10-Q 1 june2002.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549-1004 QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended June 30, 2002 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 (I.R.S. Employer incorporation 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 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 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at June 30, 2002 (Common stock, $0.315 par value) 800,000 FNB FINANCIAL CORPORATION INDEX Page PART I - FINANCIAL INFORMATION Condensed consolidated balance sheets - June 30, 2002 and December 31, 2001 4 Condensed consolidated statements of income - Three months ended June 30, 2002 and 2001 5 Condensed consolidated statements of income - Six months ended June 30, 2002 and 2001 6 Condensed consolidated statements of comprehensive income - Six months ended June 30, 2002 and 2001 7 Condensed consolidated statements of cash flows - Six months ended June 30, 2002 and 2001 8 Notes to condensed consolidated financial statements 9-10 Management's discussion and analysis of financial condition and results of operations 11-12 PART II - OTHER INFORMATION 14 Signatures 15 Exhibits 16-18 PART I - FINANCIAL INFORMATION FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS June 30, December 31, 2002 2001* (Unaudited) (Audited*) ASSETS Cash and due from banks $ 5,072,675 $ 5,400,929 Interest-bearing deposits with banks 766,323 2,572,574 Investment securities Held-to-maturity (Market value - 2002 $ 1,032,962 and 2001 $ 1,088,459) 1,070,306 1,114,764 Available-for-sale 17,701,350 19,554,290 Federal Reserve, Atlantic Central Bankers Bank, Federal Home Loan Bank 511,800 833,700 Federal Funds Sold 4,646,000 6,000,000 Loans 97,709,045 91,050,008 Less: Allowance for loan losses ( 900,365) ( 882,330) Loans, net 96,808,680 90,167,678 Bank building, equipment, furniture & fixtures, net 2,821,202 2,914,416 Accrued interest receivable 653,962 619,464 Deferred income tax charges 151,430 160,529 Other real estate owned 30,457 103,568 Cash surrender value of life insurance 2,359,074 2,313,129 Other assets 364,633 405,475 Total assets $ 132,957,892 $ 132,160,516 LIABILITIES Deposits Demand deposits $ 13,601,320 $ 13,343,930 Savings deposits 32,555,939 32,659,787 Time certificates 66,000,964 65,647,473 Other time deposits 563,949 311,190 Total deposits 112,722,172 111,962,380 Accrued interest payable & other liabilities 831,404 1,190,681 Libility for other borrowed funds 5,400,123 5,403,458 Dividends payable 112,000 216,000 Total liabilities 119,065,699 118,772,519 STOCKHOLDERS' EQUITY Capital stock, common, par value - $ 0.315; 12,000,000 shares authorized, 800,000 outstanding 252,000 252,000 Additional paid-in capital 1,789,833 1,789,833 Retained earnings 11,559,609 11,124,857 Accumulated other comprehensive income 290,751 221,307 Total stockholders' equity 13,892,193 13,387,997 Total liabilities and stockholders' equity $ 132,957,892 $ 132,160,516

*Condensed from audited financial statements. The accompanying notes are an integral part of these condensed financial statements. FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF INCOME Three Months Ended June 30, 2002 and 2001 (UNAUDITED) 2002 2001 Interest & Dividend Income Interest & fees on loans $ 1,803,483 $ 1,793,235 Interest on investment securities: Obligations of other U.S. Government Agencies 129,396 220,843 Obligations of State & Political Subdivisions 102,123 105,770 Interest on deposits with banks 3,903 41,365 Dividends on Equity Securities 3,484 14,610 Interest on federal funds sold 30,599 45,982 Total Interest & Dividend Income 2,072,988 2,221,805 Interest Expense Interest on deposits 850,237 1,134,005 Interest on other borrowed money 80,857 83,147 Total Interest Expense 931,094 1,217,152 Net interest income 1,141,894 1,004,653 Provision for loan losses 36,000 36,000 Net interest income after Provision for loan losses 1,105,894 968,653 Other income Service charges on deposit accounts 74,443 54,302 Other service charges, collection & exchange charges, commissions and fees 81,001 70,260 Other income 8,151 46,864 Net gain/(loss) on disposal of other assets ( 1,636) ( 1,250) Net gain/(loss) on sale of other real estate 0 0 Net securities gains/(losses) 0 3,733 Total other income 161,959 173,909 Other expenses 832,091 862,707 Income before income taxes 435,762 279,855 Applicable income taxes 72,230 49,980 Net income $ 363,532 $ 229,875 Earnings per share of Common Stock: Net income per share $ 0.45 $ 0.29 Cash dividend declared per share $ 0.14 $ 0.12 Weighted average number of shares outstanding 800,000 800,000

The accompanying notes are an integral part of these condensed financial statements. FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF INCOME Six Months Ended June 30, 2002 and 2001 (UNAUDITED) 2002 2001 Interest & Dividend Income Interest & fees on loans $ 3,541,524 $ 3,574,322 Interest on investment securities: Obligations of other U.S. Government Agencies 270,046 510,498 Obligations of State & Political Subdivisions 209,412 205,936 Interest on deposits with banks 20,337 60,623 Dividends on Equity Securities 12,439 30,896 Interest on federal funds sold 54,889 84,422 Total Interest & Dividend Income 4,108,647 4,466,697 Interest Expense Interest on deposits 1,748,425 2,287,688 Interest on other borrowed money 165,051 164,928 Total Interest Expense 1,913,476 2,452,616 Net interest income 2,195,171 2,014,081 Provision for loan losses 66,000 72,000 Net interest income after provision for loan losses 2,129,171 1,942,081 Other income Service charges on deposit accounts 145,643 104,144 Other service charges, collection & exchange charges, commissions and fees 134,826 132,664 Other income 63,994 88,673 Net gain/(loss) on sale of other real estate 0 ( 10,887) Net gain/(loss) on disposal of other assets ( 1,636) ( 1,250) Net securities gains/(losses) 8,025 9,968 Total other income 350,852 323,312 Other expenses 1,685,225 1,707,180 Income before income taxes 794,798 558,213 Applicable income taxes 152,046 91,082 Net income $ 642,752 $ 467,131 Earnings per share of Common Stock: Net income per share $ 0.80 $ 0.58 Cash dividend declared per share $ 0.26 $ 0.23 Weighted average number of shares outstanding 800,000 800,000

The accompanying notes are an integral part of these condensed financial statements. FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Six Months Ended June 30, 2002 and 2001 (UNAUDITED) 2002 2001 Net Income $ 642,752 $ 467,131 Other Comprehensive: Gross unrealized holding gains (losses) 113,244 348,241 Reclassification adjustment for (gains) losses realized in net income ( 8,025) ( 9,968) Net unrealized holding gains (losses) before taxes 105,219 338,273 Tax effect ( 35,774) ( 115,013) Other comprehensive income (loss) 69,445 223,260 Comprehensive Income $ 712,197 $ 690,391

The accompanying notes are an integral part of these condensed financial statements. FNB FINANCIAL CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended June 30, 2002 and 2001 (UNAUDITED) 2002 2001 Cash flows from operating activities: Net income $ 642,752 $ 467,131 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation & amortization 126,069 145,597 Provision for loan losses 66,000 72,000 Increase in Cash Surrender value of Life Insurance ( 45,945) ( 52,034) Net (gain)/loss on sales of investments ( 8,025) ( 9,968) Deferred income taxes ( 26,675) ( 24,155) Net Loss on Disposal of other Real Estate 0 10,887 (Increase) decrease in accrued interest receivable ( 34,498) 142,651 Loss on Disposal of Other Assets 1,636 1,250 Increase (decrease) in accrued interest payable and other liabilities ( 359,278) 136,824 (Increase) decrease in other assets 47,206 ( 238,069) Net cash provided (used) by operating activities: 409,242 652,114 Cash flows from investing activities: Net (increase) decrease in interest- bearing deposits with banks 1,806,251 ( 4,225,318) Purchases of Available-for-sale securities ( 1,288,977) ( 1,225,000) Proceeds from maturities and calls of securities 3,251,469 7,132,510 Proceeds sale of available-for-sale securities 48,150 22,970 Net (increase) decrease in loans ( 6,707,002) ( 1,984,805) Proceeds from sale of other real estate owned 73,111 64,635 Purchases of bank premises & equipment (net) ( 32,855) ( 84,506) Purchases of investment in insurance company ( 8,000) ( 25,000) Sale of other bank stock 321,900 0 Net cash provided (used) by investing activities ( 2 ,535,953) ( 324,514) Cash flows from financing activities: Net increase (decrease) in deposits 759,792 7,320,119 Net increase (decrease) in other borrowings ( 3,335) ( 770,676) Cash dividends paid ( 312,000) ( 280,000) Net cash provided (used) by financing activities 444,457 6,269,443 Net increase (decrease) in cash & cash equivalents( 1,682,254) 6,597,043 Cash & cash equivalents, beginning balance 11,400,929 4,020,479 Cash & cash equivalents, ending balance $ 9,718,675 $10,617,522

The accompanying notes are an integral part of these condensed financial statements. FNB FINANCIAL CORPORATION JUNE 30, 2002 (UNAUDITED) REVIEW OF INTERIM FINANCIAL STATEMENTS The condensed consolidated financial statements as of and for the three and six month periods ended June 30, 2002 and 2001 have been reviewed by independent certified public accountants. Their report on their review is attached as Exhibit 99 to this 10-Q. NOTE 1 - BASIS OF PRESENTATION The financial information presented at and for the six months ended June 30, 2002 and June 30, 2001 is unaudited. Information presented at December 31, 2001, is condensed from audited year-end financial statements. However, this unaudited information reflects all adjustments, consisting solely of normal recurring adjustments, that are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim period. NOTE 2 - 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. NOTE 3 - 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 statement of cash flows. NOTE 4 - FEDERAL INCOME TAXES For financial reporting purposes the provision for loan losses charged to operating expense is based on management's judgment, whereas for federal income tax purposes, the amount allowable under present tax law is deducted. Additionally, certain expenses are charged to operating expense in the period the liability is incurred for financial reporting purposes, whereas for federal income tax purposes, these expenses are deducted when paid. As a result of these timing differences, deferred taxes were computed after reducing pre-tax accounting income for nontaxable municipal and loan income. NOTE 5 - OTHER COMMITMENTS In the normal course of business, the bank makes various commitments and incurs certain contingent liabilities which are not reflected in the accompanying financial statements. These commitments include various guarantees and commitments to extend credit. The bank does not anticipate any losses as a result of these transactions. FNB FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net income for the first six months of 2002 was $ 642,752 compared to $ 467,131 for the first six months of 2001. This represents an increase of $ 75,621 or 37.6% from 2001. Net income on an adjusted per share basis for the first six months of 2002 was $0.80 which is an increase of $ 0.22 from the $ 0.58 per share for the six months ended June 30, 2001. Total interest and dividend income for the first six months of 2002 was $ 4,108,647 compared to $4,466,697 for the first six months of 2001, an decrease of $ 358,050. This decrease was due primarily to the downward trend of effective yields on earning assets as rates continue to be well below yields realized in the first half of 2001. Although the loan portfolio has grown by $ 11,849,462 or 13.8% over totals at the end of the first half of 2001, the decreasing interest rate environment along with a shift of earning assets from investments to Federal funds has resulted in a 8.0% decrease in total interest income from first half of 2001. Due to the depressed interest rate environment, investment securities with call features have been exercised by the issuer resulting in excess funds being invested in lower yielding federal funds until such time as they can be invested in loans or other securities. This situation has improved during the second quarter of 2002 as loan demand increased and allowed the bank to place some excess funds into higher yielding loans. In order to sustain desired net interest margins, deposit rates were lowered to decrease our funding costs. Interest expense for the six months ended June 30, 2002, was $ 1,913,476, a decrease of $ 539,140 from the $ 2,452,616 for the same period in 2001. Total deposits increased $ 1,769,565 from totals at June 30, 2001. This increase was concentrated in savings deposit accounts. This coupled with the aforementioned general reduction in deposit rates decreased the cost of funds enough to more than compensate for the decrease in interest income and allowed us to produce a 9% increase in net interest income over first half of 2001. The tax-adjusted net interest margin has increased 11 basis points for the first six months of 2002 from that of the first six months of 2001. Management will continue to competitively price its loan and deposit products while maintaining desired net interest spreads. Total non-interest income for the first six months of 2002 increased $ 27,540 over totals for the first half of 2001 due to service charges on deposit accounts, trust referral income and net earnings from the Company's investment in CBIA, which is a joint venture with several other community banks to provide property and casualty insurance products. Operating expenses for the period ended June 30, 2002, were $ 1,685,225, a $ 21,955 decrease from the operating expenses incurred for the same period in 2001 of $ 1,707,180. This decrease was mainly the result of personnel changes that reduced wages and benefits. Our income tax provision for the first six months of 2002 was $ 152,046 as compared to $ 91,082 for the first six months of 2001. We continue to operate with a marginal tax rate of 34% during the first half of 2002. The effective income tax rate for the first six months of 2002 was 19.1%, a 2.8% increase compared to 16.3% for the first six months of 2001. Total assets as of June 30, 2002, were $ 132,957,892, an increase of $ 797,376 from the period ending December 31, 2001, representing an increase of 0.6%. This increase was primarily due to increases in loans. Loans as of June 30, 2002, were $ 97,709,045 compared to $ 91,050,008 as of December 31, 2001, an increase of $ 6,659,037 or 7.3%, a result of commercial loan settlements. The allowance for loan losses at the end of the six months was $ 900,365 compared to $ 882,330 at year end 2001. The provision for loan losses for the first six months of 2002 was $ 66,000 compared to $ 72,000 for the first six months of 2001. Total equity as of June 30, 2002, was $ 13,892,193, 10.45% of total assets, as compared to $ 13,387,997, 10.13% of total assets as of December 31, 2001. The Company's risk based capital ratios continue to exceed regulatory minimum requirements. PART II - OTHER INFORMATION PART II - OTHER INFORMATION Item 1 - Legal Proceedings None Item 2 - Changes in Securities None Item 3 - Defaults Upon Senior Securities Not Applicable Item 4 - Submission of Matters to a Vote of Security Holders None Item 5 - Other Information None Item 6 - Exhibits and Reports on Form 8-K a. Exhibits: Exhibit Number Referred to Description of Exhibit: Item 601 of Regulation S-K: Exhibit 99 Report of Independent Accountant's on Interim Financial Statements Exhibit 99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 Exhibit 99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 b. Reports on Form 8-K - None SIGNATURES Pursuant to the requirements 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. /s/John C. Duffey John C. Duffey, President and Director of the Company and President of the Bank (Duly Authorized Officer) Date August 12, 20021 /s/Dale M. Fleck Dale M. Fleck Controller of the Bank (Principal Financial & Accounting Officer) Exhibit 99 INDEPENDENT ACCOUNTANT'S REPORT Board of Directors FNB Financial Corporation McConnellsburg, Pennsylvania We have reviewed the accompanying consolidated balance sheet of FNB Financial Corporation and Subsidiary as of June 30, 2002 and the related consolidated statements of income for the three and six month periods ended June 30, 2002 and 2001 and consolidated statements of comprehensive income for the six months ended June 30, 2002 and 2001 and consolidated statements of cash flows for the six months ended June 30, 2002 and 2001. These financial statements are the responsibility of the corporation's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the consolidated financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements for them to be in conformity with generally accepted accounting principles. /s/ Smith Elliott Kearns & Company, LLC SMITH ELLIOTT KEARNS & COMPANY, LLC Chambersburg, Pennsylvania August 8, 2002 EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OR THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of FNB Financial Corporation (the "Company") on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John C. Duffey, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes- Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the final condition and results of operations of the Company. /s/ John C. Duffey Chief Executive Officer August 12, 2002 EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OR THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of FNB Financial Corporation (the "Company") on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Dale M. Fleck, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the final condition and results of operations of the Company. /s/Dale M. Fleck Chief Financial Officer August 12, 2002

FNB FINANCIAL CORP /PA/ 10-Q