FRANKLIN FINANCIAL SERVICES CORP /PA/ 10-K Analysis & Summary – 3/14/2025

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Franklin Financial Services Cor

10-K

Annual report

Filing date:

03/14/2025

TLDR:

ELI5:

Franklin Financial, a bank, made a little less money this year even though they have more loans and deposits. This is because they had to pay more in interest and lost money selling some investments. They’re still in good shape financially, but they need to watch out for competition, changing interest rates, and cyber attacks.

Accession #:

0000723646-25-000020

Published on

March 16, 2025

Analyst Summary

Net income decreased from $13.6 million in 2023 to $11.1 million in 2024, driven by increased interest expenses and losses on securities sales.
Net interest income increased by 7.2%, but was offset by a 90% increase in interest expense.
Total assets increased by 19.7% to $2.2 billion, driven by growth in loans and deposits.
The loan portfolio increased by 11.2%, with commercial real estate and residential mortgages leading the growth.
Deposits increased by 18.1%, with significant growth in money management and time deposits.
Net Interest Margin decreased from 3.31% in 2023 to 2.95% in 2024.
Efficiency Ratio increased from 70.75% in 2023 to 73.36% in 2024.
Return on Average Assets decreased from 0.78% in 2023 to 0.54% in 2024.
Return on Average Equity decreased from 11.39% in 2023 to 8.05% in 2024.
The company experienced a $4.3 million loss on the sale of investment securities as part of a portfolio restructuring.
Non-owner occupied CRE loans represent 343% of total capital, exceeding the regulatory threshold for heightened scrutiny.
A large percentage of deposits are in money management accounts, making the bank’s funding costs highly sensitive to changes in interest rates.
Operating Profit Margin decreased from 20.5% to 12.9%.
Net Profit Margin decreased from 17.7% to 10.9%.
Current Ratio increased from 0.02 to 0.12.
Debt-to-Equity Ratio increased from 12.97 to 14.18.
Interest Coverage Ratio decreased from 0.68 to 0.30.
Revenue Growth was 7.6%.
Net Income Growth was -18.4%.
EPS Growth was -18.9%.
Wealth Management Services (Fair Value) increased by 6.8%.

Opportunities and Risks

Credit Risk: The high concentration in commercial real estate lending, particularly non-owner occupied properties, exposes the bank to potential losses if the commercial real estate market weakens.
Interest Rate Risk: The sensitivity of deposits to interest rate changes could negatively impact earnings if rates continue to rise.
Cybersecurity Risk: The increasing sophistication of cyber threats poses a significant risk to the bank’s operations and reputation.
Competition: Strong competition from larger regional banks, credit unions, and online lenders could limit the bank’s growth potential.
Volatility in Commercial Real Estate: The commercial real estate market, particularly the office sector, is experiencing volatility that could lead to increased non-performing loans.
Loan Growth: Continued growth in the loan portfolio, particularly in commercial real estate and residential mortgages, could drive future earnings growth.
Deposit Growth: The increase in deposits provides a stable funding base for lending activities.
Wealth Management: Growth in assets under management and wealth management fees could contribute to noninterest income.
Community Focus: The bank’s strong community ties and relationship management culture provide a competitive advantage.

Potential Implications

Company Performance

The decrease in net income and net interest margin could negatively impact future profitability.
The high concentration in commercial real estate lending poses a risk to asset quality if the commercial real estate market weakens.
Effective management of interest rate risk will be crucial to maintaining profitability in a rising rate environment.
Continued growth in loans and deposits is essential for driving future earnings growth.
The company’s ability to manage expenses and improve efficiency will be important for improving profitability.
Growth in wealth management services could provide a source of noninterest income and diversify revenue streams.

Stock Price

The decrease in net income and profitability metrics could negatively impact the stock price.
Concerns about credit risk and interest rate risk could also weigh on the stock price.
Positive developments, such as continued growth in loans and deposits, could support the stock price.
The company’s valuation ratios, such as the P/E and P/B ratios, suggest that the stock may be fairly valued.
Overall, the stock price is likely to be influenced by the company’s ability to manage risks and execute its growth strategy.

Franklin Financial Services Corp – 10-K Report Analysis

Executive Summary

This report analyzes Franklin Financial Services Corporation’s (FRAF) 10-K filing for the year ended December 31, 2024. Key findings include a slight decrease in net income compared to the previous year, driven by increased interest expenses and losses on securities sales, offset by growth in net interest income and deposits. The company maintains a strong capital position and is well-capitalized under regulatory guidelines. However, increasing competition, interest rate sensitivity, and cybersecurity risks remain concerns. Overall, a HOLD recommendation is appropriate, reflecting the company’s stable financial position and growth potential balanced against existing risks.

Company Overview

Franklin Financial Services Corporation (FRAF) is a Pennsylvania-based bank holding company operating primarily through its subsidiary, F&M Trust, a full-service commercial bank. F&M Trust provides a range of banking services to businesses, individuals, and governmental entities across south-central Pennsylvania and Washington County, Maryland. The company’s business model focuses on community banking, relationship management, and wealth management services. Recent developments include the opening of a new community office and a portfolio restructuring involving the sale of investment securities.

Detailed Analysis

Financial Statement Analysis

Income Statement

Net income decreased from $13.6 million in 2023 to $11.1 million in 2024. Net interest income increased by 7.2%, but this was offset by a significant increase in interest expense (90%) and a loss on the sale of securities. Noninterest expense also increased, primarily due to higher salaries and benefits, data processing costs, and FDIC premiums.

Key Ratios:

Net Interest Margin: 2.95% (down from 3.31% in 2023)
Efficiency Ratio: 73.36% (up from 70.75% in 2023)
Return on Average Assets: 0.54% (down from 0.78% in 2023)
Return on Average Equity: 8.05% (down from 11.39% in 2023)

Balance Sheet

Total assets increased significantly by 19.7% to $2.2 billion, driven by growth in loans and deposits. The loan portfolio increased by 11.2%, with commercial real estate and residential mortgages leading the growth. Deposits increased by 18.1%, with significant growth in money management and time deposits.

Key Metrics:

Loan-to-Deposit Ratio: Approximately 76% (calculated from reported values)
Non-performing Loans/Gross Loans: 0.02% (slight increase from 0.01% in 2023)
Allowance for Credit Losses/Loans: 1.26% (slight decrease from 1.28% in 2023)

Cash Flow Statement

Cash flow from operating activities decreased, primarily due to changes in operating assets and liabilities. Investing activities showed a net cash outflow due to purchases of investment securities and loan originations. Financing activities generated significant cash inflows, mainly from deposit growth and borrowings.

Management’s Discussion and Analysis (MD&A) Insights

Management attributes the increase in net interest income to higher yields on earning assets, but acknowledges that the cost of interest-bearing liabilities increased more rapidly. They highlight the growth in the loan portfolio and deposits as positive developments. The MD&A also discusses the impact of the portfolio restructuring, which resulted in a loss on securities sales. Management expresses confidence in the bank’s capital position and its ability to meet liquidity demands.

Red Flags and Uncommon Metrics

Loss on Securities Sales: The $4.3 million loss on the sale of investment securities as part of a portfolio restructuring is a significant item that warrants further scrutiny. While management explains the rationale behind the restructuring, the impact on earnings is substantial.
CRE Concentration: The bank’s non-owner occupied CRE loans represent 343% of total capital, exceeding the regulatory threshold for heightened scrutiny. This concentration poses a risk if the commercial real estate market deteriorates.
Interest Rate Sensitivity: A large percentage of deposits are in money management accounts, making the bank’s funding costs highly sensitive to changes in interest rates.

Comparative and Trend Analysis

Compared to the previous year, FRAF experienced slower earnings growth, driven by increased expenses and losses on securities sales. While the loan portfolio and deposits grew, the net interest margin contracted. The company’s performance relative to its peer group was mixed, with FRAF underperforming the NASDAQ Composite Index and the S&P U.S. BMI Banks – Mid-Atlantic Region Index but outperforming its peer group of Mid-Atlantic Banks with assets between $1.5B-$2.5B.

Risk and Opportunity Assessment

Risks

Credit Risk: The high concentration in commercial real estate lending, particularly non-owner occupied properties, exposes the bank to potential losses if the commercial real estate market weakens.
Interest Rate Risk: The sensitivity of deposits to interest rate changes could negatively impact earnings if rates continue to rise.
Cybersecurity Risk: The increasing sophistication of cyber threats poses a significant risk to the bank’s operations and reputation.
Competition: Strong competition from larger regional banks, credit unions, and online lenders could limit the bank’s growth potential.
Volatility in Commercial Real Estate: The commercial real estate market, particularly the office sector, is experiencing volatility that could lead to increased non-performing loans.

Opportunities

Loan Growth: Continued growth in the loan portfolio, particularly in commercial real estate and residential mortgages, could drive future earnings growth.
Deposit Growth: The increase in deposits provides a stable funding base for lending activities.
Wealth Management: Growth in assets under management and wealth management fees could contribute to noninterest income.
Community Focus: The bank’s strong community ties and relationship management culture provide a competitive advantage.

Conclusion and Actionable Insights

Franklin Financial Services Corporation is a well-managed community bank with a solid capital position and growth potential. However, the company faces several challenges, including increasing competition, interest rate sensitivity, and cybersecurity risks. The loss on securities sales and the high concentration in commercial real estate lending are also concerns. Based on this analysis, a HOLD recommendation is appropriate. Investors should monitor the company’s performance closely, particularly its ability to manage interest rate risk, maintain credit quality, and navigate the competitive landscape.

Financial Analysis of Franklin Financial Services Corporation (FRAF)

1. Commentary

Franklin Financial Services Corporation’s (FRAF) financial performance in 2024 shows a mixed picture. While total assets, net loans, and deposits increased, net income decreased compared to 2023. The increase in interest income was offset by a larger increase in interest expense, impacting net interest income. The company maintains strong capital ratios, exceeding regulatory requirements, but profitability metrics like ROA and ROE have declined. The market value to book value ratio is below 100% indicating the company’s stock may be undervalued by the market.

2. Financial Ratio and Metric Analysis

Profitability

Ratio/Metric	2024	2023	Change (%)	Industry Comparison
Gross Profit Margin	N/A (Banks do not typically report this)	N/A (Banks do not typically report this)	N/A	N/A
Operating Profit Margin	12.9% (13.315/101.451)	20.5% (15.753/76.762)	-37.1%	Community banks typically range from 20-35%. FRAF is below this range.
Net Profit Margin	10.9% (11.099/101.451)	17.7% (13.598/76.762)	-38.4%	Community banks typically range from 15-25%. FRAF is below this range.
Return on Assets (ROA)	0.54%	0.78%	-30.8%	Industry average for community banks is typically between 0.8% and 1.2%. FRAF is below this range.
Return on Equity (ROE)	8.05%	11.39%	-29.3%	Industry average for community banks is typically between 8% and 12%. FRAF is within this range.
Earnings Per Share (EPS) – Basic	$2.52	$3.11	-18.9%	Varies widely; benchmark against similar-sized regional banks.
Earnings Per Share (EPS) – Diluted	$2.51	$3.10	-19.0%	Varies widely; benchmark against similar-sized regional banks.

Liquidity

Ratio/Metric	2024	2023	Change (%)	Industry Comparison
Current Ratio	0.12 (203.613/1,815,647)	0.02 (23.140/1,537,978)	500%	Banks generally have low current ratios. The increase is due to a large increase in cash and cash equivalents.
Quick Ratio (Acid-Test Ratio)	0.12 (203.613/1,815,647)	0.02 (23.140/1,537,978)	500%	Similar to the current ratio, banks generally have low quick ratios.
Cash Ratio	0.11 (203.613/1,815,647)	0.01 (23.140/1,537,978)	1000%	Banks generally have low cash ratios.

Solvency/Leverage

Ratio/Metric	2024	2023	Change (%)	Industry Comparison
Debt-to-Equity Ratio	14.18 (2,053,125/144,716)	12.97 (1,703,903/132,136)	9.3%	Community banks typically have ratios between 8 and 12. FRAF is above this range.
Debt-to-Assets Ratio	0.93 (2,053,125/2,197,841)	0.93 (1,703,903/1,836,039)	0%	Community banks typically have ratios between 0.8 and 0.95. FRAF is within this range.
Interest Coverage Ratio (Times Interest Earned)	0.30 (13,315/43,937)	0.68 (15,753/23,125)	-55.9%	A ratio above 1.5 is generally considered safe. FRAF is below this range.

Activity/Efficiency

Ratio/Metric	2024	2023	Change (%)	Industry Comparison
Inventory Turnover	N/A (Not applicable for banks)	N/A (Not applicable for banks)	N/A	N/A
Days Sales Outstanding (DSO)	N/A (Not directly applicable for banks; can be proxied by loan collection period)	N/A (Not directly applicable for banks; can be proxied by loan collection period)	N/A	N/A
Days Payable Outstanding (DPO)	N/A (Not directly applicable for banks)	N/A (Not directly applicable for banks)	N/A	N/A
Asset Turnover	0.05 (101,451/2,197,841)	0.04 (76,762/1,836,039)	25%	Banks typically have low asset turnover ratios.

Valuation

Ratio/Metric	2024	2023	Change (%)	Industry Comparison
Price-to-Earnings Ratio (P/E)	14.19 (35.62/2.51)	10.18	39.4%	Community banks typically range from 10-15. FRAF is within this range.
Price-to-Book Ratio (P/B)	1.09 (35.62/32.69)	1.04 (31.55/30.23)	4.8%	A P/B ratio around 1 suggests fair valuation.
Price-to-Sales Ratio (P/S)	0.77 (Market Cap of 84.7M/109.989M)	0.68 (Market Cap of 81.5M/115.130M)	13.2%	Varies widely by bank and market conditions.
Enterprise Value to EBITDA (EV/EBITDA)	10.1 (200M/19.7M)	N/A	N/A	Community banks typically range from 8-12. FRAF is within this range.

Growth Rates

Ratio/Metric	2024	2023	Change (%)	Industry Comparison
Revenue Growth	7.6% (115.130M/109.989M)	N/A	N/A	Varies widely by bank and market conditions.
Net Income Growth	-18.4% (11.099M/13.598M)	N/A	N/A	Varies widely by bank and market conditions.
EPS Growth	-18.9% (2.52/3.11)	N/A	N/A	Varies widely by bank and market conditions.

Other Relevant Metrics

Wealth Management Services (Fair Value): Increased from $1,094,747 (thousands) in 2023 to $1,169,282 (thousands) in 2024, a 6.8% increase. This indicates growth in the company’s wealth management business.
Efficiency Ratio (non-GAAP): Increased from 70.75% in 2023 to 73.36% in 2024. A higher efficiency ratio indicates lower efficiency, meaning the company is spending more to generate revenue.
Net Interest Margin, fully tax equivalent: Decreased from 3.31% in 2023 to 2.95% in 2024. This indicates a decrease in the profitability of the bank’s lending activities.
Nonperforming loans/gross loans: Increased from 0.01% in 2023 to 0.02% in 2024. This indicates a slight increase in the riskiness of the bank’s loan portfolio.
Liquidity Source: The company has a total liquidity source of $703,272 (thousands) with $200,000 (thousands) outstanding and $503,272 (thousands) available. This indicates that the company has sufficient liquidity to meet its obligations.