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
For the three and nine months ended
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 Corporationreported consolidated earnings of $4.6 million( $1.05per diluted share) for the third quarter ended September 30, 2022, compared to $5.9 million( $1.31per diluted share) for the third quarter ended September 30, 2021, and $3.6 million( $.80per diluted share) for the second quarter of 2022. Year-to-date consolidated 2022 net income was $11.2 million( $2.52per diluted share) compared to $16.0 million( $3.60per 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 millionin 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 millionfor the third quarter of 2022 compared to $11.6 millionfor the third quarter of 2021. The third quarter of 2021 included $1.2 millionof Paycheck Protection Program (PPP) interest and fees compared to $0for the third quarter of 2022. Year-to-date, net interest income was $37.0 million(including $388 thousandof PPP interest and fees) compared to $33.3 millionfor the same period in 2021 (including $2.8 millionof 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 billioncompared to $1.6 billionfor the same period in 2021, and year-to-date average earnings assets increased 9% from $1.6 billionto $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 millionfor the first nine 29 -------------------------------------------------------------------------------- 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 millionin the average balance of PPP loans over the comparative periods. The average balance of deposits for the year increased $173.2 millionover 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 $0for the third quarter and a reversal of $1.9 millionfor 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 millionfor the third quarter of 2022 compared to $6.2 millionin the third quarter of 2021, a decline of $2.5 million(40.7%). This change was due primarily to a $346 thousanddecrease on the gain on sale of mortgages and a one-time $1.8 milliongain 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 millioncompared to $14.9 millionthe prior year. The change was primarily from a decrease of $1.2 millionin 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 millioncompared to $11.0 millionfor the third quarter of 2021, an increase of 11.1%. Year-to-date, noninterest expense was $35.5 millioncompared to $31.3 millionin 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 thousandoff-balance sheet liability during the second quarter of 2021. Total assets at September 30, 2022were $1.847 billioncompared to $1.774 billionat 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 milliondue to higher market interest rates during the nine month period. ? ?The net loan portfolio increased $49.8 millionduring 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 millionin non-real estate commercial loans. The Bank held $205 thousandin PPP loans at September 30, 2022, a decrease of $7.6 millionsince 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 millionsince the end of 2021. Retained earnings increased $7.0 million, after $4.3 millionin dividend payments. Accumulated other comprehensive income (AOCI) decreased by $54.6 millionas 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 $24.60per share and the tangible book value was $22.55per 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. ? 30
Key performance ratios as of or for the nine months ended
and 2021 and the year ended
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