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Section 1: 10-Q (10-Q)

20180930 Q3

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 September 30, 2018

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

For the transition period from__________ to___________

Commission file number 0-12126

FRANKLIN FINANCIAL SERVICES CORPORATION

(Exact name of registrant as specified in its charter)



 

PENNSYLVANIA

25-1440803

(State or other jurisdiction of incorporation or organization) 

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







 

20 South Main Street, Chambersburg, PA

17201-0819

(Address of principal executive offices)

(Zip Code)



(717) 264-6116

(Registrant's telephone number, including area code)

Not Applicable

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

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



Indicate by check mark whether the registrant has submitted electronically 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 4,399,135 outstanding shares of the Registrant’s common stock as of October  31, 2018.

 


 

INDEX



               



 

 

Part I - FINANCIAL INFORMATION

 



 

 

Item 1

Financial Statements

 



Consolidated Balance Sheets as of September  30, 2018 and December 31, 2017 (unaudited)

1



Consolidated Statements of Income for the Three and Nine Months ended September  30, 2018 

2



and 2017 (unaudited)

 



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

3



September  30, 2018 and 2017 (unaudited)

 



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

3



ended September 30, 2018 and 2017 (unaudited)

 



Consolidated Statements of Cash Flows for the Nine Months ended September  30, 2018 

5



and 2017 (unaudited)

 



Notes to Consolidated Financial Statements (unaudited)

6



 

 

Item 2

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

26

Item 3

Quantitative and Qualitative Disclosures about Market Risk

46

Item 4

Controls and Procedures

46



 

 

Part II - OTHER INFORMATION 

 



 

 

Item 1

Legal Proceedings

46

Item 1A

Risk Factors

47

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

48

Item 3

Defaults Upon Senior Securities

48

Item 4

Mine Safety Disclosures

48

Item 5

Other Information

49

Item 6

Exhibits

49

SIGNATURE PAGE

50



 







 

 


 

Part I FINANCIAL INFORMATION

Item 1 Financial Statements

Consolidated Balance Sheets







 

 

 

 

 

 

 

 

 

 

 

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

September 30,

 

December 31,



2018

 

2017

Assets

 

 

 

 

 

Cash and due from banks

$

16,281 

 

$

21,433 

Interest-bearing deposits in other banks

 

28,496 

 

 

37,170 

Total cash and cash equivalents

 

44,777 

 

 

58,603 

Debt securities available for sale, at fair value

 

125,403 

 

 

126,971 

Equity securities

 

383 

 

 

365 

Restricted stock

 

452 

 

 

456 

Loans held for sale

 

1,072 

 

 

442 

Loans

 

970,983 

 

 

943,700 

Allowance for loan losses

 

(12,526)

 

 

(11,792)

Net Loans

 

958,457 

 

 

931,908 

Premises and equipment, net

 

13,267 

 

 

13,741 

Bank owned life insurance

 

23,366 

 

 

22,980 

Goodwill

 

9,016 

 

 

9,016 

Other real estate owned

 

2,665 

 

 

2,598 

Deferred tax asset, net

 

4,170 

 

 

5,803 

Other assets

 

11,596 

 

 

6,930 

Total assets

$

1,194,624 

 

$

1,179,813 



 

 

 

 

 

Liabilities

 

 

 

 

 

Deposits

 

 

 

 

 

Non-interest bearing checking

$

196,478 

 

$

196,853 

Money management, savings and interest checking

 

807,643 

 

 

774,857 

Time

 

67,736 

 

 

75,471 

Total deposits

 

1,071,857 

 

 

1,047,181 

Other liabilities

 

8,739 

 

 

17,488 

Total liabilities

 

1,080,596 

 

 

1,064,669 



 

 

 

 

 

Shareholders' equity

 

 

 

 

 

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

 

 

 

 

 

4,701,367 shares issued and 4,398,361 shares outstanding at September 30, 2018 and

 

 

 

 

 

4,689,099 shares issued and 4,354,788 shares outstanding at December 31, 2017

 

4,701 

 

 

4,689 

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

 

 

 

 

 

shares issued and outstanding

 

 —

 

 

 —

Additional paid-in capital

 

41,380 

 

 

40,396 

Retained earnings

 

81,330 

 

 

82,218 

Accumulated other comprehensive loss

 

(7,790)

 

 

(6,028)

Treasury stock, 303,006 shares at September 30, 2018 and 334,311 shares at

 

 

 

 

 

December 31, 2017, at cost

 

(5,593)

 

 

(6,131)

Total shareholders' equity

 

114,028 

 

 

115,144 

Total liabilities and shareholders' equity

$

1,194,624 

 

$

1,179,813 

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

1


 

Consolidated Statements of Income





 

 

 

 

 

 

 

 

 

 

 

 



 

For the Three Months Ended

 

For the Nine Months Ended

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

 

September 30,

 

September 30,



 

2018

 

2017

 

2018

 

2017

Interest income

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

10,565 

 

$

9,130 

 

$

30,268 

 

$

26,808 

Interest and dividends on investments:

 

 

 

 

 

 

 

 

 

 

 

 

Taxable interest

 

 

507 

 

 

509 

 

 

1,548 

 

 

1,558 

Tax exempt interest

 

 

293 

 

 

275 

 

 

862 

 

 

861 

Dividend income

 

 

 

 

 

 

15 

 

 

23 

Deposits and obligations of other banks

 

 

108 

 

 

147 

 

 

326 

 

 

297 

Total interest income

 

 

11,477 

 

 

10,063 

 

 

33,019 

 

 

29,547 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

1,101 

 

 

629 

 

 

2,847 

 

 

1,785 

Short-term borrowings

 

 

21 

 

 

 —

 

 

24 

 

 

15 

Total interest expense

 

 

1,122 

 

 

629 

 

 

2,871 

 

 

1,800 

Net interest income

 

 

10,355 

 

 

9,434 

 

 

30,148 

 

 

27,747 

Provision for loan losses

 

 

250 

 

 

250 

 

 

9,579 

 

 

420 

Net interest income after provision for loan losses

 

 

10,105 

 

 

9,184 

 

 

20,569 

 

 

27,327 

Noninterest income

 

 

 

 

 

 

 

 

 

 

 

 

Investment and trust services fees

 

 

1,424 

 

 

1,353 

 

 

4,285 

 

 

3,991 

Loan service charges

 

 

191 

 

 

201 

 

 

640 

 

 

657 

Deposit service charges and fees

 

 

578 

 

 

611 

 

 

1,726 

 

 

1,789 

Other service charges and fees

 

 

357 

 

 

340 

 

 

1,043 

 

 

996 

Debit card income

 

 

422 

 

 

325 

 

 

1,224 

 

 

1,062 

Increase in cash surrender value of life insurance

 

 

129 

 

 

130 

 

 

386 

 

 

391 

Net loss on sale of other real estate owned

 

 

 —

 

 

(23)

 

 

 —

 

 

(23)

Debt securities gains, net

 

 

 

 

 

 

56 

 

 

Change in fair value of equity securities

 

 

(20)

 

 

 —

 

 

18 

 

 

 —

Other

 

 

34 

 

 

33 

 

 

111 

 

 

186 

Total noninterest income

 

 

3,120 

 

 

2,971 

 

 

9,489 

 

 

9,052 

Noninterest Expense

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

4,947 

 

 

4,694 

 

 

15,029 

 

 

14,190 

Occupancy, furniture and equipment, net

 

 

780 

 

 

809 

 

 

2,383 

 

 

2,386 

Advertising

 

 

345 

 

 

332 

 

 

1,113 

 

 

873 

Legal and professional

 

 

436 

 

 

502 

 

 

1,207 

 

 

1,173 

Data processing

 

 

591 

 

 

567 

 

 

1,791 

 

 

1,643 

Pennsylvania bank shares tax

 

 

239 

 

 

243 

 

 

712 

 

 

728 

FDIC Insurance

 

 

159 

 

 

82 

 

 

452 

 

 

281 

ATM/debit card processing

 

 

258 

 

 

190 

 

 

734 

 

 

630 

Foreclosed real estate

 

 

(8)

 

 

24 

 

 

46 

 

 

95 

Telecommunications

 

 

95 

 

 

106 

 

 

327 

 

 

308 

Provision for credit losses on off-balance sheet exposures

 

 

 —

 

 

 —

 

 

2,361 

 

 

 —

Other

 

 

729 

 

 

756 

 

 

2,253 

 

 

2,116 

Total noninterest expense

 

 

8,571 

 

 

8,305 

 

 

28,408 

 

 

24,423 

Income before federal income taxes

 

 

4,654 

 

 

3,850 

 

 

1,650 

 

 

11,956 

Federal income tax expense (benefit)

 

 

654 

 

 

774 

 

 

(671)

 

 

2,517 

Net income

 

$

4,000 

 

$

3,076 

 

$

2,321 

 

$

9,439 

Per share

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.91 

 

$

0.71 

 

$

0.53 

 

$

2.18 

Diluted earnings per share

 

$

0.91 

 

$

0.70 

 

$

0.53 

 

$

2.17 

Cash dividends declared

 

$

0.27 

 

$

0.24 

 

$

0.78 

 

$

0.69 

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

2


 

Consolidated Statements of Comprehensive Income





 

 

 

 

 

 

 

 

 

 

 

 



 

For the Three Months Ended

 

For the Nine Months Ended



 

September 30,

 

September 30,

(Dollars in thousands) (unaudited)

 

2018

 

2017

 

2018

 

2017

Net Income

 

$

4,000 

 

$

3,076 

 

$

2,321 

 

$

9,439 



 

 

 

 

 

 

 

 

 

 

 

 

Debt Securities:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized (losses) gains arising during the period

 

 

(638)

 

 

(97)

 

 

(1,974)

 

 

924 

Reclassification adjustment included in net income (1)

 

 

(5)

 

 

(1)

 

 

(56)

 

 

(3)

Net unrealized (losses) gains

 

 

(643)

 

 

(98)

 

 

(2,030)

 

 

921 

Tax effect

 

 

135 

 

 

33 

 

 

469 

 

 

(313)

Net of tax amount

 

 

(508)

 

 

(65)

 

 

(1,561)

 

 

608 



 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive (loss) income

 

 

(508)

 

 

(65)

 

 

(1,561)

 

 

608 



 

 

 

 

 

 

 

 

 

 

 

 

Total Comprehensive Income

 

$

3,492 

 

$

3,011 

 

$

760 

 

$

10,047 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Reclassification adjustment / Statement line item

 

Tax  expense (benefit)

(1) Debt securities gains, net

 

$

 

$

 —

 

$

12 

 

$

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

3


 

 

Consolidated Statements of Changes in Shareholders' Equity

For the three and nine months ended September 30, 2018 and 2017





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

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 June 30, 2018

$

4,700 

 

$

41,079 

 

$

78,514 

 

$

(7,282)

 

$

(5,839)

 

$

111,172 

Net income

 

 —

 

 

 —

 

 

4,000 

 

 

 —

 

 

 —

 

 

4,000 

Other comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

(508)

 

 

 —

 

 

(508)

Cash dividends declared, $.27 per share

 

 —

 

 

 —

 

 

(1,184)

 

 

 —

 

 

 —

 

 

(1,184)

Treasury shares issued under employee stock purchase plan, 381 shares

 

 —

 

 

 

 

 —

 

 

 —

 

 

 

 

12 

Treasury shares issued under dividend reinvestment plan, 12,957 shares

 

 —

 

 

210 

 

 

 —

 

 

 —

 

 

239 

 

 

449 

Common stock issued under incentive stock option plan, 1,600 shares

 

 

 

24 

 

 

 —

 

 

 —

 

 

 —

 

 

25 

Stock option compensation expense

 

 —

 

 

62 

 

 

 —

 

 

 —

 

 

 —

 

 

62 

Balance at September 30, 2018

$

4,701 

 

$

41,380 

 

$

81,330 

 

$

(7,790)

 

$

(5,593)

 

$

114,028 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 —

 

 

 —

 

 

2,321 

 

 

 —

 

 

 —

 

 

2,321 

Other comprehensive (loss)

 

 —

 

 

 —

 

 

 —

 

 

(1,561)

 

 

 —

 

 

(1,561)

Cash dividends declared, $.78 per share

 

 —

 

 

 —

 

 

(3,410)

 

 

 —

 

 

 —

 

 

(3,410)

Acquisition of 2,605 shares of treasury stock

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(88)

 

 

(88)

Treasury shares issued under employee stock purchase plan, 2,944 shares

 

 —

 

 

34 

 

 

 —

 

 

 —

 

 

54 

 

 

88 

Treasury shares issued under dividend reinvestment plan, 30,966 shares

 

 —

 

 

513 

 

 

 —

 

 

 —

 

 

572 

 

 

1,085 

Common stock issued under incentive stock option plan, 12,268 shares

 

12 

 

 

252 

 

 

 —

 

 

 —

 

 

 —

 

 

264 

Stock option compensation expense

 

 —

 

 

185 

 

 

 —

 

 

 —

 

 

 —

 

 

185 

Balance at September 30, 2018

$

4,701 

 

$

41,380 

 

$

81,330 

 

$

(7,790)

 

$

(5,593)

 

$

114,028 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2017

$

4,688 

 

$

40,096 

 

$

87,498 

 

$

(3,542)

 

$

(6,380)

 

$

122,360 

Net income

 

 —

 

 

 —

 

 

3,076 

 

 

 —

 

 

 —

 

 

3,076 

Other comprehensive (loss)

 

 —

 

 

 —

 

 

 —

 

 

(65)

 

 

 —

 

 

(65)

Cash dividends declared, $.24 per share

 

 —

 

 

 —

 

 

(1,042)

 

 

 —

 

 

 —

 

 

(1,042)

Treasury shares issued under employee stock purchase plan, 241 shares

 

 —

 

 

 

 

 —

 

 

 —

 

 

 

 

Treasury shares issued under dividend reinvestment plan, 5,723 shares

 

 —

 

 

85 

 

 

 —

 

 

 —

 

 

105 

 

 

190 

Stock option compensation expense

 

 —

 

 

54 

 

 

 —

 

 

 —

 

 

 —

 

 

54 

Balance at September 30, 2017

$

4,688 

 

$

40,238 

 

$

89,532 

 

$

(3,607)

 

$

(6,271)

 

$

124,580 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2016

$

4,688 

 

$

39,752 

 

$

83,081 

 

$

(4,215)

 

$

(6,813)

 

$

116,493 

Net income

 

 —

 

 

 —

 

 

9,439 

 

 

 —

 

 

 —

 

 

9,439 

Other comprehensive income

 

 —

 

 

 —

 

 

 —

 

 

608 

 

 

 —

 

 

608 

Cash dividends declared, $.69 per share

 

 —

 

 

 —

 

 

(2,988)

 

 

 —

 

 

 —

 

 

(2,988)

Treasury shares issued under employee stock purchase plan, 6,568 shares

 

 —

 

 

29 

 

 

 —

 

 

 —

 

 

120 

 

 

149 

Treasury shares issued under dividend reinvestment plan, 22,990 shares

 

 —

 

 

296 

 

 

 —

 

 

 —

 

 

422 

 

 

718 

Stock option compensation expense

 

 —

 

 

161 

 

 

 —

 

 

 —

 

 

 —

 

 

161 

Balance at September 30, 2017

$

4,688 

 

$

40,238 

 

$

89,532 

 

$

(3,607)

 

$

(6,271)

 

$

124,580 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



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

4


 

Consolidated Statements of Cash Flows





 

 

 

 

 

 



 

 

 

 

 

 



 

Nine Months Ended
September 30,



 

2018

 

2017

(Dollars in thousands) (unaudited)

 

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

 

Net income

 

$

2,321 

 

$

9,439 

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

989 

 

 

973 

Net amortization of loans and investment securities

 

 

1,307 

 

 

1,269 

Amortization and net change in mortgage servicing rights valuation

 

 

 —

 

 

41 

Provision for loan losses

 

 

9,579 

 

 

420 

Change in fair value of equity securities

 

 

(18)

 

 

 —

Debt securities gains, net

 

 

(56)

 

 

(3)

Pay-out of legal settlement

 

 

(10,000)

 

 

 —

Provision for credit losses on off-balance sheet exposures

 

 

2,361 

 

 

 —

Loans originated for sale

 

 

(16,137)

 

 

(6,773)

Proceeds from sale of loans

 

 

15,507 

 

 

6,861 

Write-down of other real estate owned

 

 

 

 

60 

Acquisition of other real estate owned

 

 

105 

 

 

 —

Write-down on premises and equipment available for sale

 

 

 —

 

 

45 

Loss on sale of premises

 

 

17 

 

 

23 

Increase in cash surrender value of life insurance

 

 

(386)

 

 

(391)

Stock option compensation

 

 

185 

 

 

161 

Contribution to pension plan

 

 

(1,000)

 

 

 —

Increase in other assets

 

 

(4,441)

 

 

(1,242)

Increase in other liabilities

 

 

1,638 

 

 

2,753 

Net cash provided by operating activities

 

 

1,977 

 

 

13,636 

Cash flows from investing activities

 

 

 

 

 

 

Proceeds from sales and calls of investment securities available for sale

 

 

4,115 

 

 

875 

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

 

 

14,289 

 

 

16,875 

Purchase of investment securities available for sale

 

 

(20,276)

 

 

(6,533)

Net decrease in restricted stock

 

 

 

 

1,311 

Net increase in loans

 

 

(36,188)

 

 

(17,643)

Capital expenditures

 

 

(599)

 

 

(871)

Proceeds from sale of other assets

 

 

117 

 

 

154 

Net proceeds from the sale of other real estate

 

 

32 

 

 

2,255 

Net cash used in investing activities

 

 

(38,506)

 

 

(3,577)

Cash flows from financing activities

 

 

 

 

 

 

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

 

 

32,411 

 

 

50,325 

Net (decrease) increase in time deposits

 

 

(7,735)

 

 

703 

Net decrease in short-term borrowings

 

 

 —

 

 

(24,270)

Dividends paid

 

 

(3,410)

 

 

(2,988)

Treasury shares issued under employee stock purchase plan

 

 

88 

 

 

149 

Treasury shares issued under dividend reinvestment plan

 

 

1,085 

 

 

718 

Common stock issued under stock option plans

 

 

264 

 

 

 —

Net cash provided by financing activities

 

 

22,703 

 

 

24,637 

(Decrease) increase in cash and cash equivalents

 

 

(13,826)

 

 

34,696 

Cash and cash equivalents as of January 1

 

 

58,603 

 

 

36,665 

Cash and cash equivalents as of September 30

 

$

44,777 

 

$

71,361 

Supplemental Disclosures of Cash Flow Information

 

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

 

Interest on deposits and other borrowed funds

 

$

2,818 

 

$

1,786 

Income taxes

 

$

250 

 

$

3,405 



 

 

 

 

 

 

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

5


 

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 September 30, 2018, 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 2017 Annual Report on Form 10-K.  The consolidated results of operations for the nine month period ended September 30, 2018 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, 2017 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete consolidated financial statements.

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

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







 

 

 

 

 

 

 

 

 

 

 

 



 

For the Three Months Ended

 

For the Nine Months Ended



 

September 30,

 

September 30,

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

 

2018

 

2017

 

2018

 

2017

Weighted average shares outstanding (basic)

 

 

4,391 

 

 

4,343 

 

 

4,375 

 

 

4,332 

Impact of common stock equivalents

 

 

21 

 

 

21 

 

 

24 

 

 

21 

Weighted average shares outstanding (diluted)

 

 

4,412 

 

 

4,364 

 

 

4,399 

 

 

4,353 

Anti-dilutive options excluded from calculation

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Net income

 

$

4,000 

 

$

3,076 

 

$

2,321 

 

$

9,439 

Basic earnings per share

 

$

0.91 

 

$

0.71 

 

$

0.53 

 

$

2.18 

Diluted earnings per share

 

$

0.91 

 

$

0.70 

 

$

0.53 

 

$

2.17 

 

6


 

Note 2. Recent Accounting Pronouncements





 

 

 

 

 

 

Standard

 

Description

 

Effective Date

 

Effect on the financial statements or other significant matters



 

 

 

 

 

 

ASU 2018-02, Income Statement (Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

 

Under ASU 2018-02, entities are allowed, but not required, to reclassify from Accumulated Other Comprehensive Income (AOCI) to retained earnings stranded tax effects resulting from the new federal corporate income tax rate of the Tax Cuts and Jobs Act (the Act).  The reclassification could include other stranded tax effects that related to the Act but do not directly related to the change in the federal rate.  Tax effects that are stranded in AOCI for other reasons may not be reclassified.  Entities also will have an option to adopt the standard retrospectively or in the period of adoption. 

 

January 1, 2018

 

The Corporation adopted the provisions of the ASU in the fourth quarter of 2017.  The Company reclassified the disproportionate tax effect resulting from the Act by increasing retained earnings by $992 thousand and reducing AOCI by $992 thousand.



 

 

 

 

 

 

ASU 2016-15, Statements of Cash Flow (Topic 320): Classification of Certain Cash Receipts and Cash Payments

 

The standard clarifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows.  The amendments are intended to reduce diversity in practice.  The standard contains additional guidance clarifying when an entity should separate cash receipts and cash payments and classifies them into more than one class of cash flows (including when reasonable judgement is required to estimate and allocate cash flows) versus when an entity should classify the aggregate amount into one class of cash flows on the basis of predominance.

 

January 1, 2018

 

The Corporation adopted the provisions of the ASU on January 1, 2018 and it had no material effect on the consolidated financial statements.



 

 

 

 

 

 

ASU 2017-07, Employee Benefits Plan (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

 

This standard requires an employer to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period.  The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations.  The amendments in this update also allow only the service cost component to be eligible for capitalization when applicable.  

 

January 1, 2018

 

The Corporation adopted the provisions of the ASU on January 1, 2018 and it had no material effect on the consolidated financial statements.  The service cost is reported in Salaries and Benefits expense and the nonservice cost is included in Other Expense on the Consolidated Statement of Income, which totaled $107 thousand and was reclassified for the first nine months of 2017.



 

 

 

 

 

 

ASU 2014-09, Revenue from Contracts with Customers (Topic 606)

 

The amendments in this Update (ASU 2014-09) establish a comprehensive revenue recognition standard. The revenue standard’s core principle is built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled. To accomplish this objective, the standard requires five basic steps: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. Three basic transition methods are available – full retrospective, retrospective with certain practical expedients, and a cumulative effect approach.

 

January 1, 2018

 

The Corporation adopted this ASU on January 1, 2018, on a modified retrospective approach, and it did not have a material effect on the Corporation's consolidated financial statements.  See Note 11. Revenue Recognition for more information.



 

 

 

 

 

 

7


 

ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities

 

The standard amends the guidance on the classification and measurement of financial instruments.  Some of the amendments include the following: 1) requires equity investments to be measured at fair value with changes in fair value recognized in net income; 2) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; 3) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; and 4) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value; among others.

 

January 1, 2018

 

The Corporation adopted the provisions of the ASU on January 1, 2018 and it had no material effect on the consolidated financial statements. The Corporation reclassified the fair value of equity securities by increasing retained earnings by $201 thousand and decreasing AOCI by $201 thousand.  In addition, according to the standard, the Corporation measured the fair value of the loan portfolio beginning March 31, 2018 using an exit price notion.  See Note 9. Fair Value Measurements and Fair Values of Financial Instruments for more information.



 

 

 

 

 

 

ASU 2016-02, Leases (Topic 842)

 

From the lessee’s perspective, the new standard established a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months.  Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement for lessees.  From the lessor’s perspective, the new standard requires a lessor to classify leases as either sales-type, finance or operating.  A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee.  If risks and rewards are conveyed without the transfer of control, the lease is treated as financing.  If the lessor doesn’t convey risks and rewards or control, an operating lease results.

 

January 1, 2019

 

The Corporation currently has real estate and equipment leases that it classifies as operating leases that are not recognized on the balance sheet.  Under the new standard, these leases will move onto the balance sheet in the form of a lease liability (the present value of a lessee's obligation to make lease payments) and a right-of-use asset (an asset that represents the lessee's right to use a specified asset for the lease term).  The offsetting transactions will gross-up the Consolidated Balance Sheet.  The Corporation has identified all of its leases (approximately 63, primarily equipment and property leases), but has not determined the effect on the Consolidated Balance Sheet. The Corporation has acquired a lease accounting model to implement the standard to be used in a test mode during 2018.  The Corporation expects to adopt the standard using the modified retrospective approach and elect the transition options of ASU 2018-11. The Corporation currently expects that the new standard will not have a material effect on its consolidated results of operations.



 

 

 

 

 

 

ASU 2018-11, Leases - Targeted Improvements (Topic 842)

 

This guidance provides entities with relief from the costs of implementing certain aspects of the new leasing standard, ASU No. 2016-02.  Specifically, under the amendments in ASU 2018-11: (1) entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard, and (2) lessors may elect not to separate lease and non-lease components when certain conditions are met.  The amendments have the same effective date as ASU 2016-02 (January 1, 2019 for the Corporation).

 

 

 

 



 

 

 

 

 

 

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. 

 

January 1, 2019

 

The Corporation is reviewing its internal accounting procedures for this implementation.  The Corporation does not expect the standard will have a material effect on its consolidated results of operations. 



 

 

 

 

 

 

8


 

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 is reviewing its financial reporting procedures for this implementation.  The Corporation does not expect the standard will have a material effect on its consolidated results of operations. 



 

 

 

 

 

 

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 guidanc