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EX-32.2 - EX-32.2 - FRANKLIN FINANCIAL SERVICES CORP /PA/fraf-20170630xex32_2.htm
EX-32.1 - EX-32.1 - FRANKLIN FINANCIAL SERVICES CORP /PA/fraf-20170630xex32_1.htm
EX-31.2 - EX-31.2 - FRANKLIN FINANCIAL SERVICES CORP /PA/fraf-20170630xex31_2.htm
EX-31.1 - EX-31.1 - FRANKLIN FINANCIAL SERVICES CORP /PA/fraf-20170630xex31_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 June 30, 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



Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).



Emerging growth company 



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 



There were 4,340,631 outstanding shares of the Registrant’s common stock as of July 31, 2017.

 


 

INDEX



               



 

 

Part I - FINANCIAL INFORMATION

 



 

 

Item 1

Financial Statements

 



Consolidated Balance Sheets as of June  30, 2017 and December 31, 2016 (unaudited)

1



Consolidated Statements of Income for the Three and Six Months ended June  30, 2017 

2



and 2016 (unaudited)

 



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

3



June  30, 2017 and 2016 (unaudited)

 



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

3



ended June 30, 2017 and 2016 (unaudited)

 



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

28

Item 3

Quantitative and Qualitative Disclosures about Market Risk

48

Item 4

Controls and Procedures

48



 

 

Part II - OTHER INFORMATION 

 



 

 

Item 1

Legal Proceedings

49

Item 1A

Risk Factors

49

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

49

Item 3

Defaults Upon Senior Securities

49

Item 4

Mine Safety Disclosures

49

Item 5

Other Information

49

Item 6

Exhibits

50

SIGNATURE PAGE

51

EXHIBITS

 







 

 


 

Part I FINANCIAL INFORMATION

Item 1 Financial Statements

Consolidated Balance Sheets







 

 

 

 

 



 

 

 

 

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

June 30

 

December 31



2017

 

2016

Assets

 

 

 

 

 

Cash and due from banks

$

14,937 

 

$

16,888 

Interest-bearing deposits in other banks

 

30,812 

 

 

19,777 

Total cash and cash equivalents

 

45,749 

 

 

36,665 

Investment securities available for sale, at fair value

 

136,036 

 

 

143,875 

Restricted stock

 

456 

 

 

1,767 

Loans held for sale

 

834 

 

 

540 

Loans

 

901,414 

 

 

893,873 

Allowance for loan losses

 

(11,307)

 

 

(11,075)

Net Loans

 

890,107 

 

 

882,798 

Premises and equipment, net

 

13,897 

 

 

14,058 

Bank owned life insurance

 

22,721 

 

 

22,459 

Goodwill

 

9,016 

 

 

9,016 

Other real estate owned

 

3,115 

 

 

4,915 

Deferred tax asset, net

 

6,180 

 

 

5,844 

Other assets

 

6,544 

 

 

5,506 

Total assets

$

1,134,655 

 

$

1,127,443 



 

 

 

 

 

Liabilities

 

 

 

 

 

Deposits

 

 

 

 

 

Noninterest-bearing checking

$

173,030 

 

$

170,345 

Money management, savings and interest checking

 

762,254 

 

 

737,140 

Time

 

72,094 

 

 

74,635 

Total Deposits

 

1,007,378 

 

 

982,120 

Short-term borrowings

 

 -

 

 

24,270 

Other liabilities

 

4,917 

 

 

4,560 

Total liabilities

 

1,012,295 

 

 

1,010,950 



 

 

 

 

 

Shareholders' equity

 

 

 

 

 

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

 

 

 

 

 

4,688,349 shares issued and 4,340,430 shares outstanding at June 30, 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

 

40,096 

 

 

39,752 

Retained earnings

 

87,498 

 

 

83,081 

Accumulated other comprehensive loss

 

(3,542)

 

 

(4,215)

Treasury stock, 347,919 shares at June 30, 2017 and 371,513 shares at

 

 

 

 

 

December 31, 2016, at cost

 

(6,380)

 

 

(6,813)

Total shareholders' equity

 

122,360 

 

 

116,493 

Total liabilities and shareholders' equity

$

1,134,655 

 

$

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

 

For the Six Months Ended

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

June 30

 

June 30



2017

 

2016

 

2017

 

2016

Interest income

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

$

9,039 

 

$

7,964 

 

$

17,678 

 

$

16,053 

Interest and dividends on investments:

 

 

 

 

 

 

 

 

 

 

 

Taxable interest

 

518 

 

 

584 

 

 

1,049 

 

 

1,160 

Tax exempt interest

 

286 

 

 

357 

 

 

587 

 

 

723 

Dividend income

 

 

 

 

 

20 

 

 

10 

Deposits and obligations of other banks

 

88 

 

 

79 

 

 

149 

 

 

141 

Total interest income

 

9,938 

 

 

8,988 

 

 

19,483 

 

 

18,087 



 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

590 

 

 

548 

 

 

1,156 

 

 

1,091 

Short-term borrowings

 

 -

 

 

 -

 

 

15 

 

 

Total interest expense

 

590 

 

 

548 

 

 

1,171 

 

 

1,093 

Net interest income

 

9,348 

 

 

8,440 

 

 

18,312 

 

 

16,994 

Provision for loan losses

 

50 

 

 

1,875 

 

 

170 

 

 

2,175 

Net interest income after provision for loan losses

 

9,298 

 

 

6,565 

 

 

18,142 

 

 

14,819 



 

 

 

 

 

 

 

 

 

 

 

Noninterest income

 

 

 

 

 

 

 

 

 

 

 

Investment and trust services fees

 

1,342 

 

 

1,218 

 

 

2,637 

 

 

2,472 

Loan service charges

 

309 

 

 

189 

 

 

455 

 

 

415 

Deposit service charges and fees

 

585 

 

 

602 

 

 

1,178 

 

 

1,180 

Other service charges and fees

 

332 

 

 

313 

 

 

656 

 

 

616 

Debit card income

 

362 

 

 

375 

 

 

738 

 

 

722 

Increase in cash surrender value of life insurance

 

131 

 

 

132 

 

 

262 

 

 

267 

Net loss on sale of other real estate owned

 

 -

 

 

(2)

 

 

 -

 

 

(10)

OTTI losses on debt securities

 

 -

 

 

 -

 

 

 -

 

 

(20)

Securities gains, net

 

 -

 

 

 

 

 

 

Other

 

94 

 

 

27 

 

 

153 

 

 

164 

Total noninterest income

 

3,155 

 

 

2,856 

 

 

6,081 

 

 

5,809 



 

 

 

 

 

 

 

 

 

 

 

Noninterest expense

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

4,871 

 

 

4,346 

 

 

9,497 

 

 

8,716 

Occupancy, net

 

535 

 

 

553 

 

 

1,119 

 

 

1,152 

Furniture and equipment

 

226 

 

 

218 

 

 

457 

 

 

434 

Advertising

 

294 

 

 

262 

 

 

541 

 

 

543 

Legal and professional

 

381 

 

 

394 

 

 

671 

 

 

691 

Data processing

 

535 

 

 

504 

 

 

1,076 

 

 

1,001 

Pennsylvania bank shares tax

 

243 

 

 

260 

 

 

486 

 

 

496 

FDIC insurance

 

93 

 

 

169 

 

 

199 

 

 

326 

ATM/debit card processing

 

222 

 

 

200 

 

 

440 

 

 

428 

Foreclosed real estate

 

13 

 

 

13 

 

 

71 

 

 

76 

Telecommunications

 

102 

 

 

90 

 

 

202 

 

 

209 

Other

 

646 

 

 

721 

 

 

1,359 

 

 

1,453 

Total noninterest expense

 

8,161 

 

 

7,730 

 

 

16,118 

 

 

15,525 

Income before federal income tax expense

 

4,292 

 

 

1,691 

 

 

8,105 

 

 

5,103 

Federal income tax expense

 

950 

 

 

130 

 

 

1,743 

 

 

815 

Net income

$

3,342 

 

$

1,561 

 

$

6,362 

 

$

4,288 



 

 

 

 

 

 

 

 

 

 

 

Per share

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

$

0.77 

 

$

0.36 

 

$

1.47 

 

$

1.00 

Diluted earnings per share

$

0.77 

 

$

0.36 

 

$

1.46 

 

$

1.00 

Cash dividends declared

$

0.24 

 

$

0.21 

 

$

0.45 

 

$

0.40 

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

2

 


 

Consolidated Statements of Comprehensive Income





 

 

 

 

 

 

 

 

 

 

 

 



 

For the Three Months Ended

 

For the Six Months Ended



 

June 30

 

June 30

(Dollars in thousands) (unaudited)

 

2017

 

2016

 

2017

 

2016

Net Income

 

$

3,342 

 

$

1,561 

 

$

6,362 

 

$

4,288 



 

 

 

 

 

 

 

 

 

 

 

 

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains arising during the period

 

 

567 

 

 

1,006 

 

 

1,021 

 

 

2,051 

Reclassification adjustment for net (gains) losses and OTTI

 

 

 

 

 

 

 

 

 

 

 

 

     included in net income (1)

 

 

 -

 

 

(2)

 

 

(2)

 

 

17 

Net unrealized gains

 

 

567 

 

 

1,004 

 

 

1,019 

 

 

2,068 

Tax effect

 

 

(193)

 

 

(340)

 

 

(346)

 

 

(702)

Net of tax amount

 

 

374 

 

 

664 

 

 

673 

 

 

1,366 



 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income

 

 

374 

 

 

664 

 

 

673 

 

 

1,366 



 

 

 

 

 

 

 

 

 

 

 

 

Total Comprehensive Income

 

$

3,716 

 

$

2,225 

 

$

7,035 

 

$

5,654 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

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 Six Months Ended June 30, 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

 

 -

 

 

 -

 

 

4,288 

 

 

 -

 

 

 -

 

 

4,288 

Other comprehensive income

 

 -

 

 

 -

 

 

 -

 

 

1,366 

 

 

 -

 

 

1,366 

Cash dividends declared, $.40 per share

 

 -

 

 

 -

 

 

(1,715)

 

 

 -

 

 

 -

 

 

(1,715)

Acquisition of 15,521 shares of treasury stock

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(350)

 

 

(350)

Treasury shares issued under employer stock purchase plan, 188 shares

 

 -

 

 

 

 

 -

 

 

 -

 

 

278 

 

 

279 

Treasury shares issued under dividend reinvestment plan, 15,372 shares

 

 -

 

 

82 

 

 

 -

 

 

 -

 

 

 

 

85 

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

 

25 

 

 

527 

 

 

 -

 

 

 -

 

 

 -

 

 

552 

Common stock issued under incentive stock option plan, 500 shares

 

 

 

 

 

 -

 

 

 -

 

 

 -

 

 

Stock option compensation expense

 

 -

 

 

58 

 

 

 -

 

 

 -

 

 

 -

 

 

58 

Balance at June 30, 2016

$

4,685 

 

$

39,454 

 

$

81,090 

 

$

(2,356)

 

$

(6,925)

 

$

115,948 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2016

$

4,688 

 

$

39,752 

 

$

83,081 

 

$

(4,215)

 

$

(6,813)

 

$

116,493 

Net income

 

 -

 

 

 -

 

 

6,362 

 

 

 -

 

 

 -

 

 

6,362 

Other comprehensive income

 

 -

 

 

 -

 

 

 -

 

 

673 

 

 

 -

 

 

673 

Cash dividends declared, $.45 per share

 

 -

 

 

 -

 

 

(1,945)

 

 

 -

 

 

 -

 

 

(1,945)

Treasury shares issued under employee stock purchase plan, 6,327 shares

 

 -

 

 

26 

 

 

 -

 

 

 -

 

 

116 

 

 

142 

Treasury shares issued under dividend reinvestment plan, 17,267 shares

 

 -

 

 

211 

 

 

 -

 

 

 -

 

 

317 

 

 

528 

Stock option compensation expense

 

 -

 

 

107 

 

 

 -

 

 

 -

 

 

 -

 

 

107 

Balance at June 30, 2017

$

4,688 

 

$

40,096 

 

$

87,498 

 

$

(3,542)

 

$

(6,380)

 

$

122,360 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

3

 


 







Consolidated Statements of Cash Flows





 

 

 

 

 



 

 

 

 

 



Six Months Ended June 30



2017

 

2016

(Dollars in thousands) (unaudited)

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

Net income

$

6,362 

 

$

4,288 

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

 

 

 

 

 

Depreciation and amortization

 

651 

 

 

666 

Net amortization of loans and investment securities

 

802 

 

 

794 

Amortization and net change in mortgage servicing rights valuation

 

27 

 

 

27 

Provision for loan losses

 

170 

 

 

2,175 

Gain on sales of securities

 

(2)

 

 

(3)

Impairment write-down on securities recognized in earnings

 

 -

 

 

20 

Loans originated for sale

 

(3,571)

 

 

(4,963)

Proceeds from sale of loans

 

3,277 

 

 

4,937 

Write-down of other real estate owned

 

49 

 

 

46 

Write-down on premises and equipment available for sale

 

45 

 

 

 -

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

 

 -

 

 

10 

Increase in cash surrender value of life insurance

 

(262)

 

 

(267)

Stock option compensation

 

107 

 

 

58 

Decrease in other assets

 

(1,431)

 

 

(504)

Increase (decrease) in other liabilities

 

 

 

(2,588)

Net cash provided by operating activities

 

6,226 

 

 

4,696 



 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Proceeds from sales and calls of investment securities available for sale

 

475 

 

 

1,765 

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

 

11,452 

 

 

11,929 

Purchase of investment securities available for sale

 

(3,900)

 

 

(16,605)

Net decrease in restricted stock

 

1,311 

 

 

346 

Net increase in loans

 

(7,448)

 

 

(46,522)

Capital expenditures

 

(650)

 

 

(288)

Proceeds from surrender of life insurance policy

 

 -

 

 

436 

Proceeds from sale of other assets

 

154 

 

 

 -

Proceeds from sale of other real estate

 

1,751 

 

 

224 

Net cash provided by (used in) investing activities

 

3,145 

 

 

(48,715)



 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

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

 

27,799 

 

 

52,147 

Net decrease in time deposits

 

(2,541)

 

 

(5,105)

Net decrease in short-term borrowings

 

(24,270)

 

 

 -

Dividends paid

 

(1,945)

 

 

(1,715)

Treasury shares issued under employee stock purchase plan

 

142 

 

 

279 

Treasury shares issued under dividend reinvestment plan

 

528 

 

 

85 

Common stock issued under stock option plans

 

 -

 

 

Common stock issued under dividend reinvestment plan

 

 -

 

 

552 

Purchase of Treasury shares

 

 -

 

 

(350)

Net cash (used) provided by financing activities

 

(287)

 

 

45,902 



 

 

 

 

 

Increase in cash and cash equivalents

 

9,084 

 

 

1,883 

Cash and cash equivalents as of January 1

 

36,665 

 

 

39,166 

Cash and cash equivalents as of June 30

$

45,749 

 

$

41,049 



 

 

 

 

 

Supplemental Disclosures of Cash Flow Information

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

Interest on deposits and other borrowed funds

$

1,177 

 

$

1,097 

Income taxes

$

3,405 

 

$

2,100 

Noncash Activities:

 

 

 

 

 

Loans transferred to Other Real Estate

$

 -

 

$

23 



 

 

 

 

 

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 June  30, 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 June 30, 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

 

For the Six Months Ended



June 30

 

June 30

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

2017

 

2016

 

2017

 

2016

Weighted average shares outstanding (basic)

 

4,331 

 

 

4,294 

 

 

4,326 

 

 

4,289 

Impact of common stock equivalents

 

21 

 

 

 

 

21 

 

 

Weighted average shares outstanding (diluted)

 

4,352 

 

 

4,298 

 

 

4,347 

 

 

4,292 

Anti-dilutive options excluded from calculation

 

 -

 

 

43 

 

 

 -

 

 

44 

Net income

$

3,342 

 

$

1,561 

 

$

6,362 

 

$

4,288 

Basic earnings per share

$

0.77 

 

$

0.36 

 

$

1.47 

 

$

1.00 

Diluted earnings per share

$

0.77 

 

$

0.36 

 

$

1.46 

 

$

1.00 







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 the Corporation's Risk Management function. The team is reviewing the requirements of the ASU and evaluating methods and models for implementation.  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 has identified a lease accounting model it expects to use to implement the standard.  It is expected the model will be functional during the fourth quarter of 2017, but the Corporation does not plan to early adopt the standard. 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:







 

 

 

 

 



 

 

 

 

 



June 30

 

December 31



2017

 

2016

(Dollars in thousands)

 

 

 

 

 

Net unrealized gains (losses) on securities

$

999 

 

$

(20)

Tax effect

 

(339)

 

 

Net of tax amount

 

660 

 

 

(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

$

(3,542)

 

$

(4,215)





Note 4. Investments

The amortized cost and estimated fair value of investment securities available for sale as of June  30, 2017 and December 31, 2016 are as follows:







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

Gross

 

Gross

 

 

 



 

Amortized

 

unrealized

 

unrealized

 

Fair

June 30, 2017

 

cost

 

gains

 

losses

 

value

Equity securities

 

$

164 

 

$

192 

 

$

 -

 

$

356 

U.S. Government and Agency securities

 

 

12,032 

 

 

134 

 

 

(34)

 

 

12,132 

Municipal securities

 

 

60,505 

 

 

1,032 

 

 

(192)

 

 

61,345 

Trust preferred securities

 

 

5,989 

 

 

 

 

(203)

 

 

5,789 

Agency mortgage-backed securities

 

 

55,370 

 

 

387 

 

 

(386)

 

 

55,371 

Private-label mortgage-backed securities

 

 

946 

 

 

68 

 

 

 -

 

 

1,014 

Asset-backed securities

 

 

31 

 

 

 -

 

 

(2)

 

 

29 



 

$

135,037 

 

$

1,816 

 

$

(817)

 

$

136,036 









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

Gross

 

Gross

 

 

 



 

Amortized

 

unrealized