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| FRAF > SEC Filings for FRAF > Form 10-Q on 9-Aug-2012 | All Recent SEC Filings |
9-Aug-2012
Quarterly Report
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 2011 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 2011 Annual Report on Form 10-K for a more detailed disclosure of the critical accounting policies.
Results of Operations
Year-to-Date Summary
At June 30, 2012, total assets were $1.057 billion, an increase of $67.3 million from December 31, 2011. Net loans increased to $758.7 million and total deposits increased to $856.6 million. The Corporation reported net income for the first six months of 2012 of $3.3 million. This is a 9.2% decrease versus net income of $3.6 million for the same period in 2011. Total revenue (interest income and noninterest income) decreased $733 thousand year-over-year. Interest income decreased $841 thousand, but was more than offset by a decrease of $1.0 million in interest expense, resulting in a $195 thousand increase in net interest income. Noninterest income improved 2.2% due to an increase in ATM fees and debit card income. Noninterest expense remained relatively flat year over year. The provision for loan losses was $2.8 million for the period, $108 thousand more than in 2011. Diluted earnings per share decreased to $.81 in 2012 from $.92 in 2011.
Key performance ratios as of, or for the six months ended June 30, 2012 and 2011 are listed below:
June 30
2012 2011
Performance measurements
Return on average assets* 0.64 % 0.74 %
Return on average equity* 7.49 % 8.64 %
Return on average tangible assets (1)* 0.67 % 0.77 %
Return on average tangible equity (1)* 8.82 % 10.23 %
Efficiency ratio (2) 66.49 % 66.22 %
Net interest margin* 3.54 % 3.72 %
Current dividend yield* 5.18 % 6.07 %
Shareholders' Value (per common share)
Diluted earnings per share $ 0.81 $ 0.92
Regular cash dividends paid $ 0.44 $ 0.54
Book value $ 22.00 $ 21.79
Tangible book value (3) $ 19.52 $ 19.19
Market value $ 13.12 $ 17.80
Market value/book value ratio 59.64 % 81.69 %
Price/earnings multiple* 8.10 9.67
Safety and Soundness
Leverage ratio (Tier 1) 8.10 % 8.10 %
Total risk-based capital ratio 12.19 % 11.82 %
Equity ratio 8.51 % 8.59 %
Tangible equity ratio (4) 7.60 % 7.62 %
Nonperforming loans/gross loans 3.83 % 4.24 %
Nonperforming assets/total assets 3.10 % 2.79 %
Allowance for loan losses as a % of loans 1.25 % 1.31 %
Net charge-offs/average loans* 0.75 % 0.35 %
Trust assets under management (market value) $ 503,537 $ 508,531
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* Annualized
(1) Excludes goodwill, intangibles and intangible amortization expense, net of tax
(2)Noninterest expense / tax equivalent net interest income plus noninterest income less net securities gains
(3) Total shareholders' equity less goodwill and intangibles / shares outsanding
(4)Total shareholders' equity less goodwill and intangibles / total assets less goodwill and intangibles
GAAP versus Non-GAAP Presentations. 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)
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Comparison of the three months ended June 30, 2012 to the three months ended June 30, 2011:
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 period 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.
Tax equivalent interest income for the second quarter of 2012 decreased $753 thousand quarter-over-quarter. Average interest-earning assets increased $47.9 million from 2011, but the yield on these assets decreased by 54 basis points to 4.25%. The average balance of investment securities decreased $1.8 million while average loans decreased $25 thousand quarter-over-quarter. Average commercial loans increased $15.6 million, but the increase was partially offset by a decrease in the average balance of mortgage and consumer loans. Average mortgage loans decreased $5.6 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 $10.0 million, as consumers continue to borrow less.
Interest expense was $1.8 million for the second quarter, a decrease of $597 thousand from the 2011 total of $2.4 million. Average interest-bearing liabilities increased $43.6 million to $841.2 million for 2012 from an average balance of $797.6 million in 2011. The average cost of these liabilities decreased from 1.21% in 2011 to .86% in 2012. Average interest-bearing deposits increased $67.5 million, due to increases in interest checking and savings accounts ($12.6 million), and money management deposits ($63.5 million). The cost of interest-bearing deposits decreased from 1.04% to .70%. Securities sold under agreements to repurchase (Repos) decreased $11.9 million on average over the prior year quarter while the average rate decreased from .25% in 2011 to .15% in 2012. The average balance of long-term debt decreased by $12.0 million due to scheduled amortization and maturities.
The changes in the balance sheet and interest rates resulted in a decrease in tax equivalent net interest income of $156 thousand to $8.6 million in 2012 from $8.7 million in 2011. The Bank's net interest margin decreased from 3.76% in 2011 to 3.51% in 2012. The decrease in the net interest margin is the result of a decrease in the rate on interest-earning assets of 54 basis points, while the yield on interest-bearing liabilities only decreased 35 basis points. Net interest income increased $106 thousand during the quarter, with $77 thousand of the increase from volume and $29 thousand from rates.
With interest rates forecast to remain at current levels through at least 2014, the Bank does not expect any increase in the yield for several years. As a result, it is likely that the cost of interest-bearing deposits will continue to be reduced in an effort to maintain the net interest margin.
The following table shows a comparative analysis of average balances, asset yields and funding costs for the three months ended June 30, 2012 and 2011. These components drive changes in net interest income.
For the Three Months Ended June 30
2012 2011
Average Income or Average Average Income or Average
(Dollars in thousands) balance expense yield/rate balance expense yield/rate
Interest-earning assets:
Interest-bearing obligations of
other banks and federal funds
sold $ 80,054 $ 55 0.28 % $ 30,284 $ 19 0.25 %
Investment securities:
Taxable 92,097 469 2.04 % 99,787 661 2.66 %
Nontaxable 39,250 539 5.51 % 33,392 486 5.84 %
Loans:
Commercial, industrial and
agricultural 629,700 7,247 4.62 % 614,124 7,625 4.98 %
Residential mortgage 57,207 819 5.74 % 62,838 939 5.99 %
Home equity loans and lines 68,457 1,042 6.11 % 78,314 1,200 6.15 %
Consumer 12,437 209 6.74 % 12,550 203 6.49 %
Loans 767,801 9,317 4.87 % 767,826 9,967 5.21 %
Total interest-earning assets 979,202 10,380 4.25 % 931,289 11,133 4.79 %
Other assets 74,134 71,381
Total assets $ 1,053,336 $ 1,002,670
Interest-bearing liabilities:
Deposits:
Interest-bearing checking $ 121,435 22 0.07 % $ 112,514 27 0.10 %
Money Management 370,020 621 0.67 % 306,567 839 1.10 %
Savings 55,321 16 0.12 % 51,607 19 0.15 %
Time 196,364 645 1.32 % 204,986 870 1.70 %
Total interest-bearing deposits 743,140 1,304 0.70 % 675,674 1,755 1.04 %
Securities sold under agreements
to repurchase 51,622 19 0.15 % 63,509 39 0.25 %
Short- term borrowings - - - - - 0.73 %
Long- term debt 46,434 488 4.22 % 58,427 614 4.22 %
Total interest-bearing
liabilities 841,196 1,811 0.86 % 797,610 2,408 1.21 %
Noninterest-bearing deposits 110,169 105,999
Other liabilities 13,441 13,758
Shareholders' equity 88,530 85,303
Total liabilities and
shareholders' equity $ 1,053,336 $ 1,002,670
Tax equivalent net interest
income/Net interest margin 8,569 3.51 % 8,725 3.76 %
Tax equivalent adjustment (378 ) (640 )
Net interest income $ 8,191 $ 8,085
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All nontaxable interest income has been adjusted to a tax-equivalent basis, using a tax rate of 34%.
Provision for Loan Losses
For the second quarter of 2012, the provision expense was $825 thousand versus $1.8 million in 2011. For more information refer to the Loan Quality and Allowance for Loan Losses discussion in the Financial Condition section.
Noninterest Income
For the second quarter of 2012, noninterest income increased $67 thousand from the same period in 2011. Investment and trust service fees were unchanged, while loan service charges increased $38 thousand due to the volume of mortgage refinancing. Mortgage banking fees increased $18 thousand, as the 2012 impairment charge was $27 thousand less than the prior year's impairment charge. Deposit service charges decreased $118 thousand due to lower retail overdraft fees and less retail checking service charge fees. Other service charges and fees increased $89 thousand primarily due to an increase in ATM fees, while debit card income increased $35 thousand due to increased volume. Other income decreased due to several nonrecurring items. Securities gains of $21 thousand were recorded during 2012 from bonds called prior to maturity, compared to none during the three months ended June 30, 2011. There were no other than temporary impairment charges recorded in 2012, compared to $55 thousand on two bonds in 2011.
The following table presents a comparison of noninterest income for the three months ended June 30, 2012 and 2011:
For the Three Months Ended
(Dollars in thousands) June 30 Change
2012 2011 Amount %
Noninterest Income
Investment and trust services fees $ 1,059 $ 1,058 $ 1 0.1
Loan service charges 269 231 38 16.5
Mortgage banking activities (27 ) (45 ) 18 (40.0 )
Deposit service charges and fees 479 597 (118 ) (19.8 )
Other service charges and fees 213 124 89 71.8
Debit card income 295 260 35 13.5
Increase in cash surrender value of
life insurance 167 175 (8 ) (4.6 )
Other 17 81 (64 ) (79.0 )
OTTI losses on securities - (370 ) 370 -
Less: Loss recognized in other
comprehensive income (before taxes) - (315 ) 315 -
Net OTTI losses recognized in
earnings - (55 ) 55 -
Securities gains (losses), net 21 - 21 -
Total noninterest income $ 2,493 $ 2,426 $ 67 2.8
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Noninterest Expense
Noninterest expense for the second quarter of 2012 was $7.6 million compared to $7.4 million in 2011. The increase in salaries and benefits was primarily due to annual salary adjustments ($230 thousand) and pension expense ($101 thousand), but these increases were partially offset by a $28 thousand decrease in health insurance expense, due to lower claims expense during the quarter from the Bank's participation in a self-insured health insurance plan. Occupancy expense remained flat quarter-over-quarter, while advertising expense increased $45 thousand, due to a marketing campaign to take advantage of the disruptions in our local market from mergers and institutions with regulatory issues. Legal and professional expenses increased $16 thousand due to expenses from matters arising in the ordinary course of business, while data processing fees decreased $47 thousand from cost savings due to the core system conversion. Other expenses decreased $148 thousand due to a prepayment penalty of $172 thousand on an FHLB term loan in the second quarter of 2011.
The following table presents a comparison of noninterest expense for the three months ended June 30, 2012 and 2011:
(Dollars in thousands) For the Three Months Ended
June 30 Change
Noninterest Expense 2012 2011 Amount %
Salaries and benefits $ 4,157 $ 3,883 $ 274 7.1
Net occupancy expense 493 496 (3 ) (0.6 )
Furniture and equipment expense 218 214 4 1.9
Advertising 396 351 45 12.8
Legal and professional fees 260 244 16 6.6
Data processing 440 487 (47 ) (9.7 )
Pennsylvania bank shares tax 187 173 14 8.1
Intangible amortization 109 111 (2 ) (1.8 )
FDIC insurance 267 256 11 4.3
Other 1,070 1,218 (148 ) (12.2 )
Total noninterest expense $ 7,597 $ 7,433 $ 164 2.2
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Income Taxes
For the second quarter of 2012 the Corporation recorded a Federal income tax expense of $356 thousand compared to a tax benefit of $447 thousand for the same quarter in 2011. For the second quarter of 2011, the Corporation recorded a Federal income tax benefit of $447 thousand. During the second quarter of 2011, an internal review discovered that tax-exempt commercial loans booked in the fourth quarter of 2008, during 2009 and 2010 and in the first quarter of 2011 were not properly coded as tax-exempt in the Bank's core processing system. This resulted in the income from these loans being recorded as taxable income and the benefit of the tax-exempt status was not reflected in the Corporation's income tax calculation. After a thorough review of the affected loans to determine the unrecorded tax benefit, and consultation with the Corporation's internal and external audit firms, the Corporation deemed the adjustment to be immaterial to the consolidated financial statements for the current and prior year and therefore, no prior period adjustment was required. The Corporation recorded the past income tax benefits during the second quarter of 2011. The adjustment to income tax expense for the second quarter was a credit of approximately $660 thousand attributable to the years 2008, 2009 and 2010 and approximately $95 thousand attributable to the first quarter of 2011. The effective tax rate for the second quarter of 2012 was 15.7% compared to a tax-credit in the second quarter of 2011. Without the adjustments for past periods, the effective tax rate for the second quarter of 2011 would have been 16.2%. All taxable income for the Corporation is taxed at a rate of 34%.
Comparison of the six months ended June 30, 2012 to the six months ended June 30, 2011:
Net Interest Income
Tax equivalent interest income for the first half of 2012 decreased by $936 thousand compared to 2011. Average interest-earning assets increased $47.3 million from 2011, but the yield on these assets decreased by 46 basis points. The average balance of investment securities was flat year over year. Total average loans increased $2.3 million year over year. Average commercial loans increased $20.2 million, but the increase was partially offset by a decrease in the average balance of mortgage and consumer loans. Average mortgage loans decreased $7.4 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 $10.5 million, as consumers continue to borrow less.
Interest expense was $3.8 million for the first half of 2012, a decrease of $1.0 million from $4.8 million in 2011. Average interest-bearing liabilities increased $41.7 million to $824.0 million for 2012 from an average balance of $782.4 million in 2011. The average cost of these liabilities decreased from 1.24% in 2011 to 0.92% in 2012. Average interest-bearing deposits increased $64.9 million, due to increases in interest checking and savings accounts ($12.8 million) and money management deposits ($56.0 million), but these increases were partially offset by decreases in certificates of deposit ($3.9 million). The cost of interest-bearing deposits decreased from 1.05% to .76%. Securities sold under agreements to repurchase have decreased $6.8 million on average over the prior year and the average rate has decreased to .15% from .25% a year earlier. The average balance of long-term debt decreased by $16.1 million due to scheduled amortization and maturities.
The changes in the balance sheet and interest rates resulted in an increase in tax equivalent net interest income of $99 thousand to $16.9 million in 2012 compared to $16.8 million in 2011. The Bank's net interest margin decreased to 3.54% in 2012 from 3.72% in 2011. The decrease in the net interest margin is the result of a decrease in the rate on interest-earning assets of 46 basis points, while the yield on interest-bearing liabilities only decreased 32 basis points. Net interest income increased $195 thousand during the year, with a $296 thousand increase from volume, which was offset by $101 thousand decrease from rates.
With interest rates forecast to remain at current levels through at least 2014, the Bank does not expect any increase in the yield for several years. As a result, it is likely that the cost of interest-bearing deposits will continue to be reduced in an effort to maintain the net interest margin.
The following table shows a comparative analysis of average balances, asset yields and funding costs for the six months ended June 30, 2012 and 2011. These components drive changes in net interest income.
For the Six Months Ended June 30
2012 2011
Average Income or Average Average Income or Average
(Dollars in thousands) balance expense yield/rate balance expense yield/rate
Interest-earning assets:
Interest-bearing obligations of
other banks
and federal funds sold $ 66,051 $ 91 0.28 % $ 20,650 $ 25 0.24 %
Investment securities:
Taxable 90,079 919 2.05 % 95,755 1,269 2.67 %
Nontaxable 39,042 1,078 5.54 % 33,716 992 5.93 %
Loans:
Commercial, industrial and
agricultural 624,866 14,539 4.67 % 604,658 14,659 4.89 %
Residential mortgage 56,317 1,533 5.46 % 63,726 1,856 5.87 %
Home equity loans and lines 69,723 2,119 6.10 % 79,729 2,441 6.17 %
Consumer 12,846 432 6.74 % 13,381 405 6.10 %
Loans 763,752 18,623 4.89 % 761,494 19,361 5.13 %
Total interest-earning assets 958,924 20,711 4.33 % 911,615 21,647 4.79 %
Other assets 72,790 70,597
Total assets $ 1,031,714 $ 982,212
Interest-bearing liabilities:
Deposits:
Interest-bearing checking $ 118,234 44 0.07 % $ 109,263 53 0.10 %
Money Management 355,721 1,253 0.71 % 299,710 1,633 1.10 %
Savings 54,284 31 0.11 % 50,450 34 0.14 %
Time 196,997 1,431 1.46 % 200,938 1,704 1.71 %
Total interest-bearing deposits 725,236 2,759 0.76 % 660,361 3,424 1.05 %
Securities sold under
agreements to repurchase 52,147 39 0.15 % 58,914 73 0.25 %
Short- term borrowings - - - 358 1 0.73 %
Long- term debt 46,630 980 4.21 % 62,722 1,315 4.23 %
Total interest-bearing
. . .
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