Franklin Financial Reports Q3 2019 Earnings; Declares Dividend

CHAMBERSBURG, Pa., Oct. 29, 2019

A summary of operating results during the third quarter of 2019 are as follows:

• Net interest income increased $480,000 quarter-over-quarter and $1.6 million year-over-year due to the growth in interest income, which outpaced higher interest expense, as interest earning assets grew more than interest bearing liabilities.

• A negative provision for loan loss expense of $162,000 was recorded in the third quarter of 2019 compared to $0 in the second quarter of 2019 and an expense of $250,000 in the third quarter of 2018. The reversal was due to a decrease in total loans and therefore, a reduction in the allowance for loan losses was appropriate. The Bank's allowance for loan loss ratio was 1.30% at September 30, 2019.  For the first nine months of 2019, the provision for loan loss expense was $237,000 compared to $10.0 million the prior year. The provision for loan loss expense for the year-to-date period in 2018 was affected by the impairment charges on a loan participation initially reported in our current report on Form 8-K filed May 31, 2018.

• Noninterest income increased $358,000 quarter-over-quarter and $853,000 year-over-year. The quarterly increase was due in part to a $58,000 increase in asset management fees in the Bank's Investment and Trust Services department and a $107,000 recovery on an insurance claim. The year-over-year increase was due primarily from asset management fees ($297,000), gains from the sale of debt securities ($200,000), and an increase in fees from originating mortgages for the secondary market ($98,000).  Mortgage production for secondary market programs has doubled in 2019 versus 2018.

• Noninterest expense for the third quarter of 2019 increased $420,000 over the same quarter of 2018 (primarily from salary increases) and decreased $398,000 year-over-year. The year-to-date decrease was primarily from the $2.4 million provision expense for credit losses on off-balance sheet exposures in 2018 in connection with the participation, as well as a decrease in the FDIC insurance expense. The Bank utilized $150,000 of the small bank assessment credit. The FDIC credit is the result of the Deposit Insurance Fund reserve ratio reaching its objective of 1.38%. The decrease in noninterest expense was partially offset by increases in salaries and benefits expense as the number of full-time equivalent employees increased in 2019 and the cost of a building feasibility study.

Total assets at September 30, 2019 were $1.3 billion, a 9.0% increase when compared with total assets at September 30, 2018 and a 7.6% increase from the year-end 2018 balance. Significant balance sheet changes since December 31, 2018 include:

• Interest-bearing deposits in other banks increased from pay-offs in the loan portfolio and increased deposits.

• The loan portfolio decreased $35.9 million due primarily to several large commercial participation payoffs of approximately $22 million as the Bank continues to move away from purely loan transactions without business relationships.

• A lease liability and a right-of-use asset of $6.2 million were initially recognized in 2019.

• Deposits increased $77.0 million primarily in interest-bearing municipal deposits due to seasonal inflows.

• Shareholders' equity increased $7.7 million due primarily to an increase in retained earnings.

"We are pleased that, despite the negative headwinds of quickly shifting national interest rate policies and a negative yield curve, the bank demonstrated strong core earnings both for the third quarter and year-to-date, supplemented by some relatively minor one-time gains," said Timothy G. Henry, President and CEO. "In addition to our positive core performance we have stayed true to our long-term strategy of moving away from transactional loan business and maintaining our focus on relationship banking. In the short term this has resulted in decreased loan outstandings but the bank is repositioning its loan portfolio with high quality relationships which will be more meaningful to the bank and to our shareholders over the long run. I am also pleased with the performance of our residential mortgage and consumer lending teams that, through product innovation and the development of increased service levels, have seen growth in originations and fee income. The market consensus moving forward seems to be calling for more challenges in the interest rate environment and moderate loan demand. We are working to position ourselves to effectively meet those challenges by concentrating on loan quality, our fee income generating business lines and using technology for more efficient interfacing with our customers and reducing transaction costs."

On October 3, 2019, the Board of Directors of Franklin Financial Services Corporation declared a $0.30 per share regular quarterly cash dividend for the fourth quarter of 2019, which is an 11.1% increase over the $0.27 per share regular quarterly cash dividend for the fourth quarter of 2018. Total cash dividends paid during the four quarters of 2019 will be $1.17 per share compared to $1.05 per share in 2018, an increase of 11.4%. The regular quarterly cash dividend for the fourth quarter will be paid on November 27, 2019 to shareholders of record at the close of business on November 1, 2019.

Franklin Financial is the largest independent, locally owned and operated bank holding company headquartered in Franklin County with assets of more than $1.3 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.

Management considers subsequent events occurring after the balance sheet date for matters which may require adjustment to, or disclosure in, the consolidated financial statements.  The review period for subsequent events extends up to and including the filing date of a public company's consolidated financial statements when filed with the Securities and Exchange Commission ("SEC"). Accordingly, the financial information in this announcement is subject to change.