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Franklin Financial Services (FRAF) - 2025 Q2 - Quarterly Report

Part I - FINANCIAL INFORMATION Financial Statements This section presents the unaudited consolidated financial statements for Franklin Financial Services Corporation as of June 30, 2025, and for the three and six-month periods then ended, including balance sheets, income statements, comprehensive income, changes in shareholders' equity, and cash flows, along with detailed notes explaining the basis of presentation and significant accounting policies Consolidated Balance Sheets As of June 30, 2025, total assets increased to $2.29 billion from $2.20 billion at year-end 2024, primarily driven by an 8.7% growth in net loans to $1.50 billion, with total deposits growing to $1.89 billion and total shareholders' equity rising to $157.4 million from $144.7 million Consolidated Balance Sheet Highlights (June 30, 2025 vs. Dec 31, 2024) | Account | June 30, 2025 ($ thousands) | December 31, 2024 ($ thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Total Assets | $2,286,745 | $2,197,841 | +4.0% | | Net Loans | $1,500,035 | $1,380,424 | +8.7% | | Debt securities available for sale | $481,259 | $508,604 | -5.4% | | Total Deposits | $1,893,471 | $1,815,647 | +4.3% | | Total Liabilities | $2,129,381 | $2,053,125 | +3.7% | | Total Shareholders' Equity | $157,364 | $144,716 | +8.7% | Consolidated Statements of Income For the second quarter of 2025, net income nearly doubled to $5.9 million from $3.0 million in Q2 2024, with diluted EPS rising to $1.32 from $0.66, and for the six months ended June 30, 2025, net income increased by 53.7% to $9.8 million from $6.4 million year-over-year, driven by a significant increase in net interest income, which rose to $17.2 million for the quarter and $32.8 million for the six-month period Income Statement Summary (in thousands, except per share data) | Metric | Q2 2025 | Q2 2024 | YTD 2025 | YTD 2024 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $17,238 | $14,211 | $32,843 | $27,765 | | Provision for Credit Losses | $635 | $546 | $1,414 | $998 | | Noninterest Income | $5,103 | $4,350 | $9,664 | $8,538 | | Noninterest Expense | $14,389 | $14,336 | $28,965 | $27,642 | | Net Income | $5,908 | $3,033 | $9,829 | $6,394 | | Diluted EPS | $1.32 | $0.66 | $2.20 | $1.43 | Consolidated Statements of Comprehensive Income (Loss) Total comprehensive income for the second quarter of 2025 was $7.0 million, up from $3.4 million in Q2 2024, and for the six-month period, comprehensive income was $14.6 million, a significant increase from $6.5 million in the prior year period, driven by higher net income and a net unrealized gain on debt securities of $4.7 million, net of tax, for the first half of 2025 Comprehensive Income Summary (in thousands) | Metric | Q2 2025 | Q2 2024 | YTD 2025 | YTD 2024 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $5,908 | $3,033 | $9,829 | $6,394 | | Other Comprehensive Gain (Loss), net of tax | $1,072 | $353 | $4,724 | $59 | | Total Comprehensive Income | $6,980 | $3,386 | $14,553 | $6,453 | Consolidated Statements of Changes in Shareholders' Equity Shareholders' equity increased from $144.7 million at the start of 2025 to $157.4 million at June 30, 2025, primarily due to $9.8 million in net income and a $4.7 million other comprehensive gain, partially offset by $2.9 million in cash dividends declared - Key drivers for the change in shareholders' equity in the first six months of 2025 include net income of $9.8 million and an other comprehensive gain of $4.7 million14 - Cash dividends declared for the first six months of 2025 totaled $0.65 per share, amounting to $2.9 million14 Consolidated Statements of Cash Flows For the six months ended June 30, 2025, cash and cash equivalents increased by $4.2 million, with net cash provided by operating activities at $14.0 million, investing activities using $85.2 million primarily due to a net increase in loans, and financing activities providing $75.4 million, driven by a net increase in deposits Cash Flow Summary for Six Months Ended June 30 (in thousands) | Cash Flow Category | 2025 | 2024 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $13,960 | $9,736 | | Net Cash used in Investing Activities | ($85,227) | ($49,553) | | Net Cash from Financing Activities | $75,444 | $196,404 | | Net Increase in Cash | $4,177 | $156,587 | Notes to Consolidated Financial Statements This section provides detailed explanations of the accounting policies and financial data presented in the statements, covering basis of presentation, investments, loan portfolio, credit losses, leases, derivatives, capital ratios, and segment reporting Management's Discussion and Analysis of Results of Operations and Financial Condition Management discusses the company's financial performance for the three and six months ended June 30, 2025, covering net interest income, credit losses, noninterest income/expenses, and financial condition, highlighting growth in net income, loans, deposits, and an improved net interest margin Results of Operations The company's results of operations showed strong improvement in the first half of 2025, with Q2 net income up 94.8% YoY to $5.9 million and YTD net income up 53.7% to $9.8 million, driven by a $5.0 million increase in tax-equivalent net interest income and loan growth Key Performance Ratios (Six Months Ended June 30) | Ratio | 2025 | 2024 | | :--- | :--- | :--- | | Return on average assets* | 0.89% | 0.63% | | Return on average equity* | 13.27% | 9.71% | | Net interest margin* | 3.13% | 2.94% | | Diluted earnings per share | $2.20 | $1.43 | - Tax-equivalent net interest income for the first six months of 2025 increased by $5.0 million to $33.3 million compared to the same period in 2024, driven by both balance sheet volume changes ($2.0 million) and interest rate changes ($3.0 million)138 - The provision for credit losses for the first six months of 2025 was $1.4 million, up from $998 thousand in the prior year period, primarily due to loan growth142 Financial Condition The company's financial condition strengthened as of June 30, 2025, with total assets reaching $2.29 billion, net loans growing 8.7% to $1.50 billion, and deposits increasing 4.3% to $1.89 billion, while maintaining a 'well capitalized' status despite an increase in nonaccrual loans - Net loans increased by $119.6 million (8.7%) to $1.50 billion since December 31, 2024, with significant growth in residential real estate construction (+47.4%) and commercial real estate (+8.6%)154 - Nonaccrual loans increased to $10.8 million as of June 30, 2025, from $266 thousand at year-end 2024, primarily due to a $7.4 million construction loan and a $2.9 million hotel loan167 - Total deposits grew by $77.8 million (4.3%) in the first six months of 2025, led by an $80.5 million increase in Money Management accounts181 - The Bank's capital conservation buffer was 4.75% at June 30, 2025, well above the regulatory requirement of 2.5%, and the Bank was considered 'well capitalized'190 Liquidity and Capital Resources The Corporation maintains strong liquidity with $689.1 million available from FHLB, Federal Reserve, and correspondent banks, supported by earnings, loan repayments, and deposit growth, while off-balance sheet commitments of $472.3 million are not expected to pose significant risk Available Liquidity Sources as of June 30, 2025 (in thousands) | Liquidity Source | Capacity | Outstanding | Available | | :--- | :--- | :--- | :--- | | Federal Home Loan Bank | $749,537 | $200,000 | $549,537 | | Federal Reserve Bank Discount Window | $63,559 | $0 | $63,559 | | Correspondent Banks | $76,000 | $0 | $76,000 | | Total | $889,096 | $200,000 | $689,096 | - Off-balance sheet commitments, including commercial and consumer credit lines, totaled $472.3 million at June 30, 2025201 Quantitative and Qualitative Disclosures about Market Risk The Corporation reported no material changes in its market risk exposure during the first six months of 2025, referring to the 2024 Annual Report on Form 10-K for detailed information - There were no material changes in the Corporation's market risk exposure during the six months ended June 30, 2025203 Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2025, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that as of June 30, 2025, the Corporation's disclosure controls and procedures are effective204 - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, the internal control over financial reporting204 Part II - OTHER INFORMATION Legal Proceedings The Corporation is involved in ordinary course litigation, but management believes no pending legal proceedings will materially adversely affect the company's financial condition or results of operations - In management's opinion, no pending legal proceedings are expected to be material to the Corporation's financial condition or results of operations209 Risk Factors No material changes to risk factors from the 2024 Form 10-K, except for a new disclosure on potential adverse impacts of changes to trade policies and tariffs on customers, which could lead to increased credit losses and reduced loan demand - A new risk factor was added concerning the adverse impact of changes in trade policies and tariffs on the business and its customers211 - Potential negative effects include higher costs for customers, reduced export demand, and supply chain disruptions, which could lead to increased loan delinquencies and credit losses for the Corporation211 Unregistered Sales of Equity Securities and Use of Proceeds In January 2025, the Board authorized a repurchase plan for up to 150,000 shares; 6,700 shares were purchased in the first six months of 2025 to fund the dividend reinvestment plan, leaving 143,300 shares available Share Repurchase Activity (Q2 2025) | Period | Shares Purchased (Program) | Weighted Average Price | Shares Remaining (Program) | | :--- | :--- | :--- | :--- | | April 2025 | 0 | N/A | 150,000 | | May 2025 | 6,700 | $38.93 | 143,300 | | June 2025 | 0 | N/A | 143,300 | Other Information No directors or executive officers adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the quarter ended June 30, 2025 - No directors or executive officers adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during Q2 2025214 Exhibits This section lists the exhibits filed with the Form 10-Q, including corporate governance documents, CEO and CFO certifications, and Interactive Data Files (XBRL) - Filed exhibits include corporate governance documents, CEO/CFO certifications, and XBRL data files215216