Franklin Financial Reports 2021 Q3 Earnings; Declares Dividend

CHAMBERSBURG, Pa., Oct. 26, 2021

A summary of operating results for the third quarter of 2021 and year-to-date 2021 are as follows:

• Net interest income was $11.6 million, inclusive of $1.2 million of interest and fees from Paycheck Protection Program (PPP) loans, for the third quarter of 2021 compared to $10.8 million (including $865 thousand of interest and fees from the PPP program) for the second quarter of 2021 and $10.4 million for the third quarter of 2020. Year-to-date, net interest income was $33.3 million (including $2.8 million of PPP interest and fees) compared to $31.0 million for the same period in 2020. The net interest margin decreased to 2.89% for the third quarter of 2021 from 3.02% for the same quarter of the prior year. On a year-to-date comparison basis, the net interest margin was 2.91% for 2021 compared to 3.25% in 2020.  The yield on earning assets decreased in both the third quarter 2021 versus 2020 third quarter comparison (down 0.20%) and the year-over-year comparison (down 0.48%) as all asset classes had lower yields as market rates remained low during the year. The year-to-date cost of interest-bearing deposits decreased from 0.39% in 2020 to 0.16% in 2021 while the cost of total deposits decreased from 0.32% in 2020 to 0.13% in 2021 as the Bank reduced deposit rates to offset lower asset yields.
• Earning assets for the third quarter of 2021 averaged $1.6 billion compared to $1.4 billion for the same period in 2020, and 2021 year-to-date average earning assets were 20.62% greater than 2020. The 2021 average balance of the investment portfolio increased $214.1 million over the same year-to-date comparative period, primarily in the municipal bond portfolio. The average balance of the loan portfolio increased from $983.2 million for the first nine months of 2020 to $1.0 billion in 2021. The average balance of the commercial loan portfolio increased $12.9 million, due to the addition of PPP loans which totaled $21.7 million at September 30, 2021 and averaged $50.3 million for the year-to-date period. The average balance of deposits for the year increased $242.5 million (20.0%) over the same period in 2020 with every deposit category increasing except for time deposits.
• The provision for loan loss expense for the third quarter of 2021 was $0 compared to a $1.1 million reversal in the second quarter of 2021, and a provision expense of $375 thousand for the third quarter of 2020. Year-to-date, the provision for loan loss expense was a reversal of $1.9 million compared to a $5.4 million provision expense for the same period in 2020. The 2020 provision expense was the result of an increase in several qualitative factors in the allowance for loan loss calculation due to the projected economic effects and impact of the COVID-19 pandemic. As of September 30, 2021, several qualitative factors were reduced throughout the year reflecting a lower risk of loss in the loan portfolio, and the twenty-quarter historical average charge-off rate used in the calculation decreased, thereby resulting in a reversal of the provision for loan loss expense. The allowance for loan loss ratio was 1.51% of gross loans as of September 30, 2021, compared to 1.66% at December 31, 2020. Excluding the PPP loans, the allowance for loan loss ratio was 1.54% at the end of the third quarter of 2021 and 1.75% at year-end 2020.
• Noninterest income totaled $6.2 million for the third quarter of 2021 compared to $4.5 million in the second quarter of 2021 and $3.6 million for the comparable quarter of 2020. Year-to-date, noninterest income was $14.9 million compared to $10.9 million in 2020. The third quarter of 2021 and the year-to-date period were both boosted by a gain of $1.8 million on the sale of the Bank's headquarters building, as previously reported. Other significant year-to-date variances include increases in Investment and Trust Services fees ($813 thousand), gains on the sale of mortgages ($990 thousand) and debit card income ($295 thousand). These increases were partially offset by a decrease of $665 thousand from gains on bank owned life insurance.
• Noninterest expense for the third quarter of 2021 was $11.0 million compared to $10.0 million in the prior quarter and $9.6 million for the third quarter of 2020. Year-to-date, noninterest expense was $31.3 million in 2021 compared to $28.8 million in 2020. The following categories contributed to the year-over-year increase: salaries and benefits increased $1.5 million, FDIC insurance increased $287 thousand, data processing expense increased $346 thousand, and nonservice pension expense increased $219 thousand. Other expenses decreased $545 thousand due primarily to a $636 thousand expense reversal relating to the reversal of a previously established off-balance sheet liability reserve.
• The effective tax rate was 13.7% and 15.1% for the third quarter and year-to-date period of 2021, respectively.

Total assets at September 30, 2021 were $1.732 billion compared $1.535 billion at December 31, 2020. Significant balance sheet changes since December 31, 2020, include: 

• Short-term interest-bearing deposits in other banks increased $38.3 million and the investment portfolio increased $148.8 million.
• The net loan portfolio increased $9.9 million over the year-end 2020 balance. The increase occurred primarily in the residential real estate construction portfolio. Commercial loans were flat from year-end 2020 as new production was completely offset by a $30.5 million reduction in PPP loans. The Bank held $21.7 million in PPP loans at September 30, 2021 ($52.3 million at December 31, 2020) with $821 thousand of deferred PPP fees remaining to be recognized.
• As of September 30, 2021, the Bank had no loans under a COVID modified payment schedule and all loans previously on modified payment have returned to contractual payment schedules.
• Deposits increased $189.7 million (14.0%) over year-end 2020, with all deposit products showing an increase except time deposits. Money management accounts and interest-bearing checking products showed the largest increases over the prior year-end.
• Shareholders' equity increased $7.7 million from December 31, 2020, due primarily to an increase of $11.9 million in retained earnings during 2021 partially offset by a decrease of $5.4 million in accumulated other comprehensive income (AOCI) as the fair value of the investment portfolio declined during the year. At September 30, 2021, the book value of the Corporation's common stock was $35.24 per share and tangible book value was $32.46 per share. In December 2020, an open market repurchase plan was approved to repurchase 150,000 shares over a one-year period. As of September 30, 2021, 35,718 shares have been repurchased under the plan.

"The third quarter marked a continuation of our move back to 'normal' as we saw strong fee income generation in residential mortgage and Investment and Trust divisions and a clearer picture of our loan quality position. Earnings in the quarter were not affected by either a large provision or reversal of loan loss expense as loan quality and the economic conditions improved. By the end of the third quarter, the majority of the PPP loans we made in 2020 have been forgiven and our lending teams are focused on developing new, profitable business for the company", said Tim Henry, President and CEO. "The third quarter also marked the sale of our current company headquarters and the start of the renovations at our future headquarters located on Nitterhouse Drive in Chambersburg, a move that was dictated by the current and anticipated growth of the company."

On October 15, 2021, the Board of Directors of Franklin Financial Services Corporation declared a $0.32 per share regular quarterly cash dividend for the fourth quarter of 2021. The regular quarterly cash dividend for the fourth quarter of 2021 will be paid on November 24, 2021, to shareholders of record at the close of business on November 5, 2021. This compares to a $0.32 per share regular cash dividend for the third quarter of 2021 and $.30 per share for the fourth quarter of 2020.  

Additional information on the Corporation is available on our website at: www.franklinfin.com/Presentations.