10-K405 1 w58663e10-k405.txt CCFNB BANCORP, INC. FORM 10-K 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, 2001 [ ] 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. [X] The aggregate market value of the voting and non-voting equity held by non-affiliates of the Registrant based on the average of the bid and asked prices of $21.39 at February 28, 2002, was $28,208,319. As of February 28, 2002, the Registrant had outstanding 1,318,762 shares of its common stock, par value $1.25 per share. DOCUMENTS INCORPORATED BY REFERENCE In addition, portions of the Annual Report to stockholders of the Registrant for the year ended December 31, 2001, are incorporated by reference in Part II of this Annual Report. Page 1 of 70 Exhibit Index on Page 28 CCFNB BANCORP, INC. FORM 10-K INDEX Part I Page Item 1. Business.............................................................................................3 Item 2. Properties..........................................................................................19 Item 3. Legal Proceedings...................................................................................19 Item 4. Submission of Matters to a Vote of Security Holders.....................................Not Applicable Part II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters...........................20 Item 6. Selected Financial Data.............................................................................20 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...............20 Item 7A. Quantitative and Qualitative Disclosures about Market Risk..........................................20 Item 8. Financial Statements and Supplementary Data.........................................................20 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............................................................................Not Applicable Part III Item 10. Directors and Executive Officers of the Registrant..................................................21 Item 11. Executive Compensation..............................................................................22 Item 12. Security Ownership of Certain Beneficial Owners and Management......................................25 Item 13. Certain Relationships and Related Transactions......................................................25 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.....................................25 SIGNATURES.......................................................................................................26 INDEX TO EXHIBITS................................................................................................28 2 CCFNB BANCORP, INC. FORM 10-K PART I ITEM 1. BUSINESS GENERAL We are a registered financial holding company, bank holding company, and Pennsylvania business corporation, and are headquartered in Bloomsburg, Pennsylvania. We have one wholly-owned 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, 2001, we had approximately: o $214 million in total assets; o $142 million in loans; o $156 million in deposits; and o $26 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 operates also a full-service trust department. A third-party brokerage is also resident in the Bank's main office in Bloomsburg, Pennsylvania. At December 31, 2001, the Bank had six branch banking offices which are located in the Pennsylvania county of Columbia. We consider our branch banking offices to be a single operating segment, because these branches have similar: o economic characteristics, o products and services, o operating processes, o delivery system, o customer bases, and o regulatory oversight. We have not operated any other reportable operating segments in the 3-year period ended December 31, 2001. In January, 2001, we purchased a 50% interest in a local insurance agency. The name of this agency is Neighborhood Group, Inc. and trades under two fictitious names: Neighborhood Advisors (insurance agency) and Neighborhood Group Financial Services (insurance and investment). Through this joint venture, we sell insurance products and services, annuities and other investment products. As of December 31, 2001, we had 84 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. 3 INTERCOMPANY TRANSACTIONS Various governmental requirements, including Sections 23A and 23B of the Federal Reserve Act and new 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, 2001, approximately $5 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. Legislation adopted in 1994 gives the federal banking agencies greater flexibility in implementing standards on asset quality, earnings, and stock valuation. Regulatory authorities have broad flexibility to initiate proceedings designed to prohibit banks from engaging in unsafe and unsound banking practices. We and the Bank are also affected by various other governmental requirements and regulations, general economic conditions, and the fiscal and monetary policies of the federal government and the Federal Reserve Board. The monetary policies of the Federal Reserve Board influence to a significant extent the overall growth of loans, leases, investments, deposits, interest rates charged on loans, and interest rates paid on deposits. The nature and impact of future changes in monetary policies are often not predictable. 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. 4 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: o the default of a commonly controlled FDIC-insured depository institution or o 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% of our total consolidated loans as of December 31, 2001. 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: o commercial, o real estate mortgages, o consumer, and o unallocated. We evaluate some loans as a group and some individually. We use the following criteria in choosing loans to be evaluated individually: o by industry group, o by risk profile, and o 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: o historical trends, o economic conditions, and o any known deterioration. We use a self-correcting mechanism to reduce differences between estimated and actual losses. We will, on a quarterly basis, weight our loss experience among the various categories and reallocate the allowance for loan losses. 5 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 as well as footnote 4 at Exhibit 13 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: o 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 o supplementary ("Tier 2") capital, which includes, among other items, perpetual preferred stock not meeting the Tier 1 definition, mandatory convertible securities, subordinated debt and allowances for loan and lease losses, subject to certain limitations, less certain required deductions. We, like other bank holding companies, are required to maintain Tier 1 and "Total Capital" (the sum of Tier 1 and Tier 2 capital, less certain deductions) equal to at least four percent and eight percent of their total risk-weighted assets (including certain off-balance sheet items, such as unused lending commitments and standby letters of credit), respectively. At December 31, 2001, we met both requirements, with Tier 1 and Total Capital equal to 19.06 percent and 19.82 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, 2001, our leverage ratio was 12.44 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 indicia 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, 2001. 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 6 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, 2001, 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, 2001, the Bank held no brokered deposits. DIVIDEND RESTRICTIONS We are a legal entity separate and district 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: o the level of undivided profits, and o absent regulatory approval, an amount not in excess of net income combined with retained net income for the preceding two years. At December 31, 2001, approximately $1.4 million 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 7 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 FDIC established the FICO assessment rates effective for the fourth quarter 2001 at approximately $0.184 per $100 annually for BIF-assessable deposits. The FICO assessments are adjusted quarterly 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 2001, the Bank paid FICO assessments of $26,778. INTERSTATE BANKING AND BRANCHING Under the Riegle-Neal Interstate Banking and Branching Efficiency Act ("Riegle-Neal"), subject to certain concentration limits and other requirements: o bank holding companies, such as we, are permitted to acquire banks and bank holding companies located in any state; o 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 o 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. 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 8 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: o 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. o Safe deposit business. Conduct a safe deposit business or acquire voting securities of a company that conducts such business. o 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. o 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. o 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: - 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. 9 - 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. o Leasing personal or real property. Leasing personal or real property or acting as agent, broker, or adviser in leasing such property under certain conditions. o 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. o 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. o 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 adviser (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; - 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. o Agency transactional services for customer investments: 10 - 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. o 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. (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 11 the company's own account and the account of others, and providing incidental services such as arranging for storage, safe custody, assaying, and shipment. o 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. o 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. o 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. o Community development activities: 12 - 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. o 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. o Data processing. Providing data processing and data processing and 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, 2001. 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 1997. 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"), in general, took effect on March 11, 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. On December 19, 2000 we became 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: o financial in nature, o incidental to an activity that is financial in nature, or o complimentary to a financial activity. 13 The GLB Act lists certain activities as financial in nature: o Lending, investing or safeguarding money or securities; o Underwriting insurance or annuities, or acting as an insurance or annuity principal, agent or broker; o Providing financial or investment advice; o Issuing or selling interests in pools of assets that a bank could hold; o Underwriting, dealing in or making markets in securities; o 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"); o 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; o 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 o 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: o Lending, exchanging, transferring, investing for others or safeguarding financial assets other than money or securities; o Providing any method of transferring financial assets; and o 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: o underwrite insurance or annuities; o engage in real estate development or investment; o engage in merchant banking; or o 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 14 "consumer" a privacy notice only if we intend to disclose nonpublic personnel 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 issued regulations (effective November 13, 2000, however, compliance was optional until July 1, 2001) which give several examples of a consumer and customer relationship: o 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. o 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. o 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. o 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. o 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. o 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: o 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. o 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: o 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; o categories of nonpublic personal information that are collected by the Bank; o the policies that the Bank maintains to protect the confidentiality and security of nonpublic personal information; o the disclosure, if required, under the Fair Credit Reporting Act; and 15 o 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 proposed regulations give several examples of the rules to follow in drafting these notices: o 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. o 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. o 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: o with the consent of the customer or consumer; o to effect, administer or enforce a transaction requested or authorized by the customer or consumer; o the servicing or processing of a financial product or service requested or authorized by the customer or consumer; o 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; o 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; o 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 o 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 Federal Bureau of Investigation or FBI has (and will) send our banking regulatory agencies lists of the names of persons suspected of involvement in the September 11, 2001, terrorist attacks on New York City and Washington, DC. The Bank has been requested (and will be requested) to search its records for any relationships or transactions with persons on those lists. If the Bank finds any relationships or transactions, the Bank must file a suspicious activity report and contact the FBI. 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 16 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. SUBPRIME LENDING In January 2001, our federal banking regulatory agencies 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. In December 2000, the Federal Reserve Board published proposed 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. On June 23, 2001, the Governor of the Commonwealth of Pennsylvania signed into law Act 55 of 2001, the Mortgage Bankers and Brokers and Consumer Equity Protection Act. This law addresses what is known as "predatory lending", among other things, and is applicable to the Bank's closed-end home equity mortgage loans, involving property located in Pennsylvania, in an amount less than $100,000 made at a "high cost" which is generally the rate and point triggers in the HOEPA. Those HOEPA triggers are: o an annual percentage rate exceeding 10 percentage points above comparable term U.S. Treasury Securities; and/or o total points and fees payable by the consumer at or before closing that exceed the greater of 8 percent of the total loan amount or $400. The $400 is adjusted annually by the annual percentage change in the CPI, and for the year 2001, was $465 according to the Federal Reserve Board. These loans are called "covered loans" under this law. If HOEPA's rate or point triggers are changed, then the definition of a covered loan under this law changes automatically. Loans with an original principal amount of $100,000 or more are not subject to this law, but may be subject to HOEPA. Certain loan terms are prohibited or conditionally restricted in connection with a covered loan, such as: balloon payments, call provisions, negative amortization, increased interest rate upon default, and prepayment fees or penalties. Certain acts or practices are prohibited, conditionally restricted, or required in connection with a covered loan, including the following: o a cautionary notice, in writing, is required to be provided by the Bank to the borrower at least three business days prior to consummation of the mortgage transaction; o it is impermissible to engage in a pattern or practice of making covered loans without due regard to the consumer's ability to repay the loan;(1) o there are restrictions on the Bank refinancing an existing covered loan held by it with a new covered loan such that no points may be charged to the extent the proceeds are used to refinance the existing covered loan if the most recent financing was within one year; o the Bank may not refinance a zero interest rate or low-rate loan made by a governmental or nonprofit lender with a covered loan unless the loan is at least ten years old or the current holder of the loan consents to the refinancing; ---------- (1) The consumer's ability to repay applies under this law only to persons whose income is 120% or less of the median family income under the metropolitan statistical area or nonmetropolitan family income statistics. There is a statutory presumption that a consumer can repay the covered loan if the monthly payment does not exceed 50% of the consumer's monthly gross income. There is no statutory presumption that a consumer cannot make the payments even if the 50% monthly gross income level is exceeded by the required monthly loan payments. 17 o the Bank may not pay proceeds from a covered loan directly to a home improvement contractor but instead must disburse the loan proceeds through an instrument payable to the borrower (statutorily defined as the person obligated to repay a covered loan) individually or jointly with the contractor or, at the borrower's election through a third party escrow agent in accordance with the terms of a written agreement signed by the borrower, the Bank, and home improvement contractor prior to disbursement of funds to the contractors; o the Bank may not sell single premium credit insurance in connection with a covered loan unless the Bank offers the borrower the option of purchasing all such credit insurance on a monthly basis (compliance with this provision is required by 18 months to 2 years after June 25, 2002); o a credit insurance notice, in writing, must be provided to the borrower stating that his or her purchase of credit insurance is not a required condition of obtaining the covered loan, and that the borrower may cancel the credit insurance within 30 days of the date of the covered loan in order to receive a full refund (meaning a credit to the loan balance or cash, at the Bank's or insurance company's discretion); o the Bank shall maintain records related to covered loans that will facilitate the Pennsylvania Department of Banking determining compliance; o the Bank or its servicer shall file quarterly reports of favorable and unfavorable credit history of the borrower with a nationally recognized consumer credit reporting agency, but this requirement shall not prevent the Bank or servicer from agreeing with the borrower not to report payment history information related to resolved or unresolved disputes with a borrower, and this provision shall not apply to covered loans held or serviced by the Bank for less than 90 days; and o the Bank shall verify that each mortgage broker with whom it does business in connection with covered loans holds the required license to engage in business in Pennsylvania. A borrower or borrower can institute a civil action to recover damages from the Bank if it engages in the above practices with respect to a covered loan. Moreover, the Pennsylvania Department of Banking can impose monetary penalties; revoke a license; issue a cease and desist order; and removal persons from their employment in the mortgage finance industry or in any other capacity related to these prohibited activities. SALES OF INSURANCE On April 1, 2001, our federal banking regulatory agencies finalized 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 - and 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 with in 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. 18 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 six branch offices located in Bloomsburg, Benton, 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. 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, all of which we own, are described as follows:

Approximate Location Square Footage Use ------------------------------------------------------------------------- Orangeville, PA 2,259 Banking Services Benton, PA 4,672 Banking Services South Centre, PA 3,868 Banking Services Scott Township, PA 16,500 Banking Services, Corporate, Credit and Operations Millville, PA 2,520 Banking Services

We consider our facilities to be suitable and adequate for our current and immediate future purposes. ITEM 3. LEGAL PROCEEDINGS We and the Bank are not parties to any legal proceedings that could have any significant effect upon our financial condition or income. In addition, we and the Bank are not parties to any legal proceedings under federal and state environmental laws. 19 PART II. ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS We had 754 stockholders of record including individual participants in security position listings and 1,318,762 shares of common stock, par value of $1.25 per share, the only authorized class of common stock, outstanding as of February 28, 2002. Our common stock trades under the symbol "CCFN." As of February 28, 2002, six 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: Tucker Anthony of Lancaster, Pennsylvania. 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 2001 and 2000 are summarized in the following table.

Dividends 2001: High ($) Low ($) Declared ($) -------- ------- ------------ First quarter 17.88 16.50 .140 Second quarter 21.00 19.00 .150 Third quarter 24.50 23.00 .150 Fourth quarter 23.75 23.05 .150

Dividends 2000: High ($) Low ($) Declared ($) -------- ------- ------------ First quarter 17.00 16.38 .140 Second quarter 16.63 16.38 .140 Third quarter 17.50 16.00 .140 Fourth quarter 19.50 16.00 .140

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. ITEM 6. SELECTED FINANCIAL DATA The information called for by this item is filed at Exhibit 13 to this report and is incorporated in its entirety by reference under this Item 6. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information called for by this item is filed at Exhibit 13 to this report and is incorporated in its entirety by reference under this Item 7. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information called for by this item is filed at Exhibit 13 to this report and is incorporated in its entirety by reference under this Item 7A. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Our consolidated financial statements and notes to these statements are filed at Exhibit 13 to this report and are incorporated in their entirety by reference under this Item 8. Our supplementary data is filed at Exhibit 13 to this report and is incorporated in its entirety by reference under this Item 8. 20 PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS At February 28, 2002, we had nine directors. Our directors are divided into three classes: three directors are in Class 1; three directors are in Class 2; and three directors are in Class 3. Each director holds office for a three-year term. The terms of the classes are staggered, so that the term of office of one class expires each year. The following information includes the age of each of our current directors and those persons who have been nominated to become a director upon their election at our 2002 annual meeting of stockholders. All of our current directors are also nominees for director.

NAME AGE PRINCIPAL OCCUPATION DIRECTOR SINCE ------------------------------------ ------------ ---------------------------------- ------------------- Don E. Bangs 70 Secretary of the Corporation and 1985 the bank. Former owner of Bangs Insurance Agency and former agent for The Thrush Insurance Agency. ------------------------------------ ------------ ---------------------------------- ------------------- Robert M. Brewington, Jr. 51 Owner of Sutliff Motors and Brewington Transportation (sales 1996 and service of cars and trucks; school bus contractor). ------------------------------------ ------------ ---------------------------------- ------------------- Edward L. Campbell 63 President of ELC Enterprises, Inc., doing business as The 1985 Heritage House Family Restaurant, and the sole proprietor of Heritage Acres Christmas tree sales. ------------------------------------ ------------ ---------------------------------- ------------------- Edward R. Harding, Jr. 55 Attorney-at-Law and President of 1984 Inter-County Land Abstract Co., Inc. (title insurance). ------------------------------------ ------------ ---------------------------------- ------------------- William F. Hess 68 Chairman and former Vice 1983 Chairman of the Corporation and the bank. Dairy farmer. ------------------------------------ ------------ ---------------------------------- ------------------- Rodney B. Keller 51 Community Development Director for PPL Electric Utilities. 2000 ------------------------------------ ------------ ---------------------------------- ------------------- Willard H. Kile, Jr., D.M.D. 47 Partner of Kile & Robinson LLC 2000 (dentists); Partner of Kile & Kile Real Estate. ------------------------------------ ------------ ---------------------------------- ------------------- Charles E. Long 66 Retired. Former President of 1993 Long Supply Co., Inc. (a wholesaler and retailer of hardware and masonry products). ------------------------------------ ------------ ---------------------------------- ------------------- Paul E. Reichart 64 President, Chief Executive 1983 Officer and Vice Chairman of the Corporation and the bank. ------------------------------------ ------------ ---------------------------------- -------------------

21 PRINCIPAL OFFICERS Our principal officers are appointed by the Board of Directors and serve at the will of the Board of Directors, subject to certain change in control agreements discussed later in this report. The following information is presented for our principal officers:

NAME & POSITION HELD SINCE EMPLOYEE SINCE AGE ---------------------------------------------- ------------- ---------------- ---------- William F. Hess Chairman 1998 * 68 ---------------------------------------------- ------------- ---------------- ---------- Paul E. Reichart President and CEO 1985 1960 64 ---------------------------------------------- ------------- ---------------- ---------- Don E. Bangs Secretary 1993 * 70 ---------------------------------------------- ------------- ---------------- ---------- Virginia D. Kocher Treasurer 1991 1972 54 ---------------------------------------------- ------------- ---------------- ----------

* Not an employee of the Company and the Bank. COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934 Executive officers and directors and "beneficial owners" of more than ten percent of our common stock must file initial reports of ownership and reports of changes in ownership with the SEC pursuant to Section 16(a). We have reviewed the reports and written representations from the executive officers and directors. Based on this review, we believe that all filing requirements were met during 2001. ITEM 11. EXECUTIVE COMPENSATION This section of the report contains charts that show the amount of compensation earned by our executive officers whose salary and bonus exceeded $100,000 for 2001. It also contains the performance graph comparing our performance relative to a peer group and the report of our human resource committee explaining the compensation philosophy for our most highly paid officers. SUMMARY COMPENSATION TABLE(1)

ANNUAL COMPENSATION ---------------------------------------------------- NAME AND PRINCIPAL FISCAL OTHER ANNUAL ALL OTHER POSITION YEAR SALARY($) BONUS($) COMPENSATION(2)($) COMPENSATION(3)($) ----------------------------- -------- ------------ ---------------- ---------------------- ------------------------ Paul E. Reichart 2001 98,302 31,333(4) 9,600 4,471 President and Chief 2000 94,439 31,598(5) 9,600 4,284 Executive Officer 1999 90,895 23,653(6) 8,400 4,131

(1) From January 1, 1999 through December 31, 2001, the Corporation did not pay any long-term compensation in the form of stock options, stock appreciation rights, restricted stock or any other long-term compensation, nor did it make any long-term incentive plan payments. Accordingly, no such information is presented in the summary compensation table set forth above. No such arrangements are currently in effect. (2) Represents the payment of directors' fees by the bank for the years presented. Mr. Reichart did not receive perquisites and other personal benefits, securities and property that totaled in the aggregate for the years presented either $50,000 or 10% of the total of the amounts reported under the salary and bonus columns. Therefore, the amounts for such perquisites and other personal benefits, securities and property are not reported. (3) These figures represent annual term insurance premium payments on the life of Mr. Reichart. (4) Includes $15,000 as a life insurance premium payment for a deferred compensation plan; $3,513 as a cash bonus representing 3-1/2 % of base salary; $5,349 as a contribution to the bank's profit sharing plan; $1,538 representing 50% up to 3% matching contribution to Mr. Reichart's 401K plan; $704 representing car expense; and $5,229 representing cafeteria plan benefits. (5) Includes $15,000 as a life insurance premium payment for a deferred compensation plan; $4,212 as a cash bonus representing 4% of base salary; $5,430 as a contribution to the bank's profit sharing plan; $1,300 representing 50% up to 3% matching contribution to Mr. Reichart's 401K plan; $718 representing car expense; and $4,938 representing cafeteria plan benefits. (6) Includes $9,977 as a life insurance premium payment for a deferred compensation plan; $1,851 as a cash bonus representing 2% of base salary; $4,941 as a contribution to the bank's profit sharing plan; $1,350 representing 50% up to 3% matching contribution to Mr. Reichart's 401K plan; $865 representing car expense; and $4,669 representing cafeteria plan benefits. 22 EXECUTIVE COMPENSATION HUMAN RESOURCE COMMITTEE REPORT Executive compensation for the officers of the Company and the Bank is determined by the Human Resource Committee of the Company's Board of Directors. Salaries and bonuses for the executive officers are reviewed annually. All executive compensation is paid by the Bank to the applicable executive. COMPENSATION PHILOSOPHY Our executive compensation philosophy is designed to attract, retain, and motivate the best managerial talent available in line with three central themes: alignment, accountability, and attraction. o Alignment with the long-term interests of our stockholders; o Accountability for results by linking executives to the Company and individual performance; and o Attraction, motivation and retention of critical talent. The Human Resource Committee annually conducts a full review of our executives and their performance in determining compensation levels. For 2001, the Human Resource Committee considered various qualitative and quantitative indicators of the Company and individual performance in determining the level of compensation for President and Chief Executive Officer and other executive officers. The review included an evaluation of the Company's performance both on a short- and long-term basis. This review included an analysis of quantitative measures, such as Return on Equity. The Human Resource Committee considered also qualitative measures such as leadership, experience, strategic direction, community representation and social responsibility. The Human Resource Committee has been sensitive to management's maintaining a balance between actions that foster long-term value creation and short-term performance. In addition, the Human Resource Committee evaluates total executive compensation in light of the operational and financial performance and compensation practices of the commercial banking industry in the Pennsylvania region. Base salaries are reviewed each year and generally adjusted relative to individual performance and competitive salaries with the commercial banking industry in the Pennsylvania region. A base salary increase of 3.03% was made to all executives in 2001. Actual salaries will continue to be set according to the scope of the responsibilities of each executive officer's position. DEFERRED COMPENSATION AGREEMENTS FOR EXECUTIVE OFFICERS Paul E. Reichart has served as our and the Bank's President and Chief Executive Officer since 1985. Mr. Reichart was named Vice Chairman in 1998. J. Jan Girton has served as the Executive Vice President, Chief Operating Officer and Assistant Secretary of the Bank since 1987. As a result of Messrs. Reichart's and Girton's active involvement and experience in the affairs of the Bank, the Bank has depended upon, and continues to depend upon, their continued employment. The Bank does not maintain employment agreements or key man insurance, other than the deferred compensation agreements described below, with respect to Messrs. Reichart and Girton. In 1992, the Bank entered into agreements with Paul E. Reichart, President and Chief Executive Officer of the Company and the Bank, and J. Jan Girton, Executive Vice President, Chief Operating Officer and Assistant Secretary of the Bank, to establish a non-qualified deferred compensation plan for these officers. Each officer is deferring compensation in order to participate in his deferred compensation plan. If the officer continues to serve as an officer of the Bank until he attains 65 years of age, the Bank has agreed to pay him 120 guaranteed consecutive monthly payments commencing on the first day of the month following the officer's 65th birthday. Each officer's guaranteed monthly payment is based upon the future value of life insurance purchased with the compensation the officer has deferred. If the officer attains 65 years of age but dies before receiving all of the guaranteed monthly payments, then the Bank will make the remaining payments to the officer's designated beneficiary or to the representative of his estate. In the event that the officer dies while serving as an officer, but prior to age 65 years of age, then the Bank will remit the guaranteed monthly payments to the officer's designated beneficiary or to the representative of his estate. The Bank has obtained life insurance (designating the bank as the beneficiary) on the life of each participating officer in an amount which is intended to cover the Bank's obligations under the deferred compensation plan, based upon certain actuarial assumptions. In 2001, the Bank accrued $25,800 as an expense for the deferred compensation plan. 23 FIVE YEAR PERFORMANCE GRAPH The following graph and table compare the cumulative total stockholder return on our common stock during the six-year period ending on December 31, 2001, with (i) the cumulative total return on the SNL Securities Corporation Performance Index (1) for 35 publicly-traded banks with under $250 million in total assets in the Middle Atlantic area (2), and (ii) the cumulative total return for all United States stocks traded on the NASDAQ Stock market. The comparison assumes the value of the investment in our common stock and each index was $100 on December 31, 1996, and assumes further the reinvestment of dividends into the applicable securities. The stockholder return shown on the graph and table below is not necessarily indicative of future performance. [CHART]

PERIOD ENDING -------------------------------------------------------------------------- Index 12/31/96 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01 --------------------------------------------------------------------------------------------------------------------- CCFNB Bancorp, Incorporated 100.00 142.50 158.65 126.33 107.83 154.90 NASDAQ - Total US* 100.00 122.48 172.68 320.89 193.01 153.15 SNL less than $250M Bank Index 100.00 163.18 155.12 136.21 134.86 168.15

* Source: CRSP, Center for Research in Security Prices, Graduate School of Business, The University of Chicago 2001. Used with permission. All rights reserved. crsp.com. SNL SECURITIES LC (804) 977-1600 (C) 2001 Notes: A. The lines represent monthly index levels derived from compounded daily returns that include all dividends. B. The indexes are reweighted daily, using the market capitalization on the previous trading day. C. If the monthly interval, based on the fiscal year-end, is not a trading day, the preceding day is used. D. The index level for all series was set to $100 on 12/31/96. (1) SNL Securities is a research and publishing firm specializing in the collection and dissemination of data on the banking, thrift and financial services industries. (2) The Middle Atlantic area comprises the states of Delaware, Pennsylvania, Maryland, New Jersey and New York, the District of Columbia and Puerto Rico. 24 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT This section describes how much stock our directors, executive officers own. It also describes the persons or entities that own more than 5% of our voting stock. STOCK OWNED BY DIRECTORS, NOMINEES FOR DIRECTOR AND EXECUTIVE DIRECTORS This table indicates the number of shares of Common Stock owned by the executive officers and directors as of March 27, 2002. The aggregate number of shares owned by all directors and executive officers is 4.64%. Unless otherwise noted, each individual has sole voting and investment power for the shares indicated below.

NAME OF INDIVIDUAL AMOUNT AND NATURE OF OF IDENTITY OF GROUP BENEFICIAL OWNERSHIP(1) PERCENT OF CLASS -------------------- ----------------------- ---------------- Don E. Bangs 8,504.764 -- Robert M. Brewington, Jr. 7,682.425 -- Edward L. Campbell 6,214.339 -- Elwood R. Harding, Jr. 15,501.615 1.18% William F. Hess 4,415.402 -- Rodney B. Keller 731.874 -- Willard H. Kile, Jr. 2,776.932 -- Virginia D. Kocher 391.000 -- Charles E. Long 6,453.995 -- Paul E. Reichart 8,362.000 -- All Officers and Directors as a group (9 directors, 3 nominees, 4 officers, 10 persons in total) 61,034.346 4.64%

(1) Includes shares held (a) directly, (b) jointly with a spouse, (c) individually by spouse, (d) by the transfer agent in the Corporation's dividend reinvestment account, and (e) in various trusts. VOTING STOCK OWNED BY "BENEFICIAL OWNER" We know of no persons or entities who own beneficially more than five percent of our common stock as of February 28, 2002. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS We encourage our directors and executive officers to have banking and financial transactions with the Bank. All of these transactions are made on comparable terms and with similar interest rates as those prevailing for other customers. The total consolidated loans made by the Bank at December 31, 2001, to its directors and officers as a group, members of their immediate families and companies in which they have a 10% or more ownership interest was $6,766,537 or approximately 26.0% of our total consolidated capital accounts. The largest amount for all of these loans in 2001 was $7,357,218 million or approximately 28.3% of our total consolidated capital accounts. These loans did not involve more than the normal risk of collectibility nor did they present other unfavorable features. PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Our consolidated financial statements and notes to these statements as well as the applicable reports of the independent certified public accountants are filed at Exhibit 13 to this report and are incorporated in their entirety by reference under this Item 14(a)1. 2. All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes to these statements. 25 3. The exhibits required by Item 601 of Regulation S-K are included under Item 14(c) to this report. (b) Reports on Form 8-K We filed no current reports on Form 8-K during the quarter ended December 31, 2001. (c) Exhibits required by Item 601 of Regulation S-K:

Exhibit Number Referred to Item 601 of Regulation SK Description of Exhibit --------------------------- ---------------------- 2 None. 3 None. 4 None. 9 None. 10 None. 11 None. 12 None. 13 Portions of the Annual Report to Stockholders for Fiscal Year Ended December 31, 2001. 16 None. 18 None. 21 List of Subsidiaries of the Company. 22 None. 23 None. 24 None. 99 SEC Guide 3 Financial Information.

By order of the Board of Directors SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CCFNB BANCORP, INC. (Bancorp) By: /s/ Paul E. Reichart Date: March 28, 2002 -------------------------------------- Paul E. Reichart President, Chief Executive Officer and Vice Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By: /s/ Don E. Bangs Date: March 28, 2002 -------------------------------------- Don E. Bangs Director and Secretary 26 By: /s/ Robert M. Brewington, Jr. Date: March 28, 2002 --------------------------------------------- Robert M. Brewington, Jr. Director By: /s/ Edward L. Campbell Date: March 28, 2002 --------------------------------------------- Edward L. Campbell Director By: /s/ Elwood R. Harding, Jr. Date: March 28, 2002 --------------------------------------------- Elwood R. Harding, Jr. Director By: /s/ William F. Hess Date: March 28, 2002 --------------------------------------------- William F. Hess Director and Chairman of the Board By: /s/ Rodney B. Keller Date: March 28, 2002 --------------------------------------------- Rodney B. Keller Director By: /s/ Willard H. Kile, Jr., DMD Date: March 28, 2002 --------------------------------------------- Willard H. Kile, Jr., DMD Director By: /s/ Charles E. Long Date: March 28, 2002 --------------------------------------------- Charles E. Long Director By: /s/ Paul E. Reichart Date: March 28, 2002 --------------------------------------------- Paul E. Reichart Director , President, Chief Executive Officer and Vice Chairman of the Board (Chief Executive Officer) By: /s/ Virginia D. Kocher Date: March 28, 2002 --------------------------------------------- Virginia D. Kocher Treasurer (Principal Financial and Accounting Officer) 27 INDEX TO EXHIBITS

Item Number Description Page ----------- ----------- ---- 13 Portions of the Annual Report to Stockholders for the Fiscal Year Ended December 31, 2001............................ 29 21 List of Subsidiaries of the Company............................ 66 99 SEC Guide 3 Financial Information.............................. 67

28 EXHIBIT 13 PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 29 CCFNB BANCORP, INC. AND SUBSIDIARY 2001 ANNUAL REPORT 30 CCFNB BANCORP, INC. AND SUBSIDIARY CCFNB Bancorp, Inc. (the "Corporation") is a registered bank holding company and organized under the Pennsylvania business corporation law. The assets are primarily those of its wholly owned subsidiary, the Columbia County Farmers National Bank. The Columbia County Farmers National Bank is a full service nationally-chartered financial institution serving customers from six locations in Columbia County; namely Orangeville, Bloomsburg, Benton, South Centre, Millville and Lightstreet. The deposits of the Bank are insured by the Federal Deposit Insurance Corporation to the maximum extent provided by law. A copy of the Corporation's Annual Report for the year ended December 31, 2001, on Form 10-K as filed with the Securities and Exchange Commission will be furnished without charge upon written request to Mr. Paul E. Reichart, President and Chief Executive Officer, Columbia County Farmers National Bank, 232 East Street, Bloomsburg, Pennsylvania 17815. CONSOLIDATED SELECTED FINANCIAL DATA (In thousands of dollars, except per share data and ratios)

2001 2000 1999 -------- -------- -------- EARNINGS Interest income ....................................... $ 13,719 $ 13,552 $ 12,669 Interest expense ...................................... 6,924 6,859 6,099 Provision for loan losses ............................. 163 54 78 Investment securities gains ........................... 99 0 39 Net income ............................................ 2,057 $ 2,054 $ 2,039 PER SHARE Net income ............................................ 1.54 $ 1.51 $ 1.48 Cash dividends ........................................ .59 .56 .51 BALANCES AT DECEMBER 31 Assets ................................................ $214,238 $203,054 $196,122 Investment securities ................................. 57,121 47,311 49,104 Net loans ............................................. 141,962 136,352 133,438 Deposits .............................................. 155,666 143,169 138,606 Stockholders' equity .................................. 26,042 25,050 23,047 RATIOS Return on average assets .............................. .99% 1.04% 1.09% Return on average equity .............................. 7.90% 8.59% 8.91% Dividend payout ratio ................................. 39.67% 37.14% 34.23% CONTENTS Message to shareholders............................................................................ 1 Consolidated balance sheets........................................................................ 2 Consolidated statements of income.................................................................. 3 Consolidated statements of stockholders' equity.................................................... 4 Consolidated statements of cash flows.............................................................. 5 Notes to consolidated financial statements 6-20 Report of Independent Certified Public Accountants................................................. 21 Management's discussion and analysis of financial condition and results of operations.............. 22-36

31 CCFNB BANCORP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2001 AND 2000

2001 2000 ------------- ------------- ASSETS Cash and due from banks ................................................................... $ 6,205,230 $ 6,722,273 Interest-bearing deposits with other banks ................................................ 2,312,406 5,440,371 Federal funds sold ........................................................................ 0 500,000 Investment Securities Available-for-Sale .................................................. 57,121,229 47,311,098 Loans, net of unearned income ............................................................. 142,989,592 137,360,493 Allowance for loan losses ................................................................. 1,027,805 1,008,301 ------------- ------------- Net loans ............................................................................ $ 141,961,787 $ 136,352,192 Premises and equipment, net ............................................................... 4,634,502 4,922,287 Accrued interest receivable ............................................................... 977,434 1,037,765 Other assets .............................................................................. 1,025,411 767,718 ------------- ------------- TOTAL ASSETS ......................................................................... $ 214,237,999 $ 203,053,704 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits: Non-interest bearing ................................................................. $ 14,711,465 $ 14,593,285 Interest bearing ..................................................................... 140,954,292 128,575,353 ------------- ------------- Total Deposits ................................................................... $ 155,665,757 $ 143,168,638 Short-term borrowings ..................................................................... 19,780,924 20,108,966 Long-term borrowings ...................................................................... 11,357,497 13,367,560 Accrued interest and other expenses ....................................................... 1,382,143 1,325,593 Other liabilities ......................................................................... 9,653 32,942 ------------- ------------- TOTAL LIABILITIES ................................................................ $ 188,195,984 $ 178,003,699 ------------- ------------- STOCKHOLDERS' EQUITY Common stock, par value $1.25 per share; authorized 5,000,000 shares; issued 1,326,172 shares 2001; 1,346,328 shares 2000 ................................................................ $ 1,657,715 $ 1,682,910 Surplus ................................................................................... 4,730,002 5,146,061 Retained earnings ......................................................................... 19,578,971 18,310,262 Accumulated other comprehensive income (loss) ............................................. 75,327 (89,228) ------------- ------------- TOTAL STOCKHOLDERS' EQUITY ....................................................... $ 26,042,015 $ 25,050,005 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ....................................... $ 214,237,999 $ 203,053,704 ============= =============

The accompanying notes are an integral part of these consolidated financial statements. 32 CCFNB BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME FOR YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

2001 2000 1999 ----------- ----------- ----------- INTEREST INCOME Interest and fees on loans .......................................... $10,645,387 $10,723,881 $ 9,707,599 Interest and dividends on investment securities: Taxable ........................................................ 1,842,153 1,924,553 2,021,448 Tax-exempt ..................................................... 814,957 731,901 689,029 Dividends ...................................................... 81,078 85,490 80,687 Federal funds sold .................................................. 66,967 2,675 38,880 Deposits in other banks ............................................. 268,742 83,252 131,729 ----------- ----------- ----------- TOTAL INTEREST INCOME ...................................... $13,719,284 $13,551,752 $12,669,368 ----------- ----------- ----------- INTEREST EXPENSE Deposits ............................................................ $ 5,473,454 $ 5,169,571 $ 4,953,724 Short-term borrowings ............................................... 718,979 1,119,810 1,014,511 Long-term borrowings ................................................ 731,371 569,747 130,408 ----------- ----------- ----------- TOTAL INTEREST EXPENSE ..................................... $ 6,923,804 $ 6,859,128 $ 6,098,643 ----------- ----------- ----------- Net interest income ................................................. $ 6,795,480 $ 6,692,624 $ 6,570,725 Provision for loan losses ........................................... 162,500 54,000 78,000 ----------- ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES ............................................ $ 6,632,980 $ 6,638,624 $ 6,492,725 ----------- ----------- ----------- NON-INTEREST INCOME Service charges and fees ............................................ $ 606,252 $ 594,838 $ 611,625 Trust department .................................................... 237,904 219,261 189,271 Other ............................................................... 205,699 239,174 210,247 Investment securities gains, net .................................... 98, 895 0 38,707 ----------- ----------- ----------- TOTAL NON-INTEREST INCOME .................................. $ 1,148,750 $ 1,053,273 $ 1,049,850 ----------- ----------- ----------- NON-INTEREST EXPENSE Salaries ............................................................ $ 2,050,305 $ 2,015,868 $ 1,905,185 Pensions and other employee benefits ................................ 691,798 644,774 629,957 Occupancy, net ...................................................... 366,157 328,313 338,684 Equipment ........................................................... 544,166 601,031 597,073 State shares tax .................................................... 242,507 218,781 196,186 Other ............................................................... 1,209,282 1,157,955 1,151,514 ----------- ----------- ----------- TOTAL NON-INTEREST EXPENSE ................................. $ 5,104,215 $ 4,966,722 $ 4,818,599 ----------- ----------- ----------- Income before income taxes .......................................... $ 2,677,515 $ 2,725,175 $ 2,723,976 Income tax expense .................................................. 620,928 671,114 684,739 ----------- ----------- ----------- NET INCOME ................................................. $ 2,056,587 $ 2,054,061 $ 2,039,237 =========== =========== =========== PER SHARE DATA Net income .......................................................... $ 1.54 $ 1.51 $ 1.48 ----------- ----------- ----------- Cash dividends ...................................................... $ .59 $ .56 $ .51 ----------- ----------- ----------- Weighted average shares outstanding ................................. 1,338,007 1,355,624 1,375,572

The accompanying notes are an integral part of these consolidated financial statements. 33 CCFNB BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

Accumulated Other Common Comprehensive Retained Comprehensive Stock Surplus Income Earnings Income (Loss) ---------- ---------- ------------- ----------- ------------- BALANCE AT DECEMBER 31, 1998............. $1,728,041 $5,849,157 $15,670,930 $ 447,551 Comprehensive income: Net income........................... 0 0 $ 2,039,237 2,039,237 0 Change in net unrealized gain (loss) on investment securities available-for-sale, net of reclassification adjustment and tax effects...................... 0 0 (1,607,498) 0 (1,607,498) ------------- Total comprehensive income $ 431,739 ============= Issuance of 7,345 shares of common stock under dividend reinvestment and stock purchase plans................................ 9,181 139,401 0 0 Sale of 549 shares of treasury stock..... 0 (4,809) 0 0 Purchase of 15,700 shares of treasury stock 0 0 0 0 Retirement of 22,127 shares of treasury stock (27,658) (500,234) 0 0 Cash dividends $.51 per share............ 0 0 (695,463) 0 ---------- ---------- ----------- ----------- BALANCE AT DECEMBER 31, 1999............. $1,709,564 $5,483,515 $17,013,997 $(1,159,947) Comprehensive income : Net income........................... 0 0 $ 2,054,061 2,054,061 0 Change in net unrealized gain on investment securities available-for-sale, net of reclassification adjustment and tax effects...................... 0 0 1,070,719 0 1,070,719 ------------- Total comprehensive income $ 3,124,780 ============= Issuance of 8,777 shares of common stock under dividend reinvestment and stock purchase plans................................ 10,971 137,191 0 0 Purchase of 30,100 shares of treasury stock 0 0 0 0 Retirement of 30,100 shares of treasury stock (37,625) (474,645) 0 0 Cash dividends $.56 per share............ 0 0 (757,796) 0 ---------- ---------- ----------- ----------- BALANCE AT DECEMBER 31, 2000............. $1,682,910 $5,146,061 $18,310,262 $ (89,228) ========== ========== =========== =========== Comprehensive income : Net income........................... 0 0 $ 2,055,587 2,056,597 0 Change in net unrealized gain on investment securities available-for-sale, net of reclassification adjustment and tax effects...................... 0 0 164,555 0 164,555 ------------- Total comprehensive income $ 2,221,142 ============= Issuance of 7,345 shares of common stock under dividend reinvestment and stock purchase plans................................ 9,181 139,112 0 0 Purchase of 27,501 shares of treasury stock 0 0 0 0 Retirement of 27,501 shares of treasury stock (34,376) (555,171) 0 0 Cash dividends $.56 per share............ 0 0 (787,879) 0 ---------- ---------- ----------- ----------- BALANCE AT DECEMBER 31, 2001............. $1,657,715 $4,730,002 $19,578,971 $ 75,327 ========== ========== =========== ===========

Treasury Stock Total --------- ----------- BALANCE AT DECEMBER 31, 1998............. $(215,260) $23,479,712 Comprehensive income: Net income........................... 0 2,039,237 Change in net unrealized gain (loss) on investment securities available-for-sale, net of reclassification adjustment and tax effects...................... 0 (1,607,498) Total comprehensive income Issuance of 7,345 shares of common stock under dividend reinvestment and stock purchase plans................................ 0 148,582 Sale of 549 shares of treasury stock..... 17,843 13,034 Purchase of 15,700 shares of treasury stock (330,475) (330,475) Retirement of 22,127 shares of treasury stock 527,892 0 Cash dividends $.51 per share............ 0 (695,463) --------- ----------- BALANCE AT DECEMBER 31, 1999............. $0 $23,047,129 Comprehensive income : Net income........................... 0 2,054,061 Change in net unrealized gain on investment securities available-for-sale, net of reclassification adjustment and tax effects...................... 0 1,070,719 Total comprehensive income Issuance of 8,777 shares of common stock under dividend reinvestment and stock purchase plans................................ 0 148,162 Purchase of 30,100 shares of treasury stock (512,270) (512,270) Retirement of 30,100 shares of treasury stock 512,270 0 Cash dividends $.56 per share............ 0 (757,796) --------- ----------- BALANCE AT DECEMBER 31, 2000............. $0 $25,050,005 == =========== Comprehensive income : Net income........................... 0 2,056,587 Change in net unrealized gain on investment securities available-for-sale, net of reclassification adjustment and tax effects...................... 0 164,555 Total comprehensive income Issuance of 7,345 shares of common stock under dividend reinvestment and stock purchase plans................................ 0 148,293 Purchase of 27,501 shares of treasury stock (589,547) (589,547) Retirement of 27,501 shares of treasury stock 589,547 0 Cash dividends $.56 per share............ 0 (787)878) --------- ----------- BALANCE AT DECEMBER 31, 2001............. $ 0 $26,042,015 ========= ===========

The accompanying notes are an integral part of these consolidated financial statements. 34 CCFNB BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

2001 2000 1999 ------------ ------------ ------------ OPERATING ACTIVITIES Net income ................................................................ $ 2,056,587 $ 2,054,061 $ 2,039,237 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses ......................................... 152,500 54,000 78,000 Depreciation and amortization ..................................... 441,033 509,630 515,511 Premium amortization on investment securities ..................... 103,748 36,381 72,948 Discount accretion on investment securities ....................... (17,734) (17,469) (22,631) Deferred income taxes (benefit) ................................... (42,741) (11,739) 18,469 (Gain) on sales of investment securities Available-for-Sale ....... (98,895) 0 (38,707) (Gain) on sale of other real estate ............................... 0 0 (1,285) Loss from investment in insurance agency .......................... 1,916 0 0 (Increase) decreases in accrued interest receivable ............... 60,331 (35,248) (170,603) (Increase) in other assets - net .................................. (140,415) (74,619) (87,181) Increase in accrued interest and other expenses ................... 56,550 94,621 54,865 Increase (decrease) in other liabilities - net .................... (23,279) 18,979 (19,504) ------------ ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES .................. $ 2,559,601 $ 2,628,597 $ 2,439,119 ------------ ------------ ------------ INVESTING ACTIVITIES Purchase of investment securities Available-for-Sale ...................... $(42,860,135) $ (1,721,950) $(16,063,486) Proceeds from sales, maturities and redemption of investment securities Available-for-Sale .................................................... 33,318,255 4,917,158 12,294,313 Proceeds from maturities and redemption of investment securities Held-to-Maturity ...................................................... 0 200,000 365,000 Net (increase) decrease in loans .......................................... (5,772,095) (2,968,509) (15,979,778) Purchases of premises and equipment ....................................... (153,248) (157,970) (139,921) Proceeds from sale of other real estate ................................... 0 0 93,234 Acquisition of interest in insurance agency ............................... (167,268) 0 0 ------------ ------------ ------------ NET CASH (USED) IN INVESTING ACTIVITIES .................... $(15,534,490) $ 268,729 $(19,430,638) ----------- ------------ ------------ FINANCING ACTIVITIES Net increase (decrease) in deposits ....................................... $ 12,497,119 $ 4,563,001 $ 926,301 Net increase (decrease) in short-term borrowings .......................... (328,042) (10,771,412) 10,462,273 Proceeds from long-term borrowings ........................................ 0 11,032,092 61,560 Repayment of long-term borrowings ......................................... (2,010,063) (8,276) (8,519) Proceeds from sale of treasury stock ...................................... 0 0 13,034 Acquisition of treasury stock ............................................. (589,547) (512,270) (330,475) Proceeds from issuance of common stock .................................... 148,293 148,162 148,582 Cash dividends paid ....................................................... (787,878) (757,796) (695,463) ------------ ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES .................. $ 8,929,882 $ 3,693,501 $10,577,293 ------------ ------------ ------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........... $ (4,145,008) $ 6,590,827 $ (6,414,226) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ............................ 12,662,644 6,071,817 12,486,043 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF YEAR .............................. $ 8,517,636 $ 12,662,644 $ 6,071,817 ============ ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest .............................................................. $ 6,944,409 $ 6,775,411 $ 6,054,137 Income taxes .......................................................... 624,853 $ 684,207 $ 680,106

The accompanying notes are an integral part of these consolidated financial statements. 35 CCFNB BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of CCFNB Bancorp, Inc. and Subsidiary (the "Corporation") are in accordance with generally accepted accounting principles generally accepted in the United States of America and conform to common practices within the banking industry. The more significant policies follow: PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of CCFNB Bancorp, Inc. and its wholly owned subsidiary, Columbia County Farmers National Bank (the "Bank"). All significant inter-company balances and transactions have been eliminated in consolidation. NATURE OF OPERATIONS & LINES OF BUSINESS The Corporation provides full banking services, including trust services, through the Bank, to individuals and corporate customers. The Bank has six offices covering an area of approximately 484 square miles in Northeastern Pennsylvania. The Corporation and its banking subsidiary are subject to regulation of the Office of the Comptroller of the Currency, The Federal Deposit Insurance Corporation and the Federal Reserve Bank of Philadelphia. Procuring deposits and making loans are the major lines of business. The deposits are mainly deposits of individuals and small businesses and the loans are mainly real estate loans covering primary residences and small business enterprises. The trust services, under the name of CCFNB and Co., include administration of various estates, pension plans, self-directed IRA's and other services. A third-party brokerage arrangement, is also resident in the main branch, namely Bloomsburg. This investment center offers a full line of stocks, bonds and other non-insured financial services. On December 19, 2000 the Corporation became a Financial Holding Company by having filed an election to do so with the Federal Reserve Board. The Financial Holding Company status was required in order to acquire an interest in a local insurance agency that occurred during January 2001. USE OF ESTIMATES The preparation of these consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of these consolidated financial statements and the reported amounts of income and expenses during the reporting periods. Actual results could differ from those estimates. INVESTMENT SECURITIES The Corporation classifies its investment securities as either "Held-to-Maturity" or "Available-for-Sale" at the time of purchase. Debt securities are classified as Held-to-Maturity when the Corporation has the ability and positive intent to hold the securities to maturity. Investment securities Held-to-Maturity are carried at cost adjusted for amortization of premiums and accretion of discounts to maturity. Debt securities not classified as Held-to-Maturity and equity securities included in the Available-for-Sale category, are carried at fair value, and the amount of any unrealized gain or loss net of the effect of deferred income taxes is reported as other comprehensive income in the Consolidated Statement of Stockholders' Equity. Management's decision to sell Available-for-Sale securities is based on changes in economic conditions controlling the sources and uses of funds, terms, availability of and yield of alternative investments, interest rate risk, and the need for liquidity. The cost of debt securities classified as Held-to-Maturity or Available-for-Sale is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion, as well as interest and dividends, is included in interest income from investments. Realized gains and losses are included in net investment securities gains. The cost of investment securities sold, redeemed or matured is based on the specific identification method. LOANS Loans are stated at their outstanding principal balances, net of deferred fees or costs, unearned income, and the allowance for loan losses. Interest on loans is accrued on the principal amount outstanding, primarily on an actual day basis. Non-refundable loan fees and certain direct costs are deferred and amortized over the life of the loans using the interest method. The amortization 36 is reflected as an interest yield adjustment, and the deferred portion of the net fees and costs is reflected as a part of the loan balance. Non-Accrual Loans - Generally, a loan is classified as non-accrual, with the accrual of interest on such a loan discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectibility of principal or interest, even though the loan currently is performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on non-accrual status, unpaid interest credited to income in the current year is reversed, and unpaid interest accrued in prior years is charged against the allowance for credit losses. Certain non-accrual loans may continue to perform, that is, payments are still being received with those payments generally applied to principal. Non-accrual loans remain under constant scrutiny and if performance continues, interest income may be recorded on a cash basis based on management's judgement as to collectibility of principal. Allowance for Loan Losses - The allowance for loan losses is established through provisions for loan losses charged against income. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. A factor in estimating the allowance for loan losses is the measurement of impaired loans. A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the loan agreement. Under current accounting standards, the allowance for loan losses related to impaired loans is based on discounted cash flows using the loan's effective interest rate or the fair value of the collateral for certain collateral dependent loans. The allowance for loan losses is maintained at a level established by management to be adequate to absorb estimated potential loan losses. Management's periodic evaluation of the adequacy of the allowance for loan losses is based on the Corporation's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions, and other relevant factors. This evaluation is inherently subjective as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. PREMISES AND EQUIPMENT Premises and equipment are stated at cost less accumulated depreciation computed principally on the straight-line method over the estimated useful lives of the assets. Maintenance and minor repairs are charged to operations as incurred. The cost and accumulated depreciation of the premises and equipment retired or sold are eliminated from the property accounts at the time of retirement or sale, and the resulting gain or loss is reflected in current operations. OTHER REAL ESTATE OWNED Other real estate owned is comprised of property acquired through a foreclosure proceeding or acceptance of a deed-in-lieu of foreclosure and loans classified as in-substance foreclosure. In accordance with Statement of Financial Accounting Standards (SFAS) No. 114, a loan is classified as in-substance foreclosure when the Corporation has taken possession of the collateral regardless of whether formal foreclosure proceedings take place. Other real estate owned is recorded at fair value at the date of foreclosure, establishing a new cost basis. After foreclosure, valuations are periodically performed by management, and the real estate is carried at the lower of (1) cost or (2) fair value minus estimated costs to sell. Income and expenses from operations of other real estate owned and changes in the valuation allowance are included in loss on other real estate owned. INVESTMENT IN INSURANCE AGENCY On January 2, 2001, the Corporation acquired a 50% interest in a local insurance agency, a corporation organized under the laws of the Commonwealth of Pennsylvania. The income or loss from this investment is accounted for under the equity method of accounting. The carrying value of this investment as of December 31, 2001 is $165,352 and is carried in other assets in the accompanying consolidated balance sheets. INCOME TAXES The provision for income taxes is based on the results of operations, adjusted primarily for tax-exempt income. Certain items of income and expense are reported in different periods for financial reporting and tax return purposes. Deferred tax assets and liabilities are determined based on the differences between the consolidated financial statement and income tax basis of assets and liabilities measured by using the enacted tax rates and laws expected to be in effect when the timing differences are expected to reverse. Deferred tax expense or benefit is based on the difference between deferred tax asset or liability from period to period. 37 PER SHARE DATA Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share", requires dual presentation of basic and diluted earnings per share. Basic earnings per share is calculated by dividing net income by the weighted average number of shares of common stock outstanding at the end of each period. Diluted earnings per share is calculated by increasing the denominator for the assumed conversion of all potentially dilutive securities. The Corporation does not have any securities which have or will have a dilutive effect, accordingly, basic and diluted per share data is the same. CASH FLOW INFORMATION For purposes of reporting consolidated cash flows, cash and cash equivalents include cash on hand and due from banks, interest-bearing deposits in other banks and federal funds sold. The Corporation considers cash classified as interest-bearing deposits with other banks as a cash equivalent because they are represented by cash accounts essentially on a demand basis. Federal funds are also included as a cash equivalent because they are generally purchased and sold for one-day periods. TRUST ASSETS AND INCOME Property held by the Corporation in a fiduciary or agency capacity for its customers is not included in the accompanying consolidated financial statements because such items are not assets of the Corporation. Trust Department income is recognized on a cash basis and is not materially different than if it was reported on an accrual basis. SEGMENT REPORTING The Corporation's banking subsidiary acts as an independent community financial services provider, and offers traditional banking and related financial services to individual, business and government customers. Through its branch, internet banking, telephone and automated teller machine network, the Bank offers a full array of commercial and retail financial services, including the taking of time, savings and demand deposits; the making of commercial, consumer and mortgage loans; and the providing of other financial services. The Bank also performs personal, corporate, pension and fiduciary services through its Trust Department as well as offering diverse investment products through its Investment center. Management does not separately allocate expenses, including the cost of funding loan demand, between the commercial, retail, trust and investment center operations of the Corporation. As such, discrete financial information is not available and segment reporting would not be meaningful. RECENT ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards (SFAS) No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities", is generally effective for transactions occurring after March 31, 2001. For recognition and reclassification of collateral and for disclosure related to securitization transactions and collateral, the effective date is for fiscal years ending after December 15, 2000. SFAS No. 140 replaces SFAS No. 125 and provides revisions to the standards for accounting and requirements for certain disclosures relating to securitizations and other transfers of financial assets. The standard is not expected to have a significant impact on the Corporation's consolidated financial condition or results of operations. RECLASSIFICATION Certain amounts in the consolidated financial statements of the prior years have been reclassified to conform with presentation used in the 2001 consolidated financial statements. Such reclassifications had no effect on the Corporation's consolidated financial condition or net income. 2. RESTRICTED CASH BALANCES The Bank is required to maintain average reserve balances with the Federal Reserve Bank. The amount required at December 31, 2001 was $1,034,000 and was satisfied by vault cash. Additionally, as compensation for check clearing and other services, compensating balances are required to be maintained with the Federal Reserve Bank and other correspondent banks. At December 31, 2001, these balances were $620,801. 38 3. INVESTMENT SECURITIES AVAILABLE-FOR-SALE The amortized cost, related estimated fair value, and unrealized gains and losses for investment securities classified as "Available-for-Sale" or "Held-to-Maturity" were as follows at December 31, 2001 and 2000:

Available-for-Sale Securities ----------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair December 31, 2001: Cost Gains Losses Value ------------ ------------ ------------ ------------ Obligations of U.S. Government Corporations and Agencies: Mortgage-backed ....................... $ 20,923,241 $ 78,087 $ 0 $ 21,001,328 Other ................................. 12,478,240 74,408 0 12,552,648 Obligations of state and political subdivisions 17,489,802 35,673 0 17,525,475 Corporate securities .......................... 4,658,023 0 69,135 4,588,888 Marketable equity securities .................. 332,456 4,696 10,662 326,490 Restricted equity securities .................. 1,126,400 0 0 1,126,400 ------------ ------------ ------------ ------------ Total ......................................... $ 57,008,162 $ 192,854 $ 79,797 $ 57,121,229 ============ ============ ============ ============

Available-for-Sale Securities ----------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair December 31, 2000: Cost Gains Losses Value ------------- ------------- ------------- ------------- Obligations of U.S. Government Corporations and Agencies: Mortgage-backed ....................... $ 13,371,642 $ 0 $ 77,488 $ 13,294,154 Other ................................. 15,893,015 0 82,855 15,810,160 Obligations of state and political subdivisions ................................ 16,025,022 79,267 0 16,104,289 Corporate securities .......................... 726,430 0 1,430 725,000 Marketable equity securities .................. 310,893 11,365 71,163 251,095 Restricted equity securities .................. 1,126,400 0 0 1,126,400 ------------- ------------- ------------- ------------- Total ......................................... $ 47,453,402 $ 90,632 $ 232,936 $ 47,311,098 ============= ============= ============= =============

Securities Available-for-Sale with an aggregate fair value of $35,683,128 in 2001 and $32,189,849 in 2000, respectively, were pledged to secure public funds, trust funds, securities sold under agreements to repurchase and other balances of $28,012,969 in 2001 and $28,900,494 in 2000, respectively, as required by law. The amortized cost and estimated fair value of debt securities, by expected maturity, are shown below at December 31, 2001. Expected maturities will differ from contractual maturities, because some borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Available-for-Sale ------------------------ Estimated Amortized Fair Cost Value ----------- ----------- Due in one year or less ................................ $ 716,660 $ 721,643 Due after one year through five years .................. 22,665,657 22,717,299 Due after five years through ten years ................. 15,722,262 15,813,469 Due after ten years .................................... 17,903,583 17,862,818 ----------- ----------- Total .................................................. $57,008,162 $57,121,229 =========== ===========

Restricted equity securities consist of stock in the Federal Home Loan Bank of Pittsburgh (FHLB), Federal Reserve Bank (FRB) and Atlantic Central Bankers Bank (ACBB) and do not have a readily determinable fair value for purposes of SFAS No. 115, because their ownership as restricted and they can be sold back only to the FHLB, FRB, ACBB or to another member 39 institution. Therefore, these securities are classified as restricted equity investment securities, carried at cost, and evaluated for impairment. The quality rating of all obligations of state and political subdivisions were "A" or higher, as rated by Moody's or Standard and Poors. The only exceptions were local issues which were not rated, but were secured by the full faith and credit obligations of the communities that issued these securities. All of the state and political subdivision investments were actively traded in a liquid market. Proceeds from sales, maturities and redemptions of investments in debt and equity securities classified as Available-for-Sale during 2001, 2000 and 1999 were $33,318,256, $4,917,158 and $12,294,313, respectively. Gross gains realized on these sales were $98,895, $0 and $38,707, respectively. There were no gross losses on the 2001, 2000, and 1999 sales. Proceeds from maturities and redemptions of investments in debt securities classified as Held-to-Maturity during 2001, 2000 and 1999 were $0, $200,000 and $365,000 respectively. There were no gross gains or losses on these sales during 2001, 2000 and 1999, respectively. 4. LOANS Major classifications of loans at December 31, 2001 and 2000 consisted of:

2001 2000 -------------- -------------- Commercial ................................... $ 13,091,017 $ 14,411,838 Tax-exempt ................................... 798,681 2,747,097 Municipal leases ............................. 1,147,999 121,520 Real estate - construction ................... 2,537,584 1,648,143 Real estate .................................. 115,716,417 106,604,521 Personal ..................................... 9,961,978 12,316,764 -------------- -------------- Total gross loans ............................ $ 143,253,676 $ 137,849,883 Less: Unearned discount ..................... 279,389 485,967 Unamortized loan fees, net of costs.... (15,305) 3,423 -------------- -------------- Loans, net of unearned income ................ $ 142,989,592 $ 137,360,493 ============== ==============

Non-accrual loans at December 31, 2001, 2000 and 1999 were $729,084, $311,780, and $198,840, respectively. The gross interest that would have been recorded if these loans had been current in accordance with their original terms and the amounts actually recorded in income were as follows:

2001 2000 1999 ------- ------- ------- Gross interest due under terms ................... $99,280 $29,248 $16,089 Amount included in income ........................ 61,568 5,023 0 ------- ------- ------- Interest income not recognized ................... $37,712 $24,225 $16,089 ======= ======= =======

At December 31, 2001 and 2000 the recorded investment in loans that are considered to be impaired as defined by SFAS No. 114 was $58,424 and $57,766, respectively. No additional charge to operations was required to provide for the impaired loans since the total allowance for loan losses is estimated by management to be adequate to provide for the loan loss allowance required by SFAS No. 114 along with any other potential losses. The average recorded investment in impaired loans during the years ended December 31, 2001 and 2000 was approximately $47,339 and $29,604, respectively. At December 31, 2001, there were no significant commitments to lend additional funds with respect to non-accrual and restructured loans. Changes in the allowance for loan losses for the years ended December 31, 2001, 2000 and 1999 were as follows:

2001 2000 1999 ----------- ----------- ----------- Balance, beginning of year .............. $ 1,008,301 $ 985,165 $ 954,516 Provision charged to operations ......... 162,500 54,000 78,000 Loans charged-off ....................... (189,186) (98,105) (99,951) Recoveries .............................. 46,190 67,241 52,600 ----------- ----------- ----------- Balance, end of year .................... $ 1,027,805 $ 1,008,301 $ 985,165 =========== =========== ===========

5. PREMISES AND EQUIPMENT A summary of premises and equipment at December 31, 2001 and 2000 follows: 40

2001 2000 ---------- ---------- Land ......................................... $ 567,939 $ 567,939 Buildings and improvements ................... 4,533,510 4,530,249 Furniture and equipment ...................... 3,556,240 3,406,254 ---------- ---------- $8,657,689 $8,504,442 Less: Accumulated depreciation .............. 4,023,187 3,582,155 ---------- ---------- $4,634,502 $4,922,287 ========== ==========

Depreciation amounted to $441,033 for 2001, $509,630 for 2000 and $515,511 for 1999. 6. DEPOSITS Major classifications of deposits at December 31, 2001 and 2000 consisted of:

2001 2000 ------------ ------------ Demand - non-interest bearing .............. $ 14,711,465 $ 14,593,285 Demand - interest bearing .................. 22,029,517 21,574,064 Savings .................................... 31,789,447 28,746,230 Time $100,000 and over ..................... 26,058,987 21,915,685 Other time ................................. 61,076,341 56,339,374 ------------ ------------ $155,665,757 $143,168,638 ============ ============

The following is a schedule reflecting remaining maturities of time deposits of $100,000 and over at December 31, 2001: 2002...................................................... $ 18,163,670 2003...................................................... 4,220,916 2004...................................................... 1,102,379 2005...................................................... 2,271,912 2006 and thereafter....................................... 300,110 -------------- Total..................................................... $ 26,058,987 ============== Interest expense related to time deposits of $100,000 or more was $1,493,072 in 2001, $1,065,537 in 2000 and $821,424 in 1999. 41 7. SHORT TERM BORROWINGS Federal funds purchased, securities sold under agreements to repurchase, and Federal Home Loan Bank advances generally represented overnight or less than 30-day borrowings. U.S. Treasury tax and loan notes for collections made by the Bank were payable on demand. Short-term borrowings consisted of the following at December 31, 2001 and 2000:

2001 -------------------------------------------------- Maximum Ending Average Month End Average Balance Balance Balance Rate ----------- ----------- ----------- ----------- Federal funds purchased and securities sold under agreements to repurchase.. $19,606,983 $19,082,599 $20,684,867 3.71% Federal Home Loan Bank Advances ...... 0 0 0 .00% U.S. Treasury tax and loan notes ..... 173,941 532,978 1,000,000 3.23% ----------- ----------- ----------- ----------- Total ................................ $19,780,924 $19,615,577 $21,684,867 3.70% =========== =========== =========== ===========

2000 -------------------------------------------------- Maximum Ending Average Month End Average Balance Balance Balance Rates ----------- ----------- ----------- ----------- Federal funds purchased and securities sold under agreements to repurchase.. $19,637,069 $16,468,523 $21,374,759 5.40% Federal Home Loan Bank Advances ...... 0 3,449,250 3,725,000 5.86% U.S. Treasury tax and loan notes ..... 471,897 439,873 1,000,000 6.38% ----------- ----------- ----------- ----------- Total ................................ $20,108,966 $20,357,646 $26,099,759 5.50% =========== =========== =========== ===========

8. LONG-TERM BORROWINGS Long-term borrowings consisted of the following due Federal Home Loan Bank at December 31, 2001 and 2000:

2001 2000 ----------- ----------- Loan dated November 28, 1997 in the original amount of $225,000 for a 10 year term requiring monthly payments of $1,627 including interest at 6.12%, maturing in 2007 with a final payment due of $146,690. Principal balances outstanding ................................................................................ $ 198,966 $ 206,082 Loan dated February 18, 1998 in the original amount of $2,000,000 for a 10 year term with a 5 year put. Interest only is payable monthly @ 5.48% with a floating rate option at the end of 5 years. Principal balances outstanding .............................. 2,000,000 2,000,000 Loan dated June 25, 1998 in the original amount of $72,000 for a 30 year term requiring monthly payments of $425 including interest at 5.856%. Principal balances outstanding ..... 68,665 69,711 Loan dated February 23, 1999 in the original amount of $29,160 for a 20 year term requiring monthly payments of $179 including interest at 5.50%. Principal balances outstanding ................................................................................ 27,493 28,111 Loan dated August 20, 1999 in the original amount of $32,400 for a 20 year term requiring monthly payments of $199 including interest at 5.50%. Principal balances outstanding ....................................................................... 30,896 31,564 Loan dated January 27, 2000 in the original amount of $5,000,000 for a 10 year term with a 1 year conversion date and a 3 month conversion frequency thereafter. At December 31,2000 the interest rate was 6.00%. Principal balances outstanding .............. 5,000,000 5,000,000 Loan dated May 26, 2000 in the original amount of $2,000,000 for a 5 year term with a 3 month conversion frequency. At December 31, 2000 the interest rate was 6.50%. Principal balances outstanding .................................................. 0 2,000,000 Loan dated August 16, 2000 in the original amount of $2,000,000 for a 10 year term with a 6 month conversion date and a 3 month conversion frequency thereafter. At December 31, 2000 the interest rate was 5.925%. Principal balances outstanding .......... 2,000,000 2,000,000 Loan dated September 20, 2000 in the original amount of $2,000,000 for a 10 year term with a 3 year month conversion date and a e month conversion frequency thereafter At December 31, 2000 the interest rate was 6.10%. Principal balances outstanding ........... 2,000,000 2,000,000 Loan December 13, 2000 in the original amount of $32,092.44 for a 20 year term requiring monthly payments of $197 including interest at 5.50%. Principal balances outstanding ................................................................................ 31,477 32,092 ----------- ----------- Total .......................................................................................... $11,357,497 $13,367,560 =========== ===========

At December 31, 2001 the annual maturities of long-term debt were as follows: $10,682 in 2002, $11,338 in 2003, $12,034 in 2004, $12,774 in 2005, $13,558 in 2006 and $11,297,111 thereafter. 42 9. COMPREHENSIVE INCOME The components of other comprehensive income and related tax effects are as follows:

Years Ended December 31, --------------------------------------- 2001 2000 1999 ----------- ----------- ----------- Unrealized holding gains (losses) on Available-for-Sale investment securities ...................................................... $ 354,266 $ 1,621,580 $(2,401,246) Less reclassification adjustment for gains realized in income ....... 98,895 0 38,707 ----------- ----------- ----------- Net unrealized gains (losses) ....................................... $ 255,371 $ 1,621,580 $(2,439,953) Tax effects ......................................................... (90,816) (550,861) 832,455 ----------- ----------- ----------- Net of tax amount ................................................... $ 164,555 $ 1,070,719 $(1,607,498) =========== =========== ===========

10. STOCKHOLDERS' EQUITY AND STOCK PURCHASE PLANS The Amended Articles of Incorporation contain a provision that permits the Corporation to issue warrants for the purchase of shares of common stock, par value $1.25 per share (the "Common Stock"), at below market prices in the event any person or entity acquires 25% or more of the Common Stock. The Corporation offers employees a stock purchase plan. The maximum number of shares of the Common Stock to be issued under this plan shall be 20,000. In addition, the Corporation may choose to purchase shares on the open market to facilitate this plan. A participating employee may annually elect deductions of at least 1% of base pay, but not more than 10% of base pay, to cover purchases of shares under this plan. A participating employee shall be deemed to have been granted an option to purchase a number of shares of the Common Stock equal to the annual aggregate amount of payroll deductions elected by the employee divided by 90% of the fair market value of Common Stock on the first day of January in each year. Stock issued to participating employees under the plan for the most recent three year period was:

Per Share ---------- Number Employees' Market of Purchase Value Date Issued Shares Price of Shares ----------- ------ ---------- --------- 2001................................................... 839 15.07 16.75 2000................................................... 603 18.45 20.50 1999................................................... 549 23.74 26.38

The Corporation also offers to its stockholders a Dividend Reinvestment and Stock Purchase Plan. Under the plan the Corporation registered with the Securities and Exchange Commission 500,000 shares of the Common Stock to be sold pursuant to the plan. The price per share for purchases under this plan is determined at each quarterly dividend payment date by the reported average mean between the bid and asked prices for the shares at the close of trading in the over-the-counter market on the trading day immediately preceding the quarterly dividend payment date. Participation in this plan by Shareholders began in June 1995. Shares issued under this plan for the most recent three year period was:

Number of Total Year Shares Proceeds ---- ------ -------- 2001................................................ 6,506 $135,649 2000................................................ 8,174 $137,037 1999................................................ 7,345 $148,582

43 11. INCOME TAXES The provision for income tax expense consisted of the following components:

Federal 2001 2000 1999 ----------- ----------- ----------- Current ............................ $ 663,669 $ 682,853 $ 666,270 Deferred (benefit) ................. (42,549) (11,739) 18,469 ----------- ----------- ----------- $ 621,120 $ 671,114 $ 684,739 =========== =========== ===========

State 2001 2000 1999 ----------- ----------- ----------- Current .......................................................... $ 0 $ 0 $ 0 Deferred (benefit) ............................................... (192) 0 0 ----------- ----------- ----------- TOTAL PROVISION FOR TAXES $ 620,928 $ 671,114 $ 684,739 =========== =========== ===========

A reconciliation of income tax expense and the amounts which would have been recorded based upon the statutory rate of 34% follows:

2001 2000 1999 --------------------- --------------------- --------------------- Amount Rate Amount Rate Amount Rate --------- --------- --------- --------- --------- --------- Provision at statutory rate ......... $ 910,355 34.0% $ 926,560 34.0% $ 926,152 34.0% Tax-exempt income ................... (329,338) (12.3) (296,431) (10.9) (276,969) (10.1) Non-deductible expenses ............. 48,142 1.8 46,176 1.7 40,087 1.4 Other, net .......................... (8,039) (.3) (5,191) (.2) (4,531) (.2) --------- --------- --------- --------- --------- --------- Actual federal income tax and rate .. $ 621,120 23.2% $ 671,114 24.6% $ 684,739 25.1% ========= ========= ========= ========= ========= =========

Income taxes applicable to realized security gains included in the provision for income taxes totaled $33,624 in 2001, $0 in 2000 and $13,160 in 1999. The net deferred tax asset (liability) recorded by the Corporation consisted of the following tax effects of temporary timing differences at December 31 2001, 2000 and 1999:

2001 2000 1999 --------- --------- --------- Deferred tax assets: Loan loss reserve ...................................................... $ 247,692 $ 241,060 $233, 194 Deferred compensation .................................................. 151,324 142,981 134,323 Non-accrual loan interest .............................................. 11,291 0 0 Contributions .......................................................... 0 0 3,400 Investment in insurance agency ......................................... 777 0 0 Unrealized investment securities losses ................................ 0 53,076 603,937 --------- --------- --------- TOTAL $ 411,084 $ 437,117 $ 974,854 ========= ========= ========= Deferred tax liabilities: Loan fees and costs .................................................... $ (64,036) $ (63,369) $ (68,321) Accretion .............................................................. (2,020) (3,591) (5,679) Unrealized investment securities gains ................................. (37,740) 0 0 Depreciation ........................................................... (260,701) (175,495) (267,070) --------- --------- --------- TOTAL $(364,497) $(342,455) $(341,070) --------- --------- --------- Net deferred tax asset (liability) ......................................... $ 46,587 $ 94,662 $ 633,784 ========= ========= =========

The above net deferred asset (liability) is included in other assets or other liabilities on the consolidated balance sheets. It is anticipated that all tax assets will be realized, accordingly, no valuation allowance was provided. The Corporation and its subsidiary file a consolidated federal income tax return. The Parent Company is also required to file a separate state income tax return and has available state operating loss carryforwards totaling $436,235. The losses expire through 2011. The related deferred state tax asset in the amount of $43,580 has been fully reserved and is not reflected in the net tax asset (liability) since management is of the opinion that such assets will not be realized in the foreseeable future. 44 12. BENEFIT AND DEFERRED COMPENSATION PLANS The Bank maintains a 401K salary deferred profit sharing plan for the benefit of its employees. Under the salary deferral component, employees may elect to contribute up to 10% of their compensation with the possibility that the Bank may make matching contributions to the plan. Under the profit sharing component, contributions are made at the discretion of the Board of Directors. Matching contributions amounted to $23,446, $22,725 and $21,600 for 2001, 2000 and 1999, respectively. Discretionary contributions amounted to $99,317, $98,638, and $93,191 in 2001, 2000 and 1999, respectively. DIRECTORS The Bank entered into agreements with three directors to establish non-qualified deferred compensation plans for each of these directors. These plans are limited to four-year terms. The Bank may, however, enter into subsequent similar plans with its directors. Each of the participating directors is deferring the payment to himself of certain directors fees to which he is entitled. Each director's future payment is based upon the cumulative amount of deferred fees together with interest currently accruing thereon at the rate of 8% per annum, subject to change by the Board of Directors. The Bank has obtained life insurance (designating the Bank as the beneficiary) on the lives of certain directors in face amounts which are intended to cover the Bank's obligations and related costs under the Director's Deferred Compensation Plan. As of December 31, 2001 and 2000, the net cash value of insurance policies was $294,703 and $253,410, respectively, and the total accrued liability was $227,535 and $201,735, respectively, relating to these directors' deferred compensation agreements. EXECUTIVE OFFICERS The Bank entered into agreements with two executive officers to establish non-qualified deferred compensation plans. Each officer is deferring compensation in order to participate in this Deferred Compensation Plan. If the officer continues to serve as an officer of the Bank until he attains sixty-five (65) years of age, the Bank has agreed to pay him 120 guaranteed consecutive monthly payments commencing on the first day of the month following the officer's 65th birthday. Each officer's guaranteed monthly payment is based upon the future value of life insurance purchased with the compensation the officer has deferred. The Bank has obtained life insurance (designating the Bank as the beneficiary) on the life of each participating officer in an amount which is intended to cover the Bank's obligations under the Deferred Compensation Plan, based upon certain actuarial assumptions. As of December 31, 2001 and 2000, the net cash value of insurance policies was $254,936 and $217,389, respectively, and the total accrued liability was $227,535 and $201,735, respectively, relating to these executive officers' deferred compensation agreements. The amounts of net cash values of insurance policies and total accrued liabilities are included in other assets and accrued interest and other expense, respectively, on the consolidated balance sheets. 13. LEASE COMMITMENTS AND CONTINGENCIES At December 31, 2001 the Bank was leasing some minor office equipment under operating leases. Rental expense under operating leases and contracted data processing services for the years ended December 31, 2001, 2000 and 1999 were $4,874, $5,702 and $5,690, respectively. In connection with an upgrade to the information systems, the Corporation estimates that in 2002 costs in the amount of $350,000 will be incurred for computer and software upgrades. In the normal course of business, there were various pending legal actions and proceedings which were not reflected in the consolidated financial statements. In the opinion of management, the consolidated financial statements have not and will not be affected materially by the outcome of such actions and proceedings. 45 14. RELATED PARTY TRANSACTIONS Certain directors and executive officers of the Corporation and the Bank, as well as companies in which they are principal owners (i.e., at least 10%), were indebted to the Bank at December 31, 2001 and 2000. These loans were made on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated parties. A summary of the activity on the related party loans, comprised of eight directors, six executive officers and their related companies, consisted of the following:

2001 2000 ----------- ----------- Balance, beginning of year ............... $ 2,113,043 $ 1,581,852 Additions ................................ 1,410,000 1,509,658 Deductions ............................... (1,158,275) (978,467) ----------- ----------- Balance, end of year ..................... $ 2,364,768 $ 2,113,043 =========== ===========

The above loans represent funds drawn and outstanding at the date of the accompanying consolidated financial statement. Commitments by the Bank to related parties on lines of credit for 2001 and 2000 presented an additional off-balance sheet risk to the extent of undisbursed funds in the amount of $317,902 and $568,251, respectively, on the above loans. These loans did not present more than the normal risk of collectibility nor present other unfavorable features. 15. REGULATORY MATTERS Dividends are paid by the Corporation to shareholders from its assets which are mainly provided by dividends from the Bank. However, national banking laws place certain restrictions on the amount of cash dividends allowed to be paid by the Bank to the Corporation. Generally, the limitation provides that dividend payments may not exceed the Bank's current year's retained income plus retained net income for the preceding two years. Accordingly, in 2002, without prior regulatory approval, the Bank may declare dividends to the Corporation in the amount of $1,355,301 plus additional amounts equal to the net income earned in 2002 for the period January 1, 2002, through the date of declaration, less any dividends which may have already been paid in 2002. Regulations also limit the amount of loans and advances from the Bank to the Corporation to 10% of consolidated net assets. The Corporation is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Corporation's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation must meet specific capital guidelines that involve quantitative measures of the Corporation's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Corporation's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Management believes, as of December 31, 2002 and 2001, that the Corporation and the Bank met all capital adequacy requirements to which they are subject. Quantitative measures established by regulation to ensure capital adequacy require the Corporation to maintain minimum amounts and ratios (set forth in the table below) of Total and Tier I Capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I Capital (as defined) to average assets (as defined). As of December 31, 2001, the most recent notification from the Office of the Comptroller of the Currency categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. The Bank's actual capital amounts (in thousands) and ratios are presented in the following table:

To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ----------------- ----------------- ----------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- As of December 31, 2001: Total Capital (To risk-weighted assets)................. $26,989 19.82% $10,894 8.00% $13,618 10.00% Tier I Capital (To risk-weighted assets)................. $25,961 19.06% $ 5,447 4.00% $ 8,171 6.00% Tier I Capital (To average assets)....................... $25,961 12.44% $ 8,346 4.00% $10,432 5.00% As of December 31, 2000: Total Capital (To risk-weighted assets)................. $25,068 21.79% $ 9,205 8.00% $11,506 10.00% Tier I Capital (To risk-weighted assets)................. $24,088 20.94% $ 4,602 4.00% $ 6,904 6.00% Tier I Capital (To average assets)....................... $24,088 13.02% $ 7,401 4.00% $ 9,251 5.00%

46 The Corporation's capital ratios are not materially different from those of the Bank. 16. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and commercial letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments. The Corporation does not engage in trading activities with respect to any of its financial instruments with off-balance sheet risk. The Corporation may require collateral or other security to support financial instruments with off-balance sheet credit risk. The contract or notional amounts at December 31, 2001 and 2000 were as follows:

2001 2000 ----------- ----------- Financial instruments whose contract amounts represent credit risk: Commitments to extend credit .................................. $11,841,592 $ 9,685,243 Financial standby letters of credit ........................... 2,347,562 1,990,087 Performance standby letters of credit ......................... 15,030 17,850 Dealer floor plans ............................................ 1,884,022 1,098,455

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on management's credit evaluation of the counter-party. Collateral held varies but may include accounts receivable, inventory, property, plant, equipment and income-producing commercial properties. Standby letters of credit and commercial letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Corporation holds collateral supporting those commitments for which collateral is deemed necessary. The extent of collateral held for those commitments at December 31, 2001 varied from 0 percent to 100 percent; the average amount collateralized was 62.8 percent. The Corporation's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit is represented by the contractual notional amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations, as it does for on-balance sheet instruments. The Corporation granted commercial, consumer and residential loans to customers within Pennsylvania. Of the total loan portfolio 81.9% was for real estate loans, principally residential. It was the opinion of management that the high concentration did not pose an adverse credit risk. Further, it was management's opinion that the remainder of the loan portfolio was balanced and diversified to the extent necessary to avoid any significant concentration of credit. 17. FAIR VALUES OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures about Fair Value of Financial Instruments", requires disclosure of fair value information about financial instruments, whether or not required to be recognized in the consolidated balance sheet, for which it is practicable to estimate such value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. These techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Fair value estimates derived 47 through these techniques cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. SFAS No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Corporation. The following methods and assumptions were used by the Corporation in estimating its fair value disclosures for financial instruments: CASH AND OTHER SHORT-TERM INSTRUMENTS Cash and due from banks, interest bearing deposits with other banks, and Federal Funds sold had carrying values which were a reasonable estimate of fair value. Accordingly, fair values regarding these instruments were provided by reference to carrying values reflected on the consolidated balance sheets. INVESTMENT SECURITIES The fair value of investment securities which included mortgage backed securities were estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. LOANS Fair values were estimated for categories of loans with similar financial characteristics. Loans were segregated by type such as commercial, tax-exempt, real estate mortgages and consumer. For estimation purposes, each loan category was further segmented into fixed and adjustable rate interest terms and also into performing and non-performing classifications. The fair value of each category of performing loans was calculated by discounting future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Fair value for non-performing loans was based on management's estimate of future cash flows discounted using a rate commensurate with the risk associated with the estimated future cash flows. The assumptions used by management were judgmentally determined using specific borrower information. DEPOSITS Under SFAS No. 107, the fair value of deposits with no stated maturity, such as Demand Deposits, Savings Accounts, and Money Market Accounts, was equal to the amount payable on demand at December 31, 2001 and 2000. Fair values for fixed rate Certificates of Deposit were estimated using a discounted cash flow calculation that applied interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. SHORT-TERM BORROWINGS The carrying amounts of federal funds purchased and securities sold under agreements to repurchase and other short-term borrowings approximated their fair values. LONG-TERM BORROWINGS The fair values of long-term borrowings, other than capitalized leases, are estimated using discounted cash flow analyses based on the Corporation's incremental borrowing rate for similar instruments. The carrying amounts of capitalized leases approximated their fair values, because the incremental borrowing rate used in the carrying amount calculation was at the market rate. COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT Management estimated that there were no material differences between the notional amount and the estimated fair value of those off-balance sheet items, because they were primarily composed of unfunded loan commitments which were generally priced at market value at the time of funding. At December 31, 2001 and 2000, the carrying values and estimated fair values of financial instruments are presented in the table below: 48

2001 2000 ---------------------------- -------------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ------------- ------------ ------------ ------------ Financial Assets: Cash and short-term investments .......... $ 8,517,836 $ 8,517,836 $ 12,662,644 $ 12,662,644 Investment securities .................... 57,121,229 57,121,229 47,311,098 47,311,098 Loans: Commercial ............................... 13,091,017 13,091,017 14,411,838 14,411,838 Tax-exempt ............................... 798,681 798,681 2,747,097 2,748,629 Qualified municipal leases ............... 1,147,999 1,147,999 121,520 121,520 Real estate - construction ............... 2,537,584 2,537,584 1,648,143 1,648,048 Real estate .............................. 115,716,417 115,819,722 106,604,521 106,495,056 Personal ................................. 9,961,978 9,964,606 12,316,764 12,079,213 ------------- ------------ ------------ ------------ Gross loans .............................. $ 143,253,676 $143,359,609 $137,849,883 $137,504,304 Less: Unearned discount ................. 279,389 0 485,9671 0 Unamortized loan fees, net of costs .. (15,305) 0 3,423 0 ------------- ------------ ------------ ------------ Loans, net of unearned income ........ $ 142,989,592 $143,359,609 $137,360,493 $137,504,304 Allowance for losses ................. 1,027,805 0 1,008,301 0 ------------- ------------ ------------ ------------ Net loans ................................ $ 141,961,787 $143,359,609 $136,352,192 $137,504,304 ============= ============ ============ ============ Financial Liabilities: Deposits: Demand - non-interest bearing ........ $ 14,711,465 $ 14,711,465 $ 14,593,285 $ 14,593,285 Demand - interest bearing ............ 22,029,517 22,029,517 21,574,064 21,574,064 Savings .............................. 31,789,447 31,789,447 28,746,230 28,746,230 Time - $100,000 and over ............. 26,058,987 27,149,953 21,915,685 22,236,210 Other time ........................... 61,076,341 63,012,111 56,339,374 56,613,257 ------------- ------------ ------------ ------------ Total Deposits .................... $ 155,665,757 $158,692,493 $143,168,638 $143,763,046 ============= ============ ============ ============ Short-Term Borrowings ........................ $ 19,780,924 $ 19,780,924 $ 20,108,966 $ 20,108,966 Long-Term Borrowings ......................... 11,357,497 11,399,546 13,367,560 13,469,281 Off-Balance Sheet Assets (Liabilities): Commitments to extend credit ............. 11,841,592 9,685,243 Standby letters of credit ................ 2,347,562 1,990,087 Performance standby letters of credit .... 15,030 17,850 Dealer floor plans ....................... 1,884,022 1,098,455

49 18. PARENT COMPANY FINANCIAL INFORMATION Condensed financial information for CCFNB Bancorp, Inc. (Parent Company only) was as follows:

BALANCE SHEETS December 31, -------------------------- Assets 2001 2000 ------------ ------------ Cash in subsidiary Bank ....................................... $ 261,018 $ 71,168 Investment in subsidiary ...................................... 25,289,498 24,568,790 Investment in other equity securities ......................... 310,866 228,804 Prepayments and other assets .................................. 170,458 28,887 Receivable from subsidiary .................................... 77,844 181,209 ------------ ------------ Total Assets .............................................. $ 26,109,684 $ 25,078,858 ============ ============ Liabilities and Stockholders' Equity Accrued expenses and other liabilities ........................ $ 67,669 $ 28,853 ------------ ------------ Total Liabilities ......................................... $ 67,669 $ 28,853 ------------ ------------ Stockholders' Equity Common stock .................................................. $ 1,657,715 $ 1,682,910 Surplus ....................................................... 4,730,002 5,146,061 Retained earnings ............................................. 19,578,971 18,310,262 Accumulated other comprehensive income (loss) ................. 75,327 (89,228) ------------ ------------ Total Stockholders' Equity ................................ $ 26,042,015 $ 25,050,005 ------------ ------------ Total Liabilities and Stockholders' Equity ................ $ 26,109,684 $ 25,078,858 ============ ============

STATEMENTS OF INCOME Years Ended December 31, ----------------------------------------- Income 2001 2000 1999 ------------ ------------ ----------- Dividends from subsidiary bank ................................ $ 1,515,635 $ 1,330,102 $ 697,859 Dividends - other ............................................. 8,898 8,291 7,837 Interest ...................................................... 2,917 4,857 8,243 ------------ ------------ ----------- Total Income .............................................. $ 1,527,450 $ 1,343,250 $ 713,939 Operating Expenses ................................................ 90,787 75,604 110,264 ------------ ------------ ----------- Income Before Taxes and Equity in Undistributed Net Income of Subsidiary .................................. $ 1,436,663 $ 1,267,646 $ 603,675 Applicable income tax (benefit) ................................... (29,746) (23,208) (33,888) ------------ ------------ ----------- Income Before Equity in Undistributed Net Income of Subsidiary ............................................. $ 1,466,409 $ 1,290,854 $ 637,563 Equity in undistributed income of subsidiary ...................... 592,094 763,207 1,401,674 Loss from investment in insurance agency .......................... (1,916) 0 0 ------------ ------------ ----------- Net Income .................................................... $ 2,056,587 $ 2,054,061 $ 2,039,237 ============ ============ =========== STATEMENTS OF CASH FLOWS Operating Activities Net Income ........................................................ $ 2,056,587 $ 2,054,061 $ 2,039,237 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiary .......... (592,094) (763,207) (1,401,674) Loss from investment in an insurance agency ............... 1,916 0 0 (Increase) decrease in receivable from subsidiary ......... 103,365 (163,235) 38,007 Deferred income taxed (benefit) ........................... (777) 0 0 Increase (decrease) in income taxes and accrued expenses Payable ................................................... 38,816 (1,417) (14,236) ------------ ------------ ----------- Net Cash Provided By Operating Activities ................. $ 1,607,813 $ 1,125,202 $ 661,334 ------------ ------------ ----------- Investing Activities Purchase of equity securities ..................................... $ (21,563) 0 $ (23,504) Acquisition of interest in an insurance agency .................... (167,268) 0 0 ------------ ------------ ----------- Net Cash (Used) in Investing Activities ................... $ (188,831) 0 $ (23,504) ============ ============ =========== Financing Activities Proceeds from sale of treasury stock .............................. 0 0 $ 13,034 Acquisition of treasury stock ..................................... (589,547) (512,270) (330,475) Proceeds from issuance of common stock ............................ 148,293 148,162 148,582 Cash dividends .................................................... (787,878) (757,796) (695,463) ------------ ------------ ----------- Net Cash (Used) By Financing Activities ................... $ (1,229,132) $ (1,121,904) $ (864,322) ------------ ------------ ----------- Increase (Decrease) in Cash and Cash Equivalents .......... $ 189,850 $ 4,298 $ (226,492) Cash and Cash Equivalents at Beginning of Year .................... 71,168 66,870 293,362 ------------ ------------ ----------- Cash and Cash Equivalents at End of Year .................. $ 261,018 $ 71,168 $ 66,870 ============ ============ ===========

50 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Stockholders of CCFNB Bancorp, Inc. We have audited the accompanying consolidated balance sheets of CCFNB Bancorp, Inc. and Subsidiary as of December 31, 2001 and 2000, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of CCFNB Bancorp, Inc. and Subsidiary as of December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with generally accepted accounting principles generally accepted in the United States of America. J. H. Williams & Co., LLP Kingston, Pennsylvania January 18, 2002 51 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CCFNB BANCORP, INC. SELECTED CONSOLIDATED FINANCIAL SUMMARY NOT COVERED BY REPORT OF INDEPENDENT ACCOUNTANTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)

2001 2000 1999 1998 1997 ------------- ------------- ------------- ------------- ------------- INCOME STATEMENT DATA: Total interest income ................................. $ 13,720 $ 13,552 $ 12,669 $ 12,444 $ 12,487 Total interest expense ................................ 6,924 6,859 6,099 6,072 5,976 ------------- ------------- ------------- ------------- ------------- Net interest income ................................... $ 6,796 $ 6,693 $ 6,570 6,372 6,511 Provision for possible loan losses .................... 163 54 78 78 60 Other operating income ................................ 1,149 1,053 1,050 981 815 Other operating expenses .............................. 5,104 4,967 4,818 4,739 4,492 Federal income taxes .................................. 621 671 685 634 749 ------------- ------------- ------------- ------------- ------------- Net income ............................................ $ 2,057 $ 2,054 $ 2,039 $ 1,902 $ 2,025 ============= ============= ============= ============= ============= PER SHARE DATA: Earnings per share (1) ................................ $ 1.54 $ 1.51 $ 1.48 $ 1.38 $ 1.47 Cash dividends declared per share ..................... $ 0.59 $ 0.56 $ 0.51 $ 0.46 $ 0.46 Book value per share .................................. $ 19.64 $ 18.61 $ 16.85 $ 17.03 $ 15.68 Average shares outstanding ............................ 1,338,007 1,355,624 1,375,572 1,378,339 1,381,800 BALANCE SHEET DATA: Total assets .......................................... $ 214,238 $ 203,054 $ 196,122 $ 185,258 $ 173,866 Total loans ........................................... $ 142,990 137,360 $ 134,423 $ 118,558 $ 119,045 Total securities ...................................... $ 57,121 47,311 $ 49,104 $ 48,151 $ 43,862 Total deposits ........................................ $ 155,666 143,169 $ 138,606 $ 137,679 $ 127,719 FHLB advances - long-term ............................. $ 11,357 13,368 $ 2,344 $ 2,291 $ 225 Total stockholders' equity ............................ $ 26,042 25,050 $ 23,047 $ 23,480 $ 22,105 PERFORMANCE RATIOS: Return on average assets .............................. 0.99% 1.04% 1.09% 1.07% 1.18% Return on average stockholders' equity ................ 7.92% 8.59% 8.91% 8.54% 9.79% Net interest margin (2) ............................... 3.68% 3.91% 3.96% 4.05% 4.23% Total non-interest expense as a percentage of average assets ..................................... 2.45% 2.52% 2.58% 2.67% 2.62% ASSET QUALITY RATIOS: Allowance for possible loan losses as a percentage of loans, net .............................. 0.72% 0.74% 0.73% 0.81% 0.76% Allowance for possible loan losses as a percentage of non-performing loans (3) ........................... 60.54% 153.66% 264.83% 100.32% 129.27% Non-performing loans as a percentage of total loans, net (3) ............................................ 1.19% 0.48% 0.28% 0.81% 0.59% Non-performing assets as a percentage of total assets (3) ................................... 0.79% 0.32% 0.19% 0.51% 0.40% Net charge-offs as a percentage of average net loans (4) ...................................... 0.10% 0.02% 0.04% 2.11% 0.06% LIQUIDITY AND CAPITAL RATIOS: Equity to assets ...................................... 12.16% 12.34% 11.75% 12.53% 12.09% Tier 1 Capital to risk-weighted assets (5) ............ 19.06% 20.94% 17.94% 20.93% 20.98% Leverage ratio (5)(6) ................................. 12.44% 13.02% 12.94% 12.95% 12.57% Total capital to risk-weighted assets (5) ............. 19.82% 21.79% 18.68% 21.80% 21.84% Dividend payout ratio ................................. 38.31% 36.89% 34.09% 33.59% 31.65%

---------- (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 Office of the Comptroller of the Currency (the "OCC"). (6) The leverage ratio is defined as the ratio of Tier 1 Capital to average total assets less intangible assets, if applicable. The following discussion and analysis should be read in conjunction with the detailed information and financial statements, including notes thereto, included elsewhere in this report. The consolidated financial condition and results of operations of the 52 Corporation are essentially those of its subsidiary, the Bank. Therefore, the analysis that follows is directed to the performance of the Bank. 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 the control of the Corporation may adversely affect the future results of operations of the Corporation. Management does not expect any one particular factor to affect the Corporation's results of operations. A downward trend in several areas, however, including real estate, construction and consumer spending, could have an adverse impact on the Corporation's ability to maintain or increase profitability. Therefore, there is no assurance that the Corporation will be able to continue their current rates of income and growth. Interest Rates. The Corporation's earnings depend, to a large extent, upon net interest income, which is primarily influenced by the relationship between its cost of funds (deposits and borrowings) and the yield on its 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 its interest rate risk management strategy comprised of interest rate risk, mortgage risk, and deposit pricing risk components, management seeks to control its exposure to interest rate changes by managing the maturity and repricing characteristics of interest-earning assets and interest-bearing liabilities. As of December 31, 2001, 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 $14,161,000, representing a cumulative one year interest rate sensitivity gap as a percentage of total assets of total assets of positive 6.6%. This condition suggests that the yield on the Corporation's interest-earning assets should adjust to changes in market interest rate at a faster rate than the cost of the Corporation's interest-bearing liabilities. Consequently, the Corporation's net interest income could increase during periods of rising interest rates. See "Interest Rate Sensitivity". Local Economic Conditions. The success of the Corporation is dependent, to a certain extent, upon the general economic conditions in the geographic market served. Although the Corporation expects 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 the Corporation serves would likely impair its ability to collect loans and could otherwise have a material adverse effect on the results of operations and financial condition of the Corporation. Competition. The Banking industry is highly competitive, with rapid changes in product delivery systems and in consolidation of service providers. Many of the Corporation's competitors are bigger than the Corporation 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 the Corporation does not offer. The Corporation is constantly striving to meet the convenience and needs of its customers and to enlarge its customer base. No assurance can be given that these efforts will be successful in maintaining and expanding the Corporation's customer base. RESULTS OF OPERATIONS The Corporation's net income increased .2% to $2,057,000 for 2001, compared to $2,054,000 for 2000. Earnings per common share for the current year were $1.54 compared to $1.51 per common share in 2000. Beginning June 1995, dividend reinvestment and employee's stock option plans went into effect for the Corporation. Additionally, since 1997 the Corporation has purchased and partially retired treasury stock. Additionally, during the last half of 1999 the Corporation entered into a strategy to purchase up to ten percent of the company's common stock in open market purchases. This resulted in 27,501 shares of stock being purchased and retired during 2001 and 30,100 shares of stock being purchased and retired during 2000. The net effect of these factors have caused a net decrease in weighted average number of shares outstanding of 1,338,007, 1,355,624, and 1,375,572 for 2001, 2000 and 1999 respectively. Loans increased 4.1% throughout 2001 to $142,990,000 from $137,360,000 in 2000. The increase was in the Real Estate lending area. Return on average assets ("ROA") decreased to .99% for 2001 compared to 1.04% for 2000. The return on average equity ("ROE") decreased to 7.9% for 2001 compared to 8.6% for 2000. Tax-equivalent net interest income increased 2.1% in 2001 to $7,290,000 in 2001 from $7,138,000 in 2000. Average earning assets increased 8.5% in 2001 from $182,673,000 in 2000 to $198,152,000 in 2001. This increased net interest income is a result of changes in interest rates with the rates being dropped by the Federal Reserve eleven times during 2001. Coupled with 53 the falling rates was a downturn in the economy and stock market which increased bank deposits, specifically certificates of deposit ("CD") as customers looked for safer investment vehicles for their assets. All loan and deposits rates dropped throughout 2001. The CD rates for deposits were much lower than previously. As a result of the factors outlined above, net interest income increased 1.5% from $6,693,000 in 2000 to $6,795,000 in 2001. TABLE OF NON-INTEREST INCOME (Dollars in Thousands)

Years Ended December 31, ----------------------------------- 2001 2000 1999 ----------- ----------- ----------- Service charges and fees ............................ $ 606 $ 595 $ 612 Trust department income ............................. 238 219 189 Investment securities gains - net ................... 99 0 39 Other ............................................... 206 239 210 ----------- ----------- ----------- Total non-interest income ........................... $ 1,149 $ 1,053 $ 1,050 =========== =========== ===========

Total non-interest income increased slightly during 2001 from $1,053,000 in 2000 to $1,149,000 in 2001. Trust income increased 8.68% from $219,000 in 2000 to $238,000 in 2001. Service fees and charges increased from $595,000 in 2000 to $606,000 in 2001 or 1.8%. Other income decreased 13.8% from $239,000 in 2000 to $206,000 in 2001. Gains on sales of investment securities increased from $0 in 2000 to $99,000 in 2001. The decrease in other income was principally the result of Investment income of $106,000 in 2000 falling to $72,000 in 2001 or a decrease of $34,000 or 32.1%. TABLE OF NON-INTEREST EXPENSE (Dollars in Thousands)

Years Ended December 31, ----------------------------------- 2001 2000 1999 ----------- ----------- ----------- Salaries and wages ......................... $ 2,050 $ 2,016 $ 1,905 Employee benefits .......................... 692 645 630 Net occupancy expense ...................... 366 328 339 Furniture and equipment expense ............ 544 601 597 State shares tax ........................... 243 219 196 Other expense .............................. 1,209 1,158 1,152 ----------- ----------- ----------- Total non-interest expense ................. $ 5,104 $ 4,967 $ 4,819 =========== =========== ===========

Total non-interest expense increased to $5,104,000 in 2001 from $4,967,000 in 2000 or an increase of 2.8% or $137,000. An $81,000 or 3% increase in salaries and benefits was attributable mainly to normal merit and cost of living increases and increased benefit costs. Furniture and equipment expense decreased $57,000 from $601,000 in 2000 compared to $544,000 in 2001. Net occupancy expenses increased $38,000 to $366,000 in 2001 compared to $328,000 in 2000. State shares tax expense increased 11% or $24,000 from 2000 to 2001. Mac expense up 16.7% or $16,000; advertising up 27.6% or $16,000; Data Processing Expense up 41.8% or $12,000; and Directors fees up 6.3% or $7,000 resulted in the increased other expenses of $51,000. A key in measuring non-interest expense is to express this non-interest expense as a percentage of average total assets. In 2000, this percentage was 2.5% compared to 2.4% in 2001 or a 4.0% improvement. The provision for loan losses increased in 2001 from $54,000 in 2000 to $162,500. The increase resulted from one small business loan that was converted to non-accrual status. NET INTEREST INCOME Tax-equivalent net interest income for 2001 equaled $7,290,000 compared to $7,138,000 in 2000, an increase of 2.1%. 54 TAX-EQUIVALENT NET INTEREST INCOME (Dollars in Thousands)

Years Ended December 31, ----------------------------------- 2001 2000 1999 ----------- ----------- ----------- Interest income ..................................... $ 13,719 $ 13,552 $ 12,669 Interest expense .................................... 6,924 6,859 6,099 ----------- ----------- ----------- Net interest income ................................. 6.795 6,693 $ 6,570 Tax-equivalent adjustment ........................... 495 445 417 ----------- ----------- ----------- Net interest income (fully taxable equivalent) ...... $ 7,290 $ 7,138 $ 6,987 =========== =========== ===========

The decrease in the overall tax-equivalent net interest margin from 4.91% in 2000 to 3.68% in 2001 is a result of interest rate changes during the year with loans repricing downward sooner than deposits repricing downward. Overall average interest earning assets yielded 6.9% in 2001 or 52 basis points less than the 7.42% in 2000. Conversely, average interest bearing liabilities cost 4.14% in 2001 or 24 basis points less than 2000. This "squeeze" occurring with the downward trend of interest rates resulted in the decreased net interest margin. 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 2001, 2000 and 1999. AVERAGE BALANCE SHEET AND RATE ANALYSIS THREE YEARS ENDED DECEMBER 31, (Dollars in thousands)

2001 2000 ----------------------------------------- --------------------------------------- Average Interest Average Average Interest Average Balance Inc./Exp Yd/Rate Balance Inc./Exp Yd/Rate ----------- ----------- ----------- ----------- ----------- ----------- ASSETS: (1) (2) (1) (2) Interest Bearing Deposits With Other Financial Institutions ........... $ 6,569 $ 269 4.09% $ 1,296 $ 83 6.40% ----------- ----------- ----------- ----------- ----------- ----------- Investment Securities: U.S. Government Securities ....... $ 29,908 $ 1,727 5.77 $ 30,980 $ 1,912 6.17 State and Municipal Obligations(3) ................. 17,162 815 7.19 14,731 732 7.53 Other Securities ................. 3,523 196 5.56 1,292 98 7.59 ----------- ----------- ----------- ----------- ----------- ----------- Total Investment Securities .......... $ 50,593 $ 2,738 5.41% $ 47,003 $ 2,742 5.83% ----------- ----------- ----------- ----------- ----------- ----------- Federal Funds Sold ................... $ 1,771 $ 67 3.78% $ 49 $ 3 6.12% ----------- ----------- ----------- ----------- ----------- ----------- Consumer ......................... $ 11,436 $ 959 8.39 12,515 1,016 8.12 Dealer Floor Plan ................ 4,522 290 6.41 5,424 475 8.76 Mortgage ......................... 111,715 8,523 7.63 104,356 8,169 7.83 Commercial ....................... 8,733 726 8.28 9,500 931 9.80 Municipal Leases(3) .............. 230 10 6.59 145 8 8.36 Tax Free(3) ...................... 2,543 137 8.16 2,385 125 7.94 ----------- ----------- ----------- ----------- ----------- ----------- Total Loans .......................... $ 139,219 $ 10,645 7.65% $ 134,325 $ 10,724 7.98% ----------- ----------- ----------- ----------- ----------- ----------- Total Interest-Earning Assets ........ $ 198,152 $ 13,719 6.92% $ 182,673 $ 13,552 7.42% ----------- ----------- ----------- ----------- Reserve for Loan Losses .............. (1,015) (1,018) Cash and Due from Banks .............. 2,373 5,360 Other Assets ......................... 9,120 9,712 ----------- ----------- Total Assets ......................... $ 208,630 $ 196,727 =========== ===========

1999 ---------------------------------------- Average Interest Average Balance Inc./Exp Yd/Rate ----------- ---------- ----------- ASSETS: (1) (2) Interest Bearing Deposits With Other Financial Institutions ........... $ 2,739 $ 132 4.82% ----------- ----------- ----------- Investment Securities: U.S. Government Securities ....... $ 34,380 $ 2,021 5.88 State and Municipal Obligations(3) ................. 14,315 689 7.29 Other Securities ................. 1,132 81 7.16 ----------- ----------- ----------- Total Investment Securities .......... $ 49,827 $ 2,791 5.60% ----------- ----------- ----------- Federal Funds Sold ................... $ 825 $ 39 4.73% ----------- ----------- ----------- Consumer ......................... 10,797 887 8.22 Dealer Floor Plan ................ 2,876 230 8.00 Mortgage ......................... 99,473 7,771 7.81 Commercial ....................... 7,768 700 9.01 Municipal Leases(3) .............. 77 5 9.84 Tax Free(3) ...................... 2,194 114 7.87 ----------- ----------- ----------- Total Loans .......................... $ 123,185 $ 9,707 7.88% ----------- ----------- ----------- Total Interest-Earning Assets ........ $ 176,576 $ 12,669 7.18% ----------- ----------- Reserve for Loan Losses .............. (990) Cash and Due from Banks .............. 1,837 Other Assets ......................... 9,174 ----------- Total Assets ......................... $ 186,597 ===========

55

LIABILITIES AND CAPITAL: SUPER NOW Deposits ..................... $ 22,188 $ 217 .98% $ 21,662 $ 279 1.29% IRA's under $100,000 ................... 8,326 368 4.42 8,147 433 5.31 Money Market Deposits .................. 8,337 173 2.08 9,308 255 2.74 Savings Deposits ....................... 21,335 396 1.86 21,464 550 2.56 Time Deposits including IRA's over $100,000 ...................... 24,272 1,493 6.15 17,169 1,066 6.21 Other Time Deposits under $100,000 .... 51,121 2,827 5.53 47,579 889 5.40 ---------- ---------- ---------- ---------- ---------- ---------- Total Interest-Bearing Deposits ........ $ 135,579 $ 5,474 4.04% $ 125,329 $ 5,170 4.13% U.S. Treasury Short-Term Borrowings .... 485 17 3.51 439 28 6.38 Short-Term Borrowings - Other .......... 0 0 .00 3.449 202 5.68 Long-Term Borrowings ................... 12,179 731 6.00 10,847 570 5.25 Repurchase Agreements .................. 18,965 702 3.70 16,468 889 5.40 ---------- ---------- ---------- ---------- ---------- ---------- Total Interest-Bearing Liabilities ..... $ 167,208 $ 6,924 4.14% $ 156,532 $ 6,859 4.38% ---------- ---------- Demand Deposits ........................ 14,022 14,445 Other Liabilities ...................... 1,420 1,840 Stockholders' Equity ................... 25,980 23,910 ---------- ---------- Total Liabilities and Capital .......... $ 208,630 $ 196,727 ========== ========== NET INTEREST INCOME/NET INTEREST MARGIN (4) ......................... $ 6,795 3.43% $ 6,693 3.66% ========== ========== ========== ========== TAX-EQUIVALENT NET INTEREST INCOME/NET INTEREST MARGIN (5) ................ $ 7,290 3.68% $ 7,138 3.91% ========== ========== ========== ==========

LIABILITIES AND CAPITAL: SUPER NOW Deposits....................... $ 21,717 $ 289 1.33% IRA's under $100,000..................... 8,352 413 4.94 Money Market Deposits.................... 10,835 298 2.75 Savings Deposits......................... 21,895 559 2.55 Time Deposits including IRA's over $100,000........................ 14,302 821 5.74 Other Time Deposits under $100,000...... 48,505 2,574 5.31 --------- -------- -------- Total Interest-Bearing Deposits.......... $125,606 $ 4,954 3.94% U.S. Treasury Short-Term Borrowings...... 454 21 4.63 Short-Term Borrowings - Other............ 1,709 97 5.68 Long-Term Borrowings..................... 2,323 130 5.60 Repurchase Agreements.................... 18,972 897 4.73 --------- -------- -------- Total Interest-Bearing Liabilities....... $149,064 $ 6,099 4.09% -------- -------- Demand Deposits.......................... 13,357 Other Liabilities........................ 1,302 Stockholders' Equity..................... 22,874 --------- Total Liabilities and Capital............ $186,597 ========= NET INTEREST INCOME/NET INTEREST MARGIN (4)........................... $ 6,570 3.72% ======== ======== TAX-EQUIVALENT NET INTEREST INCOME/NET INTEREST MARGIN (5).................. $ 6,987 3.96% ======== ========

(1) Average volume information was compared using daily (or monthly) averages. (2) Interest on loans includes fee income. (3) Yield on tax-exempt obligations has been computed on a tax-equivalent basis. (4) Net interest margin is computed by dividing net interest income by total interest-earning assets. (5) Interest and yield are presented on a tax-equivalent basis using 34% for 2001, 2000 & 1999. 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 2001, 2000 and 1999: TABLE OF NET INTEREST INCOME COMPONENTS ON A TAX-EQUIVALENT BASIS For the twelve months ended December 31, 2001 (Dollars in thousands)

2001 Versus 2000 2000 Versus 1999 1999 Versus 1998 -------------------------- -------------------------- -------------------------- 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........... $ 337 $ (30) $ 307 $ (70) $ 43 $ (27) $ (84) $ (20) $ (104) U.S. Government Securities........... (66) (124) (190) (200) 100 (100) 191 (6) 185 State and Municipal Obligations...... 183 (50) 133 30 34 64 83 (32) 51 Other Securities..................... 169 (26) 143 10 12 22 (101) (3) (104) Federal Funds Sold................... 105 (1) 104 (37) 11 (26) 10 (3) 7 Consumer Loans....................... (88) 34 (54) 141 (11) 130 144 (64) 80 Dealer Floor Plan.................... (79) (127) (206) 204 22 226 72 (12) 60 Mortgage Loans(1).................... 576 (209) 367 382 10 392 169 (282) (113) Commercial Loans..................... (71) (144) (215) 156 61 217 176 (42) 134 Municipal Leases..................... 7 (3) 4 7 (1) 6 0 0 0 Tax Free Loans....................... 13 5 18 15 2 17 108 1 109 ------- ------ ----- ------ ------ ------ ------ ------ ------ Total Earning Assets................. $ 1,086 $ (675) $ 411 $ 638 $ 283 $ 921 $ 768 $ (463) $ 305 ======= ====== ===== ====== ====== ====== ====== ====== ======

56 Interest Expense: SUPER NOW Deposits ....................... $ 7 $ (67) $ (60) $ (1) $ (9) $ (10) $ 25 $ (79) $ (54) IRA ...................................... 10 (73) (63) (10) 31 21 19 (14) 5 Money Market Deposits .................... (27) (61) (88) (42) (1) (43) (28) (28) (56) Savings Deposits ......................... (3) (150) (153) (11) 2 (9) 29 (8) 21 Time Deposits over $100,000 .............. 441 (10) 431 165 67 232 177 (23) 154 Other Time Deposits ...................... 193 43 236 (49) 63 14 78 (94) (16) U.S. Treasury - Short-Term Borrowings .... 3 (13) (10) (1) 8 7 (2) (3) (5) Short-Term Borrowings - Other ............ (202) (202) (404) 99 3 102 0 0 0 Long-Term Borrowings ..................... 70 81 151 477 (8) 469 17 (2) 15 Repurchase Agreements .................... 135 (280) (145) (118) 127 9 (60) (66) (126) -------- -------- -------- -------- -------- -------- -------- -------- -------- Total Interest-Bearing Deposits .......... $ 627 $ (732) $ (105) $ 509 $ 283 $ 792 $ 255 $ (317) $ (62) -------- -------- -------- -------- -------- -------- -------- -------- -------- NET INTEREST INCOME ...................... $ 459 $ 57 $ 516 $ 129 $ 0 $ 129 $ 513 $ (146) $ 367 ======== ======== ======== ======== ======== ======== ======== ======== ======== (1) Includes non-accrual loans. FINANCIAL CONDITION The Corporation's total consolidated assets at December 31, 2001 were $214 million which represented an increase of $7 million or 3.4% over $203 million at December 31, 2000. The 2000 growth rate was 3.6% or $7 million. Capital increased 3.6% for 2001 from $25.1 million in 2000 to $26.0 million in 2001. The equity adjustment for fair market value of securities was a positive $75,000 for 2001 compared to a negative $89,000 for 2000. Additionally, a strategy to purchase up to 10% of the capital stock of CCFNB and retire it is in place and resulted in common stock and surplus decreasing to $6.4 million in 2001 from $6.8 million in 2000 or a decrease of 5.9%. Total average assets grew 6.1% from 2000 at $197 million to 2001 at $209 million. Average earning assets grew 8.2% from 2000 or a decrease of 5.9%. Loans grew 4.1% from $137.4 million at December 31, 2000 to $143 million at December 31, 2001. Non-interest deposits grew slightly from $14.6 million at December 31, 2000 to $14.7 million at December 31, 201. Interest bearing deposits grew 9.6% from $128.6 million in 2000 to $141 million in 2001. The loan-to-deposit ratio is a key measurement of liquidity. The loan-to-deposit ratio at the Bank decreased during 2001 to 91.9% compared to 95.9% during 2000. It is management's 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 Board of Directors. Additionally, the entire Board of Directors meets with the investment consultants annually. INVESTMENTS (Dollars in thousands)

Outstanding Balance at December 31, --------------------------------------------------------------------------- 2001 2000 1999 ----------------------- ----------------------- ----------------------- Available- Held-To Available- Held-To Available- Held-To For-Sale Maturity For-Sale Maturity For-Sale Maturity ---------- ---------- ---------- ---------- ---------- ---------- (2) (1) (2) (1) (2) (1) Federal Agency Obligations ......................... $ 12,553 $ 0 $ 15,810 $ 0 $ 15,482 $ 0 Mortgage-backed Securities ......................... 21,001 0 13,294 0 17,595 0 Obligations of State and Political Subdivisions .... 17,525 0 16,104 0 14,451 200 Corporate Securities ............................... 4,589 0 725 0 0 0 Marketable Equity Securities ....................... 327 0 252 0 256 0 Restricted Equity Securities ....................... 1,126 0 1,126 0 1,120 0 ---------- ---------- ---------- ---------- ---------- ---------- Total Investment Securities ........................ $ 57,121 $ 0 $ 47,311 $ 0 $ 48,904 $ 200 ========== ========== ========== ========== ========== ==========

(1) Carried at amortized cost. (2) Carried at estimated fair value. 57 The following table sets forth the maturity distribution of the investment portfolio, the weighted average yield, and ranges of maturity at December 31, 2001. Yields are presented on a tax-equivalent basis, are based upon fair value and are weighted for the scheduled maturity. At December 31, 2001 the Corporation's investment securities portfolio had an average maturity of approximately 7.6 years.

(Dollars in Thousands) -------------------------------------------------------------------- After One After Five Year But Years But Within Within Within One Year Five Years Ten Years -------------------- -------------------- -------------------- Amount Yield Amount Yield Amount Yield -------- -------- -------- -------- -------- -------- AVAILABLE-FOR-SALE SECURITIES AT FAIR VALUE Federal Agency Obligations ................ $ 476 6.32% $ 20,003 5.99% $ 13,075 5.96% Obligations of State and Political Subdivisions ............................ 251 6.59% 713 6.84% 2,744 7.32% Corporate Securities ...................... 0 0.00% 2,001 5.37% 0 0.00% Marketable Equity Securities .............. 0 0.00% 0 0.00% 0 0.00% Restricted Equity Securities .............. 0 0.00% 0 0.00% 0 0.00% -------- -------- -------- TOTAL $ 727 5.58% $ 22,717 5.92% $ 15,819 6.21% ======== ======== ========

(Dollars in Thousands) ------------------------------------------- After Ten Years Total -------------------- -------------------- Amount Yield Amount Yield -------- -------- -------- -------- AVAILABLE-FOR-SALE SECURITIES AT FAIR VALUE Federal Agency Obligations ................ $ 0 0.00% $ 33,554 5.98% Obligations of State and Political Subdivisions ............................ 13,817 7.18% 17,525 7.18% Corporate Securities ...................... 2,588 4.44% 4,589 5.06% Marketable Equity Securities .............. 327 2.75% 327 2.75% Restricted Equity Securities .............. 1,126 6.39% 1,126 6.39% -------- -------- TOTAL $ 17,858 6.88% $ 57,121 6.25% ======== ========

Available-for-Sale securities are reported on the balance sheet at fair value. An adjustment to capital, net or deferred taxes, is the offset for this entry. The possibility of material price volatility in a falling interest rate environment is offset by the availability to the Corporation of restructuring the portfolio for gap positioning at any time through the securities classed as Available-for-Sale. The impact of the fair value accounting was an unrealized gain, net of tax, on December 31, 2001 of $75,000 compared to an unrealized loss, net of tax, on December 31, 2000 of $89,000. Presently there are no Held-to-Maturity securities. Available-for-Sale securities total $57,121,000 at year end 2001 compared to $47,311,000 at year end 2000, or a increase of 20.7%. The mix of securities in the portfolio was 21.98% U.S. agencies, 36.76% mortgage-backed securities, 30.68% municipal and 10.58% other. The Corporation does not engage in derivative investment products. LOANS LOAN PORTFOLIO LOANS OUTSTANDING (Dollars in thousands)

2001 2000 1999 ------------ ------------ ------------ Commercial ............................. $ 13,091 $ 14,412 $ 15,559 Tax-Exempt ............................. 1,947 2,747 2,124 Real Estate - Construction ............. 2,538 1,648 2,509 Real Estate ............................ 115,716 106,604 102,108 Personal ............................... 9,962 12,317 $ 12,562 ------------ ------------ ------------ $ 143,254 $ 137,850 $ 135,035 Unamortized Loan Fees, Net of Costs .... 15 (4) (28) Unearned Discount ...................... (279) (486) (584) ------------ ------------ ------------ Loans, Net ............................. $ 142,990 $ 137,360 $ 134,423 ============ ============ ============

Growth of 4.1% was experienced in the loan portfolio, from $137.4 million in 2000 to $143.0 million in 2001. The distribution of the loan portfolio reflects 82.55% real estate loans at $118,254,000; 9.14% commercial loans at $13,091,000; 1.36% tax exempt loans at $1,947,000; and 6.95% consumer loans at $9,962,000. Variable rate real estate loans were comprised of .32% with a 5 year adjustable rate; 61.61% with 3 year adjustable rate; 16.03% with 1 year adjustable rate; and 22.04% with one day to 3 month adjustable rates. Many three year and one year adjustable rate loans have bi-weekly payments. 58 DEPOSITS AND BORROWED FUNDS TABLE OF DISTRIBUTION OF AVERAGE DEPOSITS (Dollars in thousands)

December 31, ------------------------------------------ 2001 2000 1999 ------------ ------------ ------------ Demand deposits .................... $ 36,210 $ 36,107 $ 35,074 Savings deposits ................... 29,672 30,772 32,730 Time deposits ...................... 59,447 55,726 56,857 Time deposits, $100,000 and over ... 24,272 17,169 14,302 ------------ ------------ ------------ Total .............................. $ 149,601 $ 139,774 $ 138,963 ============ ============ ============

TABLE OF MATURITY DISTRIBUTION OF TIME DEPOSITS OVER $100,000 (Dollars in thousands)

December 31, ------------------------------------------ 2001 2000 1999 ------------ ------------ ------------ Three months or less ................ $ 6,446 $ 4,648 $ 4,306 Over three months to six months ..... 4,225 1,960 2,513 Over six months to twelve months .... 7,493 5,889 4,641 Over twelve months .................. 7,895 9,419 4,716 ------------ ------------ ------------ Total ............................... $ 26,059 $ 21,916 $ 16,176 ============ ============ ============

Total average deposits increased 7.1% from $140 million at year end 2000 to $150 million at year end 2001. Average savings deposits decreased 3.2% to $30 million at year end 2001 from $31 million at year end 2000. Average time deposits increased 15.1% from $73 million at year end 2000 to $84 million at year end 2001. Average interest bearing NOW accounts were $22 million for 2000 and 2001. Short-term borrowings, securities sold under agreements to repurchase and day-to-day borrowings from the Federal Home Loan Bank remained constant at $20 million for 2000 and 2001. Treasury tax and loan deposits held by the Corporation for the U.S. Treasury averaged $485,000 for 2001. One day borrowings did not occur in 2001 and repurchase agreements averaged $19 million for 2001 compared to an average of $16 million for 2000. Long-term borrowings, namely borrowings from the Federal Home Loan Bank of Pittsburgh, averaged $12 million for 2000 and $2,323,000 for 1999. NON-PERFORMING ASSETS PAST DUE AND NON-ACCRUAL LOANS (Dollars in thousands)

Lease Real Installment Financing 2001 Estate Loans Commercial Receivables Total ---- ---------- ----------- ---------- ----------- ---------- Days 30-89 ........... $ 798 $ 142 $ 9 $ 0 $ 949 Days 90 Plus ......... 915 28 26 0 969 Non-accrual .......... 429 15 285 0 729 ---------- ---------- ---------- ---------- ---------- Total ................ $ 2,142 $ 185 $ 320 $ 0 $ 2,647 ========== ========== ========== ========== ==========

Lease Real Installment Financing 2000 Estate Loans Commercial Receivables Total ---- ------------ ------------ ------------ ------------ ------------ Days 30-89 ........... $ 1,053 $ 205 $ 82 $ 0 $ 1,340 Days 90 Plus ......... 336 8 0 0 344 Non-accrual .......... 282 0 30 0 312 ------------ ------------ ------------ ------------ ------------ Total ................ $ 1,671 $ 213 $ 112 $ 0 $ 1,996 ============ ============ ============ ============ ============

59

Lease Real Installment Financing 1999 Estate Loans Commercial Receivables Total ---- ------------ ------------ ------------ ------------ ------------ Days 30-89 ........... $ 503 $ 154 $ 0 $ 8 $ 665 Days 90 Plus ......... 157 16 0 0 173 Non-accrual .......... 199 0 0 0 199 ------------ ------------ ------------ ------------ ------------ Total ................ $ 859 $ 170 $ 0 $ 8 $ 1,037 ============ ============ ============ ============ ============

At year end 2001, loans 30-89 days past due totaled $949,000 compared to $1,340,000 at year end 2000. Past due loans 90 days plus totaled $969,000 at year end 2001 compared to $344,000 at year end 2000. Non-accrual loans at year end 2001 totaled $729,000 compared to $312,000 at year end 2000. Overall, past due and non-accrual loans increased 32.62% from $1,996,000 at year end 2000 to $2,647,000 at year end 2001 or 1.9% of total loans for 2001 and 1.5% for 2000. The ratio of net charge-offs to average loans outstanding was .10% and .02% for 2001 and 2000, respectively. (See Summary of Loan Loss Experience). Management does not consider these percentages to be significant or material. Loans were stated at their outstanding principal balances, net of any deferred fees or costs, unearned income, and the allowance for loan losses. Interest on loans was accrued on the principal amount outstanding, primarily on the actual day basis. Non-renewable loan fees and certain direct costs were deferred and amortized over the life of the loans using the interest method. The amortization was reflected on an interest yield adjustment, and the deferred portion of the net fees and costs was reflected as a part of the loan balance. Generally, a loan is classified as non-accrual, and the accrual of interest on such a loan is discontinued when the contractual payment of principal or interest becomes 90 days past due or management has serious doubts about further collectibility of principal or interest, even though the loan may be performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on non-accrual status, unpaid interest credited to income in the current year is reversed, and unpaid interest accrued in prior years is charged against the allowance for loan losses. Potential problem loans are identified by management as part of its loan review process. Income recognition is in accordance with Statement of Financial Accounting Standard No. 118. Certain non-accrual loans may continue to perform, that is, payments are still being received. Generally, the payments are applied to principal. These loans remain under constant scrutiny and if performance continues, interest income may be recorded on a cash basis based on management's judgment as to collectibility of principal. ALLOWANCE FOR LOAN LOSSES AND RELATED PROVISION (Dollars in Thousands)

Outstanding Balance at December 31, ---------------------------------------------------------------------- 2001 2000 1999 --------------------- --------------------- ---------------------- % of Loans % of Loans % of Loans in Category in Category in Category to Total to Total to Total Amount Loans Amount Loans Amount Loans -------- ----------- -------- ----------- -------- ----------- Commercial ................ $ 372 11% $ 173 13% $ 270 13% Real estate mortgages ..... 464 82% 318 78% 341 78% Consumer .................. 94 7% 79 9% 88 9% Unallocated ............... 98 N/A 438 N/A 286 N/A -------- -------- -------- -------- -------- -------- $ 1,028 100% $ 1,008 100% $ 985 100% ======== ======== ======== ======== ======== ========

The allowance for loan losses was $1,028,000 at December 31, 2001, compared to $1,008,000 at December 31, 2000. This allowance equaled .72% of total loans, net of unearned income, at the end of 2001 and .73% at the end of 2000. This allowance was considered adequate based on delinquency trends and actual loans written as it relates to the loan portfolio. The loan loss reserve is analyzed quarterly and reviewed by the Board of Directors. The assessment of the loan policies and procedures during 2001 revealed no anticipated loss on any loans considered "significant". No concentration or apparent 60 deterioration in classes of loans or pledged collateral was evident. Monthly loan meetings with the Board Credit Administration Committee provided a review of new loans, delinquent loans and loan exceptions to determine compliance with policies. The schedule below presents a history of actual charge-offs and recoveries by category and related balances and ratios. SUMMARY OF LOAN LOSS EXPERIENCE (Dollars in thousands)

Years Ended December 31, ---------------------------------------------- 2001 2000 1999 ------------ ------------ ------------ Loans outstanding at end of year ............................ $ 142,990 $ 137,360 $ 134,423 ============ ============ ============ Average loans outstanding .................................... $ 139,219 $ 134,325 $ 123,185 ============ ============ ============ Allowance for loan losses: Balance, beginning of year ................................... $ 1,008 $ 985 $ 955 ------------ ------------ ------------ Loans Charged-off: Commercial and industrial ................................ (94) 0 (5) Real estate mortgages .................................... (13) (1) 0 Consumer ................................................. (82) (97) (94) Credit cards ............................................. 0 0 (1) ------------ ------------ ------------ Total loans charged-off ...................................... (189) (98) (100) ------------ ------------ ------------ Recoveries: Commercial and industrial ................................ 14 5 8 Real estate mortgages .................................... 0 3 0 Consumer ................................................. 29 55 43 Municipal leases ......................................... 0 0 0 Credit cards ............................................. 3 4 1 ------------ ------------ ------------ Total recoveries ............................................. 46 67 52 ------------ ------------ ------------ Net loans charged-off ........................................ (143) (31) (48) ------------ ------------ ------------ Provision charged to expense ................................. 163 54 78 ------------ ------------ ------------ Balance, end of year ......................................... $ 1,028 $ 1,008 $ 985 ============ ============ ============ Ratio of net charge-offs during the year to average loans outstanding during year .................................. 0.10% 0.02% 0.04% ============ ============ ============

The allowance for loan losses is established through provisions for loan losses charged against income. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. As of January 1, 1995 the Corporation adopted Statement of Financial Accounting Standards No. 114. "Accounting for Creditors for Impairment of a Loan - Income Recognition and Disclosure." ("SFAS No. 114") Under the new standards, the allowance for loan losses related to loans that were identified for evaluation in accordance with Statement No. 114 which was based on discounted cash flows using the loan's initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. Prior to 1995, the allowance for loan losses related to these loans was based on undiscounted cash flows or the fair value of the collateral for collateral dependent loans. SFAS No. 118 allowed the continued use of existing methods for income recognition on impaired loans and amends disclosure requirements to require information about the recorded investment in certain impaired loans and related income recognition on those loans. The allowance for loan losses was maintained at a level by management to be adequate to absorb estimated potential loan losses. Management's periodic revaluation of the adequacy of the allowance for loan losses was based on the Corporation's past loan loss experience; known and inherent risks in the portfolio; adverse situations that may affect the borrower's ability to repay (including the timing of future payments); and other relevant factors. This evaluation was inherently subjective as it required material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. See "Factors That May Affect Future Results". Moreover, no additions to the reserve for loan losses were required as a result of an analysis of impaired loans, as defined under SFAS No. 114 or SFAS No. 118, since the amount of impaired loans so determined was considered to be insignificant and the existing reserve was more than adequate to provide for those impaired loans. 61 LIQUIDITY Liquidity management is required to ensure that adequate funds will be available to meet anticipated and unanticipated deposit withdrawals, debt service payments, investment commitments, commercial and consumer loan demand, and ongoing operating expenses. Funding sources include principal repayments on loans, sales of assets, growth in core deposits, short and long-term borrowings, investment securities maturing, loan prepayments and repurchase agreements. Regular loan payments are a dependable source of funds, while the sale of investment securities, deposit growth and loan prepayments are significantly influenced by general economic conditions and the level of interest rates. Liquidity is managed on a daily basis at the Corporation. Management believes that the liquidity is sufficient to meet present and future financial obligations and commitments on a timely basis. However, see "Factors That May Affect Future Results". At December 31, 2001, cash and cash equivalents totaled $8,517,636 compared to $12,662,644 at December 31, 2000. Changes in cash were measured by changes in the three major classifications of cash flows known as operating, investing and financing activities. At December 31, 2001, net cash provided by operating activities equaled $2,559,601 which consisted mainly of net income adjusted for non-cash items such as depreciation, accruals on interest receivable, premiums on investment securities and provision for loan losses. Net cash used for investing activities totaled $15,634,490 which was principally the result of a $5,772,095 increase in loans and a $9,541,879 excess of purchases of Available-for-Sale investment securities over the proceeds on sale and redemptions of securities. Net cash provided by financing activities totaled $8,929,882 and consisted mainly of an increase in deposits of $12,497,119 and a decrease in long term debt of $2,010,063. CAPITAL RESOURCES Capital continues to be a strength of the Corporation. Capital is critical as it must provide growth, payment to shareholders, and absorption of unforeseen losses. The federal regulators provide standards that must be met. The Corporation is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material impact on the Corporation's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation must meet specific capital guidelines that involve quantitative measures of the Corporation's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Corporation's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Corporation to maintain minimum amounts and ratios (set forth in the following table) of Total and Tier I Capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I Capital (as defined) to average assets (as defined). As of December 31, 2001, the most recent notification from the Office of the Comptroller of the Currency categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the Table. There are no conditions or events since that notification that management believes have changed the institution's category. The Bank's actual capital amounts are ratios in the following table: 62

To be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions Amount Ratio Amount Ratio Amount Ratio ------------ ------------ ------------ ------------ ------------ ------------ As of December 31, 2001: Total Capital (To risk-weighted assets) .... $26,989 19.82% $10,894 8.00% $13,618 10.00% Tier I Capital (To risk-weighted assets) .... $25,961 19.06% $5,447 4.00% $8,171 6.00% Tier I Capital (To average assets) .......... $25,961 12.44% $8,346 4.00% $10,432 5.00% As of December 31, 2000: Total Capital (To risk-weighted assets) .... $25,068 21.79% $9,205 8.00% $11,506 10.00% Tier I Capital (To risk-weighted assets) .... $24,088 20.94% $4,602 4.00% $6,904 6.00% Tier I Capital (To average assets) .......... $24,088 13.02% $7,401 4.00% $9,251 5.00%

The Corporation's capital ratios are not materially different from those of the Bank. Dividend payouts are restricted by the Pennsylvania Business Corporation Law of 1988, as amended (the "BCL"). The BCL operates generally to preclude dividend payments if the effect thereof would render the Corporation unable to meet its obligations as they become due. As a practical matter, the Corporation's payment of dividends is contingent upon its ability to obtain funding in the form of dividends from the Bank. Payment of dividends to the Corporation by the Bank is subject to the restrictions set forth in the National Bank Act. Generally, the National Bank Act would permit the Bank to declare dividends in 2002 of approximately $1,355,301 plus additional amounts equal to the net income earned in 2002 for the period January 1, 2002 through the date of declaration, less any dividends which may be paid in 2002. Common stock issued by the Corporation is traded on a limited basis in the local over-the-counter market using the symbol CCFN. The bid prices below are actual transactions and reflect information from one of the Corporation's market-makers. The prices do not necessarily reflect any dealer or retail markup, markdown or commission:

2001 2000 ------------------------------------ ------------------------------------ Quarterly Quarterly Highest Lowest Dividend Highest Lowest Dividend ---------- ---------- ---------- ---------- ---------- ---------- Fourth quarter ..... $23.75 $23.05 $0.150 $17.00 $16.38 $0.140 Third quarter ...... $24.50 $23.00 $0.150 $16.63 $16.38 $0.140 Second quarter ..... $21.00 $19.00 $0.150 $17.50 $16.00 $0.140 First quarter ...... $17.88 $16.50 $0.140 $19.50 $16.00 $0.140

INTEREST RATE RISK MANAGEMENT Interest rate risk management involves managing the extent to which interest-sensitive assets and interest-sensitive liabilities are matched. Interest rate sensitivity is the relationship between market interest rates and earnings volatility due to the repricing characteristics of assets and liabilities. The Bank's net interest income is affected by changes in the level of market interest rates. In order to maintain consistent earnings performance, the Bank seeks to manage, to the extent possible, the repricing characteristics of its assets and liabilities. One major objective of the Bank when managing the rate sensitivity of its assets and liabilities is to stabilize net interest income. The management of and authority to assume interest rate risk is the responsibility of the Bank's Asset/Liability Committee ("ALCO"), which is comprised of senior management and Board members. ALCO meets quarterly to monitor the ratio of interest sensitive assets to interest sensitive liabilities. The process to review interest rate risk management is a regular part of management of the Bank. Consistent policies and practices of measuring and reporting interest rate risk exposure, particularly regarding the treatment of noncontractual assets and liabilities, are in effect. In addition, there is an annual process to review the interest rate risk policy with the Board of Directors which includes limits on the impact to earnings from shifts in interest rates. 63 The ratio between assets and liabilities repricing in specific time intervals is referred to as an interest rate sensitivity gap. Interest rate sensitivity gaps can be managed to take advantage of the slope of the yield curve as well as forecasted changes in the level of interest rate changes. To manage the interest sensitivity position, an asset/liability model called "gap analysis" is used to monitor the difference in the volume of the Bank's interest sensitive assets and liabilities that mature or reprice within given periods. A positive gap (asset sensitive) indicates that more assets reprice during a given period compared to liabilities, while a negative gap (liability sensitive) has the opposite effect. The Bank employs computerized net interest income simulation modeling to assist in quantifying interest rate risk exposure. This process measures and quantifies the impact on net interest income through varying interest rate changes and balance sheet compositions. The use of this model assists the ALCO to gauge the effects of the interest rate changes on interest sensitive assets and liabilities in order to determine what impact these rate changes will have upon the net interest spread. STATEMENT OF INTEREST SENSITIVITY GAP (Dollars in thousands) DECEMBER 31, 2001

> 90 Days 90 Days But 1 to 5 5 to 10 > 10 Or Less < 1 Year Years Years Years Total ---------- ---------- ---------- ---------- ---------- ---------- Short-term investments ........................... $ 2,312 0 0 0 0 $ 2,312 Securities Available-for-Sale(1) ................. 10,360 12,741 29,399 3,197 1,424 57,121 Loans (1) ........................................ 29,142 46,673 58,763 8,331 81 142,990 ---------- ---------- ---------- ---------- ---------- ---------- Rate Sensitive Assets ........................ $ 41,814 $ 59,414 $ 88,162 $ 11,528 $ 1,505 $ 202,423 ---------- ---------- ---------- ---------- ---------- ---------- Deposits: Interest-bearing demand deposits(2) .............. $ 3,305 $ 2,864 $ 15,861 0 0 $ 22,030 Savings(2) ....................................... 5,404 8,265 18,120 0 0 31,789 Time ............................................. 18,402 32,133 36,600 0 0 87,135 Borrowed funds ................................... 19,781 0 0 0 0 19,781 Long-term debt ................................... 3 8 49 11,147 150 11,357 Shareholders' equity ............................. 651 1,983 8,659 8,659 6,120 26,072 ---------- ---------- ---------- ---------- ---------- ---------- Rate Sensitive Liabilities and Shareholders' Equity ....................... $ 47,546 $ 45,253 $ 79,289 $ 19,806 $ 6,270 $ 198,164 ---------- ---------- ---------- ---------- ---------- ---------- Interest Sensitivity Gap ......................... $ (5,732) $ 14,161 $ 8,873 $ (8,278) $ (4,765) $ 4,259 Cumulative Gap ................................... $ (5,732) $ 8,429 $ 17,302 $ 9,024 $ 4,259 $ 0

(1) Investments and loans are included at the earlier of repricing or maturity adjusted for the effects of prepayments. (2) Interest bearing demand and savings accounts are included based on historical experience and managements' judgment about the behavior of these deposits in changing interest rate environments. At December 31, 2001 the Corporation's cumulative gap positions and the potential earnings change resulting from a 200 basis point change in rates were within the internal risk management guidelines. Upon reviewing the current interest sensitivity scenario, declining interest rates could negatively affect net income because the Bank is asset-sensitive. In an increasing interest rate environment, net income could be positively affected because more liabilities than assets will reprice during a given period. Certain shortcomings are inherent in the method of analysis presented in the above table. Although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates. Certain assets, such as adjustable-rate mortgages, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. In the event of a change in interest rates, prepayment and early withdrawal levels may deviate significantly from those assumed in calculating the table. The ability of many borrowers to service their adjustable-rate debt may decrease in the event of an interest rate increase. In addition to gap analysis, the Corporation also uses earnings simulation to assist in measuring and controlling interest rate risk. The following table provides information about the Corporation's financial instruments. The table presents the financial instruments including the expected cash flow over the next five years. In addition the average interest rate is shown for each period presented. The table also includes the fair market value for each category of financial instruments as of December 31, 2001. This presentation differs from the above gap report primarily due to presenting the financial instruments based on a contractual maturity as opposed to a repricing scenario as reflected in the above gap report. 64 PRINCIPAL / NOTIONAL AMOUNTS MATURING IN: (Dollars in millions)

Fair There- Value 2002 2003 2004 2005 2006 after Total 12-31-01 ------- ------- ------- ------ -------- -------- -------- -------- Rate sensitive assets: Fixed interest loans(1) $11,950 $ 6,588 $ 5,293 $3,557 $ 2,603 $ 10,311 $ 40,302 $ 40,651 Average interest rate 7.97% 7.70% 8.01% 7.81% 7.78% 7.63% 7.90% Variable interest rate loans(2) $60,927 $17,551 $23,026 $ 765 $ 419 $ 0 $102,688 $102,688 Average interest rate 6.34% 7.43% 7.08% 7.91% 7.29% 0.00% 6.72% Fixed interest rate securities(1) $ 717 $ 7,829 $ 1,091 $4,774 $ 7,159 $ 23,046 $ 44,616 $ 44,616 Average interest rate 6.41% 6.23% 5.72% 5.58% 5.61% 6.56% 6.27% Variable interest rate securities(1) $ 0 $ 996 $ 483 $ 523 $ 0 $ 10,503 $ 12,505 $ 12,505 Average interest rate 0.00% 3.75% 3.11% 2.98% 0.00% 6.59% 5.86% Other interest-bearing assets $ 2,312 $ 0 $ 0 $ 0 $ 0 $ 1,127 $ 3,439 $ 3,439 Average interest rate 4.09% 0.00% 0.00% 0.00% 0.00% 6.39% 4.55% Rate sensitive liabilities: Non-interest-bearing checking(2) $ 5,443 $ 2,317 $ 2,317 $2,317 $ 2,317 $ 0 $ 14,711 $ 14,711 Average interest rate 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Savings & interest-bearing checking(2) $16,768 $ 7,188 $ 7,188 $7,188 $ 7,188 $ 0 $ 45,520 $ 45,520 Average interest rate 0.81% 0.81% 0.81% 0.81% 0.81% 0.00% 0.81% Money market accounts(2) $ 3,071 $ 1,307 $ 1,307 $1,307 $ 1,307 $ 0 $ 8,299 $ 8,299 Average interest rate 0.90% 0.90% 0.90% 0.90% 0.90% 0.00% 0.90% Time deposits (under $100,000) $29,830 $26,443 $ 2,981 $ 807 $ 1,015 $ 0 $ 61,076 $ 63,012 Average interest rate 3.08% 4.49% 4.63% 6.04% 5.15% 0.00% 4.80% Time deposits (over 100,000) $18,164 $ 4,221 $ 1,102 $2,272 $ 300 $ 0 $ 26,059 $ 27,150 Average interest rate 4.84% 6.43% 5.83% 7.10% 6.50% 0.00% 5.36% Fixed interest rate borrowings $ 0 $ 0 $ 0 $ 0 $ 0 $ 357 $ 357 $ 357 Average interest rate 0.00% 0.00% 0.00% 0.00% 0.00% 5.93% 5.93% Variable interest rate borrowings $19,781 $ 0 $ 0 $ 0 $ 11,000 $ 0 $ 30,781 $ 30,824 Average interest rate 5.38% 0.00% 0.00% 0.00% 5.91% 0.00% 5.57%

(1) Investments and loans are included at contractual maturity. (2) Non interest-bearing checking, interest-bearing checking, savings and money market accounts are reflecting historical experience and management's judgment about the duration of these deposits. 65 EXHIBIT 21 LIST OF SUBSIDIARIES OF THE COMPANY Direct Subsidiary: Columbia County Farmers National Bank, chartered under the laws of the United States of America, a national banking association. Direct (50% Owned) Subsidiary: Neighborhood Group, Inc., incorporated under the laws of the Commonwealth of Pennsylvania. 66