Financial services

FRANKLIN FINANCIAL SERVICES CORP /PA/ Management’s Discussion and Analysis of Results of Operations and Financial Condition (Form 10-Q)

Management report and analysis of operating and financial results

                                   Condition

For the three and nine months ended September 30, 2022 and forward-looking statements 2021

Certain statements appearing herein that are not historical in nature are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements relate to one or more future periods, reflecting management’s current beliefs as to developments probable futures. , and use words such as “may”, “shall”, “expect”, “believe”, “estimate”, “anticipate”, or similar terms. Because forward-looking statements involve certain risks, uncertainties and other factors over which the Company has no direct control, actual results could differ materially from those contemplated by such statements. These factors include (but are not limited to) the following: general economic conditions, in particular with respect to the adverse impact of severe, widespread and ongoing disruptions caused by and resulting from the spread of the coronavirus pandemic COVID -19 and effects thereof, including government responses thereto, changes in inflation rates and the effects of inflation, changes in interest rates, changes in the cost of Company funds, changes in government monetary policy, changes in government regulation and taxation of financial institutions, changes in technology, increased competition in the market area of ​​the Company and other similar factors. We caution readers not to place undue reliance on these forward-looking statements. They only reflect management’s analysis at that date. The Company does not revise or update these forward-looking statements to reflect events or changed circumstances.

Critical accounting policies


Management has identified critical accounting policies for the Corporation.
These policies are particularly sensitive, requiring significant judgements,
estimates and assumptions to be made by Management. There were no changes to the
critical accounting policies disclosed in the 2021 Annual Report on Form 10-K in
regards to application or related judgments and estimates used. Please refer to
Item 7 of the Corporation's 2021 Annual Report on Form 10-K for a more detailed
disclosure of the critical accounting policies.
Results of Operations
Summary
Franklin Financial Services Corporation reported consolidated earnings of $4.6
million ($1.05 per diluted share) for the third quarter ended September 30,
2022, compared to $5.9 million ($1.31 per diluted share) for the third quarter
ended September 30, 2021, and $3.6 million ($.80 per diluted share) for the
second quarter of 2022. Year-to-date consolidated 2022 net income was $11.2
million ($2.52 per diluted share) compared to $16.0 million ($3.60 per diluted
share) for the same nine-month period in 2021. Net income for both the third
quarter of 2021 and the year-to-date period of 2021 was enhanced by a gain on
the sale of the Bank's prior headquarters building, and net income for the
year-to-date period of 2021 was enhanced by a reversal of $1.9 million in the
provision for loan losses.

A summary of operating results for the third quarter of 2022 and year-to-date 2022 is 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 $2.8 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
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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 expense 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 $49.8 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 $7.0 million, after $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.

?
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Key performance ratios as of or for the nine months ended September 30, 2022
and 2021 and the year ended December 31, 2021 are listed below:

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