SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2007
[ ] 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. 1,228,266 shares of $1.25
(par) common stock were outstanding as of October 31, 2007.
CCFNB BANCORP, INC. AND SUBSIDIARY
TABLE OF CONTENTS
SEPTEMBER 30, 2007
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 - 15
- Report of Independent Registered Public Accounting Firm 16
- Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations 17 - 25
- Controls and Procedures 26
PART II - OTHER INFORMATION 27
SIGNATURES 28 - 31
CCFNB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
Unaudited
September December
30, 2007 31, 2006
--------- --------
ASSETS
Cash and due from banks $ 5,384 $ 4,819
Interest-bearing deposits with other banks 981 405
Federal funds sold 10,809 10,307
Investment securities available-for-sale 62,159 53,486
Loans, net of unearned income 161,476 160,641
Allowance for loan losses 1,460 1,456
-------- --------
Net loans 160,016 159,185
Premises and equipment, net 5,182 5,049
Cash surrender value of bank-owned life insurance 7,009 6,767
Accrued interest receivable 1,177 994
Other assets 1,485 907
-------- --------
TOTAL ASSETS $254,202 $241,919
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Non-interest bearing $ 20,953 $ 19,258
Interest bearing 151,603 150,027
-------- --------
Total Deposits 172,556 169,285
Short-term borrowings 37,366 29,310
Long-term borrowings 11,138 11,297
Accrued interest and other expenses 1,886 1,737
Other liabilities 28 42
-------- --------
TOTAL LIABILITIES 222,974 211,671
-------- --------
STOCKHOLDERS' EQUITY
Common stock, par value $1.25 per share; authorized
5,000,000 shares; issued and outstanding 1,230,266 shares
in 2007 and 1,241,664 shares in 2006 1,538 1,552
Surplus 2,368 2,672
Retained earnings 27,289 26,054
Accumulated other comprehensive income (loss) 33 (30)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 31,228 30,248
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $254,202 $241,919
======== ========
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 Nine For the Three
Months Ending Months Ending
September 30 September 30
----------------------- -----------------------
2007 2006 2007 2006
---------- ---------- ---------- ----------
INTEREST AND DIVIDEND INCOME
Interest and fees on loans:
Taxable $ 7,926 $ 7,584 $ 2,667 $ 2,686
Tax-exempt 363 313 132 110
Interest and dividends on investment securities:
Taxable 1,757 1,242 657 429
Tax-exempt 141 217 44 58
Dividends 92 83 32 28
Federal funds sold 412 255 138 131
Deposits in other banks 136 26 48 17
---------- ---------- ---------- ----------
TOTAL INTEREST AND DIVIDEND INCOME 10,827 9,729 3,718 3,459
---------- ---------- ---------- ----------
INTEREST EXPENSE
Deposits 3,016 2,525 1,038 891
Short-term borrowings 1,108 810 406 327
Long-term borrowings 502 507 168 171
---------- ---------- ---------- ----------
TOTAL INTEREST EXPENSE 4,626 3,842 1,612 1,389
---------- ---------- ---------- ----------
Net interest income 6,201 5,878 2,106 2,070
Provision for loan losses 30 127 -- 62
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 6,171 5,751 2,106 2,008
---------- ---------- ---------- ----------
NON-INTEREST INCOME
Service charges and fees 680 618 240 225
Gain on sale of loans 124 32 60 12
Bank-owned life insurance income 217 194 74 63
Investment center 339 163 68 66
Trust department 132 114 50 38
Other 230 270 81 118
---------- ---------- ---------- ----------
TOTAL NON-INTEREST INCOME 1,722 1,391 573 522
---------- ---------- ---------- ----------
NON-INTEREST EXPENSE
Salaries 2,224 1,914 723 658
Pensions and other employee benefits 660 612 212 194
Occupancy, net 369 339 122 113
Equipment 363 364 121 120
State shares tax 236 228 77 84
Professional services 213 158 84 52
Directors' fees 139 125 46 39
Stationery and supplies 127 103 32 29
Other 900 875 295 337
---------- ---------- ---------- ----------
TOTAL NON-INTEREST EXPENSE 5,231 4,718 1,712 1,626
---------- ---------- ---------- ----------
Income before income taxes 2,662 2,424 967 904
Income tax expense 675 590 249 234
---------- ---------- ---------- ----------
NET INCOME $ 1,987 $ 1,834 $ 718 $ 670
========== ========== ========== ==========
PER SHARE DATA
Net income $ 1.61 $ 1.47 $ 0.58 $ 0.54
Cash dividends $ 0.61 $ 0.58 $ 0.21 $ 0.20
Weighted average shares outstanding 1,235,249 1,251,832 1,235,249 1,251,832
See accompanying notes to Consolidated Financial Statements.
-3-
CCFNB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
For the Nine
Months Ending
September 30,
-------------------
2007 2006
-------- --------
OPERATING ACTIVITIES
Net income $ 1,987 $ 1,834
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 30 127
Depreciation and amortization 307 274
Employee stock purchase plan expense 2 --
Premium amortization on investment securities 70 85
Discount accretion on investment securities (21) (14)
Deferred income taxes (benefit) (55) (65)
(Gain) on sale of loans (124) (32)
Proceeds from sale of mortgage loans 5,260 1,650
Originations of mortgage loans for resale (5,167) (1,713)
(Income) from investment in insurance agency (10) (10)
(Increase) in accrued interest receivable and other assets (728) (219)
Net (increase) in cash surrender value of bank-owned life insurance (242) (228)
Increase in accrued interest, other expenses and other liabilities 135 149
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,444 1,838
-------- --------
INVESTING ACTIVITIES
Purchase of investment securities available-for-sale (31,441) (10,560)
Proceeds from sales, maturities and redemptions of investment
securities available-for-sale 22,812 13,334
Net (increase) decrease in loans (830) (6,121)
Purchases of premises and equipment (440) (208)
-------- --------
NET CASH (USED IN) INVESTING ACTIVITIES (9,899) (3,555)
-------- --------
FINANCING ACTIVITIES
Net increase in deposits 3,271 (34)
Net increase in short-term borrowings 8,056 4,244
Net (decrease) in long-term borrowings (159) (9)
Acquisition of treasury stock (499) (505)
Proceeds from issuance of common stock 181 153
Cash dividends paid (752) (725)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 10,098 3,124
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 1,643 1,407
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 15,531 11,362
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 17,174 $ 12,769
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 4,564 $ 3,785
Income taxes $ 644 $ 581
See accompanying notes to Consolidated Financial Statements.
-4-
CCFNB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
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 eight
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 nine-month period ended September 30, 2007
and the year ended December 31, 2006, 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
September 30, 2007 and December 31, 2006 was $211,000 and $201,000,
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 September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards SFAS 158 "Employers' Accounting for
Defined Benefit Pension and Other Post Retirement Plans" which requires the
Corporation to recognize the funded status of a benefit plan as either assets or
liabilities in the consolidated balance sheet and to recognize as a component of
other comprehensive income, net of tax, the unrecognized actuarial gains or
losses, prior service costs and transition obligations that arise during the
period. The adoption of SFAS 158 for the year ended December 31, 2006 did not
have a material impact on the Corporation's consolidated financial condition,
results of operations or liquidity.
-9-
In September 2006, the FASB issued Statement of Financial Accounting Standards
SFAS 157, "Fair Value Measurements", which upon adoption will replace various
definitions of fair value in existing accounting literature with a single
definition, will establish a framework for measuring fair value, and will
require additional disclosures about fair value measurements. The statement
clarifies that fair value is the price that would be received to sell an asset
or the price paid to transfer a liability in the most advantageous market
available to the entity and emphasizes that fair value is a market-based
measurement and should be based on the assumptions market participants would
use. The statement also creates a three-level hierarchy under which individual
fair value estimates are to be ranked based on the relative reliability of the
inputs used in the valuation. This hierarchy is the basis for the disclosure
requirements, with fair value estimates based on the least reliable inputs
requiring more extensive disclosures about the valuation method used and the
gains and losses associated with those estimates. SFAS 157 is required to be
applied whenever another financial accounting standard requires or permits an
asset or liability to be measured at fair value. The statement does not expand
the use of fair value to any new circumstances. The Corporation will be required
to apply the new guidance beginning January 1, 2008, and does not expect it to
have a material impact on the Corporation's consolidated financial condition,
results of operations or liquidity.
In July 2006, the FASB issued FASB Staff Position FSP 13-2, "Accounting for a
Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes
Generated by a Leveraged Lease Transaction". This FSP amends SFAS 13,
"Accounting for Leases", to require a lessor in a leveraged lease transaction to
recalculate the leveraged lease for the effects of a change or projected change
in the timing of cash flows relating to income taxes that are generated by the
leveraged lease. The guidance in FSP 13-2 is required to be applied to fiscal
years beginning after December 15, 2006. The application of this FSP is not
expected to have a material impact on the Corporation's consolidated financial
condition, results of operations or liquidity.
In June 2006, the FASB issued Interpretation No. 48 FIN 48, "Accounting for
Uncertainty in Income Taxes", an interpretation of SFAS 109, "Accounting for
Income Taxes". FIN 48 prescribes a comprehensive model for how companies should
recognize, measure, present, and disclose in their financial statements
uncertain tax positions taken or expected to be taken on a tax return. Under FIN
48, tax positions shall initially be recognized in the financial statements when
it is more likely than not the position will be sustained upon examination by
the tax authorities. Such tax positions shall initially and subsequently be
measured as the largest amount of tax benefit that is greater than 50% likely of
being realized upon ultimate settlement with the tax authority assuming full
knowledge of the position and all relevant facts. FIN 48 also revises disclosure
requirements to include an annual tabular roll-forward of unrecognized tax
benefits. The provisions of this interpretation are required to be adopted for
fiscal periods beginning after December 15, 2006. The Corporation will be
required to apply the provisions of FIN 48 to all tax positions upon initial
adoption with any cumulative effect adjustment to be recognized as an adjustment
to retained earnings. The adoption of FIN 48 is not expected to have a material
impact on the Corporation's consolidated financial condition, results of
operations or liquidity.
In March 2006, the FASB issued Statement of Financial Accounting Standards SFAS
156, "Accounting for Servicing of Financial Assets", an amendment of SFAS 140.
This standard requires entities to separately recognize a servicing asset or
liability whenever it undertakes an obligation to service financial assets and
also requires all separately recognized servicing assets or liabilities to be
initially measured at fair value. Additionally, this standard permits entities
to choose among two alternatives, the amortization method or fair value
measurement method, for the subsequent measurement of each class of separately
recognized servicing assets and liabilities. Under the amortization method, an
entity shall amortize the value of servicing assets or liabilities in proportion
to and over the period of estimated net servicing income or net servicing loss
and assess servicing assets or liabilities for impairment or increased
obligation based on fair value at each reporting date. Under the fair value
measurement method, an entity shall measure servicing assets or liabilities at
fair value at each reporting date and report changes in fair value in earnings
in the period in which the changes occur.
-10-
Effective January 1, 2006, the Corporation adopted this statement by electing
amortization method as the measurement method for residential real estate
mortgage servicing rights (MSRs).
In February 2006, the FASB issued Statement of Financial Accounting Standards
SFAS 155, "Accounting for Certain Hybrid Financial Instruments", which amends
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities", and
SFAS 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". SFAS 155 requires entities to evaluate and
identify whether interests in securitized financial assets are freestanding
derivatives, hybrid financial instruments that contain an embedded derivative
requiring bifurcation, or hybrid financial instruments that contain embedded
derivatives that do not require bifurcation. SFAS 155 also permits fair value
measurement for any hybrid financial instrument that contains an embedded
derivative that otherwise would require bifurcation. This statement will be
effective for all financial instruments acquired or issued by the Corporation on
or after January 1, 2007 and is not expected to have a material impact on the
Corporation's consolidated financial condition, results of operations or
liquidity.
In November 2005, the 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 commencing in 2005.
In May 2005, the FASB issued Statement of Financial Accounting Standards SFAS
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 did not have a material impact on the
Corporation's consolidated financial condition, results of operations or
liquidity.
In December 2004, the FASB issued Statement of Financial Accounting Standards
SFAS 153, "Exchanges of Nonmonetary Assets", which amends APB Opinion No. 29,
"Accounting for Nonmonetary Transactions". SFAS 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 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 153 is effective for
nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005.
The adoption of SFAS 153 is not expected to have a material impact on the
Corporation's consolidated financial condition, results of operations or
liquidity.
-11-
In December 2004, the FASB issued SFAS 123 (revised 2004), "Share-Based
Payment". This Statement is a revision of SFAS 123, "Accounting for Stock-Based
Compensation", and supersedes APB Opinion 25, "Accounting for Stock Issued to
Employees", and its related guidance. SFAS 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 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 adopted these statements as of January
1, 2006. SFAS 123R also requires 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 did not have a material effect on the Corporation's consolidated
financial condition, results of operations or liquidity.
ADVERTISING COSTS
It is the Corporation's policy to expense advertising costs in the period in
which they are incurred. Advertising expense for the nine-month periods ended
September 30, 2007 and 2006 was approximately $76,000 and $71,000, respectively.
RECLASSIFICATION
Certain amounts in the consolidated financial statements of the prior years have
been reclassified to conform with presentation used in the 2007 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 nine-month periods ended
September 30, 2007 and September 30, 2006 were as follows:
(Amounts in Thousands)
----------------------
2007 2006
------ ------
Balance, beginning of year $1,456 $1,552
Provision charged to operations 30 127
Loans charged-off (59) (216)
Recoveries 33 25
------ ------
Balance, September 30 $1,460 $1,488
====== ======
At September 30, 2007, the total recorded investment in loans that are
considered to be impaired as defined by SFAS No. 114 was $37,000. These impaired
loans had a related allowance for loan losses of $2,300. No additional charge to
operations was required to provide for the impaired loans since the total
allowance for loan losses is estimated by management to be adequate to provide
for the loan loss allowance required by SFAS No. 114 along with any other
potential losses.
At September 30, 2007, there were no significant commitments to lend additional
funds with respect to non-accrual and restructured loans.
-12-
Non-accrual loans at September 30, 2007 and December 31, 2006 were $37,000 and
$91,000, respectively, all of which were considered impaired.
Loans past due 90 days or more and still accruing interest amounted to $180,000
at September 30, 2007.
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.
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 $103,000 and $98,000 for
the nine-month periods ended September 30, 2007 and 2006, respectively.
There were no substantial changes in other plans as disclosed in the 2006 Annual
Report.
NOTE 6 - STOCKHOLDERS' EQUITY
Changes in stockholders' equity for the nine-month period ended September 30,
2007 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, 2007 $1,241,664 $1,552 $2,672 $26,054 $(30) $ -- $30,248
Comprehensive Income:
Net income $1,987 1,987 1,987
Change in unrealized
gain (loss) on
investment securities
available-for-sale
net of
reclassification
adjustment and tax
effects 63 63 63
------
TOTAL COMPREHENSIVE
INCOME $2,050
======
Issuance of 4,419 shares of
common stock under
dividend reinvestment
and stock purchase plans 6,602 8 173 181
Purchase of 18,000 shares
of treasury stock (499) (499)
Retirement of 18,000 shares
of treasury stock (18,000) (22) (477) 499 --
Cash dividends $.61 per
share (752) (752)
---------- ------ ------ ------- ---- ----- -------
Balance at September 30, 2007 $1,230,266 $1,538 $2,368 $27,289 $ 33 $ -- $31,228
========== ====== ====== ======= ==== ===== =======
-13-
NOTE 7 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
The Corporation is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These consolidated financial instruments include commitments to extend credit,
standby letters of credit and commercial letters of credit. Those instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the consolidated balance sheets. The contract or
notional amounts of those instruments reflect the extent of involvement the
Corporation has in particular classes of financial instruments. The Corporation
does not engage in trading activities with respect to any of its financial
instruments with off-balance sheet risk.
The Corporation may require collateral or other security to support financial
instruments with off-balance sheet credit risk. The contract or notional amounts
at September 30, 2007 and December 31, 2006 were as follows:
(Amounts in Thousands)
----------------------
September December
30, 2007 31, 2006
--------- --------
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit $22,973 $19,751
Financial standby letters of credit 897 868
Performance standby letters of credit 460 530
Dealer floor plans 327 437
Loans for resale 261 51
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 customer. Collateral held varies but may
include accounts receivable, inventory, property, plant, equipment and
income-producing commercial properties.
Financial standby letters of credit and performance standby 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 September 30,
2007, 84.3% 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.
-14-
NOTE 8 - MANAGEMENT'S ASSERTIONS AND COMMENTS REQUIRED TO BE PROVIDED WITH FORM
10Q FILING
In management's opinion, the consolidated interim financial statements reflect
fair presentation of the consolidated financial position of CCFNB Bancorp, Inc.
and Subsidiary, and the results of their operations and their cash flows for the
interim periods presented. Further, the consolidated interim financial
statements are unaudited, however they reflect all adjustments, which are in the
opinion of management, necessary to present fairly the consolidated financial
condition and consolidated results of operations and cash flows for the interim
periods presented and that all such adjustments to the consolidated financial
statements are of a normal recurring nature.
The results of operations for the nine-month period ended September 30, 2007,
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, 2006 filed with the Securities and Exchange Commission.
-15-
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 September 30, 2007, and the related consolidated
statements of income for the three and nine month periods ended September 30,
2007 and 2006 and the consolidated statements of cash flows for the nine-month
periods ended September 30, 2007 and 2006. 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, 2006, 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 February 17, 2007, 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, 2006, 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
November 9, 2007
-16-
CCFNB Bancorp, Inc.
Form 10-Q
For the Quarter Ended September 30, 2007
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Consolidated Summary of Operations
(Dollars in Thousands, except for per share data)
At and For the Nine
Months
Ended September 30, At and For the Years Ended December 31,
----------------------- --------------------------------------------------------------
2007 2006 2006 2005 2004 2003 2002
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income and Expense:
Interest income $ 10,827 $ 9,729 $ 13,202 $ 11,442 $ 10,843 $ 11,221 $ 12,780
Interest expense 4,626 3,842 5,301 4,131 3,669 4,366 5,741
Net interest income 6,201 5,878 7,901 7,311 7,174 6,855 7,039
Loan loss provision 30 127 175 90 140 200 309
Net interest income after loan loss
provision 6,171 5,751 7,726 7,221 7,034 6,655 6,730
Non-interest income 1,722 1,391 1,900 1,713 1,530 1,508 1,210
Non-interest expense 5,231 4,718 6,437 6,077 5,746 5,409 5,479
Income before income taxes 2,662 2,424 3,189 2,857 2,818 2,754 2,461
Income taxes 675 590 777 631 601 591 539
Net income $ 1,987 $ 1,834 $ 2,412 $ 2,226 $ 2,217 $ 2,163 $ 1,922
Per Share: (1)
Net income $ 1.61 $ 1.47 $ 1.93 $ 1.76 $ 1.74 $ 1.69 $ 1.47
Cash dividends paid .61 .58 .78 .74 .70 .66 .63
Average shares outstanding 1,235,249 1,251,832 1,249,844 1,262,171 1,267,718 1,281,265 1,309,084
Average Balance Sheet:
Loans $ 160,038 $ 158,036 $ 158,554 $ 150,065 $ 147,348 $ 149,485 $ 147,545
Investments 57,503 50,822 53,703 54,943 61,999 58,152 54,197
Other earning assets 14,362 7,470 7,621 7,503 5,705 8,036 5,309
Total assets 247,625 233,838 236,569 230,081 231,477 230,975 223,476
Deposits 170,489 166,541 167,024 167,812 172,028 171,956 150,883
Other interest-bearing liabilities 45,440 35,636 36,676 32,253 29,823 29,772 29,356
Stockholders' equity 30,658 29,458 29,672 28,789 28,136 27,223 26,615
Balance Sheet Data:
Loans $ 161,476 $ 160,294 $ 160,641 $ 154,271 $ 149,900 $ 147,631 $ 151,338
Investments 62,159 51,276 53,486 53,919 61,834 62,775 53,528
Other earning assets 11,790 8,598 10,712 6,239 6,233 6,882 10,068
Total assets 254,202 236,457 241,920 231,218 235,377 232,914 229,032
Deposits 172,556 164,813 169,285 164,847 172,487 171,786 172,127
Other interest-bearing liabilities 48,504 40,154 40,607 35,910 30,080 32,325 28,621
Stockholders' equity 31,228 29,903 30,248 29,012 28,506 27,603 26,840
Ratios: (2)
Return on average assets 1.07% 1.05% 1.02% .97% .96% .94% .86%
Return on average equity 8.64% 8.30% 8.13% 7.73% 7.88% 7.95% 7.22%
Dividend payout ratio 37.80% 39.53% 40.39% 41.92% 40.19% 39.02% 42.86%
Average equity to average assets
ratio 12.38% 12.60% 12.54% 12.51% 12.17% 11.79% 11.77%
(1) Per share data has been calculated on the weighted average number of shares
outstanding.
(2) The ratios for the nine month period ending September 30, 2007 and 2006 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.
-17-
Earnings Summary
Net income for the nine months ended September 30, 2007 was $2.0 million or
$1.61 per basic and diluted share. These results compare with net income of $1.8
million or $1.47 per basic and diluted share for the same period in 2006.
Annualized return on average equity increased to 8.64 percent from 8.30 percent,
while the annualized return on average assets increased to 1.07 percent from
1.05 percent, for the nine months ended September 30, 2007 and 2006
respectively.
Net interest income continues to be the largest source of our operating income.
Net interest income on a tax equivalent basis increased 6.56 percent to $6.5
million at September 30, 2007 from $6.1 million at September 30, 2006. Overall,
interest earning assets yielded 6.37 percent for the nine months ended September
30, 2007 compared to 6.17 percent yield for the nine months ended September 30,
2006. The tax equivalized net interest margin decreased to 3.71 percent for the
nine months ended September 30, 2007 compared to 3.78 percent for the nine
months ended September 30, 2006.
Average interest earning assets increased $15.6 million or 7.21 percent for the
nine months ended September 30, 2007 over the same period in 2006 from $216.3
million at September 30, 2006 to $231.9 million at September 30, 2007. Average
loans increased $2.0 million or 1.27 percent, from $158.0 million at September
30, 2006 to $160.0 million at September 30, 2007. Average investments increased
$6.7 million or 13.2 percent from $50.8 million at September 30, 2006 to $57.5
million at September 30, 2007 and average federal funds sold and
interest-bearing deposits with other financial institutions increased $6.9
million or 92.3 percent from $7.5 million at September 30, 2006 to $14.4 million
at September 30, 2007.
Average interest bearing liabilities for the nine months ended September 30,
2007 were $197.6 million and for the nine month period ending September 30, 2006
they were $184.1 million, an increase of $13.5 million or 7.33 percent. Average
short-term borrowings were $24.3 million at September 30, 2006 and $34.3 million
at September 30, 2007. Long-term debt, which includes primarily FHLB advances,
was $11.3 million at September 30, 2006 and $11.1 million at September 30, 2007.
Average demand deposits increased $.4 million from $18.0 million at September
30, 2006 compared to $18.4 million at September 30, 2007.
The average interest rate for loans increased 40 basis points to 7.06 percent at
September 30, 2007 compared to 6.66 percent at September 30, 2006.
Interest-bearing deposits with other Financial Institutions and Federal Funds
Sold rates increased 7 basis points to 5.09 percent at September 30, 2007 from
5.02 percent at September 30, 2006. Average rates on interest bearing deposits
increased by 37 basis points from 2.27 percent to 2.64 percent in one year.
Average interest rates also increased on total interest bearing liabilities by
34 basis points to 3.12 percent from 2.78 percent. The cost of long-term debt
averaged 5.99 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 5.99 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 $5.9 million at September 30, 2006 to $6.2
million at September 30, 2007.
-18-
The following table reflects the components of net interest income for each of
the nine months ended September 30, 2007 and 2006:
ANALYSIS OF AVERAGE ASSETS, LIABILITIES AND CAPITAL EQUITY
AND
NET INTEREST INCOME ON A TAX EQUIVALENT BASIS
AVERAGE BALANCE SHEET AND RATE ANALYSIS
(Dollars in Thousands)
Nine Months Ended September 30, 2007 and 2006
-------------------------------------------------------------
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 $ 3,660 136 4.95% $ 676 $ 26 5.13%
Investment securities (3) 57,503 1,990 4.78% 50,822 1,542 4.34%
Federal funds sold 10,702 412 5.13% 6,794 255 5.00%
Loans 160,038 8,289 7.06% 158,036 7,897 6.66%
-------- ------- -------- ------
Total interest earning assets $231,903 $10,827 6.37% $216,328 $9,720 6.17%
-------- ------- -------- ------
Reserve for loan losses (1,467) (1,478)
Cash and due from banks 4,855 4,240
Other assets 12,334 14,748
-------- --------
Total assets $247,625 $233,838
-------- --------
LIABILITIES AND CAPITAL:
Interest bearing deposits $152,137 $ 3,016 2.64% $148,504 $2,525 2.27%
Short-term borrowings 34,302 1,108 4.31% 24,331 810 4.44%
Long-term borrowings 11,138 502 6.01% 11,305 507 5.98%
-------- ------- -------- ------
Total interest-bearing liabilities $197,577 $ 4,626 3.12% $184,140 $3,842 2.78%
-------- ------- -------- ------
Demand deposits $ 18,352 $ 18,037
Other liabilities 1,038 2,203
Stockholders' equity 30,658 29,458
-------- --------
Total liabilities and capital $247,625 $233,838
-------- --------
NET INTEREST INCOME /
NET INTEREST MARGIN (4) $ 6,201 3.57% $5,878 3.62%
TAX EQUIVALENT NET INTEREST INCOME /
NET INTEREST MARGIN (5) $ 6,461 3.71% $6,134 3.78%
(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 2007 and 2006.
-19-
The following table demonstrates the relative impact on net interest income of
changes in volume of interest earning assets and interest bearing liabilities
and changes in rates earned and paid by us on such assets and liabilities.
CHANGE IN NET INTEREST INCOME ON A TAX EQUIVALENT BASIS
Nine Months Ended September 30, 2007
Compared with 2006
Increase (Decrease) (2)
------------------------------------
Volume Rate Total
------ ---- ------
(In thousands)
Interest income:
Loans (1) $133 $632 $ 765
Investments (1) 290 224 514
Federal funds sold and other short-term
investments 346 5 351
---- ---- ------
769 861 1,630
Total Interest Income:
Interest expense:
Deposits 82 549 631
Short-term borrowings 443 (32) 411
Long term debt (10) 3 (7)
---- ---- ------
Total Interest Expense: 515 520 1,035
Net Interest Income: $254 $341 $ 595
---- ---- ------
(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 September 30, 2007 was $161.5 million and
December 31, 2006 was $160.6 million.
Income from investment securities increased to $2.0 million at September 30,
2007 compared to $1.5 million at September 30, 2006. The average balance of
investment securities for the nine months ended September 30, 2007 was $57.5
million compared to $50.8 million at September 30, 2006.
Total interest expense increased $.8 million or 21.05 percent for the first nine
months of 2007 as compared to the first nine months of 2006.
NON-INTEREST INCOME
The following table presents the components of non-interest income for the nine
months ended September 30, 2007 and 2006:
Nine Months Ended
September 30,
(Dollars in thousands)
----------------------
2007 2006
------ ------
Service charges and fees $ 680 $ 618
Gain on sale of loans 124 32
Bank-owned life insurance income 217 194
Investment center 339 163
Trust department 132 114
Other 230 270
------ ------
Total $1,722 $1,391
------ ------
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 nine months ended September 30, 2007 and September 30, 2006
total non-interest income increased $331 thousand from $1,391 thousand at
September 30, 2006 to $1,722 thousand at September 30, 2007.
Service charges and fees increased $62 thousand from $618 thousand at September
30, 2006 to $680 thousand or 10.03 percent at September 30, 2007 The largest
increase was in the fees for non-sufficient funds on checking accounts.
-20-
Sales of fixed rate mortgages through the Mortgage Partnership Finance ( MPF)
and PHFA programs reflected an increase at September 30, 2007 to $124 thousand
compared to $32 thousand at September 30, 2006. The MPF loans are being serviced
by the bank and the bank retains minimal credit risk.
Third party brokerage fees increased dramatically from $163 thousand at
September 30, 2006 to $339 thousand at September 30, 2007. The bank has added
another broker to its financial services department which should help continue
success in the future.
Other income decreased from $270 thousand at September 30, 2006 to $230 thousand
at September 30, 2007.
NON-INTEREST EXPENSE
The following table presents the components of non-interest expense for the nine
months ended September 30, 2007 and 2006:
Nine Months Ended
September 30,
-----------------
2007 2006
------ ------
(Dollars in
Thousands)
Salaries $2,224 $1,914
Pensions and other employee benefits 660 612
Occupancy expense-net 369 339
Equipment 363 364
State shares tax 236 228
Professional services 213 158
Director's fees 139 125
Stationery and supplies 127 103
Other 900 875
------ ------
Total $5,231 $4,718
------ ------
Non-interest expense increased from $4.7 million at September 30, 2006 to $5.2
million at September 30, 2007, an increase of 10.64 percent.
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, the bank utilizes budgets and related measures to control
variable expenses.
Salaries increased 15.79 percent from $1.9 million at September 30, 2006 to $2.2
million at September 30, 2007. Additionally, employee benefits increased 7.84
percent from $612 thousand at September 30, 2006 to $660 thousand at September
30, 2007. Overall, these increases were attributable to the addition of new
personnel to increase business development and annual increases in salaries and
cost of benefits. Specifically, commissions payable for brokerage sales amounted
to $168.3 thousand in 2007 and $48.9 thousand in 2006.
Occupancy expense increased 8.85 percent from $339 thousand at September 30,
2006 to $369 thousand at September 30, 2007. This increase is attributable to
general increases in the cost of utilities.
Pennsylvania Bank Shares Tax increased 3.51 percent from $228 thousand at
September 30, 2006 to $236 thousand at September 30, 2007.
Professional services increased 34.81 percent from $158 thousand at September
30, 2006 to $213 thousand at September 30, 2007. This increase is a result of
SOX 404 which is legislation requiring non-accelerated Securities and Exchange
Commission filers, such as ourselves, to attest to review of internal controls
at year end 2007. This requires documentation and testing beyond the normal
internal audit function.
Director's fees increased 11.20 percent from $125 thousand through September 30,
2006 compared to $139 thousand through September 30, 2007.
Stationery and supplies increased $24 thousand in comparing September 30, 2006
at $103 thousand and September 30, 2007 at $127 thousand, a 23.30 percent
increase. Documents were updated and replaced as many electronic enhancements
were introduced to our data processing routines, causing many forms to become
obsolete; another branch has been added and additional marketing supplies were
utilized for several areas of the bank.
Other expenses increased $25 thousand from $875 thousand at September 30, 2006
to $900 thousand at September 30, 2007, a 2.86 percent increase.
Income Taxes
Income tax expense as a percentage of pre-tax income was 25.36 percent for the
nine months ended September 30, 2007 compared with 24.34 percent for the same
period in 2006.
-21-
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
September 30, 2007, we had $62.2 million of securities available for sale
recorded at their fair value, compared with $53.5 million at December 31, 2006.
As of September 30, 2007, the investment securities available for sale had a net
unrealized gain of $33 thousand, net of deferred taxes, compared with a net
unrealized loss of $30 thousand, net of deferred taxes, at December 31, 2006.
These securities are not considered trading account securities, which may be
sold on a continuous basis, but rather are securities which the Corporation has
the ability and positive intent to hold the securities to maturity and are
classified as available-for-sale.
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 September 30, 2007:
Less than 12 months 12 months or more Total
----------------------- ----------------------- -----------------------
Description of Security Unrealized Unrealized Unrealized
(Dollars in thousands) Fair Value Loss Fair Value Loss Fair Value Loss
----------------------- ---------- ---------- ---------- ---------- ---------- ----------
Obligations of U.S. Government
Corporations and Agencies:
Mortgage backed $3,999 $18 $ 8,259 $123 $12,258 $141
Other 0 0 4,471 27 4,471 27
Obligations of State and Political
Subdivisions 570 6 0 0 570 6
Marketable Equity Securities 453 44 141 46 594 90
------ --- ------- ---- ------- ----
Total $5,022 $68 $12,871 $196 $17,893 $264
====== === ======= ==== ======= ====
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.
Non-Performing Assets
Shown below is a summary of past due and non-accrual loans:
September December
30, 2007 31,2006
Past due and non-accrual: (Dollars in Thousands)
------------------------- --------- --------
Days 30 - 89 $1,562 $638
Days 90 plus 180 67
Non-accrual 37 91
------ ----
Total $1,779 $796
Past due and non-accrual loans increased 123.49 percent from $796 thousand at
December 31, 2006 to $1,779 thousand at September 2007. The non-performing
assets expressed as a ratio to total loans was .13 percent at September 30, 2007
and .11 percent at December 31, 2006. Non-performing loans are comprised of
loans which are on a non-accrual basis, accruing loans that are 90 days or more
past due, and restructured loans. Non-performing assets are comprised of
non-performing loans and foreclosed real estate (assets acquired in
foreclosure), if applicable.
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The provision for loan losses for the first nine months of 2007 was $30 thousand
compared to the first nine months of 2006 at $127 thousand. Management is
diligent in its efforts to maintain low 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 September 30, 2007
----------------------
(Dollars in thousands)
(1) Three months or less $ 2,537
(2) Over three months through 12 months 13,013
(3) Over one year through three years 28,228
(4) Over three years through five years 6,218
(5) Over five years through 15 years 17,843
(6) Over 15 years 254
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 16,062
(2) Over three months through 12 months 14,468
(3) Over one year through three years 30,880
(4) Over three years through five years 10,185
(5) Over five years through 15 years 21,513
(6) Over 15 years 264
--------
Sub-total 161,465
Add: Non-accrual loans not included above 37
Less: Unearned income (26)
--------
Total Loans and Leases $161,476
--------
Allowance for Loan Losses
Because our loan portfolio contain 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 mortgages, Residential mortgages, Consumer loans, Municipal loans and
Non real estate commercial loans.
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.
-23-
The following table presents a summary of CCFNB's loan loss experience as of the
dates indicated:
For the Nine Months
Ended September 30,
(Dollars in thousands)
----------------------
2007 2006
-------- --------
Average loans outstanding: $160,038 $158,036
-------- --------
Total loans at end of period 161,476 160,294
-------- --------
Balance at beginning of period $ 1,456 $1,552
Total charge-offs (59) (216)
Total recoveries 33 25
-------- --------
Net charge-offs (26) (191)
Provision for loan losses 30 127
-------- --------
Balance at end of period $ 1,460 $ 1,488
-------- --------
Net charge-offs as a percent of average
loans outstanding during period .02% .12%
Allowance for loan losses as a
percent of total loans .90% .93%
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:
September 30, 2007 December 31, 2006
--------------------- ---------------------
Minimum Minimum
Calculated Standard Calculated Standard
Ratios Ratios Ratios Ratios
---------- -------- ---------- --------
Risk Based Ratios:
Tier I Capital to risk-weighted assets 19.42% 4.00% 19.25% 4.00%
Total Qualifying Capital to risk-weighted assets 20.35% 8.00% 20.29% 8.00%
Additionally, certain other ratios also provide capital analysis as follows:
September 30, December 31,
2007 2006
-------------- ------------
Tier I Capital to average assets 12.61% 12.71%
We believe that the bank's current capital position and liquidity positions are
strong and that its capital position is adequate to support its operations.
Book value per share amounted to $25.38 at September 30, 2007, compared with
$24.36 per share at December 31, 2006.
-24-
Cash dividends declared amounted to $.61 per share for the nine months ended
September 30, 2007, equivalent to a dividend payout ratio of 37.80 percent,
compared with 39.53 percent for the same period in 2006. 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 third quarter of 2007:
CCFNB BANCORP, INC.
ISSUER PURCHASES OF EQUITY SECURITIES
NUMBER OF SHARES
PURCHASED AS PART OF NUMBER OF SHARES THAT
NUMBER OF SHARES PUBLICLY ANNOUNCED MAY YET BE PURCHASED
PERIOD PURCHASED PRICE PAID PER SHARE PROGRAM (1) UNDER THE PROGRAM
------ ---------------- -------------------- -------------------- ---------------------
07/01/07 - 07/31/07 2,000 $27.00 2,000 26,000
08/01/07 - 08/31/07 2,000 $26.00 2,000 24,000
09/01/07 - 09/30/07 2,000 $27.50 2,000 22,000
----- -----
TOTAL 6,000 6,000
(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.
-25-
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 September 30,
2007, 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.
-26-
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 - Nothing to report.
-27-
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 September 30, 2007, to be signed on its behalf by the undersigned
thereunto duly authorized.
CCFNB BANCORP, INC.
(Registrant)
By /s/ Lance O. Diehl
-------------------------------------
Lance O. Diehl
President and CEO
Date: November 13, 2007
By /s/ Virginia D. Kocher
-------------------------------------
Virginia D. Kocher
Treasurer
Date: November 13, 2007
-28-