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FRANKLIN FINANCIAL SERVICES CORP /PA/ (FRAF)·Q1 2024 Earnings Summary

Executive Summary

  • Q1 2024 diluted EPS was $0.77 on net income of $3.4M, down vs Q4 2023 ($0.79) but up vs Q1 2023 ($0.75); net interest margin compressed to 2.88% from 3.24% in Q4 2023 and 3.41% in Q1 2023 due to higher funding costs and excess cash awaiting deployment .
  • Balance sheet crossed $2.0B in assets for the first time; loans grew 1.6% q/q and deposits rose 1.4% q/q; borrowings increased to $280.0M (FHLB/BTFP) to support growth, which management said will initially weigh on earnings but position the bank for expansion .
  • Credit quality remained strong: NPLs/gross loans 0.04%, NPAs/total assets 0.02%, ACL/loans 1.29% .
  • Board declared a $0.32 per-share dividend for Q2 2024; no formal financial guidance provided; management highlighted new Dauphin County community office targeted for year-end 2024 as a growth catalyst .

What Went Well and What Went Wrong

What Went Well

  • Loans and deposits both grew sequentially, with commercial real estate balances reaching $721.3M; assets surpassed $2.0B for the first time .
  • Noninterest income increased 29.9% y/y (benefiting from no repeat of 1Q23 securities sale loss) and wealth management AUM rose to $1.108B; management emphasized diversified fee income .
  • Management reiterated “stellar loan quality” and strong capital, with well-capitalized status and very low NPLs/NPAs; CEO: “All-in-all, I am pleased with the first quarter of 2024 and how we are set up for the rest of the year.” .

What Went Wrong

  • Net interest margin compressed sharply to 2.88% (from 3.24% in Q4 2023), driven by higher funding costs and excess cash balances not yet fully invested; ROA and ROE declined y/y .
  • Provision for credit losses remained elevated vs historical levels (reflecting portfolio growth); total provision $452K in Q1 2024 vs $529K in Q1 2023 .
  • Increased noninterest expense (+10.7% y/y) driven by salaries/benefits and data processing expenses amid competitive labor market and higher software costs .

Financial Results

Income Statement Summary

Metric ($000s, except per share)Q1 2023Q4 2023Q1 2024
Interest Income$16,583 $21,516 $23,809
Interest Expense$3,746 $7,616 $10,256
Net Interest Income$12,837 $13,900 $13,553
Provision for Credit Losses (Loans)$467 $732 $490
Provision for Credit Losses (Unfunded)$62 $56 $(38)
Total Provision for Credit Losses$529 $788 $452
Noninterest Income$3,225 $4,085 $4,188
Noninterest Expense$12,019 $13,148 $13,304
Income Before Taxes$3,514 $4,049 $3,985
Income Taxes$222 $578 $624
Net Income$3,292 $3,471 $3,361
Diluted EPS ($)$0.75 $0.79 $0.77

Margins and Profitability

MetricQ1 2023Q4 2023Q1 2024
Net Interest Margin (%)3.41% 3.24% 2.88%
ROA (%)0.80% 0.75% 0.67%
ROE (%)11.33% 11.81% 10.21%
Dividend Payout Ratio (%)42.68% 40.23% 41.62%

Balance Sheet and Funding

Metric ($000s)Q1 2023Q4 2023Q1 2024
Total Assets$1,711,285 $1,836,039 $2,011,614
Loans, Net$1,063,337 $1,240,933 $1,261,062
Deposits$1,502,110 $1,537,978 $1,559,312
Other Borrowings— $130,000 $280,000
Debt Securities AFS$458,154 $472,503 $462,951
Shareholders’ Equity$123,583 $132,136 $134,237

Credit Quality and Other KPIs

KPIQ1 2023Q4 2023Q1 2024
Nonperforming Loans / Gross Loans (%)0.02% 0.01% 0.04%
Nonperforming Assets / Total Assets (%)0.01% 0.01% 0.02%
ACL / Loans (%)1.31% 1.28% 1.29%
Net Loans (CO)/(Recoveries) / Avg Loans (%)0.00% -0.07% 0.00%
Cost of Total Deposits (%)0.92% —1.70%
Wealth Mgmt AUM ($000s)$942,025 $1,094,747 $1,107,611
Held at Third-Party Brokers ($000s)$124,483 $135,423 $151,465

Loan Portfolio Composition (Commercial Real Estate)

CRE Collateral Category ($000s)Dec 31, 2023Mar 31, 2024
Commercial Real Estate Total$703,800 $721,300
Apartment Buildings$120,200 $127,700
Office Buildings$87,100 $87,700
Hotels & Motels$80,700 $87,100

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Dividend per ShareQ2 2024$0.32 declared in Q1 2024 for Q1 payout $0.32 declared on Apr 11, 2024; payable May 22, 2024Maintained
Share Repurchase Authorization2024150,000 shares authorized (Dec 2023) No shares repurchased YTD 2024 under planMaintained
Formal Financial Guidance (Revenue/Margins/OpEx/Tax)2024None providedNone providedN/A

Earnings Call Themes & Trends

TopicPrevious Mentions (Q3 2023 and Q4 2023)Current Period (Q1 2024)Trend
Technology initiatives (Salesforce, automation)“Continuing the development of our use of Salesforce software throughout the bank to build better efficiencies” ; “investments in people and systems aimed at building for the future” Added automation “bots” in operations to free staff for higher-value work Improving capabilities
Macro rates and funding costsNIM 3.24% in Q4; funding costs rising; deposit cost 1.23% in 2023 NIM compressed to 2.88% due to higher funding costs and excess cash; cost of deposits 1.70% in Q1 2024 Pressure persists
Deposits and insurance coverage~91% insured/collateralized at YE 2023 ~90% estimated insured/collateralized at Mar 31, 2024 Stable high coverage
Loan growth and credit qualityRecord CRE originations; ACL/loans 1.28% at YE 2023 Loans +1.6% q/q; CRE $721.3M; ACL/loans 1.29%; NPLs very low Continued growth with strong credit
Wealth management/AUMAUM growth; exceeded $1B in 2023 AUM $1.108B; fee income growth y/y Expanding
Market expansion—New community office in Dauphin County targeted by year-end Expansion underway
Capital and liquidityWell-capitalized; borrowings $110M at Q3 2023 and $130M at YE 2023 Borrowings increased to $280M (FHLB/BTFP) to support growth Higher wholesale funding

Management Commentary

  • “Some of these steps, such as our FHLB borrowing, will have an initial negative effect on earnings but provide us additional support from which to continue our growth.” – Tim Henry, President & CEO .
  • “During the quarter, we saw company assets go over the $2 billion threshold, grew both loans and deposits, maintained stellar loan quality, and saw growth in non-interest income.” – Tim Henry .
  • “We’re building our first community office in Dauphin County… prototype a new style of community office… more effectively and efficiently bring to our customers the services they are looking for.” – Tim Henry .
  • “Continuing the development of our use of Salesforce software… to build better efficiencies and decision-making.” – Tim Henry (Q4 2023 release) .

Q&A Highlights

  • No questions were taken online during the April 23 shareholder/analyst meeting; management invited follow-up inquiries outside the meeting .

Estimates Context

  • Wall Street consensus estimates via S&P Global for Q1 2024 EPS and revenue were unavailable at time of retrieval due to system limits; as a result, comparison to consensus is omitted. We attempted retrieval but hit a daily request limit (“Daily Request Limit of 250000 Exceeded”).

Key Takeaways for Investors

  • Margin pressure is the key near-term variable: NIM fell to 2.88% as funding costs rose and cash remained under-invested; expect margin stabilization to hinge on redeployment and deposit pricing discipline .
  • Balance sheet scale and mix are tailwinds: assets >$2.0B, sequential loan and deposit growth, and very low NPLs/NPAs provide a sturdy base for earnings once funding costs normalize .
  • Diversified fee income is building resiliency: noninterest income up 29.9% y/y and wealth management AUM at $1.108B support earnings through rate cycles .
  • Wholesale funding expanded to support growth: $280.0M borrowings (including a new $200.0M three-year FHLB term loan) increase carrying costs now but should enable asset growth and eventual margin recovery as funds are deployed .
  • Capital return is steady: $0.32 dividend maintained; repurchase authorization in place, though no buybacks YTD; tangible book value per share rose to $28.50 .
  • Strategic execution: new Dauphin County office and operational automation (bots) plus ongoing Salesforce adoption indicate focus on growth and efficiency; monitor opex trajectory as these initiatives scale .
  • Without published consensus, investors should anchor on sequential and y/y trends: EPS slightly below prior quarter, above prior year; watch NIM, deposit costs, and loan growth cadence as primary drivers for the next prints .