FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1999
Commission file number: 33-66014
FNB Financial Corporation
(Exact name of registrant as specified in its charter)
Commonwealth of Pennsylvania 23-2466821
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 Lincoln Way West, McConnellsburg, PA 17233
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 717/485-3123
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at September 30, 1999
(Common stock, $0.63 par value) 400,000
FNB FINANCIAL CORPORATION
INDEX
Page
PART I - FINANCIAL INFORMATION
Condensed consolidated balance sheets -
September 30, 1999 and December 31, 1998 5
Condensed consolidated statements of income -
Three months ended September 30, 1999 and 1998 6
Condensed consolidated statements of income -
Nine months ended September 30, 1999 and 1998 7
Condensed consolidated statements of comprehensive
income -
Nine months ended September 30, 1999 and 1998 8
Condensed consolidated statements of cash flows -
Nine months ended September 30, 1999 and 1998 9
Notes to condensed consolidated financial
statements 10-12
Table #1 - Schedule of held to maturity and
available for sale investment activity for the
period January 1, 1999 through September 30, 1999 13
Table #2 - Schedule of gross unrealized gains and
unrealized losses within the held to maturity and
available for sale investment portfolios by
investment type 14
Management's discussion and analysis of financial
condition and results of operations 15-25
PART II - OTHER INFORMATION 27
Signatures 28
PART I - FINANCIAL INFORMATION
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<S> <C> <C>
September 30, December 31,
1999 1998
ASSETS: (unaudited) (audited*)
Cash and Due from banks $ 2,988,652 $ 3,134,802
Interest-bearing deposits with banks 907,467 2,019,612
Marketable Debt Securities
Held-to-maturity (Market value - 1999:
$1,957,466 and 1998: $2,429,959) 1,969,637 2,449,621
Available-for-sale 28,549,495 32,713,970
Marketable Equity Securities
Available for Sale 184,974 173,546
Federal Reserve, Atlantic Central Banker's Bank
and Federal Home Loan Bank Stock 415,000 394,100
Federal Funds Sold 0 4,136,000
Loans, net of unearned discount &
Allowance for loan losses 72,012,728 61,900,581
Bank buildings, equipment, furniture &
fixtures, net 3,177,476 3,149,012
Accrued interest receivable 718,558 718,543
Deferred income tax charges 500,008 16,989
Other real estate owned 178,408 370,511
Intangible Assets 165,582 177,856
Other assets 2,323,913 2,210,251
Total Assets $114,091,898 $113,565,394
========== ==========
LIABILITIES :
Deposits:
Demand deposits $11,145,001 $10,819,419
Savings deposits 26,802,680 30,911,801
Time certificates 61,103,923 58,501,511
Other time deposits 713,409 271,204
Total deposits $99,765,013 $100,503,935
Accrued interest payable & other liabilities 975,153 868,129
Liability for other borrowed money 1,836,217 168,764
Deferred income taxes 0 0
Accrued dividends payable 80,000 108,000
Total Liabilities $102,656,383 $101,648,828
STOCKHOLDERS' EQUITY:
Capital stock, Common, par value $0.63;
6,000,000 shares authorized; 400,000
outstanding $ 252,000 $ 252,000
Additional paid-in capital 1,789,833 1,789,833
Retained earnings 10,051,623 9,621,863
Net unrealized gain/(loss) on Available-for-sale
securities, net of tax effects (657,941) 252,870
Total Stockholders' Equity $11,435,515 $11,916,566
Total Liabilities & Stockholders' Equity$114,091,898 $113,565,394
========== ==========
</TABLE>
*Condensed from audited financial statements.
The accompanying notes are an integral part of these condensed
financial statements.
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended September 30, 1999 and 1998
(UNAUDITED)
<TABLE>
<S> <C> <C>
1999
1998
Interest & Dividend Income
Interest & fees on loans $1,484,161
$1,369,313
Interest on investment securities:
U.S. Treasury Securities 0
3,009
Obligations of other U.S.
Government Agencies 334,357
365,399
Obligations of State & Political
Subdivisions 118,438
120,888
Interest on deposits with banks 13,453
21,549
Dividends on Equity Securities 7,645
6,678
Interest on federal funds sold 6,901
77,311
Total Interest & Dividend Income 1,964,955
1,964,147
Interest Expense
Interest on deposits 1,008,512
1,053,617
Interest on Other borrowed money 23,033
2,833
Total interest expense 1,031,545
1,056,450
Net interest income 933,410
907,697
Provision for loan losses 30,000
90,000
Net interest income after
Provision for loan losses 903,410
817,697
Other income
Service charges on deposit accounts 35,384
21,279
Other service charges, collection &
exchange charges, commissions
and fees 60,534
58,859
Other income 32,051
26,055
Net Securities gains/(losses) 0
(991)
Total other income 127,969
105,202
Other expenses 756,281
690,315
Income before income taxes 275,098
232,584
Applicable income taxes 42,435
(16,299)
Net income $232,663
$248,883
=======
=======
Earnings per share of Common Stock:
Net income per share $0.58
$0.62
Cash dividend declared per share $0.20
$0.19
Weighted average number of shares outstanding 400,000
400,000
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ended September 30, 1999 and 1998
(UNAUDITED)
<TABLE>
<S> <C> <C>
1999
1998
Interest & Dividend Income
Interest & fees on loans $4,179,348
$4,061,968
Interest on investment securities:
U.S. Treasury Securities 1,585
9,509
Obligations of other U.S.
Government Agencies 1,032,983
1,036,524
Obligations of State & Political
Subdivisions 368,364
361,118
Interest on deposits with banks 58,001
54,724
Dividends on Equity Securities 22,936
21,174
Interest on federal funds sold 80,130
196,495
Total Interest & Dividend Income 5,743,347
5,741,512
Interest Expense
Interest on deposits 3,020,015
3,049,417
Interest on other borrowed money 28,604
8,554
Total Interest Expense 3,048,619
3,057,971
Net interest income 2,694,728
2,683,541
Provision for loan losses 96,000
381,114
Net interest income after
Provision for loan losses 2,598,728
2,302,427
Other income
Service charges on deposit accounts 85,927
60,771
Other service charges, collection &
exchange charges, commissions
and fees 190,514
161,680
Other income 97,196
67,890
Net Securities gains/(losses) 49,675
143,253
Total other income 423,312
433,594
Other expenses 2,224,616
2,034,407
Income before income taxes 797,424
701,614
Applicable income taxes 139,664
127,451
Net income $657,760
$574,163
=======
=======
Earnings per share of Common Stock:
Net income per share $1.64
$1.44
Cash dividend declared per share $0.57
$0.54
Weighted average number of shares outstanding 400,000
400,000
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Nine Months Ended September 30, 1999 and 1998
(UNAUDITED)
<TABLE>
<S> <C> <C>
1999
1998
Net Income $657,760
$574,163
Other Comprehensive income, net of tax
Unrealized holding gains/(losses) for period (910,811)
177,148
Comprehensive Income $(253,051)
$751,311
=======
=======
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1999 and 1998
<TABLE>
<S> <C> <C>
(UNAUDITED)
1999 1998
Cash flows from operating activities:
Net income $ 657,760 $
574,163
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation & amortization 205,446 200,176
Provision for loan losses 96,000 381,114
Net (gain)/loss on sales of
investments (49,675)
(143,253)
Loss on Disposal of Other Assets (Net) 4,346 0
Loss on Disposal of Other Real Estate 3,106 2,000
(Increase) decrease in deferred taxes (16,312)
(67,749)
(Increase) decrease in accrued
interest receivable (15)
(123,954)
Increase (decrease) in accrued interest
payable and other liabilities 107,024
233,874
Other (net) (69,468)
(72,670)
Net cash provided (used)by operating
activities 938,212 983,701
Cash flows from investing activities:
Net (increase) decrease in interest-
bearing deposits with banks 1,112,145
4,136,725
Purchases of Held-to-maturity
securities 0
(445,149)
Purchases of Available-for-sale
securities (2,221,470)
(13,217,348)
Proceeds from sales of Available-for-
sale securities 1,077,301 3,641,590
Proceeds from maturities of Held-to-
maturity securities 479,984 851,262
Proceeds from maturities of Available-
for-sale securities 3,945,924 3,672,218
Purchases of marketable equity securities (53,250)
(139,146)
Proceeds from sales of marketable equity
securities 74,200 105,000
Net (increase) decrease in loans (10,173,147)
(1,579,459)
Proceeds from sale of Other real
estate owned 153,997 44,025
Purchases of bank premises & equipment (net) (222,135)
(98,055)
Purchase of life insurance 0
(1,985,000)
Increase in cash value of life insurance (61,196)
(26,212)
Purchase of other bank stock (20,900)
(4,500)
Proceeds from sale of other assets & equipment 15,654 0
Net cash provided (used) by investing activities (5,892,893)
(5,044,049)
Cash flows from financing activities:
Net increase (decrease) in deposits (738,922)
4,142,404
Net increase (decrease) in other borrowings 1,667,453
(290,812)
Cash dividends paid (256,000)
(244,000)
Net cash provided (used) by financing activities 672,531
3,607,592
Net increase (decrease) in cash & cash
equivalents (4,282,150)
(452,756)
Cash & cash equivalents, beginning balance 7,270,802 6,422,312
Cash & cash equivalents, ending balance $2,988,652 $5,969,556
========= =========
Supplemental disclosure of cash flows information
Cash paid during the year for:
Interest $2,969,592 $2,928,659
Income taxes 200,866 113,560
Supplemental schedule of noncash investing &
financing activities
Unrealized gain (loss) on Available-for-sale
securities net of tax effects (910,811) 177,148
Accrued dividends payable 80,000 76,000
Other real estate and property acquired in
settlement of loans 0 100,000
Loan advanced for sale of other real estate 35,000 0
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
FNB FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The financial information presented at and for the nine
months ended September 30, 1999, and September 30, 1998, is
unaudited. Information presented at December 31, 1998, is
condensed from audited year-end financial statements. However,
this unaudited information reflects all adjustments,
consisting solely of normal recurring adjustments, that are,
in the opinion of management, necessary for a fair
presentation of the financial position, results of operations
and cash flows for the interim period.
NOTE 2 - PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
the corporation and its wholly-owned subsidiary, The First
National Bank of McConnellsburg. All significant
intercompany transactions and accounts have been
eliminated.
NOTE 3 - CASH FLOWS
For purposes of the statements of cash flows, the corporation
has defined cash and cash equivalents as those amounts
included in the balance sheet captions "cash and due from
banks" and "federal funds sold". As permitted by Statement
of Financial Accounting Standards No. 104, the corporation
has elected to present the net increase or decrease in
deposits in banks, loans and time deposits in the statement
of cash flows.
NOTE 4 - FEDERAL INCOME TAXES
For financial reporting purposes the provision for loan
losses charged to operating expense is based on management's
judgement, whereas for federal income tax purposes, the
amount allowable under present tax law is deducted.
Additionally, certain expenses are charged to operating
expense in the period the liability is incurred for financial
reporting purposes, whereas for federal income tax purposes,
these expenses are deducted when paid. As a result of these
timing differences, deferred taxes were computed after
reducing pre-tax accounting income for nontaxable municipal
and loan income.
NOTE 5 - INVESTMENTS
The activity within the held to maturity and available for
sale portfolios for the period January 1, 1999, through
September 30, 1999, is summarized in Table #1 on page 13. No
sales were conducted from securities contained within the held
to maturity portfolio.
The amortized cost and estimated market values of investments
by investment type and classification as available for sale or
held to maturity along with each portfolio's gross unrealized
gain or gross unrealized loss are contained in Table #2 on
page 14.
Management has purchased for the portfolio mortgage-backed
securities. The large portion of these securities have a
variable rate coupon and all have scheduled principal
payments. During periods of rising interest rates, payments
from variable rate mortgage-backed securities may accelerate
as prepayments of underlying mortgages occur as home-owners
refinance to a fixed rate while during periods of declining
interest rates, prepayments on high fixed rate mortgage-backed
securities may accelerate as home owners refinance to lower
rate mortgages. These prepayments cause yields on mortgage-
backed securities to fluctuate as larger payments of principal
necessitate the acceleration of premium amortization or
discount accretion. Due to the low dollar amount of mortgage-
backed securities in relation to the total portfolio,
management feels that interest rate risk and prepayment risks
associated with mortgage-backed securities will not have a
material impact on the financial condition of the Bank.
In regard to Collateralized Mortgage Obligations (CMOs), the
Bank presently has none of these types of investments in its
portfolio.
NOTE 6 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as
follows:
<TABLE>
<S> <C> <C>
1999
1998
Allowance for loan losses beginning of the year $731,641
$425,813
Loans charged-off during the year:
Real estate mortgages 100,000
25,000
Installment loans 27,112
65,366
Commercial & all other 31,973
89,090
Total charge-offs 159,085
179,456
Recoveries of loans previously charged-off:
Real estate mortgages 200
0
Installment loans 20,043
22,481
Commercial & all other 1,517
1,055
Total recoveries 21,760
23,536
Net loans charged-off (recovered) 137,325
155,920
Provision for loan losses charged to operations 96,000
381,114
Allowance for loan losses, September 30 $690,316
$651,007
=========
========
</TABLE>
The following table shows the principal balance of nonaccrual loans
as of September 30, 1999:
<TABLE>
<S> <C>
Nonaccrual loans $ 370,228.60
==========
Interest income that would have been
accrued at original contract rates $ 24,113.89
Amount recognized as interest income 7,544.53
Foregone revenue $ 16,569.36
=========
</TABLE>
NOTE 7 - OTHER COMMITMENTS
In the normal course of business, the bank makes various
commitments and incurs certain contingent liabilities which
are not reflected in the accompanying financial statements.
These commitments include various guarantees and commitments
to extend credit. The bank does not anticipate any losses
as a result of these transactions.
TABLE #1
SCHEDULE OF HELD TO MATURITY AND AVAILABLE FOR SALE
DEBT SECURITY PORTFOLIOS
TRANSACTION SUMMARY
FOR THE PERIOD JANUARY 1, 1999 THROUGH SEPTEMBER 30, 1999
<TABLE>
<S> <C> <C> <C>
HELD TO AVAILABLE TOTAL
MATURITY FOR SALE INVESTMENT
PORTFOLIO PORTFOLIO PORTFOLIO
BEGINNING BALANCE 1/1/99 $2,449,621 $32,330,835 $34,780,456
PURCHASES 0 2,221,470 2,221,470
PROCEEDS FROM SALES 0 1,077,301 1,077,301
NET LOSSES/(GAINS) 0 (9,875) (9,875)
MATURITIES/CALLS PAYDOWNS/
PREMIUM AMORTIZATION/DISCOUNT
ACCRETION 479,984 3,945,924 4,425,908
ENDING BALANCE 9/30/99 $1,969,637 $29,538,955 $31,488,842
========= ========== ==========
</TABLE>
TABLE #2
SCHEDULE OF UNREALIZED GAINS AND UNREALIZED LOSSES
WITHIN THE HELD TO MATURITY AND AVAILABLE FOR SALE
INVESTMENT PORTFOLIOS BY INVESTMENT TYPE
SEPTEMBER 30, 1999
<TABLE>
<S> <C> <C> <C> <C> <C>
<C> <C> <C>
HELD TO HELD TO HELD TO HELD TO
AVAILABLE AVAILABLE AVAILABLE AVAILABLE
MATURITY MATURITY MATURITY MATURITY FOR
SALE FOR SALE FOR SALE FOR SALE
BOOK MARKET UNREALIZED UNREALIZED BOOK
MARKET UNREALIZED UNREALIZED
SECURITY PORTFOLIO VALUE VALUE GAIN LOSS
VALUE VALUE GAIN LOSS
U.S. GOVERNMENT TREASURIES 0 0 0 0
0 0 0 0
U.S. GOVERNMENT TREASURIES 0 0 0 0
0 0 0 0
U.S. GOVERNMENT AGENCIES 271,674 273,880 2,206 0
782,294 784,285 1,991 0
U.S. GOVERNMENT AGENCIES 210,074 197,792 0 (12,311)
17,046,314 16,432,869 0 (613,445)
SBA GUARANTEED LOAN POOL
CERTIFICATES 405,164 407,668 2,504 0
616,566 620,359 3,793 0
SBA GUARANTEED LOAN POOL
CERTIFICATES 532,649 524,856 0 (7,793)
513,146 508,899 0 (4,247)
MORTGAGE-BACKED SECURITIES 0 0 0 0
546,909 553,245 6,336 0
MORTGAGE-BACKED SECURITIES 0 0 0 0
562,709 538,986 0 (23,723)
SECURITIES ISSUED BY STATES
& POLITICAL SUBDIVISIONS IN
THE U.S. 550,079 553,303 3,224 0
2,386,151 2,399,041 12,890 0
SECURITIES ISSUED BY STATES
& POLITICAL SUBDIVISIONS IN
THE U.S. 0 0 0 0
7,084,866 6,711,844 0 (373,055)
MARKETABLE EQUITY SECURITIES 0 0 0 0
98,250 108,250 10,000 0
MARKETABLE EQUITY SECURITIES 0 0 0 0
94,146 76,724 0 (17,422)
FEDERAL RESERVE BANK STOCK,
ATLANTIC CENTRAL BANKERS BANK
STOCK AND FEDERAL HOME LOAN
BANK STOCK 0 0 0 0
415,000 415,000 0 0
GRAND TOTALS 1,969,637 1,957,467 7,934 (20,104)
30,146,351 29,149,469 35,010 (1,031,892)
========= ========= ====== ======
========== ========== ======= =======
</TABLE>
CLASSIFICATION OF HELD TO MATURITY AND AVAILABLE FOR SALE
SECURITIES
Due to the implementation of FAS 115, management has segregated
securities as Held to Maturity, Available for Sale or Trading
securities. At the implementation of FAS 115 on January 1, 1994,
management determined that no securities were Trading securities;
that tax-free municipal with maturity dates less than the year 2000
were classified as Held to maturity securities due to management's
intention to hold these securities for tax planning purposes; and
that all other securities were classified as Available for Sale
securities due to management's intention to hold these securities
for liquidity planning purposes. Purchases of tax-free municipals
with maturities of 5 years or less made following implementation of
FAS 115 are classified as Held to Maturity securities with all
other purchase Available for Sale; however, management may decide
on a case-by-case basis that a security may be either classified as
Held to Maturity or Available for Sale depending upon the reasons
for purchase. Held to Maturity classifications are typically used
for securities purchased specifically for interest rate management
or tax-planning purposes while Available for Sale classifications
are typically used for liquidity planning purposes.
FNB FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Net income for the first nine months of 1999 was $657,760 compared
to $574,163 for the same period in 1998 and compared to $693,066
for the same period in 1997. This represents an increase of
$83,597 or 14.56% over 1998 and a decrease of $35,306 or 5.09% from
1997. Net income on an adjusted per share basis for the first nine
months of 1999 was $1.64 an increase of $0.20 from the $1.44 per
share for the same period in 1998 and a decrease of $0.09 from the
$1.73 per share for the nine months ended September 30, 1997.
This increase of $83,597 in net income is a direct result of a
decrease in the provision for loan losses. The 1999 provision for
loan losses was $96,000 while for 1998 it was $381,114; a decrease
of $285,114. This decrease in provision was offset with a decrease
in net security gains, from $143,253 in 1998 to $49,675 in 1999; a
decrease of $93,578. Also offsetting this decrease in provision
was an increase in other expenses in the amount of $190,209.
Adding to this increase in net income were increases in net
interest income of $11,187 and in service charges and fees in the
amount of $83,296.
Total interest and dividend income for the first nine months of
1999 was $5,743,347 compared to $5,741,512 in 1998 and compared to
$5,494,070 for the nine months ended September 30, 1997. This
represents an increase of $1,835 from 1998 and $249,277 from 1997.
This slight increase is a result of increased balances in loans
since September 30, 1998, of $11,810,371 which has been offset by
a decrease in yield on earning assets from 8.11% at September 30,
1998 to 7.63% at September 30, 1999.
During the first half of 1999, interest rates remained relatively
stable; however, during the third quarter of 1999, the Federal
Reserve increased short term interest rates. As a result of this
increasing rate interest environment, adjustable rate loans and
investments have begun to increase in yield while management has
retained deposit rates at existing levels. The tax-adjusted net
interest margin has decreased 21 basis points from 3.95% for the
first nine months of 1998 to 3.74%. This decrease in the net
interest margin occurred due to an increase in the reliance on
lower yielding investment debt securities while deposit rates where
retained at relatively the same levels. During the past three
months as loans have increased and deposit rates have been retained
at existing levels and lowered in July for NOW accounts and savings
accounts, the net interest margin has increased. The net interest
margin at the end of June was 3.66%. It has increased to 3.74%
since that time. The yield on investment debt securities has
decreased 25 basis points from 6.67% in 1998 to 6.42% in 1999.
As a result of a decreasing interest rate environment until the
third quarter of 1999, the tax equivalent yield on earning assets
decreased to 7.63% for the first nine months of 1999 from 8.11% for
the first nine months of 1998. The cost of interest bearing
liabilities has decreased from the first nine months of 1999 to
4.53% from 4.80%. This decrease in the cost of interest-bearing
liabilities and larger decrease in the yield on earning assets has
resulted in a decrease in the net interest margin. Management
anticipates to continue to concentrate on the improvement of the
net interest margin throughout the year and has taken steps to
improve it by decreasing rates on NOW accounts and Savings account
while retaining time deposit and money market account rates at
existing levels.
Interest expense for the nine months ended September 30, 1999, was
$3,048,619, a decrease of $9,352 over the $3,057,971 incurred for
the same period in 1998. This decrease in interest expense is due
to a decrease in the average cost of deposits from 4.80% in 1998 to
4.51% in 1999.
Total noninterest income decreased $10,282 from 1998 due to the
sale of securities which resulted in a $143,253 gain in 1998. The
security gain in 1999 was only $49,675. The increases in service
charges and other income of $83,296 is due to increased service
charge rates on deposit accounts, increased appraisal income,
increased commissions on accident/disability insurance, and
increases in the cash value of life insurance. Total operating
expenses for the period ended September 30, 1999, were $2,224,616,
a $190,209 increase from the operating expenses incurred for the
same period in 1998 of $2,034,407. This increase is mainly due to
1) increases in employee wages and benefits of $103,820, a result
of the hiring of a full-time commercial loan officer on January 1,
1999, of an increase in wage rates and an increase in employee
participation in the Company's retirement plan and health insurance
plans; and 2) an increase in the cost of fixed assets in the amount
of $34,226 due mainly to a $14,500 increase in real estate taxes as
a result of new assessed values on the main office and Fort Loudon
Office becoming effective on October 1, 1998.
The company's income tax provision for the first nine months of
1999 was $139,664 as compared to $127,451 for the first nine months
of 1998. This increase in the tax provision in the amount of
$12,213 is the direct result of the increase in taxable income in
relation to tax free income.
Although the Company continues to operate with a marginal tax rate
of 34%, the effective income tax rate for the first nine months of
1999 was 17.51%, a decrease of 0.66% from the effective tax rate
for the first nine months of 1998 of 18.17%.
Total assets as of September 30, 1999, were $114,091,898 an
increase of $526,504 over the period ending December 31, 1998,
representing an increase of .46%. Funding this increase was an
increase in other borrowing in the amount of $1,667,453, as
deposits actually decreased $738,922, a .74% decrease. This
decrease in deposits is a direct result of decreased balances in
business money market accounts since December 31, 1998. Savings
accounts, which include Money Market accounts and NOW accounts have
decreased $4,109,121 or 13.29% from December 31, 1998. At the same
time Demand deposits have increased $325,582; time deposits have
increased $2,602,412 or 4.45%; and other time deposits have
increased $442,205. Increases in borrowing are a result of
advances on the Bank's line of credit at the Federal Home Loan Bank
of Pittsburgh. This borrowing has been necessary due to the
significant increase in lending as a result of the Bank's new
commercial lender, Bill Walker, which has resulted in the
settlement of several new commercial loans. As calls of securities
have diminished and deposit generation has been curtailed due to
management's desire to retain the cost of deposits at their current
levels, it has been determined that borrowing from the FHLB offers
the Bank an effective source for liquidity purposes. Management
foresees continuing to utilize this avenue of funding into the near
future. To stimulate deposits into time deposits, special CD
offerings targeted at current time deposit and IRA customers have
been developed.
Net loans as of September 30, 1999, were $72,012,728 compared to
$61,900,581 as of December 31, 1998, representing an increase of
$10,112,147 or 16.34%. This increase is a direct result of new
commercial lending as developed by the Bank's new commercial loan
officer as discussed earlier and the purchase of $4,000,000 of 100%
guaranteed SBA and FSA loans in July 1999. The allowance for loan
losses at the end of the nine months was $690,316 compared to
$651,007 at year end 1998 and is considered adequate, in
management's judgement, to absorb possible losses on existing
loans. The provision for loan losses for the first nine months of
1999 was $96,000 compared to $381,114 for the same period in 1998.
The significant decrease in the provision is due to management's
decision in 1998 to increase the allowance for loan losses as had
been determined necessary.
Total deposits were $99,765,013 as of September 30, 1999, compared
to $100,503,935 on December 31, 1998. This represents an decrease
of $738,922 or 0.74% which reflects the activity as discussed
previously.
Total equity as of September 30, 1999, was $11,435,515, 10.02% of
total assets as compared to $11,916,566, 10.49% of total assets as
of December 31, 1998. This decrease in equity reflects the net
unrealized loss on Available-for-sale securities since December 31,
1998, in the amount of $910,812, as a direct result of the rising
interest rate environment which has caused the value of securities
held in the Bank's Available-for-Sale portfolio to decrease in
value.
The Corporation has risk-based capital ratios exceeding regulatory
requirements. Risk-based capital guidelines require a minimum
ratio of 8.0%. At September 30, 1999, the risk-based capital ratio
of the Corporation was 17.97% while at December 31, 1998, the
risk-based capital ratio was 18.21%. The following table presents
the
risk-based capital ratios for the Corporation:
<TABLE>
<S> <C> <C>
September 30, Regulatory
1999 Minimum
Leverage Ratio 10.41% 4.00%
Risk-based capital ratios:
Tier I (core capital) 16.99% 4.00%
Total Capital
(Tier I and Tier II Capital) 17.97% 8.00%
Year 2000 Readiness Plan
During the past several months many newspaper and magazine articles
have been written concerning the YEAR 2000 and the potential effect
the change from the year 1999 to the year 2000 will have on
computer systems. Due to the age of some computer programs,
computer software and computer chips, it is very possible that some
older computers, software and equipment containing computer chip
technology may not function properly when the year 2000 rolls
around, 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 ("EDP")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 Corporation's
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 Bank's 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 Corporation's policy addressing the Year 2000, the
Corporation recognized the importance of assuring, to the best of
its ability, its major business customers and vendors on which it
relies for electricity, voice communication, data processing, all
equipment, data communication, supplies, and any other function
vital to the Corporation's operation are aware of this issue and
have addressed it 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 Corporation's ability,
each is Year 2000 compatible.
RENOVATION, VALIDATION, AND IMPLEMENTATION
On Sunday, February 15 and Monday, February 16, 1998, data
processing personnel conducted an in-house test of all computer
equipment and programs, both our main frame and Local Area Network
("LAN"), in order to determine if there were any areas of concern.
All equipment worked fine after we allowed system dates on the main
frame and the LAN 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 as well as on President's Day Weekend, February 14
and February 15, 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. Those reports generated were reviewed in detail by our in
house processor, Data Processing Manager, CFO, personnel from The
First National Bank of Mercersburg 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 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 ("FRB") 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.
SUMMARY OF PHASES OF YEAR 2000 PLAN
In management's opinion based upon progress the following are
statistics as to the progress of each step in the Y2K process.
AWARENESS - 100% COMPLETE
ASSESSMENT - 100% COMPLETE
Mission critical Qantel System Equipment & Software - Complete
Mission Critical LAN system Equipment & Software - Complete
Mission Critical Fedline Equipment & Software - Complete
Mission Critical Branch Equipment - Complete
ATMs - Complete
ATM Network - Complete
Major Business Customers both loans and deposits - Complete
Bank vendors and suppliers - Complete
VALIDATION - 100% COMPLETE
Mission critical Qantel System Equipment & Software
1. Equipment - Complete
09/09/99 - Complete
12/31/99 - Complete
1/03/2000 - Complete
2/28/2000 - Complete
2/29/2000 - Complete
3/01/2000 - Complete
2. Software - 09/09/99 - Complete
12/31/99 - Complete
1/03/2000 - Complete
2/28/2000 - Complete
2/29/2000 - Complete
3/01/2000 - Complete
Mission Critical LAN system Equipment & Software
09/09/99 - Complete
12/31/99 - Complete
1/03/2000 - Complete
2/28/2000 - Complete
2/29/2000 - Complete
3/01/2000 - Complete
Credit reporting Software - TransUnion complete
Mission Critical Fedline Equipment & Software
09/09/99 - Complete Equipment only
12/31/99 - Complete
1/03/2000 - Complete
2/28/2000 - Complete
2/29/2000 - Complete
3/01/2000 - Complete
Mission Critical Branch Equipment
ATMs - Complete
ATM Network - Complete
Major Business Customers both loans and deposits - Complete
Bank vendors and suppliers - Complete
RENOVATION - 100% COMPLETE OVERALL
100% QANTEL SOFTWARE
Mission critical Qantel System
1. Equipment - Complete no changes necessary
2. Software
IRA - New program installed; testing
completed 6/30/99.
Dividend - New program installed; testing
completed 4/30/99.
General Ledger - New program installed; testing
completed 4/30/99.
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
ATMs
NCR Main Office - Complete
NCR Hancock Office - Complete
Diebold East End Office - Complete
IMPLEMENTATION - 100% COMPLETE OVERALL
100% QANTEL SOFTWARE
Mission critical Qantel System
1. Equipment - Complete no changes necessary
2. Software
IRA - New program installed; testing completed
6/30/99; implemented 9/30/99.
Dividend - New program installed, tested and
implemented.
General Ledger - New program installed; tested
and implemented.
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
ATMs
NCR Main Office - Complete
NCR Hancock Office - Complete
Diebold East End Office - Complete
Fedline testing is complete.
The LAN system has been thoroughly tested during the month of June
1998 as noted above and in other documents. All areas worked fine.
The Qantel system was tested by in-house personnel in February 1998
and our phase of the retesting was completed in September which
brought us up to the January 3, 2000 date. The First National Bank
of Mercersburg completed the remaining steps and we have jointly
reviewed the test results with CBM to verify findings. The
revisions to the Bank's mission critical Qantel software have been
loaded onto our system and were implemented on January 18, 1999.
Retesting of our system was completed in early 1999 on site for
January 3, 2000 and February 29, 2000 during the President's Day
weekend on February 14 and February 15, 1999. The new software
programs have been installed during the fourth quarter of 1998 and
were tested in the first and second quarters of 1999.
The NCR ATMs located at our main office and Hancock office have
been upgraded and tested. The Diebold ATM located at our East End
Express Banking Center 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.
The Bank's main and branch office telephone systems were physically
verified for compliance by our vendor, Sprint. The only upgrade
necessary was to our voice mail system at the main office which was
completed in June 1999. Security systems at all offices were
tested and verified by our vendor, Mosler/LeFebure.
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 1999. If a supplier is not ready for Year 2000,
the Bank will replace them with one who is.
Year 2000 Contingency Plan
A contingency plan has been developed, is being reviewed by
management and the Board, and will be refined as necessary.
Training has been completed. This plan addresses potential
problems which may arise concerning Year 2000 problems.
The Corporation's and Bank's 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.
Year 2000 Budget
The initial Budget approved by the EDP Committee and the Board for
Year 2000 renovations was initially $25,000 and has since been
increased to $30,000. 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, September 30, 1999, for Year 2000 costs as highlighted in
this section have been $27,459.36. The EDP Committee and the Board
review this budget as necessary to determine if an increase in the
initial $30,000 budget is warranted based upon costs incurred to
date.
PART II - OTHER INFORMATION
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
None
Item 2 - Changes in Securities
None
Item 3 - Defaults Upon Senior Securities
Not Applicable
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
a. Exhibits - None
b. Reports on Form 8-K - None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
/s/John C. Duffey
(John C. Duffey, President
and Director of the Company and
President of the Bank)
(Duly Authorized Officer)
Date November 8, 1999 /s/Daniel E. Waltz
(Daniel E. Waltz, Treasurer
and Director of the Company and
Senior Vice President/CFO of
the Bank)
(Principal Financial &
Accounting Officer)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,989
<INT-BEARING-DEPOSITS> 907
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 28,734
<INVESTMENTS-CARRYING> 1,970
<INVESTMENTS-MARKET> 1,957
<LOANS> 72,013
<ALLOWANCE> 690
<TOTAL-ASSETS> 114,092
<DEPOSITS> 99,765
<SHORT-TERM> 1,671
<LIABILITIES-OTHER> 1,055
<LONG-TERM> 165
<COMMON> 252
0
0
<OTHER-SE> 11,184
<TOTAL-LIABILITIES-AND-EQUITY> 114,092
<INTEREST-LOAN> 4,179
<INTEREST-INVEST> 1,426
<INTEREST-OTHER> 138
<INTEREST-TOTAL> 5,743
<INTEREST-DEPOSIT> 3,020
<INTEREST-EXPENSE> 3,049
<INTEREST-INCOME-NET> 2,695
<LOAN-LOSSES> 96
<SECURITIES-GAINS> 50
<EXPENSE-OTHER> 2,225
<INCOME-PRETAX> 797
<INCOME-PRE-EXTRAORDINARY> 797
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 658
<EPS-BASIC> 1.64
<EPS-DILUTED> 1.64
<YIELD-ACTUAL> 3.74
<LOANS-NON> 370
<LOANS-PAST> 214
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 732
<CHARGE-OFFS> 159
<RECOVERIES> 21
<ALLOWANCE-CLOSE> 690
<ALLOWANCE-DOMESTIC> 690
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
