Franklin Financial Services (FRAF) - 2023 Q2 - Quarterly Report

Part I - Financial Information Financial Statements Franklin Financial's Q2 2023 unaudited financials show total assets at $1.736 billion, net income of $6.3 million year-to-date, and CECL adoption Consolidated Balance Sheets Total assets grew to $1.736 billion by June 30, 2023, driven by a $93.7 million increase in net loans, while deposits decreased Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :--- | :--- | :--- | | Total Assets | $1,736,165 | $1,699,579 | | Total cash and cash equivalents | $64,832 | $64,899 | | Debt securities available for sale | $439,471 | $486,836 | | Net Loans | $1,130,547 | $1,036,866 | | Total Liabilities | $1,616,395 | $1,585,382 | | Total deposits | $1,513,135 | $1,551,448 | | Short-term borrowings | $70,000 | $0 | | Total shareholders' equity | $119,770 | $114,197 | Consolidated Statements of Income Q2 2023 net income was $3.0 million, with year-to-date net income at $6.3 million, impacted by higher interest expense and securities losses Income Statement Summary (in thousands, except per share data) | Metric | Q2 2023 (in thousands) | Q2 2022 (in thousands) | YTD 2023 (in thousands) | YTD 2022 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Net interest income | $13,195 | $12,111 | $26,032 | $22,919 | | Provision for credit losses | $532 | $0 | $1,061 | $0 | | Total noninterest income | $3,529 | $4,091 | $6,754 | $7,976 | | Total noninterest expense | $12,648 | $12,029 | $24,667 | $23,296 | | Net income | $2,976 | $3,578 | $6,268 | $6,590 | | Diluted EPS | $0.68 | $0.80 | $1.42 | $1.47 | Notes to Consolidated Financial Statements Notes detail CECL adoption, investment portfolio unrealized losses, loan portfolio growth to $1.145 billion, and well-capitalized status - The company adopted ASU 2016-13 (CECL) on January 1, 2023, resulting in a $536 thousand decrease to the allowance for credit loss (ACL) for loans, a $412 thousand increase to the ACL for unfunded commitments, and a $98 thousand increase to retained earnings[24] - The available-for-sale debt securities portfolio had a fair value of $439.5 million and gross unrealized losses of $57.3 million as of June 30, 2023. Management determined these impairments were not credit-related and therefore no allowance for credit loss was recorded for these investments[29][32][33] - The total loan portfolio increased to $1.145 billion at June 30, 2023, from $1.051 billion at year-end 2022, with commercial real estate being the largest segment at $638.1 million[49] - The Allowance for Credit Losses (ACL) for loans stood at $14.6 million, or 1.28% of total loans, as of June 30, 2023[65] - The company borrowed $70.0 million from the Federal Reserve's Bank Term Funding Program (BTFP) during the first half of 2023 to support its liquidity position[93] - As of June 30, 2023, both the Corporation and its subsidiary bank, Farmers & Merchants Trust Company, were considered 'well capitalized' under all regulatory capital ratios[95][98] Management's Discussion and Analysis of Results of Operations and Financial Condition Management discusses a year-to-date net income decrease to $6.3 million, loan portfolio growth, deposit decline, and bolstered liquidity with strong loan quality Results of Operations Year-to-date net income decreased to $6.3 million due to securities losses and lease termination expenses, despite a rise in net interest income YTD Performance Summary (in thousands) | Metric | YTD 2023 (in thousands) | YTD 2022 (in thousands) | | :--- | :--- | :--- | | Net Income | $6,268 | $6,590 | | Diluted EPS | $1.42 | $1.47 | | Net Interest Income | $26,032 | $22,919 | | Provision for Credit Losses | $1,061 | $0 | | Noninterest Income | $6,754 | $7,976 | | Noninterest Expense | $24,667 | $23,296 | - Year-to-date net income was negatively impacted by a $1.1 million loss on securities sales from a portfolio restructuring and a $495 thousand lease termination expense[138] - Tax-equivalent net interest income for the first half of 2023 increased by $3.0 million year-over-year, primarily due to a $3.4 million positive impact from changing interest rates[155] Financial Condition Total assets reached $1.736 billion, net loans grew by 9.0% to $1.131 billion, deposits decreased, and loan quality remained strong - Net loans increased by $93.7 million (9.0%) to $1.131 billion since December 31, 2022[138][183] - Total deposits decreased by $38.3 million (2.5%) to $1.513 billion, with a shift from noninterest-bearing and low-yield accounts to time deposits, which grew by 56.4%[139][202][206] - Loan quality remains strong, with nonaccrual loans at $102 thousand, representing just 0.01% of total loans[190] - The company repurchased 74,306 shares during the second quarter of 2023 under its authorized repurchase plan[211] Liquidity and Capital Resources The Corporation maintains $537.5 million in available liquidity, including $70.0 million from BTFP, to meet anticipated demands Available Liquidity as of June 30, 2023 (in thousands) | Liquidity Source | Capacity (in thousands) | Outstanding (in thousands) | Available (in thousands) | | :--- | :--- | :--- | :--- | | Federal Home Loan Bank | $420,487 | $0 | $420,487 | | Federal Reserve Bank Discount Window | $56,941 | $0 | $56,941 | | Fed Bank Term Funding Program | $74,121 | $70,000 | $4,121 | | Correspondent Banks | $56,000 | $0 | $56,000 | | Total | $607,549 | $70,000 | $537,549 | - Unfunded loan commitments increased to $456.9 million from $374.2 million at year-end 2022, while standby letters of credit decreased slightly[225] Quantitative and Qualitative Disclosures about Market Risk No material changes in market risk exposure were reported for the first six months of 2023 - There were no material changes in the Corporation's exposure to market risk during the first six months of 2023[227] Controls and Procedures Management concluded disclosure controls and procedures were effective, with no material changes to internal control over financial reporting - Based on an evaluation, the CEO and CFO concluded that the Corporation's disclosure controls and procedures were effective as of June 30, 2023[228] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[228] Part II - Other Information Legal Proceedings Management believes no pending legal proceedings will materially adversely affect the Corporation's financial condition or operations - In management's opinion, no pending legal proceedings are expected to be material to the Corporation's financial condition or results of operations[233] Risk Factors New risk factors highlight recent bank failures, potentially impacting deposit volatility, liquidity, and FDIC insurance premiums - A new risk factor highlights that recent bank failures (Silicon Valley Bank, Signature Bank, First Republic Bank) have eroded customer confidence and may adversely affect the Corporation[235] - Potential impacts include deposit volatility, increased liquidity demand, interest rate volatility, and possible increases in FDIC deposit insurance premiums or special assessments[235][239] Unregistered Sales of Equity Securities and Use of Proceeds The Corporation repurchased 74,306 shares for approximately $2.1 million in Q2 2023 under its 2022 repurchase plan Share Repurchase Activity - Q2 2023 | Period | Number of Shares Purchased | Weighted Average Price Paid per Share | Total Dollar Amount | | :--- | :--- | :--- | :--- | | April 2023 | 21,367 | $29.75 | $635,626 | | May 2023 | 17,348 | $26.15 | $453,642 | | June 2023 | 35,591 | $28.30 | $988,534 | | Total Q2 | 74,306 | - | $2,077,802 | - The share repurchase plan was authorized on December 15, 2022, for up to 150,000 shares and expires on December 21, 2023[237] Exhibits This section lists exhibits filed with the report, including corporate documents and certifications