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Farmers and Merchants Trust to record impairment charge in Q2 results

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Farmers and Merchants Trust to record impairment charge in Q2 results

Chambersburg, Pa.-based Franklin Financial Services Corp. unit Farmers and Merchants Trust Co. of Chambersburg determined that it anticipates recognizing an impairment charge of between $10.0 million and $11.5 million during the second quarter on aggregate loan participation interest of $14.4 million.

The noncash impairment charge relates to loan participation interest by Farmers and Merchants Trust, where the bank is not the lead lender. The loan participation interest represents Farmers and Merchants Trust's portion of loans to a single, large commercial lending relationship with the lead lender.

In addition, Farmers and Merchants Trust was notified by the lead lender, another Pennsylvania bank that this disclosure did not specify, that the loan relationship had become impaired due to fraudulent activities believed to be perpetrated by one or more executives of the borrower. Farmers and Merchants Trust concluded that the impairment charge was required under GAAP.

Franklin Financial Services currently estimates that net income will be lowered by an amount between $7.9 million and $9.1 million, or $1.80 per share to $2.08 per share, due to the impairment charge. Franklin Financial Services has been informed that the lead lender is working with the borrower to preserve and recover assets but is unable to quantify the amount of recoveries outside of the current loss estimate, or if further charges will be incurred. Also, Franklin Financial Services anticipates an indeterminate amount of expenses in connection with the preservation and recovery of assets.

The impairment charge is not expected to impact both Franklin Financial Services and Farmers and Merchants Trust status as a "well-capitalized" institution, according to the May 31 Form 8-K filing.