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, 2004.
Commission file number 33-66014
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FNB FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
COMMONWEALTH OF PENNSYLVANIA 23-2466821
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
101 Lincoln Way West, McConnellsburg, PA 17233
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 717-485-3123
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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, 2005
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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, 2004:
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, 2004,
are incorporated by reference into Parts I, II and IV. Portions of the proxy
statement for the annual shareholders meeting to be held April 26, 2005, 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 - 12
Item 2. Properties 12
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
Item 9b. Other Information 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, 2004, 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 had situated on it a
Page 4 of 18
three-story building comprised of 4,577 square feet on the first floor
and a 28' by 60' finished basement. The second and third stories of
the building were not usable. The Bank had no immediate plans for this
facility but felt it was a wise decision to purchase it for strategic
planning purposes. The Bank razed this building during 2004 to provide
additional parking for the main office facility and to prepare the site
for future expansion. During 2004 the Bank received regulatory
approval from the Comptroller to purchase and assume the deposits of
the Hancock Branch Office of Farmers & Merchants Bank & Trust located
in Washington County, Maryland. The purchase was consummated on July
16, 2004. Management and the Board felt the acquisition of these
deposits was strategically important in order to increase the Bank's
penetration of the Washington County, Maryland and Morgan County, West
Virginia markets. 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 in Pennsylvania, portions of
Washington County, Maryland, and portions of Morgan County, West
Virginia. Our primary competitor is a one-bank holding company
headquartered in McConnellsburg, Pennsylvania which has 7 branches
located throughout Fulton, Franklin, and Huntingdon Counties in
Pennsylvania. 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 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 Company 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 Company ceases to be "well-
capitalized" or "well-managed" under applicable regulatory standards,
the Federal Reserve Board may, among other things, place limitations on
the Company's ability to conduct the broader financial activities
permissible for financial holding companies or, if the deficiencies
persist, require the Company to divest the non-banking investments or
subsidiaries. In addition, if any banking subsidiary of the Company
receives a Community Reinvestment Act rating of less-than-satisfactory,
the Company would be prohibited from engaging in any additional
activities other than those permissible for bank holding
Page 5 of 18
companies that are not financial holding companies. The Company 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
Company 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.
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 Company 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 acquirer 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.
Page 6 of 18
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.
The Financial Institution Reform, Recovery and Enforcement Act of 1989
("FIRREA") was enacted in August 1989. This law was enacted primarily
to improve the supervision of savings associations by strengthening
capital, accounting, and other supervisory standards. In addition,
FIRREA reorganized the FDIC by creating two deposit insurance funds to
be administered by the FDIC: the Savings Association Insurance Fund and
the Bank Insurance Fund. Customers' deposits held by the Bank are
insured under the Bank Insurance Fund. FIRREA also regulated real
estate appraisal standards and the supervisory/enforcement powers and
penalty provisions in connection with the regulation of the Bank.
In December 1991 the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") became law. Under FDICIA, institutions must be
classified, based on their risk-based capital ratios into one of five
defined categories (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized) as outlined below:
Total Tier 1 Under a
Risk- Risk- Tier 1 Capital
Based Based Leverage Order or
Ratio Ratio Ratio Directive
CAPITAL CATEGORY
Well capitalized >10.0% >6.0% >5.0% No
Adequately capitalized > 8.0% >4.0% >4.0%*
Undercapitalized < 8.0% <4.0% <4.0%*
Significantly
Undercapitalized < 6.0% <3.0% <3.0%
Critically <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.
Page 7 of 18
A separate subtitle within FDICIA, called the "Bank Enterprise Act of
1991", requires "truth-in-savings" on consumer deposit accounts so that
consumers can make meaningful comparisons between the competing claims
of banks with regard to deposit accounts and products. Under this
provision which became effective on June 21, 1993, the Bank is required
to provide information to depositors concerning the terms and fees of
their deposit accounts and to disclose the annual percentage yield on
interest-bearing deposit accounts.
Federal regulators 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.
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act
of 2002. The Sarbanes-Oxley Act represents a comprehensive revision of
laws affecting corporate governance, accounting obligations and
corporate reporting. The Sarbanes-Oxley Act is applicable to all
companies with equity securities registered or that file reports under
the Securities Exchange Act of 1934. In particular, the Sarbanes-Oxley
Act establishes: (i) new requirements for audit committees, including
independence, expertise, and responsibilities; (ii) additional
responsibilities regarding financial statements for the Chief Executive
Officer and Chief Financial Officer of the reporting company; (iii) new
standards for auditors and regulation of audits; (iv) increased
disclosure and reporting obligations for the reporting company and its
directors and executive officers; and (v) new and increased civil and
criminal penalties for violations of the securities laws. Many of the
provisions were effective immediately while other provisions become
effective over a period of time and are subject to rulemaking by the
SEC. Because the Corporation's common stock is registered with the SEC,
it is currently subject to this Act. The Corporation is not considered
an accelerated filer as defined in Rule 12b-2 of the Securities Exchange
Act of 1934. Thus, the Corporation expects to be subject to section 404
of the Sarbanes-Oxley Act for the year ending December 31, 2006.
We do not anticipate compliance with environmental laws and regulations
to have any material effect on the Company's respective capital,
expenditures, earnings, or competitive position.
Employees
As of December 31, 2004, we employed 54 persons on a full-time
equivalent basis.
Statistical Data
Computation of our regulatory capital requirements for the periods
December 31, 2004 and December 31, 2003, on page 23 of the annual
shareholders report for the year ended December 31, 2004, 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.
Page 8 of 18
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%
Ow 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.
Loan Portfolio composition as of December 31, 2004 and December 31,
2003, on page 14 of the annual shareholders report for the year ended
December 31, 2004, is incorporated herein by reference.
Maturities of loans as of December 31, 2004, on page 14 of the annual
shareholders report for the year ended December 31, 2004, 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, 2004,
December 31, 2003, and December 31, 2002, on page 16 of the annual
shareholders report for the year ended December 31, 2004, 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
Page 9 of 18
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.
The allowance is increased by provisions charged to operating expense
and is 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, 2004 and December 31, 2003,
on page 15 and 16 of the annual shareholders report for the year ended
December 31, 2004, are incorporated herein by reference.
Although loans secured by residential and non-residential mortgages
comprise approximately 83% 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,
2004 and December 31, 2003, totaled $ 14,922,000 and $ 15,754,000,
respectively.
Maturities and rate sensitivity of total interest bearing liabilities as
of December 31, 2004, on page 36 of the annual shareholders report for
the year ended December 31, 2004, is incorporated herein by reference.
Returns on Equity and Assets
Returns on equity and assets and other statistical data for 2004, 2003,
and 2002 on page 26 of the annual shareholders report for the year ended
December 31, 2004, is incorporated herein by reference.
Page 10 of 18
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 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
Page 11 of 18
* 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 Brian F. McNamara, 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 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' vacant city lot; 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 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 2004 and 2003 on page 40 of
the annual shareholders report for the year ended December 31, 2004, 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, 2004, 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, 2004 are
as follows:
Payments due by period
- - - - - - - - - - - - - - - - - - - -
(In thousands) Total Less 1 - 3 3 - 5 More
Contractual obligations than 1 years years than 5
year years
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Long-term debt obligations $ 24,435 $ 19,056 $ 16 $ 18 $ 5,345
Operating lease obligations 38 22 16 0 0
-------- -------- ------ ------ -------
Total $ 24,473 $ 19,078 $ 32 $ 18 $ 5,345
======== ======== ====== ====== =======
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 40 of the annual shareholders report for
the year ended December 31, 2004, 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 through 39 of the annual shareholders' report for the year
ended December 31, 2004.
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, 2004, 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, 2004, is
incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
Page13 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, 2004. Based on such evaluation, such officers have
concluded that, as of December 31, 2004, 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 2004.
Item 9b - Other Information
The Company had no other events that should have been disclosed on Form
8K that were not already disclosed on such form.
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's Code of Ethics is
available on First National Bank of McConnellsburg's website at
http://www.fnbmcconnells.com.
All other information required by Item 10 is incorporated by reference
from FNB Financial Corporation's definitive proxy statement for the 2005
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 2005
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 2005
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 2005
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 2005
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, 2004, are incorporated by reference in
Item 8:
Consolidated balance sheets - December 31, 2004, and 2003
Consolidated statements of income - Years ended December 31,
2004, 2003,and 2002
Consolidated statements of stockholders' equity - Years ended
December 31, 2004, 2003,and 2002
Consolidated statements of cash flows - Years ended
December 31, 2004, 2003, and 2002
Notes to consolidated financial statements - December 31, 2004
(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 (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
* Report filed January 11, 2005 for news release announcing
resignation of Vice President and Controller.
(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 (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 3/23/2005
----------------------------------
John C. Duffey Date
President and Chief Executive Officer
(Principal Executive Officer)
/s/Brian F. McNamara 3/23/2005
----------------------------------
Brian F. McNamara Date
Senior Vice President and
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 3/23/2005 /s/Harry D. Johnston 3/23/2005
--------------------------------- ----------------------------------
John C. Duffey Date Harry D. Johnston, D. O. Date
Director, President & CEO Director, Vice President
/s/Patricia A. Carbaugh 3/23/2005 /s/Lonnie W. Palmer 3/23/2005
--------------------------------- -----------------------------------
Patricia A. Carbaugh Date Lonnie W. Palmer Date
Director Director
/s/Harvey J. Culler 3/23/2005 /s/D.A. Washabaugh, III 3/23/2005
--------------------------------- -----------------------------------
Harvey J. Culler Date D. A. Washabaugh, III Date
Director Director
/s/Craig E. Paylor 3/23/2005 /s/Terry L. Randall 3/23/2005
--------------------------------- -----------------------------------
Craig E. Paylor Date Terry L. Randall Date
Director, Chairman Director
Page 18 of 18
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 23, 2005
Exhibit 31.2
CERTIFICATION
I, Brian F. McNamara, Senior 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/ Brian F. McNamara
---------------------------
Brian F. McNamara
Senior Vice President and
Chief Financial Officer
(Principal Financial
Officer)
March 23, 2005
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, 2004 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 23, 2005
---------------
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, 2004 as filed
with the Securities and Exchange Commission on the date therein
specified (the "Report"), I, Brian F. McNamara, Senior Vice President
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/Brian F. McNamara
------------------------
Brian F. McNamara
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Dated: March 23, 2005
--------------