Business Context and Reporting Period
Franklin Financial Services Corporation, through Farmers and Merchants Trust Company of Chambersburg, operates a commercial banking and wealth management business primarily serving south-central Pennsylvania and parts of Maryland. This unaudited Form 10-Q covers the three months ended March 31, 2024, compared with the three months ended March 31, 2023 and December 31, 2023 balance-sheet amounts.
Financial Results and Key Metrics
| Metric | Q1 2024 | Comparable period |
|---|---|---|
| Net income | $3.361 million | $3.292 million in Q1 2023; $3.5 million in Q4 2023 |
| Diluted EPS | $0.77 | $0.75 in Q1 2023; $0.79 in Q4 2023 |
| Net interest income | $13.553 million | $12.837 million in Q1 2023 |
| Total provision for credit losses | $452 thousand | $529 thousand in Q1 2023 |
| Noninterest income | $4.188 million | $3.225 million in Q1 2023 |
| Noninterest expense | $13.304 million | $12.019 million in Q1 2023 |
| Net interest margin | 2.88% | 3.41% in Q1 2023 |
| Return on average assets | 0.67% | 0.80% in Q1 2023 |
| Return on average equity | 10.21% | 11.33% in Q1 2023 |
| Efficiency ratio | 73.76% | 70.70% in Q1 2023 |
- Total assets were $2.012 billion at March 31, 2024, exceeding $2.0 billion for the first time in a quarterly report.
- Gross loans increased 1.6% from year-end 2023 to $1.278 billion; net loans were $1.261 billion.
- Commercial real estate loans increased 2.5% from year-end to $721.3 million and represented 56% of gross loans. Commercial-purpose loans were $239.6 million.
- Total deposits increased 1.4% to $1.559 billion. Time deposits increased 29.8% to $171.9 million, while interest-bearing checking and savings declined 3.3%.
- Cash and cash equivalents increased to $182.6 million from $23.1 million at year-end, largely because a $200.0 million FHLB advance had not yet been fully invested.
- Total borrowings were $280.0 million, consisting of $40.0 million under the Federal Reserve Bank Term Funding Program and $240.0 million of FHLB advances.
- Shareholders’ equity increased to $134.2 million from $132.1 million. Book value per share was $30.55 and tangible book value per share was $28.50.
- Operating cash flow was $7.3 million. Investing activities used $18.1 million, while financing activities provided $170.2 million, principally from borrowings.
- The quarterly cash dividend was $0.32 per share. The board declared another $0.32 per share dividend for the second quarter of 2024.
Material Changes Versus Prior Comparable Period
- Net income increased 2.1% year over year, although results declined 3.2% from Q4 2023.
- Interest income increased 43.6% to $23.8 million, primarily due to loan growth, higher loan yields and substantially higher interest-earning deposits.
- Interest expense increased 173.8% to $10.3 million as deposit costs rose and the company added Federal Reserve and FHLB borrowings. The cost of interest-bearing deposits increased to 2.06% from 1.14%.
- Tax-equivalent net interest income increased to $13.8 million, but net interest margin declined to 2.88% from 3.41% because funding costs rose faster than asset yields.
- Noninterest income increased 29.9%, supported by higher wealth management fees, service charges and the absence of the $602 thousand net loss on debt-security sales recorded in Q1 2023.
- Noninterest expense increased 10.7%, led by higher salaries and benefits, data processing costs and FDIC insurance expense. The efficiency ratio consequently worsened.
- The effective tax rate was 15.7%, compared with 6.3% in Q1 2023. The prior-year rate benefited from $280 thousand of tax credits; without those credits, the Q1 2023 rate would have been 14.3%.
- Accumulated other comprehensive loss increased modestly to $41.2 million, reflecting a $294 thousand after-tax decline in the fair value of available-for-sale debt securities.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide formal earnings or revenue guidance. Management believes the primary market area remains well suited for growth and expects to meet anticipated liquidity demands.
- Management identifies interest-rate movements, inflation, monetary policy, funding costs, economic conditions, competition, regulation, technology and financial-industry disruption as factors that could materially affect results.
- The available-for-sale securities portfolio had a fair value of $463.0 million and net unrealized losses of approximately $49.8 million. Management states that the losses are not credit-related and that it does not intend, and does not believe it will be required, to sell the securities before recovery or maturity.
- Commercial real estate concentration is material, including approximately $546 million of nonowner-occupied loans. Key CRE exposures include apartments, offices, hotels and motels, shopping centers and development land.
- Nonaccrual loans increased to $490 thousand from $147 thousand at year-end; nonperforming loans were 0.04% of gross loans. Loans past due 90 days or more and still accruing were $5 thousand.
- The allowance for credit losses was $16.5 million, or 1.29% of gross loans, compared with 1.28% at year-end. Management believes the allowance is adequate, but its calculation depends on subjective economic, collateral and loss assumptions.
- Unfunded commitments totaled $438.2 million and standby letters of credit totaled $21.0 million. The allowance for unfunded commitments was $2.0 million.
- Available liquidity capacity was reported at $390.4 million, including $260.7 million of FHLB capacity, $53.6 million at the Federal Reserve Discount Window and $76.0 million at correspondent banks.
- The Bank was well capitalized at March 31, 2024. Its CET1 ratio was 12.52%, total risk-based capital ratio was 13.77% and Tier 1 leverage ratio was 8.74%.
- One Build America Bond was called during the quarter, resulting in $143 thousand of accelerated premium amortization. A second bond was called after quarter-end, with $118 thousand of additional accelerated amortization; remaining potential premium amortization was $238 thousand.
- No material changes to risk factors or market-risk exposure were reported. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the lower net interest margin persists as higher-cost time deposits and wholesale borrowings replace lower-cost funding.
- The maturity, pricing and repayment or refinancing risk of the $280.0 million in borrowings, including $40.0 million of FHLB borrowings due in the third quarter of 2024.
- Performance and collateral trends in the commercial real estate portfolio, particularly nonowner-occupied properties and construction loans.
- Whether nonaccrual loans, watch-list loans of $17.4 million and the allowance for credit losses remain stable as economic conditions and property values change.
- The potential effect of the approximately $49.8 million unrealized loss in the available-for-sale securities portfolio if interest rates remain elevated or securities must be sold.
- Deposit stability, including the $22.0 million of brokered CDs and the concentration of deposits in higher-rate products.
- The sustainability of the $0.32 per share quarterly dividend relative to earnings, capital requirements and funding needs.
- The filing’s forward-looking statements and legal-contingency disclosures, which state that potential losses from certain matters cannot currently be estimated.