FNCB Bancorp (FNCB) 10-K 2007 FY Annual report

EXHIBIT 13 – ANNUAL REPORT

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

First National Community Bancorp, Inc.

We have audited the accompanying consolidated balance sheets of First National Community Bancorp, Inc. as of December 31, 2007 and 2006, and the related consolidated statements of income, changes in stockholders’ equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall 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 financial position of First National Community Bancorp, Inc. and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three-years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), First National Community Bancorp, Inc.’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 12, 2008 expressed an unqualified opinion on management’s assessment of internal control over financial reporting and an unqualified opinion on the effectiveness of internal control over financial reporting.

DEMETRIUS & COMPANY, L.L.C.

Wayne, New Jersey

March 12, 2008

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FIRST NATIONAL COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, (in thousands, except share data)				2007		2006
ASSETS
Cash and cash equivalents:
	Cash and due from banks		$	24,735	$	26,418
	Federal funds sold			0		2,325
		Total cash and cash equivalents		24,735		28,743
Securities:
	Available-for-sale, at fair value			295,727		261,626
	Held-to-maturity, at cost (fair value $1,847 and $1,819)			1,722		1,639
	Federal Reserve Bank and FHLB stock, at cost			9,081		7,168
Loans, net of allowance for credit losses of $7,569 and $7,538				897,665		829,121
Bank premises and equipment				16,425		13,671
Accrued interest receivable				5,715		6,127
Intangible assets				1,713		1,739
Goodwill				8,134		8,134
Other assets				35,286		26,815
TOTAL ASSETS			$	1,296,203	$	1,184,783
LIABILITIES
Deposits:
	Demand		$	79,834	$	86,375
	Interest-bearing demand			288,879		291,400
	Savings			70,379		73,205
	Time ($100,000 and over)			176,249		187,884
	Other time			330,176		282,109
		Total deposits		945,517		920,973
Borrowed funds				227,832		152,872
Accrued interest payable				6,848		6,774
Other liabilities				8,864		7,302
		Total liabilities	$	1,189,061	$	1,087,921
STOCKHOLDERS' EQUITY
Common Stock ($1.25 par)
	Authorized: 50,000,000 shares in 2007 and 2006 Issued and outstanding: 15,746,250 shares in 2007 and 15,497,711 shares in 2006		$	19,683	$	19,373
Additional paid-in capital				56,490		52,418
Retained earnings				33,159		25,141
Accumulated other comprehensive income				(2,190)		(70)
		Total stockholders' equity		107,142		96,862
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY			$	1,296,203	$	1,184,783
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

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FIRST NATIONAL COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31, (in thousands, except per share data)		2007		2006		2005
INTEREST INCOME
Interest and fees on loans	$	67,070	$	56,905	$	42,777
Interest and dividends on securities:
U.S. Treasury and government agencies		9,584		6,762		6,078
State and political subdivisions		3,342		3,297		2,839
Other securities		1,862		1,576		1,252
Total interest and dividends on securities		14,788		11,635		10,169
Interest on balances with financial institutions		0		55		70
Interest on federal funds sold		28		73		291
TOTAL INTEREST INCOME		81,886		68,668		53,307
INTEREST EXPENSE
Interest-bearing demand		8,064		6,453		3,499
Savings		868		960		868
Time ($100,000 and over)		9,271		7,143		3,863
Other time		15,413		10,959		7,176
Interest on borrowed funds		8,956		7,671		6,951
TOTAL INTEREST EXPENSE		42,572		33,186		22,357
Net interest income before provision for credit losses		39,314		35,482		30,950
Provision for credit losses		2,200		2,080		1,860
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES		37,114		33,402		29,090
OTHER INCOME
Service charges		2,840		2,645		2,240
Net gain/(loss) on the sale of securities		721		(201)		(250)
Net gain on the sale of loans		310		240		210
Net gain on the sale of other real estate		0		297		14
Net gain/(loss) on the sale of other assets		26		(3)		0
Other		2,448		1,919		1,690
TOTAL OTHER INCOME		6,345		4,897		3,904
OTHER EXPENSES
Salaries and employee benefits		11,917		10,584		9,652
Occupancy expense		2,116		1,626		1,676
Equipment expense		1,577		1,388		1,293
Advertising expense		890		705		706
Data processing expense		1,682		1,560		1,435
Other operating expenses		5,615		4,910		4,181
TOTAL OTHER EXPENSES		23,797		20,773		18,943
INCOME BEFORE INCOME TAXES		19,662		17,526		14,051
Provision for income taxes		4,966		4,017		2,826
NET INCOME	$	14,696	$	13,509	$	11,225
EARNINGS PER SHARE:
BASIC	$	0.94	$	0.88	$	0.74
DILUTED	$	0.92	$	0.86	$	0.72
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

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FIRST NATIONAL COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended December 31, (in thousands)		2007		2006		2005
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received	$	80,570	$	67,947	$	53,134
Fees and commissions received		5,304		4,580		3,930
Interest paid		(42,506)		(30,024)		(20,280)
Cash paid to suppliers and employees		(21,543)		(17,821)		(16,783)
Income taxes paid		(5,692)		(4,876)		(3,750)
NET CASH PROVIDED BY OPERATING ACTIVITIES		16,133		19,806		16,251
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities available for sale:
Proceeds from maturities		500		0		5,000
Proceeds from sales prior to maturity		76,202		12,375		25,100
Proceeds from calls prior to maturity		35,918		24,638		24,159
Purchases		(149,531)		(69,149)		(64,092)
Net (increase)/decrease in interest-bearing bank balances		0		2,178		(198)
Investment in statutory trust		0		(310)		0
Purchase of bank owned life insurance		(5,000)		0		(2,500)
Net increase in loans to customers		(71,012)		(125,604)		(83,093)
Capital expenditures		(4,178)		(4,399)		(1,869)
Acquisition of intangible assets		0		(1,782)		0
Acquisition of goodwill		0		(8,134)		0
NET CASH USED IN INVESTING ACTIVITIES		(117,101)		(170,187)		(97,493)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, money market demand,  NOW accounts, and savings accounts		(11,887)		49,010		38,650
Net increase/(decrease) in certificates of deposit		36,431		121,297		40,304
Net increase in borrowed funds		74,961		(11,233)		10,038
Proceeds from issuance of common stock net of stock issuance costs		3,798		3,324		2,626
Proceeds from issuance of common stock - Stock Option Plans		274		628		664
Cash dividends paid		(6,614)		(5,776)		(4,513)
Cash paid in lieu of fractional shares		(3)		(6)		0
NET CASH PROVIDED BY FINANCING ACTIVITIES		96,960		157,244		87,769
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(4,008)		6,863		6,527
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		28,743		21,880		15,353
CASH AND CASH EQUIVALENTS AT END OF YEAR	$	24,735	$	28,743	$	21,880

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RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net income	$	14,696	$	13,509	$	11,225
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization and accretion, net		(1,727)		413		835
Equity in trust		(23)		0		0
Depreciation and amortization		1,653		1,388		1,303
Stock based compensation - stock option plans		249		310		248
Provision for credit losses		2,200		2,080		1,860
Provision for deferred taxes		(393)		(619)		(758)
Loss/(Gain) on sale of securities		(721)		201		250
Gain on sale of loans		(310)		(240)		(210)
Gain on sale of other real estate		0		(297)		(14)
Loss/(Gain) on sale of other assets		(26)		3		0
Increase/(decrease) in interest payable		73		3,163		2,078
Increase in accrued expenses and other liabilities		1,562		2,014		833
Increase in prepaid expenses and other assets		(1,511)		(985)		(391)
Increase in interest receivable		411		(1,134)		(1,008)
Total adjustments		1,437		6,297		5,026
NET CASH PROVIDED BY OPERATING ACTIVITIES	$	16,133	$	19,806	$	16,251
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

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FIRST NATIONAL COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
For the Years Ended December 31, 2007, 2006 and 2005 (in thousands, except share data)
				COMP-REHEN-SIVE	COMMON STOCK		ADD’L PAID-IN	RETAINED	ACCUMULATED OTHER COMP-REHENSIVE INCOME/
				INCOME	SHARES	AMOUNT	CAPITAL	EARNINGS	(LOSS)	TOTAL
BALANCES, DECEMBER 31, 2004					13,623,678	$17,030	$18,671	$38,992	$1,030	$75,723
	Comprehensive Income:
		Net income for the year		$11,225				11,225		11,225
		Other comprehensive income, net of tax:
			Unrealized loss on securities available-for-sale, net of deferred income tax benefit of $801	(1,304)
			Reclassification adjustment for gain or loss included in income (tax effect of $85)	(250)
		Total other comp. loss, net of tax		(1,554)					(1,554)	(1,554)
	Comprehensive Income			$9,671
	Cash dividends paid, $0.30 per share							(4,513)		(4,513)
	Stock based compensation – Stock Option Plans						248			248
	Proceeds from issuance of Common Stock- Stock option plans				101,250	126	563	(25)		664
	Proceeds from issuance of Common Stock through dividend reinvestment				125,925	158	2,500	(32)		2,626
	10% stock dividend (1,385,085 shares at $18.92 per share)				1,385,085	1,731	24,810	(26,541)		0
BALANCES, DECEMBER 31, 2005					15,235,938	$19,045	$46,792	$19,106	$(524)	$84,419
	Comprehensive Income:
		Net income for the year		$13,509				13,509		13,509
		Other comprehensive income, net of tax:
			Unrealized gain on securities available-for-sale, net of deferred income taxes of $234	655
			Reclassification adjustment for gain or loss included in income (tax effect of $68)	(201)
		Total other comp. income, net of tax		454					454	454
	Comprehensive Income			$13,963
	Cash dividends paid, $0.38 per share							(5,776)		(5,776)
	Stock based compensation – Stock Option Plans						310			310
	Proceeds from issuance of Common Stock- Stock option plans				101,375	126	527	(25)		628
	Proceeds from issuance of Common Stock through dividend reinvestment				154,398	194	3,169	(39)		3,324
	10% stock dividend (adjustment for new shares and price difference)				6,000	8	1,620	(1,628)		0
	Cash dividends paid in lieu of fractional shares							(6)		(6)
BALANCES, DECEMBER 31, 2006					15,497,711	$19,373	$52,418	$25,141	$(70)	$96,862
	Comprehensive Income:
		Net income for the year		$14,696				14,696		14,696
		Other comprehensive income, net of tax:
			Unrealized loss on securities available-for-sale, net of deferred income tax benefit of $1,143	(2,841)
			Reclassification adjustment for gain or loss included in income (tax effect of $252)	721
		Total other comp. loss, net of tax		(2,120)					(2,120)	(2,120)
	Comprehensive Income			$12,576
	Cash dividends paid, $0.42 per share							(6,614)		(6,614)
	Stock based compensation – Stock Option Plans						249			249

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Proceeds from issuance of Common Stock- Stock option plans		36,088	46	237	(9)		274
Proceeds from issuance of Common Stock through dividend reinvestment		212,599	264	3,586	(52)		3,798
	Cash dividends paid in lieu of fractional shares	(148)			(3)		(3)
BALANCES, DECEMBER 31, 2007		15,746,250	$19,683	$56,490	$33,159	$(2,190)	$107,142
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

Notes to Consolidated Financial Statements:

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

The accounting and reporting policies that affect the more significant elements of First National Community Bancorp, Inc.’s (the “company”) financial statements are summarized below. They have been followed on a consistent basis and are in accordance with generally accepted accounting principles and conform to general practice within the banking industry.

NATURE OF OPERATIONS

The company is a registered financial holding company, incorporated under the laws of the state of Pennsylvania. It is the parent company of First National Community Bank (the “bank”) and it’s wholly owned subsidiary FNCB Realty, Inc.

The bank provides a variety of financial services to individuals and corporate customers through its nineteen banking locations located in northeastern Pennsylvania. It provides a full range of commercial banking services which includes commercial, residential and consumer lending. Additionally, the bank provides to it's customers a variety of deposit products, including demand checking and interest-bearing deposit accounts.

FNCB Realty, Inc.’s operating activities include the acquisition, holding, and disposition of certain real estate acquired in satisfaction of loan commitments owed by third party debtors to the bank.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of First National Community Bancorp, Inc., the bank and it’s wholly owned subsidiary FNCB Realty, Inc.

All significant intercompany balances and transactions have been eliminated in consolidation.

During December 2006 the bank created First National Community Statutory Trust I (“Issuing Trust”) which is wholly owned by the company. The trust purpose is to provide an additional funding source for the company through the issuance of pooled trust preferred securities.

The company has adopted Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 46 and FIN 46(R), for the issuing trust. Accordingly, this trust has not been consolidated with the accounts of the company.

USE OF ESTIMATES

The preparation of 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 the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

SECURITIES

Debt securities that management has the ability and intent to hold to maturity are classified as held-to-maturity and carried at cost, adjusted for amortization of premium and accretion of discounts using methods approximating the interest method. Other marketable securities are classified as available-for-sale and are carried at fair value. Unrealized gains and losses on securities available-for-sale are recognized as direct increases or decreases in stockholders' equity. Cost of securities sold is recognized using the specific identification method.

Investments in the Federal Reserve Bank and FHLB stock are carried at cost due to restrictions on their sale due to regulatory requirements.

OTHER-THAN-TEMPORARY IMPAIRMENT OF SECURITIES

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Securities are evaluated on a monthly basis to determine whether a decline in their value is other than temporary. Management utilizes criteria such as the magnitude and duration of the decline and the intent and ability of the Company to retain its investment in the issues for a period of time sufficient to allow for an anticipated recovery in fair value, in addition to the reasons underlying the decline, to determine whether the loss in value is other than temporary. The term “other than temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than carrying value of the investment. Once a decline in value is determined to be other than temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.

LOANS

Loans are stated at face value, net of unamortized loan fees and costs and the allowance for credit losses. Interest on all loans is recognized on the accrual basis, based upon the principal amount outstanding.

Loans are placed on nonaccrual when a loan is specifically determined to be impaired or when management believes that the collection of interest or principal is doubtful. This is 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 the interest accrual is discontinued, interest credited to income in the current year is reversed and the accrual of income from 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.

MORTGAGE BANKING ACTIVITIES

When liquidity needs arise, management may from time to time determine that the mortgage loan portfolio provides a ready source of liquidity and elect to sell a portion of the loans which are currently held. At origination, no loans are targeted for immediate sale.

At December 31, 2007, 2006 and 2005, loans serviced for others totaled approximately $99,461,000, $88,752,000 and $85,844,000, respectively. Servicing loans for others consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors, and processing foreclosures. Loan servicing income is recorded when earned and includes servicing fees from investors in the amounts of $236,000, $218,000 and $210,000 at December 31, 2007, 2006 and 2005, respectively, and certain charges collected from borrowers, such as late payment fees. The Company has fiduciary responsibility for related escrow and custodial funds aggregating approximately $1,274,000 and $1,256,000 at December 31, 2007 and 2006, respectively.

The Company assesses the retained interest in the servicing asset or liability associated with the sold loans based on the relative fair values. The servicing asset or liability is amortized in proportion to and over the period during which estimated net servicing income or net servicing loss, as appropriate, will be received. Assessment of the fair value of the retained interest is performed on a quarterly basis. At December 31, 2007 mortgage servicing rights totaling $256,000 were included in other assets.

TRANSFERS OF FINANCIAL ASSETS

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control is surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

SERVICING

Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. Generally, purchased servicing rights are capitalized at the cost to acquire the rights. For sales of mortgage loans, a portion of the cost of originating the loan is allocated to the servicing right based on relative fair value. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternately, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. Capitalized servicing rights are reported in other assets and are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets.

Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights into tranches based on predominant risk characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the capitalized amount for the tranche. If the bank later determines that all or a portion of the impairment no longer exists for a particular tranche, a reduction of the allowance may be recorded as an increase to income.

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Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal; or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income.

LOAN IMPAIRMENT

The Bank applies the provisions of SFAS No. 114, Accounting by Creditors for Impairment of a Loan, and SFAS No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures, in it’s evaluation of the loan portfolio. SFAS 114 requires that certain impaired loans be measured based on the present value of expected future cash flows, net of disposal costs, discounted at the loan’s original effective interest rate. As a practical expedient, impairment may be measured based on the loan’s observable market price or the fair value of the collateral, net of disposal costs, if the loan is collateral dependent. When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance.

ALLOWANCE FOR CREDIT LOSSES

The allowance for credit losses is established through provisions for loan losses charged against income. Loans deemed to be uncollectible are charged against the allowance for credit losses, and subsequent recoveries, if any, are credited to the allowance.

The allowance for credit losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management’s periodic evaluation of the adequacy of the allowance is based on the Bank’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, 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 that may be susceptible to significant change, including the amounts and timing of future cash flows expected to be received on impaired loans.

The allowance consists of specific and general components. The specific component relates to loans that are classified as either doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical loss experience adjusted for qualitative factors.

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are the subject of a restructuring agreement.

LOAN FEES

Loan origination and commitment fees, as well as certain direct loan origination costs are deferred and the net amount is amortized as an adjustment of the related loan's yield. The bank is generally amortizing these amounts over the life of the related loans except for residential mortgage loans, where the timing and amount of prepayments can be reasonably estimated. For these mortgage loans, the net deferred fees are amortized over an estimated average life of 7.5 years. Amortization of deferred loan fees is discontinued when a loan is placed on nonaccrual status.

OTHER REAL ESTATE (ORE)

Real estate acquired in satisfaction of a loan and in-substance foreclosures are reported in other assets. In-substance foreclosures are properties in which the borrower has little or no equity in collateral, where repayment of the loan is expected only from the operation or sale of the collateral, and the borrower either effectively abandons control of the property or the borrower has retained control of the property but his ability to rebuild equity based on current financial conditions is considered doubtful. Properties acquired by foreclosure or deed in lieu of foreclosure and properties classified as in-substance foreclosures are transferred to ORE and recorded at the lower of cost or fair value (less estimated selling cost for disposal of real estate) at the date actually or constructively received. Costs associated

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with the repair or improvement of the real estate are capitalized when such costs significantly increase the value of the asset, otherwise, such costs are expensed. An allowance for losses on ORE is maintained for subsequent valuation adjustments on a specific property basis.

BANK PREMISES AND EQUIPMENT

Bank premises and equipment are stated at cost less accumulated depreciation. Routine maintenance and repair expenditures are expensed as incurred while significant expenditures are capitalized. Depreciation expense is determined on the straight-line method over the following ranges of useful lives:

                   Buildings and improvements 10 to 40 years

Furniture, fixtures and equipment 3 to 15 years

Leasehold improvements 5 to 30 years

GOODWILL AND INTANGIBLE ASSETS

Intangible assets which are subject to amortization include core deposit premium paid in connection with the bank’s Honesdale branch acquisition during November 2006; and on mortgage servicing rights recorded on the bank’s sale of loans in the secondary market where servicing rights have been retained. Amortization expense associated with these intangible assets is being provided for using the straight-line method over their estimated useful lives of 10 years and 5.8 years, respectively. Intangible assets subject to amortization are periodically reviewed by management for potential impairment whenever events or circumstances indicate that carrying amounts may not be recoverable.

Intangible assets which are not subject to amortization include goodwill. The cost of goodwill arose from the bank’s Honesdale branch acquisition. Goodwill is reviewed by management for possible impairment at least annually or more frequently upon the occurrence of an event or when circumstances indicate that its carrying amount exceeds fair value. Management has determined that the carrying value of goodwill has not been impaired at December 31, 2007.

ADVERTISING COSTS

Advertising costs are charged to operations in the year incurred and totaled $890,000, $705,000 and $706,000 in 2007, 2006 and 2005, respectively.

INCOME TAXES

Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

The company and its subsidiaries file a consolidated Federal income tax return. Under tax sharing agreements, each subsidiary provides for and settles income taxes with the company as if they would have filed on a separate return basis.

Effective January 1, 2007, the Company adopted Financial Interpretation No. 48, "Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109" ("FIN 48"), which is a change in accounting for income taxes. FIN 48 specifies how tax benefits for uncertain tax positions are to be recognized, measured, and derecognized in financial statements; requires certain disclosures of uncertain tax matters; specifies how reserves for uncertain tax positions should be classified on the balance sheet; and provides transition and interim period guidance, among other provisions.

CASH EQUIVALENTS

For purposes of reporting cash flows, cash equivalents include cash on hand, amounts due from banks, and federal funds sold. Generally, federal funds are purchased and sold for one-day periods.

NET INCOME PER SHARE

Basic earnings per share have been computed by dividing net income (the numerator) by the weighted-average number of common shares outstanding (the denominator) for the period. Such shares amounted to 15,601,377 in 2007, 15,352,406 in 2006 and 15,125,382 in 2005.

Diluted earnings per share have been computed by dividing net income (the numerator) by the weighted-average number of common shares and options outstanding (the denominator) for the period. Such shares amounted to 15,931,260 in 2007, 15,721,491 in 2006 and 15,537,485 in 2005.

All share and per share information has been adjusted to reflect the retroactive effect of the 25% stock dividend paid December 27, 2007, the 10% stock dividend paid March 31, 2006 and the 100% stock dividend paid on September 30, 2004.

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STOCK-BASED COMPENSATION

As of January 1, 2003 the Company adopted SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment to SFAS No. 123, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. The Company has elected to apply the prospective method as permitted by SFAS No. 148. Accordingly all options granted on and after January 1, 2003 are charged against income at their fair value. Those issued prior to adoption are accounted for on the intrinsic method in accordance with Accounting Principles Board Opinion (APB) No. 25.

BANK OWNED LIFE INSURANCE

Bank owned life insurance policies (BOLI) are carried at the cash surrender value of the underlying policies. Income on the investments in the policies, net of insurance costs, is recorded as non-interest income.

SEGMENT REPORTING

In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 requires that public companies report certain information about operating segments in complete sets of financial statements of the company and in condensed financial statements of interim periods issued to shareholders. It also requires that public companies report certain information about their products and services, the geographic areas in which they operate, and their major customers.

First National Community Bancorp, Inc. is a one bank financial holding company operating primarily in northeastern Pennsylvania. The primary purpose of the company is the delivery of financial services within its market by means of a branch network located in Lackawanna, Luzerne, Wayne and Monroe counties. Each of the company’s entities is part of the same reporting segment, whose operating results are regularly reviewed by management. Therefore, consolidated financial statements, as presented, fairly reflect the operating results of the financial services segment of our business.

NEW FINANCIAL ACCOUNTING STANDARDS

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The changes to current practice resulting from the application of SFAS No. 157 relate to the definition of fair value, the methods used to measure fair value and the expanded disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The adoption of SFAS No. 157 is not expected to have a material impact on the Company's consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159 "The Fair Value Option for Financial Assets and Financial Liabilities". Statement 159 permits entities to make an irrevocable election to carry almost any financial instrument at fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The company analyzed the benefits of the early adoption of SFAS No. 159, but has determined that such action is not consistent with the overall strategies of the company. The adoption of SFAS No. 159 is not expected to have a material impact on the Company's consolidated financial statements.

In November 2007, the SEC issued Staff Accounting Bulletin ("SAB") No. 109 ("SAB 109"), which covers written loan commitments that are accounted for at fair value through earnings and measuring fair value of a derivative loan commitment. It is effective for fiscal quarters beginning after December 15, 2007. The adoption of SAB 109 is not expected to have a material impact on the Company's consolidated financial statements.

In December 2007, the SEC issued SAB No. 110 ("SAB 110"), regarding the use of a "simplified" method in developing an estimate of expected term of "plain vanilla" share options in accordance with SFAS No. 123(R). Initially the use of the simplified method was to end by December 31, 2007, however SAB 110 allows for its usage beyond December 31, 2007. The Company anticipates using the simplified method during 2008.

In December 2007, the FASB issued SFAS No. 141R, "Business Combinations", which revises SFAS No. 141 and changes multiple aspects of the accounting for business combinations. Under the guidance of SFAS No. 141R, the acquisition method must be used, which requires the acquirer to recognize most identifiable assets acquired, liabilities assumed, and noncontrolling interests in the acquiree at their full fair value on the acquisition date. Goodwill is to be recognized as the excess of the consideration transferred plus the fair value of the noncontrolling interest over the fair values of the identifiable net assets acquired. Subsequent changes in the fair value of contingent consideration classified as a liability are to be recognized in earnings, while contingent consideration classified as equity is not to be remeasured. Costs such as transaction costs are to be excluded from acquisition accounting, generally lending to recognizing expense and additionally, restructuring costs that do not meet certain criteria at acquisition date are to be subsequently recognized as post-acquisition costs. SFAS No. 141R is effective for business combinations for which the acquisition date is on or

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after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company is currently evaluating the impact that this requirement will have on its consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interest in Consolidated Financial Statements – an amendment of ARB No. 51". SFAS No. 160 requires that a noncontrolling interest in a subsidiary (i.e. minority interest) be reported in the equity section of the balance sheet instead of being reported as a liability or in the mezzanine section between debt and equity. The amount of the consolidated net income attributable to the parent and to the noncontrolling interest must be clearly identified and presented in the consolidated statement of income. Also, regardless of whether the parent purchases additional ownership interest, sells a portion of its ownership interest in a subsidiary or the subsidiary participates in a transaction that changes the parent's ownership, as long as the parent retains controlling interest, the transaction is considered an equity transaction. SFAS No. 160 is effective for annual periods beginning after December 15, 2008. The Company is currently evaluating the impact that this requirement will have on its consolidated financial statements.

2. RESTRICTED CASH BALANCES:

The bank is required to maintain certain average reserve balances as established by the Federal Reserve Bank. The amount of those reserve balances for the reserve computation period which included December 31, 2007 was $75,000, which amount was satisfied through the restriction of vault cash.

In addition, the bank maintains compensating balances at correspondent banks, most of which are not required, but are used to offset specific charges for services. At December 31, 2007, the amount of these balances was $750,000.

3. SECURITIES:

Securities have been classified in the consolidated financial statements according to management’s intent. The carrying amount of securities and their approximate fair values (in thousands) at December 31 follow:

Available-for-sale Securities:

		Gross		Gross
		Unrealized		Unrealized	Net
	Amortized	Holding		Holding	Carrying
	Cost	Gains		Losses		Value
December 31, 2007
U.S. Treasury securities and obligations of U.S. government agencies	$ 52,380	$ 616		$ 492		$ 52,504
Obligations of state and political subdivisions	74,516	199		1,810		72,905
Collateralized mortgage obligations	79,186	519		834		78,871
Mortgage-backed securities	62,447	289		593		62,143
Corporate debt securities	29,557	5		1,254		28,308
Equity securities	1,010	0		14		996
Total	$299,096	$ 1,628		$4,997		$295,727
December 31, 2006
U.S. Treasury securities and obligations of U.S. government agencies	$ 59,502	$ 216	$ 371			$ 59,347
Obligations of state and political subdivisions	73,786	1,830	127			75,489
Collateralized mortgage obligations	64,041	194	947			63,288
Mortgage-backed securities	43,315	32	846			42,501
Corporate debt securities	20,078	162	234			20,006
Equity securities	1,010	0	15			995
Total	$261,732	$2,434	$2,540			$261,626

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Held-to-maturity Securities:

		Gross	Gross
	Net	Unrealized	Unrealized
	Carrying	Holding	Holding	Fair
	Value	Gains	Losses		Value
December 31, 2007
Obligations of state and political subdivisions	$1,722	$ 125	$ 0		$1,847
Total	$1,722	$ 125	$ 0		$1,847
December 31, 2006
Obligations of state and political subdivisions	$1,639	$ 180	$ 0		$1,819
Total	$1,639	$ 180	$ 0		$1,819

Information pertaining to securities with gross unrealized losses (in thousands) at December 31, 2007 aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

	Less than 12 Months		12 Months or Greater		Total
	Fair Value	Gross Unrealized Losses	Fair Value	Gross Unrealized Losses	Fair Value	Gross Unrealized Losses
U.S. Treasury securities and obligations of U.S. government agencies	$26,432	$492	$ 0	$ 0	$ 26,432	$ 492
Obligations of state and political subdivisions	44,877	1,600	6,079	210	50,956	1,810
Collateralized mortgage obligations	28,515	508	15,275	326	43,790	834
Mortgage-backed securities	8,644	80	24,442	513	33,086	593
Corporate debt securities	13,444	1,050	7,873	204	21,317	1,254
Mutual Fund	0	0	986	14	986	14
	$121,912	$3,730	$54,655	$1,267	$176,567	$4,997

Management evaluates securities for other-than-temporary impairment on a monthly basis. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

At December 31, 2007, the one hundred seventy debt securities with unrealized losses have depreciated 2.75% from their amortized cost basis. The maturities of these securities are guaranteed by either the U.S. Government, government sponsored agencies, other governments or corporations. Obligations of state and political subdivisions are also guaranteed by underlying insurance which further secures the safety of principal. These unrealized losses relate principally to current interest rates for similar types of securities. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government, its agencies, other governments or corporations; whether downgrades by bond rating agencies have occurred; and the results of reviews of the issuer’s financial condition. As management has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available-for-sale, no declines are deemed to be other-than-temporary.

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The following table shows the amortized cost and approximate fair value of the company's debt securities (in thousands) at December 31, 2007 using contracted maturities. Expected maturities will differ from contractual maturity because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Available-for-sale		Held-to-maturity
		Net	Net
	Amortized	Carrying	Carrying	Fair
	Cost	Value	Value	Value
Amounts maturing in:
One Year or Less	$ 501	$ 505	$ 0	$ 0
One Year through Five Years	3,814	3,858	0	0
After Five Years through Ten Years	18,547	18,738	0	0
After Ten Years	133,591	130,616	1,722	1,847
Collateralized mortgage obligations	79,186	78,871	0	0
Mortgage-backed Securities	62,447	62,143	0	0
Total	$298,086	$294,731	$1,722	$1,847

Gross proceeds from the sale of securities for the years ended December 31, 2007, 2006, and 2005 were $76,202,000, $12,375,000, and $25,100,000, respectively with the gross realized gains being $1,127,000, $30,000, and $102,000, respectively, and gross realized losses being $406,000, $231,000, and $352,000, respectively.

At December 31, 2007 and 2006, securities with a carrying amount of $192,813,000 and $201,244,000, respectively, were pledged as collateral to secure public deposits and for other purposes.

4. LOANS:

Major classifications of loans are summarized as follows (in thousands):

	2007	2006
Real estate loans, secured by residential properties	$164,764	$151,470
Real estate loans, secured by nonfarm, nonresidential properties	415,087	415,560
Commercial and industrial loans	202,665	157,837
Loans to individuals for household, family and other personal expenditures	91,052	80,770
Loans to state and political subdivisions	31,205	31,355
All other loans, including overdrafts	931	236
Gross loans	905,704	837,228
Less: Allowance for credit losses	(7,569)	(7,538)
Unearned discount	(470)	(569)
Net loans	$897,665	$829,121

Changes in the allowance for credit losses were as follows (in thousands):

	2007	2006	2005
Balance, beginning of year	$7,538	$7,528	$7,100
Recoveries credited to allowance	1,227	350	590
Provision for credit losses	2,200	2,080	1,860
TOTAL	10,965	9,958	9,550
Losses charged to allowance	3,396	2,420	2,022
Balance, end of year	$7,569	$7,538	$7,528

Information concerning the bank’s recorded investment in nonaccrual and restructured loans is as follows (in thousands):

	2007	2006
Nonaccrual loans
Impaired	$ 0	$ 0
Other	3,106	2,299
Restructured loans	0	0

Total $3,106 $2,299

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The interest income that would have been earned in 2007, 2006 and 2005 on nonaccrual and restructured loans outstanding at December 31, 2007, 2006 and 2005 in accordance with their original terms approximated $227,000, $170,000 and $6,000. The interest income actually realized on such loans in 2007, 2006 and 2005 approximated $40,000, $83,000 and $0. As of December 31, 2007, there were no outstanding commitments to lend additional funds to borrowers of impaired, restructured or nonaccrual loans.

5. BANK PREMISES AND EQUIPMENT:

Bank premises and equipment are summarized as follows (in thousands):

	2007	2006
Land	$ 4,575	$ 4,447
Buildings	8,856	7,248
Furniture, fixtures and equipment	8,968	7,750
Leasehold improvements	4,156	3,736
Total	26,555	23,181
Less accumulated depreciation	10,130	9,510
Net	$16,425	$13,671

The increase in capitalized values represents the acquisition of land and facilities to be utilized for future expansion. Depreciation and amortization expense amounted to $1,450,000, $1,345,000 and $1,303,000 at December 31, 2007, 2006 and 2005, respectively.

6. SERVICING:

Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid balances of mortgage and other loans serviced for others were $99,461,000, $88,752,000 and $85,844,000 at December 31, 2007, 2006 and 2005, respectively.

Mortgage servicing rights in the amount of $177,000 have been capitalized and amortized by the bank for loan originations sold in the secondary market for the year ended December 31, 2007.

The fair value of these rights was $359,000 at December 31, 2007. Fair value has been determined using discount rates ranging from 5.25% to 7.13% and prepayment speeds ranging from 190% to 272%; depending upon the stratification of the specific right. Based upon this fair value, management has determined that no valuation allowance associated with these mortgage servicing rights is necessary at December 31, 2007.

The following summarizes the activity pertaining to mortgage servicing rights for the year ended December 31, 2007 (in thousands):

	Mortgage  Servicing Rights
Balance, beginning of year	$ 117
Mortgage servicing rights capitalized	177
Mortgage servicing rights amortized	(38)
Provision for loss in fair value	0
Balance, end of year	$ 256

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7. GOODWILL AND INTANGIBLES:

In connection with the purchase of the Honesdale branch during 2006, the Company acquired intangible assets of $9,784,000. Of that amount, $1,650,000 is due to core deposit premium subject to periodic amortization over the useful life of 10 years. Goodwill of $8,134,000, which is not subject to amortization, arose in connection with the acquisition.

Following is a summary of non-goodwill intangibles at the end of the year (in thousands):

	December 31, 2007		December 31, 2006
	Gross Amount	Accumulated Amortization	Gross Amount	Accumulated Amortization
Intangibles subject to amortization:
Core Deposit	$ 1,650	$ 193	$1,650	$ 28
Mortgage Servicing Rights	309	53	132	15
Total	$ 1,959	$ 246	$1,782	$ 43

Amortization expense for 2007 and 2006 was $203,000 and $43,000; estimated amortization expense for each of the ensuing years through December 31, 2012 is $220,000 per year.

8. DEPOSITS:

At December 31, 2007 time deposits including certificates of deposit and Individual Retirement Accounts have the scheduled maturities as follows (in thousands):

	Time Deposits $100,000 and Over	Other Time Deposits	Total
2008	$149,584	$227,716	$377,300
2009	11,818	44,650	56,468
2010	4,390	22,334	26,724
2011	5,205	19,238	24,443
2012	4,990	14,037	19,027
2013 and Thereafter	262	2,201	2,463
Total	$176,249	$330,176	$506,425

9. BORROWED FUNDS:

Borrowed funds at December 31, 2007 and 2006 include the following (in thousands):

	2007	2006
Treasury Tax and Loan Demand Note	$ 98	$ 267
Federal Funds Purchased	35,550	0
Borrowings under Lines of Credit	181,088	141,550
Obligation under Capitalized Lease	786	745
Junior Subordinated Debentures	10,310	10,310
Total	$227,832	$152,872

Federal funds purchased represent primarily overnight borrowings providing for the short-term funding requirements of the company’s banking subsidiary and generally mature within one business day of the transaction. During 2007, the average outstanding balance on these credit lines amounted to $12,941,000 and the average rate paid in 2007 was 5.02%.

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The following table presents Federal Home Loan Bank of Pittsburgh (“FHLB of Pittsburgh”) advances at their maturity dates (in thousands):

	December 31, 2007
	Amount	Weighted Average Interest Rate
Within one year	$ 55,456	4.93%
After one year but within two years	7,364	5.28
After two years but within three years	55,000	4.60
After three years but within four years	31,000	5.08
After four years but within five years	13,233	4.48
After five years	19,035	3.68
	$181,088	4.71%

The FHLB of Pittsburgh advances include $147 million with fixed rates and $34 million with variable interest rates. All advances are collateralized either under a blanket pledge agreement by one to four family mortgage loans or with mortgage-backed securities. In addition, the company is required to purchase stock based upon the amount of advances outstanding.

At December 31, 2007 the company had available from the FHLB of Pittsburgh an open line of credit for $40,284,000 which expires on December 14, 2008. The line of credit may bear interest at either a fixed rate or a variable rate, such rate being set at the time of the funding request. In addition, at December 31, 2007, the company had available overnight repricing lines of credit with other correspondent banks totaling $48,000,000 and the Federal Reserve Bank of Philadelphia in the amount of $13,169,000. At December 31, 2007 and 2006, the company had $35,550,000 and $0 outstanding with correspondent banks.

The maximum amount of borrowings outstanding at any month end during the years ended December 31, 2007 and 2006 were $221,235,000 and $172,968,000, respectively.

At December 31, 2007, the bank is obligated for the payment of an $815,000 lease purchase option payment associated with an Other Real Estate (ORE) property acquired through a transfer in lieu of foreclosure from a defaulting loan customer. This obligation has been discounted to its present value of $785,675 using a discount rate of 5.36%. This discount is being amortized using the interest method through September 10, 2008 when the obligation becomes payable.

On December 14, 2006, First National Community Statutory Trust I (the “Trust”), a trust formed under Delaware law, that is a subsidiary of the Company, issued $10,000,000 of trust preferred securities (the “Trust Securities”) at a variable interest rate of 7.02%, with a scheduled maturity of December 15, 2036. The Company owns all of the common stock of the Trust. The proceeds from the issue were invested in $10,310,000, 7.02% Junior Subordinated Debentures (the “Debenture”) issued by the Company. The interest rate on the Trust Securities and the Debentures will reset quarterly at a spread of 1.67% above the current 3-month Libor rate. The Debentures, which mature December 15, 2036, are unsecured and rank subordinate and junior in right to all indebtedness, liabilities and obligations of the Company. Debentures represent the sole assets of the Trust. Interest on the Trust Securities is deferrable until a period of twenty consecutive quarters has elapsed. The Company has the option, subject to required regulatory approval of the Federal Reserve, to prepay the trust securities beginning December 15, 2011. The Company has, under the terms of the Debenture and the related Indenture, as well as, the other operative corporate documents, agreed to irrevocably and unconditionally guarantee the Trust’s obligations under the Debenture.

At December 31, 2007, accrued and unpaid interest associated with these Debentures amounting to $28,613 has been provided for in the accompanying consolidated financial statements.

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The Company has applied FIN 46 and FIN 46(R) to its investment in the Issuer Trust, and as such, it has reflected this investment on a deconsolidated basis. As a result, the junior subordinated debentures issued by the Issuer Trust, totaling $10,310,000 has been reflected in Borrowed Funds in the consolidated balance sheets at December 31, 2007 under the caption “Junior Subordinated Debentures”. The Company records interest expense on the corresponding debentures in its consolidated statement of income. The Company also records its common stock investment issued by First National Community Statutory Trust I in “Other Assets” in its consolidated balance sheets at December 31, 2007.

10. BENEFIT PLANS:

The bank has a defined contribution profit sharing plan which covers all eligible employees. The bank's contribution to the plan is determined at management's discretion at the end of each year and funded. Contributions to the plan in 2007, 2006 and 2005 amounted to $720,000, $650,000, and $552,000, respectively.

The bank has an unfunded non-qualified deferred compensation plan covering all eligible bank officers and directors as defined by the plan. This plan permits eligible participants to elect to defer a portion of their compensation. At December 31, 2007, elective deferred compensation amounting to $3,528,000 plus $2,389,000 in accrued interest has been included in other liabilities in the accompanying balance sheet.

11. INCOME TAXES:

The provision for income taxes included in the statement of income is comprised of the following components (in thousands):

	2007	2006	2005
Current	$5,359	$4,636	$3,584
Deferred	(393)	(619)	(758)
TOTAL	$4,966	$4,017	$2,826

The components of the net deferred tax asset, included in other assets, at December 31 are as follows (in thousands):

	2007	2006
Allowance for Credit Losses	$ 2,649	$ 2,563
Deferred Compensation	2,071	1,632
Unrealized Holding Losses on Securities Available-for-Sale	1,179	36
Stock Based Compensation	296	304
Gross Deferred Tax Asset	$ 6,195	$ 4,535
Deferred Loan Origination Fees	$ (71)	$ (76)
Deferred Intangible Assets	(208)	(20)
Depreciation	(58)	(117)
Gross Deferred Tax Liability	$ (337)	$ (213)
Net Deferred Tax Assets	$ 5,858	$ 4,322

The provision for Income Taxes differs from the amount of income tax determined applying the applicable U.S. Statutory Federal Income Tax Rate to pre-tax income from continuing operations as a result of the following differences (in thousands):

	2007	2006	2005
Provision at Statutory Tax Rates	$6,882	$5,978	$4,777
Add (Deduct):
Tax Effects of Non-Taxable Interest Income	(1,824)	(1,627)	(1,446)
Non-Deductible Interest Expense	301	254	178
Stock Options Exercised	(100)	(418)	(506)
Other Items Net	(293)	(170)	(177)
Provision for Income Taxes	$4,966	$4,017	$2,826

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First National Community Bancorp, Inc. and its subsidiaries have adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN48) effective January 1, 2007. The Company has identified its federal consolidated tax return as a “major” taxing jurisdiction as defined under FIN 48. At December 31, 2007, the company has evaluated its tax filings with this major tax jurisdiction for the calendar years 2004 through 2007. These years remain open and can be subjected to an examination. Based on its evaluation, the Company believes that its income tax filing positions and deductions would be sustained under examination; and does not anticipate any adjustments would result in a material change in its financial position. Therefore, no allowances for uncertain income tax positions, including interest and penalties, were required to be recorded at December 31, 2007 pursuant to FIN 48. Additionally, no cumulative effect of an accounting change resulted from the Company’s initial adoption of this FASB Interpretation.

12. RELATED PARTY TRANSACTIONS:

At December 31, 2007 and 2006, certain officers and directors and/or their affiliates were indebted to the bank in the aggregate amounts of $74,682,000 and $47,710,000. Such indebtedness was incurred in the ordinary course of business on substantially the same terms as those prevailing at the time for comparable transactions with other persons. During 2007, $130,696,000 of new loans were made and repayments totaled $103,724,000. Interest and fees collected on the loans amounted to $5,055,000 and $2,484,000 at December 31, 2007 and 2006. The bank was also committed under standby letters of credit as described in Note 13.

Deposits from certain officers and directors and/or their affiliates held by the bank at December 31, 2007 and 2006 amounted to $88,619,000 and $122,932,000. Interest paid on the deposits amounted to $3,568,000 and $1,488,000 at December 31, 2007 and 2006.

13. COMMITMENTS:

a) Leases:

At December 31, 2007, the company was obligated under certain noncancelable operating leases with initial or remaining terms of one year or more. Minimum future obligations under noncancelable operating leases in effect at December 31, 2007 are as follows (in thousands):

	FACILITIES	EQUIPMENT
2008	$ 404	$129
2009	166	108
2010	140	71
2011	94	20
2012	60	3
2013 and thereafter	166	0
Total	$1,030	$331

Total rental expense under operating leases amounted to $576,000 in 2007, $555,000 in 2006, and $542,000 in 2005.

(b) Financial Instruments with Off-Balance Sheet Risk:

The bank 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. Such financial instruments include commitments to extend credit and standby letters of credit which involve varying degrees of credit, interest rate or liquidity risk in excess of the amount recognized in the balance sheet. The bank's exposure to credit loss from nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments.

Financial instruments whose contract amounts represent credit risk at December 31 are as follows (in thousands):

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	2007	2006
Commitments to extend credit	$199,865	$202,895
Standby letters of credit	79,078	107,276

Commitments to extend credit are agreements to lend to customers in accordance with contractual provisions. These commitments usually are for specific periods or contain termination clauses and may require the payment of a fee. The total amounts of unused commitments do not necessarily represent future cash requirements, in that commitments often expire without being drawn upon.

Letters of credit and financial guarantees are agreements whereby the company guarantees the performance of a customer to a third party. Collateral may be required to support letters of credit in accordance with management’s evaluation of the creditworthiness of each customer. The credit exposure assumed in issuing letters of credit is essentially equal to that in other lending activities.

Outstanding commitments to extend credit and standby letters of credit issued to or on behalf of related parties amounted to $25,717,000 and $7,118,000 and $46,049,000 and $16,178,000 at December 31, 2007 and 2006, respectively.

(c) Concentration of Credit Risk:

Cash Concentrations: The bank maintains cash balances at several correspondent banks. The aggregate cash balances represent federal funds sold of $0 and $2,325,000; and due from bank accounts in excess of the limit covered by the Federal Deposit Insurance Corporation amounting to $104,000 and $273,000 as of December 31, 2007 and 2006, respectively.

Loan Concentrations: At December 31, 2007, 34.6% of the bank’s commercial loan portfolio was concentrated in loans in the following five industries. Substantially all of these loans are secured by first mortgages on commercial properties and/or collateral held.

	In thousands	%
Land Subdivision	$88,202	12.7%
Hotels	45,299	6.5
Shopping Centers/Complexes	37,978	5.4
Solid Waste Landfills	35,157	5.0
General Government	34,684	5.0

(d) Other:

The company is also a party to routine litigation involving various aspects of its business, none of which, in the opinion of management and its legal counsel, is expected to have a material adverse impact on the consolidated financial condition, results of operations or liquidity of the company.

14. STOCK OPTION PLANS:

On August 30, 2000, the Corporation’s board of directors adopted an Employee Stock Incentive Plan in which options may be granted to key officers and other employees of the Corporation. The aggregate number of shares which may be issued upon exercise of the options under the plan cannot exceed 1,100,000 shares. Options and rights granted under the plan become exercisable six months after the date the options are awarded and expire ten years after the award date.

The board of directors also adopted on August 30, 2000, the Independent Directors Stock Option Plan for members of the corporation’s board of directors who are not officers or employees of the corporation or its subsidiaries.

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The aggregate number of shares issuable under the plan cannot exceed 550,000 shares and are exercisable six months from the date the awards are granted and expire three years after the award date.

As more fully described in Note 1 to these financial statements, the Company has adopted SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure. Accordingly, all options granted after January 1, 2003 have been charged against income at their fair value. Awards granted under the plans vest immediately and the entire expense of the award is recognized in the year of grant. Upon expiration, the cost of the option is reversed and credited to income.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model average assumptions:

	Year Ended December 31,
	2007	2006	2005
Dividend yield	2.59%	1.67%	1.49%
Expected life	10 years	10 years	10 years
Expected volatility	26.5%	25.6%	25.5%
Risk-free interest rate	4.50%	4.67%	4.67%

A summary of the status of the company’s stock option plans is presented below:

	2007		2006		2005
	Shares	Weighted Average Exercise Price	Shares	Weighted Average Exercise Price	Shares	Weighted Average Exercise Price
Outstanding at the beginning of the year	349,838	$10.85	418,963	$ 8.62	495,275	$ 7.27
Granted	48,625	16.90	35,063	23.13	35,063	19.31
Exercised	(36,088)	7.61	(104,188)	6.03	(111,375)	5.96
Forfeited	(1,650)	23.13	0		0
Outstanding at the end of the year	360,725	$11.93	349,838	$10.85	418,963	$ 8.62
Options exercisable at year end	312,100	$11.16	314,775	$ 9.48	383,900	$ 7.64
Weighted average fair value of options granted during the year		$ 5.11		$ 8.83		$7.09
Stock-Based Compensation Expense		$248,571		$309,672		$248,370

Information pertaining to options outstanding at December 31, 2007 is as follows:

	Options Outstanding			Options Exercisable
Range of Exercise Price	Number Outstanding	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price	Number Exercisable	Weighted Average Exercise Price
$5.19-$23.13	360,725	6.3 years	$11.93	312,100	$11.16

15. REGULATORY MATTERS:

The bank 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,

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actions by regulators that, if undertaken, could have a direct material effect on the bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the bank must meet specific capital guidelines that involve quantitative measures of the bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The bank’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 bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2007, that the bank meets all capital adequacy requirements to which it is subject.

As of December 31, 2007, 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.

(in thousands)
	Actual		For Capital Adequacy Purposes:		To Be Well Capitalized Under Prompt Corrective Action Provisions:
	Amount	Ratio	Amount	Ratio	Amount	Ratio
As of December 31, 2007:
Total Capital (to Risk Weighted Assets)	$117,301	11.22%	>$83,601	>8.0%	>$104,501	>10.0%
Tier I Capital (to Risk Weighted Assets)	$109,732	10.50%	>$41,800	>4.0%	>$62,700	>6.0%
Tier I Capital (to Average Assets)	$109,732	8.87%	>$49,497	>4.0%	>$61,871	>5.0%
As of December 31, 2006:
Total Capital (to Risk Weighted Assets)	$104,586	10.67%	>$78,416	>8.0%	>$98,020	>10.0%
Tier I Capital (to Risk Weighted Assets)	$97,048	9.90%	>$39,208	>4.0%	>$58,812	>6.0%
Tier I Capital (to Average Assets)	$97,048	9.16%	>$42,400	>4.0%	>$53,000	>5.0%

Banking regulations also limit the amount of dividends that may be paid without prior approval of the bank's regulatory agency. Retained earnings against which dividends may be paid without prior approval of the federal banking regulators amounted to $29,142,000 at December 31, 2007, subject to the minimum capital ratio requirements noted above.

16. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:

Current accounting pronouncements require annual disclosure of estimated fair value of on-and off-balance sheet financial instruments.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Cash and short-term investments:

Cash and short-term investments include cash on hand, amounts due from banks, and federal funds sold. For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

Securities:

For securities held for investment purposes, the fair values have been individually determined based on currently quoted market prices. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

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Loans:

The fair value of loans has been estimated by discounting the future cash flows using the current rates which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

Deposits:

The fair value of demand deposits, savings deposits, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.

Borrowed funds:

Rates currently available to the bank for debt with similar terms and remaining maturities are used to estimate fair value of existing debt.

Commitments to extend credit and standby letters of credit:

The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date.

The estimated fair values of the company's financial instruments (in thousands) are as follows:

	December 31, 2007
	Carrying Value	Fair Value
FINANCIAL ASSETS
Cash and short term investments	$ 24,735	$ 24,735
Securities	306,530	306,655
Gross Loans	905,234	905,793
FINANCIAL LIABILITIES
Deposits	$945,517	$947,249
Borrowed funds	227,832	229,590
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Commitments to extend credit and standby letters of credit	$0	$898

	December 31, 2006
	Carrying Value	Fair Value
FINANCIAL ASSETS
Cash and short term investments	$ 28,743	$ 28,743
Interest-bearing balances with financial institutions	0	0
Securities	270,433	270,613
Gross Loans	836,659	827,915
FINANCIAL LIABILITIES
Deposits	$920,973	$919,834
Borrowed funds	152,872	151,583
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Commitments to extend credit and standby letters of credit	$0	$618

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17. CONDENSED FINANCIAL INFORMATION – PARENT COMPANY ONLY:

Condensed parent company only financial information is as follows (in thousands):

Condensed Balance Sheet December 31,	2007	2006
Assets:
Cash	$ 348	$ 694
Investment in Statutory Trust	333	310
Investment in Subsidiary (equity method)	116,808	106,203
Total Assets	$117,489	$107,207
Liabilities and Stockholders’ Equity:
Junior Subordinated Debentures	$ 10,310	$ 10,310
Other liabilities	37	35
Stockholders’ equity	107,142	96,862
Total Liabilities and Stockholders’ Equity	$117,489	$107,207

Condensed Statement of Income for the years ending December 31,	2007	2006	2005
Income:
Dividends from Subsidiary	$ 2,800	$ 2,400	$ 1,050
Equity in Undistributed Income of Subsidiary	12,476	11,207	10,196
Equity in Trust	23	0	0
Total Income	$15,299	$13,607	$11,246
Expenses	603	98	21
Net Income	$14,696	$13,509	$11,225

Condensed Statement of Cash Flows for the years ending December 31,	2007	2006	2005
Cash Flows from Operating Activities:
Net income	$14,696	$13,509	$11,225
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed income of subsidiary	(12,476)	(11,207)	(10,196)
Equity in Trust	(23)	0	0
Increase in other liabilities	1	35	0
Net Cash Provided by Operating Activities	$ 2,198	$ 2,337	$ 1,029
Cash Flows from Investing Activities:
Investment in capital of subsidiary	$ 0	$(10,000)	$ 0
Investment in statutory trust	0	(310)	0
Net Cash Used in Investing Activities	$ 0	$(10,310)	$ 0
Cash Flows from Financing Activities:
Increase in borrowed funds	$ 0	$ 10,310	$ 0
Cash dividends	(6,614)	(5,776)	(4,513)
Proceeds from issuance of common stock net of stock issuance costs	4,073	3,952	3,290
Cash paid in lieu of fractional shares	(3)	(6)	0
Net Cash Used in Financing Activities	$ (2,544)	$8,480	$(1,223)
Increase (decrease) in Cash	$ (346)	$ 507	$ (194)
Cash at Beginning of Year	694	187	381
Cash at End of Year	$ 348	$ 694	$ 187

Non-cash investing and financing activities:

In 1999, the company adopted a dividend reinvestment plan. Shares of stock issued in 2006, 2005 and 2004 were 123,518 shares, 100,740 shares and 115,772 shares, respectively, in lieu of paying cash dividends of $3,323,000 in 2006, $2,626,000 in 2005 and $2,060,000 in 2004.

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18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):

In thousands, except per share amounts:

	Quarter Ending
	March 31,	June 30,	September 30,	December 31,
2007
Interest income	$19,309	$20,258	$21,269	$21,050
Interest expense	9,907	10,548	11,285	10,832
Net interest income	9,402	9,710	9,984	10,218
Provision for credit losses	300	300	300	1,300
Other income	1,424	1,368	2,236	1,317
Other expenses	5,635	5,880	5,873	6,409
Provision for income taxes	1,276	1,150	1,639	901
Net income	$ 3,615	$ 3,748	$ 4,408	$ 2,925
Earnings per share:
Basic	$0.23	$0.24	$0.28	$0.19
Diluted	$0.23	$0.23	$0.28	$0.18
	Quarter Ending
	March 31,	June 30,	September 30,	December 31,
2006
Interest income	$15,363	$16,518	$17,504	$19,283
Interest expense	7,074	7,869	8,545	9,698
Net interest income	8,289	8,649	8,959	9,585
Provision for credit losses	270	270	270	1,270
Other income	1,127	1,104	1,253	1,413
Other expenses	4,929	5,008	4,981	5,855
Provision for income taxes	1,023	1,122	1,250	622
Net income	$ 3,194	$ 3,353	$ 3,711	$ 3,251
Earnings per share:
Basic	$0.21	$0.22	$0.24	$0.21
Diluted	$0.20	$0.22	$0.23	$0.21

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