Franklin Financial Services (FRAF) - 2020 Q1 - Quarterly Report

Part I - Financial Information This section presents the unaudited consolidated financial statements and management's discussion for Franklin Financial Services Corporation Item 1. Financial Statements This section presents the unaudited consolidated financial statements, including balance sheets, income statements, and cash flows, with detailed notes Consolidated Balance Sheets Table: Consolidated Balance Sheets | Metric | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :--------------------------------- | :------------------------------ | :------------------------------- | | Total Assets | $1,262,126 | $1,269,157 | | Net Loans | $921,656 | $922,609 | | Total Deposits | $1,117,433 | $1,125,392 | | Total Shareholders' Equity | $129,005 | $127,528 | Consolidated Statements of Income Table: Consolidated Statements of Income | Metric | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Net Income | $1,719 | $3,237 | | Basic Earnings Per Share | $0.40 | $0.73 | | Diluted Earnings Per Share | $0.39 | $0.73 | | Net Interest Income | $10,252 | $10,329 | | Provision for Loan Losses | $3,000 | $399 | | Total Noninterest Income | $3,889 | $3,165 | Consolidated Statements of Comprehensive Income Table: Consolidated Statements of Comprehensive Income | Metric | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :-------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Net Income | $1,719 | $3,237 | | Net Unrealized Gains (Debt Securities) | $2,058 | $1,390 | | Total Comprehensive Income | $3,345 | $4,336 | Consolidated Statements of Changes in Shareholders' Equity Table: Consolidated Statements of Changes in Shareholders' Equity | Metric | January 1, 2020 (in thousands) | March 31, 2020 (in thousands) | | :-------------------------------------- | :----------------------------- | :---------------------------- | | Balance at Beginning/End of Period | $127,528 | $129,005 | | Net Income | - | $1,719 | | Other Comprehensive Income | - | $1,626 | | Cash Dividends Declared ($0.30 per share) | - | $(1,306) | | Acquisition of Treasury Stock | - | $(1,172) | Consolidated Statements of Cash Flows Table: Consolidated Statements of Cash Flows | Metric | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :----------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Net Cash Provided by Operating Activities | $2,491 | $4,220 | | Net Cash Used in Investing Activities | $(23,111) | $(2,765) | | Net Cash Used in Financing Activities | $(9,858) | $(7,379) | | Decrease in Cash and Cash Equivalents | $(30,478) | $(5,924) | | Cash and Cash Equivalents at End of Period | $53,350 | $47,033 | Notes to Consolidated Financial Statements Note 1. Basis of Presentation This note outlines the Corporation's consolidation and clarifies that unaudited Q1 results are not indicative of the full year - The consolidated financial statements include Franklin Financial Services Corporation, Farmers and Merchants Trust Company of Chambersburg, and Franklin Future Fund Inc[18] - The financial statements are unaudited and condensed, and the consolidated results for the three-month period ended March 31, 2020, are not necessarily indicative of the operating results for the full year[20] Note 2. Recent Accounting Pronouncements ASU 2017-04 and 2018-14 had no material effect, but ASU 2016-13 (CECL) is expected to increase loan loss provisions from 2023 - ASU 2017-04 (Goodwill) was early adopted in Q4 2018 and did not have a material effect on the consolidated financial statements[23] - ASU 2018-14 (Defined Benefit Plans) was adopted on January 1, 2020, and did not have a material effect on the consolidated financial statements as it only revised disclosure requirements[23] - ASU 2016-13 (CECL model) is effective January 1, 2023, and is expected to result in earlier recognition of additions to the allowance for loan losses and possibly a larger allowance balance with a corresponding increase in the provision for loan losses[24] Note 3. Accumulated Other Comprehensive Loss Accumulated other comprehensive loss decreased to $4.36 million at March 31, 2020, due to $1.63 million in current period other comprehensive income Table: Accumulated Other Comprehensive Loss | Metric | March 31, 2020 (in thousands) | January 1, 2020 (in thousands) | | :----------------------------------- | :---------------------------- | :----------------------------- | | Beginning Balance | - | $(5,986) | | Current Period Other Comprehensive Income | $1,626 | - | | Ending Balance | $(4,360) | - | Note 4. Investments AFS securities increased to $208.0 million with a $2.3 million net unrealized gain, and equity securities decreased to $313 thousand Table: Investments | Metric | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :----------------------------------- | :---------------------------- | :------------------------------- | | Debt Securities Available for Sale, at Fair Value | $208,040 | $187,433 | | Equity Securities | $313 | $440 | - The AFS securities portfolio had a net unrealized gain of $2.3 million at March 31, 2020, an increase from $234 thousand at year-end 2019[26][130] - The unrealized loss in the municipal bond portfolio decreased to $242 thousand from $997 thousand at December 31, 2019, and was deemed non-credit related with no other-than-temporary impairment charges[132] Note 5. Loans The total loan portfolio increased slightly to $936.4 million, driven by residential real estate and construction loans, offsetting commercial declines Table: Loan Portfolio by Class | Loan Class | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :--------------------------------- | :---------------------------- | :------------------------------- | | Total Loans | $936,386 | $934,575 | | Residential Real Estate 1-4 Family | $193,972 | $190,543 | | Residential Real Estate - Construction | $15,482 | $13,323 | | Commercial Real Estate | $494,143 | $494,262 | | Commercial | $226,128 | $230,007 | Note 6. Loan Quality and Allowance for Loan Losses The ALL significantly increased to $14.7 million due to a $3.0 million provision for loan losses, and $30 million in COVID-19 deferrals were granted Table: Loan Quality and Allowance for Loan Losses | Metric | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :----------------------------------- | :---------------------------- | :------------------------------- | | ALL at Period End | $14,730 | $11,966 | | Provision for Loan Losses (Q1) | $3,000 | $399 (Q1 2019) | | Total Impaired Loans (Recorded Investment) | $11,969 | $12,176 | | Nonaccrual Loans | $3,673 | $3,828 | | Loans Past Due 90 Days+ | $32 | $77 | | Troubled Debt Restructurings (TDRs) | $10,315 | $10,446 | - Approximately $30 million in loan deferrals or modifications were granted as of March 31, 2020, in response to COVID-19[53] - No new TDR loans were reported during 2020 or 2019[53] Note 7. Leases Operating lease costs decreased to $174 thousand in Q1 2020, with a 12.8-year average term and $5.16 million total lease liability Table: Lease Costs | Metric | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :-------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Operating Lease Cost | $158 | $188 | | Short-term Lease Cost | $2 | $6 | | Variable Lease Cost | $14 | $11 | | Total Lease Cost | $174 | $205 | - Weighted-average remaining lease term is 12.8 years and weighted-average discount rate is 3.53% as of March 31, 2020[56] - Total lease liability is $5.159 million as of March 31, 2020[56] Note 8. Other Real Estate Owned The balance of other real estate owned remained at zero for the three months ended March 31, 2020, indicating no additions or dispositions during the period Table: Other Real Estate Owned | Metric | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :-------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Balance at End of Period | $0 | $2,684 | Note 9. Derivatives Derivative liabilities increased to $55 thousand at March 31, 2020, resulting in a $36 thousand recognized loss from non-hedging loan arrangements Table: Derivatives Fair Value and Recognized Loss | Metric | March 31, 2020 (in thousands) | March 31, 2019 (in thousands) | | :----------------------------------- | :---------------------------- | :---------------------------- | | Fair Value of Derivative Liabilities | $55 | $0 | | Amount of Loss Recognized in Income | $(36) | $0 | - Derivatives are not designated as hedges and result from loan participation arrangements[59][62] Note 10. Pension Total pension expense increased to $171 thousand in Q1 2020 due to higher actuarial losses, with further increases expected Table: Total Pension Expense | Metric | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :------------------ | :----------------------------------------------- | :----------------------------------------------- | | Total Pension Expense | $171 | $120 | - The Bank expects its pension expense to increase to approximately $680 thousand in 2020 compared to $421 thousand in 2019, primarily due to increases in recognized net actuarial losses[64] Note 11. Fair Value Measurements and Fair Values of Financial Instruments This note details the fair value hierarchy, with equity securities at Level 1, AFS securities at Level 2, and no nonrecurring fair value assets Table: Fair Value of Financial Instruments | Asset Description | Fair Value at March 31, 2020 (in thousands) | Fair Value at December 31, 2019 (in thousands) | | :--------------------------------- | :------------------------------------------ | :--------------------------------------------- | | Equity Securities (Level 1) | $313 | $440 | | Available for Sale Securities (Level 2) | $208,040 | $187,433 | | Impaired Loans (Level 3, nonrecurring) | $0 | $1,080 | - No assets were measured at fair value on a nonrecurring basis at March 31, 2020[76][77] Note 12. Capital Ratios The Bank remains 'well capitalized', exceeding all regulatory minimums, and did not opt-in to CBLR, with PPP loans carrying a 0% risk-weight Table: Capital Ratios (Bank) | Capital Ratio (Bank) | March 31, 2020 | December 31, 2019 | Well Capitalized Minimum | | :------------------------------- | :------------- | :---------------- | :----------------------- | | Common Equity Tier 1 Risk-based Capital Ratio | 14.52% | 14.62% | 6.50% | | Tier 1 Risk-based Capital Ratio | 14.52% | 14.62% | 8.00% | | Total Risk-based Capital Ratio | 15.78% | 15.87% | 10.00% | | Tier 1 Leverage Ratio | 9.71% | 9.59% | 5.00% | - The Bank's capital conservation buffer at March 31, 2020, was 7.78%, exceeding the 2020 regulatory buffer of 2.50%[80] - The Bank did not opt-in to the Community Bank Leverage Ratio (CBLR) despite meeting the criteria of a Qualifying Community Banking Organization[81] - PPP loans pledged as collateral for PPPLF, and PPPLF advances, are excluded from leverage capital ratios and carry a 0% risk-weight for risk-based capital rules[82] Note 13. Revenue Recognition This note details revenue recognition policies for non-interest income streams, primarily transactional or monthly recognized fees - Investment and trust services fees, loan service charges, deposit service charges and fees, debit card income, and other service charges and fees are recognized as non-interest income[85][87][88][89][90][91] - Asset management fees are generally recognized monthly based on the value of assets under management[89] - Commissions from the sale of investment and insurance products, loan service charges, deposit service charges (transaction-based), debit card income, and other service charges are recognized upon completion of the transaction[86][87][88][90][91] Note 14. Commitments and Contingencies Off-balance-sheet commitments totaled $305.2 million for credit and $24.2 million for standby letters of credit, with a $2.1 million reserve Table: Off-Balance-Sheet Commitments | Commitment Type | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :----------------------------------- | :---------------------------- | :------------------------------- | | Commercial Commitments to Extend Credit | $241,341 | $248,251 | | Consumer Commitments to Extend Credit (secured) | $58,712 | $56,898 | | Consumer Commitments to Extend Credit (unsecured) | $5,146 | $5,088 | | Total Commitments to Extend Credit | $305,199 | $310,237 | | Standby Letters of Credit | $24,199 | $26,382 | - The Bank reversed $250 thousand from a $2.4 million allowance for a standby letter of credit, resulting in a remaining reserve of $2.1 million at March 31, 2020[98] Note 15. Risk Factors This note highlights the COVID-19 pandemic's potential adverse effects on operations, including increased loan losses and goodwill impairment, with uncertain duration - The COVID-19 pandemic could adversely impact customer loan payments, leading to elevated loan losses and an increase in the Corporation's allowance for loan losses[104] - Future evaluations of the carrying amount of goodwill could result in a conclusion that goodwill is impaired[104] - The extent to which the coronavirus may impact business activity or investment results will depend on future developments, which are highly uncertain and cannot be predicted[104] Note 16. Reclassification Certain prior period amounts may have been reclassified to conform to the current year presentation, but such reclassifications did not affect reported net income - Certain prior period amounts may have been reclassified to conform to the current year presentation, but these reclassifications did not affect reported net income[105] Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Management discusses Q1 2020 financial performance, noting a net income decrease due to higher loan loss provisions, strong capital, and active PPP participation Forward Looking Statements The report contains forward-looking statements subject to risks and uncertainties, including economic conditions, interest rates, and regulatory changes - The report contains forward-looking statements that involve risks, uncertainties, and other factors over which the Corporation has no direct control, and actual results could differ materially[107] - Key factors include general economic conditions (particularly the negative impact of COVID-19), changes in interest rates, government monetary policy, regulation, taxation, inflation, technology, and competition[107] Critical Accounting Policies No changes were made to the critical accounting policies disclosed in the 2019 Annual Report on Form 10-K - There were no changes to the critical accounting policies disclosed in the 2019 Annual Report on Form 10-K regarding application or related judgments and estimates[108] Results of Operations This section details the Corporation's financial performance, including net income, net interest income, and noninterest income and expense Summary Q1 2020 net income decreased to $1.7 million ($0.39 diluted EPS) due to a $3.0 million loan loss provision, despite stable net interest and increased noninterest income Table: Key Financial Highlights | Metric | Q1 2020 (in thousands, except per share) | Q1 2019 (in thousands, except per share) | | :------------------------- | :--------------------------------------- | :--------------------------------------- | | Net Income | $1,719 | $3,237 | | Diluted Earnings Per Share | $0.39 | $0.73 | | Net Interest Income | $10,252 | $10,329 | | Net Interest Margin | 3.53% | 3.86% | | Provision for Loan Losses | $3,000 | $399 | | Noninterest Income | $3,889 | $3,165 | - The provision for loan loss expense of $3.0 million was recorded due to the economic effects of the COVID-19 pandemic, increasing qualitative factors in the allowance for loan loss calculation[110] - The Bank funded 512 loans for $50.1 million (5.4% of gross loans) through the Paycheck Protection Program (PPP) as of April 30, 2020, expecting approximately $2.0 million in processing fees[112] Net Interest Income Tax equivalent net interest income decreased slightly to $10.6 million in Q1 2020 due to rate reductions, despite positive volume contribution Table: Tax Equivalent Net Interest Income | Metric | Q1 2020 (in thousands) | Q1 2019 (in thousands) | | :----------------------------------- | :--------------------- | :--------------------- | | Tax Equivalent Net Interest Income | $10,552 | $10,717 | | Yield on Total Interest-Earning Assets | 4.00% | 4.45% | | Cost of Total Interest-Bearing Liabilities | 0.61% | 0.77% | | Net Interest Margin (T/E) | 3.53% | 3.86% | - Balance sheet volume contributed $77 thousand to tax equivalent net interest, but was offset by a $242 thousand reduction due to rates[119] Provision for Loan Losses The provision for loan losses increased substantially to $3.0 million in Q1 2020, directly resulting from the COVID-19 pandemic's economic effects Table: Provision for Loan Losses | Metric | Q1 2020 (in thousands) | Q1 2019 (in thousands) | | :------------------------ | :--------------------- | :--------------------- | | Provision for Loan Losses | $3,000 | $399 | - The increase in provision was due to the economic effects of the COVID-19 pandemic, which caused several qualitative factors in the allowance for loan loss calculation to increase from moderate to very high risk[122] Noninterest Income Noninterest income increased by $724 thousand (22.9%) to $3.89 million in Q1 2020, driven by an $812 thousand life insurance gain Table: Noninterest Income Categories | Noninterest Income Category | Q1 2020 (in thousands) | Q1 2019 (in thousands) | Change (Amount) | Change (%) | | :--------------------------------- | :--------------------- | :--------------------- | :-------------- | :--------- | | Total Noninterest Income | $3,889 | $3,165 | $724 | 22.9 | | Life Insurance Gain | $812 | $0 | $812 | NA | | Loan Service Charges | $285 | $203 | $82 | 40.4 | | Debit Card Income | $418 | $402 | $16 | 4.0 | | Change in Fair Value of Equity Securities | $(127) | $3 | $(130) | (4,333.3) | Noninterest Expense Total noninterest expense increased slightly by $116 thousand (1.2%) to $9.53 million in Q1 2020, mainly due to higher salaries Table: Noninterest Expense Categories | Noninterest Expense Category | Q1 2020 (in thousands) | Q1 2019 (in thousands) | Change (Amount) | Change (%) | | :--------------------------- | :--------------------- | :--------------------- | :-------------- | :--------- | | Total Noninterest Expense | $9,528 | $9,412 | $116 | 1.2 | | Salaries and Employee Benefits | $5,535 | $5,442 | $93 | 1.7 | | Pennsylvania Bank Shares Tax | $175 | $243 | $(68) | (28.0) | - The decrease in Pennsylvania bank shares tax was due to tax credits associated with charitable donations[125] Provision for Income Taxes The Corporation recorded a federal income tax benefit of $106 thousand in Q1 2020, resulting in an effective tax rate of (6.5)% Table: Federal Income Tax and Effective Tax Rate | Metric | Q1 2020 (in thousands) | Q1 2019 (in thousands) | | :------------------------------- | :--------------------- | :--------------------- | | Federal Income Tax (Benefit) Expense | $(106) | $446 | | Effective Tax Rate | (6.5)% | 12.1% | Financial Condition This section reviews the Corporation's financial position, including cash, investments, loans, deposits, and shareholders' equity Cash and Cash Equivalents Cash and cash equivalents decreased by $30.5 million to $53.4 million at March 31, 2020, mainly due to investment purchases Table: Cash and Cash Equivalents | Metric | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :------------------------ | :---------------------------- | :------------------------------- | | Cash and Cash Equivalents | $53,350 | $83,828 | - The decrease was mainly due to lower interest-bearing balances at the Federal Reserve from purchases in the investment portfolio[128] Investment Securities The AFS securities portfolio increased by $18.5 million with a $2.3 million net unrealized gain, while equity securities decreased to $313 thousand - The AFS securities portfolio increased $18.5 million on a cost basis since year-end 2019[129] - The unrealized loss in the municipal bond portfolio decreased to $242 thousand from $997 thousand at December 31, 2019, with no other-than-temporary impairment charges recorded[132] - No other-than-temporary impairment charges were recorded for trust preferred securities or asset-backed securities, despite unrealized losses[133][134] Table: Investment Securities Unrealized Gain/Loss | Metric | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :----------------------------------- | :---------------------------- | :------------------------------- | | Net Unrealized Gain on AFS Securities | $2,293 | $234 | | Equity Securities at Fair Value | $313 | $440 | Loans The total loan portfolio increased slightly by $1.8 million (0.2%) to $936.4 million, driven by residential real estate and construction loans Table: Loan Portfolio by Class | Loan Class | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | Change (Amount) | Change (%) | | :--------------------------------- | :---------------------------- | :------------------------------- | :-------------- | :--------- | | Total Loans | $936,386 | $934,575 | $1,811 | 0.2 | | Residential Real Estate 1-4 Family | $193,972 | $190,543 | $3,429 | 1.8 | | Residential Real Estate - Construction | $15,482 | $13,323 | $2,159 | 16.2 | | Commercial Real Estate | $494,143 | $494,262 | $(119) | (0.0) | | Commercial | $226,128 | $230,007 | $(3,879) | (1.7) | - Commercial loan participations decreased to $60.3 million (6.4% of total gross loans) at March 31, 2020, from $67.7 million (9.4% of total gross loans) at December 31, 2019[144] - The Bank retained a higher percentage of its mortgage originations in Q1 2020[139] Loan Quality Loan quality remained stable at 0.40% nonperforming loans, but $154 million in COVID-19 deferrals were granted, with PPP loans carrying no credit risk Table: Loan Quality Metrics | Metric | March 31, 2020 | December 31, 2019 | | :----------------------------------- | :------------- | :---------------- | | Nonperforming Loans to Total Gross Loans | 0.40% | 0.42% | | Nonaccrual Loans | $3,673k | $3,828k | | Loans Past Due 90 Days or More and Still Accruing | $32k | $77k | - As of April 30, 2020, the Bank granted approximately $154 million in loan deferrals or modifications (16% of gross loans) in response to the pandemic[161] - Top industries for loan deferrals include Accommodation and Food Services ($68.8 million), Retail Trade ($36.8 million), and Real Estate and Rental and Leasing ($26.4 million)[164] - The Bank funded $50.1 million in PPP loans, which are 100% guaranteed by the SBA and present no credit risk to the Bank[165] - Loans with high perceived pandemic risk totaled $128.1 million (14% of gross loans), concentrated in Arts, Entertainment, and Recreation; Retail Trade - Non Operating Sectors; and Accommodation and Food Services[168] Allowance for Loan Losses The ALL significantly increased to $14.7 million (1.57% of loans) due to a $2.6 million increase in the qualitative component from pandemic risk Table: Allowance for Loan Losses | Metric | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :----------------------------------- | :---------------------------- | :------------------------------- | | ALL at Period End | $14,730 | $11,966 | | ALL as a % of Loans | 1.57% | 1.28% | | Net Charge-offs (recoveries)/Average Loans* | 0.10% | 0.07% | - The qualitative component of the ALL increased by $2.6 million due to increased risk scores for economic conditions and level of risk, reflecting the impact of the pandemic[173] - No specific reserve was established for any of the individually evaluated impaired loans[170][176] Deposits Total deposits decreased by $8.0 million (0.7%) to $1.117 billion in Q1 2020, with noninterest-bearing deposits increasing but offset by declines Table: Deposits by Type | Deposit Type | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | Change (Amount) | Change (%) | | :--------------------------------- | :---------------------------- | :------------------------------- | :-------------- | :--------- | | Total Deposits | $1,117,433 | $1,125,392 | $(7,959) | (0.7) | | Noninterest-bearing Checking | $198,384 | $192,108 | $6,276 | 3.3 | | Interest-bearing Checking | $319,928 | $331,886 | $(11,958) | (3.6) | | Time Deposits | $83,841 | $89,348 | $(5,507) | (6.2) | - The Bank had $158.1 million in ICS reciprocal deposits and $3.2 million in CDARS reciprocal time deposits at March 31, 2020[181] Borrowings The Corporation reported no outstanding borrowings at both March 31, 2020, and December 31, 2019 - The Corporation had no outstanding borrowings at March 31, 2020, and December 31, 2019[183] Shareholders' Equity Total shareholders' equity increased by $1.5 million to $129.0 million, driven by net earnings and capital contributions, with the stock repurchase plan suspended Table: Shareholders' Equity | Metric | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :------------------------- | :---------------------------- | :------------------------------- | | Total Shareholders' Equity | $129,005 | $127,528 | | Net Earnings (Q1) | $1,719 | - | | Cash Dividend (Q1) | $(1,306) | - | - The Dividend Reinvestment Plan added $349 thousand in new capital and $211 thousand from reinvested dividends[184] - The Corporation repurchased 36,401 shares in Q1 2020 under the 2019 Repurchase Plan, which was suspended on March 19, 2020[187] - The Bank was 'well capitalized' as of March 31, 2020, exceeding all regulatory minimum capital ratios[188] Economy The Corporation's market area has a diverse economic base, but the COVID-19 pandemic dramatically changed the economic outlook with uncertain effects - The Corporation's primary market area (Franklin, Fulton, Cumberland, and Huntingdon Counties, PA) has a diverse economic base and historically stable unemployment[192] - The economic outlook dramatically changed in March 2020 due to the COVID-19 pandemic, leading to curtailed economic activity, business shutdowns, and dramatically increased unemployment[194] - The length of this economic downturn and its effect on the Corporation is currently uncertain[194] Impact of Inflation Inflation's impact on financial institutions is primarily through interest rates, which the Corporation monitors, though the precise effect is difficult to measure - The impact of inflation on financial institutions differs from other commercial enterprises, with interest rates and changes in interest rates having a more significant effect[195] - The Corporation monitors the Federal Reserve Open Market Committee (FOMC) decisions regarding interest rate changes, but the precise effect of inflation is difficult to measure[195] Liquidity The Corporation maintains robust liquidity through earnings, loan repayments, investment securities, deposit growth, and access to various credit lines - The Corporation maintains liquidity through earnings, loan repayments, amortizing investment securities, loan sales, deposit growth, and access to existing lines of credit[197] - The Bank is participating in the Paycheck Protection Program Liquidity Facility (PPPLF) to fund PPP loans, which allows full funding at a low fixed rate without accessing normal liquidity sources[201] - A temporary increase in funding is expected from stimulus checks provided by the CARES Act, though these funds are expected to be quickly withdrawn[201] Table: Available Liquidity Capacity | Liquidity Source | Available Capacity (in thousands) | | :-------------------------------- | :-------------------------------- | | Federal Home Loan Bank | $377,600 | | Federal Reserve Bank Discount Window | $21,000 | | Correspondent Banks | $21,000 | | Total | $419,600 | Off Balance Sheet Commitments Off-balance-sheet commitments include unused credit commitments and standby letters of credit, which generally do not present significant liquidity risk Table: Off-Balance-Sheet Commitments | Commitment Type | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :------------------------------- | :---------------------------- | :------------------------------- | | Unused Commitments | $329,400 | $336,600 | | Standby Letters of Credit | $24,199 | $26,382 | - These commitments generally do not present significant liquidity risk as many are expected to expire without being drawn upon[202] Item 3. Quantitative and Qualitative Disclosures about Market Risk No material changes in the Corporation's exposure to market risk occurred during the three months ended March 31, 2020 - No material changes in the Corporation's exposure to market risk occurred during the three months ended March 31, 2020[204] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes in internal control over financial reporting - The Corporation's disclosure controls and procedures were effective as of March 31, 2020[205] - There were no material changes in the Corporation's internal control over financial reporting during the quarterly period ended March 31, 2020[206] Part II - Other Information This section provides other required information, including legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings The Corporation is involved in inherent litigation but anticipates no material adverse effect on its financial position, with no material governmental proceedings pending - The nature of the Corporation's business generates a certain amount of litigation[210] - Management does not anticipate that the ultimate aggregate liability from current litigation will have a material adverse effect on the Corporation's financial position[212] - The Corporation is unable to determine whether any claim will have a material adverse effect on its results of operations in any future reporting period[212] - No material proceedings are pending or known to be threatened or contemplated against the Corporation by governmental authorities[213] Item 1A. Risk Factors The COVID-19 pandemic is a significant new risk, potentially causing adverse impacts on business, loan portfolios, and security impairments, with uncertain duration - The COVID-19 pandemic could materially and adversely impact the Corporation's business, including significantly affecting demand for products/services, increasing credit losses in loan portfolios, and requiring further impairments on securities[215] - Business operations may be disrupted if significant portions of the workforce are unable to work effectively due to illness, quarantines, or government actions[215] - The magnitude, duration, and likelihood of the COVID-19 outbreak and its future direct and indirect effects on the economy and the Corporation's business are highly uncertain[216][217] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The Corporation repurchased 36,401 shares for $1.172 million in Q1 2020, but suspended its stock repurchase plan on March 19, 2020 Table: Equity Securities Repurchases | Metric | Q1 2020 (in thousands, except per share) | | :----------------------------------- | :--------------------------------------- | | Number of Shares Purchased | 36,401 | | Weighted Average Price Paid per Share | $32.19 | | Dollar Amount of Shares Purchased | $1,172 | - The Corporation suspended activity in its stock repurchase plan on March 19, 2020[218] Item 3. Defaults Upon Senior Securities The Corporation reported no defaults on its senior securities - The Corporation reported no defaults on its senior securities[219] Item 4. Mine Safety Disclosures This item is not applicable to the Corporation - Mine Safety Disclosures are not applicable to the Corporation[219] Item 5. Other Information No other information was reported under this item - No other information was reported[220] Item 6. Exhibits This section lists the exhibits filed with the 10-Q report, including corporate documents and executive certifications - Exhibits include Articles of Incorporation, Bylaws, Rule 13a-14(a)/15d-14(a) Certifications, Section 1350 Certifications, and the Interactive Data File (XBRL)[220][221] Signatures The report was signed on May 11, 2020, by the Chief Executive Officer and Chief Financial Officer, certifying its submission - The report was signed on May 11, 2020, by Timothy G. Henry (Chief Executive Officer and President) and Mark R. Hollar (Treasurer and Chief Financial Officer)[224]