SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required]
For the fiscal year ended December 31, 1996.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act
of 1934 [No Fee required]
For the transition period from _______ to _______.
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 incorporation (I.R.S. Employer
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
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.
Class Outstanding as of March 15, 1997
Common Stock, $0.63 Par Value 400,000
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 such 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ( 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K [ ].
The aggregate market value of the voting stock held by non-affiliates of the
registrants as of March 15, 1997:
Common Stock, $0.63 Par Value - $18,000,000.00
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders report for the year ended December 31,
1996 are incorporated by reference into Parts I, II and IV.
Portions of the proxy statement for the annual shareholders meeting to be
held April 29, 1997 are incorporated by reference into Part III.
Portions of Form SB-2 Registration Statement No. 33-66014 as filed with the
Securities and Exchange Commission on September 8, 1993 are incorporated by
reference into Part IV.
A copy of a Common Stock Certificate of FNB Financial Corporation as
filed with the Securities and Exchange Commission with Form 10-K for
the fiscal year ended December
31, 1995 is incorporated by reference into Part IV.
PART I
Item 1. Business
Description of Business
FNB Financial Corporation (the Company), a Pennsylvania
business corporation, is a bank holding company registered
with and supervised by the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board"). The Company
was
incorporated on June 22, 1987 under the business corporation
law of the Commonwealth of Pennsylvania for the purpose of
becoming a bank holding company. Since commencing
operations,
the Company's business has consisted primarily of managing
and
supervising The First National Bank of McConnellsburg (the
Bank) and its principal source of income has been dividends
paid by the Bank. The Company has one wholly-owned
subsidiary, the Bank.
The Bank was established in 1906 as a national banking
association under the supervision of the Comptroller of the
Currency, the Comptroller. The Bank is a member of the
Federal Reserve System and customers' deposits held by the
Bank are insured by the Federal Deposit Insurance Corporation
to the maximum extent permitted by law. The Bank is engaged
in a full service commercial and consumer banking business
including the acceptance of time and demand deposits and the
making of secured and unsecured loans. The Bank provides its
services to individuals, corporations, partnerships,
associations, municipalities and other governmental bodies.
As of January 1, 1997, the Bank had three (3) offices and (1)
drive-up ATM located in Fulton County and one branch
office facility located in Fort Loudon, Franklin County
Pennsylvania. During 1995 the Bank received regulatory
approval from The Comptroller to purchase and assume the
deposits, real estate and building of the Fort Loudon Branch
Office of Dauphin Deposit Bank located in Franklin County,
Pennsylvania. Due to the location of this office, management
and the Board felt the acquisition of this office was
strategically important in order to officially expand the
Bank's market area into the Franklin County, PA area and
diversity its current primary market of Fulton County, PA.
It
is anticipated this office will generate new loan and deposit
demand for the Bank in the coming years. During 1996 the
Bank
received regulatory approval from The Comptroller to open its
first interstate Branch office in Hancock, Maryland after
management became aware of the closing of a branch office of
First Federal Savings Bank of Western Maryland. This office
is
known as "Hancock Community Bank, A Division of The First
National Bank of McConnellsburg". The location of this
office
is felt to be strategically important in order to expand the
Bank's operations into Washington County, Maryland and
northern
Morgan County, West Virginia. This office will also be the
Bank's first supermarket branch office. As soon as the owner
of
the adjacent supermarket completes extensive renovations, the
wall between the branch office and the supermarket will be
removed, allowing customers to enter the branch directly from
the supermarket. This office is expected to enhance demand
for
the Bank's loan and deposit products as well as retain
deposits
of customers in southern Fulton County, Pennsylvania.
The Bank received permission from the Comptroller to
expand its main office facilities in downtown McConnellsburg
to allow for larger customer service, loan department and
data
processing areas. This expansion was completed on September
1,
1996 at a cost of approximately $1,700,000. The Bank
has one wholly-owned subsidiary, First Fulton County
Community
Development Corporation, which is a Community Development
Corporation formed under 12USC24/2CFR24 whose primary
regulator is the Office of the Comptroller of the Currency,
The Comptroller. The First Fulton County Community
Development
Corporation was incorporated with the Commonwealth of
Pennsylvania on May 30, 1995. The primary business of this
community development corporation is to provide and promote
community welfare through the establishment and offering of
low interest rate loan programs to stimulate economic
rehabilitation and development for the Borough of
McConnellsburg and the entire community of Fulton County, PA.
Competition
The Bank's primary market area includes all of Fulton County
and portions of Huntingdon, Bedford and Franklin Counties,
portions of Washington County, Maryland and portions of
Morgan
County, West Virginia. The Bank's major competitor is a one
bank holding company headquartered in McConnellsburg,
Pennsylvania which has 4 branches located throughout Fulton
and
Huntingdon Counties. As of December 31, 1996, the Bank was
ranked second in total deposits when compared to its major
competitor. Also, in this market area the Bank competes with
regionally-based commercial banks (all of which have greater
assets, capital and lending limits), savings banks, savings
and
loan associations, money market funds, insurance companies,
stock brokerage firms, regulated small loan companies, credit
unions and with issuers of commercial paper and other
securities.
Although deregulation has allowed the Bank to become more
competitive in the market place in regard to pricing of loan
and deposit rates, there are disparities in taxing law which
give some of its nonbank competitors advantages which
commercial banks do not enjoy and many burdensome and costly
regulations with which it must comply. These challenges are
met by the bank developing and promoting its locally-owned
community bank image; by offering friendly and professional
customer service; and by striving to maintain competitive
interest rates for both loans and deposits.
Regulation and Supervision
The operations of the Company are subject to the provisions
of
the Bank Holding Company Act of 1956, as amended (the "Bank
Holding Company Act"), and to supervision by the Federal
Reserve Board. The Bank Holding Company Act requires the
Company to secure the prior approval of the Federal Reserve
Board before it owns or controls, directly or indirectly,
more
than five percent (5%) of the voting shares of substantially
all of the assets of an institution, including another bank.
The Bank Holding Company Act prohibits acquisition by the
Company of more than five percent (5%) of the voting shares
of, or interest in, all or substantially all of the assets of
any bank located outside of Pennsylvania unless such
acquisition is specifically authorized by the laws of the
state in which such bank is located.
The operations of the Bank are subject to federal and state
statutes applicable to banks chartered under the banking laws
of the United States, to members of the Federal Reserve
System
and to banks whose deposits are insured by the FDIC. The
operations of the Bank are also subject to regulations of the
Comptroller, the Federal Reserve Board and the FDIC. The
primary supervisory authority of the Bank is the Comptroller,
which regulates and examines the Bank. The Comptroller has
authority to prevent national banks from engaging in unsafe
or
unsound practices in conducting their businesses.
Legislation and Regulatory Changes
From time to time, legislation is enacted which has the
effect
of increasing the cost of doing business, limiting or
expanding permissible activities or affecting the competitive
balance between banks and other financial institutions.
Proposals to change the laws and regulations governing the
operations and taxation of banks, bank holding companies and
other financial institutions are frequently made in Congress,
and before various bank regulatory agencies. No prediction
can be made as to the likelihood of any major changes or the
impact such changes might have on the Company and its
subsidiary, the Bank. Certain changes of potential
significance to the Company which have been enacted recently
are discussed below.
The Federal Reserve Board, the FDIC and the Comptroller have
issued risk-based capital guidelines, which supplement
existing capital requirements. The guidelines require all
United States banks and bank holding companies to maintain a
minimum risk-based capital ratio of 8.0% (of which at least
3.0% must be in the form of common stockholders' equity).
Assets are assigned to five risk categories, with higher
levels of capital being required for the categories perceived
as representing greater risk. The required capital will
represent equity and (to the extent permitted) nonequity
capital as a percentage of total risk-weighted assets. On
the
basis of an analysis of the rules and the projected
composition of the Company's consolidated assets, it is not
expected these rules will have a material effect on the
Company's business and capital plans. The company presently
has capital ratios exceeding all regulatory requirements.
The Financial Institution Reform, Recovery and Enforcement
Act
of 1989 ("FIRREA") was enacted in August 1989. This law was
enacted primarily to improve the supervision of savings
associations by strengthening capital, accounting and other
supervisory standards. In addition, FIRREA reorganized the
FDIC by creating two deposit insurance funds to be
administered by the FDIC: the Savings Association Insurance
Fund and the Bank Insurance Fund. Customers' deposits held
by
the Bank are insured under the Bank Insurance Fund. FIRREA
also regulated real estate appraisal standards and the
supervisory/enforcement powers and penalty provisions in
connection with the regulation of the Bank.
In December 1991 the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") became law. Under FDICIA,
institutions must be classified, based on their risk-based
capital ratios into one of five defined categories (well
capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically
undercapitalized) as outlined below:
<TABLE>
<S> <C>
Total Tier 1
Under a
Risk- Risk- Tier 1
Capital
Based Based Leverage
Order or
Ratio Ratio Ratio
Directive
<S>
CAPITAL CATEGORY
<S> <C> <S><C> <S><C>
Well capitalized >10.0% >6.0% >5.0%
No
Adequately capitalized > 8.0% >4.0% >4.0%*
Undercapitalized < 8.0% <4.0% <4.0%*
Significantly
Undercapitalized < 6.0% <3.0% <3.0%
Critically undercapitalized <2.0%
</TABLE>
*3.0% for those banks having the highest available regulatory
rating.
Under FDICIA financial institutions are subject to increased
regulatory scrutiny and must comply with certain operational,
managerial and compensation standards to be developed by
Federal Reserve Board Regulations. FDICIA also required the
regulators to issue new rules establishing certain minimum
standards to which an institution must adhere including
standards requiring a minimum ratio of classified assets to
capital, minimum earnings necessary to absorb losses and
minimum ratio of market value to book value for publicly held
institutions. Additional regulations are required to be
developed relating to internal controls, loan documentation,
credit underwriting, interest rate exposure, asset growth and
excessive compensation, fees and benefits.
Annual full-scope, on-site examinations are required for all
FDIC-insured institutions except institutions with assets
under $100 million which are well capitalized, well managed
and not subject to a recent change in control, in which case,
the examination period is every eighteen (18) months. FDICIA
also required banking agencies to reintroduce loan-to-value
("LTV") ratio regulations which were previously repealed by
the 1982 Act. LTV's will limit the amount of money a
financial institution may lend to a borrower, when the loan
is
secured by real estate, to no more than a percentage to be
set
by regulation of the value of the real estate.
A separate subtitle within FDICIA, called the "Bank
Enterprise
Act of 1991", requires "truth-in-savings" on consumer deposit
accounts so that consumers can make meaningful comparisons
between the competing claims of banks with regard to deposit
accounts and products. Under this provision which became
effective on June 21, 1993, the Bank is required to provide
information to depositors concerning the terms and fees of
their deposit accounts and to disclose the annual percentage
yield on interest-bearing deposit accounts.
Neither the Company nor the Bank anticipate compliance with
environmental laws and regulations will have any material
effect on their respective capital, expenditures, earnings,
or
competitive position.
Employees
As of December 31, 1996, the Company and the Bank employed 52
persons on a full-time equivalent basis.
Statistical Data
Computation of the Company's regulatory capital requirements
for the periods December 31, 1996 and December 31, 1995 on
page 28 of the annual shareholders report for the year ended
December 31, 1996, is incorporated herein by reference.
Loan Portfolio
The Bank makes loans to both individual consumers and
commercial entities. The types offered include auto,
personal, mortgage, home equity, school, home repair, small
business, commercial, and home construction loans. Within
these loans types, the Bank makes installment loans, which
have set payments allowing the loan to be amortized over a
fixed number of payments, demand loans, which have no fixed
payment and which are payable in full on demand and are
normally issued for a term of less than one year, and
mortgage
loans, which are secured with marketable real estate and have
fixed payment amounts for a pre-established payment period.
The Bank does not assume undue risk on any loan within the
loan portfolio, and takes appropriate steps to secure all
loans as necessary.
The Bank has adopted the following loan-to-value ratios, in
accordance with standards adopted by its bank supervisory
agencies:
<TABLE>
<S>
Loan Category Loan-to-Value Limit
<S> <C>
Raw Land 65%
Land Development 75%
Construction:
Commercial, Multifamily, and other
Nonresidential 1 to 4 Family Residential 80%
Improved Property 85%
Owner-occupied 1 to 4 Family and Home Equity 90%
</TABLE>
The Bank is neither dependent upon nor exposed to loan
concentrations to a single customer or to a single industry,
the loss of any one or more of which would have a material
adverse effect on the financial condition of the Bank;
however, a portion of the Bank's customers' ability to honor
their contracts is dependent upon the construction and land
development and agribusiness economic sector. As a majority
of the Bank's loan portfolio is comprised of loans to
individuals and businesses in Fulton County, PA, a
significant
portion of the Bank's customers' abilities to honor their
contracts is dependent upon the general economic conditions
in
South Central Pennsylvania.
Loan Portfolio composition as of December 31, 1996, and
December 31, 1995, on page 12 of the annual shareholders
report for the year ended December 31, 1996, is incorporated
herein by reference.
Maturities of loans as of December 31, 1996, on page 12 of
the
annual shareholders report for the year ended December 31,
1996, is incorporated herein by reference.
Nonperforming loans consist of nonaccruing loans and loans 90
days or more past due. Nonaccruing loans are comprised of
loans that are no longer accruing interest income because of
apparent financial difficulties of the borrower. Interest on
nonaccruing loans is recorded when received only after past
due principal and interest are brought current. The general
policy of the Bank is to classify loans as nonaccrual when
they become past due in principal and interest for over 90
days and collateral is insufficient to allow continuation of
interest accrual. At that time, the accrued interest on the
nonaccrual loan is reversed from the current year earnings
and
interest is not accrued until the loan has been brought
current in accordance with contractual terms. Nonaccrual
loan
volume in 1996 more than doubled than that of 1995 and 1994.
This increase in volume is attributable to two entities, a
farming operation in Franklin County, Pennsylvania, the
amount
of which is approximately $400,000, and a personal residence
in Fulton County, Pennsylvania the amount of which is
approximately $187,000. The farm loan is collateralized by a
first mortgage position on the farm property, a 90% Farm
Service Agency (an agency of the U. S. Government) guarantee,
as
well as, all machinery, equipment and livestock, of which the
value of all collateral exceeds the outstanding balance.
The personal loan is collateralized by a residential
property and 145 acres in Fulton County, Pennsylvania for
which
the value of the property exceeds the outstanding balance of
the
loan. Management is working with both of these customers,
but
anticipates the farm loan to remain delinquent for the
foreseeable future. Management does anticipate the personal
residence loan to be brought current within the next six
months.
Nonaccrual volume for 1997 is expected to remain rather
constant
and anticipated charge-offs for 1996 is expected to be
approximately the same as in 1996 and in 1995, approximately
$85,000 to $108,000.
Nonaccrual, Past Due and Restructured Loans as of December
31,
1996, December 31, 1995 and December 31, 1994, on pages 12
and
13 of the annual shareholders report for the year ended
December
31, 1996, are incorporated herein by reference.
Allowance for Loan Loss Analysis
The allowance for loan losses is maintained at a level to
absorb potential future loan losses contained in the loan
portfolio and is formally reviewed by Management on a
quarterly basis. The allowance is increased by provisions
charged to operating expense and reduced by net charge-offs.
Management's basis for the level of the allowance and the
annual provisions is its evaluation of the loan portfolio,
current and projected domestic economic conditions, the
historical loan loss experience, present and prospective
financial condition of the borrowers, the level of
nonperforming assets, best and worst case scenarios
of possible loan losses and other relevant factors. While
Management uses available information to make such
evaluations, future adjustments of the allowance may be
necessary if economic conditions differ substantially from
the
assumptions used in making the evaluation. Loans are charged
against the allowance for loan losses when Management
believes
that the collectability of the principal is unlikely.
Activity in the allowance for loan losses and a breakdown of
the allowance for loan losses as of December 31, 1996, and
December 31, 1995, on page 12 of the annual shareholders
report for the year ended December 31, 1996, are incorporated
herein by reference.
Although loans secured by 1-4 family residential mortgages
comprise approximately 53% for the entire loan portfolio,
these mortgages have historically resulted in little or no
loss. The allocation of the Allowance for Loan Losses for
these mortgages is based upon this historical fact.
Deposits
Time Certificates of Deposit of $100,000 and over as of
December 31, 1996, and December 31, 1995, totaled $8,581,000
and $9,530,000 respectively.
Maturities and rate sensitivity of total interest bearing
liabilities as of December 31, 1996, on page 28 of the annual
shareholders report for the year ended December 31, 1996, is
incorporated herein by reference.
Returns on Equity and Assets
Returns on equity and assets and other statistical data for
1996, 1995 and 1994 on page 17 of the annual shareholders
report for the year ended December 31, 1996, is incorporated
herein by reference.
Item 2. Properties
The physical properties where the Bank conducts its business
in the Commonwealth of Pennsylvania are all owned by the
Bank while the property where the Bank conducts its business
in the State of Maryland is leased. The properties owned by
the
Bank are as follows: the main office located at 101 Lincoln
Way
West, McConnellsburg, Pennsylvania, has been attached by a
two
story brick and frame addition, to a building located at 111
South Second Street, McConnellsburg, Pennsylvania which
houses
the Bank's loan department on the first floor and future
expansion space on the second floor; a branch office located
on Route 522 South, Needmore, Pennsylvania; a property
located
at Routes 16 and 30 East, McConnellsburg, Pennsylvania which
contains a drive-up automatic teller machine and a five (5)
lane drive-up branch accessible from both Route 30 and Route
16; and a branch office located at 30 Mullen Street, Fort
Loudon, Pennsylvania, for which the Bank received regulatory
approval from the Office of the Comptroller of the Currency
to
purchase effective November 13, 1995. The branch office
leased
by the Bank in the state of Maryland is located in the
Hancock
Shopping Center at 343 North Pennsylvania Avenue in Hancock,
Maryland next to a supermarket.
The main office located in downtown McConnellsburg is housed
in a two story brick and frame building, consisting of
approximately 28,277 square feet. It has been attached (by a
two story brick and frame addition which houses the data
processing/operations center on the first floor and executive
offices and a meeting room on the second floor) to the
building located at 111 South Second Street, a brick and
frame
building situated on a one town lot which has been expanded
and renovated to house the loan department on the first floor
and future offices and rest rooms on the second floor. The
main office contains one (1) external time and temperature
sign, seven (7) internal teller stations, a customer service
office area, executive offices, one (1) drive-up teller
station,
an automatic teller machine, three (3) vaults (one containing
safe deposit boxes for customer use and one containing a fire
proof/data-secure vault in the operations center), a night
depository, a data processing center with a security
controlled
computer operations center, a loan department with a large
file
room, a kitchen and a 5,000 square foot basement storage
area.
The Needmore Branch Office, a brick and frame building
situated on approximately five (5) acres, consists of
approximately 3,000 square feet, of which 750 square feet is
rented as office space. The branch office houses three (3)
internal teller stations, one (1) drive-up teller station, a
customer service office area, one (1) vault which contains
safe deposit boxes for customer use, one (1) kitchen, and
storage areas.
The East End Express Banking Center, located on a property of
approximately 68,000 square feet at Routes 16 and 30, has
situated on it one (1) drive-up automatic teller machine and
one (1) night depository (both housed in a brick and frame
building of approximately 121 square feet), and a drive-up
branch office, a brick and frame building of approximately
576
square feet, which contains four (4) drive-up teller stations
with the potential for a total of five (5) drive-up teller
stations in the future.
The Fort Loudon Branch Office, a brick and frame building
situated on approximately .23 acres, consists of
approximately
620 square feet. The branch office houses three (3) internal
teller stations, one (1) vault which contains safe deposit
boxes for customer use, a manager's office and a basement for
storage which consists of approximately 620 square feet.
The leased office in Hancock, Maryland housing Hancock
Community
Bank is approximately 1,400 square feet and is leased from
the
owner of the shopping center next to a supermarket. It
contains
two (2) offices, one (1) automated teller machine, two (2)
drive-up teller lanes, a lobby, a safe deposit box vault for
customers and three (3) teller stations.
Item 3. Legal Proceedings
In the opinion of Management, there are no proceedings
pending
to which the Company or the Bank is a party or to which their
property is subject, which, if determined adversely to the
Company or the Bank, would be material in relation to the
Company's and the Bank's retained earnings or financial
condition. There are no proceedings pending other than
ordinary routine litigation incident to the business of the
Company and the Bank. In addition, no material proceedings
are known to be threatened or contemplated against the
Company or the Bank by government authorities.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters
The Company's common stock is not traded on a national
securities exchange but is traded inactively in the over-the-
counter market and is only occasionally and sporadically
traded through local and regional brokerage houses or through
the facilities of the Bank.
The Stock Market Analysis and Dividends for 1996 and 1995 on
page 28 of the annual shareholders report for the year ended
December 31, 1996, is incorporated herein by reference.
Item 6. Selected Financial Data
The Selected Five-Year Financial Data on page 17 of the
annual
shareholders report for the year ended December 31, 1996, is
incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Management's discussion and analysis of financial condition
and results of Operations on pages 22 through 28 of the
annual
shareholders report for the year ended December 31, 1996, is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data, some of
which
is required under Guide 3 (Statistical Disclosures by Bank
Holding Companies) are shown on pages 4 through 21 of the
annual shareholders report for the year ended December 31,
1996,
are incorporated herein by reference.
The Summary of Quarterly Financial Data on page 18 of the
annual shareholders report for the year ended December 31,
1996 is incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
PART III
Item 10. Directors and Officers of the Registrant
The information contained on pages 3 through 14 of FNB
Financial Corporation's Proxy Statement Dated March 21,
1997,
with respect to directors and executive officers of the
Company, is incorporated herein by reference in response to
this item.
Item 11. Executive Compensation
The information contained on pages 9 through 13 of FNB
Financial Corporation's Proxy Statement Dated March 21,
1997,
with respect to executive compensation, transactions and
contracts, is incorporated herein by reference in response
to
this item.
Item 12. Security Ownership of certain Beneficial Owners and
Management
The information contained on pages 3 through 5 of FNB
Financial Corporation's Proxy Statement Dated March 21, 1997
1996, with respect to security ownership of certain
beneficial owners and management, is incorporated herein by
reference in response to this item.
Item 13. Certain Relationships and Related Transactions
The information contained on pages 7 and 13 of FNB Financial
Corporation's Proxy Statement Dated March 21, 1997, with
respect to certain relationships and related transactions,
is
incorporated herein by reference in response to this item.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports of
Form
8-k.
(a) (1) - List of Financial Statements
The following consolidated financial statements of FNB
Financial Corporation and its subsidiary, included in the
annual report of the registrant to its shareholders for the
year ended December 31, 1996, are incorporated by reference
in Item 8:
Consolidated balance sheets - December 31, 1996 and 1995
Consolidated statements of income - Years ended December
31,
1996, 1995, and 1994
Consolidated statements of stockholders' equity - Years
ended December 31, 1996, 1995, and 1994
Consolidated statements of cash flows - Years ended
December
31, 1996, 1995, and 1994
Notes to consolidated financial statements - December 31,
1996
(2) - List of Financial Statement Schedules
Schedule I - Marketable Securities - Other Investments
Schedule III - Condensed Financial Information of
Registrant
Schedule VIII - Valuation and Qualifying Accounts
All other schedules for which provision is made in
the applicable accounting regulation of the
Securities and Exchange Commission are not required
under the related instructions or are inapplicable
and therefore have been omitted.
(3) Listing of Exhibits
Exhibit (3)(i) Articles of incorporation
Exhibit (3)(ii) Bylaws
Exhibit (4) Instruments defining the rights of
security holders including indentures
Exhibit (13) Annual report to security holders
Exhibit (22) Subsidiaries of the registrant
All other exhibits for which provision is made in
the applicable accounting regulation of the
Securities and Exchange Commission are not required
under the related instructions or are inapplicable
and therefore have been omitted.
(b) Reports on Form 8-K filed
None.
(c) Exhibits
Exhibit (3)(i) Articles of incorporation - Exhibit 3A
of Form SB-2 Registration Statement No. 33-66014 are
incorporated herein by reference.
Exhibit (3)(ii) Bylaws - Exhibit 3B of Form SB-2
Registration Statement No. 33-66014 are incorporated
herein by reference.
Exhibit (4) Instruments defining the rights of
security holders including debentures - Document #1 of
Form 10-K for FNB Financial Corporation for fiscal
year
ended December 31, 1995 is incorporated herein by
reference.
Exhibit (13) Annual report to security holders -
incorporated herein by reference.
Exhibit (22) Subsidiaries of the registrant - As of
this report, The First National Bank of
McConnellsburg is the only subsidiary of the
Registrant and is explained further within the
Business Section (Item 1) of this report.
The First National Bank of McConnellsburg has one
subsidiary as of the date of this report, First
Fulton County Community Development Corporation and
is explained further within the Business Section
(Item 1) of this report.
(d) Financial Statement Schedules
Schedule I - Marketable Securities - Other Investments
Schedules of Marketable Securities included on pages
10
and 11 of the annual report of the registrant to its
shareholders for the year ended December 31, 1996
are incorporated herein by reference.
Schedule III - Condensed Financial Information of
Registrant
Condensed Financial Information of the Registrant
included on page 14 and 15 of the annual report of the
registrant to its shareholders for the year ended
December 31, 1996, is incorporated herein by
reference.
Schedule VIII - Valuation and Qualifying Accounts
The schedule of the Allowance for Loan losses included
on page 12 of the annual report of the registrant to
its shareholders for the year ended December 31,
1996, is incorporated herein by reference.
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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.
FNB FINANCIAL CORPORATION
(Registrant)
John C. Duffey Date
Director and Vice President
of the Corporation
President & CEO of the Bank
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
H. Lyle Duffey Date Henry W. Daniels Date
Director, Chairman Director, Vice Chairman
John C. Duffey Date Harry D. Johnston, D. O. Date
Director, President Director, Vice President
George S. Grissinger Date Patricia A. Carbaugh Date
Director, Secretary Director
Harvey J. Culler Date Paul C. Mellott, Sr. Date
Director Director
Paul T. Ott Date D. A. Washabaugh, III Date
Director Director
Daniel E. Waltz Date
Director, Treasurer
(Principal Financial and
Accounting Officer)
EXHIBIT 13
C O N T E N T S
Page
INDEPENDENT AUDITOR'S REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS
Balance sheets 2
Statements of income 3
Statements of changes in stockholders' equity 4
Statements of cash flows 5 and 6
Notes to consolidated financial statements 7 - 22
ACCOMPANYING FINANCIAL INFORMATION
Selected five year financial data 23
Summary of quarterly financial data 24
Distribution of assets, liabilities and
stockholders' equity, interest
rates, and interest differential 25
Changes in net interest income 26
Maturities of debt securities 27
Management's discussion and analysis of consolidated
financial condition and results of operations 28 - 37
Stock market analysis and dividends 37
- -16-
INDEPENDENT AUDITOR'S REPORT
Board of Directors
FNB Financial Corporation
McConnellsburg, Pennsylvania
We have audited the accompanying consolidated
balance sheets of FNB Financial Corporation and its wholly-
owned subsidiary as of December 31, 1996 and 1995, and the
related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the three
years ended December 31, 1996. These consolidated financial
statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with
generally accepted auditing standards. Those standards
require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of FNB Financial
Corporation and its wholly-owned subsidiary as of
December 31, 1996 and 1995 and the results of their
operations and cash flows for each of the three years ended
December 31, 1996 in conformity with generally accepted
accounting principles.
Chambersburg, Pennsylvania
January 17, 1997
- -17-
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
ASSETS
<TABLE>
1996 1995
<S> <C> <C>
Cash and due from banks $ 2,473,315 $ 2,633,762
Interest-bearing deposits with banks 327,276 418,473
Marketable debt securities:
Available for sale 28,755,272 26,234,019
Held to maturity (fair value
$ 4,567,903 - 1996; $ 5,402,945 -
1995) 4,559,739 5,401,263
Marketable equity securities, available for sale 115,640 101,880
Federal Reserve, Atlantic Central Banker's
Bank and Federal Home Loan Bank stock 383,700 370,000
Federal funds sold 1,239,000 477,000
Loans, net of unearned discount and
allowance for loan losses 56,259,929 52,793,865
Bank building, equipment, furniture and
fixtures, net 3,107,960 2,086,560
Accrued interest and dividends receivable 675,180 647,921
Deferred income taxes 6,548 0
Other real estate owned 318,992 395,752
Other assets 421,521 360,647
Total assets $ 98,644,072 $ 91,921,142
LIABILITIES
Deposits:
Demand deposits $ 9,249,700 $ 7,778,115
Savings deposits 26,674,628 23,955,468
Time certificates 50,957,962 48,942,142
Other time deposits 251,678 240,562
Total deposits 87,133,968 80,916,287
Accrued dividends payable 100,000 92,000
Deferred income taxes 0 19,490
Accrued interest payable and other
liabilities 708,072 764,904
Total liabilities 87,942,040 81,792,681
STOCKHOLDERS' EQUITY
Capital stock, common, par value $ .63;
6,000,000 shares authorized; 400,000
shares issued and outstanding 252,000 252,000
Additional paid-in capital 1,789,833 1,789,833
Retained earnings 8,628,183 7,978,998
Unrealized holding gains, net of applicable
deferred income taxes of $ 16,493 -
1996; $ 55,446 - 1995 32,016 107,630
Total stockholders' equity 10,702,032 10,128,461
Total liabilities and
stockholders' equity $ 98,644,072 $ 91,921,142
</TABLE>
The Notes to Consolidated Financial Statements are an integral part
of these statements.
- -18-
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
1996 1995 1994
Interest and Dividend Income
<S> <C> <C> <C>
Interest and fees on loans $ 4,849,673 $ 4,631,807 $ 4,007,850
Interest on investment securities:
U. S. Treasury securities 51,045 55,422 80,210
Obligations of other U. S.
Government agencies 1,389,073 960,267 917,226
Obligations of States and
political subdivisions 464,979 417,352 335,051
Interest on deposits with banks 28,721 38,859 63,038
Dividends on equity securities 25,829 25,321 19,979
Interest on federal funds sold 155,196 133,383 107,061
6,964,516 6,262,411 5,530,415
Interest Expense
Interest on deposits 3,694,486 3,247,389 2,783,792
Net interest income 3,270,030 3,015,022 2,746,623
Provision for Loan Losses 95,500 74,704 2,500
Net interest income after provision
for loan losses 3,174,530 2,940,318 2,744,123
Other Income
Service charges on deposit accounts 62,117 66,568 62,595
Other service charges, collection and
exchange charges, commissions and fees 176,145 176,127 144,804
Other income 36,334 32,039 22,880
Securities gains (losses) ( 3,843) ( 5,210) (
52,778) 270,753
269,524 177,501
Other Expenses
Salaries and wages 967,102 818,155 691,748
Pensions and other employee benefits 244,302 202,829 194,393
Net occupancy expense of bank premises 150,742 115,804 101,960
Furniture and equipment expenses 162,065 158,050 141,347
FDIC assessment 2,000 84,969 163,223
Other operating expenses 743,868 574,490 610,879
2,270,079 1,954,297 1,903,550
Income before income taxes 1,175,204 1,255,545 1,018,074
Applicable income taxes 218,019 253,781 165,976
Net income $ 957,185 $ 1,001,764 $ 852,098
Earnings per share of common stock:
Net income $ 2.39 $ 2.51 $ 2.13
Weighted average shares outstanding 400,000 400,000 400,000
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of
these statements.
- -19-
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
Additional Unrealized
Common Paid-In Retained Holding
Stock Capital Earnings Gains
(Losses)
Balance, December 31,
<C> <C> <C> <C> <C>
1993 $ 252,000 $ 1,789,833 $ 6,689,136 $ 0
Net income 0 0 852,098 0
Cash dividends declared on
common stock ($ .64
per share) 0 0 ( 256,000) 0
Unrealized loss on
securities available
for sale, net of
applicable income
taxes 0 0 0 ( 397,534)
Balance, December 31,
1994 252,000 1,789,833 7,285,234 ( 397,534)
Net income 0 0 1,001,764 0
Cash dividends declared on
common stock ($ .77
per share) 0 0 ( 308,000) 0
Unrealized gain on
securities available
for sale, net of
applicable income
taxes 0 0 0 505,164
Balance, December 31,
1995 252,000 1,789,833 7,978,998 107,630
Net income 0 0 957,185 0
Cash dividends declared on
common stock ($ .77
per share) 0 0 ( 308,000) 0
Unrealized loss on
securities available
for sale, net of
applicable income
taxes 0 0 0 ( 75,614)
Balance, December 31,
1996 $ 252,000 $ 1,789,833 $ 8,628,183 $ 32,016
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of
these statements.
- -20-
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
1996 1995 1994
Cash flows from operating activities:
<S> <C> <C> <C> <C>
Net income $ 957,185 $ 1,001,764 $ 852,098
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 203,443 135,068 129,604
Provision for loan losses 95,500 74,704 2,500
Deferred income taxes 12,915 ( 19,456) 1,100
(Gain) loss on sales/maturities
of investments 3,843 5,210 52,778
(Gain) on sale of equipment ( 700) 0 0
(Increase) decrease in accrued interest
receivable ( 27,259) ( 161,765) 28,085
Increase (decrease) in accrued
interest payable and
other liabilities ( 56,832) 166,901 ( 34,319)
Other, net ( 114,019) 87,562 ( 77,900)
Net cash provided by operating
activities 1,074,076 1,289,988 953,946
Cash flows from investing activities:
Net decrease in interest bearing
deposits with banks 91,197 202,456 491,928
Maturities of held-to-maturity
securities 941,524 1,781,829 123,977
Purchases of held-to-maturity
securities ( 100,000) ( 6,710,015) ( 1,590,343)
Sales of available-for-sale
securities 0 196,469 1,975,782
Maturities of available-for-sale
securities 7,755,603 3,491,234 4,126,042
Purchases of available-for-sale
securities ( 10,409,030) ( 6,205,680) ( 1,634,565)
Proceeds from sales of other
real estate owned 102,500 26,765 61,555
Net (increase) in loans ( 3,587,304) ( 3,875,215) ( 4,124,011)
Purchase of other bank stock ( 13,700) ( 30,500) ( 21,100)
Purchases of bank premises and
equipment, net ( 1,171,694) ( 899,649) ( 332,833)
Proceeds from sale of
equipment 700 13,729 200
Net cash (used) by investing
activities ( 6,390,204) ( 12,008,577) ( 923,368)
Cash flows from financing activities:
Net increase (decrease) in
deposits 6,217,681 9,504,272 ( 1,995,805)
Cash dividends paid ( 300,000) ( 304,000) ( 168,000)
Net cash provided (used) by
financing activities 5,917,681 9,200,272 ( 2,163,805)
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of
these statements.
- -21-
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
1996 1995 1994
Net increase (decrease) in cash and
<S> <C> <C> <C> <C>
cash equivalents $ 601,553 ($ 1,518,317) ($ 2,133,227)
Cash and cash equivalents,
beginning balance 3,110,762 4,629,079 6,762,306
Cash and cash equivalents, ending
balance $ 3,712,315 $ 3,110,762 $ 4,629,079
Supplemental disclosure of cash flows information:
Cash paid during the year for:
Interest (net of capitalized
interest of $ 43,905 - 1996) $ 3,509,832 $ 3,103,611 $ 2,914,867
Income taxes 343,488 152,760 348,068
Supplemental schedule of noncash investing and
financing activities:
Unrealized gain (loss) on securities
available-for-sale ($ 114,567) $ 765,400 ($ 602,322)
Deferred income tax effect of
unrealized gain (loss) on
securities available for sale 38,953 ( 260,236) 204,788
Other real estate acquired in
settlement of loans 76,390 139,524 32,500
Accrued dividends payable 100,000 92,000 88,000
Transfer of securities from
held-to-maturity to available
for sale 0 5,072,833 0
Property, equipment and other
assets acquired with assumption
of deposit liabilities in
connection with branch acquisition 0 312,974 0
Loan advanced for sale of other
real estate owned 50,000 0 0
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of
these statements.
- -22-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Nature of Operations
FNB Financial Corporation's primary activity
consists of owning and supervising its subsidiary,
The First National Bank of McConnellsburg, which is
engaged in providing banking and bank related
services in South Central Pennsylvania, and
Northwestern Maryland. Its four offices are located
in McConnellsburg (2), Fort Loudon and Needmore,
Pennsylvania, and Hancock, Maryland.
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.
During 1995 First Fulton County Community
Development Corporation (FFCCDC) was formed as a
wholly-owned subsidiary of The First National Bank
of McConnellsburg. The purpose of FFCCDC is to
serve the needs of low-to-moderate income
individuals and small business in Fulton County
under the Community Development and Regulatory
Improvement Act of 1994. FFCCDC has not had any
development activity and to date has been an
inactive corporation.
Basis of Accounting
The Corporation uses the accrual basis of
accounting.
Use of Estimates
The preparation of financial statements in
conformity with generally accepted accounting
principles requires management to make estimates
and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial
statements and the reported amounts of revenues and
expenses during the reporting period. Actual
results could differ from those estimates.
- -23-
Note 1. Significant Accounting Policies (Continued)
Material estimates that are particularly
susceptible to significant change relate to the
determination of the allowance for losses on loans
and the valuation of real estate acquired in
connection with foreclosures or in satisfaction of
loans. In connection with the determination of the
allowances for losses on loans and foreclosed real
estate, management obtains independent appraisals
for significant properties.
While management uses available information to
recognize losses on loans and foreclosed real
estate, future additions to the allowances may be
necessary based on changes in local economic
conditions. In addition, regulatory agencies, as
an integral part of their examination process,
periodically review the Corporation's allowances
for losses on loans and foreclosed real estate.
Such agencies may require the corporation to
recognize additions to the allowances based on
their judgments about information available to them
at the time of their examination. Because of these
factors, management's estimate of credit losses
inherent in the loan portfolio and the related
allowance may change in the near term.
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 Statements of Cash Flows.
Investment Securities
In accordance with Statement of Financial
Accounting Standards Number 115 (SFAS 115) the
Corporation's investments in securities are
classified in three categories and accounted for as
follows:
- -24-
Note 1. Significant Accounting Policies (Continued)
d Trading Securities. Securities held principally
for resale in the near term are classified as
trading securities and recorded at their fair
values. Unrealized gains and losses on trading
securities are included in other income.
d Securities to be Held to Maturity. Bonds and
notes for which the Corporation has the positive
intent and ability to hold to maturity are
reported at cost, adjusted for amortization of
premiums and accretion of discounts which are
recognized in interest income using the interest
method over the period to maturity.
d Securities Available for Sale. Securities
available for sale consist of bonds and notes
not classified as trading securities nor as
securities to be held to maturity. These are
securities that management intends to use as a
part of its asset and liability management
strategy and may be sold in response to changes
in interest rates, resultant prepayment risk and
other related factors.
Unrealized holding gains and losses, net of tax, on
securities available for sale are reported as a net
amount in a separate component of shareholders'
equity until realized.
Gains and losses on the sale of securities
available for sale are determined using the
specific-identification method.
Fair values for investment securities are based on
quoted market prices.
The Corporation had no trading securities in 1996
or 1995.
Federal Reserve Bank, Atlantic Central Banker's
Bank, and Federal Home Loan Bank Stock
These investments are carried at cost. The
Corporation is required to maintain minimum
investment balances in these stocks, which are not
actively traded and therefore have no readily
determinable market value.
- -25-
Note 1. Significant Accounting Policies (Continued)
Other Real Estate Owned
Real estate properties acquired through, or in lieu
of, loan foreclosure are to be sold and are
initially recorded at the lower of carrying value
or fair value of the underlying collateral. After
foreclosure, valuations are periodically performed
by management and the real estate is carried at the
lower of carrying amount or fair value less cost to
sell. Legal fees and other costs related to
foreclosure proceedings are expensed as they are
incurred.
Loans and Allowance for Possible Loan Losses
Loans are stated at the amount of unpaid principal,
reduced by unearned discount, deferred loan
origination fees, and an allowance for loan losses.
Unearned discount on installment loans is
recognized as income over the terms of the loans by
the interest method. Interest on other loans is
calculated by using the simple interest method on
daily balances of the principal amount outstanding.
The allowance for loan losses is established
through a provision for loan losses charged to
expense. Loans are charged against the allowance
for loan losses when management believes that the
collectibility of the principal is unlikely. The
allowance is an amount that management believes
will be adequate to absorb possible losses on
existing loans that may become uncollectible, based
on evaluations of the collectibility of loans and
prior loan loss experience. The evaluations take
into consideration such factors as changes in the
nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem
loans, and current economic conditions that may
affect the borrowers' ability to pay.
In accordance with SFAS No. 91, loan origination
fees and certain direct loan origination costs are
being deferred and the net amount amortized as an
adjustment of the related loan's yield. The
Corporation is amortizing these amounts over the
contractual life of the related loans.
- -26-
Note 1. Significant Accounting Policies (Continued)
Nonaccrual Loans
The accrual of interest income on loans ceases when
principal or interest is past due 90 days or more
and collateral is inadequate to cover principal and
interest or immediately if, in the opinion of
management, full collection is unlikely. Interest
accrued but not collected as of the date of
placement on nonaccrual status is reversed and
charged against current income unless fully
collateralized. Subsequent payments received
either are applied to the outstanding principal
balance or recorded as interest income, depending
on management's assessment of the ultimate
collectibility of principal.
Bank Building, Equipment, Furniture and Fixtures
and Depreciation
Bank building, equipment, furniture and fixtures
are carried at cost less accumulated depreciation.
Expenditures for replacements are capitalized and
the replaced items are retired. Maintenance and
repairs are charged to operations as incurred.
Depreciation is computed based on straight-line and
accelerated methods over the estimated useful lives
of the related assets as follows:
Years
Bank building 10-40
Equipment, furniture and fixtures 3-20
Land improvements 10-20
Leasehold improvements 15-20
Computer software is amortized over 3 to 5 years.
Earnings Per Share
Earnings per common share were computed based upon
weighted average shares of common stock outstanding
of 400,000 for 1996, 1995 and 1994.
- -27-
Note 1. Significant Accounting Policies (Continued)
Federal Income Taxes
As a result of certain timing differences between
financial statement and federal income tax
reporting, deferred income taxes are provided in
the financial statements. See Note 8 for further
details.
Advertising
The corporation follows the policy of charging
costs of advertising to expense as incurred.
Advertising expense was $ 64,979, $ 41,439 and
$ 51,916 for 1996, 1995 and 1994, respectively.
Fair Values of Financial Instruments
Statement of Financial Accounting Standards No.
107, Disclosures About Fair Value of Financial
Instruments, requires disclosure of fair value
information about financial instruments, whether or
not recognized in the balance sheet. In cases
where quoted market prices are not available, fair
values are based on estimates using present value
or other valuation techniques. Those techniques
are significantly affected by the assumptions used,
including the discount rate and estimates of future
cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not
be realized in immediate settlement of the
instruments. Statement No. 107 excludes certain
financial instruments and all nonfinancial
instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of
the Corporation.
The following methods and assumptions were used by
the Corporation in estimating fair values of
financial instruments as disclosed herein:
d Cash and Cash Equivalents. The carrying amounts
of cash and short-term instruments approximate
their fair value.
- -28-
Note 1. Significant Accounting Policies (Continued)
d Securities to be Held to Maturity and Securities
Available for Sale. Fair values for investment
securities are based on quoted market prices.
d Loans Receivable. For variable-rate loans that
reprice frequently and have no significant
change in credit risk, fair values are based on
carrying values. Fair values for fixed rate
loans are estimated using discounted cash flow
analyses, using interest rates currently being
offered for loans with similar terms to
borrowers of similar credit quality. Fair
values for impaired loans are estimated using
discounted cash flow analyses or underlying
collateral values, where applicable.
d Deposit Liabilities. The fair values disclosed
for demand deposits are, by definition, equal to
the amount payable on demand at the reporting
date (that is, their carrying amounts). The
carrying amounts of variable-rate certificates
of deposit, and fixed-term money market accounts
approximate their fair values at the reporting
date. Fair values for fixed-rate certificates
of deposits and IRA's are estimated using a
discounted cash flow calculation that applies
interest rates currently being offered to a
schedule of aggregated expected monthly
maturities on time deposits.
d Accrued Interest. The carrying amounts of
accrued interest approximate their fair values.
d Off-Balance-Sheet Instruments. The Bank
generally does not charge commitment fees. Fees
for standby letters of credit and other off-
balance-sheet instruments are not
significant.
Note 2. Marketable Debt Securities
The amortized cost and fair values of debt
securities available for sale at December 31 were:
- -29-
Note 2. Marketable Debt Securities (Continued)
<TABLE>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
1996
U. S. Treasury
<S> <C> <C> <C> <C> <C>
securities $ 750,075 $ 2,741 ($ 238) $ 752,578
Obligations of
other U.S.
Government
agencies 15,742,003 21,973 ( 137,018) 15,626,958
Obligations of
states and
political
subdivisions 6,536,452 64,533 ( 19,652) 6,581,333
Mortgage-backed
securities 1,780,747 25,699 ( 3,712) 1,802,734
SBA Loan Pool
certificates 3,928,606 65,559 ( 2,496) 3,991,669
Totals $ 28,737,883 $ 180,505 ($ 163,116) $ 28,755,272
1995
U. S. Treasury
securities $ 1,002,107 $ 10,233 $ 0 $ 1,012,340
Obligations of
other U.S.
Government
agencies 11,365,947 39,425 ( 38,811) 11,366,561
Obligations of
states and
political
subdivisions 6,868,556 77,190 ( 44,065) 6,901,681
Mortgage-backed
securities 2,123,773 18,736 ( 6,678) 2,135,831
SBA Loan Pool
certificates 4,727,918 92,838 ( 3,150) 4,817,606
Totals $ 26,088,301 $ 238,422 ($ 92,704) $26,234,019
</TABLE>
The amortized cost and fair values of debt
securities held to maturity at December 31 were:
- -30-
Note 2. Marketable Debt Securities (Continued)
<TABLE>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
1996
SBA loan pool
<S> <C> <C> <C> <C>
certificates $ 1,629,107 $ 2,049 ($ 10,108) $ 1,621,048
Obligations of
states and
political
subdivisions 2,930,632 17,647 ( 1,424) 2,946,855
Totals $ 4,559,739 $ 19,696 ($ 11,532) $ 4,567,903
1995
SBA loan pool
certificates $ 1,719,034 $ 3,385 ($ 10,173) $ 1,712,246
Obligations of
states and
political
subdivisions 3,682,229 20,433 ( 11,963) 3,690,699
Totals $ 5,401,263 $ 23,818 ($ 22,136) $ 5,402,945
</TABLE>
During 1995 the Financial Accounting Standards
Board (FASB) issued Supplemental Guidance regarding
the implementation of SFAS No. 115 Accounting for
Certain Investments in Debt and Equity Securities.
In connection with this supplemental guidance the
FASB provided a one-time opportunity for
institutions to redesignate their security
classifications without "tainting" any of their
investment pools.
After extensive review of the Corporation's
security portfolio on December 27, 1995 management
moved $ 5,072,833 of securities classified as held-
to-maturity to the available for sale
classification and accordingly carries these
securities at their market value. No securities
were moved from the available for sale
classification to the held-to-maturity
classification and no securities were classified as
trading. The justifications for this movement were
based upon the following considerations:
- -31-
Note 2. Marketable Debt Securities (Continued)
1) Regulatory rulings which have stated the
available for sale mark-to-market adjustment
will not impact regulatory risk-based capital
positions;
2) The strong liquidity position of the Corporation
based upon its security maturity ladder;
mortgage-backed securities, SBA GLPCs and loan
principal paydowns; availability of a line of
credit from the Federal Home Loan Bank; and
availability of the Federal Reserve Discount
Window;
3) The holding of and investment in certain
adjustable rate securities for interest rate
management purposes;
4) The need to have certain fixed rate securities,
both taxable and tax-free, available for future
sale and tax swap opportunities.
The amortized cost and fair values of debt
securities available for sale and held to maturity
at December 31, 1996 by contractual maturity, are
shown below. Expected maturities will differ from
contractual maturities because borrowers may have
the right to call or repay obligations with or
without call or repayment penalties.
<TABLE>
Securities Available Securities Held
- - - for Sale - - - - - - -to Maturity- - -
Amortized Fair Amortized Fair
Cost Value Cost Value
Due in one year
<S> <C> <C> <C> <C>
or less $ 1,402,493 $ 1,402,787 $ 1,345,072 $ 1,347,927
Due after one
year but less
than five
years 10,641,510 10,586,009 1,585,560 1,598,928
Due after five
years but less
than ten
years 9,919,606 9,913,060 0 0
Due after ten
years 1,064,921 1,059,013 0 0
23,028,530 22,960,869 2,930,632 2,946,855
- -32-
Note 2. Marketable Debt Securities (Continued)
Securities Available Securities Held
- - - for Sale - - - - - - -to Maturity- - -
Amortized Fair Amortized Fair
Cost Value Cost Value
Mortgage-
backed sec-
urities 1,780,747 1,802,734 0 0
SBA loan pool
certif-
icates 3,928,606 3,991,669 1,629,107 1,621,048
Totals $ 28,737,883 $ 28,755,272 $ 4,559,739 $ 4,567,903
</TABLE>
There were no sales of investment securities in
1996.
Proceeds from sales of debt securities available
for sale during 1995 and 1994 were $ 196,469 and
$ 1,975,782, respectively. Gross losses on these
sales were $ 3,364 for 1995. Gross gains and
losses on 1994 sales were $ 5,051 and $ 57,829,
respectively.
There were no sales of held-to-maturity securities
in 1995 or 1994.
Marketable debt securities carried at $ 8,821,866
and $ 9,051,032 at December 31, 1996 and 1995,
respectively, were pledged to secure public funds
and for other purposes as required or permitted by
law.
Note 3. Marketable Equity Securities
Marketable equity securities available for sale
represents an investment in local bank stocks.
The amortized cost and fair values of equity
securities available for sale at December 31 were:
<TABLE>
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
<C> <C> <C> <C> <C>
1996 $ 84,520 $ 31,120 ($ 0) $ 115,640
1995 $ 84,520 $ 17,360 ($ 0) $ 101,880
</TABLE>
- -33-
Note 3. Marketable Equity Securities (Continued)
There were no sales of marketable equity securities
available for sale during 1996, 1995 or 1994.
Note 4. Loans
Loans consist of the following at December 31:
<TABLE>
1996 1995
(000 omitted)
Real estate loans:
<S> <C> <C> <C>
Construction and land development $ 799 $ 925
Secured by farmland 3,978 2,663
Secured by 1-4 family residential
properties 30,885 29,848
Secured by multi-family residential
properties 271 380
Secured by nonfarmland nonresidential
properties 3,149 2,993
Loans to farmers (except loans secured
primarily by real estate) 1,919 1,130
Commercial, industrial and state and
political subdivision loans 6,647 7,451
Loans to individuals for household,
family, or other personal expenditures 9,476 8,374
All other loans 923 694
Total loans 58,047 54,458
Less: Unearned discount on loans 1,382 1,259
Allowance for loan losses 405 405
Net Loans $ 56,260 $ 52,794
</TABLE>
The following table shows maturities and
sensitivities of loans to changes in interest rates
based upon contractual maturities and terms as of
December 31, 1996.
<TABLE>
Due Over 1
Due Within But Within Due Over Nonaccruing
(000 omitted) 1 Year 5 Years 5 Years Loans
Total
Loans at pre-
determined
<S> <C> <C> <C> <C> <C> <C>
interest rates $ 999 $ 8,278 $ 16,013 $ 465 $ 25,755
Loans at floating
or adjustable
interest rates 6,042 1,173 24,567 510 32,292
Total (1) $ 7,041 $ 9,451 $ 40,580 $ 975 $ 58,047
</TABLE>
- -34-
Note 4. Loans (Continued)
(1) These amounts have not been reduced by the
allowance for possible loan losses or unearned
discount.
The Bank has granted loans to the officers and
directors of the corporation and to their
associates. Related party loans are made on
substantially the same terms, including interest
rates and collateral, as those prevailing at the
time for comparable transactions with unrelated
persons and do not involve more than normal risk of
collectibility. The aggregate dollar amount of
these loans was $ 1,366,934 and $ 837,304 at
December 31, 1996 and 1995, respectively. During
1996, $ 1,174,938 of new loans were made and
repayments totaled $ 645,308. During 1995,
$ 568,871 of new loans were made and repayments
totaled $ 859,065.
Outstanding loans to Bank employees totaled
$ 776,743 and $ 676,391 for years ended
December 31, 1996 and 1995, respectively.
Note 5. Allowance for Loan Losses
Activity in the allowance for loan losses is
summarized as follows:
<TABLE>
1996 1995 1994
(000 omitted)
Allowance for loan losses,
<S> <C> <C> <C>
beginning of the year $ 405 $ 405 $ 345
Loans charged-off during the year:
Real estate mortgages 51 33 5
Installment loans 49 64 48
Commercial and all other loans 8 9 3
Total charge-offs 108 106 56
- -35-
Note 5. Allowance for Loan Losses (Continued)
1996 1995 1994
(000 omitted)
Recoveries of loans previously
charged-off:
Real estate mortgages $ 0 $ 1 $ 0
Installment loans 12 25 41
Commercial and all other loans 1 5 73
Total recoveries 13 31 114
Net loans charged-off
(recovered) 95 75 ( 58)
Provision for loan losses
charged to operations 95 75 2
Allowance for loan losses,
end of the year $ 405 $ 405 $ 405
</TABLE>
A breakdown of the allowance for loan losses as of
December 31 is as follows:
<TABLE>
- - - - -1996- - - - - - - - - - 1995 - - - -
- -
Percent of Percent of
Allowance Loans in Allowance Loans in
(000 omitted) Amount Each Category Amount Each
Category
Commercial,
industrial &
agriculture
<S> <C> <C> <C>
loans $ 53 27.24% $ 42 26.47%
1-4 family
residential
mortgages 123 47.56% 124 48.67%
Consumer &
installment
loans 179 14.59% 175 13.65%
Off balance sheet
commitments 40 10.61% 51 11.21%
Unsegregated 10 N/A 13 N/A
Total $ 405 100.0% $ 405 100.00%
</TABLE>
Impairment of loans having a recorded investment of
$ 152,312 at December 31, 1995 was recognized in
conformity with SFAS No. 114 as amended by SFAS No.
118. The average recorded investment in impaired
loans during 1995 was $ 161,000. The total
allowance for loan losses related to this loan was
less than $ 1,000 at December 31, 1995 due to the
fact that management feels the loan is adequately
collateralized. Interest income on impaired loans
of $ 10,924 was recognized for cash payments
received in 1995. The underlying collateral for
this loan was sold and the loan paid off in 1996.
There were no impaired loans in 1996 or 1994.
- -36-
Note 6. Nonaccrual, Past Due and Restructured Loans
The following table shows the principal balances of
nonaccrual loans as of December 31:
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
Nonaccrual loans $ 974,480 $ 471,519 $ 408,063
Interest income that would
have been accrued at
original contract rates $ 88,928 $ 46,550 $ 36,075
Amount recognized as
interest income 60,073 25,917 26,558
Foregone revenue $ 28,855 $ 20,633 $ 9,517
Loans 90 days or more past due (still accruing
interest) were as follows at December 31:
(000 omitted) 1996 1995 1994
Real estate mortgages $ 0 $ 0 $ 0
Installment loans 32 23 56
Demand and time loans 1 7 11
Total $ 33 $ 30 $ 67
</TABLE>
The Bank had two loans classified as restructured
troubled loans. These loans were restructured in
accordance with agreements with bankruptcy courts
regarding the terms of repayments and interest
rates. One loan was restructured during the second
quarter of 1991 and had a high balance when
restructured of approximately $ 225,000 and had a
balance at December 31, 1995 of $ 152,312. This
loan is secured with a first mortgage position on
real estate and had performed in accordance with
its restructured terms until the third quarter of
1995 at which time it became three months past due.
This loan was paid off in 1996. The other loan was
restructured in the second quarter of 1992. This
loan had a high balance of approximately $ 41,000
when restructured and had a balance of $ 5,382 at
December 31, 1996. This loan is secured with a
first mortgage position on real estate and has
performed in accordance with restructured terms
since the date of restructure.
- -37-
Note 6. Nonaccrual, Past Due and Restructured Loans
(Continued)
The following table presents the principal balances
of restructured loans as of December 31:
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
Restructured loans $ 5,382 $ 168,840 $ 201,740
Interest income that would have
been accrued at original
contract rates $ 1,189 $ 18,320 $ 22,626
Amount recognized as interest
income 1,132 13,139 21,127
Foregone revenue $ 57 $ 5,181 $ 1,499
</TABLE>
Note 7. Bank Building, Equipment, Furniture and Fixtures
Bank building, equipment, furniture and fixtures
consisted of the following at December 31:
<TABLE>
Accumulated Depreciated
Description Cost Depreciation Cost
1996
Bank building (including
<S> <C> <C> <C> <C>
land $ 211,635) $ 2,841,202 $ 653,298 $ 2,187,904
Equipment, furniture
and fixtures 1,777,010 1,031,716 745,294
Land improvements 229,947 100,909 129,038
Leasehold improve-
ments 46,132 408 45,724
$ 4,894,291 $ 1,786,331 $ 3,107,960
1995
Bank building (including
land $ 211,635) $ 1,504,871 $ 601,612 $ 903,259
Equipment, furniture
and fixtures 1,190,766 945,426 245,340
Land improvements 182,714 90,398 92,316
Construction in
progress 845,645 0 845,645
$ 3,723,996 $ 1,637,436 $ 2,086,560
</TABLE>
Depreciation and amortization expense amounted to
$ 150,294 in 1996, $ 126,258 in 1995 and $ 129,604
in 1994.
- -38-
Note 8. Income Taxes
The components of federal income tax expense are
summarized as follows:
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
Current year provision $ 205,104 $ 273,237 $ 167,076
Deferred income taxes resulting from:
Differences between financial
statement and tax
depreciation charges 13,123 76 ( 1,912)
Differences between financial
statement and tax loan loss
provision ( 208) ( 19,532) 812
Applicable income tax $ 218,019 $ 253,781 $ 165,976
</TABLE>
Federal income taxes were computed after adjusting
pretax accounting income for nontaxable income in
the amount of $ 633,813, $ 590,029 and $ 454,128
for 1996, 1995 and 1994, respectively.
A reconciliation of the effective applicable income
tax rate to the federal statutory rate is as
follows:
<TABLE>
1996 1995 1994
<S> <C>
Federal income tax rate 34.0% 34.0% 34.0%
Reduction resulting from:
Nontaxable interest income and deferred
taxes 15.5 13.8 17.7
Effective income tax rate 18.5% 20.2% 16.3%
</TABLE>
Deferred income taxes at December 31 are as
follows:
<TABLE>
1996 1995
<S> <C> <C>
Deferred tax assets $ 76,398 $ 76,190
Deferred tax liabilities ( 69,850) ( 95,680)
$ 6,548 ($ 19,490)
The tax effects of each type of significant item
that gives rise to deferred taxes are:
1996 1995
Net unrealized (gains) losses on
securities available for sale ($ 16,493) ($ 55,446)
Depreciation expense ( 53,357) ( 40,234)
Allowance for loan losses 76,398 76,190
$ 6,548 ($ 19,490)
</TABLE>
- -39-
Note 8. Income Taxes (Continued)
The corporation has not recorded a valuation
allowance for the deferred tax assets as they feel
that it is more likely than not that they will be
ultimately realized.
Note 9. Employee Benefit Plan
The Bank has a 401-K plan which covers all
employees who have attained the age of 20 and who
have completed six months of full-time service.
The plan provides for the Bank to match employee
contributions to a maximum of 5% of annual
compensation. The Bank also has the option to make
additional discretionary contributions to the plan
based upon the Bank's performance and subject to
approval by the Board of Directors. The Bank's
total expense for this plan was $ 65,644, $ 49,800,
and $ 41,475 for the years ended December 31, 1996,
1995 and 1994, respectively.
Note 10. Deposits
Included in savings deposits are NOW and Super NOW
account balances totaling $ 5,206,615 and
$ 5,849,253 at December 31, 1996 and 1995,
respectively. Also included in savings deposits at
December 31, 1996 and 1995 are Money Market account
balances totaling $ 7,479,502 and $ 4,176,121,
respectively.
Time certificates of $ 100,000 and over as of
December 31 were as follows:
<TABLE>
1996 1995
(000 omitted)
<S> <C> <C> <C>
Three months or less $ 691 $ 1,008
Three months to six months 214 2,439
Six months to twelve months 313 2,051
Over twelve months 7,363 4,032
Total $ 8,581 $ 9,530
</TABLE>
Interest expense on time deposits of $ 100,000 and
over aggregated $ 601,843, $ 518,586 and $ 369,247
for 1996, 1995 and 1994, respectively.
- -40-
Note 10. Deposits (Continued)
At December 31, 1996 the scheduled maturities of
certificates of deposit are as follows:
<TABLE>
<C> <C>
1997 $ 17,144,503
1998 15,424,600
1999 7,142,512
2000 5,554,104
2001 5,644,243
Thereafter 48,000
$ 50,957,962
</TABLE>
The Bank accepts deposits of the officers,
directors and employees of the corporation and its
subsidiary on the same terms, including interest
rates, as those prevailing at the time for
comparable transactions with unrelated persons.
The aggregate dollar amount of deposits of
officers, directors and employees totaled
$ 4,284,064 and $ 4,000,558 at December 31, 1996
and 1995, respectively.
Note 11. Financial Instruments With Off-Balance-Sheet Risk
The Bank is a party to financial instruments with
off-balance-sheet risk in the normal course of
business to meet the financial needs of its
customers and to reduce its own exposure to
fluctuations in interest rates. These financial
instruments include commitments to extend credit
and standby letters of credit. Those instruments
involve, to varying degrees, elements of credit
and interest rate risk in excess of the amount
recognized in the balance sheets. The contract
amounts of those instruments reflect the extent of
involvement the Bank has in particular classes of
financial instruments.
The Bank's exposure to credit loss in the event of
nonperformance by the other party to the financial
instrument for commitments to extend credit and
standby letters of credit is represented by the
contractual amount of those instruments. The Bank
uses the same credit policies in making
commitments and conditional obligations as it does
for on-balance-sheet instruments.
- -41
Note 11. Financial Instruments With Off-Balance-Sheet Risk
(Continued)
<TABLE>
Contract or
Notional Amount
(000 omitted)
1996 1995
Financial instruments whose contract amounts
represent credit risk at December 31:
<S> <C> <C>
Commitments to extend credit $ 5,368 $ 5,317
Commercial and standby letters of
credit 1,521 1,559
$ 6,889 $ 6,876
</TABLE>
Commitments to extend credit are agreements to
lend to a customer as long as there is no
violation of any condition established in the
contract. Commitments generally have fixed
expiration dates or other termination clauses and
may require payment of a fee. Since many of the
commitments are expected to expire without being
drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.
The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary
by the Bank upon extension of credit, is based on
management's credit evaluation of the customer.
Collateral held varies but may include accounts
receivable, inventory, real estate, equipment, and
income-producing commercial properties.
Standby letters of credit are conditional
commitments issued by the Bank to guarantee the
performance of a customer to a third party. Those
guarantees are primarily issued to support public
and private borrowing arrangements. The credit
risk involved in issuing letters of credit is
essentially the same as that involved in extending
loans to customers. The Bank holds collateral
supporting those commitments when deemed necessary
by management.
Note 12. Concentration of Credit Risk
The Board grants agribusiness, commercial and
residential loans to customers located in South
Central Pennsylvania and Northwestern Maryland.
Although the Bank has a diversified loan
- -42-
Note 12. Concentration of Credit Risk (Continued)
portfolio, a portion of its customers' ability to
honor their contracts is dependent upon the
construction and land development and agribusiness
economic sectors.
The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The
amount of collateral obtained if deemed necessary
by the Bank upon the extension of credit is based
on management's credit evaluation of the customer.
Collateral held varies but generally includes
equipment and real estate.
Note 13. FNB Financial Corporation (Parent Company Only)
Financial Information
The following are the condensed balance sheets,
income statements and statements of cash flows for
the parent company.
Balance Sheets
December 31
<TABLE>
Assets 1996 1995
<S> <C> <C> <C>
Cash $ 138,380 $ 457,673
Marketable equity securities
available for sale 115,640 101,880
Investment in the First National Bank
of McConnellsburg 10,556,551 9,664,312
Other assets 3,114 2,500
Total assets $ 10,813,685 $ 10,226,365
Liabilities and Stockholders' Equity
Dividends payable $ 100,000 $ 92,000
Other liabilities 11,653 5,904
111,653 97,904
Common stock, par value $ .63;
6,000,000 shares authorized;
400,000 shares issued
and outstanding 252,000 252,000
Additional paid-in capital 1,789,833 1,789,833
Retained earnings 8,628,183 7,978,998
Unrealized gain on securities available
for sale, net of tax effects 32,016 107,630
Total liabilities and
stockholders' equity $ 10,813,685 $ 10,226,365
</TABLE>
- -43-
Note 13. FNB Financial Corporation (Parent Company Only)
Financial Information (Continued)
<TABLE>
Statements of Income
Years Ended December 31
1996 1995 1994
Cash dividends from
<S> <C> <C> <C> <C>
wholly-owned subsidiary $ 0 $ 0 $ 0
Dividend income - Marketable
equity securities 2,868 2,508 960
Equity in undistributed income of
subsidiary 976,934 1,014,118 867,590
979,802 1,016,626 868,550
Less: holding company
expenses 22,617 14,862 16,452
Net income $ 957,185 $ 1,001,764 $ 852,098
Statements of Cash Flows
Years Ended December 31
1996 1995 1994
Cash flows from operating activities:
Net income $ 957,185 $ 1,001,764 $ 852,098
Adjustments to reconcile net
income to cash provided by
operating activities:
Equity in undistributed income
of subsidiary ( 976,934) ( 1,014,117) ( 67,590)
(Increase) decrease
in other assets ( 614) 519 ( 518)
Increase (decrease) in:
Other liabilities 1,070 ( 5,470) 5,301
Net cash (used) by
operating activities ( 19,293) ( 17,304) ( 10,709)
Cash flows from investing activities:
Purchase of marketable equity securities
available for sale 0 ( 25,000) ( 59,520)
Cash flows from financing activities:
Cash dividends paid ( 300,000) ( 304,000) ( 168,000)
Net increase (decrease)
in cash ( 319,293) ( 346,304) ( 238,229)
Cash, beginning balance 457,673 803,977 1,042,206
Cash, ending balance $ 138,380 $ 457,673 $ 803,977
</TABLE>
- -44-
Note 13. FNB Financial Corporation (Parent Company Only)
Financial Information (Continued)
Dividends paid by FNB Financial Corporation are
generally provided from the dividends it receives
from the Bank. The Bank, as a National Bank, is
subject to the dividend restrictions set forth by
the Comptroller of the Currency. Under such
restrictions, the Bank may not, without prior
approval of the Comptroller of the Currency,
declare dividends in excess of the sum of the
current year's earnings (as defined) plus the
retained earnings (as defined) from the prior two
years. The dividends that the Bank could declare
without the approval of the Comptroller of the
Currency amounted to approximately $ 2,904,720 and
$ 2,751,249 and at December 31, 1996 and 1995,
respectively.
FNB Financial Corporation's balance of retained
earnings at December 31, 1996 is $ 8,628,183 and
would be available for cash dividends, although
payment of dividends to such extent would not be
prudent or likely. The Federal Reserve Board,
which regulates bank holding companies,
establishes guidelines which indicate that cash
dividends should be covered by current period
earnings.
Note 14. Compensating Balance Arrangements
Required deposit balances at the Federal Reserve
were $ 80,000 for 1996 and 1995. Required deposit
balances at Atlantic Central Banker's Bank were
$ 282,000 and $ 279,000 at December 31, 1996 and
1995, respectively. These balances are maintained
to cover processing costs and service charges.
Note 15. Fair Value of Financial Instruments
The estimated fair values of the Corporation's
financial instruments were as follows at
December 31:
- -45-
Note 15. Fair Value of Financial Instruments (Continued)
<TABLE>
- - - - - 1996 - - - - - - - - - 1995 - - - -
Carrying Fair Carrying Fair
Amount Value Amount Value
FINANCIAL ASSETS
Cash & due from
<S> <C> <C> <C> <C>
banks $ 2,473,315 $ 2,473,315 $ 2,633,762 $ 2,633,762
Interest-bearing
deposits in
banks 327,276 327,276 418,473 418,473
Federal funds
sold 1,239,000 1,239,000 477,000 477,000
Securities available
for sale 28,737,883 28,755,272 26,172,821 26,335,899
Securities to be
held to
maturity 4,559,739 4,567,903 5,401,263 5,402,945
Other bank
stock 383,700 383,700 370,000 370,000
Loans
receivable 56,665,541 55,484,110 53,198,865 53,220,110
Accrued interest
receivable 675,180 675,180 647,921 647,921
FINANCIAL LIABILITIES
Time
certificates 50,957,962 51,580,258 48,942,142 49,566,656
Other
deposits 36,176,006 36,176,006 31,974,145 31,974,145
Accrued interest
payable 565,751 565,751 592,250 592,250
</TABLE>
Note 16. Commitments
In 1996 the Corporation committed to an
expansion project for its Fort Loudon office
facilities. Total project costs are estimated
to approximate $ 200,000. No costs have been
incurred as of December 31, 1996 for this
project.
Note 17. Line of Credit
The Bank had available a line of credit totaling
$ 3,022,000 and $ 8,207,400 at December 31, 1996
and 1995, respectively, with the Federal Home Loan
Bank of Pittsburgh. There were no borrowings
against this line in 1996 or 1995. Collateral for
the line consists of all bank assets with a book
value of approximately $ 98,560,000.
- -46-
Note 18. Operating Lease
During 1996 the Corporation entered into a lease
agreement for their Hancock, Maryland office. The
original lease term is ten years with three
separate successive options to extend the lease
for a term of five years each. Monthly rent is
$ 1,800 and the lessee pays a proportionate share
of other operating expenses. For the year ended
December 31, 1996, rent expense under this
operating lease was $ 5,400. Required lease
payments for the next five years are as follows:
<TABLE>
<C> <C>
1997 $ 21,600
1998 21,600
1999 21,600
2000 21,600
2001 21,600
Thereafter 104,400
$ 212,400
</TABLE>
- -47-
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
SELECTED FIVE YEAR FINANCIAL DATA
<TABLE>
1996 1995 1994 1993 1992
Results of Operations (000 omitted)
<S> <C> <C> <C> <C> <C>
Interest income $ 6,965 $ 6,262 $ 5,530 $ 5,510 $ 5,728
Interest expense 3,694 3,247 2,784 2,884 3,402
Provision for loan
losses 96 75 2 62 51
Net interest income
after provision for
loan losses 3,175 2,940 2,744 2,564 2,275
Other operating income 270 270 177 213 245
Other operating
expenses 2,270 1,954 1,903 1,720 1,678
Income before income
taxes 1,175 1,256 1,018 1,057 842
Applicable income
tax 218 254 166 252 174
Net income $ 957 $ 1,002 $ 852 $ 805 $ 668
Common Share Data
Per share amounts are based on weighted average shares of common stock
outstanding of 400,000 for 1996, 1995 and 1994; 359,410 for 1993; and
350,000 for 1992 after giving retroactive recognition to a 2 for 1 stock
split effective April 23, 1993.
Income before
income taxes $ 2.94 $ 3.14 $ 2.55 $ 2.94 $ 2.41
Applicable income
taxes .55 .64 .42 .70 .50
Net income 2.39 2.51 2.13 2.24 1.91
Cash dividend declared .77 .77 .64 .55 .53
Book value (actual
number of shares
outstanding before
FAS 115 adjustments) 26.68 25.05 23.33 21.83 20.22
Dividend payout ratio 32.18% 30.75% 30.04% 24.62% 27.49%
Year-End Balance Sheet Figures
(000 omitted)
Total assets $ 98,644 $ 91,921 $ 80,715 $ 82,458 $ 79,293
Net loans 56,260 52,794 49,100 45,011 46,746
Total investment
securities -
Book value 33,767 31,944 24,475 27,505 24,131
Deposits-non-
interest bearing 9,250 7,778 6,781 7,562 6,366
Deposits-interest
bearing 77,884 73,138 64,318 65,533
65,219
Total deposits 87,134 80,916 71,099 73,095 71,585
Total stockholders'
equity (before FAS 115
adjustments) 10,670 10,021 9,327 8,731 7,077
Ratios (calculated
before FAS 115 adjustments)
Average equity/
average assets 10.87% 11.58% 11.21% 9.75%
9.08
%
Return on average
equity 9.18% 10.26% 9.37% 10.40%
9.71%
Return on average
assets 1.00% 1.19% 1.05% 1.01%
.88%
</TABLE>
- -48-
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
SUMMARY OF QUARTERLY FINANCIAL DATA
The unaudited quarterly results of operations for the years ended
December 31, 1996 and 1995 are as follows:
<TABLE>
1996 1995
($ 000 omitted Quarter Ended Quarter Ended
except per
share) Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30Dec.
31
Interest
<S> <C> <C> <C> <C> <C> <C> <C> <C>
income $ 1,684 $ 1,696 $ 1,778 $ 1,807 $ 1,456 $ 1,533 $ 1,594
$
1,679
Interest
expense 936 921 926 911 713 780 845
909
Net interest
income 748 775 852 896 743 753 749 770
Provision for
loan
losses 7 38 18 33 3 23
8 41
Net interest income
after provision for
loan losses 741 737 834 863 740 730 741 729
Other income 59 72 65 74 61 66 74 69
Other
expenses 519 541 570 640 470 485
483 516
Operating income
before income
taxes 281 268 329 297 331 311 332 282
Applicable income
taxes 52 56 67 43 77 73 68
36
Net
income $ 229 $ 212 $ 262 $ 254 $ 254 $ 238 $
264 $ 246
Net income applicable
to common stock
Per share data:
Net income $ .57 $ .53 $ .65 $ .64 $ .64 $ .60
$
.66 $ .61
</TABLE>
- -49-
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS'
EQUITY, INTEREST RATES AND INTEREST DIFFERENTIAL
Years Ended December 31
<TABLE>
- - - - -1996- - - - - - - -1995- - - - - - - - - -1994- - -
- -
Average Average Average
(000 Omitted) Balance Interest Rate Balance Interest Rate Balance Interest
Rate
ASSETS
Interest bearing
deposits with banks
and federal funds
<S> <C> <C> <C> <C> <C> <C>
sold $ 3,440 $ 184 5.35% $ 2,943 $ 172 5.84%
$
2,996 $ 170 5.67%
Investment
securities 33,129 1,931 5.82% 25,837 1,458 5.64% 26,061
1,352 5.19%
Loans 53,046 4,850 9.14% 51,492 4,632 9.00%
47,632 4,008 8.41%
Total interest
earning assets 89,615 $ 6,965 7.77% 80,272 $ 6,262 7.80%
76,68
9 $ 5,530 7.21%
Cash and due from
banks 2,498 1,975 2,884
Bank premises and
equipment 2,714 1,397 1,061
Other assets 1,035 759 1,142
Total assets $ 95,862 $ 84,403 $ 81,776
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing
transaction
accounts $ 7,228 $ 155 2.14% $ 6,402 $ 146 2.28%
$
6,339 $ 146 2.30%
Money market deposit
accounts 6,690 239 3.57% 4,904 192 3.92% 5,623 201
3.
57%
Other savings
deposits 12,369 344 2.78% 12,582 372 2.96% 14,265
427
2.99%
All time deposits 50,192 2,956 5.89% 43,099 2,537 5.89%
38,494 2,010 5.22%
Total interest
bearing
liabilities 76,479 $ 3,694 4.83% 66,987 $ 3,247 4.85%
64,72
1 $ 2,784 4.30%
Demand deposits 8,153 6,924 7,336
Other
liabilities 806 722 623
Total
liabilities 85,438 74,633 72,680
Stockholders'
equity 10,424 9,770 9,096
Total
liabilities
and stockholders'
equity $ 95,862 $ 84,403 $ 81,776
Net interest income/net
interest margin/margin
average earning assets $ 3,271 3.65% $ 3,015 3.76%
$
2,746 3.58%
</TABLE>
- -50-
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
CHANGES IN NET INTEREST INCOME
<TABLE>
- -1996 Compared to 1995- - - -1995 Compared to 1994- -
Total Total
Average Average Increase Average Average Increase
(000 omitted) Volume Rate (Decrease) Volume Rate (Decrease)
Interest Income
Interest bearing
deposits with
banks and federal
<S> <C> <C> <C> <C> <C> <C>
funds sold $ 29 ($ 17) $ 12 ($ 3) $ 5 $ 2
Investment
securities 411 62 473 ( 12) 118 106
Loans 140 78 218 325 299 624
Total interest
income $ 580 $ 123 $ 703 $ 310 $ 422 $ 732
Interest Expense
Interest bearing
transaction
accounts $ 19 ($ 10) $ 9 $ 1 ($ 1) $ 0
Money market
deposit accounts 70 ( 23) 47 ( 26) 17 ( 9)
Other savings ( 6) ( 22) ( 28) ( 50) ( 5)
( 55)
All time deposits 418 1 419 240 287 527
Total interest
expense $ 501 ($ 54) $ 447 $ 165 $ 298 $ 463
Net interest income $ 256 $ 269
</TABLE>
- -51-
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
MATURITIES OF INVESTMENT SECURITIES
December 31, 1996
The following table shows the maturities of investment
securities at amortized cost as of December 31, 1996, and weighted
average yields of such securities. Yields are shown on a taxable
equivalent basis, assuming a 34% federal income tax rate.
<TABLE>
Within 1-5 5-10 Over
(000 omitted) 1 Year Years Years 10 Years Total
U.S. Treasury Securities
<S> <C> <C> <C> <C> <C> <C>
Amortized cost $ 452 $ 298 $ 0 $ 0 $ 750
Yield 5.90% 5.93% 0% 0% 5.92%
Obligations of other U.S.
Government agencies:
Amortized cost 950 7,606 6,389 797 15,742
Yield 5.37% 6.34% 7.22% 7.72%
6.71%
Obligations of state and
political subdivisions:
Amortized cost 1,345 4,324 3,530 268 9,467
Yield 5.86% 6.59% 7.71% 9.34%
6.98%
Mortgage-Backed securities
and SBA Guaranteed Loan
Pool Certificates (1):
Amortized cost 494 489 529 5,827 7,339
Yield 6.26% 7.79% 7.74% 6.61% 6.74%
Subtotal amortized
cost $ 3,241 $ 12,717 $ 10,448 $ 6,892 $ 33,298
Subtotal
yield 5.78% 6.47% 7.41% 6.84% 6.78%
Equity Securities $ 468
Yield 5.52%
Total investment
securities $ 33,766
Yield 6.76%
</TABLE>
(1) It is anticipated that these mortgage-backed securities and SBA
Guaranteed Loan Pool Certificates will be repaid prior to their
contractual maturity dates.
- -52-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following section presents a discussion and
analysis of the financial condition and results of operations
of FNB Financial Corporation (the Corporation) and its wholly-
owned subsidiary, The First National Bank of McConnellsburg
(the Bank). This discussion should be read in conjunction
with the financial tables/statistics, financial statements and
notes to financial statements appearing elsewhere in this
annual report.
RESULTS OF OPERATIONS
Overview
Consolidated net income for 1996 was $ 957,185, a
decrease of $ 44,579 or 4.45% from the net income of
$ 1,001,764 for 1995. On a per share basis, net income for
1996 was $ 2.39, based upon average shares outstanding of
400,000, compared to $ 2.51 for 1995.
Results of operations for 1996 as compared to 1995
were impacted by the following items: (1) net income was
positively impacted by a 11.64% increase in average earning
assets which was driven by a 14.51% increase in average
deposits, the result of the purchase of the Fort Loudon Branch
of Dauphin Deposit Bank on November 13, 1995, which increased
total deposits $ 5,533,477; (2) net income was negatively
impacted by a decreasing net interest margin which occurred
due to an increase in the reliance on interest income from the
purchases of lower yielding investment securities which offset
deposits purchased at the Fort Loudon office instead of higher
yielding loans while deposit rates remained relatively the
same; (3) net income was positively impacted by the
capitalization of $ 43,805 interest expense incurred during
the renovation/construction of the main office facility; (4)
net income was positively impacted by a decrease in FDIC
Insurance assessment expenses of $ 82,969 due to the
implementation of minimum FDIC Insurance assessments of
$ 2,000 as a direct result of the FDIC Insurance
capitalization fund exceeding 1.25% of all insured deposits;
(5) net income was negatively impacted by a $ 20,796 increase
in the annual provision for loan losses due to charge-offs
during the year which mandated an increase in the annual
provision; (6) net income was negatively impacted by an
increase in wage and salary expenses of $ 148,947 and employee
benefits of $ 41,473 due to: a) three full time employees and
1 part time employee hired for the operation of the Fort
Loudon Office acquired in November 1995; b) two full time and
four part time employees hired for the operation of the Bank's
- -53-
first interstate office, Hancock Community Bank, opened on
November 25, 1996 in Hancock, Maryland; c) wage and salary
increases during 1995; and d) increased participation in the
Bank's health care and retirement plans; (7) net income was
negatively impacted by a $ 34,938 increase in net occupancy
expenses as a result of the addition of the Fort Loudon
office, the Hancock Community Bank office and the
renovation/expansion of the main office which was completed on
September 1, 1996; (8) net income was negatively impacted by
the amortization of the cost of the Fort Loudon deposit
acquisition in the amount of $ 52,863, a $ 23,540 increase in
advertising/promotional expenses as a result of increased
advertising campaigns to promote the Fort Loudon Office and
the opening of Hancock Community Bank, a $ 18,083 increase in
the cost of data, voice and Automated Teller machine
communication expenses as a main result of the Fort Loudon and
Hancock Community Bank offices, a $ 13,300 increase in
professional development expenses due to the training costs of
new employees and attendance of banking association
conventions, the ninetieth anniversary celebration
stockholder's banquet of approximately $ 10,000, a $ 12,692
increase in supplies expenses due to the additional new
accounts acquired at the Fort Loudon Office and start-up
supplies for the Hancock Office, and a $ 4,844 increase in
postage costs due to increased account holders as a result of
the Fort Loudon acquisition; and (9) net income was positively
impacted by a $ 35,762 decrease in the current year income tax
provision resulting from a general decrease in taxable income
in relation to tax-free income.
Net income as a percent of total average assets for
1996, also known as return on assets (ROA), was 1.00% compared
to 1.19% for 1995. Net income as a percent of average
stockholders' equity for 1996, also known as return on equity
(ROE), was 9.18% compared to 10.26% for 1995. The ROA and ROE
for these periods were impacted by the factors discussed in
the preceding paragraphs.
During 1996 management became aware of the closing
of a branch office of First Federal Savings Bank of Western
Maryland, in Hancock, Maryland. As the Board of Directors had
targeted for several years the Hancock market as a future site
for expansion purposes, management felt it prudent to pursue
this opportunity. Although there are other branch offices of
banks and savings and loans in Hancock, Maryland, there were
no locally-owned community bank offices, and had not been
since the late 1970s and early 1980s when both local banks
were taken over by large out-of-the-area, removed-from-the-
community bank holding companies. Management felt it wise to
pursue the "nitch" of providing community banking to the
- -54-
Hancock community and supporting the needs of the community
while reinforcing the Bank's ability to maintain and service
its current accounts in the southern part of Fulton County,
Pennsylvania.
The location of this branch office known as,
Hancock Community Bank, A Division of The First National Bank
of McConnellsburg, in the Hancock Shopping Center became
reality when The Office of the Comptroller of the Currency,
the Bank's primary regulator, gave permission for the Bank to
open this office on November 25, 1996. This office, the
Bank's first interstate branch office, is also unique in that
it will also be the Bank's first supermarket branch office.
As soon as the owner of the adjacent supermarket completes
extensive renovations, the wall between the branch office and
the supermarket will be removed, allowing customers to enter
the branch directly from the supermarket. The operation of
this office is anticipated to increase operational overhead
due to the costs of personnel, equipment and furniture
expenses, utilities and rent expense; however, the long term
benefits from this office through the generation of new
deposits and loans are anticipated to increase income to the
Corporation over the next several years.
Net Interest Income
Net interest income is the amount by which interest
income on loans and investments exceeds interest incurred on
deposits and other interest-bearing liabilities. Net interest
income is the Corporation's primary source of revenue. The
amount of net interest income is affected by changes in
interest rates and by changes in the volume and mix of
interest-sensitive assets and liabilities.
Net interest income for 1996 increased $ 255,008 or
8.46% over 1995. Average earning assets for 1996 increased
$ 9,343,000 over 1995. The most significant contribution to
this increase in average earning assets was the increase in
investment securities of $ 7,292,000 or 28.22%. This earning
asset increase was funded by an increase in average deposits
of $ 10,721,000 or 14.51%. This volume increase is the result
of deposits purchased from the Fort Loudon office of
$ 5,533,477; a local school district Money Market account
transferred to the Bank in July 1996 which carried an average
balance of over $ 1,000,000; and a new business Money Market
account opened during 1996 which carried an average balance of
approximately $ 2,000,000. The volume growth in earning
assets and interest-bearing liabilities contributed to the
increase in net interest income by the amount of $ 79,000 in
1996 over 1995.
- -55-
The decline in market interest rates which began in
the third and fourth quarters of 1995, continued into the
first quarter of 1996 when the Federal Reserve Board decreased
short term interest rates. Throughout the remainder of 1996,
interest rates remained relatively the same with no major
changes in Federal Reserve interest rate policy. Average
yields on variable rate loans and investments increased 14 and
18 basis points respectively from those of 1995; however, the
average yield on federal funds sold decreased 49 basis points.
As a result of the aforementioned significant increase in the
investment of excess deposits over that of loan demand into
investment securities, the average yield on earning assets
decreased slightly in 1996 to 7.77%, a .03% decrease from
1995. The average cost of interest-bearing liabilities during
1996 was 4.83%, a .02% decrease from 1995. This decrease was
attributable to the capitalization of $ 43,805 interest
expense during the renovation/construction of the main office
in accordance with FASB guidelines but mainly due to
management's decrease of Super Now and Money Market account
rates and a 25 basis point reduction of Savings account rates.
The result of these decreases were a 14 basis point decrease
in the cost of interest-bearing transaction accounts; a 35
basis point reduction in the cost of Money Market Deposit
accounts and an 18 basis point reduction in the cost of Saving
accounts. The cost of time deposits remained at 5.89%, the
same cost as in 1995. The net effect of all interest rate
fluctuations was to increase net interest income in the amount
of $ 177,000 in 1996 over 1995. Due to the decrease in the
yield on earning assets by 3 basis points, which was slightly
more than the 2 basis point decrease in the cost of interest-
bearing liabilities, and to an increase of $ 7,789,000 or 83%
of the total increase in earning assets into lower yielding
investment securities and federal funds sold, the Bank has
experienced a decrease in its net interest margin during 1996
compared to 1995. The average net interest margin for 1996
was 3.65% compared to 3.76% for 1995.
Management anticipates the yield on earning assets
to increase during the next few quarters as indexes on
adjustable rate securities and loans have increased. The cost
of interest-bearing liabilities is projected to increase
slightly during the next few quarters as lower yielding
maturing time deposits are repriced to higher yielding rates.
As a result, the net interest spread and net interest margin
are projected to increase slightly during this period. Bank
management continually monitors the Bank's rate sensitive
position within the next year. To protect and improve rate
sensitive positions, the strategies available to the Bank are
purchasing short to medium term, fixed rate securities,
- -56-
promoting long-term lower yielding certificates of deposits,
decreasing the yield on all deposit-bearing liabilities, and
promoting all loan products.
Provision for Loan Losses
The loan loss provision is an estimated expense
charged to earnings in anticipation of losses attributable to
uncollectible loans. The provision is based on Management's
analysis of the adequacy of the allowance for loan losses.
The provision for 1996 was $ 95,500 compared to $ 74,704 in
1995. This increase was based on a decrease in the level of
recoveries of prior year charged-off loans in 1996 compared to
that of 1995. Prior year charged-off loans of approximately
$ 13,000 were recovered in 1996 compared to $ 31,000 in 1995.
At the same time, the amount of charged-off loans in 1996 was
relatively the same as those of 1995. Total charged-off loans
in 1996 were $ 108,000 compared to $ 106,000 in 1995. This
decrease in recoveries resulted in the need to increase the
provision from $ 74,704 in 1995 to $ 95,500 in 1996 and was
also based on management's assessment of the Bank's loan
volumes, past historical performance, and analysis of non-
performing and delinquent loans which indicated the present
balance of the allowance was sufficient for anticipated future
charge-offs. See discussion on Allowance for Loan Losses.
Other Operating Income and Other Operating Expenses
Other operating income for 1996 was $ 270,753, a
$ 1,229 increase over the same period in 1995. This increase
is mainly attributable to a decrease in net security losses
incurred during 1996 of $ 3,843 in comparison to 1995 net
security losses of $ 5,210. Other income increases
attributing to the total increase were a $ 4,048 recovery of
expenses incurred in the collection of a prior year charged-
off loan. Offsetting this increase was a $ 4,451 decrease in
service charges on deposit accounts, a result of a general
decrease in the collection of fees associated with overdrawn
accounts.
Total other operating expenses for 1996 increased
by $ 315,782 or 16.16%, over 1995. As 1996 was the first full
year of operational expenses associated with the Fort Loudon
office, operating expenses increased due to this operation and
are outlined in the following discussion. Employee wages and
benefits increased $ 190,420 due to increased employment as a
result of the Fort Loudon and Hancock Community Bank offices,
increased participation in health benefit and pension costs
and wage and salary increases which became effective in 1996.
Net occupancy expenses of bank premises increased $ 34,938 and
- -57-
furniture and equipment expenses increased $ 4,015 due to
increased depreciation on real estate, furniture and equipment
as a result of a full year's depreciation on the Fort Loudon
Branch Office, and on depreciation on the main office
renovation and construction completed on September 1, 1996 and
on the Hancock Community Bank office which opened on November
25, 1996. Other operating expenses increased $ 169,378 due to
the amortization of the cost of the Fort Loudon deposit
acquisition in the amount of $ 52,863, a $ 23,540 increase in
advertising/promotional expenses as a result of increased
advertising campaigns to promote the Fort Loudon Office and
the opening of Hancock Community Bank, a $ 18,083 increase in
the cost of data, voice and Automated Teller Machine
communication expenses as a main result of the Fort Loudon
and Hancock Community Bank offices, a $ 13,300 increase in
professional development expenses due to the training costs of
new employees and attendance of banking association
conventions, the ninetieth anniversary celebration
stockholder's banquet of approximately $ 10,000, a $ 12,692
increase in supplies expenses due to the additional new
accounts acquired at the Fort Loudon Office and start-up
supplies for the Hancock Office, and a $ 4,844 increase in
postage costs due to increased account holders as a result of
the Fort Loudon acquisition. Offsetting these increases in
other expenses was a $ 82,969 decrease in the FDIC insurance
premium due to the implementation of minimum FDIC Insurance
assessments of $ 2,000 as a direct result of the FDIC
Insurance capitalization fund exceeding 1.25%.
Management has been operating, during the past few
years, in an expansion mode, by increasing the Bank's target
market through the acquisition of the Fort Loudon Branch
Office in Franklin County, Pennsylvania and the opening of
Hancock Community Bank in Washington County, Maryland as well
as expanding the main office facilities to allow for future
growth and expansion of operations. As a result of this growth
and expansion, management anticipates other operating expenses
to increase during the 1997 operational year and years
thereafter, due mainly to the following: 1) depreciation of
the main office renovation/construction completed on September
1, 1996; 2) operational expenses and overhead associated with
the operation of Hancock Community Bank which opened on
November 25, 1996; and 3) operational expenses and overhead
associated with the renovation/expansion of the Fort Loudon
office scheduled for completion in mid 1997 which is
anticipated to cost approximately $ 200,000. These items are
anticipated to decrease the Corporation's net income during
the next few years as expenses of these items impact net
income. The immediate result will be a decrease in
- -58-
operational income, Earnings per Share, Return on Assets and
Return on Equity. Although this growth mode is anticipated to
reduce income in the short term, management is confident that
in the long term these growth plans will benefit the
corporation's income producing ability through the addition of
new customers to the Bank's deposit and loan bases and
retention of current customers which will result in increased
income to the corporation.
Income Taxes
The Corporation's income tax provision for 1996 was
$ 218,019, as compared to $ 253,781 for 1995. This decrease
in the tax provision in the amount of $ 35,762 was due to a
decrease in income before income taxes of $ 80,341 and an
increase in 1996 tax free interest income of $ 43,784 to
$ 633,813 from $ 590,029 for 1995. The Corporation operated
with a marginal tax rate of 34% in 1996 and 1995. The
effective tax rate of the Corporation for 1996 was 18.55%
compared to an effective tax rate for 1995 of 20.21%.
FUTURE IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June of 1996 the Financial Accounting Standards
Board issued SFAS No. 125 Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of
Liabilities. Management has not concluded on the impact on
future operations. This statement may significantly affect
accounting for and disclosures about certain bank
transactions including the following:
d Assets subject to prepayment risk
d Servicing assets and liabilities
d Securities lending transactions
d Loan participations
d Extinguishment of liabilities
d Collateral controlled by an institution as a
secured party
This statement is effective for transfers and
servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996.
- -59-
FINANCIAL CONDITION
Investment Debt Securities
The book value of the investment debt security
portfolio as of December 31, 1996, increased by $ 1,808,061
from December 31, 1995, representing a 5.74% increase. This
increase occurred primarily due to the increases in total
deposits which were unable to be offset by loan demand. Total
deposits increased $ 6,217,681 of which $ 3,466,064 was offset
by loan demand.
Due to the implementation of SFAS No. 115,
management has segregated securities as Held-to-Maturity
(HTM), Available-for-Sale (AFS) or Trading securities. This
accounting standard requires HTM securities be reported on the
balance sheet at cost and AFS securities be reported at market
value. As of December 31, 1996 the Corporation had in its
portfolio HTM securities of $ 4,559,739 with a market value of
$ 4,567,903 and AFS securities of $ 28,755,272 with a book
value of $ 28,737,886. No securities were classified as
Trading securities as of December 31, 1996. For the December
31, 1995, Balance Sheet presentations, the Bank carried
investment debt securities classified as Held-to-Maturity of
$ 5,401,263 with a market value of $ 5,402,945 and as
Available-for-Sale $ 26,234,019, with at book value of
$ 26,088,301. No securities were classified as Trading as of
December 31, 1995.
Once a security has been classified as HTM, AFS or
Trading, it cannot be moved to another classification without
"tainting" the entire classification of securities. During
the 1996 operational year, no securities were moved between
classifications. During the period of November 15, 1995
through December 31, 1995, the Financial Accounting Standards
Board and Securities and Exchange Commission relaxed these
standards and allowed institutions a one-time grace period to
move securities from one classification to another without
"tainting" any pool of securities.
After extensive review of the Corporation's
security portfolio and the reasons the organization utilizes
the security portfolio, management took advantage of this
opportunity and on December 27, 1995 moved $ 5,072,833 of
securities classified as HTM to the AFS classification and
accordingly carries these securities at their market value.
No securities were moved from the AFS classification to the
HTM classification and no securities were classified as
Trading. The justifications for this movement were based upon
the following:
- -60-
1) Regulatory rulings which have stated the AFS
mark-to-market adjustment will not impact
regulatory risk-based capital positions;
2) The strong liquidity position of the corporation
based upon its security maturity ladder;
mortgage-backed security, SBA GLPC and loan
principal paydowns; availability of a Line of
Credit from the Federal Home Loan Bank; and
availability of the Federal Reserve Discount
Window;
3) The holding of and investment in certain
adjustable rate securities for interest rate
management purposes;
4) The need to have certain fixed rate securities,
both taxable and tax-free, available for future
sales, and tax swaps opportunities.
The general policy adopted by the Bank segregates
purchases of tax-free municipals with maturities of 5 years or
less as Held-to-Maturity securities while all other security
purchases are classified as Available-for-Sale. Policy also
allows management on a case-by-case basis to make a specific
determination as to the classification of a security purchase
as Held-to-Maturity or Available-for-Sale depending upon the
reason for purchase. Management adheres to the philosophy
that 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.
As of December 31, 1996, the net unrealized gain of
the HTM portfolio was $ 8,164, a .18% increase from book value
and on the AFS portfolio a net unrealized gain of $ 17,386 or
.06% increase from book value. As of December 31, 1995, the
net unrealized gain on the HTM portfolio was $ 1,682, a .03%
increase from book value, and on the AFS portfolio, a net
unrealized gain of $ 145,718 or a .56% increase from book
value. Management has reviewed the fluctuation of market
value in each of these portfolios and has determined that due
to the last several months of relatively stable interest
rates, the values of securities contained with the Bank's
investment debt portfolio are a direct result of this
stability in interest rates and "leveling" of longer term
interest rates. Management determined that 1995's increasing
values were the result of the Federal Reserve Board's decrease
in short term interest rates during that time. Management has
therefore, concluded that the net unrealized gains and/or
- -61-
losses in the company's investment debt portfolio are a direct
result of the current monetary policy and therefore are
temporary in that security values will continue to fluctuate,
either decrease or increase in value, in response to future
changes in interest rates and monetary policy.
Management has purchased for the portfolio
mortgage-backed securities but presently has no Collateralized
Mortgage Obligations (CMOs) in its portfolio. The large
portion of these mortgage-backed 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.
Loans
The total investment in net loans was $ 56,259,929
at December 31, 1996, representing a $ 3,466,064 or 6.57%,
increase from the December 31, 1995 investment of
$ 52,793,865. The primary reasons for this increase in the
loan portfolio over the past year were due to 1) a $ 1,315,000
increase in real estate loans secured by farmland, the main
result of a $ 750,000 farmland loan refinanced from another
financial institution and two new farm loans of over
$ 650,000; 2) a $ 1,037,000 increase in loans secured by 1 to
4 family residential properties; 3) a $ 1,250,000 commercial
loan refinanced from another institution which was offset with
the payoff of a Tax Revenue Anticipation Note to a local
school district which matured on June 30, 1996 of $ 1,100,000;
and 4) an increase in loans to individuals for personal
expenditures of $ 1,102,000 which occurred due to special
promotions offering lower interest rates to consumers
throughout the year. Total new real estate mortgage loan
lending for 1996 increased $ 2,273,000 or 6.18% from December
31, 1995 in comparison to a $ 1,701,000 or 4.84% increase in
1995 from December 31, 1994. This increase in mortgage
lending reflects the general real estate environment in Fulton
- -62-
County during 1996 which has experienced an increase in new
home sales and refinancings. At the same time competitive
loan mortgage loan rates of other institutions in the
Corporation's market area has also resulted in the payoff of
mortgage loans within the Bank's loan portfolio. Overall loan
demand during the past year was stronger than that of 1995
which was the result of an increase in agriculture real estate
lending, commercial loans and consumer loans. These increases
were enhanced by the Bank's operation in a larger market area
through the Fort Loudon office in Franklin County,
Pennsylvania and Hancock Community Bank in Washington County,
Maryland.
To encourage new loan demand, management
anticipates offering additional loan promotions, reviewing
loan terms for customer "friendliness" and seeking longer term
fixed rate mortgage loans to be sold in the secondary market
to stimulate lending in the Corporation's market area. In
addition, the operation of Hancock Community Bank is
anticipated to result in an increase in additional lending in
the Washington County, Maryland area as well as in northern
Morgan County, West Virginia and southern Fulton County,
Pennsylvania.
Nonperforming Assets
Nonperforming loans consist of nonaccruing loans
and loans 90 days or more past due. Nonaccruing loans are
comprised of loans that are no longer accruing interest income
because of apparent financial difficulties of the borrower.
Interest on nonaccruing loans is recorded when received only
after past due principal and interest are brought current.
Other real estate owned includes assets acquired in
settlement of mortgage loan indebtedness and loans identified
as in-substance foreclosures. These assets are carried at the
lower of cost or fair value. The other real estate balance as
of December 31, 1996, was $ 318,992 compared to $ 395,752 as
of December 31, 1995. This decrease reflects sales of
foreclosed construction lots in Franklin County, Pennsylvania
and the sale of a 1-4 family residential property located
within the Borough of McConnellsburg. The Bank is actively
pursuing the sale of the other properties contained in Other
Real Estate and currently has a lease/purchase agreement
signed on the retail property located in downtown
McConnellsburg on which the Bank foreclosed and has included
in Other Real Estate.
- -63-
Allowance for Loan Losses
The allowance is maintained at a level to absorb
potential future loan losses contained in the loan portfolio
and is formally reviewed by Management on a quarterly basis.
The allowance is increased by provisions charged to operating
expense and reduced by net charge-offs. Management's basis
for the level of the allowance and the annual provisions is
its evaluation of the loan portfolio, current and projected
domestic economic conditions, the historical loan loss
experience, present and prospective financial condition of the
borrowers, the level of nonperforming assets, best and worst
case scenarios of possible loan losses and other relevant
factors. While Management uses available information to make
such evaluations, future adjustments of the allowance may be
necessary if economic conditions differ substantially from the
assumptions used in making the evaluation.
The allowance for loan losses remained basically
the same as the prior year at $ 405,600; however, the ratio of
the allowance to net loans was .72% at December 31, 1996, as
compared to .76% at December 31, 1995. This ratio decrease
was justified by management as the $ 750,000 of the new
agriculture real estate lending is 90% guaranteed by the Farm
Service Agency, a U. S. Government Agency. Management
believes that the current allowance for loan losses of
$ 405,600 is adequate to meet any potential loan losses.
LIQUIDITY AND RATE SENSITIVITY
The Corporation's objective is to maintain adequate
liquidity while minimizing interest rate risk. Adequate
liquidity provides resources for credit needs of borrowers,
for depositor withdrawals, and for funding Corporate
operations. Sources of liquidity are maturing investment
securities; maturing overnight investments in federal funds
sold; maturing investments in time deposits at other banks;
readily accessible interest-bearing deposits at other banks;
payments on loans, mortgage-backed securities and SBA
Guaranteed Loan Pool Certificates; and a growing core deposit
base. In order to assure a constant and stable source of
funds, the Bank has joined the Federal Home Loan Bank of
Pittsburgh because of the availability of both short term and
long term fixed rate funds. As of December 31, 1996, the Bank
had no borrowings from this institution but had readily
available to it a $ 3,022,000 line of credit.
- -64-
The objective of managing interest rate sensitivity
is to maintain or increase net interest income by structuring
interest-sensitive assets and liabilities in such a way that
they can be repriced in response to changes in market interest
rates. The Corporation has maintained a negative rate
sensitivity position, in that, rate sensitive liabilities
exceed rate sensitive assets. Therefore, in a period of
declining interest rates the Corporation's net interest income
is generally enhanced versus a period of rising interest rates
where the Corporation's net interest margin may be decreased.
Presently, the interest rate environment is
anticipated to remain relatively stable; however, some
indications are that the Federal Reserve Board may increase
short term interest rates in the near future. At the present
time, a portion of the Corporation's adjustable rate loans and
securities are repricing to slightly higher interest rates
while management is retaining the cost of interest rate
sensitive liabilities at relatively the same level.
The anticipated result of this current position will be a
gradual increase in the yield on earning assets while the cost
of interest-bearing liabilities remain relatively the same.
Management therefore expects the net interest spread and
interest margin of the Bank to increase slightly during the
next few quarters. Management continually reviews interest
rates on those deposits which can be changed immediately,
specifically NOW accounts, Money Market Accounts, and Savings
Accounts to determine if an interest rate decrease is
necessary to increase the net interest spread and net interest
margin of the Bank.
Another impact on the net interest spread and
interest margin of the Corporation has been the low loan to
deposit ratio which indicates how much of the Bank's deposits
are invested in the loan portfolio. This ratio is a primary
indicator of a Bank's liquidity position as the higher the
ratio, the less liquid assets are available to fund deposit
withdrawals. At the same time, this ratio also indicates to
management how many deposits are offset by the Bank's highest
yielding earning asset, loans; therefore, the higher the
ratio, the more deposits are invested in loans and the less
invested in lower yielding investment debt securities. The
result of a higher loan to deposit ratio is usually a higher
net interest spread and margin. Management has targeted as
the Corporation's optimal loan to deposit ratio 75% to 80%.
The loan to deposit ratio at December 31, 1996 was 64.57% and
at December 31, 1995 65.24%. This decrease of .67% from
December 31, 1995 occurred due to the acquisition of the Fort
- -65-
Loudon Office deposits which were invested immediately upon
settlement in investment securities and due to deposit growth
during 1996 exceeding that of loan growth. The current ratio
indicates that a significant amount of deposits are invested
in lower yielding investment debt securities which decrease
the net interest margin and spread of the Bank. Management
was aware that the loan to deposit ratio and subsequently the
net interest margin of the Corporation would decrease
immediately following the purchase of the Fort Loudon Branch;
however, it was determined that future growth of the
organization was limited within Fulton County and that this
operation would complement and indeed enhance the operations
of the Corporation. With the addition of Hancock Community
Bank, management is anticipating loan growth will accelerate
as new loan customers are generated in this area to offset
deposit growth in other market areas of the organization.
To minimize the risk of its negative rate
sensitivity position, the Bank employs many different methods
to diversify its risk both on the asset and the liability side
of the Balance Sheet. The Bank offers both fixed rate and
floating/adjustable rate loans to its customers. At December
31, 1996, the Bank's floating and adjustable rate loans
totaled $ 32,292,000, or 55.63% of the total loan portfolio.
As of December 31, 1995, the Bank's floating and adjustable
rate loans totaled $ 29,179,000, 54.05% of the total loan
portfolio. The bank's debt security investment portfolio as
of December 31, 1996, was comprised of a book value of
$ 7,928,548, or 23.81% of floating rate debt securities which
reprice annually or more frequently while at December 31,
1995, the Bank's debt security investment portfolio was
comprised of a book value of $ 9,981,538, or 31.70% of
floating rate securities. Specific methods which have been
employed by the Bank to address this negative rate sensitive
position are the offering of the following deposit products to
encourage the movement of short term deposits to longer term
deposits: four or five year certificates of deposit with
competitive interest rates.
The interest rate sensitivity analysis for the Bank
as of December 31, 1996 is as follows:
- -66-
<TABLE>
After 3 After 1
(000's Within But Within But Within After 5 NonInterest
omitted) 3 Months 12 Months 5 Years Years Bearing Total
ASSETS:
Federal funds
<S> <C> <C> <C> <C> <C> <C>
sold $ 1,239 $ 0 $ 0 $ 0 $ 0 $ 1,239
Investment
securities
(book value) 7,636 3,353 9,567 13,210 0 33,766
Interest
bearing
balances
due from
banks 39 0 288 0 0 327
Loans 8,656 14,800 17,204 16,412 975 58,047
Unearned
discount &
allowance
for loan
losses (1) 0 0 0 ( 1,380) 0 ( 1,380)
Noninterest
earning
assets 0 0 0 0 6,613 6,613
Total
assets $ 17,570 $ 18,153 $ 27,059 $ 28,242 $ 7,588 $ 98,612
</TABLE>
- -67-
(1) Information concerning detailed aging
categories to which these apply is not readily
available. It has been arbitrarily assigned to
the "after five years" category for purpose of
analysis.
- -68-
<TABLE>
After 3 After 1
(000's Within But Within But Within After 5 NonInterest
omitted) 3 Months 12 Months 5 Years Years Bearing
Total
LIABILITIES:
NOW accounts &
savings
<S> <C> <C> <C> <C> <C> <C>
accounts $ 26,675 $ 0 $ 0 $ 0 $ 0 $ 26,675
Time deposits 10,236 13,978 26,947 48 0 51,209
Noninterest-bearing
deposits 0 0 0 0 9,250 9,250
Other noninterest-
bearing sources
to fund earning
assets 0 0 0 0 808 808
Total
liabilities $ 36,911 $ 13,978 $ 26,947 $ 48 $ 10,058 $
87,942
Interest sensitivity
gap ($ 19,341) $ 4,175 $ 112 $ 28,194
Cumulative interest
sensitivity gap ( 19,341) ( 15,166) ( 15,054) 13,140
Gap ratio .48 1.30 1.00 N/A
Cumulative gap ratio .48 .70 .81 1.17
</TABLE>
- -69-
CAPITAL
The primary method by which the Corporation
increases total stockholders' equity is through the
accumulation of earnings. The Corporation maintains ratios
that are well above the minimum total capital levels required
by federal regulatory authorities including the new risk-based
capital guidelines. Regulatory authorities have established
capital guidelines in the form of the "leverage ratio" and
"risk-based capital ratios." The leverage ratio of the
Corporation, defined as total stockholders' equity less
intangible assets to total assets, was 10.60% as of December
31, 1996, compared to 10.63% as of December 31, 1995. The
risk-based ratios compare capital to risk-weighted assets and
off-balance-sheet activity in order to make capital levels
more sensitive to risk profiles of individual banks. A
comparison of the Corporation's capital ratios to regulatory
minimums at December 31 is as follows:
<TABLE>
FNB Financial Corporation Regulatory Minimum
1996 1995 Requirements
<S> <C>
Leverage ratio 10.60% 10.63% 3%
Risk-based capital
ratios
Tier I (core
capital) 19.30% 20.32% 4%
Combined Tier I
and Tier II
(core capital
plus allowance
for loan
losses) 20.05% 21.16% 8%
</TABLE>
FNB Financial Corporation has traditionally been
well-capitalized with ratios well above required levels and
expects equity capital to continue to exceed regulatory
guidelines and industry averages. Certain ratios are useful
in measuring the ability of a company to generate capital
internally. The following chart indicates the growth in
equity capital for the past three years.
- -70-
<TABLE>
1996 1995 1994
Equity capital at December 31
(before FAS 115 adjustments)
<C> <S> <C> <C> <C> <C>
($ 000 omitted) $ 10,670 $ 10,021 $ 9,327
Equity capital as a percent
of assets at December 31 10.60% 10.63% 11.50%
Return on average assets 1.00% 1.19% 1.05%
Return on average equity 9.18% 10.26% 9.37%
Cash dividend payout ratio 32.18% 30.75% 30.04%
</TABLE>
STOCK MARKET ANALYSIS AND DIVIDENDS
The Corporation's common stock is traded inactively
in the over-the-counter market. As of December 31, 1996 the
approximate number of shareholders of record was 457.
<TABLE>
Market Cash Market Cash
Price Dividend Price Dividend
1996 1995
<S> <C> <C> <C> <C>
First Quarter $ 35.00 $ .17 $ 26.25 $ .17
Second Quarter 45.00 .17 26.50 .18
Third Quarter 45.00 .18 30.00 .19
Fourth Quarter 45.00 .25 30.00 .23
</TABLE>
- -71-
