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 September 30, 2010,
OR
¨ TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
transition period from ....... to .......
Commission
file number 0-12126
FRANKLIN FINANCIAL SERVICES
CORPORATION
(Exact
name of registrant as specified in its charter)
PENNSYLVANIA
|
25-1440803
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Identification
No.)
|
20 SOUTH MAIN STREET (P.O.
BOX 6010), CHAMBERSBURG, PA 17201-0819
(Address
of principal executive offices)
717/264-6116
(Registrant’s
telephone number, including area code)
Not
Applicable
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes x No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes ¨ No ¨
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer ¨
|
Accelerated
filer x
|
Non-accelerated
filer ¨
|
Smaller reporting company
¨
|
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Act) Yes ¨ No
x
There
were 3,900,881 outstanding shares of the Registrant’s common stock as of October
29, 2010.
INDEX
Part
I - FINANCIAL INFORMATION |
3
|
|
|
Item
1 - Financial Statements
|
3
|
|
|
Consolidated
Balance Sheets as of September 30, 2010 and December 31, 2009
(unaudited)
|
3
|
|
|
Consolidated
Statements of Income for the Three and Nine Months ended
|
|
September
30, 2010 and 2009 (unaudited)
|
4
|
|
|
Consolidated
Statements of Changes in Shareholders’ Equity for the
|
|
Nine
Months ended September 30, 2010 and 2009 (unaudited)
|
5
|
|
|
Consolidated
Statements of Cash Flows for the Nine Months ended
|
|
September
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
|
47
|
|
|
Item
4 – Controls and Procedures
|
47
|
|
|
Part II - OTHER INFORMATION
|
48
|
|
|
Item
1 – Legal Proceedings
|
48
|
|
|
Item
1A – Risk Factors
|
48
|
|
|
Item
2 – Unregistered Sales of Equity Securities and Use of
Proceeds
|
48
|
|
|
Item
3 – Defaults by the Company on its Senior Securities
|
48
|
|
|
Item
4 – Removed and Reserved
|
48
|
|
|
Item
5 – Other Information
|
48
|
|
|
Item
6 – Exhibits
|
48
|
|
|
SIGNATURE
PAGE
|
49
|
|
|
EXHIBITS
|
|
Part
I FINANCIAL INFORMATION
Item 1 Financial
Statements
Consolidated
Balance Sheets
(Amounts
in thousands, except share and per share data)
(unaudited)
|
|
September 30
|
|
|
December 31
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$ |
16,117 |
|
|
$ |
14,336 |
|
Interest-bearing
deposits in other banks
|
|
|
5,281 |
|
|
|
18,912 |
|
Total
cash and cash equivalents
|
|
|
21,398 |
|
|
|
33,248 |
|
Investment
securities available for sale
|
|
|
125,172 |
|
|
|
143,288 |
|
Restricted
stock
|
|
|
6,482 |
|
|
|
6,482 |
|
Loans
|
|
|
757,803 |
|
|
|
739,563 |
|
Allowance
for loan losses
|
|
|
(9,598 |
) |
|
|
(8,937 |
) |
Net
Loans
|
|
|
748,205 |
|
|
|
730,626 |
|
Premises
and equipment, net
|
|
|
16,771 |
|
|
|
15,741 |
|
Bank
owned life insurance
|
|
|
19,422 |
|
|
|
18,919 |
|
Goodwill
|
|
|
9,016 |
|
|
|
9,159 |
|
Other
intangible assets
|
|
|
2,118 |
|
|
|
2,461 |
|
Other
assets
|
|
|
19,004 |
|
|
|
19,449 |
|
Total
assets
|
|
$ |
967,588 |
|
|
$ |
979,373 |
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
Demand
(non-interest bearing)
|
|
$ |
87,114 |
|
|
$ |
77,675 |
|
Savings
and interest-bearing checking
|
|
|
436,024 |
|
|
|
388,222 |
|
Time
|
|
|
203,661 |
|
|
|
272,468 |
|
Total
Deposits
|
|
|
726,799 |
|
|
|
738,365 |
|
Securities
sold under agreements to repurchase
|
|
|
54,573 |
|
|
|
55,855 |
|
Long-term
debt
|
|
|
91,343 |
|
|
|
94,688 |
|
Other
liabilities
|
|
|
12,633 |
|
|
|
11,699 |
|
Total
liabilities
|
|
|
885,348 |
|
|
|
900,607 |
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity
|
|
|
|
|
|
|
|
|
Common
stock $1 par value per share, 15,000,000 shares authorized
|
|
|
|
|
|
|
|
|
with
4,298,904 shares issued, and 3,900,750 shares and 3,863,066
shares
|
|
|
|
|
|
|
|
|
outstanding
at September 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
|
|
|
32,799 |
|
|
|
32,832 |
|
Retained
earnings
|
|
|
57,363 |
|
|
|
54,566 |
|
Accumulated
other comprehensive loss
|
|
|
(5,101 |
) |
|
|
(5,138 |
) |
Treasury
stock, 398,154 shares and 435,838 shares at cost at
|
|
|
|
|
|
|
|
|
September
30, 2010 and December 31, 2009, respectively
|
|
|
(7,120 |
) |
|
|
(7,793 |
) |
Total
shareholders' equity
|
|
|
82,240 |
|
|
|
78,766 |
|
Total
liabilities and shareholders' equity
|
|
$ |
967,588 |
|
|
$ |
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 Nine Months Ended
|
|
|
|
September 30
|
|
|
September 30
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans,
including fees
|
|
$ |
9,838 |
|
|
$ |
9,559 |
|
|
$ |
29,080 |
|
|
$ |
28,214 |
|
Interest
and dividends on investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
interest
|
|
|
739 |
|
|
|
954 |
|
|
|
2,368 |
|
|
|
3,059 |
|
Tax
exempt interest
|
|
|
385 |
|
|
|
419 |
|
|
|
1,253 |
|
|
|
1,357 |
|
Dividend
income
|
|
|
12 |
|
|
|
38 |
|
|
|
39 |
|
|
|
134 |
|
Federal
funds sold
|
|
|
- |
|
|
|
5 |
|
|
|
- |
|
|
|
11 |
|
Deposits
and obligations of other banks
|
|
|
10 |
|
|
|
9 |
|
|
|
26 |
|
|
|
10 |
|
Total
interest income
|
|
|
10,984 |
|
|
|
10,984 |
|
|
|
32,766 |
|
|
|
32,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
2,048 |
|
|
|
2,659 |
|
|
|
6,611 |
|
|
|
7,677 |
|
Securities
sold under agreements to repurchase
|
|
|
38 |
|
|
|
40 |
|
|
|
116 |
|
|
|
130 |
|
Short-term
borrowings
|
|
|
- |
|
|
|
2 |
|
|
|
- |
|
|
|
13 |
|
Long-term
debt
|
|
|
980 |
|
|
|
1,040 |
|
|
|
2,930 |
|
|
|
3,145 |
|
Total
interest expense
|
|
|
3,066 |
|
|
|
3,741 |
|
|
|
9,657 |
|
|
|
10,965 |
|
Net
interest income
|
|
|
7,918 |
|
|
|
7,243 |
|
|
|
23,109 |
|
|
|
21,820 |
|
Provision
for loan losses
|
|
|
625 |
|
|
|
1,644 |
|
|
|
1,875 |
|
|
|
2,663 |
|
Net
interest income after provision for loan losses
|
|
|
7,293 |
|
|
|
5,599 |
|
|
|
21,234 |
|
|
|
19,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
and trust services fees
|
|
|
884 |
|
|
|
866 |
|
|
|
2,908 |
|
|
|
2,622 |
|
Loan
service charges
|
|
|
288 |
|
|
|
189 |
|
|
|
757 |
|
|
|
844 |
|
Mortgage
banking activities
|
|
|
(55 |
) |
|
|
19 |
|
|
|
25 |
|
|
|
109 |
|
Deposit
service charges and fees
|
|
|
622 |
|
|
|
678 |
|
|
|
1,793 |
|
|
|
1,911 |
|
Other
service charges and fees
|
|
|
353 |
|
|
|
322 |
|
|
|
1,029 |
|
|
|
963 |
|
Increase
in cash surrender value of life insurance
|
|
|
172 |
|
|
|
158 |
|
|
|
503 |
|
|
|
482 |
|
Other
|
|
|
18 |
|
|
|
17 |
|
|
|
90 |
|
|
|
341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTTI
losses on securities
|
|
|
(318 |
) |
|
|
- |
|
|
|
(1,007 |
) |
|
|
(422 |
) |
Loss
recognized in other comprehensive loss (before taxes)
|
|
|
- |
|
|
|
- |
|
|
|
(434 |
) |
|
|
- |
|
Net
OTTI losses recognized in earnings
|
|
|
(318 |
) |
|
|
- |
|
|
|
(573 |
) |
|
|
(422 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
(losses) gains, net
|
|
|
(56 |
) |
|
|
(267 |
) |
|
|
212 |
|
|
|
(212 |
) |
Total
noninterest income
|
|
|
1,908 |
|
|
|
1,982 |
|
|
|
6,744 |
|
|
|
6,638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
3,384 |
|
|
|
3,121 |
|
|
|
10,147 |
|
|
|
9,400 |
|
Net
occupancy expense
|
|
|
478 |
|
|
|
495 |
|
|
|
1,498 |
|
|
|
1,451 |
|
Furniture
and equipment expense
|
|
|
196 |
|
|
|
216 |
|
|
|
578 |
|
|
|
646 |
|
Advertising
|
|
|
378 |
|
|
|
334 |
|
|
|
1,033 |
|
|
|
1,068 |
|
Legal
and professional fees
|
|
|
418 |
|
|
|
614 |
|
|
|
1,163 |
|
|
|
1,158 |
|
Data
processing
|
|
|
370 |
|
|
|
383 |
|
|
|
1,249 |
|
|
|
1,219 |
|
Pennsylvania
bank shares tax
|
|
|
151 |
|
|
|
143 |
|
|
|
459 |
|
|
|
431 |
|
Intangible
amortization
|
|
|
114 |
|
|
|
117 |
|
|
|
343 |
|
|
|
351 |
|
FDIC
insurance
|
|
|
302 |
|
|
|
234 |
|
|
|
882 |
|
|
|
1,148 |
|
Other
|
|
|
844 |
|
|
|
808 |
|
|
|
2,468 |
|
|
|
2,709 |
|
Total
noninterest expense
|
|
|
6,635 |
|
|
|
6,465 |
|
|
|
19,820 |
|
|
|
19,581 |
|
Income
before federal income taxes
|
|
|
2,566 |
|
|
|
1,116 |
|
|
|
8,158 |
|
|
|
6,214 |
|
Federal
income tax expense
|
|
|
763 |
|
|
|
33 |
|
|
|
2,221 |
|
|
|
1,392 |
|
Net
income
|
|
$ |
1,803 |
|
|
$ |
1,083 |
|
|
$ |
5,937 |
|
|
$ |
4,822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$ |
0.46 |
|
|
$ |
0.28 |
|
|
$ |
1.53 |
|
|
$ |
1.26 |
|
Diluted
earnings per share
|
|
$ |
0.46 |
|
|
$ |
0.28 |
|
|
$ |
1.53 |
|
|
$ |
1.26 |
|
Cash
dividends declared per share
|
|
$ |
0.27 |
|
|
$ |
0.27 |
|
|
$ |
0.81 |
|
|
$ |
0.81 |
|
The
accompanying notes are an integral part of these financial
statements.
For
the Nine Months Ended September 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
|
|
|
- |
|
|
|
- |
|
|
|
4,822 |
|
|
|
- |
|
|
|
- |
|
|
|
4,822 |
|
Unrealized
gain on securities,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of reclassification adjustments and taxes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,742 |
|
|
|
- |
|
|
|
1,742 |
|
Unrealized
gain on hedging activities,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of reclassification adjustments and taxes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
654 |
|
|
|
- |
|
|
|
654 |
|
Total
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends declared, $.81 per share
|
|
|
- |
|
|
|
- |
|
|
|
(3,104 |
) |
|
|
- |
|
|
|
- |
|
|
|
(3,104 |
) |
Acquisition
of 5,640 shares of treasury stock
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(142 |
) |
|
|
(142 |
) |
Treasury
shares issued to dividend reinvestment plan: 23,496
shares
|
|
|
- |
|
|
|
(65 |
) |
|
|
- |
|
|
|
- |
|
|
|
639 |
|
|
|
574 |
|
Common
stock issued under stock option plans: 98 shares
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2 |
|
|
|
2 |
|
Stock
option compensation
|
|
|
- |
|
|
|
29 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
29 |
|
Balance
at September 30, 2009
|
|
$ |
4,299 |
|
|
$ |
32,847 |
|
|
$ |
53,844 |
|
|
$ |
(5,361 |
) |
|
$ |
(7,993 |
) |
|
$ |
77,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2009
|
|
$ |
4,299 |
|
|
$ |
32,832 |
|
|
$ |
54,566 |
|
|
$ |
(5,138 |
) |
|
$ |
(7,793 |
) |
|
$ |
78,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
5,937 |
|
|
|
- |
|
|
|
- |
|
|
|
5,937 |
|
Unrealized
gain on securities,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of reclassification adjustments and taxes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
776 |
|
|
|
- |
|
|
|
776 |
|
Unrealized
loss on hedging activities,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of reclassification adjustments and taxes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(613 |
) |
|
|
- |
|
|
|
(613 |
) |
Pension
adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(126 |
) |
|
|
|
|
|
|
(126 |
) |
Total
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends declared, $.81 per share
|
|
|
- |
|
|
|
- |
|
|
|
(3,140 |
) |
|
|
- |
|
|
|
- |
|
|
|
(3,140 |
) |
Treasury
shares issued under stock option plans: 1,434 shares
|
|
|
- |
|
|
|
(2 |
) |
|
|
- |
|
|
|
- |
|
|
|
25 |
|
|
|
23 |
|
Treasury
shares issued to dividend reinvestment plan: 36,250 shares
|
|
|
- |
|
|
|
(31 |
) |
|
|
- |
|
|
|
- |
|
|
|
648 |
|
|
|
617 |
|
Balance
at September 30, 2010
|
|
$ |
4,299 |
|
|
$ |
32,799 |
|
|
$ |
57,363 |
|
|
$ |
(5,101 |
) |
|
$ |
(7,120 |
) |
|
$ |
82,240 |
|
The
accompanying notes are an integral part of these financial
statements.
Consolidated
Statements of Cash Flows
(unaudited)
|
|
For the Nine Months Ended September 30
|
|
|
|
2010
|
|
|
2009
|
|
(Amounts
in thousands)
|
|
|
|
|
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
Net
income
|
|
$ |
5,937 |
|
|
$ |
4,822 |
|
Adjustments
to reconcile net income to net cash provided
|
|
|
|
|
|
|
|
|
by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,000 |
|
|
|
1,074 |
|
Net
amortization of loans and investment securities
|
|
|
262 |
|
|
|
92 |
|
Stock
option compensation expense
|
|
|
- |
|
|
|
29 |
|
Amortization
and net change in mortgage servicing rights valuation
|
|
|
187 |
|
|
|
123 |
|
Amortization
of intangibles
|
|
|
343 |
|
|
|
351 |
|
Provision
for loan losses
|
|
|
1,875 |
|
|
|
2,663 |
|
Net
realized (gains) losses on sales of securities
|
|
|
(212 |
) |
|
|
212 |
|
OTTI
losses on securities
|
|
|
573 |
|
|
|
422 |
|
Loans
originated for sale
|
|
|
(1,299 |
) |
|
|
(487 |
) |
Proceeds
from sale of loans
|
|
|
952 |
|
|
|
495 |
|
Gain
on sales of loans
|
|
|
(32 |
) |
|
|
(8 |
) |
(Gain)
loss on sale or disposal of premises and equipment
|
|
|
(4 |
) |
|
|
120 |
|
Net
gain on sale or disposal of other real estate/other repossessed
assets
|
|
|
- |
|
|
|
(10 |
) |
Increase
in cash surrender value of life insurance
|
|
|
(503 |
) |
|
|
(482 |
) |
Gain
from surrender of life insurance policy
|
|
|
- |
|
|
|
(278 |
) |
Contribution
to pension plan
|
|
|
(525 |
) |
|
|
(172 |
) |
Decrease
in interest receivable and other assets
|
|
|
266 |
|
|
|
563 |
|
Decrease
in interest payable and other liabilities
|
|
|
(207 |
) |
|
|
(370 |
) |
Other,
net
|
|
|
253 |
|
|
|
66 |
|
Net
cash provided by operating activities
|
|
|
8,866 |
|
|
|
9,225 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
Proceeds
from sales of investment securities available for sale
|
|
|
7,608 |
|
|
|
9,114 |
|
Proceeds
from maturities and paydowns of investment securities available for
sale
|
|
|
22,765 |
|
|
|
21,513 |
|
Purchase
of investment securities available for sale
|
|
|
(11,560 |
) |
|
|
(37,295 |
) |
Net
increase in loans
|
|
|
(19,398 |
) |
|
|
(59,066 |
) |
Proceeds
from sale of other real estate/other repossessed assets
|
|
|
517 |
|
|
|
43 |
|
Proceeds
from surrender of life insurance policy
|
|
|
- |
|
|
|
878 |
|
Capital
expenditures
|
|
|
(1,955 |
) |
|
|
(1,219 |
) |
Net
cash used in investing activities
|
|
|
(2,023 |
) |
|
|
(66,032 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
Net
increase in demand deposits, interesting-bearing checking
|
|
|
|
|
|
|
|
|
and
savings accounts
|
|
|
57,241 |
|
|
|
20,809 |
|
Net
(decrease) increase in time deposits
|
|
|
(68,807 |
) |
|
|
61,701 |
|
Net
decrease in short-term borrowings
|
|
|
(1,282 |
) |
|
|
(9,935 |
) |
Long-term
debt payments
|
|
|
(3,345 |
) |
|
|
(3,394 |
) |
Long-term
debt advances
|
|
|
- |
|
|
|
260 |
|
Dividends
paid
|
|
|
(3,140 |
) |
|
|
(3,104 |
) |
Common
stock issued to dividend reinvestment plan
|
|
|
617 |
|
|
|
574 |
|
Common
stock issued under stock option plans
|
|
|
23 |
|
|
|
2 |
|
Purchase
of treasury shares
|
|
|
- |
|
|
|
(142 |
) |
Net
cash (used in) provided by financing activities
|
|
|
(18,693 |
) |
|
|
66,771 |
|
(Decrease)
increase in cash and cash equivalents
|
|
|
(11,850 |
) |
|
|
9,964 |
|
Cash
and cash equivalents as of January 1
|
|
|
33,248 |
|
|
|
16,713 |
|
Cash
and cash equivalents as of September 30
|
|
$ |
21,398 |
|
|
$ |
26,677 |
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information
|
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
Interest
on deposits and other borrowed funds
|
|
$ |
9,889 |
|
|
$ |
10,835 |
|
Income
taxes
|
|
$ |
3,412 |
|
|
$ |
1,944 |
|
Noncash
Activities
|
|
|
|
|
|
|
|
|
Loans
transferred to Other Real Estate
|
|
$ |
79 |
|
|
$ |
504 |
|
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 September 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 September 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 Nine Months Ended
|
|
|
|
September 30
|
|
|
September 30
|
|
(In thousands, except per share data)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Weighted
average shares outstanding (basic)
|
|
|
3,893 |
|
|
|
3,841 |
|
|
|
3,880 |
|
|
|
3,835 |
|
Impact
of common stock equivalents
|
|
|
1 |
|
|
|
- |
|
|
|
1 |
|
|
|
- |
|
Weighted
average shares outstanding (diluted)
|
|
|
3,894 |
|
|
|
3,841 |
|
|
|
3,881 |
|
|
|
3,835 |
|
Anti-dilutive
options excluded from the calculation
|
|
|
72 |
|
|
|
104 |
|
|
|
75 |
|
|
|
108 |
|
Net
income
|
|
$ |
1,803 |
|
|
$ |
1,083 |
|
|
$ |
5,937 |
|
|
$ |
4,822 |
|
Basic
earnings per share
|
|
$ |
0.46 |
|
|
$ |
0.28 |
|
|
$ |
1.53 |
|
|
$ |
1.26 |
|
Diluted
earnings per share
|
|
$ |
0.46 |
|
|
$ |
0.28 |
|
|
$ |
1.53 |
|
|
$ |
1.26 |
|
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 2010-06 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 Nine Months Ended
|
|
(Amounts in thousands)
|
|
September 30
|
|
|
September 30
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Net
Income
|
|
$ |
1,803 |
|
|
$ |
1,083 |
|
|
$ |
5,937 |
|
|
$ |
4,822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains arising during the period
|
|
|
71 |
|
|
|
2,201 |
|
|
|
815 |
|
|
|
2,005 |
|
Reclassification
adjustment for losses included in net income
|
|
|
374 |
|
|
|
267 |
|
|
|
361 |
|
|
|
634 |
|
Net
unrealized gains
|
|
|
445 |
|
|
|
2,468 |
|
|
|
1,176 |
|
|
|
2,639 |
|
Tax
effect
|
|
|
(151 |
) |
|
|
(839 |
) |
|
|
(400 |
) |
|
$ |
(897 |
) |
Net
of tax amount
|
|
|
294 |
|
|
|
1,629 |
|
|
|
776 |
|
|
|
1,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
(losses) gains arising during the period
|
|
|
(449 |
) |
|
|
(424 |
) |
|
|
(1,464 |
) |
|
|
461 |
|
Reclassification
adjustment for losses included in net income
|
|
|
181 |
|
|
|
179 |
|
|
|
536 |
|
|
|
530 |
|
Net
unrealized (losses) gains
|
|
|
(268 |
) |
|
|
(245 |
) |
|
|
(928 |
) |
|
|
991 |
|
Tax
effect
|
|
|
91 |
|
|
|
84 |
|
|
|
315 |
|
|
|
(337 |
) |
Net
of tax amount
|
|
|
(177 |
) |
|
|
(161 |
) |
|
|
(613 |
) |
|
|
654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in plan assets and benefit obligations
|
|
|
- |
|
|
|
- |
|
|
|
(191 |
) |
|
|
- |
|
Reclassification
adjustment for losses included in net income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net
unrealized losses
|
|
|
- |
|
|
|
- |
|
|
|
(191 |
) |
|
|
- |
|
Tax
effect
|
|
|
- |
|
|
|
- |
|
|
|
65 |
|
|
|
- |
|
Net
of tax amount
|
|
|
- |
|
|
|
- |
|
|
|
(126 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other comprehensive income
|
|
|
117 |
|
|
|
1,468 |
|
|
|
37 |
|
|
|
2,396 |
|
Total
Comprehensive Income
|
|
$ |
1,920 |
|
|
$ |
2,551 |
|
|
$ |
5,974 |
|
|
$ |
7,218 |
|
The
components of accumulated other comprehensive loss included in shareholders'
equity are as follows:
(Amounts in thousands)
|
|
September 30
|
|
|
December 31
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Net
unrealized losses on securities
|
|
$ |
(653 |
) |
|
$ |
(1,829 |
) |
Tax
effect
|
|
|
222 |
|
|
|
622 |
|
Net
of tax amount
|
|
|
(431 |
) |
|
|
(1,207 |
) |
|
|
|
|
|
|
|
|
|
Net
unrealized losses on derivatives
|
|
|
(2,192 |
) |
|
|
(1,263 |
) |
Tax
effect
|
|
|
745 |
|
|
|
429 |
|
Net
of tax amount
|
|
|
(1,447 |
) |
|
|
(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
|
|
$ |
(5,101 |
) |
|
$ |
(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 $28.7 million and $26.7 million of standby
letters of credit as of September 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 September 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 September 30, 2010 and December 31, 2009 are:
(Amounts in thousands)
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
unrealized
|
|
|
unrealized
|
|
|
fair
|
|
September 30, 2010
|
|
cost
|
|
|
gains
|
|
|
losses
|
|
|
value
|
|
Equity
securities
|
|
$ |
4,532 |
|
|
$ |
2 |
|
|
$ |
(1,725 |
) |
|
$ |
2,809 |
|
U.S.
Treasury securities and obligations of U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
agencies
|
|
|
20,134 |
|
|
|
421 |
|
|
|
(42 |
) |
|
|
20,513 |
|
Obligations
of state and political subdivisions
|
|
|
40,869 |
|
|
|
1,901 |
|
|
|
(13 |
) |
|
|
42,757 |
|
Corporate
debt securities
|
|
|
8,515 |
|
|
|
58 |
|
|
|
(1,713 |
) |
|
|
6,860 |
|
Mortgage-backed
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
46,905 |
|
|
|
1,236 |
|
|
|
(123 |
) |
|
|
48,018 |
|
Non-Agency
|
|
|
4,794 |
|
|
|
- |
|
|
|
(630 |
) |
|
|
4,164 |
|
Asset-backed
securities
|
|
|
75 |
|
|
|
- |
|
|
|
(24 |
) |
|
|
51 |
|
|
|
$ |
125,824 |
|
|
$ |
3,618 |
|
|
$ |
(4,270 |
) |
|
$ |
125,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
$115.2 million at September 30, 2010 and $134.6 million at December 31,
2009.
The
amortized cost and estimated fair value of debt securities as of September 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
|
|
$ |
2,447 |
|
|
$ |
2,491 |
|
Due
after one year through five years
|
|
|
14,510 |
|
|
|
14,926 |
|
Due
after five years through ten years
|
|
|
25,864 |
|
|
|
27,218 |
|
Due
after ten years
|
|
|
26,772 |
|
|
|
25,546 |
|
|
|
|
69,593 |
|
|
|
70,181 |
|
Mortgage-backed
securities
|
|
|
51,699 |
|
|
|
52,182 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
121,292 |
|
|
$ |
122,363 |
|
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 September 30, 2010 and
December 31, 2009:
|
|
September 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
|
|
$ |
1,033 |
|
|
$ |
(1,040 |
) |
|
|
2 |
|
|
$ |
1,485 |
|
|
$ |
(685 |
) |
|
|
20 |
|
|
$ |
2,518 |
|
|
$ |
(1,725 |
) |
|
|
22 |
|
U.S.
Treasury securities and obligations of U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
agencies
|
|
|
27 |
|
|
|
- |
|
|
|
1 |
|
|
|
6,948 |
|
|
|
(42 |
) |
|
|
17 |
|
|
|
6,975 |
|
|
|
(42 |
) |
|
|
18 |
|
Obligations
of state and political subdivisions
|
|
|
1,328 |
|
|
|
(9 |
) |
|
|
3 |
|
|
|
302 |
|
|
|
(4 |
) |
|
|
1 |
|
|
|
1,630 |
|
|
|
(13 |
) |
|
|
4 |
|
Corporate
debt securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6,172 |
|
|
|
(1,713 |
) |
|
|
9 |
|
|
|
6,172 |
|
|
|
(1,713 |
) |
|
|
9 |
|
Mortgage-backed
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
10,016 |
|
|
|
(122 |
) |
|
|
11 |
|
|
|
584 |
|
|
|
(1 |
) |
|
|
1 |
|
|
|
10,600 |
|
|
|
(123 |
) |
|
|
12 |
|
Non-Agency
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,164 |
|
|
|
(630 |
) |
|
|
7 |
|
|
|
4,164 |
|
|
|
(630 |
) |
|
|
7 |
|
Asset-backed
securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
53 |
|
|
|
(24 |
) |
|
|
3 |
|
|
|
53 |
|
|
|
(24 |
) |
|
|
3 |
|
Total temporarily impaired securities
|
|
$ |
12,404 |
|
|
$ |
(1,171 |
) |
|
|
17 |
|
|
$ |
19,708 |
|
|
$ |
(3,099 |
) |
|
|
58 |
|
|
$ |
32,112 |
|
|
$ |
(4,270 |
) |
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 provides additional detail about trust preferred securities as
of September 30, 2010:
Trust Preferred Securities
|
September 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
|
|
$ |
927 |
|
|
$ |
592 |
|
|
$ |
(335 |
) |
Ba1
|
|
1
|
|
None
|
|
None
|
Huntington
Cap Trust II
|
|
Single
|
|
Preferred
Stock
|
|
|
871 |
|
|
|
561 |
|
|
|
(310 |
) |
B
|
|
1
|
|
None
|
|
None
|
BankAmerica
Cap III
|
|
Single
|
|
Preferred
Stock
|
|
|
955 |
|
|
|
691 |
|
|
|
(264 |
) |
BB
|
|
1
|
|
None
|
|
None
|
Wachovia
Cap Trust II
|
|
Single
|
|
Preferred
Stock
|
|
|
272 |
|
|
|
231 |
|
|
|
(41 |
) |
Baa2
|
|
1
|
|
None
|
|
None
|
Corestates
Captl Tr II
|
|
Single
|
|
Preferred
Stock
|
|
|
922 |
|
|
|
669 |
|
|
|
(253 |
) |
Baa1
|
|
1
|
|
None
|
|
None
|
Chase
Cap VI JPM
|
|
Single
|
|
Preferred
Stock
|
|
|
955 |
|
|
|
756 |
|
|
|
(199 |
) |
BBB
|
|
1
|
|
None
|
|
None
|
Fleet
Cap Tr V
|
|
Single
|
|
Preferred
Stock
|
|
|
970 |
|
|
|
718 |
|
|
|
(252 |
) |
Baa3
|
|
1
|
|
None
|
|
None
|
|
|
|
|
|
|
$ |
5,872 |
|
|
$ |
4,218 |
|
|
$ |
(1,654 |
) |
|
|
|
|
|
|
|
The
following table provides additional detail about private label mortgage-backed
securities as of September 30, 2010:
Private Label Mortgage Backed Securities
|
|
September 30, 2010
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
|
Orgination
|
|
Amortized
|
|
|
Fair
|
|
|
Unrealized
|
|
Collateral
|
|
Lowest Credit
|
|
Credit
|
|
|
OTTI
|
|
Decscription
|
|
Date
|
|
Cost
|
|
|
Value
|
|
|
Gain
(Loss)
|
|
Type
|
|
Rating Assigned
|
|
Support
%
|
|
|
Charges
|
|
RALI
2003-QS15 A1
|
|
8/1/2003
|
|
$ |
640 |
|
|
$ |
623 |
|
|
$ |
(17 |
) |
ALT
A
|
|
Aa2
|
|
|
11.37 |
|
|
$ |
- |
|
RALI
2004-QS4 A7
|
|
3/1/2004
|
|
|
620 |
|
|
|
610 |
|
|
|
(10 |
) |
ALT
A
|
|
AAA
|
|
|
12.83 |
|
|
|
- |
|
MALT
2004-6 7A1
|
|
6/1/2004
|
|
|
760 |
|
|
|
648 |
|
|
|
(112 |
) |
ALT
A
|
|
BBB
|
|
|
10.54 |
|
|
|
- |
|
RALI
2005-QS2 A1
|
|
2/1/2005
|
|
|
703 |
|
|
|
641 |
|
|
|
(62 |
) |
ALT
A
|
|
B
|
|
|
7.53 |
|
|
|
- |
|
RALI
2006-QS4 A2
|
|
4/1/2006
|
|
|
1,004 |
|
|
|
744 |
|
|
|
(260 |
) |
ALT
A
|
|
D
|
|
|
- |
|
|
|
142 |
|
GSR
2006-5F 2A1
|
|
5/1/2006
|
|
|
494 |
|
|
|
445 |
|
|
|
(49 |
) |
Prime
|
|
CCC
|
|
|
4.29 |
|
|
|
- |
|
RALI
2006-QS8 A1
|
|
7/28/2006
|
|
|
573 |
|
|
|
453 |
|
|
|
(120 |
) |
ALT
A
|
|
D
|
|
|
- |
|
|
|
113 |
|
|
|
|
|
$ |
4,794 |
|
|
$ |
4,164 |
|
|
$ |
(630 |
) |
|
|
|
|
|
|
|
|
$ |
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
|
|
|
Nine months ended
|
|
|
|
September 30
|
|
|
September 30
|
|
(Amounts in thousands)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Components
of net periodic (benefit) cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
91 |
|
|
$ |
85 |
|
|
$ |
274 |
|
|
$ |
255 |
|
Interest
cost
|
|
|
185 |
|
|
|
181 |
|
|
|
557 |
|
|
|
545 |
|
Expected
return on plan assets
|
|
|
(209 |
) |
|
|
(190 |
) |
|
|
(628 |
) |
|
|
(570 |
) |
Amortization
of prior service cost
|
|
|
- |
|
|
|
(31 |
) |
|
|
- |
|
|
|
(93 |
) |
Recognized
net actuarial loss
|
|
|
43 |
|
|
|
82 |
|
|
|
128 |
|
|
|
246 |
|
Net
periodic cost
|
|
$ |
110 |
|
|
$ |
127 |
|
|
$ |
331 |
|
|
$ |
383 |
|
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:
|
|
Nine Months Ended
|
|
|
|
September 30
|
|
(Amounts
in thousands)
|
|
2010
|
|
|
2009
|
|
Cost
of mortgage servicing rights:
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
1,190 |
|
|
$ |
1,551 |
|
Originations
|
|
|
10 |
|
|
|
6 |
|
Amortization
|
|
|
(198 |
) |
|
|
(292 |
) |
Ending
balance
|
|
$ |
1,002 |
|
|
$ |
1,265 |
|
|
|
|
|
|
|
|
|
|
Valuation
allowance:
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
(476 |
) |
|
$ |
(689 |
) |
Valuation
charges
|
|
|
(49 |
) |
|
|
- |
|
Valuation
reversals
|
|
|
60 |
|
|
|
170 |
|
Ending
balance
|
|
$ |
(465 |
) |
|
$ |
(519 |
) |
|
|
|
|
|
|
|
|
|
Mortgage
servicing rights cost
|
|
$ |
1,002 |
|
|
$ |
1,265 |
|
Valuation
allowance
|
|
|
(465 |
) |
|
|
(519 |
) |
Carrying
value
|
|
$ |
537 |
|
|
$ |
746 |
|
|
|
|
|
|
|
|
|
|
Fair
value
|
|
$ |
537 |
|
|
$ |
746 |
|
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:
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
(Amounts in thousands)
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
21,398 |
|
|
$ |
21,398 |
|
|
$ |
33,248 |
|
|
$ |
33,248 |
|
Investment
securities available for sale
|
|
|
125,172 |
|
|
|
125,172 |
|
|
|
143,288 |
|
|
|
143,288 |
|
Restricted
stock
|
|
|
6,482 |
|
|
|
6,482 |
|
|
|
6,482 |
|
|
|
6,482 |
|
Net
loans
|
|
|
748,205 |
|
|
|
762,540 |
|
|
|
730,626 |
|
|
|
742,929 |
|
Accrued
interest receivable
|
|
|
3,848 |
|
|
|
3,848 |
|
|
|
3,904 |
|
|
|
3,904 |
|
Mortgage
servicing rights
|
|
|
537 |
|
|
|
537 |
|
|
|
714 |
|
|
|
714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$ |
726,799 |
|
|
$ |
729,493 |
|
|
$ |
738,365 |
|
|
$ |
742,953 |
|
Securities
sold under agreements to repurchase
|
|
|
54,573 |
|
|
|
54,573 |
|
|
|
55,855 |
|
|
|
55,855 |
|
Long-term
debt
|
|
|
91,343 |
|
|
|
96,367 |
|
|
|
94,688 |
|
|
|
99,013 |
|
Accrued
interest payable
|
|
|
1,056 |
|
|
|
1,056 |
|
|
|
1,288 |
|
|
|
1,288 |
|
Interest
rate swaps
|
|
|
2,193 |
|
|
|
2,193 |
|
|
|
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 September 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, upon initial
recognition, is estimated using a valuation model that calculates the present
value of estimated future net servicing income. The model incorporates
assumptions, such as loan default rates, costs to service, and prepayment
speeds. Mortgage servicing rights are carried at the lower of cost or fair value
after initial recognition.
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.
|
|
|
Level
2:
|
Valuation
is based upon quoted prices for similar instruments in active markets,
quoted prices for identical or similar instruments in markets that are not
active, and model-based valuation techniques for which all significant
assumptions are observable in the market.
|
|
|
Level
3:
|
Valuation
is generated from model-based techniques that use significant assumptions
not observable in the market. These unobservable assumptions reflect the
Corporation’s assumptions regarding what market participants would assume
when pricing a financial
instrument.
|
For
financial assets and liabilities measured at fair value on a recurring basis,
there were no transfers of financial assets or liabilities between Level 1 and
Level 2 during the period ending September 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 September 30, 2010
|
|
Asset Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Equity
securities
|
|
$ |
2,809 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
2,809 |
|
U.S.
Treasury securities and obligations of U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
agencies
|
|
|
- |
|
|
|
20,513 |
|
|
|
- |
|
|
|
20,513 |
|
Obligations
of state and political subdivisions
|
|
|
- |
|
|
|
42,757 |
|
|
|
- |
|
|
|
42,757 |
|
Corporate
debt securities
|
|
|
- |
|
|
|
6,860 |
|
|
|
- |
|
|
|
6,860 |
|
Mortgage-backed
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
- |
|
|
|
48,018 |
|
|
|
- |
|
|
|
48,018 |
|
Non-Agency
|
|
|
- |
|
|
|
4,164 |
|
|
|
- |
|
|
|
4,164 |
|
Asset-backed
securities
|
|
|
- |
|
|
|
51 |
|
|
|
- |
|
|
|
51 |
|
Total
assets
|
|
$ |
2,809 |
|
|
$ |
122,363 |
|
|
$ |
- |
|
|
$ |
125,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability
Description
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps
|
|
$ |
- |
|
|
$ |
2,193 |
|
|
$ |
- |
|
|
$ |
2,193 |
|
Total
liabilities
|
|
$ |
- |
|
|
$ |
2,193 |
|
|
$ |
- |
|
|
$ |
2,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars
in Thousands)
|
|
Fair
Value at December 31, 2009
|
|
Asset Description
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Equity
securities
|
|
$ |
3,975 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
3,975 |
|
U.S.
Treasury securities and obligations of U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
agencies
|
|
|
- |
|
|
|
28,715 |
|
|
|
- |
|
|
|
28,715 |
|
Obligations
of state and political subdivisions
|
|
|
- |
|
|
|
43,881 |
|
|
|
- |
|
|
|
43,881 |
|
Corporate
debt securities
|
|
|
- |
|
|
|
7,260 |
|
|
|
- |
|
|
|
7,260 |
|
Mortgage-backed
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
- |
|
|
|
54,743 |
|
|
|
- |
|
|
|
54,743 |
|
Non-Agency
|
|
|
- |
|
|
|
4,668 |
|
|
|
- |
|
|
|
4,668 |
|
Asset-backed
securities
|
|
|
- |
|
|
|
46 |
|
|
|
- |
|
|
|
46 |
|
Total
assets
|
|
$ |
3,975 |
|
|
$ |
139,313 |
|
|
$ |
- |
|
|
$ |
143,288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability
Description
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps
|
|
$ |
- |
|
|
$ |
1,263 |
|
|
$ |
- |
|
|
$ |
1,263 |
|
Total
liabilities
|
|
$ |
- |
|
|
$ |
1,263 |
|
|
$ |
- |
|
|
$ |
1,263 |
|
An
asset’s or liability’s level within the fair value hierarchy is based on the
lowest level of input that is significant to the fair value measurement. The
Corporation used the following methods and significant assumptions to estimate
the fair value for assets and liabilities measured on a recurring
basis.
Investment
securities: Level 1 securities represent equity securities
that are valued using quoted market prices from nationally recognized markets.
Level 2 securities represent debt securities that are valued using a
mathematical model based upon the specific characteristics of a security in
relationship to quoted prices for similar securities.
Interest rate swaps:
The interest rate swaps are valued using a discounted cash flow model that uses
verifiable market environment inputs to calculate the fair value. This method is
not dependent on the input of any significant judgments or assumptions by
Management.
For financial assets and liabilities measured at fair value on a
nonrecurring basis, the fair value measurements by level within the fair value
hierarchy are as follows:
(Dollars
in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value at September 30, 2010
|
|
Asset Description
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Impaired
loans
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
18,473 |
|
|
$ |
18,473 |
|
Other
real estate owned
|
|
|
- |
|
|
|
- |
|
|
|
308 |
|
|
|
308 |
|
Mortgage
servicing rights
|
|
|
- |
|
|
|
- |
|
|
|
537 |
|
|
|
537 |
|
Total
assets
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
19,318 |
|
|
$ |
19,318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 nine months ended
September 30, 2010:
|
|
Impaired
|
|
|
Foreclosed
|
|
|
Mortgage
|
|
(Dollars in Thousands)
|
|
Loans
|
|
|
Real Estate
|
|
|
Servicing Rights
|
|
Balance
- January 1, 2010
|
|
$ |
7,943 |
|
|
$ |
643 |
|
|
$ |
714 |
|
Charged
off
|
|
|
(846 |
) |
|
|
- |
|
|
|
- |
|
Settled
or otherwise removed
|
|
|
(983 |
) |
|
|
(414 |
) |
|
|
- |
|
Additions
|
|
|
13,827 |
|
|
|
79 |
|
|
|
10 |
|
Payments
/ amortization
|
|
|
(599 |
) |
|
|
- |
|
|
|
(198 |
) |
(Increase)
decrease in valuation allowance
|
|
|
(869 |
) |
|
|
- |
|
|
|
11 |
|
Balance
- September 30, 2010
|
|
$ |
18,473 |
|
|
$ |
308 |
|
|
$ |
537 |
|
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 September 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
September 30, 2010 and December 31, 2009 are as follows:
Fair Value of Derivative Instruments
|
|
(Dollars in thousands)
|
|
|
|
Balance Sheet
|
|
|
|
Date
|
|
Type
|
|
Location
|
|
Fair Value
|
|
September
30, 2010
|
|
Interest
rate contracts
|
|
Other
liabilities
|
|
$ |
2,193 |
|
December
31, 2009
|
|
Interest
rate contracts
|
|
Other
liabilities
|
|
$ |
1,263 |
|
The Effect of Derivative Instruments on
the Statement of Income for the Nine Months Ended September 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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate contracts
|
|
$ |
(613 |
) |
Interest
Expense
|
|
$ |
(536 |
) |
Other
income (expense)
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate contracts
|
|
$ |
654 |
|
Interest
Expense
|
|
$ |
(530 |
) |
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 Nine Month Periods Ended September 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 nine months ended September 30,
2010 of $5.9 million. This is a 23.1% increase versus net income of
$4.8 million for the same period in 2009. Total revenue (interest income and
noninterest income) increased $87 thousand year-over-year. Interest income
remained flat, while noninterest income increased due to an increase in
investment and trust services fees. Noninterest expense increased due to
increased salary and benefit expense. The provision for loan
losses was $1.9 million for the period, $788 thousand less than in
2009. Diluted earnings per share increased to $1.53 in 2010 from
$1.26 in 2009. Net loans grew to $748.2 million, while total deposits decreased
to $726.8 million. Total assets were $967.6 million at September 30,
2010, a decrease of $11.8 million from year-end 2009.
Other key
performance ratios as of, or for the nine months ended September 30, 2010 and
2009 (on an annualized basis) are listed below:
|
|
2010
|
|
|
2009
|
|
Return
on average equity (ROE)
|
|
|
9.56 |
% |
|
|
8.34 |
% |
Return
on average assets (ROA)
|
|
|
.79 |
% |
|
|
.66 |
% |
Return
on average tangible average equity(1)
|
|
|
11.80 |
% |
|
|
10.79 |
% |
Return
on average tangible average assets(1)
|
|
|
.85 |
% |
|
|
.73 |
% |
Net
interest margin
|
|
|
3.47 |
% |
|
|
3.44 |
% |
Efficiency
ratio
|
|
|
64.16 |
% |
|
|
65.50 |
% |
(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 nine months ended September 30, 2010
follows:
Comparison
of the three months ended September 30, 2010 to the three months ended September
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. For the purpose of this
discussion, balance sheet items refer to the average balance for the year and
net interest income is adjusted to a fully taxable-equivalent
basis. This tax-equivalent adjustment facilitates performance
comparisons between taxable and tax-free assets by increasing the tax-free
income by an amount equivalent to the Federal income taxes that would have been
paid if this income were taxable at the Corporation’s 34% Federal statutory
rate.
Interest
income for the third quarter of 2010 remained flat at $11.2 million compared to
the third quarter of 2009. Average interest-earning assets increased
by $617 thousand from the third quarter of 2009 but the yield on these assets
decreased by 3 basis points. The average balance on investment
securities decreased $20.7 million quarter over quarter due to pay downs,
maturities and sales in the portfolio, net of investment
purchases. Total average loans increased $43.0 million (6.0%) quarter
over quarter. Average commercial loans increased $61.2 million
(11.7%), but the increase was partially offset by a decrease in the average
balance of mortgage and consumer loans. Average mortgage loans
decreased $6.4 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 $11.8 million, as
consumers continue to borrow less during the economic recession and the indirect
lending portfolio continues to run-off as the Bank exited this business in early
2010 and no new loans have been booked.
Interest
expense was $3.1 million for the third quarter, a decrease of $675 thousand from
the third quarter of 2009 total of $3.7 million. Average
interest-bearing liabilities decreased to $797.9 million in the third quarter of
2010 from an average balance of $807.4 million during the same period in 2009, a
decrease of $9.5 million. The average cost of these liabilities
decreased from 1.84% for the third quarter of 2009 to 1.52% for the same period
in 2010. Average interest-bearing deposits increased $4.0 million,
due to increases in money management accounts ($60.4 million), but these
increases were partially offset by decreases in certificates of deposit ($57.4
million). The cost of interest-bearing deposits decreased from 1.65% to
1.26%. Securities sold under agreements to repurchase have decreased
$2.6 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 $9.9 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 tax
equivalent net interest income of $603 thousand to $8.1 million for the third
quarter of 2010 compared to $7.5 million for the third quarter of
2009. The Bank’s net interest margin increased from 3.27% to 3.53% in
2010. The increase in the net interest margin is the result of a
decrease in the rate on interest-earning liabilities of 32 basis points, while
the yield on interest-bearing assets only decreased 3 basis points.
The
following table shows a comparative analysis of average balances, asset yields
and funding costs for the three months ended September 30, 2010 and
2009. These components drive changes in net interest
income.
|
|
For the Three Months Ended September 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
|
|
$ |
15,402 |
|
|
$ |
12 |
|
|
|
0.31 |
% |
|
$ |
37,050 |
|
|
$ |
14 |
|
|
|
0.15 |
% |
Investment
securities
|
|
|
134,327 |
|
|
|
1,315 |
|
|
|
3.92 |
% |
|
|
155,018 |
|
|
|
1,601 |
|
|
|
4.13 |
% |
Loans
|
|
|
760,576 |
|
|
|
9,837 |
|
|
|
5.10 |
% |
|
|
717,620 |
|
|
|
9,621 |
|
|
|
5.29 |
% |
Total
interest-earning assets
|
|
$ |
910,305 |
|
|
|
11,164 |
|
|
|
4.87 |
% |
|
$ |
909,688 |
|
|
|
11,236 |
|
|
|
4.90 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
deposits
|
|
$ |
643,094 |
|
|
|
2,048 |
|
|
|
1.26 |
% |
|
$ |
639,118 |
|
|
|
2,659 |
|
|
|
1.65 |
% |
Securities
sold under agreements to repurchase
|
|
|
61,480 |
|
|
|
38 |
|
|
|
0.25 |
% |
|
|
64,112 |
|
|
|
40 |
|
|
|
0.25 |
% |
Short-term
borrowings
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
954 |
|
|
|
2 |
|
|
|
0.83 |
% |
Long-term
debt
|
|
|
93,278 |
|
|
|
980 |
|
|
|
4.17 |
% |
|
|
103,181 |
|
|
|
1,040 |
|
|
|
4.00 |
% |
Total
interest-bearing liabilities
|
|
$ |
797,852 |
|
|
|
3,066 |
|
|
|
1.52 |
% |
|
$ |
807,365 |
|
|
|
3,741 |
|
|
|
1.84 |
% |
Interest
spread
|
|
|
|
|
|
|
|
|
|
|
3.34 |
% |
|
|
|
|
|
|
|
|
|
|
3.06 |
% |
Tax
equivalent Net interest income/Net interest margin
|
|
|
|
|
|
|
8,098 |
|
|
|
3.53 |
% |
|
|
|
|
|
|
7,495 |
|
|
|
3.27 |
% |
Tax
equivalent adjustment
|
|
|
|
|
|
|
(180 |
) |
|
|
|
|
|
|
|
|
|
|
(252 |
) |
|
|
|
|
Net
interest income
|
|
|
|
|
|
$ |
7,918 |
|
|
|
|
|
|
|
|
|
|
$ |
7,243 |
|
|
|
|
|
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
third quarter of 2010, the provision expense was $625 thousand versus $1.6
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
three months ended September 30, 2010, noninterest income decreased slightly to
$1.9 million compared to $2.0 million in the third quarter of
2009. Investment and trust service fees increased $18 thousand due to
increases in nonrecurring income from estate fees. Loan service charges
increased $99 thousand from a higher volume of mortgage production fees from
refinancing activity in 2010, compared to 2009. Mortgage banking fees
decreased quarter over quarter due to an impairment charge of $48 thousand on
mortgage servicing rights in 2010 versus a net impairment reversal of $26
thousand in 2009. Deposit service charges decreased $56 thousand in
the third 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 for certain ATM and debit card transactions. Fee income from
overdraft programs during the quarter appear consistent with the first two
quarters of the year and the reduction in overdraft fees does not appear to be
directly related to new regulations on overdraft fees imposed by the Dodd-Frank
Act. However, the overall affect of this new regulation on future
overdraft fees is uncertain at this time. Other service charges and
fees, the increase in cash surrender value of life insurance and other income
remained fairly flat in the third quarter of 2010. There was $318
thousand in other than temporary impairment charges on two equity securities
recognized in the third quarter of 2010, versus no impairment charges in the
same quarter in 2009. The Corporation also had realized losses of $56
thousand during the quarter ended September 30, 2010 versus losses of $267
thousand for the same period in 2009.
The
following table presents a comparison of noninterest income for the three months
ended September 30, 2010 and 2009:
|
|
For the Three Months Ended
|
|
|
|
|
|
|
|
|
|
September 30
|
|
|
Change
|
|
(Dollars in thousands)
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
Noninterest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
and trust services fees
|
|
$ |
884 |
|
|
$ |
866 |
|
|
$ |
18 |
|
|
|
2.1 |
|
Loan
service charges
|
|
|
288 |
|
|
|
189 |
|
|
|
99 |
|
|
|
52.4 |
|
Mortgage
banking activities
|
|
|
(55 |
) |
|
|
19 |
|
|
|
(74 |
) |
|
|
(389.5 |
) |
Deposit
service charges and fees
|
|
|
622 |
|
|
|
678 |
|
|
|
(56 |
) |
|
|
(8.3 |
) |
Other
service charges and fees
|
|
|
353 |
|
|
|
322 |
|
|
|
31 |
|
|
|
9.6 |
|
Increase
in cash surrender value of life insurance
|
|
|
172 |
|
|
|
158 |
|
|
|
14 |
|
|
|
8.9 |
|
Other
|
|
|
18 |
|
|
|
17 |
|
|
|
1 |
|
|
|
5.9 |
|
OTTI
losses on securities
|
|
|
(318 |
) |
|
|
- |
|
|
|
(318 |
) |
|
|
- |
|
Less:
Loss recognized in other comprehensive income (before
taxes)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net
OTTI losses recognized in earnings
|
|
|
(318 |
) |
|
|
- |
|
|
|
(318 |
) |
|
|
- |
|
Securities
(losses) gains, net
|
|
|
(56 |
) |
|
|
(267 |
) |
|
|
211 |
|
|
|
(79.0 |
) |
Total
noninterest income
|
|
$ |
1,908 |
|
|
$ |
1,982 |
|
|
$ |
(74 |
) |
|
|
(3.7 |
) |
Noninterest
Expense
Noninterest expense for the third
quarter of 2010 totaled $6.6 million compared to $6.5 million in the third
quarter of 2009. The increase in salaries and benefits was primarily
due to annual salary adjustments. Net occupancy expense decreased
from lower real estate taxes on the Bank’s headquarters location, while
furniture and equipment expense decreased due to less depreciation on fixed
assets. Advertising expense increased $44 thousand due to the
marketing of the Bank’s new office that opened in Camp Hill during the
quarter. Legal and professional fees decreased over the same period
in 2009 due to less attorney’s fees in 2010 and a special audit project in the
third quarter of 2009. The Pennsylvania bank shares tax expense and
intangible amortization expense remained flat quarter over
quarter. FDIC insurance increased $68 thousand, as the FDIC
assessment rate was higher in 2010. Other expenses increased slightly
in 2010 compared to 2009.
The
following table presents a comparison of noninterest expense for the three
months ended September 30, 2010 and 2009:
|
|
For the Three Months Ended
|
|
|
|
|
|
|
|
|
|
September 30
|
|
|
Change
|
|
(Dollars in thousands)
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
Noninterest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and benefits
|
|
$ |
3,384 |
|
|
$ |
3,121 |
|
|
$ |
263 |
|
|
|
8.4 |
|
Net
occupancy expense
|
|
|
478 |
|
|
|
495 |
|
|
|
(17 |
) |
|
|
(3.4 |
) |
Furniture
and equipment expense
|
|
|
196 |
|
|
|
216 |
|
|
|
(20 |
) |
|
|
(9.3 |
) |
Advertising
|
|
|
378 |
|
|
|
334 |
|
|
|
44 |
|
|
|
13.2 |
|
Legal
and professional fees
|
|
|
418 |
|
|
|
614 |
|
|
|
(196 |
) |
|
|
(31.9 |
) |
Data
processing
|
|
|
370 |
|
|
|
383 |
|
|
|
(13 |
) |
|
|
(3.4 |
) |
Pennsylvania
bank shares tax
|
|
|
151 |
|
|
|
143 |
|
|
|
8 |
|
|
|
5.6 |
|
Intangible
amortization
|
|
|
114 |
|
|
|
117 |
|
|
|
(3 |
) |
|
|
(2.6 |
) |
FDIC
insurance
|
|
|
302 |
|
|
|
234 |
|
|
|
68 |
|
|
|
29.1 |
|
Other
|
|
|
844 |
|
|
|
808 |
|
|
|
36 |
|
|
|
4.5 |
|
Total
noninterest expense
|
|
$ |
6,635 |
|
|
$ |
6,465 |
|
|
$ |
170 |
|
|
|
2.6 |
|
Income
taxes
Federal
income tax expense was $763 thousand for the third quarter of 2010 compared to
$33 thousand in 2009. The effective tax rate for the third quarter of
2010 was 29.7% and 3.0% for 2009. The low effective tax rate in the
third quarter of 2009 was caused by the provision for loan loss expense of $1.6
million compared to $625 thousand in the third quarter of 2010, thereby
significantly reducing the pre-tax income for the third quarter of 2009. All
taxable income for the Corporation is taxed at a rate of 34%.
Comparison
of the nine months ended September 30, 2010 to the nine months ended September
30, 2009:
Net
Interest Income
Interest
income for the first nine months of 2010 was $33.5 million, $134 thousand less
than the same period in 2009. Average interest-earning assets
increased by $35.8 million from the first nine of 2009, however; the yield on
these assets decreased by 23 basis points. The average balance on
investment securities decreased $12.5 million year over year due to pay downs,
maturities and sales in the portfolio, net of investment
purchases. Total average loans increased $53.3 million (7.6%) year
over year. Average commercial loans increased $73.9 million, but the
increase was partially offset by a decrease in the average balance of mortgage
and consumer loans. Average mortgage loans decreased $6.7 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 $13.9 million, as consumers continue to borrow less
during the economic recession and as the Bank’s indirect portfolio continues to
run off.
Interest
expense was $9.7 million for the first nine months, a decrease of $1.3 million
from the first nine months of 2009 total of $11.0 million. Average
interest-bearing liabilities increased to $799.5 million from an average balance
of $772.8 million during the same period in 2009, an increase of $26.7
million. The average cost of these liabilities decreased from 1.90%
to 1.61%. Average interest-bearing deposits increased $47.3 million,
due to increases in money management accounts ($54.4 million) while certificates
of deposit decreased ($8.3 million). Securities sold under agreements
to repurchase have decreased $7.5 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 $10.6 million due to scheduled amortization and
maturities on FHLB advances.
The
changes in the balance sheet and interest rates resulted in an increase in tax
equivalent net interest income of $1.2 million to $23.8 million for the first
nine months of 2010 compared to $22.6 million for the same period in
2009. The Bank’s net interest margin increased from 3.25% in 2009 to
3.31% in 2010. The increase in the net interest margin is due to the
yield on interest-earning liabilities decreasing 29 basis points, while the
yield on interest-bearing liabilities decreased 23 basis points.
The
following table shows a comparative analysis of average balances, asset yields
and funding costs for the nine months ended September 30, 2010 and
2009. These components drive changes in net interest
income.
|
|
For the Nine Months Ended September 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
|
|
$ |
13,892 |
|
|
$ |
26 |
|
|
|
0.25 |
% |
|
$ |
19,024 |
|
|
$ |
21 |
|
|
|
0.15 |
% |
Investment
securities
|
|
|
140,285 |
|
|
|
4,235 |
|
|
|
4.02 |
% |
|
|
152,735 |
|
|
|
5,164 |
|
|
|
4.51 |
% |
Loans
|
|
|
753,994 |
|
|
|
29,191 |
|
|
|
5.14 |
% |
|
|
700,647 |
|
|
|
28,401 |
|
|
|
5.39 |
% |
Total
interest-earning assets
|
|
$ |
908,171 |
|
|
|
33,452 |
|
|
|
4.92 |
% |
|
$ |
872,406 |
|
|
|
33,586 |
|
|
|
5.15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
deposits
|
|
$ |
643,526 |
|
|
|
6,611 |
|
|
|
1.37 |
% |
|
$ |
596,189 |
|
|
|
7,677 |
|
|
|
1.72 |
% |
Securities
sold under agreements to repurchase
|
|
|
62,028 |
|
|
|
116 |
|
|
|
0.25 |
% |
|
|
69,529 |
|
|
|
130 |
|
|
|
0.25 |
% |
Short-term
borrowings
|
|
|
74 |
|
|
|
- |
|
|
|
0.64 |
% |
|
|
2,546 |
|
|
|
13 |
|
|
|
0.68 |
% |
Long-term
debt
|
|
|
93,889 |
|
|
|
2,930 |
|
|
|
4.17 |
% |
|
|
104,537 |
|
|
|
3,145 |
|
|
|
4.02 |
% |
Total
interest-bearing liabilities
|
|
$ |
799,517 |
|
|
|
9,657 |
|
|
|
1.61 |
% |
|
$ |
772,801 |
|
|
|
10,965 |
|
|
|
1.90 |
% |
Interest
spread
|
|
|
|
|
|
|
|
|
|
|
3.31 |
% |
|
|
|
|
|
|
|
|
|
|
3.25 |
% |
Tax
equivalent Net interest income/Net interest margin
|
|
|
|
|
|
|
23,795 |
|
|
|
3.47 |
% |
|
|
|
|
|
|
22,621 |
|
|
|
3.44 |
% |
Tax
equivalent adjustment
|
|
|
|
|
|
|
(686 |
) |
|
|
|
|
|
|
|
|
|
|
(801 |
) |
|
|
|
|
Net
interest income
|
|
|
|
|
|
$ |
23,109 |
|
|
|
|
|
|
|
|
|
|
$ |
21,820 |
|
|
|
|
|
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 nine months of 2010, the provision expense was $1.9 million versus $2.7
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
nine months ended September 30, 2010, noninterest income increased $106 thousand
to $6.7 million, compared to $6.6 million for the first nine months of
2009. Investment and trust service fees increased $286 thousand due
to increases in income from estate fees. Loan service charges decreased $87
thousand, as the first nine months of 2009 total included a high volume of
mortgage production fees from refinancing activity. Mortgage banking
fees decreased $84 thousand, due to a net impairment reversal of $11 thousand in
2010 versus $170 thousand in 2009. Deposit service charges
decreased $118 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 for certain ATM and debit card transactions. The reduction
in overdraft fees during the first nine months of 2010 does not appear to be
directly related to new regulations on overdraft fees imposed by the Dodd-Frank
Act. However, the overall affect of this new regulation on future
overdraft fees is uncertain at this time. Other service charges increased $66
thousand from debit card income, while the increase in cash surrender value of
life insurance remained flat for the first nine months of 2010. Other
noninterest income decreased $251 thousand year over year as 2009 included $278
thousand from the surrender of a life insurance policy. Net other
than temporary impairment charges of $573 thousand were recognized in income on
two debt and two equity securities in 2010, compared to $422 thousand on four
equity securities in 2009. The Corporation had securities gains of
$212 thousand during the first nine months of 2010 versus losses of $212
thousand for the same period in 2009.
The
following table presents a comparison of noninterest income for the nine months
ended September 30, 2010 and 2009:
|
|
For the Nine Months Ended
|
|
|
|
|
|
|
|
|
|
September 30
|
|
|
Change
|
|
(Dollars in thousands)
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
Noninterest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
and trust services fees
|
|
$ |
2,908 |
|
|
$ |
2,622 |
|
|
$ |
286 |
|
|
|
10.9 |
|
Loan
service charges
|
|
|
757 |
|
|
|
844 |
|
|
|
(87 |
) |
|
|
(10.3 |
) |
Mortgage
banking activities
|
|
|
25 |
|
|
|
109 |
|
|
|
(84 |
) |
|
|
(77.1 |
) |
Deposit
service charges and fees
|
|
|
1,793 |
|
|
|
1,911 |
|
|
|
(118 |
) |
|
|
(6.2 |
) |
Other
service charges and fees
|
|
|
1,029 |
|
|
|
963 |
|
|
|
66 |
|
|
|
6.9 |
|
Increase
in cash surrender value of life insurance
|
|
|
503 |
|
|
|
482 |
|
|
|
21 |
|
|
|
4.4 |
|
Other
|
|
|
90 |
|
|
|
341 |
|
|
|
(251 |
) |
|
|
(73.6 |
) |
OTTI
losses on securities
|
|
|
(1,007 |
) |
|
|
(422 |
) |
|
|
(585 |
) |
|
|
(138.6 |
) |
Less:
Loss recognized in other comprehensive income (before
taxes)
|
|
|
(434 |
) |
|
|
- |
|
|
|
(434 |
) |
|
|
- |
|
Net
OTTI losses recognized in earnings
|
|
|
(573 |
) |
|
|
(422 |
) |
|
|
(151 |
) |
|
|
(35.8 |
) |
Securities
(losses) gains, net
|
|
|
212 |
|
|
|
(212 |
) |
|
|
424 |
|
|
|
200.0 |
|
Total
noninterest income
|
|
$ |
6,744 |
|
|
$ |
6,638 |
|
|
$ |
106 |
|
|
|
1.6 |
|
Noninterest
Expense
Noninterest expense for the first nine
months of 2010 totaled $19.8 million compared to $19.6 million in the first nine
months of 2009. The increase in salaries and benefits was due to
increased health insurance costs, an accrual for a severance payment and annual
salary adjustments. Net occupancy expense increased in 2010 from the
cost of snow removal and the increased expense from the deregulation of
electricity prices in Cumberland County, while furniture and equipment expense
decreased due to lower depreciation on fixed assets. Advertising
expense decreased $35 thousand as 2009 contained expenses for various direct
mail and production costs. Legal and professional fees remained flat
over the same period in 2009. Data processing expense, Pennsylvania
bank shares tax expense and intangible amortization expense also remained flat
year over year. In October 2010, the Bank selected Fidelity-IBS as
its new core operating system. This new operating system should
provide greater operating efficiency and effectiveness, and should help reduce
the rate of fee increases in future years. A third quarter 2011
conversion is planned. FDIC insurance decreased $266 thousand as the
same period in 2009 contained $449 thousand of expense for the FDIC special
assessment. 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 nine months ended September 30, 2010
and 2009:
|
|
For the Nine Months Ended
|
|
|
|
|
|
|
|
|
|
September 30
|
|
|
Change
|
|
(Dollars in thousands)
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
Noninterest
Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and benefits
|
|
$ |
10,147 |
|
|
$ |
9,400 |
|
|
$ |
747 |
|
|
|
7.9 |
|
Net
occupancy expense
|
|
|
1,498 |
|
|
|
1,451 |
|
|
|
47 |
|
|
|
3.2 |
|
Furniture
and equipment expense
|
|
|
578 |
|
|
|
646 |
|
|
|
(68 |
) |
|
|
(10.5 |
) |
Advertising
|
|
|
1,033 |
|
|
|
1,068 |
|
|
|
(35 |
) |
|
|
(3.3 |
) |
Legal
and professional fees
|
|
|
1,163 |
|
|
|
1,158 |
|
|
|
5 |
|
|
|
0.4 |
|
Data
processing
|
|
|
1,249 |
|
|
|
1,219 |
|
|
|
30 |
|
|
|
2.5 |
|
Pennsylvania
bank shares tax
|
|
|
459 |
|
|
|
431 |
|
|
|
28 |
|
|
|
6.5 |
|
Intangible
amortization
|
|
|
343 |
|
|
|
351 |
|
|
|
(8 |
) |
|
|
(2.3 |
) |
FDIC
insurance
|
|
|
882 |
|
|
|
1,148 |
|
|
|
(266 |
) |
|
|
(23.2 |
) |
Other
|
|
|
2,468 |
|
|
|
2,709 |
|
|
|
(241 |
) |
|
|
(8.9 |
) |
Total
noninterest expense
|
|
$ |
19,820 |
|
|
$ |
19,581 |
|
|
$ |
239 |
|
|
|
1.2 |
|
Income
taxes
Federal
income tax expense was $2.2 million for the first nine months of 2010 compared
to $1.4 million in 2009. The effective tax rate for the first nine
months of 2010 was 27.2% and 22.4% for 2009. The lower effective tax rate in
2009 was caused by the provision for loan loss expense of $2.7 million compared
to $1.9 million in 2010, thereby significantly reducing the pre-tax income for
2009. All taxable income for the Corporation is taxed at a rate
of 34%.
Financial
Condition
Summary:
At
September 30, 2010, assets totaled $967.6 million, a decrease of $11.8 million
from the 2009 year-end balance of $979.4 million. Net loans have increased $17.6
million; however, this growth was offset by a decrease in investment securities.
Deposits are down $11.6 million during the first nine months of 2010 due
primarily to the maturity of a short-term brokered CD of $25 million in the
first quarter of 2010 and approximately $14 million in scheduled maturities of
other brokered CDs throughout the year. This funding was not replaced and this
more than offset core deposit growth during the
year. Shareholders’ equity increased $3.5 million during the
first nine months as retained earnings increased approximately $2.8 million and
Treasury stock decreased $673 thousand.
Investment
Securities:
The
investment portfolio totaled $125.2 million at September 30, 2010, a decrease of
$18.1 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. New purchases during the year were made
primarily for collateral purposes.
The
equity portfolio is comprised of bank stocks and the Bank and the Corporation
each maintain separate equity investment portfolios. The municipal
bond portfolio of $42.8 million 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 $6.9 million with the majority of the
bonds representing financial services companies. Included in the corporate bond
portfolio are seven single issuer trust preferred securities with an amortized
cost 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 seven private label mortgage backed securities
with an amortized cost of $4.8 million and a fair value of $4.2
million.
The
amortized cost and estimated fair value of investment securities available for
sale as of September 30, 2010 and December 31, 2009 are:
(Amounts in thousands)
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
unrealized
|
|
|
unrealized
|
|
|
fair
|
|
September 30, 2010
|
|
cost
|
|
|
gains
|
|
|
losses
|
|
|
value
|
|
Equity
securities
|
|
$ |
4,532 |
|
|
$ |
2 |
|
|
$ |
(1,725 |
) |
|
$ |
2,809 |
|
U.S.
Treasury securities and obligations of U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
agencies
|
|
|
20,134 |
|
|
|
421 |
|
|
|
(42 |
) |
|
|
20,513 |
|
Obligations
of state and political subdivisions
|
|
|
40,869 |
|
|
|
1,901 |
|
|
|
(13 |
) |
|
|
42,757 |
|
Corporate
debt securities
|
|
|
8,515 |
|
|
|
58 |
|
|
|
(1,713 |
) |
|
|
6,860 |
|
Mortgage-backed
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
46,905 |
|
|
|
1,236 |
|
|
|
(123 |
) |
|
|
48,018 |
|
Non-Agency
|
|
|
4,794 |
|
|
|
- |
|
|
|
(630 |
) |
|
|
4,164 |
|
Asset-backed
securities
|
|
|
75 |
|
|
|
- |
|
|
|
(24 |
) |
|
|
51 |
|
|
|
$ |
125,824 |
|
|
$ |
3,618 |
|
|
$ |
(4,270 |
) |
|
$ |
125,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
September 30, 2010, the investment portfolio contained 75 securities with $32.1
million of temporarily impaired fair value and $4.3 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 and similar to the unrealized
loss of $4.2 million on 77 securities at the end of the second
quarter. The investment categories with the largest unrealized losses continue
to be the equity portfolio (22 securities and $1.7 million unrealized loss) and
the corporate bond portfolio (9 securities and $1.7 million unrealized
loss).
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
September 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 September 30, 2010 and
December 31, 2009:
|
|
September 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
|
|
$ |
1,033 |
|
|
$ |
(1,040 |
) |
|
|
2 |
|
|
$ |
1,485 |
|
|
$ |
(685 |
) |
|
|
20 |
|
|
$ |
2,518 |
|
|
$ |
(1,725 |
) |
|
|
22 |
|
U.S.
Treasury securities and obligations of U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
agencies
|
|
|
27 |
|
|
|
- |
|
|
|
1 |
|
|
|
6,948 |
|
|
|
(42 |
) |
|
|
17 |
|
|
|
6,975 |
|
|
|
(42 |
) |
|
|
18 |
|
Obligations
of state and political subdivisions
|
|
|
1,328 |
|
|
|
(9 |
) |
|
|
3 |
|
|
|
302 |
|
|
|
(4 |
) |
|
|
1 |
|
|
|
1,630 |
|
|
|
(13 |
) |
|
|
4 |
|
Corporate
debt securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6,172 |
|
|
|
(1,713 |
) |
|
|
9 |
|
|
|
6,172 |
|
|
|
(1,713 |
) |
|
|
9 |
|
Mortgage-backed
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
10,016 |
|
|
|
(122 |
) |
|
|
11 |
|
|
|
584 |
|
|
|
(1 |
) |
|
|
1 |
|
|
|
10,600 |
|
|
|
(123 |
) |
|
|
12 |
|
Non-Agency
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,164 |
|
|
|
(630 |
) |
|
|
7 |
|
|
|
4,164 |
|
|
|
(630 |
) |
|
|
7 |
|
Asset-backed
securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
53 |
|
|
|
(24 |
) |
|
|
3 |
|
|
|
53 |
|
|
|
(24 |
) |
|
|
3 |
|
Total temporarily impaired securities
|
|
$ |
12,404 |
|
|
$ |
(1,171 |
) |
|
|
17 |
|
|
$ |
19,708 |
|
|
$ |
(3,099 |
) |
|
|
58 |
|
|
$ |
32,112 |
|
|
$ |
(4,270 |
) |
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
unrealized loss in the corporate bond portfolio of $1.7 million is concentrated
in trust-preferred securities. 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.
Due to the problems in the financial markets in 2009, most trust preferred
securities realized a significant decline in value, but market prices have
improved since the end of 2009 and the value of the Bank’s trust preferred
portfolio has improved by $800 thousand since year end. All of the
Bank’s trust preferred securities are variable rate notes with long maturities
(2027 – 2028) 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. At September 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. The
following table provides additional detail about the Bank’s trust preferred
securities:
Trust Preferred Securities
|
September 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
|
|
$ |
927 |
|
|
$ |
592 |
|
|
$ |
(335 |
) |
|
Ba1
|
|
|
1
|
|
None
|
|
None
|
Huntington
Cap Trust II
|
|
Single
|
|
Preferred
Stock
|
|
|
871 |
|
|
|
561 |
|
|
|
(310 |
) |
|
B
|
|
|
1
|
|
None
|
|
None
|
BankAmerica
Cap III
|
|
Single
|
|
Preferred
Stock
|
|
|
955 |
|
|
|
691 |
|
|
|
(264 |
) |
|
BB
|
|
|
1
|
|
None
|
|
None
|
Wachovia
Cap Trust II
|
|
Single
|
|
Preferred
Stock
|
|
|
272 |
|
|
|
231 |
|
|
|
(41 |
) |
|
Baa2
|
|
|
1
|
|
None
|
|
None
|
Corestates
Captl Tr II
|
|
Single
|
|
Preferred
Stock
|
|
|
922 |
|
|
|
669 |
|
|
|
(253 |
) |
|
Baa1
|
|
|
1
|
|
None
|
|
None
|
Chase
Cap VI JPM
|
|
Single
|
|
Preferred
Stock
|
|
|
955 |
|
|
|
756 |
|
|
|
(199 |
) |
|
BBB
|
|
|
1
|
|
None
|
|
None
|
Fleet
Cap Tr V
|
|
Single
|
|
Preferred
Stock
|
|
|
970 |
|
|
|
718 |
|
|
|
(252 |
) |
|
Baa3
|
|
|
1
|
|
None
|
|
None
|
|
|
|
|
|
|
$ |
5,872 |
|
|
$ |
4,218 |
|
|
$ |
(1,654 |
) |
|
|
|
|
|
|
|
|
|
|
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 two, have some type of credit support tranche remaining
that will absorb any loss prior to losses at the senior tranche held by the
Bank.
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 analysis on the private label MBS portfolio during the
first quarter of 2010, 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 third 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 if current
loss trends continue.
The following table provides additional
detail about private label mortgage-backed securities:
Private Label Mortgage Backed Securities
|
|
September 30, 2010
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
|
Orgination
|
|
Amortized
|
|
|
Fair
|
|
|
Unrealized
|
|
Collateral
|
|
Lowest Credit
|
|
Credit
|
|
|
OTTI
|
|
Decscription
|
|
Date
|
|
Cost
|
|
|
Value
|
|
|
Gain (Loss)
|
|
Type
|
|
Rating Assigned
|
|
Support %
|
|
|
Charges
|
|
RALI
2003-QS15 A1
|
|
8/1/2003
|
|
$ |
640 |
|
|
$ |
623 |
|
|
$ |
(17 |
) |
ALT
A
|
|
Aa2
|
|
|
11.37 |
|
|
$ |
- |
|
RALI
2004-QS4 A7
|
|
3/1/2004
|
|
|
620 |
|
|
|
610 |
|
|
|
(10 |
) |
ALT
A
|
|
AAA
|
|
|
12.83 |
|
|
|
- |
|
MALT
2004-6 7A1
|
|
6/1/2004
|
|
|
760 |
|
|
|
648 |
|
|
|
(112 |
) |
ALT
A
|
|
BBB
|
|
|
10.54 |
|
|
|
- |
|
RALI
2005-QS2 A1
|
|
2/1/2005
|
|
|
703 |
|
|
|
641 |
|
|
|
(62 |
) |
ALT
A
|
|
B
|
|
|
7.53 |
|
|
|
- |
|
RALI
2006-QS4 A2
|
|
4/1/2006
|
|
|
1,004 |
|
|
|
744 |
|
|
|
(260 |
) |
ALT
A
|
|
D
|
|
|
- |
|
|
|
142 |
|
GSR
2006-5F 2A1
|
|
5/1/2006
|
|
|
494 |
|
|
|
445 |
|
|
|
(49 |
) |
Prime
|
|
CCC
|
|
|
4.29 |
|
|
|
- |
|
RALI
2006-QS8 A1
|
|
7/28/2006
|
|
|
573 |
|
|
|
453 |
|
|
|
(120 |
) |
ALT
A
|
|
D
|
|
|
- |
|
|
|
113 |
|
|
|
|
|
$ |
4,794 |
|
|
$ |
4,164 |
|
|
$ |
(630 |
) |
|
|
|
|
|
|
|
|
$ |
255 |
|
The
following table represents the cumulative credit losses on securities recognized
in earnings as of September 30, 2010.
|
|
Nine Months
|
|
|
|
Ended
|
|
|
|
September 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, September 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 $2.8 million at
September 30, 2010 and an unrealized loss of $1.7 million. 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 two equity securities were other than temporarily
impaired and an other-than-temporary impairment charge of $318 thousand was
recorded at September 30, 2010.
The
largest single unrealized loss in the equity portfolio is in shares of First
Chester County Corporation (First Chester). The Bank owns 207,062 shares of
First Chester, with a cost basis of $10.00 per share or approximately
$2.1 million and an unrealized loss of $1.0 million. The First Chester shares
were acquired in 2008 when American Home Bank, N.A. (AHB) was acquired by First
Chester. Just prior to the merger date, the Corporation owned shares
of AHB common stock that represented an ownership of approximately 21% of the
voting stock of AHB. On the merger date, the Corporation recorded the
merger transaction with 58,000 AHB shares exchanged at $11.00 per share cash
($638 thousand) and the remaining AHB shares (299,000) exchanged for 209,000
First Chester common shares at the December 31, 2008 fair value of $10.00 per
common share.
In
December 2009, Tower Bancorp, Inc. (Tower) announced that it would acquire First
Chester in a stock transaction. The merger agreement calls for First Chester
shareholders to receive merger consideration in the form of Tower shares based
upon a pre-determined exchange ratio. The exchange ratio is a variable ratio
based upon the amount of First Chester’s delinquent loans on the last business
day of the month prior to the date the merger is completed. The exchange ratio
for Tower shares to First Chester shareholders ranges from .237 shares to .464
shares.
On
September 3, 2010, Tower filed Form S-4 providing updated information about the
merger and its expectation that the merger will be completed in the fourth
quarter of 2010. Tower also stated that had the merger occurred in
August 2010, the exchange ratio would have been .291. Based on this
exchange ratio and Tower’s closing price of $18.78 per share on August 31, 2010,
this transaction would have resulted in a loss to the Bank of $939
thousand.
As of
September 30, 2010, Tower’s share price was $20.27 per share. At this price and
the previously stated exchange ratio of .291, the loss to the Bank would have
been $849 thousand. Based on September 30, 2010 pricing, the loss to
the Bank would have ranged from $123 thousand (.464 exchange ratio) to $1.1
million (.237 exchange ratio) pre-tax.
Tower
stated that it expects to complete the merger during the fourth quarter of
2010. Due to the fluctuation in Tower’s share price and the variable
exchange ratio, the Bank is unable to accurately determine its loss at this
time. Any reduction in First Chester’s delinquent loan number and, or an
increase in Tower’s stock price, helps reduce the potential loss to the Bank.
Likewise, an increase in First Chester’s delinquent loans and, or a decrease in
Tower’s stock price will increase the potential loss to the Bank. The Bank
expects to record a loss on this transaction during the fourth quarter. The
amount of the loss will be determined by the pricing guidelines in the merger
agreement, cannot be determined accurately at September 30, 2010 and may or may
not be within the range of loss presented above.
The Bank
held $6.5 million of restricted stock at September 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 regular repurchase of excess capital stock from its members due
to deterioration in its financial condition. At September 30, 2010, the Bank
held approximately $821 thousand in excess FHLB stock that it would not have
been required to hold prior to the suspension of the stock repurchase program.
FHLB stock is evaluated for impairment primarily based on an assessment of the
ultimate recoverability of its cost. As a government sponsored entity, FHLB has
the ability to raise funding through the U.S. Treasury that can be used to
support it operations. There is not a public market for FHLB stock
and the benefits of FHLB membership (e.g., liquidity and low cost funding) add
value to the stock beyond purely financial measures. Management intends to
remain a member of the FHLB and believes that it will be able to fully recover
the cost basis of this investment.
Loans:
Net loans
have increased $17.6 million since year-end. Residential real estate
loans, comprised of mortgage and home equity loans, have remained virtually
unchanged. The Bank has originated approximately $1.3 million in mortgage loans
this year through a third party brokerage agreement. The Bank collects a fee for
originating these loans, but it does not retain or service the
loans. In addition, there is less demand from consumers for home
equity products as the equity in their homes has decreased and they are less
willing to borrow money in the uncertain economy. Due to these facts, the Bank
expects its residential real estate loan portfolio to decline in future
periods.
Residential
real estate construction loans decreased $6.4 million from the end of 2009 to
$78.3 million at September 30, 2010. This amount is comprised of $5.5
million to individuals to build their own homes and $72.8 million to developers
to construct residential homes for sale or improve land for the sale of
residential building lots. These balances compare to $1.8 million to individuals
and $82.8 million to developers at year-end. The Banks exposure
to residential construction loans is concentrated primarily in south central
Pennsylvania. Real estate construction loans, especially land development loans,
frequently provide an interest reserve in order to assist the developer during
the development stage when minimal cash flow is generated. All real estate
construction loans are underwritten in the same manner, regardless of the use of
an interest reserve. At September 30, 2010, the Bank had $19.6 million in real
estate loans funded with an interest reserve and has capitalized $1.2 million of
interest from these reserves on active projects. Real estate
construction loans are monitored on a regular basis by either an independent
third party inspector, or a joint effort between the Bank’s Risk Management
division and the assigned loan officer depending on loan amount or complexity of
the project. This monitoring process includes at a minimum, the submission of
invoices and AIA documents of costs incurred by the borrower, on-site
inspections, and joint signature between the Risk Management division and the
loan officer for disbursement of funds. Year-to-date, the Bank has
recognized $188 thousand of interest income that was funded by interest reserve
accounts.
Commercial
lending activity continues to be strong and these balances have increased
approximately $29.5 million since year-end. Commercial real estate loans have
increased $17.4 million during the year. Commercial, industrial and
agricultural loans increased $12.2 million, primarily the result of loans to
commercial customers to fund business operations (approximately $6.1 million)
and loans to local municipalities (approximately $8.2
million). During the first nine months of 2010, the Bank purchased
$8.2 million of loan participations, $5.0 in commercial and industrial, $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. At September 30, 2010, the Bank held
$187.6 million in purchased loan participations.
Consumer
loans have decreased by approximately $4.4 million, much of the decrease
occurring in the indirect lending portfolio. The Bank’s indirect
lending portfolio is approximately $8 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)
|
|
September 30, 2010
|
|
|
December
31, 2009
|
|
|
Amount
|
|
|
%
|
|
Residential
Real Estate 1-4 Family
|
|
|
|
|
|
|
|
|
|
|
|
|
First
liens
|
|
$ |
142,828 |
|
|
$ |
142,330 |
|
|
$ |
498 |
|
|
|
0.3 |
|
Junior
liens and lines of credit
|
|
|
60,431 |
|
|
|
61,460 |
|
|
|
(1,029 |
) |
|
|
(1.7 |
) |
Total
|
|
|
203,259 |
|
|
|
203,790 |
|
|
|
(531 |
) |
|
|
(0.3 |
) |
Residential
real estate - construction
|
|
|
78,268 |
|
|
|
84,649 |
|
|
|
(6,381 |
) |
|
|
(7.5 |
) |
Commercial,
industrial and agricultural real estate
|
|
|
301,189 |
|
|
|
283,839 |
|
|
|
17,350 |
|
|
|
6.1 |
|
Commercial,
industrial and agricultural
|
|
|
156,216 |
|
|
|
144,035 |
|
|
|
12,181 |
|
|
|
8.5 |
|
Consumer
|
|
|
18,871 |
|
|
|
23,250 |
|
|
|
(4,379 |
) |
|
|
(18.8 |
) |
|
|
|
757,803 |
|
|
|
739,563 |
|
|
|
18,240 |
|
|
|
2.5 |
|
Less: Allowance
for loan losses
|
|
|
(9,598 |
) |
|
|
(8,937 |
) |
|
|
(661 |
) |
|
|
7.4 |
|
Net
Loans
|
|
$ |
748,205 |
|
|
$ |
730,626 |
|
|
$ |
17,579 |
|
|
|
2.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included
in the loan balances are the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unamortized deferred loan costs
|
|
$ |
576 |
|
|
$ |
589 |
|
|
|
|
|
|
|
|
|
Unamortized
discount on purchased loans
|
|
$ |
(233 |
) |
|
$ |
(286 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
pledged as collateral for borrowings and commitments from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
|
|
$ |
601,986 |
|
|
$ |
578,823 |
|
|
|
|
|
|
|
|
|
Federal
Reserve Bank
|
|
|
54,255 |
|
|
|
122,723 |
|
|
|
|
|
|
|
|
|
|
|
$ |
656,241 |
|
|
$ |
701,546 |
|
|
|
|
|
|
|
|
|
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.
Loans on
the Bank’s watch list are loans that are adversely criticized/classified because
the 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 these trends continue, the Bank has an increasing
likelihood that it will need to liquidate collateral for
repayment. The Bank’s watch list includes loans that may or may not
be delinquent or on nonaccrual, loans that may or may not be considered
impaired, and potential problem loans. Potential problem loans are loans on the
watch list that represent borrowers that may or may not be able to comply with
current loan terms, but excludes loans that are 90 days or more past due and
nonaccrual loans. Potential problem loans were $43.2 million at September 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, is slightly worse than at year-end
2009 as nonperforming loans increased from $18.3 million at year-end 2009, to
$19.2 million at September 30, 2010. However, nonperforming loans have decreased
slightly from $20.3 million at June 30, 2010. The ratio of nonperforming loans
to total gross loans increased from 2.47% at the end of 2009 to 2.53% at
September 30, 2010. A charge-off of $554 thousand on a residential real estate
construction loan contributed to the decline in nonaccrual 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)
|
|
9/30/2010
|
|
|
12/31/2009
|
|
|
|
|
|
|
|
|
Nonaccrual
loans
|
|
|
|
|
|
|
Residential
Real Estate 1-4 Family
|
|
|
|
|
|
|
First
Liens
|
|
$ |
1,122 |
|
|
$ |
345 |
|
Junior
Liens and Lines of Credit
|
|
|
121 |
|
|
|
- |
|
Total
|
|
|
1,243 |
|
|
|
345 |
|
Residential
Real Estate - Construction
|
|
|
6,490 |
|
|
|
4,040 |
|
Commercial,
Industrial and Agricultural Real Estate
|
|
|
5,936 |
|
|
|
5,654 |
|
Commercial,
Industrial and Agricultural
|
|
|
75 |
|
|
|
124 |
|
Consumer
|
|
|
13 |
|
|
|
30 |
|
Total
nonaccrual loans
|
|
$ |
13,757 |
|
|
$ |
10,193 |
|
|
|
|
|
|
|
|
|
|
Loans
past due 90 days or more and not included above
|
|
|
|
|
|
|
|
|
Residential
Real Estate 1-4 Family
|
|
|
|
|
|
|
|
|
First
Liens
|
|
$ |
1,202 |
|
|
$ |
3,060 |
|
Junior
Liens and Lines of Credit
|
|
|
772 |
|
|
|
494 |
|
Total
|
|
|
1,974 |
|
|
|
3,554 |
|
Residential
Real Estate - Construction
|
|
|
1,458 |
|
|
|
1,426 |
|
Commercial,
Industrial and Agricultural Real Estate
|
|
|
842 |
|
|
|
1,926 |
|
Commercial,
Industrial and Agricultural
|
|
|
1,044 |
|
|
|
960 |
|
Consumer
|
|
|
85 |
|
|
|
195 |
|
Total
loans past due 90 days or more and still accruing
|
|
|
5,403 |
|
|
|
8,061 |
|
Total
nonperforming loans
|
|
|
19,160 |
|
|
|
18,254 |
|
Repossessed
assets
|
|
|
5 |
|
|
|
18 |
|
Foreclosed
real estate
|
|
|
308 |
|
|
|
642 |
|
Total
nonperforming assets
|
|
$ |
19,473 |
|
|
$ |
18,914 |
|
|
|
|
|
|
|
|
|
|
Nonperforming
loans to total gross loans
|
|
|
2.53 |
% |
|
|
2.47 |
% |
Nonperforming
assets to total assets
|
|
|
2.01 |
% |
|
|
1.93 |
% |
Allowance
for loan losses to nonperforming loans
|
|
|
50.09 |
% |
|
|
48.96 |
% |
|
|
|
|
|
|
|
|
|
Impaired
loans
|
|
$ |
24,839 |
|
|
$ |
18,123 |
|
Impaired
loans with an allowance for loss
|
|
$ |
24,232 |
|
|
$ |
12,833 |
|
Allowance
for loss on impaired loans
|
|
$ |
5,759 |
|
|
$ |
4,890 |
|
|
|
|
|
|
|
|
|
|
Troubled
debt restructurings
|
|
$ |
662 |
|
|
$ |
- |
|
The
majority of the nonaccrual loan balance is comprised of four loan relationships
totaling $11.8 million. The following table provides additional information on
the most significant nonaccrual accounts:
Significant
Nonaccrual Loans
September
30, 2010
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Orgin.
|
|
|
|
|
|
ALL
|
|
Nonaccrual
|
|
|
|
|
|
|
Date
|
|
|
Balance
|
|
|
Reserve
|
|
Date
|
|
Collateral
|
|
Location
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrower
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
real estate construction and
development , 1-4 family
|
|
2006
|
|
|
$ |
2,944 |
|
|
$ |
1,095 |
|
2009
|
|
1st
lien residential building lots 2nd
& 3rd lien single family residential rental
property
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrower
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural
4 separate notes
|
|
2004
- 2006
|
|
|
|
1,675 |
|
|
|
163 |
|
2009
|
|
1st
and 2nd lien on agricultural real estate, farm equipment, livestock and a
70% FSA guarantee on a $381 note
|
|
PA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrower
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
3 separate notes
|
|
2009
|
|
|
|
3,813 |
|
|
|
2,105 |
|
2009
|
|
1st
lien commercial real estate, equipment and other business
assets
|
|
PA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrower
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
real estate construction and development , 1-4 family 18 separate
notes
|
|
2007
- 2009
|
|
|
|
3,412 |
|
|
|
341 |
|
2010
|
|
Joint
and several liability of principals
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,844 |
|
|
$ |
3,704 |
|
|
|
|
|
|
Three of
these relationships (borrowers 1 – 3) remained relatively unchanged from
year-end. These loans include a residential real estate development loans ($2.9
million), one agricultural loan ($1.7 million) and one manufacturing loan ($3.8
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. One credit
has been removed from this list compared to June 30, 2010 as a result of the
previously mentioned third quarter charge-off. In addition to the charge-off,
the Bank received a partial payment on this credit and moved $49 thousand to
OREO. This property recently sold and the Bank expects a recovery in excess of
the OREO cost.
Borrower
4 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. During the third quarter, a financing package was
prepared by a group of lenders and submitted to the bankruptcy court for
approval. This financing package, if approved, is expected to payoff
the Bank’s position with minimal loss expected. 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. The Bank expects more of the 90-day plus loans to move to
nonaccrual status by year-end. The Bank holds $308 thousand of foreclosed real
estate, comprised of four loans by residential real estate
property.
The
following table provides additional information on the foreclosed real
estate:
Foreclosed
Real Estate
|
September
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
|
Property
3
|
2010
|
|
|
30 |
|
residential
property
|
|
PA
|
Property
4
|
2010
|
|
|
49 |
|
unimproved
residential real estate
|
|
DE
|
|
|
|
$ |
308 |
|
|
|
|
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 $24.8 million at September 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 $662
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 September 30, 2010 is
adequate.
During
the first nine months of 2010, $1.9 million was added to the allowance for loan
losses (ALL) thorough the provision for loan loss expense. The
provision expense was $2.7 million for the same period in
2009. Year-to-date, the net increase in the ALL was $661 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 1.27% at September 30, 2010 from 1.21% at the December 31,
2009.
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 $1.2 million for the first nine months of both
2010 and 2009. Both gross charge-off and recoveries are nearly the same as the
prior year, but the activity was spread across more sectors of the loan
portfolio. During the third quarter of 2010, the Bank record a $554 thousand
charge-off of a nonaccrual loan in the residential real estate construction
sector. The annualized net loan charge-off ratio of .21% is only
slightly better than the 2009 nine-month ratio of .23% and the ratio of .26% for
all of 2009.
The
following table presents an analysis of the allowance for loan
losses:
|
|
|
|
|
|
|
|
Twelve
Months
|
|
|
|
Nine
Months Ended
|
|
|
Ended
|
|
|
|
September
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
|
|
|
(34 |
) |
|
|
- |
|
|
|
- |
|
Junior
Liens and Lines of Credit
|
|
|
(140 |
) |
|
|
(94 |
) |
|
|
(94 |
) |
Total
|
|
|
(174 |
) |
|
|
(94 |
) |
|
|
(94 |
) |
Residential
real estate - construction
|
|
|
(573 |
) |
|
|
(350 |
) |
|
|
(724 |
) |
Commercial,
Industrial and Agricultural Real Estate
|
|
|
(115 |
) |
|
|
- |
|
|
|
(63 |
) |
Commercial,
Industrial and Agricultural
|
|
|
(209 |
) |
|
|
(474 |
) |
|
|
(567 |
) |
Consumer
|
|
|
(355 |
) |
|
|
(502 |
) |
|
|
(681 |
) |
Total
charge-offs
|
|
|
(1,426 |
) |
|
|
(1,420 |
) |
|
|
(2,129 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
Real Estate 1-4 Family
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Liens
|
|
|
14 |
|
|
|
20 |
|
|
|
25 |
|
Junior
Liens and Lines of Credit
|
|
|
2 |
|
|
|
- |
|
|
|
- |
|
Total
|
|
|
16 |
|
|
|
20 |
|
|
|
25 |
|
Residential
real estate - construction
|
|
|
9 |
|
|
|
- |
|
|
|
- |
|
Commercial,
Industrial and Agricultural Real Estate
|
|
|
17 |
|
|
|
- |
|
|
|
- |
|
Commercial,
Industrial and Agricultural
|
|
|
59 |
|
|
|
60 |
|
|
|
62 |
|
Consumer
|
|
|
111 |
|
|
|
148 |
|
|
|
184 |
|
Total
recoveries
|
|
|
212 |
|
|
|
228 |
|
|
|
271 |
|
Net
charge-offs
|
|
|
(1,214 |
) |
|
|
(1,192 |
) |
|
|
(1,858 |
) |
Provision
for loan losses
|
|
|
1,875 |
|
|
|
2,663 |
|
|
|
3,438 |
|
Balance
at end of period
|
|
$ |
9,598 |
|
|
$ |
8,828 |
|
|
$ |
8,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized
net loans charged-off as a percentage of average loans
|
|
|
0.21 |
% |
|
|
0.23 |
% |
|
|
0.26 |
% |
Net
loans charged-off as a percentage of the provision for loan
losses
|
|
|
64.75 |
% |
|
|
44.76 |
% |
|
|
54.04 |
% |
Allowance
as a percentage of loans
|
|
|
1.27 |
% |
|
|
1.20 |
% |
|
|
1.21 |
% |
Other
Assets:
Other
intangible assets are comprised of a core deposit intangible and a customer list
and are being amortized over the estimated useful life of the
asset.
Deposits:
Total
deposits decreased $11.6 million during the first nine months of 2010 to $726.8
million. Non-interest bearing deposits increased $9.4 million, while savings and
interest-bearing checking deposits increased $47.8 million and time deposits
decreased $68.8 million. The majority of the increase in non-interest bearing
accounts came in commercial checking accounts, small business checking accounts
and state/municipal checking accounts. The Bank’s Money
Management product increased $45.7 million due in part to a promotion in
selected markets and higher consumer savings levels, with $24 million of the
increase from commercial deposits and $22 million from retail
deposits. Retail time deposits decreased since year-end, as customers
moved funds to more liquid accounts, while brokered CDs declined $40 million due
primarily to $25 million in year-end 2009 funding that matured in the first
quarter of 2010 and $15 million in other scheduled maturities. As of
September 30, 2010, the Bank had $14.0 million in CDARS reciprocal deposits
included in brokered time deposits.
The
following table presents a summary of deposits outstanding at:
|
|
|
|
|
|
|
|
Change
|
|
(Amounts
in thousands)
|
|
9/30/2010
|
|
|
12/31/2009
|
|
|
Amount
|
|
|
%
|
|
Demand,
noninterest-bearing
|
|
$ |
87,114 |
|
|
$ |
77,675 |
|
|
$ |
9,439 |
|
|
|
12.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
checking
|
|
|
98,119 |
|
|
|
97,636 |
|
|
|
483 |
|
|
|
0.5 |
|
Savings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market accounts
|
|
|
289,264 |
|
|
|
243,600 |
|
|
|
45,664 |
|
|
|
18.7 |
|
Passbook
and statement savings
|
|
|
48,641 |
|
|
|
46,986 |
|
|
|
1,655 |
|
|
|
3.5 |
|
Total
savings and interest checking
|
|
|
436,024 |
|
|
|
388,222 |
|
|
|
47,802 |
|
|
|
12.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time
deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-brokered
|
|
|
179,000 |
|
|
|
207,338 |
|
|
|
(28,338 |
) |
|
|
(13.7 |
) |
Brokered
|
|
|
24,661 |
|
|
|
65,130 |
|
|
|
(40,469 |
) |
|
|
(62.1 |
) |
Total
time deposits
|
|
|
203,661 |
|
|
|
272,468 |
|
|
|
(68,807 |
) |
|
|
(25.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$ |
726,799 |
|
|
$ |
738,365 |
|
|
$ |
(11,566 |
) |
|
|
(1.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overdrawn
deposit accounts reclassified as loan balances
|
|
$ |
145 |
|
|
$ |
183 |
|
|
|
|
|
|
|
|
|
Borrowings:
The
balance of securities sold under agreements to repurchase, which are accounted
for as collateralized financings, decreased $1.3 million from year-end and the
long-term debt from the FHLB decreased $3.3 million due to scheduled
amortization and maturities.
Shareholders’
Equity:
Total shareholders’ equity increased
$3.5 million to $82.2 million at September 30, 2010, compared to $78.8 million
at the end of 2009. The increase in retained earnings from the
Corporation’s net income of $5.9 million was partially offset by the cash
dividend of $3.1 million. The Corporation’s dividend payout ratio of 52.9%, is
less than the 64.4% ratio for the first nine 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 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 nine months of
2010.
Effective
September 30, 2010, the Corporation amended its dividend reinvestment plan for
shareholders electing to purchase additional shares of the Corporation’s common
stock by reinvesting cash dividends paid on their shares or through optional
cash payments. Under the amended plan, the Corporation has modified
the minimum and maximum amounts that may be invested pursuant to the voluntary
cash payment option under the plan, provided for the investment of voluntary
cash payments as frequently as weekly, permitted participants to make voluntary
cash payments via direct draft (ACH transfer); and modified the formula for
determining the purchase price with respect to shares purchased under the plan
directly from the Corporation. The Corporation also authorized an additional one
million (1,000,000) shares of common stock. The Corporation has been
pleased with the initial response to the amended plan.
Capital adequacy is currently defined
by regulatory agencies through the use of several minimum required
ratios. At September 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
|
|
|
|
September
30, 2010
|
|
|
December 31, 2009
|
|
|
Minimum
|
|
|
Minimum
|
|
Total
Risk Based Capital Ratio (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Franklin
Financial Services Corporation
|
|
|
11.26 |
% |
|
|
10.89 |
% |
|
|
8.00 |
% |
|
|
n/a |
|
Farmers
& Merchants Trust Company
|
|
|
10.80 |
% |
|
|
10.45 |
% |
|
|
8.00 |
% |
|
|
10.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 Capital Ratio (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franklin
Financial Services Corporation
|
|
|
10.02 |
% |
|
|
9.69 |
% |
|
|
4.00 |
% |
|
|
n/a |
|
Farmers
& Merchants Trust Company
|
|
|
9.55 |
% |
|
|
9.25 |
% |
|
|
4.00 |
% |
|
|
6.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage
Ratio (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franklin
Financial Services Corporation
|
|
|
7.80 |
% |
|
|
7.50 |
% |
|
|
4.00 |
% |
|
|
n/a |
|
Farmers
& Merchants Trust Company
|
|
|
7.41 |
% |
|
|
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 September 30, 2010, the unemployment
rate for Pennsylvania was 9.0% and the national rate was 9.6%, while the
unemployment rate in the Corporation’s market area ranged from 7.3% in
Cumberland County to 12.1% 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 lingers, housing prices are down over
prior year, while mortgage delinquencies are consistent from the end of
2009. However, there has been an improvement in building permits
issued in 2010 versus 2009.
The
following table presents economic data:
Economic Data
|
|
|
|
|
|
|
|
|
|
|
9/30/2010
|
|
|
12/31/2009
|
|
Unemployment
Rate (seasonally adjusted)
|
|
|
|
|
|
|
Market
area range (1)
|
|
|
7.3
- 12.1 |
% |
|
|
6.8
- 14.4 |
% |
Pennsylvania
|
|
|
9.0 |
% |
|
|
8.1 |
% |
United
States
|
|
|
9.6 |
% |
|
|
9.3 |
% |
|
|
|
|
|
|
|
|
|
Housing
Price Index - year over year change
|
|
|
|
|
|
|
|
|
PA,
nonmetropolitan statistical area
|
|
|
-4.5 |
% |
|
|
-3.3 |
% |
United
States
|
|
|
-4.9 |
% |
|
|
-4.4 |
% |
|
|
|
|
|
|
|
|
|
Franklin
County Building Permits - year over year change
|
|
|
|
|
|
|
|
|
Residential,
estimated
|
|
|
5.5 |
% |
|
|
-30.0 |
% |
Multifamily,
estimated
|
|
|
32.4 |
% |
|
|
-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 nine
months 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 or 2011.
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 transaction 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 September 30, 2010, the Bank had approximately $117
million (fair value) of its investment portfolio pledged as
collateral. Another source of liquidity for the Bank is a line of
credit with the FHLB. At September 30, 2010, the Bank had approximately $131
million available on this line of credit. 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
regularly 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.
In
addition, the Bank has $26 million in unsecured lines of credit at three
correspondent banks and approximately $39 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
$228.5 million and $219.1 million, respectively, at September 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 September
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 September 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 nine months ended September 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.
Item
1A. Risk
Factors
There were no material changes in the
Corporation’s risk factors during the nine months ended September 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 8, 2010 to repurchase up
to 100,000 shares of the Corporation’s common stock over a 12 month time period.
There were no shares purchased in 2010.
The
Corporation did not issue any unregistered equity securities during the quarter
ended September 30, 2010.
Item
3. Defaults by the Company on
its Senior Securities
None
Item
4. Removed and
Reserved
Item
5. Other
Information
None
Item
6. Exhibits
Exhibits
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
|
|
|
|
|
November 8, 2010
|
|
|
/s/ William E. Snell,
Jr.
|
|
|
|
William
E. Snell, Jr.
|
|
|
|
President
and Chief Executive Officer
|
|
|
|
(Authorized
Officer)
|
|
|
|
|
November 8, 2010
|
|
|
/s/ Mark R. Hollar
|
|
|
|
Mark
R. Hollar
|
|
|
|
Treasurer
and Chief Financial Officer
|
|
|
|
(Principal
Financial Officer)
|