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, 2005
[ ] 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 if the Registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes No X
----- -----
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
----- -----
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act. Yes No X
----- -----
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant based on the average of the bid and asked
prices of $27.75 at February 28, 2006, was $34,820,728.
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See the definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer Accelerated filer Non-accelerated filer X
--- --- ---
As of February 28, 2006, the Registrant had outstanding 1,254,801 shares of its
common stock, par value $1.25 per share.
Page 1 of 78
Exhibit Index on Page 65
CCFNB BANCORP, INC.
FORM 10-K
INDEX
Page
----
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS........................ 3
ITEM 1. BUSINESS...................................................... 3
ITEM 1A. RISK FACTORS.................................................. 11
ITEM 2. PROPERTIES.................................................... 13
ITEM 3. LEGAL PROCEEDINGS............................................. 14
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES............................. 14
ITEM 6. SELECTED FINANCIAL DATA....................................... 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............. 15
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK................................................ 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 28
ITEM 9A. CONTROLS AND PROCEDURES....................................... 51
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 52
ITEM 11. EXECUTIVE COMPENSATION........................................ 54
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS................. 59
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 59
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES........................ 59
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES..................... 61
SIGNATURES............................................................... 63
INDEX TO EXHIBITS........................................................ 65
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, 2005, we had
approximately:
- $231 million in total assets;
- $154 million in loans;
- $165 million in deposits; and
- $ 29 million in stockholders' equity.
The Bank is a national banking association and member of the Federal
Reserve System whose deposits are insured by the Bank Insurance Fund of the
FDIC. The Bank is a full-service commercial bank providing a range of services
and products, including time and demand deposit accounts, consumer, commercial
and mortgage loans to individuals and small to medium-sized businesses in its
Northcentral Pennsylvania market area. The Bank also operates a full-service
trust department. Third-party brokerage services are also resident in the Bank's
office in Lightstreet, Pennsylvania. At December 31, 2005, the Bank had 7 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 systems,
- customer bases, and
- regulatory oversight.
We have not operated any other reportable operating segments in the 3-year
period ended December 31, 2005. We have combined financial information for our
third-party brokerage operation with our financial information, because this
company does not meet the quantitative threshold for a reporting operating
segment.
We hold a 50 percent interest in a local insurance agency. The name of this
agency is Neighborhood Group, Inc. and trades under the fictitious name of
Neighborhood Advisors (insurance agency). Through this joint venture, we sell
insurance products and services. We account for this local insurance agency
using the equity method of accounting.
As of December 31, 2005, 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, 2005, approximately $5.8 million was available
for loans to us from the Bank. Section 23A of the Federal Reserve Act also
generally requires that the Bank's loans to its non-bank affiliates (including
financial subsidiaries) be secured, and Section 23B of the Federal Reserve Act
generally requires that the Bank's transactions with its non-bank affiliates
(including financial subsidiaries) be on arm's-length terms. Also, we, the Bank,
and any financial subsidiary are prohibited from engaging in certain "tie-in"
arrangements in connection with extensions of credit or provision of property or
services.
SUPERVISORY AGENCIES
As a national bank and member of the Federal Reserve System, the Bank is
subject to primary supervision, regulation, and examination by the Office of the
Comptroller of the Currency and secondary regulation by the FDIC. The Bank is
subject to extensive statutes and regulations that significantly affect its
business and activities. The Bank must file reports with its regulators
concerning its activities and financial condition and obtain regulatory approval
to enter into certain transactions. The Bank is also subject to periodic
examinations by its regulators to ascertain compliance with various regulatory
requirements. Other applicable statutes and regulations relate to insurance of
deposits, allowable investments, loans, leases, acceptance of deposits, trust
activities, mergers, consolidations, payment of dividends, capital requirements,
reserves against deposits, establishment of branches and certain other
facilities, limitations on loans to one borrower and loans to affiliated
persons, activities of subsidiaries and other aspects of the business of banks.
Recent federal legislation has instructed federal agencies to adopt standards or
guidelines governing banks' internal controls, information systems, loan
documentation, credit underwriting, interest rate exposure, asset growth,
compensation and benefits, asset quality, earnings and stock valuation, and
other matters. The federal banking agencies have great flexibility in
implementing standards on asset quality, earnings, and stock valuation.
Regulatory authorities have broad flexibility to initiate proceedings designed
to prohibit banks from engaging in unsafe and unsound banking practices.
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.
4
We are subject to the jurisdiction of the SEC for matters relating to the
offering and sale of our securities. We are also subject to the SEC's rules and
regulations relating to periodic reporting, insider trader reports and proxy
solicitation materials. Our common stock is not listed for quotation of prices
on The NASDAQ Stock Market or any other nationally-recognized stock exchange.
However, daily bid and asked price quotations are maintained on the interdealer
electronic bulletin board system.
SUPPORT OF THE BANK
Under current Federal Reserve Board policy, we are expected to act as a
source of financial and managerial strength to the Bank by standing ready to use
available resources to provide adequate capital funds to the Bank during periods
of financial adversity and by maintaining the financial flexibility and
capital-raising capacity to obtain additional resources for assisting the Bank.
The support expected by the Federal Reserve Board may be required at times when
we may not have the resources or inclination to provide it.
If a default occurred with respect to the Bank, any capital loans to the
Bank from us would be subordinate in right of payment to payment of the Bank
depositors and certain of its other obligations.
LIABILITY OF COMMONLY CONTROLLED BANKS
The Bank can be held liable for any loss incurred, or reasonably expected
to be incurred, by the FDIC in connection with:
- the default of a commonly controlled FDIC-insured depository
institution or
- any assistance provided by the FDIC to a commonly controlled
FDIC-insured depository institution in danger of default.
"Default" generally is defined as the appointment of a conservator or
receiver, and "in danger of default" generally is defined as the existence of
certain conditions indicating that a default is likely to occur in the absence
of regulatory assistance.
DEPOSITOR PREFERENCE STATUTE
In the "liquidation or other resolution" of the Bank by any receiver,
federal legislation provides that deposits and certain claims for administrative
expenses and employee compensation against the Bank are afforded a priority over
the general unsecured claims against the Bank, including federal funds and
letters of credit.
ALLOWANCE FOR LOAN LOSSES
Commercial loans and commercial real estate loans comprised 34.0 percent of
our total consolidated loans as of December 31, 2005. 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 and an increase in the provision for loan losses and loan
charge-offs.
We maintain an allowance for loan losses to absorb any loan losses based
on, 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:
5
- historical trends,
- economic conditions, and
- any known deterioration.
We use a self-correcting mechanism to reduce differences between estimated
and actual losses. We will, on an annual basis, weigh our loss experience among
the various categories and reallocate the allowance for loan losses.
For a more in-depth presentation of our allowance for loan losses and the
components of this allowance, please refer to Item 7 of this report under
Management's Discussion and Analysis of Financial Condition and Results of
Operations at "Non-Performing Assets," "Allowance for Loan Losses and Related
Provision," and "Summary of Loan Loss Experience," as well as Note 4, Item 8 to
this report.
SOURCES OF FUNDS
GENERAL. Our primary source of funds is the cash flow provided by our investing
activities, including principal and interest payments on loans and
mortgage-backed and other securities. Our other sources of funds are provided by
operating activities (primarily net income) and financing activities, including
borrowings and deposits.
DEPOSITS. We offer a variety of deposit accounts with a range of interest rates
and terms. We currently offer passbook and statement savings accounts, NOW
accounts, money market accounts, demand deposit accounts and certificates of
deposit. The flow of deposits is influenced significantly by general economic
conditions, changes in prevailing interest rates, pricing of deposits and
competition. Our deposits are primarily obtained from areas surrounding our
banking offices. We rely primarily on marketing, new products, service and
long-standing relationships with customers to attract and retain these deposits.
At December 31, 2005, our deposits totaled $165 million. Of the total deposit
balance, $10 million or 6.1 percent, represent Individual Retirement Accounts
and $26 million or 15.8 percent represent certificates of deposit in amounts of
$100,000 or more.
When we determine the levels of our deposit rates, consideration is given
to local competition, yields of U.S. Treasury securities and the rates charged
for other sources of funds. We have maintained a high level of core deposits,
which has contributed to our low cost of funds. Core deposits include savings,
money market, NOW and demand deposit accounts, which, in the aggregate,
represented 50.5 percent of total deposits at December 31, 2004 and 49.7 percent
of total deposits at December 31, 2005.
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.
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 our total risk-weighted
assets (including certain off-balance sheet items, such as unused lending
commitments and standby letters of credit), respectively. At December 31, 2005,
we met both requirements, with Tier 1 and Total Capital equal to 19.2 percent
and 20.3 percent of total risk-weighted assets.
6
The Federal Reserve Board has adopted rules to incorporate market and
interest rate risk components into their risk-based capital standards. Under
these market-risk requirements, capital will be allocated to support the amount
of market risk related to a financial institution's ongoing trading activities.
The Federal Reserve Board also requires bank holding companies to maintain
a minimum "Leverage Ratio" (Tier 1 capital to adjusted total assets) of three
percent if the bank holding company has the highest regulatory rating and meets
certain other requirements, or of three percent plus an additional cushion of at
least one to two percentage points if the bank holding company does not meet
these requirements. At December 31, 2005, our leverage ratio was 12.7 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, 2005. 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, 2005, 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, 2005, 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:
7
- 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, 2005, approximately $2,274,585 was available for payment of
dividends to us.
In addition, federal bank regulatory authorities have authority to prohibit
the Bank from engaging in an unsafe or unsound practice in conducting its
business. Depending upon the financial condition of the bank in question, the
payment of dividends could be deemed to constitute an unsafe or unsound
practice. The ability of the Bank to pay dividends in the future is currently
influenced, and could be further influenced, by bank regulatory policies and
capital guidelines.
DEPOSIT INSURANCE ASSESSMENTS
The deposits of the Bank are insured up to regulatory limits by the FDIC
and, accordingly, are subject to deposit insurance assessments to maintain the
Bank Insurance Fund ("BIF") administered by the FDIC. The FDIC has adopted
regulations establishing a permanent risk-related deposit insurance assessment
system. Under this system, the FDIC places each insured bank in one of nine risk
categories based on the bank's capitalization and supervisory evaluations
provided to the FDIC by the institution's primary federal regulator. An insured
bank's insurance assessment rate is then determined by the risk category in
which it is classified by the FDIC.
In the light of the recent favorable financial situation of the federal
deposit insurance funds and the recent low number of depository institution
failures, the annual insurance premiums on bank deposits insured by the BIF vary
between $0.00 per $100 of deposits for banks classified in the highest capital
and supervisory evaluation categories to $0.27 per $100 of deposits for banks
classified in the lowest capital and supervisory evaluation categories. BIF
assessment rates are subject to semi-annual adjustment by the FDIC within a
range of up to five basis points without public comment. The FDIC also possesses
authority to impose special assessments from time to time.
The Deposit Insurance Funds Act provides for assessments to be imposed on
insured depository institutions with respect to deposits insured by the BIF (in
addition to assessments currently imposed on depository institutions with
respect to BIF-insured deposits) to pay for the cost of Financing Corporation
("FICO") funding. The FICO assessments are adjusted periodically to reflect
changes in the assessment bases of the FDIC insurance funds and do not vary
depending upon a depository institution's capitalization or supervisory
evaluations. In 2005, the Bank paid FICO assessments of $23,091.
INTERSTATE BANKING AND BRANCHING
Bank holding companies (including bank holding companies that also are
financial holding companies) are required to obtain the prior approval of the
Federal Reserve Board before acquiring more than five percent of any class of
voting stock of any non-affiliated bank. Pursuant to the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 (the "Interstate Banking and
Branching Act"), a bank holding company may acquire banks located in states
other than its home state without regard to the permissibility of such
acquisitions under state law, but subject to any state requirement that the bank
has been organized and operating for a minimum period of time, not to exceed
fSive years, and the requirement that the bank holding company, after the
proposed acquisition, controls no more than 10.0 percent of the total amount of
deposits of insured depository institutions in the United States and no more
than 30.0 percent or such lesser or greater amount set by state law of such
deposits in that state.
Subject to certain restrictions, the Interstate Banking and Branching Act
also authorizes banks to merge across state lines to create interstate banks.
The ability of banks to acquire branch offices through purchases or openings 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 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
8
common stock of a bank holding company, such as we, or otherwise obtaining
control or a "controlling influence" over that bank holding company.
PERMITTED NON-BANKING ACTIVITIES
The Federal Reserve Board permits us or our subsidiaries to engage in
nonbanking activities that are so closely related to banking or managing or
controlling banks as to be a proper incident thereto. 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 or unsound manner. Whenever
the Federal Reserve Board believes an activity that we perform 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.
COMMUNITY REINVESTMENT ACT
The Community Reinvestment Act of 1977, as amended ("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. The Bank received a "satisfactory"
rating in its last CRA examination which was held in 2002.
FINANCIAL SERVICES MODERNIZATION
We must comply with the Gramm-Leach-Bliley Act of 1999 (the "GLB Act") in
the conduct of our operations. The GLB Act eliminates the restrictions placed on
the activities of banks and bank holding companies and creates two new
structures, financial holding companies and financial subsidiaries. We and the
Bank are now allowed to provide a wider array of financial services and products
that were reserved only for insurance companies and securities firms. In
addition, we can now affiliate with an insurance company and a securities firm.
We can elect to become 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.
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. 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.
TERRORIST ACTIVITIES
The Office of Foreign Assets Control ("OFAC") of the Department of the
Treasury has, and will, send us and our banking regulatory agencies lists of
names of persons and organizations suspected of aiding, harboring or engaging in
terrorist acts. If the Bank finds a 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 Federal Bureau of Investigation. 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
The Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism ("USA PATRIOT") Act of 2001 was
enacted by Congress as a result of the terrorist attack on the World Trade
Center on September 11, 2001. The Congress is deliberating on amendments to the
USA Patriot Act, none of these proposed amendments would have a substantial
effect on our banking operations. 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.
SUBPRIME AND PREDATORY LENDING
The Federal Reserve Board has issued regulations which implement the Home
Ownership and Equity Protection Act ("HOEPA"). This Act imposes additional
disclosure requirements and certain substantive limitations on certain mortgage
loans with
9
rates or fees above specified levels. The regulations lower the rate levels that
trigger the application of HOEPA and 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 Bank must also comply with a Pennsylvania law, Act 55 of 2001, the
Mortgage Bankers and Brokers and Consumer Equity Protection Act. This Act
addresses what is known as "predatory lending," among other things, and is
applicable to the Bank's closed-end home equity mortgage loans, involving
property located in Pennsylvania, in an amount less than $100.0 thousand made at
a "high cost," which is generally the rate and point triggers in the HOEPA.
Those HOEPA triggers are:
- An annual percentage rate exceeding 8.00 percentage points above
comparable term U.S. Treasury securities for first-lien mortgages and
10 percent for subordinate-lien mortgages; and/or
- Total points and fees payable by the consumer at or before closing
that exceed the greater of 8.0 percent of the total loan amount or
$499. The $499 is adjusted annually by the annual percentage change in
the Consumer Price Index.
SALES OF INSURANCE
Our federal banking regulatory agencies have issued consumer protection
rules with respect to the retail sale of insurance products by us, the Bank, or
a subsidiary or joint venture of us or the Bank. These rules generally cover
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, us 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.
CORPORATE GOVERNANCE
The Sarbanes-Oxley Act of 2002 ("SOX") has substantially changed the manner
in which public companies govern themselves and how the accounting profession
performs its statutorily required audit function. SOX makes structural changes
in the way public companies make disclosures and strengthens the independence of
auditors and audit committees. SOX requires direct responsibility of senior
corporate management, namely the Chief Executive Officer ("CEO") and Chief
Financial Officer ("CFO"), for establishing and maintaining an adequate internal
control structure and procedures for financial reporting and disclosure by
public companies.
Under SOX, audit committees will be primarily responsible for the
appointment, compensation and oversight of the work of their auditors. The
independence of the members of the audit committee is assured by barring members
who accept consulting fees from the company or are affiliated with the company
other than in their capacity as members of the board of directors.
SOX prohibits insider trades during pension fund blackout periods and
requires prompt disclosure of insider transactions in company stock, which must
be reported by the second business day following an insider transaction.
Furthermore, SOX established a new federal crime of securities fraud with
substantial penalties.
As a result of SOX, the costs to enhance our corporate governance regime
and financial reporting controls and procedures, was approximately $33,000 in
2005 paid to an outside consultant. In addition to these third party costs, an
extensive amount of personnel time was applied to Management of the project.
There were no costs associated with SOX in 2004.
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 census data population
10
of approximately 10,774. The Bank currently serves its market area through seven
branch offices located in Bloomsburg, Benton, Buckhorn, Lightstreet, Millville,
Orangeville and South Centre, Columbia County.
The Bank competes with other depository institutions in Columbia County.
The Bank's major competitors are: First National Bank of Berwick; PNC Bank, M &
T Bank, First Columbia Bank and Trust Company of Bloomsburg, Pennsylvania, as
well as several credit unions.
The Bank's extended market area includes the adjacent Pennsylvania counties
of Luzerne, Montour, Northumberland, Schuylkill and Sullivan.
AVAILABLE INFORMATION
We file reports, proxy, information statements and other information
electronically with the SEC through the Electronic Data Gathering Analysis and
Retrieval filing system. You may read and copy any materials that we file with
the SEC at the SEC's Public Reference Room located at 450 5th Street, N.W.,
Washington, DC 20549. You can obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an
Internet site that contains reports, proxy and information statements and other
information regarding issuers that file electronically with the SEC. The SEC's
website address is http://www.sec.gov. Our website address is
http://www.ccfnb.com. Copies of our Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act, as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the SEC may be obtained without charge by
writing to CCFNB Bancorp, Inc., 232 East Street, Bloomsburg, PA 17815; Attn: Ms.
Virginia D. Kocher, Treasurer.
ITEM 1A. RISK FACTORS
ADVERSE CHANGES IN THE ECONOMIC CONDITIONS IN OUR MARKET AREA COULD MATERIALLY
AND NEGATIVELY AFFECT OUR BUSINESS.
Substantially all of our business is with consumers and small to mid-sized
companies located within Columbia, Luzerne and Montour Counties, Pennsylvania.
Our business is directly impacted by factors such as economic, political and
market conditions, broad trends in industry and finance, legislative and
regulatory changes, changes in government monetary and fiscal policies and
inflation, all of which are beyond our control. A deterioration in economic
conditions, whether caused by national or local concerns, in particular an
economic slowdown in northcentral Pennsylvania, could result in the following
consequences, any of which could materially harm our business:
- customers' credit quality may deteriorate;
- loan delinquencies may increase;
- problem assets and foreclosures may increase;
- demand for our products and services may decrease;
- competition for low cost or non-interest bearing deposits may
increase; and
- collateral securing loans may decline in value.
COMPETITIVE PRESSURES FROM FINANCIAL SERVICES COMPANIES AND OTHER COMPANIES
OFFERING BANKING SERVICES COULD NEGATIVELY IMPACT OUR BUSINESS.
We conduct banking operations primarily in northcentral Pennsylvania.
Increased competition in the Bank's market may result in reduced loans and
deposits, high customer turnover, and lower net interest rate margins.
Ultimately, the Bank may not be able to compete successfully against current and
future competitors. Many competitors in the Bank's market area, including
regional banks, other community-focused depository institutions and credit
unions, offer the same banking services as the Bank offers. The Bank also faces
competition from many other types of financial institutions, including without
limitation, finance companies, brokerage firms, insurance companies, mortgage
banks and other financial intermediaries. These competitors often have greater
resources affording them the competitive advantage of maintaining numerous
retail locations and ATMs and conducting extensive promotional and advertising
campaigns. Moreover, our credit union competitors pay no corporate taxes and
can, therefore, more aggressively price many products and services.
CHANGES IN INTEREST RATES COULD REDUCE OUR INCOME AND CASH FLOWS.
The Bank's income and cash flows and the value of its assets and
liabilities depend to a great extent on the difference between the income earned
on interest-earning assets such as loans and investment securities, and the
interest expense paid on interest-bearing liabilities such as deposits and
borrowings. These rates are highly sensitive to many factors which are beyond
our control, including general economic conditions and policies of various
governmental and regulatory agencies, in particular, the Federal Reserve Board.
11
Changes in monetary policy, including changes in interest rates, will influence
the origination of loans and investment securities and the amounts paid on
deposits. If the rates of interest the Bank pays on its deposits and other
borrowings increases more than the rates of interest the Bank earns on its loans
and other investments, the Bank's net interest income, and therefore our
earnings, could be adversely affected. The Bank's earnings could also be
adversely affected if the rates on its loans or other investments fall more
quickly than those on its deposits and other borrowings.
SIGNIFICANT INCREASES IN INTEREST RATES MAY AFFECT CUSTOMER LOAN DEMAND AND
PAYMENT HABITS.
Significant increases in market interest rates, or the perception that an
increase may occur, could adversely impact the Bank's ability to generate new
loans. An increase in market interest rates may also adversely impact the
ability of adjustable rate borrowers to meet repayment obligations, thereby
causing nonperforming loans and loan charge-offs to increase in these mortgage
products.
IF THE BANK'S LOAN GROWTH EXCEEDS THAT OF ITS DEPOSIT GROWTH, THEN THE BANK MAY
BE REQUIRED TO OBTAIN HIGHER COST SOURCES OF FUNDS.
Our growth strategy depends upon generating an increasing level of loans at
the Bank while maintaining a low level of loan losses for the Bank. As the
Bank's loans grow, it is necessary for the Bank's deposits to grow at a
comparable pace in order to avoid the need for the Bank to obtain other sources
of loan funds at higher costs. If the Bank's loan growth exceeds the deposit
growth, the Bank may have to obtain other sources of funds at higher costs.
IF THE BANK'S ALLOWANCE FOR LOAN LOSSES IS NOT ADEQUATE TO COVER ACTUAL LOAN
LOSSES, ITS EARNINGS MAY DECLINE.
The Bank maintains an allowance for loan losses to provide for loan
defaults and other classified loans due to unfavorable characteristics. The
Bank's allowance for loan losses may not be adequate to cover actual loan
losses, and future provisions for loan losses could materially and adversely
affect our operating results. The Bank's allowance for loan loss is based on
prior experience, as well as an evaluation of risks in the current portfolio.
The amount of future losses is susceptible to changes in economic, operating and
other conditions, including changes in interest rates, change in borrowers'
creditworthiness, and the value of collateral securing loans and leases that may
be beyond the Bank's control, and these losses may exceed our current estimates.
The OCC (Office of the Comptroller of the Currency) reviews the Bank's loans and
allowance for loan losses and may require the Bank to increase its allowance.
While we believe that the Bank's allowance for loan losses is adequate to cover
current losses, we cannot assure that the Bank will not further increase the
allowance for loan losses or that the OCC will not require the Bank to increase
the allowance. Either of these occurrences could materially affect our earnings.
ADVERSE CHANGES IN THE MARKET VALUE OF SECURITIES AND INVESTMENTS THAT WE MANAGE
FOR OTHERS MAY NEGATIVELY IMPACT THE GROWTH LEVEL OF THE BANK'S NON-INTEREST
INCOME.
Our company provides a broad range of trust and investment management
services for estates, trusts, agency accounts, and individual and employer
sponsored retirement plans. The market value of the securities and investments
managed by the Bank may decline due to factors outside the Bank's control. Any
such adverse changes in the market value of the securities and investments could
negatively impact the growth of the non-interest income generated from providing
these services.
THE BANK'S BRANCH LOCATIONS MAY BE NEGATIVELY AFFECTED BY CHANGES IN
DEMOGRAPHICS.
We and the Bank have strategically selected locations for bank branches
based upon regional demographics. Any changes in regional demographics may
impact the Bank's ability to reach or maintain profitability at its branch
locations. Changes in regional demographics may also affect the perceived
benefits of certain branch locations and management may be required to reduce
the number of locations of its branches.
12
CHANGES IN THE REGULATORY ENVIRONMENT MAY ADVERSELY AFFECT THE BANK'S BUSINESS.
The banking industry is highly regulated and the Bank is subject to
extensive state and federal regulation, supervision, and legislation. The Bank
is subject to regulation and supervision by the Board of Governors of the
Federal Reserve System, the Office of the Comptroller of the Currency, and the
Securities and Exchange Commission. These laws and regulations may change from
time to time and may limit our ability to offer new products and services,
obtain financing, attract deposits, and originate loans. Any changes to these
laws and regulations may adversely affect loan demand, credit quality, consumer
spending and saving habits, interest rate margins, FDIC assessments, and
operating expenses. Therefore, our results of operations and financial condition
may be materially negatively impacted by such changes.
TRAINING AND TECHNOLOGY COSTS, AS WELL AS PRODUCT DEVELOPMENT AND OPERATING
COSTS, MAY EXCEED OUR EXPECTATIONS AND NEGATIVELY IMPACT OUR PROFITABILITY.
The financial services industry is constantly undergoing technological
changes in the types of products and services provided to customers to enhance
customer convenience. Our future success will depend upon our ability to address
the changing technological needs of our customers. We have invested a
substantial amount of resources to update our technology and train the
management team. This investment in technology and training seeks to increase
efficiency in the management team's performance and improve accessibility to
customers. We are also investing in the expansion of bank branches, improvement
of operating systems, and the development of new marketing initiatives. The
costs of implementing the technology, training, product development, and
marketing costs may exceed our expectations and negatively impact our results of
operations and profitability.
IF WE FAIL TO MAINTAIN AN EFFECTIVE SYSTEM OF INTERNAL CONTROLS, WE MAY NOT BE
ABLE TO ACCURATELY REPORT OUR FINANCIAL RESULTS OR PREVENT FRAUD.
If we fail to maintain an effective system of internal controls; fail to
correct any issues in the design or operating effectiveness of internal controls
over financial reporting; or fail to prevent fraud, our shareholders could lose
confidence in our financial reporting, which could harm our business and the
trading price of our common stock.
THE LOSS OF ONE OR MORE OF OUR KEY PERSONNEL MAY MATERIALLY AND ADVERSELY AFFECT
OUR PROSPECTS.
We depend on the services of our President and Chief Executive Officer,
Lance O. Diehl, and a number of other key management personnel. The loss of Mr.
Diehl's services or that of other key personnel could materially and adversely
affect our results of operations and financial condition. Our success also
depends, in part, on our ability to attract and retain additional qualified
management personnel. Competition for such personnel is strong in the banking
industry and we may not be successful in attracting or retaining such personnel
due to our geographic location and prevailing salary levels in our market area.
ITEM 2. PROPERTIES
Our corporate headquarters are located at 232 East Street, Bloomsburg,
Pennsylvania. We own this facility which has approximately 11,686 square feet.
The Bank's legal or registered office is also at 232 East Street, Bloomsburg,
Pennsylvania. Our remaining banking centers are described as follows: We own all
of the banking centers except Buckhorn, which we lease. The Buckhorn banking
center is under a five year lease, begun in 2003, with two 5 year options with
Wal-Mart.
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, Financial Planning and
Operations
Millville, PA 2,520 Banking Services
Buckhorn, PA 693 Banking Services (In Wal-Mart
Supercenter)
Berwick, PA 2,240 Future Banking Services
We consider our facilities to be suitable and adequate for our current and
immediate future purposes.
13
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, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
We had 772 stockholders of record not including individual participants in
security position listings and 1,254,801 shares of common stock, par value of
$1.25 per share, the only authorized class of common stock, outstanding as of
February 28, 2006. Our common stock trades under the symbol "CCFN." As of
February 28, 2006, 5 firms were identified on the interdealer electronic
bulletin board system as market makers in our common stock. The following
information is reported by one of our market makers: Ferris, Baker Watts, Inc.,
Baltimore, MD. These quotations represent prices between buyers and sellers and
do not include retail makeup, markdown or commission. They may not necessarily
represent actual transactions. The high and low closing sale prices and
dividends per share of our common stock for the four quarters of 2005 and 2004
are summarized in the following table.
Dividends
2005: High ($) Low ($) Declared ($)
----- -------- ------- ------------
First quarter 27.50 27.05 .18
Second quarter 28.10 27.15 .18
Third quarter 27.75 29.75 .19
Fourth quarter 27.75 29.00 .19
Dividends
2004: High ($) Low ($) Declared ($)
----- -------- ------- ------------
First quarter 29.50 28.00 .17
Second quarter 29.00 26.50 .17
Third quarter 31.25 27.50 .18
Fourth quarter 31.00 27.10 .18
We have paid cash dividends since 1983. It is our present intention to
continue the dividend payment policy, although the payment of future dividends
must necessarily depend upon earnings, financial position, appropriate
restrictions under applicable law and other factors relevant at the time the
Board of Directors considers any declaration of dividends.
The following table presents information on the shares of our common stock
that we repurchased during the fourth quarter of 2005:
NUMBER OF
SHARES NUMBER OF
PURCHASED AS SHARES THAT
PRICE PART OF MAY YET BE
CCFNB BANCORP, INC. NUMBER OF PAID PUBLICLY PURCHASED
ISSUER PURCHASES OF EQUITY SECURITIES SHARES PER ANNOUNCED UNDER THE
MONTH PURCHASED SHARE PROGRAM PROGRAM
------------------------------------- --------- ------ ------------ ----------
10/24/05-10/24/05 2,000 $28.25 2,000 68,000
11/04/05-11/04/05 2,000 $28.75 2,000 66,000
12/06/05-12/06/05 2,000 $28.00 2,000 64,000
TOTAL 6,000 6,000
14
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) 2005 2004 2003 2002 2001
---------- ---------- ---------- ---------- ----------
INCOME STATEMENT DATA:
Total interest income $ 11,442 $ 10,843 $ 11,221 $ 12,780 $ 13,720
Total interest expense 4,131 3,669 4,366 5,741 6,924
---------- ---------- ---------- ---------- ----------
Net interest income 7,311 7,174 6,855 7,039 6,796
Provision for possible loan losses 90 140 200 309 163
Other operating income 1,713 1,530 1,508 1,210 1,149
Other operating expenses 6,077 5,746 5,409 5,479 5,104
Federal income taxes 631 601 591 539 621
---------- ---------- ---------- ---------- ----------
Net income $ 2,226 $ 2,217 $ 2,163 $ 1,922 $ 2,057
PER SHARE DATA:
Earnings per share (1) $ 1.76 $ 1.74 $ 1.69 $ 1.47 $ 1.54
Cash dividends declared per share .74 0.70 0.66 0.63 0.59
Book value per share 23.06 22.49 21.63 20.76 19.64
Average shares outstanding 1,262,171 1,274,034 1,281,265 1,309,084 1,338,007
BALANCE SHEET DATA:
Total assets $ 231,218 $ 235,377 $ 232,914 $ 229,032 $ 214,238
Total loans 154,271 149,900 147,631 151,338 142,990
Total securities 53,919 61,834 62,775 53,538 57,121
Total deposits 164,847 172,487 171,786 172,127 155,666
FHLB advances - long - term 11,311 11,323 11,335 11,347 11,357
Total stockholders' equity 29,012 28,506 27,603 26,840 26,042
PERFORMANCE RATIOS:
Return of average assets 0.97% 0.96% 0.94% 0.86% 0.99%
Return on average stockholders' equity 7.73% 7.88% 7.95% 7.22% 7.92%
Net interest margin (2) 3.63% 3.54% 3.39% 3.58% 3.68%
Total non-interest expense as a percentage of average
assets 2.64% 2.45% 2.34% 2.45% 2.45%
ASSET QUALITY RATIOS:
Allowance for possible loan losses as a percentage of
loans, net 1.02% 0.93% 0.96% 0.87% 0.72%
Allowance for possible loan losses as a percentage of
non-performing loans (3) 185.54% 110.37% 52.29% 57.95% 60.54%
Non-performing loans as a percentage of total loans,
net (3) 0.55% 0.85% 1.85% 1.49% 1.19%
Non-performing assets as a percentage of total assets (3) 0.36% 0.54% 1.16% 0.98% 0.79%
Net charge-offs as a percentage of average net loans (4) (0.05%) 0.11% 0.06% 0.03% 0.10%
LIQUIDITY AND CAPITAL RATIOS:
Equity to assets 12.55% 12.11% 11.85% 11.72% 12.16%
Tier 1 capital to risk-weighted assets (5) 19.24% 19.27% 18.82% 20.36% 19.06%
Leverage ratios (5)(6) 12.74% 12.17% 11.79% 11.77% 12.44%
Total capital to risk-weighted assets (5) 20.32% 20.31% 19.88% 18.53% 19.82%
Dividend payout ratio 41.92% 40.19% 39.02% 42.86% 38.31%
----------
(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.
15
RESULTS OF OPERATIONS
Our net income increased by .41 percent from $2,217,000 in 2004 to
$2,226,000 in 2005. Earnings per share increased by 1.15 percent from $1.74 in
2004 to $1.76 in 2005. Our return on average assets (ROAA) increased to 0.97
percent in 2005, compared to 0.96 percent in 2004. Our return on average equity
(ROAE) decreased to 7.73 percent in 2005, compared to 7.88 percent in 2004.
Loans increased by 2.92 percent in 2005 to $154,271,000 from $149,900,000
in 2004. This increase was in the real estate area.
We instituted, in 1995, a dividend reinvestment plan and an employees stock
purchase plan. Moreover, in 1999, we commenced a strategy to purchase and cancel
up to 10 percent of our outstanding shares of common stock through open market
purchases. In 2003, we again filed with the SEC to purchase up to 100,000 shares
of our outstanding shares. These repurchase programs resulted in the purchase
and cancellation of the following numbers of shares of our common stock for the
years indicated: 18,000 shares (2005); 16,000 shares (2004); and 23,988 shares
(2003). The net effect of the stock plans and the repurchase program resulted in
weighted average shares of common stock outstanding as follows: 1,262,171
(2005); 1,274,034 (2004); and 1,281,265 (2003).
Tax-equivalent net interest income increased 1.32 percent to $7.7 million
in 2005 from $7.6 million in 2004. Average earning assets were $213.0 million in
2005 and $215.1 million in 2004. Net interest income increased 1.39 percent from
$7.2 million in 2004 to $7.3 million in 2005. This increase in net interest
income is a result of the pricing and mix of our loans and deposits.
TABLE OF NON-INTEREST INCOME
(Dollars in Thousands)
Years Ended December 31,
------------------------
2005 2004 2003
------ ------ ------
Service charges and fees $ 828 $ 711 $ 572
Gain on sale of loans 40 36 190
Bank-owned life insurance income 247 257 247
Trust department income 157 165 148
Investment securities gains - net 34 3 8
Other 407 358 343
------ ------ ------
Total non-interest income $1,713 $1,530 $1,508
====== ====== ======
Total non-interest income increased during 2005 from $1,530,000 in 2004 to
$1,713,000 in 2005. The decrease in Trust income in the amount of $8,000 was
primarily due to accounts closed in 2005 and market valuations in 2005. Gain on
sale of investment securities increased from $3,000 in 2004 to $34,000 in 2005.
Service fees and charges increased from $711,000 in 2004 to $828,000 in 2005 or
16.46 percent. "Overdraft Privilege" was instrumental in this increase. Other
income increased 13.69 percent from $358,000 in 2004 to $407,000 in 2005, partly
attributable to fees collected for prepayment of loans. Gain on sale of loans
increased from $36,000 in 2004 to $40,000 in 2005. Bank-owned life insurance
income reflected a decrease of $10,000 from $257,000 in 2004 to $247,000 in
2005.
TABLE OF OTHER NON-INTEREST EXPENSE
(Dollars in Thousands)
Years Ended December 31,
------------------------
2005 2004 2003
------ ------ ------
Salaries and wages $2,324 $2,289 $2,199
Employee benefits 791 773 746
Net occupancy expense 457 394 379
Furniture and equipment expense 518 475 476
State shares tax 282 274 275
Professional services 226 228 224
Director's fees 190 147 141
Stationery and supplies 130 136 116
Other expense 1,160 1,030 853
------ ------ ------
Total non-interest expense $6,078 $5,746 $5,409
====== ====== ======
Total non-interest expense increased to $6,078,000 in 2005 from $5,746,000
in 2004 or an increase of 5.78 percent. A 1.73 percent increase in salaries and
benefits was attributable to normal merit and cost of living increases as well
as increased health insurance costs. Furniture and equipment expense increased
from $475,000 in 2004 to $518,000 in 2005. Net occupancy expense increased
$63,000 from $394,000 in 2004 to $457,000 in 2005 or 15.99 percent. State shares
tax increased $8,000 for 2005 as compared to 2004. Other expenses increased
12.62 percent from $1,030,000 in 2004 to $1,160,000 in 2005. Components
comprising some of the major changes were as follows:
16
Years Ended December 31,
---------------------------
% of
2005 2004 Inc/Dec
------- ------- -------
ATM Expense 138,432 119,675 15.67%
Sarbanes-Oxley (SOX 404) 32,997 0 100.00%
Overdraft Privilege Program Consulting 36,246 24,178 49.91%
Federal Reserve Cost 62,046 48,852 27.01%
ATM Commission 13,648 1,466 830.97%
Directors Fees 171,800 130,150 32.00%
The SOX 404 requirement has been delayed to December 31, 2007. We expect no
SOX 404 expenses in 2006 other than employee time commitment. The Chairman of
the Board received increased Directors Fees in lieu of salary beginning in 2005.
The addition of a new ATM at our Buckhorn branch was responsible for the two ATM
related expense increases. The move from DOS based Fedline to Internet based
Fedline for wire transfer was primarily responsible for the increased Federal
Reserve Costs. The Consulting for the Overdraft Privilege Program is complete;
accordingly, there will be no consulting expense after 2005.
One standard to measure non-interest expense is to express non-interest
expense as a percentage of average total assets. In 2005, this percentage was
2.64 percent compared to 2.45 percent in 2004.
Loan delinquencies increased 17.86 percent from $1,753,000 in 2004 to
$2,066,000 in 2005. The increase in these delinquencies was attributed to 30 -
89 day past dues, mainly in the real estate area. Our management has been
diligent in its efforts to reduce these delinquencies and has increased
monitoring and review of current loans to foresee future delinquency occurrences
and react to them quickly. The Bank has also implemented a centralized credit
analysis department to better analyze new loan requests. The provision for loan
losses for 2005 decreased from $140,000 in 2004 to $90,000 in 2005, although the
allowance for loan losses as a percentage of loans increased to 1.02 percent
from .93 percent.
NET INTEREST INCOME
Tax-equivalent net interest income for 2005 equaled $7,722,000 compared to
$7,605,000 in 2004, an increase of 1.54 percent. The increase in the overall net
interest margin from 3.54 percent in 2004 to 3.63 percent in 2005 is a result of
interest rate changes in the loan and deposit areas. These rates were diligently
watched and adjusted which contributed to the overall increased performance of
the Bank. Income received on interest bearing deposits with other financial
institutions increased from an average of 1.10 percent for 2004 to an average of
3.13 percent for 2005. This 203 basis point increase reflects the increased
short term rates by year-end 2005. The cost of long-term debt averaged 5.99
percent for the year which will continue to have a negative impact on our net
interest margin until rates would rise enough to allow us to pay off this debt.
We will continue to use the following strategies to mitigate this period of
pressure on our net interest margin: pricing of deposits will continue to be
monitored to meet current market conditions, large deposits over $100,000 will
continue to be priced conservatively; and in this low interest rate environment,
the majority of new investments will be kept short term in anticipation of
rising rates.
TAX-EQUIVALENT NET INTEREST INCOME
(Dollars in Thousands)
Years Ended December 31,
---------------------------
2005 2004 2003
------- ------- -------
Interest income $11,442 $10,843 $11,221
Interest expense 4,131 3,669 4,366
------- ------- -------
Net interest income 7,311 7,174 6,855
------- ------- -------
Tax-equivalent adjustment 411 431 427
------- ------- -------
Net interest income (fully taxable equivalent) $ 7,722 $ 7,605 $ 7,282
======= ======= =======
17
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 2005, 2004 and 2003.
AVERAGE BALANCE SHEET AND RATE ANALYSIS
THREE YEARS ENDED DECEMBER 31,
(Dollars in thousands)
2005 2004 2003
----------------------------- ---------------------------- ----------------------------
Average Interest Interest Average Interest Average
Balance Inc./Exp Average Inc./Exp Yd/Rate Average Inc./Exp Yd/Rate Average
(1) (2) Balance (1) (2) Yd/Rate (1) (2) Yd/Rate
-------- -------- ------- -------- ------- ------- -------- ------- -------
ASSETS:
Interest Bearing Deposits With Other
Financial Institutions $ 1,694 $ 53 3.13% $ 4,652 $ 51 1.10% $ 4,865 $ 48 0.99%
-------- ------- -------- ------- -------- -------
Investment Securities:
Taxable 46,859 1,588 3.39% 52,428 1,580 3.01% 44,833 1,314 2.93%
State and Municipal Obligations (3) 8,084 363 6.80% 9,571 450 7.12% 13,046 609 6.96%
-------- ------- -------- ------- -------- -------
Total Investment Securities $ 54,943 $ 1,951 3.89% $ 61,999 $ 2,030 3.63% $ 57,879 $ 1,923 4.35%
-------- ------- -------- ------- -------- -------
Federal Funds Sold 5,809 190 3.27% 1,053 16 1.52% 3,911 43 1.10%
-------- ------- -------- ------- -------- -------
Loans:
Taxable 140,388 8,812 6.28% $139,086 8,360 6.01% 144,004 8,987 6.24%
Tax Free (3) 9,677 436 6.83% 8,262 386 7.08% 4,340 220 7.66%
-------- ------- -------- ------- -------- -------
Total Loans $150,065 $ 9,248 6.31% $147,348 $ 8,746 6.27% $148,344 $ 9,207 6.28%
-------- ------- -------- ------- -------- -------
Total Interest-Earning Assets 212,511 11,442 5.58% $215,052 $10,843 $5.24% $214,999 $11,221 5.42%
-------- ------- ---- -------- ------- ----- -------- -------
Reserve for Loan Losses ($1,470) (1,405) (1,390)
Cash and Due from Banks 4,708 4,912 9,682
Other Assets 14,332 12,888 7,628
-------- -------- --------
Total Assets $230,081 $231,447 $230,919
LIABILITIES AND CAPITAL:
Total Interest-Bearing Deposits $150,289 2,830 1.88% $154,840 $ 2,684 1.73% $156,645 $ 3,401 2.17%
U.S. Treasury Short-Term Borrowings 296 9 3.04% 296 3 1.01% 351 3 0.85%
Long-Term Borrowings 11,317 678 5.99% 11,343 681 6.00% 11,341 679 5.99%
Repurchase Agreements 20,640 614 2.97% 18,184 301 1.66% 16,767 283 1.69%
-------- ------- -------- ------- -------- -------
Total Interest-Bearing Liabilities $182,542 $ 4,131 2.26% $184,663 $ 3,669 1.99% $185,104 $ 4,366 2.36%
-------- ------- -------- ------- -------- -------
Demand Deposits $ 17,523 17,188 15,977
Other Liabilities 1,227 1,460 2,625
Stockholders' Equity 28,789 28,136 27,213
-------- -------- --------
Total Liabilities and Capital $230,081 $231,447 $230,919
======== ======== ========
NET INTEREST INCOME/NET INTEREST
MARGIN (4) $ 7,311 3.44% $ 7,174 3.34% $ 6,855 3.19%
======= ==== ======= ===== ======= ====
TAX-EQUIVALENT NET INTEREST INCOME/NET
INTEREST MARGIN (5) $ 7,772 3.63% $ 7,605 3.54% $ 7,282 3.39%
======= ==== ======= ===== ======= ====
(1) Average volume information was compared using daily (or monthly) averages
for interest earning and bearing accounts. Certain balance sheet items
utilized quarter end balances for averages. Due to the availability of
certain daily and monthly average balance information, certain
reclassifications were made to prior period amounts.
(2) Interest on loans includes fee income.
(3) Yield on tax-exempt obligations has been computed on a tax-equivalent
basis.
(4) Net interest margin is computed by dividing net interest income by total
interest-earning assets.
(5) Interest and yield are presented on a tax-equivalent basis using 34 percent
for 2005, 2004 & 2003.
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 2005 versus 2004, 2004 versus 2003, and
2003 versus 2002:
18
TABLE OF NET INTEREST INCOME COMPONENTS ON A TAX-EQUIVALENT BASIS
For the twelve months ended December 31, 2005
(Dollars in thousands)
2005 Versus 2004 2004 Versus 2003 2003 Versus 2002
--------------------------- --------------------------- ---------------------------
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 $ (33) $ 94 $ 61 $ (2) $ 5 $ 3 $ 7 $ (22) $ (15)
Taxable Securities (168) 199 31 223 36 259 308 (649) (341)
State and Municipal Obligations (106) (31) (137) (242) 21 (221) (280) (31) (311)
Federal Funds Sold 72 18 90 (95) (71) (166) 14 52 66
Taxable Loans 78 376 454 (307) (331) (638) (47) (940) (987)
Tax Free Loans 100 (21) 79 300 (25) 275 120 (13) 107
----- ---- ----- ----- ----- ----- ----- ------- -------
Total Earning Assets (57) 635 578 $(123) $(365) $(488) $ 122 $(1,603) $(1,481)
----- ---- ----- ----- ----- ----- ----- ------- -------
Interest Expense:
Total Interest-Bearing Deposits (79) 232 153 $ (39) $(689) $(728) $ 239 $(1,491) $(1,252)
U.S. Treasury - Short-Term Borrowings 0 6 6 0 1 1 (2) (2) (4)
Long-Term Borrowings (2) (1) (3) 0 1 1 (1) 0 (1)
Repurchase Agreements 41 238 279 24 (5) 19 (9) (40) (49)
----- ---- ----- ----- ----- ----- ----- ------- -------
Total Interest-Bearing Deposits $ (40) $475 $ 435 $ (15) $(692) $(707) $ 227 $(1,533) $(1,306)
----- ---- ----- ----- ----- ----- ----- ------- -------
NET INTEREST INCOME $ (17) $160 $ 143 $(108) $ 327 $ 219 $(105) $ (70) $ (175)
===== ==== ===== ===== ===== ===== ===== ======= =======
FINANCIAL CONDITION
Our consolidated assets at December 31, 2005 were $231.2 million which
represented a decrease of $4.2 million or 1.78 percent over $235.4 million at
December 31, 2004. The comparable increase for 2004 over 2003 was 1.07 percent
or $2.5 million.
Capital increased 1.75 percent from $28.5 million in 2004 to $29.0 million
in 2005. The net adjustment reflected in stockholders' equity for the fair
market value of securities was a negative $303,000 for 2005 compared to a
positive $213,000 for 2004. Common stock and surplus decreased a net $270,000
resulting from purchase and retirement of stock in the amount of $506,000 and
stock issued under our stock plans in the amount of $236,000.
Total average assets decreased .56 percent from 2004 at $231.4 million to
2005 at $230.1 million. Average earning assets were $215.1 million in 2004 and
$212.5 million in 2005.
Loans increased 2.94 percent from $149.9 million at December 31, 2004 to
$154.3 million at December 31, 2005.
Non-interest bearing deposits decreased 2.67 percent to $18.2 million at
December 31, 2005 from $18.7 million at December 31, 2004. Interest bearing
deposits decreased 4.68 percent from $153.8 million in 2004 to $146.6 million in
2005.
The loan-to-deposit ratio is a key measurement of liquidity. Our
loan-to-deposit ratio increased during 2005 to 93.63 percent compared to 86.90
percent during 2004.
It is our opinion that the balance sheet mix and the interest rate risk
associated with the balance sheet is within manageable parameters. Constant
monitoring using asset/liability reports and interest rate risk scenarios are in
place along with quarterly asset/liability management meetings on the committee
level by the Bank's Board of Directors. Additionally, the Bank's Asset/Liability
Committee meets quarterly with an investment consultant.
INVESTMENTS
(Dollars in thousands)
2005 2004 2003
------- ------- -------
Federal Agency Obligations $21,157 $18,135 $16,002
Mortgage-backed Securities 22,564 32,021 33,338
Obligations of State and Political Subdivisions 7,782 8,930 10,773
Marketable Equity Securities 1,265 1,378 1,341
Restricted Equity Securities 1,151 1,370 1,321
------- ------- -------
Total Investment Securities $53,919 $61,834 $62,775
======= ======= =======
19
All of our securities are available-for sale and are carried at estimated
fair value. The following table sets forth the estimated maturity distribution
of the investments, the weighted average yield for each type and ranges of
maturity at December 31, 2005. Yields are presented on a tax-equivalent basis,
are based upon carrying value and are weighted for the scheduled maturity. At
December 31, 2005, our investment securities portfolio had an average maturity
of approximately 3.79 years.
(Dollars in Thousands)
------------------------------------------------------------------------------------
After One After Five
Year But Years But
Within Within Within After
One Year Five Years Ten Years Ten Years Total
-------------- --------------- -------------- -------------- ---------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------- ----- ------ ----- ------ ----- ------- -----
Federal Agency Obligations $3,781 2.64% $36,702 3.77% $3,237 7.72% $ 0 0.00% $43,720 4.00%
Obligations of State and
Political Subdivisions 0 0.00% 0 0.00% 4,791 7.11% 2,992 6.04% 7,783 6.93%
Marketable Equity Securities 0 0.00% 0 0.00% 0 0.00% 1,265 3.15% 1,265 3.15%
Restricted Equity Securities 0 0.00% 0 0.00% 0 0.00% 1,151 3.38% 1,151 3.38%
------ ------- ------ ------ -------
Total $3,781 2.64% $36,702 3.77% $8,028 7.65% $5,408 4.91% $53,919 4.20%
====== ======= ====== ====== =======
Available-for-sale securities are reported on the balance sheet at fair
value. An adjustment to capital, net of deferred taxes, is the offset for this
entry. The possibility of material price volatility in a changing interest rate
environment is offset by the availability to us of restructuring the portfolio
for gap positioning at any time through the securities classed as
available-for-sale. The impact of the fair value accounting was an unrealized
loss, net of tax, on December 31, 2005 of $303,000 compared to an unrealized
gain, net of tax, on December 31, 2004 of $213,000.
The mix of securities in the portfolio at December 31, 2005 was 81.1
percent Federal Agency Obligations, 14.4 percent Municipal Securities, and 4.5
percent Other. We do not engage in derivative investment products.
LOANS
LOAN PORTFOLIO
LOANS OUTSTANDING
(Dollars in thousands)
2005 2004 2003 2002 2001
--------- -------- -------- -------- --------
Commercial $ 12,097 $ 12,182 $ 15,328 $ 15,033 $ 13,091
Tax-Exempt 9,019 10,062 6,214 3,535 1,947
Real Estate - Construction 1,548 734 2,505 1,185 2,538
Real Estate 127,170 122,104 118,129 123,746 115,716
Personal 4,348 4,738 5,410 7,902 9,962
-------- -------- -------- -------- --------
Total Gross Loans $154,182 $149,820 $147,586 $151,401 $143,254
Add (Deduct) Unearned discount (30) (46) (64) (139) (279)
Unamortized loan costs, net of fees 119 126 109 76 15
-------- -------- -------- -------- --------
Loans, Net $154,271 $149,900 $147,631 $151,338 $142,990
======== ======== ======== ======== ========
The loan portfolio increased 2.94 percent from $149.9 million in 2004 to
$154.3 million in 2005. The percentage distribution in the loan portfolio was
83.48 percent in real estate loans at $128.8 million; 7.85 percent in commercial
loans at $12.1 million; 2.82 percent in consumer loans at $4.3 million; and 5.85
percent in tax exempt loans at $9.0 million. Real estate loans were comprised of
6.35 percent with 7/3-year adjustable rates, .09 percent with 5/3-year
adjustable rates, 5.78 percent with 5-year adjustable rates; 45.26 percent with
3-year adjustable rates; 11.99 percent with 1-year adjustable rates; and 8.08
percent with one-day to 3-month adjustable rates. Many adjustable rate loans
have bi-weekly payments. The remaining 22.45 percent of real estate loans were
fixed rates.
The following table presents the percentage distribution of loans by
category as of the date indicated:
For the years ended December 31,
----------------------------------------------------
2005 (%) 2004 (%) 2003 (%) 2002 (%) 2001 (%)
-------- -------- -------- -------- --------
Commercial 7.85 8.13 10.38 9.93 9.14
Tax Exempt 5.85 6.71 4.21 2.34 1.36
Real Estate-Construction 1.00 .49 1.70 0.78 1.77
Real Estate 82.48 81.54 80.04 81.73 80.78
Personal 2.82 3.13 3.67 5.22 6.95
------ ------ ------ ------ ------
Total Loans 100.00 100.00 100.00 100.00 100.00
====== ====== ====== ====== ======
20
The following table shows the maturity or repricing of loans in specified
categories of the Bank's loan portfolio at December 31, 2005, and the amount of
such loans with predetermined fixed rates or with floating or adjustable rates.
Expected payments are included in the table.
December 31, 2005
-----------------------
In One One Year Five Years After
Year Through Through Ten
Dollars in Thousands Or Less Five Years Ten Years Years Total
------- ---------- ---------- ------- --------
Commercial, Tax Exempt, Real Estate and
Personal Loans $59,031 $62,482 $17,615 $13,595 $152,723
Real Estate-Construction Loans 1,548 0 0 0 1,548
------- ------- ------- ------- --------
Total $60,579 $62,482 $17,615 $13,595 $154,271
======= ======= ======= ======= ========
Amount of Such Loans with:
Predetermined Fixed Rates $ 7,836 $ 7,230 $15,097 $13,595 $ 43,758
Floating or Adjustable Rates 52,743 55,252 2,518 0 110,513
------- ------- ------- ------- --------
Total $60,579 $62,482 $17,615 $13,595 $154,271
======= ======= ======= ======= ========
DEPOSITS AND BORROWED FUNDS
TABLE OF DISTRIBUTION OF AVERAGE DEPOSITS
(Dollars in thousands)
December 31,
------------------------------
2005 2004 2003
-------- -------- --------
Demand deposits $ 46,307 $ 46,953 $ 43,106
Savings deposits 37,539 37,881 37,146
Time deposits 58,380 60,003 61,588
Time deposits, $100,000 and over 25,586 27,191 30,782
-------- -------- --------
Total $167,812 $172,028 $172,622
======== ======== ========
TABLE OF MATURITY DISTRIBUTION OF TIME DEPOSITS OVER $100,000
(Dollars in thousands)
December 31,
---------------------------
2005 2004 2003
------- ------- -------
Three months or less $ 5,803 $ 6,695 $ 7,571
Over three months to six months 1,267 3,034 2,099
Over six months to twelve months 5,736 6,879 6,990
Over twelve months 12,822 9,722 11,272
------- ------- -------
Total $25,628 $26,330 $27,932
======= ======= =======
Total average deposits decreased by 2.4 percent from $172.0 million at
year-end 2004 to $167.8 million at year-end 2005. Average savings deposits
decreased to $37.5 million at year-end 2005 from $37.9 million at year-end 2004.
Average time deposits decreased 3.67 percent from $87.2 million at year-end 2004
to $84.0 million at year-end 2005. Average non-interest bearing demand deposits
increased to $17.5 million for 2005 from $17.2 million for 2004. Average
interest bearing NOW accounts decreased 3.36 percent from $29.8 million for 2004
to $28.8 million for 2005. This change in deposit mix resulted in an overall
positive impact to earnings, due to the decrease in Certificates of deposit over
$100,000 and all other interest-bearing deposits.
Short-term borrowings, securities sold under agreements to repurchase and
day-to-day borrowings from the FHLB increased 12.84 percent from $21.8 million
at year-end 2004 to $24.6 million at year-end 2005. Treasury Tax and Loan
deposits held by us for the U.S. Treasury averaged $296,000 for 2005. One-day
borrowings did not occur in 2005 and repurchase agreements increased from an
average $18.2 million in 2004 to $20.6 million in 2005. Long-term borrowings,
namely borrowings from the FHLB-Pgh, averaged $11.3 million for 2005.
21
NON-PERFORMING ASSETS
PAST DUE AND NON-ACCRUAL LOANS
(Dollars in thousands)
Real Installment
2005 Estate Loans Commercial Total
---- ------- ----------- ---------- ------
Days 30-89 $1,152 $65 $ 12 $1,229
Days 90 Plus 128 2 0 130
Non-accrual 518 0 189 707
------ --- ---- ------
Total $1,798 $67 $201 $2,066
====== === ==== ======
Real Installment
2004 Estate Loans Commercial Total
---- ------- ----------- ---------- ------
Days 30-89 $ 421 $71 $ 0 $ 492
Days 90 Plus 20 0 0 20
Non-accrual 902 0 339 1,241
------ --- ---- -----
Total $1,343 $71 $339 1,753
====== === ==== =====
Real Installment
2003 Estate Loans Commercial Total
---- ------- ----------- ---------- ------
Days 30-89 $ 438 $66 $ 81 $ 585
Days 90 Plus 345 0 24 369
Non-accrual 1,208 3 641 1,852
------ --- ---- ------
Total $1,991 $69 $746 $2,806
====== === ==== ======
At year-end 2005, loans 30-89 days past due totaled $1,229,000 compared to
$492,000 at year-end 2004. Past due loans 90 days plus totaled $130,000 at
year-end 2005 compared to $20,000 at year-end 2004. Non-accrual loans at
year-end 2005 totaled $707,000 compared to $1,241,000 at year-end 2004. Overall,
past due and non-accrual loans increased 17.9 percent from $1,753,000 at
year-end 2004 to $2,066,000 at year-end 2005. During this same period of time,
the ratio of net charge offs during the period to average loans outstanding
during the period was (.05) percent. (See Summary of Loan Loss Experience). We
do not consider these percentages to be significant or material.
Refer to the Loan section of footnote one to the Consolidated Financial
Statements, Item 8.
22
The following table presents a summary of the Bank's loan loss experience as of
the dates indicated:
For Years Ended December 31,
----------------------------------------------------
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
Loans Outstanding at End of Period $154,271 $149,900 $147,631 $151,338 $142,990
======== ======== ======== ======== ========
Average Loans Outstanding during the
Period $150,065 $147,348 $148,344 $147,545 $139,219
======== ======== ======== ======== ========
Balance of Loan Losses:
Balance, Beginning of Period $ 1,392 $ 1,415 $ 1,298 $ 1,028 $ 1,008
-------- -------- -------- -------- --------
Loans Charged Off:
Commercial and Industrial 0 (147) (52) (29) (94)
Real Estate Mortgages 0 (25) 0 (17) (13)
Consumer (54) (31) (76) (54) (82)
-------- -------- -------- -------- --------
Total Loans Charged Off (54) (203) (128) (100) (189)
Recoveries:
Commercial and Industrial 79 0 12 19 14
Real Estate Mortgages 0 5 0 0 0
Credit Cards 0 0 0 0 3
Consumer 46 35 33 42 29
-------- -------- -------- -------- --------
Total Recoveries 125 40 45 61 46
-------- -------- -------- -------- --------
Net Loans Charged Off 71 (163) (83) (39) (143)
-------- -------- -------- -------- --------
Provision for Loan Losses 90 140 200 309 163
-------- -------- -------- -------- --------
Balance, End of Period $ 1,553 $ 1,392 $ 1,415 $ 1,298 $ 1,028
======== ======== ======== ======== ========
Ratio of net charge-offs during the year to
average loans outstanding during year (.05%) 0.11% 0.06% 0.03% 0.10%
======== ======== ======== ======== ========
The following table presents an allocation of the Bank's allowance for loan
losses for specific categories as of the dates indicated:
For Years Ended December 31,
------------------------------------------
Dollars in Thousands 2005 2004 2003 2002 2001
------ ------ ------ ------ ------
Commercial $ 208 $ 349 $ 493 $ 406 $ 372
Real Estate Mortgages 694 755 696 723 464
Consumer 32 24 28 66 94
Unallocated 619 264 198 103 98
------ ------ ------ ------ ------
Total $1,553 $1,392 $1,415 $1,298 $1,028
====== ====== ====== ====== ======
23
The following table presents a summary of the Bank's nonaccrual,
restructured and past due loans as of the dates indicated:
For Years Ended December 31,
--------------------------------------------------
Dollars in thousands 2005 2004 2003 2002 2001
------- -------- -------- -------- -------
Nonaccrual, Restructured and Past Due Loans:
Nonaccrual Loans $ 707 $ 1,241 $ 1,336 $ 2,112 $ 729
Restructured Loans on Accrual Status 0 0 516 0 0
Accrual Loans Past Due 90 Days or More 130 20 369 50 969
------- -------- -------- -------- -------
Total Nonaccrual, Restructured and Past
Due Loans $ 837 $ 1,261 $ 2,221 $ 2,162 $ 1,698
======= ======== ======== ======== =======
Other Real Estate $ 0 $ 0 $ 36 $ 68 $ 0
Interest Income That Would Have Been
Recorded Under Original Terms $87,105 $129,182 $142,873 $131,335 $37,712
Interest Income Recorded During the Period $28,215 $ 86,834 $ 17,586 $ 67,873 $61,568
ALLOWANCE FOR LOAN LOSSES AND RELATED PROVISION
(Dollars in Thousands)
Outstanding Balance at December 31,
---------------------------------------------------------------------------
2005 2004 2003
----------------------- ----------------------- -----------------------
% of Loans % of Loans % of Loans
in Category in Category in Category
Amount to Total Loans Amount to Total Loans Amount to Total Loans
------ -------------- ------ -------------- ------ --------------
Commercial $ 208 13.7% $ 349 15.6% $ 493 13.1%
Real estate mortgages 694 83.5% 755 81.3% 696 81.7%
Consumer 32 2.8% 24 3.1% 28 5.2%
Unallocated 619 N/A 264 N/A 198 N/A
------ ----- ------ ----- ------ -----
$1,553 100.0% $1,392 100.0% $1,415 100.0%
====== ===== ====== ===== ====== =====
The allowance for loan losses was $1,553,000 at December 31, 2005, compared
to $1,392,000 at December 31, 2004. This allowance equaled 1.02 percent and .93
percent of total loans, net of unearned income, at the end of 2005 and 2004,
respectively. Allowance was considered adequate based on delinquency trends and
actual loans written as it relates to the loan portfolio.
The loan loss reserve was analyzed quarterly and reviewed by the Bank's
Board of Directors. The assessment of the loan policies and procedures during
2005 revealed no anticipated loss on any loans considered "significant". No
concentration or apparent deterioration in classes of loans or pledged
collateral was evident, although slight concentrations existed in one to four
family residential loans and in municipal loans. Monthly loan meetings with the
Bank's Credit Administration Committee reviewed new loans, delinquent loans and
loan exceptions to determine compliance with policies.
24
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.
As of December 31, 2005, 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, 2005:
Total Risk Based Capital
(To risk-weighted assets) $30,950 20.32% $12,185 8.00% $15,231 10.00%
Tier I Capital
(To risk-weighted assets) $29,315 19.24% $ 6,095 4.00% $ 9,142 6.00%
Tier I Capital
(To average assets) $37,347 12.74% $11,726 4.00% $14,657 5.00%
As of December 31, 2004:
Total Risk Based Capital
(To risk-weighted assets) $30,027 20.31% $11,827 8.00% $14,784 10.00%
Tier I Capital
(To risk-weighted assets) $28,488 19.27% $ 5,913 4.00% $ 8,870 6.00%
Tier I Capital
(To average assets) $34,669 12.17% $11,394 4.00% $14,244 5.00%
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 to the restrictions
set forth in the National Bank Act. Generally, the National Bank Act would
permit the Bank to declare dividends in 2006 to the Corporation of approximately
$2,274,585 plus additional amounts equal to the net income earned in 2006 for
the period January 1, 2006 through the date of declaration, less any dividends
which may be paid in 2006.
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
25
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, 2005
> 90 Days
90 Days But 1 to 5 5 to 10 > 10
Or Less < 1 Year Years Years Years Total
-------- --------- -------- ------- -------- --------
Short-term investments $ 6,239 $ 0 $ 0 $ 0 $ 0 $ 6,239
Securities Available-for-Sale (1) 2,916 21,656 25,341 1,190 2,816 53,919
Loans (1) 29,051 35,549 82,356 5,030 2,285 154,271
-------- ------- -------- ------- -------- --------
Rate Sensitive Assets 38,206 57,205 107,697 6,220 5,101 214,429
-------- ------- -------- ------- -------- --------
Deposits:
Interest-bearing demand deposits (2) $ 3,752 $ 3,463 $ 21,644 $ 0 $ 0 $ 28,859
Savings (2) 4,520 4,172 26,076 0 0 34,768
Time 26,032 31,609 25,330 0 0 82,971
Borrowed funds 22,991 0 1,609 0 0 24,600
Long-term debt 3 9 11,183 38 78 11,311
Shareholder's Equity 0 0 0 0 29,012 29,012
-------- ------- -------- ------- -------- --------
Rate Sensitive Liabilities 57,298 39,253 85,842 38 29,090 211,521
-------- ------- -------- ------- -------- --------
Interest Sensitivity Gap (19,092) 17,952 21,855 6,182 (23,989) 2,908
Cumulative Gap $(19,672) $(1,140) $ 20,715 $26,897 $ 2,908 $ 0
(1) Investments and loans are included at the earlier of repricing or maturity
and 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, 2005 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 at the one year
interval, interest rates should not affect net income because the Bank's
maturing and repricing assets and liabilities are near equally matched. At the
one to five year interval an increasing interest rate environment would
positively affect net income because more assets than liabilities will reprice.
Certain shortcomings are inherent in the method of analysis presented in
the above table. Although certain assets and liabilities may have similar
maturities or periods of repricing, they may react in different degrees to
changes in market interest rates. The interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates,
while interest rates on other types of assets and liabilities may lag behind
changes in market interest rates. Certain assets, such as adjustable-rate
mortgages, have features which restrict changes in interest rates on a
short-term basis and over the life of the asset. In the event of a change in
interest rates, prepayment and early withdrawal levels may deviate significantly
from those assumed in calculating the table. The ability of many borrowers to
service their adjustable-rate debt may decrease in the event of an interest rate
increase.
26
In addition to gap analysis, the Bank uses earnings simulation to assist in
measuring and controlling interest rate risk.
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.
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CCFNB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2005 AND 2004
2005 2004
------------ ------------
ASSETS
Cash and due from banks $ 5,122,797 $ 5,017,525
Interest-bearing deposits with other banks 1,110,241 1,820,989
Federal funds sold 5,128,786 5,994,013
Investment securities available-for-sale 53,919,318 61,834,051
Loans, net of unearned income 154,271,362 149,899,701
Allowance for loan losses 1,552,576 1,391,826
------------ ------------
Net loans 152,718,786 148,507,875
Premises and equipment, net 4,836,739 4,518,625
Cash surrender value of bank-owned life insurance 6,480,223 6,199,187
Accrued interest receivable 959,339 816,281
Other assets 941,425 668,158
------------ ------------
TOTAL ASSETS $231,217,654 $235,376,704
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES
Deposits:
Non-interest bearing $ 18,249,315 $ 18,687,440
Interest bearing 146,597,543 153,799,669
------------ ------------
Total Deposits 164,846,858 172,487,109
Short-term borrowings 24,599,711 21,757,386
Long-term borrowings 11,310,669 11,323,443
Accrued interest and other expenses 1,441,966 1,268,762
Other liabilities 6,024 33,507
------------ ------------
TOTAL LIABILITIES 202,205,228 206,870,207
============ ============
STOCKHOLDERS' EQUITY
Common stock, par value $1.25 per share; authorized 5,000,000 shares;
issued and outstanding 1,258,337 shares 2005, 1,267,718 shares 2004 1,572,921 1,584,648
Surplus 3,126,502 3,384,761
Retained earnings 24,616,500 23,323,955
Accumulated other comprehensive income (loss) (303,497) 213,133
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 29,012,426 28,506,497
============ ============
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $231,217,654 $235,376,704
============ ============
The accompanying notes are an integral part of
these consolidated financial statements.
28
CCFNB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
2005 2004 2003
----------- ----------- -----------
INTEREST INCOME
Interest and fees on loans $ 9,249,147 $ 8,746,190 $ 9,206,892
Interest and dividends on investment securities:
Taxable 1,505,644 1,508,096 1,252,973
Tax-exempt 362,543 449,988 609,478
Dividends 81,812 71,944 60,934
Federal funds sold 189,773 15,662 42,562
Deposits in other banks 52,766 51,279 48,487
----------- ----------- -----------
TOTAL INTEREST INCOME 11,441,685 10,843,159 11,221,326
----------- ----------- -----------
INTEREST EXPENSE
Deposits 2,829,972 2,684,235 3,400,449
Short-term borrowings 623,321 303,883 286,216
Long-term borrowings 677,835 680,816 679,277
----------- ----------- -----------
TOTAL INTEREST EXPENSE 4,131,128 3,668,934 4,365,942
----------- ----------- -----------
Net interest income 7,310,557 7,174,225 6,855,384
Provision for loan losses 90,000 140,000 200,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 7,220,557 7,034,225 6,655,384
----------- ----------- -----------
NON-INTEREST INCOME
Service charges and fees 828,430 710,866 572,124
Gain on sale of loans 40,046 35,959 190,382
Bank-owned life insurance income 247,036 257,246 247,334
Trust department 156,753 165,017 147,436
Investment securities gains, net 33,947 3,537 8,369
Other 407,128 357,673 342,177
----------- ----------- -----------
TOTAL NON-INTEREST INCOME 1,713,340 1,530,298 1,507,822
----------- ----------- -----------
NON-INTEREST EXPENSE
Salaries 2,323,825 2,288,564 2,199,135
Pensions and other employee benefits 790,878 772,833 746,350
Occupancy, net 456,713 394,134 378,867
Equipment 518,498 474,879 476,233
State shares tax 281,581 273,861 275,093
Professional services 225,905 228,302 223,658
Directors' fees 189,833 147,152 140,511
Stationery and supplies 130,018 136,232 116,336
Other 1,160,576 1,030,042 853,019
----------- ----------- -----------
TOTAL NON-INTEREST EXPENSE 6,077,827 5,745,999 5,409,202
----------- ----------- -----------
Income before income taxes 2,856,070 2,818,524 2,754,004
Income tax expense 630,512 601,111 591,107
----------- ----------- -----------
NET INCOME $ 2,225,558 $ 2,217,413 $ 2,162,897
----------- ----------- -----------
PER SHARE DATA
Net income $ 1.76 $ 1.74 $ 1.69
Cash dividends 0.74 0.70 0.66
Weighted average shares outstanding 1,262,171 1,274,034 1,281,265
The accompanying notes are an integral part of
these consolidated financial statements.
29
CCFNB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
Other
Common Comprehensive Retained Comprehensive Treasury
Stock Surplus Income Earnings Income (loss) Stock Total
---------- ---------- ------------- ----------- ------------- --------- -----------
BALANCE AT DECEMBER 31, 2002 $1,615,905 $4,008,665 $20,678,631 $ 536,798 $ -- $26,839,999
Comprehensive income:
Net income -- -- $2,162,897 2,162,897 -- -- 2,162,897
Change in net unrealized gain on
investment securities available
-for-sale, net of
reclassification adjustment and
tax effects -- -- (161,103) -- (161,103) -- (161,103)
----------
Total comprehensive income $2,001,794
----------
Issuance of 7,709 shares of common
stock under dividend reinvestment
and stock purchase plans 9,636 184,159 -- -- -- 193,795
Purchase of 23,988 shares of treasury
stock -- -- -- -- (588,201) (588,201)
Retirement of 23,988 shares of
treasury stock (29,985) (558,216) -- -- 588,201 --
Cash dividends $.66 per share -- -- (843,989) -- -- (843,989)
---------- ---------- ----------- --------- --------- -----------
BALANCE AT DECEMBER 31, 2003 1,595,556 3,634,608 21,997,539 375,695 -- 27,603,398
Comprehensive income:
Net income -- -- $2,217,413 2,217,413 -- -- 2,217,413
Change in net unrealized gain on
investment securities available
-for-sale, net of
reclassification adjustment and
tax effects -- -- (162,562) -- (162,562) -- (162,562)
----------
Total comprehensive income $2,054,851
----------
Issuance of 7,273 shares of common
stock under dividend reinvestment
and stock purchase plans 9,092 197,153 -- -- -- 206,245
Purchase of 16,000 shares of treasury
stock -- -- -- -- (467,000) (467,000)
Retirement of 16,000 shares of
treasury stock (20,000) (447,000) -- -- 467,000 --
Cash dividends $.70 per share -- -- (890,997) -- -- (890,997)
---------- ---------- ----------- --------- --------- -----------
BALANCE AT DECEMBER 31, 2004 1,584,648 3,384,761 23,323,955 213,133 -- 28,506,497
Comprehensive income:
Net income -- -- $2,225,558 2,225,558 -- -- 2,225,558
Change in net unrealized gain on
investment securities available-
for-sale, net of reclassification
adjustment and tax effects -- -- (516,630) -- (516,630) -- (516,630)
----------
Total comprehensive income $1,708,928
----------
Issuance of 8,619 shares of common
stock under dividend reinvestment
and stock purchase plans 10,773 224,941 -- -- -- 235,714
Purchase of 18,000 shares of treasury
stock -- -- -- -- (505,700) (505,700)
Retirement of 18,000 shares of
treasury stock (22,500) (483,200) -- -- 505,700 --
Cash dividends $.74 per share -- -- (933,013) -- -- (933,013)
---------- ---------- ----------- --------- --------- -----------
BALANCE AT DECEMBER 31, 2005 $1,572,921 $3,126,502 $24,616,500 $(303,497) $ -- $29,012,426
---------- ---------- ----------- --------- --------- -----------
The accompanying notes are an integral part of
these consolidated financial statements.
30
CCFNB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
2005 2004 2003
----------- ------------ ------------
OPERATING ACTIVITIES
Net income $ 2,225,558 $ 2,217,413 $ 2,162,897
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 90,000 140,000 200,000
Depreciation and amortization 414,214 374,664 379,733
Premium amortization on investment securities 235,572 336,292 542,743
Discount accretion on investment securities (11,666) (24,230) (27,925)
Deferred income taxes (benefit) (79,970) 78,844 (57,242)
(Gain) on sales of investment securities
available-for-sale (33,947) (3,537) (8,369)
(Gain) on sale of mortgage loans (40,046) (35,959) (190,382)
Proceeds from sale of mortgage loans 1,747,367 1,895,310 9,156,607
Originations of mortgage loans for resale (1,707,320) (2,137,886) (8,966,225)
(Gain) loss on sales of other real estate owned -- 3,180 (30,169)
(Gain) from investment in insurance agency (11,366) (17,248) (4,865)
(Increase) decrease in accrued interest receivable (143,058) (5,368) 83,322
(Increase) decrease in other assets - net 84,212 (95,298) (17,677)
Net (increase) in cash surrender value of bank
owned life insurance (281,036) (291,247) (281,334)
Increase (decrease) in accrued interest and
other expenses 173,204 81,794 (145,616)
Increase (decrease) in other liabilities - net (27,483) 20,889 (43,145)
----------- ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,634,235 2,537,613 2,752,353
----------- ------------ ------------
INVESTING ACTIVITIES
Purchase of investment securities available-for-sale (4,949,870) (24,794,418) (50,383,679)
Proceeds from sales, maturities and redemption of
investment securities available-for-sale 11,891,868 25,154,814 40,408,337
Proceeds from sales of other real estate owned -- 32,516 98,069
Net (increase) decrease in loans (4,300,909) (2,154,069) 3,589,038
Purchase of premises and equipment (732,328) (610,832) (247,505)
Purchase of bank owned life insurance policies -- -- (2,000,000)
----------- ------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 1,908,761 (2,371,989) (8,535,740)
----------- ------------ ------------
FINANCING ACTIVITIES
Net increase (decrease) in deposits (7,640,251) 701,468 (341,470)
Net increase in short-term borrowings 2,842,325 767,167 3,715,967
Repayment of long-term borrowings (12,774) (12,034) (11,338)
Acquisition of treasury stock (505,700) (467,000) (588,201)
Proceeds from issuance of common stock 235,714 206,245 193,795
Cash dividends paid (933,013) (890,997) (843,989)
----------- ------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (6,013,699) 304,849 2,124,764
----------- ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,470,703) 470,473 (3,658,623)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 12,832,527 12,362,054 16,020,677
----------- ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $11,361,824 $ 12,832,527 $ 12,362,054
----------- ------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 4,084,220 $ 3,698,805 $ 4,535,604
Income taxes $ 635,267 $ 569,349 $ 624,526
The accompanying notes are an integral part of
these consolidated financial statements.
31
CCFNB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of CCFNB Bancorp, Inc. and Subsidiary
(the "Corporation") are in accordance with the accounting principles generally
accepted in the United States of America and conform to common practices within
the banking industry. The more significant policies follow:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of CCFNB
Bancorp, Inc. and its wholly owned subsidiary, Columbia County Farmers National
Bank (the "Bank"). All significant inter-company balances and transactions have
been eliminated in consolidation.
NATURE OF OPERATIONS & LINES OF BUSINESS
The Corporation provides full banking services, including trust services,
through the Bank, to individuals and corporate customers. The Bank has seven
offices covering an area of approximately 484 square miles in Northcentral
Pennsylvania. The Corporation and its banking subsidiary are subject to the
regulation of the Office of the Comptroller of the Currency, the Federal Deposit
Insurance Corporation and the Federal Reserve Bank of Philadelphia.
Procuring deposits and making loans are the major lines of business. The
deposits are mainly deposits of individuals and small businesses and the loans
are mainly real estate loans covering primary residences and small business
enterprises. The trust services, under the name of CCFNB and Co., include
administration of various estates, pension plans, self-directed IRA's and other
services. A third-party brokerage arrangement is also resident in the
Lightstreet branch. This investment center offers a full line of stocks, bonds
and other non-insured financial services.
On December 19, 2000, the Corporation became a Financial Holding Company by
having filed an election to do so with the Federal Reserve Board. The Financial
Holding Company status was required in order to acquire an interest in a local
insurance agency that occurred during January 2001.
SEGMENT REPORTING
The Corporation's banking subsidiary acts as an independent community
financial services provider, and offers traditional banking and related
financial services to individual, business and government customers. Through its
branch, internet banking, telephone and automated teller machine network, the
Bank offers a full array of commercial and retail financial services, including
the taking of time, savings and demand deposits; the making of commercial,
consumer and mortgage loans; and the providing of other financial services. The
Bank also performs personal, corporate, pension and fiduciary services through
its Trust Department as well as offering diverse investment products through its
investment center.
Management does not separately allocate expenses, including the cost of
funding loan demand, between the commercial, retail, trust and investment center
operations of the Corporation. As such, discrete financial information is not
available and segment reporting would not be meaningful.
USE OF ESTIMATES
The preparation of these consolidated financial statements in conformity
with accounting principles in the United States of America requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
these consolidated financial statements and the reported amounts of income and
expenses during the reporting periods. Actual results could differ from those
estimates.
INVESTMENT SECURITIES
The Corporation classifies its investment securities as either
"held-to-maturity" or "available-for-sale" at the time of purchase. Debt
securities are classified as held-to-maturity when the Corporation has the
ability and positive intent to hold the securities to maturity. Investment
securities held-to-maturity are carried at cost adjusted for amortization of
premiums and accretion of discounts to maturity.
32
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 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.
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 recognition of interest income on impaired loans
is the same as for non-accrual loans discussed above.
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.
The allowance for loan losses is maintained at a level established by
management to be adequate to absorb estimated potential loan losses.
Management's periodic evaluation of the adequacy of the allowance for loan
losses is based on the Corporation's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay (including the timing of future payments), the
estimated value of any underlying collateral, composition of the loan portfolio,
current economic conditions, and other relevant factors. This evaluation is
inherently subjective as it requires material estimates, including the amounts
and timing of future cash flows expected to be received on impaired loans that
may be susceptible to significant change.
In addition, an allowance is provided for possible credit losses on
off-balance sheet credit exposures. The allowance is estimated by management and
is classified in other liabilities.
DERIVATIVES
The Bank has outstanding loan commitments that relate to the origination of
mortgage loans that will be held for resale. Pursuant to Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities" as amended by SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities", SFAS No. 149, "Amendment
of Statement 133 on Derivative and Hedging Activities" and the guidance
contained in the Derivatives Implementation Group Statement 133 Implementation
Issue No. C 13, the Bank has accounted for such loan commitments as
33
derivative instruments. The effective date of the implementation guidance is the
first day of the first fiscal quarter beginning after April 10, 2002. The
outstanding loan commitments in this category did not give rise to any losses
for the years December 31, 2005, 2004 and 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
proportion to, and over the period of, estimated net servicing income. The
unamortized cost is included in other assets in the accompanying consolidated
balance sheets. 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, 2005 and 2004 is $198,909 and $187,543, respectively, and is
carried in other assets in the accompanying consolidated balance sheets.
INCOME TAXES
The provision for income taxes is based on the results of operations,
adjusted primarily for tax-exempt income. Certain items of income and expense
are reported in different periods for financial reporting and tax return
purposes. Deferred tax assets and liabilities are determined based on the
differences between the consolidated financial statement and income tax basis of
assets and liabilities measured by using the enacted tax rates and laws expected
to be in effect when the timing differences are expected to reverse. Deferred
tax expense or benefit is based on the difference between deferred tax asset or
liability from period to period.
PER SHARE DATA
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share", requires dual presentation of basic and diluted earnings per share.
Basic earnings per share is calculated by dividing net income by the weighted
average number of shares of common stock outstanding at the end of each period.
Diluted earnings per share is calculated by increasing the denominator for the
assumed conversion of all potentially dilutive securities. The Corporation does
not have any securities which have or will have a dilutive effect, accordingly,
basic and diluted per share data are the same.
CASH FLOW INFORMATION
For purposes of reporting consolidated cash flows, cash and cash
equivalents include cash on hand and due from banks, interest-bearing deposits
in other banks and federal funds sold. The Corporation considers cash classified
as interest-bearing deposits
34
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 2005, the Financial Accounting Standards Board (FASB) issued
FASB Staff Position (FSP)115 - "The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments". This FSP provides additional
guidance on when an investment in a debt or equity security should be considered
impaired and when that impairment should be considered other-than-temporary and
recognized as a loss in the consolidated statement of income. Specifically, this
guidance clarifies that an investor should recognize an impairment loss no later
than when an impairment is deemed other-than-temporary, even if the decision to
sell has not been made. The FSP also requires certain disclosures about
unrealized losses that have not been recognized as other-than-temporary
impairments. The Corporation has followed the guidance of this FSP in 2005.
In May 2005, the FASB issued Statement of Financial Accounting Standards
("SFAS) No. 154 "Accounting Changes and Error Corrections" which modifies the
accounting for and reporting of a change in an accounting principle. This
statement applies to all voluntary changes in accounting principles and changes
required by an accounting pronouncement in the unusual instance that the
pronouncement does not include specific transition provisions. This statement
also requires retrospective application to prior period financial statements of
changes in accounting principles, unless it is impractical to determine either
the period-specific or cumulative effects of the accounting change. SFAS 154 is
effective for accounting changes made in fiscal years beginning after December
15, 2005. The adoption of SFAS 154 is not expected to have a material impact on
the Corporation's consolidated financial condition or results of operation.
In December 2004, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 153, "Exchanges of Nonmonetary Assets", which amends APB
Opinion No. 29, "Accounting for Nonmonetary Transactions". SFAS No. 153
eliminates the exception from fair value measurement for nonmonetary exchanges
of similar productive assets in Opinion No. 29 and replaces it with an exception
for exchanges that do not have commercial substance. SFAS No. 153 specifies that
a nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. SFAS
No. 153 is effective for nonmonetary exchanges occurring in fiscal periods
beginning after June 15, 2005. The adoption of SFAS No. 153 is not expected to
have a material impact on the Corporation's consolidated financial condition or
results of operations.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment". This Statement is a revision of SFAS No. 123, "Accounting for
Stock-Based Compensation", and supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees", and its related guidance. SFAS No. 123 (revised
2004) established standards for the accounting for transactions in which an
entity exchanges its equity instruments for goods or services. This Statement
requires that the cost resulting from all share-based payment transactions be
recognized in the financial statements. This Statement established fair value as
the measurement objective in accounting for share-based payment arrangements and
requires all entities to apply a fair-value-based measurement method in
accounting for share-based payment transactions with employees, except for
equity instruments held by employee share ownership plans.
In addition, this statement amends SFAS No. 95 "Statement of Cash Flows" to
require that excess tax benefits be reported as financing cash inflow rather
than as a reduction of taxes paid. The Corporation will be required to adopt
these statements as of January 1, 2006. SFAS 123R will require the Corporation
to change its method of accounting for share-based awards to include estimated
forfeitures in the initial estimate of compensation expense and to accelerate
the recognition of compensation expense for retiree-eligible employees. The
adoption of these standards is not expected to have a material effect on the
Corporation's consolidated financial condition or results of operations.
ADVERTISING COSTS
It is the Corporation's policy to expense advertising costs in the period
in which they are incurred. Advertising expense for the years ended December 31,
2005, 2004 and 2003, was approximately $81,751, $86,328 and $75,434,
respectively.
35
RECLASSIFICATIONS
Certain amounts in the consolidated financial statements of the prior years
have been reclassified to conform with presentations used in the 2005
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, 2005 was $1,219,000 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, 2005, these
balances were $741,000.
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, 2005 and 2004:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
DECEMBER 31, 2005:
Obligation of U.S. Government Corporations
and Agencies:
Mortgage-backed $22,935,558 $ 34,402 $406,156 $22,563,804
Other 21,497,710 6,274 347,137 21,156,847
Obligations of state and political subdivisions 7,688,869 100,267 7,018 7,782,118
Marketable equity securities 1,105,426 183,582 24,059 1,264,949
Restricted equity securities 1,151,600 -- -- 1,151,600
----------- -------- -------- -----------
Total $54,379,163 $324,525 $784,370 $53,919,318
=========== ======== ======== ===========
DECEMBER 31, 2004:
Obligation of U.S. Government Corporations
and Agencies:
Mortgage-backed $32,119,791 $127,903 $226,683 $32,021,011
Other 18,250,000 11,332 126,250 18,135,082
Obligations of state and political subdivisions 8,698,272 236,944 5,678 8,929,538
Marketable equity securities 1,072,858 313,196 7,834 1,378,220
Restricted equity securities 1,370,200 -- -- 1,370,200
----------- -------- -------- -----------
Total $61,511,121 $689,375 $366,445 $61,834,051
=========== ======== ======== ===========
Securities available-for-sale with an aggregate fair value of $45,085,281
and $40,299,434 at December 31, 2005 and 2004, respectively, were pledged to
secure public funds, trust funds, securities sold under agreements to repurchase
and other balances of $31,266,889 and $28,168,191 at December 31, 2005 and 2004,
respectively, as required by law.
The amortized cost and estimated fair value of debt securities, by expected
maturity, are shown below at December 31, 2005. Expected maturities will differ
from contractual maturities, because some borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties. Other
securities, marketable equity securities and restricted equity securities are
not considered to have defined maturities and are included in the "Due after ten
years" category:
Estimated Weighted
Amortized Fair Average
Cost Value Yield
----------- ----------- --------
Due in one year or less $ 3,842,438 $ 3,781,290 2.64%
Due after one year through five years 37,343,120 36,701,839 3.77%
Due after five years through ten years 7,970,720 8,028,328 6.54%
Due after ten years 5,222,885 5,407,861 4.91%
----------- -----------
Total $54,379,163 $53,919,318 4.20%
=========== ===========
36
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, 2005. 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 2005, 2004 and 2003
were $11,749,781, $25,154,814 and $40,408,337, respectively. Gross gains
realized on these sales were $33,947, $3,537 and $8,369, respectively. There
were no gross losses on the 2005, 2004 and 2003 sales.
In accordance with disclosures required by EITF No. 03-01, 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, 2005 and 2004:
Less than 12 months 12 months or more Total
------------------------ ------------------------ ------------------------
Unrealized Unrealized Unrealized
Description of Security Fair Value Loss Fair Value Loss Fair Value Loss
----------------------- ----------- ---------- ----------- ---------- ----------- ----------
DECEMBER 31, 2005:
Obligations of U.S. Government
Corporations and Agencies:
Mortgage-backed $ 8,735,755 $103,233 $ 9,768,969 $302,923 $18,504,724 $406,156
Other 4,456,955 40,755 15,443,618 306,382 19,900,573 347,137
Obligations of state and political subdivisions 669,727 7,018 -- -- 669,727 7,018
Marketable Equity Securities 398,001 10,442 30,573 13,617 428,574 24,059
----------- -------- ----------- -------- ----------- --------
Total $14,260,438 $161,448 $25,243,160 $622,922 $39,503,598 $784,370
=========== ======== =========== ======== =========== ========
DECEMBER 31, 2004:
Obligations of U.S. Government
Corporations and Agencies:
Mortgage-backed $ 678,939 $ 5,678 $ -- $ -- $ 678,939 $ 5,678
Other 16,763,135 157,165 3,412,092 69,518 20,175,227 226,683
Obligations of state and political subdivisions 15,623,750 126,250 -- -- 15,623,750 126,250
Marketable Equity Securities -- -- 90,630 7,834 90,630 7,834
----------- -------- ----------- -------- ----------- --------
Total $33,065,824 $289,093 $ 3,502,722 $ 77,352 $36,568,546 $366,445
=========== ======== =========== ======== =========== ========
The Corporation invests in various forms of agency debt including
mortgage-backed securities and callable agency debt. The fair market value of
these securities is influenced by market interest rates, prepayment speeds on
mortgage securities, bid to offer spreads in the market place and credit
premiums for various types of agency debt. These factors change continuously and
therefore the market value of these securities may be higher or lower than the
Corporation's carrying value at any measurement date.
The Corporation's marketable equity securities represent common stock
positions in various financial institutions. The fair market value of these
equities tends to fluctuate with the overall equity markets as well as the
trends specific to each institution.
The Corporation has both the intent and ability to hold the securities
contained in the previous table for a time necessary to recover the cost.
37
4. LOANS
Major classifications of loans at December 31, 2005 and 2004 consisted of:
2005 2004
------------ ------------
Commercial $ 12,096,894 $ 12,181,900
Tax-exempt 9,018,852 10,061,809
Real estate - construction 1,548,536 733,642
Real estate 127,170,180 122,104,012
Personal 4,347,575 4,738,159
------------ ------------
Total gross loans 154,182,037 149,819,522
Add (Deduct): Unearned discount (29,824) (46,195)
Unamortized loan costs, net of fees 119,149 126,374
------------ ------------
Loans, net of unearned income $154,271,362 $149,899,701
============ ============
Real estate loans held-for-sale in the amount of $0 at December 31, 2005
and $268,886 at December 31, 2004 are included in real estate loans above and
are carried at the lower of cost or market.
The aggregate amount of demand deposits that have been reclassified as loan
balances at December 31, 2005 and 2004 are $35,080 and $55,338, respectively.
Non-accrual loans at December 31, 2005, 2004 and 2003 were $706,800,
$1,240,616 and $1,851,686, 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:
2005 2004 2003
------- --------- --------
Gross interest due under terms $87,105 $129,182 $142,873
Amount included in income 28,215 86,834 17,586
------- -------- --------
Interest income not recognized $58,890 $ 42,348 $125,287
======= ======== ========
At December 31, 2005, 2004 and 2003 the recorded investment in loans that
are considered to be impaired as defined by SFAS No. 114 was $574,485,
$1,240,616 and $1,594,835, respectively. No additional charge to operations was
required to provide for the impaired loans specifically allocated allowance of
$127,535, $289,942 and $192,408, respectively at December 31, 2005, 2004 and
2003, 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, 2005, 2004 and 2003 was approximately
$902,384, $1,463,372 and $1,708,208, respectively.
Loans past due 90 days or more and still accruing interest amounted to
$130,044 at December 31, 2005 and $20,217 at December 31, 2004, 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, 2005, there were no significant commitments to lend
additional funds with respect to non-accrual and restructured loans.
Changes in the allowance for loan losses for the years ended December 31,
2005, 2004 and 2003 were as follows:
2005 2004 2003
---------- ---------- ----------
Balance, beginning of year $1,391,826 $1,415,431 $1,298,406
Provision charged to operations 90,000 140,000 200,000
Loans charged-off (54,306) (203,430) (128,452)
Recoveries 125,056 39,825 45,477
---------- ---------- ----------
Balance, end of year $1,552,576 $1,391,826 $1,415,431
========== ========== ==========
38
5. MORTGAGE SERVICING RIGHTS
The Corporation commenced selling real estate mortgages during the last
quarter of 2002. The mortgage loans sold serviced for others are not included in
the accompanying Consolidated Balance Sheets. The unpaid principal balances of
mortgage loans serviced for others were $9,794,711 and $9,788,738 at December
31, 2005 and 2004, respectively. The balances of amortized mortgage servicing
rights included in other assets at December 31, 2005 and 2004 were $36,366 and
$54,207, respectively. Valuation allowances were not provided since fair values
were determined to exceed carrying values. Fair values were determined using a
discount rate of 6% and average lives of 3 to 6 years depending on loan rate.
The following summarizes mortgage servicing rights capitalized and
amortized:
2005 2004
-------- --------
Balance, January 1 $ 54,207 $ 75,097
Servicing asset additions 5,760 7,600
Amortization (23,601) (28,490)
-------- --------
Balance, December 31 $ 36,366 $ 54,207
======== ========
The Bank does not require custodial escrow accounts in connection with the
foregoing loan servicing.
6. PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, 2005 and 2004 follows:
2005 2004
---------- ----------
Land $ 762,541 $ 567,939
Buildings and improvements 4,928,312 4,574,420
Furniture and equipment 3,536,405 4,535,624
---------- ----------
9,227,258 9,677,983
Less: Accumulated depreciation 4,390,519 5,159,358
---------- ----------
$4,836,739 $4,518,625
========== ==========
Depreciation amounted to $414,214, $374,664 and $379,733 in 2005, 2004 and
2003, respectively.
7. DEPOSITS
Major classifications of deposits at December 31, 2005 and 2004 consisted
of:
2005 2004
------------ ------------
Demand - non-interest bearing $ 18,249,315 $ 18,687,440
Demand - interest bearing 28,858,627 30,572,645
Savings 34,767,792 37,825,629
Time $100,000 and over 25,627,611 26,329,758
Other time 57,343,513 59,071,637
------------ ------------
Balance, December 31 $164,846,858 $172,487,109
============ ============
The following is a schedule reflecting remaining maturities of time
deposits of $100,000 and over at December 31, 2005:
2006 $12,582,634
2007 5,214,406
2008 4,362,957
2009 2,029,286
2010 and thereafter 1,438,328
-----------
Total $25,627,611
===========
39
Interest expense related to time deposits of $100,000 or more was $910,413
in 2005, $914,663 in 2004 and $1,208,973 in 2003.
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, 2005
and 2004:
2005 2004
---------------------------------------------- ----------------------------------------------
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 $24,052,474 $20,639,634 $24,052,474 2.97% $21,175,411 $18,184,306 $21,175,411 1.66%
U.S. Treasury tax and loan notes 547,237 295,796 893,842 3.04% 581,975 296,214 597,329 1.01%
----------- ----------- ----------- ----------- ----------- -----------
Total $24,599,711 $20,935,430 $24,946,316 2.98% $21,757,386 $18,480,520 $21,772,740 1.64%
=========== =========== =========== =========== =========== ===========
9. LONG-TERM BORROWINGS
Long-term borrowings consist of advances due Federal Home Loan Bank. Under
terms of a blanket agreement, the loans were secured by certain qualifying
assets of the Bank which consisted principally of first mortgage loans and
certain investment securities. The carrying value of these collateralized items
was $11,310,669 at December 31, 2005. The Bank has lines of credit with Atlantic
Central Bankers Bank and Federal Home Loan Bank in the aggregate amount of
$25,000,000 at December 31, 2005. The unused portions of these lines of credit
were $8,689,331 and $5,000,000, respectively at December 31, 2005. Long-term
borrowings consisted of the following at December 31, 2005 and 2004:
2005 2004
----------- -----------
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. $ 165,730 $ 174,815
Loan dated February 18, 1998 in the original amount of $2,000,000
for a 10 year term with a 5 year put
Interest only is payable monthly at 5.48% with a floating rate option,
at the discretion of FHLB, at the end of 5 years.
Principal balances oustanding. 2,000,000 2,000,000
Loan dated June 25, 1998 in the original amount of $72,000
for a 30 year term requiring monthly payments of $425
including interest at 5.856%.
Principal balances outstanding. 63,814 65,135
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. 24,651 25,421
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. 27,825 28,657
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, 2005 the interest rate was 6.00%.
Principal balances outstanding. 5,000,000 5,000,000
Loan dated August 16, 2000 in the original amount of $2,000,000
for a 10 year term with a 6 month conversion date,
at the discretion of FHLB, and a 3 month conversion
frequency thereafter. At December 31, 2005 the interest rate was 5.925%.
Principal balances outstanding. 2,000,000 2,000,000
Loan dated September 20, 2000 in the original amount of $2,000,000
for a 10 year term with a 3 year conversion date,
at the discretion of FHLB, and a 3 month conversion
frequency thereafter. At December 31, 2005 the interest rate was 6.10%.
Principal balances outstanding. 2,000,000 2,000,000
Loan dated December 13, 2000 in the original amount of $32,092
for a 20 year term requiring monthly payments of $197
including interest at 5.50%.
Principal balances outstanding. 28,649 29,415
----------- -----------
Total $11,310,669 $11,323,443
=========== ===========
At December 31, 2005 the annual maturities of long-term debt were as
follows: $13,559 in 2006, $160,202 in 2007, $2,004,366 in 2008, $4,619 in 2009,
$9,004,885 in 2010 and $123,038 thereafter.
40
10. COMPREHENSIVE INCOME
The components of the change in other comprehensive income and related tax
effects are as follows:
Years Ended December 31,
---------------------------------
2005 2004 2003
--------- --------- ---------
Unrealized holding gains (losses) on available-for-sale
investment securities $(816,725) $(275,155) $(230,183)
Reclassification adjustment for gains realized in income 33,947 3,537 8,369
--------- --------- ---------
Change in unrealized gains (losses) before tax effect (782,778) (271,618) (221,814)
Tax effect 266,148 109,056 60,711
--------- --------- ---------
Net change in unrealized gains (losses) $(516,630) $(162,562) $(161,103)
========= ========= =========
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 were:
Per Share
----------------------
Employees' Market
Number Purchase Value
of Shares Price of Shares
--------- ---------- ---------
Date Issued:
2005 365 $24.52 $27.24
2004 469 $25.20 $28.00
2003 641 $21.22 $23.58
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 were:
Number Total
of Shares Proceeds
--------- --------
Year:
2005 8,254 $226,765
2004 6,804 $194,425
2003 7,068 $180,193
12. INCOME TAXES
The provision for income tax expense consisted of the following components:
41
2005 2004 2003
-------- -------- --------
Federal:
Current $710,482 $522,267 $648,349
Deferred (benefit) (79,970) 79,146 (57,728)
-------- -------- --------
630,512 601,413 590,621
-------- -------- --------
State:
Current -- -- --
Deferred (benefit) -- (302) 486
-------- -------- --------
-- (302) 486
-------- -------- --------
Total Provision for Taxes $630,512 $601,111 $591,107
======== ======== ========
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:
2005 2004 2003
------------------ ------------------ -------------------
Amount % Rate Amount % Rate Amount % Rate
--------- ------ --------- ------ --------- ------
Provision at statutory rate $ 971,064 34.0 $ 958,298 34.0 $ 936,361 34.0
Tax-exempt income (271,565) (9.5) (283,567) (10.1) (282,067) (10.2)
Non-deductible expenses 24,830 0.8 23,262 0.8 26,314 0.9
Bank-owned life insurance income - net (83,992) (2.9) (87,464) (3.1) (84,094) (3.1)
Other, net (9,825) (0.3) (9,116) (0.3) (5,893) (0.2)
--------- ---- --------- ----- --------- -------
Actual federal income tax and rate $ 630,512 22.1 $ 601,413 21.3 $ 590,621 21.4
========= ==== ========= ===== ========= =======
Income taxes applicable to realized security gains included in the
provision for income taxes totaled $11,542 in 2005, $1,203 in 2004 and $2,845 in
2003.
The net deferred tax asset recorded by the Corporation consisted of the
following tax effects of temporary timing differences at December 31, 2005, 2004
and 2003:
2005 2004 2003
--------- --------- ---------
Deferred tax assets:
Allowance for loan losses $ 402,059 $ 371,459 $ 379,485
Allowance for off balance sheet losses 3,230 3,230 1,530
Deferred compensation and director's fees 256,279 227,019 201,611
Non-accrual loan interest 20,023 12,704 33,260
Mortgage Servicing Rights 12,640 9,559 3,463
Unrealized investment securities losses 156,347 -- --
--------- --------- ---------
Total 850,578 623,971 619,349
========= ========= =========
Deferred tax liabilities:
Loan fees and costs (66,993) (75,993) (76,689)
Accretion (1,320) (1,067) (986)
Depreciation (333,096) (337,924) (259,504)
Investment in insurance agency (10,758) (6,894) (1,232)
Unrealized investment securities gains -- (109,795) (218,852)
--------- --------- ---------
Total (412,167) (531,673) (557,263)
--------- --------- ---------
Net deferred tax asset $ 438,411 $ 92,298 $ 62,086
========= ========= =========
The above net deferred asset is included in other assets 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 $716,595.
The losses expire through 2025. The related deferred net state tax asset in the
amount of $52,491 has been fully reserved and is not reflected in the net tax
asset since management is of the opinion that such assets will not be realized
in the foreseeable future.
42
13. EMPLOYEE BENEFIT AND DEFERRED COMPENSATION PLANS
EMPLOYEE BENEFIT PLANS
The Bank maintains a 401K salary deferred profit sharing plan for the
benefit of its employees. Under the salary deferral component, employees may
elect to contribute up to 25% of their compensation with the possibility that
the Bank may make matching contributions to the plan. Under the profit sharing
component, contributions are made at the discretion of the Board of Directors.
Matching contributions amounted to $66,207, $63,453 and $64,088 in 2005,
2004 and 2003, respectively. There were no discretionary contributions in 2005,
2004 and 2003.
DEFERRED COMPENSATION PLANS
DIRECTORS
During 1990, the Bank entered into agreements with two directors to
establish non-qualified deferred compensation plans for each of these directors.
In 1994, additional plans were established for these two directors plus another
director. These plans were limited to four-year terms. The Bank may, however,
enter into subsequent similar plans with its directors. Each of the
participating directors deferred the payment to himself of certain directors'
fees to which he was entitled. Each director's future payment is based upon the
cumulative amount of deferred fees together with interest currently accruing
thereon at the rate of 8% per annum, subject to change by the Board of
Directors. The total accrued liability as of December 31, 2005 and 2004 was
$210,768 and $212,669, respectively, relating to these directors' deferred
compensation agreements.
During 2003, the directors were given the option of receiving or deferring
their directors' fees under a non-qualified deferred compensation plan which
allows the director to defer such fees until the year following the expiration
of the directors' term. Payments are then made over specified terms under these
arrangements up to a ten year period. Interest is to accrue on these deferred
fees at a five year certificate of deposit rate, which was 4% in 2004. The
certificate of deposit rate will reset in January 2008. Two directors have
elected to participate in this program and the total accrued liability as of
December 31, 2005 and 2004 was $73,422 and $41,753, respectively.
Total directors fees, including amounts currently paid for the years ended
December 31, 2005, 2004 and 2003 were $189,833, $147,152 and $140,511,
respectively, and the total accrued liability under the directors deferred
compensation plans as of December 31, 2005 and 2004 was $284,190 and $254,422,
respectively.
EXECUTIVE OFFICERS
In 1992, the Bank entered into agreements with two executive officers to
establish non-qualified deferred compensation plans. Each officer deferred
compensation in order to participate in this Deferred Compensation Plan. If the
officer continued to serve as an officer of the Bank until he attained
sixty-five (65) years of age, the Bank agreed to pay him 120 guaranteed
consecutive monthly payments commencing on the first day of the month following
the officer's 65th birthday. Each officer's guaranteed monthly payment was based
upon the future value of life insurance purchased with the compensation the
officer has deferred. The Bank obtained life insurance (designating the Bank as
the beneficiary) on the life of each participating officer in an amount which is
intended to cover the Bank's obligations under the Deferred Compensation Plan,
based upon certain actuarial assumptions.
During 2002, the agreements with the two executive officers were modified.
Under one agreement, the executive officer will receive $225,000 payable monthly
over a 10 year period commencing in February 2003. Under another agreement,
another executive officer will receive $175,000 payable monthly over a 10 year
period commencing in April 2003. This second agreement also provides
post-employment health care benefits to the executive officer until the
attainment of age 65. As of December 31, 2005 and 2004, the net cash value of
insurance policies was $370,986 and $344,936, respectively, and the total
accrued liability, equal to the present value of these obligations, was $241,772
and $269,418, respectively, relating to these executive officers' and directors'
deferred compensation agreements, and the accrued liability related to the
post-employment health care benefit was $1,451 and $9,024 as of December 31,
2005 and 2004, respectively.
In April 2003, the Bank entered into non-qualified deferred compensation
agreements with three executive officers to provide supplemental retirement
benefits commencing with the executive's retirement and ending 15 years
thereafter. The deferred compensation expense related to these agreements for
the years ended December 31, 2005 and 2004 was $91,507 and $79,710,
respectively, and the total accrued liability as of December 31, 2005 and 2004
was $226,348 and $134,841, respectively.
43
Total deferred compensation expense for current and retired executive
officers for the years ended December 31, 2005, 2004 and 2003 was $105,004,
$95,697 and $73,714, respectively, and the total accrued liability under the
executive officers' deferred compensation plans as of December 31, 2005 and 2004
was $469,571 and $413,283, respectively.
14. LEASE COMMITMENTS AND CONTINGENCIES
The Corporation's banking subsidiary entered into an operating lease on
October 23, 2004 for the rental of a branch banking facility. The initial lease
is for a term of five years, with two options available to renew for an
additional term of five years each. Rent expense for this facility was $28,000
for the year ended December 31, 2005. Minimum rental payments required under
this lease are: 2006 - $28,000, 2007 - $28,000, 2008 - $28,000, 2009 - $22,957.
At December 31, 2005 the Bank was leasing some minor office equipment under
operating leases.
Rental expense under operating leases for the years ended December 31,
2005, 2004 and 2003 was $817, $1,304 and $2,778, respectively.
The Corporation's banking subsidiary entered into an operating lease on
July 2, 2005 for the use of a 2005 GMC Yukon. The lease term is 36 months. Lease
expense for the year ended December 31, 2005 was $4,879. Minimum rental payments
required are as follows: 2006 - $7,175, 2007 - $7,175, and 2008 - $2,989.
A branch banking facility was acquired in 2005. It is expected to commence
operation in the latter half of 2006. In connection with this new facility it is
estimated that expenditures in 2006 will amount to approximately $535,000 to
make the facility operational.
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, 2005 and 2004. 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 five
directors, seven executive officers and their related companies, consisted of
the following:
2005 2004
----------- -----------
Balance, beginning of year $ 1,538,734 $ 1,688,979
Additions 963,193 889,909
Repayments (1,256,081) (1,040,154)
----------- -----------
Balance, end of year $ 1,245,846 $ 1,538,734
=========== ===========
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 loan commitments and standby letters of credit for 2005 and
2004 presented an off-balance sheet risk to the extent of undisbursed funds in
the amount of $640,564 and $441,353, respectively.
Deposits from certain officers and directors and/or their affiliated
companies held by the Bank amounted to $857,447 and $955,028 at December 31,
2005 and 2004, respectively.
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 2006, without prior
regulatory approval, the Bank may declare dividends to the Corporation in the
amount of $2,274,585 plus additional amounts equal to the net income earned in
2006 for the period January 1, 2006, through the date of declaration, less any
dividends which may have already been paid in 2006. Regulations also limit the
amount of loans and advances from the Bank to the Corporation to 10% of
consolidated net assets.
44
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, 2005 and 2004, 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, 2005, 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, 2005:
Total Risk-Based Capital
(To risk-weighted assets) $30,950 20.32% $12,185 8.00% $15,231 10.00%
Tier I Capital
(To risk-weighted assets) $29,315 19.24% $ 6,095 4.00% $ 9,142 6.00%
Tier I Capital
(To average assets) $37,347 12.74% $11,726 4.00% $14,657 5.00%
As of December 31, 2004:
Total Risk-Based Capital
(To risk-weighted assets) $30,027 20.31% $11,827 8.00% $14,784 10.00%
Tier I Capital
(To risk-weighted assets) $28,488 19.27% $ 5,913 4.00% $ 8,870 6.00%
Tier I Capital
(To average assets) $34,669 12.17% $11,394 4.00% $14,244 5.00%
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, 2005 and 2004 were as follows:
2005 2004
----------- -----------
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit $20,417,688 $15,866,324
Financial standby letters of credit 1,497,865 1,741,568
Performance standby letters of credit 570,307 846,260
Dealer floor plans 1,042,843 852,161
45
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, 2005 varied from 0 percent to 100 percent; the
average amount collateralized was 88.6 percent.
The Corporation's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit and
letters of credit is represented by the contractual notional amount of those
instruments. The Corporation uses the same credit policies in making commitments
and conditional obligations, as it does for on-balance sheet instruments.
The Corporation granted commercial, consumer and residential loans to
customers primarily within Pennsylvania. Of the total loan portfolio 83.48% 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.
46
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, 2005
and 2004.
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.
47
At December 31, 2005 and 2004, the carrying values and estimated fair
values of financial instruments are presented in the table below:
2005 2004
--------------------------- ---------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------ ------------ ------------ ------------
Financial Assets:
Cash and short-term investments $ 11,361,824 $ 11,361,824 $ 12,832,527 $ 12,832,527
Investment securities 53,919,318 53,919,318 61,834,051 61,834,051
Loans:
Commercial 12,096,895 12,045,774 12,181,900 12,169,946
Tax-exempt 9,018,852 8,909,839 10,061,809 9,853,309
Real estate - construction 1,548,536 1,555,311 733,642 731,745
Real estate 127,170,179 127,027,330 122,104,012 122,368,121
Personal 4,347,575 4,497,305 4,738,159 4,944,444
------------ ------------ ------------ ------------
Gross loans 154,182,037 154,035,559 149,819,522 150,067,565
Add (Deduct): Unearned discount (29,824) -- (46,195) --
Unamortized loan fees, net of costs 119,149 -- 126,374 --
------------ ------------ ------------ ------------
Loans, net of unearned income 154,271,362 154,035,559 149,899,701 150,067,565
Allowance for losses 1,552,576 -- 1,391,826 --
------------ ------------ ------------ ------------
Net loans $152,718,786 $154,035,559 $148,507,875 $150,067,565
============ ============ ============ ============
Cash surrender value of bank owned life insurance $ 6,480,223 $ 6,480,223 $ 6,199,187 $ 6,199,187
Financial Liabilities:
Deposits:
Demand - non-interest bearing $ 18,249,315 $ 18,249,315 $ 18,687,440 $ 18,687,440
Demand - interest bearing 28,858,627 28,858,627 30,572,645 30,572,645
Savings 34,767,792 34,767,792 37,825,629 37,825,629
Time - $100,000 and over 25,627,611 25,399,928 26,329,758 26,587,624
Other time 57,343,513 56,869,479 59,071,637 59,601,171
------------ ------------ ------------ ------------
Total Deposits $164,846,858 $164,145,141 $172,487,109 $173,274,509
============ ============ ============ ============
Short-Term Borrowings $ 24,599,711 $ 24,599,711 $ 21,757,386 $ 21,757,386
Long-Term Borrowings 11,310,669 12,074,820 11,323,443 12,709,260
Off-Balance Sheet Assets (Liabilities):
Commitments to extend credit $ 20,417,688 $ 15,866,324
Standby letters of credit 1,497,865 1,741,568
Performance standby letters of credit 570,307 846,260
Dealer floor plans 1,042,843 852,161
48
19. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for CCFNB Bancorp, Inc. (Parent Company
only) was as follows:
December 31,
-------------------------
BALANCE SHEETS 2005 2004
-------------- ----------- -----------
Assets
Cash $ 155,207 $ 178,134
Investment in subsidiary 27,437,827 26,850,446
Investment in other equity securities 1,264,946 1,378,220
Prepayments and other assets 198,909 245,276
Receivable from subsidiary 38,014 --
----------- -----------
Total Assets $29,094,903 $28,652,076
=========== ===========
Liabilities and Stockholders' Equity
Accrued expenses and other liabilities $ 82,477 $ 110,717
Payable to subsidiary -- 34,862
----------- -----------
Total Liabilities 82,477 145,579
----------- -----------
Stockholders' Equity
Common stock 1,572,921 1,584,648
Surplus 3,126,502 3,384,761
Retained earnings 24,616,500 23,323,955
Accumulated other comprehensive income (loss) (303,497) 213,133
----------- -----------
Total Stockholders' Equity 29,012,426 28,506,497
----------- -----------
Total Liabilities and Stockholders' Equity $29,094,903 $28,652,076
=========== ===========
Years Ended December 31,
------------------------------------
STATEMENTS OF INCOME 2005 2004 2003
-------------------- ----------- ----------- ----------
Income
Dividends from subsidiary bank $ 1,223,000 $ 967,703 $ 2,312,406
Dividends - other 40,660 37,256 23,432
Securities gains 33,947 -- 2,804
Other -- 174 --
Interest 1,416 2,661 2,597
----------- ----------- -----------
Total Income 1,299,023 1,007,794 2,341,239
Operating expenses 109,927 97,013 80,396
----------- ----------- -----------
Income Before Taxes and Equity in Undistributed
Net Income of Subsidiary 1,189,096 910,781 2,260,843
Applicable income tax (benefit) (17,340) (22,555) (21,133)
----------- ----------- -----------
Income Before Equity in Undistributed Net Income of Subsidiary
and Equity in Income from Insurance Agency 1,206,436 933,336 2,281,976
Equity in (excess of) undistributed income of subsidiary 1,007,756 1,266,829 (123,944)
Income from investment in insurance agency 11,366 17,248 4,865
----------- ----------- -----------
Net Income $ 2,225,558 $ 2,217,413 $ 2,162,897
=========== =========== ===========
STATEMENTS OF CASH FLOWS
Operating Activities:
Net income $ 2,225,558 $ 2,217,413 $ 2,162,897
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes 3,864 5,665 1,975
Securities gains (33,947) -- (2,804)
Distributions in excess of (equity in undistributed)
net income of subsidiary (1,007,756) (1,266,829) 123,944
(Income) from investment in an insurance agency (11,366) (17,248) (4,865)
(Increase) decrease in prepayments and other assets 57,733 (47,082) 23,823
(Increase) decrease in receivable from subsidiary (38,014) 35,181 (35,181)
Increase (decrease) in payable to subsidiary (34,862) 34,862 (20,084)
Increase (decrease) in income taxes and accrued expenses payable 17,482 -- (47,963)
----------- ----------- -----------
Net Cash Provided By Operating Activities 1,178,692 961,962 2,201,742
----------- ----------- -----------
Investing Activities:
Purchase of equity securities (140,707) -- (783,217)
Proceeds from sale of equity securities 142,087 -- 34,691
----------- ----------- -----------
Net Cash Provided By (Used In) Investing Activities 1,380 -- (748,526)
----------- ----------- -----------
Financing Activities:
Acquisition of treasury stock (505,700) (467,000) (588,201)
Proceeds from issuance of common stock 235,714 206,245 193,795
Cash dividends (933,013) (890,997) (843,989)
----------- ----------- -----------
Net Cash (Used In) Financing Activities (1,202,999) (1,151,752) (1,238,395)
----------- ----------- -----------
Increase (Decrease) in Cash and Cash Equivalents (22,927) (189,790) 214,821
Cash and Cash Equivalents at Beginning of Year 178,134 367,924 153,103
----------- ----------- -----------
Cash and Cash Equivalents at End of Year $ 155,207 $ 178,134 $ 367,924
=========== =========== ===========
49
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of CCFNB Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of CCFNB Bancorp,
Inc. and Subsidiary as of December 31, 2005 and 2004, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 2005.
These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of CCFNB
Bancorp, Inc. and Subsidiary as of December 31, 2005 and 2004, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2005 in conformity with
accounting principles generally accepted in the United States of America.
(J. H. WILLIAMS & CO., LLP)
J. H. Williams & Co., LLP
Kingston, Pennsylvania
January 13, 2006
50
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF OUR DISCLOSURE CONTROLS AND INTERNAL CONTROLS. 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 as of December
31, 2005.
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 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 Commission'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.
Our Company has created a disclosure committee. The committee consists of nine
key management personnel. The purpose of the committee is to verify that all
internal controls and procedures are in place in each area of authority. Whistle
Blowing procedures have been put in place and communicated to all directors and
employees. The disclosure committee meets quarterly before each quarter end.
We design Internal Controls procedures with the objective of providing
reasonable assurance that: (1) our transactions are properly authorized; (2) our
assets are safeguarded against unauthorized or improper use; and (3) our
transactions are properly recorded and reported, all to permit the preparation
of our financial statements in conformity with generally accepted accounting
principals.
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS. Our management, including the CEO
and Treasurer, does not expect that our Disclosure Controls or our Internal
Controls will prevent all error or all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system 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, a control system 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 such controls'
objectives and design, such control's implementation by us and the Bank and the
effect of these controls on the information generated for use in this report. In
the course of the Controls Evaluation, we sought to identify data errors,
controls problems or acts of fraud and to confirm that appropriate corrective
action, including process improvements, were being undertaken. This type of
evaluation will be done on a quarterly basis so that the conclusions concerning
controls effectiveness can be reported in our Quarterly Reports on Form 10-Q and
Annual Reports on Form 10-K. Our Internal Controls are also evaluated on an
ongoing basis by our outside internal auditors, by other personnel in the Bank
and by our external independent auditors in connection with their audit and
review activities. The overall goals of these various evaluation activities are
to monitor our Disclosure Controls and Internal Controls and to make
modifications as necessary. Our intent in this regard is that the Disclosure
Controls and Internal Controls will be maintained as dynamic systems that change
(including with improvements and corrections) as conditions warrant.
Among other matters, we sought in our evaluation to determine whether there were
any "significant deficiencies" or "material weaknesses" in our and the Bank's
Internal Controls, or whether we had identified any acts of fraud involving
personnel who have a significant role in our and the Bank's Internal Controls.
This information was important both for the Controls Evaluation generally and
because items 5 and 6 in the Section 302 Certifications of the CEO and Treasurer
require that the CEO and Treasurer disclose that information to our Board's
Audit Committee and to our independent auditors and to report on related matters
in this section of our Annual Report. In the professional auditing literature,
"significant deficiencies" are referred to as "reportable conditions". These are
control issues that could have a significant adverse effect on the ability to
record, process, summarize and report financial data in the
51
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 or correction to make in accord with our on-going
procedures.
In accord with Commission requirements, the CEO and Treasurer note that, as of
December 31, 2005, 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, as of December 31, 2005, 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 as of December 31, 2005, to provide reasonable assurance
that our financial statements are fairly presented in conformity with generally
accepted accounting principles.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The Corporation has nine directors who are divided into three classes: three
directors are in Class 1; three directors are in Class 2; and three directors
are in Class 3. Each director holds office for a three-year term. The terms of
the classes are staggered, so that the term of office of one class expires each
year.
At this meeting, the stockholders elect three Class 3 directors. Unless you
withhold authority to vote for one or more of the nominees, the persons named as
proxies intend to vote for the election of the three nominees for Class 3
director. All of the nominees are recommended by the Board of Directors:
Edward L. Campbell
Frank D. Gehrig
Elwood R. Harding, Jr.
All nominees have consented to serve as directors. The Board of Directors has no
reason to believe that any of the nominees should be unable to act as a
director. However, if any director is unable to stand for re-election, the Board
of Directors will designate a substitute. If a substitute nominee is named, the
proxies will vote for the election of the substitute.
The following information includes the age of each nominee and current director
as of the date of the meeting. All directors of the Corporation are also
directors of the bank.
CLASS 1 DIRECTORS WHOSE TERM EXPIRES IN 2008
ROBERT M. BREWINGTON, JR., 55
Director since 1996. Owner of Sutliff Motors and Brewington Transportation
and a part owner of J&B Rentals (sales and service of cars and trucks;
school bus contractor). Mr. Brewington is the brother of Sally Tucker, the
bank's Marketing Director.
WILLARD H. KILE, JR., D.M.D., 51
Director since 2000. Partner of Kile & Robinson LLC (dentists); Partner of
Kile & Kile Real Estate. Mr. Kile is a first cousin to Lance O. Diehl, our
President and Chief Executive Officer.
CHARLES E. LONG, 70
Director since 1993. Retired. Former President of Long Supply Co., Inc. (a
wholesaler and retailer of hardware and masonry products).
52
CLASS 2 DIRECTORS WHOSE TERM EXPIRES IN 2007
LANCE O. DIEHL, 40
Director since 2003. President and Chief Executive Officer of the
Corporation and the bank. Former Executive Vice President of Branch
Operations and Marketing of the bank. Mr. Diehl is a first cousin to Mr.
Kile, a director.
WILLIAM F. HESS, 72
Director since 1983. Former Chairman of the Corporation and the bank. Dairy
farmer.
PAUL E. REICHART, 68
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 AND NOMINEES FOR CLASS 3 DIRECTORS
WHOSE TERM WILL EXPIRE IN 2009
EDWARD L. CAMPBELL, 67
Director since 1985. Secretary of the Corporation and the bank. President
of ELC Enterprises, Inc. and a partnerpartnerpartner of Heritage Acres,
Christmas tree sales.
FRANK D. GEHRIG, 60
Director since 2004. Partner in Accounting Firm of Brewer, Gehrig &
Johnson, Certified Public Accountants.
ELWOOD R. HARDING, JR., 59
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, 2005:
NAME & POSITION HELD SINCE EMPLOYEE SINCE AGE
--------------- ---------- -------------- ---
Paul E. Reichart, Employee
Chairman 2004 1960 - 2004 68
Edward L. Campbell,,
Secretary 2004 * 67
Elwood R. Harding, Jr.,
Vice Chairman 2004 * 59
Lance O. Diehl,
President and Chief Executive Officer 2004 1995 40
Virginia D. Kocher
Treasurer and Assistant Secretary 1991 1972 58
* Not an employee of the Company and the Bank.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Executive officers and directors and "beneficial owners" of more than ten
percent of the Common Stock must file initial reports of ownership and reports
of changes in ownership with the SEC pursuant to Section 16(a) of the Securities
Exchange Act of 1934.
We have reviewed the reports and written representations from the executive
officers and directors. The Corporation believes that all filing requirements
were met during 2005.
53
CODE OF ETHICS
All our employees, including our Chief Executive Officer, Chief Financial
Officer and Principal Accounting Officer are required to abide by our Code of
Ethics to ensure that our business is conducted in a consistently legal and
ethical manner. This Code of Ethics forms the foundation of a comprehensive
process that includes compliance with all corporate policies and procedures, an
open relationship among colleagues that contributes to good business conduct,
and an abiding belief in the integrity of our employees. Our policies and
procedures cover all areas of professional conduct, including employment
policies, conflicts of interest, intellectual property and the protection of
confidential information, as well as strict adherence to all laws and
regulations applicable to the conduct of our business.
Employees are required to report any conduct they believe in good faith to be an
actual or apparent violation of the standards contained in our Code of Ethics or
any other unusual or suspicious business arrangement or behavior. The
Sarbanes-Oxley Act of 2002 requires audit committees to have procedures to
receive, retain and treat complaints received regarding accounting, internal
accounting controls or auditing matters and to allow for the confidential and
anonymous submission by employees of concerns regarding questionable accounting
or auditing matters. We currently have such procedures in place.
In addition, the members of our Board of Directors are required to comply with
the Code of Ethics. This Code of Ethics is intended to focus the Board and the
individual directors on areas of ethical risk, help directors recognize and deal
with ethical issues, provide mechanisms to report unethical conduct, and foster
a culture of honesty and accountability. The Code of Ethics covers all areas of
professional conduct relating to service on the Board, including conflicts of
interest, unfair or unethical use of corporate opportunities, strict maintenance
of confidential information, compliance with all applicable laws and regulations
and oversight of ethics and compliance by employees of the Company.
Copies of our Code of Ethics will be provided without charge upon written
request to: Virginia D. Kocher, Treasurer, 232 East Street, Bloomsburg, PA
17815. This Code of Ethics is also included in this 10K as Exhibit 14.
ITEM 11. EXECUTIVE COMPENSATION
This section of the report contains a table that shows the amounts of
compensation earned by our executive officers whose salary and bonus exceeded
$100,000 for 2005. The bank makes all payments to the applicable executive
officers. This section also contains the performance graph comparing our
performance relative to a peer group and the report of our compensation
committee on executive compensation explaining compensation philosophy for our
most highly paid officers.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION(1)
--------------------------------------
FISCAL OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) COMPENSATION($)
--------------------------- ------ --------- -------- --------------- ---------------
LANCE O. DIEHL 2005 120,000 3,870(2) 16,422(3) 22,379(4)
PRESIDENT AND CHIEF 2004 110,000 3,517(5) 15,391(6) 20,477(7)
EXECUTIVE OFFICER 2003 100,000 1,883(8) 13,048(9) 15,474(10)
EDWIN A. WENNER 2005 104,000 3,325(2) 4,293(11) 51,418(12)
EXECUTIVE VICE PRESIDENT 2004 95,000 2,975(5) 3,919(13) 47,873(14)
AND CHIEF OPERATING OFFICER 2003 85,000 1,843(8) 3,474(15) 36,767(16)
(1) From January 1, 2003 through December 31, 2005, we did not pay any
long-term compensation in the form of stock options, stock appreciation
rights, restricted stock or any other long-term compensation, nor did we
enter into any long-term incentive plan payments. Accordingly, no such
information is presented in the summary compensation table set forth above.
No such arrangements are currently in effect.
(2) Represents a cash bonus representing 3 1/2% of 2004 base salary.
(3) Includes $11,400 as the payment of directors' fees and $5,022 representing
the year 2005, 100% up to 3% and 50% up to the next 2% matching
contribution to Mr. Diehl's 401K plan.
(4) Includes $19,405 as a payment for a deferred compensation plan; $949
representing car expense; $258 representing cell phone expense; $826
representing cafeteria plan benefits, $266 as annual term insurance premium
payments on the life of Mr.
54
Diehl, $600 representing 1/3 partial corporate membership in the Berwick
Golf Club and $75 representing Years of Service Award for ten years of
employment at CCFNB.
(5) Represents a cash bonus representing 3 1/2% of 2003 base salary.
(6) Includes $10,800 as the payment of directors' fees and $4,591 representing
the year 2004, 100% up to 3% and 50% up to the next 2% matching
contribution to Mr. Diehl's 401K plan.
(7) Includes $16,047 as a payment for a deferred compensation plan; $678
representing car expense; $403 representing cell phone expense; $758
representing cafeteria plan benefits, $2,356 representing a Berwick Golf
Club membership and $235 as annual term insurance premium payments on the
life of Mr. Diehl.
(8) Represents a cash bonus representing 2 1/2% of 2002 base salary.
(9) 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.
(10) 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, $2,356 representing a Berwick Golf
Club membership and $227 as annual term insurance premium payments on the
life of Mr. Diehl.
(11) Represents the year 2005, 100% up to 3% and 50% up to the next 2% matching
contribution to Mr. Wenner's 401K plan.
(12) Includes $40,578 as a payment for a deferred compensation plan; $259
representing cell phone expense; $7,511 representing cafeteria plan
benefits, $600 representing 1/3 partial corporate membership in the Berwick
Golf Club and $2,470 as annual term insurance premium payments on the life
of Mr. Wenner.
(13) Represents the year 2004, 100% up to 3% and 50% up to the next 2% matching
contribution to Mr. Wenner's 401K plan.
(14) Includes $35,174 as a payment for a deferred compensation plan; $408
representing cell phone expense; $8,008 representing cafeteria plan
benefits, $2,356 representing a Berwick Golf Club membership and $1,927 as
annual term insurance premium payments on the life of Mr. Wenner.
(15) Represents the year 2003, 100% up to 3% and 50% up to the next 2% matching
contribution to Mr. Wenner's 401K plan.
(16) Includes $24,328 as a payment for a deferred compensation plan; $420
representing cell phone expense, $8,410 representing cafeteria plan
benefits, $2,356 representing a Berwick Golf Club membership and $1,253 as
annual term insurance premium payments on the life of Mr. Wenner.
COMMITTEE REPORT ON
EXECUTIVE COMPENSATION
(HOW WE DETERMINE EXECUTIVE COMPENSATION)
COMPOSITION OF COMMITTEE
All of our independent directors deem executive compensation to be very
important to the overall development and performance of the company, so they
decided to sit as our committee on executive compensation. Mr. Diehl, the
President and Chief Executive Officer, and Mr. Reichart, the Chairman, do not
participate in discussions and decisions concerning their performance and
compensation. All of our other directors meet the independence standards
contained in Rule 4200(a)(15) of the listing rules for The NASDAQ Stock Market.
In addition to this committee on executive compensation, the bank has a Human
Resource Committee comprised of four of our directors who also serve as
directors of the bank. One of those directors is Mr. Reichart who is also the
Chairman of the bank. The bank's Human Resource Committee discusses and reviews
evaluations of all management positions within the bank, except for Messrs
Reichart, the Chairman, Diehl, the President and Chief Executive Officer, and
Wenner, the Executive Vice President and Chief Operating Officer. The
compensation committee on executive compensation is solely responsible for the
compensation decisions involving the latter three officers.
Objectives Of Executive Compensation
Our executive compensation policy aims to:
- Link the executive's goals with your interests as stockholders;
- Support our strategic business plan and long-term development;
- Tie a portion of the executive's compensation to our overall
performance; and
- Attract and retain talented management.
Type Of Compensation
We utilize annual compensation which includes salary, bonus and contributions to
our 401K profit sharing plan. We award bonuses based upon our and the specific
executive's performance as a whole and may award bonuses based on the specific
executive's performance.
55
We do not have a long-term compensation program based upon the award of stock
options and restricted stock or other long-term incentive awards. However, we do
have long-term compensation agreements. See the discussion of these agreements
elsewhere in this 10K. We may consider the award of stock options in the future.
Factors Considered In Determining Compensation
Our committee on executive compensation wants the compensation of an executive
to be competitive with other commercial banking institutions doing business in
similar markets. Each year, our compensation committee on executive compensation
and the bank's Human Resources Committee reviews a report from an outside
consultant that delineates compensation at peer group banking companies;
discusses such report as well as the performance and compatibility to the
position with each executive; and takes into consideration recommendations by
such executives supervisory officers or by members of the Board of Directors for
the senior most executives. The total executive compensation for Mr. Diehl
places his compensation below the average of the lowest percentile and for Mr.
Wenner above the average of the median percentile, of bank executives in peer
group companies based upon the report of the consultant. Mr. Reichart's
compensation is based upon his lifelong experience in the banking industry as
well as a survey of the compensation afforded to chairmen of local banking
organizations in our Market Area. All of these factors are taken into
consideration in the determination of the compensation of the executives as a
group and of the officers individually.
Annual Compensation
Annual compensation for our senior executives includes salary, any bonus and
contribution to his 401K profit sharing plan. This is similar to the
compensation programs for most of our peer group banking companies.
Chief Executive Officer Compensation
Mr. Diehl received total compensation of $162,671 in the year 2005. Please refer
to the Summary Compensation Table for more details.
We established the following 2006 compensation package for Mr. Diehl: Annual
salary to be paid is $135,000 and we expect the other payment and benefits
described in the Summary Compensation Table to remain comparable in 2006 as in
2005. The Deferred Compensation amount is expected to increase approximately
$731 in 2006.
Chief Operating Officer Compensation
Mr. Wenner received total compensation of $163,036 in the year 2005. Please
refer to the Summary Compensation Table for more details.
We established the following 2006 compensation package for Mr. Wenner: Annual
salary to be paid is $115,000, and we expect the other payment and benefits
described in the Summary Compensation Table to remain comparable in 2006 as in
2005. The Deferred Compensation amount is expected to increase approximately
$2,400 in 2006.
Other Factors That Influenced Compensation
Our Compensation Committee considered that Mr. Diehl has worked for the bank for
a total of 12 years and has 18 years experience in the financial services
industry. Mr. Diehl is a magna cum laude graduate of Bloomsburg University,
receiving a Bachelor of Science in Business Administration; holds a Masters in
Business Administration from Lehigh University; and is a graduate of the Stonier
Graduate School of Banking.
56
Mr. Wenner has been employed at CCFNB since May 1974. During this time, he has
held duties as Teller, Technology Director, Internal Auditor, Loan Officer,
Community Office Manager, Credit Administrator, Vice President, Senior Vice
President and his present position of Executive Vice President and Chief
Operating Officer. In his present capacity, Mr. Wenner has direct supervision
over areas which include accounting, data deposit operations, information
technology, human resources, training, compliance, security, credit
administration and branch administration.
Committee on Executive Compensation
Robert M. Brewington, Jr.
Edward L. Campbell
Frank D. Gehrig
Elwood R. Harding, Jr.
William F. Hess
Willard H. Kile, Jr.
Charles E. Long
Deferred Compensation Agreements for Executive Officers
In 1992, the Bank entered into agreements with two executive officers, Paul E.
Reichart and J. Jan Girton, to establish non-qualified deferred compensation
plans. Each officer deferred compensation in order to participate in this
Deferred Compensation Plan. If the officer continued to serve as an officer of
the Bank until he attained 65 years of age, the Bank agreed to pay him 120
consecutive monthly payments commencing on the first day of the month following
that officer's 65th birthday. Each officer's monthly payment is based upon the
future value of life insurance purchased with the compensation the officer has
deferred. The Bank has obtained life insurance (designating the bank as the
beneficiary) on the life of each of these officers in an amount which is
intended to cover the bank's obligations under this Deferred Compensation Plan,
based upon certain actuarial assumptions.
During 2002, these agreements with the two executive officers, Paul E. Reichart
and J. Jan Girton, were modified. Mr. Reichart will receive monthly payments of
$1,875 for 120 consecutive months commencing in February 2003, and Mr. Girton
will receive monthly payments of $1,458.33 for 120 consecutive months commencing
in April 2003. Mr. Girton's agreement will also provide post employment health
care benefits to him until the attainment of age 65. As of December 31, 2005 and
2004, the net cash values of insurance policies were $370,986 and $344,936,
respectively. The total accrued liability, equal to the present value of these
obligations, was $241,772 and $269,418, respectively. The accrued liability
related to the post employment health care benefit was $1,451 and $9,024 as of
December 31, 2005 and 2004, respectively. Mr. Reichart is the former President
and Chief Executive Officer of the bank and currently the Chairman of the Board.
Mr. Girton served in the capacity of Chief Operating Officer and Executive Vice
President and retired in 2003.
In April 2003, the bank entered into non-qualified deferred compensation
agreements with three additional officers, Lance O. Diehl, Edwin A. Wenner and
Jacob S. Trump, to provide supplemental retirement benefits commencing with
these executive's retirement and ending 15 years thereafter. The deferred
compensation expense related to these agreements for the year ended December 31,
2005 was $91,507 and the total accrued liability as of December 31, 2005 and
December 31, 2004 was $226,348 and $134,841, respectively. Mr. Diehl is
currently the President and Chief Executive Officer. Mr. Wenner is currently the
Executive Vice President and Chief Operating Officer. Mr. Trump is currently the
Senior Vice President of Financial Planning.
57
FIVE-YEAR PERFORMANCE GRAPH
The following graph and table compare the cumulative total stockholder return on
our Common Stock during the five-year period ending on December 31, 2005, with
the cumulative total return on the SNL Securities Corporate Performance Index
(1) for 35 publicly-traded banks with under $250 million in total assets in the
United States of America, and the cumulative total return for all United States
stocks traded on the NASDAQ Stock Market. The comparison assumes the value of
the investment in our Common Stock and each index was $100 on December 31, 2000,
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
TOTAL RETURN PERFORMANCE
(PERFORMANCE GRAPH)
PERIOD ENDING
---------------------------------------------------------------
INDEX 12/31/00 12/31/01 12/31/02 12/31/03 12/31/04 12/31/05
----- -------- -------- -------- -------- -------- --------
CCFNB Bancorp, Incorporated 100.00 143.65 153.34 185.01 182.77 197.44
NASDAQ Composite 100.00 79.18 54.44 82.09 89.59 91.54
SNL <$250M Bank Index 100.00 124.68 153.22 231.70 286.49 298.88
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 12/31/00.
(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.
58
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
This section describes how much stock our directors and executive officers own.
It also describes the persons or entities that own more than 5 percent of our
voting stock.
STOCK OWNED BY DIRECTORS, NOMINEES FOR DIRECTOR AND THE PRINCIPAL FINANCIAL
OFFICER
This table indicates the number of shares of Common Stock owned by the executive
officers and directors as of February 28, 2006. The aggregate number of shares
owned by all directors and executive officers is 4.97 percent. Unless otherwise
noted, each individual has sole voting and investment power for the shares
indicated below.
NAME OF INDIVIDUAL AMOUNT AND NATURE OF
OF IDENTITY OF GROUP BENEFICIAL OWNERSHIP(1) PERCENT OF CLASS
-------------------- ----------------------- ----------------
Robert M. Brewington, Jr 9,047.414 --
Edward L. Campbell 7,528.643 --
Lance O. Diehl 1,716.306 --
Frank D. Gehrig 2,248.480
Elwood R. Harding, Jr 15,677.002 1.25%
William F. Hess 4,904.889 --
Willard H. Kile, Jr 5,272.668 --
Virginia D. Kocher 391.000 --
Charles E. Long 6,700.386 --
Paul E. Reichart 8,880.000 --
All Officers and Directors as a group
(9 directors, 3 nominees, 5 officers,
10 persons in total) 62,366.788 4.97%
(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 December 31, 2005.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We encourage our directors and executive officers to have banking and financial
transactions with the Bank. All of these transactions are made on comparable
terms and with similar interest rates as those prevailing for other customers.
The total consolidated loans made by the Bank at December 31, 2005, to its
directors and officers as a group, members of their immediate families and
companies in which they have a 10 percent or more ownership interest was
$4,689,662 or approximately 16.16 percent of our total consolidated capital
accounts. The largest amount for all of these loans in 2005 was $4,751,699 or
approximately 16.38 percent of our total consolidated capital accounts. These
loans did not involve more than the normal risk of collectibility nor did they
present other unfavorable features.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
J. H. Williams & Co., LLP, billed the Corporation $67,000, in 2005, for services
rendered for the audit of the Corporation's annual financial statements for the
year ended December 31, 2005 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, 2005.
AUDIT RELATED FEES
J. H. Williams & Co., LLP, billed the Corporation $10,250, in 2005, for the
performance of agreed upon procedures with respect to the trust department
($6,300) and the retail sales of non-deposit investment products of the bank
($3,950).
59
TAX FEES
J. H. Williams & Co., LLP, billed the Corporation $5,800, in 2005, for tax
compliance, tax advice and tax planning.
ALL OTHER FEES
J. H. Williams & Co., LLP billed the Corporation $0, in 2005, 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.
60
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1. Our consolidated financial statements and notes to these statements as
well as the applicable reports of the independent certified public accountants
are filed at Item 8 in this report.
2. All schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes to these
statements.
3. The exhibits required by Item 601 of Regulation S-K are included under
Item 15(b) of this report.
(b) Exhibits required by Item 601 of Regulation S-K:
Exhibit Number Referred to
Item 601 of Regulation SK Description of Exhibit
-------------------------- ----------------------
2 None.
3.1 Amended and Restated Articles of Incorporation
(Incorporated by reference to Exhibit 3.1 to
Registrant's Current Report on Form 8-K, dated May
9, 2005, filed with the Commission on May 10,
2005).
3.2 Amended Bylaws (Incorporated by reference to
Exhibit 3.2 to Registrants Current Report on Form
8-K, dated November 9, 2005, filed with the
Commission on November 10, 2005.
4 None.
9 None.
10.1 Executive Employment Agreement of Lance O. Diehl
(Incorporated by reference to Exhibit 10.1 to
Registrant's Current Report on Form 8-K, dated
December 14, 2004, filed with the Commission on
December 15, 2004).
10.2 Executive Employment Agreement of Edwin A. Wenner
(Incorporated by reference to Exhibit 10.2 to
Registrant's Current Report on Form 8-K, dated
December 14, 2004, filed with the Commission on
December 15, 2004).
10.3 Form of Deferred Director Fees Agreement and Eight
Conformed Signature Pages (Incorporated by
reference to Exhibit 10.3 to Registrant's Current
Report on Form 8-K, dated December 14, 2004, filed
with the Commission on December 15, 2004).
10.4 Supplemental Executive Retirement Plan Agreement
and Amendment for Lance O. Diehl (Incorporated by
reference to Exhibit 10.4 to Registrant's Current
Report on Form 8-K, dated December 14, 2004, filed
with the Commission on December 15, 2004).
10.5 Supplemental Executive Retirement Plan Agreement
and Amendment for Edwin A. Wenner (Incorporated by
reference to Exhibit 10.5 to Registrant's Current
Report on Form 8-K, dated December 14, 2004, filed
with the Commission on December 15, 2004).
10.6 Supplemental Executive Retirement Plan Agreement
for Jacob S. Trump (Incorporated by reference to
Exhibit 10.6 to Registrant's Current Report on Form
8-K, dated December 14, 2004, filed with the
Commission on December 15, 2004).
11 None.
12 None.
14 Code of Ethics
16 None.
18 None.
61
21 List of Subsidiaries of the Company.
22 None.
23 Consent of Independent Certified Public Accountants.
24 None.
31.1 CEO certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Principal Financial Officer certification pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 CEO certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Principal Financial Officer certification pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
99.1 Charter of the Audit Committee as of February 9,
2006
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CCFNB BANCORP, INC.
(Bancorp)
By: /s/ Lance O. Diehl Date: March 9, 2006
---------------------------------
Lance O. Diehl
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ Edward L. Campbell Date: March 9, 2006
---------------------------------
Edward L. Campbell
Director and Secretary
By: /s/ Robert M. Brewington, Jr. Date: March 9, 2006
---------------------------------
Robert M. Brewington, Jr.
Director
By: /s/ Frank D. Gehrig Date: March 9, 2006
---------------------------------
Frank D. Gehrig
Director
By: /s/ Lance O. Diehl Date: March 9, 2006
---------------------------------
Lance O. Diehl
President, Chief Executive
Officer and Director
By: /s/ Elwood R. Harding, Jr. Date: March 9, 2006
---------------------------------
Elwood R. Harding, Jr.
Director and Vice Chairman of
the Board
By: /s/ William F. Hess Date: March 9, 2006
---------------------------------
William F. Hess
Director
63
By: /s/ Willard H. Kile, Jr. Date: March 9, 2006
---------------------------------
Willard H. Kile, Jr.
Director
By: /s/ Charles E. Long Date: March 9, 2006
---------------------------------
Charles E. Long
Director
By: /s/ Paul E. Reichart Date: March 9, 2006
---------------------------------
Paul E. Reichart
Director, Chairman of the Board
By: /s/ Virginia D. Kocher Date: March 9, 2006
---------------------------------
Virginia D. Kocher
Treasurer and Assistant Secretary
(Principal Financial and
Accounting Officer)
64
INDEX TO EXHIBITS
Item Number Description Page
----------- ----------- ----
14 Code of Ethics............................................. 66
21 List of Subsidiaries of the Company........................ 71
23 Consent of Independent Certified Public Accountants........ 72
31.1 CEO certification pursuant to Section 302 of the Sarbanes
-Oxley Act of 2002...................................... 73
31.2 Principal Financial Officer certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002........... 74
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............................................. 75
32.2 Principal Financial Officer certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
ofthe Sarbanes-Oxley Act of 2002........................ 76
99.1 Charter of Audit Committee................................. 77
65