SHAREHOLDER
LETTER
2021
DEAR SHAREHOLDERS,
2021 will be remembered as a pivotal
year for your company. We worked
through the second year of challenges
brought on by the pandemic to have
the strongest financial performance
in the company’s history.
At the same time, we developed, planned, and initiated actions to
help drive the company successfully into the future, performing as
an ever-growing, community-based, financial services company.
We continued to deal with the effects of the pandemic throughout
the year. As with other companies, hiring to fill vacancies and
support growth was difficult despite raising starting wages for
many positions. Customers were negatively impacted from time
to time with closed community office lobbies due to staffing levels
affected by Covid-19. Despite this adversity, the bank’s digital
capabilities continued to develop, and customers were able to
access the bank in new ways. During 2021, the company and its
customers learned how to embrace the future in ways that are
leading us forward in a positive direction.
In 2021, your company continued to grow its balance sheet as total
assets climbed 15.6% and shareholder equity grew by 8.2%. Growth
was fueled by the continued increase in deposits, which grew by
17.0% to $1.58 billion. By design, deposits grew in just about every
type of account except certificates of deposit. Deposit growth was
further enhanced by the successful rollout of the YourWay lineup of
checking account products that focus on digital access and value
returned to our customers. While deposit growth was strong, the
bank successfully managed its cost of deposits down to 12 basis
points across the portfolio. The bank continues to look for and
develop good deposit relationships. Strong core deposits are the
foundation of the bank and, even in times of tempered loan growth,
our relationships with our depositors are not taken for granted.
While new loan originations were strong in 2021, net loan
growth was moderated by the anticipated reduction in Paycheck
Protection Program (PPP) loans and the normal amortization of
the existing loans. The PPP loan program, which began shortly
after the Covid-19 outbreak in 2020, allowed for the forgiveness
of loans if the proceeds were used for directed purposes. Of the
$105.2 million in PPP loans generated, $97.4 million was forgiven
and taken off the books by the end of 2021, representing almost
10% of our December 31, 2020, net loan portfolio.
Importantly, loan quality improved during the year. Watch list loans
and non-accrual loans decreased, both in terms of gross loan and
percentage of portfolio. Loans with modified repayments due to
the economic effects of the pandemic were reduced to zero
with all previously modified loans returning to normal amortization.
Non-performing assets to total assets decreased to 42 basis
points, from 57 basis points in 2020, while the bank maintained
a healthy Allowance for Loan Loss of 1.51% and an Allowance to
Nonperforming Loans of 204.0%.
While net loans outstanding remained relatively flat over the
year, the bank was effective in making sure the growing deposit
levels did not sit idle as bank investments grew 33.5% to
$530 million. Bank investments were primarily in U.S. agency
mortgage-backed securities and municipal securities, though
some municipal securities were liquidated at the end of the year
to fund loan growth. Over time, we expect to see the level of
bank investments decrease as funds are moved from investments
to fund anticipated increases in loan volume.
Net income for the bank was a record $19.6 million. While that
number was helped by the sale of the bank’s headquarters at
20 South Main Street in Chambersburg (net gain on sale of
$1.8 million) and a $2.1 million reversal in loan losses, “normalized”
year-end results were still very strong. While interest income from
loans dipped and the net interest margin dropped to 2.88%, the
bottom line was helped by growth in interest and dividends on
investments as deposit balances were put to work; growth in fee
income earned from investment and trust business; increases in
gains on sale of originated residential mortgages; and fee income
from other sources that grew as the economy started to spring
back from the pandemic-led
shutdown of 2020.
Of note is the steady growth in
earnings from the Investment
& Trust Services and
Residential Mortgage
teams.
Continued on
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TIMOTHY G. HENRY
President & CEO
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> Continued from previous page
In 2021, the total assets under management eclipsed $1 billion,
partially helped by performance in the equity markets, but most
importantly aided by the new additions to “assets under
management” that have come to the bank from across its entire
footprint. As a result, fee income generated by Investment & Trust
Services increased by $1.07 million year-to-year (17.7%).
Residential mortgage originations topped $127 million for the
year, increasing year-to-year fee income from the sale of
mortgages by $894 thousand (58.2%).
Non-interest expenses were also up year to year, primarily in salaries
and employee benefits, data processing, ATM and debit card
processing, and pension costs. Increases in processing costs
were due primarily to the resurgence in the economy
and increased transaction activity. The bank met
market demand by increasing salaries and
wages and accrued anticipated earned
bonuses due to its strong performance.
The result of the company’s
performance was a year-to-year
increase of 8.2% in shareholder equity
after paying dividends of $1.25 per
share (up 4.1% from 2020). ROA and
ROE were 1.17% and 13.20%
respectively, up from .91% and 9.56%
in a pandemic-affected 2020. Capital
ratios remain very strong, and the
company continues to be considered
“well capitalized” by regulators.
a floor plan that meets current needs while being adaptable to
future needs. Renovations to the building began in August 2021
and we anticipate moving into the facility in the summer of 2022.
The bank has recognized changes in the trends of its customers,
some brought on by Covid-19 and others by the continued
development of new technologies. In response, the bank has
invested in new services to help customers understand their
finances and enhanced its website and mobile banking platform
to make banking easier. It is an exciting time to be in banking,
with many new, beneficial services becoming available.
With the continuing and growing dependence on online and mobile
services, cyber-security remains at the forefront of our
thoughts. We take this responsibility to safeguard
THE BANK
is growing, not just in
terms of assets, but in
its capabilities to adapt to
the changing times and
needs of our customers.
TIMOTHY G. HENRY
President & CEO
assets seriously, and we ask for and follow the
recommendations coming from federal and
state resources and our consultants. As is
the case across all industries, the battle
to protect information and assets from
those who would try to take them is
never-ending, and we continue to be
vigilant in our efforts to protect
ourselves and our customers.
New to your company in 2022 will be
Salesforce, an internationally known
company that provides customer
relationship management software and
Due in part to the underperformance of bank stocks
compared to other industry sectors in 2020 and 2021, we
fell out of the Russell 3000 stock index and experienced a related
decrease in the liquidity of our shares. Despite dropping out of this
index, the performance of our stock matched that of our peer group
of Mid-Atlantic banks between $1 billion and $2 billion in assets and
we saw our stock price rebound over the course of the year from
$27.03 (12/31/20) to $33.10 (12/31/21). The Board of Directors
approved a new stock repurchase plan in December 2021.
By many measures, 2021, a rebound year from 2020, was a very
successful year for your company. And as employees worked
diligently to serve our customer’s needs, they were also working
to prepare the company for the future.
The most visible of the changes is the new bank headquarters
on Nitterhouse Drive. Having run out of space at our current
headquarters, it was imperative to find a new building that could
accommodate growth. The facility on Nitterhouse Drive, a former
manufacturing plant in Chambersburg, allows the bank to design
expertise and, most importantly, an ever-
growing digital platform to help all areas of the
bank work better together for our customers’ benefit.
Integrating new software into the company will be a major
undertaking in 2022, but one that should bring benefits to everyone –
shareholders, customers, and employees – in the future.
Relatively new to the company in 2021 was the intentional focus on
DEI (Diversity, Equity, and Inclusion) and ESG (Environment, Social,
and Governance). These areas have gained ground in the national
conversation and in the conversation of many of our shareholders.
During the year, the company developed its DEI statement, which
was approved by the Board of Directors. We are taking intentional
steps toward improving our programs that will support our
statement. The company has established a team of people and
retained a consultant to help us 1) analyze where we currently are in
terms of matching up with ESG principles, 2) develop a format to
publicly communicate where we stand in regard to those principles,
and 3) begin work on improving our standards when it will help the
company’s overall performance. While the DEI and ESG concepts
may seem new, many of the practices in each are already ingrained
“
”
SHAREHOLDER
LETTER
2021
in your company and the new conversations will continue our
focus on improving.
In 2022, we will see changes on the bank’s Senior Management
team as Trish Hanks, Ron Cekovich, and Joe Lieb will be retiring.
All three have been extremely gracious in how they have handled
their retirements, allowing the bank time to find their replacements,
and then overlapping their time at the bank with the new senior
managers. Because of their grace, we will be able to execute a
smooth transition, and I am forever grateful to Trish, Ron, and Joe
for their valued contributions to your company over many years
and their willingness to help us transition to the future.
During the past year, your Board of Directors was very busy working
on the strategic direction for your company and board governance.
The results of their efforts have led to improved communication
with management and greater accountability between themselves
and to shareholders. In 2021, we also saw Directors Donald Fry and
Patricia Lacy step down from their positions on the Board. We are
grateful for the significant contributions that Tricia and Don made
to your company and its shareholders over the years they served.
We wish each of them well in their future endeavors.
EITC program, which funds private school scholarships for
children in pre-Kindergarten through 12th grade whose families
meet certain income criteria. Employees also gave generously of
their time, volunteering over 1,882 hours to 47 service organizations.
I look to the future with great excitement. The bank is growing,
not just in terms of assets, but in its capabilities to adapt to the
changing times and needs of our customers. We also will be
growing in terms of geography, as we open our first “out of state”
office in Hagerstown, Maryland, in 2022. We have a great team of
people who are energized by the changes and opportunities in front
of us. While there are challenges, I do not see anything that can
stop us from continuing to profitably grow the company to meet
the future needs of our customers and communities, and bring
value to you, our shareholders.
We appreciate your confidence in the Board and management,
and we thank you for your investment and continued support
of your company.
Sincerely yours,
Your company continued its community involvement in 2021,
donating $446 thousand to 248 local organizations and
providing $200 thousand to assist 251 students through the
Timothy G. Henry
President & CEO
Franklin Financial Services Corporation and F&M Trust
E
U
L
A
V
X
E
D
N
I
$350
$300
$250
$200
$150
$100
$50
$137.67
12/31/16
12/31/17
12/31/18
12/31/19
12/31/20
12/31/21
LEGEND
Frankin Financial Services Corp.
NASDAQ Composite Index
S&P US BMI Banks - Mid-Atlantic Region
Peer Group
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CONSOLIDATED
FINANCIAL HIGHLIGHTS
2021
(Dollars in thousands, except per share)
2021
2020
PERFORMANCE MEASUREMENTS
Net income
Return on average assets
Return on average equity
Net interest margin, fully tax equivalent
SHAREHOLDERS’ VALUE (PER COMMON SHARE)
Diluted earnings per share
Basic earnings per share
Regular cash dividends paid
Book value
Market value*
Market value/book value ratio
Price/earnings multiple year-to-date
Current quarter dividend yield**
Dividend payout ratio
BALANCE SHEET HIGHLIGHTS
Total assets
Investment and equity securities
Loans, net
Deposits
Shareholders’ equity
SAFETY AND SOUNDNESS
Risk-based capital ratio (Total)
Leverage ratio (Tier 1)
Common equity ratio (Tier 1)
Nonperforming loans/gross loans
Nonperforming assets/total assets
Allowance for loan loss/loans
Net loan recoveries/average loans
ASSETS UNDER MANAGEMENT
$
19,616
$
12,800
$
1.17%
13.20%
2.88%
4.42
4.44
1.25
35.36
33.10
93.61%
7.49
3.87%
28.16%
$
0.91%
9.56%
3.21%
2.93
2.94
1.20
33.07
27.03
81.74%
9.23
4.44%
40.83%
$ 1,773,806
$
1,535,038
530,292
983,746
1,584,359
157,065
18.41%
8.52%
15.20%
0.74%
0.42%
1.51%
0.02%
397,331
992,915
1,354,573
145,176
17.69%
8.69%
14.32%
0.87%
0.57%
1.66%
0.02%
Trust and Investment Services (fair value)
$
946,964
$
836,381
Held at third-party brokers (fair value)
58,052
112,624
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* Based on the closing price of FRAF as quoted on the Nasdaq Capital Market. **Annualized.