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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 [Fee Required]
For the fiscal year ended December 31, 2000.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 [No Fee required]
For the transition period from _______ to _______.
Commission file number 33-66014
FNB FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
COMMONWEALTH OF PENNSYLVANIA 23-2466821
(State or other jurisdiction of incorporation (I.R.S.
Employer
or organization) Identification No.)
101 Lincoln Way West, McConnellsburg, PA 17233
(Address of principal executive offices) (Zip
Code)
Registrant's telephone number, including area code: 717-485-
3123
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of the latest
practicable date.
Class Outstanding as of March 5,
2001
Common Stock, $0.315 Par Value 800,000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K ( 229.405 of this chapter)
is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-
K or any amendment to this Form 10-K [ ].
The aggregate market value of the voting stock held by non-
affiliates of the registrants as of March 5, 2001:
Common Stock, $0.63 Par Value - $20,000,000.00
Page 1 of 16 Pages
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders report for the year ended
December 31, 2000, are incorporated by reference into Parts I, II
and IV.
Portions of the proxy statement for the annual shareholders
meeting to be held April 24, 2001, are incorporated by reference
into Part III.
Portions of Form SB-2 Registration Statement No. 33-66014 as
filed with the Securities and Exchange Commission on September 8,
1993, are incorporated by reference into Part IV.
The Executive Contract for the President and CEO of the Bank dated
August 1, 2000, is incorporated herein by reference into Part III.
The Executive Change of Control Agreement for the Senior Vice
President and CFO of the Bank dated August 1, 2000, is
incorporated herein by reference into Part III.
A copy of a Common Stock Certificate of FNB Financial Corporation
as filed with the Securities and Exchange Commission with Form 10-
K for the fiscal year ended December 31, 1995 is incorporated by
reference into Part IV.
Page 2 of 16 Pages
PART I
Item 1. Business
Description of Business
FNB Financial Corporation (the Company), a Pennsylvania
business corporation, is a bank holding company registered
with and supervised by the Board of Governors of the
Federal
Reserve System (the "Federal Reserve Board"). The Company
was
incorporated on June 22, 1987, under the business
corporation
law of the Commonwealth of Pennsylvania for the purpose of
becoming a bank holding company. Since commencing
operations,
the Company's business has consisted primarily of managing
and
supervising The First National Bank of McConnellsburg (the
Bank) and its principal source of income has been
dividends
paid by the Bank. The Company has one wholly-owned
subsidiary, the Bank.
The Bank was established in 1906 as a national banking
association under the supervision of the Comptroller of
the
Currency, the Comptroller. The Bank is a member of the
Federal Reserve System and customers' deposits held by the
Bank are insured by the Federal Deposit Insurance
Corporation
to the maximum extent permitted by law. The Bank is
engaged
in a full service commercial and consumer banking business
including the acceptance of time and demand deposits and
the
making of secured and unsecured loans. The Bank provides
its
services to individuals, corporations, partnerships,
associations, municipalities and other governmental
bodies.
As of January 1, 2001, the Bank had three (3) offices and
(1)
drive-up ATM located in Fulton County, one (1) branch
office facility located in Fort Loudon, Franklin County
Pennsylvania and one (1) branch office facility located in
Hancock, Washington County, Maryland. During 1995 the
Bank
received regulatory approval from The Comptroller to
purchase
and assume the deposits, real estate and building of the
Fort
Loudon Branch Office of Dauphin Deposit Bank located in
Franklin County, Pennsylvania. Due to the location of
this
office, management and the Board felt the acquisition of
this
office was strategically important in order to officially
expand the Bank's market area into the Franklin County, PA
area and diversify its current primary market of Fulton
County, PA. It is anticipated this office will generate
new
loan and deposit demand for the Bank in the coming years.
During 1996 the Bank received regulatory approval from the
Comptroller to open its first interstate Branch office in
Hancock, Maryland after management became aware of the
closing
of a branch office of First Federal Savings Bank of
Western
Maryland. This office is known as "Hancock Community
Bank, A
Division of The First National Bank of McConnellsburg".
The
location of this office is felt to be strategically
important
in order to expand the Bank's operations into Washington
Page 3 of 16 Pages
County, Maryland and northern Morgan County, West
Virginia.
This office is also the Bank's first supermarket branch
office. In October 2000, the owner of the adjacent
supermarket completed extensive renovations at which time
the
wall between the branch office and the supermarket was
removed, allowing customers to enter the branch directly
from
the supermarket. This office is expected to enhance
demand
for the Bank's loan and deposit products as well as retain
deposits of customers in southern Fulton County,
Pennsylvania.
The Bank received permission from the Comptroller to
expand its main office facilities in downtown
McConnellsburg
to allow for larger customer service, loan department and
data
processing areas. This expansion was completed on
September
1,1996, at a cost of approximately $1,700,000. In February
1999, the Bank purchased an adjacent property to the main
office facility at 115 Lincoln Way West in downtown
McConnellsburg from the Fulton Overseas Veterans
Association.
This site is 54' by 218' and has situated on it a three
story
building comprised of 4,577 usable square feet on the
first
floor and a 28' by 60' finished basement. The second and
third stories of the building are not usable. The Bank
has no
immediate plans for this facility but felt it was a wise
decision to purchase it for strategic planning purposes.
The
Bank has one wholly-owned subsidiary, First Fulton County
Community Development Corporation, which is a Community
Development Corporation formed under 12USC24/2CFR24 whose
primary regulator is the Office of the Comptroller of the
Currency, The Comptroller. The First Fulton County
Community
Development Corporation was incorporated with the
Commonwealth
of Pennsylvania on May 30, 1995. The primary business of
this
community development corporation is to provide and
promote
community welfare through the establishment and offering
of
low interest rate loan programs to stimulate economic
rehabilitation and development for the Borough of
McConnellsburg and the entire community of Fulton County,
PA.
Competition
Our primary market area includes all of Fulton County
and portions of Huntingdon, Bedford and Franklin Counties,
portions of Washington County, Maryland and portions of
Morgan
County, West Virginia. Our major competitor is a one
bank holding company headquartered in McConnellsburg,
Pennsylvania which has 7 branches located throughout
Fulton,
Franklin and Huntingdon Counties. As of December 31,
2000, we
were ranked second in total deposits when compared to our
major competitor. Also, in this market area we compete
with
regionally-based commercial banks (all of which have
greater
assets, capital and lending limits), savings banks,
savings
and loan associations, money market funds, insurance
companies, stock brokerage firms, regulated small loan
companies, credit unions and with issuers of commercial
paper
and other securities.
Page 4 of 16 Pages
Although deregulation has allowed us to become more
Competitive in the market place in regard to pricing of
loan
and deposit rates, there are disparities in taxing law
which
give some of our nonbank competitors advantages which
commercial banks do not enjoy and many burdensome and
costly
regulations with which we must comply. We meet these
challenges by developing and promoting our locally-owned
community bank image; by offering friendly and
professional
customer service; and by striving to maintain competitive
interest rates for both loans and deposits.
Regulation and Supervision
Our operations are subject to the provisions of the Bank
Holding Company Act of 1956, as amended (the "Bank Holding
Company Act"), and to supervision by the Federal Reserve
Board. The Bank Holding Company Act requires us to secure
the
Prior approval of the Federal Reserve Board before we own
or
control, directly or indirectly, more than five percent
(5%)
of the voting shares of substantially all of the assets of
an
institution, including another bank. The Bank Holding
Company
Act prohibits acquisition by the Company of more than five
percent (5%) of the voting shares of, or interest in, all
or
substantially all of the assets of any bank located
outside of
Pennsylvania unless such acquisition is specifically
Authorized by the laws of the state in which such bank is
located.
Our operations are subject to federal and state statutes
applicable to banks chartered under the banking laws of
the
United States, to members of the Federal Reserve System
and to banks whose deposits are insured by the FDIC. Our
operations are also subject to regulations of the
Comptroller,
the Federal Reserve Board and the FDIC. Our primary
supervisory authority is the Comptroller, which regulates
and
examines us. The Comptroller has authority to prevent
national banks from engaging in unsafe or unsound
practices in
conducting their businesses.
Legislation and Regulatory Changes
From time to time, legislation is enacted which has the
effect
of increasing the cost of doing business, limiting or
expanding permissible activities or affecting the
competitive
balance between banks and other financial institutions.
Proposals to change the laws and regulations governing the
operations and taxation of banks, bank holding companies
and
other financial institutions are frequently made in
Congress,
and before various bank regulatory agencies. No
prediction
can be made as to the likelihood of any major changes or
the
impact such changes might have on the Company and its
subsidiary, the Bank. Certain changes of potential
significance to the Company which have been enacted
recently
are discussed below.
The Federal Reserve Board, the FDIC and the Comptroller
have
issued risk-based capital guidelines, which supplement
existing capital requirements. The guidelines require all
Page 5 of 16 Pages
United States banks and bank holding companies to maintain
a
minimum risk-based capital ratio of 8.0% (of which at
least
3.0% must be in the form of common stockholders' equity).
Assets are assigned to five risk categories, with higher
levels of capital being required for the categories
perceived
as representing greater risk. The required capital will
represent equity and (to the extent permitted) nonequity
capital as a percentage of total risk-weighted assets. On
the
basis of an analysis of the rules and the projected
composition of the Company's consolidated assets, it is
not
expected these rules will have a material effect on the
Company's business and capital plans. The company
presently
has capital ratios exceeding all regulatory requirements.
The Financial Institution Reform, Recovery and Enforcement
Act
of 1989 ("FIRREA") was enacted in August 1989. This law
was
enacted primarily to improve the supervision of savings
associations by strengthening capital, accounting and
other
supervisory standards. In addition, FIRREA reorganized
the
FDIC by creating two deposit insurance funds to be
administered by the FDIC: the Savings Association
Insurance
Fund and the Bank Insurance Fund. Customers' deposits
held by
the Bank are insured under the Bank Insurance Fund.
FIRREA
also regulated real estate appraisal standards and the
supervisory/enforcement powers and penalty provisions in
connection with the regulation of the Bank.
In December 1991 the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") became law. Under
FDICIA,
institutions must be classified, based on their risk-based
capital ratios into one of five defined categories (well
capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically
undercapitalized) as outlined below:
Total Tier 1
Under a
Risk- Risk- Tier 1
Capital
Based Based Leverage
Order or
Ratio Ratio Ratio
Directive
CAPITAL CATEGORY
Well capitalized >10.0% >6.0% >5.0% No
Adequately capitalized > 8.0% >4.0% >4.0%*
Undercapitalized 8.0% 4.0% 4.0%*
Significantly
Undercapitalized 6.0% 3.0% 3.0%
Critically undercapitalized 2.0%
*3.0% for those banks having the highest available regulatory
rating.
Under FDICIA financial institutions are subject to
increased
regulatory scrutiny and must comply with certain
operational,
managerial and compensation standards to be developed by
Federal Reserve Board Regulations. FDICIA also required
the
regulators to issue new rules establishing certain minimum
standards to which an institution must adhere including
Page 6 of 16 Pages
standards requiring a minimum ratio of classified assets
to
capital, minimum earnings necessary to absorb losses and
minimum ratio of market value to book value for publicly
held
institutions. Additional regulations are required to be
developed relating to internal controls, loan
documentation,
credit underwriting, interest rate exposure, asset growth
and
excessive compensation, fees and benefits.
Annual full-scope, on-site examinations are required for
all
FDIC-insured institutions except institutions with assets
under $100 million which are well capitalized, well
managed
and not subject to a recent change in control, in which
case,
the examination period is every eighteen (18) months.
FDICIA
also required banking agencies to reintroduce loan-to-
value
("LTV") ratio regulations which were previously repealed
by
the 1982 Act. LTV's will limit the amount of money a
financial institution may lend to a borrower, when the
loan is
secured by real estate, to no more than a percentage to be
set
by regulation of the value of the real estate.
A separate subtitle within FDICIA, called the "Bank
Enterprise
Act of 1991", requires "truth-in-savings" on consumer
deposit
accounts so that consumers can make meaningful comparisons
between the competing claims of banks with regard to
deposit
accounts and products. Under this provision which became
effective on June 21, 1993, the Bank is required to
provide
information to depositors concerning the terms and fees of
their deposit accounts and to disclose the annual
percentage
yield on interest-bearing deposit accounts.
Federal regulators recently issued proposed regulations to
implement the privacy provisions of the Gramm-Leach-Bliley
Act
(Financial Services Modernization Act). This new law
requires
banks to notify consumers about their privacy policies and
to
give them an opportunity to "opt-out" or prevent the bank
from
sharing "nonpublic personal information" about them with
nonaffiliated third parties. Proposed regulations are
expected to take effect during 2001. We are in the
process of developing privacy policies and procedures to
provide timely disclosure of such policies and a
convenient
means for consumers to opt our of the sharing of their
information with unaffiliated third parties.
We do not anticipate compliance with environmental laws
and
regulations to have any material effect on their
respective
capital, expenditures, earnings, or competitive position.
Employees
As of December 31, 2000, we employed 56 persons on a full-
time
equivalent basis.
Statistical Data
Computation of our regulatory capital requirements for the
periods December 31, 2000, and December 31, 1999, on
page 43 of the annual shareholders report for the year
ended
December 31, 2000, is incorporated herein by reference.
Page 7 of 16 Pages
Loan Portfolio
We make loans to both individual consumers and commercial
entities. The types offered include auto, personal,
mortgage,
home equity, school, home repair, small business,
commercial,
and home construction loans. Within these loans types, we
make installment loans, which have set payments allowing
the
loan to be amortized over a fixed number of payments,
demand
loans, which have no fixed payment and which are payable
in
full on demand and are normally issued for a term of less
than
one year, and mortgage loans, which are secured with
marketable real estate and have fixed payment amounts for
a
pre-established payment period.
We do not assume undue risk on any loan within the loan
portfolio, and take appropriate steps to secure all loans
as
necessary.
We have adopted the following loan-to-value ratios, in
accordance with standards adopted by our bank supervisory
agencies:
Loan Category Loan-to-Value Limit
Raw Land 65%
Land Development 75%
Construction:
Commercial, Multifamily, and other
Nonresidential 1 to 4 Family Residential 80%
Improved Property 85%
Owner-occupied 1 to 4 Family and Home Equity 90%
We are neither dependent upon nor exposed to loan
concentrations to a single customer or to a single
industry,
the loss of any one or more of which would have a material
adverse effect on the financial condition of the Bank;
however, a portion of the Bank's customers' ability to
honor
their contracts is dependent upon the construction and
land
development and agribusiness economic sector. As a
majority
of our loan portfolio is comprised of loans to individuals
and
businesses in Fulton County, PA, a significant portion of
our
customers' abilities to honor their contracts is dependent
upon the general economic conditions in ,South Central
Pennsylvania.
Loan Portfolio composition as of December 31, 2000, and
December 31, 1999, on page 13 of the annual shareholders
report for the year ended December 31, 2000, is
incorporated
herein by reference.
Maturities of loans as of December 31, 2000, on page 14 of
the
annual shareholders report for the year ended December 31,
2000, is incorporated herein by reference.
Nonperforming loans consist of nonaccruing loans and loans
90
days or more past due. Nonaccruing loans are comprised of
loans that are no longer accruing interest income because
of
Page 8 of 16 pages
apparent financial difficulties of the borrower. Interest
on
nonaccruing loans is recorded when received only after
past
due principal and interest are brought current. Our
general
policy is to classify loans as nonaccrual when they become
past due in principal and interest for over 90 days and
collateral is insufficient to allow continuation of
interest
accrual. At that time, the accrued interest on the
nonaccrual
loan is reversed from the current year earnings and
interest
is not accrued until the loan has been brought current in
accordance with contractual terms.
Nonaccrual volume for 2000 decreased $99,283 from the
December
31, 1999, level due to the foreclosure and sale of a
residential property which was sold in the spring of
Nonaccrual volume for 1999 increased $363,616 from the
December 31, 1998, level due to a $155,000 residential
mortgage loan and several other residential mortgage loans
which were classified as nonaccrual. Nonaccrual volume for
1998 decreased $354,805 from December 31, 1997, due to a
$125,000 loan secured by a 1-4 family residential property
in the Hagerstown, MD area being moved to Other Real
Estate and sold in 1998; the amount charged-off as a
result of this movement and sale was approximately
$32,000; the charge-off in 1998 of a $100,000 commercial
loan secured by inventory; and
the charge-off of a $12,000 unsecured line of credit. The
remaining decrease in 1998 was the result of 1-4 family
mortgages classified as nonaccrual as of December 31,
1997,
being brought current.
Nonaccrual volume for 2001 is anticipated to increase due
to
some commercial loans and residential mortgage loans which
may
experience cash flow difficulties in 2001 as a result of
an
economic slowdown. Anticipated charge-offs for 2001 are
expected to remain approximately the same as the total
charge-
offs in 2000 of $203,000.
Nonaccrual, Past Due and Restructured Loans as of December
31,
2000, December 31, 1999, and December 31, 1998, on page 15
of
the annual shareholders report for the year ended December
31, 2000, are incorporated herein by reference.
Allowance for Loan Loss Analysis
The allowance for loan losses is maintained at a level to
absorb potential future loan losses contained in the loan
portfolio and is formally reviewed by us on a quarterly
basis.
The allowance is increased by provisions charged to
operating
expense and reduced by net charge-offs. Our basis for the
level of the allowance and the annual provisions is our
evaluation of the loan portfolio, current and projected
domestic economic conditions, the historical loan loss
experience, present and prospective financial condition of
the
borrowers, the level of nonperforming assets, best and
worst
case scenarios of possible loan losses and other relevant
factors. While we use available information to make such
evaluations, future adjustments of the allowance may be
necessary if economic conditions differ substantially from
the
assumptions used in making the evaluation. Loans are
charged
against the allowance for loan losses when we believe that
the
collectability of the principal is unlikely.
Page 9 of 16 Pages
Activity in the allowance for loan losses and a breakdown
of
the allowance for loan losses as of December 31, 2000, and
December 31, 1999, on page 15 of the annual shareholders
report for the year ended December 31, 2000, are
incorporated
herein by reference.
Although loans secured by 1-4 family residential mortgages
comprise approximately 42% of the entire loan portfolio,
until
recently these mortgages have historically resulted in
little
or no loss. The allocation of the Allowance for Loan
Losses
for these mortgages is based upon this historical fact.
Due
to a more critical evaluation of our commercial,
industrial,
and agricultural loan portfolio, the allocation of the
Allowance for Loan Losses for commercial, industrial, and
Agriculture loans has been accordingly increased.
Deposits
Time Certificates of Deposit of $100,000 and over as of
December 31, 2000, and December 31, 1999, totaled
$12,383,000
and $12,292,000 respectively.
Maturities and rate sensitivity of total interest bearing
liabilities as of December 31, 2000, on page 42 of the
annual
shareholders report for the year ended December 31, 2000,
is
incorporated herein by reference.
Returns on Equity and Assets
Returns on equity and assets and other statistical data
for
2000, 1999 and 1998 on page 24 of the annual shareholders
report for the year ended December 31, 2000, is
incorporated
herein by reference.
Item 2. Properties
The physical properties where we conduct our business in
the
Commonwealth of Pennsylvania are all owned by us while the
property where we conduct business in the State of
Maryland is
leased. The properties owned by us are as follows: the
main
office located at 101 Lincoln Way West, McConnellsburg,
Pennsylvania, has been attached by a two story brick and
frame
addition, to a building located at 111 South Second
Street,
McConnellsburg, Pennsylvania which houses the Bank's
consumer
loan department on the first floor and commercial loan
department and future expansion space on the second floor;
a
property adjacent to the main office facility at 115
Lincoln
Way West in downtown McConnellsburg comprised of a 54' by
218'
city lot which has situated on it a three story building
consisting of 4,577 usable square feet on the first floor,
a
28' by 60' finished basement, second and third stories
which
are unusable and a detached garage; a branch office
located on
Route 522 South, Needmore, Pennsylvania; a property
located at
Routes 16 and 30 East, McConnellsburg, Pennsylvania which
contains a drive-up automatic teller machine and a five
(5)
lane drive-up branch accessible from both Route 30 and
Route
16; and a branch office located at 30 Mullen Street, Fort
Page 10 of 16 Pages
Loudon, Pennsylvania, for which we received regulatory
approval from the Office of the Comptroller of the
Currency to
purchase effective November 13, 1995. The branch office
leased by us in the state of Maryland is located in the
Hancock Shopping Center at 343 North Pennsylvania Avenue
in
Hancock, Maryland next to a supermarket.
The main office located in downtown McConnellsburg is
housed
in a two story brick and frame building, consisting of
approximately 28,277 square feet. It has been attached
(by a
two story brick and frame addition which houses the data
processing/operations center on the first floor and
executive
offices and a meeting room on the second floor) to the
building located at 111 South Second Street, a brick and
frame
building situated on a one town lot which has been
expanded
and renovated to house the consumer loan department on the
first floor and commercial loan department and future
offices
and rest rooms on the second floor. The main office
contains
one (1) external time and temperature sign, seven (7)
internal
teller stations, a customer service office area, executive
offices, one (1) drive-up teller station, an automatic
teller
machine, three (3) vaults (one containing safe deposit
boxes
for customer use and one containing a fire proof/data-
secure
vault in the operations center), a night depository, a
data
processing center with a security controlled computer
operations center, a loan department with a large file
room, a
kitchen and a 5,000 square foot basement storage area.
The Needmore Branch Office, a brick and frame building
situated on approximately five (5) acres, consists of
approximately 3,000 square feet, of which 750 square feet
is
rented as office space. The branch office houses three
(3)
internal teller stations, one (1) drive-up teller station,
a
customer service office area, one (1) vault which contains
safe deposit boxes for customer use, one (1) kitchen, and
storage areas.
The East End Express Banking Center, located on a property
of
approximately 68,000 square feet at Routes 16 and 30, has
situated on it one (1) drive-up automatic teller machine
and
one (1) night depository (both housed in a brick and frame
building of approximately 121 square feet), and a drive-up
branch office, a brick and frame building of approximately
576
square feet, which contains four (4) drive-up teller
stations
with the potential for a total of five (5) drive-up teller
stations in the future.
The Fort Loudon Branch Office, which was expanded and
Completely renovated in 1997 at an approximate cost of
$200,000, is a brick and frame building situated on
approximately .23 acres. It consists of approximately
1,035
square feet. The branch office houses three (3) internal
teller stations, one (1) drive-up teller station, one (1)
vault which contains safe deposit boxes for customer use,
a
manager's office, one (1) kitchen, storage areas and a
basement for storage which consists of approximately 620
square feet.
Page 11 of 16 Pages
The leased office in Hancock, Maryland housing Hancock
Community Bank is approximately 1,400 square feet and is
leased from the owner of the shopping center next to a
supermarket. It contains two (2) offices, one (1)
automated
teller machine, two (2) drive-up teller lanes, a lobby, a
safe
deposit box vault for customers and three (3) teller
stations.
Item 3. Legal Proceedings
In our opinion, there are no proceedings pending to which
we
are a party or to which our property is subject, which, if
determined adversely to us would be material in relation
to
the our retained earnings or financial condition. There
are
no proceedings pending other than ordinary routine
litigation
incident to our business. In addition, no material
proceedings
are known to be threatened or contemplated against the us
by
government authorities.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters
Our common stock is not traded on a national securities
Exchange but is traded inactively in the over-the-counter
market and is only occasionally and sporadically traded
through local and regional brokerage houses or through the
facilities of the Bank.
The Stock Market Analysis and Dividends for 2000 and 1999
on
page 44 of the annual shareholders report for the year
ended
December 31, 2000, is incorporated herein by reference.
Item 6. Selected Financial Data
The Selected Five-Year Financial Data on page 24 of the
annual
shareholders report for the year ended December 31, 2000,
is
incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial
Condition
and Results of Operations
Management's discussion and analysis of financial
condition
and results of Operations on pages 29 through 44 of the
annual
shareholders report for the year ended December 31, 2000,
is
incorporated herein by reference.
Page 12 of 16 Pages
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data, some of
which
is required under Guide 3 (Statistical Disclosures by Bank
Holding Companies) are shown on pages 2 through 28 of the
annual shareholders report for the year ended December 31,
2000, are incorporated herein by reference.
The Summary of Quarterly Financial Data on page 25 of the
annual shareholders report for the year ended December 31,
2000, is incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on
Accounting
and Financial Disclosure
None.
PART III
Item 10. Directors and Officers of the Registrant
The information contained on pages 3 through 15 of FNB
Financial Corporation's Proxy Statement For the Annual
Meeting of Shareholders to be Held April 25, 2001, with
respect to directors and executive officers of the
Company,
is incorporated herein by reference in response to this
item.
Item 11. Executive Compensation
The information contained on pages 13 through 17 of FNB
Financial Corporation's Proxy Statement For the Annual
Meeting of Shareholders to be Held April 24, 2001, with
respect to executive compensation, transactions and
contracts, is incorporated herein by reference in
response to
this item. The Executive Employment Contract of the
President and CEO of the Bank and the Executive Change of
Control Agreement for the Senior Vice President and CFO
of
the Bank both dated October 2000, are incorporated herein
by
reference in response to this item.
Item 12. Security Ownership of certain Beneficial Owners and
Management
The information contained on pages 3 through 5 and pages
18
And 19 of FNB Financial Corporation's Proxy Statement For
the
Annual Meeting to be Held April 24, 2001, with respect to
security ownership of certain beneficial owners and
management, is incorporated herein by reference in
response
to this item.
Item 13. Certain Relationships and Related Transactions
The information contained on pages 9, 17, and 18 of FNB
Financial Corporation's Proxy Statement For the Annual
Meeting to be Held April 24, 2001, with respect to
certain
relationships and related transactions, is incorporated
herein by reference in response to this item.
Page 13 of 16 Pages
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports of
Form
8-k.
(a) (1) - List of Financial Statements
The following consolidated financial statements of FNB
Financial Corporation and its subsidiary, included in the
annual report of the registrant to its shareholders for
the
year ended December 31, 2000, are incorporated by
reference
in Item 8:
Consolidated balance sheets - December 31, 2000, and
1999
Consolidated statements of income - Years ended December
31,
2000, 1999 and 1998
Consolidated statements of stockholders' equity - Years
ended December 31, 2000, 1999 and 1998
Consolidated statements of cash flows - Years ended
December
31, 2000, 1999 and 1998
Notes to consolidated financial statements - December
31,
2000
(2) - List of Financial Statement Schedules
Schedule I - Marketable Securities - Other
Investments
Schedule III - Condensed Financial Information of
Registrant
Schedule VIII - Valuation and Qualifying Accounts
All other schedules for which provision is made in
the applicable accounting regulation of the
Securities and Exchange Commission are not required
under the related instructions or are inapplicable
and therefore have been omitted.
(3) Listing of Exhibits
Exhibit (3)(i) Articles of incorporation
Exhibit (3)(ii) Bylaws
Exhibit (4) Instruments defining the rights of
security holders including indentures
Exhibit (10) Material Contracts
Exhibit (13) Annual report to security holders
Exhibit (22) Subsidiaries of the registrant
Exhibit (27) Financial data schedule
All other exhibits for which provision is made in
the applicable accounting regulation of the
Securities and Exchange Commission are not
required
under the related instructions or are
inapplicable
and therefore have been omitted.
(b) Reports on Form 8-K filed
None.
Page 14 of 16 Pages
(c) Exhibits
Exhibit (3)(i) Articles of incorporation - Exhibit
3A
of Form SB-2 Registration Statement No. 33-66014
are
incorporated herein by reference.
Exhibit (3)(ii) Bylaws - Exhibit 3B of Form SB-2
Registration Statement No. 33-66014 are
incorporated
herein by reference.
Exhibit (4) Instruments defining the rights of
security holders including debentures - Document #1
of
Form 10-K for FNB Financial Corporation for fiscal
year
ended December 31, 1995 is incorporated herein by
reference.
Exhibit (10.1) Executive Supplemental Retirement
Plan
For Select Officers - incorporated by reference to
the company's Form 10-K for the year ended December
31, 1999.
Exhibit (10.2) Director Fee Continuation Agreement
for
Select Directors - incorporated by reference to the
company's Form 10-K for the year ended December 31,
1999.
Exhibit (10.3) Executive Employment Contract for
the
President and CEO of the Bank dated October 2000 -
filed herewith.
Exhibit (10.4) Executive Change of Control
Agreement
for the Senior Vice President and CFO of the Bank
dated
October 2000 is filed herewith.
Exhibit (13) Annual report to security holders -
filed herewith.
Exhibit (22) Subsidiaries of the registrant - As of
this report, The First National Bank of
McConnellsburg is the only subsidiary of the
Registrant and is explained further within the
Business Section (Item 1) of this report.
The First National Bank of McConnellsburg has one
subsidiary as of the date of this report, First
Fulton County Community Development Corporation and
is explained further within the Business Section
(Item 1) of this report.
(d) Financial Statement Schedules
Schedule I - Marketable Securities - Other
Investments
Schedules of Marketable Securities included on page
28 of the annual report of the registrant to its
shareholders for the year ended December 31, 2000,
are incorporated herein by reference.
Schedule III - Condensed Financial Information of
Registrant
Page 15 of 16 pages
Condensed Financial Information of the Registrant
included on page 24 of the annual report of the
registrant to its shareholders for the year ended
December 31, 2000, is incorporated herein by
reference.
Schedule VIII - Valuation and Qualifying Accounts
The schedule of the Allowance for Loan losses
included
on page 15 of the annual report of the registrant
to
its shareholders for the year ended December 31,
2000, is incorporated herein by reference.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FNB FINANCIAL CORPORATION
(Registrant)
/s/John C. Duffey 3/14/2001
John C. Duffey Date
Director and President
of the Corporation
President & CEO of the Bank
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates
indicated.
H. Lyle Duffey /s/Henry W. Daniels
3/14/2001
H. Lyle Duffey Date Henry W. Daniels Date
Director, Chairman Director, Vice Chairman
/s/John C. Duffey 3/14/2001 /s/Harry D. Johnston
3/14/2001
John C. Duffey Date Harry D. Johnston, D. O.
Date
Director, President Director, Vice President
/s/George S. Grissinger3/14/2001 /s/Patricia A.
Carbaugh3/14/2000
George S. Grissinger Date Patricia A. Carbaugh Date
Director Director
Harvey J. Culler /s/Lonnie W. Palmer
3/14/2001
Harvey J. Culler Date Lonnie W. Palmer Date
Director
/s/Paul T. Ott 3/14/2001 /s/Daniel E. Waltz
3/14/2001
Lonnie W. Palmer Date Daniel E. Waltz Date
Director Director, Secretary,
Treasurer
(Principal Financial and
/s/D. A. Washabaugh, III 3/14/2001 Accounting Officer)
D. A. Washabaugh, III Date
Director
Page 16 of 16 Pages
Exhibit
10.3
EXECUTIVE EMPLOYMENT AGREEMENT
This Agreement is made as of the _____ day of October,
2000, by and between the FNB Financial Corporation, a
Pennsylvania bank holding company ("Corporation"), The First
National Bank of McConnellsburg, PA ("Bank"), and John C.
Duffey, an adult individual and resident of the Commonwealth of
Pennsylvania ("Executive").
W I T N E S S E T H:
WHEREAS, the Corporation is a registered bank holding
company;
WHEREAS, the Bank is a subsidiary of the Corporation;
WHEREAS, any reference solely to Corporation in this
Agreement shall mean Corporation or Bank, unless otherwise
stated;
WHEREAS, the Corporation desires to employ the Executive as
its Chief Executive Officer under the terms and conditions set
forth herein; and
WHEREAS, the Executive desires to serve the Corporation and
Bank in an executive capacity under the terms and conditions set
forth in this Agreement; and
WHEREAS, the Executive acknowledges that this Agreement is
a renewal of the preceding Agreement which expired on August 1,
2000 (the "Prior Agreement") upon substantially the same terms
and conditions of the Prior Agreement;
WHEREAS, the Executive acknowledges that any changes that
have been made have been negotiated in good faith and are not
substantially different from the terms and conditions of the
Prior Agreement; and
WHEREAS, the Executive agrees to waive any claims that he
had, has or which may arise in the future, under the Prior
Agreement, including but not limited to, a claim that this
Agreement does not contain substantially the same terms and
conditions of the Prior Agreement expiring on August 1, 2000.
NOW, THEREFORE, in consideration of the mutual covenants
and agreements set forth herein and intending to be legally
bound hereby, the parties agree as follows:
1. TERM OF EMPLOYMENT. The Corporation and Bank employ
the Executive and the Executive accepts employment with the
Corporation and Bank for an approximate period of five (5) years
beginning on the first day of August, 2000 and ending on the
last day of July, 2005, subject, however, to prior termination
of this Agreement as set forth below.
Page 1 of 13 Pages
2. POSITION AND DUTIES.
(a) The Executive shall serve as the Chief Executive
Officer of the Corporation and the Bank and a member of the
Board of Directors of the Corporation and the Bank,
reporting only to the Board of Directors of the Corporation
and Bank respectively, and shall have those powers and
duties as may from time to time be prescribed by the Board
of Directors of the Corporation and the Bank, provided that
such duties are consistent with the Executive's position as
the Chief Executive Officer.
(b) The Executive represents to Corporation and Bank
that he is not subject or a party to any employment
agreement, non-competition covenant, non-disclosure
agreement or other agreement, covenant, understanding or
restriction which would prohibit Executive from executing
this Agreement and performing fully his duties and
responsibilities hereunder, or which would in any manner,
directly or indirectly, limit or affect the duties and
responsibilities which may now or in the future be assigned
to Executive by the Corporation and Bank.
(c) The Executive shall also be available to assist
other subsidiaries or divisions of the Corporation as he
may be directed by the Board of Directors of the
Corporation and/or Bank.
3. ENGAGEMENT IN OTHER EMPLOYMENT. The Executive shall
devote substantially all his working time, ability and attention
to the business of the Corporation and the Bank during the term
of this Agreement. Except as previously disclosed, the
Executive shall seek approval from the Board of Directors of the
Corporation and Bank in writing before the Executive engages in
any other business or commercial activities, duties or pursuits,
including, but not limited to, directorships of other companies.
Under no circumstances may the Executive engage in any business
or commercial activities, duties or pursuits which compete with
the business or commercial activities of the Corporation or
which are prohibited under the provisions of the Bank's Code of
Ethics, nor may the Executive serve as a director or officer or
in any other capacity in a company or financial institution
which competes with the Corporation.
4. COMPENSATION.
(a) ANNUAL DIRECT SALARY. As compensation for all
services rendered by the Executive under this
Agreement, the Executive shall be entitled to
receive from the Corporation an initial salary of
$90,000 per year (the "Annual Direct Salary"),
payable in substantially equal bi-weekly
installments, prorated on a weekly basis for any
partial employment period. The Annual Direct
Salary will be reviewed by the Executive
Committee of the Board of Directors of the
Corporation annually following the Corporation
and Bank's annual reorganization meeting. As
part of the salary review process, the Executive
Committee shall compare the Executive's salary
and performance to the salaries and performance
of executives in similar positions in like
Page 2 of 13 Pages
financial institutions utilizing available survey
data (like financial institutions shall mean
financial institutions of similar asset size
within the State of Pennsylvania and the
immediate surrounding region). With due
consideration to this salary and performance
information, the Executive Committee will
recommend an annual salary increase to the Board
of Directors. The Executive's final salary level
will be set at the discretion of the Board of
Directors. In no event shall the Annual Direct
Salary be decreased unless substantial
circumstances occur which warrant and require all
employees of the Corporation and/or Bank to
accept decreases in wages or salaries.
(b) INCENTIVE COMPENSATION. The Board of Directors
of the Corporation shall establish an Incentive
Compensation Plan for the Executive. The Incentive
Compensation Plan shall provide for the payment of a yearly
bonus, expressed as a percentage of the Executive's Annual
Salary (not to exceed 10% thereof) which amount shall be
paid to the Executive within thirty (30) days of the end of
the fiscal year in the event the financial and business
goals of the Corporation and the Bank are met for that year
as set forth by the Board of Directors. As part of the
Incentive Compensation Plan, the Board of Directors, in its
sole discretion, may also provide for payment of a yearly
bonus in the event some, but not all, of the financial and
business goals of the Corporation and the Bank as set forth
by the Board of Directors are met for the year in question.
(c) DIRECTOR FEES. As long as the Executive is a
duly elected and qualified member of the Board of Directors
of the Corporation or Bank, or both, the Executive shall be
entitled to the same compensation as paid to other members
of the Board of Directors of the Corporation and/or Bank,
or both.
5. FRINGE BENEFITS, VACATION, EXPENSES, AND PERQUISITES.
It is agreed that nothing paid to the Executive under any of
the below, described benefit plans or arrangements shall be
deemed to be in lieu of compensation to the Executive hereunder.
The Executive shall be entitled to:
(a) EMPLOYEE BENEFIT PLANS. The Executive shall
participate in and receive benefits under all Corporation
and Bank employment benefit plans, including but not
limited to any profit sharing plan, savings plan, stock
option plan, hospitalization plan, life insurance, and
health and accident plan or arrangement made available by
the Corporation to its executives. It is understood and
agreed that the Executive shall be entitled to the
following benefits, at minimum:
(i) Pension Plan: The Executive shall be
entitled to participate in the 401-K pension plan of
the Bank as established for all employees. Vesting
shall be in accordance with the plan outline.
Page 3 of 13 Pages
(ii) Life Insurance: The Corporation shall
provide and maintain life insurance for the Executive
if he qualifies therefore on a standard underwriting
basis. Such life insurance shall at all times be
maintained at an amount equal to three (3) times the
Executive's Annual Direct Salary.
(iii) Disability Insurance: The Corporation
shall make available both a short-term and long-term
disability insurance policy to the Executive.
(iv) Medical Coverage: All costs of the
Executive's medical insurance for both individual and
family coverage will be paid by the Corporation for
the remaining term of the Executive's employment with
the Corporation.
(b) VACATION AND HOLIDAYS. During the term of this
contract, the Executive shall be entitled to 4 weeks
vacation during the year 2001, and 5 weeks vacation during
the years 2002, 2003, 2004, and 2005. In the event that
the Executive does not take vacation, or is unable to take
vacation, the Executive's compensation shall be
supplemented at the discretion of the Board of Directors.
The Executive shall also be entitled to all paid holidays
given by the Bank to its employees.
(c) BUSINESS EXPENSES. During the term of his
employment hereunder, the Executive shall be entitled to
receive prompt reimbursement for all reasonable expenses
incurred by him in performing services hereunder, provided
that the Executive properly accounts therefore in
accordance with the Corporation and Bank's policy.
(d) BANK INDUSTRY CONVENTIONS. The Executive and the
Executive's spouse may attend the conventions of the
Pennsylvania Association of Community Bankers and/or
Pennsylvania Bankers Association, or those same trade
associations should they change their respective names
during the term of this Agreement, at the expense of the
Bank. Expense will include convention registration,
lodging, meals, travel expenses and other associated
expenses.
(e) AUTOMOBILE. The Executive shall be entitled to
the use of one Bank purchased or leased automobile. The
Executive shall also be entitled to reimbursement for all
operating expenses of the automobile, including but not
limited to oil, gasoline, maintenance, repairs and
insurance.
(f) PHYSICAL EXAMINATION. The Corporation will
provide and pay for regular physical examinations of the
Executive on an every other year basis by a qualified
physician chosen by the Executive, however, the Corporation
is not implying that a regular physical examination is
required of the Executive.
Page 4 of 13 Pages
(g) OTHER PERQUISITES AND BENEFITS. The Executive
shall receive such other perquisites and fringe benefits
(including continuing education workshops and seminars in
financial or bank related matters) as the Board of
Directors of the Corporation deems appropriate in its sole
discretion.
6. OFFICES. The Executive agrees to serve, if elected or
appointed thereto, in one or more offices or as a director of
any subsidiary of the Corporation; provided that the Executive
is indemnified for so serving on a basis no less favorable than
is currently provided under the Corporation's Articles of
Incorporation or By-Laws, as amended or supplemented. Such
indemnification shall be provided as described in paragraph 7
below.
7. INDEMNIFICATION. The Corporation shall indemnify the
Executive for any and all liability exposure and all costs of
litigation, including attorney's fees, if the Executive has
provided notice to the Corporation and the Corporation has had
an opportunity to provide a defense. The Corporation shall
indemnify the Executive, to the fullest extent permitted by
Pennsylvania law, with respect to any threatened, pending or
completed action, suit or proceeding (including any final
judgment resulting therefrom) brought against him by reason of
the fact that he is or was a director, officer, employee or
agent of the Corporation or any of its subsidiaries or is or was
serving at the request of the Corporation as a director,
officer, employee or agent of another person or entity. To the
fullest extent permitted by Pennsylvania law, the Corporation
shall in advance of final disposition pay any and all expenses
incurred by the Executive in connection with any threatened,
pending or completed action, suit or proceeding with respect to
which the Executive may be entitled to indemnification
hereunder. The Executive's right to indemnification provided
herein is not exclusive, and any other rights or indemnification
to which the Executive may be entitled under any bylaw,
agreement, vote of shareholders or otherwise, shall continue
beyond the term of this Agreement. The Executive's right to
indemnification provided herein, however, shall have no effect
should the Executive have committed an unlawful act or willingly
engaged in unauthorized conduct. The Corporation shall use its
best efforts to obtain insurance coverage for the Executive
under an insurance policy covering officers and directors of the
Corporation against lawsuits, arbitrations or other proceedings;
however, nothing herein shall be construed to require the
Corporation to obtain such insurance if the Board of Directors
of the Corporation determines that such coverage cannot be
obtained at a commercially reasonable price.
8. UNAUTHORIZED DISCLOSURE. During the period of his
employment hereunder, or at any later time, the Executive shall
not, without the written consent of the Board of Directors of
the Corporation or a person authorized thereby, knowingly
disclose to any person, other than an employee of the
Corporation or a person to whom disclosure is reasonably
necessary or appropriate in connection with the performance by
the Executive of his duties as an executive of the Corporation,
any material confidential information obtained by him while in
the employ of the Corporation with respect to any of the
Corporation's services, products, improvements, formulas,
designs or styles, processes, customers, methods of business or
any business practices the disclosure of which could be or will
be materially damaging to the Corporation; provided, however,
that confidential
Page 5 of 13 Pages
information shall not include any information known generally to
the public (other than as a result of unauthorized disclosure by
the Executive or any person with the assistance, consent or at
the direction of the Executive) or any information of a type not
otherwise considered confidential by persons engaged in the same
business or a business similar to that conducted by the
Corporation, or any information that need be disclosed as
required by law.
9. RESTRICTIVE COVENANT. The Executive hereby
acknowledges and recognizes the highly competitive nature of the
business of the Corporation and accordingly agrees that within
the marketing area of the Corporation (defined as any area
having its main or subsidiary office within fifty (50) miles of
the Corporation's headquarters or twenty-five (25) miles of any
of the Corporation's subsidiary offices), he shall not directly
or indirectly compete with the Corporation or any of its
subsidiaries for a period of one (1) year after the date of
termination of the Executive's employment if the Executive's
employment is terminated for Cause by Corporation pursuant to
paragraph 10(c) of the Agreement or such termination is a result
of a resignation by the Executive for other than a "Health and
Good Reason" under paragraph 10(d) of this Agreement. The
Executive further agrees that direct or indirect competition
includes any of the following:
(a) be engaged (other than by the Corporation),
directly or indirectly, either for his own account or as
agent, consultant, employee, partner, officer, director,
proprietor, investor (except as an investor owning less
than 5% of the stock of a publicly owned company) or
otherwise of any person, firm, corporation or enterprise
engaged in (1) the banking (including bank holding company)
or financial services industry, or (2) any other activity
in which the Corporation or any of its subsidiaries are
engaged during the Executive's employment or at the date of
termination of the Executive's employment; or
(b) provide financial or other assistance (other that
through Corporation) to any person, firm, corporation, or
enterprise engaged in (1) the banking (including bank
holding company) or financial services industry, or (2) any
other activity in which Corporation or any of its
subsidiaries is engaged during the Executive's employment;
or
(c) other than on behalf of the Corporation, solicit,
directly or indirectly, current and former customers of the
Corporation or any of its subsidiaries; or
(d) other than on behalf of the Corporation, solicit,
directly or indirectly, current or former employees of the
Corporation or any of its subsidiaries.
The existence of any immaterial claim or cause of action of
the Executive against the Corporation, whether predicated on
this Agreement or otherwise, shall not constitute a defense to
the enforcement by the Corporation of this covenant. The
Executive agrees that any breach of the restrictions set forth
in paragraphs 8 or 9 will result in irreparable injury to the
Corporation or the
Bank for which it shall have no adequate remedy at law and the
Page 6 of 13 Pages
Corporation and the Bank shall be entitled to injunctive relief
in order to enforce the provisions hereof. In the event that
this paragraph shall be determined by any court of competent
jurisdiction to be unenforceable in part by reason of it being
too great a period of time or covering too great a geographical
area, it shall be in full force and effect as to that period of
time or geographical area determined to be reasonable by the
Court.
10. TERMINATION. The Executive's employment hereunder may
be terminated without any breach of this Agreement only under
the following circumstances:
(a) DEATH. The Executive's employment hereunder
shall terminate upon his death.
(b) DISABILITY.
(i) Suspension of compensation. If, as a result
of physical or mental injury or impairment, the
Executive is unable to perform all of the essential
job functions of his position on a full-time basis
with or without reasonable accommodation and without
posing a direct threat to himself and others, for a
period of one hundred eighty (180) days, all
obligations of the Corporation to pay the Executive an
Annual Direct Salary, as set forth in paragraph 4(a)
of this Agreement are suspended. Any paid time off,
sick leave, or short-term disability pay the Executive
may be entitled to receive, pursuant to an established
disability plan or program of the Corporation shall be
considered part of the compensation the Executive
shall receive while disabled, and shall not be in
addition to the compensation received by the Executive
under this provision of the Agreement.
(ii) Disability termination. The Executive
agrees that should he remain unable to perform all of
the essential functions of his position on a full-time
basis, with or without a reasonable accommodation and
without posing a direct threat to himself or others,
after one hundred eighty (180) days, the Corporation
will suffer an undue hardship by continuing the
Executive in his position. Upon this event, all
compensation and employment obligations of the
Corporation under this Agreement shall cease (with the
exception of the Executive's rights under the
Corporation's then existing short-term and/or long-
term disability plans) and this Agreement shall
terminate.
(c) CAUSE. The Corporation may terminate the
Executive's employment hereunder for Cause. For the
purposes of this Agreement, the Corporation shall have
"Cause" to terminate the Executive's employment hereunder
upon (i) the failure by the Executive to substantially
perform his duties hereunder, other than any such failure
resulting from the Executive's incapacity due to physical
or mental illness, or (ii) the engagement by the Executive
in misconduct materially injurious to the Corporation or
the Bank (misconduct shall mean the commission of a
felony), or (iii) the violation by the Executive of the
provisions of Paragraph 3 or 8 hereof after notice from the
Corporation and a failure to cure the violation within
thirty (30) days of said
Page 7 of 13 Pages
notice, or if said violation cannot be cured within thirty
(30) days, or within a reasonable time thereafter if the
Executive is attempting to cure the violation, or (iv) the
gross negligence of the Executive in the performance of his
duties, or (v) receipt of a final written directive or
order of any governmental body or entity having
jurisdiction over the Corporation or any of its
subsidiaries requiring termination or removal of the
Executive as Chief Executive Officer or Director of the
Corporation or any of its subsidiaries or (vi) the
Executive's unlawful discrimination, including harassment,
against Corporation or Bank's employees, customers,
business associates, contractors or visitors.
(d) HEALTH AND GOOD REASON. The Executive may
terminate his employment hereunder by providing not less
than fourteen (14) days prior written notice to the
Corporation (i) if his health should become impaired to an
extent that it makes continued performance of his duties
hereunder hazardous to his physical or mental health or his
life, provided that the Executive shall furnish the
Corporation with a written statement from a qualified
doctor to such effect, and provided further, that at the
Corporation's request, the Executive shall submit to an
examination by an independent doctor selected by the
Corporation and the doctor shall have concurred with the
conclusion of the Executive's doctor or (ii) for Good
Reason. The term "Good Reason" shall mean (aa) any removal
of the Executive from or any failure to re-elect the
Executive to any of the positions indicated in Section 2
hereof, except in connection with termination of the
Executive's employment for Cause, (bb) a reduction of the
Executive's rate of compensation as provided in Section 4
hereof, (cc) failure of the Corporation or Bank to comply
with Section 5 hereof, (dd) any other material breach by
the Corporation or Bank of this Agreement, provided that
the Executive shall have given the Board of Directors of
Corporation thirty (30) days written notice of any of the
breaches set forth in subsections (aa), (bb), (cc) or (dd)
of this paragraph and such breach shall not have been cured
within such thirty (30) day period after receipt of notice;
or (ee) any Change of Control as defined under Section 14.
(e) RETIREMENT. At any time during the term of this
contract, the Executive may, provided he has reached the
age of fifty-five (55), announce his voluntary retirement
from active employment. Such announcement of voluntary
retirement shall not be considered a breach of the
contract. Such announcement must be given at least ninety
(90) days before the Executive voluntarily commences
retirement.
11. PAYMENTS UPON TERMINATION.
(a) DEATH, DISABILITY OR FOR CAUSE. If the
Executive's employment shall be terminated because of
death, disability or for Cause, the Corporation shall pay
the Executive his full Annual Direct Salary through the
date of termination at the rate in effect at the time of
termination and any other earned but unused vacation days,
personal days, holidays, or other fringe benefits owing to
Executive at the date of termination as established by
Corporation policy, and the Corporation and Bank shall have
no further obligations to the Executive under this
agreement.
Page 8 of 13 Pages
(b) UNILATERAL AND GOOD REASON TERMINATION. If the
Executive's employment is terminated by the Corporation
(other than pursuant to Paragraphs 10(a) Death, 10(b)
Disability, or 10(c) Cause hereof or as a result of non-
renewal of this Agreement), or if the Executive shall
terminate his employment for Good Reason, then the
Corporation shall pay the Executive a lump sum payment
equal to two times (2.00 X) the Annual Direct Salary. In
such event, the Corporation shall also maintain in full
force and effect, for the continued benefit of the
Executive for the full term of this Agreement, all employee
benefit plans and programs to which the Executive was
entitled prior to the date of termination if the
Executive's continued participation is possible under the
general terms and provisions of such plans and programs.
In the event that the Executive's participation in any such
plan or program is barred, the Executive shall be entitled
to receive an amount equal to the annual contribution,
payments, credits or allocations made by the Corporation to
him, to his account or on his behalf under such plans and
programs from which his continued participation is barred;
except that if the Executive's participation in any health,
medical, life insurance, or disability plan or program is
barred, the Corporation shall obtain and pay for, on
Executive's behalf, individual insurance plans, policies or
programs which provide to the Executive health, medical,
life and disability insurance coverage which is equivalent
to the insurance coverage to which Executive was entitled
prior to the date of termination.
In the event the payment described herein, when added
to all other amounts or benefits provided to or on behalf
of the Executive in connection with his termination of
employment, would result in the imposition of an excise tax
under Code Section 4999, such payment shall be
retroactively (if necessary) reduced to the extent
necessary to avoid such excise tax imposition. Upon
written notice to the Executive, together with calculation
of the Corporation's independent auditors, the Executive
shall remit to the Corporation the amount of reduction plus
such interest as may be necessary to avoid the imposition
of such excise tax. Notwithstanding the foregoing or any
other provision of this contract to the contrary, if any
portion of the amount herein payable to the Executive is
determined to be non-deductible pursuant to the regulations
promulgated under Section 280G of the Code, then the
Corporation shall be required only to pay the Executive the
amount determined to be deductible under Section 280G.
(c) NON-RENEWAL AGREEMENT AND SEVERANCE ALLOWANCE.
In the event the Executive serves the full term of this
Agreement, and the Corporation does not offer to renew this
Agreement, for reasons other than those listed in
paragraphs 10(a), 10(b) or 10(c), upon substantially the
same terms and conditions for an additional five (5) year
term, the Executive shall be entitled to a severance
allowance equal to two times (2.00 X) his Annual Direct
Salary, as well as such vested employee benefits when due
and payable, and the Corporation shall have no further
obligations.
Page 9 of 13 Pages
In the event the payment described herein, when added
to all other amounts or benefits provided to or on behalf
of the Executive in connection with his termination of
employment, would result in the imposition of an excise tax
under Code Section 4999, such payment shall be
retroactively (if necessary) reduced to the extent
necessary to avoid such excise tax imposition. Upon
written notice to the Executive, together with calculation
of the Corporation's independent auditors, the Executive
shall remit to the Corporation the amount of reduction plus
such interest as may be necessary to avoid the imposition
of such excise tax. Notwithstanding the foregoing or any
other provision of this contract to the contrary, if any
portion of the amount herein payable to the Executive is
determined to be non-deductible pursuant to the regulations
promulgated under Section 280G of the Code, then the
Corporation shall be required only to pay the Executive the
amount determined to be deductible under Section 280G.
In the event that Executive should choose not to renew
this contract upon substantially the same terms and
conditions for an additional five (5) year term, the
Executive shall be required to follow the guidelines listed
in the paragraph 9 (relating to restrictive covenants) and
the Corporation shall have no further obligations to
Executive under this Agreement or otherwise.
Nothing in this Agreement shall be construed to mean
that certain terms of this Agreement cannot be renegotiated
or that terms cannot be added to this Agreement when
negotiated in good faith.
(d) RETIREMENT. If the Executive's employment shall
be terminated because of the Executive's announced
voluntary retirement per the guidelines of Section 10 (e) ,
the Corporation shall pay the Executive his full Annual
Direct Salary and Benefits through the date of his
retirement at the rate in effect at the time of Executive's
announcement of retirement and any other earned but unused
vacation days, personal days, holidays or other fringe
benefits owing to the Executive on the date of retirement,
and the Corporation shall have no further obligations to
the Executive under this agreement.
12. REVIEW OF AGREEMENT. No later than three (3) months
before the termination date of this Agreement, the Corporation
shall cause the Executive Committee of its Board of Directors to
review with the Executive his performance and general
relationships with the members of the Board of Directors,
employees, customers and shareholders of the Corporation and its
subsidiaries in his role as Chief Executive Officer. Such
committee shall notify the Corporation's Board of Directors and
the Executive no later than two (2) months before the date of
termination of this Agreement of its recommendation as to a
renewal or non-renewal of Executive's employment with the
Corporation for an additional five (5) year term. Such renewal
shall not result in a decrease of the salary and benefits as set
forth under this Agreement.
13. DAMAGES FOR BREACH OF CONTRACT. In the event of a
breach of this Agreement by either the Corporation or the
Executive resulting in damages to either party, that party may
recover from the party breaching the Agreement any and all
damages that may be sustained.
Page 10 of 13 Pages
14. DEFINITION OF CHANGE OF CONTROL. For purposes of this
Agreement, the term "Change of Control" shall mean:
(a) (i) the merger, consolidation or division
involving the Corporation, (ii) a sale, exchange, transfer
or other disposition of substantially all the assets of the
Corporation, or (iii) a purchase by the Corporation of
substantially all the assets of another entity, unless (aa)
such merger, consolidation, division, sale, exchange,
transfer, purchase or disposition is approved in advance by
sixty percent (60%) or more of the members of the Board of
Directors of the Corporation who are not interested in the
transaction and (bb) a majority of the members of the Board
of Directors of the legal entity resulting from or existing
after any such transaction remain the majority of the Board
of Directors of the resulting entity's parent corporation;
or
(b) any "person" (as such term is used in Sections
13(d) and 14(d) of the Securities and Exchange Act of 1934
(the "Exchange Act")), other than the Corporation or any
"person" who on the date hereof is a director or officer of
the Corporation is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act) , directly or
indirectly, owns securities of the Corporation representing
twenty-four and 99/100 percent (24.99%) or more of the
combined voting power of the Corporation's then outstanding
securities; or
(c) during any period of two (2) consecutive years
during the term of this Agreement, individuals who at the
beginning of such period constitute the Board of Directors
of the Corporation cease, for any reason, to constitute at
least a majority thereof, unless the election of each
director who was not a director at the beginning of such
period has been approved in advance by directors
representing at least two-thirds (2/3) of the directors
then in office who were directors at the beginning of the
period; or
(d) any other change in control of the Corporation
similar in effect to any of the foregoing or any other
reason which would be deemed change of control by any
federal or state regulatory body.
15. DEFINITION OF DATE OF CHANGE OF CONTROL. For purposes
of this Agreement, the date of Change of Control shall mean the
earlier of:
(a) the first date on which a single person and/or
entity, or group of affiliated persons and/or entities
other than the Corporation or a person or persons who are
officers or directors of the Corporation, acquire the
beneficial ownership of twenty-five percent (25%) or more
of the Corporation's voting securities;
(b) the date of the transfer of all or substantially
all of the Corporation's assets;
(c) the date on which a merger, consolidation or
combination is consummated, as applicable;
Page 11 of 13 Pages
(d) the date on which individuals who formerly
constituted a majority of the Board of Directors of the
Corporation ceased to be a majority, unless otherwise
provided under paragraph 14 (c); or
(e) the date of change of control determined by any
federal or state regulatory body.
16. NOTICE. For the purposes of this Agreement, notices
and other communications provided for in the Agreement shall be
in writing and shall be deemed to have been duly given when
delivered or mailed by United States certified mail, return
receipt requested, postage prepaid, addressed as follows:
If to Executive:
John C. Duffey
120 West North Street
McConnellsburg, PA 17233
If to Bank or Corporation:
Board of Directors
FNB Financial Corporation
101 Lincoln Way West
McConnellsburg, PA 17233
or to such other address as any party may have furnished to the
others in writing in accordance herewith, except that notices of
change of address shall be effective only upon receipt.
17. SUCCESSORS. This Agreement shall inure to the benefit
of and be binding upon the Executive, the Corporation and any
successors to the Corporation.
18. VALIDITY. The invalidity or unenforceability of any
provision or provisions of this Agreement shall not affect the
validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.
19. AMENDMENT. This Agreement may be amended or canceled
only by mutual agreement of the parties in writing without the
consent of any other person and, so long as the Executive lives,
no person other than the parties hereto, shall have any rights
under or interest in this Agreement or the subject matter
hereof.
20. ATTORNEYS' FEES AND COSTS. If any action at law or in
equity is necessary to enforce or interpret the terms of this
Agreement, the prevailing party shall be entitled to reasonable
attorney's fees, costs, and necessary disbursements in addition
to any other relief that may be proper.
21. PAYMENT OF MONEY DUE DECEASED EXECUTIVE. If the
Executive dies prior to the expiration of the term of
employment, any monies that may be due him from the Bank under
this Agreement as of the date of death shall be paid to the
executor, administrator, or other personal representative of the
Executive's estate.
Page 12 of 13 Pages
22. LAW GOVERNING. This Agreement shall be governed by
and construed in accordance with the laws of the Commonwealth of
Pennsylvania.
23. DEFINITION OF CORPORATION. In those places within
this Agreement where the term "Corporation" is used, unless
otherwise noted, the term Corporation shall mean FNB Financial
Corporation as the parent company of any and all of its
subsidiary operations, including The First National Bank of
McConnellsburg, Pennsylvania.
24. ENTIRE AGREEMENT. This Agreement supersedes any and
all agreements, either oral or in writing, between the parties
with respect to the employment of the Executive by the
Corporation, and this Agreement contains all the covenants and
agreements between the parties with respect to such employment.
25. SEVERABILITY. If any provision of this Agreement is
declared unenforceable for any reason, the remaining provisions
of this Agreement shall be unaffected thereby and shall remain
in full force and effect.
WITNESS: EXECUTIVE:
John C. Duffey
ATTEST: FNB FINANCIAL CORPORATION
Daniel E. Waltz, Secretary Henry W. Daniels
Vice Chairman of the Board
(SEAL)
Page 13 of 13 Pages
Exhibit 10.4
Execution Copy
October 19,
2000
CHANGE IN CONTROL AGREEMENT
THIS AGREEMENT is made as of the ___ day of October, 2000,
among FNB FINANCIAL CORPORATION ("Corporation"), a Pennsylvania
business corporation having a place of business at 101 Lincoln
Way West, McConnellsburg, PA 17233-1398, FIRST NATIONAL BANK OF
MCCONNELLSBURG, ("Bank") a national banking association having a
place of business at 101 Lincoln Way West, McConnellsburg,
Pennsylvania 17233-1398, and DANIEL E. WALTZ ("Executive"), an
individual residing at 212 South Second Street, McConnellsburg,
Pennsylvania 17233.
WITNESSETH:
WHEREAS, the Corporation is a registered bank holding
company; and
WHEREAS, the Bank is a subsidiary of the Corporation; and
WHEREAS, Corporation and Bank desire to continue to retain
Executive to serve in the capacity of Chief Financial Officer of
Bank under the terms and conditions set forth herein; and
WHEREAS, Executive desires to continue to serve the
Corporation and Bank in an executive capacity under the terms
and conditions set forth herein; and
WHEREAS, Executive has determined that he does not wish to
have an agreement with substantially similar terms and
conditions of the Agreement that he had with Corporation and
Bank which agreement expired on August 1, 2000; and
WHEREAS, Executive agrees to waive any claims that he has
under the prior employment agreement, including, but not limited
to, a claim that the Corporation or Bank failed to provide him
with an employment agreement with substantially similar terms
and conditions as the prior agreement expiring on August 1,
2000; and
WHEREAS, Executive acknowledges that this Change in Control
Agreement has been negotiated in good faith; and
WHEREAS, the purpose of this Agreement is to define certain
severance benefits that would be paid by the Corporation and
Bank in the event of a Change in Control (as defined herein),
but is not intended to affect, nor does it affect, the terms of
the Executive's employment at-will, in the absence of a Change
in Control (as defined herein) of the Corporation or Bank; and
WHEREAS, Executive agrees to give written notice to the
Corporation and Bank before terminating his employment with
Corporation and Bank no less than six (6) weeks before the date
of termination.
Page 1 of 6 Pages
Execution Copy
October 19,
2000
AGREEMENT:
NOW THEREFORE, in consideration of the mutual covenants,
undertakings and agreements set forth herein, the parties
hereto, intending to be legally bound, agree as follows:
1. Employment. Executive is employed by Corporation and Bank
on an "at will" basis and there is no employment agreement
between them. The requirement set forth in this Agreement
that Executive provide Corporation and Bank with six (6)
weeks notice before termination of employment does not
alter Executive's "at will" employment status; the
requirement is merely consideration for the granting of
this Change in Control Agreement. This Agreement is
granted by Corporation and Bank in order to set forth terms
and conditions between Corporation, Bank and Executive in
the event of a Change in Control (as defined herein).
2. Rights in Event of Termination of Employment following
Change in Control. If a Change in Control (as defined
herein) occurs and Executive's employment is terminated by
Corporation or Bank other than for Cause (as defined
herein) on or before the two (2) year anniversary of the
Date of a Change in Control (as defined herein), or if
Executive terminates his employment on or before the one
(1) year anniversary of the Date of a Change in Control (as
defined herein), then Corporation or Bank shall pay to
Executive, in lieu of any other severance benefits to which
Executive may be entitled, an amount equal to(a)
Executive's annual salary for the year in which the date of
termination occurs, multiplied by (b) two (2), such payment
to be made in a lump sum on or before the fifth day
following the date of termination and which shall be
subject to applicable taxes and withholdings. However, if
the lump sum payment under this paragraph 2, when added to
all other amounts or benefits provided to or on behalf of
the Executive in connection with his termination of
employment, would result in the imposition of an excise tax
under Section 4999 of the Internal Revenue Code of 1986, as
amended (the "Code"), such payment shall be reduced to the
extent necessary to avoid such excise tax imposition.
Notwithstanding the foregoing or any other provision of
this Agreement to the contrary, if any portion of the
amount herein payable to the Executive is determined to be
non-deductible pursuant to the regulations promulgated
under Section 280G of the Code, the Corporation or Bank
shall be required only to pay to Executive the amount
determined to be deductible under Section 280G. The
determination of any reduction in the lump sum payment
under this paragraph 2 pursuant to the foregoing provisions
shall be made by Corporation's independent auditors.
3. Termination of Employment for Cause. For purposes of this
Agreement, termination for "Cause" shall mean any of the
following:
(a) Executive's conviction of or plea of guilty or nolo
contendere to a felony, a crime of falsehood or a
crime involving moral turpitude, or the actual
incarceration of Executive for a period of twenty (20)
consecutive days or more;
Page 2 of 6 Pages
(b) Executive's willful failure to follow the good
faith lawful instructions of the Board of Directors of
Corporation or Bank with respect to its operations,
after written notice from Corporation or Bank and a
failure to cure such violation within twenty (20) days
of said written notice;
(c) Executive's willful failure to substantially perform
Executive's duties to Corporation or Bank, other than
a failure resulting from Executive's incapacity
because of physical or mental illness, after notice
from Corporation or Bank and a failure to cure such
violation within twenty (20) days of said notice;
(d) dishonesty or negligence by the Executive in the
performance of his duties;
(e) Executive's violation of any law, rule or regulation
governing banks or bank officers or any final cease
and desist order issued by a bank regulatory
authority;
(f) conduct on the part of the Executive which brings
public discredit to Corporation or Bank;
(g) Executive's breach of fiduciary duty involving
personal profit;
(h) the willful engaging by the Executive in misconduct
injurious to the Corporation or Bank;
(i) Executive's unlawful discrimination, including
harassment, against Corporation or Bank's employees,
customers, business associates, contractors or
visitors;
(j) Executive's theft or abuse of Corporation or Bank's
property or the property of Corporation or Bank's
customers, employees, contractors, vendors or business
associates; or
(k) the direction or recommendation of a state or federal
bank regulatory authority to remove Executive from his
positions with Corporation or Bank as identified
herein.
During the period of time between the execution of an Agreement
to effect a Change in Control (as defined herein) and the actual
Date of Change in Control (as defined herein), termination of
the Executive's employment shall only be for Cause (as defined
in this paragraph). If during said period of time, Executive is
terminated other than for Cause (as defined in this paragraph),
then the Executive shall be paid as set forth in paragraph 2 of
this Agreement.
Page 3 of 6 Pages
4. Change in Control Defined. As used in this Agreement,
"Change in Control" shall mean a Change in Control (other than
one occurring by reason of an acquisition of the Corporation by
Executive) of a nature that would be required to be reported in
response to Item 6(e) of Schedule 14A of Regulation 14A or any
successor rule or regulation promulgated under the Securities
Exchange Act of 1934, as amended (the "Act"); provided that
without limiting the foregoing, a Change in Control shall be
deemed to have occurred if:
(a) (i) a merger, consolidation or division involving
Corporation or Bank, (ii) a sale, exchange, transfer
or other disposition of substantially all of the
assets of Corporation or Bank, or (iii) a purchase by
Corporation or Bank of substantially all of the assets
of another entity, unless (y) such merger,
consolidation, division, sale, exchange, transfer,
purchase or disposition is approved in advance by
sixty percent (60%) or more of the members of the
Board of Directors of Corporation or Bank who are not
interested in the transaction and (z) a majority of
the members of the Board of Directors of the legal
entity resulting from or existing after any such
transaction and of the Board of Directors of such
entity's parent corporation, if any, are former
members of the Board of Directors of Corporation or
Bank; or
(b) any "person" (as such term is used in Sections 13(d)
and 14(d) of the Securities Exchange Act of 1934 (the
"Exchange Act")), other than Corporation or Bank or
any "person" who on the date hereof is a director or
officer of Corporation or Bank is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities
of Corporation or Bank representing twenty-five (25%)
percent or more of the combined voting power of
Corporation or Bank's then outstanding securities, or
(c) during any period of two (2) consecutive years during
the term of Executive's employment under this
Agreement, individuals who at the beginning of such
period constitute the Board of Directors of
Corporation or Bank cease, for any reason to
constitute at least a majority thereof, unless the
election of each director who was not a director at
the beginning of such period has been approved in
advance by directors representing at least two-thirds
(2/3) of the directors then in office who were
directors at the beginning of the period; or
(d) any other change in control of Corporation or Bank
similar in effect to any of the foregoing or any other
reason which would be deemed a Change in Control by
any federal or state regulatory body.
5. Date of Change in Control Defined. For purposes of this
Agreement, the date of Change in Control shall mean:
(a) the first date on which a single person and/or entity,
or group of affiliated persons and/or entities,
acquire the beneficial ownership of twenty-five (25%)
or more of the Bank or Corporation's voting
securities, or
(b) the date of the closing of an Agreement, transferring
all or substantially all of the Bank or Corporation's
assets, or
Page 4 of 6 Pages
(c) the date on which a merger, consolidation or business
combination is consummated, as applicable, or
(d) the date on which individuals who formerly constituted
a majority of the Board of Directors of the Bank or
the Corporation under paragraph 4(c) above, cease to
be a majority.
6. No Employment Contract. This Agreement is not an
employment contract. Nothing contained herein shall
guarantee or assure Executive of continued employment by
Corporation or Bank. Rather, Corporation and Bank's
obligations to Executive hereunder shall arise only if
Executive continues to be employed by Corporation and Bank
in his present or in a higher capacity and then only in the
event the conditions described herein for payment to
Executive have been met.
7. Waiver. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or
discharge is agreed to in writing and signed by Executive
and an executive officer specifically designated by the
Boards of Directors of Corporation and Bank. No waiver by
either party hereto at any time of any breach by the other
party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or
subsequent time.
8. Attorneys' Fees and Costs. If any action at law or in
equity is necessary to enforce or interpret the terms of
this Agreement, each party shall bear their own attorneys'
fees, costs, and necessary disbursements.
9. Entire Agreement. This Agreement supersedes any and all
understandings and agreements, either oral or in writing,
between the parties with respect to any severance that may
become due as a result of or in connection with a Change in
Control. This Agreement contains all the covenants and
agreements between the parties with respect to any
severance that may become due as a result of or in
connection with a Change in Control.
10. Successors; Binding Agreement. This Agreement shall be
binding upon and inure to the benefit of Corporation, Bank
and Executive, and their respective successors, assigns,
heirs and personal representatives.
11. Validity. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity
or enforceability of any other provision of this Agreement,
which shall remain in full force and effect.
12. Applicable Law. This Agreement shall be governed by and
construed in accordance with the domestic, internal laws of
the Commonwealth of Pennsylvania, without regard to its
conflicts of laws principles.
13. Headings. The section headings of this Agreement are for
convenience only and shall not control or affect the
meaning or construction or limit the scope or intent of any
of the provisions of this Agreement.
Page 5 of 6 Pages
14. Notice. For the purposes of this Agreement, notices and
all other communications provided for in this Agreement
shall be in writing and shall be deemed to have been duly
given when delivered or mailed by United States Certified
Mail, Return Receipt Requested, postage prepaid, addressed
as follows:
If to the Executive: Daniel E. Waltz
212 South Second Street
McConnellsburg, PA 17233
If to the Corporation or Bank: Board of Directors
FNB FINANCIAL CORPORATION
101 Lincoln Way West
McConnellsburg, PA 17233-
1398
or to such other address as Executive or Corporation or
Bank may have furnished to the other in writing in
accordance herewith, except that notices of change of
address shall be effective only upon receipt.
IN WITNESS WHEREOF, the parties have executed this
Agreement as of the date first above written.
ATTEST: FNB FINANCIAL CORPORATION
______________________________
By______________________________
, Secretary Henry W. Daniels, Vice
Chairman of the Board
ATTEST: FIRST NATIONAL BANK OF
MCCONNELLSBURG
______________________________
By______________________________
, Secretary Henry W. Daniels, Vice
Chairman of the Board
WITNESS:
____________________________ ___________________________
_
Daniel E. Waltz, Executive
Page 6 of 6 Pages
Exhibit 13
FNB FINANCIAL CORPORATION
2000 ANNUAL FINANCIAL REPORT
C O N T E N T S
Page
INDEPENDENT AUDITOR'S REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS
Balance sheets 2
Statements of income 3
Statements of changes in stockholders' equity 4
Statements of cash flows 5 and 6
Notes to consolidated financial statements 7 - 23
ACCOMPANYING FINANCIAL INFORMATION
Selected five year financial data 24
Summary of quarterly financial data 25
Distribution of assets, liabilities and stockholders' equity,
interest
rates, and interest differential 26
Changes in net interest income 27
Maturities of investment securities 28
Management's discussion and analysis of financial condition and
results of operations 29-44
INDEPENDENT AUDITOR'S REPORT
Board of Directors
FNB Financial Corporation
McConnellsburg, Pennsylvania
We have audited the accompanying consolidated balance sheets
of FNB Financial Corporation and its wholly-owned subsidiary as of
December
31, 2000 and 1999, and the related consolidated statements of income,
changes in
stockholders' equity, and cash flows for each of the three years ended
December 31,
2000. These consolidated financial statements are the
responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated
2001. financial statements based on our audits.
We conducted our audits in accordance with auditing
standards generally
accepted in the United States of America. Those standards require
that we plan and
perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement.
An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
consolidated financial
statements. An audit also includes assessing the accounting
principles used and
significant estimates made by management, as well as evaluating the
overall
financial statement presentation. We believe that our audits provide
a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements
referred to above
present fairly, in all material respects, the financial position of
FNB Financial
Corporation and its wholly-owned subsidiary as of December 31, 2000
and 1999
and the results of their operations and their cash flows for each of
the three years ended December 31, 2000 in conformity with accounting
principles generally accepted in
the United States of America.
/s/ Smith Elliott Kearns &
Company, LLC
Chambersburg, Pennsylvania
February 14, 2001
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
ASSETS
2000 1999
Cash and due from banks $ 4,020,479 $
3,565,173
Interest-bearing deposits with banks 778,546 723,094
Investment securities:
Available for sale 26,768,521 28,085,248
Held to maturity (fair value $ 1,135,971 - 2000;
$ 1,556,865 - 1999) 1,207,835 1,669,712
Federal Reserve, Atlantic Central Banker's
Bank and Federal Home Loan Bank stock 833,700 681,200
Loans, net of unearned discount and allowance
for loan losses 83,112,173 76,137,080
Bank building, equipment, furniture and fixtures, net 3,069,015 3,119,101
Accrued interest and dividends receivable 789,393 687,259
Deferred income taxes 291,325 676,502
Other real estate owned 168,653 165,603
Cash surrender value of life insurance 2,209,915 2,107,104
Other assets
376,680 312,107
Total assets $ 123,626,235 $ 117,929,183
LIABILITIES
Deposits:
Demand deposits $ 11,798,431 $
10,959,096
Savings deposits 29,407,101 27,567,017
Time certificates 62,129,564 60,509,040
Other time deposits 297,392
294,783
Total deposits 103,632,488 99,329,936
Liability for borrowed funds 6,176,901 6,364,996
Accrued dividends payable 192,000 172,000
Accrued interest payable and other liabilities 1,076,819
861,514
Total liabilities 111,078,208 106,728,446
STOCKHOLDERS' EQUITY
Capital stock, common, par value $ .315; 12,000,000 shares
authorized; 800,000 shares issued and outstanding 252,000 252,000
Additional paid-in capital 1,789,833 1,789,833
Retained earnings 10,623,726 10,125,145
Accumulated other comprehensive income (loss) ( 117,532) (
966,241)
Total stockholders' equity 12,548,027
11,200,737
Total liabilities and stockholders' equity $ 123,626,235 $
117,929,183
The Notes to Consolidated Financial Statements are an integral part
of these statements.
- -2-
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2000, 1999 and 1998
2000 1999
1998
Interest and Dividend Income
Interest and fees on loans $ 6,902,812 $ 5,766,741 $ 5,450,880
Interest on investment securities:
U. S. Treasury securities 0 1,585 12,522
Obligations of other U. S.
Government agencies 1,296,141 1,366,191 1,405,213
Obligations of States and
political subdivisions 421,345 485,198 492,672
Interest on deposits with banks 49,664 68,182 81,635
Dividends on equity securities 61,901 33,995 28,329
Interest on federal funds sold 22,725 80,297 249,941
8,754,588 7,802,189 7,721,192
Interest Expense
Interest on borrowed funds 455,828 88,932 11,368
Interest on deposits 4,240,673 4,030,292 4,101,076
Net interest income 4,058,087 3,682,965 3,608,748
Provision for Loan Losses 231,319 190,000 474,814
Net interest income after provision
for loan losses 3,826,768 3,492,965 3,133,934
Other Income
Service charges on deposit accounts 181,902 123,731 85,375
Other service charges, collection and
exchange charges, commissions and fees 283,232 260,990 228,450
Other income, net 159,272 186,085 72,820
Securities gains (losses) ( 474) 49,655 143,288
623,932 620,461 529,933
Other Expenses
Salaries and wages 1,341,280 1,251,344 1,129,581
Pensions and other employee benefits 355,250 326,859 288,473
Net occupancy expense of bank premises 252,023 236,758 209,206
Furniture and equipment expenses 269,592 258,525 241,535
Other operating expenses 1,048,825 956,086 903,406
3,266,970 3,029,572 2,772,201
Income before income taxes 1,183,730 1,083,854 891,666
Applicable income taxes 229,149 180,572 109,716
Net income $ 954,581 $ 903,282 $ 781,950
Earnings per share of common stock:
Net income $ 1.19 $ 1.13 $ 0.98
Weighted average shares outstanding 800,000 800,000 800,000
The Notes to Consolidated Financial Statements are an integral
part of these statements.
- -3-
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2000, 1999 and 1998
Accumulated
Additional Other
Total
Common
Paid-In Retained Comprehensive Stockholders'
Stock
Capital Earnings Income (Loss) Equity
Balance, December 31, 1997 $ 252,000 $ 1,789,833 $ 9,163,913
$ 184,003 $ 11,389,749
Comprehensive income:
Net income 0 0 781,950 0 781,950
Changes in unrealized gain
on securities available for
sale, net of taxes of
$ 35,477 0 0 0
68,867 68,867
Total comprehensive income 850,817
Cash dividends declared on
common stock ($ .405
per share) 0 0 ( 324,000)
0
324,000)
Balance, December 31, 1998 252,000 1,789,833 9,621,863 252,870 11,916,566
Comprehensive income:
Net income 0 0 903,282 0 903,282
Changes in unrealized gain
(loss) on securities
available for sale, net
of taxes of ($ 628,026) 0 0 0
1,219,111)
Total comprehensive income ( 315,829)
Cash dividends declared on
common stock ($ .50
per share) 0 0 ( 400,000)
0 ( 400,000)
Balance, December 31, 1999 252,000 1,789,833 10,125,145
966,241) 11,200,737
Comprehensive income:
Net income 0 0 954,581 0 954,581
Changes in unrealized gain
on securities available for
sale, net of taxes of
$ 437,213 0 0 0
848,709
Total comprehensive income 1,803,290
Cash dividends declared on
common stock ($ .57
per share) 0 0 ( 456,000)
0 ( 456,000)
Balance, December 31, 2000 $ 252,000 $ 1,789,833 $ 10,623,726
($ 117,532) $ 12,548,027
The Notes to Consolidated Financial Statements are an integral part of
these statements.
- -4-
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
Cash flows from operating activities:
Net income $ 954,581 $ 903,282 $ 781,950
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 288,168 278,402 269,418
Provision for loan losses 231,319 190,000 474,814
Deferred income taxes ( 52,037) ( 31,487) ( 120,346)
Loss on sale of other real estate 805 12,281 9,904
Increase in cash surrender value of life insurance ( 102,811)
81,594)
40,510)
(Gain) loss on sales/maturities of investments 474 ( 49,655)
143,288)
865) ( 554) 0
(Increase) decrease in accrued interest
receivable ( 102,134) 31,285 ( 108,303)
Increase (decrease) in accrued interest
payable and other liabilities 215,305 ( 6,617) 129,932
(Increase) decrease in other assets ( 84,490) 14,124
17,511
Net cash provided by operating activities 1,348,315 1,259,467 1,271,082
Cash flows from investing activities:
Net (increase) decrease in interest bearing
deposits with banks ( 55,453) 1,296,518 4,030,934
Maturities of held-to-maturity securities 461,877 779,909 1,072,165
Purchases of held-to-maturity securities 0 0 ( 545,947)
Proceeds from sales of available-for-sale securities 0 1,151,501 3,746,590
Maturities of available-for-sale securities 2,742,252
4,145,757 6,135,245
140,076) (
2,292,472) ( 16,183,311)
Proceeds from sales of other real estate owned 274,087 207,527 156,912
Net (increase) in loans ( 7,480,801) ( 14,466,397) ( 3,371,383)
Purchase of other bank stock ( 152,500) ( 287,100)
4,500)
Purchases of bank premises and
equipment, net ( 222,058) ( 187,627) ( 106,587)
Purchase of life insurance 0 0 ( 1,985,000)
Proceeds from sale of equipment 1,206 1,054
0
Net cash (used) by investing activities ( 4,571,466) ( 9,651,330)
( 7,054,882)
Cash flows from financing activities:
Net increase in deposits 4,302,552 ( 1,173,998) 7,244,245
Cash dividends paid ( 436,000) ( 336,000) ( 320,000)
Net short-term borrowings ( 2,933,000) 3,701,000 0
Proceeds from long-term borrowings 12,250,000 2,500,000 0
Principal payments on borrowings ( 9,505,095) ( 4,768)
291,955)
Net cash provided by financing activities 3,678,457 4,686,234
6,632,290
The Notes to Consolidated Financial Statements are an integral
part of these statements.
- -5-
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
Net increase (decrease) in cash and cash equivalents $ 455,306 ($ 3,705,629)
$ 848,490
Cash and cash equivalents, beginning balance 3,565,173 7,270,802
6,422,312
Cash and cash equivalents, ending balance $ 4,020,479 $ 3,565,173 $ 7,270,802
Supplemental disclosure of cash flows information:
Cash paid during the year for:
Interest $ 4,610,819 $ 4,118,343 $ 4,114,164
Income taxes 167,419 226,385 159,550
Supplemental schedule of noncash investing and
financing activities:
Unrealized gain (loss) on securities
available-for-sale, net of income tax effect $ 848,709 ($ 1,219,111)
68,867
Other real estate acquired in settlement of loans 274,389 59,900 100,000
Loan advanced for sale of other real estate owned 0 0 93,000
The Notes to Consolidated Financial Statements are an integral part of
these statements.
- -6-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Nature of Operations
FNB Financial Corporation's primary activity consists of owning
and supervising its subsidiary, The First National Bank of
McConnellsburg, which is engaged in providing banking and bank
related services in South Central Pennsylvania, and
Northwestern Maryland. Its five offices are located in
McConnellsburg (2), Fort Loudon and Needmore, Pennsylvania, and
Hancock, Maryland.
Principles of Consolidation
The consolidated financial statements include the accounts of
the corporation and its wholly-owned subsidiary, The First
National Bank of McConnellsburg. All significant intercompany
transactions and accounts have been eliminated.
First Fulton County Community Development Corporation (FFCCDC)
was formed as a wholly-owned subsidiary of The First National
Bank of McConnellsburg. The purpose of FFCCDC is to serve the
needs of low-to-moderate income individuals and small business
in Fulton County under the Community Development and Regulatory
Improvement Act of 1995.
Basis of Accounting
The Corporation uses the accrual basis of accounting.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to
significant change relate to the determination of the allowance
for losses on loans and the valuation of real estate acquired
in connection with foreclosures or in satisfaction of loans.
In connection with the determination of the allowances for
losses on loans and foreclosed real estate, management obtains
independent appraisals for significant properties.
While management uses available information to recognize losses
on loans and foreclosed real estate, future additions to the
allowances may be necessary based on changes in local economic
conditions. In addition, regulatory agencies, as an integral
part of their examination process, periodically review the
Corporation's allowance for losses on loans and foreclosed real
estate. Such agencies may require the corporation to recognize
additions to the allowances based on their judgments about
information available to them at the time of their examination.
Because of these factors, management's estimate of credit
losses inherent in the loan portfolio and the related allowance
may change in the near term.
- -7-
Note 1. Significant Accounting Policies (Continued)
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 Statements of Cash Flows.
Investment Securities
In accordance with Statement of Financial Accounting Standards
Number 115 (SFAS 115) the Corporation's investments in
securities are classified in three categories and accounted for
as follows:
? Trading Securities. Securities held principally for resale
in the near term are classified as
trading securities and recorded at their fair values.
Unrealized gains and losses on trading securities are
included in other income.
? Securities to be Held to Maturity. Bonds and notes for
which the Corporation has the
positive intent and ability to hold to maturity are reported
at cost, adjusted for amortization of premiums and accretion
of discounts which are recognized in interest income using
the interest method over the period to maturity.
? Securities Available for Sale. Securities available for
sale consist of equity securities,
bonds and notes not classified as trading securities nor as
securities to be held to maturity. These are securities
that management intends to use as a part of its asset and
liability management strategy and may be sold in response
to changes in interest rates, resultant prepayment risk and
other related factors. Unrealized holding gains and
losses, net of tax, on securities available for sale are
reported as a net amount in other comprehensive income
until realized. Gains and losses on the sale of securities
available for sale are determined using the specific-
identification method.
Fair values for investment securities are based on quoted
market prices.
The Corporation had no trading securities in 2000 or 1999.
Federal Reserve Bank, Atlantic Central Banker's Bank, and
Federal Home Loan Bank Stock
These investments are carried at cost. The Corporation is
required to maintain minimum investment balances in these
stocks, which are not actively traded and therefore have no
readily determinable market value.
Other Real Estate Owned
Real estate properties acquired through, or in lieu of, loan
foreclosure are to be sold and are initially recorded at the
lower of carrying value or fair value of the underlying
collateral less cost to sell. After foreclosure, valuations
are periodically performed by management and the real estate is
carried at the lower of carrying amount or fair value less cost
to sell. Legal fees and other costs related to foreclosure
proceedings are expensed as they are incurred.
- -8-
Note 1. Significant Accounting Policies (Continued)
Loans and Allowance for Possible Loan Losses
Loans are stated at the amount of unpaid principal, reduced by
unearned discount, deferred loan origination fees, and an
allowance for loan losses. Unearned discount on installment
loans is recognized as income over the terms of the loans by
the interest method. Interest on other loans is calculated by
using the simple interest method on daily balances of the
principal amount outstanding. Amortization of premiums and
accretion of discounts on acquired loans are recognized in
interest income using the interest method over the period to
maturity. The allowance for loan losses is established through
a provision for loan losses charged to expense. Loans are
charged against the allowance for loan losses when management
believes that the collectibility of the principal is unlikely.
The allowance is an amount that management believes will be
adequate to absorb possible losses on existing loans that may
become uncollectible, based on evaluations of the
collectibility of loans and prior loan loss experience. The
evaluations take into consideration such factors as changes in
the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans, and current economic
conditions that may affect the borrowers' ability to pay.
In accordance with SFAS No. 91, loan origination fees and
certain direct loan origination costs are being deferred and
the net amount amortized as an adjustment of the related loan's
yield. The Corporation is amortizing these amounts over the
contractual life of the related loans. Deferred loan
origination fees were $ 225,776 and $ 215,670 at December 31,
2000 and 1999, respectively. Deferred loan costs were $
108,763 and $ 113,885 at December 31, 2000 and 1999,
respectively.
Nonaccrual/Impaired Loans
The accrual of interest income on loans ceases when principal
or interest is past due 90 days or more and collateral is
inadequate to cover principal and interest or immediately if,
in the opinion of management, full collection is unlikely.
Interest accrued but not collected as of the date of placement
on nonaccrual status is reversed and charged against current
income unless fully collateralized. Subsequent payments
received either are applied to the outstanding principal
balance or recorded as interest income, depending on
management's assessment of the ultimate collectibility of
principal. Interest income generally is not recognized on
specific impaired loans unless the likelihood of further loss
is remote. Interest payments received on such loans are
applied as a reduction of the loan principal balance. Interest
income on other impaired loans is recognized only to the extent
of interest payments received.
Bank Building, Equipment, Furniture and Fixtures and
Depreciation
Bank building, equipment, furniture and fixtures are carried at
cost less accumulated depreciation. Expenditures for
replacements are capitalized and the replaced items are
retired. Maintenance and repairs are charged to operations as
incurred. Depreciation is computed based on straight-line and
accelerated methods over the estimated useful lives of the
related assets as follows:
Years
Bank building 5-40
Equipment, furniture and fixtures 3-20
Land improvements 10-20
Leasehold improvements 7-20
Earnings Per Share
Earnings per common share were computed based upon weighted
average shares of common stock outstanding of 800,000 for 2000,
1999 and 1998 after giving retroactive recognition to a two-
for-one stock split issued September 1, 2000.
- -9-
Note 1. Significant Accounting Policies (Continued)
Intangibles
Intangible costs are amortized on a straight-line basis over
fifteen years.
Federal Income Taxes
As a result of certain timing differences between financial
statement and federal income tax reporting, deferred income
taxes are provided in the financial statements. See Note 7 for
further details.
Advertising
The corporation follows the policy of charging costs of
advertising to expense as incurred. Advertising expense was $ 98,561,
$ 63,268, and $ 84,311 for 2000, 1999 and 1998, respectively.
Fair Values of Financial Instruments
Statement of Financial Accounting Standards No. 107,
Disclosures About Fair Value of Financial Instruments, requires
disclosure of fair value information about financial
instruments, whether or not recognized in the balance sheet.
In cases where quoted market prices are not available, fair
values are based on estimates using present value or other
valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not
be realized in immediate settlement of the instruments.
Statement No. 107 excludes certain financial instruments and
all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Corporation.
The following methods and assumptions were used by the
Corporation in estimating fair values of financial instruments
as disclosed herein:
? Cash and Short-Term Instruments. The carrying amounts of
cash and short-term
instruments approximate their fair value.
? Securities to be Held to Maturity and Securities Available
for Sale. Fair values for
investment securities are based on quoted market prices.
? Loans Receivable. For variable-rate loans that reprice
frequently and have no significant
change in credit risk, fair values are based on carrying
values. Fair values for fixed rate loans are estimated
using discounted cash flow analyses, using interest rates
currently being offered for loans with similar terms to
borrowers of similar credit quality. Fair values for
impaired loans are estimated using discounted cash flow
analyses or underlying collateral values, where applicable.
? Deposit Liabilities. The fair values disclosed for demand
deposits are, by definition, equal
to the amount payable on demand at the reporting date (that
is, their carrying amounts). The carrying amounts of
variable-rate certificates of deposit, and fixed-term money
market accounts approximate their fair values at the
reporting date. Fair values for fixed-rate certificates of
deposit and IRA's are estimated using a discounted cash flow
calculation that applies interest rates currently being
offered to a schedule of aggregated expected monthly
maturities on time deposits.
- -10-
Note 1. Significant Accounting Policies (Continued)
? Short-Term Borrowings. The carrying amounts of federal
funds purchased, borrowings under repurchase agreements, and
other short-term borrowings maturing within 90 days
approximate their fair values. Fair values of other short-
term borrowings are estimated using discounted cash flow
analyses based on the Bank's current incremental borrowing
rates for similar types of borrowing arrangements.
? Long-Term Borrowings. The fair value of the Bank's long-
term debt is estimated using a discounted cash flow analysis
based on the Bank's current incremental borrowing rate for
similar types of borrowing arrangements.
? Accrued Interest. The carrying amounts of accrued interest
approximate their fair values.
? Off-Balance-Sheet Instruments. The Bank generally does not
charge commitment fees.
Fees for standby letters of credit and other off-balance-
sheet instruments are not significant.
Comprehensive Income
The Corporation has adopted Statement of Financial Accounting
Standards (SFAS) No. 130 - Reporting Comprehensive Income.
Under SFAS No. 130, comprehensive income is defined as the
change in equity from transactions and other events from
nonowner sources. It includes all changes in equity except
those resulting from investments by stockholders and
distributions to stockholders. Comprehensive income includes net
income and certain elements of "other comprehensive income" such
as foreign currency transactions; accounting for futures
contracts; employers accounting for pensions; and accounting for
certain investments in debt and equity securities.
The Corporation has elected to report its comprehensive income
in the statement of stockholders' equity. The only element of
"other comprehensive income" that the Corporation has is the
unrealized gain or loss on available for sale securities.
The components of the change in net unrealized gains (losses) on
securities were as follows:
2000 1999
1998
Gross unrealized holding gains (losses) arising
during the year $ 1,285,448 ($ 1,797,482) $ 247,632
Reclassification adjustment for (gains)/losses
realized in net income 474 ( 49,655) ( 143,288)
Net unrealized holding gains (losses) before taxes 1,285,922
( 1,847,137) 104,344
Tax effect ( 437,213) 628,026 ( 35,477)
Net change $ 848,709 ($ 1,219,111) $ 68,867
- -11-
Note 2. Investment Securities
The amortized cost and fair values of investment securities
available for sale at December 31 were:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
2000
Obligations of other U.S.
Government agencies $ 16,669,612 $ 254,301 ($ 440,093) $ 16,483,820
Obligations of states and
political subdivisions 8,392,131 55,935 ( 46,492) 8,401,574
Mortgage-backed securities 881,099 382 ( 3,343) 878,138
SBA Loan Pool certificates 793,610 854 ( 5,897) 788,567
Equities in local bank stock 210,148 15,219 ( 8,945)
216,422
Totals $ 26,946,600 $ 326,691 ($ 504,770) $ 26,768,521
1999
Obligations of other U.S.
Government agencies $ 17,836,357 $ 0 ($ 919,059) $ 16,917,298
Obligations of states and
political subdivisions 9,358,341 2,720 ( 508,099) 8,852,962
Mortgage-backed securities 1,066,353 4,880 ( 31,973) 1,039,260
SBA Loan Pool certificates 1,078,051 2,889 (
4,324) 1,076,616
Equities in local bank stock 210,148
21,036)
199,112
Totals $ 29,549,250 $ 20,489
($ 1,484,491) $ 28,085,248
The amortized cost and fair values of investment securities
held to maturity at December 31 were:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
2000
SBA loan pool certificates $ 682,099 $ 971 ($ 8,494) $ 674,576
Obligations of other U.S.
government agencies 525,736 0 ( 64,341) 461,395
Totals $ 1,207,835 $ 971 ($ 72,835) $ 1,135,971
1999
SBA loan pool certificates $ 829,394 $ 2,283 ($ 9,079) $ 822,598
Obligations of other U.S.
government agencies 490,258 0 ( 105,988) 384,270
Obligations of states and
political subdivisions 350,060 237 ( 300) 349,997
Totals $ 1,669,712 $ 2,520 ($ 115,367) $ 1,556,865
The amortized cost and fair values of investment securities
available for sale and held to maturity at December 31, 2000 by
contractual maturity, are shown below. Contractual maturities
will differ from expected maturities because borrowers may have
the right to call or repay obligations with or without call or
repayment penalties.
- -12-
Note 2. Investment Securities (Continued)
Securities Available Securities Held
- - - - - -
- - - for Sale - - - - - - - - - - - - to Maturity - - - - -
Amortized
Fair Amortized Fair
Cost
Value Cost Value
Due in one year or less $ 855,022 $ 854,013 $
0 $ 0
Due after one year but
less than five years 7,619,949 7,605,278 0 0
Due after five years but
less than ten years 11,498,389 11,400,119 0 0
Due after ten years 5,088,383 5,025,984 525,736 461,395
25,061,743 24,885,394 525,736 461,395
Mortgage-backed securities 881,099 878,138 0 0
SBA loan pool certificates 793,610 788,567 682,099 674,576
Equities in local bank stock 210,148 216,422
0 0
Totals $ 26,946,600 $ 26,768,521 $ 1,207,835 $ 1,135,971
There were no sales of investment securities available for sale
during 2000.
Proceeds from sales of investment securities available for sale
during 1999 were $ 1,151,501. Gross losses on these sales were
$ 4,101 and gross gains were $ 53,756. Related taxes were
$ 16,883.
Proceeds from sales of investment securities available for sale
during 1998 were $ 3,746,590. Gross losses on these sales were
$ 3,441 and gross gains were $ 146,729. Related taxes were
$ 48,718.
There were no sales of investment securities held-to-maturity
in 2000, 1999 or 1998.
Investment securities carried at $ 6,649,820 and $ 9,326,047 at
December 31, 2000 and 1999, respectively, were pledged to
secure public funds and for other purposes as required or
permitted by law.
Note 3. Loans
Loans consist of the following at December 31:
2000
1999
(000 omitted)
Real estate loans:
Construction and land development $ 1,583 $ 22
Secured by farmland 5,428 3,866
Secured by 1-4 family residential properties 42,768 40,183
Secured by multi-family residential properties 524 642
Secured by nonfarmland
nonresidential properties 11,943 7,407 Loans to farmers (except loans secured
primarily by real estate) 3,613 5,455
Commercial, industrial and state and political subdivision loans 9,440 7,843
Loans to individuals for household, family, or other personal
expenditures 7,640 11,423 All other loans 1,616 1,391
Total loans 84,555 78,232
Less: Unearned discount on loans 632 1,349
Allowance for loan losses 811 746
Net Loans $ 83,112 $ 76,137
- -13-
Note 3. Loans (Continued)
The following table shows maturities and sensitivities of loans
to changes in interest rates based upon contractual maturities
and terms as of December 31, 2000.
Due Over 1
Due Within
But Within Due Over Nonaccruing
(000 omitted) 1 Year
5 Years 5 Years Loans Total
Loans at pre-determined
interest rates $ 1,315 $ 11,976 $ 33,991 $ 90 $ 47,372
Loans at floating or
adjustable interest rates 6,742 4,057 26,151 233 37,183
Total (1) $ 8,057 $ 16,033 $ 60,142 $ 323 $ 84,555
(1) These amounts have not been reduced by the allowance
for possible loan losses or
unearned discount.
The Bank has granted loans to the officers and directors of the
corporation and to their associates. Related party loans are
made on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable
transactions with unrelated persons and do not involve more
than normal risk of collectibility. The aggregate dollar
amount of these loans was $ 1,612,752 and $ 2,370,934 at
December 31, 2000 and 1999, respectively. During 2000,
$ 887,053 of new loans were made and repayments totaled $
1,645,235. During 1999,
$ 1,814,319 of new loans were made and repayments totaled
$ 1,690,967.
Outstanding loans to Bank employees totaled $ 1,311,611 and $
1,279,747 for years ended December 31, 2000 and 1999,
respectively.
Note 4. Allowance for Loan Losses
Activity in the allowance for loan losses is summarized as
follows:
2000 1999 1998
(000 omitted)
Allowance for loan losses, beginning of the year $ 746 $ 732 $ 426
Loans charged-off during the year:
Real estate mortgages 89 100 25
Installment loans 90 40 89
Commercial and all other loans 24 61 89
Total charge-offs 203 201 203
Recoveries of loans previously charged-off:
Real estate mortgages 12 0 0
Installment loans 24 24 33
1 1 1
Total recoveries 37 25 34
Net loans charged-off (recovered) 166 176 169
Provision for loan losses charged to operations 231 190 475
Allowance for loan losses, end of the year $ 811 $ 746 $ 732
- -14-
Note 4. Allowance for Loan Losses (Continued)
A breakdown of the allowance for loan losses as of December 31
is as follows:
- - - - -
- - - - -2000- - - - - - - - - - - - - - - - - - - -1999- - - - - - - -
- -
Percent of Percent of
Allowance
Loans in Allowance Loans in
(000 omitted) Amount
Each Category Amount Each Category
Commercial, industrial
and agriculture loans $ 529 33.78% $ 295 28.04%
1-4 family residential
mortgages 92 42.30% 222
42.32%
Consumer and
installment loans 69 7.65% 67 12.03%
Off balance sheet commitments 121 16.36% 110
17.61%
Unallocated 0 N/A 52 N/A
Total $ 811 100.0% $ 746 100.0%
Impairment of loans having a recorded investment of $
1,228,633 at December 31, 2000 was recognized in conformity
with SFAS No. 114 as amended by SFAS No. 118. The average
recorded investment in impaired loans during 2000 was $
1,272,272. The total allowance for loan losses related to
these loans was $ 120,000 at December 31, 2000. Interest
income on impaired loans of $ 118,811 was recognized for cash
payments received in 2000.
There were no impaired loans in 1999 or 1998.
Note 5. Nonaccrual, Past Due and Restructured Loans
The following table shows the principal balances of nonaccrual
loans as of December 31:
2000 1999 1998
Nonaccrual loans $ 323,337 $ 422,820 $ 59,204
Interest income that would have been
accrued at original contract rates $ 31,633 $ 39,444 $
5,559
Amount recognized as interest
income 22,933 16,181 4,307
Foregone revenue $ 8,700 $ 23,263 $ 1,252
Loans 90 days or more past due (still accruing interest) were
as follows at December 31:
(000 omitted)
2000 1999 1998
Real estate mortgages $ 30 $ 55 $ 166
Installment loans 112 111 5
Demand and time loans 41 0 0
Total $ 183 $ 166 $ 171
Note 6. Bank Building, Equipment, Furniture and Fixtures
Bank building, equipment, furniture and fixtures consisted of
the following at December 31:
Accumulated Depreciated
Description
Cost Depreciation Cost
2000
Bank building (including land $ 231,635) $ 3,274,342 $ 978,291 $ 2,296,051
Equipment, furniture and fixtures 2,290,079 1,657,916 632,163
Land improvements 238,503 149,817 88,686
Leasehold improvements 64,028 11,913 52,115
$ 5,866,952 $ 2,797,937 $ 3,069,015
- -15-
Note 6. Bank Building, Equipment, Furniture and Fixtures (Continued)
Accumulated Depreciated
Description
Cost Depreciation Cost
1999
Bank building (including land $ 231,635) $ 3,267,970 $ 895,150 $ 2,372,820
Equipment, furniture and fixtures 2,091,026 1,485,118 605,908
Land improvements 238,503 138,489 100,014
Leasehold improvements 49,219 8,860 40,359
$ 5,646,718 $ 2,527,617 $ 3,119,101
Depreciation expense amounted to $ 271,803 in 2000, $ 262,036
in 1999, and $ 253,052 in 1998.
Note 7. Income Taxes
The components of federal income tax expense are summarized as
follows:
2000 1999 1998
Current year provision $ 281,186 $ 212,058 $ 230,062
Deferred income taxes resulting from:
Differences between financial
statement and tax depreciation charges ( 14,708)
7,817) ( 7,102)
Differences between financial
statement and tax loan loss
provision ( 18,868) ( 4,904) ( 103,982)
Differences between financial statement
and tax retirement benefit expense ( 18,461) (
18,765) ( 9,262) Applicable income tax $ 229,149 $ 180,572 $ 109,716
Federal income taxes were computed after adjusting pretax
accounting income for nontaxable income in the amount of $
570,394, $ 620,660, and $ 571,240 for 2000, 1999 and 1998,
respectively.
A reconciliation of the effective applicable income tax rate to
the federal statutory rate is as follows:
2000 1999 1998
Federal income tax rate 34.0% 34.0% 34.0%
Reduction resulting from:
Nontaxable income 14.6 17.3 21.7
Effective income tax rate 19.4% 16.7% 12.3%
Deferred income taxes at December 31 are as follows:
2000 1999
Deferred tax assets $ 318,054 $ 717,939
Deferred tax liabilities ( 26,729) ( 41,437)
$ 291,325 $ 676,502
- -16-
Note 7. Income Taxes (Continued)
The tax effects of each type of significant item that gives
rise to deferred taxes are:
2000 1999
Net unrealized (gains) losses on
securities available for sale $ 60,547 $ 497,761
Depreciation expense ( 26,729) ( 41,437)
Retirement benefit reserve 46,487 28,026
Allowance for loan losses 211,020 192,152
$ 291,325 $ 676,502
The corporation has not recorded a valuation allowance for the
deferred tax assets as management feels that it is more likely
than not that they will be ultimately realized.
Note 8. Employee Benefit Plans
The corporation has a 401-K plan which covers all employees who
have attained the age of 20 and who have completed six months
of full-time service. The plan provides for the corporation to
match employee contributions to a maximum of 5% of annual
compensation. The corporation also has the option to make
additional discretionary contributions to the plan based upon
the corporation's performance and subject to approval by the
Board of Directors. The corporation's total expense for this
plan was $ 105,078, $ 84,909, and $ 72,887 for the years ended
December 31, 2000, 1999 and 1998, respectively.
The corporation adopted three supplemental retirement benefit
plans for directors and executive officers. These plans are
funded with single premium life insurance on the plan
participants. The cash value of the life insurance policies is
an unrestricted asset of the corporation. The estimated present
value of future benefits to be paid totaled $ 136,727 and $
82,428 at December 31, 2000 and 1999, respectively, which is
included in other liabilities. Total annual expense for these
plans amounted to $ 54,406, $ 64,339 and $ 27,240 for 2000,
1999 and 1998, respectively.
Note 9. Deposits
Included in savings deposits are NOW and Super NOW account
balances totaling $ 6,192,804 and $ 6,253,110 at December 31,
2000 and 1999, respectively. Also included in savings deposits
at December 31, 2000 and 1999 are Money Market account balances
totaling $ 10,578,065 and $ 7,737,456, respectively.
Time certificates of $ 100,000 and over as of December 31 were
as follows:
2000 1999
(000 omitted)
Three months or less $ 1,444 $ 1,132
Three months to six months 1,058 1,641
Six months to twelve months 3,970 903
Over twelve months 5,911 8,616
Total $ 12,383 $ 12,292
Interest expense on time deposits of $ 100,000 and over
aggregated $ 699,027, $ 688,565 and $ 627,740 for 2000, 1999
and 1998, respectively.
At December 31, 2000 the scheduled maturities of certificates
of deposit are as follows (000 omitted):
2001 $ 33,936
2002 11,974
2003 6,756
2004 3,385
2005 6,078
Thereafter 1
$ 62,130
- -17-
Note 9. Deposits (Continued)
The corporation accepts deposits of the officers, directors
and employees of the corporation and its subsidiary on the
same terms, including interest rates, as those prevailing at
the time for comparable transactions with unrelated persons.
The aggregate dollar amount of deposits of officers, directors
and employees totaled $ 2,006,103 and $ 6,658,077 at
December 31, 2000 and 1999, respectively.
The aggregate amount of demand deposit overdrafts reclassified
as loan balances were
$ 212,482 and $ 177,149 at December 31, 2000 and 1999,
respectively.
Note 10. Financial Instruments With Off-Balance-Sheet Risk
The Bank is a party to financial instruments with off-balance-
sheet risk in the normal course of business to meet the
financial needs of its customers and to reduce its own exposure
to fluctuations in interest rates. These financial instruments
include commitments to extend credit and standby letters of
credit. Those instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the
amount recognized in the balance sheets. The contract amounts
of those instruments reflect the extent of involvement the Bank
has in particular classes of financial instruments.
The corporation's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument
for commitments to extend credit and standby letters of credit
is represented by the contractual amount of those instruments.
The corporation uses the same credit policies in making
commitments and conditional obligations as it does for on-
balance-sheet instruments.
Contract or
Notional Amount
(000 omitted)
2000 1999
Financial instruments whose contract amounts
represent credit risk at December 31:
Commitments to extend credit $ 14,897 $ 15,296
Commercial and standby letters of credit 1,644 1,425
$ 16,541 $ 16,721
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require
payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements.
The corporation evaluates each customer's creditworthiness on
a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the corporation upon extension of credit,
is based on management's credit evaluation of the customer.
Collateral held varies but may include accounts receivable,
inventory, real estate, equipment, and income-producing
commercial properties.
Standby letters of credit are conditional commitments issued by
the corporation to guarantee the performance of a customer to a
third party. Those guarantees are primarily issued to support
public and private borrowing arrangements. The credit risk
involved in issuing letters of credit is essentially the same
as that involved in extending loans to customers. The
corporation holds collateral supporting those commitments when
deemed necessary by management.
- -18-
Note 11. Concentration of Credit Risk
The corporation grants agribusiness, commercial and residential
loans to customers located in South Central Pennsylvania and
Northwestern Maryland. Although the corporation has a
diversified loan portfolio, a portion of its customers' ability
to honor their contracts is dependent upon the construction and
land development and agribusiness economic sectors.
The corporation evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained if
deemed necessary by the corporation upon the extension of
credit is based on management's credit evaluation of the
customer. Collateral held varies but generally includes
equipment and real estate.
The corporation maintains deposit balances at correspondent
banks, which provide check collection and item processing
services to the corporation. The balances with these
correspondent banks, at times, exceed federally insured limits,
which management considers to be a normal business risk.
Note 12. FNB Financial Corporation (Parent Company Only) Financial
Information
The following are the condensed balance sheets, statements of
income and statements of cash flows for the parent company.
Balance Sheets
December 31
Assets
2000 1999
Cash $ 64 $ 26,460
Interest-bearing deposits with banks 299 6,917
Marketable equity securities
available for sale 216,422 199,112
Investment in the First National Bank
of McConnellsburg 12,526,464 11,148,902
Other assets 3,579 6,252
Total assets $ 12,746,828 $ 11,387,643
Liabilities and Stockholders' Equity
Dividends payable $ 192,000 $ 172,000
Other liabilities 6,801 14,906
198,801 186,906
Common stock, par value $ .315; 12,000,000
shares authorized; 800,000 shares issued
and outstanding 252,000 252,000
Additional paid-in capital 1,789,833 1,789,833
Retained earnings 10,623,726 10,125,145
Accumulated other comprehensive income ( 117,532) ( 966,241)
Total liabilities and stockholders' equity $ 12,746,828 $ 11,387,643
- -19-
Note 12. FNB Financial Corporation (Parent Company Only) Financial
Information (Continued)
Statements of Income
Years Ended December 31
2000 1999 1998
Cash dividends from wholly-owned
subsidiary $ 436,000 $ 364,000 $ 327,000
Interest on deposits with banks 330 451 327
Dividend income - Marketable
equity securities 5,938 4,780 3,387
Securities gains 0 39,800 49,000
Equity in undistributed income of
subsidiary 540,277 520,400 420,069
982,545 929,431 799,783
Less: holding company expenses 27,964 18,378 12,927
Income before income taxes 954,581 911,053 786,856
Applicable income taxes 0 7,771 4,906
Net income $ 954,581 $ 903,282 $ 781,950
Statements of Cash Flows
Years Ended December 31
1998 1997
Cash flows from operating activities:
Net income $ 954,581 $ 903,282 $ 781,950
Adjustments to reconcile net
income to cash provided by
operating activities:
Equity in undistributed income
of subsidiary ( 540,277) ( 520,400) ( 420,069)
(Gain) on sales of investments 0 ( 39,800) ( 49,000)
(Increase) decrease in other assets ( 1,080) 445 235
Increase (decrease) in other liabilities ( 10,238) 5,405
9,118
Net cash provided by operating activities 402,986 348,932 322,234
Cash flows from investing activities:
Net (increase) decrease in interest bearing deposits
with banks 6,618 5,044 ( 11,961)
Purchase of marketable equity securities
available for sale 0 ( 71,002) ( 139,146)
Sales of marketable equity securities
available for sale 0 74,200 105,000
Net cash provided (used) by investing activities 6,618 8,242
46,107)
Cash flows from financing activities:
Cash dividends paid ( 436,000) ( 336,000) ( 320,000)
Net increase (decrease) in cash ( 26,396) 21,174 ( 43,873)
Cash, beginning balance 26,460 5,286 49,159
Cash, ending balance $ 64 $ 26,460 $ 5,286
- -20-
Note 13. Regulatory Matters
Dividends paid by FNB Financial Corporation are generally
provided from the dividends it receives from the Bank. The
Bank, as a National Bank, is subject to the dividend
restrictions set forth by the Comptroller of the Currency.
Under such restrictions, the Bank may not, without prior
approval of the Comptroller of the Currency, declare dividends
in excess of the sum of the current year's earnings (as
defined) plus the retained earnings (as defined) from the prior
two years. The dividends that the Bank could declare without
the approval of the Comptroller of the Currency amounted to
approximately $ 2,302,058 and $ 2,266,858 at December 31, 2000
and 1999, respectively.
FNB Financial Corporation's balance of retained earnings at
December 31, 2000 is
$ 10,623,726 and would be available for cash dividends,
although payment of dividends to such extent would not be
prudent or likely. The Federal Reserve Board, which regulates
bank
holding companies, establishes guidelines which indicate that
cash dividends should be covered
by current period earnings.
The Bank is also subject to various regulatory capital
requirements administered by federal banking agencies. Failure
to meet minimum capital requirements can initiate certain
mandatory, and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material
effect on the Bank's financial statements. Under capital
adequacy guidelines, the Bank is required to maintain minimum
capital ratios. The "leverage ratio" compares capital to
adjusted total balance sheet assets. "Tier I" and "Tier II"
capital ratios compare capital to risk-weighted assets and off-
balance sheet activity. A comparison of the Corporation's
capital ratios to regulatory minimums at December 31 is as
follows:
FNB Financial Corporation Regulatory Minimum
2000 1999 Requirements
Leverage ratio 10.03% 9.36%
4%
Risk-based capital ratios/
Tier I (core capital) 16.09% 15.39% 4%
Combined Tier I and
Tier II (core capital
plus allowance for loan
losses)
17.15% 16.43% 8%
As of December 31, 2000 the most recent regulatory exam from the
Office of the Comptroller of
the Currency categorized the Bank as well capitalized under the
regulatory frame work for prompt
corrective action. There are no conditions or events since that
notification that management
believes have changed the Bank's category.
Note 14. Compensating Balance Arrangements
Required deposit balances at the Federal Reserve were $ 105,000
and $ 125,000 for 2000 and 1999, respectively. Required
deposit balances at Atlantic Central Banker's Bank were
$ 425,000 and $ 470,000 at December 31, 2000 and 1999,
respectively. These balances are maintained to cover
processing costs and service charges.
- -21-
Note 15. Fair Value of Financial Instruments
The estimated fair values of the Corporation's financial
instruments were as follows at December 31:
- - - - - - - - 2000 - - - - - - - - - - - - - - 1999 - - - - - -
- - -
Carrying Fair Carrying Fair
Amount Value Amount Value
FINANCIAL ASSETS
Cash and due from banks $ 4,020,479 $ 4,020,479 $ 3,565,173 $ 3,565,173
Interest-bearing deposits in banks 778,546 780,309 723,094 723,094
Securities available for sale 26,768,521 26,768,521 28,085,248 28,085,248
Securities to be held to maturity 1,207,835 1,135,971 1,669,712 1,556,865
Other bank stock 833,700 833,700 681,200 681,200
Loans receivable 83,112,173 82,085,602 76,137,080 75,406,951
Accrued interest receivable 789,393 789,393 687,261 687,261
FINANCIAL LIABILITIES
Time certificates 62,129,564 62,963,904 60,509,040 61,286,056
Other deposits 41,502,924 41,502,924 38,820,896 38,820,896
Accrued interest payable 677,632 677,632 582,198 582,198
Liability for borrowed funds 6,176,901 6,578,604 6,364,996 6,358,080
Note 16. Liability for Borrowed Funds
The Bank received Community Investment Program funding from the
Federal Home Loan
Bank of Pittsburgh for $ 175,000 at a fixed rate of 6.64% and
an amortization term of 20 years. Required payments on this
loan are as follows:
2001 $ 5,443
2002 5,816
2003 6,214
2004 6,639
2005 7,094
Thereafter 127,695
$ 158,901
The Bank has borrowed on convertible ten year/three month
borrowing arrangements with
Federal Home Loan Bank of Pittsburgh. The balance outstanding
at December 31, 2000 on these arrangements was $ 5,250,000 at
variable interest rates ranging from 5.83% to 6.54% maturing
July 2010 through August 2010.
The conversion feature allows Federal Home Loan Bank to convert
the loan to repayment on the
one year anniversary of the loan date and quarterly thereafter,
subject to notification of the Bank's intentions to return the
debt or allow conversion to repayment.
On December 17, 1999, the Bank borrowed on a convertible five
year/three month borrowing
arrangement with Federal Home Loan Bank of Pittsburgh. The
current rate is 5.6% subject to
the first adjustment date of March 17, 2000 with final
maturity of December 17, 2004.
The balance was $ 2,500,000 at December 31, 1999. This was
returned in June 2000 and is no
longer an outstanding obligation at December 31, 2000.
The Bank secured a line of credit with Federal Home Loan Bank
of Pittsburgh for
$ 17,750,000 on December 1, 1999. The outstanding balance at
December 31, 2000 and 1999 was $ 768,000 and $ 1,201,000 at a
variable rate of 6.63% and 4.05%, respectively scheduled to
mature November 29, 2001.
The Bank had two loans which carried a 4.27% fixed rate with
issue dates of December 30, 1999 and December 31, 1999 and
maturity dates of January 6, 2000 and January 7, 2000,
respectively. These loans were held by Federal Home Loan Bank
of Pittsburgh. The balance on these loans totaled $ 2,500,000
at December 31, 1999.
- -22-
Note 16. Liability for Borrowed Funds (Continued)
The total maximum borrowing capacity of the Bank from Federal
Home Loan Bank at
December 31, 2000 was $ 44,367,000. Collateral for borrowings
at the Federal Home Loan
Bank of Pittsburgh consists of various securities and the
Corporation's 1-4 family mortgages with a total value of
approximately $ 57,171,000.
The following represents a summary of the liability for
borrowed funds at December 31:
2000 1999
FHLB CIP Loan $ 158,901 $ 163,996
Repurchase Agreement 0 2,500,000
Convertible Loan Arrangement 5,250,000 2,500,000
Line of Credit 768,000 1,201,000
$ 6,176,901 $ 6,364,996
Note 17. Operating Lease
The Corporation leases its Hancock, Maryland office. The
original lease term is ten years with
three separate successive options to extend the lease for a
term of five years each. Monthly rent is $ 1,800 and the
lessee pays a proportionate share of other operating expenses.
For the years ended December 31, 2000, 1999 and 1998 rent
expense under this operating lease was
$ 21,600 for each year. Required lease payments for the next
five years are as follows:
2001 $ 21,600
2002 21,600
2003 21,600
2004 21,600
2005 21,600
Thereafter 16,200
$ 124,200
- -23-
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
SELECTED FIVE YEAR FINANCIAL DATA
2000
1999 1998 1997 1996
Results of Operations (000 omitted)
Interest income $ 8,755 $ 7,802 $ 7,721 $ 7,388 $ 6,965
Interest expense 4,697 4,119 4,112 3,847 3,694
Provision for loan losses 231 190 475 233 96
Net interest income after
provision for loan losses 3,827 3,493 3,134 3,308 3,175
Other operating income 624 621 530 349 270
Other operating expenses 3,267 3,030 2,772 2,608 2,270
Income before income taxes 1,184 1,084 892 1,049 1,175
Applicable income tax 229 181 110 193 218
Net income $ 955 $ 903 $ 782 $ 856 $ 957
Common Share Data
Per share amounts are based on weighted average shares of common stock
outstanding of 800,000 for 2000, 1999, 1998, 1997 and 1996 after giving
retroactive recognition to a two-for-one stock split issued
September 1, 2000.
Income before income taxes $ 1.48 $ 1.36 $ 1.12 $ 1.31 $ 1.47
Applicable income taxes .29 .22 .14 .24 .27
Net income 1.19 1.13 .98 1.07 1.20
Cash dividend declared .57 .50 .405 .40 .385
Book value (actual number
of shares outstanding
before FAS 115 adjustments) 15.83 15.21 14.58 14.00 13.34
Dividend payout ratio 47.76% 44.28% 41.43% 37.39% 32.18%
Year-End Balance Sheet Figures
(000 omitted)
Total assets $ 123,626 $ 117,929 $ 113,565 $ 106,020 $ 98,644
Net loans 83,112 76,137 61,901 59,124 56,260
Total investment securities -
Book value 28,154 31,900 35,348 29,425 33,767
Deposits-noninterest bearing 11,798 10,959 10,819 9,988 9,250
Deposits-interest bearing 91,834 88,371 89,685 83,272 77,884
Total deposits 103,632 99,330 100,504 93,260 87,134
Total stockholders' equity (before
FAS 115 adjustments) 12,666 12,167 11,664 11,206 10,670
Ratios (calculated before FAS 115
adjustments)
Average equity/average assets 10.15% 10.49% 10.53% 10.74% 10.87%
Return on average equity 7.67% 7.53% 6.85% 7.98% 9.18%
Return on average assets .78% .79% .72% .86% 1.00%
- -24-
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
SUMMARY OF QUARTERLY FINANCIAL DATA
The unaudited quarterly results of operations for the years ended
December 31, 2000 and 1999 are as follows:
2000
1999
($ 000 omitted Quarter Ended
Quarter Ended
except per share) Mar. 31 June 30 Sept. 30 Dec. 31
Mar. 31 June 30 Sept. 30 Dec. 31
Interest income $ 2,097 $ 2,173 $ 2,255 $ 2,230 $ 1,885 $ 1,899
$ 1,968 $ 2,050
Interest expense 1,115 1,159 1,202 1,221 1,020 997
1,032 1,070
Net interest income 982 1,014 1,053 1,009 865 902 936 980
60 45 45 81
30 36
30 94
Net interest income
after provision for
loan losses 922 969 1,008 928 835 866 906 886
Other income 172 133 145 174 114 126 125 206
Security gains (losses) 0 0 0 0 ( 1) 51 0 0
Other expenses 795 794 822 856 718 751
756 805
Operating income
before
income taxes 299 308 331 246 230 292 275 287
Applicable income taxes 57 65 69 38 41
56 42 42
Net income $ 242 $ 243 $ 262 $ 208 $ 189 $ 236 $ 233 $ 245
Net income applicable
to common stock
Per share data:
Net income $ .30 $ .30 $ .33 $ .26 $ .24 $ .30
$ .29 $ .30
- -25-
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS'
EQUITY, INTEREST RATES AND INTEREST DIFFERENTIAL
Years Ended December 31
- - - - - - - -2000- - - - - - -
- - - - - - - - - -1999- - - - - - - - - - - - - - - - -
1998- - - - - - - -
Average
Average
Average
(000 omitted) Balance Interest Rate
Balance Interest Rate Balance Interest Rate
ASSETS
Interest bearing
deposits with banks
and federal funds sold $ 1,200 $ 72 6.00% $ 2,975 $ 148
6,098
$ 332 5.44%
Investment securities 30,571 1,780 5.82% 33,114 1,887 5.70% 33,100 1,939 5.86%
Loans 80,900 6,903 8.53% 68,773 5,767 8.39%
60,265 5,450 9.05%
Total interest
earning assets 112,671 $ 8,755 7.77% 104,862 $ 7,802 7.44% 99,463
$ 7,721 7.76%
Cash and due from
banks 3,746 3,467 2,959
Bank premises and
equipment 3,072 3,213 3,240
Other assets 3,200 2,776 2,833
Total assets $ 122,689 $ 114,318 $ 108,495
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing
transaction accounts $ 8,148 $ 109 1.34% $ 8,985 $ 140
8,521
$ 143 1.68%
Money market deposit
accounts 8,460 332 3.92% 7,556 251 3.32%
8,028 294 3.66%
Other savings deposits 11,095 256 2.31% 11,770 270 2.29% 11,482 307 2.67%
All time deposits 61,863 3,544 5.73% 60,916 3,369 5.53% 57,892 3,357 5.80%
Liability for borrowed
funds 7,468 456 6.11% 1,460
89 6.10% 171 11 6.43%
Total interest
bearing
liabilities 97,034 $ 4,697 4.84% 90,687 $ 4,119 4.54% 86,094 $ 4,112 4.78%
Demand deposits 12,047 10,849 10,010
Other liabilities 1,149 786
968
Total liabilities 110,230 102,322 97,072
Stockholders' equity 12,459 11,996
11,423
Total liabilities
and stockholders'
equity $ 122,689 $ 114,318 $ 108,495
Net interest income/net
interest margin/margin
average earning assets $ 4,058 3.6% $ 3,683 3.51% $ 3,609 3.63%
- -26-
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
CHANGES IN NET INTEREST INCOME
- - - -2000 Compared to
1999- - - - - - - -1999 Compared to 1998- - - -
Total Total
Average
Average Increase Average Average
Increase
(000 omitted) Volume Rate
(Decrease) Volume Rate (Decrease)
Interest Income
Interest bearing deposits
with banks and
federal funds sold ($ 88) $ 12 ($ 76) ($ 170) ($ 14) ($ 184)
Investment securities ( 144) 37 ( 107) 1 ( 53) ( 52)
Loans 1,017 119 1,136 808 ( 491) 317
Total interest income $ 785 $ 168 $ 953 $ 639 ($ 558) $ 81
Interest Expense
Interest bearing
transaction accounts ($ 13) ($ 18) ($ 31) $ 8 ($ 11) ($ 3)
Money market
deposit accounts 30 51 81 ( 17) ( 26) ( 43)
Other savings ( 15) 1 ( 14) 8 ( 45) ( 37)
All time deposits 52 123 175 175 ( 163) 12
Liability for borrowed funds 366 1 367 83 ( 5) 78
Total interest expense $ 420 $ 158 $ 578 $ 257 ($ 250) $ 7
Net interest income $ 375 $ 74
- -27-
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY
MATURITIES OF INVESTMENT SECURITIES
December 31, 2000
The following table shows the maturities of investment
securities at amortized cost as of December 31, 2000, and weighted
average yields of such securities. Yields are shown on a taxable
equivalent basis, assuming a 34% federal income tax rate.
Within
1-5 5-10 Over
(000 omitted) 1 Year Years
Years 10 Years Total
Obligations of other U.S.
Government agencies:
Amortized cost $ 580 $ 6,700 $ 8,329 $ 1,586 $ 17,195
Yield 5.62% 5.90% 6.42% 6.81% 6.23%
Obligations of state and
political subdivisions:
Amortized cost 275 1,020 3,170 3,927 8,392
Yield 6.69% 6.93% 6.91% 7.15% 7.02%
Mortgage-Backed securities
and SBA Guaranteed Loan
Pool Certificates (1):
Amortized cost 3 101 70 2,183 2,357
Yield 8.04% 6.72% 8.77% 7.14% 7.16%
Subtotal amortized cost $ 858 $ 7,821 $ 11,569 $ 7,696 $ 27,944
Subtotal yield 5.97% 6.04% 6.56% 7.08% 6.54%
Equity Securities $ 1,044
Yield 5.93%
Total investment
securities $ 28,988
Yield 6.52%
(1) It is anticipated that these mortgage-backed securities and SBA
Guaranteed Loan Pool Certificates will
be repaid prior to their contractual maturity dates.
- -28-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following section presents a discussion and analysis of the
financial condition and results of operations of FNB Financial
Corporation (the Corporation) and its wholly-owned subsidiary, The
First National Bank of McConnellsburg (the Bank). This discussion
should be read in conjunction with the financial tables/statistics,
financial statements and notes to financial statements appearing
elsewhere in this annual report.
RESULTS OF OPERATIONS
Overview
Consolidated net income for 2000 was $ 954,581, a $ 51,299, or 5.68%
increase from the net income for 1999 of $ 903,282, and an increase of
$ 172,631 or 22.08% from the net income of $ 781,950 for 1998. On a
per share basis reflecting the two-for-one stock split effective
September 1, 2000, net income for 2000 was $ 1.19, based upon average
shares outstanding of 800,000, compared to $ 1.13 for 1999 and $ 0.98
for 1998. Results of operations for 2000 as compared to 1999 were
impacted by the following items:
* Net income was positively impacted by a 7.45% increase in
average earning assets;
* Net income was negatively impacted by a $ 41,319 increase in
the provision for loan losses
compared to a $ 284,814 decrease in the provision for loan
losses, from a total of $ 474,814 in 1998 to $ 190,000 in 1999.
The decision to substantially increase the allowance in 1998 was
based upon several factors:
* A more critical analysis of our commercial and consumer loan
portfolios which resulted in a larger
allocation of the allowance reserved specifically for commercial
loans and consumer installment loans.
* The observation that the current long-run expanding economic
cycle may be reaching its peak
which could result in the slowing down of our economy.
* * The instability in the Asian Market, which showed a few signs of
stabilization, prompted
management to assess the "trickle down effects" of a slowing
economy and the Asian crisis on
businesses in our local economy and the potential for an
increase in past due loans and
delinquency problems; and
* The assessment of potential problems businesses could encounter
regarding Year 2000 computer issues.
* Net income was negatively impacted by a decrease in net gains on
the sale of securities from a net
gain of $ 49,655 in 1999 to a net loss in 2000 of $ 474 and net
gains in 1998 of $ 143,288;
* Net income was positively impacted by an increasing net interest
margin in 2000 of 0.09% from
3.51% in 1999 to 3.60% in 2000 and in 1999 was negatively
impacted by a decreasing net interest margin of 0.12% from 3.63%
in 1998 to 3.51% in 1999. The increase in 2000 occurred due to
a 0.33% increase in the yield on earning assets while the cost
of interest bearing liabilities increased 0.30%. In 2000 the
yield on earnings assets increased 0.33% due to the following:
* a 0.14% increase in the yield on loans from 8.39% in 1999
to 8.53% in 2000; a result of rising interest rate
indexes on adjustable rate loans during the entire year.
* a 0.12% increase in the yield on investment securities
from 5.70% in 1999 to 5.82% in 2000 the result of
maturities of lower yielding securities.
- -29-
* a 1.02% increase in the yield on federal funds sold and
interest-bearing deposits with
banks due to increasing yields on federal funds sold
throughout the year.
* Net income was negatively impacted by an increasing cost of
interest bearing liabilities from
4.54% in 1999 to 4.84% in 2000. Net income was positively
impacted by a decreasing cost of interest-bearing liabilities of
0.24% from 4.78% in 1998 to 4.54% in 1999. In 2000 the cost of
interest-bearing liabilities increased 0.30% due mainly to the
following:
* An increasing cost of money market deposit accounts, from
3.32% in 1999 to 3.92% in
2000.
* An increasing cost of time deposits from 5.53% in 1999 to
5.73% in 2000.
* Net income was negatively impacted by an increase in wage and
salary expenses of $89,936, or
7.19% and employee benefits of $ 28,391, or 8.69%, a direct
result of:
* Officer and employee raises during the operating year.
* Increased participation in our 401K retirement program.
* Net income was negatively impacted by a $ 15,265 increase in net
occupancy expenses and a
$ 11,067 increase in furniture and equipment expenses as a
result of:
* A $ 8,558 increase in real estate upkeep and repair as a
direct result of grounds
management expense increases.
* A $ 2,000 increase in janitorial expenses.
* A $ 3,069 increase in real estate taxes.
* A $ 2,569 increase in bank (owned) automobile
depreciation.
* A $ 3,277 increase in utility expenses.
* An increase of $ 4,262 in depreciation expenses on
furniture and equipment due to the
initial installation and upgrade of our Local Area
network.
* Net income was negatively impacted by a $ 26,813 decrease in
other income due to the 1999
demutualization of a life insurance company which insures a
portion of the life insurance polices on Directors and key
executives. In 1999 this resulted in a gain on the sale of the
stock from the demutualization in the amount of $ 64,312.
* Net income was positively impacted by a $ 58,171 increase in the
service charges on deposit
accounts as a result of increased overdraft and minimum balance
charges implemented during the 2000 year.
* Net income was positively impacted by a $ 22,242 increase in
other service charges and fees due to
a $ 11,200 increase in discount brokerage commissions and a $
7,000 increase in late charges on customers installment and
mortgage loans.
* Net income was negatively impacted by a $ 48,600 increase in the
current year income tax
provision resulting primarily from the increase in taxable
income in relation to tax free income.
Net income as a percent of total average assets for 2000, also known
as return on assets (ROA), was .78% compared to .79% for 1999 and
0.72% for 1998. Net income as a percent of average stockholders'
equity for 2000, also known as return on equity (ROE), was 7.67%
compared to 7.53% for 1999 and 6.85% for 1998. The ROA and ROE for
these periods were impacted by the factors discussed in the preceding
paragraphs.
- -30-
Net Interest Income
Net interest income is the amount by which interest income on loans
and investments exceeds interest incurred on deposits and other
interest-bearing liabilities. Net interest income is our primary
source of revenue. The amount of net interest income is affected by
changes in interest rates and by changes in the volume and mix of
interest-sensitive assets and liabilities.
Net interest income for 2000 increased $ 375,122 or 10.19% over 1999
and $ 449,339 or 12.45% over 1998. Average earning assets for 2000
increased $ 7,809,000 over 1999 and $ 13,208,000 over 1998. This
increase in average earning assets from 1999 to 2000 was the result
of:
* An increase in average loans in the amount of $12,127,000 or
17.63%.
* A decrease in average investment securities in the amount of
$ 2,543,000 or 7.68%.
* A decrease in interest-bearing deposits with banks and
federal funds sold in the amount of
$ 1,775,000 or 59.66%.
The increase in loans at an average yield of 8.53% partially funded by
the decrease in investment securities, interest-bearing deposits with
banks and federal funds sold at an average yield of 5.82% and 6.00%,
respectively, directly contributed to the increase in net interest
income.
Earning asset increases were funded in large part by an increase in
average borrowings from the Federal Home Loan Bank of Pittsburgh in an
amount of $ 6,008,000 while average deposits increased only
$ 1,537,000. The inability of deposits to supply the liquidity for
the growth of earning assets was funded, and continues to be funded,
by borrowings from the Federal Home Loan Bank (FHLB).
The volume growth in earning assets and interest-bearing liabilities
contributed to the increase in net interest income in the amount of $
365,000 in 2000 over 1999.
The year 2000 was defined by several interest rate increases by the
Federal Reserve Board. Following the pattern of increasing rates in
1999, the Federal Reserve continued to increase short term interest
rates during the first and second quarters of 2000. At the beginning
of the year 2000 the Discount Rate was 5.00% and the Federal Funds
Rate was targeted at 5.50%. As of December 31, 2000, the Discount
Rate had increased to 6.00% and the Federal Funds rate was targeted at
6.50%, both rates reflecting the last increase which occurred on May
16, 2000. As a result of these increasing interest rates security
calls were non-existent during the year as government agencies and
municipalities chose not to exercise call options during this
increasing interest rate environment. The result was a reliance on
deposit increases and borrowing from the Federal Home Loan Bank to
fund loan demand. In order to attract and retain deposits we
increased interest rates on our premium money market accounts and on
our time deposits:
* Cost of Money Market deposits increased 60 basis points to
3.92% in 2000 from 3.32% in 1999.
* Cost of time deposits increased 20 basis points from 5.53% in
1999 to 5.73% in 2000.
Although our cost of borrowing increased only 1 basis point to 6.11%,
our reliance on borrowing to fund loan demand increased over 5 times
to average borrowings of $ 7,468,000 in 2000 from $ 1,460,000 in 1999.
The overall result of increased borrowings and increased costs of
these deposits, as previously discussed, resulted in an increase in
our cost of funding assets by 30 basis points to 4.84% in 2000
compared to 4.54% in 1999.
- -31-
On the asset side the increasing interest rate environment resulted in
an increase in yield on our earning assets. As lower yielding
investments matured and indexes on adjustable rate loans and
securities increased, our yields on earning assets increased:
* The yield on Interest-bearing deposits and federal funds sold
increased 1.02% from 4.98% in
1999 to 6.00% in 2000.
* The yield on investment securities increased 12 basis points
to 5.82% in 2000 from 5.70% in 1999.
* The yield on loans increased 14 basis points from 8.39% in
1999 to 8.53% in 2000.
The net effect of all interest rate fluctuations was to increase net
interest income in the amount of
$ 10,000 in 2000 from 1999. Due to the overall increase in the yield
on earning assets by 0.33%, a
$ 12,127,000 increase in our average loan balance which is our highest
earning asset and a decreased reliance on our lower interest earning
assets of investments and interest-bearing balances with banks, this
combination of increased yields and reallocation of earning asset
balances was more than enough to offset our increased cost of deposits
of 30 basis points to 4.84% in 2000 from 4.54% in 1999. The result
was a .09% increase in our net interest margin from 3.51% in 1999 to
3.60% in 2000.
Throughout the first two quarters of 1999, interest rates remained
relatively the same with no major changes in Federal Reserve interest
rate policy. In fact, there were some indications and some
predictions interest rates may continue to decrease during this
period. These indications and predictions were quickly put to rest
when the FRB abruptly increased interest rates at the very end of the
second quarter. This initial increase in short term rates began the
trend which resulted in a tightening in monetary policy and increase
in interest rates during 1999 of 75 basis points. During 1999, we
concentrated on the reduction of the cost of deposits. The result was
the following:
* A decrease in the cost of interest-bearing transaction
accounts by 0.12% to 1.56%.
* A decrease in the cost of Money Market accounts by 0.34% to
3.32%.
* A decrease in the cost of savings deposits by 0.38% to 2.29%.
* A decrease in the cost of time deposits by 0.27% to 5.53%.
These decreases in the cost of deposits were offset by decreasing
yields on earning assets. During the first two quarters of 1999,
mortgage refinancings and decreasing adjustable rate indexes on loans
resulted in lower yields on the entire loan portfolio. Also during
this period investment securities with call features were called as
issuers took advantage of the declining rate market to reinvest at
lower rates for longer terms. The result was the following:
* A decrease of 0.46% in the yield on interest-bearing deposits
with banks and federal funds sold.
* A decrease of 0.16% in the yield on investment securities.
* A decrease of 0.66% in the yield on loans.
The net effect of all interest rate fluctuations was to decrease net
interest income in the amount of
$ 308,000 in 1999 from 1998. Due to the overall decrease in the yield
on earning assets by 0.32%, which was 0.08% more than the 0.24%
decrease in the cost of interest-bearing liabilities, we have
experienced a decrease in our net interest margin during 1999 compared
to 1998. The average net interest margin for 1999 was 3.51% compared
to 3.63% for 1998.
As we began the 2001 year, the Federal Reserve has changed its outlook
for the economy dramatically and has decreased short term interest 1%
during the month of January. Due to this dramatic shift in interest
rate policy, we anticipate the yield on earning assets to decrease
during the next few quarters as indexes on adjustable rate securities
and loans decrease and commercial loan rates and residential lending
rates begin to decrease. At the same time the current decreasing
interest rate environment has resulted in a refinancing by agencies
and municipalities of securities with call features resulting in the
loss of longer term, higher yielding investments. The decreases in
yields in the loan portfolio will result in lower yields on our
- -32-
earning assets. At the same time competition for deposits has greatly
increased as depositors are more savvy, having been encouraged by a
seemingly endless economic expansion and limitless opportunities in
the stock market to invest their funds in investment vehicles which
offer a more attractive yield than bank deposit products. The result
has forced us to offer higher deposit rates as deposits of CDs and
IRAs had begun to leave the Bank. We have begun to decrease deposit
rates on these investment vehicles in order to retain our net interest
margin and are offering special deposit terms and rates in order to
attract and retain existing deposits. To offset deposit losses and
continued loan demand, we will utilize our line of credit at the FHLB.
This funding alternative is interest rate sensitive in that the rate
reprices on a daily basis. We have matched borrowings at the FHLB
with specific loans and have utilized term borrowings to tie up
interest rates for longer periods in order to lock-in interest rate
spreads. During this period we anticipate a slight decrease in our
interest margin; however, this decrease will depend greatly upon
present market conditions for both loans and deposits. Current
strategies we are utilizing to improve our interest spread are as
follows:
* Promoting special-term fixed rate certificates of deposit
* Developing new equity-based certificates of deposits
* Promoting adjustable rate commercial and residential mortgage
loan products.
* Matching borrowings at the FHLB with specific loan credits.
* Retaining the cost of interest-bearing transaction, money
market and savings accounts at their current levels.
Provision for Loan Losses
The loan loss provision is an estimated expense charged to earnings in
anticipation of losses attributable to uncollectible loans. The
provision is based on our analysis of the adequacy of the allowance
for loan losses. The provision for 2000 was $ 231,319, compared to $
190,000 for 1999, and $ 474,814 for 1998. This increase in annual
provision of $ 41,319 in 2000 from 1999 was the result of increasing
commercial loan balances which add more volatility and risk to the
loan portfolio, as well as, specific provisions for loans we have
determined to warrant specific provisions due to issues regarding
their total and complete collectability.
The decrease in provision from 1999 to 1998 of $ 284,814 was the
result of our assessment that the level of the allowance for loan
losses was sufficient to cover anticipated losses and therefore did
not require the same size addition which was required in 1998. The
sizeable addition in 1998 was determined necessary due to the
following:
* A critical analysis in 1998 of our commercial and consumer
loan portfolios which resulted in a larger allocation of
the allowance reserved specifically for commercial loans
and consumer installment loans.
* The observation that the current long-run expanding
economic cycle may be reaching its peak which could result
in the slowing down of our economy.
* The instability in the Asian Market, which showed a few
signs of stabilization, prompted management to assess the
"trickle down effects" of a slowing economy and the Asian
crisis on businesses in our local economy and the potential
for an increase in past due loans and delinquency problems.
* The assessment of potential problems businesses could
encounter regarding Year 2000 computer issues.
Total charged-off loans in 2000 were $ 203,000 compared to $ 201,000
in 1999 and $ 203,000 in 1998. Total recoveries in 2000 were $ 37,000
compared to $ 25,000 in 1999 and $ 34,000 in 1998. See discussion on
Allowance for Loan Losses.
- -33-
Other Operating Income and Other Operating Expenses
Other operating income for 2000 was $ 623,932, a $ 3,471 increase over
the same period in 1999 and a
$ 93,999 increase over the same period in 1998. This increase is
mainly attributable to the following:
* A $ 102,810 increase in 2000 in the cash value of bank-owned
life insurance. The 1999 cash value increase was $ 81,594
while the 1998 increase was $ 44,947.
* Service charges on deposit account increasing $ 58,171 due in
large part to a $ 5.00 increase in the Overdraft/NSF fee and
also to increased deposit accounts, our stricter enforcement
of overdraft fees and an increase in minimum balance charges ;
* A $ 6,214 increase in Check/Debit Card discount and merchant
Credit Card Discounts.
* A $ 20,549 increase in income received from service charges
associated with our checking account club program.
* An $ 11,134 increase in discount brokerage commissions.
These increases in other operating income were offset by the following
decreases in 2000 from 1999:
* In 1999 the demutualization of a life insurance company which
insures a portion of the life insurance polices on Directors
and key executives. This demutualization resulted in a gain
on the sale of the stock in the amount of $ 64,312.
* A $ 50,129 decrease in the gains realized on the sale of
investment securities.
* A $ 12,166 decrease in commissions received on installment and
mortgage credit life and disability insurances.
Total other operating expenses for 2000 increased by $ 237,398 or
7.83% over 1999 and $ 494,769 or 17.85%, over 1998. This increase was
mainly the result of the following:
* An increase in wage and salary expenses of $89,936, or 7.19%
and employee benefits of
$ 28,391, or 8.69%, a direct result of:
* Officer and employee raises during the operating year.
* Increased participation in the our 401K retirement program.
* A $ 15,265 increase in net occupancy expenses and a $11,067
increase in furniture and equipment expenses due to:
* A $ 8,558 increase in real estate upkeep and repair as a
direct result of grounds management expense increases.
* A $ 2,569 increase in the depreciation expense for bank
autos as a result of the 1999 addition of two automobiles
to the bank's equipment.
* A $ 3,069 increase in real estate tax expenses.
* A $ 3,277 increase in utility expenses
* A $ 4,262 increase in depreciation expenses on furniture
and equipment
* A $ 36,486 increase in advertising and promotions expenses
due to costs incurred with the hiring of a professional
marketing firm to develop sales training programs for our
employees and advertising promotions.
* An $ 11,178 increase in FDIC insurance premiums and
Comptroller of the Currency assessment expenses due to
increased FDIC insurance premium expenses and increased
assets on which the Comptroller's assessment is based.
- -34-
* A $ 3,143 increase in the cost of communication expenses;
* A $ 3,590 increase in the amortization expense on computer
software;
* A $ 5,115 increase in professional fees due to loan review
fees incurred during the year.
We have been operating, during the past few years, in an expansion
mode, by increasing our target market through the acquisition of the
Fort Loudon Branch Office in Franklin County, Pennsylvania and the
opening of Hancock Community Bank in Washington County, Maryland,
expanding the main office facilities to allow for future growth and
expansion of operations and hiring a commercial loan officer to
increase our loan generation. As a result of this growth and
expansion, other operating expenses increased. The result has been a
decrease in operational income, earnings per Share, Return on Assets
and Return on Equity. Although this growth mode has reduced income in
the short term, we are confident that in the long term these growth
plans will benefit our income producing ability through the addition
of new customers to our deposit and loan bases and retention of
current customers resulting in increased income.
Income Taxes
Our income tax provision for 2000 was $ 229,149 compared to $ 180,572
for 1999 and $ 109,713 for 1998. The increase in the tax provision in
2000 over 1999 in the amount of $ 48,577 is the result of an increase
in income before income taxes of $ 99,876 and a decrease in tax free
income from $ 535,540 in 1999 to
$ 463,247 in 2000, a $ 72,293 or 13.50% decrease. The increase in the
tax provision in 1999 over 1998 in the amount of $ 70,856 was due to
an increase in income before income taxes of $ 192,188, a decrease in
tax-free income in the amount of $ 35,700 and a decrease in the
deferred tax adjustment from 1998 to 1999 in the amount of $ 88,860.
We operated with a marginal tax rate of 34% in 2000, 1999 and in 1998.
Our effective tax rate for 2000 was 19.36% compared to 16.66% for
1999 and 12.30% for 1998. This increase in the effective tax rate is
due to the decrease in tax-free income as discussed.
Future Impact of Recently Issued Accounting Standards
Financial Accounting Standards Board (FASB) issued Statement No. 133
as amended by SFAS No. 138, Accounting For Derivative Instruments and
Hedging Activities, effective for fiscal years beginning after
June 15, 2000. This Statement establishes accounting and reporting
standards for derivative instruments and hedging activities, including
certain derivative instruments embedded in other contracts, and
requires that an entity recognize all derivatives as assets or
liabilities in the balance sheet and measure them at fair value. If
certain conditions are met, an entity may elect to designate a
derivative as follows: (a) a hedge of the exposure to changes in the
fair value of a recognized asset or liability or an unrecognized firm
commitment, (b) a hedge of the exposure to variable cash flows of a
forecasted transaction, or (c) a hedge of the foreign currency
exposure of an unrecognized firm commitment, an available-for-sale
security, a foreign currency denominated forecasted transaction, or a
net investment in a foreign operation. The Statement generally
provides for matching the timing of the recognition of the gain or
loss on derivatives designated as hedging instruments with the
recognition of the changes in the fair value of the item being hedged.
Depending on the type of hedge, such recognition will be in either
net income or other comprehensive income. For a derivative not
designated as a hedging instrument, changes in fair value will be
recognized in net income in the period of change. Management is
currently evaluating the impact of adopting this Statement on the
consolidated financial statements, but does not anticipate that it
will have a material impact.
In September 2000, the FASB issued Statement No. 140 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". This Statement provides accounting and reporting
standards for transfers and servicing of financial assets and
extinguishments of liabilities. It replaces previously issued Statement
No. 125. Statement No. 140 revises accounting for securitizations and
other transfers of financial assets and collateral and requires certain
disclosures, but otherwise carries over most of Statement 125's
provisions without reconsideration. Statement No. 140 is effective for
transfers, servicing and extinguishments occurring after March 31, 2001.
Management is evaluating the impact of this statement, but does not
anticipate that it will have a material impact.
- -35-
FINANCIAL CONDITION
Investment Securities
The book value of the investment security portfolio as of December 31,
2000, decreased by $ 3,064,527 from December 31, 1999, representing a
9.82% decrease. This decrease occurred primarily due to the necessity
to fund an increase in total loans of $ 6,323,000 since December 31,
1999, as total deposits increased only
$ 4,302,552 and borrowings decreased $ 188,095.
Due to the implementation of SFAS No. 115, we have segregated
securities as Held-to-Maturity (HTM), Available-for-Sale (AFS) or
Trading securities. This accounting standard requires HTM securities
be reported on the balance sheet at cost and AFS securities be
reported at market value. As of December 31, 2000, we had in our
portfolio HTM securities of $ 1,207,835 with a market value of $
1,135,972 and AFS securities of $ 26,768,521 with a book value of $
26,946,600. No securities were classified as Trading securities as of
December 31, 2000. For the December 31, 1999, Balance Sheet
presentations, we had investment debt securities classified as HTM
securities of $ 1,669,712 with a market value of $ 1,556,865 and as
AFS securities of $ 28,085,249, with at book value of $ 29,549,250.
No securities were classified as Trading as of December 31, 1999.
The general policy adopted by us segregates purchases of tax-free
municipals with maturities of 5 years or less as Held-to-Maturity
securities while all other security purchases are classified as
Available-for-Sale. The Policy we adopted also allows us, on a case-
by-case basis, to make a specific determination as to the
classification of a security purchase as Held-to-Maturity or
Available-for-Sale depending upon the reason for purchase. Management
adheres to the philosophy that Held-to-Maturity classifications are
typically used for securities purchased specifically for interest rate
management or tax-planning purposes while Available-for-Sale
classifications are typically used for liquidity planning purposes.
As of December 31, 2000, the net unrealized loss of the HTM portfolio
was $ 71,863, a 5.95% decrease from book value and on the AFS
portfolio a net unrealized loss of $ 178,079 or a 0.66% decrease from
book value. As of December 31, 1999, the net unrealized loss on the
HTM portfolio was $ 112,847, a 6.76% decrease from book value, and on
the AFS portfolio, a net unrealized loss of $ 1,468,005 or a 4.97%
decrease from book value. We have reviewed the fluctuation of market
value in each of these portfolios and have determined that due to the
recent increases in short term interest rates, the values of
securities contained within our investment debt portfolio are a direct
result of the current interest rate environment. We have therefore,
concluded that the net unrealized gains and/or losses in our
investment debt portfolio are a direct result of current monetary
policy and therefore are temporary in that security values will
continue to fluctuate, either decrease or increase in value, in
response to future changes in interest rates and monetary policy.
Due to the changes in the interest rate environment and the 1.00%
decrease in short term interest rates since January 1, 2001,
securities with call features have been exercised and we anticipate
other securities with call features to be called in the near future.
As a result of called securities and the changes in the interest rate
environment, liquidity sources available from the investment portfolio
to fund loan demand have increased. We are in the process of reviewing
possible sales of securities to fund loan demand versus the use of
borrowing from the FHLB and the stimulation of deposits through the
offering of more attractive interest rates.
We have purchased for the portfolio mortgage-backed securities, but
presently we have no Collateralized Mortgage Obligations (CMOs) in our
portfolio. The large portion of these mortgage-backed securities have
a variable rate coupon and all have scheduled principal payments.
During periods of rising interest rates, payments from variable rate
mortgage-backed securities may accelerate as prepayments of underlying
mortgages occur as home-owners refinance to a fixed rate while during
periods of declining interest rates, prepayments on high fixed rate
mortgage-backed securities may accelerate as home-owners refinance to
lower rate mortgages. These prepayments cause yields on mortgage-
backed securities to fluctuate as larger payments of principal
necessitate the acceleration of premium amortization or discount
accretion. Due to the low dollar amount of mortgage-backed securities
in relation to the total portfolio, we
feel the interest rate risk and prepayment risks associated with
mortgage-backed securities will not have a material impact on our
financial condition.
- -36-
Loans
The total investment in net loans was $ 83,112,173 at December 31,
2000, representing a $ 6,975,093 or 9.16%, increase from the December
31, 1999, investment of $ 76,137,080. The primary reasons for the
increase in the loan portfolio were due to the significant increase in
commercial lending activity during the years 2000 and 1999. This
increase in commercial lending is a direct result of the hiring of our
Vice President and Loan Division Manager, Mr. William Walker, III, who
was hired for the specific purposes of enhancing and strengthening our
lending operation.
Mr. Walker brought to us a 33 year commercial banking background of
which his last 18 years had been concentrated in commercial lending.
As a member of senior management and in his official capacity as Vice
President/Loan Services Division Manager, Mr. Walker is in charge of
the entire loan department with special emphasis and concentration on
the enhancement, improvement and growth of our commercial loan
portfolio. Mr. Walker's addition to senior management has greatly
enhanced our competitive abilities in the generation of new loans as
evidenced by the aforementioned increase in loan growth.
The composition of our loan portfolio has changed per the following:
* A $ 2,585,000 increase in real estate loans secured by 1 to 4
family residential properties.
* A $ 4,536,000 increase in Loans secured by nonfarmland,
nonresidential properties due primarily to the new loans
secured by commercial real estate.
* A $ 1,571,000 increase in loans to commercial, industrial and
state and political subdivision loans.
* A $ 1,561,000 increase in loans for construction and land
development.
* A $ 3,783,000 decrease in consumer installment loans due to an
increased emphasis on commercial lending and securitization of
many of our consumer loans with mortgage positions on
properties.
Total new real estate mortgage lending increased $ 10,126,000 or
19.43% from December 31, 1999, compared to total new real estate
mortgage loan lending for 1999 which increased $ 8,171,000 or 18.59%
from December 31, 1998. This increase in the amount of real estate
lending during the past two years reflects the closing of several
commercial real estate loans and an increase in residential 1-4 family
mortgage loans as highlighted above. Competitive loan mortgage rates
of other institutions and mortgage companies in our market area during
the first two quarters of 1999 resulted in the refinancing and payoff
of mortgage loans within our loan portfolio; however, we have been
able to attract new mortgage customers through the competitive
mortgage products we offer.
Overall, loan demand during the past year decreased slightly over that
of 1999 due to the rising interest rate environment which was
encountered during the 2000 operating year. Increased aggressiveness
of competing financial institutions, mortgage loan companies and
financing companies in interest rates and marketing strategies has
resulted in the need for an increased emphasis on loan generation.
Our lending operation has been enhanced by the expertise and
experience of Mr. Walker. His knowledge of the commercial loan
business in the Hagerstown market area has resulted in several new
commercial relationships for us. Our operation in this larger market
area and through the Fort Loudon office in Franklin County,
Pennsylvania and Hancock Community Bank in Washington County, Maryland
greatly improves our ability to generate new loan relationships.
During this period, we have seen a decline in our consumer loan
generation. This decline is a direct result of increased competition
for new and used car lending as well as all consumer loans.
To encourage new loan demand, we anticipate offering additional loan
promotions, reviewing loan terms for customer "friendliness" and
developing a commercial lending strategy to stimulate lending throughout
our market area. In addition, the continued operation of Hancock
Community Bank is anticipated to result in an increase in lending in the
Washington County, Maryland area as well as in northern Morgan County,
West Virginia and southern Fulton County, Pennsylvania while the
continued operation of the recently expanded and improved Fort Loudon
Office is anticipated to stimulate lending in the Franklin County,
Pennsylvania market.
- -37-
Non-performing/Impaired Assets
Non-performing loans consist of non-accruing loans and loans 90 days
or more past due. Non-accruing loans are comprised of loans that are
no longer accruing interest income because of apparent financial
difficulties of the borrower. Interest on non-accruing loans is
recorded when received only after past due principal and interest are
brought current.
Other real estate owned includes assets acquired in settlement of
mortgage loan indebtedness. These assets are carried at the lower of
cost or fair value. The other real estate balance as of December 31,
2000, was
$ 168,653 compared to $ 165,603 as of December 31, 1999. The
following actions during the past two years indicate we are actively
pursuing the sale of all properties contained in Other Real Estate as
shown by the following:
* In February, 1999, we exchanged a 1 to 4 family residential
property on Lincoln Way East in McConnellsburg with the Bishop
Raker Post 655 of the Fulton Overseas Veterans
Association (FOVA) as a partial payment for the purchase of
the property located at 115 1/2 Lincoln Way West which is
adjacent to our property in downtown McConnellsburg.
* In April, 1999, we entered into a sales agreement for a
property located in Harrisonville, PA.
* In August 1999, we entered into a sales contract for a
building lot in Chambersburg, PA.
* In November 1999 we entered into a sales agreement for a
property located on the Tuscarora Mountains east of
McConnellsburg.
* In February, 2000, we sold of a 1 to 4 family residential
property in Hagerstown, Maryland.
* In June 2000 we sold a 1 to 4 family residential property in
Waynesboro, PA.
Properties contained in Other Real Estate may be listed with a realty
firm on a contractual basis. The realty firm is evaluated every six
months on its effectiveness in marketing and selling these properties.
Impaired loans consist of those loans which we have determined that
based upon review of collateral values and ability to repay, these
loans may not be paid in full according to contractual terms and may
require additional specific provisions to the allowance for loan
losses. As of December 31, 2000, the dollar amount outstanding on
impaired loans was $ 1,228,633; the underlying collateral values for
these loans based upon contractual lending terms was approximately $
1,135,437. The specific amount allocated for these loans in the
allowance for loan losses was $ 120,000.
Allowance for Loan Losses
The allowance is maintained at a level to absorb potential future loan
losses contained in the loan portfolio and is formally reviewed by us
on a quarterly basis. The allowance is increased by provisions
charged to operating expense and reduced by net charge-offs. Our
basis for the level of the allowance and the annual provisions is our
evaluation of the loan portfolio, current and projected domestic
economic conditions, the historical loan loss experience, present and
prospective financial condition of the borrowers, the level of non-
performing assets, and other relevant factors. While we use available
information to make such evaluations, future adjustments of the
allowance may be necessary if economic conditions differ substantially
from the assumptions used in making the evaluation.
The allowance for loan losses was increased to $ 811,124 from the
prior year level of $ 746,067. The ratio of the allowance to net
loans was 0.97% at December 31, 2000, and 0.97% at December 31, 1999.
After U. S. Government Agency, specifically the Small Business
Administration (SBA) and Farm Service Agency (FSA), guaranteed
portions are subtracted from the net loan balance, the ratio of the
allowance to unguaranteed loans increases to 1.07%. We believe the
current level of the allowance for loan losses of
$ 811,124 is adequate to meet any potential loan losses; but, we have
budgeted a monthly addition during 2001 of $ 12,000 in anticipation of
potential commercial loan problems and general increases in the total
loan portfolio.
- -38-
Liquidity and Rate Sensitivity
Our optimal objective is to maintain adequate liquidity while
minimizing interest rate risk. Adequate liquidity provides resources
for credit needs of borrowers, for depositor withdrawals, and for
funding Corporate operations. Sources of liquidity are maturing
investment securities; maturing overnight investments in federal funds
sold; maturing investments in time deposits at other banks; readily
accessible interest-bearing deposits at other banks; payments on
loans, mortgage-backed securities and SBA Guaranteed Loan Pool
Certificates; a growing core deposit base; and borrowings from the
FHLB.
In order to assure a constant and stable source of funds, we are a
member of the Federal Home Loan Bank of Pittsburgh. This membership
assures us the availability of both short term and long term fixed
rate funds. As of December 31, 2000, we had borrowings of $ 6,176,901
from this institution and had readily available to us over $
38,000,000 in additional borrowing capacity. As of December 31, 1999,
we had borrowings of
$ 6,364,996 from this institution and had readily available to us over
$ 31,000,000 in additional borrowing capacity.
Borrowings from the FHLB as of December 31, 2000, were comprised of
the following:
* A $ 2,000,000 quarterly adjustable advance maturing on August
10, 2010, repricing on
February 10, 2001.
* A $ 2,250,000 fixed rate advance with a 3 month LIBOR strike
rate of 8.00% beginning
August 28, 2001, with a final maturity of August 30, 2010.
* A $ 500,000 quarterly adjustable advance maturing on July 10,
2010, repricing on January 22, 2001.
* A $ 500,000 quarterly adjustable advance with a 3 month LIBOR
strike rate of 8.00% beginning on July 12, 2001, with a final
maturity of July 12, 2010.
* A $ 768,000 advance on a line of credit which reprices on a
daily basis.
* A $ 158,901 fixed rate advance maturing on July 17, 2017.
Borrowings from the FHLB as of December 31, 1999, were comprised of
the following:
* A $ 2,500,000 quarterly adjustable Advance Maturing on
December 17, 2004, repricing on March 17, 2000.
* A $ 1,000,000 fixed rate advance maturing on January 6, 2000.
* A $ 1,500,000 fixed rate advance maturing on January 7, 2000.
* A $ 1,201,000 advance on a line of credit which reprices on a
daily basis.
* A $ 163,996 fixed rate advance maturing on July 17, 2017.
The objective of managing interest rate sensitivity is to maintain or
increase net interest income by structuring interest-sensitive assets
and liabilities in such a way that they can be repriced in response to
changes in market interest rates. Based upon contractual maturities
of securities and the capability of NOW, Money Market, Savings
accounts and over $ 3,000,000 of borrowings from the FHLB to be
repriced within the 3 month time horizon, we have maintained a
negative rate sensitivity position, in that, rate sensitive
liabilities exceed rate sensitive assets. Therefore, in a period of
declining interest rates our net interest income is generally enhanced
versus a period of rising interest rates where our net interest margin
may be decreased. However, in a period of declining interest rates,
more securities with call features will most likely be called and be
reinvested into lower yielding investments resulting in the loss of
higher interest earnings assets. Declining rate environments also
result in the likelihood that residential home mortgage customers will
refinance their existing mortgages to lower interest rates. This
movement of securities and loans to lower interest rates during a
declining rate environment has the effect of decreasing our net
interest margin.
Presently, interest rates are anticipated to decrease further
resulting in an decreasing cost of deposits and borrowings from the
FHLB while a portion of our adjustable rate loans and securities are
repricing to lower interest rates. This decreasing interest rate
environment and possibility of lower interest rates in the future have
resulted in increased liquidity in investment debt securities as call
features of U. S. Government Agencies and State and Municipal
subdivisions in the U. S. are anticipated to be exercised by the
issuer. The
- -39-
anticipated result of this current position will be a decrease in the
yield on earning assets. We have also undertaken the position of
decreasing the cost of our interest-bearing liabilities, specifically
Time Certificates of Deposit. Following these actions, we expect our
net interest spread and interest margin to decrease slightly during
the next few months. We continually review interest rates on those
deposits which can be changed immediately, specifically NOW accounts,
Money Market Accounts, and Savings Accounts to determine if interest
rate changes are necessary to maintain our net interest spread and net
interest margin.
Another impact on our net interest spread and interest margin has been
the loan to deposit ratio which indicates how much of our deposits are
invested in the loan portfolio. This ratio is a primary indicator of
a Bank's liquidity position as the higher the ratio, the less liquid
assets are available to fund deposit withdrawals. At the same time,
this ratio also indicates to us how many deposits are offset by our
highest yielding earning assets, loans; therefore, the higher the
ratio, the more deposits are invested in loans and the less invested
in lower yielding investment debt securities. The result of a higher
loan to deposit ratio is usually a higher net interest spread and
margin. We have targeted as our optimal loan to deposit ratio 75% to
90% with a target of 84.93% by December 31, 2001. The loan to deposit
ratio at December 31, 2000, was 80.20%; at December 31, 1999, it was
76.65%; and at December 31, 1998, it was 61.61%. The increase of
3.55% from December 31, 1999, was a result of a loan increase of
$6,975,093 or 9.16% while deposits increased only $4,302,552 or 4.33%.
The increase of 18.59% from December 31, 1998, occurred due to
deposit decrease during 1999 of $ 1,173,999 and loan growth of $
14,216,499. The addition of an experienced commercial lender has
generated commercial lending which has resulted in this increased loan
to deposit ratio.
To minimize the risk of our rate sensitivity position, we employ many
different methods to diversify our risk both on the asset and the
liability side of the Balance Sheet. The Bank offers both fixed rate
and floating/adjustable rate loans to our customers. At December 31,
2000, the Bank's floating and adjustable rate loans totaled $
37,183,000, or 43.97% of the total loan portfolio. At December 31,
1999, the Bank's floating and adjustable rate loans totaled $
31,966,000, or 40.86% of the total loan portfolio. As of December 31,
1998, the Bank's floating and adjustable rate loans totaled $
28,317,000, 44.19% of the total loan portfolio. This percentage
increase of adjustable rate loans is due in part to the addition of
adjustable rate commercial loans to our loan portfolio.
The bank's debt security investment portfolio as of December 31, 2000,
was comprised of a book value of $ 1,852,000, or 6.63% of floating
rate debt securities which reprice annually or more frequently. The
bank's debt security investment portfolio as of December 31, 1999, was
comprised of a book value of
$ 2,341,556, or 7.55% of floating rate debt securities which reprice
annually or more frequently while at December 31, 1998, the Bank's
debt security investment portfolio was comprised of a book value of
$ 3,376,000, or 9.73% of floating rate securities. Specific methods
which we have employed to address the rate sensitive position are the
offering of the following deposit products to encourage the movement
of short term deposits to longer term deposits: special term
certificates of deposit with competitive interest rates over one year
in term and three year annual adjustable certificates of deposit.
Our interest rate sensitivity analysis as of December 31, 2000, based
upon our historical prepayment analysis of loans and mortgage-backed
securities, contractual maturities, and the earliest possible
repricing opportunity for loans and deposits is as follows:
- -40-
December 31, 2000
AFTER
AFTER
WITHIN
3 BUT
1 BUT
AFTER
NON-
3
WITHIN
WITHIN
5
INTEREST
MONTHS
12 MONTHS
5 YEARS
YEARS
BEARING
TOTAL
ASSETS:
FEDERAL FUNDS SOLD
$0
$0
$0
$0
$0
$0
INVESTMENT SECURITIES (BOOK VALUE)
2,918
871
7,697
17,502
0
28,988
INTEREST-BEARING BALANCES DUE FROM
BANKS
60
99
619
0
0
778
LOANS
9,868
10,649
25,890
37,825
323
84,555
UNEARNED DISCOUNT & ALLOWANCE FOR LOAN
LOSSES (1)
0
0
0
(1,443)
0
(1,443)
NONINTEREST-EARNING ASSETS
10,866
10,866
- --------------
-----------
-----------
-------
--------
----------
TOTAL ASSETS
$12,846
$11,619
$34,206
$53,884
$11,189
$123,744
=======--
= ======----
=======----
======
=====--
=======--
LIABILITIES:
NOW ACCOUNTS AND SAVINGS ACCOUNTS
$27,673
$0
$0
$0
$0
$27,673
TIME DEPOSITS
9,504
30,753
22,168
1
0
62,426
NONINTEREST-BEARING DEPOSITS
0
0
0
0
13,533
13,533
OTHER BORROWED MONEY
3,268
500
2,250
159
0
6,177
OTHER NONINTEREST-BEARING SOURCES TO FUND
EARNING ASSETS
0
0
0
0
1,269
1,269
- -----------
- - -----------
-----------
------
------
---------
TOTAL LIABILITIES
$40,445
$31,253
$24,418
$160
$14,802
$111,078
=======----
= ======-----
=======----
===--
=====-
=======-
INTEREST SENSITIVITY GAP
($27,599)
($19,634)
$9,788
$53,724
CUMULATIVE INTEREST SENSITIVITY GAP
(27,599)
(47,233)
(37,445)
16,279
GAP RATIO
0.32
0.37
1.40
N/A
CUMULATIVE GAP RATIO
0.32
0.34
0.61
1.17
Market Risk Management
We have risk management policies to monitor and limit exposure to
market risk. By
monitoring reports
which assess our exposure to market risk, we strive to enhance our net interest
margin and take advantage
of opportunities available in interest rate movements.
The continual monitoring of liquidity and interest rate risk is a function
of ALCO
reporting. Upon review
and analysis of these reports, we determine the appropriate methods we
should utilize
to reprice our
products, both loans and deposits, and the types of securities we
should purchase in
order to achieve
desired net interest margin and interest spreads. We continually
strive to attract
lower cost deposits, and
we competitively price our time deposits and loan products in order to maintain
favorable interest spreads
while minimizing interest rate risk.
- -41-
The following table sets forth the projected maturities and average rates
for all rate sensitive assets and
liabilities. The following assumptions were used in the development
of this table:
* All fixed and variable rate loans were based on the
original maturity of the note.
* All fixed and variable rate U. S. Agency and Treasury
securities and obligations of state and
political subdivisions in the U.S. were based upon the contractual
maturity date.
* All fixed and variable rate Mortgage-backed securities
and SBA GLPCs were based upon
original maturity as the Bank has not experienced a significant
prepayment of these
securities.
* We have experienced very little run-off in its history of
operations and have, until recently,
experienced net gains in deposits.
* We have large business and municipal deposits in
non-interest bearing checking and savings
and interest-bearing checking. These balances may fluctuate
significantly. Therefore, a 50%
maximum runoff of both non-interest-bearing checking and
savings and interest-bearing
checking was used as an assumption in this table.
* One large municipal deposit account alternates between
the two local community banks every
two years. This deposit account, with an average balance in excess of
$ 1,000,000, returned
to our institution in 2000 and is anticipated to leave in 2002 and continue
this cycle every two
years.
* Fixed and variable rate time deposits were based upon
original contract maturity dates.
FAIR
RATE SENSITIVE ASSETS
2001
2002
2003
2004
2005
THEREAFTER
TOTAL
VALUE
FEDERAL FUNDS SOLD
$0
$0
$0
$0
$0
$0
$0
$0
AVERAGE INTEREST RATE
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
INTEREST BEARING DEPOSITS
$159
$95
$439
$85
$0
$0
$778
$780
AVERAGE INTEREST RATE
5.78%
5.10%
5.73%
5.27%
0.00%
0.00%
5.61%
FIXED INTEREST RATE LOANS
$1,315
$2,583
$3,549
$3,526
$2,319
$34,080
$47,372
$46,646
AVERAGE INTEREST RATE
10.06%
10.15%
9.39%
8.81%
9.04%
8.68%
8.88%
VARIABLE INTEREST RATE LOANS
$6,758
$796
$2,036
$617
$608
$26,368
$37,183
$36,882
AVERAGE INTEREST RATE
9.55%
9.41%
8.82%
8.33%
8.70%
8.55%
8.76%
FIXED INTEREST RATE U.S. AGENCY AND
TREASURY
SECURITIES
$580
$550
$2,500
$649
$3,000
$9,916
$17,195
$16,945
AVERAGE INTEREST RATE
5.62%
5.23%
5.84%
5.72%
6.12%
6.48%
6.23%
FIXED INTEREST RATE MORTGAGE-BACKED &
SBA GLPC
SECURITIES
$0
$2
$19
$0
$76
$408
$505
$502
AVERAGE INTEREST RATE
0.00%
8.97%
9.36%
0.00%
5.27%
6.46%
6.40%
VARIABLE INTEREST RATE MORTGAGE-BACKED
& SBA
GLPC SECURITIES
$3
$0
$5
$0
$0
$1,844
$1,852
$1,839
AVERAGE INTEREST RATE
8.04%
0.00%
7.50%
0.00%
0.00%
7.36%
7.36%
FIXED INTEREST RATE OBLIGATIONS OF
STATE AND
POLITICAL SUBDIVISIONS IN THE U.S.
$275
$220
$215
$385
$200
$7,097
$8,392
$8,402
AVERAGE INTEREST RATE
6.69%
6.94%
6.84%
6.67%
7.52%
7.05%
7.02%
- -42-
FAIR
2001
2002
2003
2004
2005
THEREAFTER
TOTAL
VALUE
RATE SENSITIVE LIABILITIES
NONINTEREST-BEARING CHECKING
$3,384
$846
$846
$846
$846
$0
$6,768
$6,768
AVERAGE INTEREST RATE
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
SAVINGS AND INTEREST-BEARING
CHECKING
6,960
730
1,730
2,730
1,730
0
$13,880
$13,880
AVERAGE INTEREST RATE
2.83%
2.83%
2.83%
2.83%
2.83%
0.00%
2.83%
FIXED INTEREST RATE TIME DEPOSITS
$29,732
$9,201
$6,013
$3,405
$5,824
$118
$54,293
$55,128
AVERAGE INTEREST RATE
5.98%
6.08%
5.87%
5.69%
6.28%
6.13%
6.00%
VARIABLE INTEREST RATE TIME
DEPOSITS
$4,327
$3,009
$798
$0
$0
$0
$8,134
$8,134
AVERAGE INTEREST RATE
5.55%
5.63%
5.63%
0.00%
0.00%
0.00%
5.59%
FIXED INTEREST RATE BORROWINGS
$0
$0
$0
$0
$0
$159
$159
$164
AVERAGE INTEREST RATE
0.00%
0.00%
0.00%
0.00%
0.00%
6.64%
6.64%
VARIABLE INTEREST RATE BORROWINGS
$768
$5,250
$0
$0
$0
$0
$6,018
$6,414
AVERAGE INTEREST RATE
6.63%
6.08%
0.00%
0.00%
0.00%
0.00%
6.15%
Capital
The primary method by which we increase total stockholders' equity is
through the accumulation of
earnings. We maintain ratios that are well above the minimum total
capital levels required by federal
regulatory authorities including the new risk-based capital guidelines.
Regulatory authorities have
established capital guidelines in the form of the "leverage ratio" and
"risk-based capital ratios." Our
leverage ratio, defined as total stockholders' equity less intangible assets
to total assets, was 10.03 % as of
December 31, 2000, compared to 9.36% as of December 31, 1999, and
10.34% as of December 31, 1998.
The risk-based ratios compare capital to risk-weighted assets and
off-balance-sheet activity in order to
make capital levels more sensitive to risk profiles of individual banks.
A comparison of our capital ratios
to regulatory minimums at December 31 is as follows:
RISK-BASED CAPITAL RATIOS
REGULATORY MINIMUM
2000
1999
1998
REQUIREMENTS
LEVERAGE RATIO
10.03%
9.36%
10.34%
4.00%
RISK-BASED CAPITAL RATIO TIER I
16.09%
15.39%
17.12%
4.00%
(CORE CAPITAL)
COMBINDED TIER I AND TIER II
(CORE CAPITAL PLUS ALLOWANCE
FOR LOAN LOSSES)
17.15%
16.43%
18.12%
8.00%
We have traditionally been well-capitalized with ratios well above required
levels and, we expect equity
capital to continue to exceed regulatory guidelines and industry averages.
Certain ratios are useful in measuring the ability of a company to generate
capital internally. The
following chart indicates the growth in equity capital for the past three years.
- -43-
THE FOLLOWING CHART INDICATES THE GROWTH IN EQUITY CAPITAL OVER THE
PAST THREE YEARS.
2000
1999
1998
EQUITY CAPITAL AT DECEMBER 31 BEFORE FAS 115
ADJUSTMENTS & REDUCED BY INTANGIBLE ASSETS( 000
OMITTED)
12,521
12,167
11,664
EQUITY CAPITAL AS A PERCENT OF ASSETS AT
DECEMBER 31
10.12%
10.23%
10.29%
RETURN ON AVERAGE ASSETS
0.78%
0.79%
0.72%
RETURN ON AVERAGE EQUITY
7.67%
7.53%
6.85%
CASH DIVIDEND PAYOUT RATIO
47.76%
44.28%
41.43%
STOCK MARKET ANALYSIS AND DIVIDENDS
Our common stock is traded inactively in the over-the-counter market.
As of December 31, 2000, the
approximate number of shareholders of record was 455.
2000
1999
MARKET
CASH
MARKET
CASH
All stock prices and dividends reflect the 2-for-1 stock
PRICE
DIVIDEND
PRICE
DIVIDEND
split effective on September 1, 2000
HI - LOW
HI - LOW
FIRST QUARTER
$27.50 -
$24.625
$0.10
$29.00 - $26.50
$0.09
SECOND QUARTER
$27.50 - $25.00
$0.11
$29.00 - $28.00
$0.095
THIRD QUARTER
$27.50 - $24.50
$0.12
$28.50 - $27.50
$0.10
FOURTH QUARTER
$25.00 - $25.00
$0.24
$28.50 - $27.50
$0.215
- -44-
12-MOS
DEC-31-2000
DEC-31-2000
4,020
779
0
0
26,769
1,208
1,136
83,923
811
123,626
103,632
768
1,269
5,409
0
0
252
12,296
123,626
6,903
1,718
134
8,755
4,241
4,697
4,058
231
0
3,267
1,184
1,184
0
0
955
1.19
1.19
3.60
323
183
1,229
0
746
203
37
811
811
0
0
Execution Copy
October 19, 2000