SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2004
[] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______________ to _____________
Commission file number 0-19028
CCFNB BANCORP, INC.
(Name of small business Issuer in its charter)
PENNSYLVANIA 23-2254643
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
232 East Street, Bloomsburg, PA 17815
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (570) 784-4400
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirings for the past 90
days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. 1,271,993 shares of
$1.25 (par) common stock were outstanding as of October 19, 2004.
CCFNB BANCORP, INC. AND SUBSIDIARY
INDEX 10-Q
SEPTEMBER 30, 2004
PART I - FINANCIAL INFORMATION:
- Consolidated Balance Sheets 1
- Consolidated Statements of Income 2
- Consolidated Statements of Cash Flows 3
- Notes to Consolidated Financial Statements 4 - 13
- Report of Independent Registered Public Accounting Firm 14
- Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations 15 - 21
- Controls and Procedures 21
PART II - OTHER INFORMATION 23
SIGNATURES 24
CCFNB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
Unaudited
September December
30, 2004 31, 2003
-------- --------
ASSETS
Cash and due from banks $ 5,016 $ 6,359
Interest-bearing deposits with other banks 3,517 5,480
Federal funds sold 535 523
Investment securities available-for-sale 64,490 62,775
Loans, net of unearned income 149,103 147,630
Allowance for loan losses 1,425 1,415
--------- --------
Net loans 147,678 146,215
Premises and equipment, net 4,467 4,282
Other real estate owned 36 36
Cash surrender value of bank-owned life insurance 6,133 5,908
Accrued interest receivable 812 811
Other assets 618 525
--------- --------
TOTAL ASSETS $ 233,302 $232,914
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Non-interest bearing $ 17,290 $ 17,313
Interest bearing 154,238 154,473
--------- --------
Total Deposits 171,528 171,786
Short-term borrowings 20,734 20,990
Long-term borrowings 11,327 11,335
Accrued interest and other expenses 1,269 1,187
Other liabilities 87 13
--------- --------
TOTAL LIABILITIES 204,945 205,311
--------- --------
STOCKHOLDERS' EQUITY
Common stock, par value $1.25 per share; authorized 5,000,000 shares; issued and
outstanding 1,271,993 shares in 2004 and 1,276,445 shares in 2003 1,590 1,595
Surplus 3,512 3,635
Retained earnings 22,931 21,997
Accumulated other comprehensive income (loss) 324 376
--------- --------
TOTAL STOCKHOLDERS' EQUITY 28,357 27,603
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 233,302 $232,914
========= ========
See accompanying notes to Consolidated Financial Statements.
-1-
CCFNB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE DATA)
UNAUDITED
For the Nine For the Three
Months Ending Months Ending
September 30, September 30,
----------------------- -----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
INTEREST INCOME
Interest and fees on loans:
Taxable $ 6,211 $ 6,839 $ 2,055 $ 2,215
Tax-exempt 271 153 108 60
Interest and dividends on investment securities:
Taxable interest 1,126 877 374 268
Tax-exempt interest 345 479 105 139
Dividends 52 45 26 17
Federal funds sold 7 40 3 11
Deposits in other banks 37 41 15 8
---------- ---------- ---------- ----------
TOTAL INTEREST INCOME 8,049 8,474 2,686 2,718
---------- ---------- ---------- ----------
INTEREST EXPENSE
Deposits 2,008 2,690 671 782
Short-term borrowings 206 209 76 65
Long-term borrowings 510 508 171 171
---------- ---------- ---------- ----------
TOTAL INTEREST EXPENSE 2,724 3,407 918 1,018
---------- ---------- ---------- ----------
Net interest income 5,325 5,067 1,768 1,700
Provision for loan losses 110 150 30 50
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 5,215 4,917 1,738 1,650
---------- ---------- ---------- ----------
NON-INTEREST INCOME
Service charges and fees 582 507 213 166
Trust department income 109 95 34 32
Securities gains - net 3 8 3 8
Bank-owned life insurance income 191 165 63 13
Other income 233 359 81 198
---------- ---------- ---------- ----------
TOTAL NON-INTEREST INCOME 1,118 1,134 394 417
---------- ---------- ---------- ----------
NON-INTEREST EXPENSES
Salaries and wages 1,712 1,647 573 562
Pensions and other employee benefits 598 585 198 203
Occupancy expense, net 294 290 93 98
Furniture and equipment expense 351 357 116 124
Other operating expenses 1,357 1,191 429 399
---------- ---------- ---------- ----------
TOTAL NON-INTEREST EXPENSES 4,312 4,070 1,409 1,388
---------- ---------- ---------- ----------
Income before income taxes 2,021 1,981 723 681
Income tax expense 424 420 157 146
---------- ---------- ---------- ----------
NET INCOME $ 1,597 $ 1,561 $ 566 $ 535
========== ========== ========== ==========
PER SHARE DATA
Net income $ 1.25 $ 1.22 $ 0.44 $ 0.42
Cash dividends $ 0.52 $ 0.49 $ 0.18 $ 0.17
Weighted average shares outstanding 1,275,743 1,283,475 1,275,743 1,283,475
See accompanying notes to Consolidated Financial Statements.
-2-
CCFNB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
For the Nine
Months Ending
September 30,
------------------------------
2004 2003
------------ ------------
OPERATING ACTIVITIES
Net income $ 1,597 $ 1,561
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 110 150
Depreciation and amortization 282 293
Premium amortization on investment securities 242 448
Discount accretion on investment securities (21) (24)
Deferred income taxes (benefit) (11) (75)
(Gain) on sale of mortgage loans (12) (92)
(Gain) on sales of investment securities (3) (8)
Proceeds from sale of mortgage loans 1,328 8,178
Originations of mortgage loans for resale (1,316) (8,086)
(Gain) on sale of other real estate owned -- (12)
(Gain) loss from investment in insurance agency (10) (4)
(Increase) decrease in accrued interest receivable and other assets (40) (20)
Net increase in cash surrender value of bank-owned life insurance (225) (198)
Increase (decrease) in accrued interest, other expenses and other liabilities 156 (116)
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,077 1,995
------------ ------------
INVESTING ACTIVITIES
Purchase of investment securities Available-for-Sale (24,026) (45,199)
Proceeds from sales, maturities and redemptions of investment
securities Available-for-Sale 22,027 33,015
Net (increase) decrease in loans (1,572) 1,551
Purchases of premises and equipment (467) (177)
Proceeds from sale of other real estate owned -- 37
Purchase of bank-owned life insurance policies -- (2,000)
------------ ------------
NET CASH (USED IN) INVESTING ACTIVITIES (4,058) (12,773)
------------ ------------
FINANCING ACTIVITIES
Net increase in deposits (258) 939
Net increase (decrease) in short-term borrowings (256) 3,258
Net increase (decrease) in long-term borrowings (8) (9)
Acquisition of treasury stock (288) (588)
Proceeds from issuance of common stock 160 140
Cash dividends paid (663) (627)
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (1,313) 3,113
------------ ------------
(DECREASE) IN CASH AND CASH EQUIVALENTS (3,294) (7,665)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 12,362 16,020
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,068 $ 8,355
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for:
Interest $ 2,726 $ 3,543
Income taxes $ 391 $ 440
See accompanying notes to Consolidated Financial Statements.
-3-
CCFNB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of CCFNB Bancorp, Inc. and Subsidiary (the
"Corporation") are in accordance with the accounting principles generally
accepted in the United States of America and conform to common practices within
the banking industry. The more significant policies follow:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of CCFNB Bancorp,
Inc. and its wholly owned subsidiary, Columbia County Farmers National Bank (the
"Bank"). All significant inter-company balances and transactions have been
eliminated in consolidation.
NATURE OF OPERATIONS & LINES OF BUSINESS
The Corporation provides full banking services, including trust services,
through the Bank, to individuals and corporate customers. The Bank has six
offices covering an area of approximately 484 square miles in Northeastern
Pennsylvania. The Corporation and its banking subsidiary are subject to
regulation of the Office of the Comptroller of the Currency, The Federal Deposit
Insurance Corporation and the Federal Reserve Bank of Philadelphia.
Procuring deposits and making loans are the major lines of business. The
deposits are mainly deposits of individuals and small businesses and the loans
are mainly real estate loans covering primary residences and small business
enterprises. The trust services, under the name of CCFNB and Co., include
administration of various estates, pension plans, self-directed IRA's and other
services. A third-party brokerage arrangement is also resident in the
Lightstreet location. This investment center offers a full line of stocks, bonds
and other non-insured financial services.
USE OF ESTIMATES
The preparation of these consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of these consolidated financial statements and the
reported amounts of income and expenses during the reporting periods. Actual
results could differ from those estimates.
INVESTMENT SECURITIES
The Corporation classifies its investment securities as either
"Held-to-Maturity" or "Available-for-Sale" at the time of purchase. Debt
securities are classified as Held-to-Maturity when the Corporation has the
ability and positive intent to hold the securities to maturity. Investment
securities Held-to-Maturity are carried at cost adjusted for amortization of
premiums and accretion of discounts to maturity.
-4-
Debt securities not classified as Held-to-Maturity and equity securities
included in the Available-for-Sale category, are carried at fair value, and the
amount of any unrealized gain or loss net of the effect of deferred income taxes
is reported as other comprehensive income (loss) in the consolidated Statement
of Stockholders' Equity. Management's decision to sell Available-for-Sale
securities is based on changes in economic conditions controlling the sources
and uses of funds, terms, availability of and yield of alternative investments,
interest rate risk, and the need for liquidity.
The cost of debt securities classified as Held-to-Maturity or Available-for-Sale
is adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization and accretion, as well as interest and dividends, is included
in interest income from investments. Realized gains and losses are included in
net investment securities gains. The cost of investment securities sold,
redeemed or matured is based on the specific identification method.
LOANS
Loans are stated at their outstanding principal balances, net of deferred fees
or costs, unearned income, and the allowance for loan losses. Interest on loans
is accrued on the principal amount outstanding, primarily on an actual day
basis. Non-refundable loan fees and certain direct costs are deferred and
amortized over the life of the loans using the interest method. The amortization
is reflected as an interest yield adjustment, and the deferred portion of the
net fees and costs is reflected as a part of the loan balance.
Real estate mortgage loans held for resale are carried at the lower of cost or
market on an aggregate basis. These loans are sold with limited recourse to the
Corporation.
PAST DUE LOANS - Generally, a loan is considered past due when a payment is in
arrears for a period of 10 or 15 days, depending on the type of loan. Delinquent
notices are issued at this point and collection efforts will continue on loans
past due beyond 60 days which have not been satisfied. Past due loans are
continually evaluated with determination for charge-off being made when no
reasonable chance remains that the status of the loan can be improved.
NON-ACCRUAL LOANS - Generally, a loan is classified as non-accrual, with the
accrual of interest on such a loan discontinued when the contractual payment of
principal or interest has become 90 days past due or management has serious
doubts about further collectibility of principal or interest, even though the
loan currently is performing. A loan may remain on accrual status if it is in
the process of collection and is either guaranteed or well secured. When a loan
is placed on non-accrual status, unpaid interest credited to income in the
current year is reversed, and unpaid interest accrued in prior years is charged
against the allowance for loan losses. Certain non-accrual loans may continue to
perform, wherein, payments are still being received with those payments
generally applied to principal. Non-accrual loans remain under constant scrutiny
and if performance continues, interest income may be recorded on a cash basis
based on management's judgement as to collectibility of principal.
ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is established through
provisions for loan losses charged against income. Loans deemed to be
uncollectible are charged against the allowance for loan losses, and subsequent
recoveries, if any, are credited to the allowance.
A factor in estimating the allowance for loan losses is the measurement of
impaired loans. A loan is considered impaired when, based on current information
and events, it is probable that the Corporation will be unable to collect all
amounts due according to the contractual terms of the loan agreement. Under
current accounting standards, the allowance for loan losses related to impaired
loans is based on discounted cash flows using the loan's effective interest rate
or the fair value of the collateral for certain collateral dependent loans.
-5-
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", and SFAS No. 149
"Amendments to SFAS 133 on Derivative Instruments and Hedging Activities" and
the guidance contained in the Derivatives Implementation Group Statement 133
Implementation Issue No. C 13, the Bank has accounted for such loan commitments
as derivative instruments. The outstanding loan commitments in this category did
not give rise to any losses for the period ended September 30, 2004 and the year
ended December 31, 2003, as the fair market value of each outstanding loan
commitment exceeded the Bank's cost basis in each loan commitment.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation computed
principally on the straight-line method over the estimated useful lives of the
assets. Maintenance and minor repairs are charged to operations as incurred. The
cost and accumulated depreciation of the premises and equipment retired or sold
are eliminated from the property accounts at the time of retirement or sale, and
the resulting gain or loss is reflected in current operations.
MORTGAGE SERVICING RIGHTS
The Corporation originates and sells real estate loans to investors in the
secondary mortgage market. After the sale, the Corporation retains the right to
service these loans. When originated mortgage loans are sold and servicing is
retained, a servicing asset is capitalized based on relative fair value at the
date of sale. Servicing assets are amortized as an offset to other fees in
proportion to, and over the period of, estimated net servicing income. The
unamortized cost is included in other assets in the accompanying consolidated
balance sheet. The servicing rights are periodically evaluated for impairment
based on their relative fair value.
OTHER REAL ESTATE OWNED
Real estate properties acquired through, or in lieu of, loan foreclosure are
held for sale and are initially recorded at fair value on the date of
foreclosure establishing a new cost basis. After foreclosure, valuations are
periodically performed by management and the real estate is carried at the lower
of carrying amount or fair value less cost to sell and is included in other
assets. Revenues derived from and costs to maintain the assets and subsequent
gains and losses on sales are included in other non-interest income and expense.
-6-
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
September 30, 2004 and December 31, 2003 was $180,498 and $170,296,
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 bases of assets and
liabilities measured by using the enacted tax rates and laws expected to be in
effect when the timing differences are expected to reverse. Deferred tax expense
or benefit is based on the difference between deferred tax asset or liability
from period to period.
PER SHARE DATA
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share", requires dual presentation of basic and diluted earnings per share.
Basic earnings per share is calculated by dividing net income by the weighted
average number of shares of common stock outstanding at the end of each period.
Diluted earnings per share is calculated by increasing the denominator for the
assumed conversion of all potentially dilutive securities. The Corporation does
not have any securities which have or will have a dilutive effect, accordingly,
basic and diluted per share data are the same.
CASH FLOW INFORMATION
For purposes of reporting consolidated cash flows, cash and cash equivalents
include cash on hand and due from banks, interest-bearing deposits in other
banks and federal funds sold. The Corporation considers cash classified as
interest-bearing deposits with other banks as a cash equivalent because they are
represented by cash accounts essentially on a demand basis. Federal funds are
also included as a cash equivalent because they are generally purchased and sold
for one-day periods.
TRUST ASSETS AND INCOME
Property held by the Corporation in a fiduciary or agency capacity for its
customers is not included in the accompanying consolidated financial statements
because such items are not assets of the Corporation. Trust Department income is
generally recognized on a cash basis and is not materially different than if it
was reported on an accrual basis.
-7-
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others". This Interpretation expands the disclosures to be made by a guarantor
about its obligations under certain guarantees and requires the guarantor to
recognize a liability in its financial statements for the obligation assumed
under a guarantee. In general, FIN 45 applies to contracts of indemnification
agreements that contingently require the guarantor to make payments to the
guaranteed party based on changes in an underlying agreement that is related to
an asset, liability, or equity security of the guaranteed party. Certain
guarantee contracts are excluded from both the disclosure and recognition
requirements of this Interpretation, while other guarantees are subject to just
the disclosure requirements of FIN 45 but not to the recognition provisions. The
disclosure requirements of FIN 45 were effective for the Corporation as of
December 31, 2002 and require disclosure of the nature of the guarantee, the
maximum potential amount of future payments the guarantor could be required to
make under the guarantee, and the current amount of the liability, if any, for
the guarantor's obligations under the guarantee. The recognition requirements of
FIN 45 are applied prospectively to guarantees issued or modified after December
31, 2002. This standard did not have any impact on the Corporation's
consolidated financial condition or results of operations.
In December 2002, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an amendment of SFAS No. 123," is generally effective for financial
statements for fiscal years and interim periods beginning after December 31,
2002. The statement amends SFAS No. 123, "Accounting for Stock-Based
Compensation" to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. The statement also amends the disclosure requirements of SFAS No.
123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based compensation and the
effect of the method used on reported results. The Corporation does not have any
stock-based compensation, therefore the standard has no impact on the
Corporation's consolidated financial condition or results of operations.
-8-
In December 2002, the FASB issued Statement of Financial Accounting Standard
(SFAS) No. 149, "Amendments to SFAS 133 on Derivative Instruments and Hedging
Activities" is generally effective for contracts entered into after June 30,
2003. This statement amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities under SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities." The changes in this statement improve financial reporting by
requiring that contracts with comparable characteristics be accounted for
similarly. The changes will result in more consistent reporting of contracts as
either derivatives or hybrid instruments. This standard does not have any impact
on the Corporation's consolidated financial position or results of operations.
In January 2003, the FASB issued FIN 46, which provides guidance on how to
identify a variable interest entity (VIE) and determine when the assets,
liabilities, noncontrolling interests, and results of operations of a VIE are to
be included in an entity's consolidated financial statements. A VIE exists when
either the total equity investment at risk is not sufficient to permit the
entity to finance its activities by itself, or the equity investors lack one of
three characteristics associated with owning a controlling financial interest.
Those characteristics include the direct or indirect ability to make decisions
about an entity's activities through voting rights or similar rights, the
obligations to absorb the expected losses of an entity if they occur, or the
right to receive the expected residual returns of the entity if they occur. This
standard did not have any impact on the Corporation's consolidated financial
positions or results of operations.
In May 2003, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
Both Liabilities and Equity" is generally effective for financial instruments
entered into or modified after May 31, 2003 and for contracts in existence at
the start of the first interim period beginning after June 15, 2003. This
statement establishes new standards for classification, measurement and
disclosure of certain types of financial instruments having characteristics of
both liabilities and equity, including instruments that are mandatory redeemable
and that embody obligations requiring or permitting settlement by transferring
assets or by issuing an entity's own shares. In December 2003, the FASB deferred
for an indefinite period the application of the guidance in SFAS 150 to
noncontrolling interests that are classified as equity in the financial
statements of a subsidiary but would be classified as a liability in the
parent's financial statements under SFAS 150. The deferral is limited to
mandatory redeemable noncontrolling interests associated with finite-lived
subsidiaries. This standard does not have any impact on the Corporation's
consolidated financial position or results of operations.
In December 2003, the Emerging Issues Task Force (EITF) issued No. 03-01 "The
Meaning of Other-Than-Temporary Impairment and its Application to Certain
Investments" is generally effective for fiscal years ending after December 15,
2003, and addresses how to define an "other-than-temporary impairment" as well
as its application to investments classified as either "Available-for-Sale" and
"Held-to-Maturity" under SFAS 115. The EITF requires disclosure of securities in
a continuous unrealized loss position to be stratified based on length of time
those securities were carried in such a position (less than 12 months, and 12
months or more). Additional information is required to be disclosed annually to
include the nature of the investment, the cause of the decline in value and the
evidence considered in reaching the conclusion that the investment is not other
than temporarily impaired. The disclosure was initially required for fiscal
years ending after December 15, 2003, however, in September 2004 the effective
date has been delayed by the FASB. Comparative information for earlier periods
is not required.
ADVERTISING COSTS
It is the Corporation's policy to expense advertising costs in the period in
which they are incurred. Advertising expense for the periods ended September 30,
2004 and September 30, 2003, were approximately $57,388 and $54,238,
respectively.
-9-
RECLASSIFICATION
Certain amounts in the consolidated financial statements of the prior years have
been reclassified to conform with presentation used in the 2004 consolidated
financial statements. Such reclassifications had no effect on the Corporation's
consolidated financial condition or net income.
NOTE 2 - ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the periods ended September 30,
2004 and September 30, 2003 were as follows:
(Amounts in thousands)
------------------------------
2004 2003
------------ ------------
Balance, beginning of year $ 1,415 $ 1,298
Provision charged to operations 110 150
Loans charged-off (124) (44)
Recoveries 24 40
------------ ------------
Balance, September 30 $ 1,425 $ 1,444
============ ============
At September 30, 2004, the recorded investment in loans that are considered to
be impaired as defined by SFAS No. 114 was $77,706. No additional charge to
operations was required to provide for the impaired loans since the total
allowance for loan losses is estimated by management to be adequate to provide
for the loan loss allowance required by SFAS No. 114 along with any other
potential losses.
At September 30, 2004, there were no significant commitments to lend additional
funds with respect to non-accrual and restructured loans.
Non-accrual loans at September 30, 2004 and December 31, 2003 were $1,110,522
and $1,851,686, respectively.
Loans past due 90 days or more and still accruing interest amounted to $273,000
at September 30, 2004.
NOTE 3 - SHORT-TERM BORROWINGS
Federal funds purchased, 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.
-10-
NOTE 4 - LONG-TERM BORROWINGS
Long-term borrowings are comprised of advances from the Federal Home Loan Bank.
NOTE 5 - DEFERRED COMPENSATION PLANS
The Bank has entered into certain non-qualified deferred compensation agreements
with certain executive officers and directors. Expenses related to these
non-qualified deferred compensation plans amounted to $92,419 and $53,072 for
September 30, 2004 and September 30, 2003, respectively.
There were no substantial changes in other plans as disclosed in the 2003 Annual
Report.
NOTE 6 - STOCKHOLDERS' EQUITY
Changes in stockholders' equity for the period ended September 30, 2004 were as
follows:
(Amounts in Thousands, Except Common Share Data)
----------------------------------------------
Accumulated
Other
Comprehensive
Common Common Comprehensive Retained Income Treasury
Shares Stock Surplus Income Earnings (Loss) Stock Total
---------- --------- --------- ------------- ---------- ------------- ---------- ---------
Balance at January 1, 2004 1,276,445 $ 1,595 $ 3,635 $ 21,997 $ 376 $ -- $ 27,603
Comprehensive Income:
Net income $ 1,597 1,597 1,597
Change in unrealized gain (loss)
on investment securities
available-for-sale net of
reclassification adjustment
and tax effects (52) (52) (52)
----------
TOTAL COMPREHENSIVE
INCOME $ 1,545
==========
Issuance of 5,548 shares of
common stock under dividend
reinvestment and stock
purchase plans 5,548 7 153 -- -- -- 160
Purchase of 10,000 shares of
treasury stock -- -- -- -- -- (288) (288)
Retirement of 10,000 shares of
treasury stock (10,000) (12) (276) -- -- 288 --
Cash dividends $.52 per share -- -- -- (663) -- -- (663)
---------- --------- --------- ---------- ---------- ---------- ---------
Balance at September 30, 2004 1,271,993 $ 1,590 $ 3,512 $ 22,931 $ 324 $ -- $ 28,357
---------- --------- --------- ---------- ---------- ---------- ---------
-11-
NOTE 7 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
The Corporation is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These consolidated financial instruments include commitments to extend credit,
standby letters of credit and commercial letters of credit. Those instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the consolidated balance sheets. The contract or
notional amounts of those instruments reflect the extent of involvement the
Corporation has in particular classes of financial instruments. The Corporation
does not engage in trading activities with respect to any of its financial
instruments with off-balance sheet risk.
The Corporation may require collateral or other security to support financial
instruments with off-balance sheet credit risk. The contract or notional amounts
at September 30, 2004 and December 31, 2003 were as follows:
(Amounts in Thousands)
------------------------------
September December
30, 2004 31, 2003
------------ ------------
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit $ 15,682 $ 13,106
Financial standby letters of credit 1,669 1,813
Performance standby letters of credit 829 843
Dealer floor plans 2,165 1,412
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 the performance of a customer
to a third party. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Corporation holds collateral supporting those commitments for which
collateral is deemed necessary.
The Corporation's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
letters of credit is represented by the contractual notional amount of those
instruments. The Corporation uses the same credit policies in making commitments
and conditional obligations, as it does for on-balance sheet instruments.
-12-
The Corporation granted commercial, consumer and residential loans to customers
within Pennsylvania. Of the total loan portfolio at September 30, 2004, 80.1%
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.
NOTE 8 - MANAGEMENT'S ASSERTIONS AND COMMENTS REQUIRED TO BE PROVIDED WITH FORM
10Q FILING
In management's opinion, the consolidated interim financial statements reflect
fair presentation of the consolidated financial position of CCFNB Bancorp, Inc.
and Subsidiary, and the results of their operations and their cash flows for the
interim periods presented. Further, the consolidated interim financial
statements are unaudited, however they reflect all adjustments, which are in the
opinion of management, necessary to present fairly the consolidated financial
condition and consolidated results of operations and cash flows for the interim
periods presented and that all such adjustments to the consolidated financial
statements are of a normal recurring nature.
The results of operations for the nine-month period ended September 30, 2004,
are not necessarily indicative of the results to be expected for the full year.
These consolidated interim financial statements have been prepared in accordance
with requirements of Form 10Q and therefore do not include all disclosures
normally required by accounting principles generally accepted in the United
States of America applicable to financial institutions as included with
consolidated financial statements included in the Corporation's annual Form 10K
filing. The reader of these consolidated interim financial statements may wish
to refer to the Corporation's annual report or Form 10K for the period ended
December 31, 2003, filed with the Securities and Exchange Commission.
-13-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of CCFNB Bancorp, Inc.:
We have reviewed the accompanying consolidated balance sheet of CCFNB Bancorp,
Inc. and Subsidiary as of September 30, 2004, and the related consolidated
statements of income and cash flows for the three and nine-month periods ended
September 30, 2004 and 2003. These consolidated interim financial statements are
the responsibility of the management of CCFNB Bancorp, Inc. and Subsidiary.
We conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the consolidated interim financial statements referred to above for
them to be in conformity with accounting principles generally accepted in the
United States of America.
We have previously audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet of CCFNB Bancorp, Inc. and Subsidiary as of December 31, 2003, and the
related consolidated statements of income, stockholders' equity, and cash flows
for the year then ended (not presented herein); and in our report dated January
13, 2004, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 2003, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
/s/ J.H. WILLIAMS & CO., LLP
J.H. Williams & Co., LLP
Kingston, Pennsylvania
October 19, 2004
-14-
CCFNB BANCORP, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 2004
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Consolidated Summary of Operations
(Dollars in Thousands, except for per share data)
At and For the Nine
Months At and For the Years
Ended September 30, Ended December 31,
------------------------ ------------------------------------------------------------------
2004 2003 2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income and Expense:
Interest income $ 8,049 $ 8,474 $ 11,221 $ 12,780 $ 13,720 $ 13,552 $ 12,669
Interest expense 2,724 3,407 4,366 5,741 6,924 6,859 6,099
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income 5,325 5,067 6,855 7,039 6,796 6,693 6,570
Loan loss provision 110 150 200 309 163 54 78
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income after
loan loss Provision 5,215 4,917 6,655 6,730 6,633 6,639 6,492
Non-interest income 1,118 1,134 1,508 1,210 1,149 1,053 1,050
Non-interest expense 4,312 4,070 5,409 5,479 5,104 4,967 4,818
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes 2,021 1,981 2,754 2,461 2,678 2,725 2,724
Income taxes 424 420 591 539 621 671 685
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income $ 1.597 $ 1.561 $ 2,163 $ 1,922 $ 2,057 $ 2,054 $ 2,039
========== ========== ========== ========== ========== ========== ==========
Per Share: (1)
Net income $ 1.25 $ 1.22 $ 1.69 $ 1.47 $ 1.54 $ 1.51 $ 1.48
Cash dividends paid .52 .49 .66 .63 .59 .56 .51
Average shares outstanding 1,275,743 1,283,475 1,281,265 1,309,084 1,338,007 1,355,624 1,375,572
Average Balance Sheet:
Loans $ 148,367 $ 150,560 $ 149,485 $ 147,545 $ 139,219 $ 134,325 $ 123,185
Investments 63,633 59,248 58,152 54,197 50,593 47,003 49,827
Other earning assets 17,501 6,785 8,036 5,309 6,569 219 1,638
Total assets 233,108 231,173 230,975 223,476 208,630 196,727 186,597
Deposits 171,657 172,596 171,956 150,883 149,601 139,774 138,963
Other interest-bearing
liabilities 32,193 30,246 30,473 29,356 31.629 31,203 23,458
Stockholders' equity 27,980 26,973 27,223 26,615 25,890 23,910 22,874
Balance Sheet Data:
Loans $ 149,103 $ 149,339 $ 147,631 $ 151,338 $ 142,990 $ 137,360 $ 134,423
Investments 64,490 64,969 62,775 53,528 57,121 47,311 49,104
Other earning assets 4,052 3,502 6,003 10,068 63,312 4,814 1,343
Total assets 233,302 233,314 232,914 229,032 214,238 203,054 196,122
Deposits 171,528 173,066 171,786 172,127 142,990 143,169 138,606
Other interest-bearing
liabilities 32,061 31,870 32,325 28,621 31,384 33,477 33,224
Stockholders' equity 28,357 27,106 27,603 26,840 26,042 25,050 23,047
Ratios: (2)
Return on average assets .98% .96% .94% .86% .99% 1.04% 1.09%
Return on average equity 7.61% 7.72% 7.95% 7.22% 7.92% 8.59% 8.91%
Dividend payout ratio 41.52% 40.17% 39.02% 42.86% 38.31% 36.89% 34.09%
Average equity to average
assets ratio 12.00% 11.67% 11.79% 11.77% 12.16% 12.34% 11.75%
(1) Per share data has been calculated on the weighted average number of
shares outstanding.
(2) The ratios for the nine month period ending September 30, 2004 and 2003
are annualized.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This Form 10-Q, both in the MD & A and elsewhere, contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Such statements are not historical facts and include expressions about our
confidence and strategies and our expectations about new and existing programs
and products, relationships, opportunities, technology and market conditions.
These statements may be identified by such forward-looking terminology as
"expect," "look," "believe," "anticipate," "may," "will," or similar statements
or variations of such terms. Such forward-looking statements involve certain
risks and uncertainties. These include, but are not limited to, the direction of
interest rates, continued levels of loan quality and origination volume,
continued relationships with major customers, and sources for loans, as well as
the effects of economic conditions and legal and regulatory barriers and
structure. Actual results may differ materially from such forward-looking
statements. We assume no obligation for updating any such forward-looking
statement at any time. Our consolidated financial condition and results of
operations are essentially those of our wholly-owned subsidiary bank, Columbia
County Farmers National Bank. Therefore, our discussion and analysis that
follows is primarily centered on the performance of this bank.
15
EARNINGS SUMMARY
Net income for the nine months ended September 30, 2004 was $1,597 thousand or
$1.25 per basic and diluted share. These results compare with net income of
$1,561 thousand, or $1.22 per basic and diluted share for the same period in
2003. Annualized return on average equity decreased to 7.61 percent from 7.72
percent, while the annualized return on average assets increased to .98 percent
from .96 percent, for the nine months ended September 30, 2004 and 2003,
respectively.
Net interest income continues to be the largest source of our operating income.
Net interest income on a tax equivalent basis increased to $5.6 million at
September 30, 2004, compared with $5.4 million for the nine months ended
September 30, 2003. The increase in net interest income is primarily due to the
decreased interest rates on deposits and short term borrowings. The tax
equalivized interest margin increased to 3.41 percent for the nine months ended
September 30, 2004, compared to 3.32 percent for the nine months ended September
30, 2003.
Average interest earning assets increased $.4 million for the nine months ended
September 30, 2004 over the same period in 2003. Average loans decreased $2.2
million, average investments increased $4.4 million or 7.4 percent and average
federal funds sold and interest-bearing deposits with other financial
institutions decreased 1.8 million for this nine month period.
Average interest bearing liabilities for the nine months ended September 30,
2004 decreased $.4 million from the same period in 2003. Average short-term
borrowings were $20.9 million at September 30, 2004 and $18.9 million at
September 30, 2003. Long-term debt, which includes primarily FHLB advances,
remained at $11.3 million on September 30, 2004 and September 30, 2003. Average
demand deposits increased $1.4 million from 2003 balances.
The average interest rate on total interest earning assets was 5.32 percent for
the nine months ended September 30, 2004, compared with 5.22 percent for the
nine months ended September 30, 2003. The average interest rate for loans
decreased 19 basis points to 6.07 percent at September 30, 2004 compared to 6.26
percent September 30, 2003. Interest-bearing deposits with other Financial
Institutions interest rates decreased 5 basis points to 1.10 percent from 1.15
percent at September 30, 2004 and September 30, 2003, respectively. Average
rates on interest bearing deposits decreased by 56 basis points to 1.73 percent
from 2.29 percent one year ago. Average interest rates also decreased on total
interest bearing liabilities by 48 basis points to 1.95 percent from 2.43
percent. The reason for these decreases on interest bearing liabilities was
primarily attributed to the decreasing rates on all deposit liabilities.
NET INTEREST INCOME
Net interest income increased to $5.3 million for the nine months ended
September 30, 2004 compared to $5.1 million for the same period in 2003.
The following table reflects the components of net interest income for each of
the nine months ended September 30, 2004 and 2003.
ANALYSIS OF AVERAGE ASSETS, LIABILITIES AND CAPITAL EQUITY
AND
NET INTEREST INCOME ON A TAX EQUIVALENT BASIS
AVERAGE BALANCE SHEET AND RATE ANALYSIS
(Dollars in Thousands)
Nine Months Ended September 30, 2004 and 2003
Interest Average Interest Average
Average Income / Yield / Average Income / Yield /
Balance Expense Rate Balance Expense Rate
----------- ----------- ----------- ----------- ----------- -----------
(1) (2) (1) (2)
ASSETS:
Interest-bearing deposits with
other financial institutions $ 4,498 $ 37 1.10% $ 4,745 $ 41 1.15%
Investment securities (3) 63,633 1,523 3.91% 59,248 1,401 3.71%
Federal funds sold 529 7 1.76% 2,040 40 2.61%
Loans 148,367 6,482 6.07% 150,560 6,992 6.26%
----------- ----------- ----------- -----------
Total interest earning assets $ 217,027 $ 8,049 5.32% $ 216,593 $ 8,474 5.22%
----------- ----------- ----------- -----------
Reserve for loan losses (1,420) (1,371)
Cash and due from banks 5,687 5,403
Other assets 11,814 10,548
----------- -----------
Total assets $ 233,108 $ 231,173
----------- -----------
16
LIABILITIES AND CAPITAL:
Interest bearing deposits $ 154,356 $ 2,008 1.73% $ 156,731 $ 2,690 2.29%
Short-term borrowings 20,862 206 1.32% 18,903 209 1.49%
Long-term borrowings 11,331 510 6.00% 11,343 508 5.97%
----------- ----------- ----------- -----------
Total interest-bearing liabilities $ 186,549 $ 2,724 1.95% $ 186,977 $ 3,407 2.43%
----------- ----------- -----------
Demand deposits $ 17,301 $ 15,865
Other liabilities 1,278 1,358
Stockholders' equity 27,980 26,973
----------- -----------
Total liabilities and capital $ 233,108 $ 231,173
----------- -----------
NET INTEREST INCOME / $ 5,328 3.27% $ 5,067 3.12%
NET INTEREST MARGIN (4)
TAX EQUIVALENT NET INTEREST INCOME / $ 5,642 3.41% $ 5,393 3.32%
NET INTEREST MARGIN (5)
(1) Average volume information was computed using daily 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 2004 and 2003.
The following table demonstrates the relative impact on net interest income of
changes in volume of interest earnings assets and interest bearing liabilities
and changes in rates earned and paid by us on such assets and liabilities.
CHANGE IN NET INTEREST INCOME ON A TAX EQUIVALENT BASIS
Nine Months Ended September 30, 2004
Compared with 2003
Increase (Decrease)(2)
Volume Rate Total
------------ ------------ ------------
(In thousands)
Interest income:
Loans (1) $ (137) $ (286) $ (423)
Investments 163 118 281
Federal funds sold and other short-term investments (28) (28) (56)
Interest expense:
Deposits (54) (878) (932)
Short-term borrowings 29 (32) (3)
Long term debt (1) 3 2
Net: $ 24 $ 711 $ 735
(1) Interest income is adjusted to a tax equivalent basis using a 34
percent tax rate.
(2) Variances resulting from a combination of changes in volume and rates
are allocated to the categories in proportion to the absolute dollar
amounts of the change in each category.
The outstanding balance of net loans at September 30, 2004 was $147.7 million
compared to $146.2 million at December 31, 2003.
Interest income from investment securities increased 7.1 percent from $1.4
million for the nine months ended September 30, 2003 to $1.5 million for the
nine months ended September 30, 2004. The average balance of investment
securities for the nine months ended September 30, 2004 increased 7.4 percent to
$63.6 million, compared to the $59.2 million for the same period of 2003.
Total interest expense decreased $.7 million or 20.6 percent for the first nine
months of 2004 as compared to the first nine months of 2003. The cost of
interest bearing liabilities decreased on an average yield basis from 2.43
percent through September 2003 compared to 1.95 percent through September 2004.
The average yield on interest earning assets increased from 5.22 percent to 5.32
percent through September 2003 and 2004, respectively.
Average short-term borrowings increased $2 million from $18.9 million at
September 30, 2003 to $20.9 million at September 30, 2004.
Long-term borrowings from Federal Home Loan Bank remained constant at an average
$11.3 million at September 30, 2004 and 2003.
17
NON-INTEREST INCOME
The following table presents the components of non-interest income for the nine
months ended September 30, 2004 and 2003.
Nine Months Ended
September 30,
(In thousands)
------------------------------
2004 2003
------------ ------------
Service charges and fees $ 582 $ 507
Trust Department income 109 95
Investment Securities Gain -net 3 8
Gain on Sale of Loans 12 92
Gain on Sale of Other Real Estate Owned 0 12
Gain on Cash Surrender Value Life Insurance 191 165
Mortgage Servicing Rights, net of amortization (12) 72
Third party brokerage income 90 74
Other 143 109
------------ ------------
Total $ 1,118 $ 1,134
------------ ------------
Non-interest income continues to represent a considerable source of our income.
We are committed to increasing non-interest income. Increases will be derived
from our existing sources of non-interest income and any new opportunities that
may develop.
For the nine months ended September 30, 2004, total non-interest income
decreased $16 thousand to $1,118 thousand or 1.4 percent, compared to $1,134
thousand for the nine months period ended September 30, 2003.
Service charges and fees increased $75 thousand from $507 thousand at September
30, 2003 to $582 thousand or 14.8 percent at September 30, 2004. Some of this
increase can be attributed to a new overdraft privilege product that was
introduced in May 2004. Trust Department income increased from $95 thousand at
September 30, 2003 to $109 thousand or 14.7 percent at September 30 2004.
Investment securities gains were $3 thousand at September 30, 2004 and $8
thousand at September 30, 2003, a decrease of $5 thousand. Sale of Loans
generated $12 thousand in income through September 30, 2004 compared to $92
thousand for the same period of 2003. Gain on Sale of Other Real Estate Owned
realized income of $0 at September 30, 2004 compared to $12 thousand for the
nine months ended September 30, 2003. Bank Owned Life Insurance gain in Cash
Surrender Value was $191 thousand at September 30, 2004 compared to $165
thousand at September 30, 2003. Third party brokerage income reflected a $16
thousand increase or 21.6 percent comparing September 30, 2004 to September 30,
2003.
Other non-interest income increased from $109 thousand at September 30, 2003 to
$143 thousand or 31.2 percent at September 30, 2004.
NON-INTEREST EXPENSE
The following table presents the components of non-interest expense for the nine
months ended September 30, 2004 and 2003.
Nine Months Ended
September 30,
2004 2003
------------ ------------
(Dollars in Thousands)
Salaries and wages $ 1,712 $ 1,647
Employee benefits 598 585
Net occupancy expense 294 290
Furniture and equipment expense 351 357
State shares tax 212 206
Other expense 1,145 985
------------ ------------
Total $ 4,312 $ 4,070
------------ ------------
Non-interest expense increased to $4.3 million at September 30, 2004 compared to
$4.1 million at September 30, 2003.
Generally, non-interest expense accounts for the cost of maintaining facilities;
providing salaries and benefits to employees; and paying for insurance,
supplies, advertising, data processing services, taxes and other related
expenses. Some of the costs and expenses are variable while others are fixed. To
the extent possible, we utilize budgets and related measures to control variable
expenses.
Salaries increased 3.9 percent at September 30, 2004 compared to September 30,
2003. A 2.2 percent increase was reflected in employee benefits from $585
thousand at September 30, 2003, to $598 thousand at September 30, 2004.
Increased cost of health coverage accounted for a significant part of the
overall increase in employee benefits.
Pennsylvania Bank Shares Tax increased 2.9 percent from $206 thousand at
September 30, 2003 compared to $212 thousand at September 30, 2004.
Other expenses increased 16.2 percent, or $160 thousand, from $985 thousand at
September 30, 2003 to $1,145 thousand at September 30, 2004. The largest
increases were in Officers Deferred Compensation with a $27 thousand increase;
Donations with a $39 thousand increase, the result of a State enacted tax credit
available against Pennsylvania Shares Tax in 2005 and 2006; and telephone and
data processing expenses associated with the installation of high speed data
lines to all offices at $19 thousand.
18
INCOME TAXES
Income tax expense as a percentage of pre-tax income was 21.0 percent for the
nine months ended September 30, 2004 compared with 21.2 percent for the same
period in 2003. The effective tax rate for 2004 is expected to approximate 34
percent.
ASSET / LIABILITY MANAGEMENT
INTEREST RATE SENSITIVITY
Our success is largely dependent upon our ability to manage interest rate risk.
Interest rate risk can be defined as the exposure of our net interest income to
the movement in interest rates. Our interest rate risk management is the
responsibility of the Asset / Liability Management Committee ("ALCO"), which
reports to the Board of Directors. ALCO establishes policies that monitor and
coordinate our sources, uses and pricing of funds as well as interest-earning
asset pricing and volume.
We use a simulation model to analyze net interest income sensitivity to
movements in interest rates. The simulation model projects net interest income
based on various interest rate scenarios over a 12 and 24 month period. The
model is based on the actual maturity and repricing characteristics of rate
sensitive assets and liabilities. The model incorporates assumptions regarding
the impact of changing interest rates on the prepayment rates of certain assets
and liabilities. In the current stagnant interest rate environment, our net
interest income is not expected to change materially.
LIQUIDITY
Our cash requirements consist primarily of dividends to shareholders. This cash
need is routinely satisfied by dividends collected from the bank along with cash
and investments owned. Projected cash flows from this source are expected to be
adequate to pay dividends, given the current capital levels and current
profitable operations of the bank. In addition, we may repurchase shares of our
outstanding common stock for benefit plans and other corporate purposes. The
cash required for a purchase of shares can be met by using our own funds,
dividends received from the bank, and borrowed funds.
As of September 30, 2004, we had $64.5 million of securities available for sale
recorded at their fair value, compared with $62.8 million at December 31, 2003.
As of September 30, 2004, the investment securities available for sale had an
unrealized gain of $324 thousand, net of deferred taxes, compared with an
unrealized gain of 376 thousand, net of deferred taxes, at December 31, 2003.
These securities are not considered trading account securities which may be sold
on a continuous basis, but rather are securities which may be sold to meet our
various liquidity and interest rate requirements.
In accordance with disclosures required by EITF NO. 03-1, the summary below
shows the gross unrealized losses and fair value, aggregated by investment
category that individual securities have been in a continuous unrealized loss
position for less than or more than 12 months as of September 30, 2004.
12 months Or more Total
Less than Unrealized 12 months Unrealized Unrealized
Description of Security Fair Value Loss Fair Value Loss Fair Value Loss
----------------------- ----------- ----------- ----------- ----------- ----------- -----------
Obligations of U. S.
Government Corporations and
Agencies
Mortgage Backed $12,930,088 $ 89,647 $ 6,378,459 $ 88,991 $19,308,547 $ 178,638
Other 7,209,063 40,938 0 0 7,209,063 40,938
Obligations of state and
political
Subdivisions 323,040 204 0 0 323,040 204
Marketable Equity Securities 80,320 151 88,262 10,202 168,582 10,353
----------- ----------- ----------- ----------- ----------- -----------
Total $20,542,511 $ 130,940 $ 6,466,721 $ 99,193 $27,009,232 $ 230,133
----------- ----------- ----------- ----------- ----------- -----------
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
Corporations 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.
NON-PERFORMING ASSETS
Shown below is a summary of past due and non-accrual loans:
(Dollars in thousands)
September 30, December 31,
2004 2003
------------ ------------
Past due and non-accrual:
Days 30 - 89 $ 809 $ 585
Days 90 plus 273 269
Non-accrual 1,111 1,852
------------ ------------
Total $ 2,193 $ 2,706
------------ ------------
19
Past due and non-accrual loans decreased $.5 million from $2.7 million at
December 31, 2003 to $2.2 million at September 30, 2004. The loan delinquency
expressed as a ratio to total loans was 1.4% at September 30, 2004 and 1.8% at
December 31, 2003. Subsequently, one non-accrual loan was paid off in October
2004 totaling $360 thousand, leaving a balance of $751 thousand in non-accrual
loans at October 31, 2004.
Any loans classified for regulatory purposes as loss, doubtful, substandard, or
special mention that have not been disclosed under Industry Guide 3 do not (i)
represent or result from trends or uncertainties which we reasonably expect will
materially impact future operating results, liquidity, or capital resources, or
(ii) represent material credits about which we are aware of any information
which causes us to have serious doubts as to the ability of such borrowers to
comply with the loan repayment terms.
We adhere to principles provided by Financial Accounting Standards Board
Statement No. 114, "Accounting by Creditors for Impairment of a Loan" - Refer to
Note 2 above for other details.
The following analysis provides a schedule of loan maturities / interest rate
sensitivities. This schedule presents a repricing and maturity analysis as
required by the FFIEC:
(Dollars in
Thousands)
MATURITY AND REPRICING DATA FOR LOANS AND LEASES September 30, 2004
Closed-end loans secured by first liens and 1-4 family residential properties
with a remaining maturity or repricing frequency of:
(1) Three months or less $ 3,313
(2) Over three months through 12 months 12,232
(3) Over one year through three years 25,453
(4) Over three years through five years 7,432
(5) Over five years through 15 years 18,230
(6) Over 15 years 339
All loans and leases other than closed-end loans secured by first liens on 1-4
family residential properties with a remaining maturity or repricing frequency
of:
(1) Three months or less 24,617
(2) Over three months through 12 months 13,285
(3) Over one year through three years 17,356
(4) Over three years through five years 14,611
(5) Over five years through 15 years 10,677
(6) Over 15 years 494
-------------
Sub-total $ 148,039
Add: non-accrual loans not included above 1,111
Less: unearned income (47)
-------------
Total Loans and Leases $ 149,103
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses reflected a balance of $1.4 million at September
30, 2004 and December 31, 2003. The allowance is believed adequate for possible
loan losses in the future.
The provision for loan losses was $110 thousand for the first nine months of
2004 compared to $150 thousand for the first nine months of 2003.
Because our loan portfolio contains a significant number of commercial loans
with relatively large balances the deterioration of one or several of these
loans may result in a possible significant increase in non-performing loans. An
increase in non-performing loans could result in a loss of interest income,
higher carrying costs, and an increase in the provision for loan losses and loan
charge-offs.
We maintain an allowance for loan losses to absorb any loan losses based on our
historical experience, an evaluation of economic conditions, and regular reviews
of delinquencies and loan portfolio quality. In evaluating our allowance for
loan losses, we segment our loans into the following categories:
o Commercial (including investment property mortgages),
o Residential mortgages, and
o Consumer.
We evaluate some loans as a homogeneous group and others on an individual basis.
Commercial loans with balances exceeding $250 thousand are reviewed
individually. After our evaluation of these loans, we determine the required
allowance for loan losses based upon the following considerations:
o Historical loss levels,
o Prevailing economic conditions,
o Delinquency trends,
o Changes in the nature and volume of the portfolio,
o Concentrations of credit risk, and
o Changes in loan policies or underwriting standards.
Management and the Board of Directors review the adequacy of the reserve on a
quarterly basis and adjustments, if needed, are made accordingly.
20
For the Three Months
Ending September 30,
Amounts in thousands 2004 2003
-------------------- ------------ ------------
Average loans outstanding: $ 148,367 $ 150,560
Total loans at end of period 149,103 149,783
Balance at beginning of period 1,415 1,298
Total charge-offs (124) (44)
Total recoveries 24 39
Net charge-offs (100) (5)
Provision for loan losses 110 150
Balance at end of period $ 1,425 $ 1,443
------------ ------------
Net charge-offs as a percent of average loans outstanding during period .07% .00%
Allowance for loan losses as a percent of total loans .96% .96%
The allowance for loan losses is based on our evaluation of the allowance for
loan losses in relation to the credit risk inherent in the loan portfolio. In
establishing the amount of the provision required, management considers a
variety of factors, including but not limited to, general economic conditions,
volumes of various types of loans, collateral adequacy and potential losses from
significant borrowers. On a monthly basis, the Board of Directors and the bank's
Credit Administration Committee review information regarding specific loans and
the total loan portfolio in general in order to determine the amount to be
charged to the provision for loan losses.
CAPITAL ADEQUACY
A major strength of any financial institution is a strong capital position. This
capital is very critical as it must provide growth, dividend payments to
shareholders, and absorption of unforeseen losses. Our federal regulators
provide standards that must be met. These standards measure "risk-adjusted"
assets against different categories of capital. The "risk-adjusted" assets
reflect off balance sheet items, such as commitments to make loans, and also
place balance sheet assets on a "risk" basis for collectibility. The adjusted
assets are measured against the standards of Tier I Capital and Total Qualifying
Capital. Tier I Capital is common shareholders' equity. Total Qualifying Capital
includes so-called Tier II Capital which is common shareholders' equity and the
allowance for loan and lease losses. The allowance for loan and lease losses
must be lower than or equal to common shareholders' equity to be eligible for
Total Qualifying Capital.
We exceed all minimum capital requirements as reflected in the following table:
September 30, 2004 December 31, 2003
----------------------------- ------------------------------
Minimum Minimum
Calculated Standard Calculated Standard
Ratios Ratios Ratios Ratios
------------ ------------ ------------ ------------
Risk Based Ratios:
Tier I Capital to risk-weighted assets 18.37% 4.00% 19.02% 4.00%
Total Qualifying Capital to risk-weighted assets 19.37% 8.00% 20.08% 8.00%
Additionally, certain other ratios also provide capital analysis as follows:
September 30, December 31,
2004 2003
Tier I Capital to average assets 12.03% 11.59%
We believe that the bank's current capital position and liquidity positions are
strong and that its capital position is adequate to support its operations.
Book value per share amounted to $21.71 at September 30, 2004, compared with
$21.63 per share at December 31, 2003.
Cash dividends declared amounted to $.52 per share, for the nine months ended
September 30, 2004, equivalent to a dividend payout ratio of 41.52 percent,
compared with 40.17 percent for the same period in 2003. Our Board of Directors
continues to believe that cash dividends are an important component of
shareholder value and that, at the bank's current level of performance and
capital, we expect to continue our current dividend policy of a quarterly cash
distribution of earnings to our shareholders.
CONTROLS AND PROCEDURES
EVALUATION OF OUR DISCLOSURE CONTROLS AND PROCEDURES. The Securities and
Exchange Commission requires that as of the end of the period covered by this
report the CEO and the Principal Financial Officer evaluate the effectiveness of
the design and operation of our disclosure controls and procedures (as defined
in Rule 13 (a)-15(e) and Rule 15 (d)-15(e) under the Securities Exchange Act of
1934), and report on the effectiveness of the design and operation of our
disclosure controls and procedures. Accordingly, under the supervision and with
the participation of our management, including our CEO and Principal Accounting
Officer, we evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the period.
CEO/PRINCIPAL ACCOUNTING OFFICER CONCLUSIONS ABOUT THE EFFECTIVENESS OF THE
DISCLOSURE CONTROLS AND PROCEDURES. Based upon their evaluation of the
disclosure controls and procedures, our CEO and Principal Accounting Officer
have; concluded that, subject to the limitations noted below, our disclosure
controls and procedures are effective to provide reasonable assurance that
material information relating to the Company and its consolidated subsidiaries
is made known to management, including the CEO and Principal Financial Officer,
on a timely basis and particularly during the period in which this Quarterly
Report on Form 10-Q was being prepared.
21
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS.
Our management, including the CEO and Principal Financial Officer, does not
expect that our disclosure controls and procedures or our internal control, will
prevent all error and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of 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 the company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. 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, that there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions;
over time, control may become inadequate because of changes in conditions, or
the degree of compliance with the policies or 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. While we
believe that our disclosure controls and procedures have been effective, in
light of the foregoing we intend to continue to examine and refine our
disclosure controls and procedures and to monitor ongoing developments in this
area.
CHANGES IN INTERNAL CONTROLS. There were no changes in our internal control,
over financial reporting, identified in connection with the reevaluation of such
internal control over financial reporting that occurred during the period
covered by this quarterly report, that has materially affected, or is reasonably
likely to materially affect our internal control over financial reporting.
22
PART II - OTHER INFORMATION;
Item 1. Legal Proceedings
Management and the Corporation's legal counsel are not aware of any litigation
that would have a material adverse effect on the consolidated financial position
of the Corporation. There are no proceedings pending other than the ordinary
routine litigation incident to the business of the Corporation and its
subsidiary, Columbia County Farmers National Bank. In addition, no material
proceedings are pending or are known to be threatened or contemplated against
the Corporation and the Bank by government authorities.
Item 2. Changes in Securities - Nothing to report.
Item 3. Defaults Upon Senior Securities - Northing to report.
Item 4. Submission of matters to a Vote of Security Holders - Nothing to report.
Item 5. Other Information - On October 27, 2004 Columbia County Farmers National
Bank opened a branch in the Wal Mart Supercenter at
Buckhorn, 100 Lunger Drive, Bloomsburg, PA 17815
Item 6. A - Exhibits and Reports on Form 8-K - None
B - Exhibits 31.1, 31.2 and 32
23
SIGNATURES
Pursuant to the requirements 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.
(Registrant)
By /s/ LANCE O. DIEHL
---------------------------------
Lance O. Diehl
President and CEO
Date: November 8, 2004
By /s/ VIRGINIA D. KOCHER
---------------------------------
Virginia D. Kocher
Principal Financial Officer
Date: November 8, 2004
24