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, 1998.
[ ] 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, 1999
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 8, 1999:
Common Stock, $0.63 Par Value - $22,800,000.00
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders report for the year ended December 31,
1998, are
incorporated by reference into Parts I, II and IV.
Portions of the proxy statement for the annual shareholders meeting to be held
April 27, 1999, 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, 1999, 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, 1998, the Bank was
ranked first 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, 1998, the Company and the Bank employed 52
persons on a full-time equivalent basis.
Statistical Data
Computation of the Company's regulatory capital requirements
for the periods December 31, 1998, and December 31, 1997, on
page 32 of the annual shareholders report for the year ended
December 31, 1998, 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, 1998, and
December 31, 1997, on page 14 of the annual shareholders
report for the year ended December 31, 1998, is incorporated
herein by reference.
Maturities of loans as of December 31, 1998, on page 14 of the
annual shareholders report for the year ended December 31,
1998, 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 1997 decreased significantly from that of 1996.
This decrease in volume was attributable to the removal of two
loans from nonaccrual status in 1997 - a farming operation in
Franklin County, Pennsylvania, the amount of which was
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. Both of these loans were
brought current in 1997, resulting in total nonaccrual loans
decreasing over $560,000 from 1996 to 1997 in total.
Nonaccrual volume for 1998 decreased $354,805 due to a
$125,000 loan secured by a 1-4 family residential
property in the Hagerstown, MD area being moved to Other Real
Estate and sold in 1998; the amount charged-off as a result of
this movement and sale was approximately $32,000; the charge-
off
in 1998 of a $100,000 commercial loan secured by inventory; and
the charge-off of a $12,000 unsecured line of credit. The
remaining decrease in 1998 was the result of 1-4 family
mortgages classified as nonaccrual as of December 31, 1997,
being brought current.
Nonaccrual volume in 1999 is expected to increase from the
December 31, 1998, level due to a $120,000 residential
construction loan and some commercial loans which may
experience cash flow difficulties in 1999. Anticipated charge-
offs for 1999 are expected to remain approximately the same as
the total charge-offs in 1998 of $203,000 due to the potential
charge-off of the majority of the $120,000 construction loan
referenced above.
Nonaccrual, Past Due and Restructured Loans as of December 31,
1998, December 31, 1997, and December 31, 1996, on page 15 of
the annual shareholders report for the year ended December
31, 1998, 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, 1998, and
December 31, 1997, on page 15 of the annual shareholders
report for the year ended December 31, 1998, 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 a
more critical evaluation of the Bank's commercial, industrial,
and agricultural loan portfolio, 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, 1998, and December 31, 1997, totaled $11,231,000
and $10,333,000 respectively.
Maturities and rate sensitivity of total interest bearing
liabilities as of December 31, 1998, on page 31 of the annual
shareholders report for the year ended December 31, 1998, is
incorporated herein by reference.
Returns on Equity and Assets
Returns on equity and assets and other statistical data for
1998, 1997 and 1996 on page 20 of the annual shareholders
report for the year ended December 31, 1998, 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 1998 and 1997 on
page 33 of the annual shareholders report for the year ended
December 31, 1998, is incorporated herein by reference.
Item 6. Selected Financial Data
The Selected Five-Year Financial Data on page 20 of the annual
shareholders report for the year ended December 31, 1998, 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 25 through 36 of the annual
shareholders report for the year ended December 31, 1998, is
incorporated herein by reference. This discussion includes an
extensive analysis and review of the Corporation's Year 2000
Readiness Plan.
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 6 through 24 of the
annual shareholders report for the year ended December 31,
1998,
are incorporated herein by reference.
The Summary of Quarterly Financial Data on page 21 of the
annual shareholders report for the year ended December 31,
1998, 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 22, 1999,
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 22, 1999,
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
22, 1999, 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, 13 and 14 of FNB
Financial Corporation's Proxy Statement Dated March 22, 1999,
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, 1998, are incorporated by reference
in Item 8:
Consolidated balance sheets - December 31, 1998, and 1997
Consolidated statements of income - Years ended December 31,
1998, 1997 and 1996
Consolidated statements of stockholders' equity - Years
ended December 31, 1998, 1997 and 1996
Consolidated statements of cash flows - Years ended December
31, 1998, 1997 and 1996
Notes to consolidated financial statements - December 31,
1998
(2) - List of Financial Statement Schedules
Schedule I - Marketable Securities - Other Investments
Schedule III - Condensed Financial Information of
Registrant
Schedule VIII - Valuation and Qualifying Accounts
All other schedules for which provision is made in
the applicable accounting regulation of the
Securities and Exchange Commission are not required
under the related instructions or are inapplicable
and therefore have been omitted.
(3) Listing of Exhibits
Exhibit (3)(i) Articles of incorporation
Exhibit (3)(ii) Bylaws
Exhibit (4) Instruments defining the rights of
security holders including indentures
Exhibit (13) Annual report to security holders
Exhibit (22) Subsidiaries of the registrant
Exhibit (27) Financial data schedule
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
The following Form 8-K filed by FNB Financial Corporation is
incorporated herein by reference:
Form 8-K dated June 11, 1998, reporting item number 5
Other Events which reported that 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.
(c) Exhibits
Exhibit (3)(i) Articles of incorporation - Exhibit 3A
of Form SB-2 Registration Statement No. 33-66014 are
incorporated herein by reference.
Exhibit (3)(ii) Bylaws - Exhibit 3B of Form SB-2
Registration Statement No. 33-66014 are incorporated
herein by reference.
Exhibit (4) Instruments defining the rights of
security holders including debentures - Document #1 of
Form 10-K for FNB Financial Corporation for fiscal year
ended December 31, 1995 is incorporated herein by
reference.
Exhibit (13) Annual report to security holders -
incorporated herein by reference.
Exhibit (22) Subsidiaries of the registrant - As of
this report, The First National Bank of
McConnellsburg is the only subsidiary of the
Registrant and is explained further within the
Business Section (Item 1) of this report.
The First National Bank of McConnellsburg has one
subsidiary as of the date of this report, First
Fulton County Community Development Corporation and
is explained further within the Business Section
(Item 1) of this report.
(d) Financial Statement Schedules
Schedule I - Marketable Securities - Other Investments
Schedules of Marketable Securities included on pages
13 and 14 of the annual report of the registrant to its
shareholders for the year ended December 31, 1998,
are incorporated herein by reference.
Schedule III - Condensed Financial Information of
Registrant
Condensed Financial Information of the Registrant
included on page 17 and 18 of the annual report of the
registrant to its shareholders for the year ended
December 31, 1998, is incorporated herein by
reference.
Schedule VIII - Valuation and Qualifying Accounts
The schedule of the Allowance for Loan losses included
on page 15 of the annual report of the registrant to
its shareholders for the year ended December 31,
1998, 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 3/18/99
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 3/24/99
H. Lyle Duffey Date Henry W. Daniels Date
Director, Chairman Director, Vice Chairman
/s/John C. Duffey 3/18/99 /s/Harry D. Johnston 3/24/99
John C. Duffey Date Harry D. Johnston, D. O. Date
Director, President Director, Vice President
/s/George S. Grissinger 3/24/99 /s/Patricia A. Carbaugh 3/24/99
George S. Grissinger Date Patricia A. Carbaugh Date
Director, Secretary Director
/s/Harvey J. Culler 3/24/99 /s/Forrest R. Mellott
Harvey J. Culler Date Forrest R. Mellott Date
Director Director
/s/Lonnie W. Palmer 3/24/99 /s/Paul T. Ott 3/24/99
Lonnie W. Palmer Date Paul T. Ott Date
Director Director
/s/D. A. Washabaugh, III 3/24/99 /s/Daniel E. Waltz 3/24/99
D. A. Washabaugh, III Date Daniel E. Waltz Date
Director Director, Treasurer
(Principal Financial and
Accounting Officer)
Table of Contents
Financial Highlights 3
Letter to our Shareholders 4
Directors, Officers, Staff & Associates 5
Independent AuditorOs Report 6
Consolidated Balance Sheets 7
Consolidated Statements of Income 8
Consolidated Statements of Changes in StockholdersO Equity 9
Consolidated Statements of Cash Flows 10
Notes to Consolidated Financial Statements 11
Selected Five-Year Financial Data 20
Summary of Quarterly Financial Data 21
Distribution of Assets, Liabilities and StockholdersO Equity,
Interest Rates and Interest Differential 22
Changes in Net Interest Income 23
Maturities of Investment Securities 24
ManagementOs Discussion and Analysis of Financial Conditions
and Results of Operations 25
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, 1998 and 1997,
and the related consolidated statements of income, changes in stockholdersO
equity, and cash flows for each of the three years ended December 31, 1998.
These consolidated financial statements are the responsibility of the
CorporationOs 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, 1998 and 1997
and
the results of their operations and their cash flows for each of the three
years
ended December 31, 1998 in conformity with generally accepted accounting
principles.
Consolidated Balance Sheets
December 31, 1998 and 1997
1998 1997
____________ ____________
ASSETS
Cash and due from banks $ 3,134,802 $ 3,491,312
Interest-bearing deposits with banks 2,019,612 6,050,546
Investment securities:
Available for sale 32,887,516 26,338,409
Held to maturity (fair value $2,429,959 - 1998;
$2,988,188 - 1997) 2,449,621 2,975,841
Federal Reserve, Atlantic Central BankerOs
Bank and Federal Home Loan Bank stock 394,100 389,600
Federal funds sold 4,136,000 2,931,000
Loans, net of unearned discount and allowance
for loan losses 61,900,581 59,124,012
Bank building, equipment, furniture and fixtures, net 3,149,012
3,295,474
Accrued interest and dividends receivable 718,543 610,240
Deferred income taxes 16,989 0
Other real estate owned 370,511 428,488
Cash surrender value of life insurance 2,025,510 0
Other assets 362,597 385,313
____________ ____________
Total Assets $113,565,394 $106,020,235
____________ ____________
____________ ____________
LIABILITIES
Deposits:
Demand deposits $ 10,819,419 $ 9,988,174
Savings deposits 30,911,801 26,713,986
Time certificates 58,501,511 56,293,701
Other time deposits 271,204 263,829
____________ ____________
Total Deposits 100,503,935 93,259,690
Liability for borrowed funds 168,764 460,719
Accrued dividends payable 108,000 104,000
Deferred income taxes 0 67,880
Accrued interest payable and other liabilities 868,129 738,197
____________ ____________
Total Liabilities 101,648,828 94,630,486
____________ ____________
STOCKHOLDERSO 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 9,621,863 9,163,913
Accumulated other comprehensive income 252,870 184,003
____________ ____________
Total stockholdersO equity 11,916,566 11,389,749
____________ ____________
Total liabilities and stockholdersO equity $113,565,394
$106,020,235
____________ ____________
____________ ____________
Consolidated Statements of Income
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
_________ _________ _________
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $5,450,880 $ 5,271,134 $ 4,849,673
Interest on investment securities:
EEEU.S. Treasury securities 12,522 35,785 51,045
EEEObligations of other U.S. Government agencies 1,405,213
1,421,340 1,389,073
EEEObligations of states and political subdivisions 492,672 430,194
464,979
Interest on deposits with banks 81,635 25,594 28,721
Dividends on equity securities 28,329 27,078 25,829
Interest on federal funds sold 249,941 176,766 155,196
_________ _________ _________
$7,721,192 $7,387,891 $6,964,516
INTEREST EXPENSE
Interest on borrowed funds 11,368 5,865 0
Interest on deposits 4,101,076 3,841,015 3,694,486
_________ _________ _________
EEENet interest income 3,608,748 3,541,011 3,270,030
Provision for loan losses 474,814 232,500 95,500
_________ _________ _________
EEENet interest income after provision
EEEEEfor loan losses $3,133,934 $3,308,511 $3,174,530
_________ _________ _________
OTHER INCOME
Service charges on deposit accounts 85,375 72,707 62,117
Other service charges, collection and exchange charges,
EEEcommissions and fees 228,450 193,464 176,145
Other income, net 72,820 45,536 36,334
Gain on sale of PHEAA loans 0 31,211 0
Securities gains (losses) 143,288 5,752 ( 3,843)
_________ _________ _________
$ 529,933 $ 348,670 $ 270,753
_________ _________ _________
OTHER EXPENSES
Salaries and wages 1,129,581 1,094,033 967,102
Pensions and other employee benefits 288,473 286,760 244,302
Net occupancy expense of bank premises 209,206 194,148 150,742
Furniture and equipment expenses 241,535 223,680 162,065
Other operating expenses 903,406 809,708 745,868
_________ _________ _________
$2,772,201 $2,608,329 $2,270,079
_________ _________ _________
EEEIncome before income taxes 891,666 1,048,852 1,175,204
Applicable income taxes 109,716 193,122 218,019
_________ _________ _________
EEENet income $ 781,950 $ 855,730 $ 957,185
_________ _________ _________
_________ _________ _________
Earnings per share of common stock:
EEENet income $ 1.96 $ 2.14 $ 2.39
_________ _________ _________
_________ _________ _________
EEEWeighted average shares outstanding 400,000 400,000 400,000
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 1998, 1997 and 1996
Accumulated
Additional Other Total
Common Paid-In Retained Comprehensive StockholdersO
Stock Capital Earnings Income Equity
_________ __________ __________ _________ _________
BALANCE, DECEMBER 31, 1995 $252,000 $1,789,833 $7,978,998 $107,6
30
$10,128,461
Comprehensive income:
Net income 0 0 957,185 0 957,185
Changes in unrealized loss on securities
EEavailable for sale, net of taxes of ($38,952) 0 0 0 (
75,614) ( 75,614)
_________ __________ __________ _________ _________
Total comprehensive income 0 0 0 0 881,571
Cash dividends declared on common stock
EE($.77 per share) 0 0 ( 308,000) 0 ( 308,000)
_________ __________ __________ _________ _________
BALANCE, DECEMBER 31, 1996 $252,000 $1,789,833 $8,628,183 $
32,016 $10,702,032
Comprehensive income:
Net income 0 0 855,730 0 855,730
Changes in unrealized gain on securities
EEavailable for sale, net of taxes of $78,296 0 0 0 151,987
151,987
_________ __________ __________ _________ _________
Total comprehensive income 0 0 0 0 1,007,717
Cash dividends declared on common stock
EE($.80 per share) 0 0 ( 320,000) 0 ( 320,000)
_________ __________ __________ _________ _________
BALANCE, DECEMBER 31, 1997 $252,000 $1,789,833 $9,163,913 $184,0
03
$11,389,749
Comprehensive income:
Net income 0 0 781,950 0 781,950
Changes in unrealized gain on securities
EEavailable for sale, net of taxes of $35,477 0 0 0 68,867
68,867
_________ __________ __________ _________ _________
Total comprehensive income 0 0 0 0 850,817
Cash dividends declared on common stock
EE($.81 per share) 0 0 ( 324,000) 0 ( 324,000)
_________ __________ __________ _________ _________
BALANCE, DECEMBER 31, 1998 $252,000 $1,789,833 $9,621,863 $252,8
70
$11,916,566
_________ __________ __________ _________ _________
_________ __________ __________ _________ _________
Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
_________ _________ _________
Cash flows from operating activities:
Net income $ 781,950 $ 855,730 $ 957,185
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 269,418 251,405 203,443
Provision for loan losses 474,814 232,500 95,500
Deferred income taxes ( 120,346) 3,868 12,915
Loss on sale of other real estate 9,904 3,000 0
(Gain) loss on sales/maturities of investments ( 143,288)
( 5,752) 3,843
(Gain) loss on disposal of equipment 0 2,412 (
700)
(Increase) decrease in accrued interest receivable (
108,303) 64,940 ( 27,259)
Increase (decrease) in accrued
EEEEEEinterest payable and other liabilities 129,932 30,125
( 56,832)
Other, net 17,511 17,066 ( 114,019)
__________ __________ __________
Net cash provided by operating activities $1,311,592 $1,455,294
$
1,074,076
__________ __________ __________
Cash flows from investing activities:
Net (increase) decrease in interest-bearing deposits with banks
4,030,934 ( 5,723,270) 91,197
Maturities of held-to-maturity securities 1,072,165 1,735,560
941,524
Purchases of held-to-maturity securities ( 545,947) (
151,662) ( 100,000)
Proceeds from sales of available-for-sale securities 3,746,590
1,278,472 0
Maturities of available-for-sale securities 6,135,245
10,341,312 7,755,603
Purchases of available-for-sale securities (16,183,311) (
8,851,118) ( 10,409,030)
Proceeds from sales of other real estate owned 156,912 104,375
102,500
Net (increase) in loans ( 3,371,383) ( 3,313,454) (
3,587,304)
Purchase of other bank stock ( 4,500) ( 11,780)
(
13,700)
Purchases of bank premises and equipment, net ( 106,587) (
424,173) ( 1,171,694)
Purchase of life insurance ( 1,985,000) 0 0
Increase in cash surrender value of life insurance ( 40,510)
0 0
Proceeds from sale of equipment 0 0 700
__________ __________ __________
Net cash (used) by investing activities ($7,095,392) ($5,015,738)
($ 6,390,204)
__________ __________ __________
Cash flows from financing activities:
Net increase in deposits $ 7,244,245 $ 6,125,722 $ 6,217,681
Cash dividends paid ( 320,000) ( 316,000) (
300,000)
Proceeds from borrowings 0 462,493 0
Principle payments on borrowings ( 291,955) (
1,774) 0
__________ __________ __________
Net cash provided by financing activities $ 6,632,290 $6,270,441
$
5,917,681
__________ __________ __________
Net increase in cash and cash equivalents 848,490 2,709,997 601,553
Cash and cash equivalents, beginning balance 6,422,312 3,712,315
3,110,762
__________ __________ __________
Cash and cash equivalents, ending balance $7,270,802 $6,422,312
$
3,712,315
__________ __________ __________
__________ __________ __________
Supplemental disclosure of cash flows information:
Cash paid during the year for:
Interest (Net of Capitalized Interest
EEEEEEEEEEof $43,905 D 1996) $ 4,114,164 $ 3,818,501 $ 3,509,832
Income taxes 159,550 155,987 343,488
Supplemental schedule of noncash investing
and financing activities:
Unrealized gain (loss) on securities
EEavailable for sale, net of income tax effect $ 68,867
$ 151,987 ($ 75,614)
Other real estate acquired in settlement of loans 100,000
216,871 76,390
Loan advanced for sale of other real estate owned 93,000
93,600 50,000
Notes to Consolidated Financial Statements
Note 1.ESignificant Accounting Policies
Nature of Operations
FNB Financial CorporationOs 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 CorporationOs 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, managementOs estimate of
credit losses inherent in the loan portfolio and the related allowance may
change in the near term.
Cash Flows
For purposes of the statements of cash flows, the Corporation has defined cash
and cash equivalents as those amounts included in the balance sheet captions
OCash and Due From BanksO and OFederal Funds Sold.O 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
deposits in
the Statements of Cash Flows.
Investment Securities
In accordance with Statement of Financial Accounting Standards No. 115 (SFAS
115) the CorporationOs investments in securities are classified in three
categories and accounted for as follows:
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.
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.
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 other comprehensive income
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 1998 or 1997.
Federal Reserve Bank, Atlantic Central BankerOs 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.
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 borrowersO
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 loanOs yield. The Corporation is amortizing these
amounts over the contractual life of the related loans. Deferred loan
origination fees were $219,185 and $276,654 at December 31, 1998 and 1997,
respectively. Deferred loan costs were $109,163 and $102,162 at December 31,
1998 and 1997, 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
managementOs assessment of the ultimate collectibility of principal. Interest
income generally is not recognized on specific impaired loans unless the
likelihood of further loss is remote. Interest payments received on such loans
are applied as a reduction of the loan principal balance. Interest income on
other impaired loans is recognized only to the extent of interest payments
received.
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
Earnings Per Share
Earnings per common share were computed based upon weighted average shares of
common stock outstanding of 400,000 for 1998, 1997 and 1996.
Intangibles
Intangible costs are amortized on a straight-line basis over fifteen years.
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 $ 84,311, $ 69,675, and $ 64,979 for
1998,
1997 and 1996, 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:
Cash and Short-Term Instruments. The carrying amounts of cash and short-
term instruments approximate their fair value.
Securities to be Held to Maturity and Securities Available for Sale. Fair
values for investment securities are based on quoted market prices.
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.
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
IRAOs 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.
Accrued Interest. The carrying amounts of accrued interest approximate
their fair values.
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.
Comprehensive Income
In 1998 the Corporation adopted Statement of Financial Accounting Standards
(SFAS) No. 130 D Reporting Comprehensive Income. Under SFAS No. 130,
comprehensive income is defined as the change in equity from transactions and
other events from nonowner sources. It includes all changes in equity except
those resulting from investments by stockholders and distributions to
stockholders. Comprehensive income includes net income and certain elements of
Oother comprehensive incomeO such as foreign currency transactions; accounting
for future contracts; employers accounting for pensions; and accounting for
certain investments in debt and equity securities.
The Corporation has elected to report its comprehensive income in the statement
of stockholdersO equity. The only element of Oother comprehensive incomeO that
the Corporation has is the unrealized gain or loss on available for sale
securities. The 1997 financial statements have been reclassified to reflect
these changes in reporting format.
The components of the change in net unrealized gains (losses) on securities
were
as follows:
1998 1997 1996
Gross unrealized holding gains
arising during the year $247,632 $236,035 ($118,410)
Reclassification adjustment for
(gains)/losses realized in net income ( 143,288) ( 5,752)
3,843
________ ________ ________
Net unrealized holding gains (losses)
before taxes 104,344 230,283 (114,567)
Tax effect ( 35,477) ( 78,296) 38,953
________ ________ ________
Net change $ 68,867 $151,987 ($ 75,614)
________ ________ ________
________ ________ ________
Note 2.EInvestment 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
_________ _________ _________ _________
1998
U.S. Treasury securities $ 99,884 $ 491 $ 0
$ 100,375
Obligations of other U.S.
Government agencies 19,110,380 214,360 ( 14,584)
19,310,156
Obligations of states and
political subdivisions 10,604,671 153,398 ( 19,499)
10,738,570
Mortgage-backed securities 1,085,728 13,695 ( 5,315)
1,094,108
SBA loan pool certificates 1,430,172 9,287 ( 3,440)
1,436,019
Equities in local bank stock 173,546 40,693 (
5,951) 208,288
__________ _________ _________ __________
Totals $32,504,381 $ 431,924 ($ 48,789) $32,887,516
__________ _________ _________ __________
__________ _________ _________ __________
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
__________ _________ _________ __________
__________ _________ _________ __________
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
_________ _________ _________ _________
1998
SBA loan pool certificates $ 1,212,406 $ 2,360 ($ 11,850) $
1,202,916
Obligations of other U.S.
Government agencies 457,080 0 ( 20,545) 436,535
Obligations of states and
political subdivisions 780,135 10,373 0
790,508
_________ ________ _________ _________
Totals $ 2,449,621 $ 12,733 ($ 32,395) $ 2,429,959
_________ ________ _________ _________
_________ ________ _________ _________
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
_________ ________ _________ _________
_________ ________ _________ _________
The amortized cost and fair values of investment securities available for sale
and held to maturity at December 31, 1998 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 for Sale
Amortized Fair
Cost Value
Due in one year or less $ 764,924 $ 765,215
Due after one year but less than five years 6,790,230 6,839,024
Due after five years but less than ten years 15,711,828 15,914,191
Due after ten years 6,547,953 6,630,671
__________ __________
29,814,935 30,149,101
Mortgage-backed securities 1,085,728 1,094,108
SBA loan pool certificates 1,430,172 1,436,019
Equities in local bank stock 173,546 208,288
__________ __________
Totals $32,504,381 $32,887,516
__________ __________
__________ __________
Securities Held to Maturity
Amortized Fair
Cost Value
Due in one year or less $ 430,000 $ 432,397
Due after one year but less than five years 350,135 358,111
Due after five years but less than ten years 0 0
Due after ten years 457,080 436,535
__________ __________
1,237,215 1,227,043
Mortgage-backed securities 0 0
SBA loan pool certificates 1,212,406 1,202,916
Equities in local bank stock 0 0
__________ __________
Totals $ 2,449,621 $ 2,429,959
__________ __________
__________ __________
Proceeds from sales of investment securities available for sale during 1998
were
$ 3,746,590. Gross losses on these sales were $ 3,441 and gross gains were
$146,729.
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.
There were no sales of investment securities held-to-maturity in 1998, 1997 or
1996.
Investment securities carried at $5,785,222 and $7,200,891 at December 31, 1998
and 1997, respectively, were pledged to secure public funds and for other
purposes as required or permitted by law.
Note 3.ELoans
Loans consist of the following at December 31:
1998 1997
_______ _______
(000 omitted)
Real estate loans:
EEEConstruction and land development $ 256 $ 680
EEESecured by farmland 4,434 4,523
EEESecured by 1-4 family residential
EEEEEEproperties 34,065 32,045
EEESecured by multi-family residential
EEEEEEproperties 342 357
EEESecured by nonfarmland nonresidential
EEEEEEproperties 4,853 3,144
Loans to farmers (except loans secured
EEEEEEprimarily by real estate) 2,916 1,848
Commercial, industrial and state and
EEEpolitical subdivision loans 5,427 7,495
Loans to individuals for household, family,
EEEor other personal expenditures 9,949 9,343
All other loans 1,846 1,623
_______ _______
EEEEEETotal loans 64,088 61,058
Less: Unearned discount on loans 1,455 1,508
EEEE Allowance for loan losses 732 426
_______ _______
EEEE Net Loans $61,901 $59,124
_______ _______
_______ _______
The following table shows maturities and sensitivities of loans to changes in
interest rates based upon contractual maturities and terms as of December 31,
1998.
Due Over
Due 1 But Due Non-
Within Within Over accruing
1 Year 5 Years 5 Years Loans Total
______ ______ ______ ______ ______
(000 omitted)
Loans at predetermined
EEEinterest rates $1,263 $11,016 $23,433 $ 59 $ 35,771
Loans at floating or
EEEadjustable interest rates 5,196 1,851 21,270 0
28,317
______ ______ ______ ______ ______
Total (1) $6,459 $12,867 $44,703 $ 59 $64,088
______ ______ ______ ______ ______
______ ______ ______ ______ ______
(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
$2,247,582 and $3,276,692 at December 31, 1998 and 1997, respectively. During
1998, $2,412,075 of new loans were made and repayments totaled $3,441,184.
During 1997, $2,934,585 of new loans were made and repayments totaled
$1,024,827.
Outstanding loans to Bank employees totaled $1,186,068 and $1,366,203 for years
ended December 31, 1998 and 1997, respectively.
Note 4.EAllowance for Loan Losses
Activity in the allowance for loan losses is summarized as follows:
1998 1997 1996
(000 omitted)
Allowance for loan losses,
EEEbeginning of the year $426 $405 $405
Loans charged-off during the year:
EEEReal estate mortgages 25 23 51
EEEInstallment loans 89 70 49
EEECommercial and all other loans 89 134 8
______ ______ ______
EEEEEETotal charge-offs 203 227 108
Recoveries of loans previously charged-off:
EEEReal estate mortgages 0 4 0
EEEInstallment loans 33 8 12
EEECommercial and all other loans 1 3 1
______ ______ ______
EEEEEETotal recoveries 34 15 13
Net loans charged-off (recovered) 169 212 95
Provision for loan losses charged
EEEto operations 475 233 95
______ ______ ______
Allowance for loan losses, end of the year $732 $426 $405
______ ______ ______
______ ______ ______
A breakdown of the allowance for loan losses as of December 31 is as follows:
1998 1997
Percent Percent
of Loans of Loans
Allowance in Each Allowance in Each
(000 omitted) Amount Category Amount Category
_________ _________ _________ _________
Commercial, industrial
EEEand agriculture loans $435 26.03% $278 27.16%
1-4 family residential
EEEmortgages 45 44.19% 69 44.25%
Consumer and
EEEinstallment loans 150 12.90% 50 12.90%
Off-balance-sheet
EEEcommitments 95 16.88% 28 15.69%
Unsegregated 7 N/A 1 N/A
_________ _________ _________ _________
EEEEEETotal $732 100.0% $426 100.0%
_________ _________ _________ _________
_________ _________ _________ _________
There were no impaired loans in 1998.
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.
Note 5.ENonaccrual, Past Due and Restructured Loans
The following table shows the principal balances of nonaccrual loans as of
December 31:
1998 1997 1996
Nonaccrual loans $59,204 $414,009 $974,480
_________ _________ _________
_________ _________ _________
Interest income that would have been
EEEaccrued at original contract rates $ 5,559 $37,490 $88,928
Amount recognized as
EEEinterest income 4,307 18,192 60,073
_________ _________ _________
EEEEEEForegone revenue $ 1,252 $ 19,298 $28,855
_________ _________ _________
_________ _________ _________
Loans 90 days or more past due (still accruing interest) were as follows at
December 31:
1998 1997 1996
(000 omitted)
Real estate mortgages $ 166 $ 0 $ 0
Installment loans 5 24 32
Demand and time loans 0 2 1
________ ________ ________
EEETotal $171 $26 $33
________ ________ ________
________ ________ ________
Note 6.EBank Building, Equipment, Furniture and Fixtures
Bank building, equipment, furniture and fixtures consisted of the following at
December 31:
Accumulated Depreciated
Description Cost Depreciation Cost
1998
Bank building (including land $211,635) $ 3,141,361 $ 812,413
$
2,328,948
Equipment, furniture and fixtures 1,990,249 1,325,598 664,651
Land improvements 238,503 125,890 112,613
Leasehold improvements 48,819 6,019 42,800
_________ _________ _________
$5,418,932 $2,269,920 $3,149,012
_________ _________ _________
_________ _________ _________
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
_________ _________ _________
_________ _________ _________
Depreciation expense amounted to $ 253,052 in 1998, $234,643 in 1997, and
$150,294 in 1996.
Note 7.EIncome Taxes
The components of federal income tax expense are summarized as follows:
1998 1997 1996
Current year provision $230,062 $196,991 $ 205,104
Deferred income taxes resulting from:
EEEDifferences between financial statement
EEEEEEand tax depreciation charges ( 7,102) 3,000 13,123
EEEDifferences between financial statement
EEEEEEand tax loan loss provision ( 103,982) ( 6,869) (
208)
EEEDifferences between financial statement
EEEEEand tax retirement benefit expense ( 9,262) 0 0
E ________ ________ ________
EEEEEEEEEApplicable income tax $109,716 $193,122 $218,019
________ ________ ________
________ ________ ________
Federal income taxes were computed after adjusting pretax accounting income for
nontaxable income in the amount of $ 571,240, $ 522,040, and $ 633,813 for
1998,
1997 and 1996, respectively.
A reconciliation of the effective applicable income tax rate to the federal
statutory rate is as follows:
1998 1997 1996
Federal income tax rate 34.0% 34.0% 34.0%
Reduction resulting from:
EEENontaxable interest income 21.7 15.6 15.5%
______ ______ ______
EEEEEEEEEEffective income tax rate 12.3% 18.4% 18.5%
______ ______ ______
______ ______ ______
Deferred income taxes at December 31 are as follows:
1998 1997
Deferred tax assets $147,255 $26,909
Deferred tax liabilities ( 130,266) ( 94,789)
_______ ______
EEEEEEEEE $ 16,989 ($67,880)
_______ ______
_______ ______
The tax effects of each type of significant item that gives rise to deferred
taxes are:
1998 1997
Net unrealized (gains) losses on
securities available for sale ($130,266) ( $94,789)
Depreciation expense ( 49,255) ( 56,357)
Retirement benefit reserve 9,262 0
Allowance for loan losses 187,248 83,266
_______ ______
EEEEEEEEE $ 16,989 ($67,880)
_______ ______
_______ ______
The corporation has not recorded a valuation allowance for the deferred tax
assets as they feel that it is more likely than not that they will be
ultimately
realized.
Note 8.EEmployee Benefit Plans
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 BankOs performance and subject to
approval by the Board of Directors. The BankOs total expense for this plan was
$72,887, $76,754, and $65,644 for the years ended December 31, 1998, 1997 and
1996, respectively.
During 1998 the Bank adopted three new supplemental retirement benefit plans
for
directors and executive officers. These plans are funded with single premium
life insurance on the plan participants. The cash value of the life insurance
policies, which increased $40,510 during 1998, is an unrestricted asset of the
Bank. The estimated present value of future benefits to be paid totaled
$27,240
at December 31, 1998 which is included in other liabilities. Total annual
expense for these plans amounted to $31,677 total expenditures for 1998.
Note 9.EDeposits
Included in savings deposits are NOW and Super NOW account balances totaling
$7,916,530 and $5,780,398 at December 31, 1998 and 1997, respectively. Also
included in savings deposits at December 31, 1998 and 1997 are Money Market
account balances totaling $10,103,386 and $7,523,777, respectively.
Time certificates of $ 100,000 and over as of December 31 were as follows:
1998 1997
(000 omitted)
Three months or less $ 1,438 $ 1,374
Three months to six months 236 1,354
Six months to twelve months 1,409 1,713
Over twelve months 8,148 5,892
_______ _______
EEETotal $11,231 $10,333
_______ _______
_______ _______
Interest expense on time deposits of $ 100,000 and over aggregated $ 627,740, $
551,875 and $ 601,843 for 1998, 1997 and 1996, respectively.
At December 31, 1998 the scheduled maturities of certificates of deposit are as
follows:
1999 $ 22,414,798
2000 13,532,792
2001 10,870,529
2002 5,735,954
2003 5,939,438
Thereafter 8,000
__________
$58,501,511
__________
__________
The Bank accepts deposits of the officers, directors, employees and their
associates 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
$9,247,049 and $3,593,950 at December 31, 1998 and 1997, respectively.
The aggregate amount of demand deposit overdrafts reclassified as loan balances
were $7,231 and $104,582 at December 31, 1998 and 1997, respectively.
Note 10.EFinancial 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 BankOs 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)
1998 1997
Financial instruments whose contract amounts
EEErepresent credit risk at December 31:
EEEEEECommitments to extend credit $11,661 $ 9,948
EEEEEECommercial and standby letters
EEEEEEEof credit 1,356 1,411
_______ _______
$13,017 $11,359
_______ _______
_______ _______
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 customerOs
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 managementOs
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.EConcentration 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 customersO ability to
honor their contracts is dependent upon the construction and land development
and agribusiness economic sectors.
The Bank evaluates each customerOs 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 managementOs credit evaluation of the
customer.
Collateral held varies but generally includes equipment and real estate.
Note 12.EFNB Financial Corporation (Parent Company Only) Financial Information
The following are the condensed balance sheets, statements of income and
statements of cash flows for the parent company.
BALANCE SHEETS
December 31
1998 1997
ASSETS
Cash $ 5,286 $ 49,159
Interest-bearing deposits with banks 11,961 0
Marketable equity securities
available for sale 208,288 133,580
Investment in The First National Bank
EEEof McConnellsburg 11,817,398 11,322,894
Other assets 2,945 3,180
__________ __________
EEETotal Assets $12,045,878 $11,508,813
__________ __________
__________ __________
LIABILITIES AND STOCKHOLDERSO EQUITY
Dividends payable $ 108,000 $ 104,000
Other liabilities 21,312 15,064
__________ __________
EEETotal Liabilities $ 129,312 $ 119,064
Common stock, par value $.63; 6,000,000
EEEshares authorized; 400,000 shares issued
EEEand outstanding 252,000 252,000
Additional paid-in capital 1,789,833 1,789,833
Retained earnings 9,621,863 9,163,913
Accumulated other comprehensive income 252,870 184,003
__________ __________
EETotal Liabilities and
EEEStockholdersO Equity $12,045,878 $11,508,813
__________ __________
__________ __________
STATEMENTS OF INCOME
Years Ended December 31
1998 1997 1996
Cash dividends from wholly-owned
EEEsubsidiary $327,000 $ 240,000 $ 0
Interest on deposits with banks 327 0 0
Dividend income D Marketable
equity securities 3,387 3,153 2,868
Securities gains 49,000 0 0
Equity in undistributed income
EEEof subsidiary 420,069 621,935 976,934
________ _________ ________
799,783 865,088 979,802
Less: Holding company expenses 12,927 9,358 22,617
________ _________ ________
EEEIncome before income taxes 786,856 855,730 957,185
Applicable income taxes 4,906 0 0
________ _________ ________
EEENet income $781,950 $855,730 $957,185
________ _________ ________
________ _________ ________
STATEMENTS OF CASH FLOWS
Years Ended December 31
1998 1997 1996
Cash flows from operating activities:
EEENet income $781,950 $855,730 $957,185
EEEAdjustments to reconcile net
EEEEEEincome to cash provided by
EEEEEEoperating activities:
EEEEEEEEEEquity in undistributed
EEEEEEEEEEEEincome of subsidiary ( 420,069) ( 621,935) ( 976,934)
EEEEEEEEE(Gain) on sales of
EEEEEEEEEEEEinvestments ( 49,000) 0 0
EEEEEEEEE(Increase) decrease in
EEEEEEEEEEEEother assets 235 ( 66) ( 614)
EIncrease (decrease) in
EEEEEEEEEEEEother liabilities 9,118 ( 1,070) 1,070
________ ________ ________
Net cash provided (used) by
EEEoperating activities 322,234 232,659 ( 19,293)
________ ________ ________
Cash flows from investing activities:
EEENet (increase) in interest-bearing
EEEEEE deposits with banks ( 11,961) 0 0
EEEPurchase of marketable equity
securities available for sale ( 139,146) ( 5,880)
0
EEESales of marketable equity securities
EEEEEEEavailable for sale 105,000 0 0
________ ________ ________
Net cash (used) by investing activities ( 46,107) (5,880) 0
________ ________ ________
Cash flows from financing activities:
EEECash dividends paid ( 320,000) ( 316,000) ( 300,000)
________ ________ ________
Net increase (decrease) in cash ( 43,873) ( 89,221) ( 319,293)
Cash, beginning balance 49,159 138,380 457,673
________ ________ ________
Cash, ending balance $ 5,286 $ 49,159 $138,380
________ ________ ________
________ ________ ________
Note 13.ERegulatory 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 yearOs 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
$2,672,579
and $2,530,775 at December 31, 1998 and 1997, respectively.
FNB Financial CorporationOs balance of retained earnings at December 31, 1998
is
$9,621,863 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.
In addition, regulatory authorities have established capital guidelines in the
form of the Oleverage ratioO and Orisk-based capital ratios.O The leverage
ratio
of the Corporation, defined as total stockholdersO 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 CorporationOs capital
ratios to regulatory minimums at December 31 is as follows:
FNB Financial Corporation Regulatory Minimum
1998 1997 Requirements
Leverage ratio 10.13% 10.41% 4%
Risk-based capital ratios/
Tier I (core capital) 17.12% 18.09% 4%
Combined Tier I and
Tier II (core capital
plus allowance for
loan losses) 18.21% 18.79% 8%
Note 14.ECompensating Balance Arrangements
Required deposit balances at the Federal Reserve were $125,000 for 1998 and
1997. Required deposit balances at Atlantic Central BankerOs Bank were
$528,000
and $365,000 at December 31, 1998 and 1997, respectively. These balances are
maintained to cover processing costs and service charges.
Note 15.EFair Value of Financial Instruments
The estimated fair values of the CorporationOs financial instruments were as
follows at December 31:
1998
Carrying Amount Fair Value
FINANCIAL ASSETS
Cash and due from banks $ 3,134,802 $ 3,134,802
Interest-bearing deposits in banks 2,019,612 2,019,612
Federal funds sold 4,136,000 4,136,000
Securities available for sale 32,887,516 32,887,516
Securities to be held to maturity 2,449,621 2,429,959
Other bank stock 394,100 394,100
Loans receivable 61,900,581 63,590,587
Accrued interest receivable 718,543 718,543
FINANCIAL LIABILITIES
Time certificates 58,501,511 59,743,872
Other deposits 42,002,424 42,002,424
Accrued interest payable 589,664 589,664
Liability for borrowed funds 168,764 179,576
1997
Carrying Amount Fair Value
FINANCIAL ASSETS
Cash and due from banks $ 3,491,312 $ 3,491,312
Interest-bearing deposits in banks 6,050,546 6,050,546
Federal funds sold 2,931,000 2,931,000
Securities available for sale 26,338,409 26,338,409
Securities to be held to maturity 2,975,841 2,988,188
Other bank stock 389,600 389,600
Loans receivable 59,549,825 58,029,013
Accrued interest receivable 610,240 610,240
FINANCIAL LIABILITIES
Time certificates 56,293,701 56,762,321
Other deposits 36,965,989 36,965,989
Accrued interest payable 594,129 594,129
Liability for borrowed funds 460,719 460,719
Note 16.ELiability 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:
1999 $ 4,768
2000 5,094
2001 5,443
2002 5,816
2003 6,214
Thereafter 141,429
________
$168,764
________
________
The Bank had available a line of credit totaling $3,240,000 and $3,115,000 at
December 31, 1998 and 1997, respectively, with the Federal Home Loan Bank of
Pittsburgh. There were no outstanding balances against this line at December
31, 1998 or 1997. Collateral for borrowings and the line consists of various
securities and the CorporationOs 1-4 family mortgages with a book value of
approximately $42,421,000.
Note 17.EOperating 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 years ended December 31, 1998, 1997 and 1996 rent expense
under this operating lease was $21,600, $21,600 and $5,400, respectively.
Required lease payments for the next five years are as follows:
1999 21,600
2000 21,600
2001 21,600
2002 21,600
2003 21,600
Thereafter 59,400
________
$167,400
________
________
Note 18.ECommitments
In December of 1998 the Corporation entered into a purchase contract to
purchase
real estate for $75,000 cash and a property held by the Corporation in other
real estate owned at a carrying value of approximately $47,000.
Selected Five-Year Financial Data
1998 1997 1996 1995 1994
_______ _______ _______ _______ _______
Results of Operations (000 omitted)
EEEInterest income $7,721 $7,388 $ 6,965 $ 6,262 $
5,530
EEEInterest expense 4,112 3,847 3,694 3,247 2,784
EEEProvision for loan losses 475 233 96 75 2
_______ ________ ________ ________ ________
EEENet interest income after
EEEprovision for loan losses 3,134 3,308 3,175 2,940
2,744
EEEOther operating income 530 349 270 270 177
EEEOther operating expenses 2,772 2,608 2,270 1,954 1,903
_______ ________ ________ ________ ________
EEEIncome before income taxes 892 1,049 1,175 1,256 1,018
EEEApplicable income tax 110 193 218 254 166
_______ ________ ________ ________ ________
EEENet income $ 782 $ 856 $ 957 $ 1,002 $
852
_______ ________ ________ ________ ________
_______ ________ ________ ________ ________
Common Share Data
Per share amounts are based on weighted average shares of common stock
outstanding of 400,000 for 1998, 1997, 1996, 1995 and 1994.
Income before income taxes $ 2.23 $ 2.62 $ 2.94
$
3.14 $ 2.55
Applicable income taxes .28 .48 .55 .64 .42
EEENet income 1.96 2.14 2.39 2.51 2.13
Cash dividend declared .81 .80 .77 .77 .64
Book value (actual number of
EEEshares outstanding before
FAS 115 adjustments) 29.16 28.01 26.68 25.05
23.33
Dividend Payout Ratio 41.43% 37.39% 32.18% 30.75%
30.04%
Year-End Balance Sheet Figures
(000 omitted)
Total assets $113,565 $106,020 $98,644 $91,921
$80,715
Net loans 61,901 59,124 56,260 52,794 49,100
Total investment securities D
Book value 35,348 29,425 33,767 31,944
24,475
Deposits D noninterest-bearing 10,819 9,988 9,250 7,778
6,781
Deposits D interest-bearing 89,685 83,272 77,884
73,138 64,318
Total deposits 100,504 93,260 87,134 80,916
71,099
Total stockholdersO equity (before
FAS 115 adjustments) 11,664 11,206 10,670
10,021 9,327
Ratios (calculated before FAS 115 adjustments)
Average equity/average assets 10.53% 10.74% 10.87%
11.58% 11.21%
Return on average equity 6.85% 7.98% 9.18% 10.26% 9.37%
Return on average assets .72% .86% 1.00% 1.19% 1.05%
Summary of Quarterly Financial Data
The unaudited quarterly results of operations for the years ended December 31,
1998 and 1997 are as follows:
1998 1997
Quarter Ended Quarter Ended
Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30
Sept. 30 Dec. 31
(000 omitted except per share)
Interest income $1,864 $1,913 $1,964 $1,980 $1,789
$1,849 $1,857 $1,893
Interest expense 986 1,016 1,056 1,054 928 952 968 999
______ ______ ______ ______ ______ ______
______ ______
EEENet interest income 878 897 908 926 861 897 889 894
Provision for loan losses 101 190 90 94 9 44 50
130
______ ______ ______ ______ ______ ______
______ ______
EEENet interest income after
EEEEEEprovision for loan losses 777 707 818 832 852 853
839 764
Other income 85 100 106 96 71 111 84 77
Security gains (losses) 2 142 ( 1) 0 0 0 2 4
Other expenses 660 684 690 738 656 650 634 668
______ ______ ______ ______ ______ ______
______ ______
EEEOperating income before
EEEEEEincome taxes 204 265 233 190 267 314 291 177
Applicable income taxes 49 94 ( 16) ( 17) 49 69 62
13
______ ______ ______ ______ ______ ______
______ ______
EEENet income $ 155 $ 171 $ 249 $ 207 $ 218
$ 245 $ 229 $ 164
______ ______ ______ ______ ______ ______
______ ______
______ ______ ______ ______ ______ ______
______ ______
Net income applicable to common stock
Per share data:
EEENet income $ .39 $ .43 $ .62 $ .52 $ .55
$ .62 $ .57 $ .40
Distribution of Assets, Liabilities an Stockholders' Equity, Interest Rates and
Interest Differential
Years Ended December 31
1998 1997 1996
(000 omitted) Average Average Average
Balance Interest Rate Balance Interest Rate Balance
Interest Rate
ASSETS
Interest-bearing
Edeposits with
Ebanks and federal
Efunds sold $ 6,098 $332 5.44% $ 3,708 $ 202 5.45% $
3,440 $ 184 5.35%
Investment
Esecurities 33,100 1,939 5.86% 31,524 1,915 6.07%
33,12
9
1,931 5.82%
Loans 60,265 5,450 9.05% 57,794 5,271 9.12% 53,046
4,850
9.14%
_______ _______ _______ _______ _______ _______
_______ _______ _______
EEETotal interest-
EEEearning assets $99,463 $7,721 7.76% $93,026 $7,388
7.94% $89,615 $6,965 7.77%
_______ _______ _______ _______
_______ _______
_______ _______ _______ _______
_______ _______
Cash and due
Efrom banks 2,959 2,770 2,498
Bank premises and
Eequipment 3,240 3,196 2,714
Other assets 2,833 923 1,035
_______ _______ _______
EEETotal assets $108,495 $99,915 $95,862
_______ _______ _______
_______ _______ _______
LIABILITIES AND STOCKHOLDERSO EQUITY
Interest-bearing
Etransaction
Eaccounts $ 8,521 $ 143 1.68% $ 6,965 $ 146 2.10%
$
7,228 $ 155 2.14%
Money market
Edeposit accounts 8,028 294 3.66% 7,123 252 3.54% 6,690
239 3.57%
Other savings
Edeposits 11,482 307 2.67% 12,229 334 2.73% 12,369
344 2.78%
All time deposits 57,892 3,357 5.80% 53,016 3,109 5.86%
50,192
2,956 5.89%
Liability for
borrowed funds 171 11 6.43% 90 6 6.67% 0 0 .00%
_______ _______ _______ _______ _______ _______
_______ _______ _______
EEETotal interest-
EEEbearing
EEEliabilities $ 86,094 $4,112 4.78% $79,423 $3,847
4.84% $76,479 $3,694 4.83%
_______ _______ _______ _______
_______ _______
_______ _______ _______ _______
_______ _______
Demand deposits 10,010 8,884 8,153
Other liabilities 968 875 806
_______ _______ _______
EEETotal liabilities 97,072 89,182
85,438
StockholdersO equity 11,423 10,733
10,424
_______ _______ _______
EEETotal liabilities
EEEand stockholdersO
EEEequity $108,495 $99,915 $95,862
_______ _______ _______
_______ _______ _______
Net interest
Eincome/net interest
Emargin/margin average
Eearning assets $3,609 3.63% $3,541 3.80%
$
3,271 3.65%
_______ _______ _______ _______
_______ _______
_______ _______ _______ _______
_______ _______
Change in Net Interest Income
1998 Compared to 1997 1997 Compared to 1996
____________________ ____________________
Total Total
Average Average Increase Average Average Increase
(000 omitted) Volume Rate (Decrease) Volume Rate
(Decrease)
________ ________ ________ ________ ________ ________
Interest Income
EEEInterest-bearing deposits
EEEEEEwith banks and
EEEEEEfederal funds sold $130 $ 0 $130 $ 14 $ 4 $ 18
EEEInvestment securities 96 ( 72) 24 ( 93) 77 (
16)
EEELoans 225 ( 46) 179 434 ( 13) 421
_____ _____ _____ _____ _____ _____
EEEEEETotal interest income $451 ($118) $333 $355 $68 $423
_____ _____ _____ _____ _____ _____
_____ _____ _____ _____ _____ _____
Interest Expense
EEEInterest-bearing transaction
EEEEEEaccounts $ 33 ($ 36) ($ 3) ($ 6) ($ 3) ($
9)
EEEMoney market deposit accounts 32 10 42 15 ( 2) 13
EEEOther savings ( 20) ( 7) ( 27) ( 4) ( 6)
( 10)
EEEAll time deposits 286 ( 38) 248 166 ( 13) 153
EEELiability for borrowed funds 5 0 5 0 6 6
_____ _____ _____ _____ _____ _____
EEEEEETotal interest expense $336 ($ 71) $265 $171 ($18) $153
_____ _____ _____ _____ _____ _____
_____ _____ _____ _____ _____ _____
EEEEEENet interest income $ 68 $270
_____ _____
_____ _____
Maturities of Investment Securities
December 31, 1998
The following table shows the maturities of investment securities at amortized
cost as of December 31, 1998, and weighted average yields of such securities.
Yields are shown on a taxable equivalent basis, assuming a 34% federal income
tax rate.
Within 1-5 5-10 Over
(000 omitted) 1 Year Years Years 10 Years Total
U.S. Treasury Securities
EEEAmortized cost $ 100 $ 0 $ 0 $ 0 $
100
EEEYield 6.43% 0% 0% 0% 6.43%
Obligations of other
EEEU.S. Government agencies:
EEEAmortized cost 350 4,835 12,713 1,669 19,567
EEEYield 5.07% 5.79% 6.45% 6.80% 6.29%
Obligations of state and
EEEpolitical subdivisions:
EEEAmortized cost 745 2,105 3,300 5,235 11,385
EEEYield 6.21% 6.78% 7.49% 7.07% 7.08%
Mortgage-Backed securities and SBA
EEEGuaranteed Loan Pool Certificates (1):
EEEAmortized cost 41 127 333 3,227 3,728
EEEYield 6.58% 7.40% 6.36% 6.05% 6.13%
________ ________ ________ ________ ________
EEEEEESubtotal amortized cost $1,236 $7,067 $16,346 $10,131
$34,780
________ ________ ________ ________ ________
________ ________ ________ ________ ________
EEEEEESubtotal yield 5.92% 6.11% 6.65% 6.70% 6.53%
________ ________ ________ ________ ________
________ ________ ________ ________ ________
Equity Securities 568
Yield 5.32%
________
EEEEEETotal investment securities $35,348
________
________
EEEEEEYield 6.51%
________
________
(1) It is anticipated that these mortgage-backed securities and SBA Guaranteed
Loan Pool Certificates will be repaid prior to their contractual maturity dates.
Management's Discussion and Analysis of Financial Conditino 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 1998 was $781,950, a decrease of $73,780 or 8.62%
from the net income of $855,730 for 1997 and a decrease of $175,235 or 18.31%
from 1996. On a per share basis, net income for 1998 was $1.96, based upon
average shares outstanding of 400,000, compared to $2.14 for 1997 and $2.39 for
1996.
Results of operations for 1998 as compared to 1997 were impacted by the
following items:
Net income was positively impacted by a 6.92% increase in average earning
assets due to a 8.83% increase in average deposits, the result of the new
deposits generated at our Hancock Office, Hancock Community Bank, which opened
on November 25, 1996, our Fort Loudon Office which opened on November 13, 1995,
and an increase in balances of our business account customers;
Net income was negatively impacted by a decreasing net interest margin
which occurred due to a decrease in the yield on earning assets from 7.94% in
1997 to 7.76% in 1998. This was a direct result of a decrease in the yield on
investment securities from 6.07% in 1997 to 5.86% in 1998 the result of calls
and maturities of higher rate securities while costs of interest-bearing
liabilities decreased only .06% from 4.84% in 1997 to 4.78% in 1998;
Net income was negatively impacted by a $242,314 increase in the provision
for loan losses, from a total of $232,500 in 1997. The decision to increase the
allowance was based upon several factors:
A more critical analysis of our commercial and consumer loan portfolios
which resulted in a larger allocation of the allowance reserved specifically
for
commercial loans and consumer installment loans;
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;
The instability in the Asian Market, which shows a few signs of
stabilization, prompted management to assess the Otrickle down effectsO of a
slowing economy and the Asian crisis on businesses in our local economy and the
potential for an increase in past due loans and delinquency problems; and
The assessment of potential problems businesses could encounter regarding
Year 2000 computer issues.
Net income was positively impacted by net gains on the sale of securities
of $143,288 compared to $5,752 in 1997;
Net income was negatively impacted by an increase in wage and salary
expenses of $35,548 and employee benefits of $1,713 due to wage and salary
increases during 1998;
Net income was negatively impacted by a $15,058 increase in net occupancy
expenses and a $17,855 increase in furniture and equipment expenses as a result
of a full year depreciation on buildings, furniture, equipment and overhead
associated with the renovation/expansion of the Fort Loudon Office completed in
1997;
Net income was positively impacted by a $40,510 increase in the cash value
of life insurance and negatively impacted by the costs of implementing the
DirectorOs life insurance retirement plan of $31,677;
Net income was positively impacted by a $83,406 decrease in the current
year income tax provision resulting primarily from the recording of a deferred
tax asset as a result of the timing difference between the balance of the tax
allowance for loan losses and the book allowance.
Net income as a percent of total average assets for 1998, also known as return
on assets (ROA), was .72% compared to .86% for 1997 and 1.00% for 1996. Net
income as a percent of average stockholdersO equity for 1998, also known as
return on equity (ROE), was 6.85% compared to 7.98% for 1997 and 9.18% for
1996.
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 OnicheO of providing
community
banking to the Hancock community and supporting the needs of the community
while
reenforcing the BankOs 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 BankOs
primary regulator, gave permission for the Bank to open this office on November
25, 1996. This office, the BankOs first interstate branch office, is also
unique in that it will also be the BankOs 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 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
managementOs expectations. At December 31, 1998, balances of new deposits and
loans generated as a direct result of the opening of the Hancock office were
$4,942,593 and $3,963,880 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 CorporationOs 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 1998 increased $67,737 or 1.91% over 1997 and $338,718
or 10.36% over 1996. Average earning assets for 1998 increased $6,437,000 over
1997 and $9,848,000 over 1996. This increase in average earning assets from
1997 to 1998 was the result of:
An increase in loans in the amount of $2,471,000 or 4.28%;
An increase in investment securities in the amount of $1,576,000 or 5.00%;
and
An increase in interest-bearing deposits with banks and federal funds sold
in the amount of $2,390,000 or 64.46%.
The increase in the lower yielding investment securities at an average yield of
5.86% and interest-bearing deposits with banks and federal funds sold at an
average yield of 5.44% contributed to the decrease in net interest income.
The earning asset increase was funded by an increase in average deposits of
$7,797,000 or 8.83%. This volume increase is the result of an increase in
average balances of business money market accounts and in increased balances at
the Hancock office of $2,109,190. The volume growth in earning assets and
interest-bearing liabilities contributed to the increase in net interest income
by the amount of $115,000 in 1998 over 1997.
Throughout 1996, interest rates remained relatively the same with no major
changes in Federal Reserve interest rate policy. During 1997 the Federal
ReserveOs 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 rates by 25 basis points. During the first half
of 1998, interest rates remained relatively stable; however, during the latter
part of the third quarter and the beginning of the fourth quarter, the Federal
Reserve decreased short term interest rates three times. As a result of this
decreasing interest rate 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 were
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. Average yields on loans decreased 7 basis points from those
of 1997; however, the average yield on investment securities decreased 21 basis
points. As a result of the aforementioned increase in the average balance of
lower yielding investment securities and interest-bearing deposits with banks,
the average yield on earning assets decreased in 1998 to 7.76%, a .18% decrease
from 1997 and .01% decrease from 1996. The average cost of interest-bearing
liabilities during 1998 was 4.78%, a .06% decrease from 1997 and .05% decrease
from 1996. This decrease from 1997 was attributable to managementOs decrease
in
the cost of interest-bearing liabilities from 1997; however, the balances of
business money market accounts increased significantly which resulted in an
increase in the cost of Money Market accounts of 12 basis points. The result
of
these aforementioned decreases and increases in interest-bearing liabilities
were a 42 basis point decrease in the cost of interest-bearing transaction
accounts; a 6 basis point reduction in the cost of Saving accounts; and a 6
basis point reduction in the cost of time deposits. The net effect of all
interest rate fluctuations was to decrease net interest income in the amount of
$47,000 in 1998 from 1997. Due to the decrease in the yield on earning assets
by 18 basis points, which was significantly more than the 6 basis point
decrease
in the cost of interest-bearing liabilities, the Bank has experienced a
decrease
in its net interest margin during 1998 compared to 1997. The average net
interest margin for 1998 was 3.63% compared to 3.80% for 1997.
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 and the proceeds of these calls 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 BankOs earning assets.
The cost of interest-bearing liabilities is projected to decrease slightly
during the next few quarters as management has decreased the cost of interest-
bearing transaction accounts 25 basis points and has decreased the cost of
savings accounts by 25 basis points. These rate reductions combined with
maturing time deposits repriced to lower yielding rates will have the effect of
decreasing the cost of interest-bearing liabilities. As a result of this
decreasing rate environment, the net interest spread and net interest margin
are
projected to decrease during this period as the yield on earning assets is
projected to decrease at a faster pace than that of interest-bearing
liabilities. Bank management continually monitors the BankOs 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 ManagementOs analysis of the adequacy of the allowance for loan
losses.
The provision for 1998 was $474,814, compared to $232,500 for 1997, and $95,500
for 1996. This increase in annual provision from 1997 to 1998 of $242,314 was
the result of the following:
A more critical analysis of our commercial and consumer loan portfolios
which resulted in a larger allocation of the allowance reserved specifically
for
commercial loans and consumer installment loans;
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;
The instability in the Asian Market, which shows a few signs of
stabilization, prompted management to assess the Otrickle down effectsO of a
slowing economy and the Asian crisis on businesses in our local economy and the
potential for an increase in past due loans and delinquency problems; and
The assessment of potential problems businesses could encounter regarding
Year 2000 computer issues.
Total charged-off loans in 1998 were $203,000 compared to $227,000 in 1997 and
$108,000 in 1996. Total recoveries in 1998 were $34,000 compared to $15,000 in
1997 and $13,000 in 1996. See discussion on Allowance for Loan Losses.
Other Operating Income and Other Operating Expenses
Other operating income for 1998 was $529,933, a $181,263 increase over the same
period in 1997 and a $259,180 increase over the same period in 1996. This
increase is mainly attributable to the following:
A net gain on the sale of investment securities which resulted in a net
gain of $143,288 compared to a net gain in 1997 of $5,752 and a net loss in
1996
of $3,843;
Service charges on deposit account increasing $12,668 due to increased
deposit accounts, managementOs stricter enforcement of overdraft fees and an
increase in the business minimum balance charge in September;
Other service charges increasing $34,986 due mainly to a $17,275 increase
in commissions received on discount brokerage services offered at the Bank; and
Other income increasing $27,284 due to the increase in the cash value of
life insurance by $40,510.
Total other operating expenses for 1998 increased by $163,872 or 6.28% over
1997
and $502,122 or 22.12%, over 1996. This increase was mainly the result of the
following:
A $32,913 increase in the cost of occupancy and furniture and equipment
expenses;
A $37,261 increase in the cost of employee salaries, wages and benefits;
A $7,200 increase in the cost of communication expenses;
A $14,636 increase in the cost of advertising and promotions as a result
of the hiring of a professional marketing analysis of the BankOs customer base;
A $31,677 expense incurred for the cost of directorsO life insurance
premiums and retirement liability; and
A $7,800 increase in professional development expenses as a result of the
implementation of a Bank wide Total Quality Service Program.
Management has been operating, during the past few years, in an expansion mode,
by increasing the BankOs 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 1998, 1997, and 1996 operational years 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 have decreased the CorporationOs net income as overhead of these
operations has impacted net income. The immediate result has been a decrease
in
operational income, Earnings per Share, Return on Assets and Return on Equity.
Although this growth mode has reduced income in the short term, management is
confident that in the long term these growth plans will benefit the
corporationOs income producing ability through the addition of new customers to
the BankOs deposit and loan bases and retention of current customers resulting
in increased income to the corporation.
Income Taxes
The CorporationOs income tax provision for 1998 was $109,716 compared to
$193,122 for 1997 and $218,019 for 1996. The 1997 provision of $193,122
includes a $13,551 charge for taxes due as a result of an IRS audit of the
CorporationOs 1996 Federal tax return. Without this additional 1996 tax, the
CorporationOs provision for 1997 would have been $179,571. This decrease in
the
tax provision in the amount of $83,406 was due to a decrease in income before
income taxes of $157,186 and a deferred tax adjustment in the amount of
$120,346. The Corporation operated with a marginal tax rate of 34% in 1998 and
in 1997. The effective tax rate of the Corporation for 1997 was 12.30%
compared
to 18.41% for 1997 and 18.55% for 1996.
Future Impact of Recently Issued Accounting Standards
In June 1998, The Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) 133 - OAccounting for Derivative
Instruments and Hedging ActivitiesO. This Statement establishes accounting and
reporting standards for derivatives and hedging activities. In October 1998,
the FASB issued SFAS No. 134 - OAccounting for Mortgage-Backed Securities
Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking EnterpriseO. This Statement required entities that are engaged in
mortgage banking activities to classify mortgage-backed securities as trading
securities following the securitization of mortgage loans held for sale. FNB
Financial Corporation has no derivative instruments and does not engage in
hedging activities. The Corporation has no loans held for sale nor does it
engage in securitization of loans. Therefore, management does not expect that
either of the aforementioned statements will impact future results of
operations.
FINANCIAL CONDITION
Investment Securities
The book value of the investment security portfolio as of December 31, 1998,
increased by $5,918,544 from December 31, 1997, representing a 20.38%
increase.
This increase occurred primarily due to the following:
An increase in total deposits of $7,244,245;
A decrease from December 31, 1997, in federal funds sold and interest-
bearing deposits with banks of $2,825,934;
An increase in net loans of only $2,776,569; and
The purchase of life insurance on Directors and key executives in the
amount of $1,985,000.
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, 1998,
the Corporation had in its portfolio HTM securities of $2,449,621 with a market
value of $2,429,959 and AFS securities of $32,887,516 with a book value of
$32,504,381. No securities were classified as Trading securities as of
December
31, 1998. For the December 31, 1997, Balance Sheet presentations, the Bank
carried investment debt securities classified as HTM securities of $2,975,841
with a market value of $2,988,188 and as AFS securities of $26,338,409, with at
book value of $26,059,617. No securities were classified as Trading as of
December 31, 1997.
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, 1998, the net unrealized loss of the HTM portfolio was
$19,662, a .80% decrease from book value and on the AFS portfolio a net
unrealized gain of $383,135 or a 1.18% increase from book value. As of
December
31, 1997, the net unrealized gain on 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. Management has reviewed the
fluctuation of market value in each of these portfolios and has determined that
due to the recent decreases in short term interest rates, the values of
securities contained within the BankOs investment debt portfolio are a direct
result of the current interest rate environment. Management has therefore,
concluded that the net unrealized gains and/or losses in the companyOs
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 $61,900,581 at December 31, 1998,
representing a $2,776,569 or 4.70%, increase from the December 31, 1997,
investment of $59,124,012. The primary reasons for the increase in the loan
portfolio and for changes in loan portfolio composition over the past year were
due to the following:
1) A $2,020,000 increase in real estate loans secured by 1-4 family
residential properties;
2) A $1,709,000 increase in Loans secured by nonfarmland, nonresidential
properties due primarily to the purchase of $1,354,000 in loans secured by
commercial real estate;
3) A $1,068,000 increase in loans to farmers due to $1,074,000 in purchases
of the 100% guaranteed portion of United States Department of Agriculture Farm
Service Agency (USDAFSA) Loans; and
4) A $2,068,000 decrease in loans to commercial, industrial and state and
political subdivision loans due primarily to the payoff of one large commercial
loan which at December 31, 1997 had an outstanding balance of $1,309,000.
Total new real estate mortgage loan lending for 1998 increased $3,201,000 or
7.85% from December 31, 1997, in comparison to a $1,667,000 or 4.27% increase
in
1997 from December 31, 1996. This increase in the amount of real estate
lending
from 1997 to 1998 reflects the purchase of commercial real estate loans and an
increase in residential 1-4 family mortgage loans as highlighted above.
Competitive loan mortgage rates of other institutions and mortgage companies in
the CorporationOs market area has resulted in the refinancing and payoff of
mortgage loans within the BankOs loan portfolio; however, the Bank has been
able
to attract new mortgage customers through the competitive mortgage products it
currently offers.
Overall, loan demand at the Bank during the past year was somewhat improved
over
that of 1997; however, increased aggressiveness of competing financial
institutions, mortgage loan companies and financing companies in interest rates
and marketing strategies have resulted in the need for an increased emphasis on
loan generation. The lending operation of the Bank has been enhanced by the
BankOs operation in a larger market area through the Fort Loudon office in
Franklin County, Pennsylvania and Hancock Community Bank in Washington County,
Maryland.
To further enhance and strengthen the BankOs lending operation, the Board has
hired for the loan department a Loan Division Manager, Mr. Bill Walker. Mr.
Walker brings to the Bank a 33 year commercial banking background of which his
last 18 years were concentrated in commercial lending. As a member of senior
management and in his official capacity as Vice President/Loan Services
Division
Manager, Mr. Walker will be in charge of the entire loan department with
special emphasis and concentration on the enhancement, improvement and growth
of
the BankOs commercial loan portfolio. The Board and Management are confident
Mr. WalkerOs addition to senior management will greatly enhance the BankOs
competitive abilities in the generation of new loans.
To encourage new loan demand, management anticipates offering additional loan
promotions, reviewing loan terms for customer OfriendlinessO and developing a
commercial lending strategy to stimulate lending in the CorporationOs market
area. In addition, the continued operation of Hancock Community Bank is
anticipated to result in an increase in lending in the Washington County,
Maryland area as well as in northern Morgan County, West Virginia and southern
Fulton County, Pennsylvania while the continued operation of the recently
expanded and improved Fort Loudon Office is anticipated to stimulate lending in
the Franklin County, Pennsylvania market.
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, 1998, was $370,511 compared to $428,488 as of December 31, 1997.
The Bank is actively pursuing the sale of all properties contained in Other
Real
Estate as shown by the following:
In February 1998, the Bank entered into a lease purchase agreement on a 1-
4 family residential property on Lincoln Way East in McConnellsburg;
In December, 1998, the Bank sold a 1-4 family residential property in
Hagerstown, Maryland; and
In December, 1998, the Bank signed an agreement with the Bishop Raker Post
655 of the Fulton Overseas Veterans Association (FOVA) in McConnellsburg to
exchange a 1-4 family residential property on Lincoln Way East in
McConnellsburg
as a partial payment for the purchase of the property located at 115 1/2
Lincoln
Way West which is adjacent to the Bank property in downtown McConnellsburg.
Properties contained in Other Real Estate are listed with a realty firm on a
contractual basis. The realty firm is evaluated every six months on its
effectiveness in marketing and selling these properties.
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. ManagementOs 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. ManagementOs basis for the current
level in the allowance for loan losses is based upon the following:
A more critical analysis of our commercial and consumer loan portfolios
which resulted in a larger allocation of the allowance reserved specifically
for
commercial loans and consumer installment loans;
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;
The instability in the Asian Market, which shows a few signs of
stabilization, prompted management to assess the Otrickle down effectsO of a
slowing economy and the Asian crisis on businesses in our local economy and the
potential for an increase in past due loans and delinquency problems; and
The assessment of potential problems businesses could encounter regarding
Year 2000 computer issues.
The allowance for loan losses was increased to $731,641 from the prior year
level of $425,814. The ratio of the allowance to net loans was 1.17% at
December 31, 1998, and .72% at December 31, 1997. After U. S. Government
Agency, specifically the Small Business Administration (SBA) and Farm Service
Agency (FSA), guaranteed portions are subtracted from the net loan balance, the
ratio of the allowance to unguaranteed loans increases to 1.24%. Management
believes that the current allowance for loan losses of $731,641 is adequate to
meet any potential loan losses, but has budgeted a monthly addition during 1999
of $10,000 in anticipation of additional commercial loan problems and general
increases in the total loan portfolio.
Liquidity and Rate Sensitivity
The CorporationOs 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, 1998, the Bank had borrowings of $168,764 from
this institution under its Community Investment Program and had readily
available to it a $3,240,000 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 CorporationOs net interest income is generally
enhanced versus a period of rising interest rates where the CorporationOs net
interest margin may be decreased. However, in a period of declining interest
rates, more securities with call features will most likely be called and be
reinvested into lower yielding investments resulting in the loss of higher
interest earnings assets. Declining rate environments also result in the
likelihood of residential home mortgage customers to refinance their existing
mortgages 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 CorporationOs net interest margin.
Presently, the interest rate environment is anticipated to remain relatively
stable; however, some indications are that the Federal Reserve Board may
decrease short term interest rates in the near future. At the present time, a
portion of the CorporationOs adjustable rate loans and securities are repricing
to lower interest rates while management has also decreased the cost of
interest
rate sensitive liabilities. This declining rate environment and possibility of
lower interest rates in the future have 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; management has also undertaken
the task of reducing the cost of interest-bearing liabilities by decreasing the
rates on Super NOW, Money Market and Savings accounts as well as on Time
Certificates of Deposit. Even though management has taken the action of
lowering rates on interest-bearing liabilities, it is expected the net interest
spread and interest margin of the Bank will 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 BankOs
deposits are invested in the loan portfolio. This ratio is a primary indicator
of a BankOs 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 BankOs 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
CorporationOs optimal loan to deposit ratio 75% to 80%. The loan to deposit
ratio at December 31, 1998, was 61.59%; at December 31, 1997, it was 63.40%;
and
at December 31, 1996, it was 64.57%. This decrease of 1.81% from December 31,
1997, and decrease of 2.98% from December 31, 1996, occurred due to deposit
growth during 1998 and 1997 exceeding that of loan growth. 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 Mr. Bill Walker to the Loan
Department, Hancock Community Bank and the Fort Loudon Office, management is
anticipating loan growth will accelerate as new loan customers are generated in
commercial lending and in these two market areas to offset deposit growth.
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 offers both fixed rate and floating/adjustable
rate loans to its customers. At December 31, 1998, the BankOs floating and
adjustable rate loans totaled $28,317,000, or 44.19% of the total loan
portfolio. As of December 31, 1997, the BankOs floating and adjustable rate
loans totaled $33,008,000, 54.06% of the total loan portfolio. This decrease
is
due in part to lower fixed rate mortgages which have resulted in the
refinancing
of adjustable rate 1-4 family mortgages to fixed rate mortgages. The bankOs
debt security investment portfolio as of December 31, 1997, was comprised of a
book value of $3,476,000, or 9.99% of floating rate debt securities which
reprice annually or more frequently while at December 31, 1997, the BankOs debt
security investment portfolio was comprised of a book value of $5,507,795, or
18.97% 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, 1998,
based upon contractual maturities is as follows:
Market Risk Management
The corporation has risk management policies to monitor and limit exposure to
market risk. By monitoring reports which assess the CorporationOs exposure to
market risk, management strives to enhance the corporationOs 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 corporationOs 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:
After After
Within 3 but 1 but After Non-
3 Within Within 5 Interest-
(000 omitted) Months 12 Months 5 Years Years Bearing Total
ASSETS:
Federal funds
EEsold $ 4,136 $ 0 $ 0 $ 0 $ 0
$
4,136
Investment Securities
EE(Book Value) 3,069 1,543 7,044 23,518 0 35,174
Interest-bearing balances
EEdue from banks 1,226 98 684 0 0 2,008
Loans 8,135 13,032 21,308 21,554 59 64,088
Unearned discount &
EEallowance for
EEloan losses (1) 0 0 0 (2,187) 0 (2,187)
Noninterest earning
EEassets 9,940 9,940
______ ______ ______ ______ ______ ______
Total assets $16,566 $14,673 $29,036 $42,885 $ 9,999
$113,159
______ ______ ______ ______ ______ ______
______ ______ ______ ______ ______ ______
LIABILITIES:
NOW accounts &
EEsavings accounts $30,821 $ 0 $ 0 $ 0
$
0 $ 30,821
Time deposits 9,437 20,471 28,936 8 0 58,852
Noninterest-bearing
EEdeposits 0 0 0 0 10,831 10,831
Other borrowed money 0 0 0 169 0 169
Other noninterest-bearing
EEsources to fund earning
EEassets 0 0 0 0 1,033 1,033
______ ______ ______ ______ ______ ______
Total liabilities $40,258 $20,471 $28,936 $ 177 $11,864
$101,706
______ ______ ______ ______ ______ ______
______ ______ ______ ______ ______ ______
Interest sensitivity gap ($23,692) ($ 5,798) $ 100 $ 42,708
Cumulative interest
EEsensitivity gap (23,692) (29,490) (29,390) 13,318
Gap ratio 0.41 0.72 1.00 N/A
Cumulative gap ratio 0.41 0.51 0.67 1.15
(1) THESE HAVE BEEN ARBITRARILY ASSIGNED TO THE OAFTER FIVE YEARSO CATEGORY FOR
PURPOSE OF ANALYSIS.
All fixed and variable rate loans were based on the original maturity of
the note.
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.
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, 1998.
Therefore, a 50% maximum runoff of both noninterest-bearing checking and
savings
and interest-bearing checking was used as an assumption in this table.
One large municipal deposit account 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 return to our institution in 2000
and leave in 2002 and continue this cycle every two years.
Fixed and variable rate time deposits were based upon original contract
maturity dates.
Principal/Notional Amount Maturing in Fair
(in millions) 1999 2000 2001 2002 2003 Thereafter Total Value
Rate Sensitive Assets
Federal Funds Sold $4136 $ 0 $ 0 $ 0 $ 0 $
0 $ 4136 $ 4136
Average Interest Rate 4.76% 0.00% 0.00% 0.00% 0.00% 0.00%
4.76%
Interest-Bearing
Deposits $1336 $ 0 $ 88 $ 95 $ 501 $ 0 $
2020 $ 2020
Average Interest Rate 4.90% 0.00% 5.97% 5.10% 5.74% 0.00%
5.16%
Fixed Interest
Rate Loans $1219 $2058 $3367 $3245 $3640 $22242 $35771
$35493
Average Interest Rate 9.98% 10.25% 9.35% 8.81% 8.23% 8.57%
8.78%
Variable Interest
Rate Loans $4814 $ 823 $ 674 $ 303 $1056 $20647 $28317
$28097
Average Interest Rate 8.20% 8.03% 8.84% 8.42% 8.32% 8.36%
8.33%
Fixed Interest Rate U.S.
Agency and Treasury
Securities $3814 $5313 $5583 $ 504 $3248 $ 955 $19417
$19498
Average Interest Rate 6.74% 6.30% 6.24% 6.01% 6.11% 5.95%
6.31%
Variable Interest Rate
U.S. Agency and
Treasury Securities $ 100 $ 150 $ 0 $ 0 $ 0
$ 0 $ 250 $ 249
Average Interest Rate 5.09% 5.38% 0.00% 0.00% 0.00% 0.00%
5.26%
Fixed Interest Rate
Mortgage-Backed &
SBA GLPC Securities $ 41 $ 12 $ 0 $ 6 $ 37
$ 406 $ 502 $ 499
Average Interest Rate 6.58% 8.22% 0.00% 8.98% 8.87% 6.30%
6.59%
Variable Interest Rate
Mortgage-Backed &
SBA GLPC Securities $ 0 $ 16 $ 33 $ 0 $ 23
$3154 $ 3226 $ 3234
Average Interest Rate 0.00% 7.32% 6.38% 0.00% 5.75% 6.03%
6.04%
Fixed Interest Rate
Obligations of State and
Political Subdivisions
in the U.S. $ 845 $ 1966 $ 542 $ 898 $ 855 $6279 $11385
$11529
Average Interest Rate 6.14% 7.08% 7.08% 7.39% 7.04% 7.19%
7.08%
Rate Sensitive Liabilities
Noninterest-Bearing
Checking $ 2708 $ 677 $ 677 $ 677 $ 677 $ 0 $ 5416
$ 5416
Average Interest Rate 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
0.00%
Savings and Interest-
Bearing Checking $ 7705 $ 926 $1926 $ 926 $3927 $ 0
$15410 $15410
Average Interest Rate 2.50% 2.50% 2.50% 2.50% 2.50% 0.00%
2.50%
Fixed Interest Rate
Time Deposits $19183 $11231 $6175 $5895 $5772 $ 8 $48264
$49061
Average Interest Rate 5.37% 6.08% 6.00% 6.33% 5.89% 5.41%
5.80%
Variable Interest Rate
Time Deposits $ 3406 $ 2185 $4918 $ 0 $ 0 $ 0
$10509 $10683
Average Interest Rate 5.46% 5.58% 5.34% 0.00% 0.00% 0.00%
5.43%
Fixed Interest Rate
Borrowings $ 0 $ 0 $ 0 $ 0 $ 0 $ 169
$ 169 $ 180
Average Interest Rate 0.00% 0.00% 0.00% 0.00% 0.00% 6.64%
6.64%
Capital
The primary method by which the Corporation increases total stockholdersO
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 Oleverage
ratioO and Orisk-based capital ratios.O The leverage ratio of the Corporation,
defined as total stockholdersO equity less intangible assets to total assets,
was 10.34% as of December 31, 1998, compared to 10.56% as of December 31,
1997.
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 CorporationOs capital ratios to
regulatory minimums at December 31 is as follows:
FNB Financial Corporation Regulatory
Minimum
1998 1997 1996 Requirements
Leverage ratio 10.34% 10.56% 10.64% 4.00%
Risk-based capital ratio
ETier I (core capital) 17.12% 18.09% 19.30% 4.00%
ECombined Tier I and
ETier II (core capital plus
Eallowance for loan losses) 18.21% 18.79% 20.05% 8.00%
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.
1998 1997 1996
Equity capital at December 31
before FAS 115 adjustments and
reduced by intangible assets
E(000 omitted) 11,664 11,206 10,670
Equity capital as a percent of
Eassets at December 31 10.29% 10.41% 10.60%
Return on average assets 0.72% 0.86% 1.00%
Return on average equity 6.85% 7.98% 9.18%
Cash dividend payout ratio 41.43% 37.39% 32.18%
STOCK MARKET ANALYSIS AND DIVIDENDS
The CorporationOs common stock is traded inactively in the over-the-counter
market. As of December 31, 1998, the approximate number of shareholders of
record was 429.
Market Cash Market Cash
Price Dividend Price Dividend
1998 1997
Hi-Low
First Quarter $57 - $50 $0.17 $46.00 $0.17
Second Quarter $57 - $57 $0.18 $50.00 $0.18
Third Quarter $57 - $51 $0.19 $55.00 $0.19
Fourth Quarter $57 - $53 $0.27 $55.00 $0.26
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, or
may indeed not function at all.
Awareness
The Corporation and the Bank recognized this potential problem in mid-1997 and
organized a Year 2000 Management Team. This team is headed by Senior
Management
and the Data Processing Department, which reports findings and results to the
CEO, the Electronic Data Processing (OEDPO)Committee and, ultimately, to the
Board of Directors. In September 1997, this team developed and implemented a
Year 2000 policy to assure that all of the CorporationOs computers, software
and
equipment will be compatible with the year 2000 in order to avoid disruption to
financial services provided by the Corporation.
Beginning in March 1997, management of The First National Bank 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,
the BankOs 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 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
Pursuant to our Plan, the Corporation and the Bank inventoried equipment and
software which needed to be verified for Year 2000 compliance. We also
outlined
our testing dates and strategies, completion dates for all reprogramming and
testing, and a contingency plan. In addition, the Plan requires all vendors
and
business customers provide Year 2000 compliance assurances. Further, any new
equipment or computer software purchased from that date forward must be
certified by the vendor to be Year 2000 compatible.
In the CorporationOs 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 CorporationOs operation are aware of this issue and have
addressed it within their organizations 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 assesses the capability of each and follows up to assure, to
the best of the CorporationOs ability, each is Year 2000 compatible, or will be
by June 30, 1999.
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 Local Area Network (OLANO), 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 to roll-over from December 31, 1999, to January, 1,
2000. After the 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 previously discussed with our programmers. We set June 30, 1998, as
the
dead-line for necessary changes to be made by our programmers. This schedule
has been met and retesting occurred during the third and fourth quarters of
1998. Our internal final cut-off for compliance was 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 September 9,
1999, January 1, 2000, January 3, 2000, February 29, 2000, and March 1, 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 and fourth quarters of
1998,
management performed more extensive testing of these dates. Retesting of the
main frame occurred at our test location hot site at CBM (Computerized Business
Management, Inc., our software programmers and hardware vendor in Hagerstown,
MD.) Those reports generated were reviewed in detail by our in house
processors,
Data Processing Manager, CFO, personnel from The First National Bank of
Mercersburg (a bank in Franklin County, PA which uses the same Qantel computer
software and hardware as our Corporation) and our chief banking programmer at
CBM. All areas were tested to assure compliance and renovations were made as
necessary.
System dates on the LAN were tested for September 9, 1999, January 1, 2000,
January 3, 2000, and February 29, 2000. Testing for September 9, 1999, was
conducted on Monday June 8, 1998, when the system date was moved forward on the
LAN to September 8, 1999, and allowed to roll-over to September 9, 1999. On
Tuesday June 9, 1998, the date was September 9, 1999, on the LAN. All day
system dates were on this time and the system was allowed to roll over to
September 10, 1999, on June 10, 1998. On June 10, 1998, the date was returned
to normal. No problems were incurred.
On June 15, 1998, the date was changed on the LAN to December 31, 1999, and
allowed to roll over to January 1, 2000, on June 16, 1998. All day processing
was done on this date. The system date remained in the year 2000 until Friday,
June 19, 1998, on which date the future date was January 4, 2000, the second
business day in the year 2000. The system was returned to the proper date
following this test. There were no mission critical problems encountered. The
Losendos program (a Qantel terminal emulation program) displayed, in an
auxiliary field, the date at 2010. This is not used in calculations and is
only
used to show date and time for the user of the system, and is not anticipated
to
disrupt operations.
On June 22, 1998, the date was changed to February 27, 2000, and allowed to
rollover to February 28, 2000, on Tuesday, June 23, 1998; to February 29, 2000
on Wednesday, June 24, 1998; and to March 1, 2000, on Thursday, June 25, 1998.
On June 25, 1998, 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 February 29, 2000. This was verified with the
software vendor who informed us the full year 2000 needed to be input in order
to recognize the year 2000 as a leap year. The old LAN network displayed the
date as 19100 but everything operated satisfactorily. As this system is being
phased out over the next year and Y2K compatible PCs are added, this will not
be
an issue. The Losendos program, which is a Qantel terminal emulation program,
displays in an auxiliary field the date at 2010. This is not used in
calculations and is only used to show date and time for the user of the
system.
This is not anticipated to disrupt operations.
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. A
copy of this certification is available.
The Bank has tested its electronic communication ability with its correspondent
Bank, ACBB. These tests were completed in December 1998 and no problems were
encountered.
The Bank has tested its electronic communications with the Federal Reserve Bank
of Philadelphia (OFRBO) during the third and fourth quarters of 1998.
Management scheduled times with the FRB to test year 2000 compatibility of the
following customer applications:
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.
Tests of electronic communications with the Federal Reserve Bank of
Philadelphia
were conducted throughout the third and fourth quarters of 1998. All tests
performed appeared to be successfully processed by the Federal Reserve.
Management is currently reviewing detailed printouts and testing documentation
to verify the successfulness of each test performed.
SUMMARY OF PHASES OF YEAR 2000 PLAN
In managementOs opinion based upon progress the following are statistics as to
the progress of each step in the Y2K process.
Resolution Awareness & Validation Renovation Implementation
Phases Assessment
Mission Critical 100% 100% 100% 100%
Qantel Equipment Complete Complete Complete Complete
Mission Critical 100% 73% 73% 73%
Qantel Software Complete Complete Complete Complete
Expected Expected Expected
Completion Completion Completion
by 3/31/99 by 4/30/99 by 6/30/99
Local Area 100% 100% 100% 100%
Network Complete Complete Complete Complete
Fedline Equipment 100% 100% 100% 100%
and Software Complete Complete Complete Complete
Mission Critical 100% 90% 90% 90%
Equipment With Complete Complete Complete Complete
Embedded Chips Expected Expected Expected
Completion Completion Completion
by 3/31/99 by 6/30/99 by 6/30/99
Major Business 100% 80% N/A N/A
Customers Complete Complete
Major Bank 100% 75% N/A N/A
Vendors Complete Complete
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 - 88% 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 - Complete
2/29/2000 - Complete
3/01/2000 - Complete
IRA - New program installed; testing to be completed in 1st quarter of 1999.
Dividend - New program installed; testing to be completed in 1st quarter of
1999.
General Ledger - New program installed; testing to be completed in the first
quarter of 1999.
DDA - Complete
CD - Complete
Loans - Complete
Savings - Complete
Clubs - Complete
CIF - Complete
Utility Programs - Complete
Lock Boxes - Complete
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
Credit reporting Software - TransUnion complete
Mission Critical Fedline Equipment & Software
9/9/99 - Complete Equipment only
12/31/99 - Complete
1/3/2000 - Complete
2/28/2000 - Complete
2/29/2000 - Complete
3/01/2000 - Complete
Mission Critical Branch Equipment - Complete however management will be
testing the alarm systems at all locations and having a vendor certified
inspection of all office telephone systems during the first quarter of 1999.
ATMs - Complete
ATM Network - Complete
Major Business Customers both loans and deposits - 80% Complete
Bank vendors and suppliers - 75% Complete
Renovation - 93% Complete
Mission critical Qantel System
1. Equipment - Complete no changes necessary
2. Software
IRA - New program installed; testing to be completed in 1st quarter of 1999.
Dividend - New program installed; testing to be completed in 1st quarter of
1999.
General Ledger - New program installed; testing to be completed in the first
quarter of 1999.
DDA - Complete
CD - Complete
Loans - Complete
Savings - Complete
Clubs - Complete
CIF - Complete
Utility Programs - Complete
Lock Boxes - Complete
Mission Critical LAN system Equipment & Software - Complete
Mission Critical Fedline Equipment & Software - Complete
Mission Critical Branch Equipment - Complete however management will be
testing the alarm systems at all locations and having a vendor certified
inspection of all office telephone systems during the first quarter of 1999.
ATMs
NCR Main Office - Complete
NCR Hancock Office - Complete
Diebold East End Office - Complete
Implementation - 93% Complete
Mission critical Qantel System
1. Equipment - Complete no changes necessary
2. Software
IRA - New program installed; testing during first quarter of 1999.
Dividend - New program installed; testing during first quarter of 1999.
General Ledger - New program installed; testing during first quarter of 1999.
DDA - Complete
CD - Complete
Loans - Complete
Savings - Complete
Clubs - Complete
CIF - Complete
Utility Programs - Complete
Lock Boxes - Complete
Mission Critical LAN system Equipment & Software - Complete
Mission Critical Fedline Equipment & Software - Complete
Mission Critical Branch Equipment - Complete however management will be
testing the alarm systems at all locations and having a vendor certified
inspection of all office telephone systems during the first quarter of 1999.
ATMs
NCR Main Office - Complete
NCR Hancock Office - Complete
Diebold East End Office - Complete
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 January 3, 2000
date.
The First National Bank of Mercersburg has completed the remaining steps and we
have jointly reviewed the test results with CBM to verify findings. The
revisions to the BankOs mission critical Qantel software have been loaded onto
our system and were implemented on January 18, 1999. Retesting of our system
was done on site on February 15 and February 16 for January 3, 2000, and
February 29, 2000. All testing went smoothly ; only minor none mission
critical
revisions need to be made. These changes will be completed and tested by the
end of the first quarter. The new software programs have been installed during
the fourth quarter of 1998 and will be tested these include 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.
The MAC system Year 2000 certification test has been completed and our
verification/certification has been received.
Customer awareness is ongoing, newsletter articles, handouts, brochures and
Year
2000 Readiness information has been developed and provided to customers,
vendors, etc. as requested. Glossy brochures have been mailed out to
customers;
these will be continually used as statement stuffers. An article was also
published in the local papers informing customers of the Year 2000 problem and
inviting them, as well as other interested individuals, to a seminar conducted
by the Bank in July 1998. Posters and tent cards informing customers of our
Year 2000 readiness have been placed in all branch offices.
Deposit and Loan customers whose actions may have a major impact on the
Corporation and the Bank have all been surveyed and inventoried. This is an
ongoing process and follow-up has been made to all as necessary. In order to
keep this issue at the fore-front of large business depositors and loan
customers, the follow-up will continue throughout 1999.
Major Bank vendors and suppliers have been contacted and verification of their
readiness has been made. Follow-up calls were completed by December 31, 1998,
and ongoing monitoring as necessary through the second quarter of 1999. If at
that time a supplier is not ready for Year 2000, the Bank will replace them
with
one who is.
Year 2000 Budget
The initial Budget approved by the EDP Committee and the Board for Year 2000
renovations has been $25,000. These costs are specific costs dealing with the
renovation, supplies, upgrades, postage, education of customers, legal fees for
reviewing documents, personnel costs for testing, and new equipment and
software
necessary to become Year 2000 compatible. This budget does not include cost
accounting costs such as salaried personnel time involved by in house
employees.
The reason for this exclusion is that the salaried personnel working on this
issue are required to complete these tasks along with their other duties. The
total costs incurred to date for Year 2000 costs as highlighted in this section
have been $22,094. The EDP Committee and the Board review this budget as
necessary to determine if an increase in the initial $25,000 budget is
warranted
based upon costs incurred to date.
Year 2000 Contingency Plan
A contingency plan has been developed, is being reviewed by management and the
Board, and will be refined as necessary. This plan addresses potential
problems
which may arise concerning Year 2000 problems.
The CorporationOs and BankOs Year 2000 Contingency Plan was developed to
address
the possibility that information technology and non-information technology
systems may not function properly after December 31, 1999. If the Bank must
implement its contingency plan, the following areas have been included in such
plan: the mission-critical Qantel System; the LAN management information
reporting system; the ATM and MAC networks; Fedline, which included wire
transfers, automated clearing house and electronic check presentment;
electricity; communications; and cash reserves.
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,135
<INT-BEARING-DEPOSITS> 2,020
<FED-FUNDS-SOLD> 4,136
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 32,888
<INVESTMENTS-CARRYING> 2,450
<INVESTMENTS-MARKET> 2,430
<LOANS> 62,633
<ALLOWANCE> 732
<TOTAL-ASSETS> 113,565
<DEPOSITS> 100,504
<SHORT-TERM> 0
<LIABILITIES-OTHER> 976
<LONG-TERM> 169
0
0
<COMMON> 252
<OTHER-SE> 11,664
<TOTAL-LIABILITIES-AND-EQUITY> 113,565
<INTEREST-LOAN> 5,451
<INTEREST-INVEST> 1,910
<INTEREST-OTHER> 360
<INTEREST-TOTAL> 7,271
<INTEREST-DEPOSIT> 4,101
<INTEREST-EXPENSE> 4,112
<INTEREST-INCOME-NET> 3,609
<LOAN-LOSSES> 475
<SECURITIES-GAINS> 143
<EXPENSE-OTHER> 2,772
<INCOME-PRETAX> 892
<INCOME-PRE-EXTRAORDINARY> 892
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 782
<EPS-PRIMARY> 1.96
<EPS-DILUTED> 1.96
<YIELD-ACTUAL> 3.63
<LOANS-NON> 59
<LOANS-PAST> 171
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 426
<CHARGE-OFFS> 203
<RECOVERIES> 34
<ALLOWANCE-CLOSE> 732
<ALLOWANCE-DOMESTIC> 732
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
