Franklin Financial Reports 2022 Q3 Earnings; Declares Dividend

CHAMBERSBURG, Pa., Oct. 25, 2022

A summary of operating results for the third quarter of 2022 and year-to-date 2022 are as follows:

• Net interest income was $14.1 million for the third quarter of 2022 compared to $11.6 million for the third quarter of 2021. The third quarter of 2021 included $1.2 million of Paycheck Protection Program (PPP) interest and fees compared to $0 for the third quarter of 2022. Year-to-date, net interest income was $37.0 million (including $388 thousand of PPP interest and fees) compared to $33.3 million for the same period in 2021 (including $2.5 million of PPP interest and fees). The net interest margin increased to 3.28% for the third quarter of 2022 from 2.89% for the same quarter of the prior year. On a year-to-date comparison, the net interest margin was 2.96% for the first nine months of 2022 compared to 2.91% in 2021. The yield on earning assets increased in the third quarter 2022 versus 2021 comparison (up 0.44%) and year-over-year (up 0.06%). The year-to-date cost of interest-bearing deposits was 0.17% compared to 0.16% for 2021 while the cost of total deposits was 0.14% and 0.13% respectively in 2022 and 2021.
   
• Earning assets for the third quarter of 2022 averaged $1.7 billion compared to $1.6 billion for the same period in 2021, and year-to-date average earnings assets increased 9% from $1.6 billion to $1.7 billion. Year-to-date the average balance of interest-earning cash increased $72.2 million, and the investment portfolio increased $50.4 million. The average balance of the loan portfolio increased $16 million for the first nine months of 2022 compared to 2021. The growth in the year-to-date average balance of the loan portfolio was negatively affected by a decrease of $22.0 million in the average balance of PPP loans over the comparative periods. The average balance of deposits for the year increased $173.2 million over the same period in 2021 with every deposit category increasing except for time deposits which decreased by 19.4% over the period.
  
  
• There was no provision for loan loss expense for the third quarter and year-to-date periods of 2022. In 2021, the provision for loan loss expense was $0 for the third quarter and a reversal of $1.9 million for the first nine months of 2021. During 2020, the allowance for loan loss was increased through the provision expense due to increased economic uncertainty stemming from the pandemic. As these risks lessened in 2021, loans reserves were released via a reversal in the provision for loan loss. Based on loan growth in 2022 and stable credit quality indicators it was determined no additional provision expense was needed during the first nine months of the year. The allowance for loan loss ratio was 1.43% of gross loans as of September 30, 2022, compared to 1.51% at December 31, 2021.
  
  
• Noninterest income totaled $3.7 million for the third quarter of 2022 compared to $6.2 million in the third quarter of 2021, a decline of $2.5 million (40.7%). This change was due primarily to a $346 thousand decrease on the gain on sale of mortgages and a one-time $1.8 million gain on the sale of the Bank's prior headquarters building in the third quarter of 2021. Year-to-date, noninterest income decreased $3.3 million (21.9%) to $11.6 million compared to $14.9 million the prior year. The change was primarily from a decrease of $1.2 million in the gains on sale of mortgages and the previously mentioned gain on the sale of the Bank's prior headquarters building.
  
  
• Noninterest expense for the third quarter of 2022 was $12.2 million compared to $11.0 million for the third quarter of 2021, an increase of 11.1%. Year-to-date, noninterest expense was $35.5 million compared to $31.3 million in 2021, an increase of 13.5%. The categories contributing to this increase were: salaries and benefits ($2.6 million), data processing ($687 thousand), net occupancy ($402 thousand) and other expense ($492 thousand). Salaries and benefits increased primarily in employee compensation due to higher staffing levels, incentive compensation and health insurance costs. The increase in data processing is related to the implementation of a Customer Relationship Management system, while net occupancy increased from expenses for new leased space for community offices. Other expenses increased due to a reversal of $636 thousand off-balance sheet liability during the second quarter of 2021.

Total assets at September 30, 2022 were $1.847 billion compared to $1.774 billion at December 31, 2021.  Significant balance sheet changes since December 31, 2021, include:

• Short-term interest-earning deposits in other banks increased $21.2 million. The amortized cost basis of the investment portfolio increased $31.3 million; however, the fair value of the portfolio decreased by $37.8 million due to higher market interest rates during the nine-month period.
  
  
• The net loan portfolio increased $50.0 million during 2022 over the year-end 2021 balance. The largest increase occurred in the commercial real estate portfolio ($48.6 million) which was partially offset by a decrease of $11.1 million in non-real estate commercial loans. The Bank held $205 thousand in PPP loans at September 30, 2022, a decrease of $7.6 million since year-end 2021, and all PPP fees have been recognized.
  
  
• Deposits increased $120.6 million (7.6%) over year-end 2021, with all deposit products showing an increase except time deposits. Interest-bearing checking accounts showed the largest increase ($80.7 million – 15.8%), primarily in commercial and municipal accounts.
  
  
• Shareholders' equity decreased $48.9 million since the end of 2021. Retained earnings increased $11.2 million, net of $4.3 million in dividend payments. Accumulated other comprehensive income (AOCI) decreased by $54.6 million as the fair value of the investment portfolio declined during the year due to higher market interest rates. At September 30, 2022, the book value of the Corporation's common stock was $24.60 per share and the tangible book value was $22.55 per share. In December 2021, an open market repurchase plan was approved to repurchase 150,000 shares over a one-year period and 85,343 shares have been repurchased under the plan as of September 30, 2022. The Bank is considered to be well-capitalized under the regulatory guidance as of September 30, 2022.

"We are pleased to see the growth in both loans outstanding and our net interest margin (NIM) during the third quarter, that resulted in an increase in net income when looking at linked quarters. Deposit balances continued to grow, though we do expect to see the growth in deposits level off or even contract slightly," said Tim Henry, President and CEO. "As we move forward, we will be focused on our interest rate strategies to protect and enhance NIM as we expect to see deposit rates increase over the next four quarters. We are also focused on the effect that higher market interest rates are having on the accumulated other comprehensive income (AOCI) component of our balance sheet. Higher market interest rates have produced a negative AOCI balance which affects book capital. While the negative AOCI does not impact our regulatory capital measurements, and the Bank remains well capitalized under regulatory standards, we continue to monitor this position."

Henry continued, "The third quarter of 2022 was also noteworthy as the company completed its move to a new headquarters in Chambersburg and went live with Salesforce, both of which should bring about enhanced communication between team members to the ultimate benefit of our customers and shareholders."

On October 13, 2022, the Board of Directors of Franklin Financial Services Corporation declared a $0.32 per share regular quarterly cash dividend for the fourth quarter of 2022. This compares to a $0.32 per share regular cash dividend for the third quarter of 2022. The regular quarterly cash dividend for the fourth quarter of 2022 will be paid on November 28, 2022, to shareholders of record at the close of business on November 2, 2022.