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## NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

(Dollar Amounts in Thousands, except per share data) 

## NOTE 1— Statement of Accounting Policies (continued) 

## Employee Stock Option Plan (continued) 

Had compensation cost for the Corporation’s stock option plan been determined based upon the fair value at the grant dates for awards under the plan consistent with the method of FAS No. 123, the Corporation’s net income would have been reduced on a pro forma basis by $2,278, $1,978 and $116 for 2002, 2001 and 2000, respectively. Basic earnings per share on a pro forma basis would have declined $0.04 per share for 2002 and 2001 and $0.00 per share for 2000 while diluted earnings per share would have declined over the same periods by $0.04 per share, $0.03 per share and $0.00 per share. See Note 22 for additional information. Pro forma amounts are shown below: 

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## Derivative Instruments and Hedging Activities 

FASB Statement No. 133 “Accounting for Derivative Instruments and Hedging Activities” (“FASB No. 133”), as amended, established accounting and reporting standards for derivative instruments and for hedging activities which requires that an entity recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. Changes in the fair value of derivatives must be recognized in earnings when they occur unless the derivative qualifies as a hedge. If a derivative qualifies as a hedge, a company can elect to use hedge accounting to eliminate or reduce income statement volatility that would arise from reporting changes in a derivative’s fair value in income. 

The Corporation currently has no freestanding derivative or hedging instruments. Management reviews contracts from various functional areas of the Corporation to identify potential derivatives embedded within selected contracts. Management has identified potential embedded derivatives in certain loan commitments for residential mortgages where the Corporation has intent to sell to an outside investor. Due to the short-term nature of these loan commitments (30 days or less) and the minimal historical dollar amount of commitments outstanding, the corresponding impact on the Corporation’s financial condition and results of operation has not been material. 

## Earnings Per Common Share 

Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders less 

unallocated ESOP shares by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. For all periods presented the dilutive effect on average shares outstanding is the result of compensatory stock options outstanding. 

## New Accounting Pronouncements 

In June 2001, the FASB issued Statement No. 143, “Accounting for Asset Retirement Obligations” (“FAS No. 143”). The statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and associated asset retirement costs. FAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and subsequently allocated to expense over the asset’s useful life. The standard is effective for fiscal years beginning after June 15, 2002 and implementation is not expected to have a material impact on the Corporation’s financial condition or results of operations. 

Effective January 1, 2002, the Corporation adopted FASB Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“FAS No. 144”) which requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances, such as a significant decrease in the market value of an asset or the extent or manner in which an asset is used indicate that the carrying amount of an asset may not be recoverable. If there is an indication that the carrying amount of an asset may not be recoverable, future undiscounted cash flows expected to result from the use and disposition of the asset are estimated. If the sum of the expected cash flows is less than the carrying value of the asset, a loss is recognized for the difference between the carrying value and the market value of the asset. This statement also requires measurement of long-lived assets classified as held for sale at the lower of their carrying amount or fair value less cost to sell and to cease depreciation or amortization on these assets. Implementation of FAS No. 144 did not have a material impact on the Corporation’s financial condition or results of operations. 

In April 2002, the FASB issued Statement No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (“FAS No. 145”). FAS No. 145 rescinds Statement 4, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax 

