Company Quick10K Filing
Quick10K
Franklin Financial Services
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$38.75 4 $171
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-05-03 Shareholder Vote
8-K 2019-04-30 Regulation FD, Exhibits
8-K 2019-04-30 Other Events
8-K 2019-04-30 Earnings, Exhibits
8-K 2019-04-18 Other Events
8-K 2019-01-29 Earnings, Exhibits
8-K 2019-01-16 Other Events
8-K 2018-12-20 Amend Bylaw, Other Events, Exhibits
8-K 2018-10-24 Earnings, Exhibits
8-K 2018-10-12 Other Events
8-K 2018-08-09 Regulation FD, Exhibits
8-K 2018-08-02 Other Events
8-K 2018-07-24 Earnings, Exhibits
8-K 2018-07-16 Other Events
8-K 2018-05-31 Impairments
8-K 2018-05-08 Other Events
8-K 2018-04-27 Shareholder Vote
8-K 2018-04-24 Regulation FD, Exhibits
8-K 2018-04-23 Earnings, Exhibits
8-K 2018-04-13 Enter Agreement
8-K 2018-04-10 Other Events
8-K 2018-02-09 Regulation FD, Exhibits
8-K 2018-01-30 Earnings, Exhibits
8-K 2018-01-17 Other Events
8-K 2018-01-02 Enter Agreement
HON Honeywell 124,000
ECA Encana 9,700
TFSL TFS Financial 4,810
VVV Valvoline 3,420
NMIH NMI Holdings 1,860
QUOT Quotient Technology 959
ROSE Rosehill Resources 194
FSSN Fision 0
SVR Syniverse 0
EQFN Equitable Financial 0
FRAF 2019-03-31
Part I Financial Information
Item 1 Financial Statements
Note 1 - Basis of Presentation
Note 2. Recent Accounting Pronouncements
Note 3. Accumulated Other Comprehensive Loss
Note 4. Investments
Note 5. Loans
Note 6. Loan Quality and Allowance for Loan Losses
Note 7. Leases
Note 8. Other Real Estate Owned
Note 9. Pension
Note 10. Fair Value Measurements and Fair Values of Financial Instruments
Note 11. Capital Ratios
Note 12. Revenue Recognition
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II – Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults By The Company on Its Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 fraf-20190331xex31_1.htm
EX-31.2 fraf-20190331xex31_2.htm
EX-32.1 fraf-20190331xex32_1.htm
EX-32.2 fraf-20190331xex32_2.htm

Franklin Financial Services Earnings 2019-03-31

FRAF 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 fraf-20190331x10q.htm 10-Q 20190331 Q1

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

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 001-38884

FRANKLIN FINANCIAL SERVICES CORPORATION

(Exact name of registrant as specified in its charter)



 

PENNSYLVANIA

25-1440803

(State or other jurisdiction of incorporation or organization) 

(I.R.S. Employer Identification No.)







 

20 South Main Street, Chambersburg, PA

17201-0819

(Address of principal executive offices)

(Zip Code)



(717) 264-6116

(Registrant's telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

 Title of classSymbolName of exchange on which registered

Common stock FRAFNasdaq Stock Market, Inc.



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   No



Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes  No



Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.   See the definitions of “large accelerated filer,” “accelerated filer,”  “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer      Accelerated filer      Non-accelerated filer      Smaller reporting company        Emerging growth company  



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



Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act)  Yes  No



There were 4,389,414 outstanding shares of the Registrant’s common stock as of April  30, 2019.

 


 

INDEX



               



 

 

Part I - FINANCIAL INFORMATION

 



 

 

Item 1

Financial Statements

 



Consolidated Balance Sheets as of March  31, 2019 and December 31, 2018 (unaudited)

1



Consolidated Statements of Income for the Three Months ended March  31, 2019 

2



and 2018 (unaudited)

 



Consolidated Statements of Comprehensive Income for the Three Months ended

3



March  31, 2019 and 2018 (unaudited)

 



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

3



ended March 31, 2019 and 2018 (unaudited)

 



Consolidated Statements of Cash Flows for the Three Months ended March  31, 2019 

4



and 2018 (unaudited)

 



Notes to Consolidated Financial Statements (unaudited)

5



 

 

Item 2

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

24

Item 3

Quantitative and Qualitative Disclosures about Market Risk

40

Item 4

Controls and Procedures

40



 

 

Part II - OTHER INFORMATION 

 



 

 

Item 1

Legal Proceedings

41

Item 1A

Risk Factors

41

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

42

Item 3

Defaults Upon Senior Securities

42

Item 4

Mine Safety Disclosures

42

Item 5

Other Information

43

Item 6

Exhibits

43

SIGNATURE PAGE

44



 







 

 


 

Part I FINANCIAL INFORMATION

Item 1 Financial Statements

Consolidated Balance Sheets







 

 

 

 

 

 

 

 

 

 

 

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

March 31,

 

December 31,



2019

 

2018

Assets

 

 

 

 

 

Cash and due from banks

$

11,771 

 

$

16,957 

Interest-bearing deposits in other banks

 

35,262 

 

 

36,000 

Total cash and cash equivalents

 

47,033 

 

 

52,957 

Debt securities available for sale, at fair value

 

127,881 

 

 

131,472 

Equity securities

 

377 

 

 

374 

Restricted stock

 

452 

 

 

452 

Loans held for sale

 

195 

 

 

118 

Loans

 

980,466 

 

 

973,375 

Allowance for loan losses

 

(12,681)

 

 

(12,415)

Net Loans

 

967,785 

 

 

960,960 

Premises and equipment, net

 

13,347 

 

 

13,521 

Right of use asset

 

6,099 

 

 

 —

Bank owned life insurance

 

23,623 

 

 

23,496 

Goodwill

 

9,016 

 

 

9,016 

Other real estate owned

 

2,684 

 

 

2,684 

Deferred tax asset, net

 

5,700 

 

 

5,992 

Other assets

 

8,768 

 

 

8,545 

Total assets

$

1,212,960 

 

$

1,209,587 



 

 

 

 

 

Liabilities

 

 

 

 

 

Deposits

 

 

 

 

 

Non-interest bearing checking

$

192,004 

 

$

197,417 

Money management, savings and interest checking

 

795,411 

 

 

823,619 

Time

 

89,076 

 

 

61,593 

Total deposits

 

1,076,491 

 

 

1,082,629 

Lease liability

 

6,113 

 

 

 —

Other liabilities

 

8,865 

 

 

8,562 

Total liabilities

 

1,091,469 

 

 

1,091,191 



 

 

 

 

 

Shareholders' equity

 

 

 

 

 

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

 

 

 

 

 

4,708,349 shares issued and 4,410,880 shares outstanding at March 31, 2019 and

 

 

 

 

 

4,701,367 shares issued and 4,408,761 shares outstanding at December 31, 2018

 

4,708 

 

 

4,701 

Capital stock without par value, 5,000,000 shares authorized with no

 

 

 

 

 

shares issued and outstanding

 

 —

 

 

 —

Additional paid-in capital

 

41,841 

 

 

41,530 

Retained earnings

 

85,991 

 

 

83,946 

Accumulated other comprehensive loss

 

(5,281)

 

 

(6,380)

Treasury stock, 297,469 shares at March 31, 2019 and 292,606 shares at

 

 

 

 

 

December 31, 2018, at cost

 

(5,768)

 

 

(5,401)

Total shareholders' equity

 

121,491 

 

 

118,396 

Total liabilities and shareholders' equity

$

1,212,960 

 

$

1,209,587 

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

1


 

Consolidated Statements of Income





 

 

 

 

 

 



 

For the Three Months Ended

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

 

March 31,



 

2019

 

2018

Interest income

 

 

 

 

 

 

Loans, including fees

 

$

11,009 

 

$

9,577 

Interest and dividends on investments:

 

 

 

 

 

 

Taxable interest

 

 

540 

 

 

513 

Tax exempt interest

 

 

338 

 

 

274 

Dividend income

 

 

 

 

Deposits and obligations of other banks

 

 

97 

 

 

118 

Total interest income

 

 

11,989 

 

 

10,488 

Interest expense

 

 

 

 

 

 

Deposits

 

 

1,624 

 

 

795 

Short-term borrowings

 

 

36 

 

 

 —

Total interest expense

 

 

1,660 

 

 

795 

Net interest income

 

 

10,329 

 

 

9,693 

Provision for loan losses

 

 

399 

 

 

200 

Net interest income after provision for loan losses

 

 

9,930 

 

 

9,493 

Noninterest income

 

 

 

 

 

 

Investment and trust services fees

 

 

1,452 

 

 

1,397 

Loan service charges

 

 

203 

 

 

231 

Deposit service charges and fees

 

 

545 

 

 

574 

Other service charges and fees

 

 

353 

 

 

333 

Debit card income

 

 

402 

 

 

385 

Increase in cash surrender value of life insurance

 

 

127 

 

 

128 

Debt securities gains, net

 

 

24 

 

 

 —

Change in fair value of equity securities

 

 

 

 

45 

Other

 

 

56 

 

 

55 

Total noninterest income

 

 

3,165 

 

 

3,148 

Noninterest Expense

 

 

 

 

 

 

Salaries and employee benefits

 

 

5,442 

 

 

4,986 

Net occupancy

 

 

856 

 

 

815 

Advertising

 

 

402 

 

 

427 

Legal and professional

 

 

430 

 

 

329 

Data processing

 

 

705 

 

 

596 

Pennsylvania bank shares tax

 

 

243 

 

 

239 

FDIC Insurance

 

 

65 

 

 

129 

ATM/debit card processing

 

 

258 

 

 

238 

Foreclosed real estate

 

 

17 

 

 

14 

Telecommunications

 

 

105 

 

 

109 

Other

 

 

889 

 

 

766 

Total noninterest expense

 

 

9,412 

 

 

8,648 

Income before federal income taxes

 

 

3,683 

 

 

3,993 

Federal income tax expense

 

 

446 

 

 

491 

Net income

 

$

3,237 

 

$

3,502 

Per share

 

 

 

 

 

 

Basic earnings per share

 

$

0.73 

 

$

0.80 

Diluted earnings per share

 

$

0.73 

 

$

0.80 

Cash dividends declared

 

$

0.27 

 

$

0.24 

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

2


 

Consolidated Statements of Comprehensive Income





 

 

 

 

 

 



 

For the Three Months Ended



 

March 31,

(Dollars in thousands) (unaudited)

 

2019

 

2018

Net Income

 

$

3,237 

 

$

3,502 



 

 

 

 

 

 

Debt Securities:

 

 

 

 

 

 

Unrealized gains (losses) arising during the period

 

 

1,414 

 

 

(1,043)

Reclassification adjustment included in net income (1)

 

 

(24)

 

 

 —

Net unrealized gains (losses)

 

 

1,390 

 

 

(1,043)

Tax effect

 

 

(291)

 

 

262 

Net of tax amount

 

 

1,099 

 

 

(781)



 

 

 

 

 

 

Total other comprehensive income (loss)

 

 

1,099 

 

 

(781)



 

 

 

 

 

 

Total Comprehensive Income

 

$

4,336 

 

$

2,721 



 

 

 

 

 

 



 

 

 

 

 

 

Reclassification adjustment / Statement line item

 

Tax  expense (benefit)

(1) Debt securities gains, net

 

$

 

$

 —

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



 

Consolidated Statements of Changes in Shareholders' Equity

For the three months ended March 31, 2019 and 2018





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 



 

 

 

Additional

 

 

 

 

Other

 

 

 

 

 

 



Common

 

Paid-in

 

Retained

 

Comprehensive

 

Treasury

 

 

 

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

Stock

 

Capital

 

Earnings

 

Loss

 

Stock

 

Total

Balance at December 31, 2018

$

4,701 

 

$

41,530 

 

$

83,946 

 

$

(6,380)

 

$

(5,401)

 

$

118,396 

Net income

 

 —

 

 

 —

 

 

3,237 

 

 

 —

 

 

 —

 

 

3,237 

Other comprehensive income

 

 —

 

 

 —

 

 

 —

 

 

1,099 

 

 

 —

 

 

1,099 

Cash dividends declared, $.27 per share

 

 —

 

 

 —

 

 

(1,192)

 

 

 —

 

 

 —

 

 

(1,192)

Acquisition of 15,163 shares of treasury stock

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(560)

 

 

(560)

Treasury shares issued under employee stock purchase plan, 150 shares

 

 —

 

 

 

 

 —

 

 

 —

 

 

 

 

Treasury shares issued under dividend reinvestment plan, 10,150 shares

 

 —

 

 

161 

 

 

 —

 

 

 —

 

 

190 

 

 

351 

Common stock issued under incentive stock option plan, 6,982 shares

 

 

 

148 

 

 

 —

 

 

 —

 

 

 —

 

 

155 

Balance at March 31, 2019

$

4,708 

 

$

41,841 

 

$

85,991 

 

$

(5,281)

 

$

(5,768)

 

$

121,491 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

$

4,689 

 

$

40,396 

 

$

82,218 

 

$

(6,028)

 

$

(6,131)

 

$

115,144 

Cumulative adjustment for fair value of equity securities

 

 —

 

 

 —

 

 

201 

 

 

(201)

 

 

 —

 

 

 —

Net income

 

 —

 

 

 —

 

 

3,502 

 

 

 —

 

 

 —

 

 

3,502 

Other comprehensive (loss)

 

 —

 

 

 —

 

 

 —

 

 

(781)

 

 

 —

 

 

(781)

Cash dividends declared, $.24 per share

 

 —

 

 

 —

 

 

(1,045)

 

 

 —

 

 

 —

 

 

(1,045)

Acquisition of 2,605 shares of treasury stock

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(88)

 

 

(88)

Treasury shares issued under employee stock purchase plan, 200 shares

 

 —

 

 

 

 

 —

 

 

 —

 

 

 

 

Treasury shares issued under dividend reinvestment plan, 5,911 shares

 

 —

 

 

97 

 

 

 —

 

 

 —

 

 

109 

 

 

206 

Common stock issued under incentive stock option plan, 6,518 shares

 

 

 

142 

 

 

 —

 

 

 —

 

 

 —

 

 

149 

Stock option compensation expense

 

 —

 

 

31 

 

 

 —

 

 

 —

 

 

 —

 

 

31 

Balance at March 31, 2018

$

4,696 

 

$

40,668 

 

$

84,876 

 

$

(7,010)

 

$

(6,106)

 

$

117,124 



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

3


 

Consolidated Statements of Cash Flows





 

 

 

 

 

 



 

Three Months Ended
March 31,



 

2019

 

2018

(Dollars in thousands) (unaudited)

 

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

 

Net income

 

$

3,237 

 

$

3,502 

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

 

 

 

 

 

 

Depreciation and amortization

 

 

338 

 

 

333 

Net amortization of loans and investment securities

 

 

409 

 

 

438 

Provision for loan losses

 

 

399 

 

 

200 

Change in fair value of equity securities

 

 

(3)

 

 

(45)

Debt securities gains, net

 

 

(24)

 

 

 —

Loans originated for sale

 

 

(6,467)

 

 

(2,527)

Proceeds from sale of loans

 

 

6,390 

 

 

2,969 

Write-down of other real estate owned

 

 

 —

 

 

Loss on sale of premises

 

 

 —

 

 

17 

Increase in cash surrender value of life insurance

 

 

(127)

 

 

(128)

Stock option compensation

 

 

 —

 

 

31 

Contribution to pension plan

 

 

 —

 

 

(1,000)

Increase in other assets

 

 

(50)

 

 

(448)

Increase in other liabilities

 

 

118 

 

 

148 

Net cash provided by operating activities

 

 

4,220 

 

 

3,496 

Cash flows from investing activities

 

 

 

 

 

 

Proceeds from sales and calls of investment securities available for sale

 

 

3,876 

 

 

 —

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

 

 

6,084 

 

 

5,726 

Purchase of investment securities available for sale

 

 

(5,344)

 

 

(13,380)

Net (increase) decrease in loans

 

 

(7,245)

 

 

1,031 

Capital expenditures

 

 

(136)

 

 

(107)

Proceeds from sale of other assets

 

 

 —

 

 

117 

Net cash used in investing activities

 

 

(2,765)

 

 

(6,613)

Cash flows from financing activities

 

 

 

 

 

 

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

 

 

(33,621)

 

 

(3,636)

Net increase (decrease) in time deposits

 

 

27,483 

 

 

(9,084)

Dividends paid

 

 

(1,192)

 

 

(1,045)

Purchase of Treasury shares

 

 

(560)

 

 

 —

Cash received from option exercises

 

 

160 

 

 

206 

Treasury shares under dividend reinvestment plan

 

 

351 

 

 

155 

Net cash used in financing activities

 

 

(7,379)

 

 

(13,404)

Decrease in cash and cash equivalents

 

 

(5,924)

 

 

(16,521)

Cash and cash equivalents as of January 1

 

 

52,957 

 

 

58,603 

Cash and cash equivalents as of March 31

 

$

47,033 

 

$

42,082 

Supplemental Disclosures of Cash Flow Information

 

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

 

Interest on deposits and other borrowed funds

 

$

1,562 

 

$

792 

Noncash Activities

 

 

 

 

 

 

Recognition of Operating Lease Right-of-Use Asset

 

$

6,236 

 

$

 —

Recognition of Operating Lease Liability

 

$

6,236 

 

$

 —

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

4


 

FRANKLIN FINANCIAL SERVICES CORPORATION and SUBSIDIARIES

UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 1 - Basis of Presentation

The consolidated financial statements include the accounts of Franklin Financial Services Corporation (the Corporation), and its wholly-owned subsidiaries, Farmers and Merchants Trust Company of Chambersburg (the Bank) and Franklin Future Fund Inc.  Farmers and Merchants Trust Company of Chambersburg is a commercial bank that has one wholly-owned subsidiary, Franklin Financial Properties Corp.  Franklin Financial Properties Corp. holds real estate assets that are leased by the Bank. Franklin Future Fund Inc. is a non-bank investment company. The activities of non-bank entities are not significant to the consolidated totals.  All significant intercompany transactions and account balances have been eliminated.

In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the consolidated financial position, results of operations, and cash flows as of March 31, 2019, 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 2018 Annual Report on Form 10-K.  The consolidated results of operations for the three month period ended March 31, 2019 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, 2018 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete consolidated financial statements.

For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks, interest-bearing deposits in other banks and federal funds sold.  Generally, federal funds are purchased and sold for one-day periods. 

Earnings per share are computed based on the weighted average number of shares outstanding during each period end.  A reconciliation of the weighted average shares outstanding used to calculate basic earnings per share and diluted earnings per share follows:







 

 

 

 

 

 



 

For the Three Months Ended



 

March 31,

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

 

2019

 

2018

Weighted average shares outstanding (basic)

 

 

4,412 

 

 

4,359 

Impact of common stock equivalents

 

 

21 

 

 

28 

Weighted average shares outstanding (diluted)

 

 

4,433 

 

 

4,387 

Anti-dilutive options excluded from calculation

 

 

 —

 

 

 —

Net income

 

$

3,237 

 

$

3,502 

Basic earnings per share

 

$

0.73 

 

$

0.80 

Diluted earnings per share

 

$

0.73 

 

$

0.80 

 

5


 

Note 2. Recent Accounting Pronouncements

The following accounting pronouncements have recently been adopted or will be adopted in future periods.  For information on accounting pronouncements previously adopted, please refer to the Corporation’s report on Form 10-K for the year-ended December 31, 2018.





 

 

 

 

 

 

Standard

 

Description

 

Effective Date

 

Effect on the financial statements or other significant matters



 

 

 

 

 

 

ASU 2016-02, Leases (Topic 842) and all subsequently issued amendments

 

In February 2016, the FASB issued ASU 2016-02, "Leases (Subtopic 842)."  This ASU requires all lessees to recognize a lease liability and a right-of-use asset, measured at the present value of the future minimum lease payments, at the lease commencement date.  Lessor accounting remains largely unchanged under the new guidance.  FASB subsequently issued various amendments that provided implementation guidance designed to provide entities with relief from the costs of implementing certain aspects of the new standard.  From the lessee's perspective, the new standard requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases.  Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement for lessees. ASU 2016-02 and all subsequent amendments are effective for fiscal years, including interim periods, beginning after December 15, 2018.  Early adoption of ASU 2016-02 is permitted.

 

January 1, 2019

 

The Corporation adopted ASU 2016-02, "Leases (Topic 842)" and all subsequent amendments on January 1, 2019 using the modified retrospective approach, and it did not have a material effect on its consolidated results of operations. Adoption of the new standard resulted in the recognition of a lease liability and a right-of-use asset of $6.2 million without a cumulative effect adjustment to retained earnings.  The Corporation did not restate any prior period results. The Corporation adopted the package of practical expedients offered in ASU 2016-02 and therefore, existing lease classifications were not reassessed, expired or existing contracts were not reassessed for a lease, and the initial direct costs for any existing leases were not reassessed.  In addition to the package of practical expedients, the Corporation also utilized other practical expedients offered: (1) the hindsight expedient which allows entities to use hindsight to determine the lease term was not adopted, (2) leases, for all underlying asset classes, with a term less than 12 months and no purchase option were excluded, (3) the option to not separate lease and non-lease components and account for them as a single component was adopted for real estate leases, and (4) the option to not apply lease accounting to existing land easements was adopted.  See Note 7 for additional information on the adoption of the new standard.



 

 

 

 

 

 

ASU 2018-13, Disclosure Framework (Topic 820)

 

This guidance eliminates, adds and modifies certain disclosure requirements for fair value measurements.  Among the changes, entities will no longer be required to disclose the amount of and reason for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements.

 

January 1, 2019

 

The Corporation adopted the standard on January 1, 2019 and it did not have a material effect on its consolidated results of operations. 



 

 

 

 

 

 

ASU 2018-15, Accounting for Implementation Costs in a Cloud Computing Arrangement (Topic 350)

 

This ASU required an entity in a cloud computing arrangement (i.e., hosting arrangement) that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets or expense as incurred.  Capitalized implementation costs should be presented in the same line item on the balance sheet as amounts prepaid for the hosted service, if any (generally as an "other asset").  The capitalized costs will be amortized over the term of the hosting arrangement, with the amortization expense being presented in the same income statement line item as the fees paid for the hosted service.  The ASU is effective January 1, 2020 with early adoption permitted.

 

January 1, 2020

 

The Corporation adopted the standard on January 1, 2019 and it did not have a material effect on its consolidated results of operations. 



 

 

 

 

 

 

6


 

ASU 2017-04, Goodwill (Topic 350)

 

This guidance, among other things, removes step 2 of the goodwill impairment test thus eliminating the need to determine the fair value of individual assets and liabilities of the reporting unit.  Upon adoption of this standard, goodwill impairment will be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.  This may result in more or less impairment being recognized than under the current guidance. Early adoption is permitted for any impairment tests performed after January 1, 2017, applied prospectively.

 

January 1, 2020

 

The Corporation early adopted the ASU in the fourth quarter of 2018 with the completion of the 2018 impairment analysis.  The Corporation is still evaluating the effect of the standard on its consolidated financial statements.



 

 

 

 

 

 

ASU 2018-14, Disclosure Framework (Topic 715): Changes to the Disclosure Requirements for Defined Benefit Plans

 

This ASU makes minor changes to the disclosure requirements for employers that sponsor defined benefit pension and/or other postretirement benefit plans. ASU 2018-14 is effective for fiscal years ending after December 15, 2020; early adoption is permitted.

 

January 1, 2020

 

The Corporation will adopt the provisions of the ASU on January 1, 2020.  As the ASU only revises disclosure requirements, it is not expected to have a material effect on the consolidated financial statements.



 

 

 

 

 

 

ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments

 

This standard requires credit losses on most financial assets measured at amortized cost and certain other instruments to be measured using an expected credit loss model (referred to as the current expected credit loss (CECL) model).  Under this model, entities will estimate credit losses over the entire contractual term of the instrument (considering estimated prepayments, but not expected extensions or modifications unless reasonable expectation of a troubled debt restructuring exists) from the date of initial recognition of that instrument.  The ASU replaces the current accounting model for purchased credit impaired loans and debt securities.  The allowance for credit losses for purchased financial assets with a more-than insignificant amount of credit deterioration since origination (“PCD assets”), should be determined in a similar manner to other financial assets measured on an amortized cost basis.  However, upon initial recognition, the allowance for credit losses is added to the purchase price (“gross up approach”) to determine the initial amortized cost basis.  The subsequent accounting for PCD financial assets is the same expected loss model described above.

 

January 1, 2020

 

We have formed an implementation team led by the Corporation's Risk Management function. The team is reviewing the requirements of the ASU and evaluating methods and models for implementation.  The new standard will result in earlier recognition of additions to the allowance for loan losses and possibly a larger allowance for loan loss balance with a corresponding increase in the provision for loan losses in results of operations; however, the Corporation is continuing to evaluate the impact of the pending adoption of the new standard on its consolidated financial statements.  A third-party vendor has been selected to assist with the CECL calculations and the implementation process has started.  The Corporation expects to be able to run the CECL model in test mode starting in the second quarter of 2019.



 

 

 

 

 

 



Note 3. Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive losses included in shareholders' equity are as follows:







 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31,



 

2019

 

2018

(Dollars in thousands)

 

 

 

 

 

 

Net unrealized (losses) gains on debt securities

 

$

290 

 

$

(1,100)

Tax effect

 

 

(61)

 

 

230 

Net of tax amount

 

 

229 

 

 

(870)



 

 

 

 

 

 

Accumulated pension adjustment

 

 

(6,975)

 

 

(6,975)

Tax effect

 

 

1,465 

 

 

1,465 

Net of tax amount

 

 

(5,510)

 

 

(5,510)



 

 

 

 

 

 

Total accumulated other comprehensive loss

 

$

(5,281)

 

$

(6,380)

 

7


 

Note 4. Investments

Available for Sale (AFS) Securities

The amortized cost and estimated fair value of AFS securities as of March 31, 2019 and December 31, 2018 are as follows:







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

Gross

 

Gross

 

 

 



 

Amortized

 

unrealized

 

unrealized

 

Fair

March 31, 2019

 

cost

 

gains

 

losses

 

value

U.S. Government and Agency securities

 

$

9,634 

 

$

24 

 

$

(40)

 

$

9,618 

Municipal securities

 

 

63,820 

 

 

845 

 

 

(108)

 

 

64,557 

Trust preferred securities

 

 

4,080 

 

 

 —

 

 

(180)

 

 

3,900 

Agency mortgage-backed securities

 

 

42,818 

 

 

135 

 

 

(364)

 

 

42,589 

Private-label mortgage-backed securities

 

 

448 

 

 

30 

 

 

 —

 

 

478 

Asset-backed securities

 

 

6,791 

 

 

 —

 

 

(52)

 

 

6,739 



 

$

127,591 

 

$

1,034 

 

$

(744)

 

$

127,881 







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

Gross

 

Gross

 

 

 



 

Amortized

 

unrealized

 

unrealized

 

Fair

December 31, 2018

 

cost

 

gains

 

losses

 

value

U.S. Government and Agency securities

 

$

9,120 

 

$

21 

 

$

(65)

 

$

9,076 

Municipal securities

 

 

67,811 

 

 

320 

 

 

(484)

 

 

67,647 

Trust preferred securities

 

 

4,074 

 

 

 —

 

 

(316)

 

 

3,758 

Agency mortgage-backed securities

 

 

45,241 

 

 

65 

 

 

(648)

 

 

44,658 

Private-label mortgage-backed securities

 

 

457 

 

 

31 

 

 

 —

 

 

488 

Asset-backed securities

 

 

5,869 

 

 

 —

 

 

(24)

 

 

5,845 



 

$

132,572 

 

$

437 

 

$

(1,537)

 

$

131,472 



At March 31, 2019 and December 31, 2018, the fair value of AFS securities pledged to secure public funds and trust deposits totaled $76.7 million and  $84.6 million, respectively.

The amortized cost and estimated fair value of debt securities at March 31, 2019, by contractual maturity are shown below. Actual maturities may differ from contractual maturities because of prepayment or call options embedded in the securities.



 

 

 

 

 

 



 

 

 

 

 

 

(Dollars in thousands)

 

Amortized
cost

 

Fair
value

Due in one year or less

 

$

21,030 

 

$

21,084 

Due after one year through five years

 

 

25,764 

 

 

25,839 

Due after five years through ten years

 

 

35,173 

 

 

35,467 

Due after ten years

 

 

2,358 

 

 

2,424 



 

 

84,325 

 

 

84,814 

Mortgage-backed securities

 

 

43,266 

 

 

43,067 



 

$

127,591 

 

$

127,881 



The composition of the net realized gains on AFS securities for the three months ended are as follows:





 

 

 

 

 

 



 

For the Three Months Ended



 

March 31,

(Dollars in thousands)

 

2019

 

2018

Gross gains realized

 

$

33 

 

$

 —

Gross losses realized

 

 

(9)

 

 

 —

Net gains realized

 

$

24 

 

$

 —



Impairment:

The AFS securities portfolio contained 125 securities with $57.7 million of temporarily impaired fair value and $744 thousand in unrealized losses at March 31, 2019. The total unrealized loss position has decreased $793 thousand since year-end 2018. 

8


 

For securities with an unrealized loss, Management applies a systematic methodology in order to perform an assessment of the potential for other-than-temporary impairment.  In the case of debt securities, investments considered for other-than-temporary impairment: (1) had a specified maturity or repricing date; (2) were generally expected to be redeemed at par, and (3) were expected to achieve a recovery in market value within a reasonable period of time. In addition, the Bank considers whether it intends to sell these securities or whether it will be forced to sell these securities before the earlier of amortized cost recovery or maturity. The impairment identified on debt securities and subject to assessment at March 31, 2019, was deemed to be temporary and required no further adjustments to the financial statements, unless otherwise noted.

 The following table reflects temporary impairment in the AFS portfolio, aggregated by investment category, length of time that individual securities have been in a continuous unrealized loss position and the number of securities in each category as of March 31, 2019 and December 31, 2018:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



March 31, 2019



Less than 12 months

 

12 months or more

 

Total



Fair

 

Unrealized

 

 

 

Fair

 

Unrealized

 

 

 

Fair

 

Unrealized

 

 

(Dollars in thousands)

Value

 

Losses

 

Count

 

Value

 

Losses

 

Count

 

Value

 

Losses

 

Count



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and Agency
  securities

$

 —

 

$

 —

 

 —

 

$

4,777 

 

$

(40)

 

14 

 

$

4,777 

 

$

(40)

 

14 

Municipal securities

 

238 

 

 

 —

 

 

 

12,377 

 

 

(108)

 

21 

 

 

12,615 

 

 

(108)

 

22 

Trust preferred securities

 

1,166 

 

 

(33)

 

 

 

2,734 

 

 

(147)

 

 

 

3,900 

 

 

(180)

 

Agency mortgage-backed securities

 

895 

 

 

(1)

 

 

 

28,746 

 

 

(363)

 

71 

 

 

29,641 

 

 

(364)

 

75 

Asset-backed securities

 

6,721 

 

 

(51)

 

 

 

18 

 

 

(1)

 

 

 

6,739 

 

 

(52)

 

Total temporarily impaired
  securities

$

9,020 

 

$

(85)

 

14 

 

$

48,652 

 

$

(659)

 

111 

 

$

57,672 

 

$

(744)

 

125 









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



December 31, 2018



Less than 12 months

 

12 months or more