Franklin Financial Services (FRAF) - 2023 Q4 - Annual Report

Part I Business F&M Trust, a 'well capitalized' community bank, operates 22 offices in PA and MD, providing diverse financial services - The Corporation's primary subsidiary, F&M Trust, operates 22 community banking offices with total assets of approximately $1.8 billion as of December 31, 2023[16][27] F&M Trust Market Share by County (as of June 30, 2023) | County, State | of Locations | Deposits (in thousands) | Market Share | | :--- | :--- | :--- | :--- | | Franklin, PA | 13 | $1,027,967 | 37.63% | | Cumberland, PA | 8 | $378,683 | 3.43% | | Fulton, PA | 2 | $83,735 | 34.19% | | Huntingdon, PA | 1 | $27,487 | 3.81% | | Washington, MD | 1 | $6,153 | 0.19% | | Total | 25 | $1,524,025 | 8.46% | - Lending activities primarily focus on commercial real estate, construction, commercial and industrial loans, consumer installment loans, and residential mortgages[17] - As of December 31, 2023, the Bank was classified as 'well capitalized' under Basel III, with a capital conservation buffer of 5.63%, ensuring compliance and avoiding limitations on capital distributions like dividends[49] - The company employed 306 people as of December 31, 2023, with a voluntary turnover rate of 12.77%, and contributed over $480,000 in donations and 2,043 employee volunteer hours in 2023[29][34][35] Risk Factors The Corporation faces risks from concentrated real estate and commercial loans, interest rate volatility, cybersecurity, and FHLB liquidity reliance - A significant portion of the loan portfolio is concentrated in real estate, with approximately 80% ($1.008 billion) of loans secured by real estate as of December 31, 2023, and commercial purpose loans account for 82% ($1.026 billion) of the total loan portfolio[65][66] - The company is exposed to interest rate risk, as changes in rates affect net interest income, with profitability depending on the spread between interest earned on assets and interest paid on liabilities[73] - Cybersecurity is a major risk, with potential for system failures or breaches leading to disclosure of confidential information, financial loss, and reputational damage[74] - Liquidity risk is heightened by a high concentration in funding from the Federal Home Loan Bank (FHLB), where inability to access FHLB funding could materially impact liquidity management[79] - Fee income is heavily dependent on stock market values through the Wealth Management Department and on specific deposit services like debit cards and overdraft protection, making it vulnerable to market fluctuations and regulatory changes[75][77] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - There are no unresolved staff comments[96] Cybersecurity The Corporation manages cybersecurity risks via a formal information security program, including assessments, testing, training, and vendor management, with no material impact to date - The Corporation has a formal information security program to assess, identify, and monitor cybersecurity risks, which is overseen by the Board Enterprise Risk Management Committee[96][100] - Cybersecurity measures include periodic testing of systems, threat simulation exercises, regular employee training, and a vendor management process that includes diligence on critical vendors[97][99] - As of the report date, risks from cybersecurity threats or incidents have not had a material effect on the Corporation[101] Properties The Corporation operates 35 owned or leased properties, including 27 banking facilities and 8 remote ATMs, across PA and MD Property Ownership Status | Property Type | Owned | Leased | | :--- | :--- | :--- | | Facilities used in Banking Operations | 16 | 11 | | Remote ATM Sites | 3 | 5 | Legal Proceedings The Corporation is involved in ordinary course litigation, with no anticipated material adverse effect on financial position and no pending governmental proceedings - In management's opinion, the ultimate aggregate liability from all current litigation is not expected to have a material adverse effect on the Corporation's financial position[105] Mine Safety Disclosures This item is not applicable to the Corporation - Not Applicable[107] Part II Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities FRAF common stock trades on Nasdaq, with 1,536 shareholders and a new plan to repurchase 150,000 shares approved in December 2023 - As of December 31, 2023, the Corporation had 1,536 shareholders of record[108] - In December 2023, a new plan was approved to repurchase 150,000 shares of common stock over a one-year period, though no shares were repurchased during the fourth quarter of 2023[112][113] Cumulative Total Return Comparison (5-Year Period) | Index | 12/31/18 | 12/31/23 | | :--- | :--- | :--- | | Franklin Financial Services Corporation | $100.00 | $122.03 | | NASDAQ Composite | $100.00 | $236.17 | | S&P U.S. BMI Banks - Mid-Atlantic Region | $100.00 | $166.23 | | Peer Group* | $100.00 | $120.76 | Management's Discussion and Analysis of Financial Condition and Results of Operations Net income decreased to $13.6 million in 2023 due to higher credit loss provisions and securities losses, despite net interest income growth and robust loan expansion Key Financial Performance (2023 vs. 2022) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Net Income | $13.6 million | $14.9 million | | Diluted EPS | $3.10 | $3.36 | | Net Interest Income | $53.6 million | $51.6 million | | Provision for Credit Losses | $2.7 million | $0.65 million | | Noninterest Income | $14.9 million | $15.3 million | | Noninterest Expense | $50.0 million | $48.7 million | | Return on Average Assets | 0.78% | 0.83% | | Return on Average Equity | 11.39% | 11.64% | Balance Sheet Highlights (Year-End) | Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Assets | $1.84 billion | $1.70 billion | | Net Loans | $1.24 billion | $1.04 billion | | Total Deposits | $1.54 billion | $1.55 billion | | Shareholders' Equity | $132.1 million | $114.2 million | - The net interest margin increased to 3.31% in 2023 from 3.11% in 2022, as the yield on earning assets rose by 130 basis points to 4.70%, outpacing the 139 basis point increase in the cost of interest-bearing liabilities to 1.75%[134][136] - The company adopted the CECL accounting standard on January 1, 2023, with the provision for credit losses increasing significantly to $2.7 million in 2023, primarily due to strong loan portfolio growth of 19.7%[137][141] - Shareholders' equity grew by $17.9 million, supported by $8.1 million in retained earnings and a $10.3 million improvement in accumulated other comprehensive income (AOCI) from the investment portfolio's improved fair value[142] Quantitative and Qualitative Disclosures About Market Risk The Corporation's primary market risk is interest rate risk, managed via simulation, showing liability sensitivity with projected net interest income decreases in varying rate environments - The Corporation's main market risk exposure is interest rate risk, arising from its financial instruments like loans, securities, and deposits[262] Net Interest Income Sensitivity Analysis (1-Year Projection) | Change in Rates (bps) | Projected NII (in thousands) | % Change from Base | | :--- | :--- | :--- | | +300 | $48,500 | (7.5)% | | +200 | $50,000 | (4.8)% | | +100 | $51,300 | (2.3)% | | Unchanged | $52,500 | — | | (100) | $52,000 | (0.9)% | | (200) | $51,700 | (1.5)% | | (300) | $51,400 | (2.1)% | Financial Statements and Supplementary Data This section presents the Corporation's audited consolidated financial statements for 2023 and 2022, including balance sheets, income statements, and detailed accounting notes Consolidated Financial Statements Consolidated financial statements detail the Corporation's 2023 and 2022 financial position and results, with 2023 total assets at $1.84 billion and net income at $13.6 million Consolidated Balance Sheet Highlights (December 31) | (in thousands) | 2023 | 2022 | | :--- | :--- | :--- | | Total Assets | $1,836,039 | $1,699,579 | | Net Loans | $1,240,933 | $1,036,866 | | Total Deposits | $1,537,978 | $1,551,448 | | Total Liabilities | $1,703,903 | $1,585,382 | | Total Shareholders' Equity | $132,136 | $114,197 | Consolidated Income Statement Highlights (Year Ended December 31) | (in thousands) | 2023 | 2022 | | :--- | :--- | :--- | | Net Interest Income | $53,637 | $51,586 | | Provision for Credit Losses | $2,724 | $650 | | Noninterest Income | $14,851 | $15,250 | | Noninterest Expense | $50,011 | $48,691 | | Net Income | $13,598 | $14,938 | Notes to Consolidated Financial Statements Notes detail significant accounting policies, including CECL adoption, confirm the Bank's 'well capitalized' status, and highlight strong loan quality and investment portfolio composition - The Corporation adopted the CECL standard (ASU 2016-13) on January 1, 2023, resulting in a $536 thousand decrease to the ACL for loans, a $412 thousand increase to the ACL for unfunded commitments, and a net $98 thousand increase to retained earnings[312][345] Bank Regulatory Capital Ratios (December 31, 2023) | Ratio | Actual | Well Capitalized Minimum | | :--- | :--- | :--- | | Common Equity Tier 1 | 12.38% | 6.50% | | Tier 1 Risk-based Capital | 12.38% | 8.00% | | Total Risk-based Capital | 13.63% | 10.00% | | Tier 1 Leverage | 9.44% | 5.00% | - The loan portfolio quality remained high, with nonaccrual loans totaling only $147 thousand and loans past due 90+ days and still accruing at just $5 thousand as of December 31, 2023[387] - The Allowance for Credit Losses (ACL) for loans increased from $14.2 million at year-end 2022 to $16.1 million at year-end 2023, primarily due to a $2.6 million provision expense driven by loan growth[394] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes or disagreements with its accountants on accounting principles, financial disclosure, or auditing scope - None[486] Controls and Procedures Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2023, with no material Q4 changes - The CEO and CFO concluded that the Corporation's disclosure controls and procedures were effective as of December 31, 2023[487] - Management concluded that the Corporation's internal control over financial reporting was effective as of December 31, 2023, based on the COSO framework[490] Other Information No directors or executive officers adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements in Q4 2023 - No directors or executive officers adopted or terminated a Rule 10b5-1 trading arrangement or other non-Rule 10b5-1 trading arrangement in Q4 2023[492] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2024 proxy statement - Required information is incorporated by reference from the forthcoming 2024 proxy statement[495][496][497] Executive Compensation Executive compensation information is incorporated by reference from the Corporation's 2024 proxy statement - Required information is incorporated by reference from the 'EXECUTIVE COMPENSATION' section of the 2024 proxy statement[499] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership details for beneficial owners and management, plus equity compensation plan matters, are incorporated by reference from the 2024 proxy statement - Required information is incorporated by reference from the 2024 proxy statement[500][501][502] Certain Relationships and Related Transactions, and Director Independence Related party transactions and director independence information are incorporated by reference from the Corporation's 2024 proxy statement - Required information is incorporated by reference from the 2024 proxy statement[503] Principal Accountant Fees and Services Principal accountant fees and services information is incorporated by reference from the Corporation's 2024 proxy statement - Required information is incorporated by reference from the 'RELATIONSHIP WITH INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS' section of the 2024 proxy statement[504] Part IV Exhibits, Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the Form 10-K report, including certifications - This item lists all financial statements, schedules, and exhibits filed with the report, including certifications by the CEO and CFO[506][508] Form 10-K Summary The company has not provided a summary for Form 10-K - None[510]