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 accompan