e10vk
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year-ended December 31, 2010
or
     
o   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file Number: 000-19028
CCFNB BANCORP, INC.
(Name of registrant as specified in its charter)
     
PENNSYLVANIA
(State or other jurisdiction of
incorporation or organization)
  23-2254643
(I.R.S. Employer
Identification Number)
     
232 East Street, Bloomsburg, Pennsylvania
(Address of principal executive offices)
  17815
(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 o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to section 13 or section 15(d) of the Act. Yes o No þ
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 þ No o
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. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer o   Accelerated filer o   Non-accelerated filer o (Do not check if a smaller reporting company)   Smaller reporting company þ
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes o No þ
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the Registrant’s most recently completed second fiscal quarter, $59,747,543 as of June 30, 2010.
As of March 8, 2011, the Registrant had outstanding 2,225,931 shares of its common stock, par value $1.25 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement prepared in connection with its annual meeting of Shareholders to be held May 10, 2011, are incorporated by reference into parts III and IV of this report.
 
 

 


 

CCFNB BANCORP, INC.
FORM 10-K
INDEX
         
    Page  
PART I
       
Item 1. Business
    3  
Item 1A. Risk Factors
    10  
Item 1B. Unresolved Staff Comments
    14  
Item 2. Properties
    14  
Item 3. Legal Proceedings
    14  
PART II
       
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
    30  
Item 8. Financial Statements and Supplementary Data
    31  
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    65  
Item 9A Controls and Procedures
    65  
Item 9B. Other Information
    67  
PART III
       
Item 10. Directors, Executive Officers and Corporate Governance
    67  
Item 11. Executive Compensation
    67  
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    67  
Item 13. Certain Relationships and Related Transactions, and Director Independence
    67  
Item 14. Principal Accounting Fees and Services
    67  
PART IV
       
Item 15. Exhibits, Financial Statements Schedules
    68  
SIGNATURES
    69  
INDEX TO EXHIBITS
    70  

2


 

PART I
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 bank subsidiary which is First Columbia Bank & Trust Co. (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, 2010, we had approximately:
    $614 million in total assets;
 
    $340 million in gross loans;
 
    $474 million in deposits; and
 
    $68 million in stockholders’ equity.
     The Bank is a state-chartered bank whose deposits are insured by the Deposit 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, 2010, the Bank had fourteen branch banking offices which are located in the Pennsylvania counties of Columbia, Luzerne, and Northumberland.
     We consider our branch banking offices to be a single operating segment, because these branches have similar:
    economic characteristics,
 
    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, 2010. We have combined financial information for our third-party brokerage operation with our financial information because this operation 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, 2010, we had 185 employees on a full-time equivalent basis. The Corporation and the Bank are not parties to any collective bargaining agreement and employee relations are considered to be good.
     On July 18, 2008, the Corporation completed its acquisition of Columbia Financial Corporation (“CFC”). Under the terms of the Agreement and Plan of Reorganization dated as of November 29, 2007, CFC merged with and into the Corporation; and the Corporations’ wholly-owned subsidiary, Columbia County Farmers National Bank merged with and into the Bank. The transaction was accounted for in accordance with FASB ASC 805, Business Combinations (SFAS No. 141-Business Combinations). In connection therewith, the Corporation issued approximately 1,030,286 shares of its common stock and paid cash of approximately $3,000 in lieu of the issuance of fractional shares in exchange for all of the issued and outstanding shares of CFC common stock. The aggregate value of the Corporation’s common stock issued and cash paid in the merger was $26,316,000. Assets and liabilities of CFC were recorded at estimated fair values as of the acquisition date and the results of the acquired entity operations are included in income from that date.
Regulation and Supervision
     The Corporation is a financial holding company, and is registered as such with the Board of Governors of the Federal Reserve System (the Federal Reserve Board). As a registered bank holding company and financial holding company, the Corporation is subject to regulation under the Bank Holding Company Act of 1956 and to inspection, examination, and supervision by the Federal Reserve Board.
     The operations of the Bank are subject to federal and state statutes applicable to banks chartered under the banking laws of the United States, and to banks whose deposits are insured by the Federal Deposit Insurance Corporation. The Bank’s operation also is subject to regulations of the Pennsylvania Department of Banking, the Federal Reserve Board and the Federal Deposit Insurance Corporation (FDIC).

3


 

     Several of the more significant regulatory provisions applicable to banks and financial holding companies to which the Corporation and the Bank are subject are discussed below. To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory provisions. Any change in applicable law or regulation may have a material effect on the business and prospects of the Corporation and the Bank.
Financial and Bank Holding Company Activities
     As a financial holding company, the Corporation may engage in, and acquire companies engaged in, activities that are considered “financial in nature”, as defined by the Gramm-Leach-Bliley Act and Federal Reserve Board interpretations. These activities include, among other things, securities underwriting, dealing and market-making, sponsoring mutual funds and investment companies, insurance underwriting and agency activities, and merchant banking. If any banking subsidiary of the Corporation ceases to be “well capitalized” or “well managed” under applicable regulatory standards, the Federal Reserve Board may, among other things, place limitations on the Corporation’s ability to conduct the broader financial activities permissible for financial holding companies or, if the deficiencies persist, require the Corporation to divest the banking subsidiary. In addition, if any banking subsidiary of the Corporation receives a Community Reinvestment Act rating of less than satisfactory, the Corporation would be prohibited from engaging in any additional activities other than those permissible for bank holding companies that are not financial holding companies. The Corporation may engage directly or indirectly in activities considered financial in nature, either de novo or by acquisition, as long as it gives the Federal Reserve Board after-the-fact notice of the new activities.
Interstate Banking and Branching
     As a bank holding company, the Corporation is required to obtain prior Federal Reserve Board approval before acquiring more than 5% of the voting shares, or substantially all of the assets, of a bank holding company, bank, or savings association. Under the Riegle-Neal Interstate Banking and Branching Efficiency Act (the “Riegle-Neal Act”), subject to certain concentration limits and other requirements, bank holding companies such as the Corporation may acquire banks and bank holding companies located in any state. The Riegle-Neal Act also permits banks to acquire branch offices outside their home states by merging with out-of-state banks, purchasing branches in other states, and establishing de novo branch offices in other states. Previously, the ability of banks to acquire or establish branch offices in another state was contingent on the host state having adopted legislation “opting in” to those provisions of the Riegle-Neal Act. Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), banks now may acquire or establish branches in another state to the same extent as a bank chartered in that state would be permitted to establish branches.
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 10% 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 the Corporation, 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% (5% in the case of an acquirer that is a bank holding company) or more of any class of outstanding voting stock of a bank holding company, or otherwise obtaining control or a “controlling influence” over that bank holding company.
Liability for Banking Subsidiaries
     Under Federal Reserve Board policy, a bank holding company is expected to act as a source of financial and managerial strength to each of its subsidiary banks and to commit resources to their support. This support may be required at times when the bank holding company may not have the resources to provide it. Similarly, under the cross-guarantee provisions of the Federal Deposit Insurance Act, the FDIC can hold any FDIC-insured depository institution liable for any loss suffered or anticipated by the FDIC in connection with (1) the “default” of a commonly controlled FDIC-insured depository institution; or (2) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution “in danger of default”.
Capital Requirements
     Information concerning the Corporation and the Bank with respect to capital requirements is incorporated by reference from Note 17, “Regulatory Matters”, of the “Notes to Consolidated Financial Statements” included under Item 8 of this report, and from the “Capital Resources” section of the “Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations”, included under Item 7 of this report.
FDICIA
     The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), and the regulations promulgated under FDICIA, among other things, established five capital categories for insured depository institutions — well capitalized, adequately

4


 

capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized — and requires federal bank regulatory agencies to implement systems for “prompt corrective action” for insured depository institutions that do not meet minimum capital requirements based on these categories. Unless a bank is well capitalized, it is subject to restrictions on its ability to offer brokered deposits and on certain other aspects of its operations. 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 5% of the bank’s assets at the time it became undercapitalized and the amount needed to comply with the plan. As of December 31, 2010, the Bank was considered well capitalized based on the guidelines implemented by the bank’s regulatory agencies.
Dividend Restrictions
     The Corporation’s funding for cash distributions to its shareholders is derived principally from dividends received from the Bank. Various federal and state laws limit the amount of dividends the Bank can pay to the Corporation without regulatory approval. In addition, federal bank regulatory agencies have authority to prohibit the Bank from engaging in an unsafe or unsound practice in conducting its business. The payment of dividends, depending upon the financial condition of the bank in question, could be deemed to constitute an unsafe or unsound practice. The ability of the Bank to pay dividends in the future is currently, and could be further, influenced by bank regulatory policies and capital guidelines. The Federal Reserve Board in 2009 notified all bank holding companies that dividends should be eliminated, deferred or significantly reduced if the bank holding company’s net income for the past four quarters, net of dividends paid during that period, is not sufficient to fully fund the dividends; the bank holding company’s prospective rate of earnings retention is not consistent with the bank holding company’s capital needs and overall, current and prospective financial conditions; or the bank holding company will not meet, or is in danger of meeting, its minimum regulatory capital adequacy ratios. Additional information concerning the Corporation and the Bank with respect to dividends is incorporated by reference from Note 17, “Regulatory Matters”, of the “Notes to Consolidated Financial Statements” included under Item 8 of this report, and the “Capital Resources” section of “Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations”, included under Item 7 of this report.
Deposit or Preference Statute
     In the “liquidation or other resolution” of an institution by any receiver, U.S. federal legislation provides that deposits and certain claims for administrative expenses and employee compensation against the insured depository institution would be afforded a priority over the general unsecured claims against that institution, including federal funds and letters of credit.
Other Federal Laws and Regulations
     The Corporation’s operations are subject to additional federal laws and regulations applicable to financial institutions, including, without limitation:
    Privacy provisions of the Gramm-Leach-Bliley Act and related regulations, which require us to maintain privacy policies intended to safeguard customer financial information, to disclose the policies to our customers and to allow customers to “opt out” of having their financial service providers disclose their confidential financial information to non-affiliated third parties, subject to certain exceptions;
 
    Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;
 
    Consumer protection rules for the sale of insurance products by depository institutions, adopted pursuant to the requirements of the Gramm-Leach-Bliley Act; and
 
    USA Patriot Act, which requires financial institutions to take certain actions to help prevent, detect and prosecute international money laundering and the financing of terrorism.
Sarbanes-Oxley Act of 2002
     On July 30, 2002, the Sarbanes-Oxley Act of 2002 was enacted. The Sarbanes-Oxley Act represents a comprehensive revision of laws affecting corporate governance, accounting obligations and corporate reporting. The Sarbanes-Oxley Act is applicable to all companies, such as the Corporation, with equity securities registered or that file reports under the Securities Exchange Act of 1934. In particular, the Sarbanes-Oxley Act established: (i) new requirements for audit committees, including independence, expertise, and responsibilities; (ii) additional responsibilities regarding financial statements for the chief executive officer and chief financial officer of the reporting company; (iii) new standards for auditors and regulation of audits; (iv) increased disclosure and reporting obligations for the reporting company and its directors and executive officers; and (v) new and increased civil and criminal penalties for violations of the securities laws. Many of the provisions were effective immediately while other provisions became effective over a period of time and are subject to rulemaking by the SEC.

5


 

FDIC Insurance and Assessments
     The Bank’s deposits are insured to applicable limits by the FDIC. Under the Dodd-Frank Act, the maximum deposit insurance amount has been permanently increased from $100,000 to $250,000 and unlimited deposit insurance has been extended to non-interest-bearing transaction accounts until December 31, 2012. Prior to the Dodd-Frank Act, the FDIC had established a Temporary Liquidity Guarantee Program under which, for the payment of an additional assessment by insured banks that did not opt out, the FDIC fully guaranteed all non-interest-bearing transaction accounts until December 31, 2010 (the “Transaction Account Guarantee Program”) and all senior unsecured debt of insured depository institutions or their qualified holding companies issued between October 14, 2008 and October 31, 2009, with the FDIC’s guarantee expiring by December 31, 2012 (the “Debt Guarantee Program”). The Company and the Bank opted out of the Debt Guarantee Program. The Bank did not opt out of the Transaction Account Guarantee Program.
     The FDIC has adopted a risk-based premium system that provides for quarterly assessments based on an insured institution’s ranking in one of four risk categories based on regulatory capital ratios and other supervisory factors. The Bank is currently in Risk Category 1, the lowest risk category.
     Starting in 2009, the FDIC significantly raised the assessment rate in order to restore the reserve ratio of the Deposit Insurance Fund to the statutory minimum of 1.15%. For the quarter beginning January 1, 2009, the FDIC raised the base annual assessment rate for institutions in Risk Category 1 to between 12 and 14 basis points. For the quarter beginning April 1, 2009 the FDIC set the base annual assessment rate for institutions in Risk Category 1 to between 12 and 16 basis points. An institution’s assessment rate could be lowered by as much as five basis points based on the ratio of its long-term unsecured debt to deposits or, for smaller institutions, based on the ratio of certain amounts of Tier 1 capital to adjusted assets. The assessment rate may be adjusted for Risk Category 1 institutions that have a high level of brokered deposits and have experienced higher levels of asset growth (other than through acquisitions).
     The FDIC imposed a special assessment equal to five basis points of assets less Tier 1 capital as of June 30, 2009, payable on September 30, 2009, and reserved the right to impose additional special assessments. Instead of imposing additional special assessments during 2009, the FDIC required all insured depository institutions to prepay their estimated risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011 and 2012 on December 30, 2009. For purposes of estimating the future assessments, each institution’s base assessment rate in effect on September 30, 2009 was used, increased by three basis points beginning in 2011, and the assessment base was increased at a 5% annual growth rate. The prepaid assessment will be applied against actual quarterly assessments until exhausted. Any funds remaining after June 30, 2013 will be returned to the institution. This prepaid assessment does not preclude the FDIC from changing assessment rates or from further revising the risk-based assessment system.
     The Dodd-Frank Act requires the FDIC to take such steps as necessary to increase the reserve ratio of the Deposit Insurance Fund from 1.15% to 1.35% of insured deposits by 2020. In setting the assessments, the FDIC is required to off set the effect of the higher reserve ratio against insured depository institutions with total consolidated assets of less than 10 billion. The Dodd-Frank Act also broadens the base for FDIC insurance assessments so that assessments will be based on the average consolidated total assets less average tangible equity capital of a financial institution rather than on its insured deposits. The FDIC has adopted a new restoration plan to increase the reserve ratio to 1.15% by September 30, 2020 with additional rulemaking scheduled for 2011 regarding the method to be used to achieve a 1.35% reserve ratio by 2020 and offset the effect on institutions with assets less than $10 billion in assets. Pursuant to the new restoration plan, the FDIC will forgo the 3 basis point increase in assessments scheduled to take effect on January 1, 2011. The FDIC has proposed new assessment regulations that would redefine the assessment base as average consolidated assets less average tangible equity. The proposed regulations would use the current assessment rate schedule with modifications to the unsecured debt and brokered deposit adjustments and the elimination of the secured liability adjustment.
     In addition, all FDIC-insured institutions are required to pay assessments to the FDIC to fund interest payments on bonds issued by the Financing Corporation (“FICO”), an agency of the Federal government established to recapitalize the Federal Savings and Loan Insurance Corporation. The FICO assessment rates, which are determined quarterly, averaged .0108% of insured deposits on an annualized basis in fiscal year 2010. These assessments will continue until the FICO bonds mature in 2017.
Government Actions and Legislation
     The Emergency Economic Stabilization Act of 2008 (the “EES Act”), effective October 2008, allocated up to $700 billion towards purchasing and insuring assets held by financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. Pursuant to authority granted under the EES Act, the U.S. Treasury announced the Capital Purchase Program whereby the U.S. Treasury agreed to purchase senior preferred shares from qualifying U.S. financial institutions. Participating institutions must agree to certain limitations on executive compensation, repurchases of junior preferred or common stock and increases in common stock dividend payments. The Corporation, after considerate analysis, chose not to participate in the Capital Purchase Program.
     The government has also implemented the Homeowner Affordability and Stability Plan (“HASP”), a $75 billion federal program intended to support recovery in the housing market and ensure that eligible homeowners are able to continue to fulfill their mortgage obligations. HASP includes the following initiatives: (i) a refinance option for homeowners that are current in their mortgage payments and whose mortgages are owned by Fannie Mae or Freddie Mac; (ii) a homeowner stability initiative to prevent foreclosures and help eligible borrowers stay in their homes by offering loan modifications that reduce mortgage payments to more

6


 

sustainable levels; and (iii) an increase in U.S. Treasury funding to Fannie Mae and Freddie Mac to allow them to lower mortgage rates. HASP also offers monetary incentives to mortgage holders for certain modifications of at-risk loans and would establish an insurance fund designed to reduce foreclosures.
Dodd-Frank Wall Street Reform and Consumer Protection Act
     On July 21, 2010, the Dodd-Frank Act was signed into law. The Dodd-Frank Act is intended to effect a fundamental restructuring of federal banking regulation. Among other things, the Dodd-Frank Act creates a new Financial Stability Oversight Council to identify systemic risks in the financial system and gives federal regulators new authority to take control of and liquidate financial firms. The Dodd-Frank Act additionally creates a new independent federal regulator to administer federal consumer protection laws. The Dodd-Frank Act is expected to have a significant impact on our business operations as its provisions take effect. Among the provisions that may affect us are the following:
     Holding Company Capital Requirements. The Dodd-Frank Act requires the Federal Reserve Board to apply consolidated capital requirements to depository institution holding companies that are no less stringent than those currently applied to depository institutions. Under these standards, trust preferred securities will be excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010 by a bank holding company with less than $15 billion in assets. The Dodd-Frank Act additionally requires capital requirements to be countercyclical so that the required amount of capital increases in times of economic expansion and decreases in times of economic contraction, consistent with safety and soundness.
     Corporate Governance. The Dodd-Frank Act will require publicly traded companies to give stockholders a non-binding vote on executive compensation at their first annual meeting taking place six months after the date of enactment and at least every three years thereafter (“Say-On-Pay”) and on so-called “golden parachute” payments in connection with approvals of mergers and acquisitions unless previously voted on by shareholders. Pursuant to recently adopted SEC regulations, “smaller reporting companies,” such as the Corporation, are not required to comply with the Say-On-Pay voting requirements until the first annual shareholders meeting occurring on or after January 21, 2013. The new legislation also authorizes the SEC to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials. Additionally, the Dodd-Frank Act directs the federal banking regulators to promulgate rules prohibiting excessive compensation paid to executives of depository institutions and their holding companies with assets in excess of $1.0 billion, regardless of whether the company is publicly traded or not. The Dodd-Frank Act gives the SEC authority to prohibit broker discretionary voting on elections of directors and executive compensation matters.
     Prohibition Against Charter Conversions of Troubled Institutions. Effective one year after enactment, the Dodd-Frank Act prohibits a depository institution from converting from a state to federal charter or vice versa while it is the subject of a cease and desist order or other formal enforcement action or a memorandum of understanding with respect to a significant supervisory matter unless the appropriate federal banking agency gives notice of the conversion to the federal or state authority that issued the enforcement action and that agency does not object within 30 days. The notice must include a plan to address the significant supervisory matter. The converting institution must also file a copy of the conversion application with its current federal regulator which must notify the resulting federal regulator of any ongoing supervisory or investigative proceedings that are likely to result in an enforcement action and provide access to all supervisory and investigative information relating hereto.
     Limits on Derivatives. Effective 18 months after enactment, the Dodd-Frank Act prohibits state-chartered banks from engaging in derivatives transactions unless the loans to one borrower limits of the state in which the bank is chartered takes into consideration credit exposure to derivatives transactions. For this purpose, a derivatives transaction includes any contract, agreement, swap, warrant, note or option that is based in whole or in part on the value of, any interest in, or any quantitative measure or the occurrence of any event relating to, one or more commodities, securities, currencies, interest or other rates, indices or other assets.
     Transactions with Affiliates and Insiders. Effective one year from the date of enactment, the Dodd-Frank Act expands the definition of affiliate for purposes of quantitative and qualitative limitations of Section 23A of the Federal Reserve Act to include mutual funds advised by a depository institution or its affiliates. The Dodd-Frank Act will apply section 23A and Section 22(h) of the Federal Reserve Act (governing transactions with insiders) to derivative transactions, repurchase agreements and securities lending and borrowing transactions that create credit exposure to an affiliate or an insider. Any such transactions with affiliates must be fully secured. The current exemption from Section 23A for transactions with financial subsidiaries will be eliminated. The Dodd-Frank Act will additionally prohibit an insured depository institution from purchasing an asset from or selling an asset to an insider unless the transaction is on market terms and, if representing more than 10% of capital, is approved in advance by the disinterested directors.
     Debit Card Interchange Fees. Effective July 21, 2011, the Dodd-Frank Act requires that the amount of any interchange fee charged by a debit card issuer with respect to a debit card transaction must be reasonable and proportional to the cost incurred by the issuer. Within nine months of enactment, the Federal Reserve Board is required to establish standards for reasonable and proportional fees which may take into account the costs of preventing fraud. The restrictions on interchange fees, however, do not apply to banks that, together with their affiliates, have assets of less than $10 billion.
     Interest on Business Accounts. Effective July 21, 2011, the Dodd-Frank Act repealed the federal prohibitions on the ability of financial institutions to pay interest on demand deposit accounts. Our interest expense will increase and our net interest margin will decrease if we begin to offer interest on demand deposits to attract additional customers or maintain current customers.

7


 

     Consumer Financial Protection Bureau. The Dodd-Frank Act creates a new, independent federal agency called the Consumer Financial Protection Bureau (“CFPB”), which is granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Act, the consumer financial privacy provisions of the Gramm-Leach-Bliley Act and certain other statutes. The CFPB will have examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets. Smaller institutions will be subject to rules promulgated by the CFPB but will continue to be examined and supervised by federal banking regulators for consumer compliance purposes. The CFPB will have authority to prevent unfair, deceptive or abusive practices in connection with the offering of consumer financial products. The Dodd-Frank Act authorizes the CFPB to establish certain minimum standards for the origination of residential mortgages including a determination of the borrower’s ability to repay. In addition, the Dodd-Frank Act will allow borrowers to raise certain defenses to foreclosure if they receive any loan other than a “qualified mortgage” as defined by the CFPB. The Dodd-Frank Act permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations.
Future Legislation
     Changes to the laws and regulations to which the Corporation and the Bank are subject can affect the operating environment of both the Corporation and the Bank in substantial and unpredictable ways. The Corporation cannot accurately predict whether those changes in laws and regulations will occur, and, if those changes occur, the ultimate effect they would have upon the financial condition or results of operations of the Corporation. This is also true of federal legislation particularly given the current volatile environment.
The Bank
     The Bank’s legal headquarters are located at 232 East Street, Bloomsburg, Columbia County, Pennsylvania 17815. The Bank is a locally managed community bank that seeks to provide personal attention and professional financial assistance to its customers. The Bank serves the needs of individuals and small to medium-sized businesses. The Bank’s business philosophy includes offering direct access to its President and other officers and providing friendly, informed and courteous service, local and timely decision making, flexible and reasonable operating procedures and consistently-applied credit policies.
     The Bank solicits small and medium-sized businesses located primarily within the Bank’s market area that typically borrow in the $25,000 to $2.0 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 encompasses 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 Columbia 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 Columbia County, is the second largest municipality, with a 2000 census data population of approximately 10,774. The Bank currently serves its market area through fourteen branch offices located in Bloomsburg, Benton, Berwick, Buckhorn, Catawissa, Elysburg, Hazelton, Lightstreet, Millville, Orangeville and Scott Township.
     The Bank competes with other depository institutions in Columbia, Luzerne, and Northumberland Counties. The Bank’s major competitors are: First Keystone Community Bank, PNC Bank, FNB Bank and M & T Bank, as well as several credit unions. The Bank’s extended market area includes the adjacent Pennsylvania counties of Lycoming, Montour, Schuylkill and Sullivan.
Allowance for Loan Losses
     Commercial loans and commercial real estate loans comprised 48.7 percent of our total consolidated loans as of December 31, 2010. 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, financial, and agricultural
 
    real estate mortgages,

8


 

    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:
    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 “Provision for Loan Losses,” “Allowance for Loan Losses,” and “Non-performing Loans,” 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, 2010, our deposits totaled $474 million.
     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 51.0 percent of total deposits at December 31, 2010 and 49.5 percent of total deposits at December 31, 2009.
     We are not dependent for deposits nor exposed by loan concentrations to a single customer, or to a small group of customers of which the loss of any one or more 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,” as well as Note 7, Item 8 to this report.
Available Information
     We file reports, proxy, statements and other information electronically with the SEC through the Electronic Data Gathering Analysis and Retrieval (EDGAR) 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.firstcolumbiabank.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: Mr. Jeffrey T. Arnold, CFO and Treasurer.

9


 

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, Lycoming, Luzerne, Montour, and Northumberland 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 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 or rise slower 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 which could adversely affect our earnings.
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 losses 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, changes in borrowers’ creditworthiness, and the value of collateral securing

10


 

loans and leases that may be beyond the Bank’s control, and these losses may exceed our current estimates. The FDIC and Pennsylvania Department of Banking review 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 regulators will not require the Bank to increase the allowance. Either of these occurrences could adversely 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.
     The Bank 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.
We operate in a highly regulated environment and may be adversely affected by changes in laws and regulations.
     We are subject to extensive regulation and supervision under federal and state laws and regulations. The requirements and limitations imposed by such laws and regulations limit the manner in which we conduct our business, undertake new investments and activities and obtain financing. These regulations are designed primarily for the protection of the deposit insurance funds and consumers and not to benefit our shareholders. Financial institution regulation has been the subject of significant legislation including, without limitations, the Dodd-Frank Wall Street Reform Consumer Protection Act, and may be the subject of further significant legislation in the future, none of which is within our control. These programs and proposals subject us and other financial institution to additional restrictions, oversight and costs that may have an adverse impact on our business, financial condition, results of operations or the price of our common stock. Federal and state regulatory agencies also frequently adopt changes to their regulations or change the manner in which existing regulations are applied or enforced. We cannot predict the substance or impact of pending or future legislation, regulation or the application thereof. Compliance with such current and potential regulation and scrutiny may significantly increase our costs, impede the efficiency of our internal business processes, require us to increase our regulatory capital and limit our ability to pursue business opportunities in an efficient manner.
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 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.

11


 

Increases in FDIC insurance premiums may have a material adverse effect of our results of operations.
     During 2008, 2009 and 2010, higher levels of bank failures have dramatically increased resolution costs of the Federal Deposit Insurance Corporation, or the FDIC, and depleted the deposit insurance fund. In addition, the FDIC and the U.S. Congress have taken action to increase federal deposit insurance coverage, placing additional stress on the deposit insurance fund.
     In order to maintain a strong funding position and restore reserve ratios of the deposit insurance fund, the FDIC increased assessment rates of insured institutions uniformly by seven cents for every $100 of deposits beginning with the first quarter of 2009, with additional changes beginning April 1, 2009, which require riskier institutions to pay a larger share of premiums by factoring the rate adjustments based on secured liabilities and unsecured debt levels.
     To further support the rebuilding of the deposit insurance fund, the FDIC imposed a special assessment on each insured institution, equal to five basis points of the institution’s total assets minus Tier 1 capital as of September 30, 2009. For the Bank, this represented an aggregate charge of approximately $260,000. In lieu of imposing an additional special assessment, the FDIC required all institutions to prepay their assessments for all of 2010, 2011 and 2012, which for us totaled $2.0 million. The FDIC has indicated that future special assessments are possible, although it has not determined the magnitude or timing of any future assessments.
     We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. If there are additional bank or financial institution failures, we may be required to pay even higher FDIC premiums. Our expenses for the years ended December 31, 2010 and 2009 have been adversely affected by these increased premiums and any additional special assessments may further adversely affect our results of operations.
We are a holding company dependent for liquidity on payments from First Columbia Bank & Trust Co., our major subsidiary, which are subject to restrictions.
     We are a financial holding company and depend on dividends, distributions and other payments from First Columbia Bank & Trust Co., our major subsidiary to fund dividend payments and to fund all payments on obligations. The Bank is subject to laws that restrict dividend payments or authorize regulatory bodies to block or reduce the flow of funds from it to us. Restrictions or regulatory action of that kind could impede access to funds that we need to make payments on our obligations, dividend payments or stock repurchases. In addition, our right to participate in a distribution of assets upon our subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors.
Our commercial real estate lending may expose us to a greater risk of loss and hurt our earnings and profitability.
     Our business strategy includes making loans secured by commercial real estate. These types of loans generally have higher risk-adjusted returns and shorter maturities than traditional one-to-four family residential mortgage loans. At December 31, 2010, our loans secured by commercial real estate properties totaled approximately $96 million, which represented 28.1% of total loans. Loans secured by commercial real estate properties are generally for larger amounts and may involve a greater degree of risk than one-to-four family residential mortgage loans. Payments on loans secured by these properties are often dependent on the income produced by the underlying properties which, in turn, depends on the successful operation and management of the properties. Accordingly, repayment of these loans is subject to adverse conditions in the real estate market of the local economy. In addition, many economists believe that deterioration in income producing commercial real estate is likely to worsen as vacancy rates continue to rise and absorption rates of existing square footage continue to decline. Because of the current general economic slowdown, these loans represent higher risk, could result in an increase in our total net-charge offs and could require us to increase our allowance for loan losses, which could have a material adverse effect on our financial condition and results of operations. While we seek to minimize these risks in a variety of ways, there can be no assurance that these measures will protect against credit-reacted losses.
We are required to make a number of judgments in applying accounting policies and different estimates and assumptions in the application of these policies could result in a decrease in capital and/or other material changes to our reports of financial condition and results of operations. Also, changes in accounting standards can be difficult to predict and can materially impact how we record and report our financial condition and results of operations.
     Material estimates that are particularly susceptible to significant changes relate to the determination of the allowance for loan losses and reserve for unfunded lending commitments and the fair value of certain financial instruments (securities, derivatives, and privately held investments). While we have identified those accounting policies that are considered critical and have procedures in place to facilitate the associated judgments, different assumptions in the application of these policies could result in a decrease to net income and, possibly, capital and may have a material adverse effect on our financial condition and results of operations.
     Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. From time to time, the Financial Accounting Standards Board changes the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations.

12


 

Impairment of investment securities, goodwill, other intangible assets, or deferred tax assets could require charges to earnings, which could result in a negative impact on our results of operations.
     In assessing the impairment of investment securities, we consider the length of time and extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuers, and the intent and ability to retain its investment in the issuer for a period of time sufficient to allow for an anticipated recovery in fair value in the near term. Under current accounting standards, goodwill and certain other intangible assets with indeterminate lives are no longer amortized but, instead, are assessed for impairment periodically or when impairment indicators are present. Assessment of goodwill and such other intangible assets could result in circumstances were the applicable intangible asset is deemed to be impaired for accounting purposes. Under such circumstances, the intangible asset’s impairment would be reflected as a charge to earnings in the period during which such impairment is identified. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The impact of each of these impairment matters could have a material adverse effect on our business, result of operations and financial condition.
If we want to, or are compelled to, raise additional capital in the future, that capital may not be available when it is needed and on terms favorable to current shareholders.
     Federal banking regulators requires us and our banking subsidiary to maintain adequate levels of capital to support our operations. These capital levels are determined and dictated by law, regulation and banking regulatory agencies. In addition, capital levels are also determined by our management and board of directors based on capital levels that they believe are necessary to support our business operations. At December 31, 2010, all three capital ratios for us and our banking subsidiary were above “well capitalized” levels under current bank regulatory guidelines. To be “well capitalized,” banking companies generally must maintain a Tier 1 leverage ratio of at least 5%, a Tier 1 risk-based capital ratio of at least 6% and a Total risk-based capital ratio of at least 10%. However, our regulators may require us or our banking subsidiary to operate with higher capital levels. For example, regulators recently have required some banks to attain a Tier 1 leverage ratio of at least 8%, a Tier 1 risk-based capital ratio of at least 10%, and a Total risk-based capital ratio of at least 12%.
     Our ability to raise additional capital will depend on conditions in the capital markets at that time, which are outside of our control, and on our financial performance. Accordingly, we cannot assure you of our ability to raise additional capital on terms and time frames acceptable to us and to raise additional capital at all. If we cannot raise additional capital in sufficient amounts when needed, our ability to comply with regulatory capital requirements could be materially impaired. Additionally, the inability to raise capital in sufficient amounts may adversely affect our operations, financial conditions and results of operations. Our ability to borrow could also be impaired by factors that are nonspecific to us, such as severe disruption of the financial markets or negative news and expectations about the prospects for the financial services industry as a whole as evidenced by recent turmoil in the domestic and worldwide credit markets. If we raise capital through the issuance of additional shares of our common stock or other securities, we would likely dilute the ownership interests of current investors and could dilute the per share book value or earnings per share of our common stock. Furthermore, a capital raise through issuance of additional shares may have an adverse impact on our stock price.
The soundness of other financial institutions could adversely affect us.
     Our ability to engage in routine funding and other transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty and other relationships. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems, losses of depositor, creditor and counterparty confidence and could lead to losses or defaults by us or by other institutions . We could experience increases in deposits and assets as a result of other banks’ difficulties or failure, which would increase the capital we need to support such growth.
A substantial decline in the value of our Federal Home Loan Bank of Pittsburgh common stock may adversely affect our financial condition.
     We own common stock of the Federal Home Loan Bank of Pittsburgh, or the FHLB, in order to qualify for membership in the Federal Home Loan Bank system, which enables us to borrow funds under the Federal Home Loan Bank advance program. The carrying value and fair market value of our FHLB common stock was approximately $2.9 million as of December 31, 2010.
     Published reports indicate that certain member banks of the Federal Home Loan Bank system may be subject to asset quality risks that could result in materially lower regulatory capital levels. In December 2008, the FHLB had notified its member banks that it had suspended dividend payments and the repurchase of capital stock until further notice is provided. In an extreme situation, it is possible that the capitalization of the Federal Home Loan Bank, including the FHLB, could be substantially diminished or reduced to zero. Consequently, given that there is no market for our FHLB common stock, we believe that there is a risk that our investment could be deemed other-than-temporarily impaired at some time in the future. If this occurs, it may adversely affect our results of operations, and financial condition. If the FHLB were to cease operations, or if we were required to write-off our investment in the FHLB, our business, financial condition, liquidity, capital and results of operations may be materially adversely affected.

13


 

An interruption or breach in security with respect to our information system, or our outsourced service providers, could adversely impact our reputation and have an adverse impact on our financial condition and results of operations.
     We rely on software, communication, and other information exchange on a variety of computing platforms and networks and over the Internet. Despite numerous safeguards, we cannot be certain that all of our systems are entirely free from vulnerability to attack or other technological difficulties or failures. We rely on the services of a variety of vendors to meet our data processing and communication needs. If information security is breached or other technology difficulties or failures occur, information may be lost or misappropriated, services and operations may be interrupted and we could be exposed to claims from customers. Any of these results could have a material adverse effect on our financial condition, results of operations or liquidity.
Item 1B. Unresolved Staff Comments
     Not applicable.
Item 2. Properties
     Our executive offices are at 232 East Street, Bloomsburg, Pennsylvania. The Bank’s legal or registered office is also at 232 East Street, Bloomsburg, Pennsylvania.
     We own all of the banking centers except 2 branch facilities and 2 ATM facilities, which we lease. See Footnote 14 at Item 8 for lease details. During 2010 we sold a former branch bank building located at Red Rock Road, Benton. The remaining banking centers are described as follows:
                   
    Approximate   Own or      
Location   Square Footage   Lease   Use
Market Street, Benton, PA
    8,512     Own   Banking Services
1919 W. Front Street, Berwick, PA
    2,440     Own   Banking Services
Market Street, Berwick, PA
    3,547     Own   Banking Services
1 Hospital Drive, Bloomsburg
    120     Lease   ATM Facility
17 E. Main Street, Bloomsburg
    100     Lease   ATM Facility
232 East Street, Bloomsburg
    16,213     Own   Main Office and Bancorp Headquarters
Market Street, Bloomsburg
    1,335     Lease   Banking Services
Buckhorn, PA
    693     Lease   Banking Services (In Wal-Mart Supercenter)
Buckhorn, PA
    3,804     Own   Banking Services
Catawissa, PA
    1,558     Own   Banking Services
Catawissa, PA
    1,300     Own   Residential
Elysburg, PA
    2,851     Own   Banking Services
Millville, PA
    2,553     Own   Banking Services
Orangeville, PA
    3,444     Own   Banking Services
1199 Lightstreet Road, Scott
Township, PA
    16,384     Own   Banking Services, Financial Planning, IT and Deposit Operations
2691 Columbia Blvd, Scott
Township, PA
    3,680     Own   Banking Services
992 Central Road, Scott
Township, PA
    12,813     Own   Operations Center
West Hazleton, PA
    3,015     Own   Banking Services
     We consider our facilities to be suitable and adequate for our current and immediate future purposes.
Item 3. Legal Proceedings
     We and the Bank are not party to any legal proceedings that could have a material 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.
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
     We had 955 stockholders of record not including individual participants in security position listings and 2,225,931 shares of common stock, par value of $1.25 per share, the only authorized class of common stock, outstanding as of March 1, 2011. Quotations

14


 

for our common stock appear under the symbol “CCFN” on the OTC Bulletin Board. These quotations represent inter-dealer prices and do not include retail mark up, 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 2010 and 2009 are summarized in the following table.
                         
2010:   High ($)     Low ($)     Dividends Declared ($)  
First quarter
    27.78       24.95       .29  
Second quarter
    27.99       25.70       .29  
Third quarter
    28.22       25.70       .30  
Fourth quarter
    30.00       27.72       .30  
                         
2009:   High ($)     Low ($)     Dividends Declared ($)  
First quarter
    19.00       14.00       .24  
Second quarter
    22.50       18.35       .24  
Third quarter
    24.00       20.90       .27  
Fourth quarter
    28.00       23.50       .28  
     We have paid cash dividends since organization of the Corporation in 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, restrictions under applicable law and other factors relevant at the time the Board of Directors considers any declaration of dividends. Our ability to pay dividends is subject to certain legal restrictions described in Note 17, “Regulatory Matters” of the “Notes to Consolidated Financial Statements” included under Item 8 of this report, and from the “Capital Resources” section of the “Management’s Discussion and Analysis of Consolidated Financial Conditions and Results of Operations,” included under Item 7 of this report.
     Following is a schedule of the shares of the Corporation’s common stock purchased by the Corporation during the fourth quarter of 2010:
                                 
    Total     Average     Total Number of     Maximum Number (or  
    Number of     Price Paid     Shares (or Units)     Approximate Dollar Value)  
    Shares (or     per Share     Purchased as Part of     of Shares (or Units) that  
    Units)     (or Units)     Publicly Announced     May Yet Be Purchased  
Period   Purchased     Purchased     Plans or Programs (1)     Under the Plans or Programs  
Month #1 (October 1 - October 31, 2010)
    5,000     $ 28.80       5,000       139,000  
Month #2 (November 1 - November 30, 2010)
                      139,000  
Month #3 (December 1 - December 31, 2010)
                      139,000  
 
(1)   This program was announced in 2009. The Board of Directors approved the purchase of 200,000 shares from time to time at prevailing market prices in block trades on the open market or in privately negotiated transactions, as market conditions warrant. No expiration date is associated with this program.

15


 

Item 6. Selected Financial Data
     During the year ended December 31, 2008, we completed the acquisition of Columbia Financial Corporation which had a material affect on the comparability of the information listed below. Details of the merger are included in footnote 15 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K.
CCFNB BANCORP, INC.
SELECTED CONSOLIDATED FINANCIAL SUMMARY
                                         
            For the Year Ending December 31,        
(In Thousands except per share data)   2010     2009     2008     2007     2006  
INCOME STATEMENT DATA:
                                       
Total interest income
  $ 26,776     $ 28,420     $ 21,357     $ 14,483     $ 13,202  
Total interest expense
    6,683       8,614       7,504       6,185       5,301  
     
Net interest income
    20,093       19,806       13,853       8,298       7,901  
Provision for possible loan losses
    1,555       1,025       750       30       175  
Non interest income
    6,123       5,065       3,043       2,305       1,900  
Non interest expenses
    16,031       15,914       12,172       7,038       6,437  
Federal income taxes
    2,326       2,055       896       888       777  
     
Net income
  $ 6,304     $ 5,877     $ 3,078     $ 2,647     $ 2,412  
     
 
                                       
PER SHARE DATA:
                                       
Earnings per share (1)
  $ 2.82     $ 2.61     $ 1.82     $ 2.15     $ 1.93  
Cash dividends declared per share
  $ 1.18     $ 1.03     $ 0.90     $ 0.82     $ 0.78  
Book value per share
  $ 30.48     $ 28.95     $ 26.94     $ 25.79     $ 24.36  
Average annual shares outstanding
    2,232,239       2,253,087       1,688,498       1,233,339       1,249,844  
 
                                       
BALANCE SHEET DATA:
                                       
Total assets
  $ 614,299     $ 602,489     $ 568,319     $ 245,324     $ 241,920  
Total loans
    340,453       330,489       320,068       161,460       160,641  
Total securities
    210,185       223,250       196,580       57,686       53,486  
Total deposits
    473,792       462,288       434,309       170,938       169,285  
FHLB advances-long-term
    6,123       15,128       9,133       11,137       11,297  
Total stockholders’ equity
    67,854       65,086       60,775       31,627       30,249  
 
                                       
PERFORMANCE RATIOS:
                                       
Return on average assets
    1.03 %     1.01 %     0.77 %     1.07 %     1.02 %
Return on average stockholders’ equity
    9.35 %     9.25 %     6.91 %     8.54 %     7.97 %
Net interest margin (2)
    3.68 %     3.80 %     3.90 %     3.74 %     3.74 %
Total non-interest expense as a percentage of average assets
    2.62 %     2.73 %     3.06 %     2.83 %     2.72 %
 
                                       
ASSET QUALITY RATIOS:
                                       
Allowance for possible loan losses as a percentage of total loans
    1.41 %     1.27 %     1.17 %     0.89 %     0.91 %
Allowance for possible loan losses as a percentage of non-performing loans (3)
    115.75 %     89.87 %     83.29 %     102.64 %     686.79 %
Non-performing loans as a percentage of total loans (3)
    1.22 %     1.42 %     1.43 %     0.09 %     0.13 %
Non-performing assets as a percentage of total assets (3)
    0.68 %     0.78 %     0.86 %     0.57 %     0.09 %
Net charge-offs as a percentage of average net loans (4)
    -0.28 %     -0.18 %     -0.05 %     -0.03 %     -0.17 %
 
                                       
LIQUIDITY AND CAPITAL RATIOS:
                                       
Average equity to average assets
    11.04 %     10.90 %     11.19 %     12.48 %     12.79 %
Tier 1 capital to risk-weighted assets (5)
    17.25 %     16.38 %     15.37 %     18.10 %     19.25 %
Leverage ratios (5) (6)
    10.00 %     9.82 %     9.27 %     12.71 %     12.71 %
Total capital to risk-weighted assets (5)
    18.50 %     17.62 %     16.48 %     18.93 %     20.29 %
Dividend Payout Ratio
    41.72 %     39.44 %     51.75 %     38.16 %     40.38 %

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 FDIC.
 
(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
CAUTIONARY STATEMENT
     Certain statements in this section and elsewhere in 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:
    Our business and financial results are affected by business and economic conditions, both generally and specifically in the Northcentral Pennsylvania market in which we operate.
 
    Changes in interest rates and valuations in the debt, equity and other financial markets.
 
    Disruptions in the liquidity and other functioning of financial markets, including such disruptions in the market for real estate and other assets commonly securing financial products.
 
    Actions by the Federal Reserve Board and other government agencies, including those that impact money supply and market interest rates.
 
    Changes in our customers’ and suppliers’ performance in general and their creditworthiness in particular.
 
    Changes in customer preferences and behavior, whether as a result of changing business and economic conditions or other factors.
 
    Changes resulting from the newly enacted Dodd-Frank Wall Street Reform and Consumer Protection Act.
 
    A continuation of recent turbulence in significant segments of the United States and global financial markets, particularly if it worsens, could impact our performance, both directly by affecting our revenues and the value of our assets and liabilities and indirectly by affecting our customers and suppliers and the economy generally.
 
    Our business and financial performance could be impacted as the financial industry restructures in the current environment by changes in the competitive landscape.
 
    Given current economic and financial market conditions, our forward-looking statements are subject to the risk that these conditions will be substantially different than we are currently expecting. These statements are based on our current expectations that interest rates will remain low throughout most of 2011 with consistent credit spreads and our view that national economic trends currently point to improving economic conditions into 2011 and a subdued recovery.
 
    Legal and regulatory developments could have an impact on our ability to operate our businesses or our financial condition or results of operations or our competitive position or reputation. Reputational impacts, in turn, could affect matters such as business generation and retention, our ability to attract and retain management, liquidity and

17


 

      funding. These legal and regulatory developments could include: (a) the unfavorable resolution of legal proceedings or regulatory and other governmental inquiries; (b) increased litigation risk from recent regulatory and other governmental developments; (c) the results of the regulatory examination process, and regulators’ future use of supervisory and enforcement tools; (d) legislative and regulatory reforms, including changes to laws and regulations involving tax, pension, education and mortgage lending, the protection of confidential customer information, and other aspects of the financial institution industry; and (e) changes in accounting policies and principles.
    Our business and operating results are affected by our ability to identify and effectively manage risks inherent in our businesses, including, where appropriate, through the effective use of third-party insurance and capital management techniques.
 
    Our ability to anticipate and respond to technological changes can have an impact on our ability to respond to customer needs and to meet competitive demands.
 
    Our ability to implement our business initiatives and strategies could affect our financial performance over the next several years.
 
    Competition can have an impact on customer acquisition, growth and retention, as well as on our credit spreads and product pricing, which can affect market share, deposits and revenues.
 
    Our business and operating results can also be affected by widespread natural disasters, terrorist activities or international hostilities, either as a result of the impact on the economy and capital and other financial markets generally or on us or on our customers and suppliers.
     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.
     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
NET INTEREST INCOME
2010 vs. 2009
     Tax-equivalent net interest income increased $342,000 thousand or 1.7 percent to $20.8 million for the year ended December 31, 2010. Net interest margin decreased to 3.68 percent at December 31, 2010 from 3.80 percent at December 31, 2009. The decrease in margin resulted primarily from the yield on interest-bearing liabilities decreasing 47 basis points to 1.39 percent while the yield on interest-earning assets decreased 54 basis points to 4.86 percent.
     The 54 basis point decrease to the yield from interest-earning assets was driven by decreases of 24 basis points to the loan yield and the 89 basis point decrease to the investment yield. Tax-equivalent net interest income from loans decreased to $20.1 million for the year ended December 31, 2010 as variable rate real estate loans re-priced to lower market rates and the overall average balance of residential mortgages continued to decline from customer refinancing. For the year ended December 31, 2010, tax-equivalent net interest income from investments decreased $1.6 million while the yield decreased 89 basis points. The primary cause of the yield decrease was the 2010 reinvestment, at lower rates, of called U.S. Agency securities.
     The 47 basis point decrease on interest-bearing liabilities resulted from decreases of 47 basis points to the deposit yield and the 43 basis point decrease to the borrowing yield. The total deposit yield decreased 47 basis points to 1.41 percent at December 31, 2010 while the yield on total borrowings decreased 43 basis points to 1.29 percent at December 31, 2010. Decreases of 75 basis points on the time deposits and 28 basis points on the money markets for the year ended December 31, 2010 were the primary reason for the yield decrease in total deposits. A decrease of 135 basis points on the long-term borrowings for the year ended December 31, 2010 was the primary reason for the yield decrease in the total borrowings as the short-term borrowing yield increased 5 basis points over the same period. The long-term borrowing had an average balance of $9.3 million and $12.5 million as of December 31, 2010 and 2009, respectively and reflects the 2010 maturity and repayment of $9.0 million in term FHLB borrowings. The yield decreases were driven by lower U.S. Treasury rates as well as local market competition.

18


 

2009 vs. 2008
     Tax-equivalent net interest income increased $6.1 million or 42.5 percent to $20.5 million for the year ended December 31, 2009.
     Reported tax-equivalent interest income increased $7.2 million or 33.0 percent to $29.1 million for the year ended December 31, 2009. The increase primarily resulted from the 2008 acquisition of Columbia Financial Corporation (“CFC”) as described in Note 15 of the Notes to the Consolidated Financial Statements included in Item 8. The acquisition of CFC, completed July 18, 2008,contributed a 2008 increase in net loans in the amount of $160.7 million, an increase in investment securities in the amount of $138.3 million, an increase in federal funds sold in the amount of $517,000, and an increase in interest-bearing deposits in other banks of $129,000.
     Reported interest expense increased $1.1 million or 14.8 percent to $8.6 million. The 2008 acquisition of CFC contributed an increase in deposits in the amount of $264.7 million, an increase in other borrowings of $31.9 million, and an increase of $4.6 million in junior subordinate debentures.
     Net interest margin decreased to 3.80 percent at December 31, 2009 from 3.90 percent at December 31, 2008. The decrease in margin resulted primarily from the yield on interest-bearing liabilities decreasing 51 basis points to 1.86 percent while the yield on interest-earning assets decreased 54 basis points to 5.40 percent. The 54 basis point decrease to interest-earning assets was driven by related decreases of 49 basis points to the loan yield and the 40 basis point decrease to the investment yield. Tax-equivalent net interest income from loans increased to $20.2 million for the year ended December 31, 2009. Despite the increased income, an overall decrease in the yield resulted as variable rate real estate loans re-priced to market rates. For the year ended December 31, 2009, tax-equivalent net interest income from investments increased $2.9 million while the yield decreased 40 basis points. The primary cause of the yield decrease was the 2009 reinvestment, at lower rates, of called U.S. Agency securities. The 51 basis point decrease on interest-bearing liabilities resulted from related decreases of 44 basis points to the deposit yield and the 92 basis point decrease to the borrowing yield. The total deposit yield decreased 44 basis points to 1.88 percent at December 31, 2009 while the yield on total borrowings decreased 92 basis points to 1.72 percent at December 31, 2009. A decrease of 59 basis points on the time deposits for the year ended December 31, 2009 was the primary reason for the yield decrease in total deposits. Time deposits had an average balance of $228.0 million and $154.3 million as of December 31, 2009 and 2008, respectively. A decrease of 101 basis points on the short-term borrowings for the year ended December 31, 2009 was the primary reason for the yield decrease in the total borrowings as the long-term borrowing yield decreased 96 basis points over the same period. The short-term borrowing had an average balance of $48.8 million and $42.9 million as of December 31, 2009 and 2008, respectively. The yield decreases were driven by the rate decreases enacted throughout 2008 by the Federal Open Market Committee (FOMC) as well as local market competition.

19


 

     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 2010, 2009 and 2008.
AVERAGE BALANCE SHEET AND RATE ANALYSIS
YEARS ENDED DECEMBER 31,
                                                                         
    2010     2009     2008  
(In Thousands)   Average Balance     Interest     Average Rate     Average Balance     Interest     Average Rate     Average Balance     Interest     Average Rate  
ASSETS:
    (1 )                     (1 )                     (1 )                
Tax-exempt loans
  $ 22,900     $ 1,460       6.38 %   $ 19,627     $ 1,254       6.39 %   $ 16,156     $ 1,070       6.62 %
All other loans
    316,511       18,662       5.90 %     307,450       18,925       6.16 %     218,915       14,587       6.66 %
 
                                                     
Total loans (2)(3)(4)
    339,411       20,122       5.93 %     327,077       20,179       6.17 %     235,071       15,657       6.66 %
 
                                                     
 
                                                                       
Taxable securities
    196,615       6,710       3.41 %     189,202       8,220       4.34 %     118,012       5,633       4.77 %
Tax-exempt securitites (3)
    10,640       602       5.66 %     11,550       650       5.63 %     6,765       385       5.69 %
 
                                                     
Total securities
    207,255       7,312       3.53 %     200,752       8,870       4.42 %     124,777       6,018       4.82 %
 
                                                     
 
                                                                       
Federal funds sold
    1,536       2       0.13 %     7,639       10       0.13 %     6,990       155       2.22 %
Interest-bearing deposits
    17,623       42       0.24 %     2,877       8       0.28 %     873       22       2.52 %
 
                                                     
 
                                                                       
Total interest-earning assets
    565,825       27,478       4.86 %     538,345       29,067       5.40 %     367,711       21,852       5.94 %
 
                                                           
 
Other assets
    45,161                       44,460                       30,117                  
 
                                                     
 
TOTAL ASSETS
  $ 610,986                     $ 582,805                     $ 397,828                  
 
                                                                 
 
                                                                       
LIABILITIES:
                                                                       
Savings
  $ 63,223       237       0.37 %   $ 56,493       225       0.40 %   $ 39,223       156       0.40 %
Now deposits
    71,374       99       0.14 %     68,650       100       0.15 %     47,534       129       0.27 %
Money market deposits
    42,460       319       0.75 %     43,906       452       1.03 %     21,119       350       1.66 %
Time deposits
    234,812       5,154       2.19 %     228,005       6,701       2.94 %     154,334       5,447       3.53 %
 
                                                     
Total deposits
    411,869       5,809       1.41 %     397,054       7,478       1.88 %     262,210       6,082       2.32 %
 
                                                     
 
                                                                       
Short-term borrowings
    53,691       427       0.80 %     48,826       368       0.75 %     42,912       754       1.76 %
Long-term borrowings
    9,252       349       3.77 %     12,492       640       5.12 %     9,413       572       6.08 %
Junior subordinate debentures
    4,640       98       2.11 %     4,640       128       2.76 %     1,605       96       5.98 %
 
                                                     
Total borrowings
    67,583       874       1.29 %     65,958       1,136       1.72 %     53,930       1,422       2.64 %
 
                                                     
 
                                                                       
Total interest-bearing liabilities
    479,452       6,683       1.39 %     463,012       8,614       1.86 %     316,140       7,504       2.37 %
 
                                                           
 
                                                                       
Demand deposits
    59,013                       51,908                       34,403                  
Other liabilities
    5,096                       4,359                       2,761                  
Stockholders’ equity
    67,425                       63,526                       44,524                  
 
                                                     
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 610,986                     $ 582,805                     $ 397,828                  
 
                                                                 
 
                                                                       
Interest rate spread (6)
                    3.47 %                     3.54 %                     3.57 %
 
                                                                 
Net interest income/margin (5)
          $ 20,795       3.68 %           $ 20,453       3.80 %           $ 14,348       3.90 %
 
                                                           
 
(1)   Average volume information was compared using daily averages for interest-earning and bearing accounts.
 
(2)   Interest on loans includes loan fee income.
 
(3)   Tax exempt interest revenue is shown on a tax-equivalent basis using a statutory federal income tax rate of 34 percent for 2010, 2009 and 2008.
 
(4)   Nonaccrual loans have been included with loans for the purpose of analyzing net interest earnings.
 
(5)   Net interest margin is computed by dividing annualized tax-equivalent net interest income by total interest earning assets.
 
(6)   Interest rate spread represents the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities.

20


 

Reconcilement of Taxable Equivalent Net Interest Income
                         
    For the Years Ended December 31,  
(In Thousands)   2010     2009     2008  
Total interest income
  $ 26,776     $ 28,420     $ 21,357  
Total interest expense
    6,683       8,614       7,504  
 
                 
 
Net interest income
    20,093       19,806       13,853  
Tax equivalent adjustment
    702       647       495  
 
                 
 
                       
Net interest income
                       
(fully taxable equivalent)
  $ 20,795     $ 20,453     $ 14,348  
 
                 
Rate/Volume Analysis
     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 2010 versus 2009, and 2009 versus 2008:
                                                 
    Year Ended December 31,  
    2010 vs 2009     2009 vs 2008  
    Increase (Decrease)     Increase (Decrease)  
    Due to     Due to  
(In Thousands)   Volume     Rate     Net     Volume     Rate     Net  
Interest income:
                                               
Loans, tax-exempt
  $ 209     $ (4 )   $ 205     $ 223     $ (39 )   $ 184  
Loans
    613       (875 )     (262 )     5,346       (1,008 )     4,338  
Taxable investment securities
    311       (1,821 )     (1,510 )     3,133       (546 )     2,587  
Tax-exempt investment securities
    (51 )     3       (48 )     269       (4 )     265  
Federal funds sold
    (8 )           (8 )     13       (158 )     (145 )
Interest bearing deposits
    35       (1 )     34       19       (33 )     (14 )
 
                                   
Total interest-earning assets
    1,109       (2,698 )     (1,589 )     9,003       (1,788 )     7,215  
 
                                   
 
Interest expense:
                                               
Savings
    26       (14 )     12       69             69  
NOW deposits
    4       (5 )     (1 )     44       (73 )     (29 )
Money market deposits
    (16 )     (117 )     (133 )     272       (170 )     102  
Time deposits
    195       (1,742 )     (1,547 )     2,278       (1,024 )     1,254  
Short-term borrowings
    41       18       59       93       (479 )     (386 )
Long-term borrowings, FHLB
    (2,588 )     2,297       (291 )     168       (100 )     68  
 
Junior subordinate debentures
          (30 )     (30 )     84       (52 )     32  
 
                                   
Total interest-bearing liabilities
    (2,338 )     407       (1,931 )     3,008       (1,898 )     1,110  
 
                                   
Change in net interest income
  $ 3,447     $ (3,105 )   $ 342     $ 5,995     $ 110     $ 6,105  
 
                                   
PROVISION FOR LOAN LOSSES
2010 vs. 2009
     The provision for loan losses is based upon management’s quarterly review of the loan portfolio. The purpose of the review is to assess loan quality, identify impaired loans, analyze delinquencies, evaluate potential charge-offs and recoveries, and assess the general conditions in the markets served. Management remains committed to an aggressive and thorough program of problem loan identification and resolution. Annually, an independent loan review is performed for the Bank. The allowance for loan losses is evaluated quarterly and is calculated by applying historic loss factors to the various outstanding loans types while excluding loans for

21


 

which a specific allowance has already been determined. Loss factors are based on management’s consideration of the nature of the portfolio segments, historical loan loss experience, industry standards and trends with respect to nonperforming loans, and its core knowledge and experience with specific loan segments.
     Although management believes that it uses the best information available to make such determinations and that the allowance for loan losses is adequate at December 31, 2010, future adjustments could be necessary if circumstances or economic conditions differ substantially from the assumptions used in making the initial determinations. A downturn in the local economy or employment and delays in receiving financial information from borrowers could result in increased levels of nonperforming assets and charge-offs, increased loan loss provisions and reductions in interest income. Also, as part of the examination process, bank regulatory agencies periodically review the Bank’s loan loss allowance. The bank regulators could require the recognition of additions to the loan loss allowance based on their judgment of information available to them at the time of their examination.
     The provision for loan losses amounted to $1,555,000 and $1,025,000 for the years ended December 31, 2010 and 2009, respectively. Management concluded the increase of the provision was appropriate considering the gross loan growth experience of $10.0 million, minimal decreases in nonperforming assets, increased levels of commercial loans, and the sluggish recovery in the national economy. Utilizing the resources noted above, management concluded that the allowance for loan losses remains at a level adequate to provide for probable losses inherent in the loan portfolio.
2009 vs. 2008
     The provision for loan losses increased from $1,025,000 in 2009 to $750,000 in 2008.
NON-INTEREST INCOME
2010 vs. 2009
     Total non-interest income increased $1.1 million or 20.9 percent to $6.1 million for the year ended December 31, 2010. The service charges and fees increased $74,000 or 4.3 percent to $1,778,000 for the year ended December 31, 2010. Gain on sale of loans increased $496,000 or 80.4 percent from $617,000 in 2009 to $1,113,000 in 2010 primarily due to increased volume of loans sold during 2010. Brokerage income increased $44,000 or 15.7 percent from $281,000 in 2009 to $325,000 in 2010. Income from Trust services increased $8,000 or 1.2 percent from $655,000 in 2009 to $663,000 in 2010. During 2010, we recorded an other than temporary impairment loss on the equity security portfolio in the amount of $42,000. During 2009, we recorded an other than temporary impairment loss on the equity security portfolio in the amount of $69,000 and a realized loss from the sale of equity securities in the amount of $316,000. Interchange fees increased $107,000 or 14.4 percent from $743,000 in 2009 to $850,000 in 2010 due to increased transactional volume. Other income decreased $13,000 from $1,005,000 in 2009 to $992,000 in 2010.
                                                 
    For The Year Ended  
    December 31, 2010     December 31, 2009     Change  
(In Thousands)   Amount     % Total     Amount     % Total     Amount     %  
Service charges and fees
  $ 1,778       29.0 %   $ 1,704       33.6 %   $ 74       4.3 %
Gain on sale of loans
    1,113       18.2       617       12.2       496       80.4  
Earnings on bank-owned life insurance
    444       7.3       445       8.8       (1 )     (0.2 )
Brokerage
    325       5.3       281       5.5       44       15.7  
Trust
    663       10.8       655       12.9       8       1.2  
Investment security losses
    (42 )     (0.7 )     (385 )     (7.6 )     343       (89.1 )
Interchange fees
    850       13.9       743       14.7       107       14.4  
Other
    992       16.2       1,005       19.9       (13 )     (1.3 )
             
Total non-interest income
  $ 6,123       100.0 %   $ 5,065       100.0 %   $ 1,058       20.9 %
             
2009 vs. 2008
     Total non-interest income increased $2.0 million or 66.4 percent to $5.1 million for the year ended December 31, 2009. The increase primarily resulted from the 2008 acquisition of CFC as described in Note 15 of the Notes to the Consolidated Financial Statements included in Item 8. The service charges and fees increased $423,000 or 33.0 percent to $1,704,000 for the year ended December 31, 2009. Gain on sale of loans increased $301,000 or 95.3 percent from $316,000 in 2008 to $617,000 in 2009. Brokerage income increased $63,000 or 28.9 percent from $218,000 in 2008 to $281,000 in 2009. Income from Trust services increased $221,000 or 50.9 percent from $434,000 in 2008 to $655,000 in 2009. During 2009, we recorded an other than temporary impairment loss on the equity security portfolio in the amount of $69,000 and a realized loss from the sale of equity securities in the amount of $316,000. Other income increased $563,000 from $442,000 in 2008 to $1,005,000 in 2009 primarily as a result of a 2009 gain on the sale of property and equipment in the amount of $129,000.

22


 

                                                 
    For The Year Ended  
    December 31, 2009     December 31, 2008     Change  
(In Thousands)   Amount     % Total     Amount     % Total     Amount     %  
Service charges and fees
  $ 1,704       33.6 %   $ 1,281       42.1 %   $ 423       33.0 %
Gain on sale of loans
    617       12.2       316       10.4       301       95.3  
Earnings on bank-owned life insurance
    445       8.8       366       12.0       79       21.6  
Brokerage
    281       5.5       218       7.2       63       28.9  
Trust
    655       12.9       434       14.3       221       50.9  
Investment security losses
    (385 )     (7.6 )     (431 )     (14.2 )     46       (10.7 )
Interchange fees
    743       14.7       417       13.7       326       78.2  
Other
    1,005       19.9       442       14.5       563       127.4  
             
Total non-interest income
  $ 5,065       100.0 %   $ 3,043       100.0 %   $ 2,022       66.4 %
             
NON-INTEREST EXPENSE
2010 vs. 2009
     Total non-interest expense increased $117 thousand or 0.7% from $15.9 million in 2009 to $16.0 million in 2010. Salaries and employee benefits increased $339 thousand or 4.3 percent for the year ended December 31, 2010 primarily as a result of increased health insurance premiums. FDIC assessments decreased $310 thousand from $920 thousand in 2009 to $610 thousand in 2010 due to the 2009 special assessment and a decrease in assessment rate.
     One standard to measure non-interest expense is to express non-interest expense as a percentage of average total assets. In 2010 this percentage was 2.62 percent compared to 2.73 percent in 2009.
                                                 
    For The Years Ended  
    December 31, 2010     December 31, 2009     Change  
(In Thousands)   Amount     % Total     Amount     % Total     Amount     %  
Salaries
  $ 6,447       40.2 %   $ 6,314       39.7 %   $ 133       2.1 %
Employee benefits
    1,811       11.3       1,605       10.1       206       12.8  
Occupancy
    1,114       6.9       1,062       6.7       52       4.9  
Furniture and equipment
    1,330       8.3       1,272       8.0       58       4.6  
State shares tax
    561       3.5       529       3.3       32       6.0  
Professional fees
    595       3.7       587       3.7       8       1.4  
Directors fees
    274       1.7       284       1.8       (10 )     (3.5 )
FDIC assessments
    610       3.8       920       5.8       (310 )     (33.7 )
Telecommunications
    385       2.4       347       2.2       38       11.0  
Amortization of core deposit intangible
    576       3.6       643       4.0       (67 )     (10.4 )
Automated teller machine and interchange
    560       3.5       509       3.2       51       10.0  
Other
    1,768       11.1       1,842       11.5       (74 )     (4.0 )
             
Total non-interest expense
  $ 16,031       100.0 %   $ 15,914       100.0 %   $ 117       0.7 %
             
2009 vs. 2008
     Total non-interest expense increased $3.7 million or 30.7% from $12.2 million in 2008 to $15.9 million in 2009. The increases primarily resulted from the 2008 acquisition of CFC as described in Note 15 of the Notes to the Consolidated Financial Statements included in Item 8. Salaries and employee benefits increased $859 thousand or 12.2 percent for the year ended December 31, 2009. Other expenses, Occupancy, Furniture and Equipment, Professional fees, Directors fees, Telecommunications, and Amortization of core deposit intangible all experienced net increases as a result of the 2008 CFC acquisition. FDIC assessments increased $839 thousand from $81 thousand in 2008 to $920 thousand in 2009 due to the special assessment and an overall industry wide increase in assessment rates.
     One standard to measure non-interest expense is to express non-interest expense as a percentage of average total assets. In 2009 this percentage was 2.73 percent compared to 3.06 percent in 2008.

23


 

                                                 
                    For The Years Ended              
    December 31, 2009     December 31, 2008     Change  
(In Thousands)   Amount     % Total     Amount     % Total     Amount     %  
Salaries
  $ 6,314       39.7 %   $ 4,762       39.1 %   $ 1,552       32.6 %
Employee benefits
    1,605       10.1       2,298       18.9       (693 )     (30.2 )
Occupancy
    1,062       6.7       760       6.2       302       39.7  
Furniture and equipment
    1,272       8.0       927       7.6       345       37.2  
State shares tax
    529       3.3       418       3.4       111       26.6  
Professional fees
    587       3.7       570       4.7       17       3.0  
Directors fees
    284       1.8       244       2.0       40       16.4  
FDIC assessments
    920       5.8       81       0.7       839       1,035.8  
Telecommunications
    347       2.2       215       1.8       132       61.4  
Amortization of core deposit intangible
    643       4.0       280       2.3       363        
Automated teller machine and interchange
    509       3.2       286       2.3       223       78.0  
Other
    1,842       11.5       1,331       11.0       511       38.4  
             
Total non-interest expense
  $ 15,914       100.0 %   $ 12,172       100.0 %   $ 3,742       30.7 %
             
FINANCIAL CONDITION
     Our consolidated assets at December 31, 2010 were $614.3 million which represented an increase of $11.8 million or 2.0 percent from $602.5 million at December 31, 2009. The increase for 2009 from 2008 was 6.0 percent or $34.2 million.
     Capital increased 4.3 percent from $65.1 million in 2009 to $67.9 million in 2010, after an adjustment for the fair market value of securities which was a decrease in capital of $302 thousand for 2010 compared to an increase in capital of $4.3 million for 2009. Common stock and surplus increased a net $446 thousand resulting primarily from issuance of 16,081 shares of stock under our Employee Stock Purchase Plan and the Dividend Reinvestment Plan. During the year ended December 31, 2010, the Corporation purchased 38,500 shares under the announced stock buyback program. The treasury stock shares were purchased at a cost of $1,050,000.
     Total average assets increased 4.8 percent from $582.8 million at December 31, 2009 to $611.0 million at December 31, 2010. Average earning assets were $565.8 million in 2010 and $538.3 million in 2009.
     Loans increased 3.0 percent from $330.5 million at December 31, 2009 to $340.5 million at December 31, 2010.
     Interest bearing deposits increased 1.1 percent to $410.9 million at December 31, 2010 from $406.6 million at December 31, 2009. Noninterest-bearing deposits increased 12.8 percent from $55.7 million in 2009 to $62.9 million in 2010.
     The loan-to-deposit ratio is a key measurement of liquidity. Our loan-to-deposit ratio increased during 2010 to 71.9 percent compared to 71.5 percent during 2009.
     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.
INVESTMENT SECURITIES AVAILABLE-FOR-SALE
                         
    For the Years Ended December 31,  
(In Thousands)   2010     2009     2008  
Federal Agency Obligations
  $ 58,903     $ 68,339     $ 64,080  
Mortgage-backed Securities
    132,515       138,856       118,046  
Obligations of State amd Political Subdivisions
    13,671       11,374       9,994  
Marketable Equity Securities
    2,084       1,697       2,293  
 
                 
Total
  $ 207,173     $ 220,266     $ 194,413  
 
                 

24


 

     All of our securities are available-for-sale and are carried at estimated fair value. The following table shows the maturities of investment securities, at amortized cost, at December 31, 2010 and the weighted average yields (for tax-exempt obligations on a fully taxable basis a 34 percent tax rate) of such:
                                                                                 
                    After One Year     After Five Year              
    Within     But Within     But Within     After        
    One Year     Five Years     Ten Years     Ten Years     Total  
(In Thousands)   Amount     Yield     Amount     Yield     Amount     Yield     Amount     Yield     Amount     Yield  
Federal Agency Obligations
  $ 1,347       3.69 %   $ 45,233       1.93 %   $ 23,851       3.60 %   $ 117,623       3.62 %   $ 188,054       3.21 %
Obligations of State and Political Subdivisions
    994       3.66 %     1,975       5.99 %     5,130       5.15 %     5,526       5.97 %     13,625       5.48 %
 
                                                           
 
  $ 2,341             $ 47,208             $ 28,981             $ 123,149               201,679          
 
                                                           
Marketable Equity Securities
                                                                    2,130          
 
                                                                             
Total Invesment Securities
                                                                  $ 203,809          
 
                                                                             
     Available-for-sale securities are reported on the consolidated balance sheet at fair value with an offsetting adjustment to deferred taxes. The possibility of material price volatility in a changing interest rate environment is offset by the availability to the bank of restructuring the portfolio for gap positioning at any time through the securities classed as available-for-sale. The impact of the fair value accounting was an unrealized gain, net of tax, on December 31, 2010 of $2,221,000 compared to an unrealized gain, net of tax, on December 31, 2009 of $2,523,000, which represents an unrealized loss, net of tax, of $302,000 for 2010.
     The mix of securities in the portfolio at December 31, 2010 was 92.4 percent Federal Agency Obligations, 6.6 percent Municipal Securities, and 1.0 percent Other. We did not trade in derivative investment products during 2010.
LOANS
     The loan portfolio increased 3.0 percent from $330.5 million in 2009 to $340.5 million in 2010. The percentage distribution in the loan portfolio was 80.5 percent in real estate loans at $274.2 million; 9.9 percent in commercial loans at $33.8 million; 2.2 percent in consumer loans at $7.3 million; and 7.4 percent in tax exempt loans at $25.2 million.
     The following table presents the five-year breakdown of loans by type as of the date indicated:
                                         
    For the Years Ended December 31,  
(In Thousands)   2010     2009     2008     2007     2006  
Commercial, financial and agricultural
  $ 33,819     $ 37,642     $ 27,165     $ 8,074     $ 9,574  
Tax-exempt
    25,180       18,055       16,762       13,108       9,621  
Real estate
    262,355       253,463       262,539       132,453       135,009  
Real estate construction
    11,689       13,526       5,307       3,698       2,231  
Installment loans to individuals
    7,232       7,725       8,202       4,059       4,118  
Add (deduct): Unearned discount
    (6 )     (15 )     (24 )     (23 )     (19 )
Unamortized loan costs, net of fees
    184       93       117       91       107  
 
                             
Gross loans
  $ 340,453     $ 330,489     $ 320,068     $ 161,460     $ 160,641  
 
                             
     The following table presents the percentage distribution of loans by category as of the date indicated:
                                         
    For the Years Ended December 31,  
    2010     2009     2008     2007     2006  
Commercial, financial and agricultural
    9.9 %     11.4 %     8.5 %     5.0 %     6.0 %
Tax-exempt
    7.4       5.5       5.2       8.1       6.0  
Real estate
    77.1       76.7       82.1       82.1       84.1  
Real estate construction
    3.4       4.1       1.7       2.3       1.4  
Installment loans to individuals
    2.2       2.3       2.5       2.5       2.5  
 
                             
Gross loans
    100.0 %     100.0 %     100.0 %     100.0 %     100.0 %
 
                             
     The following table shows the actual maturity of loans in specified categories of the Bank’s loan portfolio at December 31, 2010, and the amount of such loans with predetermined fixed rates or with floating or adjustable rates. The table does not include any estimate of prepayments which significantly shortens the average useful life of all loans and may cause our actual repayment experience to differ from that shown below.

25


 

                                 
            One Year              
    In One Year     Through     Over        
(In Thousands)   or Less     Five Years     Five Years     Total  
Commercial, Tax exempt, Real estate and Personal loans
  $ 22,140     $ 35,471     $ 271,153     $ 328,764  
Real estate construction
    11,689                   11,689  
 
                       
 
  $ 33,829     $ 35,471     $ 271,153     $ 340,453  
 
                       
Amounts of Such Loans with:
                               
Predetermined Fixed Rates
  $ 9,158     $ 27,086     $ 81,891     $ 118,135  
Floating or Adjustable Rates
    24,671       8,385       189,262       222,318  
 
                       
 
  $ 33,829     $ 35,471     $ 271,153     $ 340,453  
 
                       
ALLOWANCE FOR LOAN LOSSES
     The allowance for loan losses was $4.8 million at December 31, 2010, compared to $4.2 million at December 31, 2009. This allowance equaled 1.41 percent and 1.27 percent of total loans, net of unearned income, at the end of 2010 and 2009, respectively. During 2008, an increase of $1.7 million resulted from the acquisition of CFC as described in Note 15 of the Notes to the Consolidated Financial Statements included in Item 8. The loan loss reserve was analyzed quarterly and reviewed by the Bank’s Board of Directors. No concentration or apparent deterioration in classes of loans or pledged collateral was evident. Regular loan meetings with the Bank’s Director Loan Committee reviewed new loans. Delinquent loans, loan exceptions and certain large loans are addressed by the full Board no less than monthly to determine compliance with policies. Allowance for loan losses was considered adequate based on delinquency trends and actual loans written as it relates to the loan portfolio.
     The following table presents an allocation of the Bank’s allowance for loan losses for specific categories:
                                         
    For the Years Ended December 31,  
(In Thousands)   2010     2009     2008     2007     2006  
     
Commercial, financial, and agricultural
  $ 752     $ 567     $ 402     $ 104     $ 101  
Real estate mortgages
    3,529       3,132       2,461       700       659  
Installment loans to indiviuals
    106       149       158       28       27  
Unallocated
    414       362       737       605       669  
     
 
  $ 4,801     $ 4,210     $ 3,758     $ 1,437     $ 1,456  
     
     The following table presents a summary of the Bank’s loan loss experience as of the dates indicated:
                                         
    For the Years Ended December 31,  
(In Thousands)   2010     2009     2008     2007     2006  
Average Loans Outstanding during the period
  $ 339,411     $ 327,077     $ 235,071     $ 160,348     $ 158,554  
 
                             
 
Balance, beginning of year
  $ 4,210     $ 3,758     $ 1,437     $ 1,456     $ 1,553  
Provision charged to operations
    1,555       1,025       750       30       175  
Allowance acquired
                1,683              
 
Loans charged off:
                                       
Commercial, financial, and agricultural
    (5 )     (116 )                 (185 )
Real estate mortgages
    (994 )     (407 )     (42 )     (29 )     (65 )
Installment loans to indiviuals
    (37 )     (76 )     (106 )     (56 )     (50 )
 
Recoveries:
                                       
Commercial, financial, and agricultural
    34       1       4             8  
Real estate mortgages
    14       10       2       1        
Installment loans to indiviuals
    24       15       30       35       20  
 
                             
Balance, end of year
  $ 4,801     $ 4,210     $ 3,758     $ 1,437     $ 1,456  
 
                             
Net charge-offs to Average loans outstanding during the period
    -0.28 %     -0.18 %     -0.05 %     -0.03 %     -0.17 %
 
                             

26


 

NON-PERFORMING LOANS
     In 2010, loans 30-89 days past due totaled $3.2 million compared to $1.7 million in 2009. There were no 90-days past due loans that were not classified as non-accrual at December 31, 2010 or 2009. Non-accrual loans at December 31, 2010 totaled $3.8 million as compared to $4.4 million in 2009. Overall, past due and non-accrual loans totaled $7.0 million and $6.1 million at December 31, 2010 and 2009, respectively. For the year ended December 31, 2010 and 2009, the ratio of net charge-offs during the period to average loans outstanding during the period was 0.28 percent and 0.18 percent, respectively (See Summary of Allowance for Loan Losses). Refer to the Loan section of Note 1 and Note 4— Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K filing.
     The following table presents past due and non-accrual loans by loan type and in summary as of the dates indicated:
                                         
    For the Years Ended December 31,  
(In Thousands)   2010     2009     2008     2007     2006  
     
Commercial, financial and agricultural
                                       
Days 30—89
  $ 244     $ 14     $ 61     $ 168     $  
Days 90 plus
                             
Non —accrual
    224       145       581              
Real estate
                                       
Days 30—89
    2,880       1,632       1,528       259       598  
Days 90 plus
                      70       67  
Non—accrual
    3,604       4,216       3,780       77       91  
Installment loans to individuals
                                       
Days 30—89
    32       49       9       33       40  
Days 90 plus
                      10        
Non —accrual
                92              
 
                             
 
  $ 6,984     $ 6,056     $ 6,051     $ 617     $ 796  
 
                             
 
                                       
Days 30—89
  $ 3,156     $ 1,695     $ 1,598     $ 460     $ 638  
Days 90 plus
                      80       67  
Non —accrual
    3,828       4,361       4,453       77       91  
 
                             
 
  $ 6,984     $ 6,056     $ 6,051     $ 617     $ 796  
 
                             
 
                                       
Restructured loans still accruing
  $ 319     $ 323     $ 58     $ 1,018     $ 539  
 
                             
 
                                       
Other real estate owned
  $     $ 29     $ 373     $     $ 14  
 
                             
 
                                       
Interest income that would have been recorded under original terms
  $ 224     $ 285     $ 320     $ 10     $ 98  
 
                             
 
                                       
Interest income recorded during the year
  $ 187     $ 241     $ 116     $ 4     $ 90  
 
                             
 
                                       
DEPOSITS
     Total average deposits increased by 4.9 percent from $449.0 million in 2009 to $470.9 million in 2010. Average savings deposits increased 11.9 percent to $63.2 million in 2010 from $56.5 million in 2009. Average time deposits increased 3.0 percent from $228.0 million in 2009 to $234.8 million in 2010. Average non-interest bearing demand deposits increased to $59.0 million in 2010 from $51.9 million in 2009. Average interest bearing NOW accounts increased 4.0 percent from $68.7 million in 2009 to $71.4 million in 2010
     Total average deposits increased by 51.4 percent from $296.6 million in 2008 to 449.0 million in 2009. These large increases were primarily attributed to the CFC acquisition completed on July 18, 2008. Average savings deposits increased 44.0 percent to $56.5 million in 2009 from $39.2 million in 2008. Average time deposits increased 47.7 percent from $154.3 million in 2008 to $228.0 million in 2009. Average non-interest bearing demand deposits increased to $51.9 million in 2009 from $34.4 million in 2008. Average interest bearing NOW accounts increased 44.4 percent from $47.5 million in 2008 to $68.7 million in 2009.

27


 

     The average balance and average rate paid on deposits are summarized as follows:
                                                 
    2010     2009     2008  
    Average             Average             Average        
(In Thousands)   Balance     Rate     Balance     Rate     Balance     Rate  
Non-interest bearing
  $ 59,013       %   $ 51,908       %   $ 34,403       %
Savings
    63,223       0.37       56,493       0.40       39,223       0.40  
Now deposits
    71,374       0.14       68,650       0.15       47,534       0.27  
Money market deposits
    42,460       0.75       43,906       1.03       21,119       1.66  
Time deposits
    234,812       2.19       228,005       2.94       154,334       3.53  
             
Total deposits
  $ 470,882       1.23 %   $ 448,962       1.67 %   $ 296,613       2.05 %
             
     The remaining maturities of certificates of deposit of $100,000 or more are as follows:
                         
    For the Years Ended  
(In Thousands)   2010     2009     2008  
Three months or less
  $ 6,543     $ 8,346     $ 9,353  
Three months to six months
    4,035       8,666       9,259  
Six months to twelve months
    12,504       20,805       24,095  
Over twelve months
    56,596       33,903       15,672  
     
Total
  $ 79,678     $ 71,720     $ 58,379  
     
 
As a percentage of total average time deposits
    33.9 %     31.5 %     37.8 %
     
BORROWED FUNDS
     The average balance of short-term borrowings, including securities sold under agreements to repurchase and day-to-day FHLB — Pittsburgh borrowings increased $4.9 million or 10.0 percent from $48.8 million in 2009 to $53.7 million in 2010. Short-term borrowings amounted to 11.2 percent of total interest-bearing liabilities as of December 31, 2010 as compared to 10.5 percent in 2009. Long-term borrowings, namely borrowings from the FHLB-Pittsburgh, averaged $13.9 million in 2010 and $17.1 million in 2009. As part of the 2008 acquisition of CFC, we assumed the junior subordinate debentures which amounted to $4.6 million at December 31, 2010, 2009 and 2008.
     The average balances of other borrowed funds are summarized as follows:
                                                 
    December 31, 2010     December 31, 2009     December 31, 2008  
(In Thousands)   Amount     % Total     Amount     % Total     Amount     % Total  
Short-term borrowings:
                                               
Securities sold under agreement to repurchase
  $ 52,315       77.4 %   $ 47,873       72.6 %   $ 41,573       77.1 %
Other short-term borrowings, FHLB
    603       0.9       352       0.5       849       1.6  
U.S. Treasury tax and loan notes
    773       1.1       601       0.9       490       0.9  
             
Total short-term borrowings
    53,691       79.4 %     48,826       74.0 %     42,912       79.6 %
 
Long-term borrowings, FHLB
    9,252       13.7       12,492       19.0       9,413       17.4  
Junior subordinate debentures
    4,640       6.9       4,640       7.0       1,605       3.0  
             
Total borrowed funds
  $ 67,583       100.0 %   $ 65,958       100.0 %   $ 53,930       100.0 %
             
CAPITAL RESOURCES
     Capital continues to be a strength for the Bank. Capital is critical as it must provide growth, payment to shareholders, and absorption of unforeseen losses. The federal regulators provide standards that must be met.
     As of December 31, 2010, the Bank was categorized 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.

28


 

     Our actual consolidated capital amounts and ratios are in the following table:
                                 
    2010     2009  
(In Thousands)   Amount     Ratio     Amount     Ratio  
Total Capital (to Risk-weighted Assets)
                               
Actual
  $ 64,476       18.5 %   $ 60,322       17.6 %
For Capital Adequacy Purposes
    27,884       8.0       27,394       8.0  
To Be Well-Capitalized
    34,855       10.0       34,243       10.0  
 
Tier I Capital (to Risk-weighted Assets)
                               
Actual
  $ 60,114       17.3 %   $ 56,102       16.4 %
For Capital Adequacy Purposes
    13,942       4.0       13,697       4.0  
To Be Well-Capitalized
    20,913       6.0       20,546       6.0  
 
Tier I Capital (to Average Assets)
                               
Actual
  $ 60,114       10.0 %   $ 56,102       9.8 %
For Capital Adequacy Purposes
    24,034       4.0       22,861       4.0  
To Be Well-Capitalized
    30,043       5.0       28,577       5.0  
     Our capital ratios are not materially different from those of the Bank.
     Dividends paid by the Corporation are generally provided from dividends paid to it by the Bank. Under provisions of the Pennsylvania Banking Code, cash dividends may be paid by the Bank from accumulated net earnings (retained earnings) as long as minimum capital requirements are met. The minimum capital requirements stipulate that the Bank’s surplus or excess of capital be equal to the amount of capital stock. The Bank carries capital in excess of capital requirements. The Bank has a balance of $21.9 million in its retained earnings at December 31, 2010, which is fully available for the payout of cash dividends. In order for the Corporation to maintain its financial holding company status, all banking subsidiaries must maintain a well capitalized status. The Corporation’s balance of retained earnings at December 31, 2010 is $36.4 million and would be available for the payout of cash dividends, although payment of dividends to such extent would not be prudent or likely. In 2009 the Federal Reserve Board notified all bank holding companies that dividends should be eliminated, deferred or significantly reduced if the bank holding company’s net income for the past four quarters, net of dividends paid during that period, is not sufficient to fully fund the dividends; the bank holding company’s prospective rate of earnings retention is not consistent with the bank holding company’s capital needs and overall, current and prospective financial condition; or the bank holding company will not meet or is in danger of meeting its minimum regulatory capital adequacy ratios.
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 potential liquidity risk factors at Item 1A — Risk Factors and refer to Consolidated Statements of Cash Flows at Item 8 in this Form 10-K.
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

29


 

sensitive assets to interest sensitive liabilities. The process to review interest rate risk management is a regular part of the 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.
     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 rates.
     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
December 31, 2010
                                                 
    90 Days     > 90 Days     1 to 5     5 to 10     > 10        
(In Thousands)   Or Less     But < 1 Year     Years     Years     Years     Total  
Interest-bearing deposits at banks
  $ 20,332     $     $     $     $     $ 20,332  
Investment securities (1)
    21,249       46,547       108,551       21,242       12,596       210,185  
Loans (1)
    51,571       55,507       149,748       48,326       35,301       340,453  
 
                                   
Rate Sensitive Assets
    93,152       102,054       258,299       69,568       47,897       570,970  
 
                                   
Deposits:
                                               
Interest-bearing demand deposits (2)
                56,762       14,191             70,953  
Savings (2)
    7,249       17,440       69,880       13,110             107,679  
Time
    30,974       65,339       135,492       478             232,283  
Borrowed funds
    55,001       2,701       1,057                   58,759  
Long-term debt
    1       4       6,023       55       40       6,123  
Junior Subordinated Debentures
    4,640                               4,640  
 
                                   
Rate Sensitive Liabilities
    97,865       85,484       269,214       27,834       40       480,437  
 
                                   
Interest Sensitivity Gap
  $ (4,713 )   $ 16,570     $ (10,915 )   $ 41,734     $ 47,857     $ 90,533  
 
                                   
Cumulative Gap
  $ (4,713 )   $ 11,857     $ 942     $ 42,676     $ 90,533     $  
 
                                   
 
(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, 2010, our cumulative gap positions and the potential earnings change resulting from a 300 basis point change in rates were within the internal risk management guidelines.
     Upon reviewing the current interest sensitivity scenario at the one to five year intervals, interest rates should not significantly affect net income because the Bank’s maturing and repricing assets and liabilities are near equally matched. At the one year 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 report on Form 10-K under the caption “Interest Rate Risk Management” and is incorporated in its entirety by reference under this Item 7A.

30


 

Item 8. Financial Statements and Supplementary Data
CCFNB Bancorp, Inc.
Consolidated Balance Sheets
                 
    December 31,  
(In Thousands)   2010     2009  
ASSETS
               
Cash and due from banks
  $ 7,263     $ 8,922  
Interest-bearing deposits in other banks
    18,683       1,945  
Federal funds sold
    1,649       592  
 
           
Total cash and cash equivalents
    27,595       11,459  
Investment securities, available for sale, at fair value
    207,173       220,266  
Restricted securities, at cost
    3,012       2,984  
Loans, net of unearned income
    340,453       330,489  
Less: Allowance for loan losses
    4,801       4,210  
 
           
Loans, net
    335,652       326,279  
Premises and equipment, net
    11,992       12,583  
Accrued interest receivable
    1,632       2,006  
Cash surrender value of bank-owned life insurance
    11,942       11,440  
Investment in limited partnerships
    1,607       687  
Intangible Assets:
               
     Core deposit
    2,192       2,768  
     Goodwill
    7,937       7,937  
Prepaid FDIC assessment
    1,490       2,037  
Other assets
    2,075       2,043  
 
           
TOTAL ASSETS
  $ 614,299     $ 602,489  
 
           
 
               
LIABILITIES
               
Interest-bearing deposits
  $ 410,915     $ 406,554  
Noninterest-bearing deposits
    62,877       55,734  
 
           
Total deposits
    473,792       462,288  
Short-term borrowings
    58,759       51,997  
Long-term borrowings
    6,123       15,128  
Junior subordinate debentures
    4,640       4,640  
Accrued interest payable
    652       859  
Other liabilities
    2,479       2,491  
 
           
TOTAL LIABILITIES
    546,445       537,403  
 
           
 
               
STOCKHOLDERS’ EQUITY
               
Common stock, par value $1.25 per share; authorized 5,000,000 shares; issued 2,286,931 shares in 2010 and 2,270,850 shares in 2009
    2,859       2,838  
Surplus
    27,964       27,539  
Retained earnings
    36,397       32,723  
Accumulated other comprehensive income
    2,221       2,523  
Treasury stock, at cost; 61,000 shares in 2010 and 22,500 shares in 2009
    (1,587 )     (537 )
 
           
TOTAL STOCKHOLDERS’ EQUITY
    67,854       65,086  
 
           
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 614,299     $ 602,489  
 
           
See accompanying notes to consolidated financial statements.

31


 

CCFNB Bancorp, Inc.
Consolidated Statements of Income
                         
    For the Years Ended December 31,  
(In Thousands, Except Per Share Data)   2010     2009     2008  
INTEREST AND DIVIDEND INCOME
                       
Interest and fees on loans:
                       
Taxable
  $ 18,662     $ 18,925     $ 14,586  
Tax-exempt
    963       828       706  
Interest and dividends on investment securities:
                       
Taxable
    6,668       8,162       5,521  
Tax-exempt
    397       429       254  
Dividend and other interest income
    42       58       112  
Federal funds sold
    2       10       155  
Deposits in other banks
    42       8       23  
 
                 
TOTAL INTEREST AND DIVIDEND INCOME
    26,776       28,420       21,357  
 
                 
 
INTEREST EXPENSE
                       
Deposits
    5,809       7,478       6,083  
Short-term borrowings
    427       368       753  
Long-term borrowings
    349       640       572  
Junior subordinate debentures
    98       128       96  
 
                 
TOTAL INTEREST EXPENSE
    6,683       8,614       7,504  
 
                 
 
                       
NET INTEREST INCOME
    20,093       19,806       13,853  
 
                       
PROVISION FOR LOAN LOSSES
    1,555       1,025       750  
 
                 
 
                       
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    18,538       18,781       13,103  
 
                 
 
                       
NON -INTEREST INCOME
                       
Service charges and fees
    1,778       1,704       1,281  
Gain on sale of loans
    1,113       617       316  
Earnings on bank-owned life insurance
    444       445       366  
Brokerage
    325       281       218  
Trust
    663       655       434  
Investment security losses
    (42 )     (385 )     (431 )
Interchange fees
    850       743       417  
Other
    992       1,005       442  
 
                 
TOTAL NON-INTEREST INCOME
    6,123       5,065       3,043  
 
                 
 
                       
NON -INTEREST EXPENSE
                       
Salaries
    6,447       6,314       4,762  
Employee benefits
    1,811       1,605       2,298  
Occupancy
    1,114       1,062       760  
Furniture and Equipment
    1,330       1,272       927  
State shares tax
    561       529       418  
Professional fees
    595       587       570  
Director’s fees
    274       284       244  
FDIC assessments
    610       920       81  
Telecommunications
    385       347       215  
Amortization of core deposit intangible
    576       643       280  
Automated teller machine and interchange
    560       509       286  
Other
    1,768       1,842       1,331  
 
                 
TOTAL NON-INTEREST EXPENSE
    16,031       15,914       12,172  
 
                 
 
                       
INCOME BEFORE INCOME TAX PROVISION
    8,630       7,932       3,974  
INCOME TAX PROVISION
    2,326       2,055       896  
 
                 
NET INCOME
  $ 6,304     $ 5,877     $ 3,078  
 
                 
 
                       
EARNINGS PER SHARE
  $ 2.82     $ 2.61     $ 1.82  
 
                 
CASH DIVIDENDS PER SHARE
  $ 1.18     $ 1.03     $ 0.90  
 
                 
WEIGHTED AVERAGE SHARES OUTSTANDING
    2,232,239       2,253,087       1,688,498  
 
                 
See accompanying notes to the consolidated financial statements.

32


 

CCFNB Bancorp, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
                                                         
                                  Accumulated                
      Common                     Other             Total  
      Stock             Retained     Comprehensive     Treasury     Stockholders’  
(In Thousands Except Per Share Data)   Shares     Amount     Surplus     Earnngs     Income (loss)     Stock     Equity  
Balance, December 31, 2007
    1,226,536     $ 1,533     $ 2,271     $ 27,679     $ 144     $     $ 31,627  
Comprehensive Income:
                                                       
Net income
                            3,078                       3,078  
Change in net unrealized gain on investment securities available-for-sale, net of reclassification adjustment and tax effects.
                                    1,478               1,478  
Total comprehensive income
                                                    4,556  
Par value of new shares issued to acquire Columbia Financial
    1,030,286       1,288       25,026                               26,314  
Common stock issuance under dividend reinvestment and stock purchase plans
    12,258       15       252                               267  
Recognition of employee stock purchase plan expense
                    2                               2  
Purchase of treasury stock (16,000 shares)
                                            (398 )     (398 )
Retirement of treasury stock
    (16,000 )     (20 )     (378 )                     398        
Cash dividends, ($0.90 per share)
                            (1,593 )                     (1,593 )
 
                                         
 
                                                       
Balance, December 31, 2008
    2,253,080       2,816       27,173       29,164       1,622             60,775  
Comprehensive Income:
                                                       
Net income
                            5,877                       5,877  
Change in net unrealized gain on investment securities available-for-sale, net of reclassification adjustment and tax effects.
                                    901               901  
Total comprehensive income
                                                    6,778  
Common stock issuance under dividend reinvestment and stock purchase plans
    17,770       22       359                               381  
Recognition of employee stock purchase plan expense
                    7                               7  
Purchase of treasury stock (22,500 shares)
                                            (537 )     (537 )
Cash dividends, ($1.03 per share)
                            (2,318 )                     (2,318 )
 
                                         
 
                                                       
Balance, December 31, 2009
    2,270,850       2,838       27,539       32,723       2,523       (537 )     65,086  
Comprehensive Income:
                                                       
Net income
                            6,304                       6,304  
Change in net unrealized gain on investment securities available-for-sale, net of reclassification adjustment and tax effects.
                                    (302 )             (302 )
Total comprehensive income
                                                    6,002  
Common stock issuance under dividend reinvestment and stock purchase plans
    16,081       21       419                               440  
Recognition of employee stock purchase plan expense
                    6                               6  
Purchase of treasury stock (38,500 shares)
                                            (1,050 )     (1,050 )
Cash dividends, ($1.18 per share)
                            (2,630 )                     (2,630 )
 
                                         
 
                                                       
Balance, December 31, 2010
    2,286,931     $ 2,859     $ 27,964     $ 36,397     $ 2,221     $ (1,587 )   $ 67,854  
 
                                         
See accompanying notes to the consolidated financial statements.

33


 

CCFNB Bancorp, Inc.
Consolidated Statements of Cash Flows
                         
    Years Ended December 31,  
(In Thousands)   2010     2009     2008  
OPERATING ACTIVITIES
                       
Net Income
  $ 6,304     $ 5,877     $ 3,078  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Provision for loan losses
    1,555       1,025       750  
Depreciation and amortization of premises and equipment
    944       1,023       693  
Loss (gain) on sale of investment securities
          316       (6 )
Impairment loss on securites
    42       69       437  
Amortization and accretion on investment securities
    933       606       350  
(Gain) loss on sale of premises and equipment
    (47 )     (117 )     29  
Loss on sale of other real estate owned
    11       94        
Deferred income (benefit) taxes
    (159 )     35       (259 )
Gain on sale of loans
    (1,113 )     (617 )     (316 )
Proceeds from sale of mortgage loans
    46,273       35,074       17,384  
Originations of mortgage loans held for resale
    (46,898 )     (33,847 )     (16,477 )
Amortization of intangibles and invesment in limited partnerships
    741       801       353  
Decrease in accrued interest receivable
    374       382       228  
Increases in cash surrender value of bank-owned life insurance
    (502 )     (497 )     (404 )
Decrease in accrued interest payable
    (207 )     (216 )     (164 )
(Decrease) Increase in prepaid FDIC assessment
    547       (2,037 )      
Other, net
    (251 )     (1,501 )     (211 )
 
                 
Net cash provided by operating activities
    8,547       6,470       5,465  
 
                 
INVESTING ACTIVITIES
                       
Investment securities available for sale:
                       
Purchases
    (116,087 )     (117,943 )     (49,809 )
Proceeds from sales, maturities and redemptions
    128,246       92,463       50,001  
Proceeds from redemption of restricted securities
    156             1,806  
Purchase of restricted securities
    (184 )     (817 )     (1,176 )
Net (increase) decrease in loans
    (9,490 )     (12,350 )     2,723  
Proceeds from sale of premises and equipment
    249       1,294       786  
Proceeds from sale of other real estate owned
    318       996        
Purchase of investment in limited partnership
    (1,084 )            
Acquisition of bank cash
                5,803  
Acquisition of premises and equipment
    (556 )     (2,174 )     (2,534 )
 
                 
Net cash provided by (used for) investing activities
    1,568       (38,531 )     7,600  
 
                 
FINANCING ACTIVITIES
                       
Net increase (decrease) in deposits
    11,504       27,979       (1,321 )
Net increase (decrease) in short-term borrowings
    6,762       (3,465 )     (5,932 )
Proceeds from long-term borrowings
          6,000        
Repayment of long-term borrowings
    (9,005 )     (5 )     (2,004 )
Acquisition of treasury stock
    (1,050 )     (537 )     (398 )
Proceeds from issuance of common stock
    440       381       267  
Cash dividends paid
    (2,630 )     (2,318 )     (1,593 )
 
                 
Net cash provided by (used for) financing activities
    6,021       28,035       (10,981 )
 
                 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    16,136       (4,026 )     2,084  
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    11,459       15,485       13,401  
 
                 
CASH AND CASH EQUIVALENTS, END OF PERIOD
  $ 27,595     $ 11,459     $ 15,485  
 
                 
 
                       
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
                       
Interest paid
  $ 6,890     $ 8,830     $ 6,904  
Income taxes paid
    2,605       1,790       992  
Loans transferred to other real estate owned
    300       746       373  
See accompanying notes to the consolidated financial statements.

34


 

CCFNB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     The accounting and reporting policies of CCFNB Bancorp, Inc. (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, First Columbia Bank & Trust Co. (the “Bank). Columbia Financial Corporation (“CFC”), the former parent company of the Bank was acquired by CCFNB Bancorp, Inc. on July 18, 2008 and Columbia County Farmers National Bank (“CCFNB”) merged with and into the Bank on July 18, 2008. The 2008 financial results reflected in the statements of this report include results of earnings of the Corporation from January 1, 2008 through December 31, 2008, which includes the earnings results of the acquired entities from July 18, 2008 through December 31, 2008. All significant inter-company balances and transactions have been eliminated in consolidation.
NATURE OF OPERATIONS
     The Corporation is a financial holding company that provides full service banking, including trust services, through the Bank, to individuals and corporate customers. The Bank has fourteen offices covering an area of approximately 752 square miles in Northcentral Pennsylvania. The Corporation and Bank are subject to the regulation of the Pennsylvania Department of Banking, 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 include various types of checking accounts, statement savings, money market accounts, interest checking accounts, individual retirement accounts, and certificates of deposit. The Bank also offers non-insured “Repo sweep” accounts. Lending products include commercial, consumer, and mortgage loans. The trust services, trading under the name of B.B.C.T., Co. include administration of various estates, pension plans, self-directed IRA’s and other services. A third-party brokerage arrangement is also resident in the Lightstreet branch. This investment center offers a full line of stocks, bonds and other non-insured financial services.
SEGMENT REPORTING
     The Bank 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, remote capture, 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 B.B.C.T., Co. as well as offers 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 revenue and expenses during the reporting periods. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant changes include the assessment for impairment of certain investment securities, the allowance for loan losses, deferred tax assets and liabilities, impairment of other intangible assets, and other real estate owned. Assumptions and factors used in the estimates are evaluated on an annual basis or whenever events or changes in circumstances indicate that the previous assumptions and factors have changed. The result of the analysis could result in adjustments to the 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.

35


 

     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.
RESTRICTED SECURITIES
     Restricted equity securities consist of stock in the Federal Home Loan Bank of Pittsburgh (“FHLB — Pittsburgh”), and Atlantic Central Bankers Bank (“ACBB”) and do not have a readily determinable fair value because their ownership is restricted, and they can be sold back only to the FHLB-Pittsburgh, ACBB or to another member institution. Therefore, these securities are classified as restricted equity investment securities, carried at cost, and evaluated for impairment. At December 31, 2010, the Corporation held $2,977,000 in stock of the FHLB-Pittsburgh and $35,000 in stock of ACBB. At December 31, 2009, the Corporation held $2,949,000 in stock of FHLB-Pittsburgh and $35,000 in stock of ACBB.
     The Corporation evaluated its holding of restricted stock for impairment and deemed the stock to not be impaired due to the expected recoverability of par value, which equals the value reflected within the Corporation’s financial statements. The decision was based on several items ranging from the estimated true economic losses embedded within FHLB’s mortgage portfolio to the FHLB’s liquidity position and credit rating. The Corporation utilizes the impairment framework outlined in GAAP to evaluate stock for impairment. The following factors were evaluated to determine the ultimate recoverability of the par value of the Corporation’s restricted stock holdings; (i) the significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted; (ii) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB; (iii) the impact of legislative and regulatory changes on the institutions and, accordingly, on the customer base of the FHLB; (iv) the liquidity position of the FHLB; and (v) whether a decline is temporary or whether it affects the ultimate recoverability of the FHLB stock based on (a) the materiality of the carrying amount to the member institution and (b) whether an assessment of the institution’s operational needs for the foreseeable future allow management to dispose of the stock. Based on the analysis of these factors, the Corporation determined that its holding of restricted stock was not impaired at December 31, 2010 and 2009.
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. A portion of these loans are sold with limited recourse by the Corporation.
     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 may be currently 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.
     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

36


 

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, the Bank is subject to periodic examination by its federal and state examiners, and may be required by such regulators to recognize additions to the allowance for loan losses based on their assessment of credit information available to them at the time of their examinations.
     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.
     The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. At the present time, select loans are not aggregated for collective impairment evaluation, as such; all loans are subject to individual impairment evaluation should the facts and circumstances pertinent to a particular loan suggest that such evaluation is necessary. Factors considered by management in determining impairment include payment status and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from collateral. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a trouble debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Bank determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.
     The general component covers all other loans not identified as impaired and is based on historical losses adjusted for current factors. The historical loss component of the allowance is determined by losses recognized by portfolio segment over the preceding two years. In calculating the historical component of our allowance, we aggregate our loans into one of four portfolio segments: Commercial, Financial & Agriculture, Commercial Real Estate, Consumer Real Estate, and Installment Loans to Individuals. Risk factors impacting loans in each of the portfolio segments include broad deterioration of property values, reduced consumer and business spending as a result continued high unemployment and reduced credit availability and lack of confidence in a sustainable recovery. Actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: the concentration of watch and substandard loans as a percentage of total loans, levels of loan concentration within the portfolio segment or division of a portfolio segment and broad economic conditions.
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 Bank originates and sells real estate loans to investors in the secondary mortgage market. After the sale, the Bank retains the right to service most of these loans. When originated mortgage loans are sold and servicing is retained, a servicing asset is capitalized based on relative fair value at the date of sale. Servicing assets are amortized as an offset to other fees in proportion to, and over the period of, estimated net servicing income. The unamortized cost is included in other assets in the accompanying consolidated balance sheets. The servicing rights are periodically evaluated for impairment based on their relative fair value.
JUNIOR SUBORDINATE DEBENTURES
     During 2006, CFC issued $4,640,000 in junior debentures due December 15, 2036 to Columbia Financial Statutory Trust I (Trust). On July 18, 2008, the Corporation became the successor to CFC and to this Trust, respectively. The Corporation owns all of the $140,000 in common equity of the Trust and the debentures are the sole asset of the Trust. The Trust, a wholly-owned unconsolidated subsidiary of the Corporation, issued $4,500,000 of floating-rate trust capital securities in a non-public offering in reliance on Section 4 (2) of the Securities Act of 1933. The floating-rate capital securities provide for quarterly distributions at a variable annual coupon rate, reset quarterly, based on the 3-month LIBOR plus 1.75%. The coupon rate was 2.05% at December 31, 2010. The securities are callable by the Corporation, subject to any required regulatory approval, at par, after five years. The

37


 

Corporation unconditionally guarantees the trust capital securities. The terms of the junior subordinated debentures and the common equity of the trust mirror the terms of the trust capital securities issued by the Trust.
INTANGIBLE ASSETS — GOODWILL
     Goodwill represents the excess of the purchase price over the fair market value of net assets acquired. The Corporation has recorded net goodwill of $7,937,000 at December 31, 2010 and 2009 related to the 2008 acquisition of Columbia Financial Corporation and its subsidiary, First Columbia Bank & Trust Co. In accordance with current accounting standards, goodwill is not amortized. Management performs an annual evaluation for impairment. Any impairment of goodwill results in a charge to income. The Corporation periodically assesses whether events or changes in circumstances indicate that the carrying amounts of goodwill and other intangible assets may be impaired. Goodwill is tested for impairment at the reporting unit level and an impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. The Company employs general industry practices in evaluating the impairment of its goodwill and other intangible assets. The Company calculates the value of goodwill using a combination of the following valuation methods: dividend discount analysis under the income approach, which calculates the present value of all excess cash flows plus the present value of a terminal value, the price/earnings multiple under the market approach and the change in control premium to market price approach. Based upon these reviews, management determined there was no impairment of goodwill during 2010 or 2009. No assurance can be given that future impairment tests will not result in a charge to earnings.
INTANGIBLE ASSETS — CORE DEPOSIT
     The Corporation has an amortizable intangible asset related to the deposit premium paid for the acquisition of Columbia Financial Corporation’s subsidiary, First Columbia Bank & Trust Co. This intangible asset is being amortized on a sum of the years digits method over 10 years and has a carrying value of $2,192,000 as of December 31, 2010. At December 31, 2009, the intangible asset had a carrying value of $2,768,000. The recoverability of the carrying value is evaluated on an ongoing basis, and permanent declines in value, if any, are charged to expense. Amortization of the core deposit intangible amounted to $576,000 and $643,000 for the years ended December 31, 2010 and 2009, respectively.
The estimated amortization expense of the core deposit intangible over its remaining life is as follows:
         
For the Year Ended:        
2011
  $ 509,000  
2012
    442,000  
2013
    374,000  
2014
    308,000  
2015
    240,000  
Thereafter
    319,000  
 
     
Total
  $ 2,192,000  
 
     
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. The amount of other real estate owned was $0 and $29,000 as of December 31, 2010 and 2009, respectively and is included in other assets in the accompanying consolidated balance sheets.
BANK OWNED LIFE INSURANCE
     The Corporation invests in Bank Owned Life Insurance (BOLI). Purchase of BOLI provides life insurance coverage on certain present and retired employees and Directors with the Corporation being owner and primary beneficiary of the policies.
INVESTMENTS IN LIMITED PARTNERSHIPS
     The Corporation is a limited partner in four partnerships at December 31, 2010 that provide low income housing in the Corporation’s geographic market area. The investments are accounted for under the effective yield method. Under the effective yield method, the Corporation recognizes tax credits as they are allocated and amortizes the initial cost of the investment to provide a constant effective yield over the period that the tax credits are allocated to the Corporation. Under this method, the tax credits allocated, net of any amortization of the investment in the limited partnerships, are recognized in the consolidated statements of income as a component of income tax expense. The amount of tax credits allocated to the Corporation was $187,000 and the amortization of the investments in limited partnerships was $164,000 in 2010. The amount of tax credits allocated to the Corporation was $187,000

38


 

and the amortization of the investments in limited partnerships was $158,000 in 2009. The carrying value of the Corporation’s investments in limited partnerships was $1,607,000 and $687,000 at December 31, 2010 and 2009, respectively. During 2010, the Corporation purchased an interest in a low income housing partnership in the amount of $1,084,000.
INVESTMENT IN INSURANCE AGENCY
     The Corporation owns a 50 percent 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, 2010 and 2009 was $232,000, and is included 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.
     In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, the projected future taxable income and tax planning strategies in making this assessment. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
     A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.
     The Corporation and the Bank are subject to U.S. federal income tax and Commonwealth of Pennsylvania tax. The Corporation is no longer subject to examination by Federal or State taxing authorities for the years before 2007. At December 31, 2010 and December 31, 2009 the Corporation did not have any unrecognized tax benefits. The Corporation does not expect the amount of any unrecognized tax benefits to significantly increase in the next twelve months. The Corporation recognizes interest related to income tax matters as interest expense and penalties related to income tax matters as other noninterest expense. At December 31, 2020 and December 31, 2009, the Corporation does not have any amounts accrued for interest and/or penalties.
PER SHARE DATA
     Basic earnings per share are 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 are calculated by increasing the denominator for the assumed conversion of all potentially dilutive securities. The Corporation does not have any securities which have or will have a dilutive effect, so accordingly, basic and diluted per share data are the same.
CASH FLOW INFORMATION
     For purposes of reporting consolidated cash flows, cash and cash equivalents include cash on hand and due from banks, interest-bearing deposits in other banks and federal funds sold. The Corporation considers cash classified as interest-bearing deposits with other banks as a cash equivalent because they are represented by cash accounts essentially on a demand basis. Federal funds are also included as a cash equivalent because they are generally purchased and sold for one-day periods.
TREASURY STOCK
     The purchase of the Corporation’s common stock is recorded at cost. At the date of subsequent reissue, the treasury stock account is reduced by the cost of such stock on a last-in first-out basis.
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 and the Bank. Trust Department income is generally recognized on a cash basis and is not materially different than if it was reported on an accrual basis.
ACCUMULATED OTHER COMPREHENSIVE INCOME
     The Corporation is required to present accumulated other comprehensive income in a full set of general-purpose financial statements for all periods presented. Accumulated other comprehensive income is comprised of net unrealized holding gains on the

39


 

available for sale investment securities portfolio. The Corporation has elected to report the effects of other comprehensive income as part of the Consolidated Statement of Changes in Stockholders’ Equity.
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, 2010, 2009, and 2008 was approximately $224,000, $199,000, and $145,000, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
     FASB ASU 2010-20, “Receivable (Topic 310), Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses” — ASU 2010-20 requires new and enhanced disclosures about the credit quality of an entity’s financing receivables and its allowance for credit losses. The new and amended disclosure requirements focus on such areas as nonaccrual and past due financing receivables, allowance for credit losses related to financing receivables, impaired loans, credit quality information and modifications. The ASU requires an entity to disaggregate new and existing disclosures based on how it develops its allowance for credit losses and how it manages credit exposures. For public entities, the disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. See Note 4.
     FASB ASU 2010-09 — Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure requirements. This accounting standard update modifies the requirement to disclose the date that subsequent events are considered through for SEC filers. An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. This change alleviates potential conflicts between Subtopic 855-10 and the SEC’s requirements.
     FASB ASC 860 — In June 2009, the FASB issued new guidance impacting FASB ASC 860, Transfers and servicing (Statement No. 166 — Accounting for Transfers of Financial Assets an amendment of FASB Statement No. 140). The new guidance removes the concept of a qualifying special-purpose entity and limits the circumstances in which a financial asset, or portion of a financial asset, should be derecognized when the transferor has not transferred the entire financial asset to an entity that is not consolidated with the transferor in the financial statements being presented and/or when the transferor has continuing involvement with the transferred financial asset. The new guidance became effective for the Corporation on January 1, 2010. The implementation of this new guidance did not have a material impact on the Corporation’s consolidated financial statements.
     FASB ASC 820-10- In January 2010, the FASB issued an update (ASC No. 2010-06, Improving Disclosures about Fair Value Measurements) impacting FASB ASC 820-10, Fair Value Measurements and Disclosures. The amendments in this update require new disclosures about significant transfers in and out of Level 1 and Level 2 fair value measurements. The amendments also require a reporting entity to provide information about activity for purchases, sales, issuances and settlements in Level 3 fair value measurements and clarify disclosures about the Level of disaggregation and disclosures about inputs and valuation techniques. This update became effective for the Corporation on January 1, 2010. The implementation of this new guidance did not have a material impact on the Corporation’s consolidated financial statements.
RECLASSIFICATIONS
     Certain amounts in the consolidated financial statements of the prior years have been reclassified to conform to presentations used in the 2010 consolidated financial statements. Such reclassifications had no effect on the Corporation’s consolidated financial condition or net income.
2. RESTRICTED CASH BALANCES
     The Bank is required to maintain average clearing balances with the Federal Reserve Bank. The amount required at December 31, 2010 was $150,000.

40


 

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, 2010 and 2009:
                                 
    2010  
            Gross     Gross     Estimated  
    Amortized     Unrealized     Unrealized     Fair  
(In Thousands)   Cost     Gains     Losses     Value  
Obligation of U.S. Government Corporations and Agencies:
                               
Mortgage-backed
  $ 129,008     $ 3,794     $ (287 )   $ 132,515  
Other
    59,046       279       (422 )     58,903  
Obligations of state and politic al subdivisions
    13,625       115       (69 )     13,671  
 
                       
Total debt securities
    201,679       4,188       (778 )     205,089  
Marketable equity securities
    2,130       148       (194 )     2,084  
 
                       
Total investment securities AFS
  $ 203,809     $ 4,336     $ (972 )   $ 207,173  
 
                       
                                 
    2009  
            Gross     Gross     Estimated  
    Amortized     Unrealized     Unrealized     Fair  
(In Thousands)   Cost     Gains     Losses     Value  
Obligation of U.S. Government Corporations and Agencies:
                               
Mortgage-backed
  $ 134,762     $ 4,212     $ (118 )   $ 138,856  
Other
    68,323       421       (405 )     68,339  
Obligations of state and political subdivisions
    11,265       116       (7 )     11,374  
 
                       
Total debt securities
    214,350       4,749       (530 )     218,569  
Marketable equity securities
    2,093       41       (437 )     1,697  
 
                       
Total investment securities AFS
  $ 216,443     $ 4,790     $ (967 )   $ 220,266  
 
                       
     Securities available-for-sale with an aggregate fair value of $94,979,000 and $95,579,000 at December 31, 2010 and 2009, respectively, were pledged to secure public funds, trust funds, securities sold under agreements to repurchase and other balances of $70,861,000 and $73,734,000 at December 31, 2010 and 2009, respectively, as required by law.
     The amortized cost and estimated fair value of investment securities, by expected maturity, are shown below at December 31, 2010. Expected maturities on debt securities 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 and marketable equity securities are not considered to have defined maturities and are included in the “Due after ten years” category:
                         
                    Weighted  
    Amortized     Estimated     Average  
(In Thousands)   Cost     Fair Value     Yield  
 
                 
Due in one year or less
  $ 2,341     $ 2,372       3.68 %
Due after one year to five years
    47,208       47,175       2.10 %
Due after five years to ten years
    28,981       29,388       3.88 %
Due after ten years
    125,279       128,238       3.72 %
 
                   
Total
  $ 203,809     $ 207,173          
 
                   
     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, 2010. 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.

41


 

     Proceeds from sales, maturities and redemptions of investments in debt and equity securities classified as available-for-sale during 2010, 2009 and 2008 were $128,402,000, $92,463,000, and $51,807,000, respectively. For the year ended December 31, 2010, the Corporation did not realize a gross gain or loss. Gross gains realized on these sales for the years ended December 31, 2009 and 2008 were $0 and $6,000, respectively. Gross losses realized on these sales for the years ended December 31, 2009 and 2008 were $316,000 and $0, respectively.
     Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. Investment securities classified as available for sale or held-to-maturity are generally evaluated for OTTI under FASB ASC 320 (SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities). In determining OTTI under the FASB ASC 320 (SFAS No. 115) model, management considers many factors, including (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.
     When other-than-temporary-impairment occurs, the amount of the other-than-temporary-impairment recognized in earnings depends on whether an entity intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss. If an entity intends to sell or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the other-than-temporary impairment shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the other-than-temporary impairment shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total other-than-temporary impairment related to the other factors shall be recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the other-than-temporary-impairment recognized in earnings shall become the new amortized cost basis of the investment.
     The following summary shows the gross unrealized losses and fair value, aggregated by investment category of those individual securities that have been in a continuous unrealized loss position for less than or more than 12 months as of December 31, 2010 and 2009:
                                                 
    2010  
    Less than Twelve Months     Twelve Months or Greater     Total  
    Estimated     Gross     Estimated     Gross     Estimated     Gross  
    Fair     Unrealized     Fair     Unrealized     Fair     Unrealized  
(In Thousands)   Value     Losses     Value     Losses     Value     Losses  
Obligations of U.S. Government Corporations and Agencies:
                                               
Mortgage-backed
  $ 33,482     $ 287     $     $     $ 33,482     $ 287  
Other
    29,578       422                   29,578       422  
Obligations of state and political subdivisions
    3,849       69                   3,849       69  
 
                                   
Total debt securities
    66,909       778                   66,909       778  
Equity securities
    45       3       1,005       191       1,050       194  
 
                                   
Total
  $ 66,954     $ 781     $ 1,005     $ 191     $ 67,959     $ 972  
 
                                   
                                                 
    2009  
    Less than Twelve Months     Twelve Months or Greater     Total  
    Estimated     Gross     Estimated     Gross     Estimated     Gross  
    Fair     Unrealized     Fair     Unrealized     Fair     Unrealized  
(In Thousands)   Value     Losses     Value     Losses     Value     Losses  
Obligations of U.S. Government Corporations and Agencies:
                                               
Mortgage-backed
  $ 8,105     $ 117     $ 51     $ 1     $ 8,156     $ 118  
Other
    28,876       405                   28,876       405  
Obligations of state and political subdivisions
    1,856       7                   1,856       7  
 
                                   
Total debt securities
    38,837       529       51       1       38,888       530  
Equity securities
    366       159       806       278       1,172       437  
 
                                   
Total
  $ 39,203     $ 688     $ 857     $ 279     $ 40,060     $ 967  
 
                                   

42


 

     At December 31, 2010, the Corporation had a total of 272 debt securities and 45 equity security positions. At December 31, 2010, there were a total of 47 individual debt securities and 2 individual equity securities that were in a continuous unrealized loss position for less than twelve months. At December 31, 2010, there were no debt securities and 23 individual equity securities in a continuous loss position for greater than twelve months.
     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 does not consider the debt securities contained in the previous table to be other-than-temporarily impaired since it has both the intent and ability to hold the securities until a recovery of fair value, which may be maturity.
     The Corporation’s marketable equity securities consist of common stock positions in various Commercial Banks, Savings and Loans/Thrifts, and Diversified Financial Service Corporations varying in asset size and geographic region. The Corporation’s equity securities represent less than 1 percent of the total available for sale investments as of December 31, 2010. The following tables display the Corporation’s holdings of these securities by asset size and geographic region as of December 31, 2010:
                                 
    December 31, 2010  
            Gross     Gross     Estimated  
(In Thousands)   Amortized     Unrealized     Unrealized     Fair  
Asset size($)   Cost     Gains     Losses     Value  
 
Under $1 Billion
  $ 455     $ 59     $ (23 )   $ 491  
$1 to $5 Billion
    209       10       (18 )     201  
$6 to $100 billion
    780       44       (134 )     690  
Over $100 Billion
    686       35       (19 )     702  
     
 
  $ 2,130     $ 148     $ (194 )   $ 2,084  
     
                                 
    December 31, 2010  
            Gross     Gross     Estimated  
(In Thousands)   Amortized     Unrealized     Unrealized     Fair  
Geographic Region   Cost     Gains     Losses     Value  
 
Eastern U.S.
  $ 1,040     $ 95     $ (110 )   $ 1,025  
Southeastern U.S.
    110             (3 )     107  
Western U.S.
    53             (1 )     52  
National
    927       53       (80 )     900  
     
 
  $ 2,130     $ 148     $ (194 )   $ 2,084  
     
     The fair market value of the equity securities tends to fluctuate with the overall equity markets as well as the trends specific to each institution. The equity securities portfolio is reviewed in a similar manner as that of the debt securities with greater emphasis placed on the length of time the market value has been less than the carrying value and the financial sector outlook. The Corporation also reviews dividend payment activities, levels of non performing assets and loan loss reserves, and whether or not the issuer is participating in the TARP Capital Purchase Program. The starting point for the equity analysis is the length and severity of market value decline. The Corporation and an independent consultant monitor the entire portfolio monthly with particular attention given to securities in a continuous loss position of at least ten percent for over twelve months. During 2010, impairment was recognized on a few securities which management believed that a sufficient amount of credit damage had occurred relative to the issuer’s capital position to render the security unlikely to recover to our cost within the near term. For the years ended December 31, 2010, 2009 and 2008 the Corporation recorded an other-than-temporary impairment totaling $42,000, $69,000 and $437,000, respectively related to the investment in these equity securities. Securities with an unrealized loss that were determined to be other-than-temporary were written down to fair value, with the write-down recorded as a realized loss included in security (losses) gains. The Corporation evaluated the near-term prospects of the issuer in relation the severity and duration of the market value decline as well as the other attributes listed above. Based on that evaluation and the Corporation’s ability and intent to hold these equity securities for a reasonable period of time sufficient for a forecasted recovery of fair value, the Corporation does not consider these equity securities to be other-than-temporarily impaired at December 31, 2010.

43


 

4. LOANS
     Major classifications of loans at December 31, 2010 and 2009 consisted of:
                 
(In Thousands)   2010     2009  
Commercial, financial and agricultural
  $ 33,819     $ 37,642  
Tax-exempt
    25,180       18,055  
Commercial real estate:
               
Commercial mortgages
    95,688       81,704  
Other construction and land develpoment loans
    6,284       9,072  
Secured by farmland
    5,697       5,843  
Consumer real estate:
               
Home equity loans
    21,687       23,985  
Home equity lines of credit
    17,802       15,129  
1-4 family reisdential mortgages
    121,665       126,895  
Construction
    5,405       4,454  
Installment loans to individuals
    7,232       7,725  
Unearned discount
    (6 )     (15 )
 
           
Gross loans
  $ 340,453     $ 330,489  
 
           
Loan Origination and Risk Management
     The Corporation has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and the Board of Directors approve these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.
     Commercial, financial, and agricultural loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. Underwriting standards are designed to promote relationship banking rather than transactional banking. Once it is determined that the borrower’s management possesses sound ethics and solid business acumen, the Corporation’s management examines current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial, financial, and agricultural loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial, financial, and agricultural loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.
     Commercial real estate loans are subject to underwriting standards and processes similar to commercial, financial, and agricultural loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Corporations’ commercial real estate portfolio are diverse in terms of type and geographic locations served by the Corporation. This diversity helps reduce the Corporation’s exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral. As a general rule the Corporation avoids financing single-purpose projects unless other underwriting factors are present to help mitigate risk.
     The Corporation originates consumer loans using a credit scoring system to supplement the underwriting process. To monitor and manage consumer loan risk, polices and procedures are reviewed and modified on a regular basis. In addition, risk is reduced by keeping the loan amounts relatively small and spread across many individual borrowers. Additionally, trend reports are reviewed regularly by management. Underwriting standards for home equity loans are influenced by statutory requirements, which include such controls as maximum loan-to-value percentages, collection remedies, documentation requirements, and limits on the number of loans an individual can have at one time.
     The Corporation contracts an independent third party consultant that reviews and validates the credit risk program on an annual basis. Results of theses reviews are presented to management. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Corporation’s loan policies and procedures.

44


 

     Real estate loans held-for-sale in the amount of $2,005,000 at December 31, 2010 and $267,000 at December 31, 2009 are included in consumer 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 consumer loan balances at December 31, 2010 and 2009 are $137,000 and $99,000, respectively.
Concentrations of Credit Risk
     Most of the Corporation’s lending activity occurs within the Bank’s primary market area which encompasses Columbia County, a 484 square mile area located in North central Pennsylvania. The majority of the Corporation’s loan portfolio consists of commercial and consumer real estate loans. As of December 31, 2010 and 2009, there were no concentrations of loans related to any single industry in excess of 10% of total loans.
Non-Accrual and Past Due 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 collectability of principal or interest, even though the loan may be currently 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 collectability of principal.
     Non-accrual loans, segregated by class of loans, were as follows as of December 31:
                         
(In Thousands)   2010     2009     2008  
Commercial, financial and agricultural
  $ 224     $ 145     $ 581  
Tax-exempt
                 
Commercial real estate:
                       
Commercial mortgages
    2,166       3,100       481  
Other construction and land develpoment loans
                 
Secured by farmland
                 
Consumer real estate:
                       
Home equity loans
    297       109       14  
Home equity lines of credit
          92       53  
1-4 family reisdential mortgages
    1,141       915       3,324  
Construction
                 
Installment loans to individuals
                 
 
                 
 
Total
  $ 3,828     $ 4,361     $ 4,453  
 
                 
     The gross interest that would have been recorded if all non-accrual loans during the year had been current in accordance with their original terms and the amounts actually recorded in income were as follows:
                         
(In Thousands)   2010     2009     2008  
Gross interest due under terms
  $ 224     $ 285     $ 320  
Amount included in income
    (187 )     (241 )     (116 )
 
                 
Interest income not recognized
  $ 37     $ 44     $ 204  
 
                 
     At December 31, 2010, there were no significant commitments to lend additional funds with respect to non-accrual and restructured 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.
     An age analysis of past due loans, segregated by class of loans, as of December 31, 2010 were as follows:

45


 

                                                 
    Loans     Loans                             Accruing Loans  
    30-89 Days     90 or more days     Total Past     Current     Total     90 or more  
(In Thousands)   Past Due     Past Due     Due Loans     Loans     Loans     Days Past Due  
     
Commercial, financial and agricultural
  $ 244     $ 224     $ 468     $ 33,351     $ 33,819     $  
Tax-exempt
                      25,180       25,180        
Commercial real estate:
                                               
Commercial mortgages
    511       2,166       2,677       93,011       95,688        
Other construction and land develpoment loans
                      6,284       6,284        
Secured by farmland
                      5,697       5,697        
Consumer real estate:
                                               
Home equity loans
    136       297       433       21,254       21,687        
Home equity lines of credit
                      17,802       17,802        
1-4 family reisdential mortgages
    2,233       1,141       3,374       118,291       121,665        
Construction
                      5,405       5,405        
Installment loans to individuals
    32             32       7,200       7,232        
Unearned discount
                      (6 )     (6 )        
     
Gross loans
  $ 3,156     $ 3,828     $ 6,984     $ 333,469     $ 340,453     $  
     
     There were no loans past due 90 days and still accruing interest at December 31, 2010, 2009 and 2008.
Impaired Loans
     A loan is considered impaired when, based on current information and events, it is probable the Corporation will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated in smaller-balance loans of a similar nature and on an individual basis for other loans. If a loan is impaired, a specific allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. The recognition of interest income on impaired loans is the same as for non-accrual loans discussed above.
     No additional charge to operations was required to provide for these impaired loans as the specifically allocated allowance of $813,000 at December 31, 2010, is estimated by management to be adequate to provide for the loan loss allowance associated with these impaired loans. The average recorded investment in impaired loans during the years ended December 31, 2010, 2009 and 2008 was approximately $4,465,000, $4,956,000 and $1,905,000, respectively.
     Impaired loans are set forth in the following table as of December 31:
                                         
    2010  
    Unpaid     Recorded     Recorded              
    Contractual     Investment     Investment     Total        
    Principal     With No     With     Recorded     Related  
(In Thousands)   Balance     Allowance     Allowance     Investment     Allowance  
     
Commercial, financial and agricultural
  $ 498     $ 463     $ 35     $ 498     $ 15  
Tax-exempt
                             
Commercial real estate:
                                       
Commercial mortgages
    2,325       484       1,841       2,325       499  
Other construction and land develpoment loans
                             
Secured by farmland
    319       319             319        
Consumer real estate:
                                       
Home equity loans
    411       112       299       411       209  
Home equity lines of credit
                             
1-4 family reisdential mortgages
    1,211       716       495       1,211       90  
Construction
                             
Installment loans to individuals
                             
     
Gross loans
  $ 4,764     $ 2,094     $ 2,670     $ 4,764     $ 813  
     

46


 

                                         
    2009  
    Unpaid     Recorded     Recorded              
    Contractual     Investment     Investment     Total        
    Principal     With No     With     Recorded     Related  
(In Thousands)   Balance     Allowance     Allowance     Investment     Allowance  
     
Commercial, financial and agricultural
  $ 45     $ 45     $     $ 45     $  
Tax-exempt
                             
Commercial real estate:
                                       
Commercial mortgages
    3,275       1,332       1,943       3,275       377  
Other construction and land develpoment loans
                             
Secured by farmland
    323       323             323        
Consumer real estate:
                                       
Home equity loans
    72       56       16       72       16  
Home equity lines of credit
    92       92             92        
1-4 family reisdential mortgages
    1,032       614       418       1,032       101  
Construction
                             
Installment loans to individuals
                             
     
Gross loans
  $ 4,839     $ 2,462     $ 2,377     $ 4,839     $ 494  
     
Allowance for Possible 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.
     The following table details activity in the allowance for possible loan losses by portfolio segment for the years ended December 31, 2010 and 2009. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
                                                 
    2010  
    Commercial     Commercial     Consumer     Installment              
    Financial &     Real     Real     Loans              
(In Thousands)   Agricultural     Estate     Estate     Individuals     Unallocated     Total  
     
Balance, beginning of year
  $ 567     $ 1,793     $ 1,339     $ 149     $ 362     $ 4,210  
Provision charged to operations
    156       1,464       (87 )     (30 )     52       1,555  
Loans charged off
    (5 )     (973 )     (21 )     (37 )           (1,036 )
Recoveries
    34       2       12       24             72  
     
Balance, end of year
  $ 752     $ 2,286     $ 1,243     $ 106     $ 414       4,801  
     
 
                                               
Ending balance individually evaluated for impairment
  $ 54     $ 654     $ 90     $     $     $ 798  
     
 
                                               
Ending balance collectively evaluated for impairment
  $ 698     $ 1,632     $ 1,153     $ 106     $ 414     $ 4,003  
     

47


 

                                                 
    2009  
    Commercial     Commercial     Consumer     Installment              
    Financial &     Real     Real     Loans              
(In Thousands)   Agricultural     Estate     Estate     Individuals     Unallocated     Total  
     
Balance, beginning of year
  $ 402     $ 1,340     $ 1,121     $ 158     $ 737     $ 3,758  
Provision charged to operations
    280       448       619       51       (373 )     1,025  
Loans charged off
    (116 )           (407 )     (76 )           (599 )
Recoveries
    1       4       6       15             26  
     
Balance, end of year
  $ 567     $ 1,792     $ 1,339     $ 148     $ 364       4,210  
     
 
                                               
Ending balance individually evaluated for impairment
  $     $ 392     $ 102     $     $     $ 494  
     
 
                                               
Ending balance collectively evaluated for impairment
  $ 567     $ 1,415     $ 1,237     $ 148     $ 414     $ 3,781  
     
     Activity in the allowance for possible loan losses during 2008 was as follows:
         
    2008  
Balance, beginning of year
  $ 1,437  
Provision charged to operations
    750  
Allowance acquired
    1,683  
Loans charged off
    (148 )
Recoveries
    36  
 
     
Balance, end of year
  $ 3,758  
 
     
     The Corporation’s recorded investment in loans as of December 31, 2010 and 2009 related to each balance in the allowance for possible loan losses by portfolio segment and disaggregated on the basis of the Corporation’s impairment methodology was as follows:
                                         
    2010  
    Commercial     Commercial     Consumer     Installment        
    Financial &     Real     Real     Loans        
(In Thousands)   Agricultural     Estate     Estate     Individuals     Total  
     
Ending balance individually evaluated for impairment
  $ 498     $ 2,644     $ 1,622     $     $ 4,764  
 
                                       
Ending balance collectively evaluated for impairment
    58,501       105,025       164,937       7,226       335,689  
 
                                       
     
Ending balance
  $ 58,999     $ 107,669     $ 166,559     $ 7,226     $ 340,453  
     
                                         
    2009  
    Commercial     Commercial     Consumer     Installment        
    Financial &     Real     Real     Loans        
(In Thousands)   Agricultural     Estate     Estate     Individuals     Total  
     
Ending balance individually evaluated for impairment
  $ 45     $ 3,598     $ 1,196     $     $ 4,839  
 
                                       
Ending balance collectively evaluated for impairment
    55,652       93,021       169,267       7,710       325,650  
 
                                       
     
Ending balance
  $ 55,697     $ 96,619     $ 170,463     $ 7,710     $ 330,489  
     
Loan Modifications
     From time to time, the Bank may agree to modify the contractual terms of a borrower’s loan. In cases where such modifications represent a concession to a borrower experiencing financial difficulty, the modification is considered a troubled debt

48


 

restructuring. Loans modified in a troubled debt restructuring are placed on nonaccrual status until the Bank determines the future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrate a period of performance according to the restructured terms of six months. At December 31, 2010, there were no significant loans modified in troubled debt restructurings.
5. MORTGAGE SERVICING RIGHTS
     The Bank sells real estate mortgages. The mortgage loans sold which are serviced for others are not included in the accompanying Consolidated Balance Sheets. The unpaid principal balances of mortgage loans serviced for others were $75,647,000 and $57,154,000 at December 31, 2010 and 2009, respectively. The balances of amortized mortgage servicing rights included in other assets at December 31, 2010 and 2009 were $491,000 and $344,000, respectively. Valuation allowances were not provided since fair values were determined to equal carrying values. Fair values were determined using a discount rate of 6% and average expected lives of 3 to 6 years.
    The following summarizes mortgage servicing rights capitalized and amortized:
                 
(In Thousands)   2010     2009  
Balance, beginning of year
  $ 344     $ 206  
Servicing asset additions
    235       214  
Amortization
    (88 )     (76 )
 
           
Balance, end of year
  $ 491     $ 344  
 
           
The Bank does not require custodial escrow accounts in connection with the foregoing loan servicing.
6. PREMISES AND EQUIPMENT
     A summary of premises and equipment at December 31, 2010 and 2009 follows:
                 
(In Thousands)   2010     2009  
Land
  $ 1,684     $ 1,704  
Premises
    11,942       12,139  
Furniture and equipment
    9,244       8,969  
Leasehold improvements
    64       64  
 
           
Total
    22,934       22,876  
Less accumulated depreciation and amortization
    10,942       10,293  
 
           
Net premises and equipment
  $ 11,992     $ 12,583  
 
           
     Depreciation amounted to $944,000, $1,023,000 and $693,000 in 2010, 2009 and 2008, respectively.
7. DEPOSITS
     Major classifications of deposits at December 31, 2010 and 2009 consisted of:
                 
(In Thousands)   2010     2009  
Demand deposits
  $ 62,877     $ 55,734  
Interest-bearing demand deposits
    70,953       71,396  
Savings
    107,679       101,537  
Time deposits over $100,000
    79,678       71,720  
Other time deposits
    152,605       161,901  
 
           
Total deposits
  $ 473,792     $ 462,288  
 
           
     The following is a schedule reflecting remaining maturities of time deposits of $100,000 and over at December 31, 2010:

49


 

         
(In Thousands)        
2011
  $ 23,082  
2012
    22,774  
2013
    23,195  
2014
    3,883  
2015
    6,744  
 
     
Total
  $ 79,678  
 
     
     Interest expense related to time deposits of $100,000 or more was $1,703,000 in 2010, $1,915,000 in 2009 and $1,581,000 in 2008.
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, 2010 and 2009:
                                 
    2010
            Weighted     Maximum        
    Ending     Average     Month End     Average  
(In Thousands)   Balance     Balance     Balance     Rate  
Securities sold under agreements to repurchase
  $ 57,824     $ 52,315     $ 62,172       0.81 %
Other short-term borrowings
          773       4,075       0.73 %
U.S. Treasury tax and loan notes
    935       603       1,000       0.00 %
             
Total
  $ 58,759     $ 53,691     $ 67,247       0.79 %
             
                                 
    2009
            Weighted     Maximum        
    Ending     Average     Month End     Average  
(In Thousands)   Balance     Balance     Balance     Rate  
     
Securities sold under agreements to repurchase
  $ 51,682     $ 47,873     $ 56,253       0.76 %
Other short-term borrowings
          352       5,400       0.64 %
U.S. Treasury tax and loan notes
    315       601       994       0.00 %
             
Total
  $ 51,997     $ 48,826     $ 62,647       0.75 %
             
9. LONG-TERM BORROWINGS
     Long-term borrowings consist of advances due to the FHLB — Pittsburgh. Under terms of a blanket agreement, the loans were secured by certain qualifying assets of the Bank which consisted principally of first mortgage loans. The carrying value of these collateralized items was $179,422,000 at December 31, 2010. The Bank has lines of credit with Federal Reserve Bank Discount Window, Wells Fargo Bank, and FHLB — Pittsburgh in the aggregate amount of $184,422,000 at December 31, 2010. The unused portion of these lines of credit was $178,299,000 at December 31, 2010. Long-term borrowings consisted of the following at December 31, 2010 and 2009:

50


 

                 
(In Thousands)   2010     2009  
     
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 5.86%.
  $ 56     $ 58  
 
               
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%.
    20       21  
 
               
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%.
    23       24  
 
               
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. This note matured and was paid off during 2010.
          5,000  
 
               
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. This note matured and was paid off during 2010.
          2,000  
 
               
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. This note matured and was paid off in 2010.
          2,000  
 
               
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%.
    24       25  
 
               
Three FHLB Fixed Rate Community Lending Program loans dated May 7, 2009 in the original amount of $1,000,000 each for terms ranging from 3 to 5 years. At December 31, 2010 the interest rates ranged from 2.03% to 2.94%.
    3,000       3,000  
 
               
Three FHLB Fixed Rate Community Lending Program loans dated July 15, 2009 in the original amount of $1,000,000 each for terms ranging from 3 to 5 years. At December 31, 2010 the interest rates ranged from 1.99% to 3.04%.
    3,000       3,000  
     
Total
  $ 6,123     $ 15,128  
     
     The following is a schedule reflecting remaining maturities of long-term debt at December 31, 2010:
         
(In Thousands)    
2011
  $ 5  
2012
    2,005  
2013
    2,006  
2014
    2,006  
2015
    6  
Thereafter
    95  
 
     
Total
  $ 6,123  
 
     

51


 

10. COMPREHENSIVE INCOME
     The components of the change in other comprehensive income and related tax effects are as follows:
                         
    Years Ended December 31,  
(In Thousands)   2010     2009     2008  
Unrealized holding (losses) gains on available-for-sale investment securities
  $ (416 )   $ 1,750     $ 2,671  
Reclassification adjustment for losses realized in income
    (42 )     (385 )     (431 )
 
                 
Change in net unrealized gains before tax effect
    (458 )     1,365       2,240  
Tax effect
    (156 )     464       762  
     
Change in net unrealized gain on investment securities available-for-sale, net of reclassification and tax effect
  $ (302 )   $ 901     $ 1,478  
 
                 
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 is 20,000. In addition, the Corporation may choose to purchase shares on the open market to facilitate this plan. During 2009 the plan was amended to allow participating employees to elect quarterly 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 quarterly aggregate amount of payroll deductions elected by the employee divided by the lower of 90% of the fair market value of Common Stock on the average of the last ten days prior to the offering date or 90% of the fair market value of common Stock on the average of the last ten days prior to purchase date as defined by the plan. Stock issued to participating employees under the plan for the most recent three year period was:
                         
            Average Per Share  
            Employees’     Market  
    Number     Purchase     Value  
    of Shares     Price     of Shares  
Year Issued:
                       
2010
    2,149     $ 24.19     $ 27.00  
2009
    3,154     $ 20.96     $ 22.55  
2008
    606     $ 22.86     $ 25.40  
     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  
(In Thousands, Except Per Share Data)   of Shares     Proceeds  
     
Year:
               
2010
    13,932     $ 387  
2009
    14,616     $ 319  
2008
    11,652     $ 254  

52


 

12. INCOME TAXES
     The provision for income tax expense consisted of the following components:
                         
    For the Years Ended December 31,  
(In Thousands)   2010     2009     2008  
Currently payable
  $ 2,496     $ 1,980     $ 1,155  
Deferred (benefit) tax
    (170 )     75       (259 )
 
                 
 
                       
Total income tax provision
  $ 2,326     $ 2,055     $ 896  
 
                 
     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:
                                                 
  2010     2009     2008  
(In Thousands)   Amount     %     Amount     %     Amount     %  
Provision at statutory rate
  $ 2,934       34.0 %   $ 2,697       34.0 %   $ 1,351       34.0 %
Tax-exempt income
    (462 )     (5.4 )     (428 )     (5.4 )     (327 )     (8.2 )
Bank-owned life insurance income-net
    (151 )     (1.7 )     (152 )     (1.9 )     (124 )     (3.1 )
Tax credit from limited partnerships less amortization, net
    (131 )     (1.5 )     (133 )     (1.7 )     (68 )     (1.7 )
Non-decuctible expenses
    35       0.4       38       0.5       51       1.3  
Other, net
    101       1.2       33       0.4       13       0.2  
 
                                   
 
                                               
Effective income tax and rate
  $ 2,326       27.0 %   $ 2,055       25.9 %   $ 896       22.5 %
 
                                   
     The net deferred tax liability recorded by the Corporation consisted of the following tax effects of temporary timing differences at December 31, 2010 and 2009:
                 
(In Thousands)   2010     2009  
Deferred tax assets:
               
Allowance for loan losses
  $ 1,376     $ 1,101  
Allowance for off balance sheet losses
    3       3  
Deferred compensation and director’s fees
    457       418  
Non-accrual loan interest
    23       21  
Investment in limited partnerships
    126       106  
Impairment losses on investment securities
    393       378  
*   Property valuation
    238       280  
Capital loss carryforward
    159       238  
 
           
Total
    2,775       2,545  
 
           
 
               
Deferred tax liabilities:
               
Loan fees and costs
    (63 )     (32 )
Bond accretion
    (88 )     (73 )
Depreciation
    (619 )     (598 )
Investment in insurance agency
    (22 )     (22 )
*   Intangibles
    (1,185 )     (1,186 )
*   Other
    (30 )     (27 )
Unrealized investment security gains
    (1,144 )     (1,299 )
 
           
Total
    (3,151 )     (3,237 )
 
           
Deferred tax liability, net
  $ (376 )   $ (692 )
 
           
     The above net deferred tax liability is included in other liabilities on the accompanying consolidated balance sheets. Those items noted with an (*) resulted from the 2008 acquisition of Columbia Financial Corporation, see Note 15. Except for the capital loss carryover, it is anticipated that all tax assets shown above will be realized and accordingly no valuation allowance was provided. The Corporation has a capital loss carryforward in the amount of $668,000 as of December 31, 2010. It is possible, due to term limits on

53


 

the carryover, that not all of the capital losses will be utilized before expiration. Therefore, the Corporation has recorded a valuation allowance in the amount of $200,000 as of December 31, 2010.
     The Corporation and the Bank file a consolidated federal income tax return. The Corporation is also required to file a separate state income tax return and has available state operating loss carryforwards totaling $1,344,000. The losses expire through 2038. The related deferred net state tax asset in the amount of $134,000 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 deferral profit sharing plan for the benefit of its employees. Under the salary deferral component, employees may elect to contribute a percentage of compensation up to the maximum amount allowable not to exceed the limits of IRS Code Section 401(K). The Corporation matches 100% of employee contributions up to 4% of compensation. Under the profit sharing component, contributions are made at the discretion of the Bank’s Board of Directors. Matching contributions amounted to $204,000, $195,000 and $157,000 for the years ended December 31, 2010, 2009 and 2008, respectively. There were no discretionary contributions for the years ended December 31, 2010, 2009 and 2008.
DEFERRED COMPENSATION PLANS
Directors
     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 5-year certificate of deposit rate, which was 4.62% in 2008. The certificate of deposit rate will reset in January 2013. Three directors have elected to participate in this program and the total accrued liability as of December 31, 2010 and 2009 was $255,000, and $243,000, respectively.
     Total directors’ fees, including amounts currently paid for the years ended December 31, 2010, 2009 and 2008 were $274,000, $284,000 and $244,000, respectively.
     During 2008, the directors were given the option of receiving or deferring their directors’ fees under a non-qualified deferred compensation plan with the same features as the above plan. The interest rate that will be paid beginning with the January 2009 director pay is 4% for a 5-year period and will reset in January 2014. Two directors elected to participate in this plan for 2010. Total accrued liability as of December 31, 2010 and 2009 was $70,000 and $33,000. The same two directors have elected to participate in this plan for 2011.
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 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 this 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 receives $225,000 payable monthly over a 10-year period commencing in February 2003. Under another agreement, another executive officer receives $175,000 payable monthly over a 10-year period commencing in April 2003. This second agreement also provided post-employment health care benefits to the executive officer until the attainment of age 65. As of December 31, 2010 and 2009, the net cash value of insurance policies was $492,000 and $464,000, respectively, and the total accrued liability, equal to the present value of these obligations, was $82,000 and $117,000, respectively, relating to these retired executive officers’ deferred compensation plans.
     In April 2003, the Bank entered into non-qualified deferred compensation agreements with three senior officers to provide supplemental retirement benefits commencing with the executive’s retirement and ending 15 years thereafter. One participant began payout during 2009 with amount received being $8,000 during 2009 and $20,000 each year thereafter. The deferred compensation expense related to these agreements for the years ended December 31, 2010, 2009 and 2008 was $99,000, $113,000 and $119,000 respectively, and the total accrued liability as of December 31, 2010 and 2009 was $737,000 and $658,000, respectively.
     In 2009, the Bank entered into a non-qualified deferred compensation agreement with one senior officer to provide supplemental retirement benefits commencing with the executive’s retirement and ending 15 years thereafter. The deferred compensation expense related to this agreement for the years ended December 31, 2010 and 2009 was $23,000 and $12,000 respectively and the total accrued liability as of December 31, 2010 and 2009 was $35,000 and $12,000, respectively.

54


 

     In December 2010, the Bank entered into a Supplemental Executive Retirement Plan for one senior officer to provide supplemental retirement benefits commencing with the executive’s retirement and ending 15 years thereafter. This plan expense commences in 2011; therefore, no expense or accrued liability exists at December 31, 2010.
     The Bank entered into agreements to provide post-retirement benefits to employees in the form of life insurance payable to the employee’s estate upon their death through endorsement split dollar life insurance arrangements. The Corporation adopted the guidance in FASB ASC 715-60-35 Compensation — Retirement Benefits — Post Retirement effective January 1, 2007 to recognize the liability for future benefits in the amount of $12,000. The post- retirement benefit expense related to these split dollar arrangements amounted to $0, $23,000 and $72,000 for the years ended December 31, 2010, 2009 and 2008. The total accrued liability for the split dollar post retirement benefits amounted to $166,000 for the years ended December 31, 2010 and 2009, respectively.
     Total deferred compensation and split dollar post retirement benefit expense for current and retired officers for the years ended December 31, 2010, 2009 and 2008 was $122,000, $155,000 and $187,000, respectively, and the total accrued liability under the officers’ deferred compensation and split dollar post retirement plans as of December 31, 2010 and 2009 was $1,017,000 and $953,000, respectively.
14. LEASE COMMITMENTS AND CONTINGENCIES
     The Corporation leases facilities and office equipment under operating leases expiring through 2016. Rental expense under operating leases totaled approximately $219,000 in 2010, $149,000 in 2009 and $78,000 in 2008. Minimum future rental payments under non-cancelable operating leases having remaining terms in excess of 1 year as of December 31, 2010 are as follows:
         
(In Thousands)        
2011
  $ 280  
2012
    282  
2013
    123  
2014
    41  
2015
    5  
Thereafter
    5  
 
     
Total
  $ 736  
 
     
     In 2008, the Corporation purchased the license to utilize banking software, and entered into contractual commitments to pay annual license fees associated with the software. The license fee was waived for the first year and future fees are payable based on the Bank’s asset size. As part of the agreement, the second and third year license fees will be based on the Bank’s asset size as of March 31, 2008. The Corporation estimates the annual fees for the years ended December 31, 2011 and 2012 will amount to $166,000 and $191,000, respectively.
15. ACQUISITION
     On July 18, 2008, the Corporation completed its acquisition of Columbia Financial Corporation (“CFC”). Under the terms of the Agreement and Plan of Reorganization dated as of November 29, 2007, CFC merged with and into the Corporation; and the Corporations’ wholly-owned subsidiary, Columbia County Farmers National Bank merged with and into the Bank. The Corporation acquired 100% of the outstanding shares of CFC for a total purchase price of $26,316,000. The transaction was accounted for in accordance with FASB ASC 805, Business Combinations (SFAS No. 141-Business Combinations). In connection therewith, the Corporation issued approximately 1,030,286 shares of its common stock and paid cash of approximately $3,000 in lieu of the issuance of fractional shares in exchange for all of the issued and outstanding shares of CFC common stock. Assets and liabilities of CFC are recorded at estimated fair values as of the acquisition date and the results of the acquired entity operations are included in income from that date. The fair values of acquired assets and liabilities, including identified intangible assets, were finalized as quickly as possible following the acquisition. The CFC purchase price allocation is complete.
     The following table shows the excess purchase price of the carrying value of net assets acquired, purchase price allocation and resulting goodwill recorded for this acquisition. Changes to the carrying amount of goodwill, premises and equipment and junior subordinate debentures, since the merger date, reflect additional information obtained about the fair value of the assets acquired and liabilities assumed.

55


 

         
(In Thousands)        
Purchase price
  $ 26,316  
Carrying value of net assets acquired
    (17,855 )
 
     
Excess of purchase price over carrying value of net assets acquired
    8,461  
 
       
Purchase accounting adjustments:
       
Loans
    30  
Premises and equipment
    853  
Deposits
    1,235  
Severance and related costs
    840  
Deferred taxes
    208  
 
     
Subtotal
    11,627  
Core deposit intangibles
    (3,690 )
 
     
Goodwill
  $ 7,937  
 
     
The following table summarized the estimated fair value of net assets acquired:
         
(In Thousands)        
Assets
       
Cash and cash equivalents
  $ 5,157  
Interest-bearing deposits in other banks
    129  
Federal funds sold
    517  
Investment securities
    138,257  
Loans, net of allowance for loan losses
    160,724  
Premises and equipment
    6,492  
Accrued interest receivable
    1,534  
Bank-owned life insurance
    3,462  
Investment in limited partnerships
    919  
Goodwill and other intangibles
    11,627  
Other assets
    564  
 
     
Total assets
  $ 329,382  
 
     
 
       
Liabilities
       
Deposits
  $ 264,692  
Borrowings
    31,883  
Junior subordinate debentures
    4,640  
Accrued interest payable
    764  
Other liabilities
    1,087  
 
     
Total liabilities
  $ 303,066  
 
     
 
       
Fair value of net assets acquired
  $ 26,316  
 
     
The following unaudited pro forma consolidated financial information presents the combined results of operations of the Corporation as if the CFC acquisition had occurred as of the beginning of 2008:

56


 

         
    For the Year Ended  
(In Thousands, Except Per Share Data)   December 31, 2008  
Net interest income
  $ 19,132  
Provision for loan losses
    775  
 
     
Net interest income after provision for loan losses
    18,357  
Non-interest income
    4,739  
Non-interest expense
    16,923  
 
     
Income before income tax provision
    6,173  
Income tax provision
    1,743  
 
     
Net income
  $ 4,430  
 
     
 
       
Net income per common share
  $ 1.97  
 
     
Average common shares outstanding
    2,251,486  
 
     
The pro forma results include amortization of fair value adjustments on loans, premises and equipment, deposits, and debt, and amortization of newly acquired intangibles. The proforma number of average shares outstanding includes adjustments for shares issued for the acquisitions but does not assume any incremental repurchases. The pro forma results presented do not reflect cost savings or revenue enhancements anticipated from the acquisition and are not necessarily indicative of what actually would have occurred if the acquisition had been completed as of the beginning of the periods presented, nor are they necessarily indicative of future consolidated results.
16. RELATED PARTY TRANSACTIONS
     Certain directors and executive officers of the Corporation and the Bank, as well as companies in which they are principal owners (i.e., at least 10% ownership), were indebted to the Bank at December 31, 2010 and 2009. 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 these related party loans consisted of the following:
                                 
    Beginning                     Ending  
(In Thousands)   Balance     Additions     Payments     Balance  
 
2010
  $ 7,845     $ 995     $ (998 )   $ 7,842  
2009
    7,803       1,441       (1,399 )     7,845  
     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 2010 and 2009 presented an off-balance sheet risk to the extent of undisbursed funds in the amount of $3,842,000 and $3,139,000 respectively.
     Deposits from certain officers and directors and/or their affiliated companies held by the Bank amounted to $3,462,000 and $3,715,000 at December 31, 2010 and 2009, respectively.
     The total consolidated loans made by the bank at December 31, 2010, to its directors and executive officers as a group, members of their immediate families and companies in which they have a 10% or more ownership interest was $10,286,000 or approximately 15.2 percent of the Corporation’s total consolidated capital accounts. This amount also represented the largest amount of all these loans in 2010. These loans did not involve more than the normal risk of collectability nor did they present other unfavorable features.
17. REGULATORY MATTERS
     Dividends paid by the Corporation are generally provided from dividends paid to it by the Bank. Under provisions of the Pennsylvania Banking Code, cash dividends may be paid by the Bank from accumulated net earnings (retained earnings) as long as minimum capital requirements are met. The minimum capital requirements stipulate that the Bank’s surplus or excess of capital be equal to the amount of capital stock. The Bank carries capital in excess of capital requirements. The Bank has a balance of $21.9 million in its retained earnings at December 31, 2010, which is fully available for the payout of cash dividends. In order for the Corporation to maintain its financial holding company status, all banking subsidiaries must maintain a well capitalized status. The Corporation’s balance of retained earnings at December 31, 2010 is $36.4 million and would be available for the payout of cash dividends, although payment of dividends to such extent would not be prudent or likely. In 2009 the Federal Reserve Board notified all bank holding companies that dividends should be eliminated, deferred or significantly reduced if the bank holding company’s net income for the past four quarters, net of dividends paid during that period, is not sufficient to fully fund the dividends; the bank

57


 

holding company’s prospective rate of earnings retention is not consistent with the bank holding company’s capital needs and overall, current and prospective financial condition; or the bank holding company will not meet or is in danger of meeting its minimum regulatory capital adequacy ratios.
     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.
     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). Management believes, as of December 31, 2009 and 2008, that the Corporation and the Bank met all capital adequacy requirements to which they are subject.
     As of December 31, 2010, the Bank was categorized 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.
     The following table reflects the Corporation’s actual consolidated capital amounts and ratios at December 31:
                                 
    2010     2009  
(In Thousands)   Amount     Ratio     Amount     Ratio  
Total Capital
(to Risk-weighted Assets)
                               
Actual
  $ 64,476       18.5 %   $ 60,322       17.6 %
For Capital Adequacy Purposes
    27,884       8.0       27,394       8.0  
To Be Well-Capitalized
    34,855       10.0       34,243       10.0  
 
                               
Tier I Capital
(to Risk-weighted Assets)
                               
Actual
  $ 60,114       17.3 %   $ 56,102       16.4 %
For Capital Adequacy Purposes
    13,942       4.0       13,697       4.0  
To Be Well-Capitalized
    20,913       6.0       20,546       6.0  
 
                               
Tier I Capital
(to Average Assets)
                               
Actual
  $ 60,114       10.0 %   $ 56,102       9.8 %
For Capital Adequacy Purposes
    24,034       4.0       22,861       4.0  
To Be Well-Capitalized
    30,043       5.0       28,577       5.0  
     The Corporation’s capital ratios are not materially different from those of the Bank.
18. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK
     The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and commercial letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments. The Corporation does not engage in trading activities with respect to any of its financial instruments with off-balance sheet risk.
     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, 2010 and 2009 were as follows:

58


 

                 
(In Thousands)   2010     2009  
Financial instruments whose contract amounts represents credit risk:
               
Commitments to extend credit
  $ 65,926     $ 71,868  
Standby letters of credit
    2,674       3,393  
Dealer floor plans
    966       932  
Loans held for sale
    2,005       267  
     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, 2010 varied from 0 percent to 100 percent. The average amount collateralized was 78.8 percent.
     The Corporation’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit is represented by the contractual notional amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations, as it does for on-balance sheet instruments.
     The Corporation granted commercial, consumer and residential loans to customers primarily within Pennsylvania. Of the total loan portfolio, 80.5% was for real estate loans, principally residential. It was the opinion of management that this high concentration did not pose an adverse credit risk. Further, it is management’s opinion that the remainder of the loan portfolio was balanced and diversified to the extent necessary to avoid any significant concentration of credit.
19. FAIR VALUE MEASUREMENTS
     Effective January 1, 2008, the Corporation adopted FASB ASC 820-10 (SFAS No. 157), which, among other things, requires enhanced disclosures about assets and liabilities carried at fair value. FASB ASC 820-10 establishes a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring assets and liabilities at fair value. The standard describes three levels of inputs that may be used to measure fair values:
     
Level I:
  Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
 
   
Level II:
  Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments of which can be directly observed.
 
   
Level III:
  Assets and liabilities that have little or no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into determination of fair value require significant management judgment or estimation.
     The following table presents the assets reported on the consolidated statements of financial condition at their fair value as of December 31, 2010 and 2009 by level within the fair value hierarchy. As required by FASB ASC 820-10, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
                                 
            December 31, 2010        
(In Thousands)   Level I     Level II     Level III     Total  
Assets Measured on a Recurring Basis:
                               
Investment Securities, available-for-sale
  $ 2,084     $ 205,089     $     $ 207,173  

59


 

                                 
            December 31, 2009        
(In Thousands)   Level I     Level II     Level III     Total  
Assets Measured on a Recurring Basis:
                               
Investment Securities, available-for-sale
  $ 1,697     $ 218,569     $     $ 220,266  
     At December 31, 2010 and 2009, investments measured at fair value on a recurring basis and the valuation methods used are as follows:
                                 
            December 31, 2010        
    Level I     Level II     Level III     Total  
(In Thousands)                                
Available for sale securities
                               
Obligation of US Government Agencies
                               
Mortgage-backed
  $     $ 132,515     $     $ 132,515  
Other
          58,903             58,903  
Obligations of state and political subdivisions
          13,671             13,671  
Equity securities
    2,084                   2,084  
 
                       
 
  $ 2,084     $ 205,089     $     $ 207,173  
 
                       
                                 
            December 31, 2009        
(In Thousands)   Level I     Level II     Level III     Total  
Available for sale securities
                               
Obligation of US Government Agencies
                               
Mortgage-backed
  $     $ 138,856     $     $ 138,856  
Other
          68,339             68,339  
Obligations of state and political subdivisions
          11,374             11,374  
Equity securities
    1,697                   1,697  
 
                       
 
  $ 1,697     $ 218,569     $     $ 220,266  
 
                       
     The estimated fair values of equity securities classified as Level I are derived from quoted market prices in active markets; these assets consists mainly of stocks held in other banks. The estimated fair values of all debt securities classified as Level II are obtained from nationally-recognized third-party pricing agencies. The estimated fair values are derived primarily from cash flow models, which include assumptions for interest rates, credit losses, and prepayment speeds. The significant inputs utilized in the cash flow models are based on market data obtained from sources independent of the Corporation (observable inputs), and are therefore classified as Level II within the fair value hierarchy.
     The following table presents the assets reported on the consolidated statements of financial condition at their fair value on a non-recurring basis as of December 31, 2010 and 2009 by level within the fair value hierarchy. As required by FASB ASC 820-10, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
                                 
            December 31, 2010        
(In Thousands)   Level I     Level II     Level III     Total  
Assets Measured on a Non-recurring Basis:
                               
Impaired Loans
  $     $ 4,764     $     $ 4,764  
Loans Held for Sale
          2,005             2,005  
Mortgage Servicing Rights
          491             491  
Other Real Estate Owned
                       
 
                       
 
  $     $ 7,260     $     $ 7,260  
 
                       

60


 

                                 
    December 31, 2009  
(In Thousands)   Level I     Level II     Level III     Total  
Assets Measured on a Non-recurring Basis:
                               
Impaired Loans
  $     $ 4,839     $     $ 4,839  
Loans Held for Sale
          267             267  
Mortgage Servicing Rights
          344             344  
Other Real Estate Owned
          29             29  
 
                       
 
  $     $ 5,479     $     $ 5,479  
 
                       
20. ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS
     The Corporation is required to disclose estimated fair values for its financial instruments. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. 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. FASB ASC 825-10 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.
     At December 31, 2010 and 2009, the carrying values and estimated fair values of financial instruments are presented in the table below:
                                 
    2010     2009  
    Carrying     Estimated     Carrying     Estimated  
(In Thousands)   Amount     Fair Value     Amount     Fair Value  
     
Financial Assets:
                               
Cash and short-term instruments
  $ 27,595     $ 27,595     $ 11,459     $ 11,459  
Investment securities
    207,173       207,173       220,266       220,266  
Restricted securities
    3,012       3,012       2,984       2,984  
Loans, net
    335,652       341,814       326,279       329,726  
Cash surrender value of bank owned life insurance
    11,942       11,942       11,440       11,440  
Accrued interest receivable
    1,632       1,632       2,006       2,006  
     
 
                               
Financial Liabilities:
                               
Interest- bearing deposits
    410,915       414,706       406,554       410,168  
Noninterest- bearing deposits
    62,877       62,877       55,734       55,734  
Short-term borrowings
    58,759       58,759       51,997       51,997  
Long-term borrowings
    6,123       6,303       15,128       15,375  
Junior subordinate debentures
    4,640       4,640       4,640       4,640  
Accrued interest payable
    652       652       859       859  
     
 
                               
Off-Balance Sheet Assets (Liabilities):
                               
Commitments to extend credit
          $ 65,926             $ 71,868  
Standby letters of credit
            2,674               3,393  
Dealer floor plans
            966               932  
     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.
    RESTRICTED SECURITIES
     The carrying value of regulatory stock approximates fair value based on applicable redemption provisions.

61


 

     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
     ACCRUED INTEREST RECEIVABLE AND PAYABLE
     The fair values are equal to the current carrying value.
     DEPOSITS
     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, 2010 and 2009.
     Fair values for fixed rate Certificates of Deposit were estimated using a discounted cash flow calculation that applied interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
     SHORT-TERM BORROWINGS
     The carrying amounts of federal funds purchased and securities sold under agreements to repurchase and other short-term borrowings approximated their fair values.
     LONG-TERM BORROWINGS
     The fair values of long-term borrowings, other than capitalized leases, are estimated using discounted cash flow analyses based on the Corporation’s incremental borrowing rate for similar instruments. The carrying amounts of capitalized leases approximated their fair values, because the incremental borrowing rate used in the carrying amount calculation was at the market rate.
     COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
     Management estimated that there were no material differences between the notional amount and the estimated fair value of those off-balance sheet items, because they were primarily composed of unfunded loan commitments which were generally priced at market value at the time of funding.
21. PARENT COMPANY FINANCIAL INFORMATION
     Condensed financial information for CCFNB Bancorp, Inc. (Parent Company only) was as follows:
                         
BALANCE SHEETS   December 31,  
(In Thousands)   2010     2009     2008  
     
Assets
                       
Cash
  $ 530     $ 793     $ 524  
Investment in subsidiary
    68,763       65,927       61,568  
Investment in other equity securities
    2,084       1,697       2,292  
Prepayments and other assets
    1,121       1,226       942  
Receivable from subsidiary
          109       200  
     
Total Assets
  $ 72,498     $ 69,752     $ 65,526  
     
Liabilities and Stockholders’ Equity
                       
Junior subordinate debentures
  $ 4,640     $ 4,640       4,640  
Accrued expenses and other liabilities
    4       26     $ 111  
     
Total Liabilities
    4,644       4,666       4,751  
     
Stockholders’ Equity
                       
Common stock
    2,859       2,838       2,816  
Surplus
    27,964       27,539       27,173  
Retained earnings
    36,397       32,723       29,164  
Accumulated other comprehensive income
    2,221       2,523       1,622  
Treasury stock
    (1,587 )     (537 )      
     
Total Stockholders’ Equity
    67,854       65,086       60,775  
     
Total Liabilities and Stockholders’ Equity
  $ 72,498     $ 69,752     $ 65,526  
     

62


 

                         
STATEMENTS OF INCOME   Years Ended December 31,  
(In Thousands)   2010     2009     2008  
     
Income
                       
Dividends from subsidiary bank
  $ 3,130     $ 2,818     $ 2,359  
Dividends — other
    44       55       81  
Securities losses, net
    (42 )     (383 )     (431 )
     
Total Income
    3,132       2,490       2,009  
Operating expenses
    212       245       202  
     
Income Before Taxes and Equity in Undistributed
                       
Net Income of Subsidiary and Insurance Agency
    2,920       2,245       1,807  
Applicable income tax benefit
    (14 )     (204 )     (206 )
     
Income Before Equity in Undistributed Net Income of Subsidiary and Equity in Income from Insurance Agency
    2,934       2,449       2,013  
Equity in undistributed income of subsidiary
    3,370       3,414       1,059  
Equity in income from investment in insurance agency
          14       6  
     
Net Income
  $ 6,304     $ 5,877     $ 3,078  
     
                         
STATEMENTS OF CASH FLOWS   Years Ended December 31,  
(In Thousands)   2010     2009     2008  
     
Operating Activities:
                       
Net income
  $ 6,304     $ 5,877     $ 3,078  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Securities losses (gains)
          314       (6 )
Impairment loss on securites
    42       69       437  
Equity in undistributed net income of subsidiary
    (3,370 )     (3,414 )     (1,059 )
Decrease (increase) in amounts due from subsidiary
    109       (44 )     (219 )
Decrease in income taxes and accrued expenses payable
    (30 )     (230 )     (263 )
     
Net Cash Provided By Operating Activities
    3,055       2,572       1,968  
     
Investing Activities:
                       
Purchase of equity securities
    (78 )           (153 )
Acquisition of bank cash
                251  
Proceeds from sale of equity securities
          164       51  
     
Net Cash (Used in) Provided By Investing Activities
    (78 )     164       149  
     
Financing Activities:
                       
Acquisition of treasury stock
    (1,050 )     (537 )     (398 )
Proceeds from issuance of common stock
    440       388       267  
Cash dividends
    (2,630 )     (2,318 )     (1,593 )
     
Net Cash Used In Financing Activities
    (3,240 )     (2,467 )     (1,724 )
     
(Decrease) increase in Cash and Cash Equivalents
    (263 )     269       393  
Cash and Cash Equivalents at Beginning of Year
    793       524       131  
     
Cash and Cash Equivalents at End of Year
  $ 530     $ 793     $ 524  
     

63


 

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, 2010 and 2009, 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, 2010. CCFNB Bancorp, Inc.’s management is responsible for these consolidated financial statements. 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 audits 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, 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, 2010 and 2009, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2010 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   
March 8, 2011 

64


 

         
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
     None.
Item 9A. Controls and Procedures
(a) Disclosure Controls and Procedures.
     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 Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosure.
     We have created a disclosure committee. The committee consists of eight 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 periodically.
     We design internal control 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 CFO, 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 Corporation 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 CFO 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 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 CFO require that the CEO and CFO disclose that information to our Board’s Audit Committee and to our independent auditors and to report on related matters in this section of our Annual Report. In the professional auditing literature, “significant deficiencies” are referred to as “reportable conditions”. These are control issues that could have a significant adverse effect on the ability to record, process, summarize and report financial data in the financial statements. A “material weakness” is defined in the auditing literature as a particularly serious reportable condition where the internal control does not reduce to a relatively low level the risk that misstatements caused by error or fraud may occur in amounts that would be material in relation to the financial statements and not be detected within a timely period by employees in the normal course of performing their assigned functions. In addition, we sought to deal with other controls matters in the controls evaluation, and in each case if a problem was identified, we considered what revision, improvement or correction to make in accord with our on-going procedures.

65


 

     In accord with Commission requirements, the CEO and CFO note that, as of December 31, 2010, 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. The Corporation’s management, including the Corporation’s CEO and CFO, have evaluated the effectiveness of the Corporation’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (“Exchange Act”). Based upon their evaluation, the CEO and CFO concluded that, as of the end of the period covered by this report, the Corporation’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Corporation files or submits under the Exchange Act with the Commission is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and is accumulated and communicated to the Corporation’s management, including its CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
(b) Management’s Report on Internal Control Over Financial Reporting
     Management of the Corporation is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act. The Corporation’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
     Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
     A material weakness is a significant deficiency (as defined in Public Company Accounting Oversight Board Auditing Standard No. 2), or a combination of significant deficiencies, that results in there being more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by management or employees in the normal course of performing their assigned functions.
     Management assessed the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment, management believes that, as of December 31, 2010, the Corporation’s internal control over financial reporting was effective.
     This annual report does not include an attestation report of the Corporation’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Corporation’s registered public accounting firm pursuant to rules of the Commission that permit the Corporation to provide only management’s report in this annual report.
         
   
/s/ Lance O. Diehl    
President 
Chief Executive Officer
 
 
Date: March 8, 2011     
   
/s/ Jeffrey T. Arnold    
Chief Financial Officer and Treasurer
 
 
Date: March 8, 2011     
 
(c) Changes to Internal Control Over Financial Reporting
     There were no changes in the Corporation’s internal control over financial reporting during the three months ended December 31, 2010 that have materially impacted, or are reasonably likely to material affect, the Corporation’s internal control over financial reporting.

66


 

Item 9B. Other Information
    None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Directors
     For information relating to the directors of the Corporation, the section captioned “Board of Directors” in the Corporation’s Proxy Statement for the 2011 Annual Meeting of Stockholders is incorporated by reference.
Executive Officers
     For information relating to officers of the Corporation, the section captioned “Executive Compensation” in the Corporation’s Proxy Statement for the 2011 Annual Meeting of Stockholders is incorporated by reference.
Compliance with Section 16(a) of the Exchange Act
     For information regarding compliance with Section 16(a) of the Exchange Act, the section captioned “Stock Ownership” in the Corporation’s Proxy Statement for the 2011 Annual Meeting of Stockholders is incorporated by reference.
Disclosure of Code of Ethics
     The Corporation has adopted a Code of Ethics that applies to directors, officers, and employees of the Corporation and the Bank. A copy of the Code of Ethics is posted on the Corporation’s website at www.firstcolumbiabank.com. Copies of the Code of Ethics may be obtained without charge by writing to CCFNB Bancorp, Inc., 232 East Street, Bloomsburg, PA 17815; Attn: Mr. Jeffrey T. Arnold, CFO and Treasurer. The Corporation intends to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding an amendment to, or a waiver from, a provision of its Code of Ethics by posting such information on its website.
Corporate Governance
     For information regarding the nominating and audit committees, the sections captioned “Corporate Governance”, “Board of Directors” and “Audit Committee Report”, in the Corporation’s Proxy Statement for the 2011 Annual Meeting of Stockholders are incorporated by reference.
Item 11. Executive Compensation
     For information regarding executive compensation, the section captioned “Executive Compensation” in the Corporation’s Proxy Statement for the 2011 Annual meeting of Stockholders is incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
     Security Ownership of Certain Beneficial Owners Information required by this item is incorporated herein by reference to the section captioned “Stock Ownership” in the Corporation’s Proxy Statement for the 2011 Annual Meeting of Stockholders.
     Security Ownership of Management Information required by this item is incorporated herein by reference to the section captioned “Stock Ownership” in the Corporation’s Proxy Statement for the 2011 Annual Meeting of Stockholders.
Item 13. Certain Relationships and Related Transactions, Director Independence
Certain Relationships and Related Transactions
     For information relating to transactions with related persons, the section captioned “Executive Compensation” in the Corporation’s Proxy Statement for the 2011 Annual Meeting of Stockholders is incorporated herein by reference.
Director Independence
     For information regarding director independence, the section captioned “Corporate Governance” in the Corporation’s Proxy Statement for the 2011 Annual Meeting of Stockholders is incorporated by reference.
Item 14. Principal Accounting Fees and Services
     For information regarding the principal accounting fees and expenses, the section captioned “Independent Registered Public Accounting Firm” in the Corporation’s Proxy Statement for the 2011 Annual Meeting of Stockholders is incorporated by reference.

67


 

PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this report:
  1.   The following financial statements are filed herewith in Item 8:
      Report of Independent Registered Public Accounting Firm
 
      Consolidated Balance Sheet as of December 31, 2010 and 2009
 
      Consolidated Statement of Income for the Years Ended December 31, 2010, 2009 and 2008
 
      Consolidated Statement of Changes in Stockholders’ Equity for the Years Ended December 31, 2010, 2009 and 2008
 
      Consolidated Statement of Cash Flows for the Years Ended December 31, 2010, 2009 and 2008
 
      Notes to Consolidated Financial Statements
  2.   All financial statement schedules are omitted because the required information is either not applicable, not required or is shown in the respective financial statement or in the notes thereto, which are incorporated by reference at subsection (a) (1) of this item.
 
  3.   The following exhibits are filed herewith, or, as indicated, incorporated by reference as a part of this report.
             
 
    3.1     Amended and Restated Articles of Incorporation (1)
 
    3.2     Amended Bylaws (9)
 
    10.1     Executive Employment Agreement of Lance O. Diehl (2)
 
    10.2     Executive Employment Agreement of Edwin A. Wenner (3)
 
    10.3     Form of Deferred Director Fees Agreement (4)
 
    10.4     Supplemental Executive Retirement Plan Agreement and Amendment of Lance O. Diehl (5))
 
    10.5     Supplemental Executive Retirement Plan Agreement and Amendment of Edwin A. Wenner (6)
 
    10.6     Supplemental Executive Retirement Plan Agreement of Paul Page (7)
 
    10.7     Executive Employment Agreement for Paul Page (8)
 
    10.8     Executive Employment Agreement of Jeffrey T. Arnold (10)
 
    10.9     Supplemental Executive Retirement Plan Agreement of Jeffrey T. Arnold (11)
 
    21     List of Subsidiaries of the Corporation
 
    23     Consent of Independent Registered Public Accounting Firm
 
    31.1     Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer
 
    31.2     Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer
 
    32.1     Section 1350 Certification of Principal Executive Officer
 
    32.2     Section 1350 Certification of Principal Financial Officer
 
(1)   Incorporated by reference to Exhibit 1 to Registrant’s Current Report on Form 8-K, dated May 9, 2005, filed with the commission on May 10, 2005.
 
(2)   Incorporated by reference to Exhibit 10.6 to Registrant’s Registration Statement on Form S-4 filed with the Commission on March 27, 2008.
 
(3)   Incorporated by reference to Exhibit 10.7 to Registrant’s Registration Statement on Form S-4 filed with the Commission on March 27, 2008.
 
(4)   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.
 
(5)   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.
 
(6)   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.
 
(7)   Incorporated by reference to Exhibit 1 to Registrant’s Current Report on Form 8-K, dated May 27, 2009, filed with the Commission on May 28, 2009.
 
(8)   Incorporated by reference to Exhibit 10.9 to Registrant’s Registration Statement on Form S-4 filed with the Commission on March 27, 2008.

68


 

(9)   Incorporated by reference to Exhibit 3.2 to Registrant’s Annual Report on Form 10-K, dated March 9, 2010, filed with the Commission on March 26, 2010.
 
(10)   Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K, dated December 14, 2010, filed with the Commission on December 17, 2010.
 
(11)   Incorporated by reference to Exhibit 10.2 to Registrant’s Current Report on Form 8-K, dated December 14, 2010, filed with the Commission on December 17, 2010.
(b) See item 15(a)(3)
(c) None.
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.
(Registrant)
         
   
By:   /s/ Lance O. Diehl   Date: March 8, 2011   
  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/ Robert W. Brewington, Jr.
 
Robert W. Brewington, Jr.
Director
  Date: March 8, 2011 
 
       
By:
  /s/ Edward L. Campbell
 
Edward L. Campbell.
Director
  Date: March 8, 2011 
 
       
By:
  /s/ Lance O. Diehl
 
Lance O. Diehl
President, Chief Executive Officer and
Director (Principal Executive Officer)
  Date: March 8, 2011 
 
       
By:
  /s/ Robert W. Dillon
 
Robert W. Dillon
Director
  Date: March 8, 2011 
 
       
By:
  /s/ Frank D. Gehrig
 
Frank D. Gehrig
Director
  Date: March 8, 2011 
 
       
By:
  /s/ William F. Gittler
 
William F. Gittler
Director
  Date: March 8, 2011 
 
       
By:
  /s/ Glenn E. Halterman
 
Glenn E. Halterman
Director, Chairman of the Board
  Date: March 8, 2011 

69


 

         
By:
  /s/ Elwood R. Harding, Jr..
 
Elwood R. Harding, Jr.
Director, Vice Chairman of the Board
  Date: March 8, 2011 
 
       
By:
  /s/ Joanne I. Keenan
 
Joanne I. Keenan
Director
  Date: March 8, 2011 
 
       
By:
  /s/ Willard H. Kile, Jr.
 
Willard H. Kile, Jr.
Director
  Date: March 8, 2011 
 
       
By:
  /s/ W. Bruce McMichael, Jr.
 
W. Bruce McMichael, Jr.
Director
  Date: March 8, 2011 
 
       
By:
  /s/ Mary Ann B. Naugle
 
Mary Ann B. Naugle
Director
  Date: March 8, 2011 
 
       
By:
  /s/ Andrew B. Pruden
 
Andrew B. Pruden
Director
  Date: March 8, 2011 
 
       
By:
  /s/ Charles B. Pursel
 
Charles B. Pursel
Director
  Date: March 8, 2011 
 
       
By:
  /s/ Steven H. Shannon
 
Steven H. Shannon
Director
  Date: March 8, 2011 
 
       
By:
  /s/ Jeffrey T. Arnold
 
Jeffrey T. Arnold
Chief Financial Officer and Treasurer
(Principal Financial Officer)
(Principal Accounting Officer)
  Date: March 8, 2011 
INDEX TO EXHIBITS
             
Item Number   Description   Page
21
  List of Subsidiaries of the Corporation     71  
23
  Consent of Independent Registered Public Accounting Firm     72  
31.1
  Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer     73  
31.2
  Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer     74  
32.1
  Section 1350 Certification of Principal Executive Officer     75  
32.2
  Section 1350 Certification of Principal Financial Officer     76  

70