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, 2006
[ ] 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 an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes No 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 $28.05 at June 30, 2006, was $35,065,417.
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See the definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer Accelerated filer Non-accelerated filer X
--- --- ---
As of February 28, 2007, the Registrant had outstanding 1,238,221 shares of its
common stock, par value $1.25 per share.
Page 1 of 84
Exhibit Index on Page 72
CCFNB BANCORP, INC.
FORM 10-K
INDEX
PAGE
----
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS........................ 3
ITEM 1. BUSINESS........................................................ 3
ITEM 1A. RISK FACTORS.................................................... 11
ITEM 2. PROPERTIES...................................................... 13
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......................................... 51
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............. 52
ITEM 11. EXECUTIVE COMPENSATION.......................................... 56
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS................................. 65
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................. 65
ITEM 14. ACCOUNTANT FEES AND SERVICES.................................... 66
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES....................... 68
SIGNATURES............................................................... 70
INDEX TO EXHIBITS........................................................ 72
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, 2006, we had
approximately:
- $242 million in total assets;
- $161 million in loans;
- $169 million in deposits; and
- $ 30 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, 2006, 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, 2006. 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, 2006, 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, 2006, 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, 2006. 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, 2006, our
deposits totaled $169 million. Of the total deposit balance, $10 million or 5.9
percent represent Individual Retirement Accounts and $29 million or 17.2 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 49.7 percent of total deposits at December 31, 2005 and 48.5 percent
of total deposits at December 31, 2006.
We are not dependent for deposits nor exposed by loan concentrations
to a single customer, or to a small group of customers 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, 2006, we met both requirements, with Tier 1 and Total Capital equal to 19.3
percent and 20.3 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, 2006, our leverage ratio was 12.7
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,
2006. 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, 2006, 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, 2006, 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, 2006, approximately $1,953,064 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 expects to
receive a one-time assessment credit of approximately $182,912 which
will offset the cost of expected higher deposit insurance premiums for
2007. We do not anticipate that these higher FDIC deposit insurance
premiums will have a material adverse effect on our net income for
2007.
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 can elect 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 $528. The $528 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.
THE BANK
The Bank's legal headquarters are located at 232 East Street,
Bloomsburg, and Columbia County, Pennsylvania 17815. The Bank is a locally-owned
and managed community bank that seeks to provide personal attention and
professional financial assistance
10
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.
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
11
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 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.
12
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.
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. Our 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
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.
13
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 761 stockholders of record not including individual
participants in security position listings and 1,238,221 shares of common stock,
par value of $1.25 per share, the only authorized class of common stock,
outstanding as of February 28, 2007. Our common stock trades under the symbol
"CCFN." As of February 28, 2007, 5 firms were identified on the interdealer
electronic bulletin board system as market makers in our common stock. The
following information is reported by one of our market makers: Ferris, Baker
Watts, Inc., Baltimore, MD. These quotations represent prices between buyers and
sellers and do not include retail mark, markdown or commission. They may not
necessarily represent actual transactions. The high and low closing sale prices
and dividends per share of our common stock for the four quarters of 2006 and
2005 are summarized in the following table.
Dividends
2006: High ($) 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
Dividends
2005: High ($) Low ($) Declared ($)
----- -------- ------- ------------
First quarter 27.50 27.05 .18
Second quarter 28.10 27.15 .18
Third quarter 29.75 27.75 .19
Fourth quarter 29.00 27.75 .19
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.
The following table presents information on the shares of our common
stock that we repurchased during the fourth quarter of 2006:
CCFNB BANCORP, INC.
ISSUER PURCHASES OF EQUITY SECURITIES
NUMBER OF
SHARES NUMBER OF
PURCHASED SHARES THAT
AVG AS PART OF MAY YET BE
NUMBER OF PRICE PUBLICLY PURCHASED
SHARES PAID PER ANNOUNCED UNDER THE
MONTH PURCHASED SHARE PROGRAM PROGRAM
----- --------- -------- ---------- -----------
10/01/06 - 10/31/06 2,000 $29.00 2,000 44,000
11/01/06 - 11/30/06 0 0 0 44,000
12/01/06 - 12/31/06 4,000 $29.75 4,000 40,000
----- -----
TOTAL 6,000 6,000
===== =====
14
FIVE-YEAR PERFORMANCE GRAPH
The following graph and table compare the cumulative total stockholder return on
our Common Stock during the five-year period ending on December 31, 2006, with
the cumulative total return on the SNL Securities Corporate Performance Index
(1) for 35 publicly-traded banks with under $250 million in total assets in the
United States of America, and the cumulative total return for all United States
stocks traded on the NASDAQ Stock Market. The comparison assumes the value of
the investment in our Common Stock and each index was $100 on December 31, 2001,
and assumes further the reinvestment of dividends into the applicable
securities. The stockholder return shown on the graph and table below is not
necessarily indicative of future performance.
CCFNB BANCORP, INCORPORATED
(PERFORMANCE GRAPH)
PERIOD ENDING
---------------------------------------------------------------
INDEX 12/31/01 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06
----- -------- -------- -------- -------- -------- --------
CCFNB Bancorp, Incorporated 100.00 106.75 128.80 127.24 137.45 139.60
NASDAQ Composite 100.00 68.76 103.67 113.16 115.57 127.58
SNL <$250M Bank Index 100.00 122.88 185.83 229.77 239.71 259.95
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)
2006 2005 2004 2003 2002
---------- ---------- ---------- ---------- ----------
INCOME STATEMENT DATA:
Total interest income $ 13,202 $ 11,442 $ 10,843 $ 11,221 $ 12,780
Total interest expense 5,301 4,131 3,669 4,366 5,741
---------- ---------- ---------- ---------- ----------
Net interest income 7,901 7,311 7,174 6,855 7,039
Provision for possible loan losses 175 90 140 200 309
Other operating income 1,900 1,713 1,530 1,508 1,210
Other operating expenses 6,437 6,077 5,746 5,409 5,479
Federal income taxes 777 631 601 591 539
---------- ---------- ---------- ---------- ----------
Net income $ 2,412 $ 2,226 $ 2,217 $ 2,163 $ 1,922
PER SHARE DATA:
Earnings per share (1) $ 1.93 $ 1.76 $ 1.74 $ 1.69 $ 1.47
Cash dividends declared per share .78 .74 0.70 0.66 0.63
Book value per share 24.36 23.06 22.49 21.63 20.76
Average annual shares outstanding 1,249,844 1,262,171 1,274,034 1,281,265 1,309,084
BALANCE SHEET DATA:
Total assets $ 241,920 $ 231,218 $ 235,377 $ 232,914 $ 229,032
Total loans 160,641 154,271 149,900 147,631 151,338
Total securities 53,486 53,919 61,834 62,775 53,538
Total deposits 169,285 164,847 172,487 171,786 172,127
FHLB advances - long - term 11,297 11,311 11,323 11,335 11,347
Total stockholders' equity 30,249 29,012 28,506 27,603 26,840
PERFORMANCE RATIOS:
Return of average assets 1.02% 0.97% 0.96% 0.94% 0.86%
Return on average stockholders' equity 7.97% 7.73% 7.88% 7.95% 7.22%
Net interest margin (2) 3.74% 3.63% 3.54% 3.39% 3.58%
Total non-interest expense as a percentage of
average assets 2.72% 2.64% 2.45% 2.34% 2.45%
ASSET QUALITY RATIOS:
Allowance for possible loan losses as a
percentage of loans, net 0.91% 1.02% 0.93% 0.96% 0.87%
Allowance for possible loan losses as a
percentage of non-performing loans (3) 921.52% 185.54% 110.37% 52.29% 57.95%
Non-performing loans as a percentage of total
loans, net (3) 0.10% 0.55% 0.85% 1.85% 1.49%
Non-performing assets as a percentage of total
assets (3) 0.07% 0.36% 0.54% 1.16% 0.98%
Net charge-offs as a percentage of average net
loans (4) 0.17% (0.05)% 0.11% 0.06% 0.03%
LIQUIDITY AND CAPITAL RATIOS:
Equity to assets 12.50% 12.55% 12.11% 11.85% 11.72%
Tier 1 capital to risk-weighted assets (5) 19.25% 19.24% 19.27% 18.82% 20.36%
Leverage ratios (5)(6) 12.71% 12.74% 12.17% 11.79% 11.77%
Total capital to risk-weighted assets (5) 20.29% 20.32% 20.31% 19.88% 18.53%
Dividend payout ratio 40.39% 41.92% 40.19% 39.02% 42.86%
16
----------
(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 8.36 percent from $2,226,000 in 2005 to
$2,412,000 in 2006. Earnings per share increased by 9.66 percent from $1.76 in
2005 to $1.93 in 2006. Our return on average assets (ROAA) increased to 1.02
percent in 2006, compared to 0.97 percent in 2005. Our return on average equity
(ROAE) increased to 7.97 percent in 2006, compared to 7.73 percent in 2005.
Loans increased by 4.13 percent in 2006 to $160,641,000 from
$154,271,000 in 2005. This increase was mainly in the real estate area.
We instituted, in 1995, a dividend reinvestment plan and an employees
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 (2006); 18,000 shares (2005); and 16,000
shares (2004). The net effect of the stock plans and the repurchase program
resulted in weighted average shares of common stock outstanding as follows:
1,249,884 (2006); 1,262,171 (2005); and 1,274,034 (2004).
Tax-equivalent net interest income increased 6.41 percent to $8.3
million in 2006 from $7.8 million in 2005. Average earning assets were $220.6
million in 2006 and $212.5 million in 2005. Net interest income increased 8.22
percent from $7.3 million in 2005 to $7.9 million in 2006. 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,
------------------------
2006 2005 2004
------ ------ ------
Service charges and fees $ 846 $ 828 $ 711
Gain on sale of loans 45 40 36
Bank-owned life insurance income 253 247 257
Trust department income 191 157 165
Investment securities gains - net 0 34 3
Other 565 407 358
------ ------ ------
Total non-interest income $1,900 $1,713 $1,530
====== ====== ======
Total non-interest income increased 10.92 percent during 2006 from
$1,713,000 in 2005 to $1,900,000 in 2006 or 10.92%. Service fees and charges
increased from $828,000 in 2005 to $846,000 in 2006 or 2.17 percent. "Overdraft
Privilege" was instrumental in this increase. Other income increased 38.82
percent from $407,000 in 2005 to $565,000 in 2006. Factors attributable to this
increase were an increase of $101,000 in Third Party Brokerage Sales for the
year. An increase of $57,000 in other income represents participation in a state
program designed to give tax credits to participating institutions.
17
TABLE OF OTHER NON-INTEREST EXPENSE
(Dollars in Thousands)
Years Ended December 31,
------------------------
2006 2005 2004
------ ------ ------
Salaries and wages $2,615 $2,324 $2,289
Employee benefits 837 791 773
Net occupancy expense 458 457 394
Furniture and equipment expense 494 518 475
State shares tax 304 282 274
Professional services 229 259 228
Director's fees 171 190 147
Stationery and supplies 137 130 136
Other expense 1,192 1,127 1,030
------ ------ ------
Total non-interest expense $6,437 $6,078 $5,746
====== ====== ======
Total non-interest expense increased 5.91 percent to $6,437,000 in
2006 from $6,078,000 in 2005. A 10.82 percent increase in salaries and benefits
was attributable to the staffing of our new Berwick branch, addition of two
business development officers and normal merit increases of employees. State
shares tax increased $22,000 for 2006 as compared to 2005. Professional services
decreased $30,000 from $259,000 in 2005 to $229,000 in 2006. The decrease was
attributable to a one year reprieve to non-accelerated filers such as ourselves
for Sarbanes Oxley 404 compliance. Director expenses decreased 10 percent due to
the Chairman of the Board fee decreasing from $56,000 per year in 2005 to
$40,000 per year in 2006. Other expenses increased 5.76 percent from $1,127,000
in 2005 to $1,192,000 in 2006. Donations increased $67,000 due to participation
in a state program designed to give tax credits to participating institutions.
One standard to measure non-interest expense is to express
non-interest expense as a percentage of average total assets. In 2006, this
percentage was 2.72 percent compared to 2.64 percent in 2005.
Loan delinquencies decreased 61.47 percent from $2,066,000 in 2005 to
$796,000 in 2006. The decrease in these delinquencies was across each category:
30 - 89 day past dues, 90 days and over, and non-accrual. 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 has also implemented a centralized credit
analysis department to better analyze new loan requests. The provision for loan
losses increased from $90,000 in 2005 to $175,000 in 2006 as loans increased by
$6.4 million, still reflecting the allowance for loan losses as a percentage of
loans at .91 percent in 2006 from 1.02 percent in 2005..
NET INTEREST INCOME
Tax-equivalent net interest income for 2006 equaled $8,256,000
compared to $7,772,000 in 2005, an increase of 6.23 percent. The increase in the
overall net interest margin from 3.63 percent in 2005 to 3.74 percent in 2006 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 3.24 percent for 2005
to an average of 5.07 percent for 2006. This 183 basis point increase reflects
the increased short term rates by year-end 2006. The 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,
---------------------------
2006 2005 2004
------- ------- -------
Interest income $13,202 $11,442 $10,843
Interest expense 5,301 4,131 3,669
------- ------- -------
Net interest income 7,901 7,311 7,174
------- ------- -------
Tax-equivalent adjustment 355 411 431
------- ------- -------
Net interest income (fully taxable equivalent) $ 8,256 $ 7,722 $ 7,605
======= ======= =======
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 2006, 2005 and 2004.
AVERAGE BALANCE SHEET AND RATE ANALYSIS
THREE YEARS ENDED DECEMBER 31,
(Dollars in thousands)
2006 2005 2004
----------------------------- ----------------------------- -----------------------------
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 $ 750 $ 39 5.20% $ 1,694 $ 53 3.13% $ 4,652 $ 51 1.10%
Investment Securities:
Taxable 47,857 1,850 3.86% 46,859 1,588 3.39% 52,428 1,580 3.01%
State and Municipal
Obligations (3) 5,846 268 6.95% 8,084 363 6.80% 9,571 450 7.12%
-------- -------- -------- ------- -------- -------
Total Investment Securities 53,703 2,118 4.20% 54,943 1,951 3.89% 61,999 2,030 3.63%
-------- -------- -------- ------- -------- -------
Federal Funds Sold 7,621 385 5.05% 5,809 190 3.27% 1,053 16 1.52%
-------- -------- -------- ------- -------- -------
Loans:
Taxable 149,121 10,239 6.87% 140,388 8,812 6.28% 139,086 $ 8,360 6.01%
Tax Free (3) 9,433 421 6.76% 9,677 436 6.83% 8,262 386 7.08%
-------- -------- -------- ------- -------- -------
Total Loans 158,554 10,660 6.86% 150,065 9,248 6.31% 147,348 8,746 6.27%
-------- -------- -------- ------- -------- -------
Total Interest-Earning Assets 220,628 13,202 5.98% 212,511 11,442 5.58% 215,052 10,843 5.24%
-------- -------- -------- ------- -------- -------
Reserve for Loan Losses ($1,504) (1,470) (1,405)
Cash and Due from Banks 4,971 4,708 4,912
Other Assets 12,474 14,332 12,888
-------- -------- --------
Total Assets 236,569 230,081 231,447
======== ======== ========
LIABILITIES AND CAPITAL:
Total Interest-Bearing Deposits 148,756 3,463 2.33% 150,289 2,830 1.88% 154,840 2,684 1.73%
U.S. Treasury Short-Term Borrowings 318 15 4.72% 296 9 3.04% 296 3 1.01%
Short-Term Borrowings - Other 19 1 5.26% 0 0 0.00% 0 0 0.00%
Long-Term Borrowings 11,303 677 5.99% 11,317 678 5.99% 11,343 681 6.00%
Repurchase Agreements 25,036 1,145 4.57% 20,640 614 2.97% 18,184 301 1.66%
-------- -------- -------- ------- -------- -------
Total Interest-Bearing Liabilities 185,432 5,301 2.86% 182,542 4,131 2.26% 184,663 3,669 1.99%
-------- -------- -------- ------- -------- -------
Demand Deposits 18,268 17,523 17,188
Other Liabilities 2,620 1,227 1,460
Stockholders' Equity 30,249 28,789 28,136
-------- -------- --------
Total Liabilities and Capital $236,569 $230,081 $231,447
======== ======== ========
NET INTEREST INCOME/NET INTEREST
MARGIN (4) $ 7,901 3.58% $ 7,311 3.44% $ 7,174 3.34%
======== ==== ======= ==== ------- ====
TAX-EQUIVALENT NET INTEREST
INCOME/NET INTEREST MARGIN (5) $ 8,256 3.74% $ 7,772 3.63% $ 7,605 3.54%
======== ==== ======= ==== ------- ====
----------
(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 2006, 2005 and 2004.
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 2006 versus 2005, 2005 versus 2004, and
2004 versus 2003:
19
TABLE OF NET INTEREST INCOME COMPONENTS ON A TAX-EQUIVALENT BASIS
For the twelve months ended December 31, 2006
(Dollars in thousands)
2006 Versus 2005 2005 Versus 2004 2004 Versus 2003
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 Other
Financial Institutions $ (30) $ 35 $ 5 $ (33) $ 94 $ 61 $ (2) $ 5 $ 3
Taxable Securities 34 220 254 (168) 199 31 223 36 259
State and Municipal Obligations (152) 12 (140) (106) (31) (137) (242) 21 (221)
Federal Funds Sold 59 103 162 72 18 90 (95) (71) (166)
Taxable Loans 548 828 1,376 78 376 454 (307) (331) (638)
Tax Free Loans (17) (7) (24) 100 (21) 79 300 (25) 275
----- ------ ------ ----- ---- ----- ----- ----- -----
Total Earning Assets 442 1,191 1,633 (57) 635 578 $(123) $(365) $(488)
----- ------ ------ ----- ---- ----- ----- ----- -----
Interest Expense:
Total Interest-Bearing Deposits (29) 676 647 (79) 232 153 $ (39) $(689) $(728)
U.S. Treasury - Short-Term Borrowings 1 5 6 0 6 6 0 1 1
Long-Term Borrowings (1) 0 (1) (2) (1) (3) 0 1 1
Repurchase Agreements 131 330 461 41 238 279 24 (5) 19
----- ------ ------ ----- ---- ----- ----- ----- -----
Total Interest-Bearing Liabilities: $ 102 $1,011 $1,113 $ (40) $475 $ 435 $ (15) $(692) $(707)
----- ------ ------ ----- ---- ----- ----- ----- -----
NET INTEREST INCOME $ 340 $ 180 $ 520 $ (17) $160 $ 143 $(108) $ 327 $ 219
===== ====== ====== ===== ==== ===== ===== ===== =====
FINANCIAL CONDITION
Our consolidated assets at December 31, 2006 were $241.9 million which
represented an increase of $10.7 million or 4.63 percent over $231.2 million at
December 31, 2005. The decrease for 2005 from 2004 was 1.78 percent or $4.2
million.
Capital increased 4.14 percent from $29.0 million in 2005 to $30.2
million in 2006, after an adjustment for the fair market value of securities
which was a decrease in capital of $29,900 for 2006 compared to a decrease in
capital of $303,500 for 2005. This was a result of an increase in the unrealized
gain in securities in 2006 of $274,000. Common stock and surplus decreased a net
$475,000 resulting from the purchase and retirement of stock in the amount of
$681,000 and stock issued under our stock plans in the amount of $206,000.
Total average assets increased 2.82 percent from 2005 at $230.1
million to 2006 at $236.6 million. Average earning assets were $212.5 million in
2005 and $220.6 million in 2006.
Loans increased 4.08 percent from $154.3 million at December 31, 2005
to $160.6 million at December 31, 2006.
Non-interest bearing deposits increased 6.04 percent to $19.3 million
at December 31, 2006 from $18.2 million at December 31, 2005. Interest bearing
deposits increased 2.32 percent from $146.6 million in 2005 to $150.0 million in
2006.
The loan-to-deposit ratio is a key measurement of liquidity. Our
loan-to-deposit ratio increased during 2006 to 94.89 percent compared to 93.58
percent during 2005.
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.
INVESTMENTS
(Dollars in thousands)
2006 2005 2004
------- ------- -------
Federal Agency Obligations $25,066 $21,157 $18,135
Mortgage-backed Securities 21,147 22,564 32,021
Obligations of State and Political Subdivisions 4,703 7,782 8,930
Marketable Equity Securities 1,341 1,265 1,378
Restricted Equity Securities 1,229 1,151 1,370
------- ------- -------
Total Investment Securities $53,486 $53,919 $61,834
======= ======= =======
20
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, 2006. Yields are presented on a
tax-equivalent basis, are based upon carrying value and are weighted for the
scheduled maturity. At December 31, 2006 our investment securities portfolio had
an average maturity of approximately 2.99 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 $11,587 4.02% $30,407 4.58% $4,219 5.78% $ 0 0.00% $46,213 4.54%
Obligations of State and Political
Subdivisions 0 0.00% 200 6.58% 2,307 6.76% 2,196 6.19% 4.703 6.49%
Marketable Equity Securities 0 0.00% 0 0.00% 0 0.00% 1,341 3.44% 1,341 3.44%
Restricted Equity Securities 0 0.00% 0 0.00% 0 0.00% 1,229 5.41% 1,229 5.41%
------- ------- ------ ------ -------
Total $11,587 4.02% $30,607 4.58% $6,526 6.27% $4,766 4.80% $53,486 4.69%
------- ------- ------ ------ -------
Available-for-sale securities are reported on the 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 us 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 loss, net of tax, on December 31, 2006
of $30,000 compared to an unrealized loss, net of tax, on December 31, 2005 of
$303,000, which represents an unrealized gain, net of tax, of $274,000 for
2006..
The mix of securities in the portfolio at December 31, 2006 was 86.40
percent Federal Agency Obligations, 8.79 percent Municipal Securities, and 4.81
percent Other. We did not trade in derivative investment products during 2006.
LOANS
LOAN PORTFOLIO
LOANS OUTSTANDING
(Dollars in thousands)
2006 2005 2004 2003 2002
--------- -------- -------- -------- --------
Commercial $ 9,574 $ 12,097 $ 12,182 $ 15,328 $ 15,033
Tax-Exempt 9,621 9,019 10,062 6,214 3,535
Real Estate - Construction 2,231 1,548 734 2,505 1,185
Real Estate 135,009 127,170 122,104 118,129 123,746
Personal 4,118 4,348 4,738 5,410 7,902
--------- -------- -------- -------- --------
Total Gross Loans $ 160,553 $154,182 $149,820 $147,586 $151,401
Add (Deduct) Unearned discount (19) (30) (46) (64) (139)
Unamortized loan costs, net of fees 107 119 126 109 76
--------- -------- -------- -------- --------
Loans, Net $ 160,641 $154,271 $149,900 $147,631 $151,338
--------- -------- -------- -------- --------
The loan portfolio increased 4.08 percent from $154.3 million in 2005
to $160.6 million in 2006. The percentage distribution in the loan portfolio was
85.49 percent in real estate loans at $137.2 million; 5.96 percent in commercial
loans at $9.6 million; 2.56 percent in consumer loans at $4.1million; and 5.99
percent in tax exempt loans at $9.6 million.
Real Estate loans were comprised of 5.20 percent with 5/5-year
adjustable rates, 5.69 percent with 7/3-year adjustable rates, .33 percent with
5/3-year adjustable rates, 2.25 percent with 5-year adjustable rates; 43.33
percent with 3-year adjustable rates; 10.86 percent with 1-year adjustable
rates; and 6.86 percent with one-day to 3-month adjustable rates. Many
adjustable rate loans have bi-weekly payments. The remaining 25.48 percent of
real estate loans were fixed rates.
21
The following table presents the percentage distribution of loans by
category as of the date indicated:
For the years ended December 31,
2006 (%) 2005 (%) 2004 (%) 2003 (%) 2002 (%)
-------- -------- -------- -------- --------
Commercial 5.96 7.85 8.13 10.38 9.93
Tax Exempt 5.99 5.85 6.71 4.21 2.34
Real Estate-Construction 1.39 1.00 .49 1.70 0.78
Real Estate 84.10 82.48 81.54 80.04 81.73
Personal 2.56 2.82 3.13 3.67 5.22
------ ------ ------ ------ ------
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, 2006, 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, 2006
-----------------------
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 $55,587 $88,312 $8,789 $5,722 $158,410
Real Estate-Construction Loans 2,231 0 0 0 2,231
------- ------- ------ ------ --------
$57,818 $88,312 $8,789 $5,722 $160,641
======= ======= ====== ====== ========
Amount of Such Loans with:
Predetermined Fixed Rates $13,241 $26,950 $7,786 $5,722 $ 53,699
Floating or Adjustable Rates 44,577 61,362 1,003 0 106,942
------- ------- ------ ------ --------
Total $57,818 $88,312 $8,789 $5,722 $160,641
======= ======= ====== ====== ========
DEPOSITS AND BORROWED FUNDS
TABLE OF DISTRIBUTION OF AVERAGE DEPOSITS
(Dollars in thousands)
December 31,
------------------------------
2006 2005 2004
-------- -------- --------
Demand deposits $ 47,297 $46,307 $ 46,953
Savings deposits 35,465 37,539 37,881
Time deposits 57,319 58,380 60,003
Time deposits, $100,000 and over 26,943 25,586 27,191
-------- -------- --------
Total $167,024 $167,812 $172,028
======== ======== ========
TABLE OF MATURITY DISTRIBUTION OF TIME DEPOSITS OVER $100,000
(Dollars in thousands)
December 31,
---------------------------
2006 2005 2004
------- ------- -------
Three months or less $ 6,942 $ 5,803 $ 6,695
Over three months to six months 3,502 1,267 3,034
Over six months to twelve months 6,952 5,736 6,879
Over twelve months 11,475 12,822 9,722
------- ------- -------
Total $28,871 $25,628 $26,330
======= ======= =======
Total average deposits decreased by .48 percent from $167.8 million in
2005 to $167.0 million in 2006. Average savings deposits decreased 5.33 percent
to $35.5 million in 2006 from $37.5 million in 2005. Average time deposits
increased .35 percent
22
from $84.0 million in 2005 to $84.3 million in 2006. Average non-interest
bearing demand deposits increased to $18.3 million in 2006 from $17.5 million in
2005. Average interest bearing NOW accounts increased .69 percent from $28.8
million in 2005 to $29.0 million in 2006.
Short-term borrowings, securities sold under agreements to repurchase
and day-to-day borrowings increased 19.11 percent from $24.6 million in 2005 to
$29.3 million in 2006. Treasury Tax and Loan deposits held by us for the U.S.
Treasury averaged $318,000 in 2006. One-day borrowings averaged $19,000 in 2006
and repurchase agreements increased from an average $20.6 million in 2005 to
$25.0 million in 2006. Long-term borrowings, namely borrowings from the
FHLB-Pittsburgh, averaged $11.3 million in 2005 and 2006.
NON-PERFORMING ASSETS
PAST DUE AND NON-ACCRUAL LOANS
(Dollars in thousands)
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
====== === ==== ======
Real Installment
2004 Estate Loans Commercial Total
---- ------ ----------- ---------- ------
Days 30-89 $421 $71 $ 0 $ 492
Days 90 Plus 20 0 0 20
Non-accrual 902 0 339 1,241
---- --- ---- ------
Total $343 $71 $339 $1,753
==== === ==== ======
In 2006, loans 30-89 days past due totaled $638,000 compared to
$1,229,000 in 2005. Past due loans 90 days plus totaled $67,000 in 2006,
compared to $130,000 in 2005. Non-accrual loans in 2006 totaled $91,000 compared
to $707,000 in 2005. Overall, past due and non-accrual loans decreased 61.47
percent from $2,066,000 in 2005 to $796,000 in. With loans increasing by more
than $6.4 million this 61.47 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 20 years. During this same period of time, the ratio
of net charge offs during the period to average loans outstanding during the
period was .17 percent. (See Summary of Loan Loss Experience).
Refer to the Loan section of footnote one and footnote four - 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,
----------------------------------------------------
2006 2005 2004 2003 2002
-------- -------- -------- -------- --------
Loans Outstanding at End of Period $160,641 $154,271 $149,900 $147,631 $151,338
-------- ======== ======== ======== ========
Average Loans Outstanding during the Period $158,554 $150,065 $147,348 $148,344 $147,545
======== ======== ======== ======== ========
Balance of Loan Losses and Loan Loss Activity:
Balance, Beginning of Period $ 1,553 $ 1,392 $ 1,415 $ 1,298 $ 1,028
-------- -------- -------- -------- --------
Loans Charged Off:
Commercial and Industrial (185) 0 (147) (52) (29)
Real Estate Mortgages (65) 0 (25) (0) (17)
Consumer (50) (54) (31) (76) (54)
-------- -------- -------- -------- --------
Total Loans Charged Off (300) (54) (203) (128) (100)
Recoveries:
Commercial and Industrial 8 79 0 12 19
Real Estate Mortgages 0 0 5 0 0
Consumer 20 46 35 33 42
-------- -------- -------- -------- --------
Total Recoveries 28 125 40 45 61
-------- -------- -------- -------- --------
Net Loans Charged Off (272) 71 (163) (83) (39)
Provision for Loan Losses 175 90 140 200 309
-------- -------- -------- -------- --------
Balance, End of Period $ 1,456 $ 1,553 $ 1,392 $ 1,415 $ 1,298
======== ======== ======== ======== ========
Ratio of net charge-offs during the year to
average loans outstanding during year 0.17% (0.05)% 0.11% 0.06% 0.03%
======== ======== ======== ======== ========
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 2006 2005 2004 2003 2002
------ ------ ------ ------ ------
Commercial $ 101 $ 208 $ 349 $ 493 $ 406
Real Estate Mortgages 659 694 755 696 723
Consumer 27 32 24 28 66
Unallocated 669 619 264 198 103
------ ------ ------ ------ ------
Total $1,456 $1,553 $1,392 $1,415 $1,298
------ ------ ------ ------ ------
24
The following table presents a summary of the Bank's nonaccrual,
restructured and past due loans as of the dates indicated:
For Years Ended December 31,
---------------------------------------------------
Dollars in thousands 2006 2005 2004 2003 2002
-------- ------- -------- -------- --------
Nonaccrual, Restructured and Past Due Loans:
Nonaccrual Loans $ 91 $ 707 $ 1,241 $ 1,336 $ 2,112
Restructured Loans on Accrual Status 54 0 0 516 0
Accrual Loans Past Due 90 Days or More 67 130 20 369 50
-------- ------- -------- -------- --------
Total Nonaccrual, Restructured and Past
Due Loans $ 212 $ 837 $ 1,261 $ 2,221 $ 2,162
======== ======= ======== ======== ========
Other Real Estate $ 14 $ 0 $ 0 $ 36 $ 68
Interest Income That Would Have Been
Recorded Under Original Terms $130,183 $87,105 $129,182 $142,873 $131,335
Interest Income Recorded During the Period $ 90,173 $28,215 $ 86,834 $ 17,586 $ 67,873
ALLOWANCE FOR LOAN LOSSES AND RELATED PROVISION
(Dollars in Thousands)
Outstanding Balance at December 31,
------------------------------------------------------------------
2006 2005 2004
-------------------- -------------------- --------------------
% 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 $ 101 12.0% $ 208 13.7% $ 349 15.6%
Real estate mortgages 659 85.5% 694 83.5% 755 81.3%
Consumer 27 2.5% 32 2.8% 24 3.1%
Unallocated 669 N/A 619 N/A 264 N/A
------ ----- ------ ----- ------ -----
$1,456 100.0% $1,553 100.0% $1,392 100.0%
------ ----- ------ ----- ------ -----
The allowance for loan losses was $1,456,000 at December 31, 2006,
compared to $1,553,000 at December 31, 2005. This allowance equaled .91 percent
and 1.02 percent of total loans, net of unearned income, at the end of 2006 and
2005, 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 2006 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 us. 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, 2006, 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, 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%
As of December 31, 2005:
Total Risk Based Capital
(To risk-weighted assets) $30,950 20.32% $12,185 8.00% $15,231 10.00%
Tier I Capital
(To risk-weighted assets) $29,315 19.24% $ 6,095 4.00% $ 9,142 6.00%
Tier I Capital
(To average assets) $29,315 12.74% $11,726 4.00% $14,657 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 2007 to the Corporation
of approximately $1,953,064 plus additional amounts equal to the net income
earned in 2007 for the period January 1, 2007 through the date of declaration,
less any dividends which may be paid in 2007.
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, 2006
> 90 Days
90 Days But 1 to 5 5 to 10 > 10
Or Less < 1 Year Years Years Years Total
------- --------- -------- ------- -------- --------
Short-term investments $10,712 $ 0 $ 0 $ 0 $ 0 $ 10,712
Securities Available-for-Sale (1) 10,715 17,897 22,391 191 2,292 53,486
Loans (1) 23,306 34,227 95,000 5,823 2,285 160,641
------- ------- -------- ------- -------- --------
Rate Sensitive Assets 44,733 52,124 117,391 6,014 4,577 224,839
------- ------- -------- ------- -------- --------
Deposits:
Interest-bearing demand deposits (2) $ 4,182 $ 3,894 $ 20,767 $ 0 $ 0 $ 28,843
Savings (2) 5,239 5,449 23,336 0 0 34,024
Time 12,878 33,806 40,476 0 0 87,160
Borrowed funds 26,597 1,144 1,569 0 0 29,310
Long-term debt 4 159 11,019 20 95 11,297
Shareholder's Equity 0 0 0 0 30,249 30,249
------- ------- -------- ------- -------- --------
Rate Sensitive Liabilities 48,900 44,452 97,167 20 30,344 220,883
------- ------- -------- ------- -------- --------
Interest Sensitivity Gap (4,167) 7,672 20,224 5,994 (25,767) 3,956
Cumulative Gap $(4,167) $ 3,505 $ 23,729 $29,723 $ 3,956 $ 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, 2006, 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, 2006 AND 2005
2006 2005
------------ ------------
ASSETS
Cash and due from banks $ 4,819,258 $ 5,122,797
Interest-bearing deposits with other banks 405,210 1,110,241
Federal funds sold 10,307,030 5,128,786
Investment securities available-for-sale 53,486,269 53,919,318
Loans, net of unearned income 160,640,992 154,271,362
Allowance for loan losses 1,455,636 1,552,576
------------ ------------
Net loans 159,185,356 152,718,786
Premises and equipment, net 5,048,790 4,836,739
Cash surrender value of bank-owned life insurance 6,767,080 6,480,223
Accrued interest receivable 994,169 959,339
Other assets 906,534 941,425
------------ ------------
TOTAL ASSETS $241,919,696 $231,217,654
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Non-interest bearing $ 19,257,761 $ 18,249,315
Interest bearing 150,026,746 146,597,543
------------ ------------
Total Deposits 169,284,507 164,846,858
Short-term borrowings 29,309,848 24,599,711
Long-term borrowings 11,297,111 11,310,669
Accrued interest and other expenses 1,737,307 1,441,966
Other liabilities 42,103 6,024
------------ ------------
TOTAL LIABILITIES 211,670,876 202,205,228
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, par value $1.25 per share;
authorized 5,000,000 shares; issued and
outstanding 1,241,664 shares 2006,
1,258,337 shares 2005 1,552,080 1,572,921
Surplus 2,672,545 3,126,502
Retained earnings 26,054,135 24,616,500
Accumulated other comprehensive (loss) (29,940) (303,497)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 30,248,820 29,012,426
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $241,919,696 $231,217,654
============ ============
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, 2006, 2005 AND 2004
2006 2005 2004
----------- ----------- -----------
INTEREST INCOME
Interest and fees on loans $10,659,884 $ 9,249,147 $ 8,746,190
Interest and dividends on investment securities:
Taxable 1,729,638 1,505,644 1,508,096
Tax-exempt 268,233 362,543 449,988
Dividends 119,782 81,812 71,944
Federal funds sold 385,227 189,773 15,662
Deposits in other banks 38,807 52,766 51,279
----------- ----------- -----------
TOTAL INTEREST INCOME 13,201,571 11,441,685 10,843,159
----------- ----------- -----------
INTEREST EXPENSE
Deposits 3,462,683 2,829,972 2,684,235
Short-term borrowings 1,161,236 623,321 303,883
Long-term borrowings 677,047 677,835 680,816
----------- ----------- -----------
TOTAL INTEREST EXPENSE 5,300,966 4,131,128 3,668,934
----------- ----------- -----------
Net interest income 7,900,605 7,310,557 7,174,225
Provision for loan losses 175,000 90,000 140,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 7,725,605 7,220,557 7,034,225
----------- ----------- -----------
NON-INTEREST INCOME
Service charges and fees 845,618 828,430 710,866
Gain on sale of loans 45,343 40,046 35,959
Bank-owned life insurance income 253,080 247,036 257,246
Trust department 191,105 156,753 165,017
Investment securities gains, net 58 33,947 3,537
Other 565,179 407,128 357,673
----------- ----------- -----------
TOTAL NON-INTEREST INCOME 1,900,383 1,713,340 1,530,298
----------- ----------- -----------
NON-INTEREST EXPENSE
Salaries 2,615,369 2,323,825 2,288,564
Pensions and other employee benefits 836,533 790,878 772,833
Occupancy, net 458,330 456,713 394,134
Equipment 493,651 518,498 474,879
State shares tax 304,122 281,581 273,861
Professional services 229,164 258,891 228,303
Directors' fees 170,746 189,833 147,152
Stationery and supplies 136,963 130,018 136,232
Other 1,192,134 1,127,590 1,030,041
----------- ----------- -----------
TOTAL NON-INTEREST EXPENSE 6,437,012 6,077,827 5,745,999
----------- ----------- -----------
Income before income taxes 3,188,976 2,856,070 2,818,524
Income tax expense 777,335 630,512 601,111
----------- ----------- -----------
NET INCOME $ 2,411,641 $ 2,225,558 $ 2,217,413
=========== =========== ===========
PER SHARE DATA
Net income $ 1.93 $ 1.76 $ 1.74
Cash dividends 0.78 0.74 0.70
Weighted average shares outstanding 1,249,844 1,262,171 1,274,034
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, 2006, 2005 AND 2004
Accumulated
Other
Common Comprehensive Retained Comprehensive Treasury
Stock Surplus Income Earnings Income (loss) Stock Total
---------- ---------- ------------- ----------- ------------- --------- -----------
BALANCE AT DECEMBER 31, 2003 $1,595,556 $3,634,608 $21,997,539 $375,695 $ -- $27,603,398
Comprehensive income:
Net income -- -- $2,217,413 2,217,413 -- -- 2,217,413
Change in net unrealized (loss) on
investment securities
available-for-sale,
net of reclassification adjustment
and tax effects -- -- (162,562) -- (162,562) -- (162,562)
----------
Total comprehensive income $2,054,851
==========
Issuance of 7,273 shares of common stock
under dividend reinvestment and stock
purchase plans 9,092 197,153 -- -- -- 206,245
Purchase of 16,000 shares of treasury
stock -- -- -- -- (467,000) (467,000)
Retirement of 16,000 shares of treasury
stock (20,000) (447,000) -- -- 467,000 --
Cash dividends $.70 per share -- -- (890,997) -- -- (890,997)
---------- ---------- ----------- -------- --------- -----------
BALANCE AT DECEMBER 31, 2004 1,584,648 3,384,761 23,323,955 213,133 -- 28,506,497
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
========== =========== =========== ======== ========= ===========
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, 2006, 2005 AND 2004
2006 2005 2004
------------ ----------- ------------
OPERATING ACTIVITIES
Net income $ 2,411,641 $ 2,225,558 $ 2,217,413
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 175,000 90,000 140,000
Depreciation and amortization 376,277 414,214 374,664
Employee stock purchase plan expense 1,308 -- --
Premium amortization on investment securities 104,690 235,572 336,292
Discount accretion on investment securities (17,398) (11,666) (24,230)
Deferred income taxes (benefit) (31,363) (79,970) 78,844
(Gain) on sales of investment securities available-for-sale (58) (33,947) (3,537)
(Gain) on sale of mortgage loans held for resale (45,343) (40,046) (35,959)
Proceeds from sale of mortgage loans held for resale 2,395,899 1,747,367 1,895,310
Originations of mortgage loans held for resale (2,566,964) (1,707,320) (2,137,886)
Loss on sales of other real estate owned -- -- 3,180
Income from investment in insurance agency (2,156) (11,366) (17,248)
Increase in accrued interest receivable (34,830) (143,058) (5,368)
(Increase) decrease in other assets - net (72,512) 84,212 (95,298)
Net increase in cash surrender value of bank owned life insurance (286,857) (281,036) (291,247)
Increase in accrued interest and other expenses 295,342 173,204 81,794
Increase (decrease) in other liabilities - net 27,666 (27,483) 20,889
------------ ----------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,730,342 2,634,235 2,537,613
------------ ----------- ------------
INVESTING ACTIVITIES
Purchase of investment securities available-for-sale (15,704,899) (4,949,870) (24,794,418)
Proceeds from sales, maturities and redemption of investment
securities available-for-sale 16,465,192 11,891,868 25,154,814
Proceeds from sales of other real estate owned -- -- 32,516
Net increase in loans (6,425,162) (4,300,909) (2,154,069)
Purchase of premises and equipment (579,915) (732,328) (610,832)
------------ ----------- ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (6,244,784) 1,908,761 (2,371,989)
------------ ----------- ------------
FINANCING ACTIVITIES
Net increase (decrease) in deposits 4,437,649 (7,640,251) 701,468
Net increase in short-term borrowings 4,710,137 2,842,325 767,167
Repayment of long-term borrowings (13,558) (12,774) (12,034)
Acquisition of treasury stock (680,700) (505,700) (467,000)
Proceeds from issuance of common stock 204,594 235,714 206,245
Cash dividends paid (974,006) (933,013) (890,997)
------------ ----------- ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 7,684,116 (6,013,699) 304,849
------------ ----------- ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,169,674 (1,470,703) 470,473
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 11,361,824 12,832,527 12,362,054
------------ ----------- ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 15,531,498 $11,361,824 $ 12,832,527
------------ ----------- ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 5,220,974 $ 4,084,220 $ 3,698,805
Income taxes $ 885,939 $ 635,267 $ 569,349
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, 2006, 2005 AND 2004
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, 2006, 2005 and
2004, 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, 2006 and 2005 is $201,066 and $198,909, 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, 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 September 2006, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards SFAS 158 "Employers'
Accounting for Defined Benefit Pension and Other Post Retirement Plans" which
requires the Corporation to recognize the funded status of a benefit plan as
either assets or liabilities in the consolidated balance sheet and to recognize
as a component of other comprehensive income, net of tax, the unrecognized
actuarial gains or losses, prior service costs and transition obligations that
arise during the period. The adoption of SFAS 158 for the year ended December
31, 2006 did not have a material impact on the Corporation's consolidated
financial condition, results of operations or liquidity.
In September 2006, the FASB issued Statement of Financial Accounting
Standards SFAS 157, "Fair Value Measurements", which upon adoption will replace
various definitions of fair value in existing accounting literature with a
single definition, will establish a framework for measuring fair value, and will
require additional disclosures about fair value measurements. The statement
clarifies that fair value is the price that would be received to sell an asset
or the price paid to transfer a liability in the most advantageous market
available to the entity and emphasizes that fair value is a market-based
measurement and should be based on the assumptions market participants would
use. The statement also creates a three-level hierarchy under which individual
fair value estimates are to be ranked based on the relative reliability of the
inputs used in the valuation. This hierarchy is the basis for the disclosure
requirements, with fair value estimates based on the least reliable inputs
requiring more extensive disclosures about the valuation method used and the
gains and losses associated with those estimates. SFAS 157 is required to be
applied whenever another financial accounting standard requires or permits an
asset or liability to be measured at fair value. The statement does not expand
the use of fair value to any new circumstances. The Corporation will be required
to apply the new guidance beginning January 1, 2008, and does not expect it to
have a material impact on the Corporation's consolidated financial condition,
results of operations or liquidity.
In July 2006, the FASB issued FASB Staff Position FSP 13-2,
"Accounting for a Change or Projected Change in the Timing of Cash Flows
Relating to Income Taxes Generated by a Leveraged Lease Transaction". This FSP
amends SFAS 13, "Accounting for Leases", to require a lessor in a leveraged
lease transaction to recalculate the leveraged lease for the effects of a change
or projected change in the timing of cash flows relating to income taxes that
are generated by the leveraged lease. The guidance in FSP 13-2 is required to be
applied to fiscal years beginning after December 15, 2006. The application of
this FSP is not expected to have a material impact on the Corporation's
consolidated financial condition, results of operations or liquidity.
In June 2006, the FASB issued Interpretation No. 48 FIN 48,
"Accounting for Uncertainty in Income Taxes", an interpretation of SFAS 109,
"Accounting for Income Taxes". FIN 48 prescribes a comprehensive model for how
companies should recognize, measure, present, and disclose in their financial
statements uncertain tax positions taken or expected to be taken on a tax
return. Under FIN 48, tax positions shall initially be recognized in the
financial statements when it is more likely than not the position will be
sustained upon examination by the tax authorities. Such tax positions shall
initially and subsequently be measured as the largest amount of tax benefit that
is greater than 50% likely of being realized upon ultimate settlement with the
tax authority assuming full knowledge of the position and all relevant facts.
FIN 48 also revises disclosure requirements to include an annual tabular
roll-forward of unrecognized tax benefits. The provisions of this interpretation
are required to be adopted for fiscal periods beginning after December 15, 2006.
The Corporation will be required to apply the provisions of FIN 48 to all tax
positions upon initial adoption with any cumulative effect adjustment to be
recognized as an adjustment to retained earnings. The adoption of FIN 48 is not
expected to have a material impact on the Corporation's consolidated financial
condition, results of operations or liquidity.
In March 2006, the FASB issued Statement of Financial Accounting
Standards SFAS 156, "Accounting for Servicing of Financial Assets", an amendment
of SFAS 140. This standard requires entities to separately recognize a servicing
asset or liability whenever it undertakes an obligation to service financial
assets and also requires all separately recognized servicing assets or
liabilities to be initially measured at fair value. Additionally, this standard
permits entities to choose among two alternatives, the amortization method or
fair value measurement method, for the subsequent measurement of each class of
separately recognized servicing assets and liabilities. Under the amortization
method, an entity shall amortize the value of servicing assets or liabilities in
proportion to and over the period of estimated net servicing income or net
servicing loss and assess servicing assets or liabilities for impairment or
increased obligation based on fair value at each reporting date. Under the fair
value measurement method, an entity shall measure servicing assets or
liabilities at fair value at each reporting date and report changes in fair
value in earnings in the period in which the changes occur.
Effective January 1, 2006, the Corporation adopted this statement by
electing amortization method as the measurement method for residential real
estate mortgage servicing rights (MSRs).
35
In February 2006, the FASB issued Statement of Financial Accounting
Standards SFAS 155, "Accounting for Certain Hybrid Financial Instruments", which
amends SFAS 133, "Accounting for Derivative Instruments and Hedging Activities",
and SFAS 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". SFAS 155 requires entities to evaluate and
identify whether interests in securitized financial assets are freestanding
derivatives, hybrid financial instruments that contain an embedded derivative
requiring bifurcation, or hybrid financial instruments that contain embedded
derivatives that do not require bifurcation. SFAS 155 also permits fair value
measurement for any hybrid financial instrument that contains an embedded
derivative that otherwise would require bifurcation. This statement will be
effective for all financial instruments acquired or issued by the Corporation on
or after January 1, 2007 and is not expected to have a material impact on the
Corporation's consolidated financial condition, results of operations or
liquidity.
In November 2005, the FASB issued FASB Staff Position FSP 115 - "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments". This FSP provides additional guidance on when an investment in a
debt or equity security should be considered impaired and when that impairment
should be considered other-than-temporary and recognized as a loss in the
consolidated statement of income. Specifically, this guidance clarifies that an
investor should recognize an impairment loss no later than when an impairment is
deemed other-than-temporary, even if the decision to sell has not been made. The
FSP also requires certain disclosures about unrealized losses that have not been
recognized as other-than-temporary impairments. The Corporation has followed the
guidance of this FSP in 2005.
In May 2005, the FASB issued Statement of Financial Accounting
Standards SFAS 154 "Accounting Changes and Error Corrections" which modifies the
accounting for and reporting of a change in an accounting principle. This
statement applies to all voluntary changes in accounting principles and changes
required by an accounting pronouncement in the unusual instance that the
pronouncement does not include specific transition provisions. This statement
also requires retrospective application to prior period financial statements of
changes in accounting principles, unless it is impractical to determine either
the period-specific or cumulative effects of the accounting change. SFAS 154 is
effective for accounting changes made in fiscal years beginning after December
15, 2005. The adoption of SFAS 154 did not have a material impact on the
Corporation's consolidated financial condition, results of operations or
liquidity.
In December 2004, the FASB issued Statement of Financial Accounting
Standards SFAS 153, "Exchanges of Nonmonetary Assets", which amends APB Opinion
No. 29, "Accounting for Nonmonetary Transactions". SFAS 153 eliminates the
exception from fair value measurement for nonmonetary exchanges of similar
productive assets in Opinion No. 29 and replaces it with an exception for
exchanges that do not have commercial substance. SFAS 153 specifies that a
nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. SFAS
153 is effective for nonmonetary exchanges occurring in fiscal periods beginning
after June 15, 2005. The adoption of SFAS 153 is not expected to have a material
impact on the Corporation's consolidated financial condition, results of
operations or liquidity.
In December 2004, the FASB issued SFAS 123 (revised 2004),
"Share-Based Payment". This Statement is a revision of SFAS 123, "Accounting for
Stock-Based Compensation", and supersedes APB Opinion 25, "Accounting for Stock
Issued to Employees", and its related guidance. SFAS 123 (revised 2004)
established standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. This Statement requires
that the cost resulting from all share-based payment transactions be recognized
in the financial statements. This Statement established fair value as the
measurement objective in accounting for share-based payment arrangements and
requires all entities to apply a fair-value-based measurement method in
accounting for share-based payment transactions with employees, except for
equity instruments held by employee share ownership plans.
In addition, this statement amends SFAS 95 "Statement of Cash Flows"
to require that excess tax benefits be reported as financing cash inflow rather
than as a reduction of taxes paid. The Corporation adopted these statements as
of January 1, 2006. SFAS 123R also requires the Corporation to change its method
of accounting for share-based awards to include estimated forfeitures in the
initial estimate of compensation expense and to accelerate the recognition of
compensation expense for retiree-eligible employees. The adoption of these
standards did not have a material effect on the Corporation's consolidated
financial condition, results of operations or liquidity.
ADVERTISING COSTS
It is the Corporation's policy to expense advertising costs in the
period in which they are incurred. Advertising expense for the years ended
December 31, 2006, 2005 and 2004, was approximately $100,759, $81,751 and
$86,328, respectively.
RECLASSIFICATIONS
Certain amounts in the consolidated financial statements of the prior
years have been reclassified to conform with presentations used in the 2006
consolidated financial statements. Such reclassifications had no effect on the
Corporation's consolidated financial condition or net income.
2. RESTRICTED CASH BALANCES
36
The Bank is required to maintain average reserve balances with the
Federal Reserve Bank. The amount required at December 31, 2006 was $1,240,000
and was satisfied by vault cash. 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,
2006, these balances were $786,061.
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, 2006 and
2005:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
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
=========== ======== ======== ===========
DECEMBER 31, 2005:
Obligation of U.S. Government Corporations
and Agencies:
Mortgage-backed $22,935,558 $ 34,402 $406,156 $22,563,804
Other 21,497,710 6,274 347,137 21,156,847
Obligations of state and political subdivisions 7,688,869 100,267 7,018 7,782,118
Marketable equity securities 1,105,426 183,582 24,059 1,264,949
Restricted equity securities 1,151,600 -- -- 1,151,600
----------- -------- -------- -----------
Total $54,379,163 $324,525 $784,370 $53,919,318
=========== ======== ======== ===========
Securities available-for-sale with an aggregate fair value of
$46,845,312 and $45,085,281 at December 31, 2006 and 2005, respectively, were
pledged to secure public funds, trust funds, securities sold under agreements to
repurchase and other balances of $38,330,191 and $31,266,889 at December 31,
2006 and 2005, respectively, as required by law.
The amortized cost and estimated fair value of debt securities, by
expected maturity, are shown below at December 31, 2006. 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 $11,659,078 $11,587,651 4.02%
Due after one year through five years 30,834,592 30,606,518 4.60%
Due after five years through ten years 6,526,057 6,526,067 6.13%
Due after ten years 4,511,905 4,766,033 4.80%
----------- ----------- ----
Total $53,531,632 $53,486,269 4.69%
=========== =========== ====
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.
37
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, 2006. 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 2006, 2005 and
2004 were $16,465,192, $11,891,868 and $25,154,814, respectively. Gross gains
realized on these sales were $58, $33,947 and $3,537, respectively. There were
no gross losses on the 2006, 2005 and 2004 sales.
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 that individual securities have been in a continuous unrealized loss
position for less than or more than 12 months as of December 31, 2006 and 2005:
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, 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
----------- -------- ----------- -------- ----------- --------
DECEMBER 31, 2005:
Obligations of U.S. Government
Corporations and Agencies:
Mortgage-backed $ 8,735,755 $103,233 $ 9,768,969 $302,923 $18,504,724 $406,156
Other 4,456,955 40,755 15,443,618 306,382 19,900,573 347,137
Obligations of state and political subdivisions 669,727 7,018 -- -- 669,727 7,018
Marketable Equity Securities 398,001 10,442 30,573 13,617 428,574 24,059
----------- -------- ----------- -------- ----------- --------
Total $14,260,438 $161,448 $25,243,160 $622,922 $39,503,598 $784,370
----------- -------- ----------- -------- ----------- --------
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, 2006 and 2005 consisted
of:
2006 2005
------------- -------------
Commercial $ 9,574,252 $ 12,096,894
Tax-exempt 9,620,742 9,018,852
Real estate - construction 2,231,209 1,548,536
Real estate 135,008,963 127,170,180
Personal 4,117,586 4,347,575
------------ ------------
Total gross loans 160,552,752 154,182,037
Add (Deduct): Unearned discount (18,975) (29,824)
Unamortized loan costs, net of fees 107,215 119,149
------------ ------------
Loans, net of unearned income $160,640,992 $154,271,362
============ ============
38
Real estate loans held-for-sale in the amount of $216,408 at December
31, 2006 and $0 at December 31, 2005 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, 2006 and 2005 are $49,200 and $35,080,
respectively.
Non-accrual loans at December 31, 2006, 2005 and 2004 were $91,204,
$706,800 and $1,240,616, respectively. The gross interest that would have been
recorded if these loans had been current in accordance with their original terms
and the amounts actually recorded in income were as follows:
2006 2005 2004
-------- ------- --------
Gross interest due under terms $130,183 $87,105 $129,182
Amount included in income 90,173 28,215 86,834
-------- ------- --------
Interest income not recognized $ 40,010 $58,890 $ 42,348
======== ======= ========
At December 31, 2006, 2005 and 2004 the recorded investment in loans
that are considered to be impaired as defined by SFAS No. 114 was $91,204,
$574,485 and $1,240,616, respectively. No additional charge to operations was
required to provide for the impaired loans specifically allocated allowance of
$6,360, $127,535 and $289,942, respectively at December 31, 2006, 2005 and 2004,
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, 2006, 2005 and 2004 was approximately
$275,362, $902,384 and $1,463,372, respectively.
Loans past due 90 days or more and still accruing interest amounted to
$67,115 at December 31, 2006 and $130,044 at December 31, 2005, 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, 2006, 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, 2006, 2005 and 2004 were as follows:
2006 2005 2004
---------- ---------- -----------
Balance, beginning of year $1,552,576 $1,391,826 $ 1,415,431
Provision charged to operations 175,000 90,000 140,000
Loans charged-off (299,745) (54,306) (203,430)
Recoveries 27,805 125,056 39,825
---------- ---------- -----------
Balance, end of year $1,455,636 $1,552,576 $ 1,391,826
========== ========== ===========
5. MORTGAGE SERVICING RIGHTS
The Corporation commenced selling real estate mortgages during the
last quarter of 2002. The mortgage loans sold serviced for others are not
included in the accompanying Consolidated Balance Sheets. The unpaid principal
balances of mortgage loans serviced for others were $9,781,577 and $9,794,711 at
December 31, 2006 and 2005, respectively. The balances of amortized mortgage
servicing rights included in other assets at December 31, 2006 and 2005 were
$26,779 and $36,366, 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 depending on loan rate.
The following summarizes mortgage servicing rights capitalized and
amortized:
2006 2005
-------- --------
Balance, January 1 $ 36,366 $ 54,207
Servicing asset additions 10,242 5,760
Amortization (19,829) (23,601)
-------- --------
Balance, December 31 $ 26,779 $ 36,366
======== ========
The Bank does not require custodial escrow accounts in connection with
the foregoing loan servicing.
39
6. PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, 2006 and 2005
follows:
2006 2005
---------- ----------
Land $ 737,526 $ 762,541
Buildings and improvements 5,291,624 4,928,312
Furniture and equipment 3,786,436 3,536,405
---------- ----------
9,815,586 9,227,258
Less: Accumulated depreciation 4,766,796 4,390,519
---------- ----------
$5,048,790 $4,836,739
========== ==========
Depreciation amounted to $376,277, $414,214 and $374,664 in 2006, 2005
and 2004, respectively.
7. DEPOSITS
Major classifications of deposits at December 31, 2006 and 2005
consisted of:
2006 2005
------------ ------------
Demand - non-interest bearing $ 19,257,761 $ 18,249,315
Demand - interest bearing 28,842,953 28,858,627
Savings 34,023,884 34,767,792
Time $100,000 and over 28,870,821 25,627,611
Other time 58,289,088 57,343,513
------------ ------------
Balance, December 31 $169,284,507 $164,846,858
============ ============
The following is a schedule reflecting remaining maturities of time
deposits of $100,000 and over at December 31, 2006:
2007 $17,396,218
2008 6,088,607
2009 2,420,604
2010 1,209,466
2011 and thereafter 1,755,926
-----------
Total $28,870,821
===========
Interest expense related to time deposits of $100,000 or more was
$1,127,954 in 2006, $910,413 in 2005 and $914,663 in 2004.
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 December 31, 2006
and 2005:
2006 2005
---------------------------------------------- ------------------------------------------------
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 $28,709,389 $25,036,106 $29,739,452 4.57% $24,052,474 $20,639,634 $24,052,474 2.97%
Other short-term borrowings -- 19,178 50,000 5.26% -- -- -- --
U.S. Treasury tax and loan notes 600,459 315,805 901,384 4.72% 547,237 295,796 893,842 3.04%
----------- ----------- ----------- ----------- ----------- -----------
Total $29,309,848 $25,371,089 $30,690,836 4.58% $24,599,711 $20,935,430 $24,946,316 2.98%
=========== =========== =========== =========== =========== ===========
40
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 $11,297,111 at December 31, 2006. The Bank has lines of credit with Atlantic
Central Bankers Bank and Federal Home Loan Bank in the aggregate amount of
$25,000,000 at December 31, 2006. The unused portions of these lines of credit
were $8,702,889 and $5,000,000, respectively at December 31, 2006. Long-term
borrowings consisted of the following at December 31, 2006 and 2005:
2006 2005
----------- -----------
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 $ 165,730
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. 62,413 63,814
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. 23,838 24,651
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. 26,946 27,825
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, 2006 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, 2006 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, 2006 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. 27,840 28,649
----------- -----------
Total $11,297,111 $11,310,669
=========== ===========
At December 31, 2006 the annual maturities of long-term debt were as
follows: $160,202 in 2007, $2,004,366 in 2008, $4,618 in 2009, $9,004,885 in
2010, $5,167 in 2011 and $117,873 thereafter.
10. COMPREHENSIVE INCOME
The components of the change in other comprehensive income and related
tax effects are as follows:
41
Years Ended December 31,
--------------------------------
2006 2005 2004
-------- --------- ---------
Unrealized holding gains (losses) on available-for-sale
investment securities $414,427 $(816,725) $(275,155)
Reclassification adjustment for gains realized in income 58 33,947 3,537
-------- --------- ---------
Change in unrealized gains (losses) before tax effect 414,485 (782,778) (271,618)
Tax effect 140,928 266,148 109,056
-------- --------- ---------
Net change in unrealized gains (losses) $273,557 $(516,630) $(162,562)
======== ========= =========
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:
2006 464 $25.38 $28.20
2005 365 $24.52 $27.24
2004 469 $25.20 $28.00
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:
2006 6,863 $192,817
2005 8,254 $226,765
2004 6,804 $194,425
12. INCOME TAXES
The provision for income tax expense consisted of the following
components:
42
2006 2005 2004
-------- -------- --------
Federal:
Current $808,698 $710,482 $522,267
Deferred (benefit) (31,363) (79,970) 79,146
-------- -------- --------
777,335 630,512 601,413
-------- -------- --------
State:
Current -- -- --
Deferred (benefit) -- -- (302)
-------- -------- --------
-- -- (302)
-------- -------- --------
Total Provision for Taxes $777,335 $630,512 $601,111
======== ======== ========
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:
2006 2005 2004
------------------- ------------------ ------------------
Amount % Rate Amount % Rate Amount % Rate
---------- ------ --------- ------ --------- ------
Provision at statutory rate $1,084,252 34.0 $ 971,064 34.0 $ 958,298 34.0
Tax-exempt income (234,510) (7.4) (271,565) (9.5) (283,567) (10.1)
Non-deductible expenses 27,627 0.9 24,830 0.8 23,262 0.8
Bank-owned life insurance income - net (86,047) (2.7) (83,992) (2.9) (87,464) (3.1)
Other, net (13,987) (0.4) (9,825) (0.3) (9,116) (0.3)
---------- ---- --------- ---- --------- -----
Actual federal income tax and rate $ 777,335 24.4 $ 630,512 22.1 $ 601,413 21.3
========== ==== ========= ==== ========= =====
Income taxes applicable to realized security gains included in the
provision for income taxes totaled $20 in 2006, $11,542 in 2005 and $1,203 in
2004.
The net deferred tax asset recorded by the Corporation consisted of
the following tax effects of temporary timing differences at December 31, 2006,
2005 and 2004:
43
2006 2005 2004
--------- --------- ---------
Deferred tax assets:
Allowance for loan losses $ 393,154 $ 402,059 $ 371,459
Allowance for off balance sheet losses 3,230 3,230 3,230
Deferred compensation and director's fees 292,665 256,279 227,019
Non-accrual loan interest 8,363 20,023 12,704
Mortgage servicing rights 13,535 12,640 9,559
Charitable contributions 5,100 -- --
Unrealized investment securities losses 15,424 156,347 --
--------- --------- ---------
Total 731,471 850,578 623,971
--------- --------- ---------
Deferred tax liabilities:
Loan fees and costs (59,970) (66,993) (75,993)
Accretion (2,202) (1,320) (1,067)
Depreciation (328,957) (333,096) (337,924)
Investment in insurance agency (11,491) (10,758) (6,894)
Unrealized investment securities gains -- -- (109,795)
--------- --------- ---------
Total (402,620) (412,167) (531,673)
--------- --------- ---------
Net deferred tax asset $ 328,851 $ 438,411 $ 92,298
========= ========= =========
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
$739,527. The losses expire through 2026. The related deferred net state tax
asset in the amount of $46,915 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.
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 $75,444, $66,207 and $63,453 in
2006, 2005 and 2004, respectively. There were no discretionary contributions in
2006, 2005 and 2004.
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, 2006 and 2005 was
$208,734 and $210,768, respectively, relating to these directors' deferred
compensation agreements.
44
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 2006.
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, 2006 and 2005 was $115,687 and $73,422, respectively.
Total directors fees, including amounts currently paid for the years
ended December 31, 2006, 2005 and 2004 were $170,746, $189,833 and $147,152,
respectively, and the total accrued liability under the directors deferred
compensation plans as of December 31, 2006 and 2005 was $324,421 and $284,190,
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, 2006 and 2005, the net cash value of
insurance policies was $396,322 and $370,986, respectively, and the total
accrued liability, equal to the present value of these obligations, was $212,768
and $241,772, respectively, relating to these executive officers' and directors'
deferred compensation agreements, and the accrued liability related to the
post-employment health care benefit was $0 and $1,451 as of December 31, 2006
and 2005, respectively.
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, 2006 and 2005 was $97,244 and $91,507,
respectively, and the total accrued liability as of December 31, 2006 and 2005
was $323,592 and $226,348, respectively.
Total deferred compensation expense for current and retired executive
officers for the years ended December 31, 2006, 2005 and 2004 was $108,239,
$105,004 and $95,697, respectively, and the total accrued liability under the
executive officers' deferred compensation plans as of December 31, 2006 and 2005
was $536,360 and $469,571, respectively.
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, 2006. Minimum rental payments required under
this lease are 2007 - $28,000, 2008 - $28,000, 2009 - $22,957.
At December 31, 2006 the Bank was leasing some minor office equipment
under operating leases.
Rental expense under operating leases for the years ended December 31,
2006, 2005 and 2004 was $1,070, $817, and $1,304, 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, 2006 was $7,125. Minimum rental
payments required are as follows: 2007 - $7,175 and 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. 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, 2006 and 2005. 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:
45
2006 2005
---------- -----------
Balance, beginning of year $1,245,846 $ 1,538,734
Additions 483,787 963,193
Repayments (798,334) (1,256,081)
---------- -----------
Balance, end of year $ 931,299 $ 1,245,846
========== ===========
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 2006 and
2005 presented an off-balance sheet risk to the extent of undisbursed funds in
the amount of $623,567 and $640,564, respectively.
Deposits from certain officers and directors and/or their affiliated
companies held by the Bank amounted to $1,845,404 and $857,447 at December 31,
2006 and 2005, respectively.
16. 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
retained net income for the preceding two years. Accordingly, in 2007, without
prior regulatory approval, the Bank may declare dividends to the Corporation in
the amount of $1,953,064 plus additional amounts equal to the net income earned
in 2007 for the period January 1, 2007, through the date of declaration, less
any dividends which may have already been paid in 2007. 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, 2006 and 2005, 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, 2006, 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:
46
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------- -----
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%
As of December 31, 2005:
Total Risk-Based Capital
(To risk-weighted assets) $30,950 20.32% $12,185 8.00% $15,231 10.00%
Tier I Capital
(To risk-weighted assets) $29,315 19.24% $ 6,095 4.00% $ 9,142 6.00%
Tier I Capital
(To average assets) $29,315 12.74% $11,726 4.00% $14,657 5.00%
The Corporation's capital ratios are not materially different from
those of the Bank.
17. 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.
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, 2006 and 2005 were as follows:
2006 2005
----------- -----------
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit $19,751,463 $20,417,688
Financial standby letters of credit 867,504 1,497,865
Performance standby letters of credit 529,636 570,307
Dealer floor plans 437,218 1,042,843
Loans for resale 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, 2006 varied from 0 percent to 100
percent; the average amount collateralized was 45.7 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
47
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 85.5% 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.
18. 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.
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 December 31,
2006 and 2005.
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
48
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.
At December 31, 2006 and 2005, the carrying values and estimated fair
values of financial instruments are presented in the table below:
2006 2005
--------------------------- ---------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------ ------------ ------------ ------------
Financial Assets:
Cash and short-term investments $ 15,531,498 $ 15,531,498 $ 11,361,824 $ 11,361,824
Investment securities 53,486,269 53,486,269 53,919,318 53,919,318
Loans:
Commercial 9,574,252 9,520,265 12,096,894 12,045,774
Tax-exempt 9,620,742 9,492,663 9,018,852 8,909,839
Real estate - construction 2,231,209 2,234,882 1,548,536 1,555,311
Real estate 135,008,963 134,678,025 127,170,180 127,027,330
Personal 4,117,586 4,254,343 4,347,575 4,497,305
------------ ------------ ------------ ------------
Gross loans 160,552,752 160,180,178 154,182,037 154,035,559
Add (Deduct): Unearned discount (18,975) -- (29,824) --
Unamortized loan fees, net of costs 107,215 -- 119,149 --
------------ ------------ ------------ ------------
Loans, net of unearned income 160,640,992 160,180,178 154,271,362 154,035,559
Allowance for losses 1,455,636 -- 1,552,576 --
------------ ------------ ------------ ------------
Net loans $159,185,356 $160,180,178 $152,718,786 $154,035,559
============ ============ ============ ============
Cash surrender value of bank owned life insurance $ 6,767,080 $ 6,767,080 $ 6,480,223 $ 6,480,223
Financial Liabilities:
Deposits:
Demand - non-interest bearing $ 19,257,761 $ 19,257,761 $ 18,249,315 $ 18,249,315
Demand - interest bearing 28,842,953 28,842,953 28,858,627 28,858,627
Savings 34,023,884 34,023,884 34,767,792 34,767,792
Time - $100,000 and over 28,870,821 28,765,326 25,627,611 25,399,928
Other time 58,289,088 58,173,492 57,343,513 56,869,479
------------ ------------ ------------ ------------
Total Deposits $169,284,507 $169,063,416 $164,846,858 $164,145,141
============ ============ ============ ============
Short-Term Borrowings $ 29,309,848 $ 29,309,848 $ 24,599,711 $ 24,599,711
Long-Term Borrowings 11,297,111 11,772,313 11,310,669 12,074,820
Off-Balance Sheet Assets (Liabilities):
Commitments to extend credit $ 19,751,463 $ 20,417,688
Standby letters of credit 867,504 1,497,865
Performance standby letters of credit 529,636 570,307
Dealer floor plans 437,218 1,042,843
19. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for CCFNB Bancorp, Inc. (Parent Company
only) was as follows:
49
December 31,
-------------------------
2006 2005
----------- -----------
BALANCE SHEETS
Assets
Cash $ 162,071 $ 155,207
Investment in subsidiary 28,606,146 27,437,827
Investment in other equity securities 1,341,531 1,264,946
Prepayments and other assets 260,825 198,909
Receivable from subsidiary -- 38,014
----------- -----------
Total Assets $30,370,573 $29,094,903
=========== ===========
Liabilities and Stockholders' Equity
Accrued expenses and other liabilities $ 91,766 $ 82,477
Payable to subsidiary 29,987 --
----------- -----------
Total Liabilities 121,753 82,477
----------- -----------
Stockholders' Equity
Common stock 1,552,080 1,572,921
Surplus 2,672,545 3,126,502
Retained earnings 26,054,135 24,616,500
Accumulated other comprehensive (loss) (29,940) (303,497)
----------- -----------
Total Stockholders' Equity 30,248,820 29,012,426
----------- -----------
Total Liabilities and Stockholders' Equity $30,370,573 $29,094,903
=========== ===========
Years Ended December 31,
---------------------------------------
2006 2005 2004
----------- ----------- -----------
STATEMENTS OF INCOME
Income
Dividends from subsidiary bank $ 1,478,298 $ 1,223,000 $ 967,703
Dividends - other 44,469 40,660 37,256
Securities gains 58 33,947 --
Other -- -- 174
Interest 1,520 1,416 2,661
----------- ----------- -----------
Total Income 1,524,345 1,299,023 1,007,794
Operating expenses 82,367 109,927 97,013
----------- ----------- -----------
Income Before Taxes and Equity in
Undistributed Net Income of Subsidiary 1,441,978 1,189,096 910,781
Applicable income tax (benefit) (22,199) (17,340) (22,555)
----------- ----------- -----------
Income Before Equity in Undistributed Net
Income of Subsidiary and Equity in
Income from Insurance Agency 1,464,177 1,206,436 933,336
Equity in undistributed income of subsidiary 945,308 1,007,756 1,266,829
Income from investment in insurance agency 2,156 11,366 17,248
----------- ----------- -----------
Net Income $ 2,411,641 $ 2,225,558 $ 2,217,413
=========== =========== ===========
STATEMENTS OF CASH FLOWS
Operating Activities:
Net income $ 2,411,641 $ 2,225,558 $ 2,217,413
Adjustments to reconcile net income to net
cash provided by operating activities:
Deferred income taxes 733 3,864 5,665
Securities gains (58) (33,947) --
Equity in undistributed net income of
subsidiary (945,308) (1,007,756) (1,266,829)
(Income) from investment in an insurance
agency (2,156) (11,366) (17,248)
(Increase) decrease in prepayments and
other assets (59,760) 57,733 (47,082)
(Increase) decrease in receivable from
subsidiary 39,322 (38,014) 35,181
Increase (decrease) in payable to
subsidiary 29,986 (34,862) 34,862
Increase (decrease) in income taxes and
accrued expenses payable (17,482) 17,482 --
----------- ----------- -----------
Net Cash Provided By Operating
Activities 1,456,918 1,178,692 961,962
----------- ----------- -----------
Investing Activities:
Purchase of equity securities -- (140,707) --
Proceeds from sale of equity securities 58 142,087 --
----------- ----------- -----------
Net Cash Provided By Investing
Activities 58 1,380 --
----------- ----------- -----------
Financing Activities:
Acquisition of treasury stock (680,700) (505,700) (467,000)
Proceeds from issuance of common stock 204,594 235,714 206,245
Cash dividends (974,006) (933,013) (890,997)
----------- ----------- -----------
Net Cash (Used In) Financing Activities (1,450,112) (1,202,999) (1,151,752)
----------- ----------- -----------
Increase (Decrease) in Cash and Cash
Equivalents 6,864 (22,927) (189,790)
Cash and Cash Equivalents at Beginning of Year 155,207 178,134 367,924
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year $ 162,071 $ 155,207 $ 178,134
=========== =========== ===========
50
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, 2006 and 2005, 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, 2006.
These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements 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, 2006 and 2005, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2006 in conformity with
accounting principles generally accepted in the United States of America.
/s/ J. H. Williams & Co., LLP
J. H. Williams & Co., LLP
Kingston, Pennsylvania
February 17, 2007
51
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, 2006.
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
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
52
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, 2006, 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, 2006, 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, 2006, to provide reasonable assurance
that our financial statements are fairly presented in conformity with generally
accepted accounting principles.
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.
At this meeting, the stockholders elect three Class 2 directors.
Unless you withhold authority to vote for one or more of the nominees, the
persons named as proxies intend to vote for the election of the three nominees
for Class 2 director. All of the nominees are recommended by the Board of
Directors:
Lance O. Diehl
W. Bruce McMichael, Jr.
Paul E. Reichart
All nominees have consented to serve as directors. The Board of
Directors has no reason to believe that any of the nominees should be unable to
act as a director. However, if any director is unable to stand for re-election,
the Board of Directors will designate a substitute. If a substitute nominee is
named, the proxies will vote for the election of the substitute.
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
ROBERT M. BREWINGTON, JR., 56
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., 52
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.
CHARLES E. LONG, 71
Director since 1993. Retired. Former President of Long Supply Co.,
Inc. (a wholesaler and retailer of hardware and masonry products).
53
CLASS 2 DIRECTORS WHOSE TERM EXPIRES IN 2007 AND NOMINEES FOR CLASS 2 DIRECTORS
WHOSE TERM WILL EXPIRE IN 2010
LANCE O. DIEHL, 41
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, 47
Director since 2006. Licensed Funeral Director; President, McMichael
Funeral Home, Inc.
PAUL E. REICHART, 69
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.
CLASS 3 DIRECTORS WHOSE TERM EXPIRES IN 2009
EDWARD L. CAMPBELL, 68
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, 61
Director since 2004. Partner in Accounting Firm of Brewer, Gehrig &
Johnson, Certified Public Accountants.
ELWOOD R. HARDING, JR., 60
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 2006, the Corporation's Board of Directors held 13 meetings and
the bank's Board of Directors held 23 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 2006.
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)
54
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. Bruce 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.
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 and reviews the proposed salary
increases of the officers, 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.
55
DIRECTORS' COMPENSATION (7)
Interest Earned
on Deferred
Fees Director's
Earned Non-Equity Fee Plans and
Or Incentive Nonqualified
Paid Stock Option Plan Deferred All Other
in Cash Awards Awards Compensation Compensation Compensation
Name ($) ($)(1) ($)(2) ($)(3) Earnings($) ($)(6) Total($)
---- ------- ------ ------ ------------ --------------- ------------ --------
Robert M. Brewington, Jr. 13,400 0 0 0 1,632(4) N/A 15,032
Edward L. Campbell 14,625 0 0 0 0 N/A 14,625
Frank D. Gehrig 13,675 0 0 0 0 N/A 13,675
Elwood R. Harding, Jr. 13,400 0 0 0 12,128(5) N/A 25,528
Willard H. Kile, Jr. 15,325 0 0 0 1,912(4) N/A 17,237
Charles E. Long 14,775 0 0 0 0 N/A 14,775
W. Bruce Michael, Jr. 9,875 0 0 0 139(4) N/A 10,014
Paul E. Reichart 40,000 0 0 0 0 N/A 40,000
(1) No Stock Awards were given by the Corporation in 2006.
(2) No Option Awards were given by the Corporation in 2006.
(3) No Non-Equity Incentive Plan Compensation was paid to Directors in 2006.
(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, 2006 and 2005, the net cash surrender value of
these and other insurance policies was $490,887 and $448,101, respectively, and
the total accrued liability was $208,734 and $210,768, respectively, relating to
these agreements. Mr. Harding is currently a Director of the Corporation and his
total accrued liability was $156,930 and $145,312 at December 31, 2006 and 2005,
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 2006. 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, 2005 and 2006, deferred fees and
accrued interest for Mr. Brewington was $33,849 and $48,881; deferred fees and
accrued interest for Mr. Kile was $39,573 and $56,810 and deferred fees and
accrued interest for Mr. McMichael was $0 and $9,996, respectively.
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
REPORT OF COMMITTEE ON EXECUTIVE COMPENSATION
56
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 2006 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, 2006, to be filed
with the SEC.
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 $196,949 in the year 2006.
Please refer to the Summary Compensation Table..
We established the following 2007 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
2007 as in 2006. A 2006 4% "across the board" bonus was paid in January 2007
which amounted to $5,400. The bank will also contribute $21,891 in 2007 to Mr.
Diehl's deferred compensation plan.
TREASURER (PRINCIPAL FINANCIAL OFFICER) COMPENSATION
Ms. Kocher received total compensation of $61,069 in the year 2006.
Please refer to the Summary Compensation Table.
We established the following 2007 compensation package for Ms. Kocher:
Annual salary to be paid is $53,045, and we expect the other payment and
benefits described in the Summary Compensation Table to remain comparable in
2007 as in 2006. A 2006 4% "across the board" bonus was paid in January 2007
which amounted to $2,060.
CHIEF OPERATING OFFICER COMPENSATION
Mr. Wenner received total compensation of $184,606 in the year 2006.
Please refer to the Summary Compensation Table.
We established the following 2007 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
2007 as in 2006. A 2006 4% "across the board" bonus was paid in January 2007
which amounted to $4,600. The bank will also contribute $46,770 in 2007 to Mr.
Wenner's deferred compensation plan.
SENIOR VICE PRESIDENT OF FINANCIAL PLANNING DEPARTMENT COMPENSATION
Mr. Trump received total compensation of $131,614 in the year 2006.
Please refer to the Summary Compensation Table.
We established the following 2007 compensation package for Mr. Trump:
Annual salary to be paid is $78,003, and we expect the other payment and
benefits described in the Summary Compensation Table to remain comparable in
2007 as in 2006. A 2006 4%
57
"across the board" bonus was paid in January 2007 in the amount of $3,059. The
bank will also contribute $37,051 in 2007 to Mr. Trump's deferred compensation
plan.
OTHER FACTORS THAT INFLUENCED COMPENSATION
We considered Messrs. Diehl's 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 2006:
- Revenues increased 14.8% to $15,102,000
- Earnings from continuing operations grew 8.4% to $2,411,641
- Loans increased 4.1% to $160,641,000
- Return on average total capital was 7.97%
In addition, we considered Mr. Diehl's leadership in meeting the
operational and strategic goals established for the bank in the beginning of
2006.
Our Compensation Committee considered that Mr. Diehl has worked for
the bank for a total of 13 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.
Ms. Kocher began her employment at the bank in June 1965. She has 34
years of banking experience. During this time, she has held duties as Executive
Assistant, Teller, Accountant, Personnel, Assistant Vice President and present
positions of Vice President, Controller and Assistant Secretary of the bank and
Treasurer, Principal Financial Officer, and Assistant Secretary of the
Corporation. Ms. Kocher is a graduate of the Central Atlantic Advanced School of
Banking. Her duties include responsibility for Bank and Bancorp corporate
accounting, financial reporting systems, shareholder relations, accounts
payable, ALCO systems, funds management, Disclosure Committee and regulatory
reporting.
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.
Mr. Trump has been employed at the bank since 1989 and has 37 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.
COMPENSATION DISCUSSION AND ANALYSIS
The following discussion will touch upon:
- the objectives of our executive compensation policy;
- what our compensation policy is designed to award;
- each element of compensation;
58
- the reasons why these elements of compensation were selected;
- how we determine the amount of each element of compensation; and
- how each element of compensation chosen by us fits into the objectives
of our overall executive compensation policy.
OBJECTIVES OF EXECUTIVE COMPENSATION
- link the executive's goals with your interests as
stockholders;
- support our strategic business plan and long-term
development;
- award a portion of the executive's compensation based upon
our overall performance; and
- attract and retain talented management.
Our decisions on senior executive officer compensation are based
primarily upon our assessment of each executive's leadership and operational
performance and potential to enhance long-term stockholder value. We rely upon
our judgment about each individual - and not on rigid formulas or short-term
changes in business performance - in determining the amount and mix of
compensation elements and whether each particular payment or award provides an
appropriate incentive and reward for performance that sustains and enhances
long-term stockholder value. Key factors affecting our judgment include:
performance compared to the financial, operational and strategic goals
established for the executive at the beginning of the year; nature, scope and
level of responsibilities; contribution to the Corporation's financial results,
particularly with respect to key metrics such as, revenue, earnings and return
on total capital; effectiveness in leading our initiatives to increase customer
value and productivity; contribution to the Corporation's commitment to
corporate responsibility, including success in creating a culture of integrity
and compliance with applicable laws and our ethics policies; and commitment to
community leadership and diversity.
We considered each executive's current salary and prior year bonus,
the appropriate balance between incentives for long-term and short-term
performance and the compensation paid to the executive's peers within the
Corporation and industry.
We also consulted with an executive compensation expert and considered
the compensation levels and performances of banking companies in comparable
market areas, as these companies are most likely to compete with us for the
services of our executives. However, we do not tie our compensation decisions to
any particular range or level of total compensation paid to executives at those
companies.
ELEMENTS OF EXECUTIVE COMPENSATION
We utilize annual compensation which includes salary, cash bonus and
cash contributions to our 401(K) profit sharing plan, as well as certain
perquisites. The key elements of our executive compensation program are:
Base Salary. Base salaries for our executives are established based on the scope
of their responsibilities, taking into account competitive market compensation
paid by other companies for similar positions as well as salaries paid to the
executives' peers within the Corporation and industry. We set base salaries at a
level designed to attract and retain superior leaders. Base salaries are
typically reviewed every 12 months, and adjusted from time to time to take into
account outstanding individual performance, promotions and competitive
compensation levels. The salaries we paid to the named executive officers are
shown in the applicable Summary Compensation Table.
Annual Bonus. We generally pay annual bonuses to all employees to incent and
reward superior performance for the year. Bonuses, which are at the sole
discretion of the Board of Directors, are paid to all employees in cash in
January for the prior year's performance. In addition, the Board of Directors
may award an additional cash bonus based upon the evaluation of each executive's
individual performance during the year, in the context of our assessment of the
overall performance of the Corporation and the executive's function in meeting
the specific financial and other key goals established for the Corporation and
the executive's function. This evaluation also includes an assessment of how the
executive performed compared to the financial, operational and strategic goals
and objectives established for the executive at the beginning of the year. The
annual bonuses we awarded over the last three years are shown in the applicable
Summary Compensation Tables.
We do not have a long-term compensation program based upon the award of stock
options and restricted stock or other long-term incentive awards. However, we do
have long-term compensation agreements. See the discussion of these agreements
elsewhere in this proxy statement. We may consider the award of stock options or
restricted stock in the future.
Perquisites. We provide our senior executive officers with perquisites that we
believe are reasonable, competitive and consistent with the Corporation's
overall executive compensation program. We believe that our perquisites help us
to retain the best leaders and allow them to operate more effectively. These
perquisites, include but are not limited to, profit-sharing plan, employee stock
purchase plan, life insurance plan (including an arrangement with 18 current and
former bank officers under a bank-owned life insurance
59
investment), disability insurance plan, business expense reimbursement,
vacation, holiday, sick and personal days with pay, as provided by the bank to
its regular full-time employees. Mr. Diehl also receives the use of a
bank-provided automobile and the bank reimburses all expenses relating thereto,
including fuel, oil, maintenance and insurance costs. The use of this automobile
is limited to Mr. Diehl, his spouse, authorized bank personnel or a designated
driver in the event of an emergency. Mr. Reichart also receives the use of a
bank-provided vehicle and the expenses relating thereto. Mr. Reichart does
reimburse the bank for certain mileage expenses. In addition, Mr. Reichart is
afforded the use of a cellphone. Mr. Reichart's expenses combined do not total
more than $10,000 for 2006.
BENCHMARKING AND PEER GROUP
Our committee on executive compensation wants the compensation of an
executive to be competitive with other commercial banking institutions doing
business in similar markets. Each year, our compensation committee on executive
compensation and the bank's Human Resources Committee reviews a report from L.
R. Webber Associates, Inc, PO Box 593, Hollidaysburg, PA 16648, ("Webber") that
delineates compensation at peer group banking companies; discusses such report
as well as the performance and compatibility to the position with each named
executive officer in this proxy statement; and takes into consideration
recommendations by each named executive officer's supervisory officer or by
members of the Board of Directors for the senior most named executive officers.
The total executive compensation for Mr. Diehl places his compensation above the
average mid-point range of the peer group by asset size and above the average
minimum range for the region. The total compensation for Ms. Kocher is
determined by the Human Resource Committee, which uses a quartile system for
salary ranges and not the Webber survey; however, her salary would range half
way between the mid-point and maximum compensation ranges. Mr. Wenner's
compensation is placed above the average maximum range of the peer group by
asset size and above the average mid-point range for the region. Mr. Trump's
compensation is determined by the Human Resource Committee, which uses a
quartile system for salary ranges and not the Webber survey; however, his salary
would range in the upper to maximum compensation range. All of these factors are
taken into consideration in the determination of the compensation of the named
executive officers as a group and of the named executive officers individually.
Webber prepares an annual salary/benefit survey for the bank. This
survey included information on 12 banks and 2 thrifts for the asset group
ranging from $200,000,000 to $299,999,999 in assets. This survey further
compared 13 banks and 4 thrifts for the region including Columbia County and the
following additional Pennsylvania counties: Carbon, Lackawanna, Luzerne, Monroe,
Northampton, Pike, Schuylkill, Susquehanna, Wayne and Wyoming. The average
minimum and maximum salary ranges for the Chief Executive Officer reflect
$89,061 to $325,050, respectfully. Compensation for the Chief Operating Officer
ranges from a minimum of $57,000 to a maximum of $235,000.
The Corporation's quartile system was originally created by Webber.
Calculations are provided each year by the Human Resource Officer showing each
current quartile with projected adjustments of an increase of 2%, 3% and 4%.
This information is then presented to the Board of Directors by the President
and Chief Operating Officer, and the Board of Directors makes the final
decision. It was decided that there would be no adjustments to the quartile
ranges for 2007. The salary ranges for the Controller (Principal Financial
Officer) reflect a minimum of $34,772 with the maximum at $58,288. The Senior
Vice President (Senior Vice President of Financial Planning) position uses the
same Webber classifications system and the minimum salary reflects $47,905 with
the maximum at $81,893.
BASE SALARY AND BENEFITS
Annual base salary is designed to compensate executive officers for
their continued levels of superior performance. The base salary amounts paid to
the named executive officers for the fiscal year 2006 are reflected in the
salary column of the Summary Compensation Table. In addition to base cash
compensation, each executive officer participates in the same retirement plan,
profit sharing plan, savings plan, life insurance plan or disability insurance
plan, business expense reimbursement, vacation pay, holiday pay, sick pay and
personal days off with pay, as provided by the bnk to its regular full time
employees. According to executive employee agreements for the Chief Executive
Officer and Chief Operating Officer, base salary shall not fall below $100,000
and $85,000, respectively. Benefits included are the same as described above for
perquisites.
CASH BONUS AWARDS
The Board of Directors of the bank, in its sole discretion, may
provide for payment of an annual bonus to all of the employees of the bank.
However, Messrs. Diehl and Wenner each received an additional $5,000 cash bonus
in December 2006 for outstanding performance.
SEVERANCE AND CHANGE IN CONTROL BENEFIT
As delineated in the employment agreements for the Chief Executive
Officer and the Chief Operating Officer, termination without cause, the bank
shall pay the executive his annual base salary (minus applicable taxes and
withholdings) for a one (1) year
60
period, together with the dollar value of any accrued vacation and unreimbursed
business expenses as of the date of termination. If the executive's employment
shall be terminated for cause, the Bank shall pay the executive his full annual
base salary, minus applicable taxes and withholdings prorated through the date
of termination at the rate in effect at the time of termination, together with
the dollar value of any accrued vacation and unreimbursed business expenses as
of the date of termination. There are no other employee agreements for the other
named executive officers contained in this proxy statement.
The bank has entered into the following severance and change in
control agreements for the named executive officers identified below:
If Mr. Diehl terminated his employment with the Corporation for good
reason following a change in control, he would have had $270,000 available to
him, or the amount equal to two times his annual base salary, (minus applicable
taxes and withholdings), and his vested share balance in the bank's qualified
defined contribution plan.
TAX AND ACCOUNTING CONSIDERATION
We will take into account tax consequences to our named executive
officers in designing the various elements of our executive compensation policy,
such as the design terms to defer immediate income recognition in accordance
with Section 409A of the Internal Revenue Code of 1986.
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 years ended
December 31, 2005 and 2004 and a new expanded one for the year ended December
31, 2006. This latter table includes information about our principal financial
officer as well as other named executive officers whose annual total
compensation, as defined by the SEC's rules, exceeded $100,000.
SUMMARY COMPENSATION TABLE FOR THE
YEAR ENDED DECEMBER 31, 2006
Non-Stock Change in
Name and Stock Option Incentive Nonqualified All Other
Principal Salary Bonus ($) Awards ($) Awards ($) Plan Compen- Deferred Comp. Compensa-
Position Year ($) (1) (6) (7) sation ($) (8) Plans ($) tion ($) Total ($)
--------- ---- ------- --------- ---------- ---------- -------------- -------------- --------- ---------
Lance O. Diehl,
President &
Chief
Executive
Officer 2006 135,000 4,200 0 0 0 20,136 37,613(2) 196,949
Virginia D.
Kocher,
Treasurer &
Principal
Financial
Officer 2006 51,500 1,750 0 0 0 0 7,819(3) 61,069
61
Edwin A.
Wenner,
Executive
Vice-President
& Chief
Operating
Officer 2006 115,000 3,640 0 0 0 43,024 22,942(4) 184,606
Jacob S. Trump,
Senior Vice
President 2006 76,473 2,624 0 0 0 34,084 18,433(5) 131,614
(1) Represents a cash bonus representing 3 1/2% of 2005 base salary.
(2) 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.
(3) Includes $1,597 representing the bank's matching contribution to Ms.
Kocher's 401K plan; $3,584 as cafeteria plan benefits; $2,005 as term life
insurance and bank-owned life insurance premium payments; and $633 for
various meal, dues and travel expenses.
(4) 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.
(5) 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 $522 for various meal
and travel expenses.
(6) No Stock Awards were given by the Corporation in 2006.
(7) No Option Awards were given by the Corporation in 2006.
(8) No Non-stock Incentive Plan Compensation was given by the Corporation in
2006.
SUMMARY COMPENSATION TABLE FOR
THE YEARS ENDED DECEMBER 31, 2005 AND 2004
ANNUAL COMPENSATION(1)
--------------------------------------
FISCAL OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) COMPENSATION($)
--------------------------- ------ --------- -------- --------------- ---------------
LANCE O. DIEHL 2005 120,000 3,870(2) 16,422(3) 22,379(4)
PRESIDENT AND CHIEF 2004 110,000 3,517(5) 15,391(6) 20,477(7)
EXECUTIVE OFFICER
EDWIN A. WENNER 2005 104,000 3,325(2) 4,293(8) 51,418(9)
EXECUTIVE VICE PRESIDENT AND CHIEF 2004 95,000 2,975(5) 3,919(10) 47,873(11)
OPERATING OFFICER
(1) From January 1, 2004 through December 31, 2005, we did not pay any
long-term compensation in the form of stock options, stock appreciation
rights, restricted stock or any other long-term compensation, nor did we
enter into any long-term incentive
62
plan payments. Accordingly, no such information is presented in the summary
compensation table set forth above. No such arrangements are currently in
effect.
(2) Represents a cash bonus representing 3 1/2% of 2004 base salary.
(3) Includes $11,400 as the payment of directors' fees and $5,022 representing
the bank's matching contribution to Mr. Diehl's 401K plan.
(4) Includes $19,405 as a payment for a deferred compensation plan; $949 as car
expense; $258 as cellphone expense; $826 as cafeteria plan benefits, $266
as term life insurance premium payments on the life of Mr. Diehl, $600 as a
partial corporate membership in the Berwick Golf Club and $75 for a Years
of Service Award for ten years of employment at the bank.
(5) Represents a cash bonus representing 3 1/2% of 2003 base salary.
(6) Includes $10,800 as the payment of directors' fees and $4,591 representing
the bank's matching contribution to Mr. Diehl's 401K plan.
(7) Includes $16,047 as a payment for a deferred compensation plan; $678 as car
expense; $403 as cellphone expense; $758 as cafeteria plan benefits, $2,356
as a Berwick Golf Club membership and $235 as term life insurance premium
payments on the life of Mr. Diehl.
(8) Represents the bank's matching contribution to Mr. Wenner's 401K plan.
(9) Includes $40,578 as a payment for a deferred compensation plan; $259 as
cellphone expense; $7,511 as cafeteria plan benefits, $600 as a partial
corporate membership in the Berwick Golf Club and $2,470 as term life
insurance premium payments on the life of Mr. Wenner.
(10) Represents the bank's matching contribution to Mr. Wenner's 401K plan.
(11) Includes $35,174 as a payment for a deferred compensation plan; $408 as
cellphone expense; $8,008 as cafeteria plan benefits, $2,356 as a Berwick
Golf Club membership and $1,927 as term life insurance premium payments on
the life of Mr. Wenner.
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 2006
from this deferred compensation arrangement. The accrued liability of his
deferred compensation arrangement at December 31, 2006 was $118,464.
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, 2006 was $97,244 and the total
accrued liability as of December 31, 2006 and December 31, 2005 was $323,592 and
$226,348, respectively. Mr. Diehl is currently President and Chief Executive
Officer. Mr. Wenner is currently the Executive Vice President and Chief
Operating Officer. Mr. Trump is currently the Senior Vice President of Financial
Planning.
The following table illustrates the above deferred compensation
arrangements with our current Chairman of the Board and Messrs. Diehl, Wenner
and Trump.
Executive Bank Aggregate
Contributions in Contributions Withdrawals/Distributions Aggregate Balance at
Name 2006 ($) (1) in 2006 ($) ($) (2) December 31, 2006 ($)
---- ---------------- ------------- ------------------------- --------------------
Lance O. Diehl,
President and Chief
Executive Officer 0 $20,136 0 $ 66,687
Edwin A. Wenner,
Executive
Vice-President and
Chief Operating
Officer 0 $43,024 0 $143,104
63
Paul E. Reichart,
Chairman of the
Board (3) 0 $ 6,127 $22,500 $118,464
Jacob S. Trump,
Senior Vice President
of Financial Planning 0 $34,084 0 $113,801
(1) The deferred compensation plans do not allow executive contributions.
(2) Messrs. Diehl, Wenner and Trump have not attained retirement; hence no
withdrawals or distributions.
(3) Mr. Reichart is no longer employed by the Corporation and the bank;
however, he does serve as Chairman of the Board.
RETIREMENT PLANS
We maintain a Non Qualified Deferred Compensation Plan for certain named
executive officers. The following table presents information about these plans
as it pertains to each named executive officer:
Estimated
Number of Normal Estimated Early
Years Normal Retirement Early Retirement
Credited Retirement Annual Retirement Annual
Name Plan Name Service (#) Age (#) Benefit ($) Age (#)(1) Benefit ($) (2)
---- --------------------- ----------- ---------- ----------- ---------- ---------------
Lance O. Diehl, Non Qualified
President and Chief Deferred Compensation
Executive Officer Plan 3 3/4 60 90,000 N/A N/A
Virginia D. Kocher,
Treasurer N/A N/A N/A N/A N/A N/A
Edwin A. Wenner, Non Qualified
Executive Deferred Compensation
64
Vice-Presiden
and Chief Operating
Officer Plan 3 3/4 60 50,000 N/A N/A
Jacob S. Trump, Non Qualified
Senior Vice President Deferred Compensation
of Financial Planning Plan 3 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 are entitled to early retirement in 2006.
(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.
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 28, 2007. The aggregate
number of shares owned by all directors, principal financial officer and named
executive officers is 4.95%. 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. 9,272.413 --
Edward L. Campbell 7,637.008 --
Lance O. Diehl 1,946.077 --
65
Frank D. Gehrig 2,310.897
Elwood R. Harding, Jr. 15,719.310 1.27%
Willard H. Kile, Jr. 6,164.197 --
Virginia D. Kocher 391.000 --
Charles E. Long 6,700.386 --
W. Bruce McMichael, Jr. 1,629.000 --
Paul E. Reichart 8,880.000 --
Jacob S. Trump 266.956 --
Edwin A. Wenner 325.000 --
All Officers and Directors
as a group (9 directors,
3 nominees, 7 named
officers, 12 persons
in total) (2) 61,242.244 4.95%
(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; Jacob S.
Trump, Senior Vice President and Financial Planning Officer and Virginia D.
Kocher, Treasurer and Principal Financial Officer. Messrs. Wenner and Trump
and Ms. Kocher 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 2006.
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 and 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, 2006, 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 $4,183,000 or
approximately 13.83% of the Corporation's total consolidated capital accounts.
The largest amount for all of these loans in 2006 was $5,662,000 or
approximately 18.72% of the Corporation's total consolidated capital accounts.
These loans did not involve more than the normal risk of collectibility nor did
they present other unfavorable features.
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Audit Committee has appointed J.H.Williams & Co., LLP, (J.H.
Williams) certified public accountants, as the Corporation's independent
registered public accounting firm to audit the financial statements of the
Corporation for the year ended December 31, 2007.
66
A member of J.H. Williams will be present at the annual meeting, and
will have the opportunity to make a statement and be available to respond to
appropriate questions by stockholders.
FEES PAID TO J. H. WILLIAMS & CO., LLP
Aggregate fees for professional services for the Corporation by J. H. Williams
for the years ended December 31, 2006 and 2005 were:
($ in thousands) 2006 2005
---------------- ------- -------
Audit 69,200 67,000
Audit Related 11,472 10,250
Tax 5,925 5,800
All Other 0.0 0.0
------- -------
Total $86,597 $83,050
======= =======
AUDIT FEES - Audit fees for 2006 and 2005 were $69,200 and $67,000,
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 2006 and 2005 were $11,472
and $10,250 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.
TAX FEES - Tax fees for 2006 and 2005 were $5,925 and $5,800,
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.
67
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
68
(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.
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. Section 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.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.1 Charter of the Audit Committee
69
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: March 8, 2007
---------------------------------
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: March 8, 2007
---------------------------------
Edward L. Campbell
Director and Secretary
By: /s/ Robert M. Brewington, Jr. Date: March 8, 2007
---------------------------------
Robert M. Brewington, Jr.
Director
By: /s/ Frank D. Gehrig Date: March 8, 2007
---------------------------------
Frank D. Gehrig
Director
By: /s/ Lance O. Diehl Date: March 8, 2007
---------------------------------
Lance O. Diehl
President, Chief Executive
Officer and Director
By: /s/ Elwood R. Harding, Jr. Date: March 8, 2007
---------------------------------
Elwood R. Harding, Jr.
Director and Vice Chairman of
the Board
By: /s/ Willard H. Kile, Jr. Date: March 8, 2007
---------------------------------
Willard H. Kile, Jr.
Director
70
By: /s/ Charles E. Long Date: March 8, 2007
---------------------------------
Charles E. Long
Director
By: /s/ W. Bruce McMichael, Jr. Date: March 8, 2007
---------------------------------
W. Bruce McMichael, Jr.
Director
By: /s/ Paul E. Reichart Date: March 8, 2007
---------------------------------
Paul E. Reichart
Director, Chairman of the Board
By: /s/ Virginia D. Kocher Date: March 8, 2007
---------------------------------
Virginia D. Kocher
Treasurer and Assistant Secretary
(Principal Financial and
Accounting Officer)
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INDEX TO EXHIBITS
Item
Number Description Page
------ ----------- ----
14 Code of Conduct and Ethics...................................... 73
21 List of Subsidiaries of the Company............................. 77
23 Consent of Independent Certified Public Accountants............. 78
31.1 CEO certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002..................................................... 79
31.2 Principal Financial Officer certification pursuant to Section
302 of the Sarbanes-Oxley Act of 2002........................... 80
32.1 CEO certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002............................................................ 81
32.2 Principal Financial Officer certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002...................................... 82
99.1 Charter of Audit Committee...................................... 83
72