SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year-ended December 31, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____________to________________
Commission file Number: 0-19028
CCFNB BANCORP, INC.
(Name of small business issuer in its charter)
PENNSYLVANIA 23-2254643
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
232 East Street, Bloomsburg, Pennsylvania 17815
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (570) 784-4400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $1.25 per share.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the voting and non-voting common equity
held by non-affiliates of the Registrant based on the average of the bid and
asked prices of $29.00 at February 28, 2004, was $37,030,506.
As of February 28, 2004, the Registrant had outstanding 1,276,914
shares of its common stock, par value $1.25 per share.
Page 1 of 79
Exhibit Index on Page 67
CCFNB BANCORP, INC.
FORM 10-K
INDEX
Page
----
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS..................................................................... 3
ITEM 1. BUSINESS................................................................................................ 3
ITEM 2. PROPERTIES.............................................................................................. 18
ITEM 3. LEGAL PROCEEDINGS....................................................................................... 19
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............................... 19
ITEM 6. SELECTED FINANCIAL DATA................................................................................. 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................... 20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.............................................. 32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................................. 32
ITEM 9A. CONTROLS AND PROCEDURES................................................................................. 55
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...................................................... 56
ITEM 11. EXECUTIVE COMPENSATION.................................................................................. 58
FIVE-YEAR PERFORMANCE GRAPH........................................................................................ 60
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.......... 61
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................................................... 61
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.................................................................. 61
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K....................................... 62
SIGNATURES............................................................................................................ 64
INDEX TO EXHIBITS..................................................................................................... 67
2
CCFNB BANCORP, INC.
FORM 10-K
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This annual report on Form 10-K, other periodic reports filed by us under the
Securities Exchange Act of 1934, as amended, and any other written or oral
statements made by or on behalf of us may include "forward looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 which
reflect our current views with respect to future events and financial
performance. Such forward looking statements are based on general assumptions
and are subject to various risks, uncertainties, and other factors that may
cause actual results to differ materially from the views, beliefs and
projections expressed in such statements. These risks, uncertainties and other
factors include, but are not limited to:
- possible changes in economic and business conditions that may
affect the prevailing interest rates, the prevailing rates of
inflation, or the amount of growth, stagnation, or recession
in the global, U.S., and Northcentral Pennsylvania economies,
the value of investments, collectibility of loans and the
profitability of business entities;
- possible changes in monetary and fiscal policies, laws and
regulations, and other activities of governments, agencies and
similar organizations;
- the effects of easing of restrictions on participants in the
financial services industry, such as banks, securities brokers
and dealers, investment companies and finance companies, and
changes evolving from the enactment of the Gramm-Leach-Bliley
Act which became effective in 2000, and attendant changes in
matters and effects of competition in the financial services
industry;
- the cost and other effects of legal proceedings, claims,
settlements and judgments; and
- our ability to achieve the expected operating results related
to our operations which depends on a variety of factors,
including the continued growth of the markets in which we
operate consistent with recent historical experience, and our
ability to expand into new markets and to maintain profit
margins in the face of pricing pressures.
The words "believe," "expect," "anticipate," "project" and similar expressions
signify forward looking statements. Readers are cautioned not to place undue
reliance on any forward looking statements made by or on behalf of us. Any such
statement speaks only as of the date the statement was made. We undertake no
obligation to update or revise any forward looking statements.
ITEM 1. BUSINESS
GENERAL
We are a registered financial holding company, bank holding company, and
Pennsylvania business corporation, and are headquartered in Bloomsburg,
Pennsylvania. We have one wholly-owned subsidiary which is Columbia County
Farmers National Bank or referred to as the Bank. A substantial part of our
business consists of the management and supervision of the Bank. Our principal
source of income is dividends paid by the Bank. At December 31, 2003, we had
approximately:
- $233 million in total assets;
- $148 million in loans;
- $172 million in deposits; and
- $ 28 million in stockholders' equity.
The Bank is a national banking association and member of the Federal Reserve
System whose deposits are insured by the Bank Insurance Fund of the FDIC. The
Bank is a full-service commercial bank providing a range of services and
products, including time and demand deposit accounts, consumer, commercial and
mortgage loans to individuals and small to medium-sized business in its
Northcentral Pennsylvania market area. The Bank also operates a full-service
trust department. A third-party brokerage is also resident in the Bank's office
in Lightstreet, Pennsylvania. At December 31, 2003, the Bank had six branch
banking offices which are located in the Pennsylvania county of Columbia.
We consider our branch banking offices to be a single operating segment, because
these branches have similar:
- economic characteristics,
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- products and services,
- operating processes,
- delivery system,
- customer bases, and
- regulatory oversight.
We have not operated any other reportable operating segments in the 3-year
period ended December 31, 2003.
We hold a 50% interest in a local insurance agency. The name of this agency is
Neighborhood Group, Inc. and trades under the fictitious name of Neighborhood
Advisors (insurance agency). Through this joint venture, we sell insurance
products and services.
As of December 31, 2003, we had 86 employees on a full-time equivalent basis.
The Company and the Bank are not parties to any collective bargaining agreement
and employee relations are considered to be good.
SUPERVISION AND REGULATION
The following discussion sets forth the material elements of the regulatory
framework applicable to us and the Bank and provides certain specific
information. This regulatory framework is primarily intended for the protection
of investors in our common stock, depositors at the Bank and the Bank Insurance
Fund that insures bank deposits. To the extent that the following information
describes statutory and regulatory provisions, it is qualified by reference to
those provisions. A change in the statutes, regulations or regulatory policies
applicable to us or the Bank may have a material effect on our business.
INTERCOMPANY TRANSACTIONS
Various governmental requirements, including Sections 23A and 23B of the Federal
Reserve Act and Regulation W of the Federal Reserve Board, limit borrowings by
us from the Bank and also limit various other transactions between us and the
Bank. For example, Section 23A of the Federal Reserve Act limits to no more than
ten percent of its total capital the aggregate outstanding amount of the Bank's
loans and other "covered transactions" with any particular non-bank affiliate
(including a financial subsidiary) and limits to no more than 20 percent of its
total capital the aggregate outstanding amount of the Bank's covered
transactions with all of its affiliates (including financial subsidiaries). At
December 31, 2003, approximately $5 million was available for loans to us from
the Bank. Section 23A of the Federal Reserve Act also generally requires that
the Bank's loans to its non-bank affiliates (including financial subsidiaries)
be secured, and Section 23B of the Federal Reserve Act generally requires that
the Bank's transactions with its non-bank affiliates (including financial
subsidiaries) be on arm's-length terms. Also, we, the Bank, and any financial
subsidiary are prohibited from engaging in certain "tie-in" arrangements in
connection with extensions of credit or provision of property or services.
SUPERVISORY AGENCIES
As a national bank and member of the Federal Reserve System, the Bank is subject
to primary supervision, regulation, and examination by the Office of the
Comptroller of the Currency and secondary regulation by the FDIC. The Bank is
subject to extensive statutes and regulations that significantly affect its
business and activities. The Bank must file reports with its regulators
concerning its activities and financial condition and obtain regulatory approval
to enter into certain transactions. The Bank is also subject to periodic
examinations by its regulators to ascertain compliance with various regulatory
requirements. Other applicable statutes and regulations relate to insurance of
deposits, allowable investments, loans, leases, acceptance of deposits, trust
activities, mergers, consolidations, payment of dividends, capital requirements,
reserves against deposits, establishment of branches and certain other
facilities, limitations on loans to one borrower and loans to affiliated
persons, activities of subsidiaries and other aspects of the business of banks.
Recent Federal legislation has instructed federal agencies to adopt standards or
guidelines governing banks' internal controls, information systems, loan
documentation, credit underwriting, interest rate exposure, asset growth,
compensation and benefits, asset quality, earnings and stock valuation, and
other matters. Legislation adopted in 1994 gives the federal banking agencies
greater flexibility in implementing standards on asset quality, earnings, and
stock valuation. Regulatory authorities have broad flexibility to initiate
proceedings designed to prohibit banks from engaging in unsafe and unsound
banking practices.
We and the Bank are also affected by various other governmental requirements and
regulations, general economic conditions, and the fiscal and monetary policies
of the federal government and the Federal Reserve Board. The monetary policies
of the Federal Reserve Board influence to a significant extent the overall
growth of loans, leases, investments, deposits, interest rates charged on loans,
and interest rates paid on deposits. The nature and impact of future changes in
monetary policies are often not predictable.
We are subject to the jurisdiction of the SEC for matters relating to the
offering and sale of our securities. We are also subject to the SEC's rules and
regulations relating to periodic reporting, insider trader reports and proxy
solicitation materials. Our common stock is not listed for quotation of prices
on The NASDAQ Stock Market or any other nationally-recognized stock exchange.
However, daily bid and asked price quotations are maintained on the interdealer
electronic bulletin board system.
4
SUPPORT OF THE BANK
Under current Federal Reserve Board policy, we are expected to act as a source
of financial and managerial strength to the Bank by standing ready to use
available resources to provide adequate capital funds to the Bank during periods
of financial adversity and by maintaining the financial flexibility and
capital-raising capacity to obtain additional resources for assisting the Bank.
The support expected by the Federal Reserve Board may be required at times when
we may not have the resources or inclination to provide it.
If a default occurred with respect to the Bank, any capital loans to the Bank
from us would be subordinate in right of payment to payment of the Bank
depositors and certain of its other obligations.
LIABILITY OF COMMONLY CONTROLLED BANKS
The Bank can be held liable for any loss incurred, or reasonably expected to be
incurred, by the FDIC in connection with:
- the default of a commonly controlled FDIC-insured depository
institution or
- any assistance provided by the FDIC to a commonly controlled
FDIC-insured depository institution in danger of default.
"Default" generally is defined as the appointment of a conservator or receiver,
and "in danger of default" generally is defined as the existence of certain
conditions indicating that a default is likely to occur in the absence of
regulatory assistance.
DEPOSITOR PREFERENCE STATUTE
In the "liquidation or other resolution" of the Bank by any receiver, federal
legislation provides that deposits and certain claims for administrative
expenses and employee compensation against the Bank are afforded a priority over
the general unsecured claims against the Bank, including federal funds and
letters of credit.
ALLOWANCE FOR LOAN LOSSES
There are certain risks inherent in making all loans. These risks include
interest rate changes over the time period in which loans may be repaid, risks
resulting from changes in our Northcentral Pennsylvania area economy, risks
inherent in dealing with individual borrowers, and, in the case of a loan backed
by collateral, risks resulting from uncertainties about the future value of the
collateral.
Commercial loans and commercial real estate loans comprised 30.0% of our total
consolidated loans as of December 31, 2003. Commercial loans are typically
larger than residential real estate loans and consumer loans. Because our loan
portfolio contains a significant number of commercial loans and commercial real
estate loans with relatively large balances, the deterioration of one or a few
of these loans may cause a significant increase in nonperforming loans. An
increase in nonperforming loans could result in a loss of earnings from these
loans, an increase in the provision for loan losses and loan charge-offs.
We maintain an allowance for loan losses to absorb any loan losses based on,
among other things, our historical experience, an evaluation of economic
conditions, and regular reviews of any delinquencies and loan portfolio quality.
We cannot assure you that charge-offs in future periods will not exceed the
allowance for loan losses or that additional increases in the allowance for loan
losses will not be required. Additions to the allowance for loan losses would
result in a decrease in our net income and, possibly, our capital.
In evaluating our allowance for loan losses, we divide our loans into the
following categories:
- commercial,
- real estate mortgages,
- consumer, and
- unallocated.
We evaluate some loans as a group and some individually. We use the following
criteria in choosing loans to be evaluated individually:
- by risk profile, and
- by past due status.
After our evaluation of these loans, we allocate portions of our allowance for
loan losses to categories of loans based upon the following considerations:
- historical trends,
5
- economic conditions, and
- any known deterioration.
We use a self-correcting mechanism to reduce differences between estimated and
actual losses. We will, on an annual basis, weigh our loss experience among the
various categories and reallocate the allowance for loan losses.
For a more in-depth presentation of our allowance for loan losses and the
components of this allowance, please refer to Item 7 of this report under
Management's Discussion and Analysis of Financial Condition and Results of
Operations at "Non-Performing Assets," "Allowance for Loan Losses and Related
Provision," and "Summary of Loan Loss Experience," as well as Note 4, Item 8 to
this report.
SOURCES OF FUNDS
GENERAL. Our primary source of funds is the cash flow provided by our investing
activities, including principal and interest payments on loans and
mortgage-backed and other securities. Our other sources of funds are provided by
operating activities (primarily net income) and financing activities, including
borrowings and deposits.
DEPOSITS. We offer a variety of deposit accounts with a range of interest rates
and terms. We currently offer passbook and statement savings accounts, NOW
accounts, money market accounts, demand deposit accounts and certificates of
deposit. The flow of deposits is influenced significantly by general economic
conditions, changes in prevailing interest rates, pricing of deposits and
competition. Our deposits are primarily obtained from areas surrounding our
banking offices. We rely primarily on marketing, new products, service and
long-standing relationships with customers to attract and retain these deposits.
At December 31, 2003, our deposits totaled $172 million. Of the total deposit
balance, $10 million or 6%, represent Individual Retirement Accounts and $27
million or 16% represent certificates of deposit in amounts of $100,000 or more.
When we determine the levels of our deposit rates, consideration is given to
local competition, yields of U.S. Treasury securities and the rates charged for
other sources of funds. We have maintained a high level of core deposits, which
has contributed to our low cost of funds. Core deposits include savings, money
market, NOW and demand deposit accounts, which, in the aggregate, represented
48% of total deposits at December 31, 2003 and 45% of total deposits at December
31, 2002.
For a further discussion of our deposits, please refer to Item 7 of this report
under Management's Discussion and Analysis of Financial Condition and Results of
Operations at "Deposits and Borrowed Funds," as well as Note 7, Item 8 to this
report.
CAPITAL REQUIREMENTS
We are subject to risk-based capital requirements and guidelines imposed by the
Federal Reserve Board, which are substantially similar to the capital
requirements and guidelines imposed by the Comptroller of the Currency on the
Bank. For this purpose, a bank's or bank holding company's assets and certain
specified off-balance sheet commitments are assigned to four risk categories,
each weighted differently based on the level of credit risk that is ascribed to
those assets or commitments. In addition, risk-weighted assets are adjusted for
low-level recourse and market-risk equivalent assets. A bank's or bank holding
company's capital, in turn, includes the following tiers:
- core ("Tier 1") capital, which includes common equity,
non-cumulative perpetual preferred stock, a limited amount of
cumulative perpetual preferred stock, and minority interests
in equity accounts of consolidated subsidiaries, less
goodwill, certain identifiable intangible assets, and certain
other assets; and
- supplementary ("Tier 2") capital, which includes, among other
items, perpetual preferred stock not meeting the Tier 1
definition, mandatory convertible securities, subordinated
debt and allowances for loan and lease losses, subject to
certain limitations, less certain required deductions.
We, like other bank holding companies, are required to maintain Tier 1 and
"Total Capital" (the sum of Tier 1 and Tier 2 capital, less certain deductions)
equal to at least four percent and eight percent of their total risk-weighted
assets (including certain off-balance sheet items, such as unused lending
commitments and standby letters of credit), respectively. At December 31, 2003,
we met both requirements, with Tier 1 and Total Capital equal to 18.82 percent
and 19.88 percent of total risk-weighted assets.
The Federal Reserve Board has adopted rules to incorporate market and interest
rate risk components into their risk-based capital standards. Under these
market-risk requirements, capital will be allocated to support the amount of
market risk related to a financial institution's ongoing trading activities.
The Federal Reserve Board also requires bank holding companies to maintain a
minimum "Leverage Ratio" (Tier 1 capital to adjusted total assets) of three
percent if the bank holding company has the highest regulatory rating and meets
certain other requirements, or of
6
three percent plus an additional cushion of at least one to two percentage
points if the bank holding company does not meet these requirements. At December
31, 2003, our leverage ratio was 11.79 percent.
The Federal Reserve Board may set capital requirements higher than the minimums
noted above for holding companies whose circumstances warrant it. For example,
bank holding companies experiencing or anticipating significant growth may be
expected to maintain strong capital positions substantially above the minimum
supervisory levels without significant reliance on intangible assets.
Furthermore, the Federal Reserve Board has indicated that it will consider a
"Tangible Tier 1 Leverage Ratio" (deducting all intangibles) and other
indications of capital strength in evaluating proposals for expansion or new
activities, or when a bank holding company faces unusual or abnormal risk. The
Federal Reserve Board has not advised us of any specific minimum leverage ratio
applicable to us.
The Bank is subject to similar risk-based capital and leverage requirements
adopted by the Comptroller of the Currency. The Bank was in compliance with the
applicable minimum capital requirements as of December 31, 2003. The Comptroller
of the Currency has not advised the Bank of any specific minimum leverage ratio
applicable to the Bank.
Failure to meet capital requirements could subject the Bank to a variety of
enforcement remedies, including the termination of deposit insurance by the
FDIC, and to certain restrictions on its business. The Federal Deposit Insurance
Corporation Improvements Act of 1991 ("FDICIA"), among other things, identifies
five capital categories for insured banks - well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized, and critically
undercapitalized - and requires federal bank regulatory agencies to implement
systems for "prompt corrective action" for insured banks that do not meet
minimum capital requirements based on these categories. The FDICIA imposed
progressively more restrictive constraints on operations, management, and
capital distributions, depending on the category in which an institution is
classified. Unless a bank is well capitalized, it is subject to restrictions on
its ability to offer brokered deposits, on "pass-through" insurance coverage for
certain of its accounts, and on certain other aspects of its operations. FDICIA
generally prohibits a bank from paying any dividend or making any capital
distribution or paying any management fee to its holding company if the bank
would thereafter be undercapitalized. An undercapitalized bank is subject to
regulatory monitoring and may be required to divest itself of or liquidate
subsidiaries. Holding companies of such institutions may be required to divest
themselves of such institutions or divest themselves of or liquidate other
affiliates. An undercapitalized bank must develop a capital restoration plan,
and its parent bank holding company must guarantee the bank's compliance with
the plan up to the lesser of five percent of the bank's assets at the time it
became undercapitalized or the amount needed to comply with the plan. Critically
undercapitalized institutions are prohibited from making payments of principal
and interest on subordinated debt and are generally subject to the mandatory
appointment of a conservator or receiver.
Rules adopted by the Comptroller of the Currency under FDICIA provide that a
national bank is deemed to be well capitalized if the bank has a total
risk-based capital ratio of ten percent or greater, a Tier 1 risk-based capital
ratio of six percent or greater, and a leverage ratio of five percent or greater
and the institution is not subject to a written agreement, order, capital
directive, or prompt corrective action directive to meet and maintain a specific
level of any capital measure. As of December 31, 2003, the Bank was
well-capitalized, based on the prompt corrective action ratios and guidelines
described above. It should be noted, however, that a bank's capital category is
determined solely for the purpose of applying the Comptroller of the Currency's
prompt corrective action regulations, and that the capital category may not
constitute an accurate representation of the bank's overall financial condition
or prospects.
BROKERED DEPOSITS
Under FDIC regulations, no FDIC-insured bank can accept brokered deposits unless
it (1) is well capitalized, or (2) is adequately capitalized and receives a
waiver from the FDIC. In addition, these regulations prohibit any bank that is
not well capitalized from paying an interest rate on brokered deposits in excess
of three-quarters of one percentage point over certain prevailing market rates.
As of December 31, 2003, the Bank held no brokered deposits.
DIVIDEND RESTRICTIONS
We are a legal entity separate and distinct from the Bank. In general, under
Pennsylvania law, we cannot pay a cash dividend if such payment would render us
insolvent. Our revenues consist primarily of dividends paid by the Bank. The
National Bank Act limits the amount of dividends the Bank can pay to us without
regulatory approval. The Bank may declare and pay dividends to us to the lesser
of:
- the level of undivided profits, and
- absent regulatory approval, an amount not in excess of net
income combined with retained net income for the preceding two
years.
At December 31, 2003, approximately $364 thousand was available for payment of
dividends to us.
7
In addition, federal bank regulatory authorities have authority to prohibit the
Bank from engaging in an unsafe or unsound practice in conducting its business.
Depending upon the financial condition of the bank in question, the payment of
dividends could be deemed to constitute an unsafe or unsound practice. The
ability of the Bank to pay dividends in the future is currently influenced, and
could be further influenced, by bank regulatory policies and capital guidelines.
DEPOSIT INSURANCE ASSESSMENTS
The deposits of the Bank are insured up to regulatory limits by the FDIC and,
accordingly, are subject to deposit insurance assessments to maintain the Bank
Insurance Fund ("BIF") administered by the FDIC. The FDIC has adopted
regulations establishing a permanent risk-related deposit insurance assessment
system. Under this system, the FDIC places each insured bank in one of nine risk
categories based on the bank's capitalization and supervisory evaluations
provided to the FDIC by the institution's primary federal regulator. An insured
bank's insurance assessment rate is then determined by the risk category in
which it is classified by the FDIC.
In the light of the recent favorable financial situation of the federal deposit
insurance funds and the recent low number of depository institution failures,
the annual insurance premiums on bank deposits insured by the BIF vary between
$0.00 per $100 of deposits for banks classified in the highest capital and
supervisory evaluation categories to $0.27 per $100 of deposits for banks
classified in the lowest capital and supervisory evaluation categories. BIF
assessment rates are subject to semi-annual adjustment by the FDIC within a
range of up to five basis points without public comment. The FDIC also possesses
authority to impose special assessments from time to time.
The Deposit Insurance Funds Act provides for assessments to be imposed on
insured depository institutions with respect to deposits insured by the BIF (in
addition to assessments currently imposed on depository institutions with
respect to BIF-insured deposits) to pay for the cost of Financing Corporation
("FICO") funding. The FICO assessments are adjusted periodically to reflect
changes in the assessment bases of the FDIC insurance funds and do not vary
depending upon a depository institution's capitalization or supervisory
evaluations. In 2003, the Bank paid FICO assessments of $27,019.
INTERSTATE BANKING AND BRANCHING
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act
("Riegle-Neal"), subject to certain concentration limits and other requirements:
- bank holding companies, such as we, are permitted to acquire
banks and bank holding companies located in any state;
- any bank that is a subsidiary of a bank holding company is
permitted to receive deposits, renew time deposits, close
loans, service loans, and receive loan payments as an agent
for any other depository institution subsidiary of that bank
holding company; and
- banks are permitted to acquire branch offices outside their
home states by merging with out-of-state banks, purchasing
branches in other states, and establishing de novo branch
offices in other states.
The ability of banks to acquire branch offices through purchase or opening of
other branches is contingent, however, on the host state having adopted
legislation "opting in" to those provisions of Riegle-Neal. In addition, the
ability of a bank to merge with a bank located in another state is contingent on
the host state not having adopted legislation "opting out" of that provision of
Riegle-Neal. Pennsylvania has opted in to all of these provisions upon the
condition that another host state has similar or reciprocal requirements as in
Pennsylvania.
As of the date of this report, we are not contemplating any interstate
acquisitions of a bank or a branch office.
CONTROL ACQUISITIONS
The Change in Bank Control Act prohibits a person or group of persons from
acquiring "control" of a bank holding company, unless the Federal Reserve Board
has been notified and has not objected to the transaction. Under a rebuttable
presumption established by the Federal Reserve Board, the acquisition of ten
percent or more of a class of voting stock of a bank holding company with a
class of securities registered under Section 12 of the Exchange Act, such as we,
would, under the circumstances set forth in the presumption, constitute
acquisition of control of the bank holding company.
In addition, a company is required to obtain the approval of the Federal Reserve
Board under the Bank Holding Company Act before acquiring 25 percent (five
percent in the case of an acquirer that is a bank holding company) or more of
any class of outstanding common stock of a bank holding company, such as we, or
otherwise obtaining control or a "controlling influence" over that bank holding
company.
8
PERMITTED NON-BANKING ACTIVITIES
The Federal Reserve Board permits us or our subsidiaries to engage in nonbanking
activities so closely related to banking or managing or controlling banks as to
be a proper incident thereto. For a discussion of other activities that are
financial in nature in which we can engage, see the caption that follows
entitled "Financial Services Modernization."
The Federal Reserve Board requires us to serve as a source of financial and
managerial strength to the Bank and not to conduct our operations in an unsafe
and unsound manner. Whenever the Federal Reserve Board believes an activity that
we are doing or our control of a nonbank subsidiary (other than a nonbank
subsidiary of the Bank) constitutes a serious risk to the financial safety,
soundness, or stability of the Bank and is inconsistent with sound banking
principles or the purposes of the federal banking laws, the Federal Reserve
Board may require us to terminate that activity or to terminate control of that
subsidiary. While the types of permissible activities are subject to change by
the Federal Reserve Board, the principal nonbanking activities that presently
may be conducted by a bank holding company or its subsidiary without prior
approval of the Federal Reserve Board are:
- Servicing Activities. Furnishing services for, or establish or
acquire a company that engages solely in servicing activities
for:
- us or the Bank in connection with activities
authorized by law, such as commitments entered into by any
subsidiary with third parties as long as we or our servicing
company comply with published guidelines and do not act as a
principal in dealing with third parties;
- the internal operations of the Bank, such as:
- accounting, auditing and appraising;
- advertising and public relations;
- data processing and transmission services,
data bases or facilities;
- personnel services;
- courier services;
- holding or operating property used by our
subsidiaries or for their future use;
- liquidating property acquired from the Bank;
and
- selling, purchasing or underwriting
insurance, such as blanket bond insurance,
group insurance for employees and property
and casualty insurance.
- Safe deposit business. Conduct a safe deposit business or
acquire voting securities of a company that conducts such
business.
- Securities or property representing five percent or less of
any company. Acquiring five percent or less of the outstanding
voting securities of any company regardless of that company's
activities.
- Extending credit and servicing loans. Making, acquiring,
brokering, or servicing loans or other extensions of credit
(including factoring, issuing letters of credit and accepting
drafts) for the company's account or for the account of
others.
- Activities related to extending credit. Any activity usual in
connection with making, acquiring, brokering or servicing
loans or other extensions of credit, as determined by the
Federal Reserve Board. The Federal Reserve Board has
determined that the following activities are usual in
connection with making, acquiring, brokering or servicing
loans or other extensions of credit:
- Real estate and personal property
appraising. Performing appraisals of real
estate and tangible and intangible personal
property, including securities.
- Arranging commercial real estate equity
financing. Acting as intermediary for the
financing of commercial or industrial
income-producing real estate by arranging
for the transfer of the title, control, and
risk of such a real estate project to one or
more investors, if the bank holding company
and its affiliates do not have an interest
in, or participate in managing or
developing, a real estate project for which
it arranges equity financing, and do not
promote or sponsor the development of the
property.
- Check-guaranty services. Authorizing a
subscribing merchant to accept personal
checks tendered by the merchant's customers
in payment for goods and services, and
purchasing from the merchant validly
authorized checks that are subsequently
dishonored.
9
- Collection agency services. Collecting
overdue accounts receivable, either retail
or commercial.
- Credit bureau services. Maintaining
information related to the credit history of
consumers and providing the information to a
credit grantor who is considering a
borrower's application for credit or who has
extended credit to the borrower.
- Asset management, servicing, and collection
activities. Engaging under contract with a
third party in asset management, servicing,
and collection of assets of a type that an
insured depository institution may originate
and own, if the company does not engage in
real property management or real estate
brokerage services as part of these
services.
- Acquiring debt in default. Acquiring debt
that is in default at the time of
acquisition under certain conditions.
- Real estate settlement servicing. Providing
real estate settlement services.
- Leasing personal or real property. Leasing personal or real
property or acting as agent, broker, or adviser in leasing
such property under certain conditions.
- Operating nonbank depository institutions:
- Industrial banking. Owning, controlling, or
operating an industrial bank, Morris Plan
bank, or industrial loan company, so long as
the institution is not a bank.
- Operating savings association. Owning,
controlling or operating a savings
association, if the savings association
engages only in deposit-taking activities,
lending, and other activities that are
permissible for bank holding companies.
- Trust company functions. Performing functions or activities
that may be performed by a trust company (including activities
of a fiduciary, agency, or custodial nature), in the manner
authorized by federal or state law, so long as the company is
not a bank for purposes of the Bank Holding Company Act.
- Financial and investment advisory activities. Acting as
investment or financial advisor to any person, including
(without, in any way, limiting the foregoing):
- Serving as investment adviser (as defined in
section 2(a)(20) of the Investment Company
Act of 1940, 15 U.S.C. 80a-2(a)(20)), to an
investment company registered under that
act, including sponsoring, organizing, and
managing a closed-end investment company;
- Furnishing general economic information and
advice, general economic statistical
forecasting services, and industry studies;
- Providing advice in connection with mergers,
acquisitions, divestitures, investments,
joint ventures, leveraged buyouts,
recapitalizations, capital structurings,
financing transactions and similar
transactions, and conducting financial
feasibility studies;
- Providing information, statistical
forecasting, and advice with respect to any
transaction in foreign exchange, swaps, and
similar transactions, commodities, and any
forward contract, option, future, option on
a future, and similar instruments;
- Providing educational courses, and
instructional materials to consumers on
individual financial management matters; and
- Providing tax-planning and tax-preparation
services to any person.
- Agency transactional services for customer investments:
- Securities brokerage. Providing securities
brokerage services (including securities
clearing and/or securities execution
services on an exchange), whether alone or
in combination with investment advisory
services, and incidental activities
(including related securities credit
activities and custodial services), if the
securities
10
brokerage services are restricted to buying
and selling securities solely as agent for
the account of customers and do not include
securities underwriting or dealing.
- Riskless principal transactions. Buying and
selling in the secondary market all types of
securities on the order of customers as a
"riskless principal" to the extent of
engaging in a transaction in which the
company, after receiving an order to buy (or
sell) a security from a customer, purchases
(or sells) the security for its own account
to offset a contemporaneous sale to (or
purchase from) the customer. This does not
include:
(A) Selling bank-ineligible securities at
the order of a customer that is the issuer of the
securities, or selling bank-ineligible securities in
any transaction where the company has a contractual
agreement to place the securities as agent of the
issuer; or
(B) Acting as a riskless principal in any
transaction involving a bank-ineligible security for
which the company or any of its affiliates acts as
underwriter (during the period of the underwriting or
for 30 days thereafter) or dealer.
- Private placement services. Acting as agent
for the private placement of securities in
accordance with the requirements of the
Securities Act of 1933 ("1933 Act") and the
rules of the Securities and Exchange
Commission, if the company engaged in the
activity does not purchase or repurchase for
its own account the securities being placed,
or hold in inventory unsold portions of
issues of these securities.
- Futures commission merchant. Acting as a
futures commission merchant ("FCM") for
unaffiliated persons in the execution,
clearance, or execution and clearance of any
futures contract and option on a futures
contract traded on an exchange in the United
States or abroad under certain conditions.
- Other transactional services. Providing to
customers as agent transactional services
with respect to swaps and similar
transactions.
- Investment transactions as principal:
- Underwriting and dealing in government
obligations and money market instruments.
Underwriting and dealing in obligations of
the United States, general obligations of
states and their political subdivisions, and
other obligations that state member banks of
the Federal Reserve System may be authorized
to underwrite and deal in under 12 U.S.C. 24
and 335, including banker's acceptances and
certificates of deposit, under the same
limitations as would be applicable if the
activity were performed by the bank holding
company's subsidiary member banks or its
subsidiary nonmember banks as if they were
member banks.
- Investing and trading activities. Engaging
as principal in:
(A) Foreign exchange;
(B) Forward contracts, options, futures,
options on futures, swaps, and similar contracts,
whether traded on exchanges or not, based on any
rate, price, financial asset (including gold, silver,
platinum, palladium, copper, or any other metal
approved by the Federal Reserve Board), nonfinancial
asset, or group of assets, other than a
bank-ineligible security under certain conditions.
(C) Forward contracts, options, futures,
options on futures, swaps, and similar contracts,
whether traded on exchanges or not, based on an index
of a rate, a price, or the value of any financial
asset, nonfinancial asset, or group of assets, if the
contract requires such settlement.
- Buying and selling bullion, and related
activities. Buying, selling and storing
bars, rounds, bullion, and coins of gold,
silver, platinum, palladium, copper, and any
other metal approved by the Federal Reserve
Board, for the company's own account and the
account of others, and providing incidental
services such as arranging for storage, safe
custody, assaying, and shipment.
- Management consulting and counseling activities:
- Management consulting. Providing management
consulting advice under certain conditions.
11
- Employee benefits consulting services.
Providing consulting services to employee
benefit, compensation and insurance plans,
including designing plans, assisting in the
implementation of plans, providing
administrative services to plans, and
developing employee communication programs
for plans.
- Career counseling services. Providing career
counseling services to:
(A) A financial organization and
individuals currently employed by, or recently
displaced from, a financial organization;
(B) Individuals who are seeking employment
at a financial organization; and
(C) Individuals who are currently employed
in or who seek positions in the finance, accounting,
and audit departments of any company.
- Support services:
- Courier services. Providing courier services
for:
(A) Checks, commercial papers, documents,
and written instruments (excluding currency or
bearer-type negotiable instruments) that are
exchanged among banks and financial institutions; and
(B) Audit and accounting media of a
banking or financial nature and other business
records and documents used in processing such media.
(ii) Printing and selling MICR-encoded items.
Printing and selling checks and related documents, including corporate
image checks, cash tickets, voucher checks, deposit slips, savings
withdrawal packages, and other forms that require Magnetic Ink
Character Recognition ("MICR") encoding.
- Insurance agency and underwriting:
- Credit insurance. Acting as principal,
agent, or broker for insurance (including
home mortgage redemption insurance) that is:
(A) Directly related to an extension of
credit by the bank holding company or any of its
subsidiaries; and
(B) Limited to ensuring the repayment of
the outstanding balance due on the extension of
credit in the event of the death, disability, or
involuntary unemployment of the debtor.
- Finance company subsidiary. Acting as agent
or broker for insurance directly related to
an extension of credit by a finance company
that is a subsidiary of a bank holding
company under certain conditions.
- Engaging in any general insurance agency
activities.
- Supervision of retail insurance agents.
Supervising on behalf of insurance
underwriters the activities of retail
insurance agents who sell fidelity, property
and casualty and group insurances for the
operations and employees of the bank holding
company or its subsidiaries.
- Community development activities:
- Financing and investment activities. Making
equity and debt investments in corporations
or projects designed primarily to promote
community welfare, such as the economic
rehabilitation and development of low-income
areas by providing housing, services, or
jobs for residents.
- Advisory activities. Providing advisory and
related services for programs designed
primarily to promote community welfare.
- Money orders, savings bonds, and traveler's checks. The
issuance and sale at retail of money orders and similar
consumer-type payment instruments; the sale of U.S. savings
bonds; and the issuance and sale of traveler's checks.
12
- Data processing. Providing data processing data transmission
services, facilities (including data processing and data
transmission hardware, software, documentation, or operating
personnel), data bases, advice, and access to such services,
facilities, or data bases by any technological means under
certain conditions.
COMMUNITY REINVESTMENT ACT
The Community Reinvestment Act of 1977, as amended (the "CRA"), and the
regulations promulgated to implement the CRA are designed to create a system for
bank regulatory agencies to evaluate a depository institution's record in
meeting the credit needs of its community. CRA regulations establish tests for
evaluating both small and large depository institutions' investment in the
community. A "small bank" is defined as a bank which has total assets of less
than $250 million and is independent or is an affiliate of a holding company
with less than $1 billion in assets. There are streamlined procedures for
evaluating small banks and the frequency of CRA examinations will occur less
often based upon a bank's CRA rating. A large retail institution is one which
does not meet the "small bank" definition. A large retail institution can be
evaluated under one of two tests: (1) a three-part test evaluating the
institution's lending, service and investment performance; or (2) a "strategic
plan" designed by the institution with community involvement and approved by the
appropriate federal bank regulator. A large institution must choose one of these
options under which to be examined. In addition, the CRA regulations include
separate rules regarding the manner in which "wholesale banks" and "limited
purpose banks" will be evaluated for compliance.
For the purposes of the CRA regulations, the Bank is deemed to be a "small
bank," based upon financial information as of December 31, 2003. The Bank will
be examined under the streamlined procedures. The Bank received a "satisfactory"
CRA rating in its last CRA examination which was held in 2003.
CONCENTRATION
We are not dependent for deposits nor exposed by loan concentrations to a single
customer or to a small group of customers the loss of any one or more of which
would have a materially adverse effect on our financial condition.
FINANCIAL SERVICES MODERNIZATION
The Gramm-Leach-Bliley Act (the "GLB Act"), in general, took effect on March 11,
2000. The GLB Act contains some of the most far-reaching changes governing the
operations of companies doing business in the financial services industry. The
GLB Act eliminates the restrictions placed on the activities of banks and bank
holding companies. By creating two new structures - financial holding companies
and financial subsidiaries - we and the Bank will be allowed to provide a wider
array of financial services and products that were reserved only for insurance
companies and securities firms. In addition, we can now affiliate with an
insurance company and a securities firm.
On December 19, 2000 we became a financial holding company. A financial holding
company has authority to engage in activities referred to as "financial
activities" that are not permitted to bank holding companies. A financial
holding company may also affiliate with companies that are engaged in financial
activities. A "financial activity" is an activity that does not pose a safety
and soundness risk and is:
- financial in nature,
- incidental to an activity that is financial in nature, or
- complimentary to a financial activity.
The GLB Act lists certain activities as financial in nature:
- Lending, investing or safeguarding money or securities;
- Underwriting insurance or annuities, or acting as an insurance
or annuity principal, agent or broker;
- Providing financial or investment advice;
- Issuing or selling interests in pools of assets that a bank
could hold;
- Underwriting, dealing in or making markets in securities;
- Engaging in any activity that the Federal Reserve Board found
before the GLB Act to be related closely to banking (See the
section in this report entitled "Permitted Non-banking
Activities");
- Engaging within the United States in any activity that a bank
holding company could engage in outside of the country, if the
Federal Reserve Board determined before the GLB Act that the
activity was usual in connection with banking or other
financial operations internationally;
- Merchant banking - acquiring or controlling ownership
interests in an entity engaged in impermissible activities,
if: the interests are not held by a depository institution;
the interests are held by a securities affiliate or an
investment advisory affiliate of an insurance company as part
of underwriting, merchant or investment banking activity; the
interests are held
13
long enough to enable their sale in a manner consistent with
the financial viability of such an activity; and we do not
control the entity except to the extent necessary to obtain a
reasonable return on the investment; or
- Insurance portfolio investing - acquiring or controlling
ownership interests in an entity engaged in impermissible
activities, if: the interests are not held by a depository
institution; the interests are held by an insurance or annuity
company; the interests represent investments made in the
ordinary course of business in accordance with state law; and
we do not control the entity except to the extent necessary to
obtain a reasonable return on the investment.
The GLB Act instructs the Federal Reserve Board to adopt a regulation or order
defining certain additional activities as financial in nature, to the extent
they are consistent with the purposes of the GLB Act. These are:
- Lending, exchanging, transferring, investing for others or
safeguarding financial assets other than money or securities;
- Providing any method of transferring financial assets; and
- Arranging, effecting or facilitating financial transactions
for third parties.
Other activities also may be decided by the Federal Reserve Board to be
financial in nature or incidental to a financial activity if they meet specified
criteria. The Federal Reserve Board is instructed to consider the purposes of
the GLB Act and the Bank Holding Company Act; changes in the market in which
financial holding companies compete; changes in the technology used to deliver
financial services; and whether the proposed activity is necessary or
appropriate to allow a financial holding company and its affiliates to compete
effectively, deliver services efficiently and offer services through the most
advanced technological means available.
The GLB Act gives national banks authority to use "financial subsidiaries" to
engage in financial activities. This authority has some limitations. A financial
subsidiary of the Bank may not, as a principal:
- underwrite insurance or annuities;
- engage in real estate development or investment;
- engage in merchant banking; or
- engage in insurance portfolio investment activities.
A bank's investment in a financial subsidiary will affect the way it calculates
its capital. The bank must deduct from its assets and stockholders' equity the
total of its investments in financial subsidiaries. Moreover, a bank must
present its financial information in two ways: in accordance with generally
accepted accounting principles, and, separately, in a manner that reflects the
segregation of the bank's investments in financial subsidiaries.
PRIVACY
Title V of the GLB Act creates a minimum federal standard of privacy by limiting
the instances which we and the Bank may disclose nonpublic personal information
about a consumer of our products or services to nonaffiliated third parties. A
state, such as Pennsylvania, can impose a greater or more restrictive standard
of privacy than the GLB Act. The GLB Act distinguishes "consumers" from
"customers" for purposes of the notice requirements imposed by this Act. We are
required to give a "consumer" a privacy notice only if we intend to disclose
nonpublic personal information about the consumer to a nonaffiliated third
party. However, by contrast, we are required to give a "customer" a notice of
our privacy policy at the time of the establishment of a customer relationship
and then annually, thereafter during the continuation of the customer
relationship.
The term consumer is different from the term customer. A consumer means an
individual who obtains or has obtained a financial product or service from the
Bank that is to be used primarily for personal, family or household purposes or
that individual's representative. A customer of the Bank is an individual with a
continuous relationship with the Bank. The Office of the Comptroller of the
Currency has regulations which give several examples of a consumer and customer
relationship:
- An individual who applies to the Bank for credit for personal,
family or household purposes is a consumer of a financial
service, regardless of whether the credit is extended.
- An individual who provides nonpublic personal information to
the Bank in order to obtain a determination about whether he
or she may qualify for a loan to be used primarily for
personal, family, or household purposes is a consumer of a
financial service, regardless of whether the loan is extended
by the Bank or another financial institution.
- An individual who provides nonpublic personal information to
the Bank in connection with obtaining or seeking to obtain
financial, investment or economic advisory services is a
consumer regardless of whether the Bank establishes an ongoing
advisory relationship.
- An individual who negotiates a workout with the Bank for a
loan that the Bank owns is a consumer regardless of whether
the Bank originally extended the loan to the individual.
- An individual who has a loan from the Bank is the Bank's
consumer even if the Bank:
- Hires an agent to collect on the loan;
14
- Sells the rights to service the loan; or
- Bought the loan from the financial
institution that originated the loan.
- An individual is not the Bank's consumer solely
because the Bank processes information about the individual on
behalf of a financial institution that extended the loan to
the individual.
On the other hand, several examples of a customer follow:
- A customer has a continuing relationship with the Bank if the
customer:
- Has a deposit, loan, credit, trust or investment
account with the Bank;
- Purchases an insurance product from the Bank;
- Holds an investment product through the Bank;
- Enters into an agreement or understanding with the
Bank whereby the Bank undertakes to arrange or broker
a home mortgage loan for the customer;
- Has a loan that the Bank services where the Bank owns
the servicing rights;
- Enters into a lease of personal property with the
Bank; or
- Obtains financial, investment, or economic advisory
services from the Bank for a fee.
- A person does not, however, have a continuing relationship
with the Bank and therefore is not a customer, if:
- The person only obtains a financial product or
service in an isolated transaction, such as
withdrawing cash from the Bank's ATM or purchasing a
cashier's check or money order;
- The Bank sells the person's loan and does not retain
the rights to service the loan; or
- The Bank sells the person airline tickets, travel
insurance or traveler's checks in an isolated
transaction.
In general, the Bank cannot disclose to a nonaffiliated third party any
nonpublic personal information of its customers and consumers unless the Bank
provides its customer or consumer with a notice that includes:
- the policies and practices of the Bank with regard to:
- disclosing nonpublic personal information to
nonaffiliated third parties;
- the categories of persons to whom the information is
or may be disclosed; and
- the policy for disclosure to former customers;
- categories of nonpublic personal information that are
collected by the Bank;
- the policies that the Bank maintains to protect the
confidentiality and security of nonpublic personal
information;
- the disclosure, if required, under the Fair Credit Reporting
Act; and
- in addition, the Bank must provide an opt out notice to each
of its consumers and customers that explains accurately the
right to opt out of any disclosure by the Bank of the
customer's or consumer's nonpublic personal information and
the means by which the customer or consumer may exercise the
opt out right.
The GLB Act sets forth a new requirement that this notice to a consumer or
customer must be in clear and conspicuous or "plain English" language and
presentation. The regulations give several examples of the rules to follow in
drafting these notices:
- The Bank makes its notice reasonably understandable if, the
Bank:
- Presents the information contained in the
notice in clear, concise sentences,
paragraphs and sections;
- Uses short explanatory sentences and bullet
lists, whenever possible;
- Uses definite, concrete, everyday words and
active voice, whenever possible;
- Avoids multiple negatives;
- Avoids legal and highly technical business
terminology; and
- Avoids boilerplate explanations that are
imprecise and readily subject to different
interpretations.
- The Bank designs its notice to call attention to the nature
and significance of the information contained in the notice
if, to the extent applicable, the Bank:
- Uses a plain-language heading to call
attention to the notice;
- Uses a typeface and type size that are easy
to read; and
- Provides wide margins and ample line
spacing.
- If the Bank provides a notice on the same form as another
notice or other documents, the Bank designs its notice to call
attention to the nature and significance of the information
contained in the notice if the Bank uses:
- Larger type size(s), boldface or italics in
the text;
- Wider margins and line spacing in the
notice; or
- Shading or sidebars to highlight the notice,
whenever possible.
The GLB Act creates certain exceptions to the prohibition on disclosure of
nonpublic personal information of customers and consumers. Some of these
exceptions are:
15
- with the consent of the customer or consumer;
- to effect, administer or enforce a transaction requested or
authorized by the customer or consumer;
- the servicing or processing of a financial product or service
requested or authorized by the customer or consumer;
- the maintaining or servicing of the customer's or consumer's
account with the Bank or with another entity as part of a
private label credit card program;
- disclosure to persons holding a legal or beneficial interest
relating to the customer or consumer or to persons acting in a
fiduciary or representative capacity on behalf of the customer
or consumer;
- providing information to insurance rate advisory
organizations, guaranty funds or agencies, rating agencies,
persons assessing the Bank's compliance with industry
standards and the Bank's attorneys, accountants and auditors;
and
- disclosure permitted under other laws, such as the Right to
Financial Privacy Act, to law enforcement agencies or under
local and state laws.
The Bank cannot disclose an account number or similar form of access code for a
credit card account, deposit account or transaction account of a customer or
consumer to any non-affiliated third party for use in telemarketing, direct mail
marketing or other marketing through electronic mail to the customer or
consumer.
TERRORIST ACTIVITIES
The Office of Foreign Assets Control or OFAC of the Department of the Treasury
has (and will) send our banking regulatory agencies lists of names of persons
and organizations suspected of aiding, harboring or engaging in terrorist acts.
If the Bank finds any name on any transaction, account or wire transfer that is
on an OFAC list, the Bank must freeze such account, file a suspicious activity
report and notify the FBI. The Bank has appointed an OFAC compliance officer to
oversee the inspection of its accounts and the filing of any notifications.
THE USA PATRIOT ACT
In the wake of the tragic events of September 11, 2002, the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism ("USA PATRIOT") Act of 2002 was enacted. Under the USA
PATRIOT Act, financial institutions are subject to prohibitions against
specified financial transactions and account relationships as well as enhanced
due diligence and "know your customer" standards in their dealings with foreign
financial institutions and foreign customers. For example, the enhanced due
diligence policies, procedures, and controls generally require financial
institutions to take reasonable steps:
- to conduct enhanced scrutiny of account relationships to guard
against money laundering and report any suspicious
transactions;
- to ascertain the identity of the nominal and beneficial owners
of, and the source of funds deposited into, each account as
needed to guard against money laundering and report any
suspicious transactions;
- to ascertain for any foreign bank, the shares of which are not
publicly traded, the identify of the owners of the foreign
bank, and the nature and extent of the ownership interest of
each such owner; and
- to ascertain whether any foreign bank provides correspondent
accounts to other foreign banks and, if so, the identity of
those foreign banks and related due diligence information.
Under the USA PATRIOT Act, the Bank established anti-money laundering programs
including a customer identification program. The USA PATRIOT Act sets forth
minimum standards for these programs, including:
- the development of internal policies, procedures, and
controls;
- the designation of a compliance officer;
- an ongoing employee training program; and
- and independent audit function, in order to test these
programs.
In addition, the USA PATRIOT Act authorized the Secretary of the Treasury to
adopt rules increasing the cooperation and information sharing between financial
institutions, regulators, and law enforcement authorities regarding individuals,
entities and organizations engaged in, or reasonably suspected based on credible
evidence of engaging in, terrorist acts or money laundering activities. Any
financial institutions complying with these rules will not be deemed to have
violated the privacy provisions of the Gramm-Leach-Bliley Act, as discussed
above.
SUBPRIME AND PREDATORY LENDING PRACTICES
Our federal banking regulatory agencies have jointly issued expanded examination
and supervision guidance relating to subprime lending activities. In the
guidance, "subprime" lending generally refers to programs that target borrowers
with weakened credit
16
histories or lower repayment capacity. The guidance principally applies to
institutions with subprime lending programs with an aggregate credit exposure
equal to or greater than 25 percent of an institution's Tier 1 capital. Such
institutions would be subject to more stringent risk management standards and,
in many cases, additional capital requirements. As a starting point, the
guidance generally expects that such an institution would hold capital against
subprime portfolios in an amount that is one and one-half to three times greater
than the amount appropriate for similar types of non-subprime assets. The Bank
does not engage in any subprime lending programs.
The Federal Reserve Board has issued regulations which would implement the Home
Ownership and Equity Protection Act or HOEPA. This Act imposes additional
disclosure requirements and certain substantive limitations on certain mortgage
loans with rates or fees above specified levels. The proposed regulations would
lower the rate levels that trigger the application of HOEPA and would include
additional fees in the calculation of the fee amount that triggers HOEPA. The
loans that the Bank currently makes are generally below the rate and fee levels
that trigger HOEPA.
The Comptroller of the Currency issued a final rule, effective February 12,
2004, that specifies the types of state and local laws that do not apply to the
Bank's lending and deposit taking activities and the types of state and local
laws that generally do apply to the Bank. This final rule was partly enacted in
response to state and local laws prohibiting what is commonly called "predatory
lending" activities.
The Comptroller of the Currency adopted its own anti-predatory lending standard
that focuses on consumer loans and permits the Bank to use a variety of
reasonable methods to determine a borrower's ability to repay, including, for
example, the borrower's current and expected income, current and expected cash
flows, net worth, other relevant financial obligations, employment status,
credit history or other relevant factors. In addition, the Bank shall not engage
in unfair or deceptive practices within the meaning of Section 5 of the Federal
Trade Commission Act, 15 U.S.C. 45(a)(1), and regulations made under the
authority of this act in connection with consumer loans.
This final rule also preempts state and local laws that obstruct, impair or
condition the Bank's ability to fully exercise its deposit-taking powers under
federal law and to fully exercise its powers to conduct other activities under
federal law.
The Bank may exercise its deposit-taking powers without regard to state and
local law limitations concerning:
- Abandoned and dormant accounts;
- Checking accounts;
- Disclosure requirements;
- Funds availability;
- Savings account orders of withdrawal;
- State licensing or registration requirements (except for
purposes of service of process); and
- Special purpose savings services.
State and local laws on the following subjects are not inconsistent with the
lending, deposit-taking and activities powers of the Bank and apply to the Bank
to the extent that they only incidentally affect the exercise of the Bank's
powers:
- Contracts;
- Torts;
- Criminal law;
- Rights to collect debts;
- Acquisition and transfer of property;
- Taxation;
- Zoning; and
- Any other law the effect of which the Comptroller of the
Currency determines to be incidental to the operations of the
Bank or otherwise consistent with the authority granted to the
Bank to engage in lending, deposit-taking and other incidental
activities.
SALES OF INSURANCE
Our federal banking regulatory agencies have issued their consumer protection
rules with respect to the retail sale of insurance products by the Company, the
Bank, or a subsidiary or joint venture of the Company or the Bank. These rules
cover generally practices, solicitations, advertising or offers of any insurance
product by a depository institution or any person that performs such activities
at an office of, or on behalf of, the Company or the Bank. Moreover, these rules
include specific provisions relating to sales practices, disclosures and
advertising, the physical separation of banking and nonbanking activities, and
domestic violence discrimination.
17
THE BANK
The Bank's legal headquarters are located at 232 East Street, Bloomsburg,
Columbia County, Pennsylvania 17815. The Bank is a locally-owned and managed
community bank that seeks to provide personal attention and professional
financial assistance to its customers. The Bank serves the needs of individuals
and small to medium-sized businesses. The Bank's business philosophy includes
offering direct access to its President and other officers and providing
friendly, informed and courteous service, local and timely decision making,
flexible and reasonable operating procedures and consistently-applied credit
policies.
The Bank solicits small and medium-sized businesses located primarily within the
Bank's market area that typically borrow in the $25,000 to $1.0 million range.
In the event that certain loan requests may exceed the Bank's lending limit to
any one customer, the Bank seeks to arrange such loans on a participation basis
with other financial institutions.
MARKETING AREA
The Bank's primary market area is Columbia County, a 484 square mile area
located in Northcentral Pennsylvania with a population of approximately 64,157
based on 2000 census data. The Town of Bloomsburg is the County's largest
municipality and its center of industry and commerce. Bloomsburg has a
population of approximately 12,375 based on 2000 census data, and is the county
seat. Berwick, located on the eastern boundary of the County, is the second
largest municipality, with a 2000 population of approximately 10,774. The Bank
currently serves its market area through six branch offices located in
Bloomsburg, Benton, Lightstreet, Millville, Orangeville and South Centre,
Columbia County.
The Bank competes with eight other depository institutions in Columbia County.
The Bank's major competitors are: First National Bank of Berwick; PNC Bank,
N.A., the largest commercial bank headquartered in Pennsylvania; and First
Columbia Bank and Trust Company of Bloomsburg, Pennsylvania.
The Bank's extended market area includes the adjacent Pennsylvania counties of
Luzerne, Montour, Northumberland, Schuylkill and Sullivan.
FUTURE LEGISLATION
Various legislation, including proposals to substantially change the financial
institution regulatory system and to expand or contract the powers of banking
institutions and bank holding companies, is from time to time introduced in the
Congress. This legislation may change banking statutes and our operating
environment in substantial and unpredictable ways. If enacted, such legislation
could increase or decrease the cost of doing business, limit or expand
permissible activities or affect the competitive balance among banks, savings
associations, credit unions, and other financial institutions. We can not
accurately predict whether any of this potential legislation will ultimately be
enacted, and, if enacted, the ultimate effect that it, or implementing
regulations, would have upon our financial condition or results of operations.
ITEM 2. PROPERTIES
Our corporate headquarters are located at 232 East Street, Bloomsburg,
Pennsylvania. We own this facility which has approximately 11,686 square feet.
The Bank's legal or registered office is also at 232 East Street, Bloomsburg,
Pennsylvania. Our remaining banking centers, all of which we own, are described
as follows:
Approximate
Location Square Footage Use
-----------------------------------------------------------------------------
Orangeville, PA 2,259 Banking Services
-----------------------------------------------------------------------------
Benton, PA 4,672 Banking Services
-----------------------------------------------------------------------------
South Centre, PA 3,868 Banking Services
-----------------------------------------------------------------------------
Scott Township, PA 16,500 Banking Services, Corporate,
Credit and Operations
-----------------------------------------------------------------------------
Millville, PA 2,520 Banking Services
-----------------------------------------------------------------------------
We consider our facilities to be suitable and adequate for our current and
immediate future purposes.
18
ITEM 3. LEGAL PROCEEDINGS
We and the Bank are not parties to any legal proceedings that could have any
significant effect upon our financial condition or income. In addition, we and
the Bank are not parties to any legal proceedings under federal and state
environmental laws.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
We had 792 stockholders of record including individual participants in security
position listings and 1,276,914 shares of common stock, par value of $1.25 per
share, the only authorized class of common stock, outstanding as of February 25,
2004. Our common stock trades under the symbol "CCFN." As of February 25, 2004,
4 firms were identified on the interdealer electronic bulletin board system as
market makers in our common stock. The following information is reported by one
of our market makers: Ferris, Baker Watts, Inc., Baltimore, MD. These quotations
represent prices between buyers and sellers and do not include retail makeup,
markdown or commission. They may not necessarily represent actual transactions.
The high and low closing sale prices and dividends per share of our common stock
for the four quarters of 2003 and 2002 are summarized in the following table.
Dividends
2003: High ($) Low ($) Declared ($)
----- -------- ------- ------------
First quarter 24.20 23.20 .16
--------------------------------------------------------------------
Second quarter 25.00 23.50 .16
--------------------------------------------------------------------
Third quarter 26.00 24.40 .17
--------------------------------------------------------------------
Fourth quarter 28.25 26.45 .17
--------------------------------------------------------------------
Dividends
2002: High ($) Low ($) Declared ($)
----- -------- ------- ------------
First quarter 23.45 21.12 .15
------------------------------------------------------------------------
Second quarter 21.60 21.00 .16
------------------------------------------------------------------------
Third quarter 24.00 20.36 .16
------------------------------------------------------------------------
Fourth quarter 24.25 23.00 .16
------------------------------------------------------------------------
We have paid cash dividends since 1983. It is our present intention to continue
the dividend payment policy, although the payment of future dividends must
necessarily depend upon earnings, financial position, appropriate restrictions
under applicable law and other factors relevant at the time the Board of
Directors considers any declaration of dividends.
19
ITEM 6. SELECTED FINANCIAL DATA
CCFNB BANCORP, INC.
SELECTED CONSOLIDATED FINANCIAL SUMMARY
AS OF DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA AND RATIOS) 2003 2002 2001 2000 1999
------------------------------------------------------- ---- ---- ---- ---- ----
INCOME STATEMENT DATA:
Total interest income $ 11,221 $ 12,780 $ 13,720 $ 13,552 $ 12,669
Total interest expense 4,366 5,741 6,924 6,859 6,099
------------- ------------- ------------- ------------- -------------
Net interest income 6,855 $ 7,039 $ 6,796 $ 6,693 $ 6,570
Provision for possible loan losses 200 309 163 54 78
Other operating income 1,508 1,210 1,149 1,053 1,050
Other operating expenses 5,409 5,479 5,104 4,967 4,818
Federal income taxes 591 539 621 671 685
------------- ------------- ------------- ------------- -------------
Net income $ 2,163 $ 1,922 $ 2,057 $ 2,054 $ 2,039
------------- ------------- ------------- ------------- -------------
PER SHARE DATA:
Earnings per share (1) $ 1.69 $ 1.47 $ 1.54 $ 1.51 $ 1.48
Cash dividends declared per share 0.66 0.63 0.59 0.56 0.51
Book value per share 21.63 20.76 19.64 18.61 16.85
Average shares outstanding 1,281,265 1,309,084 1,338,007 1,355,624 1,375,572
BALANCE SHEET DATA:
Total assets $ 232,914 $ 229,032 $ 214,238 $ 203,054 $ 196,122
Total loans 147,631 151,338 142,990 137,360 134,423
Total securities 62,775 53,538 57,121 47,311 49,104
Total deposits 171,786 172,127 155,666 143,169 138,606
FHLB advances - long-term 11,335 11,347 11,357 13,368 2,344
Total stockholders' equity 27,603 26,840 26,042 25,050 23,047
PERFORMANCE RATIOS:
Return on average assets 0.94% 0.86% 0.99% 1.04% 1.09%
Return on average stockholders' equity 7.95% 7.22% 7.92% 8.59% 8.91%
Net interest margin (2) 3.38% 3.58% 3.68% 3.88% 3.96%
Total non-interest expense as a percentage of
average assets 2.34% 2.45% 2.45% 2.52% 2.58%
ASSET QUALITY RATIOS:
Allowance for possible loan losses as a
percentage of loans, net 0.97% 0.87% 0.72% 0.74% 0.73%
Allowance for possible loan losses as a percentage of
non-performing loans (3) 52.29% 57.95% 60.54% 341.27% 264.83%
Non-performing loans as a percentage of total loans,
net (3) 1.85% 1.49% 1.19% 0.25% 0.28%
Non-performing assets as a percentage
of total assets (3) 1.16% 0.98% 0.79% 0.17% 0.19%
Net charge-offs as a percentage of average net
loans (4) 0.06% 0.03% 0.10% 0.02% 0.04%
LIQUIDITY AND CAPITAL RATIOS:
Equity to assets 11.85% 11.72% 12.16% 12.34% 11.75%
Tier 1 Capital to risk -weighted assets (5) 18.82% 20.36% 19.06% 20.94% 17.94%
Leverage ratio (5)(6) 11.79% 11.77% 12.44% 13.02% 12.94%
Total capital to risk -weighted assets (5) 19.88% 18.53% 19.82% 21.79% 18.68%
Dividend payout ratio 39.02% 42.86% 38.31% 37.09% 34.23%
--------------------
(1) Based upon average shares and common share equivalents outstanding.
(2) Represents net interest income as a percentage of average total
interest-earning assets, calculated on a tax-equivalent basis.
(3) Non-performing loans are comprised of (i) loans which are on a
non-accrual basis, (ii) accruing loans that are 90 days or more past due, and
(iii) restructured loans. Non-performing assets are comprised of non-performing
loans and foreclosed real estate (assets acquired in foreclosure), if
applicable.
(4) Based upon average balances for the respective periods.
(5) Based on the Federal Reserve Bank's risk-based capital guidelines, as
applicable to the Corporation. The Bank is subject to similar requirements
imposed by the Comptroller of the Currency.
(6) The leverage ratio is defined as the ratio of Tier 1 Capital to average
total assets less intangible assets, if applicable.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the detailed information and financial statements, including notes thereto,
included elsewhere in this Annual Report. Our consolidated financial condition
and results of operations are essentially those of our subsidiary, the Bank.
Therefore, the analysis that follows is directed to the performance of the Bank.
20
FACTORS THAT MAY AFFECT FUTURE RESULTS
General. Banking is affected, directly and indirectly, by local,
domestic and international economic and political conditions, and by government
monetary and fiscal policies. Conditions such as inflation, recession,
unemployment, volatile interest rates, tight money supply, real estate values,
international conflicts and other factors beyond our control may adversely
affect the future results of operations. We do not expect any one particular
factor to affect our results of operations. A downward trend in several areas,
however, including real estate, construction and consumer spending, could have
an adverse impact on our ability to maintain or increase profitability.
Therefore, there is no assurance that we will be able to continue our current
rates of income and growth.
Interest Rates. Our earnings depend, to a large extent, upon net
interest income, which is primarily influenced by the relationship between the
cost of funds (deposits and borrowings) and the yield on interest-earning assets
(loans and investments). This relationship, known as the net interest spread, is
subject to fluctuation and is affected by regulatory, economic and competitive
factors which influence interest rates, the volume, rate and mix of
interest-earning assets and interest-bearing liabilities, and the level of
non-performing assets. As part of our interest rate risk management strategy
comprised of interest rate risk, mortgage risk, and deposit pricing risk
components, we seek to control our exposure to interest rate changes by managing
the maturity and repricing characteristics of interest-earning assets and
interest-bearing liabilities.
As of December 31, 2003, total interest-earning assets maturing or
repricing within one year were more than total interest-bearing liabilities
maturing or repricing in the same period by $14,642,000, representing a
cumulative one-year interest rate sensitivity gap as a positive percentage of
6.77%. This condition suggests that the yield on the interest-earning assets
should adjust to changes in market interest rates at a faster rate than the cost
of the interest-bearing liabilities. Consequently, our net interest income could
increase during periods of rising interest rates. See "Interest Rate
Sensitivity".
Local Economic Conditions. Our success is dependent, to a certain
extent, upon the general economic conditions in the geographic market in which
we conduct our business. Although we expect that economic conditions will
continue to be favorable in this market, no assurance can be given that these
economic conditions will continue. Adverse changes in economic conditions in the
geographic market that we serve would likely impair our ability to collect loans
and could otherwise have a material adverse effect on our results of operations
and financial condition.
Competition. The banking industry is highly competitive, with rapid
changes in product delivery systems and in consolidation of service providers.
Many of our competitors are bigger than us in terms of assets and have
substantially greater technical, marketing and financial resources. Because of
their size, many of these competitors can (and do) offer products and services
that we do not offer. We are constantly striving to meet the convenience and
needs of our customers and to enlarge our customer base. No assurance can be
given that these efforts will be successful in maintaining and expanding our
customer base.
RESULTS OF OPERATIONS
Our net income increased by 12.5% from $1,922,000 in 2002 to $2,163,000
in 2003. Earnings per share increased by 15.0% from $1.47 in 2002 to $1.69 in
2003. Our return on average assets (ROAA) increased to 0.94% in 2003, compared
to 0.86% in 2002. Our return on average equity (ROAE) increased to 7.95% in
2003, compared to 7.22% in 2002.The primary reasons for these increases in our
performance ratios were the repricing of interest bearing deposits and other
income items, including , but not limited to, gains associated with mortgages
originated and sold as well as increases in cash surrender value of bank owned
life insurance. Other expenses were also tightly managed.
Loans decreased by 2.4% in 2003 to $147,631,000 from $151,338,000 in
2002. This decrease was in the real estate lending area.
We instituted, in 1995, a dividend reinvestment plan and an employees
stock purchase plan. Moreover, in 1999, we commenced a strategy to purchase and
cancel up to 10% of our outstanding shares of common stock through open market
purchases. In 2003, we again filed with the Securities & Exchange Commission to
purchase up to 100,000 shares of our outstanding shares. This repurchase program
resulted in the purchase and cancellation of the following numbers of shares of
our common stock for the years indicated: 23,988 shares (2003); 41,500 shares
(2002); and 27,501 shares (2001). The net effect of the stock plans and the
repurchase program resulted in weighted average shares of common stock
outstanding as follows: 1,281,265 (2003); 1,309,084 (2002); and 1,338,007
(2001).
Tax-equivalent net interest income decreased 2.7% to $7.3 million in
2003 from $7.5 million in 2002. Average earning assets increased 3.4% from
$223.5 million in 2002 to $231.0 million in 2003. Net interest income decreased
1.4% from $7.0 million in 2002 to $6.9 million in 2003. This decreased net
interest income is a result of the long term debt portion of our liabilities
being fixed at a high interest rate with all other areas adjusting downward.
21
TABLE OF NON-INTEREST INCOME
(Dollars in Thousands)
Years Ended December 31,
------------------------
2003 2002 2001
---- ---- ----
Service charges and fees $ 692 $ 649 $ 606
Gain on sale of loans 190 2 0
Bank-owned life insurance income 247 28 0
Trust department income 148 215 238
Investment securities gains - net 8 137 99
Other 223 180 206
------ ------ ------
Total non-interest income $1,508 $1,211 $1,149
------ ------ ------
Total non-interest income increased during 2003 from $1,211,000 in 2002
to $1,508,000 in 2003. The decline in Trust income in the amount of $67,000 was
primarily due to the decline in market value of the accounts. Gain on sale of
investment securities decreased from $137,000 in 2002 to $8,000 in 2003. Service
fees and charges increased from $649,000 in 2002 to $692,000 in 2003 or 6.6%.
Other income increased 23.9% from $180,000 in 2002 to $223,000 in 2003. During
2002, we began a fixed-rate mortgage sales program with the Federal Home Loan
Bank of Pittsburgh (FHLB-Pgh), in which fixed-rate mortgages are sold to
FHLB-Pgh with servicing rights maintained by us and some recourse retained by
us. During 2003, 87 loans were placed on the books reflecting a gain in sale of
these loans of $190,000. Bank-owned life insurance income reflected an increase
of $219,000 from $28,000 in 2002 to $247,000 in 2003. In December 2002, we
purchased $3,000,000 of Bank-owned life insurance against the lives of senior
officers. During May 2003, we purchased an additional $2,000,000 in Bank-owned
life insurance on the lives of 18 officers.
TABLE OF NON-INTEREST EXPENSE
(Dollars in Thousands)
Years Ended December 31,
------------------------
2003 2002 2001
---- ---- ----
Salaries and wages $2,199 $2,137 $2,024
Employee benefits 746 730 692
Net occupancy expense 379 355 366
Furniture and equipment expense 476 587 544
State shares tax 275 254 243
Other expense 1,334 1,416 1,235
------ ------ ------
Total non-interest expense $5,409 $5,479 $5,104
------ ------ ------
Total non-interest expense decreased slightly to $5,409,000 in 2003
from $5,479,000 in 2002 or a decrease of 1.3%. A 2.9% increase in salaries and
benefits was attributable to normal merit and cost of living increases as well
as increased health insurance costs. Furniture and equipment expense decreased
18.9% from $587,000 in 2002 compared to $476,000 in 2003. Net occupancy expense
increased $24,000 from $355,000 in 2002 to $379,000 in 2003 or 6.8%. State
shares tax increased 8.3% from $254,000 in 2002 to $275,000 in 2003. Other
expenses decreased slightly from $1,416,000 in 2002 to $1,334,000 in 2003.
One standard to measure non-interest expense is to express non-interest
expense as a percentage of average total assets. In 2003, this percentage was
2.3% compared to 2.5% in 2002.
Loan delinquencies decreased 32.6% from $4,013,000 in 2002 to
$2,706,000 in 2003. The decrease in these delinquencies was attributed to the
ongoing efforts of the loan department to work out problem loans and collect
past due payments. Our management has been diligent in its efforts to reduce
these delinquencies and has increased monitoring and review of current loans to
foresee future delinquency occurrences and react to them quickly. The provision
for loan losses for 2003 decreased from $309,000 in 2002 to $200,000 in 2003.
NET INTEREST INCOME
Tax-equivalent net interest income for 2003 equaled $7,282,000 compared
to $7,529,000 in 2002, a decrease of 3.3%. The decrease in the overall net
interest margin from 3.34% in 2002 to 3.18% in 2003 is a result of interest rate
changes with adjustable loan rates repricing downward throughout 2003 in this
continuing downward interest rate environment. Income received on one-day
investments fell from an average of 1.22% for 2002 to an average of .71% for
2003. This "squeeze" caused by interest rates is keeping the net interest spread
in a declining mode; however, the change in net interest margin is gradual and
slight. Our "asset" sensitive position places us in a position to have an
increase in our net interest margin when rates rise. The cost of long-term debt
averaged 5.99% for the year which contributed to the declining net interest
margin. This long-term debt will remain a deterrent to us in a declining
interest rate environment. This is 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 5.99% 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 lowered, if necessary, to meet current market
conditions; large deposits over $100,000 will continue to
22
be priced conservatively; and in this low interest rate environment, the
majority of new investments will be kept short term in anticipation of rising
rates.
TAX-EQUIVALENT NET INTEREST INCOME
(Dollars in Thousands)
Years Ended December 31,
------------------------
2003 2002 2001
---- ---- ----
Interest income $11,221 $12,780 $13,719
Interest expense 4,366 5,741 6,924
Net interest income 6,855 7,039 6,795
------- ------- -------
Tax-equivalent adjustment 427 490 495
------- ------- -------
Net interest income (fully taxable equivalent) $ 7,282 $ 7,529 $ 7,290
======= ======= =======
The following Average Balance Sheet and Rate Analysis table presents
the average assets, actual income or expense and the average yield on assets,
liabilities and stockholders' equity for the years 2003, 2002 and 2001.
AVERAGE BALANCE SHEET AND RATE ANALYSIS
THREE YEARS ENDED DECEMBER 31,
(Dollars in thousands)
2003 2002 2001
---- ---- ----
Average Interest Average Average Interest Average Average Interest Average
Balance Inc./Exp Yd/Rate Balance Inc./Exp Yd/Rate Balance Inc./Exp Yd/Rate
------- -------- ------- ------- -------- ------- ------- -------- -------
(1) (2) (1) (2) (1) (2)
ASSETS:
Interest Bearing Deposits With Other
Financial Institutions $ 6,746 $ 48 0.71% $ 5,309 $ 65 1.22% $ 6,569 $ 269 4.09%
-------- ------- -------- ------- -------- -------
Investment Securities:
Taxable 44,890 1,314 2.93% 37,232 1,769 4.75% 33,431 $ 1,923 5.85%
State and Municipal
Obligations (3) 13,262 609 6.96% 16,965 799 7.14% 17,162 815 7.19%
-------- ------- -------- ------- -------- -------
Total Investment Securities $ 58,152 $ 1,923 4.35% $ 54,197 $ 2,568 4.74% $ 50,593 $ 2,738 5.41%
-------- ------- -------- ------- -------- -------
Federal Funds Sold 1,290 43 3.33% 3,503 51 1.46% 1,771 67 3.78%
-------- ------- -------- ------- -------- -------
Loans:
Taxable 144,611 8,987 6.21% 144,685 9,943 6.92% 136,446 10,498 7.91%
Tax Free (3) 4,874 220 6.84% 2,860 153 8.10% 2,773 147 8.06%
-------- ------- -------- ------- -------- -------
Total Loans $149,485 $ 9,207 6.31% $147,545 $10,096 6.84% $139,219 $10,645 7.65%
-------- ------- -------- ------- -------- -------
Total Interest-Earning Assets 215,673 11,221 5.59% 210,554 12,780 6.07% 198,152 13,719 6.92%
-------- ------- -------- ------- -------- -------
Reserve for Loan Losses (1,357) (1,167) (1,015)
Cash and Due from Banks 6,156 5,328 2,373
Other Assets 10,503 8,761 9,120
-------- -------- --------
Total Assets $230,975 $223,476 $208,630
======== ======== ========
LIABILITIES AND CAPITAL:
Total Interest-Bearing Deposits $155,681 $ 3,401 2.18% $150,883 $ 4,725 3.13% $135,579 $ 5,474 4.04%
U.S. Treasury Short-Term Borrowings 701 3 0.43% 511 6 1.17% 485 17 3.51%
Short-Term Borrowings - Other 0 0 0.00% 0 0 0.00% 0 0 .00%
Long-Term Borrowings 11,341 679 5.99% 11,351 680 5.99% 12,179 731 6.00%
Repurchase Agreements 18,431 283 1.54% 17,494 330 1.89% 18,965 702 3.70%
-------- ------- -------- ------- -------- -------
Total Interest-Bearing Liabilities $186,154 $ 4,366 2.35% $180,239 $ 5,741 3.19% $167,208 $ 6,924 4.14%
-------- ------- -------- ------- -------- -------
Demand Deposits 16,275 15,224 14,022
Other Liabilities 1,323 1,398 1,420
Stockholders' Equity 27,223 26,615 25,980
-------- -------- --------
Total Liabilities and Capital $230,975 $223,476 $208,630
======== ======== ========
NET INTEREST INCOME/NET INTEREST
MARGIN (4) $ 6,855 3.18% $ 7,039 3.34% $ 6,795 3.43%
======= ==== ======= ==== ======= ====
TAX-EQUIVALENT NET INTEREST INCOME/NET
INTEREST MARGIN (5) $ 7,282 3.38% $ 7,529 3.58% $ 7,290 3.68%
======= ==== ======= ==== ======= ====
(1) Average volume information was compared using daily (or monthly)
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%
for 2003, 2002 & 2001.
COMPONENTS OF NET INTEREST INCOME
To enhance the understanding of the effects of volumes (the average
balance of earning assets and costing liabilities) and average interest rate
fluctuations on the balance sheet as it pertains to net interest income, the
table below reflects these changes for 2003 versus 2002, 2002 versus 2001, and
2001 versus 2000:
23
TABLE OF NET INTEREST INCOME COMPONENTS ON A TAX-EQUIVALENT BASIS
For the twelve months ended December 31, 2003
(Dollars in thousands)
2003 Versus 2002 2002 Versus 2001 2001 Versus 2000
---------------- ---------------- ----------------
Increase (Decrease) Increase (Decrease) Increase (Decrease)
Due to Changes In Due to Changes In Due to Changes In
------------------- ------------------- ------------------
Average Average Average Average Average Average
Volume Rate Total Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- ----- ------ ---- -----
Interest Income:
Interest-Bearing Deposits with Other
Financial Institutions $ 18 $ (27) $ (9) $ (52) $ (189) $ (241) $ 337 $ (30) $ 307
Taxable Securities 364 (678) (314) 216 (329) (113) 103 (150) (47)
State and Municipal Obligations (264) (31) (295) (14) (9) (23) 183 (50) 133
Federal Funds Sold (32) 66 34 65 (41) 24 105 (1) 104
Taxable Loans (5) (1,027) (1,032) 609 (1,085) (476) 338 (446) (108)
Tax Free Loans 163 (36) 127 (18) 8 (10) 20 2 22
------- ------- ------- ------- ------- ------- ------- ------- -------
Total Earning Assets $ 244 $(1,733) $(1,489) $ 806 $(1,645) $ (839) $ 1,086 $ (675) $ 411
------- ------- ------- ------- ------- ------- ------- ------- -------
Interest Expense:
Total Interest Bearing Deposits $ 150 $(1,433) $(1,283) $ 578 $(1,188) $ (610) $ 621 $ (318) $ 303
U.S. Treasury - Short-Term Borrowings 2 (4) (2) 1 (11) (10) 3 (13) (10)
Short-Term Borrowings - Other 0 0 0 0 0 0 (202) (202) (404)
Long-Term Borrowings (1) 0 (1) (50) (1) (51) 70 81 151
Repurchase Agreements 18 (61) (43) (54) (343) (397) 135 (280) (145)
------- ------- ------- ------- ------- ------- ------- ------- -------
Total Interest-Bearing Deposits $ 169 $(1,498) $(1,329) $ 475 $(1,543) $(1,068) $ 627 $ (732) $ (105)
------- ------- ------- ------- ------- ------- ------- ------- -------
NET INTEREST INCOME $ 75 $ (235) $ (160) $ 331 $ (102) $ 229 $ 459 $ 57 $ 516
======= ======= ======= ======= ======= ======= ======= ======= =======
(1) Includes non-accrual loans.
FINANCIAL CONDITION
Our consolidated assets at December 31, 2003 were $233 million which
represented an increase of $4 million or 1.7% over $229 million at December 31,
2002. The comparable increase for 2002 over 2001 was 6.9% or $15 million.
Capital increased 3.0% from $26.8 million in 2002 to $27.6 million in
2003. The adjustment for the fair market value of securities was a positive
$537,000 for 2002 compared to a positive $376,000 for 2003. Common stock and
surplus decreased a net $394,000 resulting from purchase and retirement of stock
in the amount of $588,000 and stock issued under Drip and Reinvestment plans in
the amount of $194,000.
Total average assets grew 3.4% from 2002 at $223.5 million to 2003 at
$231.0 million. Average earning assets grew 2.4% from 2002 at $210.6 million to
2003 at $215.7 million.
Loans decrease 2.4% from $151.3 million at December 31, 2002 to $147.6
million at December 31, 2003.
Non-interest bearing deposits grew 13.8%
to $17.3 million at December 31, 2003 from $15.2 million at December 31, 2002.
Interest bearing deposits decreased 1.4% from $156.7 million in 2002 to $154.5
million in 2003.
The loan-to-deposit ratio is a key measurement of liquidity. Our
loan-to-deposit ratio decreased during 2003 to 85.9% compared to 87.9% during
2002.
It is our opinion that the balance sheet mix and the interest rate risk
associated with the balance sheet is within manageable parameters. Constant
monitoring using asset/liability reports and interest rate risk scenarios are in
place along with quarterly asset/liability management meetings on the committee
level by the Bank's Board of Directors. Additionally, the Board's
Asset/Liability Committee meets with the investment consultants quarterly.
INVESTMENTS
(Dollars in thousands)
2003 2002 2001
---- ---- ----
Federal Agency Obligations $16,002 $10,107 $12,553
Mortgage-backed Securities 33,338 22,690 21,001
Obligations of State and Political Subdivisions 10,773 15,751 17,525
Corporate Securities 0 3,419 4,589
Marketable Equity Securities 1,341 363 327
Restricted Equity Securities 1,321 1,198 1,126
------- ------- -------
Total Investment Securities $62,775 $53,528 $57,121
------- ------- -------
All of our securities are available-for sale and are carried at
estimated fair value. The following table sets forth the maturity distribution
of the investments, the weighted average yield for each type and ranges of
maturity at December 31,
24
2003. Yields are presented on a tax-equivalent basis, are based upon carrying
value and are weighted for the scheduled maturity. At December 31, 2003, our
investment securities portfolio had an average maturity of approximately 4.65
years.
(Dollars in Thousands)
----------------------
After One After Five
Year But Years But
Within Within Within After
One Year Five Years Ten Years Ten Years Total
-------- ---------- --------- --------- -----
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Federal Agency Obligations $6,407 5.00% $34,833 3.47% $ 8,100 3.59% $ 0 0.00% $49,340 3.68%
Obligations of State and
Political 0 0.00% 0 0.00% 3,865 7.04% 6,908 7.11% 10,773 7.09%
Subdivisions
Marketable Equity Securities 0 0.00% 0 0.00% 0 0.00% 1,341 1.77% 1,341 1.77%
Restricted Equity Securities 0 0.00% 0 0.00% 0 0.00% 1,321 2.92% 1,321 2.92%
------ ------- ------- ------ -------
Total $6,407 5.00% $34,833 3.47% $11,965 4.74% $9,570 6.05% $62,775 4.24%
------ ------- ------- ------ -------
Available-for-sale securities are reported on the balance sheet at fair
value. An adjustment to capital, net or deferred taxes, is the offset for this
entry. The possibility of material price volatility in a falling interest rate
environment is offset by the availability to us of restructuring the portfolio
for gap positioning at any time through the securities classed as
available-for-sale. The impact of the fair value accounting was an unrealized
gain, net of tax, on December 31, 2003 of $376,000 compared to an unrealized
gain, net of tax, on December 31, 2002 of $537,000.
The mix of securities in the portfolio is 78.6% Federal Agency
Obligations, 17.2% Municipal Securities, and 4.2% Other. We do not engage in
derivative investment products.
LOANS
LOAN PORTFOLIO
LOANS OUTSTANDING
(Dollars in thousands)
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Commercial $ 15,328 $ 15,033 $ 13,091 $ 14,412 $ 15,559
Tax-Exempt 6,214 3,535 1,947 2,869 2,297
Real Estate - Construction 2,505 1,185 2,538 1,648 2,509
Real Estate 118,129 123,746 115,716 106,604 102,108
Personal 5,410 7,902 9,962 12,317 12,562
--------- --------- --------- --------- ---------
Total Gross Loans $ 147,586 $ 151,401 $ 143,254 $ 137,850 $ 135,035
Add (Deduct) Unearned discount (64) (139) (279) (486) (584)
Unamortized loan costs, net of fees 109 76 15 (4) (28)
--------- --------- --------- --------- ---------
Loans, Net $ 147,631 $ 151,338 $ 142,990 $ 137,360 $ 134,423
--------- --------- --------- --------- ---------
The loan portfolio decreased 2.4% from $151.3 million in 2002 to $147.6
million in 2003. The percentage distribution in the loan portfolio was 81.7% in
real estate loans at $120.6 million; 10.4% in commercial loans at $15.3 million;
3.7% in consumer loans at $5.5 million; and 4.2% in tax exempt loans at $6.2
million. Variable rate real estate loans were comprised of 8.9% with 7-year
adjustable rates, 3.9% with 5-year adjustable rates; 53.3% with 3-year
adjustable rates; 20.1% with 1-year adjustable rates; and 13.8% with one-day to
3-month adjustable rates. Many adjustable rate loans have bi-weekly payments.
The remaining 24.8% of real estate loans are fixed rates.
The following table presents the percentage distribution of loans by
category as of the date indicated:
For the years ended December 31,
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Commercial 10.38% 9.93% 9.14% 10.45% 11.57%
Tax Exempt 4.21% 2.34% 1.36% 2.08% 1.71%
Real Estate-Construction 1.70% 0.78% 1.77% 1.20% 1.87%
Real Estate 80.04% 81.73% 80.78% 77.33% 75.94%
Personal 3.67% 5.22% 6.95% 8.94% 8.91%
------ ------ ------ ------ ------
Total Loans 100.00% 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ====== ======
25
The following table shows the maturity of loans in specified categories of
CCFNB's loan portfolio at December 31, 2003, and the amount of such loans with
predetermined fixed rates or with floating or adjustable rates:
December 31, 2003
-----------------
Maturing Maturing
Maturing After After Maturing
In One One Year Five Years After
Year Through Through Ten
Or Less Five Years Ten Years Years Total
------- ---------- --------- ----- -----
Amounts in Thousands
Commercial, Tax Exempt, Real Estate and
Personal Loans $ 60,942 $ 61,489 $ 18,379 $ 4,271 $145,081
Real Estate-Construction Loans 2,505 0 0 0 2,505
-------- -------- -------- -------- --------
Total $ 63,447 $ 61,489 $ 18,379 $ 4,271 $147,586
======== ======== ======== ======== ========
Amount of Such Loans with:
Predetermined Fixed Rates $ 8,729 $ 20,273 $ 12,667 $ 4,271 $ 45,940
Floating or Adjustable Rates 54,718 41,216 5,712 0 101,646
-------- -------- -------- -------- --------
Total $ 63,447 $ 61,489 $ 18,379 $ 4,271 $147,586
======== ======== ======== ======== ========
DEPOSITS AND BORROWED FUNDS
TABLE OF DISTRIBUTION OF AVERAGE DEPOSITS
(Dollars in thousands)
December 31,
------------
2003 2002 2001
---- ---- ----
Demand deposits $ 43,106 $ 39,799 $ 36,210
Savings deposits 36,215 34,898 29,672
Time deposits 61,853 62,267 59,447
Time deposits, $100,000 and over 30,782 29,143 24,272
-------- -------- --------
Total $171,956 $166,107 $149,601
-------- -------- --------
TABLE OF MATURITY DISTRIBUTION OF TIME DEPOSITS OVER $100,000
(Dollars in thousands)
December 31,
------------
2003 2002 2001
---- ---- ----
Three months or less $ 7,571 $ 9,236 $ 6,446
Over three months to six months 2,099 5,769 4,225
Over six months to twelve months 6,990 8,123 7,493
Over twelve months 11,272 8,063 7,895
------- ------- -------
Total $27,932 $31,191 $26,059
======= ======= =======
Total average deposits increased by 3.6% from $166.1 million at
year-end 2002 to $172.0 million at year-end 2003. Average savings deposits
increased to $36.2 million at year-end 2003 from $34.9 million at year-end 2002.
Average time deposits increased 1.3% from $91.4 million at year-end 2002 to
$92.6 million at year-end 2003. Average non-interest bearing demand deposits
increased to $16.3 million for 2003 from $15.2 million for 2002. Average
interest bearing NOW accounts increased 8.9% from $24.6 million for 2002 to
$26.8 million for 2003.
Short-term borrowings, securities sold under agreements to repurchase
and day-to-day borrowings from the FHLB-Pgh increased 6.1% from $18.0 million at
year-end 2002 to $19.1 million at year-end 2003. Treasury Tax and Loan deposits
held by us for the U.S. Treasury averaged $701,000 for 2003. One-day borrowings
did not occur in 2003 and repurchase agreements averaged $18.4 million for 2003.
Long-term borrowings, namely borrowings from the FHLB-Pgh, averaged $11.3
million for 2003.
26
NON-PERFORMING ASSETS
PAST DUE AND NON-ACCRUAL LOANS
(Dollars in thousands)
Real Installment
2003 Estate Loans Commercial Total
---- ------ ----- ---------- -----
Days 30-89 $ 438 $ 66 $ 81 $ 585
Days 90 Plus 245 0 24 269
Non-accrual 1,208 3 641 1852
------- ------ ------ ------
Total $1 ,891 $ 69 $ 746 $2,706
======= ====== ====== ======
Real Installment
2002 Estate Loans Commercial Total
---- ------ ----- ---------- -----
Days 30-89 $1,216 $ 112 $ 513 $1,841
Days 90 Plus 40 10 0 50
Non-accrual 1,279 6 837 2,122
------ ------ ------ ------
Total $2,535 $ 128 $1,350 $4,013
====== ====== ====== ======
Real Installment
2001 Estate Loans Commercial Total
---- ------ ----- ---------- -----
Days 30-89 $ 798 $ 142 $ 9 $ 949
Days 90 Plus 915 28 26 969
Non-accrual 429 15 285 729
------ ------ ------ ------
Total $2,142 $ 185 $ 320 $2,647
====== ====== ====== ======
At year-end 2003, loans 30-89 days past due totaled $585,000 compared
to $1,841,000 at year-end 2002. Past due loans 90 days plus totaled $269,000 at
year-end 2003 compared to $50,000 at year-end 2002. Non-accrual loans at
year-end 2003 totaled $1,852,000 compared to $2,122,000 at year-end 2002.
Overall, past due and non-accrual loans decreased 32.6% from $4,013,000 at
year-end 2002 to $2,706,000 at year-end 2003. During this same period of time,
the ratio of net charge offs during the period to average loans outstanding
during the period was .06%. (See Summary of Loan Loss Experience). We do not
consider these percentages to be significant or material.
Refer to the Loan section of footnote one to the Consolidated Financial
Statements, Item 8.
27
The following table presents a summary of CCFNB's loan loss experience as
of the dates indicated:
For Years Ended December 31,
----------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Loans Outstanding at End of Period $ 147,631 $ 151,338 $ 142,990 $ 137,360 $ 134,423
========= ========= ========= ========= =========
Average Loans Outstanding During the Period $ 149,485 $ 147,545 $ 139,219 $ 134,325 $ 123,185
========= ========= ========= ========= =========
Allowance for Loan Losses:
Balance, Beginning of Period $ 1,298 $ 1,028 $ 1,008 $ 985 $ 955
--------- --------- --------- --------- ---------
Loans Charged Off:
Commercial and Industrial (52) (29) (94) 0 (5)
Real Estate Mortgages 0 (17) (13) (1) 0
Consumer (76) (54) (82) (97) (95)
--------- --------- --------- --------- ---------
Total Loans Charged Off (128) (100) (189) (98) (100)
Recoveries:
Commercial and Industrial 12 19 14 5 8
Real Estate Mortgages 0 0 0 3 0
Credit Cards 0 0 3 4 0
Consumer 33 42 29 55 44
--------- --------- --------- --------- ---------
Total Recoveries 45 61 46 67 52
--------- --------- --------- --------- ---------
Net Loans Charged Off (83) (39) (143) (31) (48)
Provision for Loan Losses 200 390 163 54 78
--------- --------- --------- --------- ---------
Balance, End of Period $ 1,415 $ 1,298 $ 1,028 $ 1,008 $ 985
========= ========= ========= ========= =========
Ratio of net charge-offs during the year to average loans
outstanding during year 0.06% 0.03% 0.10% 0.02% 0.04%
========= ========= ========= ========= =========
The following table presents an allocation of CCFNB's allowance for loan
losses for specific categories as of the dates indicated:
For Years Ended December 31,
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Commercial $ 493 $ 406 $ 372 $ 173 $ 270
Real Estate Mortgages 696 723 464 318 341
Consumer 28 66 94 79 88
Unallocated 198 103 98 438 286
------ ------ ------ ------ ------
Total $1,415 $1,298 $1,028 $1,008 $ 985
28
The following table presents a summary of CCFNB's nonaccrual, restructured
and past due loans as of the dates indicated:
For Years Ended December 31,
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Nonaccrual, Restructured and Past Due Loans:
Nonaccrual Loans $ 1,336 $ 2,112 $ 729 $ 312 $ 199
Restructured Loans on Accrual Status 516 0 0 0 0
Accrual Loans Past Due 90 Days or More 269 50 969 344 157
-------- -------- -------- -------- --------
Total Nonaccrual, Restructured and Past
Due Loans $ 2,121 $ 2,162 $ 1,698 $ 656 $ 356
======== ======== ======== ======== ========
Other Real Estate $ 36 $ 68 $ 0 $ 0 $ 0
Interest Income That Would Have Been
Recorded Under Original Terms $125,287 $ 63,462 $ 37,712 $ 24,225 $ 16,089
Interest Income Recorded During the Period $ 17,586 $ 67,873 $ 61,568 $ 5,023 $ 0
ALLOWANCE FOR LOAN LOSSES AND RELATED PROVISION
(Dollars in Thousands)
Outstanding Balance at December 31,
-----------------------------------
2003 2002 2001
---- ---- ----
% of Loans % of Loans % of Loans
in Category in Category in Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ -----
Commercial $ 493 13.1% $ 406 13.0% $ 372 13.0%
Real estate mortgages 696 81.7% 723 82.0% 464 78.0%
Consumer 28 5.2% 66 5.0% 94 7.0%
Unallocated 198 N/A 103 N/A 98 N/A
------ ------ ------ ----- ------ -----
$1,415 100.0% $1,298 100.0% $1,028 100.0%
------ ------ ------ ----- ------ -----
The allowance for loan losses was $1,415,000 at December 31, 2003,
compared to $!,298,000 at December 31, 2002. This allowance equaled .96% and
..87% of total loans, net of unearned income, at the end of 2003 and 2002. This
allowance was considered adequate based on delinquency trends and actual loans
written as it relates to the loan portfolio.
The loan loss reserve is analyzed quarterly and reviewed by the Bank's
Board of Directors. The assessment of the loan policies and procedures during
2003 revealed no anticipated loss on any loans considered "significant". No
concentration or apparent deterioration in classes of loans or pledged
collateral was evident. Monthly loan meetings with the Bank Board's Credit
Administration Committee reviewed new loans, delinquent loans and loan
exceptions to determine compliance with policies.
29
LIQUIDITY
Liquidity management is required to ensure that adequate funds will be
available to meet anticipated and unanticipated deposit withdrawals, debt
service payments, investment commitments, commercial and consumer loan demand,
and ongoing operating expenses. Funding sources include principal repayments on
loans, sales of assets, growth in core deposits, short and long-term borrowings,
investment securities coming due, loan prepayments and repurchase agreements.
Regular loan payments are a dependable source of funds, while the sale of
investment securities, deposit growth and loan prepayments are significantly
influenced by general economic conditions and the level of interest rates.
We manage liquidity on a daily basis. We believe that our liquidity is
sufficient to meet present and future financial obligations and commitments on a
timely basis. However, see "Factors That May Affect Future Results" and refer to
consolidated Statements of Cash Flows.
CAPITAL RESOURCES
Capital continues to be a strength for us. Capital is critical as it
must provide growth, payment to shareholders, and absorption of unforeseen
losses. The federal regulators provide standards that must be met. We are
subject to various regulatory capital requirements administered by the federal
banking agencies. Failure to meet minimum capital requirements can initiate
certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material impact on our
consolidated financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, we must meet specific capital
guidelines that involve quantitative measures of our assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. Our capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by federal banking regulation are to
ensure capital adequacy require that we maintain minimum amounts and ratios (set
forth in the following table) of Total and Tier I Capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I Capital (as
defined) to average assets (as defined).
As of December 31, 2003, the most recent notification from the
Comptroller of the Currency, the Bank's primary federal regulator, categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized the Bank must maintain
minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set
forth in the Table. There are no conditions or events since that notification
that management believes have changed the institution's category.
The Bank's actual capital amounts are ratios in the following table:
To be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 2003:
Total Risk Based Capital
(To risk-weighted assets) $28,752 19.88% $11,570 8.00% $14,463 10.00%
Tier I Capital
(To risk-weighted assets) $27,220 18.82% $ 5,785 4.00% $ 8,678 6.00%
Tier I Capital
(To average assets) $26,303 11.79% $ 8,924 4.00% $11,155 5.00%
As of December 31, 2002:
Total Risk Based Capital
(To risk-weighted assets) $27,615 19.46% $11,352 8.00% $14,191 10.00%
Tier I Capital
(To risk-weighted assets) $26,303 18.53% $ 5,682 4.00% $ 8,524 6.00%
Tier I Capital
(To average assets) $26,303 11.77% $ 8,939 4.00% $11,174 5.00%
Our capital ratios are not materially different from those of the Bank.
Dividend payouts are restricted by the Pennsylvania Business
Corporation Law of 1988, as amended (the BCL). The BCL operates generally to
preclude dividend payments if the effect thereof would render us unable to meet
our obligations as they become due. As a practical matter, our payment of
dividends is contingent upon our ability to obtain funding in the form of
dividends from the Bank. Payment of dividends to us by the Bank is subject
30
to the restrictions set forth in the National Bank Act. Generally, the National
Bank Act would permit the Bank to declare dividends in 2004 of approximately
$364,186 plus additional amounts equal to the net income earned in 2004 for the
period January 1, 2004 through the date of declaration, less any dividends which
may be paid in 2004.
INTEREST RATE RISK MANAGEMENT
Interest rate risk management involves managing the extent to which
interest-sensitive assets and interest-sensitive liabilities are matched.
Interest rate sensitivity is the relationship between market interest rates and
earnings volatility due to the repricing characteristics of assets and
liabilities. The Bank's net interest income is affected by changes in the level
of market interest rates. In order to maintain consistent earnings performance,
the Bank seeks to manage, to the extent possible, the repricing characteristics
of its assets and liabilities.
One major objective of the Bank when managing the rate sensitivity of
its assets and liabilities is to stabilize net interest income. The management
of and authority to assume interest rate risk is the responsibility of the
Bank's Asset/Liability Committee ("ALCO"), which is comprised of senior
management and Board members. ALCO meets quarterly to monitor the ratio of
interest sensitive assets to interest sensitive liabilities. The process to
review interest rate risk management is a regular part of management of the
Bank. Consistent policies and practices of measuring and reporting interest rate
risk exposure, particularly regarding the treatment of noncontractual assets and
liabilities, are in effect. In addition, there is an annual process to review
the interest rate risk policy with the Board of Directors which includes limits
on the impact to earnings from shifts in interest rates.
The ratio between assets and liabilities repricing in specific time
intervals is referred to as an interest rate sensitivity gap. Interest rate
sensitivity gaps can be managed to take advantage of the slope of the yield
curve as well as forecasted changes in the level of interest rate changes.
To manage the interest sensitivity position, an asset/liability model
called "gap analysis" is used to monitor the difference in the volume of the
Bank's interest sensitive assets and liabilities that mature or reprice within
given periods. A positive gap (asset sensitive) indicates that more assets
reprice during a given period compared to liabilities, while a negative gap
(liability sensitive) has the opposite effect. The Bank employs computerized net
interest income simulation modeling to assist in quantifying interest rate risk
exposure. This process measures and quantifies the impact on net interest income
through varying interest rate changes and balance sheet compositions. The use of
this model assists the ALCO to gauge the effects of the interest rate changes on
interest sensitive assets and liabilities in order to determine what impact
these rate changes will have upon the net interest spread.
STATEMENT OF INTEREST SENSITIVITY GAP
(Dollars in thousands)
DECEMBER 31, 2003
> 90 Days
90 Days But 1 to 5 5 to 10 > 10
Or Less < 1 Year Years Years Years Total
------- -------- ----- ----- ----- -----
Short-term investments $ 6,003 $ 0 $ 0 $ 0 $ 0 $ 6,003
Securities Available-for-Sale (1) 7,978 20,525 29,929 1,340 3,003 62,775
Loans (1) 33,887 37,734 65,100 2,559 8,351 147,631
-------- -------- -------- -------- -------- --------
Rate Sensitive Assets 47,868 58,259 95,029 3,899 11,354 216,409
-------- -------- -------- -------- -------- --------
Deposits:
Interest-bearing demand deposits (2) $ 4,312 $ 4,014 $ 21,410 $ 0 $ 0 $ 29,736
Savings (2) 5,626 5,887 24,747 0 0 36,260
Time 25,260 23,856 39,360 0 0 88,476
Borrowed funds 20,689 301 0 0 0 20,990
Long-term debt 3 9 2,191 9,132 0 11,335
Shareholders' equity 382 1,146 6,112 5,730 14,233 27,603
-------- -------- -------- -------- -------- --------
Rate Sensitive Liabilities and Shareholders' Equity 56,272 35,213 93,820 14,862 14,233 214,400
-------- -------- -------- -------- -------- --------
Interest Sensitivity Gap (8,404) 23,046 1,209 (10,963) (2,879) 2,009
Cumulative Gap $ (8,404) $ 14,642 $ 15,851 $ 4,888 $ 2,009 $ 0
(1) Investments and loans are included at the earlier of repricing or maturity
adjusted for the effects of prepayments.
(2) Interest bearing demand and savings accounts are included based on
historical experience and managements' judgment about the behavior of these
deposits in changing interest rate environments.
At December 31, 2003, our cumulative gap positions and the potential
earnings change resulting from a 200 basis point change in rates were within the
internal risk management guidelines.
Upon reviewing the current interest sensitivity scenario, declining
interest rates could negatively affect net income because the Bank is
asset-sensitive. In an increasing interest rate environment, net income could be
positively affected because more assets than liabilities will reprice during a
given period.
Certain shortcomings are inherent in the method of analysis presented
in the above table. Although certain assets and liabilities may have similar
maturities or periods of repricing, they may react in different degrees to
changes in market interest rates. The interest rates on certain types of assets
and liabilities may fluctuate in advance
31
of changes in market interest rates, while interest rates on other types of
assets and liabilities may lag behind changes in market interest rates. Certain
assets, such as adjustable-rate mortgages, have features which restrict changes
in interest rates on a short-term basis and over the life of the asset. In the
event of a change in interest rates, prepayment and early withdrawal levels may
deviate significantly from those assumed in calculating the table. The ability
of many borrowers to service their adjustable-rate debt may decrease in the
event of an interest rate increase.
In addition to gap analysis, the Bank uses earnings simulation to
assist in measuring and controlling interest rate risk.
The following table provides information about our financial
instruments. The table presents the financial instruments including the expected
cash flow over the next five years. In addition the average interest rate is
shown for each period presented. The table also includes the fair market value
for each category of financial instruments as of December 31, 2003. This
presentation differs from the above gap report primarily due to presenting the
financial instruments based on a contractual maturity as opposed to a repricing
scenario as reflected in the above gap report.
PRINCIPAL / NOTIONAL AMOUNTS ESTIMATED TO MATURE IN:
(Dollars in thousands)
Fair
There- Value
2004 2005 2006 2007 2008 After Total 12-31-03
---- ---- ---- ---- ---- ----- ----- --------
Rate sensitive assets:
Fixed interest loans (1) $ 7,485 $ 6,115 $ 5,014 $ 4,563 $ 3,978 $15,806 $ 42,961 $ 42,833
Average interest rate 7.19% 6.89% 6.78% 6.67% 6.43% 6.23% 6.57%
Variable interest rate loans (2) $ 55,565 $16,350 $20,117 $ 1,136 $ 1,845 $ 9,786 $104,799 $104,161
Average interest rate 5.20% 5.86% 5.50% 5.97% 6.01% 6.65% 5.48%
Fixed interest rate securities (1) $ 6,407 $ 7,019 $ 2,873 $14,495 $ 920 $ 8,644 $ 40,358 $ 40,358
Average interest rate 4.95% 4.16% 3.43% 3.63% 4.87% 5.81% 5.83%
Variable interest rate securities (1) $ 0 $ 0 $ 0 $ 0 $ 1,000 $21,417 $ 22,417 $ 22,417
Average interest rate 0.00% 0.00% 0.00% 0.00% 3.00% 3.63% 3.55%
Other interest-bearing assets $ 6,003 $ 0 $ 0 $ 0 $ 0 $ 5,908 $ 11,911 $ 11,911
Average interest rate 1.04% 0.00% 0.00% 0.00% 0.00% 4.97% 3.01%
Rate sensitive liabilities:
Non-interest-bearing checking (2) $ 6,925 $ 2,597 $ 2,597 $ 2,597 $ 2,597 $ 0 $ 17,313 $ 17,313
Average interest rate 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Savings & interest-bearing checking (2) $ 10,462 $ 3,923 $ 3,923 $ 3,923 $ 3,923 $ 0 $ 26,154 $ 26,154
Average interest rate 0.61% 0.61% 0.61% 0.61% 0.61% 0.00% 0.61%
Money market accounts (2) $ 4,042 $ 1,516 $ 1,516 $ 1,516 $ 1,516 $ 0 $ 10,106 $ 10,106
Average interest rate 0.91% 0.91% 0.91% 0.91% 0.91% 0.00% 0.91%
Time deposits (under $100,000) $ 31,598 $14,246 $ 3,137 $ 4,213 $ 7,350 $ 0 $ 60,544 $ 61,323
Average interest rate 2.42% 3.59% 3.41% 4.59% 3.87% 0.00% 2.96%
Time deposits (over 100,000) $ 17,585 $ 5,399 $ 1,008 $ 1,133 $ 2,807 $ 0 $ 27,932 $ 28,088
Average interest rate 2.65% 5.03% 4.77% 5.13% 4.05% 0.00% 3.53%
Fixed interest rate borrowings $ 0 $ 0 $ 0 $ 0 $ 0 $ 335 $ 335 $ 335
Average interest rate 0.00% 0.00% 0.00% 0.00% 0.00% 5.99% 5.99%
Variable interest rate borrowings $ 20,990 $ 0 $ 0 $ 0 $11,000 $ 0 $ 31,990 $ 34,411
Average interest rate 1.54% 0.00% 0.00% 0.00% 5.99% 0.00% 3.47%
(1) Investments and loans are included at contractual maturity.
(2) Non interest-bearing checking, interest-bearing checking, savings and money
market accounts are presented reflecting historical experience and management's
judgment about the duration of these deposits.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by this item can be found at Item 7 of this Annual
Report under the caption "Interest Rate Risk Management" and is incorporated in
its entirety by reference under this Item 7A.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED FINANCIAL STATEMENTS AND FOOTNOTES
FOR THE FISCAL YEAR-ENDED DECEMBER 31, 2003
CCFNB BANCORP, INC. AND SUBSIDIARY
CCFNB Bancorp, Inc. (the "Corporation") is a registered bank holding
company and organized under the Pennsylvania business corporation law. The
assets are primarily those of its wholly owned subsidiary, the Columbia County
Farmers National Bank.
32
The Columbia County Farmers National Bank is a full service
nationally-chartered financial institution serving customers from six locations
in Columbia County; namely Orangeville, Bloomsburg, Benton, South Centre,
Millville and Lightstreet. The deposits of the Bank are insured by the Federal
Deposit Insurance Corporation to the maximum extent provided by law.
CONSOLIDATED SELECTED FINANCIAL DATA
(In thousands of dollars, except per share data and ratios)
2003 2002 2001
---- ---- ----
EARNINGS
Interest income $ 11,221 $ 12,780 $ 13,719
Interest expense 4,366 5,741 6,924
Provision for loan losses 200 309 163
Investment securities gains 8 137 99
Net income 2,163 1,922 2,057
PER SHARE
Net income $ 1.69 $ 1.47 $ 1.54
Cash dividends .66 .63 .59
BALANCES AT DECEMBER 31
Assets $232,914 $229,032 $214,238
Investment securities 62,775 53,528 57,121
Net loans 146,215 150,040 141,962
Deposits 171,786 172,127 155,666
Stockholders' equity 27,603 26,840 26,042
RATIOS
Return on average assets .94% .86% .99%
Return on average equity 7.95% 7.22% 7.92%
Dividend payout ratio 39.02% 42.86% 38.31%
33
CCFNB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
2003 2002
---- ----
ASSETS
Cash and due from banks $ 6,358,541 $ 5,952,976
Interest-bearing deposits with other banks 5,480,177 8,010,927
Federal funds sold 523,336 2,056,774
Investment securities available-for-sale 62,774,590 53,527,510
Loans, net of unearned income 147,630,702 151,338,411
Allowance for loan losses 1,415,431 1,298,406
------------ ------------
Net loans $146,215,271 $150,040,005
Premises and equipment, net 4,282,457 4,414,686
Other real estate owned 35,696 67,900
Cash surrender value of bank-owned life insurance 5,907,940 3,626,606
Accrued interest receivable 810,912 894,234
Other assets 525,401 440,773
------------ ------------
TOTAL ASSETS $232,914,321 $229,032,391
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Non-interest bearing $ 17,313,192 $ 15,238,044
Interest bearing 154,472,449 156,889,067
------------ ------------
Total Deposits $171,785,641 $172,127,111
Short-term borrowings 20,990,219 17,274,252
Long-term borrowings 11,335,477 11,346,815
Accrued interest and other expenses 1,186,968 1,332,584
Other liabilities 12,618 111,630
------------ ------------
TOTAL LIABILITIES $205,310,923 $202,192,392
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, par value $1.25 per share; authorized
5,000,000 shares; issued and outstanding 1,276,445
shares 2003, 1,292,724 shares 2002 $ 1,595,556 $ 1,615,905
Surplus 3,634,608 4,008,665
Retained earnings 21,997,539 20,678,631
Accumulated other comprehensive income 375,695 536,798
------------ ------------
TOTAL STOCKHOLDERS' EQUITY $ 27,603,398 $ 26,839,999
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $232,914,321 $229,032,391
------------ ------------
The accompanying notes are an integral part of these consolidated financial
statements.
34
CCFNB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
---- ---- ----
INTEREST INCOME
Interest and fees on loans $ 9,206,892 $10,096,412 $10,645,387
Interest and dividends on investment securities:
Taxable 1,252,973 1,710,258 1,842,153
Tax-exempt 609,478 798,663 814,957
Dividends 60,934 58,792 81,078
Federal funds sold 42,562 51,224 66,967
Deposits in other banks 48,487 64,872 268,742
----------- ----------- -----------
TOTAL INTEREST INCOME $11,221,326 $12,780,221 $13,719,284
----------- ----------- -----------
INTEREST EXPENSE
Deposits $ 3,400,449 $ 4,724,904 $ 5,473,454
Short-term borrowings 286,216 336,364 718,979
Long-term borrowings 679,277 679,936 731,371
----------- ----------- -----------
TOTAL INTEREST EXPENSE $ 4,365,942 $ 5,741,204 $ 6,923,804
----------- ----------- -----------
Net interest income $ 6,855,384 $ 7,039,017 $ 6,795,480
Provision for loan losses 200,000 309,000 162,500
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES $ 6,655,384 $ 6,730,017 $ 6,632,980
----------- ----------- -----------
NON-INTEREST INCOME
Service charges and fees $ 691,332 $ 649,071 $ 606,252
Gain on sale of loans 190,382 1,435 0
Bank-owned life insurance income 247,334 27,968 0
Trust department 147,436 215,145 237,904
Other 222,969 180,059 205,699
Investment securities gains, net 8,369 136,892 98,895
----------- ----------- -----------
TOTAL NON-INTEREST INCOME $ 1,507,822 $ 1,210,570 $ 1,148,750
----------- ----------- -----------
NON-INTEREST EXPENSE
Salaries $ 2,199,135 $ 2,136,784 $ 2,024,505
Pensions and other employee benefits 746,350 729,689 691,798
Occupancy, net 378,867 354,643 366,157
Equipment 476,233 587,168 544,166
State shares tax 275,093 254,208 242,507
Other 1,333,524 1,416,680 1,235,082
----------- ----------- -----------
TOTAL NON-INTEREST EXPENSE $ 5,409,202 $ 5,479,172 $ 5,104,215
----------- ----------- -----------
Income before income taxes $ 2,754,004 $ 2,461,415 $ 2,677,515
Income tax expense 591,107 539,157 620,928
----------- ----------- -----------
NET INCOME $ 2,162,897 $ 1,922,258 $ 2,056,587
----------- ----------- -----------
PER SHARE DATA
Net income $ 1.69 $ 1.47 $ 1.54
Cash dividends .66 .63 .59
----------- ----------- -----------
Weighted average shares outstanding 1,281,265 1,309,084 1,338,007
35
CCFNB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
Common Comprehensive Retained
Stock Surplus Income Earnings
----- ------- ------ --------
BALANCE AT DECEMBER 31, 2000 $1,682,910 $5,146,061 $18,310,262
Comprehensive income :
Net income 0 0 $2,056,587 2,056,597
Change in net unrealized gain on
investment securities
available-for-sale,
net of reclassification
adjustment and
tax effects 0 0 164,555 0
----------
Total comprehensive income $2,221,142
==========
Issuance of 7,345 shares of common stock
under dividend reinvestment and stock
purchase plans 9,181 139,112 0
Purchase of 27,501 shares of treasury
stock 0 0 0
Retirement of 27,501 shares of treasury
stock (34,376) (555,171) 0
Cash dividends $.59 per share 0 0 (787,878)
---------- ---------- -----------
BALANCE AT DECEMBER 31, 2001 $1,657,715 $4,730,002 $19,578,971
Comprehensive income:
Net income 0 0 $ 1,922,258 1,922,258
Change in net unrealized gain on
investment securities
available-for-sale,
net of reclassification
adjustment and
tax effects 0 0 461,471 0
----------
Total comprehensive income $2,383,729
==========
Issuance of 8,052 shares of common
stock under
dividend reinvestment and stock
purchase plans 10,065 167,188 0
Purchase of 41,500 shares of
treasury stock 0 0 0
Retirement of 41,500 shares of treasury
stock (51,875) (888,525) 0
Cash dividends $.63 per share 0 0 (822,598)
---------- ---------- -----------
BALANCE AT DECEMBER 31, 2002 $1,615,905 $4,008,665 $20,678,631
---------- ---------- -----------
Comprehensive income:
Net income 0 0 $2,162,897 $2,162,897
Change in net unrealized gain on
investment securities
available-for-sale,
net of reclassification
adjustment and tax effects 0 0 (161,103) 0
----------
Total comprehensive income $2,001,794
==========
Issuance of 7,709 shares of common stock
under dividend reinvestment and stock
purchase plans 9,636 184,159 0
Purchase of 23,988 shares of
treasury stock 0 0 0
Retirement of 23,988 shares of treasury
stock (29,985) (558,216) 0
Cash dividends $.66 per share 0 0 (843,989)
---------- ---------- -----------
BALANCE AT DECEMBER 31, 2003 $1,595,556 $ 3,634,608 $21,997,539
========== =========== ===========
Accumulated
Other
Comprehensive Treasury
Income (Loss) Stock Total
------------- ----- -----
BALANCE AT DECEMBER 31, 2000 $ (89,228) $ 0 $ 25,050,005
Comprehensive income :
Net income 0 0 2,056,587
Change in net unrealized gain on
investment securities
available-for-sale,
net of reclassification
adjustment and
tax effects 164,555 0 164,555
Total comprehensive income
Issuance of 7,345 shares of common stock
under dividend reinvestment and stock
purchase plans 0 0 148,293
Purchase of 27,501 shares of treasury
stock 0 (589,547) (589,547)
Retirement of 27,501 shares of treasury
stock 0 589,547 0
Cash dividends $.59 per share 0 0 (787,878)
---------- --------- ------------
BALANCE AT DECEMBER 31, 2001 $ 75,327 $ 0 $ 26,042,015
Comprehensive income:
Net income 0 0 1,922,258
Change in net unrealized gain on
investment securities
available-for-sale,
net of reclassification
adjustment and
tax effects 461,471 0 461,471
Total comprehensive income
Issuance of 8,052 shares of common
stock under
dividend reinvestment and stock
purchase plans 0 0 177,253
Purchase of 41,500 shares of
treasury stock 0 (940,400) (940,400)
Retirement of 41,500 shares of treasury
stock 0 940,400 0
Cash dividends $.63 per share 0 0 (822,598)
---------- --------- ------------
BALANCE AT DECEMBER 31, 2002 $ 536,798 $ 0 $ 26,839,999
---------- --------- ------------
Comprehensive income:
Net income 0 0 $ 2,162,897
Change in net unrealized gain on
investment securities
available-for-sale,
net of reclassification
adjustment and tax effects (161,103) 0 (161,103)
Total comprehensive income
Issuance of 7,709 shares of common stock
under dividend reinvestment and stock
purchase plans 0 0 193,795
Purchase of 23,988 shares of
treasury stock 0 (588,201) (588,201)
Retirement of 23,988 shares of treasury
stock 0 588,201 0
Cash dividends $.66 per share 0 0 (843,989)
---------- --------- ------------
BALANCE AT DECEMBER 31, 2003 $ 375,695 $ 0 $ 27,603,398
========== ========= ============
36
CCFNB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
---- ---- ----
OPERATING ACTIVITIES
Net income $ 2,162,897 $ 1,922,258 $ 2,056,587
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 200,000 309,000 162,500
Depreciation and amortization 379,733 479,529 441,033
Premium amortization on investment securities 542,743 240,126 103,748
Discount accretion on investment securities (27,925) (21,966) (17,734)
Deferred income taxes (benefit) (57,242) (139,369) (42,741)
(Gain) on sales of investment securities available-for-sale (8,369) (136,892) (98,895)
(Gain) on sale of mortgage loans (190,382) (1,435) 0
Proceeds from sale of mortgage loans 9,156,607 143,315 0
Originations of mortgage loans for resale (8,966,225) (142,065) 0
Gain on sales of other real estate owned (30,169) 0 0
(Gain) loss from investment in insurance agency (4,865) (78) 1,916
Decrease in accrued interest receivable 83,322 83,200 60,331
Increase in other assets - net (17,677) (11,510) (61,575)
Net increase in cash surrender value of bank owned life insurance (281,334) (76,967) (78,840)
Increase (decrease) in accrued interest and other expenses (145,616) (49,559) 56,550
Increase (decrease) in other liabilities - net (43,145) 46,100 (23,279)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 2,752,353 $ 2,643,687 $ 2,559,601
------------ ------------ ------------
INVESTING ACTIVITIES
Purchase of investment securities available-for-sale $(50,383,679) $(31,616,079) $(42,860,135)
Proceeds from sales, maturities and redemption of investment securities
available-for-sale 40,408,337 35,831,825 33,318,256
Proceeds from sales of other real estate owned 98,069 0 0
Net (increase) decrease in loans 3,589,038 (8,454,934) (5,772,095)
Purchases of premises and equipment (247,505) (259,713) (153,248)
Acquisition of interest in insurance agency 0 0 (167,268)
Purchase of bank owned life insurance policies (2,000,000) (3,000,000) 0
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES $ (8,535,740) $ (7,498,901) $(15,634,490)
------------ ------------ ------------
FINANCING ACTIVITIES
Net increase (decrease) in deposits $ (341,470) $ 16,461,354 $ 12,497,119
Net increase (decrease) in short-term borrowings 3,715,967 (2,506,672) (328,042)
Repayment of long-term borrowings (11,338) (10,682) (2,010,063)
Acquisition of treasury stock (588,201) (940,400) (589,547)
Proceeds from issuance of common stock 193,795 177,253 148,293
Cash dividends paid (843,989) (822,598) (787,878)
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 2,124,764 $ 12,358,255 $ 8,929,882
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (3,658,623) $ 7,503,041 $ (4,145,007)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 16,020,677 8,517,636 12,662,644
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 12,362,054 $ 16,020,677 $ 8,517,637
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 4,535,604 $ 5,800,312 $ 6,944,409
Income taxes $ 624,526 $ 780,669 $ 624,853
37
The accompanying notes are an integral part of these consolidated financial
statements.
CCFNB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
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
main branch, namely Bloomsburg. This investment center offers a full line of
stocks, bonds and other non-insured financial services.
On December 19, 2000, the Corporation became a Financial Holding
Company by having filed an election to do so with the Federal Reserve Board. The
Financial Holding Company status was required in order to acquire an interest in
a local insurance agency that occurred during January 2001.
SEGMENT REPORTING
The Corporation's banking subsidiary acts as an independent community
financial services provider, and offers traditional banking and related
financial services to individual, business and government customers. Through its
branch, internet banking, telephone and automated teller machine network, the
Bank offers a full array of commercial and retail financial services, including
the taking of time, savings and demand deposits; the making of commercial,
consumer and mortgage loans; and the providing of other financial services. The
Bank also performs personal, corporate, pension and fiduciary services through
its Trust Department as well as offering diverse investment products through its
Investment center.
Management does not separately allocate expenses, including the cost of
funding loan demand, between the commercial, retail, trust and investment center
operations of the Corporation. As such, discrete financial information is not
available and segment reporting would not be meaningful.
USE OF ESTIMATES
The preparation of these consolidated financial statements in
conformity with accounting principles in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of these consolidated financial statements and the reported amounts of
income and expenses during the reporting periods. Actual results could differ
from those estimates.
INVESTMENT SECURITIES
The Corporation classifies its investment securities as either
"held-to-maturity" or "available-for-sale" at the time of purchase. Debt
securities are classified as held-to-maturity when the Corporation has the
ability and positive intent to hold the securities to maturity. Investment
securities held-to-maturity are carried at cost adjusted for amortization of
premiums and accretion of discounts to maturity.
Debt securities not classified as held-to-maturity and equity
securities included in the available-for-sale category, are carried at fair
value, and the amount of any unrealized gain or loss net of the effect of
deferred income taxes is reported as other comprehensive income in the
Consolidated Statement of Stockholders' Equity. Management's decision to sell
available-for-sale securities is based on changes in economic conditions
controlling the sources and uses of funds, terms, availability of and yield of
alternative investments, interest rate risk, and the need for liquidity.
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
38
from investments. Realized gains and losses are included in net investment
securities gains. The cost of investment securities sold, redeemed or matured is
based on the specific identification method.
LOANS
Loans are stated at their outstanding principal balances, net of
deferred fees or costs, unearned income, and the allowance for loan losses.
Interest on loans is accrued on the principal amount outstanding, primarily on
an actual day basis. Non-refundable loan fees and certain direct costs are
deferred and amortized over the life of the loans using the interest method. The
amortization is reflected as an interest yield adjustment, and the deferred
portion of the net fees and costs is reflected as a part of the loan balance.
Real estate mortgage loans held for resale are carried at the lower of
cost or market on an aggregate basis. These loans are sold with limited recourse
to the Corporation.
Past Due Loans - Generally, a loan is considered past due when a
payment is in arrears for a period of 10 or 15 days, depending on the type of
loan. Delinquent notices are issued at this point and collection efforts will
continue on loans past due beyond 60 days which have not been satisfied. Past
due loans are continually evaluated with determination for charge-off being made
when no reasonable chance remains that the status of the loan can be improved.
Non-Accrual Loans - Generally, a loan is classified as non-accrual,
with the accrual of interest on such a loan discontinued when the contractual
payment of principal or interest has become 90 days past due or management has
serious doubts about further collectibility of principal or interest, even
though the loan currently is performing. A loan may remain on accrual status if
it is in the process of collection and is either guaranteed or well secured.
When a loan is placed on non-accrual status, unpaid interest credited to income
in the current year is reversed, and unpaid interest accrued in prior years is
charged against the allowance for loan losses. Certain non-accrual loans may
continue to perform wherein payments are still being received with those
payments generally applied to principal. Non-accrual loans remain under constant
scrutiny and if performance continues, interest income may be recorded on a cash
basis based on management's judgment as to collectibility of principal.
Allowance for Loan Losses - The allowance for loan losses is
established through provisions for loan losses charged against income. Loans
deemed to be uncollectible are charged against the allowance for loan losses,
and subsequent recoveries, if any, are credited to the allowance.
A factor in estimating the allowance for loan losses is the measurement
of impaired loans. A loan is considered impaired when, based on current
information and events, it is probable that the Corporation will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. Under current accounting standards, the allowance for loan losses
related to impaired loans is based on discounted cash flows using the loan's
effective interest rate or the fair value of the collateral for certain
collateral dependent loans.
The allowance for loan losses is maintained at a level established by
management to be adequate to absorb estimated potential loan losses.
Management's periodic evaluation of the adequacy of the allowance for loan
losses is based on the Corporation's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay (including the timing of future payments), the
estimated value of any underlying collateral, composition of the loan portfolio,
current economic conditions, and other relevant factors. This evaluation is
inherently subjective as it requires material estimates, including the amounts
and timing of future cash flows expected to be received on impaired loans that
may be susceptible to significant change.
In addition, an allowance is provided for possible credit losses on
off-balance sheet credit exposures. The allowance is estimated by management and
is classified in other liabilities.
DERIVATIVES
The Bank has outstanding loan commitments that relate to the
origination of mortgage loans that will be held for resale. Pursuant to
Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for
Derivative Instruments and Hedging Activities" as amended by SFAS No. 138
"Accounting for Certain Derivative Instruments and Certain Hedging Activities"
and the guidance contained in the Derivatives Implementation Group Statement 133
Implementation Issue No. C 13, the Bank has accounted for such loan commitments
as derivative instruments. The effective date of the implementation guidance is
the first day of the first fiscal quarter beginning after April 10, 2002. The
outstanding loan commitments in this category did not give rise to any losses
for the year-ended December 31, 2003, as the fair market value of each
outstanding loan commitment exceeded the Bank's cost basis in each loan
commitment.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation
computed principally on the straight-line method over the estimated useful lives
of the assets. Maintenance and minor repairs are charged to operations as
incurred. The cost and accumulated depreciation of the premises and equipment
retired or sold are eliminated from the property accounts at the time of
retirement or sale, and the resulting gain or loss is reflected in current
operations.
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
39
proportion to, and over the period of, estimated net servicing income. The
unamortized cost is included in other assets in the accompanying consolidated
balance sheet. The servicing rights are periodically evaluated for impairment
based on their relative fair value.
OTHER REAL ESTATE OWNED
Real estate properties acquired through, or in lieu of, loan
foreclosure are held for sale and are initially recorded at fair value on the
date of foreclosure establishing a new cost basis. After foreclosure, valuations
are periodically performed by management and the real estate is carried at the
lower of carrying amount or fair value less cost to sell and is included in
other assets. Revenues derived from and costs to maintain the assets and
subsequent gains and losses on sales are included in other non-interest income
and expense.
BANK OWNED LIFE INSURANCE
The Corporation invests in Bank Owned Life Insurance (BOLI). Purchase
of BOLI provides life insurance coverage on certain employees with the
Corporation being owner and primary beneficiary of the policies.
INVESTMENT IN INSURANCE AGENCY
On January 2, 2001, the Corporation acquired a 50% interest in a local
insurance agency, a corporation organized under the laws of the Commonwealth of
Pennsylvania. The income or loss from this investment is accounted for under the
equity method of accounting. The carrying value of this investment as of
December 31, 2003 and 2002 is $170,296, and $165,430, respectively, and is
carried in other assets in the accompanying consolidated balance sheets.
INCOME TAXES
The provision for income taxes is based on the results of operations,
adjusted primarily for tax-exempt income. Certain items of income and expense
are reported in different periods for financial reporting and tax return
purposes. Deferred tax assets and liabilities are determined based on the
differences between the consolidated financial statement and income tax basis of
assets and liabilities measured by using the enacted tax rates and laws expected
to be in effect when the timing differences are expected to reverse. Deferred
tax expense or benefit is based on the difference between deferred tax asset or
liability from period to period.
PER SHARE DATA
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings
Per Share", requires dual presentation of basic and diluted earnings per share.
Basic earnings per share is calculated by dividing net income by the weighted
average number of shares of common stock outstanding at the end of each period.
Diluted earnings per share is calculated by increasing the denominator for the
assumed conversion of all potentially dilutive securities. The Corporation does
not have any securities which have or will have a dilutive effect, accordingly,
basic and diluted per share data is 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 November 2002, the Financial Accounting Standards Board (FASB)
issued Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others". This interpretation expands the disclosures to be made by a guarantor
about its obligations under certain guarantees and requires the guarantor to
recognize a liability in its financial statements for the obligation assumed
under a guarantee. In general, FIN 345 applies to contracts of indemnification
agreements that contingently require the guarantor to make payments to the
guaranteed party based on changes in an underlying that is related to an asset,
liability, or equity security of the guaranteed party. Certain guarantee
contracts are excluded from both the disclosure and recognition requirements of
this Interpretation, while other guarantees are subject o just the disclosure
requirements of FIN 45 but not to the recognition provisions. The disclosure
requirements of FIN 45 were effective for the corporation as of December 31,
2002 and require disclosure of the nature of the guarantee, the maximum
potential amount of future payments the guarantor could be required to make
under the guarantee, and the current amount of the liability, if any, for the
guarantor's obligations under the guarantee. The recognition requirements of FIN
45 are applied prospectively to guarantees issued or modified after December 31,
2002. This standard did not have any impact on the corporation's consolidated
financial condition or results of operations.
In December 2002, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure - an amendment of SFAS No. 123," which generally effective for
financial
40
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.
In December 2002, the FASB issued 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.
In January 2003, the FASB issued FIN 46, which provides guidance on how
to identify a variable interest entity (VIE) and determine when the assets,
liabilities, noncontrolling interests, and results of operations of a VIE are to
be included in an entity's consolidated financial statements. A VIE exists when
either the total equity investment at risk is not sufficient to permit the
entity to finance its activities by itself, or the equity investors lack one of
three characteristics associated with owning a controlling financial interest.
Those characteristics include the direct or indirect ability to make decisions
about an entity's activities through voting rights or similar rights. The
obligations to absorb the expected losses of an entity if they occur, or the
right to receive the expected residual returns of the entity if they occur. This
standard did not have any impact on the Corporation's consolidated financial
positions or results of operations.
In May 2003, the FASB issued 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
mandatory redeemable and that embody obligations requiring or permitting
settlement by transferring assets or by issuing an entity's own shares. In
December 2003, the FASB deferred for an indefinite period the application of the
guidance in SFAS 150 to noncontrolling interest that are classified as equity in
the financial statements of a subsidiary but would be classified as a liability
in the parent's financial statements under SFAS 150. The deferral is limited to
mandatory redeemable noncontrolling interests associated with finite-lived
subsidiaries. This standard does not have any impact on the Corporation's
consolidated financial position or results of operations.
In December 2003, the Emerging Issuance Task Force Issue (EITF) issued
no. 03-01 "The Meaning of Other-Than-Temporary Impairment and its Application to
Certain Investments" is generally effective for fiscal years ending after
December 15, 2003, and addresses how to define an "other-than-temporary
impairment" as well as its application to investments classified as either
"available-for-sale" and "held-to-maturity" under SFAS 115. The EITF requires
disclosure of securities in a continuous unrealized loss position to be
stratified based on length of time those securities were carried in such a
position (less than 12 months, and 12 months or more). Additional information is
required to be disclosed to include the nature of the investment, the cause of
the decline in value and the evidence considered in reaching the conclusion that
the investment is not other than temporarily impaired. The disclosure is
required for fiscal years ending after December 15, 2003. Comparative
information for earlier periods is not required.
ADVERTISING COSTS
It is the Corporation's policy to expense advertising costs in the
period in which they are incurred. Advertising expense for the years ended
December 31, 2003, 2002 and 2001, was approximately $75,434, $71,923, and
$73,192, respectively.
RECLASSIFICATIONS
Certain amounts in the consolidated financial statements of the prior
years have been reclassified to conform with presentations used in the 2003
consolidated financial statements. Such reclassifications had no effect on the
Corporation's consolidated financial condition or net income.
2. RESTRICTED CASH BALANCES
The Bank is required to maintain average reserve balances with the
Federal Reserve Bank. The amount required at December 31, 2003 was $1,287,000
and was satisfied by vault cash. Additionally, as compensation for check
clearing and other services, compensating balances are required to be maintained
with the Federal Reserve Bank and other correspondent banks. At December 31,
2003, these balances were $1,617,000.
41
3. INVESTMENT SECURITIES AVAILABLE-FOR-SALE
The amortized cost, related estimated fair value, and unrealized gains
and losses for investment securities were as follows at December 31, 2003 and
2002:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 2003: Cost Gains Losses Value
------------------ ---- ----- ------ -----
Obligations of U.S. Government Corporations and
Agencies:
Mortgage-backed $33,299,509 $ 211,830 $ 173,349 $33,337,990
Other 16,000,924 33,998 33,291 16,001,631
Obligations of state and political subdivisions 10,474,524 298,152 0 10,772,676
Marketable equity securities 1,083,786 20,330 13,123 1,340,993
Restricted equity securities 1,321,300 0 0 1,321,300
----------- ----------- ----------- -----------
Total $62,180,043 $ 814,310 $ 219,763 $62,774,590
----------- ----------- ----------- -----------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 2002: Cost Gains Losses Value
------------------ ---- ----- ------ -----
Obligations of U.S. Government Corporations and
Agencies:
Mortgage-backed $22,266,089 $ 440,491 $ 16,812 $22,689,768
Other 10,082,530 43,029 18,253 10,107,306
Obligations of state and political subdivisions 15,336,744 420,898 7,037 15,750,605
Corporate securities 3,495,029 9,179 85,487 3,418,721
Marketable equity securities 332,456 57,384 27,030 362,810
Restricted equity securities 1,198,300 0 0 1,198,300
----------- ----------- ----------- -----------
Total $52,711,148 $ 970,981 $ 154,619 $53,527,510
----------- ----------- ----------- -----------
Securities available-for-sale with an aggregate fair value of
$38,434,252 in 2003 and $33,456,382 in 2002, respectively, were pledged to
secure public funds, trust funds, securities sold under agreements to repurchase
and other balances of $27,696,640 in 2003 and $25,430,978 in 2002, respectively,
as required by law.
The amortized cost and estimated fair value of debt securities, by
expected maturity, are shown below at December 31, 2003. Expected maturities
will differ from contractual maturities, because some borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties. Other securities, marketable equity securities and restricted equity
securities are not considered to have defined maturities and are included in the
"Due after ten years" category:
Estimated Weighted
Amortized Fair Average
Cost Value Yield
---- ----- -----
Due in one year or less $ 6,379,256 $ 6,407,199 5.00%
Due after one year through five years 34,799,465 34,832,996 3.47%
Due after five years through ten years 11,854,944 11,963,808 4.74%
Due after ten years 9,146,378 9,570,587 6.05%
----------- -----------
Total $62,180,043 $62,774,590 4.24%
----------- -----------
Restricted equity securities consist of stock in the Federal Home Loan
Bank of Pittsburgh (FHLB), Federal Reserve Bank (FRB) and Atlantic Central
Bankers Bank (ACBB) and do not have a readily determinable fair value for
purposes of SFAS No. 115, because their ownership is restricted, and they can be
sold back only to the FHLB, FRB, ACBB or to another member institution.
Therefore, these securities are classified as restricted equity investment
securities, carried at cost, and evaluated for impairment.
There were no aggregate investments with a single issuer (excluding the
U. S. Government and its Agencies) which exceeded ten percent of consolidated
stockholders' equity at December 31, 2003. The quality rating of all obligations
of state and political subdivisions were "A" or higher, as rated by Moody's or
Standard and Poors. The only exceptions were local issues which were not rated,
but were secured by the full faith and credit obligations of the communities
that issued these securities. All of the state and political subdivision
investments were actively traded in a liquid market.
Proceeds from sales, maturities and redemptions of investments in debt
and equity securities classified as available-for-sale during 2003, 2002 and
2001 were $41,449,375, $35,899,741, and $33,318,256, respectively. Gross gains
realized on these sales were $8,369, $136,892, and $98,895, respectively. There
were no gross losses on the 2003, 2002, and 2001 sales.
42
In accordance with disclosures required by EITF NO. 03-1, the summary
below shows the gross unrealized losses and fair value, aggregated by investment
category that individual securities have been in a continuous unrealized loss
position for less than or more than 12 months as of December 31, 2003:
Less than 12 months 12 months or more Total
------------------- ----------------- -----
Unrealized Unrealized Unrealized
Description of Security Fair Value Loss Fair Value Loss Fair Value Loss
----------------------- ----------- ----------- ----------- ----------- ----------- -----------
Obligations of U.S.
Government Corporations
and Agencies
Mortgage backed $14,229,090 $ 159,831 $ 1,131,042 $ 13,518 $15,360,132 $ 173,349
Other 7,466,710 33,291 0 0 7,466,710 33,291
Marketable Equity Securities 54,000 274 31,341 12,849 85,341 13,123
----------- ----------- ----------- ----------- ----------- -----------
Total $21,749,800 $ 193,396 $ 1,162,383 $ 26,367 $22,912,183 $ 219,763
=========== =========== =========== =========== =========== ===========
The Corporation invests in various forms of agency debt including
mortgage backed securities and callable agency debt. The fair market value of
these securities is influenced by market interest rates, prepayment speeds on
mortgage securities, bid to offer spreads in the market place and credit
premiums for various types of agency debt. These factors change continuously and
therefore the market value of these securities may be higher or lower than the
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.
4. LOANS
Major classifications of loans at December 31, 2003 and 2002 consisted
of:
2003 2002
---- ----
Commercial $ 15,327,951 $ 15,033,479
Tax-exempt 3,912,476 1,290,478
Municipal leases 2,301,615 2,244,397
Real estate - construction 2,504,905 1,185,530
Real estate 118,128,511 123,745,716
Personal 5,410,169 7,901,766
------------- -------------
Total gross loans $ 147,585,627 151,401,366
Add (Deduct): Unearned discount (64,246) (139,153)
Unamortized loan costs, net of fees 109,321 76,198
------------- -------------
Loans, net of unearned income $ 147,630,702 151,338,411
============= =============
Non-accrual loans at December 31, 2003, 2002 and 2001 were $1,851,686,
$2,122,074, and $729,084, respectively. The gross interest that would have been
recorded if these loans had been current in accordance with their original terms
and the amounts actually recorded in income were as follows:
2003 2002 2001
---- ---- ----
Gross interest due under terms $142,873 $131,335 $ 99,280
Amount included in income 17,586 67,873 61,568
-------- -------- --------
Interest income not recognized $125,287 $ 63,462 $ 37,712
======== ======== ========
At December 31, 2003, 2002 and 2001 the recorded investment in loans
that are considered to be impaired as defined by SFAS No. 114 was $192,409,
$149,278, and $58,424, respectively. No additional charge to operations was
required to provide for the impaired loans since the total allowance for loan
losses is estimated by management to be adequate to provide for the loan loss
allowance required by SFAS No. 114 along with any other potential losses. The
average recorded investment in impaired loans during the years ended December
31, 2003, 2002 and 2001 was approximately $232,031, $86,566, $47,339,
respectively.
Loans past due 90 days or more and still accruing interest amounted to
$369,000 at December 31, 2003 and $49,532 at December 31, 2002, as presented in
accordance with AICPA Statement of Position 01-06 "Accounting by Certain
Entities (Including Entities with Trade Receivables) that Lend to or Finance the
Activities of Others," effective for fiscal years beginning after December 15,
2001.
At December 31, 2003, there were no significant commitments to lend
additional funds with respect to non-accrual and restructured loans.
43
Changes in the allowance for loan losses for the years ended December
31, 2003, 2002 and 2001 were as follows:
2003 2002 2001
---- ---- ----
Balance, beginning of year $ 1,298,406 $ 1,027,805 $ 1,008,301
Provision charged to operations 200,000 309,000 162,500
Loans charged-off (128,452) (99,707) (189,186)
Recoveries 45,477 61,308 46,190
----------- ----------- -----------
Balance, end of year $ 1,415,431 $ 1,298,406 $ 1,027,805
=========== =========== ===========
5. MORTGAGE SERVICING RIGHTS
The Corporation commenced selling real estate mortgages during the last
quarter of 2002. The mortgage loans sold serviced for others are not included in
the accompanying Consolidated Balance Sheets. The unpaid principal balances of
mortgage loans serviced for others were $8,956,268 and $143,500 at December 31,
2003 and 2002, respectively. The balances of amortized mortgage servicing rights
included in other assets at December 31, 2003 and 2002 were $75,097 and $1,429,
respectively. Valuation allowances were not provided since fair values were
determined to exceed carrying values. Fair values were determined using a
discount rate of 6% and average lives of 3 to 8 years depending on loan rate.
The following summarizes mortgage servicing rights capitalized and
amortized.
2003 2002
---- ----
Balances, January 1 $ 1,429 $ 0
Servicing asset additions 89,662 1,435
Amortization (15,994) (6)
-------- --------
Balance, December 31 $ 75,097 $ 1,429
======== ========
The Bank does not require custodial escrow accounts in connection with
the forgoing loan servicing.
6. PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, 2003 and 2002
follows:
2003 2002
---- ----
Land $ 567,939 $ 567,939
Buildings and improvements 4,546,704 4,539,204
Furniture and equipment 4,033,088 3,810,259
---------- ----------
$9,147,731 $8,917,402
Less: Accumulated depreciation 4,865,274 4,502,716
---------- ----------
$4,282,457 $4,414,686
========== ==========
Depreciation amounted to $379,733, $479,529 and $441,033 in 2003, 2002
and 2001 respectively..
7. DEPOSITS
Major classifications of deposits at December 31, 2003 and 2002
consisted of:
2003 2002
---- ----
Demand - non-interest bearing $ 17,313,192 $ 15,238,044
Demand - interest bearing 29,736,472 27,785,333
Savings 36,259,730 35,000,853
Time $100,000 and over 27,931,828 31,190,539
Other time 60,544,419 62,912,342
------------ ------------
$171,785,641 $172,127,111
============ ============
The following is a schedule reflecting remaining maturities of time
deposits of $100,000 and over at December 31, 2003:
2004 $16,658,793
2005 5,613,410
2006 1,007,820
2007 1,132,594
2008 and thereafter 3,519,211
-----------
Total $27,931,828
===========
44
Interest expense related to time deposits of $100,000 or more was
$1,208,973 in 2003, $1,419,337 in 2002 and $1,493,072 in 2001.
8. SHORT TERM BORROWINGS
Securities sold under agreements to repurchase and Federal Home Loan
Bank advances generally represented overnight or less than 30-day borrowings.
U.S. Treasury tax and loan notes for collections made by the Bank were payable
on demand. Short-term borrowings consisted of the following at December 31, 2003
and 2002:
2003 2002
---- ----
Weighted Maximum Weighted Maximum
Ending Average Month End Average Ending Average Month End Average
Balance Balance Balance Rate Balance Balance Balance Rate
------- ------- ------- ---- ------- ------- ------- ----
Securities sold under
agreements to repurchase $20,588,977 $16,767,306 $20,588,977 1.69% $16,274,315 $17,494,315 $20,058,091 1.89%
U.S. Treasury tax and loan notes 401,242 349,214 1,000,000 .92% 1,000,000 511,131 1,000,000 1.17%
----------- ----------- ----------- ----------- ----------- -----------
Total $20,990,219 $17,116,520 $21,588,977 1.67% $17,274,252 $18,005,446 $21,058,091 1.87%
=========== =========== =========== =========== =========== ===========
9. LONG-TERM BORROWINGS
Long-term borrowings consist of advances due Federal Home Loan Bank.
Under terms of a blanket agreement, the loans were secured by certain qualifying
assets of the Bank which consisted principally of first mortgage loans and
certain investment securities. The carrying value of these collateralized items
was $116,612,000 at December 31, 2003. The Bank has lines of credit with
Atlantic Central Bankers Bank and Federal Home Loan Bank in the aggregate amount
of $98,833,000 at December 31, 2003. The unused portion of these lines of credit
were $5,000,000 and $82,497,000, respectively at December 31, 2003. Long-term
borrowings consisted of the following at December 31, 2003 and 2002:
2003 2002
---- ----
Loan dated November 28, 1997 in the original amount of $225,000 for a 10 year term
requiring monthly payments of $1,627 including interest at 6.12%, maturing in 2007
with a final payment due of $146,690. Principal balances outstanding $ 183,361 $ 191,402
Loan dated February 18, 1998 in the original amount of $2,000,000 for a 10 year term
with a 5 year put. Interest only is payable monthly at 5.48% with a floating rate
option, at the discretion of FHLB, at the end of 5 years. Principal balances outstanding 2,000,000 2,000,000
Loan dated June 25, 1998 in the original amount of $72,000 for a 30 year term requiring
monthly payments of $425 including interest at 5.856%. Principal balances outstanding 66,381 67,556
Loan dated February 23, 1999 in the original amount of $29,160 for a 20 year term
requiring monthly payments of $179 including interest at 5.50%. Principal balances
outstanding 26,150 26,840
Loan dated August 20, 1999 in the original amount of $32,400 for a 20 year term
requiring monthly payments of $199 including interest at 5.50%. Principal
balances outstanding 29,444 30,190
Loan dated January 27, 2000 in the original amount of $5,000,000 for a 10 year term with
a 1 year conversion date, at the discretion of FHLB, and a 3 month conversion
frequency thereafter. At December 31, 2003 the interest rate was 6.00%. Principal
balances outstanding 5,000,000 5,000,000
Loan dated August 16, 2000 in the original amount of $2,000,000 for a 10 year
term with a 6 month conversion date, at the discretion of FHLB, and a 3
month conversion frequency thereafter. 2,000,000 2,000,000
At December 31, 2003 the interest rate was 5.925%. Principal balances outstanding
Loan dated September 20, 2000 in the original amount of $2,000,000 for a 10 year term
with a 3 year conversion date, at the discretion of FHLB, and a 3 month
conversion frequency thereafter. 2,000,000 2,000,000
At December 31, 2003 the interest rate was 6.10%. Principal balances outstanding
Loan December 13, 2000 in the original amount of $32,092 for a 20 year term
requiring monthly payments of $197 including interest at 5.50%. Principal balances
outstanding 30,141 30,827
----------- -----------
Total $11,335,477 $11,346,815
=========== ===========
45
At December 31, 2003 the annual maturities of long-term debt were as
follows: $12,034 in 2004, $12,774 in 2005, $13,559 in 2006, $160,202 in 2007,
$2,004,366 in 2008 and $9,132,542 thereafter.
10. COMPREHENSIVE INCOME
The components of the change in other comprehensive income and related
tax effects are as follows:
Years Ended December 31,
------------------------
2003 2002 2001
---- ---- ----
Unrealized holding gains (losses) on available-for-sale investment
Securities $(230,183) $ 840,186 $ 354,266
Less reclassification adjustment for gains realized in income 8,369 136,892 98,895
--------- --------- ---------
Net unrealized gains (losses) $(221,814) $ 703,294 $ 255,371
Tax effects 60,711 (241,823) (90,816)
--------- --------- ---------
Net of tax amount $(161,103) $ 461,471 $ 164,555
========= ========= =========
11. STOCKHOLDERS' EQUITY AND STOCK PURCHASE PLANS
The Amended Articles of Incorporation contain a provision that permits
the Corporation to issue warrants for the purchase of shares of common stock,
par value $1.25 per share (the "Common Stock"), at below market prices in the
event any person or entity acquires 25% or more of the Common Stock.
The Corporation offers employees a stock purchase plan. The maximum
number of shares of the Common Stock to be issued under this plan shall be
20,000. In addition, the Corporation may choose to purchase shares on the open
market to facilitate this plan. A participating employee may annually elect
deductions of at least 1% of base pay, but not more than 10% of base pay, to
cover purchases of shares under this plan. A participating employee shall be
deemed to have been granted an option to purchase a number of shares of the
Common Stock equal to the annual aggregate amount of payroll deductions elected
by the employee divided by 90% of the fair market value of Common Stock on the
first day of January in each year. Stock issued to participating employees under
the plan for the most recent three year period was:
Per Share
---------
Number
Date of Employees' Market Value
Issued Shares Purchase Price Of Shares
------ ------ -------------- ---------
2003 641 $21.22 $23.58
2002 590 $20.92 $23.25
2001 839 $15.07 $16.75
The Corporation also offers to its stockholders a Dividend Reinvestment
and Stock Purchase Plan. Under the plan, the Corporation registered with the
Securities and Exchange Commission 500,000 shares of the Common Stock to be sold
pursuant to the plan. The price per share for purchases under this plan is
determined at each quarterly dividend payment date by the reported average mean
between the bid and asked prices for the shares at the close of trading in the
over-the-counter market on the trading day immediately preceding the quarterly
dividend payment date. Participation in this plan by Shareholders began in June
1995. Shares issued under this plan for the most recent three year period was:
Number of Total
Year Shares Proceeds
---- ------ --------
2003 7,068 $180,193
2002 7,462 $164,906
2001 6,506 $135,649
12. INCOME TAXES
The provision for income tax expense consisted of the following
components:
2003 2002 2001
---- ---- ----
Federal
Current $ 648,349 $ 678,526 $ 663,669
Deferred (benefit) (57,728) (139,377) (42,549)
--------- --------- ---------
$ 590,621 $ 539,149 $ 621,120
--------- --------- ---------
46
State
Current $ 0 $ 0 $ 0
Deferred (benefit) 486 8 (192)
--------- --------- ---------
TOTAL PROVISION FOR TAXES $ 591,107 $ 539,157 $ 620,928
========= ========= =========
A reconciliation of the actual provision for federal income tax expense
and the amounts which would have been recorded based upon the statutory rate of
34% follows:
2003 2002 2001
---- ---- ----
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
Provision at statutory rate $ 936,361 34.0% $ 836,811 34.0% $ 910,355 34.0%
Tax-exempt income (282,067) (10.2) (323,811) (13.2) (327,037) (12.2)
Non-deductible expenses 26,314 .9 38,296 1.6 48,142 1.8
Bank owned life insurance income - net (84,094) (3.1) (9,509) (.4) (8,106) (.3)
Other, net (5,893) (.2) (2,638) (.1) (2,234) (.1)
--------- ---- --------- ---- --------- ----
Actual federal income tax and rate $ 590,621 21.4% $ 539,149 21.9% $ 621,120 23.2%
========= ==== ========= ==== ========= ====
Income taxes applicable to realized security gains included in the
provision for income taxes totaled $2,845 in 2003, $48,110 in 2002, and $33,624
in 2001.
The net deferred tax asset (liability) recorded by the Corporation
consisted of the following tax effects of temporary timing differences at
December 31, 2003, 2002 and 2001:
2003 2002 2001
---- ---- ----
Deferred tax assets:
Allowance for loan losses $ 379,485 $ 339,696 $ 247,692
Allowance for off balance sheet losses 1,530 0 0
Deferred compensation and director's fees 201,611 185,430 151,324
Non-accrual loan interest 33,260 16,800 11,291
Mortgage Servicing Rights 3,463 0 0
Contributions 0 5,588 0
Investment in insurance agency 0 746 777
--------- --------- ---------
TOTAL $ 619,349 $ 548,260 $ 411,084
========= ========= =========
Deferred tax liabilities:
Loan fees and costs $ (76,689) $ (74,104) $ (64,036)
Accretion (986) (2,516) (2,020)
Unrealized investment securities gains (218,852) (279,563) (37,740)
Depreciation (259,504) (247,944) (260,701)
Investment in insurance agency (1,232) 0 0
--------- --------- ---------
TOTAL $(557,263) $(604,127) $(364,497)
--------- --------- ---------
Net deferred tax asset (liability) $ 62,086 $ (55,867) $ 46,587
========= ========= =========
The above net deferred asset (liability) is included in other assets or
other liabilities on the consolidated balance sheets. It is anticipated that all
tax assets shown above will be realized, accordingly, no valuation allowance was
provided.
The Corporation and its subsidiary file a consolidated federal income
tax return. The Parent Company is also required to file a separate state income
tax return and has available state operating loss carryforwards totaling
$571,228. The losses expire through 2023. The related deferred state tax asset
in the amount of $57,066 has been fully reserved and is not reflected in the net
tax asset (liability) since management is of the opinion that such assets will
not be realized in the foreseeable future.
13. BENEFIT AND DEFERRED COMPENSATION PLANS
The Bank maintains a 401K salary deferred profit sharing plan for the
benefit of its employees. Under the salary deferral component, employees may
elect to contribute up to 10% of their compensation with the possibility that
the Bank may make matching contributions to the plan. Under the profit sharing
component, contributions are made at the discretion of the Board of Directors.
Matching contributions amounted to $64,088, $24,927, and $23,446 for
2003, 2002 and 2001, respectively. Discretionary contributions amounted to $0,
$92,312, and $99,317 in 2003, 2002 and 2001, respectively.
DIRECTORS
During 1990, the Bank entered into agreements with two directors to
establish non-qualified deferred compensation plans for each of these directors.
In 1994, additional plans were established for these two directors plus another
director. These plans are
47
limited to four-year terms. The Bank may, however, enter into subsequent similar
plans with its directors. Each of the participating directors is deferring the
payment to himself of certain directors fees to which he is entitled. Each
director's future payment is based upon the cumulative amount of deferred fees
together with interest currently accruing thereon at the rate of 8% per annum,
subject to change by the Board of Directors. The Bank has obtained life
insurance (designating the Bank as the beneficiary) on the lives of certain
directors in face amounts which are intended to cover the Bank's obligations and
related costs under the Director's Deferred Compensation Plan. As of December
31, 2003 and 2002, the net cash value of insurance policies was $368,924 and
$331,095, respectively, and the total accrued liability was $214,418 and
$216,039, respectively, relating to these directors' deferred compensation
agreements.
During 2003, the directors were given the option of receiving or deferring
their directors' fees under a non-qualified deferred compensation plan which
allows the director to defer such fees until the year following the expiration
of the directors term. Payments are then made over specified terms under these
arrangements up to a ten year period. Interest is to accrue on these deferred
fees at the five year certificate of deposit rate, which was 4% in 2003. Two
directors have elected to participate in this program and the total accrued
liability at December 31, 2003 was $13,317.
EXECUTIVE OFFICERS
In 1992, the Bank entered into agreements with two executive officers
to establish non-qualified deferred compensation plans. Each officer
deferred compensation in order to participate in this Deferred Compensation
Plan. If the officer continues to serve as an officer of the Bank until he
attains sixty-five (65) years of age, the Bank has agreed to pay him 120
guaranteed consecutive monthly payments commencing on the first day of the
month following the officer's 65th birthday. Each officer's guaranteed
monthly payment is based upon the future value of life insurance purchased
with the compensation the officer has deferred. The Bank has obtained life
insurance (designating the Bank as the beneficiary) on the life of each
participating officer in an amount which is intended to cover the Bank's
obligations under the Deferred Compensation Plan, based upon certain
actuarial assumptions.
During 2002, the agreements with the two executive officers were
modified. Under one agreement, the executive officer will receive $225,000
payable monthly over a 10 year period commencing in February 2003. Under
another agreement, another executive officer will receive $175,000 payable
monthly over a 10 year period commending in April 2003. This second
agreement will also provide post employment health care benefits to the
executive officer until the attainment of age 65. As of December 31, 2003
and 2002, the net cash value of insurance policies was $318,119 and
$292,515 respectively, and the total accrued liability, equal to the
present value of these obligations, was $295,674 and $314,674,
respectively, relating to these executive officers' and directors' deferred
compensation agreements, and the accrued liability related to the post
employment health care benefit was $14,336 and $14,668 as of December 31,
2003 and December 31, 2002, respectively.
In April 2003, the Bank entered into non-qualified deferred
compensation agreements with three executive officers to provide
supplemental retirement benefits commencing with the executive's retirement
and ending 15 years thereafter. The deferred compensation expense related
to these agreements for the year ended December 31, 2003 and the total
accrual liability as of December 31, 2003 was $55,131.
14. LEASE COMMITMENTS AND CONTINGENCIES
At December 31, 2003 the Bank was leasing some minor office equipment
under operating leases.
Rental expense under operating leases for the years ended December 31,
2003, 2002 and 2001 were $2,778, $4,976, and $4,874, respectively.
In the normal course of business, there were various pending legal
actions and proceedings which were not reflected in the consolidated financial
statements. In the opinion of management, the consolidated financial statements
have not and will not be affected materially by the outcome of such actions and
proceedings.
15. RELATED PARTY TRANSACTIONS
Certain directors and executive officers of the Corporation and the
Bank, as well as companies in which they are principal owners (i.e., at least
10% ownership), were indebted to the Bank at December 31, 2003 and 2002. These
loans were made on substantially the same terms and conditions, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with unrelated parties. These loans did not present more than the
normal risk of collectibility nor present other unfavorable features.
A summary of the activity on the related party loans, comprised of
seven directors, six executive officers and their related companies, consisted
of the following:
2003 2002
---- ----
Balance, beginning of year $2,004,160 $2,364,768
Additions 654,404 901,660
Deductions 969,585 1,262,268
---------- ----------
Balance, end of year $1,688,979 $2,004,160
========== ==========
48
The above loans represent funds drawn and outstanding at the date of
the accompanying consolidated financial statement. Commitments by the Bank to
related parties on lines of credit for 2003 and 2002 presented an additional
off-balance sheet risk to the extent of undisbursed funds in the amount of
$410,768 and $437,955, respectively, on the above loans.
16. REGULATORY MATTERS
Dividends are paid by the Corporation to shareholders from its assets
which are mainly provided by dividends from the Bank. However, national banking
laws place certain restrictions on the amount of cash dividends allowed to be
paid by the Bank to the Corporation. Generally, the limitation provides that
dividend payments may not exceed the Bank's current year's retained income plus
retained net income for the preceding two years. Accordingly, in 2004, without
prior regulatory approval, the Bank may declare dividends to the Corporation in
the amount of $364,186 plus additional amounts equal to the net income earned in
2004 for the period January 1, 2004, through the date of declaration, less any
dividends which may have already been paid in 2004. Regulations also limit the
amount of loans and advances from the Bank to the Corporation to 10% of
consolidated net assets.
The Corporation is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Corporation's consolidated financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Corporation must meet specific capital guidelines that involve
quantitative measures of the Corporation's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices. The
Corporation's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors. Management believes, as of December 31, 2003 and 2002, that the
Corporation and the Bank met all capital adequacy requirements to which they are
subject.
Quantitative measures established by regulation to ensure capital
adequacy require the Corporation to maintain minimum amounts and ratios (set
forth in the table below) of Total and Tier I Capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I Capital (as
defined) to average assets (as defined).
As of December 31, 2003, the most recent notification from the Office
of the Comptroller of the Currency categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized, the Bank must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category.
The Bank's actual capital amounts (in thousands) and ratios are
presented in the following table:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 2003:
Total Risk Based Capital
(To risk-weighted assets) $28,752 19.88% $11,570 8.00% $14,463 10.00%
Tier I Capital
(To risk-weighted assets) 27,220 18.82% 5,785 4.00% 8,678 6.00%
Tier I Capital
(To average assets) 26,303 11.79% 8,924 4.00% 11,155 5.00%
As of December 31, 2002:
Total Risk Based Capital
(To risk-weighted assets) $27,615 19.46% $11,352 8.00% $14,191 10.00%
Tier I Capital
(To risk-weighted assets) $26,303 18.53% $ 5,682 4.00% $ 8,524 6.00%
Tier I Capital
(To average assets) $26,303 11.77% $ 8,939 4.00% $11,174 5.00%
The Corporation's capital ratios are not materially different from
those of the Bank.
17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
The Corporation is a party to financial instruments with off-balance
sheet risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit,
standby letters of credit and commercial letters of credit. Those instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the consolidated balance sheets. The contract or
notional amounts of those instruments reflect the extent of involvement the
Corporation has in particular classes of financial instruments. The Corporation
does not engage in trading activities with respect to any of its financial
instruments with off-balance sheet risk.
The Corporation may require collateral or other security to support
financial instruments with off-balance sheet credit risk. The contract or
notional amounts at December 31, 2003 and 2002 were as follows:
49
2003 2002
---- ----
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit $13,105,609 $11,768,038
Financial standby letters of credit 1,812,748 1,842,578
Performance standby letters of credit 842,808 48,404
Dealer floor plans 1,412,279 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 payment to a
third party when a customer either fails to repay an obligation or fails to
perform some non-financial obligation. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. The Corporation holds collateral supporting those
commitments for which collateral is deemed necessary. The extent of collateral
held for those commitments at December 31, 2003 varied from 0 percent to 100
percent; the average amount collateralized was 83.3 percent.
The Corporation's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit and letters of credit is represented by the contractual notional
amount of those instruments. The Corporation uses the same credit policies in
making commitments and conditional obligations, as it does for on-balance sheet
instruments.
The Corporation granted commercial, consumer and residential loans to
customers within Pennsylvania. Of the total loan portfolio 82.2% was for real
estate loans, principally residential. It was the opinion of management that the
high concentration did not pose an adverse credit risk. Further, it was
management's opinion that the remainder of the loan portfolio was balanced and
diversified to the extent necessary to avoid any significant concentration of
credit.
18. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards (SFAS) No. 107,
"Disclosures about Fair Value of Financial Instruments", requires disclosure of
fair value information about financial instruments, whether or not required to
be recognized in the consolidated balance sheet, for which it is practicable to
estimate such value. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
These techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. Fair value estimates
derived through these techniques cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. SFAS No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Corporation.
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments:
CASH AND OTHER SHORT-TERM INSTRUMENTS
Cash and due from banks, interest bearing deposits with other
banks, and Federal Funds sold had carrying values which were a
reasonable estimate of fair value. Accordingly, fair values regarding
these instruments were provided by reference to carrying values
reflected on the consolidated balance sheets.
INVESTMENT SECURITIES
The fair value of investment securities which included
mortgage backed securities were estimated based on bid prices published
in financial newspapers or bid quotations received from securities
dealers.
LOANS
Fair values were estimated for categories of loans with
similar financial characteristics. Loans were segregated by type such
as commercial, tax-exempt, real estate mortgages and consumer. For
estimation purposes, each loan category was further segmented into
fixed and adjustable rate interest terms and also into performing and
non-performing classifications.
The fair value of each category of performing loans was
calculated by discounting future cash flows using the current rates at
which similar loans would be made to borrowers with similar credit
ratings and for the same remaining maturities.
Fair value for non-performing loans was based on management's
estimate of future cash flows discounted using a rate commensurate with
the risk associated with the estimated future cash flows. The
assumptions used by management were judgmentally determined using
specific borrower information.
CASH SURRENDER VALUE OF BANK OWNED LIFE INSURANCE
The fair values are equal to the current carrying value.
50
DEPOSITS
Under SFAS No. 107, the fair value of deposits with no stated
maturity, such as Demand Deposits, Savings Accounts, and Money Market
Accounts, was equal to the amount payable on demand at December 31,
2003 and 2002.
Fair values for fixed rate Certificates of Deposit were
estimated using a discounted cash flow calculation that applied
interest rates currently being offered on certificates to a schedule of
aggregated expected monthly maturities on time deposits.
SHORT-TERM BORROWINGS
The carrying amounts of federal funds purchased and securities
sold under agreements to repurchase and other short-term borrowings
approximated their fair values.
LONG-TERM BORROWINGS
The fair values of long-term borrowings, other than
capitalized leases, are estimated using discounted cash flow analyses
based on the Corporation's incremental borrowing rate for similar
instruments. The carrying amounts of capitalized leases approximated
their fair values, because the incremental borrowing rate used in the
carrying amount calculation was at the market rate.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
Management estimated that there were no material differences
between the notional amount and the estimated fair value of those
off-balance sheet items, because they were primarily composed of
unfunded loan commitments which were generally priced at market value
at the time of funding.
At December 31, 2003 and 2002, the carrying values and
estimated fair values of financial instruments are presented in the
table below:
51
2003 2002
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
Financial Assets:
Cash and short-term investments $ 12,362,418 $ 12,362,418 $ 16,020,677 $ 16,020,677
Investment securities 62,774,590 62,774,590 53,527,510 53,527,510
Loans:
Commercial 14,686,854 $ 15,370,057 15,033,479 15,061,929
Tax-exempt 6,214,091 5,638,217 3,534,875 3,627,342
Real estate - construction 2,504,905 2,499,842 1,185,530 1,184,982
Real estate 118,772,883 118,173,859 123,745,716 124,272,112
Personal 5,406,894 5,952,930 7,901,766 7,952,022
------------- ------------- ------------- -------------
Gross loans $ 147,585,627 $ 147,634,905 $ 151,401,366 $ 152,098,387
Add (Deduct): Unearned discount (64,246) 0 (139,153) 0
Unamortized loan fees, net of costs 109,321 0 76,198 0
------------- ------------- ------------- -------------
Loans, net of unearned income $ 147,630,702 $ 147,634,905 $ 151,338,411 $ 152,098,387
Allowance for losses 1,415,431 0 1,298,406 0
------------- ------------- ------------- -------------
Net loans $ 146,215,271 $ 147,634,905 $ 150,040,005 $ 152,098,387
============= ============= ============= =============
Cash surrender value of bank owned life insurance $ 5,907,940 $ 5,907,940 $ 3,626,606 $ 3,626,606
Financial Liabilities:
Deposits:
Demand - non-interest bearing $ 17,313,192 $ 17,313,192 $ 15,238,044 $ 15,238,044
Demand - interest bearing 29,736,472 29,736,472 27,785,333 27,785,333
Savings 36,259,730 36,259,730 35,000,853 35,000,853
Time - $100,000 and over 27,931,828 28,428,248 31,190,539 31,789,269
Other time 60,544,419 61,740,215 62,912,342 64,477,628
------------- ------------- ------------- -------------
Total Deposits $ 171,785,641 $ 173,477,857 $ 172,127,111 $ 174,291,127
============= ============= ============= =============
Short-Term Borrowings $ 20,990,219 $ 20,990,219 $ 17,274,252 $ 17,274,252
Long-Term Borrowings 11,335,477 13,756,414 11,346,815 11,589,167
Off-Balance Sheet Assets (Liabilities):
Commitments to extend credit $ 13,027,609 $ 11,433,789
Standby letters of credit 1,812,748 1,842,578
Performance standby letters of credit 842,608 48,404
Dealer floor plans 1,412,279 1,393,763
52
19. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for CCFNB Bancorp, Inc. (Parent Company
only) was as follows:
December 31,
------------
2003 2002
---- ----
BALANCE SHEETS
Assets
Cash $ 367,924 $ 153,103
Investment in subsidiary 25,797,196 26,214,740
Investment in other equity securities 1,326,234 351,870
Prepayments and other assets 180,946 199,905
Receivable from subsidiary 35,181 0
----------- -----------
Total Assets $27,707,481 $26,919,618
=========== ===========
Liabilities and Stockholders' Equity
Accrued expenses and other liabilities $ 104,083 $ 59,535
Payable to subsidiary 0 20,084
----------- -----------
Total Liabilities $ 104,083 $ 79,619
----------- -----------
Stockholders' Equity
Common stock $ 1,595,556 $ 1,615,905
Surplus 3,634,608 4,008,665
Retained earnings 21,997,539 20,678,631
Accumulated other comprehensive income 375,695 536,798
----------- -----------
Total Stockholders' Equity $27,603,398 $26,839,999
----------- -----------
Total Liabilities and Stockholders' Equity $27,707,481 $26,919,618
=========== ===========
Years Ended December 31,
------------------------
2003 2002 2001
---- ---- ----
STATEMENTS OF INCOME
Income
Dividends from subsidiary bank $ 2,312,406 $ 1,470,933 $ 1,515,635
Dividends - other 23,432 10,553 8,898
Securities gains 2,804 0 0
Interest 2,597 2,489 2,917
----------- ----------- -----------
Total Income $ 2,341,239 $ 1,483,975 $ 1,527,450
Operating Expenses 80,396 72,683 90,787
----------- ----------- -----------
Income Before Taxes and Equity in Undistributed
Net Income of Subsidiary $ 2,260,843 $ 1,411,292 $ 1,436,663
Applicable income tax (benefit) (21,133) (22,758) (29,746)
----------- ----------- -----------
Income Before Equity in Undistributed Net Income
of Subsidiary and Equity in Income (Loss) from Insurance Agency $ 2,281,976 $ 1,434,050 $ 1,466,409
Equity in (Excess of) undistributed income of subsidiary (123,944) 488,130 592,094
Income (Loss) from investment in insurance agency 4,865 78 (1,916)
----------- ----------- -----------
Net Income $ 2,162,897 $ 1,922,258 $ 2,056,587
=========== =========== ===========
STATEMENTS OF CASH FLOWS
Operating Activities
Net Income $ 2,162,897 $ 1,922,258 $ 2,056,587
Adjustments to reconcile net income to net cash provided by
operating activities:
Securities Gains (2,804) 0 0
Distributions in Excess of (Equity in Undistributed)
Net Income of Subsidiary 123,944 (488,130) (592,094)
(Income) loss from investment in an insurance agency (4,865) (78) 1,916
(Increase) decrease in prepayments and other assets 23,823 (34,474) 0
(Increase) decrease in receivable from subsidiary (35,181) 77,844 103,365
Increase (decrease) in payable to subsidiary (20,084) 20,084 0
Deferred income taxed (benefit) 1,975 31 (777)
Increase (decrease) in income taxes and accrued expenses
Payable (47,963) (19,705) 38,816
----------- ----------- -----------
Net Cash Provided By Operating Activities $ 2,201,742 $ 1,477,830 $ 1,607,813
----------- ----------- ----------
Investing Activities
Purchase of equity securities $ (783,217) $ 0 $ (21,563)
Proceeds from sale of equity securities 34,691 0 0
Acquisition of interest in an insurance agency 0 0 (167,268)
----------- ----------- -----------
Net Cash Used in Investing Activities $ (748,526) $ 0 $ (188,831)
----------- ----------- -----------
Financing Activities
Acquisition of treasury stock $ (588,201) $ (940,400) $ (589,547)
Proceeds from issuance of common stock 193,795 177,253 148,293
Cash dividends (843,989) (822,598) (787,878)
----------- ----------- -----------
Net Cash (Used in) Financing Activities $(1,238,395) $(1,585,745) $(1,229,132)
----------- ----------- -----------
Increase (Decrease) in Cash and Cash Equivalents $ 214,821 $ (107,915) $ 189,850
Cash and Cash Equivalents at Beginning of Year 153,103 261,018 71,168
----------- ----------- -----------
Cash and Cash Equivalents at End of Year $ 367,924 $ 153,103 $ 261,018
=========== =========== ===========
53
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders of CCFNB Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of CCFNB Bancorp,
Inc. and Subsidiary as of December 31, 2003 and 2002, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 2003. These consolidated
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of CCFNB
Bancorp, Inc. and Subsidiary as of December 31, 2003 and 2002, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America.
/s/ J. H. Williams & Co., LLP
J. H. Williams & Co., LLP
Kingston, Pennsylvania
January 13, 2004
54
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF OUR DISCLOSURE CONTROLS AND INTERNAL CONTROLS. Within the 90-day
period prior to the date of this report on Form 10-K, we evaluated the
effectiveness of the design and operation of our "disclosure controls and
procedures" (Disclosure Controls), and our "internal controls and procedures for
financial reporting" (Internal Controls). This evaluation (the Controls
Evaluation) was done under the supervision and with the participation of
management, including our Chief Executive Officer (CEO) and Chief Financial
Officer (Treasurer). Rules adopted by the SEC require that, in this section of
this report, we present the conclusions of the CEO and the Treasurer about the
effectiveness of our Disclosure Controls and Internal Controls based on and as
of the date of the Controls Evaluation.
CEO AND CFO CERTIFICATIONS. Appearing at Exhibits 31.1, 31.2, 32.1 and 32.2 of
this report are two separate forms of "Certifications" for each of the CEO and
the Treasurer. This section of this report which you are currently reading is
the information concerning the Controls Evaluation referred to in the Section
302 Certification and this information should be read in conjunction with the
Section 302 Certification for a more complete understanding of the topics
presented.
DISCLOSURE CONTROLS AND INTERNAL CONTROLS. Disclosure Controls are procedures
that are designed with the objective of ensuring that information required to be
disclosed in our reports filed under the Securities Exchange Act of 1934
(Exchange Act), such as this report, is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules. Disclosure
Controls are also designed with the objective of ensuring that such information
is accumulated and communicated to our management, including the CEO and
Treasurer, as appropriate, to allow timely decisions regarding required
disclosure.
The Corporation has created a disclosure committee. The committee consists of
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
55
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.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
At February 28, 2004, we had nine directors.
Our directors are divided into three classes: three directors are in Class 1;
three directors are in Class 2; and three directors are in Class 3. Each
director holds office for a three-year term. The terms of the classes are
staggered, so that the term of office of one class expires each year.
The following information includes the age of each of our current directors, a
recently-resigned director, and those persons who have been nominated to become
a director upon their election at our 2004 annual meeting of stockholders. All
directors of the Corporation are also directors of the Bank.
CLASS 1 DIRECTORS WHOSE TERM EXPIRES IN 2005
ROBERT M. BREWINGTON, JR., 53
Director since 1996. Owner of Sutliff Motors and Brewington
Transportation (sales and service of cars and trucks; school bus
contractor).
WILLARD H. KILE, JR., D.M.D., 49
Director since 2000. Partner of Kile & Robinson LLC (dentists); Partner
of Kile & Kile Real Estate.
CHARLES E. LONG, 68
Director since 1993. Retired. Former President of Long Supply Co., Inc.
(a wholesaler and retailer of hardware and masonry products).
56
CLASS 2 DIRECTORS WHOSE TERM EXPIRES IN 2004 AND NOMINEES FOR CLASS 2 DIRECTORS
WHOSE TERM WILL EXPIRE IN 2007
LANCE O. DIEHL, 38
Director since 2003. President and Chief Executive Officer of the
Corporation and the bank.
WILLIAM F. HESS, 70
Director since 1983. Former Chairman of the Corporation and the bank.
Dairy farmer.
PAUL E. REICHART, 66
Director since 1983. Chairman and former Vice Chairman of the
Corporation and the bank. Former President and Chief Executive Officer
of the Corporation and the bank.
CLASS 3 DIRECTORS WHOSE TERM EXPIRES IN 2006
DON E. BANGS, 72
Director since 1985. Secretary of the Corporation and the bank. Former
owner of Bangs Insurance Agency and former agent for The Thrush
Insurance Agency.
EDWARD L. CAMPBELL, 65
Director since 1985. President of ELC Enterprises, Inc. and the sole
proprietor of Heritage Acres Christmas tree sales.
ELWOOD R. HARDING, JR., 57
Director since 1984. Vice Chairman of the Corporation and the Bank.
Attorney at law and President of Premier Real Estate Settlement
Services, Inc. (title insurance).
PRINCIPAL OFFICERS
Our principal officers are appointed by the Board of Directors and serve at the
will of the Board of Directors, subject to certain change in control agreements
discussed later in this report. The following information is presented for those
persons who were principal officers at December 31, 2003:
EMPLOYEE
NAME & POSITION HELD SINCE SINCE AGE
-------------------------------------------------------------------------------
Paul E. Reichart,
Chairman 2003 1960 66
-------------------------------------------------------------------------------
Don E. Bangs,
Secretary 1993 * 72
-------------------------------------------------------------------------------
Elwood R. Harding, Jr.,
Vice Chairman 2003 * 57
-------------------------------------------------------------------------------
Lance O. Diehl,
President and Chief Executive Officer 2003 1995 38
-------------------------------------------------------------------------------
Virginia D. Kocher
Treasurer and Assistant Secretary 1991 1972 56
-------------------------------------------------------------------------------
* Not an employee of the Company and the Bank.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Executive officers and directors and "beneficial owners" of more than ten
percent of our common stock must file initial reports of ownership and reports
of changes in ownership with the SEC pursuant to Section 16(a).
We have reviewed the reports and written representations from the executive
officers and directors. The Corporation believes that all filing requirements
were met during 2003 with the exception of the second quarter filings for Lance
O. Diehl, Robert M. Brewington, Jr. and retired Chief Operating Officer, J. Jan
Girton. These Form 4 filings were submitted via paper format rather than
electronically due to a misinterpretation of the new regulation effective on
June 30, 2003. Mr. Diehl's and Mr. Brewington's filings were corrected by
submitting them electronically on July 14, 2003. Mr. Girton's form was submitted
electronically on July 17, 2003.
57
CODE OF ETHICS
We adopted a Code of Ethics that applies to all employees, including the Chief
Executive Officer and the Chief Financial Officer. A copy of the code of Ethics
is filed as Exhibit 14 to this report.
We will provide to any person, without charge, upon request, a copy of our Code
of Ethics, by writing to Ms. Virginia D. Kocher, Vice President, Columbia County
Farmers National Bank, 232 East Street, Bloomsburg, PA 17815.
ITEM 11. EXECUTIVE COMPENSATION
This section of the report contains charts that show the amount of compensation
earned by our executive officers whose salary and bonus exceeded $100,000 for
2003. It also contains the performance graph comparing our performance relative
to a peer group and the report of our human resource committee explaining the
compensation philosophy for our most highly paid officers.
SUMMARY COMPENSATION TABLE(1)
ANNUAL COMPENSATION
-----------------------------------------------
NAME AND PRINCIPAL FISCAL OTHER ANNUAL ALL OTHER
POSITION YEAR SALARY($) BONUS($) COMPENSATION($) COMPENSATION($)
----------------------------------------------------------------------------------------------------------------
Lance O. Diehl 2003 100,000 1,883(2) 13,048(3) 13,118(4)
President and Chief 2002 72,424 2,796(5) 1,130(6) 7,779(7)
Executive Officer 2001 67,547 2,350(8) 1,048(9) 8,455(10)
----------------------------------------------------------------------------------------------------------------
(1) From January 1, 2001 through December 31, 2003, the Corporation did not
pay any long-term compensation in the form of stock options, stock
appreciation rights, restricted stock or any other long-term
compensation, nor did it make any long-term incentive plan payments.
Accordingly, no such information is presented in the summary
compensation table set forth above. No such arrangements are currently
in effect.
(2) Represents a cash bonus representing 21/2% of 2002 base salary.
(3) Includes $8,925 as the payment of directors' fees and $4,123
representing the year 2003, 100% up to 3% and 50% up to the next 2%
matching contribution to Mr. Diehl's 401K plan.
(4) Includes $11,099 as a payment for a deferred compensation plan; $711
representing car expense; $420 representing cell phone expense; $661
representing cafeteria plan benefits and $227 as annual term insurance
premium payments on the life of Mr. Diehl.
(5) Represents a cash bonus representing 4% of 2001 base salary.
(6) Represents the year 2002, 50% up to 3% matching contribution to Mr.
Diehl's 401K plan.
(7) Includes $3,411 as a contribution to the bank's profit sharing plan;
$420 representing cell phone expense; $3,680 representing cafeteria
plan benefits and $268 as annual term insurance premium payments on the
life of Mr. Diehl.
(8) Represents a cash bonus representing 31/2% of 2000 base salary.
(9) Represents the year 2001, 50% up to 3% matching contribution to Mr.
Diehl's 401K plan.
(10) Includes $3,647 as a contribution to the bank's profit sharing plan;
$420 representing cell phone expense; $4,172 representing cafeteria
plan benefits and $216 as annual term insurance premium payments on the
life of Mr. Diehl.
EXECUTIVE COMPENSATION
HUMAN RESOURCE COMMITTEE REPORT
Executive compensation for the officers of the Corporation and the bank is
determined by the Human Resource Committee of the Corporation's Board of
Directors. Salaries and bonuses for the executive officers are reviewed
annually. All executive compensation is paid by the bank to the applicable
executive.
COMPENSATION PHILOSOPHY
The Corporation's executive compensation philosophy is designed to attract,
retain, and motivate the best managerial talent available in line with three
central themes: alignment, accountability, and attraction.
- Alignment with the long-term interests of our stockholders;
- Accountability for results by linking executives to the
Corporation and individual performance; and
- Attraction, motivation and retention of critical talent.
58
The Human Resource Committee annually conducts a full review of the performance
of the Corporation and its executives in determining compensation levels. For
2003, the Human Resource Committee considered various qualitative and
quantitative indicators of the Corporation and individual performance in
determining the level of compensation for the Corporation's President and Chief
Executive Officer and its other executive officers. The review included an
evaluation of the Corporation's performance both on a short and long-term basis.
This review included an analysis of quantitative measures, such as Return on
Equity. The Human Resource Committee considered also qualitative measures such
as leadership, experience, strategic direction, community representation and
social responsibility. The Human Resource Committee has been sensitive to
management's maintaining a balance between actions that foster long-term value
creation and short-term performance. In addition, the Human Resource Committee
evaluates total executive compensation in light of the operational and financial
performance and compensation practices of the commercial banking industry in the
Pennsylvania region.
Base salaries are reviewed each year and generally adjusted relative to
individual performance and competitive salaries with the commercial banking
industry in the Pennsylvania region.
A base salary average decrease of 26.62% was made to all executives in 2003.
Actual salaries will continue to be set according to the scope of the
responsibilities of each executive officer's position.
DEFERRED COMPENSATION AGREEMENTS FOR EXECUTIVE OFFICERS
In 1992, the bank entered into agreements with two executive officers to
establish non-qualified deferred compensation plans. Each officer deferred
compensation in order to participate in this Deferred Compensation Plan. If the
officer continues to serve as an officer of the bank until he attains sixty-five
(65) years of age, the bank has agreed to pay him 120 guaranteed consecutive
monthly payments commencing on the first day of the month following the
officer's 65th birthday. Each officer's guaranteed monthly payment is based upon
the future value of life insurance purchased with the compensation the officer
has deferred. The bank has obtained life insurance (designating the bank as the
beneficiary) on the life of each participating officer in an amount which is
intended to cover the bank's obligations under the deferred compensation plan,
based upon certain actuarial assumptions.
During 2002, the agreements with the two executive officers were modified. Under
one agreement, the executive officer will receive $225,000 payable monthly over
a 10 year period commencing in February 2003. Under another agreement, another
executive officer will receive $175,000 payable monthly over a 10 year period
commencing in April 2003. This second agreement will also provide post
employment health care benefits to the executive officer until the attainment of
age 65. As of December 31, 2003 and 2002, the net cash value of insurance
policies was $318,119 and $292,515, respectively, and the total accrued
liability, equal to the present value of these obligations, was $295,674 and
$314,674, respectively, relating to these executive officers' and directors'
deferred compensation agreements, and the accrued liability related to the post
employment health care benefit was $14,336 and $14,668 as of December 31, 2003
and December 31, 2002, respectively.
In April 2003, the bank entered into non-qualified deferred compensation
agreements with three executive officers to provide supplemental retirement
benefits commencing with the executive's retirement and ending 15 years
thereafter. The deferred compensation expense related to these agreements for
the year ended December 31, 2003 and the total accrued liability as of December
31, 2003 was $55,131.
59
FIVE-YEAR PERFORMANCE GRAPH
The following graph and table compare the cumulative total stockholder return on
the Corporation's Common Stock during the five-year period ending on December
31, 2003, with (i) the cumulative total return on the SNL Securities Corporate
Performance Index (1) for 35 publicly-traded banks with under $250 million in
total assets in the United States of America, and (ii) the cumulative total
return for all United States stocks traded on the NASDAQ Stock Market. The
comparison assumes the value of the investment in the Corporation Common Stock
and each index was $100 on December 31, 1998, and assumes further the
reinvestment of dividends into the applicable securities. The stockholder return
shown on the graph and table below is not necessarily indicative of future
performance.
CCFNB BANCORP, INCORPORATED
[PERFORMANCE GRAPH]
PERIOD ENDING
---------------------------------------------------------------------
INDEX 12/31/98 12/31/99 12/31/00 12/31/01 12/31/02 12/31/03
--------------------------------------------------------------------------------------------------------------------
CCFNB Bancorp, Incorporated 100.00 79.63 67.97 97.63 104.22 125.75
NASDAQ - Total US 100.00 185.95 113.19 89.65 61.67 92.90
SNL <$250M Bank Index 100.00 87.81 86.94 108.40 133.20 201.44
SOURCE : SNL FINANCIAL LC, CHARLOTTESVILLE, VA (434) 977-1600
Notes:
A. The lines represent monthly index levels derived from compounded daily
returns that include all dividends.
B. The indexes are reweighted daily, using the market capitalization on
the previous trading day.
C. If the monthly interval, based on the fiscal year-end, is not a trading
day, the preceding day is used.
D. The index level for all series was set to $100 on 12/31/98.
(1) SNL Securities is a research and publishing firm specializing in the
collection and dissemination of data on the banking, thrift and financial
services industries.
60
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
This section describes how much stock our directors, executive officers own. It
also describes the persons or entities that own more than 5% of our voting
stock.
STOCK OWNED BY DIRECTORS, NOMINEES FOR DIRECTOR AND EXECUTIVE DIRECTORS
This table indicates the number of shares of Common Stock owned by the executive
officers and directors as of March 23, 2004. The aggregate number of shares
owned by all directors and executive officers is 4.98%. Unless otherwise noted,
each individual has sole voting and investment power for the shares indicated
below.
NAME OF INDIVIDUAL AMOUNT AND NATURE OF
OF IDENTITY OF GROUP BENEFICIAL OWNERSHIP(1) PERCENT OF CLASS
--------------------------------------------------------------------------------------------
Don E. Bangs 8,826.504 ----
--------------------------------------------------------------------------------------------
Robert M. Brewington, Jr. 8,646.589 ----
--------------------------------------------------------------------------------------------
Edward L. Campbell 6,109.820 ----
--------------------------------------------------------------------------------------------
Lance O. Diehl 544.051 ----
--------------------------------------------------------------------------------------------
Elwood R. Harding, Jr. 15,589.529 1.22%
--------------------------------------------------------------------------------------------
William F. Hess 4,660.931 ----
--------------------------------------------------------------------------------------------
Willard H. Kile, Jr. 3,632.237 ----
--------------------------------------------------------------------------------------------
Virginia D. Kocher 391.000 ----
--------------------------------------------------------------------------------------------
Charles E. Long 6,509.862 ----
--------------------------------------------------------------------------------------------
Paul E. Reichart 8,741.000 ----
--------------------------------------------------------------------------------------------
All Officers and Directors as a group
(9 directors, 3 nominees, 5 officers,
10 persons in total) 63,651.523 4.98%
--------------------------------------------------------------------------------------------
(1) Includes shares held (a) directly, (b) jointly with a spouse, (c)
individually by spouse, (d) by the transfer agent in the Corporation's
dividend reinvestment account, (e) in the 401(k) plan, and (f) in
various trusts.
VOTING STOCK OWNED BY "BENEFICIAL OWNER"
There are no persons or entities known by the Corporation to own beneficially
more than five percent of the Common Stock as of March 23, 2004.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We encourage our directors and executive officers to have banking and financial
transactions with the Bank. All of these transactions are made on comparable
terms and with similar interest rates as those prevailing for other customers.
The total consolidated loans made by the Bank at December 31, 2003, to its
directors and officers as a group, members of their immediate families and
companies in which they have a 10% or more ownership interest was $9,996,950 or
approximately 36.2% of our total consolidated capital accounts. The largest
amount for all of these loans in 2003 was $10,922,143 or approximately 39.6% of
our total consolidated capital accounts. These loans did not involve more than
the normal risk of collectibility nor did they present other unfavorable
features.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
J. H. Williams & Co., LLP, billed the Corporation $63,500, in 2003, for services
rendered for the audit of the Corporation's annual financial statements for the
year ended December 31, 2003 and the reviews of the financial statements
included in the Corporation's reports on SEC Form 10-Q for the quarters ended
March 31, June 30 and September 30, 2003.
61
AUDIT RELATED FEES
J. H. Williams & Co., LLP, billed the Corporation $9,450, in 2003, for the
performance of agreed upon procedures with respect to the trust department
($6,000) and the retail sales of non deposit investment products of the bank
($3,450).
TAX FEES
J. H. Williams & Co., LLP, billed the Corporation $5,500, in 2003, for tax
compliance, tax advice and tax planning.
ALL OTHER FEES
J. H. Williams & Co., LLP billed the Corporation $0, in 2003, for other services
rendered.
All such services that were performed by J. H. Williams & Co., LLP were done by
permanent, full-time employees and partners of such firm.
The Audit Committee considered whether the provision of the services rendered
above was compatible with maintaining the independence of J. H. Williams & Co.,
LLP as the independent outside auditors. The Audit Committee concluded that the
independence of such firm was maintained.
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Our consolidated financial statements and notes to these
statements as well as the applicable reports of the independent certified public
accountants are filed at Item 8 in this report.
2. All schedules are omitted because they are not applicable or
the required information is shown in the financial statements or notes to these
statements.
3. The exhibits required by Item 601 of Regulation S-K are
included under Item 14(c) to this report.
(b) Reports on Form 8-K
We filed no current reports on Form 8-K during the quarter ended December 31,
2003.
(c) Exhibits required by Item 601 of Regulation S-K:
Exhibit Number Referred to
Item 601 of Regulation SK Description of Exhibit
--------------------------- --------------------------------------------------
2 None.
3 None.
4 None.
9 None.
10 None.
11 None.
12 None.
14 Code of Ethics
16 None.
18 None.
21 List of Subsidiaries of the Company.
22 None.
23 None.
24 None.
31.1 CEO certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Principal Financial Officer certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 CEO certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
62
32.2 Principal Financial Officer certification pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
99A Charter of the Audit Committee as of April 30, 2003.
63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CCFNB BANCORP, INC.
(Bancorp)
By: /s/ Lance O. Diehl Date: March 11, 2004
------------------------------------------------
Lance O. Diehl
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ Don E. Bangs Date: March 11, 2004
------------------------------------------------
Don E. Bangs
Director and Secretary
By: /s/ Robert M. Brewington, Jr. Date: March 11, 2004
------------------------------------------------
Robert M. Brewington, Jr.
Director
By: /s/ Edward L. Campbell Date: March 11, 2004
------------------------------------------------
Edward L. Campbell
Director
By: /s/ Lance O. Diehl Date: March 11, 2004
------------------------------------------------
Lance O. Diehl
President, Chief Executive Officer and Director
By: /s/ Elwood R. Harding, Jr. Date: March 11, 2004
------------------------------------------------
Elwood R. Harding, Jr.
Director and Vice Chairman of the Board
By: /s/ William F. Hess Date: March 11, 2004
------------------------------------------------
William F. Hess
Director
By: /s/ Willard H. Kile, Jr., DMD Date: March 11, 2004
------------------------------------------------
Willard H. Kile, Jr., DMD
Director
64
By: /s/ Charles E. Long Date: March 11, 2004
------------------------------------------------
Charles E. Long
Director
By: /s/ Paul E. Reichart Date: March 11, 2004
------------------------------------------------
Paul E. Reichart
Director, Chairman of the Board
By: /s/ Virginia D. Kocher Date: March 11, 2004
------------------------------------------------
Virginia D. Kocher
Treasurer and Assistant Secretary
(Principal Financial and Accounting Officer)
65
INDEX TO EXHIBITS
Item Number Description Page
----------- ----------- ----
14 Code of Ethics................................................. 68
21 List of Subsidiaries of the Company............................ 73
31.1 CEO certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002..................................... 74
31.2 Principal Financial Officer certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.................. 75
32.1 CEO certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002........................................................ 76
32.2 Principal Financial Officer certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002..................................... 77
99A Charter of the Audit Committee as of April 30, 2003............ 78