CONSOLIDATED FINANCIAL HIGHLIGHTS
SHAREHOLDER LETTER
( DO L L A R S I N T H O U S A N D S , E X C E P T P E R S H A R E )
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Dear Shareholders,
2020 will be remembered by many for the national, local, and
personal challenges of dealing with the coronavirus. While I wish,
for you our shareholders, that our stock had performed better I
will remember 2020 as a year when your company demonstrated
tremendous resolve, adaptability, and resilience to the benefit of
our customers and laid the groundwork for the bank to continue
its growth into the future.
We started 2020 with great promise coming off a record year for
your company. However, in mid-March we needed to make the
abrupt technological and process changes necessary for the
bank’s employees to be able to work from home and still keep
the bank running and serving our customers. Shortly thereafter
we needed to establish a new internal lending team to handle
Paycheck Protection Program (PPP) loan requests for the benefit
of our existing and new customers whose businesses were
being threatened by the pandemic related lock down. Again, our
PPP team had to work from home and rely on our technological
capabilities. And perhaps most challenging, while we thought
company in the event of adverse loan performance due to
the pandemic, was partially offset by a one-time reversal
to our income tax expense of $1.1 million due to a benefit
included in the Coronavirus Aid, Relief and Security Act
and $840 thousand in gains on bank-owned life insurance
policies. On the whole non-interest expenses remained
controlled with only a 2.7% net increase year over year.
Earnings from Investment & Trust Services also supported the
income statement as total assets under management grew
and the company saw a shift from assets held at third party
brokers to assets held and managed by the department.
Through the year the company took prudent steps to
strengthen its balance sheet. As noted, the company added
significantly to its loan loss reserves in both the first and
second quarters as the deteriorating economic conditions
of the time warranted. In August, your company issued
$20 million in subordinated debt on favorable terms that
further strengthened the company’s balance sheet.
in March the conditions brought on by the pandemic would
While commercial loan activity slowed in 2020 overall net
only last for 90 to 120 days, we operated through the remainder
loans grew 7.6% due primarily to new PPP loan outstandings.
of 2020 working under these pandemic driven conditions.
Commercial relationship managers worked tirelessly
throughout the year to support their customers’ needs
Despite these conditions, from a net income perspective, 2020
which became ever more pressing because of the economic
was the second-best year in the company’s history. Net income
uncertainty.
was $12.8 million and total assets climbed 21% to $1.54 billion.
Net interest income remained relatively flat compared to the
Deposits grew over 20% year-over-year in 2020. There
previous year despite the margin squeeze from the dramatic
are several factors for this growth, many of them tied to
downward shift in interest rates. The unusually large provision
the response to the pandemic, as some of the stimulus
for loan losses, taken as a conservative step to protect the
funding and PPP loan proceeds stayed in bank deposit
accounts and the customer base became more conservative
with their spending in response to the shutdowns.
Loan growth at the company could not match the growth in
deposits but the company was successful putting the excess
funds to work as investments grew from $188 million to $397
million. I expect that this growth in investments will be temporary
as the company would prefer to put these funds to work in
good quality loans that benefit our customers and community.
Overall, the balance sheet maintained strong liquidity and
improved its already strong capital ratios. Notably, we continue
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Timothy G. Henry
President and CEO
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PERFORMANCE MEASUREMENTSNet income $ 12,800 $ 16,115Return on average assets 0.91% 1.29%Return on average equity 9.56% 13.17%Net interest margin, fully tax-equivalent 3.21% 3.68%SHAREHOLDERS’ VALUE (PER COMMON SHARE)Diluted earnings per share $ 2.93 $ 3.67Basic earnings per share 2.94 3.68Regular cash dividends paid 1.20 1.17Book value 33.07 29.30Market value* 27.03 38.69Market value/book value ratio 81.74% 132.05%Price/earnings multiple year-to-date 9.23 10.54Current quarter dividend yield** 4.44% 3.10%Dividend payout ratio 40.83% 31.74%BALANCE SHEET HIGHLIGHTSTotal assets $ 1,535,038 $ 1,269,157Investment and equity securities 397,331 187,873Loans, net 992,915 922,609Deposits 1,354,573 1,125,392Shareholders’ equity 145,176 127,528SAFETY AND SOUNDNESSRisk-based capital ratio (total) 17.69% 16.08%Leverage ratio (tier one) 8.69% 9.72%Common equity ratio (tier one) 14.32% 14.82%Nonperforming loans/gross loans 0.87% 0.42%Nonperforming assets/total assets 0.57% 0.31%Allowance for loan loss/loans 1.66% 1.28%Net loans (recovered) charged-off/average loans -0.02% 0.07%ASSETS UNDER MANAGEMENTTrust and investment services (fair value) $ 836,381 $ 790,949Held at third-party brokers (fair value) 112,624 127,976 *Based on the closing price of FRAF as quoted on the Nasdaq Capital Market**Annualized to be a well-capitalized bank. Shareholder equity climbed
originations, from $47 million originated in 2019 to a record
world became mainstay, and their efforts on behalf of the
We appreciate our customers and thank them for giving
$17.6 million (13.8%) to $145 million due primarily to retained
$125 million, which lead to a year-over-year increase of
shareholders, customers and employees was noteworthy.
us the opportunity to serve them throughout the year.
earnings of $7.6 million and a $9.2 million increase in other
$1.1 million in gains on the sale of mortgages. While the
comprehensive income from unrealized gains in investments.
economic environment proved to be good for residential
Due to the bank’s operating performance and strong balance
sheet, your company was able to maintain its dividend
throughout 2020. This was an important offset to the significant
decline in market value of the company’s per share stock value
as the stocks of financial industry companies across the country
fell out of favor due to concerns related to the pandemic. It
has been good to see the stock price rally from a 52-week low
of $19.60 and we remain confident that as concerns of credit
deterioration for the industry decrease and margins stabilize
or improve, we will see improvement in our stock’s value.
Through the course of the year, I saw the employees of your
company repeatedly rise to the challenges of providing
excellent customer service during a pandemic. Our community
offices, despite having to close the lobbies for most of the
year, developed creative ways to provide great service to
our customers as evidenced by the growth of deposits and
the large number of home equity lines of credit that we
established. Despite often not being able to meet face to
face with customers, Commercial and Investment & Trust
relationship managers worked in unconventional ways
to bring the needed services, be it Paycheck Protection
Program loans or investment management, to our customers.
These extraordinary efforts were made by both internal
and customer facing departments throughout the bank.
Important steps for the future of the company were also
taken during 2020. In order to respond to the conditions
the pandemic imposed on us we accelerated our turn to
technology. Initially our technology services department
had to focus on setting up our employees to be able to
work securely and efficiently from home which they were
successfully able to do. Then we turned to technology to
improve our interface with our customers and increase the
services our mobile customers have available to them.
In 2021 we will be rolling out a suite of new products and
services that our customers can access either through mobile
or online connections. We were already headed in this direction
but because of the pandemic the timetable was sped up.
mortgages in 2020 the seeds of our success were actually
sown in 2019 as we revamped the systems and procedures
of our residential mortgage department and added to our
team of residential mortgage originators. These moves
positioned us to be able to take advantage of, and build
upon, the market opportunities that presented themselves
in 2020 and that we think will continue in 2021.
Also, in 2020, we set the plans in action to develop a new
Capital Region headquarters located north of Harrisburg
along I-81. The new regional headquarters opened in
February 2021 and brings together, in one location,
members of our Capital Region Commercial, Investment
& Trust and Retail teams who can work together to the
benefit of our customers. This is an important step in the
growth of our presence in a growing and vibrant market
for the bank and will benefit us well into the future.
We take our responsibilities of being a leader in the
communities we serve seriously. We always have.
We always will. Typically, this leadership shows in the
financial contributions to community organizations and in
our employees’ voluntary commitment of their time and talent
back into the community. During 2020 we saw the needs
of the communities we serve growing and we felt obligated
to assist. On top of our normal giving, we added a $100,000
donation that went to local social service and first responder
organizations to help them help the community at large.
During 2020 we welcomed Kevin W. Craig to your company’s
Board of Directors. Kevin brings a CPA and business owner
background to the Board and he is already making valuable
contributions to the Board.
In December Donald A. Fry announced his intentions to
retire form the Board effective with the annual shareholders
meeting in 2021. Don has been a member of the Board
since 1998 and the Board appreciates the contributions
he has made to the company over these many years.
Regarding your Board of Directors, they too adjusted quickly,
and not a Board or Committee meeting was cancelled or
In 2020 we saw a 166% increase in residential mortgage
missed. Operating and conducting business in the virtual
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2020 proved to be a good year for your company as we
We have been tested in 2020 and I feel we passed the test.
strengthened the balance sheet, recorded the second-best
I have great confidence in the team we have at Franklin
net income in company’s history and positioned the company
Financial Services Corporation and F&M Trust. Undoubtably
for future growth. As we move into 2021, we will continue
there will be more tests in 2021 brought on by the pandemic
to work under the conditions created by the pandemic.
and the changing needs of our customers but I believe we will
But, as we did in 2020, we will build upon our systems,
pass those tests too and continue to build the value of your
procedures and, most importantly, our people, to be able
company into the future.
to profitably grow our company to meet the future needs of
our customers and bring value to you our shareholders.
After this extraordinary year I also want to take a moment
to thank our customers. It was not an easy year for us but
it was not an easy year for our customers either. During the
past year, our customers responded well, with understanding
and at times humor, to the changes we needed to make
in order to protect them and our employees. Never before
in my career have I ever asked a customer to wear a mask
Thank you for your investment and continued support of
your company.
Sincerely,
into a bank building! But that is the kind of year it was, and
Timothy G. Henry
our customers stayed with us and rolled with the changes.
President and CEO
T OT A L R E T U R N P E R F O R M A N C E
( A S D O L L A R S)
L E G E N D
$134
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Index Value$250$200$150$100$5012/31/1512/31/1612/31/1712/31/1812/31/1912/31/20Franklin Financial Services Corp.NASDAQ Composite IndexSNL Mid-Atlantic Bank IndexPeer Group$300