FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1998
Commission file number: 33-66014
FNB Financial Corporation
(Exact name of registrant as specified in its charter)
Commonwealth of Pennsylvania 23-2466821
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 Lincoln Way West, McConnellsburg, PA 17233
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 717/485-3123
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at September 30, 1998
(Common stock, $0.63 par value) 400,000
FNB FINANCIAL CORPORATION
INDEX
Page
PART I - FINANCIAL INFORMATION
Condensed consolidated balance sheets -
September 30, 1998 and December 31, 1997 5
Condensed consolidated statements of income -
Three months ended September 30, 1998 and 1997 6
Condensed consolidated statements of income -
Six months ended September 30, 1998 and 1997 7
Condensed consolidated statements of comprehensive
income -
Six months ended September 30, 1998 and 1997 8
Condensed consolidated statements of cash flows -
Six months ended September 30, 1998 and 1997 9
Notes to condensed consolidated financial
statements 10-12
Table #1 - Schedule of held to maturity and
available for sale investment activity for the
period January 1, 1998 through September 30, 1998 13
Table #2 - Schedule of gross unrealized gains and
unrealized losses within the held to maturity and
available for sale investment portfolios by
investment type 14
Management's discussion and analysis of financial
condition and results of operations 15-28
PART II - OTHER INFORMATION 29
Signatures 31
PART I - FINANCIAL INFORMATION
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<S> <C> <C>
September 30, December 31,
1998 1997
ASSETS: (unaudited) (audited*)
Cash and Due from banks $ 2,767,556 $ 3,491,312
Interest-bearing deposits with banks 1,913,821 6,050,546
Marketable Debt Securities
Held-to-maturity (Market value - 1998:
$2,581,887 and 1997: $2,988,188) 2,569,727 2,975,841
Available-for-sale 32,484,203 26,204,829
Marketable Equity Securities
Available for Sale 203,550 133,580
Federal Reserve, Atlantic Central Banker's Bank
and Federal Home Loan Bank Stock 394,100 389,600
Federal Funds Sold 3,202,000 2,931,000
Loans, net of unearned discount &
Allowance for loan losses 60,202,357 59,124,012
Bank buildings, equipment, furniture &
fixtures, net 3,206,095 3,295,474
Accrued interest receivable 734,194 610,240
Deferred income tax charges 0 0
Other real estate owned 491,302 428,488
Intangible Assets 181,948 194,222
Other assets 2,285,669 191,091
Total Assets $110,636,522 $106,020,235
========== ==========
LIABILITIES :
Deposits:
Demand deposits $ 9,692,581 $ 9,988,174
Savings deposits 29,123,890 26,713,986
Time certificates 57,885,260 56,293,701
Other time deposits 700,363 263,829
Total deposits $97,402,094 $93,259,690
Accrued interest payable & other liabilities 972,071 738,197
Liability for other borrowed money 169,907 460,719
Deferred income taxes 91,389 67,880
Accrued dividends payable 76,000 104,000
Total Liabilities $98,711,461 $94,630,486
STOCKHOLDERS' EQUITY:
Capital stock, Common, par value $0.63;
6,000,000 shares authorized; 400,000
outstanding $ 252,000 $ 252,000
Additional paid-in capital 1,789,833 1,789,833
Retained earnings 9,522,077 9,163,913
Net unrealized gain/(loss) on Available-for-sale
securities, net of tax effects 361,151 184,003
Total Stockholders' Equity $11,925,061 $11,389,749
Total Liabilities & Stockholders' Equity$110,636,522 $106,020,235
========== ==========
</TABLE>
*Condensed from audited financial statements.
The accompanying notes are an integral part of these condensed
financial statements.
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended September 30, 1998 and 1997
(UNAUDITED)
<TABLE>
<S> <C> <C>
1998
1997
Interest & Dividend Income
Interest & fees on loans $1,369,313
$1,325,252
Interest on investment securities:
U.S. Treasury Securities 3,009
7,938
Obligations of other U.S.
Government Agencies 365,399
359,652
Obligations of State & Political
Subdivisions 120,888
104,737
Interest on deposits with banks 21,549
7,113
Dividends on Equity Securities 6,678
6,570
Interest on federal funds sold 77,311
45,314
Total Interest & Dividend Income 1,964,147
1,856,576
Interest Expense
Interest on deposits 1,053,617
965,611
Interest on Other borrowed money 2,833
2,419
Total interest expense 1,056,450
968,030
Net interest income 907,697
888,546
Provision for loan losses 90,000
50,000
Net interest income after
Provision for loan losses 817,697
838,546
Other income
Service charges on deposit accounts 21,279
19,726
Other service charges, collection &
exchange charges, commissions
and fees 58,859
55,431
Other income 26,055
9,427
Net Securities gains/(losses) (991)
1,806
Total other income 105,202
86,390
Other expenses 690,315
634,295
Income before income taxes 232,584
290,641
Applicable income taxes (16,299)
61,931
Net income $248,883
$228,710
=======
=======
Earnings per share of Common Stock:
Net income per share $0.62
$0.57
Cash dividend declared per share $0.19
$0.19
Weighted average number of shares outstanding 400,000
400,000
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ended September 30, 1998 and 1997
(UNAUDITED)
<TABLE>
<S> <C> <C>
1998
1997
Interest & Dividend Income
Interest & fees on loans $4,061,968
$3,914,682
Interest on investment securities:
U.S. Treasury Securities 9,509
30,068
Obligations of other U.S.
Government Agencies 1,036,524
1,088,071
Obligations of State & Political
Subdivisions 361,118
317,313
Interest on deposits with banks 54,724
15,930
Dividends on Equity Securities 21,174
20,457
Interest on federal funds sold 196,495
107,549
Total Interest & Dividend Income 5,741,512
5,494,070
Interest Expense
Interest on deposits 3,049,417
2,843,912
Interest on other borrowed money 8,554
2,978
Total Interest Expense 3,057,971
2,846,890
Net interest income 2,683,541
2,647,180
Provision for loan losses 381,114
102,500
Net interest income after
Provision for loan losses 2,302,427
2,544,680
Other income
Service charges on deposit accounts 60,771
52,722
Other service charges, collection &
exchange charges, commissions
and fees 161,680
153,489
Other income 67,890
60,106
Net Securities gains/(losses) 143,253
1,901
Total other income 433,594
268,218
Other expenses 2,034,407
1,940,083
Income before income taxes 701,614
872,815
Applicable income taxes 127,451
179,749
Net income $574,163
$693,066
=======
=======
Earnings per share of Common Stock:
Net income per share $1.44
$1.73
Cash dividend declared per share $0.54
$0.54
Weighted average number of shares outstanding 400,000
400,000
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Nine Months Ended September 30, 1998 and 1997
(UNAUDITED)
<TABLE>
<S> <C> <C>
1998
1997
Net Income 574,163
$693,066
Other Comprehensive income, net of tax
Unrealized holding gains/(losses) for period 177,148
91,798
Comprehensive Income $751,311
$784,864
=======
=======
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1998 and 1997
<TABLE>
<S> <C> <C>
(UNAUDITED)
1998 1997
Cash flows from operating activities:
Net income $ 574,163 $
693,066
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation & amortization 200,176 178,967
Provision for loan losses 381,114 102,500
Net (gain)/loss on sales of
investments (143,253)
(1,901)
Increase in Cash Value of Life Insurance (26,212) 0
Loss on Disposal of Other Real Estate 2,000 0
(Increase) decrease in deferred taxes (67,749) 0
(Increase) decrease in accrued
interest receivable (123,954)
(29,095)
Increase (decrease) in accrued interest
payable and other liabilities 233,874
158,577
Other (net) (72,670)
63,137
Net cash provided (used)by operating
activities 957,489 1,165,251
Cash flows from investing activities:
Net (increase) decrease in interest-
bearing deposits with banks 4,136,725
(170,054)
Purchases of Held-to-maturity
securities (445,149)
(151,662)
Purchases of Available-for-sale
securities (13,217,348)
(4,247,391)
Proceeds from sales of Available-for-
sale securities 3,641,590 709,352
Proceeds from maturities of Held-to-
maturity securities 851,262 1,164,229
Proceeds from maturities of Available-
for-sale securities 3,672,218 5,532,786
Purchases of marketable equity securities (139,146)
(5,880)
Proceeds from sales of marketable equity
securities 105,000 0
Net (increase) decrease in loans (1,579,459)
(2,018,640)
Proceeds from sale of Other real
estate owned 44,025 10,075
Purchases of bank premises &
equipment (net) (98,055)
(361,686)
Purchase of life insurance (1,985,000) 0
Purchase of other bank stock (4,500)
(5,900)
Net cash provided (used) by investing
activities (5,017,837)
456,229
Cash flows from financing activities:
Net increase (decrease) in deposits 4,142,404
923,356
Net increase (decrease) in other borrowings (290,812) 174,296
Cash dividends paid (244,000)
(240,000)
Net cash provided (used) by financing
activities 3,607,592
857,652
Net increase (decrease) in cash & cash
equivalents (452,756)
2,479,132
Cash & cash equivalents, beginning balance 6,422,312 3,712,315
Cash & cash equivalents, ending balance $5,969,556 $6,191,447
========= =========
Supplemental disclosure of cash flows information
Cash paid during the year for:
Interest $2,928,659 $2,479,132
Income taxes 113,560 104,565
Supplemental schedule of noncash investing &
financing activities
Unrealized gain (loss) on Available-for-sale
securities net of tax effects 177,148 91,798
Accrued dividends payable 76,000 76,000
Other real estate and property acquired in
settlement of loans 100,000 201,311
Loan advanced for sale of other real estate 0 93,600
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
FNB FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The financial information presented at and for the nine
months ended September 30, 1998 and September 30, 1997 is
unaudited. Information presented at December 31, 1997, is
condensed from audited year-end financial statements. However,
this unaudited information reflects all adjustments,
consisting solely of normal recurring adjustments, that are,
in the opinion of management, necessary for a fair
presentation of the financial position, results of operations
and cash flows for the interim period.
NOTE 2 - PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
the corporation and its wholly-owned subsidiary, The First
National Bank of McConnellsburg. All significant
intercompany transactions and accounts have been
eliminated.
NOTE 3 - CASH FLOWS
For purposes of the statements of cash flows, the corporation
has defined cash and cash equivalents as those amounts
included in the balance sheet captions "cash and due from
banks" and "federal funds sold". As permitted by Statement
of Financial Accounting Standards No. 104, the corporation
has elected to present the net increase or decrease in
deposits in banks, loans and time deposits in the statement
of cash flows.
NOTE 4 - FEDERAL INCOME TAXES
For financial reporting purposes the provision for loan
losses charged to operating expense is based on management's
judgement, whereas for federal income tax purposes, the
amount allowable under present tax law is deducted.
Additionally, certain expenses are charged to operating
expense in the period the liability is incurred for financial
reporting purposes, whereas for federal income tax purposes,
these expenses are deducted when paid. As a result of these
timing differences, deferred taxes were computed after
reducing pre-tax accounting income for nontaxable municipal
and loan income.
NOTE 5 - INVESTMENTS
The activity within the held to maturity and available for
sale portfolios for the period January 1, 1998, through
September 30, 1998, is summarized in Table #1 on page 13. No
sales were conducted from securities contained within the held
to maturity portfolio.
The amortized cost and estimated market values of investments
by investment type and classification as available for sale or
held to maturity along with each portfolio's gross unrealized
gain or gross unrealized loss are contained in Table #2 on
page 14.
Management has purchased for the portfolio mortgage-backed
securities. The large portion of these securities have a
variable rate coupon and all have scheduled principal
payments. During periods of rising interest rates, payments
from variable rate mortgage-backed securities may accelerate
as prepayments of underlying mortgages occur as home-owners
refinance to a fixed rate while during periods of declining
interest rates, prepayments on high fixed rate mortgage-backed
securities may accelerate as home owners refinance to lower
rate mortgages. These prepayments cause yields on mortgage-
backed securities to fluctuate as larger payments of principal
necessitate the acceleration of premium amortization or
discount accretion. Due to the low dollar amount of mortgage-
backed securities in relation to the total portfolio,
management feels that interest rate risk and prepayment risks
associated with mortgage-backed securities will not have a
material impact on the financial condition of the Bank.
In regard to Collateralized Mortgage Obligations (CMOs), the
Bank presently has none of these types of investments in its
portfolio.
NOTE 6 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as
follows:
<TABLE>
<S> <C> <C>
1998
1997
Allowance for loan losses beginning of the year $425,813
$405,612
Loans charged-off during the year:
Real estate mortgages 25,000
22,820
Installment loans 65,366
43,307
Commercial & all other 89,090
65,995
Total charge-offs 179,456
132,122
Recoveries of loans previously charged-off:
Real estate mortgages 0
507
Installment loans 22,481
6,535
Commercial & all other 1,055
805
Total recoveries 23,536
7,847
Net loans charged-off (recovered) 155,920
124,275
Provision for loan losses charged to operations 381,114
102,500
Allowance for loan losses, September 30 $651,007
$383,837
=========
========
</TABLE>
The following table shows the principal balance of nonaccrual loans
as of September 30, 1998:
<TABLE>
<S> <C>
Nonaccrual loans $ 74,155.80
==========
Interest income that would have been
accrued at original contract rates $ 4,530.57
Amount recognized as interest income 3,191.10
Foregone revenue $ 1,339.47
=========
</TABLE>
NOTE 7 - OTHER COMMITMENTS
In the normal course of business, the bank makes various
commitments and incurs certain contingent liabilities which
are not reflected in the accompanying financial statements.
These commitments include various guarantees and commitments
to extend credit. The bank does not anticipate any losses
as a result of these transactions.
TABLE #1
SCHEDULE OF HELD TO MATURITY AND AVAILABLE FOR SALE
DEBT SECURITY PORTFOLIOS
TRANSACTION SUMMARY
FOR THE PERIOD JANUARY 1, 1998 THROUGH SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C> <C>
HELD TO AVAILABLE TOTAL
MATURITY FOR SALE INVESTMENT
PORTFOLIO PORTFOLIO PORTFOLIO
BEGINNING BALANCE 1/1/98 $2,975,841 $25,969,217 $28,945,058
PURCHASES 445,149 13,217,348 13,662,497
PROCEEDS FROM SALES 0 3,641,590 3,641,590
NET LOSSES/(GAINS) 0 (94,252) (94,252)
MATURITIES/CALLS PAYDOWNS/
PREMIUM AMORTIZATION/DISCOUNT
ACCRETION 851,262 3,672,218 4,523,480
ENDING BALANCE 9/30/98 $2,569,728 $31,967,009 $34,536,737
========= ========== ==========
</TABLE>
TABLE #2
SCHEDULE OF UNREALIZED GAINS AND UNREALIZED LOSSES
WITHIN THE HELD TO MATURITY AND AVAILABLE FOR SALE
INVESTMENT PORTFOLIOS BY INVESTMENT TYPE
SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C> <C> <C> <C>
<C> <C> <C>
HELD TO HELD TO HELD TO HELD TO
AVAILABLE AVAILABLE AVAILABLE AVAILABLE
MATURITY MATURITY MATURITY MATURITY FOR
SALE FOR SALE FOR SALE FOR SALE
BOOK MARKET UNREALIZED UNREALIZED BOOK
MARKET UNREALIZED UNREALIZED
SECURITY PORTFOLIO VALUE VALUE GAIN LOSS
VALUE VALUE GAIN LOSS
U.S. GOVERNMENT TREASURIES 0 0 0 0
199,621 200,500 879 0
U.S. GOVERNMENT TREASURIES 0 0 0 0
0 0 0 0
U.S. GOVERNMENT AGENCIES 354,390 356,655 2,265 0
18,291,112 18,602,457 311,345 0
U.S. GOVERNMENT AGENCIES 94,753 94,400 0 (353)
862,191 858,747 0 (3,444)
SBA GUARANTEED LOAN POOL
CERTIFICATES 802,295 806,600 4,305 0
1,472,426 1,488,243 15,817 0
SBA GUARANTEED LOAN POOL
CERTIFICATES 388,136 384,414 0 (3,722)
86,555 85,948 0 (607)
MORTGAGE-BACKED SECURITIES 0 0 0 0
947,991 969,710 21,719 0
MORTGAGE-BACKED SECURITIES 0 0 0 0
11,082 11,011 0 (71)
SECURITIES ISSUED BY STATES
& POLITICAL SUBDIVISIONS IN
THE U.S. 830,154 839,915 9,761 0
9,412,259 9,588,744 176,485 0
SECURITIES ISSUED BY STATES
& POLITICAL SUBDIVISIONS IN
THE U.S. 100,000 99,903 0 (97)
683,772 678,842 0 (4,930)
MARKETABLE EQUITY SECURITIES 0 0 0 0
79,400 113,300 33,900 0
MARKETABLE EQUITY SECURITIES 0 0 0 0
94,146 90,250 0 (3,896)
FEDERAL RESERVE BANK STOCK,
ATLANTIC CENTRAL BANKERS BANK
STOCK AND FEDERAL HOME LOAN
BANK STOCK 0 0 0 0
394,100 394,100 0 0
GRAND TOTALS 2,569,728 2,581,887 16,331 (4,172)
32,534,655 33,081,852 560,145 (12,948)
========= ========= ====== ======
========== ========== ======= =======
</TABLE>
CLASSIFICATION OF HELD TO MATURITY AND AVAILABLE FOR SALE
SECURITIES
Due to the implementation of FAS 115, management has segregated
securities as Held to Maturity, Available for Sale or Trading
securities. At the implementation of FAS 115 on January 1, 1994,
management determined that no securities were Trading securities;
that tax-free municipal with maturity dates less than the year 2000
were classified as Held to maturity securities due to management's
intention to hold these securities for tax planning purposes; and
that all other securities were classified as Available for Sale
securities due to management's intention to hold these securities
for liquidity planning purposes. Purchases of tax-free municipals
with maturities of 5 years or less made following implementation of
FAS 115 are classified as Held to Maturity securities with all
other purchase Available for Sale; however, management may decide
on a case-by-case basis that a security may be either classified as
Held to Maturity or Available for Sale depending upon the reasons
for purchase. Held to Maturity classifications are typically used
for securities purchased specifically for interest rate management
or tax-planning purposes while Available for Sale classifications
are typically used for liquidity planning purposes.
FNB FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Net income for the first nine months of 1998 was $574,163 compared
to $693,066 for the same period in 1997. This represents a
decrease of $118,903 or 17,16%. Net income on an adjusted per
share basis for the first nine months of 1998 was $1.44 per share,
a decrease of $0.29 from the $1.73 per share for the nine months
ended September 30, 1997.
This decrease of $118,903 in net income is a direct result of the
Board of Directors and management's decision to increase the
allowance for loan losses to approximately 1.25% of net loans by
year-end 1998. During the first nine months of 1998, the provision
to the allowance for loan losses has been $381,114, a $278,614
increase over the $102,500 provision for the first nine months of
1997. As can be seen, this increase in the provision directly
decreased net income for the first nine months of 1998.
The decision to increase the allowance is based upon several
factors. Of immediate concern is the observation that the current
long-run expanding economic cycle may be reaching its peak which
could result in the slowing down of our economy. This observation
combined with the instability in the Asian Market, which shows a
few signs of stabilization, has prompted management to be proactive
and increase the allowance before the "trickle down effects" of a
slowing economy and the Asian crisis affects businesses in our
local economy resulting in past due loans and delinquency
problems.
Another issue of concern to management is the potential problems
businesses could encounter regarding Year 2000 computer issues.
Although our organization has been very proactive in addressing
Year 2000 issues and has taken necessary steps to assure no
interruption in our banking operations will occur from this century
date change, management is concerned the business community in
general is not addressing this issue as promptly as banking
organizations have done. As such, management feels it wise to
again be proactive and increase the allowance for loan losses in
anticipation of potential past due and delinquent loans which could
arise as a direct result of computer problems associated with this
century date change.
Total interest and dividend income for the first nine months of
1998 was $5,741,512 compared to $5,494,070 for the nine months
ended September 30, 1997, representing an increase of $247,442.
This increase is a result of an increase in the average balances of
loans, federal funds sold, and interest bearing deposits with
banks. Since September 30, 1997, the average balance of net loans
has increased $2,274,647 or 3.96%, the average balance of federal
funds sold has increased $2,101,596 or 79.85%, and the average
balance of interest bearing deposits with banks has increased
$885,705 or 217%. These increases during the first nine months of
1998 over the first nine months in 1997 resulted in an increase of
loan interest income in the amount of $147,286, in federal funds
sold income of $88,946, and in interest bearing deposits of other
banks income of $38,794.
During the first half of 1998, interest rates remained relatively
stable; however, during the latter part of the third quarter of
1998, the Federal Reserve decreased short term interest rates. As
a result of this decreasing rate interest environment, several
investment securities with call features were called by the issuer
resulting in the loss of higher interest earning assets and several
one-to-four family residential mortgages have been refinanced to
lower interest rates. To address this decreasing yield on earning
assets, management has decreased deposit rates but not at the same
pace as that of earning assets. The tax-adjusted net interest
margin has decreased 16 basis points to 3.95% for the first nine
months of 1998 from that of the first nine months of 1997 which was
4.11%. This decrease in net interest margin occurred due to an
increase in the reliance of lower yielding federal funds sold,
investment debt securities, and time deposits of other banks to
offset the increase in deposits of a short term nature. As stated
previously, the average balance of federal funds sold increased
$2,101,596 and the average balance of time deposits other banks
increased $885,705. Although the average balance of investment
debt securities has increased $273,886, due to the calls as
discussed previously and the reinvestment of called securities and
maturities into lower yielding investment securities, the yield on
investment debt securities has decreased 10 basis points from 6.77%
in 1997 to 6.67% in 1998.
As a result of this decreasing interest rate environment, the tax
equivalent yield on earning assets decreased to 8.11% for the first
nine months of 1998 from 8.22% for the first nine months of 1997.
The cost of interest bearing liabilities has decreased only
slightly from the first nine months of 1997 to 4.80% from 4.81%.
This slight decrease in the cost of interest-bearing liabilities
and larger decrease in the yield on earning assets has resulted in
a decrease in the net interest margin. Management anticipates to
continue to concentrate on the improvement of the net interest
margin throughout the year and has taken steps to improve it by
decreasing rates more dramatically on time deposits and money
market accounts.
Interest expense for the nine months ended September 30, 1998, was
$3,057,971, an increase of $211,081 over the $2,846,890 incurred
for the same period in 1997. This increase in interest expense is
due to an increase in the average balance of time deposits in the
amount of $5,096,023 or 9.77% and in savings accounts of $814,445
or 3.11%. Total deposit volume increased $9,344,770 or 10.61%
since September 30, 1997. This increase is the result of a
$4,932,345 or 9.31% increase in time certificates of deposit due to
movement of funds from lower yielding savings accounts and other
financial institutions. Savings accounts increased $3,891,213 or
15.42% due to increases in personal Super NOW accounts of over
$1,500,000 and business Money Market Accounts of over $2,000,000.
Non-interest bearing demand deposit accounts increased $494,237 or
5.37% from September 30, 1997. The cost of total interest bearing
deposits for the first nine months of 1998 was 4.80% compared to
4.81% for the same period in 1997. This decrease in cost of
deposits and increase in volume of interest bearing deposits
resulted in the $211,081 increase in interest expense as discussed
earlier.
Total noninterest income increased $165,376 over 1997 due to the
sale of securities which resulted in a $143,253 gain. Total
operating expenses for the period ended September 30, 1998, were
$2,034,407, a $94,324 increase from the operating expenses incurred
for the same period in 1997 of $1,940,083. This increase is mainly
due to 1) increases in employee wages and benefits of $41,416, a
result of an increase in wage rates and an increase in employee
participation in the Company's retirement plan and health insurance
plans; and 2) an increase in the cost of fixed assets in the amount
of $27,740 due to increased utility bills, depreciation, insurance
and taxes as a result of the completed renovation/expansion of the
Fort Loudon office facility and additional equipment placed in
service during the past year.
The company's income tax provision for the first nine months of
1998 was $127,451 as compared to $179,749 for the first nine months
of 1997. This decrease in the tax provision in the amount of
$52,298 is the direct result of the deferred tax adjustment which
resulted from the difference between the financial statement
allowance for loan losses and the tax allowance for loan losses.
As the tax deductible allowance for the loan losses is based upon
experience and net charge-offs, the amount of the provision above
the bank's experience of net charge-offs is not deductible for
federal tax purposes and results in a timing difference in the
calculation for federal tax liability.
Although the Company continues to operate with a marginal tax rate
of 34%, the effective income tax rate for the first nine months of
1998 was 18.17%, an increase of 2.42% from the effective tax rate
for the first nine months of 1997 of 20.59%. This decrease in the
effective tax rate is due to the deferred tax adjustment as a
result of the difference between the federal tax allowance for loan
losses and the financial statements allowance for loan losses as
discussed in the preceding paragraph.
Total assets as of September 30, 1998, were $110,656,522 an
increase of $4,616,287 over the period ending December 31, 1997,
representing an increase of 4.35%. Funding this increase in total
assets was an increase in total deposits of $4,142,404 or 4.44%.
The increase in deposits was the result of increased balances in
time deposits of $1,591,559 and in savings account balances of
$2,409,904. Net loans as of September 30, 1998, were $60,202,357
compared to $59,124,012 as of December 31, 1997. The allowance for
loan losses at the end of the nine months was $651,007 compared to
$425,813 at year end 1997 and is considered adequate, in
management's judgement, to absorb possible losses on existing
loans. The provision for loan losses for the first nine months of
1998 was $381,114 compared to $102,500 for the same period in
1997.
The significant increase in the provision is due to management's
decision to increase the allowance for loan losses as discussed in
the preceding paragraphs.
Total deposits were $97,402,094 as of September 30, 1998, compared
to $93,259,690 on December 31, 1997. This represents an increase
of $4,142,404 or 4.44% which reflects the activity as discussed
previously.
Total equity as of September 30, 1998, was $11,925,061, 10.78% of
total assets as compared to $11,389,749, 10.74% of total assets as
of December 31, 1997. This increase in equity reflects the
reinvestment of earnings into the corporation.
The Corporation has risk-based capital ratios exceeding regulatory
requirements. Risk-based capital guidelines require a minimum
ratio of 8.0%. At September 30, 1998, the risk-based capital ratio
of the Corporation was 18.96% while at December 31, 1997, the
risk-based capital ratio was 18.79%. The following table presents
the
risk-based capital ratios for the Corporation:
<TABLE>
<S> <C> <C>
September 30, Regulatory
1998 Minimum
Leverage Ratio 10.33% 4.00%
Risk-based capital ratios:
Tier I (core capital) 17.93% 4.00%
Total Capital
(Tier I and Tier II Capital) 18.96% 8.00%
Year 2000 Readiness Plan
During the past several months many newspaper and magazine articles
have been written concerning the YEAR 2000 and the potential effect
the change from the year 1999 to the year 2000 will have on
computer systems. Due to the age of some computer programs,
computer software and computer chips, it is very possible that some
older computers, software and equipment containing computer chip
technology may not function properly when the year 2000 rolls
around and may indeed not function at all.
AWARENESS
The Bank has recognized this potential problem and had developed
and implemented in September 1997 a Year 2000 Management
team/policy to assure all of the corporation's computers, software
and equipment are compatible with the year 2000 in order to avoid
disruption to financial services provided by the corporation. This
team is headed by Senior Management and the Data Processing
Department which reports findings and results to the CEO, the EDP
Committee, and ultimately to the Board of Directors.
Beginning in March 1997, management of The First National began
discussions with our Computer equipment providers and programmers
regarding the Year 2000 issue and how it would effect our
processing capabilities. In September 1997, our EDP Committee,
comprised of four outside Directors, the Data Processing Manager,
Cashier and CFO, and the Board of Directors adopted a Year 2000
Action Plan/Policy which has been implemented. This plan appointed
the CFO in charge of the Year 2000 project implementation as
supervisor of the Data Processing Department.
ASSESSMENT
In our plan/policy the Bank inventoried equipment and software
which needed to be verified for Year 2000 compliance. We also
outlined our testing dates and strategies, vendors and business
customers whom we needed assured of Year 2000 compliance,
completion dates for all reprogramming and testing, a contingency
plan, and assurance any new equipment or computer software
purchased from that date forward was certified by the vendor to be
Year 2000 compatible.
In the Corporation's policy addressing the Year 2000, the
Corporation recognized the importance of assuring, to the best of
its ability, its major business customers and vendors on which it
relies for electricity, voice communication, data processing, all
equipment, data communication, supplies, and any other function
vital to the corporation's operation are aware of this issue and
have addressed it by having their computer equipment and software
analyzed and tested for compatibility with the Year 2000. To
assess the status of each major business customer and vendor, the
corporation in November 1997 sent to each a 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.
RENOVATION, VALIDATION, AND IMPLEMENTATION
On Sunday, February 15 and Monday, February 16, 1998, data
processing personnel conducted an in-house test of all computer
equipment and programs, both our Main frame and LAN, in order to
determine if there were any areas of concern. All equipment worked
fine after we allowed system dates on the main frame and the LAN
(Local Area Network) to roll-over from 12-31-1999 to 01-01-2000.
After date roll-over we tested programs extensively performing
regular daily procedures as well as year-end close out procedures.
There were some minor problems which resulted, many of which we
were aware before testing and had already discussed with our
programmers. We had set June 30, 1998 as the dead-line for
necessary changes to be made by our programmers. This schedule has
been met and we have scheduled retesting during the third and
fourth quarters of 1998. Our internal final cut-off for compliance
is December 31, 1998 in order to allow for any unforeseen problems
to be addressed in early 1999.
On May 28, 1998, system dates on the main frame were tested for
9/9/1999, 1/1/2000, 1/3/2000, 2/29/2000, and 3/01/2000. These
tests were performed by having the system date rolled over to make
sure the system continued to operate. There were no problems
encountered. During retesting procedures of our main frame in the
third quarter of 1998, management performed more extensive testing
of these dates. Management anticipates no problems with these
dates. Retesting of the main frame has occurred at our test
location site at Computerized Business Management (CBM).
System dates on the LAN were tested for 9/9/99, 1/1/00, 1/3/00 and
2/29/00. Testing for 9/9/99 was done on Monday June 8, 1998 when
the system date was moved forward on the LAN to 9/8/99 and allowed
to roll-over to 9/9/99. On Tuesday 6/9/98 the date was 9/9/99 on
the LAN. All day system dates were on this time and the system was
allowed to roll over to 9/10/99 on 6/10/98. On 6/10/98 the date
was returned to normal. No problems were incurred.
On 6/15/98 the date was changed on the LAN to 12/31/99 and allowed
to roll over to 1/1/00 on 6/16/99. All day processing was done on
this date. The system date remained in the year 2000 until Friday
6/19/98 on which date the future date was 1/4/00, the second
business day in the year 2000. The system was returned to the
proper date following this test. There were no problems
encountered major Year 2000 problems; however, a terminal emulation
program displayed in an auxiliary field the date a 2010 instead of
2000. This is not used in calculations and is only used to show
date and time for the user of the system. This is not a problem.
On 6/22/98 the date was changed to 2/27/00 and allowed to rollover
to 2/28/00 on Tuesday, 6/23/98; to 2/29/98 on Wednesday, 6/24/98;
and to 3/1/00 on Thursday, 6/25/98. On 6/25/98 the system date was
returned to the correct date. There were no problems encountered
other than the credit reporting software to pull credit reports not
recognizing the Date 2/29/2000. This software is to be upgraded by
our credit reporting software company to replace and solve this
problem. The old LAN network displayed the date as 19100 but
everything operated as intended. As this LAN system is being
phased out over the next year and Y2K compatible PCs are added,
this will not be an issue. The terminal emulation program displays
in an auxiliary field the date 2010. This is not used to
calculations and is only used to show date and time for the user of
the system. This is not a problem.
The purpose of these tests was to assure management the LAN and all
programs on the LAN will operate properly on these various dates.
Each department was asked to track their usage of programs during
this period and to note any problems which were encountered so they
could be addressed as quickly as possible with our software vendor.
The Bank has completed certification testing with the MAC network
for ATM communications having had MAC successfully process our Year
2000 test files.
The Bank will be testing its electronic communication ability with
its correspondent Bank, ACBB, during the fourth quarter. There are
no foreseen problems.
The Bank has and will be testing its electronic communications with
the Federal Reserve during the third and fourth quarters of 1998.
Management has scheduled times with the FRB to test year 2000
compatibility of the following customer applications with the
Federal Reserve:
a. Wire transfers;
b. TT&L;
c. ACH;
d. Electronic Check Presentment;
e. Cash Ordering and Early Credit;
f. Reserve Requirements;
g. Account Balance Monitoring;
h. Savings Bond Ordering;
i. Check Returns;
j. Account Statements.
The following is an update for testing which has occurred to date:
A. Wire transfers
Tests were conducted on 9/18/98 for 12/31/99, 9/19/98 for
1/03/2000, 10/09/98 for 2/28/2000, 10/10/98 for 2/29/2000 and
10/11/98 for 3/01/2000. Testing results are currently being
reviewed. However, all wire transfers performed were successfully
processed by the Federal Reserve.
B. TT&L
Tests were conducted on 9/18/98 for 12/31/99, 9/19/98 for
1/03/2000, 10/09/98 for 2/28/2000, 10/10/98 for 2/29/2000 and
10/11/98 for 3/01/2000. Testing results are currently being
reviewed. All TT&L advices performed were successfully processed
by the Federal Reserve. The account activity and account status
reports were processed successfully.
C. Statistical Reporting
As our institution is a weekly reporter, FR2900 tests were
conducted on 10/7/98 for 12/27/99, 1/03/2000, 1/10/2000 with the PC
date on 2/10/2000; on 10/08/98 for 2/28/2000 with the PC date on
2/29/2000; and on 10/09/98 for 3/06/2000 with the PC date on
4/06/2000. All FR2900 reports were successfully processed by the
FRB. All reports requested were properly processed. Dates
remaining to process are on 12/9/1998 for 12/27/99 with the PC date
on 12/31/99 and on 12/10/98 for 12/06/99, 12/13/99 and 12/20/99
with the PC date on 1/11/2000.
D. Account Balance Monitoring and Integrated Accounting System
Tests were conducted on 9/18/98 for 12/31/99, 9/19/98 for
1/03/2000, 10/09/98 for 2/28/2000, 10/10/98 for 2/29/2000 and
10/11/98 for 3/01/2000. Testing results are currently being
reviewed. All balancing inquiries performed were successfully
processed by the Federal Reserve.
E. Account Statements
Tests were conducted on 9/18/98 for 12/31/99, 9/19/98 for
1/03/2000, 10/11/98 for 2/29/2000 and 10/14/98 for 3/01/2000.
Testing results are currently being reviewed. All statements were
received from the FRB. The data reflected on these reports
reflects some of the test data actually processed during the shared
testing weekend while other data was generated as test data for
receipt purposes only from the FRB. Overall this account statement
worked.
F. ACH
1. Originating
Tests were conducted on 9/18/98 for 12/31/99, 9/19/98 for
1/03/2000, 10/09/98 for 2/28/2000, 10/10/98 for 2/29/2000 and
10/11/98 for 3/01/2000. Testing results are currently being
reviewed. All ACH debits processed were successfully processed by
the FRB. The only problem incurred were on the first two tests on
9/18/98 and 9/19/98 when incorrect ABA numbers were used and the
files did no process correctly at FRB. This was not a Year 2000
problem but an incorrect ABA number problem. The files on these
dates were successfully received and processed by the FRB who
informed us of these errors.
2. Receiving
Tests were conducted on 9/18/98 for 12/31/99, 9/19/98 for
1/03/2000, 10/09/98 for 2/28/2000, 10/10/98 for 2/29/2000 and
10/11/98 for 3/01/2000. Testing results are currently being
reviewed. All ACH files received were successfully processed by
the our system and uploaded into the Qantel system. Batches were
created and eliminated. In fact we are sure our system will
recognize and post these transactions to the customers accounts as
on two test dates not all test batches were eliminated and were
updated to customer accounts which subsequently had to be reversed
and manually eliminated. As a result of this posting error, we are
therefore convinced the system will recognize this data form the
Year 2000. These test files have been copied onto diskette so that
these files can be tested again in the future.
G. Electronic Check Presentment
Tests were conducted on 9/18/98 for 12/31/99, 9/19/98 for
1/03/2000, 10/09/98 for 2/28/2000, 10/10/98 for 2/29/2000 and
10/11/98 for 3/01/2000. Testing results are currently being
reviewed. All ECP files received were successfully processed by
the our system and uploaded into the Qantel system. Batches were
created and eliminated. These test files have been copied onto
diskette so that these files can be tested again in the future.
H. Cash Orders and Early Credit
All testing was performed and completed on 8/17/98 for 12/31/99,
8/18/98 for 12/31/99 and 1/3/2000 and on 9/18/98 for 2/28/2000 and
2/29/2000. All were successful in FRB's receipt of these files.
There was an initial problem testing with FRB as the FRB did not
set up the receipt of these test files properly for 12/31/99. This
date will need to be retested however the problems incurred were
not Year 2000 related but were due to processing errors at the
FRB.
Printouts are available.
I. Savings Bond orders
Tests were conducted on 10/5/98 for 12/31/99, on 10/13/98 for
1/3/2000, on 10/19/98 for 2/28/2000, and on 10/26/98 for
2/29/2000.
All bonds processed were successful. Verification from FRB has
been received.
J. Check Returns
Tests were conducted on 9/18/98 for 12/31/99, 9/19/98 for
1/03/2000, 10/09/98 for 2/28/2000, 10/10/98 for 2/29/2000 and
10/11/98 for 3/01/2000. Testing results are currently being
reviewed. All Check adjustment files received were successfully
processed the FRB. The only problem which occurred on the two
first test dates was that only check adjustments can be sent to the
FRB not to another financial institution which is the test we
performed (currently we are not using this service but wished to
test it in the event we begin to use it). This problem was not a
Year 2000 problem and the files were successfully sent to and
received by the FRB.
SUMMARY OF PHASES OF YEAR 2000 PLAN
In management's opinion based upon progress the following are
statistics as to the progress of each step in the Y2K process.
AWARENESS - 100% COMPLETE
ASSESSMENT - 100% COMPLETE
Mission critical Qantel System Equipment & Software - Complete
Mission Critical LAN system Equipment & Software - Complete
Mission Critical Fedline Equipment & Software - Complete
Mission Critical Branch Equipment - Complete
ATMs - Complete
ATM Network - Complete
Major Business Customers both loans and deposits - Complete
Bank vendors and suppliers - Complete
VALIDATION - 75% COMPLETE
Mission critical Qantel System Equipment & Software
1. Equipment - Complete
9/9/99 - Complete
12/31/99 - Complete
1/3/2000 - Complete
2/28/2000 - Complete
2/29/2000 - Complete
3/01/2000 - Complete
2. Software - 9/9/99 - Complete
12/31/99 - Complete
1/3/2000 - Complete
2/28/2000 - Incomplete
2/29/2000 - Incomplete
3/01/2000 - Incomplete
Mission Critical LAN system Equipment & Software
9/9/99 - Complete
12/31/99 - Complete
1/3/2000 - Complete
2/28/2000 - Complete
2/29/2000 - Complete
3/01/2000 - Complete
Mission Critical Fedline Equipment & Software
9/9/99 - Complete Equipment only
12/31/99 - Complete except FR2900 and Cash
Orders
1/3/2000 - Complete except FR2900
2/28/2000 - Complete except Savings Bonds
2/29/2000 - Complete except Savings Bonds
3/01/2000 - Complete except savings Bonds
and ACH receiving and
originating
Mission Critical Branch Equipment - Complete however
management will be testing the alarm systems at all
locations and the main office phone system during
the fourth quarter of 1998
ATMs - Complete
ATM Network - Complete
Major Business Customers both loans and deposits - Complete
Bank vendors and suppliers - Complete
RENOVATION - 90% COMPLETE OVERALL
45% QANTEL SOFTWARE
Mission critical Qantel System
1. Equipment - Complete no changes necessary
2. Software
IRA - New program needed 4th Quarter
installation
Dividend - New program needed 4th quarter
installation
General Ledger - New program needed 4th quarter
installation
DDA - Changes needed after retesting
CD - Complete
Loans - Changes needed after retesting
Savings - Complete
Clubs - Complete
CIF - Complete
Utility Programs - Complete
Lock Boxes - Changes needed after retesting to
be done during 4th quarter
Mission Critical LAN system Equipment & Software - Complete
Mission Critical Fedline Equipment & Software - Complete
Mission Critical Branch Equipment - Complete
ATMs
NCR Main Office - Complete
NCR Hancock Office - Complete
Diebold East End Office - Complete
IMPLEMENTATION - 90% COMPLETE OVERALL
45% QANTEL SOFTWARE
Mission critical Qantel System
1. Equipment - Complete no changes necessary
2. Software
IRA - New program needed 4th Quarter
installation
Dividend - New program needed 4th quarter
installation
General Ledger - New program needed 4th quarter
installation
DDA - Changes needed after retesting
CD - Complete
Loans - Changes needed after retesting
Savings - Complete
Clubs - Complete
CIF - Complete
Utility Programs - Complete
Lock Boxes - Changes needed after retesting
Mission Critical LAN system Equipment & Software - Complete
Mission Critical Fedline Equipment & Software - Complete
except for Credit Reporting software which needs 2/29/2000
recognition
Mission Critical Branch Equipment - Complete
ATMs
NCR Main Office - Complete
NCR Hancock Office - Complete
Diebold East End Office - Complete
Fedline processing is all but complete as there are only a couple
of areas and dates left to test - Cash for 12/31/99; Reserve
Reporting for 12/31/99 and 1/10/2000; and Savings Bonds for
2/28/2000 and 2/29/2000. These are all the areas to test.
The LAN system has been thoroughly tested during the month of June
has noted above and in other documents. All areas worked fine.
The Qantel system has been tested by us in February 1998 and our
phase of the retesting complete in September which brings us up to
the 1/03/2000 date. Mercersburg is to complete the remaining steps
after which we will jointly review the test results with CBM and
verify findings. Once this is done, during the fourth quarter, the
revisions to software will be loaded to our system. Retesting of
our system will be done in early 1999 on site. The new software
programs will be installed during the fourth quarter and tested,
the General Ledger program, the Dividends program and the IRA
program.
The NCR ATMs have been upgraded and tested. The Diebold ATM has
been upgraded and tested. All other mission critical equipment has
been signed off by the manufacturer or supplier. See list of
Mission critical equipment attached to this document.
Customer awareness is ongoing. Newsletter articles, handouts,
brochures and the Readiness information have been developed and
distributed. Glossy brochures have been mailed out to customers;
these will be continually utilized as statement stuffers. An
article was also published in the local papers informing customers
of the Year 2000 problem and inviting them and interested
individuals to a seminar conducted by the Bank in July 1998.
A contingency plan has been developed and will be refined as
necessary. This plan addresses potential problems which may arise
given Year 2000 problems.
Business deposit and loan customers have all been surveyed and
inventoried. This is an ongoing process and follow-up has been
made to all as necessary. The follow-up will continue throughout
1998 and 1999 to keep this issue at the fore-front of large
business depositors and loan customers.
Major Bank vendors and suppliers have been contacted and
verification of their readiness made. Follow-up calls will be
completed by 12/31/98 and ongoing monitoring as necessary through
the second quarter of 1999 which if at that time a supplier is not
ready for Year 2000, one who is will replace them.
YEAR 2000 BUDGET
The initial budget approved by the EDP Committee and the Board for
Year 2000 renovations is $25,000. These costs are specific costs
dealing with the renovation, supplies, upgrades, postage, educating
customers, and new equipment and software necessary to become Year
2000 compatible. This budget does not include the cost accounting
costs such as personnel time involved in house. The reason for
this is that personnel working on this issue are salaried and are
required to complete these tasks along with their other duties.
Costs incurred to date for Year 2000 compliance issues has been
$14,813.45. This budget is reassessed and adjusted as necessary by
the EDP Committee.
Capital Market/Asset Management Counter Parties Year 2000 issues
The Bank uses the Major Brokerage firms/Investment Bankers of
Vining Sparks, BNK, Wheat First Union Securities and Prime Vest.
These brokerage firms/investment Bankers have supplied the Bank
with information which states they are compatible with the Year
2000 issues or they will be compliant by 12/31/98. Vining Sparks
is already Year 2000 compliant. Prime Vest will have final
sign-off of all systems by 12/31/98. Wheat First Union will be
compliant by 12/31/98. As BNK relies on Wheat First Union for its
processing, they will be fully compliant by 12/31/98.
In regard to securities contained within the Bank's security
portfolio, securities of the U. S. Government and its agencies,
FHLB, FNMA, FHLMC, GNMA, SBA etc. make up the portfolio. The
tax-free municipal portfolio contains securities which are all AAA
insured securities in blocks of $200,000 or less. As these
securities are insured and are in blocks of $200,000 or less, they
are not a threat to liquidity problems if problems should arise at
a particular municipality with Year 2000 issues. The fact that the
portfolio is spread throughout the entire 50 states and the various
municipalities within these states also gives the Bank a much more
diversified risk of issues arising from Year 2000 noncompliance.
In that the Bank holds these securities for the tax free benefit,
the liquidity factor is not an issue with these bonds. The Bank
does not have a need to use these funds in the first quarter of
2000. There are $215,000 of bonds maturing on 1/1/2000 in the
Bank's portfolio, both of these bonds are in the state of PA. In
February there is only $170,000 of bonds maturing both in the state
of PA. If by chance these bonds would not pay immediately due to
Year 2000 problems, this would not affect the liquidity of the
Bank. Also these Bonds are AAA insured backed by the full faith
and credit of these municipalities; therefore, liquidity is not an
issue.
For U. S. Government Bonds and Agency Bonds, only $200,000 of FHLBs
are scheduled to mature in January 2000 with no other Government or
Agency bonds to mature until 3/30/98. This again poses no
liquidity problems for the Bank as this will not create a liquidity
issue for the Bank.
Overall management feels the security portfolio poses no real Year
2000 problems for the Bank as there is not major need for liquidity
of the Bank's Security portfolio at that time.
In regard to Federal Fund sales, the Bank sells funds to Mellon
Bank and ACBB. Both of these institutions will be Year 2000
compatible by 12/31/98 so there is not a Year 2000 threat by
selling Federal Funds to these Banks. Therefore, funds will be
returned from overnight sales on 12/31/1999 and received on
1/3/2000 and the same on 2/28/2000, 2/29/2000 and 3/01/2000. If by
chance there would be a Year 2000 problem, the Bank can borrow
funds for liquidity purposes from the Federal Reserve Bank of
Philadelphia through the Discount Window where over $13,000,000 of
securities could be pledged to borrow funds and from the Federal
Home Loan Bank of Pittsburgh through the use of the Bank's
$3,300,000 line of credit.
Overall the capital market/asset management problems regarding Year
2000 issues are felt to be of little concern to the Bank due to the
previous discussion.
PART II - OTHER INFORMATION
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
None
Item 2 - Changes in Securities
None
Item 3 - Defaults Upon Senior Securities
Not Applicable
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
a. Exhibits - None
b. Reports on Form 8-K - Yes
Item Reported - Item 5 - Other Events
Following an Office of the Comptroller
of the Currency (OCC) examination of The
First National Bank of McConnellsburg, the
Corporation's primary subsidiary, which ended
on June 11, 1998, the Bank increased its
Allowance for Loan Losses by $100,000.
Date of Report - June 11, 1998
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
/s/John C. Duffey
(John C. Duffey, President
and Director of the Company and
President of the Bank)
(Duly Authorized Officer)
Date November 10, 1998 /s/Daniel E. Waltz
(Daniel E. Waltz, Treasurer
and Director of the Company and
Senior Vice President/CFO of
the Bank)
(Principal Financial &
Accounting Officer)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,768
<INT-BEARING-DEPOSITS> 1,914
<FED-FUNDS-SOLD> 3,202
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 32,484
<INVESTMENTS-CARRYING> 2,570
<INVESTMENTS-MARKET> 2,582
<LOANS> 60,202
<ALLOWANCE> 651
<TOTAL-ASSETS> 110,636
<DEPOSITS> 97,402
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,139
<LONG-TERM> 170
<COMMON> 252
0
0
<OTHER-SE> 11,673
<TOTAL-LIABILITIES-AND-EQUITY> 110,636
<INTEREST-LOAN> 1,369
<INTEREST-INVEST> 496
<INTEREST-OTHER> 99
<INTEREST-TOTAL> 5,742
<INTEREST-DEPOSIT> 3,049
<INTEREST-EXPENSE> 3,058
<INTEREST-INCOME-NET> 2,683
<LOAN-LOSSES> 381
<SECURITIES-GAINS> 143
<EXPENSE-OTHER> 2,034
<INCOME-PRETAX> 702
<INCOME-PRE-EXTRAORDINARY> 702
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 574
<EPS-PRIMARY> 1.44
<EPS-DILUTED> 1.44
<YIELD-ACTUAL> 3.95
<LOANS-NON> 74
<LOANS-PAST> 33
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 426
<CHARGE-OFFS> 180
<RECOVERIES> 24
<ALLOWANCE-CLOSE> 651
<ALLOWANCE-DOMESTIC> 651
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
