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 March 31, 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 March 31, 1999
(Common stock, $0.63 par value) 400,000
FNB FINANCIAL CORPORATION
INDEX
Page
PART I - FINANCIAL INFORMATION
Condensed consolidated balance sheets -
March 31, 1999 and December 31, 1998 5
Condensed consolidated statements of income -
Three months ended March 31, 1999 and 1998 6
Condensed consolidated statements of comprehensive
income -
Three months ended March 31, 1999 and 1998 7
Condensed consolidated statements of cash flows -
Three months ended March 31, 1999 and 1998 8
Notes to condensed consolidated financial
statements 9-11
Table #1 - Schedule of held to maturity and
available for sale investment activity for the
period January 1, 1999 through March 31, 1999 12
Table #2 - Schedule of gross unrealized gains and
unrealized losses within the held to maturity and
available for sale investment portfolios by
investment type 13
Management's discussion and analysis of financial
condition and results of operations 14-23
PART II - OTHER INFORMATION 24
Signatures 26
PART I - FINANCIAL INFORMATION
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<S> <C> <C>
March 31, December 31,
1999 1998
ASSETS: (unaudited) (audited*)
Cash and Due from banks $ 2,736,242 $ 3,134,802
Interest-bearing deposits with banks 2,113,137 2,019,612
Marketable Debt Securities
Held-to-maturity (Market value - 1999
$2,341,602 and 1998: $2,429,959) 2,377,315 2,449,621
Available-for-sale 31,207,980 32,679,228
Marketable Equity Securities
Available for Sale 217,700 208,288
Federal Reserve, Atlantic Central Banker's Bank
and Federal Home Loan Bank Stock 394,100 394,100
Federal Funds Sold 3,949,000 4,136,000
Loans, net of unearned discount &
Allowance for loan losses 62,984,903 61,900,581
Bank buildings, equipment, furniture &
fixtures, net 3,270,641 3,149,012
Accrued interest receivable 704,480 718,543
Deferred income tax charges 120,470 16,989
Other real estate owned 322,261 370,511
Intangible Assets 173,765 177,856
Other assets 2,346,059 2,210,251
Total Assets $112,918,053 $113,565,394
========== ==========
LIABILITIES :
Deposits:
Demand deposits $10,258,192 $10,819,419
Savings deposits 29,669,854 30,911,801
Time certificates 59,506,440 58,501,511
Other time deposits 481,775 271,204
Total deposits $99,916,261 $100,503,935
Accrued interest payable & other liabilities 923,442 868,129
Liability for other borrowed funds 167,601 168,764
Deferred income taxes 0 0
Accrued dividends payable 72,000 108,000
Total Liabilities $101,079,304 $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 9,739,320 9,621,863
Accumulated other comprehensive income 57,596 252,870
Total Stockholders' Equity $11,838,749 $11,916,566
Total Liabilities & Stockholders' Equity$112,918,053 $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 March 31, 1999 and 1998
(UNAUDITED)
<TABLE>
<S> <C> <C>
1999
1998
Interest & Dividend Income
Interest & fees on loans $1,318,898
$1,323,777
Interest on investment securities:
U.S. Treasury Securities 1,585
3,494
Obligations of other U.S.
Government Agencies 354,521
326,713
Obligations of State & Political
Subdivisions 128,776
126,656
Interest on deposits with banks 28,085
25,288
Dividends on Equity Securities 8,163
8,139
Interest on federal funds sold 42,565
49,800
Total Interest & Dividend Income 1,882,593
1,863,867
Interest Expense
Interest on deposits 1,017,540
982,733
Interest on Other Borrowed Money 2,795
2,870
Total interest expense 1,020,335
985,603
Net interest income 862,258
878,264
Provision for loan losses 30,000
101,114
Net interest income after
Provision for loan losses 832,258
777,150
Other income
Service charges on deposit accounts 22,940
20,218
Other service charges, collection &
exchange charges, commissions
and fees 63,275
49,886
Other income 33,094
15,085
Net Securities gains/(losses) (3,691)
1,573
Total other income 115,618
86,762
Other expenses 717,382
660,091
Income before income taxes 230,494
203,821
Applicable income taxes 41,037
48,942
Net income $189,457
$154,879
=======
=======
Earnings per share of Common Stock:
Net income per share $0.47
$0.39
Cash dividend declared per share $0.18
$0.17
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
Three Months Ended March 31, 1999 and 1998
(UNAUDITED)
<TABLE>
<S> <C> <C>
1999
1998
Net income $189,457
$154,879
Other Comprehensive income, net of tax
Unrealized holding gains/(losses) for period (195,274) (
32,643)
Comprehensive Income $( 5,817)
$122,236
=======
=======
</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
Three Months Ended March 31, 1999 and 1998
<TABLE>
<S> <C> <C>
(UNAUDITED)
1999 1998
Cash flows from operating activities:
Net income $ 189,457 $ 154,879
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation & amortization 65,933 65,409
Provision for loan losses 30,000 101,114
Net (gain)/loss on sales of
investments 3,691
(1,573)
(Increase) decrease in accrued
interest receivable 14,063
(30,256)
Loss on Disposal of Other Real Estate 2,500 2,000
Deferred Income Taxes (2,886) 0
Increase (decrease) in accrued
interest payable and
other liabilities 55,313 67,543
Other (net) (115,409)
(81,971)
Net cash provided (used)by operating
activities 242,662 277,145
Cash flows from investing activities:
Net (increase) decrease in interest-
bearing deposits with banks (93,525)
5,545,779
Purchases of Held-to-maturity
securities 0 0
Purchases of Available-for-sale
securities (1,053,706)
(4,591,794)
Proceeds from sales of Available-for-
sale securities 0 0
Proceeds from maturities of Held-to-
maturity securities 72,306 513,694
Proceeds from maturities of Available-
for-sale securities 2,215,982 3,038,533
Purchases of marketable equity securities 0
(45,000)
Net (increase) decrease in loans (1,114,322)
290,936
Proceeds from sale of Other real
estate owned 45,750 19,025
Purchases of bank premises &
equipment (net) (183,471)
(57,504)
Purchase of Life Insurance 0
(1,985,000)
Increase in Cash Value of Life Insurance (20,399)
(3,983)
Purchase of other bank stock 0 0
Net cash provided (used) by investing
activities (131,385)
2,724,686
Cash flows from financing activities:
Net increase (decrease) in deposits (587,674)
(1,453,355)
Net increase (decrease) in Other borrowings (1,163)
(288,581)
Cash dividends paid (108,000)
(104,000)
Net cash provided (used) by financing
activities (696,837)
(1,845,936)
Net increase (decrease) in cash & cash
equivalents (585,560)
1,155,895
Cash & cash equivalents, beginning balance 7,270,802 6,422,312
Cash & cash equivalents, ending balance $6,685,242 $7,578,207
========= =========
Supplemental disclosure of cash flows information
Cash paid during the year for:
Interest $ 927,927 $ 898,184
Income taxes 35,926 0
Supplemental schedule of noncash investing &
financing activities
Unrealized gain (loss) on Available-for-sale
securities, net of income tax effect (195,274) (
32,643)
Accrued dividends payable 72,000 68,000
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
FNB FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The financial information presented at and for the three
months ended March 31, 1999, and March 31, 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
March 31, 1999, is summarized in Table #1 on page 12. 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 13.
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 AND NONACCRUAL LOANS
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 0
0
Installment loans 12,446
10,856
Commercial & all other 30,000
88,237
Total charge-offs 42,446
99,093
Recoveries of loans previously charged-off:
Real estate mortgages 0
0
Installment loans 8,658
1,047
Commercial & all other 375
330
Total recoveries 9,033
1,377
Net loans charged-off (recovered) 33,413
97,716
Provision for loan losses charged to operations 30,000
101,114
Allowance for loan losses, March 31 $728,228
$429,211
======== ========
</TABLE>
The following table shows the principal balance of nonaccrual loans
as of March 31, 1999:
<TABLE>
<S> <C>
Nonaccrual loans $ 395,356.60
==========
Interest income that would have been
accrued at original contract rates $ 8,628.85
Amount recognized as interest income 2,147.64
Foregone revenue $ 6,481.21
=========
</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 MARCH 31, 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 1,053,706 1,053,706
NET LOSSES/GAINS 0 3,691 3,691
MATURITIES/CALLS PAYDOWNS/
PREMIUM AMORTIZATION/DISCOUNT
ACCRETION 72,306 2,215,982 2,288,288
ENDING BALANCE 3/31/99 $2,377,315 $31,164,868 $33,549,565
========= ========== ==========
</TABLE>
TABLE #2
SCHEDULE OF UNREALIZED GAINS AND UNREALIZED LOSSES
WITHIN THE HELD TO MATURITY AND AVAILABLE FOR SALE
INVESTMENT PORTFOLIOS BY INVESTMENT TYPE
MARCH 31, 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 0 0 0 0
10,991,996 11,154,513 162,517 0
U.S. GOVERNMENT AGENCIES 465,158 425,125 0 (40,033)
7,573,344 7,358,801 0 (214,543)
SBA GUARANTEED LOAN POOL
CERTIFICATES 270,798 273,080 2,281 0
784,948 793,564 8,615 0
SBA GUARANTEED LOAN POOL
CERTIFICATES 861,242 854,224 0 (7,018)
572,312 569,988 0 (2,323)
MORTGAGE-BACKED SECURITIES 0 0 0 0
634,021 645,527 11,506 0
MORTGAGE-BACKED SECURITIES 0 0 0 0
374,353 370,763 0 (3,590)
SECURITIES ISSUED BY STATES
& POLITICAL SUBDIVISIONS IN
THE U.S. 780,117 789,173 9,056 0
9,742,235 9,827,688 85,453 0
SECURITIES ISSUED BY STATES
& POLITICAL SUBDIVISIONS IN
THE U.S. 0 0 0 0
491,658 487,136 0 (4,522)
MARKETABLE EQUITY SECURITIES 0 0 0 0
79,400 134,200 54,800 0
MARKETABLE EQUITY SECURITIES 0 0 0 0
94,146 83,500 0 (10,646)
FEDERAL RESERVE BANK STOCK,
ATLANTIC CENTRAL BANKERS BANK
STOCK AND FEDERAL HOME LOAN
BANK STOCK 0 0 0 0
394,100 394,100 0 0
GRAND TOTALS 2,377,315 2,341,602 11,338 (47,051)
31,732,514 31,819,780 322,891 (235,625)
========= ========= ====== ======
========== ========== ======= =======
</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 three months of 1999 was $189,457,
compared to $154,879 for the first three months of 1998 and
$218,142 for the same period in 1997. This represents an increase
of $34,578 or 22% from 1998 and a decrease of $28,685 or 13.15%
from 1997. Net income on an adjusted per share basis for the first
three months of 1999 was $0.47 an increase of $.08 from the $0.39
per share for 1998, and a decrease of $0.08 from the $0.55 per
share for the three months ended March 31, 1997. This increase
from 1998 is a direct result of a decrease in the allowance for
loan loss provision which was $101,114 for the first three months
in 1998 compared to $30,000 for the first three months in 1999.
Total interest and dividend income for the first three months of
1999 was $1,882,593 compared to $1,863,867 for the first three
months of 1998, an increase of $18,726, and compared to $1,788,629
for the three months ended March 31, 1997, representing an increase
of $93,964. This increase is a result of an increase in the
balance of earning assets and investments in the Bank's security
portfolio. Since March 31, 1998, net loans have increased
$4,252,941 or 7.24% while the book value of investment debt
securities has increased $3,563,367 or 11.88%. This increase in
loans, the Bank's highest yielding interest-earning asset, and
increase in the lower yielding assets of investments held in the
Bank's investment portfolio have increased the Bank's interest
income for the first three months of 1999.
During the first quarter of 1999, interest rates on loans and on
investments have remained relatively the same. Also, during the
first quarter, some investment securities with call features were
called by the issuer resulting in the loss of higher interest
earning assets. At the same time, some residential mortgage
customers refinanced their mortgage loans to lower interest rates
at our institution and at other institution's which resulted in a
general decline in the yield on both investment securities and
loans since the fourth quarter of 1998. Management has decreased
deposit rates but not at the same pace as that of earning assets.
Combined with the aforementioned increase in loans and increase in
investments, net interest income has increased, however, the bank's
net interest margin during the first quarter of 1998 has decreased
due to the decrease of yields on loans and investments while the
cost of deposits did not decrease as greatly as that of earning
assets. Management anticipates the decrease in interest rates on
loans and investments and the decrease of deposit rates to lower
levels will result in the slight decrease of the interest margin
during the next few earning periods.
Interest expense for the three months ended March 31, 1999, was
$1,020,335, an increase of $34,732 from the $985,603 for the same
period in 1998, and an increase of $92,513 from the $927,822
incurred for the same period in 1997. This increase is due to an
increase in the balances of interest-bearing deposits. Total
interest-bearing deposit balances has increased $7,614,501 or 9.28%
since March 31, 1998.
The tax-adjusted net interest margin has decreased 40 basis points
to 3.62% for the first three months of 1998 from that of the first
three months of 1997 which was 4.02%. This decrease occurred due
to a larger decrease in the yield on earning assets which occured
during the entire 1998 year than in the cost of interest-bearing
liabilities. The tax-equivalent yield on earning assets for the
first three months of 1998 decreased .59% to 7.58% from 8.17% for
the same period in 1998 while the cost of interest-bearing
liabilities decreased .30% to 4.54% from 4.84% for the same period
in 1998. Management anticipates to concentrate on the improvement
of net interest margin throughout the year. Recent decreases in
interest rates on adjustable rate loans and securities will be
offset by maturing higher cost time deposits repriced to lower
yielding deposits and a general decrease in the cost of savings
account balances. During the year management still anticipates
securities which have call features to most likely be called
resulting in a decrease in yield on the investment portfolio. This
combined with continued refinancings by mortgage home owners to
lower interest rates will squeeze the net interest margin and may
result in a decrease in such. Through the decrease of deposit
rates, management will strive to maintain the decrease of the net
interest margin to a minimum.
Total noninterest income for the first three months of 1999
increased $28,856 due to a $2,722 increase in service charges on
deposit accounts and a $13,389 increase in other income as a result
of a $16,416 increase in the cash value of life insurance.
Operating expenses for the period ended March 31, 1999, were
$717,382, a $57,291 increase from the operating expenses incurred
for the same period in 1998 of $660,091.
The company's income tax provision for the first three months of
1999 was $41,034 as compared to $48,942 for the first three months
of 1998. The Company continues to operate with a marginal tax rate
of 34%, during the first quarter of 1999. The effective income tax
rate for the first three months of 1999 was 17.80% a 6.21% decrease
compared to 24.01% for the first three months of 1998 and a
decrease of 0.48% from the effective tax rate for the first three
months of 1997 of 18.28%.
Total assets as of March 31, 1999, were $112,918,053, a decrease of
$647,341 from the period ending December 31, 1998, representing a
decrease of 0.57%. This decrease in total assets was anticipated
as there were large temporary deposits at the Bank on December 31,
1998, in business Money Market account balances which were expected
to leave the Bank shortly after the beginning of the 1999 year.
This in fact did occur and total deposits decreased $587,674 or
0.58%. The decrease in deposits was the result of decreased Money
Market account balances which are included under the savings
account caption. Totals savings accounts decreased $1,241,947 to
$29,669,854 from $30,911,801 at December 31, 1998. This decrease
was a direct result of the movement of the temporary deposits as
discussed previously. Time deposits increased $1,004,929 to
$59,506,440 from $58,501,511 at December 31, 1998, a 1.72%
increase. Net loans as of March 31, 1999, were $62,984,903
compared to $61,900,581 as of December 31, 1998. The allowance for
loan losses at the end of the three months was $728,228 compared to
$731,641 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 three months of
1999 was $30,000 compared to $101,114 for the first three months of
1998 and $9,000 for the same period in 1997. This decrease from
the 1998 provision and dramatic increase over the 1997 provision
was a direct result of one large commercial loan charge-off in 1998
which necessitated the increase of the allowance for loan losses.
Total deposits were $99,916,261 as of March 31, 1999, compared to
$100,503,935 on December 31, 1998. This represents a decrease of
$587,674 or 0.58% which reflects the activity as discussed
previously.
Total equity as of March 31, 1999, was $11,838,749, 10.48% of total
assets, as compared to $11,916,566, 10.49% of total assets as of
December 31, 1998. This slight decrease in equity reflects a
decrease in Accumulated other comprehensive income which is a
direct result of a decrease in the unrealized gains on securities
available for sale, net of tax effects, during the first quarter of
1999 from that of December 31, 1999.
The Corporation has risk-based capital ratios exceeding regulatory
requirements. Risk-based capital guidelines require a minimum
ratio of 8.0%. At March 31, 1999, the risk-based capital ratio of
the Corporation was 18.00% 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>
March 31, Regulatory
1999 Minimum
Leverage Ratio 10.29% 3.00%
Risk-based capital ratios:
Tier I (core capital) 16.94% 4.00%
Total Capital
(Tier I and Tier II Capital) 18.00% 8.00%
</TABLE>
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, 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
("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. 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. 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. 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 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 - 95% 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
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
Alarm systems at all locations have had vendor
certified inspections completed and verified for
Year 2000 readiness
Office telephone systems inspections have been completed
at all locations.
Upgrade of Main office Voice mail required by
6/30/99.
ATMs - Complete
ATM Network - Complete
Major Business Customers both loans and deposits - Complete
Bank vendors and suppliers - Complete
RENOVATION - 95% COMPLETE OVERALL
100% QANTEL SOFTWARE
Mission critical Qantel System
1. Equipment - Complete no changes necessary
2. Software
IRA - New program installed; testing to be
completed in 2nd quarter of 1999.
Dividend - Complete
General Ledger - Complete
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
Alarm systems at all locations have had vendor
certified inspections completed and verified for
Year 2000 readiness
Office telephone systems inspections have been completed
at all locations.
Upgrade of Main office Voice mail required by
6/30/99.
ATMs
NCR Main Office - Complete
NCR Hancock Office - Complete
Diebold East End Office - Complete
IMPLEMENTATION - 95% COMPLETE OVERALL
91% QANTEL SOFTWARE
Mission critical Qantel System
1. Equipment - Complete no changes necessary
2. Software
IRA - New program installed; testing during
second quarter of 1999.
Dividend - Complete
General Ledger - Complete
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
Upgrade of main office voice mail is necessary
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
Bank's 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 were completed and tested by the end of the first quarter.
The new software programs have been installed during the fourth
quarter of 1998 and were tested these include the General Ledger
program and the Dividends program. The IRA program is still in the
process of testing and will be completed by 6/30/99.
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, March 31, 1999, for Year 2000 costs as
highlighted in this section have been $22,249.42. 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, has been reviewed and
completed by management. It will be presented to the EDP Committee
and the Board for adoption. 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.
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/CEO of the Bank)
(Duly Authorized Officer)
Date May 5, 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)
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