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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

 

 -

 

 

323 

GSR 2006-5F 2A1

 

5/1/2006

 

 

37 

 

 

43 

 

 

 

Prime

 

D

 

 -

 

 

15 

RALI 2006-QS8 A1

 

7/28/2006

 

 

183 

 

 

202 

 

 

19 

 

ALT A

 

D

 

 -

 

 

242 



 

 

 

$

986 

 

$

1,037 

 

$

51 

 

 

 

 

 

 

 

$

595 





Impairment:

The investment portfolio contained one hundred and three securities with $58 million of temporarily impaired fair value and $1.3 million in unrealized losses at March 31, 2017. The total unrealized loss position has improved from a $1.6 million unrealized loss at year-end 2016. 

For securities with an unrealized loss, Management applies a systematic methodology in order to perform an assessment of the potential for other-than-temporary impairment.  In the case of debt securities, investments considered for other-than-temporary impairment: (1) had a specified maturity or repricing date; (2) were generally expected to be redeemed at par, and (3) were expected to achieve a recovery in market value within a reasonable period of time. In addition, the Bank considers whether it intends to sell these securities or whether it will be forced to sell these securities before the earlier of amortized cost recovery or maturity. Equity securities are assessed for other-than-temporary impairment based on the length of time of impairment, dollar amount of the impairment and general market and financial conditions relating to specific issues.  The impairment identified on debt and equity securities and subject to assessment at March 31, 2017, was deemed to be temporary and required no further adjustments to the financial statements, unless otherwise noted.

10

 


 

The following table reflects temporary impairment in the investment portfolio (excluding restricted stock), aggregated by investment category, length of time that individual securities have been in a continuous unrealized loss position and the number of securities in each category as of March 31, 2017 and December 31, 2016:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



March 31, 2017

 

 



Less than 12 months

 

12 months or more

 

Total



Fair

 

Unrealized

 

 

 

Fair

 

Unrealized

 

 

 

Fair

 

Unrealized

 

 

(Dollars in thousands)

Value

 

Losses

 

Count

 

Value

 

Losses

 

Count

 

Value

 

Losses

 

Count



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and Agency securities

$

729 

 

$

(9)

 

 

$

3,349 

 

$

(16)

 

10 

 

$

4,078 

 

$

(25)

 

11 

Municipal securities

 

14,817 

 

 

(306)

 

28 

 

 

1,678 

 

 

(67)

 

 

 

16,495 

 

 

(373)

 

30 

Trust preferred securities

 

 -

 

 

 -

 

 -

 

 

5,573 

 

 

(412)

 

 

 

5,573 

 

 

(412)

 

Agency mortgage-backed securities

 

26,791 

 

 

(376)

 

42 

 

 

4,726 

 

 

(89)

 

11 

 

 

31,517 

 

 

(465)

 

53 

Private-label mortgage-backed securities

 

 -

 

 

 -

 

 -

 

 

259 

 

 

(1)

 

 

 

259 

 

 

(1)

 

Asset-backed securities

 

 -

 

 

 -

 

 -

 

 

 

 

(2)

 

 

 

 

 

(2)

 

Total temporarily impaired securities

$

42,337 

 

$

(691)

 

71 

 

$

15,589 

 

$

(587)

 

32 

 

$

57,926 

 

$

(1,278)

 

103 









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



December 31, 2016



Less than 12 months

 

12 months or more

 

Total



Fair

 

Unrealized

 

 

 

Fair

 

Unrealized

 

 

 

Fair

 

Unrealized

 

 

(Dollars in thousands)

Value

 

Losses

 

Count

 

Value

 

Losses

 

Count

 

Value

 

Losses

 

Count



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and Agency securities

$

789 

 

$

(9)

 

 

$

3,413 

 

$

(17)

 

10 

 

$

4,202 

 

$

(26)

 

11 

Municipal securities

 

23,407 

 

 

(417)

 

43 

 

 

1,598 

 

 

(154)

 

 

 

25,005 

 

 

(571)

 

45 

Trust preferred securities

 

 -

 

 

 -

 

 -

 

 

5,461 

 

 

(518)

 

 

 

5,461 

 

 

(518)

 

Agency mortgage-backed securities

 

26,995 

 

 

(359)

 

39 

 

 

4,656 

 

 

(93)

 

11 

 

 

31,651 

 

 

(452)

 

50 

Private-label mortgage-backed securities

 

281 

 

 

(5)

 

 

 

 -

 

 

 -

 

 -

 

 

281 

 

 

(5)

 

Asset-backed securities

 

 -

 

 

 -

 

 -

 

 

 

 

(2)

 

 

 

 

 

(2)

 

Total temporarily impaired securities

$

51,472 

 

$

(790)

 

84 

 

$

15,132 

 

$

(784)

 

31 

 

$

66,604 

 

$

(1,574)

 

115 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



The unrealized loss in the municipal bond portfolio decreased to $373 thousand from $571 thousand at December 31, 2016 as market prices improved during the quarter.  There are thirty securities in this portfolio with an unrealized loss and the loss in this portfolio is deemed to be non-credit related and no other-than-temporary impairment charges have been recorded.

The trust preferred portfolio contains seven securities with a fair value of $5.6 million and an unrealized loss of $412 thousand. The trust-preferred securities held by the Bank are single entity issues, not pooled trust preferred securities.  Therefore, the impairment review of these securities is based only on the issuer and the security cannot be impaired by the performance of other issuers as if it was a pooled trust-preferred bond. All of the Bank’s trust preferred securities are single issue, variable rate notes with long maturities (2027 – 2028).  None of these bonds have suspended or missed a dividend payment. At March 31, 2017, the Bank believes it will be able to collect all interest and principal due on these bonds and no other-than-temporary-impairment charges were recorded. 

There is one PLMBS bond showing a small unrealized loss of $1 thousand.  However, the PLMBS sector as a whole is showing a net unrealized gain of $51 thousand at quarter end.  This is primarily a result of the cumulative OTTI charges recorded on this portfolio.  Due to the nature of these bonds, they are evaluated closely. These bonds were all rated AAA at time of purchase, but have since experienced rating declines. Some have experienced increased delinquencies and defaults, while others have seen the credit support increase as the bonds paid-down. The Bank monitors the performance of the PLMBS investments on a regular basis and reviews delinquencies, default rates, credit support levels and various cash flow stress test scenarios. In determining the credit related loss, Management considers all principal past due 60 days or more as a loss. If additional principal moves beyond 60 days past due, it will also be considered a loss.  The Bank has recorded $595 thousand of cumulative impairment charges on this portfolio. Management continues to monitor these securities and it is possible that additional write-downs may occur if current loss trends continue.

11

 


 

The following table represents the cumulative credit losses on debt securities recognized in earnings as of March 31:







 

 

 

 

 



 

 

 

 

(Dollars in thousands)

Three Months Ended



2017

 

2016

Balance of cumulative credit-related OTTI at January 1

$

595 

 

$

555 

Additions for credit-related OTTI not previously recognized

 

 -

 

 

20 

Additional increases for credit-related OTTI previously recognized when there is no intent to sell

 

 

 

 

 

   and no requirement to sell before recovery of amortized cost basis

 

 -

 

 

 -

Decreases for previously recognized credit-related OTTI because there was an intent to sell

 

 -

 

 

 -

Reduction for increases in cash flows expected to be collected

 

 -

 

 

 -

Balance of credit-related OTTI at March 31

$

595 

 

$

575 



 

 

 

 

 

The Bank held $436 thousand of restricted stock at March 31, 2017.  Except for $30 thousand, this investment represents stock in FHLB Pittsburgh. The Bank is required to hold this stock to be a member of FHLB and it is carried at cost of $100 per share. The level of FHLB stock held is determined by FHLB and is comprised of a minimum membership amount plus a variable activity amount. FHLB stock is evaluated for impairment primarily based on an assessment of the ultimate recoverability of its cost. As a government sponsored entity, FHLB has the ability to raise funding through the U.S. Treasury that can be used to support its operations.  There is not a public market for FHLB stock and the benefits of FHLB membership (e.g., liquidity and low cost funding) add value to the stock beyond purely financial measures. Management intends to remain a member of the FHLB and believes that it will be able to fully recover the cost basis of this investment.        





Note 5. Loans

The Bank reports its loan portfolio based on the primary collateral of the loan. It further classifies these loans by the primary purpose, either consumer or commercial. The Bank’s residential real estate loans include long-term loans to individuals and businesses secured by mortgages on the borrower’s real property and include home equity loans.  Construction loans are made to finance the purchase of land and the construction of residential and commercial buildings thereon, and are secured by mortgages on real estate.  Commercial real estate loans include construction, owner and non-owner occupied properties and farm real estate.  Commercial loans are made to businesses of various sizes for a variety of purposes including property, plant and equipment, working capital and loans to government municipalities.  Commercial lending is concentrated in the Bank’s primary market, but also includes purchased loan participations. Consumer loans are comprised of installment loans and unsecured personal lines of credit. 

12

 


 

A summary of loans outstanding, by class, at the end of the reporting periods is as follows:



 

 

 

 

 



 

 

 

 

 

(Dollars in thousands)

March 31, 2017

 

December 31, 2016

Residential Real Estate 1-4 Family

 

 

 

 

 

Consumer first liens

$

101,534 

 

$

103,125 

Commercial first lien

 

65,030 

 

 

65,445 

Total first liens

 

166,564 

 

 

168,570 



 

 

 

 

 

Consumer junior liens and lines of credit

 

44,023 

 

 

44,817 

Commercial junior liens and lines of credit

 

5,370 

 

 

5,396 

Total junior liens and lines of credit

 

49,393 

 

 

50,213 

Total residential real estate 1-4 family

 

215,957 

 

 

218,783 



 

 

 

 

 

Residential real estate - construction

 

 

 

 

 

Consumer

 

1,034 

 

 

1,350 

Commercial

 

9,904 

 

 

7,625 

Total residential real estate construction

 

10,938 

 

 

8,975 



 

 

 

 

 

Commercial real estate

 

397,321 

 

 

390,584 

Commercial

 

274,722 

 

 

270,826 

        Total commercial

 

672,043 

 

 

661,410 



 

 

 

 

 

Consumer

 

4,591 

 

 

4,705 



 

903,529 

 

 

893,873 

Less: Allowance for loan losses

 

(11,278)

 

 

(11,075)

Net Loans

$

892,251 

 

$

882,798 



 

 

 

 

 

Included in the loan balances are the following:

 

 

 

 

 

Net unamortized deferred loan costs

$

363 

 

$

242 



 

 

 

 

 

Loans pledged as collateral for borrowings and commitments from:

 

 

 

 

 

FHLB

$

717,790 

 

$

711,682 

Federal Reserve Bank

 

37,618 

 

 

41,152 



$

755,408 

 

$

752,834 



13

 


 

Note 6. Loan Quality and Allowance for Loan Losses

The following table presents, by class, the activity in the Allowance for Loan Losses (ALL) for the periods ended:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Residential Real Estate 1-4 Family

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Junior Liens &

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

First Liens

 

Lines of Credit

 

Construction

 

Real Estate

 

Commercial

 

Consumer

 

Unallocated

 

Total



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALL at December 31, 2016

 

$

1,105 

 

$

323 

 

$

224 

 

$

6,109 

 

$

1,893 

 

$

100 

 

$

1,321 

 

$

11,075 

Charge-offs

 

 

(8)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(28)

 

 

 -

 

 

(36)

Recoveries

 

 

 

 

 -

 

 

 -

 

 

 -

 

 

102 

 

 

16 

 

 

 -

 

 

119 

Provision

 

 

 

 

(2)

 

 

50 

 

 

17 

 

 

(11)

 

 

11 

 

 

53 

 

 

120 

ALL at March 31, 2017

 

$

1,100 

 

$

321 

 

$

274 

 

$

6,126 

 

$

1,984 

 

$

99 

 

$

1,374 

 

$

11,278 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALL at December 31, 2015

 

$

989 

 

$

308 

 

$

194 

 

$

5,649 

 

$

1,519 

 

$

102 

 

$

1,325 

 

$

10,086 

Charge-offs

 

 

(3)

 

 

 -

 

 

 -

 

 

(3)

 

 

(63)

 

 

(42)

 

 

 -

 

 

(111)

Recoveries

 

 

32 

 

 

 -

 

 

 -

 

 

 -

 

 

15 

 

 

20 

 

 

 -

 

 

67 

Provision

 

 

(21)

 

 

 

 

 

 

535 

 

 

39 

 

 

19 

 

 

(285)

 

 

300 

ALL at March 31, 2016

 

$

997 

 

$

316 

 

$

199 

 

$

6,181 

 

$

1,510 

 

$

99 

 

$

1,040 

 

$

10,342 



The following table presents, by class, loans that were evaluated for the ALL under the specific reserve (individually) and those that were evaluated under the general reserve (collectively) and the amount of the ALL established in each class as of March 31, 2017 and December 31, 2016:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Residential Real Estate 1-4 Family

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Junior Liens &

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

First Liens

 

Lines of Credit

 

Construction

 

Real Estate

 

Commercial

 

Consumer

 

Unallocated

 

Total



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans evaluated for ALL:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually

 

$

624 

 

$

52 

 

$

478 

 

$

13,946 

 

$

 -

 

$

 -

 

$

 -

 

$

15,100 

Collectively

 

 

165,940 

 

 

49,341 

 

 

10,460 

 

 

383,375 

 

 

274,722 

 

 

4,591 

 

 

 -

 

 

888,429 

Total

 

$

166,564 

 

$

49,393 

 

$

10,938 

 

$

397,321 

 

$

274,722 

 

$

4,591 

 

$

 -

 

$

903,529 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALL established for loans evaluated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

 -

Collectively

 

 

1,100 

 

 

321 

 

 

274 

 

 

6,126 

 

 

1,984 

 

 

99 

 

 

1,374 

 

 

11,278 

ALL at March 31, 2017

 

$

1,100 

 

$

321 

 

$

274 

 

$

6,126 

 

$

1,984 

 

$

99 

 

$

1,374 

 

$

11,278 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans evaluated for ALL:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually

 

$

628 

 

$

52 

 

$

480 

 

$

13,523 

 

$

 -

 

$

 -

 

$

 -

 

$

14,683 

Collectively

 

 

167,942 

 

 

50,161 

 

 

8,495 

 

 

377,061 

 

 

270,826 

 

 

4,705 

 

 

 -

 

 

879,190 

Total

 

$

168,570 

 

$

50,213 

 

$

8,975 

 

$

390,584 

 

$

270,826 

 

$

4,705 

 

$

 -

 

$

893,873 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALL established for loans evaluated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

 -

Collectively

 

 

1,105 

 

 

323 

 

 

224 

 

 

6,109 

 

 

1,893 

 

 

100 

 

 

1,321 

 

 

11,075 

ALL at December 31, 2016

 

$

1,105 

 

$

323 

 

$

224 

 

$

6,109 

 

$

1,893 

 

$

100 

 

$

1,321 

 

$

11,075 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14

 


 

The following table shows additional information about those loans considered to be impaired at March 31, 2017 and December 31, 2016:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Impaired Loans



 

With No Allowance

 

With Allowance

(Dollars in thousands)

 

 

 

 

Unpaid

 

 

 

 

 

Unpaid

 

 

 



 

Recorded

 

Principal

 

Recorded

 

Principal

 

Related

March 31, 2017

 

Investment

 

Balance

 

Investment

 

Balance

 

Allowance

 Residential Real Estate 1-4 Family

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First liens

 

$

914 

 

$

987 

 

$

 -

 

$

 -

 

$

 -

Junior liens and lines of credit

 

 

85 

 

 

93 

 

 

 -

 

 

 -

 

 

 -

Total

 

 

999 

 

 

1,080 

 

 

 -

 

 

 -

 

 

 -

 Residential real estate - construction

 

 

478 

 

 

534 

 

 

 -

 

 

 -

 

 

 -

 Commercial real estate

 

 

13,946 

 

 

14,634 

 

 

 -

 

 

 -

 

 

 -

 Commercial

 

 

23 

 

 

35 

 

 

 -

 

 

 -

 

 

 -

Total

 

$

15,446 

 

$

16,283 

 

$

 -

 

$

 -

 

$

 -







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Residential Real Estate 1-4 Family

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First liens

 

$

956 

 

$

1,030 

 

$

 -

 

$

 -

 

$

 -

Junior liens and lines of credit

 

 

85 

 

 

93 

 

 

 -

 

 

 -

 

 

 -

Total

 

 

1,041 

 

 

1,123 

 

 

 -

 

 

 -

 

 

 -

 Residential real estate - construction

 

 

480 

 

 

535 

 

 

 -

 

 

 -

 

 

 -

 Commercial real estate

 

 

13,523 

 

 

14,133 

 

 

 

 

 

 -

 

 

 -

 Commercial

 

 

23 

 

 

35 

 

 

 -

 

 

 -

 

 

 -

Total

 

$

15,067 

 

$

15,826 

 

$

 -

 

$

 -

 

$

 -



15

 


 

The following table shows the average of impaired loans and related interest income for the three months ended March 31, 2017 and 2016:





 

 

 

 

 



Three Months Ended



March 31, 2017



Average

 

Interest

(Dollars in thousands)

Recorded

 

Income



Investment

 

Recognized

 Residential Real Estate 1-4 Family

 

 

 

 

 

First liens

$

919 

 

$

10 

Junior liens and lines of credit

 

85 

 

 

 -

Total

 

1,004 

 

 

10 

 Residential real estate - construction

 

479 

 

 

 -

 Commercial real estate

 

13,519 

 

 

116 

 Commercial

 

23 

 

 

 -

Total

$

15,025 

 

$

126 



 

 

 

 

 



 

 

 

 

 



Three Months Ended



March 31, 2016



Average

 

Interest

(Dollars in thousands)

Recorded

 

Income



Investment

 

Recognized

 Residential Real Estate 1-4 Family

 

 

 

 

 

First liens

$

1,069 

 

$

Junior liens and lines of credit

 

70 

 

 

 -

Total

 

1,139 

 

 

 Residential real estate - construction

 

502 

 

 

 -

 Commercial real estate

 

14,372 

 

 

121 

 Commercial

 

44 

 

 

 -

Total

$

16,057 

 

$

127 

16

 


 



The following table presents the aging of payments of the loan portfolio:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

Loans Past Due and Still Accruing

 

 

 

 

Total



 

Current

 

30-59 Days

 

60-89 Days

 

90 Days+

 

Total

 

Non-Accrual

 

Loans

March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Real Estate 1-4 Family

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First liens

 

$

165,959 

 

$

375 

 

$

34 

 

$

 -

 

$

409 

 

$

196 

 

$

166,564 

Junior liens and lines of credit

 

 

49,180 

 

 

98 

 

 

30 

 

 

 -

 

 

128 

 

 

85 

 

 

49,393 

Total

 

 

215,139 

 

 

473 

 

 

64 

 

 

 -

 

 

537 

 

 

281 

 

 

215,957 

Residential real estate - construction

 

 

10,460 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

478 

 

 

10,938 

Commercial real estate

 

 

390,943 

 

 

378 

 

 

1,519 

 

 

 -

 

 

1,897 

 

 

4,481 

 

 

397,321 

Commercial

 

 

274,454 

 

 

55 

 

 

190 

 

 

 -

 

 

245 

 

 

23 

 

 

274,722 

Consumer

 

 

4,575 

 

 

 

 

 

 

 -

 

 

16 

 

 

 -

 

 

4,591 

Total

 

$

895,571 

 

$

914 

 

$

1,781 

 

$

 -

 

$

2,695 

 

$

5,263 

 

$

903,529 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Real Estate 1-4 Family

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First liens

 

$

166,689 

 

$

1,236 

 

$

414 

 

$

 -

 

$

1,650 

 

$

231 

 

$

168,570 

Junior liens and lines of credit

 

 

50,031 

 

 

96 

 

 

 -

 

 

 -

 

 

96 

 

 

86 

 

 

50,213 

Total

 

 

216,720 

 

 

1,332 

 

 

414 

 

 

 -

 

 

1,746 

 

 

317 

 

 

218,783 

Residential real estate - construction

 

 

8,495 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

480 

 

 

8,975 

Commercial real estate

 

 

384,658 

 

 

858 

 

 

447 

 

 

665 

 

 

1,970 

 

 

3,956 

 

 

390,584 

Commercial

 

 

270,478 

 

 

250 

 

 

75 

 

 

 -

 

 

325 

 

 

23 

 

 

270,826 

Consumer

 

 

4,672 

 

 

30 

 

 

 

 

 -

 

 

33 

 

 

 -

 

 

4,705 

Total

 

$

885,023 

 

$

2,470 

 

$

939 

 

$

665 

 

$

4,074 

 

$

4,776 

 

$

893,873 

17

 


 

The following table reports the internal credit rating for the loan portfolio.  Consumer purpose loans are assigned a rating of either pass or substandard based on the performance status of the loans.  Substandard consumer loans are comprised of loans 90 days or more past due and still accruing, and nonaccrual loans.  Commercial purpose loans may be assigned any rating in accordance with the Bank’s internal risk rating system.



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



Pass

 

Special Mention

 

Substandard

 

Doubtful

 

 

 

(Dollars in thousands)

(1-5)

 

(6)

 

(7)

 

(8)

 

Total



 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Real Estate 1-4 Family

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First liens

$

165,245 

 

$

187 

 

$

1,132 

 

$

 -

 

$

166,564 

Junior liens and lines of credit

 

49,207 

 

 

28 

 

 

158 

 

 

 -

 

 

49,393 

Total

 

214,452 

 

 

215 

 

 

1,290 

 

 

 -

 

 

215,957 

Residential real estate - construction

 

10,188 

 

 

 -

 

 

750 

 

 

 -

 

 

10,938 

Commercial real estate

 

383,578 

 

 

 -

 

 

13,743 

 

 

 -

 

 

397,321 

Commercial

 

271,690 

 

 

178 

 

 

2,854 

 

 

 -

 

 

274,722 

Consumer

 

4,591 

 

 

 -

 

 

 -

 

 

 -

 

 

4,591 

Total

$

884,499 

 

$

393 

 

$

18,637 

 

$

 -

 

$

903,529 









 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Real Estate 1-4 Family

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First liens

$

167,199 

 

$

227 

 

$

1,144 

 

$

 -

 

$

168,570 

Junior liens and lines of credit

 

50,017 

 

 

28 

 

 

168 

 

 

 -

 

 

50,213 

Total

 

217,216 

 

 

255 

 

 

1,312 

 

 

 -

 

 

218,783 

Residential real estate - construction

 

8,220 

 

 

 -

 

 

755 

 

 

 -

 

 

8,975 

Commercial real estate

 

377,283 

 

 

 -

 

 

13,301 

 

 

 -

 

 

390,584 

Commercial

 

267,901 

 

 

957 

 

 

1,968 

 

 

 -

 

 

270,826 

Consumer

 

4,705 

 

 

 -

 

 

 -

 

 

 -

 

 

4,705 

Total

$

875,325 

 

$

1,212 

 

$

17,336 

 

$

 -

 

$

893,873 

18

 


 

The following table presents information on the Bank’s Troubled Debt Restructuring (TDR) loans:



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Troubled Debt Restructurings



 

 

 

 

 

 

 

 

 

 

 

 

That Have Defaulted on



 

 

 

 

 

 

 

 

 

Modified Terms in the

(Dollars in thousands)

 

Troubled Debt Restructurings

 

Last Twelve Months



 

Number of

 

Recorded

 

 

 

 

 

 

 

Number of

 

Recorded



 

Contracts

 

Investment

 

Performing*

 

Nonperforming*

 

Contracts

 

Investment

March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate - construction

 

 

$

478 

 

$

478 

 

$

 -

 

 -

 

$

 -

Residential real estate

 

 

 

869 

 

 

718 

 

 

151 

 

 

 

151 

Commercial real estate

 

11 

 

 

11,950 

 

 

10,700 

 

 

1,250 

 

 

 

1,250 

  Total

 

17 

 

$

13,297 

 

$

11,896 

 

$

1,401 

 

 

$

1,401 



   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate - construction

 

 

$

480 

 

$

480 

 

$

 -

 

 -

 

$

 -

Residential real estate

 

 

 

875 

 

 

724 

 

 

151 

 

 

 

151 

Commercial real estate

 

11 

 

 

12,064 

 

 

10,814 

 

 

1,250 

 

 

 

1,250 

  Total

 

17 

 

$

13,419 

 

$

12,018 

 

$

1,401 

 

 

$

1,401 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*The performing status is determined by the loan’s compliance with the modified terms.



There were no new TDR loans made in the first three months of 2017.  





The following table reports new TDR loans during 2016, concession granted and the recorded investment as of March  31, 2016:







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New During Period



 

Number of

 

 

Pre-TDR

 

 

After-TDR

 

 

Recorded

 

 

Three Months Ended March 31, 2016

 

Contracts

 

 

Modification

 

 

Modification

 

 

Investment

 

Concession

Commercial real estate

 

 

$

525 

 

$

525 

 

$

508 

 

maturity







Note 7. Other Real Estate Owned

Changes in other real estate owned during the three months ended March 31, 2017 and 2016 were as follows:





 

 

 

 

 

 



 

March 31

(Dollars in thousands)

 

2017

 

2016

Balance at beginning of the period

 

$

4,915 

 

$

6,451 

   Additions

 

 

 -

 

 

 -

   Proceeds from dispositions

 

 

(1,751)

 

 

(66)

   (Loss) gain on sales, net

 

 

 -

 

 

(8)

   Valuation adjustment

 

 

(49)

 

 

(46)

Balance at the end of the period

 

$

3,115 

 

$

6,331 





19

 


 

Note 8. Pension

The components of pension expense for the periods presented are as follows:





 

 

 

 

 



 



Three Months Ended March 31

(Dollars in thousands)

2017

 

2016

Components of net periodic cost:

 

 

 

 

 

Service cost

$

78 

 

$

81 

Interest cost

 

166 

 

 

180 

Expected return on plan assets

 

(268)

 

 

(293)

Recognized net actuarial loss

 

137 

 

 

111 

Net period cost

$

113 

 

$

79 



The Bank expects its pension expense to decrease to approximately $459 thousand in 2017 compared to $922 thousand in 2016. This decrease is due to a pension settlement expense of approximately $564 thousand that was recorded in the second half of 2016, as a result of lump sum distributions.  No pension contributions were made or are expected to be made in 2017.

 







Note 9.  Fair Value Measurements and Fair Values of Financial Instruments

Management uses its best judgment in estimating the fair value of the Corporation’s financial instruments; however, there are inherent weaknesses in any estimation technique.  Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Corporation could have realized in a sales transaction on the dates indicated.  The estimated fair value amounts have been measured as of their respective period-ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates.  As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates maybe different than the amounts reported at each year-end.

FASB ASC Topic 820, “Financial Instruments”, requires disclosure of the fair value of financial assets and liabilities, including those financial assets and liabilities that are not measured and reported at fair value on a recurring and nonrecurring basis. The Corporation does not report any nonfinancial assets at fair value. FASB ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  The three levels of the fair value hierarchy under FASB ASC Topic 820 are as follows:

Level 1: Valuation is based on unadjusted, quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2:  Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.  There may be substantial differences in the assumptions used for securities within the same level.  For example, prices for U.S. Agency securities have fewer assumptions and are closer to level 1 valuations than the private label mortgage backed securities that require more assumptions and are closer to level 3 valuations.

Level 3: Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Corporation’s assumptions regarding what market participants would assume when pricing a financial instrument. 

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

The following methods and assumptions were used to estimate the fair values of the Corporation’s financial instruments at March 31, 2017 and December 31, 2016.

Cash and Cash Equivalents:  For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

Investment securities:  The fair value of investment securities is determined in accordance with the methods described under FASB ASC Topic 820 as discussed below.

20

 


 

Restricted stock:  The carrying value of restricted stock approximates its fair value based on redemption provisions for the restricted stock.

Loans held for sale: The fair value of loans held for sale is determined by the price set between the Bank and the purchaser prior to origination. These loans are usually sold at par.

Net loans (including impaired loans)The fair value of fixed-rate loans is estimated for each major type of loan (e.g. real estate, commercial, industrial and agricultural and consumer) by discounting the future cash flows associated with such loans using rates currently offered for loans with similar terms to borrowers of comparable credit quality.  The model considers scheduled principal maturities, repricing characteristics, prepayment assumptions and interest cash flows.  The discount rates used are estimated based upon consideration of a number of factors including the treasury yield curve, expense and service charge factors. For variable rate loans that reprice frequently and have no significant change in credit quality, carrying values approximate the fair value.

Accrued Interest Receivable:  The carrying amount is a reasonable estimate of fair value.

Deposits and Short-term borrowingsThe fair value of demand deposits, savings accounts, and money market deposits is the amount payable on demand at the reporting date.  The fair value of fixed-rate certificates of deposit is estimated by discounting the future cash flows using rates approximating those currently offered for certificates of deposit with similar remaining maturities.  For short-term borrowings, the carrying value approximates a reasonable estimate of the fair value.

Accrued interest payable:  The carrying amount is a reasonable estimate of fair value.

The following information regarding the fair value of the Corporation’s financial instruments should not be interpreted as an estimate of the fair value of the entire Corporation since a fair value calculation is only provided for a limited portion of the Corporation’s assets and liabilities.  Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Corporation’s disclosures and those of other companies may not be meaningful. 

21

 


 

The fair value of the Corporation's financial instruments are as follows:







 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



March 31, 2017



Carrying

 

Fair

 

 

 

 

 

 

 

(Dollars in thousands)

Amount

 

Value

 

Level 1

 

Level 2

 

Level 3



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

39,673 

 

$

39,673 

 

$

39,673 

 

$

 -

 

$

 -

Investment securities available for sale

 

137,182 

 

 

137,182 

 

 

326 

 

 

136,856 

 

 

 -

Restricted stock

 

436 

 

 

436 

 

 

 -

 

 

436 

 

 

 -

Loans held for sale

 

448 

 

 

448 

 

 

 -

 

 

448 

 

 

 -

Net loans

 

892,251 

 

 

893,900 

 

 

 -

 

 

 -

 

 

893,900 

Accrued interest receivable

 

3,154 

 

 

3,154 

 

 

 -

 

 

3,154 

 

 

 -



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

$

1,006,594 

 

$

1,006,082 

 

$

 -

 

$

1,006,082 

 

$

 -

Accrued interest payable

 

131 

 

 

131 

 

 

 -

 

 

131 

 

 

 -



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



December 31, 2016



Carrying

 

Fair

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

Amount

 

Value

 

Level 1

 

Level 2

 

Level 3



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

36,665 

 

$

36,665 

 

$

36,665 

 

$

 -

 

$

 -

Investment securities available for sale

 

143,875 

 

 

143,875 

 

 

290 

 

 

143,585 

 

 

 -

Restricted stock

 

1,767 

 

 

1,767 

 

 

 -

 

 

1,767 

 

 

 -

Loans held for sale

 

540 

 

 

540 

 

 

 -

 

 

540 

 

 

 -

Net loans

 

882,798 

 

 

889,910 

 

 

 -

 

 

 -

 

 

889,910 

Accrued interest receivable

 

3,592 

 

 

3,592 

 

 

 -

 

 

3,592 

 

 

 -



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

$

982,120 

 

$

981,949 

 

$

 -

 

$

981,949 

 

$

 -

Short-term debt

 

24,270 

 

 

24,270 

 

 

24,270 

 

 

 -

 

 

 -

Accrued interest payable

 

116 

 

 

116 

 

 

 -

 

 

116 

 

 

 -



 

 

 

 

 

 

 

 

 

 

 

 

 

 

22

 


 

Recurring Fair Value Measurements

For financial assets and liabilities measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at March  31, 2017 and December 31, 2016 are as follows:







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

(Dollars in Thousands

Fair Value at March 31, 2017

Asset  Description

Level 1

 

Level 2

 

Level 3

 

Total

Equity securities

$

326 

 

$

 -

 

$

 -

 

$

326 

U.S. Government and Agency securities

 

 -

 

 

12,310 

 

 

 -

 

 

12,310 

Municipal securities

 

 -

 

 

60,707 

 

 

 -

 

 

60,707 

Trust Preferred Securities

 

 -

 

 

5,573 

 

 

 -

 

 

5,573 

Agency mortgage-backed securities

 

 -

 

 

57,199 

 

 

 -

 

 

57,199 

Private-label mortgage-backed securities

 

 -

 

 

1,037 

 

 

 -

 

 

1,037 

Asset-backed securities

 

 -

 

 

30 

 

 

 -

 

 

30 

Total assets

$

326 

 

$

136,856 

 

$

 -

 

$

137,182 



 

 

 

 

 

 

 

 

 

 

 







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

(Dollars in Thousands)

Fair Value at December 31, 2016

Asset  Description

Level 1

 

Level 2

 

Level 3

 

Total

Equity securities

$

290 

 

$

 -

 

$

 -

 

$

290 

U.S. Government and Agency securities

 

 -

 

 

12,720 

 

 

 -

 

 

12,720 

Municipal securities

 

 -

 

 

62,985 

 

 

 -

 

 

62,985 

Trust Preferred Securities

 

 -

 

 

5,461 

 

 

 -

 

 

5,461 

Agency mortgage-backed securities

 

 -

 

 

61,284 

 

 

 -

 

 

61,284 

Private-label mortgage-backed securities

 

 -

 

 

1,104 

 

 

 -

 

 

1,104 

Asset-backed securities

 

 -

 

 

31 

 

 

 -

 

 

31 

Total assets

$

290 

 

$

143,585 

 

$

 -

 

$

143,875 



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

The Corporation used the following methods and significant assumptions to estimate the fair values for financial assets measured at fair value on a recurring basis.

Investment securities:  Level 1 securities represent equity securities that are valued using quoted market prices from nationally recognized markets. Level 2 securities represent debt securities that are valued using a mathematical model based upon the specific characteristics of a security in relationship to quoted prices for similar securities.    

23

 


 

Nonrecurring Fair Value Measurements

For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at March  31, 2017 and December 31, 2016 are as follows:







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 



Fair Value at March 31, 2017

Asset  Description

Level 1

 

Level 2

 

Level 3

 

Total

Premises held-for-sale (1)

$

 -

 

$

 -

 

$

165 

 

$

165 

Other real estate owned (1)

 

 -

 

 

 -

 

 

177 

 

 

177 

Total assets

$

 -

 

$

 -

 

$

342 

 

$

342 







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

(Dollars in Thousands)

Fair Value at December 31, 2016

Asset  Description

Level 1

 

Level 2

 

Level 3

 

Total

Premises held-for-sale (1)

$

 -

 

$

 -

 

$

200 

 

$

200 

Other real estate owned (1)

 

 -

 

 

 -

 

 

2,407 

 

 

2,407 

Total assets

$

 -

 

$

 -

 

$

2,607 

 

$

2,607 

(1)

Includes assets directly charged-down to fair value during the year-to-date period.

The Corporation used the following methods and significant assumptions to estimate the fair values for financial assets measured at fair value on a nonrecurring basis.

Impaired loans: Impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral.  Collateral values are estimated using Level 3 inputs based on customized discounting criteria.

Premises held-for-sale: The fair value of premises held for sale, upon initial recognition, is estimated using Level 3 inputs within the fair value hierarchy. 

Other real estate: The fair value of other real estate, upon initial recognition, is estimated using Level 2 inputs within the fair value hierarchy based on observable market data and Level 3 inputs based on customized discounting criteria.  In connection with the measurement and initial recognition of the foregoing assets, the Corporation recognizes charge-offs through the allowance for loan losses.  Subsequent charge-offs are recognized as an expense.

The Corporation did not record any liabilities at fair value for which measurement of the fair value was made on a nonrecurring basis at March 31, 2017. For financial assets and liabilities measured at fair value on a recurring basis, there were no transfers of financial assets or liabilities between Level 1 and Level 2 during the period ending March 31, 2017.

The following table presents additional quantitative information about Level 3 assets measured at fair value on a nonrecurring basis:





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

(Dollars in Thousands)

 

 

Quantitative Information about Level 3 Fair Value Measurements



 

 

 

 

 

 

 

 

Range

March 31, 2017

 

 

Fair Value

 

Valuation Technique

 

Unobservable Input

 

(Weighted Average)

Premises held-for-sale

 

$

165 

 

Sales Contract

 

N/A

 

 -



 

 

 

 

 

 

 

 

 

Other real estate owned

 

 

177 

 

Appraisal

 

N/A

 

 -



 

 

 

 

 

 

Cost to sell

 

8% (8%)



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Range

December 31, 2016

 

 

Fair Value

 

Valuation Technique

 

Unobservable Input

 

(Weighted Average)

Premises held-for-sale

 

$

200 

 

Appraisal

 

Qualitative adjustment

 

5% (5%)



 

 

 

 

 

 

 

 

 

Other real estate owned

 

 

2,407 

 

Appraisal

 

N/A

 

 -



 

 

 

 

 

 

Cost to sell

 

8% (8%)



 

 





24

 


 

Note 10. Capital Ratios

Capital adequacy is currently defined by regulatory agencies through the use of several minimum required ratios.  In July 2013, Federal banking regulators approved the final rules from the Basel Committee on Banking Supervision for the regulation of capital requirements for bank holding companies and U.S banks, generally referred to as “Basel III.” The Basel III standards were effective for the Corporation and the Bank, effective January 1, 2015 (subject to a phase-in period for certain provisions).  Basel III imposes significantly higher capital requirements and more restrictive leverage and liquidity ratios than those previously in place.  The capital ratios to be considered “well capitalized” under Basel III are: (1) Common Equity Tier 1 (CET1) of 6.5%, (2) Tier 1 Leverage of 5%, (3) Tier 1 Risk-Based Capital of 8%, and (4) Total Risk-Based Capital of 10%.  The CET1 ratio is a new capital ratio under Basel III and the Tier 1 risk-based capital ratio of 8% has been increased from 6%. The rules also include changes in the risk weights of certain assets to better reflect credit and other risk exposures. In addition, a capital conservation buffer will be phased-in beginning January 1, 2016 at 0.625%,  1.25% for 2017, 1.875% for 2018 and 2.50% for 2019 and thereafter.  The capital conservation buffer will be applicable to all of the capital ratios except for the Tier1 Leverage ratio. The capital conservation buffer is equal to the lowest value of the three applicable capital ratios less the regulatory minimum for each respective capital measurement.  The Bank’s capital conservation buffer at March 31, 2017 was 8.18% (total risk-based capital 16.18% less 8.00%) compared to the 2017 regulatory buffer of 1.25%.  Compliance with the capital conservation buffer is required in order to avoid limitations to certain capital distributions.  As of March 31, 2017, the Bank was “well capitalized’ under the Basel III requirements and believes it would be “well capitalized” on a fully-phased in basis had such a requirement been in effect.

   The following table summarizes regulatory capital information as of March 31, 2017 and December 31, 2016 for the Corporation and the Bank





 

 

 

 

 

 

 

 



 

 

 

 

 

Regulatory Ratios



 

 

 

 

 

Adequately

 

Well



 

 

 

 

 

Capitalized

 

Capitalized

(Dollars in thousands)

 

March 31, 2017

 

December 31, 2016

 

Minimum

 

Minimum



 

 

 

 

 

 

 

 

Common Equity Tier 1 Risk-based Capital Ratio (1)

 

 

 

 

 

 

 

 

Franklin Financial Services Corporation

 

14.99% 

 

14.41% 

 

4.500% 

 

N/A

Farmers & Merchants Trust Company

 

14.91% 

 

14.29% 

 

4.500% 

 

6.50% 



 

 

 

 

 

 

 

 

Tier 1 Risk-based Capital Ratio (2)

 

 

 

 

 

 

 

 

Franklin Financial Services Corporation

 

14.99% 

 

14.41% 

 

6.000% 

 

N/A

Farmers & Merchants Trust Company

 

14.91% 

 

14.29% 

 

6.000% 

 

8.00% 



 

 

 

 

 

 

 

 

Total Risk-based Capital Ratio (3)

 

 

 

 

 

 

 

 

Franklin Financial Services Corporation

 

16.25% 

 

15.67% 

 

8.000% 

 

N/A

Farmers & Merchants Trust Company

 

16.18% 

 

15.55% 

 

8.000% 

 

10.00% 



 

 

 

 

 

 

 

 

Tier 1 Leverage Ratio (4)

 

 

 

 

 

 

 

 

Franklin Financial Services Corporation

 

10.31% 

 

10.11% 

 

4.000% 

 

N/A

Farmers & Merchants Trust Company

 

10.25% 

 

10.02% 

 

4.000% 

 

5.00% 



 

 

 

 

 

 

 

 

(1) Common equity Tier 1 capital/ total risk-weighted assets (2) Tier 1 capital / total risk-weighted assets

(3) Total risk-based capital / total risk-weighted assets, (4) Tier 1 capital / average quarterly assets









31Note 11. Reclassification

Certain prior period amounts may have been reclassified to conform to the current year presentation.  Such reclassifications did not affect the Corporation’s financial position or results of operations.

25

 


 

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

For the Three Months Ended March 31, 2017 and 2016



Forward Looking Statements



Certain statements appearing herein which are not historical in nature are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Such forward-looking statements refer to a future period or periods, reflecting management’s current views as to likely future developments, and use words such as “may,” “will,” “expect,” “believe,” “estimate,” “anticipate,” or similar terms.  Because forward-looking statements involve certain risks, uncertainties and other factors over which the Corporation has no direct control, actual results could differ materially from those contemplated in such statements.  These factors include (but are not limited to) the following: general economic conditions, changes in interest rates, changes in the Corporation’s cost of funds, changes in government monetary policy, changes in government regulation and taxation of financial institutions, changes in the rate of inflation, changes in technology, the intensification of competition within the Corporation’s market area, and other similar factors.



Critical Accounting Policies



Management has identified critical accounting policies for the Corporation.  These policies are particularly sensitive, requiring significant judgements, estimates and assumptions to be made by Management. There were no changes to the critical accounting policies disclosed in the 2016 Annual Report on Form 10-K in regards to application or related judgments and estimates used.  Please refer to Item 7 of the Corporation’s 2016 Annual Report on Form 10-K for a more detailed disclosure of the critical accounting policies.



Results of Operations



Year-to-Date Summary

At March 31, 2017, total assets were $1.131 billion, an increase of $3.7 million from December 31, 2016. Net loans increased to $892.3 million and total deposits increased to $1.007 billion.  The Corporation reported net income for the first three months of 2017 of $3.0 million.  This is a 10.8% increase versus net income of $2.7 million for the same period in 2016.  Total revenue (interest income and noninterest income) increased by $420 thousand year over year. Interest income increased $448 thousand, while interest expense increased by $36 thousand, resulting in a $412 thousand increase in net interest income. The provision for loan losses was $120 thousand for the first three months of 2017, $180 thousand less than in 2016, due in part to a $100 thousand recovery. Noninterest income decreased $28 thousand, while noninterest expense increased $162 thousand. Income tax expense increased from $685 thousand in 2016 to $793 thousand in 2017. The effective tax rate increased from 20.1% in 2016 to 20.8% in 2017. Diluted earnings per share increased to $.70 in 2017 from $.64 in 2016.

26

 


 

Key performance ratios as of, or for the three months ended March 31, 2017 and 2016 and the year ended December 31, 2016 are listed below:







 

 

 

 

 

 

 

 

 



 

March 31

 

December 31

 

March 31



 

2017

 

2016

 

2016

(Dollars in thousands, except per share)

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

Balance Sheet Highlights

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,131,134 

 

$

1,127,443 

 

$

1,036,323 

Investment securities

 

 

137,182 

 

 

143,875 

 

 

169,516 

Loans, net

 

 

892,251 

 

 

882,798 

 

 

760,802 

Deposits

 

 

1,006,594 

 

 

982,120 

 

 

917,447 

Shareholders' equity

 

 

119,178 

 

 

116,493 

 

 

110,113 



 

 

 

 

 

 

 

 

 

Summary of Operations

 

 

 

 

 

 

 

 

 

Interest income

 

$

9,546 

 

$

36,979 

 

$

9,098 

Interest expense

 

 

581 

 

 

2,245 

 

 

545 

Net interest income

 

 

8,965 

 

 

34,734 

 

 

8,553 

Provision for loan losses

 

 

120 

 

 

3,775 

 

 

300 

Net interest income after provision for loan losses

 

 

8,845 

 

 

30,959 

 

 

8,253 

Noninterest income

 

 

2,925 

 

 

11,605 

 

 

2,953 

Noninterest expense

 

 

7,957 

 

 

33,175 

 

 

7,795 

Income before income taxes

 

 

3,813 

 

 

9,389 

 

 

3,411 

Income tax

 

 

793 

 

 

1,302 

 

 

685 

Net income

 

$

3,020 

 

$

8,087 

 

$

2,726 



 

 

 

 

 

 

 

 

 

Performance Measurements

 

 

 

 

 

 

 

 

 

Return on average assets*

 

 

1.08% 

 

 

0.74% 

 

 

1.04% 

Return on average equity*

 

 

10.33% 

 

 

7.04% 

 

 

9.75% 

Return on average tangible assets (1)*

 

 

1.09% 

 

 

0.75% 

 

 

1.05% 

Return on average tangible equity (1)*

 

 

11.19% 

 

 

7.64% 

 

 

10.53% 

Efficiency ratio (1)

 

 

63.62% 

 

 

68.26% 

 

 

64.67% 

Net interest margin

 

 

3.69% 

 

 

3.62% 

 

 

3.70% 



 

 

 

 

 

 

 

 

 

Shareholders' Value (per common share)

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

0.70 

 

$

1.88 

 

$

0.64 

Basic earnings per share

 

 

0.70 

 

 

1.88 

 

 

0.64 

Regular cash dividends paid

 

 

0.21 

 

 

0.82 

 

 

0.19 

Book value

 

 

27.55 

 

 

26.99 

 

 

26.56 

Tangible book value (1)

 

 

25.47 

 

 

24.90 

 

 

24.54 

Market value

 

 

30.45 

 

 

28.60 

 

 

22.00 

Market value/book value ratio

 

 

110.53% 

 

 

105.97% 

 

 

82.55% 

Price/earnings multiple*

 

 

10.88 

 

 

15.21 

 

 

8.59 

Current dividend yield*

 

 

2.76% 

 

 

2.94% 

 

 

3.45% 

Dividend payout ratio

 

 

30.03% 

 

 

43.56% 

 

 

29.82% 



 

 

 

 

 

 

 

 

 

Safety and Soundness

 

 

 

 

 

 

 

 

 

Risk-based capital ratio (Total)

 

 

16.25% 

 

 

15.67% 

 

 

15.87% 

Leverage ratio (Tier 1)

 

 

10.31% 

 

 

10.11% 

 

 

10.38% 

Common equity ratio (Tier 1)

 

 

14.99% 

 

 

14.41% 

 

 

14.61% 

Nonperforming loans/gross loans

 

 

0.58% 

 

 

0.61% 

 

 

1.29% 

Nonperforming assets/total assets

 

 

0.74% 

 

 

0.92% 

 

 

1.56% 

Allowance for loan losses as a % of loans

 

 

1.25% 

 

 

1.24% 

 

 

1.29% 

Net (recoveries) charge-offs/average loans*

 

 

-0.04%

 

 

0.33% 

 

 

0.02% 

 

 

 

 

 

 

 

 

 

 

Trust assets under management (fair value)

 

$

639,110 

 

$

622,630 

 

$

588,136 



*Annualized

(1)

See the section titled “GAAP versus Non-GAAP Presentation” that follows.

27

 


 

GAAP versus non-GAAP PresentationsThe Corporation supplements its traditional GAAP measurements with certain non-GAAP measurements to evaluate its performance and to eliminate the effect of intangible assets.  By eliminating intangible assets, the Corporation believes it presents a measurement that is comparable to companies that have no intangible assets or to companies that have eliminated intangible assets in similar calculations. However, not all companies may use the same calculation method for each measurement. The non-GAAP measurements are not intended to be used as a substitute for the related GAAP measurements. The following table shows the calculation of the non-GAAP measurements.





 

 

 

 

 

 

 

 

 

(Dollars in thousands, except per share)

 

 

Three months ended

 

 

Twelve months ended

 

 

Three months ended



 

 

March 31, 2017

 

 

December 31, 2016

 

 

March 31, 2016

Return on Average Tangible Assets (non-GAAP)

 

 

 

 

 

 

 

 

 

Net income

 

$

3,020 

 

$

8,087 

 

$

2,726 



 

 

 

 

 

 

 

 

 

Average assets

 

 

1,115,434 

 

 

1,088,047 

 

 

1,052,212 

Less average intangible assets

 

 

(9,016)

 

 

(9,016)

 

 

(9,016)

Average assets (non-GAAP)

 

 

1,106,418 

 

 

1,079,031 

 

 

1,043,196 



 

 

 

 

 

 

 

 

 

 Return on average tangible assets (non-GAAP)

 

 

1.09% 

 

 

0.75% 

 

 

1.05% 



 

 

 

 

 

 

 

 

 

Return on Tangible Equity (non-GAAP)

 

 

 

 

 

 

 

 

 

Net income

 

$

3,020 

 

$

8,087 

 

$

2,726 



 

 

 

 

 

 

 

 

 

Average shareholders' equity

 

 

116,989 

 

 

114,884 

 

 

112,534 

Less average intangible assets

 

 

(9,016)

 

 

(9,016)

 

 

(9,016)

Average shareholders' equity (non-GAAP)

 

 

107,973 

 

 

105,868 

 

 

103,518 



 

 

 

 

 

 

 

 

 

 Return on average tangible equity (non-GAAP)

 

 

11.19% 

 

 

7.64% 

 

 

10.53% 



 

 

 

 

 

 

 

 

 

Tangible Book Value (per share) (non-GAAP)

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

$

119,178 

 

$

116,493 

 

$

114,313 

Less intangible assets

 

 

(9,016)

 

 

(9,016)

 

 

(9,016)

Shareholders' equity (non-GAAP)

 

 

110,162 

 

 

107,477 

 

 

105,297 



 

 

 

 

 

 

 

 

 

Shares outstanding (in thousands)

 

 

4,325 

 

 

4,317 

 

 

4,290 



 

 

 

 

 

 

 

 

 

 Tangible book value (non-GAAP)

 

 

25.47 

 

 

24.90 

 

 

24.54 



 

 

 

 

 

 

 

 

 

Efficiency Ratio

 

 

 

 

 

 

 

 

 

Noninterest expense

 

$

7,957 

 

$

33,175 

 

$

7,795 



 

 

 

 

 

 

 

 

 

Net interest income  

 

 

8,965 

 

 

34,734 

 

 

8,553 

Plus tax equivalent adjustment to net interest income

 

 

619 

 

 

2,246 

 

 

528 

Plus noninterest income, net of securities gains/losses & OTTI

 

 

2,923 

 

 

11,623 

 

 

2,972 

Total revenue

 

 

6,661 

 

 

48,603 

 

 

12,053 



 

 

 

 

 

 

 

 

 

 Efficiency ratio

 

 

63.62% 

 

 

68.26% 

 

 

64.67% 



Comparison of the three months ended March 31, 2017 to the three months ended March 31, 2016:

Net Interest Income

The most important source of the Corporation’s earnings is net interest income, which is defined as the difference between income on interest-earning assets and the expense of interest-bearing liabilities supporting those assets.  Principal categories of interest-earning assets are loans and securities, while deposits, short-term borrowings and long-term debt are the principal categories of interest-bearing liabilities.  Demand deposits enhance net interest income because they are noninterest-bearing deposits. For the purpose of this discussion, balance sheet items refer to the average balance for the year and net interest income is adjusted to a fully taxable-equivalent basis.  This tax-equivalent adjustment facilitates performance comparisons between taxable and tax-free assets by increasing the tax-free income by an amount equivalent to the Federal income taxes that would have been paid if this income were taxable at the Corporation’s 34% Federal statutory rate. 



28

 


 

Tax equivalent net interest income increased $503 thousand to $9.6 million in the first quarter of 2017 compared to $9.1 million in the same period in 2016.  Balance sheet volume contributed $785 thousand to this increase, but was reduced by $282 thousand due to lower rates. 



The following table presents average balances, tax-equivalent (T/E) interest income, and yields earned or rates paid on the assets or liabilities.  All nontaxable interest income has been adjusted to a tax-equivalent basis using a tax rate of 34%. 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



For the Three Months Ended March 31



2017

 

2016



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Average

 

Income or

 

Average

 

Average

 

Income or

 

Average

(Dollars in thousands)

balance

 

expense

 

yield/rate

 

balance

 

expense

 

yield/rate



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing obligations of other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

banks and federal funds sold

$

20,735 

 

$

62 

 

1.21% 

 

$

30,878 

 

$

62 

 

0.81% 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

94,766 

 

 

544 

 

2.33% 

 

 

105,756 

 

 

581 

 

2.21% 

Tax Exempt

 

46,363 

 

 

452 

 

3.89% 

 

 

51,463 

 

 

550 

 

4.28% 

               Investments

 

141,129 

 

 

996 

 

2.86% 

 

 

157,219 

 

 

1,131 

 

2.89% 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, industrial and agricultural

 

737,071 

 

 

7,489 

 

4.06% 

 

 

642,907 

 

 

6,823 

 

4.20% 

Residential mortgage

 

76,512 

 

 

753 

 

3.94% 

 

 

78,622 

 

 

787 

 

4.00% 

Home equity loans and lines

 

72,305 

 

 

799 

 

4.48% 

 

 

70,918 

 

 

754 

 

4.28% 

Consumer

 

4,716 

 

 

66 

 

5.68% 

 

 

5,556 

 

 

69 

 

4.99% 

Loans

 

890,604 

 

 

9,107 

 

4.10% 

 

 

798,003 

 

 

8,433 

 

4.19% 

Total interest-earning assets

 

1,052,468 

 

$

10,165 

 

3.92% 

 

 

986,100 

 

$

9,626 

 

3.93% 

Other assets

 

62,966 

 

 

 

 

 

 

 

66,112 

 

 

 

 

 

Total assets

$

1,115,434 

 

 

 

 

 

 

$

1,052,212 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing checking

$

255,741 

 

$

77 

 

0.12% 

 

$

237,779 

 

$

72 

 

0.12% 

Money Management

 

422,255 

 

 

365 

 

0.35% 

 

 

390,267 

 

 

332 

 

0.34% 

Savings

 

76,887 

 

 

20 

 

0.11% 

 

 

69,950 

 

 

13 

 

0.08% 

Time

 

74,089 

 

 

104 

 

0.57% 

 

 

84,872 

 

 

126 

 

0.60% 

Total interest-bearing deposits

 

828,972 

 

 

566 

 

0.28% 

 

 

782,868 

 

 

543 

 

0.28% 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other borrowings

 

7,470 

 

 

15 

 

0.82% 

 

 

1,576 

 

 

 

0.60% 

Total interest-bearing liabilities

 

836,442 

 

 

581 

 

0.28% 

 

 

784,444 

 

 

545 

 

0.28% 

Noninterest-bearing deposits

 

157,067 

 

 

 

 

 

 

 

149,703 

 

 

 

 

 

Other liabilities

 

4,936 

 

 

 

 

 

 

 

5,531 

 

 

 

 

 

Shareholders' equity

 

116,989 

 

 

 

 

 

 

 

112,534 

 

 

 

 

 

Total liabilities and shareholders' equity

$

1,115,434 

 

 

 

 

 

 

$

1,052,212 

 

 

 

 

 

T/E net interest income/Net interest margin

 

 

 

 

9,584 

 

3.69% 

 

 

 

 

 

9,081 

 

3.70% 

Tax equivalent adjustment

 

 

 

 

(619)

 

 

 

 

 

 

 

(528)

 

 

Net interest income

 

 

 

$

8,965 

 

 

 

 

 

 

$

8,553 

 

 



29

 


 

Provision for Loan Losses

Provision expense for the first quarter was $120 thousand, compared to $300 thousand in 2016.  The decrease in the provision expense was due in part to a $100 thousand recovery during the quarter, net of growth in the loan portfolio.  For more information refer to the Loan Quality and Allowance for Loan Losses discussion in the Financial Condition section.



Noninterest Income

For the first quarter of 2017, noninterest income decreased $28 thousand from the same period in 2016.  Investment and trust service fees increased due to an increase in recurring fee income from assets under management in 2017. Loan service charges decreased, as there was a large prepayment penalty in the first quarter of 2016.  The change in debit card income was due to increased usage by customers in the first quarter of 2017, compared to the same period in 2016. Other income was higher in 2016, due to a $76 thousand gain from the proceeds of a bank owned life insurance policy. 

       

The following table presents a comparison of noninterest income for the three months ended March 31, 2017 and 2016.





 

 

 

 

 

 

 

 

 

 



For the Three Months Ended

 

 

 

 

 



March 31

 

Change

(Dollars in thousands)

2017

 

2016

 

Amount

 

%

Noninterest Income

 

 

 

 

 

 

 

 

 

 

Investment and trust services fees

$

1,295 

 

$

1,253 

 

$

42 

 

3.4 

Loan service charges

 

147 

 

 

226 

 

 

(79)

 

(35.0)

Deposit service charges and fees

 

592 

 

 

578 

 

 

14 

 

2.4 

Other service charges and fees

 

324 

 

 

303 

 

 

21 

 

6.9 

Debit card income

 

375 

 

 

347 

 

 

28 

 

8.1 

Increase in cash surrender value of life insurance

 

131 

 

 

135 

 

 

(4)

 

(3.0)

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

 

 -

 

 

(8)

 

 

 

100.0 

OTTI losses on debt securities

 

 -

 

 

(20)

 

 

20 

 

100.0 

Securities gains (losses), net

 

 

 

 

 

 

100.0 

Other

 

59 

 

 

138 

 

 

(79)

 

(57.2)

Total noninterest income

$

2,925 

 

$

2,953 

 

$

(28)

 

(0.9)



30

 


 

Noninterest Expense

Noninterest expense for the first quarter of 2017 increased $162 thousand compared to the same period in 2016.  The increase in salaries and benefits was primarily due to a $112 thousand increase in salary expense due to merit increases and increased staffing levels and a $33 thousand increase in pension expense compared to the same period in 2016.  The change in data processing expenses is due to increased utilization of the Bank’s mobile banking platforms.  FDIC insurance decreased as the Bank’s base assessment rate decreased.

The following table presents a comparison of noninterest expense for the three months ended March 31, 2017 and 2016:



 

 

 

 

 

 

 

 

 

 



For the Three Months Ended

 

 

 

 

 

(Dollars in thousands)

March 31

 

Change

Noninterest Expense

2017

 

2016

 

Amount

 

%

Salaries and benefits

$

4,626 

 

$

4,370 

 

$

256 

 

5.9 

Net occupancy expense

 

584 

 

 

600 

 

 

(16)

 

(2.7)

Furniture and equipment expense

 

231 

 

 

216 

 

 

15 

 

6.9 

Advertising

 

247 

 

 

282 

 

 

(35)

 

(12.4)

Legal and professional fees

 

290 

 

 

297 

 

 

(7)

 

(2.4)

Data processing

 

541 

 

 

497 

 

 

44 

 

8.9 

Pennsylvania bank shares tax

 

243 

 

 

237 

 

 

 

2.5 

FDIC insurance

 

106 

 

 

157 

 

 

(51)

 

(32.5)

ATM/debit card processing

 

218 

 

 

228 

 

 

(10)

 

(4.4)

Foreclosed real estate

 

58 

 

 

63 

 

 

(5)

 

(7.9)

Telecommunications

 

100 

 

 

118 

 

 

(18)

 

(15.3)

Other

 

713 

 

 

730 

 

 

(17)

 

(2.3)

Total noninterest expense

$

7,957 

 

$

7,795 

 

$

162 

 

2.1 



Provision for Income Taxes

For the first quarter of 2017, the Corporation recorded a Federal income tax expense of $793 thousand compared to $685 thousand for the same quarter in 2016. The effective tax rate was 20.8% for the first quarter of 2017 compared to 20.1% for the same period in 2016.  The increase in the effective tax rate was due primarily to an increase in pretax income in 2017, compared to first quarter 2016.  The variances from the federal statutory rate are generally due to tax-exempt income from investments, loans and bank-owned life insurance. All taxable income for the Corporation is taxed at a rate of 34%.



Financial Condition

Summary:

At March 31, 2017, assets totaled $1.131 billion, an increase of $3.7 million from the 2016 year-end balance of $1.127 billion. Investment securities decreased $6.7 million, while net loans increased $9.5 million (1.1%) due to growth in the commercial loan portfolio. Deposits increased $24.5 million (2.5%) during the first three months of 2017, mainly in interest-bearing deposits. Shareholders’ equity increased $2.7 million during the first three months as retained earnings increased $2.1 million, accumulated other comprehensive loss decreased $299 thousand and the Corporation’s Dividend Reinvestment Plan (DRIP) added an additional $221 thousand in new capital.



Cash and Cash Equivalents:

Cash and cash equivalents totaled $39.7 million at March 31, 2017, an increase of $3.0 million from the prior year-end balance of $36.7 million.  Interest-bearing deposits are held primarily at the Federal Reserve ($13.5 million) and in short-term bank owned certificates of deposit ($12.3 million).



Investment Securities:    

The investment portfolio has decreased $7.1 million on a cost basis, since year-end 2016. The composition of the portfolio has remained consistent with municipal securities and U.S. Agency mortgage-backed securities comprising the greatest portion of the portfolio at approximately 44% and 42% of the portfolio fair value, respectively.  The average life of the portfolio was 3.93 years. 

The investment portfolio had a net unrealized gain of $432 thousand at March 31, 2017 compared to a net unrealized loss of $20 thousand at the prior year-end. The increase in the unrealized gain is due primarily to the change in interest

31

 


 

rates.  The portfolio averaged $141.1 million with a yield of 2.86% for the first three months of 2017. This compares to an average of $157.2 million and a yield of 2.89% for the same period in 2016. 

The Bank holds only one equity security, a Pennsylvania community bank. The municipal bond portfolio is well diversified geographically (issuers from within 28 states) and is comprised primarily of general obligation bonds (75%).  Many municipal bonds have credit enhancements in the form of private bond insurance or other credit support. The largest geographic municipal bond exposure is to 14 issuers in the state of Texas with a fair value of $8.5 million and 11 issuers in the state of Pennsylvania with a fair value of $7.0 million. The average rating of the municipal portfolio from Moody’s is Aa2. It contains $59.5 million of bonds rated A3 or higher and one bond of $600 thousand that is not rated by Moody’s rating agency.  No municipal bonds are rated below investment grade.

The holdings of trust preferred investments and private-label mortgage-backed securities (PLMBS) are unchanged since year-end and are detailed in separate tables.

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



The investment portfolio contained one hundred and three securities with $57.9 million of temporarily impaired fair value and $1.3 million in unrealized losses at March 31, 2017. The total unrealized loss position has improved from a $1.6 million unrealized loss at year-end 2016. 

For securities with an unrealized loss, Management applies a systematic methodology in order to perform an assessment of the potential for other-than-temporary impairment.  In the case of debt securities, investments considered for other-than-temporary impairment: (1) had a specified maturity or repricing date; (2) were generally expected to be redeemed at par, and (3) were expected to achieve a recovery in market value within a reasonable period of time. In addition, the Bank considers whether it intends to sell these securities or whether it will be forced to sell these securities before the earlier of amortized cost recovery or maturity. Equity securities are assessed for other-than-temporary impairment based on the length of time of impairment, dollar amount of the impairment and general market and financial conditions relating to specific issues.  The impairment identified on debt and equity securities and subject to assessment at March 31, 2017, was deemed to be temporary and required no further adjustments to the financial statements, unless otherwise noted.

32

 


 

The following table reflects temporary impairment in the investment portfolio (excluding restricted stock), aggregated by investment category, length of time that individual securities have been in a continuous unrealized loss position and the number of securities in each category as of March 31, 2017 and December 31, 2016:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



March 31, 2017

 

 



Less than 12 months

 

12 months or more

 

Total



Fair

 

Unrealized

 

 

 

Fair

 

Unrealized

 

 

 

Fair

 

Unrealized

 

 

(Dollars in thousands)

Value

 

Losses

 

Count

 

Value

 

Losses

 

Count

 

Value

 

Losses

 

Count



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and Agency securities

$

729 

 

$

(9)

 

 

$

3,349 

 

$

(16)

 

10 

 

$

4,078 

 

$

(25)

 

11 

Municipal securities

 

14,817 

 

 

(306)

 

28 

 

 

1,678 

 

 

(67)

 

 

 

16,495 

 

 

(373)

 

30 

Trust preferred securities

 

 -

 

 

 -

 

 -

 

 

5,573 

 

 

(412)

 

 

 

5,573 

 

 

(412)

 

Agency mortgage-backed securities

 

26,791 

 

 

(376)

 

42 

 

 

4,726 

 

 

(89)

 

11 

 

 

31,517 

 

 

(465)

 

53 

Private-label mortgage-backed securities

 

 -

 

 

 -

 

 -

 

 

259 

 

 

(1)

 

 

 

259 

 

 

(1)

 

Asset-backed securities

 

 -

 

 

 -

 

 -

 

 

 

 

(2)

 

 

 

 

 

(2)

 

Total temporarily impaired securities

$

42,337 

 

$

(691)

 

71 

 

$

15,589 

 

$

(587)

 

32 

 

$

57,926 

 

$

(1,278)

 

103 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



December 31, 2016



Less than 12 months

 

12 months or more

 

Total



Fair

 

Unrealized

 

 

 

Fair

 

Unrealized

 

 

 

Fair

 

Unrealized

 

 

(Dollars in thousands)

Value

 

Losses

 

Count

 

Value

 

Losses

 

Count

 

Value

 

Losses

 

Count



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and Agency securities

$

789 

 

$

(9)

 

 

$

3,413 

 

$

(17)

 

10 

 

$

4,202 

 

$

(26)

 

11 

Municipal securities

 

23,407 

 

 

(417)

 

43 

 

 

1,598 

 

 

(154)

 

 

 

25,005 

 

 

(571)

 

45 

Trust preferred securities

 

 -

 

 

 -

 

 -

 

 

5,461 

 

 

(518)

 

 

 

5,461 

 

 

(518)

 

Agency mortgage-backed securities

 

26,995 

 

 

(359)

 

39 

 

 

4,656 

 

 

(93)

 

11 

 

 

31,651 

 

 

(452)

 

50 

Private-label mortgage-backed securities

 

281 

 

 

(5)

 

 

 

 -

 

 

 -

 

 -

 

 

281 

 

 

(5)

 

Asset-backed securities

 

 -

 

 

 -

 

 -

 

 

 

 

(2)

 

 

 

 

 

(2)

 

Total temporarily impaired securities

$

51,472 

 

$

(790)

 

84 

 

$

15,132 

 

$

(784)

 

31 

 

$

66,604 

 

$

(1,574)

 

115 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



The unrealized loss in the municipal bond portfolio decreased to $373 thousand from $571 thousand at December 31, 2016 as market prices improved during the quarter.  There are thirty securities in this portfolio with an unrealized loss and the loss in this portfolio is deemed to be non-credit related and no other-than-temporary impairment charges have been recorded.

The trust preferred portfolio contains seven securities with a fair value of $5.6 million and an unrealized loss of $412 thousand The trust-preferred securities held by the Bank are single entity issues, not pooled trust preferred securities.  Therefore, the impairment review of these securities is based only on the issuer and the security cannot be impaired by the performance of other issuers as if it was a pooled trust-preferred bond. All of the Bank’s trust preferred securities are single issue, variable rate notes with long maturities (2027 – 2028).  None of these bonds have suspended or missed a dividend payment. At March 31, 2017, the Bank believes it will be able to collect all interest and principal due on these bonds and no other-than-temporary-impairment charges were recorded. 

There is one PLMBS bond showing a small unrealized loss of $1 thousand.  However, the PLMBS sector as a whole is showing an unrealized gain of $51 thousand at quarter end.  This is primarily a result of the cumulative OTTI charges recorded on this portfolio.  Due to the nature of these bonds, they are evaluated closely. These bonds were all rated AAA at time of purchase, but have since experienced rating declines. Some have experienced increased delinquencies and defaults, while others have seen the credit support increase as the bonds paid-down. The Bank monitors the performance of the PLMBS investments on a regular basis and reviews delinquencies, default rates, credit support levels and various cash flow stress test scenarios. In determining the credit related loss, Management considers all principal past due 60 days or more as a loss. If additional principal moves beyond 60 days past due, it will also be considered a loss.  The Bank has recorded $595 thousand of cumulative impairment charges on this portfolio. Management continues to monitor these securities and it is possible that additional write-downs may occur if current loss trends continue.

The Bank held $436 thousand of restricted stock at March 31, 2017.  Except for $30 thousand, this investment represents stock in FHLB Pittsburgh. The Bank is required to hold this stock to be a member of FHLB and it is carried at cost of $100 per share. The level of FHLB stock held is determined by FHLB and is comprised of a minimum membership amount plus a variable activity amount. FHLB stock is evaluated for impairment primarily based on an

33

 


 

assessment of the ultimate recoverability of its cost. As a government sponsored entity, FHLB has the ability to raise funding through the U.S. Treasury that can be used to support its operations.  There is not a public market for FHLB stock and the benefits of FHLB membership (e.g., liquidity and low cost funding) add value to the stock beyond purely financial measures. Management intends to remain a member of the FHLB and believes that it will be able to fully recover the cost basis of this investment.



 Loans:    

Residential real estate:  This category is comprised of consumer purpose loans secured by residential real estate and to a lesser extent, commercial purpose loans secured by residential real estate.  The consumer purpose category represents traditional residential mortgage loans and home equity products (primarily junior liens and lines of credit). Commercial purpose loans in this category represent loans made for various business needs, but are secured with residential real estate. In addition to the real estate collateral, it is possible that additional security is provided by personal guarantees or UCC filings. These loans are underwritten as commercial loans and are not originated to be sold.

Total residential real estate loans decreased $2.8 million over 2016, primarily in the consumer first lien and consumer junior liens and lines of credit categories due to pay downs.  For the first three months of 2017, the Bank originated $3.2 million in mortgages, including approximately $1.3 million for a fee through a third party brokerage agreement. The Bank does not originate or hold any loans that would be considered sub-prime or Alt-A, and does not generally originate mortgages outside of its primary market area.

Residential real estate construction:  The largest component of this category represents loans to residential real estate developers ($9.9 million), while loans for individuals to construct personal residences totaled $1.0 million at March 31, 2017.  The Bank’s exposure to residential construction loans is concentrated primarily in south central Pennsylvania. Real estate construction loans, including residential real estate and land development loans, occasionally provide an interest reserve in order to assist the developer during the development stage when minimal cash flow is generated. All real estate construction loans are underwritten in the same manner, regardless of the use of an interest reserve.

At March 31, 2017,  the Bank had $1.1 million in residential real estate construction loans funded with an interest reserve and capitalized $31 thousand of interest from these reserves on active projects.  These loans were comprised of $284 in residential construction and $821 thousand in commercial construction (reported in the commercial real estate category).  Real estate construction loans are monitored on a regular basis by either an independent third party inspector or the assigned loan officer depending on loan amount or complexity of the project. This monitoring process includes at a minimum, the submission of invoices and AIA documents (depending on the complexity of the project) detailing costs incurred by the borrower, on-site inspections, and a signature by the assigned loan officer for disbursement of funds.    

Commercial real estate (CRE): This category includes commercial, industrial, farm and agricultural loans, where real estate serves as the primary collateral for the loans. Total commercial real estate loans increased to $397.3 million from $390.6 million at the end of 2016, an increase of $6.7 million.  The increases were primarily in commercial construction and multi-family units. The largest sectors (by collateral) in the commercial real estate category are: office buildings ($58.7 million), hotels and motels ($45.9 million), land development ($42.8 million), apartment units ($36.3 million), and auto dealerships ($32.3 million). 

Commercial (C&I):  This category includes commercial, industrial, farm, agricultural, and municipal loans.  C&I loans increased $3.9 million to $274.7 million at March 31, 2017, compared to $270.8 million at the end of 2016, primarily in the municipal loan portfolio. The largest sectors (by industry) in the commercial loan category are: public administration ($65.2 million), utilities ($35.2 million), educational services ($28.1 million) and retail trade ($27.1 million).  At March 31, 2017, the Bank had $160.3 million in municipal loans. The Bank is very active in its market in pursuing commercial lending opportunities and has historically supplemented in-market growth with purchased loan participations. Commercial loan participations were purchased in an effort to increase commercial lending and diversify the loan mix, both geographically and by industry sector.  Purchased loans are originated primarily within the south central Pennsylvania market and are purchased from only a few select counter parties.  At March 31, 2017, the Bank held $131.1 million in purchased loan participations in its portfolio.  The Bank expects that commercial lending will continue to be the primary area of loan growth in the future, via in-market lending, but it expects new purchase participations to decline.    

Consumer loans: This category decreased $114 thousand due primarily to regular payments and maturities. The majority of the Bank’s consumer loans, approximately $3.0 million, are personal lines of credit. The Bank believes the consumer portfolio will continue to decline.  

34

 


 

The following table presents a summary of loans outstanding, by primary collateral as of:





 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

Change

(Dollars in thousands)

March 31, 2017

 

December 31, 2016

 

 

Amount

 

%

Residential Real Estate 1-4 Family

 

 

 

 

 

 

 

 

 

 

Consumer first liens

$

101,534 

 

$

103,125 

 

$

(1,591)

 

(1.5)

Commercial first lien

 

65,030 

 

 

65,445 

 

 

(415)

 

(0.6)

Total first liens

 

166,564 

 

 

168,570 

 

 

(2,006)

 

(1.2)



 

 

 

 

 

 

 

 

 

 

Consumer junior liens and lines of credit

 

44,023 

 

 

44,817 

 

 

(794)

 

(1.8)

Commercial junior liens and lines of credit

 

5,370 

 

 

5,396 

 

 

(26)

 

(0.5)

Total junior liens and lines of credit

 

49,393 

 

 

50,213 

 

 

(820)

 

(1.6)

Total residential real estate 1-4 family

 

215,957 

 

 

218,783 

 

 

(2,826)

 

(1.3)



 

 

 

 

 

 

 

 

 

 

Residential real estate - construction

 

 

 

 

 

 

 

 

 

 

Consumer

 

1,034 

 

 

1,350 

 

 

(316)

 

(23.4)

Commercial

 

9,904 

 

 

7,625 

 

 

2,279 

 

29.9 

Total residential real estate construction

 

10,938 

 

 

8,975 

 

 

1,963 

 

21.9 



 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

397,321 

 

 

390,584 

 

 

6,737 

 

1.7 

Commercial

 

274,722 

 

 

270,826 

 

 

3,896 

 

1.4 

        Total commercial

 

672,043 

 

 

661,410 

 

 

10,633 

 

1.6 



 

 

 

 

 

 

 

 

 

 

Consumer

 

4,591 

 

 

4,705 

 

 

(114)

 

(2.4)



 

903,529 

 

 

893,873 

 

 

9,656 

 

1.1 

Less: Allowance for loan losses

 

(11,278)

 

 

(11,075)

 

 

(203)

 

1.8 

Net Loans

$

892,251 

 

$

882,798 

 

$

9,453 

 

1.1 



 

 

 

 

 

 

 

 

 

 

Loan Quality: 

Management utilizes a risk rating scale ranging from 1-Prime to 9-Loss to evaluate loan quality. This risk rating scale is used primarily for commercial purpose loans. Consumer purpose loans are identified as either a pass or substandard rating based on the performance status of the loans. Substandard consumer loans are loans that are 90 days or more past due and still accruing.  Loans rated 1 – 4 are considered pass credits. Loans that are rated 5 are pass credits, but have been identified as credits that are likely to warrant additional attention and monitoring. Loans rated 6-Special Mention or worse begin to receive enhanced monitoring and reporting by the Bank. Loans rated 7-Substandard or 8-Doubtful exhibit the greatest financial weakness and present the greatest possible risk of loss to the Bank. Nonaccrual loans are rated no better than 7-Substandard.   The following factors represent some of the factors used in determining the risk rating of a borrower: cash flow, debt coverage, liquidity, management, and collateral. Risk ratings, for pass credits, are generally reviewed annually for term debt and at renewal for revolving or renewing debt. The Bank monitors loan quality by reviewing four primary measurements: (1) loans rated 6-Special Mention or worse (collectively “watch list”), (2) delinquent loans, (3) net-charge-offs, and other real estate owned (OREO).

Watch list loans exhibit financial weaknesses that increase the potential risk of default or loss to the Bank. However, inclusion on the watch list, does not by itself, mean a loss is certain. The watch list totaled $19.0 million at quarter end and includes both performing and nonperforming loans.  It is comprised of $393 thousand rated 6- Special Mention and $18.7 million rated 7-Substandard. The Bank has no loans rated 8-Doubtful or 9-Loss. Included in the substandard total are $5.3 million of nonaccrual loans.  The watch list totaled $18.5 million at December 31, 2016. The credit composition of the portfolio, by primary collateral is shown in Note 6 of the accompanying financial statements. The Bank’s Loan Management Committee reviews these loans and risk ratings on a quarterly basis in order to proactively identify and manage problem loans. In addition, a committee meets monthly to discuss possible workout strategies for OREO and all credits rated 7-Substandard or worse. Management also tracks other commercial loan risk measurements including high loan to value loans, concentrations, participations and policy exceptions and reports these to the Credit Risk Oversight Committee of the Board of Directors. The Bank also uses a third-party consultant to assist with internal loan review with a goal of reviewing 60% of commercial loans each year. The FDIC defines certain supervisory loan-to-value lending limits.  The Bank’s internal loan–to-value limits are all equal to, or have a lower loan-to-value limit, than the supervisory limits.  At March 31, 2017, the Bank had loans of $27.0 million that exceeded the supervisory limit.

35

 


 

Delinquent loans are a result of borrowers’ cash flow and/or alternative sources of cash being insufficient to repay loans.  The Bank’s likelihood of collateral liquidation to repay the loans becomes more probable the further behind a borrower falls, particularly when loans reach 90 days or more past due. Management monitors the performance status of loans by the use of an aging report. The aging report can provide an early indicator of loans that may become severely delinquent and possibly result in a loss to the Bank.  See Note 6 in the accompanying financial statements for a table that presents the aging of payments in the loan portfolio.

Nonaccruing loans generally represent Management’s determination that the borrower will be unable to repay the loan in accordance with its contractual terms and that collateral liquidation may or may not fully repay both interest and principal. It is the Bank’s policy to evaluate the probable collectability of principal and interest due under terms of loan contracts for all loans 90-days or more, nonaccrual loans, or impaired loans. Further, it is the Bank’s policy to discontinue accruing interest on loans that are not adequately secured and in the process of collection.  Upon determination of nonaccrual status, the Bank subtracts any current year accrued and unpaid interest from its income, and any prior year accrued and unpaid interest from the allowance for loan losses.  Management continually monitors the status of nonperforming loans, the value of any collateral and potential of risk of loss.  Nonaccrual loans are rated no better than 7-Substandard.

Loan quality, as measured by the balance of nonperforming loans has shown minimal change since year-end 2016.  A decline in loans past due 90 or more was offset by an increase in nonaccrual loans. OREO declined during the first quarter due to the sale of a property that was carried at $1.8 million. The following table presents a summary of nonperforming assets:



 

 

 

 

 



 

 

 

 

 



 

 

 

 

 

(Dollars in thousands)

March 31, 2017

 

December 31, 2016



 

 

 

 

 

Nonaccrual loans

 

 

 

 

 

Residential Real Estate 1-4 Family

 

 

 

 

 

First liens

$

196 

 

$

231 

Junior liens and lines of credit

 

85 

 

 

86 

Total

 

281 

 

 

317 

Residential real estate - construction

 

478 

 

 

480 

Commercial real estate

 

4,481 

 

 

3,956 

Commercial

 

23 

 

 

23 

Total nonaccrual loans

 

5,263 

 

 

4,776 



 

 

 

 

 

Loans past due 90 days or more and not included above

 

 

 

 

 

Commercial real estate

 

 -

 

 

665 

Total loans past due 90 days or more and still accruing

 

 -

 

 

665 



 

 

 

 

 

Total nonperforming loans

 

5,263 

 

 

5,441 



 

 

 

 

 

Other real estate owned

 

3,115 

 

 

4,915 

Total nonperforming assets

$

8,378 

 

$

10,356 



 

 

 

 

 



 

 

 

 

 

Nonperforming loans to total gross loans

 

0.58% 

 

 

0.61% 

Nonperforming assets to total assets

 

0.74% 

 

 

0.92% 

Allowance for loan losses to nonperforming loans

 

214.29% 

 

 

203.55% 



36

 


 

The following table identifies the most significant loans in nonaccrual status. These three nonaccrual loans account for 88% of the total nonaccrual balance. The table also indicates those significant nonaccrual loans that are classified as troubled debt restructurings (TDR). A TDR loan is maintained on nonaccrual status until a satisfactory repayment history is established.  All loans on the watch list that are not on nonaccrual or past due 90 days more are considered potential problem loans. Potential problem loans at March 31, 2017 totaled $13.8 million compared to $17.1 million at year-end 2016.  The following table provides information on the most significant nonaccrual loans as of March 31, 2017:



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

ALL

 

Nonaccrual

 

TDR

 

 

 

 

 

Last



 

Balance

 

 

Reserve

 

Date

 

Status

 

Collateral

 

Location

 

Appraisal(1)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit 1

 

1,712 

 

 

 -

 

Mar-12

 

Y

 

1st and 2nd liens on commercial real estate, residential real estate and business assets

 

PA

 

Jan-16

$

3,810 

Credit 2

 

1,684 

 

 

 -

 

Dec-14

 

N

 

Hotel and entertainment complex

 

PA

 

Apr-16

$

4,200 

Credit 3

 

1,250 

 

 

 -

 

Sep-16

 

Y

 

1st lien on farmland

 

PA

 

Jul-14

$

2,391 



$

4,646 

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

(1) Appraisal value, as reported, does not reflect the pay-off of any senior liens or the cost to liquidate the collateral, but does reflect only the Bank’s share of the collateral if it is a participated loan.

Credit 1 is a TDR that is performing in accordance with the modified terms. Credit 2 is in the process of foreclosure. Credit 3 is a listed for sale. A partial pay-down is possible during the second quarter of 2017 due to the sale of real estate. 

In addition to monitoring nonaccrual loans, the Bank also closely monitors impaired loans and troubled debt restructurings (TDR).  A loan is considered to be impaired when, based on current information and events, it is probable that the Bank will be unable to collect all interest and principal payments due according to the originally contracted terms of the loan agreement.  Nonaccrual loans (excluding consumer purpose loans) and TDR loans are considered impaired.

A loan is considered a troubled debt restructuring if the creditor (the Bank), for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. These concessions may include lowering the rate, extending the maturity, re-amortization of the payment, or a combination of multiple concessions.   The Bank reviews all loans rated 6-Special Mention or worse when it is providing a loan restructure, modification or new credit facility to determine if the action is a TDR.  If a TDR loan is placed on nonaccrual status, it remains on nonaccrual status for at least six months to ensure performance.

In accordance with financial accounting standards, TDR loans are always considered impaired until they are paid off or in certain circumstances, refinanced.  However, an impaired TDR loan can be a performing loan. Impaired loans totaled $15.4 million at quarter-end compared to $15.1 million at year-end 2016.

The following table shows the composition of impaired loans as of:





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 



 

March 31, 2017

(Dollars in thousands)

 

Nonaccrual

 

Accruing

 

Total



 

Non-TDR

 

TDR

 

TDR

 

Impaired

Residential Real Estate 1-4 Family

 

 

 

 

 

 

 

 

 

 

 

 

First liens

 

$

45 

 

$

151 

 

$

718 

 

$

914 

Junior liens and lines of credit

 

 

85 

 

 

 -

 

 

 -

 

 

85 

Total

 

 

130 

 

 

151 

 

 

718 

 

 

999 

Residential real estate - construction

 

 

 -

 

 

478 

 

 

 -

 

 

478 

Commercial real estate

 

 

1,996 

 

 

2,485 

 

 

9,465 

 

 

13,946 

Commercial

 

 

23 

 

 

 -

 

 

 -

 

 

23 

Total

 

$

2,149 

 

$

3,114 

 

$

10,183 

 

$

15,446 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Loan Losses: 

Management performs a quarterly evaluation of the adequacy of the allowance for loan losses (ALL). The ALL is determined by segmenting the loan portfolio based on the loan’s collateral. The Bank further classifies the portfolio based on the primary purpose of the loan, either consumer or commercial.  When calculating the ALL, consideration is given to a variety of factors in establishing this estimate including, but not limited to, current economic conditions, diversification of the loan portfolio, delinquency statistics, results of internal loan reviews, historical charge-offs, the adequacy of the underlying collateral (if collateral dependent) and other relevant factors. The Bank begins enhanced monitoring of all loans rated 6 (Special Mention) or worse, and obtains a new appraisal or asset valuation for any loan rated 7 (Substandard) or worse. Management, at its discretion, may determine that additional adjustments to the appraisal or valuation are

37

 


 

required.  Valuation adjustments will be made as necessary based on factors, including, but not limited to: the economy, deferred maintenance, industry, type of property/equipment, age of the appraisal, etc. and the knowledge Management has about a particular situation. In addition, the cost to sell or liquidate the collateral is also estimated and deducted from the valuation in order to determine the net realizable value to the Bank. When determining the allowance for loan losses, certain factors involved in the evaluation are inherently subjective and require material estimates that may be susceptible to significant change, including the amounts and timing of future cash flows expected to be received on impaired loans. Management monitors the adequacy of the allowance for loan losses on an ongoing basis and reports its adequacy quarterly to the Credit Risk Oversight Committee of the Board of Directors.  Management believes that the allowance for loan losses at March 31, 2017 is adequate.

The analysis for determining the ALL is consistent with guidance set forth in generally accepted accounting principles (GAAP) and the Interagency Policy Statement on the Allowance for Loan and Lease Losses. The analysis has two components, specific and general allocations. The specific component addresses specific reserves established for impaired loans. A loan is considered to be impaired when, based on current information and events, it is probable that the Bank will be unable to collect all interest and principal payments due according to the originally contracted terms of the loan agreement.  Collateral values discounted for market conditions and selling costs are used to establish specific allocations for impaired loans. It is possible that as a result of the credit analysis, a specific reserve is not required for an impaired loan. For impaired commercial loans with balances less than $250 thousand and all consumer purpose loans, a specific reserve analysis is not performed and these loans are added to the general allocation pool. These loans totaled $346 thousand at March 31, 2017 and are comprised primarily of loans secured by residential real estate. Management does not believe that excluding these loans from the specific reserve analysis presents any additional risk.  At March  31, 2017, impaired loans totaled $15.4 million compared to $15.1 million at year-end 2016. The Bank currently has no specific reserve established for any loans.  Note 6 in the accompanying financial statements provide additional information about the ALL established for impaired loans.

The general allocation component addresses the reserves established for pools of homogenous loans. The general component includes a quantitative and qualitative analysis. When calculating the general allocation, the Bank segregates its loan portfolio into the following sectors based primarily on the type of supporting collateral:  residential real estate, commercial, industrial or agricultural real estate; commercial and industrial (C&I non-real estate), and consumer.  The residential real estate sector is further segregated by first lien loans, junior liens and home equity products, and residential real estate construction. The quantitative analysis uses the Bank’s twenty quarter rolling historical loan loss experience adjusted for factors derived from current economic and market conditions that have been determined to have an effect on the probability and magnitude of a loss.  The historical loss experience factor for the general allocation was .84% of gross loans ($7.6 million), unchanged from December 31, 2016.

The qualitative analysis utilizes a risk matrix that incorporates qualitative and environmental factors such as: loan volume, management, loan review process, credit concentrations, competition, and legal and regulatory issues. These factors are each risk rated from minimal to high risk and in total can add up to a maximum qualitative factor of 37.5 basis points. At March 31, 2017, these factors totaled 26 basis points ($2.3 million), unchanged from year-end 2016.  The risk assessment of factors are determined on the basis of Management’s observation, judgment and experience.  In addition to two factors above, there is an unallocated reserve of $1.4 million at March 31, 2017 compared to $1.3 million at the prior year-end.

Real estate appraisals and collateral valuations are an important part of the Bank’s process for determining potential loss on collateral dependent loans and thereby have a direct effect on the determination of loan reserves, charge-offs and the calculation of the allowance for loan losses.  As long as the loan remains a performing loan, no further updates to appraisals are required. If a loan or relationship migrates to risk rating of 7-Substandard or worse, an evaluation for impairment status is made based on the current information available at the time of downgrade and a new appraisal or collateral valuation is obtained.

In determining the allowance for loan losses, Management, at its discretion, may determine that additional adjustments to the fair value obtained from an appraisal or collateral valuation are required. Adjustments will be made as necessary based on factors, including, but not limited to the economy, deferred maintenance, industry, type of property or equipment etc., and the knowledge Management has about a particular situation. In addition, the cost to sell or liquidate the collateral is also estimated and deducted from the valuation in order to determine the net realizable value to the Bank. If an appraisal is not available, Management may make its best estimate of the real value of the collateral or use last known market value and apply appropriate discounts.  If an adjustment is made to the collateral valuation, this will be documented with appropriate support and reported to the Loan Management Committee.

38

 


 

The following table shows the loans that were evaluated for the allowance for loan losses under a specific reserve (individually) and those that were evaluated under a general reserve (collectively), and the amount of the allowance established in each loan class as of March 31, 2017 and December 31, 2016:



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Residential Real Estate 1-4 Family

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Junior Liens &

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

First Liens

 

Lines of Credit

 

Construction

 

Real Estate

 

Commercial

 

Consumer

 

Unallocated

 

Total



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans evaluated for ALL:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually

 

$

624 

 

$

52 

 

$

478 

 

$

13,946 

 

$

 -

 

$

 -

 

$

 -

 

$

15,100 

Collectively

 

 

165,940 

 

 

49,341 

 

 

10,460 

 

 

383,375 

 

 

274,722 

 

 

4,591 

 

 

 -

 

 

888,429 

Total

 

$

166,564 

 

$

49,393 

 

$

10,938 

 

$

397,321 

 

$

274,722 

 

$

4,591 

 

$

 -

 

$

903,529 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALL established for loans evaluated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

 -

Collectively

 

 

1,100 

 

 

321 

 

 

274 

 

 

6,126 

 

 

1,984 

 

 

99 

 

 

1,374 

 

 

11,278 

ALL at March 31, 2017

 

$

1,100 

 

$

321 

 

$

274 

 

$

6,126 

 

$

1,984 

 

$

99 

 

$

1,374 

 

$

11,278 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans evaluated for ALL:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually

 

$

628 

 

$

52 

 

$

480 

 

$

13,523 

 

$

 -

 

$

 -

 

$

 -

 

$

14,683 

Collectively

 

 

167,942 

 

 

50,161 

 

 

8,495 

 

 

377,061 

 

 

270,826 

 

 

4,705 

 

 

 -

 

 

879,190 

Total

 

$

168,570 

 

$

50,213 

 

$

8,975 

 

$

390,584 

 

$

270,826 

 

$

4,705 

 

$

 -

 

$

893,873 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALL established for loans evaluated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

 -

Collectively

 

 

1,105 

 

 

323 

 

 

224 

 

 

6,109 

 

 

1,893 

 

 

100 

 

 

1,321 

 

 

11,075 

ALL at December 31, 2016

 

$

1,105 

 

$

323 

 

$

224 

 

$

6,109 

 

$

1,893 

 

$

100 

 

$

1,321 

 

$

11,075 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

During the first quarter of 2017, the Bank recorded $120 thousand for the loan loss provision expense compared to $300 thousand during the same quarter of the prior year. During the quarter, the Bank had gross loan charge-offs of only $36 thousand. Since loan recoveries exceeded charge-offs, the bank recorded a net loan recovery of $83 thousand.  As a result of the loan loss provision and the net recovery, the allowance for Loan Losses (ALL) increased to $11.3 million at quarter-end. Charged-off loans usually result from: (1) a borrower being legally relieved of loan repayment responsibility through bankruptcy, (2) insufficient collateral sale proceeds to repay a loan; or (3) the borrower and/or guarantor does not own other assets that, if sold, would generate sufficient sale proceeds to repay a loan. The Bank recorded net loan charge-offs of $44 thousand for the first three months of 2016.

39

 


 

The following table presents an analysis of the allowance for loan losses for the periods ended:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Residential Real Estate 1-4 Family

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Junior Liens &

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

First Liens

 

Lines of Credit

 

Construction

 

Real Estate

 

Commercial

 

Consumer

 

Unallocated

 

Total



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALL at December 31, 2016

 

$

1,105 

 

$

323 

 

$

224 

 

$

6,109 

 

$

1,893 

 

$

100 

 

$

1,321 

 

$

11,075 

Charge-offs

 

 

(8)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(28)

 

 

 -

 

 

(36)

Recoveries

 

 

 

 

 -

 

 

 -

 

 

 -

 

 

102 

 

 

16 

 

 

 -

 

 

119 

Provision

 

 

 

 

(2)

 

 

50 

 

 

17 

 

 

(11)

 

 

11 

 

 

53 

 

 

120 

ALL at March 31, 2017

 

$

1,100 

 

$

321 

 

$

274 

 

$

6,126 

 

$

1,984 

 

$

99 

 

$

1,374 

 

$

11,278 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALL at December 31, 2015

 

$

989 

 

$

308 

 

$

194 

 

$

5,649 

 

$

1,519 

 

$

102 

 

$

1,325 

 

$

10,086 

Charge-offs

 

 

(3)

 

 

 -

 

 

 -

 

 

(3)

 

 

(63)

 

 

(42)

 

 

 -

 

 

(111)

Recoveries

 

 

32 

 

 

 -

 

 

 -

 

 

 -

 

 

15 

 

 

20 

 

 

 -

 

 

67 

Provision

 

 

(21)

 

 

 

 

 

 

535 

 

 

39 

 

 

19 

 

 

(285)

 

 

300 

ALL at March 31, 2016

 

$

997 

 

$

316 

 

$

199 

 

$

6,181 

 

$

1,510 

 

$

99 

 

$

1,040 

 

$

10,342 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The allocation of the allowance for loan losses is based on estimates and is not intended to imply limitations on the usage of the allowance.  The entire allowance is available to absorb any losses without regard to the category in which the loan is classified.



Other Real Estate Owned: 

The Bank holds $3.1 million of other real estate owned (OREO), comprised of five properties compared to $4.9 million on the same five properties at December 31, 2016.  A portion of one property carried at $1.8 million was sold during the first quarter.  The most significant OREO holding is one property carried at $2.5 million (80% of total OREO) that is secured by 196 acres of land intended for residential real estate development. This property is under contract to be sold; however, the agreement allows for a due diligence period until November 2017. Therefore, the final outcome is not certain. This property was part of a participated loan and the workout is being handled by the lead bank.  During 2017, the Bank recorded a write down of $49 thousand on one property and incurred expense of $9 thousand to hold and maintain OREO. Note 7 of the accompanying financial statements provides additional information on activity in OREO.

The Bank had $123 thousand of residential properties in the process of foreclosure at March 31, 2017 and December 31, 2016.

40

 


 

Deposits: 

Total deposits increased $24.5 million during the first three months of 2017 to $1.007 billion. Non-interest bearing deposits increased $1.4 million, while interest-bearing checking and savings increased $24.0 million and time deposits decreased $886 thousand. Interest bearing checking increased by $21.6 million, primarily from nonprofit deposits.  The Bank’s Money Management product decreased $1.9 million.  Retail time deposits decreased since year-end, as customers moved funds to more liquid accounts.  As of March 31, 2017, the Bank had $3.4 million in reciprocal time deposits included in brokered time deposits.  



 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

Change

(Dollars in thousands)

March 31, 2017

 

December 31, 2016

 

 

Amount

 

%

Noninterest-bearing checking

$

171,696 

 

$

170,345 

 

$

1,351 

 

0.8 



 

 

 

 

 

 

 

 

 

 

Interest-bearing checking

 

263,502 

 

 

241,906 

 

 

21,596 

 

8.9 

Money management

 

418,373 

 

 

420,309 

 

 

(1,936)

 

(0.5)

Savings

 

79,274 

 

 

74,925 

 

 

4,349 

 

5.8 

Total interest-bearing checking and savings

 

761,149 

 

 

737,140 

 

 

24,009 

 

3.3 



 

 

 

 

 

 

 

 

 

 

Retail time deposits

 

70,377 

 

 

71,264 

 

 

(887)

 

(1.2)

Brokered time deposits

 

3,372 

 

 

3,371 

 

 

 

0.0 

Total time deposits

 

73,749 

 

 

74,635 

 

 

(886)

 

(1.2)

Total deposits

$

1,006,594 

 

$

982,120 

 

$

24,474 

 

2.5 



 

 

 

 

 

 

 

 

 

 

Overdrawn deposit accounts reclassified as loans

$

121 

 

$

181 

 

 

 

 

 



Borrowings:

The Corporation had no short-term borrowings at March 31, 2017, compared to $24.3 million at December 31, 2016. 

Shareholders’ Equity:

Total shareholders’ equity increased $2.7 million to $119.2 million at March 31, 2017, compared to $116.5 million at the end of 2016.  The increase in retained earnings from the Corporation’s net income of $3.0 million was partially offset by the cash dividend of $907 thousand. The Corporation’s dividend payout ratio was 30.03% for the first three months of 2017 compared to 43.6% in 2016.

As part of its quarterly dividend decision, the Corporation considers current and future income projections, dividend yield, payout ratio, and current and future capital ratios. For the first quarter of 2017, the Corporation paid a $0.21 per share dividend, compared to $0.19 paid in the first quarter of 2016. On April 13, 2017 the Board of Directors declared a $0.24 per share regular quarterly dividend for the second quarter of 2017, which will be paid on May 24, 2017.

In addition, the Corporation considers how dividend decisions may affect the Dividend Reinvestment Plan (DRIP), which has raised $221 thousand in new capital this year with 7,436 new shares purchased.  On April 14, 2016, the Board of Directors approved a stock repurchase program that authorized the repurchase of up to $350,000 in shares of common stock during each calendar quarter through March 31, 2017. In 2016, the Corporation repurchased 30,196 shares of its common stock for $700 thousand.  No shares were repurchased in the first quarter of 2017.  The 2016 stock repurchase plan has expired and there is currently no repurchase plan in place.

In July 2013, Federal banking regulators approved the final rules from the Basel Committee on Banking Supervision for the regulation of capital requirements for bank holding companies and U.S banks, generally referred to as “Basel III.” The Basel III standards were effective for the Corporation and the Bank, effective January 1, 2015 (subject to a phase-in period for certain provisions).  Basel III imposes significantly higher capital requirements and more restrictive leverage and liquidity ratios than those previously in place.  The capital ratios to be considered “well capitalized” under Basel III are: (1) Common Equity Tier 1 (CET1) of 6.5%, (2) Tier 1 Leverage of 5%, (3) Tier 1 Risk-Based Capital of 8%, and (4) Total Risk-Based Capital of 10%.  The CET1 ratio is a new capital ratio under Basel III and the Tier 1 risk-based capital ratio of 8% has been increased from 6%. The rules also include changes in the risk weights of certain assets to better reflect credit and other risk exposures. In addition, a capital conservation buffer will be phased-in beginning January 1, 2016 at 0.625%, 1.25% for 2017, 1.875% for 2018 and 2.50% for 2019 and thereafter.  The capital conservation buffer will be applicable to all of the capital ratios except for the Tier1 Leverage ratio. The capital conservation buffer is equal to the lowest value of the three applicable capital ratios less the regulatory minimum for each respective capital measurement.  The Bank’s capital conservation buffer at March 31, 2017 was 8.18% (total risk-based capital 16.18% less 8.00%) compared to the 2017 regulatory buffer of 1.25%.  Compliance with the capital conservation buffer is required in order to avoid limitations to certain capital distributions.  As of March 31, 2017, the Bank was “well capitalized’ under the

41

 


 

Basel III requirements and believes it would be “well capitalized” on a fully-phased in basis had such a requirement been in effect.

   The following table summarizes regulatory capital information as of March 31, 2017 and December 31, 2016 for the Corporation and the Bank. 





 

 

 

 

 

 

 

 



 

 

 

 

 

Regulatory Ratios



 

 

 

 

 

Adequately

 

Well



 

 

 

 

 

Capitalized

 

Capitalized

(Dollars in thousands)

 

March 31, 2017

 

December 31, 2016

 

Minimum

 

Minimum



 

 

 

 

 

 

 

 

Common Equity Tier 1 Risk-based Capital Ratio (1)

 

 

 

 

 

 

 

 

Franklin Financial Services Corporation

 

14.99% 

 

14.41% 

 

4.500% 

 

N/A

Farmers & Merchants Trust Company

 

14.91% 

 

14.29% 

 

4.500% 

 

6.50% 



 

 

 

 

 

 

 

 

Tier 1 Risk-based Capital Ratio (2)

 

 

 

 

 

 

 

 

Franklin Financial Services Corporation

 

14.99% 

 

14.41% 

 

6.000% 

 

N/A

Farmers & Merchants Trust Company

 

14.91% 

 

14.29% 

 

6.000% 

 

8.00% 



 

 

 

 

 

 

 

 

Total Risk-based Capital Ratio (3)

 

 

 

 

 

 

 

 

Franklin Financial Services Corporation

 

16.25% 

 

15.67% 

 

8.000% 

 

N/A

Farmers & Merchants Trust Company

 

16.18% 

 

15.55% 

 

8.000% 

 

10.00% 



 

 

 

 

 

 

 

 

Tier 1 Leverage Ratio (4)

 

 

 

 

 

 

 

 

Franklin Financial Services Corporation

 

10.31% 

 

10.11% 

 

4.000% 

 

N/A

Farmers & Merchants Trust Company

 

10.25% 

 

10.02% 

 

4.000% 

 

5.00% 



 

 

 

 

 

 

 

 

(1) Common equity Tier 1 capital/ total risk-weighted assets (2) Tier 1 capital / total risk-weighted assets

(3) Total risk-based capital / total risk-weighted assets, (4) Tier 1 capital / average quarterly assets



Economy 

The Corporation’s primary market area includes Franklin, Fulton, Cumberland and Huntingdon Counties,  Pennsylvania.  This area is diverse in demographic and economic makeup.  County populations range from a low of approximately 15,000 in Fulton County to over 238,000 in Cumberland County. Unemployment in the Bank’s market area has remained virtually unchanged over the past year and ranges from a low of 3.8% in Cumberland County to high of 8.2% in Huntingdon County.  The market area has a diverse economic base and local industries include warehousing, truck & rail shipping centers, light and heavy manufacturers, health-care, higher education institutions, farming and agriculture, and a varied service sector.  The Corporation’s primary market area is located in south central Pennsylvania and provides easy access to the major metropolitan markets on the east coast via trucking and rail transportation. Because of this, warehousing and distribution companies continue to find the area attractive. The local economy is not overly dependent on any one industry or business and Management believes that the Bank’s primary market area continues to be well suited for growth.

42

 


 

The following provides selected economic data for the Bank’s primary market:

Economic Data





 

 

 

 



 

 

 

 



 

 



 

March 31, 2017

 

December 31, 2016

Unemployment Rate (seasonally adjusted)

 

 

 

 

Market area range (1)

 

3.8% - 8.2%

 

4.2 - 6.6%

Pennsylvania

 

5.0% 

 

5.7% 

United States

 

4.7% 

 

4.6% 



 

 

 

 

Housing Price Index - year over year change

 

 

 

 

PA, nonmetropolitan statistical area

 

3.0% 

 

2.8% 

United States

 

5.6% 

 

5.6% 



 

 

 

 

Franklin County Building Permits - year over year change

 

 

 

 

Residential, estimated

 

2.0% 

 

20.9% 

Multifamily, estimated

 

-85.0%

 

-31.7%



 

 

 

 

(1) Franklin, Cumberland, Fulton and Huntingdon Counties

 

 

 



Unlike many companies, the assets and liabilities of the Corporation are financial in nature. As such, interest rates and changes in interest rates may have a more significant effect on the Corporation’s financial results than on other types of industries. Because of this, the Corporation watches the actions of the Federal Reserve Open Market Committee (FOMC) as it makes decisions about interest rate changes. In March 2017, the FOMC increased the federal funds rate target range, following a similar increase in December 2016.  Looking throughout 2017, the FOMC continues to state that the timing and magnitude of rate increases will be data dependent; therefore, the likelihood of any rate increase or decrease in 2017 is unknown, despite predictions of two or more increases.    

Liquidity

The Corporation must meet the financial needs of the customers that it serves, while providing a satisfactory return on the shareholders’ investment.  In order to accomplish this, the Corporation must maintain sufficient liquidity in order to respond quickly to the changing level of funds required for both loan and deposit activity.  The goal of liquidity management is to meet the ongoing cash flow requirements of depositors who want to withdraw funds and of borrowers who request loan disbursements. The Bank regularly reviews it liquidity position by measuring its projected net cash flows (in and out) at a 30 and 90-day interval.  The Bank stresses this measurement by assuming a level of deposit out-flows that have not historically been realized. In addition to this forecast, other funding sources are reviewed as a method to provide emergency funding if necessary.  The objective of this measurement is to identify the amount of cash that could be raised quickly without the need to liquidate assets.  The Bank also stresses its liquidity position utilizing different longer-term scenarios.  The varying degrees of stress create pressure on deposit flows in its local market, reduce access to wholesale funding and limit access of funds available through brokered deposit channels. In addition to stressing cash flow, specific liquidity risk indicators are monitored to help identify risk areas.  This analysis will help identify and quantify the potential cash surplus/deficit over a variety of time horizons to ensure the Bank has adequate funding resources.  Assumptions used for liquidity stress testing are subjective.  Should an evolving liquidity situation or business cycle present new data, potential assumption changes will be considered.  The Bank believes it can meet all anticipated liquidity demands.

Historically, the Corporation has satisfied its liquidity needs from earnings, repayment of loans and amortizing investment securities, maturing investment securities, loan` sales, deposit growth and its ability to access existing lines of credit.  All investment securities are classified as available for sale; therefore, securities that are not pledged as collateral for borrowings are an additional source of readily available liquidity, either by selling the security or, more preferably, to provide collateral for additional borrowing. At March 31, 2017, the Bank had approximately $75.9 million (fair value) in its investment portfolio pledged as collateral for deposits.  The Bank also has access to other wholesale funding via the brokered CD market.

The FHLB system has always been a major funding source for community banks.  The Bank’s maximum borrowing capacity with the FHLB at March 31, 2017 was $296.0 million with $296 available to borrow.  There are no indicators that lead the Bank to believe the FHLB would discontinue its lending function or restrict the Bank’s ability to borrow if

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either of these events were to occur, it would have a negative effect on the Bank and it is unlikely that the Bank could replace the level of FHLB funding in a short time. 

The Bank has established credit at the Federal Reserve Discount Window and as of quarter-end had the ability to borrow approximately $21 million. 



Off Balance Sheet Commitments

The Corporation’s financial statements do not reflect various commitments that are made in the normal course of business, which may involve some liquidity risk.  These commitments consist mainly of unfunded loans and letters of credit made under the same standards as on-balance sheet instruments.  Because these instruments have fixed maturity dates, and because many of them will expire without being drawn upon, they do not generally present any significant liquidity risk to the Corporation.  Unused commitments and standby letters of credit totaled $301.7 million and $301.3 million, respectively, at March 31, 2017 and December 31, 2016.

The Corporation has entered into various contractual obligations to make future payments.  These obligations include time deposits, long-term debt, operating leases, deferred compensation and pension payments.  These amounts have not changed materially from those reported in the Corporation’s 2016 Annual Report on Form 10-K.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

There were no material changes in the Corporation’s exposure to market risk during the three months ended March 31, 2017. For more information on market risk refer to the Corporation’s 2016 Annual Report on Form 10-K.

Item 4.  Controls and Procedures

Evaluation of Controls and Procedures

The Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon the evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2017, the Corporation’s disclosure controls and procedures are effective. Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in the Corporation’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. There were no changes in the Corporation’s internal control over financial reporting during the quarterly period ended March 31, 2017, that have materially affected, or are reasonably likely to materially affect, the internal control over financial reporting.

The management of the Corporation is responsible for establishing and maintaining adequate internal control over financial reporting. The Corporation’s internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 

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Part II – OTHER INFORMATION

Item 1.     Legal Proceedings

The nature of the Corporation’s business generates a certain amount of litigation involving matters arising in the ordinary course of business including, without limitation, the Kalan et al. v. Farmers and Merchants Trust Company of Chambersburg, et al. (Case No. 2:15-CV-01435-WB) case filed in the United States District Court for the Eastern District of Pennsylvania and described in our current report on Form 8-K filed July 29, 2016.  The impact that any matter may have upon our results of operation or financial condition in any future reporting period will depend upon, among other things, the amount of loss resulting from such matter and the amount of income otherwise reported for the period.  No material proceedings are pending or are known to be threatened or contemplated against us by governmental authorities.

We establish accruals for legal proceedings when information related to the loss contingencies represented by those matters indicates both that a loss is probable and that the amount of loss can be reasonably estimated.  When we are able to do so, we also determine estimates of possible losses or ranges of possible losses, whether in excess of any related accrued liability or where there is no accrued liability.

We have not yet established any specific accrual for the Kalan matter because we are not yet able to provide an evaluation of the likelihood of an unfavorable outcome or an estimate of the amount or range of potential loss.  The damages sought by the Plaintiffs are as yet unspecified and uncertain.  It is as yet unclear as to whether the case will be allowed to proceed as a class action and, if so, how the class would be defined.  The case presents a number of legal uncertainties yet to be resolved including, whether Plaintiffs’ claims are timely and whether, as a directed trustee, the Bank could be liable for the Plaintiffs’ claims.  There are significant facts in dispute and discovery is in early stages.

These assessments are based upon our analysis of currently available information and we subject to significant judgment and a variety of assumptions and uncertainties.  As new information is obtained, we may change our assessments and, as a result take or adjust the amounts of our accruals and change our estimates of possible losses or ranges of possible losses.  Due to the inherent subjectivity of the assessments and unpredictability of outcomes of legal proceedings, any amounts that may be accrued or included in estimates of possible losses or ranges of possible losses may not represent the actual loss to the Corporation from the Kalan or any other legal proceeding.  Our exposure and ultimate losses may be higher, possibly significantly higher, than amounts we may accrue or amounts we may estimate.

Item 1A. Risk Factors 

There were no material changes in the Corporation’s risk factors during the three months ended March 31, 2017. For more information, refer to the Corporation’s 2016 Annual Report on Form 10-K.

Item 2.   Unregistered  Sales of Equity Securities and Use of Proceeds

The Board of Directors approved a stock repurchase plan on April 14, 2016 that authorizes the repurchase of up to $350,000 in shares of common stock during each calendar quarter through March 31, 2017.  The 2016 stock repurchase plan has expired and there is currently no repurchase plan in place.

The following table reports stock repurchases and total shares repurchased under this plan:





 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands, except per share)

 

 

Weighted

 

 

Dollar Amount of

 

 

Dollar Amount of



 

 

 

 

Average

 

 

Shares Purchased

 

 

Shares that May



 

Number of

 

 

Price Paid

 

 

as Part of Publically

 

 

Yet Be Purchased

Period

 

Shares Purchased

 

 

per Share

 

 

Announced Program

 

 

Under Program



 

 

 

 

 

 

 

 

 

 

 

April 2016

 

15,521 

 

$

22.55 

 

$

350 

 

$

1,050 

August 2016

 

14,675 

 

 

23.80 

 

 

350 

 

 

700 



 

30,196 

 

$

23.16 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Item 3.   Defaults by the Company on its Senior Securities

None

Item 4.   Mine Safety Disclosures

Not Applicable

Item 5.   Other Information

None

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Item 6.   Exhibits 

Exhibits

3.1   Articles of Incorporation of the Corporation.  (Filed as Exhibit 3.1 to Annual Report on Form 10-K for the year ended December 31, 2014 and incorporated herein by reference.)

3.2   Bylaws of the Corporation. (Filed as Exhibit 3.2 to Annual Report on Form 10-K for the year ended December 31, 2016 and incorporated herein by reference.)

31.1 Rule 13a – 14(a)/15d-14(a) Certifications – Principal Executive Officer

31.2 Rule 13a – 14(a)/15d-14(a) Certifications – Principal Financial Officer

32.1 Section 1350 Certifications – Principal Executive Officer

32.2 Section 1350 Certifications – Principal Financial Officer

101 Interactive Data File (XBRL)

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FRANKLIN FINANCIAL SERVICES CORPORATION

and SUBSIDIARIES



SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



Franklin Financial Services Corporation





 

 



 

 

May 8, 2017

 

/s/ Timothy G. Henry



 

Timothy G. Henry



 

Chief Executive Office and President



 

(Principal Executive Officer)



 

 

May 8, 2017

 

/s/ Mark R. Hollar



 

Mark R. Hollar



 

Treasurer and Chief Financial Officer



 

(Principal Financial and Accounting Officer)



47