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, 1997.
[ ] 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, 1998
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 - $22,000,000.00
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders report for the year ended December 31,
1997 are
incorporated by reference into Parts I, II and IV.
Portions of the proxy statement for the annual shareholders meeting to be held
April 28, 1998 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, 1998, the Bank had three (3) offices and (1)
drive-up ATM located in Fulton County, one (1) branch
office facility located in Fort Loudon, Franklin County
Pennsylvania and one (1) branch office facility located in
Hancock, Washington County, Maryland. 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, 1997, 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:
Total Tier 1
Under a
Risk- Risk- Tier 1
Capital
Based Based Leverage
Order or
Ratio Ratio Ratio
Directive
CAPITAL CATEGORY
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%
*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, 1997, the Company and the Bank employed 55
persons on a full-time equivalent basis.
Statistical Data
Computation of the Company's regulatory capital requirements
for the periods December 31, 1997 and December 31, 1996 on
page 43 of the annual shareholders report for the year ended
December 31, 1997, 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:
Loan Category Loan-to-Value Limit
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%
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, 1997, and
December 31, 1996, on page 12 of the annual shareholders
report for the year ended December 31, 1997, is incorporated
herein by reference.
Maturities of loans as of December 31, 1997, on page 13 of the
annual shareholders report for the year ended December 31,
1997, 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.
This increase in volume was 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. Due to both of these loans being brought current in 1997,
total nonaccrual loans from 1996 to 1997 decreased over $560,000
in total.
Nonaccrual volume for 1998 may increase as the aforementioned
farm loan and some commercial loans may experience cash flow
difficulties in 1998. Anticipated charge-offs for 1998 are
expected to be approximately the same as in 1997 due to a
commercial loan liquidation in 1998 which may result in a
charge-off in excess of $50,000.
Nonaccrual, Past Due and Restructured Loans as of December 31,
1997, December 31, 1996, and December 31, 1995, on page 14 of
the annual shareholders report for the year ended December
31, 1997, 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, 1997, and
December 31, 1996, on page 12 of the annual shareholders
report for the year ended December 31, 1997, 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. Due to the
potential commercial loan liquidation which may result in a
charge-off in excess of $50,000 and the problems experienced
with the farming operation in Franklin County, Pennsylvania, the
allocation of the Allowance for Loan Losses for commercial,
industrial, and agriculture loans has been accordingly
increased.
Deposits
Time Certificates of Deposit of $100,000 and over as of
December 31, 1997, and December 31, 1996, totaled $10,333,000
and $8,581,000 respectively.
Maturities and rate sensitivity of total interest bearing
liabilities as of December 31, 1997, on page 39 of the annual
shareholders report for the year ended December 31, 1997, is
incorporated herein by reference.
Returns on Equity and Assets
Returns on equity and assets and other statistical data for
1997, 1996 and 1995 on page 18 of the annual shareholders
report for the year ended December 31, 1997, 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, which was expanded and completely
renovated in 1997 at an approximate cost of $200,000, is a brick
and frame building situated on approximately .23 acres. It
consists of approximately 1,035 square feet. The branch office
houses three (3) internal teller stations, one (1) drive-up
teller station, one (1) vault which contains safe deposit
boxes for customer use, a manager's office, one (1) kitchen,
storage areas 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 1997 and 1996 on
page 44 of the annual shareholders report for the year ended
December 31, 1997, is incorporated herein by reference.
Item 6. Selected Financial Data
The Selected Five-Year Financial Data on page 23 of the annual
shareholders report for the year ended December 31, 1997, 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 28 through 45 of the annual
shareholders report for the year ended December 31, 1997, 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 2 through 45 of the
annual shareholders report for the year ended December 31, 1997,
are incorporated herein by reference.
The Summary of Quarterly Financial Data on page 24 of the
annual shareholders report for the year ended December 31,
1997 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 15 of FNB
Financial Corporation's Proxy Statement Dated March 23, 1998,
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 23, 1998,
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 and pages 14 and
15 of FNB Financial Corporation's Proxy Statement Dated March
23, 1998, 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 8 and 14 of FNB Financial
Corporation's Proxy Statement Dated March 23, 1998, 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, 1997, are incorporated by reference
in Item 8:
Consolidated balance sheets - December 31, 1997 and 1996
Consolidated statements of income - Years ended December 31,
1997, 1996, and 1995
Consolidated statements of stockholders' equity - Years
ended December 31, 1997, 1996, and 1995
Consolidated statements of cash flows - Years ended December
31, 1997, 1996, and 1995
Notes to consolidated financial statements - December 31,
1997
(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 (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.
Exhibit (27) Financial data schedule
(d) Financial Statement Schedules
Schedule I - Marketable Securities - Other Investments
Schedules of Marketable Securities included on page
11 of the annual report of the registrant to its
shareholders for the year ended December 31, 1997
are incorporated herein by reference.
Schedule III - Condensed Financial Information of
Registrant
Condensed Financial Information of the Registrant
included on page 19 of the annual report of the
registrant to its shareholders for the year ended
December 31, 1997, is incorporated herein by
reference.
Schedule VIII - Valuation and Qualifying Accounts
The schedule of the Allowance for Loan losses included
on page 14 of the annual report of the registrant to
its shareholders for the year ended December 31,
1997, 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)
/s/John C. Duffey 3/25/98
John C. Duffey Date
Director and 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 Henry W. Daniels
H. Lyle Duffey Date Henry W. Daniels Date
Director, Chairman Director, Vice Chairman
/s/John C. Duffey 3/25/98 /s/Harry D. Johnston 3/25/98
John C. Duffey Date Harry D. Johnston, D. O. Date
Director, President Director, Vice President
/s/George S. Grissinger 3/25/98 /s/Patricia A. Carbaugh 3/25/98
George S. Grissinger Date Patricia A. Carbaugh Date
Director, Secretary Director
/s/Harvey J. Culler 3/25/98 /s/Paul T. Ott 3/25/98
Harvey J. Culler Date Paul T. Ott Date
Director Director
/s/D. A. Washabaugh, III 3/28/98 /s/Daniel E. Waltz 3/25/98
D. A. Washabaugh, III Date Daniel E. Waltz Date
Director Director, Treasurer
(Principal Financial and
Accounting Officer)
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 28 - 45
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, 1997 and 1996, and the related
consolidated statements of income, changes in stockholders' equity,
and cash flows for each of the three years ended December 31, 1997.
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, 1997 and 1996 and the results of their
operations and cash flows for each of the three years ended
December 31, 1997 in conformity with generally accepted accounting
principles.
Chambersburg, Pennsylvania
January 30, 1998
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
ASSETS
1997 1996
Cash and due from banks $ 3,491,312 $ 2,473,315
Interest-bearing deposits with banks 6,050,546 327,276
Investment securities:
Available for sale 26,338,409 28,870,912
Held to maturity (fair value $ 2,988,188 - 1997;
$ 4,567,903 - 1996) 2,975,841 4,559,739
Federal Reserve, Atlantic Central Banker's
Bank and Federal Home Loan Bank stock 389,600 383,700
Federal funds sold 2,931,000 1,239,000
Loans, net of unearned discount and allowance
for loan losses 59,124,012 56,259,929
Bank building, equipment, furniture and fixtures, net 3,295,474 3,107,960
Accrued interest and dividends receivable 610,240 675,180
Deferred income taxes 0 6,548
Other real estate owned 428,488 318,992
Other assets 385,313 421,521
Total assets $ 106,020,235 $ 98,644,072
LIABILITIES
Deposits:
Demand deposits $ 9,988,174 $ 9,249,700
Savings deposits 26,713,986 26,674,628
Time certificates 56,293,701 50,957,962
Other time deposits 263,829 251,678
Total deposits 93,259,690 87,133,968
Accrued dividends payable 104,000 100,000
Deferred income taxes 67,880 0
Accrued interest payable and other liabilities 738,197 708,072
Liability for borrowed funds 460,719 0
Total liabilities 94,630,486 87,942,040
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 9,163,913 8,628,183
Unrealized holding gains, net of applicable
deferred income taxes of $ 94,789 - 1997; $ 16,493 - 1996 184,003
32,016
Total stockholders' equity 11,389,749 10,702,032
Total liabilities and stockholders' equity $ 106,020,235 $
98,644,072
The Notes to Consolidated Financial Statements are an integral part
of these statements.
- -2-
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1997, 1996 and 1995
1997 1996
1995
Interest and Dividend Income
Interest and fees on loans $ 5,271,134 $ 4,849,673 $ 4,631,807
Interest on investment securities:
U. S. Treasury securities 35,785 51,045 55,422
Obligations of other U. S.
Government agencies 1,421,340 1,389,073 960,267
Obligations of States and
political subdivisions 430,194 464,979 417,352
Interest on deposits with banks 25,594 28,721 38,859
Dividends on equity securities 27,078 25,829 25,321
Interest on federal funds sold 176,766 155,196
133,383
7,387,891 6,964,516 6,262,411
Interest Expense
Interest on borrowed funds 5,865 0 0
Interest on deposits 3,841,015 3,694,486 3,247,389
Net interest income 3,541,011 3,270,030 3,015,022
Provision for Loan Losses 232,500 95,500 74,704
Net interest income after provision
for loan losses 3,308,511 3,174,530 2,940,318
Other Income
Service charges on deposit accounts 72,707 62,117 66,568
Other service charges, collection and
exchange charges, commissions and fees 193,464 176,145 176,127
Other income, net 45,536 36,334 32,039
Gain on sale of PHEAA loans 31,211 0 0
Securities gains (losses) 5,752 ( 3,843) (
5,210)
348,670 270,753 269,524
Other Expenses
Salaries and wages 1,094,033 967,102 818,155
Pensions and other employee benefits 286,760 244,302 202,829
Net occupancy expense of bank premises 194,148 150,742 115,804
Furniture and equipment expenses 223,680 162,065 158,050
FDIC assessment 11,047 2,000 84,969
Other operating expenses 798,661 743,868 574,490
2,608,329 2,270,079 1,954,297
Income before income taxes 1,048,852 1,175,204 1,255,545
Applicable income taxes 193,122 218,019 253,781
Net income $ 855,730 $ 957,185 $ 1,001,764
Earnings per share of common stock:
Net income $ 2.14 $ 2.39 $ 2.51
Weighted average shares outstanding 400,000 400,000 400,000
The Notes to Consolidated Financial Statements are an integral part of
these statements.
- -3-
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1997, 1996 and 1995
Additional
Unrealized
Common Paid-In
Retained Holding
Stock Capital
Earnings Gains (Losses)
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
Net income 0 0 855,730 0
Cash dividends declared on
common stock ($ .80 per share) 0 0 ( 320,000) 0
Unrealized gain on securities
available for sale, net of
applicable income taxes 0 0 0
151,987
Balance, December 31, 1997 $ 252,000 $ 1,789,833 $ 9,163,913 $ 184,003
The Notes to Consolidated Financial Statements are an integral part of these
statements.
- -4-
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
Cash flows from operating activities:
Net income $ 855,730 $ 957,185 $ 1,001,764
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 251,405 203,443 135,068
Provision for loan losses 232,500 95,500 74,704
Deferred income taxes 3,868 12,915 ( 19,456)
Loss on sale of other real estate 3,000 0 0
(Gain) loss on sales/maturities of investments ( 5,752)
3,8
43 5,210
(Gain) loss on disposal of equipment 2,412 ( 700)
0
(Increase) decrease in accrued interest
receivable 64,940 ( 27,259) ( 161,765)
Increase (decrease) in accrued interest
payable and other liabilities 30,125 ( 56,832) 166,90
1
Other, net 17,066 ( 114,019) 87,562
Net cash provided by operating activities 1,455,294 1,074,076 1,289,988
Cash flows from investing activities:
Net (increase) decrease in interest bearing
deposits with banks ( 5,723,270) 91,197 202,456
Maturities of held-to-maturity securities 1,735,560 941,524 1,781,829
Purchases of held-to-maturity securities ( 151,662) (
100,000)
( 6,710,015)
Sales of available-for-sale securities 1,278,472 0 196,469
Maturities of available-for-sale securities 10,341,312 7,755,603 3,491,
234
Purchases of available-for-sale securities ( 8,851,118) (
10,409,030)
( 6,205,680)
Proceeds from sales of other real estate owned 104,375 102,500 26,765
Net (increase) in loans ( 3,313,454) ( 3,587,304) (
3,875,215)
Purchase of other bank stock ( 11,780) ( 13,700)
( 30,500)
Purchases of bank premises and
equipment, net ( 424,173) ( 1,171,694) ( 899,649)
Proceeds from sale of equipment 0 700
13,729
Net cash (used) by investing activities ( 5,015,738) ( 6,390,204)
( 12,008,577)
Cash flows from financing activities:
Net increase in deposits 6,125,722 6,217,681 9,504,272
Cash dividends paid ( 316,000) ( 300,000) ( 304,000)
Proceeds from borrowings 462,493 0 0
Principle payments on borrowings ( 1,774) 0
0
Net cash provided by financing activities 6,270,441 5,917,681
9,200,272
The Notes to Consolidated Financial Statements are an integral part
of these statements.
- -5-
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
Net increase (decrease) in cash and
cash equivalents $ 2,709,997 $ 601,553 ($ 1,518,317)
Cash and cash equivalents, beginning balance 3,712,315 3,110,762
4,629,079
Cash and cash equivalents, ending balance $ 6,422,312 $ 3,712,315 $
3,110,762
Supplemental disclosure of cash flows information:
Cash paid during the year for:
Interest (net of capitalized interest of
$ 43,905 - 1996) $ 3,818,501 $ 3,509,832 $ 3,103,611
Income taxes 155,987 343,488 152,760
Supplemental schedule of noncash investing and
financing activities:
Unrealized gain (loss) on securities
available-for-sale, net of income tax effect $ 151,987 ($
75,614)
$ 505,164
Other real estate acquired in settlement of loans 216,871 76,390 139,52
4
Transfer of securities from held-to-maturity to
available for sale 0 0 5,072,833
Property, equipment and other assets acquired
with assumption of deposit liabilities in
connection with branch acquisition 0 0 312,974
Loan advanced for sale of other real estate owned 93,600 50,000 0
The Notes to Consolidated Financial Statements are an integral part of
these statements.
- -6-
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 five 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.
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.
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.
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.
- -7-
Note 1. Significant Accounting Policies (Continued)
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:
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 equity securities,
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 1997 or 1996.
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.
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 less cost to sell. 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.
- -8-
Note 1. Significant Accounting Policies (Continued)
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. Deferred loan
origination fees were $ 276,654 and $ 264,956 at
December 31, 1997 and 1996, respectively. Deferred loan
costs were $ 102,162 and $ 103,845 at December 31, 1997
and 1996, respectively.
Nonaccrual/Impaired 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 1997, 1996 and 1995.
- -9-
Note 1. Significant Accounting Policies (Continued)
Goodwill and Other Intangibles
Goodwill and organization costs are amortized on a
straight-line basis over lives of fifteen and five years,
respectively.
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 7 for further details.
Advertising
The corporation follows the policy of charging costs of
advertising to expense as incurred. Advertising expense was $ 65,734,
$ 64,979, and $ 41,439 for 1997, 1996 and 1995, 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 Short-Term Instruments. The carrying
amounts of cash and short-term
instruments approximate their fair value.
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.
- -10-
Note 1. Significant Accounting Policies (Continued)
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. Investment Securities
The amortized cost and fair values of investment securities
available for sale at December 31 were:
Gross
Gross
Amortized
Unrealized Unrealized Fair
Cost
Gains Losses Value
1997
U. S. Treasury securities $ 298,831 $ 1,013 $ 0
$
299,844
Obligations of other U.S.
Government agencies 13,292,047 63,736 ( 19,993) 13,335,790
Obligations of states and
political subdivisions 8,642,382 126,381 ( 2,979) 8,765,784
Mortgage-backed securities 986,975 22,054 ( 225) 1,008,804
SBA Loan Pool certificates 2,748,982 46,370 ( 745)
2,794,607
Equities in local bank stock 90,400 43,180 0
133,580
Totals $ 26,059,617 $ 302,734 ($ 23,942) $ 26,338,409
1996
U. S. Treasury 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
Equities in local bank stock 84,520 31,120 0
115,640
Totals $ 28,822,403 $ 211,625 ($ 163,116) $ 28,870,912
The amortized cost and fair values of investment securities
held to maturity at December 31 were:
Gross
Gross
Amortized
Unrealized Unrealized Fair
Cost
Gains Losses Value
1997
SBA loan pool certificates $ 1,510,702 $ 3,532 ($ 3,539) $
1,510,695
Obligations of states and
political subdivisions 1,465,139 12,354 0 1,477,493
Totals $ 2,975,841 $ 15,886 ($ 3,539) $ 2,988,188
1996
SBA loan pool 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
- -11-
Note 2. Marketable Debt Securities (Continued)
The amortized cost and fair values of investment securities
available for sale and held to maturity at December 31,
1997 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.
Securities Available
Securities Held
- - - - - - for Sale - - - - - -
- - - - - to Maturity - - - - -
Amortized Fair
Amortized Fair
Cost Value
Cost Value
Due in one year or less $ 1,983,551 $ 1,982,333 $ 455,000 $
455,444
Due after one year but
less than five years 6,788,830 6,818,350 1,010,139 1,022,049
Due after five years but
less than ten years 10,719,069 10,819,917 0 0
Due after ten years 2,741,810 2,780,818 0
0
22,233,260 22,401,418 1,465,139 1,477,493
Mortgage-backed securities 986,975 1,008,804 0 0
SBA loan pool certificates 2,748,982 2,794,607 1,510,702
1,51
0,695
Equities in local bank stock 90,400 133,580 0
0
Totals $ 26,059,617 $ 26,338,409 $ 2,975,841 $ 2,988,188
Proceeds from sales of investment securities available for
sale during 1997 were $ 1,278,472. Gross losses on these
sales were $ 10,395 and gross gains were $ 13,728.
There were no sales of investment securities in 1996.
Proceeds from sales of investment securities available for
sale during 1995 were $ 196,469. Gross losses on these
sales were $ 3,364 and gross gains were $ 0.
There were no sales of investment securities held-to-
maturity in 1997, 1996 or 1995.
Investment securities carried at $ 7,200,891 and $
8,821,866 at December 31, 1997 and 1996, respectively,
were pledged to secure public funds and for other purposes
as required or permitted by law.
Note 3. Loans
Loans consist of the following at December 31:
1997 1996
(000 omitted)
Real estate loans:
Construction and land development $ 680 $ 799
Secured by farmland 4,523 3,978
Secured by 1-4 family residential properties 32,045 30,885
Secured by multi-family residential properties 357 271
Secured by nonfarmland nonresidential properties 3,144 3,149
Loans to farmers (except loans secured
primarily by real estate) 1,848 1,919
Commercial, industrial and state and political subdivision
loans 7,495 6,647
Loans to individuals for household, family, or other
personal expenditures 9,343 9,476
All other loans 1,623 923
Total loans 61,058 58,047
Less: Unearned discount on loans 1,508 1,382
Allowance for loan losses 426 405
Net Loans $ 59,124 $ 56,260
- -12-
Note 3. Loans (Continued)
The following table shows maturities and sensitivities of
loans to changes in interest rates based upon contractual
maturities and terms as of December 31, 1997.
Due Over 1
Due Within But Within
Due Over Nonaccruing
(000 omitted) 1 Year 5 Years
5 Years Loans Total
Loans at pre-determined
interest rates $ 758 $ 10,019 $ 17,197 $ 76 $ 28,050
Loans at floating or
adjustable interest rates 6,251 2,650 23,769 338
33,008
Total (1) $ 7,009 $ 12,669 $ 40,966 $ 414 $ 61,058
(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 $ 3,276,692
and $ 1,366,934 at December 31, 1997 and 1996,
respectively. During 1997, $ 2,934,585 of new loans were
made and repayments totaled $ 1,024,827. During 1996, $
1,174,938 of new loans were made and repayments totaled
$ 645,308.
Outstanding loans to Bank employees totaled $ 1,366,203
and $ 776,743 for years ended December 31, 1997 and
1996, respectively.
Note 4. Allowance for Loan Losses
Activity in the allowance for loan losses is summarized as
follows:
1997 1996 1995
(000 omitted)
Allowance for loan losses, beginning of the year $ 405 $ 405 $ 405
Loans charged-off during the year:
Real estate mortgages 23 51 33
Installment loans 70 49 64
Commercial and all other loans 134 8 9
Total charge-offs 227 108 106
Recoveries of loans previously charged-off:
Real estate mortgages 4 0 1
Installment loans 8 12 25
Commercial and all other loans 3 1 5
Total recoveries 15 13 31
Net loans charged-off (recovered) 212 95 75
Provision for loan losses charged to operations 233 95
75
Allowance for loan losses, end of the year $ 426 $ 405 $ 405
- -13-
Note 4. Allowance for Loan Losses (Continued)
A breakdown of the allowance for loan losses as of
December 31 is as follows:
- - - - - - - -1997- - - - - - - -
- - - - - - - - - - -1996- - - - - - - - -
Percent of
Percent of
Allowance Loans in
Allowance Loans in
(000 omitted) Amount Each
Category Amount Each Category
Commercial, industrial
and agriculture loans $ 278 27.16% $ 53 27.24%
1-4 family residential
mortgages 69 44.25% 123 47.56%
Consumer and
installment loans 50 12.90% 179 14.59%
Off balance sheet
commitments 28 15.69% 40 10.61%
Unsegregated 1 N/A 10 N/A
Total $ 426 100.0% $ 405 100.0%
Impairment of loans having a recorded investment of
$ 112,000 at December 31, 1997 was recognized in
conformity with SFAS No. 114 as amended by SFAS No.
118. The average recorded investment in impaired loans
during 1997 was $ 174,236. The total allowance for loan
losses related to these loans was $ 100,000 at
December 31, 1997. Interest income on impaired loans of
$ 3,318 was recognized for cash payments received in
1997. There were no impaired loans in 1996.
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 felt
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.
Note 5. Nonaccrual, Past Due and Restructured Loans
The following table shows the principal balances of
nonaccrual loans as of December 31:
1997
1996 1995
Nonaccrual loans $ 414,009 $ 974,480 $ 471,519
Interest income that would have been
accrued at original contract rates $ 37,490 $ 88,928 $
46,550
Amount recognized as interest
income 18,192 60,073 25,917
Foregone revenue $ 19,298 $ 28,855 $ 20,633
Loans 90 days or more past due (still accruing interest)
were as follows at December 31:
(000 omitted) 1997
1996 1995
Real estate mortgages $ 0 $ 0 $ 0
Installment loans 24 32 23
Demand and time loans 2 1 7
Total $ 26 $ 33 $ 30
- -14-
Note 5. Nonaccrual, Past Due and Restructured Loans
(Continued)
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 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
was secured with a first mortgage position on real estate
and was paid off in 1997.
The following table presents the principal balances of
restructured loans as of December 31:
1997
1996 1995
Restructured loans $ 0 $ 5,382 $ 168,840
Interest income that would have been
accrued at original contract rates $ 0 $ 1,189 $ 18,320
Amount recognized as interest income 0 1,132 13,139
Foregone revenue $ 0 $ 57 $ 5,181
Note 6. Bank Building, Equipment, Furniture and Fixtures
Bank building, equipment, furniture and fixtures consisted
of the following at December 31:
Accumulated Depreciated
Description Cost
Depreciation Cost
1997
Bank building (including land $ 211,635) $ 3,110,146 $ 731,017
$
2,379,129
Equipment, furniture and fixtures 1,916,091 1,169,959 746,132
Land improvements 237,753 113,172 124,581
Leasehold improvements 48,819 3,187 45,632
$ 5,312,809 $ 2,017,335 $ 3,295,474
1996
Bank building (including 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 improvements 46,132 408 45,724
$ 4,894,291 $ 1,786,331 $ 3,107,960
Depreciation and amortization expense amounted to $
234,643 in 1997, $ 150,294 in 1996, and $ 126,258 in
1995.
- -15-
Note 7. Income Taxes
The components of federal income tax expense are
summarized as follows:
1997
1996 1995
Current year provision $ 196,991 $ 205,104 $ 273,237
Deferred income taxes resulting from:
Differences between financial
statement and tax depreciation charges 3,000 13,123 76
Differences between financial
statement and tax loan loss
provision ( 6,869) ( 208) ( 19,532)
Applicable income tax $ 193,122 $ 218,019 $ 253,781
Federal income taxes were computed after adjusting pretax
accounting income for nontaxable income in the amount of
$ 522,040, $ 633,813, and $ 590,029 for 1997, 1996 and
1995, respectively.
A reconciliation of the effective applicable income tax rate
to the federal statutory rate is as follows:
1997 1996 1995
Federal income tax rate 34.0% 34.0% 34.0%
Reduction resulting from:
Nontaxable interest income and other timing
differences 15.6 15.5 13.8
Effective income tax rate 18.4% 18.5% 20.2%
Deferred income taxes at December 31 are as follows:
1997 1996
Deferred tax assets $ 26,909 $ 76,398
Deferred tax liabilities ( 94,789) ( 69,850)
($ 67,880) $ 6,548
The tax effects of each type of significant item that gives
rise to deferred taxes are:
1997 1996
Net unrealized (gains) losses on
securities available for sale ($ 94,789) ($ 16,493)
Depreciation expense ( 56,357) ( 53,357)
Allowance for loan losses 83,266 76,398
($ 67,880) $ 6,548
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.
- -16-
Note 8. 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 $ 76,754, $ 65,644, and $ 49,800 for the
years ended December 31, 1997, 1996 and 1995,
respectively.
Note 9. Deposits
Included in savings deposits are NOW and Super NOW
account balances totaling $ 5,780,398 and $ 5,206,615 at
December 31, 1997 and 1996, respectively. Also included
in savings deposits at December 31, 1997 and 1996 are
Money Market account balances totaling
$ 7,523,777 and $ 7,479,502, respectively.
Time certificates of $ 100,000 and over as of December 31
were as follows:
1997 1996
(000 omitted)
Three months or less $ 1,374 $ 691
Three months to six months 1,354 214
Six months to twelve months 1,713 313
Over twelve months 5,892 7,363
Total $ 10,333 $ 8,581
Interest expense on time deposits of $ 100,000 and over
aggregated $ 551,875, $ 601,843 and $ 518,586 for 1997,
1996 and 1995, respectively.
At December 31, 1997 the scheduled maturities of
certificates of deposit are as follows:
1998 $ 25,074,382
1999 11,182,335
2000 8,657,619
2001 5,643,619
2002 5,714,746
Thereafter 21,000
$ 56,293,701
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 $ 3,593,950 and $
4,284,064 at December 31, 1997 and 1996, respectively.
- -17-
Note 10. 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.
Contract or
Notional Amount
(000 omitted)
1997 1996
Financial instruments whose contract amounts
represent credit risk at December 31:
Commitments to extend credit $ 9,948 $ 5,368
Commercial and standby letters of credit 1,411 1,521
$ 11,359 $ 6,889
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 11. 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 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.
- -18-
Note 12. 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
Assets
1997 1996
Cash $ 49,159 $ 138,380
Marketable equity securities
available for sale 133,580 115,640
Investment in the First National Bank
of McConnellsburg 11,322,894 10,556,551
Other assets 3,180 3,114
Total assets $ 11,508,813 $ 10,813,685
Liabilities and Stockholders' Equity
Dividends payable $ 104,000 $ 100,000
Other liabilities 15,064 11,653
119,064 111,653
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 9,163,913 8,628,183
Unrealized gain on securities available
for sale, net of tax effects 184,003 32,016
Total liabilities and stockholders' equity $ 11,508,813 $
10,813,685
Statements of Income
Years Ended December 31
1997
1996 1995
Cash dividends from wholly-owned
subsidiary $ 240,000 $ 0 $ 0
Dividend income - Marketable
equity securities 3,153 2,868 2,508
Equity in undistributed income of
subsidiary 621,935 976,934 1,014,118
865,088 979,802 1,016,626
Less: holding company expenses 9,358 22,617
14,862
Net income $ 855,730 $ 957,185 $ 1,001,764
- -19-
Note 12. FNB Financial Corporation (Parent Company Only)
Financial Information (Continued)
Statements of Cash Flows
Years Ended December 31
1997
1996 1995
Cash flows from operating activities:
Net income $ 855,730 $ 957,185 $ 1,001,764
Adjustments to reconcile net
income to cash provided by
operating activities:
Equity in undistributed income
of subsidiary ( 621,935) ( 976,934) ( 1,014,117)
(Increase) decrease in other assets ( 66) (
614) 519
Increase (decrease) in:
Other liabilities ( 1,070) 1,070 (
5,470)
Net cash provided (used) by operating activities 232,659 ( 19,293)
( 17,304)
Cash flows from investing activities:
Purchase of marketable equity securities
available for sale ( 5,880) 0 ( 25,000)
Cash flows from financing activities:
Cash dividends paid ( 316,000) ( 300,000) ( 304,000)
Net increase (decrease) in cash ( 89,221) ( 319,293) (
346,304)
Cash, beginning balance 138,380 457,673 803,977
Cash, ending balance $ 49,159 $ 138,380 $ 457,673
Note 13. Regulatory Matters
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 $ 2,530,775 and
$ 2,904,720 at December 31, 1997 and 1996, respectively.
FNB Financial Corporation's balance of retained earnings
at December 31, 1997 is
$ 9,163,913 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.
- -20-
Note 13. Regulatory Matters (Continued)
In addition, 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. 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:
FNB Financial
Corporation Regulatory Minimum
1997
1996 Requirements
Leverage ratio 10.41% 10.60% 3%
Risk-based capital ratios/
Tier I (core capital) 18.09% 19.30% 4%
Combined Tier I and
Tier II (core capital
plus allowance for loan
losses) 18.79% 20.05% 8%
Note 14. Compensating Balance Arrangements
Required deposit balances at the Federal Reserve were $
125,000 and $ 80,000 for 1997 and 1996, respectively.
Required deposit balances at Atlantic Central Banker's
Bank were
$ 365,000 and $ 282,000 at December 31, 1997 and 1996,
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:
- - - - - - - - 1997 - - -
- - - - - - - - - - - - 1996 - - - - - - -
Carrying
Fair Carrying Fair
Amount
Value Amount Value
FINANCIAL ASSETS
Cash and due from banks $ 3,491,312 $ 3,491,312 $ 2,473,315
$
2,473,315
Interest-bearing deposits in banks 6,050,546 6,050,546 327,276 327,27
6
Federal funds sold 2,931,000 2,931,000 1,239,000 1,239,000
Securities available for sale 26,338,409 26,338,409 28,870,912
28,870,912
Securities to be held to maturity 2,975,841 2,988,188 4,559,739 4,567,
903
Other bank stock 389,600 389,600 383,700 383,700
Loans receivable 59,549,825 58,029,013 56,665,541 55,484
,110
Accrued interest receivable 610,240 610,240 675,180 675,180
FINANCIAL LIABILITIES
Time certificates 56,293,701 56,762,321 50,957,962 51,580
,258
Other deposits 36,965,989 36,965,989 36,176,006 36,176
,006
Accrued interest payable 594,129 594,129 565,751 565,751
Liability for borrowed funds 460,719 460,719 0 0
- -21-
Note 16. Liability for Borrowed Funds
At December 31, 1997, the Corporation was
carrying a deficit balance of $ 287,493 at one of its
correspondent banks due to a cash letter error by the
Federal Reserve Bank. The deficit balance cleared
the next business day.
The Bank received Community Investment Program
funding from the Federal Home Loan
Bank of Pittsburgh for $ 175,000 at a fixed rate of 6.64%
and an amortization term of 20 years. Required payments
on this loan are as follows:
1998 $ 4,462
1999 4,768
2000 5,094
2001 5,443
2002 5,816
Thereafter 147,643
$ 173,226
The Bank had available a line of credit totaling $
3,115,000 and $ 3,022,400 at December 31, 1997 and
1996, respectively, with the Federal Home Loan Bank of
Pittsburgh. There were no outstanding balances against
this line at December 31, 1997 or 1996. Collateral for
borrowings and the line consists of various securities and
the Corporation's 1-4 family mortgages with a book value
of approximately $ 36,374,000.
Note 17. Operating Lease
During 1996 the Corporation entered into a lease
agreement for its 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, 1997, rent expense under this operating lease
was $ 21,600. Required lease payments for the next five years are as
follows:
1998 $ 21,600
1999 21,600
2000 21,600
2001 21,600
2002 21,600
Thereafter 81,000
$ 189,000
- -22-
FNB FINANCIAL CORPORATION AND ITS WHOLLY-
OWNED SUBSIDIARY
SELECTED FIVE YEAR FINANCIAL DATA
1997 1996
1995 1994 1993
Results of Operations (000 omitted)
Interest income $ 7,388 $ 6,965 $ 6,262 $ 5,530 $ 5,510
Interest expense 3,847 3,694 3,247 2,784 2,884
Provision for loan losses 233 96 75
2 62
Net interest income after
provision for loan losses 3,308 3,175 2,940 2,744 2,564
Other operating income 349 270 270 177 213
Other operating expenses 2,608 2,270 1,954 1,903 1,720
Income before income taxes 1,049 1,175 1,256 1,018 1,057
Applicable income tax 193 218 254 166 252
Net income $ 856 $ 957 $ 1,002 $ 852 $ 805
Common Share Data
Per share amounts are based on weighted average shares of common
stock outstanding of 400,000 for 1997, 1996, 1995 and 1994; and
359,410 for 1993 after giving retroactive recognition to a 2 for 1 stock
split effective April 23, 1993.
Income before income taxes $ 2.62 $ 2.94 $ 3.14 $ 2.55 $
2.94
Applicable income taxes .48 .55 .64 .42 .70
Net income 2.14 2.39 2.51 2.13 2.24
Cash dividend declared .80 .77 .77 .64 .55
Book value (actual number
of shares outstanding
before FAS 115 adjustments) 28.01 26.68 25.05 23.33 21.83
Dividend payout ratio 37.39% 32.18% 30.75% 30.04% 24.62%
Year-End Balance Sheet Figures
(000 omitted)
Total assets $ 106,020 $ 98,644 $ 91,921 $ 80,715 $ 82,458
Net loans 59,124 56,260 52,794 49,100 45,011
Total investment securities -
Book value 29,425 33,767 31,944 24,475 27,505
Deposits-noninterest bearing 9,988 9,250 7,778 6,781 7,562
Deposits-interest bearing 83,272 77,884 73,138 64,318 65,533
Total deposits 93,260 87,134 80,916 71,099 73,095
Total stockholders' equity (before
FAS 115 adjustments) 11,206 10,670 10,021 9,327 8,731
Ratios (calculated before FAS 115
adjustments)
Average equity/average assets 10.74% 10.87% 11.58% 11.21% 9.75%
Return on average equity 7.98% 9.18% 10.26% 9.37% 10.40%
Return on average assets .86% 1.00% 1.19% 1.05% 1.01%
- -23-
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, 1997 and 1996 are as
follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
<C>
1997 1996
($ 000 omitted Quarter Ended Quarter Ended
except per share) Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30
Sept. 30 Dec. 31
Interest income $ 1,789 $ 1,849 $ 1,857 $ 1,893 $ 1,684 $ 1,696
$
1,778 $ 1,807
Interest expense 928 952 968 999 936 921
926 911
Net interest income 861 897 889 894 748 775 852 896
Provision for loan losses 9 44 50 130 7
38 18 33
Net interest income
after provision for
loan losses 852 853 839 764 741 737 834 863
Other income 71 111 86 81 59 72 65 74
Other expenses 656 650 634 668 519 541
570 640
Operating income
before
income taxes 267 314 291 177 281 268 329 297
Applicable income taxes 49 69 62 13 52
56 67 43
Net income $ 218 $ 245 $ 229 $ 164 $ 229 $ 212
$
262 $ 254
Net income applicable
to common stock
Per share data:
Net income $ .55 $ .62 $ .57 $ .40 $ .57 $ .53
$
.65 $ .64
</TABLE>
- -24-
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>
<S> <C> <C> <C> <C> <C>
<C>
- - - - - - - -1997- - - - - - - - -
- - - - - - - -1996- - - - - - - -
- - - - - - - -1995- - - - - - - -
Average Average Average
(000 omitted) Balance Interest Rate Balance
Interest Rate Balance Interest Rate
ASSETS
Interest bearing
deposits with banks
and federal funds sold $ 3,708 $ 202 5.45% $ 3,440 $ 184
5.3
5%
$ 2,943 $ 172 5.84%
Investment securities 31,524 1,915 6.07% 33,129 1,931 5.82%
25,837 1,458 5.64%
Loans 57,794 5,271 9.12% 53,046 4,850 9.14%
51,492 4,632 9.00%
Total interest
earning assets 93,026 $ 7,388 7.94% 89,615 $ 6,965 7.77%
80,272 $ 6,262
7.80%
Cash and due from
banks 2,770 2,498 1,975
Bank premises and
equipment 3,196 2,714 1,397
Other assets 923 1,035 759
Total assets $ 99,915 $ 95,862 $ 84,403
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing
transaction accounts $ 6,965 $ 146 2.10% $ 7,228 $ 155 2.14%
$ 6,402 $ 146 2.28%
Money market deposit
accounts 7,123 252 3.54% 6,690 239 3.57% 4,904
192 3
.92%
Other savings deposits 12,229 334 2.73% 12,369 344 2.78% 12,582
372 2.96%
All time deposits 53,016 3,109 5.86% 50,192 2,956 5.89%
43,099
2,537 5.89%
Liability for borrowed
funds 90 6 6.67% 0
0 .00% 0
0 .00%
Total interest
bearing
liabilities 79,423 $ 3,847 4.84% 76,479 $ 3,694 4.83%
66,98
7 $ 3,247 4.85%
Demand deposits 8,884 8,153 6,924
Other liabilities 875 806 722
Total liabilities 89,182 85,438 74,633
Stockholders' equity 10,733 10,424 9,770
Total liabilities
and stockholders'
equity $ 99,915 $ 95,862 $ 84,403
Net interest income/net
interest margin/margin
average earning assets $ 3,541 3.80% $ 3,271 3.65%
$
3,015 3.76%
</TABLE>
- -25-
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
CHANGES IN NET INTEREST INCOME
<TABLE>
<S> <C> <C> <C>
<C> <C> <C>
- - -1997 Compared to 1996- - -
- - -1996 Compared to 1995 - - -
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 funds sold $ 14 $ 4 $ 18 $ 29 ($ 17) $
12
Investment securities ( 93) 77 ( 16) 411 62 473
Loans 434 ( 13) 421 140 78 218
Total interest income $ 355 $ 68 $ 423 $ 580 $ 123
$
703
Interest Expense
Interest bearing
transaction accounts ($ 6) ($ 3) ($ 9) $ 19 ($ 10)
$
9
Money market
deposit accounts 15 ( 2) 13 70 ( 23) 47
Other savings ( 4) ( 6) ( 10) ( 6) ( 22) (
28)
All time deposits 166 ( 13) 153 418 1 419
Liability for borrowed funds 0 6 6 0
0 0
Total interest expense $ 171 ($ 18) $ 153 $ 501 ($
54) $ 447
Net interest income $ 270 $ 256
</TABLE>
- -26-
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
MATURITIES OF INVESTMENT SECURITIES
December 31, 1997
The following table shows the maturities of investment securities at
amortized cost
as of December 31, 1997, and weighted average yields of such securities.
Yields are shown on a
taxable equivalent basis, assuming a 34% federal income tax rate.
<TABLE>
<S> <C> <C> <C> <C> <C>
<C>
Within 1-5
5-10 Over
(000 omitted) 1 Year Years
Years 10 Years Total
U.S. Treasury Securities
Amortized cost $ 199 $ 100 $ 0 $ 0 $ 299
Yield 5.77% 6.27% 0% 0% 5.93%
Obligations of other U.S.
Government agencies:
Amortized cost 1,049 3,551 8,192 500 13,292
Yield 5.45% 6.29% 7.13% 7.43% 6.79%
Obligations of state and
political subdivisions:
Amortized cost 1,190 4,148 2,527 2,242 10,107
Yield 5.96% 6.89% 7.91% 7.70% 7.22%
Mortgage-Backed securities
and SBA Guaranteed Loan
Pool Certificates (1):
Amortized cost 23 273 477 4,474 5,247
Yield 8.82% 7.78% 8.43% 6.73% 6.95%
Subtotal amortized cost $ 2,461 $ 8,072 $ 11,196 $ 7,216 $
28,945
Subtotal yield 5.76% 6.65% 7.36% 7.08% 6.96%
Equity Securities $ 480
Yield 5.64%
Total investment
securities $ 29,425
Yield 6.94%
</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.
- -27-
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 1997 was $855,730, a decrease of
$101,455 or 10.60% from the net income of $957,185 for 1996 and a
decrease of $146,034 or 14.58% from 1995. On a per share basis,
net income for 1997 was $2.14, based upon average shares
outstanding of 400,000, compared to $2.39 for 1996 and $2.51 for
1995..
Results of operations for 1997 as compared to 1996 were impacted by
the following items: (1) net income was positively impacted by a
3.81% increase in average earning assets which was driven by a
4.34% increase in average deposits, the result of the new deposits
generated at our Hancock Office, Hancock Community Bank, which
opened on November 25, 1996 and increased deposits of our Fort
Loudon Office which opened on November 13, 1995; (2) net income was
positively impacted by an increasing net interest margin which
occurred due to an increase in the yield on earning assets from
7.77% in 1996 to 7.94% in 1997 a direct result of an increase in
the yield on investment securities which increased from 5.82% in
1996 to 6.07% in 1997 while costs of interest bearing liabilities
increased only .01% in 1997 from 4.83% in 1996 to 4.84% in 1997;
(3) net income was negatively impacted by a $137,000 increase in
the provision for loan losses, from $95,500 in 1996 to $232,500 in
1997, an increase which was necessary due primarily to the
unforeseen bankruptcy of a commercial loan; (4) net income was
positively impacted by a $31,211 gain on the sale of PHEAA loans
which were sold due to increasing federal regulations and
bureaucracy diminishing the Bank's ability to profitability
originate these loans; (5) net income was negatively impacted by an
increase in wage and salary expenses of $126,931 and employee
benefits of $42,458 due a) to a full year of expenses for two full
time and four part time employees hired for the operation of the
Bank's first interstate office, Hancock Community Bank, opened on
November 25, 1996 in Hancock, Maryland; b) wage and salary
increases during 1997; and c) increased participation in the Bank's
health care and retirement plans; (6) net income was negatively
impacted by a $43,406 increase in net occupancy expenses and a
$61,615 increase in furniture and equipment expenses as a result of
a full year depreciation on buildings, furniture, equipment and `
28
overhead associated with the Hancock Community Bank office and the
renovation/expansion of the main office completed on September 1,
1996; (8) net income was positively impacted by an accounting
estimate change which decreased the amortization of the cost of the
Fort Loudon deposit acquisition in the amount of $37,356; a $16,241
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 $5,969 decrease in professional
development expenses due to a decrease in the training costs of new
employees and attendance of banking association conventions; an
$11,544 increase in supplies expenses due to the additional new
accounts acquired at the Fort Loudon Office and start-up supplies
for the Hancock Office; a $15,278 increase in professional fees due
to a $6,500 cost for the professional appraisal of all the
corporation's properties and VISA debit card start up costs of over
$4,000; and a $9,640 increase in costs associated with the
collection and recovery of past due, delinquent and charged off
loans; and (9) net income was positively impacted by a $24,897
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 1997, also
known as return on assets (ROA), was .86% compared to 1.00% for
1996 and 1.19% for 1995. Net income as a percent of average
stockholders' equity for 1997, also known as return on equity
(ROE), was 7.98% compared to 9.18% for 1996 and 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
Hancock community and supporting the needs of the community while
reenforcing the Banks' 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
extension renovations, the wall between the branch office and the
supermarket will be removed, allowing customers to enter the branch
29
directly from the supermarket. The operation of this office has
increased 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. The deposit
and loan growth of the Hancock office has exceeded management's
expectations. At December 31, 1997 balances of new deposits and
loans generated as a direct result of the opening of the Hancock
office were $2,833,403 and $2,393,878 respectively.
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 1997 increased $270,981 or 8.29% over
1996 and $525,989 or 17.45% over 1995. Average earning assets for
1997 increased $3,411,000 over 1996 and $12,754,000 over 1995. The
most significant contribution to this increase in average earning
assets from 1996 to 1997 was the increase in loans in the amount of
$4,748,000 or 8.95% and a decrease in investment securities of
$1,605,000 or 4.84%. The decrease in the lower yielding investment
securities of 6.07% to the higher yielding loans of 9.12%
contributed to the increase in net interest income. The earning
asset increase was also funded by an increase in average deposits
of $3,585,000 or 4.23%. This volume increase is the result of
deposits generated at the Fort Loudon office and new deposits at
the Hancock office of $2,833,403. The volume growth in earning
assets and interest-bearing liabilities contributed to the increase
in net interest income by the amount of $184,000 in 1997 over 1996.
The decline in market interest rates which had 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 1996, interest rates remained relatively the
same with no major changes in Federal Reserve interest rate policy.
During 1997 the Federal Reserve's interest rate policy remained
the same as that of 1996 with the only change occurring at the end
of the first quarter when the Federal Reserve decreased short term
interest rate by 25 basis points. Average yields on loans
decreased 2 basis points from those of 1996; however, the average
yield on investment securities increased 25 basis points and the
average yield on federal funds sold increased 10 basis points. As
a result of the aforementioned increase in the average balance of
higher yielding loans while the average balance of lower yielding
investment securities decreased, the average yield on earning
assets increased in 1997 to 7.94%, a .17% increase from 1996 and
.14% increase from 1995. The average cost of
30
interest-bearing liabilities during 1997 was 4.84%, a .01% increase
from 1996 and .01% decrease from 1995. This very minimal increase
from 1996 was attributable to management's retention of rates and
decrease in the cost of interest-bearing liabilities from 1996 and
the $2,824,000 increase in the balance of higher yielding
certificates of deposit. The result of these decreases were a 4
basis point decrease in the cost of interest-bearing transaction
accounts; a 3 basis point reduction in the cost of Money Market
Deposit accounts; a 5 basis point reduction in the cost of Saving
accounts; and a 3 basis point reduction in the cost of time
deposits. The net effect of all interest rate fluctuations was to
increase net interest income in the amount of $86,000 in 1997 over
1996. Due to the increase in the yield on earning assets by 17
basis points, which was significantly more than the 1 basis point
increase in the cost of interest-bearing liabilities, and to an
increase of $4,748,000 into higher yielding loans, the Bank has
experienced an increase in its net interest margin during 1997
compared to 1996. The average net interest margin for 1997 was
3.80% compared to 3.65% for 1996.
Management anticipates the yield on earning assets to decrease
during the next few quarters as indexes on adjustable rate
securities and loans have decreased and loan competition in the
residential lending environment has forced management to reduce
interest rates on all residential mortgage products. At the same
time interest rates on investment securities at their current low
interest rate level has resulted in calls of higher yielding
investment securities being invested in lower yielding securities.
These decreases in yield in both the loan portfolio and the
investment portfolio will result in lower yields on the Bank's
earning assets while 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 decrease 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, 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 1997 was $232,500
compared to $95,500 for 1996, and $74,704 for 1995. This increase
of $137,000 from 1996 to 1997 was the result of an increase in
charged-off loans classified as commercial loans. Due to a
bankruptcy filing by a loan customer over $100,000 was charged-off
for this customer. As a result of this charge-off, the
31
loan loss provision for 1997 was increased accordingly. Total
charged-off loans in 1997 were $227,000 compared to $108,000 in
1996 and $106,000 in 1995. Total recoveries in 1997 were $15,000
compared to $13,000 in 1996 and $31,000 in 1995. The increase in
the allowance balance by $20,000 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 1997 was $348,670, a $77,917 increase
over the same period in 1996 and a $79,146 increase over the same
period in 1995. This increase is mainly attributable to the gain
on the sale of PHEAA loans on June 19, 1997 which resulted in a
gain of $31,211. Service charges on deposit account increased
$10,600 due to increased deposit accounts and managements stricter
enforcement of overdraft fees. Other service charges increased
$17,319 due to an $18,845 increase in commissions received on the
writing of consumer and residential home life and
accident/disability insurance as a direct result of increased
consumer lending and loans closed which purchased this insurance.
Other income increased $9,202 due mainly to a $4,400 increase in
rental income.
Total other operating expenses for 1997 increased by $338,250 or
14.90% over 1996 and $654,032 or 33.47%, over 1995. As 1997 was
the first full year of operational expenses associated with the
Hancock office, operating expenses increased due to this operation
and are outlined in the following discussion. Employee wages and
benefits increased $169,389 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 1997. Net occupancy
expenses of bank premises increased $43,406 and furniture and
equipment expenses increased $61,615 due to increased depreciation
on real estate, furniture and equipment as a result of a full
year's 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 $54,793 due to a $16,241 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
$5,969 decrease in professional development expenses due to a
decrease in the training costs of new employees and attendance of
banking association conventions; an $11,544 increase in supplies
expenses due to the additional new accounts acquired at the Fort
Loudon Office and start-up supplies for the Hancock Office; a
$15,278 increase in professional fees due to a $6,500 cost for the
professional appraisal of all the corporation's properties and VISA
debit card start up costs of over $4,000; and a $9,640 increase in
32
costs associated with the collection and recovery of past due,
delinquent and charged off loans.
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, other operating expenses
increased during the 1997 operational year and will for the 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 which were completed
in November 1997 costing approximately $200,000. These items will
decrease the Corporation's net income during the next few years as
overhead of these operations impact net income. The immediate
result will be a decrease in operational income, Earnings per
Share, Return on Assets and Return on Equity. Although this growth
mode has and will 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 resulting in increased income to the corporation.
Income Taxes
The Corporation's income tax provision for 1997 was $193,122
compared to $218,019 for 1996 and $253,781 for 1995. The 1997
provision of $193,122 includes a $13,551 charge for taxes due as a
result of an IRS audit of the Corporation's 1996 Federal tax
return. Without this additional 1996 tax, the corporation's
provision for 1997 would have been $179,571. This decrease in the
tax provision in the amount of $24,897 was due to a decrease in
income before income taxes of $126,352. The Corporation operated
with a marginal tax rate of 34% in 1997 and in 1996. The effective
tax rate of the Corporation for 1997 was 18.41% compared to 18.55%
for 1996 and 20.21% for 1995.
Future Impact of Recently Issued Accounting Standards
In June 1997, The Financial Accounting Standards Board (FASB)
issued SFAS 30 "Reporting Comprehensive Income", with the main
objective of disclosing and reporting all changes in equity that
result from recognized transactions; and other economic events of
the period being reported. This statement is effective for fiscal
years beginning after December 15, 1997, with quarterly reporting
to begin March 31, 1998. The impact of this statement on the Bank
will be limited to reporting on market value adjustments under SFAS
115 and disclosure of any activity of treasury stock.
33
FINANCIAL CONDITION
Investment Debt Securities
The book value of the investment debt security portfolio as of
December 31, 1997, decreased by $4,346,684 from December 31, 1996,
representing a 13.02% decrease. This decrease occurred primarily
due to increases in interest-bearing deposits with banks of
$5,723,270, loan demand of $2,864,083 and federal funds sold of
$1,692,000 while total deposits increased $6,125,722.
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, 1997
the Corporation had in its portfolio HTM securities of $2,975,841
with a market value of $2,988,188 and AFS securities of $26,338,409
with a book value of $26,059,617. No securities were classified as
Trading securities as of December 31, 1997. For the December 31,
1996, Balance Sheet presentations, the Bank carried investment debt
securities classified as Held-to-Maturity of $4,559,739 with a
market value of $4,567,903 and as Available-for-Sale $28,870,912,
with at book value of $28,822,403. No securities were classified
as Trading as of December 31, 1996.
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, 1997, the net unrealized gain of the HTM
portfolio was $12,347, a .41% increase from book value and on the
AFS portfolio a net unrealized gain of $278,792 or a 1.07% increase
from book value. As of December 31, 1996, the net unrealized gain
on the HTM portfolio was $8,164, a .18% increase from book value,
and on the AFS portfolio, a net unrealized gain of $48,509 or a
.17% 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. Management determined that 1996's increasing
values were the result of the Federal Reserve Board's stability in
34
interest rate policy and the "leveling" of longer term interest
rates. Management has therefore, concluded that the net unrealized
gains and/or losses in the company's investment debt portfolio are
a direct result of 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 $59,124,012 at December 31,
1997, representing a $2,864,083 or 5.09%, increase from the
December 31, 1996 investment of $56,259,929. The primary reasons
for this increase in the loan portfolio over the past year was due
to 1) a $1,160,000 increase in real estate loans secured by 1 to 4
family residential properties; 2) a $545,000 increase in loans
secured by farmland which occurred due to Farm Service Agency (FSA)
guaranteed loan refinancings from other financial institutions; 3)
a $700,000 increase in a bank holding company line of credit; and
4) an increase in commercial, industrial and state and political
subdivision loans of $848,000 which occurred primarily to a new
equipment loan advanced to a commercial customer of over
$1,000,000. Total new real estate mortgage loan lending for 1997
increased $1,667,000 or 4.27% from December 31, 1996 in comparison
to a $2,273,000 or 6.18% increase in 1996 from December 31, 1995.
This decrease in the amount of mortgage lending from 1996 to 1997
reflects the competitive nature of the market in which the Bank
operates. Competitive loan mortgage rates of other institutions
and mortgage companies in the Corporation's market area has
resulted in the payoff of mortgage loans within the Bank's loan
portfolio. Overall loan demand during the past year was weaker
than that of 1996 which was a direct result of increased
aggressiveness of competing financial institutions, mortgage loan
companies and financing companies in interest rates and marketing
35
strategies. The lending operation of the Bank has been 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 continued 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 impaired loans.
These assets are carried at the lower of cost or fair value. The
other real estate balance as of December 31, 1997, was $428,488
compared to $318,992 as of December 31, 1996. This increase
reflects the addition of three residential dwellings, two in the
borough of McConnellsburg and one in Licking Creek Township. The
Bank is actively pursuing the sale of all properties contained in
Other Real Estate. At December 31, 1996, the Bank had a
lease/purchase agreement on a retail property which was contained
in Other Real Estate on that date and is located in downtown
McConnellsburg. In July 1997 the tenant exercised the right to
purchase the property, and accordingly this property was removed
from Other Real Estate upon settlement of the purchase.
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, 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.
36
The allowance for loan losses was increased to $425,814 from the
prior year level of $405,600. The ratio of the allowance to net
loans was .72% at December 31, 1997 and at December 31, 1996.
Management believes that the current allowance for loan losses of
$425,814 is adequate to meet any potential loan losses, but has
budgeted a monthly addition during 1998 of $10,000 in anticipation
of additional commercial loan problems and general increases in the
total loan portfolio.
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, 1997, the Bank had borrowings of $173,226 from this
institution under its Community Investment Program and had readily
available to it a $3,115,000 line of credit.
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. Based upon
contractual maturities of securities and the capability of NOW and
Savings accounts to be repriced within the 3 month time horizon,
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. However, when savings accounts
are spread based upon their movement to other time deposits and
securities are spread based upon their earliest call date, the Bank
maintains a positive rate sensitivity position, in that, rate
sensitive assets exceed rate sensitive liabilities. This means
that in a period of declining interest rates, more securities will
most likely be called and be reinvested into lower rate
investments. Declining rate environments also result in the
likelihood of residential home mortgage customer to refinance their
existing mortgage to lower interest rates. This movement of
securities and loans to lower interest rates during a declining
rate environment has the effect of decreasing the Corporation's net
interest margin.
Presently, the interest rate environment is anticipated to remain
relatively stable; however, some indications are that the
37
Federal Reserve Board may decrease 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 lower
interest rates while management has also decreased the cost of
interest rate sensitive liabilities. This stable rate environment
and possibility of lower interest rates in the future has resulted
in investment debt securities with higher interest rates and call
features of U. S. Government Agencies and State and Municipal
subdivisions in the U. S. held by the Bank being called. The
proceeds of these called securities are being reinvested into lower
yielding investment debt securities which will decrease the yield
on the investment debt security portfolio. The anticipated result
of this current position will be a gradual decrease in the yield on
earning assets while the cost of interest-bearing liabilities
remains relatively the same. Management therefore expects the net
interest spread and interest margin of the Bank to decrease
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, 1997 was 63.40% and at December
31, 1996 64.57%. This decrease of 1.17% from December 31, 1996
occurred due to deposit growth during 1997 exceeding that of loan
growth, some of which was temporary in nature in that approximately
$2,000,000 to $3,000,000 of demand deposits and savings deposits at
year end 1997 are expected to be withdrawn from the Bank by mid-
February. The current loan to deposit 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. 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 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
38
offers both fixed rate and floating/adjustable rate loans to its
customers. At December 31, 1997, the Bank's floating and
adjustable rate loans totaled $33,008,000, or 54.06% of the total
loan portfolio. As of December 31, 1996, the Bank's floating and
adjustable rate loans totaled $32,292,000, 55.63% of the total loan
portfolio. The bank's debt security investment portfolio as of
December 31, 1997, was comprised of a book value of $5,507,795, or
18.97% of floating rate debt securities which reprice annually or
more frequently while at December 31, 1996, the Bank's debt
security investment portfolio was comprised of a book value of
$7,928,548, or 23.81% of floating rate securities. Specific methods
which have been employed by the Bank to address the 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 and three year annual adjustable
certificates of deposit.
The interest rate sensitivity analysis for the Bank as of December
31, 1997 based upon contractual maturities is as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1997
AFTER
AFTER
WITHIN
3 BUT
1 BUT
AFTER
NON-
3
WITHIN
WITHIN
5
INTEREST
MONTHS
12 MONTHS
5 YEARS
YEARS
BEARING
TOTAL
ASSETS:
FEDERAL FUNDS SOLD
$2,931
$0
$0
$0
$0
$2,931
INVESTMENT SECURITIES (BOOK VALUE)
5,287
2,799
7,511
13,738
0
29,335
INTEREST-BEARING BALANCES DUE FROM
BANKS
5,763
190
98
0
0
6,051
LOANS
9,981
14,524
18,739
17,400
414
61,058
UNEARNED DISCOUNT & ALLOWANCE FOR
LOAN
LOSSES (1)
0
0
0
(1,934)
0
(1,934)
NONINTEREST-EARNING ASSETS
8,260
8,260
TOTAL ASSETS
$23,962
$17,513
$26,348
$29,204
$8,674
$105,701
LIABILITIES:
NOW ACCOUNTS AND SAVINGS ACCOUNTS
$26,714
$0
$0
$0
$0
$26,714
TIME DEPOSITS
8,605
22,377
25,554
21
0
56,557
NONINTEREST-BEARING DEPOSITS
0
0
0
0
10,037
10,037
39
OTHER BORROWED MONEY
288
0
0
173
0
461
OTHER NONINTEREST-BEARING SOURCES TO
FUND
EARNING ASSETS
0
0
0
0
791
791
TOTAL LIABILITIES
$35,607
$22,377
$25,554
$194
$10,828
$94,560
INTEREST SENSITIVITY GAP
($11,645)
($4,864)
$794
$29,010
CUMULATIVE INTEREST SENSITIVITY GAP
(11,645)
(16,509)
(15,715)
13,295
GAP RATIO
0.67
0.78
1.03
N/A
CUMULATIVE GAP RATIO
0.67
0.72
0.81
1.16
</TABLE>
IT HAS BEEN ARBITRARILY ASSIGNED TO THE "AFTER FIVE YEARS" CATEGORY FOR PURPOSE
OF ANALYSIS.
Market Risk Management
The corporation has risk management policies to monitor and limit
exposure to market risk. By monitoring reports which assess the
corporation's exposure to market risk, management strives to
enhance the corporation's net interest margin and take advantage of
opportunities available in interest rate movements.
The continual monitoring of liquidity and interest rate risk is a
function of the corporation's ALCO reporting. Upon review and
analysis of these reports, management determines the appropriate
methods it should use to reprice its products, both loans and
deposits, and the types of securities it should purchase in order
to achieve desired net interest margin and interest spreads.
Management continually strives to attract lower cost deposits,
competitively price its time deposits and loan products in order to
maintain favorable interest spreads while minimizing interest rate
risk.
The following table sets forth the projected maturities and average
rate for all rate sensitive assets and liabilities. The following
assumptions were used in the development of this table:
* All fixed and variable rate loans were based on the original
maturity of the note as the Bank has not experienced a significant
rewriting of loans.
* All fixed and variable rate U. S. Agency and Treasury securities
and obligations of state and political subdivisions in the U.S.
were based upon the maturity date or the call date, whichever was
earlier.
* All fixed and variable rate Mortgage-backed securities and SBA
GLPCs were based upon original maturity as the Bank has not
experienced a significant prepayment of these securities.
* The Bank has experienced very little run-off in its history of
operations and has experienced net gains in deposits.
40
* The Bank has large business and municipal deposits in noninterest
bearing checking and savings and interest bearing checking. These
balances may fluctuate significantly and were at high levels on
December 31, 1997. Therefore, a 50% maximum runoff of both
noninterest bearing checking and savings and interest bearing
checking was used as an assumption in this table.
* The Bank currently has on deposit one large municipal deposit
which alternates between the two local community banks every two
years. This deposit account, with an average balance in excess of
$1,000,000, has been assumed to move to the other institution in
1998 and return in 2000 and continue this cycle every two years.
* Fixed and variable rate time deposits were based upon original
contract maturity dates.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN MILLIONS)
- ---------------PRINCIPAL/NOTIONAL AMOUNT MATURING IN----------
- ----
FAIR
RATE SENSITIVE ASSETS
1998
1999
2000
2001
2002
THEREAFTER
TOTAL
VALUE
FEDERAL FUNDS SOLD
$2,931
$0
$0
$0
$0
$0
$2,931
$2,931
AVERAGE INTEREST RATE
5.45%
- --
- --
- --
- --
- --
5.45%
INTEREST BEARING DEPOSITS
IN BANKS
$5,953
$98
$0
$0
$0
$0
$6,051
$6,051
AVERAGE INTEREST RATE
5.49%
6.25%
- --
- --
- --
- --
5.50%
FIXED INTEREST RATE LOANS
$819
$2,113
$2,298
$2,416
$1,984
$16,912
$26,542
$25,021
AVERAGE INTEREST RATE
11.30%
10.11%
9.97%
9.31%
8.66%
9.81%
9.32%
VARIABLE INTEREST RATE
LOANS
$6,712
$730
$327
$778
$1,624
$22,837
$33,008
$33,008
AVERAGE INTEREST RATE
7.45%
8.04%
8.93%
9.32%
7.54%
8.83%
8.82%
FIXED INTEREST RATE
U. S. AGENCY & TREASURY
SECURITIES
$8,943
$2,551
$650
$450
$203
$294
$13,091
$13,138
41
AVERAGE INTEREST RATE
6.71%
7.21%
6.88%
6.83%
6.88%
6.70%
6.82%
VARIABLE INTEREST RATE
U. S. AGENCY & TREASURY
SECURITIES
$250
$250
$0
$0
$0
$0
$500
$498
AVERAGE INTEREST RATE
5.08%
5.48%
- --
- --
- --
- --
5.28%
FIXED INTEREST RATE
MORTGAGE-BACKED AND SBA
GLPC SECURITIES
$5
$80
$26
$0
$9
$179
$299
$304
AVERAGE INTEREST RATE
7.50%
6.65%
8.21%
- --
8.98%
8.58%
8.03%
VARIABLE INTEREST RATE
MORTGAGE-BACKED AND SBA
GLPC SECURITIES
$18
$0
$34
$123
$0
$4,773
$4,948
$5,010
AVERAGE INTEREST RATE
9.18%
- --
7.82%
8.31%
- --
6.83%
6.88%
FIXED INTEREST RATE
OBLIGATIONS OF STATE AND
POLITICAL SUBDIVIONS IN
THE US
$3,143
$680
$2,617
$947
$843
$1,877
$10,107
$10,243
AVERAGE INTEREST RATE
6.81%
6.48%
7.39%
7.35%
7.38%
7.46%
7.16%
RATE SENSITIVE LIABILITIES
NONINTEREST BEARING
CHECKING
$2,497
$624
$624
$624
$625
$0
$4,994
$4,994
AVERAGE INTEREST RATE
- --
- --
- --
- --
- --
- --
- --
SAVINGS AND INTEREST
BEARING CHECKING
$6,679
$1,670
$670
$1,670
$2,669
$0
$13,357
$13,357
AVERAGE INTEREST RATE
2.96%
2.96%
2.96%
2.96%
2.96%
- --
2.96%
42
FIXED INTEREST RATE
TIME DEPOSITS
$21,743
$7,952
$6,398
$5,644
$5,715
$21
$47,473
$47,681
AVERAGE INTEREST RATE
5.59%
6.16%
6.68%
6.10%
6.22%
6.66%
5.97%
FIXED INTEREST RATE
TIME DEPOSITS
$3,610
$3,212
$2,259
$0
$0
$0
$9,081
$9,081
AVERAGE INTEREST RATE
5.88%
5.52%
5.59%
- --
- --
- --
5.68%
FIXED INTEREST RATE
BORROWINGS
$287
$0
$0
$0
$0
$174
$461
$460
AVERAGE INTEREST RATE
- --
- --
- --
- --
- --
6.64%
2.51%
</TABLE>
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 10.41% as of December 31, 1997,
compared to 10.60% as of December 31, 1996. 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>
<S> <C> <C> <C>
FNB FINANCIAL CORPORATION
REGULATORY
MINIMUM
1997
1996
REQUIREMENTS
LEVERAGE RATIO
10.41%
10.60%
3.00%
RISK-BASED CAPITAL RATIO TIER I
18.09%
19.30%
4.00%
(CORE CAPITAL)
COMBINDED TIER I AND TIER II (CORE CAPTIAL
PLUS ALLOWANCE FOR LOAN LOSSES)
18.79%
20.05%
8.00%
</TABLE>
43
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.
<TABLE>
<S> <C> <C> <C>
1997
1996
1995
EQUITY CAPITAL AT DECEMBER 31 BEFORE FAS 115
ADJUSTMENTS & REDUCED BY INTANGIBLE ASSETS( 000 OMITTED)
11,206
10,670
10,021
EQUITY CAPITAL AS A PERCENT OF ASSETS AT
DECEMBER 31
10.41%
10.60%
10.63%
RETURN ON AVERAGE ASSETS
.86
1.00
1.19
RETURN ON AVERAGE EQUITY
7.98
9.18
10.26
CASH DIVIDEND PAYOUT RATIO
37.39%
32.18
30.75
</TABLE>
STOCK MARKET ANALYSIS AND DIVIDENDS
The Corporation's common stock is traded inactively in the over-
the-counter market. As of December 31, 1997 the approximate number
of shareholders of record was 421.
<TABLE>
<S> <C> <C> <C> <C>
MARKET
CASH
MARKET
CASH
PRICE
DIVIDEND
PRICE
DIVIDEND
1997
1996
FIRST QUARTER
$46.00
$0.17
$35.00
$0.17
SECOND QUARTER
$50.00
$0.18
$45.00
$0.17
THIRD QUARTER
$55.00
$0.19
$45.00
$0.18
FOURTH QUARTER
$55.00
$0.26
$45.00
$0.25
</TABLE>
YEAR 2000 ISSUES
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.
44
The Corporation 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.
The policy of the Corporation is to assure current equipment,
computers and software are Year 2000 compatible; to test on-site
compatibility of equipment and software in the first quarter of
1998; to assure to the best of its ability each vendor and major
business customer is Year 2000 compatible; to have all
modifications and updates required in place by December 1998 so any
unforeseen problems may be addressed in early 1999; and to have a
contingency plan in place should it be necessary. In addition the
Corporation has approved a specific budget for modifications,
replacements and testing necessary to assure Year 2000 compliance.
This budget is reviewed and updated by the EDP Committee as
necessary.
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 short
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.
45
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,491
<INT-BEARING-DEPOSITS> 6,051
<FED-FUNDS-SOLD> 2,931
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 26,338
<INVESTMENTS-CARRYING> 2,976
<INVESTMENTS-MARKET> 2,988
<LOANS> 59,550
<ALLOWANCE> 426
<TOTAL-ASSETS> 106,020
<DEPOSITS> 93,260
<SHORT-TERM> 287
<LIABILITIES-OTHER> 910
<LONG-TERM> 173
0
0
<COMMON> 252
<OTHER-SE> 10,450
<TOTAL-LIABILITIES-AND-EQUITY> 106,020
<INTEREST-LOAN> 5,271
<INTEREST-INVEST> 1,888
<INTEREST-OTHER> 229
<INTEREST-TOTAL> 7,388
<INTEREST-DEPOSIT> 3,841
<INTEREST-EXPENSE> 3,847
<INTEREST-INCOME-NET> 3,541
<LOAN-LOSSES> 233
<SECURITIES-GAINS> 6
<EXPENSE-OTHER> 2,608
<INCOME-PRETAX> 1,049
<INCOME-PRE-EXTRAORDINARY> 1,049
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 856
<EPS-PRIMARY> 2.14
<EPS-DILUTED> 2.14
<YIELD-ACTUAL> 3.80
<LOANS-NON> 414
<LOANS-PAST> 26
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 405
<CHARGE-OFFS> 227
<RECOVERIES> 15
<ALLOWANCE-CLOSE> 426
<ALLOWANCE-DOMESTIC> 426
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
