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 June 30, 2010,
OR
o 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
o
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 o No
o
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 o Accelerated
filer x Non-accelerated
filer o Smaller
reporting company o
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Act) Yeso No
x
There
were 3,888,866 outstanding shares of the Registrant’s common stock as of July
30, 2010.
INDEX
Part
I - FINANCIAL INFORMATION
|
|
3
|
|
|
|
Item
1 - Financial Statements
|
|
3
|
|
|
|
Consolidated
Balance Sheets as of June 30, 2010 and December 31, 2009
(unaudited)
|
|
3
|
|
|
|
Consolidated
Statements of Income for the Three and Six Months ended
|
|
|
June
30, 2010 and 2009 (unaudited)
|
|
4
|
|
|
|
Consolidated
Statements of Changes in Shareholders’ Equity for the
|
|
|
Six
Months ended June 30, 2010 and 2009 (unaudited)
|
|
5
|
|
|
|
Consolidated
Statements of Cash Flows for the Six Months ended
|
|
|
June
30, 2010 and 2009 (unaudited)
|
|
6
|
|
|
|
Notes
to Consolidated Financial Statements (unaudited)
|
|
7
|
|
|
|
Item
2 - Management’s Discussion and Analysis of Results
of Operations and Financial Condition
|
|
21
|
|
|
|
Item
3 – Quantitative and Qualitative Disclosures about Market
Risk
|
|
45
|
|
|
|
Item
4 – Controls and Procedures
|
|
45
|
|
|
|
Part
II - OTHER INFORMATION
|
|
46
|
|
|
|
Item
1 – Legal Proceedings
|
|
46
|
|
|
|
Item
1A – Risk Factors
|
|
46
|
|
|
|
Item
2 – Unregistered Sales of Equity Securities and Use of
Proceeds
|
|
46
|
|
|
|
Item
3 – Defaults by the Company on its Senior Securities
|
|
46
|
|
|
|
Item
4 – Removed and Reserved
|
|
46
|
|
|
|
Item
5 – Other Information
|
|
46
|
|
|
|
Item
6 – Exhibits
|
|
46
|
|
|
|
SIGNATURE
PAGE
|
|
47
|
|
|
|
EXHIBITS
|
|
|
Part
I FINANCIAL INFORMATION
Item 1 Financial
Statements
Consolidated
Balance Sheets
(Amounts
in thousands, except share and per share data)
(unaudited)
|
|
June 30
|
|
|
December 31
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$ |
16,881 |
|
|
$ |
14,336 |
|
Interest-bearing
deposits in other banks
|
|
|
20,130 |
|
|
|
18,912 |
|
Total
cash and cash equivalents
|
|
|
37,011 |
|
|
|
33,248 |
|
Investment
securities available for sale
|
|
|
128,347 |
|
|
|
143,288 |
|
Restricted
stock
|
|
|
6,482 |
|
|
|
6,482 |
|
Loans
|
|
|
758,411 |
|
|
|
739,563 |
|
Allowance
for loan losses
|
|
|
(9,751 |
) |
|
|
(8,937 |
) |
Net
Loans
|
|
|
748,660 |
|
|
|
730,626 |
|
Premises
and equipment, net
|
|
|
16,282 |
|
|
|
15,741 |
|
Bank
owned life insurance
|
|
|
19,251 |
|
|
|
18,919 |
|
Goodwill
|
|
|
9,016 |
|
|
|
9,159 |
|
Other
intangible assets
|
|
|
2,232 |
|
|
|
2,461 |
|
Other
assets
|
|
|
19,324 |
|
|
|
19,449 |
|
Total
assets
|
|
$ |
986,605 |
|
|
$ |
979,373 |
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
Demand
(non-interest bearing)
|
|
$ |
90,324 |
|
|
$ |
77,675 |
|
Savings
and interest-bearing checking
|
|
|
421,671 |
|
|
|
388,222 |
|
Time
|
|
|
218,362 |
|
|
|
272,468 |
|
Total
Deposits
|
|
|
730,357 |
|
|
|
738,365 |
|
Securities
sold under agreements to repurchase
|
|
|
68,622 |
|
|
|
55,855 |
|
Long-term
debt
|
|
|
93,796 |
|
|
|
94,688 |
|
Other
liabilities
|
|
|
12,673 |
|
|
|
11,699 |
|
Total
liabilities
|
|
|
905,448 |
|
|
|
900,607 |
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity
|
|
|
|
|
|
|
|
|
Common
stock $1 par value per share, 15,000,000 shares authorized
|
|
|
|
|
|
|
|
|
with
4,298,904 shares issued, and 3,888,368 shares and 3,863,066
shares
|
|
|
|
|
|
|
|
|
outstanding
at June 30, 2010 and December 31, 2009, respectively
|
|
|
4,299 |
|
|
|
4,299 |
|
Capital
stock without par value, 5,000,000 shares authorized
|
|
|
|
|
|
|
|
|
with
no shares issued or outstanding
|
|
|
- |
|
|
|
- |
|
Additional
paid-in capital
|
|
|
32,806 |
|
|
|
32,832 |
|
Retained
earnings
|
|
|
56,610 |
|
|
|
54,566 |
|
Accumulated
other comprehensive loss
|
|
|
(5,217 |
) |
|
|
(5,138 |
) |
Treasury
stock, 410,536 shares and 435,838 shares at cost at June
30,
|
|
|
|
|
|
|
|
|
2010
and December 31, 2009, respectively
|
|
|
(7,341 |
) |
|
|
(7,793 |
) |
Total
shareholders' equity
|
|
|
81,157 |
|
|
|
78,766 |
|
Total
liabilities and shareholders' equity
|
|
$ |
986,605 |
|
|
$ |
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
|
|
|
For the Six Months Ended
|
|
|
|
June 30
|
|
|
June 30
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans,
including fees
|
|
$ |
9,691 |
|
|
$ |
9,463 |
|
|
$ |
19,242 |
|
|
$ |
18,655 |
|
Interest
and dividends on investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
interest
|
|
|
758 |
|
|
|
1,017 |
|
|
|
1,628 |
|
|
|
2,106 |
|
Tax
exempt interest
|
|
|
397 |
|
|
|
463 |
|
|
|
869 |
|
|
|
937 |
|
Dividend
income
|
|
|
10 |
|
|
|
39 |
|
|
|
27 |
|
|
|
96 |
|
Federal
funds sold
|
|
|
- |
|
|
|
6 |
|
|
|
- |
|
|
|
6 |
|
Deposits
and obligations of other banks
|
|
|
10 |
|
|
|
1 |
|
|
|
16 |
|
|
|
1 |
|
Total
interest income
|
|
|
10,866 |
|
|
|
10,989 |
|
|
|
21,782 |
|
|
|
21,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
2,204 |
|
|
|
2,535 |
|
|
|
4,563 |
|
|
|
5,018 |
|
Securities
sold under agreements to repurchase
|
|
|
40 |
|
|
|
45 |
|
|
|
77 |
|
|
|
90 |
|
Short-term
borrowings
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
11 |
|
Long-term
debt
|
|
|
977 |
|
|
|
1,050 |
|
|
|
1,951 |
|
|
|
2,105 |
|
Total
interest expense
|
|
|
3,221 |
|
|
|
3,630 |
|
|
|
6,591 |
|
|
|
7,224 |
|
Net
interest income
|
|
|
7,645 |
|
|
|
7,359 |
|
|
|
15,191 |
|
|
|
14,577 |
|
Provision
for loan losses
|
|
|
625 |
|
|
|
426 |
|
|
|
1,250 |
|
|
|
1,019 |
|
Net
interest income after provision for loan losses
|
|
|
7,020 |
|
|
|
6,933 |
|
|
|
13,941 |
|
|
|
13,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
and trust services fees
|
|
|
1,007 |
|
|
|
862 |
|
|
|
2,024 |
|
|
|
1,757 |
|
Loan
service charges
|
|
|
272 |
|
|
|
378 |
|
|
|
469 |
|
|
|
653 |
|
Mortgage
banking activities
|
|
|
11 |
|
|
|
118 |
|
|
|
81 |
|
|
|
91 |
|
Deposit
service charges and fees
|
|
|
593 |
|
|
|
653 |
|
|
|
1,171 |
|
|
|
1,232 |
|
Other
service charges and fees
|
|
|
351 |
|
|
|
339 |
|
|
|
677 |
|
|
|
641 |
|
Increase
in cash surrender value of life insurance
|
|
|
166 |
|
|
|
160 |
|
|
|
332 |
|
|
|
324 |
|
Other
|
|
|
22 |
|
|
|
29 |
|
|
|
70 |
|
|
|
325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTTI
losses on securities
|
|
|
- |
|
|
|
(212 |
) |
|
|
(689 |
) |
|
|
(421 |
) |
Loss
recognized in other comprehensive income (before taxes)
|
|
|
- |
|
|
|
- |
|
|
|
(434 |
) |
|
|
- |
|
Net
OTTI losses recognized in earnings
|
|
|
- |
|
|
|
(212 |
) |
|
|
(255 |
) |
|
|
(421 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
gains, net
|
|
|
20 |
|
|
|
42 |
|
|
|
268 |
|
|
|
54 |
|
Total
noninterest income
|
|
|
2,442 |
|
|
|
2,369 |
|
|
|
4,837 |
|
|
|
4,656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and benefits
|
|
|
3,322 |
|
|
|
3,126 |
|
|
|
6,762 |
|
|
|
6,279 |
|
Net
occupancy expense
|
|
|
496 |
|
|
|
476 |
|
|
|
1,019 |
|
|
|
956 |
|
Furniture
and equipment expense
|
|
|
191 |
|
|
|
213 |
|
|
|
382 |
|
|
|
429 |
|
Advertising
|
|
|
343 |
|
|
|
418 |
|
|
|
655 |
|
|
|
734 |
|
Legal
and professional fees
|
|
|
350 |
|
|
|
293 |
|
|
|
745 |
|
|
|
545 |
|
Data
processing
|
|
|
502 |
|
|
|
435 |
|
|
|
879 |
|
|
|
836 |
|
Pennsylvania
bank shares tax
|
|
|
152 |
|
|
|
143 |
|
|
|
308 |
|
|
|
288 |
|
Intangible
amortization
|
|
|
114 |
|
|
|
117 |
|
|
|
229 |
|
|
|
234 |
|
FDIC
insurance
|
|
|
288 |
|
|
|
683 |
|
|
|
580 |
|
|
|
914 |
|
Other
|
|
|
767 |
|
|
|
1,062 |
|
|
|
1,627 |
|
|
|
1,900 |
|
Total
noninterest expense
|
|
|
6,525 |
|
|
|
6,966 |
|
|
|
13,186 |
|
|
|
13,115 |
|
Income
before federal income taxes
|
|
|
2,937 |
|
|
|
2,336 |
|
|
|
5,592 |
|
|
|
5,099 |
|
Federal
income tax expense
|
|
|
778 |
|
|
|
697 |
|
|
|
1,459 |
|
|
|
1,359 |
|
Net
income
|
|
$ |
2,159 |
|
|
$ |
1,639 |
|
|
$ |
4,133 |
|
|
$ |
3,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$ |
0.56 |
|
|
$ |
0.43 |
|
|
$ |
1.07 |
|
|
$ |
0.98 |
|
Diluted
earnings per share
|
|
$ |
0.56 |
|
|
$ |
0.43 |
|
|
$ |
1.07 |
|
|
$ |
0.98 |
|
Cash
dividends declared per share
|
|
$ |
0.27 |
|
|
$ |
0.27 |
|
|
$ |
0.54 |
|
|
$ |
0.54 |
|
The
accompanying notes are an integral part of these financial
statements.
For
the Six Months Ended June 30, 2010 and 2009
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
|
|
(Dollars
in thousands, except share and 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
|
|
|
- |
|
|
|
- |
|
|
|
3,740 |
|
|
|
- |
|
|
|
- |
|
|
|
3,740 |
|
Unrealized
gain on securities, net of reclassification adjustments and
taxes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
114 |
|
|
|
- |
|
|
|
114 |
|
Unrealized
gain on hedging activities, net of reclassification adjustments and
taxes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
815 |
|
|
|
- |
|
|
|
815 |
|
Total
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
4,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends declared, $.54 per share
|
|
|
- |
|
|
|
- |
|
|
|
(2,068 |
) |
|
|
- |
|
|
|
- |
|
|
|
(2,068 |
) |
Acquisition
of 5,640 shares of treasury stock
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(93 |
) |
|
|
(93 |
) |
Treasury
shares issued to dividend reinvestment plan: 23,496
shares
|
|
|
- |
|
|
|
(50 |
) |
|
|
- |
|
|
|
- |
|
|
|
420 |
|
|
|
370 |
|
Stock
option compensation
|
|
|
- |
|
|
|
20 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
20 |
|
Balance
at June 30, 2009
|
|
$ |
4,299 |
|
|
$ |
32,853 |
|
|
$ |
53,798 |
|
|
$ |
(6,828 |
) |
|
$ |
(8,165 |
) |
|
$ |
75,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2009
|
|
$ |
4,299 |
|
|
$ |
32,832 |
|
|
$ |
54,566 |
|
|
$ |
(5,138 |
) |
|
$ |
(7,793 |
) |
|
$ |
78,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
4,133 |
|
|
|
- |
|
|
|
- |
|
|
|
4,133 |
|
Unrealized
gain on securities, net of reclassification adjustments and
taxes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
482 |
|
|
|
- |
|
|
|
482 |
|
Unrealized
loss on hedging activities, net of reclassification adjustments and
taxes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(435 |
) |
|
|
- |
|
|
|
(435 |
) |
Pension
adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(126 |
) |
|
|
|
|
|
|
(126 |
) |
Total
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
4,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends declared, $.54 per share
|
|
|
- |
|
|
|
- |
|
|
|
(2,089 |
) |
|
|
- |
|
|
|
- |
|
|
|
(2,089 |
) |
Treasury
shares issued under stock option plans: 1,051 shares
|
|
|
- |
|
|
|
(2 |
) |
|
|
- |
|
|
|
- |
|
|
|
18 |
|
|
|
16 |
|
Treasury
shares issued to dividend reinvestment plan: 24,251 shares
|
|
|
- |
|
|
|
(24 |
) |
|
|
- |
|
|
|
- |
|
|
|
434 |
|
|
|
410 |
|
Balance
at June 30, 2010
|
|
$ |
4,299 |
|
|
$ |
32,806 |
|
|
$ |
56,610 |
|
|
$ |
(5,217 |
) |
|
$ |
(7,341 |
) |
|
$ |
81,157 |
|
The
accompanying notes are an integral part of these financial
statements.
Consolidated
Statements of Cash Flows
(unaudited)
|
|
For the Six Months Ended June 30
|
|
|
|
2010
|
|
|
2009
|
|
(Amounts
in thousands)
|
|
|
|
|
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
Net
income
|
|
$ |
4,133 |
|
|
$ |
3,740 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
672 |
|
|
|
717 |
|
Net
amortization of loans and investment securities
|
|
|
152 |
|
|
|
46 |
|
Stock
option compensation expense
|
|
|
- |
|
|
|
20 |
|
Amortization
and net change in mortgage servicing rights valuation
|
|
|
73 |
|
|
|
71 |
|
Amortization
of intangibles
|
|
|
229 |
|
|
|
234 |
|
Provision
for loan losses
|
|
|
1,250 |
|
|
|
1,019 |
|
Net
realized gains on sales of securities
|
|
|
(268 |
) |
|
|
(54 |
) |
OTTI
losses on securities
|
|
|
255 |
|
|
|
421 |
|
Loans
originated for sale
|
|
|
(920 |
) |
|
|
- |
|
Proceeds
from sale of loans
|
|
|
952 |
|
|
|
- |
|
Gain
on sales of loans
|
|
|
(32 |
) |
|
|
- |
|
(Gain)
loss on sale or disposal of premises and equipment
|
|
|
(4 |
) |
|
|
118 |
|
Net
gain on sale or disposal of other real estate/other repossessed
assets
|
|
|
- |
|
|
|
(6 |
) |
Increase
in cash surrender value of life insurance
|
|
|
(332 |
) |
|
|
(324 |
) |
Gain
from surrender of life insurance policy
|
|
|
- |
|
|
|
(276 |
) |
Contribution
to pension plan
|
|
|
(525 |
) |
|
|
(87 |
) |
Decrease
in interest receivable and other assets
|
|
|
239 |
|
|
|
841 |
|
Increase
in interest payable and other liabilities
|
|
|
130 |
|
|
|
389 |
|
Other,
net
|
|
|
90 |
|
|
|
102 |
|
Net
cash provided by operating activities
|
|
|
6,094 |
|
|
|
6,971 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
Proceeds
from sales of investment securities available for sale
|
|
|
6,378 |
|
|
|
7,364 |
|
Proceeds
from maturities and paydowns of investment securities available for
sale
|
|
|
15,341 |
|
|
|
13,976 |
|
Purchase
of investment securities available for sale
|
|
|
(6,081 |
) |
|
|
(21,132 |
) |
Net
increase in loans
|
|
|
(19,447 |
) |
|
|
(28,375 |
) |
Proceeds
from sale of other real estate/other repossessed assets
|
|
|
440 |
|
|
|
33 |
|
Proceeds
from surrender of life insurance policy
|
|
|
- |
|
|
|
600 |
|
Capital
expenditures
|
|
|
(1,166 |
) |
|
|
(896 |
) |
Net
cash used in investing activities
|
|
|
(4,535 |
) |
|
|
(28,430 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
Net
increase in demand deposits, interesting-bearing checking and savings
accounts
|
|
|
46,098 |
|
|
|
17,021 |
|
Net
(decrease) increase in time deposits
|
|
|
(54,106 |
) |
|
|
65,631 |
|
Net
increase (decrease) in short-term borrowings
|
|
|
12,767 |
|
|
|
(18,146 |
) |
Long-term
debt payments
|
|
|
(892 |
) |
|
|
(2,960 |
) |
Long-term
debt advances
|
|
|
- |
|
|
|
260 |
|
Dividends
paid
|
|
|
(2,089 |
) |
|
|
(2,068 |
) |
Common
stock issued to dividend reinvestment plan
|
|
|
410 |
|
|
|
370 |
|
Common
stock issued under stock option plans
|
|
|
16 |
|
|
|
- |
|
Purchase
of treasury shares
|
|
|
- |
|
|
|
(93 |
) |
Net
cash provided by financing activities
|
|
|
2,204 |
|
|
|
60,015 |
|
Increase
in cash and cash equivalents
|
|
|
3,763 |
|
|
|
38,556 |
|
Cash
and cash equivalents as of January 1
|
|
|
33,248 |
|
|
|
16,713 |
|
Cash
and cash equivalents as of June 30
|
|
$ |
37,011 |
|
|
$ |
55,269 |
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information
|
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
Interest
on deposits and other borrowed funds
|
|
$ |
6,874 |
|
|
$ |
7,365 |
|
Income
taxes
|
|
$ |
2,602 |
|
|
$ |
1,494 |
|
Noncash
Activities
|
|
|
|
|
|
|
|
|
Loans
transferred to Other Real Estate
|
|
$ |
- |
|
|
$ |
413 |
|
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 June 30, 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 States of
America (“GAAP”) have been condensed or omitted. It is suggested that
these consolidated financial statements be read in conjunction with the audited
consolidated financial statements and notes thereto included in the
Corporation’s 2009 Annual Report on Form 10-K. The consolidated
results of operations for the period ended June 30, 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
|
|
|
For the Six Months Ended
|
|
|
|
June 30
|
|
|
June 30
|
|
(In
thousands, except per share data)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Weighted
average shares outstanding (basic)
|
|
|
3,880 |
|
|
|
3,837 |
|
|
|
3,874 |
|
|
|
3,832 |
|
Impact
of common stock equivalents
|
|
|
3 |
|
|
|
- |
|
|
|
2 |
|
|
|
- |
|
Weighted
average shares outstanding (diluted)
|
|
|
3,883 |
|
|
|
3,837 |
|
|
|
3,876 |
|
|
|
3,832 |
|
Anti-dilutive
options excluded from the calculation
|
|
|
76 |
|
|
|
109 |
|
|
|
76 |
|
|
|
110 |
|
Net
income
|
|
$ |
2,159 |
|
|
$ |
1,639 |
|
|
$ |
4,133 |
|
|
$ |
3,740 |
|
Basic
earnings per share
|
|
$ |
0.56 |
|
|
$ |
0.43 |
|
|
$ |
1.07 |
|
|
$ |
0.98 |
|
Diluted
earnings per share
|
|
$ |
0.56 |
|
|
$ |
0.43 |
|
|
$ |
1.07 |
|
|
$ |
0.98 |
|
Note
2 – Recent Accounting Pronouncements
Receivables and the
Allowances for Credit Losses. In July 2010, the FASB issued Accounting
Standards Update No. (ASU) 2010-20, Receivables (Topic
310): Disclosures about the Credit Quality of Financing Receivables
and the Allowances for Credit Losses. This Update requires
expanded disclosures to help financial statement users understand the nature of
credit risks inherent in a creditor’s portfolio of financing receivables; how
that risk is analyzed and assessed in arriving at the allowance for credit
losses; and the changes, and reasons for those changes, in both the receivables
and the allowance for credit losses. The disclosures should be prepared on a
disaggregated basis and provide a roll-forward schedule of the allowance for
credit losses and detailed information on financing receivables including, among
other things, recorded balances, nonaccrual status, impairments, credit quality
indicators, details for troubled debt restructurings and an aging of past due
financing receivables. Disclosures required as of the end of a
reporting period are effective for interim and annual reporting periods ending
after December 15, 2010. Disclosures required for activity occurring
during a reporting period are effective for interim and annual reporting periods
beginning after December 15, 2010. This Update is not expected to
have a material impact on the Corporation’s financial position or consolidated
financial statements.
Fair Value Measurements and
Disclosures. The FASB has issued ASU
2010-06, Fair Value
Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value
Measurements. This ASU requires some new disclosures and clarifies some
existing disclosure requirements about fair value measurement as set forth in
Codification Subtopic 820-10. The FASB’s objective is to improve these
disclosures and, thus, increase the transparency in financial reporting.
Specifically, ASU 2010-06 amends Codification Subtopic 820-10 to now require a
reporting entity to disclose separately the amounts of significant transfers in
and out of Level 1 and Level 2 fair value measurements and describe the reasons
for the transfers; and in the reconciliation for fair value measurements using
significant unobservable inputs, a reporting entity should present separately
information about purchases, sales, issuances, and settlements. ASU
2010-06 is effective for interim and annual reporting periods beginning after
December 15, 2009, except for the disclosures about purchases, sales, issuances,
and settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years. The
Corporation early adopted ASU 2010-09 effective with the quarter end June 30,
2010.
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 comprehensive income and related tax effects are as
follows:
|
|
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
(Amounts in thousands)
|
|
June 30
|
|
|
June 30
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Net
Income
|
|
$ |
2,159 |
|
|
$ |
1,639 |
|
|
$ |
4,133 |
|
|
$ |
3,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
(losses) gains arising during the period
|
|
|
(690 |
) |
|
|
1,882 |
|
|
|
744 |
|
|
|
(196 |
) |
Reclassification
adjustment for losses (gains) included in net income
|
|
|
(20 |
) |
|
|
170 |
|
|
|
(13 |
) |
|
|
367 |
|
Net
unrealized (losses) gains
|
|
|
(710 |
) |
|
|
2,052 |
|
|
|
731 |
|
|
|
171 |
|
Tax
effect
|
|
|
241 |
|
|
|
(698 |
) |
|
|
(249 |
) |
|
|
(57 |
) |
Net
of tax amount
|
|
|
(469 |
) |
|
|
1,354 |
|
|
|
482 |
|
|
|
114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
(losses) gains arising during the period
|
|
|
(677 |
) |
|
|
777 |
|
|
|
(1,015 |
) |
|
|
885 |
|
Reclassification
adjustment for losses included in net income
|
|
|
174 |
|
|
|
177 |
|
|
|
354 |
|
|
|
350 |
|
Net
unrealized (losses) gains
|
|
|
(503 |
) |
|
|
954 |
|
|
|
(661 |
) |
|
|
1,235 |
|
Tax
effect
|
|
|
171 |
|
|
|
(323 |
) |
|
|
226 |
|
|
|
(420 |
) |
Net
of tax amount
|
|
|
(332 |
) |
|
|
631 |
|
|
|
(435 |
) |
|
|
815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 (loss) income
|
|
|
(801 |
) |
|
|
1,985 |
|
|
|
(79 |
) |
|
|
929 |
|
Total
Comprehensive Income
|
|
$ |
1,358 |
|
|
$ |
3,624 |
|
|
$ |
4,054 |
|
|
$ |
4,669 |
|
The
components of accumulated other comprehensive loss included in shareholders'
equity are as follows:
(Amounts
in thousands)
|
|
June 30
|
|
|
December 31
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Net
unrealized losses on securities
|
|
$ |
(1,098 |
) |
|
$ |
(1,829 |
) |
Tax
effect
|
|
|
373 |
|
|
|
622 |
|
Net
of tax amount
|
|
|
(725 |
) |
|
|
(1,207 |
) |
|
|
|
|
|
|
|
|
|
Net
unrealized losses on derivatives
|
|
|
(1,924 |
) |
|
|
(1,263 |
) |
Tax
effect
|
|
|
655 |
|
|
|
429 |
|
Net
of tax amount
|
|
|
(1,269 |
) |
|
|
(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
|
|
$ |
(5,217 |
) |
|
$ |
(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 $28.3 million and $26.7 million of standby
letters of credit as of June 30, 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 June 30, 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 June 30, 2010 and December 31, 2009 are:
(Amounts
in thousands)
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
unrealized
|
|
|
unrealized
|
|
|
fair
|
|
June
30, 2010
|
|
cost
|
|
|
gains
|
|
|
losses
|
|
|
value
|
|
Equity
securities
|
|
$ |
5,401 |
|
|
$ |
65 |
|
|
$ |
(1,444 |
) |
|
$ |
4,022 |
|
U.S.
Treasury securities and obligations of U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
agencies
|
|
|
22,723 |
|
|
|
414 |
|
|
|
(95 |
) |
|
|
23,042 |
|
Obligations
of state and political subdivisions
|
|
|
40,852 |
|
|
|
1,186 |
|
|
|
(46 |
) |
|
|
41,992 |
|
Corporate
debt securities
|
|
|
8,611 |
|
|
|
26 |
|
|
|
(1,787 |
) |
|
|
6,850 |
|
Mortgage-backed
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
46,726 |
|
|
|
1,408 |
|
|
|
(11 |
) |
|
|
48,123 |
|
Non-Agency
|
|
|
5,051 |
|
|
|
- |
|
|
|
(786 |
) |
|
|
4,265 |
|
Asset-backed
securities
|
|
|
81 |
|
|
|
- |
|
|
|
(28 |
) |
|
|
53 |
|
|
|
$ |
129,445 |
|
|
$ |
3,099 |
|
|
$ |
(4,197 |
) |
|
$ |
128,347 |
|
|
|
|
|
|
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
$116.5 million at June 30, 2010 and $134.6 million at December 31,
2009.
The
amortized cost and estimated fair value of debt securities as of June 30, 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
|
|
$ |
3,438 |
|
|
$ |
3,450 |
|
Due
after one year through five years
|
|
|
15,043 |
|
|
|
15,324 |
|
Due
after five years through ten years
|
|
|
26,228 |
|
|
|
27,171 |
|
Due
after ten years
|
|
|
27,558 |
|
|
|
25,992 |
|
|
|
|
72,267 |
|
|
|
71,937 |
|
Mortgage-backed
securities
|
|
|
51,777 |
|
|
|
52,388 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
124,044 |
|
|
$ |
124,325 |
|
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 June 30, 2010 and December
31, 2009:
|
|
June 30, 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
|
|
$ |
1,840 |
|
|
$ |
(287 |
) |
|
|
2 |
|
|
$ |
1,796 |
|
|
$ |
(1,157 |
) |
|
|
22 |
|
|
$ |
3,636 |
|
|
$ |
(1,444 |
) |
|
|
24 |
|
U.S.
Treasury securities and obligations of U.S. Government
agencies
|
|
|
76 |
|
|
|
- |
|
|
|
2 |
|
|
|
9,654 |
|
|
|
(95 |
) |
|
|
20 |
|
|
|
9,730 |
|
|
|
(95 |
) |
|
|
22 |
|
Obligations
of state and political subdivisions
|
|
|
2,528 |
|
|
|
(31 |
) |
|
|
7 |
|
|
|
292 |
|
|
|
(15 |
) |
|
|
1 |
|
|
|
2,820 |
|
|
|
(46 |
) |
|
|
8 |
|
Corporate
debt securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6,096 |
|
|
|
(1,787 |
) |
|
|
9 |
|
|
|
6,096 |
|
|
|
(1,787 |
) |
|
|
9 |
|
Mortgage-backed
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
1,727 |
|
|
|
(9 |
) |
|
|
3 |
|
|
|
699 |
|
|
|
(2 |
) |
|
|
1 |
|
|
|
2,426 |
|
|
|
(11 |
) |
|
|
4 |
|
Non-Agency
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,265 |
|
|
|
(786 |
) |
|
|
7 |
|
|
|
4,265 |
|
|
|
(786 |
) |
|
|
7 |
|
Asset-backed
securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
53 |
|
|
|
(28 |
) |
|
|
3 |
|
|
|
53 |
|
|
|
(28 |
) |
|
|
3 |
|
Total
temporarily impaired securities
|
|
$ |
6,171 |
|
|
$ |
(327 |
) |
|
|
14 |
|
|
$ |
22,855 |
|
|
$ |
(3,870 |
) |
|
|
63 |
|
|
$ |
29,026 |
|
|
$ |
(4,197 |
) |
|
|
77 |
|
|
|
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
following table reflects additional information about trust preferred securities
as of June 30, 2010:
Trust Preferred Securities
|
June 30, 2010
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deal Name
|
|
Single Issuer or Pooled
|
|
Class
|
|
Amortized Cost
|
|
|
Estimated Fair Value
|
|
|
Gross Unrealized Gain (Loss)
|
|
|
Lowest Credit Rating Assigned
|
|
|
Number of Banks currently Performing
|
|
Deferrals and Defaults as % of Original Collateral
|
|
Expected Deferral/ Defaults as a Percentage of Remaining Performing Collateral
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Huntington
Cap Trust
|
|
Single
|
|
Preferred
Stock
|
|
$ |
926 |
|
|
$ |
595 |
|
|
$ |
(331 |
) |
|
Ba1
|
|
|
|
1 |
|
None
|
|
None
|
Huntingtn
Cap Trust II
|
|
Single
|
|
Preferred
Stock
|
|
|
870 |
|
|
|
565 |
|
|
|
(305 |
) |
|
Ba1
|
|
|
|
1 |
|
None
|
|
None
|
BankAmerica
Cap III
|
|
Single
|
|
Preferred
Stock
|
|
|
954 |
|
|
|
673 |
|
|
|
(281 |
) |
|
Baa3
|
|
|
|
1 |
|
None
|
|
None
|
Wachovia
Cap Trust II
|
|
Single
|
|
Preferred
Stock
|
|
|
272 |
|
|
|
230 |
|
|
|
(42 |
) |
|
Baa2
|
|
|
|
1 |
|
None
|
|
None
|
Corestates
Captl Tr II
|
|
Single
|
|
Preferred
Stock
|
|
|
921 |
|
|
|
619 |
|
|
|
(302 |
) |
|
Baa1
|
|
|
|
1 |
|
None
|
|
None
|
Chase
Cap VI JPM
|
|
Single
|
|
Preferred
Stock
|
|
|
955 |
|
|
|
779 |
|
|
|
(176 |
) |
|
A2
|
|
|
|
1 |
|
None
|
|
None
|
Fleet
Cap Tr V
|
|
Single
|
|
Preferred
Stock
|
|
|
970 |
|
|
|
732 |
|
|
|
(238 |
) |
|
Baa3
|
|
|
|
1 |
|
None
|
|
None
|
|
|
|
|
|
|
$ |
5,868 |
|
|
$ |
4,193 |
|
|
$ |
(1,675 |
) |
|
|
|
|
|
|
|
|
|
|
|
The
following table provides additional detail about private label mortgage-backed
securities as of June 30, 2010:
Private Label Mortgage Backed Securities
|
|
June 30, 2010
|
|
(Dollars in thousands)
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Orgination
|
|
Amortized
|
|
|
Fair
|
|
|
Unrealized
|
|
Collateral
|
|
Current
|
|
|
Credit
|
|
|
OTTI
|
|
Decscription
|
|
Date
|
|
Cost
|
|
|
Value
|
|
|
Gain (Loss)
|
|
Type
|
|
Rating
|
|
|
Support %
|
|
|
Charges
|
|
RALI
2003-QS15 A1
|
|
8/1/2003
|
|
$ |
715 |
|
|
$ |
694 |
|
|
$ |
(21 |
) |
ALT
A
|
|
Aa2
|
|
|
|
11.29 |
|
|
$ |
- |
|
RALI
2004-QS4 A7
|
|
3/1/2004
|
|
|
666 |
|
|
|
652 |
|
|
|
(14 |
) |
ALT
A
|
|
AAA
|
|
|
|
13.03 |
|
|
|
- |
|
MALT
2004-6 7A1
|
|
6/1/2004
|
|
|
780 |
|
|
|
650 |
|
|
|
(130 |
) |
ALT
A
|
|
AAA
|
|
|
|
10.52 |
|
|
|
- |
|
RALI
2005-QS2 A1
|
|
2/1/2005
|
|
|
730 |
|
|
|
608 |
|
|
|
(121 |
) |
ALT
A
|
|
B
|
|
|
|
7.70 |
|
|
|
- |
|
RALI
2006-QS4 A2
|
|
4/1/2006
|
|
|
1,044 |
|
|
|
756 |
|
|
|
(288 |
) |
ALT
A
|
|
Caa2
|
|
|
|
0.68 |
|
|
|
142 |
|
GSR
2006-5F 2A1
|
|
5/1/2006
|
|
|
544 |
|
|
|
479 |
|
|
|
(65 |
) |
Prime
|
|
CCC
|
|
|
|
4.64 |
|
|
|
- |
|
RALI
2006-QS8 A1
|
|
7/28/2006
|
|
|
572 |
|
|
|
426 |
|
|
|
(146 |
) |
ALT
A
|
|
Caa2
|
|
|
|
0.00 |
|
|
|
113 |
|
|
|
|
|
$ |
5,051 |
|
|
$ |
4,265 |
|
|
$ |
(786 |
) |
|
|
|
|
|
|
|
|
|
|
$ |
255 |
|
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
|
|
|
Six months ended
|
|
|
|
June 30
|
|
|
June 30
|
|
(Amounts
in thousands)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Components
of net periodic (benefit) cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
91 |
|
|
$ |
85 |
|
|
$ |
183 |
|
|
$ |
170 |
|
Interest
cost
|
|
|
185 |
|
|
|
181 |
|
|
|
371 |
|
|
|
362 |
|
Expected
return on plan assets
|
|
|
(209 |
) |
|
|
(190 |
) |
|
|
(419 |
) |
|
|
(380 |
) |
Amortization
of prior service cost
|
|
|
- |
|
|
|
(31 |
) |
|
|
- |
|
|
|
(62 |
) |
Recognized
net actuarial loss
|
|
|
43 |
|
|
|
82 |
|
|
|
86 |
|
|
|
165 |
|
Net
periodic cost
|
|
$ |
110 |
|
|
$ |
127 |
|
|
$ |
221 |
|
|
$ |
255 |
|
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:
|
|
Six
Months Ended
|
|
|
|
June
30
|
|
(Amounts
in thousands)
|
|
2010
|
|
|
2009
|
|
Cost
of mortgage servicing rights:
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
1,190 |
|
|
$ |
1,551 |
|
Originations
|
|
|
10 |
|
|
|
3 |
|
Amortization
|
|
|
(134 |
) |
|
|
(214 |
) |
Ending
balance
|
|
$ |
1,066 |
|
|
$ |
1,340 |
|
|
|
|
|
|
|
|
|
|
Valuation
allowance:
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
(476 |
) |
|
$ |
(689 |
) |
Valuation
charges
|
|
|
- |
|
|
|
- |
|
Valuation
reversals
|
|
|
60 |
|
|
|
143 |
|
Ending
balance
|
|
$ |
(416 |
) |
|
$ |
(546 |
) |
|
|
|
|
|
|
|
|
|
Mortgage
servicing rights cost
|
|
$ |
1,066 |
|
|
$ |
1,340 |
|
Valuation
allowance
|
|
|
(416 |
) |
|
|
(546 |
) |
Carrying
value
|
|
$ |
650 |
|
|
$ |
794 |
|
|
|
|
|
|
|
|
|
|
Fair
value
|
|
$ |
650 |
|
|
$ |
794 |
|
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 may be 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:
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
(Amounts
in thousands)
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
37,011 |
|
|
$ |
37,011 |
|
|
$ |
33,248 |
|
|
$ |
33,248 |
|
Investment
securities available for sale
|
|
|
128,347 |
|
|
|
128,347 |
|
|
|
143,288 |
|
|
|
143,288 |
|
Restricted
stock
|
|
|
6,482 |
|
|
|
6,482 |
|
|
|
6,482 |
|
|
|
6,482 |
|
Net
loans
|
|
|
748,660 |
|
|
|
753,792 |
|
|
|
730,626 |
|
|
|
742,929 |
|
Accrued
interest receivable
|
|
|
3,805 |
|
|
|
3,805 |
|
|
|
3,904 |
|
|
|
3,904 |
|
Mortgage
servicing rights
|
|
|
650 |
|
|
|
650 |
|
|
|
714 |
|
|
|
714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$ |
730,357 |
|
|
$ |
733,021 |
|
|
$ |
738,365 |
|
|
$ |
742,953 |
|
Securities
sold under agreements to repurchase
|
|
|
68,622 |
|
|
|
68,622 |
|
|
|
55,855 |
|
|
|
55,855 |
|
Long-term
debt
|
|
|
93,796 |
|
|
|
97,523 |
|
|
|
94,688 |
|
|
|
99,013 |
|
Accrued
interest payable
|
|
|
1,005 |
|
|
|
1,005 |
|
|
|
1,288 |
|
|
|
1,288 |
|
Interest
rate swaps
|
|
|
1,924 |
|
|
|
1,924 |
|
|
|
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 June 30, 2010 and December 31, 2009:
Cash and Cash
Equivalents: For these short-term instruments, the carrying
amount is a reasonable estimate of fair value.
Investment securities
available for sale: The fair value of investment securities is determined
in accordance with the methods described under FASB ASC Topic 820 as discussed
below.
Restricted
stock: The carrying value of restricted stock approximates its
fair value based on redemption provisions for the restricted stock.
Net
loans: The fair value of fixed-rate loans is estimated for
each major type of loan (e.g. real estate, commercial, industrial and
agricultural and consumer) by discounting the future cash flows associated with
such loans using rates currently offered for loans with similar terms to
borrowers of comparable credit quality. The model considers scheduled
principal maturities, repricing characteristics, prepayment assumptions and
interest cash flows. The discount rates used are estimated based upon
consideration of a number of factors including the treasury yield curve, expense
and service charge factors. For variable rate loans that reprice frequently and
have no significant change in credit quality, carrying values approximate the
fair value.
Accrued interest
receivable: The carrying amount is a reasonable estimate of fair
value.
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, Securities sold
under agreements to repurchase and Long-term debt: 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 as discussed below.
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.
|
|
Level2:
|
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.
|
|
Level3:
|
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,
there were no transfers of financial assets or liabilities between Level 1 and
Level 2 during the period ending June 30, 2010.
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 June 30, 2010
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Asset Description
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities
|
|
$ |
4,022 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
4,022 |
|
U.S.
Treasury securities and obligations of U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
agencies
|
|
|
- |
|
|
|
23,042 |
|
|
|
- |
|
|
|
23,042 |
|
Obligations
of state and political subdivisions
|
|
|
- |
|
|
|
41,992 |
|
|
|
- |
|
|
|
41,992 |
|
Corporate
debt securities
|
|
|
- |
|
|
|
6,850 |
|
|
|
- |
|
|
|
6,850 |
|
Mortgage-backed
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
- |
|
|
|
48,123 |
|
|
|
- |
|
|
|
48,123 |
|
Non-Agency
|
|
|
- |
|
|
|
4,265 |
|
|
|
- |
|
|
|
4,265 |
|
Asset-backed
securities
|
|
|
- |
|
|
|
53 |
|
|
|
- |
|
|
|
53 |
|
Total
assets
|
|
$ |
4,022 |
|
|
$ |
124,325 |
|
|
$ |
- |
|
|
$ |
128,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability
Description
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps
|
|
$ |
- |
|
|
$ |
1,924 |
|
|
$ |
- |
|
|
$ |
1,924 |
|
Total
liabilities
|
|
$ |
- |
|
|
$ |
1,924 |
|
|
$ |
- |
|
|
$ |
1,924 |
|
(Dollars
in Thousands)
|
|
Fair Value at December 31, 2009
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Asset Description
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 June 30, 2010
|
|
Asset Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Impaired
loans
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
15,690 |
|
|
|
15,690 |
|
Other
real estate owned
|
|
|
- |
|
|
|
- |
|
|
|
229 |
|
|
|
229 |
|
Mortgage
servicing rights
|
|
|
- |
|
|
|
- |
|
|
|
650 |
|
|
|
650 |
|
Total
assets
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
16,569 |
|
|
$ |
16,569 |
|
(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
|
|
|
- |
|
|
|
- |
|
|
|
643 |
|
|
|
643 |
|
Mortgage
servicing rights
|
|
|
- |
|
|
|
- |
|
|
|
714 |
|
|
|
714 |
|
Total
assets
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
9,300 |
|
|
$ |
9,300 |
|
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.
The
following table presents a reconciliation of impaired loans, foreclosed real
estate and mortgage servicing rights measured at fair value on a nonrecurring
basis, using significant unobservable inputs (Level 3) for the six months ended
June 30, 2010:
|
|
Impaired
|
|
|
Foreclosed
|
|
|
Mortgage
|
|
(Dollars in Thousands)
|
|
Loans
|
|
|
Real Estate
|
|
|
Servicing Rights
|
|
Balance
- January 1, 2010
|
|
$ |
7,943 |
|
|
$ |
643 |
|
|
$ |
714 |
|
Charged
off
|
|
|
(273 |
) |
|
|
- |
|
|
|
- |
|
Settled
or otherwise removed
|
|
|
(555 |
) |
|
|
(414 |
) |
|
|
- |
|
Additions
|
|
|
9,985 |
|
|
|
- |
|
|
|
10 |
|
Payments
/ amortization
|
|
|
(507 |
) |
|
|
- |
|
|
|
(134 |
) |
(Increase)
decrease in valuation allowance
|
|
|
(903 |
) |
|
|
- |
|
|
|
60 |
|
Balance
- June 30, 2010
|
|
$ |
15,690 |
|
|
$ |
229 |
|
|
$ |
650 |
|
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 swaps as of June 30, 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 |
% |
|
|
0.16 |
% |
|
$ |
344 |
|
$
|
10,000
|
|
5/30/2015
|
|
|
3.87 |
% |
|
|
0.16 |
% |
|
$ |
371 |
|
The
variable rate is indexed to the 91-day Treasury Bill auction (discount) rate and
resets weekly.
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 June
30, 2010 and December 31, 2009 are as follows:
Fair
Value of Derivative Instruments
|
|
(Dollars
in thousands)
|
|
Balance
Sheet
|
|
|
|
Date
|
|
Type
|
|
Location
|
|
Fair
Value
|
|
June
30, 2010
|
|
Interest
rate contracts
|
|
Other
liabilities
|
|
$ |
1,924 |
|
December
31, 2009
|
|
Interest
rate contracts
|
|
Other
liabilities
|
|
$ |
1,263 |
|
The Effect of Derivative Instruments on
the Statement of Income for the Six Months Ended June 30, 2010 and 2009
follows:
Derivatives in ASC Topic 815 Cash Flow Hedging Relationships
|
|
(Dollars in thousands, net of tax)
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate contracts
|
|
$ |
(435 |
) |
|
Interest
Expense
|
|
$ |
(355 |
) |
|
Other
income (expense)
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate contracts
|
|
$ |
815 |
|
|
Interest
Expense
|
|
$ |
(350 |
) |
|
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 and Six Month Periods Ended June 30, 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 first six months ended June 30, 2010 of
$4.1 million. This is a 10.5% increase versus net income of $3.7
million for the same period in 2009. Total revenue (interest income and
noninterest income) increased $162 thousand year-over-year. Interest income
decreased slightly due to decreases in interest income in the investment
portfolio, while investment and trust revenue, as well as security gains helped
improve noninterest income. Noninterest expense increased due to increased
salary and benefit expense and higher legal and professional
fees. The provision for loan losses was $1.3 million for the
period, $231 thousand more than in 2009. Diluted earnings per share
increased to $1.07 in 2010 from $.98 in 2009. Total assets were $986.6 million
at June 30, 2010, an increase of $7.2 million from year-end 2009. Net
loans grew to $748.7 million, while total deposits decreased to $730.4
million.
Other key
performance ratios as of, or for the six months ended June 30, 2010 and 2009 (on
an annualized basis) are listed below:
|
|
2010
|
|
|
2009
|
|
Return
on average equity (ROE)
|
|
|
10.21 |
% |
|
|
9.99 |
% |
Return
on average assets (ROA)
|
|
|
.84 |
% |
|
|
.80 |
% |
Return
on average tangible average equity(1)
|
|
|
12.55 |
% |
|
|
12.54 |
% |
Return
on average tangible average assets(1)
|
|
|
.89 |
% |
|
|
.86 |
% |
Net
interest margin
|
|
|
3.46 |
% |
|
|
3.54 |
% |
Efficiency
ratio
|
|
|
64.25 |
% |
|
|
65.18 |
% |
(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 and six months ended June 30, 2010
follows:
Comparison
of the three months ended June 30, 2010 to the three months ended June 30,
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 second quarter of 2010 decreased to $10.9 million from $11.0
million in the second quarter of 2009. Average interest-earning
assets increased by $32.6 million from the second quarter of 2009; however, the
yield on these assets decreased by 26 basis points. The average
balance on investment securities decreased $13.1 million quarter over quarter
due to pay downs, maturities and sales in the portfolio, net of investment
purchases. Total average loans increased $49.5 million (7.0%) quarter
over quarter. Average commercial loans increased $69.6 million
(13.8%), but the increase was partially offset by a decrease in the average
balance of mortgage and consumer loans. Average mortgage loans
decreased $6.1 million, as the majority of new mortgage originations are sold in
the secondary market and the portfolio continues to runoff. Average
consumer loans, including home equity loans, decreased $14.0 million, as
consumers continue to borrow less during the economic recession.
Interest
expense was $3.2 million for the second quarter, a decrease of $409 thousand
from the second quarter of 2009 total of $3.6 million. Average
interest-bearing liabilities increased to $798.4 million in the second quarter
of 2010 from an average balance of $776.9 million during the same period in
2009, an increase of $21.5 million. The average cost of these
liabilities decreased from 1.87% for the second quarter of 2009 to 1.62% for the
same period in 2010. Average interest-bearing deposits increased
$40.3 million, due to increases in money management accounts ($58.5 million),
but these increases were partially offset by decreases in certificates of
deposit ($25.3 million). The cost of interest-bearing deposits decreased from
1.69% to 1.38%. Securities sold under agreements to repurchase have
decreased $8.2 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 $10.7 million due to scheduled amortization and
maturities on Federal Home Loan Bank of Pittsburgh (FHLB) advances.
The
changes in the balance sheet and interest rates resulted in an increase in net
interest income of $286 thousand to $7.6 million for the second quarter of 2010
compared to $7.4 million for the second quarter of 2009. The Bank’s
net interest margin decreased slightly from 3.49% to 3.48% in
2010. The decrease in the net interest margin is due to the yield on
interest-earning assets (mainly variable rate commercial loans) decreasing 26
basis points, while the yield on interest-bearing liabilities only decreased 25
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 June 30, 2010 and
2009. These components drive changes in net interest
income.
|
|
For the Three Months Ended June 30
|
|
|
|
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
|
|
$ |
15,638 |
|
|
$ |
10 |
|
|
|
0.26 |
% |
|
$ |
19,397 |
|
|
$ |
7 |
|
|
|
0.14 |
% |
Investment
securities
|
|
|
138,202 |
|
|
|
1,344 |
|
|
|
3.89 |
% |
|
|
151,333 |
|
|
|
1,729 |
|
|
|
4.57 |
% |
Loans
|
|
|
754,882 |
|
|
|
9,746 |
|
|
|
5.15 |
% |
|
|
705,369 |
|
|
|
9,524 |
|
|
|
5.38 |
% |
Total
interest-earning assets
|
|
$ |
908,723 |
|
|
|
11,100 |
|
|
|
4.90 |
% |
|
$ |
876,099 |
|
|
|
11,260 |
|
|
|
5.16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
deposits
|
|
$ |
640,405 |
|
|
|
2,204 |
|
|
|
1.38 |
% |
|
$ |
600,068 |
|
|
|
2,535 |
|
|
|
1.69 |
% |
Securities
sold under agreements to repurchase
|
|
|
63,993 |
|
|
|
40 |
|
|
|
0.25 |
% |
|
|
72,178 |
|
|
|
45 |
|
|
|
0.25 |
% |
Long-term
debt
|
|
|
93,972 |
|
|
|
977 |
|
|
|
4.17 |
% |
|
|
104,639 |
|
|
|
1,050 |
|
|
|
4.02 |
% |
Total
interest-bearing liabilities
|
|
$ |
798,370 |
|
|
|
3,221 |
|
|
|
1.62 |
% |
|
$ |
776,885 |
|
|
|
3,630 |
|
|
|
1.87 |
% |
Interest
spread
|
|
|
|
|
|
|
|
|
|
|
3.28 |
% |
|
|
|
|
|
|
|
|
|
|
3.29 |
% |
Tax
equivalent Net interest income/Net interest margin
|
|
|
|
|
|
|
7,879 |
|
|
|
3.48 |
% |
|
|
|
|
|
|
7,630 |
|
|
|
3.49 |
% |
Tax
equivalent adjustment
|
|
|
|
|
|
|
(234 |
) |
|
|
|
|
|
|
|
|
|
|
(271 |
) |
|
|
|
|
Net
interest income
|
|
|
|
|
|
$ |
7,645 |
|
|
|
|
|
|
|
|
|
|
$ |
7,359 |
|
|
|
|
|
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. Loan
categories are based on an internal classification/purpose and do not
necessarily reflect a specific type of collateral, if any.
Provision
for Loan Losses
For the
second quarter of 2010, the provision expense was $625 thousand versus $426
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 June 30, 2010, noninterest income increased slightly by $73
thousand to $2.4 million, the same as in the second quarter of
2009. Investment and trust service fees increased $145 thousand due
to increases in nonrecurring income from estate fees. Loan service charges
decreased $106 thousand, as the second quarter of 2009 total included a high
volume of mortgage production fees from refinancing
activity. Mortgage banking fees decreased quarter over quarter due to
a net impairment recovery of $143 thousand on mortgage servicing rights in
2009. Deposit service charges decreased $60 thousand in the second
quarter of 2010 due to a decrease in account analysis fees and a decrease in
fees from the Bank’s overdraft protection program. New regulations effective
July 1, 2010 require consumers to opt-in to overdraft protection programs. The
affect of this new regulation on future overdraft fees is uncertain at this
time. Other service charges and fees, an increase in cash surrender
value of life insurance and other income remained flat in the second quarter of
2010. There were no other than temporary impairment charges
recognized in the second quarter of 2010, versus $212 thousand on two equity
securities in the same quarter in 2009. The Corporation took gains of
$20 thousand during the quarter ended June 30, 2010 versus gains of $42 thousand
for the same period in 2009.
The
following table presents a comparison of noninterest income for the three months
ended June 30, 2010 and 2009:
|
|
For the Three Months Ended
|
|
|
|
|
|
|
|
|
|
June 30
|
|
|
Change
|
|
(Dollars
in thousands)
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
Noninterest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
and trust services fees
|
|
$ |
1,007 |
|
|
$ |
862 |
|
|
$ |
145 |
|
|
|
16.8 |
|
Loan
service charges
|
|
|
272 |
|
|
|
378 |
|
|
|
(106 |
) |
|
|
(28.0 |
) |
Mortgage
banking activities
|
|
|
11 |
|
|
|
118 |
|
|
|
(107 |
) |
|
|
(90.7 |
) |
Deposit
service charges and fees
|
|
|
593 |
|
|
|
653 |
|
|
|
(60 |
) |
|
|
(9.2 |
) |
Other
service charges and fees
|
|
|
351 |
|
|
|
339 |
|
|
|
12 |
|
|
|
3.5 |
|
Increase
in cash surrender value of life insurance
|
|
|
166 |
|
|
|
160 |
|
|
|
6 |
|
|
|
3.8 |
|
Other
|
|
|
22 |
|
|
|
29 |
|
|
|
(7 |
) |
|
|
(24.1 |
) |
OTTI
losses on securities
|
|
|
- |
|
|
|
(212 |
) |
|
|
212 |
|
|
|
100.0 |
|
Less:
Loss recognized in other comprehensive income (before
taxes)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net
OTTI losses recognized in earnings
|
|
|
- |
|
|
|
(212 |
) |
|
|
212 |
|
|
|
100.0 |
|
Securities
gains, net
|
|
|
20 |
|
|
|
42 |
|
|
|
(22 |
) |
|
|
(52.4 |
) |
Total
noninterest income
|
|
$ |
2,442 |
|
|
$ |
2,369 |
|
|
$ |
73 |
|
|
|
3.1 |
|
Noninterest
Expense
Noninterest expense for the second
quarter of 2010 totaled $6.5 million compared to $7.0 million in the second
quarter of 2009. The increase in salaries and benefits was due to
annual performance increases as well as increased health insurance
costs. Net occupancy expense and furniture and equipment expense
remained flat, while advertising expense decreased $75 thousand due to the
timing of various direct mail and production costs. Legal and
professional fees increased over the same period in 2009 due to expenses from
litigation involving matters arising in the ordinary course of business and a
special audit project. The Pennsylvania bank shares tax expense and
intangible amortization expense remained flat quarter over
quarter. FDIC insurance decreased $395 thousand as 2009 contained the
FDIC special assessment expense of $449 thousand. Other expenses
decreased in 2010 as 2009 expenses contained a prepayment penalty of $86
thousand on a high-rate term loan from the FHLB and a write-down of leasehold
improvements of $118 thousand from closing a branch location in
2009.
The following table presents a
comparison of noninterest expense for the three months ended June 30, 2010 and
2009:
|
|
For the Three Months Ended
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
June 30
|
|
|
Change
|
|
Noninterest Expense
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
Salaries
and benefits
|
|
$ |
3,322 |
|
|
$ |
3,126 |
|
|
$ |
196 |
|
|
|
6.3 |
|
Net
occupancy expense
|
|
|
496 |
|
|
|
476 |
|
|
|
20 |
|
|
|
4.2 |
|
Furniture
and equipment expense
|
|
|
191 |
|
|
|
213 |
|
|
|
(22 |
) |
|
|
(10.3 |
) |
Advertising
|
|
|
343 |
|
|
|
418 |
|
|
|
(75 |
) |
|
|
(17.9 |
) |
Legal
and professional fees
|
|
|
350 |
|
|
|
293 |
|
|
|
57 |
|
|
|
19.5 |
|
Data
processing
|
|
|
502 |
|
|
|
435 |
|
|
|
67 |
|
|
|
15.4 |
|
Pennsylvania
bank shares tax
|
|
|
152 |
|
|
|
143 |
|
|
|
9 |
|
|
|
6.3 |
|
Intangible
amortization
|
|
|
114 |
|
|
|
117 |
|
|
|
(3 |
) |
|
|
(2.6 |
) |
FDIC
insurance
|
|
|
288 |
|
|
|
683 |
|
|
|
(395 |
) |
|
|
(57.8 |
) |
Other
|
|
|
767 |
|
|
|
1,062 |
|
|
|
(295 |
) |
|
|
(27.8 |
) |
Total
noninterest expense
|
|
$ |
6,525 |
|
|
$ |
6,966 |
|
|
$ |
(441 |
) |
|
|
(6.3 |
) |
Income
taxes
Federal
income tax expense was $778 thousand for the second quarter of 2010 compared to
$697 thousand in 2009. The effective tax rate for the second quarter
of 2010 was 26.5% and 29.8% for 2009. All taxable income for the
Corporation is taxed at a rate of 34%.
Comparison
of the six months ended June 30, 2010 to the six months ended June 30,
2009:
Net
Interest Income
Interest
income for the first half of 2010 was $21.8 million, $19 thousand less than the
same period in 2009. Average interest-earning assets increased by
$53.3 million from the first half of 2009, however; the yield on these assets
decreased by 33 basis points. The average balance on investment
securities decreased $8.3 million year over year due to pay downs, maturities
and sales in the portfolio, net of investment purchases. Total
average loans increased $58.5 million (8.5%) year over year. Average
commercial loans increased $80.3 million, but the increase was partially offset
by a decrease in the average balance of mortgage and consumer
loans. Average mortgage loans decreased $6.9 million, as the majority
of new mortgage originations are sold in the secondary market and the portfolio
continues to runoff. Average consumer loans, including home equity
loans, decreased $14.9 million, as consumers continue to borrow less during the
economic recession.
Interest
expense was $6.6 million for the first six months, a decrease of $633 thousand
from the first six months of 2009 total of $7.2 million. Average
interest-bearing liabilities increased to $800.3 million from an average balance
of $755.5 million during the same period in 2009, an increase of $44.8
million. The average cost of these liabilities decreased from 1.93%
to 1.66%. Average interest-bearing deposits increased $69.0 million,
due to increases in money management accounts ($51.4 million) while certificates
of deposit decreased ($34.6 million), and the cost decreased from 1.76% to
1.43%. Securities sold under agreements to repurchase have decreased
$9.9 million on average over the prior year and the average rate has remained
constant at .25%. The average balance of long-term debt
decreased by $11.0 million due to scheduled amortization and maturities on FHLB
advances.
The
changes in the balance sheet and interest rates resulted in an increase in net
interest income of $614 thousand to $15.2 million for the first half of 2010
compared to $14.6 million for the first half of 2009. The Bank’s net
interest margin decreased from 3.54% in 2009 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 33 basis points, while
the yield on interest-bearing liabilities only decreased 27 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 six months ended June 30, 2010 and
2009. These components drive changes in net interest
income.
|
|
For
the Six Months Ended June 30
|
|
|
|
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
|
|
$ |
13,137 |
|
|
$ |
16 |
|
|
|
0.25 |
% |
|
$ |
10,011 |
|
|
$ |
7 |
|
|
|
0.14 |
% |
Investment
securities
|
|
|
143,264 |
|
|
|
2,919 |
|
|
|
4.08 |
% |
|
|
151,594 |
|
|
|
3,563 |
|
|
|
4.70 |
% |
Loans
|
|
|
750,703 |
|
|
|
19,353 |
|
|
|
5.16 |
% |
|
|
692,160 |
|
|
|
18,779 |
|
|
|
5.43 |
% |
Total
interest-earning assets
|
|
$ |
907,104 |
|
|
|
22,288 |
|
|
|
4.95 |
% |
|
$ |
853,765 |
|
|
|
22,349 |
|
|
|
5.28 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
deposits
|
|
$ |
643,742 |
|
|
|
4,563 |
|
|
|
1.43 |
% |
|
$ |
574,725 |
|
|
|
5,018 |
|
|
|
1.76 |
% |
Securities
sold under agreements to repurchase
|
|
|
62,302 |
|
|
|
77 |
|
|
|
0.25 |
% |
|
|
72,238 |
|
|
|
90 |
|
|
|
0.25 |
% |
Short-term
borrowings
|
|
|
111 |
|
|
|
- |
|
|
|
0.64 |
% |
|
|
3,342 |
|
|
|
11 |
|
|
|
0.66 |
% |
Long-term
debt
|
|
|
94,194 |
|
|
|
1,951 |
|
|
|
4.17 |
% |
|
|
105,215 |
|
|
|
2,105 |
|
|
|
4.03 |
% |
Total
interest-bearing liabilities
|
|
$ |
800,350 |
|
|
|
6,591 |
|
|
|
1.66 |
% |
|
$ |
755,520 |
|
|
|
7,224 |
|
|
|
1.93 |
% |
Interest
spread
|
|
|
|
|
|
|
|
|
|
|
3.29 |
% |
|
|
|
|
|
|
|
|
|
|
3.35 |
% |
Tax
equivalent Net interest income/Net interest margin
|
|
|
|
|
|
|
15,697 |
|
|
|
3.46 |
% |
|
|
|
|
|
|
15,125 |
|
|
|
3.54 |
% |
Tax
equivalent adjustment
|
|
|
|
|
|
|
(506 |
) |
|
|
|
|
|
|
|
|
|
|
(548 |
) |
|
|
|
|
Net
interest income
|
|
|
|
|
|
$ |
15,191 |
|
|
|
|
|
|
|
|
|
|
$ |
14,577 |
|
|
|
|
|
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. Loan
categories are based on an internal classification/purpose and do not
necessarily reflect a specific type of collateral, if any.
Provision
for Loan Losses
For the
first half of 2010, the provision expense was $1.3 million versus $1.0 million
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
six months ended June 30, 2010, noninterest income increased $181 thousand to
$4.8 million, compared to $4.7 million for the first six months of
2009. Investment and trust service fees increased $267 thousand due
to increases in income from estate fees. Loan service charges decreased $184
thousand, as the first six months of 2009 total included a high volume of
mortgage production fees from refinancing activity. Mortgage banking
fees remained flat year over year, while deposit service charges decreased $61
thousand due to a decrease in account analysis fees and a decrease in fees from
the Bank’s overdraft protection program. New regulations effective July 1, 2010
require consumers to opt-in to overdraft protection programs. The affect of this
new regulation on future overdraft fees is uncertain at this time. Other service
charges and the increase in cash surrender value of life insurance remained flat
in the first half of 2010. Other noninterest income decreased $255
thousand year over year as 2009 included $279 thousand 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 2010, compared
to $421 thousand on four equity securities in 2009. The Corporation
took securities gains of $268 thousand during the first half of 2010 versus
gains of $54 thousand for the same period in 2009.
The
following table presents a comparison of noninterest income for the six months
ended June 30, 2010 and 2009:
|
|
For the Six Months Ended
|
|
|
|
|
|
|
|
|
|
June 30
|
|
|
Change
|
|
(Dollars in thousands)
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
Noninterest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
and trust services fees
|
|
$ |
2,024 |
|
|
$ |
1,757 |
|
|
$ |
267 |
|
|
|
15.2 |
|
Loan
service charges
|
|
|
469 |
|
|
|
653 |
|
|
|
(184 |
) |
|
|
(28.2 |
) |
Mortgage
banking activities
|
|
|
81 |
|
|
|
91 |
|
|
|
(10 |
) |
|
|
(11.0 |
) |
Deposit
service charges and fees
|
|
|
1,171 |
|
|
|
1,232 |
|
|
|
(61 |
) |
|
|
(5.0 |
) |
Other
service charges and fees
|
|
|
677 |
|
|
|
641 |
|
|
|
36 |
|
|
|
5.6 |
|
Increase
in cash surrender value of life insurance
|
|
|
332 |
|
|
|
324 |
|
|
|
8 |
|
|
|
2.5 |
|
Other
|
|
|
70 |
|
|
|
325 |
|
|
|
(255 |
) |
|
|
(78.5 |
) |
OTTI
losses on securities
|
|
|
(689 |
) |
|
|
(421 |
) |
|
|
(268 |
) |
|
|
63.7 |
|
Less:
Loss recognized in other comprehensive income (before
taxes)
|
|
|
(434 |
) |
|
|
- |
|
|
|
(434 |
) |
|
|
- |
|
Net
OTTI losses recognized in earnings
|
|
|
(255 |
) |
|
|
(421 |
) |
|
|
166 |
|
|
|
39.4 |
|
Securities
gains, net
|
|
|
268 |
|
|
|
54 |
|
|
|
214 |
|
|
|
396.3 |
|
Total
noninterest income
|
|
$ |
4,837 |
|
|
$ |
4,656 |
|
|
$ |
181 |
|
|
|
3.9 |
|
Noninterest
Expense
Noninterest expense for the first six
months of 2010 totaled $13.2 million compared to $13.1 million in the first half
of 2009. The increase in salaries and benefits was due to increased
health insurance costs, an accrual for a severance payment and annual
performance increases. Net occupancy expense increased in 2010 from
the cost of snow removal. Advertising expense decreased $79 thousand
due to the timing of various direct mail and production costs, while legal and
professional fees increased over the same period in 2009 due to expenses from
litigation involving matters arising in the ordinary course of business and a
special audit project. The Pennsylvania bank shares tax expense and
intangible amortization expense remained flat quarter over
quarter. FDIC Insurance decreased $334 thousand as the same period in
2009 contained $449 thousand of expense for the FDIC special assessment. Under
recently passed legislation, the method of calculating FDIC insurance premiums
will shift for a deposit base assessment to an asset based assessment. This
changes is expected to result in a lower deposit assessment rate than under the
current system. Other expenses decreased in 2010, as the same period
in 2009 contained a prepayment penalty of $86 thousand on a high-rate term loan
from the FHLB and a write-down of leasehold improvements of $118 thousand from
closing a branch location in the second quarter of 2009.
The following table presents a
comparison of noninterest expense for the six months ended June 30, 2010 and
2009:
|
|
For the Six Months Ended
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
June 30
|
|
|
Change
|
|
Noninterest
Expense
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
Salaries
and benefits
|
|
$ |
6,762 |
|
|
$ |
6,279 |
|
|
$ |
483 |
|
|
|
7.7 |
|
Net
occupancy expense
|
|
|
1,019 |
|
|
|
956 |
|
|
|
63 |
|
|
|
6.6 |
|
Furniture
and equipment expense
|
|
|
382 |
|
|
|
429 |
|
|
|
(47 |
) |
|
|
(11.0 |
) |
Advertising
|
|
|
655 |
|
|
|
734 |
|
|
|
(79 |
) |
|
|
(10.8 |
) |
Legal
and professional fees
|
|
|
745 |
|
|
|
545 |
|
|
|
200 |
|
|
|
36.7 |
|
Data
processing
|
|
|
879 |
|
|
|
836 |
|
|
|
43 |
|
|
|
5.1 |
|
Pennsylvania
bank shares tax
|
|
|
308 |
|
|
|
288 |
|
|
|
20 |
|
|
|
6.9 |
|
Intangible
amortization
|
|
|
229 |
|
|
|
234 |
|
|
|
(5 |
) |
|
|
(2.1 |
) |
FDIC
insurance
|
|
|
580 |
|
|
|
914 |
|
|
|
(334 |
) |
|
|
(36.5 |
) |
Other
|
|
|
1,627 |
|
|
|
1,900 |
|
|
|
(273 |
) |
|
|
(14.4 |
) |
Total
noninterest expense
|
|
$ |
13,186 |
|
|
$ |
13,115 |
|
|
$ |
71 |
|
|
|
0.5 |
|
Income
taxes
Federal
income tax expense was $1.5 million for the first half of 2010 compared to $1.4
million in 2009. The effective tax rate for the first six months of
2010 was 26.1% and 26.7% for 2009. All taxable income for the
Corporation is taxed at a rate of 34%.
Financial
Condition
Summary:
At June
30, 2010, assets totaled $986.6 million, an increase of $7.2 million from the
2009 year-end balance of $979.4 million. Net loan growth has been strong, up
$18.0 million; however, this growth was offset by a decrease in investment
securities. Deposits are down $8.0 million. During the first half of 2010,
approximately $32 million of short-term brokered CDs matured. This funding was
not replaced and this more than offset core deposit growth during the first half
of 2010. Shareholders’ equity increased during the first six
months as retained earnings increased approximately $2.0 million.
Investment
Securities:
The
investment portfolio totaled $128.3 million at June 30, 2010, a decrease of
$14.9 million since year-end 2009. During 2010, cash flows from maturing
investments were used to fund loan growth and offset a slight decrease in
deposits during the year.
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 $6.8 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 $4.2 million. The majority of the mortgage-backed security portfolio is
comprised of U.S. Government Agency products. However, the Bank has 7 private
label mortgage backed securities with an amortized cost of $5.1 million and a
fair value of $4.3 million.
The
amortized cost and estimated fair value of investment securities available for
sale as of June 30, 2010 and December 31, 2009 are:
(Amounts
in thousands)
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
unrealized
|
|
|
unrealized
|
|
|
fair
|
|
June
30, 2010
|
|
cost
|
|
|
gains
|
|
|
losses
|
|
|
value
|
|
Equity
securities
|
|
$ |
5,401 |
|
|
$ |
65 |
|
|
$ |
(1,444 |
) |
|
$ |
4,022 |
|
U.S.
Treasury securities and obligations of U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
agencies
|
|
|
22,723 |
|
|
|
414 |
|
|
|
(95 |
) |
|
|
23,042 |
|
Obligations
of state and political subdivisions
|
|
|
40,852 |
|
|
|
1,186 |
|
|
|
(46 |
) |
|
|
41,992 |
|
Corporate
debt securities
|
|
|
8,611 |
|
|
|
26 |
|
|
|
(1,787 |
) |
|
|
6,850 |
|
Mortgage-backed
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
46,726 |
|
|
|
1,408 |
|
|
|
(11 |
) |
|
|
48,123 |
|
Non-Agency
|
|
|
5,051 |
|
|
|
- |
|
|
|
(786 |
) |
|
|
4,265 |
|
Asset-backed
securities
|
|
|
81 |
|
|
|
- |
|
|
|
(28 |
) |
|
|
53 |
|
|
|
$ |
129,445 |
|
|
$ |
3,099 |
|
|
$ |
(4,197 |
) |
|
$ |
128,347 |
|
|
|
|
|
|
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 June
30, 2010, the investment portfolio contained 77 securities with $29.0 million of
temporarily impaired fair value and $4.2 million in unrealized losses. This
position is improved from year-end 2009 when there were 99 securities with an
unrealized loss of $5.4 million, but slightly worse than the unrealized loss
of $3.9 million at the end of the first quarter. Of the total
unrealized loss position, $2.7 million (53 securities) exists within the debt
security portfolio. Within this category, the corporate bond
portfolio contains 9 securities with an unrealized loss of $1.8 million or 63%
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
June 30, 2010 were deemed to be temporary and required no further adjustment to
the financial statements.
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 June 30, 2010 and December
31, 2009:
|
|
June 30, 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
|
|
$ |
1,840 |
|
|
$ |
(287 |
) |
|
|
2 |
|
|
$ |
1,796 |
|
|
$ |
(1,157 |
) |
|
|
22 |
|
|
$ |
3,636 |
|
|
$ |
(1,444 |
) |
|
|
24 |
|
U.S.
Treasury securities and obligations of U.S. Government
agencies
|
|
|
76 |
|
|
|
- |
|
|
|
2 |
|
|
|
9,654 |
|
|
|
(95 |
) |
|
|
20 |
|
|
|
9,730 |
|
|
|
(95 |
) |
|
|
22 |
|
Obligations
of state and political subdivisions
|
|
|
2,528 |
|
|
|
(31 |
) |
|
|
7 |
|
|
|
292 |
|
|
|
(15 |
) |
|
|
1 |
|
|
|
2,820 |
|
|
|
(46 |
) |
|
|
8 |
|
Corporate
debt securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6,096 |
|
|
|
(1,787 |
) |
|
|
9 |
|
|
|
6,096 |
|
|
|
(1,787 |
) |
|
|
9 |
|
Mortgage-backed
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
1,727 |
|
|
|
(9 |
) |
|
|
3 |
|
|
|
699 |
|
|
|
(2 |
) |
|
|
1 |
|
|
|
2,426 |
|
|
|
(11 |
) |
|
|
4 |
|
Non-Agency
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,265 |
|
|
|
(786 |
) |
|
|
7 |
|
|
|
4,265 |
|
|
|
(786 |
) |
|
|
7 |
|
Asset-backed
securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
53 |
|
|
|
(28 |
) |
|
|
3 |
|
|
|
53 |
|
|
|
(28 |
) |
|
|
3 |
|
Total
temporarily impaired securities
|
|
$ |
6,171 |
|
|
$ |
(327 |
) |
|
|
14 |
|
|
$ |
22,855 |
|
|
$ |
(3,870 |
) |
|
|
63 |
|
|
$ |
29,026 |
|
|
$ |
(4,197 |
) |
|
|
77 |
|
|
|
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 ($1.8 million)
is concentrated in trust-preferred securities with an unrealized loss of $1.7
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 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 continued
to improve since the end of 2009. All of the Bank’s 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 (Wachovia
and Corestates) (Baa2) and Huntington Bancshares (Ba1). At June 30, 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. During the second
quarter, the Bank sold one corporate bond at a loss of $6
thousand. The following table provides additional detail about the
Bank’s trust preferred
securities:
Trust
Preferred Securities
|
June
30, 2010
|
(Dollars
in thousands)
|
Deal Name
|
|
Single
Issuer or
Pooled
|
|
Class
|
|
Amortized
Cost
|
|
|
Estimated
Fair Value
|
|
|
Gross
Unrealized
Gain (Loss)
|
|
|
Lowest
Credit
Rating
Assigned
|
|
|
Number of
Banks
currently
Performing
|
|
Deferrals
and Defaults
as % of
Original
Collateral
|
|
Expected Deferral/
Defaults as a
Percentage of
Remaining Performing
Collateral
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Huntington Cap Trust
|
|
Single
|
|
Preferred Stock
|
|
$ |
926 |
|
|
$ |
595 |
|
|
$ |
(331 |
) |
|
Ba1
|
|
|
1
|
|
None
|
|
None
|
|
Huntingtn Cap Trust II
|
|
Single
|
|
Preferred Stock
|
|
|
870 |
|
|
|
565 |
|
|
|
(305 |
) |
|
Ba1
|
|
|
1
|
|
None
|
|
None
|
|
BankAmerica Cap III
|
|
Single
|
|
Preferred Stock
|
|
|
954 |
|
|
|
673 |
|
|
|
(281 |
) |
|
Baa3
|
|
|
1
|
|
None
|
|
None
|
|
Wachovia Cap Trust II
|
|
Single
|
|
Preferred Stock
|
|
|
272 |
|
|
|
230 |
|
|
|
(42 |
) |
|
Baa2
|
|
|
1
|
|
None
|
|
None
|
|
Corestates Captl Tr II
|
|
Single
|
|
Preferred Stock
|
|
|
921 |
|
|
|
619 |
|
|
|
(302 |
) |
|
Baa1
|
|
|
1
|
|
None
|
|
None
|
|
Chase Cap VI JPM
|
|
Single
|
|
Preferred Stock
|
|
|
955 |
|
|
|
779 |
|
|
|
(176 |
) |
|
A2
|
|
|
1
|
|
None
|
|
None
|
|
Fleet Cap Tr V
|
|
Single
|
|
Preferred Stock
|
|
|
970 |
|
|
|
732 |
|
|
|
(238 |
) |
|
Baa3
|
|
|
1
|
|
None
|
|
None
|
|
|
|
|
|
|
|
$ |
5,868 |
|
|
$ |
4,193 |
|
|
$ |
(1,675 |
) |
|
|
|
|
|
|
|
|
|
|
|
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 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 all 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. The Bank’s Alt-A investments continue to
experience rating declines and some experienced an increase in delinquencies and
default rates, and a weakening of the underlying credit support. All
of these bonds, except one, have some type of credit support tranche that will
absorb any loss prior to losses at the senior tranche held by the Bank. At June
30, 2010, the bond ratings ranged from CCC to AAA, and credit support levels
ranged from 0% to 13.03%.
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. In determining the credit related loss, Management considers all
principal past due 60 days or more as a loss. If additional principal moves
beyond 60 days past due, it will also be considered a loss. As a result of the
first quarter analysis on the private label MBS portfolio, it was determined
that two bonds contained losses that were considered other-than-temporary.
Management determined $255 thousand was credit related and therefore, recorded
an impairment charge of $255 thousand in earnings during the first quarter of
2010. The same review process was conducted for the second quarter of
2010 and no additional impairment charges were required.
The
market for private label 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 provides additional detail about private label mortgage-backed
securities:
Private Label Mortgage Backed Securities
|
|
June 30, 2010
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Orgination
|
|
Amortized
|
|
|
Fair
|
|
|
Unrealized
|
|
Collateral
|
|
Current
|
|
|
Credit
|
|
|
OTTI
|
|
Decscription
|
|
Date
|
|
Cost
|
|
|
Value
|
|
|
Gain (Loss)
|
|
Type
|
|
Rating
|
|
|
Support %
|
|
|
Charges
|
|
RALI 2003-QS15 A1
|
|
8/1/2003
|
|
$ |
715 |
|
|
$ |
694 |
|
|
$ |
(21 |
) |
ALT
A
|
|
Aa2
|
|
|
|
11.29 |
|
|
$ |
- |
|
RALI 2004-QS4 A7
|
|
3/1/2004
|
|
|
666 |
|
|
|
652 |
|
|
|
(14 |
) |
ALT
A
|
|
AAA
|
|
|
|
13.03 |
|
|
|
- |
|
MALT 2004-6 7A1
|
|
6/1/2004
|
|
|
780 |
|
|
|
650 |
|
|
|
(130 |
) |
ALT
A
|
|
AAA
|
|
|
|
10.52 |
|
|
|
- |
|
RALI 2005-QS2 A1
|
|
2/1/2005
|
|
|
730 |
|
|
|
608 |
|
|
|
(121 |
) |
ALT
A
|
|
B
|
|
|
|
7.70 |
|
|
|
- |
|
RALI 2006-QS4 A2
|
|
4/1/2006
|
|
|
1,044 |
|
|
|
756 |
|
|
|
(288 |
) |
ALT
A
|
|
Caa2
|
|
|
|
0.68 |
|
|
|
142 |
|
GSR 2006-5F 2A1
|
|
5/1/2006
|
|
|
544 |
|
|
|
479 |
|
|
|
(65 |
) |
Prime
|
|
CCC
|
|
|
|
4.64 |
|
|
|
- |
|
RALI 2006-QS8 A1
|
|
7/28/2006
|
|
|
572 |
|
|
|
426 |
|
|
|
(146 |
) |
ALT
A
|
|
Caa2
|
|
|
|
0.00 |
|
|
|
113 |
|
|
|
|
|
$ |
5,051 |
|
|
$ |
4,265 |
|
|
$ |
(786 |
) |
|
|
|
|
|
|
|
|
|
|
$ |
255 |
|
The
following table represents the cumulative credit losses on securities recognized
in earnings as of June 30, 2010.
|
|
Six Months
|
|
|
|
Ended
|
|
|
|
June 30, 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, June 30, 2010
|
|
$ |
255 |
|
The
Corporation and the Bank each have a portfolio of equity securities that are
concentrated in bank stocks. The stocks represent a mix of community,
large regional and national bank stocks with a fair value of $4.0 million at
June 30, 2010. Unrealized losses on equity securities totaled
$1.4 million, falling back to virtually the 2009 year-end level, after showing
an improvement at the end of the first quarter. Equity securities are
assessed for other-than-temporary impairment based on the length of time of
impairment, dollar amount of the impairment and general market and financial
conditions relating to specific issues. 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 June 30, 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 June 30, 2010, the Bank held
approximately $708 thousand in excess FHLB stock that it would not have been
required to hold prior to the suspension of the stock repurchase program. During
the second quarter, the FHLB announced an amended capital plan effective July 1,
2010 that changes the capital stock calculation and therefore, the amount of
capital stock the Bank is required to hold. The above amount of excess stock
reflects this change. 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 $18.0 million since year-end. Residential real estate
loans have increased by $1.9 million. Mortgages, home equity loans
and lines of credit have decreased approximately $6 million, while commercial
loans for residential real estate 1-4 families has increased approximately $8
million. Residential real estate construction remained flat period
over period with an ending balance of $84.8 million. This amount is
comprised of $1.7 million in loans to individuals to build their own homes and
$83.1 million in loans to developers to construct residential homes for
sale. This compares with $1.8 million to individuals and $82.8
million to developers at year-end. The Bank expects its mortgage and
home equity portfolios to decrease as the majority of new mortgages are sold and
there is less demand from consumers for home equity loans as the equity in their
homes has decreased and consumers are less willing to borrow money.
Commercial
lending activity continues to be strong and these balances have increased
approximately $18.7 million since year-end. Commercial real estate loans have
increased $8.9 million during the year. Commercial, industrial and
agricultural loans increased $9.8 million, primarily the result of loans to
commercial customers to fund business operations (approximately $3.0 million)
and loans to local municipalities (approximately $4.9
million). During the first half of 2010, the Bank purchased $3.1
million of loan participations, $1.5 million included in commercial real estate
and $1.4 million included in residential real estate
construction. The Bank expects the amount of commercial loan
participations available for purchase in 2010 will be less than the $45.2
million purchased in 2009 as a result of a general slow down in commercial
business activity.
Consumer
loans have decreased by approximately $2.0 million, much of the decrease
occurring in the indirect lending portfolio. The Bank’s indirect
lending portfolio is approximately $10 million, down from approximately $13
million at year-end. With the Bank’s decision to exit this line of
business in the first quarter of 2010, as well as the unwillingness of consumers
to increase their debt, the consumer portfolio will continue to
run-down.
The
following table presents a summary of loans outstanding, by primary collateral,
at:
|
|
|
|
|
|
|
|
Change
|
|
(Amounts
in thousands)
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
Amount
|
|
|
%
|
|
Residential
Real Estate 1-4 Family
|
|
|
|
|
|
|
|
|
|
|
|
|
First
liens
|
|
$ |
145,604 |
|
|
$ |
142,330 |
|
|
$ |
3,274 |
|
|
|
2.3 |
|
Junior
liens and lines of credit
|
|
|
60,134 |
|
|
|
61,460 |
|
|
|
(1,326 |
) |
|
|
(2.2 |
) |
Total
|
|
|
205,738 |
|
|
|
203,790 |
|
|
|
1,948 |
|
|
|
1.0 |
|
Residential
real estate - construction
|
|
|
84,820 |
|
|
|
84,649 |
|
|
|
171 |
|
|
|
0.2 |
|
Commercial,
industrial and agricultural real estate
|
|
|
292,762 |
|
|
|
283,839 |
|
|
|
8,923 |
|
|
|
3.1 |
|
Commercial,
industrial and agricultural
|
|
|
153,858 |
|
|
|
144,035 |
|
|
|
9,823 |
|
|
|
6.8 |
|
Consumer
|
|
|
21,233 |
|
|
|
23,250 |
|
|
|
(2,017 |
) |
|
|
(8.7 |
) |
|
|
|
758,411 |
|
|
|
739,563 |
|
|
|
18,848 |
|
|
|
2.5 |
|
Less: Allowance
for loan losses
|
|
|
(9,751 |
) |
|
|
(8,937 |
) |
|
|
(814 |
) |
|
|
9.1 |
|
Net
Loans
|
|
$ |
748,660 |
|
|
$ |
730,626 |
|
|
$ |
18,034 |
|
|
|
2.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included
in the loan balances are the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unamortized deferred loan costs
|
|
$ |
575 |
|
|
$ |
589 |
|
|
|
|
|
|
|
|
|
Unamortized
discount on purchased loans
|
|
$ |
(257 |
) |
|
$ |
(286 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
pledged as collateral for borrowings and commitments from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
|
|
$ |
353,156 |
|
|
$ |
360,621 |
|
|
|
|
|
|
|
|
|
Federal
Reserve Bank
|
|
|
115,542 |
|
|
|
122,723 |
|
|
|
|
|
|
|
|
|
|
|
$ |
468,698 |
|
|
$ |
483,344 |
|
|
|
|
|
|
|
|
|
Loan
Quality:
Management
monitors loan asset quality by continually reviewing four measurements: (1)
watch list loans, (2) delinquent loans (primarily 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, as well as
potential problem loans. Potential problem loans are loans representing
borrowers that may or may not be able to comply with current loan terms, but
exclude loans that are 90 days or more past due and nonaccrual loans. Potential
problem loans were $28.1 million at June 30, 2010. Management
emphasizes early identification and monitoring of these loans to proactively
minimize any risk of loss.
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, continued to deteriorate as
nonperforming loans increased from $18.3 million at year-end 2009, to $19.4
million at March 31, 2010 and $20.3 million at June 30, 2010. As a result, the
nonperforming loan ratio increased slightly from 2.47% at the end of 2009 to
2.67% at June 30, 2010. The addition of one residential real estate construction
loan ($3.4 million) during the second quarter and an increase in residential
real estate loans ($657 thousand) over the six-month period contributed to the
increase in nonaccural loans since year-end. Likewise, consumers
continue to struggle with the lingering effects of the recession as overall
residential mortgage delinquencies continue to increase. Management expects the
trend of increasing delinquencies to continue during 2010.
The
following table presents a summary of nonperforming assets:
(Dollars
in thousands)
|
|
6/30/2010
|
|
|
12/31/2009
|
|
|
|
|
|
|
|
|
Nonaccrual
loans
|
|
|
|
|
|
|
Residential
Real Estate 1-4 Family
|
|
|
|
|
|
|
First
Liens
|
|
$ |
1,002 |
|
|
$ |
345 |
|
Junior
Liens and Lines of Credit
|
|
|
122 |
|
|
|
- |
|
Total
|
|
|
1,124 |
|
|
|
345 |
|
Residential
Real Estate - Construction
|
|
|
7,217 |
|
|
|
4,040 |
|
Commercial,
Industrial and Agricultural Real Estate
|
|
|
6,214 |
|
|
|
5,654 |
|
Commercial,
Industrial and Agricultural
|
|
|
126 |
|
|
|
124 |
|
Consumer
|
|
|
16 |
|
|
|
30 |
|
Total
nonaccrual loans
|
|
$ |
14,697 |
|
|
$ |
10,193 |
|
|
|
|
|
|
|
|
|
|
Loans
past due 90 days or more and not included above
|
|
|
|
|
|
|
|
|
Residential
Real Estate 1-4 Family
|
|
|
|
|
|
|
|
|
First
Liens
|
|
$ |
1,336 |
|
|
$ |
3,060 |
|
Junior
Liens and Lines of Credit
|
|
|
423 |
|
|
|
494 |
|
Total
|
|
|
1,759 |
|
|
|
3,554 |
|
Residential
Real Estate - Construction
|
|
|
2,417 |
|
|
|
1,426 |
|
Commercial,
Industrial and Agricultural Real Estate
|
|
|
815 |
|
|
|
1,926 |
|
Commercial,
Industrial and Agricultural
|
|
|
413 |
|
|
|
960 |
|
Consumer
|
|
|
162 |
|
|
|
195 |
|
Total
loans past due 90 days or more and still accruing
|
|
|
5,566 |
|
|
|
8,061 |
|
Total
nonperforming loans
|
|
|
20,263 |
|
|
|
18,254 |
|
Repossessed
assets
|
|
|
- |
|
|
|
18 |
|
Foreclosed
real estate
|
|
|
229 |
|
|
|
642 |
|
Total
nonperforming assets
|
|
$ |
20,492 |
|
|
$ |
18,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming
loans to total gross loans
|
|
|
2.67 |
% |
|
|
2.47 |
% |
Nonperforming
assets to total assets
|
|
|
2.08 |
% |
|
|
1.93 |
% |
Allowance
for loan losses to nonperforming loans
|
|
|
48.12 |
% |
|
|
48.96 |
% |
|
|
|
|
|
|
|
|
|
Impaired
loans
|
|
$ |
25,194 |
|
|
$ |
18,123 |
|
Impaired
loans with an allowance for loss
|
|
$ |
21,482 |
|
|
$ |
12,833 |
|
Allowance
for loss on impaired loans
|
|
$ |
5,792 |
|
|
$ |
4,890 |
|
|
|
|
|
|
|
|
|
|
Troubled
debt restructurings
|
|
$ |
667 |
|
|
$ |
- |
|
The
majority of the nonaccrual loan balance is comprised of five loan relationships
totaling $12.7 million. The following table provides additional information on
the most significant nonaccrual accounts:
Significant Nonaccrual Loans
|
|
June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Orgin.
|
|
|
|
|
|
ALL
|
|
Nonaccrual
|
|
|
|
|
|
|
|
Date
|
|
|
Balance
|
|
|
Reserve
|
|
Date
|
|
Collateral
|
|
Location
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrower
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
and land development
|
|
2006
|
|
|
$ |
2,944 |
|
|
$ |
1,095 |
|
2009
|
|
1st
lien residential building lots
|
|
PA
|
|
1 -4
family residential property
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2nd
& 3rd lien single family residential
|
|
MD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
rental
property
|
|
|
|
Borrower
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural
|
|
2004 - 2006
|
|
|
|
1,695 |
|
|
|
181 |
|
2009
|
|
1st
and 2nd lien on agricultural real estate,
|
|
PA
|
|
4
separate notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
farm
equipment, livestock and a 70% FSA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
guarantee
on a $381 note
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrower
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
|
2009
|
|
|
|
3,814 |
|
|
|
2,121 |
|
2009
|
|
1st
lien commercial real estate, equipment
|
|
PA
|
|
3
separate notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
other business assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrower
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
and land development
|
|
2006
|
|
|
|
861 |
|
|
|
324 |
|
2008
|
|
1st
lien raw land
|
|
MD
|
|
1 -4
family residential property
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
building lots and raw land
|
|
DE
|
|
2
separate notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrower
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
and land development
|
|
2007 - 2009
|
|
|
|
3,412 |
|
|
|
341 |
|
2010
|
|
Joint
and several liability of principals
|
|
N/A
|
|
1 -4
family residential property
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
separate notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,726 |
|
|
$ |
4,062 |
|
|
|
|
|
|
|
Four of
these relationships (borrowers 1 – 4) remained relatively unchanged from
year-end. These loans include two residential real estate development loans
($3.8 million) one manufacturing loan ($3.8 million) and one agricultural loan
($1.7 million). These loans are all secured, in part, by some type of real
estate collateral. In addition, specific reserves have been established against
these loans to cover 100% of estimated losses. Management continues to pursue
numerous workout options on these credits in an effort to minimize any
loss.
Borrower
5 is new to nonaccrual status during the second quarter. This borrower is in the
business of providing interim construction financing, primarily for modular
homes. The Bank is one of a number of financial institutions that have
separately provided financing for this business. Despite filing for bankruptcy
at the end of the first quarter of 2010, the account was current and performing
until it was placed on nonaccrual status in the second quarter. The
Bank has joint and several liability against the principals of the business who
have substantial net worth. As part of the bankruptcy process, the principal has
petitioned the court for permission to invest cash in the business. In addition,
several other banks, in an effort to improve their collateral position have
proposed a new financing package, which if approved by the bankruptcy court,
would payoff the Bank’s position. Based upon Management’s assessment
of the bankruptcy plan and the principals’ personal net worth, it believes that
the Bank’s loss will be limited. The Bank is uncertain when the bankruptcy plan
and new financing may be approved and it continues to monitor its risk of loss
on this account.
The
balance of loans 90 days or more past due and still accruing has declined since
year-end 2009 as loans have moved to nonaccrual status. Residential real estate
construction is the only loan category to show an increase over
year-end. This increase is the result of one loan ($959
thousand) that matured and was up for renewal and moved beyond 90 days past due
as a result of the maturity date and a temporary delay in renewing the
loan. Subsequent to quarter end, this credit was reviewed and renewed
with market terms. The Bank holds $229 thousand of foreclosed real estate,
comprised of one loan secured by residential real estate and one loan secured by
several residential building lots.
The
following table provides additional information on the foreclosed real
estate:
Foreclosed
Real Estate
|
|
June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars
in thousands)
|
|
Date
|
|
|
|
|
|
|
|
|
|
Acquired
|
|
Balance
|
|
Collateral
|
|
Location
|
|
|
|
|
|
|
|
|
|
|
|
Property
1
|
|
2009
|
|
$ |
91 |
|
4 residential building lots
|
|
PA
|
|
Property
2
|
|
2009
|
|
|
138 |
|
Residential property
|
|
PA
|
|
|
|
|
|
$ |
229 |
|
|
|
|
|
A loan is
considered to be impaired when, based on current information and events, it is
probable that the Bank will be unable to collect all interest and principal
payments due according to the originally contracted terms of the loan agreement.
Impaired loans totaled $21.3 million at June 30, 2010. Additional information on
impaired loans is included in the nonperforming loan table.
A loan is
considered a troubled debt restructuring if the creditor, for economic or legal
reasons related to the debtor’s financial difficulties, grants a concession to
the debtor that it would not otherwise consider. The Bank has one
loan classified as a troubled debt restructuring for $667
thousand. The loan is currently in compliance with its modified
terms. The bank has not performed any type of loan workout where it
has restructured an existing loan into multiple new loans.
Management
continually monitors the status of nonperforming loans, the value of any
collateral and potential of risk of loss.
Allowance
for Loan Losses:
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. It is Management’s general practice to
obtain a new appraisal or asset valuation for any loan that it has rated as
substandard or higher, including nonaccrual. Management, at its discretion, may
determine that additional adjustments to the appraisal or valuation are
required. Valuation adjustments will be made as necessary based on
other factors, including, but not limited to the economy, deferred maintenance,
industry, type of property/equipment etc and the knowledge Management has about
a particular situation. In addition, the cost to sell or liquidate the
collateral is also estimated when determining the realizable value to the
Bank.
Certain
factors involved in the evaluation are inherently subjective, as they require
material estimates that may be susceptible to significant change, including the
amounts and timing of future cash flows expected to be received on impaired
loans.
The
analysis for determining the ALL is consistent with guidance set forth in
generally accepted accounting principals (GAAP) and the Interagency Policy
Statement on the Allowance for Loan and Lease Losses. The analysis has two
components, specific and general allocations. The specific component addresses
specific reserves established for impaired loans. A loan is considered to be
impaired when, based on current information and events, it is probable that the
Bank will be unable to collect all interest and principal payments due according
to the originally contracted terms of the loan agreement. Expected
cash flow or collateral values discounted for market conditions and selling
costs are used to establish specific allocations.
The
general component addresses the reserves established for pools of homogenous
loans. The general component includes a quantitative and qualitative
analysis. The quantitative analysis includes the Bank’s historical
loan loss experience (weighted towards most recent periods) and other factors
derived from economic and market conditions that have been determined to have an
affect on the probability and magnitude of a loss. The qualitative analysis
utilizes a risk matrix that incorporates qualitative and environmental factors
such as: loan volume, management, nonperforming loans, loan review process,
credit concentrations, competition, and legal and regulatory issues. Input for
these factors is determined on the basis of Management’s observation, judgment
and experience. As a result of this input, additional loss
percentages are assigned to each pool of loans.
Management
monitors the adequacy of the allowance for loan losses on an ongoing basis and
reports its adequacy quarterly to the Credit Risk Oversight Committee of the
Board of Directors. Management believes that the ALL at June 30, 2010 is
adequate.
During
the first six months of 2010, $1.3 million was added to the allowance of loan
losses (ALL) thorough the provision for loan losses expense. The
provision expense was $1.0 million for the same period in 2009. For
the first six months of 2010, the net increase in the ALL was $814 thousand.
Management has continued to add to the ALL to account for continued loan growth
and increasing delinquency levels. The ALL as a percentage of loans
increased to 1.29% at June 30, 2010 from 1.21% at the December 31,
2009.
The
following table presents an analysis of the allowance for loan
losses:
|
|
|
|
|
|
|
|
Twelve Months
|
|
|
|
Six Months Ended
|
|
|
Ended
|
|
|
|
June 30
|
|
|
12/31/2009
|
|
(Dollars
in thousands)
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
$ |
8,937 |
|
|
$ |
7,357 |
|
|
$ |
7,357 |
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
Real Estate 1-4 Family
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Liens
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Junior
Liens and Lines of Credit
|
|
|
(126 |
) |
|
|
(94 |
) |
|
|
(94 |
) |
Total
|
|
|
(126 |
) |
|
|
(94 |
) |
|
|
(94 |
) |
Residential
real estate - construction
|
|
|
- |
|
|
|
- |
|
|
|
(724 |
) |
Commercial,
Industrial and Agricultural Real Estate
|
|
|
(115 |
) |
|
|
- |
|
|
|
(63 |
) |
Commercial,
Industrial and Agricultural
|
|
|
(102 |
) |
|
|
(200 |
) |
|
|
(567 |
) |
Consumer
|
|
|
(214 |
) |
|
|
(322 |
) |
|
|
(681 |
) |
Total
charge-offs
|
|
|
(557 |
) |
|
|
(616 |
) |
|
|
(2,129 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
Real Estate 1-4 Family
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Liens
|
|
|
9 |
|
|
|
15 |
|
|
|
25 |
|
Junior
Liens and Lines of Credit
|
|
|
1 |
|
|
|
- |
|
|
|
- |
|
Total
|
|
|
10 |
|
|
|
15 |
|
|
|
25 |
|
Residential
real estate - construction
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Commercial,
Industrial and Agricultural Real Estate
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Commercial,
Industrial and Agricultural
|
|
|
45 |
|
|
|
58 |
|
|
|
62 |
|
Consumer
|
|
|
66 |
|
|
|
97 |
|
|
|
184 |
|
Total
recoveries
|
|
|
121 |
|
|
|
170 |
|
|
|
271 |
|
Net
charge-offs
|
|
|
(436 |
) |
|
|
(446 |
) |
|
|
(1,858 |
) |
Provision
for loan losses
|
|
|
1,250 |
|
|
|
1,019 |
|
|
|
3,438 |
|
Balance
at end of year
|
|
$ |
9,751 |
|
|
$ |
7,930 |
|
|
$ |
8,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized
net loans charged-off as a percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
of
average loans
|
|
|
0.12 |
% |
|
|
0.13 |
% |
|
|
0.26 |
% |
Net
loans charged-off as a percentage of the
|
|
|
|
|
|
|
|
|
|
|
|
|
provision
for loan losses
|
|
|
34.88 |
% |
|
|
43.77 |
% |
|
|
54.04 |
% |
Allowance
as a percentage of loans
|
|
|
1.29 |
% |
|
|
1.13 |
% |
|
|
1.21 |
% |
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.
The Bank
recorded net loan charges-off of $436 thousand compared to $446 thousand in the
first half of 2009. The annualized net loan charge-off ratio of
..12% is only slightly better than the 2009 six-month ratio of .13%, but is
approximately half of the ratio of .26% for all of 2009.
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 $8.0 million during the first six months of 2010 to $730.4
million. Non-interest bearing deposits increased $12.6 million, while savings
and interest-bearing checking deposits increased $33.4 million and time deposits
decreased $54.1 million. The majority of the increase in non-interest bearing
accounts came in commercial checking accounts ($8 million) and retail checking
accounts ($3 million). The Bank’s Money Management product
increased $29.6 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 $32 million due to short-term funding maturing in the
first half of 2010. As of June 30, 2010, the Bank had $19.9 million
in CDARS reciprocal deposits included in brokered time deposits.
The
following table presents a summary of deposits outstanding at:
|
|
|
|
|
|
|
|
Change
|
|
(Amounts
in thousands)
|
|
6/30/2010
|
|
|
12/31/2009
|
|
|
Amount
|
|
|
%
|
|
Demand,
noninterest-bearing
|
|
$ |
90,324 |
|
|
$ |
77,675 |
|
|
$ |
12,649 |
|
|
|
16.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
checking
|
|
|
98,237 |
|
|
|
97,636 |
|
|
|
601 |
|
|
|
0.6 |
|
Savings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market accounts
|
|
|
273,236 |
|
|
|
243,600 |
|
|
|
29,636 |
|
|
|
12.2 |
|
Passbook
and statement savings
|
|
|
50,198 |
|
|
|
46,986 |
|
|
|
3,212 |
|
|
|
6.8 |
|
Total
savings and interest checking
|
|
|
421,671 |
|
|
|
388,222 |
|
|
|
33,449 |
|
|
|
8.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time
deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
than $100,000
|
|
|
131,704 |
|
|
|
144,762 |
|
|
|
(13,058 |
) |
|
|
(9.0 |
) |
$100,000
and over
|
|
|
53,284 |
|
|
|
62,576 |
|
|
|
(9,292 |
) |
|
|
(14.8 |
) |
Brokered
time deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
than $100,000
|
|
|
13,838 |
|
|
|
21,226 |
|
|
|
(7,388 |
) |
|
|
(34.8 |
) |
$100,000
and over
|
|
|
19,536 |
|
|
|
43,904 |
|
|
|
(24,368 |
) |
|
|
(55.5 |
) |
Total
time deposits
|
|
|
218,362 |
|
|
|
272,468 |
|
|
|
(54,106 |
) |
|
|
(19.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
deposits
|
|
$ |
730,357 |
|
|
$ |
738,365 |
|
|
$ |
(8,008 |
) |
|
|
(1.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overdrawn
deposit accounts reclassified as loan balances
|
|
$ |
188 |
|
|
$ |
183 |
|
|
|
|
|
|
|
|
|
Borrowings:
The
balance of securities sold under agreements to repurchase, which are accounted
for as collateralized financings, increased $12.8 million from year-end and the
long-term debt from the FHLB decreased $892 thousand due to scheduled
amortization and maturities.
Shareholders’
Equity:
Total shareholders’ equity increased
$2.4 million to $81.2 million at June 30, 2010, compared to $78.8 million at the
end of 2009. The increase in retained earnings from the Corporation’s
net income of $4.1 million was partially offset by the cash dividend of $2.1
million. The increase of $79 thousand in accumulated other comprehensive loss is
mainly the result of a decline in the market value of
derivatives. The Corporation’s dividend payout ratio of 50.5%, is
less than the 55.3% ratio for the first six months of 2009 and the total payout
ratio of 62.9% 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 three quarters 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 six months of 2010.
Capital adequacy is currently defined
by regulatory agencies through the use of several minimum required
ratios. At June 30, 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
|
|
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
Minimum
|
|
|
Minimum
|
|
Total
Risk Based Capital Ratio (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Franklin
Financial Services Corporation
|
|
|
11.11 |
% |
|
|
10.89 |
% |
|
|
8.00 |
% |
|
|
n/a
|
|
Farmers
& Merchants Trust Company
|
|
|
10.65 |
% |
|
|
10.45 |
% |
|
|
8.00 |
% |
|
|
10.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 Capital Ratio (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franklin
Financial Services Corporation
|
|
|
9.87 |
% |
|
|
9.69 |
% |
|
|
4.00 |
% |
|
|
n/a
|
|
Farmers
& Merchants Trust Company
|
|
|
9.40 |
% |
|
|
9.25 |
% |
|
|
4.00 |
% |
|
|
6.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage
Ratio (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franklin
Financial Services Corporation
|
|
|
7.73 |
% |
|
|
7.50 |
% |
|
|
4.00 |
% |
|
|
n/a
|
|
Farmers
& Merchants Trust Company
|
|
|
7.35 |
% |
|
|
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’s primary market area
includes Franklin, Fulton, Cumberland and Huntingdon County, PA. This
area is diverse in demographic and economic makeup. County
populations range from a low of approximately 15,000 in Fulton County to over
230,000 in Cumberland County. At June 30, 2010, the unemployment rate
for Pennsylvania was 9.1% and the national rate was 9.5%, while the unemployment
rate in the Corporation’s market area ranged from 7.8% in Cumberland County to
12.3% in Fulton County. The unemployment rates for the Bank’s market
area have increased over the last three years along with state and national
rates.
As the
recession negatively affected unemployment numbers, it also resulted in a slow
down in building permits and housing prices. The largest decline in
building permits and housing prices over the last three years occurred in 2009,
but building permits have rebounded slightly in 2010 when compared to
2009. Recent statistics from the Federal Reserve show that the
national rate of residential mortgages 90 days or more past due is 5.6% compared
to rates ranging from 2.0% to 3.7% in the Corporation’s market
area. The Bank’s ratio of first lien residential mortgages past due
90 days or more is .92%.
The
following table presents economic data:
Economic
Data
|
|
6/30/2010
|
|
|
12/31/2009
|
|
Unemployment
Rate (seasonally adjusted)
|
|
|
|
|
|
|
Market
area range (1)
|
|
|
7.8 - 12.3 |
% |
|
|
6.8 - 14.4 |
% |
Pennsylvania
|
|
|
9.1 |
% |
|
|
8.1 |
% |
United
States
|
|
|
9.5 |
% |
|
|
9.3 |
% |
|
|
|
|
|
|
|
|
|
Housing
Price Index - year over year change
|
|
|
|
|
|
|
|
|
PA,
nonmetropolitan statistical area
|
|
|
-4.4 |
% |
|
|
-3.3 |
% |
United
States
|
|
|
-6.8 |
% |
|
|
-4.4 |
% |
|
|
|
|
|
|
|
|
|
Franklin
County Building Permits - year over year change
|
|
|
|
|
|
|
|
|
Residential,
estimated
|
|
|
5.2 |
% |
|
|
-30.0 |
% |
Multifamily,
estimated
|
|
|
8.4 |
% |
|
|
-38.9 |
% |
|
|
|
|
|
|
|
|
|
Mortgage
Delinquency
|
|
|
|
|
|
|
|
|
Market
area range (1)
|
|
|
2.2 - 3.9 |
% |
|
|
2.0 - 3.7 |
% |
National
|
|
|
5.70 |
% |
|
|
5.60 |
% |
(1)
Franklin, Cumberland, Fulton and Huntingdon Counties
Unlike many companies, the assets and
liabilities of the Corporation are financial in nature. As such, interest rates
and changes in interest rates may have a more significant effect on the
Corporation’s financial results than on other types of industries. Because of
this, the Corporation watches the actions of the Federal Reserve Open Market
Committee (FOMC) as it makes decisions about interest rate changes. The Fed
continued to hold the fed funds target rate steady at .25% in the first half 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.
Regulatory
Issues
On July
21, 2010, the President signed the Dodd-Frank Wall Street Reform and Consumer
Protection Act. This legislation is one of the most comprehensive reform bills
ever introduced to the financial services industry. Financial service providers
from small community banks to the largest Wall Street firms will be affected by
this legislation. Many of aspects of this Act will take effect over several
years and the Corporation is still reviewing the details of the Act. At this
time, it is difficult to predict the extent to which the Act will affect the
Corporation. However, it is likely that the Act will impose a greater regulatory
burden on the Corporation and increase its cost of compliance.
Some of
the provisions included in the Act that are likely to affect the Corporation
are:
|
·
|
The
Consumer Financial Protection Bureau (CFPB) has been created to set rules
and regulations regarding consumer lending activities. Banks
with less than $10 billion in assets are exempt from examination by the
CFPB, but the CFPB can require community banks to submit any information
it requests for review. The CFPB will also require new
disclosure requirements for all
banks.
|
|
·
|
FDIC
assessments will be based on bank assets rather than domestic
deposits.
|
|
·
|
FDIC
insurance limits have been permanently increased to
$250,000.
|
|
·
|
Unlimited
deposit insurance coverage for noninterest bearing transactions accounts
has been extended for two years through the Transaction Account Guarantee
program.
|
|
·
|
New
trust preferred securities issued by bank holding companies no longer
qualify as Tier 1 capital.
|
|
·
|
Loan
originators must now retain 5% of any loan they sell or securitize, except
for mortgages that meet low-risk standards, yet to be
developed.
|
|
·
|
The
Federal Reserve is directed to set interchange rates for debit-card
issuers with more than $10 billion in assets that are directly related to
the cost of providing the service. The affect of this price-control is
expected to flow down to community banks in the form of lower interchange
fees. Merchants may now set a minimum transaction amount for the use of
debit or credit cards.
|
|
·
|
Shareholders
of publicly traded community banks must be given a non-binding vote on
executive compensation.
|
The
Federal Reserve Board implemented new rules that prohibit financial institutions
from charging consumers fees for paying overdrafts on automated teller machine
(ATM) and one-time debit card transactions, unless a consumer consents, or
opts-in, to the overdraft service for those types of transactions. The new rules
are effective July 1, 2010 for accounts opened after this date and effective
August 15, 2010 for accounts opened prior to July 1, 2010.
These new
rules could result in a reduction of overdraft fee income if a significant
number of consumers choose not to opt-in to the overdraft service. During the
second quarter, the Bank undertook an aggressive process to notify consumers of
this change and to encourage them to consent to the overdraft service so that
their current overdraft protection benefit will continue to function as they are
accustomed to. The Bank is pleased with the level of opt-in responses it has
received, but it is still uncertain as to the affect that this rule change could
have on fee income.
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 June 30, 2010, the Bank had approximately $118 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
June 30, 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 $73 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. The Bank’s ability to access brokered CDs could be negatively
affected if its capital level was to fall below “well capitalized.”
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
$196.9 million and $219.1 million, respectively, at June 30, 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 June 30,
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 June 30, 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 six months ended June 30, 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.
There were no material changes in the
Corporation’s risk factors during the six months ended June 30, 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 June 30, 2010, 4,179 shares have been purchased under this plan in 2009.
No shares have been purchased in 2010.
The
Corporation did not issue any unregistered equity securities during the quarter
ended June 30, 2010.
Item
3.
|
Defaults by the
Company on its Senior
Securities
|
None
Item
4.
|
Removed and
Reserved
|
Item
5.
|
Other
Information
|
None
Exhibits
3.1 Articles
of Incorporation of the Corporation. (Filed as Exhibit 3.1 to
Annual Report on Form 10-K for the year ended December 31, 2005 and
incorporated herein by reference.)
3.2 Bylaws
of the Corporation. (Filed as Exhibit 99 to Current Report on Form 8-K filed on
December 20, 2004 and incorporated herein by reference.)
31.1 Rule
13a – 14(a)/15d-14(a) Certifications – Principal Executive Officer
31.2 Rule
13a – 14(a)/15d-14(a) Certifications – Principal Financial Officer
32.1
Section 1350 Certifications – Principal Executive Officer
32.2
Section 1350 Certifications – Principal Financial Officer
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
|
|
|
|
August 9,
2010
|
|
|
/s/ William E. Snell,
Jr. |
|
|
|
William
E. Snell, Jr.
|
|
|
President
and Chief Executive Officer
|
|
|
(Authorized
Officer)
|
|
|
|
August 9,
2010
|
|
|
/s/ Mark R.
Hollar |
|
|
|
|
Mark
R. Hollar
|
|
|
Treasurer
and Chief Financial Officer
|
|
|
(Principal
Financial
Officer)
|