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EX-31.2 - FRANKLIN FINANCIAL SERVICES CORP /PA/v221326_ex31-2.htm
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EX-31.1 - FRANKLIN FINANCIAL SERVICES CORP /PA/v221326_ex31-1.htm
EX-32.1 - FRANKLIN FINANCIAL SERVICES CORP /PA/v221326_ex32-1.htm
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
 (Mark One)
x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011,
OR

¨  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ....... to .......

Commission file number 0-12126

FRANKLIN FINANCIAL SERVICES CORPORATION
(Exact name of registrant as specified in its charter)

PENNSYLVANIA
 
25-1440803
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
  
Identification No.)

20 SOUTH MAIN STREET (P.O. BOX 6010), CHAMBERSBURG, PA 17201-0819
(Address of principal executive offices)

717/264-6116
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x   No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨  No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.   See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer ¨       Accelerated filer  x         Non-accelerated filer ¨          Smaller reporting company ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act)  Yes¨  No x

There were 3,935,003 outstanding shares of the Registrant’s common stock as of April 29, 2011.
 
 
 

 
 
INDEX

Part I - FINANCIAL INFORMATION
 
   
Item 1 - Financial Statements
  3
   
 
Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010 (unaudited)
  3
     
 
Consolidated Statements of Income for the Three Months ended March 31, 2011 and 2010 (unaudited)
  4
     
 
Consolidated Statements of Changes in Shareholders’ Equity for the Three Months ended March 31, 2011 and 2010 (unaudited)
5
     
 
Consolidated Statements of Cash Flows for the Three Months ended March 31, 2011 and 2010 (unaudited)
  6
     
 
Notes to Consolidated Financial Statements (unaudited)
  7
     
Item 2 - Management’s Discussion and Analysis of Results of Operations and Financial Condition
  26
   
Item 3 – Quantitative and Qualitative Disclosures about Market Risk
  47
   
Item 4 – Controls and Procedures
  47
   
Part II - OTHER INFORMATION
 
   
Item 1 – Legal Proceedings
  48
   
Item 1A – Risk Factors
  48
   
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
  48
   
Item 3 – Defaults by the Company on its Senior Securities
  48
   
Item 4 – Removed and Reserved
  48
   
Item 5 – Other Information
  48
   
Item 6 – Exhibits
  48
   
SIGNATURE PAGE
  49
   
EXHIBITS
 

 
2

 
 
Part I FINANCIAL INFORMATION

Item 1 Financial Statements

Consolidated Balance Sheets
(Amounts in thousands, except share and per share data)
(unaudited)

   
March 31
   
December 31
 
   
2011
   
2010
 
         
 
 
Assets
           
Cash and due from banks
  $ 12,512     $ 11,528  
Interest-bearing deposits in other banks
    9,468       10,578  
Total cash and cash equivalents
    21,980       22,106  
Investment securities available for sale , at fair value
    123,467       117,616  
Restricted stock
    5,852       6,159  
Loans
    763,518       748,642  
Allowance for loan losses
    (9,198 )     (8,801 )
Net Loans
    754,320       739,841  
Premises and equipment, net
    16,392       16,592  
Bank owned life insurance
    19,756       19,591  
Goodwill
    9,016       9,016  
Other intangible assets
    1,894       2,004  
Other assets
    19,306       18,964  
Total assets
  $ 971,983     $ 951,889  
                 
Liabilities
               
Deposits
               
Demand (noninterest-bearing)
  $ 100,647     $ 90,317  
Savings and interest checking
    455,947       441,819  
Time
    200,713       202,195  
Total Deposits
    757,307       734,331  
Securities sold under agreements to repurchase
    54,366       51,164  
Long-term debt
    61,712       70,885  
Other liabilities
    14,258       12,870  
Total liabilities
    887,643       869,250  
                 
Shareholders' equity
               
Common stock $1 par value per share, 15,000,000 shares authorized
               
with 4,330,848 shares issued and 3,932,924 shares outstanding at
               
March 31, 2011 and 4,317,058 shares issued and 3,919,108 shares
               
outstanding at December 31, 2010
    4,331       4,317  
Capital stock without par value, 5,000 shares authorized
               
with no shares issued or outstanding
    -       -  
Additional paid-in capital
    33,354       33,096  
Retained earnings
    58,775       57,984  
Accumulated other comprehensive loss
    (5,005 )     (5,642 )
Treasury stock, 397,924 shares and 397,950 shares at cost at March 31,
               
2011 and December 31, 2010, respectively
    (7,115 )     (7,116 )
Total shareholders' equity
    84,340       82,639  
Total liabilities and shareholders' equity
  $ 971,983     $ 951,889  

The accompanying notes are an integral part of these financial statements.

 
3

 

Consolidated Statements of Income
(Amounts in thousands, except per share data)
(unaudited)

   
For the Three Months Ended
 
   
March 31
 
   
2011
   
2010
 
       
Interest income
           
Loans, including fees
  $ 9,342     $ 9,551  
Interest and dividends on investments:
               
Taxable interest
    583       870  
Tax exempt interest
    343       472  
Dividend income
    25       16  
Deposits and obligations of other banks
    7       7  
Total interest income
    10,300       10,916  
                 
Interest expense
               
Deposits
    1,670       2,360  
Securities sold under agreements to repurchase
    33       38  
Short-term borrowings
    1       -  
Long-term debt
    701       973  
Total interest expense
    2,405       3,371  
Net interest income
    7,895       7,545  
Provision for  loan losses
    900       625  
Net interest income after provision for loan losses
    6,995       6,920  
                 
Noninterest income
               
Investment and trust services fees
    932       1,017  
Loan service charges
    481       197  
Mortgage banking activities
    10       69  
Deposit service charges and fees
    536       577  
Other service charges and fees
    362       326  
Increase in cash surrender value of life insurance
    165       166  
Other
    25       49  
OTTI losses on securities
    -       (689 )
Loss recognized in other comprehensive income (before taxes)
    -       (434 )
Net OTTI losses recognized in earnings
    -       (255 )
Securities gains, net
    11       249  
Total noninterest income
    2,522       2,395  
                 
Noninterest Expense
               
Salaries and benefits
    3,713       3,441  
Net occupancy expense
    531       526  
Furniture and equipment expense
    223       192  
Advertising
    292       301  
Legal and professional fees
    271       395  
Data processing
    381       377  
Pennsylvania bank shares tax
    165       156  
Intangible amortization
    111       114  
FDIC insurance
    311       292  
Other
    1,024       866  
Total noninterest expense
    7,022       6,660  
Income before federal income taxes
    2,495       2,655  
Federal income tax expense
    646       681  
Net income
  $ 1,849     $ 1,974  
                 
Per share
               
Basic earnings per share
  $ 0.47     $ 0.51  
Diluted earnings per share
  $ 0.47     $ 0.51  
Cash dividends declared per share
  $ 0.27     $ 0.27  

The accompanying notes are an integral part of these financial statements.

 
4

 

Consolidated Statements of Changes in Shareholders' Equity
For the Three Months Ended March 31, 2011 and 2010
(unaudited)

                      
Accumulated
             
         
Additional
         
Other
             
   
Common
   
Paid-in
   
Retained
   
Comprehensive
   
Treasury
       
(Dollars in thousands, except per share data)
 
Stock
   
Capital
   
Earnings
   
Loss
   
Stock
   
Total
 
                                     
Balance at December 31, 2009
  $ 4,299     $ 32,832     $ 54,566     $ (5,138 )   $ (7,793 )   $ 78,766  
                                                 
Comprehensive income:
                                               
Net income
    -       -       1,974       -       -       1,974  
Unrealized gain on securities,
                                               
net of reclassification adjustments and taxes
    -       -       -       951       -       951  
Unrealized loss on hedging activities,
                                               
net of reclassification adjustments and taxes
    -       -       -       (104 )     -       (104 )
Pension adjustment, net of tax
                            (126 )             (126 )
Total Comprehensive income
                            -               2,695  
                                                 
Cash dividends declared, $.27 per share
    -       -       (1,042 )     -       -       (1,042 )
Treasury shares issued to dividend reinvestment plan: 12,885 shares
    -       (26 )     -       -       230       204  
Balance at March 31, 2010
  $ 4,299     $ 32,806     $ 55,498     $ (4,417 )   $ (7,563 )   $ 80,623  
                                                 
Balance at December 31, 2010
  $ 4,317     $ 33,096     $ 57,984     $ (5,642 )   $ (7,116 )   $ 82,639  
                                                 
Comprehensive income:
                                               
Net income
    -       -       1,849       -       -       1,849  
Unrealized gain on securities,
                                               
net of reclassification adjustments and taxes
    -       -       -       479       -       479  
Unrealized gain on hedging activities,
                                               
net of reclassification adjustments and taxes
    -       -       -       158       -       158  
Pension adjustment, net of tax
    -       -       -       -       -       -  
Total Comprehensive income
                                            2,486  
                                                 
Cash dividends declared, $.27 per share
    -       -       (1,058 )     -       -       (1,058 )
Common stock issued under stock option plans, 26 shares
    -       -       -       -       1       1  
Common stock issued under dividend reinvestment plan, 13,790 shares
    14       258       -       -       -       272  
Balance at March 31, 2011
  $ 4,331     $ 33,354     $ 58,775     $ (5,005 )   $ (7,115 )   $ 84,340  

The accompanying notes are an integral part of these financial statements.

 
5

 

Consolidated Statements of Cash Flows
(unaudited)

   
For the Three Months Ended March 31
 
   
2011
   
2010
 
(Amounts in thousands)
           
Cash flows from operating activities
           
Net income
  $ 1,849     $ 1,974  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    349       336  
Net amortization (accretion) of loans and investment securities
    159       40  
Amortization and net change in mortgage servicing rights valuation
    36       9  
Amortization of intangibles
    110       114  
Provision for loan losses
    900       625  
Net realized gains on sales of securities
    (11 )     (249 )
Other-than-temporary-impairment losses on securities
    -       255  
Loans originated for sale
    -       (121 )
Proceeds from sale of loans
    -       137  
Gain on sales of loans
    -       (16 )
Net loss on sale or disposal of other real estate/other repossessed assets
    -       18  
Increase in cash surrender value of life insurance
    (165 )     (166 )
Contribution to pension plan
    (102 )     (321 )
Increase in interest receivable and other assets
    (51 )     (481 )
Increase in interest payable and other liabilities
    1,622       1,038  
Other, net
    533       (171 )
Net cash provided by operating activities
    5,229       3,021  
                 
Cash flows from investing activities
               
Proceeds from sales and calls of investment securities available for sale
    880       4,408  
Proceeds from maturities and paydowns of investment securities available for sale
    4,094       9,503  
Purchase of investment securities available for sale
    (11,223 )     (1,853 )
Decrease in restricted stock
    307       -  
Net increase in loans
    (15,636 )     (10,806 )
Proceeds from sale of other real estate/other repossessed assets
    124       391  
Capital expenditures
    (121 )     (319 )
Net cash (used in) provided by investing activities
    (21,575 )     1,324  
                 
Cash flows from financing activities
               
Net increase in demand deposits, NOW accounts and savings accounts
    24,458       24,298  
Net decrease in time deposits
    (1,482 )     (35,983 )
Net increase in short-term borrowings and repurchase agreements
    3,202       3,815  
Long-term debt payments
    (9,173 )     (444 )
Dividends paid
    (1,058 )     (1,042 )
Common stock issued to dividend reinvestment plan
    -       204  
Common stock issued under dividend reinvestment plan
    272       -  
Common stock issued under stock options plans
    1       -  
Net cash provided by (used in) financing activities
    16,220       (9,152 )
Decrease in cash and cash equivalents
    (126 )     (4,807 )
Cash and cash equivalents at beginning of period
    22,106       33,248  
Cash and cash equivalents at end of period
  $ 21,980     $ 28,441  
                 
Supplemental Disclosures of Cash Flow Information
               
Cash paid during the year for:
               
Interest on deposits and other borrowed funds
  $ 2,271     $ 3,311  
Income taxes
  $ -     $ 1,002  
Noncash Activities
               
Loans transferred to Other Real Estate
  $ 207     $ 413  

The accompanying notes are an integral part of these financial statements.

 
6

 
 
FRANKLIN FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Basis of Presentation

The consolidated financial statements include the accounts of Franklin Financial Services Corporation (the Corporation), and its wholly-owned subsidiaries, Farmers and Merchants Trust Company of Chambersburg (the Bank), Franklin Financial Properties Corp., and Franklin Future Fund Inc.  Farmers and Merchants Trust Company of Chambersburg is a commercial bank that has one wholly-owned subsidiary, Franklin Realty Services Corporation.  Franklin Realty Services Corporation is an inactive real-estate brokerage company.  Franklin Financial Properties Corp. holds real estate assets that are leased by the Bank. Franklin Future Fund Inc. is a non-bank investment company. The activities of non-bank entities are not significant to the consolidated totals.  All significant intercompany transactions and account balances have been eliminated.

In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the consolidated financial position, results of operations, and cash flows as of March 31, 2011, and for all other periods presented have been made.

Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted.  It is suggested that these consolidated financial statements be read in conjunction with the audited consolidated financial statements and notes thereto included in the Corporation’s 2010 Annual Report on Form 10-K.  The consolidated results of operations for the period ended March 31, 2011 are not necessarily indicative of the operating results for the full year.  Management has evaluated subsequent events for potential recognition and/or disclosure through the date these consolidated financial statements were issued.

The consolidated balance sheet at December 31, 2010 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete consolidated financial statements.

For purposes of reporting cash flows, cash and cash equivalents include Cash and due from banks, Interest-bearing deposits in other banks and Federal funds sold.  Generally, Federal funds are purchased and sold for one-day periods.

Earnings per share is computed based on the weighted average number of shares outstanding during each period end.  A reconciliation of the weighted average shares outstanding used to calculate basic earnings per share and diluted earnings per share follows:

 
 
7

 

 
   
For the Three Months Ended
 
   
March 31
 
(In thousands, except per share data)
 
2011
   
2010
 
Weighted average shares outstanding (basic)
    3,925       3,868  
Impact of common stock equivalents
    5       -  
Weighted average shares outstanding (diluted)
    3,931       3,868  
Anti-dilutive options excluded from the calculation
    70       102  
Net income
  $ 1,849     $ 1,974  
Basic earnings per share
  $ 0.47     $ 0.51  
Diluted earnings per share
  $ 0.47     $ 0.51  

Note 2 – Recent Accounting Pronouncements
 
Receivables – Troubled Debt Restructurings by Creditors.   The FASB has issued this Update to clarify the accounting principles applied to loan modifications, as defined by FASB ASC Subtopic 310-40, Receivables – Troubled Debt Restructurings by Creditors.  The update clarifies guidance on a creditor’s evaluation of whether or not a concession has been granted, with an emphasis on evaluating all aspects of the modification rather than a focus on specific criteria, such as the effective interest rate test, to determine a concession.  The Update goes on to provide guidance on specific types of modifications such as changes in the interest rate of the borrowing, and insignificant delays in payments, as well as guidance on the creditor’s evaluation of whether or not a debtor is experiencing financial difficulties.  For public entities, the amendments in the Update are effective for the first interim or annual periods beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption.  The entity should also disclose information required by ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, which had previously been deferred by ASU 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debit Restructurings in Update No. 2010-20, for interim and annual periods beginning on or after June 15, 2011.  Early adoption is permitted.  The Corporation is in the process of analyzing the loan portfolio to properly identify loans that may be determined to be Troubled Debt Restructuring loans.  The results of this analysis could increase future charge-off and nonaccrual balances.

Note 3 – Comprehensive Income

Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on available-for-sale securities and derivatives and the change in plan assets and benefit obligations on the Bank’s pension plan, net of tax, that are recognized as separate components of shareholders’ equity.
 
 
8

 
 
The components of other comprehensive income and related tax effects are as follows:

   
For the Three Months Ended
 
(Amounts in thousands)
 
March 31
 
   
2011
   
2010
 
Net Income
  $ 1,849     $ 1,974  
                 
Securities:
               
Unrealized gains arising during the period
    737       1,435  
Reclassification adjustment for (gains) losses included in net income
    (11 )     6  
Net unrealized gains
    726       1,441  
Tax effect
    (247 )     (490 )
Net of tax amount
    479       951  
                 
Derivatives:
               
Unrealized gains (losses) arising during the period
    66       (338 )
Reclassification adjustment for losses included in net income
    175       181  
Net unrealized gains (losses)
    241       (157 )
Tax effect
    (82 )     53  
Net of tax amount
    158       (104 )
                 
Pension:
               
Change in plan assets and benefit obligations
    -       (191 )
Reclassification adjustment for losses included in net income
    -       -  
Net unrealized losses
    -       (191 )
Tax effect
    -       65  
Net of tax amount
    -       (126 )
                 
Total other comprehensive income
    637       721  
Total Comprehensive Income
  $ 2,486     $ 2,695  

The components of accumulated other comprehensive loss included in shareholders' equity are as follows:

(Amounts in thousands)
 
March 31
   
December 31
 
   
2011
   
2010
 
             
Net unrealized losses on securities
  $ (300 )   $ (1,026 )
Tax effect
    102       349  
Net of tax amount
    (198 )     (677 )
                 
Net unrealized losses on derivatives
    (1,511 )     (1,752 )
Tax effect
    513       596  
Net of tax amount
    (998 )     (1,156 )
                 
Accumulated pension adjustment
    (5,771 )     (5,771 )
Tax effect
    1,962       1,962  
Net of tax amount
    (3,809 )     (3,809 )
Total accumulated other comprehensive loss
  $ (5,005 )   $ (5,642 )
 
 
9

 
 
Note 4 – Guarantees

The Corporation does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit.  Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party.  Generally, all letters of credit, when issued, have expiration dates within one year.  The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers.  The Bank generally holds collateral and/or personal guarantees supporting these commitments.  The Bank had $28.6 million and $20.5 million of standby letters of credit as of March 31, 2011 and December 31, 2010, respectively. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees.  The amount of the liability as of March 31, 2011 and December 31, 2010 for guarantees under standby letters of credit issued was not material.

Note 5 - Investments

The amortized cost and estimated fair value of investment securities available for sale as of March 31, 2011 and December 31, 2010 are:

(Amounts in thousands)
       
Gross
   
Gross
   
Estimated
 
   
Amortized
   
unrealized
   
unrealized
   
fair
 
March 31, 2011
 
cost
   
gains
   
losses
   
value
 
Equity securities
  $ 3,258     $ 58     $ (454 )   $ 2,862  
Obligations of U.S. Government agencies
    17,562       61       (46 )     17,577  
Obligations of state and political subdivisions
    38,908       1,203       (99 )     40,012  
Corporate debt securities
    2,615       69       (25 )     2,659  
Preferred securities
    5,881       -       (1,363 )     4,518  
Mortgage-backed securities
                               
Agency
    51,305       863       (148 )     52,020  
Non-Agency
    4,167       20       (419 )     3,768  
Asset-backed securities
    71       -       (20 )     51  
    $ 123,767     $ 2,274     $ (2,574 )   $ 123,467  

 
       
Gross
   
Gross
   
Estimated
 
(Amounts in thousands)
 
Amortized
   
unrealized
   
unrealized
   
fair
 
December 31, 2010
 
cost
   
gains
   
losses
   
value
 
Equity securities
  $ 4,126     $ 50     $ (538 )   $ 3,638  
Obligations of U.S. Government agencies
    14,780       61       (56 )     14,785  
Obligations of state and political subdivisions
    39,477       894       (419 )     39,952  
Corporate debt securities
    2,646       64       (44 )     2,666  
Preferred securities
    5,876       -       (1,680 )     4,196  
Mortgage-backed securities
                               
Agency
    47,239       1,104       (46 )     48,297  
Non-Agency
    4,424       20       (415 )     4,029  
Asset-backed securities
    74       -       (21 )     53  
    $ 118,642     $ 2,193     $ (3,219 )   $ 117,616  

The book value of securities pledged as collateral to secure various funding sources was $115.5 million at March 31, 2011 and $108.7 million at December 31, 2010.
 
 
10

 
 
The amortized cost and estimated fair value of debt securities as of March 31, 2011, by contractual maturity are shown below. Actual maturities may differ from contractual maturities because of prepayment or call options embedded in the securities.

         
Estimated
 
   
Amortized
   
fair
 
(Amounts in thousands)
 
cost
   
value
 
Due in one year or less
  $ 5,378     $ 5,411  
Due after one year through five years
    14,235       14,647  
Due after five years through ten years
    17,491       17,997  
Due after ten years
    27,933       26,762  
      65,037       64,817  
Mortgage-backed securities
    55,472       55,788  
                 
 
  $ 120,509     $ 120,605  

The following table reflects temporary impairment in the investment portfolio (excluding restricted stock), aggregated by investment category, length of time that individual securities have been in a continuous unrealized loss position and the number of securities in each category as of March 31, 2011 and December 31, 2010:
 
   
March 31, 2011
 
   
Less than 12 months
   
12 months or more
   
Total
 
   
Fair
   
Unrealized
         
Fair
   
Unrealized
         
Fair
   
Unrealized
       
(Amounts in thousands)
 
Value
   
Losses
   
Number
   
Value
   
Losses
   
Number
   
Value
   
Losses
   
Number
 
                                                       
Equity securities
  $ 813     $ (19 )     2     $ 1,334     $ (435 )     18     $ 2,147     $ (454 )     20  
Obligations of U.S. Government agencies
    1,039       (16 )     3       6,326       (30 )     12       7,365       (46 )     15  
Obligations of state and political subdivisions
    5,637       (86 )     12       293       (13 )     1       5,930       (99 )     13  
Corporate debt securities
    -       -       -       1,987       (25 )     2       1,987       (25 )     2  
Preferred Securities
    -       -       -       4,517       (1,363 )     7       4,517       (1,363 )     7  
Mortgage-backed securities
                                                                       
Agency
    16,749       (148 )     12       -       -       -       16,749       (148 )     12  
Non-Agency
    450       (1 )     1       2,028       (418 )     4       2,478       (419 )     5  
Asset-backed securities
    -       -       -       52       (20 )     3       52       (20 )     3  
Total temporarily impaired securities
  $ 24,688     $ (270 )     30     $ 16,537     $ (2,304 )     47     $ 41,225     $ (2,574 )     77  
                                                                         
   
December 31, 2010
 
   
Less than 12 months
   
12 months or more
   
Total
 
   
Fair
   
Unrealized
           
Fair
   
Unrealized
           
Fair
   
Unrealized
         
(Amounts in thousands)
 
Value
   
Losses
   
Number
   
Value
   
Losses
   
Number
   
Value
   
Losses
   
Number
 
                                                                         
Equity securities
  $ 1     $ (1 )     1     $ 3,261     $ (537 )     20     $ 3,262     $ (538 )     21  
Obligations of U.S. Government agencies
    3,476       (17 )     2       6,433       (39 )     14       9,909       (56 )     16  
Obligations of state and political subdivisions
    11,861       (405 )     24       292       (14 )     1       12,153       (419 )     25  
Corporate debt securities
    -       -       -       1,968       (44 )     2       1,968       (44 )     2  
Preferred Securities
    -       -       -       4,196       (1,680 )     7       4,196       (1,680 )     7  
Mortgage-backed securities
                                                                       
Agency
    9,859       (46 )     6       -       -       -       9,859       (46 )     6  
Non-Agency
    -       -       -       2,676       (415 )     5       2,676       (415 )     5  
Asset-backed securities
    -       -       -       53       (21 )     3       53       (21 )     3  
Total temporarily impaired securities
  $ 25,197     $ (469 )     33     $ 18,879     $ (2,750 )     52     $ 44,076     $ (3,219 )     85  
 
 
11

 
 
The following table provides additional detail about trust preferred securities as of March 31, 2011:

Trust Preferred Securities
(Dollars in thousands)
Deal Name
 
Single
Issuer or
Pooled
 
Class
 
Amortized
Cost
   
Estimated
Fair Value
   
Gross
Unrealized
Gain (Loss)
   
Lowest
Credit
Rating
Assigned
   
Number of
Banks
Currently
Performing
 
Deferrals
and Defaults
as % of
Original
Collateral
 
Expected Deferral/
Defaults as a
Percentage of
Remaining Performing
Collateral
                                             
Huntington Cap Trust
 
Single
 
Preferred Stock
  $ 928     $ 593     $ (335 )   B       1  
None
 
None
Huntington Cap Trust II
 
Single
 
Preferred Stock
    873       561       (312 )   B       1  
None
 
None
BankAmerica Cap III
 
Single
 
Preferred Stock
    956       760       (196 )  
BB
      1  
None
 
None
Wachovia Cap Trust II
 
Single
 
Preferred Stock
    273       235       (38 )  
Baa2
      1  
None
 
None
Corestates Captl Tr II
 
Single
 
Preferred Stock
    924       781       (143 )  
Baa1
      1  
None
 
None
Chase Cap VI JPM
 
Single
 
Preferred Stock
    956       828       (128 )  
BBB
      1  
None
 
None
Fleet Cap Tr V
 
Single
 
Preferred Stock
    971       761       (210 )  
BB
      1  
None
 
None
            $ 5,881     $ 4,519     $ (1,362 )                    

The following table provides additional detail about private label mortgage-backed securities as of March 31, 2011:
 
Private Label Mortgage Backed Securities
 
(Dollars in thousands)
                 
Gross
                 
Cummulative
 
   
Orgination
 
Amortized
   
Fair
   
Unrealized
 
Collateral
 
Lowest Credit
   
Credit
   
OTTI
 
Decscription
 
Date
 
Cost
   
Value
   
Gain (Loss)
 
Type
 
Rating Assigned
   
Support %
   
Charges
 
RALI 2003-QS15 A1
 
8/1/2003
  $ 451     $ 450     $ (1 )
ALT A
 
Aa2
      11.60     $ -  
RALI 2004-QS4 A7
 
3/1/2004
    564       566       2  
ALT A
 
AAA
      12.81       -  
MALT 2004-6 7A1
 
6/1/2004
    706       724       18  
ALT A
 
BBB
      10.70       -  
RALI 2005-QS2 A1
 
2/1/2005
    630       574       (56 )
ALT A
  B       7.64       -  
RALI 2006-QS4 A2
 
4/1/2006
    912       686       (226 )
ALT A
  D       -       202  
GSR 2006-5F 2A1
 
5/1/2006
    397       361       (36 )
Prime
 
CCC
      4.14       -  
RALI 2006-QS8 A1
 
7/28/2006
    507       407       (100 )
ALT A
  D       -       133  
        $ 4,167     $ 3,768     $ (399 )                   $ 335  

 
For more information concerning investments, refer to the Investment Securities discussion in the Financial Condition section of management’s discussion and analysis.
 
 
12

 
 
Note 6 – Loans

A summary of loans outstanding, by primary collateral, at the end of the reporting period is as follows:
               
Change
 
(Amounts in thousands)
 
March 31, 2011
   
December 31, 2010
   
Amount
   
%
 
Residential Real Estate 1-4 Family
                       
First liens
  $ 144,174     $ 144,128     $ 46       -  
Junior liens and lines of credit
    54,323       56,694       (2,371 )     (4.2 )
Total
    198,497       200,822       (2,325 )     (1.2 )
Residential real estate - construction
    81,184       79,557       1,627       2.0  
Commercial, industrial and agricultural real estate
    303,153       304,195       (1,042 )     (0.3 )
Commercial, industrial and agricultural
    164,712       146,672       18,040       12.3  
Consumer
    15,972       17,396       (1,424 )     (8.2 )
      763,518       748,642       14,876       2.0  
Less:  Allowance for loan losses
    (9,198 )     (8,801 )     (397 )     4.5  
Net Loans
  $ 754,320     $ 739,841     $ 14,479       2.0  
                                 
Included in the loan balances are the following:
                               
Net unamortized deferred loan costs
  $ 566     $ 567                  
Unamortized discount on purchased loans
  $ (208 )   $ (220 )                
                                 
Loans pledged as collateral for borrowings and commitments from:
                         
FHLB
  $ 702,866     $ 648,272                  
Federal Reserve Bank
    49,343       53,682                  
    $ 752,209     $ 701,954                  

Note 7 – Loan Quality

The following table presents, by loan segment, the Allowance for Loan Losses (ALL) for the periods ended:
 
    
 
   
 
         
Commercial
                   
   
Residential Real Estate 1-4 Family
   
Industrial &
   
Commercial
             
   
 
   
Junior Liens &
   
 
   
Agricultural
   
Industrial &
             
(Dollars in thousands)
 
First Liens
   
Lines of Credit
   
Construction
   
Real Estate
   
Agricultural
   
Consumer
   
Total
 
                                           
ALL at December 31, 2010
  $ 600     $ 352     $ 2,596     $ 3,358     $ 1,578     $ 317     $ 8,801  
Charge-offs
    (107 )     (5 )     (400 )     (161 )     -       (64 )     (737 )
Recoveries
    11       -       -       193       -       30       234  
Provision
    108       (55 )     146       826       (131 )     6       900  
ALL at March 31, 2011
  $ 612     $ 292     $ 2,342     $ 4,216     $ 1,447     $ 289     $ 9,198  
                                                         
ALL at December 31, 2009
  $ 550     $ 278     $ 3,087     $ 4,175     $ 752     $ 95     $ 8,937  
Charge-offs
    (107 )     (165 )     (982 )     (1,736 )     (232 )     (452 )     (3,674 )
Recoveries
    19       10       53       18       61       142       303  
Provision
    138       229       438       901       997       532       3,235  
ALL at December 31, 2010
  $ 600     $ 352     $ 2,596     $ 3,358     $ 1,578     $ 317     $ 8,801  
 
 
13

 
 
The following table presents, by loan segment, loans that were evaluated for the ALL under the specific reserve (individually) and those that were evaluated under the general reserve (collectively) as of March 31, 2011 and December 31, 2010.