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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 June 30, 2002
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 June 30, 2002
(Common stock, $0.315 par value) 800,000
FNB FINANCIAL CORPORATION
INDEX
Page
PART I - FINANCIAL INFORMATION
Condensed consolidated balance sheets -
June 30, 2002 and December 31, 2001 4
Condensed consolidated statements of income -
Three months ended June 30, 2002 and 2001 5
Condensed consolidated statements of income -
Six months ended June 30, 2002 and 2001 6
Condensed consolidated statements of comprehensive
income - Six months ended June 30, 2002 and 2001 7
Condensed consolidated statements of cash flows -
Six months ended June 30, 2002 and 2001 8
Notes to condensed consolidated financial
statements 9-10
Management's discussion and analysis of financial
condition and results of operations 11-12
PART II - OTHER INFORMATION 14
Signatures 15
Exhibits 16-18
PART I - FINANCIAL INFORMATION
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2002 2001*
(Unaudited) (Audited*)
ASSETS
Cash and due from banks $ 5,072,675 $ 5,400,929
Interest-bearing deposits with banks 766,323 2,572,574
Investment securities
Held-to-maturity (Market value -
2002 $ 1,032,962 and 2001
$ 1,088,459) 1,070,306 1,114,764
Available-for-sale 17,701,350 19,554,290
Federal Reserve, Atlantic Central Bankers
Bank, Federal Home Loan Bank 511,800 833,700
Federal Funds Sold 4,646,000 6,000,000
Loans 97,709,045 91,050,008
Less: Allowance for loan losses ( 900,365) ( 882,330)
Loans, net 96,808,680 90,167,678
Bank building, equipment, furniture &
fixtures, net 2,821,202 2,914,416
Accrued interest receivable 653,962 619,464
Deferred income tax charges 151,430 160,529
Other real estate owned 30,457 103,568
Cash surrender value of life insurance 2,359,074 2,313,129
Other assets 364,633 405,475
Total assets $ 132,957,892 $ 132,160,516
LIABILITIES
Deposits
Demand deposits $ 13,601,320 $ 13,343,930
Savings deposits 32,555,939 32,659,787
Time certificates 66,000,964 65,647,473
Other time deposits 563,949 311,190
Total deposits 112,722,172 111,962,380
Accrued interest payable & other
liabilities 831,404 1,190,681
Libility for other borrowed funds 5,400,123 5,403,458
Dividends payable 112,000 216,000
Total liabilities 119,065,699 118,772,519
STOCKHOLDERS' EQUITY
Capital stock, common, par value -
$ 0.315; 12,000,000 shares authorized,
800,000 outstanding 252,000 252,000
Additional paid-in capital 1,789,833 1,789,833
Retained earnings 11,559,609 11,124,857
Accumulated other comprehensive income 290,751 221,307
Total stockholders' equity 13,892,193 13,387,997
Total liabilities and
stockholders' equity $ 132,957,892 $ 132,160,516
*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 June 30, 2002 and 2001
(UNAUDITED)
2002 2001
Interest & Dividend Income
Interest & fees on loans $ 1,803,483 $ 1,793,235
Interest on investment securities:
Obligations of other U.S. Government Agencies 129,396 220,843
Obligations of State & Political Subdivisions 102,123 105,770
Interest on deposits with banks 3,903 41,365
Dividends on Equity Securities 3,484 14,610
Interest on federal funds sold 30,599 45,982
Total Interest & Dividend Income 2,072,988 2,221,805
Interest Expense
Interest on deposits 850,237 1,134,005
Interest on other borrowed money 80,857 83,147
Total Interest Expense 931,094 1,217,152
Net interest income 1,141,894 1,004,653
Provision for loan losses 36,000 36,000
Net interest income after
Provision for loan losses 1,105,894 968,653
Other income
Service charges on deposit accounts 74,443 54,302
Other service charges, collection & exchange
charges, commissions and fees 81,001 70,260
Other income 8,151 46,864
Net gain/(loss) on disposal of other assets ( 1,636) ( 1,250)
Net gain/(loss) on sale of other real estate 0 0
Net securities gains/(losses) 0 3,733
Total other income 161,959 173,909
Other expenses 832,091 862,707
Income before income taxes 435,762 279,855
Applicable income taxes 72,230 49,980
Net income $ 363,532 $ 229,875
Earnings per share of Common Stock:
Net income per share $ 0.45 $ 0.29
Cash dividend declared per share $ 0.14 $ 0.12
Weighted average number of shares outstanding 800,000 800,000
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
Six Months Ended June 30, 2002 and 2001
(UNAUDITED)
2002 2001
Interest & Dividend Income
Interest & fees on loans $ 3,541,524 $ 3,574,322
Interest on investment securities:
Obligations of other U.S. Government Agencies 270,046 510,498
Obligations of State & Political Subdivisions 209,412 205,936
Interest on deposits with banks 20,337 60,623
Dividends on Equity Securities 12,439 30,896
Interest on federal funds sold 54,889 84,422
Total Interest & Dividend Income 4,108,647 4,466,697
Interest Expense
Interest on deposits 1,748,425 2,287,688
Interest on other borrowed money 165,051 164,928
Total Interest Expense 1,913,476 2,452,616
Net interest income 2,195,171 2,014,081
Provision for loan losses 66,000 72,000
Net interest income after provision
for loan losses 2,129,171 1,942,081
Other income
Service charges on deposit accounts 145,643 104,144
Other service charges, collection & exchange
charges, commissions and fees 134,826 132,664
Other income 63,994 88,673
Net gain/(loss) on sale of other real estate 0 ( 10,887)
Net gain/(loss) on disposal of other assets ( 1,636) ( 1,250)
Net securities gains/(losses) 8,025 9,968
Total other income 350,852 323,312
Other expenses 1,685,225 1,707,180
Income before income taxes 794,798 558,213
Applicable income taxes 152,046 91,082
Net income $ 642,752 $ 467,131
Earnings per share of Common Stock:
Net income per share $ 0.80 $ 0.58
Cash dividend declared per share $ 0.26 $ 0.23
Weighted average number of shares outstanding 800,000 800,000
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
Six Months Ended June 30, 2002 and 2001
(UNAUDITED)
2002 2001
Net Income $ 642,752 $ 467,131
Other Comprehensive:
Gross unrealized holding gains (losses) 113,244 348,241
Reclassification adjustment for (gains) losses
realized in net income ( 8,025) ( 9,968)
Net unrealized holding gains (losses) before taxes 105,219 338,273
Tax effect ( 35,774) ( 115,013)
Other comprehensive income (loss) 69,445 223,260
Comprehensive Income $ 712,197 $ 690,391
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
Six Months Ended June 30, 2002 and 2001
(UNAUDITED)
2002 2001
Cash flows from operating activities:
Net income $ 642,752 $ 467,131
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation & amortization 126,069 145,597
Provision for loan losses 66,000 72,000
Increase in Cash Surrender value
of Life Insurance ( 45,945) ( 52,034)
Net (gain)/loss on sales of investments ( 8,025) ( 9,968)
Deferred income taxes ( 26,675) ( 24,155)
Net Loss on Disposal of other Real Estate 0 10,887
(Increase) decrease in accrued
interest receivable ( 34,498) 142,651
Loss on Disposal of Other Assets 1,636 1,250
Increase (decrease) in accrued interest
payable and other liabilities ( 359,278) 136,824
(Increase) decrease in other assets 47,206 ( 238,069)
Net cash provided (used) by operating activities: 409,242 652,114
Cash flows from investing activities:
Net (increase) decrease in interest-
bearing deposits with banks 1,806,251 ( 4,225,318)
Purchases of Available-for-sale securities ( 1,288,977) ( 1,225,000)
Proceeds from maturities and calls of securities 3,251,469 7,132,510
Proceeds sale of available-for-sale securities 48,150 22,970
Net (increase) decrease in loans ( 6,707,002) ( 1,984,805)
Proceeds from sale of other real estate owned 73,111 64,635
Purchases of bank premises & equipment (net) ( 32,855) ( 84,506)
Purchases of investment in insurance company ( 8,000) ( 25,000)
Sale of other bank stock 321,900 0
Net cash provided (used) by investing activities ( 2 ,535,953) ( 324,514)
Cash flows from financing activities:
Net increase (decrease) in deposits 759,792 7,320,119
Net increase (decrease) in other borrowings ( 3,335) ( 770,676)
Cash dividends paid ( 312,000) ( 280,000)
Net cash provided (used) by financing activities 444,457 6,269,443
Net increase (decrease) in cash & cash equivalents( 1,682,254) 6,597,043
Cash & cash equivalents, beginning balance 11,400,929 4,020,479
Cash & cash equivalents, ending balance $ 9,718,675 $10,617,522
The accompanying notes are an integral part of these
condensed financial statements.
FNB FINANCIAL CORPORATION
JUNE 30, 2002
(UNAUDITED)
REVIEW OF INTERIM FINANCIAL STATEMENTS
The condensed consolidated financial statements as of and
for the three and six month periods ended June 30, 2002 and
2001 have been reviewed by independent certified public
accountants. Their report on their review is attached as
Exhibit 99 to this 10-Q.
NOTE 1 - BASIS OF PRESENTATION
The financial information presented at and for the six
months ended June 30, 2002 and June 30, 2001 is unaudited.
Information presented at December 31, 2001, 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 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
judgment, 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 - 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.
FNB FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Net income for the first six months of 2002 was $ 642,752 compared
to $ 467,131 for the first six months of 2001. This represents an
increase of $ 75,621 or 37.6% from 2001. Net income on an adjusted
per share basis for the first six months of 2002 was $0.80 which is
an increase of $ 0.22 from the $ 0.58 per share for the six months
ended June 30, 2001.
Total interest and dividend income for the first six months of 2002
was $ 4,108,647 compared to $4,466,697 for the first six months of
2001, an decrease of $ 358,050.
This decrease was due primarily to the downward trend of effective
yields on earning assets as rates continue to be well below yields
realized in the first half of 2001. Although the loan portfolio has
grown by $ 11,849,462 or 13.8% over totals at the end of the first
half of 2001, the decreasing interest rate environment along with a
shift of earning assets from investments to Federal funds has
resulted in a 8.0% decrease in total interest income from first half
of 2001.
Due to the depressed interest rate environment, investment
securities with call features have been exercised by the issuer
resulting in excess funds being invested in lower yielding federal
funds until such time as they can be invested in loans or other
securities. This situation has improved during the second quarter
of 2002 as loan demand increased and allowed the bank to place some
excess funds into higher yielding loans.
In order to sustain desired net interest margins, deposit rates were
lowered to decrease our funding costs.
Interest expense for the six months ended June 30, 2002, was
$ 1,913,476, a decrease of $ 539,140 from the $ 2,452,616 for the
same period in 2001. Total deposits increased $ 1,769,565 from
totals at June 30, 2001. This increase was concentrated in savings
deposit accounts. This coupled with the aforementioned general
reduction in deposit rates decreased the cost of funds enough to
more than compensate for the decrease in interest income and allowed
us to produce a 9% increase in net interest income over first half
of 2001.
The tax-adjusted net interest margin has increased 11 basis points
for the first six months of 2002 from that of the first six months
of 2001. Management will continue to competitively price its loan
and deposit products while maintaining desired net interest spreads.
Total non-interest income for the first six months of 2002 increased
$ 27,540 over totals for the first half of 2001 due to service
charges on deposit accounts, trust referral income and net earnings
from the Company's investment in CBIA, which is a joint venture with
several other community banks to provide property and casualty
insurance products. Operating expenses for the period ended
June 30, 2002, were $ 1,685,225, a $ 21,955 decrease from the
operating expenses incurred for the same period in 2001 of
$ 1,707,180. This decrease was mainly the result of personnel
changes that reduced wages and benefits.
Our income tax provision for the first six months of 2002 was
$ 152,046 as compared to $ 91,082 for the first six months of 2001.
We continue to operate with a marginal tax rate of 34% during the
first half of 2002. The effective income tax rate for the first six
months of 2002 was 19.1%, a 2.8% increase compared to 16.3% for the
first six months of 2001.
Total assets as of June 30, 2002, were $ 132,957,892, an increase of
$ 797,376 from the period ending December 31, 2001, representing an
increase of 0.6%. This increase was primarily due to increases in
loans. Loans as of June 30, 2002, were $ 97,709,045 compared to
$ 91,050,008 as of December 31, 2001, an increase of $ 6,659,037 or
7.3%, a result of commercial loan settlements. The allowance for
loan losses at the end of the six months was $ 900,365 compared to
$ 882,330 at year end 2001. The provision for loan losses for the
first six months of 2002 was $ 66,000 compared to $ 72,000 for the
first six months of 2001.
Total equity as of June 30, 2002, was $ 13,892,193, 10.45% of total
assets, as compared to $ 13,387,997, 10.13% of total assets as of
December 31, 2001.
The Company's risk based capital ratios continue to exceed
regulatory minimum requirements.
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:
Exhibit Number Referred to Description of Exhibit:
Item 601 of Regulation S-K:
Exhibit 99 Report of Independent
Accountant's on Interim
Financial Statements
Exhibit 99.1 Certification of Chief
Executive Officer
pursuant to 18 U.S.C.
Section 1350
Exhibit 99.2 Certification of Chief
Financial Officer
pursuant to 18 U.S.C.
Section 1350
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 August 12, 20021 /s/Dale M. Fleck
Dale M. Fleck
Controller of the Bank
(Principal Financial &
Accounting Officer)
Exhibit 99
INDEPENDENT ACCOUNTANT'S REPORT
Board of Directors
FNB Financial Corporation
McConnellsburg, Pennsylvania
We have reviewed the accompanying consolidated balance sheet of
FNB Financial Corporation and Subsidiary as of June 30, 2002 and the
related consolidated statements of income for the three and six
month periods ended June 30, 2002 and 2001 and consolidated
statements of comprehensive income for the six months ended June 30,
2002 and 2001 and consolidated statements of cash flows for the six
months ended June 30, 2002 and 2001. These financial statements are
the responsibility of the corporation's management.
We conducted our reviews in accordance with standards
established by the American Institute of Certified Public
Accountants. A review of interim financial information consists
principally of applying analytical procedures to financial data and
making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the
consolidated financial statements taken as a whole. Accordingly, we
do not express such an opinion.
Based on our reviews, we are not aware of any material
modifications that should be made to the accompanying consolidated
financial statements for them to be in conformity with generally
accepted accounting principles.
/s/ Smith Elliott Kearns & Company, LLC
SMITH ELLIOTT KEARNS & COMPANY, LLC
Chambersburg, Pennsylvania
August 8, 2002
EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OR THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of FNB Financial
Corporation (the "Company") on Form 10-Q for the period ending
June 30, 2002 as filed with the Securities and Exchange Commission
on the date hereof (the "Report"), I, John C. Duffey, Chief
Executive Officer of the Company, certify, pursuant to 18 U.S.C.
section 1350, as adopted pursuant to section 906 of the Sarbanes-
Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents,
in all material respects, the final condition and results of
operations of the Company.
/s/ John C. Duffey
Chief Executive Officer
August 12, 2002
EXHIBIT 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OR THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of FNB Financial
Corporation (the "Company") on Form 10-Q for the period ending June
30, 2002 as filed with the Securities and Exchange Commission on
the date hereof (the "Report"), I, Dale M. Fleck, Chief Financial
Officer of the Company, certify, pursuant to 18 U.S.C. section
1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act
of 2002, that:
(1) The Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents,
in all material respects, the final condition and results of
operations of the Company.
/s/Dale M. Fleck
Chief Financial Officer
August 12, 2002