SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2006
[ ] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ______________ to _____________
Commission file number 0-19028
CCFNB BANCORP, INC.
(Name of small business Issuer in its charter)
PENNSYLVANIA 23-2254643
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
232 East Street, Bloomsburg, PA 17815
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (570) 784-4400
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirings for the past 90
days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. 1,252,566 shares of $1.25
(par) common stock were outstanding as of April 28, 2006.
CCFNB BANCORP, INC. AND SUBSIDIARY
TABLE OF CONTENTS
MARCH 31, 2006
Page
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PART 1 - FINANCIAL INFORMATION:
- Consolidated Balance Sheets 2
- Consolidated Statements of Income 3
- Consolidated Statements of Cash Flows 4
- Notes to Consolidated Financial Statements 5 - 14
- Report of Independent Registered Public Accounting Firm 15
- Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations 16 - 23
- Controls and Procedures 24
PART II - OTHER INFORMATION 25
SIGNATURES 26 - 29
CCFNB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
Unaudited
March December
31, 2006 31, 2005
--------- --------
ASSETS
Cash and due from banks $ 4,582 $ 5,123
Interest-bearing deposits with other banks 225 1,110
Federal funds sold 6,486 5,129
Investment securities available-for-sale 52,370 53,919
Loans, net of unearned income 154,381 154,271
Allowance for loan losses 1,399 1,552
-------- --------
Net loans 152,982 152,719
Premises and equipment, net 4,750 4,837
Cash surrender value of bank-owned life insurance 6,553 6,480
Accrued interest receivable 900 959
Other assets 1,127 942
-------- --------
TOTAL ASSETS $229,975 $231,218
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Non-interest bearing $ 18,022 $ 18,249
Interest bearing 148,949 146,598
-------- --------
Total Deposits 166,971 164,847
Short-term borrowings 20,546 24,600
Long-term borrowings 11,307 11,310
Accrued interest and other expenses 1,404 1,442
Other liabilities 501 6
-------- --------
TOTAL LIABILITIES 200,729 202,205
-------- --------
STOCKHOLDERS' EQUITY
Common stock, par value $1.25 per share; authorized
5,000,000 shares; issued and outstanding 1,256,566 shares
in 2006 and 1,258,337 shares in 2005 1,571 1,573
Surplus 3,078 3,127
Retained earnings 24,929 24,616
Accumulated other comprehensive income (loss) (332) (303)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 29,246 29,013
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $229,975 $231,218
======== ========
See accompanying notes to Consolidated Financial Statements.
-2-
CCFNB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE DATA)
UNAUDITED
For the Three
Months Ending
March 31,
-----------------------
2006 2005
---------- ----------
INTEREST AND DIVIDEND INCOME
Interest and fees on loans:
Taxable $ 2,379 $ 2,090
Tax-exempt 99 110
Interest and dividends on investment securities:
Taxable 401 387
Tax-exempt 83 96
Dividends 24 20
Federal funds sold 36 26
Deposits in other banks 4 6
---------- ----------
TOTAL INTEREST AND DIVIDEND INCOME 3,026 2,735
---------- ----------
INTEREST EXPENSE
Deposits 787 672
Short-term borrowings 220 114
Long-term borrowings 167 167
---------- ----------
TOTAL INTEREST EXPENSE 1,174 953
---------- ----------
Net interest income 1,852 1,782
Provision for loan losses 22 30
---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,830 1,752
---------- ----------
NON-INTEREST INCOME
Service charges and fees 187 196
Gain on sale of loans 11 15
Bank-owned life insurance income 67 67
Trust department 38 36
Other 106 96
---------- ----------
TOTAL NON-INTEREST INCOME 409 410
---------- ----------
NON-INTEREST EXPENSE
Salaries 613 552
Pensions and other employee benefits 211 204
Occupancy, net 118 116
Equipment 121 124
State shares tax 73 74
Professional services 55 86
Directors' fees 43 47
Stationery and supplies 30 32
Other 264 267
---------- ----------
TOTAL NON-INTEREST EXPENSE 1,528 1,502
---------- ----------
Income before income taxes 711 660
Income tax expense 160 136
---------- ----------
NET INCOME $ 551 $ 524
========== ==========
PER SHARE DATA
Net income $ 0.44 $ 0.41
Cash dividends $ 0.19 $ 0.18
Weighted average shares outstanding 1,255,823 1,265,223
See accompanying notes to Consolidated Financial Statements.
-3-
CCFNB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
For the Three Months
Ending March 31,
--------------------
2006 2005
-------- -------
OPERATING ACTIVITIES
Net income $ 551 $ 524
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 22 30
Depreciation and amortization 90 101
Premium amortization on investment securities 34 72
Discount accretion on investment securities (4) (5)
Deferred income taxes (benefit) 19 (20)
(Gain) on sale of loans (11) (15)
Proceeds from sale of mortgage loans 762 732
Originations of mortgage loans for resale (823) (621)
(Income) from investment in insurance agency (3) (2)
(Increase) in accrued interest receivable and other assets (128) (268)
Net (increase) in cash surrender value of bank-owned life insurance (73) (73)
Increase (decrease) in accrued interest, other expenses and other liabilities (43) 18
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 393 473
------- -------
INVESTING ACTIVITIES
Purchase of investment securities available-for-sale (544) --
Proceeds from sales, maturities and redemptions of investment
securities available-for-sale 2,520 2,891
Net (increase) decrease in loans (214) 10
Purchases of premises and equipment (3) (68)
------- -------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 1,759 2,833
------- -------
FINANCING ACTIVITIES
Net increase (decrease) in deposits 2,124 (1,248)
Net (decrease) in short-term borrowings (4,054) (2,302)
Net (decrease) in long-term borrowings (3) (3)
Acquisition of treasury stock (111) (113)
Proceeds from issuance of common stock 61 63
Cash dividends paid (238) (227)
------- -------
NET CASH (USED IN) FINANCING ACTIVITIES (2,221) (3,830)
------- -------
(DECREASE) IN CASH AND CASH EQUIVALENTS (69) (524)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 11,362 12,833
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $11,293 $12,309
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 1,174 $ 1,011
Income taxes $ 17 $ --
See accompanying notes to Consolidated Financial Statements.
-4-
CCFNB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of CCFNB Bancorp, Inc. and Subsidiary (the
"Corporation") are in accordance with the accounting principles generally
accepted in the United States of America and conform to common practices within
the banking industry. The more significant policies follow:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of CCFNB Bancorp,
Inc. and its wholly owned subsidiary, Columbia County Farmers National Bank (the
"Bank"). All significant inter-company balances and transactions have been
eliminated in consolidation.
NATURE OF OPERATIONS & LINES OF BUSINESS
The Corporation provides full banking services, including trust services,
through the Bank, to individuals and corporate customers. The Bank has seven
offices covering an area of approximately 484 square miles in Northcentral
Pennsylvania. The Corporation and its banking subsidiary are subject to
regulation of the Office of the Comptroller of the Currency, The Federal Deposit
Insurance Corporation and the Federal Reserve Bank of Philadelphia.
Procuring deposits and making loans are the major lines of business. The
deposits are mainly deposits of individuals and small businesses and the loans
are mainly real estate loans covering primary residences and small business
enterprises. The trust services, under the name of CCFNB and Co., include
administration of various estates, pension plans, self-directed IRA's and other
services. A third-party brokerage arrangement is also resident in the
Lightstreet branch. This investment center offers a full line of stocks, bonds
and other non-insured financial services.
SEGMENT REPORTING
The Corporation's banking subsidiary acts as an independent community financial
services provider, and offers traditional banking and related financial services
to individual, business and government customers. Through its branch, internet
banking, telephone and automated teller machine network, the Bank offers a full
array of commercial and retail financial services, including the taking of time,
savings and demand deposits; the making of commercial, consumer and mortgage
loans; and the providing of other financial services. The Bank also performs
personal, corporate, pension and fiduciary services through its Trust Department
as well as offering diverse investment products through its investment center.
Management does not separately allocate expenses, including the cost of funding
loan demand, between the commercial, retail, trust and investment center
operations of the Corporation. As such, discrete financial information is not
available and segment reporting would not be meaningful.
-5-
USE OF ESTIMATES
The preparation of these consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of these consolidated financial statements and the
reported amounts of income and expenses during the reporting periods. Actual
results could differ from those estimates.
INVESTMENT SECURITIES
The Corporation classifies its investment securities as either
"held-to-maturity" or "available-for-sale" at the time of purchase. Debt
securities are classified as held-to-maturity when the Corporation has the
ability and positive intent to hold the securities to maturity. Investment
securities held-to-maturity are carried at cost adjusted for amortization of
premiums and accretion of discounts to maturity.
Debt securities not classified as held-to-maturity and equity securities
included in the available-for-sale category, are carried at fair value, and the
amount of any unrealized gain or loss net of the effect of deferred income taxes
is reported as other comprehensive income (loss) (see Note 6). Management's
decision to sell available-for-sale securities is based on changes in economic
conditions controlling the sources and uses of funds, terms, availability of and
yield of alternative investments, interest rate risk, and the need for
liquidity.
The cost of debt securities classified as held-to-maturity or available-for-sale
is adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization and accretion, as well as interest and dividends, is included
in interest income from investments. Realized gains and losses are included in
net investment securities gains. The cost of investment securities sold,
redeemed or matured is based on the specific identification method.
LOANS
Loans are stated at their outstanding principal balances, net of deferred fees
or costs, unearned income, and the allowance for loan losses. Interest on loans
is accrued on the principal amount outstanding, primarily on an actual day
basis. Non-refundable loan fees and certain direct costs are deferred and
amortized over the life of the loans using the interest method. The amortization
is reflected as an interest yield adjustment, and the deferred portion of the
net fees and costs is reflected as a part of the loan balance.
Real estate mortgage loans held for resale are carried at the lower of cost or
market on an aggregate basis. These loans are sold with limited recourse to the
Corporation.
PAST DUE LOANS - Generally, a loan is considered past due when a payment is in
arrears for a period of 10 or 15 days, depending on the type of loan. Delinquent
notices are issued at this point and collection efforts will continue on loans
past due beyond 60 days which have not been satisfied. Past due loans are
continually evaluated with determination for charge-off being made when no
reasonable chance remains that the status of the loan can be improved.
-6-
NON-ACCRUAL LOANS - Generally, a loan is classified as non-accrual, with the
accrual of interest on such a loan discontinued when the contractual payment of
principal or interest has become 90 days past due or management has serious
doubts about further collectibility of principal or interest, even though the
loan currently is performing. A loan may remain on accrual status if it is in
the process of collection and is either guaranteed or well secured. When a loan
is placed on non-accrual status, unpaid interest credited to income in the
current year is reversed, and unpaid interest accrued in prior years is charged
against the allowance for loan losses. Certain non-accrual loans may continue to
perform, wherein, payments are still being received with those payments
generally applied to principal. Non-accrual loans remain under constant scrutiny
and if performance continues, interest income may be recorded on a cash basis
based on management's judgement as to collectibility of principal.
ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is established through
provisions for loan losses charged against income. Loans deemed to be
uncollectible are charged against the allowance for loan losses, and subsequent
recoveries, if any, are credited to the allowance.
A factor in estimating the allowance for loan losses is the measurement of
impaired loans. A loan is considered impaired when, based on current information
and events, it is probable that the Corporation will be unable to collect all
amounts due according to the contractual terms of the loan agreement. Under
current accounting standards, the allowance for loan losses related to impaired
loans is based on discounted cash flows using the loan's effective interest rate
or the fair value of the collateral for certain collateral dependent loans. The
recognition of interest income on impaired loans is the same as for non-accrual
loans as discussed above.
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. This allowance is estimated by management and is
classified in other liabilities.
DERIVATIVES
The Bank has outstanding loan commitments that relate to the origination of
mortgage loans that will be held for resale. Pursuant to Statement of Financial
Accounting Standards (SFAS) No. 133 "Accounting for Derivative Instruments and
Hedging Activities" as amended by SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities", and SFAS No. 149
"Amendments to SFAS 133 on Derivative Instruments and Hedging Activities" and
the guidance contained in the Derivatives Implementation Group Statement 133
Implementation Issue No. C 13, the Bank has accounted for such loan commitments
as derivative instruments. The outstanding loan commitments in this category did
not give rise to any losses for the three-month period ended March 31, 2006 and
the year ended December 31, 2005, as the fair market value of each outstanding
loan commitment exceeded the Bank's cost basis in each loan commitment.
-7-
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation computed
principally on the straight-line method over the estimated useful lives of the
assets. Maintenance and minor repairs are charged to operations as incurred. The
cost and accumulated depreciation of the premises and equipment retired or sold
are eliminated from the property accounts at the time of retirement or sale, and
the resulting gain or loss is reflected in current operations.
MORTGAGE SERVICING RIGHTS
The Corporation originates and sells real estate loans to investors in the
secondary mortgage market. After the sale, the Corporation retains the right to
service some of these loans. When originated mortgage loans are sold and
servicing is retained, a servicing asset is capitalized based on relative fair
value at the date of sale. Servicing assets are amortized as an offset to other
fees in proportion to, and over the period of, estimated net servicing income.
The unamortized cost is included in other assets in the accompanying
consolidated balance sheet. The servicing rights are periodically evaluated for
impairment based on their relative fair value.
OTHER REAL ESTATE OWNED
Real estate properties acquired through, or in lieu of, loan foreclosure are
held for sale and are initially recorded at fair value on the date of
foreclosure establishing a new cost basis. After foreclosure, valuations are
periodically performed by management and the real estate is carried at the lower
of carrying amount or fair value less cost to sell and is included in other
assets. Revenues derived from and costs to maintain the assets and subsequent
gains and losses on sales are included in other non-interest income and expense.
BANK OWNED LIFE INSURANCE
The Corporation invests in Bank Owned Life Insurance (BOLI). Purchase of BOLI
provides life insurance coverage on certain directors and employees with the
Corporation being owner and primary beneficiary of the policies.
INVESTMENT IN INSURANCE AGENCY
On January 2, 2001, the Corporation acquired a 50% interest in a local insurance
agency, a corporation organized under the laws of the Commonwealth of
Pennsylvania. The income or loss from this investment is accounted for under the
equity method of accounting. The carrying value of this investment as of March
31, 2006 and December 31, 2005 was $202,000 and $199,000, respectively, and is
carried in other assets in the accompanying consolidated balance sheets.
-8-
INCOME TAXES
The provision for income taxes is based on the results of operations, adjusted
primarily for tax-exempt income. Certain items of income and expense are
reported in different periods for financial reporting and tax return purposes.
Deferred tax assets and liabilities are determined based on the differences
between the consolidated financial statement and income tax bases of assets and
liabilities measured by using the enacted tax rates and laws expected to be in
effect when the timing differences are expected to reverse. Deferred tax expense
or benefit is based on the difference between deferred tax asset or liability
from period to period.
PER SHARE DATA
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share", requires dual presentation of basic and diluted earnings per share.
Basic earnings per share is calculated by dividing net income by the weighted
average number of shares of common stock outstanding at the end of each period.
Diluted earnings per share is calculated by increasing the denominator for the
assumed conversion of all potentially dilutive securities. The Corporation does
not have any securities which have or will have a dilutive effect, accordingly,
basic and diluted per share data are the same.
CASH FLOW INFORMATION
For purposes of reporting consolidated cash flows, cash and cash equivalents
include cash on hand and due from banks, interest-bearing deposits in other
banks and federal funds sold. The Corporation considers cash classified as
interest-bearing deposits with other banks as a cash equivalent because they are
represented by cash accounts essentially on a demand basis. Federal funds are
also included as a cash equivalent because they are generally purchased and sold
for one-day periods.
TRUST ASSETS AND INCOME
Property held by the Corporation in a fiduciary or agency capacity for its
customers is not included in the accompanying consolidated financial statements
because such items are not assets of the Corporation. Trust Department income is
generally recognized on a cash basis and is not materially different than if it
was reported on an accrual basis.
RECENT ACCOUNTING PRONOUNCEMENTS
In 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.
-9-
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 three-month periods ended
March 31, 2006 and 2005 was approximately $21,000 and $19,000, respectively.
-10-
RECLASSIFICATION
Certain amounts in the consolidated financial statements of the prior years have
been reclassified to conform with presentation used in the 2006 consolidated
financial statements. Such reclassifications had no effect on the Corporation's
consolidated financial condition or net income.
NOTE 2 - ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the three-month periods ended March
31, 2006 and March 31, 2005 were as follows:
(Amounts in Thousands)
----------------------
2006 2005
------ ------
Balance, beginning of year $1,552 $1,392
Provision charged to operations 22 30
Loans charged-off (191) (7)
Recoveries 16 27
------ ------
Balance, March 31 $1,399 $1,442
====== ======
At March 31, 2006, the total recorded investment in loans that are considered to
be impaired as defined by SFAS No. 114 was $548,000. These impaired loans had a
related allowance for loan losses of $82,000. No additional charge to operations
was required to provide for the impaired loans since the total allowance for
loan losses is estimated by management to be adequate to provide for the loan
loss allowance required by SFAS No. 114 along with any other potential losses.
At March 31, 2006, there were no significant commitments to lend additional
funds with respect to non-accrual and restructured loans.
Non-accrual loans at March 31, 2006 and December 31, 2005 were $548,000 and
$707,000, respectively, all of which were considered impaired.
Loans past due 90 days or more and still accruing interest amounted to $111,000
at March 31, 2006.
NOTE 3 - SHORT-TERM BORROWINGS
Securities sold under agreements to repurchase, and Federal Home Loan Bank
advances generally represented overnight or less than 30-day borrowings. U.S.
Treasury tax and loan notes for collections made by the Bank were payable on
demand.
NOTE 4 - LONG-TERM BORROWINGS
Long-term borrowings are comprised of advances from the Federal Home Loan Bank.
-11-
NOTE 5 - DEFERRED COMPENSATION PLANS
The Bank has entered into certain non-qualified deferred compensation agreements
with certain executive officers and directors. Expenses related to these
non-qualified deferred compensation plans amounted to $32,000 and $31,000 for
the three-month periods ended March 31, 2006 and 2005, respectively.
There were no substantial changes in other plans as disclosed in the 2005 Annual
Report.
NOTE 6 - STOCKHOLDERS' EQUITY
Changes in stockholders' equity for the three-month period ended March 31, 2006
were as follows:
(Amounts in Thousands, Except Common Share Data)
-------------------------------------------------------------------------------------
Accumulated
Other
Comprehensive
Common Common Comprehensive Retained Income Treasury
Shares Stock Surplus Income Earnings (Loss) Stock Total
--------- ------ ------- ------------- -------- ------------- -------- -------
Balance at January 1, 2006 1,258,337 $1,573 $3,127 $24,616 $(303) $ -- $29,013
Comprehensive Income:
Net income -- -- -- $551 551 -- -- 551
Change in unrealized gain (loss)
on investment securities
available-for-sale net of
reclassification adjustment
and tax effects -- -- -- (29) -- (29) -- (29)
----
TOTAL COMPREHENSIVE INCOME $522
====
Issuance of 2,229 shares of common
stock under dividend reinvestment
and stock purchase plans 2,229 3 57 -- -- -- 60
Purchase of 4,000 shares of treasury
stock -- -- -- -- -- (111) (111)
Retirement of 4,000 shares of
treasury stock (4,000) (5) (106) -- -- 111 --
Cash dividends $.19 per share -- -- -- (238) -- -- (238)
--------- ------ ------ ------- ----- ----- -------
Balance at March 31, 2006 1,256,566 $1,571 $3,078 $24,929 $(332) $ -- $29,246
========= ====== ====== ======= ===== ===== =======
NOTE 7 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
The Corporation is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These consolidated financial instruments include commitments to extend credit,
standby letters of credit and commercial letters of credit. Those instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the consolidated balance sheets. The contract or
notional amounts of those instruments reflect the extent of involvement the
Corporation has in particular classes of financial instruments. The Corporation
does not engage in trading activities with respect to any of its financial
instruments with off-balance sheet risk.
-12-
The Corporation may require collateral or other security to support financial
instruments with off-balance sheet credit risk. The contract or notional amounts
at March 31, 2006 and December 31, 2005 were as follows:
(Amounts in Thousands)
------------------------
March 31, December 31,
2006 2005
--------- ------------
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit $24,703 $20,418
Financial standby letters of credit 1,552 1,498
Performance standby letters of credit 968 570
Dealer floor plans 426 1,043
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 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 at March 31, 2006,
85.4% was for real estate loans, with significantly most being 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.
-13-
NOTE 8 - MANAGEMENT'S ASSERTIONS AND COMMENTS REQUIRED TO BE PROVIDED WITH FORM
10Q FILING
In management's opinion, the consolidated interim financial statements reflect
fair presentation of the consolidated financial position of CCFNB Bancorp, Inc.
and Subsidiary, and the results of their operations and their cash flows for the
interim periods presented. Further, the consolidated interim financial
statements are unaudited, however they reflect all adjustments, which are in the
opinion of management, necessary to present fairly the consolidated financial
condition and consolidated results of operations and cash flows for the interim
periods presented and that all such adjustments to the consolidated financial
statements are of a normal recurring nature.
The results of operations for the three-month period ended March 31, 2006, are
not necessarily indicative of the results to be expected for the full year.
These consolidated interim financial statements have been prepared in accordance
with requirements of Form 10Q and therefore do not include all disclosures
normally required by accounting principles generally accepted in the United
States of America applicable to financial institutions as included with
consolidated financial statements included in the Corporation's annual Form 10K
filing. The reader of these consolidated interim financial statements may wish
to refer to the Corporation's annual report or Form 10K for the period ended
December 31, 2005, filed with the Securities and Exchange Commission.
-14-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of CCFNB Bancorp, Inc.:
We have reviewed the accompanying consolidated balance sheet of CCFNB Bancorp,
Inc. and Subsidiary as of March 31, 2006, and the related consolidated
statements of income and cash flows for the three-month periods ended March 31,
2006 and 2005. These consolidated interim financial statements are the
responsibility of the management of CCFNB Bancorp, Inc. and Subsidiary.
We conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the consolidated interim financial statements referred to above for
them to be in conformity with accounting principles generally accepted in the
United States of America.
We have previously audited, in accordance with the auditing standards of the
Public Company Accounting Oversight Board (United States), the consolidated
balance sheet of CCFNB Bancorp, Inc. and Subsidiary as of December 31, 2005, and
the related consolidated statements of income, changes in stockholders' equity,
and cash flows for the year then ended (not presented herein); and in our report
dated January 13, 2006, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying consolidated balance sheet as of December 31, 2005, is fairly
stated, in all material respects, in relation to the consolidated balance sheet
from which it has been derived.
J.H. Williams & Co., LLP
Kingston, Pennsylvania
April 27, 2006
-15-
CCFNB BANCORP, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 2006
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Consolidated Summary of Operations
(Dollars in Thousands, except for per share data)
At and For the Three
Months
Ended March 31, At and For the Years Ended December 31,
---------------------- ----------------------------------------------------------
2006 2005 2005 2004 2003 2002 2001
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income and Expense:
Interest income $ 3,026 $ 2,735 $ 11,442 $ 10,843 $ 11,221 $ 12,780 $ 13,720
Interest expense 1,174 953 4,131 3,669 4,366 5,741 6,924
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income 1,852 1,782 7,311 7,174 6,855 7,039 6,796
Loan loss provision 22 30 90 140 200 309 163
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income after loan loss
provision 1,830 1,752 7,221 7,034 6,655 6,730 6,633
Non-interest income 409 410 1,713 1,530 1,508 1,210 1,149
Non-interest expense 1,528 1,502 6,077 5,746 5,409 5,479 5,104
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes 711 660 2,857 2,818 2,754 2,461 2,678
Income taxes 160 136 631 601 591 539 621
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income $ 551 $ 524 $ 2,226 $ 2,217 $ 2,163 $ 1,922 $ 2,057
========== ========== ========== ========== ========== ========== ==========
Per Share: (1)
Net income $ .44 $ 41 $ 1.76 $ 1.74 $ 1.69 $ 1.47 $ 1.54
Cash dividends paid .19 .18 .74 .70 .66 .63 .59
Average shares outstanding 1,255,823 1,265,223 1,262,171 1,267,718 1,281,265 1,309,084 1,338,007
Average Balance Sheet:
Loans $ 154,661 $ 149,617 $ 150,065 $ 147,348 $ 149,485 $ 147,545 $ 139,219
Investments 53,145 62,009 54,943 61,999 58,152 54,197 50,593
Other earning assets 3,685 5,491 7,503 5,705 8,036 5,309 6,569
Total assets 230,597 232,557 230,081 231,477 230,975 223,476 208,630
Deposits 165,910 171,641 167,812 172,028 171,956 150,883 149,601
Other interest-bearing liabilities 33,092 31,399 32,253 29,823 29,772 29,356 31,629
Stockholders' equity 29,130 28,222 28,789 28,136 27,223 26,615 25,890
Balance Sheet Data:
Loans $ 154,381 $ 149,815 $ 154,271 $ 149,900 $ 147,631 $ 151,338 $ 142,990
Investments 52,370 58,344 53,919 61,834 62,775 53,528 57,121
Other earning assets 6,711 4,823 6,239 6,233 6,882 10,068 9,644
Total assets 229,975 231,731 231,218 235,377 232,914 229,032 214,238
Deposits 166,971 171,339 164,847 172,487 171,786 172,127 155,666
Other interest-bearing liabilities 31,853 30,775 35,910 30,080 32,325 28,621 31,384
Stockholders' equity 29,246 28,404 29,012 28,506 27,603 26,840 26,042
Ratios: (2)
Return on average assets .96% .90% .97% .96% .94% .86% .99%
Return on average equity 7.57% 7.43% 7.73% 7.88% 7.95% 7.22% 7.90%
Dividend payout ratio 43.19% 43.32% 41.92% 40.19% 39.02% 42.86% 38.31%
Average equity to average assets ratio 12.63% 12.14% 12.51% 12.17% 11.79% 11.77% 12.16%
(1) Per share data has been calculated on the weighted average number of shares
outstanding.
(2) The ratios for the three month period ending March 31, 2006 and 2005 are
annualized.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This Form 10-Q, both in the MD & A and elsewhere, contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Such statements are not historical facts and include expressions about our
confidence and strategies and our expectations about new and existing programs
and products, relationships, opportunities, technology and market conditions.
These statements may be identified by such forward-looking terminology as
"expect," "look," "believe," "anticipate," "may," "will," or similar statements
or variations of such terms. Such forward-looking statements involve certain
risks and uncertainties. These include, but are not limited to, the direction of
interest rates, continued levels of loan quality and origination volume,
continued relationships with major customers, and sources for loans, as well as
the effects of economic conditions and legal and regulatory barriers and
structure. Actual results may differ materially from such forward-looking
statements. We assume no obligation for updating any such forward-looking
statement at any time. Our consolidated financial condition and results of
operations are essentially those of our wholly-owned subsidiary bank, Columbia
County Farmers National Bank. Therefore, our discussion and analysis that
follows is primarily centered on the performance of this bank.
16
EARNINGS SUMMARY
Net income for the three months ended March 31, 2006 was $551 thousand or $.44
per basic and diluted share. These results compare with net income of $524
thousand, or $.41 per basic and diluted share for the same period in 2005.
Annualized return on average equity increased to 7.57 percent from 7.43 percent,
while the annualized return on average assets increased to .96 percent from .90
percent, for the three months ended March 31, 2006 and 2005 respectively.
Net interest income continues to be the largest source of our operating income.
Net interest income on a tax equivalent basis remained at $1.9 million at March
31, 2006 and March 31, 2005. Overall, interest earning assets yielded 5.92
percent for the three months ended March 31, 2006 compared to 5.23 percent yield
for the three months ended March 31, 2005. The tax equivalized interest margin
increased to 3.68 percent for the three months ended March 31, 2006 compared to
3.48 percent for the three months ended March 31, 2005.
Average interest earning assets decreased $5.6 million or 2.58 percent for the
three months ended March 31, 2006 over the same period in 2005 from $217.1
million at March 31, 2005 to $211.5 million at March 31, 2006. Average loans
increased $5.1 million or 3.41 percent, average investments decreased $8.9
million or 14.35 percent from $62.0 million at March 31, 2005 to $53.1 million
at March 31, 2006 and average federal funds sold and interest-bearing deposits
with other financial institutions decreased $1.8 million or 32.73 percent from
$5.5 million at March 31, 2005 to $3.7 million at March 31, 2006.
Average interest bearing liabilities for the three months ended March 31, 2006
were $180.9 million and for the three month period ending March 31, 2005 they
were $184.5 million. Average short-term borrowings were $20.1 million at March
31, 2005 and $21.8 million at March 31, 2006. Long-term debt, which includes
primarily FHLB advances, was $11.3 million at March 31, 2005 and 2006. Average
demand deposits decreased $.4 million from $18.5 million at March 31, 2005
compared to $18.1 million at March 31, 2006.
The average interest rate for loans increased 51 basis points to 6.54 percent at
March 31, 2006 compared to 6.03 percent March 31, 2005. Interest-bearing
deposits with other Financial Institutions and Federal Funds Sold rates
increased 201 basis points to 4.34 percent at March 31, 2006 from 2.33 percent
at March 31, 2005. Average rates on interest bearing deposits increased by 37
basis points from 1.76 percent to 2.13 percent in one year. Average interest
rates also increased on total interest bearing liabilities by 53 basis points to
2.60 percent from 2.07 percent. The tax equivalized net interest margin
increased to 3.68 percent for the three months ended March 31, 2006 from 3.48
percent for the three months ended March 31, 2005. The cost of long-term debt
averaged 5.91 percent for the past several years which negatively impacted net
interest margin. This high costing liability will remain due to the fact that
the Federal Home Loan Bank has the option to reprice these loans at their
discretion. Until interest rates would rise to make the current 5.91 percent
average rate unattractive, this in all probability will not occur. We will
continue to price deposits conservatively.
NET INTEREST INCOME
Net interest income increased from $1.8 million at March 31, 2005 to $1.9
million at March 31, 2006.
The following table reflects the components of net interest income for each of
the three months ended March 31, 2006 and 2005:
ANALYSIS OF AVERAGE ASSETS, LIABILITIES AND CAPITAL EQUITY
AND
NET INTEREST INCOME ON A TAX EQUIVALENT BASIS
AVERAGE BALANCE SHEET AND RATE ANALYSIS
(Dollars in Thousands)
Three Months Ended March 31, 2006 and 2005
-------------------------------------------------------------------------
Interest Interest
Average Income / Average Yield Average Income / Average
Balance Expense / Rate Balance Expense Yield / Rate
-------- --------- ------------- -------- -------- ------------
(1) (2) (1) (2)
ASSETS:
Interest-bearing deposits with
other financial institutions $ 408 $ 4 3.92% $ 1,157 $ 6 2.07%
Investment securities (3) 53,145 508 4.24% 62,009 503 3.56%
Federal funds sold 3,277 36 4.39% 4,334 26 2.40%
Loans 154,661 2,478 6.54% 149,617 2,200 6.03%
-------- ------ -------- ------
Total interest earning assets $211,491 $3,026 5.92% $217,117 $2,735 5.23%
-------- ------ -------- ------
Reserve for loan losses (1,561) (1,408)
Cash and due from banks 4,181 5,719
Other assets 16,486 11,129
-------- --------
Total assets $230,597 $232,557
-------- --------
17
LIABILITIES AND CAPITAL:
Interest bearing deposits $147,774 $ 788 2.13% $153,116 $ 672 1.76%
Short-term borrowings 21,783 219 4.02% 20,078 114 2.28%
Long-term borrowings 11,309 167 5.91% 11,321 167 5.90%
-------- ------ -------- ------
Total interest-bearing liabilities $180,866 $1,174 2.60% $184,515 $ 953 2.07%
-------- ------ -------- ------
Demand deposits $ 18,136 $ 18,525
Other liabilities 2,465 1,295
Stockholders' equity 29,130 28,222
-------- --------
Total liabilities and capital $230,597 $232,557
-------- --------
NET INTEREST INCOME /
NET INTEREST MARGIN (4) $1,852 3.50% $1,782 3.28%
TAX EQUIVALENT NET INTEREST INCOME /
NET INTEREST MARGIN (5) $1,946 3.68% $1,888 3.48%
(1) Average volume information was computed 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 annualized net interest income
by total interest earning assets.
(5) Interest and yield are presented on a tax-equivalent basis using 34 percent
for 2006 and 2005.
The following table demonstrates the relative impact on net interest income of
changes in volume of interest earnings assets and interest bearing liabilities
and changes in rates earned and paid by us on such assets and liabilities.
CHANGE IN NET INTEREST INCOME ON A TAX EQUIVALENT BASIS
Three Months Ended March 31, 2006
Compared with 2005
Increase (Decrease) (2)
---------------------------------
Volume Rate Total
------ ----- -----
(In thousands)
Interest income:
Loans (1) 304 763 1,067
Investments (1) (316) 422 106
Federal funds sold and other
short-term investments (42) 110 68
---- ----- -----
Total Interest Income: (54) 1,295 1,241
Interest expense:
Deposits (94) 567 473
Short-term borrowings 39 349 388
Long term debt (1) 1 0
---- ----- -----
Total Interest Expense: (56) 917 861
Net Interest Income: 2 378 380
(1) Interest income is adjusted to a tax equivalent basis using a 34 percent
tax rate.
(2) Variances resulting from a combination of changes in volume and rates are
allocated to the categories in proportion to the absolute dollar amounts of
the change in each category
The outstanding balance of loans at March 31, 2006 was $154.4 and December 31,
2005 was $154.3 million.
Income from investment securities remained at $.5 million at March 31, 2006 and
2005. The average balance of investment securities for the three months ended
March 31, 2006 was $53.1 million compared to $62.0 million at March 31, 2005.
Total interest expense increased $.2 million or 20.00 percent for the first
three months of 2006 as compared to the first three months of 2005. This
percentage increase is attributable to volume increases along with rising
interest rates, particularly in short term borrowings. The average yield on
interest earning assets increased from 5.23 percent to 5.92 percent as of March
31, 2005 and 2006, respectively.
18
NON-INTEREST INCOME
The following table presents the components of non-interest income for the three
months ended March 31, 2006 and 2005:
Three Months Ended
March 31,
(In thousands)
------------------
2006 2005
---- ----
Service charges and fees $187 $196
Trust department income 38 36
Gain on sale of loans 11 15
Gain on cash surrender value of BOLI 67 67
Other 106 96
---- ----
Total $409 $410
---- ----
Non-interest income continues to represent a considerable source of our income.
We are committed to increasing non-interest income. Increases will be from our
existing sources of non-interest income and any new opportunities that may
develop. For the three months ended March 31, 2006 and March 31, 2005 total
non-interest income remained at $.4 million. Service charges and fees decreased
$9 thousand from $196 thousand at March 31, 2005 to $187 thousand or 4.59
percent at March 31, 2006. This decrease is mainly attributable to the fees
associated with the "Overdraft Privilege" program, which is into its second full
year; loss of fees from a large commercial customer who we no longer maintain a
relationship with; and fees received from early pay-off of loans. Sales of fixed
rate mortgages through the MPF and PHFA programs eased in the first three months
of 2006 compared to the first three months of 2005 resulting in gain on sale of
loans decreasing from $15 thousand in 2005 to $11 thousand in 2006. The MPF
loans are being serviced by CCFNB and the bank retains minimal credit risk.
Other non-interest income increased $10 thousand from $96 thousand at March 31,
2005 to $106 thousand at March 31, 2006. This increase is mainly attributable to
ATM and debit card related fees, including surcharge fees, foreign usage fees,
and monthly ATM cardholder usage fees; and penalty paid on COD early
withdrawals.
NON-INTEREST EXPENSE
The following table presents the components of non-interest expense for the
three months ended March 31, 2006 and 2005:
Three Months Ended
March 31,
------------------
2006 2005
------ ------
(Dollars in
Thousands)
Salaries and wages $ 613 $ 552
Employee benefits 211 204
Net occupancy expense 118 116
Equipment expense 121 124
State shares tax 73 74
Professional services 55 86
Director fees 43 47
Stationery and supplies 30 32
Other expense 264 267
------ ------
Total $1,528 $1,502
------ ------
Non-interest expense remained at $1.5 million at March 31, 2006 and March 31,
2005.
Generally, non-interest expense accounts for the cost of maintaining facilities;
providing salaries and benefits to employees; and paying for insurance,
supplies, advertising, data processing services, taxes and other related
expenses. Some of the costs and expenses are variable while others are fixed. To
the extent possible, we utilize budgets and related measures to control variable
expenses.
Salaries increased 11.05 percent from $552 thousand at March 31, 2005 to $613
thousand at 2006. Additionally, employee benefits increased 3.43 percent from
$204 thousand at March 31, 2005 to $211 thousand at March 31, 2006. These
increases were attributable to the addition of new personnel to increase
business development and annual increases in salaries and cost of benefits.
Occupancy expense increased 1.72 percent. This increase is attributable to
additional janitorial costs as a result of obtaining third party janitorial
service rather than employee compensated janitorial services. Equipment expense
reflects a $3 thousand decrease for the first three months of 2006 compared to
the first three months of 2005. Pricing of service on equipment contracts have
decreased this large expense item. We will continue to comparatively price
services to obtain the best value for our shareholders. Depreciation expense is
lower than last year. We expect depreciation expense to increase third and
fourth quarter of 2006 with the opening of our Berwick branch.
Pennsylvania Bank Shares Tax decreased slightly due to change in the mix of
securities used to calculate this tax. The decrease was from $74 thousand at
March 31, 2005 to $73 thousand at March 31, 2006.
Professional services decreased 36.05 percent from $86 thousand at March 31,
2005 to $55 thousand at March 31, 2006. This decrease is attributable to the
Sarbanes Oxley (Sox 404) required project that is complete until SEC rulings are
determined. We expect no SOX 404 expense in 2006. Additionally, set up fees
attributable to the Overdraft Privilege Program are no longer applicable.
Director's fees decreased 8.51 percent from $47 thousand through March 31, 2005
compared to $43 thousand through March 31, 2006. Beginning January 2006, the
Chairman of the Board fee decreased from $56 thousand annually to $40 thousand
annually.
Stationery and supplies decreased $2 thousand in comparing March 31, 2005 at $32
thousand and March 31, 2006 at $30 thousand.
19
Other expenses decreased $3 thousand from $267 thousand at March 31, 2005 to
$264 thousand at March 31, 2006. Telephone and Data Processing expenses for the
first quarter 2006 compared to the first quarter of 2005 were the reason for the
decrease in other expenses. These particular expenses should continue to show a
decrease in the future due to a recent review and recommendations by a third
party consultant.
INCOME TAXES
Income tax expense as a percentage of pre-tax income was 22.50 percent for the
three months ended March 31, 2006 compared with 20.61 percent for the same
period in 2005. The effective tax rate for 2006 remains at 34 percent.
ASSET / LIABILITY MANAGEMENT
INTEREST RATE SENSITIVITY
Our success is largely dependent upon our ability to manage interest rate risk.
Interest rate risk can be defined as the exposure of our net interest income to
the movement in interest rates. We do not currently use derivatives to manage
market and interest rate risks. Our interest rate risk management is the
responsibility of the Asset / Liability Management Committee ("ALCO"), which
reports to the Board of Directors. ALCO establishes policies that monitor and
coordinate our sources, uses and pricing of funds as well as interest-earning
asset pricing and volume.
We use a simulation model to analyze net interest income sensitivity to
movements in interest rates. The simulation model projects net interest income
based on various interest rate scenarios over a 12 and 24 month period. The
model is based on the actual maturity and repricing characteristics of rate
sensitive assets and liabilities. The model incorporates assumptions regarding
the impact of changing interest rates on the prepayment rates of certain assets
and liabilities. In the current interest rate environment, our net interest
income is not expected to change materially.
LIQUIDITY
Liquidity measures the ability to satisfy current and future cash flow needs as
they become due. Maintaining a level of liquid funds through asset / liability
management seeks to ensure that these needs are met at a reasonable cost As of
March 31,2006, we had $52.4 million of securities available for sale recorded at
their fair value, compared with $53.9 million at December 31, 2005. As of March
31, 2006, the investment securities available for sale had a net unrealized loss
of $332 thousand, net of deferred taxes, compared with a net unrealized loss of
$303 thousand, net of deferred taxes, at December 31, 2005. These securities are
not considered trading account securities, which may be sold on a continuous
basis, but rather are securities which may be sold to meet our various liquidity
and interest rate requirements.
In accordance with disclosures required by EITF NO. 03-1, the summary below
reflects the gross unrealized losses and fair value, aggregated by investment
category that individual securities have been in a continuous unrealized loss
position for less than or more than 12 months as of March 31, 2006:
Less than 12 months 12 months or more Total
------------------------ ------------------------ ------------------------
Unrealized Unrealized Unrealized
Description of Security Fair Value Loss Fair Value Loss Fair Value Loss
----------------------- ----------- ---------- ----------- ---------- ----------- ----------
Obligations of U.S. Government
Corporations and Agencies:
Mortgage backed $ 6,315,891 $ 36,588 $11,685,494 $378,152 $18,001,385 $414,740
Other 5,192,283 55,584 15,939,465 310,535 21,131,748 366,119
Obligations of State and Political
Subdivisions 316,719 6,673 350,976 365 667,695 7,038
Marketable Equity Securities 130,333 11,798 37,144 7,046 167,477 18,844
----------- -------- ----------- -------- ----------- --------
Total $11,955,226 $110,643 $28,013,079 $696,098 $39,968,305 $806,741
=========== ======== =========== ======== =========== ========
Note: This schedule reflects only unrealized losses without the effect of
unrealized gains.
The Corporation invests in various forms of agency debt including mortgage
backed securities and callable agency debt. The fair market value of these
securities is influenced by market interest rates, prepayment speeds on mortgage
securities, bid to offer spreads in the market place and credit premiums for
various types of agency debt. These factors change continuously and therefore
the market value of these securities may be higher or lower than the
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.
20
NON-PERFORMING ASSETS
Shown below is a summary of past due and non-accrual loans:
(Dollars in thousands)
----------------------
March December
31, 2006 31, 2005
-------- --------
Past due and non-accrual:
Days 30 - 89 $ 487 $1,229
Days 90 plus 111 130
Non-accrual 548 707
------ ------
Total $1,146 $2,066
====== ======
Past due and non-accrual loans decreased 52.38 percent from $2.1 million at
December 31, 2005 to $1.1 million at March 31, 2006. The loan delinquency
expressed as a ratio to total loans was .74 percent at March 31, 2006 and 1.34
percent at December 31, 2005.
The provision for loan losses for the first three months of 2006 was $22
thousand compared to the first three months of 2005 at $30 thousand. Management
is diligent in its efforts to reduce delinquencies and continues to monitor and
review current loans to foresee future delinquency occurrences and react to them
quickly.
Any loans classified for regulatory purposes as loss, doubtful, substandard, or
special mention that have not been disclosed under Industry Guide 3 do not (i)
represent or result from trends or uncertainties which we reasonably expect will
materially impact future operating results, liquidity, or capital resources, or
(ii) represent material credits about which we are aware of any information
which causes us to have serious doubts as to the ability of such borrowers to
comply with the loan repayment terms.
We adhere to principles provided by Financial Accounting Standards Board
Statement No. 114, "Accounting by Creditors for Impairment of a Loan" - Refer to
Note 2 above for other details.
The following analysis provides a schedule of loan maturities / interest rate
sensitivities. This schedule presents a repricing and maturity analysis as
required by the FFIEC:
(Dollars
in Thousands)
March 31,
MATURITY AND REPRICING DATA FOR LOANS AND LEASES 2006
------------------------------------------------ -------------
Closed-end loans secured by first liens and 1-4 family residential properties with a
remaining maturity or repricing frequency of:
(1) Three months or less $ 3,636
(2) Over three months through 12 months 13,832
(3) Over one year through three years 25,825
(4) Over three years through five years 8,290
(5) Over five years through 15 years 18,665
(6) Over 15 years 255
All loans and leases other than closed-end loans secured by first liens on 1-4 family residential
properties with a remaining maturity or repricing frequency of:
(1) Three months or less 19,783
(2) Over three months through 12 months 10,200
(3) Over one year through three years 25,841
(4) Over three years through five years 13,638
(5) Over five years through 15 years 12,867
(6) Over 15 years 1,031
--------
Sub-total $153,863
Add: Non-accrual loans not included above 548
Less: Unearned income (30)
--------
Total Loans and Leases $154,381
========
ALLOWANCE FOR LOAN LOSSES
Because our loan portfolio and delinquencies contains a significant number of
commercial loans with relatively large balances, the deterioration of one or
several of these loans may result in a possible significant increase in loss of
interest income, higher carrying costs, and an increase in the provision for
loan losses and loan charge-offs.
We maintain an allowance for loan losses to absorb any loan losses based on our
historical experience, an evaluation of economic conditions, and regular reviews
of delinquencies and loan portfolio quality. In evaluating our allowance for
loan losses, we segment our loans into the following categories:
- Commercial (including investment property mortgages),
- Residential mortgages, and
- Consumer.
21
We evaluate some loans as a homogeneous group and others on an individual basis.
Commercial loans with balances exceeding $250 thousand are reviewed
individually. After our evaluation of all loans, we determine the required
allowance for loan losses based upon the following considerations:
- Historical loss levels,
- Prevailing economic conditions,
- Delinquency trends,
- Changes in the nature and volume of the portfolio,
- Concentrations of credit risk, and
- Changes in loan policies or underwriting standards.
Management and the Board of Directors review the adequacy of the reserve on a
quarterly basis and adjustments, if needed, are made accordingly.
The following table presents a summary of CCFNB's loan loss experience as of the
dates indicated:
For the Three Months
Ending March 31,
Amounts in thousands
--------------------
2006 2005
-------- --------
Average loans outstanding: $154,661 $149,617
-------- --------
Total loans at end of period 154,381 149,815
-------- --------
Balance at beginning of period $ 1,553 $ 1,392
Total charge-offs (192) (7)
Total recoveries 16 27
-------- --------
Net charge-offs (176) 20
Provision for loan losses 22 30
-------- --------
Balance at end of period $ 1,399 $ 1,442
-------- --------
Net charge-offs as a percent of average loans outstanding
during period .11% .01%
Allowance for loan losses as a percent of total loans .91% .96%
The allowance for loan losses is based on our evaluation of the allowance for
loan losses in relation to the credit risk inherent in the loan portfolio. In
establishing the amount of the provision required, management considers a
variety of factors, including but not limited to, general economic conditions,
volumes of various types of loans, collateral adequacy and potential losses from
significant borrowers. On a monthly basis, the Board of Directors and the bank's
Credit Administration Committee review information regarding specific loans and
the total loan portfolio in general in order to determine the amount to be
charged to the provision for loan losses.
CAPITAL ADEQUACY
A major strength of any financial institution is a strong capital position. This
capital is very critical as it must provide growth, dividend payments to
shareholders, and absorption of unforeseen losses. Our federal regulators
provide standards that must be met. These standards measure "risk-adjusted"
assets against different categories of capital. The "risk-adjusted" assets
reflect off balance sheet items, such as commitments to make loans, and also
place balance sheet assets on a "risk" basis for collectibility. The adjusted
assets are measured against the standards of Tier I Capital and Total Qualifying
Capital. Tier I Capital is common shareholders' equity. Total Qualifying Capital
includes so-called Tier II Capital, which are common shareholders' equity and
the allowance for loan and lease losses. The allowance for loan and lease losses
must be lower than or equal to common shareholders' equity to be eligible for
Total Qualifying Capital.
We exceed all minimum capital requirements as reflected in the following table:
March 31, 2006 December 31, 2005
--------------------- ---------------------
Minimum Minimum
Calculated Standard Calculated Standard
Ratios Ratios Ratios Ratios
---------- -------- ---------- --------
Risk Based Ratios:
Tier I Capital to risk-weighted assets 19.87% 4.00% 19.24% 4.00%
Total Qualifying Capital to risk-weighted assets 20.88% 8.00% 20.32% 8.00%
Additionally, certain other ratios also provide capital analysis as follows:
March 31, December 31,
2006 2005
--------- ------------
Tier I Capital to average assets 12.83% 12.74%
We believe that the bank's current capital position and liquidity positions are
strong and that its capital position is adequate to support its operations.
22
Book value per share amounted to $23.28 at March 31, 2006, compared with $23.06
per share at December 31, 2005.
Cash dividends declared amounted to $.19 per share for the three months ended
March 31, 2006, equivalent to a dividend payout ratio of 43.2 percent, compared
with 43.3 percent for the same period in 2005. Our Board of Directors continues
to believe that cash dividends are an important component of shareholder value
and that, at the bank's current level of performance and capital; we expect to
continue our current dividend policy of a quarterly cash distribution of
earnings to our shareholders.
The following table presents information on the shares of our common stock that
we repurchased during the first quarter of 2006:
CCFNB BANCORP, INC.
ISSUER PURCHASES OF EQUITY SECURITIES
NUMBER OF SHARES NUMBER OF SHARES
PURCHASED AS PART THAT MAY YET BE
NUMBER OF SHARES PRICE PAID OF PUBLICLY ANNOUNCED PURCHASED UNDER
PERIOD PURCHASED PER SHARE PROGRAM (1) THE PROGRAM
------ ---------------- ---------- --------------------- ----------------
01/06/06 - 01/06/06 2,000 $28.25 2,000 62,000
02/07/06 - 02/07/06 2,000 $27.35 2,000 60,000
03/01/06 - 03/31/06 0 60,000
-----
TOTAL 4,000 4,000
(1) This program was announced in 2003 and represents the second buy-back
program. The Board of Directors approved the purchase of 100,000 shares.
There is no expiration date associated with this program.
23
Controls and Procedures
Item 4. Controls and Procedures
Our Chief Executive Officer (CEO) and Principal Financial Officer (PFO)
have concluded that our disclosure controls and procedures (as defined in Rules
13a - 15(e) and 15d - 15(e) under the Securities Exchange Act of 1934, as
amended), based on their evaluation of these controls and procedures as of the
end of the period covered by this Report, were effective as of such date at the
reasonable assurance level as discussed below to ensure that information
required to be disclosed by us in the reports we file under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission and that such information is accumulated and
communicated to our management, including its principal executive officer and
principal financial officer, as appropriate to allow timely decisions regarding
required disclosure.
Our management, including the CEO and PFO, does not expect that our
disclosure controls and internal controls will prevent all errors and all fraud.
A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the system are met.
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 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. In addition, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people or by management override of the controls.
The CEO and PFO have evaluated the changes to our internal controls over
financial reporting that occurred during our fiscal quarter ended March 31,
2006, as required by paragraph (d) Rules 13a - 15 and 15d - 15 under the
Securities Exchange Act of 1934, as amended, and have concluded that there were
no changes that materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.
24
PART II - OTHER INFORMATION;
Item 1. Legal Proceedings
Management and the Corporation's legal counsel are not aware of any litigation
that would have a material adverse effect on the consolidated financial position
of the Corporation. There are no proceedings pending other than the ordinary
routine litigation incident to the business of the Corporation and its
subsidiary, Columbia County Farmers National Bank. In addition, no material
proceedings are pending or are known to be threatened or contemplated against
the Corporation and the Bank by government authorities.
Item 2. Changes in Securities - Nothing to report.
Item 3. Defaults Upon Senior Securities - Nothing to report.
Item 4. Submission of Matters to a Vote of Security Holders - Nothing to report.
Item 5. Other Information - Nothing to report.
Item 6. Exhibits and Reports on Form 8-K - The following were filed with the SEC
during 2006:
March 10, 2006 - - Proxy dated December 31, 2005
April 3, 2006 - Item 1.01 - Entry into a Material Definitive Agreement -
Complying with newly enacted Section 409A of Internal Revenue Code of
1986...changes made to existing deferred compensation programs maintained
by the Subsidiary.
May 1, 2006 - Item 5.02 - Departure of a Director and Election of a
Director - Resignation of Director and Election of Director to fill
unexpired term.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this quarterly report on Form 10-Q for the period
ended March 31, 2006, to be signed on its behalf by the undersigned thereunto
duly authorized.
CCFNB BANCORP, INC.
(Registrant)
By /s/ Lance O. Diehl
-------------------------------------
Lance O. Diehl
President and CEO
Date: May 10, 2006
By /s/ Virginia D. Kocher
-------------------------------------
Virginia D. Kocher
Treasurer
Date: May 10, 2006
26