10-K/A: Franklin Financial Services Corporation Files Amended 10-K to Include Performance Graph

Franklin Financial Services Corporation has filed an amendment to its annual report to include a total performance graph and updated certifications.

Summary

• Franklin Financial Services Corporation filed an amended 10-K to include a total performance graph, which was missing from the original filing.
• The amendment also includes new certifications from the principal executive officer and principal financial officer.
• The original 10-K was filed on March 11, 2024, and this amendment does not modify or update any other disclosures.
• The company's common stock is listed on the Nasdaq Capital Market under the symbol FRAF.
• The company operates primarily through its subsidiary, F&M Trust, a full-service commercial bank.
• F&M Trust operates 22 community banking offices in Pennsylvania and Maryland.
• The bank offers a variety of services including checking, savings, loans, and wealth management.
• The company also has subsidiaries for venture capital investments and real estate holdings.
• The company's market share in Franklin County, PA is 37.63% based on deposits.
• The company had 306 employees as of December 31, 2023, with a majority being women.
• The company's total voluntary turnover rate was 12.77% in 2023.
• The company donated over $480 thousand to 296 organizations and funded 323 scholarships for $156 thousand in 2023.
• The company is subject to regulation by the Federal Reserve and the FDIC.
• The company is considered well-capitalized under Basel III requirements.
• The company's lending limit is approximately $47.0 million.
• The company's total assets were approximately $1.8 billion as of December 31, 2023.
• The company's net income for 2023 was $13.6 million, or $3.10 per diluted share.
• The company's net interest margin was 3.31% for 2023.
• The company's loan portfolio increased by 19.7% in 2023.
• The company's deposits decreased by 0.9% in 2023.
• The company's shareholders' equity increased by $17.9 million in 2023.
• The company's book value per share was $30.23 and tangible book value was $28.17 as of December 31, 2023.

Sentiment

Score: 5

Explanation: The document presents a mixed picture with both positive and negative aspects. While the company shows strong loan growth and capital position, there are concerns about declining deposits, increased expenses, and potential risks. The overall sentiment is neutral to slightly negative.

Positives

• The company's loan portfolio experienced significant growth, increasing by 19.7% in 2023.
• Shareholders' equity increased by $17.9 million, indicating a strengthening financial position.
• The company is considered well-capitalized under regulatory guidelines.
• The company actively engages in community service, donating over $480 thousand and funding $156 thousand in scholarships.
• The company has a high employee engagement survey response rate of 94%.

Negatives

• The company's deposits decreased by 0.9% in 2023.
• Noninterest income decreased due to losses from the sale of securities.
• The company's lending limit of $47 million may restrict its ability to serve larger businesses.
• The company faces strong competition from other financial institutions.
• The company's liquidity contingency funding is highly concentrated with the Federal Home Loan Bank of Pittsburgh.

Risks

• Real estate related loans are a significant portion of the loan portfolio, making the company vulnerable to real estate market fluctuations.
• Commercial loans are also a significant portion of the loan portfolio, and their repayment is dependent on the success of the business activity.
• The company is subject to commercial real estate volatility that may result in increases in non-performing loans.
• The allowance for credit losses may prove to be insufficient to absorb inherent losses in the loan portfolio.
• The company's geographic diversification is limited, making it vulnerable to localized economic events.
• Changes in interest rates could have an adverse impact on the company's results of operations.
• The company's 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.
• A large percentage of deposits may be highly sensitive to changes in interest rates.
• Unrealized losses in the Banks investment portfolio could affect liquidity.
• The company is subject to claims and litigation pertaining to fiduciary responsibility.
• Public health crises such as epidemics or pandemics could materially and adversely impact the company's business.
• The company's operations could be affected by climate change.
• Negative developments affecting the banking industry, including bank failures or concerns regarding liquidity, have eroded customer confidence in the banking system and may have a material adverse effect on the company.
• The stock market can be volatile, and fluctuations in the company's operating results and other factors could cause the stock price to decline.
• The Bank's ability to pay dividends to the Corporation is subject to regulatory limitations that may affect the Corporations ability to pay dividends to its shareholders.

Future Outlook

The company expects that real estate secured loans will continue to comprise a significant part of its balance sheet. The company also expects that the investment portfolio will continue to remain concentrated in U.S. Agency mortgage-backed securities and municipal bonds. The company continues to monitor and implement rules and regulations as they are adopted and modified, and to evaluate their application to current and future operations.

Management Comments

• Management believes the ACL is adequate to absorb inherent losses in the loan portfolio.
• 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 intends to remain a member of the FHLB and believes that it will be able to fully recover the cost basis of this investment.

Industry Context

The company operates in a highly competitive environment with 35 competing commercial banks in its primary market area, as well as credit unions, mortgage banks, and online competitors. The company is the largest financial institution headquartered in Franklin County, PA. The company's performance is influenced by actions of the Federal Reserve Board and changes in interest rates.

Comparison to Industry Standards

• The company's return on average assets of 0.78% is below the average for the banking industry, which typically ranges from 1% to 1.5%.
• The company's return on average equity of 11.39% is within the typical range for community banks, which is between 10% and 15%.
• The company's efficiency ratio of 70.75% is higher than the industry average, which is typically between 55% and 65%, indicating higher operating costs relative to revenue.
• The company's net interest margin of 3.31% is within the typical range for community banks, which is between 3% and 4%.
• The company's loan growth of 19.7% is higher than the industry average, which is typically between 5% and 10%, indicating aggressive lending activity.
• The company's deposit decrease of 0.9% is below the industry average, which is typically between 2% and 5% growth, indicating potential challenges in attracting and retaining deposits.
• The company's capital ratios are above the regulatory requirements, indicating a strong capital position.
• The company's nonperforming loan ratio of 0.01% is significantly lower than the industry average, which is typically between 0.5% and 1%, indicating strong asset quality.

Legal Proceedings

• The nature of the Corporations 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.
• In managements opinion, we do not anticipate, at the present time, that the ultimate aggregate liability, if any, arising out of all litigation to which the Corporation is a party will have a material adverse effect on our financial position.

Stakeholder Impact

• Shareholders may be concerned about the decrease in net income and the potential impact of risks on the stock price.
• Employees may be affected by changes in compensation and benefits.
• Customers may be affected by changes in interest rates and the availability of credit.
• Suppliers and creditors may be affected by the company's financial performance and ability to meet its obligations.

Next Steps

• The company will continue to monitor and implement rules and regulations as they are adopted and modified.
• The company will continue to evaluate the application of new rules and regulations to current and future operations.
• The company will continue to explore other sources of capital as part of its capital management plan.
• The company will continue to monitor the credit quality of the portfolio to ensure that an appropriate ACL is maintained.

Key Dates

Keywords

bank, financial services, community bank, loans, deposits, wealth management, credit risk, interest rate risk, capital, regulation, cybersecurity, real estate, commercial lending