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EX-32.1 - EX-32.1 - FRANKLIN FINANCIAL SERVICES CORP /PA/fraf-20150630xex321.htm
EX-32.2 - EX-32.2 - FRANKLIN FINANCIAL SERVICES CORP /PA/fraf-20150630xex322.htm
EX-31.2 - EX-31.2 - FRANKLIN FINANCIAL SERVICES CORP /PA/fraf-20150630xex312.htm
EX-31.1 - EX-31.1 - FRANKLIN FINANCIAL SERVICES CORP /PA/fraf-20150630xex311.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 June  30, 2015

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

PA17201-0819

(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 4,252,508 outstanding shares of the Registrant’s common stock as of July 31, 2015.

 


 

INDEX

 

               

 

 

 

Part I - FINANCIAL INFORMATION

 

 

 

 

Item 1 

Financial Statements

 

 

Consolidated Balance Sheets as of June  30, 2015 and December 31, 2014 (unaudited)

1

 

Consolidated Statements of Income for the Three and Six Months ended June  30, 2015 

2

 

and 2014 (unaudited)

 

 

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

3

 

June  30, 2015 and 2014 (unaudited)

 

 

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

4

 

ended June  30, 2015 and 2014 (unaudited)

 

 

Consolidated Statements of Cash Flows for the Six Months ended June  30, 2015 

5

 

and 2014 (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

 

 

 

 

 

 

 

 

 

(unaudited)

 

 

 

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

June 30

 

December 31

 

2015

 

2014

Assets

 

 

 

 

 

Cash and due from banks

$

17,649 

 

$

14,258 

Interest-bearing deposits in other banks

 

46,754 

 

 

34,335 

Total cash and cash equivalents

 

64,403 

 

 

48,593 

Investment securities available for sale, at fair value

 

176,424 

 

 

171,751 

Restricted stock

 

439 

 

 

438 

Loans held for sale

 

1,755 

 

 

389 

Loans

 

733,212 

 

 

726,531 

Allowance for loan losses

 

(9,450)

 

 

(9,111)

Net Loans

 

723,762 

 

 

717,420 

Premises and equipment, net

 

14,531 

 

 

15,046 

Bank owned life insurance

 

22,377 

 

 

22,098 

Goodwill

 

9,016 

 

 

9,016 

Other intangible assets

 

 -

 

 

181 

Other real estate owned

 

4,018 

 

 

3,666 

Deferred tax asset, net

 

4,690 

 

 

4,328 

Other assets

 

7,124 

 

 

8,522 

Total assets

$

1,028,539 

 

$

1,001,448 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Deposits

 

 

 

 

 

Noninterest-bearing checking

$

143,564 

 

$

136,910 

Money management, savings and interest checking

 

680,424 

 

 

645,672 

Time

 

92,071 

 

 

98,599 

Total Deposits

 

916,059 

 

 

881,181 

Repurchase Agreements

 

 -

 

 

9,079 

Other liabilities

 

5,302 

 

 

7,667 

Total liabilities

 

921,361 

 

 

897,927 

 

 

 

 

 

 

Shareholders' equity

 

 

 

 

 

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

 

 

 

 

 

4,625,071 shares issued and 4,241,355 shares outstanding at June 30, 2015 and

 

 

 

 

 

4,606,564 shares issued and 4,218,330 shares outstanding at December 31, 2014

 

4,625 

 

 

4,607 

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

 

 

 

 

 

shares issued and outstanding

 

 -

 

 

 -

Additional paid-in capital

 

37,926 

 

 

37,504 

Retained earnings

 

75,288 

 

 

71,452 

Accumulated other comprehensive loss

 

(3,800)

 

 

(3,100)

Treasury stock, 383,716 shares at June 30, 2015 and 388,234 shares at

 

 

 

 

 

December 31, 2014, at cost

 

(6,861)

 

 

(6,942)

Total shareholders' equity

 

107,178 

 

 

103,521 

Total liabilities and shareholders' equity

$

1,028,539 

 

$

1,001,448 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

1

 


 

Consolidated Statements of Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Six Months Ended

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

June 30

 

June 30

 

2015

 

2014

 

2015

 

2014

Interest income

 

 

 

 

 

 

 

 

 

 

 

   Loans, including fees

$

7,477 

 

$

7,648 

 

$

14,853 

 

$

15,159 

Interest and dividends on investments:

 

 

 

 

 

 

 

 

 

 

 

Taxable interest

 

613 

 

 

661 

 

 

1,248 

 

 

1,302 

Tax exempt interest

 

408 

 

 

376 

 

 

817 

 

 

734 

Dividend income

 

 

 

31 

 

 

60 

 

 

56 

Deposits and obligations of other banks

 

72 

 

 

45 

 

 

127 

 

 

84 

Total interest income

 

8,578 

 

 

8,761 

 

 

17,105 

 

 

17,335 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

619 

 

 

694 

 

 

1,260 

 

 

1,396 

Securities sold under agreements to repurchase

 

 -

 

 

 

 

 -

 

 

Long-term debt

 

 -

 

 

121 

 

 

 -

 

 

242 

Total interest expense

 

619 

 

 

817 

 

 

1,260 

 

 

1,647 

Net interest income

 

7,959 

 

 

7,944 

 

 

15,845 

 

 

15,688 

Provision for loan losses

 

310 

 

 

266 

 

 

635 

 

 

464 

Net interest income after provision for loan losses

 

7,649 

 

 

7,678 

 

 

15,210 

 

 

15,224 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest income

 

 

 

 

 

 

 

 

 

 

 

Investment and trust services fees

 

1,388 

 

 

1,101 

 

 

2,651 

 

 

2,192 

Loan service charges

 

297 

 

 

250 

 

 

471 

 

 

418 

Mortgage banking activities

 

17 

 

 

19 

 

 

25 

 

 

32 

Deposit service charges and fees

 

586 

 

 

525 

 

 

1,077 

 

 

990 

Other service charges and fees

 

311 

 

 

317 

 

 

607 

 

 

584 

Debit card income

 

356 

 

 

337 

 

 

675 

 

 

643 

Increase in cash surrender value of life insurance

 

140 

 

 

144 

 

 

279 

 

 

286 

Other real estate owned (losses) gains, net

 

 -

 

 

(62)

 

 

32 

 

 

(185)

Other

 

13 

 

 

10 

 

 

237 

 

 

62 

OTTI losses recognized in earnings

 

 -

 

 

 -

 

 

(20)

 

 

 -

Gain on conversion

 

 -

 

 

 -

 

 

728 

 

 

 -

Securities gains, net

 

 

 

221 

 

 

 

 

221 

Total noninterest income

 

3,116 

 

 

2,862 

 

 

6,770 

 

 

5,243 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest expense

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

4,203 

 

 

4,107 

 

 

8,286 

 

 

8,357 

Net occupancy expense

 

556 

 

 

586 

 

 

1,172 

 

 

1,262 

Furniture and equipment expense

 

239 

 

 

237 

 

 

470 

 

 

491 

Advertising

 

283 

 

 

270 

 

 

471 

 

 

586 

Legal and professional fees

 

203 

 

 

353 

 

 

499 

 

 

618 

Data processing

 

556 

 

 

493 

 

 

1,023 

 

 

884 

Pennsylvania bank shares tax

 

206 

 

 

173 

 

 

402 

 

 

347 

Intangible amortization

 

90 

 

 

104 

 

 

181 

 

 

207 

FDIC insurance

 

160 

 

 

222 

 

 

308 

 

 

454 

ATM/debit card processing

 

186 

 

 

178 

 

 

373 

 

 

357 

Other

 

977 

 

 

892 

 

 

1,965 

 

 

1,741 

Total noninterest expense

 

7,659 

 

 

7,615 

 

 

15,150 

 

 

15,304 

Income before federal income taxes

 

3,106 

 

 

2,925 

 

 

6,830 

 

 

5,163 

Federal income tax expense

 

632 

 

 

606 

 

 

1,472 

 

 

1,018 

Net income

$

2,474 

 

$

2,319 

 

$

5,358 

 

$

4,145 

 

 

 

 

 

 

 

 

 

 

 

 

Per share

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

$

0.58 

 

$

0.55 

 

$

1.27 

 

$

0.99 

Diluted earnings per share

$

0.58 

 

$

0.55 

 

$

1.26 

 

$

0.99 

Cash dividends declared

$

0.19 

 

$

0.17 

 

$

0.36 

 

$

0.34 

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 Six Months Ended

 

 

June 30

 

June 30

(Dollars in thousands) (unaudited)

 

2015

 

2014

 

2015

 

2014

Net Income

 

$

2,474 

 

$

2,319 

 

$

5,358 

 

$

4,145 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized (losses) gains arising during the period

 

 

(1,239)

 

 

774 

 

 

(536)

 

 

2,194 

Reclassification adjustment for gains included in net income (1)

 

 

(8)

 

 

(221)

 

 

(716)

 

 

(221)

Net unrealized (losses) gains

 

 

(1,247)

 

 

553 

 

 

(1,252)

 

 

1,973 

Tax effect

 

 

424 

 

 

(188)

 

 

426 

 

 

(671)

Net of tax amount

 

 

(823)

 

 

365 

 

 

(826)

 

 

1,302 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) arising during the period

 

 

32 

 

 

(4)

 

 

31 

 

 

(12)

Reclassification adjustment for losses included in net income (2)

 

 

64 

 

 

94 

 

 

160 

 

 

189 

Net unrealized gains

 

 

96 

 

 

90 

 

 

191 

 

 

177 

Tax effect

 

 

(32)

 

 

(30)

 

 

(65)

 

 

(60)

Net of tax amount

 

 

64 

 

 

60 

 

 

126 

 

 

117 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive (loss) income

 

 

(759)

 

 

425 

 

 

(700)

 

 

1,419 

Total Comprehensive Income

 

$

1,715 

 

$

2,744 

 

$

4,658 

 

$

5,564 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification adjustment / Statement line item

 

Tax  expense (benefit)

 

Tax  expense (benefit)

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

 

$

 

$

75 

 

$

243 

 

$

75 

(2) Derivatives / interest expense on deposits

 

 

(22)

 

 

(32)

 

 

(54)

 

 

(64)

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

3

 


 

 

 

 

 

Consolidated Statements of Changes in Shareholders' Equity

For the Six months June 30, 2015 and 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2013

$

4,561 

 

$

36,636 

 

$

65,897 

 

$

(4,696)

 

$

(7,010)

 

$

95,388 

Net income

 

-

 

 

-

 

 

4,145 

 

 

 -

 

 

 -

 

 

4,145 

Other comprehensive income

 

 -

 

 

 -

 

 

 -

 

 

1,419 

 

 

 -

 

 

1,419 

Cash dividends declared, $.34 per share

 

-

 

 

-

 

 

(1,419)

 

 

 -

 

 

 -

 

 

(1,419)

Treasury shares issued under stock option plans, 3,476 shares

 

-

 

 

(10)

 

 

 -

 

 

 -

 

 

62 

 

 

52 

Common stock issued under dividend reinvestment plan, 20,642 shares

 

20 

 

 

354 

 

 

-

 

 

 -

 

 

 -

 

 

374 

Balance at June 30, 2014

$

4,581 

 

$

36,980 

 

$

68,623 

 

$

(3,277)

 

$

(6,948)

 

$

99,959 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2014

$

4,607 

 

$

37,504 

 

$

71,452 

 

$

(3,100)

 

$

(6,942)

 

$

103,521 

Net income

 

-

 

 

-

 

 

5,358 

 

 

-

 

 

-

 

 

5,358 

Other comprehensive loss

 

 -

 

 

 -

 

 

 -

 

 

(700)

 

 

 -

 

 

(700)

Cash dividends declared, $.36 per share

 

-

 

 

-

 

 

(1,522)

 

 

-

 

 

-

 

 

(1,522)

Treasury shares issued under stock option plans, 4,518 shares

 

-

 

 

 

 

 -

 

 

 -

 

 

81 

 

 

86 

Common stock issued under dividend reinvestment plan, 18,507 shares

 

18 

 

 

417 

 

 

-

 

 

-

 

 

-

 

 

435 

Balance at June 30, 2015

$

4,625 

 

$

37,926 

 

$

75,288 

 

$

(3,800)

 

$

(6,861)

 

$

107,178 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

4

 


 

 

 

Consolidated Statements of Cash Flows

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Six Months Ended June 30

 

2015

 

2014

(Dollars in thousands) (unaudited)

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

Net income

$

5,358 

 

$

4,145 

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

 

 

 

 

 

Depreciation and amortization

 

675 

 

 

732 

Net amortization of loans and investment securities

 

796 

 

 

893 

Amortization and net change in mortgage servicing rights valuation

 

 

 

Amortization of intangibles

 

181 

 

 

207 

Provision for loan losses

 

635 

 

 

464 

Net realized gains on sales of securities

 

(8)

 

 

(221)

Impairment writedown on securities recognized in earnings

 

20 

 

 

 -

Gain on conversion

 

(728)

 

 

 -

Loans originated for sale

 

(3,812)

 

 

(3,554)

Proceeds from sale of loans

 

2,446 

 

 

3,303 

Writedown on premises and equipment

 

60 

 

 

 -

Writedown of other real estate owned

 

 -

 

 

200 

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

 

(32)

 

 

(15)

Increase in cash surrender value of life insurance

 

(279)

 

 

(286)

Decrease (increase) in other assets

 

1,380 

 

 

(118)

(Decrease) increase in other liabilities

 

(2,195)

 

 

613 

Net cash provided by operating activities

 

4,506 

 

 

6,371 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Proceeds from sales and calls of investment securities available for sale

 

1,381 

 

 

1,582 

Proceeds from maturities and paydowns of securities available for sale

 

14,132 

 

 

12,313 

Purchase of investment securities available for sale

 

(21,689)

 

 

(28,362)

Net increase in restricted stock

 

(1)

 

 

(32)

Net increase in loans

 

(7,256)

 

 

(10,012)

Capital expenditures

 

(190)

 

 

(321)

Proceeds from sale of other real estate/other repossessed assets

 

129 

 

 

493 

Net cash used in investing activities

 

(13,494)

 

 

(24,339)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Net increase in demand deposits, NOW, and savings accounts

 

41,406 

 

 

63,087 

Net decrease in time deposits

 

(6,528)

 

 

(8,107)

Net decrease in repurchase agreements

 

(9,079)

 

 

(21,570)

Long-term debt payments

 

 -

 

 

(403)

Dividends paid

 

(1,522)

 

 

(1,419)

Treasury stock issued under stock option plans

 

86 

 

 

52 

Common stock issued under dividend reinvestment plan

 

435 

 

 

374 

Net cash provided by financing activities

 

24,798 

 

 

32,014 

 

 

 

 

 

 

Increase in cash and cash equivalents

 

15,810 

 

 

14,046 

Cash and cash equivalents as of January 1

 

48,593 

 

 

40,745 

Cash and cash equivalents as of June 30

$

64,403 

 

$

54,791 

 

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

Interest on deposits and other borrowed funds

$

1,304 

 

$

1,670 

Income taxes

$

1,513 

 

$

236 

 

 

 

 

 

 

Noncash Activities

 

 

 

 

 

Loans transferred to Other Real Estate

$

449 

 

$

82 

 

 

 

 

 

 

The accompanying notes are an integral part of these 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 June  30, 2015, 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 2014 Annual Report on Form 10-K.  The consolidated results of operations for the period ended June 30, 2015 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, 2014 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 Six Months Ended

 

June 30

 

June 30

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

2015

 

2014

 

2015

 

2014

Weighted average shares outstanding (basic)

 

4,234 

 

 

4,184 

 

 

4,228 

 

 

4,178 

Impact of common stock equivalents

 

11 

 

 

 

 

 

 

Weighted average shares outstanding (diluted)

 

4,245 

 

 

4,191 

 

 

4,236 

 

 

4,184 

Anti-dilutive options excluded from calculation

 

13 

 

 

34 

 

 

28 

 

 

37 

Net income

$

2,474 

 

$

2,319 

 

$

5,358 

 

$

4,145 

Basic earnings per share

$

0.58 

 

$

0.55 

 

$

1.27 

 

$

0.99 

Diluted earnings per share

$

0.58 

 

$

0.55 

 

$

1.26 

 

$

0.99 

 

 

 

 

 

 

Note 2. Recent Accounting Pronouncements

Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement . ASU 2015-05 “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, revises the scope of Subtopic 350-40 to include internal-use software accessed through a hosting arrangement (e.g., cloud computing, software as a service, etc.) only if both of the following criteria are met: (1) the customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty (there is no significant penalty if the customer has the ability to take delivery of the software without incurring significant cost and the ability to use the software separately without significant loss of utility or value); and (2) it is feasible for the customer to either run the software on its own hardware or contract with another party unrelated to the vendor to host the software.  If both of the criteria are present in a hosting arrangement, then the arrangement contains a software license and the customer should account for that element in accordance with Subtopic 350-40 (i.e., expense fees as incurred).  The ASU is effective for public business entities for fiscal years beginning after

6

 


 

December 15, 2015, and interim periods within those fiscal years.  For all other entities, the ASU is effective for fiscal years beginning after December 15, 2015, and interim periods within fiscal year beginning after December 15, 2016.  Early adoption is permitted.  An entity can elect to adopt the amendments either (1) prospectively to all arrangements entered into or materially modified after the effective date, or (2) retrospectively.  The Corporation does not believe ASU 350-40 will have a material effect on its financial statements.

Receivables (Topic 310): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure. ASU 2014-04 “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure” clarifies that a creditor is considered to have physical possession of residential real estate that is collateral for a residential mortgage loan when it obtains legal title to the collateral or a deed in lieu of foreclosure or similar legal agreement is completed.  Consequently, it should reclassify the loan to other real estate owned at that time.  ASU 2014-04 applies to all creditors who obtain physical possession resulting from an in substance repossession or foreclosure of residential real estate property collateralizing a consumer mortgage loan in satisfaction of a receivable.  The ASU does not apply to commercial real estate loans, as the foreclosure process and applicable laws for those assets are significantly different from residential real estate.  The ASU is effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014.  ASU 2014-04 did not have a material effect on the Corporation’s 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. 

 

Note 3. Accumulated Other Comprehensive Loss

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30

 

December 31

 

2015

 

2014

(Dollars in thousands)

 

 

 

 

 

Net unrealized gains on securities

$

1,100 

 

$

2,352 

Tax effect

 

(374)

 

 

(800)

Net of tax amount

 

726 

 

 

1,552 

 

 

 

 

 

 

Net unrealized losses on derivatives

 

 -

 

 

(191)

Tax effect

 

 -

 

 

65 

Net of tax amount

 

 -

 

 

(126)

 

 

 

 

 

 

Accumulated pension adjustment

 

(6,858)

 

 

(6,858)

Tax effect

 

2,332 

 

 

2,332 

Net of tax amount

 

(4,526)

 

 

(4,526)

 

 

 

 

 

 

Total accumulated other comprehensive loss

$

(3,800)

 

$

(3,100)

 

 

 

7

 


 

Note 4. Guarantees

The Corporation does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit.  Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party.  Generally, all letters of credit, when issued, have expiration dates within one year.  The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers. The Bank generally holds collateral and/or personal guarantees supporting these commitments.  The Bank had $26.0 million and $22.7 million of standby letters of credit as of June  30, 2015 and December 31, 2014, respectively. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees.  The amount of the liability as of June  30, 2015 and December 31, 2014 for guarantees under standby letters of credit issued was not material.

 

Note 5. Investments

The amortized cost and estimated fair value of investment securities available for sale as of June  30, 2015 and December 31, 2014 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

unrealized

 

unrealized

 

Fair

June 30, 2015

 

cost

 

gains

 

losses

 

value

Equity securities

 

$

164 

 

$

78 

 

$

 -

 

$

242 

U.S. Government agency securities

 

 

16,245 

 

 

168 

 

 

(29)

 

 

16,384 

Municipal securities

 

 

71,277 

 

 

1,459 

 

 

(604)

 

 

72,132 

Trust preferred securities

 

 

5,949 

 

 

 -

 

 

(621)

 

 

5,328 

Agency mortgage-backed securities

 

 

80,145 

 

 

917 

 

 

(323)

 

 

80,739 

Private-label mortgage-backed securities

 

 

1,502 

 

 

58 

 

 

 -

 

 

1,560 

Asset-backed securities

 

 

42 

 

 

 -

 

 

(3)

 

 

39 

 

 

$

175,324 

 

$

2,680 

 

$

(1,580)

 

$

176,424 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

unrealized

 

unrealized

 

Fair

December 31, 2014

 

cost

 

gains

 

losses

 

value

Equity securities

 

$

274 

 

$

779 

 

$

 -

 

$

1,053 

U.S. Government and Agency securities

 

 

15,854 

 

 

173 

 

 

(64)

 

 

15,963 

Municipal securities

 

 

66,832 

 

 

1,826 

 

 

(292)

 

 

68,366 

Trust preferred securities

 

 

5,940 

 

 

 -

 

 

(803)

 

 

5,137