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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year-ended December 31, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____________to________________
Commission file Number: 0-19028
CCFNB BANCORP, INC.
(Name of small business issuer in its charter)
PENNSYLVANIA 23-2254643
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
232 East Street, Bloomsburg, Pennsylvania 17815
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (570) 784-4400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $1.25 per share.
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 past 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 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. [ ]
Indicate by check mark whether the Registrant is an accelerated
filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the voting and non-voting common
equity held by non-affiliates of the Registrant based on the average of the bid
and asked prices of $27.28 at February 28, 2005, was $34,484,184.
As of February 28, 2005, the Registrant had outstanding 1,264,083
shares of its common stock, par value $1.25 per share.
Page 1 of 84
Exhibit Index on Page 71
CCFNB BANCORP, INC.
FORM 10-K
INDEX
Page
----
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS........................................................... 3
ITEM 1. BUSINESS......................................................................................... 3
ITEM 2. PROPERTIES....................................................................................... 19
ITEM 3. LEGAL PROCEEDINGS................................................................................ 19
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........................ 19
ITEM 6. SELECTED FINANCIAL DATA.......................................................................... 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............ 21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....................................... 35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................................................... 36
ITEM 9A. CONTROLS AND PROCEDURES.......................................................................... 61
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................................... 62
ITEM 11. EXECUTIVE COMPENSATION........................................................................... 65
FIVE-YEAR PERFORMANCE GRAPH.............................................................................. 69
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS... 70
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................................... 70
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES........................................................... 70
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K................................ 71
SIGNATURES ................................................................................................. 73
INDEX TO EXHIBITS........................................................................................... 75
2
CCFNB BANCORP, INC.
FORM 10-K
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This annual report on Form 10-K, other periodic reports filed by us under the
Securities Exchange Act of 1934, as amended, and any other written or oral
statements made by or on behalf of us may include "forward looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 which
reflect our current views with respect to future events and financial
performance. Such forward looking statements are based on general assumptions
and are subject to various risks, uncertainties, and other factors that may
cause actual results to differ materially from the views, beliefs and
projections expressed in such statements. These risks, uncertainties and other
factors include, but are not limited to:
- possible changes in economic and business conditions that may affect
the prevailing interest rates, the prevailing rates of inflation, or
the amount of growth, stagnation, or recession in the global, U.S.,
and Northcentral Pennsylvania economies, the value of investments,
collectibility of loans and the profitability of business entities;
- possible changes in monetary and fiscal policies, laws and
regulations, and other activities of governments, agencies and
similar organizations;
- the effects of easing of restrictions on participants in the
financial services industry, such as banks, securities brokers and
dealers, investment companies and finance companies, and changes
evolving from the enactment of the Gramm-Leach-Bliley Act which
became effective in 2000, and attendant changes in matters and
effects of competition in the financial services industry;
- the cost and other effects of legal proceedings, claims, settlements
and judgments; and
- our ability to achieve the expected operating results related to our
operations which depends on a variety of factors, including the
continued growth of the markets in which we operate consistent with
recent historical experience, and our ability to expand into new
markets and to maintain profit margins in the face of pricing
pressures.
The words "believe", "expect", "anticipate", "project" and similar expressions
signify forward looking statements. Readers are cautioned not to place undue
reliance on any forward looking statements made by or on behalf of us. Any such
statement speaks only as of the date the statement was made. We undertake no
obligation to update or revise any forward looking statements.
ITEM 1. BUSINESS
GENERAL
We are a registered financial holding company, bank holding company, and
Pennsylvania business corporation, and are headquartered in Bloomsburg,
Pennsylvania. We have one wholly-owned subsidiary which is Columbia County
Farmers National Bank or referred to as the Bank. A substantial part of our
business consists of the management and supervision of the Bank. Our principal
source of income is dividends paid by the Bank. At December 31, 2004, we had
approximately:
- $235 million in total assets;
- $150 million in loans;
- $172 million in deposits; and
- $ 29 million in stockholders' equity.
The Bank is a national banking association and member of the Federal Reserve
System whose deposits are insured by the Bank Insurance Fund of the FDIC. The
Bank is a full-service commercial bank providing a range of services and
products, including time and demand deposit accounts, consumer, commercial and
mortgage loans to individuals and small to medium-sized business in its
Northcentral Pennsylvania market area. The Bank also operates a full-service
trust department. A third-party brokerage is also resident in the Bank's office
in Lightstreet, Pennsylvania. At December 31, 2004, the Bank had 7 branch
banking offices which are located in the Pennsylvania county of Columbia.
3
We consider our branch banking offices to be a single operating segment, because
these branches have similar:
- economic characteristics,
- products and services,
- operating processes,
- delivery system,
- customer bases, and
- regulatory oversight.
We have not operated any other reportable operating segments in the 3-year
period ended December 31, 2004. We have combined financial information for our
third-party brokerage operation with our financial information, because this
company does not meet the quantitative threshold for a reporting operating
segment.
We hold a 50 percent interest in a local insurance agency. The name of this
agency is Neighborhood Group, Inc. and trades under the fictitious name of
Neighborhood Advisors (insurance agency). Through this joint venture, we sell
insurance products and services. We account for this local insurance agency
using the equity method of accounting.
As of December 31, 2004, we had 89 employees on a full-time equivalent basis.
The Company and the Bank are not parties to any collective bargaining agreement
and employee relations are considered to be good.
SUPERVISION AND REGULATION
The following discussion sets forth the material elements of the regulatory
framework applicable to us and the Bank and provides certain specific
information. This regulatory framework is primarily intended for the protection
of investors in our common stock, depositors at the Bank and the Bank Insurance
Fund that insures bank deposits. To the extent that the following information
describes statutory and regulatory provisions, it is qualified by reference to
those provisions. A change in the statutes, regulations or regulatory policies
applicable to us or the Bank may have a material effect on our business.
INTERCOMPANY TRANSACTIONS
Various governmental requirements, including Sections 23A and 23B of the Federal
Reserve Act and Regulation W of the Federal Reserve Board, limit borrowings by
us from the Bank and also limit various other transactions between us and the
Bank. For example, Section 23A of the Federal Reserve Act limits to no more than
ten percent of its total capital the aggregate outstanding amount of the Bank's
loans and other "covered transactions" with any particular non-bank affiliate
(including a financial subsidiary) and limits to no more than 20 percent of its
total capital the aggregate outstanding amount of the Bank's covered
transactions with all of its affiliates (including financial subsidiaries). At
December 31, 2004, approximately $5.7 million was available for loans to us from
the Bank. Section 23A of the Federal Reserve Act also generally requires that
the Bank's loans to its non-bank affiliates (including financial subsidiaries)
be secured, and Section 23B of the Federal Reserve Act generally requires that
the Bank's transactions with its non-bank affiliates (including financial
subsidiaries) be on arm's-length terms. Also, we, the Bank, and any financial
subsidiary are prohibited from engaging in certain "tie-in" arrangements in
connection with extensions of credit or provision of property or services.
SUPERVISORY AGENCIES
As a national bank and member of the Federal Reserve System, the Bank is subject
to primary supervision, regulation, and examination by the Office of the
Comptroller of the Currency and secondary regulation by the FDIC. The Bank is
subject to extensive statutes and regulations that significantly affect its
business and activities. The Bank must file reports with its regulators
concerning its activities and financial condition and obtain regulatory approval
to enter into certain transactions. The Bank is also subject to periodic
examinations by its regulators to ascertain compliance with various regulatory
requirements. Other applicable statutes and regulations relate to insurance of
deposits, allowable investments, loans, leases, acceptance of deposits, trust
activities, mergers, consolidations, payment of dividends, capital requirements,
reserves against deposits, establishment of branches and certain other
facilities, limitations on loans to one borrower and loans to affiliated
persons, activities of subsidiaries and other aspects of the business of banks.
Recent federal legislation has instructed federal agencies to adopt standards or
guidelines governing banks' internal controls, information systems, loan
documentation, credit underwriting, interest rate exposure, asset growth,
compensation and benefits, asset quality, earnings and stock valuation, and
other matters. The federal banking agencies have great flexibility in
implementing standards on asset quality, earnings, and stock valuation.
Regulatory authorities have broad flexibility to initiate proceedings designed
to prohibit banks from engaging in unsafe and unsound banking practices.
4
We and the Bank are also affected by various other governmental requirements and
regulations, general economic conditions, and the fiscal and monetary policies
of the federal government and the Federal Reserve Board. The monetary policies
of the Federal Reserve Board influence to a significant extent the overall
growth of loans, leases, investments, deposits, interest rates charged on loans,
and interest rates paid on deposits. The nature and impact of future changes in
monetary policies are often not predictable.
We are subject to the jurisdiction of the SEC for matters relating to the
offering and sale of our securities. We are also subject to the SEC's rules and
regulations relating to periodic reporting, insider trader reports and proxy
solicitation materials. Our common stock is not listed for quotation of prices
on The NASDAQ Stock Market or any other nationally-recognized stock exchange.
However, daily bid and asked price quotations are maintained on the interdealer
electronic bulletin board system.
SUPPORT OF THE BANK
Under current Federal Reserve Board policy, we are expected to act as a source
of financial and managerial strength to the Bank by standing ready to use
available resources to provide adequate capital funds to the Bank during periods
of financial adversity and by maintaining the financial flexibility and
capital-raising capacity to obtain additional resources for assisting the Bank.
The support expected by the Federal Reserve Board may be required at times when
we may not have the resources or inclination to provide it.
If a default occurred with respect to the Bank, any capital loans to the Bank
from us would be subordinate in right of payment to payment of the Bank
depositors and certain of its other obligations.
LIABILITY OF COMMONLY CONTROLLED BANKS
The Bank can be held liable for any loss incurred, or reasonably expected to be
incurred, by the FDIC in connection with:
- the default of a commonly controlled FDIC-insured depository
institution or
- any assistance provided by the FDIC to a commonly controlled
FDIC-insured depository institution in danger of default.
"Default" generally is defined as the appointment of a conservator or receiver,
and "in danger of default" generally is defined as the existence of certain
conditions indicating that a default is likely to occur in the absence of
regulatory assistance.
DEPOSITOR PREFERENCE STATUTE
In the "liquidation or other resolution" of the Bank by any receiver, federal
legislation provides that deposits and certain claims for administrative
expenses and employee compensation against the Bank are afforded a priority over
the general unsecured claims against the Bank, including federal funds and
letters of credit.
ALLOWANCE FOR LOAN LOSSES
There are certain risks inherent in making all loans. These risks include
interest rate changes over the time period in which loans may be repaid, risks
resulting from changes in our Northcentral Pennsylvania area economy, risks
inherent in dealing with individual borrowers, and, in the case of a loan backed
by collateral, risks resulting from uncertainties about the future value of the
collateral.
Commercial loans and commercial real estate loans comprised 33.1 percent of our
total consolidated loans as of December 31, 2004. Commercial loans are typically
larger than residential real estate loans and consumer loans. Because our loan
portfolio contains a significant number of commercial loans and commercial real
estate loans with relatively large balances, the deterioration of one or a few
of these loans may cause a significant increase in nonperforming loans. An
increase in nonperforming loans could result in a loss of earnings from these
loans, an increase in the provision for loan losses and loan charge-offs.
We maintain an allowance for loan losses to absorb any loan losses based on,
among other things, our historical experience, an evaluation of economic
conditions, and regular reviews of any delinquencies and loan portfolio quality.
We cannot assure you that charge-offs in future periods will not exceed the
allowance for loan losses or that additional increases in the allowance for loan
losses will not be required. Additions to the allowance for loan losses would
result in a decrease in our net income and, possibly, our capital.
In evaluating our allowance for loan losses, we divide our loans into the
following categories:
- commercial,
- real estate mortgages,
- consumer, and
- unallocated.
5
We evaluate some loans as a group and some individually. We use the following
criteria in choosing loans to be evaluated individually:
- by risk profile, and
- by past due status.
After our evaluation of these loans, we allocate portions of our allowance for
loan losses to categories of loans based upon the following considerations:
- historical trends,
- economic conditions, and
- any known deterioration.
We use a self-correcting mechanism to reduce differences between estimated and
actual losses. We will, on an annual basis, weigh our loss experience among the
various categories and reallocate the allowance for loan losses.
For a more in-depth presentation of our allowance for loan losses and the
components of this allowance, please refer to Item 7 of this report under
Management's Discussion and Analysis of Financial Condition and Results of
Operations at "Non-Performing Assets," "Allowance for Loan Losses and Related
Provision," and "Summary of Loan Loss Experience," as well as Note 4, Item 8 to
this report.
SOURCES OF FUNDS
GENERAL. Our primary source of funds is the cash flow provided by our investing
activities, including principal and interest payments on loans and
mortgage-backed and other securities. Our other sources of funds are provided by
operating activities (primarily net income) and financing activities, including
borrowings and deposits.
DEPOSITS. We offer a variety of deposit accounts with a range of interest rates
and terms. We currently offer passbook and statement savings accounts, NOW
accounts, money market accounts, demand deposit accounts and certificates of
deposit. The flow of deposits is influenced significantly by general economic
conditions, changes in prevailing interest rates, pricing of deposits and
competition. Our deposits are primarily obtained from areas surrounding our
banking offices. We rely primarily on marketing, new products, service and
long-standing relationships with customers to attract and retain these deposits.
At December 31, 2004, our deposits totaled $172.5 million. Of the total deposit
balance, $9.8 million or 5.7 percent, represent Individual Retirement Accounts
and $24.5 million or 14.2 percent represent certificates of deposit in amounts
of $100,000 or more.
When we determine the levels of our deposit rates, consideration is given to
local competition, yields of U.S. Treasury securities and the rates charged for
other sources of funds. We have maintained a high level of core deposits, which
has contributed to our low cost of funds. Core deposits include savings, money
market, NOW and demand deposit accounts, which, in the aggregate, represented
50.5 percent of total deposits at December 31, 2004 and 48 percent of total
deposits at December 31, 2003.
For a further discussion of our deposits, please refer to Item 8 of this report
under Management's Discussion and Analysis of Financial Condition and Results of
Operations at "Deposits and Borrowed Funds," as well as Note 7, Item 8 to this
report.
CAPITAL REQUIREMENTS
We are subject to risk-based capital requirements and guidelines imposed by the
Federal Reserve Board, which are substantially similar to the capital
requirements and guidelines imposed by the Comptroller of the Currency on the
Bank. For this purpose, a bank's or bank holding company's assets and certain
specified off-balance sheet commitments are assigned to four risk categories,
each weighted differently based on the level of credit risk that is ascribed to
those assets or commitments. In addition, risk-weighted assets are adjusted for
low-level recourse and market-risk equivalent assets. A bank's or bank holding
company's capital, in turn, includes the following tiers:
- core ("Tier 1") capital, which includes common equity,
non-cumulative perpetual preferred stock, a limited amount of
cumulative perpetual preferred stock, and minority interests in
equity accounts of consolidated subsidiaries, less goodwill, certain
identifiable intangible assets, and certain other assets; and
- supplementary ("Tier 2") capital, which includes, among other items,
perpetual preferred stock not meeting the Tier 1 definition,
mandatory convertible securities, subordinated debt and allowances
for loan and lease losses, subject to certain limitations, less
certain required deductions.
6
We, like other bank holding companies, are required to maintain Tier 1 and
"Total Capital" (the sum of Tier 1 and Tier 2 capital, less certain deductions)
equal to at least four percent and eight percent of our total risk-weighted
assets (including certain off-balance sheet items, such as unused lending
commitments and standby letters of credit), respectively. At December 31, 2004,
we met both requirements, with Tier 1 and Total Capital equal to 19.3 percent
and 20.3 percent of total risk-weighted assets.
The Federal Reserve Board has adopted rules to incorporate market and interest
rate risk components into their risk-based capital standards. Under these
market-risk requirements, capital will be allocated to support the amount of
market risk related to a financial institution's ongoing trading activities.
The Federal Reserve Board also requires bank holding companies to maintain a
minimum "Leverage Ratio" (Tier 1 capital to adjusted total assets) of three
percent if the bank holding company has the highest regulatory rating and meets
certain other requirements, or of three percent plus an additional cushion of at
least one to two percentage points if the bank holding company does not meet
these requirements. At December 31, 2004, our leverage ratio was 12.2 percent.
The Federal Reserve Board may set capital requirements higher than the minimums
noted above for holding companies whose circumstances warrant it. For example,
bank holding companies experiencing or anticipating significant growth may be
expected to maintain strong capital positions substantially above the minimum
supervisory levels without significant reliance on intangible assets.
Furthermore, the Federal Reserve Board has indicated that it will consider a
"Tangible Tier 1 Leverage Ratio" (deducting all intangibles) and other
indications of capital strength in evaluating proposals for expansion or new
activities, or when a bank holding company faces unusual or abnormal risk. The
Federal Reserve Board has not advised us of any specific minimum leverage ratio
applicable to us.
The Bank is subject to similar risk-based capital and leverage requirements
adopted by the Comptroller of the Currency. The Bank was in compliance with the
applicable minimum capital requirements as of December 31, 2004. The Comptroller
of the Currency has not advised the Bank of any specific minimum leverage ratio
applicable to the Bank.
Failure to meet capital requirements could subject the Bank to a variety of
enforcement remedies, including the termination of deposit insurance by the
FDIC, and to certain restrictions on its business. The Federal Deposit Insurance
Corporation Improvements Act of 1991 ("FDICIA"), among other things, identifies
five capital categories for insured banks - well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized, and critically
undercapitalized - and requires federal bank regulatory agencies to implement
systems for "prompt corrective action" for insured banks that do not meet
minimum capital requirements based on these categories. The FDICIA imposed
progressively more restrictive constraints on operations, management, and
capital distributions, depending on the category in which an institution is
classified. Unless a bank is well capitalized, it is subject to restrictions on
its ability to offer brokered deposits, on "pass-through" insurance coverage for
certain of its accounts, and on certain other aspects of its operations. FDICIA
generally prohibits a bank from paying any dividend or making any capital
distribution or paying any management fee to its holding company if the bank
would thereafter be undercapitalized. An undercapitalized bank is subject to
regulatory monitoring and may be required to divest itself of or liquidate
subsidiaries. Holding companies of such institutions may be required to divest
themselves of such institutions or divest themselves of or liquidate other
affiliates. An undercapitalized bank must develop a capital restoration plan,
and its parent bank holding company must guarantee the bank's compliance with
the plan up to the lesser of five percent of the bank's assets at the time it
became undercapitalized or the amount needed to comply with the plan. Critically
undercapitalized institutions are prohibited from making payments of principal
and interest on subordinated debt and are generally subject to the mandatory
appointment of a conservator or receiver.
Rules adopted by the Comptroller of the Currency under FDICIA provide that a
national bank is deemed to be well capitalized if the bank has a total
risk-based capital ratio of ten percent or greater, a Tier 1 risk-based capital
ratio of six percent or greater, and a leverage ratio of five percent or greater
and the institution is not subject to a written agreement, order, capital
directive, or prompt corrective action directive to meet and maintain a specific
level of any capital measure. As of December 31, 2004, the Bank was
well-capitalized, based on the prompt corrective action ratios and guidelines
described above. It should be noted, however, that a bank's capital category is
determined solely for the purpose of applying the Comptroller of the Currency's
prompt corrective action regulations, and that the capital category may not
constitute an accurate representation of the bank's overall financial condition
or prospects.
BROKERED DEPOSITS
Under FDIC regulations, no FDIC-insured bank can accept brokered deposits unless
it (1) is well capitalized, or (2) is adequately capitalized and receives a
waiver from the FDIC. In addition, these regulations prohibit any bank that is
not well capitalized from paying an interest rate on brokered deposits in excess
of three-quarters of one percentage point over certain prevailing market rates.
As of December 31, 2004, the Bank held no brokered deposits.
7
DIVIDEND RESTRICTIONS
We are a legal entity separate and distinct from the Bank. In general, under
Pennsylvania law, we cannot pay a cash dividend if such payment would render us
insolvent. Our revenues consist primarily of dividends paid by the Bank. The
National Bank Act limits the amount of dividends the Bank can pay to us without
regulatory approval. The Bank may declare and pay dividends to us to the lesser
of:
- the level of undivided profits, and
- absent regulatory approval, an amount not in excess of net income
combined with retained net income for the preceding two years.
At December 31, 2004, approximately $1,143,000 was available for payment of
dividends to us.
In addition, federal bank regulatory authorities have authority to prohibit the
Bank from engaging in an unsafe or unsound practice in conducting its business.
Depending upon the financial condition of the bank in question, the payment of
dividends could be deemed to constitute an unsafe or unsound practice. The
ability of the Bank to pay dividends in the future is currently influenced, and
could be further influenced, by bank regulatory policies and capital guidelines.
DEPOSIT INSURANCE ASSESSMENTS
The deposits of the Bank are insured up to regulatory limits by the FDIC and,
accordingly, are subject to deposit insurance assessments to maintain the Bank
Insurance Fund ("BIF") administered by the FDIC. The FDIC has adopted
regulations establishing a permanent risk-related deposit insurance assessment
system. Under this system, the FDIC places each insured bank in one of nine risk
categories based on the bank's capitalization and supervisory evaluations
provided to the FDIC by the institution's primary federal regulator. An insured
bank's insurance assessment rate is then determined by the risk category in
which it is classified by the FDIC.
In the light of the recent favorable financial situation of the federal deposit
insurance funds and the recent low number of depository institution failures,
the annual insurance premiums on bank deposits insured by the BIF vary between
$0.00 per $100 of deposits for banks classified in the highest capital and
supervisory evaluation categories to $0.27 per $100 of deposits for banks
classified in the lowest capital and supervisory evaluation categories. BIF
assessment rates are subject to semi-annual adjustment by the FDIC within a
range of up to five basis points without public comment. The FDIC also possesses
authority to impose special assessments from time to time.
The Deposit Insurance Funds Act provides for assessments to be imposed on
insured depository institutions with respect to deposits insured by the BIF (in
addition to assessments currently imposed on depository institutions with
respect to BIF-insured deposits) to pay for the cost of Financing Corporation
("FICO") funding. The FICO assessments are adjusted periodically to reflect
changes in the assessment bases of the FDIC insurance funds and do not vary
depending upon a depository institution's capitalization or supervisory
evaluations. In 2004, the Bank paid FICO assessments of $25,300.
INTERSTATE BANKING AND BRANCHING
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 we, are permitted to acquire banks
and bank holding companies located in any state;
- any bank that is a subsidiary of a bank holding company is permitted
to receive deposits, renew time deposits, close loans, service
loans, and receive loan payments as an agent for any other
depository institution subsidiary of that bank holding company; and
- banks are permitted 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 through purchase or opening of
other branches 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. Pennsylvania has opted in to all of these provisions upon the
condition that another host state has similar or reciprocal requirements as in
Pennsylvania.
As of the date of this report, we are not contemplating any interstate
acquisitions of a bank or a branch office.
8
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 ten
percent 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 we,
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 percent (five
percent in the case of an acquirer that is a bank holding company) or more of
any class of outstanding common stock of a bank holding company, such as we, or
otherwise obtaining control or a "controlling influence" over that bank holding
company.
PERMITTED NON-BANKING ACTIVITIES
The Federal Reserve Board permits us or our subsidiaries to engage in nonbanking
activities so closely related to banking or managing or controlling banks as to
be a proper incident thereto. For a discussion of other activities that are
financial in nature in which we can engage, see the caption that follows
entitled "Financial Services Modernization."
The Federal Reserve Board requires us to serve as a source of financial and
managerial strength to the Bank and not to conduct our operations in an unsafe
and unsound manner. Whenever the Federal Reserve Board believes an activity that
we are doing or our control of a nonbank subsidiary (other than a nonbank
subsidiary of the Bank) constitutes a serious risk to the financial safety,
soundness, or stability of the Bank and is inconsistent with sound banking
principles or the purposes of the federal banking laws, the Federal Reserve
Board may require us to terminate that activity or to terminate control of that
subsidiary. While the types of permissible activities are subject to change by
the Federal Reserve Board, the principal nonbanking activities that presently
may be conducted by a bank holding company or its subsidiary without prior
approval of the Federal Reserve Board are:
- Servicing Activities. Furnishing services for, or establish or
acquire a company that engages solely in servicing activities for:
- us or the Bank in connection with activities authorized by
law, such as commitments entered into by any subsidiary with third
parties as long as we or our servicing company comply with
published guidelines and do not act as a principal in dealing with
third parties;
- the internal operations of the Bank, such as:
- accounting, auditing and appraising;
- advertising and public relations;
- data processing and transmission services, data bases or
facilities;
- personnel services;
- courier services;
- holding or operating property used by our subsidiaries
or for their future use;
- liquidating property acquired from the Bank; and
- selling, purchasing or underwriting insurance, such as
blanket bond insurance, group insurance for employees and
property and casualty insurance.
- Safe deposit business. Conduct a safe deposit business or acquire
voting securities of a company that conducts such business.
- Securities or property representing five percent or less of any
company. Acquiring five percent or less of the outstanding voting
securities of any company regardless of that company's activities.
- Extending credit and servicing loans. Making, acquiring, brokering,
or servicing loans or other extensions of credit (including
factoring, issuing letters of credit and accepting drafts) for the
company's account or for the account of others.
- Activities related to extending credit. Any activity usual in
connection with making, acquiring, brokering or servicing loans or
other extensions of credit, as determined by the Federal Reserve
Board. The Federal Reserve Board has determined that the following
activities are usual in connection with making, acquiring, brokering
or servicing loans or other extensions of credit:
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- Real estate and personal property appraising. Performing appraisals
of real estate and tangible and intangible personal property,
including securities.
- Arranging commercial real estate equity financing. Acting as
intermediary for the financing of commercial or industrial
income-producing real estate by arranging for the transfer of the
title, control, and risk of such a real estate project to one or
more investors, if the bank holding company and its affiliates do
not have an interest in, or participate in managing or developing, a
real estate project for which it arranges equity financing, and do
not promote or sponsor the development of the property.
- Check-guaranty services. Authorizing a subscribing merchant to
accept personal checks tendered by the merchant's customers in
payment for goods and services, and purchasing from the merchant
validly authorized checks that are subsequently dishonored.
- Collection agency services. Collecting overdue accounts receivable,
either retail or commercial.
- Credit bureau services. Maintaining information related to the
credit history of consumers and providing the information to a
credit grantor who is considering a borrower's application for
credit or who has extended credit to the borrower.
- Asset management, servicing, and collection activities. Engaging
under contract with a third party in asset management, servicing,
and collection of assets of a type that an insured depository
institution may originate and own, if the company does not engage in
real property management or real estate brokerage services as part
of these services.
- Acquiring debt in default. Acquiring debt that is in default at the
time of acquisition under certain conditions.
- Real estate settlement servicing. Providing real estate settlement
services.
- - Leasing personal or real property. Leasing personal or real property or
acting as agent, broker, or adviser in leasing such property under certain
conditions.
- - Operating nonbank depository institutions:
- Industrial banking. Owning, controlling, or operating an industrial
bank, Morris Plan bank, or industrial loan company, so long as the
institution is not a bank.
- Operating savings association. Owning, controlling or operating a
savings association, if the savings association engages only in
deposit-taking activities, lending, and other activities that are
permissible for bank holding companies.
- - Trust company functions. Performing functions or activities that may be
performed by a trust company (including activities of a fiduciary, agency, or
custodial nature), in the manner authorized by federal or state law, so long
as the company is not a bank for purposes of the Bank Holding Company Act.
- - Financial and investment advisory activities. Acting as investment or
financial advisor to any person, including (without, in any way, limiting the
foregoing):
- Serving as investment advisor (as defined in section 2(a)(20) of the
Investment Company Act of 1940, 15 U.S.C. 80a-2(a)(20)), to an
investment company registered under that act, including sponsoring,
organizing, and managing a closed-end investment company;
- Furnishing general economic information and advice, general economic
statistical forecasting services, and industry studies;
- Providing advice in connection with mergers, acquisitions,
divestitures, investments, joint ventures, leveraged buyouts,
recapitalizations, capital structurings, financing transactions and
similar transactions, and conducting financial feasibility studies;
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- Providing information, statistical forecasting, and advice with
respect to any transaction in foreign exchange, swaps, and similar
transactions, commodities, and any forward contract, option, future,
option on a future, and similar instruments;
- Providing educational courses, and instructional materials to
consumers on individual financial management matters; and
- Providing tax-planning and tax-preparation services to any person.
- - Agency transactional services for customer investments:
- Securities brokerage. Providing securities brokerage services
(including securities clearing and/or securities execution services
on an exchange), whether alone or in combination with investment
advisory services, and incidental activities (including related
securities credit activities and custodial services), if the
securities brokerage services are restricted to buying and selling
securities solely as agent for the account of customers and do not
include securities underwriting or dealing.
- Riskless principal transactions. Buying and selling in the secondary
market all types of securities on the order of customers as a
"riskless principal" to the extent of engaging in a transaction in
which the company, after receiving an order to buy (or sell) a
security from a customer, purchases (or sells) the security for its
own account to offset a contemporaneous sale to (or purchase from)
the customer. This does not include:
(A) Selling bank-ineligible securities at the order of a
customer that is the issuer of the securities, or selling bank-ineligible
securities in any transaction where the company has a contractual
agreement to place the securities as agent of the issuer; or
(B) Acting as a riskless principal in any transaction
involving a bank-ineligible security for which the company or any of its
affiliates acts as underwriter (during the period of the underwriting or
for 30 days thereafter) or dealer.
- Private placement services. Acting as agent for the private
placement of securities in accordance with the requirements of the
Securities Act of 1933 ("1933 Act") and the rules of the Securities
and Exchange Commission, if the company engaged in the activity does
not purchase or repurchase for its own account the securities being
placed, or hold in inventory unsold portions of issues of these
securities.
- Futures commission merchant. Acting as a futures commission merchant
("FCM") for unaffiliated persons in the execution, clearance, or
execution and clearance of any futures contract and option on a
futures contract traded on an exchange in the United States or
abroad under certain conditions.
- Other transactional services. Providing to customers as agent
transactional services with respect to swaps and similar
transactions.
- - Investment transactions as principal:
- Underwriting and dealing in government obligations and money market
instruments. Underwriting and dealing in obligations of the United
States, general obligations of states and their political
subdivisions, and other obligations that state member banks of the
Federal Reserve System may be authorized to underwrite and deal in
under 12 U.S.C. 24 and 335, including banker's acceptances and
certificates of deposit, under the same limitations as would be
applicable if the activity were performed by the bank holding
company's subsidiary member banks or its subsidiary nonmember banks
as if they were member banks.
- Investing and trading activities. Engaging as principal in:
(A) Foreign exchange;
(B) Forward contracts, options, futures, options on futures,
swaps, and similar contracts, whether traded on exchanges or not, based on
any rate, price, financial asset (including gold, silver, platinum,
palladium, copper, or any other metal approved by the Federal Reserve
Board), nonfinancial asset, or group of assets, other than a
bank-ineligible security under certain conditions.
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(C) Forward contracts, options, futures, options on futures,
swaps, and similar contracts, whether traded on exchanges or not, based on
an index of a rate, a price, or the value of any financial asset,
nonfinancial asset, or group of assets, if the contract requires such
settlement.
- Buying and selling bullion, and related activities. Buying, selling
and storing bars, rounds, bullion, and coins of gold, silver,
platinum, palladium, copper, and any other metal approved by the
Federal Reserve Board, for the company's own account and the account
of others, and providing incidental services such as arranging for
storage, safe custody, assaying, and shipment.
- - Management consulting and counseling activities:
- Management consulting. Providing management consulting advice under
certain conditions.
- Employee benefits consulting services. Providing consulting services
to employee benefit, compensation and insurance plans, including
designing plans, assisting in the implementation of plans, providing
administrative services to plans, and developing employee
communication programs for plans.
- Career counseling services. Providing career counseling services to:
(A) A financial organization and individuals currently
employed by, or recently displaced from, a financial organization;
(B) Individuals who are seeking employment at a financial
organization; and
(C) Individuals who are currently employed in or who seek
positions in the finance, accounting, and audit departments of any
company.
- - Support services:
- Courier services. Providing courier services for:
(A) Checks, commercial papers, documents, and written
instruments (excluding currency or bearer-type negotiable instruments)
that are exchanged among banks and financial institutions; and
(B) Audit and accounting media of a banking or financial
nature and other business records and documents used in processing such
media.
(ii) Printing and selling MICR-encoded items. Printing and selling checks
and related documents, including corporate image checks, cash tickets, voucher
checks, deposit slips, savings withdrawal packages, and other forms that require
Magnetic Ink Character Recognition ("MICR") encoding.
- - Insurance agency and underwriting:
- Credit insurance. Acting as principal, agent, or broker for
insurance (including home mortgage redemption insurance) that is:
(A) Directly related to an extension of credit by the bank
holding company or any of its subsidiaries; and
(B) Limited to ensuring the repayment of the outstanding
balance due on the extension of credit in the event of the death,
disability, or involuntary unemployment of the debtor.
- Finance company subsidiary. Acting as agent or broker for insurance
directly related to an extension of credit by a finance company that
is a subsidiary of a bank holding company under certain conditions.
- Engaging in any general insurance agency activities.
- Supervision of retail insurance agents. Supervising on behalf of
insurance underwriters the activities of retail insurance agents who
sell fidelity, property and casualty and group insurances for the
operations and employees of the bank holding company or its
subsidiaries.
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- Community development activities:
- Financing and investment activities. Making equity and
debt investments in corporations or projects designed
primarily to promote community welfare, such as the
economic rehabilitation and development of low-income
areas by providing housing, services, or jobs for
residents.
- Advisory activities. Providing advisory and related
services for programs designed primarily to promote
community welfare.
- Money orders, savings bonds, and traveler's checks. The issuance and
sale at retail of money orders and similar consumer-type payment
instruments; the sale of U.S. savings bonds; and the issuance and
sale of traveler's checks.
- Data processing. Providing data processing data transmission
services, facilities (including data processing and data
transmission hardware, software, documentation, or operating
personnel), data bases, advice, and access to such services,
facilities, or data bases by any technological means under certain
conditions.
COMMUNITY REINVESTMENT ACT
The Community Reinvestment Act of 1977, as amended (the "CRA"), and the
regulations promulgated to implement the CRA are designed to create a system for
bank regulatory agencies to evaluate a depository institution's record in
meeting the credit needs of its community. CRA regulations establish tests for
evaluating both small and large depository institutions' investment in the
community. A "small bank" is defined as a bank which has total assets of less
than $250 million and is independent or is an affiliate of a holding company
with less than $1 billion in assets. There are streamlined procedures for
evaluating small banks and the frequency of CRA examinations will occur less
often based upon a bank's CRA rating. A large retail institution is one which
does not meet the "small bank" definition. A large retail institution can be
evaluated under one of two tests: (1) a three-part test evaluating the
institution's lending, service and investment performance; or (2) a "strategic
plan" designed by the institution with community involvement and approved by the
appropriate federal bank regulator. A large institution must choose one of these
options under which to be examined. In addition, the CRA regulations include
separate rules regarding the manner in which "wholesale banks" and "limited
purpose banks" will be evaluated for compliance.
For the purposes of the CRA regulations, the Bank is deemed to be a "small
bank," based upon financial information as of December 31, 2004. The Bank will
be examined under the streamlined procedures. The Bank received a "satisfactory"
CRA rating in its last CRA examination which was held in 2003.
CONCENTRATION
We are not dependent for deposits nor exposed by loan concentrations to a single
customer or to a small group of customers the loss of any one or more of which
would have a materially adverse effect on our financial condition.
FINANCIAL SERVICES MODERNIZATION
The Gramm-Leach-Bliley Act (the "GLB Act") took effect in 2000. The GLB Act
contains some of the most far-reaching changes governing the operations of
companies doing business in the financial services industry. The GLB Act
eliminates the restrictions placed on the activities of banks and bank holding
companies. By creating two new structures - financial holding companies and
financial subsidiaries - we and the Bank will be allowed to provide a wider
array of financial services and products that were reserved only for insurance
companies and securities firms. In addition, we can now affiliate with an
insurance company and a securities firm.
We are currently deemed to be a financial holding company. A financial holding
company has authority to engage in activities referred to as "financial
activities" that are not permitted to bank holding companies. A financial
holding company may also affiliate with companies that are engaged in financial
activities. A "financial activity" is an activity that does not pose a safety
and soundness risk and is:
- financial in nature,
- incidental to an activity that is financial in nature, or
- complimentary to a financial activity.
The GLB Act lists certain activities as financial in nature:
- Lending, investing or safeguarding money or securities;
- Underwriting insurance or annuities, or acting as an insurance or
annuity principal, agent or broker;
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- Providing financial or investment advice;
- Issuing or selling interests in pools of assets that a bank could
hold;
- Underwriting, dealing in or making markets in securities;
- Engaging in any activity that the Federal Reserve Board found before
the GLB Act to be related closely to banking (See the section in
this report entitled "Permitted Non-banking Activities");
- Engaging within the United States in any activity that a bank
holding company could engage in outside of the country, if the
Federal Reserve Board determined before the GLB Act that the
activity was usual in connection with banking or other financial
operations internationally;
- Merchant banking - acquiring or controlling ownership interests in
an entity engaged in impermissible activities, if: the interests are
not held by a depository institution; the interests are held by a
securities affiliate or an investment advisory affiliate of an
insurance company as part of underwriting, merchant or investment
banking activity; the interests are held long enough to enable their
sale in a manner consistent with the financial viability of such an
activity; and we do not control the entity except to the extent
necessary to obtain a reasonable return on the investment; or
- Insurance portfolio investing - acquiring or controlling ownership
interests in an entity engaged in impermissible activities, if: the
interests are not held by a depository institution; the interests
are held by an insurance or annuity company; the interests represent
investments made in the ordinary course of business in accordance
with state law; and we do not control the entity except to the
extent necessary to obtain a reasonable return on the investment.
The GLB Act instructs the Federal Reserve Board to adopt a regulation or order
defining certain additional activities as financial in nature, to the extent
they are consistent with the purposes of the GLB Act. These are:
- Lending, exchanging, transferring, investing for others or
safeguarding financial assets other than money or securities;
- Providing any method of transferring financial assets; and
- Arranging, effecting or facilitating financial transactions for
third parties.
Other activities also may be decided by the Federal Reserve Board to be
financial in nature or incidental to a financial activity if they meet specified
criteria. The Federal Reserve Board is instructed to consider the purposes of
the GLB Act and the Bank Holding Company Act; changes in the market in which
financial holding companies compete; changes in the technology used to deliver
financial services; and whether the proposed activity is necessary or
appropriate to allow a financial holding company and its affiliates to compete
effectively, deliver services efficiently and offer services through the most
advanced technological means available.
The GLB Act gives national banks authority to use "financial subsidiaries" to
engage in financial activities. This authority has some limitations. A financial
subsidiary of the Bank may not, as a principal:
- underwrite insurance or annuities;
- engage in real estate development or investment;
- engage in merchant banking; or
- engage in insurance portfolio investment activities.
A bank's investment in a financial subsidiary will affect the way it calculates
its capital. The bank must deduct from its assets and stockholders' equity the
total of its investments in financial subsidiaries. Moreover, a bank must
present its financial information in two ways: in accordance with generally
accepted accounting principles, and, separately, in a manner that reflects the
segregation of the bank's investments in financial subsidiaries.
PRIVACY
Title V of the GLB Act creates a minimum federal standard of privacy by limiting
the instances which we and the Bank may disclose nonpublic personal information
about a consumer of our products or services to nonaffiliated third parties. A
state, such as Pennsylvania, can impose a greater or more restrictive standard
of privacy than the GLB Act. The GLB Act distinguishes "consumers" from
"customers" for purposes of the notice requirements imposed by this Act. We are
required to give a "consumer" a privacy notice only if we intend to disclose
nonpublic personal information about the consumer to a nonaffiliated third
party. However, by contrast, we are required to give a "customer" a notice of
our privacy policy at the time of the establishment of a customer relationship
and then annually, thereafter during the continuation of the customer
relationship.
The term consumer is different from the term customer. A consumer means an
individual who obtains or has obtained a financial product or service from the
Bank that is to be used primarily for personal, family or household purposes or
that individual's representative. A customer of the Bank is an individual with a
continuous relationship with the Bank. The Office of the Comptroller of the
Currency has regulations which give several examples of a consumer and customer
relationship:
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- An individual who applies to the Bank for credit for personal,
family or household purposes is a consumer of a financial service,
regardless of whether the credit is extended.
- An individual who provides nonpublic personal information to the
Bank in order to obtain a determination about whether he or she may
qualify for a loan to be used primarily for personal, family, or
household purposes is a consumer of a financial service, regardless
of whether the loan is extended by the Bank or another financial
institution.
- An individual who provides nonpublic personal information to the
Bank in connection with obtaining or seeking to obtain financial,
investment or economic advisory services is a consumer regardless of
whether the Bank establishes an ongoing advisory relationship.
- An individual who negotiates a workout with the Bank for a loan that
the Bank owns is a consumer regardless of whether the Bank
originally extended the loan to the individual.
- An individual who has a loan from the Bank is the Bank's consumer
even if the Bank:
- Hires an agent to collect on the loan;
- Sells the rights to service the loan; or
- Bought the loan from the financial institution that
originated the loan.
- An individual is not the Bank's consumer solely because the
Bank processes information about the individual on behalf of a
financial institution that extended the loan to the individual.
On the other hand, several examples of a customer follow:
- A customer has a continuing relationship with the Bank if the
customer:
- Has a deposit, loan, credit, trust or investment account with
the Bank;
- Purchases an insurance product from the Bank;
- Holds an investment product through the Bank;
- Enters into an agreement or understanding with the Bank
whereby the Bank undertakes to arrange or broker a home
mortgage loan for the customer;
- Has a loan that the Bank services where the Bank owns the
servicing rights;
- Enters into a lease of personal property with the Bank; or
- Obtains financial, investment, or economic advisory services
from the Bank for a fee.
- A person does not, however, have a continuing relationship with the
Bank and therefore is not a customer, if:
- The person only obtains a financial product or service in an
isolated transaction, such as withdrawing cash from the Bank's
ATM or purchasing a cashier's check or money order;
- The Bank sells the person's loan and does not retain the
rights to service the loan; or
- The Bank sells the person airline tickets, travel insurance or
traveler's checks in an isolated transaction.
In general, the Bank cannot disclose to a nonaffiliated third party any
nonpublic personal information of its customers and consumers unless the Bank
provides its customer or consumer with a notice that includes:
- the policies and practices of the Bank with regard to:
- disclosing nonpublic personal information to nonaffiliated third
parties;
- the categories of persons to whom the information is or may be
disclosed; and
- the policy for disclosure to former customers;
- categories of nonpublic personal information that are collected by the
Bank;
- the policies that the Bank maintains to protect the confidentiality and
security of nonpublic personal information;
- the disclosure, if required, under the Fair Credit Reporting Act; and
- in addition, the Bank must provide an opt out notice to each of its
consumers and customers that explains accurately the right to opt out
of any disclosure by the Bank of the customer's or consumer's nonpublic
personal information and the means by which the customer or consumer
may exercise the opt out right.
The GLB Act sets forth a new requirement that this notice to a consumer or
customer must be in clear and conspicuous or "plain English" language and
presentation. The regulations give several examples of the rules to follow in
drafting these notices:
- The Bank makes its notice reasonably understandable if, the Bank:
- Presents the information contained in the notice in clear,
concise sentences, paragraphs and sections;
- Uses short explanatory sentences and bullet lists, whenever
possible;
- Uses definite, concrete, everyday words and active voice,
whenever possible;
- Avoids multiple negatives;
- Avoids legal and highly technical business terminology; and
- Avoids boilerplate explanations that are imprecise and readily
subject to different interpretations.
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- The Bank designs its notice to call attention to the nature and
significance of the information contained in the notice if, to the
extent applicable, the Bank:
- Uses a plain-language heading to call attention to the notice;
- Uses a typeface and type size that are easy to read; and
- Provides wide margins and ample line spacing.
- If the Bank provides a notice on the same form as another notice or
other documents, the Bank designs its notice to call attention to the
nature and significance of the information contained in the notice if
the Bank uses:
- Larger type size(s), boldface or italics in the text;
- Wider margins and line spacing in the notice; or
- Shading or sidebars to highlight the notice, whenever
possible.
The GLB Act creates certain exceptions to the prohibition on disclosure of
nonpublic personal information of customers and consumers. Some of these
exceptions are:
- with the consent of the customer or consumer;
- to effect, administer or enforce a transaction requested or authorized
by the customer or consumer;
- the servicing or processing of a financial product or service requested
or authorized by the customer or consumer;
- the maintaining or servicing of the customer's or consumer's account
with the Bank or with another entity as part of a private label credit
card program;
- disclosure to persons holding a legal or beneficial interest relating
to the customer or consumer or to persons acting in a fiduciary or
representative capacity on behalf of the customer or consumer;
- providing information to insurance rate advisory organizations,
guaranty funds or agencies, rating agencies, persons assessing the
Bank's compliance with industry standards and the Bank's attorneys,
accountants and auditors; and
- disclosure permitted under other laws, such as the Right to Financial
Privacy Act, to law enforcement agencies or under local and state laws.
The Bank cannot disclose an account number or similar form of access code for a
credit card account, deposit account or transaction account of a customer or
consumer to any non-affiliated third party for use in telemarketing, direct mail
marketing or other marketing through electronic mail to the customer or
consumer.
TERRORIST ACTIVITIES
The Office of Foreign Assets Control or OFAC of the Department of the Treasury
has (and will) send our banking regulatory agencies lists of names of persons
and organizations suspected of aiding, harboring or engaging in terrorist acts.
If the Bank finds any name on any transaction, account or wire transfer that is
on an OFAC list, the Bank must freeze such account, file a suspicious activity
report and notify the FBI. The Bank has appointed an OFAC compliance officer to
oversee the inspection of its accounts and the filing of any notifications.
THE USA PATRIOT ACT
In the wake of the tragic events of September 11, 2001, the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism ("USA PATRIOT") Act of 2002 was enacted. Under the USA
PATRIOT Act, financial institutions are subject to prohibitions against
specified financial transactions and account relationships as well as enhanced
due diligence and "know your customer" standards in their dealings with foreign
financial institutions and foreign customers. For example, the enhanced due
diligence policies, procedures, and controls generally require financial
institutions to take reasonable steps:
- to conduct enhanced scrutiny of account relationships to guard against
money laundering and report any suspicious transactions;
- to ascertain the identity of the nominal and beneficial owners of, and the
source of funds deposited into, each account as needed to guard against
money laundering and report any suspicious transactions;
- to ascertain for any foreign bank, the shares of which are not publicly
traded, the identify of the owners of the foreign bank, and the nature and
extent of the ownership interest of each such owner; and
- to ascertain whether any foreign bank provides correspondent accounts to
other foreign banks and, if so, the identity of those foreign banks and
related due diligence information.
Under the USA PATRIOT Act, the Bank established anti-money laundering programs
including a customer identification program. The USA PATRIOT Act sets forth
minimum standards for these programs, including:
- the development of internal policies, procedures, and controls;
- the designation of a compliance officer;
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- an ongoing employee training program; and
- and independent audit function, in order to test these programs.
In addition, the USA PATRIOT Act authorized the Secretary of the Treasury to
adopt rules increasing the cooperation and information sharing between financial
institutions, regulators, and law enforcement authorities regarding individuals,
entities and organizations engaged in, or reasonably suspected based on credible
evidence of engaging in, terrorist acts or money laundering activities. Any
financial institutions complying with these rules will not be deemed to have
violated the privacy provisions of the Gramm-Leach-Bliley Act, as discussed
above.
SUBPRIME AND PREDATORY LENDING PRACTICES
Our federal banking regulatory agencies have jointly issued expanded examination
and supervision guidance relating to subprime lending activities. In the
guidance, "subprime" lending generally refers to programs that target borrowers
with weakened credit histories or lower repayment capacity. The guidance
principally applies to institutions with subprime lending programs with an
aggregate credit exposure equal to or greater than 25 percent of an
institution's Tier 1 capital. Such institutions would be subject to more
stringent risk management standards and, in many cases, additional capital
requirements. As a starting point, the guidance generally expects that such an
institution would hold capital against subprime portfolios in an amount that is
one and one-half to three times greater than the amount appropriate for similar
types of non-subprime assets. The Bank does not engage in any subprime lending
programs.
The Federal Reserve Board has issued regulations which would implement the Home
Ownership and Equity Protection Act or HOEPA. This Act imposes additional
disclosure requirements and certain substantive limitations on certain mortgage
loans with rates or fees above specified levels. The proposed regulations would
lower the rate levels that trigger the application of HOEPA and would include
additional fees in the calculation of the fee amount that triggers HOEPA. The
loans that the Bank currently makes are generally below the rate and fee levels
that trigger HOEPA.
The Comptroller of the Currency issued a regulation, that specifies the types of
state and local laws that do not apply to the Bank's lending and deposit taking
activities and the types of state and local laws that generally do apply to the
Bank. This final rule was partly enacted in response to state and local laws
prohibiting what is commonly called "predatory lending" activities.
The Comptroller of the Currency adopted its own anti-predatory lending standard
that focuses on consumer loans and permits the Bank to use a variety of
reasonable methods to determine a borrower's ability to repay, including, for
example, the borrower's current and expected income, current and expected cash
flows, net worth, other relevant financial obligations, employment status,
credit history or other relevant factors. In addition, the Bank shall not engage
in unfair or deceptive practices within the meaning of Section 5 of the Federal
Trade Commission Act, 15 U.S.C. 45(a)(1), and regulations made under the
authority of this act in connection with consumer loans.
This final rule also preempts state and local laws that obstruct, impair or
condition the Bank's ability to fully exercise its deposit-taking powers under
federal law and to fully exercise its powers to conduct other activities under
federal law.
The Bank may exercise its deposit-taking powers without regard to state and
local law limitations concerning:
- Abandoned and dormant accounts;
- Checking accounts;
- Disclosure requirements;
- Funds availability;
- Savings account orders of withdrawal;
- State licensing or registration requirements (except for purposes of
service of process); and
- Special purpose savings services.
State and local laws on the following subjects are not inconsistent with the
lending, deposit-taking and activities powers of the Bank and apply to the Bank
to the extent that they only incidentally affect the exercise of the Bank's
powers:
- Contracts;
- Torts;
- Criminal law;
- Rights to collect debts;
- Acquisition and transfer of property;
- Taxation;
- Zoning; and
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- Any other law the effect of which the Comptroller of the Currency
determines to be incidental to the operations of the Bank or otherwise
consistent with the authority granted to the Bank to engage in lending,
deposit-taking and other incidental activities.
SALES OF INSURANCE
Our federal banking regulatory agencies have issued their consumer protection
rules with respect to the retail sale of insurance products by the Company, the
Bank, or a subsidiary or joint venture of the Company or the Bank. These rules
cover generally practices, solicitations, advertising or offers of any insurance
product by a depository institution or any person that performs such activities
at an office of, or on behalf of, the Company or the Bank. Moreover, these rules
include specific provisions relating to sales practices, disclosures and
advertising, the physical separation of banking and nonbanking activities, and
domestic violence discrimination.
THE BANK
The Bank's legal headquarters are located at 232 East Street, Bloomsburg,
Columbia County, Pennsylvania 17815. The Bank is a locally-owned and managed
community bank that seeks to provide personal attention and professional
financial assistance to its customers. The Bank serves the needs of individuals
and small to medium-sized businesses. The Bank's business philosophy includes
offering direct access to its President and other officers and providing
friendly, informed and courteous service, local and timely decision making,
flexible and reasonable operating procedures and consistently-applied credit
policies.
The Bank solicits small and medium-sized businesses located primarily within the
Bank's market area that typically borrow in the $25,000 to $1.0 million range.
In the event that certain loan requests may exceed the Bank's lending limit to
any one customer, the Bank seeks to arrange such loans on a participation basis
with other financial institutions.
MARKETING AREA
The Bank's primary market area is Columbia County, a 484 square mile area
located in Northcentral Pennsylvania with a population of approximately 64,157
based on 2000 census data. The Town of Bloomsburg is the County's largest
municipality and its center of industry and commerce. Bloomsburg has a
population of approximately 12,375 based on 2000 census data, and is the county
seat. Berwick, located on the eastern boundary of the County, is the second
largest municipality, with a 2000 population of approximately 10,774. The Bank
currently serves its market area through seven branch offices located in
Bloomsburg, Benton, Buckhorn, Lightstreet, Millville, Orangeville and South
Centre, Columbia County.
The Bank competes with eight other depository institutions in Columbia County.
The Bank's major competitors are: First National Bank of Berwick; PNC Bank,
N.A., the largest commercial bank headquartered in Pennsylvania; and First
Columbia Bank and Trust Company of Bloomsburg, Pennsylvania.
The Bank's extended market area includes the adjacent Pennsylvania counties of
Luzerne, Montour, Northumberland, Schuylkill and Sullivan.
FUTURE LEGISLATION
Various legislation, including proposals to substantially change the financial
institution regulatory system and to expand or contract the powers of banking
institutions and bank holding companies, is from time to time introduced in the
Congress. This legislation may change banking statutes and our operating
environment in substantial and unpredictable ways. If enacted, such legislation
could increase or decrease the cost of doing business, limit or expand
permissible activities or affect the competitive balance among banks, savings
associations, credit unions, and other financial institutions. We can not
accurately predict whether any of this potential legislation will ultimately be
enacted, and, if enacted, the ultimate effect that it, or implementing
regulations, would have upon our financial condition or results of operations.
18
ITEM 2. PROPERTIES
Our corporate headquarters are located at 232 East Street, Bloomsburg,
Pennsylvania. We own this facility which has approximately 11,686 square feet.
The Bank's legal or registered office is also at 232 East Street, Bloomsburg,
Pennsylvania.
Our remaining banking centers are described as follows: We own all of the
banking centers except Buckhorn, which we began leasing in late October, 2004.
We have a five year lease with two 5 year options with Wal-Mart for this
Buckhorn location.
Approximate
Location Square Footage Use
- ------------------ -------------- -----------------------------
Orangeville, PA 2,259 Banking Services
Benton, PA 4,672 Banking Services
South Centre, PA 3,868 Banking Services
Scott Township, PA 16,500 Banking Services, Corporate,
Credit and Operations
Millville, PA 2,520 Banking Services
Buckhorn, PA 693 Banking Services (In Wal-Mart
Supercenter)
We consider our facilities to be suitable and adequate for our current and
immediate future purposes.
ITEM 3. LEGAL PROCEEDINGS
We and the Bank are not parties to any legal proceedings that could have any
significant effect upon our financial condition or income. In addition, we and
the Bank are not parties to any legal proceedings under federal and state
environmental laws.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
We had 778 stockholders of record including individual participants in security
position listings and 1,264,083 shares of common stock, par value of $1.25 per
share, the only authorized class of common stock, outstanding as of February 28,
2005. Our common stock trades under the symbol "CCFN." As of February 28, 2005,
3 firms were identified on the interdealer electronic bulletin board system as
market makers in our common stock. The following information is reported by one
of our market makers: Ferris, Baker Watts, Inc., Baltimore, MD. These quotations
represent prices between buyers and sellers and do not include retail makeup,
markdown or commission. They may not necessarily represent actual transactions.
The high and low closing sale prices and dividends per share of our common stock
for the four quarters of 2004 and 2003 are summarized in the following table.
Dividends
2004: High ($) Low ($) Declared ($)
- -------------- -------- ------- ------------
First quarter 29.50 28.00 .17
Second quarter 29.00 26.50 .17
Third quarter 31.25 27.50 .18
Fourth quarter 31.00 27.10 .18
Dividends
2003: High ($) Low ($) Declared ($)
- -------------- -------- ------- ------------
First quarter 24.20 23.20 .16
Second quarter 25.00 23.50 .16
Third quarter 26.00 24.40 .17
Fourth quarter 28.25 26.45 .17
19
We have paid cash dividends since 1983. It is our present intention to continue
the dividend payment policy, although the payment of future dividends must
necessarily depend upon earnings, financial position, appropriate restrictions
under applicable law and other factors relevant at the time the Board of
Directors considers any declaration of dividends.
The following table presents information on the shares of our common stock that
we repurchased during the fourth quarter of 2004:
CCFNB BANCORP, INC.
ISSUER PURCHASES OF EQUITY SECURITIES
NUMBER OF NUMBER OF
SHARES SHARES THAT MAY
PURCHASED AS YET BE
NUMBER OF PART OF PUBLICLY PURCHASED
SHARES PRICE PAID PER ANNOUNCED UNDER THE
MONTH PURCHASED SHARE PROGRAM (1) PROGRAM
10/26/04 - 10/26/04 2,000 $29.75 2,000 86,000
11/04/04 - 11/04/04 2,000 $31.00 2,000 84,000
12/09/04 - 12/09/04 2,000 $28.75 2,000 82,000
TOTAL 6,000 6,000
(1) This program was announced in 2003. Board of Directors approved purchase
of 100,000 shares. There is no expiration date associated with this
program.
20
ITEM 6. SELECTED FINANCIAL DATA
CCFNB BANCORP, INC.
SELECTED CONSOLIDATED FINANCIAL SUMMARY
AS OF DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
INCOME STATEMENT DATA:
Total interest income $ 10,843 $ 11,221 $ 12,780 $ 13,720 $ 13,552
Total interest expense 3,669 4,366 5,741 6,924 6,859
---------- ---------- ---------- ---------- ----------
Net interest income 7,174 6,855 7,039 6,796 6,693
Provision for possible loan losses 140 200 309 163 54
Other operating income 1,530 1,508 1,210 1,149 1,053
Other operating expenses 5,746 5,409 5,479 5,104 4,967
Federal income taxes 601 591 539 621 671
---------- ---------- ---------- ---------- ----------
Net income $ 2,217 $ 2,163 $ 1,922 $ 2,057 $ 2,054
PER SHARE DATA:
Earnings per share (1) $ 1.74 $ 1.69 $ 1.47 $ 1.54 $ 1.51
Cash dividends declared per share 0.70 0.66 0.63 0.59 0.56
Book value per share 22.49 21.63 20.76 19.64 18.61
Average shares outstanding 1,267,718 1,281,265 1,309,084 1,338,007 1,355,624
BALANCE SHEET DATA:
Total assets $ 235,377 $ 232,914 $ 229,032 $ 214,238 $ 203,054
Total loans 149,900 147,631 151,338 142,990 137,360
Total securities 61,834 62,775 53,538 57,121 47,311
Total deposits 172,487 171,786 172,127 155,666 143,169
FHLB advances - long - term 11,323 11,335 11,347 11,357 13,368
Total stockholders' equity 28,506 27,603 26,840 26,042 25,050
PERFORMANCE RATIOS:
Return of average assets 0.96% 0.94% 0.86% 0.99% 1.04%
Return on average stockholders' equity 7.88% 7.95% 7.22% 7.92% 8.59%
Net interest margin (2) 3.54% 3.39% 3.58% 3.68% 3.88%
Total non-interest expense as a percentage of
average assets 2.45% 2.34% 2.45% 2.45% 2.52%
ASSET QUALITY RATIOS:
Allowance for possible loan losses as a
percentage of loans, net 0.93% 0.96% 0.87% 0.72% 0.74%
Allowance for possible loan losses as a
percentage of non-performing loans (3) 110.37% 52.29% 57.95% 60.54% 341.27%
Non-performing loans as a percentage of total
loans, net (3) 0.85% 1.85% 1.49% 1.19% .25%
Non-performing assets as a percentage of total
assets (3) 0.54% 1.16% 0.98% 0.79% 0.17%
Net charge-offs as a percentage of average net
loans (4) 0.11% 0.06% 0.03% 0.10% 0.02%
LIQUIDITY AND CAPITAL RATIOS:
Equity to assets 12.11% 11.85% 11.72% 12.16% 12.34%
Tier 1 capital to risk-weighted assets (5) 19.27% 18.82% 20.36% 19.06% 20.94%
Leverage ratios (5)(6) 12.17% 11.79% 11.77% 12.44% 13.02%
Total capital to risk-weighted assets (5) 20.31% 19.88% 18.53% 19.82% 21.79%
Dividend payout ratio 40.19% 39.02% 42.86% 38.31% 37.09%
- --------------------
(1) Based upon average shares and common share equivalents outstanding.
(2) Represents net interest income as a percentage of average total
interest-earning assets, calculated on a tax-equivalent basis.
(3) Non-performing loans are comprised of (i) loans which are on a non-accrual
basis, (ii) accruing loans that are 90 days or more past due, and (iii)
restructured loans. Non-performing assets are comprised of non-performing
loans and foreclosed real estate (assets acquired in foreclosure), if
applicable.
(4) Based upon average balances for the respective periods.
(5) Based on the Federal Reserve Bank's risk-based capital guidelines, as
applicable to the Corporation. The Bank is subject to similar requirements
imposed by the Comptroller of the Currency.
(6) The leverage ratio is defined as the ratio of Tier 1 Capital to average
total assets less intangible assets, if applicable.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the detailed information and financial statements, including notes thereto,
included elsewhere in this Annual Report. Our consolidated financial condition
and results of operations are essentially those of our subsidiary, the Bank.
Therefore, the analysis that follows is directed to the performance of the Bank.
21
FACTORS THAT MAY AFFECT FUTURE RESULTS
General. Banking is affected, directly and indirectly, by local, domestic
and international economic and political conditions, and by government monetary
and fiscal policies. Conditions such as inflation, recession, unemployment,
volatile interest rates, tight money supply, real estate values, international
conflicts and other factors beyond our control may adversely affect the future
results of operations. We do not expect any one particular factor to affect our
results of operations. A downward trend in several areas, however, including
real estate, construction and consumer spending, could have an adverse impact on
our ability to maintain or increase profitability. Therefore, there is no
assurance that we will be able to continue our current rates of income and
growth.
Interest Rates. Our earnings depend, to a large extent, upon net interest
income, which is primarily influenced by the relationship between the cost of
funds (deposits and borrowings) and the yield on interest-earning assets (loans
and investments). This relationship, known as the net interest spread, is
subject to fluctuation and is affected by regulatory, economic and competitive
factors which influence interest rates, the volume, rate and mix of
interest-earning assets and interest-bearing liabilities, and the level of
non-performing assets. As part of our interest rate risk management strategy
comprised of interest rate risk, mortgage risk, and deposit pricing risk
components, we seek to control our exposure to interest rate changes by managing
the maturity and repricing characteristics of interest-earning assets and
interest-bearing liabilities.
As of December 31, 2004, total interest-earning assets maturing or
repricing within one year were more than total interest-bearing liabilities
maturing or repricing in the same period by $830,000 representing a cumulative
one-year interest rate sensitivity gap as a positive percentage of .4 percent of
Interest Earning Assets. This condition suggests that the yield on the
interest-earning assets should adjust to changes in market interest rates at a
slighty faster rate than the cost of the interest-bearing liabilities.
Consequently, our net interest income could increase during periods of rising
interest rates. See "Interest Rate Sensitivity".
Local Economic Conditions. Our success is dependent, to a certain extent,
upon the general economic conditions in the geographic market in which we
conduct our business. Although we expect that economic conditions will continue
to be favorable in this market, no assurance can be given that these economic
conditions will continue. Adverse changes in economic conditions in the
geographic market that we serve would likely impair our ability to collect loans
and could otherwise have a material adverse effect on our results of operations
and financial condition.
Competition. The banking industry is highly competitive, with rapid
changes in product delivery systems and in consolidation of service providers.
Many of our competitors are bigger than us in terms of assets and have
substantially greater technical, marketing and financial resources. Because of
their size, many of these competitors can (and do) offer products and services
that we do not offer. We are constantly striving to meet the convenience and
needs of our customers and to enlarge our customer base. No assurance can be
given that these efforts will be successful in maintaining and expanding our
customer base.
RESULTS OF OPERATIONS
Our net income increased by 2.5 percent from $2,163,000 in 2003 to
$2,217,000 in 2004. Earnings per share increased by 3.0 percent from $1.69 in
2003 to $1.74 in 2004. Our return on average assets (ROAA) increased to 0.96
percent in 2004, compared to 0.94 percent in 2003. Our return on average equity
(ROAE) decreased to 7.88 percent in 2004, compared to 7.95 percent in 2003.
Loans increased by 1.5 percent in 2004 to $149,900,000 from $147,631,000
in 2003. This increase was in the real estate and municipal lending area.
We instituted, in 1995, a dividend reinvestment plan and an employees
stock purchase plan. Moreover, in 1999, we commenced a strategy to purchase and
cancel up to 10 percent of our outstanding shares of common stock through open
market purchases. In 2003, we again filed with the SEC to purchase up to 100,000
shares of our outstanding shares. These repurchase programs resulted in the
purchase and cancellation of the following numbers of shares of our common stock
for the years indicated: 16,000 shares (2004); 23,988 shares (2003); and 41,500
shares (2002). The net effect of the stock plans and the repurchase program
resulted in weighted average shares of common stock outstanding as follows:
1,274,034 (2004); 1,281,265 (2003); and 1,309,084 (2002).
Tax-equivalent net interest income increased 4.1 percent to $7.6 million
in 2004 from $7.3 million in 2003. Average earning assets were $215.0 million in
2003 and $215.1 million in 2004. Net interest income increased 4.4 percent from
$6.9 million in 2003 to $7.2 million in 2004. This increase in net interest
income is a result of the pricing and mix of our loans and deposits.
22
TABLE OF NON-INTEREST INCOME
(Dollars in Thousands)
Years Ended December 31,
--------------------------
2004 2003 2002
------ ------ ------
Service charges and fees $ 841 $ 692 $ 649
Gain on sale of loans 26 190 2
Bank-owned life insurance income 257 247 28
Trust department income 165 148 215
Investment securities gains - net 3 8 137
Other 238 223 180
------ ------ ------
Total non-interest income $1,530 $1,508 $1,211
------ ------ ------
Total non-interest income increased during 2004 from $1,508,000 in 2003 to
$1,530,000 in 2004. The increase in Trust income in the amount of $17,000 was
primarily due to new accounts opened in 2004. Gain on sale of investment
securities decreased from $8,000 in 2003 to $3,000 in 2004. Service fees and
charges increased from $692,000 in 2003 to $841,000 in 2004 or 21.53 percent.
The introduction of "Overdraft Privilege" was instrumental in this increase.
Also introduced in 2004 were loans sold to Pennsylvania Housing Finance Agency
which provided a fee for the acquisition and sale of loans to this state agency.
The PHFA increase amounted to $9,600 and penalty on early withdrawal of
Certificates of Deposit amounted to $9,600. Other income increased 6.7 percent
from $223,000 in 2003 to $238,000 in 2004, partly attributable to late loan fees
collected on non-accrual loans in 2004. Gain on sale of loans decreased from
$190,000 in 2003 to $26,000 in 2004. Bank-owned life insurance income reflected
an increase of $10,000 from $247,000 in 2003 to $257,000 in 2004. In December
2002, we purchased $3,000,000 of Bank-owned life insurance. During May 2003, we
purchased an additional $2,000,000 in Bank-owned life insurance.
TABLE OF OTHER NON-INTEREST EXPENSE
(Dollars in Thousands)
Years Ended December 31,
--------------------------
2004 2003 2002
------ ------ ------
Salaries and wages $2,289 $2,199 $2,137
Employee benefits 773 746 729
Net occupancy expense 394 379 354
Furniture and equipment expense 475 476 587
State shares tax 274 275 254
Professional services 228 224 220
Director's fees 147 141 141
Stationery and supplies 136 116 129
Other expense 1,030 853 927
------ ------ ------
Total non-interest expense $5,746 $5,409 $5,479
------ ------ ------
Total non-interest expense increased to $5,746,000 in 2004 from $5,409,000
in 2003 or an increase of 6.2 percent. A 4.0 percent increase in salaries and
benefits was attributable to normal merit and cost of living increases as well
as increased health insurance costs. Furniture and equipment expense remained
near constant at $475,000 and $476,000 in 2004 and 2003. Net occupancy expense
increased $15,000 from $379,000 in 2003 to $394,000 in 2004 or 4.0 percent.
State shares tax decreased $1,000 for 2004 as compared to 2003 due to our
participation in a 2-year program offered by the Commonwealth of Pennsylvania in
which contributions to private education results in credits to this State tax.
Other expenses increased 20.8 percent from $853,000 in 2003 to $1,030,000 in
2004. Components comprising some of the major changes were as follows:
Years Ended December 31,
-----------------------------
% of
2004 2003 Inc/Dec
------ ------ -------
Officer Retirement Deferred Compensation Plan II 79,710 55,131 44.6%
Overdraft Privilege Program 24,178 0 100.0%
Data Processing Expense 71,118 53,301 25.0%
Donations 50,115 29,090 72.3%
One standard to measure non-interest expense is to express non-interest
expense as a percentage of average total assets. In 2004, this percentage was
2.5 percent compared to 2.3 percent in 2003.
23
Loan delinquencies decreased 37.5 percent from $2,806,000 in 2003 to
$1,753,000 in 2004. The decrease in these delinquencies was attributed to the
ongoing efforts of the loan department to work out problem loans and collect
past due payments. Our management has been diligent in its efforts to reduce
these delinquencies and has increased monitoring and review of current loans to
foresee future delinquency occurrences and react to them quickly. The Bank has
also implemented a centralized credit analysis department to better analyze new
loan requests. The provision for loan losses for 2004 decreased from $200,000 in
2003 to $140,000 in 2004.
NET INTEREST INCOME
Tax-equivalent net interest income for 2004 equaled $7,605,000 compared to
$7,282,000 in 2003, an increase of 4.4 percent. The increase in the overall net
interest margin from 3.4 percent in 2003 to 3.5 percent in 2004 is a result of
interest rate changes in the loan and deposit areas. These rates were diligently
watched and adjusted which contributed to the overall increased performance of
the bank. Income received on interest bearing deposits with other financial
institution increased from an average of 1.0 percent for 2003 to an average of
1.1 percent for 2004. This 10 basis point increase reflects the increased short
term rates by year end 2004. The cost of long-term debt averaged 6.0 percent for
the year which will continue to have a negative impact on our net interest
margin until rates would rise enough to allow us to pay off the debt. We will
continue to use the following strategies to mitigate this period of pressure on
our net interest margin: pricing of deposits will continue to be monitored to
meet current market conditions, large deposits over $100,000 will continue to be
priced conservatively; and in this low interest rate environment, the majority
of new investments will be kept short term in anticipation of rising rates.
TAX-EQUIVALENT NET INTEREST INCOME
(Dollars in Thousands)
Years Ended December 31,
-----------------------------
2004 2003 2002
------- ------- -------
Interest income $10,843 $11,221 $12,780
Interest expense 3,669 4,366 5,741
------- ------- -------
Net interest income 7,174 6,855 7,039
------- ------- -------
Tax-equivalent adjustment 431 427 490
------- ------- -------
Net interest income (fully taxable equivalent) $ 7,605 $ 7,282 $ 7,529
======= ======= =======
24
The following Average Balance Sheet and Rate Analysis table presents the
average assets, actual income or expense and the average yield on assets,
liabilities and stockholders' equity for the years 2004, 2003 and 2002.
AVERAGE BALANCE SHEET AND RATE ANALYSIS
THREE YEARS ENDED DECEMBER 31,
(Dollars in thousands)
2004 2003 2002
---- ---- ----
Average Interest Average Average Interest Average Average Interest Average
Balance Inc./Exp Yd/Rate Balance Inc./Exp Yd/Rate Balance Inc./Exp Yd/Rate
------- -------- ------- ------- -------- ------- ------- -------- -------
(1) (2) (1) (2) (1) (2)
ASSETS:
Interest Bearing Deposits With Other
Financial Institutions $ 4,652 $ 51 1.10% $ 4,865 $ 48 0.99% $ 4,363 $ 65 1.49%
-------- ------- -------- ------- --------- -------
Investment Securities:
Taxable 52,428 1,580 3.01% 44,833 1,314 2.93% 38,182 1,769 4.63%
State and Municipal
Obligations (3) 9,571 450 7.12% 13,046 609 6.96% 16,965 799 7.14%
-------- ------- -------- ------- --------- -------
Total Investment Securities $ 61,999 $ 2,030 3.63% $ 57,879 $ 1,923 4.35% $ 55,147 $ 2,568 5.40%
-------- ------- -------- ------- --------- -------
Federal Funds Sold 1,053 16 1.52% 3,911 43 1.10% 3,091 51 1.65%
-------- ------- -------- ------- --------- -------
Loans:
Taxable $139,086 8,360 6.01% 144,004 8,987 6.24% 144,685 9,943 6.89%
Tax Free (3) 8,262 386 7.08% 4,340 220 7.66% 2,860 153 8.10%
-------- ------- -------- ------- --------- -------
Total Loans $147,348 $ 8,746 6.27% $148,344 $ 9,207 6.28% $ 147,545 $10,096 6.90%
-------- ------- -------- ------- --------- -------
Total Interest-Earning Assets $215,052 $10,843 $5.24% $214,999 $11,221 5.42% $210,1462 $12,780 6.31%
-------- ------- ----- -------- ------- --------- -------
Reserve for Loan Losses (1,405) (1,390) (1,101)
Cash and Due from Banks 4,912 9,682 4,641
Other Assets 12,888 7,628 9,788
-------- -------- ---------
Total Assets $231,477 $230,919 $ 223,474
LIABILITIES AND CAPITAL:
Total Interest-Bearing Deposits $154,840 $ 2,684 1.73% $156,645 $ 3,401 2.17% $ 149,113 $ 4,725 3.17%
U.S. Treasury Short-Term Borrowings 296 3 1.01% 351 3 0.85% 511 6 1.17%
Short-Term Borrowings - Other 0 0 0.00% 0 0 0.00% 0 0 0.00%
Long-Term Borrowings 11,343 681 6.00% 11,341 679 5.99% 11,352 680 5.99%
Repurchase Agreements 18,184 301 1.66% 16,767 283 1.69% 17,221 330 1.92%
-------- ------- -------- ------- --------- -------
Total Interest-Bearing Liabilities $184,663 $ 3,669 1.99% $185,104 $ 4,366 2.36% $ 178,197 $ 5,741 3.19%
-------- ------- -------- ------- --------- -------
Demand Deposits 17,188 15,977 14,593
Other Liabilities 1,460 2,625 4,069
Stockholders' Equity 28,136 27,213 26,615
-------- -------- ---------
Total Liabilities and Capital $231,477 $230,919 $ 223,474
======== ======== =========
NET INTEREST INCOME/NET INTEREST
MARGIN (4) $ 7,174 3.34% $ 6,855 3.19% $ 7,039 3.35%
======= ==== ======= ==== ======= ====
TAX-EQUIVALENT NET INTEREST INCOME/NET
INTEREST MARGIN (5) $ 7,605 3.54% $ 7,282 3.39% $ 7,529 3.58%
======= ==== ======= ==== ======= ====
(1) Average volume information was compared using daily (or monthly) averages
for interest earning and bearing accounts. Certain balance sheet items
utilized quarter end balances for averages. Due to the availability of
certain daily and monthly average balance information, certain
reclassifications were made to prior period amounts.
(2) Interest on loans includes fee income.
(3) Yield on tax-exempt obligations and tax-exempt loans have been computed on
a tax-equivalent basis.
(4) Net interest margin is computed by dividing net interest income by total
interest-earning assets.
(5) Interest and yield are presented on a tax-equivalent basis using 34
percent for 2004, 2003 & 2002.
COMPONENTS OF NET INTEREST INCOME
To enhance the understanding of the effects of volumes (the average
balance of earning assets and costing liabilities) and average interest rate
fluctuations on the balance sheet as it pertains to net interest income, the
table below reflects these changes for 2004 versus 2003, 2003 versus 2002, and
2002 versus 2001:
25
TABLE OF NET INTEREST INCOME COMPONENTS ON A TAX-EQUIVALENT BASIS
For the twelve months ended December 31, 2004
(Dollars in thousands)
2004 Versus 2003 2003 Versus 2002 2002 Versus 2001
---------------- ---------------- ----------------
Increase (Decrease) Increase (Decrease) Increase (Decrease)
Due to Changes In Due to Changes In Due to Changes In
Average Average Average Average Average Average
Volume Rate Total Volume Rate Total Volume Rate Total
------- ------- ----- ------- ------- ----- ------- ------- -----
Interest Income:
Interest-Bearing Deposits with Other
Financial Institutions $ (2) $ 5 $ 3 $ 7 $ (22) $ (15) $ (90) $ (171) $ (261)
Taxable Securities 223 36 259 308 (649) (341) 278 (408) (130)
State and Municipal Obligations (242) 21 (221) (280) (31) (311) (14) (9) (23)
Federal Funds Sold (95) (71) (166) 14 52 66 50 (38) 12
Taxable Loans (307) (331) (638) (47) (940) (987) 652 (1,392) (740)
Tax Free Loans 300 (25) 275 120 (13) 107 7 1 8
----- ----- ----- ----- ------- ------- ----- ------- -------
Total Earning Assets $(123) $(365) $(488) $ 122 $(1,603) $(1,481) $ 883 $(2,017) $(1,134)
----- ----- ----- ----- ------- ------- ----- ------- -------
Interest Expense:
Total Interest-Bearing Deposits $ (39) $(689) $(728) $ 239 $(1,491) $(1,252) $ 547 $(1,180) $ (633)
U.S. Treasury - Short-Term Borrowings 0 1 1 (2) (2) (4) 1 (11) (10)
Short-Term Borrowings - Other 0 0 0 0 0 0 0 0 0
Long-Term Borrowings 0 1 1 (1) 0 (1) (50) (1) (51)
Repurchase Agreements 24 (5) 19 (9) (40) (49) (65) (338) (403)
----- ----- ----- ----- ------- ------- ----- ------- -------
Total Interest-Bearing Deposits $ (15) $(692) $(707) $ 227 $(1,533) $(1,306) $ 433 $(1,530 $(1,097)
----- ----- ----- ----- ------- ------- ----- ------- -------
NET INTEREST INCOME $(108) $ 327 $ 219 $(105) $ (70) $ (175) $ 450 $ (487) $ (37)
===== ===== ===== ===== ======= ======= ===== ======= =======
(1) Includes non-accrual loans.
FINANCIAL CONDITION
Our consolidated assets at December 31, 2004 were $235 million which
represented an increase of $2 million or .9 percent over $233 million at
December 31, 2003. The comparable increase for 2003 over 2002 was 1.7 percent or
$4 million.
Capital increased 3.3 percent from $27.6 million in 2003 to $28.5 million
in 2004. The net adjustment reflected in stockholders equity for the fair market
value of securities was a positive $376,000 for 2003 compared to a positive
$213,000 for 2004. Common stock and surplus decreased a net $261,000 resulting
from purchase and retirement of stock in the amount of $467,000 and stock issued
under our stock plans in the amount of $206,000.
Total average assets grew .2 percent from 2003 at $231.0 million to 2004
at $231.5 million. Average earning assets were $215.0 million in 2003 and $215.1
million in 2004.
Loans increased 1.6 percent from $147.6 million at December 31, 2003 to
$149.9 million at December 31, 2004.
Non-interest bearing deposits grew 8.1 percent to $18.7 million at
December 31, 2004 from $17.3 million at December 31, 2003. Interest bearing
deposits decreased .5 percent from $154.5 million in 2003 to $153.8 million in
2004.
The loan-to-deposit ratio is a key measurement of liquidity. Our
loan-to-deposit ratio increased during 2004 to 86.9 percent compared to 85.9
percent during 2003.
It is our opinion that the balance sheet mix and the interest rate risk
associated with the balance sheet is within manageable parameters. Constant
monitoring using asset/liability reports and interest rate risk scenarios are in
place along with quarterly asset/liability management meetings on the committee
level by the bank's Board of Directors. Additionally, the bank's Asset/Liability
Committee meets quarterly with an investment consultant.
26
INVESTMENTS
(Dollars in thousands)
2004 2003 2002
------- ------- -------
Federal Agency Obligations $18,135 $16,002 $10,107
Mortgage-backed Securities 32,021 33,338 22,690
Obligations of State and Political Subdivisions 8,930 10,773 15,751
Corporate Securities 0 0 3,419
Marketable Equity Securities 1,378 1,341 363
Restricted Equity Securities 1,370 1,321 1,198
------- ------- -------
Total Investment Securities $61,834 $62,775 $53,528
------- ------- -------
All of our securities are available-for sale and are carried at estimated
fair value. The following table sets forth the estimated maturity distribution
of the investments, the weighted average yield for each type and ranges of
maturity at December 31, 2004. Yields are presented on a tax-equivalent basis,
are based upon carrying value and are weighted for the scheduled maturity. At
December 31, 2004, our investment securities portfolio had an average maturity
of approximately 4.65 years.
(Dollars in Thousands)
----------------------
After One After Five
Year But Years But
Within Within Within After
One Year Five Years Ten Years Ten Years Total
-------- ---------- ---------------------- --------- -----
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------- ----- ------ ----- ------ ----- ------- -----
Federal Agency Obligations 3,136 2.90% 43,068 3.25% $3,004 4.21% $ 948 3.35% $50,156 3.31%
Obligations of State and
Political Subdivisions 0 0.00% 0 0.00% 4,287 7.13% 4,643 6.64% 8,930 6.88%
Marketable Equity Securities 0 0.00% 0 0.00% 0 0.00% 1,378 2.58% 1,378 2.58%
Restricted Equity Securities 0 0.00% 0 0.00% 0 0.00% 1,370 2.87% 1,370 2.87%
------ ------- ------ ------ -------
Total $3,136 2.90% $43,068 3.25% $7,291 6.03% $8,339 5.25% $61,834 3.82%
------ ------- ------ ------ -------
Available-for-sale securities are reported on the balance sheet at fair
value. An adjustment to capital, net of deferred taxes, is the offset for this
entry. The possibility of material price volatility in a changing interest rate
environment is offset by the availability to us of restructuring the portfolio
for gap positioning at any time through the securities classed as
available-for-sale. The impact of the fair value accounting was an unrealized
gain, net of tax, on December 31, 2004 of $213,000 compared to an unrealized
gain, net of tax, on December 31, 2003 of $376,000.
The mix of securities in the portfolio is 81.1 percent Federal Agency
Obligations, 14.4 percent Municipal Securities, and 4.5 percent Other. We do not
engage in derivative investment products.
LOANS
LOAN PORTFOLIO
LOANS OUTSTANDING
(Dollars in thousands)
2004 2003 2002 2001 2000
--------- --------- --------- --------- ---------
Commercial $ 12,182 $ 15,328 $ 15,033 $ 13,091 $ 14,412
Tax-Exempt 10,062 6,214 3,535 1,947 2,869
Real Estate - Construction 734 2,505 1,185 2,538 1,648
Real Estate 122,104 118,129 123,746 115,716 106,604
Personal 4,738 5,410 7,902 9,962 12,317
--------- --------- --------- --------- ---------
Total Gross Loans $ 149,820 $ 147,586 $ 151,401 $ 143,254 $ 137,850
Add (Deduct) Unearned discount (46) (64) (139) (279) (486)
Unamortized loan costs, net of fees 126 109 76 15 (4)
--------- --------- --------- --------- ---------
Loans, Net $ 149,900 $ 147,631 $ 151,338 $ 142,990 $ 137,360
--------- --------- --------- --------- ---------
The loan portfolio increased 1.6 percent from $147.6 million in 2003 to
$149.9 million in 2004. The percentage distribution in the loan portfolio was
82.0 percent in real estate loans at $123.0 million; 8.1 percent in commercial
loans at $12.2 million; 3.2 percent in consumer loans at $4.7 million; and 6.7
percent in tax exempt loans at $10.0 million. Real estate loans were comprised
of 6.5 percent with 7/3-year adjustable rates, 5.1 percent with 5-year
adjustable rates; 35.9 percent with 3-year adjustable rates; 14.3 percent with
1-year adjustable rates; and 9.3 percent with one-day to 3-month adjustable
rates. Many adjustable rate loans have bi-weekly payments. The remaining 28.9
percent of real estate loans were fixed rates.
27
The following table presents the percentage distribution of loans by
category as of the date indicated:
For the years ended December 31,
2004 (%) 2003 (%) 2002 (%) 2001 (%) 2000 (%)
-------- --------- --------- --------- ---------
Commercial 8.13 10.38 9.93 9.14 10.45
Tax Exempt 6.71 4.21 2.34 1.36 2.08
Real Estate-Construction .49 1.70 0.78 1.77 1.20
Real Estate 81.54 80.04 81.73 80.78 77.33
Personal 3.13 3.67 5.22 6.95 8.94
------ ------ ------ ------ ------
Total Loans 100.00 100.00 100.00 100.00 100.00
====== ====== ====== ====== ======
The following table shows the maturity of loans in specified categories of
CCFNB's loan portfolio at December 31, 2004, and the amount of such loans with
predetermined fixed rates or with floating or adjustable rates:
December 31, 2004
-------------------------------------------
Maturing Maturing
Maturing After After Maturing
In One One Year Five Years After
Year Through Through Ten
Or Less Five Years Ten Years Years Total
-------- ---------- ---------- -------- -------
Amounts in Thousands
Commercial, Tax Exempt, Real Estate and
Personal Loans $56,506 $76,042 $14,253 $2,285 $149,086
Real Estate-Construction Loans 734 0 0 0 734
------- ------- ------- ------ --------
Total $57,240 $76,042 $14,253 $2,285 $149,820
======= ======= ======= ====== ========
Amount of Such Loans with:
Predetermined Fixed Rates $ 6,002 $22,738 $11,011 $2,285 $ 42,036
Floating or Adjustable Rates 51,238 53,304 3,242 0 107,784
------- ------- ------- ------ --------
Total $57,240 $76,042 $14,253 $2,285 $149,820
======= ======= ======= ====== ========
DEPOSITS AND BORROWED FUNDS
TABLE OF DISTRIBUTION OF AVERAGE DEPOSITS
(DOLLARS IN THOUSANDS)
December 31,
--------------------------------
2004 2003 2002
-------- -------- --------
Demand deposits $ 46,953 $ 43,106 $ 39,168
Savings deposits 37,881 36,881 33,128
Time deposits 51,133 52,599 53,631
Time deposits, $100,000 and over 36,061 40,036 37,779
-------- -------- --------
Total $172,028 $172,622 $163,706
-------- -------- --------
28
TABLE OF MATURITY DISTRIBUTION OF TIME DEPOSITS OVER $100,000
(Dollars in thousands)
December 31,
-----------------------------
2004 2003 2002
------- ------- -------
Three months or less $ 6,695 $ 7,571 $ 9,236
Over three months to six months 3,034 2,099 5,769
Over six months to twelve months 6,879 6,990 8,123
Over twelve months 9,722 11,272 8,063
------- ------- -------
Total $26,330 $27,932 $31,191
======= ======= =======
Total average deposits decreased by .01 percent from $172.6 million at
year-end 2003 to $172.0 million at year-end 2004. Average savings deposits
increased to $37.9 million at year-end 2004 from $36.9 million at year-end 2003.
Average time deposits decreased 5.9 percent from $92.6 million at year-end 2003
to $87.2 million at year-end 2004. Average non-interest bearing demand deposits
increased to $17.2 million for 2004 from $16.0 million for 2003. Average
interest bearing NOW accounts increased 13.4 percent from $27.1 million for 2003
to $29.8 million for 2004. This change in deposit mix resulted in an overall
positive impact to earnings due to the decrease in Certificates of Deposit and
the increase in core deposits.
Short-term borrowings, securities sold under agreements to repurchase and
day-to-day borrowings from the FHLB increased 2.9 percent from $20.6 million at
year-end 2003 to $21.2 million at year-end 2004. Treasury Tax and Loan deposits
held by us for the U.S. Treasury averaged $296,000 for 2004. One-day borrowings
did not occur in 2004 and repurchase agreements increased from an average $16.8
million in 2003 to $18.2 million in 2004. Long-term borrowings, namely
borrowings from the FHLB-Pgh, averaged $11.3 million for 2004.
NON-PERFORMING ASSETS
PAST DUE AND NON-ACCRUAL LOANS
(Dollars in thousands)
Real Installment
2004 Estate Loans Commercial Total
---- ------ ----------- ---------- ------
Days 30-89 $ 421 $71 $ 0 $ 492
Days 90 Plus 20 0 0 20
Non-accrual 902 0 339 1,241
------ --- ---- ------
Total $1,343 $71 $339 1,753
====== === ==== ======
Real Installment
2003 Estate Loans Commercial Total
---- ------ ----------- ---------- ------
Days 30-89 $ 438 $66 $ 81 $ 585
Days 90 Plus 345 0 24 369
Non-accrual 1,208 3 641 1852
------ --- ---- ------
Total $1,991 $69 $746 $2,806
====== === ==== ======
Real Installment
2002 Estate Loans Commercial Total
---- ------ ----------- ---------- ------
Days 30-89 $1,216 $112 $ 513 $1,841
Days 90 Plus 40 10 0 50
Non-accrual 1,279 6 837 2,122
------ ---- ------ ------
Total $2,535 $128 $1,350 $4,013
====== ==== ====== ======
At year-end 2004, loans 30-89 days past due totaled $492,000 compared to
$585,000 at year-end 2003. Past due loans 90 days plus totaled $20,000 at
year-end 2004 compared to $369,000 at year-end 2003. Non-accrual loans at
year-end 2004 totaled $1,241,000 compared to $1,852,000 at year-end 2003.
Overall, past due and non-accrual loans decreased 37.5 percent from $2,806,000
at year-end 2003 to $1,753,000 at year-end 2004. During this same period of
time, the ratio of net charge offs during the period to average loans
outstanding during the period was .11 percent. (See Summary of Loan Loss
Experience). We do not consider these percentages to be significant or material.
Refer to the Loan section of footnote one to the Consolidated Financial
Statements, Item 8.
29
The following table presents a summary of CCFNB's loan loss experience as
of the dates indicated:
For Years Ended December 31,
----------------------------------------------------------------------
2004 2003 2002 2001 2000
--------- --------- --------- --------- ---------
Loans Outstanding at End of Period $ 149,900 $ 147,631 $ 151,338 $ 142,990 $ 137,360
========= ========= ========= ========= =========
Average Loans Outstanding During the Period $ 147,348 $ 148,344 $ 147,545 $ 139,219 $ 134,325
========= ========= ========= ========= =========
Allowance for Loan Losses:
Balance, Beginning of Period $ 1,415 $ 1,298 $ 1,028 $ 1,008 $ 985
--------- --------- --------- --------- ---------
Loans Charged Off:
Commercial and Industrial (147) (52) (29) (94) 0
Real Estate Mortgages (25) 0 (17) (13) (1)
Consumer (31) (76) (54) (82) (97)
--------- --------- --------- --------- ---------
Total Loans Charged Off (203) (128) (100) (189) (98)
Recoveries:
Commercial and Industrial 0 12 19 14 5
Real Estate Mortgages 5 0 0 0 3
Credit Cards 0 0 0 3 4
Consumer 35 33 42 29 55
--------- --------- --------- --------- ---------
Total Recoveries 40 45 61 46 67
--------- --------- --------- --------- ---------
Net Loans Charged Off (163) (83) (39) (143) (31)
Provision for Loan Losses 140 200 390 163 54
--------- --------- --------- --------- ---------
Balance, End of Period $ 1,392 $ 1,415 $ 1,298 $ 1,028 $ 1,008
========= ========= ========= ========= =========
Ratio of net charge-offs during the year to
average loans outstanding during year 0.11% 0.06% 0.03% 0.10% 0.02%
========= ========= ========= ========= =========
The following table presents an allocation of CCFNB's allowance for loan
losses for specific categories as of the dates indicated:
For Years Ended December 31,
----------------------------------------------
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
Commercial $ 349 $ 493 $ 406 $ 372 $ 173
Real Estate Mortgages 755 696 723 464 318
Consumer 24 28 66 94 79
Unallocated 264 198 103 98 438
------ ------ ------ ------ ------
Total $1,392 $1,415 $1,298 $1,028 $1,008
------ ------ ------ ------ ------
30
The following table presents a summary of CCFNB's nonaccrual, restructured
and past due loans as of the dates indicated:
For Years Ended December 31,
2004 2003 2002 2001 2000
-------- -------- -------- ------- -------
Nonaccrual, Restructured and Past Due Loans:
Nonaccrual Loans $ 1,241 $ 1,336 $ 2,112 $ 729 $ 312
Restructured Loans on Accrual Status 0 516 0 0 0
Accrual Loans Past Due 90 Days or More 20 369 50 969 344
-------- -------- -------- ------- -------
Total Nonaccrual, Restructured and Past
Due Loans $ 1,261 $ 2,221 $ 2,162 $ 1,698 $ 656
======== ======== ======== ======= =======
Other Real Estate $ 0 $ 36 $ 68 $ 0 $ 0
Interest Income That Would Have Been
Recorded Under Original Terms $129,182 $142,873 $131,335 $37,712 $24,225
Interest Income Recorded During the Period $ 86,834 $ 17,586 $ 67,873 $61,568 $ 5,023
ALLOWANCE FOR LOAN LOSSES AND RELATED PROVISION
(Dollars in Thousands)
Outstanding Balance at December 31,
--------------------------------------------------------------
2004 2003 2002
------------------- ------------------- --------------------
% of Loans % of Loans % of Loans
in Category in Category in Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------ ----------- ------ ----------- ------ -----------
Commercial $ 349 15.6 $ 493 13.1 $ 406 13.0
Real estate mortgages 755 81.3 696 81.7 723 82.0
Consumer 24 3.1 28 5.2 66 5.0
Unallocated 264 N/A 198 N/A 103 N/A
------ ----- ------ ----- ------ -----
$1,392 100.0 $1,415 100.0 $1,298 100.0
------ ----- ------ ----- ------ -----
31
The allowance for loan losses was $1,392,000 at December 31, 2004,
compared to $1,415,000 at December 31, 2003. This allowance equaled .93 percent
and .96 percent of total loans, net of unearned income, at the end of 2004 and
2003. This allowance was considered adequate based on delinquency trends and
actual loans written as it relates to the loan portfolio.
The loan loss reserve was analyzed quarterly and reviewed by the bank's
Board of Directors. The assessment of the loan policies and procedures during
2004 revealed no anticipated loss on any loans considered "significant". No
concentration or apparent deterioration in classes of loans or pledged
collateral was evident. Monthly loan meetings with the bank's Credit
Administration Committee reviewed new loans, delinquent loans and loan
exceptions to determine compliance with policies.
LIQUIDITY
Liquidity management is required to ensure that adequate funds will be
available to meet anticipated and unanticipated deposit withdrawals, debt
service payments, investment commitments, commercial and consumer loan demand,
and ongoing operating expenses. Funding sources include principal repayments on
loans, sales of assets, growth in core deposits, short and long-term borrowings,
investment securities coming due, loan prepayments and repurchase agreements.
Regular loan payments are a dependable source of funds, while the sale of
investment securities, deposit growth and loan prepayments are significantly
influenced by general economic conditions and the level of interest rates.
We manage liquidity on a daily basis. We believe that our liquidity is
sufficient to meet present and future financial obligations and commitments on a
timely basis. However, see "Factors That May Affect Future Results" and refer to
consolidated Statements of Cash Flows.
CAPITAL RESOURCES
Capital continues to be a strength for us. Capital is critical as it must
provide growth, payment to shareholders, and absorption of unforeseen losses.
The federal regulators provide standards that must be met. We are subject to
various regulatory capital requirements administered by the 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 impact on our consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, we must meet specific capital guidelines that involve
quantitative measures of our assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. Our capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by federal banking regulation to ensure
capital adequacy require that we maintain minimum amounts and ratios (set forth
in the following table) of Total and Tier I Capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I Capital (as
defined) to average assets (as defined).
As of December 31, 2004, the most recent notification from the Comptroller
of the Currency, the Bank's primary federal regulator, categorized the Bank as
well capitalized under the regulatory framework for prompt corrective action. To
be categorized as well capitalized the Bank must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the
Table. There are no conditions or events since that notification that management
believes have changed the institution's category.
The Bank's actual capital amounts are ratios in the following table:
32
TO be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- ------------------ ---------------------
Amount Ratio(%) Amount Ratio(%) Amount Ratio(%)
------ -------- ------- -------- ------- --------
As of December 31, 2004:
Total Risk Based Capital
(To risk-weighted assets) $30,027 20.31% $11,827 8.00% $14,784 10.00%
Tier I Capital
(To risk-weighted assets) $28,488 19.27% $ 5,913 4.00% $ 8,870 6.00%
Tier I Capital
(To average assets) $34,669 12.17% $11,394 4.00% $14,244 5.00%
As of December 31, 2003:
Total Risk Based Capital
(To risk-weighted assets) $28,752 19.88% $11,570 8.00% $14,463 10.00%
Tier I Capital
(To risk-weighted assets) $27,220 18.82% $ 5,785 4.00% $ 8,678 6.00%
Tier I Capital
(To average assets) $26,303 11.79% $ 8,924 4.00% $11,155 5.00%
Our capital ratios are not materially different from those of the Bank.
33
Dividend payouts are restricted by the Pennsylvania Business Corporation
Law of 1988, as amended (the BCL). The BCL operates generally to preclude
dividend payments if the effect thereof would render us unable to meet our
obligations as they become due. As a practical matter, our payment of dividends
is contingent upon our ability to obtain funding in the form of dividends from
the Bank. Payment of dividends to us by the Bank is subject to the restrictions
set forth in the National Bank Act. Generally, the National Bank Act would
permit the Bank to declare dividends in 2005 of approximately $1,142,885 plus
additional amounts equal to the net income earned in 2005 for the period January
1, 2005 through the date of declaration, less any dividends which may be paid in
2005.
INTEREST RATE RISK MANAGEMENT
Interest rate risk management involves managing the extent to which
interest-sensitive assets and interest-sensitive liabilities are matched.
Interest rate sensitivity is the relationship between market interest rates and
earnings volatility due to the repricing characteristics of assets and
liabilities. The Bank's net interest income is affected by changes in the level
of market interest rates. In order to maintain consistent earnings performance,
the Bank seeks to manage, to the extent possible, the repricing characteristics
of its assets and liabilities.
One major objective of the Bank when managing the rate sensitivity of its
assets and liabilities is to stabilize net interest income. The management of
and authority to assume interest rate risk is the responsibility of the Bank's
Asset/Liability Committee ("ALCO"), which is comprised of senior management and
Board members. ALCO meets quarterly to monitor the ratio of interest sensitive
assets to interest sensitive liabilities. The process to review interest rate
risk management is a regular part of management of the Bank. Consistent policies
and practices of measuring and reporting interest rate risk exposure,
particularly regarding the treatment of noncontractual assets and liabilities,
are in effect. In addition, there is an annual process to review the interest
rate risk policy with the Board of Directors which includes limits on the impact
to earnings from shifts in interest rates.
The ratio between assets and liabilities repricing in specific time
intervals is referred to as an interest rate sensitivity gap. Interest rate
sensitivity gaps can be managed to take advantage of the slope of the yield
curve as well as forecasted changes in the level of interest rate changes.
To manage the interest sensitivity position, an asset/liability model
called "gap analysis" is used to monitor the difference in the volume of the
Bank's interest sensitive assets and liabilities that mature or reprice within
given periods. A positive gap (asset sensitive) indicates that more assets
reprice during a given period compared to liabilities, while a negative gap
(liability sensitive) has the opposite effect. The Bank employs computerized net
interest income simulation modeling to assist in quantifying interest rate risk
exposure. This process measures and quantifies the impact on net interest income
through varying interest rate changes and balance sheet compositions. The use of
this model assists the ALCO to gauge the effects of the interest rate changes on
interest sensitive assets and liabilities in order to determine what impact
these rate changes will have upon the net interest spread.
34
STATEMENT OF INTEREST SENSITIVITY GAP
(Dollars in thousands)
DECEMBER 31, 2004
>90 Days
90 Days But 1 to 5 5 to 10 > 10
Or Less < 1 Year Years Years Years Total
-------- -------- -------- -------- -------- --------
Short-term investments $ 7,815 $ 0 $ 0 $ 0 $ 0 $ 7,815
Securities Available-for-Sale (1) 4,844 18,365 33,566 2,293 2,766 61,834
Loans (1) 30,741 32,570 78,632 7,957 0 149,900
-------- -------- -------- -------- -------- --------
Rate Sensitive Assets 43,400 50,935 112,198 10,250 2,766 219,549
-------- -------- -------- -------- -------- --------
Deposits:
Interest-bearing demand deposits (2) $ 4,428 $ 4,131 $ 22,578 $ 0 $ 0 $ 31,137
Savings (2) 5,485 5,107 27,234 0 0 37,826
Time 23,521 28,843 32,473 0 0 84,837
Borrowed funds 20,322 0 1,435 0 0 21,757
Long-term debt 3 9 2,191 9,014 106 11,323
Shareholders' equity 414 1,242 6,601 8,257 11,992 28,506
-------- -------- -------- -------- -------- --------
Rate Sensitive Liabilities and Shareholders' Equity 54,173 39,332 92,512 17,271 12,098 215,386
-------- -------- -------- -------- -------- --------
Interest Sensitivity Gap (10,773) 11,603 19,686 (7,021) (9,332) 4,163
Cumulative Gap $(10,773) $ 830 $ 20,516 $ 13,495 $ 4,163 $ 0
(1) Investments and loans are included at the earlier of repricing or maturity
adjusted for the effects of prepayments.
(2) Interest bearing demand and savings accounts are included based on
historical experience and managements' judgment about the behavior of these
deposits in changing interest rate environments.
35
At December 31, 2004, our cumulative gap positions and the potential
earnings change resulting from a 200 basis point change in rates were within the
internal risk management guidelines.
Upon reviewing the current interest sensitivity scenario, declining
interest rates could negatively affect net income because the Bank is
asset-sensitive. In an increasing interest rate environment, net income could be
positively affected because more assets than liabilities will reprice during a
given period.
Certain shortcomings are inherent in the method of analysis presented in
the above table. Although certain assets and liabilities may have similar
maturities or periods of repricing, they may react in different degrees to
changes in market interest rates. The interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates,
while interest rates on other types of assets and liabilities may lag behind
changes in market interest rates. Certain assets, such as adjustable-rate
mortgages, have features which restrict changes in interest rates on a
short-term basis and over the life of the asset. In the event of a change in
interest rates, prepayment and early withdrawal levels may deviate significantly
from those assumed in calculating the table. The ability of many borrowers to
service their adjustable-rate debt may decrease in the event of an interest rate
increase.
In addition to gap analysis, the Bank uses earnings simulation to assist
in measuring and controlling interest rate risk.
The following table provides information about our financial instruments.
The table presents the financial instruments including the expected cash flow
over the next five years. In addition the average interest rate is shown for
each period presented. The table also includes the fair market value for each
category of financial instruments as of December 31, 2004. This presentation
differs from the above gap report primarily due to presenting the financial
instruments based on a contractual maturity as opposed to a repricing scenario
as reflected in the above gap report.
36
PRINCIPAL / NOTIONAL AMOUNTS ESTIMATED TO MATURE IN:
(Dollars in thousands)
Fair
There- Value
2005 2006 2007 2008 2009 After Total 12-31-04
---- ------ ------ ------ ------ ------ -------- --------
Rate sensitive assets:
Fixed interest loans (1) 6,002 7,657 5,816 4,933 4,332 13,490 $ 42,230 $ 42,036
Average interest rate 6.42% 6.26% 6.01% 5.68% 5.86% 4.78% 5.28%
Variable interest rate loans (2) 48,415 18,591 16,670 3,204 7,811 3,237 $107,670 $108,032
Average interest rate 5.29% 6.02% 5.75% 5.95% 4.79% 6.64% 5.58%
Fixed interest rate securities (2) 0 3,889 6,601 9,806 4,791 15,171 $ 40,258 $ 40,258
Average interest rate 0.00% 2.67% 3.03% 3.13% 3.40% 4.90% 3.75%
Variable interest rate securities (2) 2,748 0 0 1,000 2,496 15,332 $ 21,576 $ 21,576
Average interest rate 2.69% 0.00% 0.00% 3.00% 3.00% 3.62% 3.42%
Other interest-bearing assets 7,815 0 0 0 0 0 $ 7,815 $ 7,815
Average interest rate 2.16% 0.00% 0.00% 0.00% 0.00% 0.00% 2.16%
Rate sensitive liabilities:
Non-interest-bearing checking (2) 5,231 3,364 3,364 3,364 3,364 0 $ 18,687 $ 18,687
Average interest rate 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Savings & interest-bearing checking (2) 15,999 10,649 10,649 10,649 10,649 0 $ 58,595 $ 58,595
Average interest rate .30% .30% .30% .30% .30% 0.00% .30%
Money market accounts (2) 3,921 2,941 2,941 0 0 0 $ 9,803 $ 9,803
Average interest rate .35% .35% .35% 0.00% 0.00% 0.00% .35%
Time deposits (under $100,000) 30,015 9,948 8,040 7,678 3,391 0 $ 59,072 $ 59,601
Average interest rate 1.99% 2.34% 3.41% .3.85% 4.00% 0.00% 2.59%
Time deposits (over $100,000) 16,608 1,831 2,194 2,861 2,836 0 $ 26,330 $ 26,588
Average interest rate 2.94% 3.89% 4.28% 4.04% 4317% 0.00% 3.51%
Fixed interest rate borrowings 13 14 160 4 128 4 $ 323 $ 323
Average interest rate 5.91% 5.91% 5.91% 5.91% 5.91% 5.91% 5.91%
Variable interest rate borrowings 21,629 0 0 2,000 128 9,000 $ 32,757 $ 32,852
Average interest rate 1.43% 0.00% 0.00% 5.99% 5.99% 5.99% 3.04%
(1) Investments and loans are included at contractual maturity.
(2) Non interest-bearing checking, interest-bearing checking, savings and
money market accounts are presented reflecting historical experience and
management's judgment about the duration of these deposits.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by this item can be found at Item 7 of this Annual
Report under the caption "Interest Rate Risk Management" and is incorporated in
its entirety by reference under this Item 7A.
37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED FINANCIAL STATEMENTS AND FOOTNOTES
FOR THE FISCAL YEAR-ENDED DECEMBER 31, 2004
CCFNB BANCORP, INC. AND SUBSIDIARY
CCFNB Bancorp, Inc. (the "Corporation") is a registered bank holding
company and organized under the Pennsylvania business corporation law. The
assets are primarily those of its wholly owned subsidiary, the Columbia County
Farmers National Bank.
The Columbia County Farmers National Bank is a full service
nationally-chartered financial institution serving customers from seven
locations in Columbia County; namely Orangeville, Bloomsburg, Benton, Buckhorn,
South Centre, Millville and Lightstreet. The deposits of the Bank are insured by
the Federal Deposit Insurance Corporation to the maximum extent provided by law.
CONSOLIDATED SELECTED FINANCIAL DATA
(In thousands of dollars, except per share data and ratios)
2004 2003 2002
---- ---- ----
EARNINGS
Interest income $ 10,843 $ 11,221 $ 12,780
Interest expense 3,669 4,366 5,741
Provision for loan losses 140 200 309
Investment securities gains 4 8 137
Net income 2,217 2,163 1,922
PER SHARE
Net Income $ 1.74 $ 1.69 $ 1.47
Cash dividends .70 .66 .63
BALANCES AT DECEMBER 31
Assets $235,377 $232,914 $229,032
Investment securities 61,834 62,775 53,528
Net loans 148,508 146,215 150,040
Deposits 172,487 171,786 172,127
Stockholders' equity 28,506 27,603 26,840
RATIOS
Return on average assets .96% .94% .86%
Return on average equity 7.88% 7.95% 7.22%
Dividend payout ratio 40.19% 39.02% 42.86%
38
CCFNB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
2004 2003
---- ----
ASSETS
Cash and due from banks $ 5,017,525 $ 6,358,541
Interest-bearing deposits with other banks 1,820,989 5,480,177
Federal funds sold 5,994,013 523,336
Investment securities available-for-sale 61,834,051 62,774,590
Loans, net of unearned income 149,899,701 147,630,702
Allowance for loan losses 1,391,826 1,415,431
------------ ------------
Net loans 148,507,875 146,215,271
Premises and equipment, net 4,518,625 4,282,457
Other real estate owned - 35,696
Cash surrender value of bank-owned life insurance 6,199,187 5,907,940
Accrued interest receivable 816,281 810,912
Other assets 668,158 525,401
------------ ------------
TOTAL ASSETS $235,376,704 $232,914,321
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Non-interest bearing $ 18,687,440 $ 17,313,192
Interest bearing 153,799,669 154,472,449
------------ ------------
Total Deposits 172,487,109 171,785,641
Short-term borrowings 21,757,386 20,990,219
Long-term borrowings 11,323,443 11,335,477
Accrued interest and other expenses 1,268,762 1,186,968
Other liabilities 33,507 12,618
------------ ------------
TOTAL LIABILITIES 206,870,207 205,310,923
============ ============
STOCKHOLDERS' EQUITY
Common stock, par value $1.25 per share; authorized 5,000,000 shares;
issued and outstanding 1,267,718 shares 2004, 1,276,445 shares 2003 1,584,648 1,595,556
Surplus 3,384,761 3,634,608
Retained earnings 23,323,955 21,997,539
Accumulated other comprehensive income 213,133 375,695
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 28,506,497 27,603,398
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $235,376,704 $232,914,321
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
39
CCFNB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2003 2002
---- ---- ----
INTEREST INCOME
Interest and fees on loans $ 8,746,190 $ 9,206,892 $10,096,412
Interest and dividends on investment securities:
Taxable 1,508,096 1,252,973 1,710,258
Tax-exempt 449,988 609,478 798,663
Dividends 71,944 60,934 58,792
Federal funds sold 15,662 42,562 51,224
Deposits in other banks 51,279 48,487 64,872
----------- ----------- -----------
TOTAL INTEREST INCOME 10,843,159 11,221,326 12,780,221
----------- ----------- -----------
INTEREST EXPENSE
Deposits 2,684,235 3,400,449 4,724,904
Short-term borrowings 303,883 286,216 336,364
Long-term borrowings 680,816 679,277 679,936
----------- ----------- -----------
TOTAL INTEREST EXPENSE 3,668,934 4,365,942 5,741,204
----------- ----------- -----------
Net interest income 7,174,225 6,855,384 7,039,017
Provision for loan losses 140,000 200,000 309,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 7,034,225 6,655,384 6,730,017
----------- ----------- -----------
NON-INTEREST INCOME
Service charges and fees 841,245 691,332 649,071
Gain on sale of loans 26,310 190,382 1,435
Bank-owned life insurance income 257,246 247,334 27,968
Trust department 165,017 147,436 215,145
Other 236,943 222,969 180,059
Investment securities gains, net 3,537 8,369 136,892
----------- ----------- -----------
TOTAL NON-INTEREST INCOME 1,530,298 1,507,822 1,210,570
----------- ----------- -----------
NON-INTEREST EXPENSE
Salaries 2,288,564 2,199,135 2,136,784
Pensions and other employee benefits 772,833 746,350 729,689
Occupancy, net 394,134 378,867 354,643
Equipment 474,879 476,233 587,168
State shares tax 273,861 275,093 254,208
Professional services 228,302 223,658 219,929
Directors' fees 147,152 140,511 140,719
Stationery and supplies 136,232 116,336 128,793
Other 1,030,042 853,019 927,239
----------- ----------- -----------
TOTAL NON-INTEREST EXPENSE 5,745,999 5,409,202 5,479,172
----------- ----------- -----------
Income before income taxes 2,818,524 2,754,004 2,461,415
Income tax expense 601,111 591,107 539,157
----------- ----------- -----------
NET INCOME $ 2,217,413 $ 2,162,897 $ 1,922,258
=========== =========== ===========
PER SHARE DATA
Net income $ 1.74 $ 1.69 $ 1.47
Cash dividends 0.70 0.66 0.63
Weighted average shares outstanding 1,274,034 1,281,265 1,309,084
The accompanying notes are an integral part of these consolidated financial
statements
40
CCFNB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
________________________________________________________________________________
Other
Common Comprehensive Retained Comprehensive Treasury
Stock Surplus Income Earnings Income (loss) Stock Total
----------- ----------- ------------- ----------- ------------- ---------- ------------
BALANCE AT DECEMBER 31, 2001 $ 1,657,715 $ 4,730,002 $19,578,971 $ 75,327 $ - $ 26,042,015
Comprehensive income:
Net income - - $ 1,922,258 1,922,258 - - 1,922,258
Change in net unrealized gain on
investment securities
available-for-sale,
net of reclassification adjustment
and tax effects - - 461,471 - 461,471 - 461,471
-------------
Total comprehensive income $ 2,383,729
-------------
Issuance of 8,052 shares of common stock
under dividend reinvestment and stock
purchase plans 10,065 167,188 - - - 177,253
Purchase of 41,500 shares of treasury - - - - (940,400) (940,400)
stock
Retirement of 41,500 shares of treasury
stock (51,875) (888,525) - - 940,400 -
Cash dividends $.63 per share - - (822,598) - - (822,598)
----------- ----------- ----------- ------------- ---------- ------------
BALANCE AT DECEMBER 31, 2002 1,615,905 4,008,665 20,678,631 536,798 - 26,839,999
Comprehensive income:
Net income - - $ 2,162,897 2,162,897 - - 2,162,897
Change in net unrealized gain on
investment securities
available-for-sale,
net of reclassification adjustment
and tax effects - - (161,103) - (161,103) - (161,103)
-------------
Total comprehensive income $ 2,001,794
-------------
Issuance of 7,709 shares of common stock
under dividend reinvestment and stock
purchase plans 9,636 184,159 - - - 193,795
Purchase of 23,988 shares of treasury - - - - (588,201) (588,201)
stock
Retirement of 23,988 shares of treasury
stock (29,985) (558,216) - - 588,201 -
Cash dividends $.66 per share - - (843,989) - - (843,989)
----------- ----------- ----------- ------------- ---------- ------------
BALANCE AT DECEMBER 31, 2003 1,595,556 3,634,608 21,997,539 375,695 - 27,603,398
Comprehensive income:
Net income - - $ 2,217,413 2,217,413 - - 2,217,413
Change in net unrealized gain on
investment securities
available-for-sale,
net of reclassification adjustment
and tax effects - - (162,562) - (162,562) - (162,562)
Total comprehensive income $ 2,054,851
Issuance of 7,273 shares of common stock
under dividend reinvestment and stock
purchase plans 9,092 197,153 - - - 206,245
Purchase of 16,000 shares of treasury - - - - (467,000) (467,000)
stock
Retirement of 16,000 shares of treasury
stock (20,000) (447,000) - - 467,000 -
Cash dividends $.70 per share - - (890,997) - - (890,997)
----------- ----------- ----------- ------------- ---------- ------------
BALANCE AT DECEMBER 31, 2004 $ 1,584,648 $ 3,384,761 $23,323,955 $ 213,133 $ - $ 28,506,497
----------- ----------- ----------- ------------- ---------- ------------
The accompanying notes are an integral part of these consolidated financial
statements.
41
CCFNB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2003 2002
------------ ------------ ------------
OPERATING ACTIVITIES
Net income $ 2,217,413 $ 2,162,897 $ 1,922,258
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 140,000 200,000 309,000
Depreciation and amortization 374,664 379,733 479,529
Premium amortization on investment securities 336,292 542,743 240,126
Discount accretion on investment securities (24,230) (27,925) (21,966)
Deferred income taxes (benefit) 78,844 (57,242) (139,369)
(Gain) on sales of investment securities available-for-sale (3,537) (8,369) (136,892)
(Gain) on sale of mortgage loans (26,310) (190,382) (1,435)
Proceeds from sale of mortgage loans 1,895,310 9,156,607 143,315
Originations of mortgage loans for resale (2,137,886) (8,966,225) (142,065)
(Gain) loss on sales of other real estate owned 3,180 (30,169) -
(Gain) loss from investment in insurance agency (17,248) (4,865) (78)
(Increase) decrease in accrued interest receivable (5,368) 83,322 83,200
Increase in other assets - net (95,298) (17,677) (11,510)
Net increase in cash surrender value of bank owned life insurance (291,247) (281,334) (76,967)
Increase (decrease) in accrued interest and other expenses 81,794 (145,616) (49,559)
Increase (decrease) in other liabilities - net 20,889 (43,145) 46,100
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,547,262 2,752,353 2,643,687
------------ ------------ ------------
INVESTING ACTIVITIES
Purchase of investment securities available-for-sale (24,794,418) (50,383,679) (31,616,079)
Proceeds from sales, maturities and redemption of investment
securities available-for-sale 25,154,814 40,408,337 35,831,825
Proceeds from sales of other real estate owned 32,516 98,069 -
Net (increase) decrease in loans (2,163,718) 3,589,038 (8,454,934)
Purchase of premises and equipment (610,832) (247,505) (259,713)
Purchase of bank owned life insurance policies - (2,000,000) (3,000,000)
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (2,381,638) (8,535,740) (7,498,901)
------------ ------------ ------------
FINANCING ACTIVITIES
Net increase (decrease) in deposits 701,468 (341,470) 16,461,354
Net increase (decrease) in short-term borrowings 767,167 3,715,967 (2,506,672)
Repayment of long-term borrowings (12,034) (11,338) (10,682)
Acquisition of treasury stock (467,000) (588,201) (940,400)
Proceeds from issuance of common stock 206,245 193,795 177,253
Cash dividends paid (890,997) (843,989) (822,598)
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 304,849 2,124,764 12,358,255
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 470,473 (3,658,623) 7,503,041
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 12,362,054 16,020,677 8,517,636
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 12,832,527 $ 12,362,054 $ 16,020,677
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 3,698,805 $ 4,535,604 $ 5,800,312
Income taxes $ 569,349 $ 624,526 $ 780,669
The accompanying notes are an integral part of these consolidated financial
statements.
42
CCFNB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of CCFNB Bancorp, Inc. and
Subsidiary (the "Corporation") are in accordance with the accounting principles
generally accepted in the United States of America and conform to common
practices within the banking industry. The more significant policies follow:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of CCFNB
Bancorp, Inc. and its wholly owned subsidiary, Columbia County Farmers National
Bank (the "Bank"). All significant inter-company balances and transactions have
been eliminated in consolidation.
NATURE OF OPERATIONS & LINES OF BUSINESS
The Corporation provides full banking services, including trust services,
through the Bank, to individuals and corporate customers. The Bank has seven
offices covering an area of approximately 484 square miles in Northcentral
Pennsylvania. The Corporation and its banking subsidiary are subject to
regulation of the Office of the Comptroller of the Currency, The Federal Deposit
Insurance Corporation and the Federal Reserve Bank of Philadelphia.
Procuring deposits and making loans are the major lines of business. The
deposits are mainly deposits of individuals and small businesses and the loans
are mainly real estate loans covering primary residences and small business
enterprises. The trust services, under the name of CCFNB and Co., include
administration of various estates, pension plans, self-directed IRA's and other
services. A third-party brokerage arrangement is also resident in the
Lightstreet branch. This investment center offers a full line of stocks, bonds
and other non-insured financial services.
On December 19, 2000, the Corporation became a Financial Holding Company
by having filed an election to do so with the Federal Reserve Board. The
Financial Holding Company status was required in order to acquire an interest in
a local insurance agency that occurred during January 2001.
SEGMENT REPORTING
The Corporation's banking subsidiary acts as an independent community
financial services provider, and offers traditional banking and related
financial services to individual, business and government customers. Through its
branch, internet banking, telephone and automated teller machine network, the
Bank offers a full array of commercial and retail financial services, including
the taking of time, savings and demand deposits; the making of commercial,
consumer and mortgage loans; and the providing of other financial services. The
Bank also performs personal, corporate, pension and fiduciary services through
its Trust Department as well as offering diverse investment products through its
investment center.
Management does not separately allocate expenses, including the cost of
funding loan demand, between the commercial, retail, trust and investment center
operations of the Corporation. As such, discrete financial information is not
available and segment reporting would not be meaningful.
USE OF ESTIMATES
The preparation of these consolidated financial statements in conformity
with accounting principles in the United States of America requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
these consolidated financial statements and the reported amounts of income and
expenses during the reporting periods. Actual results could differ from those
estimates.
INVESTMENT SECURITIES
The Corporation classifies its investment securities as either
"held-to-maturity" or "available-for-sale" at the time of purchase. Debt
securities are classified as held-to-maturity when the Corporation has the
ability and positive intent to hold the securities to maturity. Investment
securities held-to-maturity are carried at cost adjusted for amortization of
premiums and accretion of discounts to maturity.
Debt securities not classified as held-to-maturity and equity securities
included in the available-for-sale category, are carried at fair value, and the
amount of any unrealized gain or loss net of the effect of deferred income taxes
is reported as other comprehensive income in the Consolidated Statement of
Stockholders' Equity. Management's decision to sell available-for-sale
securities is based on changes in economic conditions controlling the sources
and uses of funds, terms, availability of and yield of alternative investments,
interest rate risk, and the need for liquidity.
43
The cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization and accretion, as well as interest and
dividends, is included in interest income from investments. Realized gains and
losses are included in net investment securities gains. The cost of investment
securities sold, redeemed or matured is based on the specific identification
method.
LOANS
Loans are stated at their outstanding principal balances, net of deferred
fees or costs, unearned income, and the allowance for loan losses. Interest on
loans is accrued on the principal amount outstanding, primarily on an actual day
basis. Non-refundable loan fees and certain direct costs are deferred and
amortized over the life of the loans using the interest method. The amortization
is reflected as an interest yield adjustment, and the deferred portion of the
net fees and costs is reflected as a part of the loan balance.
Real estate mortgage loans held for resale are carried at the lower of
cost or market on an aggregate basis. These loans are sold with limited recourse
to the Corporation.
Past Due Loans - Generally, a loan is considered past due when a payment
is in arrears for a period of 10 or 15 days, depending on the type of loan.
Delinquent notices are issued at this point and collection efforts will continue
on loans past due beyond 60 days which have not been satisfied. Past due loans
are continually evaluated with determination for charge-off being made when no
reasonable chance remains that the status of the loan can be improved.
Non-Accrual Loans - Generally, a loan is classified as non-accrual, with
the accrual of interest on such a loan discontinued when the contractual payment
of principal or interest has become 90 days past due or management has serious
doubts about further collectibility of principal or interest, even though the
loan currently is performing. A loan may remain on accrual status if it is in
the process of collection and is either guaranteed or well secured. When a loan
is placed on non-accrual status, unpaid interest credited to income in the
current year is reversed, and unpaid interest accrued in prior years is charged
against the allowance for loan losses. Certain non-accrual loans may continue to
perform wherein payments are still being received with those payments generally
applied to principal. Non-accrual loans remain under constant scrutiny and if
performance continues, interest income may be recorded on a cash basis based on
management's judgment as to collectibility of principal.
Allowance for Loan Losses - The allowance for loan losses is established
through provisions for loan losses charged against income. Loans deemed to be
uncollectible are charged against the allowance for loan losses, and subsequent
recoveries, if any, are credited to the allowance.
A factor in estimating the allowance for loan losses is the measurement of
impaired loans. A loan is considered impaired when, based on current information
and events, it is probable that the Corporation will be unable to collect all
amounts due according to the contractual terms of the loan agreement. Under
current accounting standards, the allowance for loan losses related to impaired
loans is based on discounted cash flows using the loan's effective interest rate
or the fair value of the collateral for certain collateral dependent loans.
The allowance for loan losses is maintained at a level established by
management to be adequate to absorb estimated potential loan losses.
Management's periodic evaluation of the adequacy of the allowance for loan
losses is based on the Corporation's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay (including the timing of future payments), the
estimated value of any underlying collateral, composition of the loan portfolio,
current economic conditions, and other relevant factors. This evaluation is
inherently subjective as it requires material estimates, including the amounts
and timing of future cash flows expected to be received on impaired loans that
may be susceptible to significant change.
In addition, an allowance is provided for possible credit losses on
off-balance sheet credit exposures. The allowance is estimated by management and
is classified in other liabilities.
DERIVATIVES
The Bank has outstanding loan commitments that relate to the origination
of mortgage loans that will be held for resale. Pursuant to Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities" as amended by SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities", SFAS No. 149,
"Amendment of Statement 133 on Derivative and Hedging Activities" and the
guidance contained in the Derivatives Implementation Group Statement 133
Implementation Issue No. C 13, the Bank has accounted for such loan commitments
as derivative instruments. The effective date of the implementation guidance is
the first day of the first fiscal quarter beginning after April 10, 2002. The
outstanding loan commitments in this category did not give rise to any losses
for the years December 31, 2004, 2003 and 2002, as the fair market value of each
outstanding loan commitment exceeded the Bank's cost basis in each loan
commitment.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation
computed principally on the straight-line method over the estimated useful lives
of the assets. Maintenance and minor repairs are charged to operations as
incurred. The cost and accumulated depreciation of the premises and equipment
retired or sold are eliminated from the property accounts at the time of
retirement or sale, and the resulting gain or loss is reflected in current
operations.
44
MORTGAGE SERVICING RIGHTS
The Corporation originates and sells real estate loans to investors in the
secondary mortgage market. After the sale, the Corporation retains the right to
service these loans. When originated mortgage loans are sold and servicing is
retained, a servicing asset is capitalized based on relative fair value at the
date of sale. Servicing assets are amortized as an offset to other fees in
proportion to, and over the period of, estimated net servicing income. The
unamortized cost is included in other assets in the accompanying consolidated
balance sheet. The servicing rights are periodically evaluated for impairment
based on their relative fair value.
OTHER REAL ESTATE OWNED
Real estate properties acquired through, or in lieu of, loan foreclosure
are held for sale and are initially recorded at fair value on the date of
foreclosure establishing a new cost basis. After foreclosure, valuations are
periodically performed by management and the real estate is carried at the lower
of carrying amount or fair value less cost to sell and is included in other
assets. Revenues derived from and costs to maintain the assets and subsequent
gains and losses on sales are included in other non-interest income and expense.
BANK OWNED LIFE INSURANCE
The Corporation invests in Bank Owned Life Insurance (BOLI). Purchase of
BOLI provides life insurance coverage on certain employees with the Corporation
being owner and primary beneficiary of the policies.
INVESTMENT IN INSURANCE AGENCY
On January 2, 2001, the Corporation acquired a 50% interest in a local
insurance agency, a corporation organized under the laws of the Commonwealth of
Pennsylvania. The income or loss from this investment is accounted for under the
equity method of accounting. The carrying value of this investment as of
December 31, 2004 and 2003 is $187,543 and $170,296, respectively, and is
carried in other assets in the accompanying consolidated balance sheets.
INCOME TAXES
The provision for income taxes is based on the results of operations,
adjusted primarily for tax-exempt income. Certain items of income and expense
are reported in different periods for financial reporting and tax return
purposes. Deferred tax assets and liabilities are determined based on the
differences between the consolidated financial statement and income tax basis of
assets and liabilities measured by using the enacted tax rates and laws expected
to be in effect when the timing differences are expected to reverse. Deferred
tax expense or benefit is based on the difference between deferred tax asset or
liability from period to period.
PER SHARE DATA
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share", requires dual presentation of basic and diluted earnings per share.
Basic earnings per share is calculated by dividing net income by the weighted
average number of shares of common stock outstanding at the end of each period.
Diluted earnings per share is calculated by increasing the denominator for the
assumed conversion of all potentially dilutive securities. The Corporation does
not have any securities which have or will have a dilutive effect, accordingly,
basic and diluted per share data are the same.
CASH FLOW INFORMATION
For purposes of reporting consolidated cash flows, cash and cash
equivalents include cash on hand and due from banks, interest-bearing deposits
in other banks and federal funds sold. The Corporation considers cash classified
as interest-bearing deposits with other banks as a cash equivalent because they
are represented by cash accounts essentially on a demand basis. Federal funds
are also included as a cash equivalent because they are generally purchased and
sold for one-day periods.
TRUST ASSETS AND INCOME
Property held by the Corporation in a fiduciary or agency capacity for its
customers is not included in the accompanying consolidated financial statements
because such items are not assets of the Corporation. Trust Department income is
generally recognized on a cash basis and is not materially different than if it
was reported on an accrual basis.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2004, the Financial Accounting Standards Board (FASB) issued
Staff Position No. 106-1 "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003", which
allows companies to recognize or defer recognizing the effects of the Medicare
Prescription Drug Improvement and Modernization Act of 2003, or Medicare Act,
for annual financial statements of fiscal years ending after December 7, 2003.
The Medicare Act introduced both a Medicare prescription-drug benefit and a
federal subsidy to sponsors of retiree health-care plans that provide a benefit
at least
45
"actuarially equivalent" to the Medicare benefit. These provisions of the
Medicare Act affect accounting measurements. This standard did not have any
material impact on the Corporation's consolidated financial condition or results
of operations.
In September 2004, the FASB issued Staff Position Emerging Issues Task
Force ("EITF") Issue No. 03-01, "Effective Date of Paragraphs 10-20 of EITF
Issue No. 03-01, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments", which delays the effective date for the
measurement and recognition guidance contained in EITF Issue No. 03-01. EITF
Issue No. 03-01 provides guidance for evaluating whether an investment is
other-than-temporarily impaired and was originally effective for other-than-
temporarily impairment evaluations made in reporting periods beginning after
June 15, 2004. The delay in the effective date for the measurement and
recognition guidance contained in paragraphs 10 through 20 of EITF Issue No.
03-01 does not suspend the requirement to recognize other-than-temporary
impairments as required by existing authoritative literature. The disclosure
guidance in paragraphs 21 and 22 of EITF Issue No. 03-01 remains effective. The
delay will be superseded concurrent with the final issuance of EITF Issue No.
03-01a, which is expected to provide implementation guidance on matters such as
impairment evaluations for declines in value caused by increases in interest
rates and/or sector spreads.
In December 2004, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 153, "Exchanges of Nonmonetary Assets", which amends APB
Opinion No. 29, "Accounting for Nonmonetary Transactions". SFAS No. 153
eliminates the exception from fair value measurement for nonmonetary exchanges
of similar productive assets in Opinion No. 29 and replaces it with an exception
for exchanges that do not have commercial substance. SFAS No. 153 specifies that
a nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. SFAS
No. 153 is effective for nonmonetary exchanges occurring in fiscal periods
beginning after June 15, 2005. The adoption of SFAS No. 153 is not expected to
have a material impact on the Corporation's consolidated financial condition or
results of operations.
In December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment". This Statement is a revision of SFAS No. 123, "Accounting
for Stock-Based Compensation", and supersedes APB Opinion No. 25, "Accounting
for Stock Issued to Employees", and its related guidance. SFAS No. 123 (revised
2004) established standards for the accounting for transactions in which an
entity exchanges its equity instruments for goods or services. This Statement
requires that the cost resulting from all share-based payment transactions be
recognized in the financial statements. This Statement established fair value as
the measurement objective in accounting for share-based payment arrangements and
requires all entities to apply a fair-value-based measurement method in
accounting for share-based payment transactions with employees, except for
equity instruments held by employee share ownership plans. This Statement is
effective for public entities that do not file as small business issuers as of
the beginning of the first interim or annual reporting period that begins after
June 15, 2005. The adoption of SFAS No. 123 (revised 2004) is not expected to
have a material impact on the Corporation's consolidated financial condition or
results of operations.
ADVERTISING COSTS
It is the Corporation's policy to expense advertising costs in the period
in which they are incurred. Advertising expense for the years ended December 31,
2004, 2003 and 2002, was approximately $86,328, $75,434 and $71,923,
respectively.
RECLASSIFICATIONS
Certain amounts in the consolidated financial statements of the prior
years have been reclassified to conform with presentations used in the 2004
consolidated financial statements. Such reclassifications had no effect on the
Corporation's consolidated financial condition or net income.
2. RESTRICTED CASH BALANCES
The Bank is required to maintain average reserve balances with the Federal
Reserve Bank. The amount required at December 31, 2004 was $1,197,000 and was
satisfied by vault cash. Additionally, as compensation for check clearing and
other services, compensating balances are required to be maintained with the
Federal Reserve Bank and other correspondent banks. At December 31, 2004, these
balances were $918,021.
46
3. INVESTMENT SECURITIES AVAILABLE-FOR-SALE
The amortized cost, related estimated fair value, and unrealized gains and
losses for investment securities were as follows at December 31, 2004 and 2003:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ---------- ---------- -------------
DECEMBER 31, 2004:
Obligation of U.S. Government Corporations
and Agencies:
Mortgage-backed $ 32,119,791 $ 127,903 $ 226,683 $ 32,021,011
Other 18,250,000 11,332 126,250 18,135,082
Obligations of state and political subdivisions 8,698,272 236,944 5,678 8,929,538
Marketable equity securities 1,072,858 313,196 7,834 1,378,220
Restricted equity securities 1,370,200 - - 1,370,200
------------- ---------- ---------- -------------
Total $ 61,511,121 $ 689,375 $ 366,445 $ 61,834,051
============= ========== ========== =============
DECEMBER 31, 2003:
Obligation of U.S. Government Corporations
and Agencies:
Mortgage-backed $ 33,299,509 $ 211,830 $ 173,349 $ 33,337,990
Other 16,000,924 33,998 33,291 16,001,631
Obligations of state and political subdivisions 10,474,524 298,152 - 10,772,676
Marketable equity securities 1,083,786 270,330 13,123 1,340,993
Restricted equity securities 1,321,300 - - 1,321,300
------------- ---------- ---------- -------------
Total $ 62,180,043 $ 814,310 $ 219,763 $ 62,774,590
============= ========== ========== =============
Securities available-for-sale with an aggregate fair value of $40,299,434
in 2004 and $38,434,252 in 2003 were pledged to secure public funds, trust
funds, securities sold under agreements to repurchase and other balances of
$28,168,191 in 2004 and $27,696,640 in 2003, as required by law.
The amortized cost and estimated fair value of debt securities, by
expected maturity, are shown below at December 31, 2004. Expected maturities
will differ from contractual maturities, because some borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties. Other securities, marketable equity securities and restricted equity
securities are not considered to have defined maturities and are included in the
"Due after ten years" category:
Estimated Weighted
Amortized Fair Average
Cost Value Yield
------------ ------------ --------
Due in one year or less $ 3,106,841 $ 3,136,132 2.90%
Due after one year through five years 43,305,293 43,068,090 3.25%
Due after five years through ten years 7,160,746 7,291,013 6.03%
Due after ten years 7,938,241 8,338,816 6.07%
------------ ------------
Total $ 61,511,121 $ 61,834,051 3.84%
============ ============
Restricted equity securities consist of stock in the Federal Home Loan
Bank of Pittsburgh (FHLB), Federal Reserve Bank (FRB) and Atlantic Central
Bankers Bank (ACBB) and do not have a readily determinable fair value for
purposes of SFAS No. 115, because their ownership is restricted, and they can be
sold back only to the FHLB, FRB, ACBB or to another member institution.
Therefore, these securities are classified as restricted equity investment
securities, carried at cost, and evaluated for impairment.
There were no aggregate investments with a single issuer (excluding the U.
S. Government and its Agencies) which exceeded ten percent of consolidated
stockholders' equity at December 31, 2004. The quality rating of all obligations
of state and political subdivisions were "A" or higher, as rated by Moody's or
Standard and Poors. The only exceptions were local issues which were not rated,
but were secured by the full faith and credit obligations of the communities
that issued these securities. All of the state and political subdivision
investments were actively traded in a liquid market.
47
Proceeds from sales, maturities and redemptions of investments in debt and
equity securities classified as available-for-sale during 2004, 2003 and 2002
were $25,154,814, $40,408,337 and $35,831,825, respectively. Gross gains
realized on these sales were $3,537, $8,369 and $136,892, respectively. There
were no gross losses on the 2004, 2003, and 2002 sales.
In accordance with disclosures required by EITF No. 03-1, the summary
below shows the gross unrealized losses and fair value, aggregated by investment
category that individual securities have been in a continuous unrealized loss
position for less than or more than 12 months as of December 31, 2004 and 2003:
Less than 12 months 12 months or more Total
-------------------------- ------------------------ -------------------------
Unrealized Unrealized Unrealized
Description of Security Fair Value Loss Fair Value Loss Fair Value Loss
----------------------- ------------- ---------- ----------- ---------- ------------ ----------
December 31, 2004
Obligations of U.S. Government
Corporations and Agencies:
Mortgage backed $ 678,939 $ 5,678 $ - $ - $ 678,939 $ 5,678
Other 16,763,135 157,165 3,412,092 69,518 20,175,227 226,683
Obligations of state and
political subdivisions 15,623,750 126,250 - - 15,623,750 126,250
Marketable Equity Securities - - 90,630 7,834 90,630 7,834
------------- ---------- ----------- ---------- ------------ ----------
Total $ 33,065,824 $ 289,093 $ 3,502,722 $ 77,352 $ 36,568,546 $ 366,445
============= ========== =========== ========== ============ ==========
December 31, 2003
Obligations of U.S. Government
Corporations and Agencies:
Mortgage backed $ 14,229,090 $ 159,831 $ 1,131,042 $ 13,518 $ 15,360,132 $ 173,349
Other 7,466,710 33,291 - - 7,466,710 33,291
Marketable Equity Securities 54,000 274 31,341 12,849 85,341 13,123
------------- ---------- ----------- ---------- ------------ ----------
Total $ 21,749,800 $ 193,396 $ 1,162,383 $ 26,367 $ 22,912,183 $ 219,763
============= ========== =========== ========== ============ ==========
The Corporation invests in various forms of agency debt including mortgage
backed securities and callable agency debt. The fair market value of these
securities is influenced by market interest rates, prepayment speeds on mortgage
securities, bid to offer spreads in the market place and credit premiums for
various types of agency debt. These factors change continuously and therefore
the market value of these securities may be higher or lower than the
Corporation's carrying value at any measurement date.
The Corporation's marketable equity securities represent common stock
positions in various financial institutions. The fair market value of these
equities tends to fluctuate with the overall equity markets as well as the
trends specific to each institution.
The Corporation has both the intent and ability to hold the securities
contained in the previous table for a time necessary to recover the cost.
4. LOANS
Major classifications of loans at December 31, 2004 and 2003 consisted of:
2004 2003
-------------- -------------
Commercial $ 12,181,900 $ 15,327,951
Tax-exempt 10,061,809 6,214,091
Real estate - construction 733,642 2,504,905
Real estate 122,104,012 118,128,511
Personal 4,738,159 5,410,169
-------------- -------------
Total gross loans 149,819,522 147,585,627
Add (Deduct): Unearned discount (46,195) (64,246)
Unamortized loan costs, net of fees 126,374 109,321
-------------- -------------
Loans, net of unearned income $ 149,899,701 $ 147,630,702
============== =============
Real estate loans held-for-sale in the amount of $268,886 at December 31,
2004 are included in real estate loans in the previous schedule and are carried
at the lower of cost or market.
Non-accrual loans at December 31, 2004, 2003 and 2002 were $1,240,616,
$1,851,686, and $2,122,074, respectively. The gross interest that would have
been recorded if these loans had been current in accordance with their original
terms and the amounts actually recorded in income were as follows:
48
2004 2003 2002
--------- --------- ---------
Gross interest due under terms $ 129,182 $ 142,873 $ 131,335
Amount included in income 86,834 17,586 67,873
--------- --------- ---------
Interest income not recognized $ 42,348 $ 125,287 $ 63,462
========= ========= =========
At December 31, 2004, 2003 and 2002 the recorded investment in loans that
are considered to be impaired as defined by SFAS No. 114 was $289,942, $192,409
and $149,278, respectively. No additional charge to operations was required to
provide for the impaired loans since the total allowance for loan losses is
estimated by management to be adequate to provide for the loan loss allowance
required by SFAS No. 114 along with any other potential losses. The average
recorded investment in impaired loans during the years ended December 31, 2004,
2003 and 2002 was approximately $139,084, $232,031 and $86,566, respectively.
Loans past due 90 days or more and still accruing interest amounted to
$20,217 at December 31, 2004 and $369,000 at December 31, 2003, as presented in
accordance with AICPA Statement of Position 01-06, "Accounting by Certain
Entities (Including Entities with Trade Receivables) that Lend to or Finance the
Activities of Others," effective for fiscal years beginning after December 15,
2001.
At December 31, 2004, there were no significant commitments to lend
additional funds with respect to non-accrual and restructured loans.
Changes in the allowance for loan losses for the years ended December 31,
2004, 2003 and 2002 were as follows:
2004 2003 2002
----------- ----------- -----------
Balance, beginning of year $ 1,415,431 $ 1,298,406 $ 1,027,805
Provision charged to operations 140,000 200,000 309,000
Loans charged-off (203,430) (128,452) (99,707)
Recoveries 39,825 45,477 61,308
----------- ----------- -----------
Balance, end of year $ 1,391,826 $ 1,415,431 $ 1,298,406
=========== =========== ===========
5. MORTGAGE SERVICING RIGHTS
The Corporation commenced selling real estate mortgages during the last
quarter of 2002. The mortgage loans sold serviced for others are not included in
the accompanying Consolidated Balance Sheets. The unpaid principal balances of
mortgage loans serviced for others were $9,788,738 and $8,956,268 at December
31, 2004 and 2003, respectively. The balances of amortized mortgage servicing
rights included in other assets at December 31, 2004 and 2003 were $54,207 and
$75,097, respectively. Valuation allowances were not provided since fair values
were determined to exceed carrying values. Fair values were determined using a
discount rate of 6% and average lives of 3 to 6 years depending on loan rate.
The following summarizes mortgage servicing rights capitalized and
amortized.
2004 2003
-------- --------
Balance, January 1 $ 75,097 $ 1,429
Servicing asset additions 7,600 89,662
Amortization (28,490) (15,994)
-------- --------
Balance, December 31 $ 54,207 $ 75,097
======== ========
The Bank does not require custodial escrow accounts in connection with the
forgoing loan servicing.
49
6. PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, 2004 and 2003 follows:
2004 2003
------------ -----------
Land $ 567,939 $ 567,939
Buildings and improvements 4,574,420 4,546,704
Furniture and equipment 4,535,624 4,033,088
------------ -----------
9,677,983 9,147,731
Less: Accumulated depreciation 5,159,358 4,865,274
------------ -----------
$ 4,518,625 $ 4,282,457
============ ===========
Depreciation amounted to $374,664, $379,733 and $479,529 in 2004, 2003 and
2002, respectively.
7. DEPOSITS
Major classifications of deposits at December 31, 2004 and 2003 consisted
of:
2004 2003
------------- -------------
Demand - non-interest bearing $ 18,687,440 $ 17,313,192
Demand - interest bearing 30,572,645 29,736,472
Savings 37,825,629 36,259,730
Time $100,000 and over 26,329,758 27,931,828
Other time 59,071,637 60,544,419
------------- -------------
Balance, December 31 $ 172,487,109 $ 171,785,641
============= =============
The following is a schedule reflecting remaining maturities of time
deposits of $100,000 and over at December 31, 2004:
2005 $ 16,607,725
2006 1,830,754
2007 2,193,848
2008 2,861,519
2009 and thereafter 2,835,912
------------
Total $ 26,329,758
============
Interest expense related to time deposits of $100,000 or more was $914,663
in 2004, $1,208,973 in 2003 and $1,419,337 in 2002.
8. SHORT-TERM BORROWINGS
Securities sold under agreements to repurchase and Federal Home Loan Bank
advances generally represented overnight or less than 30-day borrowings. U.S.
Treasury tax and loan notes for collections made by the Bank were payable on
demand. Short-term borrowings consisted of the following at December 31, 2004
and 2003:
2004 2003
------------------------------------------------ -----------------------------------------------
Weighted Maximum Weighted Maximum
Ending Average Month End Average Ending Average Month End Average
Balance Balance Balance Rate Balance Balance Balance Rate
------------ ------------ ------------ ------- ------------ ----------- ------------ -------
Securities sold under agreements
to repurchase $ 21,175,411 $ 18,184,306 $ 21,175,411 1.66% $ 20,588,977 $ 16,767,01 $ 20,588,977 1.69%
U.S. Treasury tax and loan notes 581,975 296,214 597,329 1.01% 401,242 351,214 1,000,000 0.85%
------------ ------------ ------------ ------------ ----------- ------------
Total $ 21,757,386 $ 18,480,520 $ 21,772,740 1.64% $ 20,990,219 $ 17,118,22 $ 21,588,977 1.67%
============ ============ ============ ============ =========== ============
50
9. LONG-TERM BORROWINGS
Long-term borrowings consist of advances due Federal Home Loan Bank. Under
terms of a blanket agreement, the loans were secured by certain qualifying
assets of the Bank which consisted principally of first mortgage loans and
certain investment securities. The carrying value of these collateralized items
was $11,323,443 at December 31, 2004. The Bank has lines of credit with Atlantic
Central Bankers Bank and Federal Home Loan Bank in the aggregate amount of
$25,000,000 at December 31, 2004. The unused portion of these lines of credit
were $8,676,557 and $5,000,000, respectively at December 31, 2004. Long-term
borrowings consisted of the following at December 31, 2004 and 2003:
2004 2003
------------ ------------
Loandated November 28, 1997 in the original amount of $225,000 for a 10 year
term requiring monthly payments of $1,627 including interest at 6.12%,
maturing in 2007 with a final payment due of $146,690. Principal
balances outstanding. $ 174,815 $ 183,361
Loan dated February 18, 1998 in the original amount of $2,000,000 for a 10 year term
with a 5 year put. Interest only is payable monthly at 5.48% with a floating rate
option, at the discretion of FHLB, at the end of 5 years. Principal
balances oustanding. 2,000,000 2,000,000
Loan dated June 25, 1998 in the original amount of $72,000 for a 30 year term
requiring monthly payments of $425 including interest at 5.856%. Principal balances
outstanding. 65,135 66,381
Loandated February 23, 1999 in the original amount of $29,160 for a 20 year
term requiring monthly payments of $179 including interest at 5.50%. Principal
balances outstanding. 25,421 26,150
Loan dated August 20, 1999 in the original amount of $32,400 for a 20 year term
requiring monthly payments of $199 including interest at 5.50%. Principal balances
outstanding. 28,657 29,444
Loan dated January 27, 2000 in the original amount of $5,000,000 for a 10 year term
with a 1 year conversion date, at the discretion of FHLB, and a 3 month
conversion frequency thereafter. At December 31, 2004 the interest rate was 6.00%.
Principal balances outstanding. 5,000,000 5,000,000
Loan dated August 16, 2000 in the original amount of $2,000,000 for a 10 year term
with a 6 month conversion date, at the discretion of FHLB, and a 3 month
conversion frequency thereafter. At December 31, 2004 the interest rate was 5.925%.
Principal balances outstanding. 2,000,000 2,000,000
Loan dated September 20, 2000 in the original amount of $2,000,000 for a 10 year term
with a 3 year conversion date, at the discretion of FHLB, and a 3 month
conversion frequency thereafter. At December 31, 2004 the interest rate was 6.10%.
Principal balances outstanding. 2,000,000 2,000,000
Loan dated December 13, 2000 in the original amount of $32,092 for a 20 year term
requiring monthly payments of $197 including interest at 5.50%. Principal
balances outstanding. 29,415 30,141
------------ ------------
Total $ 11,323,443 $ 11,335,477
============ ============
At December 31, 2004 the annual maturities of long-term debt were as
follows: $12,773 in 2005, $13,558 in 2006, $160,203 in 2007, $2,004,367 in 2008,
$4,618 in 2009 and $9,127,924 thereafter.
10. COMPREHENSIVE INCOME
The components of the change in other comprehensive income and related tax
effects are as follows:
Years Ended December 31,
-------------------------------------
2004 2003 2002
---------- ---------- ---------
Unrealized holding gains (losses) on available-for-sale
investment securities $ (275,155) $ (230,183) $ 840,186
Reclassification adjustment for gains realized in income 3,537 8,369 136,892
---------- ---------- ---------
Change in unrealized gains (losses) before tax effect (271,618) (221,814) 703,294
Tax effect 109,056 60,711 (241,823)
---------- ---------- ---------
Net change in unrealized gains (losses) $ (162,562) $ (161,103) $ 461,471
========== ========== =========
51
11. STOCKHOLDERS' EQUITY AND STOCK PURCHASE PLANS
The Amended Articles of Incorporation contain a provision that permits
the Corporation to issue warrants for the purchase of shares of common stock,
par value $1.25 per share (the "Common Stock"), at below market prices in the
event any person or entity acquires 25% or more of the Common Stock.
The Corporation offers employees a stock purchase plan. The maximum
number of shares of the Common Stock to be issued under this plan shall be
20,000. In addition, the Corporation may choose to purchase shares on the open
market to facilitate this plan. A participating employee may annually elect
deductions of at least 1% of base pay, but not more than 10% of base pay, to
cover purchases of shares under this plan. A participating employee shall be
deemed to have been granted an option to purchase a number of shares of the
Common Stock equal to the annual aggregate amount of payroll deductions elected
by the employee divided by 90% of the fair market value of Common Stock on the
first day of January in each year. Stock issued to participating employees under
the plan for the most recent three year period was:
Per Share
----------------------
Employees' Market
Number Purchase Value
of Shares Price of Shares
--------- ---------- ---------
Date Issued:
2004 469 $ 25.20 $ 28.00
2003 641 $ 21.22 $ 23.58
2002 590 $ 20.92 $ 23.25
The Corporation also offers to its stockholders a Dividend Reinvestment
and Stock Purchase Plan. Under the plan, the Corporation registered with the
Securities and Exchange Commission 500,000 shares of the Common Stock to be sold
pursuant to the plan. The price per share for purchases under this plan is
determined at each quarterly dividend payment date by the reported average mean
between the bid and asked prices for the shares at the close of trading in the
over-the-counter market on the trading day immediately preceding the quarterly
dividend payment date. Participation in this plan by Shareholders began in June
1995. Shares issued under this plan for the most recent three year period was:
Number Total
of Shares Proceeds
--------- ----------
Year:
2004 6,804 $ 194,425
2003 7,068 $ 180,193
2002 7,462 $ 164,906
12. INCOME TAXES
The provision for income tax expense consisted of the following
components:
2004 2003 2002
----------- ----------- ----------
Federal:
Current $ 522,267 $ 648,349 $ 678,526
Deferred (benefit) 79,146 (57,728) (139,377)
----------- ----------- ----------
601,413 590,621 539,149
----------- ----------- ----------
State:
Current - - -
Deferred (benefit) (302) 486 8
----------- ----------- ----------
(302) 486 8
----------- ----------- ----------
Total Provision for Taxes $ 601,111 $ 591,107 $ 539,157
=========== =========== ==========
A reconciliation of the actual provision for federal income tax expense
and the amounts which would have been recorded based upon the statutory rate of
34% follows:
52
2004 2003 2002
--------------------- -------------------- ---------------------
Amount % Rate Amount % Rate Amount % Rate
--------- ------ ------- ------ ------- ------
Provision at statutory rate $ 958,298 34.0 $ 936,361 34.0 $ 836,811 34.0
Tax-exempt income (283,567) (10.1) (282,067) (10.2) (323,811) (13.2)
Non-deductible expenses 23,262 0.8 26,314 0.9 38,296 1.6
Bank owned life insurance income-net (87,464) (3.1) (84,094) (3.1) (9,509) (0.4)
Other, net (9,116) (0.3) (5,893) (0.2) (2,638) (0.1)
--------- ----- --------- ----- --------- -----
Actual federal income tax and rate $ 601,413 21.3 $ 590,621 21.4 $ 539,149 21.9
========= ===== ========= ===== ========= =====
Income taxes applicable to realized security gains included in the
provision for income taxes totaled $1,203 in 2004, $2,845 in 2003 and $48,110 in
2002.
The net deferred tax asset (liability) recorded by the Corporation
consisted of the following tax effects of temporary timing differences at
December 31, 2004, 2003 and 2002:
2004 2003 2002
---- ---- ----
Deferred tax assets:
Allowance for loan losses $ 371,459 $ 379,485 $ 339,696
Allowance for off balance sheet losses 3,230 1,530 -
Deferred compensation and director's fees 227,019 201,611 185,430
Non-accrual loan interest 12,704 33,260 16,800
Mortgage Servicing Rights 9,559 3,463 -
Contributions - - 5,588
Investment in insurance agency - - 746
---------- ----------- -----------
Total 623,971 619,349 548,260
========== =========== ===========
Deferred tax liabilities:
Loan fees and costs (75,993) (76,689) (74,104)
Accretion (1,067) (986) (2,516)
Unrealized investment securities gains (109,795) (218,852) (279,563)
Depreciation (337,924) (259,504) (247,944)
Investment in insurance agency (6,894) (1,232) -
---------- ----------- -----------
Total (531,673) (557,263) (604,127)
---------- ----------- -----------
Net deferred tax asset (liability) $ 92,298 $ 62,086 $ (55,867)
========== =========== ===========
The above net deferred asset (liability) is included in other assets or
other liabilities on the consolidated balance sheets. It is anticipated that all
tax assets shown above will be realized, accordingly, no valuation allowance was
provided.
The Corporation and its subsidiary file a consolidated federal income tax
return. The Parent Company is also required to file a separate state income tax
return and has available state operating loss carryforwards totaling $654,229.
The losses expire through 2024. The related deferred state tax asset in the
amount of $65,357 has been fully reserved and is not reflected in the net tax
asset (liability) since management is of the opinion that such assets will not
be realized in the foreseeable future.
13. EMPLOYEE BENEFIT AND DEFERRED COMPENSATION PLANS
EMPLOYEE BENEFIT PLANS
The Bank maintains a 401K salary deferred profit sharing plan for the
benefit of its employees. Under the salary deferral component, employees may
elect to contribute up to 25% of their compensation with the possibility that
the Bank may make matching contributions to the plan. Under the profit sharing
component, contributions are made at the discretion of the Board of Directors.
Matching contributions amounted to $63,453, $64,088 and $24,927 for 2004,
2003 and 2002, respectively. Discretionary contributions amounted to $0, $0 and
$92,312 in 2004, 2003 and 2002, respectively.
53
DEFERRED COMPENSATION PLANS
DIRECTORS
During 1990, the Bank entered into agreements with two directors to
establish non-qualified deferred compensation plans for each of these directors.
In 1994, additional plans were established for these two directors plus another
director. These plans were limited to four-year terms. The Bank may, however,
enter into subsequent similar plans with its directors. Each of the
participating directors deferred the payment to himself of certain directors'
fees to which he was entitled. Each director's future payment is based upon the
cumulative amount of deferred fees together with interest currently accruing
thereon at the rate of 8% per annum, subject to change by the Board of
Directors. The total accrued liability was $212,669 and $214,418, respectively,
relating to these directors' deferred compensation agreements.
During 2003, the directors were given the option of receiving or deferring
their directors' fees under a non-qualified deferred compensation plan which
allows the director to defer such fees until the year following the expiration
of the directors' term. Payments are then made over specified terms under these
arrangements up to a ten year period. Interest is to accrue on these deferred
fees at a five year certificate of deposit rate, which was 4% in 2004. The
certificate of deposit rate will reset in January 2008. Two directors have
elected to participate in this program and the total accrued liability at
December 31, 2004 and 2003 was $41,753 and $13,317, respectively.
Total directors fees, including amounts currently paid for the years ended
December 31, 2004, 2003 and 2002 were $147,152, $140,511 and $140,719,
respectively, and the total accrued liabilities under the directors deferred
compensation plans as of December 31, 2004 and 2003 were $254,422 and $227,735,
respectively.
EXECUTIVE OFFICERS
In 1992, the Bank entered into agreements with two executive officers to
establish non-qualified deferred compensation plans. Each officer deferred
compensation in order to participate in this Deferred Compensation Plan. If the
officer continued to serve as an officer of the Bank until he attained
sixty-five (65) years of age, the Bank agreed to pay him 120 guaranteed
consecutive monthly payments commencing on the first day of the month following
the officer's 65th birthday. Each officer's guaranteed monthly payment was based
upon the future value of life insurance purchased with the compensation the
officer has deferred. The Bank obtained life insurance (designating the Bank as
the beneficiary) on the life of each participating officer in an amount which is
intended to cover the Bank's obligations under the Deferred Compensation Plan,
based upon certain actuarial assumptions.
During 2002, the agreements with the two executive officers were modified.
Under one agreement, the executive officer will receive $225,000 payable monthly
over a 10 year period commencing in February 2003. Under another agreement,
another executive officer will receive $175,000 payable monthly over a 10 year
period commencing in April 2003. This second agreement also provides
post-employment health care benefits to the executive officer until the
attainment of age 65. As of December 31, 2004 and 2003, the net cash value of
insurance policies was $344,936 and $318,119 respectively, and the total accrued
liability, equal to the present value of these obligations, was $269,418 and
$295,767, respectively, relating to these executive officers' and directors'
deferred compensation agreements, and the accrued liability related to the
post-employment health care benefit was $9,024 and $14,336 as of December 31,
2004 and December 31, 2003, respectively.
In April 2003, the Bank entered into non-qualified deferred compensation
agreements with three executive officers to provide supplemental retirement
benefits commencing with the executive's retirement and ending 15 years
thereafter. The deferred compensation expense related to these agreements for
the years ended December 31, 2004 and 2003 was $79,710 and $55,131 and the total
accrual liability as of December 31, 2004 and 2003 was $134,841 and $55,131,
respectively.
Total deferred compensation expense for executive officers for the years
ended December 31, 2004, 2003 and 2002 was $95,697, $73,714 and $101,807,
respectively and the total accrued liabilities under the executive officers
deferred compensation plans as of December 31, 2004 and 2003 was $418,283 and
$365,234, respectively.
14. LEASE COMMITMENTS AND CONTINGENCIES
The Corporation's banking subsidiary entered into an operating lease on
October 23, 2004 for the rental of a branch banking facility. The initial lease
is for a term of five years, with two options available to renew for an
additional term of five years each. Rent expense for this facility was $5,043
for the year ended December 31, 2004. Minimum rental payments required under
this lease are: 2005 - $28,000, 2006 - $28,000, 2007 - $28,000, 2008 - $28,000,
2009 - $22,957.
At December 31, 2004 the Bank was leasing some minor office equipment
under operating leases.
Rental expense under operating leases for the years ended December 31,
2004, 2003 and 2002 were $1,304, $2,778 and $4,976, respectively.
In the normal course of business, there were various pending legal actions
and proceedings which were not reflected in the consolidated financial
statements. In the opinion of management, the consolidated financial statements
have not and will not be affected materially by the outcome of such actions and
proceedings.
15. RELATED PARTY TRANSACTIONS
Certain directors and executive officers of the Corporation and the Bank,
as well as companies in which they are principal owners (i.e., at least 10%
ownership), were indebted to the Bank at December 31, 2004 and 2003. These loans
were made on substantially the same terms and conditions, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with unrelated parties. These loans did not present more than the
normal risk of collectibility nor present other unfavorable features.
54
A summary of the activity on the related party loans, comprised of five
directors, seven executive officers and their related companies, consisted of
the following:
2004 2003
----------- -----------
Balance, beginning of year $ 1,688,979 $ 2,004,160
Additions 889,909 654,404
Deductions (1,040,154) (969,585)
----------- -----------
Balance, end of year $ 1,538,734 $ 1,688,979
=========== ===========
The above loans represent funds drawn and outstanding at the date of the
accompanying consolidated financial statement. Commitments by the Bank to
related parties on lines of credit for 2004 and 2003 presented an additional
off-balance sheet risk to the extent of undisbursed funds in the amount of
$441,353 and $410,768, respectively, on the above loans.
16. REGULATORY MATTERS
Dividends are paid by the Corporation to shareholders from its assets
which are mainly provided by dividends from the Bank. However, national banking
laws place certain restrictions on the amount of cash dividends allowed to be
paid by the Bank to the Corporation. Generally, the limitation provides that
dividend payments may not exceed the Bank's current year's retained income plus
retained net income for the preceding two years. Accordingly, in 2005, without
prior regulatory approval, the Bank may declare dividends to the Corporation in
the amount of $1,142,885 plus additional amounts equal to the net income earned
in 2005 for the period January 1, 2005, through the date of declaration, less
any dividends which may have already been paid in 2005. Regulations also limit
the amount of loans and advances from the Bank to the Corporation to 10% of
consolidated net assets.
The Corporation is subject to various regulatory capital requirements
administered by the 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 consolidated financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Corporation must meet specific capital guidelines that involve
quantitative measures of the Corporation's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices. The
Corporation's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors. Management believes, as of December 31, 2004 and 2003, that the
Corporation and the Bank met all capital adequacy requirements to which they are
subject.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation to maintain minimum amounts and ratios (set forth in the
table below) of Total and Tier I Capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I Capital (as defined) to average
assets (as defined).
As of December 31, 2004, the most recent notification from the Office of
the Comptroller of the Currency categorized the Bank as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
The Bank's actual capital amounts (in thousands) and ratios are presented
in the following table:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------- ------ -------- ------- -------- -------
As of December 31, 2004:
Total Risk Based Capital
(To risk-weighted assets) $30,027 20.31% $11,827 8.00% $14,784 10.00%
Tier I Capital
(To risk-weighted assets) $28,488 19.27% $ 5,913 4.00% $ 8,870 6.00%
Tier I Capital
(To average assets) $34,669 12.17% $11,394 4.00% $14,244 5.00%
As of December 31, 2003:
Total Risk Based Capital
(To risk-weighted assets) $28,752 19.88% $11,570 8.00% $14,463 10.00%
Tier I Capital
(To risk-weighted assets) $27,220 18.82% $ 5,785 4.00% $ 8,678 6.00%
Tier I Capital
(To average assets) $26,303 11.79% $ 8,924 4.00% $11,155 5.00%
The Corporation's capital ratios are not materially different from those
of the Bank.
55
17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
The Corporation is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit,
standby letters of credit and commercial letters of credit. Those instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the consolidated balance sheets. The contract or
notional amounts of those instruments reflect the extent of involvement the
Corporation has in particular classes of financial instruments. The Corporation
does not engage in trading activities with respect to any of its financial
instruments with off-balance sheet risk.
The Corporation may require collateral or other security to support
financial instruments with off-balance sheet credit risk. The contract or
notional amounts at December 31, 2004 and 2003 were as follows:
2004 2003
----------- -----------
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit $13,828,499 $13,027,609
Financial standby letters of credit 1,741,568 1,812,748
Performance standby letters of credit 846,260 842,608
Dealer floor plans 852,161 1,412,279
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. Because 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 counter-party. Collateral held
varies but may include accounts receivable, inventory, property, plant,
equipment and income-producing commercial properties.
Standby letters of credit and commercial letters of credit are conditional
commitments issued by the Corporation to guarantee payment to a third party when
a customer either fails to repay an obligation or fails to perform some
non-financial obligation. The credit risk involved in issuing letters of credit
is essentially the same as that involved in extending loan facilities to
customers. The Corporation holds collateral supporting those commitments for
which collateral is deemed necessary. The extent of collateral held for those
commitments at December 31, 2004 varied from 0 percent to 100 percent; the
average amount collateralized was 85.0 percent.
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 letters of credit is represented by the contractual notional 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.
The Corporation granted commercial, consumer and residential loans to
customers primarily within Pennsylvania. Of the total loan portfolio 81.3% was
for real estate loans, principally residential. It was the opinion of management
that the high concentration did not pose an adverse credit risk. Further, it was
management's opinion that the remainder of the loan portfolio was balanced and
diversified to the extent necessary to avoid any significant concentration of
credit.
18. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures
about Fair Value of Financial Instruments", requires disclosure of fair value
information about financial instruments, whether or not required to be
recognized in the consolidated balance sheet, for which it is practicable to
estimate such value. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
These techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. Fair value estimates
derived through these techniques cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. SFAS 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 its fair value disclosures for financial instruments:
CASH AND OTHER SHORT-TERM INSTRUMENTS
Cash and due from banks, interest bearing deposits with other banks,
and Federal Funds sold had carrying values which were a reasonable
estimate of fair value. Accordingly, fair values regarding these
instruments were provided by reference to carrying values reflected on the
consolidated balance sheets.
INVESTMENT SECURITIES
The fair value of investment securities which included mortgage
backed securities were estimated based on bid prices published in
financial newspapers or bid quotations received from securities dealers.
LOANS
Fair values were estimated for categories of loans with similar
financial characteristics. Loans were segregated by type such as
commercial, tax-exempt, real estate mortgages and consumer. For estimation
purposes, each loan category
56
was further segmented into fixed and adjustable rate interest terms and
also into performing and non-performing classifications.
The fair value of each category of performing loans was calculated
by discounting future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit ratings and for the
same remaining maturities.
Fair value for non-performing loans was based on management's
estimate of future cash flows discounted using a rate commensurate with
the risk associated with the estimated future cash flows. The assumptions
used by management were judgmentally determined using specific borrower
information.
CASH SURRENDER VALUE OF BANK OWNED LIFE INSURANCE
The fair values are equal to the current carrying value.
DEPOSITS
Under SFAS No. 107, the fair value of deposits with no stated
maturity, such as Demand Deposits, Savings Accounts, and Money Market
Accounts, was equal to the amount payable on demand at December 31, 2004
and 2003.
Fair values for fixed rate Certificates of Deposit were estimated
using a discounted cash flow calculation that applied interest rates
currently being offered on certificates to a schedule of aggregated
expected monthly maturities on time deposits.
SHORT-TERM BORROWINGS
The carrying amounts of federal funds purchased and securities sold
under agreements to repurchase and other short-term borrowings
approximated their fair values.
LONG-TERM BORROWINGS
The fair values of long-term borrowings, other than capitalized
leases, are estimated using discounted cash flow analyses based on the
Corporation's incremental borrowing rate for similar instruments. The
carrying amounts of capitalized leases approximated their fair values,
because the incremental borrowing rate used in the carrying amount
calculation was at the market rate.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
Management estimated that there were no material differences between
the notional amount and the estimated fair value of those off-balance
sheet items, because they were primarily composed of unfunded loan
commitments which were generally priced at market value at the time of
funding.
57
At December 31, 2004 and 2003, the carrying values and estimated fair
values of financial instruments are presented in the table below:
2004 2003
--------------------------------- --------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------------- ------------- -------------- --------------
Financial Assets:
Cash and short-term investments $ 12,832,527 $ 12,832,527 $ 12,362,054 $ 12,362,054
Investment securities 61,834,051 61,834,051 62,774,590 62,774,590
Loans:
Commercial 12,181,900 12,169,946 15,327,951 15,370,057
Tax-exempt 10,061,809 9,853,309 6,214,091 5,638,217
Real estate - construction 733,642 731,745 2,504,905 2,499,842
Real estate 122,104,012 122,368,121 118,128,511 118,173,859
Personal 4,738,159 4,944,444 5,410,169 5,952,930
--------------- ------------- -------------- --------------
Gross loans 149,819,522 150,067,565 147,585,627 147,634,905
Add (Deduct): Unearned discount (46,195) - (64,246) -
Unamortized loan fees, net of costs 126,374 - 109,321 -
--------------- ------------- -------------- --------------
Loans, net of unearned income 149,899,701 150,067,565 147,630,702 147,634,905
Allowance for losses 1,391,826 - 1,415,431 -
--------------- ------------- -------------- --------------
Net loans $ 148,507,875 $ 150,067,565 $ 146,215,271 $ 147,634,905
=============== ============= ============== ==============
Cash surrender value of bank ow ned life insurance $ 6,199,187 $ 6,199,187 $ 5,907,940 $ 5,907,940
Financial
Liabilities:
Deposits:
Demand - non-interest bearing $ 18,687,440 $ 18,687,440 $ 17,313,192 $ 17,313,192
Demand - interest bearing 30,572,645 30,572,645 29,736,472 29,736,472
Savings 37,825,629 37,825,629 36,259,730 36,259,730
Time - $100,000 and over 26,329,758 26,587,624 27,931,828 28,428,248
Other time 59,071,637 59,601,171 60,544,419 61,740,215
--------------- ------------- -------------- --------------
Total Deposits $ 172,487,109 $ 173,274,509 $ 171,785,641 $ 173,477,857
--------------- ------------- -------------- --------------
Short-Term Borrowings $ 21,757,386 $ 21,757,386 $ 20,990,219 $ 20,990,219
Long-Term Borrowings 11,323,443 11,417,151 11,335,477 13,756,414
Off-Balance Sheet Assets (Liabilities):
Commitments to extend credit $ 13,828,499 $ 13,027,609
Standby letters of credit 1,741,568 1,812,748
Performance standby letters of credit 846,260 842,608
Dealer floor plans 852,161 1,412,279
58
19. PAREENT COMPANY FINANCIAL INFORMATION
Condensed financial information for CCFNB Bancorp, Inc. (Parent
Company only) was as follows:
December 31,
--------------------------
BALANCE SHEETS 2004 2003
- -------------- ----------- -----------
Assets
Cash $ 178,134 $ 367,924
Investment in subsidiary 26,850,446 25,797,196
Investment in other equity securities 1,378,220 1,326,234
Prepayments and other assets 245,276 180,946
Receivable from subsidiary - 35,181
----------- -----------
Total Assets $28,652,076 $27,707,481
----------- -----------
Liabilities and Stockholders' Equity
Accrued expenses and other liabilities $ 110,717 $ 104,083
Payable to subsidiary 34,862 -
----------- -----------
Total Liabilities 145,579 104,083
----------- -----------
Stockholders' Equity
Common stock 1,584,648 1,595,556
Surplus 3,384,761 3,634,608
Retained earnings 23,323,955 21,997,539
Accumulated other comprehensive income 213,133 375,695
----------- -----------
Total Stockholders' Equity 28,506,497 27,603,398
----------- -----------
Total Liabilities and Stockholders' Equity $28,652,076 $27,707,481
----------- -----------
Years Ended December 31,
-------------------------------------------
STATEMENTS OF INCOME 2004 2003 2002
- -------------------- ----------- ----------- -----------
Income
Dividends from subsidiary bank $ 967,703 $ 2,312,406 $ 1,470,933
Dividends - other 37,256 23,432 10,553
Securities gains - 2,804 -
Other 174 - -
Interest 2,661 2,597 2,489
----------- ----------- -----------
Total Income 1,007,794 2,341,239 1,483,975
Operating Expenses 97,013 80,396 72,683
----------- ----------- -----------
Income Before Taxes and Equity in Undistributed
Net Income of Subsidiary 910,781 2,260,843 1,411,292
Applicable income tax (benefit) (22,555) (21,133) (22,758)
----------- ----------- -----------
Income Before Equity in Undistributed Net Income of Subsidiary
and Equity in Income from Insurance Agency 933,336 2,281,976 1,434,050
Equity in (excess of) undistributed income of subsidiary 1,266,829 (123,944) 488,130
Income from investment in insurance agency 17,248 4,865 78
----------- ----------- -----------
Net Income $ 2,217,413 $ 2,162,897 $ 1,922,258
----------- ----------- -----------
STATEMENTS OF CASH FLOWS
Operating Activities:
Net income $ 2,217,413 $ 2,162,897 $ 1,922,258
Adjustments to reconcile net income to net cash provided by operating
activities:
Deferred income taxes (benefit) 5,665 1,975 31
Securities gains - (2,804) -
Distributions in excess of (equity in undistributed) net income of
subsidiary (1,266,829) 123,944 (488,130)
(Income) loss from investment in an insurance agency (17,248) (4,865) (78)
(Increase) decrease in prepayments and other assets (47,082) 23,823 (34,474)
(Increase) decrease in receivable from subsidiary 35,181 (35,181) 77,844
Increase (decrease) in payable to subsidiary 34,862 (20,084) 20,084
Increase (decrease) in income taxes and accrued expenses payable - (47,963) (19,705)
----------- ----------- -----------
Net Cash Provided By Operating Activities 961,962 2,201,742 1,477,830
----------- ----------- -----------
Investing Activities:
Purchase of equity securities - (783,217) -
Proceeds from sale of equity securities - 34,691 -
----------- ----------- -----------
Net Cash (Used in) Investing Activities - (748,526) -
----------- ----------- -----------
Financing Activities:
Acquisition of treasury stock (467,000) (588,201) (940,400)
Proceeds from issuance of common stock 206,245 193,795 177,253
Cash dividends (890,997) (843,989) (822,598)
----------- ----------- -----------
Net Cash (Used in) Financing Activities (1,151,752) (1,238,395) (1,585,745)
----------- ----------- -----------
Increase (Decrease) in Cash and Cash Equivalents (189,790) 214,821 (107,915)
Cash and Cash Equivalents at Beginning of Year 367,924 153,103 261,018
----------- ----------- -----------
Cash and Cash Equivalents at End of Year 178,134 $ 367,924 $ 153,103
----------- ----------- -----------
59
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of CCFNB Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of CCFNB Bancorp,
Inc. and Subsidiary as of December 31, 2004 and 2003, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 2004.
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 the standards of the Public Company
Accounting Oversight Board (United States). 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 consolidated 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 consolidated financial position of CCFNB
Bancorp, Inc. and Subsidiary as of December 31, 2004 and 2003, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2004 in conformity with
accounting principles generally accepted in the United States of America.
/s/ J. H. Williams & Co., LLP
J. H. Williams & Co., LLP
Kingston, Pennsylvania
January 14, 2005
60
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF OUR DISCLOSURE CONTROLS AND INTERNAL CONTROLS. Within the 90-day
period prior to the date of this report on Form 10-K, we evaluated the
effectiveness of the design and operation of our "disclosure controls and
procedures" (Disclosure Controls), and our "internal controls and procedures for
financial reporting" (Internal Controls). This evaluation (the Controls
Evaluation) was done under the supervision and with the participation of
management, including our Chief Executive Officer (CEO) and Chief Financial
Officer (Treasurer). Rules adopted by the SEC require that, in this section of
this report, we present the conclusions of the CEO and the Treasurer about the
effectiveness of our Disclosure Controls and Internal Controls based on and as
of the date of the Controls Evaluation.
CEO AND CFO CERTIFICATIONS. Appearing at Exhibits 31.1, 31.2, 32.1 and 32.2 of
this report are two separate forms of "Certifications" for each of the CEO and
the Treasurer. This section of this report which you are currently reading is
the information concerning the Controls Evaluation referred to in the Section
302 Certification and this information should be read in conjunction with the
Section 302 Certification for a more complete understanding of the topics
presented.
DISCLOSURE CONTROLS AND INTERNAL CONTROLS. Disclosure Controls are procedures
that are designed with the objective of ensuring that information required to be
disclosed in our reports filed under the Securities Exchange Act of 1934
(Exchange Act), such as this report, is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules. Disclosure
Controls are also designed with the objective of ensuring that such information
is accumulated and communicated to our management, including the CEO and
Treasurer, as appropriate, to allow timely decisions regarding required
disclosure.
The Corporation has created a disclosure committee. The committee consists of
nine key management personnel. The purpose of the committee is to verify that
all internal controls and procedures are in place in each area of authority.
Whistle Blowing procedures have been put in place and communicated to all
directors and employees. The disclosure committee meets quarterly before each
quarter end.
We design Internal Controls procedures with the objective of providing
reasonable assurance that: (1) our transactions are properly authorized; (2) our
assets are safeguarded against unauthorized or improper use; and (3) our
transactions are properly recorded and reported, all to permit the preparation
of our financial statements in conformity with generally accepted accounting
principals.
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS. Our management, including the CEO
and Treasurer, does not expect that our Disclosure Controls or our Internal
Controls will prevent all error or all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control systems are met. Further, the
design of a control system must reflect the fact that there are resource
constraints, and the benefits or controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within our company and the Bank have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, control may become inadequate because of changes
in conditions, or the degree of compliance with the policies and procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
SCOPE OF THE CONTROLS EVALUATION. The CEO and Treasurer evaluation of our
Disclosure Controls and Internal Controls included a review of the controls'
objectives and design, the control's implementation by us and the Bank and the
effect of the controls on the information generated for use in this report. In
the course of the Controls Evaluation, we sought to identify data errors,
controls problems or acts of fraud and to confirm that appropriate corrective
action, including process improvements, were being undertaken. This type of
evaluation will be done on a quarterly basis so that the conclusions concerning
controls effectiveness can be reported in our Quarterly Reports on Form 10-Q and
Annual Reports on Form 10-K. Our Internal Controls are also evaluated on an
ongoing basis by our Outside Internal Auditors, by other personnel in the Bank
and by our external independent auditors in connection with their audit and
review activities. The overall goals of these various evaluation activities are
to monitor our Disclosure Controls and Internal Controls and to make
modifications as necessary. Our intent in this regard is that the Disclosure
Controls and Internal Controls will be maintained as dynamic systems that change
(including with improvements and corrections) as conditions warrant.
Among other matters, we sought in our evaluation to determine whether there were
any "significant deficiencies" or "material weaknesses" in our and the Bank's
Internal Controls, or whether we had identified any acts of fraud involving
personnel who have a
61
significant role in our and the Bank's Internal Controls. This information was
important both for the Controls Evaluation generally and because items 5 and 6
in the Section 302 Certifications of the CEO and Treasurer require that the CEO
and Treasurer disclose that information to our Board's Audit Committee and to
our independent auditors and to report on related matters in this section of our
Annual Report. In the professional auditing literature, "significant
deficiencies" are referred to as "reportable conditions"; these are control
issues that could have a significant adverse effect on the ability to record,
process, summarize and report financial data in the financial statements. A
"material weakness" is defined in the auditing literature as a particularly
serious reportable condition where the internal control does not reduce to a
relatively low level the risk that misstatements caused by error or fraud may
occur in amounts that would be material in relation to the financial statements
and not be detected within a timely period by employees in the normal course of
performing their assigned functions. In addition, we sought to deal with other
controls matters in the Controls Evaluation, and in each case if a problem was
identified, we considered what revision, improvement and/or correction to make
in accord with our on-going procedures.
In accord with SEC requirements, the CEO and Treasurer note that, since the date
of the Controls Evaluation (Evaluation Date) to the date of this Annual Report,
there have been no significant changes in Internal Controls or in other factors
that could significantly affect Internal Controls, including any corrective
actions with regard to significant deficiencies and material weaknesses.
CONCLUSIONS. Based upon the Controls Evaluation, our CEO and Treasurer have
concluded that, subject to the limitations noted above, our Disclosure Controls
are effective to ensure that material information relating to CCFNB Bancorp,
Inc. and its consolidated subsidiaries is made known to management, including
the CEO and Treasurer, particularly during the period when our Exchange Act
periodic reports are being prepared, and that our Internal Controls are
effective to provide reasonable assurance that our financial statements are
fairly presented in conformity with generally accepted accounting principles.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The Corporation has nine directors who are divided into three classes:
three directors are in Class 1; three directors are in Class 2; and three
directors are in Class 3. Each director holds office for a three-year term. The
terms of the classes are staggered, so that the term of office of one class
expires each year.
At this meeting, the stockholders elect three Class 1 directors. Unless
you withhold authority to vote for one or more of the nominees, the persons
named as proxies intend to vote for the election of the three nominees for Class
1 director. All of the nominees are recommended by the Board of Directors:
Robert M. Brewington, Jr.
Willard H. Kile, Jr.
Charles E. Long
All nominees have consented to serve as directors. The Board of Directors
has no reason to believe that any of the nominees should be unable to act as a
director. However, if any director is unable to stand for re-election, the Board
of Directors will designate a substitute. If a substitute nominee is named, the
proxies will vote for the election of the substitute.
The following information includes the age of each nominee and current
director as of the date of the meeting. All directors of the Corporation are
also directors of the bank.
CLASS 1 DIRECTORS WHOSE TERM EXPIRES IN 2005 AND NOMINEES FOR CLASS 1 DIRECTORS
WHOSE TERM WILL EXPIRE IN 2008
ROBERT M. BREWINGTON, JR., 54
Director since 1996. Owner of Sutliff Motors and Brewington Transportation
and a part owner of J&B Honda (sales and service of cars and trucks;
school bus contractor). Mr. Brewington is the brother of Sally Tucker, the
bank's Marketing Director.
WILLARD H. KILE, JR., D.M.D., 50
Director since 2000. Partner of Kile & Robinson LLC (dentists); Partner of
Kile & Kile Real Estate. Mr. Kile is a first cousin to Lance O. Diehl, our
President and Chief Executive Officer.
CHARLES E. LONG, 69
62
Director since 1993. Retired. Former President of Long Supply Co., Inc. (a
wholesaler and retailer of hardware and masonry products).
63
CLASS 2 DIRECTORS WHOSE TERM EXPIRES IN 2007
LANCE O. DIEHL, 39
Director since 2003. President and Chief Executive Officer of the
Corporation and the bank. Former Executive Vice President of Branch
Operations and Marketing of the bank. Mr. Diehl is a first cousin to Mr.
Kile, a director.
WILLIAM F. HESS, 71
Director since 1983. Former Chairman of the Corporation and the bank.
Dairy farmer.
PAUL E. REICHART, 67
Director since 1983. Chairman and former Vice Chairman of the Corporation
and the bank. Former President and Chief Executive Officer of the
Corporation and the bank.
CLASS 3 DIRECTORS WHOSE TERM EXPIRES IN 2006
EDWARD L. CAMPBELL, 66
Director since 1985. Secretary of the Corporation and the bank. President
of ELC Enterprises, Inc. and the sole proprietor of Heritage Acres
Christmas tree sales.
FRANK D. GEHRIG, 59
Director since 2004. Partner in Accounting Firm of Brewer, Gehrig &
Johnson, Certified Public Accountants.
ELWOOD R. HARDING, JR., 58
Director since 1984. Vice Chairman of the Corporation and the Bank.
Attorney at law and President of Premier Real Estate Settlement Services,
Inc. (title insurance).
PRINCIPAL OFFICERS
Our principal officers are appointed by the Board of Directors and serve at the
will of the Board of Directors, subject to certain change in control agreements
discussed later in this report. The following information is presented for those
persons who were principal officers at December 31, 2004:
EMPLOYEE
NAME & POSITION HELD SINCE SINCE AGE
- ------------------------------------- ---------- -------- ---
Paul E. Reichart,
Chairman 2004 1960 67
Edward L. Campbell,,
Secretary 2004 * 66
Elwood R. Harding, Jr.,
Vice Chairman 2004 * 58
Lance O. Diehl,
President and Chief Executive Officer 2004 1995 39
Virginia D. Kocher
Treasurer and Assistant Secretary 1991 1972 57
* Not an employee of the Company and the Bank.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Executive officers and directors and "beneficial owners" of more than ten
percent of the Common Stock must file initial reports of ownership and reports
of changes in ownership with the SEC pursuant to Section 16(a) of the Securities
Exchange Act of 1934.
We have reviewed the reports and written representations from the executive
officers and directors. The Corporation believes that all filing requirements
were met during 2004 with the exception of the second quarter filing for Frank
D. Gehrig and fourth quarter filing
64
for Willard H. Kile, Jr. Mr. Gehrig was newly appointed to the Board on April
29, 2004 but an initial Statement of Beneficial Ownership, Form 3, was not filed
until May 25, 2004. Filings are electronic now with a two-day filing deadline
from the date of the transaction. The bank was unable to obtain the proper
paperwork and register Mr. Gehrig's initial ownership holdings of 2,052.684,
held between he and his spouse, within the new two-day deadline. Mr. Kile was
gifted 164 shares on October 18, 2004, but the bank was not notified of the
transaction until October 28, 2004, which is the date the Form 4 was
transmitted.
CODE OF ETHICS
All our employees, including our Chief Executive Officer, Chief Financial
Officer and Principal Accounting Officer are required to abide by our Code of
Ethics to ensure that our business is conducted in a consistently legal and
ethical manner. This Code of Ethics forms the foundation of a comprehensive
process that includes compliance with all corporate policies and procedures, an
open relationship among colleagues that contributes to good business conduct,
and an abiding belief in the integrity of our employees. Our policies and
procedures cover all areas of professional conduct, including employment
policies, conflicts of interest, intellectual property and the protection of
confidential information, as well as strict adherence to all laws and
regulations applicable to the conduct of our business.
Employees are required to report any conduct they believe in good faith to be an
actual or apparent violation of the standards contained in our Code of Ethics or
any other unusual or suspicious business arrangement or behavior. The
Sarbanes-Oxley Act of 2002 requires audit committees to have procedures to
receive, retain and treat complaints received regarding accounting, internal
accounting controls or auditing matters and to allow for the confidential and
anonymous submission by employees of concerns regarding questionable accounting
or auditing matters. We currently have such procedures in place.
In addition, the members of our Board of Directors are required to comply with
the Code of Ethics. This Code of Ethics is intended to focus the Board and the
individual directors on areas of ethical risk, help directors recognize and deal
with ethical issues, provide mechanisms to report unethical conduct, and foster
a culture of honesty and accountability. The Code of Ethics covers all areas of
professional conduct relating to service on the Board, including conflicts of
interest, unfair or unethical use of corporate opportunities, strict maintenance
of confidential information, compliance with all applicable laws and regulations
and oversight of ethics and compliance by employees of the Company.
Copies of our Code of Ethics will be provided without charge upon written
request to: Virginia D. Kocher, Treasurer, 232 East Street, Bloomsburg, PA
17815. This Code of Ethics is also included in this 10K as Exhibit 14.
ITEM 11. EXECUTIVE COMPENSATION
This section of the report contains a table that shows the amounts of
compensation earned by our executive officers whose salary and bonus exceeded
$100,000 for 2004. The bank makes all payments to the applicable executive
officers. This section also contains the performance graph comparing our
performance relative to a peer group and the report of our compensation
committee on executive compensation explaining compensation philosophy for our
most highly paid officers.
SUMMARY COMPENSATION TABLE(1)
ANNUAL COMPENSATION
-------------------------------------------
NAME AND PRINCIPAL FISCAL OTHER ANNUAL ALL OTHER
POSITION YEAR SALARY($) BONUS($) COMPENSATION($) COMPENSATION($)
- ------------------- ------ --------- -------- --------------- ---------------
LANCE O. DIEHL 2004 110,000 3,517(2) 15,391(3) 18,121(4)
PRESIDENT AND CHIEF 2003 100,000 1,883(5) 13,048(6) 13,118(7)
EXECUTIVE OFFICER 2002 72,424 2,796(8) 1,130(9) 7,779(10)
(1) From January 1, 2002 through December 31, 2004, we did not pay any
long-term compensation in the form of stock options, stock appreciation
rights, restricted stock or any other long-term compensation, nor did we
enter into any long-term incentive plan payments. Accordingly, no such
information is presented in the summary compensation table set forth
above. No such arrangements are currently in effect.
(2) Represents a cash bonus representing 3 1/2% of 2003 base salary.
(3) Includes $10,800 as the payment of directors' fees and $4,591 representing
the year 2004, 100% up to 3% and 50% up to the next 2% matching
contribution to Mr. Diehl's 401K plan.
(4) Includes $16,047 as a payment for a deferred compensation plan; $678
representing car expense;$403 representing cell phone expense; $758
representing cafeteria plan benefits and $235 as annual term insurance
premium payments on the life of Mr. Diehl.
(5) Represents a cash bonus representing 2 1/2% of 2002 base salary.
65
(6) Includes $8,925 as the payment of directors' fees and $4,123 representing
the year 2003, 100% up to 3% and 50% up to the next 2% matching
contribution to Mr. Diehl's 401K plan.
(7) Includes $11,099 as a payment for a deferred compensation plan; $711
representing car expense; $420 representing cell phone expense; $661
representing cafeteria plan benefits and $227 as annual term insurance
premium payments on the life of Mr. Diehl.
(8) Represents a cash bonus representing 4% of 2001 base salary.
(9) Represents the year 2002, 50% up to 3% matching contribution to Mr.
Diehl's 401K plan.
(10) Includes $3,411 as a contribution to the bank's profit sharing plan; $420
representing cell phone expense; $3,680 representing cafeteria plan
benefits and $268 as annual term insurance premium payments on the life of
Mr. Diehl.
COMMITTEE REPORT ON
EXECUTIVE COMPENSATION
(HOW WE DETERMINE EXECUTIVE COMPENSATION)
COMPOSITION OF COMMITTEE
Our independent directors deem executive compensation to be very important
to the overall development and performance of the company, so they decided to
sit as our committee on executive compensation. Mr. Diehl, the President and
Chief Executive Officer, and Mr. Reichart, the Chairman, do not participate in
discussions and decisions concerning their performance and compensation. All of
our other directors meet the independence standards contained in Rule
4200(a)(15) of the listing rules for The NASDAQ Stock Market.
In addition to this committee on executive compensation, the bank has a
Human Resource Committee comprised of four of our directors who also serve as
directors of the bank. One of those directors is Mr. Reichart who is also the
Chairman of the bank. The bank's Human Resource Committee discusses and reviews
evaluations of all management positions within the bank, except for Messrs
Reichart, the Chairman, Diehl, the President and Chief Executive Officer, and
Wenner, the Executive Vice President and Chief Operating Officer. The
compensation committee on executive compensation is solely responsible for the
compensation decisions involving the latter three officers.
Objectives Of Executive Compensation
Our executive compensation policy aims to:
- Link the executive's goals with your interests as
stockholders;
- Support our strategic business plan and long-term
development;
- Tie a portion of the executive's compensation to our
overall performance; and
- Attract and retain talented management.
Type Of Compensation
We utilize annual compensation which includes salary, bonus and
contributions to our 401K profit sharing plan. We award bonuses based upon our
and the specific executive's performance.
We do not have a long-term compensation program based upon the award of
stock options and restricted stock or other long-term incentive awards. However,
we do have long-term compensation agreements. See the discussion of these
agreements elsewhere in this 10K. We may consider the award of stock options in
the future.
Factors Considered In Determining Compensation
Our committee on executive compensation wants the compensation of an
executive to be competitive with other commercial banking institutions doing
business in similar markets. Each year, our compensation committee on executive
compensation and the bank's Human Resources Committee reviews a report from an
outside consultant that delineates compensation at peer group banking companies;
discusses such report as well as the performance and compatibility to the
position with each executive; and takes into consideration recommendations by
such executives supervisory officers or by members of the Board of Directors for
the senior most executives. The total executive compensation for Messrs.
Reichart, Diehl and Wenner place them generally in the median percentile of
executives in peer group banking companies based upon the report by the outside
consultant. All of these factors are taken into consideration in the
determination of the compensation of the executives as a group and of the
officers individually.
66
Annual Compensation
Annual compensation for our senior executives includes salary, any bonus
and contribution to his 401K profit sharing plan. This is similar to the
compensation programs for most of our peer group banking companies. We intend to
pay salaries at the median of the peer group banking companies that are
represented in the report of the outside consultant.
Chief Executive Officer Compensation
Mr. Diehl received total compensation of $147,029 in the year 2004. Please
refer to the Summary Compensation Table on page 62 for more details.
We established the following 2005 compensation package for Mr. Diehl:
Annual salary to be paid is $120,000, and we expect the other payment and
benefits described in the Summary Compensation Table to remain the same, in 2005
as in 2004.
Other Factors That Influenced Compensation
Our Compensation Committee considered that Mr. Diehl has worked for the
bank for a total of 11 years and has 17 years experience in the financial
services industry. Mr. Diehl is a magna cum laude graduate of Bloomsburg
University, receiving a Bachelor of Science in Business Administration; holds a
Masters in Business Administration from Lehigh University; and is a graduate of
the Stonier Graduate School of Banking.
Committee on Executive Compensation
Robert M. Brewington, Jr.
Edward L. Campbell
Frank D. Gehrig
Elwood R. Harding, Jr.
William F. Hess
Willard H. Kile, Jr.
Charles E. Long
Deferred Compensation Agreements for Executive Officers
In 1992, the bank entered into agreements with two executive officers, Paul E.
Reichart and J. Jan Girton, to establish non-qualified deferred compensation
plans. Each officer deferred compensation in order to participate in this
Deferred Compensation Plan. If the officer continued to serve as an officer of
the bank until he attained 65 years of age, the bank agreed to pay him 120
consecutive monthly payments commencing on the first day of the month following
that officer's 65th birthday. Each officer's monthly payment is based upon the
future value of life insurance purchased with the compensation the officer has
deferred. The bank has obtained life insurance (designating the bank as the
beneficiary) on the life of each of these officers in an amount which is
intended to cover the bank's obligations under this Deferred Compensation Plan,
based upon certain actuarial assumptions.
During 2002, these agreements with the two executive officers, Paul E. Reichart
and J. Jan Girton, were modified. Under one agreement, the executive officer
receives monthly payments of $1,875 for 120 consecutive months commencing in
February 2003. Under another agreement, another executive officer receives
monthly payments of $1,458.33 for 120 consecutive months commencing in April
2003. This second agreement also provides post employment health care benefits
to the executive officer until the attainment of age 65. As of December 31, 2004
and 2003, the net cash values of insurance policies were $407,319 and $318,119,
respectively. The total accrued liability, equal to the present value of these
obligations, was $269,418 and $295,674, respectively. The accrued liability
related to the post employment health care benefit was $13,650 and $14,336 as of
December 31, 2004 and 2003, respectively. Mr. Reichart is the former President
and Chief Executive Officer of the bank and currently the Chairman of the Board.
Mr. Girton served in the capacity of Chief Operating Officer and Executive Vice
President and retired in 2003.
In April 2003, the bank entered into non-qualified deferred compensation
agreements with three additional officers, Lance O. Diehl, Edwin A. Wenner and
Jacob S. Trump, to provide supplemental retirement benefits commencing with
these executive's retirement and ending 15 years thereafter. The deferred
compensation expense related to these agreements for the year ended December 31,
2004 was $79,710 and the total accrued liability as of December 31, 2004 and
December 31, 2003 was $134,841 and $55,131, respectively. Mr.
67
Diehl is currently the President and Chief Executive Officer. Mr. Wenner is
currently the Executive Vice President and Chief Operating Officer. Mr. Trump is
currently the Senior Vice President of Financial Planning.
68
FIVE-YEAR PERFORMANCE GRAPH
The following graph and table compare the cumulative total stockholder return on
our Common Stock during the five-year period ending on December 31, 2004, with
the cumulative total return on the SNL Securities Corporate Performance Index
(1) for 35 publicly-traded banks with under $250 million in total assets in the
United States of America, and the cumulative total return for all United States
stocks traded on the NASDAQ Stock Market. The comparison assumes the value of
the investment in our Common Stock and each index was $100 on December 31, 1999,
and assumes further the reinvestment of dividends into the applicable
securities. The stockholder return shown on the graph and table below is not
necessarily indicative of future performance.
CCFNB BANCORP, INCORPORATED
[LINE GRAPH]
PERIOD ENDING
-------------------------------------------------------------------
INDEX 12/31/99 12/31/00 12/31/01 12/31/02 12/31/03 12/31/04
- --------------------------- -------- -------- --------- -------- -------- --------
CCFNB Bancorp, Incorporated 100.00 85.36 122.61 130.89 157.92 156.01
NASDAQ Composite 100.00 60.82 48.16 33.11 49.93 54.49
SNL <$250M Bank Index 100.00 99.01 123.45 151.70 229.40 283.65
SOURCE : SNL FINANCIAL LC, CHARLOTTESVILLE, VA (434) 977-1600
Notes:
A. The lines represent monthly index levels derived from compounded daily
returns that include all dividends.
B. The indexes are reweighted daily, using the market capitalization on the
previous trading day.
C. If the monthly interval, based on the fiscal year-end, is not a trading
day, the preceding day is used.
D. The index level for all series was set to $100 on 12/31/99.
(1) SNL Securities is a research and publishing firm specializing in the
collection and dissemination of data on the banking, thrift and financial
services industries.
69
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
This section describes how much stock our directors and executive officers own.
It also describes the persons or entities that own more than 5 percent of our
voting stock.
STOCK OWNED BY DIRECTORS, NOMINEES FOR DIRECTOR AND EXECUTIVE DIRECTORS
This table indicates the number of shares of Common Stock owned by the executive
officers and directors as of March 21, 2005. The aggregate number of shares
owned by all directors and executive officers is 4.66%. Unless otherwise noted,
each individual has sole voting and investment power for the shares indicated
below.
NAME OF INDIVIDUAL AMOUNT AND NATURE OF
OF IDENTITY OF GROUP BENEFICIAL OWNERSHIP(1) PERCENT OF CLASS
- ---------------------------------------- ----------------------- ----------------
Robert M. Brewington, Jr. 8,835.277 ----
Edward L. Campbell 6,260.466 ----
Lance O. Diehl 1,092.108 ----
Frank D. Gehrig 2,090.932
Elwood R. Harding, Jr. 15,630.697 1.24%
William F. Hess 4,775.783 ----
Willard H. Kile, Jr. 4,439.010 ----
Virginia D. Kocher 391.000 ----
Charles E. Long 6,605.252 ----
Paul E. Reichart 8,821.000 ----
---------------- ----------
All Officers and Directors as a group
(9 directors, 3 nominees, 5 officers,
10 persons in total) 58,941.525 4.66%
================ ==========
(1) Includes shares held (a) directly, (b) jointly with a spouse, (c)
individually by spouse, (d) by the transfer agent in the Corporation's
dividend reinvestment account, (e) in the 401(k) plan, and (f) in various
trusts.
VOTING STOCK OWNED BY "BENEFICIAL OWNER"
There are no persons or entities known by the Corporation to own beneficially
more than five percent of the Common Stock as of March 21, 2005.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We encourage our directors and executive officers to have banking and financial
transactions with the Bank. All of these transactions are made on comparable
terms and with similar interest rates as those prevailing for other customers.
The total consolidated loans made by the Bank at December 31, 2004, to its
directors and officers as a group, members of their immediate families and
companies in which they have a 10 percent or more ownership interest was
$5,027,096 or approximately 17.6 percent of our total consolidated capital
accounts. The largest amount for all of these loans in 2004 was $9.098,557 or
approximately 31.9 percent of our total consolidated capital accounts. These
loans did not involve more than the normal risk of collectibility nor did they
present other unfavorable features.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
J. H. Williams & Co., LLP, billed the Corporation $65,700, in 2004, for services
rendered for the audit of the Corporation's annual financial statements for the
year ended December 31, 2004 and the reviews of the financial statements
included in the Corporation's reports on SEC Form 10-Q for the quarters ended
March 31, June 30 and September 30, 2004.
AUDIT RELATED FEES
70
J. H. Williams & Co., LLP, billed the Corporation $9,775, in 2004, for the
performance of agreed upon procedures with respect to the trust department
($6,200) and the retail sales of non deposit investment products of the bank
($3,575).
TAX FEES
J. H. Williams & Co., LLP, billed the Corporation $5,700, in 2004, for tax
compliance, tax advice and tax planning.
ALL OTHER FEES
J. H. Williams & Co., LLP billed the Corporation $0, in 2004, for other services
rendered.
All such services that were performed by J. H. Williams & Co., LLP were done by
permanent, full-time employees and partners of such firm.
The Audit Committee considered whether the provision of the services rendered
above was compatible with maintaining the independence of J. H. Williams & Co.,
LLP as the independent outside auditors. The Audit Committee concluded that the
independence of such firm was maintained.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1. Our consolidated financial statements and notes to these statements
as well as the applicable reports of the independent certified public
accountants are filed at Item 8 in this report.
2. All schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes to these
statements.
3. The exhibits required by Item 601 of Regulation S-K are included
under Item 15(c) to this report.
(b) Reports on Form 8-K
We filed three reports on Form 8-K during the quarter ended December 31, 2004.
On November 10, 2004, we filed a Form 8-K in reference to the new Amended
By-Laws of the Corporation.
On December 14, 2004, we filed a Form 8-K disclosing Executive Employment
Agreements, Deferred Director Fees Agreement, Supplemental Executive Retirement
Plan Agreements and salaries for 2005 for the Chairman and Executive Officers.
On December 27, 2004, we filed a Form 8-K in reference to new Director's fees
for 2005.
71
(c) Exhibits required by Item 601 of Regulation S-K:
Exhibit Number Referred to
Item 601 of Regulation SK Description of Exhibit
- -------------------------- --------------------------------------------------------
2 None.
3 None.
4 None.
9 None.
10 None.
11 None.
12 None.
14 Code of Ethics
16 None.
18 None.
21 List of Subsidiaries of the Company.
22 None.
23 Consent of Independent Certified Public Accountants.
24 None.
31.1 CEO certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Principal Financial Officer certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 CEO certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
32.2 Principal Financial Officer certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
72
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.
CCFNB BANCORP, INC.
(Bancorp)
By: /s/ Lance O. Diehl Date: March 9, 2005
------------------------------
Lance O. Diehl
President and Chief Executive 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.
By: /s/ Edward L. Campbell Date: March 9, 2005
------------------------------
Edward L. Campbell
Director and Secretary
By: /s/ Robert M. Brewington, Jr. Date: March 9, 2005
------------------------------
Robert M. Brewington, Jr.
Director
By: /s/ Frank D. Gehrig Date: March 9, 2005
------------------------------
Frank D. Gehrig
Director
By: /s/ Lance O. Diehl Date: March 9, 2005
------------------------------
Lance O. Diehl
President, Chief Executive
Officer and Director
By: /s/ Elwood R. Harding, Jr. Date: March 9, 2005
------------------------------
Elwood R. Harding, Jr.
Director and Vice Chairman of
the Board
By: /s/ William F. Hess Date: March 9, 2005
------------------------------
William F. Hess
Director
73
By: /s/ Willard H. Kile, Jr. Date: March 9, 2005
------------------------------
Willard H. Kile, Jr.
Director
By: /s/ Charles E. Long Date: March 9, 2005
------------------------------
Charles E. Long
Director
By: /s/ Paul E. Reichart Date: March 9, 2005
------------------------------
Paul E. Reichart
Director and Chairman of
the Board
By: /s/ Virginia D. Kocher Date: March 9, 2005
------------------------------
Virginia D. Kocher
Treasurer and Assistant
Secretary (Principal Financial
and Accounting Officer)
74
INDEX TO EXHIBITS
Item Number Description Page
- ----------- ----------- ----
14 Code of Ethics......................................................................... 72
21 List of Subsidiaries of the Company.................................................... 77
23 Consent of Independent Certified Public Accountants.................................... 78
31.1 CEO certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002............ 79
31.2 Principal Financial Officer certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002............................................................. 80
32.1 CEO certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.......................................... 81
32.2 Principal Financial Officer certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002...................... 82
99.A Charter of the Audit Committee ........................................................ 87
75