Franklin Financial Services Corporation ($FRAF)

Hello, and welcome to the Annual Meeting of Shareholders of Franklin Financial Services Corporation. Please note that today's meeting is being recorded. [Operator Instructions] It is now my pleasure to turn today's meeting over to Chairman of the Board, Warren Elliott. Mr. Chairman, the floor is yours.

Thank you, Ruby. Good morning, and thank you for joining us today. As Chairman of the Board of Franklin Financial Services Corporation, I hereby call this Annual Meeting of Shareholders to order and appoint Amanda M. Ducey, Secretary of the company, as Secretary of the meeting. The Secretary of the company has filed proof that proper notice of the meeting has been given and that a legal quorum is present in person or by proxy. The meeting is now, therefore, lawfully convened and ready to transact business. It's my pleasure to introduce our Loan Servicing Manager and Vice President, Pam Johns for the [ invitation. ] Pam?

Thank you, Warren. Please join me in a moment of prayer. Father, we thank you for this day and the opportunity to live in your word and to share the good news of your risen son, Jesus Christ. Please be with us during the time of business and may your hand of blessing and grace be on the decisions made today and as we move forward this week, this month and this year. We ask that you continue to lead, guide and direct the leaders of this organization, so we can all be a positive influence in the communities and the people we serve. We ask for your hedge of protection to surround our first responders, our military, the leaders in this country and around the globe. May your unconditional love and mercy touch hearts and open minds to promote wise decisions and peace. In Jesus name, we pray, amen.

Amen. Thank you, Pam. The minutes of the 2025 Annual Meeting are available for inspection by contacting the Judge of Election and may be examined by any shareholder following the meeting. In order to help you better understand the business of the company, my remarks today and those of other company officers who will speak or respond to questions will include forward-looking statements relating to anticipated financial performance, future operating results, business prospects, new products and similar matters. These statements represent our best judgment based upon present circumstances and the information now available to us of what we think may occur in the future. And of course, it's possible that actual results may differ materially from those that we envision today. For a more complete discussion on the subject of forward-looking statements, I refer you to our annual report on Form 10-K as filed with the Securities and Exchange Commission. Now I'm pleased to make some introductions. As you know, I'm Warren Elliott, Chairman of the Board. We have Craig Best, our President and CEO. We have Board members, Marty Brown, Kevin Craig, Greg Duffey, Dan Fisher, Stanley Kerlin, Don Mowery, Kim Rzomp and Greg Snook. We also have Director of Emeritus, Skip Jennings; our attorney, Nick Bybel; Zoe Clayton, the Assistant Corporate Secretary and Judge of Elections; and Allison Minnis, partner with Crowe, our auditors. So again, good morning. As we convene this year's annual meeting, I am honored to share my remarks as we achieve a monumental milestone in our bank's history. F&M Trust, based here in Chambersburg, Pennsylvania, has been in business since 1906, and we are now proudly celebrating 120 years of financial service. 1906 was an interesting time in banking as just 1 year after our founding, the banking panic of 1907 took place. The panic occurred when F. Augustus Heinze and Charles Morse made an attempt to corner the market for copper. The scheme failed and there was a run on banks. Think George Bailey of It's a Wonderful Life, if you're wondering what a run on banks looks like in those early banking days. This caused a nearly 50% drop in the stock market. It also caused the failure of a huge bank, Knickerbocker Trust Company. JPMorgan had a chance to rescue Knickerbocker but declined. However, as more and more banks and trust entered bankruptcy, Morgan stepped in to stop the run on banks. F&M Trust was fortunate to survive that second year of operation and with a desire to avoid similar situations in the future, Congress created the Federal Reserve System in 1913. F&M Trust dodged another similar dark day for banking and the stock market just a short time later in 1929 when in a 4-day period, the market lost 36% of its value. In hindsight, 1906 was probably not the best time to start a new bank, but adversity can build strength and F&M survived and grew. This bank also survived World War II, the savings and loan crisis, the dot-com bubble, Y2K and the Great Recession of 2007 to 2009. I have been involved with this bank for some time. Our longevity is a testament to the trust our customers and shareholders place in us and the dedication of our team. Our financial performance over the past year reflects the strength and stability of our organization. This solid foundation allows us to continue to deliver value to our shareholders while maintaining the high standards of fiscal responsibility that define F&M Trust. As we celebrate this 120th anniversary, we remain committed to the values that have guided us since our founding while looking forward to a future of continued growth and community partnership. Looking ahead, our strategic focus remains on increasing shareholder value, creating strong organic growth, enhancing our digital banking capabilities and expanding our service footprint to ensure that we meet the evolving needs of our customers. Finally, as you will hear later, I am pleased to announce that we have promoted Chad Carroll to the Office of President of our company. As Chief Operating Officer, Chad has done a stellar job and has been an integral part of our record earnings year. With that, I also want to thank our CEO, Craig Best, after the completion of his first full year with us. Additionally, I want to take the opportunity to acknowledge our employees and the Board of Directors for their tireless efforts and stewarding the bank through another successful year. And finally, I want to thank you, the shareholder, for your continued support and belief in this company as we move into our 121st year and more of operation. Thank you for listening. The Board of Directors has earlier chosen Zoe Clayton to serve as Judge of Election. She has filed her oath with the Secretary of the meeting, and I hereby direct that it be made part of the minutes of the meeting. An affidavit of mailing executed by [ William Valentin ] and notarized by a notary public qualified in the county of Middlesex in the State of New Jersey dated March 26, 2026, has been placed in the corporation's minute book affirming the mailing of the shareholder letter, proxy card, the proxy statement and 10-K on March 24, 2026, to the shareholders of record as of the record date of March 9, 2026. The first item of business is the election of directors. The 4 nominees receiving the highest number of votes will be elected. The Board of Directors has nominated and recommends the election of Craig W. Best, G. Warren Elliott, Stanley J. Kerlin, Kimberly M. Rzomp. May I have a formal motion with respect to these nominees?

Mr. Chairman, I hereby move the nomination of the following persons for election as directors to Class A to serve for 3-year terms. Craig W. Best, G. Warren Elliott, Stanley J. Kerlin and Kimberly M. Rzomp.

Thank you, Mr. [ Morrow. ] Do I have a second?

Mr. Chairman, I second these nominations.

Thank you, Ms. [ Hebner. ] in accordance with Section 3.5 of the bylaws, advance notice must be given of the intention of any shareholders to make a nomination from the floor. Since no such notice has been given, any other nominations would be out of order, and I hereby declare the nominations to be closed. The second item of business is the say-on-pay vote. The Dodd-Frank Wall Street Reform and Consumer Protection Act requires that we provide our shareholders with the opportunity to cast a nonbinding advisory vote to approve the compensation paid to our named executive officers as disclosed in our proxy statement for this meeting. For the reasons discussed in the Compensation Discussion and Analysis section of the proxy statement, we believe that our executive compensation programs align with our executive compensation philosophy, support its goals and provide an appropriate balance between risk and reward. Thus, the Board of Directors recommends that the shareholders vote for the approval of the compensation paid to our named executive officers as disclosed in the proxy statement. May I have a formal motion with respect to the say-on-pay vote?

Mr. Chairman, I hereby move the adoption of the following resolution resolved that the compensation of the named executive officers as disclosed in the company's proxy statement for the annual meeting held on April 28, 2026, is hereby approved.

Thank you, Mr. [ Nepper. ] Do I have a second?

Mr. Chairman, I second this motion.

Thank you, Mr. [ Keller. ] The third item of business is the ratification of the selection of auditors. The Audit Committee of the Board has selected Crowe as Franklin Financial's independent registered public accounting firm for 2026. May I have a formal motion to ratify the Audit Committee's selection of auditors?

Mr. Chairman, I hereby move the ratification of the selection of Crowe as Franklin Financial's independent registered public accounting firm for 2026.

Thank you, Ms. [ Plummer. ] Do I have a second?

Mr. Chairman, I second this motion.

Thank you, Ms. [ Miller. ] Because no further business is on the agenda to come before this meeting, we will move on to voting. The polls are open. If you have previously voted and do not wish to change your vote, there is no need for you to take any action at this time. [Voting] With that, I'm very pleased to introduce our Chief Financial Officer, for his remarks, Mr. Mark Hollar. Mark?

Thank you, Mr. Chairman. As you follow your company during 2025, you already know it was a very good year. We saw improved profitability as net income increased from $11.1 million in 2024, $21.2 million in 2025. As a result, key performance metrics such as the ROA and ROE improved over the prior year period. These results were driven by an increase in net interest income as asset yields increased year-over-year, decrease in the cost of deposits, an increase in noninterest income and a slower increase in noninterest expense than in prior years. Tangible book value of a share of Franklin Financial stock increased 21% in 2025 in the year at $37.10 per share. Looking at the loan portfolio, net loans increased 11.6% over the year-end 2024 balance, primarily from increases in commercial real estate and 1 to 4 family residential mortgages. The portfolio continues to be well diversified across asset classes and loans and real estate collateral located primarily in our markets of South and Central Pennsylvania. 2025 marked the fourth consecutive year that the yield on the loan portfolio increased. At December 31, 2025, the allowance for credit losses was 1.32% of gross loans compared to 1.26% at the end of 2024, and management believes this reserve is adequate for the risk profile of the portfolio. Deposit balances increased 1.1% during the year compared to the growth of 14% in 2024, but the 2025 growth rate was negatively affected by the bank's decision to pay off $65 million of higher rate brokered CDs in the fourth quarter of the year. Including the effect of the CD payoff, growth rate in 2025 would have been 4.7%. The average cost of deposits for 2025 was 1.85%, down slightly from 2024. At year-end, approximately 18% of deposits were in noninterest-bearing accounts compared to 16% in the prior year. I previously mentioned the improvement in net interest income in 2025. With this increase, we also saw an increase in the net interest margin as asset yields increased for the fourth consecutive year, the cost of liability decreased for the first time in 4 years. Net interest income increased approximately $12 million year-over-year. The increase was driven nearly equally by changes in balance sheet volume and interest rates. Bank's earning performance continues to be enhanced by a diversified source of noninterest income that represented approximately 22% of total revenue in 2025. Fee income as a percentage of revenue has exceeded 21% for each of the past 6 years. Key component of the bank's noninterest income or fees from its wealth management services had totaled $9.2 million in 2025, an increase of 7.4% over the prior year. At the end of the year, assets under management by our wealth management team totaled $1.4 billion. Contribution to fee income and subsequently to net income by our wealth management services are a competitive advantage for the bank. Shareholder, your company earned $4.74 per share in 2025, paid a cash dividend of $1.31 per share and increased its tangible book value per share by $6.45. From a total return perspective, your investment in Frank's Financial has performed well over the last 5 years. Finally, on April 23, we released our first quarter earnings of $6.6 million or $1.48 per share. This represents an increase of 9.8% over the fourth quarter of 2025 earnings of $6 million or $1.35 per share, an increase of 69.2% compared to the first quarter of 2025. The Board of Directors declared a $0.34 per share cash dividend for the second quarter of 2026, payable on May 27 to shareholders of record on May 1. This is a 3% increase over the dividend for the second quarter of 2025. Now I would like to introduce Craig Best, CEO of Frank's Financial and F&M Trust.

Thank you, Mark. Before I take any of your questions, I'd like to make a few comments. 2025 was an outstanding year. Our net income reached $21.2 million, marking the highest earnings in the bank's 120-year history. Our performance in 2025 was due to the hard work and dedication of our employees and their passion for providing the highest level of service and care for our customers. The investments that we've made in infrastructure and technology have fueled our growth over the last 3 years and have set us up for years of success. According to our year-end 2025 financial reports, net loans grew by 11.6%, driven mainly by increases in commercial and residential real estate loans. We also saw steady deposit growth, all while maintaining competitive deposit rates and ensuring that more than 87% of our deposits are either FDIC insured or collateralized. Company's total assets surpassed $2.2 billion, and our Wealth Management division grew assets under management by 8.6% to $1.4 billion. Our new community office in Dauphin County, which now holds over $54 million in deposits, has originated more than $6 million in consumer loans and has opened 474 new deposit accounts as of December 31, 2025. Additionally, our service area has expanded. We now offer wealth management, commercial financing and residential lending in Maryland, West Virginia and neighboring counties in Pennsylvania. As Mark just reported, our strong performance has continued in 2026. Net income for our first quarter was $6.6 million or $1.48 per share. This is an increase of $2.7 million over our first quarter of 2025. The improved performance was fueled by margin expansion and expense control. Also driving first quarter performance was the growth of our Wealth Management division. Simply put, we have one of the best Wealth Management groups in the Mid-Atlantic region. With more than $1.4 billion in assets under management, we are one of the largest asset managers associated with a community bank our size. The experience and level of service provided by our investment managers has made this group one of the most respected in our market. I'd also like to comment on our most recent announcement naming Chad Carroll as the President of our company and our bank. Chad joined F&M in 2023 and since that time, has implemented growth processes that have allowed us to be a growth leader in all of our business lines, commercial, retail, mortgage and wealth. This promotion gives us leadership stabilization and is well deserved. Congratulations, Chad. Finally, I'd like to thank all of our shareholders for your support and confidence you have shown in the company. Now I'll take any questions that you might have. Mark, do we have any questions?

No questions.

It appears that we have no questions, so I'll turn it back over to our Chairman, Warren Elliott.

Thank you, Craig. With that, the submission of the ballots, the polls are now closed. I would now like to call upon the Judge of Elections, [ Zoe Clayton, ] for her report.

Mr. Chairman, having inspected the proxies and counted the ballots, I hereby report as Judge of Election that, a, the 4 nominees have received the highest number of votes cast and have been elected to the Board of Directors for a 3-year term; b, the compensation paid to the named executive officers has been approved by the majority of votes cast; and c, the Auditors Committee selection of Crowe as Franklin Financial's independent registered public accounting firm for 2026 has been ratified by a majority of the votes cast.

Thank you, Ms. Clayton. Therefore, I hereby declare that the following persons have been elected to the Board of Directors, Class A for a term of 3 years; Craig W. Best, G. Warren Elliott, Stanley J. Kerlin, Kimberly M. Rzomp. The compensation paid to our named executive officers has been approved and the Audit Committee's selection of Crowe as Franklin Financial's independent registered public accounting firm for 2026 has been ratified. With that, I want to again thank Judge of Elections, Zoe Clayton. I'd also like to thank Amanda Ducey, Matt Weaver, Pam Johns, Mark Hollar, Chad Carroll and Craig Best. And finally, all of you for your continued support. There being no further business to come before this meeting, I declare the meeting to be adjourned. I thank you and wish all of you to have a good remainder of your day.

This concludes the meeting. You may now disconnect.