes goodwill, intangibles and intangible amortization expense, net of tax. 2 Noninterest expense / tax equivalent net interest income plus noninterest income less net securities gains. 3 Total shareholders’ equity less goodwill and intangibles / shares outstanding. 4 Total shareholders’ equity less goodwill and intangibles / total assets less goodwill and intangibles. 2 Summary of Selected Financial Data (d ollars in thousa nds , e xc ept p er s ha r e) 2012 2011 2010 2009 2008 Fo r t he year ended, De ce mber 31 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 Performance Measurements Return on average assets Return on average equity Return on average tangible assets1 Return on average tangible equity1 Efficiency ratio2 Net interest margin Current dividend yield Dividend payout ratio Shareholders’ Value (per common share) Diluted earnings per share Basic earnings per share Regular cash dividends paid Book value Tangible book value3 Market value Market value/book value ratio Price/earnings multiple Balance Sheet Highlights $ 39,142 6,890 32,252 5,225 $ $ 27,027 9,451 30,601 5,877 512 5,365 0.51% 6.00% 0.55% 7.14% 70.44% 3.50% 4.86% 59.09% 1.32 1.32 0.78 22.31 19.84 14.00 62.75% 10.61 $ 41,791 9,154 32,637 7,524 25,113 10,200 28,333 6,980 411 $ 6,569 $ 43,284 12,443 30,841 3,235 $ 43,757 14,674 29,083 3,438 $ 46,156 16,037 30,119 1,193 27,606 9,366 26,423 10,549 2,937 $ 7,612 25,645 8,880 25,929 8,596 2,011 $ 6,585 28,926 6,538 23,189 12,275 3,680 $ 8,595 0.66% 7.68% 0.70% 9.30% 63.46% 3.73% 8.74% 65.05% 1.66 1.66 1.08 21.67 19.04 12.35 56.99% 7.44 $ 0.78% 9.34% 0.82% 11.27% 63.43% 3.53% 5.92% 55.10% 1.96 1.96 1.08 21.09 18.28 18.25 86.53% 9.31 $ 0.69% 8.69% 0.74% 10.79% 65.35% 3.44% 6.61% 62.95% 1.71 1.71 1.08 20.39 17.38 16.33 80.09% 9.55 $ 1.01% 10.99% 1.05% 13.19% 61.25% 4.03% 5.92% 47.66% 2.24 2.24 1.07 19.10 15.94 18.25 95.55% 8.15 $ Total assets Investment securities (includes restricted stock) Loans, net Deposits and customer repurchase agreements Shareholders’ equity $ 1,027,363 136,889 743,200 916,649 91,634 $ 990,248 130,323 756,687 841,089 87,182 $ 951,889 123,775 739,841 785,495 82,639 $ 979,373 149,770 730,626 794,220 78,766 $ 902,460 154,041 668,860 691,653 73,059 Safety and Soundness Leverage ratio (Tier 1) Risk-based capital ratio (Tier 1) Common equity ratio Tangible common equity ratio4 Nonperforming loans/gross loans Nonperforming assets/total assets Allowance for loan losses as a % of loans Net charge-offs/average loans Average equity to average asset ratio Trust Assets 8.29% 12.60% 8.92% 8.01% 4.90% 4.10% 1.38% 0.60% 8.60% 8.40% 12.14% 8.80% 7.82% 2.94% 2.60% 1.27% 0.86% 8.63% 8.16% 11.73% 8.68% 7.61% 3.68% 2.96% 1.18% 0.45% 8.36% 7.50% 10.89% 8.04% 6.94% 2.47% 1.93% 1.21% 0.26% 7.98% 7.84% 11.02% 8.10% 6.85% 0.59% 0.44% 1.09% 0.19% 9.18% Trust assets under management (market value) $ 520,434 $ 481,536 $ 490,420 $ 460,233 $ 497,215 1 Excludes goodwill, intangibles and intangible amortization expense, net of tax. 2 Noninterest expense / tax equivalent net interest income plus noninterest income less net securities gains. 3 Total shareholders’ equity less goodwill and intangibles / shares outstanding. 4 Total shareholders’ equity less goodwill and intangibles / total assets less goodwill and intangibles. 3 A Message to Our Shareholders Dear Shareholder: Franklin Financial reported earnings of $5,365,000 in 2012, representing an 18.3% decrease from our 2011 earnings of $6,569,000. Diluted earnings per share decreased to $1.32 per share in 2012 from $1.66 per share in 2011. As a shareholder, you received cash dividends of $0.78 per share in 2012, representing a 27.8% decline from the $1.08 per share regular cash dividends paid in 2011. This was a result of our decision to decrease the dividend to $0.17 per share for each of the last three quarters from the $0.27 regular cash dividend paid to shareholders in the first quarter of 2012 as well as in previous quarters. Bill Snell President and Chief Executive Officer Bill Snell President & CEO Prior to the reduction, our regular quarterly dividend payout had exceeded 60% of net income for several quarters. In light of the uncertain economic and regulatory environment, prior to the start of the second quarter the Board determined that it would be prudent to reduce the dividend payout rather place ourselves in the position that we needed to raise substantial capital and significantly dilute our shareholders. Our current dividend payout represents a 4.86% return based upon the closing price of Franklin Financial stock at December 31, 2012. Our dividend payout ratio remains in the upper end of our peer banking group range. The market value of a share of Franklin Financial stock rebounded from a closing price of $12.35 at December 31, 2011 to $14.00 at December 31, 2012. As of mid-March, the market value of a share of Franklin Financial stock has improved into the $16.50 to $17.00 range. The Federal Reserve is flooding the market with cash in order to stimulate the economy which continues to muddle along. Although housing is showing signs of modest improvement, the unemployment profile may take years to fix. Any increase in short-term rates is now tied to the unemployment rate dropping below 6.5% which means that short-term rates may be low for a prolonged period. Throughout 2012, our ability to increase earnings was impaired by the same factors that have challenged the financial services industry for the past several years – weak quality loan demand, compressed net interest rate margins, increased compliance costs and reduced fee income. In previous years, we had been able to generate earnings from balance sheet growth despite margin compression. 4 However, that was not the case in 2012 as both individuals and businesses in South Central Pennsylvania were hesitant to borrow and cautious in their outlook for the overall economic recovery. As a result of slower growth on our balance sheet and a narrowing margin, Net Interest Income declined by 1.2% from a year earlier. Although most components of Non-Interest Income increased during 2012, Total Non-Interest Income declined by $749,000 or 7.3% to $9,451,000. This decrease resulted from write-downs in the amount of $582,000 on two properties held in Other Real Estate Owned (OREO) as well as lower Securities Gains. Non-Interest expense increased by $2,268,000 or 8.0% during 2012, reflecting increased Salary and Benefits Expense as well as a one-time penalty in the amount of $439,000 to prepay $33,138,000 in higher interest rate borrowings at the Federal Home Loan Bank of Pittsburgh. This action will benefit Net Interest Income in future years. Our Provision for Loan Losses declined from $7,524,000 to $5,225,000. In 2012, our net loans charged off ratio improved to 0.60% from 0.86% in 2011 as net charge-offs declined from $6,602,000 in 2011 to $4,569,000 in 2012. Non-Accruing Loans totaled $36,394,000 at year-end, representing a 105% increase over the $17,756,000 at year-end 2011. We have been able to exit some problem credits, however, the impact C o n t i n u e d New Mechanicsburg Location In 1906, F&M Trust opened its first community banking office. Since day one, customers have enjoyed our 100% local approach to personal service and great value. Today, we bring full-service community banking to 26 locations throughout South Central PA, including our newest location serving Mechanicsburg. The office is located at Silver Creek Plaza on the Pike, near Toys“R”Us®. 5 F&M Trust Management Team Left to right: Mark Hollar Senior Vice President, Chief Financial Officer and Treasurer Dennis Ginder Senior Vice President, Risk Management Officer Trish Hanks Senior Vice President, Retail Services Market Manager Ken Ditzler Senior Vice President, Marketing and Corporate Communications Manager Ron Cekovich Senior Vice President, Technology Services Manager Karen Carmack Senior Vice President, Human Resources Manager, Affirmative Action and HIPAA Privacy Officer Bill Snell President & Chief Executive Officer Lise Shehan Senior Vice President, Investment & Trust Services Manager 6 of the continuing sluggish economy created challenges for several additional customer relationships. As a result, our nonperforming ratios rose to 4.90% of gross loans and 4.10% of total assets at year-end. Franklin Financial’s total assets at December 31, 2012 topped the $1 billion mark, reaching $1,027,363,000 as compared to $990,248,000 one year earlier, an increase of 3.7%. Net loans outstandings declined by 1.8% on a year-over-year basis while average loan outstandings decreased by 0.4%. Commercial loan demand softened with average loan outstandings in this portfolio increasing $9,501,000 or only 1.6%. Average consumer loan outstandings decreased 14.0% to $79,053,000 as consumers continued to be hesitant to look for credit and focused on a flight to safety with increased savings. Average residential mortgage loan outstandings were relatively unchanged, although mortgage activity was brisk throughout the year from refinancings. During 2012, our mortgage originators settled $52,110,000 in mortgage loans, the highest volume in many years. The consumer flight to safety was apparent in our deposit balances. Total deposits and repurchase agreements as measured at December 31, 2012 increased by 9.0% to $916,649,000 while average C o n t i n u e d Financial Highlights 7 Total Assets4005006007008009001,00020112010200920082012As dollars in millionsAs dollars in millions9529901,027902979Net Loans40045050055060065070075080020112010200920082012740757743669731Total Deposits & ReposAs dollars in millionsAs dollars in millions55060065070075080085090095020112010200920082012785841917692794Net Income109876543210201120102009200820126.597.616.575.378.60Regular Cash Dividends PaidAs dollars per share0.500.751.001.251.50 201120102009200820121.081.080.781.071.08ROE/ROA0.000.501.001.50As percentage values20112010200920082012ROA 0.78TROA 0.8210.011.513.014.58.57.05.5ROE9.306.0013.1910.7911.277.1410.998.699.34ROA 0.66ROA 0.51TROA 0.55ROA 0.69ROA 1.01TROA 1.05TROA 0.74TROA 0.70TANGIBLE ROE7.68Chambersburg Waste Paper, Inc. C h a m b e r s b u r g Left to right: After nearly 40 years in business, Chambersburg Waste Paper, Inc., Mike Metz Vice President Commercial Services F&M Trust Ron Froeschle Vice President Employee Benefits Officer F&M Trust Kelly Adams President Chambersburg Waste Paper Kristian Johnson Secretary Chambersburg Waste Paper Craig Adams Warehouse Supervisor Chambersburg Waste Paper (CWP) knows what it takes to build a successful business – hard work, state-of-the-art equipment, and a reliable, locally-based, financial team. That’s why Kelly Adams, president, and his team prefer working with F&M Trust. CWP started working with F&M Trust in 1990. Ever since, F&M Trust has been there to serve the business’ financial needs, including everyday banking, employee benefits programs, credit services, and more. With flexible thinking and personalized service from F&M Trust, CWP has been able to expand facilities, enhance equipment, rebuild after a devastating fire, and plan for future opportunities. Today, Mike Metz and Ron Froeschle of F&M Trust continue the tradition of providing local, personal service to Kelly and his team as they focus on serving their own clients and processing up to 50 tons of recycled products per hour – the speed of small business success. 8 deposits and repurchase agreements increased 7.4% to $900,175,000. Average core deposits (i.e. checking, savings, and interest bearing checking) increased by $20,675,000 or 7.7%. Average balances in our Money Management Account increased by $56,987,000 or 18.4% as the competitive yield and liquidity offered by this product continued to be attractive to customers. Our Net Interest Margin dropped from 3.73% in 2011 to 3.50% on a fully tax equivalized basis at year-end as we faced intense pricing competition to retain and grow quality loans as well as loan assets repricing at lower rates. Accordingly, fully tax equivalized Net Interest Income decreased by 1.2% from $34,367,000 in 2011 to $33,935,000 in 2012. The market value of assets under management by our Investment and Trust Services Department grew by 8.1% to $520,434,000 at December 31, 2012, reflecting the addition of new client relationships and higher market valuations. Assets under management as reported do not include approximately $116,413,000 in assets held at third party brokers at December 31, 2012 compared to $114,600,000 at year-end 2011. Investment and Trust Services fee income, including revenue generated through the Personal Investment Centers, increased 3.4% from $3,953,000 in 2011 to $4,087,000 in 2012. Our financial condition remains strong as evidenced by a Total Risk-Based Capital Ratio of 12.60% and a Leverage Capital Ratio of 8.29%. These ratios remain above the levels that federal regulators require for an institution to be considered “well capitalized.” C o n t i n u e d A New Online Experience During 2012, F&M Trust made a dedicated effort to improve the online customer experience. By redeveloping the website from the ground up, clients can now find what they need much easier – detailed product information, handy financial calculators, local office hours, and of course, secure online banking with bill pay. As smartphones continue to become the mobile standard, F&M Trust is in step with the latest technology advances. The new mobile version of our website is optimized to help users access accounts safely, get product information, check rates, locate the nearest F&M Trust office, and more. 9 Our Tangible Common Equity Ratio, which measures Total Equity net of Goodwill and Intangible Assets as a percentage of Total Assets excluding Goodwill and Intangible Assets, stands at 8.01% at year-end up from 7.82% at December 31, 2011. This ratio is increasingly used by regulators and investors as a measure of capital adequacy. In October, we appointed Registrar and Transfer Company as our new transfer agent, registrar and dividend agent. This change allows us to better serve our shareholders now and in the future. Shareholders now have access to their account information online to update their account information, request transfer ownership of shares, cast votes, and more. And shareholders have the flexibility to either contact our corporate secretaries for assistance or contact Registrar and Transfer Company directly. Shareholders continue to participate in the Dividend Reinvestment and Stock Purchase Plan (“the Plan”). Since amendments were made in September 2010 to enhance our capital adequacy by providing our shareholders with a convenient and economical way to purchase additional shares of Franklin Financial common stock by reinvesting cash dividends paid on their shares or through optional cash payments, in excess of $3,200,000 have been invested through the Plan. C o n t i n u e d In Touch with the Arts F&M Trust understands the value of South Central PA’s cultural and community organizations. A great high-touch example is the bank’s relationship with Totem Pole Playhouse in Fayetteville. Since 1993, F&M Trust has been a reliable contributer, helping the playhouse to remain viable and strong. The playhouse is about to celebrate its 63rd season of quality summer theatre, and F&M Trust’s pledge of $25,000 helped get the 2012 appeal off the ground. Ray Ficca, artistic director, noted, “We greatly appreciate F&M Trust taking such a lead role. They have always been a great supporter of our theatre.” In addition, F&M Trust supports a variety of community-service initiatives across the region. Whether through financial support or volunteering (or both!), F&M Trust lives up to its 100-year commitment of helping to build stronger local communities. 10 Left to right: Martha Walker Director FFSC Ray Ficca Artistic Director Totem Pole Playhouse Bill Snell President & CEO F&M Trust M&C Lumber Co., Inc. Fulton County In 1988, Mark and Connie Mellott purchased their Needmore lumber products Left to right: business from Mark’s father, starting an impressive 3rd generation of family ownership. Today, M&C Lumber Co. Inc. continues to provide quality wood products to businesses throughout their multistate service region. With 3 service-minded employees on staff, the Mellotts know the financial challenges that small business owners face every day – operational expenses, payroll, benefits and more. That’s why Mark and Connie prefer working with F&M Trust, their 100% local community banking partner. F&M Trust has all the advanced financial tools and services they need to manage a successful small business. Gerri Fischer and Don Trego of F&M Trust work together to provide customized banking solutions that help the Mellotts manage everything with ease. Mark also manages a fleet of school busses, requiring additional attention and financial support. That’s okay with F&M Trust. The bank enjoys supporting the entrepreneurial spirit of small business owners. With flexible thinking and personalized service, F&M Trust can help local small businesses take advantage of new opportunities. Don Trego Assistant Vice President Small Business Relationship Manager F&M Trust Mark Mellott Owner M&C Lumber Co., Inc. Connie Mellott Owner M&C Lumber Co., Inc. Gerri Fischer Financial Services Officer and Manager F&M Trust 11 Cumberland-Franklin Joint Municipal Authority Cumberland & Franklin Counties Left to right: Dwain Koser Manager CFJMA Lisa E. Suders Assistant Manager and Treasurer CFJMA Thomas Ginnick Member Board of Directors CFJMA Dianne Cornman, ctp Cash Management Specialist F&M Trust Dave Zimmerman Commercial Services Relationship Manager F&M Trust Recently, Cumberland-Franklin Joint Municipal Authority (CFJMA) decided to add capacity to their service network to allow for future growth in the Shippensburg region. Also, the Authority saw an opportunity to be at the forefront in meeting important Chesapeake Bay watershed quality standards. When planning enhancements, the Authority met with several financial resources, including F&M Trust. Dave Zimmerman and Dianne Cornman of F&M Trust worked to not only bid on the financing of the project, but also recommend a total financial solution. By combining multiple loans into one, and implementing a better Cash Management process, the Authority could enhance their facilities and streamline office operations. After considering all bids, F&M Trust was selected as the best overall choice – providing superior bottomline value, local convenience, and well-designed financial tools. Since switching to F&M Trust, the Authority has been thrilled with the level of personalized service received from their 100% local banking team. 12 Last year we engaged in a checking account acquisition strategy aimed at increasing our market share. This campaign targeted customers of other financial institutions who are being impacted by disruptions relating to merger or regulatory issues using a predictive statistical model to identify the best prospects in targeted markets. The program was supported by customer service and sales training, tell-a-friend referrals, mystery shopping, and performance monitoring. We are pleased to report that the program was effective in growing consumer checking accounts by 58% and new consumer checking balances by over 90%. Supported by our successful OnBoarding program to effectively expand relationships and cross-sell banking services, the acquisition program served to enhance customer retention as well. Throughout the year we worked tirelessly to ensure that all of our ATM machines were compliant with the Americans with Disabilities Act (ADA). Upgrades were made to enable ATM users without sight to use the machines through audio commands. The cost for us to comply with this regulation at our 35 ATMs totaled more than $550,000. During the spring, the F&M Trust Newville Office relocated from 9 West Big Spring Avenue to 51 South High Street on May 29. The new office, although occupying less square footage than the previous facility, offers full-service banking including drive-up teller service, drive-up ATM access, safe deposit boxes, and lobby service. Our participation was integral in Newville’s revitalization project, undertaken by 3T Investors LP. A portion of the property was set aside for a town clock and community Christmas tree to enhance the town center. C o n t i n u e d Adding the Mobile Touch Today’s banking customer demands finger-tip convenience to help keep a busy life easier to manage. With an ever-increasing number of smartphone users, F&M Trust welcomed the opportunity to help every customer keep in touch with their personal funds. In 2012, the bank introduced F&M Trust Mobile, a secure and convenient way to manage funds. Every bank customer now has the option to bank his or her favorite way – in person, on the phone, online, and on the road. Customers will soon be able to make check deposits with smartphone technology – Mobile Xpress Deposit will be introduced during 2013. As technology evolves, F&M Trust will be there developing new ways to make banking more convenient. 13 In July, we began the expedited issuance of debit cards to enhance the delivery of service to our banking customers. Debit cards for new accounts, as well as those being replaced as a result of being lost or stolen, are produced locally using ‘flat card’ technology. This enhancement reduced turn-around time by more than half and allows us to accommodate special issuance requests more easily. In early December, our web site underwent a facelift with a fresh new look and mobile application. The web site also introduced other features including searchable data tools, campaign-based messaging, informational videos and more. And we rolled out a mobile banking platform so customers could bank with us on their smartphones. F&M Trust’s Mechanicsburg Office, located at 6375 Carlisle Pike, Mechanicsburg in the Silver Creek Plaza on the Pike, opened for business on November 14. The office is in front of Toys ‘R Us and a Buffalo Wild Wings restaurant. The 3,188 square foot facility includes a banking lobby with teller stations and customer service offices, drive-up teller and drive through ATM services, conference room, and offices for Commercial Services and Small Business Relationship Managers, Investment and Trust Services staff, and Residential Mortgage Orginators. Cydnie Kelly joined us as the Community Office Manager of the Mechanicsburg Office, the twenty-sixth community banking office in our network. In the fourth quarter, Richard E. Jordan III was appointed to the boards of directors of Franklin Financial Services Corporation and its subsidiary, F&M Trust, as a Class C director with a term expiring in 2015. C o n t i n u e d The Natural Touch F&M Trust not only believes in setting a good example for today’s youth, but also in supporting our region’s agricultural interests. Local 4-H and FFA clubs in Cumberland, Franklin, Fulton and Huntingdon Counties provide excellent opportunities for today’s youth to learn about agriculture, sustainability and leadership. By participating in local club sales and agricultural fairs, F&M Trust has the natural touch with youth and the PA farming community. Left to right: Claudia Hissong, 4-H member, with Gretchen the goat, and Renee Preso, F&M Trust. 14 Radle Electric Cumberland County Left to right: Joe Radle Co-Owner Radle Electric Lindsay Reisinger Assistant Vice President Small Business Relationship Manager F&M Trust Since its start in 2005, Radle Electric has been working hard to provide excellent customer service and quality workmanship for installation and repair clients throughout South Central PA. Clients have noticed. That’s why co-owners Joe Radle and his wife Laura Lee Lukunich (not pictured) have been repeat winners of Harrisburg Magazine’s “Simply the Best” and also received the “Super Service Award” from Angie’s List, a national consumer ratings service. The owners are very dedicated to the community, too. As an Air Force veteran, Joe invites clients to participate in Facebook promotions where customers can win donations to local military charities. The company also supports Passion for Mother’s Flowers Memorial Garden in Hampden Township, honoring loved ones lost to cancer, including Laura’s mother. When Joe and Laura were searching for a banking partner to help them grow the business, they chose F&M Trust. It was Lindsay Reisinger’s service-minded approach, and F&M Trust’s community-focused reputation, that provided the ‘spark’ to build a great business relationship. 15 Personalized Trust Services Investment & Trust Services Don Wissner Retired Bev Wissner Retired Rod Salter Assistant Vice President, Investment & Trust Services Relationship Manager, F&M Trust In 2012, Don and Bev Wissner decided to improve how they managed their personal assets. As retirees enjoying their lives in the Penn National community, they wanted to be sure their funds were secure and performing well. Don and Bev already enjoyed the level of personalized service they’ve been receiving from F&M Trust, and talked with Rod Salter about how the Investment & Trust Services team could streamline the management of their assets. After discussing everything, Don and Bev decided to let Rod help manage their retirement accounts. They’ve been pleased with Rod’s personal service, and Don really enjoys the fact that he no longer needs to handle the day-to-day management of investments. The couple agreed that they would recommend F&M Trust to friends, because of the excellent personal service and the financial integrity of the bank. Jordan is a commercial real estate manager and developer serving as Vice President of Smith Land & Improvement Corporation, Camp Hill. He is active in the community serving on the board of the Lion Foundation of Camp Hill, advisory board of The Salvation Army Harrisburg Capital City Region as president and member of the property and executive committees, board of the West Shore YMCA as president, and on the Capital Region Economic Development (CREDC) board of directors. In 2013, we will continue to enhance banking convenience for our customers through advancements in technology. In March, we will introduce Online Account Creation, giving customers the ability to open accounts online. By mid-year, customers will be able to create their own customized Freedom Cards (MasterCard Debit Card) by selecting an image from their PC, Facebook, Twitter, Flickr, or Picasa, customize the image, and create the card. In the second half of 2013, we will add Mobile Xpress Deposit or remote deposit capture to our mobile banking platform. When this service is introduced, customers will be able to deposit checks from home, work, or nearly anywhere simply by taking a photo of the items with their smartphone and electronically presenting them for deposit. We are also planning upgrades to our online banking and online bill pay systems during the year. 16 Our Investment and Trust Services Division is currently evaluating several candidates for our broker dealer business. We anticipate that our selection will provide a higher level of support resulting in enhanced customer service. We recently embarked on a comprehensive study of our current community office network as well as “self-service” delivery channels including ATMs, Mobile Banking and Internet Banking with the objective of increasing market penetration and profitability. This initiative will result in a five-year plan for the development of new or transformed community offices more fully integrated with our “self-service” delivery channels incorporating measurable financial objectives. Our perspective is that 2013 will be yet another challenging year for financial institutions with this prolonged period of low interest rates and high levels of unemployment and loan delinquencies continuing. In addition, we see additional regulations for all financial institutions continuing to have an impact on our industry. Your interest and support as Franklin Financial shareholders is very much appreciated. Sincerely, William E. Snell, Jr. President & CEO High Tech is in the Cards In addition to personalized local service, today’s community banking customer prefers added convenience. With recent advances in debit card production technology, F&M Trust has introduced Expedited Issuance debit card service. Customers no longer need to wait a week or more for a new F&M Trust debit card to arrive in the mail. With Expedited Issuance printing capabilities, a new debit card can arrive in just two to Expedited Issuance Debit Card Printer three days. In emergencies, a replacement debit card can be produced even faster. F&M Trust is dedicated to combining today’s high-tech financial tools with personal, high-touch service. The objective? High customer satisfaction, of course. 17 FFSC Board of Directors Front (left to right) Back (left to right) Donald A. Fry President, Cumberland Valley Rental and Towne Cleaners, ANDOCO, Inc. Richard E. Jordan III Vice President, Smith Land & Improvement Corp. Charles S. Bender II Retired, F&M Trust Executive Vice President Donald H. Mowery President, R. S. Mowery & Sons, Inc. G. Warren Elliott President, Cardinal Crossing, Inc., Former Franklin County Commissioner Allan E. Jennings, Jr. President, Jennings Chevrolet, Buick, GMC, Inc. William E. Snell, Jr. President and Chief Executive Officer, F&M Trust Martha B. Walker, Esq. Partner, Walker, Connor & Spang, LLC Daniel J. Fisher President and Chief Executive Officer, D.L. Martin Company Martin R. Brown President, M.R. Brown Funeral Home, Inc. Stephen E. Patterson, Esq. Principal, Salzmann Hughes P.C. Stanley J. Kerlin, Esq. Attorney, Law Offices of Stanley J. Kerlin, LLC FFSC Officers G. Warren Elliott Chairman of the Board William E. Snell, Jr. President and Chief Executive Officer Mark R. Hollar Treasurer and Chief Financial Officer Catherine C. Angle Corporate Secretary Joyce A. Riley Assistant Corporate Secretary 18 Management William E. Snell, Jr. President and Chief Executive Officer Mark R. Hollar Senior Vice President Chief Financial Officer and Treasurer Karen K. Carmack, SPHR Senior Vice President Human Resources Manager, Affirmative Action and HIPAA Privacy Officer Ronald L. Cekovich Senior Vice President Technology Services Manager Kenneth C. Ditzler Senior Vice President Marketing and Corporate Communications Manager E. Dennis Ginder Senior Vice President Risk Management Officer Patricia A. Hanks Senior Vice President Retail Services Market Manager Lise M. Shehan, Esq. Senior Vice President Investment & Trust Services Manager Relationship Management Division Commercial Services Dianne L. Cornman, CTP Vice President Cash Management Specialist Michael S. Metz Vice President Philip A. Pantano Vice President Barbara L. Peltzer Vice President David P. Zimmerman Vice President Kathleen M. Bloss Assistant Vice President Credit Department Manager Mary S. Cordell Assistant Vice President Commercial Services Relationship Manager Jeramy D. Culler Credit Analyst Eric J. Fleming Small Business Credit Analyst Maria S. Seabra Credit Analyst Jennifer D. Kaiser Commercial Services Support Specialist Retail Services L. Kay Estep Assistant Vice President GO Club Coordinator Officers CHAMBERSBURG MARKET OFFICES Lincoln Way East Office Lisa A. Hogue Financial Services Officer and Manager Tina M. Bricker Assistant Financial Services Officer and Assistant Manager Memorial Square Office Summer Franzoni Assistant Vice President and Manager Kim S. McKenrick Assistant Vice President and Assistant Financial Services Officer Pamela J. Kolsun Assistant Financial Services Officer Orchard Park Office Antonia L. Diffenderfer Assistant Vice President and Manager Penn Hall and Menno Village Offices Barbara A. Seylar Financial Services Officer and Manager Philadelphia Avenue Office Eric L. Alleman Financial Services Officer and Manager Norland Avenue Office Shaun M. Young Financial Services Officer and Manager St. Thomas Office Dana L. Kaiser Financial Services Officer and Manager West Side Office N. Joy Weller Vice President and Manager 19 Officers (continued) SOUTHERN FRANKLIN COUNTY MARKET OFFICES Renee L. Preso Assistant Vice President Southern Franklin County Market Manager Lynn A. Waite Small Business Relationship Manager Greencastle Office Lisa A. Cesa Financial Services Officer and Manager Marion Office Vicky L. Carson Assistant Financial Services Officer and Assistant Manager Mont Alto Office Brian J. Over Financial Services Officer and Manager Linda K. Stottlemyer Assistant Financial Services Officer and Assistant Manager Waynesboro Office Natasha J. Koons Financial Services Officer and Manager Chastity L. Wantz Assistant Financial Services Officer and Assistant Manager CUMBERLAND COUNTY MARKET OFFICES Lindsay J. Reisinger Small Business Relationship Manager Boiling Springs Office Kevin M. Stoner Financial Services Officer and Manager Camp Hill Office Katrina E. Buck Financial Services Officer and Manager 20 Carlisle Crossing Office Warfordsburg Office David R. Winters Assistant Vice President and Manager Geraldine A. Fischer Financial Services Officer and Manager Mechanicsburg Office Cydnie Kelly Financial Services Officer and Manager Newville Office Ellen L. Ile Financial Services Officer and Manager Ritner Highway and Hanover Street Offices I. Edward Bidelspach Assistant Vice President and Manager Shippensburg Office Barbara A. Hoover Financial Services Officer and Manager FULTON & HUNTINGDON COUNTIES MARKET OFFICES Donald L. Trego Assistant Vice President Small Business Relationship Manager Hustontown Office Denise M. Doyle Financial Services Officer and Manager McConnellsburg Office Mary E. Wright Financial Services Officer and Manager Orbisonia Office Shawna C. Dunmire Financial Services Officer and Manager Penns Village Office Brenda J. Gordon Financial Services Officer and Manager Consumer Lending Services Kristen G. Appleby Consumer Lending Manager Mark E. Bitting Mortgage Production Manager Investment & Trust Services Warren M. Hurt Vice President Senior Investment Portfolio Manager Carole L. Crist Vice President Investment & Trust Services Officer Ronald R. Froeschle, QPA, QKA Vice President Employee Benefits Officer David C. Gority Vice President Investment & Trust Services Officer Charles R. Porter Vice President Business Development James P. Probst Vice President Investment & Trust Services Officer Diana L. Sponseller, CISP Vice President Investment & Trust Services Officer Dennis L. Wilson, CTFA Vice President Investment & Trust Services Officer David Y. Luo Investment Portfolio Manager Officers (continued) Mary F. Cramer Bank Secrecy Act and OFAC Analyst Sheryl R. Snider Assistant Compliance Officer Credit Administration William A. Pryor Vice President Credit Recovery Manager Robert K. Day Commercial Credit Recovery Officer Steven R. Gormont Credit Recovery Officer Technology Services Division Matthew C. Clark Assistant Vice President Assistant Technology Services Officer Patricia R. Ganoe Assistant Vice President Deposit Operations Manager Pamela A. Johns Assistant Vice President Loan Servicing Manager Joshua S. Davis Assistant Technology Services Manager Carol L. Morris Assistant Loan Servicing Manager Stacey A. Stenger Data Operations Manager Andrew M. Otto Investment & Trust Services Relationship Manager Heather C. Hershey Estate Administration Officer Robin L. Murray Trust Operations Manager Matthew T. Brennan Assistant Investment & Trust Services Officer Personal Investment Counselor Avis M. Graham, CFP®, RFC, CASL Assistant Investment & Trust Services Officer Personal Investment Counselor Roderick C. Salter, FSS, CTFA Assistant Investment & Trust Services Officer Personal Investment Counselor Marketing Samantha J. Burke Marketing Officer Melissa D. Miller Marketing Officer Facilities Barry L. Shetter Assistant Vice President Facilities Manager Finance & Control Kim A. Brant Asset-Liability Analyst Amy B. Herrold Controller Human Resources Levi L. Crouse Human Resources Officer Christina L. Yoder Training and Development Officer Corporate Catherine C. Angle Corporate Secretary Joyce A. Riley Assistant Corporate Secretary Risk Management Division Olaf R. Hasse Vice President Loan Portfolio Risk Management Officer Eric M. Follin Documentation Review Officer Matthew R. Shank Assistant Documentation Review Officer Janet E. Stamper Assistant Documentation Review Officer Compliance Lorie M. Heckman, CRCM Vice President Bank Secrecy Act, Compliance and Security Officer 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 Marion Community Office Newville Community Office Community Office Locations 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 Fulton and Huntingdon Counties Hustontown 7781 Waterfall Road Hustontown 717-987-3193 McConnellsburg 100 Lincoln Way East McConnellsburg 717-485-3144 Orbisonia 18810 Sandy Ridge Station Orbisonia 814-447-3104 Penns Village 182 Buchanan Trail McConnellsburg 717-485-3167 Warfordsburg 560 Great Cove Road Warfordsburg 717-294-3288 Cumberland County Boiling Springs 3 East First Street Boiling Springs 717-241-4131 Camp Hill 3907 Market Street Camp Hill 717-731-9604 Carlisle Crossing 214A Westminster Drive Carlisle 717-243-2215 Hanover Street 14 North Hanover Street Carlisle 717-249-1331 Mechanicsburg 6375 Carlisle Pike Mechanicsburg 717-697-0444 Newville 51 South High Street Newville 717-776-2240 Ritner Highway 1901 Ritner Highway Carlisle 717-960-1400 Shippensburg 13 Shippensburg Shopping Center 717-530-2100 Chambersburg Area Lincoln Way East 1712 Lincoln Way East Chambersburg 717-264-9414 Memorial Square 20 South Main Street Chambersburg 717-264-6116 Menno Village 2075 Scotland Avenue Chambersburg 717-261-3697 Norland Avenue 870 Norland Avenue Chambersburg 717-262-2085 Orchard Park 841 Wayne Avenue Chambersburg 717-263-1801 Penn Hall 1425 Philadelphia Avenue Chambersburg 717-261-3660 Philadelphia Avenue 2405 Philadelphia Avenue Chambersburg 717-264-5122 St. Thomas 6962 Lincoln Way West St. Thomas 717-369-3240 West Side 1100 Lincoln Way West Chambersburg 717-263-9168 22 Ayr Town Center in McConnellsburg Shippensburg West End ATM STAR®/Cirrus® ATM Locations Chambersburg Area Downtown Drive-Up ¬ 150 Lincoln Way East Chambersburg Southern Franklin County Greencastle ¬ 518 North Antrim Way Greencastle Marion ¬ 5293 Main Street Marion Mont Alto ¬ 8 Park Street Mont Alto Penn National Clubhouse 3720 Clubhouse Drive Fayetteville Quincy Village 6596 Orphanage Road Quincy Waynesboro ¬ 200 East Main Street Waynesboro Waynesboro Market Place ¬ 11123 Buchanan Trail East Waynesboro Zullinger ¬ 4884 Buchanan Trail East Zullinger Fayetteville ¬ 4025 Lincoln Way East Fayetteville Lincoln Way East ¬ 1712 Lincoln Way East Chambersburg Menno Village 2075 Scotland Avenue Chambersburg Norland Avenue ¬ 870 Norland Avenue Chambersburg Northgate Commons 1500 Northfield Drive Chambersburg Orchard Park ¬ 841 Wayne Avenue Chambersburg Penn Hall 1425 Philadelphia Avenue Chambersburg Philadelphia Avenue ¬ 2405 Philadelphia Avenue Chambersburg St. Thomas ¬ 6962 Lincoln Way West St. Thomas West Side ¬ 1100 Lincoln Way West Chambersburg ¬ Indicates drive-up access Fulton & Huntingdon Counties Ayr Town Center ¬ 368 South 2nd Street McConnellsburg Hustontown ¬ 7781 Waterfall Road Hustontown McConnellsburg ¬ 100 Lincoln Way East McConnellsburg Orbisonia ¬ 18810 Sandy Ridge Station Orbisonia Penns Village ¬ 182 Buchanan Trail McConnellsburg Riverview Business Center ¬ 11734 Lenape Drive Mount Union Warfordsburg ¬ 560 Great Cove Road Warfordsburg Cumberland County Boiling Springs 3 East First Street Boiling Springs Camp Hill ¬ 3907 Market Street Camp Hill Carlisle Crossing ¬ 214A Westminster Drive Carlisle Carlisle Plaza Drive-Up ¬ 700 East High Street Carlisle Hanover Street 14 North Hanover Street Carlisle Mechanicsburg ¬ 6375 Carlisle Pike Mechanicsburg Newville ¬ 51 South High Street Newville Ritner Highway ¬ 1901 Ritner Highway Carlisle Shippensburg ¬ 13 Shippensburg Shopping Center Shippensburg West End ¬ 9966 Molly Pitcher Highway Shippensburg 23 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. 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 Raymond James and Associates 222 South Riverside Plaza, 7th Floor Chicago, IL 60606 866-353-7522 RBC Wealth Management 2101 Oregon Pike Lancaster, PA 17601 800-456-9234 Stifel, Nicolaus & Co. 20 Ash Street, Suite 400 Conshohocken, PA 19428 800-223-6807 Registrar and Transfer Agent Registrar and Transfer Company is the transfer agent and registrar for Franklin Financial Services Corporation. Annual Meeting The Annual Shareholders’ Meeting will be held Tuesday, April 30, 2013 at the Orchards Restaurant in Chambersburg. The Business 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 15. Registrar and Transfer Company 10 Commerce Drive Cranford, NJ 07016-3572 1-800-368-5948 Email: info@rtco.comw Web Site www.franklinfin.com Market & Dividends The Corporation’s common stock is not actively traded in the over-the-counter market. The Corporation’s stock is quoted on the OTCQB Market Tier of the OTC Markets under the symbol “FRAF”. 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 2,032 shareholders of record as of December 31, 2012. The range of high and low bid prices is shown below for the years 2012 and 2011. Also shown are the regular quarterly cash dividends paid for the same years. 2012 Per Share 2011 Per Share High Low Dividends Paid First quarter $15.85 $12.30 $0.27 First quarter Second quarter Third quarter Fourth quarter 15.75 14.29 14.75 12.86 13.10 13.65 0.17 0.17 0.17 $0.78 Second quarter Third quarter Fourth quarter High $17.00 18.25 17.50 15.55 wLow Dividends Paid $15.19 $0.27 17.10 15.10 12.30 0.27 0.27 0.27 $1.08 24 S u p p o r t i n g o u r c o m m u n i t i e s a n d l o c a l e c o n o m y. 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 

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