Franklin Financial Services Corp., the parent of F&M Trust Co. lost millions of dollars in the second quarter due to an alleged fraud involving one of its borrowers, Worley & Obetz Inc.
The Chambersburg-based bank reported a net loss of $5.2 million in this year’s second quarter, down from a profit of $3.3 million for the same period in 2017.
For the first six months of this year, Franklin Financial reported a net loss of $1.7 million, down from net income of $6.4 million for the first half of 2017.
Results were affected by nearly $10 million in impairment charges from a $14.4 million loan participation, the bank said.
The participation represented F&M’s portion of loans and off-balance sheet items to a single, large commercial lending relationship. Fulton Bank was the lead bank on the loan.
The impairment is believed to stem from fraudulent activities perpetrated by one or more executives and staff members of Worley & Obetz, which filed for bankruptcy in June. The Manheim-based energy company closed it doors abruptly amid news that it is being investigated for an alleged fraud related to a former executive.
Fulton Financial Corp. last week filed a complaint in U.S. Bankruptcy Court alleging, in part, that former Worley CEO Jeffrey Lyons received, directly or indirectly, $1 million in transfers from Worley & Obetz.
A spokesman for Franklin declined to say whether it would also be taking legal action over the Worley situation.
The bank increased its provision for loan losses to $9.3 million to replenish its allowance for loan losses, a reserve amount that banks set aside to cover bad loans. At the same time last year, the bank’s provision was $50,000.
Despite the bad loan, interest income increased for Franklin Financial. Net interest income rose to $10.1 million, while the bank’s net interest margin widened to 3.75 percent from 3.72 percent. Net interest margin reflects the spread between what a bank makes on loans and what it pays out on deposits.
Total deposits increased 5 percent to $1.1 billion for the second quarter of 2018 over the same period last year.
In addition, the bank posted a $2.4 million non-interest expense to establish a reserve for existing off-balance sheet commitments related to the loan participation.
“Our quarter and year-to-date earnings are obviously negatively impacted by the loss we sustained due to the fraudulent activity believed to be perpetuated by one or more executives and personnel employed by the borrower and its related entities,” Timothy G. Henry, president and CEO of Franklin Financial, said in a statement.
Total assets as of June 30 were $1.2 billion, a 3.4 percent increase when compared with total assets last June.
Franklin Financial subsidiary F&M Trust operates 22 branches throughout Pennsylvania.