Franklin Financial Services Corporation
Annual Report 2014

Plain-text annual report

CONNECTED TO OUR COMMUNITIES 2014 ANNUAL REPORT  TABLE OF CONTENTS 1 Shareholder Letter 6 FFSC Directors and Officers 8 Technology 9 Innovative Products 10 Giving a Helping Hand 11 Serving Our Community 12 Our Customer Stories 18 F&M Trust Senior Management Team 19 F&M Trust Officers 22 Consolidated Financial Highlights 23 Summary of Selected Financial Data 24 F&M Trust Community Office Locations FRANKLIN FINANCIAL SERVICES CORPORATION / 1 DEAR FELLOW SHAREHOLDER: Franklin Financial reported earnings of $8,402,000 in 2014, representing a 34.8% increase over our 2013 earnings of $6,232,000. Diluted earnings per share increased 32.5% from $1.51 per share in 2013 to $2.00 per share in 2014. Expense control and a 73.8% reduction in our Provision for Loan Loss were the primary factors driving our performance in 2014. As a shareholder, you received cash dividends of $0.68 per share in 2014, matching the cash dividends paid in 2013. Our current dividend represents a 3.1% return based upon the closing price of Franklin Financial stock at December 31, 2014, remaining in the upper end of our peer banking group range. Our Dividend Payout Ratio for 2014 was 33.9%. The market value of a share of Franklin Financial stock increased 28.7% from a closing price of $17.10 at year-end 2013 to $22.00 at December 31, 2014. Our Tax Equivalent Net Interest Income increased 1.0% from $33,260,000 in 2013 to $33,592,000 in 2014. A reduction in Interest Expense and an increased benefit from tax-free income was sufficient to offset a reduction in Interest Income. Average Interest Earning Assets decreased by $13,025,000 and the yield fell from 3.93% in 2013 to 3.89% in 2014. The low interest rate environment that continues to be supported by the Federal Reserve, coupled with spotty loan demand and intense competition for quality loans, continues to push asset yields down. Both Average Interest Bearing Liabilities and the cost of these liabilities also declined in 2014, resulting in an improvement in our Net Interest Margin from 3.47% in 2013 to 3.56% in 2014. Non-Interest Income increased by $984,000 or 10.0%, reflecting a 3.3% increase in Investment and Trust Services Fee Income as well as increases in Deposit Service Charges and Fees (14.4%), Debit Card Income (6.8%) and Other Service Charges and Fees (32.4%). Non-Interest Expense was tightly controlled, increasing $209,000 or .7% for the year. Increased Salary and Benefits Expense, including salary adjustments, incentive compensation accruals and severance accrual for employees affected by the consolidation of three of our community offices in 2015, was largely offset by a reduction in Advertising and Other Expenses, which includes Loan Collection Expense and Other Real Estate Expense. As I stated previously, our Provision for Loan Losses decreased by $2,156,000 or 73.8% in 2014, reflecting continued strong improvement in our asset quality. Net Charge-Offs decreased from $3,597,000 in 2013 to $1,355,000 in 2014, marking the third consecutive year of a decline in Net Charge-Offs. Our Net Charge-Off Ratio improved from .49% in 2013 to .19% in 2014. Non-Accruing Loans totaled $12,291,000 at year-end 2014, representing a 50% decrease from the $24,643,000 total at year-end 2013. Our Nonperforming Loans to Total Gross Loans ratio declined from 4.90% in 2012 to 3.49% in 2 / 2014 ANNUAL REPORT We have also created a five-year plan for the development of new or transformed community offices which are more fully integrated with our “self-service” delivery channels. “ 2013 to 1.74% at year-end 2014 while our Nonperforming Assets to Total Assets Ratio also declined from 4.10% in 2012 to 3.04% in 2013 to 1.63% at year-end 2014. We continue to work diligently to exit our remaining problem credits and are optimistic that we will again make significant progress in 2015. At year-end our Allowance for Loan Losses as a percentage of Total Loans stood at 1.25%. ” Franklin Financial’s Total Assets increased from $984,587,000 at year-end 2013 to $1,001,448 at December 31, 2014. Net Loans Outstanding increased by .5% on a year-over-year basis while average loans outstanding decreased by .7%. Commercial Loan demand remained spotty and, coupled with the exit of several problem loans, average outstandings in this portfolio declined by $8,645,000 or 1.4%. Average Consumer Loans Outstanding decreased by 2.6% to $67,792,000 while Average Residential Mortgage Loans Outstanding increased by 5.8% as we retained more originations in the portfolio. Total Deposits and Repurchase Agreements as measured at December 31, 2014 increased 2.4% while Average Deposits and Repurchase Agreements decreased by 2.1%. Average Core Deposits (i.e. checking, savings, and interest-bearing checking) increased by $46,466,000 or 13.3%. Average balances in our Money Management Account product remained flat. The market value of Assets Under Management by our Investment and Trust Services Department grew by 5.4% to $605,796,000 at December 31, 2014, reflecting the addition of new client relationships and higher market valuations. Assets Under Management as reported do not include approximately $132,700,000 in assets held at third party brokers at year-end. Investment and Trust Services Fee Income, including revenue generated through our brokerage offerings, increased 3.3% to $4,575,000 in 2014. Our financial condition remains strong as evidenced by a Total Risk Based Capital Ratio of 15.49% and a Leverage Capital Ratio of 9.69%. These ratios remain above the level that Federal regulators require for an institution to be considered “well capitalized.” Franklin Financial’s Tangible Common Equity Ratio also improved to 9.51% at year-end 2014. In July 2013, Federal Banking regulators approved the final rules from the Basel Committee on Banking Supervision for the regulation of capital requirements for U.S. Banks. This regulation is generally referred to as “Basel III.” Certain components of the new capital requirements are effective January, 2015 with others being phased in through January 1, 2019. As of December 31, 2014, we believe that we will be “well capitalized” under these new rules. We continued to enhance banking convenience for our customers through advancements in technology throughout 2014. Online channels continue to be a primary focus. We updated the user interface (experience) for both Online Account Opening and Online Banking, streamlining the process and allowing for quicker access to important information. We also added the ability to view loan statements online. We added Xpress Deposit for Better Business Checking accounts as well as a new application developed just for the iPad to our Mobile Banking service. We also upgraded Franklin Busine$$eDeposit, our Remote Deposit Capture product for businesses, with a new platform that has increased risk monitoring tools to allow for quicker fraud detection. And we continue to invest heavily in our technology infrastructure. As Microsoft no longer supports Windows XP, a significant amount of time and resources was spent in order to upgrade to a current version of the Windows Operating System (OS). This included laptops, servers and ATM’s. A new core switch was added to our internal network to segment traffic and allow for quicker access to data. Both the hardware and software of our document imaging system was upgraded, including a new security feature to allow for integration into Microsoft’s Active Directory, eliminating the need for users to have an additional user ID and password. FRANKLIN FINANCIAL SERVICES CORPORATION / 3 In July, we were the first financial institution in our market to introduce the EquityAdvantage Card, a MasterCard Debit Card that enables customers to access their Home Equity Line of Credit. We are delighted with the reception that this product has received. As I reported in last year’s Shareholder Letter, in late 2013, we embarked on a comprehensive study of our community office network as well as “self-service” delivery channels, including ATM’s, Mobile Banking and Internet Banking, with the objective of increasing market penetration and profitability. As a result of this analysis, we concluded that four of our community offices did not have the market potential to achieve the desired level of profitability. Accordingly, the Hanover Street Office was closed in January, 2014. In October, 2014, we announced the consolidation of our St. Thomas Office into our West Side Office and the consolidation of our Penns Village and Warfordsburg Community Offices into our McConnellsburg Office. These consolidations were effective January 21, 2015 and are projected to result in a reduction in Operating Expenses of approximately $500,000 per year. Further, we identified another group of community offices which have not achieved a desired level of profitability. We are currently developing specific marketing plans with measurable financial objectives over a specified time horizon for each of these offices. We have also created a five-year plan for the development of new or transformed community offices which are more fully integrated with our “self-service” delivery channels. The first such transformation will be at our Waynesboro Office, which was built in the 1960’s. With the forthcoming acquisition of Susquehanna Bancshares by BB&T, we are seeing significantly increased opportunities in this market. In late 2014, Matt Weaver joined our Management Group as Marketing and Corporate Communications Manager. Matt is a native of Sharpsburg, Maryland, and brings to us more than 20 years of financial services marketing with a bank, a national Certified Public Accounting firm, and an Advertising Agency. He is responsible for the development and implementation of our overall branding, marketing and communications strategies. During 2015, we will be focusing on several initiatives to help combat potential fraudulent activity on customer accounts. This will include a more robust system that will monitor debit card activity as well as a system to monitor activity associated with Bill Pay and Franklin Busine$$Link transactions. Because of the recent increase in “merchant compromises,” we will also be introducing a new “chip” debit card that utilizes EMV technology to better secure debit card transactions. I’d like to recognize Chuck Bender and Steve Patterson, who retired from the Franklin Financial Services and F&M Trust Boards at year end, after 33 and 16 years, respectively. We have included in this Annual Report a special section highlighting Chuck and Steve’s years of service. Their insight, wisdom and support will be missed. Tricia Lacy and Greg Duffey have been appointed to the Board of Directors of Franklin Financial Services Corporation and F&M Trust as Class B Directors, with a term expiring in 2016. Tricia is President of the Beistle Company, a manufacturer of decorations and party goods based in Shippensburg. Greg is a partner in Craig, Friedly, Potter & Moore Insurance, an independent agency based in Waynesboro. The appointment of Tricia and Greg reflects our continued commitment to finding dedicated community leaders and advocates to help guide our company. We anticipate that we will see a continuation of the low interest rate environment in 2015 coupled with intense competition for quality loans and additional regulation. Your continued support as Franklin Financial shareholders is very much appreciated. Sincerely, William E. Snell, Jr. President & CEO 4 / 2014 ANNUAL REPORT FINANCIAL STRENGTH AND STABILIT Y TOTAL RETURN PERFORMANCE FRANKLIN FINANCIAL SERVICES CORPORATION NASDAQ COMPOSITE SNL NORTH EAST OTC-BB & PINK BLANKS 200 150 100 100 119 118 109 50 ‘09 ‘10 117 107 86 ‘11 222 174 166 193 144 131 138 122 103 ‘12 ‘13 ‘14 NET INCOME (as dollars in millions) NET INCOME (as dollars in millions) REGULAR CASH DIVIDENDS PAID (as dollars per share) REGULAR CASH DIVIDENDS PAID (as dollars per share) 7.61 6.57 8.40 7.61 6.23 5.37 10 8 6.57 6 8.40 6.23 5.37 ‘10 ‘11 ‘12 ‘13 ‘14 ‘10 ‘11 4 2 0 ‘12 ‘13 ‘14 ROE (as precentage values) ROE (as precentage values) 10 8 6 4 2 0 12 10 8 6 4 2 0 1.08 1.08 0.68 1.08 1.2 1.08 1.0 0.68 0.78 0.68 0.8 0.78 0.68 0.6 0.4 0.2 ‘10 ‘11 ‘12 ‘13 ‘14 ‘10 ‘11 0.0 ‘12 ‘13 ‘14 ROA (as precentage values) ROA (as precentage values) 1.2 1.0 0.8 0.6 0.4 0.2 0.0 1.0 0.8 0.6 0.4 0.2 0.0 ROE TANGIBLE ROE ROE TANGIBLE ROE ROA TANGIBLE ROA ROA TANGIBLE ROA 0.78 0.82 0.66 0.78 0.83 0.87 0.82 10 0.66 0.83 0.87 0.70 0.610.64 0.51 0.55 0.610.64 0.51 0.55 0.82 0.78 0.70 0.66 0.87 0.83 0.82 0.78 0.87 0.83 0.64 0.61 0.55 0.51 0.70 0.66 0.64 0.61 0.6 0.55 0.51 12 0.70 8 6 4 2 0 ‘10 ‘11 ‘12 ‘13 ‘14 ‘10 ‘11 ‘12 ‘13 ‘14 ‘10 ‘11 ‘12 ‘13 ‘14 ‘10 ‘11 ‘13 ‘14 1.0 0.8 0.4 0.2 0.0 ‘12 TOTAL ASSETS (as dollars in millions) 952 990 1,027 1,001 985 ‘10 ‘11 ‘12 ‘13 ‘14 1200 1000 800 600 400 200 0 FRANKLIN FINANCIAL SERVICES CORPORATION / 5 NET LOANS (as dollars in millions) TOTAL DEPOSITS AND REPOS (as dollars in millions) TOTAL ASSETS (as dollars in millions) 800 700 600 500 400 300 200 100 ‘14 0 740 757 743 714 717 NET INCOME (as dollars in millions) 890 870 917 785 841 10 8.40 7.61 6.57 6.23 5.37 ‘10 ‘11 ‘12 ‘13 ‘14 ‘10 ‘10 ‘11 ‘12 ‘13 ‘14 8 6 4 2 0 ‘11 ‘12 ‘13 ‘14 NET LOANS (as dollars in millions) ROE (as precentage values) NET LOANS (as dollars in millions) TOTAL ASSETS (as dollars in millions) REGULAR CASH DIVIDENDS PAID (as dollars per share) 1000 800 952 1,001 1,027 990 985 1.08 1,027 1,001 1.08 985 0.68 1200 1000 952 600 990 400 200 0 0.78 0.68 ‘10 ‘11 ‘12 ‘13 ‘14 ‘10 ‘11 ‘10 ‘12 ‘11 ‘13 ‘12 ‘14 ‘13 ‘14 1200 1000 800 600 400 200 0 1.2 1.0 0.8 0.6 0.4 0.2 0.0 800 600 400 200 0 ROE TANGIBLE ROE 0.78 0.82 0.66 0.70 0.610.64 0.51 0.55 717 714 ROA (as precentage values) 800 ROA 700 TANGIBLE ROA 740 757 743 0.83 740 0.87 12 757 10 743 717 714 800 700 600 500 400 600 500 0.82 400 0.78 300 200 100 ‘14 0 8 6 4 2 0 ‘10 ‘11 ‘12 ‘13 300 ‘14 ‘11 ‘12 ‘13 ‘14 200 100 ‘14 0 TOTAL DEPOSITS AND REPOS (as dollars in millions) TOTAL DEPOSITS AND REPOS (as dollars in millions) 917 870 890 841 785 917 870 0.87 0.83 1.0 841 0.8 785 890 0.70 0.66 0.64 0.61 0.55 0.51 0.6 0.4 0.2 ‘10 ‘11 ‘12 ‘13 ‘14 1000 800 600 400 200 0 1000 800 600 400 200 0 ‘10 ‘11 ‘12 ‘13 ‘14 ‘10 ‘10 ‘11 ‘12 ‘13 ‘14 ‘10 ‘11 0.0 ‘12 ‘13 ‘14 6 / 2014 ANNUAL REPORT FFSC BOARD OF DIRECTORS FFSC Board of Directors G. Warren Elliott President, Cardinal Crossing, Inc., Former Franklin County Commissioner Daniel J. Fisher President and Chief Executive Officer, D.L. Martin Company Stanley J. Kerlin, Esq. Attorney, Law Offices of Stanley J. Kerlin, LLC Donald H. Mowery President, R.S. Mowery & Sons, Inc. Stephen E. Patterson, Esq. Principal, Salzmann Hughes P.C. Martha B. Walker, Esq. Partner, Walker, Connor & Spang, LLC William E. Snell, Jr. President and Chief Executive Officer, F&M Trust Donald A. Fry President, Cumberland Valley Rental and Towne Cleaners, ANDOCO, Inc. Charles S. Bender II Retired, F&M Trust Executive Vice President Martin R. Brown President, M.R. Brown Funeral Home, Inc. Allan E. Jennings, Jr. President, Jennings Chevrolet, Buick, GMC, Inc. Richard E. Jordan III Vice President, Smith Land & Improvement Corp. FFSC Officers G. Warren Elliott Chairman of the Board Mark R. Hollar Treasurer and Chief Financial Officer William E. Snell, Jr. President and Chief Executive Officer Joyce A. Riley Assistant Corporate Secretary Franklin Financial Service Corporation Board of Directors, front row (left to right): Donald A. Fry, Charles S. Bender II, G. Warren Elliott, William E. Snell Jr, Martha B. Walker, and Daniel J. Fisher: back row (left to right): Richard E. Jordan III, Donald H. Mowery, Allen E. Jennings Jr, Martin R. Brown, Stephen E. Patterson, and Stanley J. Kerlin FRANKLIN FINANCIAL SERVICES CORPORATION / 7 STEPHEN E. PATTERSON (Chairman of the Asset and Liability Committee; Executive; Nominating and Corporate Governance; and Trust Committees) Mr. Stephen E. Patterson is stepping down from the Franklin Financial and F&M Trust Boards of Directors after 17 years. He has been an invaluable voice on the board and his business and management expertise, legal knowledge, and thoughtful insight will be missed. With more than 40 years’ experience, Mr. Patterson specializes in business law, real estate, and estate planning and administration. He is a principal and practicing attorney at Salzmann Hughes, P.C. and a graduate of Gettysburg College and the Wake Forest University School of Law. A revered member of our community, he has also served on the boards of numerous businesses and nonprofits. We appreciate Mr. Patterson’s contributions to F&M Trust and wish him success in his future endeavors. CHARLES S. BENDER, II (Chairman of the Audit Committee; Executive; Asset and Liability; Credit Risk Oversight; Executive; and Nominating and Corporate Governance Committees) After more than three decades of service, Mr. Charles S. Bender, II is vacating his position on the Franklin Financial and F&M Trust Boards of Directors. An F&M Trust employee since 1975, Mr. Bender has genuinely earned the admiration of his colleagues—particularly for his banking and regulatory knowledge. A graduate of Susquehanna University, he began his career as an FDIC Bank Examiner. At F&M Trust, he held many titles including Loan Portfolio Manager and Executive Vice President until retiring in 2002. A life-long area resident, Mr. Bender has also shared his talents with his neighbors, serving on the boards of local organizations and nonprofits. His contributions to F&M Trust run vast and deep. We wish him well in retirement. A TRIBUTE TO OUR RETIREES 8 / 2014 ANNUAL REPORT WE ARE A LOCAL COMMUNITY BANK FRESH BANKING TECHNOLOGY “ In 2014, we made considerable advancements in technology through competitive products like our EquityAdvantage Debit Card, iPad Mobile Banking App, and Mobile Xpress Deposit. F&M Trust has always put an emphasis on technology with a strategic approach. Over the years, we have introduced innovative products and services to enable an enhanced customer experience. Now, F&M Trust customers have on-the-spot access to their home equity funds easily and safely with the convenience of a debit card. EquityAdvantage Debit Card First-to-market among our local competitors, F&M Trust’s EquityAdvantage Debit Card provides customers with instant access to their home equity funds. As with a traditional debit card, account holders can access their funds at ATMs or any retailer that accepts MasterCard®. ” We developed this card to create a simple and safe way for homeowners to access their equity lines, when and where it was convenient for them. The EquityAdvantage Debit Card is provided when a customer opens a home equity line of credit and is equipped with advanced fraud protections, ensuring a customer’s hard-earned home equity is safeguarded. Whether they are swiping the card at the hardware store or using it to withdraw cash at the ATM, the EquityAdvantage Debit Card is a new resource our customers have been swift to embrace. Now you can make a deposit anytime, anywhere using your mobile device. Mobile Xpress Deposit is quick, safe, convenient, and simple. Our new Mobile Banking App for iPad is just one more way F&M Trust is meeting our customers where they want to be met. “ ” FRANKLIN FINANCIAL SERVICES CORPORATION / 9 iPad Mobile Banking App With the continued popularity of our Online Banking App, F&M Trust unveiled a Mobile Banking App in 2014 designed exclusively for the iPad. This new resource allows customers to view account balances and transactions, transfer funds, and pay bills on their iPads. F&M Trust understands that customers want convenience and flexibility in banking. Now, whether a customer prefers to bank on a laptop, mobile phone, or iPad, they can do so with our easy-to-use and secure applications. Mobile Xpress Deposit Mobile Xpress Deposit is another innovative product that F&M Trust customers have been quick to adopt—and in 2014, we introduced the service for small business customers with Better Business Checking. In just months, Mobile Xpress Deposit has become very popular among area small businesses—as most local community banks have yet to offer this technology. With Mobile Xpress Deposit, customers can simply take photos of endorsed checks with their smart phones, deposit them, and have access to those funds as soon as the next business day. Mobile Xpress Deposit was so popular among our personal banking customers, we couldn’t wait to introduce the service for our small business customers— and it’s been a hit. “ INNOVATIVE PRODUCTS ” 10 / 2014 ANNUAL REPORT GIVING A HELPING HAND StartFresh Checking: Offering Second Chances for Financial Success F&M Trust is devoted to its community—a part of the fabric of each neighborhood it serves. Many have fallen on hard times as a result of the economic downturn and it has been challenging for some to get back on their feet financially. To address the needs of these hard-working individuals and families, F&M Trust introduced StartFresh Checking. StartFresh provides a second chance to open a traditional bank account—even if an individual was previously turned down. Customers enjoy a low monthly fee, online banking access, unlimited check writing privileges, and more. StartFresh Checking has already helped many in our local community rebuild financial foundations and regain control of their financial futures. “ We are only as strong as our community and F&M Trust remains committed to addressing the needs of hard-working individuals and families. ” FRANKLIN FINANCIAL SERVICES CORPORATION / 11 SERVING OUR COMMUNITY Employees Share F&M Trust’s Commitment to Giving Back Whether it’s F&M Trust’s women—and men—walking in high heels for Women in Need or building homes for the Chambersburg Habitat for Humanity, our family of employees is dedicated to giving back. In 2014, almost 700 volunteers gave more than 1,500 hours for these community endeavors and others, including the financial literacy program at New Hope Ministries in Mechanicsburg. F&M Trust also demonstrated its commitment to the community in 2014 through generous pledges and donations, including: l $45,000 to the Waynesboro Area Business Education Community Foundation’s Capital Campaign. l $40,000 to the Alexander Hamilton Memorial Library in Waynesboro. l $5,000 to the American Literacy Corporation, and many more! ” 12 / 2014 ANNUAL REPORT OUR RESULTS ARE MORE THAN JUST NUMBERS “ Ron is always just a phone call or email away. His experience in pension administration was one of the biggest bonuses when we decided to use his expertise to manage our retirement needs at FSIP. –Joseph Spangler FSIP Chief Financial Officer and Human Resources Manager ” ROOTED IN HISTORY, COMMITTED TO THE FUTURE Flight Systems Industrial Products / Carlisle For more than 40 years, Flight Systems Industrial Products (FSIP) has been filling a niche in the electronics’ business, providing controls for a variety of vehicles and more. Although the company takes its name from its heritage in the aerospace industry, today FSIP provides new and remanufactured electronic products found on electric and gas powered vehicles, such as industrial trucks, golf carts, scrubber-sweepers, mining cars/ locomotives, electric boats, go-karts and ground support equipment. Committed to quality and service, FSIP boasts alliances with industry leaders, such as Curtis Instruments, Sevcon, InMotion, Navitas, and S.P.E. Elettronica Industriale, as well as many vehicle manufacturers. Joseph Spangler, FSIP Chief Financial Officer and Human Resources Manager, and Cheryl Collins, FSIP Benefits Administrator, look to F&M Trust to manage and administer the company’s 401(k) Plan. Since 2008, they’ve worked closely with Ron Froeschle, Employee Benefits Specialist, so they can offer the best in 401(k) services to their employees. Ron Froeschle with Joseph Spangler and Cheryl Collins of Flight Systems Matt has the ability to understand our “growing” needs and to help us charter the complex lending environment in today’s world. –Mark Toigo, Owner, Toigo Orchards Greenhouse “ ” FRANKLIN FINANCIAL SERVICES CORPORATION / 13 Toigo Orchards Greenhouse / Carlisle Mark Toigo is a second generation farmer who not only knows how to listen to his crops; he also knows how to listen to consumers. As a result, Mark and his wife Jaime have developed Toigo Orchards Greenhouse into a state-of-the-art production facility to meet consumers’ growing demand for local and organic food. Their Integrated Pest Management system leaves no chemical residue on their vegetables and their production facility allows all the natural resources used in production to filter back into the growing process. That focus on nutrition, sustainable food production, and environmental stewardship caught the eye of Whole Foods Markets, which has made Toigo Orchards Greenhouse a leading supplier for the Mid-Atlantic region. With plans for a new greenhouse, the Toigos turned to banker Matt Harshbarger, F&M Trust Commercial Services Relationship Manager. The Toigos appreciate Matt’s genuine interest in their business and use F&M Trust for commercial loans, checking, and payroll services. Diamond, Passion, Jaime, and Mark Toigo with Matt Harshbarger SUSTAINABLE FARM. SUSTAINABLE BUSINESS 14 / 2014 ANNUAL REPORT FOR FINANCIAL SUCCESS A CANVAS “ The staff of the bank know and understand my business and provide me with friendly and excellent customer service. They are very knowledgeable about their product lines and constantly exceed my expectations. –Susan Shaffer, Owner, Joyful Arts Studio Joyful Arts Studio / Greencastle Consumed by her corporate job, Susan Shaffer was discouraged she could not find time to work on her real passion—art. So, in 2012, she left her desk job to explore that passion and opened Joyful Arts Studio. A beautiful windowed store-front in Greencastle, Joyful Arts Studio offers a variety of lessons, including watercolor, acrylic, oil, mixed media, and jewelry design. The studio also offers children’s lessons and Corks and Canvas Painting Parties. Since opening its doors, Joyful Arts Studio has moved locations twice to accommodate growth. Class offerings have swelled from one or two to eight packed classes per week. ” Susan banks with F&M Trust for the personal service. She has checking and savings accounts with the bank and enjoys the weekly “check-ins” she receives from Kim Smith, Greencastle Community Office Manager, and Renee Preso, Southern Franklin County Market Manager. Kim Smith, Susan Shaffer of Joyful Arts, and Renee Preso FRANKLIN FINANCIAL SERVICES CORPORATION / 15 Twin Oaks Dairy, LLC / Mercersburg In 2001, beer distributors Jeff Reeder and Tim Strickler set out to find a new venture, and today that move has propelled them to the top of the region’s markets for natural and organic milk, as well as natural beef production. It began when the two teamed up with F&M Trust to purchase a small dairy farm in Emmitsburg, Maryland. After expanding there, Jeff and Tim partnered again with the bank to purchase a Mercersburg dairy operation. Soon after, they consolidated the successful dairy operations and transformed the Emmitsburg facility to a natural beef production operation. Today, Twin Oaks is not only a leading producer of natural beef and natural and organic milk for prominent natural food retailers; they are exploring new opportunities like veterinary health. Twin Oaks values its relationships with F&M Trust and looks to Bill Snell, President and CEO, and Brian Reidell, Cash Management Specialist, for flexible credit lines, sweep accounts, and direct deposit. “ We looked for a bank that wanted to be a financial partner with us. We have always found F&M to be genuinely interested in how our business works. –Jeff Reeder, Co-Founder, Twin Oaks Dairy, LLC ” Jeff Reeder of Twin Oaks, Brian Reidel, and Tim Strickler of Twin Oaks FINDING SUCCESS IN BEEF AND DAIRY FARMING, NATURALLY 16 / 2014 ANNUAL REPORT BAKING A FINANCIAL SUCCESS From humble beginnings in a Chambersburg garage, Martin’s Famous Pastry Shoppe, Inc., has ballooned to a multi-million dollar business that boasts the top branded hamburger bun in the U.S. Martin’s Famous Pastry Shoppe, Inc. / Chambersburg Lloyd and Lois Martin opened the small bakery in 1958, baking potato rolls based on a family recipe for Cloverleaf Rolls. Over the years, they grew their operation exponentially and with it a distribution base that reaches from Maine to Florida and beyond. Today, Martin’s continues as a family-operated company and attributes its success to a “legacy of extraordinary quality and service.” Martin’s relies on F&M Trust for many of its commercial lending and cash management needs. Just around the corner, Martin’s enjoys F&M Trust’s community focus and the dedicated service they receive at the Memorial Square Office from Bill Snell, President and Chief Executive Officer, Brian Reidell, Merchant Services Specialist, and Steve Butz, Commercial Services Market Manager. “ Our roots are in Chambersburg and having a business partner with a team of financial experts right here in our hometown has been an invaluable asset as we’ve grown. –Tony Martin CEO, Martin’s Famous Pastry Shoppe, Inc. ” Sherry Flair and Tony Martin of Martin’s Famous Pastry Shoppe with Steve Butz, Bill Snell, and Scott Heinzelman of Martin’s Famous Pastry Shoppe FRANKLIN FINANCIAL SERVICES CORPORATION / 17 COMMITTED TO CARING We value our relationship with F&M Trust and look forward to expanding that relationship in the future. –Hugh Davis CEO of Menno Haven “ ” Menno Haven, Inc. / Chambersburg When David H. Lehman and Norman Martin first envisioned a long-term Christian nursing facility for Chambersburg’s aging community in 1962, they probably didn’t foresee the overwhelming response or growth they would experience over the next five decades. What was once a 56-bed nursing center is now two regionally recognized retirement communities, a home care service, and an adult day service with more than 1,200 clients. Operated as a nonprofit, Menno Haven is guided by a commitment to “enhancing the quality of life through responsive Christian Human Services” and that commitment is evident in its respected reputation. For 25 years, Menno Haven has entrusted its banking needs to its community bank, F&M Trust. Working closely with Stacey Stenger, Data Operations, and Jim Probst, Investment and Trust Relationship Manager, Menno Haven uses F&M Trust’s checking and trust account services, as well as Franklin Business Link to simplify payroll and resident billing. Wayne Yeager and Hugh Davis of Menno Haven with Jim Probst 18 / 2014 ANNUAL REPORT SENIOR MANAGEMENT From Left to Right Lise M. Shehan, Esq. Senior Vice President, Investment & Trust Services Manager Mark R. Hollar Senior Vice President, Chief Financial Officer and Treasurer Matthew D. Weaver Senior Vice President, Marketing and Corporate Communications Manager Steven D. Butz Senior Vice President, Commercial Services Market Manager Patricia A. Hanks Senior Vice President, Retail Services Market Manager William E. Snell, Jr. President and Chief Executive Officer 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  FRANKLIN FINANCIAL OFFICERS Commercial Services Steven D. Butz Senior Vice President Commercial Services Market Manager Brian C. Reidell Vice President Commercial Services Cash Management and Merchant Services Specialist Kathleen M. Bloss Assistant Vice President Senior Credit Analyst Mary S. Cordell Vice President Commercial Services Relationship Manager Jeramy D. Culler Small Business Credit Analyst William R. Feist, IV Vice President Commercial Services Relationship Manager Eric J. Fleming Credit Department Manager Matthew D. Harshbarger Vice President Commercial Services Relationship Manager Jennifer D. Kaiser Commercial Services Support Specialist Danielle J. Meredith Credit Analyst Michael S. Metz Vice President Commercial Services Relationship Manager Philip A. Pantano Vice President Commercial Services Relationship Manager Katherine M. Powley Vice President Commercial Services Relationship Manager Maria S. Seabra Credit Analyst David P. Zimmerman Vice President Commercial Services Relationship Manager Executive William E. Snell, Jr. President and Chief Executive Officer Joyce A. Riley Assistant Corporate Secretary Facilities Barry L. Shetter Assistant Vice President Facilities Manager Finance Mark R. Hollar Senior Vice President Chief Financial Officer and Treasurer Kim A. Brant Asset-Liability Analyst Amy B. Herrold Controller Human Resources Karen K. Carmack, SPHR Senior Vice President Human Resources Manager Affirmative Action and HIPAA Privacy Officer FRANKLIN FINANCIAL SERVICES CORPORATION / 19 Levi L. Crouse Human Resources Officer Christina L. Yoder Training & Development Officer Investment & Trust Services Lise M. Shehan, Esq. Senior Vice President, Investment & Trust Services Manager Marissa Pinto Burt Investment & Trust Services Franklin and Fulton/Huntingdon County Market Manager Bruce A. Smith Investment & Trust Services Cumberland County Market Manager Matthew W. Berger Investment & Trust Services Relationship Manager Carole L. Crist Vice President Investment & Trust Services Relationship Manager Ronald R. Froeschle Vice President Employee Benefits Officer David C. Gority Vice President Investment & Trust Services Relationship Manager Avis M. Graham Assistant Vice President Investment & Trust Services Relationship Manager Heather C. Hershey Estate Administration Officer Warren M. Hurt Vice President Chief Investment Officer 20 / 2014 ANNUAL REPORT OFFICERS David Y. Luo Investment Portfolio Manager Robin L. Murray Trust Operations Manager Andrew M. Otto Investment & Trust Services Relationship Manager James P. Probst Vice President Investment & Trust Services Relationship Manager Diana L. Sponseller Vice President Investment & Trust Services Relationship Manager Dennis L. Wilson Vice President Investment & Trust Services Relationship Manager Marketing Matthew D. Weaver Senior Vice President, Marketing and Corporate Communications Manager Samantha J. Burke Marketing Officer Melissa D. Miller Marketing Officer Retail Services L. Kay Estep Assistant Vice President GO Club Coordinator Chambersburg Market Patricia A. Hanks Senior Vice President Retail Services Market Manager Patricia M. Murray Assistant Vice President Small Business Relationship Manager Lincoln Way East Lisa A. Hogue Financial Services Officer Manager Memorial Square Summer Franzoni Assistant Vice President Manager Kimberly S. McKenrick Assistant Vice President Assistant Financial Services Officer Michele A. Williams Financial Services Officer Assistant Manager Norland Avenue Shaun M. Young Assistant Vice President Manager Penn Hall/Menno Village Barbara A. Seylar Financial Services Officer Manager Philadelphia Avenue Eric L. Alleman Financial Services Officer Manager Orchard Park Dana L. Kaiser-Brechbeil Financial Services Officer Manager West Side Tina M. Bricker Financial Services Officer Manager Cumberland County Market Robert D. Weed Vice President Market Manager Christopher J. Fitting Small Business Relationship Manager Boiling Springs Jason S. Hutton Financial Services Officer Manager Camp Hill Michelle M. Farren Financial Services Officer Manager Mechanicsburg Cydnie Kelly Financial Services Officer Manager Shippensburg & Newville Ellen L. Ile Financial Services Officer Manager Ritner Highway I. Edward Bidelspach Assistant Vice President Manager So. Franklin County Market Renee L. Preso Vice President Market Manager Lynn A. Waite Assistant Vice President Small Business Relationship Manager FRANKLIN FINANCIAL SERVICES CORPORATION / 21 Rainbow D. Hopkins Security Officer William A. Pryor Vice President Credit Recovery Manager Matthew R. Shank Assistant Documentation Review Officer David W. Smith BSA/OFAC Analyst Sheryl R. Snider Assistant Compliance Officer Janet E. Stamper Consumer Documentation Review Officer Technology Services Ronald L. Cekovich Senior Vice President Technology Services Manager Matthew C. Clark Technology Services Officer Joshua S. Davis Assistant Technology Services Officer Patricia R. Ganoe Deposit/Data Operations Manager Pamela A. Johns Assistant Vice President Loan Servicing Manager Carol L. Morris Assistant Loan Servicing Manager OFFICERS Greencastle Kimberly M. Smith Financial Services Officer Manager Marion Vicky L. Carson Assistant Financial Services Officer Mont Alto Sarah S. Stansfield Financial Services Officer Manager Waynesboro Natasha J. Koons Financial Services Officer Manager Chastity L. Wantz Assistant Financial Services Officer Assistant Manager Fulton/Huntingdon County Market Joyce E. Ritchey Vice President Market Manager Donald L. Trego Assistant Vice President Small Business Relationship Manager McConnellsburg Mary E. Wright Financial Services Officer Manager Hustontown Bertha A. Peffer Financial Services Officer Manager Orbisonia Susanne M. House Financial Services Officer Manager Consumer Lending Jared M. Leonard Assistant Vice President Consumer and Residential Mortgage Lending Manager Cathy S. Goodhart Residential Mortgage Lending Officer Timothy A. Rarick Consumer Lending Officer David R. Winters Consumer Lending Officer Risk Management Robert K. Day Commercial Credit Recovery Officer Eric M. Follin Documentation Review Officer Steven R. Gormont Consumer Credit Recovery Officer Olaf R. Hasse Vice President Loan Portfolio Risk Management Officer Lorie M. Heckman Vice President Compliance Officer 22 / 2014 ANNUAL REPORT CONSOLIDATED FINANCIAL HIGHLIGHTS (dollars in thousands, except per share) Performance Measurements Net income Return on average assets Return on average equity Return on average tangible assets(1) Return on average tangible equity(1) Efficiency ratio (2) 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 value (3) Market value Market value/book value ratio Price/earnings multiple Balance Sheet Highlights Total assets Investment securities Loans, net Deposits and customer repurchase agreements Shareholders’ equity Safety and Soundness Risk-based capital ratio (Total) Leverage ratio (Tier 1) Common equity ratio Tangible common equity ratio(4) Nonperforming loans/gross loans Nonperforming assets/total assets Allowance for loan losses as a % of loans Net charge-offs/average loans Trust assets under management (fair value) (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 2014 2013 $ 8,402 $ 6,232 0.83% 8.44% 0.87% 9.72% 0.61% 6.72% 0.64% 7.86% 70.83% 72.01% 3.56% 3.09% 3.47% 3.98% 33.88% 45.09% $ 2.00 2.01 0.68 24.54 22.36 22.00 89.65% 11.00 $ 1.51 1.51 0.68 22.88 20.55 17.10 74.74% 11.32 $ 1,001,448 $ 984,587 171,751 717,420 890,260 103,521 159,674 713,711 869,558 95,388 15.49% 9.69% 10.34% 9.51% 1.74% 1.63% 1.25% 0.19% 14.24% 9.14% 9.69% 8.79% 3.49% 3.04% 1.34% 0.49% $ 605,796 $ 574,680 FRANKLIN FINANCIAL SERVICES CORPORATION / 23 SUMMARY OF SELECTED FINANCIAL DATA For the Year Ended December 31 (dollars in thousands, except per share) 2014 2013 2012 2011 2010 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 assets(1) Return on average tangible equity(1) Efficiency ratio (2) 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 value (3) Market value Market value/book value ratio Price/earnings multiple Balance Sheet Highlights Total assets Investment securities Loans, net Deposits and customer repurchase agreements Shareholders’ equity Safety and Soundness Risk-based capital ratio (Total) Leverage ratio (Tier 1) Common equity ratio Tangible common equity ratio(4) Nonperforming loans/gross loans Nonperforming assets/total assets Allowance for loan losses as a % of loans Net charge-offs/average loans Trust assets under management (fair value) $ 34,794 3,180 31,614 764 30,850 10,861 31,303 10,408 2,006 $ 36,042 4,378 $ 31,664 2,920 28,744 9,877 31,094 7,527 1,295 39,142 6,890 32,252 5,225 27,027 9,451 30,601 5,877 512 $ 41,791 9,154 $ 43,284 12,443 32,637 7,524 25,113 10,200 28,333 6,980 411 30,841 3,235 27,606 9,366 26,423 10,549 2,937 $ 8,402 $ 6,232 $ 5,365 $ 6,569 $ 7,612 0.83% 8.44% 0.87% 9.72% 70.83% 3.56% 3.09% 33.88% 2.00 2.01 0.68 24.54 22.36 22.00 89.65% 11.00 $ 0.61% 6.72% 0.64% 7.86% 72.01% 3.47% 3.98% 45.09% 1.51 1.51 0.68 22.88 20.55 17.10 74.74% 11.32 $ 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 $ 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 $ $ 1,001,448 171,751 717,420 890,260 103,521 $ 984,587 159,674 713,711 869,558 95,388 $ 1,027,363 133,328 743,200 916,649 91,634 $ 990,248 125,301 756,687 841,089 87,182 $ 951,889 117,616 739,841 785,495 82,639 15.49% 9.69% 10.34% 9.51% 1.74% 1.63% 1.25% 0.19% 14.24% 9.14% 9.69% 8.79% 3.49% 3.04% 1.34% 0.49% 12.60% 8.29% 8.92% 8.01% 4.90% 4.10% 1.38% 0.60% 12.14% 8.40% 8.80% 7.82% 2.94% 2.60% 1.27% 0.86% 11.73% 8.16% 8.68% 7.61% 3.68% 2.96% 1.18% 0.45% $ 605,796 $ 574,680 $ 520,434 $ 481,536 $ 490,420 24 / 2014 ANNUAL REPORT COMMUNITY OFFICE/ATM LOCATIONS Chambersburg Area Lincoln Way East 1712 Lincoln Way East, Chambersburg 264-9414 Memorial Square 20 South Main Street, Chambersburg 264-6116 Menno Village 2075 Scotland Avenue, Chambersburg 261-3697 Norland Avenue 870 Norland Avenue, Chambersburg 262-2085 Orchard Park 841 Wayne Avenue, Chambersburg 263-1801 Penn Hall 1425 Philadelphia Avenue, Chambersburg 261-3660 Philadelphia Avenue 2405 Philadelphia Avenue, Chambersburg 264-5122 West Side 1100 Lincoln Way West, Chambersburg 263-9168 Southern Franklin County Greencastle 518 N. Antrim Way, Greencastle 597-2384 Marion 5293 Main Street, Marion 375-2200 Mont Alto 8 Park Street, Mont Alto 749-3161 Waynesboro 200 East Main Street, Waynesboro 762-2188 Cumberland County Boiling Springs 3 East First Street, Boiling Springs 241-4131 Camp Hill 3907 Market Street, Camp Hill 731-9604 Carlisle Crossing 214A Westminster Drive, Carlisle 243-2215 Carlisle Plaza Drive-Up 700 East High Street, Carlisle 243-0416 Mechanicsburg 6375 Carlisle Pike, Mechanicsburg 697-0444 Newville 51 South High Street, Newville 776-2240 Ritner Highway 1901 Ritner Highway, Carlisle 960-1400 Shippensburg 13 Shippensburg Shopping Center, Shippensburg 530-2100 Fulton & Huntingdon County Hustontown 7781 Waterfall Road, Hustontown 987-3193 McConnellsburg 100 Lincoln Way East, McConnellsburg 485-3144 Orbisonia 18810 Sandy Ridge Station, Orbisonia 814/447-3104 Additional ATM Locations Ayr Town Center 368 South 2nd Street, McConnellsburg Fayetteville 4025 Lincoln Way East, Fayetteville Northgate Commons 1500 Northfield Drive, Chambersburg Penn National Clubhouse 3720 Club House Drive, Fayetteville Quincy Village 6596 Orphanage Road, Quincy Riverview Business Center 11734 Lenape Drive, Mount Union Shippensburg West End 9966 Molly Pitcher Highway, Shippensburg Waynesboro Market Place 11123 Buchanan Trail East, Waynesboro Zullinger 4884 Buchanan Trail East, Zullinger P. O. Box 6010 Chambersburg, PA 17201 888.264.6116 www.franklinfin.com 

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