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, 1997
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, 1997
(Common stock, $0.63 par value) 400,000
FNB FINANCIAL CORPORATION
INDEX
Page
PART I - FINANCIAL INFORMATION
Condensed consolidated balance sheets -
September 30, 1997 and December 31, 1996 5
Condensed consolidated statements of income -
Three months ended September 30, 1997 and 1996 6
Condensed consolidated statements of income -
Nine months ended September 30, 1997 and 1996 7
Condensed consolidated statements of cash flows -
Nine months ended September 30, 1997 and 1996 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, 1997 through September 30, 1997 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,
1997 1996
ASSETS: (unaudited) (audited*)
Cash and Due from banks $ 2,481,447 $ 2,473,315
Interest-bearing deposits with banks 497,330 327,276
Marketable Debt Securities
Held-to-maturity (Market value - 1997:
$3,559,086 and 1996: $4,567,903) 3,547,172 4,559,739
Available-for-sale 26,898,014 28,755,272
Marketable Equity Securities
Available for Sale 124,020 115,640
Federal Reserve, Atlantic Central Banker's Bank
and Federal Home Loan Bank Stock 389,600 383,700
Federal Funds Sold 3,710,000 1,239,000
Loans, net of unearned discount &
Allowance for loan losses 58,068,358 56,259,929
Bank buildings, equipment, furniture &
fixtures, net 3,302,811 3,107,960
Accrued interest receivable 704,275 675,180
Deferred income tax charges 0 6,548
Other real estate owned 418,618 318,992
Intangible Assets 198,314 210,588
Other assets 145,950 210,933
Total Assets $100,485,909 $98,644,072
=========== ==========
LIABILITIES :
Deposits:
Demand deposits $ 9,198,344 $ 9,249,700
Savings deposits 25,232,677 26,674,628
Time certificates 52,952,915 50,957,962
Other time deposits 673,388 251,678
Total deposits $88,057,324 $87,133,968
Accrued interest payable & other liabilities 866,649 708,072
Deferred income taxes 40,742 0
Other Borrowed Funds 174,296 0
Accrued dividends payable 76,000 100,000
Total Liabilities $89,215,011 $87,942,040
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 9,105,251 8,628,183
Net unrealized gain/(loss) on Available-for-sale
securities, net of tax effects 123,814 32,016
Total Stockholders' Equity $11,270,898 $10,702,032
Total Liabilities & Stockholders' Equity$100,485,909 $98,644,072
=========== ==========
</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, 1997 and 1996
(UNAUDITED)
<TABLE>
<S> <C> <C>
1997
1996
Interest & Dividend Income
Interest & fees on loans $1,325,252
$1,245,558
Interest on investment securities:
U.S. Treasury Securities 7,938
11,084
Obligations of other U.S.
Government Agencies 359,652
352,242
Obligations of State & Political
Subdivisions 104,737
116,919
Interest on deposits with banks 7,113
4,181
Dividends on Equity Securities 6,570
6,350
Interest on federal funds sold 45,314
42,187
Total Interest & Dividend Income 1,856,576
1,778,521
Interest Expense
Interest on other borrowed funds 2,419
0
Interest on deposits 965,611
926,206
Total interest expense 968,030
926,206
Net interest income 888,546
852,315
Provision for loan losses 50,000
17,500
Net interest income after
Provision for loan losses 838,546
834,815
Other income
Service charges on deposit accounts 19,726
15,367
Other service charges, collection &
exchange charges, commissions
and fees 55,431
42,677
Other income 9,427
6,821
Net Securities gains/(losses) 1,806
0
Total other income 86,390
64,865
Other expenses 634,295
570,409
Income before income taxes 290,641
329,271
Applicable income taxes 61,931
67,120
Net income $228,710
$262,151
=======
=======
Earnings per share of Common Stock:
Net income per share $0.57
$0.66
Cash dividend declared per share $0.19
$0.18
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, 1997 and 1996
(UNAUDITED)
<TABLE>
<S> <C> <C>
1997
1996
Interest & Dividend Income
Interest & fees on loans $3,914,682
$3,598,185
Interest on investment securities:
U.S. Treasury Securities 30,068
39,980
Obligations of other U.S.
Government Agencies 1,088,071
1,005,598
Obligations of State & Political
Subdivisions 317,313
354,105
Interest on deposits with banks 15,930
24,620
Dividends on Equity Securities 20,457
18,890
Interest on federal funds sold 107,549
117,373
Total Interest & Dividend Income 5,494,070
5,158,751
Interest Expense
Interest on Other Borrowed Funds 2,978
0
Interest on deposits 2,843,912
2,783,052
Total interest expense 2,846,890
2,783,052
Net interest income 2,647,180
2,375,699
Provision for loan losses 102,500
62,500
Net interest income after
Provision for loan losses 2,544,680
2,313,199
Other income
Service charges on deposit accounts 52,722
46,750
Other service charges, collection &
exchange charges, commissions
and fees 153,489
126,791
Other income 60,106
26,643
Net Securities gains/(losses) 1,901
(3,843)
Total other income 268,218
196,341
Other expenses 1,940,083
1,630,275
Income before income taxes 872,815
879,265
Applicable income taxes 179,749
175,825
Net income $693,066
$703,440
=======
=======
Earnings per share of Common Stock:
Net income per share $1.73
$1.76
Cash dividend declared per share $0.54
$0.52
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, 1997 and 1996
<TABLE>
<S> <C> <C>
(UNAUDITED)
1997 1996
Cash flows from operating activities:
Net income $ 693,066 $ 703,440
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation & amortization 178,967 147,125
Provision for loan losses 102,500 62,500
Net (gain)/loss on sales of
investments (1,901)
3,843
(Increase) decrease in accrued
interest receivable (29,095)
(50,417)
Increase (decrease) in accrued
interest payable and
other liabilities 158,577
(23,000)
Other (net) 63,137
(319,981)
Net cash provided (used)by operating
activities 1,165,251 523,510
Cash flows from investing activities:
Net (increase) decrease in interest-
bearing deposits with banks (170,054)
194,535
Purchases of Held-to-maturity securities (151,662)
(100,000)
Purchases of Available-for-sale
securities (4,247,391)
(7,198,170)
Proceeds from sales of Available-for-
sale securities 709,352 0
Proceeds from maturities of Held-to-
maturity securities 1,164,229 466,596
Proceeds from maturities of Available-
for-sale securities 5,532,786 5,264,825
Purchases of marketable equity securities (5,880) 0
Net (increase) decrease in loans (2,018,640)
(1,056,459)
Proceeds from sale of Other real
estate owned 10,075 39,000
Purchases of bank premises &
equipment (net) (361,686)
(977,442)
Proceeds from sale of equipment 0 0
Purchase of other bank stock (5,900)
(13,700)
Net cash provided (used) by investing
activities 456,229
(3,380,815)
Cash flows from financing activities:
Net increase (decrease) in deposits 923,356
6,370,001
Net increase (decrease) in other borrowed
funds 174,296 0
Cash dividends paid (240,000)
(228,000)
Net cash provided (used) by financing
activities 857,652 6,142,001
Net increase (decrease) in cash & cash
equivalents 2,479,132
3,284,696
Cash & cash equivalents, beginning balance 3,712,315 3,110,762
Cash & cash equivalents, ending balance $6,191,447 $6,395,458
========= =========
Supplemental disclosure of cash flows information
Cash paid during the year for:
Interest $2,784,186 $2,634,234
Income taxes 104,565 275,088
Supplemental schedule of noncash investing &
financing activities
Unrealized loss on Available-for-sale
securities 187,602 (277,997)
Deferred income tax on unrealized loss on
available-for-sale securities (63,788) 94,519
Accrued dividends payable 76,000 72,000
Other real estate acquired in
settlement of loans 201,311 75,027
Loan advanced for sale of other real
estate owned 93,600 50,000
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
FNB FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The financial information presented at and for the nine
months ended September 30, 1997 and September 30, 1996 is
unaudited. Information presented at December 31, 1996, 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, 1997, through
September 30, 1997, is summarized in Table #1 on page 12. 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 13.
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>
1997 1996
Allowance for loan losses beginning of the year $405,612
$405,000
Loans charged-off during the year:
Real estate mortgages 22,820
51,090
Installment loans 43,307
24,135
Commercial & all other 65,995
4,530
Total charge-offs 132,122
79,755
Recoveries of loans previously charged-off:
Real estate mortgages 507
0
Installment loans 6,535
9,636
Commercial & all other 805
830
Total recoveries 7,847
10,466
Net loans charged-off (recovered) 124,275
69,289
Provision for loan losses charged to operations 102,500
62,500
Allowance for loan losses, September 30 $383,837
$398,211
======== ========
</TABLE>
The following table shows the principal balance of nonaccrual loans
as of September 30, 1997:
<TABLE>
<S> <C>
Nonaccrual loans $ 457,920.02
==========
Interest income that would have been
accrued at original contract rates $ 33,503.14
Amount recognized as interest income 16,043.71
Foregone revenue $ 17,459.43
=========
</TABLE>
NOTE 7 - COMMITMENTS
Fort Loudon Office Renovation/Expansion
As of September 30, 1997, the Board of Directors has committed
to an expansion project for the Fort Loudon Branch Office.
This project was approved by the Board on August 28, 1996.
This renovation/expansion will increase the size of the
office, improve customer access and add a one lane drive-up
facility. Management estimates total expenditures related to
this project including additional equipment purchases will be
approximately $200,000. Renovation, design, and construction
costs of $173,709 were incurred as of September 30, 1997.
These expenditures are included in the September 30, 1997
financial statements under the balance sheet caption "Bank
building, equipment, furniture and fixtures, net."
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, 1997 THROUGH SEPTEMBER 30, 1997
<TABLE>
<S> <C> <C> <C>
HELD TO AVAILABLE TOTAL
MATURITY FOR SALE INVESTMENT
PORTFOLIO PORTFOLIO PORTFOLIO
BEGINNING BALANCE 1/1/97 $4,559,739 $28,737,883 $33,297,622
PURCHASES 151,662 4,247,391 4,399,053
PROCEEDS FROM SALES 0 709,352 709,352
NET GAINS (1) 0 (1,901) (1,901)
MATURITIES/CALLS PAYDOWNS/
PREMIUM AMORTIZATION/DISCOUNT
ACCRETION 1,164,229 5,533,786 6,698,015
ENDING BALANCE 9/30/96 $3,547,172 $26,744,037 $30,291,209
========= ========== ==========
</TABLE>
NOTE (1): THE NET SECURITY GAINS ARE THE RESULT OF DISCOUNT
REMAINING ON AFS SECURITIES WHICH HAD BEEN CALLED.
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, 1997
<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
498,622 499,970 1,348 0
U.S. GOVERNMENT TREASURIES 0 0 0 0
0 0 0 0
U.S. GOVERNMENT AGENCIES 0 0 0 0
8,946,545 8,994,631 48,086 0
U.S. GOVERNMENT AGENCIES 0 0 0 0
6,089,777 6,058,297 0 (31,480)
SBA GUARANTEED LOAN POOL
CERTIFICATES 826,258 829,516 3,258 0
2,747,024 2,795,962 48,938 0
SBA GUARANTEED LOAN POOL
CERTIFICATES 725,468 721,332 0 (4,136)
121,864 121,045 0 (819)
MORTGAGE-BACKED SECURITIES 0 0 0 0
957,395 978,859 21,464 0
MORTGAGE-BACKED SECURITIES 0 0 0 0
145,626 145,339 0 (287)
SECURITIES ISSUED BY STATES
& POLITICAL SUBDIVISIONS IN
THE U.S. 1,920,074 1,933,156 13,082 0
5,068,294 5,144,436 76,142 0
SECURITIES ISSUED BY STATES
& POLITICAL SUBDIVISIONS IN
THE U.S. 75,373 75,083 0 (290)
2,168,890 2,159,475 0 (9,415)
MARKETABLE EQUITY SECURITIES 0 0 0 0
90,400 124,020 33,620 0
FEDERAL RESERVE BANK STOCK,
ATLANTIC CENTRAL BANKERS BANK
STOCK AND FEDERAL HOME LOAN
BANK STOCK 0 0 0 0
389,600 389,600 0 0
GRAND TOTALS 3,547,172 3,559,086 16,340 (4,426)
27,224,037 27,411,634 229,598 (42,001)
========= ========= ====== ======
========== ========== ======= =======
</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 1997 was $693,066 compared
to $703,440 for the same period in 1996. This represents a
decrease of $10,374 or 1.47%. Net income on an adjusted per share
basis for the first nine months of 1997 was $1.73 per share, a
decrease of $0.03 from the $1.76 per share for the nine months
ended September 30, 1996.
Total interest and dividend income for the first nine months of
1997 was $5,494,070 compared to $5,158,751 for the nine months
ended September 30, 1996, representing an increase of $335,319.
This increase is a result of both an increase in the balance of
loans in the loan portfolio and higher yields on investments in the
Bank's security portfolio. Since December 31, 1996, net loans have
increased $1,808,429 or 3.21%. This increase combined with a
slight decrease in the yield on the loan portfolio from 9.36% for
the first nine months of 1996 to 9.18% for the first nine months of
1997 resulted in an increase to loan interest income in the amount
of $316,497. The book value of investment debt securities has
decreased $3,007,413 or 9.03% since December 30, 1996; however,
interest income on these securities increased $35,769 as a result
of an increase in the yield on these securities from 6.52% for the
first nine months of 1997 to 6.77% for the first nine months of
1997.
During the first quarter of 1997, short-term interest rates were
increased 0.25% by the Federal Reserve Board. Since that increase,
interest rates have remained relatively stable. As a result of
this interest rate environment in which interest rates are not
anticipated to increase in the short term, several investment
securities with call features were called by the issuer, resulting
in the loss of higher interest earning assets. The result,
combined with the aforementioned increase in loans and increase in
investment yield, has been an increase in the bank's net interest
margin and interest spread during the first three quarters of
1997.
Management anticipates the net interest margin and interest spread
decrease slightly due to calls of higher yielding securities and
movement of lower yielding savings account investments to higher
yielding time certificates of deposit. To lessen the impact of
these two items, management intends to retain deposit rates at
relatively the same levels.
Interest expense for the nine months ended September 30, 1997, was
$2,846,890, an increase of $63,838 from the $2,783,052 incurred for
the same period in 1996. This very small increase is due to the
retention of deposit rates at lower levels during the first nine
months of 1997. Total deposit volume increased $923,356 or 1.06%
since December 31, 1996. This increase is the result of a
$1,994,953 or 3.91% increase in time certificates of deposit due to
movement of funds from lower yielding savings accounts and from
other financial institutions. Savings accounts decreased
$1,441,951 or 5.41% due to movement of funds to time certificates.
Non-interest bearing demand deposit accounts remained relatively
the same at $9,198,344, only a slight decrease of $51,356 from
December 31, 1996. The increase in the balances of the higher cost
time deposits while the lower cost savings accounts decreased,
contributed to the increase in interest cost when compared to 1996.
The tax-adjusted net interest margin has increased 15 basis points
to 4.11% for the first nine months of 1997 from that of the first
nine months of 1996 which was 3.96%. This increase occurred due to
an increase in the yield on earning assets while the cost of
interest bearing liabilities has decreased. The tax-equivalent
yield on earning assets for the first nine months of 1997 increased
0.08% to 8.22% from 8.14% for the first nine months of 1996 while
the cost of interest-bearing liabilities decreased 0.08% to 4.82%
from 4.90% for the same period in 1996. This decrease in cost of
interest-bearing liabilities and increase in yield on earning
assets has resulted in an increase in the net interest margin.
Management anticipates to continue to concentrate on the retention
and improvement of the net interest margin; however, recent calls
of higher yielding securities threatens to decrease the yield on
the investment portfolio as reinvestment yields on securities of
similar term and maturity are at a lower rate of interest and
movement of lower yielding savings account investments to higher
yielding time certificates of deposit increase the cost of
interest-bearing liabilities. To offset this decrease in yield and
lessen the impact of the savings to time deposit movement, deposit
rates have been held consistent and in some cases have been
decreased.
Total noninterest income increased $71,877 due primarily to a
$31,211 gain on the sale of the Bank's portfolio of student loans
on June 19; a $16,180 increase in the commission received on
disability and life insurance written on consumer installment and
mortgage loans over the same period in 1996; an $11,800 increase in
other service charges, collection and late fees; and a $5,971
increase in service charges on deposit accounts. Operating
expenses for the period ended September 30, 1997, were $1,940,083
a $309,808 increase from the operating expenses incurred for the
same period in 1996 of $1,630,275. This increase is due to 1)
increases in employee wages and benefits of $146,239 as a result of
an increase in wage rates, an increase in the number of employees
due to the opening of Hancock Community Bank in November 1996 which
increased personnel by six employees and an increase in employee
participation in the Company's retirement plan and health insurance
plans; 2) an increase in the cost of fixed assets in the amount of
$71,980 due to increased utility/communication billings,
depreciation, insurance and taxes as a result of the purchase of
the completed renovation/expansion of the main office facility in
September 1996 and the opening of Hancock Community Bank in
November 1996; 3) an increase in the Promotion/Advertising expenses
of the Bank in the amount of $25,551 over 1996 due to increased
promotional/advertising campaigns; 4) a new expense in 1997 for the
lease of the office housing Hancock Community Bank in the amount of
$16,200; 5) an $11,149 increase in collection and repossession
costs due to increased collection efforts in 1997; 6) a $11,934
increase in professional fees due to appraisal fees for the all
Bank properties of over $6,000; and 7) a $9,033 increase in
regulatory assessments due to FDIC charges for FICO Bond interest.
Management anticipates the cost of fixed assets to increase
slightly during the fourth quarters of 1997 and in 1998 as the Fort
Loudon branch office renovation comes to a close. Increased costs
associated with this construction will include additional
depreciation, utility billings, real estate insurance, real estate
taxes and equipment and maintenance costs. These increased costs
may result in a decrease to net income during the next few
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 and particularly the Franklin
County market by expanding the size of the Fort Loudon facilities.
The company's income tax provision for the first nine months of
1997 was $179,749 as compared to $175,825 for the first nine months
of 1996. This increase in the tax provision in the amount of
$3,924 is due to a 1996 tax accounting change which resulted in a
payment for additional 1996 income taxes of $13,551. Without this
1996 tax accounting adjustment, the actual 1997 tax provision is
$166,198. This decrease in actual 1997 income taxes from 1996 is
a result of an increase in the tax deduction for loan losses in
1997 when compared to 1996 due to the increase net charge-offs in
1997 over 1996 as noted in Footnote 6.
Although the Company continues to operate with a marginal tax rate
of 34%, the effective income tax rate for the first nine months of
1997 (not considering the $13,551 payment in 1997 for 1996
additional income taxes) was 19.04%, a decrease of 1.96% from the
effective tax rate for the first nine months of 1996 of 20.00%.
This decrease in the effective tax rate is primarily due to the
increase in the tax deduction for loan losses in 1997 when compared
to 1996.
Total assets as of September 30, 1996, were $100,485,909 an
increase of $1,841,837 over the period ending December 31, 1996,
representing an increase of 1.87%. Funding this increase in total
assets was an increase in total deposits of $923,356 or 1.06% and
an increase in stockholders' equity of $568,866. The increase in
deposits was the result of increased balances in time deposits of
$1,994,953, while savings account balances decreased $1,441,951
since December 31, 1996. Net loans as of September 30, 1997, were
$58,068,358 compared to $56,259,929 as of December 31, 1996. The
allowance for loan losses at the end of the nine months was
$383,837 compared to $405,612 at year end 1996. Management
anticipates the need to increase the reserve by at least $30,000 to
year-end 1997 in order to increase the allowance to a level
sufficient to absorb possible losses on existing loans. If
additions to the allowance above the $30,000 are necessary, net
income will be reduced in order to fund these additional
provisions. The provision for loan losses for the first nine
months of 1997 was $102,500 compared to $62,500 for the same period
in 1996.
Total deposits were $88,057,324 as of September 30, 1997, compared
to $87,133,968 on December 31, 1996. This represents an increase
of $923,356 or 1.06% which reflects the activity as discussed
previously.
Total equity as of September 30, 1997, was $11,270,898, 11.22% of
total assets as compared to $10,702,032, 10.85% of total assets as
of December 31, 1996. This increase in equity reflects earnings
for the first nine months of 1997 and an increase in market value
of marketable securities which has resulted in a net unrealized
gain on available for sale securities, net of tax effects of
$123,814, a $91,798 increase from the December 31, 1996 net
unrealized gain on available for sale securities, net of tax
effects of $32,016.
The Corporation has risk-based capital ratios exceeding regulatory
requirements. Risk-based capital guidelines require a minimum
ratio of 8.0%. At September 30, 1997, the risk-based capital ratio
of the Corporation was 19.55% while at December 31, 1996, the
risk-based capital ratio was 20.05%. The following table presents
the
risk-based capital ratios for the Corporation:
<TABLE>
<S> <C> <C>
September 30, Regulatory
1997 Minimum
Leverage Ratio 10.91% 3.00%
Risk-based capital ratios:
Tier I (core capital) 18.88% 4.00%
Total Capital
(Tier I and Tier II Capital) 19.55% 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
(John C. Duffey, President
and Director of the Company and
President/CEO of the Bank)
(Duly Authorized Officer)
Date October 27, 1997 /s/Daniel E. Waltz
(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-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,481
<INT-BEARING-DEPOSITS> 497
<FED-FUNDS-SOLD> 3,710
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 26,898
<INVESTMENTS-CARRYING> 3,547
<INVESTMENTS-MARKET> 3,559
<LOANS> 58,068
<ALLOWANCE> 384
<TOTAL-ASSETS> 100,486
<DEPOSITS> 88,057
<SHORT-TERM> 0
<LIABILITIES-OTHER> 984
<LONG-TERM> 174
<COMMON> 252
0
0
<OTHER-SE> 11,019
<TOTAL-LIABILITIES-AND-EQUITY> 100,486
<INTEREST-LOAN> 3,915
<INTEREST-INVEST> 1,456
<INTEREST-OTHER> 123
<INTEREST-TOTAL> 5,494
<INTEREST-DEPOSIT> 2,844
<INTEREST-EXPENSE> 2,847
<INTEREST-INCOME-NET> 2,647
<LOAN-LOSSES> 103
<SECURITIES-GAINS> 2
<EXPENSE-OTHER> 1,940
<INCOME-PRETAX> 873
<INCOME-PRE-EXTRAORDINARY> 873
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 693
<EPS-PRIMARY> 1.73
<EPS-DILUTED> 1.73
<YIELD-ACTUAL> 4.20
<LOANS-NON> 458
<LOANS-PAST> 50
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 405
<CHARGE-OFFS> 132
<RECOVERIES> 8
<ALLOWANCE-CLOSE> 384
<ALLOWANCE-DOMESTIC> 384
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
