10-Q/A 1 fnb10ka.txt SECURITIES AND EXCHANGE COMMISSION PRIVATE WASHINGTON, D.C. 20549-1004 FORM 10-K/A [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2001. [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee required] For the transition period from _______ to _______. Commission file number 33-66014 FNB FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) COMMONWEALTH OF PENNSYLVANIA 23-2466821 (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 101 Lincoln Way West, McConnellsburg, PA 17233 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 717-485-3123 Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: None Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Class Outstanding as of March 5, 2002 Common Stock, $0.315 Par Value 800,000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ( 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ]. The aggregate market value of the voting stock held by non-affiliates of the registrants as of March 5, 2002: Common Stock, $0.315 Par Value - $20,000,000.00 Page 1 of 17 Pages DOCUMENTS INCORPORATED BY REFERENCE Portions of the annual shareholders report for the year ended December 31, 2001, are incorporated by reference into Parts I, II and IV. Portions of the proxy statement for the annual shareholders meeting to be held April 23, 2002, are incorporated by reference into Part III. Portions of Form SB-2 Registration Statement No. 33-66014 as filed with the Securities and Exchange Commission on September 8, 1993, are incorporated by reference into Part IV. The Executive Contract for the President and CEO of the Bank dated August 1, 2000, is incorporated herein by reference into Part III. The Executive Change of Control Agreement for the Senior Vice President and CFO of the Bank dated August 1, 2000, is incorporated herein by reference into Part III. A copy of a Common Stock Certificate of FNB Financial Corporation as filed with the Securities and Exchange Commission with Form 10-K for the fiscal year ended December 31, 1995 is incorporated by reference into Part IV. Page 2 of 17 Pages PART I Item 1. Business Description of Business FNB Financial Corporation (the Company), a Pennsylvania business corporation, is a bank holding company registered with and supervised by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). The Company was incorporated on June 22, 1987, under the business corporation law of the Commonwealth of Pennsylvania for the purpose of becoming a bank holding company. Since commencing operations, the Company's business has consisted primarily of managing and supervising The First National Bank of McConnellsburg (the Bank) and its principal source of income has been dividends paid by the Bank. The Company has one wholly-owned subsidiary, the Bank. The Bank was established in 1906 as a national banking association under the supervision of the Comptroller of the Currency, the Comptroller. The Bank is a member of the Federal Reserve System and customers' deposits held by the Bank are insured by the Federal Deposit Insurance Corporation to the maximum extent permitted by law. The Bank is engaged in a full service commercial and consumer banking business including the acceptance of time and demand deposits and the making of secured and unsecured loans. The Bank provides its services to individuals, corporations, partnerships, associations, municipalities and other governmental bodies. As of December 31, 2001, the Bank had three (3) offices and (1) drive-up ATM located in Fulton County, one (1) branch office facility located in Fort Loudon, Franklin County Pennsylvania and one (1) branch office facility located in Hancock, Washington County, Maryland. During 1995 the Bank received regulatory approval from The Comptroller to purchase and assume the deposits, real estate and building of the Fort Loudon Branch Office of Dauphin Deposit Bank located in Franklin County, Pennsylvania. Due to the location of this office, management and the Board felt the acquisition of this office was strategically important in order to officially expand the Bank's market area into the Franklin County, PA area and diversify its current primary market of Fulton County, PA. It is anticipated this office will generate new loan and deposit demand for the Bank in the coming years. During 1996 the Bank received regulatory approval from the Comptroller to open its first interstate Branch office in Hancock, Maryland after management became aware of the closing of a branch office of First Federal Savings Bank of Western Maryland. This office is known as "Hancock Community Bank, A Division of The First National Bank of McConnellsburg". The location of this office is felt to be strategically important in order to expand the Bank's operations into Washington County, Maryland and northern Morgan County, West Virginia. This office is also the Bank's first supermarket branch Page 3 of 17 Pages office. In October 2000, the owner of the adjacent supermarket completed extensive renovations at which time the wall between the branch office and the supermarket was removed, allowing customers to enter the branch directly from the supermarket. This office is expected to enhance demand for the Bank's loan and deposit products as well as retain deposits of customers in southern Fulton County, Pennsylvania. The Bank received permission from the Comptroller to expand its main office facilities in downtown McConnellsburg to allow for larger customer service, loan department and data processing areas. This expansion was completed on September 1,1996, at a cost of approximately $1,700,000. In February 1999, the Bank purchased an adjacent property to the main office facility at 115 Lincoln Way West in downtown McConnellsburg from the Fulton Overseas Veterans Association. This site is 54' by 218' and has situated on it a three story building comprised of 4,577 usable square feet on the first floor and a 28' by 60' finished basement. The second and third stories of the building are not usable. The Bank has no immediate plans for this facility but felt it was a wise decision to purchase it for strategic planning purposes. The Bank has one wholly-owned subsidiary, First Fulton County Community Development Corporation, which is a Community Development Corporation formed under 12USC24/2CFR24 whose primary regulator is the Office of the Comptroller of the Currency, The Comptroller. The First Fulton County Community Development Corporation was incorporated with the Commonwealth of Pennsylvania on May 30, 1995. The primary business of this community development corporation is to provide and promote community welfare through the establishment and offering of low interest rate loan programs to stimulate economic rehabilitation and development for the Borough of McConnellsburg and the entire community of Fulton County, PA. Competition Our primary market area includes all of Fulton County and portions of Huntingdon, Bedford and Franklin Counties, portions of Washington County, Maryland and portions of Morgan County, West Virginia. Our major competitor is a one bank holding company headquartered in McConnellsburg, Pennsylvania which has 7 branches located throughout Fulton, Franklin and Huntingdon Counties. As of December 31, 2001, we were ranked second in total deposits when compared to our major competitor. Also, in this market area we compete with regionally-based commercial banks (all of which have greater assets, capital and lending limits), savings banks, savings and loan associations, money market funds, insurance companies, stock brokerage firms, regulated small loan companies, credit unions and with issuers of commercial paper and other securities. Page 4 of 17 Pages Although deregulation has allowed us to become more Competitive in the market place in regard to pricing of loan and deposit rates, there are disparities in taxing law which give some of our nonbank competitors advantages which commercial banks do not enjoy and many burdensome and costly regulations with which we must comply. We meet these challenges by developing and promoting our locally-owned community bank image; by offering friendly and professional customer service; and by striving to maintain competitive interest rates for both loans and deposits. Regulation and Supervision Our operations are subject to the provisions of the Bank Holding Company Act of 1956, as amended (the "Bank Holding Company Act"), and to supervision by the Federal Reserve Board. The Bank Holding Company Act requires us to secure the Prior approval of the Federal Reserve Board before we own or control, directly or indirectly, more than five percent (5%) of the voting shares of substantially all of the assets of an institution, including another bank. The Bank Holding Company Act prohibits acquisition by the Company of more than five percent (5%) of the voting shares of, or interest in, all or substantially all of the assets of any bank located outside of Pennsylvania unless such acquisition is specifically Authorized by the laws of the state in which such bank is located. Our operations are subject to federal and state statutes applicable to banks chartered under the banking laws of the United States, to members of the Federal Reserve System and to banks whose deposits are insured by the FDIC. Our operations are also subject to regulations of the Comptroller, the Federal Reserve Board and the FDIC. Our primary supervisory authority is the Comptroller, which regulates and examines us. The Comptroller has authority to prevent national banks from engaging in unsafe or unsound practices in conducting their businesses. Legislation and Regulatory Changes From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial institutions. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial institutions are frequently made in Congress, and before various bank regulatory agencies. No prediction can be made as to the likelihood of any major changes or the impact such changes might have on the Company and its subsidiary, the Bank. Certain changes of potential significance to the Company which have been enacted recently are discussed below. Page 5 of 17 Pages 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 Significantly < 8.0% <4.0% <4.0%* Undercapitalized < 6.0% <3.0% <3.0% Critically undercapitalized <2.0%

*3.0% for those banks having the highest available regulatory rating. Page 6 of 17 Pages 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. Additional regulations are required to be developed relating to internal controls, loan documentation, credit underwriting, interest rate exposure, asset growth and excessive compensation, fees and benefits. Annual full-scope, on-site examinations are required for all FDIC-insured institutions except institutions with assets under $100 million which are well capitalized, well managed and not subject to a recent change in control, in which case, the examination period is every eighteen (18) months. FDICIA also required banking agencies to reintroduce loan-to-value ("LTV") ratio regulations which were previously repealed by the 1982 Act. LTV's will limit the amount of money a financial institution may lend to a borrower, when the loan is secured by real estate, to no more than a percentage to be set by regulation of the value of the real estate. A separate subtitle within FDICIA, called the "Bank Enterprise Act of 1991", requires "truth-in-savings" on consumer deposit accounts so that consumers can make meaningful comparisons between the competing claims of banks with regard to deposit accounts and products. Under this provision which became effective on June 21, 1993, the Bank is required to provide information to depositors concerning the terms and fees of their deposit accounts and to disclose the annual percentage yield on interest-bearing deposit accounts. Federal regulators issued regulations to implement the privacy provisions of the Gramm-Leach-Bliley Act (Financial Services Modernization Act). This new law requires banks to notify consumers about their privacy policies and to give them an opportunity to "opt-out" or prevent the bank from sharing "nonpublic personal information" about them with nonaffiliated third parties. 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 our of the sharing of their information with unaffiliated third parties. We do not anticipate compliance with environmental laws and regulations to have any material effect on their respective capital, expenditures, earnings, or competitive position. Page 7 of 17 Pages Employees As of December 31, 2001, we employed 55 persons on a full- time equivalent basis. Statistical Data Computation of our regulatory capital requirements for the periods December 31, 2001, and December 31, 2000, on page 44 of the annual shareholders report for the year ended December 31, 2001, 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: Commercial, Multifamily, and other Nonresidential 1 to 4 Family Residential 80% Improved Property 85% Owner-occupied 1 to 4 Family and Home Equity 90%

We are neither dependent upon nor exposed to loan concentrations to a single customer or to a single industry, the loss of any one or more of which would have a material adverse effect on the financial condition of the Bank; however, a portion of the Bank's customers' ability to honor their contracts is dependent upon the construction and land development and agribusiness economic sector. As a majority of our loan portfolio is comprised of loans to individuals Page 8 of 17 Pages and businesses in Fulton County, PA, a significant portion of our customers' abilities to honor their contracts is dependent upon the general economic conditions in ,South Central Pennsylvania. Loan Portfolio composition as of December 31, 2001, and December 31, 2000, on page 13 of the annual shareholders report for the year ended December 31, 2001, is incorporated herein by reference. Maturities of loans as of December 31, 2001, on page 14 of the annual shareholders report for the year ended December 31, 2001, 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, 2001, December 31, 2000, and December 31, 1999, on page 15 of the annual shareholders report for the year ended December 31, 2001, are incorporated herein by reference. Allowance for Loan Loss Analysis The allowance for loan losses is maintained at a level to absorb potential future loan losses contained in the loan portfolio and is formally reviewed by us on a quarterly basis. The allowance is increased by provisions charged to operating expense and reduced by net charge-offs. Our basis for the level of the allowance and the annual provisions is our evaluation of the loan portfolio, current and projected domestic economic conditions, the historical loan loss experience, present and prospective financial condition of the borrowers, the level of nonperforming assets, best and worst case scenarios of possible loan losses and other relevant factors. While we use available information to make such evaluations, future adjustments of the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. Loans are charged against the allowance for loan losses when we believe that the collectability of the principal is unlikely. Activity in the allowance for loan losses and a breakdown of the allowance for loan losses as of December 31, 2001, and December 31, 2000, on page 14 and 15 of the annual Page 9 of 17 Pages shareholders report for the year ended December 31, 2001, are incorporated herein by reference. Although loans secured by 1-4 family residential mortgages comprise approximately 48% of the entire loan portfolio, until recently these mortgages have historically resulted in little or no loss. The allocation of the Allowance for Loan Losses for these mortgages is based upon this historical fact. Due to a more critical evaluation of our commercial, industrial, and agricultural loan portfolio, the allocation of the Allowance for Loan Losses for commercial, industrial, and Agriculture loans has been accordingly increased. Deposits Time Certificates of Deposit of $100,000 and over as of December 31, 2001, and December 31, 2000, totaled $12,696,000 and $12,383,000 respectively. Maturities and rate sensitivity of total interest bearing liabilities as of December 31, 2001, on page 43 of the annual shareholders report for the year ended December 31, 2001, is incorporated herein by reference. Returns on Equity and Assets Returns on equity and assets and other statistical data for 2001, 2000 and 1999 on page 24 of the annual shareholders report for the year ended December 31, 2001, is incorporated herein by reference. Item 2. Properties The physical properties where we conduct our business in the Commonwealth of Pennsylvania are all owned by us while the property where we conduct business in the State of Maryland is leased. The properties owned by us are as follows: the main office located at 101 Lincoln Way West, McConnellsburg, Pennsylvania, has been attached by a two story brick and frame addition, to a building located at 111 South Second Street, McConnellsburg, Pennsylvania which houses the Bank's consumer loan department on the first floor and commercial loan department and future expansion space on the second floor; a property adjacent to the main office facility at 115 Lincoln Way West in downtown McConnellsburg comprised of a 54' by 218' city lot which has situated on it a three story building consisting of 4,577 usable square feet on the first floor, a 28' by 60' finished basement, second and third stories which are unusable and a detached garage; a branch office located on Route 522 South, Needmore, Pennsylvania; a property located at Routes 16 and 30 East, McConnellsburg, Pennsylvania which contains a drive-up automatic teller machine and a five (5) lane drive-up branch accessible from both Route 30 and Route 16; and a branch office located at 30 Mullen Street, Fort Loudon, Pennsylvania, for which we Page 10 of 17 Pages received regulatory approval from the Office of the Comptroller of the Currency to purchase effective November 13, 1995. The branch office leased by us in the state of Maryland is located in the Hancock Shopping Center at 343 North Pennsylvania Avenue in Hancock, Maryland next to a supermarket. The main office located in downtown McConnellsburg is housed in a two story brick and frame building, consisting of approximately 28,277 square feet. It has been attached (by a two story brick and frame addition which houses the data processing/operations center on the first floor and executive offices and a meeting room on the second floor) to the building located at 111 South Second Street, a brick and frame building situated on a one town lot which has been expanded and renovated to house the consumer loan department on the first floor and commercial loan department and future offices and rest rooms on the second floor. The main office contains one (1) external time and temperature sign, seven (7) internal teller stations, a customer service office area, executive offices, one (1) drive-up teller station, an automatic teller machine, three (3) vaults (one containing safe deposit boxes for customer use and one containing a fire proof/data-secure vault in the operations center), a night depository, a data processing center with a security controlled computer operations center, a loan department with a large file room, a kitchen and a 5,000 square foot basement storage area. The Needmore Branch Office, a brick and frame building situated on approximately five (5) acres, consists of approximately 3,000 square feet, of which 750 square feet is rented as office space. The branch office houses three (3) internal teller stations, one (1) drive-up teller station, a customer service office area, one (1) vault which contains safe deposit boxes for customer use, one (1) kitchen, and storage areas. The East End Express Banking Center, located on a property of approximately 68,000 square feet at Routes 16 and 30, has situated on it one (1) drive-up automatic teller machine and one (1) night depository (both housed in a brick and frame building of approximately 121 square feet), and a drive-up branch office, a brick and frame building of approximately 576 square feet, which contains four (4) drive-up teller stations with the potential for a total of five (5) drive-up teller stations in the future. The Fort Loudon Branch Office, which was expanded and completely renovated in 1997 at an approximate cost of $200,000, is a brick and frame building situated on approximately .23 acres. It consists of approximately 1,035 square feet. The branch office houses three (3) internal teller stations, one (1) drive-up teller station, one (1) Page 11 of 17 Pages vault which contains safe deposit boxes for customer use, a manager's office, one (1) kitchen, storage areas and a basement for storage which consists of approximately 620 square feet. The leased office in Hancock, Maryland housing Hancock Community Bank is approximately 1,400 square feet and is leased from the owner of the shopping center next to a supermarket. It contains two (2) offices, one (1) automated teller machine, two (2) drive-up teller lanes, a lobby, a safe deposit box vault for customers and three (3) teller stations. Item 3. Legal Proceedings In our opinion, there are no proceedings pending to which we are a party or to which our property is subject, which, if determined adversely to us would be material in relation to our retained earnings or financial condition. There are no proceedings pending other than ordinary routine litigation incident to our business. In addition, no material proceedings are known to be threatened or contemplated against the us by government authorities. Item 4. Submission of Matters to a Vote of Security Holders None. PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters Our common stock is not traded on a national securities exchange but is traded inactively in the over-the-counter market and is only occasionally and sporadically traded through local and regional brokerage houses. The Stock Market Analysis and Dividends for 2001 and 2000 on page 44 of the annual shareholders report for the year ended December 31, 2001, is incorporated herein by reference. Item 6. Selected Financial Data The Selected Five-Year Financial Data on page 24 of the annual shareholders report for the year ended December 31, 2001, is incorporated herein by reference. Page 12 of 17 Pages Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion and analysis of financial condition and results of Operations on pages 29 through 44 of the annual shareholders report for the year ended December 31, 2001, is incorporated herein by reference. 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 7 through 28 of the annual shareholders report for the year ended December 31, 2001, are incorporated herein by reference. The Summary of Quarterly Financial Data on page 25 of the annual shareholders report for the year ended December 31, 2001, is incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Officers of the Registrant The information contained on pages 3 through 15 of FNB Financial Corporation's Proxy Statement For the Annual Meeting of Shareholders to be Held April 23, 2002, with respect to directors and executive officers of the Company, is incorporated herein by reference in response to this item. Item 11. Executive Compensation The information contained on pages 12 through 16 of FNB Financial Corporation's Proxy Statement For the Annual Meeting of Shareholders to be Held April 23, 2002, with respect to executive compensation, transactions and contracts, is incorporated herein by reference in response to this item. The Executive Employment Contract of the President and CEO of the Bank and the Executive Change of Control Agreement for the Senior Vice President and CFO of the Bank both dated October 2000, are incorporated herein by reference in response to this item. Page 13 of 17 Pages Item 12. Security Ownership of certain Beneficial Owners and Management The information contained on pages 3 through 5 and pages 18 and 19 of FNB Financial Corporation's Proxy Statement For the Annual Meeting to be Held April 23, 2002, with respect to security ownership of certain beneficial owners and management, is incorporated herein by reference in response to this item. Item 13. Certain Relationships and Related Transactions The information contained on page 16 of FNB Financial Corporation's Proxy Statement For the Annual Meeting to be Held April 23, 2002, with respect to certain relationships and related transactions, is incorporated herein by reference in response to this item. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports of Form 8-K. (a) (1) - List of Financial Statements The following consolidated financial statements of FNB Financial Corporation and its subsidiary, included in the annual report of the registrant to its shareholders for the year ended December 31, 2001, are incorporated by reference in Item 8: Consolidated balance sheets - December 31, 2001, and 2000 Consolidated statements of income - Years ended December 31, 2001, 2000 and 1999 Consolidated statements of stockholders' equity - Years ended December 31, 2001, 2000 and 1999 Consolidated statements of cash flows - Years ended December 31, 2001, 2000 and 1999 Notes to consolidated financial statements - December 31, 2001 (2) - List of Financial Statement Schedules Schedule I - Marketable Securities - Other Investments Schedule III - Condensed Financial Information of Registrant Schedule VIII - Valuation and Qualifying Accounts Page 14 of 17 Pages All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. (3) - Listing of Exhibits Exhibit (3)(i) Articles of incorporation Exhibit (3)(ii) Bylaws Exhibit (4) Instruments defining the rights of security holders including indentures Exhibit (10) Material Contracts Exhibit (13) Annual Report to Security holders Exhibit (22) Subsidiaries of the registrant Exhibit (27) Financial data schedule All other exhibits for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. (b) Reports on Form 8-K filed None. (c) Exhibits Exhibit (3)(i) Articles of incorporation - Exhibit 3A of Form SB-2 Registration Statement No. 33-66014 are incorporated herein by reference. Exhibit (3)(ii) Bylaws - Exhibit 3B of Form SB-2 Registration Statement No. 33-66014 are incorporated herein by reference. Exhibit (4) Instruments defining the rights of security holders including debentures - Document #1 of Form 10-K for FNB Financial Corporation for fiscal year ended December 31, 1995 is incorporated herein by reference. Exhibit (10.1) Executive Supplemental Retirement Plan For Select Officers - incorporated by reference to the Company's Form 10-K for the year ended December 31, 1999. Exhibit (10.2) Director Fee Continuation Agreement for Select Directors - incorporated by reference to the Company's Form 10-K for the year ended December 31, 1999. Exhibit (10.3) Executive Employment Contract for the President and CEO of the Bank dated October 2000 is incorporated by reference to the Company's Form 10-K for the year ended December 31, 2000. Page 15 of 17 Pages Exhibit (10.4) Executive Change of Control Agreement for the Senior Vice President and CFO 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 (13) Annual report to security holders - filed herewith. Exhibit (22) Subsidiaries of the registrant - As of this report, The First National Bank of McConnellsburg is the only subsidiary of the Registrant and is explained further within the Business Section (Item 1) of this report. The First National Bank of McConnellsburg has one subsidiary as of the date of this report, First Fulton County Community Development Corporation and is explained further within the Business Section (Item 1) of this report. (d) Financial Statement Schedules Schedule I - Marketable Securities - Other Investments Schedules of Marketable Securities included on pages 12 and 13 of the annual report of the registrant to its shareholders for the year ended December 31, 2001 are incorporated herein by reference. Schedule III - Condensed Financial Information of Registrant Condensed Financial Information of the Registrant included on page 19 and 20 of the annual report of the registrant to its shareholders for the year ended December 31, 2001, is incorporated herein by reference. Schedule VIII - Valuation and Qualifying Accounts The schedule of the Allowance for Loan losses included on page 15 of the annual report of the registrant to its shareholders for the year ended December 31, 2001, is incorporated herein by reference. Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FNB FINANCIAL CORPORATION (Registrant) /s/John C. Duffey 7/29/2002 John C. Duffey Date Director and President of the Corporation President & CEO of the Bank (Principal Executive Officer) Page 16 of 17 Pages 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/H. Lyle Duffey 7/29/2002 /s/Henry W. Daniels 7/29/2002 H. Lyle Duffey Date Henry W. Daniels Date Director, Chairman Director, Vice Chairman /s/John C. Duffey 7/29/2002 /s/Harry D. Johnston 7/29/2002 John C. Duffey Date Harry D. Johnston, D. O. Date Director, President Director, Vice President /s/Patricia A. Carbaugh 7/29/2002 /s/Lonnie W. Palmer 7/29/2002 Patricia A. Carbaugh Date Lonnie W. Palmer Date Director /s/Harvey J. Culler 7/29/2002 /s/D.A. Washabaugh, III 7/29/2002 Harvey J. Culler Date D. A. Washabaugh, III Date Director Director /s/Paul T. Ott 7/29/2002 /s/Terry L. Randall 7/29/2002 Lonnie W. Palmer Date Terry L. Randall Date Director Director /s/Craig E. Paylor 7/29/2002 Craig E. Paylor Date Director Page 17 of 17 Pages EXHIBIT 13 FNB FINANCIAL CORPORATION 2001 ANNUAL FINANCIAL REPORT C O N T E N T S Page INDEPENDENT AUDITOR'S REPORT 1 CONSOLIDATED FINANCIAL STATEMENTS Balance sheets 2 Statements of income 3 Statements of changes in stockholders' equity 4 Statements of cash flows 5 and 6 Notes to consolidated financial statements 7 - 23 ACCOMPANYING FINANCIAL INFORMATION Selected five year financial data 24 Summary of quarterly financial data 25 Distribution of assets, liabilities and stockholders' equity, interest rates, and interest differential 26 Changes in net interest income 27 Maturities of investment securities 28 Management's discussion and analysis of financial condition and results of operations 29-44 INDEPENDENT AUDITOR'S REPORT Board of Directors FNB Financial Corporation McConnellsburg, Pennsylvania We have audited the accompanying consolidated balance sheets of FNB Financial Corporation and its wholly-owned subsidiary as of December 31, 2001 and 2000, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the three years ended December 31, 2001. 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 subsidiary as of December 31, 2001 and 2000 and the results of their operations and their cash flows for each of the three years ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. /S/Smith Elliott Kearns & Company, LLC Chambersburg, Pennsylvania February 15, 2002 FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY CONSOLIDATED BALANCE SHEETS December 31, 2001 and 2000 2001 2000 ASSETS Cash and due from banks $ 5,400,929 $ 4,020,479 Federal funds sold 6,000,000 0 Interest-bearing deposits with banks 2,572,574 778,546 Investment securities: Available for sale 19,554,290 26,768,521 Held to maturity (fair value $ 1,088,459 - 2001; $ 1,135,971 - 2000) 1,114,764 1,207,835 Federal Reserve, Atlantic Central Banker's Bank and Federal Home Loan Bank stock 833,700 833,700 Loans, net of unearned discount and allowance for loan losses 90,167,678 83,112,173 Bank building, equipment, furniture and fixtures, net 2,914,416 3,069,015 Accrued interest and dividends receivable 619,464 789,393 Deferred income taxes 160,529 291,325 Other real estate owned 103,568 168,653 Cash surrender value of life insurance 2,313,129 2,209,915 Other assets 405,475 376,680 Total assets $ 132,160,516 $ 123,626,235 LIABILITIES Deposits: Demand deposits $ 13,343,930 $ 11,798,431 Savings deposits 32,659,787 29,407,101 Time certificates 65,647,473 62,129,564 Other time deposits 311,190 297,392 Total deposits 111,962,380 103,632,488 Liability for borrowed funds 5,403,458 6,176,901 Accrued dividends payable 216,000 192,000 Accrued interest payable and other liabilities 1,190,681 1,076,819 Total liabilities 118,772,519 111,078,208 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 11,124,857 10,623,726 Accumulated other comprehensive income (loss) 221,307 ( 117,532) Total stockholders' equity 13,387,997 12,548,027 Total liabilities and stockholders' equity $ 132,160,516 $ 123,626,235 The Notes to Consolidated Financial Statements are an integral part of these statements. -2- FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 2001, 2000 and 1999 2001 2000 1999 Interest and Dividend Income Interest and fees on loans $ 7,140,997 $ 6,902,812 $ 5,766,741 Interest on investment securities: U. S. Treasury securities 0 0 1,585 Obligations of other U.S. Government agencies 845,914 1,296,141 1,366,191 Obligations of States and political subdivisions 416,998 421,345 485,198 Dividends on equity securities 59,123 61,901 33,995 Interest on deposits with banks 39,117 49,664 68,182 Interest on federal funds sold 265,496 22,725 80,297 8,767,645 8,754,588 7,802,189 Interest Expense Interest on borrowed funds 333,299 455,828 88,932 Interest on deposits 4,343,347 4,240,673 4,030,292 Net interest income 4,090,999 4,058,087 3,682,965 Provision for Loan Losses 144,000 231,319 190,000 Net interest income after provision for loan losses 3,946,999 3,826,768 3,492,965 Other Income Service charges on deposit accounts 217,431 181,902 123,731 Other service charges, collection and exchange charges, commissions and fees 366,337 283,232 260,990 Other income, net 137,375 159,272 186,085 Securities gains (losses) 17,986 ( 474) 49,655 739,129 623,932 620,461 Other Expenses Salaries and wages 1,432,292 1,341,280 1,251,344 Pensions and other employee benefits 363,253 355,250 326,859 Net occupancy expense of bank premises 256,186 252,023 236,758 Furniture and equipment expenses 284,372 269,592 258,525 Other operating expenses 1,089,383 1,048,825 956,086 3,425,486 3,266,970 3,029,572 Income before income taxes 1,260,642 1,183,730 1,083,854 Applicable income taxes 255,511 229,149 180,572 Net income $ 1,005,131 $ 954,581 $ 903,282 Earnings per share of common stock: Net income $ 1.26 $ 1.19 $ 1.13 Weighted average shares outstanding 800,000 800,000 800,000 The Notes to Consolidated Financial Statements are an integral part of these statements. -3- FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Years Ended December 31, 2001, 2000, and 1999 Accumulated Additional Other Total Common Paid-in Retained Comprehensive Stockholders' Stock Capital Earnings Income (Loss) Equity Balance, December 31, 1998 252,000 1,789,833 9,621,863 252,870 11,916,566 Comprehensive income: Net income 0 0 903,282 0 903,282 Changes in unrealized gain (loss) on securities available for sale, net of taxes of ($ 628,026) 0 0 0 ( 1,219,111) ( 1,219,111) Total comprehensive income (loss) ( 315,829) Cash dividends declared on common stock ($ .50 per share) 0 0 ( 400,000) 0 ( 400,000) Balance, December 31, 1999 252,000 1,789,833 10,125,145 ( 966,241) 11,200,737 Comprehensive income: Net income 0 0 954,581 0 954,581 Changes in unrealized gain on securities available for sale, net of taxes of $ 437,213 0 0 0 848,709 848,709 Total comprehensive income 1,803,290 Cash dividends declared on common stock ($ .57 per share) 0 0 ( 456,000) 0 ( 456,000) Balance, December 31, 2000 $ 252,000 1,789,833 $ 10,623,726 ($ 117,532) $ 12,548,027 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

The Notes to Consolidated Financial Statements are an integral part of these statements. -4- FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2001, 2000 and 1999 2001 2000 1999 Cash flows from operating activities: Net income $ 1,005,131 $ 954,581 $ 903,282 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 300,331 288,168 278,402 Provision for loan losses 144,000 231,319 190,000 Deferred income taxes ( 43,758) ( 52,037) ( 31,487) Loss on sale of other real estate 19,038 805 12,281 Increase in cash surrender value of life insurance ( 103,214) ( 102,811) ( 81,594) (Gain) loss on sales/maturities of investments ( 17,986) 474 ( 49,655) (Gain) loss on disposal of equipment 0 ( 865) ( 554) (Increase) decrease in accrued interest receivable 169,929 ( 102,134) 31,285 Increase (decrease) in accrued interest payable and other liabilities 113,862 215,305 ( 6,617) (Increase) decrease in other assets ( 43,445) ( 84,490) 14,124 Net cash provided by operating activities 1,543,888 1,348,315 1,259,467 Cash flows from investing activities: Net (increase) decrease in interest bearing deposits with banks ( 1,794,028) ( 55,453) 1,296,518 Maturities of held-to-maturity securities 93,071 461,877 779,909 Proceeds from sales of available-for-sale securities 38,720 0 1,151,501 Maturities of available-for-sale securities 10,107,008 2,742,252 4,145,757 Purchases of available-for-sale securities ( 2,400,118) ( 140,076) ( 2,292,472) Proceeds from sales of other real estate owned 46,047 274,087 207,527 Net (increase) in loans ( 7,199,505) ( 7,480,801) ( 14,466,397) Purchase of other bank stock 0 ( 152,500) ( 287,100) Purchases of bank premises and equipment, net ( 131,082) ( 222,058) ( 187,627) Proceeds from sale of equipment 0 1,206 1,054 Net cash (used) by investing activities ( 1,239,887) ( 4,571,466) ( 9,651,330) Cash flows from financing activities: Net increase in deposits 8,329,892 4,302,552 ( 1,173,998) Cash dividends paid ( 480,000) ( 436,000) ( 336,000) Net short-term borrowings 0 ( 2,933,000) 3,701,000 Proceeds from long-term borrowings 0 12,250,000 2,500,000 Principal payments on borrowings ( 773,443) ( 9,505,095) ( 4,768) Net cash provided by financing activities 7,076,449 3,678,457 4,686,234

The Notes to Consolidated Financial Statements are an integral part of these statements. -5- FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) Years Ended December 31, 2001, 2000 and 1999 2001 2000 1999 Net increase (decrease) in cash and cash equivalents $ 7,380,450 $ 455,306 ($ 3,705,629) Cash and cash equivalents, beginning balance 4,020,479 3,565,173 7,270,802 Cash and cash equivalents, ending balance $ 11,400,929 $ 4,020,479 $ 3,565,173 Supplemental disclosure of cash flows information: Cash paid during the year for: Interest $ 4,766,560 $ 4,610,819 $ 4,118,343 Income taxes 345,860 167,419 226,385 Supplemental schedule of noncash investing and financing activities: Unrealized gain (loss) on securities available-for-sale, net of income tax effect $ 338,839 $ 848,709 ($ 1,219,111) Other real estate acquired in settlement of loans 0 274,389 59,900

The Notes to Consolidated Financial Statements are an integral part of these statements. -6- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Significant Accounting Policies Nature of Operations FNB Financial Corporation's primary activity consists of owning and supervising its subsidiary, The First National Bank of McConnellsburg, which is engaged in providing banking and bank related services in South Central Pennsylvania, and Northwestern Maryland. Its five offices are located in McConnellsburg (2), Fort Loudon and Needmore, Pennsylvania, and Hancock, Maryland. Principles of Consolidation The consolidated financial statements include the accounts of the Corporation and its wholly-owned subsidiary, The First National Bank of McConnellsburg. All significant intercompany transactions and accounts have been eliminated. First Fulton County Community Development Corporation (FFCCDC) was formed as a wholly-owned subsidiary of The First National Bank of McConnellsburg. The purpose of FFCCDC is to serve the needs of low-to-moderate income individuals and small business in Fulton County under the Community Development and Regulatory Improvement Act of 1995. Basis of Accounting The Corporation uses the accrual basis of accounting. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts 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". As permitted by Statement of Financial Accounting Standards No. 104, the Corporation has elected to present the net increase or decrease in deposits in banks, loans and deposits in the Statements of Cash Flows. Investment Securities In accordance with Statement of Financial Accounting Standards Number 115 (SFAS 115)the Corporation's investments in securities are classified in three categories and accounted for as follows: - Trading Securities. Securities held principally for resale in the near term are classified as trading securities and recorded at their fair values. Unrealized gains and losses on trading securities are included in other income. - Securities to be Held to Maturity. Bonds and notes for which the Corporation has the positive intent and ability to hold to maturity are reported at cost, adjusted for amortization of premiums and accretion of discounts which are recognized in interest income using the interest method over the period to maturity. - Securities Available for Sale. Securities available for sale consist of equity securities, 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 2001 or 2000. 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 discounton 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 premiumsand accretion of discounts on acquired loans are recognized in interest income using the interest method over the period to maturity. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb possible losses on existing loans that may become uncollectible, based on evaluations of the collectibility of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrowers' ability to pay. In accordance with SFAS No. 91, loan origination fees and certain direct loan origination costs are being deferred and the net amount amortized as an adjustment of the related loan's yield. The Corporation is amortizing these amounts over the contractual life of the related loans. Deferred loan origination fees were $ 217,739 and $ 225,776 at December 31, 2001 and 2000, respectively. Deferred loan costs were $ 104,992 and $ 108,763 at December 31, 2001 and 2000, respectively. Nonaccrual/Impaired Loans The accrual of interest income on loans ceases when principal or interest is past due 90 days or more and collateral is inadequate to cover principal and interest or immediately if, in the opinion of management, full collection is unlikely. Interest accrued but not collected as of the date of placement on nonaccrual status is reversed and charged against current income unless fully collateralized. Subsequent payments received either are applied to the outstanding principal balance or recorded as interest income, depending on management's assessment of the ultimate collectibility of principal. A loan is considered impaired when, based on current information and events, it isprobable that scheduled collections of principal or interest will not be made according to the contractual terms of the loan agreement. Impairment is measuredon 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 thelikelihood 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. -9- Note 1. Significant Accounting Policies (Continued) Bank Building, Equipment, Furniture and Fixtures and Depreciation Bank building, equipment, furniture and fixtures are carried at cost less accumulated depreciation. Expenditures for replacements are capitalized and the replaced items are retired. Maintenance and repairs are charged to operations as incurred. Depreciation is computed based on straight-line and accelerated methods over the estimated useful lives of the related assets as follows: Years Bank building 5-40 Equipment, furniture and fixtures 3-20 Land improvements 10-20 Leasehold improvements 7-20 Earnings Per Share Earnings per common share were computed based upon weighted average shares of common stock outstanding of 800,000 for 2001, 2000, and 1999 after giving retroactive recognition to a two-for-one stock split issued September 1, 2000. Intangibles Intangible costs are amortized on a straight-line basis over fifteen years. Federal Income Taxes As a result of certain timing differences between financial statement and federal income tax reporting, deferred income taxes are provided in the financial statements. See Note 7 for further details. Advertising The Corporation follows the policy of charging costs of advertising to expense as incurred. Advertising expense was $ 80,238, $ 98,561, and $ 63,268 for 2001, 2000, and 1999, respectively. Fair Values of Financial Instruments Statement of Financial Accounting Standards No. 107, Disclosures About Fair Value of Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Statement No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Corporation. The following methods and assumptions were used by the Corporation in estimating fair values of financial instruments as disclosed herein: - Cash and Short-Term Instruments. The carrying amounts of cash and short-term instruments approximate their fair value. - Securities to be Held to Maturity and Securities Available for Sale. Fair values for investment securities are based on quoted market prices. -10- Note 1. Significant Accounting Policies (Continued) - Loans Receivable. For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. Fair values for fixed rate loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable. - Deposit Liabilities. The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate certificates of deposit, and fixed-term money market accounts approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit and IRA's are estimated using a discounted cash flow calculation that applies interest rates currently being offered to a schedule of aggregated expected monthly maturities on time deposits. - 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 The Corporation has adopted Statement of Financial Accounting Standards (SFAS) No. 130 - Reporting Comprehensive Income. Under SFAS No. 130, comprehensive income is defined as the change in equity from transactions and other events from nonowner sources. It includes all changes in equity except those resulting from investments by stockholders and distributions to stockholders. Comprehensive income includes net income and certain elements of "other comprehensive income" such as foreign currency transactions; accounting for futures contracts; employers accounting for pensions; and accounting for certain investments in debt and equity securities. The Corporation has elected to report its comprehensive income in the statement of stockholders' equity. The only element of "other comprehensive income" that the Corporation has is the unrealized gain or loss on available for sale securities. The components of the change in net unrealized gains (losses) on securities were as follows: 2001 2000 1999 Gross unrealized holding gains (losses) arising during the year $ 531,378 $ 1,285,448 ($ 1,797,482) Reclassification adjustment for (gains)/losses realized in net income ( 17,986) 474 ( 49,655) Net unrealized holding gains (losses) before taxes 513,392 1,285,922 ( 1,847,137) Tax effect ( 174,553)( 437,213) 628,026 Net change $ 338,839 $ 848,709 ($ 1,219,111)

-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 2001 Obligations of other U.S. Government agencies $ 7,838,868 $ 214,912 ($ 2,034) $ 8,051,746 Obligations of states and political subdivisions 9,849,481 165,522 ( 52,136) 9,957,867 Mortgage-backed securities 693,173 3,509 ( 539) 696,143 SBA Loan Pool certificates 663,184 2,704 ( 2,356) 663,532 Equities in local bank stock 179,271 18,231 ( 12,500) 185,002 Totals $ 19,218,977 $ 404,878 ($ 69,565) $ 19,554,290 2000 Obligations of other U.S. Government agencies $ 16,669,612 $ 254,301 ($ 440,093) $ 16,483,820 Obligations of states and political subdivisions 8,392,131 55,935 ( 46,492) 8,401,574 Mortgage-backed securities 881,099 382 ( 3,343) 878,138 SBA Loan Pool certificates 793,610 854 ( 5,897) 788,567 Equities in local bank stock 210,148 15,219 ( 8,945) 216,422 Totals $ 26,946,600 $ 326,691 ($ 504,770) $ 26,768,521

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 2001 SBA loan pool certificates $ 551,033 $ 2,255 ($ 3,111) $ 550,177 Obligations of other U.S. government agencies 563,731 0 ( 25,448) 538,283 Totals $ 1,114,764 $ 2,255 ($ 28,559) $ 1,088,460 2000 SBA loan pool certificates $ 682,099 $ 971 ($ 8,494) $ 674,576 Obligations of other U.S. government agencies 525,736 0 ( 64,341) 461,395 Totals $ 1,207,835 $ 971 ($ 72,835) $ 1,135,971

The amortized cost and fair values of investment securities available for sale and held to maturity at December 31, 2001 by contractual maturity, are shown below. Contractual maturities will differ from expected maturities because borrowers may have the right to call or repay obligations with or without call or repayment penalties. -12- Note 2. Investment Securities (Continued) Securities Available Securities Held - - - - - - for Sale - - - - - - - - - - - - to Maturity- - - - - - Amortized Fair Amortized Fair Cost Value Cost Value Due in one year or less $ 1,175,532 $ 1,185,461 $ 0 $ 0 Due after one year but less than five years 5,630,260 5,792,830 0 0 Due after five years but less than ten years 7,298,957 7,460,695 0 0 Due after ten years 3,578,600 3,570,627 563,731 538,283 17,683,349 18,009,613 563,731 538,283 Mortgage-backed securities 693,173 696,143 0 0 SBA loan pool certificates 663,184 663,532 551,033 550,177 Equities in local bank stock 179,271 185,002 0 0 Totals $ 19,218,977 $ 19,554,290 $ 1,114,764 $ 1,088,460

Proceeds from sales of investment securities available for sale during 2001 were $ 38,720. Gross losses on these sales were $ 0 and gross gains were $ 7,843. Related taxes were $ 2,667. There were no sales of investment securities available for sale during 2000. Proceeds from sales of investment securities available for sale during 1999 were $ 1,151,501. Gross losses on these sales were $ 4,101 and gross gains were $ 53,756. Related taxes were$ 16,883. There were no sales of investment securities held-to-maturity in 2001, 2000, or 1999. Investment securities carried at $ 5,828,486 and $ 6,649,820 at December 31, 2001 and 2000, respectively, were pledged to secure public funds and for other purposes as required or permitted by law. Note 3. Loans Loans consist of the following at December 31: 2001 2000 (000 omitted) Real estate loans: Construction and land development $ 3,946 $ 1,583 Secured by farmland 5,216 5,428 Secured by 1-4 family residential properties 43,945 42,768 Secured by multi-family residential properties 538 524 Secured by nonfarmland nonresidential properties 14,360 11,943 Loans to farmers (except loans secured primarily by real estate) 3,314 3,613 Commercial, industrial and state and political subdivision loans 10,392 9,440 Loans to individuals for household, family, or other personal expenditures 7,848 7,640 All other loans 1,812 1,616 Total loans 91,371 84,555 Less: Unearned discount on loans 321 632 Allowance for loan losses 882 811 Net Loans $ 90,168 $ 83,112 -13- Note 3. Loans (Continued) The following table shows maturities and sensitivities of loans to changes in interest rates based upon contractual maturities and terms as of December 31, 2001. Due Over 1 But Due Within Within 5 Due Over Nonaccruing 1 Year Years 5 Years Loans Total Loans at pre-determined interest rates $ 2,567 $ 11,261 $ 30,973 $ 181 $ 44,982 Loans at floating or adjustable interest rates 14,285 4,483 27,311 310 49,389 Total (1) $ 16,852 $ 15,744 $ 58,284 $ 491 $ 91,371 (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 $ 1,139,616 and $ 1,612,752 at December 31, 2001 and 2000, respectively. During 2001, $ 2,362,817 of new loans were made and repayments totaled $ 2,835,935. During 2000, $ 887,053 of new loans were made and repayments totaled $ 1,645,235. Outstanding loans to Corporate employees totaled $ 1,289,035 and $ 1,311,611 at December 31, 2001 and 2000, respectively. Note 4. Allowance for Loan Losses Activity in the allowance for loan losses is summarized as follows: 2001 2000 1999 Allowance for loan losses, beginning of the year $ 811 $ 746 $ 732 Loans charged-off during the year: Real estate mortgages 18 89 100 Installment loans 90 90 40 Commercial and all other loans 1 24 61 Total charge-offs 109 203 201 Recoveries of loans previously charged-off: Real estate mortgages 18 12 0 Installment loans 18 24 24 Commercial and all other loans 0 1 1 Total recoveries 36 37 25 Net loans charged-off (recovered) 73 166 176 Provision for loan losses charged to operations 144 231 190 Allowance for loan losses, end of the year $ 882 $ 811 $ 746 -14- Note 4. Allowance for Loan Losses (Continued) A breakdown of the allowance for loan losses as of December 31 is as follows: - - - - - - - 2001 - - - - - - - - - - - - - - 2000 - - - - - - - Percent of Percent of Loans in Loans in Allowance Each Allowance Each (000 omitted) Amount Category Amount Category Commercial, industrial and agriculture loans $ 575 37.51% $ 529 33.78% 1-4 family residential mortgages 131 41.65 92 42.30% Consumer and installment loan 58 7.44 69 7.65% Off balance sheet commitments 69 13.40 121 16.36% Unallocated 49 N/A 0 N/A Total $ 882 100.00% $ 811 100.00% Impairment of loans having a recorded investment of $ 859,974 and $ 1,228,633 at December 31, 2001 and 2000 respectively, was recognized in conformity with SFAS No. 114 as amended by SFAS No. 118. The average recorded investment in impaired loans was $ 1,019,975 and $ 1,272,272 during 2001 and 2000, respectively. The total allowance for loan losses related to these loans was $ 120,000 at December 31, 2001 and 2000. Interest income on impaired loans of $ 85,042 and $ 118,811 was recognized for cash payments received in 2001 and 2000, respectively. There were no impaired loans in 1999. Note 5. Nonaccrual, Past Due and Restructured Loans The following table shows the principal balances of nonaccrual loans as of December 31: 2001 2000 1999 Nonaccrual loans $ 491,659 $ 323,337 $ 422,820 Interest income that would have been accrued at original contract rates $ 43,468 $ 31,633 $ 39,444 Amount recognized as interest income 28,545 22,933 16,181 Foregone revenue $ 14,924 $ 8,700 $ 23,263 Loans 90 days or more past due (still accruing interest) were as follows at December 31: (000 omitted) 2001 2000 1999 Real estate mortgages $ 228 $ 30 $ 55 Installment loans 45 112 111 Demand and time loans 0 41 0 Total $ 273 $ 183 $ 166 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 2001 Land $ 231,635 $ 0 $ 2,31,635 Bank building and improvements 3,282,293 1,220,619 2,061,674 Equipment, furniture and fixtures 2,419,952 1,847,084 572,868 Leasehold improvements 64,028 15,789 48,239 $ 5,997,908 $ 3,083,492 $ 2,914,416 -15- Note 6. Bank Building, Equipment, Furniture and Fixtures (Continued) Accumulated Depreciated Description Cost Depreciation Cost 2000 Land $ 231,635 $ 0 $ 231,635 Bank building and improvements 3,281,210 1,128,108 2,153,102 Equipment, furniture and fixtures 2,290,079 1,657,916 632,163 Leasehold improvements 64,028 11,913 52,115 $ 5,866,952 $ 2,797,937 $ 3,069,015 Depreciation expense amounted to $ 285,683, $ 271,803 and $ 262,036 for 2001, 2000 and 1999, respectively. Note 7. Income Taxes The components of federal income tax expense are summarized as follows: 2001 2000 1999 Current year provision $ 299,269 $ 281,186 $ 212,058 Deferred income taxes resulting from: Differences between financial statement and tax depreciation charges ( 4,793) ( 14,708) ( 7,817) Differences between financial statement and tax loan loss provision ( 24,758) ( 18,868) ( 4,904) Differences between financial statement and tax retirement benefit expense ( 14,207) ( 18,461) ( 18,765) Applicable income tax $ 255,511 $ 229,149 $ 180,572 Federal income taxes were computed after adjusting pretax accounting income for nontaxable income in the amount of $ 578,139, $ 570,394, and $ 620,660 for 2001, 2000, and 1999, respectively. A reconciliation of the effective applicable income tax rate to the federal statutory rate is as follows: 2001 2000 1999 Federal income tax rate 34.0% 34.0% 34.0% Reduction resulting from: Nontaxable income 13.7 14.6 17.3 Effective income tax rate 20.3% 19.4% 16.7% Deferred income taxes at December 31 are as follows: 2001 2000 Deferred tax assets $ 296,472 $ 318,054 Deferred tax liabilities ( 135,943) ( 26,729) $ 160,529 $ 291,325 -16- Note 7. Income Taxes (Continued) The tax effects of each type of significant item that gives rise to deferred taxes are: 2001 2000 Net unrealized (gains) losses on securities available for sale ($ 114,007) $ 60,547 Depreciation expense ( 21,936) ( 26,729) Retirement benefit reserve 60,694 46,487 Allowance for loan losses 235,778 211,020 $ 160,529 $ 291,325 The Corporation has not recorded a valuation allowance for the deferred tax assets as management feels that it is more likely than not that they will be ultimately realized. Note 8. Employee Benefit Plans The Corporation has a 401-K plan which covers all employees who have attained the age of 20 and who have completed six months of full-time service. The plan provides for the Corporation to match employee contributions to a maximum of 5% of annual compensation. The Corporation also has the option to make additional discretionary contributions to the plan based upon the Corporation's performance and subject to approval by the Board of Directors. The Corporation's total expense for this plan was $ 94,923, $ 105,078, and $ 84,909, for the years ended December 31, 2001, 2000, and 1999, respectively. The Corporation adopted three supplemental retirement benefit plans for directors and executive officers. These plans are funded with single premium life insurance on the plan participants. The cash value of the life insurance policies is an unrestricted asset of the Corporation. The estimated present value of future benefits to be paid totaled $ 178,512 and $ 136,727 at December 31, 2001 and 2000, respectively, which is included in other liabilities. Total annual expense for these plans amounted to $ 55,656, $ 54,406, and $ 64,339 for 2001, 2000, and 1999, respectively. Note 9. Deposits Included in savings deposits are NOW and Super NOW account balances totaling $ 7,647,991 and $ 6,192,804 at December 31, 2001 and 2000, respectively. Also included in savings deposits at December 31, 2001 and 2000 are Money Market account balances totaling $ 11,179,592 and $ 10,578,065, respectively. Time certificates of $ 100,000 and over as of December 31 were as follows: 2001 2000 (000 omitted) Three months or less $ 1,304 $ 1,444 Three months to six months 855 1,058 Six months to twelve months 1,533 3,970 Over twelve months 9,004 5,911 Total $ 12,696 $ 12,383 Interest expense on time deposits of $ 100,000 and over aggregated $ 726,092, $ 699,027, and $ 688,565 for 2001, 2000, and 1999, respectively. At December 31, 2001 the scheduled maturities of certificates of deposit are as follows (000 omitted): 2002 $ 31,028 2003 9,123 2004 13,282 2005 6,013 2006 6,200 Thereafter 2 $ 65,648 -17- Note 9. Deposits (Continued) The Corporation accepts deposits of the officers, directors and employees of the corporation and its subsidiary on the same terms, including interest rates, as those prevailing at the time for comparable transactions with unrelated persons. The aggregate dollar amount of deposits of officers, directors and employees totaled $ 2,367,738 and $ 2,006,103 at December 31, 2001 and 2000, respectively. The aggregate amount of demand deposit overdrafts reclassified as loan balances were $ 24,846 and $ 212,482 at December 31, 2001 and 2000, respectively. Derivative Instruments Included in time deposits at December 31, 2001 are Index Powered Certificates of Deposit ("IPCD's") totaling $ 1,055,108. The IPCD product is offered through a program with the Federal Home Loan Bank (FHLB). The ultimate pay off at maturity, which is in five years, is the initial deposited principal plus the appreciation in the S&P 500 Index ("S&P Call Option"). The S&P Call Option is considered an embedded derivative designated as a non-hedging item. The change in fair value of the S&P Call Option for 2001 resulted in a gain of $ 16,347 which is included in other income. In order to hedge its risk associated with the IPCD Product, the Corporation has entered into a derivative contract with the FHLB whereby the Corporation pays FHLB a fixed rate interest charge (ranging from 4.2% to 4.97%) in return for a guarantee that the FHLB will pay the Corporation the cash equivalent of the growth in the S&P 500 Index due at the IPCD maturity date. The change in fair value of the FHLB Derivative Contract for 2001 resulted in a loss of $ 7,615 which is included in other income. Note 10. Financial Instruments With Off-Balance-Sheet Risk The Corporation is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financial needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets. The contract amounts of those instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments. The Corporation's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Contract or Notional Amount (000 omitted) 2001 2000 Financial instruments whose contract amounts represent credit risk at December 31: Commitments to extend credit $ 12,494 $ 14,897 Commercial and standby letters of credit 1,644 1,644 $ 14,138 $ 16,541 -18- Note 10. Financial Instruments With Off-Balance-Sheet Risk (Continued) Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on management's credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, real estate, equipment, and income-producing commercial properties. Standby letters of credit are conditional commitments issued by the corporation to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Corporation holds collateral supporting those commitments when deemed necessary by management. Note 11. Concentration of Credit Risk The Corporation grants agribusiness, commercial and residential loans to customers located in South Central Pennsylvania and Northwestern Maryland. Although the Corporation has a diversified loan portfolio, a portion of its customers' ability to honor their contracts is dependent upon the construction and land development and agribusiness economic sectors as disclosed in Note 3. The Corporation evaluates each customer's creditworthiness on a case-by- case basis. The amount of collateral obtained, if deemed necessary upon the extension of credit, is based on management's credit evaluation of the customer. Collateral held varies but generally includes equipment and real estate. The Corporation maintains deposit balances at correspondent banks, which provide check collection and item processing services to the Corporation. The balances with these correspondent banks, at times, exceed federally insured limits, which management considers to be a normal business risk. Note 12. FNB Financial Corporation (Parent Company Only) Financial Information The following are the condensed balance sheets, statements of income and statements of cash flows for the parent company. Balance Sheets December 31 Assets 2001 2000 Cash $ 22,665 $ 64 Interest-bearing deposits with banks 6,395 299 Marketable equity securities available for sale 185,002 216,422 Investment in the First National Bank of McConnellsburg 13,368,499 12,526,464 Other assets 21,436 3,579 Total assets $ 13,603,997 $ 12,746,828 -19- Note 12. FNB Financial Corporation (Parent Company Only) Financial Information (Continued) Liabilities and Stockholders' Equity Dividends payable $ 216,000 $ 192,000 Other liabilities 0 6,801 216,000 198,801 Common stock, par value $ .315; 12,000,000 shares authorized; 800,000 shares issued and outstanding 252,000 252,000 Additional paid-in capital 1,789,833 1,789,833 Retained earnings 11,124,857 10,623,726 Accumulated other comprehensive income (loss) 221,307 ( 117,532) Total stockholders' equity 13,387,997 12,548,027 Total liabilities and stockholders' equity $ 13,603,997 $ 12,746,828 Statements of Income Years Ended December 31 2001 2000 1999 Cash dividends from wholly-owned subsidiary $ 542,000 $ 436,000 $ 364,000 Interest on deposits with banks 303 330 451 Dividend income - Marketable equity securities 5,369 5,938 4,780 Securities gains 7,843 0 39,800 Miscellaneous income (loss) ( 4,168) 0 0 Equity in undistributed income of subsidiary 503,389 540,277 520,400 1,054,736 982,545 929,431 Less: holding company expenses 49,605 27,964 18,378 Income before income taxes 1,005,131 954,581 911,053 Applicable income taxes 0 0 7,771 Net income $ 1,005,131 $ 954,581 $ 903,282 -20- Note 12. FNB Financial Corporation (Parent Company Only) Financial Information (Continued) Statements of Cash Flows Years Ended December 31 2001 2000 1999 Cash flows from operating activities: Net income $ 1,005,131 $ 954,581 $ 903,282 Adjustments to reconcile net income to cash provided by operating activities: Equity in undistributed income of subsidiary ( 503,389) ( 540,277) ( 520,400) (Gain) on sales of investments ( 7,843) 0 ( 39,800) (Increase) decrease in other assets ( 17,857) ( 1,080) 445 Increase (decrease) in other liabilities ( 6,065) ( 10,238) 5,405 Net cash provided by operating activities 469,977 402,986 348,932 Cash flows from investing activities: Net (increase) decrease in interest bearing deposits with banks ( 6,096) 6,618 5,044 Purchase of marketable equity securities available for sale 0 0 ( 71,002) Sales of marketable equity securities available for sale 38,720 0 74,200 Net cash provided by investing activities 32,624 6,618 8,242 Cash flows from financing activities: Cash dividends paid ( 480,000) ( 436,000) ( 336,000) Net increase (decrease) in cash 22,601 ( 26,396) 21,174 Cash, beginning balance 64 26,460 5,286 Cash, ending balance $ 22,665 $ 64 $ 26,460

Note 13. Regulatory Matters Dividends paid by FNB Financial Corporation are generally provided from the dividends it receives from its Subsidiary Bank. The Bank, as a National Bank, is subject to the dividend restrictions set forth by the Office of the Comptroller of the Currency (OCC). Under such restrictions, the Corporation may not, without prior approval of the OCC, declare dividends in excess of the sum of the current year's earnings (as defined) plus the retained earnings (as defined) from the prior two years. The dividends that the Bank could declare without the approval of the OCC amounted to approximately $ 3,056,386 and $ 2,302,058 at December 31, 2001 and 2000, respectively. FNB Financial Corporation's balance of retained earnings at December 31, 2001 is $ 11,124,857 and would be available for cash dividends, although payment of dividends to such extent would not be prudent or likely. The Federal Reserve Board, which regulates bank holding companies, establishes guidelines which indicate that cash dividends should be covered by current period earnings. -21- Note 13. Regulatory Matters (Continued) The Corporation is also subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial statements. Under capital adequacy guidelines, the Corporation is required to maintain minimum capital ratios. The "leverage ratio" compares capital to adjusted total balance sheet assets. "Tier I" and "Tier II" capital ratios compare capital to risk-weighted assets and off-balance sheet activity. A comparison of the Corporation's capital ratios to regulatory minimums at December 31 is as follows: FNB Financial Corporation Regulatory Minimum 2001 2000 Requirements Leverage ratio 9.88% 10.03% 4% Risk-based capital ratios/ Tier I (core capital) 14.89% 16.09% 4% Combined Tier I and Tier II (core capital plus allowance for loan losses) 15.90% 17.15% 8% As of December 31, 2001 the most recent regulatory exam from the Office of the Comptroller of the Currency categorized the Corporation as well capitalized under the regulatory frame work for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Corporation's category. Note 14. Compensating Balance Arrangements Required deposit balances at the Federal Reserve were $ 650,000 and $ 105,000 for 2001 and 2000, respectively. Required deposit balance at Atlantic Central Banker's Bank was $ 425,000 at December 31, 2001 and 2000. These balances are maintained to cover processing costs and service charges. Note 15. Fair Value of Financial Instruments The estimated fair values of the Corporation's financial instruments were as follows at December 31: - - - - - 2001 - - - - - - - - - - 2000 - - - - Carrying Fair Carrying Fair Amount Value Amount Value FINANCIAL ASSETS Cash and due from banks $ 5,400,929 $ 5,400,929 $ 4,020,479 $ 4,020,479 Federal funds sold 6,000,000 6,000,000 0 0 Interest-bearing deposits in banks 2,572,574 2,589,534 778,546 780,309 Securities available for sale 19,554,290 19,554,290 26,768,521 26,768,521 Securities to be held to maturity 1,114,764 1,088,460 1,207,835 1,135,971 Other bank stock 833,700 833,700 833,700 833,700 Loans receivable 90,167,678 92,256,899 83,112,173 82,085,602 Accrued interest receivable 619,464 619,464 789,393 789,393 FINANCIAL LIABILITIES Time certificates 65,647,473 67,998,882 62,129,564 62,963,904 Other deposits 46,314,907 46,314,907 41,502,924 41,502,924 Accrued interest payable 586,433 586,433 677,632 677,632 Liability for borrowed funds 5,403,458 5,763,175 6,176,901 6,578,604

-22- Note 16. Liability for Borrowed Funds Included in liabilities for borrowed funds at December 31 are borrowings from The Federal Home Loan Bank as follows: Advance Principal Outstanding Interest Maturity Type Amount 2001 2000 Rate Date Convertible (1) $ 2,250,000 $ 2,250,000 $ 2,250,000 6.23% 8/30/10 Convertible (1) 2,000,000 2,000,000 2,000,000 5.83 8/10/10 Convertible (1) 500,000 500,000 500,000 5.98 7/21/10 Convertible (1) 500,000 500,000 500,000 6.54 7/12/10 Credit Line 17,750,000 0 768,000 1.88 - 6.63 12/31/02 CIP/Term (2) 175,000 153,458 158,901 6.64 7/14/17 $ 5,403,458 $ 6,176,901

(1) Interest rates on Convertible Loans are fixed until the market rate reaches a pre-determined Comparative Rate/Index or Strike Rate/Index, at which time the interest rate becomes adjustable quarterly based upon the three month LIBOR rate. At the time any loan rate becomes adjustable, the Corporation has the option to repay the debt entirely without penalty or convert to a repayment schedule. (2) The Corporation received Community Investment Program funding from the Federal Home Loan Bank of Pittsburgh for $ 175,000 at a fixed rate of 6.64% and an amortization term of 20 years. Required payments on this loan are as follows: 2002 $ 5,816 2003 6,214 2004 6,639 2005 7,094 2006 7,737 Thereafter 119,958 $ 153,458 The total maximum borrowing capacity from Federal Home Loan Bank at December 31, 2001 was $ 44,807,000. Collateral for borrowings at the Federal Home LoanBank consists of various securities and the Corporation's 1-4 family mortgages with a total value of approximately $ 51,191,000. Note 17. Operating Lease The Corporation leases its Hancock, Maryland office. The original lease term is ten years with three separate successive options to extend the lease for a term of five years each. Monthly rent is $ 1,800 and the lessee pays a proportionate share of other operating expenses. For the years ended December 31,2001, 2000, and 1999 rent expense under this operating lease was $ 21,600 for each year. Required lease payments for the next five years are as follows: 2002 $ 21,600 2003 21,600 2004 21,600 2005 21,600 2006 16,200 $ 102,600 -23- FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY SELECTED FIVE YEAR FINANCIAL DATA 2001 2000 1999 1998 1997 Results of Operations (000 omitted) Interest income $ 8,767 $ 8,755 $ 7,802 $ 7,721 $ 7,388 Interest expense 4,676 4,697 4,119 4,112 3,847 Provision for loan losses 144 231 190 475 233 Net interest income after provision for loan losses 3,947 3,827 3,493 3,134 3,308 Other operating income 739 624 621 530 349 Other operating expenses 3,425 3,267 3,030 2,772 2,608 Income before income taxes 1,261 1,184 1,084 892 1,049 Applicable income tax 256 229 181 110 193 Net income $ 1,005 $ 955 $ 903 $ 782 $ 856 Common Share Data Per share amounts are based on weighted average shares of common stock outstanding of 800,000 for 2001, 2000, 1999, 1998, and 1997 after giving retroactive recognition to a two-for-one stock split issued September 1, 2000. Income before income taxes $ 1.58 $ 1.48 $ 1.36 $ 1.12 $ 1.31 Applicable income taxes .32 .29 .22 .14 .24 Net income 1.26 1.19 1.13 .98 1.07 Cash dividend declared .63 .57 .50 .405 .40 Book value (actual number of shares outstanding before FAS 115 adjustments) 16.46 15.83 15.21 14.58 14.00 Dividend payout ratio 50.14% 47.76% 44.28% 41.43% 37.39% Year-End Balance Sheet Figures (000 omitted) Total assets 132,161 $ 123,626 $ 117,929 $ 113,565 $ 106,020 Net loans 90,168 83,112 76,137 61,901 59,124 Total investment securities - Amortized cost 20,334 28,154 31,900 35,348 29,425 Deposits-noninterest bearing 13,344 11,798 10,959 10,819 9,988 Deposits-interest bearing 98,618 91,834 88,371 89,685 83,272 Total deposits 111,962 103,632 99,330 100,504 93,260 Total stockholders' equity (before FAS 115 adjustments) 13,167 12,666 12,167 11,664 11,206 Ratios (calculated before FAS 115 adjustments) Average equity/average assets 10.05% 10.15% 10.49% 10.53% 10.74% Return on average equity 7.74% 7.67% 7.53% 6.85% 7.98% Return on average assets .78% .78% .79% .72% .86% -24- FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY SUMMARY OF QUARTERLY FINANCIAL DATA The unaudited quarterly results of operations for the years ended December 31, 2001 and 2000 are as follows: 2001 2000 ($ 000 omitted Quarter Ended Quarter Ended except per share) Mar.31 June 30 Sept. 30 Dec. 31 Mar.31 June 30 Sept. 30 Dec. 31 Interest income $ 2,245 $ 2,222 $ 2,188 $ 2,112 $ 2,097 $ 2,173 $ 2,255 $ 2,230 Interest expense 1,236 1,217 1,160 1,063 1,115 1,159 1,202 1,221 Net interest income 1,009 1,005 1,028 1,049 982 1,014 1,053 1,009 Provision for loan losses 36 36 36 36 60 45 45 81 Net interest income after provision for loan losses 973 969 992 1,013 922 969 1,008 928 Other income 143 170 169 239 172 133 145 174 Security gains (losses) 6 4 4 4 0 0 0 0 Other expenses 844 863 833 885 795 794 822 856 Operating income before income taxes 278 280 332 371 299 308 331 246 Applicable income taxes 41 50 64 101 57 65 69 38 Net income $ 237 $ 230 $ 268 $ 270 $ 242 $ 243 $ 262 $ 208 Net income applicable to common stock Per share data: Net income $ .30 $ .29 $ .33 $ .34 $ .30 $ .30 $ .33 $ .26

-25- FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY, INTEREST RATES AND INTEREST DIFFERENTIAL Years Ended December 31 - - - - - -2001 - - - - - - - - - - - -2000 - - - - - - - - - - - -1999 - - - - - - Average Average Average (000 omitted) Balance Interest Rate Balance Interest Rate Balance Interest Rate ASSETS Interest bearing deposits with banks and federal funds sold $ 8,614 $ 305 3.54% $ 1,200 $ 72 6.00% $ 2,975 $ 148 4.98% Investment securities 24,037 1,322 5.50% 30,571 1,780 5.82% 33,114 1,887 5.70% Loans 86,059 7,141 8.30% 80,900 6,903 8.53% 68,773 5,767 8.39% Total interest earning assets 118,710 8,768 7.39% 112,671 $ 8,755 7.77% 104,862 $ 7,802 7.44% Cash and due from banks 3,342 3,746 3,467 Bank premises and equipment 3,017 3,072 3,213 Other assets 4,158 3,200 2,776 Total assets $ 129,227 $ 122,689 $ 114,318 LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing transaction accounts $ 8,118 $ 94 1.16% $ 8,148 $ 109 1.34% $ 8,985 $ 140 1.56% Money market deposit accounts 11,830 366 3.09% 8,460 332 3.92% 7,556 251 3.32% Other savings deposits 10,995 215 1.96% 11,095 256 2.31% 11,770 270 2.29% All time deposits 65,214 3,669 5.63% 61,863 3,544 5.73% 60,916 3,369 5.53% Liability for borrowed funds 5,410 333 6.16% 7,468 456 6.11% 1,460 89 6.10% Total interest bearing liabilities 101,567 4,677 4.60% 97,034 $ 4,697 4.84% 90,687 $ 4,119 4.54% Demand deposits 13,399 12,047 10,849 Other liabilities 1,274 1,149 786 Total liabilities 116,240 110,230 102,322 Stockholders' equity 12,987 12,459 11,996 Total liabilities and stockholders' equity $ 129,227 $ 122,689 $ 114,318 Net interest income/net interest margin $ 4,091 3.45% $ 4,058 3.59% $ 3,683 3.51%

-26- FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY CHANGES IN NET INTEREST INCOME - - - - 2001 Compared to 2000 - - - - - - - - 2000 Compared to 1999 - - - - Total Total Average Average Increase Average Average Increase (000 omitted) Volume Rate (Decrease) Volume Rate (Decrease) Interest Income Interest bearing deposits with banks and federal funds sold $ 445 ($ 212) $ 233 ($ 88) $ 12 ($ 76) Investment securities ( 380) ( 78) ( 458) ( 144) 37 ( 107) Loans 440 ( 202) 238 1,017 119 1,136 Total interest income $ 505 ($ 492) $ 13 $ 785 $ 168 $ 953 Interest Expense Interest bearing transaction accounts $ 0 ($ 15) ($ 15) ($ 13) ($ 18) ($ 31) Money market deposit accounts 132 ( 98) 34 30 51 81 Other savings ( 2) ( 39) ( 41) ( 15) 1 ( 14) All time deposits 192 ( 67) 125 52 123 175 Liability for borrowed funds ( 126) 3 ( 123) 366 1 367 Total interest expense $ 196 ($ 216) ($ 20) $ 420 $ 158 $ 578 Net interest income $ 33 $ 375

-27- FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY MATURITIES OF INVESTMENT SECURITIES December 31, 2001 The following table shows the maturities of investment securities at amortized cost as of December 31, 2001, and weighted average yields of such securities. Yields are shown on a taxable equivalent basis, assuming a 34% federal income tax rate. (000 omitted) Within 1 1-5 5-10 Over 10 Year Years Years Years Total Obligations of other U.S. Government agencies: Amortized cost $ 550 $ 3,401 $ 3,200 $ 1,252 $ 8,403 Yield 5.22% 5.70% 6.20% 6.97% 6.05% Obligations of state and political subdivisions: Amortized cost 625 2,230 4,100 2,890 9,845 Yield 5.26% 5.34% 7.12% 7.15% 6.61% Mortgage-Backed securities and SBA Guaranteed Loan Pool Certificates (1): Amortized cost 0 91 41 1,775 1,907 Yield 0% 6.64% 5.73% 4.55% 4.67% Subtotal amortized cost 1,175 5,722 7,341 5,917 20,155 Subtotal yield 5.25% 5.58% 6.71% 6.33% 6.19% Equity Securities $ 179 Yield 5.84% Total investment securities $ 20,334 Yield 6.18% (1) It is anticipated that these mortgage-backed securities and SBA Guaranteed Loan Pool Certificates will be repaid prior to their contractual maturity dates. -28- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following section presents a discussion and analysis of the financial condition and results of operations of FNB Financial Corporation (the Corporation) and its wholly-owned subsidiary, The First National Bank of McConnellsburg (the Bank). This discussion should be read in conjunction with the financial tables/statistics, financial statements and notes to financial statements appearing elsewhere in this annual report. RESULTS OF OPERATIONS Overview Consolidated net income for 2001 was $1,005,131, a $50,550, or 5.30% increase from the net income for 2000 of $954,581, and an increase of $101,849 or 11.28% from the net income of $903,282 for 1999. On a per share basis net income for 2001 was $1.26, based upon average shares outstanding of 800,000, compared to $1.19 for 2000 and $1.13 for 1999. Results of operations for 2001 as compared to 2000 were impacted by the following items: - Net income was positively impacted by a 5.35% increase in average earning assets; - Net income was positively impacted by an $87,319 decrease in the provision for loan losses. - Net income was positively impacted by an increase in net gains on the sale of securities from a net loss in 2000 of $474 to a net gain in 2001 of $17,986. - Net income was negatively impacted by a decreasing net interest margin in 2001 of 0.14% from 3.59% in 2000 to 3.45%. The decrease in 2001 occurred due to a 0.37% decrease in the yield on earning assets while the cost of interest bearing liabilities decreased 0.24%. In 2001 the yield on earnings assets decreased 0.37% due to the following: - a 0.22% decrease in the yield on loans from 8.53% in 2000 to 8.30% in 2001; a result of decreasing interest rate indexes on adjustable rate loans during the entire year. - a 0.32% decrease in the yield on investment securities from 5.82% in 2000 to 5.50% in 2001, the result of exercised call features and maturities of higher yielding securities. - a 2.46% decrease in the yield on federal funds sold and interest-bearing deposits with banks due to decreasing yields on federal funds sold throughout the year. - Net income was positively impacted by a decreasing cost of interest bearing liabilities of 0.24% from 4.84% in 2000 to 4.60% due mainly to the following: - A decreasing cost of money market deposit accounts of 0.83% from 3.92% in 2000 to 3.09% in 2001. - A decreasing cost of interest-bearing transaction accounts of 0.18% from 1.34% in 2000 to 1.16% in 2001. - A decreasing cost of savings accounts of 0.35% from 2.31% in 2000 to 1.96% in 2001. - A decreasing cost of time deposits of 0.10% from 5.73% in 2000 to 5.63% in 2001. -29- - Net income was negatively impacted by an increase in wage and salary expenses of $91,012 or 6.79% and employee benefits of $8,003, or 2.25%, a direct result of: - Officer and employee raises during the operating year. - Increased participation in our 401K retirement program. - Net income was negatively impacted by a $4,163 increase in net occupancy expenses and a $14,780 increase in furniture and equipment expenses as a result of: - A $3,524 increase in real estate taxes. - An increase of $10,328 in depreciation expenses on furniture and equipment due to the upgrade of our Local Area network. - Net income was positively impacted by a $35,529 increase in the service charges on deposit accounts as a result of increased overdraft and minimum balance charges. - Net income was positively impacted by a $83,105 increase in other service charges and fees due to: - A $57,497 increase in annuity sale commissions. - A $9,901 increase in late charges on customers' installment and mortgage loans. - A $6,213 increase in debit card income. - Net income was negatively impacted by a $21,897 decrease in other income, the result of net losses on other real estate owned of $19,038. - Net income was negatively impacted by a $26,362 increase in the current year income tax provision resulting primarily from the increase in taxable income in relation to tax free income. Net income as a percent of total average assets for 2001, also known as return on assets (ROA), was .78% compared to .78% for 2000 and 0.79% for 1999. Net income as a percent of average stockholders' equity for 2001, also known as return on equity (ROE), was 7.74% compared to 7.67% for 2000 and 7.53% for 1999. The ROA and ROE for these periods were impacted by the factors discussed in the preceding paragraphs. Net Interest Income Net interest income is the amount by which interest income on loans and investments exceeds interest incurred on deposits and other interest-bearing liabilities. Net interest income is our primary source of revenue. The amount of net interest income is affected by changes in interest rates and by changes in the volume and mix of interest-sensitive assets and liabilities. Net interest income for 2001 increased $ 32,912 or 0.81% over 2000 and $ 408,034 or 11.1% over 1999. Average earning assets for 2001 increased $ 6,039,000 over 2000 and $ 13,848,000 over 1999. This increase in average earning assets from 2000 to 2001 was the result of: - An increase in average loans in the amount of $5,159,000 or 6.38%. - A decrease in average investment securities in the amount of $6,534,000 or 21.37%. - An increase in interest-bearing deposits with banks and federal funds sold in the amount of $7,414,000. -30- The increase in loans at an average yield of 8.30% funded by the decrease in investment securities directly contributed to the increase in net interest income. Earning asset increases were funded by an increase in average interest-bearing deposits and non-interest-bearing deposits. Average interest-bearing deposits increased $6,591,000 or 7.36% while non- interest-bearing deposits increased $1,352,000 or 11.22%. These increases in funding by deposits resulted in our ability to decrease average borrowings from the Federal Home Loan Bank of Pittsburgh in an amount of $2,058,000, from $7,468,000 in 2000 to $5,410,000 in 2001. The volume growth in earning assets and interest-bearing liabilities contributed to the increase in net interest income in the amount of $196,000 in 2001 over 2000. The year 2001 was defined by several interest rate decreases by the Federal Reserve Board. Following a period of rising interest rates in 1999, the Federal Reserve continued to increase short term interest rates during the first and second quarters of 2000. Beginning in early 2001, the Federal Reserve began what would become the shortest period in recent history of rapidly decreasing interest rates which continued throughout the year 2001. As we began the year 2001 the Federal Funds interest rate was targeted at 6.50% and the Discount Rate was 6.00%. As of December 31, 2001, the Federal Reserve had drastically and dramatically decreased short term rates to a 40 year low, having targeted the Federal Funds Rate at 1.75% and the Discount Rate at 1.25%. These decreases were justified by Federal Reserve officials due to the strong indications of the beginning of national and local economic recessions which were further intensified by the events of September 11, 2001. As a result of these dramatic interest rate decreases, higher yielding investment securities with call features were called and longer term fixed rate mortgages, both consumer and commercial, were refinanced to lower interest rates. The proceeds from the called securities allowed us to pay down borrowings at the Federal Home Loan Bank; however, these dramatic interest rate reductions resulted in the yields on investments and loans to decrease dramatically. On the asset side this decreasing interest rate environment resulted in a decrease in yield on our earning assets. As lower yielding investments matured and were called and indexes on adjustable rate loans and securities decreased, our yields on earning assets decreased: - The yield on interest-bearing deposits and federal funds sold decreased 2.46% from 6.00% in 2000 to 3.54% in 2001. - The yield on investment securities decreased 0.32% from 5.82% in 2000 to 5.50% in 2001. - The yield on loans decreased 0.22% from 8.53% in 2000 to 8.30% in 2001. In order to reduce the effect of these dramatic earning asset interest rate reductions, it was necessary to dramatically decrease our cost of interest-bearing liabilities. - The cost of interest-bearing transaction accounts decreased 0.18% from 1.34% in 2000 to 1.16% in 2001. - The cost of Money Market accounts decreased 0.83% from 3.92% in 2000 to 3.09% in 2001. - The cost of savings deposits decreased 0.35% from 2.31% in 2000 to 1.96% in 2001. - The cost of time deposits decreased 0.10% from 5.73% in 2000 to 5.63% in 2001. -31- The net effect of all interest rate fluctuations was to decrease net interest income in the amount of $276,000 in 2001 from 2000. Due to the overall decrease in the yield on earning assets by 0.38%, a decreased cost of deposits of 0.24% in 2001 from 2000, and a change in the earning asset composition, the result was an increase in net interest income of $ 33,000 and a 0.14% decrease in our net interest margin from 3.59% in 2000 to 3.45% in 2001. At the beginning of the year 2000 the Discount Rate was 5.00% and the Federal Funds Rates was targeted at 5.50%. As of December 31, 2000, the Discount Rate had increased to 6.00% and the Federal Funds rate was targeted at 6.50%, both rates reflecting the last increase which occurred on May 16, 2000. As a result of these increasing interest rates security calls were non-existent during the year 2000 as government agencies and municipalities chose not to exercise call options during this increasing interest rate environment. The result was a reliance on deposit increases and borrowing from the Federal Home Loan Bank to fund loan demand. In order to attract and retain deposits we increased interest rates on our premium money market accounts and on our time deposits: - Cost of Money Market deposits increased 60 basis points to 3.92% in 2000 from 3.32% in 1999. - Cost of time deposits increased 20 basis points from 5.53% in 1999 to 5.73% in 2000. Although our cost of borrowing increased only 1 basis point to 6.11%, our reliance on borrowing to fund loan demand increased over 5 times to average borrowings of $7,468,000 in 2000 from $1,460,000 in 1999. The overall result of increased borrowings and increased costs of these deposits, as previously discussed, resulted in an increase in our cost of funding assets by 30 basis points to 4.84% in 2000 compared to 4.54% in 1999. On the asset side the increasing interest rate environment resulted in an increase in yield on our earning assets. As lower yielding investments matured and indexes on adjustable rate loans and securities increased, our yields on earning assets increased: - The yield on interest-bearing deposits and federal fund sold increased 1.02% from 4.98% in 1999 to 6.00% in 2000. - The yield on investment securities increased 12 basis points to 5.82% in 2000 from 5.70% in 1999. - The yield on loans increased 13 basis points from 8.39% in 1999 to 8.53% in 2000. The net effect of all interest rate fluctuations was to increase net interest income in the amount of $ 10,000 in 2000 from 1999. Due to the overall increase in the yield on earning assets by 0.33%, a $12,127,000 increase in our average loan balance which is our highest earning asset and a decreased reliance on our lower interest earning assets of investments and interest-bearing balances with banks, this combination of increased yields and reallocation of earning asset balances was more than enough to offset our increased cost of deposits of 30 basis points to 4.84% in 2000 from 4.54% in 1999. The result was a .08% increase in our net interest margin from 3.51% in 1999 to 3.59% in 2000. -32- As we began the 2002 year, the Federal Reserve has remained cautious and has retained interest rates at their current levels during the month of January. We anticipate the yield on earning assets to decrease during the next few quarters as indexes on adjustable rate securities and loans decrease and commercial loan rates and residential lending rates continue to decrease. The decreases in yields in the loan portfolio will result in lower yields on our earning assets. We will continue to decrease deposit rates on deposits in order to retain our net interest margin. If necessary, to offset deposit losses and continued loan demand, we will utilize our line of credit at the FHLB. This funding alternative is interest rate sensitive in that the rate reprices on a daily basis. We have matched borrowings at the FHLB with specific loans and have utilized term borrowings to tie up interest rates for longer periods in order to lock-in interest rate spreads. During this period we anticipate a slight decrease in our interest margin; however, this decrease will depend greatly upon present market conditions for both loans and deposits. Current strategies we are utilizing to improve our interest spread are as follows: - Promoting adjustable rate commercial and residential mortgage loan products. - Matching borrowings at the FHLB with specific loan credits. - Reducing the cost of interest-bearing transaction, money market and savings accounts. Provision for Loan Losses The loan loss provision is an estimated expense charged to earnings in anticipation of losses attributable to uncollectible loans. The provision is based on our analysis of the adequacy of the allowance for loan losses. The provision for 2001 was $144,000, compared to $231,319 for 2000, and $190,000 for 1999. The decrease in provision of $87,319 was due to the implementation of a more thorough and extensive annual loan portfolio review and quarterly analysis of the allowance for loan losses which identified our ability to decrease the allowance provision in 2001. The increase in annual provision of $41,319 in 2000 from 1999 was the result of increasing commercial loans balances which add more volatility and risk to the loan portfolio, as well as specific provisions for loans we have determined to warrant specific provisions due to issues regarding their total and complete collectability. Total charged-off loans in 2001 were $109,000 compared to $203,000 in 2000 and $201,000 in 1999. Total recoveries in 2000 were $36,000 compared to $37,000 in 2000 and $25,000 in 1999. See discussion on Allowance for Loan Losses. Other Operating Income and Other Operating Expenses Other operating income for 2001 was $739,129, a $115,197, or 18.46% increase over the same period in 2000 and a $118,668, or 19.13% increase over the same period in 1999. This increase is mainly attributable to the following: - A $35,529 increase in the service charges on deposit accounts as a result of increased overdraft and minimum balance charges. - An $83,105 increase in other service charges and fees due to: - A $57,497 increase in annuity sale commissions. - A $9,901 increase in late charges on customers' installment and mortgage loans. - A $6,213 increase in debit card income. -33- Total other operating expenses for 2001 were $3,425,486, an increase of $158,516 or 4.85% over 2000's expenses of $3,266,970 and an increase of $395,914 or 13.07%, over 1999's expenses for $3,029,572. This increase was mainly the result of the following: - An increase in wage and salary expenses of $91,012 or 6.79% and employee benefits of $8,003, or 2.25%, a direct result of: - Officer and employee raises during the operating year. - Increased participation in our 401K retirement program. - A $4,163 increase in net occupancy expenses and a $14,780 increase in furniture and equipment expenses as a result of: - A $3,524 increase in real estate taxes. - A $10,328 increase in depreciation expenses on furniture and equipment due to the upgrade of our Local Area network. - A $7,400 increase in the Pennsylvania Shares Tax Expense - A $10,700 increase in Professional Development Expenses - A $6,200 increase in Dues and Subscriptions Expenses - $10,100 in expenses incurred for the shareholder's banquet Income Taxes Our income tax provision for 2001 was $255,511 compared to $229,149 for 2000 and $180,572 for 1999. The increase in the tax provision in 2001 over 2000 in the amount of $26,362 is the result of an increase in income before income taxes of $76,912 and a decrease in taxable allowance for loan losses from $175,825 in 2000 to $71,183 in 2001, a $104,642 or 59.51% decrease. The increase in the tax provision in 2000 over 1999 in the amount of $48,577 was due to an increase in income before income taxes of $99,876, and a decrease in tax-free income in the amount of $72,293 or 13.50%. We operated with a marginal tax rate of 34% in 2001, 2000 and 1999. Our effective tax rate for 2001 was 20.27% compared to 19.36% for 2000 and 16.66% for 1999. This increase in the effective tax rate is due to the decrease in the taxable allowance for loan losses as discussed. Future Impact of Recently Issued Accounting Standards Financial Accounting Standards Board (FASB) issues Statement No. 133 as amended by SFAS No. 138, Accounting for Derivative Instruments and Hedging Activities, effective for fiscal years beginning after June 15, 2000. This Statement establishes accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other contracts, and requires that an entity recognize all derivatives as assets or liabilities in the balance sheet and measure them at fair value. If certain conditions are met, an entity may elect to designate a derivative as follows: (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability of an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of an unrecognized firm commitment, an available-for-sale security, a foreign currency denominated forecasted transaction, or a net investment in a foreign operation. The Statement generally provides for matching the timing of the recognition of the gain or loss on derivatives designated a hedging instruments with the recognition of the change in the fair value of the item being hedged. Depending on the type of hedge, such recognition will be either net income or other comprehensive income. For a derivative not designated as a hedging instrument, changes in fair value will be recognized in net income in the period of change. Management has evaluated the impact of adopting this Statement on the consolidated financial statements, but does not anticipate that it will have a material impact. -34- Future Impact of Recently Issued Accounting Standards (Continued) Financial Accounting Standards Board (FASB) Standard 142, which is effective for years beginning after December 12, 2001, addresses the financial accounting and reporting for acquired goodwill and other intangible assets. It does not address intangibles acquired as part of business combinations which is addressed by FASB 141. This statement also addresses how goodwill and intangibles are accounted for after they have been initially recognized. Management is currently evaluating the impact this statement would have on the consolidated financial statements when adopted, but does not anticipate that it will have a material impact. FINANCIAL CONDITION Investment Securities The book value of the investment security portfolio as of December 31, 2001 decreased by $7,821,000 from December 31, 2000, representing a 27.78% decrease. This decrease occurred primarily due to the calls of investment securities during the year as a result of the decreasing interest rate environment. Proceeds from called securities were used to fund loan demand and were invested in federal funds sold. Due to the implementation of SFAS No. 115, we have segregated securities as Held-to-Maturity (HTM), Available-for-Sale (AFS) or Trading securities. This accounting standard requires HTM securities be reported on the balance sheet at cost and AFS securities be reported at market value. As of December 31, 2001, we had in our portfolio HTM securities of $1,114,764 with a market value of $1,088,460 and AFS securities of $19,554,290 with a book value of $19,218,977. No securities were classified as Trading securities as of December 31, 2001. For the December 31, 2000 Balance Sheet presentations, we had investment debt securities classified as HTM securities of $1,207,835 with a market value of $1,135,971 and as AFS securities of $26,768,521, with at book value of $26,946,600. No securities were classified as Trading as of December 31, 2000. The general policy adopted by us segregates purchases of tax-free municipals with maturities of 5 years or less as Held-to-Maturity securities while all other security purchases are classified as Available- for-Sale. The Policy we adopted also allows us, on a case-by-case basis, to make a specific determination as to the classification of a security purchase as Held-to-Maturity or Available-for-Sale depending upon the reason for purchase. Management adheres to the philosophy that Held-to- Maturity classifications are typically used for securities purchased specifically for interest rate management or tax-planning purposes while Available-for-Sale classifications are typically used for liquidity planning purposes. As of December 31, 2001, the net unrealized loss of the HTM portfolio was $26,304, a 2.36% decrease from book value and on the AFS portfolio a net unrealized gain of $ 335,313 or a 1.74% increase over book value. As of December 31, 2000, the net unrealized loss on the HTM portfolio was $71,864, a 5,95% decrease from book value, and on the AFS portfolio, a net unrealized loss of $178,079 or a 0.66% decrease from book value. We have reviewed the fluctuation of market value in each of these portfolios and have determined that due to the recent increases in short term interest rates, the values of securities contained within our investment debt portfolio are a direct result of the current interest rate environment. We have therefore concluded that the net unrealized gains and/or losses in our investment debt portfolio are a direct result of current monetary policy and therefore are temporary in that security values will continue to fluctuate, either decrease or increase in value, in response to future changes in interest rates and monetary policy. -35- Investment Securities (Continued) Due to the drastic changes in the interest rate environment during the year 2001, many securities with call features were exercised. As a result of called securities and the changes in the interest rate environment, liquidity sources available from the investment portfolio to fund loan demand increased dramatically; however, at the same time, the overall yield on the investment portfolio decreased as higher yielding securities were called. We have purchased for the portfolio mortgage-backed securities, but presently we have no Collateralized Mortgage Obligations (CMOs) in our portfolio. The large portion of these mortgage-backed securities have a variable rate coupon and all have scheduled principal payments. During periods of rising interest rates, payments from variable rate mortgage-backed securities may accelerate as prepayments of underlying mortgages occur as home-owners refinance to a fixed rate while during periods of declining interest rates, prepayments on high fixed rate mortgage-backed securities may accelerate as home-owners refinance to lower rate mortgages. These prepayments cause yields on mortgage- backed securities to fluctuate as larger payments of principal necessitate the acceleration of premium amortization or discount accretion. Due to the low dollar amount of mortgage-backed securities in relation to the total portfolio, we feel the interest rate risk and prepayment risks associated with mortgage-backed securities will not have a material impact on our financial condition. Loans The total investment in net loans was $90,167,678 at December 31, 2001, representing a $7,055,505 or 8.49% increase from the December 31, 2000, investment of $83,112,173. The primary reasons for the increase in the loan portfolio were due to the continued increases in real estate loans for the purpose of construction and land development and in real estate loans secured by nonfarmland, nonresidential properties, mainly commercial real estate lending. This increase in commercial lending is a direct result of our organization's decision to strengthen our lending operations by hiring experienced loan personnel, with a particular focus on commercial lending. The composition of our loan portfolio has changed per the following: - A $2,363,000 increase in real estate loans secured by construction and land development activities. - A $1,177,000 increase in real estate loans secured by 1 to 4 family residential properties. - A $2,417,000 increase in loans secured by nonfarmland, nonresidential properties due primarily to the new loans secured by commercial real estate. - A $952,000 increase in loans to commercial, industrial and state and political subdivision loans. - A $208,000 increase in consumer installment loans. Total new real estate mortgage lending increased $5,759,000 or 9.25% from December 31, 2000, compared to total new real estate mortgage loan lending for 1999 which increased $10,126,000 or 19.43% from December 31, 1999. This increase in the amount of real estate lending during the past two years reflects the closing of several commercial real estate loans and an increase in residential 1-4 family mortgage loans as highlighted above. Competitive loan mortgage rates of other institutions and mortgage companies in our market area have resulted in the refinancing and payoff of mortgage loans within our loan portfolio; however, we have been able to attract new mortgage customers through the competitive mortgage products we offer. -36- Loans (Continued) Overall, loan demand during the past year decreased over that of 2000 due to the onset of an economic recession and a falling interest rate environment which were encountered during the 2001 operating year. The effects of this decrease in interest rates, the onset of an economic recession, and the events of September 11, 2001, resulted in a decrease in commercial lending activity and increased aggressiveness of competing financial institutions, mortgage loan companies and financing companies to retain and attract new loan customers. Through the efforts of experienced commercial lending staff, our lending operation has been enhanced by commercial loan business in the Hagerstown market area. Our operation in the Hagerstown market area and through the Fort Loudon office in Franklin County, Pennsylvania and Hancock Community Bank in Washington County, Maryland greatly improves our ability to generate new loan relationships. During the past few years, we have seen a decline in our consumer loan generation. This decline is a direct result of increased competition for new and used car lending as well as all consumer loans. To encourage new loan demand, we anticipate offering additional loan promotions, reviewing loan terms for customer "friendliness" and developing a commercial lending strategy to stimulate lending throughout our market area. In addition, the continued operation of Hancock Community Bank is anticipated to result in an increase in lending in the Washington County, Maryland area as well as in northern Morgan County, West Virginia and southern Fulton County, Pennsylvania while the continued operation of the Fort Loudon Office is anticipated to stimulate lending in the Franklin County, Pennsylvania market. Non-performing/Impaired Assets Non-performing loans consist of non-accruing loans and loans 90 days or more past due. Non-accruing loans are comprised of loans that are no longer accruing interest income because of apparent financial difficulties of the borrower. Interest on non-accruing loans is recorded when received only after past due principal and interest are brought current. Other real estate owned includes assets acquired in settlement of mortgage loan indebtedness and loans identified as impaired loans. These assets are carried at the lower of cost or fair value. The other real estate balance as of December 31, 2001, was $103,568 compared to $168,653 as of December 31, 2000. The following actions during the past two years indicate we are actively pursuing the sale of all properties contained in Other Real Estate as shown by the following: - In February 2000, we sold a 1 to 4 family residential property in Hagerstown, Maryland. - In June 2000, we sold a 1 to 4 family residential property in Waynesboro, PA. - In February 2001, we sold a multi-family residential property in Chambersburg, PA. - In April 2001, we sold a 1 to 4 family residential building lot in Chambersburg, PA. Properties contained in Other Real Estate may be listed with a realty firm on a contractual basis. The realty firm is evaluated every six months on its effectiveness in marketing and selling these properties. Impaired loans consist of those loans which we have determined, based upon review of collateral values and ability to repay, may not be paid in full according to contractual terms and may require additional specific provisions to the allowance for loans losses. As of December 31, 2001, the dollar amount outstanding on impaired loans was $859,974; the underlying collateral values for these loans based upon contractual lending terms was approximately $934,967. The specific amount allocated for these loans in the allowance for loan losses was $120,000. -37- Allowance for Loan Losses The allowance is maintained at a level to absorb potential future loan losses contained in the loan portfolio and is formally reviewed by us on a quarterly basis. The allowance is increased by provisions charged to operating expense and reduced by net charge-offs. Our basis for the level of the allowance and the annual provisions is our evaluation of the loan portfolio, current and projected domestic economic conditions, the historical loan loss experience, present and prospective financial condition of the borrowers, the level of non-performing assets, and other relevant factors. While we use available information to make such evaluations, future adjustments of the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. The allowance for loan losses was increased to $882,330 from the prior year level of $811,124. The ratio of the allowance to net loans was 0.97% at December 31, 2001, and 0.97% at December 31, 2000. After U. S. Government Agency, specifically the Small Business Administration (SBA) and Farm Service Agency (FSA), guaranteed portions are subtracted from the net loan balance, the ratio of the allowance to unguaranteed loans increases to 1.03. We believe the current level of the allowance for loan losses of $882,330, is adequate to meet any potential loan losses; however, we have budgeted a monthly addition during 2002 of $10,000 in anticipation of potential commercial loan problems and general increases in the total loan portfolio. Liquidity and Rate Sensitivity Our optimal objective is to maintain adequate liquidity while minimizing interest rate risk. Adequate liquidity provides resources for credit needs of borrowers, for depositor withdrawals, and for funding corporate operations. Sources of liquidity are maturing/called investment securities; maturing overnight investments in federal funds sold; maturing investments in time deposits at other banks; readily accessible interest-bearing deposits at other banks; payments on loans, mortgage-backed securities and SBA Guaranteed Loan Pool Certificates; a growing core deposit base; and borrowings from the FHLB. In order to assure a constant and stable source of funds, we are a member of the Federal Home Loan Bank of Pittsburgh. This membership assures us the availability of both short term and long term fixed rate funds. As of December 31, 2001, we had borrowings of $5,403,458 from this institution and had readily available to us over $39,400,000 in additional borrowing capacity.As of December 31, 2000, we had borrowings of $6,176,901 from this institution and had readily available to us over $38,000,000 in additional borrowing capacity. -38- Liquidity and Rate Sensitivity (Continued) Borrowings from the FHLB as of December 31, 2001, were comprised of the following: - A $2,000,000 quarterly adjustable advance maturing on August 10, 2010, repricing on February 10, 2002. - A $2,250,000 fixed rate advance with a 3 month LIBOR strike rate of 8.00% repricing February 28, 2002, with a final maturity of August 30, 2010. - A $500,000 quarterly adjustable advance maturing on July 10, 2010, repricing on January 21, 2002. - A $500,000 quarterly adjustable advance with a 3 month LIBOR strike rate of 8.00% repricing on January 12, 2002, with a final maturity of July 12, 2010. - A $153,458 fixed rate advance maturing on July 17, 2017. Borrowings from the FHLB as of December 31, 2000, were comprised of the following: - A $2,000,000 quarterly adjustable advance maturing on August 10, 2010, repricing on February 10, 2001. - A $2,250,000 fixed rate advance with a 3 month LIBOR strike rate of 8.00% beginning August 28, 2001, with a final maturity of August 30, 2010. - A $500,000 quarterly adjustable advance maturing on July 10, 2010, repricing on January 21, 2001. - A $500,000 quarterly adjustable advance with a 3 month LIBOR strike rate of 8.00% beginning on July 12, 2001, with a final maturity of July 12, 2010. - A $768,000 advance on a line of credit which reprices on a daily basis. - A $158,901 fixed rate advance maturing on July 17, 2017. The objective of managing interest rate sensitivity is to maintain or increase net interest income by structuring interest-sensitive assets and liabilities in such a way that they can be repriced in response to changes in market interest rates. Based upon contractual maturities of securities and the capability of NOW, Money Market, and Savings accounts, we have maintained a negative rate sensitivity position, in that, rate sensitive liabilities exceed rate sensitive assets. Therefore, in a period of declining interest rates our net interest income is generally enhanced versus a period of rising interest rates where our net interest margin may be decreased. However, in a period of declining interest rates, more securities with call features will most likely be called and be reinvested into lower yielding investments resulting in the loss of higher interest earnings assets. Declining rate environments also result in the likelihood that residential home mortgage customers will refinance their existing mortgages to lower interest rates. This movement of securities and loans to lower interest rates during a declining rate environment has the effect of decreasing our net interest margin. Presently, interest rates are anticipated to possibly decrease further resulting in a decreasing cost of deposits while a portion of our adjustable rate loans and securities are repricing to lower interest rates. This decreasing interest rate environment and possibility of lower interest rates in the future have resulted in increased liquidity in investment debt securities as call features of U. S. Government Agencies and State and Municipal subdivisions in the U. S. are anticipated to be exercised by the issuer. The anticipated result of this current position will be a decrease in the yield on earning assets. We have also undertaken the position of decreasing the cost of our interest-bearing liabilities, specifically Time Certificates of Deposit. Following these actions, we expect our net interest spread and interest margin to decrease slightly during the next few months. We continually review interest rates on those deposits which can be changed immediately, specifically NOW accounts, Money Market Accounts, and Savings Accounts to determine if interest rate changes are necessary to maintain our net interest spread and net interest margin. -39- Liquidity and Rate Sensitivity (Continued Another impact on our net interest spread and interest margin has been the loan to deposit ratio which indicates how much of our deposits are invested in the loan portfolio. This ratio is a primary indicator of a Bank's liquidity position as the higher the ratio, the less liquid assets are available to fund deposit withdrawals. At the same time, this ratio also indicates to us how many deposits are offset by our highest yielding earning assets, loans; therefore, the higher the ratio, the more deposits are invested in loans and the less invested in lower yielding investment debt securities. The result of a higher loan to deposit ratio is usually a higher net interest spread and margin. We have targeted as our optimal loan to deposit ratio 75% to 90% with a target of 81.17% by December 31, 2002. The loan to deposit ratio at December 31, 2001, was 80.53%; at December 31, 2000, it was 80.20%; and at December 31, 1999, it was 76.65%. The slight increase of 0.33% from December 31, 2000, was a result of a loan increase of $7,055,505 or 8.49% while deposits increased $8,329,983 or 8.04%. The increase of 3.55% from December 31, 1999, occurred due to deposit increase during 2000 of $4,302,554 and loan growth of $6,975,093. The addition of an experienced commercial lender has generated commercial lending which has resulted in this increased loan to deposit ratio. To minimize the risk of our rate sensitivity position, we employ many different methods to diversify our risk both on the asset and the liability side of the Balance Sheet. The Bank offers both fixed rate and floating/adjustable rate loans to our customers. At December 31, 2001, the Bank's floating and adjustable rate loans totaled $49,389,000, or 54.05% of the total loan portfolio. At December 31, 2000, the Bank's floating and adjustable rate loans totaled $37,183,000, or 43.97% of the total loan portfolio. As of December 31, 1999 the Bank's floating and adjustable rate loans totaled $31,966,000, 40.86% of the total loan portfolio. This percentage increase of adjustable rates is due in large part to the addition of adjustable rate commercial loans to our loan portfolio. The bank's debt security investment portfolio as of December 31, 2001, was comprised of a book value of $1,483,000, or 7.36% of floating rate debt securities which reprice annually or more frequently. The bank's debt security investment portfolio as of December 31, 2000, was comprised of a book value of $1,852,000, or 6.63% of floating rate debt securities which reprice annually or more frequently while at December 31, 1999 the Bank's debt security investment portfolio was comprised of a book value of $2,341,556, or 7.55% of floating rate securities. Specific methods which we have employed to address the rate sensitive position are the offering of the following deposit products to encourage the movement of short term deposits to longer term deposits: special term certificates of deposit with competitive interest rates over one year in term and three year annual adjustable certificates of deposit. -40- Our interest rate sensitivity analysis as of December 31, 2001, based upon our historical prepayment mortgage-backed securities, contractual maturities, and the earliest possible repricing opportunity for loans and deposits is as follows: December 31, 2001 After 3 But After 1 Non- Within 3 Within 12 But Within After 5 Interest Months Months 5 Years Years Bearing Total Assets: Federal funds sold $ 6,000 $ 0 $ 0 $ 0 $ 0 $ 6,000 Investment securities (book value) 1,180 1,345 6,795 11,855 0 21,175 Interest-bearing balances due from banks 1,821 95 657 0 0 2,573 Loans 7,658 13,556 36,393 33,293 491 91,371 Unearned discount & allowance for loan losses (1) 0 0 0 ( 1,203) 0 ( 1,203) Noninterest-earning assets 0 0 0 0 12,024 12,024 Total assets $ 16,659 $ 14,996 $ 43,825 $ 43,945 $ 12,515 $ 131,940 Liabilities: NOW accounts and savings accounts $ 32,660 $ 0 $ 0 $ 0 $ 0 $ 32,660 Time Deposits 13,450 28,677 23,830 2 0 65,959 Noninterest-bearing deposits 0 0 0 0 13,344 13,344 Other borrowed money 0 0 0 5,403 0 5,403 Other noninterest- bearing sources to fund earning assets 0 0 0 0 1,407 1,407 Total liabilities $ 46,110 $ 28,677 $ 23,830 $ 5,405 $ 14,751 $ 118,773 Interest sensitivity gap ($ 29,451) ($ 13,681) $ 19,995 $ 38,540 Cumulative interest sensitivity gap ( 29,451) ( 43,132) ( 23,137) 15,403 Gap ratio ( 0.36) ( 0.52) 1.84 N/A Cumulative gap ratio ( 0.36) ( 0.42) ( 0.77) 1.15

(1) It has been arbitrarily assigned to the "after five years" category for purpose of analysis. We have risk management policies to monitor and limit exposure to market risk. By monitoring reports which assess our exposure to market risk, we strive to enhance our net interest margin and take advantage of opportunities available in interest rate movements. -41- The continual monitoring of liquidity and interest rate risk is a function of ALCO reporting. Upon review and analysis of these reports, we determine the appropriate methods we should utilize to reprice our products, both loans and deposits, and the types of securities we should purchase in order to achieve desired net interest margin and interest spreads. We continually strive to attract lower cost deposits, and we competitively price our time deposits and loan products in order to maintain favorable interest spreads while minimizing interest rate risk. The following table sets forth the projected maturities and average rate for all rate sensitive assets and liabilities. The following assumptions were used in the development of this table: - All fixed and variable rate loans were based on the original maturity of the note. - All fixed and variable rate U. S. Agency and Treasury securities and obligations of state and political subdivisions in the U.S. were based upon the contractual maturity date. - All fixed and variable rate Mortgage-backed securities and SBA GLPCs were based upon original maturity as the Bank has not experienced a significant prepayment of these securities. - We have experienced very little run-off in its history of operations and have experienced net gains in deposits. - We have large business and municipal deposits in non-interest bearing checking and savings and interest-bearing checking. These balances may fluctuate significantly. Therefore, a 50% maximum runoff of both non-interest-bearing checking and savings and interest- bearing checking was used as an assumption in this table. - One large municipal deposit account alternates between the two local community banks every two years. This deposit account, with an average balance in excess of $1,000,000, is anticipated to leave in 2002 and return in 2004. - Fixed and variable rate time deposits were based upon original contract maturity dates. -42- Rate Sensitive Assets (000 omitted) 2002 2003 2004 2005 2006 Thereafter Total Fair Value Federal funds sold $ 6,000 $ 0 $ 0 $ 0 $ 0 $ 0 $ 6,000 $ 6,000 Average interest rate 1.75% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Interest bearing deposits 1,922 460 83 0 108 0 2,573 2,589 Average interest rate 1.85% 5.74% 5.27% 0.00% 4.06% 0.00% 2.76% Fixed interest rate loans 2,568 2,418 4,175 2,635 2,102 31,084 44,982 46,010 Average interest rate 9.17% 9.77% 9.09% 9.32% 8.78% 8.00% 8.38% Variable interest rate loans 14,285 2,489 133 401 1,460 27,621 46,389 47,450 Average interest rate 7.01% 6.77% 8.53% 8.45% 7.36% 7.45% 7.29% Fixed interest rate U.S. Agency and Treasury 550 1,900 450 950 100 4,452 8,402 8,590 Average interest rate 5.23% 5.65% 5.43% 5.88% 6.25% 6.42% 6.05% Fixed interest rate mortgage- backed & SBA GLPC securities 0 12 0 62 15 336 425 428 Average interest rate 0.00% 9.49% 0.00% 5.84% 8.25% 6.35% 6.43% Variable interest rate mortgaged-backed & SBA GLPC securities 0 3 0 0 0 1,480 1,483 1,483 Average interest rate 0.00% 4.00% 0.00% 0.00% 0.00% 4.17% 4.17% Fixed interest rate obligations of state and political subdivisions in the U.S. 625 705 1,095 240 190 6,990 9,845 9,957 Average interest rate 5.26% 4.13% 5.76% 6.03% 6.55% 7.13% 6.61% Rate Sensitive Liabilities (000 omitted) Noninterest-bearing checking 3,336 834 834 834 834 0 6,672 6,672 Average interest rate 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Savings and interest-bearing checking 8,165 2,041 541 2,042 3,541 0 16,330 16,330 Average interest rate 1.68% 1.68% 1.68% 1.68% 1.68% 1.68% 1.68% Fixed interest rate time deposits 28,354 7,873 3,744 5,939 5,961 2 51,873 53,730 Average interest rate 4.90% 5.20% 5.50% 6.25% 4.65% 4.65% 5.11% Variable interest rate time deposits 3,247 2,218 8,310 0 0 0 13,775 14,269 Average interest rate 5.25% 5.02% 4.33% 0.00% 0.00% 0.00% 4.66% Fixed interest rate borrowing 0 0 0 0 0 153 153 156 Average interest rate 0.00% 0.00% 0.00% 0.00% 0.00% 6.64% 6.64% Variable interest rate borrowings 0 0 0 0 0 5,250 5,250 5,607 Average interest rate 0.00% 0.00% 0.00% 0.00% 0.00% 6.08% 6.08%

-43- Capital The primary method by which we increase total stockholders' equity is through the accumulation of earnings. We maintain ratios that are well above the minimum total capital levels required by federal regulatory authorities including the new risk-based capital guidelines. Regulatory authorities have established capital guidelines in the form of the "leverage ratio" and "risk-based capital ratios." Our leverage ratio, defined as total stockholders' equity less intangible assets to total assets, was 9.88% as of December 31, 2001, compared to 10.03% as of December 31, 2000, and 9.36% as of December 31, 1999. The risk-based ratios compare capital to risk-weighted assets and off-balance-sheet activity in order to make capital levels more sensitive to risk profiles of individual banks. A comparison of our capital ratios to regulatory minimums at December 31 is as follows: Regulatory Minimum 2001 2000 1999 Requirements Leverage ratio 9.88% 10.03% 9.36% 4.00% Risk-based capital ratio Tier I (core capital) 14.89% 16.09% 15.39% 4.00% Combined Tier I and Tier II (core capital plus allowance for loan losses 15.90% 17.15% 16.43% 8.00% We have traditionally been well-capitalized with ratios well above required levels and, we expect equity capital to continue to exceed regulatory guidelines and industry averages. Certain ratios are useful in measuring the ability of a company to generate capital internally. The following chart indicates the growth in equity capital for the past three years. 2001 2000 1999 Equity capital at December 31 before FAS 115 adjustments and reduced by intangible assets (000 omitted) $ 13,035 $ 12,521 $ 12,167 Equity capital as a percent of assets at December 31 10.08% 10.12% 10.23% Return on average assets 0.78% 0.78% 0.79% Return on average equity 7.74% 7.67% 7.53% Cash dividend payout ratio 50.14% 47.76% 44.28%

STOCK MARKET ANALYSIS AND DIVIDENDS Our common stock is traded inactively in the over-the-counter market. As of December 31, 2001, the approximate number of shareholders of record was 464. 2001 2000 Cash Cash Market Price Dividend Market Price Dividend All stock prices and dividends reflect the 2-for-1 stock split effective on September 1, 2000 HI LOW HI LOW First Quarter $ 24.75 - $ 24.75 $ 0.11 $ 27.50 - $ 24.63 $ 0.10 Second Quarter $ 25.00 - $ 24.50 $ 0.12 $ 27.50 - $ 25.00 $ 0.11 Third Quarter $ 25.00 - $ 23.00 $ 0.13 $ 27.50 - $ 24.50 $ 0.12 Fourth Quarter $ 25.00 - $ 23.00 $ 0.27 $ 25.00 - $ 25.00 $ 0.24

-44- EX-27 9 12-MOS DEC-31-2001 DEC-31-2001 5,401 2,573 6,000 0 19,554 1,115 1,088 91,050 882 132,161 111,962 0 1,407 5,403 0 0 252 13,136 132,161 7,141 1,263 364 8,768 4,343 4,677 4,091 144 18 3,425 1,261 1,261 0 0 1,005 1.26 1.26 3.45 492 273 860 0 811 109 36 882 882 0 49

FNB FINANCIAL CORP /PA/ 10-K/A