SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended December 31, 2003.
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: 17-485-3123
-------------
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding as of March 15, 2004
------------------------------ --------------------------------
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 [X].
The aggregate market value of the voting stock held by non-affiliates of the
registrants as of December 31, 2003:
Common Stock, $0.315 Par Value - $ 20,800,000
Page 1 of 18
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders report for the year ended December 31, 2003,
are incorporated by reference into Parts I, II and IV. Portions of the proxy
statement for the annual shareholders meeting to be held April 27, 2004, are
incorporated by reference into Part III of this Form 10-K.
Page 2 of 18
FNB FINANCIAL CORPORATION
FORM 10-K
INDEX
Page
Part I
Item 1. Business 2 - 11
Item 2. Properties 11
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 13
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 7a. Quantitative and Qualitative Disclosures about Market
Risk 13
Item 8. Financial Statements and Supplementary Data 13
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 13
Item 9a. Controls and Procedures 14
Part III
Item 10. Directors and Executive Officers of the Registrant 15
Item 11. Executive Compensation 15
Item 12. Security Ownership of Certain Beneficial Owners
and Management 15
Item 13. Certain Relationships and Related Transactions 15
Item 14. Principal Accountant Fees and Services 15
Part IV
Item 15. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 16 - 17
Signatures 18
Page 3 of 18
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 two wholly-owned subsidiaries, the Bank, and a Mortgage
Brokerage Company.
In the second quarter of 2003, FNB Financial Corporation formed a new
company called FNB Mortgage Brokers, Inc. The company was organized as
a "C" Corporation and is a wholly-owned subsidiary of the FNB Financial
Corporation. The company's primary activity is to broker secondary
mortgage loans in the Pennsylvania and Maryland markets. On August 29,
2003, FNB Mortgage Brokers, Inc. acquired substantially all the assets
of MMI Mortgage Brokers, Inc. and entered into an executive employment
agreement with the owner of MMI. The purchase price of the assets
acquired by FNB was $ 25,000.
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 December 31, 2003, 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. During 1996
the Bank received regulatory approval from the Comptroller to open its
first interstate Branch office in Hancock, Maryland after management
became aware of the closing of a branch office of First Federal Savings
Bank of Western Maryland. This office is known as "Hancock Community
Bank, A Division of The First National Bank of McConnellsburg". The
location of this office is felt to be strategically important in order
to expand the Bank's operations into Washington County, Maryland and
northern Morgan County, West Virginia. This office 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.
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
Page 4 of 18
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. 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.
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
FNB Financial Corporation (FNB) is a financial holding company, and is
registered as such with the Board of Governors of the Federal Reserve
System (the Federal Reserve Board). As a financial holding company,
the Corporation may engage in, and acquire companies engaged in,
activities that are considered "financial in nature", as defined by the
Gramm-Leach-Bliley Act and Federal Reserve Board interpretations.
These activities include, among other things, securities underwriting,
dealing and market-making, sponsoring mutual funds and investment
companies, insurance underwriting and agency activities, and merchant
banking. If any banking subsidiary of the Corporation ceases to be
"well capitalized" or "well managed" under applicable regulatory
standards, the Federal Reserve Board may, among other things, place
limitations on the Corporation's ability to conduct the broader
financial activities permissible for financial holding companies or, if
the deficiencies persist, require the Corporation to divest the banking
subsidiary. In addition, if any banking subsidiary of the Corporation
receives a Community Reinvestment Act rating of less than satisfactory,
the Corporation would be prohibited from engaging in any additional
activities other than those permissible for bank holding companies that
are not financial holding companies. The Corporation may engage
directly or indirectly in activities considered financial in nature,
either de novo or by acquisition, as long as it gives the Federal
Reserve board after-the-fact notice of the new activities. The Gramm-
Leach-Bliley Act also permits national banks, such as The First
National Bank of McConnellsburg, to engage in activities considered
financial in nature through a financial subsidiary, subject to certain
conditions and limitations and with the approval of the OCC.
Interstate Banking and Branching. As the bank holding company, the
Corporation is required to obtain prior Federal Reserve Board approval
before acquiring more than 5% of the voting shares, or substantially
all of the assets, of a bank holding company, bank, or savings
association.
Page 5 of 18
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act
(Riegle-Neal), subject to certain concentration limits and other
requirements, bank holding companies such as the Corporation may
acquire banks and bank holding companies located in any state. Riegle-
Neal also permits banks to acquire branch offices outside their home
states by merging with out-of-state banks, purchasing branches in other
states, and establishing de novo branch offices in other states. The
ability of banks to acquire branch offices is contingent, however, on
the host state having adopted legislation "opting in" to those
provisions of Riegle-Neal. In addition, the ability of a bank to merge
with a bank located in another state is contingent on the host state
not having adopted legislation "opting out" of that provision of Riegle-
Neal.
Control Acquisitions. The Change in Bank Control Act prohibits a
person or group of persons from acquiring "control" of a bank holding
company, unless the Federal Reserve Board has been notified and has not
objected to the transaction. Under a rebuttable presumption
established by the Federal Reserve Board, the acquisition of 10% or
more of a class of voting stock of a bank holding company with a class
of securities registered under Section 12 of the Exchange Act, such as
the Corporation, would, under the circumstances set forth in the
presumption, constitute acquisition of control of the bank holding
company. In addition, a company is required to obtain the approval of
the Federal Reserve Board under the Bank Holding Company Act before
acquiring 25% (5% in the case of an aquiror that is a bank holding
company) or more of any class of outstanding voting stock of a bank
holding company, or otherwise obtaining control or a "controlling
influence" over that bank holding company.
Operations of the First National Bank of McConnellsburg 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 subsidiaries.
Certain changes of potential significance to the Company which have
been enacted recently are discussed below.
The Federal Reserve Board, the FDIC, and the Comptroller have issued
risk-based capital guidelines, which supplement existing capital
requirements. The guidelines require all United States banks and bank
holding companies to maintain a minimum risk-based capital ratio of
8.0% (of which at least 3.0% must be in the form of common
stockholders' equity). Assets are assigned to five risk categories,
with higher levels of capital being required for the categories
perceived as representing greater risk. The required capital will
represent equity and (to the extent permitted) nonequity capital as a
percentage of total risk-weighted assets. On the basis of an analysis
of the rules and the projected composition of the Company's
consolidated assets, it is not expected these rules will have a
material effect on the Company's business and capital plans. The
company presently has capital ratios exceeding all regulatory
requirements.
Page 6 of 18
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 Capital
Risk- Risk- Tier 1 Order or
Based Based Leverage Directive
Ratio Ratio Ratio
----- ----- ----- ---------
CAPITAL CATEGORY
Well capitalized >10.0% >6.0% >5.0% No
Adequately > 8.0% >4.0% >4.0%*
capitalized
Undercapitalized < 8.0% <4.0% <4.0%*
Significantly
Undercapitalized < 6.0% <3.0% <3.0%
Critically <2.0%
undercapitalized
*3.0% for those banks having the highest available regulatory rating.
Under FDICIA financial institutions are subject to increased
regulatory scrutiny and must comply with certain operational,
managerial and compensation standards to be developed by Federal
Reserve Board Regulations. FDICIA also required the regulators to
issue new rules establishing certain minimum standards to which an
institution must adhere including standards requiring a minimum ratio
of classified assets to capital, minimum earnings necessary to absorb
losses and minimum ratio of market value to book value for publicly
held institutions
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.
Page 7 of 18
Federal regulators issued regulations to implement the privacy
provisions of the Gramm-Leach-Bliley Act (Financial Services
Modernization Act). This 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. Regulations became effective
during 2001. We have developed privacy policies and procedures to
provide timely disclosure of such policies and a convenient means for
consumers to opt out 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, 2003, we employed 56 persons on a full-time
equivalent basis.
Statistical Data
Computation of our regulatory capital requirements for the periods
December 31, 2003 and December 31, 2002, on page 23 of the annual
shareholders report for the year ended December 31, 2003, is
incorporated herein by reference.
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: 80%
Commercial, Multifamily, and
other Nonresidential 1 to 4
Family Residential
Improved Property 85%
Owner-occupied 1 to 4 Family and 90%
Home Equity
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, Pennsylvania, a significant portion of
our customers' abilities to honor their contracts is dependent upon
the general economic conditions in South Central Pennsylvania.
Page 8 of 18
Loan Portfolio composition as of December 31, 2003 and December 31,
2002, on page 14 of the annual shareholders report for the year ended
December 31, 2003, is incorporated herein by reference.
Maturities of loans as of December 31, 2003, on page 14 of the annual
shareholders report for the year ended December 31, 2003, is
incorporated herein by reference. Nonperforming loans consist of
nonaccruing loans and loans 90 days or more past due. Nonaccruing
loans are comprised of loans that are no longer accruing interest
income because of apparent financial difficulties of the borrower.
Interest on nonaccruing loans is recorded when received only after
past due principal and interest are brought current. 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, Past Due and Restructured Loans as of December 31, 2003,
December 31, 2002, and December 31, 2001, on page 16 of the annual
shareholders report for the year ended December 31, 2003, 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.
Management utilizes a comprehensive systematic review of our loan
portfolio on a quarterly basis in order to determine the adequacy of
the Allowance for Loan Losses. Each quarter the loan portfolio is
categorized into various Pools as follows:
POOL #1 Specific allowances for any individually
identified
trouble loans
POOL #2 Commercial and Industrial
POOL #3 Commercial and Industrial - Real Estate Secured
POOL #4 Consumer Demand and Installment
POOL #5 Consumer Mortgage and Home Equity
Lines of credit and non-secured commercial loans with balances of
$ 100,000 and over are individually reviewed. Also, loans that are 90
days or more past due or have been previously classified as
substandard are individually reviewed. Allocations to the Allowance
for Loan Losses are based upon classifications assigned to those
loans.
Loan classifications utilized are consistent with OCC regulatory
guidelines and are as follows:
Allowance Factors
-----------------
Loss Charge-off
Doubtful 20% - 50%
Substandard 10% - 20%
Special Mention 5% - 10%
Watch 1% - 5%
The remaining portion of the Pools are evaluated as groups with
allocations made to the allowance based on historical loss experience,
current and anticipated trends in delinquencies, and general economic
conditions within the bank's trading area.
In addition to the aforementioned internal loan review, the Bank
engages an outside firm to annually conduct an independent loan review
in order to validate the methodologies used internally and to
independently test the adequacy of the Allowance for Loan Losses.
Page 9 of 18
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 collectibility of the principal is unlikely.
Activity in the allowance for loan losses and a breakdown of the
allowance for loan losses as of December 31, 2003 and December 31, 2002,
on page 15 and 16 of the annual shareholders report for the year ended
December 31, 2003, are incorporated herein by reference.
Although loans secured by residential and non-residential mortgages
comprise approximately 69% 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 set accordingly.
Deposits
Time Certificates of Deposit of $ 100,000 and over as of December 31,
2003 and December 31, 2002, totaled $ 15,754,000 and $ 13,395,000,
respectively.
Maturities and rate sensitivity of total interest bearing liabilities as
of December 31, 2003, on page 36 of the annual shareholders report for
the year ended December 31, 2003, is incorporated herein by reference.
Returns on Equity and Assets
Returns on equity and assets and other statistical data for 2003, 2002,
and 2001 on page 26 of the annual shareholders report for the year ended
December 31, 2003, is incorporated herein by reference.
Important Factors Relating to Forward Looking Statements
This Report contains statements (including, without limitation,
statements in "Management's Discussion and Analysis of Financial
Condition and Results of Operations," included in this Report under Item
7), that are considered "forward-looking statements" as defined in the
Private Securities Litigation Reform Act of 1995. In addition, the
Company may make other written and oral communications from time to time
that contain such statements. Forward-looking statements, including
statements as to industry trends, future expectations and other matters
that do not relate strictly to historical facts, are based on certain
assumptions by management, and are often identified by words or phrases
such as "anticipated", "believe", "expect", "intend", "seek", "plan",
"objective", "trend", and "goal". Forward-looking statements are
subject to various assumptions, risks, and uncertainties, which change
over time, and speak only as of the date they are made.
The Company undertakes no obligation to update any forward-looking
statements. Actual results could differ materially from those
anticipated in forward-looking statements and future results could
differ materially from historical performance. In addition to factors
mentioned elsewhere in this Report or previously disclosed in our SEC
reports (accessible on the SEC's website at www.sec.gov), the following
factors, among others, could
Page 10 of 18
cause actual results to differ materially from forward-looking
statements and future results could differ materially from historical
performance:
* general political and economic conditions may be less favorable
than expected;
* developments concerning credit quality in various corporate lending
industry sectors as well as consumer and other types of credit, may
result in an increase in the level of our provision for credit
losses, nonperforming assets, net charge-offs and reserve for
credit losses;
* customer borrowing, repayment, investment, and deposit practices
generally may be less favorable than anticipated; and interest rate
and currency fluctuations, equity and bond market fluctuations, and
inflation may be grater than expected;
* the mix of interest rates and maturities of our interest earning
assets and interest bearing liabilities (primarily loans and
deposits) may be less favorable than expected;
* competitive product and pricing pressures among financial
institutions within our markets may increase;
* legislative or regulatory developments, including changes in laws
or regulations concerning taxes, banking, securities, capital
requirements and risk-based capital guidelines, reserve
methodologies, deposit insurance and other aspects of the financial
services industry, may adversely affect the businesses in which we
are engaged or our financial results;
* legal and regulatory proceedings and related matters with respect
to the financial services industry, including those directly
involving the Company and its subsidiaries, could adversely affect
the Company or the financial services industry generally;
* pending and proposed changes in accounting rules, policies,
practices, and procedures could adversely affect our financial
results;
* instruments and strategies used to manage exposure to various types
of market and credit risk could be less effective than anticipated,
and we may not be able to effectively mitigate our risk exposures
in particular market environments or against particular types of
risk;
* terrorist activities or other hostilities, including the situation
surrounding Iraq, may adversely affect the general economy,
financial and capital markets, specific industries, and the
Company; and
* technological changes, including the impact of the Internet on our
businesses, may be more difficult or expensive than anticipated.
Availability of Company Filings
The Company files periodic reports with the Securities and Exchange
Commission (SEC) in the form of 10-Q's - quarterly reports; 10-K -
annual report; annual proxy statements and Form 8-K for any
significant events that may arise during the year. Copies of the
Company's filings may be obtained free of charge through the SEC's
internet site at www.sec.gov or by written request to Dale M. Fleck,
Chief Financial Officer at 101 Lincoln Way West, McConnellsburg,
Pennsylvania 17233.
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
Page 11 of 18
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 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.
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 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.
Page 12 of 18
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 under the symbol
FNBBD and is only occasionally and sporadically traded through local
and regional brokerage houses.
The Stock Market Analysis and Dividends for 2003 and 2002 on page 39
of the annual shareholders report for the year ended December 31,
2003, is incorporated herein by reference.
Item 6. Selected Financial Data
The Selected Five-Year Financial Data on page 26 of the annual
shareholders report for the year ended December 31, 2003, is
incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Contractual obligations of the Corporation as of December 31, 2003 are
as follows:
Payments due by period
- - - - - - - - - - - - - - - - - - - - - - - - -
Less More
(In thousands) than 1 31 - 3 3 - 5 than 5
Contractual obligations Total year years years years
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Long-term debt obligations $ 14,681 $ 9,296 $ 15 $ 16 $ 5,354
Operating lease obligations 59 22 37 0 0
-------- ------- ------ ------ -------
Total $ 14,740 $ 9,318 $ 52 $ 16 $ 5,354
======== ======= ====== ====== =======
All other information required by Item 7 is included in "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" on pages 31 through 39 of the annual shareholders report
for the year ended December 31, 2003, which is incorporated herein by
reference.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
Information required under this item is incorporated by reference to
pages 37 and 38 of the annual shareholders' report for the year ended
December 31, 2003.
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 30 of the annual shareholders
report for the year ended December 31, 2003, are incorporated herein
by reference.
The Summary of Quarterly Financial Data on page 27 of the annual
shareholders report for the year ended December 31, 2003, is
incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
Page 13 of 18
Item 9a. Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the Company's disclosure controls and
procedures (as such term is defined in Rules 13a-14(c) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) as
of December 31, 2003. Based on such evaluation, such officers have
concluded that, as of December 31, 2003, the Company's disclosure
controls and procedures are effective in alerting them on a timely
basis to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's
periodic filings under the Exchange Act.
Changes in Internal Controls
There have not been any significant changes in the Company's internal
control over financial reporting or in other factors that could
significantly affect such control during the fourth quarter of 2003.
Page 14 of 18
PART III
Item 10. Directors and Executive Officers of the Registrant
The Company has adopted a code of ethics that applies to all senior
financial officers (including its chief executive officer, chief
financial officer, chief accounting officer, controller, and any
person performing similar functions). The Corporation has filed a
copy of this Code of Ethics as Exhibit 14 to this Form 10-K.
All other information required by Item 10 is incorporated by reference
from FNB Financial Corporation's definitive proxy statement for the
2004 Annual Meeting of Shareholders filed pursuant to Regulation 14A.
Item 11. Executive Compensation
The information required by Item 11 is incorporated by reference from
FNB Financial Corporation's definitive proxy statement for the 2004
Annual Meeting of Shareholders filed pursuant to Regulation 14A.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 12 is incorporated by reference from
FNB Financial Corporation's definitive proxy statement for the 2004
Annual Meeting of Shareholders filed pursuant to Regulation 14A.
Item 13. Certain Relationships and Related Transactions
The information required by Item 13 is incorporated by reference from
FNB Financial Corporation's definitive proxy statement for the 2004
Annual Meeting of Shareholders filed pursuant to Regulation 14A.
Item 14. Principal Accountant Fees and Services
The information required by Item 14 is incorporated by reference from
FNB Financial Corporation's definitive proxy statement for the 2004
Annual Meeting of Shareholders filed pursuant to Regulation 14A.
Page 15 of 18
PART IV
Item 15. 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 subsidiaries, included in the
annual report of the registrant to its shareholders for the
year ended December 31, 2003, are incorporated by reference
in Item 8:
Consolidated balance sheets - December 31, 2003, and 2002
Consolidated statements of income - Years ended December 31,
2003, 2002,and 2001
Consolidated statements of stockholders' equity - Years
ended December 31, 2003, 2002,and 2001
Consolidated statements of cash flows - Years ended
December 31, 2003, 2002, and 2001
Notes to consolidated financial statements - December 31,
2003
(2) - List of Financial Statement Schedules
All financial statement schedules for which provision is
made in the applicable accounting regulations 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 (14) Code of Ethics
Exhibit (21) Subsidiaries of the registrant
Exhibit (31) Rule 13a-14(a)/15d-14(a) Certifications
Exhibit (32) Section 1350 Certifications
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.
(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.
Page 16 of 18
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 is incorporated by
reference to the Company's Form 10-K for the year ended
December 31, 2000.
Exhibit (10.4) Executive employment agreement for Vice President
of FNB Mortgage Brokers, Inc. - incorporated by reference to the
Company's Form 10-Q for the quarter ended September 30, 2003.
Exhibit (13) Annual report to security holders - filed herewith.
Exhibit (14) Code of Ethics Policy for Senior Financial Officers
- filed herewith.
Exhibit (21) Subsidiaries of the registrant - filed herewith.
Exhibit (31.1) Certification of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 - filed
herewith.
Exhibit (31.2) Certification of Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 - filed
herewith.
Exhibit (32.1) Certification of Chief Executive Officer pursuant
to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 - filed herewith.
Exhibit (32.2) Certification of Chief Financial Officer pursuant
to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 - filed herewith.
(d) Financial Statement Schedules
None
Page 17 of 18
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 3/24/2004
-----------------------------
John C. Duffey Date
President and Chief Executive Officer
(Principal Executive Officer)
/s/Dale M. Fleck 3/24/2004
-----------------------------
Dale M. Fleck Date
Vice President, Controller &
Chief Financial Officer
(Principal Financial & Accounting
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.
/s/John C. Duffey 3/24/2004 /s/Harry D. Johnston 3/24/2004
- ------------------------------------- --------------------------------------
John C. Duffey Date Harry D. Johnston, D. O. Date
Director, President & CEO Director, Vice President
/s/Patricia A. Carbaugh 3/24/2004 /s/Lonnie W. Palmer 3/24/2004
- ------------------------------------- --------------------------------------
Patricia A. Carbaugh Date Lonnie W. Palmer Date
Director Director
/s/Harvey J. Culler 3/24/2004 /s/D.A. Washabaugh, III 3/24/2004
- ------------------------------------- --------------------------------------
Harvey J. Culler Date D. A. Washabaugh, III Date
Director, Chairman Director
/s/Craig E. Paylor 3/24/2004 /s/Terry L. Randall 3/24/2004
- ------------------------------------- --------------------------------------
Craig E. Paylor Date Terry L. Randall Date
Director Director
Page 18 of 18
Exhibit 13
FNB FINANCIAL CORPOATION
2003 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 - 25
ACCOMPANYING FINANCIAL INFORMATION
Selected five year financial data 26
Summary of quarterly financial data 27
Distribution of assets, liabilities and stockholders'
equity, interest rates, and interest differential 28
Changes in net interest income 29
Maturities of investment securities 30
Management's discussion and analysis of financial
condition and results of operations 31 - 39
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 subsidiaries as of December 31, 2003
and 2002, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the three years ended
December 31, 2003. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to
express an opinion on these consolidated 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 subsidiaries as of December 31, 2003
and 2002 and the results of their operations and their cash flows for each of
the three years ended December 31, 2003 in conformity with accounting principles
generally accepted in the United States of America.
/S/ Smith Elliott Kearns & Company, LLC
---------------------------------------
SMITH ELLIOTT KEARNS & COMPANY, LLC
Chambersburg, Pennsylvania
February 19, 2004
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002
2003 2002
ASSETS
Cash and due from banks $ 3,495,604 $ 3,650,351
Interest-bearing deposits with banks 1,518,766 968,266
Investment securities:
Available for sale 32,039,636 20,583,684
Held to maturity (fair value $ 325,957 - 2003, $ 692,188 - 2002) 326,809 692,839
Federal Reserve, Atlantic Central Banker's Bank and Federal Home
Loan Bank stock 1,136,500 666,000
Loans, net of unearned discount and allowance for loan losses 101,284,984 100,526,867
Bank building, equipment, furniture and fixtures, net 3,269,724 2,723,375
Accrued interest and dividends receivable 555,760 658,856
Deferred income taxes 0 51,703
Other real estate owned 0 66,512
Cash surrender value of life insurance 2,747,474 2,405,020
Other assets 659,758 371,932
-------------- --------------
Total assets $ 147,035,015 $ 133,365,405
============== ==============
LIABILITIES
Deposits:
Demand deposits $ 15,901,219 $ 13,930,687
Savings deposits 32,535,398 30,520,623
Time certificates 68,000,625 65,934,931
Other time deposits 284,667 306,118
-------------- --------------
Total deposits 116,721,909 110,692,359
Liability for borrowed funds 14,680,992 7,232,659
Accrued dividends payable 272,000 264,000
Accrued interest payable and other liabilities 607,133 999,564
Deferred income taxes 33,839 0
-------------- --------------
Total liabilities 132,315,873 119,188,582
-------------- --------------
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 12,330,729 11,746,170
Accumulated other comprehensive income 346,580 388,820
-------------- --------------
Total stockholders' equity 14,719,142 14,176,823
-------------- --------------
Total liabilities and stockholders' equity $ 147,035,015 $ 133,365,405
============== ==============
The Notes to Consolidated Financial
Statements are an integral
part of these statements.
-2-
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2003, 2002, and 2001
2003 2002 2001
Interest and Dividend Income
Interest and fees on loans $ 7,194,596 $ 7,292,537 $ 7,140,997
Interest on investment securities:
Obligations of other U.S. Government agencies 677,913 509,073 845,914
Obligations of States and political subdivisions 354,446 402,302 416,998
Dividends on equity securities 24,573 25,519 59,123
Interest on deposits with banks 31,985 54,609 39,117
Interest on federal funds sold 6,368 68,424 265,496
------------- ------------- -------------
8,289,881 8,352,464 8,767,645
------------- ------------- -------------
Interest Expense
Interest on borrowed funds 422,941 335,318 333,299
Interest on deposits 2,939,338 3,388,181 4,343,347
------------- ------------- -------------
3,362,279 3,723,499 4,676,646
------------- ------------- -------------
Net interest income 4,927,602 4,628,965 4,090,999
Provision for Loan Losses 144,000 142,000 144,000
------------- ------------- -------------
Net interest income after provision for loan 4,783,602 4,486,965 3,946,999
losses
------------- ------------- -------------
Other Income
Service charges on deposit accounts 183,716 200,470 217,431
Other service charges, collection and exchange
charges, commissions and fees 361,798 305,406 366,337
Other income, net 149,317 143,217 137,375
Securities gains 49,046 44,776 17,986
------------- ------------- -------------
743,877 693,869 739,129
------------- ------------- -------------
Other Expenses
Salaries and wages 1,530,400 1,428,559 1,432,292
Pensions and other employee benefits 368,932 378,011 363,253
Net occupancy expense of bank premises 267,716 250,214 256,186
Furniture and equipment expenses 292,598 257,403 284,372
Other operating expenses 1,404,342 1,179,918 1,089,383
------------- ------------- -------------
3,863,988 3,494,105 3,425,486
------------- ------------- -------------
Income before income taxes 1,663,491 1,686,729 1,260,642
Applicable income taxes 438,932 473,416 255,511
------------- ------------- -------------
Net income $ 1,224,559 $ 1,213,313 $ 1,005,131
============= ============= =============
Earnings per share of common stock:
Net income $ 1.53 $ 1.52 $ 1.26
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 SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2003, 2002, and 2001
Accumulated
Other Total
Additional Comprehensive Stockholders
Common Stock Paid-In Retained Income (Loss) ' Equity
Capital Earnings
Balance, December 31, 2000 $ 252,000 $ 1,789,833 $ 10,623,726 ($ 117,532) $ 12,548,027
Comprehensive income:
Net income 0 0 1,005,131 0 1,005,131
Changes in unrealized gain
on securities available for
sale, net of taxes of
$ 174,553 0 0 0 338,839 338,839
------------
Total comprehensive income 1,343,970
------------
Cash dividends declared on
common stock ($ .63
per share) 0 0 ( 504,000) 0 ( 504,000)
------------- ------------- -------------- ------------- ------------
Balance, December 31, 2001 252,000 1,789,833 11,124,857 221,307 13,387,997
Comprehensive income:
Net income 0 0 1,213,313 0 1,213,313
Changes in unrealized gain
on securities available for
sale, net of taxes of
$ 86,293 0 0 0 167,513 167,513
------------
Total comprehensive income 1,380,826
------------
Cash dividends declared on
common stock ($ .74
per share) 0 0 ( 592,000) 0 ( 592,000)
------------- ------------- -------------- ------------- ------------
Balance, December 31, 2002 252,000 1,789,833 11,746,170 388,820 14,176,823
Comprehensive income:
Net income 0 0 1,224,559 0 1,224,559
Changes in unrealized gain
on securities available for
sale, net of taxes of
$ 21,760 0 0 0 ( 42,240) ( 42,240)
------------
Total comprehensive income
1,182,319
------------
Cash dividends declared on
common stock ($ .80
per share) 0 0 ( 640,000) 0 ( 640,000)
------------- ------------- -------------- ------------- ------------
Balance, December 31, 2003 $ 252,000 $ 1,789,833 $ 12,330,729 $ 346,580 $ 14,719,142
============= ============= ============= ============= ============
The Notes to Consolidated Financial
Statements are an integral
part of these statements.
-4-
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2003, 2002, and 2001
2003 2002 2001
Cash flows from operating activities:
Net income $ 1,224,559 $ 1,213,313 $ 1,005,131
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 312,172 260,581 300,331
Provision for loan losses 144,000 142,000 144,000
Deferred income taxes 107,304 22,532 ( 43,758)
(Gain) loss on sale of other real estate 20,026 ( 15,673) 19,038
Increase in cash surrender value of life insurance ( 92,454) ( 91,891) ( 103,214)
(Gain) loss on sales/maturities of investments ( 49,046) ( 44,776) ( 17,986)
(Gain) loss on disposal of equipment 31,766 0 0
(Increase) decrease in accrued interest
receivable 103,096 ( 39,392) 169,929
Increase (decrease) in accrued interest
payable and other liabilities ( 392,431) ( 191,117) 113,862
(Increase) decrease in other assets ( 287,826) 33,543 ( 43,445)
------------- ------------- -------------
Net cash provided by operating activities 1,121,166 1,289,120 1,543,888
------------- ------------- -------------
Cash flows from investing activities:
Net (increase) decrease in interest bearing
deposits with banks ( 550,500) 1,604,308 ( 1,794,028)
Maturities of held-to-maturity securities 366,030 421,925 93,071
Proceeds from sales of available-for-sale securities 1,337,376 942,253 38,720
Maturities of available-for-sale securities 6,741,340 3,840,642 10,107,008
Purchases of available-for-sale securities ( 19,549,624) ( 5,513,706) ( 2,400,118)
Proceeds from sales of other real estate owned 46,486 119,241 46,047
Net (increase) in loans ( 902,117) ( 10,567,701) ( 7,199,505)
Sale (purchase) of other bank stock ( 470,500) 167,700 0
Purchase of life insurance ( 250,000) 0 0
Purchases of bank premises and
equipment, net ( 890,287) ( 69,540) ( 131,082)
-------------- -------------- --------------
Net cash (used) by investing activities ( 14,121,796) ( 9,054,878) ( 1,239,887)
-------------- -------------- --------------
Cash flows from financing activities:
Net increase (decrease) in deposits 6,029,550 ( 1,270,021) 8,329,892
Cash dividends paid ( 632,000) ( 544,000) ( 480,000)
Net short-term borrowings ( 1,835,000) 1,835,000 0
Proceeds from long-term borrowings 9,289,000 0 0
Principal payments on long-term borrowings ( 5,667) ( 5,799) ( 773,443)
-------------- -------------- --------------
Net cash provided by financing activities $ 12,845,883 $ 15,180 $ 7,076,449
-------------- ------------- --------------
The Notes to Consolidated Financial
Statements are an integral
part of these statements.
-5-
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 2003, 2002, and 2001
2003 2002 2001
Net increase (decrease) in cash and cash ($ 154,747) ($ 7,750,578) $ 7,380,450
equivalents
Cash and cash equivalents, beginning balance 3,650,351 11,400,929 4,020,479
------------- ------------- -------------
Cash and cash equivalents, ending balance $ 3,495,604 $ 3,650,351 $ 11,400,929
============= ============= =============
Supplemental disclosure of cash flows information:
Cash paid during the year for:
Interest $ 3,463,813 $ 3,874,078 $ 4,766,560
Income taxes 661,864 321,247 345,860
Supplemental schedule of noncash investing and
financing activities:
Unrealized gain (loss) on securities
available-for-sale, net of income tax effect ($ 42,240) $ 167,513 $ 338,839
Other real estate acquired in settlement of loans 0 66,512 0
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 subsidiaries, FNB Mortgage Brokers, Inc., which brokers
secondary mortgage loans in the Pennsylvania and Maryland markets, and
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 subsidiaries of FNB Mortgage Brokers,
Inc. and 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 allowance 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". 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
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, and 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 2003 or 2002.
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 estimated 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 estimated 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. 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.
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.
A loan is considered impaired when, based on current information and
events, it is probable that scheduled collections of principal or
interest will not be made according to the contractual terms of the loan
agreement. Impairment is measured on a loan-by-loan basis (except for
consumer loans, which are collectively evaluated) by either the present
value of expected future cash flows discounted at the loan's effective
interest rate, the loan's obtainable market price, or the fair value of
the underlying collateral.
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 15-40
Equipment, furniture and fixtures 3-20
Land improvements 10-20
Leasehold improvements 7-20
-9-
Note 1. Significant Accounting Policies (Continued)
Earnings Per Share
Earnings per common share were computed based upon weighted average
shares of common stock outstanding of 800,000 for 2003, 2002, and 2001.
Intangibles
Identifiable intangible assets 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 $ 66,620, $ 52,267,
$ 80,238 for 2003, 2002, and 2001, respectively.
Fair Values of Financial Instruments
Generally accepted accounting principles 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. Certain financial instruments and all nonfinancial
instruments are excluded 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.
-10-
Note 1. Significant Accounting Policies (Continued)
* 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.
* 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
Corporation's current incremental borrowing rates for similar
types of borrowing arrangements.
* Long-Term Borrowings. The fair value of the Corporation's
long-term debt is estimated using a discounted cash flow analysis
based on the Corporation'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 Corporation generally does
not charge commitment fees. Fees for standby letters of credit
and other off-balance-sheet instruments are not significant.
Comprehensive Income
Under generally accepted accounting principles, 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:
2003 2002 2001
Gross unrealized holding gains (losses)
arising during the year ($ 14,954) $ 298,582 $ 531,378
Reclassification adjustment for (gains)/losses
realized in net income ( 49,046) ( 44,776) ( 17,986)
------------ ------------ ------------
Net unrealized holding gains (losses) before taxes ( 64,000) 253,806 513,392
Tax effect 21,760 ( 86,293) ( 174,553)
------------ ------------ ------------
Net change ($ 42,240) $ 167,513 $ 338,839
============ ============= ============
-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
2003
Obligations of other U.S.
Government agencies $ 1,200,162 $ 51,915 $ 0 $ 1,252,077
Obligations of states and
political subdivisions 8,592,013 372,735 ( 6,875) 8,957,873
Mortgage-backed securities 21,141,232 125,758 ( 55,424) 21,211,566
SBA Loan Pool certificates 419,809 2,778 ( 951) 421,636
Equities in local bank stock 161,301 35,183 0 196,484
------------ ------------ ------------- ------------
Totals $ 31,514,517 $ 588,369 ($ 63,250) $ 32,039,636
============ ============ ============= ============
2002
Obligations of other U.S.
Government agencies $ 5,597,609 $ 170,358 $ 0 $ 5,767,967
Obligations of states and
political subdivisions 8,315,356 368,502 0 8,683,858
Mortgage-backed securities 5,472,039 51,219 0 5,523,258
SBA Loan Pool certificates 509,858 3,175 ( 1,278) 511,755
Equities in local bank stock 99,701 8,645 ( 11,500) 96,846
------------ ------------ ------------- ------------
Totals $ 19,994,563 $ 601,899 ($ 12,778) $ 20,583,684
============ ============ ============= ============
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
2003
SBA loan pool certificates $ 326,809 $ 1,416 ($ 2,268) $ 325,957
========= ========= ========== =========
2002
SBA loan pool certificates $ 427,220 $ 1,857 ($ 3,221) $ 425,856
Obligations of other U.S.
government agencies 265,619 713 0 266,332
--------- --------- --------- ---------
Totals $ 692,839 $ 2,570 ($ 3,221) $ 692,188
< ========= ========= ========== =========
-12-
Note 2. Investment Securities (Continued)
The amortized cost and fair values of investment securities available
for sale and held to maturity at December 31, 2003 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.
Securities Available Securities Held
- - - - - - for Sale - - - - - - - - - - - - to Maturity- - - -
Amortized Fair Amortized Fair
Cost Value Cost Value
Due in one year or less $ 1,495,000 $ 1,521,527 $ 0 $ 0
Due after one year through
five years 5,812,246 6,111,315 0 0
Due after five years through
ten years 1,283,409 1,368,206 0 0
Due after ten years 1,201,520 1,208,901 0 0
------------- ------------- ------------- -------------
9,792,175 10,209,949 0 0
Mortgage-backed securities 21,141,232 21,211,567 0 0
SBA loan pool certificates 419,809 421,636 326,809 325,957
Equities in local bank stock 161,301 196,484 0 0
------------- ------------- ------------- -------------
Totals $ 31,514,517 $ 32,039,636 $ 326,809 $ 325,957
============= ============= ============= =============
Proceeds from sales of securities available-for-sale during 2003 were
$ 1,337,376 resulting in gross losses of $ 0 and gross gains of
$ 49,046. Related taxes were $ 16,675.
Proceeds from sales of investment securities available-for-sale during
2002 were $ 942,253 resulting in gross losses of $ 3,156 and gross gains
of $ 47,932. Related taxes were $ 15,224.
Proceeds from sales of investment securities available-for-sale during
2001 were $ 38,720 resulting in gross losses of $ 0 and gross gains of
$ 7,843. Related taxes were $ 2,667.
There were no sales of investment securities held-to-maturity in 2003,
2002, or 2001.
Investment securities carried at $ 3,968,687 and $ 4,459,332 at
December 31, 2003 and 2002, respectively, were pledged to secure public
funds and for other purposes as required or permitted by law.
-13
Note 3. Loans
Loans consist of the following at December 31:
2003 2002
(000 omitted)
Real estate loans:
Construction and land development $ 7,267 $ 3,679
Secured by farmland 4,190 4,453
Secured by 1-4 family residential properties 51,696 52,668
Secured by multi-family residential properties 321 1,781
Secured by nonfarmland nonresidential properties 18,462 15,537
Loans to farmers (except loans secured
primarily by real estate) 1,423 3,237
Commercial, industrial and state and political subdivision 10,182 10,690
loans
Loans to individuals for household, family, or other personal
expenditures 6,667 7,457
All other loans 2,055 2,099
------------ ------------
Total loans 102,263 101,601
Less: Unearned discount on loans 85 146
Allowance for loan losses 893 928
------------ ------------
Net Loans $ 101,285 $ 100,527
============ ============
The following table shows maturities and sensitivities of loans to
changes in interest rates based upon contractual maturities and terms as
of December 31, 2003.
(000 omitted) Due Over 1
Due Within But Within Due Over Nonaccruing
1 Year 5 Years 5 Years Loans Total
Loans at pre-determined $ 4,966 $ 9,989 $ 28,471 $ 366 $ 43,792
interest rates
Loans at floating or adjustable 18,223 36,838 2,556 854 58,471
interest rates
-------- -------- -------- ------- ---------
Total (1) $ 23,189 $ 46,827 $ 31,027 $ 1,220 $ 102,263
======== ======== ======== ======= =========
(1) These amounts have not been reduced by the allowance for possible
loan losses or unearned discount.
The Corporation has granted loans to its officers and directors, 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 $ 1,472,943 and $ 1,121,995 at December 31,
2003 and 2002, respectively. During 2003, $ 540,236 of new loans were
made and repayments totaled $ 189,288. During 2002, $ 1,083,329 of new
loans were made and repayments totaled $ 1,100,950.
Outstanding loans to Corporate employees totaled $ 1,226,637 and
$ 1,326,593 at December 31, 2003 and 2002, respectively.
-14-
Note 4. Allowance for Loan Losses
Activity in the allowance for loan losses is summarized as follows:
2003 2002 2001
Allowance for loan losses, beginning of the $ 928 $ 882 $ 811
year
Loans charged-off during the year:
Real estate mortgages 0 39 18
Installment loans 168 88 90
Commercial and all other loans 65 0 1
--------- --------- ---------
Total charge-offs 233 127 109
Recoveries of loans previously charged-off:
Real estate mortgages 0 9 18
Installment loans 55 22 18
Commercial and all other loans 0 0 0
--------- --------- ---------
Total recoveries 55 31 36
Net loans charged-off (recovered) 178 96 73
Provision for loan losses charged to operations 144 142 144
--------- --------- ---------
Allowance for loan losses, end of the year $ 893 $ 928 $ 882
========= ========= =========
Ratio of net charge-offs to average loans 0.17% 0.10% 0.08%
========= ========= =========
A breakdown of the allowance for loan losses as of December 31 is as
follows:
- - - - - - - 2003 - - - - - - - - - - - 2002 - - - -
Percent of Percent of
Loans in Loans in
Allowance Each Allowance Each
(000 omitted) Amount Category Amount Category
Commercial, industrial
and agriculture $ 726 22.55% $ 645 21.71%
loans
1-4 family residential
mortgages 130 68.92% 179 68.88%
Consumer and
installment loan 37 8.53% 55 9.41%
Unallocated 0 49
N/A N/A
------------ ------------ ------------ ------------
Total $ 893 $ 928
100.00% 100.00%
============ ============ ============ ============
-15-
Note 4. Allowance for Loan Losses (Continued)
Impairment of loans having a recorded investment of $ 698,454,
$ 803,043, and $ 859,974 at December 31, 2003, 2002, and 2001,
respectively, was recognized in conformity with generally accepted
accounting principles. The average recorded investment in impaired
loans was $ 743,650, $ 828,615, and $ 1,019,975 during 2003, 2002, and
2001, respectively. The total allowance for loan losses related to
these loans was $ 224,000 at December 31, 2003, $ 241,000 at December
31, 2002, and $ 120,000 at December 31, 2001. Interest income on
impaired loans of $ 35,513, $ 77,330, and $ 85,042 was recognized for
cash payments received in 2003, 2002, and 2001, respectively.
Note 5. Nonaccrual, Past Due and Restructured Loans
The following table shows the principal balances of nonaccrual loans as
of December 31:
2003 2002 2001
Nonaccrual loans $ 1,219,660 $ 934,673 $ 491,659
============= ============= =============
Interest income that would have been
accrued at original contract rates $ 131,028 $ 85,292 $ 43,468
Amount recognized as interest
income 94,631 56,361 28,545
------------- ------------- -------------
Foregone revenue $ 36,397 $ 28,931 $ 14,923
============= ============= =============
Loans 90 days or more past due (still accruing interest) were as follows at
December 31:
(000 omitted) 2003 2002 2001
Real estate mortgages $ 85 $ 91 $ 228
Installment loans 21 47 45
Commercial and industrial 0 53 0
------------- ------------- -------------
Total $ 106 $ 191 $ 273
============= ============= =============
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
2003
Land $ 246,905 $ 0 $ 246,905
Bank building and improvements 3,241,967 1,336,893 1,905,074
Equipment, furniture and 2,809,729 1,732,471 1,077,258
fixtures
Leasehold improvements 64,028 23,541 40,487
------------- ------------- -------------
$ 6,362,629 $ 3,092,905 $ 3,269,724
============= ============= =============
2002
Land $ 231,635 $ 0 $ 231,635
Bank building and improvements 3,287,975 1,311,784 1,976,191
Equipment, furniture and 2,464,010 1,992,824 471,186
fixtures
Leasehold improvements 64,028 19,665 44,363
------------- ------------- -------------
$ 6,047,648 $ 3,324,273 $ 2,723,375
============= ============= =============
-16-
Note 6. Bank Building, Equipment, Furniture and Fixtures (Continued)
Depreciation expense amounted to $ 312,172, $ 260,581, and $ 285,683 for
2003, 2002, and 2001, respectively.
Note 7. Income Taxes
The components of federal income tax expense are summarized as follows:
2003 2002 2001
Current year provision $ 331,628 $ 450,884 $ 299,269
Deferred income taxes resulting from:
Differences between financial
statement and tax depreciation charges 89,105 48,049 ( 4,793)
Differences between financial
statement and tax loan loss
provision 8,820 ( 15,129) ( 24,758)
Differences between financial statement
and tax retirement benefit expense 9,379 ( 10,388) ( 14,207)
------------ ------------ ------------
Applicable income tax $ 438,932 $ 473,416 $ 255,511
============ ============ ============
Federal income taxes were computed after adjusting pretax accounting
income for nontaxable income in the amount of $ 476,207, $ 537,475, and
$ 578,139 for 2003, 2002, and 2001, respectively.
A reconciliation of the effective applicable income tax rate to the
federal statutory rate is as follows:
2003 2002 2001
Federal income tax rate 34.0% 34.0% 34.0%
Reduction resulting from:
Nontaxable income 7.6 5.9 13.7
----- ----- ----
Effective income tax rate 26.4% 28.1% 20.3%
===== ===== =====
Deferred tax assets have been provided for deductible temporary
differences related to the allowance for loan loss and retirement
benefit reserve. Deferred tax liabilities have been provided for
taxable temporary differences related to depreciation and unrealized
gains on securities available-for-sale. The net deferred taxes included
in the accompanying balance sheets at December 31 are as follows:
2003 2002
Deferred Tax Assets
Retirement benefit reserve $ 61,704 $ 71,082
Allowance for loan losses 242,087 250,907
------------- -------------
303,791 321,989
Deferred Tax Liabilities
Net unrealized (gains) losses on
on securities available-for-sale ( 178,540) ( 200,301)
Depreciation ( 159,090) ( 69,985)
-------------- --------------
( 337,630) ( 270,286)
-------------- --------------
Net deferred tax asset (liability) ($ 33,839) $ 51,703
============== ==============
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.
-17-
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 $ 79,942, $ 84,699, and $ 94,923, for the
years ended December 31, 2003, 2002, and 2001, 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 $
226,633 and $ 209,066 at December 31, 2003 and 2002, respectively, which
is included in other liabilities. Total annual expense for these plans
amounted to $ 36,311, $ 81,516, and $ 55,656, for 2003, 2002, and 2001,
respectively.
Note 9. Deposits
Included in savings deposits are NOW and Super NOW account balances
totaling $ 7,755,240 and $ 7,449,001 at December 31, 2003 and 2002,
respectively. Also included in savings deposits at December 31, 2003
and 2002 are Money Market account balances totaling $ 8,437,791 and
$ 7,789,010, respectively.
Time certificates of $ 100,000 and over as of December 31 were as
follows:
2003 2002
(000 omitted)
Three months or less $ 2,697 $ 960
Three months to six months 1,256 1,385
Six months to twelve months 2,965 1,954
Over twelve months 8,836 9,096
--------- ----------
Total $ 15,754 $ 13,395
========= ==========
Interest expense on time deposits of $ 100,000 and over aggregated
$ 529,000, $ 658,000, and $ 726,000 for 2003, 2002, and 2001,
respectively.
At December 31, 2003 the scheduled maturities of certificates of deposit
are as follows (000 omitted):
2004 $ 32,561
2005 9,236
2006 7,465
2007 10,287
2008 8,452
--------
$ 68,001
========
-18-
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 $ 1,400,818 and
$ 2,223,487 at December 31, 2003 and 2002, respectively.
The aggregate amount of demand deposit overdrafts reclassified as loan
balances were $ 8,479 and $ 14,046 at December 31, 2003 and 2002,
respectively.
Derivative Instruments
Included in time deposits are Index Powered Certificates of Deposit
("IPCD's") totaling $ 1,351,228 and $ 1,296,562 at December 31, 2003 and
2002, respectively. The IPCD product is offered through a program with
the Federal Home Loan Bank (FHLB). The ultimate pay off at maturity,
which is in five years, is the initial deposited principal plus the
appreciation in the S&P 500 Index ("S&P Call Option"). The S&P Call
Option is considered an embedded derivative designated as a non-hedging
item. The change in fair value of the S&P Call Option resulted in a
loss of $ 74,765 and a gain of $ 219,023 for 2003 and 2002,
respectively, which are included in other income.
In order to hedge its risk associated with the IPCD Product, the
Corporation has entered into a derivative contract with the FHLB whereby
the Corporation pays FHLB a fixed rate interest charge (ranging from
4.2% to 4.97%) in return for a guarantee that the FHLB will pay the
Corporation the cash equivalent of the growth in the S&P 500 Index due
at the IPCD maturity date. The change in fair value of the FHLB
Derivative Contract resulted in a gain of $ 78,561 and a loss of
$ 176,702 for 2003 and 2002, respectively, which is included in other
income.
Note 10. Financial Instruments With Off-Balance-Sheet Risk
The Corporation 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 Corporation 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)
2003 2002
Financial instruments whose contract amounts
represent credit risk at December 31:
Commitments to extend credit $ 12,392 $ 12,513
Commercial and standby letters of credit 2,136 2,230
-------- --------
$ 14,528 $ 14,743
======== ========
-19-
Note 10. Financial Instruments With Off-Balance-Sheet Risk (Continued)
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.
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 as disclosed in Note 3.
The Corporation evaluates each customer's creditworthiness on a case-by-
case basis. The amount of collateral obtained, if deemed necessary 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 2003 2002
Cash $ 77,302 $ 9,105
Interest-bearing deposits with banks 100,511 165,897
Marketable equity securities
available for sale 196,484 96,846
Investment in wholly-owned subsidiaries 14,289,088 14,162,837
Other assets 327,757 38,892
------------- -------------
Total assets $ 14,991,142 $ 14,473,577
============= =============
-20-
Note 12. FNB Financial Corporation (Parent Company Only) Financial Information
(Continued)
Liabilities and Stockholders' Equity
2003 2002
Dividends payable $ 272,000 $ 264,000
Other liabilities 0 32,754
------------- -------------
Total liabilities 272,000 296,754
------------- -------------
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 12,330,729 11,746,170
Accumulated other comprehensive income 346,580 388,820
------------- -------------
Total stockholders' equity 14,719,142 14,176,823
------------- -------------
Total liabilities and stockholders' equity $ 14,991,142 $ 14,473,577
============= =============
Statements of Income
Years Ended December 31
2003 2002 2001
Cash dividends from wholly-owned
subsidiaries $ 1,082,000 $ 569,000 $ 542,000
Interest on deposits with banks 137 388 303
Dividend income - Marketable
equity securities 4,778 4,641 5,369
Securities gains 44,395 42,691 7,843
Miscellaneous income (loss) 18,305 11,397 ( 4,168)
Equity in undistributed income of
subsidiaries 118,596 621,158 503,389
---------------- ------------- -------------
1,268,211 1,249,275 1,054,736
Less: holding company 43,652 35,962 49,605
expenses
---------------- ------------- -------------
Net income $ 1,224,559 $ 1,213,313 $ 1,005,131
================ ============= =============
-21-
Note 12. FNB Financial Corporation (Parent Company Only) Financial Information
(Continued)
Statements of Cash Flows
Years Ended December 31
2003 2002 2001
Cash flows from operating activities:
Net income $ 1,224,559 $ 1,213,313 $ 1,005,131
Adjustments to reconcile net
income to cash provided by
operating activities:
Equity in undistributed income
of subsidiaries ( 118,596) ( 621,158) ( 503,389)
(Gain) on sales of investments ( 44,395) ( 42,691) ( 7,843)
(Increase) decrease in other assets ( 301,798) ( 14,537) ( 17,857)
Increase (decrease) in other liabilities ( 32,754) 32,754 ( 6,065)
---------------- ------------- --------------
Net cash provided by operating activities 727,016 567,681 469,977
---------------- ------------- --------------
Cash flows from investing activities:
Net (increase) decrease in interest bearing
deposits with banks 65,386 ( 159,502) ( 6,096)
Investment in subsidiary ( 75,000) 0 0
Purchase of marketable equity securities
available for sale ( 196,299) ( 143,866) 0
Sales of marketable equity securities
available for sale 179,094 266,127 38,720
---------------- ------------- -------------
Net cash provided (used) by investing
activities ( 26,819) ( 37,241) 32,624
---------------- ------------- --------------
Cash flows from financing activities:
Cash dividends paid ( 632,000) ( 544,000) ( 480,000)
---------------- ------------- -------------
Net increase (decrease) in cash 68,197 ( 13,560) 22,601
Cash, beginning balance 9,105 22,665 64
---------------- ------------- -------------
Cash, ending balance $ 77,302 $ 9,105 $ 22,665
================ ============= =============
Note 13. Regulatory Matters
Dividends paid by FNB Financial Corporation are generally provided from
the dividends it receives from its Subsidiary Bank. The Bank, as a
National Bank, is subject to the dividend restrictions set forth by the
Office of the Comptroller of the Currency (OCC). Under such
restrictions, the Corporation may not, without prior approval of the
OCC, 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 OCC amounted to approximately $ 3,872,654 and
$ 3,690,009 at December 31, 2003 and 2002, respectively.
-22-
Note 13. Regulatory Matters (Continued)
FNB Financial Corporation's balance of retained earnings at December 31,
2003 is $ 12,330,729 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 Corporation 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 Corporation's
financial statements. Under capital adequacy guidelines, the
Corporation 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
2003 2002 Requirements
Leverage ratio 10.17% 10.50% 4%
Risk-based capital ratios:
Tier I (core capital) 15.20% 15.63% 4%
Combined Tier I and
Tier II (core capital
plus allowance for loan
losses) 16.15% 16.69% 8%
As of December 31, 2003 the most recent regulatory exam from the Office
of the Comptroller of the Currency categorized the Corporation 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 Corporation's category.
Note 14. Compensating Balance Arrangements
Required deposit balances at the Federal Reserve were $ 400,000 and
$ 100,000 for 2003 and 2002, respectively. Required deposit balance at
Atlantic Central Banker's Bank was $ 425,000 at December 31, 2003 and
2002. These balances are maintained to cover processing costs and
service charges.
-23-
Note 15. Fair Value of Financial Instruments
The estimated fair values of the Corporation's financial instruments
were as follows at December 31:
- - - - - - 2003 - - - - - - - - - - - - 2002 - - - - -
Carrying Fair Carrying Fair
Amount Value Amount Value
FINANCIAL ASSETS
Cash and due from banks $ 3,495,604 $ 3,495,604 $ 3,650,351 $ 3,650,351
3,650,351
Interest-bearing deposits in banks 1,518,766 1,527,341 968,266 990,976
Securities available for sale 32,039,636 32,039,636 20,583,684 20,583,684
Securities to be held to maturity 326,809 325,957 692,839 692,188
Other bank stock 1,136,500 1,136,500 666,000 666,000
Loans receivable 101,284,984 100,803,961 100,526,867 100,695,330
Accrued interest receivable 555,760 555,760 658,856 658,856
FINANCIAL LIABILITIES
Time certificates 68,000,625 69,500,472 65,934,931 68,165,120
Other deposits 48,721,284 48,721,284 44,757,428 44,757,428
Accrued interest payable 302,279 302,279 403,813 403,813
Liability for borrowed funds 14,680,992 15,516,087 7,232,659 8,004,310
Note 16. Liability for Borrowed Funds
Included in liabilities for borrowed funds at December 31 are
borrowings from The Federal Home Loan Bank as follows:
Advance Principal Outstanding Interest Maturity
Type Amount Rate Date
2003 2002
Fixed $ 2,500,000 $ 2,500,000 $ 0 1.30% 3/8/04
Convertible (1) 2,250,000 2,250,000 2,250,000 6.23% 8/30/10
Convertible (1) 2,000,000 2,000,000 2,000,000 5.83% 8/10/10
Convertible (1) 500,000 500,000 500,000 5.98% 7/21/10
Convertible (1) 500,000 500,000 500,000 6.54% 7/12/10
Credit Line 17,750,000 6,789,000 1,835,000 1.03% 12/21/04
CIP/Term (2) 175,000 141,992 147,659 6.64% 7/14/17
$ 14,680,992 $ 7,232,659
(1) Interest rates on Convertible Loans are fixed until the market
rate reaches a pre-determined Comparative Rate/Index or Strike
Rate/Index, at which time the interest rate becomes adjustable
quarterly based upon the three month LIBOR rate. At the time any
loan rate becomes adjustable, the Corporation has the option to
repay the debt entirely without penalty or convert to a repayment
schedule.
-24-
Note 16. Liability for Borrowed Funds (Continue)
(2) The Corporation 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:
2004 $ 6,639
2005 7,094
2006 7,737
2007 8,098
2008 8,653
Thereafter 103,771
-------------
$ 141,992
=============
The total maximum borrowing capacity from Federal Home Loan Bank at
December 31, 2003 was $ 72,171,000. Collateral for borrowings at the
Federal Home Loan Bank consists of various securities and the
Corporation's 1-4 family mortgages with a total value of approximately
$ 74,791,000.
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, 2003, 2002, and 2001, rent expense under this
operating lease was $ 21,600 for each year. Required lease payments for
the remaining three years are as follows:
2004 $ 21,600
2005 21,600
2006 16,200
--------
$ 59,400
========
-25-
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARIES
SELECTED FIVE YEAR FINANCIAL DATA
2003 2002 2001 2000 1999
Results of Operations (000
omitted)
Interest income $ 8,290 $ 8,352 $ 8,767 $ 8,755 $ 7,802
Interest expense 3,362 3,723 4,676 4,697 4,119
Provision for loan losses 144 142 144 231 190
--------- --------- --------- --------- ---------
Net interest income after
provision for loan losses 4,784 4,487 3,947 3,827 3,493
Other operating income 743 693 739 624 621
Other operating expenses 3,864 3,494 3,425 3,267 3,030
--------- --------- --------- --------- ---------
Income before income taxes 1,663 1,686 1,261 1,184 1,084
Applicable income tax 438 473 256 229 181
--------- --------- --------- --------- ---------
Net income $ 1,225 $ 1,213 $ 1,005 $ 955 $ 903
========= ========= ========= ========= =========
Common Share Data
Per share amounts are based on weighted average shares of common stock outstanding of 800,000
for 2003, 2002, 2001, 2000, and 1999 after giving retroactive recognition to a two-for-one
stock split issued September 1, 2000.
Income before income taxes $ 2.08 $ 2.11 $ 1.58 $ 1.48 $ 1.36
Applicable income taxes 0.55 0.59 0.32 0.29 0.22
Net income 1.53 1.52 1.26 1.19 1.13
Cash dividend declared 0.80 0.74 0.63 0.57 0.50
Book value (actual number
of shares outstanding) 18.40 17.72 16.73 15.69 14.00
Dividend payout ratio 52.26% 48.79% 50.14% 47.76% 44.28%
Year-End Balance Sheet Figures
(000 omitted)
Total assets $ 147,035 $ 133,365 $ 132,161 $ 123,626 $ 117,929
Net loans 101,285 100,527 90,168 83,112 76,137
Total investment securities -
Amortized cost 31,841 20,687 20,334 28,154 31,900
Deposits-noninterest bearing 15,901 13,931 13,344 11,798 10,959
Deposits-interest bearing 100,821 96,761 98,618 91,834 88,371
Total deposits 116,722 110,692 111,962 103,632 99,330
Total stockholders' equity 14,719 14,177 13,388 12,548 11,201
Ratios
Average equity/average assets 10.55% 10.30% 10.05% 10.15% 10.49%
Return on average equity 8.28% 9.01% 7.74% 7.67% 7.53%
Return on average assets 0.87% 0.93% 0.78% 0.78% 0.79%
-26-
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARIES
SUMMARY OF QUARTERLY FINANCIAL DATA
The unaudited quarterly results of operations for the years ended December 31, 2003 and 2002 are as follows:
2003 2002
($ 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 $ 2,037 $ 2,070 $ 2,011 $ 2,172 $ 2,036 $ 2,073 $ 2,082 $ 2,161
Interest expense 842 841 842 837 982 931 931 879
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income 1,195 1,229 1,169 1,335 1,054 1,142 1,151 1,282
Provision for loan losses 36 36 36 36 30 36 37 39
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income
after provision for
loan losses 1,159 1,193 1,133 1,299 1,024 1,106 1,114 1,243
Other income 214 153 173 155 181 162 163 142
Security gains (losses) 2 46 1 0 8 0 19 18
Other expenses 871 942 1,001 1,050 853 832 890 919
-------- -------- -------- -------- -------- -------- -------- --------
Operating income
before
income taxes 504 450 306 404 360 436 406 484
Applicable income taxes 106 135 62 136 80 72 156 165
-------- -------- -------- -------- -------- -------- -------- --------
Net income $ 398 $ 315 $ 244 $ 268 $ 280 $ 364 $ 250 $ 319
======== ======== ======== ======== ======== ======== ======== ========
Net income applicable
to common stock
Per share data:
Net income $ 0.50 $ 0.39 $ 0.31 $ 0.33 $ 0.35 $ 0.46 $ 0.31 $ 0.40
-27-
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARIES
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS'
EQUITY, INTEREST RATES AND INTEREST DIFFERENTIAL
Years Ended December 31
- - - - - - - - - - -2003 - - - - - - - - - - - - - -2002 - - - - - - - - - - - - -2001 - -
Average Average Average
(000 omitted) Balance Interest Rate Balance Interest Rate Balance Interest Rate
ASSETS
Interest bearing
deposits with banks
and federal funds sold $ 1,310 $ 38 2.90% $ 5,870 $ 123 2.18% $ 8,614 $ 305 3.54%
Investment securities 26,785 1,057 3.95% 19,048 936 4.91% 24,037 1,322 5.50%
Loans 102,219 7,195 7.04% 96,209 7,293 7.58% 86,059 7,141 8.30%
---------- ---------- ----- ---------- ---------- ----- ---------- ---------- -----
Total interest
earning assets 130,314 $ 8,290 6.36% 121,127 $ 8,352 6.89% 118,710 $ 8,768 7.39%
========== ===== ========== ===== ========== =====
Cash and due from
banks 3,723 3,743 3,342
Bank premises and
equipment 3,009 2,827 3,017
Other assets 3,239 2,854 4,158
---------- ---------- ----------
Total assets $ 140,285 $ 130,551 $ 129,227
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing
transaction accounts $ 6,353 $ 38 0.60% $ 6,876 $ 49 0.70% $ 8,118 $ 94 1.16%
Money market deposit
accounts 5,459 69 1.26% 8,303 150 1.81% 11,830 366 3.09%
Other savings deposits 16,323 110 0.67% 15,299 190 1.24% 10,995 215 1.96%
All time deposits 67,810 2,722 4.01% 65,920 2,999 4.54% 65,214 3,669 5.63%
Liability for borrowed
funds 10,902 423 3.88% 5,433 335 6.17% 5,410 333 6.16%
---------- ---------- ----- ---------- ---------- ----- ---------- ---------- -----
Total interest
bearing
liabilities 106,847 $ 3,362 3.15% 101,831 $ 3,723 3.66% 101,567 $ 4,677 4.60%
========== ===== ========== ===== ========== =====
Demand deposits 17,615 14,172 13,399
Other liabilities 1,023 1,097 1,274
---------- ---------- ----------
Total liabilities 125,485 117,100 116,240
Stockholders' equity 14,800 13,451 12,987
---------- ---------- ----------
Total liabilities
and stockholders'
Equity $ 140,285 $ 130,551 $ 129,227
========== ========== ==========
Net interest income/net
interest margin $ 4,928 3.78% $ 4,629 3.82% $ 4,091 3.45%
========== ===== ========== ===== ========== =====
Note: Average loan balances presented include loans placed on non-accrual status.
-28-
FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARIES
CHANGES IN NET INTEREST INCOME
- - - - 2003 Compared to 2002 - - - - - - - - 2002 Compared to 2001 - - - -
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 ($ 99) $ 14 ($ 85) ($ 97) ($ 85) ($ 182)
Investment securities 380 ( 259) 121 ( 274) ( 112) ( 386)
Loans 456 ( 554) ( 98) 842 ( 690) 152
---------- ---------- ----------- ---------- ----------- ----------
Total interest income $ 737 ($ 799) ($ 62) $ 471 ($ 887) ($ 416)
========== ========== ========== ========== ========== ==========
Interest Expense
Interest bearing
transaction accounts ($ 4) ($ 7) ($ 11) ($ 14) ($ 31) ($ 45)
Money market
deposit accounts ( 51) ( 30) ( 81) ( 109) ( 107) ( 216)
Other savings 13 ( 93) ( 80) 84 ( 109) ( 25)
All time deposits 86 ( 363) ( 277) 40 ( 710) ( 670)
Liability for borrowed funds 337 ( 249) 88 2 0 2
---------- ----------- ---------- ---------- ---------- ----------
Total interest expense $ 381 ($ 742) ($ 361) $ 3 ($ 957) ($ 954)
========== ========== ========== ========== ========== ===========
Net interest income $ 299 $ 538
========== ===========
-29-
FNB FINANCIAL CORPORATION AND ITS
WHOLLY-OWNED SUBSIDIARIES
MATURITIES OF INVESTMENT SECURITIES
December 31, 2003
The following table shows the maturities of investment securities at
amortized cost as of December 31, 2003, and weighted average yields of such
securities. Yields are shown on a taxable equivalent basis, assuming a 34%
federal income tax rate.
(000 omitted)
Within 1 Year 1-5 Years 5-10 Years Over 10 Years Total
Obligations of other U.S. Government
agencies:
Amortized cost $ 450 $ 750 $ 0 $ 0 $ 1,200
Yield 5.59% 5.84% 0.00% 0.00% 5.75%
Obligations of state and political
subdivisions:
Amortized cost 1,045 5,062 1,283 1,202 8,592
Yield 4.34% 4.42% 4.54% 4.64% 4.46%
Mortgage-Backed securities and SBA
Guaranteed Loan Pool Certificates (1):
Amortized cost 0 10 3,273 18,605 21,888
Yield 0.00% 5.79% 3.34% 3.95% 3.86%
------------- ------------- ------------- ------------- --------------
Subtotal amortized cost 1,495 5,822 4,556 19,807 31,680
------------- ------------- ------------- ------------- -------------
Subtotal yield 4.72% 4.61% 3.68% 3.99% 4.09%
------------- ------------- ------------- ------------- -------------
Equity Securities $ 161
Yield 3.67%
Total investment securities $ 31,841
=============
Yield 4.09%
(1) It is anticipated that these mortgage-backed securities and SBA
Guaranteed Loan Pool Certificates will
be repaid prior to their contractual maturity dates.
-30-
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 subsidiaries, The First National Bank of
McConnellsburg (the Bank) and FNB Mortgage Brokers, Inc. 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 2003 was $ 1,224,559, a $ 11,246, or 0.93%
increase from the net income for 2002 of $ 1,213,313, and an increase in 2002
net income of $ 208,182, or 20.7% from the net income of $ 1,005,131 for 2001.
On a per share basis, net income for 2003 was $ 1.53, based upon average shares
outstanding of 800,000, compared to $ 1.52 for 2002 and $ 1.26 for 2001.
Net Interest Income
Total interest income decreased $ 62,000 from 2002 to 2003 and
decreased $ 415,000 from 2001 to 2002. Decreases in 2003 and 2002 were due to
reduction in rates. Average loans outstanding in 2003 increased 6.3% over 2002
as the bank continues to penetrate the Washington County, Maryland market.
Average rates continued to decline throughout 2003 which caused a $ 554,000
decrease in earnings from loans compared to 2002. However, this decrease was
offset somewhat by the increase in volume of average loans outstanding in 2003
resulting in a net decrease in interest earnings from loans of only $ 98,000 or
0.84% compared to 2002. Earnings on investments (excluding gains from sales)
increased 12.9% in 2003 compared to a 29.2% decrease in 2002. The increase in
2003 was attributed solely to the expansion of the investment portfolio as loan
demand subsided during the year. This increase was offset by the continuing
decline in average yields which dropped 96 basis points from 2002 to 2003. The
decrease in 2002 was a combination of a decrease in volume with available funds
being directed into loans as investments rolled off and a decrease in average
yields. Total average earning assets increased 7.6% in 2003 compared to 2.0% in
2002. Increases in earning assets during 2002 were proportionately higher in
loans than in 2003, which typically produce higher yields than investments thus
producing the higher net interest margins during 2002 than 2003.
Interest from loans accounted for 86.8% of total interest income for
2003, as compared to 87.3% and 81.4% for 2002 and 2001, respectively.
Total interest expense was $ 3,362,000 for 2003, a decrease of
$ 361,000 from the $ 3,723,000 for 2002. The increase in total average deposits
was 2.7% in 2003 compared to 0.9% in 2002. Increases in deposits during 2003
were concentrated in regular savings and time deposits which increased 6.7% and
2.9%, respectively over 2002. However, the average rates paid on these deposits
decreased 56 basis points contributing to the overall decrease in the cost of
funds in 2003. Overall deposit growth was flat during 2002 with interest
bearing demand deposits decreasing 23.9% and time deposits and savings
increasing 1.1% and 39.1%, respectively. Although overall growth was flat
during 2002, rates decreased 193 basis points which caused a decrease in
interest expense on deposits of 22%. Average borrowed funds increased 100.7%
resulting in increased interest expense on borrowed funds of 26.2%. The changes
in volume of earning assets along with the decreased level of rates paid for
deposits caused the overall net interest margin to decrease from 3.82% in 2002
to 3.78% in 2003.
-31-
Allowance for Loan Losses and Related Provisions
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 2003 was $ 144,000, compared to $ 142,000 for 2002, and $ 144,000
for 2001.
The changes in the allowance for loan losses are presented in Note 4
of the financial statements. Net charge-offs in 2003 were $ 178,000 compared to
$ 96,000 in 2002 and $ 73,000 in 2001, representing .17%, .10% and .08% of
average loans outstanding for 2003, 2002, and 2001, respectively.
Impaired loans in 2003, 2002, and 2001, represent one credit
relationship, details of which are presented in Note 4 to the financial
statements. This loan is performing and is well collateralized.
Management utilizes a comprehensive systematic review of our loan
portfolio on a quarterly basis in order to determine the adequacy of the
Allowance for Loan Losses. Each quarter the loan portfolio is categorized into
various Pools as follows:
POOL #1 Specific allowances for any individually identified
trouble loans
POOL #2 Commercial and Industrial
POOL #3 Commercial and Industrial - Real Estate Secured
POOL #4 Consumer Demand and Installment
POOL #5 Consumer Mortgage and Home Equity
Lines of credit and non-secured commercial loans with balances of
$ 100,000 and over are individually reviewed. Also, loans that are 90 days or
more past due or have been previously classified as substandard are individually
reviewed. Allocations to the Allowance for Loan Losses are based upon
classifications assigned to those loans.
Loan classifications utilized are consistent with OCC regulatory
guidelines and are as follows:
Allowance Factors
Loss Charge-off
Doubtful 20% - 50%
Substandard 10% - 20%
Special Mention 5% - 10%
Watch 1% - 5%
The remaining portion of the Pools are evaluated as groups with
allocations made to the allowance based on historical loss experience, current
and anticipated trends in delinquencies, and general economic conditions within
the bank's trading area.
In addition to the aforementioned internal loan review, the Bank
engages an outside firm to annually conduct an independent loan review in order
to validate the methodologies used internally and to independently test the
adequacy of the Allowance for Loan Losses.
Delinquencies are well below peer group averages and management is not
aware of any problem loans other than those disclosed herein that are indicative
of trends, events, or uncertainties that would significantly impact operations,
liquidity or capital.
-32-
Other Operating Income and Other Operating Expenses
Other income represents service charges on deposit accounts,
commissions and fees received for the sale of travelers' checks, money orders
and savings bonds, fees for trust referrals, fees for investment services,
securities gains, and losses, increases in cash surrender value of life
insurance, and other income, such as safe deposit box rents. In the second
quarter of 2003, FNB Financial Corporation formed a new company called FNB
Mortgage Brokers, Inc. The company was organized as a "C" Corporation and is a
wholly-owned subsidiary of FNB Financial Corporation. The company's primary
activity is to broker secondary mortgage loans in the Pennsylvania and Maryland
markets. On August 29, 2003, FNB Mortgage Brokers, Inc. acquired substantially
all the assets of MMI Mortgage Brokers, Inc. and entered into an executive
employment agreement with the owner of MMI. Other income increased $ 50,000 or
7.2% for 2003 over 2002, and decreased $ 45,000 or 6.1% for 2002 over 2001.
Increases in 2003 relate primarily to the mortgage brokerage fees and
commissions earned by FNB Mortgage Brokers, Inc. The changes in 2002 relate
primarily to service charges and other fees related to deposits which fluctuated
with the related changes in volumes of deposits discussed earlier.
The noninterest expenses are classified into five main categories:
salaries; employee benefits; occupancy expenses, which include depreciation,
maintenance, utilities, taxes and insurance; equipment expenses, which include
depreciation, rents and maintenance; and other operating expenses, which include
all other expenses incurred in operating the Corporation.
Overall personnel related expenses increased 5.1% in 2003 over 2002.
Salaries and wages increased as the result of changes in personnel caused by a
core data processing system conversion and acquisition of a mortgage brokerage
business in 2003. Increases from 2001 to 2002 were primarily the result of
personnel changes.
Occupancy, furniture, and equipment expenses increased 10.3% in 2003
compared to 2002. This increase was caused by converting the core processing
applications to a new system in 2003.
Other expenses increased 19.0% in 2003 compared to 2002 and 8.3% in
2002 compared to 2001. Increases were primarily in processing costs and
professional fees.
Income Taxes
Applicable income taxes changed between 2001, 2002, and 2003 as a
result of changes in pre-tax accounting income and taxable income. Details of
income tax expense are presented in Note 7 to the financial statements. As
described in Note 1 of the Notes to Consolidated Financial Statements, deferred
income taxes have been provided for timing differences in the recognition of
certain expenses between financial reporting and tax purposes. Deferred income
taxes have been provided at prevailing tax rates for such items as depreciation,
provision for loan losses, deferred compensation, and unrealized gains and
losses on investment securities available for sale. The marginal tax rate at
which deferred taxes were provided during 2003 and 2002 is 34%. At December 31,
2003 and 2002, deferred taxes amounted to ($ 33,839) and $ 51,703, respectively.
If all timing differences reversed in 2004, the actual income taxes saved by the
recognition of the aforementioned expenses would not be significantly different
from the deferred income taxes recognized for financial reporting purposes.
The current level of nontaxable investment and loan income is such
that the Corporation is not affected by the alternative minimum tax rules.
-33-
CRITICAL ACCOUNTING POLICIES
Bank policy related to the allowance for loan losses is considered to
be a critical accounting policy because the allowance for loan losses represents
a particularly sensitive accounting estimate. The amount of the allowance is
based on management's evaluation of the collectibility of the loan portfolio,
including the nature of the loan portfolio, credit concentrations, trends in
historical loss experience, specific impaired loans, and economic conditions.
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 the collectibility of the principal is
unlikely. The allowance is an amount 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.
FUTURE IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
Financial Accounting Standards Board Statement 150 - Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity, was issued May of 2003 and is effective for financial instruments
entered into or modified after May 31, 2003. This statement establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It requires
that an issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). Many of those instruments were
previously classified as equity. Provisions of this statement are consistent
with the Board's proposal to revise the definition of liabilities to encompass
certain obligations that a reporting entity can or must settle by issuing its
own equity shares, depending on the nature of the relationship established
between the holder and the issuer. Management does not expect there to be a
significant impact from this statement since the Corporation currently does not
have any obligations requiring settlement by the issuance of its own shares of
stock.
In December 2003, the Financial Accounting Standards Board released
Financial Interpretation No. 46, Consolidation of Variable Interest Entities
(FIN 46). This Interpretation of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, addresses consolidation by business
enterprises of variable interest entities, which have one or more of the
following characteristics:
1. The equity investment at risk is not sufficient to permit the
entity to finance its activities without additional subordinated
financial support provided by any parties, including the equity
holders.
2. The equity investors lack one or more of the following essential
characteristics of a controlling financial interest:
a. The direct or indirect ability to make decisions about the
entity's
activities through voting rights or similar rights;
b. The obligation to absorb the expected losses of the entity;
c. The right to receive the expected residual returns of the
entity.
3. The equity investors have voting rights that are not proportionate
to their economic interest, and the activities of the entity
involve or are conducted on behalf of an investor with the
disproportionately small voting interest.
Management does not expect this interpretation to have a significant
impact since the Corporation does not have any investment in any entity with the
aforementioned characteristics.
-34-
Financial Accounting Standards Board (FASB) Standard 148, Accounting
for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB
123. This statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of Statement
123 to require prominent disclosure about the effects on reported net income of
an entity's accounting policy decisions with respect to stock-based employee
compensation. Finally, this Statement amends APB Opinion No. 28, Interim
Financial Reporting, to require disclosure about those effects in interim
financial information. The Corporation does not have any stock option plan,
therefore, SFAS No. 148 will have no affect.
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/called 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, 2003, we had borrowings of $ 14,680,992 from this institution and
had readily available to us over $ 72,171,000 in additional borrowing capacity.
As of December 31, 2002, we had borrowings of $ 7,232,659 from this institution
and had readily available to us over $ 54,470,000 in additional borrowing
capacity.
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, and Savings accounts, 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. In a period of declining
interest rates, more securities with call features will most likely be called
and will be reinvested into lower yielding investments resulting in the loss of
higher interest earnings assets.
Presently, interest rates are anticipated to remain depressed further
resulting in a decreasing cost of deposits while a portion of our adjustable
rate loans and securities continue repricing to lower interest rates. This
decreasing interest rate environment and the 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
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.
-35-
Our interest rate sensitivity analysis as of December 31, 2003, based
upon our historical prepayment mortgage-backed securities, contractual
maturities, and the earliest possible repricing opportunity for loans and
deposits is as follows:
December 31, 2003 (000 omitted)
After 3 But After 1 But
Within 3 Within 12 Within 5 After 5
Months Months Years Years Total
Rate Sensitive Assets:
Investment securities
(book value) $ 150 $ 1,345 $ 6,529 $ 23,656 $ 31,680
Interest-bearing balances
due from banks 1,419 0 100 0 1,519
Loans 15,152 9,172 46,827 31,027 102,178
------------ ------------ ------------ ------------ ------------
$ 16,721 $ 10,517 $ 53,456 $ 54,683 $ 135,377
============ ============ ============ ============ ============
Rate Sensitive Liabilities:
NOW accounts and savings accounts $ 32,535 $ 0 $ 0 $ 0 $ 32,535
Time deposits 9,019 23,564 35,418 68,001
Other time deposits 0 285 0 0 285
Other borrowed money 0 9,289 0 5,392 14,681
------------ ------------ ------------ ------------ ------------
$ 41,554 $ 33,138 $ 35,418 $ 5,392 $ 115,502
============ ============ ============ ============ ============
Interest sensitivity gap ($ 24,833) ($ 22,621) $ 18,038 $ 49,291 $ 19,875
Cumulative interest sensitivity gap ( 24,833) ( 47,454) ( 29,416) 19,875
RSA/RSL - cumulative ( 0.42) ( 0.36) ( 0.73) 1.17
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.
-36-
MARKET RISK MANAGEMENT
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.
The following table sets forth the projected maturities and average
rate for all rate sensitive assets and liabilities. The following assumptions
were used in the development of this table:
* 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 earliest call 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 our history of
operations and have 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.
* Fixed and variable rate time deposits were based upon original
contract maturity dates.
-37-
Rate Sensitive Assets
(000 omitted) 2004 2005 2006 2007 2008 Thereafter Total Fair Value
Interest bearing deposits $ 1,419 $ 0 $ 100 $ 0 $ 0 $ 0 $ 1,519 $ 1,527
Average interest rate 5.00% 0.00% 2.59% 0.00% 0.00% 0.00% 3.79%
Fixed interest rate loans 4,966 1,932 3,386 2,088 2,583 28,837 43,792 43,167
Average interest rate 4.94% 9.37% 7.81% 8.64% 6.95% 7.34% 7.23%
Variable interest rate loans 18,223 4,557 8,849 12,480 10,952 3,410 58,471 57,637
Average interest rate 4.62% 6.24% 6.15% 6.80% 6.18% 6.93% 5.83%
Fixed interest rate U.S. Agency
and Treasury 450 750 0 0 0 0 1,200 1,252
Average interest rate 3.69% 3.85% 0.00% 0.00% 0.00% 0.00% 3.79%
Fixed interest rate mortgage-backed &
SBA GLPC securities 0 0 0 0 5 837 842 845
Average interest rate 0.00% 0.00% 0.00% 0.00% 2.72% 3.49% 3.45%
Variable interest rate mortgaged-backed
& SBA GLPC securities 0 0 4 0 0 21,042 21,046 21,114
Average interest rate 0.00% 0.00% 5.41% 0.00% 0.00% 4.02% 4.01%
Fixed interest rate obligations of state and
political subdivisions in the U.S. 1,045 620 1,110 810 3,230 1,777 8,592 8,958
Average interest rate 3.96% 4.18% 4.50% 4.36% 4.39% 4.66% 4.42%
Rate Sensitive Liabilities
(000 omitted)
Noninterest-bearing checking 4,008 1,002 1,002 1,002 1,002 0 8,016 8,016
Average interest rate 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Savings and interest-bearing checking 8,205 2,052 2,051 2,051 2,051 0 16,410 16,410
Average interest rate 0.69% 0.69% 0.69% 0.69% 0.69% 0.00% 0.69%
Fixed interest rate time deposits 14,767 7,780 7,463 10,287 8,430 0 48,727 49,809
Average interest rate 2.51% 5.20% 3.84% 4.44% 3.46% 0.00% 3.71%
Variable interest rate time deposits 17,808 1,456 2 0 0 0 19,266 19,691
Average interest rate 3.89% 3.36% 3.80% 0.00% 0.00% 0.00% 3.85%
Fixed interest rate borrowing 2,500 0 0 0 0 142 2,642 2,793
Average interest rate 1.30% 0.00% 0.00% 0.00% 0.00% 6.64% 1.60%
Variable interest rate borrowings 6,789 0 0 0 0 5,250 12,039 12,723
Average interest rate 1.13% 0.00% 0.00% 0.00% 0.00% 6.08% 3.28%
-38-
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 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 is defined as total stockholders'
equity less intangible assets to total assets. The risk-based ratios compare
capital to risk-weighted assets and off-balance-sheet activity in order to make
capital levels more sensitive to risk profiles of individual banks. A
comparison of our capital ratios to regulatory minimums at December 31 is as
follows:
Regulatory
Minimum
2003 2002 2001 Requirements
Leverage ratio 10.17% 10.50% 9.88% 4.00%
Risk-based capital ratio Tier
I (core capital) 15.20% 15.63% 14.89% 4.00%
Combined Tier I and Tier II
(core capital plus 16.15% 16.69% 15.90% 8.00%
allowance for loan losses
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.
2003 2002 2001
Equity capital at December 31 (000 omitted) $ 14,719 $ 14,177 $ 13,388
Equity capital as a percent of assets at December 31 10.01% 10.63% 10.13%
Return on average assets 0.87% .93% 0.78%
Return on average equity 8.28% 9.01% 7.74%
Cash dividend payout ratio 52.26% 48.79% 50.14%
STOCK MARKET ANALYSIS AND DIVIDENDS
Our common stock is traded inactively in the over-the-counter market.
As of December 31, 2003, the approximate number of shareholders of record was
476.
2003 2002
Cash Cash
Market Price Dividend Market Price Dividend
HI LOW LOW HI
First Quarter $ 23.00 - 22.50 $ 0.13 $ 23.50 - 20.00 $ 0.12
Second Quarter $ 24.04 - 24.04 $ 0.16 $ 22.00 - 20.00 $ 0.14
Third Quarter $ 26.50 - 24.00 $ 0.17 $ 22.50 - 22.00 $ 0.15
Fourth Quarter $ 26.00 - 26.00 $ 0.34 $ 22.50 - 22.50 $ 0.33
-39-
Exhibit 14
FNB FINANCIAL CORPORATION
CODE OF ETHICS FOR FINANCIAL
PROFESSIONALS
This Code of Ethics for Financial Professionals applies to the principal
executive officer of FNB Financial Corporation (FNB) and its reporting
subsidiaries and all professionals serving in a finance, accounting, treasury,
tax or investor relation's role. FNB expects all of its employees to act in
accordance with the highest standards of personal and professional integrity in
all aspects of their activities, to comply with all applicable laws, rules and
regulations, to deter wrongdoing and abide by the FNB Code of Conduct and other
policies and procedures adopted by FNB that govern the conduct of its employees.
This Code of Ethics is intended to supplement the FNB Code of Conduct.
You agree to:
(a) Engage in and promote honest and ethical conduct, including the ethical
handling of actual or apparent conflicts of interest between personal and
professional relationships;
(b) Avoid conflicts of interest and to disclose to the Chairman of the Audit
Committee any material transaction or relationship that reasonably could
be expected to give rise to such a conflict;
(c) Take all reasonable measures to protect the confidentiality of non-public
information about FNB or its subsidiaries and their customers obtained or
created in connection with your activities and to prevent the
unauthorized disclosure of such information unless required by
applicable law or regulation or legal or regulatory process;
(d) Produce full, fair, accurate, timely, and understandable disclosure in
reports and documents that FNB or its subsidiaries files with, or
submits to, the Securities and Exchange Commission and other regulators
and in other public communications made by FNB or its subsidiaries;
(e) Comply with applicable governmental laws, rules, regulations, as well as
the rules and regulations of self-regulatory organizations of which FNB
or its subsidiaries is a member; and
(f) Promptly report any possible violation of this Code of Conduct to the
Chairman of the Board of Directors of FNB or any of the parties or
channels listed in the FNB Code of Conduct.
You are prohibited from directly or indirectly taking any action to fraudulently
influence, coerce, manipulate or mislead FNB or its subsidiaries' independent
public auditors for the purpose of rendering the financial statements of FNB or
its subsidiaries misleading.
Code of Ethics
Page 2
You understand that you will be held accountable for your adherence to this Code
of Ethics. Your failure to observe the terms of this Code of Ethics may result
in disciplinary action, up to and including termination of employment.
Violations of this Code of Ethics may also constitute violations of law and may
result in civil and criminal penalties for you, your supervisors and/or FNB.
If you have any questions regarding the best course of action in a particular
situation, you should promptly contact the Chairman of the Board of Directors.
You may choose to remain anonymous in reporting any possible violation of the
Code of Ethics.
Your Personal Commitment to the FNB Financial Corporation Code of Ethics for
Financial Professionals
I acknowledge that I have received and read the FNB Code of Ethics for Financial
Professionals, and understand my obligations as an employee to comply with the
Code of Ethics.
I understand that my agreement to comply with the Code of Ethics does not
constitute a contract of employment.
Please sign here: Date:
-------------------------------- --------------
Please print your name:
--------------------------------------------------
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
1. The First National Bank of McConnellsburg; a nationally chartered bank
established in 1906.
2. FNB Mortgage Brokers, Inc. - a Pennsylvania "C" Corporation licensed in
Pennsylvania and Maryland to broker mortgage loans in the secondary market.
Exhibit 31.1
CERTIFICATION
I, John C. Duffey, President and CEO, certify, that:
1. I have reviewed this annual report on Form 10-K of FNB Financial Corporation.
2. Based on my knowledge, the annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report.
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this annual report based on such evaluation; and
(c) disclosed in this annual report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting.
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent function):
(a) all significant deficiencies and material weaknesses in the design or
operation of the internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
By: /s/ John C. Duffey
------------------------
John C. Duffey
President and CEO
(Principal Executive Officer)
March 24, 2004
Exhibit 31.2
CERTIFICATION
I, Dale M. Fleck, Vice President and CFO, certify, that:
1. I have reviewed this annual report on Form 10-K of FNB Financial Corporation.
2. Based on my knowledge, the annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report.
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this annual report based on such evaluation; and
(c) disclosed in this annual report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting.
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent function):
(a) all significant deficiencies and material weaknesses in the design or
operation of the internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
By: /s/ Daley M. Fleck
-----------------------------
Dale M. Fleck
Vice President and CFO
(Principal Financial Officer)
March 24, 2004
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OR THE SARBANES-OXLEY
ACT OF 2002
In connection with the Annual Report of FNB Financial Corporation (the
"Company") on Form 10-K for the period ending December 31, 2003 as filed with
the Securities and Exchange Commission on the date therein specified (the
"Report"), I, John C. Duffey, President and Chief Executive Officer of the
Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company
as of and for the period covered by the Report.
By: /s/John C Duffey
------------------------
John C. Duffey
President and Chief
Executive Officer,
Director
Dated: March 24, 2004
--------------
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OR THE SARBANES-OXLEY
ACT OF 2002
In connection with the Annual Report of FNB Financial Corporation(the "Company")
on Form 10-K for the period ending December 31, 2003 as filed with the
Securities and Exchange Commission on the date therein specified (the "Report"),
I, Dale M. Fleck, Vice President, Controller, and Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company
as of and for the period covered by the Report.
By: /s/Dale M. Fleck
------------------------
Dale M. Fleck
Vice President, Controller,
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
Dated: March 24, 2004
-------------