The following table sets forth certain information with respect to the company’s allowance for credit losses and charge-offs (in thousands)
The following table presents information about the company’s non-performing assets for the periods indicated (in thousands):
Non-performing assets are comprised of non-accrual loans and loans past due 90 days or more and still accruing, and other real estate owned. Loans are placed in nonaccrual status when management believes that the collection of interest or principal is doubtful, or generally when a default of interest or principal has existed for 90 days or more, unless such loan is fully secured and in the process of collection. When interest accrual is discontinued, interest credited to income in the current year is reversed and interest accrued in prior years is charged against the allowance for credit losses. Any payments received are applied, first to the outstanding loan amounts, then to the recovery of any charged-off loan amounts. Any excess is treated as a recovery of lost interest. Nonaccrual loans at September 30, 2007 were comprised of eight credits which are adequately secured by mortgages or UCC’s on the property. The company currently anticipates that any loss recognized on these credits would not exceed $400,000.
The provision for credit losses varies from year to year based on management's evaluation of the adequacy of the allowance for credit losses in relation to the risks inherent in the loan portfolio. In its evaluation, management considers credit quality, changes in loan volume, composition of the loan portfolio, past experience, delinquency trends, and the economic condition. Consideration is also given to examinations performed by regulatory authorities and the company’s independent accountants. A monthly provision of $100,000 was credited to the allowance during the first nine months of 2007. A monthly provision of $90,000 was credited to the allowance during the first nine months of 2006. The ratio of the loan loss reserve to total loans at September 30, 2007 and 2006 was 0.90% and 1.02%, respectively.
Asset/Liability Management, Interest Rate Sensitivity and Inflation
The major objectives of the company’s asset and liability management are to (1) manage exposure to changes in the interest rate environment to achieve a neutral interest sensitivity position within reasonable ranges, (2) ensure adequate liquidity and funding, (3) maintain a strong capital base, and (4) maximize net interest income opportunities. The bank manages these objectives through its Senior Management and Asset and Liability Management Committees. Members of the committees meet regularly to develop balance sheet strategies affecting the future level of net interest income, liquidity and capital. Items that are considered in asset and liability management include balance sheet forecasts, the economic environment, the anticipated direction of interest rates and the bank’s earnings sensitivity to changes in these rates.
The company analyzes its interest sensitivity position to manage the risk associated with interest rate movements through the use of gap analysis and simulation modeling. Because of the limitations of the gap reports, the bank uses simulation modeling to project future net interest income streams incorporating the current “gap” position, the forecasted balance sheet mix, and the anticipated spread relationships between market rates and bank products under a variety of interest rate scenarios.
Economic conditions affect financial institutions, as they do other businesses, in a number of ways. Rising inflation affects all businesses through increased operating costs but affects banks primarily through the manner in which they manage their interest sensitive assets and liabilities in a rising rate environment. Economic recession can also have a material effect on financial institutions as the assets and liabilities affected by a decrease in interest rates must be managed in a way that will maximize the largest component of a bank’s income, that being net interest income. Recessionary periods may also tend to decrease borrowing needs and increase the uncertainty inherent in the borrowers’ ability to pay previously advanced loans. Additionally, reinvestment of investment portfolio maturities can pose a problem as attractive rates are not as available. Management closely monitors the interest rate risk of the balance sheet and the credit risk inherent in the loan portfolio in order to minimize the effects of fluctuations caused by changes in general economic conditions.
Liquidity
The term liquidity refers to the ability of the company to generate sufficient amounts of cash to meet its cash-flow needs. Liquidity is required to fulfill the borrowing needs of the bank's credit customers and the withdrawal and maturity requirements of its deposit customers, as well as to meet other financial commitments.
The short-term liquidity position of the company is strong as evidenced by $19,818,000 in cash and cash equivalents. A secondary source of liquidity is provided by the investment portfolio with $54 million or 18% of the portfolio maturing or expected to provide cash flow within one year through maturities, projected calls or principal reductions.
The company's focus is on retail deposits as a source of funds, although short-term needs can be funded with municipal deposits. The bank has the ability to sell Federal funds to invest excess cash; however, the bank can also borrow in the Federal Funds market to meet temporary liquidity needs. Other sources of potential liquidity include Federal Home Loan Bank advances, the Federal Reserve Discount Window, CDARS deposits and the Brokered CD market.
Capital Management
A strong capital base is essential to the continued growth and profitability of the company and in that regard the maintenance of appropriate levels of capital is a management priority. The company’s principal capital planning goals are to provide an adequate return to shareholders while retaining a sufficient base from which to provide for future growth, while at the same time complying with all regulatory standards. As more fully described in Note 15 to the year end audited financial statements, regulatory authorities have prescribed specified minimum capital ratios as guidelines for determining capital adequacy to help insure the safety and soundness of financial institutions.
Total stockholders' equity increased $7,603,000 or 8% during the first nine months of 2007 comprised of an increase in retained earnings in the amount of $7,164,000 after paying cash dividends, $2,885,000 from stock issued through Dividend Reinvestment and Stock Option Plans offset by a $2,446,000 decrease in other comprehensive income. During the same period of 2006, total stockholders' equity increased $9,465,000, or 11%, comprised of an increase in retained earnings of $6,207,000, after paying cash dividends and $2,747,000 from stock issued through Dividend Reinvestment and a $511,000 increase in other comprehensive income. The total dividend payout during the
first nine months of 2007 and 2006 represents $.37 per share and $.34 per share, respectively. Excluding the impact due to securities valuation, increases in core equity amounted to $10,049,000 and $8,954,000, respectively.
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The Board of Governors of the Federal Reserve System and other various regulatory agencies have specified guidelines for purposes of evaluating a bank's capital adequacy. Currently, banks must maintain a leverage ratio of core capital to total assets at a prescribed level, namely 3%. In addition, bank regulators have issued risk-based capital guidelines. Under such guidelines, minimum ratios of core capital and total qualifying capital as a percentage of risk-weighted assets and certain off-balance sheet items of 4% and 8% are required. As of September 30, 2007, the bank met all capital requirements with a leverage ratio of 8.48% and core capital and total risk-based capital ratios of 10.26% and 11.05%, respectively. On a consolidated basis, the company's leverage ratio, core capital and total risk-based capital ratios at September 30, 2007 were 8.50%, 10.28% and 11.08%, respectively.
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the company’s exposure to market risk during the first nine months of 2007. For discussion of the company’s exposure to market risk, refer to Item 7A, Quantitative and Qualitative Disclosure about Market Risk, contained in the company’s Annual Report incorporated by reference in Form 10-K for the year ended December 31, 2006.
ITEM 4. – CONTROLS AND PROCEDURES
The company carried out an evaluation, under the supervision and with the participation of the company’s management, including the company’s Chief Executive Officer along with the company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as such term is defined under Rule 13a – 15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act). Based upon that evaluation, the company’s Chief Executive Officer along with the company’s Chief Financial Officer concluded that the company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the company (including its consolidated subsidiaries) required to be included in the company’s periodic SEC filings.
The management of the company is responsible for (1) the preparation of the accompanying financial statements; (2) establishing and maintaining internal controls over financial reporting; and (3) the assessment of the effectiveness of internal control over financial reporting. The Securities and Exchange Commission defines effective internal control over financial reporting as a process designed under the supervision of the company’s principal executive officer and principal financial officer, and implemented in conjunction with management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles.
The company’s internal control over financial reporting is supported by written policies and procedures. All internal control systems, no matter how well designed, have inherent limitations and provide only reasonable assurance that the objectives of the control system are met. Therefore, no evaluation of controls can provide absolute assurance that all control issues and misstatements due to error or fraud, if any, within the company have been detected. Additionally, any system of controls is subject to the risk that controls may become inadequate due to changes in conditions or that compliance with policies or procedures may deteriorate.
As of September 30, 2007, management of the company conducted an assessment of the effectiveness of the company’s internal control over financial reporting based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management has concluded that the company’s internal control over financial reporting was effective as of September 30, 2007.
There were no changes in our internal control over financial reporting that occurred during the period covered by this quarterly report that have materially affected, or are, reasonably likely to materially affect, the company’s internal controls over financial reporting.
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Part II Other Information
Item 1 - Legal Proceedings.
The bank is not involved in any material pending legal proceedings, other than routine litigation incidental to the business.
Item 1A. – Risk Factors.
No material changes in risk factors occurred from those previously disclosed in the company’s Form 10-K for the year ended December 31, 2006.
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3 - Defaults upon Senior Securities.
Item 4 - Submission of Matters to a Vote of Security Holders.
Item 5 - Other Information.
Item 6 – Exhibits.
| Exhibit 31.1 | Certification of Principal Executive Officer |
| Pursuant to Section 302 of the Sarbanes-Oxley Act |
| Exhibit 31.2 | Certification of Principal Financial Officer |
| Pursuant to Section 302 of the Sarbanes-Oxley Act |
| Exhibit 32.1 | Certification of Principal Executive Officer |
| Pursuant to Section 906 of the Sarbanes-Oxley Act |
| Exhibit 32.2 | Certification of Principal Financial Officer |
| Pursuant to Section 906 of the Sarbanes-Oxley Act |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Registrant: FIRST NATIONAL COMMUNITY BANCORP, INC |
Date: | November 6, 2007 | /s/ J. David Lombardi |
| J. David Lombardi, President/ |
Date: | November 6, 2007 | /s/ William Lance |
| William Lance, Treasurer/ |
| Principal Financial Officer |
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