Franklin Financial Reports 2020 Q2 Earnings; Declares Dividend

CHAMBERSBURG, Pa., July 28, 2020

A summary of operating results for the second quarter of 2020 are as follows: 

• Net interest income was $10.3 million for the second quarter of 2020, compared to $10.6 million for the second quarter of 2019. The net interest margin was 3.26% for second quarter of 2020, compared to 3.74% for second quarter of 2019. Year-to-date net interest income was $20.6 million in 2020, compared to $20.9 million in 2019. However, the net interest margin fell from 3.80% in 2019 to 3.39% in 2020.
  
  
• Earning assets for year-to-date 2020 averaged $1.3 billion compared to $1.2 billion for the same period in 2019. The year-to-date average balance of the loan portfolio decreased from $977.8 million in 2019 to $962.3 million in 2020. The average balance of the commercial loan portfolio decreased $17.7 million from 2019 due to participation payoffs. The average balance of the investment portfolio increased $90.0 million as the Bank invested excess funds to counter the reduction in loans. The yield on earning assets fell by 0.66% from 4.41% in 2019 to 3.75% in 2020 as market rates decreased during the year. The decrease in the yield was the primary reason for the decline in interest income. Average interest-bearing deposits increased $69.0 million from 2019 to 2020. The cost of interest-bearing deposits fell from 0.78% in 2019 to 0.47% in 2020 as the Bank reduced deposit rates. The overall cost of funds fell from 0.65% in 2019 to 0.38% in 2020. As a result, interest expense on deposits declined $1.2 million helping to stabilize net interest income year over year.
  
  
• A provision for loan loss expense of $2.0 million was recorded for the second quarter of 2020 and $5.0 million year-to-date, as the economic effects of the COVID-19 pandemic caused several qualitative factors in the allowance for loan loss calculation to increase. With this provision expense, the allowance for loan loss ratio was 1.64% of outstanding loans. The provision expense for the second quarter of 2019 was $0 and was $399 thousand year-to-date 2019 with an allowance ratio of 1.28%. The allowance for loan loss ratio was 1.28% at December 31, 2019.
  
  
• Noninterest income decreased $284 thousand in the second quarter of 2020 over the same quarter of 2019. Fees on the sale of mortgages increased $147 thousand over the quarter but was more than offset by a decrease in deposit fees and security gains recognized in 2019, but not in 2020. Year-to-date, noninterest income increased $439 thousand over the same period in 2019, due to an $812 thousand gain on a bank-owned life insurance policy and increased mortgage fees but was partially offset by a decrease in deposit fees. Fees related to transactional activity (e.g. ATM, debit card) were negatively affected by stay-at-home orders and business shutdowns related to the pandemic.
  
  
• Noninterest expense for the second quarter of both 2020 and 2019 was $9.6 million. Year-to-date, noninterest expense increased $156 thousand over the same quarter of 2019. There were no significant changes in any expense category quarter-over-quarter or year-over-year. The pandemic held many expense items in check, such as business travel, education and community activities, but the Bank made a $100 thousand contribution to various social service and first responder organizations in the local community during the second quarter.
  
  
• The Corporation recorded an income tax benefit of $1.1 million in the second quarter of 2020. This benefit was available due to the passage of the Coronavirus Aid, Relief and Economic Security Act (the CARES Act) in March 2020. The CARES Act allows for net operating losses (NOL) incurred in 2018, 2019 and 2020 to be carried back to offset taxable income earned during the five-year period prior to the year in which the NOL was incurred. The Corporation incurred an NOL in 2018 that it is able to carryback to prior periods when the statutory rate for the Corporation was 34% as compared to the current rate of 21%.

Total assets at June 30, 2020 were $1.423 billion compared to $1.269 billion at December 31, 2019. Significant balance sheet changes since December 31, 2019 include: 

• Short-term interest-bearing deposits in other banks decreased $27.6 million since year-end as cash was reinvested into the investment portfolio, which increased $98.8 million.
  
  
• The loan portfolio increased $77.6 million during 2020 over year-end 2019. The portfolio increased in junior liens and lines of credit and commercial loans (from the Paycheck Protection Program (PPP) lending), partially offset by a decline in residential first lien mortgages. The Bank held $62.5 million of PPP loans at June 30, 2020 and recorded $233 thousand in interest income from PPP loan origination fees during the second quarter of 2020.
  
  
• Deposits increased $148.0 million from year-end 2019, primarily in checking and money management accounts.
  
  
• Shareholders' equity increased $7.3 million due primarily to an increase in accumulated other comprehensive income. Retained earnings increased only $2.2 million due to the lower earnings. The book value of the Corporation's common stock increased from $29.30 to $30.98 per share since year-end. The Corporation suspended activity in its stock repurchase plan on March 19, 2020.

"Despite the negative effects that COVID-19 has had on our communities and customers, and the additional provision for probable loan losses that was recorded, your company had a good second quarter. We recognize that the full economic effects of the pandemic may not be felt until late in the third quarter and into the fourth quarter, perhaps into 2021," said Timothy G. Henry, President and CEO. "Your company's management team is proactively working to prepare the company for the challenges ahead by building on our already strong capital base, growing significant fee-income producing lines of business to offset the net interest margin compression and controlling expenses. Our successes in 2019 and the first two quarters of 2020 allow us to enter this crisis in a position of strength, which enables us to provide ongoing assistance to our customers and communities. We will remain tightly focused on our response as the health and economic climate evolves."

On July 9, 2020, the Board of Directors of Franklin Financial Services Corporation declared a $0.30 per share regular quarterly cash dividend for the third quarter of 2020. This compares to a $0.30 per share regular cash dividend for the second quarter of 2020. The regular quarterly cash dividend for the third quarter of 2020 will be paid on August 26, 2020 to shareholders of record at the close of business on August 7, 2020.

Additional information on the Corporation's COVID-19 response and financial updates are available on our website at www.franklinfin.com/Presentations. 

Franklin Financial is the largest independent, locally owned and operated bank holding company headquartered in Franklin County with assets of more than $1.4 billion. Its wholly-owned subsidiary, F&M Trust, has twenty-two community banking locations in Franklin, Cumberland, Fulton and Huntingdon Counties. Franklin Financial stock is trading on the Nasdaq Stock Market under the symbol FRAF. Please visit our website for more information, www.franklinfin.com.