Attached files
file | filename |
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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 |
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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 |
|
|
|
|
Consolidated Statements of Comprehensive Income for the Three and Nine Months ended |
3 |
|
|
|
|
Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months |
4 |
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|
|
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Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2016 |
5 |
|
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|
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6 |
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Management’s Discussion and Analysis of Results of Operations and Financial Condition |
28 |
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52 |
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52 |
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Part II - OTHER INFORMATION |
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53 |
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53 |
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53 |
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53 |
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53 |
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53 |
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53 |
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54 |
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EXHIBITS |
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Part I FINANCIAL INFORMATION
Item 1 Financial Statements
|
|||||
(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 | |
|
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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 |
2 | 3 | 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 |
4 | 1 | 6 | 1 | |||||||
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 | |||||||
|
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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 |
- |
- |
4 | 8 | |||||||
Other |
56 | 126 | 219 | 363 | |||||||
Total noninterest income |
2,803 | 2,983 | 8,613 | 9,753 | |||||||
|
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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 | ||||
|
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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) | ||||||||
|
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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 | ||||||||
|
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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 |
- |
||||||||
|
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Total other comprehensive (loss) income |
(191) | 724 | 1,175 | 24 | ||||||||
Total Comprehensive Income |
$ |
1,884 |
$ |
3,303 |
$ |
7,538 |
$ |
7,961 | ||||
|
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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) |
- |
||||||||
|
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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:
|
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Accumulated |
||||||||||||||||
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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 |
- |
6 |
- |
- |
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 |
- |
2 |
- |
- |
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 |
4 | 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 |
7 | 5 | 3 | 7 | |||||||
Weighted average shares outstanding (diluted) |
4,314 | 4,257 | 4,298 | 4,243 | |||||||
Anti-dilutive options excluded from calculation |
9 | 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 |
34 |