Management's Discussion and Analysis of Results of Operations and Financial
Condition
For the Three and Six Months Ended June 30, 2021 and 2020
Forward Looking Statements
Certain statements appearing herein which are not historical in nature are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements refer to a future
period or periods, reflecting management's current views as to likely future
developments, and use words such as "may," "will," "expect," "believe,"
"estimate," "anticipate," or similar terms. Because forward-looking statements
involve certain risks, uncertainties and other factors over which the
Corporation has no direct control, actual results could differ materially from
those contemplated in such statements. These factors include (but are not
limited to) the following: general economic conditions, particularly with regard
to the negative impact of severe, wide-ranging and continuing disruptions caused
by, and resulting from, the spread of the coronavirus COVID-19 pandemic and
affects thereof, including governmental responses thereto, changes in interest
rates, changes in the Corporation's cost of funds, changes in government
monetary policy, changes in government regulation and taxation of financial
institutions, changes in the rate of inflation, changes in technology, the
intensification of competition within the Corporation's market area, and other
similar factors. We caution readers not to place undue reliance on these
forward-looking statements. They only reflect management's analysis as of this
date. The Corporation 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 2020 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 2020 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
$5.3 million ($1.19 per diluted share) for the second quarter of 2021 compared
to $3.1 million ($.71 per diluted share) for the same period in 2020, and $4.8
million ($1.09 per diluted share) for the first quarter of 2021. Net income for
year-to-date 2021 was $10.1 million ($2.28 per diluted share) compared to $4.8
million ($1.10 per diluted share) for the same six-month period in 2020.
A summary of operating results for the second quarter of 2021 and year-to-date
2021 are as follows:
?Net interest income was $10.8 million, inclusive of $746 thousand of interest
and fees from Paycheck Protection Program (PPP) loans, for the second quarter of
2021 compared to $10.8 million (including $884 thousand of PPP interest and
fees) for the first quarter of 2021 and $10.3 million for the second quarter of
2020. Year-to-date, net interest income was $21.7 million (including $1.6
million of PPP interest and fees) compared to $20.6 million for the same period
in 2020. The net interest margin decreased to 2.82% for the second quarter of
2021 from 3.26% for the same quarter of the prior year. On a year-to-date
comparison, the net interest margin was 2.92% for 2021 compared to 3.39% in
2020. The yield on earning assets decreased in both the second quarter of 2021
versus 2020 comparison (down 0.52%) and year-to-date comparison (down 0.64%) as
all asset classes had lower yields as market rates decreased over the year. The
year-to-date cost of interest-bearing deposits decreased from 0.47% in 2020 to
0.16% in 2021 while the cost of total deposits fell from 0.38% in 2020 to 0.13%
in 2021 as the Bank reduced deposit rates to offset lower asset yields.
?Earning assets for the second quarter of 2021 averaged $1.6 billion compared to
$1.3 billion for the same period in 2020, and year-to-date average earnings
assets were 23.2% higher than 2021. The 2021 average balance of the investment
portfolio increased $216.2 million over the same
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comparative period, primarily in the municipal bond portfolio. The average
balance of the loan portfolio increased from $962.3 million for the first six
months of 2020 to $1.0 billion in 2021. The average balance of the commercial
loan portfolio increased $32.9 million, primarily due to the addition of
Paycheck Protection Program (PPP) loans, which totaled $53.6 million at June
30, 2021, and averaged $57.2 million for the year-to-date period. The average
balance of deposits for the year increased $259.6 million over the
same period in 2020 with every deposit category increasing except for time
deposits.
?
?The provision for loan loss expense for the second quarter of 2021 was a
reversal of $1.1 million compared to an $800 thousand reversal in the first
quarter of 2021, and a provision expense of $2.0 million for the second quarter
of 2020. Year-to-date, the provision for loan loss expense was a reversal of
$1.9 million compared to $5.0 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 June
30, 2021, several qualitative factors were reduced 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 June 30, 2021, compared to 1.66% at December 31, 2020.
Excluding the PPP loans, the allowance for loan loss ratio was 1.59% at the end
of the second quarter of 2021 and 1.75% at year-end 2020.
?
?Noninterest income totaled $4.5 for the second quarter of 2021 compared to $4.2
million in the first quarter and $3.4 million for the comparable quarter of
2020. Year-to-date, noninterest income was $8.7 million, $1.4 million
greater than the prior year. The largest increases year-over-year were in
Investment and Trust Service fees ($507 thousand), gain on the sale of mortgages
($965 thousand) and debit card income ($236 thousand). These increases were
partially offset by a decrease of $812 thousand from a gain on a bank owned life
insurance policy recorded in 2020.
?
?Noninterest expense for the second quarter of 2021 was $10.1 million compared
to $10.2 million in the prior quarter and $9.6 million for the second quarter of
2020. Year-to-date, noninterest expense was $20.3 million compared to compared
to $19.2 million in 2020. Salaries and benefits increased $987 thousand, FDIC
insurance increased $234 thousand year-over-year, while nonservice pension
increased $219 thousand. Other expense decreased $596 thousand year-over-year.
In the second quarter of 2020, a $636 thousand allowance previously established
for an off-balance sheet liability was reversed with an offsetting amount
reversed from other expense, compared to a $250 thousand reversal in the prior
year-to-date period related to the same off-balance sheet liability.
?The effective tax rate for was 16.4% and 15.9% for the second quarter and
year-to-date period of 2021, respectively.
Total assets at June 30, 2021 were $1.678 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 $41.5 million and
the investment portfolio increased $115.3 million.
?
?The net loan portfolio decreased $8.9 million during 2021 over the year-end
2020 balance. The reduction occurred primarily in the commercial loan portfolio,
with a decrease in commercial real estate loans partially offset by an increase
in PPP loans. The Bank held $53.6 million in PPP loans at June 30, 2021, with
$1.9 million net deferred PPP fees remaining to be recognized. The Bank is
recognizing the PPP fees over the contractual life of the PPP loans (two years
or five years). As PPP
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loans are granted forgiveness by the SBA, fee recognition will accelerate.
?
?At June 30 2021, the Bank had $13.3 million modified loans compared to $67.6
million at year-end 2020. The current balance is comprised primarily of two
unrelated loans to hotels for $7.8 million, one loan for $4.7 million in rental
real estate and one loan in food service for $771 thousand. All of these loans
were making some form of modified payment as of June 30, 2021 and are currently
expected to return to a principal and interest payment schedule in the third
quarter of 2021.
?
?Deposits increased $136.6 million (10.1%) over year-end 2020, with all deposit
products showing an increase except time deposits. Based on current information
known to Management, the increases seem to stem from government stimulus
payments to consumers, businesses and municipalities, lower spending as economic
activity slowed during the pandemic and a sense of security offered by bank
deposits in uncertain economic times.
?
?Shareholders' equity increased $6.0 million from the end of 2020, due primarily
to an increase of $7.4 million in retained earnings partially offset by a
decrease of $2.3 million in accumulated other comprehensive income (AOCI) as
the fair value of the investment portfolio declined during the year. At June 30,
2021, the book value of the Corporation's common stock was $34.16 per share and
the tangible book value was $32.12 per share. In December 2020, an open market
repurchase plan was approved to repurchase 150,000 shares over a one-year period
and 23,155 shares have been repurchased under the plan as of June 30, 2021.
?
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Key performance ratios as of, or for the six months ended June 30, 2021 and 2020
and the year ended December 31, 2020 are listed below:
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FRANKLIN FINANCIAL SERVICES CORPORATION 
