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 September 30, 2003
[ ] 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. 1,274,541 shares of $1.25
(par) common stock were outstanding as of October 20, 2003.
CCFNB BANCORP, INC. AND SUBSIDIARY
SEPTEMBER 30, 2003
INDEX 10-Q
PART I - FINANCIAL INFORMATION:
- Consolidated Balance Sheets 1
- Consolidated Statements of Income 2
- Consolidated Statements of Cash Flows 3
- Notes to Consolidated Financial Statements 4 - 14
- Report of Independent Certified Public Accountants 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
CCFNB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER DECEMBER
30, 2003 31, 2002
UNAUDITED
-------- --------
ASSETS
Cash and due from banks....................................... $ 4,853 $ 5,953
Interest-bearing deposits with other banks.................... 1,479 8,010
Federal funds sold............................................ 2,023 2,057
Investment securities:
Securities Available-for-Sale............................... 64,969 53,527
Loans, net of unearned income................................. 149,783 151,338
Allowance for loan losses..................................... 1,444 1,298
-------- --------
Net loans................................................... $148,339 $150,040
Premises and equipment........................................ 4,299 4,415
Other real estate owned....................................... 43 68
Cash surrender value life insurance........................... 5,825 3,627
Accrued interest receivable................................... 780 894
Other assets.................................................. 704 441
-------- --------
TOTAL ASSETS............................................. $233,314 $229,032
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Non-interest bearing........................................ $ 16,493 $ 15,238
Interest bearing............................................ 156,573 156,889
-------- --------
Total Deposits........................................... $173,066 $172,127
Short-term borrowings......................................... 20,532 17,274
Long-term borrowings.......................................... 11,338 11,347
Accrued interest and other expenses........................... 1,252 1,332
Other liabilities............................................. 20 112
-------- --------
TOTAL LIABILITIES........................................ $206,208 $202,192
-------- --------
STOCKHOLDERS' EQUITY
Common stock, par value $1.25 per share; authorized
5,000,000 shares; issued and outstanding 1,274,541 shares
in 2003 and 1,292,724 shares in 2002........................ $ 1,593 $ 1,616
Surplus....................................................... 3,584 4,009
Retained earnings............................................. 21,613 20,679
Accumulated other comprehensive income (loss)................. 316 536
-------- --------
TOTAL STOCKHOLDERS' EQUITY............................... $ 27,106 $ 26,840
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............... $233,314 $229,032
======== ========
See accompanying notes to Consolidated Financial Statements.
-1-
CCFNB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE DATA)
UNAUDITED
FOR THE NINE FOR THE THREE
MONTHS ENDING MONTHS ENDING
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2003 2002 2003 2002
-------- -------- -------- --------
INTEREST INCOME
Interest and fees on loans:
Taxable...................................... $ 6,839 $ 7,514 $ 2,215 $ 2,507
Tax-exempt................................... 153 108 60 43
Interest and dividends on investment securities:
Taxable interest............................. 877 1,314 268 413
Tax-exempt interest.......................... 479 611 139 202
Dividends.................................... 45 44 17 14
Interest on federal funds sold................. 40 41 11 22
Interest on deposits in other banks............ 41 52 8 19
-------- -------- -------- --------
TOTAL INTEREST INCOME..................... $ 8,474 $ 9,684 $ 2,718 $ 3,220
-------- -------- -------- --------
INTEREST EXPENSE
Interest on deposits........................... $ 2,690 $ 3,557 $ 782 $ 1,205
Interest on short-term borrowings.............. 209 258 65 88
Interest on long-term borrowings............... 508 509 171 172
-------- -------- -------- --------
TOTAL INTEREST EXPENSE.................... $ 3,407 $ 4,324 $ 1,018 $ 1,465
-------- -------- -------- --------
Net interest income............................ $ 5,067 $ 5,360 $ 1,700 $ 1,755
Provision for loan losses...................... 150 264 50 205
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES............................... $ 4,917 $ 5,096 $ 1,650 $ 1,550
-------- -------- -------- --------
NON-INTEREST INCOME
Service charges and fees....................... $ 507 $ 487 $ 166 $ 161
Trust department income........................ 95 151 32 48
Securities gains - net......................... 8 107 8 107
Bank-owned life insurance income............... 165 55 13 6
Other income................................... 359 88 198 52
-------- -------- -------- --------
TOTAL NON-INTEREST INCOME................. $ 1,134 $ 888 $ 417 $ 374
-------- -------- -------- --------
NON-INTEREST EXPENSES
Salaries and wages............................. $ 1,647 $ 1,638 $ 562 $ 563
Pensions and other employee benefits........... 585 566 203 193
Occupancy expense, net......................... 290 268 98 88
Furniture and equipment expense................ 357 442 124 141
Other operating expenses....................... 1,191 1,162 399 404
-------- -------- -------- --------
TOTAL NON-INTEREST EXPENSES............... $ 4,070 $ 4,076 $ 1,386 $ 1,389
-------- -------- -------- --------
Income before income taxes..................... $ 1,981 $ 1,908 $ 681 $ 535
Income tax expense............................. 420 419 146 101
-------- -------- -------- --------
NET INCOME................................ $ 1,561 $ 1,489 $ 535 $ 434
======== ======== ======== ========
PER SHARE DATA
Net income..................................... $ 1.22 $ 1.13 $ .42 $ .33
Cash dividends................................. $ .49 $ .47 $ .17 $ .16
Weighted average shares outstanding............ 1,283,475 1,312,811 1,283,475 1,312,811
See accompanying notes to Consolidated Financial Statements.
-2-
CCFNB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
FOR THE NINE
MONTHS ENDING
SEPTEMBER 30,
-------------
2003 2002
-------- --------
OPERATING ACTIVITIES
Net income........................................................ $ 1,561 $ 1,489
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses...................................... 150 264
Depreciation and amortization.................................. 293 361
Premium amortization on investment securities.................. 448 149
Discount accretion on investment securities.................... (24) (17)
Deferred income taxes (benefit)................................ (75) (114)
(Gain) on sale of mortgage loans............................... (92) 0
(Gain) on sales of investment securities....................... (8) (107)
Proceeds from sale of mortgage loans........................... 8,178 0
Originations of mortgage loans for resale...................... (8,086) 0
(Gain) on sale of other real estate owned...................... (12) 0
(Gain) loss from investment in insurance agency................ (4) 6
(Increase) decrease in accrued interest receivable and
other assets................................................. (20) 96
Net increase in cash surrender value of bank-owned life
insurance.................................................... (198) (62)
Increase (decrease) in accrued interest, other expenses and
other liabilities............................................ (116) (15)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................... $ 1,995 $ 2,050
-------- --------
INVESTING ACTIVITIES
Purchase of investment securities Available-for-Sale.............. $(45,199) $(26,130)
Proceeds from sales, maturities and redemptions of investment
securities Available-for-Sale................................... 33,015 26,042
Net (increase) decrease in loans.................................. 1,551 (7,736)
Purchases of premises and equipment............................... (177) (250)
Proceeds from sale of other real estate owned..................... 37 0
Purchase of bank owned life insurance policies.................... (2,000) 0
-------- --------
NET CASH (USED IN) INVESTING ACTIVITIES...................... $(12,773) $ (8,074)
-------- --------
FINANCING ACTIVITIES
Net increase (decrease) in deposits............................... $ 939 $ 12,870
Net increase (decrease) in short-term borrowings.................. 3,258 (1,480)
Net increase (decrease) in long-term borrowings................... (9) (7)
Acquisition of treasury stock..................................... (588) 135
Proceeds from issuance of common stock............................ 140 (675)
Cash dividends paid............................................... (627) (615)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES.................... $ 3,113 $ 10,228
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............. $ (7,665) $ 4,204
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.................. 16,020 8,518
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 8,355 $ 12,722
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest........................................................ $ 3,543 $ 4,353
Income taxes.................................................... $ 440 $ 532
See accompanying notes to Consolidated Financial Statements.
-3-
CCFNB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
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 six offices covering an area of approximately 484 square miles
in Northeastern 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.
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.
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.
-4-
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) 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.
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 originated for resale 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.
-5-
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.
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 effective date of the
implementation guidance was 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 period ended
September 30, 2003 and the year ended December 31, 2002, as the fair
market value of each outstanding loan commitment exceeded the Bank's
cost basis in each loan commitment.
-6-
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 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 September 30, 2003 and December 31, 2002
was $169,466 and $165,431, respectively, and is carried in other assets
in the accompanying consolidated balance sheets.
-7-
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.
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.
-8-
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.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill
and Other Intangible Assets" is generally effective for fiscal years
beginning after December 31, 2001, and addresses the financial
accounting and reporting for acquired goodwill and other intangible
assets and replaces APB Opinion No. 17 "Intangible Assets". The
statement addresses how intangible assets that are acquired
individually or with a group or other assets (but not those acquired in
a business combination) should be accounted for in financial statements
upon their acquisition. Goodwill and other intangible assets with an
indefinite useful life should not be amortized but should be tested for
impairment at least annually. Intangibles that are separable from
goodwill and that have a determinable useful life should be amortized
over the determinable useful life. The standard does not have any
impact on the Corporation's consolidated financial condition or results
of operations.
Statement of Financial Accounting Standards (SFAS) No. 143 "Accounting
for Asset Retirement Obligations" is generally effective for financial
statements for fiscal years beginning after June 15, 2002. The
statement addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. It applies to legal obligations
associated with the retirement of long-lived assets that result from
the acquisition, construction development and (or) the normal operation
of a long-lived asset. The Statement requires that the fair value of a
liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value
can be made. The associated asset retirement costs are capitalized as
part of the carrying amount of the long-lived asset. This standard is
not expected to have any impact on the Corporation's consolidated
financial condition or results of operations.
Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting
for Impairment or Disposal of Long-Lived Assets" is generally effective
for financial statements issued for fiscal years beginning after
December 15, 2001, and for interim periods within those fiscal years.
The statement addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. The statement replaces
FASB Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of", and the accounting
and reporting provisions of APB Opinion No. 30, "Reporting the Results
of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions", for the disposal of a "segment of a business" (as
previously defined in that opinion). The statement also amends ARB No.
51, "Consolidated Financial Statements", to eliminate the exception to
consolidation for a subsidiary for which control is likely to be
temporary. This standard does not have any impact on the Corporation's
consolidated financial conditions or results of operations.
-9-
Statement of Financial Accounting Standards (SFAS) No. 145, "Recession
of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13
and Technical Corrections" is generally effective for financial
statements issued on or after May 15, 2002. The statement rescinds FASB
Statement No. 4, "Reporting Gains and Losses from Extinguishment of
Debt", and an amendment of that statement, FASB Statement No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements".
The statement amends FASB Statement No. 13, "Accounting for Leases", to
eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain
lease modifications that have economic effects that are similar to
sale-leaseback transactions. The statement also amends other existing
authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed
conditions. This standard does not have any impact on the Corporation's
consolidated financial condition or results of operations.
Statement of Financial Accounting Standards (SFAS) No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure" is generally
effective for financial statements for fiscal years and interim periods
beginning after December 31, 2002. The statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation", to provide alternative
methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. The
statement also amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based compensation
and the effect of the method used on reported results. The Corporation
does not have any stock-based compensation, therefore the standard has
no impact on the Corporation's consolidated financial condition or
results of operations.
Statement of Financial Accounting Standard (SFAS) No. 149, "Amendments
to SFAS 133 on Derivative Instruments and Hedging Activities" is
generally effective for contracts entered into after June 30, 2003.
This Statement amends and clarifies financial accounting and reporting
for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives)
and for hedging activities under SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities". The changes in this
Statement improve financial reporting by requiring that contracts with
comparable characteristics be accounted for similarly. The changes will
result in more consistent reporting of contracts as either derivatives
or hybrid instruments. This standard does not have any impact on the
Corporation's consolidated financial position or results of operations.
Statement of Financial Accounting Standards (SFAS) No. 150 "Accounting
for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity" is generally effective for financial
instruments entered into or modified after May 31, 2003 and for
contracts in existence at the start of the first interim period
beginning after June 15, 2003. This Statement establishes new standards
for classification, measurement and disclosure of certain types of
financial instruments having characteristics of both liabilities and
equity, including instruments that are mandatorily redeemable and that
embody obligations requiring or permitting settlement by transferring
assets or by issuing an entity's own shares. This standard does not
have any impact on the Corporation's consolidated financial position or
results of operations.
-10-
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 September 30, 2003 and September 30, 2002, were approximately
$54,238 and $54,194, respectively.
RECLASSIFICATION
Certain amounts in the consolidated financial statements of the prior
years have been reclassified to conform with presentation used in the
2003 consolidated financial statements. Such reclassifications had no
effect on the Corporation's consolidated financial condition or net
income.
NOTE 2 - ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the periods ended
September 30, 2003 and September 30, 2002 were as follows:
(Amounts in Thousands)
----------------------
2003 2002
---- ----
Balance, beginning of year......................... $ 1,298 $ 1,028
Provision charged to operations.................... 150 264
Loans charged-off.................................. (44) (65)
Recoveries......................................... 40 52
-------- --------
Balance, September 30.............................. $ 1,444 $ 1,279
======== ========
At September 30, 2003 the recorded investment in loans that are
considered to be impaired as defined by SFAS No. 114 was $239,280. 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 September 30, 2003, there were no significant commitments to lend
additional funds with respect to non-accrual and restructured loans.
There were no real estate loans held for resale at September 30, 2003
and December 31, 2002.
Non-accrual loans at September 30, 2003 and December 31, 2002 were
$2,142,000 and $2,122,000, respectively.
Loans past due 90 days or more and still accruing interest amounted to
$392,000 at September 30, 2003.
NOTE 3 - SHORT-TERM BORROWINGS
Federal funds purchased, 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.
-11-
NOTE 4 - LONG-TERM BORROWINGS
Long-term borrowings are comprised of advances from the Federal Home
Loan Bank.
NOTE 5 - DEFERRED COMPENSATION PLANS
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 aggregate commitment under these
agreements is $2,400,000, and the expected charge to operations to fund
such plans for the year ending December 31, 2003 is estimated to be
approximately $48,775.
There were no substantial changes in other plans as disclosed in the
2002 Annual Report.
NOTE 6 - STOCKHOLDERS' EQUITY
Changes in stockholders' equity for the period ended September 30, 2003
were as follows:
(AMOUNTS IN THOUSANDS, EXCEPT COMMON SHARE DATA)
------------------------------------------------
ACCUMULATED
OTHER
COMPREHENSIVE COMPREHENSIVE
COMMON COMMON INCOME RETAINED INCOME TREASURY
SHARES STOCK SURPLUS (LOSS) EARNINGS (LOSS) STOCK TOTAL
------ ----- ------- ------ -------- ------ ----- -----
Balance at January 1, 2003......... 1,292,724 $ 1,616 $ 4,009 $ 0 $20,679 $ 536 $ 0 $26,840
Comprehensive Income:
Net income........................ 0 0 0 1,561 1,561 0 0 1,561
Change in unrealized gain (loss)
on investment securities
available-for-sale net of
reclassification adjustment
and tax effects.................. 0 0 0 (220) 0 (220) 0 (220)
-------
TOTAL COMPREHENSIVE INCOME (LOSS) $ 1,341
=======
Issuance of 5,805 shares of common
stock under dividend reinvestment
and stock purchase plans......... 5,805 7 133 0 0 0 140
Purchase of 23,988 shares of
treasury stock................... 0 0 0 0 0 (588) (588)
Retirement of 23,988 shares of
treasury stock................... (23,988) (30) (558) 0 0 588 0
Cash dividends $.49 per share...... 0 0 0 (627) 0 0 (627)
--------- ------- ------- ------- ------- ------ -------
Balance at September 30, 2003...... 1,274,541 $ 1,593 $ 3,584 $21,613 $ 316 $ 0 $27,106
========= ======= ======= ======= ======= ====== =======
-12-
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.
The Corporation may require collateral or other security to support
financial instruments with off-balance sheet credit risk. The contract
or notional amounts at September 30, 2003 and December 31, 2002 were as
follows:
(Amounts in Thousands)
----------------------
SEPTEMBER DECEMBER
30, 2003 31, 2002
-------- --------
FINANCIAL INSTRUMENTS WHOSE CONTRACT AMOUNTS
REPRESENT CREDIT RISK:
Commitments to extend credit..................... $11,932,136 $11,768,038
Financial standby letters of credit.............. 1,841,212 1,842,578
Performance standby letters of credit............ 159,812 48,404
Dealer floor plans............................... 1,928,097 1,393,763
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 the
performance of a customer 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.
-13-
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 September
30, 2003, 80.6% 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 - 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 nine-month period ended September 30,
2003, 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, 2002, filed with the Securities and Exchange Commission.
-14-
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
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 September 30, 2003, and the related consolidated
statements of income and cash flows for the three and nine month periods ended
September 30, 2003 and 2002. These consolidated interim financial statements are
the responsibility of the management of CCFNB Bancorp, Inc. and Subsidiary.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with
auditing standards generally accepted in the United States of America, 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 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 auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
CCFNB Bancorp, Inc. and Subsidiary as of December 31, 2002, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
year then ended (not presented herein); and in our report dated January 20,
2003, 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, 2002, 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
October 10, 2003
-15-
CCFNB BANCORP, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 2003
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 Nine
Months At and For the Years
Ended September 30, Ended December 31,
------------------- ------------------
2003 2002 2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income and Expense:
Interest income .................. $ 8,474 $ 9,684 $ 12,780 $ 13,720 $ 13,552 $ 12,669 $ 12,444
Interest expense ................. 3,407 4,324 5,741 6,924 6,859 6,099 6,072
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income .............. 5,067 5,360 7,039 6,796 6,693 6,570 6,372
Loan loss provision .............. 150 264 309 163 54 78 78
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income after loan
loss Provision ................. 4,917 5,096 6,730 6,633 6,639 6,492 6,294
Non-interest income .............. 1,134 888 1,210 1,149 1,053 1,050 981
Non-interest expense ............. 4,070 4,076 5,479 5,104 4,967 4,818 4,739
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes ....... 1,981 1,908 2,461 2,678 2,725 2,724 2,536
Income taxes ..................... 420 419 539 621 671 685 634
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income ....................... $ 1,561 $ 1,489 $ 1,922 $ 2,057 $ 2,054 $ 2,039 $ 1,902
========== ========== ========== ========== ========== ========== ==========
Per Share:(1)
Net income ....................... $ 1.22 $ 1.13 $ 1.47 $ 1.54 $ 1.51 $ 1.48 $ 1.38
Cash dividends paid .............. .49 .47 .63 .59 .56 .51 .46
Average shares outstanding ....... 1,283,475 1,312,811 1,309,084 1,338,007 1,355,624 1,375,572 1,378,339
Average Balance Sheet:
Loans ............................ $ 150,560 $ 146,565 $ 147,545 $ 139,219 $ 134,325 $ 123,185 $ 116,490
Investments ...................... 59,248 54,381 54,197 50,593 47,003 49,827 45,878
Other earning assets ............. 6,785 7,590 5,309 6,569 219 1,638 3,890
Total assets ..................... 231,173 219,015 223,476 208,630 196,727 186,597 177,643
Deposits ......................... 172,596 162,157 150,883 149,601 139,774 138,963 131,366
Other interest-bearing liabilities 30,246 29,417 29,356 31,629 31,203 23,458 22,660
Stockholders' equity ............. 26,973 26,036 26,615 25,890 23,910 22,874 22,264
Balance Sheet Data:
Loans ............................ $ 149,339 $ 150,624 $ 151,338 $ 142,990 $ 137,360 $ 134,423 $ 118,558
Investments ...................... 64,969 58,015 53,528 57,121 47,311 49,104 48,151
Other earning assets ............. 3,502 6,735 10,068 63,312 4,814 1,343 5,133
Total assets ..................... 233,314 226,610 229,032 214,238 203,054 196,122 185,258
Deposits ......................... 173,066 168,536 172,127 142,990 143,169 138,606 137,679
Other interest-bearing liabilities 31,870 29,651 28,621 31,384 33,477 33,224 22,709
Stockholders' equity ............. 27,106 26,922 26,840 26,042 25,050 23,047 23,480
Ratios:(2)
Return on average assets ......... .96% .95% .86% .99% 1.04% 1.09% 1.07%
Return on average equity ......... 7.72% 7.63% 7.22% 7.92% 8.59% 8.91% 8.54%
Dividend payout ratio ............ 40.17% 41.30% 42.86% 38.31% 36.89% 34.09% 33.59%
Average equity to average
assets ratio ................... 11.67% 11.89% 11.77% 12.16% 12.34% 11.75% 12.53%
(1) Per share data has been calculated on the weighted average number of
shares outstanding.
(2) The ratios for the nine month period ending September 30, 2003 and 2002
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.
16
EARNINGS SUMMARY
Net income for the nine months ended September 30, 2003 was $1,561 thousand or
$1.22 per basic and diluted share. These results compare with net income of
$1,489 thousand, or $1.13 per basic and diluted share for the same period in
2002. Annualized return on average equity increased to 7.72 percent from 7.63
percent, while the annualized return on average assets increased to .96 percent
from .95 percent, for the nine months ended September 30, 2003 and 2002
respectively.
Net interest income continues to be the largest source of our operating income.
Net interest income on a tax equivalent basis decreased to $5.4 million at
September 30, 2003, compared with $5.7 million for the nine months ended
September 30, 2002. The decrease in net interest income is primarily due to the
decreased interest rates on loans and the securities that are called in this low
interest rate environment and replaced with lower yielding securities. The tax
equavilized interest margin decreased to 3.32 percent for the nine months ended
September 30, 2003, compared to 3.66 percent for the nine months ended September
30, 2002.
Average interest earning assets increased $8.1 million or 3.9 percent for the
nine months ended September 30, 2003 over the same period in 2002. Average loans
increased $4.0 million or 2.7 percent, average investments increased $4.8
million or 8.8 percent and average federal funds sold and interest-bearing
deposits with other financial institutions decreased .8 million or 10.6 percent
for this nine month period.
Average interest bearing liabilities for the nine months ended September 30,
2003 increased $9.8 million or 5.5 percent from the same period in 2002. Average
short-term borrowings were $18.9 million at September 30, 2003 and $18.1 million
at September 30, 2002. Long-term debt, which includes primarily FHLB advances,
remained at 11.3 million on September 30, 2003 and September 30, 2002. Average
demand deposits increased $1.5 million from 2002 balances.
The average interest rate on total interest earning assets was 5.22 percent for
the nine months ended September 30, 2003, compared with 6.19 percent for the
nine months ended September 30, 2002. The average interest rate for loans
decreased 72 basis points to 6.26 percent at September 30, 2003 compared to 6.98
percent September 30, 2002. Interest-bearing deposits with other Financial
Institutions interest rates decreased 42 basis points to 1.15 percent from 1.57
percent at September 30, 2003 and September 30, 2002 respectively. Average rates
on interest bearing deposits decreased by 92 basis points to 2.29 percent from
3.21 percent one year ago. Average interest rates also decreased on total
interest bearing liabilities by 82 basis points to 2.43 percent from 3.25
percent. The reason for these decreases on interest bearing liabilities was
primarily attributed to the decreasing rates on all deposit liabilities and the
tied-to-prime interest rates paid on repurchase agreements with large customers.
NET INTEREST INCOME
Net interest income decreased to $5.1 million for the nine months ended
September 30, 2003 compared to $5.4 million for the same period in 2002.
The following table reflects the components of net interest income for each of
the nine months ended September 30, 2003 and 2002.
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)
Nine Months Ended September 30, 2003 and 2002
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 institutions ............. $ 4,745 $ 41 1.15% $ 4,413 $ 52 1.57%
Investment securities (3) .......... 59,248 1,401 3.71% 54,381 1,969 5.60%
Federal funds sold ................. 2,040 40 2.61% 3,177 41 1.72%
Loans .............................. 150,560 6,992 6.26% 146,565 7,622 6.98%
--------- --------- --------- ---------
Total interest earning assets ...... $ 216,593 $ 8,474 5.22% $ 208,536 $ 9,684 6.19%
--------- --------- --------- ---------
Reserve for loan losses ............ (1,371) (1,053)
Cash and due from banks ............ 5,403 2,266
Other assets ....................... 10,548 9,266
--------- ---------
Total assets ....................... $ 231,173 $ 219,015
--------- ---------
17
LIABILITIES AND CAPITAL:
Interest bearing deposits............ $ 156,731 $ 2,690 2.29% $ 147,789 $ 3,557 3.21%
Short-term borrowings................ 18,903 209 1.49% 18,064 258 1.91%
Long-term borrowings................. 11,343 508 5.97% 11,353 509 5.98%
--------- --------- --------- ---------
Total interest-bearing liabilities $ 186,977 $ 3,407 2.43% $ 177,206 $ 4,324 3.25%
--------- --------- --------- ---------
Demand deposits...................... $15,865 $14,368
Other liabilities.................... 1,358 1,405
Stockholders' equity................. 26,973 26,036
--------- ---------
Total liabilities and capital........ $ 231,173 $ 219,015
--------- ---------
NET INTEREST INCOME /
NET INTEREST MARGIN (4)............ $ 5,067 3.12% $ 5,360 3.43%
TAX EQUIVALENT NET INTEREST INCOME /
NET INTEREST MARGIN (5)............ $ 5,393 3.32% $ 5,730 3.66%
(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 2003 and 2002.
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
Nine Months Ended September 30, 2003
Compared with 2002
Increase (Decrease) (2)
Volume Rate Total
------ ---- -----
Interest income: (In thousands)
Loans (1) .......................................... $ 279 $(1,055) $ (776)
Investments ........................................ 273 (1,028) (755)
Federal funds sold and other short-term investments (13) (3) (16)
Interest expense:
Deposits ........................................... $ 287 $(1,360) $(1,073)
Short-term borrowings .............................. 16 (78) (62)
Long term debt ..................................... (1) (1) (2)
Net: ........................................................ $ 237 $ (647) $ (410)
(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.
Average interest earning assets at September 30, 2003 increased by 3.9 percent
over September 30, 2002 to $216.6 million from $208.5 million.
Average loans outstanding increased from $146.6 million to $150.6 million or 2.7
percent for the nine months ended September 30, 2003, as compared to the nine
months ended September 30, 2002.
The outstanding balance of net loans at September 30, 2003 was $148.3 million
compared to $150.0 million at December 31, 2002.
Interest income from investment securities decreased 30.0% from $2.0 million for
the nine months ended September 30, 2002 to $1.4 million for the nine months
ended September 30, 2003. The average balance of investment securities for the
nine months ended September 30, 2003 increased 8.8 percent to $59.2 million,
compared to the $54.4 million for the same period of 2002.
Total interest expense decreased $.9 million or 20.9 percent for the first nine
months of 2003 as compared to the first nine months of 2002. The cost of
interest bearing liabilities decreased on an average yield basis from 3.25
percent through September 2002 compared to 2.43 percent through September 2003.
The average yield on interest earning assets decreased from 6.19 percent to 5.22
percent through September 2002 and 2003, respectively.
Average short-term borrowings increased $.8 million from $18.1 million at
September 30, 2002 to $18.9 million at September 30, 2003.
Long-term borrowings from Federal Home Loan Bank remained constant at an average
$11.3 million at September 30, 2003 and 2002.
NON-INTEREST INCOME
The following table presents the components of non-interest income for the nine
months ended September 30, 2003 and 2002.
18
Nine Months Ended
September 30,
(In thousands)
--------------
2003 2002
------ ------
Service charges and fees ............................... $ 507 $ 487
Trust Department income ................................ 95 151
Investment Securities Gain - net ...................... 8 107
Gain on Sale of Loans .................................. 92 0
Gain on Sale of Other Real Estate Owned ................ 12 0
Gain on Cash Surrender Value Life Insurance ............ 165 13
Mortgage Servicing Rights, net of amortization ......... 72 0
Third party brokerage income ........................... 74 71
Other .................................................. 109 59
------ ------
Total ......................................... $1,134 $ 888
------ ------
Non-interest income continues to represent a considerable source of our income.
We are committed to increasing non-interest income. Increases will be derived
from our existing sources of non-interest income and any new opportunities that
may develop.
For the nine months ended September 30, 2003, total non-interest income
increased $246 thousand to $1,134 thousand or 27.7 percent, compared to $888
thousand for the nine months period ended September 30, 2002.
Service charges and fees increased $20 thousand from $487 thousand at September
30, 2002 to $507 thousand or 4.1 percent at September 30, 2003. Trust Department
income decreased from $151 thousand at September 30, 2002 to $95 thousand or
37.1 percent at September 30 2003. Investment securities gains were $8 thousand
at September 30, 2003 and $107 thousand at September 30, 2002, a decrease of $99
thousand. Sale of Loans generated $92 thousand in income through September 30,
2003 compared to $0 for the same period of 2002. Gain on Sale of Other Real
Estate Owned realized income of $12 thousand at September 30, 2003 compared to
$0 for the nine months ended September 30, 2002. Bank Owned Life Insurance gain
in Cash Surrender Value was $165 thousand at September 30, 2003 compared to $13
thousand at September 30, 2002. Loan sales created net income of $72 thousand in
Net Mortgage Servicing Rights at September 30, 2003 compared to $0 at September
30, 2002. Third party brokerage income reflected a $3 thousand increase or 4.2
percent comparing September 30, 2003 to September 30, 2002.
Other non-interest income increased from $59 thousand at September 30, 2002 to
$109 thousand or 83.1 percent at September 30, 2003. This increase was
attributable to new fees of $28 thousand for preparation of loans for sale and
$6 thousand for Service and Credit Enhancement Fees for these loans sold.
Additional Merchant fees for Credit Card services amounted to $20 thousand for
the period ending September 30, 2003 compared to September 30, 2002.
NON-INTEREST EXPENSE
The following table presents the components of non-interest expense for the nine
months ended September 30, 2003 and 2002.
Nine Months Ended
September 30,
2003 2002
------ ------
(Dollars in Thousands)
Salaries and wages ............................ $1,647 $1,638
Employee benefits .............................. 585 566
Net occupancy expense .......................... 290 268
Furniture and equipment expense ................ 357 442
State shares tax ............................... 206 192
Other expense .................................. 985 970
------ ------
Total ................................. $4,070 $4,076
------ ------
Non-interest expense remained constant at $4.1 million at September 30, 2002 and
September 30, 2003.
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 increased .05 percent at September 30, 2003 compared to September 30,
2002. A 3.36 percent increase was reflected in employee benefits from $566
thousand at September 30, 2002, to $585 thousand at September 30, 2004.
Increased cost of employee benefits, specifically health coverage, accounted for
the increase in employee benefits.
Occupancy expense and furniture and equipment expense reflects a $63 thousand or
8.9 percent decrease for the first nine months of 2003 compared to the first
nine months of 2002, principally attributable to reductions in depreciation
expense.
Pennsylvania Bank Shares Tax increased 7.3 percent from $192 thousand at
September 30, 2002 compared to $206 thousand at September 30, 2003.
Other expenses increased 1.5 percent from $970 thousand at September 30, 2002 to
$985 thousand at September 30, 2003.
19
INCOME TAXES
Income tax expense as a percentage of pre-tax income was 21.2 percent for the
nine months ended September 30, 2003 compared with 22.0 percent for the same
period in 2002. The effective tax rate for 2003 is expected to approximate 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. 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 stagnant 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. On the
asset side, liquid funds are maintained in the form of cash and due from banks,
federal funds sold, investment securities maturing within one year, and security
and loan payments. Liquid assets amounted to $114.7 million and $202.3 million
at September 30, 2003 and December 31, 2002, respectively. This represents 53.0
percent and 96.1 percent of earning assets, and 49.6 percent and 88.3 percent of
total assets at September 30, 2003 and December 31, 2002, respectively.
On the liability side, the primary source of funds available to meet liquidity
needs is our core deposit base, which generally excludes certificates of deposit
over $100 thousand Core deposits averaged approximately $142.4 million for the
nine months ended September 30, 2003 and $137.0 million for the year ended
December 31, 2002, representing 65.7 percent and 65.1 percent of average earning
assets. Short-term and long-term borrowings through federal funds lines,
repurchase agreements, Federal Home Loan Bank advances and large dollar
certificates of deposit, generally those over $100 thousand, are used as
supplemental funding sources. Additional liquidity is derived from scheduled
loan and investment payments of principal and interest, as well as prepayments
received. For the nine months ended September 30, 2003, there were $33.0 million
of proceeds from the sales, maturities and redemptions of investment securities
available for sale. Purchases of investment securities for the nine months ended
September 30, 2003 were $45.2 million. Short-term borrowings and certificates of
deposit over $100 thousand amounted to $49.8 million and $48.5 million for the
nine months ended September 30, 2003 and the year ended December 31, 2002,
respectively.
Our cash requirements consist primarily of dividends to shareholders. This cash
need is routinely satisfied by dividends collected from the bank along with cash
and investments owned. Projected cash flows from this source are expected to be
adequate to pay dividends, given the current capital levels and current
profitable operations of the bank. In addition, we may repurchase shares of our
outstanding common stock for benefit plans and other corporate purposes. The
cash required for a purchase of shares can be met by using our own funds,
dividends received from the bank, and borrowed funds.
As of September 30, 2003, we had $65.0 million of securities available for sale
recorded at their fair value, compared with $53.5 million at December 31, 2002.
As of September 30, 2003, the investment securities available for sale had an
unrealized gain of $316 thousand, net of deferred taxes, compared with an
unrealized gain of $536 thousand, net of deferred taxes, at December 31, 2002.
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.
NON-PERFORMING ASSETS
Shown below is a summary of past due and non-accrual loans:
(Dollars in thousands)
September December
30, 31,
2003 2002
------ ------
Past due and non-accrual:
Days 30 - 89 .......................... $ 914 $1,841
Days 90 plus .......................... 392 50
Non-accrual ............................ 2,142 2,122
------ ------
Total ...................................... $3,448 $4,013
------ ------
Past due and non-accrual loans decreased $.6 million from $4.0 million at
December 31, 2002 to $3.4 million at September 30, 2003. The loan delinquency
expressed as a ratio to total loans was 2.3% at September 30, 2003 and 2.6% at
December 31, 2002.
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:
(Dollars in
Thousands)
MATURITY AND REPRICING DATA FOR LOANS AND LEASES September 30,
2003
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 .................................................. $ 2,406
(2) Over three months through 12 months ................................... 12,412
(3) Over one year through three years ..................................... 28,193
(4) Over three years through five years ................................... 2,424
(5) Over five years through 15 years ...................................... 22,232
(6) Over 15 years ......................................................... 380
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 .................................................. 26,697
(2) Over three months through 12 months ................................... 14,988
(3) Over one year through three years ..................................... 17,295
(4) Over three years through five years ................................... 7,632
(5) Over five years through 15 years ...................................... 12,622
(6) Over 15 years ......................................................... 433
---------
Sub-total ........................................................ $ 147,714
Add: non-accrual loans not included above ...................................... 2,142
Less: unearned income ........................................................... (73)
---------
Total Loans and Leases ........................................... $ 149,783
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses reflected a balance of $1.4 million or .93 percent
of total loans at September 30, 2003 and a balance of $1.3 million or.86 percent
of total loans at December 31, 2002. The allowance is believed adequate for
possible loan losses in the future.
The provision for loan losses was $150 thousand for the first nine months of
2003 compared to $264 thousand for the first nine months of 2002.
Because our loan portfolio 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 non-performing loans. An
increase in non-performing loans could result in a 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 September 30,
Amounts in thousands 2003 2002
-------------------- --------- ---------
Average loans outstanding: ............................................ $ 150,560 $ 146,565
Total loans at end of period .......................................... 149,783 150,624
Balance at beginning of period ............................... 1,298 1,028
Total charge-offs ............................................ (44) (65)
Total recoveries ............................................ 39 52
Net charge-offs ............................................. (5) (13)
Provision for loan losses ................................... 150 264
Balance at end of period ............................................. $ 1,443 $ 1,279
--------- ---------
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Net charge-offs as a percent of average loans outstanding during period .00% .01%
Allowance for loan losses as a percent of total loans ................. .93% .86%
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.
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:
September 30, 2003 December 31, 2002
------------------ -----------------
Minimum Minimum
Calculated Standard Calculated Standard
Ratios Ratios Ratios Ratios
------ ------ ------ ------
Risk Based Ratios:
Tier I Capital to risk-weighted assets ......... 19.02% 4.00% 18.53% 4.00%
Total Qualifying Capital to risk-weighted assets 20.08% 8.00% 19.46% 8.00%
Additionally, certain other ratios also provide capital analysis as follows:
September December
30, 31,
2003 2002
Tier I Capital to average assets ....................... 11.59% 11.77%
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 $21.27 at September 30, 2003, compared with
$20.76 per share at December 31, 2002.
Cash dividends declared amounted to $0.49 per share, for the nine months ended
September 30, 2003, equivalent to a dividend payout ratio of 40.2 percent,
compared with 41.3 percent for the same period in 2002. 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.
CONTROLS AND PROCEDURES
EVALUATION OF OUR DISCLOSURE CONTROLS AND PROCEDURES. The Securities and
Exchange Commission requires that as of the end of the period covered by this
report the CEO and the Principal Financial Officer evaluate the effectiveness of
the design and operation of our disclosure controls and procedures (as defined
in Rule 13 (a)-15(e) and Rule 15 (d)-15(e) under the Securities Exchange Act of
1934), and report on the effectiveness of the design and operation of our
disclosure controls and procedures. Accordingly, under the supervision and with
the participation of our management, including our CEO and Principal Accounting
Officer, we evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the period.
CEO/PRINCIPAL ACCOUNTING OFFICER CONCLUSIONS ABOUT THE EFFECTIVENESS OF THE
DISCLOSURE CONTROLS AND PROCEDURES. Based upon their evaluation of the
disclosure controls and procedures, our CEO and Principal Accounting Officer
have; concluded that, subject to the limitations noted below, our disclosure
controls and procedures are effective to provide reasonable assurance that
material information relating to the Company and its consolidated subsidiaries
is made known to management, including the CEO and Principal Financial Officer,
on a timely basis and particularly during the period in which this Quarterly
Report on Form 10-Q was being prepared.
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS.
Our management, including the CEO and Principal Financial Officer, does not
expect that our disclosure controls and procedures or our internal control, will
prevent all error and 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 system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of 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 the company 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, that 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 or 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. While we
believe that our disclosure controls and procedures have been effective, in
light of the foregoing we intend to continue to examine and refine our
disclosure controls and procedures and to monitor ongoing developments in this
area.
22
CHANGES IN INTERNAL CONTROLS. There were no changes in our internal control,
over financial reporting, identified in connection with the reevaluation of such
internal control over financial reporting that occurred during the period
covered by this quarterly report, that has materially affected, or is reasonably
likely to materially affect our internal control over financial reporting.
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 - Northing to report.
Item 4. Submission of matters to a Vote of Security Holders - Nothing to report.
Item 5. Other Information - None
Item 6. A - Exhibits and Reports on Form 8-K
8 K filed August 14, 2003
At the Registrant's Board meeting of August 14, 2003, the directors
authorized the purchase of up to 100,000 shares of its issued and outstanding
common stock, from time to time, in open market purchases, through a licensed
broker-dealer, in accordance with the terms, conditions and restriction
contained in Rule 10b-18.
B - Exhibits 31.1, 31.2 and 32
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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: November 7, 2003
By /s/ Virginia D. Kocher
------------------------------------
Virginia D. Kocher
Principal Financial Officer
Date: November 7, 2003
25