FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1996
Commission file number: 33-66014
FNB Financial Corporation
(Exact name of registrant as specified in its charter)
Commonwealth of Pennsylvania 23-2466821
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 Lincoln Way West, McConnellsburg, PA 17233
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 717/485-3123
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 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 X NO
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at September 30, 1996
(Common stock, $0.63 par value) 400,000
FNB FINANCIAL CORPORATION
INDEX
Page
PART I - FINANCIAL INFORMATION
Condensed consolidated balance sheets -
September 30, 1996 and December 31, 1995 5
Condensed consolidated statements of income -
Three months ended September 30, 1996 and 1995 6
Condensed consolidated statements of income -
Nine months ended September 30, 1996 and 1995 7
Condensed consolidated statements of cash flows -
Nine months ended September 30, 1996 and 1995 8
Notes to condensed consolidated financial
statements 9-11
Table #1 - Schedule of held to maturity and
available for sale investment activity for the
period January 1, 1996 through September 30, 1996 12
Table #2 - Schedule of gross unrealized gains and
unrealized losses within the held to maturity and
available for sale investment portfolios by
investment type 13
Management's discussion and analysis of financial
condition and results of operations 14-17
PART II - OTHER INFORMATION 19
Signatures 20
PART I - FINANCIAL INFORMATION
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<S> <C> <C>
September 30, December 31,
1996 1995
ASSETS: (unaudited) (audited*)
Cash and Due from banks $ 2,752,458 $ 2,633,762
Interest-bearing deposits with banks 223,938 418,473
Marketable Debt Securities
Held-to-maturity (Market value - 1996:
$5,021,947 and 1995: $5,402,945) 5,034,667 5,401,263
Available-for-sale 27,712,525 26,234,019
Marketable Equity Securities
Available for Sale 111,800 101,880
Federal Reserve, Atlantic Central Banker's Bank
and Federal Home Loan Bank Stock 383,700 370,000
Federal Funds Sold 3,643,000 477,000
Loans, net of unearned discount &
Allowance for loan losses 53,762,797 52,793,865
Bank buildings, equipment, furniture &
fixtures, net 2,953,148 2,086,560
Accrued interest receivable 698,338 647,921
Deferred income tax charges 130,475 0
Other real estate owned 382,492 395,752
Intangible Assets 215,858 255,506
Other assets 427,787 105,141
Total Assets $98,432,983 $91,921,142
========== ==========
LIABILITIES :
Deposits:
Demand deposits $ 9,269,143 $ 7,778,115
Savings deposits 28,234,548 23,955,468
Time certificates 49,152,388 48,942,142
Other time deposits 630,209 240,562
Total deposits $87,286,288 $80,916,287
Accrued interest payable & other liabilities 741,901 764,901
Deferred income taxes 0 19,490
Accrued dividends payable 72,000 92,000
Total Liabilities $88,100,189 $81,792,678
STOCKHOLDERS' EQUITY:
Capital stock, Common, par value $0.63;
6,000,000 shares authorized; 400,000
outstanding $ 252,000 $ 252,000
Additional paid-in capital 1,789,833 1,789,833
Retained earnings 8,474,439 7,979,001
Net unrealized gain/(loss) on Available-for-sale
securities, net of tax effects (183,478) 107,630
Total Stockholders' Equity $10,332,794 $10,128,464
Total Liabilities & Stockholders' Equity $98,432,983 $91,921,142
========== ==========
</TABLE>
*Condensed from audited financial statements.
The accompanying notes are an integral part of these condensed
financial statements.
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended September 30, 1996 and 1995
(UNAUDITED)
<TABLE>
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1996
1995
Interest & Dividend Income
Interest & fees on loans $1,245,558
$1,181,138
Interest on investment securities:
U.S. Treasury Securities 11,084
16,294
Obligations of other U.S.
Government Agencies 352,242
224,031
Obligations of State & Political
Subdivisions 116,919
110,941
Interest on deposits with banks 4,181
10,057
Dividends on Equity Securities 6,350
6,312
Interest on federal funds sold 42,187
45,417
Total Interest & Dividend Income 1,778,521
1,594,190
Interest Expense
Interest on deposits 926,206
845,428
Net interest income 852,315
748,762
Provision for loan losses 17,500
7,500
Net interest income after
Provision for loan losses 834,815
741,262
Other income
Service charges on deposit accounts 15,367
17,156
Other service charges, collection &
exchange charges, commissions
and fees 42,677
45,952
Other income 6,821
12,741
Net Securities gains/(losses) 0
(1,846)
Total other income 64,865
74,003
Other expenses 570,409
482,642
Income before income taxes 329,271
332,623
Applicable income taxes 67,120
68,004
Net income $262,151
$264,619
=======
=======
Earnings per share of Common Stock:
Net income per share $0.66
$0.66
Cash dividend declared per share $0.18
$0.19
Weighted average number of shares outstanding 400,000
400,000
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ended September 30, 1996 and 1995
(UNAUDITED)
<TABLE>
<S> <C> <C>
1996
1995
Interest & Dividend Income
Interest & fees on loans $3,598,185
$3,405,086
Interest on investment securities:
U.S. Treasury Securities 39,980
39,671
Obligations of other U.S.
Government Agencies 1,005,598
696,588
Obligations of State & Political
Subdivisions 354,105
296,662
Interest on deposits with banks 24,620
30,547
Dividends on Equity Securities 18,890
18,871
Interest on federal funds sold 117,373
95,952
Total Interest & Dividend Income 5,158,751
4,583,377
Interest Expense
Interest on deposits 2,783,052
2,339,177
Net interest income 2,375,699
2,244,200
Provision for loan losses 62,500
33,174
Net interest income after
Provision for loan losses 2,313,199
2,211,026
Other income
Service charges on deposit accounts 46,750
50,186
Other service charges, collection &
exchange charges, commissions
and fees 126,791
130,456
Other income 26,643
25,942
Net Securities gains/(losses) (3,843)
(5,210)
Total other income 196,341
201,374
Other expenses 1,630,275
1,437,686
Income before income taxes 879,265
974,714
Applicable income taxes 175,825
218,274
Net income $703,440
$756,440
=======
=======
Earnings per share of Common Stock:
Net income per share $1.76
$1.89
Cash dividend declared per share $0.52
$0.54
Weighted average number of shares outstanding 400,000
400,000
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1996 and 1995
<TABLE>
<S> <C> <C>
(UNAUDITED)
1996 1995
Cash flows from operating activities:
Net income $ 703,440 $ 756,440
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation & amortization 147,125 92,786
Provision for loan losses 62,500 33,174
Net (gain)/loss on sales of
investments 3,843
5,210
(Increase) decrease in accrued
interest receivable (50,417)
(132,132)
Increase (decrease) in accrued
interest payable and
other liabilities (23,000) 155,733
Other (net) (319,981) 54,421
Net cash provided (used)by operating
activities 523,510 965,632
Cash flows from investing activities:
Net (increase) decrease in interest-
bearing deposits with banks 194,535
84,266
Purchases of Held-to-maturity
securities (100,000)
(5,035,910)
Purchases of Available-for-sale
securities (7,198,170)
(397,078)
Proceeds from sales of Available-for-
sale securities 0 196,469
Proceeds from maturities of Held-to-
maturity securities 466,596 480,470
Proceeds from maturities of Available-
for-sale securities 5,264,825 2,924,730
Purchases of marketable equity securities 0
(25,000)
Net (increase) decrease in loans (1,056,459)
(3,302,061)
Proceeds from sale of Other real
estate owned 39,000 21,500
Purchases of bank premises &
equipment (net) (977,442)
(289,378)
Proceeds from sale of equipment 0 13,729
Purchase of other bank stock (13,700)
(30,500)
Net cash provided (used) by investing
activities (3,380,815)
(5,358,763)
Cash flows from financing activities:
Net increase (decrease) in deposits 6,370,001
4,005,011
Cash dividends paid (228,000)
(228,000)
Net cash provided (used) by financing
activities 6,142,001 3,777,011
Net increase (decrease) in cash & cash
equivalents 3,284,696
(616,120)
Cash & cash equivalents, beginning balance 3,110,762 4,629,079
Cash & cash equivalents, ending balance $6,395,458 $4,012,959
========= =========
Supplemental disclosure of cash flows information
Cash paid during the year for:
Interest $2,634,234 $2,188,081
Income taxes 275,088 101,840
Supplemental schedule of noncash investing &
financing activities
Unrealized loss on Available-for-sale
securities (277,997) 5,002
Deferred income tax on unrealized loss on
available-for-sale securities 94,519 (1,701)
Accrued dividends payable 72,000 76,000
Other real estate acquired in
settlement of loans 75,027 139,524
Loan advanced for sale of other real
estate owned 50,000 29,983
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
FNB FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The financial information presented at and for the nine
months ended September 30, 1996 and September 30, 1995 is
unaudited. Information presented at December 31, 1995, is
condensed from audited year-end financial statements.
However, this unaudited information reflects all adjustments,
consisting solely of normal recurring adjustments, that are,
in the opinion of management, necessary for a fair
presentation of the financial position, results of operations
and cash flows for the interim period.
NOTE 2 - PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
the corporation and its wholly-owned subsidiary, The First
National Bank of McConnellsburg. All significant
intercompany transactions and accounts have been
eliminated.
NOTE 3 - CASH FLOWS
For purposes of the statements of cash flows, the corporation
has defined cash and cash equivalents as those amounts
included in the balance sheet captions "cash and due from
banks" and "federal funds sold". As permitted by Statement
of Financial Accounting Standards No. 104, the corporation
has elected to present the net increase or decrease in
deposits in banks, loans and time deposits in the statement
of cash flows.
NOTE 4 - FEDERAL INCOME TAXES
For financial reporting purposes the provision for loan
losses charged to operating expense is based on management's
judgement, whereas for federal income tax purposes, the
amount allowable under present tax law is deducted.
Additionally, certain expenses are charged to operating
expense in the period the liability is incurred for financial
reporting purposes, whereas for federal income tax purposes,
these expenses are deducted when paid. As a result of these
timing differences, deferred taxes were computed after
reducing pre-tax accounting income for nontaxable municipal
and loan income.
NOTE 5 - INVESTMENTS
The activity within the held to maturity and available for
sale portfolios for the period January 1, 1996, through
September 30, 1996, is summarized in Table #1 on page 11. No
sales were conducted from securities contained within the held
to maturity portfolio.
The amortized cost and estimated market values of investments
by investment type and classification as available for sale or
held to maturity along with each portfolio's gross unrealized
gain or gross unrealized loss are contained in Table #2 on
page 12.
Management has purchased for the portfolio mortgage-backed
securities. The large portion of these securities have a
variable rate coupon and all have scheduled principal
payments. During periods of rising interest rates, payments
from variable rate mortgage-backed securities may accelerate
as prepayments of underlying mortgages occur as home-owners
refinance to a fixed rate while during periods of declining
interest rates, prepayments on high fixed rate mortgage-backed
securities may accelerate as home owners refinance to lower
rate mortgages. These prepayments cause yields on mortgage-
backed securities to fluctuate as larger payments of principal
necessitate the acceleration of premium amortization or
discount accretion. Due to the low dollar amount of mortgage-
backed securities in relation to the total portfolio,
management feels that interest rate risk and prepayment risks
associated with mortgage-backed securities will not have a
material impact on the financial condition of the Bank.
In regard to Collateralized Mortgage Obligations (CMOs), the
Bank presently has none of these types of investments in its
portfolio.
NOTE 6 - ALLOWANCE FOR LOAN LOSSES AND NONACCRUAL LOANS
Activity in the allowance for loan losses is summarized as
follows:
<TABLE>
<S> <C> <C>
1996 1995
Allowance for loan losses beginning of the year $405,000
$405,036
Loans charged-off during the year:
Real estate mortgages 51,090
2,517
Installment loans 24,135
50,609
Commercial & all other 4,530
9,168
Total charge-offs 79,755
62,294
Recoveries of loans previously charged-off:
Real estate mortgages 0
460
Installment loans 9,636
21,138
Commercial & all other 830
5,253
Total recoveries 10,466
26,851
Net loans charged-off (recovered) 69,289
35,443
Provision for loan losses charged to operations 62,500
33,174
Allowance for loan losses, September 30 $398,211
$402,767
======== ========
</TABLE>
The following table shows the principal balance of nonaccrual loans
as of September 30, 1996:
<TABLE>
<S> <C>
Nonaccrual loans $ 381,081.48
==========
Interest income that would have been
accrued at original contract rates $ 26,203.78
Amount recognized as interest income 13,650.07
Foregone revenue $ 12,553.71
=========
</TABLE>
NOTE 7 - COMMITMENTS
Main Office Renovation/Expansion
As of September 30, 1996, the Board of Directors has committed
to an expansion project for its main office facilities.
Demolition, design, and construction costs of $1,721,978 were
incurred as of September 30,1996. These expenditures are
included in the September 30, 1996 financial statements under
the balance sheet caption "Bank building, equipment, furniture
and fixtures, net." Management estimates total expenditures
related to this project including additional equipment
purchases will be approximately $1,750,000.
Hancock, Maryland Branch Office
In May 1996, the Board of Directors approved management to
seek approval from The Office of the Comptroller of the
Currency to locate a branch office in Hancock, Maryland to be
known as "Hancock Community Bank, a Division of The First
National Bank of McConnellsburg". Management negotiated the
lease of a facility located in the Hancock Shopping Center
adjacent to Pittman's IGA Supermarket which formerly had been
occupied by First Federal Savings Bank of Western Maryland.
The size of this facility is approximately 1,500 square feet,
has a two lane drive-up window and an automatic teller
machine. Eventually in the 1997 calendar year, this office
will be designed as a supermarket branch in addition to a
regular branch office as management of Pittman's IGA and the
Bank have agreed to remove the wall between the two businesses
in order to establish a supermarket branch in 1997.
The Office of the Comptroller of the Currency approved this
branch office on August 23, 1996 and gave the Bank 18 months
from this date to open this branch office. Management
anticipates opening this office during the month of November
1996. Total expenditures anticipated in the opening of this
branch office are estimated to be approximately $200,000.
NOTE 8 - OTHER COMMITMENTS
In the normal course of business, the bank makes various
commitments and incurs certain contingent liabilities which
are not reflected in the accompanying financial statements.
These commitments include various guarantees and commitments
to extend credit. The bank does not anticipate any losses
as a result of these transactions.
TABLE #1
SCHEDULE OF HELD TO MATURITY AND AVAILABLE FOR SALE
DEBT SECURITY PORTFOLIOS
TRANSACTION SUMMARY
FOR THE PERIOD JANUARY 1, 1996 THROUGH SEPTEMBER 30, 1996
<TABLE>
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HELD TO AVAILABLE TOTAL
MATURITY FOR SALE INVESTMENT
PORTFOLIO PORTFOLIO PORTFOLIO
BEGINNING BALANCE 1/1/96 $5,401,263 $26,088,301 $31,489,564
PURCHASES 100,000 7,198,170 7,298,170
NET LOSSES (1) 0 3,843 3,843
MATURITIES/CALLS PAYDOWNS/
PREMIUM AMORTIZATION/DISCOUNT
ACCRETION 466,596 5,264,825 5,731,421
ENDING BALANCE 9/30/96 $5,034,667 $28,017,803 $33,052,470
========= ========== ==========
</TABLE>
NOTE (1): THE SECURITY LOSSES ARE THE RESULT OF PREMIUM REMAINING
ON AFS SECURITIES WHICH HAD BEEN CALLED DURING THE FIRST
QUARTER.
TABLE #2
SCHEDULE OF UNREALIZED GAINS AND UNREALIZED LOSSES
WITHIN THE HELD TO MATURITY AND AVAILABLE FOR SALE
INVESTMENT PORTFOLIOS BY INVESTMENT TYPE
SEPTEMBER 30, 1996
<TABLE>
<S> <C> <C> <C> <C> <C>
<C> <C> <C>
HELD TO HELD TO HELD TO HELD TO
AVAILABLE AVAILABLE AVAILABLE AVAILABLE
MATURITY MATURITY MATURITY MATURITY FOR
SALE FOR SALE FOR SALE FOR SALE
BOOK MARKET UNREALIZED UNREALIZED BOOK
MARKET UNREALIZED UNREALIZED
SECURITY PORTFOLIO VALUE VALUE GAIN LOSS
VALUE VALUE GAIN LOSS
U.S. GOVERNMENT TREASURIES 0 0 0 0
102,864 103,250 386 0
U.S. GOVERNMENT TREASURIES 0 0 0 0
647,744 644,345 0 (3,399)
U.S. GOVERNMENT AGENCIES 0 0 0 0
1,799,966 1,807,248 7,282 0
U.S. GOVERNMENT AGENCIES 0 0 0 0
13,024,580 12,680,086 0 (344,494)
SBA GUARANTEED LOAN POOL
CERTIFICATES 402,581 403,594 1,013 0
3,405,374 3,483,630 78,255 0
SBA GUARANTEED LOAN POOL
CERTIFICATES 1,293,586 1,276,676 0 (16,910)
650,397 645,940 0 (4,456)
MORTGAGE-BACKED SECURITIES 0 0 0 0
502,324 514,159 11,835 0
MORTGAGE-BACKED SECURITIES 0 0 0 0
1,249,570 1,230,328 0 (19,242)
SECURITIES ISSUED BY STATES
& POLITICAL SUBDIVISIONS IN
THE U.S. 864,647 876,851 12,204 0
2,521,699 2,564,379 42,681 0
SECURITIES ISSUED BY STATES
& POLITICAL SUBDIVISIONS IN
THE U.S. 2,473,853 2,464,826 0 (9,027)
4,113,285 4,039,160 0 (74,126)
MARKETABLE EQUITY SECURITIES 0 0 0 0
84,520 111,800 27,280 0
FEDERAL RESERVE BANK STOCK,
ATLANTIC CENTRAL BANKERS BANK
STOCK AND FEDERAL HOME LOAN
BANK STOCK 0 0 0 0
383,700 383,700 0 0
GRAND TOTALS 5,034,667 5,021,947 13,217 (25,937)
28,486,023 28,208,025 167,719 (445,717)
========= ========= ====== ======
========== ========== ======= =======
</TABLE>
CLASSIFICATION OF HELD TO MATURITY AND AVAILABLE FOR SALE
SECURITIES
Due to the implementation of FAS 115, management has segregated
securities as Held to Maturity, Available for Sale or Trading
securities. At the implementation of FAS 115 on January 1, 1994,
management determined that no securities were Trading securities;
that tax-free municipal with maturity dates less than the year 2000
were classified as Held to maturity securities due to management's
intention to hold these securities for tax planning purposes; and
that all other securities were classified as Available for Sale
securities due to management's intention to hold these securities
for liquidity planning purposes. Purchases of tax-free municipals
with maturities of 5 years or less made following implementation of
FAS 115 are classified as Held to Maturity securities with all
other purchase Available for Sale; however, management may decide
on a case-by-case basis that a security may be either classified as
Held to Maturity or Available for Sale depending upon the reasons
for purchase. Held to Maturity classifications are typically used
for securities purchased specifically for interest rate management
or tax-planning purposes while Available for Sale classifications
are typically used for liquidity planning purposes.
FNB FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Net income for the first nine months of 1996 was $703,440 compared
to $756,440 for the same period in 1995. This represents a
decrease of $53,000 or 7.01%. Net income on an adjusted per share
basis for the first nine months of 1996 was $1.76 per share, a
decrease of $0.13 from the $1.89 per share for the nine months
ended September 30, 1995.
Total interest and dividend income for the first nine months of
1996 was $5,158,751 compared to $4,583,377 for the nine months
ended September 30, 1995, representing an increase of $575,374.
This increase is a result of both a general increase in the balance
of earning assets and slightly higher yields on investments in the
Bank's security portfolio and on adjustable rate loans which have
repriced to higher interest rates. However, since December 31,
1995, net loans have increased $968,932 or 1.84% while the book
value of investment debt securities have increased $1,562,906 and
federal funds sold have increased $3,166,000. This increase in
loans, the Bank's highest yielding interest-earning asset, and
subsequent increases in the lower yielding assets of investments
and federal funds sold have increased the Bank's interest income
for the first nine months of 1996.
During the last quarter of 1995 and the first quarter of 1996,
interest rates on loans, adjustable rate investments and federal
funds sold decreased due to decreases in short-term interest rates
by the Federal Reserve Board. Since the first quarter of 1996,
interest rates have begun to increase. During the first quarter,
several investment securities with call features were called by the
issuer resulting in the loss of higher interest earning assets. At
the same time, management was decreasing deposit rates but not at
the same pace as that of earning assets. The result combined with
the aforementioned increase in loans and increase in investments
and federal funds sold resulted in a decrease in the bank's net
interest margin and interest spread during the first and second
quarters of 1996. However, during the third quarter of 1996, the
Federal Reserve Board maintained short term interest rates at the
same level during the second quarter. This allowed management to
maintain deposit rates at relatively the same levels as in the
first and second quarters while interest rate indexes on loans and
securities increased resulting in a higher interest spread and net
interest margin than that during the first and second quarters of
1996. Management anticipates the continued increase in interest
rates on loans and investments and the retention of deposit rates
at lower levels will result in the average interest rates earned on
assets to increase during the next few earning periods while
maturing liabilities will be repriced to lower interest rates
thereby creating a slight increase in interest spreads and net
interest margins.
Interest expense for the nine months ended September 30, 1996, was
$2,783,052, an increase of $443,875 from the $2,339,177 incurred
for the same period in 1995. This increase is due to the
significant increase in total interest-bearing deposits as a result
of the purchase of the Fort Loudon Branch of Dauphin Deposit Bank
in November 1995. Total deposit volume increased $6,370,001 or
7.87% since December 31, 1995. Savings accounts increased
$4,279,080 or 17.86% due to the Bank acquiring a money market
account of over $1,000,000 for a local school district on July 1
for the next two year period and an increase in the money market
account balances of two large business accounts. Non-interest
bearing demand deposit accounts increased $1,491,028 or 19.17% from
December 31, 1995, the result of new account openings and an
increase in the balance of business accounts. Time certificates
increased only $210,246, while other time deposits, comprised of
Christmas and vacation club accounts, increased $389,647. The
increase in the lower cost interest-bearing savings deposits and
club accounts as well as the noninterest-bearing demand deposit
accounts while the higher cost time deposits increased only
slightly, contributed to this increase in interest cost when
compared to 1995.
The tax-adjusted net interest margin has decreased 22 basis points
to 3.96% for the first nine months of 1996 from that of the first
nine months of 1995 which was 4.18%. This decrease occurred due to
an increase in the cost of interest-bearing liabilities which
occurred throughout the 1995 year and the first quarter of 1996 due
to a general increase in the cost of all deposits while the yield
on earning assets increased only slightly. The tax-equivalent
yield on earning assets for the first nine months of 1996 decreased
.02% to 8.14% from 8.16% for the same period in 1995 while the cost
of interest-bearing liabilities increased .13% to 4.90% from 4.77%
for the same period in 1995. This increase in cost of
interest-bearing liabilities has surpassed that of the decrease in
yield on
earning assets resulting in a decrease in net interest margin.
Management anticipates to continue to concentrate on the
improvement of net interest margin throughout the year and has
taken steps to improve it by decreasing rates on savings accounts
by 25 basis points during the first quarter and retaining the cost
time deposits at lower levels. Recent increases in interest rates
on adjustable rate loans and securities while higher cost time
deposits have matured and been repriced to lower yielding deposits
have resulted in a gradual increase in the net interest margin.
Total noninterest income decreased $5,033 due primarily to the 1995
receipt of interest in the amount of $3,927 from the IRS on a prior
year tax refund and $587 from the FDIC for the 1995 FDIC Insurance
premium refund. Operating expenses for the period ended September
30, 1996, were $1,630,275 a $192,589 increase from the operating
expenses incurred for the same period in 1995 of $1,437,686. This
increase is due to 1) increases in employee wages and benefits of
$109,768 as a result of an increase in wage rates, an increase in
the number of employees due to the purchase of the Fort Loudon
Branch which increased personnel by three employees, an increase in
employee participation in the Company's retirement plan and a
decrease in the deferral of loan origination costs associated with
SFAS 91; 2) an increase in the cost of fixed assets in the amount
of $50,012 due to increased utility bills, depreciation, insurance
and taxes as a result of the purchase of the Fort Loudon Branch of
Dauphin Deposit Bank in November 1995 and the main office
renovation and expansion for which depreciation began in the third
quarter of 1996; 3) an additional new expense in 1996 of
amortization of the premium on deposits purchased at the Fort
Loudon Office for which the first nine months of 1996 expense was
$39,648; and 4) additional expenses in 1996 for the 90th
anniversary stockholders banquet which cost approximately $10,000.
These increases were offset by a decrease in other operating
expenses of $75,979 due to the reduction in FDIC insurance
assessments. Management anticipates the cost of fixed assets to
increase significantly during the fourth quarters of 1996 and in
1997 as the main office construction comes to a close and the
operation of the Hancock branch office begins. Increased costs
associated with this construction will include additional
depreciation, utility billings, real estate insurance, real estate
taxes and equipment and maintenance costs. Additional costs
associated with the Hancock office will be employee wages and
benefits, lease payments and depreciation on equipment. These
costs will result in a decrease in net income during the next
several quarters; however, due to the strength of the Bank in
regard to its capital position, the Board and management felt it
wise to plan for the future growth of the organization by expanding
its main office facilities and seizing the opportunity to expand
into a new market area which had been targeted by the Board for
several years.
The company's income tax provision for the first nine months of
1996 was $175,825 as compared to $218,274 for the first nine months
of 1995. This decrease in the tax provision in the amount of
$42,449 is due to an increase in tax-free income in relation to
income before income taxes. During the first nine months of 1996
total tax-free income was $498,116 or 56.65% of income before
income taxes compared to $419,605 or 43.05% of income before income
taxes for the same period in 1995.
Although the Company continues to operate with a marginal tax rate
of 34%, during the first quarter of 1996, the Company was subject
to the alternative minimum tax of 20% due to the increase in
tax-free income as highlighted earlier. The effective income tax
rate
for the first nine months of 1996 was 20.00%, a decrease of 2.39%
from the effective tax rate for the first nine months of 1995 of
22.39%. This decrease in the effective tax rate is primarily due
to the increase of tax-free interest income in relation to income
before income taxes.
Total assets as of September 30, 1996, were $98,432,983 an increase
of $6,511,841 over the period ending December 31, 1995,
representing an increase of 7.08%. Funding this increase in total
assets was an increase in total deposits of $6,370,001 or 7.87%.
The increase in deposits was the result of increased balances in
time deposits of $210,246, in savings account balances of
$4,279,080 and in demand deposits of $1,491,028 since December 31,
1995. Net loans as of September 30, 1996, were $53,762,797
compared to $52,793,865 as of December 31, 1995. The allowance for
loan losses at the end of the nine months was $398,211 compared to
$405,000 at year end 1995 and is considered adequate, in
management's judgement, to absorb possible losses on existing
loans. The provision for loan losses for the first nine months of
1996 was $62,500 compared to $33,174 for the same period in 1995.
Total deposits were $87,286,288 as of September 30, 1996, compared
to $80,916,287 on December 31, 1995. This represents an increase
of $6,370,001 or 7.87% which reflects the activity as discussed
previously.
Total equity as of September 30, 1996, was $10,332,794, 10.50% of
total assets as compared to $10,128,464, 11.02% of total assets as
of December 31, 1995. This slight increase in equity reflects a
decrease in market value of marketable securities which has
resulted in a net unrealized loss on available for sale securities,
net of tax effects of ($183,478), a $291,108 decrease from the
December 31, 1995 net unrealized gain on available for sale
securities, net of tax effects of $107,630.
The Corporation has risk-based capital ratios exceeding regulatory
requirements. Risk-based capital guidelines require a minimum
ratio of 8.0%. At September 30, 1996, the risk-based capital ratio
of the Corporation was 19.51% while at December 31, 1995, the
risk-based capital ratio was 21.16%. The following table presents
the
risk-based capital ratios for the Corporation:
<TABLE>
<S> <C> <C>
September 30, Regulatory
1996 Minimum
Leverage Ratio 10.45% 3.00%
Risk-based capital ratios:
Tier I (core capital) 18.78% 4.00%
Total Capital
(Tier I and Tier II Capital) 19.51% 8.00%
</TABLE>
PART II - OTHER INFORMATION
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
None
Item 2 - Changes in Securities
None
Item 3 - Defaults Upon Senior Securities
Not Applicable
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
a. Exhibits - None
b. Reports on Form 8-K - None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
/s/
(John C. Duffey, President
and Director of the Company and
President/CEO of the Bank)
(Duly Authorized Officer)
Date /s/
(Daniel E. Waltz, Treasurer
and Director of the Company and
Senior Vice President/CFO of
the Bank)
(Principal Financial &
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,752
<INT-BEARING-DEPOSITS> 224
<FED-FUNDS-SOLD> 3,643
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 27,713
<INVESTMENTS-CARRYING> 5,035
<INVESTMENTS-MARKET> 5,022
<LOANS> 54,161
<ALLOWANCE> 398
<TOTAL-ASSETS> 98,433
<DEPOSITS> 87,286
<SHORT-TERM> 0
<LIABILITIES-OTHER> 814
<LONG-TERM> 0
<COMMON> 252
0
0
<OTHER-SE> 10,081
<TOTAL-LIABILITIES-AND-EQUITY> 98,433
<INTEREST-LOAN> 3,598
<INTEREST-INVEST> 1,419
<INTEREST-OTHER> 142
<INTEREST-TOTAL> 5,159
<INTEREST-DEPOSIT> 2,783
<INTEREST-EXPENSE> 2,783
<INTEREST-INCOME-NET> 2,376
<LOAN-LOSSES> 63
<SECURITIES-GAINS> (4)
<EXPENSE-OTHER> 1,630
<INCOME-PRETAX> 879
<INCOME-PRE-EXTRAORDINARY> 879
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 703
<EPS-PRIMARY> 1.76
<EPS-DILUTED> 1.76
<YIELD-ACTUAL> 3.96
<LOANS-NON> 381
<LOANS-PAST> 123
<LOANS-TROUBLED> 8
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 405
<CHARGE-OFFS> 80
<RECOVERIES> 10
<ALLOWANCE-CLOSE> 398
<ALLOWANCE-DOMESTIC> 398
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
