10-K 1 fnbmcc10k.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549-1004 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2004. Commission file number 33-66014 -------- 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 15, 2005 ------------------------------ -------------------------------- Common Stock, $0.315 Par Value 800,000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ( 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X]. The aggregate market value of the voting stock held by non-affiliates of the registrants as of December 31, 2004: Common Stock, $0.315 Par Value - $ 20,800,000 Page 1 of 18 DOCUMENTS INCORPORATED BY REFERENCE Portions of the annual shareholders report for the year ended December 31, 2004, are incorporated by reference into Parts I, II and IV. Portions of the proxy statement for the annual shareholders meeting to be held April 26, 2005, are incorporated by reference into Part III of this Form 10-K. Page 2 of 18 FNB FINANCIAL CORPORATION FORM 10-K INDEX Page Part I Item 1. Business 2 - 12 Item 2. Properties 12 Item 3. Legal Proceedings 12 Item 4. Submission of Matters to a Vote of Security Holders 12 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 13 Item 6. Selected Financial Data 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 7a. Quantitative and Qualitative Disclosures about Market Risk 13 Item 8. Financial Statements and Supplementary Data 13 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 13 Item 9a. Controls and Procedures 14 Item 9b. Other Information 14 Part III Item 10. Directors and Executive Officers of the Registrant 15 Item 11. Executive Compensation 15 Item 12. Security Ownership of Certain Beneficial Owners and Management 15 Item 13. Certain Relationships and Related Transactions 15 Item 14. Principal Accountant Fees and Services 15 Part IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 16 - 17 Signatures 18 Page 3 of 18 PART I Item 1. Business Description of Business FNB Financial Corporation (the Company), a Pennsylvania business corporation, is a bank holding company registered with and supervised by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). The Company was incorporated on June 22, 1987, under the business corporation law of the Commonwealth of Pennsylvania for the purpose of becoming a bank holding company. Since commencing operations, the Company's business has consisted primarily of managing and supervising The First National Bank of McConnellsburg (the Bank) and its principal source of income has been dividends paid by the Bank. The Company has two wholly-owned subsidiaries, the Bank, and a Mortgage Brokerage Company. In the second quarter of 2003, FNB Financial Corporation formed a new company called FNB Mortgage Brokers, Inc. The company was organized as a "C" Corporation and is a wholly-owned subsidiary of the FNB Financial Corporation. The company's primary activity is to broker secondary mortgage loans in the Pennsylvania and Maryland markets. On August 29, 2003, FNB Mortgage Brokers, Inc. acquired substantially all the assets of MMI Mortgage Brokers, Inc. and entered into an executive employment agreement with the owner of MMI. The purchase price of the assets acquired by FNB was $ 25,000. The Bank was established in 1906 as a national banking association under the supervision of the Comptroller of the Currency (the Comptroller). The Bank is a member of the Federal Reserve System and customers' deposits held by the Bank are insured by the Federal Deposit Insurance Corporation to the maximum extent permitted by law. The Bank is engaged in a full service commercial and consumer banking business including the acceptance of time and demand deposits and the making of secured and unsecured loans. The Bank provides its services to individuals, corporations, partnerships, associations, municipalities, and other governmental bodies. As of December 31, 2004, the Bank had three (3) offices and (1) drive-up ATM located in Fulton County, one (1) branch office facility located in Fort Loudon, Franklin County Pennsylvania and one (1) branch office facility located in Hancock, Washington County, Maryland. During 1995 the Bank received regulatory approval from The Comptroller to purchase and assume the deposits, real estate, and building of the Fort Loudon Branch Office of Dauphin Deposit Bank located in Franklin County, Pennsylvania. Due to the location of this office, management and the Board felt the acquisition of this office was strategically important in order to officially expand the Bank's market area into the Franklin County, PA area and diversify its current primary market of Fulton County, PA. During 1996 the Bank received regulatory approval from the Comptroller to open its first interstate Branch office in Hancock, Maryland after management became aware of the closing of a branch office of First Federal Savings Bank of Western Maryland. This office is known as "Hancock Community Bank, A Division of The First National Bank of McConnellsburg". The location of this office is felt to be strategically important in order to expand the Bank's operations into Washington County, Maryland and northern Morgan County, West Virginia. This office is also the Bank's first supermarket branch office. In October 2000, the owner of the adjacent supermarket completed extensive renovations at which time the wall between the branch office and the supermarket was removed, allowing customers to enter the branch directly from the supermarket. The Bank received permission from the Comptroller to expand its main office facilities in downtown McConnellsburg to allow for larger customer service, loan department, and data processing areas. This expansion was completed on September 1,1996, at a cost of approximately $1,700,000. In February 1999, the Bank purchased an adjacent property to the main office facility at 115 Lincoln Way West in downtown McConnellsburg from the Fulton Overseas Veterans Association. This site is 54' by 218' and had situated on it a Page 4 of 18 three-story building comprised of 4,577 square feet on the first floor and a 28' by 60' finished basement. The second and third stories of the building were not usable. The Bank had no immediate plans for this facility but felt it was a wise decision to purchase it for strategic planning purposes. The Bank razed this building during 2004 to provide additional parking for the main office facility and to prepare the site for future expansion. During 2004 the Bank received regulatory approval from the Comptroller to purchase and assume the deposits of the Hancock Branch Office of Farmers & Merchants Bank & Trust located in Washington County, Maryland. The purchase was consummated on July 16, 2004. Management and the Board felt the acquisition of these deposits was strategically important in order to increase the Bank's penetration of the Washington County, Maryland and Morgan County, West Virginia markets. The Bank has one wholly-owned subsidiary, First Fulton County Community Development Corporation, which is a Community Development Corporation formed under 12USC24/2CFR24 whose primary regulator is the Office of the Comptroller of the Currency, The Comptroller. The First Fulton County Community Development Corporation was incorporated with the Commonwealth of Pennsylvania on May 30, 1995. The primary business of this community development corporation is to provide and promote community welfare through the establishment and offering of low interest rate loan programs to stimulate economic rehabilitation and development for the Borough of McConnellsburg and the entire community of Fulton County, PA. Competition Our primary market area includes all of Fulton County and portions of Huntingdon, Bedford, and Franklin Counties in Pennsylvania, portions of Washington County, Maryland, and portions of Morgan County, West Virginia. Our primary competitor is a one-bank holding company headquartered in McConnellsburg, Pennsylvania which has 7 branches located throughout Fulton, Franklin, and Huntingdon Counties in Pennsylvania. Also, in this market area we compete with regionally- based commercial banks (all of which have greater assets, capital and lending limits), savings banks, savings and loan associations, money market funds, insurance companies, stock brokerage firms, regulated small loan companies, credit unions and with issuers of commercial paper and other securities. Although deregulation has allowed us to become more competitive in the market place in regard to pricing of loan and deposit rates, there are disparities in taxing law which give some of our nonbank competitors advantages which commercial banks do not enjoy and many burdensome and costly regulations with which we must comply. We meet these challenges by developing and promoting our locally-owned community bank image, by offering friendly and professional customer service, and by striving to maintain competitive interest rates for both loans and deposits. Regulation and Supervision FNB Financial Corporation is a financial holding company, and is registered as such with the Board of Governors of the Federal Reserve System (the Federal Reserve Board). As a financial holding company, the Company may engage in, and acquire companies engaged in, activities that are considered "financial in nature", as defined by the Gramm- Leach-Bliley Act and Federal Reserve Board interpretations. These activities include, among other things, securities underwriting, dealing and market-making, sponsoring mutual funds and investment companies, insurance underwriting and agency activities, and merchant banking. If any banking subsidiary of the Company ceases to be "well- capitalized" or "well-managed" under applicable regulatory standards, the Federal Reserve Board may, among other things, place limitations on the Company's ability to conduct the broader financial activities permissible for financial holding companies or, if the deficiencies persist, require the Company to divest the non-banking investments or subsidiaries. In addition, if any banking subsidiary of the Company receives a Community Reinvestment Act rating of less-than-satisfactory, the Company would be prohibited from engaging in any additional activities other than those permissible for bank holding Page 5 of 18 companies that are not financial holding companies. The Company may engage directly or indirectly in activities considered financial in nature, either de novo or by acquisition, as long as it gives the Federal Reserve board after-the-fact notice of the new activities. The Gramm-Leach-Bliley Act also permits national banks, such as The First National Bank of McConnellsburg, to engage in activities considered financial in nature through a financial subsidiary, subject to certain conditions and limitations, and with the approval of the OCC. Interstate Banking and Branching. As the bank holding company, the Company is required to obtain prior Federal Reserve Board approval before acquiring more than 5% of the voting shares, or substantially all of the assets, of a bank holding company, bank, or savings association. Under the Riegle-Neal Interstate Banking and Branching Efficiency Act (Riegle-Neal), subject to certain concentration limits and other requirements, bank holding companies such as the Company may acquire banks and bank holding companies located in any state. Riegle-Neal also permits banks to acquire branch offices outside their home states by merging with out-of-state banks, purchasing branches in other states, and establishing de novo branch offices in other states. The ability of banks to acquire branch offices is contingent, however, on the host state having adopted legislation "opting in" to those provisions of Riegle-Neal. In addition, the ability of a bank to merge with a bank located in another state is contingent on the host state not having adopted legislation "opting out" of that provision of Riegle- Neal. Control Acquisitions. The Change in Bank Control Act prohibits a person or group of persons from acquiring "control" of a bank holding company, unless the Federal Reserve Board has been notified and has not objected to the transaction. Under a rebuttable presumption established by the Federal Reserve Board, the acquisition of 10% or more of a class of voting stock of a bank holding company with a class of securities registered under Section 12 of the Exchange Act, such as the Corporation, would, under the circumstances set forth in the presumption, constitute acquisition of control of the bank holding company. In addition, a company is required to obtain the approval of the Federal Reserve Board under the Bank Holding Company Act before acquiring 25% (5% in the case of an acquirer that is a bank holding company) or more of any class of outstanding voting stock of a bank holding company, or otherwise obtaining control or a "controlling influence" over that bank holding company. Operations of the First National Bank of McConnellsburg are subject to federal and state statutes applicable to banks chartered under the banking laws of the United States, to members of the Federal Reserve System and to banks whose deposits are insured by the FDIC. Our operations are also subject to regulations of the Comptroller, the Federal Reserve Board, and the FDIC. Our primary supervisory authority is the Comptroller, which regulates and examines us. The Comptroller has authority to prevent national banks from engaging in unsafe or unsound practices in conducting their businesses. Legislation and Regulatory Changes From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial institutions. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial institutions are frequently made in Congress, and before various bank regulatory agencies. No prediction can be made as to the likelihood of any major changes or the impact such changes might have on the Company and its subsidiaries. Certain changes of potential significance to the Company which have been enacted recently are discussed below. Page 6 of 18 The Federal Reserve Board, the FDIC, and the Comptroller have issued risk-based capital guidelines, which supplement existing capital requirements. The guidelines require all United States banks and bank holding companies to maintain a minimum risk-based capital ratio of 8.0% (of which at least 3.0% must be in the form of common stockholders' equity). Assets are assigned to five risk categories, with higher levels of capital being required for the categories perceived as representing greater risk. The required capital will represent equity and (to the extent permitted) nonequity capital as a percentage of total risk-weighted assets. On the basis of an analysis of the rules and the projected composition of the Company's consolidated assets, it is not expected these rules will have a material effect on the Company's business and capital plans. The Company presently has capital ratios exceeding all regulatory requirements. The Financial Institution Reform, Recovery and Enforcement Act of 1989 ("FIRREA") was enacted in August 1989. This law was enacted primarily to improve the supervision of savings associations by strengthening capital, accounting, and other supervisory standards. In addition, FIRREA reorganized the FDIC by creating two deposit insurance funds to be administered by the FDIC: the Savings Association Insurance Fund and the Bank Insurance Fund. Customers' deposits held by the Bank are insured under the Bank Insurance Fund. FIRREA also regulated real estate appraisal standards and the supervisory/enforcement powers and penalty provisions in connection with the regulation of the Bank. In December 1991 the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") became law. Under FDICIA, institutions must be classified, based on their risk-based capital ratios into one of five defined categories (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) as outlined below: Total Tier 1 Under a Risk- Risk- Tier 1 Capital Based Based Leverage Order or Ratio Ratio Ratio Directive CAPITAL CATEGORY Well capitalized >10.0% >6.0% >5.0% No Adequately capitalized > 8.0% >4.0% >4.0%* Undercapitalized < 8.0% <4.0% <4.0%* Significantly Undercapitalized < 6.0% <3.0% <3.0% Critically <2.0% undercapitalized

*3.0% for those banks having the highest available regulatory rating. Under FDICIA financial institutions are subject to increased regulatory scrutiny and must comply with certain operational, managerial and compensation standards to be developed by Federal Reserve Board Regulations. FDICIA also required the regulators to issue new rules establishing certain minimum standards to which an institution must adhere including standards requiring a minimum ratio of classified assets to capital, minimum earnings necessary to absorb losses and minimum ratio of market value to book value for publicly held institutions Annual full-scope, on-site examinations are required for all FDIC- insured institutions except institutions with assets under $100 million which are well capitalized, well managed and not subject to a recent change in control, in which case, the examination period is every eighteen (18) months. FDICIA also required banking agencies to reintroduce loan-to-value ("LTV") ratio regulations which were previously repealed by the 1982 Act. LTV's will limit the amount of money a financial institution may lend to a borrower, when the loan is secured by real estate, to no more than a percentage to be set by regulation of the value of the real estate. Page 7 of 18 A separate subtitle within FDICIA, called the "Bank Enterprise Act of 1991", requires "truth-in-savings" on consumer deposit accounts so that consumers can make meaningful comparisons between the competing claims of banks with regard to deposit accounts and products. Under this provision which became effective on June 21, 1993, the Bank is required to provide information to depositors concerning the terms and fees of their deposit accounts and to disclose the annual percentage yield on interest-bearing deposit accounts. Federal regulators issued regulations to implement the privacy provisions of the Gramm-Leach-Bliley Act (Financial Services Modernization Act). This law requires banks to notify consumers about their privacy policies and to give them an opportunity to "opt-out" or prevent the bank from sharing "nonpublic personal information" about them with nonaffiliated third parties. Regulations became effective during 2001. We have developed privacy policies and procedures to provide timely disclosure of such policies and a convenient means for consumers to opt out of the sharing of their information with unaffiliated third parties. On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act represents a comprehensive revision of laws affecting corporate governance, accounting obligations and corporate reporting. The Sarbanes-Oxley Act is applicable to all companies with equity securities registered or that file reports under the Securities Exchange Act of 1934. In particular, the Sarbanes-Oxley Act establishes: (i) new requirements for audit committees, including independence, expertise, and responsibilities; (ii) additional responsibilities regarding financial statements for the Chief Executive Officer and Chief Financial Officer of the reporting company; (iii) new standards for auditors and regulation of audits; (iv) increased disclosure and reporting obligations for the reporting company and its directors and executive officers; and (v) new and increased civil and criminal penalties for violations of the securities laws. Many of the provisions were effective immediately while other provisions become effective over a period of time and are subject to rulemaking by the SEC. Because the Corporation's common stock is registered with the SEC, it is currently subject to this Act. The Corporation is not considered an accelerated filer as defined in Rule 12b-2 of the Securities Exchange Act of 1934. Thus, the Corporation expects to be subject to section 404 of the Sarbanes-Oxley Act for the year ending December 31, 2006. We do not anticipate compliance with environmental laws and regulations to have any material effect on the Company's respective capital, expenditures, earnings, or competitive position. Employees As of December 31, 2004, we employed 54 persons on a full-time equivalent basis. Statistical Data Computation of our regulatory capital requirements for the periods December 31, 2004 and December 31, 2003, on page 23 of the annual shareholders report for the year ended December 31, 2004, is incorporated herein by reference. Loan Portfolio We make loans to both individual consumers and commercial entities. The types offered include auto, personal, mortgage, home equity, school, home repair, small business, commercial, and home construction loans. Within these loans types, we make installment loans, which have set payments allowing the loan to be amortized over a fixed number of payments; demand loans, which have no fixed payment and which are payable in full on demand and are normally issued for a term of less than one year; and mortgage loans, which are secured with marketable real estate and have fixed payment amounts for a pre-established payment period. We do not assume undue risk on any loan within the loan portfolio, and take appropriate steps to secure all loans as necessary. Page 8 of 18 We have adopted the following loan-to-value ratios, in accordance with standards adopted by our bank supervisory agencies: Loan Category Loan-to-Value Limit Raw Land 65% Land Development 75% Construction: 80% Commercial, Multifamily, and other Nonresidential 1 to 4 Family Residential Improved Property 85% Ow Owner-occupied 1 to 4 Family and 90% Home Equity

We are neither dependent upon nor exposed to loan concentrations to a single customer or to a single industry, the loss of any one or more of which would have a material adverse effect on the financial condition of the Bank; however, a portion of the Bank's customers' ability to honor their contracts is dependent upon the construction and land development and agribusiness economic sector. As a majority of our loan portfolio is comprised of loans to individuals and businesses in Fulton County, Pennsylvania, a significant portion of our customers' abilities to honor their contracts is dependent upon the general economic conditions in South Central Pennsylvania. Loan Portfolio composition as of December 31, 2004 and December 31, 2003, on page 14 of the annual shareholders report for the year ended December 31, 2004, is incorporated herein by reference. Maturities of loans as of December 31, 2004, on page 14 of the annual shareholders report for the year ended December 31, 2004, is incorporated herein by reference. Nonperforming loans consist of nonaccruing loans and loans 90 days or more past due. Nonaccruing loans are comprised of loans that are no longer accruing interest income because of apparent financial difficulties of the borrower. Interest on nonaccruing loans is recorded when received only after past due principal and interest are brought current. Our general policy is to classify loans as nonaccrual when they become past due in principal and interest for over 90 days and collateral is insufficient to allow continuation of interest accrual. At that time, the accrued interest on the nonaccrual loan is reversed from the current year earnings and interest is not accrued until the loan has been brought current in accordance with contractual terms. Nonaccrual, Past Due and Restructured Loans as of December 31, 2004, December 31, 2003, and December 31, 2002, on page 16 of the annual shareholders report for the year ended December 31, 2004, are incorporated herein by reference. Allowance for Loan Loss Analysis The allowance for loan losses is maintained at a level to absorb potential future loan losses contained in the loan portfolio and is formally reviewed by us on a quarterly basis. Management utilizes a comprehensive systematic review of our loan portfolio on a quarterly basis in order to determine the adequacy of the Allowance for Loan Losses. Each quarter the loan portfolio is categorized into various Pools as follows: POOL #1 Specific allowances for any individually identified trouble loans POOL #2 Commercial and Industrial POOL #3 Commercial and Industrial - Real Estate Secured POOL #4 Consumer Demand and Installment POOL #5 Consumer Mortgage and Home Equity Page 9 of 18 Lines of credit and non-secured commercial loans with balances of $ 100,000 and over are individually reviewed. Also, loans that are 90 days or more past due or have been previously classified as substandard are individually reviewed. Allocations to the Allowance for Loan Losses are based upon classifications assigned to those loans. Loan classifications utilized are consistent with OCC regulatory guidelines and are as follows: Allowance Factors Loss Charge-off Doubtful 20% - 50% Substandard 10% - 20% Special Mention 5% - 10% Watch 1% - 5%

The remaining portion of the Pools are evaluated as groups with allocations made to the allowance based on historical loss experience, current and anticipated trends in delinquencies, and general economic conditions within the bank's trading area. In addition to the aforementioned internal loan review, the Bank engages an outside firm to annually conduct an independent loan review in order to validate the methodologies used internally and to independently test the adequacy of the Allowance for Loan Losses. The allowance is increased by provisions charged to operating expense and is reduced by net charge-offs. Our basis for the level of the allowance and the annual provisions is our evaluation of the loan portfolio, current and projected domestic economic conditions, the historical loan loss experience, present and prospective financial condition of the borrowers, the level of nonperforming assets, best and worst case scenarios of possible loan losses and other relevant factors. While we use available information to make such evaluations, future adjustments of the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. Loans are charged against the allowance for loan losses when we believe that the collectibility of the principal is unlikely. Activity in the allowance for loan losses and a breakdown of the allowance for loan losses as of December 31, 2004 and December 31, 2003, on page 15 and 16 of the annual shareholders report for the year ended December 31, 2004, are incorporated herein by reference. Although loans secured by residential and non-residential mortgages comprise approximately 83% of the entire loan portfolio, until recently these mortgages have historically resulted in little or no loss. The allocation of the Allowance for Loan Losses for these mortgages is based upon this historical fact. Due to a more critical evaluation of our commercial, industrial, and agricultural loan portfolio, the allocation of the Allowance for Loan Losses for commercial, industrial, and agriculture loans has been set accordingly. Deposits Time Certificates of Deposit of $ 100,000 and over as of December 31, 2004 and December 31, 2003, totaled $ 14,922,000 and $ 15,754,000, respectively. Maturities and rate sensitivity of total interest bearing liabilities as of December 31, 2004, on page 36 of the annual shareholders report for the year ended December 31, 2004, is incorporated herein by reference. Returns on Equity and Assets Returns on equity and assets and other statistical data for 2004, 2003, and 2002 on page 26 of the annual shareholders report for the year ended December 31, 2004, is incorporated herein by reference. Page 10 of 18 Important Factors Relating to Forward Looking Statements This Report contains statements (including, without limitation, statements in "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in this Report under Item 7), that are considered "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. In addition, the Company may make other written and oral communications from time to time that contain such statements. Forward-looking statements, including statements as to industry trends, future expectations and other matters that do not relate strictly to historical facts, are based on certain assumptions by management, and are often identified by words or phrases such as "anticipated", "believe", "expect", "intend", "seek", "plan", "objective", "trend", and "goal". Forward-looking statements are subject to various assumptions, risks, and uncertainties, which change over time, and speak only as of the date they are made. The Company undertakes no obligation to update any forward-looking statements. Actual results could differ materially from those anticipated in forward-looking statements and future results could differ materially from historical performance. In addition to factors mentioned elsewhere in this Report or previously disclosed in our SEC reports (accessible on the SEC's website at www.sec.gov), the following factors, among others, could cause actual results to differ materially from forward-looking statements and future results could differ materially from historical performance: * general political and economic conditions may be less favorable than expected; * developments concerning credit quality in various corporate lending industry sectors as well as consumer and other types of credit, may result in an increase in the level of our provision for credit losses, nonperforming assets, net charge-offs and reserve for credit losses; * customer borrowing, repayment, investment, and deposit practices generally may be less favorable than anticipated; and interest rate and currency fluctuations, equity and bond market fluctuations, and inflation may be grater than expected; * the mix of interest rates and maturities of our interest earning assets and interest bearing liabilities (primarily loans and deposits) may be less favorable than expected; * competitive product and pricing pressures among financial institutions within our markets may increase; * legislative or regulatory developments, including changes in laws or regulations concerning taxes, banking, securities, capital requirements and risk-based capital guidelines, reserve methodologies, deposit insurance and other aspects of the financial services industry, may adversely affect the businesses in which we are engaged or our financial results; * legal and regulatory proceedings and related matters with respect to the financial services industry, including those directly involving the Company and its subsidiaries, could adversely affect the Company or the financial services industry generally; * pending and proposed changes in accounting rules, policies, practices, and procedures could adversely affect our financial results; * instruments and strategies used to manage exposure to various types of market and credit risk could be less effective than anticipated, and we may not be able to effectively mitigate our risk exposures in particular market environments or against particular types of risk; * terrorist activities or other hostilities, including the situation surrounding Iraq, may adversely affect the general economy, financial and capital markets, specific industries, and the Company; and Page 11 of 18 * technological changes, including the impact of the Internet on our businesses, may be more difficult or expensive than anticipated. Availability of Company Filings The Company files periodic reports with the Securities and Exchange Commission (SEC) in the form of 10-Q's - quarterly reports; 10-K - annual report; annual proxy statements and Form 8-K for any significant events that may arise during the year. Copies of the Company's filings may be obtained free of charge through the SEC's internet site at www.sec.gov or by written request to Brian F. McNamara, Chief Financial Officer at 101 Lincoln Way West, McConnellsburg, Pennsylvania 17233. Item 2. Properties The physical properties where we conduct our business in the Commonwealth of Pennsylvania are all owned by us while the property where we conduct business in the State of Maryland is leased. The properties owned by us are as follows: the main office located at 101 Lincoln Way West, McConnellsburg, Pennsylvania, has been attached by a two story brick and frame addition, to a building located at 111 South Second Street, McConnellsburg, Pennsylvania, which houses the Bank's consumer loan department on the first floor and commercial loan department and future expansion space on the second floor; a property adjacent to the main office facility at 115 Lincoln Way West in downtown McConnellsburg comprised of a 54' by 218' vacant city lot; a branch office located on Route 522 South, Needmore, Pennsylvania; a property located at Routes 16 and 30 East, McConnellsburg, Pennsylvania, which contains a drive-up automatic teller machine and a five (5) lane drive- up branch accessible from both Route 30 and Route 16; and a branch office located at 30 Mullen Street, Fort Loudon, Pennsylvania, for which we received regulatory approval from the Office of the Comptroller of the Currency to purchase effective November 13, 1995. The branch office leased by us in the state of Maryland is located in the Hancock Shopping Center at 343 North Pennsylvania Avenue in Hancock, Maryland next to a supermarket. Item 3. Legal Proceedings In our opinion, there are no proceedings pending to which we are a party or to which our property is subject, which, if determined adversely to us would be material in relation to our retained earnings or financial condition. There are no proceedings pending other than ordinary routine litigation incident to our business. In addition, no material proceedings are known to be threatened or contemplated against us by government authorities. Item 4. Submission of Matters to a Vote of Security Holders None. Page 12 of 18 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters Our common stock is not traded on a national securities exchange but is traded inactively in the over-the-counter market under the symbol FNBBD and is only occasionally and sporadically traded through local and regional brokerage houses. The Stock Market Analysis and Dividends for 2004 and 2003 on page 40 of the annual shareholders report for the year ended December 31, 2004, is incorporated herein by reference. Item 6. Selected Financial Data The Selected Five-Year Financial Data on page 26 of the annual shareholders report for the year ended December 31, 2004, is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Contractual obligations of the Corporation as of December 31, 2004 are as follows: Payments due by period - - - - - - - - - - - - - - - - - - - - (In thousands) Total Less 1 - 3 3 - 5 More Contractual obligations than 1 years years than 5 year years - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Long-term debt obligations $ 24,435 $ 19,056 $ 16 $ 18 $ 5,345 Operating lease obligations 38 22 16 0 0 -------- -------- ------ ------ ------- Total $ 24,473 $ 19,078 $ 32 $ 18 $ 5,345 ======== ======== ====== ====== =======

All other information required by Item 7 is included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 31 through 40 of the annual shareholders report for the year ended December 31, 2004, which is incorporated herein by reference. Item 7a. Quantitative and Qualitative Disclosures about Market Risk Information required under this item is incorporated by reference to pages 37 through 39 of the annual shareholders' report for the year ended December 31, 2004. Item 8. Financial Statements and Supplementary Data The financial statements and supplementary data, some of which is required under Guide 3 (Statistical Disclosures by Bank Holding Companies) are shown on pages 2 through 30 of the annual shareholders report for the year ended December 31, 2004, are incorporated herein by reference. The Summary of Quarterly Financial Data on page 27 of the annual shareholders report for the year ended December 31, 2004, is incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Page13 of 18 Item 9a. Controls and Procedures The Company's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-14(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of December 31, 2004. Based on such evaluation, such officers have concluded that, as of December 31, 2004, the Company's disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic filings under the Exchange Act. Changes in Internal Controls There have not been any significant changes in the Company's internal control over financial reporting or in other factors that could significantly affect such control during the fourth quarter of 2004. Item 9b - Other Information The Company had no other events that should have been disclosed on Form 8K that were not already disclosed on such form. Page 14 of 18 PART III Item 10. Directors and Executive Officers of the Registrant The Company has adopted a code of ethics that applies to all senior financial officers (including its chief executive officer, chief financial officer, chief accounting officer, controller, and any person performing similar functions). The Corporation's Code of Ethics is available on First National Bank of McConnellsburg's website at http://www.fnbmcconnells.com. All other information required by Item 10 is incorporated by reference from FNB Financial Corporation's definitive proxy statement for the 2005 Annual Meeting of Shareholders filed pursuant to Regulation 14A. Item 11. Executive Compensation The information required by Item 11 is incorporated by reference from FNB Financial Corporation's definitive proxy statement for the 2005 Annual Meeting of Shareholders filed pursuant to Regulation 14A. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by Item 12 is incorporated by reference from FNB Financial Corporation's definitive proxy statement for the 2005 Annual Meeting of Shareholders filed pursuant to Regulation 14A. Item 13. Certain Relationships and Related Transactions The information required by Item 13 is incorporated by reference from FNB Financial Corporation's definitive proxy statement for the 2005 Annual Meeting of Shareholders filed pursuant to Regulation 14A. Item 14. Principal Accountant Fees and Services The information required by Item 14 is incorporated by reference from FNB Financial Corporation's definitive proxy statement for the 2005 Annual Meeting of Shareholders filed pursuant to Regulation 14A. Page 15 of 18 PART IV Item 15. Exhibits, Financial Statement Schedules, and Reports of Form 8- K. (a) (1) - List of Financial Statements The following consolidated financial statements of FNB Financial Corporation and its subsidiaries, included in the annual report of the registrant to its shareholders for the year ended December 31, 2004, are incorporated by reference in Item 8: Consolidated balance sheets - December 31, 2004, and 2003 Consolidated statements of income - Years ended December 31, 2004, 2003,and 2002 Consolidated statements of stockholders' equity - Years ended December 31, 2004, 2003,and 2002 Consolidated statements of cash flows - Years ended December 31, 2004, 2003, and 2002 Notes to consolidated financial statements - December 31, 2004 (2) - List of Financial Statement Schedules All financial statement schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. (3) - Listing of Exhibits Exhibit (3)(i) Articles of incorporation Exhibit (3)(ii) Bylaws Exhibit (4) Instruments defining the rights of security holders including indentures Exhibit (10) Material Contracts Exhibit (13) Annual Report to Security holders Exhibit (21) Subsidiaries of the registrant Exhibit (31) Rule 13a-14(a)/15d-14(a) Certifications Exhibit (32) Section 1350 Certifications All other exhibits for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. (b) Reports on Form 8-K filed * Report filed January 11, 2005 for news release announcing resignation of Vice President and Controller. (c) Exhibits Exhibit (3)(i) Articles of incorporation - Exhibit 3A of Form SB-2 Registration Statement No. 33-66014 are incorporated herein by reference. Exhibit (3)(ii) Bylaws - Exhibit 3B of Form SB-2 Registration Statement No. 33-66014 are incorporated herein by reference. Exhibit (4) Instruments defining the rights of security holders including debentures - Document #1 of Form 10-K for FNB Financial Corporation for fiscal year ended December 31, 1995 is incorporated herein by reference. Page 16 of 18 Exhibit (10.1) Executive Supplemental Retirement Plan for Select Officers - incorporated by reference to the Company's Form 10-K for the year ended December 31, 1999. Exhibit (10.2) Director Fee Continuation Agreement for Select Directors - incorporated by reference to the Company's Form 10-K for the year ended December 31, 1999. Exhibit (10.3) Executive Employment Contract for the President and CEO of the Bank dated October 2000 is incorporated by reference to the Company's Form 10-K for the year ended December 31, 2000. Exhibit (10.4) Executive employment agreement for Vice President of FNB Mortgage Brokers, Inc. - incorporated by reference to the Company's Form 10-Q for the quarter ended September 30, 2003. Exhibit (13) Annual report to security holders - filed herewith. Exhibit (21) Subsidiaries of the registrant - filed herewith. Exhibit (31.1) Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - filed herewith. Exhibit (31.2) Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - filed herewith. Exhibit (32.1) Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - filed herewith. Exhibit (32.2) Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - filed herewith. (d) Financial Statement Schedules None Page 17 of 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FNB FINANCIAL CORPORATION ---------------------------------- (Registrant) /s/John C. Duffey 3/23/2005 ---------------------------------- John C. Duffey Date President and Chief Executive Officer (Principal Executive Officer) /s/Brian F. McNamara 3/23/2005 ---------------------------------- Brian F. McNamara Date Senior Vice President and Chief Financial Officer (Principal Financial & Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/John C. Duffey 3/23/2005 /s/Harry D. Johnston 3/23/2005 --------------------------------- ---------------------------------- John C. Duffey Date Harry D. Johnston, D. O. Date Director, President & CEO Director, Vice President /s/Patricia A. Carbaugh 3/23/2005 /s/Lonnie W. Palmer 3/23/2005 --------------------------------- ----------------------------------- Patricia A. Carbaugh Date Lonnie W. Palmer Date Director Director /s/Harvey J. Culler 3/23/2005 /s/D.A. Washabaugh, III 3/23/2005 --------------------------------- ----------------------------------- Harvey J. Culler Date D. A. Washabaugh, III Date Director Director /s/Craig E. Paylor 3/23/2005 /s/Terry L. Randall 3/23/2005 --------------------------------- ----------------------------------- Craig E. Paylor Date Terry L. Randall Date Director, Chairman Director Page 18 of 18 Exhibit 21 SUBSIDIARIES OF THE REGISTRANT 1. The First National Bank of McConnellsburg; a nationally chartered bank established in 1906. 2. FNB Mortgage Brokers, Inc. - a Pennsylvania "C" Corporation licensed in Pennsylvania and Maryland to broker mortgage loans in the secondary market. Exhibit 31.1 CERTIFICATION I, John C. Duffey, President and CEO, certify, that: 1. I have reviewed this annual report on Form 10-K of FNB Financial Corporation. 2. Based on my knowledge, the annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report. 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and (c) disclosed in this annual report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies and material weaknesses in the design or operation of the internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. By: /s/ John C. Duffey --------------------------- John C. Duffey President and CEO (Principal Executive Officer) March 23, 2005 Exhibit 31.2 CERTIFICATION I, Brian F. McNamara, Senior Vice President and CFO, certify, that: 1. I have reviewed this annual report on Form 10-K of FNB Financial Corporation. 2. Based on my knowledge, the annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report. 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and (c) disclosed in this annual report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies and material weaknesses in the design or operation of the internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. By: /s/ Brian F. McNamara --------------------------- Brian F. McNamara Senior Vice President and Chief Financial Officer (Principal Financial Officer) March 23, 2005 Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OR THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of FNB Financial Corporation (the "Company") on Form 10-K for the period ending December 31, 2004 as filed with the Securities and Exchange Commission on the date therein specified (the "Report"), I, John C. Duffey, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report. By: /s/John C Duffey ------------------------ John C. Duffey President and Chief Executive Officer, Director Dated: March 23, 2005 --------------- Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OR THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of FNB Financial Corporation(the "Company") on Form 10-K for the period ending December 31, 2004 as filed with the Securities and Exchange Commission on the date therein specified (the "Report"), I, Brian F. McNamara, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes- Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report. By: /s/Brian F. McNamara ------------------------ Brian F. McNamara Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Dated: March 23, 2005 --------------

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