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 June 30, 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. 1,248,104 shares of $1.25 (par) common stock were outstanding as of July 24, 2006. CCFNB BANCORP, INC. AND SUBSIDIARY TABLE OF CONTENTS JUNE 30, 2006 Page ------ PART 1 - FINANCIAL INFORMATION: - Consolidated Balance Sheets 2 - Consolidated Statements of Income 3 - Consolidated Statements of Cash Flows 4 - Notes to Consolidated Financial Statements 5 - 14 - Report of Independent Registered Public Accounting Firm 15 - Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations 16 - 23 - Controls and Procedures 24 PART II - OTHER INFORMATION 25 SIGNATURES 26 - 29 CCFNB BANCORP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) Unaudited June December 30, 2006 31, 2005 --------- -------- ASSETS Cash and due from banks $ 4,229 $ 5,123 Interest-bearing deposits with other banks 741 1,110 Federal funds sold 9,892 5,129 Investment securities available-for-sale 48,033 53,919 Loans, net of unearned income 160,676 154,271 Allowance for loan losses 1,438 1,552 -------- -------- Net loans 159,238 152,719 Premises and equipment, net 4,714 4,837 Cash surrender value of bank-owned life insurance 6,638 6,480 Accrued interest receivable 959 959 Other assets 1,383 942 -------- -------- TOTAL ASSETS $235,827 $231,218 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits: Non-interest bearing $ 18,394 $ 18,249 Interest bearing 149,668 146,598 -------- -------- Total deposits 168,062 164,847 Short-term borrowings 25,600 24,600 Long-term borrowings 11,304 11,310 Accrued interest and other expenses 1,546 1,442 Other liabilities 24 6 -------- -------- TOTAL LIABILITIES 206,536 202,205 -------- -------- STOCKHOLDERS' EQUITY Common stock, par value $1.25 per share; authorized 5,000,000 shares; issued and outstanding 1,250,104 shares in 2006 and 1,261,870 shares in 2005 1,563 1,573 Surplus 2,904 3,127 Retained earnings 25,304 24,616 Accumulated other comprehensive income (loss) (480) (303) -------- -------- TOTAL STOCKHOLDERS' EQUITY 29,291 29,013 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $235,827 $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 Six For the Three Months Ending Months Ending June 30, June 30, ----------------------- ----------------------- 2006 2005 2006 2005 ---------- ---------- ---------- ---------- INTEREST AND DIVIDEND INCOME Interest and fees on loans: Taxable $ 4,711 $ 4,260 $ 2,332 $ 2,170 Tax-exempt 390 217 291 107 Interest and dividends on investment securities: Taxable 813 760 412 373 Tax-exempt 159 186 76 90 Dividends 55 41 31 21 Federal funds sold 124 64 88 38 Deposits in other banks 9 19 5 13 ---------- ---------- ---------- ---------- TOTAL INTEREST AND DIVIDEND INCOME 6,261 5,547 3,235 2,812 ---------- ---------- ---------- ---------- INTEREST EXPENSE Deposits 1,634 1,359 847 687 Short-term borrowings 483 245 263 131 Long-term borrowings 336 336 169 169 ---------- ---------- ---------- ---------- TOTAL INTEREST EXPENSE 2,453 1,940 1,279 987 ---------- ---------- ---------- ---------- Net interest income 3,808 3,607 1,956 1,825 Provision for loan losses 65 60 43 30 ---------- ---------- ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,743 3,547 1,913 1,795 ---------- ---------- ---------- ---------- NON-INTEREST INCOME Service charges and fees 393 400 206 204 Gain on sale of loans 20 23 9 8 Bank-owned life insurance income 131 131 64 64 Trust department 76 71 38 35 Other 249 204 143 108 ---------- ---------- ---------- ---------- TOTAL NON-INTEREST INCOME 869 829 460 419 ---------- ---------- ---------- ---------- NON-INTEREST EXPENSE Salaries 1,256 1,132 643 580 Pensions and other employee benefits 418 399 207 195 Occupancy, net 226 231 108 115 Equipment 244 250 123 126 State shares tax 144 141 71 67 Professional services 106 157 51 71 Directors' fees 86 94 43 47 Stationery and supplies 74 76 44 44 Other 538 559 274 292 ---------- ---------- ---------- ---------- TOTAL NON-INTEREST EXPENSE 3,092 3,039 1,564 1,537 ---------- ---------- ---------- ---------- Income before income taxes 1,520 1,337 809 677 Income tax expense 356 281 196 145 ---------- ---------- ---------- ---------- NET INCOME $ 1,164 $ 1,056 $ 613 $ 532 ========== ========== ========== ========== PER SHARE DATA Net income $ 0.93 $ 0.84 $ 0.49 $ 0.42 Cash dividends $ 0.38 $ 0.36 $ 0.19 $ 0.18 Weighted average shares outstanding 1,254,008 1,264,235 1,254,008 1,264,235 See accompanying notes to Consolidated Financial Statements. -3- CCFNB BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) UNAUDITED For the Six Months Ending June 30, ----------------- 2006 2005 ------- ------- OPERATING ACTIVITIES Net income $ 1,164 $ 1,056 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 65 60 Depreciation and amortization 181 201 Premium amortization on investment securities 62 137 Discount accretion on investment securities (11) (6) Deferred income taxes (benefit) (21) (54) (Gain) on sale of loans (20) (23) Proceeds from sale of mortgage loans 1,152 1,281 Originations of mortgage loans for resale (1,250) (989) (Income) from investment in insurance agency (5) (9) (Increase) in accrued interest receivable and other assets (324) (188) Net (increase) in cash surrender value of bank-owned life insurance (158) (158) Increase (decrease) in accrued interest, other expenses and other liabilities 122 (9) ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES 957 1,299 ------- ------- INVESTING ACTIVITIES Purchase of investment securities available-for-sale (3,119) -- Proceeds from sales, maturities and redemptions of investment securities available-for-sale 8,687 6,590 Net (increase) decrease in loans (6,466) 207 Purchases of premises and equipment (59) (660) ------- ------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (957) 6,137 ------- ------- FINANCING ACTIVITIES Net increase (decrease) in deposits 3,215 (4,925) Net increase (decrease) in short-term borrowings 1,000 (1,149) Net (decrease) in long-term borrowings (6) (6) Acquisition of treasury stock (337) (279) Proceeds from issuance of common stock 104 112 Cash dividends paid (476) (455) ------- ------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 3,500 (6,702) ------- ------- INCREASE IN CASH AND CASH EQUIVALENTS 3,500 734 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 11,362 12,833 ------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $14,862 $13,567 ======= ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest $ 2,439 $ 1,960 Income taxes $ 299 $ 254 See accompanying notes to Consolidated Financial Statements. -4- CCFNB BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 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 six-month period ended June 30, 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 June 30, 2006 and December 31, 2005 was $204,000 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 and, 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 and 2006. -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 Statement of Financial Accounting Standards ("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 has adopted 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 six-month periods ended June 30, 2006 and 2005 was approximately $45,000 and $41,000, 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 six-month periods ended June 30, 2006 and June 30, 2005 were as follows: (Amounts in Thousands) ---------------------- 2006 2005 ------ ------ Balance, beginning of year $1,553 $1,392 Provision charged to operations 65 60 Loans charged-off (199) (22) Recoveries 19 39 ------ ------ Balance, June 30 $1,438 $1,469 ====== ====== At June 30, 2006, the total recorded investment in loans that are considered to be impaired as defined by SFAS No. 114 was $31,000. These impaired loans had a related allowance for loan losses of $51,350. 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 June 30, 2006, there were no significant commitments to lend additional funds with respect to non-accrual and restructured loans. Non-accrual loans at June 30, 2006 and December 31, 2005 were $296,000 and $707,000, respectively, all of which were considered impaired. Loans past due 90 days or more and still accruing interest amounted to $44,000 at June 30, 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 $64,000 and $77,000 for the six-month periods ended June 30, 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 six-month period ended June 30, 2006 were as follows: (Amounts in Thousands, Except Common Share Data) Accumulated Other Common Common Comprehensive Retained Comprehensive Treasury Shares Stock Surplus Income Earnings Income (Loss) Stock Total ---------- ------ ------- ------------- -------- ------------- -------- ------- Balance at January 1, 2006 1,258,337 $1,573 $3,127 $24,616 $(303) $ -- $29,013 Comprehensive Income: Net income $1,164 1,164 1,164 Change in unrealized gain (loss) on investment securities available-for- sale net of reclassification adjustment and tax effects (177) (177) (177) ------ TOTAL COMPREHENSIVE INCOME $ 987 ====== Issuance of 3,767 shares of common stock under dividend reinvestment and stock purchase plans 3,767 5 99 104 Purchase of 12,000 shares of treasury stock (337) (337) Retirement of 12,000 shares of treasury stock (12,000) (15) (322) 337 -- Cash dividends $.38 per share (476) (476) --------- ------ ------ ------- ----- ----- ------- Balance at June 30, 2006 1,250,104 $1,563 $2,904 $25,304 $(480) $ -- $29,291 ========= ====== ====== ======= ===== ===== ======= 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 June 30, 2006 and December 31, 2005 were as follows: (Amounts in Thousands) ---------------------- June December 30, 2006 31, 2005 -------- -------- Financial instruments whose contract amounts represent credit risk: Commitments to extend credit $19,131 $20,418 Financial standby letters of credit 1,527 1,498 Performance standby letters of credit 619 570 Dealer floor plans 476 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 June 30, 2006, 85.71% 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 six-month period ended June 30, 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 June 30, 2006, and the related consolidated statements of income for the three and six-month periods ended June 30, 2006 and 2005 and the consolidated statements of cash flows for the six-month periods ended June 30, 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. /s/ J. H. Williams & Co., LLP J.H. Williams & Co., LLP Kingston, Pennsylvania July 27, 2006 -15- CCFNB BANCORP, INC. FORM 10-Q FOR THE QUARTER ENDED JUNE 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 Six Months Ended June 30, At and For the Years Ended December 31, ---------------------- ---------------------------------------------------------- 2006 2005 2005 2004 2003 2002 2001 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income and Expense: Interest income $ 6,261 $ 5,547 $ 11,442 $ 10,843 $ 11,221 $ 12,780 $ 13,720 Interest expense 2,453 1,940 4,131 3,669 4,366 5,741 6,924 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net interest income 3,808 3,607 7,311 7,174 6,855 7,039 6,796 Loan loss provision 65 60 90 140 200 309 163 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net interest income after loan loss provision 3,743 3,547 7,221 7,034 6,655 6,730 6,633 Non-interest income 869 829 1,713 1,530 1,508 1,210 1,149 Non-interest expense 3,092 3,039 6,077 5,746 5,409 5,479 5,104 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income before income taxes 1,520 1,337 2,857 2,818 2,754 2,461 2,678 Income taxes 356 281 631 601 591 539 621 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income $ 1,164 $ 1,056 $ 2,226 $ 2,217 $ 2,163 $ 1,922 $ 2,057 ========== ========== ========== ========== ========== ========== ========== Per Share: (1) Net income $ .93 $ .84 $ 1.76 $ 1.74 $ 1.69 $ 1.47 $ 1.54 Cash dividends paid .38 .36 .74 .70 .66 .63 .59 Average shares outstanding 1,254,008 1,264,235 1,262,171 1,274,034 1,281,265 1,309,084 1,338,007 Average Balance Sheet: Loans $ 156,712 $ 149,628 $ 150,065 $ 147,348 $ 149,485 $ 147,545 $ 139,219 Investments 50,976 56,627 54,943 61,999 58,152 54,197 50,593 Other earning assets 5,596 6,939 7,503 5,705 8,036 5,309 6,569 Total assets 233,523 230,659 230,081 231,477 230,975 223,476 208,630 Deposits 165,961 169,401 167,812 172,028 171,956 150,883 149,601 Other interest-bearing liabilities 34,069 31,351 32,253 29,823 29,772 29,356 31,629 Stockholders' equity 29,152 28,605 28,789 28,136 27,223 26,615 25,890 Balance Sheet Data: Loans $ 159,238 $ 149,441 $ 154,271 $ 149,900 $ 147,631 $ 151,338 $ 142,990 Investments 48,033 54,909 53,919 61,834 62,775 53,538 57,121 Other earning assets 10,633 9,054 6,239 6,233 6,882 10,068 9,644 Total assets 235,827 229,587 231,218 235,377 232,914 229,032 214,238 Deposits 168,062 167,562 164,847 172,487 171,786 172,127 155,666 Other interest-bearing liabilities 36,904 31,925 35,910 30,080 32,325 28,621 31,384 Stockholders' equity 29,291 28,806 29,012 28,506 27,603 26,840 26,042 Ratios: (2) Return on average assets 1.00% .92% .97% .96% .94% .86% .99% Return on average equity 7.99% 7.38% 7.73% 7.88% 7.95% 7.22% 7.92% Dividend payout ratio 40.89% 43.09% 41.92% 40.19% 39.02% 42.86% 38.31% Average equity to average assets ratio 12.48% 12.40% 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 six month period ending June 30, 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 six months ended June 30, 2006 was $1.2 million or $.93 per basic and diluted share. These results compare with net income of $1.1 million, or $.84 per basic and diluted share for the same period in 2005. Annualized return on average equity increased to 7.99 percent from 7.38 percent, while the annualized return on average assets increased to 1.00 percent from .92 percent, for the six months ended June 30, 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 increased from $3.8 million at June 30, 2005 to $4.0 million at June 30, 2006. Overall, interest earning assets yielded 6.07 percent for the six months ended June 30, 2006 compared to 5.23 percent yield for the six months ended June 30, 2005. The tax equivalized interest margin increased to 3.72 percent for the six months ended June 30, 2006 compared to 3.58 percent for the six months ended June 30, 2005. Average interest earning assets increased $.1 million or .05 percent for the six months ended June 30, 2006 over the same period in 2005 from $213.2 million at June 30, 2005 to $213.3 million at June 30, 2006. Average loans increased $7.1 million or 4.75 percent, average investments decreased $5.6 million or 9.89 percent from $56.6 million at June 30, 2005 to $51.0 million at June 30, 2006 and average federal funds sold and interest-bearing deposits with other financial institutions decreased $1.3 million or 18.84 percent from $6.9 million at June 30, 2005 to $5.6 million at June 30, 2006. Average interest bearing liabilities for the six months ended June 30, 2006 and June 30, 2005 were $182.5 million. Average short-term borrowings were $20.0 million at June 30, 2005 and $22.8 million at June 30, 2006. Long-term debt, which includes primarily FHLB advances, was $11.3 million at June 30, 2005 and 2006. Average demand deposits decreased $.7 million from $18.2 million at June 30, 2005 compared to $17.5 million at June 30, 2006. The average interest rate for loans increased 51 basis points to 6.64 percent at June 30, 2006 compared to 6.13 percent at June 30, 2005. Interest-bearing deposits with other Financial Institutions and Federal Funds Sold rates increased 236 basis points to 4.75 percent at June 30, 2006 from 2.39 percent at June 30, 2005. Average rates on interest bearing deposits increased by 40 basis points from 1.80 percent to 2.20 percent in one year. Average interest rates also increased on total interest bearing liabilities by 56 basis points to 2.69 percent from 2.13 percent. The cost of long-term debt averaged 5.94 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 5.94 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 $3.6 million at June 30, 2005 to $3.8 million at June 30, 2006. The following table reflects the components of net interest income for each of the six months ended June 30, 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) Six Months Ended June 30, 2006 and 2005 -------------------------------------------------------------- Interest Average Interest Average Average Income / Yield / Average Income / Yield / Balance Expense Rate Balance Expense Rate -------- --------- ------- -------- -------- ------- (1) (2) (1) (2) ASSETS: Interest-bearing deposits with other financial institutions $ 383 $ 9 4.70% $ 2,079 $ 19 1.83% Investment securities (3) 50,976 1,027 4.48% 56,627 987 3.82% Federal funds sold 5,213 124 4.76% 4,860 64 2.63% Loans 156,712 5,101 6.64% 149,628 4,477 6.13% -------- ------ -------- ------ Total interest earning assets $213,284 $6,261 6.07% $213,194 $5,547 5.23% -------- ------ -------- ------ Reserve for loan losses (1,484) (1,456) Cash and due from banks 4,229 6,000 Other assets 17,494 12,921 -------- -------- Total assets $233,523 $230,659 -------- -------- 17 LIABILITIES AND CAPITAL: Interest bearing deposits $148,434 $1,634 2.20% $151,185 $1,359 1.80% Short-term borrowings 22,762 483 4.24% 20,032 245 2.45% Long-term borrowings 11,307 336 5.94% 11,319 336 5.94% -------- ------ -------- ------ Total interest-bearing liabilities $182,503 $2,453 2.69% $182,536 $1,940 2.13% -------- ------ -------- ------ Demand deposits $ 17,527 $ 18,216 Other liabilities 4,341 1,302 Stockholders' equity 29,152 28,605 -------- -------- Total liabilities and capital $233,523 $230,659 -------- -------- NET INTEREST INCOME / $3,808 3.57% $3,607 3.38% NET INTEREST MARGIN (4) TAX EQUIVALENT NET INTEREST INCOME / $3,967 3.72% $3,815 3.58% NET INTEREST MARGIN (5) (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 Six Months Ended June 30, 2006 Compared with 2005 Increase (Decrease) (2) -------------------------------- Volume Rate Total ------ -------------- ------ (In thousands) Interest income: Loans (1) 434 763 1,197 Investments (1) (216) 374 158 Federal funds sold and other short-term investments (32) 164 132 ---- ----- ----- Total Interest Income: 186 1,301 1,487 Interest expense: Deposits (50) 605 555 Short-term borrowings 67 359 426 Long term debt (1) 0 (1) ---- ----- ----- Total Interest Expense: 16 964 980 Net Interest Income: 170 337 507 (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 June 30, 2006 was $160.7 million and December 31, 2005 was $154.3 million. Income from investment securities remained at $1.0 million at June 30, 2006 and 2005. The average balance of investment securities for the six months ended June 30, 2006 was $51.0 million compared to $56.6 million at June 30, 2005. Total interest expense increased $5.5 million or 26.44 percent for the first six months of 2006 as compared to the first six 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 6.07 percent as of June 30, 2005 and 2006, respectively. 18 NON-INTEREST INCOME The following table presents the components of non-interest income for the six months ended June 30, 2006 and 2005: Six Months Ended June 30, (In thousands) ---------------- 2006 2005 ---- ---- Service charges and fees $393 $400 Trust department income 76 71 Gain on sale of loans 20 23 Gain on cash surrender value of BOLI 131 131 Other 249 204 ---- ---- Total $869 $829 ---- ---- 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 six months ended June 30, 2006 and June 30, 2005 total non-interest income increased from $829 thousand at June 30, 2005 to $869 thousand at June 30, 2006. Service charges and fees decreased $7 thousand from $400 thousand at June 30 2005 to $393 thousand or 1.75 percent at June 30, 2006. This decrease is largely attributable to fees received in 2005 from early pay-off of loans. Sales of fixed rate mortgages through the MPF and PHFA programs decreased in the first six months of 2006 compared to the first six months of 2005 resulting in gain on sale of loans decreasing from $23 thousand in 2005 to $20 thousand in 2006. The MPF loans are being serviced by CCFNB and the bank retains minimal credit risk. Other non-interest income increased $45 thousand from $204 thousand at June 30, 2005 to $249 thousand at June 30, 2006. This increase is primarily attributable to ATM and debit card related fees; from $59 thousand at June 30, 2005 to $66 thousand at June 30, 2006 and investment center income, from $62 thousand at June 30, 2005 to $97 thousand at June 30, 2006. NON-INTEREST EXPENSE The following table presents the components of non-interest expense for the six months ended June 30, 2006 and 2005: Six Months Ended June 30, ---------------------- 2006 2005 ------ ------ (Dollars in Thousands) Salaries and wages $1,256 $1,132 Employee benefits 418 399 Net occupancy expense 226 231 Equipment expense 244 250 State shares tax 144 141 Professional services 106 157 Director fees 86 94 Stationery and supplies 74 76 Other expense 538 559 ------ ------ Total $3,092 $3,039 ------ ------ Non-interest expense increased 3.33 percent from $3.0 million at June 30, 2005 to $3.1 million at June 30, 2006. 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 10.95 percent from $1,132 thousand at June 30, 2005 to $1,256 thousand at 2006. Additionally, employee benefits increased 4.76 percent from $399 thousand at June 30, 2005 to $418 thousand at June 30, 2006. These increases were partially attributable to the addition of new personnel to increase business development and annual increases in salaries and cost of benefits. Occupancy expense decreased 2.16 percent, from $231 thousand at June 30, 2005 to $226 thousand at June 30, 2006. This decrease is attributable to savings of miscellaneous occupancy, which includes heat and snow plowing. Equipment expense reflects a $6 thousand decrease for the first six months of 2006 compared to the first six months of 2005. This decrease is a result of less depreciation expense as some equipment has fully depreciated. Occupancy expense is expected to increase with the opening of our Berwick branch in the fourth quarter of 2006. Pennsylvania Bank Shares Tax increased $3 thousand from $141 thousand at June 30, 2005 to $144 thousand at June 30, 2006. Professional services decreased 32.48 percent from $157 thousand at June 30, 2005 to $106 thousand at June 30, 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 $94 thousand through June 30, 2005 compared to $86 thousand through June 30, 2006. Beginning January 2006, the Chairman of the Board fee decreased from $56 thousand annually to $40 thousand annually. 19 Stationery and supplies decreased $2 thousand in comparing June 30, 2005 at $76 thousand and June 30, 2006 at $74 thousand. Other expenses decreased $21 thousand or 3.76 percent from $559 thousand at June 30, 2005 to $538 thousand at June 30, 2006. Telephone expenses for the second quarter 2006 compared to the second quarter of 2005 were the reason for a decrease of $9.2 thousand other expenses. This particular expense should continue to show a decrease in the future due to a recent review and recommendations by a third party consultant. Charge-offs in the deposit area for the first half of 2006 also decreased by $2.7 thousand compared to the first half of 2005. Donations through June 30, 2006 were $4.2 thousand less than through June 30, 2005. With the lowering of our past due loans, loan costs decreased $4.4 thousand from June 30, 2005 to June 30, 2006. INCOME TAXES Income tax expense as a percentage of pre-tax income was 23.42 percent for the six months ended June 30, 2006 compared with 21.02 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 June 30, 2006, we had $48.0 million of securities available for sale recorded at their fair value, compared with $53.9 million at December 31, 2005. As of June 30, 2006, the investment securities available for sale had a net unrealized loss of $480 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 June 30, 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 $ 6,325,191 $ 59,623 $11,365,944 $416,331 $17,691,135 $475,954 Other 7,618,932 129,111 13,442,605 307,395 21,061,537 436,506 Obligations of State and Political Subdivisions 806,562 19,109 806,562 19,109 Marketable Equity Securities 330,815 17,638 34,347 9,843 365,162 27,481 ----------- -------- ----------- -------- ----------- -------- Total $15,081,500 $225,481 $24,842,896 $733,569 $39,924,396 $959,050 ----------- -------- ----------- -------- ----------- -------- 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) ----------------------- June 30, December 31, 2006 2005 -------- ------------ Past due and non-accrual: Days 30 - 89 $490 $1,229 Days 90 plus 44 130 Non-accrual 296 707 ---- ------ Total $830 $2,066 Past due and non-accrual loans decreased 61.90 percent from $2.1 million at December 31, 2005 to $.8 million at June 30, 2006. The loan delinquency expressed as a ratio to total loans was .52 percent at June 30, 2006 and 1.34 percent at December 31, 2005. The provision for loan losses for the first six months of 2006 was $65 thousand compared to the first six months of 2005 at $60 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: MATURITY AND REPRICING DATA FOR LOANS AND LEASES (Dollars in Thousands) June 30, 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 $ 4,023 (2) Over three months through 12 months 11,944 (3) Over one year through three years 28,561 (4) Over three years through five years 6,705 (5) Over five years through 15 years 19,269 (6) Over 15 years 327 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 19,562 (2) Over three months through 12 months 9,502 (3) Over one year through three years 31,486 (4) Over three years through five years 14,350 (5) Over five years through 15 years 13,769 (6) Over 15 years 903 -------- Sub-total $160,401 Add: Non-accrual loans not included above 296 Less: Unearned income (21) -------- Total Loans and Leases $160,676 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 Six Months Ending June 30, Amounts in thousands -------------------- 2006 2005 -------- -------- Average loans outstanding: $156,712 $149,628 -------- -------- Total loans at end of period 160,676 149,441 -------- -------- Balance at beginning of period $ 1,553 $ 1,392 Total charge-offs (199) (22) Total recoveries 19 39 -------- -------- Net (charge-offs) recoveries (180) 17 Provision for loan losses 65 60 -------- -------- Balance at end of period $ 1,438 $ 1,469 -------- -------- Net (charge-offs) recoveries as a percent of average loans outstanding during period .11% (.01)% Allowance for loan losses as a percent of total loans .89% .98% 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: June 30, 2006 December 31, 2005 --------------------- --------------------- Minimum Minimum Calculated Standard Calculated Standard Ratios Ratios Ratios Ratios ---------- -------- ---------- -------- Risk Based Ratios: Tier I Capital to risk-weighted assets 18.30% 4.00% 19.24% 4.00% Total Qualifying Capital to risk-weighted assets 19.29% 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 12.29% 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 $23.43 at June 30, 2006, compared with $23.06 per share at December 31, 2005. Cash dividends declared amounted to $.38 per share for the six months ended June 30, 2006, equivalent to a dividend payout ratio of 40.89 percent, compared with 43.09 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 second quarter of 2006: CCFNB BANCORP, INC. ISSUER PURCHASES OF EQUITY SECURITIES NUMBER OF SHARES PURCHASED AS PART OF NUMBER OF SHARES THAT NUMBER OF SHARES PRICE PAID PUBLICLY ANNOUNCED MAY YET BE PURCHASED PERIOD PURCHASED PER SHARE PROGRAM (1) UNDER THE PROGRAM ------ ---------------- ---------- -------------------- --------------------- 04/11/06 - 04/11/06 2,000 $28.40 2,000 58,000 04/27/06 - 04/27/06 2,000 $28.25 2,000 56,000 05/04/06 - 05/04/06 2,000 $28.00 2,000 54,000 06/30/06 - 06/30/06 2,000 $28.00 2,000 52,000 ----- ----- TOTAL 8,000 8,000 (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 June 30, 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 June 30, 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: August 8, 2006 By /s/ Virginia D. Kocher ------------------------------------- Virginia D. Kocher Treasurer Date: August 8, 2006 26