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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2005
[ ] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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, PA 17815
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (570) 784-4400
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirings for the past 90
days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. 1,264,067 shares of $1.25
(par) common stock were outstanding as of April 26, 2005.
CCFNB BANCORP, INC. AND SUBSIDIARY
INDEX 10-Q
MARCH 31, 2005
Page
-------
PART 1 - FINANCIAL INFORMATION:
- Consolidated Balance Sheets 2
- Consolidated Statements of Income 3
- Consolidated Statements of Cash Flows 4
- Notes to Consolidated Financial Statements 5 - 14
- Report of Independent Registered Public Accounting Firm 15
- Management's Discussion and Analysis of Consolidated Financial Condition
and Results of Operations 16 - 22
- Controls and Procedures 23
PART II - OTHER INFORMATION 24
SIGNATURES 25 - 28
1
CCFNB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
Unaudited
March December
31, 2005 31, 2004
----------- ----------
ASSETS
Cash and due from banks $ 7,486 $ 5,018
Interest-bearing deposits with other banks 1,116 1,821
Federal funds sold 3,707 5,994
Investment securities available-for-sale 58,344 61,834
Loans, net of unearned income 149,815 149,900
Allowance for loan losses 1,442 1,392
----------- ----------
Net loans 148,373 148,508
Premises and equipment, net 4,486 4,519
Cash surrender value of bank-owned life insurance 6,272 6,199
Accrued interest receivable 780 816
Other assets 1,167 668
----------- ----------
TOTAL ASSETS $ 231,731 $ 235,377
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Non-interest bearing $ 19,698 $ 18,687
Interest bearing 151,541 153,800
----------- ----------
Total Deposits 171,239 172,487
Short-term borrowings 19,455 21,757
Long-term borrowings 11,320 11,323
Accrued interest and other expenses 1,299 1,269
Other liabilities 14 34
----------- ----------
TOTAL LIABILITIES 203,327 206,870
----------- ----------
STOCKHOLDERS' EQUITY
Common stock, par value $1.25 per share; authorized
5,000,000 shares; issued and outstanding 1,266,067 shares
in 2005 and 1,267,718 shares in 2004 1,583 1,585
Surplus 3,337 3,385
Retained earnings 23,621 23,324
Accumulated other comprehensive income (loss) (137) 213
----------- ----------
TOTAL STOCKHOLDERS' EQUITY 28,404 28,507
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 231,731 $ 235,377
=========== ==========
See accompanying notes to Consolidated Financial Statements.
2
CCFNB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE DATA)
UNAUDITED
For the Three
Months Ending
March 31,
-----------------------
INTEREST INCOME 2005 2004
---------- ----------
Interest and fees on loans:
Taxable $ 2,090 $ 2,111
Tax-exempt 110 74
Interest and dividends on investment securities:
Taxable interest 387 379
Tax-exempt interest 96 127
Dividends 20 18
Federal funds sold 26 1
Deposits in other banks 6 10
---------- ----------
TOTAL INTEREST INCOME 2,735 2,720
---------- ----------
INTEREST EXPENSE
Deposits 672 672
Short-term borrowings 114 69
Long-term borrowings 167 170
---------- ----------
TOTAL INTEREST EXPENSE 953 911
---------- ----------
Net interest income 1,782 1,809
Provision for loan losses 30 50
---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,752 1,759
---------- ----------
NON-INTEREST INCOME
Service charges and fees 238 167
Gain on sale of loans 15 3
Bank-owned life insurance income 67 71
Trust department 36 34
Other 54 46
Investment securities gains, net - -
---------- ----------
TOTAL NON-INTEREST INCOME 410 321
---------- ----------
NON-INTEREST EXPENSE
Salaries 552 571
Pensions and other employee benefits 204 204
Occupancy, net 116 105
Equipment 124 107
State shares tax 74 73
Professional services 86 65
Directors' fees 47 37
Stationery and supplies 32 32
Other 267 251
---------- ----------
TOTAL NON-INTEREST EXPENSE 1,502 1,445
---------- ----------
Income before income taxes 660 635
Income tax expense 136 126
---------- ----------
NET INCOME $ 524 $ 509
========== ==========
PER SHARE DATA
Net income $ 0.41 $ 0.40
Cash dividends $ 0.18 $ 0.17
Weighted average shares outstanding 1,265,223 1,276,995
See accompanying notes to Consolidated Financial Statements.
3
CCFNB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
OPERATING ACTIVITIES
Net income $ 524 $ 509
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 30 50
Depreciation and amortization 101 83
Premium amortization on investment securities 72 64
Discount accretion on investment securities (5) (13)
Deferred income taxes (benefit) (20) 3
(Gain) on sale of mortgage loans (15) (3)
Proceeds from sale of mortgage loans 732 150
Originations of mortgage loans for resale (621) (148)
(Gain) loss from investment in insurance agency (2) 1
(Increase) decrease in accrued interest receivable and other assets (268) (191)
Net increase in cash surrender value of bank-owned life insurance (73) (77)
Increase (decrease) in accrued interest, other expenses and other liabilities 18 44
---------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 473 472
---------- ---------
INVESTING ACTIVITIES
Purchase of investment securities Available-for-Sale - (8,513)
Proceeds from sales, maturities and redemptions of investment
securities Available-for-Sale 2,891 10,297
Net (increase) decrease in loans 10 1,130
Purchases of premises and equipment (68) (231)
---------- ---------
NET CASH PROVIDED BY INVESTING ACTIVITIES 2,833 2,683
---------- ---------
FINANCING ACTIVITIES
Net increase (decrease) in deposits (1,248) (1,939)
Net increase (decrease) in short-term borrowings (2,302) (4,184)
Net decrease in long-term borrowings (3) (2)
Acquisition of treasury stock (113) -
Proceeds from issuance of common stock 63 64
Cash dividends paid (227) (217)
---------- ---------
NET CASH (USED IN) FINANCING ACTIVITIES (3,830) (6,278)
---------- ---------
(DECREASE) IN CASH AND CASH EQUIVALENTS (524) (3,123)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 12,833 12,362
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,309 $ 9,239
========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 1,011 $ 933
Income taxes $ - $ -
See accompanying notes to Consolidated Financial Statements.
4
CCFNB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
NOTE 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 North Central
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 location. This investment center offers a full line of stocks, bonds
and other non-insured financial services.
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.
5
USE OF ESTIMATES
The preparation of these consolidated financial statements in conformity with
accounting principles generally accepted 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 (loss) (see Note 6). 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.
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.
6
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 judgement 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", and SFAS No. 149
"Amendments to SFAS 133 on Derivative Instruments 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 outstanding loan commitments in this category did
not give rise to any losses for the period ended March 31, 2005 and the year
ended December 31, 2004, as the fair market value of each outstanding loan
commitment exceeded the Bank's cost basis in each loan commitment.
7
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.
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 March
31, 2005 and December 31, 2004 was $190,000 and $187,000, respectively, and is
carried in other assets in the accompanying consolidated balance sheets.
8
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 bases 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 "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.
9
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 periods ended March 31,
2005 and 2004, were approximately $19,042 and $19,000, respectively.
RECLASSIFICATION
Certain amounts in the consolidated financial statements of the prior years have
been reclassified to conform with presentation used in the 2005 consolidated
financial statements. Such reclassifications had no effect on the Corporation's
consolidated financial condition or net income.
10
NOTE 2 - ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the periods ended March 31, 2005
and March 31, 2004 were as follows:
(Amounts in Thousands)
----------------------
2005 2004
-------- ---------
Balance, beginning of year $ 1,392 $ 1,415
Provision charged to operations 30 50
Loans charged-off (7) (116)
Recoveries 27 16
-------- ---------
Balance, March 31 $ 1,442 $ 1,365
======== =========
At March 31, 2005 the recorded investment in loans that are considered to be
impaired as defined by SFAS No. 114 was $172,000. 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.
At March 31, 2005, there were no significant commitments to lend additional
funds with respect to non-accrual and restructured loans.
Non-accrual loans at March 31, 2005 and December 31, 2004 were $1,211,000 and
$1,241,000, respectively.
Loans past due 90 days or more and still accruing interest amounted to $18,000
at March 31, 2005.
NOTE 3 - 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.
NOTE 4 - LONG-TERM BORROWINGS
Long-term borrowings are comprised of advances from the Federal Home Loan Bank.
11
NOTE 5 - DEFERRED COMPENSATION PLANS
The Bank has entered into certain non-qualified deferred compensation agreements
with certain executive officers and directors. Expense related to these
non-qualified deferred compensation plans amounted to $31,000 and $28,000 for
March 31, 2005 and 2004, respectively.
There were no substantial changes in other plans as disclosed in the 2004 Annual
Report.
NOTE 6 - STOCKHOLDERS' EQUITY
Changes in stockholders' equity for the period ended March 31, 2005 were as
follows:
(Amounts in Thousands, Except Common Share Data)
---------------------------------------------------------------------------------------
Accumulated
Other
Comprehensive
Common Common Comprehensive Retained Income Treasury
Shares Stock Surplus Income Earnings (Loss) Stock Total
---------- ------ ------- ------------- -------- ------------- -------- --------
Balance at January 1, 2005 $1,267,718 $1,585 $ 3,385 $ 23,324 $ 213 $ - $ 28,507
Comprehensive Income:
Net income - - - $ 524 524 - - 524
Change in unrealized gain (loss)
on investment securities
available-for-sale net of
reclassification adjustment
and tax effects - - - (350) - (350) - (350)
------
TOTAL COMPREHENSIVE
INCOME $ 174
======
Issuance of 1,984 shares of
common stock under dividend
reinvestment and stock
purchase plans 2,349 3 60 - - - 63
Purchase of 4,000 shares of
treasury stock - - - - - - (113) (113)
Retirement of 4,000 shares of
treasury stock (4,000) (5) (108) - - 113 -
Cash dividends $.41 per share - - - (227) - - (227)
---------- ------ ------- -------- ------ ----- --------
Balance at March 31, 2005 1,266,067 $1,583 $ 3,337 $ 23,621 $ (137) $ - $ 28,404
========== ====== ======= ======== ====== ===== ========
NOTE 7 - 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 consolidated 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.
12
The Corporation may require collateral or other security to support financial
instruments with off-balance sheet credit risk. The contract or notional amounts
at March 31, 2005 and December 31, 2004 were as follows:
(Amounts in Thousands)
----------------------
March December
31, 2005 31, 2004
-------- --------
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit $ 15,738 $ 13,829
Financial standby letters of credit 1,692 1,742
Performance standby letters of credit 846 846
Dealer floor plans 1,111 852
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. 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 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
within Pennsylvania. Of the total loan portfolio at March 31, 2005, 81.9% 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.
NOTE 8 - SUBSEQUENT EVENT
In April 2005 the Corporation entered into an agreement to purchase a vacant
branch bank facility located in Berwick, Pennsylvania. The cost of the property
to be acquired is $550,000 and it is anticipated that an additional expenditure
of approximately $250,000 will be required for renovations and equipment to make
the facility operational.
13
NOTE 9 - MANAGEMENT'S ASSERTIONS AND COMMENTS REQUIRED TO BE PROVIDED WITH
FORM 10Q FILING
In management's opinion, the consolidated interim financial statements reflect
fair presentation of the consolidated financial position of CCFNB Bancorp, Inc.
and Subsidiary, and the results of their operations and their cash flows for the
interim periods presented. Further, the consolidated interim financial
statements are unaudited, however they reflect all adjustments, which are in the
opinion of management, necessary to present fairly the consolidated financial
condition and consolidated results of operations and cash flows for the interim
periods presented and that all such adjustments to the consolidated financial
statements are of a normal recurring nature.
The results of operations for the three-month period ended March 31, 2005, are
not necessarily indicative of the results to be expected for the full year.
These consolidated interim financial statements have been prepared in accordance
with requirements of Form 10Q and therefore do not include all disclosures
normally required by accounting principles generally accepted in the United
States of America applicable to financial institutions as included with
consolidated financial statements included in the Corporation's annual Form 10K
filing. The reader of these consolidated interim financial statements may wish
to refer to the Corporation's annual report or Form 10K for the period ended
December 31, 2004, filed with the Securities and Exchange Commission.
14
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of CCFNB Bancorp, Inc.:
We have reviewed the accompanying consolidated balance sheet of CCFNB Bancorp,
Inc. and Subsidiary as of March 31, 2005, and the related consolidated
statements of income and cash flows for the three month periods ended March 31,
2005 and 2004. These consolidated interim financial statements are the
responsibility of the management of CCFNB Bancorp, Inc. and Subsidiary.
We conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the consolidated interim financial statements referred to above for
them to be in conformity with accounting principles generally accepted in the
United States of America.
We have previously audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet of CCFNB Bancorp, Inc. and Subsidiary as of December 31, 2004, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for the year then ended (not presented herein); and in our report
dated January 14, 2005, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying consolidated balance sheet as of December 31, 2004, is fairly
stated, in all material respects, in relation to the consolidated balance sheet
from which it has been derived.
/s/ J.H. Williams & Co., LLP
J.H. Williams & Co., LLP
Kingston, Pennsylvania
April 22, 2005
15
CCFNB BANCORP, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 2005
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Consolidated Summary of Operations
(Dollars in Thousands, except for per share data)
At and For the Three
Months
Ended March 31, At and For the Years Ended December 31,
---------------------- --------------------------------------------------------------
2005 2004 2004 2003 2002 2001 2000
--------- ---------- ---------- ---------- ---------- ---------- ----------
Income and Expense:
Interest income $ 2,735 $ 2,720 $ 10,843 $ 11,221 $ 12,780 $ 13,720 $ 13,552
Interest expense 953 911 3,669 4,366 5,741 6,924 6,859
--------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income 1,782 1,809 7,174 6,855 7,039 6,796 6,693
Loan loss provision 30 50 140 200 309 163 54
--------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income after
loan loss Provision 1,752 1,759 7,034 6,655 6,730 6,633 6,639
Non-interest income 410 321 1,530 1,508 1,210 1,149 1,053
Non-interest expense 1,502 1,445 5,746 5,409 5,479 5,104 4,967
--------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes 660 635 2,818 2,754 2,461 2,678 2,725
Income taxes 136 126 601 591 539 621 671
--------- ---------- ---------- ---------- ---------- ---------- ----------
Net income $ 524 $ 509 $ 2,217 $ 2,163 $ 1,922 $ 2,057 $ 2,054
========= ========== ========== ========== ========== ========== ==========
Per Share: 1)
Net income $ .41 $ .40 $ 1.74 $ 1.69 $ 1.47 $ 1.54 $ 1.51
Cash dividends paid .18 .17 .70 .66 .63 .59 .56
Average shares outstanding 1,265,223 1,276,995 1,267,718 1,281,265 1,309,084 1,338,007 1,355,624
Average Balance Sheet:
Loans $ 149,617 $ 147,015 $ 147,348 $ 149,485 $ 147,545 $ 139,219 $ 134,325
Investments 62,009 61,934 61,999 58,152 54,197 50,593 47,003
Other earning assets 5,491 5,165 5,705 8,036 5,309 6,569 219
Total assets 232,557 230,103 231,477 230,975 223,476 208,630 196,727
Deposits 171,641 170,817 154,840 171,956 150,883 149,601 139,774
Other interest-bearing
liabilities 31,399 30,232 29,823 29,772 29,356 31,629 31,203
Stockholders' equity 28,222 27,832 28,136 27,223 26,615 25,890 23,910
Balance Sheet Data:
Loans $ 149,815 $ 146,400 $ 149,900 $ 147,631 $ 151,338 $ 142,990 $ 137,360
Investments 58,344 61,093 61,834 62,775 53,528 57,121 47,311
Other earning assets 4,823 4,327 11,012 6,882 10,068 9,644 4,814
Total assets 231,731 227,291 235,377 232,914 229,032 214,238 203,054
Deposits 171,239 169,847 172,487 171,786 172,127 155,666 143,169
Other interest-bearing
liabilities 30,775 28,139 33,080 32,325 28,621 31,384 33,477
Stockholders' equity 28,404 28,061 28,506 27,603 26,840 26,042 25,050
Ratios: (2)
Return on average assets .90% .88% .96% .94% .86% .99% 1.04%
Return on average equity 7.43% 7.32% 7.88% 7.95% 7.22% 7.90% 8.59%
Dividend payout ratio 43.32% 42.63% 40.19% 39.02% 42.86% 38.31% 37.09%
Average equity to average
assets ratio 12.14% 12.10% 12.17% 11.79% 11.77% 12.16% 12.34%
(1) Per share data has been calculated on the weighted average number of
shares outstanding.
(2) The ratios for the three month period ending March 31, 2005 and 2004 are
annualized.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This Form 10-Q, both in the MD & A and elsewhere, contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Such statements are not historical facts and include expressions about our
confidence and strategies and our expectations about new and existing programs
and products, relationships, opportunities, technology and market conditions.
These statements may be identified by such forward-looking terminology as
"expect," "look," "believe," "anticipate," "may," "will," or similar statements
or variations of such terms. Such forward-looking statements involve certain
risks and uncertainties. These include, but are not limited to, the direction of
interest rates, continued levels of loan quality and origination volume,
continued relationships with major customers, and sources for loans, as well as
the effects of economic conditions and legal and regulatory barriers and
structure. Actual results may differ materially from such forward-looking
statements. We assume no obligation for updating any such forward-looking
statement at any time. Our consolidated financial condition and results of
operations are essentially those of our wholly-owned subsidiary bank, Columbia
County Farmers National Bank. Therefore, our discussion and analysis that
follows is primarily centered on the performance of this bank.
EARNINGS SUMMARY
Net income for the three months ended March 31, 2005 was $524 thousand or $.41
per basic and diluted share. These results compare with net income of $509
thousand, or $.40 per basic and diluted share for the same period in 2004.
Annualized return on average equity increased to 7.43 percent from 7.32 percent,
while the annualized return on average assets increased to .90 percent from .88
percent, for the three months ended March 31, 2005 and 2004 respectively.
16
Net interest income continues to be the largest source of our operating income.
Net interest income on a tax equivalent basis remained at $1.9 million at March
31, 2005, compared with March 31, 2004. Overall, interest earning assets yielded
5.23 percent for the quarter ended March 31, 2005 compared to 5.28 percent yield
for the quarter ended March 31, 2004. The tax equivalized interest margin
decreased to 3.48 percent for the three months ended March 31, 2005 compared to
3.57 percent for the three months ended March 31, 2004.
Average interest earning assets increased $3 million or 1.4 percent for the
three months ended March 31, 2005 over the same period in 2004. Average loans
increased $2.6 million or 1.8 percent, average investments remained at $62.0
million and average federal funds sold and interest-bearing deposits with other
financial institutions increased .3 million or 5.8 percent from $5.2 million at
March 31, 2004 to $5.5 million at March 31, 2005.
Average interest bearing liabilities for the three months ended March 31, 2005
were $184.5 million and for the three month period ending March 31, 2004 were
$184.8 . Average short-term borrowings were $18.9 million at March 31, 2004 and
$20.1 million at March 31, 2005, an increase of 6.3 percent. Long-term debt,
which includes primarily FHLB advances, was $11.3 million at March 31, 2004 and
2005. Average demand deposits increased $2.3 million from 2004 balances.
The average interest rate for loans decreased 8 basis points to 6.03 percent at
March 31, 2005 compared to 6.11 percent March 31, 2004. Interest-bearing
deposits with other Financial Institutions interest rates increased 112 basis
points to 2.07 percent from .95 percent at March 31, 2004 Average rates on
interest bearing deposits increased by 2 basis points from 1.74 percent to 1.76
percent in one year. Average interest rates also increased on total interest
bearing liabilities by 10 basis points to 2.07 percent from 1.97 percent. The
reason for these increases on interest bearing liabilities was primarily
attributed to the interest rates on all deposit liabilities and the
tied-to-prime interest rates paid on repurchase agreements. The tax equivalized
net interest margin decreased to 3.48 percent for the three months ended March
31, 2005 from 3.57 percent for the three months ended March 31, 2004. The cost
of long-term debt averaged 5.97 percent for the past several years which
contributed to the declining net interest margin. This high costing liability
will remain due to the fact that the Federal Home Loan Bank has the option to
reprice these loans at their discretion. Until interest rates would rise to make
the current 5.97 percent average rate unattractive, this in all probability will
not occur. We will continue to use the following strategies to mitigate this
decline in our net interest margin: Pricing of deposits will continue to be
monitored and priced conservatively; and in this low interest rate environment
the majority of new investments will be kept short term in anticipation of
rising rates.
NET INTEREST INCOME
Net interest income remained at $1.8 million for the three months ended March
31, 2005 and 2004.
The following table reflects the components of net interest income for each of
the three months ended March 31, 2005 and 2004.
ANALYSIS OF AVERAGE ASSETS, LIABILITIES AND CAPITAL EQUITY
AND
NET INTEREST INCOME ON A TAX EQUIVALENT BASIS
AVERAGE BALANCE SHEET AND RATE ANALYSIS
(Dollars in Thousands)
Three Months Ended March 31, 2005 and 2004
Interest Average Interest Average
Average Income / Yield / Average Income / Yield /
Balance Expense Rate Balance Expense Rate
--------- -------- ------- -------- -------- --------
(1) (2) (1) (2)
ASSETS:
Interest-bearing deposits with other financial $ 1,157 $ 6 2.07% $ 4,203 $ 10 .95%
institutions
Investment securities (3) 62,009 503 3.56% 61,934 524 3.38%
Federal funds sold 4,334 26 2.40% 962 1 .42%
Loans 149,617 2,200 6.03% 147,015 2,185 6.11%
--------- -------- --------- --------
Total interest earning assets $ 217,117 $ 2,735 5.23% $ 214,114 $ 2,720 5.28%
--------- -------- --------- --------
Reserve for loan losses (1,408) (1,390)
Cash and due from banks 5,419 5,636
Other assets 11,129 11,743
--------- ---------
Total assets $ 232,557 $ 230,103
--------- ---------
LIABILITIES AND CAPITAL:
Interest bearing deposits $ 153,116 $ 672 1.76% $ 154,607 $ 672 1.74%
Short-term borrowings 20,078 114 2.28% 18,898 69 1.46%
Long-term borrowings 11,321 167 5.90% 11,334 170 6.00%
--------- -------- --------- --------
Total interest-bearing liabilities $ 184,515 $ 953 2.07% $ 184,839 $ 911 1.97%
--------- -------- --------- --------
Demand deposits $ 18,525 $ 16,210
Other liabilities 1,295 1,222
Stockholders' equity 28,222 27,832
--------- ---------
Total liabilities and capital $ 232,557 $ 230,103
--------- ---------
NET INTEREST INCOME / $ 1,782 3.28% $ 1,809 3.38%
NET INTEREST MARGIN (4)
TAX EQUIVALENT NET INTEREST INCOME / $ 1,888 3.48% $ 1,913 3.57%
NET INTEREST MARGIN (5)
17
(1) Average volume information was computed using daily averages.
(2) Interest on loans includes fee income.
(3) Yield on tax-exempt obligations has 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 2005 and 2004.
The following table demonstrates the relative impact on net interest income of
changes in volume of interest earnings assets and interest bearing liabilities
and changes in rates earned and paid by us on such assets and liabilities.
CHANGE IN NET INTEREST INCOME ON A TAX EQUIVALENT BASIS
Three Months Ended March 31, 2005
Compared with 2004
Increase (Decrease)(2)
Volume Rate Total
------ ---- -----
(In thousands)
Interest income:
Loans (1) 159 (118) 41
Investments (1) 3 111 114
Federal funds sold and other short-term investments 3 76 79
Interest expense:
Deposits (26) 31 5
Short-term borrowings 17 155 172
Long term debt (1) (11) (12)
--- ---- ---
Net Interest Income: 175 (106) 69
(1) Interest income is adjusted to a tax equivalent basis using a 34 percent
tax rate.
(2) Variances resulting from a combination of changes in volume and rates are
allocated to the categories in proportion to the absolute dollar amounts
of the change in each category.
The outstanding balance of loans at March 31, 2005 was $149.8 million compared
to $149.9 million at December 31, 2004.
Income from investment securities declined $21 thousand at $503 thousand for the
three months ended March 31, 2005 compared to $524 thousand at March 31, 2004.
The average balance of investment securities for the three months ended March
31, 2005 and March 31, 2004 remained at 62.0 million.
Total interest expense increased $42 thousand or 4.6 percent for the first three
months of 2005 as compared to the first three months of 2004. The average yield
on interest earning assets decreased from 5.28 percent to 5.23 percent through
March 2004 and 2005, respectively.
NON-INTEREST INCOME
The following table presents the components of non-interest income for the three
months ended March 31, 2005 and 2004:
Three Months Ended
March 31,
(In thousands)
` ------------------
2005 2004
---- ----
Service charges and fees $238 $167
Trust Department income 36 34
Investment securities gain - net 0 0
Gain on sale of loans 15 3
Gain on sale of Other Real Estate Owned 0 3
Gain on Cash Surrender Value of BOLI 67 71
Third party brokerage income 27 23
Other 27 20
---- ----
Total $410 $321
---- ----
Non-interest income continues to represent a considerable source of our income.
We are committed to increasing non-interest income. Increases will be from our
existing sources of non-interest income and any new opportunities that may
develop. For the three months ended March 31, 2005, total non-interest income
increased $89 thousand to $410 thousand or 27.7 percent, compared to $321
thousand for the three month period ended March 31, 2004. Service charges and
fees increased $71 thousand from $167 thousand at March 31, 2004 to $238
thousand or 42.5 percent at March 31, 2005. This increase is mainly attributable
to the introduction of "Overdraft Privilege" program in 2004. Trust Department
income increased from $34 thousand at March 31, 2004 to $36 thousand or 5.9
percent at March 31, 2005. Third party brokerage income reflected a $4 thousand
increase or 17.4 percent comparing March 31, 2004 to March 31, 2005. By selling
fixed rate mortgages through the MPF and PHFA programs we increased our gain on
sale of loans from $3 thousand through March 2004 to $15 thousand through March
2005. The MPF loans are being serviced by CCFNB and the bank retains some credit
risk. Investment in Bank Owned Life Insurance is reflected in the March 31, 2005
balance sheet and income statement. Other non-interest income increased $7
thousand from $20 thousand at March 31, 2004 to $27 thousand at March 31, 2005.
18
NON-INTEREST EXPENSE
The following table presents the components of non-interest expense for the
three months ended March 31, 2004 and 2005:
Three Months Ended
March 31,
2005 2004
------ ------
(Dollars in Thousands)
Salaries and wages $ 552 $ 571
Employee benefits 204 204
Net occupancy expense 116 105
Furniture and equipment expense 124 107
State shares tax 74 73
Professional Services 86 65
Director Fees 47 37
Stationery and Supplies 32 32
Other expense 267 251
------ ------
Total $1,502 $1,445
------ ------
Non-interest expense increased from $1.4 million at March 31, 2004 to $1.5
million at March 31, 2005.
Generally, non-interest expense accounts for the cost of maintaining facilities;
providing salaries and benefits to employees; and paying for insurance,
supplies, advertising, data processing services, taxes and other related
expenses. Some of the costs and expenses are variable while others are fixed. To
the extent possible, we utilize budgets and related measures to control variable
expenses.
Salaries decreased 3.3 percent at March 31, 2005 compared to March 31, 2004.
Employee benefits remained at $204 thousand at March 31, 2004 and 2005.
Occupancy expense increased 10.5 percent. Furniture and equipment expense
reflects a $17 thousand or 15.9 percent increase for the first three months of
2005 compared to the first three months of 2004. New computer hardware is
replacing fully depreciated hardware and recognition of depreciation on this new
equipment will have the effect of increased expense going forward.
Pennsylvania Bank Shares Tax increased 1.4 percent from $73 thousand at March
31, 2004 compared to $74 thousand at March 31, 2005.
Other expenses increased $16 thousand or 6.4 percent from $251 thousand at March
31, 2004 to $267 thousand at March 31, 2005.
INCOME TAXES
Income tax expense as a percentage of pre-tax income was 20.6 percent for the
three months ended March 31, 2005 compared with 19.8 percent for the same period
in 2004. The effective tax rate for 2005 remains at 34 percent.
ASSET / LIABILITY MANAGEMENT
INTEREST RATE SENSITIVITY
Our success is largely dependent upon our ability to manage interest rate risk.
Interest rate risk can be defined as the exposure of our net interest income to
the movement in interest rates. We do not currently use derivatives to manage
market and interest rate risks. Our interest rate risk management is the
responsibility of the Asset / Liability Management Committee ("ALCO"), which
reports to the Board of Directors. ALCO establishes policies that monitor and
coordinate our sources, uses and pricing of funds as well as interest-earning
asset pricing and volume.
We use a simulation model to analyze net interest income sensitivity to
movements in interest rates. The simulation model projects net interest income
based on various interest rate scenarios over a 12 and 24 month period. The
model is based on the actual maturity and repricing characteristics of rate
sensitive assets and liabilities. The model incorporates assumptions regarding
the impact of changing interest rates on the prepayment rates of certain assets
and liabilities. In the current interest rate environment, our net interest
income is not expected to change materially.
LIQUIDITY
Liquidity measures the ability to satisfy current and future cash flow needs as
they become due. Maintaining a level of liquid funds through asset / liability
management seeks to ensure that these needs are met at a reasonable cost As of
March 31, 2005, we had $58.3 million of securities available for sale recorded
at their fair value, compared with $61.8 million at December 31, 2004. As of
March 31, 2005, the investment securities available for sale had an unrealized
loss of $137 thousand, net of deferred taxes, compared with an unrealized gain
of $213 thousand, net of deferred taxes, at December 31, 2004. These securities
are not considered trading account securities which may be sold on a continuous
basis, but rather are securities which may be sold to meet our various liquidity
and interest rate requirements.
19
In accordance with disclosures required by EITF NO. 03-1, the summary
below reflects 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 March 31,
2005:
Less than 12 months 12 months or more Total
Unrealized Unrealized Unrealized
Description of Security Fair Value Loss Fair Value Loss Fair Value Loss
Obligations of U.S. Government
Corporations and Agencies:
Mortgage backed $12,135,568 $133,617 $ 9,787,163 $203,433 $21,922,731 $337,050
Other 12,071,676 178,324 4,854,375 145,625 16,926,051 323,949
Obligations of state and political
Subdivisions 670,547 12,122 0 0 670,547 12,122
Marketable Equity Securities 69,721 603 32,674 11,516 102,395 12,119
TOTAL $24,947,512 $324,666 $14,674,212 $360,574 $39,621,724 $685,240
Note: This schedule reflects only unrealized losses without the effect of
unrealized gains.
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
Corporations 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.
Non-Performing Assets
Shown below is a summary of past due and non-accrual loans:
(Dollars in thousands)
March 31, December 31,
2005 2004
Past due and non-accrual:
Days 30 - 89 $ 686 $ 492
Days 90 plus 18 20
Non-accrual 1,211 1,241
------ ------
Total $1,915 $1,753
Past due and non-accrual loans increased 9.2 percent from $1.8 million at
December 31, 2004 to $1.9 million at March 31, 2005. The loan delinquency
expressed as a ratio to total loans was 1.3 percent at March 31, 2005 and 1.2
percent at December 31, 2004.
The provision for loan losses for the first quarter of 2005 was $30 thousand
compared to first quarter of 2004 at $50 thousand Management is 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.
Any loans classified for regulatory purposes as loss, doubtful, substandard, or
special mention that have not been disclosed under Industry Guide 3 do not (i)
represent or result from trends or uncertainties which we reasonably expect will
materially impact future operating results, liquidity, or capital resources, or
(ii) represent material credits about which we are aware of any information
which causes us to have serious doubts as to the ability of such borrowers to
comply with the loan repayment terms.
We adhere to principles provided by Financial Accounting Standards Board
Statement No. 114, "Accounting by Creditors for Impairment of a Loan" - Refer to
Note 2 above for other details.
20
The following analysis provides a schedule of loan maturities / interest rate
sensitivities. This schedule presents a repricing and maturity analysis as
required by the FFIEC:
MATURITY AND REPRICING DATA FOR LOANS AND LEASES
(Dollars in
Thousands)
March 31, 2005
Closed-end loans secured by first liens and 1-4 family residential properties
with a remaining maturity or repricing frequency of:
(1) Three months or less $ 3,376
(2) Over three months through 12 months 12,674
(3) Over one year through three years 27,659
(4) Over three years through five years 7,321
(5) Over five years through 15 years 17,505
(6) Over 15 years 335
All loans and leases other than closed-end loans secured by first liens on 1-4
family residential properties with a remaining maturity or repricing frequency
of:
(1) Three months or less 22,901
(2) Over three months through 12 months 10,074
(3) Over one year through three years 19,559
(4) Over three years through five years 15,196
(5) Over five years through 15 years 11,380
(6) Over 15 years 669
--------
Sub-total $148,649
Add: Non-accrual loans not included above 1,211
Less: Unearned income (45)
--------
Total Loans and Leases $149,815
ALLOWANCE FOR LOAN LOSSES
Because our loan portfolio and delinquencies contains a significant number of
commercial loans with relatively large balances, the deterioration of one or
several of these loans may result in a possible significant increase in loss of
interest income, higher carrying costs, and 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 our
historical experience, an evaluation of economic conditions, and regular reviews
of delinquencies and loan portfolio quality. In evaluating our allowance for
loan losses, we segment our loans into the following categories:
- Commercial (including investment property mortgages),
- Residential mortgages, and
- Consumer.
We evaluate some loans as a homogeneous group and others on an individual basis.
Commercial loans with balances exceeding $250 thousand are reviewed
individually. After our evaluation of these loans, we determine the required
allowance for loan losses based upon the following considerations:
- Historical loss levels,
- Prevailing economic conditions,
- Delinquency trends,
- Changes in the nature and volume of the portfolio,
- Concentrations of credit risk, and
- Changes in loan policies or underwriting standards.
Management and the Board of Directors review the adequacy of the reserve on a
quarterly basis and adjustments, if needed, are made accordingly.
For the Three Months
Ending March 31,
Amounts in thousands 2005 2004
- -------------------- ---------- ----------
Average loans outstanding: $ 149,716 $ 147,015
--------- ---------
Total loans at end of period 149,815 146,400
--------- ---------
Balance at beginning of period 1,392 1,415
Total charge-offs (7) (116)
Total recoveries 27 16
--------- ---------
Net charge-offs 20 (100)
Provision for loan losses 30 50
--------- ---------
Balance at end of period $ 1,442 $ 1,365
--------- ---------
Net charge-offs as a percent of average loans outstanding during period .01% .01%
Allowance for loan losses as a percent of total loans .96% .93%
The allowance for loan losses is based on our evaluation of the allowance for
loan losses in relation to the credit risk inherent in the loan portfolio. In
establishing the amount of the provision required, management considers a
variety of factors, including but not limited to, general economic conditions,
volumes of various types of loans, collateral adequacy and potential losses from
significant borrowers. On a monthly basis, the Board of Directors and the bank's
Credit Administration Committee review information regarding specific loans and
the total loan portfolio in general in order to determine the amount to be
charged to the provision for loan losses.
21
CAPITAL ADEQUACY
A major strength of any financial institution is a strong capital position. This
capital is very critical as it must provide growth, dividend payments to
shareholders, and absorption of unforeseen losses. Our federal regulators
provide standards that must be met. These standards measure "risk-adjusted"
assets against different categories of capital. The "risk-adjusted" assets
reflect off balance sheet items, such as commitments to make loans, and also
place balance sheet assets on a "risk" basis for collectibility. The adjusted
assets are measured against the standards of Tier I Capital and Total Qualifying
Capital. Tier I Capital is common shareholders' equity. Total Qualifying Capital
includes so-called Tier II Capital, which is common shareholders' equity and the
allowance for loan and lease losses. The allowance for loan and lease losses
must be lower than or equal to common shareholders' equity to be eligible for
Total Qualifying Capital.
We exceed all minimum capital requirements as reflected in the following table:
March 31, 2005 December 31, 2004
--------------------- ---------------------
Minimum Minimum
Calculated Standard Calculated Standard
Ratios Ratios Ratios Ratios
---------- -------- ---------- --------
Risk Based Ratios:
Tier I Capital to risk-weighted assets 19.79% 4.00% 19.27% 4.00%
Total Qualifying Capital to risk-weighted assets 20.86% 8.00% 20.31% 8.00%
Additionally, certain other ratios also provide capital analysis as follows:
March 31, December 31,
2005 2004
--------- ------------
Tier I Capital to average assets 12.27% 12.17%
We believe that the bank's current capital position and liquidity positions are
strong and that its capital position is adequate to support its operations.
Book value per share amounted to $22.44 at March 31, 2005, compared with $22.49
per share at December 31, 2004.
Cash dividends declared amounted to $.18 per share, for the three months ended
March 31, 2005, equivalent to a dividend payout ratio of 43.32 percent, compared
with 42.63 percent for the same period in 2004. Our Board of Directors continues
to believe that cash dividends are an important component of shareholder value
and that, at the bank's current level of performance and capital, we expect to
continue our current dividend policy of a quarterly cash distribution of
earnings to our shareholders.
22
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
ten 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 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.
23
PART II - OTHER INFORMATION;
Item 1. Legal Proceedings
Management and the Corporation's legal counsel are not aware of any litigation
that would have a material adverse effect on the consolidated financial position
of the Corporation. There are no proceedings pending other than the ordinary
routine litigation incident to the business of the Corporation and its
subsidiary, Columbia County Farmers National Bank. In addition, no material
proceedings are pending or are known to be threatened or contemplated against
the Corporation and the Bank by government authorities.
Item 2. Changes in Securities - Nothing to report.
Item 3. Defaults Upon Senior Securities - Nothing to report.
Item 4. Submission of matters to a Vote of Security Holders - Nothing to report.
Item 5. Other Information - Nothing to report.
Item 6. Exhibits and Reports on Form 8-K - Nothing to report.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CCFNB BANCORP, INC.
(Registrant)
By: /s/ Lance O. Diehl
-------------------------------------
Lance O. Diehl
President and CEO
Date: May 10, 2005
By: /s/ Virginia D. Kocher
-------------------------------------
Virginia D. Kocher
Treasurer
Date: May 10, 2005
25