Unassociated Document
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-Q
(Mark
One)
x QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
quarterly period ended March 31, 2010,
OR
¨ 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
|
|
(I.R.S.
Employer
|
incorporation
or organization)
|
|
Identification
No.)
|
20 SOUTH MAIN STREET (P.O.
BOX 6010), CHAMBERSBURG, PA 17201-0819
(Address
of principal executive offices)
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 x No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes ¨ No
¨
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large accelerated filer ¨ Accelerated
filer x Non-accelerated
filer ¨ Smaller
reporting company ¨
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Act) Yes¨ No
x
There
were 3,876,601 outstanding shares of the Registrant’s common stock as of April
30, 2010.
INDEX
Part I - FINANCIAL
INFORMATION
|
|
|
|
Item
1 - Financial Statements
|
3
|
|
|
Consolidated
Balance Sheets as of March 31, 2010 and December 31, 2009
(unaudited)
|
3
|
|
|
Consolidated
Statements of Income for the Three Months ended
|
|
March
31, 2010 and 2009 (unaudited)
|
4
|
|
|
Consolidated
Statements of Changes in Shareholders’ Equity for the
|
|
Three
Months ended March 31, 2010 and 2009 (unaudited)
|
5
|
|
|
Consolidated
Statements of Cash Flows for the Three Months ended
|
|
March
31, 2010 and 2009 (unaudited)
|
6
|
|
|
Notes
to Consolidated Financial Statements (unaudited)
|
7
|
|
|
Item 2 - Management’s
Discussion and Analysis of Financial Condition and Results
of Operations
|
19
|
|
|
Item
3 – Quantitative and Qualitative Disclosures about Market
Risk
|
34
|
|
|
Item
4 – Controls and Procedures
|
34
|
|
|
Part II - OTHER INFORMATION
|
|
|
|
Item
1 – Legal Proceedings
|
35
|
|
|
Item
1A – Risk Factors
|
35
|
|
|
Item
2 – Unregistered Sales of Equity Securities and Use of
Proceeds
|
35
|
|
|
Item
3 – Defaults Upon Senior Securities
|
35
|
|
|
Item
4 – Removed and Reserved
|
35
|
|
|
Item
5 – Other Information
|
35
|
|
|
Item
6 – Exhibits
|
35
|
|
|
SIGNATURE
PAGE
|
36
|
|
|
EXHIBITS
|
|
Part
I FINANCIAL INFORMATION
Item 1 Financial
Statements
Consolidated
Balance Sheets
(Amounts
in thousands, except per share data)
(unaudited)
|
|
March 31
|
|
|
December 31
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$ |
17,057 |
|
|
$ |
14,336 |
|
Interest-bearing
deposits in other banks
|
|
|
11,384 |
|
|
|
18,912 |
|
Total
cash and cash equivalents
|
|
|
28,441 |
|
|
|
33,248 |
|
Investment
securities available for sale
|
|
|
132,681 |
|
|
|
143,288 |
|
Restricted
stock
|
|
|
6,482 |
|
|
|
6,482 |
|
Loans
|
|
|
750,072 |
|
|
|
739,563 |
|
Allowance
for loan losses
|
|
|
(9,349 |
) |
|
|
(8,937 |
) |
Net
Loans
|
|
|
740,723 |
|
|
|
730,626 |
|
Premises
and equipment, net
|
|
|
15,754 |
|
|
|
15,741 |
|
Bank
owned life insurance
|
|
|
19,084 |
|
|
|
18,919 |
|
Goodwill
|
|
|
9,016 |
|
|
|
9,159 |
|
Other
intangible assets
|
|
|
2,346 |
|
|
|
2,461 |
|
Other
assets
|
|
|
19,740 |
|
|
|
19,449 |
|
Total
assets
|
|
$ |
974,267 |
|
|
$ |
979,373 |
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
Demand
(non-interest bearing)
|
|
$ |
89,092 |
|
|
$ |
77,675 |
|
Savings
and interest checking
|
|
|
401,103 |
|
|
|
388,222 |
|
Time
|
|
|
236,485 |
|
|
|
272,468 |
|
Total
Deposits
|
|
|
726,680 |
|
|
|
738,365 |
|
Securities
sold under agreements to repurchase
|
|
|
59,670 |
|
|
|
55,855 |
|
Long-term
debt
|
|
|
94,244 |
|
|
|
94,688 |
|
Other
liabilities
|
|
|
13,050 |
|
|
|
11,699 |
|
Total
liabilities
|
|
|
893,644 |
|
|
|
900,607 |
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity
|
|
|
|
|
|
|
|
|
Common
stock $1 par value per share, 15,000 shares authorized with 4,299 shares
issued, and 3,876 shares and 3,863 shares outstanding at March 31, 2010
and December 31, 2009, respectively
|
|
|
4,299 |
|
|
|
4,299 |
|
Capital
stock without par value, 5,000 shares authorized with no shares issued or
outstanding
|
|
|
- |
|
|
|
- |
|
Additional
paid-in capital
|
|
|
32,806 |
|
|
|
32,832 |
|
Retained
earnings
|
|
|
55,498 |
|
|
|
54,566 |
|
Accumulated
other comprehensive loss
|
|
|
(4,417 |
) |
|
|
(5,138 |
) |
Treasury
stock, 423 shares and 436 shares at cost at March 31, 2010 and December
31, 2009, respectively
|
|
|
(7,563 |
) |
|
|
(7,793 |
) |
Total
shareholders' equity
|
|
|
80,623 |
|
|
|
78,766 |
|
Total
liabilities and shareholders' equity
|
|
$ |
974,267 |
|
|
$ |
979,373 |
|
The
accompanying notes are an integral part of these financial
statements.
Consolidated
Statements of Income
(Amounts
in thousands, except per share data)
(unaudited)
|
|
For the Three Months Ended
|
|
|
|
March 31
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
Interest
income
|
|
|
|
|
|
|
Loans,
including fees
|
|
$ |
9,551 |
|
|
$ |
9,192 |
|
Interest
and dividends on investments:
|
|
|
|
|
|
|
|
|
Taxable
interest
|
|
|
870 |
|
|
|
1,089 |
|
Tax
exempt interest
|
|
|
472 |
|
|
|
474 |
|
Dividend
income
|
|
|
16 |
|
|
|
57 |
|
Deposits
and obligations of other banks
|
|
|
7 |
|
|
|
- |
|
Total
interest income
|
|
|
10,916 |
|
|
|
10,812 |
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
2,360 |
|
|
|
2,482 |
|
Securities
sold under agreements to repurchase
|
|
|
38 |
|
|
|
45 |
|
Short-term
borrowings
|
|
|
- |
|
|
|
11 |
|
Long-term
debt
|
|
|
973 |
|
|
|
1,055 |
|
Total
interest expense
|
|
|
3,371 |
|
|
|
3,593 |
|
Net
interest income
|
|
|
7,545 |
|
|
|
7,219 |
|
Provision
for loan losses
|
|
|
625 |
|
|
|
593 |
|
Net
interest income after provision for loan losses
|
|
|
6,920 |
|
|
|
6,626 |
|
|
|
|
|
|
|
|
|
|
Noninterest
income
|
|
|
|
|
|
|
|
|
Investment
and trust services fees
|
|
|
1,017 |
|
|
|
894 |
|
Loan
service charges
|
|
|
197 |
|
|
|
277 |
|
Mortgage
banking activities
|
|
|
69 |
|
|
|
(28 |
) |
Deposit
service charges and fees
|
|
|
577 |
|
|
|
580 |
|
Other
service charges and fees
|
|
|
326 |
|
|
|
302 |
|
Increase
in cash surrender value of life insurance
|
|
|
166 |
|
|
|
164 |
|
Other
|
|
|
49 |
|
|
|
295 |
|
|
|
|
|
|
|
|
|
|
OTTI
losses on securities
|
|
|
(689 |
) |
|
|
(209 |
) |
Loss
recognized in other comprehensive income (before taxes)
|
|
|
(434 |
) |
|
|
- |
|
Net
OTTI losses recognized in earnings
|
|
|
(255 |
) |
|
|
(209 |
) |
|
|
|
|
|
|
|
|
|
Securities
gains, net
|
|
|
249 |
|
|
|
12 |
|
Total
noninterest income
|
|
|
2,395 |
|
|
|
2,287 |
|
|
|
|
|
|
|
|
|
|
Noninterest
Expense
|
|
|
|
|
|
|
|
|
Salaries
and benefits
|
|
|
3,441 |
|
|
|
3,153 |
|
Net
occupancy expense
|
|
|
526 |
|
|
|
480 |
|
Furniture
and equipment expense
|
|
|
192 |
|
|
|
217 |
|
Advertising
|
|
|
312 |
|
|
|
315 |
|
Legal
and professional fees
|
|
|
395 |
|
|
|
251 |
|
Data
processing
|
|
|
377 |
|
|
|
401 |
|
Pennsylvania
bank shares tax
|
|
|
156 |
|
|
|
145 |
|
Intangible
amortization
|
|
|
114 |
|
|
|
117 |
|
FDIC
insurance
|
|
|
292 |
|
|
|
231 |
|
Other
|
|
|
855 |
|
|
|
840 |
|
Total
noninterest expense
|
|
|
6,660 |
|
|
|
6,150 |
|
Income
before federal income taxes
|
|
|
2,655 |
|
|
|
2,763 |
|
Federal
income tax expense
|
|
|
681 |
|
|
|
662 |
|
Net
income
|
|
$ |
1,974 |
|
|
$ |
2,101 |
|
|
|
|
|
|
|
|
|
|
Per
share
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$ |
0.51 |
|
|
$ |
0.55 |
|
Diluted
earnings per share
|
|
$ |
0.51 |
|
|
$ |
0.55 |
|
Cash
dividends declared per share
|
|
$ |
0.27 |
|
|
$ |
0.27 |
|
The
accompanying notes are an integral part of these financial
statements.
For
the Three Months Ended March 31, 2010 and 2009
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
|
|
(Dollars
in thousands, except per share data)
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Loss
|
|
|
Stock
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2008
|
|
$ |
4,299 |
|
|
$ |
32,883 |
|
|
$ |
52,126 |
|
|
$ |
(7,757 |
) |
|
$ |
(8,492 |
) |
|
$ |
73,059 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
2,101 |
|
|
|
- |
|
|
|
- |
|
|
|
2,101 |
|
Unrealized
loss on securities, net of reclassification adjustments and
taxes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,202 |
) |
|
|
- |
|
|
|
(1,202 |
) |
Unrealized
gain on hedging activities, net of reclassification adjustments and
taxes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
186 |
|
|
|
- |
|
|
|
186 |
|
Total
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
1,085 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends declared, $.27 per share
|
|
|
- |
|
|
|
- |
|
|
|
(1,033 |
) |
|
|
- |
|
|
|
- |
|
|
|
(1,033 |
) |
Acquisition
of 3,000 shares of treasury stock
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(51 |
) |
|
|
(51 |
) |
Treasury
shares issued to dividend reinvestment plan: 12,049 shares
|
|
|
- |
|
|
|
(34 |
) |
|
|
- |
|
|
|
- |
|
|
|
217 |
|
|
|
183 |
|
Stock
option compensation
|
|
|
- |
|
|
|
5 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5 |
|
Balance
at March 31, 2009
|
|
$ |
4,299 |
|
|
$ |
32,854 |
|
|
$ |
53,194 |
|
|
$ |
(8,773 |
) |
|
$ |
(8,326 |
) |
|
$ |
73,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2009
|
|
$ |
4,299 |
|
|
$ |
32,832 |
|
|
$ |
54,566 |
|
|
$ |
(5,138 |
) |
|
$ |
(7,793 |
) |
|
$ |
78,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
1,974 |
|
|
|
- |
|
|
|
- |
|
|
|
1,974 |
|
Unrealized
gain on securities, net of reclassification adjustments and
taxes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
951 |
|
|
|
- |
|
|
|
951 |
|
Unrealized
loss on hedging activities, net of reclassification adjustments and
taxes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(104 |
) |
|
|
- |
|
|
|
(104 |
) |
Pension
adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(126 |
) |
|
|
|
|
|
|
(126 |
) |
Total
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
2,695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends declared, $.27 per share
|
|
|
- |
|
|
|
- |
|
|
|
(1,042 |
) |
|
|
- |
|
|
|
- |
|
|
|
(1,042 |
) |
Treasury
shares issued to dividend reinvestment plan: 12,885 shares
|
|
|
- |
|
|
|
(26 |
) |
|
|
- |
|
|
|
- |
|
|
|
230 |
|
|
|
204 |
|
Balance
at March 31, 2010
|
|
$ |
4,299 |
|
|
$ |
32,806 |
|
|
$ |
55,498 |
|
|
$ |
(4,417 |
) |
|
$ |
(7,563 |
) |
|
$ |
80,623 |
|
The
accompanying notes are an integral part of these financial
statements.
Consolidated
Statements of Cash Flows
(unaudited)
|
|
For the Three Months Ended March
31
|
|
|
|
2010
|
|
|
2009
|
|
(Amounts
in thousands)
|
|
|
|
|
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
Net
income
|
|
$ |
1,974 |
|
|
$ |
2,101 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
336 |
|
|
|
361 |
|
Net
amortization (accretion) of loans and investment
securities
|
|
|
40 |
|
|
|
(35 |
) |
Stock
option compensation expense
|
|
|
- |
|
|
|
5 |
|
Amortization
and net change in mortgage servicing rights valuation
|
|
|
9 |
|
|
|
111 |
|
Amortization
of intangibles
|
|
|
114 |
|
|
|
117 |
|
Provision
for loan losses
|
|
|
625 |
|
|
|
593 |
|
Net
realized gains on sales of securities
|
|
|
(249 |
) |
|
|
(12 |
) |
Other-than-temporary-impairment
losses on securities
|
|
|
255 |
|
|
|
209 |
|
Loans
originated for sale
|
|
|
(121 |
) |
|
|
- |
|
Proceeds
from sale of loans
|
|
|
137 |
|
|
|
- |
|
Gain
on sales of loans
|
|
|
(16 |
) |
|
|
- |
|
Gain
on sale or disposal of premises and equipment
|
|
|
- |
|
|
|
(5 |
) |
Net
loss on sale or disposal of other real estate/other repossessed
assets
|
|
|
18 |
|
|
|
- |
|
Increase
in cash surrender value of life insurance
|
|
|
(166 |
) |
|
|
(164 |
) |
Gain
from surrender of life insurance policy
|
|
|
- |
|
|
|
(275 |
) |
Contribution
to pension plan
|
|
|
(321 |
) |
|
|
- |
|
(Increase)
decrease in interest receivable and other assets
|
|
|
(481 |
) |
|
|
453 |
|
Increase
in interest payable and other liabilities
|
|
|
1,038 |
|
|
|
959 |
|
Other,
net
|
|
|
(171 |
) |
|
|
(111 |
) |
Net
cash provided by operating activities
|
|
|
3,021 |
|
|
|
4,307 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
Proceeds
from sales of investment securities available for sale
|
|
|
4,408 |
|
|
|
2,964 |
|
Proceeds
from maturities of investment securities available for
sale
|
|
|
9,503 |
|
|
|
5,120 |
|
Purchase
of investment securities available for sale
|
|
|
(1,853 |
) |
|
|
(2,687 |
) |
Net
increase in loans
|
|
|
(10,806 |
) |
|
|
(20,754 |
) |
Proceeds
from sale of other real estate/other repossessed assets
|
|
|
391 |
|
|
|
- |
|
Capital
expenditures
|
|
|
(319 |
) |
|
|
(609 |
) |
Net
cash provided by (used in) investing activities
|
|
|
1,324 |
|
|
|
(15,966 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
Net
increase in demand deposits, NOW accounts and savings
accounts
|
|
|
24,298 |
|
|
|
3,481 |
|
Net
(decrease) increase in certificates of deposit
|
|
|
(35,983 |
) |
|
|
23,583 |
|
Net
increase (decrease) in short-term borrowings
|
|
|
3,815 |
|
|
|
(14,434 |
) |
Long-term
debt payments
|
|
|
(444 |
) |
|
|
(1,183 |
) |
Long-term
debt advances
|
|
|
- |
|
|
|
260 |
|
Dividends
paid
|
|
|
(1,042 |
) |
|
|
(1,033 |
) |
Common
stock issued to dividend reinvestment plan
|
|
|
204 |
|
|
|
183 |
|
Purchase
of treasury shares
|
|
|
- |
|
|
|
(51 |
) |
Net
cash (used in) provided by financing activities
|
|
|
(9,152 |
) |
|
|
10,806 |
|
Decrease
in cash and cash equivalents
|
|
|
(4,807 |
) |
|
|
(853 |
) |
Cash
and cash equivalents as of January 1
|
|
|
33,248 |
|
|
|
16,713 |
|
Cash
and cash equivalents as of March 31
|
|
$ |
28,441 |
|
|
$ |
15,860 |
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information
|
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
Interest
on deposits and other borrowed funds
|
|
$ |
3,311 |
|
|
$ |
3,323 |
|
Income
taxes
|
|
$ |
1,002 |
|
|
$ |
203 |
|
The
accompanying notes are an integral part of these financial
statements.
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), Franklin
Financial Properties Corp., and Franklin Future Fund Inc. Farmers and
Merchants Trust Company of Chambersburg is a commercial bank that has one
wholly-owned subsidiary, Franklin Realty Services
Corporation. Franklin Realty Services Corporation is an inactive
real-estate brokerage company. 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, 2010, 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 State 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 2009 Annual Report on Form 10-K. The consolidated
results of operations for the period ended March 31, 2010 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, 2009 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 is 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
|
|
(In
thousands, except per share data)
|
|
2010
|
|
|
2009
|
|
Weighted
average shares outstanding (basic)
|
|
|
3,868 |
|
|
|
3,827 |
|
Impact
of common stock equivalents
|
|
|
- |
|
|
|
- |
|
Weighted
average shares outstanding (diluted)
|
|
|
3,868 |
|
|
|
3,827 |
|
Anti-dilutive
options excluded from the calculation
|
|
|
102 |
|
|
|
111 |
|
Net
income
|
|
$ |
1,974 |
|
|
$ |
2,101 |
|
Basic
earnings per share
|
|
$ |
0.51 |
|
|
$ |
0.55 |
|
Diluted
earnings per share
|
|
$ |
0.51 |
|
|
$ |
0.55 |
|
Note
2 – Recent Accounting Pronouncements
Transfers and
Servicing. In October 2009, the FASB issued ASU 2009-16, Transfers and Servicing (Topic 860)
- Accounting for Transfers of Financial Assets. This Update
amends the Codification for the issuance of FASB Statement No. 166, Accounting for Transfers of
Financial Assets-an amendment of FASB Statement No. 140. The amendments
in this Update improve financial reporting by eliminating the exceptions for
qualifying special-purpose entities from the consolidation guidance and the
exception that permitted sale accounting for certain mortgage securitizations
when a transferor has not surrendered control over the transferred financial
assets. In addition, the amendments require enhanced disclosures about the risks
that a transferor continues to be exposed to because of its continuing
involvement in transferred financial assets. Comparability and
consistency in accounting for transferred financial assets will also be improved
through clarifications of the requirements for isolation and limitations on
portions of financial assets that are eligible for sale accounting. This Update
was effective January 1, 2010 for the Corporation and there was no material
affect on its operating results, financial position or consolidated financial
statements.
Note
3 – Comprehensive Income
Comprehensive
income consists of net income and other comprehensive income. Other
comprehensive income includes unrealized gains and losses on available-for-sale
securities and derivatives and the change in plan assets and benefit obligations
on the Bank’s pension plan, net of tax, that are recognized as separate
components of shareholders’ equity.
The
components of other comprehensive income (loss) and related tax effects are as
follows:
|
|
For the Three Months Ended
|
|
(Amounts in thousands)
|
|
March 31
|
|
|
|
2010
|
|
|
2009
|
|
Net
Income
|
|
$ |
1,974 |
|
|
$ |
2,101 |
|
|
|
|
|
|
|
|
|
|
Securities:
|
|
|
|
|
|
|
|
|
Unrealized
gains (losses) arising during the period
|
|
|
1,435 |
|
|
|
(2,018 |
) |
Reclassification
adjustment for losses included in net income
|
|
|
6 |
|
|
|
197 |
|
Net
unrealized gains (losses)
|
|
|
1,441 |
|
|
|
(1,821 |
) |
Tax
effect
|
|
|
(490 |
) |
|
|
619 |
|
Net
of tax amount
|
|
|
951 |
|
|
|
(1,202 |
) |
|
|
|
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
Unrealized
(losses) gains arising during the period
|
|
|
(338 |
) |
|
|
109 |
|
Reclassification
adjustment for losses included in net income
|
|
|
181 |
|
|
|
173 |
|
Net
unrealized (losses) gains
|
|
|
(157 |
) |
|
|
282 |
|
Tax
effect
|
|
|
53 |
|
|
|
(96 |
) |
Net
of tax amount
|
|
|
(104 |
) |
|
|
186 |
|
|
|
|
|
|
|
|
|
|
Pension:
|
|
|
|
|
|
|
|
|
Change
in plan assets and benefit obligations
|
|
|
(191 |
) |
|
|
- |
|
Reclassification
adjustment for losses included in net income
|
|
|
- |
|
|
|
- |
|
Net
unrealized losses
|
|
|
(191 |
) |
|
|
- |
|
Tax
effect
|
|
|
65 |
|
|
|
- |
|
Net
of tax amount
|
|
|
(126 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
Total
other comprehensive income (loss)
|
|
|
721 |
|
|
|
(1,016 |
) |
Total
Comprehensive Income
|
|
$ |
2,695 |
|
|
$ |
1,085 |
|
The
components of accumulated other comprehensive loss included in shareholders'
equity are as follows:
(Amounts
in thousands)
|
|
March
31
|
|
|
December
31
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Net
unrealized losses on securities
|
|
$ |
(388 |
) |
|
$ |
(1,829 |
) |
Tax
effect
|
|
|
132 |
|
|
|
622 |
|
Net
of tax amount
|
|
|
(256 |
) |
|
|
(1,207 |
) |
|
|
|
|
|
|
|
|
|
Net
unrealized losses on derivatives
|
|
|
(1,422 |
) |
|
|
(1,263 |
) |
Tax
effect
|
|
|
484 |
|
|
|
429 |
|
Net
of tax amount
|
|
|
(938 |
) |
|
|
(834 |
) |
|
|
|
|
|
|
|
|
|
Accumulated
pension adjustment
|
|
|
(4,883 |
) |
|
|
(4,692 |
) |
Tax
effect
|
|
|
1,660 |
|
|
|
1,595 |
|
Net
of tax amount
|
|
|
(3,223 |
) |
|
|
(3,097 |
) |
Total
accumulated other comprehensive loss
|
|
$ |
(4,417 |
) |
|
$ |
(5,138 |
) |
Note
4 – Guarantees
The Corporation does not issue any
guarantees that would require liability recognition or disclosure, other than
its standby letters of credit. Standby letters of credit are
conditional commitments issued by the Bank to guarantee the performance of a
customer to a third party. Generally, all letters of credit, when
issued, have expiration dates within one year. The credit risk
involved in issuing letters of credit is essentially the same as those that are
involved in extending loan facilities to customers. The Bank
generally holds collateral and/or personal guarantees supporting these
commitments. The Bank had $28.1 million and $26.7 million of standby
letters of credit as of March 31, 2010 and December 31, 2009, respectively.
Management believes that the proceeds obtained through a liquidation of
collateral and the enforcement of guarantees would be sufficient to cover the
potential amount of future payments required under the corresponding
guarantees. The amount of the liability as of March 31, 2010 and
December 31, 2009 for guarantees under standby letters of credit issued was not
material.
Note
5 - Investments
The
amortized cost and estimated fair value of investment securities available for
sale as of March 31, 2010 and December 31, 2009 are:
(Amounts
in thousands)
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
unrealized
|
|
|
unrealized
|
|
|
fair
|
|
March 31, 2010
|
|
cost
|
|
|
gains
|
|
|
losses
|
|
|
value
|
|
Equity
securities
|
|
$ |
5,400 |
|
|
$ |
142 |
|
|
$ |
(963 |
) |
|
$ |
4,579 |
|
U.S.
Treasury securities and obligations of U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
agencies
|
|
|
23,095 |
|
|
|
470 |
|
|
|
(125 |
) |
|
|
23,440 |
|
Obligations
of state and political subdivisions
|
|
|
41,238 |
|
|
|
1,427 |
|
|
|
(38 |
) |
|
|
42,627 |
|
Corporate
debt securities
|
|
|
9,609 |
|
|
|
25 |
|
|
|
(1,968 |
) |
|
|
7,666 |
|
Mortgage-backed
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
48,283 |
|
|
|
1,476 |
|
|
|
(8 |
) |
|
|
49,751 |
|
Non-Agency
|
|
|
5,362 |
|
|
|
- |
|
|
|
(797 |
) |
|
|
4,565 |
|
Asset-backed
securities
|
|
|
82 |
|
|
|
- |
|
|
|
(29 |
) |
|
|
53 |
|
|
|
$ |
133,069 |
|
|
$ |
3,540 |
|
|
$ |
(3,928 |
) |
|
$ |
132,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
(Amounts
in thousands)
|
|
Amortized
|
|
|
unrealized
|
|
|
unrealized
|
|
|
fair
|
|
December 31, 2009
|
|
cost
|
|
|
gains
|
|
|
losses
|
|
|
value
|
|
Equity
securities
|
|
$ |
5,400 |
|
|
$ |
37 |
|
|
$ |
(1,462 |
) |
|
$ |
3,975 |
|
U.S.
Treasury securities and obligations of U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
agencies
|
|
|
28,258 |
|
|
|
618 |
|
|
|
(161 |
) |
|
|
28,715 |
|
Obligations
of state and political subdivisions
|
|
|
42,611 |
|
|
|
1,332 |
|
|
|
(62 |
) |
|
|
43,881 |
|
Corporate
debt securities
|
|
|
9,603 |
|
|
|
- |
|
|
|
(2,343 |
) |
|
|
7,260 |
|
Mortgage-backed
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
53,214 |
|
|
|
1,576 |
|
|
|
(47 |
) |
|
|
54,743 |
|
Non-Agency
|
|
|
5,947 |
|
|
|
- |
|
|
|
(1,279 |
) |
|
|
4,668 |
|
Asset-backed
securities
|
|
|
84 |
|
|
|
- |
|
|
|
(38 |
) |
|
|
46 |
|
|
|
$ |
145,117 |
|
|
$ |
3,563 |
|
|
$ |
(5,392 |
) |
|
$ |
143,288 |
|
The book
value of securities pledged as collateral to secure various funding sources was
$122.9 million at March 31, 2010 and $134.6 million at December 31,
2009.
The
amortized cost and estimated fair value of debt securities as of March 31, 2010,
by contractual maturity are shown below. Actual maturities may differ from
contractual maturities because of prepayment or call options embedded in the
securities.
|
|
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
fair
|
|
(Amounts
in thousands)
|
|
cost
|
|
|
value
|
|
Due
in one year or less
|
|
$ |
3,037 |
|
|
$ |
3,043 |
|
Due
after one year through five years
|
|
|
15,060 |
|
|
|
15,342 |
|
Due
after five years through ten years
|
|
|
28,473 |
|
|
|
29,694 |
|
Due
after ten years
|
|
|
27,454 |
|
|
|
25,707 |
|
|
|
|
74,024 |
|
|
|
73,786 |
|
Mortgage-backed
securities
|
|
|
53,645 |
|
|
|
54,316 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
127,669 |
|
|
$ |
128,102 |
|
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, 2010 and December
31, 2009:
|
|
March 31, 2010
|
|
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
|
(Amounts
in thousands)
|
|
Value
|
|
|
Losses
|
|
|
Number
|
|
Value
|
|
|
Losses
|
|
|
Number
|
|
Value
|
|
|
Losses
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities
|
|
$ |
26 |
|
|
$ |
(12 |
) |
|
|
2 |
|
|
$ |
2,004 |
|
|
$ |
(951 |
) |
|
|
23 |
|
|
$ |
2,030 |
|
|
$ |
(963 |
) |
|
|
25 |
|
U.S.
Treasury securities and obligations of U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
agencies
|
|
|
45 |
|
|
|
- |
|
|
|
1 |
|
|
|
12,846 |
|
|
|
(125 |
) |
|
|
24 |
|
|
|
12,891 |
|
|
|
(125 |
) |
|
|
25 |
|
Obligations
of state and political subdivisions
|
|
|
1,339 |
|
|
|
(20 |
) |
|
|
4 |
|
|
|
289 |
|
|
|
(18 |
) |
|
|
1 |
|
|
|
1,628 |
|
|
|
(38 |
) |
|
|
5 |
|
Corporate
debt securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6,915 |
|
|
|
(1,968 |
) |
|
|
10 |
|
|
|
6,915 |
|
|
|
(1,968 |
) |
|
|
10 |
|
Mortgage-backed
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
4,617 |
|
|
|
(8 |
) |
|
|
4 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,617 |
|
|
|
(8 |
) |
|
|
4 |
|
Non-Agency
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,565 |
|
|
|
(797 |
) |
|
|
7 |
|
|
|
4,565 |
|
|
|
(797 |
) |
|
|
7 |
|
Asset-backed
securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
53 |
|
|
|
(29 |
) |
|
|
3 |
|
|
|
53 |
|
|
|
(29 |
) |
|
|
3 |
|
Total
temporarily impaired securities
|
|
$ |
6,027 |
|
|
$ |
(40 |
) |
|
|
11 |
|
|
$ |
26,672 |
|
|
$ |
(3,888 |
) |
|
|
68 |
|
|
$ |
32,699 |
|
|
$ |
(3,928 |
) |
|
|
79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
|
|
(Amounts
in thousands)
|
|
Value
|
|
|
Losses
|
|
|
Number
|
|
|
Value
|
|
|
Losses
|
|
|
Number
|
|
|
Value
|
|
|
Losses
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities
|
|
$ |
2,343 |
|
|
$ |
(395 |
) |
|
|
7 |
|
|
$ |
1,494 |
|
|
$ |
(1,067 |
) |
|
|
21 |
|
|
$ |
3,837 |
|
|
$ |
(1,462 |
) |
|
|
28 |
|
U.S.
Treasury securities and obligations of U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
agencies
|
|
|
63 |
|
|
|
- |
|
|
|
3 |
|
|
|
13,411 |
|
|
|
(161 |
) |
|
|
27 |
|
|
|
13,474 |
|
|
|
(161 |
) |
|
|
30 |
|
Obligations
of state and political subdivisions
|
|
|
1,843 |
|
|
|
(41 |
) |
|
|
6 |
|
|
|
285 |
|
|
|
(21 |
) |
|
|
1 |
|
|
|
2,128 |
|
|
|
(62 |
) |
|
|
7 |
|
Corporate
debt securities
|
|
|
622 |
|
|
|
(1 |
) |
|
|
5 |
|
|
|
6,537 |
|
|
|
(2,342 |
) |
|
|
10 |
|
|
|
7,159 |
|
|
|
(2,343 |
) |
|
|
15 |
|
Mortgage-backed
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
10,812 |
|
|
|
(47 |
) |
|
|
9 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
10,812 |
|
|
|
(47 |
) |
|
|
9 |
|
Non-Agency
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,668 |
|
|
|
(1,279 |
) |
|
|
7 |
|
|
|
4,668 |
|
|
|
(1,279 |
) |
|
|
7 |
|
Asset-backed
securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
46 |
|
|
|
(38 |
) |
|
|
3 |
|
|
|
46 |
|
|
|
(38 |
) |
|
|
3 |
|
Total
temporarily impaired securities
|
|
$ |
15,683 |
|
|
$ |
(484 |
) |
|
|
30 |
|
|
$ |
26,441 |
|
|
$ |
(4,908 |
) |
|
|
69 |
|
|
$ |
42,124 |
|
|
$ |
(5,392 |
) |
|
|
99 |
|
For more
information concerning investments, refer to the Investment Securities
discussion in the Financial Condition section.
Note
6 – Pensions
The
components of pension expense for the periods presented are as
follows:
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31
|
|
(Amounts
in thousands)
|
|
2010
|
|
|
2009
|
|
Components
of net periodic cost:
|
|
|
|
|
|
|
Service
cost
|
|
$ |
91 |
|
|
$ |
85 |
|
Interest
cost
|
|
|
185 |
|
|
|
181 |
|
Expected
return on plan assets
|
|
|
(209 |
) |
|
|
(190 |
) |
Amortization
of prior service cost
|
|
|
- |
|
|
|
(31 |
) |
Recognized
net actuarial loss
|
|
|
43 |
|
|
|
82 |
|
Net
periodic cost
|
|
$ |
110 |
|
|
$ |
127 |
|
The Bank
expects its pension expense to decrease slightly in 2010 compared to
2009. The Bank expects to contribute $626 thousand to its pension
plan in 2010. This amount will meet the minimum funding
requirements.
Note
7 – Mortgage Servicing Rights
Activity pertaining to mortgage
servicing rights and the related valuation allowance follows:
|
|
Three Months Ended
|
|
|
|
March 31
|
|
(Amounts
in thousands)
|
|
2010
|
|
|
2009
|
|
Cost
of mortgage servicing rights:
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
1,190 |
|
|
$ |
1,551 |
|
Originations
|
|
|
6 |
|
|
|
- |
|
Amortization
|
|
|
(69 |
) |
|
|
(110 |
) |
Ending
balance
|
|
$ |
1,127 |
|
|
$ |
1,441 |
|
|
|
|
|
|
|
|
|
|
Valuation
allowance:
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
(477 |
) |
|
$ |
(689 |
) |
Valuation
charges
|
|
|
- |
|
|
|
- |
|
Valuation
reversals
|
|
|
60 |
|
|
|
- |
|
Ending
balance
|
|
$ |
(417 |
) |
|
$ |
(689 |
) |
|
|
|
|
|
|
|
|
|
Mortgage
servicing rights cost
|
|
$ |
1,127 |
|
|
$ |
1,441 |
|
Valuation
allowance
|
|
|
(417 |
) |
|
|
(689 |
) |
Carrying
value
|
|
$ |
710 |
|
|
$ |
752 |
|
|
|
|
|
|
|
|
|
|
Fair
value
|
|
$ |
710 |
|
|
$ |
763 |
|
Note
8 – Fair Value Measurements
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 quarter-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 quarter-end.
FASB ASC
Topic 825, 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 non-recurring
basis.
The
estimated fair value of the Corporation's financial instruments are as
follows:
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
(Amounts
in thousands)
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
28,441 |
|
|
$ |
28,441 |
|
|
$ |
33,248 |
|
|
$ |
33,248 |
|
Investment
securities available for sale
|
|
|
132,681 |
|
|
|
132,681 |
|
|
|
143,288 |
|
|
|
143,288 |
|
Restricted
stock
|
|
|
6,482 |
|
|
|
6,482 |
|
|
|
6,482 |
|
|
|
6,482 |
|
Net
loans
|
|
|
740,723 |
|
|
|
747,867 |
|
|
|
730,626 |
|
|
|
742,929 |
|
Accrued
interest receivable
|
|
|
4,021 |
|
|
|
4,021 |
|
|
|
3,904 |
|
|
|
3,904 |
|
Mortgage
servicing rights
|
|
|
710 |
|
|
|
710 |
|
|
|
714 |
|
|
|
714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$ |
726,680 |
|
|
$ |
729,982 |
|
|
$ |
738,365 |
|
|
$ |
742,953 |
|
Securities
sold under agreements to repurchase
|
|
|
59,670 |
|
|
|
59,670 |
|
|
|
55,855 |
|
|
|
55,855 |
|
Long-term
debt
|
|
|
94,244 |
|
|
|
98,639 |
|
|
|
94,688 |
|
|
|
99,013 |
|
Accrued
interest payable
|
|
|
1,347 |
|
|
|
1,347 |
|
|
|
1,288 |
|
|
|
1,288 |
|
Interest
rate swaps
|
|
|
1,422 |
|
|
|
1,422 |
|
|
|
1,263 |
|
|
|
1,263 |
|
The
preceding information 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. The following methods and
assumptions were used to estimate the fair values of the Corporation’s financial
instruments at March 31, 2010:
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.
Restricted
stock: The carrying value of restricted stock approximates its
fair value based on redemption provisions for the restricted stock.
Loans,
net: 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.
Mortgage servicing
rights: The fair value of mortgage servicing rights is based on
observable market prices when available or the present value of expected future
cash flows when not available. Assumptions, such as loan default
rates, costs to service, and prepayment speeds significantly affect the estimate
of future cash flows. Mortgage servicing rights are carried at the lower of cost
or fair value.
Deposits and Securities sold
under agreements to repurchase: The 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 and long-term debt is estimated by discounting the future cash flows
using rates approximating those currently offered for certificates of deposit
and borrowings with similar remaining maturities. For securities sold
under agreements to repurchase, the carrying
value approximates a reasonable estimate of the fair value.
Accrued interest
payable: The carrying amount is a reasonable estimate of fair
value.
Interest rate
swaps: The
fair value of the interest rate swaps is determined in accordance with the
methods described under FASB ASC Topic 820.
Off balance sheet financial
instruments: Outstanding commitments to extend credit and commitments
under standby letters of credit include fixed and variable rate commercial and
consumer commitments. The fair value of the commitments is estimated
using the fees currently charged to enter into similar agreements.
FASB
ASC Topic 820, Fair Value
Measurements and Disclosures established 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.
|
|
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.
|
For
financial assets and liabilities measured at fair value on a recurring basis,
the fair value measurements by level within the fair value hierarchy are as
follows:
(Dollars
in Thousands)
|
|
Fair Value at March 31,
2010
|
|
Asset Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Equity
securities
|
|
$ |
4,579 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
4,579 |
|
U.S.
Treasury securities and obligations of U.S. Government
agencies
|
|
|
- |
|
|
|
23,440 |
|
|
|
- |
|
|
|
23,440 |
|
Obligations
of state and political subdivisions
|
|
|
- |
|
|
|
42,627 |
|
|
|
- |
|
|
|
42,627 |
|
Corporate
debt securities
|
|
|
- |
|
|
|
7,666 |
|
|
|
- |
|
|
|
7,666 |
|
Mortgage-backed
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
- |
|
|
|
49,751 |
|
|
|
- |
|
|
|
49,751 |
|
Non-Agency
|
|
|
- |
|
|
|
4,565 |
|
|
|
- |
|
|
|
4,565 |
|
Asset-backed
securities
|
|
|
- |
|
|
|
53 |
|
|
|
- |
|
|
|
53 |
|
Total
assets
|
|
$ |
4,579 |
|
|
$ |
128,102 |
|
|
$ |
- |
|
|
$ |
132,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Description
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps
|
|
$ |
- |
|
|
$ |
1,422 |
|
|
$ |
- |
|
|
$ |
1,422 |
|
Total
liabilities
|
|
$ |
- |
|
|
$ |
1,422 |
|
|
$ |
- |
|
|
$ |
1,422 |
|
(Dollars
in Thousands)
|
|
Fair Value at December 31,
2009
|
|
Asset Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Equity
securities
|
|
$ |
3,975 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
3,975 |
|
U.S.
Treasury securities and obligations of U.S. Government
agencies
|
|
|
- |
|
|
|
28,715 |
|
|
|
- |
|
|
|
28,715 |
|
Obligations
of state and political subdivisions
|
|
|
- |
|
|
|
43,881 |
|
|
|
- |
|
|
|
43,881 |
|
Corporate
debt securities
|
|
|
- |
|
|
|
7,260 |
|
|
|
- |
|
|
|
7,260 |
|
Mortgage-backed
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
- |
|
|
|
54,743 |
|
|
|
- |
|
|
|
54,743 |
|
Non-Agency
|
|
|
- |
|
|
|
4,668 |
|
|
|
- |
|
|
|
4,668 |
|
Asset-backed
securities
|
|
|
- |
|
|
|
46 |
|
|
|
- |
|
|
|
46 |
|
Total
assets
|
|
$ |
3,975 |
|
|
$ |
139,313 |
|
|
$ |
- |
|
|
$ |
143,288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Description
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps
|
|
$ |
- |
|
|
$ |
1,263 |
|
|
$ |
- |
|
|
$ |
1,263 |
|
Total
liabilities
|
|
$ |
- |
|
|
$ |
1,263 |
|
|
$ |
- |
|
|
$ |
1,263 |
|
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
Corporation used the following methods and significant assumptions to estimate
the fair value for assets and liabilities measured 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.
Interest rate swaps:
The interest rate swaps are valued using a discounted cash flow model that uses
verifiable market environment inputs to calculate the fair value. This method is
not dependent on the input of any significant judgments or assumptions by
Management.
For
financial assets and liabilities measured at fair value on a nonrecurring basis,
the fair value measurements by level within the fair value hierarchy are as
follows:
(Dollars
in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at March 31,
2010
|
|
Asset Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Impaired
loans
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
9,781 |
|
|
$ |
9,781 |
|
Other
real estate owned
|
|
|
- |
|
|
|
- |
|
|
|
229 |
|
|
|
229 |
|
Mortgage
servicing rights
|
|
|
- |
|
|
|
- |
|
|
|
710 |
|
|
|
710 |
|
Total
assets
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
10,720 |
|
|
$ |
10,720 |
|
(Dollars
in Thousands)
|
|
Fair Value at December 31,
2009
|
|
Asset Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Impaired
loans
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
7,943 |
|
|
$ |
7,943 |
|
Other
real estate owned
|
|
|
- |
|
|
|
- |
|
|
|
642 |
|
|
|
642 |
|
Mortgage
servicing rights
|
|
|
- |
|
|
|
- |
|
|
|
714 |
|
|
|
714 |
|
Total
assets
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
9,299 |
|
|
$ |
9,299 |
|
The
Corporation used the following methods and significant assumptions to estimate
the fair value of assets and liabilities measured 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.
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.
Mortgage servicing
rights: The fair value of mortgage servicing rights, upon initial
recognition, is estimated using a valuation model that calculates the present
value of estimated future net servicing income. The model
incorporates Level 3 assumptions such as cost to service, discount rate,
prepayment speeds, default rates and losses. Mortgage servicing
rights are carried at the lower of cost or fair value after initial
recognition.
Note
9 – Financial Derivatives
The Board
of Directors has given Management authorization to enter into derivative
activity including interest rate swaps, caps and floors, forward-rate
agreements, options and futures contracts in order to hedge interest rate
risk. The Bank is exposed to credit risk equal to the positive fair
value of a derivative instrument, if any, as a positive fair value indicates
that the counterparty to the agreement is financially liable to the
Bank. To limit this risk, counterparties must have an investment
grade long-term debt rating and individual counterparty credit exposure is
limited by Board approved parameters. Management anticipates
continuing to use derivatives, as permitted by its Board-approved policy, to
manage interest rate risk. During 2008, the Bank entered into two
interest rate swap transactions in order to hedge the Corporation’s exposure to
changes in cash flows attributable to the effect of interest rate changes on
variable rate liabilities.
Information
regarding the interest rate swap as of March 31, 2010 follows:
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
Amount
Expected to
|
|
|
|
|
|
|
|
|
|
|
|
be
Expensed into
|
|
Notional
|
|
Maturity
|
|
Interest
Rate
|
|
|
Earnings
within the
|
|
Amount
|
|
Date
|
|
Fixed
|
|
|
Variable
|
|
|
next
12 Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,000 |
|
5/30/2013
|
|
|
3.60 |
% |
|
|
0.11 |
% |
|
$ |
349 |
|
$ |
10,000 |
|
5/30/2015
|
|
|
3.87 |
% |
|
|
0.11 |
% |
|
$ |
376 |
|
Derivatives
with a positive fair value are reflected as other assets in the consolidated
balance sheet while those with a negative fair value are reflected as other
liabilities. As short-term interest rates decrease, the net expense
of the swap increases. As short-term rates increase, the net expense
of the swap decreases.
Fair
Value of Derivative Instruments in the Consolidated Balance Sheets as of March
31, 2010 and December 31, 2009 are as follows:
Fair Value of Derivative Instruments Designated as
Hedging Instruments Under ASC Topic 815
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
Liability Derivatives
|
|
|
|
|
|
Balance
Sheet
|
|
|
|
Date
|
|
Type
|
|
Location
|
|
Fair Value
|
|
March
31, 2010
|
|
Interest
rate contracts
|
|
Other
liabilities
|
|
$
|
1,422
|
|
December
31, 2009
|
|
Interest
rate contracts
|
|
Other
liabilities
|
|
$ |
1,263 |
|
The Effect of Derivative Instruments on
the Statement of Income for the Three Months Ended March 31, 2010 and 2009
follows:
Derivatives in ASC Topic 815 Cash Flow Hedging Relationships
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Amount of Gain
|
|
|
|
|
|
|
|
|
|
Location of
|
|
or (Loss)
|
|
|
|
|
|
|
|
|
|
Gain or (Loss)
|
|
Recognized in
|
|
|
|
|
|
|
|
|
|
Recognized in
|
|
Income on
|
|
|
|
|
|
Location of
|
|
Amount of Gain
|
|
Income on
|
|
Derivatives
|
|
|
|
Amount of Gain
|
|
Gain or (Loss)
|
|
or (Loss)
|
|
Derivative (Ineffective
|
|
(Ineffective Portion
|
|
|
|
or (Loss)
|
|
Reclassified from
|
|
Reclassified from
|
|
Portion and Amount
|
|
and Amount
|
|
|
|
Recognized in
|
|
Accumulated OCI
|
|
Accumulated OCI
|
|
Excluded from
|
|
Excluded from
|
|
|
|
OCI on Derivative
|
|
into Income
|
|
into Income
|
|
Effectiveness
|
|
Effectiveness
|
|
Date / Type
|
|
(Effective Portion)
|
|
(Effective Portion)
|
|
(Effective Portion)
|
|
Testing)
|
|
Testing)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate contracts
|
|
$ |
(104 |
) |
Interest
Expense
|
|
$ |
(181 |
) |
Other
income (expense)
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate contracts
|
|
$ |
186 |
|
Interest
Expense
|
|
$ |
(173 |
) |
Other
income (expense)
|
|
$ |
- |
|
Note
10 – Reclassifications
Certain prior period amounts may have
been reclassified to conform to the current year presentation. Such
reclassifications did not affect reported net
income.
Item
2
Management’s
Discussion and Analysis of Results of Operations and Financial
Condition
For
the Three Month Periods Ended March 31, 2010 and 2009
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 to include
Allowance for Loan Losses, Mortgage Servicing Rights, Financial Derivatives,
Temporary Investment Impairment and Stock-based Compensation. There
were no changes to the critical accounting policies disclosed in the 2009 Annual
Report on Form 10-K in regards to application or related judgements and
estimates used. Please refer to Item 7 of the Corporation’s 2009
Annual Report on Form 10-K for a more detailed disclosure of the critical
accounting policies.
Results of
Operations
Year-to-Date
Summary
The
Corporation reported net income for the three months ended March 31, 2010 of
$2.0 million. This is a 6% decrease versus net income of $2.1 million
for the same period in 2009. Total revenue (interest income and noninterest
income) increased $212 thousand year-over-year, as loan volume increased
interest income and investment and trust revenue, and security gains helped
improve noninterest income. Noninterest expense increased due to increased
salary and benefit expense and higher legal fees. The provision
for loan losses was $625 thousand for the period, $32 thousand more than in
2009. Diluted earnings per share decreased to $.51 in 2010 from $.55
in 2009. Total assets were $974.3 million at March 31, 2010, a decrease of $5.1
million from year-end 2009. Net loans grew to $740.7 million, while
total deposits decreased to $726.7 million.
Other key
performance ratios as of, or for the three months ended March 31, 2010 and 2009
(on an annualized basis) are listed below:
|
|
2010
|
|
|
2009
|
|
Return
on average equity (ROE)
|
|
|
10.00 |
% |
|
|
11.42 |
% |
Return
on average assets (ROA)
|
|
|
.82 |
% |
|
|
.94 |
% |
Return
on average tangible average equity(1)
|
|
|
12.02 |
% |
|
|
14.10 |
% |
Return
on average tangible average assets(1)
|
|
|
.85 |
% |
|
|
.98 |
% |
Net
interest margin
|
|
|
3.46 |
% |
|
|
3.61 |
% |
Efficiency
ratio
|
|
|
65.17 |
% |
|
|
62.93 |
% |
(1) The
Corporation supplements its traditional GAAP measurements with Non-GAAP
measurements. The Non-GAAP measurements include Return on Average Tangible
Assets and Return on Average Tangible Equity. As a result of merger
transactions, intangible assets (primarily goodwill and core deposit
intangibles) were created. The Non-GAAP disclosures are intended to eliminate
the effects of the intangible assets and allow for better comparisons to periods
when such assets did not exist. The following table shows the
adjustments made between the GAAP and NON-GAAP measurements:
GAAP Measurement
|
|
Calculation
|
Return
on Average Assets
|
|
Net
Income / Average Assets
|
Return
on Average Equity
|
|
Net
Income / Average Equity
|
Non- GAAP Measurement
|
|
Calculation
|
Return
on Average Tangible Assets
|
|
Net
Income plus Intangible Amortization /
|
|
|
Average
Assets less Average Intangible Assets
|
Return
on Average Tangible Equity
|
|
Net
Income plus Intangible Amortization /
|
|
|
Average
Equity less Average Intangible Assets
|
Efficiency
Ratio
|
|
Noninterest
Expense / Tax Equivalent Net Interest Income plus Noninterest Income
(excluding Security Gains/Losses and Other Than Temporary
Impairment)
|
A more detailed discussion of the
operating results for the three months ended March 31, 2010 and 2009
follows:
Comparison
of the three months ended March 31, 2010 to the three months ended March 31,
2009:
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, securities sold under agreements to repurchase
(Repos), 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. All balance sheet amounts
in the discussion of net interest income refer to either year-to-date or
quarterly average balances.
Interest
income for the first quarter of 2010 increased to $10.9 million from $10.8
million during the first quarter of 2009. Average interest-earning
assets increased by $74.1 million from the first quarter of 2009, however the
yield on these assets decreased by 40 basis points. The average
balance on investment securities decreased $3.5 million quarter over quarter due
to pay downs, maturities and sales in the portfolio, net of investment
purchases. Total average loans increased $67.6 million (10.0%)
quarter over quarter. Average commercial loans increased $91.0
million, but the increase was partially offset by a decrease in the average
balance of mortgage and consumer loans. Average mortgage loans
decreased $7.7 million, as the majority of new mortgage originations are sold in
the secondary market and the portfolio continues to runoff. Average
consumer loans decreased $15.8 million, as consumers continue to borrow less
during the economic recession.
Interest
expense was $3.4 million for the first quarter, a decrease of $222 thousand from
the first quarter of 2009 total of $3.6 million. Average
interest-bearing liabilities increased to $802.3 million in the first quarter of
2010 from an average balance of $734.2 million during the same period in 2009,
an increase of $68.2 million. The average cost of these liabilities
decreased from 1.98% to 1.70%. Average interest-bearing deposits
increased $97.7 million, due to increases in money management accounts ($44.2
million) and certificates of deposit ($51.3 million), but the cost decreased
from 1.83% to 1.48%. Securities sold under agreements to repurchase
have decreased $11.7 million on average over the prior year quarter and the
average rate has remained constant at .25%. The average balance
of long-term debt decreased by $11.4 million as the Bank paid down advances from
the Federal Home Loan Bank of Pittsburgh (FHLB).
The
changes in the balance sheet and interest rates resulted in an increase in net
interest income of $326 thousand to $7.5 million for the first quarter of 2010
compared to $7.2 million for the first quarter of 2009. The Bank’s
net interest margin decreased from 3.60% to 3.46% in 2010. The
decrease in the net interest margin is due to the yield on interest-earning
assets (mainly variable rate commercial loans) decreasing 40 basis points, while
the yield on interest-bearing liabilities only decreased 28 basis points. An
extended period of low market interest rates is likely to continue to reduce the
net interest margin because liability rates can no longer be significantly
reduced.
The
following table shows a comparative analysis of average balances, asset yields
and funding costs for the three months ended March 31, 2010 and
2009. These components drive changes in net interest
income.
|
|
For the Three Months Ended March 31
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
Tax
|
|
|
|
|
|
|
|
|
Tax
|
|
|
|
|
|
|
Average
|
|
|
Equivalent
|
|
|
Average
|
|
|
Average
|
|
|
Equivalent
|
|
|
Average
|
|
(Dollars in thousands)
|
|
balance
|
|
|
Interest
|
|
|
yield/rate
|
|
|
balance
|
|
|
Interest
|
|
|
yield/rate
|
|
Interest-earning
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
funds sold and interest-bearing balances
|
|
$ |
10,636 |
|
|
$ |
7 |
|
|
|
0.25 |
% |
|
$ |
626 |
|
|
$ |
- |
|
|
|
0.38 |
% |
Investment
securities
|
|
|
148,326 |
|
|
|
1,576 |
|
|
|
4.25 |
% |
|
|
151,855 |
|
|
|
1,835 |
|
|
|
4.83 |
% |
Loans
|
|
|
746,523 |
|
|
|
9,607 |
|
|
|
5.18 |
% |
|
|
678,951 |
|
|
|
9,255 |
|
|
|
5.49 |
% |
Total
interest-earning assets
|
|
$ |
905,486 |
|
|
|
11,190 |
|
|
|
4.97 |
% |
|
$ |
831,432 |
|
|
|
11,090 |
|
|
|
5.37 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
deposits
|
|
$ |
647,079 |
|
|
|
2,360 |
|
|
|
1.48 |
% |
|
$ |
549,381 |
|
|
|
2,482 |
|
|
|
1.83 |
% |
Securities
sold under agreements to repurchase
|
|
|
60,612 |
|
|
|
38 |
|
|
|
0.25 |
% |
|
|
72,297 |
|
|
|
45 |
|
|
|
0.25 |
% |
Short-term
borrowings
|
|
|
223 |
|
|
|
- |
|
|
|
0.65 |
% |
|
|
6,684 |
|
|
|
11 |
|
|
|
0.68 |
% |
Long-term
debt
|
|
|
94,416 |
|
|
|
973 |
|
|
|
4.18 |
% |
|
|
105,790 |
|
|
|
1,055 |
|
|
|
4.04 |
% |
Total
interest-bearing liabilities
|
|
$ |
802,330 |
|
|
|
3,371 |
|
|
|
1.70 |
% |
|
$ |
734,152 |
|
|
|
3,593 |
|
|
|
1.98 |
% |
Interest
spread
|
|
|
|
|
|
|
|
|
|
|
3.27 |
% |
|
|
|
|
|
|
|
|
|
|
3.39 |
% |
Tax
equivalent Net interest income/Net interest margin
|
|
|
|
|
|
|
7,819 |
|
|
|
3.46 |
% |
|
|
|
|
|
|
7,497 |
|
|
|
3.60 |
% |
Tax
equivalent adjustment
|
|
|
|
|
|
|
(274 |
) |
|
|
|
|
|
|
|
|
|
|
(278 |
) |
|
|
|
|
Net
interest income
|
|
|
|
|
|
$ |
7,545 |
|
|
|
|
|
|
|
|
|
|
$ |
7,219 |
|
|
|
|
|
All
amounts have been adjusted to a tax-equivalent basis using a tax rate
of 34%. Investments include the average unrealized gains or
losses.
Dividend
income is reported as taxable income but is adjusted for the dividend received
deduction. Loan balances include nonaccruing loans, loans
held for
sale, and are gross of the allowance for loan losses.
Provision
for Loan Losses
For the
first quarter of 2010, the provision expense was $625 thousand versus $593
thousand for the same period in 2009. For more information concerning
loan quality and the allowance for loan losses, refer to the Loan discussion in
the Financial Condition section.
Noninterest
Income
For the
three months ended March 31, 2010, noninterest income increased $108 thousand to
$2.4 million, compared to $2.3 million for the first quarter of
2009. Investment and trust service fees increased $123 thousand due
to increases in nonrecurring income from estate fees. Loan service charges
decreased $80 thousand, as the 2009 first quarter total included a high volume
of fees from mortgage refinancing. Mortgage banking fees increased
quarter to quarter due to a net impairment recovery on mortgage servicing rights
in 2010, compared to net impairment charge in 2009. Deposit service
charges and increase in cash surrender value of life insurance remained flat in
the first quarter of 2010. Other noninterest income decreased $246
thousand quarter over quarter as 2009 included the income from the surrender of
a life insurance policy. Other than temporary impairment charges of
$255 thousand were recognized in income on two debt securities in the quarter,
compared to $209 thousand on equity securities in 2009. The
Corporation took gains of $249 thousand on three debt securities during the
quarter ended March 31, 2010 versus gains of $12 thousand for the same period in
2009.
|
|
For
the Three Months Ended
|
|
|
|
|
|
|
|
|
|
March
31
|
|
|
Change
|
|
(Dollars
in thousands)
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
Noninterest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
and trust services fees
|
|
$ |
1,017 |
|
|
$ |
894 |
|
|
$ |
123 |
|
|
|
13.8 |
|
Loan
service charges
|
|
|
197 |
|
|
|
277 |
|
|
|
(80 |
) |
|
|
(28.9 |
) |
Mortgage
banking activities
|
|
|
69 |
|
|
|
(28 |
) |
|
|
97 |
|
|
|
346.4 |
|
Deposit
service charges and fees
|
|
|
577 |
|
|
|
580 |
|
|
|
(3 |
) |
|
|
(0.5 |
) |
Other
service charges and fees
|
|
|
326 |
|
|
|
302 |
|
|
|
24 |
|
|
|
7.9 |
|
Increase
in cash surrender value of life insurance
|
|
|
166 |
|
|
|
164 |
|
|
|
2 |
|
|
|
1.2 |
|
Other
|
|
|
49 |
|
|
|
295 |
|
|
|
(246 |
) |
|
|
(83.4 |
) |
Net
OTTI recognized in earnings
|
|
|
(255 |
) |
|
|
(209 |
) |
|
|
(46 |
) |
|
|
(22.0 |
) |
Securities
gains, net
|
|
|
249 |
|
|
|
12 |
|
|
|
237 |
|
|
|
1,975.0 |
|
Total
noninterest income
|
|
$ |
2,395 |
|
|
$ |
2,287 |
|
|
$ |
108 |
|
|
|
4.7 |
|
Noninterest
Expense
Noninterest expense for the first
quarter of 2010 totaled $6.7 million compared to $6.2 million in the first
quarter of 2009. The increase in salaries and benefits was due to
increased health insurance costs and an accrual for a severance
payment. Net occupancy expense increased in 2010 from the cost of
snow removal. Advertising expense remained flat, while legal and
professional fees increased over the same period in 2009 due to expenses from
several ongoing lawsuits stemming from activities at Community Financial, Inc
prior to its acquisition by the Corporation in 2008. The Pennsylvania
bank shares tax expense and intangible amortization expense remained flat
quarter over quarter. FDIC Insurance increased $61 thousand due to
increases in the rates paid in the first quarter of 2010 versus the same period
in 2009. Other expenses increased primarily due to expense related to
the disposal of other real estate owned and repossessed assets.
|
|
For
the Three Months Ended
|
|
|
|
|
|
|
|
(Dollars
in thousands)
|
|
March
31
|
|
|
Change
|
|
Noninterest
Expense
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
Salaries
and benefits
|
|
$ |
3,441 |
|
|
$ |
3,153 |
|
|
$ |
288 |
|
|
|
9.1 |
|
Net
occupancy expense
|
|
|
526 |
|
|
|
480 |
|
|
|
46 |
|
|
|
9.6 |
|
Furniture
and equipment expense
|
|
|
192 |
|
|
|
217 |
|
|
|
(25 |
) |
|
|
(11.5 |
) |
Advertising
|
|
|
312 |
|
|
|
315 |
|
|
|
(3 |
) |
|
|
(1.0 |
) |
Legal
and professional fees
|
|
|
395 |
|
|
|
251 |
|
|
|
144 |
|
|
|
57.4 |
|
Data
processing
|
|
|
377 |
|
|
|
401 |
|
|
|
(24 |
) |
|
|
(6.0 |
) |
Pennsylvania
bank shares tax
|
|
|
156 |
|
|
|
145 |
|
|
|
11 |
|
|
|
7.6 |
|
Intangible
amortization
|
|
|
114 |
|
|
|
117 |
|
|
|
(3 |
) |
|
|
(2.6 |
) |
FDIC
insurance
|
|
|
292 |
|
|
|
231 |
|
|
|
61 |
|
|
|
26.4 |
|
Other
|
|
|
855 |
|
|
|
840 |
|
|
|
15 |
|
|
|
1.8 |
|
Total
noninterest expense
|
|
$ |
6,660 |
|
|
$ |
6,150 |
|
|
$ |
510 |
|
|
|
8.3 |
|
Income
taxes
Federal
income tax expense was $681 thousand for the first quarter of 2010 compared to
$662 thousand in 2009. The effective tax rate for the first quarter
of 2010 was 25.6% and 24.0% for 2009. All taxable income for the
Corporation is taxed at a rate of 34%.
Financial
Condition
Summary:
At March
31, 2010, assets totaled $974.3 million, a decrease of $5.1 million from the
2009 year-end balance of $979.4 million. Net loan growth has been strong, up
$10.1 million; however, this growth was offset by a decrease in cash and cash
equivalents, and investment securities. Deposits are down $11.7
million. During the quarter, approximately $23 million of short-term brokered
CDs matured. This funding was not replaced and this more than offset core
deposit growth during the quarter. Shareholders’ equity
increased during the quarter as unrealized losses recorded in accumulated other
comprehensive income declined and retained earnings increased approximately $900
thousand.
Investment
Securities:
The
investment portfolio totaled $132.7 million at March 31, 2010, a decrease
of $10.6 million since year-end 2009. During the quarter, cash flows
from maturing investments were used to fund loan growth and payoff maturing
short-term brokered CDs.
The
equity portfolio is comprised of bank stocks and the Bank and the Corporation
each maintain separate equity investment portfolios. The municipal
bond portfolio is well diversified geographically and is comprised primarily of
general obligation bonds with credit enhancements in the form of private bond
insurance or other credit enhancements. The Bank holds corporate
bonds with a fair value $7.7 million with the majority of the bonds representing
financial services companies. Included in the corporate bond
portfolio are seven single issuer trust preferred bonds with a book value of
$5.9 million and a fair value of $3.9 million. The majority of the
mortgage-backed security portfolio is comprised of U.S. Government Agency
products. However, the Bank has 7 private label “Alt-A”, mortgage backed
securities.
The
amortized cost and estimated fair value of investment securities available for
sale as of March 31, 2010 and December 31, 2009 are:
(Amounts
in thousands)
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
unrealized
|
|
|
unrealized
|
|
|
fair
|
|
March 31, 2010
|
|
cost
|
|
|
gains
|
|
|
losses
|
|
|
value
|
|
Equity
securities
|
|
$ |
5,400 |
|
|
$ |
142 |
|
|
$ |
(963 |
) |
|
$ |
4,579 |
|
U.S.
Treasury securities and obligations of U.S. Government
agencies
|
|
|
23,095 |
|
|
|
470 |
|
|
|
(125 |
) |
|
|
23,440 |
|
Obligations
of state and political subdivisions
|
|
|
41,238 |
|
|
|
1,427 |
|
|
|
(38 |
) |
|
|
42,627 |
|
Corporate
debt securities
|
|
|
9,609 |
|
|
|
25 |
|
|
|
(1,968 |
) |
|
|
7,666 |
|
Mortgage-backed
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
48,283 |
|
|
|
1,476 |
|
|
|
(8 |
) |
|
|
49,751 |
|
Non-Agency
|
|
|
5,362 |
|
|
|
- |
|
|
|
(797 |
) |
|
|
4,565 |
|
Asset-backed
securities
|
|
|
82 |
|
|
|
- |
|
|
|
(29 |
) |
|
|
53 |
|
|
|
$ |
133,069 |
|
|
$ |
3,540 |
|
|
$ |
(3,928 |
) |
|
$ |
132,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
(Amounts
in thousands)
|
|
Amortized
|
|
|
unrealized
|
|
|
unrealized
|
|
|
fair
|
|
December 31, 2009
|
|
cost
|
|
|
gains
|
|
|
losses
|
|
|
value
|
|
Equity
securities
|
|
$ |
5,400 |
|
|
$ |
37 |
|
|
$ |
(1,462 |
) |
|
$ |
3,975 |
|
U.S.
Treasury securities and obligations of U.S. Government
agencies
|
|
|
28,258 |
|
|
|
618 |
|
|
|
(161 |
) |
|
|
28,715 |
|
Obligations
of state and political subdivisions
|
|
|
42,611 |
|
|
|
1,332 |
|
|
|
(62 |
) |
|
|
43,881 |
|
Corporate
debt securities
|
|
|
9,603 |
|
|
|
- |
|
|
|
(2,343 |
) |
|
|
7,260 |
|
Mortgage-backed
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
53,214 |
|
|
|
1,576 |
|
|
|
(47 |
) |
|
|
54,743 |
|
Non-Agency
|
|
|
5,947 |
|
|
|
- |
|
|
|
(1,279 |
) |
|
|
4,668 |
|
Asset-backed
securities
|
|
|
84 |
|
|
|
- |
|
|
|
(38 |
) |
|
|
46 |
|
|
|
$ |
145,117 |
|
|
$ |
3,563 |
|
|
$ |
(5,392 |
) |
|
$ |
143,288 |
|
At March
31, 2010, the investment portfolio contained 79 securities with $32.7 million of
temporarily impaired fair value and $3.9 million in unrealized losses. The
position at quarter end improved from year-end 2009 when there were 99
securities with an unrealized loss of $5.4 million. Of the total unrealized loss
position, $3.0 million (54 securities) exists within the debt security
portfolio. Within this category, the corporate bond portfolio
contains 10 securities with an unrealized loss of $2.0 million or 66% of the
unrealized loss in the debt security portfolio.
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 maturity. Accordingly,
the impairments identified on debt securities and subjected to the assessment at
March 31, 2010 were deemed to be temporary and required no further adjustment to
the financial statements, except as described below.
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, 2010 and December
31, 2009:
|
|
March
31, 2010
|
|
|
|
Less
than 12 months
|
|
|
12
months or more
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
|
(Amounts
in thousands)
|
|
Value
|
|
|
Losses
|
|
|
Number
|
|
|
Value
|
|
|
Losses
|
|
|
Number
|
|
|
Value
|
|
|
Losses
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities
|
|
$ |
26 |
|
|
$ |
(12 |
) |
|
|
2 |
|
|
$ |
2,004 |
|
|
$ |
(951 |
) |
|
|
23 |
|
|
$ |
2,030 |
|
|
$ |
(963 |
) |
|
|
25 |
|
U.S.
Treasury securities and obligations of U.S. Government
agencies
|
|
|
45 |
|
|
|
- |
|
|
|
1 |
|
|
|
12,846 |
|
|
|
(125 |
) |
|
|
24 |
|
|
|
12,891 |
|
|
|
(125 |
) |
|
|
25 |
|
Obligations
of state and political subdivisions
|
|
|
1,339 |
|
|
|
(20 |
) |
|
|
4 |
|
|
|
289 |
|
|
|
(18 |
) |
|
|
1 |
|
|
|
1,628 |
|
|
|
(38 |
) |
|
|
5 |
|
Corporate
debt securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6,915 |
|
|
|
(1,968 |
) |
|
|
10 |
|
|
|
6,915 |
|
|
|
(1,968 |
) |
|
|
10 |
|
Mortgage-backed
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
4,617 |
|
|
|
(8 |
) |
|
|
4 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,617 |
|
|
|
(8 |
) |
|
|
4 |
|
Non-Agency
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,565 |
|
|
|
(797 |
) |
|
|
7 |
|
|
|
4,565 |
|
|
|
(797 |
) |
|
|
7 |
|
Asset-backed
securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
53 |
|
|
|
(29 |
) |
|
|
3 |
|
|
|
53 |
|
|
|
(29 |
) |
|
|
3 |
|
Total
temporarily impaired securities
|
|
$ |
6,027 |
|
|
$ |
(40 |
) |
|
|
11 |
|
|
$ |
26,672 |
|
|
$ |
(3,888 |
) |
|
|
68 |
|
|
$ |
32,699 |
|
|
$ |
(3,928 |
) |
|
|
79 |
|
|
|
December
31, 2009
|
|
|
|
Less
than 12 months
|
|
|
12
months or more
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
|
(Amounts
in thousands)
|
|
Value
|
|
|
Losses
|
|
|
Number
|
|
|
Value
|
|
|
Losses
|
|
|
Number
|
|
|
Value
|
|
|
Losses
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities
|
|
$ |
2,343 |
|
|
$ |
(395 |
) |
|
|
7 |
|
|
$ |
1,494 |
|
|
$ |
(1,067 |
) |
|
|
21 |
|
|
$ |
3,837 |
|
|
$ |
(1,462 |
) |
|
|
28 |
|
U.S.
Treasury securities and obligations of U.S. Government
agencies
|
|
|
63 |
|
|
|
- |
|
|
|
3 |
|
|
|
13,411 |
|
|
|
(161 |
) |
|
|
27 |
|
|
|
13,474 |
|
|
|
(161 |
) |
|
|
30 |
|
Obligations
of state and political subdivisions
|
|
|
1,843 |
|
|
|
(41 |
) |
|
|
6 |
|
|
|
285 |
|
|
|
(21 |
) |
|
|
1 |
|
|
|
2,128 |
|
|
|
(62 |
) |
|
|
7 |
|
Corporate
debt securities
|
|
|
622 |
|
|
|
(1 |
) |
|
|
5 |
|
|
|
6,537 |
|
|
|
(2,342 |
) |
|
|
10 |
|
|
|
7,159 |
|
|
|
(2,343 |
) |
|
|
15 |
|
Mortgage-backed
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
10,812 |
|
|
|
(47 |
) |
|
|
9 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
10,812 |
|
|
|
(47 |
) |
|
|
9 |
|
Non-Agency
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,668 |
|
|
|
(1,279 |
) |
|
|
7 |
|
|
|
4,668 |
|
|
|
(1,279 |
) |
|
|
7 |
|
Asset-backed
securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
46 |
|
|
|
(38 |
) |
|
|
3 |
|
|
|
46 |
|
|
|
(38 |
) |
|
|
3 |
|
Total
temporarily impaired securities
|
|
$ |
15,683 |
|
|
$ |
(484 |
) |
|
|
30 |
|
|
$ |
26,441 |
|
|
$ |
(4,908 |
) |
|
|
69 |
|
|
$ |
42,124 |
|
|
$ |
(5,392 |
) |
|
|
99 |
|
The loss
in the corporate bond portfolio is concentrated in trust-preferred securities
with an unrealized loss of $1.9 million. Trust preferred securities
are typically issued by a subsidiary grantor trust of a bank holding company,
which uses the proceeds of the equity issuance to purchase deeply subordinated
debt issued by the bank holding company. Trust-preferred securities
can reflect single entity issues or a group of entities (pooled trust
preferred). Pooled trust preferred securities have been the subject of
significant write-downs due in some cases from the default of one issuer in the
pool that then impairs the entire pool. Because of the current financial
conditions, most trust preferred securities have realized a significant decline
in value, but market prices have improved since the end of 2009. All of the
issues are variable rate notes from companies that received money (and in some
cases paid back) from the Troubled Asset Relief Program (TARP), continue to pay
dividends and have raised capital. The holdings and ratings of the
trust-preferred securities include issues from: BankAmerica (Baa3), JP Morgan
(A2), Wells Fargo (Baa2) and Huntington Bancshares (Ba1). At March 31, 2010, 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.
The
largest unrealized loss in the mortgage-backed security (MBS) portfolio is in
the non-agency private label “Alt-A” sector. Alt-A loans are first-lien
residential mortgages that generally conform to traditional “prime” credit
guidelines; however, loan factors such as the loan-to-value ratio, loan
documentation, occupancy status or property type cause these loans not to
qualify for standard underwriting programs. The Alt-A product in the
Bank’s portfolio is comprised of fixed-rate products that were originated
between 2003 and 2006 and were originally rated AAA. The bonds issued in 2006,
during the height of the real estate market, appear to be experiencing the
highest delinquency and loss rates. During 2009, all of the Bank’s Alt-A
investments experienced rating declines and some experienced an increase in
delinquencies and default rates, and a weakening of the underlying credit
support. All of these bonds have some type of credit support tranche
that will absorb any loss prior to losses at the senior tranche held by the
Bank. At March 31, 2010, the bond ratings ranged from C to AAA, unchanged from
year-end 2009, and credit support levels ranged from .20% to
13.13%. The low end of the credit support range has declined slightly
from year-end 2009. The Bank monitors the performance of the Alt-A
investments on a regular basis and reviews delinquencies, default rates, credit
support levels and various cash flow stress test scenarios.
As a
result of the analysis on Alt-A MBS, it was determined that two bonds contained
losses that were considered other-than-temporary. These bonds had an unrealized
loss position of $689 thousand of which Management determined $255 thousand was
credit related and therefore, recorded an impairment charge of $255 thousand in
earnings during the first quarter. In determining the credit related loss,
Management considered 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 market for Alt-A MBS continues to be weak and Management believes that
this factor accounts for a portion of the unrealized losses that is not
attributable to credit issues. Management will continue to monitor these
securities and it is possible that additional write-downs may occur in 2010 if
current loss trends continue.
The
following table represents the cumulative credit losses on securities recognized
in earnings as of March 31, 2010.
|
|
Three
Months
|
|
|
|
Ended
|
|
|
|
March
31, 2010
|
|
Balance
of cumulative credit losses on securities, January 1, 2010
|
|
$ |
- |
|
|
|
|
|
|
Additions
for credit losses recorded which were not previously recognized as
components of earnings
|
|
|
255 |
|
|
|
|
|
|
Balance
of cumulative credit losses on securities, March 31, 2010
|
|
$ |
255 |
|
Equity
securities are assessed for “other-than-temporary” impairment based on the
length of time of impairment, dollar amount of the impairment, general market
conditions and the financial condition of each specific issue. Unrealized losses
on equity securities totaled $963 thousand, but have declined since year-end
2009 as the price of bank stocks has improved during the
quarter. Management’s review of the equity portfolio determined that
no other-than-temporary impairment charges were required.
The Bank
held $6.5 million of restricted stock at March 31, 2010. Except for
$30 thousand, this investment represents stock in the FHLB, which the Bank is
required to hold to be a member of FHLB, and is carried at cost of $100 per
share. In December 2008, FHLB announced it would suspend its cash
dividend and the repurchase of excess capital stock from its members due to
deterioration in its financial condition. At March 31, 2010, the Bank held
approximately $1.6 million in excess FHLB stock that it would not have been
required to hold prior to the suspension of the stock repurchase
program. 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 it 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:
Net loans
have increased $10.1 million since year-end. Loans secured by
residential real estate have increased by approximately $800 thousand. Consumer
mortgages and residential construction loans have declined slightly during the
first quarter. This decrease was offset by an increase in other residential real
estate loans that are primarily commercial purpose, but with residential
collateral. Commercial lending activity continues to be strong and
these balances have increased approximately $14.7 million since year-end.
However, the growth in commercial loans was partially offset by a decrease of
approximately $5.0 million in the consumer and home equity loan portfolios. The
decrease in the consumer loan portfolio is primarily from pay downs on home
equity loans, much of which was a result of refinancing with a first mortgage.
In addition, the Bank has an indirect lending portfolio of approximately $11
million. With the decision to exit this line of business in the first quarter of
2010, this portfolio will continue to run-down and negatively affect the balance
of the total consumer loan portfolio. The Bank will continue to service these
loans until they payoff.
The
following table presents a summary of loans outstanding, by primary collateral,
at:
|
|
|
|
|
|
|
|
Change
|
|
(Amounts
in thousands)
|
|
March
31, 2010
|
|
|
December
31, 2009
|
|
|
Amount
|
|
|
%
|
|
Residential
real estate, consumer mortgage
|
|
$ |
68,421 |
|
|
$ |
70,105 |
|
|
$ |
(1,684 |
) |
|
|
(2.4 |
) |
Residential
real estate, other
|
|
|
44,019 |
|
|
|
40,517 |
|
|
|
3,502 |
|
|
|
8.6 |
|
Residential
real estate construction
|
|
|
83,639 |
|
|
|
84,649 |
|
|
|
(1,010 |
) |
|
|
(1.2 |
) |
Home
equity loans and lines of credit
|
|
|
89,913 |
|
|
|
93,168 |
|
|
|
(3,255 |
) |
|
|
(3.5 |
) |
Commercial,
industrial and agricultural real estate
|
|
|
292,054 |
|
|
|
283,839 |
|
|
|
8,215 |
|
|
|
2.9 |
|
Commercial,
industrial and agricultural
|
|
|
150,478 |
|
|
|
144,035 |
|
|
|
6,443 |
|
|
|
4.5 |
|
Consumer
|
|
|
21,548 |
|
|
|
23,250 |
|
|
|
(1,702 |
) |
|
|
(7.3 |
) |
|
|
|
750,072 |
|
|
|
739,563 |
|
|
|
10,509 |
|
|
|
1.4 |
|
Less: Allowance
for loan losses
|
|
|
(9,349 |
) |
|
|
(8,937 |
) |
|
|
(412 |
) |
|
|
4.6 |
|
Net
Loans
|
|
$ |
740,723 |
|
|
$ |
730,626 |
|
|
$ |
10,097 |
|
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included
in the loan balances are the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unamortized deferred loan costs
|
|
$ |
556 |
|
|
$ |
589 |
|
|
|
|
|
|
|
|
|
Unamortized
discount on purchased loans
|
|
$ |
(268 |
) |
|
$ |
(286 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
pledged as collateral for borrowings and commitments from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
|
|
$ |
350 |
|
|
$ |
361 |
|
|
|
|
|
|
|
|
|
Federal
Reserve Bank
|
|
|
121 |
|
|
|
123 |
|
|
|
|
|
|
|
|
|
|
|
$ |
471 |
|
|
$ |
484 |
|
|
|
|
|
|
|
|
|
Loans
Quality:
Management
monitors loan asset quality (risk of loss from lending activities) by
continually reviewing four measurements: (1) watch list loans, (2) delinquent
loans (nonaccrual loans and loans past due 90 days or more), (3) foreclosed real
estate (commonly referred to as other real estate owned or “OREO”), and (4)
net-charge-offs. Management compares trends in these measurements
with the Corporation’s internally established targets, as well as its national
peer group’s average measurements.
Watch
list loans are adversely criticized/classified loans where borrowers are
experiencing weakening cash flow and may be paying loans with alternative
sources of cash, for example, savings or the sale of unrelated
assets. If this continues, the Corporation has an increasing
likelihood that it will need to liquidate collateral for
repayment. Watch list loans include loans that may or may not be
delinquent, and loans that may or may not be considered
impaired. Management emphasizes early identification and monitoring
of these loans in order for it to proactively minimize any risk of
loss. Impaired loans increased $5.4 million during the first quarter
due primarily to the addition of one credit ($3.4 million) in the commercial
construction industry.
Delinquent
loans are a result of borrowers’ cash flow and/or alternative sources of cash
being insufficient to pay loans. The Corporation’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 breaks down delinquent loans into two categories: (1) loans that are
past due 30-89 days, and (2) nonperforming loans that are comprised of loans
that are 90 days or more past due or loans for which Management has stopped
accruing interest. Nonaccruing loans generally represent Management’s
determination that collateral liquidation is not likely to fully repay both
interest and principal.
It is the
Corporation’s policy to evaluate the probable collectability of principal and
interest due under terms of loan contracts for all loans 90-days or more past
due or restructured loans. Further, it is the Corporation’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 Corporation 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.
Loan
quality, as measured by nonperforming loans, deteriorated slightly from year-end
2009 as nonperforming loans increased approximately $1 million during the
quarter. Consequently, the nonperforming loans and nonperforming assets ratios
increased slightly from the end of 2009. An increase in residential real estate
loans moving to nonaccrual status was the primary factor for the increase in
nonperforming loans. Consumers continue to struggle with the lingering effects
of the recession as overall residential mortgage delinquencies continue to
increase. Management expects this trend to continue during 2010. The remaining
composition of the nonaccrual loans has remained relatively unchanged from
year-end. There are four loans that account for the majority of the nonaccrual
balance. These loans include two residential real estate development loans ($4.0
million) one manufacturing loan ($3.9 million), one agricultural loan ($2.0
million), and all of these loans are secured by some type of real estate
collateral. In addition, Management has already recorded partial charge-offs on
these loans and specific reserves have been established against the remaining
balance for the estimated loss portion of the credits. Management has
been pursuing numerous workout options on these credits in an effort to minimize
any loss.
The
balance of loans 90 days or more past due and still accruing has remained
constant at $8.1 million during the quarter and the mix of loans has remained
nearly the same. Management continues to monitor the performance of these loans,
the value of any collateral and potential of risk of loss. Foreclosed real
estate declined during the quarter as the Bank disposed of one property during
the quarter. The foreclosed real estate is comprised of one residential real
estate property and several residential building lots.
The
following table presents a summary of nonperforming assets:
(Dollars
in thousands)
|
|
3/31/2010
|
|
|
12/31/2009
|
|
|
|
|
|
|
|
|
Nonaccrual
loans
|
|
|
|
|
|
|
Residential
real estate
|
|
$ |
1,065 |
|
|
$ |
345 |
|
Residential
real estate construction
|
|
|
4,031 |
|
|
|
4,040 |
|
Commercial,
industrial and agricultural real estate
|
|
|
5,855 |
|
|
|
5,654 |
|
Commercial,
industrial and agricultural
|
|
|
123 |
|
|
|
124 |
|
Consumer
|
|
|
16 |
|
|
|
30 |
|
Total
nonaccrual loans
|
|
$ |
11,090 |
|
|
$ |
10,193 |
|
|
|
|
|
|
|
|
|
|
Loans
past due 90 days or more and not included above
|
|
|
|
|
|
|
|
|
Residential
real estate
|
|
$ |
3,394 |
|
|
$ |
3,554 |
|
Residential
real estate construction
|
|
|
1,549 |
|
|
|
1,426 |
|
Commercial,
industrial and agricultural real estate
|
|
|
1,892 |
|
|
|
1,926 |
|
Commercial,
industrial and agricultural
|
|
|
1,080 |
|
|
|
960 |
|
Consumer
|
|
|
206 |
|
|
|
195 |
|
Total
loans past due 90 days or more and still accruing
|
|
|
8,121 |
|
|
|
8,061 |
|
Total
nonperforming loans
|
|
|
19,211 |
|
|
|
18,254 |
|
Repossessed
assets
|
|
|
2 |
|
|
|
18 |
|
Foreclosed
real estate
|
|
|
229 |
|
|
|
642 |
|
Total
nonperforming assets
|
|
$ |
19,442 |
|
|
$ |
18,914 |
|
|
|
|
|
|
|
|
|
|
Nonperforming
loans to total gross loans
|
|
|
2.56 |
% |
|
|
2.47 |
% |
Nonperforming
assets to total assets
|
|
|
2.00 |
% |
|
|
1.93 |
% |
Allowance
for loan losses to nonperforming loans
|
|
|
48.66 |
% |
|
|
48.96 |
% |
|
|
|
|
|
|
|
|
|
Impaired
loans
|
|
$ |
23,498 |
|
|
$ |
18,123 |
|
Impaired
loans with an allowance for loss
|
|
$ |
14,919 |
|
|
$ |
12,833 |
|
Allowance
for loss on impaired loans
|
|
$ |
5,138 |
|
|
$ |
4,890 |
|
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 marketable assets that, if sold, would generate sufficient sale proceeds
to repay a loan.
During
the first quarter of 2010, the Bank recorded $213 thousand net loan charge-offs
compared to $107 thousand in the first quarter of 2009. Total loans
charged-off during the quarter increased slightly when compared to the same
quarter last year; however, the amount of previously charged-off loans recovered
was less than the prior year. Therefore, the annualized net loan charge-off
ratio increased to .11%.
The
provision for loan losses was $625 thousand during the quarter, compared to $593
thousand in the prior year quarter. Management continues to add to the allowance
for loan losses (ALL) to account for continued loan growth and increasing
delinquency levels. The ALL as a percentage of loans increased to
1.25% from 1.21% at the December 31, 2009.
Management
performs a monthly evaluation of the adequacy of the allowance for loan
losses. 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, borrowers’ actual or perceived financial and
managerial strengths, the adequacy of the underlying collateral (if collateral
dependent) and other relevant factors. This evaluation is inherently subjective,
as it requires 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.
The analysis has two components,
specific and general allocations. Expected cash flow or collateral
values discounted for market conditions and selling costs are used to establish
specific allocations. The Bank’s historical loan loss experience and
other qualitative factors derived from economic and market conditions are used
to establish general allocations for the remainder of the
portfolio. Management monitors the adequacy of the allowance for loan
losses on an ongoing basis and reports its adequacy assessment monthly to the
Board of Directors, and quarterly to the Audit Committee. Management believes
that the ALL at March 31, 2010 is adequate.
The
following table presents an analysis of the allowance for loan
losses.
|
|
|
|
|
|
|
|
Twelve
Months
|
|
|
|
Three
Months Ended
|
|
|
Ended
|
|
|
|
March 31
|
|
|
12/31/2009
|
|
(Dollars
in thousands)
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
$ |
8,937 |
|
|
$ |
7,357 |
|
|
$ |
7,357 |
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
real estate
|
|
|
- |
|
|
|
- |
|
|
|
(283 |
) |
Residential
Real Estate Construction
|
|
|
- |
|
|
|
- |
|
|
|
(724 |
) |
Commercial,
Industrial and Agriculturalreal estate
|
|
|
(115 |
) |
|
|
- |
|
|
|
(63 |
) |
Commercial,
Industrial and Agricultural
|
|
|
(86 |
) |
|
|
(29 |
) |
|
|
(567 |
) |
Consumer
|
|
|
(93 |
) |
|
|
(206 |
) |
|
|
(492 |
) |
Total
charge-offs
|
|
|
(294 |
) |
|
|
(235 |
) |
|
|
(2,129 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
real estate
|
|
|
5 |
|
|
|
9 |
|
|
|
166 |
|
Residential
Real Estate Construction
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Commercial,
Industrial and Agricultural real estate
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Commercial,
Industrial and Agricultural
|
|
|
35 |
|
|
|
56 |
|
|
|
62 |
|
Consumer
|
|
|
41 |
|
|
|
63 |
|
|
|
43 |
|
Total
recoveries
|
|
|
81 |
|
|
|
128 |
|
|
|
271 |
|
Net
charge-offs
|
|
|
(213 |
) |
|
|
(107 |
) |
|
|
(1,858 |
) |
Provision
for loan losses
|
|
|
625 |
|
|
|
593 |
|
|
|
3,438 |
|
Balance
at end of year
|
|
$ |
9,349 |
|
|
$ |
7,843 |
|
|
$ |
8,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized
net loans charged-off as a percentage of average loans
|
|
|
0.11 |
% |
|
|
0.06 |
% |
|
|
0.26 |
% |
Net
loans charged-off as a percentage of the provision for loan
losses
|
|
|
34.08 |
% |
|
|
18.04 |
% |
|
|
54.04 |
% |
Allowance
as a percentage of loans
|
|
|
1.25 |
% |
|
|
1.13 |
% |
|
|
1.21 |
% |
Other
Assets:
Other
intangible assets are comprised of a core deposit intangible and a customer list
and are being amortized over the estimated useful life of the
asset.
Deposits:
Total
deposits decreased $11.7 million during the first three months of 2010 to $726.7
million. Non-interest bearing deposits increased $11.4 million, while savings
and interest-bearing checking deposits increased $12.9 million and time deposits
decreased $36.0 million. The majority of the increase in non-interest bearing
accounts came in retail accounts ($5 million) and commercial checking accounts
($4 million). The Bank’s Money Management product increased
$9.6 million due in part to a promotion in selected markets and higher consumer
savings levels. Retail time deposits decreased since year-end, as
customers moved funds to more liquid accounts, while brokered CDs declined
approximately $24 million due to short-term funding maturing in the first
quarter of 2010. As of March 31, 2010, the Bank had $25.2 million in
CDARS reciprocal deposits included in brokered time deposits.
The
following table presents a summary of deposits outstanding at:
|
|
|
|
|
|
|
|
Change
|
|
(Amounts
in thousands)
|
|
3/31/2010
|
|
|
12/31/2009
|
|
|
Amount
|
|
|
%
|
|
Demand,
noninterest-bearing
|
|
$ |
89,092 |
|
|
$ |
77,675 |
|
|
$ |
11,417 |
|
|
|
14.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
checking
|
|
|
98,166 |
|
|
|
97,636 |
|
|
|
530 |
|
|
|
0.5 |
|
Savings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market accounts
|
|
|
254,024 |
|
|
|
243,600 |
|
|
|
10,424 |
|
|
|
4.3 |
|
Passbook
and statement savings
|
|
|
48,913 |
|
|
|
46,986 |
|
|
|
1,927 |
|
|
|
4.1 |
|
Total
savings and interest checking
|
|
|
401,103 |
|
|
|
388,222 |
|
|
|
12,881 |
|
|
|
3.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time
deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
than $100,000
|
|
|
138,254 |
|
|
|
144,762 |
|
|
|
(6,508 |
) |
|
|
(4.5 |
) |
$100,000
and over
|
|
|
57,635 |
|
|
|
62,576 |
|
|
|
(4,941 |
) |
|
|
(7.9 |
) |
Brokered
time deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
than $100,000
|
|
|
16,373 |
|
|
|
21,226 |
|
|
|
(4,853 |
) |
|
|
(22.9 |
) |
$100,000
and over
|
|
|
24,223 |
|
|
|
43,904 |
|
|
|
(19,681 |
) |
|
|
(44.8 |
) |
Total
time deposits
|
|
|
236,485 |
|
|
|
272,468 |
|
|
|
(35,983 |
) |
|
|
(13.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
deposits
|
|
$ |
726,680 |
|
|
$ |
738,365 |
|
|
$ |
(11,685 |
) |
|
|
(1.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overdrawn
deposit accounts reclassified as loan balances
|
|
$ |
118 |
|
|
$ |
183 |
|
|
|
|
|
|
|
|
|
Borrowings:
The Repo
balance increased $3.8 million from year-end, while long-term debt from the FHLB
decreased $444 thousand due to scheduled pay downs in the first quarter of
2010.
Shareholders’
Equity:
Total shareholders’ equity increased
$1.9 million to $80.6 million at March 31, 2010, compared to $78.8 million at
the end of 2009. The increase in retained earnings from the
Corporation’s net income of $2.0 million was partially offset by the cash
dividend of $1.0 million. The increase of $721 thousand in accumulated other
comprehensive loss is the result of an improvement in the market value of
investment securities available for sale. The Corporation’s dividend
payout ratio exceeds the first quarter 2009 ratio, but is less than the total
payout ratio of 63% in 2009. As capital levels become increasingly
important during this difficult economic period, the Corporation decided to
maintain its current dividend rate for the first and second quarter of 2010 as a
sign of confidence to its shareholders. Management views the dividend payout as
a critical piece of its capital management plan. Additionally, the
Corporation is currently exploring other sources of capital as part of its
capital management plan for the Corporation and the Bank. The
Corporation did not repurchase any shares of the Corporation’s common stock
during the first three months of 2010.
Capital adequacy is currently defined
by regulatory agencies through the use of several minimum required
ratios. At March 31, 2010, the Corporation was well capitalized as
defined by the banking regulatory agencies. Regulatory capital ratios
for the Corporation and the Bank are shown below:
|
|
|
|
|
|
|
|
Regulatory
Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
Well
Capitalized
|
|
|
|
March
31, 2010
|
|
|
December
31, 2009
|
|
|
Minimum
|
|
|
Minimum
|
|
Total
Risk Based Capital Ratio (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Franklin
Financial Services Corporation
|
|
|
11.08 |
% |
|
|
10.89 |
% |
|
|
8.00 |
% |
|
|
n/a |
|
Farmers
& Merchants Trust Company
|
|
|
10.63 |
% |
|
|
10.45 |
% |
|
|
8.00 |
% |
|
|
10.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 Capital Ratio (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franklin
Financial Services Corporation
|
|
|
9.84 |
% |
|
|
9.69 |
% |
|
|
4.00 |
% |
|
|
n/a |
|
Farmers
& Merchants Trust Company
|
|
|
9.38 |
% |
|
|
9.25 |
% |
|
|
4.00 |
% |
|
|
6.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage
Ratio (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franklin
Financial Services Corporation
|
|
|
7.65 |
% |
|
|
7.50 |
% |
|
|
4.00 |
% |
|
|
n/a |
|
Farmers
& Merchants Trust Company
|
|
|
7.27 |
% |
|
|
7.13 |
% |
|
|
4.00 |
% |
|
|
5.00 |
% |
(1)Total
risk-based capital / total risk-weighted assets, (2)Tier 1 capital / total
risk-weighted assets, (3) Tier 1 capital / average quarterly assets
Economy
The Corporation operates in Franklin,
Cumberland, Fulton and Huntingdon Counties, Pennsylvania. The general economic
conditions in this market have slightly improved since year-end and unemployment
rates are vastly different from county to county. Franklin County’s
unemployment rate remained steady at 8.8%, Cumberland County’s rate increased
slightly to 7.4%, while Fulton County’s rate decreased to 12.6% at March 31,
2010. These rates compare to the Pennsylvania state average of 9.0%.
Management believes that the Bank’s primary market area continues to be well
suited for growth as the national recession eases. The
Corporation is not overly dependent on any one industry within its market area
and the industries located in its market area are well diversified.
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. The Fed
continued to hold the fed funds target rate steady at .25% in the first quarter
of 2010. The effort by the Federal Reserve to reduce short-term rates
has had a negative effect on the Corporation’s net interest
margin. If rates continue to remain low, it is unlikely that the net
interest margin will improve significantly in 2010.
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 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 investments 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, 2010, the Bank had approximately $123 million
of its investment portfolio pledged as collateral. Another source of
liquidity for the Bank is a line of credit with the FHLB. The FHLB
system has always been a major source of funding for community banks. The
capital level of the FHLB, and the entire FHLB system, has been strained due to
the declining value of mortgage related assets. The FHLB has implemented steps
to improve its capital position that included a suspension of its dividend and
an end to its practice of redeeming members’ stock. Both of these actions are
not favorable to the Bank. There are no indicators that lead the Bank to believe
the FHLB will discontinue its lending function. If that 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. Another action that may be
considered by FHLB to increase its capital is to have a capital call on its
member banks. This would require the member banks to invest more capital into
the FHLB when most banks would prefer not make such an investment. At
March 31, 2010, the Bank had approximately $95 million available on this line of
credit.
In
addition, the Bank has $26 million in unsecured lines of credit at three
correspondent banks and approximately $80 million in funding available at the
Federal Reserve Discount Window. The Bank also has the ability to
access other funding sources including wholesale borrowings and brokered
CDs.
Off
Balance Sheet Commitments and Contractual Obligations
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
$222.9 million and $219.1 million, respectively, at March 31, 2010 and December
31, 2009.
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
2009 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,
2010. For more information on market risk refer to the Corporation’s 2009 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, 2010, 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.
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.
Changes
in Internal Controls
There
were no changes during the three months ended March 31, 2010 in the
Corporation’s internal control over financial reporting which materially
affected, or which are reasonably likely to affect, the Corporation’s internal
control over financial reporting.
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. However, in management’s opinion,
there are no proceedings pending to which the Corporation is a party or to which
our property is subject, which, if determined adversely to the Corporation,
would be material in relation to our shareholders’ equity or financial
condition. In addition, no material proceedings are pending or are
known to be threatened or contemplated against us by governmental authorities or
other parties.
Item
1A. Risk
Factors
There were no material changes in the
Corporation’s risk factors during the three months ended March 31, 2010. For
more information, refer to the Corporation’s 2009 Annual Report on Form
10-K.
Item
2. Unregistered Sales
of Equity Securities and Use of Proceeds
The
Corporation announced a stock repurchase plan on July 9, 2009 to repurchase up
to 100,000 shares of the Corporation’s common stock over a 12 month time period.
As of March 31, 2010, 4,179 shares have been purchased under this plan in 2009.
There were no shares purchased in 2010.
Item
3. Defaults by the Company on
its Senior Securities
None
Item
4. Removed and
Reserved
Item
5. Other
Information
None
Item
6. Exhibits
Exhibits
31.1 Rule
13a – 14(a)/15d-14(a) Certifications – Chief Executive Officer
31.2 Rule
13a – 14(a)/15d-14(a) Certifications – Chief Financial Officer
32.1
Section 1350 Certifications – Chief Executive Officer
32.2
Section 1350 Certifications – Chief Financial Officer
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 6, 2010
|
|
|
/s/ William E. Snell,
Jr.
|
|
|
|
William
E. Snell, Jr.
|
|
|
|
President
and Chief Executive Officer
|
|
|
|
|
May 6, 2010
|
|
|
/s/ Mark R. Hollar
|
|
|
|
Mark
R. Hollar
|
|
|
|
Treasurer
and Chief Financial
Officer
|