$41.90
$100.40
bear $41.90
base $75.60
bull $100.40
margin of safety $32.00
market price* $62.75
Franklin Financial is the holding company for F&M Trust, a community bank founded in 1906 and based in Chambersburg, south-central Pennsylvania. It holds about $2.3 billion of assets, $1.9 billion of deposits and $1.5 billion of loans, and also runs a trust and wealth-management business with roughly $1.4 billion of client assets. It earns money mainly from the gap between what it charges on loans and securities and what it pays on deposits, plus trust and fee income. Borrowing and deposits are the raw material of the business, so we value the earnings that belong to shareholders after interest and do not subtract the $200 million of Federal Home Loan Bank advances or the $10.9 million of subordinated notes a second time. Earnings per share since 2016: $1.88, $0.50, $1.39, $3.67, $2.93, $4.42, $3.36, $3.10, $2.51 and $4.74 (2025). The dips are explained, not random. In 2017 a $10 million class-action settlement was expensed. In 2018 a single purchased commercial loan participation cost $9.3 million in charge-offs. In 2020 loan-loss provisions rose to $4.6 million. In 2024 a $4.3 million loss on securities sales and a squeezed margin cut profit. 2025 jumped because net interest income rose 21% as the margin widened from 2.95% to 3.25%, and net loans grew 11.6%. Profit for the first half of 2026 was $13.2 million, versus $9.8 million a year earlier, with net interest income of $19.3 million in the second quarter, up from $17.2 million. EARNINGS LEVEL. We set the normal earnings level at $4.25 per share. Putting each year on a normal tax rate and removing the one-time items, 2021 through 2025 were roughly $3.8, $3.2, $2.9, $3.2 and $4.75, a median near $3.2 that covers a full interest-rate cycle but describes a smaller bank with a thinner margin; loans have grown by hundreds of millions since then. The last five quarters have each earned $1.3 to $1.5 per share, which is real corroboration of a higher level, and the bank's own simulation shows net interest income of $75.6 million on today's balance sheet if rates stay put against $69.6 million earned in 2025, and only about 2% of change for each 1% move in rates, so the margin is not a bet on rates. We still stop at $4.25, below 2025's $4.75, because the step-up is only five quarters old and has not been tested through a credit cycle. GROWTH. Last year's earnings growth was very large, but flattered by the weak 2024; the growth assumed for year 1 of the middle case is 2.5%, below that, so no reversal needs to be argued. We credit only growth that is the proven, repeatable output of how this bank operates: it has grown loans and book value from retained earnings for decades, through the 2020 shutdown and the 2018 loss, while paying a steady dividend ($1.34 a year now). The middle case grows earnings 2.5% a year for five years and 1.5% for five more, then stops, and every dollar of growth is charged for the capital the bank must retain to support it. We leave out further margin widening, share gains, new markets and any acquisition because none is contracted or has been repeated reliably. BUSINESS VALUES. These are values for the shares after all obligations; the cases are our estimates and not predictions. Middle case: about $75.60 per share, about $27 coming from the first ten years of cash the owners could take out and about $48 from what the franchise keeps earning after that: a 120-year-old deposit and trust franchise whose core deposits cost 1.85% and whose earnings have never gone negative for a full year. Optimistic case: about $100.40, assuming the normal level is the current run rate of about $5.30, growth of 3.5% and then 2.5%, and credit losses staying near the 0.00% to 0.03% of loans the bank has recently reported; this is what happens if the 2025-26 margin proves permanent and loan growth of the kind seen in 2025 continues. Conservative case: about $41.90, built on a full credit cycle of the 2008-2010 kind that hit commercial real estate hardest. Commercial real estate is $904 million, 57.9% of loans: apartments $182 million, hotels $102 million, land development $97 million, office $93 million, shopping centers $88 million, all in one region. In this case the margin first falls back to the 2024 level (earnings of $3.30 a share for two years), then loan losses over four years total about 4% of loans, roughly $66 million before tax: about 4.5% of commercial real estate with far worse on land development, plus 1.5% on everything else. That is below the industry's peak but above this bank's own history, though the 2018 participation alone cost 1.1% of loans in one year. After tax and normal provisions that takes earnings to $1.60 in year three, then to losses of $0.90 and $0.20 a share in years four and five, and $1.80 in year six. We treat those loss years as capital shareholders must replace (in effect, dilution at trough prices), since the bank still holds well above regulatory minimums (common equity ratio 11.45% against 6.5% to be well capitalised) but would drop to the neighbourhood of 8% to 9%. Earnings then recover only to $2.90 a share, the weakest normalized year in the record, and stay there. This case still exceeds tangible book of about $39 per share because the deposit franchise and trust business keep earning more than the capital behind them even after losses of this size; if that recovery did not happen, tangible book is the more honest floor. MARGIN-OF-SAFETY PRICE. We are quite sure of the earnings level at about $3.20 to $4.75 over a cycle and much less sure of anything above that. The worst plausible event is a commercial real estate downturn in a single region on a bank that has twice taken roughly $10 million hits from single events in ten years (the 2017 settlement and the 2018 participation). The bank would survive it, with no debt maturities that threaten it, deposits that are 87% insured or collateralised and funding from the FHLB and Federal Reserve available, but earnings could be near zero for two years. Nonaccrual loans rose from 0.02% to 0.55% in 2025 on one $7.1 million construction loan with an $892 thousand reserve; if that and the other three nonaccrual CRE loans (about $8.1 million in all) were a first sign rather than an exception, we would be wrong. If we are wrong on the margin holding, normal earnings of $3.20 are about 25% lower; if wrong on credit, the bear case applies; either way tangible book of roughly $39 per share is the anchor. The price assumes a five-year holding period; over that period the bank pays a dividend of about $1.34 a share and retains about $3 a share a year, which adds to book value. The margin-of-safety price is $32 a share: about 7.5 times normal earnings, about 18% below tangible book, a dividend yield above 4%. From that price, if the franchise earns what we describe and the shares come to reflect it within five years, the dividends plus the middle-case value imply 20% a year, and in a bad credit cycle the conservative case still implies a bank worth more than that price. The shares are thinly traded. WHAT CHANGED. Our previous estimate (September 2026) used a different basis for valuing the cases and its figures are not comparable. In the business itself the main news is a stronger first half of 2026, with profit up 35%, while our view of the credit risk is unchanged: commercial real estate concentration, the 2025 nonaccrual loans and the thin trading remain.