FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1998
Commission file number: 33-66014
FNB Financial Corporation
(Exact name of registrant as specified in its charter)
Commonwealth of Pennsylvania 23-2466821
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 Lincoln Way West, McConnellsburg, PA 17233
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 717/485-3123
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at June 30, 1998
(Common stock, $0.63 par value) 400,000
FNB FINANCIAL CORPORATION
INDEX
Page
PART I - FINANCIAL INFORMATION
Condensed consolidated balance sheets -
June 30, 1998 and December 31, 1997 5
Condensed consolidated statements of income -
Three months ended June 30, 1998 and 1997 6
Condensed consolidated statements of income -
Six months ended June 30, 1998 and 1997 7
Condensed consolidated statements of comprehensive
income -
Six months ended June 30, 1998 and 1997 8
Condensed consolidated statements of cash flows -
Six months ended June 30, 1998 and 1997 9
Notes to condensed consolidated financial
statements 10-12
Table #1 - Schedule of held to maturity and
available for sale investment activity for the
period January 1, 1998 through June 30, 1998 13
Table #2 - Schedule of gross unrealized gains and
unrealized losses within the held to maturity and
available for sale investment portfolios by
investment type 14
Management's discussion and analysis of financial
condition and results of operations 15-18
PART II - OTHER INFORMATION 20
Signatures 21
PART I - FINANCIAL INFORMATION
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<S> <C> <C>
June 30, December 31,
1998 1997
ASSETS: (unaudited) (audited*)
Cash and Due from banks $ 3,470,623 $ 3,491,312
Interest-bearing deposits with banks 595,159 6,050,546
Marketable Debt Securities
Held-to-maturity (Market value - 1998:
$2,384,105 and 1997: $2,988,188) 2,371,690 2,975,841
Available-for-sale 30,581,602 26,204,829
Marketable Equity Securities
Available for Sale 108,300 133,580
Federal Reserve, Atlantic Central Banker's Bank
and Federal Home Loan Bank Stock 394,100 389,600
Federal Funds Sold 7,364,000 2,931,000
Loans, net of unearned discount &
Allowance for loan losses 60,120,674 59,124,012
Bank buildings, equipment, furniture &
fixtures, net 3,256,198 3,295,474
Accrued interest receivable 651,534 610,240
Deferred income tax charges 0 0
Other real estate owned 511,852 428,488
Intangible Assets 186,039 194,222
Other assets 2,269,573 191,091
Total Assets $111,881,344 $106,020,235
========== ==========
LIABILITIES :
Deposits:
Demand deposits $10,182,692 $ 9,988,174
Savings deposits 30,728,283 26,713,986
Time certificates 57,932,419 56,293,701
Other time deposits 502,559 263,829
Total deposits $99,345,953 $93,259,690
Accrued interest payable & other liabilities 805,159 738,197
Liability for other borrowed money 171,032 460,719
Deferred income taxes 14,939 67,880
Accrued dividends payable 72,000 104,000
Total Liabilities $100,409,083 $94,630,486
STOCKHOLDERS' EQUITY:
Capital stock, Common, par value $0.63;
6,000,000 shares authorized; 400,000
outstanding $ 252,000 $ 252,000
Additional paid-in capital 1,789,833 1,789,833
Retained earnings 9,349,194 9,163,913
Net unrealized gain/(loss) on Available-for-sale
securities, net of tax effects 81,234 184,003
Total Stockholders' Equity $11,472,261 $11,389,749
Total Liabilities & Stockholders' Equity$111,881,344 $106,020,235
========== ==========
</TABLE>
*Condensed from audited financial statements.
The accompanying notes are an integral part of these condensed
financial statements.
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended June 30, 1998 and 1997
(UNAUDITED)
<TABLE>
<S> <C> <C>
1998
1997
Interest & Dividend Income
Interest & fees on loans $1,368,878
$1,318,651
Interest on investment securities:
U.S. Treasury Securities 3,006
11,061
Obligations of other U.S.
Government Agencies 344,412
358,468
Obligations of State & Political
Subdivisions 113,574
105,837
Interest on deposits with banks 7,887
4,930
Dividends on Equity Securities 6,357
6,446
Interest on federal funds sold 69,384
43,473
Total Interest & Dividend Income 1,913,498
1,848,866
Interest Expense
Interest on deposits 1,013,067
951,038
Interest on Other borrowed money 2,851
0
Net interest income 1,015,918
951,038
Provision for loan losses 190,000
43,500
Net interest income after
Provision for loan losses 707,580
854,328
Other income
Service charges on deposit accounts 19,274
18,268
Other service charges, collection &
exchange charges, commissions
and fees 52,935
51,969
Other income 26,750
40,593
Net Securities gains/(losses) 142,671
95
Total other income 241,630
110,925
Other expenses 684,001
650,028
Income before income taxes 265,209
315,225
Applicable income taxes 94,808
69,011
Net income $170,401
$246,214
=======
=======
Earnings per share of Common Stock:
Net income per share $0.43
$0.62
Cash dividend declared per share $0.18
$0.18
Weighted average number of shares outstanding 400,000
400,000
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended June 30, 1998 and 1997
(UNAUDITED)
<TABLE>
<S> <C> <C>
1998
1997
Interest & Dividend Income
Interest & fees on loans $2,692,655
$2,589,431
Interest on investment securities:
U.S. Treasury Securities 6,500
22,130
Obligations of other U.S.
Government Agencies 671,125
728,419
Obligations of State & Political
Subdivisions 240,230
212,576
Interest on deposits with banks 33,175
8,817
Dividends on Equity Securities 14,496
13,887
Interest on federal funds sold 119,184
62,235
Total Interest & Dividend Income 3,777,365
3,637,495
Interest Expense
Interest on deposits 1,995,800
1,878,301
Interest on other borrowed money 5,721
559
Total Interest Expense 2,001,521
1,878,860
Net interest income 1,775,844
1,758,635
Provision for loan losses 291,114
52,500
Net interest income after
Provision for loan losses 1,484,730
1,706,135
Other income
Service charges on deposit accounts 39,492
32,996
Other service charges, collection &
exchange charges, commissions
and fees 102,821
98,058
Other income 41,835
50,678
Net Securities gains/(losses) 144,244
95
Total other income 328,392
181,827
Other expenses 1,344,092
1,305,788
Income before income taxes 469,030
582,174
Applicable income taxes 143,750
117,818
Net income $325,280
$464,356
=======
=======
Earnings per share of Common Stock:
Net income per share $0.81
$1.16
Cash dividend declared per share $0.35
$0.35
Weighted average number of shares outstanding 400,000
400,000
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Six Months Ended June 30, 1998 and 1997
(UNAUDITED)
<TABLE>
<S> <C> <C>
1998
1997
Net Income 325,280
$464,356
Other Comprehensive income, net of tax
Unrealized holding gains/(losses for period (102,789)
41,807
Comprehensive Income $222,491
$506,163
=======
=======
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1998 and 1997
<TABLE>
<S> <C> <C>
(UNAUDITED)
1998 1997
Cash flows from operating activities:
Net income $ 325,280 $
464,356
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation & amortization 132,417 138,012
Provision for loan losses 291,114 52,500
Net (gain)/loss on sales of
investments (144,244)
95
Increase in Cash Value of Life Insurance (15,514) 0
Loss on Disposal of Other Real Estate 2,000 0
(Increase) decrease in accrued
interest receivable (41,294)
50,460
Increase (decrease) in accrued
interest payable and
other liabilities 66,962
14,985
Other (net) (68,200)
20,414
Net cash provided (used)by operating
activities 548,521 741,822
Cash flows from investing activities:
Net (increase) decrease in interest-
bearing deposits with banks 5,455,387
9,817
Purchases of Held-to-maturity
securities 0
(151,662)
Purchases of Available-for-sale
securities (9,248,615)
(1,875,375)
Proceeds from sales of Available-for-
sale securities 3,641,590 709,447
Proceeds from maturities of Held-to-
maturity securities 604,151 750,056
Proceeds from maturities of Available-
for-sale securities 1,184,993 2,714,409
Purchases of marketable equity securities (45,000)
(5,880)
Proceeds from sales of marketable equity
securities 105,000 0
Net (increase) decrease in loans (1,407,776)
(443,933)
Proceeds from sale of Other real
estate owned 23,475 10,075
Purchases of bank premises &
equipment (net) (84,491)
(170,621)
Purchase of life insurance (1,985,000) 0
Purchase of other bank stock (4,500)
(5,900)
Net cash provided (used) by investing
activities (1,760,786)
1,540,433
Cash flows from financing activities:
Net increase (decrease) in deposits 6,086,263
735,696
Net increase (decrease) in other borrowings (289,687)
Cash dividends paid (172,000)
(168,000)
Net cash provided (used) by financing
activities 5,624,576
567,696
Net increase (decrease) in cash & cash
equivalents 4,412,311
2,848,951
Cash & cash equivalents, beginning balance 6,422,312 3,712,315
Cash & cash equivalents, ending balance $10,834,623 $6,561,266
========= =========
Supplemental disclosure of cash flows information
Cash paid during the year for:
Interest $2,009,913 $1,876,388
Income taxes 67,570 38,924
Supplemental schedule of noncash investing &
financing activities
Unrealized gain (loss) on Available-for-sale
securities net of tax effects (102,769) 41,807
Accrued dividends payable 72,000 72,000
Other real estate and property acquired in
settlement of loans 120,000 59,311
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
FNB FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The financial information presented at and for the six
months ended June 30, 1998 and June 30, 1997 is unaudited.
Information presented at December 31, 1997, is condensed from
audited year-end financial statements. However, this
unaudited information reflects all adjustments, consisting
solely of normal recurring adjustments, that are, in the
opinion of management, necessary for a fair presentation of
the financial position, results of operations and cash
flows for the interim period.
NOTE 2 - PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
the corporation and its wholly-owned subsidiary, The First
National Bank of McConnellsburg. All significant
intercompany transactions and accounts have been
eliminated.
NOTE 3 - CASH FLOWS
For purposes of the statements of cash flows, the corporation
has defined cash and cash equivalents as those amounts
included in the balance sheet captions "cash and due from
banks" and "federal funds sold". As permitted by Statement
of Financial Accounting Standards No. 104, the corporation
has elected to present the net increase or decrease in
deposits in banks, loans and time deposits in the statement
of cash flows.
NOTE 4 - FEDERAL INCOME TAXES
For financial reporting purposes the provision for loan
losses charged to operating expense is based on management's
judgement, whereas for federal income tax purposes, the
amount allowable under present tax law is deducted.
Additionally, certain expenses are charged to operating
expense in the period the liability is incurred for financial
reporting purposes, whereas for federal income tax purposes,
these expenses are deducted when paid. As a result of these
timing differences, deferred taxes were computed after
reducing pre-tax accounting income for nontaxable municipal
and loan income.
NOTE 5 - INVESTMENTS
The activity within the held to maturity and available for
sale portfolios for the period January 1, 1998, through
June 30, 1998, is summarized in Table #1 on page 13. No
sales were conducted from securities contained within the held
to maturity portfolio.
The amortized cost and estimated market values of investments
by investment type and classification as available for sale or
held to maturity along with each portfolio's gross unrealized
gain or gross unrealized loss are contained in Table #2 on
page 14.
Management has purchased for the portfolio mortgage-backed
securities. The large portion of these securities have a
variable rate coupon and all have scheduled principal
payments. During periods of rising interest rates, payments
from variable rate mortgage-backed securities may accelerate
as prepayments of underlying mortgages occur as home-owners
refinance to a fixed rate while during periods of declining
interest rates, prepayments on high fixed rate mortgage-backed
securities may accelerate as home owners refinance to lower
rate mortgages. These prepayments cause yields on mortgage-
backed securities to fluctuate as larger payments of principal
necessitate the acceleration of premium amortization or
discount accretion. Due to the low dollar amount of mortgage-
backed securities in relation to the total portfolio,
management feels that interest rate risk and prepayment risks
associated with mortgage-backed securities will not have a
material impact on the financial condition of the Bank.
In regard to Collateralized Mortgage Obligations (CMOs), the
Bank presently has none of these types of investments in its
portfolio.
NOTE 6 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as
follows:
<TABLE>
<S> <C> <C>
1998
1997
Allowance for loan losses beginning of the year $425,813
$405,612
Loans charged-off during the year:
Real estate mortgages 25,000
3,785
Installment loans 50,840
11,231
Commercial & all other 88,237
3,313
Total charge-offs 164,077
18,329
Recoveries of loans previously charged-off:
Real estate mortgages 0
507
Installment loans 17,775
4,531
Commercial & all other 705
416
Total recoveries 18,480
5,454
Net loans charged-off (recovered) 145,597
12,875
Provision for loan losses charged to operations 291,114
52,500
Allowance for loan losses, June 30 $571,330
$445,236
=========
========
</TABLE>
The following table shows the principal balance of nonaccrual loans
as of June 30, 1998:
<TABLE>
<S> <C>
Nonaccrual loans $ 49,442.11
==========
Interest income that would have been
accrued at original contract rates $ 2,242.75
Amount recognized as interest income 1,820.29
Foregone revenue $ 422.46
=========
</TABLE>
NOTE 7 - OTHER COMMITMENTS
In the normal course of business, the bank makes various
commitments and incurs certain contingent liabilities which
are not reflected in the accompanying financial statements.
These commitments include various guarantees and commitments
to extend credit. The bank does not anticipate any losses
as a result of these transactions.
TABLE #1
SCHEDULE OF HELD TO MATURITY AND AVAILABLE FOR SALE
DEBT SECURITY PORTFOLIOS
TRANSACTION SUMMARY
FOR THE PERIOD JANUARY 1, 1998 THROUGH JUNE 30, 1998
<TABLE>
<S> <C> <C> <C>
HELD TO AVAILABLE TOTAL
MATURITY FOR SALE INVESTMENT
PORTFOLIO PORTFOLIO PORTFOLIO
BEGINNING BALANCE 1/1/98 $2,975,841 $25,969,217 $28,945,058
PURCHASES 0 9,248,615 9,248,615
PROCEEDS FROM SALES 0 3,641,590 3,641,590
NET LOSSES/(GAINS) 0 (96,171) (96,171)
MATURITIES/CALLS PAYDOWNS/
PREMIUM AMORTIZATION/DISCOUNT
ACCRETION 604,151 1,184,993 1,789,144
ENDING BALANCE 6/30/97 $2,371,690 $30,487,420 $32,666,768
========= ========== ==========
</TABLE>
TABLE #2
SCHEDULE OF UNREALIZED GAINS AND UNREALIZED LOSSES
WITHIN THE HELD TO MATURITY AND AVAILABLE FOR SALE
INVESTMENT PORTFOLIOS BY INVESTMENT TYPE
JUNE 30, 1998
<TABLE>
<S> <C> <C> <C> <C> <C>
<C> <C> <C>
HELD TO HELD TO HELD TO HELD TO
AVAILABLE AVAILABLE AVAILABLE AVAILABLE
MATURITY MATURITY MATURITY MATURITY FOR
SALE FOR SALE FOR SALE FOR SALE
BOOK MARKET UNREALIZED UNREALIZED BOOK
MARKET UNREALIZED UNREALIZED
SECURITY PORTFOLIO VALUE VALUE GAIN LOSS
VALUE VALUE GAIN LOSS
U.S. GOVERNMENT TREASURIES 0 0 0 0
199,362 200,160 798 0
U.S. GOVERNMENT TREASURIES 0 0 0 0
0 0 0 0
U.S. GOVERNMENT AGENCIES 0 0 0 0
12,104,298 12,162,048 57,751 0
U.S. GOVERNMENT AGENCIES 0 0 0 0
6,491,641 6,456,671 0 (34,971)
SBA GUARANTEED LOAN POOL
CERTIFICATES 969,397 975,227 5,831 0
1,683,462 1,702,770 19,308 0
SBA GUARANTEED LOAN POOL
CERTIFICATES 347,121 344,214 0 (2,907)
93,409 92,862 0 (547)
MORTGAGE-BACKED SECURITIES 0 0 0 0
842,121 961,422 19,301 0
MORTGAGE-BACKED SECURITIES 0 0 0 0
10,479 10,296 0 (184)
SECURITIES ISSUED BY STATES
& POLITICAL SUBDIVISIONS IN
THE U.S. 1,005,172 1,014,696 9,524 0
5,769,965 5,836,226 66,261 0
SECURITIES ISSUED BY STATES
& POLITICAL SUBDIVISIONS IN
THE U.S. 50,000 49,968 0 (33)
3,292,684 3,259,148 0 (33,535)
MARKETABLE EQUITY SECURITIES 0 0 0 0
79,400 108,300 28,900 0
FEDERAL RESERVE BANK STOCK,
ATLANTIC CENTRAL BANKERS BANK
STOCK AND FEDERAL HOME LOAN
BANK STOCK 0 0 0 0
394,100 394,100 0 0
GRAND TOTALS 2,371,690 2,384,105 15,355 (2,940)
30,960,920 31,084,002 192,318 (69,236)
========= ========= ====== ======
========== ========== ======= =======
</TABLE>
CLASSIFICATION OF HELD TO MATURITY AND AVAILABLE FOR SALE
SECURITIES
Due to the implementation of FAS 115, management has segregated
securities as Held to Maturity, Available for Sale or Trading
securities. At the implementation of FAS 115 on January 1, 1994,
management determined that no securities were Trading securities;
that tax-free municipal with maturity dates less than the year 2000
were classified as Held to maturity securities due to management's
intention to hold these securities for tax planning purposes; and
that all other securities were classified as Available for Sale
securities due to management's intention to hold these securities
for liquidity planning purposes. Purchases of tax-free municipals
with maturities of 5 years or less made following implementation of
FAS 115 are classified as Held to Maturity securities with all
other purchase Available for Sale; however, management may decide
on a case-by-case basis that a security may be either classified as
Held to Maturity or Available for Sale depending upon the reasons
for purchase. Held to Maturity classifications are typically used
for securities purchased specifically for interest rate management
or tax-planning purposes while Available for Sale classifications
are typically used for liquidity planning purposes.
FNB FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Net income for the first six months of 1998 was $325,280 compared
to $464,356 for the same period in 1997. This represents a
decrease of $139,076 or 29.95%. Net income on an adjusted per
share basis for the first six months of 1998 was $0.81 per share,
a decrease of $0.35 from the $1.16 per share for the six months
ended June 30, 1997.
This decrease of $139,076 in net income is a direct result of the
Board of Directors and management's decision to increase the
allowance for loan losses to approximately 1.25% of net loans by
year-end 1998. During the first six months of 1998, the provision
to the allowance for loan losses has been $291,114, a $238,614
increase over the $52,500 provision for the first six months of
1997. As can be seen, this increase in the provision directly
decreased net income for the first six months of 1998.
The decision to increase the allowance is based upon several
factors. Of immediate concern is the observation that the current
long-run expanding economic cycle may be reaching its peak which
could result in the slowing down of our economy. This observation
combined with the instability in the Asian Market, which currently
shows no signs of stabilization, has prompted management to be
proactive and increase the allowance before the "trickle down
effects" of a slowing economy and the Asian crisis affects
businesses in our local economy resulting in past due loans and
delinquency problems. Another issue of concern to management is
the potential problems businesses could encounter regarding Year
2000 computer issues. Although our organization has been very
proactive in addressing Year 2000 issues and have taken necessary
steps to assure no interruption in our banking operations will
occur from this century date change, management is concerned the
business community in general is not addressing this issue as
promptly as banking organizations have done. As such, management
feels it wise to again be proactive and increase the allowance for
loan losses in anticipation of potential past due and delinquent
loans which could arise as a direct result of computer problems
associated with this century date change.
Total interest and dividend income for the first six months of 1998
was $3,777,365 compared to $3,637,495 for the six months ended June
30, 1997, representing an increase of $139,870. This increase is
a result of an increase in the average balances of loans, federal
funds sold, and deposits with other banks. Since June 30, 1997,
net loans have increased $3,529,623 or 6.24% and federal funds sold
have increased $5,232,000. These increases during the first six
months of 1998 over the first six months in 1997 resulted in an
increase of loan interest income in the amount of $103,224 and in
federal funds sold income of $56,949.
During the first half of 1998, interest rates have remained
relatively stable. As a result of this stable interest rate
environment in which interest rates are not anticipated to increase
in the short term, several investment securities with call features
were called by the issuer resulting in the loss of higher interest
earning assets. At the same time, management has decreased deposit
rates only slightly but not at the same pace as that of earning
assets. The tax-adjusted net interest margin has decreased 22
basis points to 3.99% for the first six months of 1998 from that of
the first six months of 1997 which was 4.21%. This decrease in net
interest margin occurred due to an increase in the reliance of
lower yielding federal funds sold and time deposits of other banks
to offset the increase in deposits of a short term nature. The
average balance of federal funds sold increased $2,142,000 and the
average balance of time deposits other banks increased $879,000.
As a result of this reliance, the tax equivalent yield on earning
assets decreased to 8.15% for the first six months of 1998 from
8.39% for the first six months of 1997. The cost of interest
bearing liabilities has increased only slightly from the first six
months of 1997 to 4.82% from 4.80%. This increase in cost of
interest-bearing liabilities and decrease in yield on earning
assets has resulted in a decrease in the net interest margin.
Management anticipates to continue to concentrate on the
improvement of the net interest margin throughout the year and has
taken steps to improve it by decreasing rates on savings accounts
and Super NOW accounts.
Interest expense for the six months ended June 30, 1998, was
$2,001,521, an increase of $122,661 over the $1,878,860 incurred
for the same period in 1997. This increase in interest expense is
due to an increase in the average balance of time deposits in the
amount of $6,406,935 or 12.63%. Total deposit volume increased
$11,476,289 or 13.06% since June 30, 1997. This increase is the
result of a $5,752,074 or 11.02% increase in time certificates of
deposit due to movement of funds from lower yielding savings
accounts and other financial institutions. Savings accounts
increased $3,931,220 or 14.67% due to increases in personal Super
NOW accounts of over $1,500,000 and business Money Market Accounts
of over $2,000,000. Non-interest bearing demand deposit accounts
increased $1,771,379 or 21.06% from June 30, 1997. The cost of
total interest bearing deposits for the first six months of 1997
was 4.82% compared to 4.80% for the same period in 1997. This
increase in cost of deposits and increase in volume of interest
bearing deposits resulted in the $122,661 increase in interest
expense as discussed earlier.
Total noninterest income increased $146,565 over 1997 due to the
sale of securities which resulted in a $144,244 gain. Total
operating expenses for the period ended June 30, 1997, were
$1,344,092, a $38,304 increase from the operating expenses incurred
for the same period in 1997 of $1,305,788. This increase is due to
1) increases in employee wages and benefits of $24,834, a result of
an increase in wage rates and an increase in employee participation
in the Company's retirement plan and health insurance plans; and 2)
an increase in the cost of fixed assets in the amount of $14,413
due to increased utility bills, depreciation, insurance and taxes
as a result of the completed renovation/expansion of the Fort
Loudon office facility and additional equipment placed in service
during the past year.
The company's income tax provision for the first six months of 1998
was $143,750 as compared to $117,818 for the first six months of
1997. This increase in the tax provision in the amount of $25,932
is due to an increase in income before applicable taxes and the
allowance for loan losses of $125,470. As the tax deductible
allowance for the loan losses is based upon experience and net
charge-offs, the amount of the provision above the bank's
experience of net charge-offs is not deductible for federal tax
purposes. The result of which is an increased federal tax
liability in relation to net income due to management's decision to
increase the allowance for loan losses.
Although the Company continues to operate with a marginal tax rate
of 34%, the effective income tax rate for the first six months of
1998 was 30.64%, an increase of 10.40% from the effective tax rate
for the first six months of 1997 of 20.24%. This increase in the
effective tax rate is due to the nondeductibility of the provision
for loan losses in excess of current year's anticipated charge-offs
as discussed in the preceding paragraph.
Total assets as of June 30, 1998, were $111,881,344 an increase of
$5,861,109 over the period ending December 31, 1997, representing
an increase of 5.53%. Funding this increase in total assets was an
increase in total deposits of $6,086,263 or 6.53%. The increase in
deposits was the result of increased balances in time deposits of
$1,638,718 and in savings account balances of $4,014,297. Net
loans as of June 30, 1998, were $60,120,674 compared to $59,124,012
as of December 31, 1997. The allowance for loan losses at the end
of the six months was $571,330 compared to $425,813 at year end
1997 and is considered adequate, in management's judgement, to
absorb possible losses on existing loans. The provision for loan
losses for the first six months of 1998 was $291,114 compared to
$52,500 for the same period in 1997. The significant increase in
the provision is due to management's decision to increase the
allowance for loan losses as discussed in the preceding paragraphs.
Total deposits were $99,345,953 as of June 30, 1998, compared to
$93,259,690 on December 31, 1997. This represents an increase of
$6,086,263 or 6.53% which reflects the activity as discussed
previously.
Total equity as of June 30, 1998, was $11,472,261, 10.25% of total
assets as compared to $11,389,749, 10.74% of total assets as of
December 31, 1997. This increase in equity reflects the
reinvestment of earnings into the corporation.
The Corporation has risk-based capital ratios exceeding regulatory
requirements. Risk-based capital guidelines require a minimum
ratio of 8.0%. At June 30, 1998, the risk-based capital ratio of
the Corporation was 18.14% while at December 31, 1997, the
risk-based capital ratio was 18.79%. The following table presents
the
risk-based capital ratios for the Corporation:
<TABLE>
<S> <C> <C>
June 30, Regulatory
1998 Minimum
Leverage Ratio 10.01% 3.00%
Risk-based capital ratios:
Tier I (core capital) 17.26% 4.00%
Total Capital
(Tier I and Tier II Capital) 18.14% 8.00%
Year 2000 Readiness Plan
During the past several months many newspaper and magazine articles
have been written concerning the YEAR 2000 and the potential effect
the change from the year 1999 to the year 2000 will have on
computer systems. Due to the age of some computer programs,
computer software and computer chips, it is very possible that some
older computers, software and equipment containing computer chip
technology may not function properly when the year 2000 rolls
around and may indeed not function at all.
The Bank has recognized this potential problem and had developed
and implemented in September 1997 a Year 2000 Management
team/policy to assure all of the corporation's computers, software
and equipment are compatible with the year 2000 in order to avoid
disruption to financial services provided by the corporation. This
team is headed by Senior Management and the Data Processing
Department which reports findings and results to the CEO, the EDP
Committee, and ultimately to the Board of Directors.
Beginning in March 1997, management of The First National began
discussions with our Computer equipment providers and programmers
regarding the Year 2000 issue and how it would effect our
processing capabilities. In September 1997, our EDP Committee,
comprised of four outside Directors, the Data Processing Manager,
Cashier and CFO, and the Board of Directors adopted a Year 2000
Action Plan/Policy which has been implemented. This plan appointed
the CFO in charge of the Year 2000 project implementation as
supervisor of the Data Processing Department.
In our plan/policy the Bank inventoried equipment, computers, and
software which needed to be verified for Year 2000 compliance. We
also outlined our testing dates and strategies, vendors and
business customers whom we needed assured of Year 2000 compliance,
completion dates for all reprogramming and testing, a contingency
plan, and assurance any new equipment or computer software
purchased from that date forward was certified by the vendor to be
Year 2000 compatible.
In the Corporation's policy addressing the Year 2000, the
Corporation recognized the importance of assuring, to the best of
its ability, its major business customers and vendors on which it
relies for electricity, voice communication, data processing, all
equipment, data communication, supplies, and any other function
vital to the corporation's operation are aware of this issue and
have addressed it by having their computer equipment and software
analyzed and tested for compatibility with the Year 2000. To
assess the status of each major business customer and vendor, the
corporation in November 1997 sent to each a questionnaire/survey
regarding their Year 2000 implementation plans. As each vendor and
business customer returns the survey, management is assessing the
capability of each and following up to assure, to the best of the
corporation's ability, each is compatible.
On Sunday, February 15 and Monday, February 16, 1998, data
processing personnel conducted an in-house test of all computer
equipment and programs, both our Main frame and LAN, in order to
determine if there were any areas of concern. All equipment worked
fine after we allowed system dates on the main frame and the LAN
(Local Area Network) to roll-over from 12-31-1999 to 01-01-2000.
After date roll-over we tested programs extensively performing
regular daily procedures as well as year-end close out procedures.
There were some minor problems which resulted, many of which we
were aware before testing and had already discussed with our
programmers. We had set June 30, 1998 as the dead-line for
necessary changes to be made by our programmers. This schedule has
been met and we have scheduled retesting during the third quarter
of 1998. Our internal final cut-off for compliance is December 31,
1998 in order to allow for any unforeseen problems to be addressed
in early 1999.
On May 28, 1998, system dates on the main frame were tested for
9/9/1999, 1/1/2000, 1/3/2000, 2/29/2000, and 3/01/2000. These
tests were performed by having the system date rolled over to make
sure the system continued to operate. There were no problems
encountered. During retesting procedures of our main frame early
in the third quarter of 1998, management will be performing more
extensive testing of these dates. Management anticipates no
problems with these dates.
The Bank has completed certification testing with the MAC network
for ATM communications having had MAC successfully process our Year
2000 test files. The Bank will be testing its electronic
communications with the Federal Reserve during the third and fourth
quarters of 1998. Management will be scheduling times with the FRB
to test year 2000 compatibility of the following customer
applications with the Federal Reserve:
a. Wire transfers;
b. TT&L;
c. ACH; and
d. Electronic Check Presentment.
The initial budget management has set aside for the correction of
Year 2000 problems is $25,000. To date approximately $3,500 has
been spent on personnel time, postage, and supplies to assses the
corporation's Year 2000 readiness and the corportion's customers
and vendors Year 2000 readiness. The budget is updated by
management as necessary.
Management is in the process of assessing appropriate contingency
plans in the event of unforeseen Year 2000 problems. Contingency
plans are anticipated to be finalized during the third and fourth
quarters of 1998.
PART II - OTHER INFORMATION
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
None
Item 2 - Changes in Securities
None
Item 3 - Defaults Upon Senior Securities
Not Applicable
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
a. Exhibits - None
b. Reports on Form 8-K - Yes
Item Reported - Item 5 - Other Events
Following an Office of the Comptroller
of the Currency (OCC) examination of The
First National Bank of McConnellsburg, the
Corporation's primary subsidiary, which ended
on June 11, 1998, the Bank increased its
Allowance for Loan Losses by $100,000.
Date of Report - June 11, 1998
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
/s/John C. Duffey
(John C. Duffey, President
and Director of the Company and
President of the Bank)
(Duly Authorized Officer)
Date August 07, 1998 /s/Daniel E. Waltz
(Daniel E. Waltz, Treasurer
and Director of the Company and
Senior Vice President/CFO of
the Bank)
(Principal Financial &
Accounting Officer)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,471
<INT-BEARING-DEPOSITS> 595
<FED-FUNDS-SOLD> 7,364
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 30,582
<INVESTMENTS-CARRYING> 2,372
<INVESTMENTS-MARKET> 2,384
<LOANS> 60,121
<ALLOWANCE> 571
<TOTAL-ASSETS> 111,881
<DEPOSITS> 99,346
<SHORT-TERM> 0
<LIABILITIES-OTHER> 805
<LONG-TERM> 171
<COMMON> 252
0
0
<OTHER-SE> 11,220
<TOTAL-LIABILITIES-AND-EQUITY> 111,881
<INTEREST-LOAN> 2,693
<INTEREST-INVEST> 932
<INTEREST-OTHER> 152
<INTEREST-TOTAL> 3,777
<INTEREST-DEPOSIT> 1,996
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<INTEREST-INCOME-NET> 1,776
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<EXPENSE-OTHER> 1,344
<INCOME-PRETAX> 469
<INCOME-PRE-EXTRAORDINARY> 325
<EXTRAORDINARY> 0
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<NET-INCOME> 325
<EPS-PRIMARY> 0.81
<EPS-DILUTED> 0.81
<YIELD-ACTUAL> 3.99
<LOANS-NON> 49
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<ALLOWANCE-OPEN> 426
<CHARGE-OFFS> 164
<RECOVERIES> 18
<ALLOWANCE-CLOSE> 571
<ALLOWANCE-DOMESTIC> 571
<ALLOWANCE-FOREIGN> 0
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