10-K: Franklin Financial Services Reports Lower 2024 Earnings Amidst Rising Interest Expenses

Franklin Financial Services Corporation reports a decrease in net income for 2024, primarily due to increased interest expenses and a loss on the sale of securities, despite growth in net interest income and total assets.

Summary

• Franklin Financial Services Corporation's consolidated earnings decreased to $11.1 million ($2.51 per diluted share) in 2024 from $13.6 million ($3.10 per diluted share) in 2023.
• Net interest income increased by 7.2% to $57.5 million in 2024, compared to $53.6 million in 2023.
• The net interest margin decreased from 3.31% in 2023 to 2.95% in 2024, as the cost of interest-bearing liabilities increased more than the yield on earning assets.
• The provision for credit losses on loans decreased to $2.0 million in 2024 from $2.6 million in 2023, with the ACL ratio at 1.26% as of December 31, 2024.
• Noninterest income decreased to $13.7 million in 2024 from $14.9 million in 2023, primarily due to a loss on the sale of securities.
• Noninterest expense increased to $55.9 million in 2024 from $50.0 million in 2023, driven by increases in salaries and benefits, data processing expenses, and FDIC premiums.
• Total assets increased by 19.7% to $2.198 billion at December 31, 2024, from $1.836 billion at December 31, 2023.
• Deposits increased by $277.7 million to $1.816 billion at year-end 2024.
• Shareholders' equity increased by $12.6 million to $144.7 million at December 31, 2024.
• An open market repurchase plan was approved in January 2025 to repurchase 150,000 shares through December 31, 2025.

Sentiment

Score: 5

Explanation: The document presents a mixed picture. While there is growth in assets and deposits, the decrease in net income and net interest margin suggests challenges. The outlook is cautiously optimistic.

Positives

• Net interest income increased by 7.2% to $57.5 million.
• Total assets increased by 19.7% to $2.198 billion.
• Deposits increased by $277.7 million to $1.816 billion.
• The bank is considered well-capitalized under regulatory guidance.
• The company donated over $591 thousand to 325 organizations in the community and funded 392 scholarships for $227 thousand.
• Employees volunteered 2,132 hours to 90 different service organizations.

Negatives

• Net income decreased from $13.6 million in 2023 to $11.1 million in 2024.
• The net interest margin decreased from 3.31% to 2.95%.
• Noninterest income decreased to $13.7 million from $14.9 million due to losses on the sale of securities.
• Noninterest expense increased by $5.9 million, primarily due to salaries, data processing, and FDIC insurance.

Risks

• Real estate and commercial loans are a significant portion of the loan portfolio, making the bank vulnerable to economic downturns and market volatility.
• The allowance for credit losses may be insufficient to absorb inherent losses in the loan portfolio.
• Strong competition in the bank's primary market areas could adversely affect its financial condition.
• Changes in interest rates could have an adverse impact on the results of operations.
• Operational or security systems may experience interruption or breach in security, including cyber-attacks.
• A large component of fee income is dependent on stock market values and two deposit services.
• Liquidity contingency funding is highly concentrated with the Federal Home Loan Bank of Pittsburgh.
• Negative developments affecting the banking industry, including bank failures or concerns regarding liquidity may have a material adverse effect on the Corporation.
• The stock market can be volatile, and fluctuations in operating results and other factors could cause the stock price to decline.

Future Outlook

Management expects that real estate secured loans will continue to comprise a significant part of its balance sheet and that commercial lending will continue to be the primary driver of loan growth. The Corporation benefits from higher interest rates over the long-term.

Management Comments

• Management believes that the Banks primary market area continues to be well suited for growth.
• Management believes it can meet all anticipated liquidity demands.
• Management believes the ACL at December 31, 2024 is adequate.

Industry Context

The Corporation and its banking subsidiary operate in a highly competitive environment in south central Pennsylvania and Washington County, MD, facing competition from large regional banks, independent community banks, credit unions, mortgage banks, brokerage firms, and online competitors.

Comparison to Industry Standards

• The document compares Franklin Financial's performance to a peer group of Mid-Atlantic Banks with assets between $1.5 billion $2.5 billion as of September 30, 2024.
• The document includes a performance graph comparing the cumulative total return to shareholders of Franklin Financial with selected market indices and a bank peer group for the five-year period ended December 31, 2024.
• The Bank's compensation philosophy is to provide pay opportunities at the median level of prevailing industry practices among community banking companies of similar asset size and market type.

Legal Proceedings

• The nature of the Corporation's business generates a certain amount of litigation.
• We establish accruals for legal proceedings when information related to the loss contingencies represented by those matters indicates both that a loss is probable and the amount of the loss can be reasonably estimated.

Stakeholder Impact

• Shareholders will see a decrease in earnings per share and return on equity.
• Employees may experience pressure to control costs and improve efficiency.
• Customers may see changes in product offerings and pricing as the bank adapts to the changing economic environment.

Next Steps

• The Corporation will continue to monitor and implement rules and regulations as they are adopted and modified.
• The Corporation is continually exploring other sources of capital as part of its capital management plan for the Corporation and the Bank.

Key Dates