Hello, and welcome to the annual meeting of shareholders of Franklin Financial Services Corporation. Please note that today's meeting is being recorded. During the meeting, we'll have a question and answer session. You can submit questions or comments at any time by clicking on the Message tab. It is now my pleasure to turn today's meeting over to G. Warren Elliott, Chairman of the Board of Franklin Financial Services Corporation. Mr. Elliott, the floor is yours.
Thank you very much. Good morning, everyone. As Chairman of the Board of Franklin Financial Services Corporation and as Chairman of this meeting, I hereby call this annual meeting of shareholders to order and appoint Amanda M. Ducey, Secretary of the company, as Secretary of the meeting and direct that she keep the minutes of the meeting. The Secretary of the company has filed proof that the proper notice of the meeting has been given and that a legal quorum is present in person or by proxy. The meeting is now therefore lawfully convened and ready to transact business. It's my pleasure this morning to introduce our Vice President of Loan Servicing for our invocation, Ms. Pam Johns. Pam.
Thank you and good morning, everyone. Take a moment of silence here as we just bow our heads to give thanks. Father, we thank you for this opportunity to come together as an organization to celebrate the successes and the accomplishments, to just recognize the efforts of the employees, our shareholders, our communities, and we thank you for the many blessings you have provided. Father, we've come through a year of continued challenges and newness of things that we've never experienced before. We thank you for being with us as we continue to thrive both personally and professionally. We recognize those who have lost loved ones, and we mourn with them and pray for your love and your peace and your comfort with them during this time of grief.
Father, as we come out of the season of Lent and Easter, we just remember to always be thankful for our risen Lord. Father, we all have a little of that doubting Thomas in us, and we just remember Jesus' words that, "Blessed are those who have seen and believed, and blessed are those who have not seen and yet still believe." Father, we just thank you for the continued blessings on this organization and those who direct it. We ask for your guidance as we follow through with this meeting today and that the decisions that are made are for the benefit of our company, our employees, and the communities that we serve. Father, we just ask all this in your precious Jesus' name. Amen.
Amen. Thank you, Pam. The minutes of the 2021 annual meeting are available for inspection by contacting the judge of election and may be examined by any shareholder following the meeting. In order to help you better understand the business of the company, where we have been, where we wanna go, our remarks today will include Forward-Looking Statements relating to anticipated financial performance, future operating results, business prospects, new products, and similar matters. These statements represent our best judgment based upon present circumstances and the information now available to us of what we think may occur in the future. Of course, it is possible that actual results may differ materially from those we envision today.
For a more complete discussion on the subject of forward-looking statements, including a list of some of the risk factors that might adversely affect operating results, I refer you to the section entitled Forward-Looking Statements, which appears in our annual report on Form 10-K as filed with the Securities and Exchange Commission. It's now my pleasure to introduce our board of directors and some of our key associates. From the board, of course, we have myself, G. Warren Elliott, as Chairman of the Board. We have our President and CEO, Tim G. Henry, who you will hear from later in the meeting. We have Marty Brown, Kevin Craig, Greg Duffy, Dan Fisher, Skip Jennings, Stanley J. Kerlin, Don Mallory, and Kim Zahn. We also have our legal associate, Nick Bybel, who's a partner in Bybel Rutledge LLP. We have Zoe Clayton, our assistant corporate secretary and judge of elections.
We have Sarah Dodkin from our CPA, Crowe. Good morning again. I've had the honor of serving on this board for 30 years now. Changes over that time period, of course, have been monumental. A quick look back, and it's hard to recognize a world without Google, YouTube, Twitter, or Alexa, let alone without cell phones, texting, emails, and the World Wide Web, which we are using today to conduct this meeting. Using those same 30-year-old goggles leads me to suggest that our bank and our board of directors have undergone similar transformation, the pace of which has accelerated over the course of the last several years, and 2021 was no exception.
As a result, from my current position as chair of the board, I believe that this company is currently in the best position for serious and significant growth that I have seen during my tenure. Some of you may ask why I would say that, and how can I substantiate it? Both are fair questions. First and foremost is the board itself. Without strong, engaged, energetic boards, companies can drift or live on past laurels like one exceptional year in earnings. When either of those occurs, a board may not adequately plan and prepare for the growth necessary to continue to secure their company's future. Such is not the case at Franklin Financial. To a person, we are a board that is fully aware of whom we represent, that being you, the shareholders. As shareholders, you have expectations.
We also recognize that we have obligations to both the communities in which we operate, as well as the employees that work here to deliver our services. With those precepts in mind, what does that look like in terms of board governance and functionality? It begins with the fact that your board members do not feel entitled to serving in that capacity. We understand that we are each elected to serve a three-year term. During that time, we will stand for an annual peer-to-peer evaluation. We will each need to apply for a new term at the conclusion of three years, and our attendance record and evaluations will be reviewed by the Nominating and Corporate Governance Committee for recommendation to the full board. There is no entitlement, no automatic renewal of a nomination. You work hard as a board member and you continue to earn a board seat. Period.
Like most banks, this has not always been the case, and I would like to recognize Director Dan Fisher, chair of the Nominating and Corporate Governance Committee, for the effort to create and oversee the process for review and evaluations. Too many banks have a combined position of chair of the board, CEO, and president. Most corporate governance advisory groups that focus on banks do not favor that structure, especially for a community bank. They recommend that functionally, no one person on the board be permitted to accumulate too much structural authority if you truly desire to be a high-performing bank. To these points, F&M Trust does not have the position of president and CEO combined with that of the board chair. Further, no one director chairs more than one functional standing committee, including myself.
I referenced high-performing banks, a group of banks that we are on the threshold of joining. We have set our sights on achieving that goal, and in order to do so, some other good governance best practices that are suggested are ones that we have adopted. For example, we have an executive session each quarter without staff or management present in order to openly discuss any individual matters. Fortunately, these sessions have been thoughtful and positive. However, they are an important component to have in place if and when they are truly needed should problems arise. Another tool that we have developed and deployed is both an overall board governance annual review as well as a peer-to-peer director evaluation that I previously referred to. We are in our sixth year of the governance survey and our third year of peer-to-peer director review.
We are among a group of less than 10% of banks nationwide that have embraced this highly recommended practice. We have had 100% participation in both efforts every year, and we have received very positive feedback regarding the overall process. Finally, we are one year removed from the board engaging in direct loan approval authority. This was not necessarily an easy decision, but it is one that has produced very good results. While we can continue to monitor credits, loan approvals, exceptions, and risk using either existing or newly developed tools, the additional time that has been gained is being used for strategic discussions, planning, and addressing new and often cumbersome regulatory issues among other pressing matters. In fact, in the near future, we will soon be using that time to develop a new three-year strategic plan for the bank.
Already, we have challenged management to strategically grow our company commercially and geographically, both organically and through acquisitions. We need to do this. We need to grow because if we have examined our company, we believe that growth, profitability, and shareholder value is what best serves our constituencies, being our shareholders, our communities, and our employees. We believe so because it will allow us to remain a community bank, albeit a high-performing community bank. Despite the challenges that COVID brought to our bank and to our communities, 2021 was a record year in terms of earnings. In light of that, I especially want to acknowledge our President and CEO, Tim Henry, our senior management team, and all of our employees for their efforts. This year, we will deploy some of those earnings to invest in long-term sustainable growth.
You'll hear more on that from Tim in a few moments. Let me conclude with this. Our board, both individually and collectively, is as engaged in the process of building a better and bigger bank as I have ever witnessed. We understand that moving too fast can create risk, yet failing to move or moving too slowly can have equally negative consequences that are even more perilous. We are taking some bold, calculated steps in 2022. Seeking efficiency, a large portion of our staff will be relocated under one roof. A new client and sales management platform will be implemented. We have set our sights on growing our Harrisburg market, as well as expanding into a new market in Washington County, Maryland. We are taking these and other strategic steps to ensure the viability and sustainability of your company as we seek to enhance stock value.
Your board clearly understands their role as it relates to you as a shareholder. You will see that management is on exactly the same page with us as you hear from our CFO and Executive Vice President of Finance, Mark Hollar, and then subsequently from our President and CEO, Tim Henry. Once again, thank you for your time, for your continued interest in, and your support of your company. Moving on to our first item of business. The board of directors has earlier chosen Zoe Clayton to serve as judge of election. She has filed her oath with the secretary of this meeting, and I hereby direct that it be made part of the minutes of this meeting.
An affidavit of mailing executed by William Valentin and notarized by a notary public qualified in the County of Middlesex in the state of New Jersey, dated March 23, 2022, has been placed in the corporation's minute book, affirming the mailing of the shareholder letter, proxy card, and proxy statement, as well as 10-K, on March 22, 2022 to the shareholders of record as of the record date of March 7, 2022. The first item of business is the election of directors. The three nominees receiving the highest number of votes will be elected. The board of directors has nominated and recommends the election of Martin R. Brown, Allan E. Jennings, Jr., Gregory A. Duffey. May I have a formal motion with respect to these nominees?
Mr. Chairman, I hereby move the nomination of the following persons for election as directors to Class B to serve for three-year terms. Martin R. Brown, Allan E. Jennings, Jr., Gregory A. Duffey.
Thank you, Mr. Weaver. Do I have a second? As Chairman of the board, I hit the pause button for a second because we are not hearing the folks that we're supposed to hear in terms of making motions in seconds. I'm gonna declare a three-minute recess. We've sent someone out of the room to check on the technology to see whether we're just not hearing them or whether the folks have dropped off the line. Okay. Now, we do have someone present in the meeting. I'm asking for a second for the nominations for directors. We have a motion made by Mr. Weaver with regards to Martin Brown, Allan Jennings, and Greg Duffey. Is there a second?
Mr. Chairman, I second these nominations.
Thank you, Mr. Berger. In accordance with Section 3.5 of the bylaws, advance notice must be given at the attention of any shareholder to make a motion from the floor. Since no such notice has been given, any other nominations would be out of order, and I hereby declare the nominations to be closed. That brings us to the second item of business. The second item of business is the say-on-pay vote. The Dodd-Frank Wall Street Reform and Consumer Protection Act requires that we provide our shareholders with the opportunity to cast a non-binding advisory vote to approve the compensation paid to our named executive officers as disclosed in our proxy statements for this meeting.
For the reasons discussed in the compensation discussion and analysis section of the proxy statement, we believe that our executive compensation programs align with our executive compensation philosophy, that it also supports its goals and provides an appropriate balance between risk and reward. Thus, the Board of Directors recommends that the shareholders vote for the approval of the compensation paid to our named executive officers as disclosed in the proxy statement. May I have a formal motion with respect to the say-on-pay vote?
Mr. Chairman, I hereby move the adoption of the following resolution. Resolve that the compensation of the named executive officers as disclosed in the company's proxy statement for the annual meeting held on April 26th, 2022, be hereby approved.
Thank you, Mr. Hurt. Do I have a second?
Mr. Chairman, I second the motion.
We have a motion and a second. Moving on to the third item of business. Thank you. The third item of business is the ratification of the selection of auditors. The Audit Committee of the board has selected Crowe as Franklin Financial's independent registered public accounting firm for 2022. May I have a formal motion to ratify the Audit Committee's selection of auditors?
Mr. Chairman, I hereby move the ratification of the selection of Crowe as Franklin Financial independent registered public accounting firm for 2022. Do I have a second?
Thank you for that. We have a motion. Is there a second?
Mr. Chairman, I second the motion.
Thank you for that. We have a motion and second regarding the third item of business. The polls are now open. Because no further business is on the agenda to come before this meeting, we will move on to voting. The polls are now open. If you have previously voted and do not wish to change your vote, there is no need for you to take any action at this time. It's now my pleasure to introduce our Vice President of Finance and our Chief Financial Officer, Mr. Mark Hollar. Mark.
Thank you, Warren. As we began the year of 2021, there was a feeling of uncertainty as to what lay ahead as the pandemic, entering its second year, continued to weigh heavily on your company, its customers, communities, and employees. Now, as we look back on 2021, we can say, as a company, we came through it better than we thought we might. Here are some balance sheet highlights for the year. For a second straight year, total assets reached a record high, increasing 16% to $1.8 billion. Investment portfolio grew by 33% as we actively tried to invest a significant inflow of deposits throughout the year. Net loans outstanding decreased by 1% as new loan production was completely offset by amortization payoffs and a $44 million decrease in Paycheck Protection Program loans, or PPP, during 2021.
Excluding the effect of the PPP loans, net loans would have grown approximately 4% or $35 million year-over-year. At the end of 2021, we held $8 million in PPP loans, which are expected to be forgiven and paid off in 2022. Consumer lending remained strong in home equity and mortgage products due to low interest rates. We recorded gains of $2.4 million on the sale of mortgages, an increase of $900,000 over 2020. Deposit balances increased by $230 million or 17% during the year, with all deposit categories except for time deposits showing an increase year-over-year. For the second straight year, deposits were positively affected by government stimulus programs provided to consumers, businesses, and municipalities.
With the continued growth of deposits and a slight decrease in loans, the loan to deposit ratio fell to 63% at year-end. However, adding the investment portfolio to this calculation shows the company had 96% of its deposits invested in earning assets during the year. Here are some financial highlights for the year. For 2021, Franklin Financial earned $19.6 million, a 53% or $6.8 million increase over earnings of $12.8 million in 2020. The most significant factors contributing to the record earnings of 2021 are a $2.7 million increase in net interest income of $44.7 million, inclusive of $3.3 million of interest and fees from PPP loans. PPP interest and fees in 2021 was approximately $400,000 more than recorded the prior year.
Net of these interest and fees from PPP, net interest income increased 5.9% from $39.1 million in 2020 to $41.4 million in 2021. In 2021, the provision for loan loss expense was a negative $2.1 million, reflecting the reversal in the allowance for loan loss from provision expense recorded in 2020 due to the economic uncertainty of the pandemic. The release of reserves in 2021 resulted in a positive swing in comparable earnings of $6.7 million from the prior year provision expense of $4.6 million.
Non-interest income increased $4.4 million, driven by an increase in investment and trust services of $1.1 million, an increase in the gain on sale of mortgages of $900,000, and a one-time gain of $1.8 million from the sale of the corporate headquarters in anticipation of a move to a new corporate headquarters and operations center in 2022. Partially offsetting the increase in non-interest income was an increase of $3.9 million in non-interest expense, driven by increases in incentive compensation, health insurance, data processing, and pension expenses. For key performance measures we saw in 2021, return on assets, or ROA, was 1.17% and return on equity was 13.20%.
As market interest rates remained low during the year, asset yields decreased 0.45%, while the cost of deposits fell 0.16%, resulting in a decrease in the net interest margin from 3.21% in 2020 to 2.8% in 2021. The cost of deposits for the year of 2021 was just 12 basis points. With regard to the safety and soundness of the company, the bank maintained strong capital ratios for the year and had an allowance for loan loss coverage ratio of 1.51% at year-end. At December 31, 2020, the bank had $16 million in COVID-related modified loans. At the end of 2021, all of these loans have come off modified status and are on a repayment schedule.
With regard to shareholder value, as a shareholder, your company earned $4.42 per share in 2021, and you received $1.25 in cash dividends per share as the company returned 28.2% of net income to shareholders in the form of cash dividends. The book value and tangible book value of a share of Franklin Financial stock each increased more than $2 per share during the year. The total return per share of Franklin Financial stock was approximately 27% in 2021. This morning, we released first quarter of 2022 earnings of $3 million, or $0.67 per share.
This compares to $3.7 million and $0.82 per share in the fourth quarter of 2021 and $4.8 million, or $1.09 per share for the first quarter of 2020. In comparison to the first quarter of 2021, net interest income was flat. Non-interest income was down in part due to $300,000 less in gains on the sale of mortgages and non-interest expenses up from increases in salary and benefits, data processing, and marketing expenses. That concludes my remarks. I will now turn it over to Tim Hery, our President and CEO, for his comments.
Thank you, Mark. Good morning, everyone. For Franklin Financial Services Corporation and F&M Trust, there's perhaps the opportunity to take a bow. Mark Hollar has just finished telling you about 2021, which we had record net income, saw strong growth in both the residential mortgage and investment and trust services, rolled out new checking services with a focus on digital and continued to grow our core deposits. All this while spending the year still working under the constraints of COVID and the related viruses that made life and work more difficult for both our customers and ourselves. Surely, these are good reasons to celebrate and congratulate ourselves on a good year for your company. We won't because 2021 is already in the past, and the highlights of the year I just discussed are perhaps not even the most important events of the last year.
Perhaps more important to our future were the decisions to move forward with the new headquarters that can support our future growth, to bring on new software that can help us move quickly and effectively into the digital age, and how we are transitioning retiring leadership and adding to our existing team of leaders who will help us grow into the future. We are planning to move into the new headquarters located on Nitterhouse Drive this summer. The building is substantially on budget and on time due to the combined efforts of our contractor, consultants, and the team at F&M. The move is critical to the future of the bank as we have simply run out of room at our current site.
I'm excited for the possibilities the new building opens up for us, and I'm also excited for the future of our current headquarters at 20 South Main Street in Chambersburg, as the building, under new ownership, will remain an important part of downtown Chambersburg. This summer, we'll also see the bank rolling out Salesforce to all bank team members. Working with Salesforce, a recognized worldwide business leader in customer management software, will help all of us at the bank better serve our customers by making it easier and more efficient to bring more of what the bank has to offer them. By engaging Salesforce, we are also developing a digital backbone that will allow us to continue to grow digitally as an organization, benefiting our internal teams and the customers they serve.
This year, we will see several of our senior management team retire after long and successful careers at the bank. Ron Cekovich, Joe Lieb, and Trish Hanks have served your company well for many years, and the contributions they have made to our collective success are immeasurable. Their professionalism and personalities will be sorely missed. We have been fortunate to be able to attract outstanding people, and Steve Poynott, who will be our new Chief Operating Officer, Lou Giustini, our new Chief Retail Services Officer, and David Long, our new Chief Technology Officer, who bring with them a wealth of experience and capabilities and will add to the senior management team that we now have.
In each situation, we are blessed to be able to have a lengthy transition period, which will allow for a smooth transition for the incoming senior managers, the bank as a whole, and for our customers. Last year, at this same meeting, I focused my comments around the theme of never stop moving forward. My comments were made with the backdrop of adversity that COVID had brought to bear on all of us and on the need to persevere no matter what the obstacles were. One such obstacle to moving forward can be your own success. By many measures, last year was a very successful year for your company, arguably the most successful year the company has ever had. It would be easy to suggest that we not change a thing, to keep everything the way it is today. After all, why mess with success?
If we allow that way of thinking to prevail, our success in the past would become our biggest obstacle to success in the future. We know we cannot stand still because the world around us does not stand still. COVID has been replaced with inflation. Flat interest rates have been replaced by quickly rising rates. Supply chain issues create challenges for all of us, and the list goes on. For us, there is no time to rest, and there is no time to resist making changes needed to remain relevant in a changing world. Yet in the midst of all this, some things will not change.
We will continue to adhere to our mission of bringing the right financial solutions to our customers, to our vision of remaining an independent community bank, and to our core values of integrity, teamwork, excellence, accountability, and concern for our shareholders, our customers, and the communities we serve. Meeting the demands of our mission and vision will take new ways of thinking, new ways of doing business, and a willingness to embrace change while holding firm to our core values. Your team at Franklin Financial Services Corporation and F&M Trust are capable of doing just that, and they've already demonstrated their abilities through the course of 2021 and now into 2022. Your board of directors has also had to embrace change in order to move forward. The board committees have changed. The board meeting agendas and what we talk about has also changed.
The board members continually educate themselves to the current financial services world that we work in. I appreciate and thank each board member for their dedication and support over the past year. Our long-term focus is set as defined by our mission and vision, and while there will be ups and downs along the way, I believe the future looks very bright for your company. Over the last six years, I have enjoyed and appreciated the opportunity to talk with many of you, and my door is always open to you to share your thoughts, questions, and concerns. I've learned from you, and our conversations have helped me be a more effective leader. Thank you for your support. I look forward to being able to continue to give you good reports on your company over the coming years. Thank you.
Thank you, Tim. Let's pause and see if anybody has any questions for you as we take a look out on the internet. So far, we're not seeing anything, but as Tim indicated, if you ever do have a question, it doesn't just have to occur at this meeting. Please feel free to contact Tim or a board member, and we'll get it addressed. Moving forward, the polls are closed, and we're now ready for the report of the judge of elections. I'd like to reintroduce Zoe Clayton and ask for her report. We have Ms. Clayton on her way to deliver the results. Ms. Clayton.
Mr. Chairman, having inspected the proxies and counted the ballots, I hereby report as Judge of Elections that, A, the three nominees have received the highest number of votes cast and have been elected to the board of directors for a three-year term. B, the compensation paid to the named executive officers has been approved by a majority of votes cast. C, the audit committee's selection of Crowe as Franklin Financial's independent registered public accounting firm for 2022 has been ratified by a majority of the votes cast.
Thank you, Ms. Clayton. With that said, I hereby declare that the following persons have been elected to the board of directors. Class B for a term of three years, Martin R. Brown, Allan E. Jennings, Jr., Gregory A. Duffey. Secondly, the compensation paid to our named executive officers has been approved. Finally, the audit committee's selection of Crowe as Franklin Financial's independent registered public accounting firm for 2022 has been ratified. With that, I would like to thank our Judge of Elections, Zoe Clayton. I'd also like to thank our Corporate Secretary, Amanda Ducey, for all her work in preparing for this meeting. Finally, I'd like to thank each one of you for your attendance. There being no further business to come before the meeting, I hereby declare the meeting to be adjourned. Thank you all. Have a great day.