SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year-ended December 31, 2007
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____________to________________
Commission file Number: 0-19028
CCFNB BANCORP, INC.
(Name of registrant as specified in its charter)
PENNSYLVANIA 23-2254643
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
232 East Street, Bloomsburg, Pennsylvania 17815
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (570) 784-4400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $1.25 per share.
Indicate by check mark if the Registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ]
(Do not check if a smaller reporting company) Smaller reporting company [X]
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act. Yes [ ] No [X]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant based on the average of the bid and asked
prices of $24.81 at June 30, 2007, was $30,612,663.
As of February 25, 2008, the Registrant had outstanding 1,227,142 shares of its
common stock, par value $1.25 per share.
CCFNB BANCORP, INC.
FORM 10-K
INDEX
PAGE
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SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS............................... 3
ITEM 1. BUSINESS............................................................. 3
ITEM 1A. RISK FACTORS......................................................... 11
ITEM 2. PROPERTIES........................................................... 14
ITEM 3. LEGAL PROCEEDINGS.................................................... 14
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES........ 14
ITEM 6. SELECTED FINANCIAL DATA.............................................. 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................ 17
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........... 27
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............. 28
ITEM 9A. CONTROLS AND PROCEDURES.............................................. 53
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................... 55
ITEM 11. EXECUTIVE COMPENSATION............................................... 58
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.......................................... 64
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................... 64
ITEM 14. ACCOUNTANT FEES AND SERVICES......................................... 65
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES............................ 66
SIGNATURES...................................................................... 68
INDEX TO EXHIBITS............................................................... 70
2
CCFNB BANCORP, INC.
FORM 10-K
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This annual report on Form 10-K, other periodic reports filed by us
under the Securities Exchange Act of 1934, as amended, and any other written or
oral statements made by or on behalf of us may include "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 which reflect our current views with respect to future events and
financial performance. Such forward looking statements are based on general
assumptions and are subject to various risks, uncertainties, and other factors
that may cause actual results to differ materially from the views, beliefs and
projections expressed in such statements. These risks, uncertainties and other
factors include, but are not limited to:
- possible changes in economic and business conditions that may affect
the prevailing interest rates, the prevailing rates of inflation, or
the amount of growth, stagnation, or recession in the global, U.S.,
and Northcentral Pennsylvania economies, the value of investments,
collectibility of loans and the profitability of business entities;
- possible changes in monetary and fiscal policies, laws and
regulations, and other activities of governments, agencies and
similar organizations;
- the effects of easing of restrictions on participants in the
financial services industry, such as banks, securities brokers and
dealers, investment companies and finance companies, and changes
evolving from the enactment of the Gramm-Leach-Bliley Act, which
became effective in 2000, and attendant changes in matters and
effects of competition in the financial services industry;
- the cost and other effects of legal proceedings, claims, settlements
and judgments; and
- our ability to achieve the expected operating results related to our
operations which depends on a variety of factors, including the
continued growth of the markets in which we operate consistent with
recent historical experience, and our ability to expand into new
markets and to maintain profit margins in the face of pricing
pressures.
The words "believe," "expect," "anticipate," "project" and similar
expressions signify forward looking statements. Readers are cautioned not to
place undue reliance on any forward looking statements made by or on behalf of
us. Any such statement speaks only as of the date the statement was made. We
undertake no obligation to update or revise any forward looking statements.
ITEM 1. BUSINESS
GENERAL
We are a registered financial holding company, bank holding company,
and Pennsylvania business corporation, and are headquartered in Bloomsburg,
Pennsylvania. We have one wholly-owned subsidiary which is Columbia County
Farmers National Bank or referred to as the Bank. A substantial part of our
business consists of the management and supervision of the Bank. Our principal
source of income is dividends paid by the Bank. At December 31, 2007, we had
approximately:
- $245 million in total assets;
- $161 million in loans;
- $171 million in deposits; and
- $32 million in stockholders' equity.
The Bank is a national banking association and member of the Federal
Reserve System whose deposits are insured by the Bank Insurance Fund of the
FDIC. The Bank is a full-service commercial bank providing a range of services
and products, including time and demand deposit accounts, consumer, commercial
and mortgage loans to individuals and small to medium-sized businesses in its
Northcentral Pennsylvania market area. The Bank also operates a full-service
trust department. Third-party brokerage services are also resident in the Bank's
office in Lightstreet, Pennsylvania. At December 31, 2007, the Bank had 8 branch
banking offices which are located in the Pennsylvania county of Columbia.
We consider our branch banking offices to be a single operating
segment, because these branches have similar:
- economic characteristics,
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- products and services,
- operating processes,
- delivery systems,
- customer bases, and
- regulatory oversight.
We have not operated any other reportable operating segments in the
3-year period ended December 31, 2007. We have combined financial information
for our third-party brokerage operation with our financial information, because
this company does not meet the quantitative threshold for a reporting operating
segment.
We hold a 50 percent interest in a local insurance agency. The name
of this agency is Neighborhood Group, Inc. and trades under the fictitious name
of Neighborhood Advisors (insurance agency). Through this joint venture, we sell
insurance products and services. We account for this local insurance agency
using the equity method of accounting.
As of December 31, 2007, we had 95 employees on a full-time
equivalent basis. The Company and the Bank are not parties to any collective
bargaining agreement and employee relations are considered to be good.
SUPERVISION AND REGULATION
The following discussion sets forth the material elements of the
regulatory framework applicable to us and the Bank and provides certain specific
information. This regulatory framework is primarily intended for the protection
of investors in our common stock, depositors at the Bank and the Bank Insurance
Fund that insures bank deposits. To the extent that the following information
describes statutory and regulatory provisions, it is qualified by reference to
those provisions. A change in the statutes, regulations or regulatory policies
applicable to us or the Bank may have a material effect on our business.
INTERCOMPANY TRANSACTIONS
Various governmental requirements, including Sections 23A and 23B of
the Federal Reserve Act and Regulation W of the Federal Reserve Board, limit
borrowings by us from the Bank and also limit various other transactions between
us and the Bank. For example, Section 23A of the Federal Reserve Act limits to
no more than ten percent of its total capital the aggregate outstanding amount
of the Bank's loans and other "covered transactions" with any particular
non-bank affiliate (including a financial subsidiary) and limits to no more than
20 percent of its total capital the aggregate outstanding amount of the Bank's
covered transactions with all of its affiliates (including financial
subsidiaries). At December 31, 2007, approximately $6.0 million was available
for loans to us from the Bank. Section 23A of the Federal Reserve Act also
generally requires that the Bank's loans to its non-bank affiliates (including
financial subsidiaries) be secured, and Section 23B of the Federal Reserve Act
generally requires that the Bank's transactions with its non-bank affiliates
(including financial subsidiaries) be on arm's-length terms. Also, we, the Bank,
and any financial subsidiary are prohibited from engaging in certain "tie-in"
arrangements in connection with extensions of credit or provision of property or
services.
SUPERVISORY AGENCIES
As a national bank and member of the Federal Reserve System, the
Bank is subject to primary supervision, regulation, and examination by the
Office of the Comptroller of the Currency and secondary regulation by the FDIC.
The Bank is subject to extensive statutes and regulations that significantly
affect its business and activities. The Bank must file reports with its
regulators concerning its activities and financial condition and obtain
regulatory approval to enter into certain transactions. The Bank is also subject
to periodic examinations by its regulators to ascertain compliance with various
regulatory requirements. Other applicable statutes and regulations relate to
insurance of deposits, allowable investments, loans, leases, acceptance of
deposits, trust activities, mergers, consolidations, payment of dividends,
capital requirements, reserves against deposits, establishment of branches and
certain other facilities, limitations on loans to one borrower and loans to
affiliated persons, activities of subsidiaries and other aspects of the business
of banks. Recent federal legislation has instructed federal agencies to adopt
standards or guidelines governing banks' internal controls, information systems,
loan documentation, credit underwriting, interest rate exposure, asset growth,
compensation and benefits, asset quality, earnings and stock valuation, and
other matters. The federal banking agencies have great flexibility in
implementing standards on asset quality, earnings, and stock valuation.
Regulatory authorities have broad flexibility to initiate proceedings designed
to prohibit banks from engaging in unsafe and unsound banking practices.
We and the Bank are also affected by various other governmental
requirements and regulations, general economic conditions, and the fiscal and
monetary policies of the federal government and the Federal Reserve Board. The
monetary policies of the Federal Reserve Board influence to a significant extent
the overall growth of loans, leases, investments, deposits, interest rates
charged on loans, and interest rates paid on deposits. The nature and impact of
future changes in monetary policies are often not predictable.
4
We are subject to the jurisdiction of the SEC for matters relating
to the offering and sale of our securities. We are also subject to the SEC's
rules and regulations relating to periodic reporting, insider trader reports and
proxy solicitation materials. Our common stock is not listed for quotation of
prices on The NASDAQ Stock Market or any other nationally-recognized stock
exchange. However, daily bid and asked price quotations are maintained on the
interdealer electronic bulletin board system.
SUPPORT OF THE BANK
Under current Federal Reserve Board policy, we are expected to act
as a source of financial and managerial strength to the Bank by standing ready
to use available resources to provide adequate capital funds to the Bank during
periods of financial adversity and by maintaining the financial flexibility and
capital-raising capacity to obtain additional resources for assisting the Bank.
The support expected by the Federal Reserve Board may be required at times when
we may not have the resources or inclination to provide it.
If a default occurred with respect to the Bank, any capital loans to
the Bank from us would be subordinate in right of payment to payment of the Bank
depositors and certain of its other obligations.
LIABILITY OF COMMONLY CONTROLLED BANKS
The Bank can be held liable for any loss incurred, or reasonably
expected to be incurred, by the FDIC in connection with:
- the default of a commonly controlled FDIC-insured depository
institution or
- any assistance provided by the FDIC to a commonly controlled
FDIC-insured depository institution in danger of default.
"Default" generally is defined as the appointment of a conservator
or receiver, and "in danger of default" generally is defined as the existence of
certain conditions indicating that a default is likely to occur in the absence
of regulatory assistance.
DEPOSITOR PREFERENCE STATUTE
In the "liquidation or other resolution" of the Bank by any
receiver, federal legislation provides that deposits and certain claims for
administrative expenses and employee compensation against the Bank are afforded
a priority over the general unsecured claims against the Bank, including federal
funds and letters of credit.
ALLOWANCE FOR LOAN LOSSES
Commercial loans and commercial real estate loans comprised 37.9
percent of our total consolidated loans as of December 31, 2007. Commercial
loans are typically larger than residential real estate loans and consumer
loans. Because our loan portfolio contains a significant number of commercial
loans and commercial real estate loans with relatively large balances, the
deterioration of one or a few of these loans may cause a significant increase in
nonperforming loans. An increase in nonperforming loans could result in a loss
of earnings from these loans and an increase in the provision for loan losses
and loan charge-offs.
We maintain an allowance for loan losses to absorb any loan losses
based on, among other things, our historical experience, an evaluation of
economic conditions, and regular reviews of any delinquencies and loan portfolio
quality. We cannot assure you that charge-offs in future periods will not exceed
the allowance for loan losses or that additional increases in the allowance for
loan losses will not be required. Additions to the allowance for loan losses
would result in a decrease in our net income and, possibly, our capital.
In evaluating our allowance for loan losses, we divide our loans
into the following categories:
- commercial,
- real estate mortgages,
- consumer, and
- unallocated.
We evaluate some loans as a group and some individually. We use the
following criteria in choosing loans to be evaluated individually:
- by risk profile, and
- by past due status.
After our evaluation of these loans, we allocate portions of our
allowance for loan losses to categories of loans based upon the following
considerations:
5
- historical trends,
- economic conditions, and
- any known deterioration.
We use a self-correcting mechanism to reduce differences between
estimated and actual losses. We will, on an annual basis, weigh our loss
experience among the various categories and reallocate the allowance for loan
losses.
For a more in-depth presentation of our allowance for loan losses
and the components of this allowance, please refer to Item 7 of this report
under Management's Discussion and Analysis of Financial Condition and Results of
Operations at "Non-Performing Assets," "Allowance for Loan Losses and Related
Provision," and "Summary of Loan Loss Experience," as well as Note 4, Item 8 to
this report.
SOURCES OF FUNDS
GENERAL. Our primary source of funds is the cash flow provided by
our investing activities, including principal and interest payments on loans and
mortgage-backed and other securities. Our other sources of funds are provided by
operating activities (primarily net income) and financing activities, including
borrowings and deposits.
DEPOSITS. We offer a variety of deposit accounts with a range of
interest rates and terms. We currently offer savings accounts, NOW accounts,
money market accounts, demand deposit accounts and certificates of deposit. The
flow of deposits is influenced significantly by general economic conditions,
changes in prevailing interest rates, pricing of deposits and competition. Our
deposits are primarily obtained from areas surrounding our banking offices. We
rely primarily on marketing, new products, service and long-standing
relationships with customers to attract and retain these deposits. At December
31, 2007, our deposits totaled $171 million. Of the total deposit balance, $9
million or 5.26 percent represent Individual Retirement Accounts and $30 million
or 17.54 percent represent certificates of deposit in amounts of $100,000 or
more.
When we determine the levels of our deposit rates, consideration is
given to local competition, yields of U.S. Treasury securities and the rates
charged for other sources of funds. We have maintained a high level of core
deposits, which has contributed to our low cost of funds. Core deposits include
savings, money market, NOW and demand deposit accounts, which, in the aggregate,
represented 48.5 percent of total deposits at December 31, 2006 and 46.26
percent of total deposits at December 31, 2007.
We are not dependent for deposits nor exposed by loan concentrations
to a single customer, or to a small group of customers of which the loss of any
one or more of which would have a materially adverse effect on our financial
condition.
For a further discussion of our deposits, please refer to Item 7 of
this report under Management's Discussion and Analysis of Financial Condition
and Results of Operations at "Deposits and Borrowed Funds," as well as Note 7,
Item 8 to this report.
CAPITAL REQUIREMENTS
We are subject to risk-based capital requirements and guidelines
imposed by the Federal Reserve Board, which are substantially similar to the
capital requirements and guidelines imposed by the Comptroller of the Currency
on the Bank. For this purpose, a bank's or bank holding company's assets and
certain specified off-balance sheet commitments are assigned to four risk
categories, each weighted differently based on the level of credit risk that is
ascribed to those assets or commitments. In addition, risk-weighted assets are
adjusted for low-level recourse and market-risk equivalent assets. A bank's or
bank holding company's capital, in turn, includes the following tiers:
- core ("Tier 1") capital, which includes common equity,
non-cumulative perpetual preferred stock, a limited amount of
cumulative perpetual preferred stock, and minority interests
in equity accounts of consolidated subsidiaries, less
goodwill, certain identifiable intangible assets, and certain
other assets; and
- supplementary ("Tier 2") capital, which includes, among other
items, perpetual preferred stock not meeting the Tier 1
definition, mandatory convertible securities, subordinated
debt and allowances for loan and lease losses, subject to
certain limitations, less certain required deductions.
We, like other bank holding companies, are required to maintain Tier
1 and "Total Capital" (the sum of Tier 1 and Tier 2 capital, less certain
deductions) equal to at least four percent and eight percent of our total
risk-weighted assets (including certain off-balance sheet items, such as unused
lending commitments and standby letters of credit), respectively. At December
31, 2007, we met both requirements, with Tier 1 and Total Capital equal to 18.10
percent and 18.93 percent of total risk-weighted assets.
6
The Federal Reserve Board has adopted rules to incorporate market
and interest rate risk components into their risk-based capital standards. Under
these market-risk requirements, capital will be allocated to support the amount
of market risk related to a financial institution's ongoing trading activities.
The Federal Reserve Board also requires bank holding companies to
maintain a minimum "Leverage Ratio" (Tier 1 capital to adjusted total assets) of
three percent if the bank holding company has the highest regulatory rating and
meets certain other requirements, or of three percent plus an additional cushion
of at least one to two percentage points if the bank holding company does not
meet these requirements. At December 31, 2007, our leverage ratio was 12.71
percent.
The Federal Reserve Board may set capital requirements higher than
the minimums noted above for holding companies whose circumstances warrant it.
For example, bank holding companies experiencing or anticipating significant
growth may be expected to maintain strong capital positions substantially above
the minimum supervisory levels without significant reliance on intangible
assets. Furthermore, the Federal Reserve Board has indicated that it will
consider a "Tangible Tier 1 Leverage Ratio" (deducting all intangibles) and
other indications of capital strength in evaluating proposals for expansion or
new activities, or when a bank holding company faces unusual or abnormal risk.
The Federal Reserve Board has not advised us of any specific minimum leverage
ratio applicable to us.
The Bank is subject to similar risk-based capital and leverage
requirements adopted by the Comptroller of the Currency. The Bank was in
compliance with the applicable minimum capital requirements as of December 31,
2007. The Comptroller of the Currency has not advised the Bank of any specific
minimum leverage ratio applicable to the Bank.
Failure to meet capital requirements could subject the Bank to a
variety of enforcement remedies, including the termination of deposit insurance
by the FDIC, and to certain restrictions on its business. The Federal Deposit
Insurance Corporation Improvements Act of 1991 ("FDICIA"), among other things,
identifies five capital categories for insured banks - well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized, and
critically undercapitalized - and requires federal bank regulatory agencies to
implement systems for "prompt corrective action" for insured banks that do not
meet minimum capital requirements based on these categories. The FDICIA imposed
progressively more restrictive constraints on operations, management, and
capital distributions, depending on the category in which an institution is
classified. Unless a bank is well capitalized, it is subject to restrictions on
its ability to offer brokered deposits, on "pass-through" insurance coverage for
certain of its accounts, and on certain other aspects of its operations. FDICIA
generally prohibits a bank from paying any dividend or making any capital
distribution or paying any management fee to its holding company if the bank
would thereafter be undercapitalized. An undercapitalized bank is subject to
regulatory monitoring and may be required to divest itself of or liquidate
subsidiaries. Holding companies of such institutions may be required to divest
themselves of such institutions or divest themselves of or liquidate other
affiliates. An undercapitalized bank must develop a capital restoration plan,
and its parent bank holding company must guarantee the bank's compliance with
the plan up to the lesser of five percent of the bank's assets at the time it
became undercapitalized or the amount needed to comply with the plan. Critically
undercapitalized institutions are prohibited from making payments of principal
and interest on subordinated debt and are generally subject to the mandatory
appointment of a conservator or receiver.
Rules adopted by the Comptroller of the Currency under FDICIA
provide that a national bank is deemed to be well capitalized if the bank has a
total risk-based capital ratio of ten percent or greater, a Tier 1 risk-based
capital ratio of six percent or greater, and a leverage ratio of five percent or
greater and the institution is not subject to a written agreement, order,
capital directive, or prompt corrective action directive to meet and maintain a
specific level of any capital measure. As of December 31, 2007, the Bank was
well-capitalized, based on the prompt corrective action ratios and guidelines
described above. It should be noted, however, that a bank's capital category is
determined solely for the purpose of applying the Comptroller of the Currency's
prompt corrective action regulations, and that the capital category may not
constitute an accurate representation of the bank's overall financial condition
or prospects.
BROKERED DEPOSITS
Under FDIC regulations, no FDIC-insured bank can accept brokered
deposits unless it (1) is well capitalized, or (2) is adequately capitalized and
receives a waiver from the FDIC. In addition, these regulations prohibit any
bank that is not well capitalized from paying an interest rate on brokered
deposits in excess of three-quarters of one percentage point over certain
prevailing market rates. As of December 31, 2007, the Bank held no brokered
deposits.
DIVIDEND RESTRICTIONS
We are a legal entity separate and distinct from the Bank. In
general, under Pennsylvania law, we cannot pay a cash dividend if such payment
would render us insolvent. Our revenues consist primarily of dividends paid by
the Bank. The National Bank Act limits the amount of dividends the Bank can pay
to us without regulatory approval. The Bank may declare and pay dividends to us
to the lesser of:
7
- the level of undivided profits, and
- absent regulatory approval, an amount not in excess of net
income combined with retained net income for the preceding two
years.
At December 31, 2007, approximately $2,067,807 was available for
payment of dividends to us.
In addition, federal bank regulatory authorities have authority to
prohibit the Bank from engaging in an unsafe or unsound practice in conducting
its business. Depending upon the financial condition of the bank in question,
the payment of dividends could be deemed to constitute an unsafe or unsound
practice. The ability of the Bank to pay dividends in the future is currently
influenced, and could be further influenced, by bank regulatory policies and
capital guidelines.
DEPOSIT INSURANCE REFORM LAWS
On February 8, 2006, the President signed the Federal Deposit
Insurance Reform Act of 2005, and, on February 15, 2006, the President signed
into law The Federal Deposit Insurance Reform Conforming Amendments of Act 2005
(collectively, the Reform Act).
According to the FDIC, the Reform Act provides for the following
changes:
- Merging the Bank Insurance Fund (BIF) and the Savings
Association Insurance Fund (SAIF) into a new fund, the
Deposit Insurance Fund (DIF). This change was made
effective March 31, 2006.
- Increasing the coverage limit for retirement accounts to
$250,000 and indexing the coverage limit for retirement
accounts to inflation as with the general deposit
insurance coverage limit. This change was made effective
April 1, 2006.
- Establishing a range of 1.15 percent to 1.50 percent
within which the FDIC Board of Directors may set the
Designated Reserve Ratio (DRR).
- Allowing the FDIC to
manage the pace at which the reserve ratio varies within
this range.
1. If the reserve ratio falls below 1.15 percent - or
is expected to within six months - the FDIC must
adopt a restoration plan that provides that the
DIF will return to 1.15 percent generally within 5
years.
2. If the reserve ratio exceeds 1.35 percent, the
FDIC must generally dividend to BIF members half
of the amount above the amount necessary to
maintain the DIF at 1.35 percent, unless the FDIC
Board, considering statutory factors, suspends the
dividends.
3. If the reserve ratio exceeds 1.5 percent, the FDIC
must generally dividend to BIF members all amounts
above the amount necessary to maintain the DIF at
1.5 percent.
- Eliminating the restrictions on premium rates based on
the DRR and granting the FDIC Board the discretion to
price deposit insurance according to risk for all
insured institutions regardless of the level of the
reserve ratio.
- Granting a one-time initial assessment credit (of
approximately $4.7 billion) to recognize institutions'
past contributions to the fund.
Under the Reform Act, the Bank is a member of the DIF and received a
one-time assessment credit of $182,912 in 2007 which offset the cost
of higher deposit insurance premiums. At year end 2007 the remaining
credit available to us was $117,437. We do not anticipate that these
higher FDIC deposit insurance premiums will have a material adverse
effect on our net income for 2008.
INTERSTATE BANKING AND BRANCHING
Bank holding companies (including bank holding companies that also
are financial holding companies) are required to obtain the prior approval of
the Federal Reserve Board before acquiring more than five percent of any class
of voting stock of any non-affiliated bank. Pursuant to the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking
and Branching Act"), a bank holding company may acquire banks located in states
other than its home state without regard to the permissibility of such
acquisitions under state law, but subject to any state requirement that the bank
has been organized and operating for a minimum period of time, not to exceed
five years, and the requirement that the bank holding company, after the
proposed acquisition, controls no more than 10.0 percent of the total amount of
deposits of insured depository institutions in the United States and no more
than 30.0 percent or such lesser or greater amount set by state law of such
deposits in that state.
Subject to certain restrictions, the Interstate Banking and
Branching Act also authorizes banks to merge across state lines to create
interstate banks. The ability of banks to acquire branch offices through
purchases or openings of other branches is contingent, however, on the host
state having adopted legislation "opting in" to those provisions of Riegle-Neal.
In addition, the ability of a bank to merge with a bank located in another state
is contingent on the host state not having adopted legislation "opting out" of
that
8
provision of Riegle-Neal. Pennsylvania has opted in to all of these provisions
upon the condition that another host state has similar or reciprocal
requirements. As of the date of this report, we are not contemplating any
interstate acquisitions of a bank or a branch office.
CONTROL ACQUISITIONS
The Change in Bank Control Act prohibits a person or group of
persons from acquiring "control" of a bank holding company, unless the Federal
Reserve Board has been notified and has not objected to the transaction. Under a
rebuttable presumption established by the Federal Reserve Board, the acquisition
of ten percent or more of a class of voting stock of a bank holding company with
a class of securities registered under Section 12 of the Exchange Act, such as
we, would, under the circumstances set forth in the presumption, constitute
acquisition of control of the bank holding company.
In addition, a company is required to obtain the approval of the
Federal Reserve Board under the Bank Holding Company Act before acquiring 25
percent (five percent in the case of an acquirer that is a bank holding company)
or more of any class of outstanding common stock of a bank holding company, such
as we, or otherwise obtaining control or a "controlling influence" over that
bank holding company.
PERMITTED NON-BANKING ACTIVITIES
The Federal Reserve Board permits us or our subsidiaries to engage
in nonbanking activities that are so closely related to banking or managing or
controlling banks as to be a proper incident thereto. The Federal Reserve Board
requires us to serve as a source of financial and managerial strength to the
Bank and not to conduct our operations in an unsafe or unsound manner. Whenever
the Federal Reserve Board believes an activity that we perform or our control of
a nonbank subsidiary, other than a nonbank subsidiary of the Bank, constitutes a
serious risk to the financial safety, soundness or stability of the Bank and is
inconsistent with sound banking principles or the purposes of the federal
banking laws, the Federal Reserve Board may require us to terminate that
activity or to terminate control of that subsidiary.
COMMUNITY REINVESTMENT ACT
The Community Reinvestment Act of 1977, as amended ("CRA"), and the
regulations promulgated to implement the CRA, are designed to create a system
for bank regulatory agencies to evaluate a depository institution's record in
meeting the credit needs of its community. The Bank received a "satisfactory"
rating in its last CRA examination which was held in 2002.
FINANCIAL SERVICES MODERNIZATION
We must comply with the Gramm-Leach-Bliley Act of 1999 (the "GLB
Act") in the conduct of our operations. The GLB Act eliminates the restrictions
placed on the activities of banks and bank holding companies and creates two new
structures, financial holding companies and financial subsidiaries. We and the
Bank are now allowed to provide a wider array of financial services and products
that were reserved only for insurance companies and securities firms. In
addition, we can now affiliate with an insurance company and a securities firm.
We have elected to become a financial holding company. A financial holding
company has authority to engage in activities referred to as "financial
activities" that are not permitted to bank holding companies. A financial
holding company may also affiliate with companies that are engaged in financial
activities. A "financial activity" is an activity that does not pose a safety
and soundness risk and is financial in nature, incidental to an activity that is
financial in nature, or complimentary to a financial activity.
PRIVACY
Title V of the GLB Act creates a minimum federal standard of privacy
by limiting the instances which we and the Bank may disclose nonpublic personal
information about a consumer of our products or services to nonaffiliated third
parties. The GLB Act distinguishes "consumers" from "customers" for purposes of
the notice requirements imposed by this Act. We are required to give a
"consumer" a privacy notice only if we intend to disclose nonpublic personal
information about the consumer to a nonaffiliated third party. However, by
contrast, we are required to give a "customer" a notice of our privacy policy at
the time of the establishment of a customer relationship and then annually,
thereafter during the continuation of the customer relationship.
TERRORIST ACTIVITIES
The Office of Foreign Assets Control ("OFAC") of the Department of
the Treasury has, and will, send us and our banking regulatory agencies lists of
names of persons and organizations suspected of aiding, harboring or engaging in
terrorist acts. If the Bank finds a name on any transaction, account or wire
transfer that is on an OFAC list, the Bank must freeze such account, file a
suspicious activity report and notify the Federal Bureau of Investigation. The
Bank has appointed an OFAC compliance officer to oversee the inspection of its
accounts and the filing of any notifications.
9
THE USA PATRIOT ACT
The Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism ("USA PATRIOT") Act of 2001 was
enacted by Congress as a result of the terrorist attack on the World Trade
Center on September 11, 2001. The Congress is deliberating on amendments to the
USA Patriot Act. None of these proposed amendments would have a substantial
effect on our banking operations. Under the USA PATRIOT Act, financial
institutions are subject to prohibitions against specified financial
transactions and account relationships, as well as enhanced due diligence and
"know your customer" standards in their dealings with foreign financial
institutions and foreign customers.
SUBPRIME AND PREDATORY LENDING
The Federal Reserve Board has issued regulations which implement the
Home Ownership and Equity Protection Act ("HOEPA"). This Act imposes additional
disclosure requirements and certain substantive limitations on certain mortgage
loans with rates or fees above specified levels. The regulations lower the rate
levels that trigger the application of HOEPA and include additional fees in the
calculation of the fee amount that triggers HOEPA. The loans that the Bank
currently makes are generally below the rate and fee levels that trigger HOEPA.
The Bank must also comply with a Pennsylvania law, Act 55 of 2001,
the Mortgage Bankers and Brokers and Consumer Equity Protection Act. This Act
addresses what is known as "predatory lending," among other things, and is
applicable to the Bank's closed-end home equity mortgage loans, involving
property located in Pennsylvania, in an amount less than $100.0 thousand made at
a "high cost," which is generally the rate and point triggers in the HOEPA.
Those HOEPA triggers are:
- An annual percentage rate exceeding 8.00 percentage points
above comparable term U.S. Treasury securities for first-lien
mortgages and 10 percent for subordinate-lien mortgages;
and/or
- Total points and fees payable by the consumer at or before
closing that exceed the greater of 8.0 percent of the total
loan amount or $561. The $561 is adjusted annually by the
annual percentage change in the Consumer Price Index.
SALES OF INSURANCE
Our federal banking regulatory agencies have issued consumer
protection rules with respect to the retail sale of insurance products by us,
the Bank, or a subsidiary or joint venture of us or the Bank. These rules
generally cover practices, solicitations, advertising or offers of any insurance
product by a depository institution or any person that performs such activities
at an office of, or on behalf of, us or the Bank. Moreover, these rules include
specific provisions relating to sales practices, disclosures and advertising,
the physical separation of banking and nonbanking activities and domestic
violence discrimination.
CORPORATE GOVERNANCE
The Sarbanes-Oxley Act of 2002 ("SOX") has substantially changed the
manner in which public companies govern themselves and how the accounting
profession performs its statutorily required audit function. SOX makes
structural changes in the way public companies make disclosures and strengthens
the independence of auditors and audit committees. SOX requires direct
responsibility of senior corporate management, namely the Chief Executive
Officer ("CEO") and Chief Financial Officer ("CFO"), for establishing and
maintaining an adequate internal control structure and procedures for financial
reporting and disclosure by public companies.
Under SOX, audit committees will be primarily responsible for the
appointment, compensation and oversight of the work of their auditors. The
independence of the members of the audit committee is assured by barring members
who accept consulting fees from the company or are affiliated with the company
other than in their capacity as members of the board of directors.
SOX prohibits insider trades during pension fund blackout periods
and requires prompt disclosure of insider transactions in company stock, which
must be reported by the second business day following an insider transaction.
Furthermore, SOX established a new federal crime of securities fraud with
substantial penalties.
As a result of SOX, the costs to enhance our corporate governance
regime and financial reporting controls and procedures, were approximately
$33,000 in 2005 paid to an outside consultant. In addition to these third party
costs, an extensive amount of personnel time was applied to management of the
project. There were no costs associated with SOX in 2006; however management
time was applied to the project. In 2007 internal control over financial
reporting was required to be tested. Cost of third party documenting and testing
for SOX 404 requirement was $59,000.
10
THE BANK
The Bank's legal headquarters are located at 232 East Street,
Bloomsburg, Columbia County, Pennsylvania 17815. The Bank is a locally-owned and
managed community bank that seeks to provide personal attention and professional
financial assistance to its customers. The Bank serves the needs of individuals
and small to medium-sized businesses. The Bank's business philosophy includes
offering direct access to its President and other officers and providing
friendly, informed and courteous service, local and timely decision making,
flexible and reasonable operating procedures and consistently-applied credit
policies.
The Bank solicits small and medium-sized businesses located
primarily within the Bank's market area that typically borrow in the $25,000 to
$1.0 million range. In the event that certain loan requests may exceed the
Bank's lending limit to any one customer, the Bank seeks to arrange such loans
on a participation basis with other financial institutions.
MARKETING AREA
The Bank's primary market area is Columbia County, a 484 square mile
area located in Northcentral Pennsylvania with a population of approximately
64,151 based on 2000 census data. The Town of Bloomsburg is the County's largest
municipality and its center of industry and commerce. Bloomsburg has a
population of approximately 12,375 based on 2000 census data, and is the county
seat. Berwick, located on the eastern boundary of the County, is the second
largest municipality, with a 2000 census data population of approximately
10,774. The Bank currently serves its market area through eight branch offices
located in Bloomsburg, Benton, Berwick, Buckhorn, Lightstreet, Millville,
Orangeville and South Centre, Columbia County.
The Bank competes with other depository institutions in Columbia
County. The Bank's major competitors are: First National Bank of Berwick; PNC
Bank, M & T Bank and First Columbia Bank and Trust Company of Bloomsburg,
Pennsylvania, as well as several credit unions.
The Bank's extended market area includes the adjacent Pennsylvania
counties of Luzerne, Montour, Northumberland, Schuylkill and Sullivan.
AVAILABLE INFORMATION
We file reports, proxy, information statements and other information
electronically with the SEC through the Electronic Data Gathering Analysis and
Retrieval filing system. You may read and copy any materials that we file with
the SEC at the SEC's Public Reference Room located at 450 5th Street, N.W.,
Washington, DC 20549. You can obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an
Internet site that contains reports, proxy and information statements and other
information regarding issuers that file electronically with the SEC. The SEC's
website address is http://www.sec.gov. Our website address is
http://www.ccfnb.com. Copies of our Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act, as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the SEC may be obtained without charge by
writing to CCFNB Bancorp, Inc., 232 East Street, Bloomsburg, PA 17815; Attn: Ms.
Virginia D. Kocher, Treasurer.
ITEM 1A. RISK FACTORS
ADVERSE CHANGES IN THE ECONOMIC CONDITIONS IN OUR MARKET AREA COULD MATERIALLY
AND NEGATIVELY AFFECT OUR BUSINESS.
Substantially all of our business is with consumers and small to
mid-sized companies located within Columbia, Luzerne and Montour Counties,
Pennsylvania. Our business is directly impacted by factors such as economic,
political and market conditions, broad trends in industry and finance,
legislative and regulatory changes, changes in government monetary and fiscal
policies and inflation, all of which are beyond our control. A deterioration in
economic conditions, whether caused by national or local concerns, in particular
an economic slowdown in northcentral Pennsylvania, could result in the following
consequences, any of which could materially harm our business:
- customers' credit quality may deteriorate;
- loan delinquencies may increase;
- problem assets and foreclosures may increase;
- demand for our products and services may decrease;
- competition for low cost or non-interest bearing deposits may
increase; and
- collateral securing loans may decline in value.
COMPETITIVE PRESSURES FROM FINANCIAL SERVICES COMPANIES AND OTHER COMPANIES
OFFERING BANKING SERVICES COULD NEGATIVELY IMPACT OUR BUSINESS.
11
We conduct banking operations primarily in northcentral
Pennsylvania. Increased competition in the Bank's market may result in reduced
loans and deposits, high customer turnover, and lower net interest rate margins.
Ultimately, the Bank may not be able to compete successfully against current and
future competitors. Many competitors in the Bank's market area, including
regional banks, other community-focused depository institutions and credit
unions, offer the same banking services as the Bank offers. The Bank also faces
competition from many other types of financial institutions, including without
limitation, finance companies, brokerage firms, insurance companies, mortgage
banks and other financial intermediaries. These competitors often have greater
resources affording them the competitive advantage of maintaining numerous
retail locations and ATMs and conducting extensive promotional and advertising
campaigns. Moreover, our credit union competitors pay no corporate taxes and
can, therefore, more aggressively price many products and services.
CHANGES IN INTEREST RATES COULD REDUCE OUR INCOME AND CASH FLOWS.
The Bank's income and cash flows and the value of its assets and
liabilities depend to a great extent on the difference between the income earned
on interest-earning assets such as loans and investment securities, and the
interest expense paid on interest-bearing liabilities such as deposits and
borrowings. These rates are highly sensitive to many factors which are beyond
our control, including general economic conditions and policies of various
governmental and regulatory agencies, in particular, the Federal Reserve Board.
Changes in monetary policy, including changes in interest rates, will influence
the origination of loans and investment securities and the amounts paid on
deposits. If the rates of interest the Bank pays on its deposits and other
borrowings increases more than the rates of interest the Bank earns on its loans
and other investments, the Bank's net interest income, and therefore our
earnings, could be adversely affected. The Bank's earnings could also be
adversely affected if the rates on its loans or other investments fall more
quickly than those on its deposits and other borrowings.
SIGNIFICANT INCREASES IN INTEREST RATES MAY AFFECT CUSTOMER LOAN DEMAND AND
PAYMENT HABITS.
Significant increases in market interest rates, or the perception
that an increase may occur, could adversely impact the Bank's ability to
generate new loans. An increase in market interest rates may also adversely
impact the ability of adjustable rate borrowers to meet repayment obligations,
thereby causing nonperforming loans and loan charge-offs to increase in these
mortgage products.
IF THE BANK'S LOAN GROWTH EXCEEDS THAT OF ITS DEPOSIT GROWTH, THEN THE BANK MAY
BE REQUIRED TO OBTAIN HIGHER COST SOURCES OF FUNDS.
Our growth strategy depends upon generating an increasing level of
loans at the Bank while maintaining a low level of loan losses for the Bank. As
the Bank's loans grow, it is necessary for the Bank's deposits to grow at a
comparable pace in order to avoid the need for the Bank to obtain other sources
of loan funds at higher costs. If the Bank's loan growth exceeds the deposit
growth, the Bank may have to obtain other sources of funds at higher costs.
IF THE BANK'S ALLOWANCE FOR LOAN LOSSES IS NOT ADEQUATE TO COVER ACTUAL LOAN
LOSSES, ITS EARNINGS MAY DECLINE.
The Bank maintains an allowance for loan losses to provide for loan
defaults and other classified loans due to unfavorable characteristics. The
Bank's allowance for loan losses may not be adequate to cover actual loan
losses, and future provisions for loan losses could materially and adversely
affect our operating results. The Bank's allowance for loan loss is based on
prior experience, as well as an evaluation of risks in the current portfolio.
The amount of future losses is susceptible to changes in economic, operating and
other conditions, including changes in interest rates, change in borrowers'
creditworthiness, and the value of collateral securing loans and leases that may
be beyond the Bank's control, and these losses may exceed our current estimates.
The OCC (Office of the Comptroller of the Currency) reviews the Bank's loans and
allowance for loan losses and may require the Bank to increase its allowance.
While we believe that the Bank's allowance for loan losses is adequate to cover
current losses, we cannot assure that the Bank will not further increase the
allowance for loan losses or that the OCC will not require the Bank to increase
the allowance. Either of these occurrences could materially affect our earnings.
ADVERSE CHANGES IN THE MARKET VALUE OF SECURITIES AND INVESTMENTS THAT WE MANAGE
FOR OTHERS MAY NEGATIVELY IMPACT THE GROWTH LEVEL OF THE BANK'S NON-INTEREST
INCOME.
Our company provides a broad range of trust and investment
management services for estates, trusts, agency accounts, and individual and
employer sponsored retirement plans. The market value of the securities and
investments managed by the Bank may decline due to factors outside the Bank's
control. Any such adverse changes in the market value of the securities and
investments could negatively impact the growth of the non-interest income
generated from providing these services.
THE BANK'S BRANCH LOCATIONS MAY BE NEGATIVELY AFFECTED BY CHANGES IN
DEMOGRAPHICS.
We and the Bank have strategically selected locations for bank
branches based upon regional demographics. Any changes in regional demographics
may impact the Bank's ability to reach or maintain profitability at its branch
locations. Changes in regional
12
demographics may also affect the perceived benefits of certain branch locations
and management may be required to reduce the number of locations of its
branches.
CHANGES IN THE REGULATORY ENVIRONMENT MAY ADVERSELY AFFECT THE BANK'S BUSINESS.
The banking industry is highly regulated and the Bank is subject to
extensive state and federal regulation, supervision, and legislation. The Bank
is subject to regulation and supervision by the Board of Governors of the
Federal Reserve System, the Office of the Comptroller of the Currency, and the
Securities and Exchange Commission. These laws and regulations may change from
time to time and may limit our ability to offer new products and services,
obtain financing, attract deposits, and originate loans. Any changes to these
laws and regulations may adversely affect loan demand, credit quality, consumer
spending and saving habits, interest rate margins, FDIC assessments, and
operating expenses. Therefore, our results of operations and financial condition
may be materially negatively impacted by such changes.
TRAINING AND TECHNOLOGY COSTS, AS WELL AS PRODUCT DEVELOPMENT AND OPERATING
COSTS, MAY EXCEED OUR EXPECTATIONS AND NEGATIVELY IMPACT OUR PROFITABILITY.
The financial services industry is constantly undergoing
technological changes in the types of products and services provided to
customers to enhance customer convenience. Our future success will depend upon
our ability to address the changing technological needs of our customers. We
have invested a substantial amount of resources to update our technology and
train the management team. This investment in technology and training seeks to
increase efficiency in the management team's performance and improve
accessibility to customers. We are also investing in the expansion of bank
branches, improvement of operating systems, and the development of new marketing
initiatives. The costs of implementing the technology, training, product
development, and marketing costs may exceed our expectations and negatively
impact our results of operations and profitability.
IF WE FAIL TO MAINTAIN AN EFFECTIVE SYSTEM OF INTERNAL CONTROLS, WE MAY NOT BE
ABLE TO ACCURATELY REPORT OUR FINANCIAL RESULTS OR PREVENT FRAUD.
If we fail to maintain an effective system of internal controls;
fail to correct any issues in the design or operating effectiveness of internal
controls over financial reporting; or fail to prevent fraud, our shareholders
could lose confidence in our financial reporting, which could harm our business
and the trading price of our common stock.
THE LOSS OF ONE OR MORE OF OUR KEY PERSONNEL MAY MATERIALLY AND ADVERSELY AFFECT
OUR PROSPECTS.
We depend on the services of our President and Chief Executive
Officer, Lance O. Diehl, and a number of other key management personnel. The
loss of Mr. Diehl's services or that of other key personnel could materially and
adversely affect our results of operations and financial condition. Our success
also depends, in part, on our ability to attract and retain additional qualified
management personnel. Competition for such personnel is strong in the banking
industry and we may not be successful in attracting or retaining such personnel
due to our geographic location and prevailing salary levels in our market area.
13
ITEM 2. PROPERTIES
Our corporate headquarters are located at 232 East Street,
Bloomsburg, Pennsylvania. We own this facility which has approximately 11,686
square feet. The Bank's legal or registered office is also at 232 East Street,
Bloomsburg, Pennsylvania.
We own all of the banking centers except Buckhorn, which we lease.
The Buckhorn banking center is under a five year lease, begun in 2003, with two
5 year options with Wal-Mart. During 2007 we purchased the former Long John
Silver's restaurant building in Scott Township for future expansion. This
building and the remaining banking centers are described as follows:
Approximate
Location Square Footage Use
--------------------------- --------------- ----------------------------
Orangeville, PA 2,259 Banking Services
Benton, PA 4,672 Banking Services
South Centre, PA 3,868 Banking Services
Scott Township, PA 16,500 Banking Services,
Corporate, Credit, Financial
Planning, Marketing and
Operations
Scott Township, PA 2,500 Future Expansion
Formerly Long John Silver's
Millville, PA 2,520 Banking Services
Buckhorn, PA 693 Banking Services
(In Wal-Mart Supercenter)
Berwick, PA 2,240 Banking Services
We consider our facilities to be suitable and adequate for our
current and immediate future purposes.
ITEM 3. LEGAL PROCEEDINGS
We and the Bank are not parties to any legal proceedings that could
have any significant effect upon our financial condition or income. In addition,
we and the Bank are not parties to any legal proceedings under federal and state
environmental laws.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
We had xxx stockholders of record not including individual
participants in security position listings and 1,227,142 shares of common stock,
par value of $1.25 per share, the only authorized class of common stock,
outstanding as of February 25, 2008. Our common stock trades under the symbol
"CCFN." As of February 25, 2008, 5 firms were identified on the interdealer
electronic bulletin board system as market makers in our common stock. The
following information is reported by one of our market makers: Ferris, Baker
Watts, Inc., Baltimore, MD. These quotations represent prices between buyers and
sellers and do not include retail mark, markdown or commission. They may not
necessarily represent actual transactions. The high and low closing sale prices
and dividends per share of our common stock for the four quarters of 2007 and
2006 are summarized in the following table.
Dividends
2007: High ($) Low ($) Declared ($)
-------------- -------- ------- ------------
First quarter 29.00 27.55 .20
Second quarter 27.70 26.70 .20
Third quarter 27.08 26.63 .21
Fourth quarter 25.95 25.35 .21
Dividends
2006: High ($) Low ($) Declared ($)
-------------- -------- ------- ------------
First quarter 28.08 27.23 .19
Second quarter 28.05 27.63 .19
Third quarter 28.53 27.63 .20
Fourth quarter 29.30 28.33 .20
We have paid cash dividends since 1983. It is our present intention
to continue the dividend payment policy, although the payment of future
dividends must necessarily depend upon earnings, financial position, appropriate
restrictions under applicable law and other factors relevant at the time the
Board of Directors considers any declaration of dividends.
14
The following table presents information on the shares of our common
stock that we repurchased during the fourth quarter of 2007:
CCFNB BANCORP, INC.
ISSUER PURCHASES OF EQUITY SECURITIES
NUMBER OF NUMBER OF
SHARES SHARES
AVG PURCHASED THAT MAY
PRICE AS PART OF YET BE
NUMBER OF PAID PUBLICLY PURCHASED
SHARES PER ANNOUNCED UNDER THE
MONTH PURCHASED SHARE PROGRAM PROGRAM
------------------ ---------- ------ ---------- -----------
10/01/07 - 10/31/07 2,000 $27.25 2,000 20,000
11/01/07 - 11/30/07 2,000 $26.00 2,000 18,000
12/01/07 - 12/31/07 2,000 $26.00 2000 16,000
------- --------
TOTAL 6,000 6,000
15
ITEM 6. SELECTED FINANCIAL DATA
CCFNB BANCORP, INC.
SELECTED CONSOLIDATED FINANCIAL SUMMARY
AS OF DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
2007 2006 2005 2004 2003
------------- ------------- ------------- ------------- -------------
INCOME STATEMENT DATA:
Total interest income ........................... $ 14,483 $ 13,202 $ 11,442 $ 10,843 $ 11,221
Total interest expense .......................... 6,185 5,301 4,131 3,669 4,366
------------- ------------- ------------- ------------- -------------
Net interest income ............................. 8,298 7,901 7,311 7,174 6,855
Provision for possible loan losses .............. 30 175 90 140 200
Other operating income .......................... 2,305 1,900 1,713 1,530 1,508
Other operating expenses ........................ 7,038 6,437 6,077 5,746 5,409
Federal income taxes ............................ 888 777 631 601 591
------------- ------------- ------------- ------------- -------------
Net income ...................................... $ 2,647 $ 2,412 $ 2,226 $ 2,217 $ 2,163
PER SHARE DATA:
Earnings per share (1) .......................... $ 2.15 $ 1.93 $ 1.76 $ 1.74 $ 1.69
Cash dividends declared per share ............... 0.82 0.78 0.74 0.70 0.66
Book value per share ............................ 25.79 24.36 23.06 22.49 21.63
Average annual shares outstanding ............... 1,233,339 1,249,844 1,262,171 1,274,034 1,281,265
BALANCE SHEET DATA:
Total assets .................................... $ 245,324 $ 241,920 $ 231,218 $ 235,377 $ 232,914
Total loans ..................................... 161,460 160,641 154,271 149,900 147,631
Total securities ................................ 57,686 53,486 53,919 61,834 62,775
Total deposits .................................. 170,938 169,285 164,847 172,487 171,786
FHLB advances - long - term ..................... 11,137 11,297 11,311 11,323 11,335
Total stockholders' equity ...................... 31,627 30,249 29,012 28,506 27,603
PERFORMANCE RATIOS:
Return on average assets ........................ 1.07% 1.02% 0.97% 0.96% 0.94%
Return on average stockholders' equity .......... 8.54% 8.13% 7.73% 7.88% 7.95%
Net interest margin (2) ......................... 3.74% 3.74% 3.65% 3.54% 3.38%
Total non-interest expense as a percentage of
average assets .................................. 2.83% 2.72% 2.64% 2.45% 2.34%
ASSET QUALITY RATIOS:
Allowance for possible loan losses as a
percentage of loans, net ......................... 0.90% 0.91% 1.02% 0.93% 0.96%
Allowance for possible loan losses as a
percentage of non-performing loans (3) .......... 1026.43% 921.52% 185.54% 110.37% 52.29%
Non-performing loans as a percentage of total
loans, net (3) .................................. 0.09% 0.10% 0.55% 0.85% 1.85%
Non-performing assets as a percentage of total 0.06% 0.07% 0.36% 0.54% 1.16%
assets (3).......................................
Net charge-offs as a percentage of average net (0.03)% (0.17)% 0.05% (0.11)% (0.06)%
loans (4)........................................
LIQUIDITY AND CAPITAL RATIOS:
Equity to assets ................................ 12.89% 12.50% 12.55% 12.11% 11.85%
Tier 1 capital to risk-weighted assets (5) ...... 18.10% 19.25% 19.24% 19.27% 18.82%
Leverage ratios (5)(6) .......................... 12.71% 12.71% 12.74% 12.17% 11.79%
Total capital to risk-weighted assets (5) ....... 18.93% 20.29% 20.32% 20.31% 19.88%
Dividend payout ratio ........................... 38.15% 40.39% 41.92% 40.19% 39.02%
(1) Based upon average shares and common share equivalents outstanding.
(2) Represents net interest income as a percentage of average total
interest-earning assets, calculated on a tax-equivalent basis.
(3) Non-performing loans are comprised of (i) loans which are on a non-accrual
basis, (ii) accruing loans that are 90 days or more past due, and (iii)
restructured loans. Non-performing assets are comprised of non-performing
loans and foreclosed real estate (assets acquired in foreclosure), if
applicable.
(4) Based upon average balances for the respective periods.
(5) Based on the Federal Reserve Bank's risk-based capital guidelines, as
applicable to the Corporation. The Bank is subject to similar requirements
imposed by the Comptroller of the Currency.
(6) The leverage ratio is defined as the ratio of Tier 1 Capital to average
total assets less intangible assets, if applicable.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the detailed information and consolidated financial statements, including notes
thereto, included elsewhere in this Annual Report. Our consolidated financial
condition and results of operations are essentially those of our subsidiary, the
Bank. Therefore, the analysis that follows is directed to the performance of the
Bank.
RESULTS OF OPERATIONS
Our net income increased by 9.74 percent from $2,412,000 in 2006 to
$2,647,000 in 2007. Earnings per share increased by 11.14 percent from $1.93 in
2006 to $2.15 in 2007. Our return on average assets (ROAA) increased to 1.07
percent in 2007, compared to 1.02 percent in 2006. Our return on average equity
(ROAE) increased to 8.54 percent in 2007, compared to 7.97 percent in 2006.
Loans increased by 0.51 percent in 2007 to $161,460,000 from $160,641,000
in 2006. This increase was mainly in the tax exempt area.
We instituted, in 1995, a dividend reinvestment plan and an employee stock
purchase plan. Moreover, in 1999, we commenced a strategy to purchase and cancel
up to 10 percent of our outstanding shares of common stock through open market
purchases. In 2003, we again filed with the SEC to purchase up to 100,000 shares
of our outstanding shares. These repurchase programs resulted in the purchase
and cancellation of the following numbers of shares of our common stock for the
years indicated: 24,000 shares (2007); 24,000 shares (2006); and 18,000 shares
(2005). The net effect of the stock plans and the repurchase program resulted in
weighted average shares of common stock outstanding as follows: 1,233,339
(2007); 1,249,844 (2006); and 1,262,171 (2005).
Tax-equivalent net interest income increased 4.82 percent to $8.7 million
in 2007 from $8.3 million in 2006. Average earning assets were $231.7 million in
2007 and $220.6 million in 2006. Net interest income increased 5.06 percent from
$7.9 million in 2006 to $8.3 million in 2007. This increase in net interest
income is a result of the pricing and mix of our loans and deposits.
TABLE OF NON-INTEREST INCOME
(Dollars in Thousands)
Years Ended December 31,
------------------------
2007 2006 2005
------ ------ ------
Service charges and fees $ 942 $ 846 $ 828
Gain on sale of loans 182 45 40
Bank-owned life insurance income 285 253 247
Trust department income 196 191 157
Investment center income 399 219 118
Investment securities gains - net 0 0 34
Other 301 346 289
------ ------ ------
Total non-interest income $2,305 $1,900 $1,713
------ ------ ------
Total non-interest income increased 21.32 percent during 2007 from
$1,900,000 in 2006 to $2,305,000 in 2007. Service fees and charges increased
from $846,000 in 2006 to $942,000 in 2007 or 11.35 percent. "Overdraft
Privilege" was instrumental in this increase. Gain on sale of loans increased
304.44% from $45,000 in 2006 to $182,000 in 2007. Management and employees
participated in an incentive program to market these fixed rate loans and the
program was very successful. Investment center income showed a dramatic 82.19%
increase from $219,000 in 2006 to $399,000 in 2007. The bank has added another
broker to its financial services department which should help continue success
in the future. Other income decreased $45,000 from $346,000 in 2006 to $301,000
in 2007.
17
TABLE OF OTHER NON-INTEREST EXPENSE
(Dollars in Thousands)
Years Ended December 31,
---------------------------------
2007 2006 2005
--------- --------- ---------
Salaries $ 3,001 $ 2,615 $ 2,324
Employee benefits 896 837 791
Occupancy, net 491 458 457
Equipment 485 494 518
State shares tax 313 304 282
Professional services 315 229 259
Directors' fees 188 171 190
Stationery and supplies 159 137 130
Other 1,190 1,192 1,127
--------- --------- ---------
Total non-interest expense $ 7,038 $ 6,437 $ 6,078
--------- --------- ---------
Total non-interest expense increased 9.34 percent to $7,038,000 in 2007
from $6,437,000 in 2006. A 12.89 percent increase in salaries and benefits was
attributable to commissions and bonuses paid, specifically to Investment center
personnel and normal merit increases of employees. State shares tax increased
2.96 percent or $9,000 for 2007 as compared to 2006. Professional services
increased $86,000 from $229,000 in 2006 to $315,000 in 2007. A major factor in
this increase was the installation and training of staff on the new branch
capture system which does away with costly hardware and maintenance involved
with it. Other expense decreased slightly.
One standard to measure non-interest expense is to express non-interest
expense as a percentage of average total assets. In 2007 this percentage was
2.83 percent compared to 2.72 percent in 2006.
Loan delinquencies decreased 22.49 percent from $796,000 in 2006 to
$617,000 in 2007. The decrease in these delinquencies was across the 30 - 89 day
past due category and the non - accrual category. The 90 days plus category
increased slightly. Our management has been diligent in its efforts to reduce
these delinquencies and has increased monitoring and review of current loans to
foresee future delinquency occurrences and react to them quickly. The Bank
continues to utilize a centralized credit analysis department to analyze new
loan requests. The provision for loan losses decreased from $175,000 in 2006 to
$30,000 in 2007 as loans increased by $819 thousand, still reflecting the
allowance for loan losses as a percentage of loans at 0.90 percent in 2007 from
0.91 percent in 2006.
NET INTEREST INCOME
Tax-equivalent net interest income for 2007 equaled $8,655,000 compared to
$8,256,000 in 2006, an increase of 4.83 percent. The decrease in the overall net
interest margin from 3.90 percent in 2006 to 3.89 percent in 2007 is a result of
interest rate changes in the loan and deposit products. These rates were
monitored and adjusted which contributed to the overall increased performance of
the Bank. Interest received on interest bearing deposits with other financial
institutions increased from an average of 5.07 percent for 2006 to an average of
5.15 percent for 2007. he cost of long-term debt averaged 5.99 percent for the
year which will continue to have a negative impact on our net interest margin,
until rates would rise enough to allow us to pay off this debt. We will continue
to use the following strategies to mitigate this period of pressure on our net
interest margin: pricing of deposits will continue to be monitored to meet
current market conditions; large deposits over $100,000 will continue to be
priced conservatively; and in this low interest rate environment, the majority
of new investments will be kept short-term in anticipation of rising rates.
TAX-EQUIVALENT NET INTEREST INCOME
(Dollars in Thousands)
Years Ended December 31,
---------------------------------
2007 2006 2005
--------- --------- ---------
Interest income $ 14,483 $ 13,202 $ 11,442
Interest expense 6,185 5,301 4,131
--------- --------- ---------
Net interest income 8,298 7,901 7,311
--------- --------- ---------
Tax-equivalent adjustment 357 355 411
--------- --------- ---------
Net interest income (fully taxable equivalent) $ 8,655 $ 8,256 $ 7,722
========= ========= =========
18
The following Average Balance Sheet and Rate Analysis table presents the
average assets, actual income or expense and the average yield on assets,
liabilities and stockholders' equity for the years 2007, 2006 and 2005.
AVERAGE BALANCE SHEET AND RATE ANALYSIS
THREE YEARS ENDED DECEMBER 31,
(Dollars in thousands)
2007 2006 2005
----------------------------- ---------------------------- ----------------------------
Average Interest Average Average Interest Average Average Interest Average
Balance Inc./Exp Yd/Rate Balance Inc./Exp Yd/Rate Balance Inc./Exp Yd/Rate
-------- -------- ------- -------- -------- ------- -------- -------- -------
(1) (2) (1) (2) (1) (2)
ASSETS:
Interest Bearing Deposits With Other
Financial Institutions $ 2,754 $ 145 5.27% $ 750 $ 39 5.20% $ 1,694 $ 53 3.13%
Investment Securities:
Taxable 54,353 2,546 4.68% 47,857 1,850 3.87% 46,859 1,588 3.39%
State and Municipal
Obligations (3) 4,200 186 6.71% 5,846 268 6.94% 8,084 363 6.80%
-------- -------- -------- -------- ------- --------
Total Investment Securities 58,553 2,732 5.08% 53,703 2,118 4.20% 54,943 1,951 3.89%
-------- -------- -------- -------- ------- --------
Federal Funds Sold 10,013 512 5.11% 7,621 385 5.05% 5,809 190 3.27%
-------- -------- -------- -------- ------- --------
Loans:
Taxable 148,959 10,585 7.11% 149,121 10,239 6.87% 140,388 8,812 6.28%
Tax Free (3) 11,389 509 6.77% 9,433 421 6.77% 9,677 436 6.82%
-------- -------- -------- -------- ------- --------
Total Loans 160,348 11,094 7.08% 158,554 10,660 6.86% 150,065 9,248 6.31%
-------- -------- -------- -------- ------- --------
Total Interest-Earning Assets 231,668 14,483 6.41% 220,628 13,202 6.14% 212,511 11,442 5.58%
-------- -------- -------- -------- ------- --------
Reserve for Loan Losses (1,504) (1,481) (1,470)
Cash and Due from Banks 4,555 3,608 7,708
Other Assets 13,757 13,814 11,332
-------- ------- -------
Total Assets 248,476 236,569 230,081
======== ------- -------
LIABILITIES AND CAPITAL:
Total Interest-Bearing Deposits 153,192 4,058 2.65% 148,756 3,463 2.33% 150,289 2,830 1.88%
U.S. Treasury Short-Term Borrowings 377 18 4.77% 318 15 4.72% 296 9 3.04%
Short-Term Borrowings - Other 0 0 0 19 1 5.26% 0 0 0.00%
Long-Term Borrowings 11,188 670 5.99% 11,303 677 5.99% 11,317 678 5.99%
Repurchase Agreements 31,205 1,439 4.61% 25,036 1,145 4.57% 20,640 614 2.97%
-------- -------- -------- -------- ------- --------
Total Interest-Bearing Liabilities 195,962 6,185 3.16% 185,432 5,301 2.86% 182,542 4,131 2.26%
-------- -------- -------- -------- ------- --------
Demand Deposits 19,611 18,268 17,523
Other Liabilities 1,900 2,620 1,227
Stockholders' Equity 31,003 30,249 28,789
-------- -------- --------
Total Liabilities and Capital $248,476 $236,569 $230,081
======== -------- --------
NET INTEREST INCOME/NET INTEREST
MARGIN (4) $ 8,298 3.58% $ 7,901 3.58% $ 7,311 3.44%
======== ----- --------- ===== -------- =====
TAX-EQUIVALENT NET INTEREST INCOME/NET
INTEREST MARGIN (5) $ 8,655 3.74% $ 8,256 3.74% $ 7,772 3.65%
======== ----- --------- ----- -------- =====
----------
(1) Average volume information was compared using daily (or monthly) averages
for interest earning and bearing accounts. Certain balance sheet items
utilized quarter end balances for averages.
(2) Interest on loans includes fee income.
(3) Yield on tax-exempt obligations has been computed on a tax-equivalent
basis.
(4) Net interest margin is computed by dividing net interest income by total
interest-earning assets.
(5) Interest and yield are presented on a tax-equivalent basis using 34
percent for 2007, 2006 and 2005.
19
COMPONENTS OF NET INTEREST INCOME
To enhance the understanding of the effects of volumes (the average
balance of earning assets and costing liabilities) and average interest rate
fluctuations on the balance sheet as it pertains to net interest income, the
table below reflects these changes for 2007 versus 2006, 2006 versus 2005, and
2005 versus 2004:
TABLE OF NET INTEREST INCOME COMPONENTS ON A TAX-EQUIVALENT BASIS
For the twelve months ended December 31, 2007
(Dollars in thousands)
2007 Versus 2006 2006 Versus 2005 2005 Versus 2004
--------------------------- ------------------------------- ----------------------------
Increase (Decrease) Increase (Decrease) Increase (Decrease)
Due to Changes In Due to Changes In Due to Changes In
--------------------------- ------------------------------- ----------------------------
Average Average Average Average Average Average
Volume Rate Total Volume Rate Total Volume Rate Total
------- ------- ------- -------- -------- -------- ------- ------- -------
Interest Income:
Interest-Bearing Deposits with $ 104 $ 1 $ 105 $ (30) $ 35 $ 5 $ (2) $ 5 $ 3
Other Financial Institutions
Taxable Securities 251 388 639 34 225 259 223 36 259
State and Municipal Obligations (114) (13) (127) (152) 11 (141) (242) 21 (221)
Federal Funds Sold 121 5 126 59 103 162 (95) (71) (166)
Taxable Loans (11) 358 347 548 828 1,376 (307) (331) (638)
Tax Free Loans 132 0 132 (17) (5) (22) 300 (25) 275
------- ------- ------- -------- -------- -------- ------- ------- -------
Total Earning Assets $ 483 $ 739 $ 1,222 $ 442 $ 1,197 $ 1,639 $ (123) $ (365) $ (488)
------- ------- ------- -------- -------- -------- ------- ------- -------
Interest Expense:
Total Interest-Bearing Deposits $ 103 $ 476 $ 579 $ (29) $ 676 $ 647 $ (39) $ (689) $ (728)
U.S. Treasury - Short-Term Borrowings 2 0 2 1 5 6 0 1 1
Long-Term Borrowings (7) 0 (7) (1) 0 (1) 0 1 1
Repurchase Agreements 282 10 292 131 330 461 24 (5) 19
------- ------- ------- -------- -------- -------- ------- ------- -------
Total Interest-Bearing Liabilities: $ 380 $ 486 $ 866 $ 102 $ 1,011 $ 1,113 $ (15) $ (692) $ (707)
------- ------- ------- -------- -------- -------- ------- ------- -------
NET INTEREST INCOME $ 103 $ 253 $ 356 $ 340 $ 186 $ 526 $ (108) $ 327 $ 219
------- ======= ------- ======== -------- ======== ------- ======= -------
FINANCIAL CONDITION
Our consolidated assets at December 31, 2007 were $245.3 million which
represented an increase of $3.4 million or 1.41 percent over $241.9 million at
December 31, 2006. The increase for 2006 from 2005 was 4.63 percent or $10.7
million.
Capital increased 4.64 percent from $30.2 million in 2006 to $31.6 million
in 2007, after an adjustment for the fair market value of securities which was
an increase in capital of $143,700 for 2007 compared to a decrease in capital of
$29,900 for 2006. This was a result of an increase in the net realized gain in
securities in 2007 of $173,600. Common stock and surplus decreased a net
$420,000 resulting primarily from the purchase and retirement of stock in the
amount of $658,000 and stock issued under our stock plans in the amount of
$236,000. A cumulative effect of an accounting change for split dollar deferred
compensation plans resulted in a decrease of $12,000 to retained earnings.
Total average assets increased 5.03 percent from $236.6 million at
December 31, 2006 to $248.5 million at December 31, 2007. Average earning assets
were $220.6 million in 2006 and $231.7 million in 2007.
Loans increased 0.51 percent from $160.6 million at December 31, 2006 to
$161.5 million at December 31, 2007.
Non-interest bearing deposits increased 0.52 percent to $19.4 million at
December 31, 2007 from $19.3 million at December 31, 2006. Interest bearing
deposits increased 1.00 percent from $150.0 million in 2006 to $151.5 million in
2007.
The loan-to-deposit ratio is a key measurement of liquidity. Our
loan-to-deposit ratio decreased during 2007 to 94.46 percent compared to 94.89
percent during 2006.
It is our opinion that the asset/liability mix and the interest rate risk
associated with the balance sheet is within manageable parameters. Constant
monitoring using asset/liability reports and interest rate risk scenarios are in
place along with quarterly asset/liability management meetings on the committee
level by the Bank's Board of Directors. Additionally, the Bank's Asset/Liability
Committee meets quarterly with an investment consultant.
20
INVESTMENTS
(Dollars in thousands)
2007 2006 2005
------- ------- -------
Federal Agency Obligations $27,547 $25,066 $21,157
Mortgage-backed Securities 23,781 21,147 22,564
Obligations of State and Political Subdivisions 4,046 4,703 7,782
Marketable Equity Securities 1,037 1,341 1,265
Restricted Equity Securities 1,275 1,229 1,151
------- ------- -------
Total Investment Securities $57,686 $53,486 $53,919
------- ------- -------
All of our securities are available-for sale and are carried at estimated
fair value. The following table sets forth the estimated maturity distribution
of the investments, the weighted average yield for each type and ranges of
maturity at December 31, 2007. Yields are presented on a tax-equivalent basis,
are based upon carrying value and are weighted for the scheduled maturity. At
December 31, 2007 our investment securities portfolio had an average maturity of
approximately 3.88 years.
(Dollars in Thousands)
------------------------------------------------------------------------------------------------------
After One After Five
Year But Years But
Within Within Within After
One Year Five Years Ten Years Ten Years Total
------------------- ------------------- ------------------- ------------------- ------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
-------- --------- -------- --------- -------- --------- -------- --------- -------- --------
Federal Agency Obligations $ 10,325 4.22% $ 30,455 5.30% $ 10,548 5.51% $ 0 0.00% $ 51,328 5.13%
Obligations of State and
Political Subdivisions 0 0.00% 200 6.57% 2,507 6.67% 1,339 6.16% 4,046 6.49%
Marketable Equity Securities 0 0.00% 0 0.00% 0 0.00% 1,037 3.88% 1,037 3.88%
Restricted Equity Securities 0 0.00% 0 0.00% 0 0.00% 1,275 5.20% 1,275 5.20%
-------- -------- -------- ------- -------- ------- -------- ------- -------- -------
Total $ 10,325 4.22% $ 30,655 5.31% $ 13,055 5.73% $ 3,651 5.20% $ 57,686 5.22%
-------- -------- -------- ------- -------- ------- -------- ------- -------- -------
Available-for-sale securities are reported on the consolidated balance
sheet at fair value with an offsetting adjustment to deferred taxes. The
possibility of material price volatility in a changing interest rate environment
is offset by the availability to the bank of restructuring the portfolio for gap
positioning at any time through the securities classed as available-for-sale.
The impact of the fair value accounting was an unrealized gain, net of tax, on
December 31, 2007 of $144,000 compared to an unrealized loss, net of tax, on
December 31, 2006 of $30,000, which represents an unrealized gain, net of tax,
of $174,000 for 2007.
The mix of securities in the portfolio at December 31, 2007 was 88.98
percent Federal Agency Obligations, 7.01 percent Municipal Securities, and 4.01
percent Other. We did not trade in derivative investment products during 2007.
LOANS
LOAN PORTFOLIO
LOANS OUTSTANDING
(Dollars in thousands)
2007 2006 2005 2004 2003
--------- --------- --------- --------- ---------
Commercial $ 8,074 $ 9,574 $ 12,097 $ 12,182 $ 15,328
Tax-Exempt 13,108 9,621 9,019 10,062 6,214
Real Estate - Construction 3,698 2,231 1,548 734 2,505
Real Estate 132,453 135,009 127,170 122,104 118,129
Personal 4,059 4,118 4,348 4,738 5,410
--------- --------- --------- --------- ---------
Total Gross Loans $ 161,392 $ 160,553 $ 154,182 $ 149,820 $ 147,586
Add (Deduct) Unearned discount (22) (19) (30) (46) (64)
Unamortized loan costs, net of fees 90 107 119 126 109
--------- --------- --------- --------- ---------
Loans, Net $ 161,460 $ 160,641 $ 154,271 $ 149,900 $ 147,631
--------- --------- --------- --------- ---------
The loan portfolio increased 0.51 percent from $160.6 million in 2006 to
$161.5 million in 2007. The percentage distribution in the loan portfolio was
84.36 percent in real estate loans at $136.2 million; 5.00 percent in commercial
loans at $8.1 million; 2.52 percent in consumer loans at $4.1 million; and 8.12
percent in tax exempt loans at $13.1 million.
Real Estate loans were comprised of 4.72 percent with 5/5-year adjustable
rates, 4.23 percent with 7/3-year adjustable rates, .43 percent with 5/3-year
adjustable rates, 3.90 percent with 5-year adjustable rates; 43.00 percent with
3-year adjustable rates; 8.99
21
percent with 1-year adjustable rates; and 5.56 percent with one-day to 3-month
adjustable rates. Many adjustable rate loans have bi-weekly payments. The
remaining 29.17 percent of real estate loans were fixed rates.
The following table presents the percentage distribution of loans by
category as of the date indicated:
For the years ended December 31,
2007 (%) 2006 (%) 2005 (%) 2004 (%) 2003 (%)
------- ------- ------- ------- -------
Commercial 5.00 5.96 7.85 8.13 10.38
Tax Exempt 8.12 5.99 5.85 6.71 4.21
Real Estate-Construction 2.29 1.39 1.00 .49 1.70
Real Estate 82.07 84.10 82.48 81.54 80.04
Personal 2.52 2.56 2.82 3.13 3.67
------- ------- ------- ------- -------
Total Loans 100.00 100.00 100.00 100.00 100.00
======= ======= ======= ======= =======
The following table shows the maturity or repricing of loans in specified
categories of the Bank's loan portfolio at December 31, 2007, and the amount of
such loans with predetermined fixed rates or with floating or adjustable rates.
Expected payments are included in the table.
December 31, 2007
-------------------------------------------------------
In One One Year Five Years After
Year Through Through Ten
Or Less Five Years Ten Years Years Total
---------- ---------- ---------- ---------- ----------
Dollars in Thousands
Commercial, Tax Exempt, Real Estate and
Personal Loans $ 53,427 $ 96,325 $ 7,832 $ 178 $ 157,762
Real Estate-Construction Loans 3,698 0 0 0 3,698
---------- ---------- ---------- ---------- ----------
$ 57,125 $ 96,325 $ 7,832 $ 178 $ 161,460
========== ========== ========== ========== ==========
Amount of Such Loans with:
Predetermined Fixed Rates $ 13,386 $ 37,931 $ 7,175 $ 178 $ 58,670
Floating or Adjustable Rates 43,739 58,394 657 0 102,790
---------- ---------- ---------- ---------- ----------
Total $ 57,125 $ 96,325 $ 7,832 $ 178 $ 161,460
========== ========== ========== ========== ==========
DEPOSITS AND BORROWED FUNDS
TABLE OF DISTRIBUTION OF AVERAGE DEPOSITS
(Dollars in thousands)
December 31,
----------------------------------------
2007 2006 2005
---------- ---------- ----------
Demand deposits $ 48,933 $ 47,297 $ 46,307
Savings deposits 33,496 35,465 37,539
Time deposits 60,578 57,319 58,380
Time deposits, $100,000 and over 29,796 26,943 25,586
---------- ---------- ----------
Total $ 172,803 $ 167,024 $ 167,812
---------- ---------- ----------
22
TABLE OF MATURITY DISTRIBUTION OF TIME DEPOSITS OVER $100,000
(Dollars in thousands)
December 31,
---------------------------------
2007 2006 2005
--------- --------- ---------
Three months or less $ 8,932 $ 6,942 $ 5,803
Over three months to six months 7,662 3,502 1,267
Over six months to twelve months 5,799 6,952 5,736
Over twelve months 8,248 11,475 12,822
-------- -------- --------
Total $ 30,641 $ 28,871 $ 25,628
======== ======== ========
Total average deposits increased by 3.47 percent from $167.0 million in
2006 to $172.8 million in 2007. Average savings deposits decreased 5.55 percent
to $33.5 million in 2007 from $35.5 million in 2006. Average time deposits
increased 7.25 percent from $84.3 million in 2006 to $90.4 million in 2007.
Average non-interest bearing demand deposits increased to $48.9 million in 2007
from $47.3 million in 2006. Average interest bearing NOW accounts increased 1.01
percent from $29.0 million in 2006 to $29.3 million in 2007.
Short-term borrowings, securities sold under agreements to repurchase and
day-to-day borrowings increased 24.41 percent from $25.4 million in 2006 to
$31.6 million in 2007. Treasury Tax and Loan deposits held by us for the U.S.
Treasury averaged $376,000 in 2007. One-day borrowings averaged $0 in 2007 and
repurchase agreements increased from an average $25.0 million in 2006 to $31.2
million in 2007. Long-term borrowings, namely borrowings from the
FHLB-Pittsburgh, averaged $11.2 million in 2007 and $11.3 million in 2006.
NON-PERFORMING ASSETS
PAST DUE AND NON-ACCRUAL LOANS
(Dollars in thousands)
Real Installment
2007 Estate Loans Commercial Total
--------------- ------ ----------- ---------- -------
Days 30-89 $ 259 $ 33 $ 168 $ 460
Days 90 Plus 70 10 0 80
Non-accrual 77 0 0 77
------ ----------- ---------- -------
Total $ 406 $ 43 $ 168 $ 617
====== =========== ========== =======
Real Installment
2006 Estate Loans Commercial Total
--------------- ------ ----------- ---------- -------
Days 30-89 $ 598 $ 40 $ 0 $ 638
Days 90 Plus 67 0 0 67
Non-accrual 91 0 0 91
------ ----------- ---------- -------
Total $ 756 $ 40 $ 0 $ 796
====== =========== ========== =======
Real Installment
2005 Estate Loans Commercial Total
--------------- ------ ----------- ---------- -------
Days 30-89 $1,152 $ 65 $ 12 $ 1,229
Days 90 Plus 128 2 0 130
Non-accrual 518 0 189 707
------ ----------- ---------- -------
Total $1,798 $ 67 $ 201 $ 2,066
====== =========== ---------- =======
In 2007, loans 30-89 days past due totaled $460,000 compared to $638,000
in 2006. Past due loans 90 days plus totaled $80,000 in 2007, compared to
$67,000 in 2006. Non-accrual loans in 2007 totaled $77,000 compared to $91,000
in 2006. Overall, past due and non-accrual loans decreased 22.49 percent from
$796,000 in 2006 to $617,000 in 2007 With loans increasing by more than $.8
million this 22.49 percent decrease overall is a result of our diligence to loan
quality, underwriting and collection practices, as well as reflective of local
economic conditions. The amount and percent of past due loans is the lowest in
over 21 years. During this past year, the ratio of net charge offs during the
period to average loans outstanding during the period was (0.03) percent. (See
Summary of Loan Loss Experience).
Refer to the Loan section of footnote 1 and footnote 4 - Loans to the
Consolidated Financial Statements, Item 8.
23
The following table presents a summary of the Bank's loan loss experience
as of the dates indicated:
For Years Ended December 31,
2007 2006 2005 2004 2003
--------- --------- ---------- ---------- ---------
Loans Outstanding at End of Period $ 161,460 $ 160,641 $ 154,271 $ 149,900 $ 147,631
-------- --------- ========== ========== =========
Average Loans Outstanding during the
Period $ 160,348 $ 158,554 $ 150,065 $ 147,348 $ 148,344
========= ========= ========== ========== =========
Balance of Loan Losses and Loan Loss Activity:
Balance, Beginning of Period $ 1,456 $ 1,553 $ 1,392 $ 1,415 $ 1,298
--------- --------- ---------- ---------- ---------
Loans Charged Off:
Commercial and Industrial 0 (185) 0 (147) (52)
Real Estate Mortgages (29) (65) 0 (25) (0)
Consumer (56) (50) (54) (31) (76)
--------- --------- ---------- ---------- ---------
Total Loans Charged Off (85) (300) (54) (203) (128)
Recoveries:
Commercial and Industrial 0 8 79 0 12
Real Estate Mortgages 1 0 0 5 0
Consumer 35 20 46 35 33
--------- --------- ---------- ---------- ---------
Total Recoveries 36 28 125 40 45
--------- --------- ---------- ---------- ---------
Net Loans Charged Off (49) (272) 71 (163) (83)
Provision for Loan Losses 30 175 90 140 200
--------- --------- ---------- ---------- ---------
Balance, End of Period $ 1,437 $ 1,456 $ 1,553 $ 1,392 $ 1,415
========= ========= ========== ==========
Ratio of net charge-offs during the year to
average loans outstanding during year (0.03)% (0.17)% 0.05% (0.11)% (0.06)%
========= ========= ========== ========== =========
The following table presents an allocation of the Bank's allowance for
loan losses for specific categories as of the dates indicated:
For Years Ended December 31,
---------------------------------------------
Dollars in Thousands 2007 2006 2005 2004 2003
------ ------ ------ ------ ------
Commercial $ 104 $ 101 $ 208 $ 349 $ 493
Real Estate Mortgages 700 659 694 755 696
Consumer 28 27 32 24 28
Unallocated 605 669 619 264 198
------ ------ ------ ------ ------
Total $1,437 $1,456 $1,553 $1,392 $1,415
------ ------ ------ ------ ------
24
The following table presents a summary of the Bank's non-accrual,
restructured and past due loans as of the dates indicated:
For Years Ended December 31,
Dollars in thousands 2007 2006 2005 2004 2003
------- -------- ------- -------- --------
Nonaccrual, Restructured and Past Due Loans:
Nonaccrual Loans $ 77 $ 91 $ 707 $ 1,241 $ 1,336
Restructured Loans on Accrual Status 1,243 54 0 0 516
Accrual Loans Past Due 90 Days or More 80 67 130 20 369
------- -------- ------- -------- --------
Total Nonaccrual, Restructured and Past
Due Loans $ 1,400 $ 212 $ 837 $ 1,261 $ 2,221
======= ======== ======= ======== ========
Other Real Estate $ 0 $ 14 $ 0 $ 0 $ 36
Interest Income That Would Have Been
Recorded Under Original Terms $49,358 $130,183 $ 8,715 $129,182 $142,873
Interest Income Recorded During the Period $ 3,857 $ 90,173 $28,215 $ 86,834 $ 17,586
ALLOWANCE FOR LOAN LOSSES AND RELATED PROVISION
(Dollars in Thousands)
Outstanding Balance at December 31,
----------------------------------------------------------------------------
2007 2006 2005
------------------------ ----------------------- -------------------------
% of Loans % of Loans % of Loans
in Category in Category in Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------------ --------- ----------- --------- ----------- -----------
Commercial $ 104 13.1% $ 101 12.0% $ 208 13.7%
Real estate mortgages 700 84.4% 659 85.5% 694 83.5%
Consumer 28 2.5% 27 2.5% 32 2.8%
Unallocated 605 N/A 669 N/A 619 N/A
------------ ------- ----------- ------- ----------- -----
$ 1,437 100.0% $ 1,456 100.0% $ 1,553 100.0%
------------ ------- ----------- ------- ----------- -----
The allowance for loan losses was $1,437, 000 at December 31, 2007,
compared to $1,456,000 at December 31, 2006. This allowance equaled .90 percent
and .91 percent of total loans, net of unearned income, at the end of 2007 and
2006, respectively. Allowance was considered adequate based on delinquency
trends and actual loans written as it relates to the loan portfolio.
The loan loss reserve was analyzed quarterly and reviewed by the Bank's
Board of Directors. The assessment of the loan policies and procedures during
2007 revealed no anticipated loss on any loans considered "significant". No
concentration or apparent deterioration in classes of loans or pledged
collateral was evident, although slight concentrations existed in one to four
family residential loans and in municipal loans. Monthly loan meetings with the
Bank's Credit Administration Committee reviewed new loans, delinquent loans and
loan exceptions to determine compliance with policies.
LIQUIDITY
Liquidity management is required to ensure that adequate funds will be
available to meet anticipated and unanticipated deposit withdrawals, debt
service payments, investment commitments, commercial and consumer loan demand,
and ongoing operating expenses. Funding sources include principal repayments on
loans, sales of assets, growth in core deposits, short and long-term borrowings,
investment securities coming due, loan prepayments and repurchase agreements.
Regular loan payments are a dependable source of funds, while the sale of
investment securities, deposit growth and loan prepayments are significantly
influenced by general economic conditions and the level of interest rates.
We manage liquidity on a daily basis. We believe that our liquidity is
sufficient to meet present and future financial obligations and commitments on a
timely basis. However, see Item 1A - Risk Factors and refer to consolidated
Statements of Cash Flows.
25
CAPITAL RESOURCES
Capital continues to be a strength for the bank. Capital is critical as it
must provide growth, payment to shareholders, and absorption of unforeseen
losses. The federal regulators provide standards that must be met.
As of December 31, 2007, the most recent notification from the Comptroller
of the Currency, the Bank's primary federal regulator, categorized the Bank as
well capitalized under the regulatory framework for prompt corrective action. To
be categorized as well capitalized, the Bank must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios.
The Corporation's actual capital amounts are ratios in the following
table:
To be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- --------------------- ----------------------
Amount Ratio(%) Amount Ratio(%) Amount Ratio(%)
------- -------- -------- --------- -------- ---------
As of December 31, 2007:
Total Risk Based Capital
(To risk-weighted assets) $32,930 18.93% $13,917 8.00% $17,396 10.00%
Tier I Capital
(To risk-weighted assets) $31,483 18.10% $ 6,958 4.00% $10,436 6.00%
Tier I Capital
(To average assets) $31,483 12.71% $ 9,908 4.00% $12,385 5.00%
As of December 31, 2006:
Total Risk Based Capital
(To risk-weighted assets) $31,685 20.29% $12,493 8.00% $15,616 10.00%
Tier I Capital
(To risk-weighted assets) $30,063 19.25% $ 6,247 4.00% $ 9,370 6.00%
Tier I Capital
(To average assets) $30,063 12.71% $ 9,461 4.00% $11,827 5.00%
Our capital ratios are not materially different from those of the
Bank.
Dividend payouts are restricted by the Pennsylvania Business Corporation
Law of 1988, as amended (the BCL). The BCL operates generally to preclude
dividend payments if the effect thereof would render us unable to meet our
obligations as they become due. As a practical matter, our payment of dividends
is contingent upon our ability to obtain funding in the form of dividends from
the Bank. Payment of dividends to us by the Bank is subject to the restrictions
set forth in the National Bank Act. Generally, the National Bank Act would
permit the Bank to declare dividends in 2008 to the Corporation of approximately
$2,067,807 plus additional amounts equal to the net income earned in 2008 for
the period January 1, 2008 through the date of declaration, less any dividends
which may be paid in 2008.
INTEREST RATE RISK MANAGEMENT
Interest rate risk management involves managing the extent to which
interest-sensitive assets and interest-sensitive liabilities are matched.
Interest rate sensitivity is the relationship between market interest rates and
earnings volatility due to the repricing characteristics of assets and
liabilities. The Bank's net interest income is affected by changes in the level
of market interest rates. In order to maintain consistent earnings performance,
the Bank seeks to manage, to the extent possible, the repricing characteristics
of its assets and liabilities.
One major objective of the Bank when managing the rate sensitivity of its
assets and liabilities is to stabilize net interest income. The management of
and authority to assume interest rate risk is the responsibility of the Bank's
Asset/Liability Committee ("ALCO"), which is comprised of senior management and
Board members. ALCO meets quarterly to monitor the ratio of interest sensitive
assets to interest sensitive liabilities. The process to review interest rate
risk management is a regular part of management of the Bank. Consistent policies
and practices of measuring and reporting interest rate risk exposure,
particularly regarding the treatment of noncontractual assets and liabilities,
are in effect. In addition, there is an annual process to review the interest
rate risk policy with the Board of Directors which includes limits on the impact
to earnings from shifts in interest rates.
26
The ratio between assets and liabilities repricing in specific time
intervals is referred to as an interest rate sensitivity gap. Interest rate
sensitivity gaps can be managed to take advantage of the slope of the yield
curve as well as forecasted changes in the level of interest rate changes.
To manage the interest sensitivity position, an asset/liability model
called "gap analysis" is used to monitor the difference in the volume of the
Bank's interest sensitive assets and liabilities that mature or reprice within
given periods. A positive gap (asset sensitive) indicates that more assets
reprice during a given period compared to liabilities, while a negative gap
(liability sensitive) has the opposite effect. The Bank employs computerized net
interest income simulation modeling to assist in quantifying interest rate risk
exposure. This process measures and quantifies the impact on net interest income
through varying interest rate changes and balance sheet compositions. The use of
this model assists the ALCO to gauge the effects of the interest rate changes on
interest sensitive assets and liabilities in order to determine what impact
these rate changes will have upon our net interest spread.
STATEMENT OF INTEREST SENSITIVITY GAP
(Dollars in thousands)
December 31, 2007
>90 Days
90 Days But 1 to 5 5 to 10 > 10
Or Less <1 Year Years Years Years Total
--------- -------- --------- -------- -------- --------
Short-term investments $ 13,401 $ 0 $ 0 $ 0 $ 0 $ 13,401
Securities Available-for-Sale (1) 13,649 22,207 18,540 549 2,741 57,686
Loans (1) 21,736 35,389 96,325 7,832 178 161,460
--------- -------- --------- -------- -------- --------
Rate Sensitive Assets 48,786 57,596 114,865 8,381 2,919 232,547
--------- -------- --------- -------- -------- --------
Deposits:
Interest-bearing demand deposits (2) $ 3,807 $ 2,772 $ 14,803 $ 7,402 $ 0 $ 28,784
Savings (2) 4,411 3,488 16,901 6,104 0 30,904
Time 18,197 35,095 38,564 0 0 91,856
Borrowed funds 29,397 114 0 0 0 29,511
Long-term debt 2,000 0 9,025 32 80 11,137
Shareholder's Equity 0 0 0 0 31,627 31,627
--------- -------- --------- -------- -------- --------
Rate Sensitive Liabilities 57,812 41,469 79,293 13,538 31,707 223,819
--------- -------- --------- -------- -------- --------
Interest Sensitivity Gap (9,026) 16,127 35,572 (5,157) (28,788) 8,728
Cumulative Gap $ (9,026) $ 7,101 $ 42,673 $ 37,516 $ 8,728 $ 0
(1) Investments and loans are included at the earlier of repricing or maturity
and adjusted for the effects of prepayments.
(2) Interest bearing demand and savings accounts are included based on
historical experience and managements' judgment about the behavior of
these deposits in changing interest rate environments.
At December 31, 2007, our cumulative gap positions and the potential
earnings change resulting from a 200 basis point change in rates were within the
internal risk management guidelines.
Upon reviewing the current interest sensitivity scenario at the one-year
interval, interest rates should not affect net income because the Bank's
maturing and repricing assets and liabilities are near equally matched. At the
ninety day through ten year intervals an increasing interest rate environment
would positively affect net income because more assets than liabilities would
reprice.
Certain shortcomings are inherent in the method of analysis presented in
the above table. Although certain assets and liabilities may have similar
maturities or periods of repricing, they may react in different degrees to
changes in market interest rates. The interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates,
while interest rates on other types of assets and liabilities may lag behind
changes in market interest rates. Certain assets, such as adjustable-rate
mortgages, have features which restrict changes in interest rates on a
short-term basis and over the life of the asset. In the event of a change in
interest rates, prepayment and early withdrawal levels may deviate significantly
from those assumed in calculating the table. The ability of many borrowers to
service their adjustable-rate debt may decrease in the event of an interest rate
increase.
In addition to gap analysis, the Bank uses earnings simulation to assist
in measuring and controlling interest rate risk. The Bank also simulates the
impact on net interest income of plus and minus 100, 200 and 300 basis point
rate shocks. The results of these theoretical rate shocks provide an additional
tool to help manage the Bank's interest rate risk.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by this item can be found at Item 7 of this
Annual Report under the caption "Interest Rate Risk Management" and is
incorporated in its entirety by reference under this Item 7A.
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CCFNB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2007 AND 2006
2007 2006
------------- --------------
ASSETS
Cash and due from banks $ 5,549,918 $ 4,819,258
Interest-bearing deposits with other banks 732,088 405,210
Federal funds sold 7,119,225 10,307,030
Investment securities available-for-sale 57,686,376 53,486,269
Loans, net of unearned income 161,460,362 160,640,992
Allowance for loan losses 1,437,505 1,455,636
------------- --------------
Net loans 160,022,857 159,185,356
Premises and equipment, net 5,087,448 5,048,790
Cash surrender value of bank-owned life insurance 7,076,208 6,767,080
Accrued interest receivable 1,081,795 994,169
Other assets 968,349 906,534
------------- --------------
TOTAL ASSETS $ 245,324,264 $ 241,919,696
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Non-interest bearing $ 19,394,241 $ 19,257,761
Interest bearing 151,544,250 150,026,746
------------- --------------
Total Deposits 170,938,491 169,284,507
Short-term borrowings 29,510,877 29,309,848
Long-term borrowings 11,136,909 11,297,111
Accrued interest and other expenses 2,081,900 1,737,307
Other liabilities 29,509 42,103
------------- --------------
TOTAL LIABILITIES 213,697,686 211,670,876
------------- --------------
STOCKHOLDERS' EQUITY
Common stock, par value $1.25 per share; authorized 5,000,000 shares;
issued and outstanding 1,226,536 shares 2007, 1,241,664 shares 2006 1,533,170 1,552,080
Surplus 2,271,175 2,672,545
Retained earnings 27,678,533 26,054,135
Accumulated other comprehensive income (loss) 143,700 (29,940)
------------- --------------
TOTAL STOCKHOLDERS' EQUITY 31,626,578 30,248,820
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 245,324,264 $ 241,919,696
============= ==============
The accompanying notes are an integral part of these consolidated
financial statements.
28
CCFNB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
2007 2006 2005
-------------- ------------- ------------
INTEREST INCOME
Interest and fees on loans $ 11,094,146 $ 10,659,884 $ 9,249,147
Interest and dividends on investment securities:
Taxable 2,422,357 1,729,638 1,505,644
Tax-exempt 185,727 268,233 362,543
Dividends 123,266 119,782 81,812
Federal funds sold 512,353 385,227 189,773
Deposits in other banks 145,088 38,807 52,766
-------------- ------------- ------------
TOTAL INTEREST INCOME 14,482,937 13,201,571 11,441,685
-------------- ------------- ------------
INTEREST EXPENSE
Deposits 4,057,897 3,462,683 2,829,972
Short-term borrowings 1,457,350 1,161,236 623,321
Long-term borrowings 670,033 677,047 677,835
-------------- ------------- ------------
TOTAL INTEREST EXPENSE 6,185,280 5,300,966 4,131,128
============== ============= ============
Net interest income 8,297,657 7,900,605 7,310,557
Provision for loan losses 30,000 175,000 90,000
-------------- ------------- ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 8,267,657 7,725,605 7,220,557
-------------- ------------- ------------
NON-INTEREST INCOME
Service charges and fees 942,463 845,618 828,430
Gain on sale of loans 181,652 45,343 40,046
Bank-owned life insurance income 284,500 253,080 247,036
Investment center income 399,232 219,383 118,443
Trust department 195,854 191,105 156,753
Investment securities gains, net 41 58 33,947
Other 301,192 345,796 288,685
-------------- ------------- ------------
TOTAL NON-INTEREST INCOME 2,304,934 1,900,383 1,713,340
-------------- ------------- ------------
NON-INTEREST EXPENSE
Salaries 3,000,517 2,615,369 2,323,825
Pensions and other employee benefits 896,437 836,533 790,878
Occupancy, net 491,147 458,330 456,713
Equipment 485,078 493,651 518,498
State shares tax 313,113 304,122 281,581
Professional services 314,887 229,164 258,891
Directors' fees 188,143 170,746 189,833
Stationery and supplies 158,869 136,963 130,018
Other 1,189,475 1,192,134 1,127,590
-------------- ------------- ------------
TOTAL NON-INTEREST EXPENSE 7,037,666 6,437,012 6,077,827
-------------- ------------- ------------
Income before income taxes 3,534,925 3,188,976 2,856,070
Income tax expense 888,037 777,335 630,512
-------------- ------------- ------------
NET INCOME $ 2,646,888 $ 2,411,641 $ 2,225,558
============== ============= ============
PER SHARE DATA
Net income $ 2.15 $ 1.93 $ 1.76
Cash dividends 0.82 0.78 0.74
Weighted average shares outstanding 1,233,339 1,249,844 1,262,171
The accompanying notes are an integral part of these consolidated
financial statements.
29
CCFNB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
Accumulated
Other
Common Comprehensive Retained Comprehensive Treasury
Stock Surplus Income Earnings Income (loss) Stock Total
------------ ------------ --------------- ------------- --------------- ----------- --------------
BALANCE AT $ 1,584,648 $ 3,384,761 $ 23,323,955 $ 213,133 - $ 28,506,497
DECEMBER 31, 2004
-------------------
Comprehensive
income:
Net income - - $ 2,225,558 2,225,558 - - 2,225,558
Change in net
unrealized
(loss) on
investment
securities
available-for-sale,
net of
reclassification
adjustment and
tax effects - - (516,630) - (516,630) - (516,630)
---------------
Total
comprehensive income 1,708,928
---------------
Issuance of 8,619
shares of common
stock under
dividend
reinvestment and
stock purchase
plans 10,773 224,941 - - - 235,714
Purchase of
18,000 shares of
treasury stock - - - - (505,700) (505,700)
Retirement of
18,000 shares of
treasury stock (22,500) (483,200) - - 505,700 -
Cash dividends
$.74 per share - - (933,013) - - (933,013)
------------ ------------- ------------- ---------------- ------------ ---------------
BALANCE AT
DECEMBER 31, 2005 1,572,921 $ 3,126,502 $ 24,616,500 ($303,497) - $ 29,012,426
Comprehensive
income:
Net income - - 2,411,641 2,411,641 - - 2,411,641
---------------
Change in net
unrealized gain
on investment
securities
available-for-sale,
net of
reclassification
adjustment and
tax effects - - 273,557 - 273,557 - 273,557
---------------
Total
comprehensive income 2,685,198
Issuance of 7,327
shares of common
stock under
dividend
reinvestment and
stock purchase
plans 9,159 195,435 - - - 204,594
Recognition of
employee stock
purchase plan
expense - 1,308 - - - 1,308
Purchase of
24,000 shares of
treasury stock - - - - (680,700) (680,700)
Retirement of
24,000 shares of
treasury stock (30,000) (650,700) - - 680,700 -
Cash dividends
$.78 per share - - (974,006) - - (974,006)
------------ -------------- ------------- --------------- ------------ ---------------
-------------------
BALANCE AT
DECEMBER 31, 2006 1,552,080 2,672,545 26,054,135 (29,940) - 30,248,820
Comprehensive
income:
Net income - - 2,646,888 2,646,888 - - 2,646,888
Change in net
unrealized gain
on investment
securities
available-for-sale,
net of
reclassification
adjustment and
tax effects - - 173,640 - 173,640 - 173,640
---------------
Total
comprehensive income $ 2,820,528
===============
Issuance of 8,872
shares of common
stock
Cumulative effect
of change in
accounting for
deferred
compensation
endorsement
split-dollar life
insurance
arrangements (12,570) (12,570)
Issuance of 8,872
shares of common
stock
under dividend
reinvestment and
stock purchase
plans 11,090 224,654 - - - 235,744
Recognition of
employee stock
purchase plan
expense - 1,576 - - - 1,576
Purchase of
24,000 shares of
treasury stock - - - - (657,600) (657,600)
Retirement of
24,000 shares of
treasury stock (30,000) (627,600) - - 657,600 -
Cash dividends
$.82 per share - - (1,009,920) - - (1,009,920)
------------ ------------- ------------- ---------------- ----------- ---------------
BALANCE AT
DECEMBER 31, 2007 $ 1,533,170 $ 2,271,175 $ 27,678,533 $ 143,700 $ - $ 31,626,578
============ ============= ============= ================ =========== ==============
The accompanying notes are an integral part of these consolidated
financial statements.
30
CCFNB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
2007 2006 2005
------------ ------------ ------------
OPERATING ACTIVITIES
Net income $ 2,646,888 $ 2,411,641 $ 2,225,558
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 30,000 175,000 90,000
Depreciation and amortization 409,076 376,277 414,214
Employee stock purchase plan expense 1,576 1,308 -
Premium amortization on investment securities 92,474 104,690 235,572
Discount accretion on investment securities (48,763) (17,398) (11,666)
Deferred income taxes (benefit) (24,582) (31,363) (79,970)
(Gain) on sales of investment securities available-for-sale (41) (58) (33,947)
(Gain) on sale of mortgage loans held for resale (181,652) (45,343) (40,046)
Proceeds from sale of mortgage loans held for resale 9,978,512 2,395,899 1,747,367
Originations of mortgage loans held for resale (10,214,986) (2,566,964) (1,707,320)
Loss on sales of other real estate owned - - -
Income from investment in insurance agency (11,565) (2,156) (11,366)
Increase in accrued interest receivable (87,626) (34,830) (143,058)
(Increase) decrease in other assets - net (115,119) (72,512) 84,212
Net increase in cash surrender value of bank owned life insurance (309,128) (286,857) (281,036)
Increase in accrued interest and other expenses 344,593 295,342 173,204
Increase (decrease) in other liabilities - net (25,164) 27,666 (27,483)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,484,493 2,730,342 2,634,235
------------ ------------ ------------
INVESTING ACTIVITIES
Purchase of investment securities available-for-sale (39,779,562) (15,704,899) (4,949,870)
Proceeds from sales, maturities and redemption of investment
securities available-for-sale 35,798,876 16,465,192 11,891,868
Proceeds from sales of other real estate owned - - -
Net increase in loans (449,375) (6,425,162) (4,300,909)
Purchase of premises and equipment (447,734) (579,915) (732,328)
------------ ------------ -------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (4,877,795) (6,244,784) 1,908,761
------------ ------------ ------------
FINANCING ACTIVITIES
Net increase (decrease) in deposits 1,653,984 4,437,649 (7,640,251)
Net increase in short-term borrowings 201,029 4,710,137 2,842,325
Repayment of long-term borrowings (160,202) (13,558) (12,774)
Acquisition of treasury stock (657,600) (680,700) (505,700)
Proceeds from issuance of common stock 235,744 204,594 235,714
Cash dividends paid (1,009,920) (974,006) (933,013)
------------ ------------ -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 263,035 7,684,116 (6,013,699)
------------ ------------ -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,130,267) 4,169,674 (1,470,703)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 15,531,498 11,361,824 12,832,527
------------ ------------ -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 13,401,231 $ 15,531,498 $ 11,361,824
============ ============ =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 6,134,655 $ 5,220,974 $ 4,084,220
Income taxes $ 888,663 $ 885,939 $ 635,267
The accompanying notes are an integral part of these consolidated
financial statements.
31
CCFNB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
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 the regulation of the Office of the Comptroller of the Currency, the Federal
Deposit Insurance Corporation and the Federal Reserve Bank of Philadelphia.
Procuring deposits and making loans are the major lines of business. The
deposits are mainly deposits of individuals and small businesses and the loans
are mainly real estate loans covering primary residences and small business
enterprises. The trust services, under the name of CCFNB and Co., include
administration of various estates, pension plans, self-directed IRA's and other
services. A third-party brokerage arrangement is also resident in the
Lightstreet branch. This investment center offers a full line of stocks, bonds
and other non-insured financial services.
On December 19, 2000, the Corporation became a Financial Holding Company
by having filed an election to do so with the Federal Reserve Board. The
Financial Holding Company status was required in order to acquire an interest in
a local insurance agency that occurred during January 2001.
SEGMENT REPORTING
The Corporation's banking subsidiary acts as an independent community
financial services provider, and offers traditional banking and related
financial services to individual, business and government customers. Through its
branch, internet banking, telephone and automated teller machine network, the
Bank offers a full array of commercial and retail financial services, including
the taking of time, savings and demand deposits; the making of commercial,
consumer and mortgage loans; and the providing of other financial services. The
Bank also performs personal, corporate, pension and fiduciary services through
its Trust Department as well as offering diverse investment products through its
investment center.
Management does not separately allocate expenses, including the cost of
funding loan demand, between the commercial, retail, trust and investment center
operations of the Corporation. As such, discrete financial information is not
available and segment reporting would not be meaningful.
USE OF ESTIMATES
The preparation of these consolidated financial statements in conformity
with accounting principles in the United States of America requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
these consolidated financial statements and the reported amounts of income and
expenses during the reporting periods. Actual results could differ from those
estimates.
INVESTMENT SECURITIES
The Corporation classifies its investment securities as either
"held-to-maturity" or "available-for-sale" at the time of purchase. Debt
securities are classified as held-to-maturity when the Corporation has the
ability and positive intent to hold the securities to maturity. Investment
securities held-to-maturity are carried at cost adjusted for amortization of
premiums and accretion of discounts to maturity.
32
Debt securities not classified as held-to-maturity and equity securities
included in the available-for-sale category, are carried at fair value, and the
amount of any unrealized gain or loss net of the effect of deferred income taxes
is reported as other comprehensive income in the Consolidated Statement of
Changes in Stockholders' Equity. Management's decision to sell
available-for-sale securities is based on changes in economic conditions
controlling the sources and uses of funds, terms, availability of and yield of
alternative investments, interest rate risk, and the need for liquidity.
The cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization and accretion, as well as interest and
dividends, is included in interest income from investments. Realized gains and
losses are included in net investment securities gains. The cost of investment
securities sold, redeemed or matured is based on the specific identification
method.
LOANS
Loans are stated at their outstanding principal balances, net of deferred
fees or costs, unearned income, and the allowance for loan losses. Interest on
loans is accrued on the principal amount outstanding, primarily on an actual day
basis. Non-refundable loan fees and certain direct costs are deferred and
amortized over the life of the loans using the interest method. The amortization
is reflected as an interest yield adjustment, and the deferred portion of the
net fees and costs is reflected as a part of the loan balance.
Real estate mortgage loans held for resale are carried at the lower of
cost or market on an aggregate basis. These loans are sold with limited recourse
to the Corporation.
Past Due Loans - Generally, a loan is considered past due when a payment
is in arrears for a period of 10 or 15 days, depending on the type of loan.
Delinquent notices are issued at this point and collection efforts will continue
on loans past due beyond 60 days which have not been satisfied. Past due loans
are continually evaluated with determination for charge-off being made when no
reasonable chance remains that the status of the loan can be improved.
Non-Accrual Loans - Generally, a loan is classified as non-accrual, with
the accrual of interest on such a loan discontinued when the contractual payment
of principal or interest has become 90 days past due or management has serious
doubts about further collectibility of principal or interest, even though the
loan currently is performing. A loan may remain on accrual status if it is in
the process of collection and is either guaranteed or well secured. When a loan
is placed on non-accrual status, unpaid interest credited to income in the
current year is reversed, and unpaid interest accrued in prior years is charged
against the allowance for loan losses. Certain non-accrual loans may continue to
perform wherein payments are still being received with those payments generally
applied to principal. Non-accrual loans remain under constant scrutiny and if
performance continues, interest income may be recorded on a cash basis based on
management's judgment as to collectibility of principal.
Impaired Loans - A loan is considered impaired when, based on current
information and events, it is probable that the Corporation will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. Under current accounting standards, the allowance for loan losses
related to impaired loans is based on discounted cash flows using the loan's
effective interest rate or the fair value of the collateral for certain
collateral dependent loans. The recognition of interest income on impaired loans
is the same as for non-accrual loans discussed above.
Allowance for Loan Losses - The allowance for loan losses is established
through provisions for loan losses charged against income. Loans deemed to be
uncollectible are charged against the allowance for loan losses, and subsequent
recoveries, if any, are credited to the allowance.
The allowance for loan losses is maintained at a level established by
management to be adequate to absorb estimated potential loan losses.
Management's periodic evaluation of the adequacy of the allowance for loan
losses is based on the Corporation's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay (including the timing of future payments), the
estimated value of any underlying collateral, composition of the loan portfolio,
current economic conditions, and other relevant factors. This evaluation is
inherently subjective as it requires material estimates, including the amounts
and timing of future cash flows expected to be received on impaired loans that
may be susceptible to significant change.
In addition, an allowance is provided for possible credit losses on
off-balance sheet credit exposures. The allowance is estimated by management and
is classified in other liabilities.
DERIVATIVES
The Bank has outstanding loan commitments that relate to the origination
of mortgage loans that will be held for resale. Pursuant to Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities" as amended by SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities", SFAS No. 149,
"Amendment of Statement 133 on Derivative and Hedging Activities" and the
guidance contained in the Derivatives Implementation Group Statement 133
Implementation Issue No. C 13, the Bank has accounted for such loan commitments
as derivative instruments. The outstanding loan commitments in this category did
not give rise to any losses for the years ended December 31, 2007, 2006 and
2005, as the fair market value of each outstanding loan commitment exceeded the
Bank's cost basis in each loan commitment.
33
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation
computed principally on the straight-line method over the estimated useful lives
of the assets. Maintenance and minor repairs are charged to operations as
incurred. The cost and accumulated depreciation of the premises and equipment
retired or sold are eliminated from the property accounts at the time of
retirement or sale, and the resulting gain or loss is reflected in current
operations.
MORTGAGE SERVICING RIGHTS
The Corporation originates and sells real estate loans to investors in the
secondary mortgage market. After the sale, the Corporation retains the right to
service these loans. When originated mortgage loans are sold and servicing is
retained, a servicing asset is capitalized based on relative fair value at the
date of sale. Servicing assets are amortized as an offset to other fees in
proportion to, and over the period of, estimated net servicing income. The
unamortized cost is included in other assets in the accompanying consolidated
balance sheets. The servicing rights are periodically evaluated for impairment
based on their relative fair value.
OTHER REAL ESTATE OWNED
Real estate properties acquired through, or in lieu of, loan foreclosure
are held for sale and are initially recorded at fair value on the date of
foreclosure establishing a new cost basis. After foreclosure, valuations are
periodically performed by management and the real estate is carried at the lower
of carrying amount or fair value less cost to sell and is included in other
assets. Revenues derived from and costs to maintain the assets and subsequent
gains and losses on sales are included in other non-interest income and expense.
BANK OWNED LIFE INSURANCE
The Corporation invests in Bank Owned Life Insurance (BOLI). Purchase of
BOLI provides life insurance coverage on certain employees with the Corporation
being owner and primary beneficiary of the policies.
INVESTMENT IN INSURANCE AGENCY
On January 2, 2001, the Corporation acquired a 50% interest in a local
insurance agency, a corporation organized under the laws of the Commonwealth
of Pennsylvania. The income or loss from this investment is accounted for under
the equity method of accounting. The carrying value of this investment as of
December 31, 2007 and 2006 was $212,631 and $201,066, respectively, and is
carried in other assets in the accompanying consolidated balance sheets.
INCOME TAXES
The provision for income taxes is based on the results of operations,
adjusted primarily for tax-exempt income. Certain items of income and expense
are reported in different periods for financial reporting and tax return
purposes. Deferred tax assets and liabilities are determined based on the
differences between the consolidated financial statement and income tax basis of
assets and liabilities measured by using the enacted tax rates and laws expected
to be in effect when the timing differences are expected to reverse. Deferred
tax expense or benefit is based on the difference between deferred tax asset or
liability from period to period.
PER SHARE DATA
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share", requires dual presentation of basic and diluted earnings per share.
Basic earnings per share is calculated by dividing net income by the weighted
average number of shares of common stock outstanding at the end of each period.
Diluted earnings per share is calculated by increasing the denominator for the
assumed conversion of all potentially dilutive securities. The Corporation does
not have any securities which have or will have a dilutive effect, so
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.
34
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 December 2007, the Financial Accounting Standards Board (FASB) issued
State of Financial Accounting Standards SFAS 141(R), "Business
Combinations". SFAS 141(R) will significantly change how entities apply the
acquisition method to business combinations. The most significant changes
affecting how the Corporation will account for business combinations under this
Statement include: the acquisition date will be the date the acquirer obtains
control; all (and only) identifiable assets acquired, liabilities assumed, and
noncontrolling interests in the acquiree will be stated at fair value on the
acquisition date; assets or liabilities arising from noncontractual
contingencies will be measured at their acquisition date fair value only if it
is more likely than not that they meet the definition of an asset or liability
on the acquisition date; adjustments subsequently made to the provisional
amounts recorded on the acquisition date will be made retroactively during a
measurement period not to exceed one year; acquisition-related restructuring
costs that do not meet the criteria in SFAS 146, "Accounting for Costs
Associated with Exit or Disposal Activities", will be expensed as incurred;
transaction costs will be expensed as incurred; reversals of deferred income tax
valuation allowances and income tax contingencies will be recognized in earnings
subsequent to the measurement period; and the allowance for loan losses of an
acquiree will not be permitted to be recognized by the acquirer. Additionally,
SFAS 141(R) will require new and modified disclosures surrounding subsequent
changes to acquisition-related contingencies, contingent consideration,
noncontrolling interests, acquisition-related transaction costs, fair values and
cash flows not expected to be collected for acquired loans, and an enhanced
goodwill rollforward.
The Corporation will be required to prospectively apply SFAS 141(R) to all
business combinations completed on or after January 1, 2009. Early adoption is
not permitted. For business combinations in which the acquisition date was
before the effective date, the provisions of SFAS 141(R) will apply to the
subsequent accounting for deferred income tax valuation allowances and income
tax contingencies and will require any changes in those amounts to be
recorded in earnings. Management is currently evaluating the effects that
SFAS 141(R) will have on the financial condition, results of operations,
liquidity, and the disclosures that will be presented in the consolidated
financial statements.
In December 2007, the FASB issued Statement of Financial Accounting
Standards SFAS 160, "Noncontrolling Interests in Consolidated Financial
Statements, an Amendment of ARB 51". SFAS 160 establishes new accounting and
reporting standards for noncontrolling interests in a subsidiary and for the
deconsolidation of a subsidiary. SFAS 160 will require entities to classify
noncontrolling interests as a component of stockholders' equity and will require
subsequent changes in ownership interest in a subsidiary to be accounted for as
an equity transaction. Additionally, SFAS 160 will require entities to recognize
a gain or loss upon the loss of control of a subsidiary and to remeasure any
ownership interest retained at fair value on that date. This statement also
requires expanded disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners. SFAS 160
is effective on a prospective basis for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2008, except for the
presentation and disclosure requirements, which are required to be applied
retrospectively. Early adoption is not permitted. The adoption of this
standard is not expected to have a material impact on the Corporation's
consolidated financial condition, results of operations or liquidity.
EITF 06-4, "Accounting for Deferred Compensation and Postretirement
Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements", was
issued in September 2006 and is effective for fiscal years beginning after
December 15, 2007 with earlier application permitted. EITF 06-4 requires that,
for split-dollar life insurance arrangements that provide a benefit to an
employee that extends to postretirement periods, an employer should recognize
a liability for future benefits in accordance with SFAS No. 106. EITF 06-4
requires that recognition of the effects of adoption should be either by (a)
a change in accounting principle through a cumulative-effect adjustment to
retained earnings as of the beginning of the year of adoption or (b) a change
in accounting principle through retrospective application to all prior periods.
The Corporation adopted this standard as of January 1, 2007 through a
cumulative-effect adjustment to beginning retained earnings. This adjustment
represented a decrease of $12,570 to retained earnings.
In November 2007, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 109, which addresses the valuation of written loan
commitments accounted for at fair value through earnings. The guidance in SAB
109 expresses the staff's view that the measurement of fair value for a written
loan commitment accounted for at fair value through earnings should incorporate
the expected net future cash flows related to the associated servicing of the
loan. Previously under SAB 105, Application of Accounting Principles to Loan
Commitments, this component of value was not incorporated into the fair value of
the loan commitment. The Corporation does not account for any written loan
commitments at fair value through earnings.
35
In June 2007, the FASB ratified the consensus reached in EITF 06-11,
"Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards".
EITF 06-11 applies to entities that have share-based payment arrangements that
entitle employees to receive dividends or dividend equivalents on equity-
classified nonvested shares when those dividends or dividend equivalents
are charged to retained earnings and result in an income tax deduction. Entities
that have share-based payment arrangements that fall within the scope of EITF
06-11 will be required to increase capital surplus for any realized income tax
benefit associated with dividends or dividend equivalents paid to employees for
equity classified nonvested equity awards. Any increase recorded to capital
surplus is required to be included in an entity's pool of excess tax benefits
that are available to absorb potential future tax deficiencies on share-based
payment awards. The Corporation will adopt EITF 06-11 on January 1, 2008 for
dividends declared on share-based payment awards subsequent to this date. The
impact of adoption is not expected to have a material impact on financial
condition, results of operations, or liquidity.
In April 2007, the FASB issued FSP 39-1, "Amendment of FASB Interpretation
No. 39, Offsetting of Amounts Related to Certain Contracts". FSP 39-1 permits
entities to offset fair value amounts recognized for multiple derivative
instruments executed with the same counterparty under a master netting
agreement. FSP 39-1 clarifies that the fair value amounts recognized for the
right to reclaim cash collateral, or the obligation to return cash collateral,
arising from the same master netting arrangement, should also be offset against
the fair value of the related derivative instruments.
Effective January 1, 2008, the Corporation adopted a
net presentation for derivative positions and related collateral entered into
under master netting agreements pursuant to the guidance in FIN 39 and FSP 39-1.
The adoption of this guidance would result in balance sheet reclassifications of
certain cash collateral-based short-term investments against the related
derivative liabilities and certain deposit liability balances against the
related fair values of derivative assets. The effects of these reclassifications
will fluctuate based on the fair values of derivative contracts but overall
would not have a material impact on either total assets or total liabilities.
The adoption of these standards will not have an impact on the Corporations
consolidated financial condition, results of operations or liquidity.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Liabilities". The statement allows an entity to elect to
measure certain financial assets and liabilities at fair value with changes in
fair value recognized in the income statement each period. The statement also
requires additional disclosures to identify the effects of an entity's fair
value election on its earnings. The election is irrevocable. The Corporation is
currently assessing whether it will elect to adopt SFAS 159.
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, 2007 did not
have a material impact on the Corporation's consolidated financial condition,
results of operations or liquidity.
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 adopt SFAS
157 on 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 was adopted by the Corporation on
January 1, 2007. The application of this FSP did not 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
36
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 were adopted by the Corporation on January 1, 2007. The adoption
of FIN 48 did not 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.
Effective January 1, 2006, the Corporation adopted this statement by
electing amortization method as its 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 was
effective for all financial instruments acquired or issued by the Corporation on
or after January 1, 2007 and the adoption of SFAS 155 did not have a material
impact 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 years ended December 31,
2007, 2006 and 2005, was approximately $103,853, $100,759, and $81,751,
respectively.
RECLASSIFICATIONS
Certain amounts in the consolidated financial statements of the prior
years have been reclassified to conform with presentations used in the 2007
consolidated financial statements. Such reclassifications had no effect on the
Corporation's consolidated financial condition or net income.
2. RESTRICTED CASH BALANCES
The Bank is required to maintain average reserve balances with the Federal
Reserve Bank. The amount required at December 31, 2007 was $1,351,000;
$1,190,000 was satisfied by vault cash; leaving $161,000 required to be
maintained daily. Additionally, as compensation for check clearing and other
services, compensating balances are required to be maintained with the Federal
Reserve Bank and other correspondent banks. At December 31, 2007, these balances
were $879,572.
37
3. INVESTMENT SECURITIES AVAILABLE-FOR-SALE
The amortized cost, related estimated fair value, and unrealized gains and
losses for investment securities were as follows at December 31, 2007 and 2006:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ----------- ---------- ------------
DECEMBER 31, 2007:
Obligation of U.S. Government Corporations
and Agencies:
Mortgage-backed $ 23,719,055 $ 135,204 $ 73,181 $ 23,781,078
Other 27,370,354 183,753 6,560 27,547,547
Obligations of state and political subdivisions 3,999,114 46,528 - 4,045,642
Marketable equity securities 1,105,426 93,737 161,754 1,037,409
Restricted equity securities 1,274,700 - - 1,274,700
------------ ----------- ---------- ------------
Total $ 57,468,649 $ 459,222 $ 241,495 $ 57,686,376
============ =========== ========== ============
DECEMBER 31, 2006:
Obligation of U.S. Government Corporations
and Agencies:
Mortgage-backed $ 21,297,544 $ 60,837 $ 211,246 $ 21,147,135
Other 25,245,358 - 179,415 25,065,943
Obligations of state and political subdivisions 4,654,404 49,282 926 4,702,760
Marketable equity securities 1,105,426 264,564 28,459 1,341,531
Restricted equity securities 1,228,900 - - 1,228,900
------------ ----------- ---------- ------------
Total $ 53,531,632 $ 374,683 $ 420,046 $ 53,486,269
============ =========== ========== ============
Securities available-for-sale with an aggregate fair value of $48,991,313
and $46,845,312 at December 31, 2007 and 2006, respectively, were pledged to
secure public funds, trust funds, securities sold under agreements to repurchase
and other balances of $41,100,080 and $38,330,191 at December 31, 2007 and 2006,
respectively, as required by law.
The amortized cost and estimated fair value of debt securities, by
expected maturity, are shown below at December 31, 2007. Expected maturities
will differ from contractual maturities, because some borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties. Other securities, marketable equity securities and restricted equity
securities are not considered to have defined maturities and are included in the
"Due after ten years" category:
Estimated Weighted
Amortized Fair Average
Cost Value Yield
----------- ----------- --------
Due in one year or less $10,369,355 $10,325,465 4.22%
Due after one year through five years 30,450,271 30,655,827 5.31%
Due after five years through ten years 12,946,272 13,054,125 5.73%
Due after ten years 3,702,751 3,650,959 5.20%
----------- -----------
Total $57,468,649 $57,686,376 5.22%
=========== ===========
Restricted equity securities consist of stock in the Federal Home Loan
Bank of Pittsburgh (FHLB), Federal Reserve Bank (FRB) and Atlantic Central
Bankers Bank (ACBB) and do not have a readily determinable fair value for
purposes of SFAS No. 115, because their ownership is restricted, and they can be
sold back only to the FHLB, FRB, ACBB or to another member institution.
Therefore, these securities are classified as restricted equity investment
securities, carried at cost, and evaluated for impairment.
There were no aggregate investments with a single issuer (excluding the U.
S. Government and its Agencies) which exceeded ten percent of consolidated
stockholders' equity at December 31, 2007. The quality rating of all obligations
of state and political subdivisions were "A" or higher, as rated by Moody's or
Standard and Poors. The only exceptions were local issues which were not rated,
but were secured by the full faith and credit obligations of the communities
that issued these securities. All of the state and political subdivision
investments were actively traded in a liquid market.
Proceeds from sales, maturities and redemptions of investments in debt and
equity securities classified as available-for-sale during 2007, 2006 and 2005
were $35,798,876, $16,465,192 and $11,891,868, respectively. Gross gains
realized on these sales were $41, $58 and $33,947, respectively. There were no
gross losses on the 2007, 2006 and 2005 sales.
38
In accordance with disclosures required by EITF No. 03-01, the summary
below shows the gross unrealized losses and fair value, aggregated by investment
category of those individual securities that have been in a continuous
unrealized loss position for less than or more than 12 months as of December 31,
2007 and 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
---------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
DECEMBER 31, 2007:
Obligations of U.S. Government
Corporations and Agencies:
Mortgage-backed $ 658,844 $ 2,569 $ 5,986,058 $ 70,612 $ 6,644,902 $ 73,181
Other - - 1,493,440 6,560 1,493,440 6,560
Obligations of state and political
subdivisions - - - - - -
Marketable Equity Securities 444,162 106,641 131,208 55,113 575,370 161,754
----------- ----------- ----------- ----------- ----------- -----------
Total $ 1,103,006 $ 109,210 $ 7,610,706 $ 132,285 $ 8,713,712 $ 241,495
=========== =========== =========== =========== =========== ===========
DECEMBER 31, 2006:
Obligations of U.S. Government
Corporations and Agencies:
Mortgage-backed $ 1,770,261 $ 6,534 $12,121,532 $ 204,712 $13,891,793 $ 211,246
Other 7,228,772 18,194 13,837,170 161,221 21,065,942 179,415
Obligations of state and political
subdivisions 322,540 926 - - 322,540 926
Marketable Equity Securities 45,320 8,954 112,542 19,505 157,862 28,459
----------- ----------- ----------- ----------- ----------- -----------
Total $ 9,366,893 $ 34,608 $26,071,244 $ 385,438 $35,438,137 $ 420,046
=========== =========== =========== =========== =========== ===========
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.
4. LOANS
Major classifications of loans at December 31,
2007 and 2006 consisted of:
2007 2006
------------- -------------
Commercial $ 8,073,652 $ 9,574,252
Tax-exempt 13,108,054 9,620,742
Real estate - construction 3,698,415 2,231,209
Real estate 132,453,112 135,008,963
Personal 4,058,756 4,117,586
------------- -------------
Total gross loans 161,391,989 160,552,752
Add (Deduct): Unearned discount (22,325) (18,975)
Unamortized loan costs, net of fees 90,698 107,215
------------- -------------
Loans, net of unearned income $ 161,460,362 $ 160,640,992
============= =============
Real estate loans held-for-sale in the amount of $418,126 at
December 31, 2007 and $216,408 at December 31, 2006 are included in real estate
loans above and are carried at the lower of cost or market.
The aggregate amount of demand deposits that have been reclassified as
loan balances at December 31, 2007 and 2006 are $113,436 and $49,200,
respectively.
39
Non-accrual loans at December 31, 2007, 2006 and 2005 were $77,298,
$91,204 and $706,800, respectively. The gross interest that would have been
recorded if all non-accrual loans during the year had been current in accordance
with their original terms and the amounts actually recorded in income were as
follows:
2007 2006 2005
-------- -------- --------
Gross interest due under terms $ 49,358 $130,183 $ 87,105
Amount included in income 3,857 90,173 28,215
-------- -------- --------
Interest income not recognized $ 45,501 $ 40,010 $ 58,890
======== ======== ========
At December 31, 2007, 2006 and 2005 the recorded investment in loans that
are considered to be impaired as defined by SFAS No. 114 was $72,515, $91,204
and $574,485, respectively. No additional charge to operations was required to
provide for the impaired loans specifically allocated allowance of $4,783,
$6,360 and $127,535, respectively at December 31, 2007, 2006 and 2005, since the
total allowance for loan losses is estimated by management to be adequate to
provide for the loan loss allowance required by SFAS No. 114 along with any
other potential losses. The average recorded investment in impaired loans during
the years ended December 31, 2007, 2006 and 2005 was approximately $56,506,
$275,362 and $902,384, respectively.
Loans past due 90 days or more and still accruing interest amounted to
$77,298 at December 31, 2007 and $67,115 at December 31, 2006, as presented in
accordance with AICPA Statement of Position 01-06, "Accounting by Certain
Entities (Including Entities with Trade Receivables) that Lend to or Finance the
Activities of Others," effective for fiscal years beginning after December 15,
2001.
At December 31, 2007, there were no significant commitments to lend
additional funds with respect to non-accrual and restructured loans.
Changes in the allowance for loan losses for the years ended December 31,
2007, 2006 and 2005 were as follows:
2007 2006 2005
----------- ----------- -----------
Balance, beginning of year $ 1,455,636 $ 1,552,576 $ 1,391,826
Provision charged to operations 30,000 175,000 90,000
Loans charged-off (83,778) (299,745) (54,306)
Recoveries 35,647 27,805 125,056
----------- ----------- -----------
Balance, end of year $ 1,437,505 $ 1,455,636 $ 1,552,576
=========== =========== ===========
5. MORTGAGE SERVICING RIGHTS
The Corporation commenced selling real estate mortgages during the last
quarter of 2002. The mortgage loans sold which are serviced for others are not
included in the accompanying Consolidated Balance Sheets. The unpaid principal
balances of mortgage loans serviced for others were $13,478,778 and $9,781,577
at December 31, 2007 and 2006, respectively. The balances of amortized mortgage
servicing rights included in other assets at December 31, 2007 and 2006 were
$49,113 and $26,779, respectively. Valuation allowances were not provided since
fair values were determined to exceed carrying values. Fair values were
determined using a discount rate of 6% and average expected lives of 3 to 6
years.
The following summarizes mortgage servicing rights capitalized and
amortized:
2007 2006
---------- ---------
Balance, January 1 $ 26,779 $ 36,366
Servicing asset additions 39,852 10,242
Amortization (17,518) (19,829)
--------- ---------
Balance, December 31 $ 49,113 $ 26,779
========= =========
The Bank does not require custodial escrow accounts in connection with the
foregoing loan servicing.
40
6. PREMISES AND EQUIPMENT
A summary of premises and equipment at StateDecember 31, 2007 and 2006
follows:
2007 2006
----------- -----------
Land $ 980,433 $ 737,526
Buildings and improvements 5,302,424 5,291,624
Furniture and equipment 3,807,990 3,786,436
----------- -----------
10,090,847 9,815,586
Less: Accumulated depreciation 5,003,399 4,766,796
----------- -----------
$ 5,087,448 $ 5,048,790
=========== ===========
Depreciation amounted to $409,076, $376,277 and $414,214 in 2007, 2006 and
2005, respectively.
7. DEPOSITS
Major classifications of deposits at StateDecember 31, 2007 and 2006
consisted of:
2007 2006
------------ ------------
Demand - non-interest bearing $ 19,394,241 $ 19,257,761
Demand - interest bearing 28,783,914 28,842,953
Savings 30,903,568 34,023,884
Time $100,000 and over 30,640,784 28,870,821
Other time 61,215,984 58,289,088
------------ ------------
Balance, December 31 $170,938,491 $169,284,507
============ ============
The following is a schedule reflecting remaining maturities of time
deposits of $100,000 and over at StateDecember 31, 2007:
2008 $ 22,392,663
2009 2,878,571
2010 1,771,557
2011 1,752,106
2012 and thereafter 1,845,887
------------
Total $ 30,640,784
------------
Interest expense related to time deposits of $100,000 or more was
$1,369,298 in 2007, $1,127,954 in 2006 and $910,413 in
2005.
8. SHORT-TERM BORROWINGS
Securities sold under agreements to repurchase and Federal Home Loan Bank
advances generally represented overnight or less than 30-day borrowings. U.S.
Treasury tax and loan notes for collections made by the Bank were payable on
demand. Short-term borrowings consisted of the following at StateDecember 31,
2007 and 2006:
2007 2006
--------------------------------------- -----------------------------------------------------------
Weighted Maximum Weighted Maximum
Ending Average Month End Average Ending Average Month End Average
Balance Balance Balance Rate Balance Balance Balance Rate
----------- ----------- ----------- ------- ----------- ----------- ----------- -------
Securities sold under
agreements
to repurchase $29,265,102 $31,204,896 $37,489,889 4.61% $28,709,389 $25,036,106 $29,739,452 4.57%
Other short-term borrowings - - 0.00% - 19,178 50,000 5.26%
U.S. Treasury tax and loan
notes 245,775 376,146 1,000,000 4.91% 600,459 315,805 901,384 4.72%
----------- ----------- ----------- ----------- ----------- -----------
Total $29,510,877 $31,581,042 $38,489,889 4.61% $29,309,848 $25,371,089 $30,690,836 4.58%
=========== =========== =========== =========== =========== ===========
41
9. LONG-TERM BORROWINGS
Long-term borrowings consist of advances due Federal Home Loan Bank. Under
terms of a blanket agreement, the loans were secured by certain qualifying
assets of the Bank which consisted principally of first mortgage loans and
certain investment securities. The carrying value of these collateralized items
was $11,136,908 at December 31, 2007. The Bank has lines of credit with
Atlantic Central Bankers Bank, PNC, Federal Reserve Bank Discount Window and
Federal Home Loan Bank in the aggregate amount of $129,032,000 at December
31, 2007. The unused portions of these lines of credit were $5,000,000,
$7,000,000, $2,000,000 and $103,735,000, respectively at December 31, 2007.
Long-term borrowings consisted of the following At December 31, 2007 and
2006:
2007 2006
------------ -----------
Loan dated November 28, 1997 in the original amount of $225,000 for a 10 year
term requiring monthly payments of $1,627 including interest at 6.12%, maturing
in 2007 with a final payment due of $146,690. Principal balances outstanding. $ - $ 156,074
Loan dated February 18, 1998 in the original amount of $2,000,000 for a 10 year
term with a 5 year put. Interest only is payable monthly at 5.48% with a
floating rate option, at the discretion of FHLB, at the end of 5 years
Principal balances outstanding. 2,000,000 2,000,000
Loan dated June 25, 1998 in the original amount of $72,000 for a 30 year term
requiring monthly payments of $425 including interest at 5.856%
Principal balances outstanding. 60,928 62,413
Loan dated February 23, 1999 in the original amount of $29,160 for a 20 year
term requiring monthly payments of $179 including interest at 5.50%. Principal
balances outstanding. 22,979 23,838
Loan dated August 20, 1999 in the original amount of $32,400 for a 20 year term
requiring monthly payments of $199 including interest at 5.50%. Principal
balances outstanding. 26,017 26,946
Loan dated January 27, 2000 in the original amount of $5,000,000 for a 10 year
term with a 1 year conversion date, at the discretion of FHLB, and a 3 month
conversion frequency thereafter. At December 31, 2007 the interest rate was 6.00%
Principal balances outstanding. 5,000,000 5,000,000
Loan dated August 16, 2000 in the original amount of $2,000,000 for a 10 year
term with a 6 month conversion date, at the discretion of FHLB, and a 3 month
conversion frequency thereafter. At December 31, 2007 the interest rate was 5.925%
Principal balances outstanding. 2,000,000 2,000,000
Loan dated September 20, 2000 in the original amount of $2,000,000 for a 10
year term with a 3 year conversion date, at the discretion of FHLB, and a 3 month
conversion frequency thereafter. At December 31, 2007 the interest rate was 6.10%
Principal balances outstanding. 2,000,000 2,000,000
Loan dated December 13, 2000 in the original amount of $32,092 for a 20 year
term requiring monthly payments of $197 including interest at 5.50%. Principal
balances outstanding. 26,984 27,840
------------ -----------
Total $ 11,136,908 $11,297,111
============ ===========
At December 31, 2007 the annual maturities of long-term debt were as
follows: $2,004,366 in 2008, $4,619 in 2009,
$9,004,885 in 2010, $5,167 in 2011, $5,466 in 2012 and $112,405 thereafter.
10. COMPREHENSIVE INCOME
The components of the change in other comprehensive income and related tax
effects are as follows:
Years Ended December 31,
---------------------------------
2007 2006 2005
--------- --------- ---------
Unrealized holding gains (losses) on available-for-sale
investment securities $ 263,050 $ 414,427 $(816,725)
Reclassification adjustment for gains realized in income 41 58 33,947
--------- --------- ---------
Change in unrealized gains (losses) before tax effect 263,091 414,485 (782,778)
Tax effect 89,451 140,928 266,148
--------- --------- ---------
Net change in unrealized gains (losses) $ 173,640 $ 273,557 $(516,630)
========= ========= =========
42
11. STOCKHOLDERS' EQUITY AND STOCK PURCHASE PLANS
The Amended Articles of Incorporation contain a provision that permits the
Corporation to issue warrants for the purchase of shares of common stock, par
value $1.25 per share (the "Common Stock"), at below market prices in the event
any person or entity acquires 25% or more of the Common Stock.
The Corporation offers employees a stock purchase plan. The maximum number
of shares of the Common Stock to be issued under this plan shall be 20,000. In
addition, the Corporation may choose to purchase shares on the open market to
facilitate this plan. A participating employee may annually elect deductions of
at least 1% of base pay, but not more than 10% of base pay, to cover purchases
of shares under this plan. A participating employee shall be deemed to have been
granted an opportunity to purchase a number of shares of the Common Stock equal
to the annual aggregate amount of payroll deductions elected by the employee
divided by 90% of the fair market value of Common Stock on the first day of
January in each year. Stock issued to participating employees under the plan for
the most recent three year period was:
Per Share
----------------------
Employees' Market
Number Purchase Value
of Shares Price of Shares
--------- ---------- ---------
Date Issued:
2007 557 $ 25.50 $ 28.33
2006 464 $ 25.38 $ 28.20
2005 365 $ 24.52 $ 27.24
The Corporation also offers to its stockholders a Dividend Reinvestment
and Stock Purchase Plan. Under the plan, the Corporation registered with the
Securities and Exchange Commission 500,000 shares of the Common Stock to be sold
pursuant to the plan. The price per share for purchases under this plan is
determined at each quarterly dividend payment date by the reported average mean
between the bid and asked prices for the shares at the close of trading in the
over-the-counter market on the trading day immediately preceding the quarterly
dividend payment date. Participation in this plan by shareholders began in June
1995. Shares issued under this plan for the most recent three year period were:
Number Total
of Shares Proceeds
--------- ---------
Year:
2007 8,315 $ 221,539
2006 6,863 $ 192,817
2005 8,254 $ 226,765
12. INCOME TAXES
The provision for income tax expense consisted of the following
components:
2007 2006 2005
--------- --------- ---------
Federal:
Current $ 912,619 $ 808,698 $ 710,482
Deferred (benefit) (24,582) (31,363) (79,970)
888,037 777,335 630,512
State:
Current - - -
Deferred (benefit)
- - -
--------- --------- ---------
- - -
--------- --------- ---------
Total Provision for Taxes $ 888,037 $ 777,335 $ 630,512
========= ========= =========
43
A reconciliation of the actual provision for federal income tax expense
and the amounts which would have been recorded based upon the statutory rate of
34% follows:
2007 2006 2005
--------------------- ----------------------- ------------------
Amount % Rate Amount % Rate Amount % Rate
----------- ------ ----------- ------- --------- -------
Provision at statutory rate $ 1,201,875 34.0 $ 1,084,252 34.0 $ 971,064 34.0
Tax-exempt income (236,093) (6.7) (234,510) (7.4) (271,565) (9.5)
Non-deductible expenses 31,895 0.9 27,627 0.9 24,830 0.8
Bank-owned life insurance income - net (96,730) (2.7) (86,047) (2.7) (83,992) (2.9)
Other, net (12,910) (0.4) (13,987) (0.4) (9,825) (0.3)
----------- ---- ----------- ---- --------- ----
Actual federal income tax and rate $ 888,037 25.1 $ 777,335 24.4 $ 630,512 22.1
=========== ==== =========== ==== ========= ====
Income taxes applicable to realized security gains included in the
provision for income taxes totaled $14 in 2007, $20 in 2006 and $11,542 in 2005.
The net deferred tax asset recorded by the Corporation consisted of the
following tax effects of temporary timing differences at December 31, 2007,
2006 and 2005:
2007 2006 2005
--------- --------- ---------
Deferred tax assets:
Allowance for loan losses $ 386,990 $ 393,154 $ 402,059
Allowance for off balance sheet losses 3,230 3,230 3,230
Deferred compensation and director's fees 337,861 292,665 256,279
Non-accrual loan interest 9,122 8,363 20,023
Mortgage servicing rights 13,347 13,535 12,640
Charitable contributions - 5,100 -
Unrealized investment securities losses - 15,424 156,347
--------- --------- ---------
Total 750,550 731,471 850,578
========= ========= =========
Deferred tax liabilities:
Loan fees and costs (60,080) (59,970) (66,993)
Accretion (14,106) (2,202) (1,320)
Depreciation (322,932) (328,957) (333,096)
Investment in insurance agency (15,423) (11,491) (10,758)
Unrealized investment securities gains (74,027) - -
Total (486,568) (402,620) (412,167)
--------- --------- ---------
Net deferred tax asset $ 263,982 $ 328,851 $ 438,411
========= ========= =========
The above net deferred asset is included in other assets on the
consolidated balance sheets. It is anticipated that all tax assets shown above
will be realized, accordingly, no valuation allowance was provided.
The Corporation and its subsidiary file a consolidated federal income tax
return. The Parent Company is also required to file a separate state income tax
return and has available state operating loss carryforwards totaling $858,045.
The losses expire through 2027. The related deferred net state tax asset in the
amount of $81,187 has been fully reserved and is not reflected in the net tax
asset since management is of the opinion that such assets will not be realized
in the foreseeable future.
44
13. EMPLOYEE BENEFIT AND DEFERRED COMPENSATION PLANS
EMPLOYEE BENEFIT PLANS
The Bank maintains a 401K salary deferred profit sharing plan for the
benefit of its employees. Under the salary deferral component, employees may
elect to contribute up to 25% of their compensation with the possibility that
the Bank may make matching contributions to the plan. Under the profit sharing
component, contributions are made at the discretion of the Board of Directors.
Matching contributions amounted to $91,435, $75,444 and $66,207 in 2007,
2006 and 2005, respectively. There were no discretionary contributions in 2007,
2006 and 2005.
DEFERRED COMPENSATION PLANS
DIRECTORS
During 1990, the Bank entered into agreements with two directors to
establish non-qualified deferred compensation plans for each of these directors.
In 1994, additional plans were established for these two directors plus another
director. These plans were limited to four-year terms. The Bank may, however,
enter into subsequent similar plans with its directors. Each of the
participating directors deferred the payment to himself of certain directors'
fees to which he was entitled. Each director's future payment is based upon the
cumulative amount of deferred fees together with interest currently accruing
thereon at the rate of 8% per annum, subject to change by the Board of
Directors. The total accrued liability as of December 31, 2007 and 2006 was
$206,521 and $208,734, respectively, relating to these directors' deferred
compensation agreements.
During 2003, the directors were given the option of receiving or deferring
their directors' fees under a non-qualified deferred compensation plan which
allows the director to defer such fees until the year following the expiration
of the directors' term. Payments are then made over specified terms under these
arrangements up to a ten year period. Interest is to accrue on these deferred
fees at a five year certificate of deposit rate, which was 4% in 2007. The
certificate of deposit rate will reset in January 2008. Three directors have
elected to participate in this program and the total accrued liability as of
December 31, 2007 and 2006 was $171,178 and $115,687, respectively.
Total directors fees, including amounts currently paid for the years ended
December 31, 2007, 2006 and 2005 were $188,143, $170,746 and $189,833,
respectively, and the total accrued liability under the directors deferred
compensation plans as of December 31, 2007 and 2006 was $377,699 and $324,421
respectively.
EXECUTIVE OFFICERS
In 1992, the Bank entered into agreements with two executive officers to
establish non-qualified deferred compensation plans. Each officer deferred
compensation in order to participate in this Deferred Compensation Plan. If the
officer continued to serve as an officer of the Bank until he attained
sixty-five (65) years of age, the Bank agreed to pay him 120 guaranteed
consecutive monthly payments commencing on the first day of the month following
the officer's 65th birthday. Each officer's guaranteed monthly payment was based
upon the future value of life insurance purchased with the compensation the
officer has deferred. The Bank obtained life insurance (designating the Bank as
the beneficiary) on the life of each participating officer in an amount which is
intended to cover the Bank's obligations under the Deferred Compensation Plan,
based upon certain actuarial assumptions.
During 2002, the agreements with the two executive officers were modified.
Under one agreement, the executive officer will receive $225,000 payable monthly
over a 10 year period commencing in February 2003. Under another agreement,
another executive officer will receive $175,000 payable monthly over a 10 year
period commencing in April 2003. This second agreement also provides
post-employment health care benefits to the executive officer until the
attainment of age 65. As of December 31, 2007 and 2006, the net cash value of
insurance policies was $412,190 and $396,322, respectively, and the total
accrued liability, equal to the present value of these obligations, was $182,336
and $212,768, respectively, relating to these executive officers' and directors'
deferred compensation agreements. The post-employment health care benefit has
expired.
The Bank entered into agreements to provide post-retirement benefits to
employees in the form of life insurance payable to the employee's upon
their death through endorsement split dollar life insurance arrangements. The
Corporation adopted the guidance in EITF-06-4 (See recent accounting
pronouncements in Note 1) effective January 1, 2007 to recognize the liability
for future benefits in the amount of $12,570.
In April 2003, the Bank entered into non-qualified deferred compensation
agreements with three executive officers to provide supplemental retirement
benefits commencing with the executive's retirement and ending 15 years
thereafter. The deferred compensation expense related to these agreements for
the years ended December 31, 2007, 2006 and 2005 was $110,080, $97,244 and
$91,507 respectively, and the total accrued liability as of December 31,
2007 and 2006 was $433,672 and $323,592, respectively.
Total deferred compensation expense for current and retired executive
officers for the years ended December 31, 2007, 2006 and 2005 was $119,649,
$108,239 and $ 105,004, respectively, and the total accrued liability under the
executive officers' deferred compensation plans as of December 31, 2007 and 2006
was $628,577 and $536,360, respectively.
45
14. LEASE COMMITMENTS AND CONTINGENCIES
The Corporation's banking subsidiary entered into an operating lease on
October 23, 2004 for the rental of a branch banking facility. The initial lease
is for a term of five years, with two options available to renew for an
additional term of five years each. Rent expense for this facility was $28,000
for the year ended December 31, 2007. Minimum rental payments required under
this lease are 2008 - $28,000 and 2009 - $22,957.
At December 31, 2007 the Bank was leasing some minor office equipment
under operating leases.
Rental expense under operating leases for the years ended December 31,
2007, 2006 and 2005 was $496, $1,070, and $817, respectively.
The Corporation's banking subsidiary entered into an operating lease on
July 2, 2005 for the use of a 2005 GMC Yukon. The lease term is 36 months. Lease
expense for the year ended December 31, 2007 was $7,175. Minimum rental payments
required are as follows: 2008 - $3,587.
In the normal course of business, there were various pending legal actions
and proceedings which were not reflected in the consolidated financial
statements. In the opinion of management, the consolidated financial statements
have not and will not be affected materially by the outcome of such actions and
proceedings.
15. ACQUISITION COMMITMENT
On November 29, 2007, CCFNB Bancorp, Inc. (CCFNB Bancorp) entered into a
definitive agreement with Columbia Financial Corporation ("Columbia Financial")
for CCFNB Bancorp to acquire Columbia Financial for approximately 1,030,407
shares of CCFNB Bancorp common stock. Based upon CCFNB Bancorp closing common
stock price on November 29, 2007, the consideration represents approximately
$26,223,842 in stock or approximately $18.32 per Columbia Financial share.
Columbia Financial based in Bloomsburg, Pennsylvania, with approximately
$315 million in assets and $259 million in deposits, provides banking and other
financial services, including trust, investment and brokerage, to individuals
and businesses in Columbia, Northumberland and Luzerne Counties, Pennsylvania.
The transaction is expected to close in the third quarter of 2008 and is subject
to customary closing conditions, including regulatory approvals and the
approvals of CCFNB Bancorp and Columbia Financial stockholders.
16. RELATED PARTY TRANSACTIONS
Certain directors and executive officers of the Corporation and the Bank,
as well as companies in which they are principal owners (i.e., at least 10%
ownership), were indebted to the Bank at December 31, 2007 and 2006. These loans
were made on substantially the same terms and conditions, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with unrelated parties. These loans did not present more than the
normal risk of collectibility nor present other unfavorable features.
A summary of the activity on the related party loans, comprised of five
directors, seven executive officers and their related companies, consisted of
the following:
2007 2006
----------- -----------
Balance, beginning of year $ 931,299 $ 1,245,846
Additions 600,111 483,787
Repayments (605,654) (798,334)
----------- -----------
Balance, end of year $ 925,756 $ 931,299
=========== ===========
The above loans represent funds drawn and outstanding at the date of the
accompanying consolidated financial statement. Commitments by the Bank to
related parties on loan commitments and standby letters of credit for 2007 and
2006 presented an off-balance sheet risk to the extent of undisbursed funds in
the amount of $917,585 and $623,567, respectively.
Deposits from certain officers and directors and/or their affiliated
companies held by the Bank amounted to $1,727,986 and $1,845,404 at December 31,
2007 and 2006, respectively.
17. REGULATORY MATTERS
Dividends are paid by the Corporation to shareholders from its assets
which are mainly provided by dividends from the Bank. However, national banking
laws place certain restrictions on the amount of cash dividends allowed to be
paid by the Bank to the Corporation. Generally, the limitation provides that
dividend payments may not exceed the Bank's current year's retained income plus
46
retained net income for the preceding two years. Accordingly, in 2008, without
prior regulatory approval, the Bank may declare dividends to the Corporation in
the amount of $2,067,807 plus additional amounts equal to the net income earned
in 2008 for the period January 1, 2008, through the date of declaration, less
any dividends which may have already been paid in 2008. Regulations also limit
the amount of loans and advances from the Bank to the Corporation to 10% of
consolidated net assets.
The Corporation is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Corporation's consolidated financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Corporation must meet specific capital guidelines that involve
quantitative measures of the Corporation's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices. The
Corporation's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors. Management believes, as of December 31, 2007 and 2006, that the
Corporation and the Bank met all capital adequacy requirements to which they are
subject.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation to maintain minimum amounts and ratios (set forth in the
table below) of Total and Tier I Capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I Capital (as defined) to average
assets (as defined).
As of December 31, 2007, the most recent notification from the Office of
the Comptroller of the Currency categorized the Bank as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
The Corporation's actual capital amounts (in thousands) and ratios are
presented in the following table:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------- ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------ -------- ------ -------- ------
As of December 31, 2007:
Total Risk-Based Capital $ 32,930 18.93% $ 13,917 8.00% $ 17,396 10.00%
(To risk-weighted assets)
Tier I Capital $ 31,483 18.10% $ 6,958 4.00% $ 10,436 6.00%
(To risk-weighted assets)
Tier I Capital $ 31,483 12.71% $ 9,908 4.00% $ 12,385 5.00%
(To average assets)
As of December 31, 2006:
Total Risk-Based Capital $ 31,685 20.29% $ 12,493 8.00% $ 15,616 10.00%
(To risk-weighted assets)
Tier I Capital $ 30,063 19.25% $ 6,247 4.00% $ 9,370 6.00%
(To risk-weighted assets)
Tier I Capital $ 30,063 12.71% $ 9,461 4.00% $ 11,827 5.00%
(To average assets)
The Corporation's capital ratios are not materially different from those
of the Bank.
18. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
The Corporation is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit,
standby letters of credit and commercial letters of credit. Those instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the consolidated balance sheets. The contract or
notional amounts of those instruments reflect the extent of involvement the
Corporation has in particular classes of financial instruments. The Corporation
does not engage in trading activities with respect to any of its financial
instruments with off-balance sheet risk.
47
The Corporation may require collateral or other security to support financial
instruments with off-balance sheet credit risk. The contract or notional amounts
at December 31, 2007 and 2006 were as follows:
2007 2006
------------ ------------
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit $ 20,492,020 $ 10,751,463
Financial standby letters of credit 755,686 867,504
Performance standby letters of credit 922,858 529,636
Dealer floor plans 66,372 437,218
Loans for resale 418,126 50,750
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Because many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Corporation evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Corporation upon extension of credit, is
based on management's credit evaluation of the counter-party. Collateral held
varies but may include accounts receivable, inventory, property, plant,
equipment and income-producing commercial properties.
Standby letters of credit and commercial letters of credit are conditional
commitments issued by the Corporation to guarantee payment to a third party when
a customer either fails to repay an obligation or fails to perform some
non-financial obligation. The credit risk involved in issuing letters of credit
is essentially the same as that involved in extending loan facilities to
customers. The Corporation holds collateral supporting those commitments for
which collateral is deemed necessary. The extent of collateral held for those
commitments at December 31, 2007 varied from 0 percent to 100 percent; the
average amount collateralized was 19.2 percent.
The Corporation's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to extend credit
and letters of credit is represented by the contractual notional amount of those
instruments. The Corporation uses the same credit policies in making commitments
and conditional obligations, as it does for on-balance sheet instruments.
The Corporation granted commercial, consumer and residential loans to
customers primarily within Pennsylvania. Of the total loan portfolio 84.4% was
for real estate loans, principally residential. It was the opinion of management
that the high concentration did not pose an adverse credit risk. Further, it was
management's opinion that the remainder of the loan portfolio was balanced and
diversified to the extent necessary to avoid any significant concentration of
credit.
19. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures
about Fair Value of Financial Instruments", requires disclosure of fair value
information about financial instruments, whether or not required to be
recognized in the consolidated balance sheet, for which it is practicable to
estimate such value. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
These techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. Fair value estimates
derived through these techniques cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. SFAS No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Corporation.
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments:
CASH AND OTHER SHORT-TERM INSTRUMENTS
Cash and due from banks, interest bearing deposits with other banks,
and Federal Funds sold had carrying values which were a reasonable
estimate of fair value. Accordingly, fair values regarding these
instruments were provided by reference to carrying values reflected on the
consolidated balance sheets.
INVESTMENT SECURITIES
The fair value of investment securities which included mortgage
backed securities were estimated based on bid prices published in
financial newspapers or bid quotations received from securities dealers.
48
LOANS
Fair values were estimated for categories of loans with similar
financial characteristics. Loans were segregated by type such as
commercial, tax-exempt, real estate mortgages and consumer. For estimation
purposes, each loan category was further segmented into fixed and
adjustable rate interest terms and also into performing and non-performing
classifications.
The fair value of each category of performing loans was calculated
by discounting future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit ratings and for the
same remaining maturities.
Fair value for non-performing loans was based on management's
estimate of future cash flows discounted using a rate commensurate with
the risk associated with the estimated future cash flows. The assumptions
used by management were judgmentally determined using specific borrower
information.
CASH SURRENDER VALUE OF BANK OWNED LIFE INSURANCE
The fair values are equal to the current carrying value.
DEPOSITS
Under SFAS No. 107, the fair value of deposits with no stated
maturity, such as Demand Deposits, Savings Accounts, and Money Market
Accounts, was equal to the amount payable on demand At StateDecember 31,
2007 and 2006.
Fair values for fixed rate Certificates of Deposit were estimated
using a discounted cash flow calculation that applied interest rates
currently being offered on certificates to a schedule of aggregated
expected monthly maturities on time deposits.
SHORT-TERM BORROWINGS
The carrying amounts of federal funds purchased and securities sold
under agreements to repurchase and other short-term borrowings
approximated their fair values.
LONG-TERM BORROWINGS
The fair values of long-term borrowings, other than capitalized
leases, are estimated using discounted cash flow analyses based on the
Corporation's incremental borrowing rate for similar instruments. The
carrying amounts of capitalized leases approximated their fair values,
because the incremental borrowing rate used in the carrying amount
calculation was at the market rate.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
Management estimated that there were no material differences between
the notional amount and the estimated fair value of those off-balance
sheet items, because they were primarily composed of unfunded loan
commitments which were generally priced at market value at the time of
funding.
49
At StateDecember 31, 2007 and 2006, the carrying values and estimated fair
values of financial instruments are presented in the table below:
2007 2006
------------------------------ --------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------- ------------- ------------- -------------
Financial Assets:
Cash and short-term investments $ 13,401,231 $ 13,401,231 $ 15,531,498 $ 15,531,498
Investment securities 57,686,376 57,686,376 53,486,269 53,486,269
Loans:
Commercial 8,073,652 8,035,579 9,574,252 9,520,265
Tax-exempt 13,108,054 12,829,364 9,620,742 9,492,663
Real estate - construction 3,698,415 3,708,191 2,231,209 2,234,882
Real estate 132,453,112 132,257,558 135,008,963 134,678,025
Personal 4,058,756 4,213,237 4,117,586 4,254,343
------------- ------------- ------------- -------------
Gross loans 161,391,989 161,043,929 160,552,752 160,180,178
Add (Deduct): Unearned discount (22,325) - (18,975) -
Unamortized loan fees, net of costs 90,698 - 107,215 -
------------- ------------- ------------- -------------
Loans, net of unearned income 161,460,362 161,043,929 160,640,992 160,180,178
Allowance for losses 1,437,505 - 1,455,636 -
------------- ------------- ------------- -------------
Net loans $ 160,022,857 $ 161,043,929 $ 159,185,356 $ 160,180,178
============= ============= ============= =============
Cash surrender value of bank owned life insurance $ 7,076,208 $ 7,076,208 $ 6,767,080 $ 6,767,080
Financial Liabilities:
Deposits:
Demand - non-interest bearing $ 19,394,241 $ 19,394,241 $ 19,257,761 $ 19,257,761
Demand - interest bearing 28,783,914 28,783,914 28,842,953 28,842,953
Savings 30,903,568 30,903,568 34,023,884 34,023,884
Time - $100,000 and over 30,640,784 30,770,430 28,870,821 28,765,326
Other time 61,215,984 61,103,537 58,289,088 58,173,492
------------- ------------- ------------- -------------
Total Deposits $ 170,938,491 $ 170,955,690 $ 169,284,507 $ 169,063,416
============= ============= ============= =============
Short-Term Borrowings $ 29,510,877 $ 29,510,877 $ 29,309,848 $ 29,309,848
Long-Term Borrowings 11,136,909 11,708,033 11,297,111 11,772,313
Off-Balance Sheet Assets (Liabilities):
Commitments to extend credit $ 20,492,020 $ 10,751,460
Standby letters of credit 755,686 867,504
Performance standby letters of credit 922,858 529,636
Dealer floor plans 66,372 437,218
50
20. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for CCFNB Bancorp, Inc. (Parent Company
only) was as follows:
December 31,
----------------------------
BALANCE SHEETS 2007 2006 2005
------------------------------------------------------ ------------ ------------ ------------
Assets
Cash $ 131,321 $ 162,071 $ 155,207
Investment in subsidiary 30,090,437 28,606,146 27,437,827
Investment in other equity securities 1,037,409 1,341,531 1,264,946
Prepayments and other assets 401,713 260,825 198,909
Receivable from subsidiary - - 38,014
------------ ------------ ------------
Total Assets $ 31,660,880 $ 30,370,573 $ 29,094,903
============ ============ ============
Liabilities and Stockholders' Equity
Accrued expenses and other liabilities $ 15,423 $ 91,766 $ 82,477
Payable to subsidiary 18,879 29,987 -
------------ ------------ ------------
Total Liabilities 34,302 121,753 82,477
============ ============ ============
Stockholders' Equity
Common stock 1,533,170 1,552,080 1,572,921
Surplus 2,271,175 2,672,545 3,126,502
Retained earnings 27,678,533 26,054,135 24,616,500
Accumulated other comprehensive (loss) 143,700 (29,940) (303,497)
------------ ------------ ------------
Total Stockholders' Equity 31,626,578 30,248,820 29,012,426
------------ ------------ ------------
Total Liabilities and Stockholders' Equity $ 31,660,880 $ 30,370,573 $ 29,094,903
============ ============ ============
Years Ended December 31,
-----------------------------------------
STATEMENTS OF INCOME 2007 2006 2004
------------------------------------------------------------------------------- ----------- ----------- -----------
Income
Dividends from subsidiary bank $ 1,533,595 $ 1,478,298 $ 1,223,000
Dividends - other 45,722 44,469 40,660
Securities gains 41 58 33,947
Other - - -
Interest 1,463 1,520 1,416
----------- ----------- -----------
Total Income 1,580,821 1,524,345 1,299,023
Operating expenses 89,222 82,367 109,927
----------- ----------- -----------
Income Before Taxes and Equity in Undistributed
Net Income of Subsidiary and Insurance Agency 1,491,599 1,441,978 1,189,096
Applicable income tax (benefit) (21,225) (22,199) (17,340)
----------- ----------- -----------
Income Before Equity in Undistributed Net Income of Subsidiary
and Equity in Income from Insurance Agency 1,512,824 1,464,177 1,206,436
Equity in undistributed income of subsidiary 1,122,499 945,308 1,007,756
Equity in income from investment in insurance agency 11,565 2,156 11,366
----------- ----------- -----------
Net Income $ 2,646,888 $ 2,411,641 $ 2,225,558
=========== =========== ===========
STATEMENTS OF CASH FLOWS
Operating Activities:
Net income $ 2,646,888 $ 2,411,641 $ 2,225,558
Adjustments to reconcile net income to net cash provided by operating
activities:
Deferred income taxes 3,932 733 3,864
Securities gains (41) (58) (33,947)
Equity in undistributed net income of subsidiary (1,122,499) (945,308) (1,007,756)
(Income) from investment in insurance agency (11,565) (2,156) (11,366)
(Increase) decrease in prepayments and other assets (106,198) (59,760) 57,733
(Increase) decrease in receivable from subsidiary - 39,322 (38,014)
Increase (decrease) in payable to subsidiary (9,531) 29,986 (34,862)
Increase (decrease) in income taxes and accrued expenses payable - (17,482) 17,482
----------- ----------- -----------
Net Cash Provided By Operating Activities 1,400,986 1,456,918 1,178,692
----------- ----------- -----------
Investing Activities:
Purchase of equity securities - - (140,707)
Proceeds from sale of equity securities 41 58 142,087
----------- ----------- -----------
Net Cash Provided By Investing Activities 41 58 1,380
----------- ----------- -----------
Financing Activities:
Acquisition of treasury stock (657,600) (680,700) (505,700)
Proceeds from issuance of common stock 235,743 204,594 235,714
Cash dividends (1,009,920) (974,006) (933,013)
----------- ----------- -----------
Net Cash (Used In) Financing Activities (1,431,777) (1,450,112) (1,202,999)
----------- ----------- -----------
Increase (Decrease) in Cash and Cash Equivalents (30,750) 6,864 (22,927)
Cash and Cash Equivalents at Beginning of Year 162,071 155,207 178,134
----------- ----------- -----------
Cash and Cash Equivalents at End of Year $ 131,321 $ 162,071 $ 155,207
----------- ----------- -----------
51
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of CCFNB Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of CCFNB
Bancorp, Inc. and Subsidiary as of December 31, 2007 and 2006, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 2007.
These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial state\ments based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The
Corporation is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audit included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Corporation's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of CCFNB
Bancorp, Inc. and Subsidiary as of December 31, 2007 and 2006, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2007 are in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Corporation
changed its method of accounting for endorsement split-dollar life insurance
arrangements in accordance with the Emerging Issues Task Force (EITF) Issue No.
06-4 "Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Endorsement Split-Dollar Life Insurance Arrangements" as of January 1, 2007.
/s/ J. H. Williams & Co., LLP
J. H. Williams & Co., LLP
Kingston, Pennsylvania
February 28, 2008
52
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF OUR DISCLOSURE CONTROLS AND INTERNAL CONTROLS. We evaluated the
effectiveness of the design and operation of our "disclosure controls and
procedures" (Disclosure Controls), and our "internal controls and procedures for
financial reporting" (Internal Controls). This evaluation (the Controls
Evaluation) was done under the supervision and with the participation of
management, including our Chief Executive Officer (CEO) and Chief Financial
Officer (Treasurer). Rules adopted by the SEC require that, in this section of
this report, we present the conclusions of the CEO and the Treasurer about the
effectiveness of our Disclosure Controls and Internal Controls as of
December 31, 2007.
CEO AND CFO CERTIFICATIONS. Appearing at Exhibits 31.1, 31.2, 32.1 and 32.2 of
this report are two separate forms of "Certifications" for the CEO and the
Treasurer. This section of this report which you are currently reading is the
information concerning the Controls Evaluation referred to in the Section 302
Certification and this information should be read in conjunction with the
Section 302 Certification for a more complete understanding of the topics
presented.
DISCLOSURE CONTROLS AND INTERNAL CONTROLS. Disclosure Controls are procedures
that are designed with the objective of ensuring that information required to be
disclosed in our reports filed under the Securities Exchange Act of 1934
(Exchange Act), such as this report, is recorded, processed, summarized and
reported within the time periods specified in the Commission's rules. Disclosure
Controls are also designed with the objective of ensuring that such information
is accumulated and communicated to our management, including the CEO and
Treasurer, as appropriate, to allow timely decisions regarding required
disclosure.
Our Company has created a disclosure committee. The committee consists of nine
key management personnel. The purpose of the committee is to verify that all
internal controls and procedures are in place in each area of authority. Whistle
Blowing procedures have been put in place and communicated to all directors and
employees. The disclosure committee meets quarterly before each quarter end.
We design Internal Controls procedures with the objective of providing
reasonable assurance that: (1) our transactions are properly authorized; (2) our
assets are safeguarded against unauthorized or improper use; and (3) our
transactions are properly recorded and reported, all to permit the preparation
of our financial statements in conformity with generally accepted accounting
principals.
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS. Our management, including the CEO
and Treasurer, does not expect that our Disclosure Controls or our Internal
Controls will prevent all error or all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits or controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within our company and the Bank have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, a control system may become inadequate because of
changes in conditions, or the degree of compliance with the policies and
procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
SCOPE OF THE CONTROLS EVALUATION. The CEO and Treasurer evaluation of our
Disclosure Controls and Internal Controls included a review of such controls'
objectives and design, such control's implementation by us and the Bank and the
effect of these controls on the information generated for use in this report. In
the course of the Controls Evaluation, we sought to identify data errors,
controls problems or acts of fraud and to confirm that appropriate corrective
action, including process improvements, were being undertaken. This type of
evaluation will be done on a quarterly basis so that the conclusions concerning
controls effectiveness can be reported in our Quarterly Reports on Form 10-Q and
Annual Reports on Form 10-K. Our Internal Controls are also evaluated on an
ongoing basis by our outside internal auditors, by other personnel in the Bank
and by our external independent auditors in connection with their audit and
review activities. The overall goals of these various evaluation activities are
to monitor our Disclosure Controls and Internal Controls and to make
modifications as necessary. Our intent in this regard is that the Disclosure
Controls and Internal Controls will be maintained as dynamic systems that change
(including with improvements and corrections) as conditions warrant.
Among other matters, we sought in our evaluation to determine whether there were
any "significant deficiencies" or "material weaknesses" in our and the Bank's
Internal Controls, or whether we had identified any acts of fraud involving
personnel who have a significant role in our and the Bank's Internal Controls.
This information was important both for the Controls Evaluation generally and
53
because items 5 and 6 in the Section 302 Certifications of the CEO and Treasurer
require that the CEO and Treasurer disclose that information to our Board's
Audit Committee and to our independent auditors and to report on related matters
in this section of our Annual Report. In the professional auditing literature,
"significant deficiencies" are referred to as "reportable conditions". These are
control issues that could have a significant adverse effect on the ability to
record, process, summarize and report financial data in the financial
statements. A "material weakness" is defined in the auditing literature as a
particularly serious reportable condition where the internal control does not
reduce to a relatively low level the risk that misstatements caused by error or
fraud may occur in amounts that would be material in relation to the financial
statements and not be detected within a timely period by employees in the normal
course of performing their assigned functions. In addition, we sought to deal
with other controls matters in the Controls Evaluation, and in each case if a
problem was identified, we considered what revision, improvement or correction
to make in accord with our on-going procedures.
In accord with Commission requirements, the CEO and Treasurer note that,
as of December 31, 2007, there have been no significant changes in Internal
Controls or in other factors that could significantly affect Internal Controls,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
CONCLUSIONS. Based upon the Controls Evaluation, our CEO and Treasurer have
concluded that, as of December 31, 2007, subject to the limitations noted above,
our Disclosure Controls are effective to ensure that material information
relating to CCFNB Bancorp, Inc. and its consolidated subsidiaries is made known
to management, including the CEO and Treasurer, particularly during the period
when our Exchange Act periodic reports are being prepared, and that our Internal
Controls are effective as of December 31, 2007, to provide reasonable assurance
that our financial statements are fairly presented in conformity with generally
accepted accounting principles.
54
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
ELECTION OF DIRECTORS
The Corporation has nine directors who are divided into three classes:
Three directors are in Class 1; three directors are in Class 2; and three
directors are in Class 3. Each director holds office for a three-year term. The
terms of the classes are staggered, so that the term of office of one class
expires each year. Class 1 director Charles E. Long will be resigning from the
Board before the annual meeting because of age requirements.
The following information includes the age of each nominee and current
director as of the date of the meeting. All directors of the Corporation are
also directors of the bank.
CLASS 1 DIRECTORS WHOSE TERM EXPIRES IN 2008 AND NOMINEES FOR CLASS 1 DIRECTORS
WHOSE TERM WILL EXPIRE IN 2011
ROBERT M. BREWINGTON, JR., 57
Director since 1996. Owner of Sutliff Motors and Brewington Transportation
and a part owner of J&B Honda (sales and service of cars and trucks;
school bus contractor, sales of motorcycles and ATVs). Mr. Brewington is
the brother of Sally Tucker, the bank's Marketing Director.
WILLARD H. KILE, JR., D.M.D., 53
Director since 2000. Partner of Kile & Robinson LLC (dentists); Partner of
Kile & Kile Real Estate. Mr. Kile is a first cousin to Lance O. Diehl, our
President and Chief Executive Officer.
CLASS 1 DIRECTOR WHOSE TERM EXPIRES IN 2008 AND CAN NO LONGER SERVE DUE TO THE
AGE QUALIFICATION
CHARLES E. LONG, 72
Director since 1993. Retired. Former president of Long Supply Co., Inc. (
a wholesaler and retailer of hardware and masonry products).
CLASS 2 DIRECTORS WHOSE TERM EXPIRES IN 2010
LANCE O. DIEHL, 42
Director since 2003. President and Chief Executive Officer of the
Corporation and the bank. Former Executive Vice President of Branch
Operations and Marketing of the bank. Mr. Diehl is a first cousin to Mr.
Kile, a director.
W. BRUCE MCMICHAEL, 48
Director since 2006. Licensed Funeral Director; President, McMichael
Funeral Home, Inc., Benton, PA.
PAUL E. REICHART, 70
Director since 1983. Chairman and former Vice Chairman of the Corporation
and the bank. Former President and Chief Executive Officer of the
Corporation and the bank.
55
CLASS 3 DIRECTORS WHOSE TERM EXPIRES IN 2009
EDWARD L. CAMPBELL, 69
Director since 1985. Secretary of the Corporation and the bank. President
of ELC Enterprises, Inc. and a partner of Heritage Acres, Evergreens.
FRANK D. GEHRIG, 62
Director since 2004. Partner in Accounting Firm of Brewer, Gehrig &
Johnson, Certified Public Accountants.
ELWOOD R. HARDING, JR., 61
Director since 1984. Vice Chairman of the Corporation and the bank.
Attorney at law and President of Premier Real Estate Settlement Services,
Inc. (title insurance).
NUMBER OF MEETINGS
During 2007, the Corporation's Board of Directors held 18 meetings and the
bank's Board of Directors held 25 meetings. All of the Corporation's directors
attended 75% or more of all Board of Directors and Committee meetings of the
Corporation and the bank during 2007.
COMMITTEES OF THE BOARD OF DIRECTORS OF THE CORPORATION
The Audit Committee of the Corporation is composed of the same members as
the Audit Committee of the bank. See discussion under the caption: "Audit
Committee Report". The Audit Committee serves as the Qualified Legal Compliance
Committee of the Corporation for purposes of Rule 205 of the SEC.
The Corporation has no other standing committees. The bank's Human
Resource Committee performs the functions for a compensation committee of the
Corporation. See the caption: "Committee Report on Executive Compensation".
COMMITTEES OF THE BOARD OF DIRECTORS OF THE BANK
LONG CREDIT
BOARD OF RANGE ADMINI- HUMAN ASSET-
NAME DIRECTORS EXECUTIVE AUDIT PLANNING STRATION RESOURCE TRUST LIABILITY
----------------------------- --------- --------- ----- -------- -------- -------- ----- ---------
Robert M. Brewington, Jr. [X] [X] [X] [X](1)
Edward L. Campbell [X] [X] [X](1) [X] [X]
Lance O. Diehl [X] [X] [X] [X] [X] [X] [X]
Frank D. Gehrig [X] [X] [X](1)
Elwood R. Harding, Jr. [X] [X] [X] [X](1) [X]
Willard H. Kile, Jr. [X] [X](1) [X]
Charles E. Long [X] [X] [X](1) [X] [X]
W. PersonNameBruce McMichael,
Jr. [X] [X] [X]
Paul E. Reichart [X](1) [X](1) [X] [X] [X] [X] [X]
(1) Chairman.
EXECUTIVE COMMITTEE
The Executive Committee reviews the operations of the Board of Directors with
respect to directors' fees and frequency of Board of Directors' meetings as well
as the Corporation's capital structure, stock position and earnings. In
addition, the Executive Committee analyzes other management issues and
periodically makes recommendations to the Board of Directors based on its
findings.
56
AUDIT COMMITTEE
The Audit Committee is responsible for the review and evaluation of the system
of internal controls and corporate compliance with applicable rules, regulations
and laws. The Audit Committee meets with outside independent auditors and senior
management to review the scope of the internal and external audit engagements,
the adequacy of the internal and external auditors, corporate policies to ensure
compliance and significant changes in accounting principles. See "Audit
Committee Report".
LONG RANGE PLANNING COMMITTEE
This committee studies the future growth, capital development and corporate
structure of the Corporation.
CREDIT ADMINISTRATION COMMITTEE
This committee reviews all new loans, past due loans, loan compliance, loan
review and other pertinent matters.
HUMAN RESOURCE COMMITTEE
This committee recommends to the Board of Directors the amount to be considered
for contribution to the profit sharing/401K plan, reviews the proposed salary
increases of the officers, and recommends any employee bonus amounts before they
are presented to the Board of Directors for approval. See "Committee Report on
Executive Compensation".
TRUST COMMITTEE
This committee is responsible for the oversight of the Trust Department,
including the Trust Department investments and operations. Additionally, the
committee oversees our third party brokerage firm.
ASSET-LIABILITY COMMITTEE
This committee reviews asset-liability positions and provides support and
direction in managing net interest margins and liquidity.
DIRECTORS' COMPENSATION (7)
Interest Earned
on Deferred
Director's Fee
Plans and
Fees Non-Equity Nonqualified
Earned Stock Option Incentive Plan Deferred All Other
Or Paid in Awards ($) Awards ($) Compensation ($) Compensation Compensation ($)
Name Cash ($) (1) (2) (3) Earnings ($) (6) Total ($)
------------------ ---------- ---------- ---------- ---------------- --------------- ---------------- ---------
Robert M.
Brewington, Jr. 15,500 0 0 0 2,296(4) N/A 17,796
Edward L. Campbell 16,700 0 0 0 0 N/A 16,700
Frank D. Gehrig 17,300 0 0 0 0 N/A 17,300
Elwood R.
Harding, Jr. 15,200 0 0 0 13,080(5) N/A 28,280
Willard H. Kile,
Jr. 17,000 0 0 0 2,657(4) N/A 19,657
Charles E. Long 15,500 0 0 0 0 N/A 15,500
W. Bruce Michael,
Jr. 17,300 0 0 0 739(4) N/A 18,039
Paul E. Reichart 40,000 0 0 0 0 N/A 40,000
57
(1) No Stock Awards were given by the Corporation in 2007.
(2) No Option Awards were given by the Corporation in 2007.
(3) No Non-Equity Incentive Plan Compensation was paid to Directors in 2007.
(4) Represents interest earned on deferred director's fees.
(5) Represents increase in value due to interest earned on two Nonqualified
Deferred Compensation Plans.
(6) No director listed incurred more than $10,000 in all other compensation.
(7) See "Deferred Compensation Agreements" for more information.
Lance O. Diehl, President and CEO, is also a Director. Refer to Summary
Compensation Table.
DEFERRED COMPENSATION AGREEMENTS FOR DIRECTORS
The bank entered into two agreements with Elwood R. Harding, Jr., to
establish non-qualified deferred compensation plans. Each of these plans was
limited to a four-year period of deferment of director's fees. Mr. Harding's
future payment is based upon the cumulative amount of deferred fees together
with interest currently accruing thereon at the rate of 8% per annum, subject to
change by the Board of Directors. The bank has obtained life insurance policies
(designating the bank as beneficiary) on the life of Mr. Harding which is
intended to cover the bank's obligations and related costs under these
agreements. As of December 31, 2007 and 2006, the net cash surrender value of
these and other insurance policies was $536,186 and $490,887, respectively, and
the total accrued liability was $206,521 and $208,734, respectively, relating to
these agreements. Mr. Harding is currently a Director of the Corporation and his
total accrued liability was $176,690 and $163,610 at December 31, 2007 and 2006,
respectfully. At retirement age of 69, Mr. Harding will receive $20,283 for 10
years and at retirement age of 72, Mr. Harding will receive an additional
$31,300 for 10 years.
The bank gave the directors the option of receiving or deferring their
directors' fees under a deferred director's fee plan which allows the director
to defer such fees until the year following the expiration of the director's
term. Each year, the director has the option of participating for that year.
Payments are then made over specified terms under these arrangements up to a
ten-year period. Interest is to accrue on these deferred fees at a five-year
certificate of deposit rate, which was 4% in 2007. The current certificate of
deposit rate will reset in January 2008. Three directors, specifically Robert M.
Brewington, Jr., Willard H. Kile, Jr. and W. Bruce McMichael, Jr. have elected
to participate in this program; at December 31, 2006 and 2007, deferred fees and
accrued interest for Mr. Brewington was $48,881 and $66,676; deferred fees and
accrued interest for Mr. Kile was $56,810 and $76,467 and deferred fees and
accrued interest for Mr. McMichael was $9,996 and $28,035, respectively.
ITEM 11. EXECUTIVE COMPENSATION EXECUTIVE COMPENSATION
REPORT OF COMMITTEE ON EXECUTIVE COMPENSATION
All of our independent directors deem executive compensation to be very
important to the overall development and performance of the company, so they
decided to sit as our committee on executive compensation. Mr. Diehl, the
President and Chief Executive Officer, and Mr. Reichart, the Chairman, do not
participate in discussions and decisions concerning their performance and
compensation. All of our other directors meet the independence standards
contained in Rule 4200(a)(15) of the listing rules for The NASDAQ Stock Market.
In addition to this committee on executive compensation, the bank has a
Human Resource Committee comprised of four of our directors, who also serve as
directors of the bank. One of those directors is Mr. Reichart, who is also the
Chairman of the bank. The bank's Human Resource Committee discusses and reviews
evaluations of all management positions within the bank, except for Messrs
Reichart, the Chairman, Diehl, the President and Chief Executive Officer, and
Wenner, the Executive Vice President and Chief Operating Officer. The
compensation committee on executive compensation is solely responsible for the
compensation decisions involving the latter three officers and, in consultation
with Mr. Diehl, reviewed the compensation for the other named executive officers
in this proxy statement.
Over the past year, the Board, sitting as the Committee on Executive
Compensation, met one time to discuss the performance of the executive officers
in the previous year and to compare their performance with peers. Moreover, the
Human Resources Committee met one time in 2007 to discuss the performance of all
the officers excluding the executive officers. Officer's salaries were also
compared with peer reports.
The Board, sitting as the Committee on Executive Compensation, reviewed
the text of the Compensation Discussion and Analysis section contained in this
proxy statement and approved its inclusion in the proxy statement and in our
Annual Report on Form 10-K for the year ended December 31, 2007, to be filed
with the SEC.
58
ANNUAL COMPENSATION
Annual compensation for our senior executives includes salary, bonus and
contribution to his/her 401K profit sharing plan. This is similar to the
compensation programs for most of our peer group banking companies.
CHIEF EXECUTIVE OFFICER COMPENSATION
Mr. Diehl received total compensation of $240,003 in the year 2007. Please
refer to the Summary Compensation Table.
We established the following 2008 compensation package for Mr. Diehl:
Annual salary to be paid is $150,000, and we expect the other payment and
benefits described in the Summary Compensation Table to remain comparable in
2008 as in 2007. A 2007 4% "across the board" bonus was paid in January 2008
which amounted to $6,000. The bank will also contribute $25,017 in 2008 to Mr.
Diehl's deferred compensation plan.
CHIEF OPERATING OFFICER COMPENSATION
Mr. Wenner received total compensation of $218,021 in the year 2007.
Please refer to the Summary Compensation Table.
We established the following 2008 compensation package for Mr. Wenner:
Annual salary to be paid is $125,000, and we expect the other payment and
benefits described in the Summary Compensation Table to remain comparable in
2008 as in 2007. A 2007 4% "across the board" bonus was paid in January 2008
which amounted to $5,000. The bank will also contribute $52,517 in 2008 to Mr.
Wenner's deferred compensation plan.
SENIOR VICE PRESIDENT OF FINANCIAL PLANNING DEPARTMENT COMPENSATION
Mr. Trump received total compensation of $139,199 in the year 2007. Please
refer to the Summary Compensation Table.
We established the following 2008 compensation package for Mr. Trump:
Annual salary to be paid is $79,563, and we expect the other payment and
benefits described in the Summary Compensation Table to remain comparable in
2008 as in 2007. A 2007 4% "across the board" bonus was paid in January 2008 in
the amount of $3,120. The bank will also contribute $41,529 in 2008 to Mr.
Trump's deferred compensation plan.
OTHER FACTORS THAT INFLUENCED COMPENSATION
We considered Messrs. Diehl and Wenner's pay and annual bonus appropriate
because of their roles in creating a culture of high performance with high
integrity and in leading the Corporation to strong financial results in 2007:
- Revenues increased 11.16% to $16,788,000
- Earnings from continuing operations grew 9.75% to $2,646,888
- Loans increased 0.51% to $161,460,000
- Return on average total capital was 8.54%
In addition, we considered Mr. Diehl's leadership in meeting the
operational and strategic goals established for the bank in the beginning of
2007.
Our Compensation Committee considered that Mr. Diehl has worked for the
bank for a total of 14 years and has 19 years experience in the financial
services industry. Mr. Diehl is a magna cum laude graduate of Bloomsburg
University, receiving a Bachelor of Science in Business Administration; holds a
Masters in Business Administration from Lehigh University; and is a graduate of
the Stonier Graduate School of Banking.
Mr. Wenner has been employed at the bank since May 1974. During this time,
he has held duties as Teller, Technology Director, Internal Auditor, Loan
Officer, Community Office Manager, Credit Administrator, Vice President, Senior
Vice President and his present position of Executive Vice President and Chief
Operating Officer. In his present capacity, Mr. Wenner has direct supervision
over areas which include accounting, data deposit operations, information
technology, human resources, training, compliance, security, credit
administration and branch administration.
59
Mr. Trump has been employed at the bank since 1989 and has 38 years of
banking experience. His duties have included Office Manager and Commercial
Lending Officer, and he is currently Senior Vice President of the Financial
Planning Department, which he was instrumental in starting in 1990. Mr. Trump is
a graduate of Williamsport Community College, the Paralegal Institute in
Philadelphia and the Pennsylvania Bankers Association Trust School. He has
gained valuable experience working with both public and private foundations, as
well as managing investment portfolios, tax preparations, pension plan
administration and also account administration.
Committee on Executive Compensation
Robert M. Brewington, Jr.
Edward L. Campbell
Frank D. Gehrig
Elwood R. Harding, Jr.
Willard H. Kile, Jr.
Charles E. Long
W. Bruce McMichael, Jr.
SUMMARY COMPENSATION TABLES
The Securities and Exchange Commission (SEC) has amended its rules with
respect to the presentation of information about executive compensation. We are
required to present additional information about how we compensate our named
executive officers, and, in our case, to include additional officers whose names
and compensation were not required to be presented in our proxy statements for
past annual meetings. This new approach to the disclosure of executive
compensation can be phased-in over a 3-year period. Therefore, we are presenting
two Summary Compensation Tables for your review - one for the year ended
December 31, 2005 and a new expanded one for the years ended December 31, 2006
and 2007. This latter table includes information about two executive officers
and one additional officer whose annual total compensation, as defined by the
SEC's rules, exceeded $100,000.
SUMMARY COMPENSATION TABLE FOR THE
YEARS ENDED DECEMBER 31, 2007 AND 2006
Change in
Non-Stock Nonqualified
Name and Stock Option Incentive Plan Deferred All Other
Principal Awards ($) Awards ($) Compen- Comp. Plans Compensa-
Position Year Salary ($) Bonus ($) (9) (10) sation ($)(11) ($) tion ($) Total ($)
--------------------------- ---- ---------- --------- ---------- ---------- --------------- ------------- --------- ---------
Lance O. Diehl, President 2007 150,000 5,400(1) 0 0 0 23,127 61,476(2) 240,003
& Chief Executive Officer 2006 135,000 4,200(3) 0 0 0 20,136 37,613(4) 196,949
Edwin A. Wenner, Executive
Vice-President & Chief 2007 125,000 4,600(1) 0 0 0 48,5544 39,867(5) 218,021
Operating Officer 2006 115,000 3,640(3) 0 0 0 3,024 22,942(6) 184,606
Jacob S. Trump, Senior
Vice President of 2007 78,003 3,059(1) 0 0 0 38,399 19,738(7) 139,199
Financial Planning 2006 76,473 2,624(3) 0 0 0 34,084 18,433(8) 131,614
60
(1) Represents a cash bonus representing 4% of 2006 base salary.
(2) Includes $12,500 as the payment of directors' fees; $7,303 representing
the bank's matching contribution to Mr. Diehl's 401K plan; $11,441 as car
expense; $880 as cellphone expense; $1,477 as cafeteria plan benefits;
$743 as term life insurance and bank-owned life insurance premium
payments; $600 as a partial corporate membership in the Berwick Golf Club;
$1,532 for various meal and travel expenses; and $25,000 as a one time
cash bonus.
(3) Represents a cash bonus representing 3 -1/2% of 2005 base salary.
(4) Includes $10,925 as the payment of directors' fees; $5,848 representing
the bank's matching contribution to Mr. Diehl's 401K plan; $11,217 as car
expense; $543 as cellphone expense; $1,178 as cafeteria plan benefits;
$649 as term life insurance and bank-owned life insurance premium
payments; $600 as a partial corporate membership in the Berwick Golf Club;
$1,653 for various meal and travel expenses; and $5,000 as a one time cash
bonus.
(5) Includes $5,984 representing the bank's matching contribution to Mr.
Wenner's 401K plan; $877 as cellphone expense; $7,545 as cafeteria plan
benefits; $3,450 as term life insurance and bank-owned life insurance
premium payments; $600 as a partial corporate membership in the Berwick
Golf Club; $1,411 for various meal and travel expenses; and $20,000 as a
one time cash bonus.
(6) Includes $4,946 representing the bank's matching contribution to Mr.
Wenner's 401K plan; $368 as cellphone expense; $7,563 as cafeteria plan
benefits; $3,147 as term life insurance and bank-owned life insurance
premium payments; $600 as a partial corporate membership in the Berwick
Golf Club; $1,318 for various meal and travel expenses; and $5,000 as a
one time cash bonus.
(7) Includes $3,242 representing the bank's matching contribution to Mr.
Trump's 401K plan; $8,891 as cafeteria plan benefits; $4,602 as term life
insurance and bank-owned life insurance premium payments; $2,335 as an
annual membership in the Eagles Mere Country Club and $668 for various
meal and travel expenses.
(8) Includes $3,164 representing the bank's matching contribution to Mr.
Trump's 401K plan; $8,548 as cafeteria plan benefits; $3,999 as term life
insurance and bank-owned life insurance premium payments; $2,200 as an
annual membership in the Eagles Mere Country Club and $522 for various
meal and travel expenses.
(9) No Stock Awards were given by the Corporation in 2007.
(10) No Option Awards were given by the Corporation in 2007.
(11) No Non-stock Incentive Plan Compensation was given by the Corporation in
2007.
61
DEFERRED COMPENSATION AGREEMENTS
The bank entered into an agreement with Paul E. Reichart, Chairman of the
Board, to establish a non-qualified deferred compensation plan. If Mr. Reichart
served as an officer of the bank until he attained 65 years of age, the bank
agreed to pay him 120 consecutive monthly payments commencing on the first day
of the month following his 65th birthday. His monthly payment is based upon the
future value of life insurance purchased with the compensation that he deferred.
The bank has obtained life insurance (designating the bank as the beneficiary)
on Mr. Reichart's life which is intended to cover the bank's obligations under
this Deferred Compensation Plan, based upon certain actuarial assumptions.
Mr. Reichart receives monthly payments of $1,875 for 120 consecutive
months which commenced in February 2003. Mr. Reichart received $22,500 in 2007
from this deferred compensation arrangement. The accrued liability of his
deferred compensation arrangement at December 31, 2007 was $101,286.
The bank entered into non-qualified deferred compensation agreements with
Lance O. Diehl, Edwin A. Wenner and Jacob S. Trump, to provide supplemental
retirement benefits commencing with these officer's retirement and ending 15
years thereafter. The bank has obtained life insurance (designating the bank as
the beneficiary) on Messrs Diehl, Wenner and Trump's life which is intended to
cover the bank's obligations under this Deferred Compensation Plan, based upon
certain actuarial assumptions. The deferred compensation expense related to
these agreements for the year ended December 31, 2007 was $110,080 and the total
accrued liability as of December 31, 2007 and December 31, 2006 was $433,672 and
$323,592, respectively. Mr. Diehl is currently President and Chief Executive
Officer. Mr. Wenner is currently the Executive Vice President and Chief
Operating Officer. Mr. Trump is currently the Senior Vice President of Financial
Planning.
The following table illustrates the above deferred compensation
arrangements with our current Chairman of the Board and Messrs. Diehl, Wenner
and Trump.
Executive Bank Aggregate
Contributions in Contributions Withdrawals/Distributions Aggregate Balance At
Name 2007 ($) (1) in 2007 ($) ($) (2) December 31, 2007 ($)
---------------------- ---------------- ------------- ------------------------- --------------------
Lance O. Diehl,
President and Chief
Executive Officer 0 $23,127 0 $ 89,814
Edwin A. Wenner,
Executive
Vice-President and
Chief Operating
Officer 0 $48,554 0 $191,658
Paul E. Reichart,
Chairman of the
Board (3) 0 $ 5,323 $22,500 $101,286
Jacob S. Trump,
Senior Vice President of
Financial Planning 0 $38,399 0 $152,200
(1) The deferred compensation plans do not allow executive contributions.
(2) Messrs. Diehl, Wenner and Trump have not attained retirement; hence no
withdrawals or distributions.
(3) Mr. Reichart is no longer employed by the Corporation and the bank;
however, he does serve as Chairman of the Board.
62
RETIREMENT PLANS
We maintain a Non Qualified Deferred Compensation Plan for certain named
executive officers. The following table presents information about these plans
as it pertains to each named executive officer:
Estimated
Number of Estimated Normal Early
Years Normal Retirement Early Retirement
Credited Retirement Annual Benefit Retirement Annual Benefit
Name Plan Name Service (#) Age (#) ($) Age (#)(1) ($) (2)
-------------------- ------------------ ----------- ---------- ---------------- ---------- --------------
Lance O. Diehl, Non Qualified
President and Chief Deferred
Executive Officer CompensationPlan 4 3/4 60 90,000 N/A N/A
Edwin A. Wenner, Non Qualified
Executive Deferred
Vice-President and Compensation Plan
Chief Operating
Officer 4 3/4 60 50,000 N/A N/A
Jacob S. Trump, Non Qualified
Senior Vice Deferred
President of Compensation Plan
Financial Planning 4 3/4 62 20,000 N/A N/A
(1) A vesting schedule is in place for the Non Qualified Deferred Compensation
Plan. No executive officers were entitled to early retirement in 2007.
(2) No Estimated Early Retirement Annual Benefit is included in non qualified
deferred compensation plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
This section describes how much stock our directors and named executive
officers own. It also describes the persons or entities that own more than 5
percent of our voting stock.
63
STOCK OWNERSHIP
STOCK OWNED BY DIRECTORS AND NAMED EXECUTIVE OFFICERS
This table indicates the number of shares of Common Stock owned by the
named executive officers and directors as of February 1, 2008. The aggregate
number of shares owned by all directors, principal financial officer and named
executive officers is 5.23%. Unless otherwise noted, each individual has sole
voting and investment power for the shares indicated below.
NAME OF INDIVIDUAL AMOUNT AND NATURE OF
OF IDENTITY OF GROUP BENEFICIAL OWNERSHIP(1) PERCENT OF CLASS
------------------------------------- ----------------------- ----------------
Robert M. Brewington, Jr. 9,642.831 --
Edward L. Campbell 7,874.327 --
Lance O. Diehl 2,002.317 --
Frank D. Gehrig 2,382.219
Elwood R. Harding, Jr. 15,748.971 1.28%
Willard H. Kile, Jr. 7,003.444 --
Charles E. Long 6,700.386 --
W. Bruce McMichael, Jr. 1,629.000 --
Paul E. Reichart 10,217.110 --
Jacob S. Trump 275.110 --
Edwin A. Wenner 325.000 --
All Officers and Directors as a group
(9 directors, 2 nominees, 6 named
officers, 11 persons in total) (2) 63,800.715 5.20%
(1) Includes shares held (a) directly, (b) jointly with a spouse, (c)
individually by spouse, (d) by the transfer agent in the Corporation's
dividend reinvestment account, (e) in the 401(k) plan, and (f) in various
trusts.
(2) 7 named officers include: Paul E. Reichart, Chairman of the Board; Elwood
R. Harding, Jr., Vice-Chairman of the Board, Edward L. Campbell, Secretary
of the Board; Lance O. Diehl, President and Chief Executive Officer; Edwin
A. Wenner, Chief Operating Officer and Executive Vice President; and Jacob
S. Trump, Senior Vice President and Financial Planning Office. Messrs.
Wenner and Trump are not Directors of the Corporation.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Executive officers and directors and "beneficial owners" of more than ten
percent of the Common Stock must file initial reports of ownership and reports
of changes in ownership with the SEC pursuant to Section 16(a) of the Securities
Exchange Act of 1934.
We have reviewed the reports and written representations from the named
executive officers and directors. The Corporation believes that all filing
requirements were met during 2007.
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS AND RELATIONSHIPS
There were no arrangements or vending contracts, etc. with any immediate
family member or business associate of any board member or named executive
officer exceeding $60,000.
The Corporation encourages its directors and executive officers to have
banking and financial transactions with the bank. All of these transactions are
made on comparable terms and with similar interest rates as those prevailing for
other customers.
The total consolidated loans made by the bank at December 31, 2007, to its
directors and officers as a group, members of their immediate families and
companies in which they have a 10% or more ownership interest was $4,437,000 or
approximately 14.03 percent of the Corporation's total consolidated capital
accounts. The largest amount for all of these loans in 2007 was $4,507,000 or
approximately 14.25 percent of the Corporation's total consolidated capital
accounts. These loans did not involve more than the normal risk of
collectibility nor did they present other unfavorable features.
64
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Audit Committee has appointed J. H. Williams & Co., LLP, (JH Williams)
certified public accountants, as the Corporation's independent registered public
accounting firm to audit the financial statements of the Corporation for the
year ended December 31, 2007.
A member of JH Williams will be present at the annual meeting, and will
have the opportunity to make a statement and be available to respond to
appropriate questions by stockholders.
FEES PAID TO J. H. WILLIAMS & CO., LLP
Aggregate fees for professional services for the Corporation by JH Williams for
the years ended December 31, 2007 and 2006 were:
($ in thousands) 2007 2006
---------------- ------- -------
Audit 71,300 69,200
Audit Related 18,237 11,472
Tax 6,100 5,925
All Other 0 0
------- -------
Total $95,637 $86,597
------- -------
AUDIT FEES - Audit fees for 2007 and 2006 were $71,300 and $69,200,
respectively, for the annual audit and quarterly reviews of the consolidated
financial statements for services related to attestation reports required by
statute or regulation and consents in respect of Securities and Exchange
Commission filings.
AUDIT-RELATED FEES - Audit-related fees for 2007 and 2006 were $18,237 and
$11,472 respectively, and are comprised of assurance and related services that
are traditionally performed by the independent registered public accounting
firm. These services include attest and agreed-upon procedures not required by
statute or regulation, which address accounting, reporting and control matters
with respect to the trust department and retail sales of non-deposit investment
products of the bank and review of certain financial information related to
merger candidate.
TAX FEES - Tax fees for 2007 and 2006 were $6,100 and $5,925,
respectively, for tax return compliance, tax advice and tax planning.
ALL OTHER FEES - The Corporation's current policy restricts the use of JH
Williams to audit, audit-related and tax services only.
AUDIT COMMITTEE PROCEDURES
The Corporation's policy on the use of JH Williams' services is not to engage
its registered independent accounting firm for services other than audit,
audit-related and tax services.
The Audit committee, along with all independent Directors, review and ratify all
accounting firms annually. The terms and fees for the annual audit service
engagement must be pre-approved by the Audit Committee. Additionally, all fees
for audit, audit-related and tax services must be approved by the Audit
Committee and any fees in excess of budgeted fees must also be specifically
approved by the Audit Committee.
65
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1. Our consolidated financial statements and notes to these statements as
well as the applicable reports of the independent certified public accountants
are filed at Item 8 in this report.
2. All schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes to these
statements.
3. The exhibits required by Item 601 of Regulation S-K are included under
Item 15(b) of this report.
(b) Exhibits required by Item 601 of Regulation S-K:
Exhibit Number Referred to
Item 601 of Regulation SK Description of Exhibit
--------------------------- ----------------------
2 None.
3.1 Amended and Restated Articles of Incorporation
(Incorporated by reference to Exhibit 3.1 to
Registrant's Current Report on Form 8-K, dated May 9,
2005, filed with the Commission on May 10, 2005).
3.2 Amended Bylaws (Incorporated by reference to Exhibit
3.2 to Registrants Current Report on Form 8-K, dated
November 9, 2005, filed with the Commission on November
10, 2005).
4 None.
9 None.
10.1 Executive Employment Agreement of Lance O. Diehl
(Incorporated by reference to Exhibit 10.1 to
Registrant's Current Report on Form 8-K, dated December
14, 2004, filed with the Commission on December 15,
2004).
10.2 Executive Employment Agreement of Edwin A. Wenner
(Incorporated by reference to Exhibit 10.2 to
Registrant's Current Report on Form 8-K, dated December
14, 2004, filed with the Commission on December 15,
2004).
10.3 Form of Deferred Director Fees Agreement and Eight
Conformed Signature Pages (Incorporated by reference to
Exhibit 10.3 to Registrant's Current Report on Form
8-K, dated December 14, 2004, filed with the Commission
on December 15, 2004).
10.4 Supplemental Executive Retirement Plan Agreement and
Amendment for Lance O. Diehl (Incorporated by reference
to Exhibit 10.4 to Registrant's Current Report on Form
8-K, dated December 14, 2004, filed with the Commission
on December 15, 2004).
10.5 Supplemental Executive Retirement Plan Agreement and
Amendment for Edwin A. Wenner (Incorporated by
reference to Exhibit 10.5 to Registrant's Current
Report on Form 8-K, dated December 14, 2004, filed with
the Commission on December 15, 2004).
10.6 Supplemental Executive Retirement Plan Agreement for
Jacob S. Trump (Incorporated by reference to Exhibit
10.6 to Registrant's Current Report on Form 8-K, dated
December 14, 2004, filed with the Commission on
December 15, 2004).
11 None.
12 None.
14 Code of Conduct and Ethics
16 None.
18 None.
66
21 List of Subsidiaries of the Company.
22 None.
23 Consent of Independent Certified Public Accountants.
24 None.
31.1 CEO certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Principal Financial Officer certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 CEO certification pursuant to 18 U.S.C. ss. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
32.2 Principal Financial Officer certification pursuant to
18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
99.1 Charter of the Audit Committee
67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CCFNB BANCORP, INC.
(Bancorp)
By: /s/ Lance O. Diehl Date: February 28, 2008
-----------------------------------------------
Lance O. Diehl
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ Edward L. Campbell Date: February 28, 2008
-----------------------------------------------
Edward L. Campbell
Director and Secretary
By: /s/ Robert M. Brewington, Jr. Date: February 28, 2008
-----------------------------------------------
Robert M. Brewington, Jr.
Director
By: /s/ Frank D. Gehrig Date: February 28, 2008
-----------------------------------------------
Frank D. Gehrig
Director
By: /s/ Lance O. Diehl Date: February 28, 2008
-----------------------------------------------
Lance O. Diehl
President, Chief Executive Officer and Director
By: /s/ Elwood R. Harding, Jr. Date: February 28, 2008
-----------------------------------------------
Elwood R. Harding, Jr.
Director and Vice Chairman of the Board
By: /s/ Willard H. Kile, Jr. Date: February 28, 2008
-----------------------------------------------
Willard H. Kile, Jr.
Director
68
By: /s/ Charles E. Long Date: February 28, 2008
-----------------------------------------
Charles E. Long
Director
By: /s/ W. Bruce McMichael, Jr. Date: February 28, 2008
-----------------------------------------
W. Bruce McMichael, Jr.
Director
By: /s/ Paul E. Reichart Date: February 28, 2008
-----------------------------------------
Paul E. Reichart
Director , Chairman of the Board
By: /s/ Virginia D. Kocher Date: February 28, 2008
-----------------------------------------
Virginia D. Kocher
Treasurer and Assistant Secretary
(Principal Financial and Accounting Officer)
69
INDEX TO EXHIBITS
Item Number Description Page
----------- ----------- ----
14 Code of Conduct and Ethics 71
21 List of Subsidiaries of the Company 75
23 Consent of Independent Certified Public Accountants 76
31.1 CEO certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 77
31.2 Principal Financial Officer certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 78
32.1 CEO certification pursuant to 18 U.S.C. ss. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 79
32.2 Principal Financial Officer certification pursuant to 18
U.S.C. ss. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 80
99.1 Charter of Audit Committee 81
70