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EX-32.2 - EX-32.2 - FRANKLIN FINANCIAL SERVICES CORP /PA/fraf-20170331xex32_2.htm
EX-32.1 - EX-32.1 - FRANKLIN FINANCIAL SERVICES CORP /PA/fraf-20170331xex32_1.htm
EX-31.2 - EX-31.2 - FRANKLIN FINANCIAL SERVICES CORP /PA/fraf-20170331xex31_2.htm
EX-31.1 - EX-31.1 - FRANKLIN FINANCIAL SERVICES CORP /PA/fraf-20170331xex31_1.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 March  31, 2017

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,”  “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer         Accelerated filer       Non-accelerated filer        Smaller reporting company          Emerging growth 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 4,327,336 outstanding shares of the Registrant’s common stock as of April 30, 2017.

 


 

INDEX



               



 

 

Part I - FINANCIAL INFORMATION

 



 

 

Item 1

Financial Statements

 



Consolidated Balance Sheets as of March  31, 2017 and December 31, 2016 (unaudited)

1



Consolidated Statements of Income for the Three Months ended March  31, 2017 

2



and 2016 (unaudited)

 



Consolidated Statements of Comprehensive Income for the Three Months ended

3



March  31, 2017 and 2016 (unaudited)

 



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

3



ended March 31, 2017 and 2016 (unaudited)

 



Consolidated Statements of Cash Flows for the Three Months ended March  31, 2017 

4



and 2016 (unaudited)

 



Notes to Consolidated Financial Statements (unaudited)

5



 

 

Item 2

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

26

Item 3

Quantitative and Qualitative Disclosures about Market Risk

44

Item 4

Controls and Procedures

44



 

 

Part II - OTHER INFORMATION 

 



 

 

Item 1

Legal Proceedings

45

Item 1A

Risk Factors

45

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

45

Item 3

Defaults Upon Senior Securities

45

Item 4

Mine Safety Disclosures

45

Item 5

Other Information

45

Item 6

Exhibits

46

SIGNATURE PAGE

47

EXHIBITS

 







 

 


 

Part I FINANCIAL INFORMATION

Item 1 Financial Statements

Consolidated Balance Sheets







 

 

 

 

 



 

 

 

 

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

March 31

 

December 31



2017

 

2016

Assets

 

 

 

 

 

Cash and due from banks

$

13,731 

 

$

16,888 

Interest-bearing deposits in other banks

 

25,942 

 

 

19,777 

Total cash and cash equivalents

 

39,673 

 

 

36,665 

Investment securities available for sale, at fair value

 

137,182 

 

 

143,875 

Restricted stock

 

436 

 

 

1,767 

Loans held for sale

 

448 

 

 

540 

Loans

 

903,529 

 

 

893,873 

Allowance for loan losses

 

(11,278)

 

 

(11,075)

Net Loans

 

892,251 

 

 

882,798 

Premises and equipment, net

 

13,783 

 

 

14,058 

Bank owned life insurance

 

22,590 

 

 

22,459 

Goodwill

 

9,016 

 

 

9,016 

Other real estate owned

 

3,115 

 

 

4,915 

Deferred tax asset, net

 

5,987 

 

 

5,844 

Other assets

 

6,653 

 

 

5,506 

Total assets

$

1,131,134 

 

$

1,127,443 



 

 

 

 

 

Liabilities

 

 

 

 

 

Deposits

 

 

 

 

 

Noninterest-bearing checking

$

171,696 

 

$

170,345 

Money management, savings and interest checking

 

761,149 

 

 

737,140 

Time

 

73,749 

 

 

74,635 

Total Deposits

 

1,006,594 

 

 

982,120 

Short-term borrowings

 

 -

 

 

24,270 

Other liabilities

 

5,362 

 

 

4,560 

Total liabilities

 

1,011,956 

 

 

1,010,950 



 

 

 

 

 

Shareholders' equity

 

 

 

 

 

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

 

 

 

 

 

4,688,349 shares issued and 4,325,425 shares outstanding at March 31, 2017 and

 

 

 

 

 

4,688,349 shares issued and 4,316,836 shares outstanding at December 31, 2016

 

4,688 

 

 

4,688 

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

 

 

 

 

 

shares issued and outstanding

 

 -

 

 

 -

Additional paid-in capital

 

39,867 

 

 

39,752 

Retained earnings

 

85,194 

 

 

83,081 

Accumulated other comprehensive loss

 

(3,916)

 

 

(4,215)

Treasury stock, 362,924 shares at March 31, 2017 and 371,513 shares at

 

 

 

 

 

December 31, 2016, at cost

 

(6,655)

 

 

(6,813)

Total shareholders' equity

 

119,178 

 

 

116,493 

Total liabilities and shareholders' equity

$

1,131,134 

 

$

1,127,443 



 

 

 

 

 

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

 

 

 

 

 























1

 


 

Consolidated Statements of Income





 

 

 

 

 



For the Three Months Ended

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

March 31



2017

 

2016

Interest income

 

 

 

 

 

Loans, including fees

$

8,639 

 

$

8,088 

Interest and dividends on investments:

 

 

 

 

 

Taxable interest

 

531 

 

 

575 

Tax exempt interest

 

301 

 

 

367 

Dividend income

 

13 

 

 

Deposits and obligations of other banks

 

62 

 

 

62 

Total interest income

 

9,546 

 

 

9,098 



 

 

 

 

 

Interest expense

 

 

 

 

 

Deposits

 

566 

 

 

543 

Short-term borrowings

 

15 

 

 

Total interest expense

 

581 

 

 

545 

Net interest income

 

8,965 

 

 

8,553 

Provision for loan losses

 

120 

 

 

300 

Net interest income after provision for loan losses

 

8,845 

 

 

8,253 



 

 

 

 

 

Noninterest income

 

 

 

 

 

Investment and trust services fees

 

1,295 

 

 

1,253 

Loan service charges

 

147 

 

 

226 

Deposit service charges and fees

 

592 

 

 

578 

Other service charges and fees

 

324 

 

 

303 

Debit card income

 

375 

 

 

347 

Increase in cash surrender value of life insurance

 

131 

 

 

135 

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

 

 -

 

 

(8)

OTTI losses on debt securities

 

 -

 

 

(20)

Securities gains, net

 

 

 

Other

 

59 

 

 

138 

Total noninterest income

 

2,925 

 

 

2,953 



 

 

 

 

 

Noninterest expense

 

 

 

 

 

Salaries and employee benefits

 

4,626 

 

 

4,370 

Occupancy, net

 

584 

 

 

600 

Furniture and equipment

 

231 

 

 

216 

Advertising

 

247 

 

 

282 

Legal and professional

 

290 

 

 

297 

Data processing

 

541 

 

 

497 

Pennsylvania bank shares tax

 

243 

 

 

237 

FDIC insurance

 

106 

 

 

157 

ATM/debit card processing

 

218 

 

 

228 

Foreclosed real estate

 

58 

 

 

63 

Telecommunications

 

100 

 

 

118 

Other

 

713 

 

 

730 

Total noninterest expense

 

7,957 

 

 

7,795 

Income before federal income tax expense

 

3,813 

 

 

3,411 

Federal income tax expense

 

793 

 

 

685 

Net income

$

3,020 

 

$

2,726 



 

 

 

 

 

Per share

 

 

 

 

 

Basic earnings per share

$

0.70 

 

$

0.64 

Diluted earnings per share

$

0.70 

 

$

0.64 

Cash dividends declared

$

0.21 

 

$

0.19 

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

2

 


 

Consolidated Statements of Comprehensive Income





 

 

 

 

 

 



 

For the Three Months Ended



 

March 31

(Dollars in thousands) (unaudited)

 

2017

 

2016

Net Income

 

$

3,020 

 

$

2,726 



 

 

 

 

 

 

Securities:

 

 

 

 

 

 

Unrealized gains arising during the period

 

 

454 

 

 

1,045 

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

 

 

(2)

 

 

19 

Net unrealized gains

 

 

452 

 

 

1,064 

Tax effect

 

 

(153)

 

 

(362)

Net of tax amount

 

 

299 

 

 

702 



 

 

 

 

 

 

Total other comprehensive income

 

 

299 

 

 

702 



 

 

 

 

 

 

Total Comprehensive Income

 

$

3,319 

 

$

3,428 



 

 

 

 

 

 



 

 

 

 

 

 

Reclassification adjustment / Statement line item

 

Tax  expense (benefit)

(1) Securities / securities (gains) losses and OTTI losses, net

 

$

 

$

(6)

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

 

 

 













Consolidated Statements of Changes in Shareholders' Equity

For the Three Months Ended March 31, 2017 and 2016:









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

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, 2015

$

4,659 

 

$

38,778 

 

$

78,517 

 

$

(3,722)

 

$

(6,856)

 

$

111,376 

Net income

 

-

 

 

-

 

 

2,726 

 

 

-

 

 

-

 

 

2,726 

Other comprehensive income

 

 -

 

 

 -

 

 

 -

 

 

702 

 

 

 -

 

 

702 

Cash dividends declared, $0.19 per share

 

-

 

 

-

 

 

(813)

 

 

-

 

 

-

 

 

(813)

Treasury shares issued under stock option plans, 183 shares

 

-

 

 

 

 

 -

 

 

 -

 

 

 

 

Common stock issued under dividend reinvestment plan, 14,158 shares

 

14 

 

 

290 

 

 

 -

 

 

 -

 

 

 -

 

 

304 

Stock option compensation expense

 

 -

 

 

14 

 

 

-

 

 

-

 

 

-

 

 

14 

Balance at March 31, 2016

$

4,673 

 

$

39,083 

 

$

80,430 

 

$

(3,020)

 

$

(6,853)

 

$

114,313 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2016

$

4,688 

 

$

39,752 

 

$

83,081 

 

$

(4,215)

 

$

(6,813)

 

$

116,493 

Net income

 

 -

 

 

 -

 

 

3,020 

 

 

 -

 

 

 -

 

 

3,020 

Other comprehensive income

 

 -

 

 

 -

 

 

 -

 

 

299 

 

 

 -

 

 

299 

Cash dividends declared, $.21 per share

 

 -

 

 

 -

 

 

(907)

 

 

 -

 

 

 -

 

 

(907)

Treasury shares issued under employee stock purchase plan, 1,126 shares

 

 -

 

 

 

 

 -

 

 

 -

 

 

21 

 

 

25 

Treasury shares issued under dividend reinvestment plan, 7,463 shares

 

 -

 

 

84 

 

 

 -

 

 

 -

 

 

137 

 

 

221 

Stock option compensation expense

 

 -

 

 

27 

 

 

 -

 

 

 -

 

 

 -

 

 

27 

Balance at March 31, 2017

$

4,688 

 

$

39,867 

 

$

85,194 

 

$

(3,916)

 

$

(6,655)

 

$

119,178 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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



3

 


 

Consolidated Statements of Cash Flows





 

 

 

 

 



 

 

 

 

 



Three Months Ended March 31



2017

 

2016

(Dollars in thousands) (unaudited)

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

Net income

$

3,020 

 

$

2,726 

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

 

 

 

 

 

Depreciation and amortization

 

332 

 

 

331 

Net amortization of loans and investment securities

 

369 

 

 

355 

Amortization and net change in mortgage servicing rights valuation

 

14 

 

 

14 

Provision for loan losses

 

120 

 

 

300 

Gain on sales of securities

 

(2)

 

 

(1)

Impairment write-down on securities recognized in earnings

 

 -

 

 

20 

Loans originated for sale

 

(1,220)

 

 

(2,805)

Proceeds from sale of loans

 

1,312 

 

 

2,707 

Write-down of other real estate owned

 

45 

 

 

 -

Write-down on premises and equipment

 

49 

 

 

46 

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

 

 -

 

 

Increase in cash surrender value of life insurance

 

(131)

 

 

(135)

Stock option compensation

 

27 

 

 

14 

Decrease in other assets

 

(1,409)

 

 

(545)

Increase (decrease) in other liabilities

 

619 

 

 

(684)

Net cash provided by operating activities

 

3,145 

 

 

2,351 



 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Proceeds from sales and calls of investment securities available for sale

 

475 

 

 

615 

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

 

6,246 

 

 

7,426 

Purchase of investment securities available for sale

 

 -

 

 

(2,637)

Net decrease in restricted stock

 

1,331 

 

 

343 

Net increase in loans

 

(9,517)

 

 

(20,440)

Capital expenditures

 

34 

 

 

(150)

Proceeds from surrender of life insurance policy

 

 -

 

 

436 

Proceeds from sale of other real estate

 

1,751 

 

 

66 

Net cash provided by (used in) investing activities

 

320 

 

 

(14,341)



 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

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

 

25,360 

 

 

34,644 

Net decrease in time deposits

 

(886)

 

 

(2,188)

Net decrease in short-term borrowings

 

(24,270)

 

 

 -

Dividends paid

 

(907)

 

 

(813)

Treasury shares issued under employee stock purchase plan

 

25 

 

 

Treasury shares issued under dividend reinvestment plan

 

221 

 

 

304 

Net cash (used) provided by financing activities

 

(457)

 

 

31,951 



 

 

 

 

 

Increase in cash and cash equivalents

 

3,008 

 

 

19,961 

Cash and cash equivalents as of January 1

 

36,665 

 

 

39,166 

Cash and cash equivalents as of March 31

$

39,673 

 

$

59,127 



 

 

 

 

 

Supplemental Disclosures of Cash Flow Information

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

Interest on deposits and other borrowed funds

$

566 

 

$

522 

Income taxes

$

1,002 

 

$

700 



 

 

 

 

 

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

 

 

 

 

 



4

 


 



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 March  31, 2017, 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 2016 Annual Report on Form 10-K.  The consolidated results of operations for the three month periods ended March 31, 2017 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, 2016 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



March 31

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

2017

 

2016

Weighted average shares outstanding (basic)

 

4,321 

 

 

4,283 

Impact of common stock equivalents

 

20 

 

 

Weighted average shares outstanding (diluted)

 

4,341 

 

 

4,285 

Anti-dilutive options excluded from calculation

 

14 

 

 

63 

Net income

$

3,020 

 

$

2,726 

Basic earnings per share

$

0.70 

 

$

0.64 

Diluted earnings per share

$

0.70 

 

$

0.64 





5

 


 









Note 2. Recent Accounting Pronouncements





 

 

 

 

 

 

Standard

 

Description

 

Effective Date

 

Effect on the financial statements or other significant matters



 

 

 

 

 

 

ASU 2016-15, Statements of Cash Flow (Topic 320): Classification of Certain Cash Receipts and Cash Payments

 

The standard 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 standard 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.

 

January 1, 2018

 

We do not expect this guidance will have an effect on the Corporation's consolidated financial statements.



 

 

 

 

 

 

ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments

 

This standard 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.

 

January 1, 2020

 

We have formed an implementation team led by Risk Management that also includes other lines of business and functions within the Corporation.  The team is working on developing models that can meet the requirements of the new guidance. The Corporation believes the new standard will result in earlier recognition of additions to the allowance for loan losses and possibly a larger allowance for loan loss balance with a corresponding increase in the provision for loan losses in results of operations; however, the Corporation is continuing to evaluate the impact of the pending adoption of the new standard on its consolidated financial statements. 



 

 

 

 

 

 

ASU 2014-09, Revenue from Contracts with Customers (Topic 606)

 

The amendments in this Update (ASU 2014-09) establish a comprehensive revenue recognition standard. 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. Three basic transition methods are available – full retrospective, retrospective with certain practical expedients, and a cumulative effect approach.

 

January 1, 2018

 

The majority of our revenue comes from net interest income, and is explicitly out of scope of the guidance.  The contracts in noninterest income that are in scope of the guidance are primarily related to service charges and fees on deposit accounts, investment and trust income and other service charges and fees.  We are analyzing the contracts in scope to determine if our current accounting will change.



 

 

 

 

 

 

ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities

 

The standard amends the guidance on the classification and measurement of financial instruments.  Some of the amendments include the following: 1) requires equity investments 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.

 

January 1, 2018

 

We do not expect this guidance will have a material effect on the Corporation's consolidated financial statements.  We do not have a significant number of AFS equity securities.  Additionally we do not have financial liabilities accounted for under the fair value option.  The adoption of this guidance is not expected to be material.



 

 

 

 

 

 

6

 


 

ASU 2016-02, Leases (Topic 842)

 

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 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.

 

January 1, 2019

 

The Corporation currently has real estate and equipment leases that it classifies as operating leases that are not recognized on the balance sheet.  Under the new standard, these leases will move onto the balance sheet.  The Corporation is currently gathering data and reviewing methods of implementing the standard, but due to the number of lease agreements in effect, the Corporation believes the new standard will not have a material effect on its consolidated financial statements.



 

 

 

 

 

 

ASU 2017-04, Goodwill (Topic 350)

 

This guidance, among other things, removes step 2 of the goodwill impairment test thus eliminating the need to determine the fair value of individual assets and liabilities of the reporting unit.  Upon adoption of this standard, goodwill impairment will be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.  This may result in more or less impairment being recognized than under the current guidance.

 

January 1, 2020

 

We do not currently expect this guidance to have a material effect on the Corporation's consolidated financial statements based upon the most recent goodwill impairment analysis.



 

 

 

 

 

 

ASU 2016-09, Stock Compensation (Topic 718): Improvements to Employee Share-based Payment Accounting

 

The standard requires entities to recognize the income tax effects of share-based awards in the income statement when the awards vest or are settled (i.e. the additional paid-in capital pools will be eliminated).  The guidance on employers' accounting for an employee's use of shares to satisfy the employer's statutory income tax withholding obligation and for forfeitures is changing.  The standard also provides an entity the option to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur.

 

January 1, 2017

 

We adopted the standard during the first quarter of 2017.  Due to the type of stock compensation plans used by the Corporation, there was no effect on the Corporation's consolidated financial statements.



 

 

 

 

 

 

ASU 2017-09,  Premium Amortization on Purchased Callable Debt Securities

 

The standard shortens the amortization period for premiums on purchased callable debt securities to the earliest call date, rather than amortizing over the full contractual term.  The standard does change the standard for securities held at a discount.  The amendments require companies to reset the effective yield using the payment terms of the debt security if the call option is not exercised on the earliest call date.  If the security has additional future called dates, any excess of the amortized cost basis over the amount repayable by the issuer at the next call date should be amortized to the next call date.

 

January 1, 2017

 

We adopted the standard during the first quarter of 2017, and there was no effect on the Corporation's consolidated financial statements.



 

 

 

 

 

 

ASU 2017-07, Employee Benefits Plan (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

 

This standard requires an employer to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period.  The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations.  The amendments in this update also allow only the service cost component to be eligible for capitalization when applicable.  

 

January 1, 2018

 

We do not expect this standard will have an effect on the Corporation's consolidated financial statements.





7

 


 



Note 3. Accumulated Other Comprehensive Loss

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







 

 

 

 

 



 

 

 

 

 



March 31

 

December 31



2017

 

2016

(Dollars in thousands)

 

 

 

 

 

Net unrealized gains (losses) on securities

$

432 

 

$

(20)

Tax effect

 

(146)

 

 

Net of tax amount

 

286 

 

 

(13)



 

 

 

 

 

Accumulated pension adjustment

 

(6,366)

 

 

(6,366)

Tax effect

 

2,164 

 

 

2,164 

Net of tax amount

 

(4,202)

 

 

(4,202)



 

 

 

 

 

Total accumulated other comprehensive loss

$

(3,916)

 

$

(4,215)







Note 4. Investments

The amortized cost and estimated fair value of investment securities available for sale as of March  31, 2017 and December 31, 2016 are as follows:







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

Gross

 

Gross

 

 

 



 

Amortized

 

unrealized

 

unrealized

 

Fair

March 31, 2017

 

cost

 

gains

 

losses

 

value

Equity securities

 

$

164 

 

$

162 

 

$

 -

 

$

326 

U.S. Government and Agency securities

 

 

12,200 

 

 

135 

 

 

(25)

 

 

12,310 

Municipal securities

 

 

60,117 

 

 

963 

 

 

(373)

 

 

60,707 

Trust preferred securities

 

 

5,985 

 

 

 -

 

 

(412)

 

 

5,573 

Agency mortgage-backed securities

 

 

57,266 

 

 

398 

 

 

(465)

 

 

57,199 

Private-label mortgage-backed securities

 

 

986 

 

 

52 

 

 

(1)

 

 

1,037 

Asset-backed securities

 

 

32 

 

 

 -

 

 

(2)

 

 

30 



 

$

136,750 

 

$

1,710 

 

$

(1,278)

 

$

137,182 









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

Gross

 

Gross

 

 

 



 

Amortized

 

unrealized

 

unrealized

 

Fair

December 31, 2016

 

cost

 

gains

 

losses

 

value

Equity securities

 

$

164 

 

$

126 

 

$

 -

 

$

290 

U.S. Government and Agency securities

 

 

12,598 

 

 

148 

 

 

(26)

 

 

12,720 

Municipal securities

 

 

62,763 

 

 

793 

 

 

(571)

 

 

62,985 

Trust preferred securities

 

 

5,979 

 

 

 -

 

 

(518)

 

 

5,461 

Agency mortgage-backed securities

 

 

61,305 

 

 

431 

 

 

(452)

 

 

61,284 

Private-label mortgage-backed securities

 

 

1,053 

 

 

56 

 

 

(5)

 

 

1,104 

Asset-backed securities

 

 

33 

 

 

 -

 

 

(2)

 

 

31 



 

$

143,895 

 

$

1,554 

 

$

(1,574)

 

$

143,875 



At March 31, 2017 and December 31, 2016, the fair value of investment securities pledged to secure public funds, trust balances, deposit and other obligations totaled $75.9 million and $79.1 million, respectively.

8

 


 

The amortized cost and estimated fair value of debt securities at March  31, 2017, by contractual maturity are shown below. Actual maturities may differ from contractual maturities because of prepayment or call options embedded in the securities.



 

 

 

 

 



 

 

 

 

 



 

 

 

 



 

 

 

(Dollars in thousands)

Amortized cost

 

Fair value

Due in one year or less

$

1,562 

 

$

1,563 

Due after one year through five years

 

11,375 

 

 

11,543 

Due after five years through ten years

 

31,555 

 

 

31,754 

Due after ten years

 

33,842 

 

 

33,760 



 

78,334 

 

 

78,620 

Mortgage-backed securities

 

58,252 

 

 

58,236 



$

136,586 

 

$

136,856 





The composition of the net realized securities gains for the three months ended are as follows:





 

 

 

 

 



For the Three Months Ended



March 31

(Dollars in thousands)

2017

 

2016

Gross gains realized

$

 

$

Gross losses realized

 

 -

 

 

 -

Conversion gain

 

 -

 

 

 -

Net gains realized

$

 

$



The following table provides additional detail about trust preferred securities as of March 31, 2017:

Trust Preferred Securities





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deal Name

 

Maturity

 

Single Issuer or Pooled

 

Class

 

Amortized Cost

 

Fair Value

 

Gross Unrealized Gain (Loss)

 

Lowest Credit Rating Assigned



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BankAmerica Cap III

 

1/15/2027

 

Single

 

Preferred Stock

 

$

968 

 

$

911 

 

$

(57)

 

BB+

Wachovia Cap Trust II

 

1/15/2027

 

Single

 

Preferred Stock

 

 

280 

 

 

269 

 

 

(11)

 

BBB

Huntington Cap Trust

 

2/1/2027

 

Single

 

Preferred Stock

 

 

947 

 

 

856 

 

 

(91)

 

BB

Corestates Captl Tr II

 

2/15/2027

 

Single

 

Preferred Stock

 

 

944 

 

 

910 

 

 

(34)

 

BBB+

Huntington Cap Trust II

 

6/15/2028

 

Single

 

Preferred Stock

 

 

902 

 

 

825 

 

 

(77)

 

BB

Chase Cap VI JPM

 

8/1/2028

 

Single

 

Preferred Stock

 

 

967 

 

 

900 

 

 

(67)

 

BBB-

Fleet Cap Tr V

 

12/18/2028

 

Single

 

Preferred Stock

 

 

977 

 

 

902 

 

 

(75)

 

BB+



 

 

 

 

 

 

 

$

5,985 

 

$

5,573 

 

$

(412)

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



9

 


 

The following table provides additional detail about private label mortgage-backed securities as of March 31, 2017:

Private Label Mortgage Backed Securities





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

Gross 

 

 

 

 

 

 

 

Cumulative



 

Origination

 

Amortized

 

Fair

 

Unrealized

 

Collateral

 

Lowest Credit

 

Credit

 

OTTI

Description

 

Date

 

Cost

 

Value

 

Gain (Loss)

 

Type

 

Rating Assigned

 

Support %

 

Charges

MALT 2004-6 7A1

 

6/1/2004

 

$

260 

 

$

259 

 

$

(1)

 

ALT A

 

CCC

 

16.29 

 

$

 -

RALI 2005-QS2 A1

 

2/1/2005

 

 

140 

 

 

157 

 

 

17 

 

ALT A

 

CC

 

1.47 

 

 

15 

RALI 2006-QS4 A2

 

4/1/2006

 

 

366 

 

 

376 

 

 

10 

 

ALT A

 

D

 

 -