Franklin Financial Reports 2023 Q4 and Full Year 2023 Results; Declares Dividend
- Net interest income increased by 1.5% in the fourth quarter of 2023 compared to the same period in 2022.
- Total assets increased by 8.0% from December 31, 2022, to December 31, 2023.
- Total net loans increased by 19.7% from December 31, 2022.
- Shareholders' equity increased by $17.9 million from December 31, 2022, to year-end 2023.
- The Corporation's common stock book value was $30.23 per share at year-end 2023.
- Net income decreased by 10.1% in the fourth quarter of 2023 compared to the third quarter of 2023.
- Total deposits decreased by 1.9% from the end of the third quarter of 2023.
- Noninterest income year-to-date was $399 thousand less than the same period in 2022.
- The average balance of interest-earning cash balances decreased by 68.4% in 2023 compared to 2022.
- Noninterest expense increased by 7.8% in the fourth quarter of 2023 compared to the third quarter of 2023.
Insights
The reported decrease in net income for Franklin Financial Services Corporation both quarterly and year-to-date signals potential concerns for investors regarding the company's profitability trends. The decline in net income is attributed to a combination of factors, including a loss on securities sales, lease termination expenses and increased provisions for credit losses. These financial headwinds could be indicative of a challenging economic environment and may prompt investors to scrutinize the company's risk management and cost control measures more closely.
Moreover, the increase in the provision for credit losses, which has risen year-over-year, suggests a more cautious outlook on potential credit risk within the loan portfolio. This is particularly relevant given the notable expansion in commercial real estate loans, which now constitute a significant portion of the loan portfolio. Investors should be aware of the concentration risk and the potential impact of economic downturns on real estate markets.
The increase in net loans and the decrease in total deposits, while not uncommon in the banking sector, could affect the bank's liquidity position and interest rate risk profile. The growth in loans may reflect positive business development efforts, yet the reduction in deposits could lead to higher funding costs, especially in a rising interest rate environment. The Net Interest Margin (NIM) contraction year-over-year is a critical metric to consider, as it may impact future earnings potential.
From a market perspective, the strategic initiatives undertaken by Franklin Financial Services Corporation, such as the restructuring of investments on the balance sheet and the development of Salesforce software to improve efficiencies, are noteworthy. These efforts aim to position the company for future growth and may be seen as a proactive response to the rapid changes in the interest rate landscape and broader market conditions.
However, the dip in net interest income and the tightening of the net interest margin (NIM) reflect the pressure on the bank's core revenue-generating capability. The banking industry is highly sensitive to interest rate fluctuations and the Federal Reserve's monetary policy actions in 2023 have likely influenced these figures. Investors may be interested in how the bank plans to navigate the anticipated interest rate environment and its impact on margins and overall profitability.
The bank's capitalization level, as indicated by its status as 'well-capitalized' under regulatory guidance, provides a degree of reassurance regarding its financial stability. Yet, the repurchase plan of common stock, while potentially accretive to earnings per share, will need to be balanced against the need for capital to support loan growth and absorb potential credit losses.
Franklin Financial Services Corporation's financial results are reflective of broader economic trends, including the impact of monetary tightening and a competitive labor market. The increased cost of deposits from 0.23% in 2022 to 1.23% in 2023 is a direct consequence of higher interest rates and could signal a shift in savers' behavior as they seek higher returns on their deposits. This trend may persist as long as the interest rate environment remains elevated.
The bank's focus on commercial real estate lending growth amidst a dynamic economic climate requires careful monitoring. The success of this strategy hinges on the health of the regional economy and the real estate market, particularly in south-central Pennsylvania. A downturn in the real estate sector could lead to higher default rates and impact the bank's financial health.
Lastly, the reported decrease in accumulated other comprehensive income (AOCI) suggests some recovery in the bank's investment portfolio valuation, likely due to changes in market interest rates. This could have implications for the bank's balance sheet strength and its ability to withstand further interest rate volatility.
- Net income for the fourth quarter of 2023 was
$3.5 million $0.79 $3.9 million $0.88 10.1% ) and$3.7 million $0.84 6.6% ). - For the fourth quarter of 2023, the provision for credit losses was
$788 thousand $875 thousand $650 thousand - Net income year-to-date for 2023 was
$13.6 million $3.10 $14.9 million $3.36 7.7% . As compared to the prior year-to-date results, 2023 was affected by a loss of$1.1 million $495 thousand $2.1 million - Total net loans increased
4.2% from the end of the third quarter of 2023 and19.7% from December 31, 2022. - Total deposits decreased
1.9% from the end of the third quarter of 2023, and0.9% from December 31, 2022. At year-end 2023, borrowings from the Federal Reserve and Federal Home Loan Bank ofPittsburgh (FHLB) totaled$130.0 million - For the year-to-date period, Return on Average Assets (ROA) was
0.78% , Return on Average Equity (ROE) was11.39% and the Net Interest Margin (NIM) was3.31% ; compared to an ROA of0.83% , ROE of11.64% , and NIM of3.11% for the same period in 2022. - On January 18, 2024, the Board of Directors declared a
$0.32
Balance Sheet Highlights
Total assets at December 31, 2023 were
- Debt securities available for sale decreased
$14.3 million 2.9% ). During the first and second quarter of 2023, the Bank sold approximately$41.2 million - Net loans increased
$204.1 million 19.7% ) over the year-end 2022 balance, primarily from an increase of$140.0 million $703.8 million $120.2 million $87.1 million $80.7 million Pennsylvania . - Total deposits decreased
$13.5 million 0.9% ) from year-end 2022. Time deposits and money management accounts increased$77.5 million 1.23% , compared to0.23% in 2022. On December 31, 2023, the Bank estimated that approximately91% of its deposits were FDIC insured or collateralized. - On December 31, 2023, the Bank had borrowings of
$130.0 million $90.0 million $40.0 million Pittsburgh . The Bank has additional funding capacity in the BTFP, the Federal Reserve Discount Window, the FHLB and correspondent banks. - Shareholders' equity increased
$17.9 million $132.1 million $8.1 million $5.6 million $(51.3) million $(40.9) million $30.23 $28.17 - Average earning assets for 2023 were
$1.65 6 billion$1.70 2 billion2.8% . In 2023, the average balance of interest-earning cash balances decreased$109.2 million 68.4% ) to support loan growth and to offset a decrease in average deposits during the year. The average balance of the investment portfolio decreased$48.9 million 9.6% ), while the average balance of the loan portfolio increased$111.3 million 10.8% ), over the prior year averages. Within the loan portfolio, average commercial loan balances increased$77.7 million $33.2 million $1.53 0 billion$101.4 million 6.2% ) from the average balance for 2022. All deposit categories reported a year-over-year decrease in average balances, except for time deposits. On a year-over-year comparison, the yield on earning assets increased 130 basis points from3.40% in 2022 to4.70% for 2023, while the cost of interest-bearing liabilities increased 139 basis points from0.36% to1.75% over the same period.
Income Statement Highlights
- Net interest income was
$13.9 million $13.7 million $14.6 million 3.24% for the fourth quarter of 2023 compared to3.29% in the prior quarter and3.58% for the fourth quarter of 2022. Year-to-date, NIM was3.31% compared to3.11% for the same period of 2022. - On January 1, 2023, the Bank adopted a new accounting standard for the calculation of its allowance for credit losses (ACL), referred to as the current expected credit loss (CECL) model. Upon adoption, the Bank recorded a decrease of
$536 thousand $411 thousand $98 thousand $26 thousand $732 thousand $866 $650 thousand 1.28% on December 31, 2023, compared to1.35% on December 31, 2022. For the fourth quarter of 2023, the provision for credit losses on unfunded commitments was$56 thousand $9 thousand $0 $2.0 million $1.5 million - Noninterest income totaled
$4.1 million $4.0 million 1.8% ), and$3.6 million 13.2% ). - Noninterest income year-to-date was
$14.9 million $399 thousand 2.6% ) less than the same period in 2022. The decrease was driven primarily by a loss of$1.1 million - Noninterest expense for the fourth quarter of 2023 was
$13.1 million $12.2 7.8% ) and$13.2 million - Noninterest expense was
$50.0 million $48.7 million $1.3 million 2.7% . Contributing to the year-over-year increase was an increase of$855 thousand $329 thousand $495 thousand - The effective federal income tax rate was
13.7% for 2023 and14.6% for 2022. The year-to-date rate reflects the benefit of$367 thousand 16.0% .
"In a year of rapid interest rate challenges, failed banks, and other market disruptions, we were able to move the company forward by staying focused on building for the future," said Tim Henry, President and CEO. "Our steps forward included restructuring investments on the balance sheet, controlling expenses, growing outstanding loan balances, mitigating deposit challenges, and continuing the development of our use of Salesforce software throughout the bank to build better efficiencies and decision-making. When combined, these steps position us for a positive future as an independent, community bank."
Additional information on the Corporation is available on our website at: www.franklinfin.com/Presentations.
Franklin Financial is the largest independent, locally owned and operated bank holding company headquartered in
Management considers subsequent events occurring after the balance sheet date for matters which may require adjustment to, or disclosure in, the consolidated financial statements. The review period for subsequent events extends up to and including the filing date of a public company's consolidated financial statements when filed with the Securities and Exchange Commission ("SEC"). Accordingly, the financial information in this announcement is subject to change.
Certain statements appearing herein which are not historical in nature are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements refer to a future period or periods, reflecting management's current views as to likely future developments, and use words "may," "will," "expect," "believe," "estimate," "anticipate," or similar terms. Because forward-looking statements involve certain risks, uncertainties and other factors over which Franklin Financial Services Corporation has no direct control, actual results could differ materially from those contemplated in such statements. These factors include (but are not limited to) the following: changes in interest rates, changes in the rate of inflation, general economic conditions and their effect on the Corporation and our customers, changes in the Corporation's cost of funds, changes in government monetary policy, changes in government regulation and taxation of financial institutions, changes in technology, the intensification of competition within the Corporation's market area, and other similar factors.
We caution readers not to place undue reliance on these forward-looking statements. They only reflect management's analysis as of this date. The Corporation does not revise or update these forward-looking statements to reflect events or changed circumstances. Please carefully review the risk factors described in other documents the Corporation files from time to time with the SEC, including the Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and any Current Reports on Form 8-K.
FRANKLIN FINANCIAL SERVICES CORPORATION | |||||||||||||||||
Financial Highlights (Unaudited) | |||||||||||||||||
Earnings Summary | For the Three Months Ended | For the Twelve Months Ended | |||||||||||||||
(Dollars in thousands, except per share data) | 12/31/2023 | 9/30/2023 | 12/31/2022 | 2023 | 2022 | % Change | |||||||||||
Interest income | $ | 21,516 | $ | 20,154 | $ | 16,997 | $ | 76,762 | $ | 56,449 | 36.0 | ||||||
Interest expense | 7,616 | 6,447 | 2,392 | 23,125 | 4,863 | 375.5 | |||||||||||
Net interest income | 13,900 | 13,707 | 14,605 | 53,637 | 51,586 | 4.0 | |||||||||||
Provision for credit losses - loans | 732 | 866 | 650 | 2,589 | 650 | 298.3 | |||||||||||
Provision for credit losses - unfunded commitments | 56 | 9 | - | 135 | - | 0.0 | |||||||||||
Noninterest income | 4,085 | 4,013 | 3,610 | 14,851 | 15,250 | (2.6) | |||||||||||
Noninterest expense | 13,148 | 12,198 | 13,196 | 50,011 | 48,691 | 2.7 | |||||||||||
Income before income taxes | 4,049 | 4,647 | 4,369 | 15,753 | 17,495 | (10.0) | |||||||||||
Income taxes | 578 | 788 | 652 | 2,155 | 2,557 | (15.7) | |||||||||||
Net income | $ | 3,471 | $ | 3,859 | $ | 3,717 | $ | 13,598 | $ | 14,938 | (9.0) | ||||||
Diluted earnings per share | (7.7) | ||||||||||||||||
Regular cash dividends paid | 0.0 | ||||||||||||||||
Balance Sheet Highlights (as of) | 12/31/2023 | 9/30/2023 | 12/31/2022 | ||||||||||||||
Total assets | $ | 1,836,039 | $ | 1,827,910 | $ | 1,699,579 | |||||||||||
Debt securities available for sale, at fair value | 472,503 | 458,276 | 486,836 | ||||||||||||||
Loans, net | 1,240,933 | 1,191,322 | 1,036,866 | ||||||||||||||
Other borrowings | 130,000 | 110,000 | - | ||||||||||||||
Deposits | 1,537,978 | 1,567,414 | 1,551,448 | ||||||||||||||
Shareholders' equity | 132,136 | 114,769 | 114,197 | ||||||||||||||
Assets Under Management (fair value) | |||||||||||||||||
Wealth Management | 1,094,747 | 963,805 | 904,317 | ||||||||||||||
Held at third party brokers | 135,423 | 126,394 | 116,398 | ||||||||||||||
As of and for the Three Months Ended | For the Twelve Months Ended | ||||||||||||||||
Performance Ratios | 12/31/2023 | 9/30/2023 | 12/31/2022 | 12/31/2023 | 12/31/2022 | ||||||||||||
Return on average assets* | 0.75 % | 0.86 % | 0.84 % | 0.78 % | 0.83 % | ||||||||||||
Return on average equity* | 11.81 % | 12.73 % | 13.58 % | 11.39 % | 11.64 % | ||||||||||||
Dividend payout ratio | 40.23 % | 36.07 % | 37.77 % | 41.15 % | 37.88 % | ||||||||||||
Net interest margin* | 3.24 % | 3.29 % | 3.58 % | 3.31 % | 3.11 % | ||||||||||||
Net loan recoveries (chargeoffs) /average loans | -0.07 % | 0.01 % | -0.56 % | -0.02 % | -0.15 % | ||||||||||||
Nonperforming loans / gross loans | 0.01 % | 0.02 % | 0.01 % | ||||||||||||||
Nonperforming assets / total assets | 0.01 % | 0.01 % | 0.01 % | ||||||||||||||
Allowance for loan loss / loans | 1.28 % | 1.29 % | 1.35 % | ||||||||||||||
Book value, per share | $ | 30.23 | $ | 26.31 | $ | 26.01 | |||||||||||
Tangible book value (1) | $ | 28.17 | $ | 24.24 | $ | 23.96 | |||||||||||
Market value, per share | $ | 31.55 | $ | 28.50 | $ | 36.10 | |||||||||||
Market value/book value ratio | 104.37 % | 108.32 % | 138.79 % | ||||||||||||||
Market value/tangible book value ratio | 112.01 % | 117.55 % | 150.67 % | ||||||||||||||
Price/earnings multiple* | 9.98 | 8.10 | 10.74 | 10.18 | 10.74 | ||||||||||||
Current quarter dividend yield* | 4.06 % | 4.49 % | 3.55 % | ||||||||||||||
* Annualized | |||||||||||||||||
(1) NonGAAP measurement. See GAAP versus NonGAAP disclosure | |||||||||||||||||
GAAP versus non-GAAP Presentations – The Corporation supplements its traditional GAAP measurements with certain non-GAAP measurements to evaluate its performance and to eliminate the effect of intangible assets. By eliminating intangible assets (Goodwill), the Corporation believes it presents a measurement that is comparable to companies that have no intangible assets or to companies that have eliminated intangible assets in similar calculations. However, not all companies may use the same calculation method for each measurement. The non-GAAP measurements are not intended to be used as a substitute for the related GAAP measurements. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, our reported results prepared in accordance with GAAP. In the event of such a disclosure or release, the Securities and Exchange Commission's Regulation G requires: (i) the presentation of the most directly comparable financial measure calculated and presented in accordance with GAAP and (ii) a reconciliation of the differences between the non-GAAP financial measure presented and the most directly comparable financial measure calculated and presented in accordance with GAAP. The following table shows the calculation of the non-GAAP measurements.
NonGAAP | |||||||||
(Dollars in thousands, except per share) | |||||||||
December 31, 2023 | September 30, 2023 | December 31, 2022 | |||||||
Tangible Book Value (per share) (non-GAAP) | |||||||||
Shareholders' equity | $ | 132,136 | $ | 114,769 | $ | 114,197 | |||
Less intangible assets | (9,016) | (9,016) | (9,016) | ||||||
Shareholders' equity (non-GAAP) | 123,120 | 105,753 | 105,181 | ||||||
Shares outstanding (in thousands) | $ | 4,371 | $ | 4,362 | $ | 4,390 | |||
Tangible book value (non-GAAP) | $ | 28.17 | $ | 24.24 | $ | 23.96 | |||
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SOURCE Franklin Financial Services Corporation
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