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EX-31.1 - EX-31.1 - FRANKLIN FINANCIAL SERVICES CORP /PA/fraf-20160930xex31_1.htm
EX-32.2 - EX-32.2 - FRANKLIN FINANCIAL SERVICES CORP /PA/fraf-20160930xex32_2.htm
EX-32.1 - EX-32.1 - FRANKLIN FINANCIAL SERVICES CORP /PA/fraf-20160930xex32_1.htm
EX-31.2 - EX-31.2 - FRANKLIN FINANCIAL SERVICES CORP /PA/fraf-20160930xex31_2.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

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

For the quarterly period ended September 30, 2016

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 incorporation or organization) 

(I.R.S. Employer Identification No.)







 

20 South Main Street, Chambersburg

PA 17201-0819

(Address of principal executive offices)

(Zip Code)



(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   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          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



There were 4,299,317 outstanding shares of the Registrant’s common stock as of October 31, 2016.

 


 

INDEX



               



 

 

Part I - FINANCIAL INFORMATION

 



 

 

Item 1

Financial Statements

 



Consolidated Balance Sheets as of September  30, 2016 and December 31, 2015 (unaudited)

1



Consolidated Statements of Income for the Three and Nine Months ended September  30, 2016 

2



and 2015 (unaudited)

 



Consolidated Statements of Comprehensive Income for the Three and Nine Months ended

3



September  30, 2016 and 2015 (unaudited)

 



Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months

4



ended September 30, 2016 and 2015 (unaudited)

 



Consolidated Statements of Cash Flows for the Nine Months ended September  30, 2016 

5



and 2015 (unaudited)

 



Notes to Consolidated Financial Statements (unaudited)

6



 

 

Item 2

Management’s Discussion and Analysis of Results of Operations and Financial Condition

28

Item 3

Quantitative and Qualitative Disclosures about Market Risk

52

Item 4

Controls and Procedures

52



 

 

Part II - OTHER INFORMATION 

 



 

 

Item 1

Legal Proceedings

53

Item 1A

Risk Factors

53

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

53

Item 3

Defaults Upon Senior Securities

53

Item 4

Mine Safety Disclosures

53

Item 5

Other Information

53

Item 6

Exhibits

53

SIGNATURE PAGE

54

EXHIBITS

 







 

 


 

Part I FINANCIAL INFORMATION

Item 1 Financial Statements

Consolidated Balance Sheets







 

 

 

 

 



 

 

 

 

(Dollars in thousands, except share and per share data)(unaudited)

September 30

 

December 31



2016

 

2015

Assets

 

 

 

 

 

Cash and due from banks

$

16,770 

 

$

20,664 

Interest-bearing deposits in other banks

 

23,824 

 

 

18,502 

Total cash and cash equivalents

 

40,594 

 

 

39,166 

Investment securities available for sale, at fair value

 

155,345 

 

 

159,473 

Restricted stock

 

1,118 

 

 

782 

Loans held for sale

 

367 

 

 

461 

Loans

 

858,576 

 

 

782,016 

Allowance for loan losses

 

(10,685)

 

 

(10,086)

Net Loans

 

847,891 

 

 

771,930 

Premises and equipment, net

 

14,322 

 

 

14,759 

Bank owned life insurance

 

22,327 

 

 

22,364 

Goodwill

 

9,016 

 

 

9,016 

Other real estate owned

 

5,872 

 

 

6,451 

Deferred tax asset, net

 

4,044 

 

 

4,758 

Other assets

 

6,224 

 

 

6,135 

Total assets

$

1,107,120 

 

$

1,035,295 



 

 

 

 

 

Liabilities

 

 

 

 

 

Deposits

 

 

 

 

 

Noninterest-bearing checking

$

174,390 

 

$

152,095 

Money management, savings and interest checking

 

726,845 

 

 

680,686 

Time

 

77,317 

 

 

85,731 

Total Deposits

 

978,552 

 

 

918,512 

Short-term borrowings

 

8,530 

 

 

 -

Other liabilities

 

3,159 

 

 

5,407 

Total liabilities

 

990,241 

 

 

923,919 



 

 

 

 

 

Shareholders' equity

 

 

 

 

 

Common stock, $1 par value per share,15,000,000 shares authorized with

 

 

 

 

 

4,688,149 shares issued and 4,299,223 shares outstanding at September 30, 2016 and

 

 

 

 

 

4,659,319 shares issued and 4,275,879 shares outstanding at December 31, 2015

 

4,688 

 

 

4,659 

Capital stock without par value, 5,000,000 shares authorized with no

 

 

 

 

 

shares issued and outstanding

 

 -

 

 

 -

Additional paid-in capital

 

39,584 

 

 

38,778 

Retained earnings

 

82,262 

 

 

78,517 

Accumulated other comprehensive loss

 

(2,547)

 

 

(3,722)

Treasury stock, 388,926 shares at September 30, 2016 and 383,440 shares at

 

 

 

 

 

December 31, 2015, at cost

 

(7,108)

 

 

(6,856)

Total shareholders' equity

 

116,879 

 

 

111,376 

Total liabilities and shareholders' equity

$

1,107,120 

 

$

1,035,295 



 

 

 

 

 

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

 

 

 

 

 



















1

 


 

Consolidated Statements of Income





 

 

 

 

 

 

 

 

 

 

 



For the Three Months Ended

 

For the Nine Months Ended

(Dollars in thousands, except per share data) (unaudited)

September 30

 

September 30



2016

 

2015

 

2016

 

2015

Interest income

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

$

8,343 

 

$

7,665 

 

$

24,394 

 

$

22,518 

Interest and dividends on investments:

 

 

 

 

 

 

 

 

 

 

 

Taxable interest

 

569 

 

 

584 

 

 

1,729 

 

 

1,832 

Tax exempt interest

 

355 

 

 

402 

 

 

1,079 

 

 

1,218 

Dividend income

 

 

 

 

 

12 

 

 

63 

Deposits and obligations of other banks

 

79 

 

 

66 

 

 

220 

 

 

192 

Total interest income

 

9,348 

 

 

8,720 

 

 

27,434 

 

 

25,823 



 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

559 

 

 

554 

 

 

1,650 

 

 

1,813 

Short-term borrowings

 

 

 

 

 

 

 

Total interest expense

 

563 

 

 

555 

 

 

1,656 

 

 

1,814 

Net interest income

 

8,785 

 

 

8,165 

 

 

25,778 

 

 

24,009 

Provision for loan losses

 

1,150 

 

 

400 

 

 

3,325 

 

 

1,035 

Net interest income after provision for loan losses

 

7,635 

 

 

7,765 

 

 

22,453 

 

 

22,974 



 

 

 

 

 

 

 

 

 

 

 

Noninterest income

 

 

 

 

 

 

 

 

 

 

 

Investment and trust services fees

 

1,211 

 

 

1,154 

 

 

3,683 

 

 

3,805 

Loan service charges

 

102 

 

 

288 

 

 

518 

 

 

784 

Deposit service charges and fees

 

635 

 

 

623 

 

 

1,815 

 

 

1,700 

Other service charges and fees

 

325 

 

 

309 

 

 

941 

 

 

916 

Debit card income

 

373 

 

 

346 

 

 

1,095 

 

 

1,021 

Increase in cash surrender value of life insurance

 

131 

 

 

137 

 

 

399 

 

 

416 

Net (loss) gain on sale of other real estate owned

 

(20)

 

 

 -

 

 

(31)

 

 

32 

OTTI losses on debt securities

 

(10)

 

 

 -

 

 

(30)

 

 

(20)

Gain on conversion of investment security

 

 -

 

 

 -

 

 

 -

 

 

728 

Securities gains, net

 

 -

 

 

 -

 

 

 

 

Other

 

56 

 

 

126 

 

 

219 

 

 

363 

Total noninterest income

 

2,803 

 

 

2,983 

 

 

8,613 

 

 

9,753 



 

 

 

 

 

 

 

 

 

 

 

Noninterest expense

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

4,566 

 

 

4,214 

 

 

13,282 

 

 

12,500 

Occupancy, net

 

556 

 

 

535 

 

 

1,708 

 

 

1,706 

Furniture and equipment

 

221 

 

 

232 

 

 

655 

 

 

702 

Advertising

 

296 

 

 

336 

 

 

839 

 

 

807 

Legal and professional

 

423 

 

 

311 

 

 

1,114 

 

 

811 

Data processing

 

539 

 

 

524 

 

 

1,540 

 

 

1,547 

Pennsylvania bank shares tax

 

203 

 

 

206 

 

 

699 

 

 

608 

Intangible amortization

 

 -

 

 

 -

 

 

 -

 

 

181 

FDIC insurance

 

188 

 

 

170 

 

 

514 

 

 

479 

ATM/debit card processing

 

214 

 

 

193 

 

 

642 

 

 

566 

Foreclosed real estate

 

18 

 

 

322 

 

 

93 

 

 

341 

Telecommunications

 

91 

 

 

145 

 

 

300 

 

 

379 

Other

 

665 

 

 

675 

 

 

2,119 

 

 

2,385 

Total noninterest expense

 

7,980 

 

 

7,863 

 

 

23,505 

 

 

23,012 

Income before federal income tax expense

 

2,458 

 

 

2,885 

 

 

7,561 

 

 

9,715 

Federal income tax expense

 

383 

 

 

306 

 

 

1,198 

 

 

1,778 

Net income

$

2,075 

 

$

2,579 

 

$

6,363 

 

$

7,937 



 

 

 

 

 

 

 

 

 

 

 

Per share

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

$

0.48 

 

$

0.61 

 

$

1.48 

 

$

1.87 

Diluted earnings per share

$

0.48 

 

$

0.61 

 

$

1.48 

 

$

1.87 

Cash dividends declared

$

0.21 

 

$

0.19 

 

$

0.61 

 

$

0.55 

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







2

 


 







Consolidated Statements of Comprehensive Income





 

 

 

 

 

 

 

 

 

 

 

 



 

For the Three Months Ended

 

For the Nine Months Ended



 

September 30

 

September 30

(Dollars in thousands) (unaudited)

 

2016

 

2015

 

2016

 

2015

Net Income

 

$

2,075 

 

$

2,579 

 

$

6,363 

 

$

7,937 



 

 

 

 

 

 

 

 

 

 

 

 

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized (losses) gains arising during the period

 

 

(524)

 

 

1,097 

 

 

1,528 

 

 

561 

Reclassification adjustment for losses (gains) included in net income (1)

 

 

10 

 

 

 -

 

 

26 

 

 

(716)

Net unrealized (losses) gains

 

 

(514)

 

 

1,097 

 

 

1,554 

 

 

(155)

Tax effect

 

 

174 

 

 

(373)

 

 

(528)

 

 

53 

Net of tax amount

 

 

(340)

 

 

724 

 

 

1,026 

 

 

(102)



 

 

 

 

 

 

 

 

 

 

 

 

Derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains arising during the period

 

 

 -

 

 

 -

 

 

 -

 

 

31 

Reclassification adjustment for losses included in net income (2)

 

 

 -

 

 

 -

 

 

 -

 

 

160 

Net unrealized gains

 

 

 -

 

 

 -

 

 

 -

 

 

191 

Tax effect

 

 

 -

 

 

 -

 

 

 -

 

 

(65)

Net of tax amount

 

 

 -

 

 

 -

 

 

 -

 

 

126 



 

 

 

 

 

 

 

 

 

 

 

 

Pension:

 

 

 

 

 

 

 

 

 

 

 

 

Change in plan assets and benefit obligations

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Reclassification adjustment for losses included in net income (3)

 

 

225 

 

 

 -

 

 

225 

 

 

 -

Net unrealized losses

 

 

225 

 

 

 -

 

 

225 

 

 

 -

Tax effect

 

 

(76)

 

 

 -

 

 

(76)

 

 

 -

Net of tax amount

 

 

149 

 

 

 -

 

 

149 

 

 

 -



 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive (loss) income

 

 

(191)

 

 

724 

 

 

1,175 

 

 

24 

Total Comprehensive Income

 

$

1,884 

 

$

3,303 

 

$

7,538 

 

$

7,961 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Reclassification adjustment / Statement line item

 

Tax  expense (benefit)

(1) Securities / gain on conversion & securities (gains) losses,

 

 

 

 

 

 

 

 

 

 

 

 

   including OTTI losses, net

 

$

(3)

 

$

 -

 

$

(9)

 

$

243 

(2) Derivatives / interest expense on deposits

 

 

 -

 

 

 -

 

 

 -

 

 

(54)

(3) Pension / Salary & Benefits

 

 

(77)

 

 

 -

 

 

(77)

 

 

 -



 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 















3

 


 







Consolidated Statements of Changes in Shareholders' Equity

For the Nine Months Ended September 30, 2016 and 2015:









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 



 

 

 

Additional

 

 

 

 

Other

 

 

 

 

 

 



Common

 

Paid-in

 

Retained

 

Comprehensive

 

Treasury

 

 

 

(Dollars in thousands, except per share data) (unaudited)

Stock

 

Capital

 

Earnings

 

Loss

 

Stock

 

Total

Balance at December 31, 2014

$

4,607 

 

$

37,504 

 

$

71,452 

 

$

(3,100)

 

$

(6,942)

 

$

103,521 

Net income

 

 -

 

 

 -

 

 

7,937 

 

 

 -

 

 

 -

 

 

7,937 

Other comprehensive income

 

 -

 

 

 -

 

 

 -

 

 

24 

 

 

 -

 

 

24 

Cash dividends declared, $.55 per share

 

 -

 

 

 -

 

 

(2,330)

 

 

 -

 

 

 -

 

 

(2,330)

Treasury shares issued under stock option plans, 4,794 shares

 

 -

 

 

 

 

 -

 

 

 -

 

 

86 

 

 

92 

Common stock issued under dividend reinvestment plan, 36,608 shares

 

36 

 

 

833 

 

 

 -

 

 

 -

 

 

 -

 

 

869 

Balance at September 30, 2015

$

4,643 

 

$

38,343 

 

$

77,059 

 

$

(3,076)

 

$

(6,856)

 

$

110,113 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2015

$

4,659 

 

$

38,778 

 

$

78,517 

 

$

(3,722)

 

$

(6,856)

 

$

111,376 

Net income

 

 -

 

 

 -

 

 

6,363 

 

 

 -

 

 

 -

 

 

6,363 

Other comprehensive income

 

 -

 

 

 -

 

 

 -

 

 

1,175 

 

 

 -

 

 

1,175 

Cash dividends declared, $.61 per share

 

 -

 

 

 -

 

 

(2,618)

 

 

 -

 

 

 -

 

 

(2,618)

Acquisition of 30,196 shares of treasury stock

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(700)

 

 

(700)

Treasury shares issued under employer stock purchase plan, 539 shares

 

 -

 

 

 

 

 -

 

 

 -

 

 

10 

 

 

12 

Treasury shares issued under dividend reinvestment plan, 24,171 shares

 

 -

 

 

134 

 

 

 -

 

 

 -

 

 

438 

 

 

572 

Common stock issued under dividend reinvestment plan, 25,230 shares

 

25 

 

 

527 

 

 

 -

 

 

 -

 

 

 -

 

 

552 

Common stock issued under incentive stock option plan, 3,600 shares

 

 

 

55 

 

 

 -

 

 

 -

 

 

 -

 

 

59 

Stock option compensation expense

 

 -

 

 

88 

 

 

 -

 

 

 -

 

 

 -

 

 

88 

Balance at September 30, 2016

$

4,688 

 

$

39,584 

 

$

82,262 

 

$

(2,547)

 

$

(7,108)

 

$

116,879 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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



















4

 


 

Consolidated Statements of Cash Flows





 

 

 

 

 



 

 

 

 

 



Nine Months Ended September 30



2016

 

2015

(Dollars in thousands) (unaudited)

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

Net income

$

6,363 

 

$

7,937 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

1,002 

 

 

999 

Net amortization of loans and investment securities

 

1,218 

 

 

1,248 

Amortization and net change in mortgage servicing rights valuation

 

41 

 

 

20 

Amortization of intangibles

 

 -

 

 

181 

Provision for loan losses

 

3,325 

 

 

1,035 

Gain on sales of securities

 

(4)

 

 

(8)

Impairment write-down on securities recognized in earnings

 

30 

 

 

20 

Gain on conversion of investment security

 

 -

 

 

(728)

Loans originated for sale

 

(6,598)

 

 

(6,193)

Proceeds from sale of loans

 

6,692 

 

 

6,206 

Write-down of other real estate owned

 

46 

 

 

250 

Write-down on premises and equipment

 

 -

 

 

60 

Net loss (gain) on sale or disposal of other real estate/other repossessed assets

 

31 

 

 

(32)

Increase in cash surrender value of life insurance

 

(399)

 

 

(416)

Gain from surrender of life insurance policy

 

 -

 

 

(103)

Stock option compensation

 

88 

 

 

 -

Decrease in other assets

 

154 

 

 

1,877 

Decrease in other liabilities

 

(2,247)

 

 

(2,497)

Net cash provided by operating activities

 

9,742 

 

 

9,856 



 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Proceeds from sales and calls of investment securities available for sale

 

1,925 

 

 

1,381 

Proceeds from maturities and pay-downs of securities available for sale

 

18,984 

 

 

21,607 

Purchase of investment securities available for sale

 

(16,605)

 

 

(21,689)

Net increase in restricted stock

 

(336)

 

 

(417)

Net increase in loans

 

(79,275)

 

 

(47,110)

Capital expenditures

 

(515)

 

 

(765)

Proceeds from surrender of life insurance policy

 

436 

 

 

 -

Proceeds from sale of other real estate

 

625 

 

 

129 

Net cash used in investing activities

 

(74,761)

 

 

(46,864)



 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Net increase in demand deposits, interest-bearing checking, and savings accounts

 

68,454 

 

 

45,360 

Net decrease in time deposits

 

(8,414)

 

 

(9,094)

Net decrease in repurchase agreements

 

 -

 

 

(9,079)

Net increase in short-term borrowings

 

8,530 

 

 

3,500 

Dividends paid

 

(2,618)

 

 

(2,330)

Common stock issued under stock option plans

 

71 

 

 

92 

Common stock issued under dividend reinvestment plan

 

1,124 

 

 

869 

Purchase of treasury stock

 

(700)

 

 

 -

Net cash provided by financing activities

 

66,447 

 

 

29,318 



 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

1,428 

 

 

(7,690)

Cash and cash equivalents as of January 1

 

39,166 

 

 

48,593 

Cash and cash equivalents as of September 30

$

40,594 

 

$

40,903 



 

 

 

 

 

Supplemental Disclosures of Cash Flow Information

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

Interest on deposits and other borrowed funds

$

1,643 

 

$

1,826 

Income taxes

$

2,100 

 

$

2,514 



 

 

 

 

 

Noncash Activities

 

 

 

 

 

Loans transferred to Other Real Estate

$

123 

 

$

3,488 



 

 

 

 

 

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

 

 

 

 

 



5

 


 













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) and Franklin Future Fund Inc.  Farmers and Merchants Trust Company of Chambersburg is a commercial bank that has one wholly-owned subsidiary, Franklin Financial Properties Corp.  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 September  30, 2016, 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 2015 Annual Report on Form 10-K.  The consolidated results of operations for the three and nine month periods ended September 30, 2016 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, 2015 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 are 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:







 

 

 

 

 

 

 

 

 

 

 



For the Three Months Ended

 

For the Nine Months Ended



September 30

 

September 30

(Dollars and shares in thousands, except per share data)

2016

 

2015

 

2016

 

2015

Weighted average shares outstanding (basic)

 

4,307 

 

 

4,252 

 

 

4,295 

 

 

4,236 

Impact of common stock equivalents

 

 

 

 

 

 

 

Weighted average shares outstanding (diluted)

 

4,314 

 

 

4,257 

 

 

4,298 

 

 

4,243 

Anti-dilutive options excluded from calculation

 

 

 

26 

 

 

37 

 

 

27 

Net income

$

2,075 

 

$

2,579 

 

$

6,363 

 

$

7,937 

Basic earnings per share

$

0.48 

 

$

0.61 

 

$

1.48 

 

$

1.87 

Diluted earnings per share

$

0.48 

 

$

0.61 

 

$

1.48 

 

$

1.87 









Note 2. Recent Accounting Pronouncements

Statements of Cash Flow (Topic 320).  In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments (Topic 320).”  ASU 2016-15 clarifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows.  The amendments are intended to reduce diversity in practice.  The ASU contains additional guidance clarifying when an entity should separate cash receipts and cash payments and classify them into more than one class of cash flows (including when reasonable judgement is required to estimate and allocate cash flows) versus when an entity should classify the aggregate amount into one class of cash flows on the basis of predominance.  The amendments are effective fiscal years, and interim periods within those fiscal years, beginning after

6

 


 

December 15, 2017.  The Corporation is currently evaluating the impact of the pending adoption of the amended standard on its consolidated financial statements.



Financial Instruments – Credit Losses (Topic 326). In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.”  ASU 2016-13 requires credit losses on most financial assets measured at amortized cost and certain other instruments to be measured using an expected credit loss model (referred to as the current expected credit loss (CECL) model).  Under this model, entities will estimate credit losses over the entire contractual term of the instrument (considering estimated prepayments, but not expected extensions or modifications unless reasonable expectation of a troubled debt restructuring exists) from the date of initial recognition of that instrument.  The ASU replaces the current accounting model for purchased credit impaired loans and debt securities.  The allowance for credit losses for purchased financial assets with a more-than insignificant amount of credit deterioration since origination (“PCD assets”), should be determined in a similar manner to other financial assets measured on an amortized cost basis.  However, upon initial recognition, the allowance for credit losses is added to the purchase price (“gross up approach”) to determine the initial amortized cost basis.  The subsequent account for PCD financial assets is the same expected loss model described above.  The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.  Early adoption is permitted as of the fiscal year beginning after December 15, 2018, including interim periods within those fiscal years.  The Corporation is currently evaluating the impact of the pending adoption of the new standard on its consolidated financial statements.



Revenue from Contracts with Customers (Topic 606). The amendments in this Update (ASU 2014-09) establish a comprehensive revenue recognition standard for virtually all industries under U.S. GAAP, including those that previously followed industry-specific guidance such as the real estate, construction and software industries. The revenue standard’s core principle is built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled. To accomplish this objective, the standard requires five basic steps: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The ASU is effective for public entities for annual periods beginning after December 15, 2016, including interim periods therein. Three basic transition methods are available – full retrospective, retrospective with certain practical expedients, and a cumulative effect approach. Under the third alternative, an entity would apply the new revenue standard only to contracts that are incomplete under legacy U.S. GAAP at the date of initial application (e.g. January 1, 2017) and recognize the cumulative effect of the new standard as an adjustment to the opening balance of retained earnings. That is, prior years would not be restated and additional disclosures would be required to enable users of the financial statements to understand the impact of adopting the new standard in the current year compared to prior years that are presented under legacy U.S. GAAP. Early adoption is prohibited under U.S. GAAP. The Corporation does not believe ASU 2014-09 will have a material effect on its financial statements. 



Financial Instruments – Overall (Topic 825-10). In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Topic 825-10): “Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 amends the guidance on the classification and measurement of financial instruments.  Some of the amendments in ASU 2016-01 include the following: 1) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; 2) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; 3) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; and 4) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value; among others.  For public business entities, the amendments of ASU 2016-01 are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  The Corporation does not believe ASU 2016-01 will have a material effect on its financial statements.

Leases (Topic 842). In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, Leases.  From the lessee’s perspective, the new standard established a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months.  Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income

7

 


 

statement for a lessees.  From the lessor’s perspective, the new standard requires a lessor to classify leases as either sales-type, finance or operating.  A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee.  If risks and rewards are conveyed without the transfer of control, the lease is treated as financing.  If the lessor doesn’t convey risks and rewards or control, an operating lease results.

The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available.  A modified retrospective transition approach is required for lessors for sales-type, direct financing, and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available.  The Corporation is currently evaluating the impact of the pending adoption of the new standard on its consolidated financial statements.   





Note 3. Accumulated Other Comprehensive Loss

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







 

 

 

 

 



 

 

 

 

 



September 30

 

December 31,



2016

 

2015

(Dollars in thousands)

 

 

 

 

 

Net unrealized gains on securities

$

2,692 

 

$

1,138 

Tax effect

 

(915)

 

 

(387)

Net of tax amount

 

1,777 

 

 

751 



 

 

 

 

 

Accumulated pension adjustment

 

(6,552)

 

 

(6,777)

Tax effect

 

2,228 

 

 

2,304 

Net of tax amount

 

(4,324)

 

 

(4,473)



 

 

 

 

 

Total accumulated other comprehensive loss

$

(2,547)

 

$

(3,722)











8

 


 

Note 4. Investments

The amortized cost and estimated fair value of investment securities available for sale as of September  30, 2016 and December 31, 2015 are as follows:







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

Gross

 

Gross

 

 

 



 

Amortized

 

unrealized

 

unrealized

 

Fair

September 30, 2016

 

cost

 

gains

 

losses

 

value

Equity securities

 

$

164 

 

$

86 

 

$

 -

 

$

250 

U.S. Government and Agency securities

 

 

12,728 

 

 

292 

 

 

(21)

 

 

12,999 

Municipal securities

 

 

66,248 

 

 

1,924 

 

 

(92)

 

 

68,080 

Trust preferred securities

 

 

5,973 

 

 

 -

 

 

(555)

 

 

5,418 

Agency mortgage-backed securities

 

 

66,369 

 

 

1,089 

 

 

(79)

 

 

67,379 

Private-label mortgage-backed securities

 

 

1,137 

 

 

57 

 

 

(7)

 

 

1,187 

Asset-backed securities