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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year-ended December 31, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____________to________________
Commission file Number: 0-19028
CCFNB BANCORP, INC.
(Name of small business issuer in its charter)
PENNSYLVANIA 23-2254643
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
232 East Street, Bloomsburg, Pennsylvania 17815
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (570) 784-4400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $1.25 per share.
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the past 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated
filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the voting and non-voting common
equity held by non-affiliates of the Registrant based on the average of the bid
and asked prices of $27.28 at February 28, 2005, was $34,484,184.
As of February 28, 2005, the Registrant had outstanding 1,264,083
shares of its common stock, par value $1.25 per share.
Page 1 of 84
Exhibit Index on Page 71
CCFNB BANCORP, INC.
FORM 10-K
INDEX
Page
----
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS........................................................... 3
ITEM 1. BUSINESS......................................................................................... 3
ITEM 2. PROPERTIES....................................................................................... 19
ITEM 3. LEGAL PROCEEDINGS................................................................................ 19
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........................ 19
ITEM 6. SELECTED FINANCIAL DATA.......................................................................... 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............ 21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....................................... 35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................................................... 36
ITEM 9A. CONTROLS AND PROCEDURES.......................................................................... 61
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................................... 62
ITEM 11. EXECUTIVE COMPENSATION........................................................................... 65
FIVE-YEAR PERFORMANCE GRAPH.............................................................................. 69
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS... 70
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................................... 70
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES........................................................... 70
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K................................ 71
SIGNATURES ................................................................................................. 73
INDEX TO EXHIBITS........................................................................................... 75
2
CCFNB BANCORP, INC.
FORM 10-K
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This annual report on Form 10-K, other periodic reports filed by us under the
Securities Exchange Act of 1934, as amended, and any other written or oral
statements made by or on behalf of us may include "forward looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 which
reflect our current views with respect to future events and financial
performance. Such forward looking statements are based on general assumptions
and are subject to various risks, uncertainties, and other factors that may
cause actual results to differ materially from the views, beliefs and
projections expressed in such statements. These risks, uncertainties and other
factors include, but are not limited to:
- possible changes in economic and business conditions that may affect
the prevailing interest rates, the prevailing rates of inflation, or
the amount of growth, stagnation, or recession in the global, U.S.,
and Northcentral Pennsylvania economies, the value of investments,
collectibility of loans and the profitability of business entities;
- possible changes in monetary and fiscal policies, laws and
regulations, and other activities of governments, agencies and
similar organizations;
- the effects of easing of restrictions on participants in the
financial services industry, such as banks, securities brokers and
dealers, investment companies and finance companies, and changes
evolving from the enactment of the Gramm-Leach-Bliley Act which
became effective in 2000, and attendant changes in matters and
effects of competition in the financial services industry;
- the cost and other effects of legal proceedings, claims, settlements
and judgments; and
- our ability to achieve the expected operating results related to our
operations which depends on a variety of factors, including the
continued growth of the markets in which we operate consistent with
recent historical experience, and our ability to expand into new
markets and to maintain profit margins in the face of pricing
pressures.
The words "believe", "expect", "anticipate", "project" and similar expressions
signify forward looking statements. Readers are cautioned not to place undue
reliance on any forward looking statements made by or on behalf of us. Any such
statement speaks only as of the date the statement was made. We undertake no
obligation to update or revise any forward looking statements.
ITEM 1. BUSINESS
GENERAL
We are a registered financial holding company, bank holding company, and
Pennsylvania business corporation, and are headquartered in Bloomsburg,
Pennsylvania. We have one wholly-owned subsidiary which is Columbia County
Farmers National Bank or referred to as the Bank. A substantial part of our
business consists of the management and supervision of the Bank. Our principal
source of income is dividends paid by the Bank. At December 31, 2004, we had
approximately:
- $235 million in total assets;
- $150 million in loans;
- $172 million in deposits; and
- $ 29 million in stockholders' equity.
The Bank is a national banking association and member of the Federal Reserve
System whose deposits are insured by the Bank Insurance Fund of the FDIC. The
Bank is a full-service commercial bank providing a range of services and
products, including time and demand deposit accounts, consumer, commercial and
mortgage loans to individuals and small to medium-sized business in its
Northcentral Pennsylvania market area. The Bank also operates a full-service
trust department. A third-party brokerage is also resident in the Bank's office
in Lightstreet, Pennsylvania. At December 31, 2004, the Bank had 7 branch
banking offices which are located in the Pennsylvania county of Columbia.
3
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 system,
- customer bases, and
- regulatory oversight.
We have not operated any other reportable operating segments in the 3-year
period ended December 31, 2004. We have combined financial information for our
third-party brokerage operation with our financial information, because this
company does not meet the quantitative threshold for a reporting operating
segment.
We hold a 50 percent interest in a local insurance agency. The name of this
agency is Neighborhood Group, Inc. and trades under the fictitious name of
Neighborhood Advisors (insurance agency). Through this joint venture, we sell
insurance products and services. We account for this local insurance agency
using the equity method of accounting.
As of December 31, 2004, we had 89 employees on a full-time equivalent basis.
The Company and the Bank are not parties to any collective bargaining agreement
and employee relations are considered to be good.
SUPERVISION AND REGULATION
The following discussion sets forth the material elements of the regulatory
framework applicable to us and the Bank and provides certain specific
information. This regulatory framework is primarily intended for the protection
of investors in our common stock, depositors at the Bank and the Bank Insurance
Fund that insures bank deposits. To the extent that the following information
describes statutory and regulatory provisions, it is qualified by reference to
those provisions. A change in the statutes, regulations or regulatory policies
applicable to us or the Bank may have a material effect on our business.
INTERCOMPANY TRANSACTIONS
Various governmental requirements, including Sections 23A and 23B of the Federal
Reserve Act and Regulation W of the Federal Reserve Board, limit borrowings by
us from the Bank and also limit various other transactions between us and the
Bank. For example, Section 23A of the Federal Reserve Act limits to no more than
ten percent of its total capital the aggregate outstanding amount of the Bank's
loans and other "covered transactions" with any particular non-bank affiliate
(including a financial subsidiary) and limits to no more than 20 percent of its
total capital the aggregate outstanding amount of the Bank's covered
transactions with all of its affiliates (including financial subsidiaries). At
December 31, 2004, approximately $5.7 million was available for loans to us from
the Bank. Section 23A of the Federal Reserve Act also generally requires that
the Bank's loans to its non-bank affiliates (including financial subsidiaries)
be secured, and Section 23B of the Federal Reserve Act generally requires that
the Bank's transactions with its non-bank affiliates (including financial
subsidiaries) be on arm's-length terms. Also, we, the Bank, and any financial
subsidiary are prohibited from engaging in certain "tie-in" arrangements in
connection with extensions of credit or provision of property or services.
SUPERVISORY AGENCIES
As a national bank and member of the Federal Reserve System, the Bank is subject
to primary supervision, regulation, and examination by the Office of the
Comptroller of the Currency and secondary regulation by the FDIC. The Bank is
subject to extensive statutes and regulations that significantly affect its
business and activities. The Bank must file reports with its regulators
concerning its activities and financial condition and obtain regulatory approval
to enter into certain transactions. The Bank is also subject to periodic
examinations by its regulators to ascertain compliance with various regulatory
requirements. Other applicable statutes and regulations relate to insurance of
deposits, allowable investments, loans, leases, acceptance of deposits, trust
activities, mergers, consolidations, payment of dividends, capital requirements,
reserves against deposits, establishment of branches and certain other
facilities, limitations on loans to one borrower and loans to affiliated
persons, activities of subsidiaries and other aspects of the business of banks.
Recent federal legislation has instructed federal agencies to adopt standards or
guidelines governing banks' internal controls, information systems, loan
documentation, credit underwriting, interest rate exposure, asset growth,
compensation and benefits, asset quality, earnings and stock valuation, and
other matters. The federal banking agencies have great flexibility in
implementing standards on asset quality, earnings, and stock valuation.
Regulatory authorities have broad flexibility to initiate proceedings designed
to prohibit banks from engaging in unsafe and unsound banking practices.
4
We and the Bank are also affected by various other governmental requirements and
regulations, general economic conditions, and the fiscal and monetary policies
of the federal government and the Federal Reserve Board. The monetary policies
of the Federal Reserve Board influence to a significant extent the overall
growth of loans, leases, investments, deposits, interest rates charged on loans,
and interest rates paid on deposits. The nature and impact of future changes in
monetary policies are often not predictable.
We are subject to the jurisdiction of the SEC for matters relating to the
offering and sale of our securities. We are also subject to the SEC's rules and
regulations relating to periodic reporting, insider trader reports and proxy
solicitation materials. Our common stock is not listed for quotation of prices
on The NASDAQ Stock Market or any other nationally-recognized stock exchange.
However, daily bid and asked price quotations are maintained on the interdealer
electronic bulletin board system.
SUPPORT OF THE BANK
Under current Federal Reserve Board policy, we are expected to act as a source
of financial and managerial strength to the Bank by standing ready to use
available resources to provide adequate capital funds to the Bank during periods
of financial adversity and by maintaining the financial flexibility and
capital-raising capacity to obtain additional resources for assisting the Bank.
The support expected by the Federal Reserve Board may be required at times when
we may not have the resources or inclination to provide it.
If a default occurred with respect to the Bank, any capital loans to the Bank
from us would be subordinate in right of payment to payment of the Bank
depositors and certain of its other obligations.
LIABILITY OF COMMONLY CONTROLLED BANKS
The Bank can be held liable for any loss incurred, or reasonably expected to be
incurred, by the FDIC in connection with:
- the default of a commonly controlled FDIC-insured depository
institution or
- any assistance provided by the FDIC to a commonly controlled
FDIC-insured depository institution in danger of default.
"Default" generally is defined as the appointment of a conservator or receiver,
and "in danger of default" generally is defined as the existence of certain
conditions indicating that a default is likely to occur in the absence of
regulatory assistance.
DEPOSITOR PREFERENCE STATUTE
In the "liquidation or other resolution" of the Bank by any receiver, federal
legislation provides that deposits and certain claims for administrative
expenses and employee compensation against the Bank are afforded a priority over
the general unsecured claims against the Bank, including federal funds and
letters of credit.
ALLOWANCE FOR LOAN LOSSES
There are certain risks inherent in making all loans. These risks include
interest rate changes over the time period in which loans may be repaid, risks
resulting from changes in our Northcentral Pennsylvania area economy, risks
inherent in dealing with individual borrowers, and, in the case of a loan backed
by collateral, risks resulting from uncertainties about the future value of the
collateral.
Commercial loans and commercial real estate loans comprised 33.1 percent of our
total consolidated loans as of December 31, 2004. 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, an increase in the provision for loan losses and loan charge-offs.
We maintain an allowance for loan losses to absorb any loan losses based on,
among other things, our historical experience, an evaluation of economic
conditions, and regular reviews of any delinquencies and loan portfolio quality.
We cannot assure you that charge-offs in future periods will not exceed the
allowance for loan losses or that additional increases in the allowance for loan
losses will not be required. Additions to the allowance for loan losses would
result in a decrease in our net income and, possibly, our capital.
In evaluating our allowance for loan losses, we divide our loans into the
following categories:
- commercial,
- real estate mortgages,
- consumer, and
- unallocated.
5
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 "Non-Performing Assets," "Allowance for Loan Losses and Related
Provision," and "Summary of Loan Loss Experience," as well as Note 4, Item 8 to
this report.
SOURCES OF FUNDS
GENERAL. Our primary source of funds is the cash flow provided by our investing
activities, including principal and interest payments on loans and
mortgage-backed and other securities. Our other sources of funds are provided by
operating activities (primarily net income) and financing activities, including
borrowings and deposits.
DEPOSITS. We offer a variety of deposit accounts with a range of interest rates
and terms. We currently offer passbook and statement 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, 2004, our deposits totaled $172.5 million. Of the total deposit
balance, $9.8 million or 5.7 percent, represent Individual Retirement Accounts
and $24.5 million or 14.2 percent represent certificates of deposit in amounts
of $100,000 or more.
When we determine the levels of our deposit rates, consideration is given to
local competition, yields of U.S. Treasury securities and the rates charged for
other sources of funds. We have maintained a high level of core deposits, which
has contributed to our low cost of funds. Core deposits include savings, money
market, NOW and demand deposit accounts, which, in the aggregate, represented
50.5 percent of total deposits at December 31, 2004 and 48 percent of total
deposits at December 31, 2003.
For a further discussion of our deposits, please refer to Item 8 of this report
under Management's Discussion and Analysis of Financial Condition and Results of
Operations at "Deposits and Borrowed Funds," as well as Note 7, Item 8 to this
report.
CAPITAL REQUIREMENTS
We are subject to risk-based capital requirements and guidelines imposed by the
Federal Reserve Board, which are substantially similar to the capital
requirements and guidelines imposed by the Comptroller of the Currency on the
Bank. For this purpose, a bank's or bank holding company's assets and certain
specified off-balance sheet commitments are assigned to four risk categories,
each weighted differently based on the level of credit risk that is ascribed to
those assets or commitments. In addition, risk-weighted assets are adjusted for
low-level recourse and market-risk equivalent assets. A bank's or bank holding
company's capital, in turn, includes the following tiers:
- core ("Tier 1") capital, which includes common equity,
non-cumulative perpetual preferred stock, a limited amount of
cumulative perpetual preferred stock, and minority interests in
equity accounts of consolidated subsidiaries, less goodwill, certain
identifiable intangible assets, and certain other assets; and
- supplementary ("Tier 2") capital, which includes, among other items,
perpetual preferred stock not meeting the Tier 1 definition,
mandatory convertible securities, subordinated debt and allowances
for loan and lease losses, subject to certain limitations, less
certain required deductions.
6
We, like other bank holding companies, are required to maintain Tier 1 and
"Total Capital" (the sum of Tier 1 and Tier 2 capital, less certain deductions)
equal to at least four percent and eight percent of our total risk-weighted
assets (including certain off-balance sheet items, such as unused lending
commitments and standby letters of credit), respectively. At December 31, 2004,
we met both requirements, with Tier 1 and Total Capital equal to 19.3 percent
and 20.3 percent of total risk-weighted assets.
The Federal Reserve Board has adopted rules to incorporate market and interest
rate risk components into their risk-based capital standards. Under these
market-risk requirements, capital will be allocated to support the amount of
market risk related to a financial institution's ongoing trading activities.
The Federal Reserve Board also requires bank holding companies to maintain a
minimum "Leverage Ratio" (Tier 1 capital to adjusted total assets) of three
percent if the bank holding company has the highest regulatory rating and meets
certain other requirements, or of three percent plus an additional cushion of at
least one to two percentage points if the bank holding company does not meet
these requirements. At December 31, 2004, our leverage ratio was 12.2 percent.
The Federal Reserve Board may set capital requirements higher than the minimums
noted above for holding companies whose circumstances warrant it. For example,
bank holding companies experiencing or anticipating significant growth may be
expected to maintain strong capital positions substantially above the minimum
supervisory levels without significant reliance on intangible assets.
Furthermore, the Federal Reserve Board has indicated that it will consider a
"Tangible Tier 1 Leverage Ratio" (deducting all intangibles) and other
indications of capital strength in evaluating proposals for expansion or new
activities, or when a bank holding company faces unusual or abnormal risk. The
Federal Reserve Board has not advised us of any specific minimum leverage ratio
applicable to us.
The Bank is subject to similar risk-based capital and leverage requirements
adopted by the Comptroller of the Currency. The Bank was in compliance with the
applicable minimum capital requirements as of December 31, 2004. The Comptroller
of the Currency has not advised the Bank of any specific minimum leverage ratio
applicable to the Bank.
Failure to meet capital requirements could subject the Bank to a variety of
enforcement remedies, including the termination of deposit insurance by the
FDIC, and to certain restrictions on its business. The Federal Deposit Insurance
Corporation Improvements Act of 1991 ("FDICIA"), among other things, identifies
five capital categories for insured banks - well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized, and critically
undercapitalized - and requires federal bank regulatory agencies to implement
systems for "prompt corrective action" for insured banks that do not meet
minimum capital requirements based on these categories. The FDICIA imposed
progressively more restrictive constraints on operations, management, and
capital distributions, depending on the category in which an institution is
classified. Unless a bank is well capitalized, it is subject to restrictions on
its ability to offer brokered deposits, on "pass-through" insurance coverage for
certain of its accounts, and on certain other aspects of its operations. FDICIA
generally prohibits a bank from paying any dividend or making any capital
distribution or paying any management fee to its holding company if the bank
would thereafter be undercapitalized. An undercapitalized bank is subject to
regulatory monitoring and may be required to divest itself of or liquidate
subsidiaries. Holding companies of such institutions may be required to divest
themselves of such institutions or divest themselves of or liquidate other
affiliates. An undercapitalized bank must develop a capital restoration plan,
and its parent bank holding company must guarantee the bank's compliance with
the plan up to the lesser of five percent of the bank's assets at the time it
became undercapitalized or the amount needed to comply with the plan. Critically
undercapitalized institutions are prohibited from making payments of principal
and interest on subordinated debt and are generally subject to the mandatory
appointment of a conservator or receiver.
Rules adopted by the Comptroller of the Currency under FDICIA provide that a
national bank is deemed to be well capitalized if the bank has a total
risk-based capital ratio of ten percent or greater, a Tier 1 risk-based capital
ratio of six percent or greater, and a leverage ratio of five percent or greater
and the institution is not subject to a written agreement, order, capital
directive, or prompt corrective action directive to meet and maintain a specific
level of any capital measure. As of December 31, 2004, the Bank was
well-capitalized, based on the prompt corrective action ratios and guidelines
described above. It should be noted, however, that a bank's capital category is
determined solely for the purpose of applying the Comptroller of the Currency's
prompt corrective action regulations, and that the capital category may not
constitute an accurate representation of the bank's overall financial condition
or prospects.
BROKERED DEPOSITS
Under FDIC regulations, no FDIC-insured bank can accept brokered deposits unless
it (1) is well capitalized, or (2) is adequately capitalized and receives a
waiver from the FDIC. In addition, these regulations prohibit any bank that is
not well capitalized from paying an interest rate on brokered deposits in excess
of three-quarters of one percentage point over certain prevailing market rates.
As of December 31, 2004, the Bank held no brokered deposits.
7
DIVIDEND RESTRICTIONS
We are a legal entity separate and distinct from the Bank. In general, under
Pennsylvania law, we cannot pay a cash dividend if such payment would render us
insolvent. Our revenues consist primarily of dividends paid by the Bank. The
National Bank Act limits the amount of dividends the Bank can pay to us without
regulatory approval. The Bank may declare and pay dividends to us to the lesser
of:
- the level of undivided profits, and
- absent regulatory approval, an amount not in excess of net income
combined with retained net income for the preceding two years.
At December 31, 2004, approximately $1,143,000 was available for payment of
dividends to us.
In addition, federal bank regulatory authorities have authority to prohibit the
Bank from engaging in an unsafe or unsound practice in conducting its business.
Depending upon the financial condition of the bank in question, the payment of
dividends could be deemed to constitute an unsafe or unsound practice. The
ability of the Bank to pay dividends in the future is currently influenced, and
could be further influenced, by bank regulatory policies and capital guidelines.
DEPOSIT INSURANCE ASSESSMENTS
The deposits of the Bank are insured up to regulatory limits by the FDIC and,
accordingly, are subject to deposit insurance assessments to maintain the Bank
Insurance Fund ("BIF") administered by the FDIC. The FDIC has adopted
regulations establishing a permanent risk-related deposit insurance assessment
system. Under this system, the FDIC places each insured bank in one of nine risk
categories based on the bank's capitalization and supervisory evaluations
provided to the FDIC by the institution's primary federal regulator. An insured
bank's insurance assessment rate is then determined by the risk category in
which it is classified by the FDIC.
In the light of the recent favorable financial situation of the federal deposit
insurance funds and the recent low number of depository institution failures,
the annual insurance premiums on bank deposits insured by the BIF vary between
$0.00 per $100 of deposits for banks classified in the highest capital and
supervisory evaluation categories to $0.27 per $100 of deposits for banks
classified in the lowest capital and supervisory evaluation categories. BIF
assessment rates are subject to semi-annual adjustment by the FDIC within a
range of up to five basis points without public comment. The FDIC also possesses
authority to impose special assessments from time to time.
The Deposit Insurance Funds Act provides for assessments to be imposed on
insured depository institutions with respect to deposits insured by the BIF (in
addition to assessments currently imposed on depository institutions with
respect to BIF-insured deposits) to pay for the cost of Financing Corporation
("FICO") funding. The FICO assessments are adjusted periodically to reflect
changes in the assessment bases of the FDIC insurance funds and do not vary
depending upon a depository institution's capitalization or supervisory
evaluations. In 2004, the Bank paid FICO assessments of $25,300.
INTERSTATE BANKING AND BRANCHING
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act
("Riegle-Neal"), subject to certain concentration limits and other requirements:
- bank holding companies, such as we, are permitted to acquire banks
and bank holding companies located in any state;
- any bank that is a subsidiary of a bank holding company is permitted
to receive deposits, renew time deposits, close loans, service
loans, and receive loan payments as an agent for any other
depository institution subsidiary of that bank holding company; and
- banks are permitted 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.
The ability of banks to acquire branch offices through purchase or opening of
other branches is contingent, however, on the host state having adopted
legislation "opting in" to those provisions of Riegle-Neal. In addition, the
ability of a bank to merge with a bank located in another state is contingent on
the host state not having adopted legislation "opting out" of that provision of
Riegle-Neal. Pennsylvania has opted in to all of these provisions upon the
condition that another host state has similar or reciprocal requirements as in
Pennsylvania.
As of the date of this report, we are not contemplating any interstate
acquisitions of a bank or a branch office.
8
CONTROL ACQUISITIONS
The Change in Bank Control Act prohibits a person or group of persons from
acquiring "control" of a bank holding company, unless the Federal Reserve Board
has been notified and has not objected to the transaction. Under a rebuttable
presumption established by the Federal Reserve Board, the acquisition of ten
percent or more of a class of voting stock of a bank holding company with a
class of securities registered under Section 12 of the Exchange Act, such as we,
would, under the circumstances set forth in the presumption, constitute
acquisition of control of the bank holding company.
In addition, a company is required to obtain the approval of the Federal Reserve
Board under the Bank Holding Company Act before acquiring 25 percent (five
percent in the case of an acquirer that is a bank holding company) or more of
any class of outstanding common stock of a bank holding company, such as we, or
otherwise obtaining control or a "controlling influence" over that bank holding
company.
PERMITTED NON-BANKING ACTIVITIES
The Federal Reserve Board permits us or our subsidiaries to engage in nonbanking
activities so closely related to banking or managing or controlling banks as to
be a proper incident thereto. For a discussion of other activities that are
financial in nature in which we can engage, see the caption that follows
entitled "Financial Services Modernization."
The Federal Reserve Board requires us to serve as a source of financial and
managerial strength to the Bank and not to conduct our operations in an unsafe
and unsound manner. Whenever the Federal Reserve Board believes an activity that
we are doing or our control of a nonbank subsidiary (other than a nonbank
subsidiary of the Bank) constitutes a serious risk to the financial safety,
soundness, or stability of the Bank and is inconsistent with sound banking
principles or the purposes of the federal banking laws, the Federal Reserve
Board may require us to terminate that activity or to terminate control of that
subsidiary. While the types of permissible activities are subject to change by
the Federal Reserve Board, the principal nonbanking activities that presently
may be conducted by a bank holding company or its subsidiary without prior
approval of the Federal Reserve Board are:
- Servicing Activities. Furnishing services for, or establish or
acquire a company that engages solely in servicing activities for:
- us or the Bank in connection with activities authorized by
law, such as commitments entered into by any subsidiary with third
parties as long as we or our servicing company comply with
published guidelines and do not act as a principal in dealing with
third parties;
- the internal operations of the Bank, such as:
- accounting, auditing and appraising;
- advertising and public relations;
- data processing and transmission services, data bases or
facilities;
- personnel services;
- courier services;
- holding or operating property used by our subsidiaries
or for their future use;
- liquidating property acquired from the Bank; and
- selling, purchasing or underwriting insurance, such as
blanket bond insurance, group insurance for employees and
property and casualty insurance.
- Safe deposit business. Conduct a safe deposit business or acquire
voting securities of a company that conducts such business.
- Securities or property representing five percent or less of any
company. Acquiring five percent or less of the outstanding voting
securities of any company regardless of that company's activities.
- Extending credit and servicing loans. Making, acquiring, brokering,
or servicing loans or other extensions of credit (including
factoring, issuing letters of credit and accepting drafts) for the
company's account or for the account of others.
- Activities related to extending credit. Any activity usual in
connection with making, acquiring, brokering or servicing loans or
other extensions of credit, as determined by the Federal Reserve
Board. The Federal Reserve Board has determined that the following
activities are usual in connection with making, acquiring, brokering
or servicing loans or other extensions of credit:
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- Real estate and personal property appraising. Performing appraisals
of real estate and tangible and intangible personal property,
including securities.
- Arranging commercial real estate equity financing. Acting as
intermediary for the financing of commercial or industrial
income-producing real estate by arranging for the transfer of the
title, control, and risk of such a real estate project to one or
more investors, if the bank holding company and its affiliates do
not have an interest in, or participate in managing or developing, a
real estate project for which it arranges equity financing, and do
not promote or sponsor the development of the property.
- Check-guaranty services. Authorizing a subscribing merchant to
accept personal checks tendered by the merchant's customers in
payment for goods and services, and purchasing from the merchant
validly authorized checks that are subsequently dishonored.
- Collection agency services. Collecting overdue accounts receivable,
either retail or commercial.
- Credit bureau services. Maintaining information related to the
credit history of consumers and providing the information to a
credit grantor who is considering a borrower's application for
credit or who has extended credit to the borrower.
- Asset management, servicing, and collection activities. Engaging
under contract with a third party in asset management, servicing,
and collection of assets of a type that an insured depository
institution may originate and own, if the company does not engage in
real property management or real estate brokerage services as part
of these services.
- Acquiring debt in default. Acquiring debt that is in default at the
time of acquisition under certain conditions.
- Real estate settlement servicing. Providing real estate settlement
services.
- - Leasing personal or real property. Leasing personal or real property or
acting as agent, broker, or adviser in leasing such property under certain
conditions.
- - Operating nonbank depository institutions:
- Industrial banking. Owning, controlling, or operating an industrial
bank, Morris Plan bank, or industrial loan company, so long as the
institution is not a bank.
- Operating savings association. Owning, controlling or operating a
savings association, if the savings association engages only in
deposit-taking activities, lending, and other activities that are
permissible for bank holding companies.
- - Trust company functions. Performing functions or activities that may be
performed by a trust company (including activities of a fiduciary, agency, or
custodial nature), in the manner authorized by federal or state law, so long
as the company is not a bank for purposes of the Bank Holding Company Act.
- - Financial and investment advisory activities. Acting as investment or
financial advisor to any person, including (without, in any way, limiting the
foregoing):
- Serving as investment advisor (as defined in section 2(a)(20) of the
Investment Company Act of 1940, 15 U.S.C. 80a-2(a)(20)), to an
investment company registered under that act, including sponsoring,
organizing, and managing a closed-end investment company;
- Furnishing general economic information and advice, general economic
statistical forecasting services, and industry studies;
- Providing advice in connection with mergers, acquisitions,
divestitures, investments, joint ventures, leveraged buyouts,
recapitalizations, capital structurings, financing transactions and
similar transactions, and conducting financial feasibility studies;
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- Providing information, statistical forecasting, and advice with
respect to any transaction in foreign exchange, swaps, and similar
transactions, commodities, and any forward contract, option, future,
option on a future, and similar instruments;
- Providing educational courses, and instructional materials to
consumers on individual financial management matters; and
- Providing tax-planning and tax-preparation services to any person.
- - Agency transactional services for customer investments:
- Securities brokerage. Providing securities brokerage services
(including securities clearing and/or securities execution services
on an exchange), whether alone or in combination with investment
advisory services, and incidental activities (including related
securities credit activities and custodial services), if the
securities brokerage services are restricted to buying and selling
securities solely as agent for the account of customers and do not
include securities underwriting or dealing.
- Riskless principal transactions. Buying and selling in the secondary
market all types of securities on the order of customers as a
"riskless principal" to the extent of engaging in a transaction in
which the company, after receiving an order to buy (or sell) a
security from a customer, purchases (or sells) the security for its
own account to offset a contemporaneous sale to (or purchase from)
the customer. This does not include:
(A) Selling bank-ineligible securities at the order of a
customer that is the issuer of the securities, or selling bank-ineligible
securities in any transaction where the company has a contractual
agreement to place the securities as agent of the issuer; or
(B) Acting as a riskless principal in any transaction
involving a bank-ineligible security for which the company or any of its
affiliates acts as underwriter (during the period of the underwriting or
for 30 days thereafter) or dealer.
- Private placement services. Acting as agent for the private
placement of securities in accordance with the requirements of the
Securities Act of 1933 ("1933 Act") and the rules of the Securities
and Exchange Commission, if the company engaged in the activity does
not purchase or repurchase for its own account the securities being
placed, or hold in inventory unsold portions of issues of these
securities.
- Futures commission merchant. Acting as a futures commission merchant
("FCM") for unaffiliated persons in the execution, clearance, or
execution and clearance of any futures contract and option on a
futures contract traded on an exchange in the United States or
abroad under certain conditions.
- Other transactional services. Providing to customers as agent
transactional services with respect to swaps and similar
transactions.
- - Investment transactions as principal:
- Underwriting and dealing in government obligations and money market
instruments. Underwriting and dealing in obligations of the United
States, general obligations of states and their political
subdivisions, and other obligations that state member banks of the
Federal Reserve System may be authorized to underwrite and deal in
under 12 U.S.C. 24 and 335, including banker's acceptances and
certificates of deposit, under the same limitations as would be
applicable if the activity were performed by the bank holding
company's subsidiary member banks or its subsidiary nonmember banks
as if they were member banks.
- Investing and trading activities. Engaging as principal in:
(A) Foreign exchange;
(B) Forward contracts, options, futures, options on futures,
swaps, and similar contracts, whether traded on exchanges or not, based on
any rate, price, financial asset (including gold, silver, platinum,
palladium, copper, or any other metal approved by the Federal Reserve
Board), nonfinancial asset, or group of assets, other than a
bank-ineligible security under certain conditions.
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(C) Forward contracts, options, futures, options on futures,
swaps, and similar contracts, whether traded on exchanges or not, based on
an index of a rate, a price, or the value of any financial asset,
nonfinancial asset, or group of assets, if the contract requires such
settlement.
- Buying and selling bullion, and related activities. Buying, selling
and storing bars, rounds, bullion, and coins of gold, silver,
platinum, palladium, copper, and any other metal approved by the
Federal Reserve Board, for the company's own account and the account
of others, and providing incidental services such as arranging for
storage, safe custody, assaying, and shipment.
- - Management consulting and counseling activities:
- Management consulting. Providing management consulting advice under
certain conditions.
- Employee benefits consulting services. Providing consulting services
to employee benefit, compensation and insurance plans, including
designing plans, assisting in the implementation of plans, providing
administrative services to plans, and developing employee
communication programs for plans.
- Career counseling services. Providing career counseling services to:
(A) A financial organization and individuals currently
employed by, or recently displaced from, a financial organization;
(B) Individuals who are seeking employment at a financial
organization; and
(C) Individuals who are currently employed in or who seek
positions in the finance, accounting, and audit departments of any
company.
- - Support services:
- Courier services. Providing courier services for:
(A) Checks, commercial papers, documents, and written
instruments (excluding currency or bearer-type negotiable instruments)
that are exchanged among banks and financial institutions; and
(B) Audit and accounting media of a banking or financial
nature and other business records and documents used in processing such
media.
(ii) Printing and selling MICR-encoded items. Printing and selling checks
and related documents, including corporate image checks, cash tickets, voucher
checks, deposit slips, savings withdrawal packages, and other forms that require
Magnetic Ink Character Recognition ("MICR") encoding.
- - Insurance agency and underwriting:
- Credit insurance. Acting as principal, agent, or broker for
insurance (including home mortgage redemption insurance) that is:
(A) Directly related to an extension of credit by the bank
holding company or any of its subsidiaries; and
(B) Limited to ensuring the repayment of the outstanding
balance due on the extension of credit in the event of the death,
disability, or involuntary unemployment of the debtor.
- Finance company subsidiary. Acting as agent or broker for insurance
directly related to an extension of credit by a finance company that
is a subsidiary of a bank holding company under certain conditions.
- Engaging in any general insurance agency activities.
- Supervision of retail insurance agents. Supervising on behalf of
insurance underwriters the activities of retail insurance agents who
sell fidelity, property and casualty and group insurances for the
operations and employees of the bank holding company or its
subsidiaries.
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- Community development activities:
- Financing and investment activities. Making equity and
debt investments in corporations or projects designed
primarily to promote community welfare, such as the
economic rehabilitation and development of low-income
areas by providing housing, services, or jobs for
residents.
- Advisory activities. Providing advisory and related
services for programs designed primarily to promote
community welfare.
- Money orders, savings bonds, and traveler's checks. The issuance and
sale at retail of money orders and similar consumer-type payment
instruments; the sale of U.S. savings bonds; and the issuance and
sale of traveler's checks.
- Data processing. Providing data processing data transmission
services, facilities (including data processing and data
transmission hardware, software, documentation, or operating
personnel), data bases, advice, and access to such services,
facilities, or data bases by any technological means under certain
conditions.
COMMUNITY REINVESTMENT ACT
The Community Reinvestment Act of 1977, as amended (the "CRA"), and the
regulations promulgated to implement the CRA are designed to create a system for
bank regulatory agencies to evaluate a depository institution's record in
meeting the credit needs of its community. CRA regulations establish tests for
evaluating both small and large depository institutions' investment in the
community. A "small bank" is defined as a bank which has total assets of less
than $250 million and is independent or is an affiliate of a holding company
with less than $1 billion in assets. There are streamlined procedures for
evaluating small banks and the frequency of CRA examinations will occur less
often based upon a bank's CRA rating. A large retail institution is one which
does not meet the "small bank" definition. A large retail institution can be
evaluated under one of two tests: (1) a three-part test evaluating the
institution's lending, service and investment performance; or (2) a "strategic
plan" designed by the institution with community involvement and approved by the
appropriate federal bank regulator. A large institution must choose one of these
options under which to be examined. In addition, the CRA regulations include
separate rules regarding the manner in which "wholesale banks" and "limited
purpose banks" will be evaluated for compliance.
For the purposes of the CRA regulations, the Bank is deemed to be a "small
bank," based upon financial information as of December 31, 2004. The Bank will
be examined under the streamlined procedures. The Bank received a "satisfactory"
CRA rating in its last CRA examination which was held in 2003.
CONCENTRATION
We are not dependent for deposits nor exposed by loan concentrations to a single
customer or to a small group of customers the loss of any one or more of which
would have a materially adverse effect on our financial condition.
FINANCIAL SERVICES MODERNIZATION
The Gramm-Leach-Bliley Act (the "GLB Act") took effect in 2000. The GLB Act
contains some of the most far-reaching changes governing the operations of
companies doing business in the financial services industry. The GLB Act
eliminates the restrictions placed on the activities of banks and bank holding
companies. By creating two new structures - financial holding companies and
financial subsidiaries - we and the Bank will be allowed to provide a wider
array of financial services and products that were reserved only for insurance
companies and securities firms. In addition, we can now affiliate with an
insurance company and a securities firm.
We are currently deemed to be a financial holding company. A financial holding
company has authority to engage in activities referred to as "financial
activities" that are not permitted to bank holding companies. A financial
holding company may also affiliate with companies that are engaged in financial
activities. A "financial activity" is an activity that does not pose a safety
and soundness risk and is:
- financial in nature,
- incidental to an activity that is financial in nature, or
- complimentary to a financial activity.
The GLB Act lists certain activities as financial in nature:
- Lending, investing or safeguarding money or securities;
- Underwriting insurance or annuities, or acting as an insurance or
annuity principal, agent or broker;
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- Providing financial or investment advice;
- Issuing or selling interests in pools of assets that a bank could
hold;
- Underwriting, dealing in or making markets in securities;
- Engaging in any activity that the Federal Reserve Board found before
the GLB Act to be related closely to banking (See the section in
this report entitled "Permitted Non-banking Activities");
- Engaging within the United States in any activity that a bank
holding company could engage in outside of the country, if the
Federal Reserve Board determined before the GLB Act that the
activity was usual in connection with banking or other financial
operations internationally;
- Merchant banking - acquiring or controlling ownership interests in
an entity engaged in impermissible activities, if: the interests are
not held by a depository institution; the interests are held by a
securities affiliate or an investment advisory affiliate of an
insurance company as part of underwriting, merchant or investment
banking activity; the interests are held long enough to enable their
sale in a manner consistent with the financial viability of such an
activity; and we do not control the entity except to the extent
necessary to obtain a reasonable return on the investment; or
- Insurance portfolio investing - acquiring or controlling ownership
interests in an entity engaged in impermissible activities, if: the
interests are not held by a depository institution; the interests
are held by an insurance or annuity company; the interests represent
investments made in the ordinary course of business in accordance
with state law; and we do not control the entity except to the
extent necessary to obtain a reasonable return on the investment.
The GLB Act instructs the Federal Reserve Board to adopt a regulation or order
defining certain additional activities as financial in nature, to the extent
they are consistent with the purposes of the GLB Act. These are:
- Lending, exchanging, transferring, investing for others or
safeguarding financial assets other than money or securities;
- Providing any method of transferring financial assets; and
- Arranging, effecting or facilitating financial transactions for
third parties.
Other activities also may be decided by the Federal Reserve Board to be
financial in nature or incidental to a financial activity if they meet specified
criteria. The Federal Reserve Board is instructed to consider the purposes of
the GLB Act and the Bank Holding Company Act; changes in the market in which
financial holding companies compete; changes in the technology used to deliver
financial services; and whether the proposed activity is necessary or
appropriate to allow a financial holding company and its affiliates to compete
effectively, deliver services efficiently and offer services through the most
advanced technological means available.
The GLB Act gives national banks authority to use "financial subsidiaries" to
engage in financial activities. This authority has some limitations. A financial
subsidiary of the Bank may not, as a principal:
- underwrite insurance or annuities;
- engage in real estate development or investment;
- engage in merchant banking; or
- engage in insurance portfolio investment activities.
A bank's investment in a financial subsidiary will affect the way it calculates
its capital. The bank must deduct from its assets and stockholders' equity the
total of its investments in financial subsidiaries. Moreover, a bank must
present its financial information in two ways: in accordance with generally
accepted accounting principles, and, separately, in a manner that reflects the
segregation of the bank's investments in financial subsidiaries.
PRIVACY
Title V of the GLB Act creates a minimum federal standard of privacy by limiting
the instances which we and the Bank may disclose nonpublic personal information
about a consumer of our products or services to nonaffiliated third parties. A
state, such as Pennsylvania, can impose a greater or more restrictive standard
of privacy than the GLB Act. The GLB Act distinguishes "consumers" from
"customers" for purposes of the notice requirements imposed by this Act. We are
required to give a "consumer" a privacy notice only if we intend to disclose
nonpublic personal information about the consumer to a nonaffiliated third
party. However, by contrast, we are required to give a "customer" a notice of
our privacy policy at the time of the establishment of a customer relationship
and then annually, thereafter during the continuation of the customer
relationship.
The term consumer is different from the term customer. A consumer means an
individual who obtains or has obtained a financial product or service from the
Bank that is to be used primarily for personal, family or household purposes or
that individual's representative. A customer of the Bank is an individual with a
continuous relationship with the Bank. The Office of the Comptroller of the
Currency has regulations which give several examples of a consumer and customer
relationship:
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- An individual who applies to the Bank for credit for personal,
family or household purposes is a consumer of a financial service,
regardless of whether the credit is extended.
- An individual who provides nonpublic personal information to the
Bank in order to obtain a determination about whether he or she may
qualify for a loan to be used primarily for personal, family, or
household purposes is a consumer of a financial service, regardless
of whether the loan is extended by the Bank or another financial
institution.
- An individual who provides nonpublic personal information to the
Bank in connection with obtaining or seeking to obtain financial,
investment or economic advisory services is a consumer regardless of
whether the Bank establishes an ongoing advisory relationship.
- An individual who negotiates a workout with the Bank for a loan that
the Bank owns is a consumer regardless of whether the Bank
originally extended the loan to the individual.
- An individual who has a loan from the Bank is the Bank's consumer
even if the Bank:
- Hires an agent to collect on the loan;
- Sells the rights to service the loan; or
- Bought the loan from the financial institution that
originated the loan.
- An individual is not the Bank's consumer solely because the
Bank processes information about the individual on behalf of a
financial institution that extended the loan to the individual.
On the other hand, several examples of a customer follow:
- A customer has a continuing relationship with the Bank if the
customer:
- Has a deposit, loan, credit, trust or investment account with
the Bank;
- Purchases an insurance product from the Bank;
- Holds an investment product through the Bank;
- Enters into an agreement or understanding with the Bank
whereby the Bank undertakes to arrange or broker a home
mortgage loan for the customer;
- Has a loan that the Bank services where the Bank owns the
servicing rights;
- Enters into a lease of personal property with the Bank; or
- Obtains financial, investment, or economic advisory services
from the Bank for a fee.
- A person does not, however, have a continuing relationship with the
Bank and therefore is not a customer, if:
- The person only obtains a financial product or service in an
isolated transaction, such as withdrawing cash from the Bank's
ATM or purchasing a cashier's check or money order;
- The Bank sells the person's loan and does not retain the
rights to service the loan; or
- The Bank sells the person airline tickets, travel insurance or
traveler's checks in an isolated transaction.
In general, the Bank cannot disclose to a nonaffiliated third party any
nonpublic personal information of its customers and consumers unless the Bank
provides its customer or consumer with a notice that includes:
- the policies and practices of the Bank with regard to:
- disclosing nonpublic personal information to nonaffiliated third
parties;
- the categories of persons to whom the information is or may be
disclosed; and
- the policy for disclosure to former customers;
- categories of nonpublic personal information that are collected by the
Bank;
- the policies that the Bank maintains to protect the confidentiality and
security of nonpublic personal information;
- the disclosure, if required, under the Fair Credit Reporting Act; and
- in addition, the Bank must provide an opt out notice to each of its
consumers and customers that explains accurately the right to opt out
of any disclosure by the Bank of the customer's or consumer's nonpublic
personal information and the means by which the customer or consumer
may exercise the opt out right.
The GLB Act sets forth a new requirement that this notice to a consumer or
customer must be in clear and conspicuous or "plain English" language and
presentation. The regulations give several examples of the rules to follow in
drafting these notices:
- The Bank makes its notice reasonably understandable if, the Bank:
- Presents the information contained in the notice in clear,
concise sentences, paragraphs and sections;
- Uses short explanatory sentences and bullet lists, whenever
possible;
- Uses definite, concrete, everyday words and active voice,
whenever possible;
- Avoids multiple negatives;
- Avoids legal and highly technical business terminology; and
- Avoids boilerplate explanations that are imprecise and readily
subject to different interpretations.
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- The Bank designs its notice to call attention to the nature and
significance of the information contained in the notice if, to the
extent applicable, the Bank:
- Uses a plain-language heading to call attention to the notice;
- Uses a typeface and type size that are easy to read; and
- Provides wide margins and ample line spacing.
- If the Bank provides a notice on the same form as another notice or
other documents, the Bank designs its notice to call attention to the
nature and significance of the information contained in the notice if
the Bank uses:
- Larger type size(s), boldface or italics in the text;
- Wider margins and line spacing in the notice; or
- Shading or sidebars to highlight the notice, whenever
possible.
The GLB Act creates certain exceptions to the prohibition on disclosure of
nonpublic personal information of customers and consumers. Some of these
exceptions are:
- with the consent of the customer or consumer;
- to effect, administer or enforce a transaction requested or authorized
by the customer or consumer;
- the servicing or processing of a financial product or service requested
or authorized by the customer or consumer;
- the maintaining or servicing of the customer's or consumer's account
with the Bank or with another entity as part of a private label credit
card program;
- disclosure to persons holding a legal or beneficial interest relating
to the customer or consumer or to persons acting in a fiduciary or
representative capacity on behalf of the customer or consumer;
- providing information to insurance rate advisory organizations,
guaranty funds or agencies, rating agencies, persons assessing the
Bank's compliance with industry standards and the Bank's attorneys,
accountants and auditors; and
- disclosure permitted under other laws, such as the Right to Financial
Privacy Act, to law enforcement agencies or under local and state laws.
The Bank cannot disclose an account number or similar form of access code for a
credit card account, deposit account or transaction account of a customer or
consumer to any non-affiliated third party for use in telemarketing, direct mail
marketing or other marketing through electronic mail to the customer or
consumer.
TERRORIST ACTIVITIES
The Office of Foreign Assets Control or OFAC of the Department of the Treasury
has (and will) send our banking regulatory agencies lists of names of persons
and organizations suspected of aiding, harboring or engaging in terrorist acts.
If the Bank finds any name on any transaction, account or wire transfer that is
on an OFAC list, the Bank must freeze such account, file a suspicious activity
report and notify the FBI. The Bank has appointed an OFAC compliance officer to
oversee the inspection of its accounts and the filing of any notifications.
THE USA PATRIOT ACT
In the wake of the tragic events of September 11, 2001, the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism ("USA PATRIOT") Act of 2002 was enacted. Under the USA
PATRIOT Act, financial institutions are subject to prohibitions against
specified financial transactions and account relationships as well as enhanced
due diligence and "know your customer" standards in their dealings with foreign
financial institutions and foreign customers. For example, the enhanced due
diligence policies, procedures, and controls generally require financial
institutions to take reasonable steps:
- to conduct enhanced scrutiny of account relationships to guard against
money laundering and report any suspicious transactions;
- to ascertain the identity of the nominal and beneficial owners of, and the
source of funds deposited into, each account as needed to guard against
money laundering and report any suspicious transactions;
- to ascertain for any foreign bank, the shares of which are not publicly
traded, the identify of the owners of the foreign bank, and the nature and
extent of the ownership interest of each such owner; and
- to ascertain whether any foreign bank provides correspondent accounts to
other foreign banks and, if so, the identity of those foreign banks and
related due diligence information.
Under the USA PATRIOT Act, the Bank established anti-money laundering programs
including a customer identification program. The USA PATRIOT Act sets forth
minimum standards for these programs, including:
- the development of internal policies, procedures, and controls;
- the designation of a compliance officer;
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- an ongoing employee training program; and
- and independent audit function, in order to test these programs.
In addition, the USA PATRIOT Act authorized the Secretary of the Treasury to
adopt rules increasing the cooperation and information sharing between financial
institutions, regulators, and law enforcement authorities regarding individuals,
entities and organizations engaged in, or reasonably suspected based on credible
evidence of engaging in, terrorist acts or money laundering activities. Any
financial institutions complying with these rules will not be deemed to have
violated the privacy provisions of the Gramm-Leach-Bliley Act, as discussed
above.
SUBPRIME AND PREDATORY LENDING PRACTICES
Our federal banking regulatory agencies have jointly issued expanded examination
and supervision guidance relating to subprime lending activities. In the
guidance, "subprime" lending generally refers to programs that target borrowers
with weakened credit histories or lower repayment capacity. The guidance
principally applies to institutions with subprime lending programs with an
aggregate credit exposure equal to or greater than 25 percent of an
institution's Tier 1 capital. Such institutions would be subject to more
stringent risk management standards and, in many cases, additional capital
requirements. As a starting point, the guidance generally expects that such an
institution would hold capital against subprime portfolios in an amount that is
one and one-half to three times greater than the amount appropriate for similar
types of non-subprime assets. The Bank does not engage in any subprime lending
programs.
The Federal Reserve Board has issued regulations which would implement the Home
Ownership and Equity Protection Act or HOEPA. This Act imposes additional
disclosure requirements and certain substantive limitations on certain mortgage
loans with rates or fees above specified levels. The proposed regulations would
lower the rate levels that trigger the application of HOEPA and would include
additional fees in the calculation of the fee amount that triggers HOEPA. The
loans that the Bank currently makes are generally below the rate and fee levels
that trigger HOEPA.
The Comptroller of the Currency issued a regulation, that specifies the types of
state and local laws that do not apply to the Bank's lending and deposit taking
activities and the types of state and local laws that generally do apply to the
Bank. This final rule was partly enacted in response to state and local laws
prohibiting what is commonly called "predatory lending" activities.
The Comptroller of the Currency adopted its own anti-predatory lending standard
that focuses on consumer loans and permits the Bank to use a variety of
reasonable methods to determine a borrower's ability to repay, including, for
example, the borrower's current and expected income, current and expected cash
flows, net worth, other relevant financial obligations, employment status,
credit history or other relevant factors. In addition, the Bank shall not engage
in unfair or deceptive practices within the meaning of Section 5 of the Federal
Trade Commission Act, 15 U.S.C. 45(a)(1), and regulations made under the
authority of this act in connection with consumer loans.
This final rule also preempts state and local laws that obstruct, impair or
condition the Bank's ability to fully exercise its deposit-taking powers under
federal law and to fully exercise its powers to conduct other activities under
federal law.
The Bank may exercise its deposit-taking powers without regard to state and
local law limitations concerning:
- Abandoned and dormant accounts;
- Checking accounts;
- Disclosure requirements;
- Funds availability;
- Savings account orders of withdrawal;
- State licensing or registration requirements (except for purposes of
service of process); and
- Special purpose savings services.
State and local laws on the following subjects are not inconsistent with the
lending, deposit-taking and activities powers of the Bank and apply to the Bank
to the extent that they only incidentally affect the exercise of the Bank's
powers:
- Contracts;
- Torts;
- Criminal law;
- Rights to collect debts;
- Acquisition and transfer of property;
- Taxation;
- Zoning; and
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- Any other law the effect of which the Comptroller of the Currency
determines to be incidental to the operations of the Bank or otherwise
consistent with the authority granted to the Bank to engage in lending,
deposit-taking and other incidental activities.
SALES OF INSURANCE
Our federal banking regulatory agencies have issued their consumer protection
rules with respect to the retail sale of insurance products by the Company, the
Bank, or a subsidiary or joint venture of the Company or the Bank. These rules
cover generally practices, solicitations, advertising or offers of any insurance
product by a depository institution or any person that performs such activities
at an office of, or on behalf of, the Company or the Bank. Moreover, these rules
include specific provisions relating to sales practices, disclosures and
advertising, the physical separation of banking and nonbanking activities, and
domestic violence discrimination.
THE BANK
The Bank's legal headquarters are located at 232 East Street, Bloomsburg,
Columbia County, Pennsylvania 17815. The Bank is a locally-owned and managed
community bank that seeks to provide personal attention and professional
financial assistance to its customers. The Bank serves the needs of individuals
and small to medium-sized businesses. The Bank's business philosophy includes
offering direct access to its President and other officers and providing
friendly, informed and courteous service, local and timely decision making,
flexible and reasonable operating procedures and consistently-applied credit
policies.
The Bank solicits small and medium-sized businesses located primarily within the
Bank's market area that typically borrow in the $25,000 to $1.0 million range.
In the event that certain loan requests may exceed the Bank's lending limit to
any one customer, the Bank seeks to arrange such loans on a participation basis
with other financial institutions.
MARKETING AREA
The Bank's primary market area is Columbia County, a 484 square mile area
located in Northcentral Pennsylvania with a population of approximately 64,157
based on 2000 census data. The Town of Bloomsburg is the County's largest
municipality and its center of industry and commerce. Bloomsburg has a
population of approximately 12,375 based on 2000 census data, and is the county
seat. Berwick, located on the eastern boundary of the County, is the second
largest municipality, with a 2000 population of approximately 10,774. The Bank
currently serves its market area through seven branch offices located in
Bloomsburg, Benton, Buckhorn, Lightstreet, Millville, Orangeville and South
Centre, Columbia County.
The Bank competes with eight other depository institutions in Columbia County.
The Bank's major competitors are: First National Bank of Berwick; PNC Bank,
N.A., the largest commercial bank headquartered in Pennsylvania; and First
Columbia Bank and Trust Company of Bloomsburg, Pennsylvania.
The Bank's extended market area includes the adjacent Pennsylvania counties of
Luzerne, Montour, Northumberland, Schuylkill and Sullivan.
FUTURE LEGISLATION
Various legislation, including proposals to substantially change the financial
institution regulatory system and to expand or contract the powers of banking
institutions and bank holding companies, is from time to time introduced in the
Congress. This legislation may change banking statutes and our operating
environment in substantial and unpredictable ways. If enacted, such legislation
could increase or decrease the cost of doing business, limit or expand
permissible activities or affect the competitive balance among banks, savings
associations, credit unions, and other financial institutions. We can not
accurately predict whether any of this potential legislation will ultimately be
enacted, and, if enacted, the ultimate effect that it, or implementing
regulations, would have upon our financial condition or results of operations.
18
ITEM 2. PROPERTIES
Our corporate headquarters are located at 232 East Street, Bloomsburg,
Pennsylvania. We own this facility which has approximately 11,686 square feet.
The Bank's legal or registered office is also at 232 East Street, Bloomsburg,
Pennsylvania.
Our remaining banking centers are described as follows: We own all of the
banking centers except Buckhorn, which we began leasing in late October, 2004.
We have a five year lease with two 5 year options with Wal-Mart for this
Buckhorn location.
Approximate
Location Square Footage Use
- ------------------ -------------- -----------------------------
Orangeville, PA 2,259 Banking Services
Benton, PA 4,672 Banking Services
South Centre, PA 3,868 Banking Services
Scott Township, PA 16,500 Banking Services, Corporate,
Credit and Operations
Millville, PA 2,520 Banking Services
Buckhorn, PA 693 Banking Services (In Wal-Mart
Supercenter)
We consider our facilities to be suitable and adequate for our current and
immediate future purposes.
ITEM 3. LEGAL PROCEEDINGS
We and the Bank are not parties to any legal proceedings that could have any
significant effect upon our financial condition or income. In addition, we and
the Bank are not parties to any legal proceedings under federal and state
environmental laws.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
We had 778 stockholders of record including individual participants in security
position listings and 1,264,083 shares of common stock, par value of $1.25 per
share, the only authorized class of common stock, outstanding as of February 28,
2005. Our common stock trades under the symbol "CCFN." As of February 28, 2005,
3 firms were identified on the interdealer electronic bulletin board system as
market makers in our common stock. The following information is reported by one
of our market makers: Ferris, Baker Watts, Inc., Baltimore, MD. These quotations
represent prices between buyers and sellers and do not include retail makeup,
markdown or commission. They may not necessarily represent actual transactions.
The high and low closing sale prices and dividends per share of our common stock
for the four quarters of 2004 and 2003 are summarized in the following table.
Dividends
2004: High ($) Low ($) Declared ($)
- -------------- -------- ------- ------------
First quarter 29.50 28.00 .17
Second quarter 29.00 26.50 .17
Third quarter 31.25 27.50 .18
Fourth quarter 31.00 27.10 .18
Dividends
2003: High ($) Low ($) Declared ($)
- -------------- -------- ------- ------------
First quarter 24.20 23.20 .16
Second quarter 25.00 23.50 .16
Third quarter 26.00 24.40 .17
Fourth quarter 28.25 26.45 .17
19
We have paid cash dividends since 1983. It is our present intention to continue
the dividend payment policy, although the payment of future dividends must
necessarily depend upon earnings, financial position, appropriate restrictions
under applicable law and other factors relevant at the time the Board of
Directors considers any declaration of dividends.
The following table presents information on the shares of our common stock that
we repurchased during the fourth quarter of 2004:
CCFNB BANCORP, INC.
ISSUER PURCHASES OF EQUITY SECURITIES
NUMBER OF NUMBER OF
SHARES SHARES THAT MAY
PURCHASED AS YET BE
NUMBER OF PART OF PUBLICLY PURCHASED
SHARES PRICE PAID PER ANNOUNCED UNDER THE
MONTH PURCHASED SHARE PROGRAM (1) PROGRAM
10/26/04 - 10/26/04 2,000 $29.75 2,000 86,000
11/04/04 - 11/04/04 2,000 $31.00 2,000 84,000
12/09/04 - 12/09/04 2,000 $28.75 2,000 82,000
TOTAL 6,000 6,000
(1) This program was announced in 2003. Board of Directors approved purchase
of 100,000 shares. There is no expiration date associated with this
program.
20
ITEM 6. SELECTED FINANCIAL DATA
CCFNB BANCORP, INC.
SELECTED CONSOLIDATED FINANCIAL SUMMARY
AS OF DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
INCOME STATEMENT DATA:
Total interest income $ 10,843 $ 11,221 $ 12,780 $ 13,720 $ 13,552
Total interest expense 3,669 4,366 5,741 6,924 6,859
---------- ---------- ---------- ---------- ----------
Net interest income 7,174 6,855 7,039 6,796 6,693
Provision for possible loan losses 140 200 309 163 54
Other operating income 1,530 1,508 1,210 1,149 1,053
Other operating expenses 5,746 5,409 5,479 5,104 4,967
Federal income taxes 601 591 539 621 671
---------- ---------- ---------- ---------- ----------
Net income $ 2,217 $ 2,163 $ 1,922 $ 2,057 $ 2,054
PER SHARE DATA:
Earnings per share (1) $ 1.74 $ 1.69 $ 1.47 $ 1.54 $ 1.51
Cash dividends declared per share 0.70 0.66 0.63 0.59 0.56
Book value per share 22.49 21.63 20.76 19.64 18.61
Average shares outstanding 1,267,718 1,281,265 1,309,084 1,338,007 1,355,624
BALANCE SHEET DATA:
Total assets $ 235,377 $ 232,914 $ 229,032 $ 214,238 $ 203,054
Total loans 149,900 147,631 151,338 142,990 137,360
Total securities 61,834 62,775 53,538 57,121 47,311
Total deposits 172,487 171,786 172,127 155,666 143,169
FHLB advances - long - term 11,323 11,335 11,347 11,357 13,368
Total stockholders' equity 28,506 27,603 26,840 26,042 25,050
PERFORMANCE RATIOS:
Return of average assets 0.96% 0.94% 0.86% 0.99% 1.04%
Return on average stockholders' equity 7.88% 7.95% 7.22% 7.92% 8.59%
Net interest margin (2) 3.54% 3.39% 3.58% 3.68% 3.88%
Total non-interest expense as a percentage of
average assets 2.45% 2.34% 2.45% 2.45% 2.52%
ASSET QUALITY RATIOS:
Allowance for possible loan losses as a
percentage of loans, net 0.93% 0.96% 0.87% 0.72% 0.74%
Allowance for possible loan losses as a
percentage of non-performing loans (3) 110.37% 52.29% 57.95% 60.54% 341.27%
Non-performing loans as a percentage of total
loans, net (3) 0.85% 1.85% 1.49% 1.19% .25%
Non-performing assets as a percentage of total
assets (3) 0.54% 1.16% 0.98% 0.79% 0.17%
Net charge-offs as a percentage of average net
loans (4) 0.11% 0.06% 0.03% 0.10% 0.02%
LIQUIDITY AND CAPITAL RATIOS:
Equity to assets 12.11% 11.85% 11.72% 12.16% 12.34%
Tier 1 capital to risk-weighted assets (5) 19.27% 18.82% 20.36% 19.06% 20.94%
Leverage ratios (5)(6) 12.17% 11.79% 11.77% 12.44% 13.02%
Total capital to risk-weighted assets (5) 20.31% 19.88% 18.53% 19.82% 21.79%
Dividend payout ratio 40.19% 39.02% 42.86% 38.31% 37.09%
- --------------------
(1) Based upon average shares and common share equivalents outstanding.
(2) Represents net interest income as a percentage of average total
interest-earning assets, calculated on a tax-equivalent basis.
(3) Non-performing loans are comprised of (i) loans which are on a non-accrual
basis, (ii) accruing loans that are 90 days or more past due, and (iii)
restructured loans. Non-performing assets are comprised of non-performing
loans and foreclosed real estate (assets acquired in foreclosure), if
applicable.
(4) Based upon average balances for the respective periods.
(5) Based on the Federal Reserve Bank's risk-based capital guidelines, as
applicable to the Corporation. The Bank is subject to similar requirements
imposed by the Comptroller of the Currency.
(6) The leverage ratio is defined as the ratio of Tier 1 Capital to average
total assets less intangible assets, if applicable.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the detailed information and 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.
21
FACTORS THAT MAY AFFECT FUTURE RESULTS
General. Banking is affected, directly and indirectly, by local, domestic
and international economic and political conditions, and by government monetary
and fiscal policies. Conditions such as inflation, recession, unemployment,
volatile interest rates, tight money supply, real estate values, international
conflicts and other factors beyond our control may adversely affect the future
results of operations. We do not expect any one particular factor to affect our
results of operations. A downward trend in several areas, however, including
real estate, construction and consumer spending, could have an adverse impact on
our ability to maintain or increase profitability. Therefore, there is no
assurance that we will be able to continue our current rates of income and
growth.
Interest Rates. Our earnings depend, to a large extent, upon net interest
income, which is primarily influenced by the relationship between the cost of
funds (deposits and borrowings) and the yield on interest-earning assets (loans
and investments). This relationship, known as the net interest spread, is
subject to fluctuation and is affected by regulatory, economic and competitive
factors which influence interest rates, the volume, rate and mix of
interest-earning assets and interest-bearing liabilities, and the level of
non-performing assets. As part of our interest rate risk management strategy
comprised of interest rate risk, mortgage risk, and deposit pricing risk
components, we seek to control our exposure to interest rate changes by managing
the maturity and repricing characteristics of interest-earning assets and
interest-bearing liabilities.
As of December 31, 2004, total interest-earning assets maturing or
repricing within one year were more than total interest-bearing liabilities
maturing or repricing in the same period by $830,000 representing a cumulative
one-year interest rate sensitivity gap as a positive percentage of .4 percent of
Interest Earning Assets. This condition suggests that the yield on the
interest-earning assets should adjust to changes in market interest rates at a
slighty faster rate than the cost of the interest-bearing liabilities.
Consequently, our net interest income could increase during periods of rising
interest rates. See "Interest Rate Sensitivity".
Local Economic Conditions. Our success is dependent, to a certain extent,
upon the general economic conditions in the geographic market in which we
conduct our business. Although we expect that economic conditions will continue
to be favorable in this market, no assurance can be given that these economic
conditions will continue. Adverse changes in economic conditions in the
geographic market that we serve would likely impair our ability to collect loans
and could otherwise have a material adverse effect on our results of operations
and financial condition.
Competition. The banking industry is highly competitive, with rapid
changes in product delivery systems and in consolidation of service providers.
Many of our competitors are bigger than us in terms of assets and have
substantially greater technical, marketing and financial resources. Because of
their size, many of these competitors can (and do) offer products and services
that we do not offer. We are constantly striving to meet the convenience and
needs of our customers and to enlarge our customer base. No assurance can be
given that these efforts will be successful in maintaining and expanding our
customer base.
RESULTS OF OPERATIONS
Our net income increased by 2.5 percent from $2,163,000 in 2003 to
$2,217,000 in 2004. Earnings per share increased by 3.0 percent from $1.69 in
2003 to $1.74 in 2004. Our return on average assets (ROAA) increased to 0.96
percent in 2004, compared to 0.94 percent in 2003. Our return on average equity
(ROAE) decreased to 7.88 percent in 2004, compared to 7.95 percent in 2003.
Loans increased by 1.5 percent in 2004 to $149,900,000 from $147,631,000
in 2003. This increase was in the real estate and municipal lending area.
We instituted, in 1995, a dividend reinvestment plan and an employees
stock purchase plan. Moreover, in 1999, we commenced a strategy to purchase and
cancel up to 10 percent of our outstanding shares of common stock through open
market purchases. In 2003, we again filed with the SEC to purchase up to 100,000
shares of our outstanding shares. These repurchase programs resulted in the
purchase and cancellation of the following numbers of shares of our common stock
for the years indicated: 16,000 shares (2004); 23,988 shares (2003); and 41,500
shares (2002). The net effect of the stock plans and the repurchase program
resulted in weighted average shares of common stock outstanding as follows:
1,274,034 (2004); 1,281,265 (2003); and 1,309,084 (2002).
Tax-equivalent net interest income increased 4.1 percent to $7.6 million
in 2004 from $7.3 million in 2003. Average earning assets were $215.0 million in
2003 and $215.1 million in 2004. Net interest income increased 4.4 percent from
$6.9 million in 2003 to $7.2 million in 2004. This increase in net interest
income is a result of the pricing and mix of our loans and deposits.
22
TABLE OF NON-INTEREST INCOME
(Dollars in Thousands)
Years Ended December 31,
--------------------------
2004 2003 2002
------ ------ ------
Service charges and fees $ 841 $ 692 $ 649
Gain on sale of loans 26 190 2
Bank-owned life insurance income 257 247 28
Trust department income 165 148 215
Investment securities gains - net 3 8 137
Other 238 223 180
------ ------ ------
Total non-interest income $1,530 $1,508 $1,211
------ ------ ------
Total non-interest income increased during 2004 from $1,508,000 in 2003 to
$1,530,000 in 2004. The increase in Trust income in the amount of $17,000 was
primarily due to new accounts opened in 2004. Gain on sale of investment
securities decreased from $8,000 in 2003 to $3,000 in 2004. Service fees and
charges increased from $692,000 in 2003 to $841,000 in 2004 or 21.53 percent.
The introduction of "Overdraft Privilege" was instrumental in this increase.
Also introduced in 2004 were loans sold to Pennsylvania Housing Finance Agency
which provided a fee for the acquisition and sale of loans to this state agency.
The PHFA increase amounted to $9,600 and penalty on early withdrawal of
Certificates of Deposit amounted to $9,600. Other income increased 6.7 percent
from $223,000 in 2003 to $238,000 in 2004, partly attributable to late loan fees
collected on non-accrual loans in 2004. Gain on sale of loans decreased from
$190,000 in 2003 to $26,000 in 2004. Bank-owned life insurance income reflected
an increase of $10,000 from $247,000 in 2003 to $257,000 in 2004. In December
2002, we purchased $3,000,000 of Bank-owned life insurance. During May 2003, we
purchased an additional $2,000,000 in Bank-owned life insurance.
TABLE OF OTHER NON-INTEREST EXPENSE
(Dollars in Thousands)
Years Ended December 31,
--------------------------
2004 2003 2002
------ ------ ------
Salaries and wages $2,289 $2,199 $2,137
Employee benefits 773 746 729
Net occupancy expense 394 379 354
Furniture and equipment expense 475 476 587
State shares tax 274 275 254
Professional services 228 224 220
Director's fees 147 141 141
Stationery and supplies 136 116 129
Other expense 1,030 853 927
------ ------ ------
Total non-interest expense $5,746 $5,409 $5,479
------ ------ ------
Total non-interest expense increased to $5,746,000 in 2004 from $5,409,000
in 2003 or an increase of 6.2 percent. A 4.0 percent increase in salaries and
benefits was attributable to normal merit and cost of living increases as well
as increased health insurance costs. Furniture and equipment expense remained
near constant at $475,000 and $476,000 in 2004 and 2003. Net occupancy expense
increased $15,000 from $379,000 in 2003 to $394,000 in 2004 or 4.0 percent.
State shares tax decreased $1,000 for 2004 as compared to 2003 due to our
participation in a 2-year program offered by the Commonwealth of Pennsylvania in
which contributions to private education results in credits to this State tax.
Other expenses increased 20.8 percent from $853,000 in 2003 to $1,030,000 in
2004. Components comprising some of the major changes were as follows:
Years Ended December 31,
-----------------------------
% of
2004 2003 Inc/Dec
------ ------ -------
Officer Retirement Deferred Compensation Plan II 79,710 55,131 44.6%
Overdraft Privilege Program 24,178 0 100.0%
Data Processing Expense 71,118 53,301 25.0%
Donations 50,115 29,090 72.3%
One standard to measure non-interest expense is to express non-interest
expense as a percentage of average total assets. In 2004, this percentage was
2.5 percent compared to 2.3 percent in 2003.
23
Loan delinquencies decreased 37.5 percent from $2,806,000 in 2003 to
$1,753,000 in 2004. The decrease in these delinquencies was attributed to the
ongoing efforts of the loan department to work out problem loans and collect
past due payments. Our management has been diligent in its efforts to reduce
these delinquencies and has increased monitoring and review of current loans to
foresee future delinquency occurrences and react to them quickly. The Bank has
also implemented a centralized credit analysis department to better analyze new
loan requests. The provision for loan losses for 2004 decreased from $200,000 in
2003 to $140,000 in 2004.
NET INTEREST INCOME
Tax-equivalent net interest income for 2004 equaled $7,605,000 compared to
$7,282,000 in 2003, an increase of 4.4 percent. The increase in the overall net
interest margin from 3.4 percent in 2003 to 3.5 percent in 2004 is a result of
interest rate changes in the loan and deposit areas. These rates were diligently
watched and adjusted which contributed to the overall increased performance of
the bank. Income received on interest bearing deposits with other financial
institution increased from an average of 1.0 percent for 2003 to an average of
1.1 percent for 2004. This 10 basis point increase reflects the increased short
term rates by year end 2004. The cost of long-term debt averaged 6.0 percent for
the year which will continue to have a negative impact on our net interest
margin until rates would rise enough to allow us to pay off the debt. We will
continue to use the following strategies to mitigate this period of pressure on
our net interest margin: pricing of deposits will continue to be monitored to
meet current market conditions, large deposits over $100,000 will continue to be
priced conservatively; and in this low interest rate environment, the majority
of new investments will be kept short term in anticipation of rising rates.
TAX-EQUIVALENT NET INTEREST INCOME
(Dollars in Thousands)
Years Ended December 31,
-----------------------------
2004 2003 2002
------- ------- -------
Interest income $10,843 $11,221 $12,780
Interest expense 3,669 4,366 5,741
------- ------- -------
Net interest income 7,174 6,855 7,039
------- ------- -------
Tax-equivalent adjustment 431 427 490
------- ------- -------
Net interest income (fully taxable equivalent) $ 7,605 $ 7,282 $ 7,529
======= ======= =======
24
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 2004, 2003 and 2002.
AVERAGE BALANCE SHEET AND RATE ANALYSIS
THREE YEARS ENDED DECEMBER 31,
(Dollars in thousands)
2004 2003 2002
---- ---- ----
Average Interest Average Average Interest Average Average Interest Average
Balance Inc./Exp Yd/Rate Balance Inc./Exp Yd/Rate Balance Inc./Exp Yd/Rate
------- -------- ------- ------- -------- ------- ------- -------- -------
(1) (2) (1) (2) (1) (2)
ASSETS:
Interest Bearing Deposits With Other
Financial Institutions $ 4,652 $ 51 1.10% $ 4,865 $ 48 0.99% $ 4,363 $ 65 1.49%
-------- ------- -------- ------- --------- -------
Investment Securities:
Taxable 52,428 1,580 3.01% 44,833 1,314 2.93% 38,182 1,769 4.63%
State and Municipal
Obligations (3) 9,571 450 7.12% 13,046 609 6.96% 16,965 799 7.14%
-------- ------- -------- ------- --------- -------
Total Investment Securities $ 61,999 $ 2,030 3.63% $ 57,879 $ 1,923 4.35% $ 55,147 $ 2,568 5.40%
-------- ------- -------- ------- --------- -------
Federal Funds Sold 1,053 16 1.52% 3,911 43 1.10% 3,091 51 1.65%
-------- ------- -------- ------- --------- -------
Loans:
Taxable $139,086 8,360 6.01% 144,004 8,987 6.24% 144,685 9,943 6.89%
Tax Free (3) 8,262 386 7.08% 4,340 220 7.66% 2,860 153 8.10%
-------- ------- -------- ------- --------- -------
Total Loans $147,348 $ 8,746 6.27% $148,344 $ 9,207 6.28% $ 147,545 $10,096 6.90%
-------- ------- -------- ------- --------- -------
Total Interest-Earning Assets $215,052 $10,843 $5.24% $214,999 $11,221 5.42% $210,1462 $12,780 6.31%
-------- ------- ----- -------- ------- --------- -------
Reserve for Loan Losses (1,405) (1,390) (1,101)
Cash and Due from Banks 4,912 9,682 4,641
Other Assets 12,888 7,628 9,788
-------- -------- ---------
Total Assets $231,477 $230,919 $ 223,474
LIABILITIES AND CAPITAL:
Total Interest-Bearing Deposits $154,840 $ 2,684 1.73% $156,645 $ 3,401 2.17% $ 149,113 $ 4,725 3.17%
U.S. Treasury Short-Term Borrowings 296 3 1.01% 351 3 0.85% 511 6 1.17%
Short-Term Borrowings - Other 0 0 0.00% 0 0 0.00% 0 0 0.00%
Long-Term Borrowings 11,343 681 6.00% 11,341 679 5.99% 11,352 680 5.99%
Repurchase Agreements 18,184 301 1.66% 16,767 283 1.69% 17,221 330 1.92%
-------- ------- -------- ------- --------- -------
Total Interest-Bearing Liabilities $184,663 $ 3,669 1.99% $185,104 $ 4,366 2.36% $ 178,197 $ 5,741 3.19%
-------- ------- -------- ------- --------- -------
Demand Deposits 17,188 15,977 14,593
Other Liabilities 1,460 2,625 4,069
Stockholders' Equity 28,136 27,213 26,615
-------- -------- ---------
Total Liabilities and Capital $231,477 $230,919 $ 223,474
======== ======== =========
NET INTEREST INCOME/NET INTEREST
MARGIN (4) $ 7,174 3.34% $ 6,855 3.19% $ 7,039 3.35%
======= ==== ======= ==== ======= ====
TAX-EQUIVALENT NET INTEREST INCOME/NET
INTEREST MARGIN (5) $ 7,605 3.54% $ 7,282 3.39% $ 7,529 3.58%
======= ==== ======= ==== ======= ====
(1) Average volume information was compared using daily (or monthly) averages
for interest earning and bearing accounts. Certain balance sheet items
utilized quarter end balances for averages. Due to the availability of
certain daily and monthly average balance information, certain
reclassifications were made to prior period amounts.
(2) Interest on loans includes fee income.
(3) Yield on tax-exempt obligations and tax-exempt loans have been computed on
a tax-equivalent basis.
(4) Net interest margin is computed by dividing net interest income by total
interest-earning assets.
(5) Interest and yield are presented on a tax-equivalent basis using 34
percent for 2004, 2003 & 2002.
COMPONENTS OF NET INTEREST INCOME
To enhance the understanding of the effects of volumes (the average
balance of earning assets and costing liabilities) and average interest rate
fluctuations on the balance sheet as it pertains to net interest income, the
table below reflects these changes for 2004 versus 2003, 2003 versus 2002, and
2002 versus 2001:
25
TABLE OF NET INTEREST INCOME COMPONENTS ON A TAX-EQUIVALENT BASIS
For the twelve months ended December 31, 2004
(Dollars in thousands)
2004 Versus 2003 2003 Versus 2002 2002 Versus 2001
---------------- ---------------- ----------------
Increase (Decrease) Increase (Decrease) Increase (Decrease)
Due to Changes In Due to Changes In Due to Changes In
Average Average Average Average Average Average
Volume Rate Total Volume Rate Total Volume Rate Total
------- ------- ----- ------- ------- ----- ------- ------- -----
Interest Income:
Interest-Bearing Deposits with Other
Financial Institutions $ (2) $ 5 $ 3 $ 7 $ (22) $ (15) $ (90) $ (171) $ (261)
Taxable Securities 223 36 259 308 (649) (341) 278 (408) (130)
State and Municipal Obligations (242) 21 (221) (280) (31) (311) (14) (9) (23)
Federal Funds Sold (95) (71) (166) 14 52 66 50 (38) 12
Taxable Loans (307) (331) (638) (47) (940) (987) 652 (1,392) (740)
Tax Free Loans 300 (25) 275 120 (13) 107 7 1 8
----- ----- ----- ----- ------- ------- ----- ------- -------
Total Earning Assets $(123) $(365) $(488) $ 122 $(1,603) $(1,481) $ 883 $(2,017) $(1,134)
----- ----- ----- ----- ------- ------- ----- ------- -------
Interest Expense:
Total Interest-Bearing Deposits $ (39) $(689) $(728) $ 239 $(1,491) $(1,252) $ 547 $(1,180) $ (633)
U.S. Treasury - Short-Term Borrowings 0 1 1 (2) (2) (4) 1 (11) (10)
Short-Term Borrowings - Other 0 0 0 0 0 0 0 0 0
Long-Term Borrowings 0 1 1 (1) 0 (1) (50) (1) (51)
Repurchase Agreements 24 (5) 19 (9) (40) (49) (65) (338) (403)
----- ----- ----- ----- ------- ------- ----- ------- -------
Total Interest-Bearing Deposits $ (15) $(692) $(707) $ 227 $(1,533) $(1,306) $ 433 $(1,530 $(1,097)
----- ----- ----- ----- ------- ------- ----- ------- -------
NET INTEREST INCOME $(108) $ 327 $ 219 $(105) $ (70) $ (175) $ 450 $ (487) $ (37)
===== ===== ===== ===== ======= ======= ===== ======= =======
(1) Includes non-accrual loans.
FINANCIAL CONDITION
Our consolidated assets at December 31, 2004 were $235 million which
represented an increase of $2 million or .9 percent over $233 million at
December 31, 2003. The comparable increase for 2003 over 2002 was 1.7 percent or
$4 million.
Capital increased 3.3 percent from $27.6 million in 2003 to $28.5 million
in 2004. The net adjustment reflected in stockholders equity for the fair market
value of securities was a positive $376,000 for 2003 compared to a positive
$213,000 for 2004. Common stock and surplus decreased a net $261,000 resulting
from purchase and retirement of stock in the amount of $467,000 and stock issued
under our stock plans in the amount of $206,000.
Total average assets grew .2 percent from 2003 at $231.0 million to 2004
at $231.5 million. Average earning assets were $215.0 million in 2003 and $215.1
million in 2004.
Loans increased 1.6 percent from $147.6 million at December 31, 2003 to
$149.9 million at December 31, 2004.
Non-interest bearing deposits grew 8.1 percent to $18.7 million at
December 31, 2004 from $17.3 million at December 31, 2003. Interest bearing
deposits decreased .5 percent from $154.5 million in 2003 to $153.8 million in
2004.
The loan-to-deposit ratio is a key measurement of liquidity. Our
loan-to-deposit ratio increased during 2004 to 86.9 percent compared to 85.9
percent during 2003.
It is our opinion that the balance sheet 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.
26
INVESTMENTS
(Dollars in thousands)