SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[ X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No.__________
FIRST NATIONAL COMMUNITY BANCORP, INC.
(Exact Name of Registrant as Specified in Its Charter)
Pennsylvania 23-2900790
State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
102 E. Drinker St. Dunmore, PA 18512
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (570) 346-7667
Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
NONE
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $1.25 par value
(Title of Class)
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 preceding 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 Company's common stock held by
non-affiliates at March 21, 2001: $77,000,483.
REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes _______ No ________
APPLICABLE ONLY TO CORPORATE REGISTRANTS State the number of
shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.
2,524,606 shares of common stock
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Annual Report to security holders for the Fiscal
Year Ended December 31, 2000 are incorporated by reference.
FIRST NATIONAL COMMUNITY BANCORP, INC.
Part I.
Item 1 - Business
CORPORATE PROFILE
The Business of First National Community Bancorp, Inc.
THE COMPANY
First National Community Bancorp, Inc. (the "company") is a Pennsylvania
Corporation, incorporated in 1997 and is registered as a financial holding
company under the Bank Holding Company Act of 1956, as amended. The company
became an active bank holding company on July 1, 1998 when it assumed ownership
of First National Community Bank (the "bank"). On November 2, 2000, the Federal
Reserve Bank of Philadelphia approved the company's application to change its
status to a financial holding company as a complement to the company's strategic
objective. The bank is a wholly-owned subsidiary of the company.
The company's primary activity consists of owning and operating the
bank, which provides the customary retail and commercial banking services to
individuals and businesses. The bank provides practically all of the company's
earnings as a result of its banking services.
THE BANK
The bank was established as a national banking association in 1910 as
"The First National Bank of Dunmore." Based upon shareholder approval received
at a Special Shareholders' Meeting held October 27, 1987, the bank changed its
name to "First National Community Bank" effective March 1, 1988. The bank's
operations are conducted from offices located in Lackawanna and Luzerne
Counties, Pennsylvania:
Office Date Opened
-------- -------------
Main October 1910
Scranton September 1980
Dickson City December 1984
Fashion Mall July 1988
Wilkes-Barre July 1993
Pittston Plaza April 1995
Kingston August 1996
Exeter November 1998
Daleville April 2000
Plains June 2000
Back Mountain October 2000
The bank provides the usual commercial banking services to individuals
and businesses, including a wide variety of deposit instruments. Consumer loans
include both secured and unsecured installment loans, fixed and variable rate
mortgages, home equity term loans and Lines of Credit and "Instant Money"
overdraft protection loans. Additionally, the bank is also in the business of
underwriting indirect auto loans which are originated through various auto
dealers in northeastern Pennsylvania and dealer floor plan loans. MasterCard and
VISA personal credit cards are available through the Bank, as well as the FNCB
Check Card which allows customers to access their checking account at any retail
location that accepts VISA and serves the dual purpose of an ATM card. In the
commercial lending field, the bank offers demand and term loans, either secured
or unsecured, letters of credit, working capital loans, accounts receivable,
inventory or equipment financing loans, and commercial mortgages. In addition,
the bank offers MasterCard and VISA processing services to its commercial
customers, as well as Auto Cash Manager which is personal computer based and
FNCBusiness, which is internet based. Both are menu driven products that allow
our business customers to have direct access to their account information and
the ability to perform certain daily transactions from their place of business.
As a result of the bank's partnership with INVEST, our customers are able to
access alternative products such as mutual funds, annuities, stock and bond
purchases, etc. directly from our INVEST representatives. The bank also offers
customers the convenience of 24-hour banking, seven days a week, through its ATM
(MAC) network. These automated teller machines are available at the following:
Community Offices Remote Locations
Dunmore Petro Truck Stop, 98 Grove St., Dupont
Dickson City Pit-Stop Emporium, RR1 I-81 Exit 60, Dalton
Fashion Mall Bill's Shursave Supermarket, Rt. 502, Daleville
Pittston Convenient Food Mart, 3021 N. Main Ave., Scranton
Kingston
Exeter
Daleville
Plains
Back Mountain
Additionally, to further enhance 24-hour banking services, Telephone
Banking (Account Link), Loan by Phone, and Mortgage Link are available to
customers. These services provide consumers the ability to access account
information, perform related account transfers, and apply for a loan through the
use of a touch tone telephone. Internet banking is also available through the
"FNCB Online" system.
As of December 31, 2000, no material portion of the bank's deposits has
been obtained from a single person or entity. Industry concentrations exist with
regard to the hotel and automobile dealership industries as well as with loans
and lines of credit to shopping centers/retail complexes and office
complexes/units. As of December 31, 2000, loans and lines of credit to each of
these industries were as follows:
o Hotels $20,612,000
o Automobile Dealers $17,937,000
o Shopping Centers/Retail Complexes $19,532,000
o Office Complexes/Units $17,684,000
First lien mortgages on the real estate, carefully selected dealers and
a diverse group of borrowers provide security against undue risks in the
portfolio.
COMPETITION
The bank is one of two financial institutions with principal offices in
Dunmore. Primary competition in the Dunmore, Scranton and Mid Valley markets
comes from several commercial banks and savings and loan associations operating
in these areas. Our Luzerne County offices share many of the same competitors we
face in Lackawanna County as well as several banks and savings & loans that are
not in our Lackawanna County market. Deposit deregulation has intensified the
competition for deposits among banks in recent years. Additional competition is
derived from credit unions, finance companies, brokerage firms, insurance
companies and retailers.
REGULATORY MATTERS
The company is subject to certain annual reporting requirements
regarding its business operations. As a registered company under the Bank
Holding Company Act of 1956, as amended, the company is subject to the
supervision and examination by the Federal Reserve Board under the Act.
The bank is subject to regulation and supervision by the Office of the
Comptroller of the Currency, which includes regular examinations of the bank's
records and operations. As a member of the Federal Deposit Insurance Corporation
(FDIC), the bank's depositors' accounts are insured up to $100,000 per
depositor. To obtain this protection for its depositors, the bank pays an
assessment and is subject to the regulations of the FDIC. The bank is also a
member of the Federal Reserve System and as such is subject to the rules
promulgated by the Federal Reserve Board.
EMPLOYEES
As of December 31, 2000 the bank employed 213 persons, including 54
part-time employees.
Item 2 - Properties
Type of
Property Location Ownership Use
1 102 East Drinker Street
Dunmore, PA Own Main Office
2 419-421 Spruce Street
Scranton, PA Own Scranton Branch
3 934 Main Avenue
Dickson City, PA Own Dickson City Branch
4 277 Scranton/Carbondale Highway
Scranton, PA Lease Fashion Mall Branch
5 23 West Market Street
Wilkes-Barre, PA Lease Wilkes-Barre Branch
6 1700 N. Township Blvd.
Pittston, PA Lease Pittston Plaza Branch
7 754 Wyoming Avenue
Kingston, PA Lease Kingston Branch
8 1625 Wyoming Avenue
Exeter, PA Lease Exeter Branch
9 Route 502 & 435
Daleville, PA Lease Daleville Branch
10 27 North River Road
Plains, PA Lease Plains Branch
11 169 North Memorial Highway
Shavertown, PA Lease Back Mountain Branch
12 269 E. Grove St.
Clarks Green, PA Own Land
13 200 S. Blakely Street
Dunmore, PA Lease Administrative Center
14 107-109 S. Blakely Street
Dunmore, PA Own Parking Lot
15 114-116 S. Blakely Street
Dunmore, PA Own Parking Lot
16 1708 Tripp Avenue
Dunmore, PA Own Parking Lot
Item 3 - Legal Proceedings
The company is not involved in any material pending legal proceedings,
other than routine litigation incidental to the business.
Item 4 - Submission of Matters to a Vote of Security Holders
Not Applicable
Part II.
Item 5 - Market for Registrant's Common Equity and Related Stockholder
Matters
INVESTOR INFORMATION
MARKET PRICES OF STOCK AND DIVIDENDS PAID
The company's common stock is not actively traded. The principal market
area for the company's stock is northeastern Pennsylvania. First National
Community Bancorp, Inc. is listed in the Over-The-Counter (OTC) Bulletin Board
Stocks under the symbol "FNCB". Quarterly market highs and lows and dividends
paid for each of the past two years are presented below. These prices do not
necessarily represent actual transactions. The bank expects that comparable cash
dividends will be paid in the future.
MARKET PRICE DIVIDENDS PAID
HIGH LOW PER SHARE
QUARTER 2000
First $37.00 $30.00 $ .17
Second 33.00 29.50 .17
Third 34.50 28.13 .19
Fourth 30.00 27.88 .35
-----
$0.88
=====
QUARTER 1999
First $39.00 $32.00 $ .15
Second 42.00 39.50 .15
Third 43.50 39.00 .17
Fourth 41.50 37.00 .33
-----
$0.80
=====
MARKET MAKERS
INVEST Financial Corporation Ryan, Beck and Co.
102 E. Drinker Street 80 Main Street
Dunmore, PA 18512 West Orange, NJ 07052
1-888-845-3622 1-800-325-7926
Legg Mason Wood Walker, Inc. Tucker Anthony Inc.
330 Montage Mountain Road Mid Atlantic Division
Scranton, PA 18507 666 Fifth Avenue
(570) 346-9300 New York, NY 10103
1-800-526-6371
TRANSFER AGENT
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016-9982
Shareholder questions regarding stock ownership should be directed to the
Investor Relations Department at Registrar and Transfer Company at
1-800-368-5948.
DIVIDEND CALENDAR
Dividends on the company's common stock, if approved by the Board of
Directors, are customarily paid on or about March 15, June 15, September 15 and
December 15. Record dates for dividends are customarily March 1, June 1,
September 1, and December 1.
SHAREHOLDERS' INQUIRIES
A copy of the company's Annual Report for the year ended December 31,
2000 on Form 10-K, as required to be filed with the Securities and Exchange
Commission, may be obtained free of charge by writing to:
Treasurer
First National Community Bancorp, Inc.
102 East Drinker Street
Dunmore, PA 18512
INTERNET ADDRESS
www.fncb.com
E-MAIL ADDRESS
fncb@fncb.com
Item 6 - Selected Financial Data
FIRST NATIONAL COMMUNITY BANCORP, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(In thousands, except per share data)
For the Years Ended December 31,
-------------------------------------------------------------
2000 1999 1998 1997 1996
-------------------------------------------------------------
Total assets 583,852 540,363 483,385 428,335 372,438
Interest-bearing balances
with financial institutions 3,359 2,874 2,478 1,586 2,771
Securities 152,316 146,528 131,830 121,367 82,476
Net loans 393,125 359,244 324,610 280,731 259,880
Total deposits 460,418 411,126 380,039 345,668 320,968
Stockholders' equity 46,684 37,055 34,679 31,580 27,631
Net interest income before
provision for credit losses 19,021 17,643 15,445 14,580 12,765
Provision for credit losses 970 1,020 920 1,110 820
Other income 1,382 1,577 1,583 1,628 1,099
Other expenses 11,752 10,795 9,423 8,839 7,904
Income before income taxes 7,681 7,405 6,685 6,259 5,140
Provision for income taxes 1,661 1,756 1,578 1,616 1,265
Net income 6,020 5,649 5,107 4,643 3,875
Cash dividends paid 2,202 1,922 1,703 1,396 1,178
Per share data:
Net income - basic (1) 2.41 2.35 2.13 1.94 1.62
Net income - diluted (1) 2.39 2.35 2.13 1.94 1.62
Cash dividends (2) 0.88 0.80 0.71 0.58 0.49
Book value (1)(3) 18.66 15.39 14.46 13.17 11.52
Weighted average number of
shares outstanding 2,502,245 2,407,278 2,398,360 2,398,360 2,398,360
(1) Earnings per share and book value per share are calculated based on the
weighted average number of shares outstanding during each year, after
giving retroactive effect to the 100% stock dividend declared in 1998 and
the 10% stock dividends declared in 1997 and 1996.
(2) Cash dividends per share have been restated to reflect to retroactive
effect of the 100% stock dividend declared in 1998 and the 10% stock
dividends declared in 1997 and 1996.
(3) Reflects the effect of SFAS No. 115 in the amount of $880,000 in 2000,
$(4,252,000) in 1999, $791,000 in 1998, $1,097,000 in 1997, and $384,000 in
1996.
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following financial review of First National Community Bancorp, Inc. is
presented on a consolidated basis and is intended to provide a comparison of the
financial performance of the company, including its wholly-owned subsidiary,
First National Community Bank for the years ended December 31, 2000, 1999 and
1998. The information presented below should be read in conjunction with the
company's consolidated financial statements and accompanying notes appearing
elsewhere in this report. All share and per share data has been restated to
reflect the 100% stock dividend paid to shareholders on July 20, 1998.
SUMMARY
Net income was $6,020,000 in 2000 which was $371,000, or 7%, higher than
the $5,649,000 earned in 1999. The 1999 earnings were $542,000, or 11% higher
than the 1998 total. Basic earnings per share were $2.41, $2.35 and $2.13 in
2000, 1999 and 1998. The weighted average number of shares outstanding in 2000
was 2,502,245 while the weighted average number of shares in 1999 and 1998 were
2,407,278 and 2,398,360.
The improvement in earnings that was recognized in 2000 is due to the $1.4
million increase in net interest income which offset an increase in operating
expenses and a reduction in other income. Loan growth and increases in money
market deposits helped us to improve net interest income through increased
spread while investment activity also contributed to the improvement.
The increase in 1999 earnings was due primarily to a $2.2 million, or 14%,
improvement in net interest income which exceeded the $1.4 million increase in
other expenses and a $300,000 increase in other costs, net. Growth of the
balance sheet also contributed to the improved earnings in 1999 as increases due
to volume far exceeded a slight decrease related to repricing.
Return on assets for the years ended December 31, 2000, 1999, and 1998 was
1.06%, 1.09% and 1.13%. Return on equity was 14.88% in 2000, 16.26% in 1999 and
15.29% in 1998.
NET INTEREST INCOME
Net interest income, the difference between interest income and fees on
earning assets and interest expense on deposits and borrowed funds, is the
largest component of the company's operating income and as such is the primary
determinant of profitability. Before providing for future credit losses, net
interest income increased 8% in 2000. Changes in net interest income generally
occur due to fluctuations in the balances and/or mixes of interest-earning
assets and interest-bearing liabilities, and changes in their corresponding
interest yields and costs. Changes in nonperforming assets, together with
interest lost and recovered on those assets, also impact comparisons of net
interest income. In the following schedules, net interest income is analyzed on
a tax-equivalent basis, thereby increasing interest income on certain tax-exempt
loans and investments by the amount of federal income tax savings realized. In
this manner, the true economic impact on earnings from various assets and
liabilities can be more accurately compared.
During 2000, tax-equivalent net interest income increased $1.6 million, or
8%. Sound pricing policies, aggressive growth strategies and effective
asset-liability management techniques contributed to the improved earnings
during a period of interest rate volatility.
Average loans increased $31 million, or 9%, in 2000 resulting in an
additional $3.9 million earned. Commercial loan growth accounted for 98% of the
increase during the year as mortgage growth was limited due to the sale of over
$9 million of residential mortgage loans and installment loans decreased. Rising
interest rates during 2000 resulted in a thirty-five basis point improvement in
the yield earned on average loans.
The company's securities portfolio was $16 million larger on the average
when compared to 1999. A thirty-one basis point increase in the yield earned on
securities resulted in a $1.6 million increase in interest income. Money market
assets, which were $1.6 million higher on average, increased one hundred
thirty-two basis points and provided an additional $169,000 of earnings.
Average interest-bearing deposits were $32 million higher than in 1999
comprised of an $18 million increase in certificates of deposit and a $14
million increase in lower costing money market and savings balances. Growth and
interest rate increases added fifty basis points and $3.4 million to the cost of
these deposits.
Borrowed funds were $9 million higher than the 1999 average balance. A
thirty-one basis point increase in the cost of these funds added $762,000 of
interest expense.
The increase in earnings due to growth of the balance sheet was offset by a
fourteen basis point decrease in the net interest income spread, resulting in a
five basis point decrease in the net interest margin. Investment leveraging
transactions again contributed to the decreased margin but added over $400,000
to net income. Exclusive of investment leveraging transactions, the 2000 net
interest margin would have been 4.07% compared to 4.10% in 1999.
In 1999, tax-equivalent net interest income increased $2.3 million, or 14%,
from the $16.7 million reported in 1998.
Average loans increased $50 million, or 17%, from the 1998 level and
provided an increase of $3.4 million of interest income. Commercial loans
provided $40 million of the increased balances and $2.9 million of the increased
earnings, while average consumer loans increased $10 million and added $500,000
to the improved earnings. The lower interest rate environment which prevailed
during the first three quarters of 1999 resulted in a twenty-six basis point
reduction in the yield on average loans when compared to 1998 due to growth and
repricing at the lower rates.
Securities in the company's investment portfolio averaged $14 million
higher than in 1998 and provided an $800,000 increase in interest income. Yields
earned on securities decreased nine basis points from the 1998 levels. Average
money market assets, which include interest-bearing deposits with banks and
federal funds sold, were $2 million lower than in 1998 which resulted in a
$139,000 decrease in interest income earned.
Average interest-bearing deposits increased $35 million, or 11%, in 1999
comprised of $20 million in time certificates of deposit and $15 million in
lower costing savings and interest-bearing demand deposits. The reduced level of
interest rates contributed to a twenty-seven basis point reduction in the
company's cost of deposits. Borrowed funds and other interest-bearing
liabilities were $21 million higher on the average in 1999 but the lower rate
scenario resulted in a twenty-one basis point reduction in the cost of these
liabilities.
As a result of the growth of the balance sheet and the overall reduction in
yields earned and paid, the company's net interest margin decreased slightly in
1999 from 3.84% to 3.82%. Investment leveraging transactions also added to the
profitability of the company in 1999, as evidenced by the $518,000 earned on the
transactions, but also compressed the company's net interest margin. Exclusive
of the investment leveraging transactions, the 1999 net interest margin would
have been 4.10% compared to 4.15% in 1998.
Yield Analysis
(dollars in thousands-taxable equivalent basis)(1)
2000 1999 1998
--------------------------------- -------------------------------- ---------------------------
Interest Average Interest Average Interest Average
Average Income/ Interest Average Income/ Interest Average Income/ Interest
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------------------------------------------------------------------------------------------------
ASSETS:
Earning Assets:(2)
Commercial loans-taxable $233,337 $20,888 8.95% $203,276 $17,311 8.52% $161,839 $14,272 8.82%
Commercial loans-tax free 10,777 1,065 9.88% 10,366 978 9.43% 11,648 1,106 9.50%
Mortgage loans 46,957 3,699 7.88% 44,870 3,496 7.79% 50,072 3,951 7.89%
Installment loans 92,769 7,580 8.17% 94,363 7,529 7.98% 78,971 6,606 8.37%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total Loans 383,840 33,232 8.66% 352,875 29,314 8.31% 302,530 25,935 8.57%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Securities-taxable 112,851 7,765 6.88% 102,035 6,619 6.49% 95,602 6,239 6.53%
Securities-tax free 42,998 3,525 8.20% 37,342 3,040 8.14% 30,196 2,587 8.57%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total Securities 155,849 11,290 7.24% 139,377 9,659 6.93% 125,798 8,826 7.02%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Interest-bearing deposits
with banks 3,202 217 6.78% 2,553 145 5.68% 2,918 177 6.07%
Federal funds sold 3,262 212 6.49% 2,346 115 4.90% 4,007 222 5.54%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total Money Market Assets 6,464 429 6.63% 4,899 260 5.31% 6,925 399 5.76%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total Earning Assets 546,153 44,951 8.23% 497,151 39,233 7.89% 435,253 35,160 8.08%
Non-earning assets 25,063 24,658 21,657
Allowance for credit losses (4,935) (4,469) (3,932)
-------- -------- --------
Total Assets $566,281 $517,340 $452,978
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-Bearing Liabilities:
Interest-bearing demand $ 77,579 $ 2,194 2.83% $ 62,183 $ 1,490 2.40% $ 50,504 $ 1,225 2.43%
deposits
Savings deposits 44,116 964 2.19% 45,716 1,020 2.23% 41,983 1,001 2.38%
Time deposits over $100,000 75,307 4,480 5.95% 68,800 3,494 5.08% 61,618 3,265 5.30%
Other time deposits 195,621 11,686 5.97% 184,229 9,937 5.39% 171,147 9,764 5.71%
-------- ------- ----- -------- ------- ----- -------- -------
Total Interest-Bearing 392,623 19,324 4.92% 360,928 15,941 4.42% 325,252 15,255 4.69%
Deposits
Borrowed funds and other
Interest-bearing liabilities 84,682 5,046 5.96% 75,803 4,284 5.65% 54,661 3,202 5.86%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total Interest-Bearing 477,305 24,370 5.11% 436,731 20,225 4.63% 379,913 18,457 4.86%
Liabilities
Demand deposits 43,774 41,810 35,887
Other liabilities 4,898 4,191 3,779
Stockholders' equity 40,304 34,608 33,399
-------- -------- --------
Total Liabilities and
Stockholders' Equity $566,281 $517,340 $452,978
======== ======== ========
------- ------- -------
Net Interest Income Spread $20,581 3.12% $19,008 3.26% $16,703 3.22%
======= ===== ======= ===== ======= =====
Net Interest Margin 3.77% 3.82% 3.84%
===== ===== =====
(1) In this schedule and other schedules presented on a tax-equivalent basis,
income that is exempt from federal income taxes, i.e. interest on state and
municipal securities, has been adjusted to a taxable equivalent basis using a
34% federal income tax rate.
(2) Excludes non-performing loans.
RATE VOLUME ANALYSIS
The most significant impact on net income between periods is derived from
the interaction of changes in the volume and rates earned or paid on
interest-earning assets and interest-bearing liabilities. The volume of earning
dollars in loans and investments, compared to the volume of interest-bearing
liabilities represented by deposits and borrowings, combined with the spread,
produces the changes in net interest income between periods. Components of
interest income and interest expense are presented on a tax-equivalent basis
using the statutory federal income tax rate of 34%.
The following table shows the effect of changes in volume and interest
rates on net interest income. The variance in interest income or expense due to
the combination of rate and volume has been allocated proportionately.
Rate/Volume Variance Report(1)
(dollars in thousands-taxable equivalent basis)
2000 vs 1999 1999 vs 1998
---------------------------- ------------------------
Increase(Decrease) Increase(Decrease)
---------------------------- ------------------------
Total Due to Due to Total Due to Due to
Change Volume Rate Change Volume Rate
---------------------------- ------------------------
Interest Income:
Commercial loans-taxable $3,577 $2,573 $1,004 $3,039 $3,486 $(447)
Commercial loans-tax free 87 40 47 (128) (122) (6)
Mortgage loans 203 163 40 (455) (412) (43)
Installment loans 51 (156) 207 923 1,268 (345)
----------------------- -----------------------
Total Loans 3,918 2,620 1,298 3,379 4,220 (841)
----------------------- -----------------------
Securities-taxable 1,146 700 446 380 421 (41)
Securities-tax free 485 461 24 453 612 (159)
----------------------- -----------------------
Total Securities 1,631 1,161 470 833 1,033 (200)
----------------------- -----------------------
Interest-bearing deposits
with banks 72 37 35 (32) (22) (10)
Federal funds sold 97 45 52 (107) (92) (15)
----------------------- -----------------------
Total Money Market Assets 169 82 87 (139) (114) (25)
----------------------- -----------------------
Total Interest Income 5,718 3,863 1,855 4,073 5,139 (1,066)
----------------------- -----------------------
Interest Expense:
Interest-bearing
demand deposits 704 369 335 265 273 (8)
Savings deposits (56) (35) (21) 19 88 (69)
Time deposits over $100,000 986 330 656 229 381 (152)
Other time deposits 1,749 614 1,135 173 746 (573)
----------------------- ----------------------
Total Interest-Bearing
Deposits 3,383 1,278 2,105 686 1,488 (802)
Borrowed funds and other
interest-bearing
liabilities 762 502 260 1,082 1,239 (157)
----------------------- -----------------------
Total Interest Expense 4,145 1,780 2,365 1,768 2,727 (959)
----------------------- -----------------------
Net Interest Income $1,573 $2,083 $ (510) $2,305 $2,412 $(107)
======================= =======================
(1) Changes in interest income and interest expense attributable to
changes in both volume and rate have been allocated
proportionately to changes due to volume and changes due to rate.
CURRENT YEAR
In 2000, tax-equivalent net interest income was $1.6 million more than the
1999 total. Growth of the balance sheet added over $2 million of net interest
income in 2000 as earnings from new loans and investments exceeded the cost of
the deposits and borrowed funds required to grow. Loan growth added $2.6 million
in income and investment activities added $1.2 million while new funds added
$1.8 million of interest expense. Rising interest rates had a positive effect on
interest income, adding over $1.8 million, but this increase was offset by a
$2.4 million increase in our cost of funds due to repricing. Certificate of
deposit repricing accounted for 76% of the increased cost due to rate. Higher
rates on money market deposits and rising costs on borrowed funds contributed in
the remaining increase.
PRIOR YEAR
In 1999, tax-equivalent net interest income increased $2.3 million in
comparison to the prior year. Balance sheet growth was directly responsible for
the improved earnings as evidenced by the $2.4 million increase due to volume.
Loan growth added $4.2 million to interest income comprised of increases in both
commercial and consumer loans while investment portfolio activity and money
market assets contributed an additional $900,000. Funding for the loan and
investment growth was derived from deposits and borrowed funds. The additional
cost generated from the growth of interest-bearing liabilities was $2.7 million
in 1999. Repricing had a minimal effect on overall net interest income in 1999
due to effective asset/liability management techniques. Lower yields on new
earning assets and repricing resulted in a $1.1 million reduction in interest
income but this negative impact was offset by a $1 million reduction in the cost
of interest-bearing liabilities. Certificate of deposit repricing provided the
majority of this variance as the lower rates which developed during the fourth
quarter of 1998 affected the portfolio during the first half of 1999.
PROVISION FOR CREDIT LOSSES
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
conditions. Consideration is also given to examinations performed by regulatory
authorities and the company's independent auditors. The provision for credit
losses was $970,000 in 2000, $1,020,000 in 1999 and $920,000 in 1998. The ratio
of the loan loss reserve to total loans was 1.32% at December 31, 2000 and 1.30%
as of December 31, 1999.
OTHER INCOME
Other Income 2000 1999 1998
------ ------ ------
(in thousands)
Service charges $1,023 $ 845 $ 780
Net gain/loss on the sale of securities (108) 197 125
Net gain on the sale of other real estate 0 23 47
Other 467 512 631
------ ------ ------
Total Other Income $1,382 $1,577 $1,583
====== ====== ======
The company's other income category can be separated into three distinct
sub-categories; service charges make up the core component of this area of
earnings while net gains (losses) from the sale of assets and other fee income
comprise the balance.
In 2000, service charges on deposits increased $178,000, or 21%, due to
increased relationships and expanded services. Securities sales resulted in a
$108,000 net loss in 2000 as management sold securities during the year in order
to purchase investments which will benefit future periods. During the year, the
company continued to shed interest-rate risk through the sale of long-term,
fixed-rate mortgage loans. The $9 million of loans sold in 2000, at rates
ranging from 5.75% to 8.75%, resulted in an $82,000 loss of which $39,000 was
recovered from the recognition of loan fees.
During 1999, income from service charges on deposits increased $65,000, or
8%. Net gains from securities sales amounted to $197,000 in 1999 as management
sold securities prior to the exercise of near-term call options. The $23,000 net
gain on the sale of other assets represents earnings generated from properties
carried in the bank's real estate subsidiary, FNCB Realty Inc. In 1999, the
company sold $15 million of fixed rate residential mortgage loans. These loan
sales, with rates ranging from 6.125% to 8.50%, added $49,000 to 1999 earnings
after accounting for fees associated with the sale. Earnings generated through
our partnership with INVEST Financial Services totaled $78,000 in 1999.
OTHER EXPENSES
Other Expenses 2000 1999 1998
------- ------- -------
(in thousands)
Salary expense $ 4,675 $ 4,297 $3,772
Employee benefit expense 1,177 1,121 977
Occupancy expense 1,087 993 869
Equipment expense 908 781 677
Advertising expense 507 468 341
Data Processing expense 796 689 599
Other operating expense 2,602 2,446 2,188
------- ------- ------
Total Other Expenses $11,752 $10,795 $9,423
======= ======= ======
Total other expenses increased $957,000, or 9%, over the 1999 total.
Employee costs increased $434,000, or 45% of the total increase. Occupancy and
equipment costs rose $221,000, or 23% of the total. All other expenses increased
32% over the 1999 total, half of which was due to rising advertising and data
processing costs. The company's overhead ratio, which measures non-interest
expenses as a percentage of average assets, was 2.08% in 2000 compared to 2.09%
in 1999.
Salary and benefit costs comprise 50% of the company's total other
expenses. Salaries rose $378,000, or 9%, in 2000 due to merit increases and
costs associated with three new community offices. As of December 31, 2000, the
company had 186 full-time equivalent employees on staff which is an 11% increase
from the 168 reported last year. Employee benefit costs were limited to a 5%
increase comprised of payroll taxes and profit sharing contributions. Health
care costs remained flat as any increase in cost was recovered through employee
contributions.
Occupancy costs rose $94,000 in 2000 due to the three new community offices.
Equipment costs increased $127,000 over the prior year. Approximately one half
of the increase in equipment costs can be attributed to the new offices while
the remaining increase is comprised of depreciation expense on new equipment.
All other operating expenses increased $302,000, or 8%, in 2000. Data
processing costs increased $107,000 due to increased services and the growth of
the company. Uncontrollable costs such as FDIC/OCC assessments and bank shares
tax increased $90,000. Office supplies and advertising added another $80,000 to
the increase.
In 1999, total other expenses increased $1.4 million, or 15%. Employee
costs increased $669,000, or 49% of the total increase, while occupancy and
equipment costs rose $228,000, or 17% of the total. All other expenses increased
$475,000 or 34% of the total due primarily to increases in advertising and data
processing costs. The company's overhead ratio was 2.09% in 1999 compared to
2.08% in 1998.
Salary and benefit costs amounted to 50% of the company's total other
expenses. In 1999, salary expense increased $525,000, or 14%, due partially to
merit increases but also due to a full year's expense associated with the bank's
Exeter Office which opened in November, 1998. Full-time equivalent employees at
December 31, 1999 were 168 which matched the same number as of year end 1998.
Employee benefit costs increased $144,000, or 15%, in 1999 due to a $64,000
increase in company provided health care costs, a $55,000 increase in payroll
related benefits, and a $25,000 increase in the company's contribution to a
defined contribution profit sharing plan.
Occupancy expenses increased $124,000 due primarily to costs associated
with a new community office. Rental expense, real estate taxes, depreciation
expense and utility costs comprise 76% of the increase. Equipment costs
increased $104,000 in 1999 due almost entirely to depreciation expense on new
equipment.
All other operating expenses increased $475,000, or 15% in 1999.
Advertising costs increased $127,000 due to bank promotions while data
processing costs increased $86,000 due to increased services and the overall
growth of the bank.
PROVISION FOR INCOME TAXES
Federal income tax expense decreased $95,000 in 2000 in comparison to the
1999 total in spite of the $276,000 improvement in income before taxes. Tax
benefits derived from an increased level of tax-exempt income had a $128,000
positive effect while deferred tax items reduced the 2000 provision by $61,000.
The company's effective tax rate for 2000 was 21.6% compared to 23.7% in 1999.
During 1999, federal income tax expense increased $178,000 from the 1998
total. The increase can be attributed to the $720,000 improvement in pre-tax
income while the benefits received from tax-exempt interest income and other
deferred items increased $67,000 in comparison to the prior year. The company's
effective tax rate for 1998 was 23.6%.
FINANCIAL CONDITION
Total assets increased $43 million, or 8%, in 2000 compared to $57 million
and 12% in 1999. Total deposits increased $49 million in 2000 and stockholders'
equity increased $10 million to offset a $17 million reduction in borrowed
funds. This growth was utilized to fund the $34 million increase in new loans
and $6 million of securities.
SECURITIES
The primary objectives in managing the company's securities portfolio are
to maintain the necessary flexibility to meet liquidity and asset and liability
management needs and to provide a stable source of interest income.
During 2000 total securities increased $6 million which includes a $9
million increase in the fair market value of the portfolio. Purchases in 2000
included $10 million of securities which were funded with structured borrowings,
thereby providing a favorable spread between the rate earned on the securities
and the cost of the borrowings. As of December 31, 2000, the company had $51
million of these leveraged transactions. Management remains committed to
strategies which limit purchases to those that are virtually free of credit risk
and will help to meet the objectives of the company's investment and
asset/liability management policies.
The following table sets forth the carrying value of securities at the dates
indicated:
December 31,
2000 1999 1998
-------- -------- --------
(in thousands)
U.S. Treasury securities and
obligations of U.S. government agencies $ 17,611 $ 20,785 $ 13,109
Obligations of state and political
subdivisions 46,776 39,097 33,671
Mortgage-backed securities 81,147 77,763 77,590
Corporate debt securities 1,749 937 992
Equity securities 5,033 7,946 6,468
-------- -------- --------
Total $152,316 $146,528 $131,830
======== ======== ========
The following table sets forth the maturities of securities at December 31,
2000 (in thousands) and the weighted average yields of such securities
calculated on the basis of the cost and effective yields weighted for the
scheduled maturity of each security. Tax-equivalent adjustments, using a 34%
rate, have been made in calculating yields on obligations of state and political
subdivisions.
Mortgage-
Within 2 - 5 6 - 10 Over Backed No Fixed
One Year Years Years 10 Years Securities Maturity Total
--------- ------- ------- -------- --------- --------- -------
U.S. Treasury securities $499 $1,499 $ 0 $ 0 $ 0 $ 0 $ 1,998
Yield 6.01% 5.97% 5.98%
Obligations of U.S. government agencies 7,873 7,586 15,459
Yield 7.13% 6.96% 7.05%
Obligations of state and political
subdivisions (1) 4,539 41,441 45,980
Yield 8.48% 7.95% 8.00%
Corporate debt securities 1,037 750 1,787
Yield 6.70% 7.55% 7.06%
Mortgage-backed securities 80,727 80,727
Yield 7.06% 7.06%
Equity securities (2) 5,033 5,033
Yield 6.97% 6.97%
---- ------ ------- ------- ------- ------ --------
Total maturities $499 $1,499 $13,449 $49,777 $80,727 $5,033 $150,984
==== ====== ======= ======= ======= ====== ========
Weighted yield 6.01% 5.97% 7.55% 7.79% 7.06% 6.97% 7.33%
===== ====== ====== ====== ====== ====== ======
(1) Yields on state and municipal securities have been adjusted to a
tax-equivalent basis using a 34% federal income tax rate.
(2) Yield presented represents 2000 actual return.
LOANS
Total loans increased $34 million, or 9%, in 2000. Real estate loans
increased $16 million comprised of a $21 million increase in commercial
mortgages and a $5 million reduction in residential mortgage loans. The decrease
in residential mortgage loans is due to the sale of over $9 million of these
loans in 2000 to reduce the company's interest rate risk exposure and to create
liquidity for future loan fundings. Commercial loans increased $18 million
including $4 million of dealer floor plan loans.
Details regarding the loan portfolio for each of the last five years ending
December 31 are as follows:
Loans Outstanding
(in thousands)
2000 1999 1998 1997 1996
-------- -------- -------- -------- ---------
Commercial and Financial $ 79,483 $ 61,337 $ 49,796 $ 36,790 $ 29,625
Real Estate 246,061 230,029 211,554 190,266 181,455
Installment 62,504 65,075 58,799 46,174 43,200
Other 10,327 7,517 8,748 11,133 8,785
-------- -------- -------- -------- --------
Total Loans Gross 398,375 363,958 328,897 284,363 263,065
Unearned Discount 0 0 (4) (10) (18)
-------- -------- -------- -------- --------
Total Loans 398,375 363,958 328,893 284,353 263,047
Allowance for Credit Losses (5,250) (4,714) (4,283) (3,623) (3,167)
-------- -------- -------- -------- --------
Net Loans $393,125 $359,244 $324,610 $280,730 $259,880
======== ======== ======== ======== ========
The following schedule shows the repricing distribution of loans
outstanding as of December 31, 2000. Also provided are these amounts classified
according to sensitivity to changes in interest rates.
Loans Outstanding - Repricing Distribution
(in thousands)
Within One to Over Five
One Year Five Years Years Total
-------- ---------- --------- ---------
Commercial and Financial $ 52,279 $ 22,754 $ 4,450 $ 79,483
Real Estate 91,097 112,806 42,158 246,061
Installment 2,851 58,935 718 62,504
Other 3,980 1,017 5,330 10,327
-------- -------- ------- --------
Total $150,207 $195,512 $52,656 $398,375
======== ======== ======= ========
Loans with predetermined
interest rates $ 8,120 $ 90,857 $44,345 $143,322
Loans with floating rates 142,087 104,655 8,311 255,053
-------- -------- ------- --------
Total $150,207 $195,512 $52,656 $398,375
======== ======== ======= ========
ASSET QUALITY
The company manages credit risk through the application of policies and
procedures designed to foster sound underwriting and credit monitoring
practices, although, as is the case with any financial institution, a certain
degree of credit risk is dependent in part on local and general economic
conditions that are beyond the company's control.
The company's risk management committee meets quarterly or more often as
required and makes recommendations to the board of directors regarding
provisions for credit losses. The committee reviews individual problem credits
and ensures that ample reserves are established considering both general
allowances and specific allocations.
The following schedule reflects various non-performing categories as of
December 31 for each of the last five years:
December 31
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(in thousands)
Nonaccrual:
Impaired $ 0 $ 0 $ 0 $ 0 $ 447
Other 645 288 845 207 267
Loans past due 90 days or more
and still accruing 224 498 452 1,224 354
Other Real Estate Owned 0 0 0 0 337
---- ---- ------ ------ ------
Total Non-Performing Assets $869 $786 $1,297 $1,431 $1,405
==== ==== ====== ====== ======
During the year, total non-performing assets increased $83,000 comprised of
a $357,000 increase in non-accrual loans and a $274,000 decrease in past due
loans. The increase in non-accrual loans is limited to three credits which were
transferred to nonaccrual status in 2000. Management believes that any losses
which may result from these problem credits will be minimal.
On December 31, 2000, the company's ratio of nonaccrual loans to total
loans was .16%. While this represents an increase from the .08% reported in
1999, we continue to rank well ahead of peer banks in measurements of
delinquency. The company continues to acknowledge the weakness in local real
estate markets, emphasizing strict underwriting standards to minimize the
negative impact of the current environment.
ALLOWANCE FOR CREDIT LOSSES
The following table presents an allocation of the allowance for credit
losses as of the end of each of the last five years:
Loan Loss Reserve Allocation
(in thousands)
12/31/00 12/31/99 12/31/98 12/31/97 12/31/96
Percentage Percentage Percentage Percentage Percentage
of of of of of
Loans in Loans in Loans in Loans in Loans in
Each Each Each Each Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Loans Loans Loans Loans Loans
Amount Amount Amount Amount Amount
Commercial and
Financial $2,483 67% $2,917 61% $1,706 58% $1,340 56% $1,326 52%
Real Estate 190 12% 89 13% 117 14% 118 20% 98 26%
Installment 98 21% 94 26% 92 28% 69 24% 61 22%
Unallocated 2,479 - 1,614 - 2,368 2,096 - 1,682 -
----------------- ----------------- --------------- ----------------- -----------------
$5,250 100% $4,714 100% $4,283 100% $3,623 100% $3,167 100%
================= ================= =============== ================= =================
The following schedule presents an analysis of the allowance for credit
losses for each of the last five years:
(in thousands)
Years Ended December 31
----------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
Balance, January 1 $4,714 $4,283 $3,623 $3,167 $2,800
Charge-Offs:
Commercial and Financial 70 123 77 547 420
Real Estate 268 462 50 9 20
Installment 355 271 180 141 141
------ ------ ----- ----- -----
Total Charge-Offs 693 856 307 697 581
------ ------ ----- ----- -----
Recoveries on Charged-Off Loans:
Commercial and Financial 10 23 11 8 109
Real Estate 122 154 1 0 0
Installment 127 90 35 35 19
------ ------ ------ ------ ------
Total Recoveries 259 267 47 43 128
------ ------ ------ ------ ------
Net Charge-Offs 434 589 260 654 453
------ ------ ------ ------ ------
Provision for Credit Losses 970 1,020 920 1,110 820
------ ------ ------ ------ ------
Balance, December 31 $5,250 $4,714 $4,283 $3,623 $3,167
====== ====== ====== ====== ======
Net Charge-Offs during the period
as a percentage of average loans
outstanding during the period .11% .17% .09% .24% .18%
Allowance for credit losses as a
percentage of net loans outstanding
at end of period 1.32% 1.30% 1.30% 1.27% 1.20%
During 2000, net charge-offs decreased $155,000 from the 1999 level to
.11% of average loans outstanding. Installment loan charge-offs increased during
2000 due to delinquencies in the company's indirect auto portfolio, but many of
the losses were recovered within the same fiscal year. There were no losses
realized during 2000 from loans classified as nonaccrual on December 31, 1999.
DEPOSITS
The primary source of funds to support the company's growth is its deposit
base, and emphasis has been placed on accumulating new deposits while making
every effort to retain current relationships. Total deposits increased $49
million in 2000 including over $20 million in low-cost savings and demand
accounts and $29 million in certificates of deposit.
The average daily amount of deposits and rates paid on such deposits is
summarized for the periods indicated in the following table:
Year Ended December 31,
---------------------------------------------------
2000 1999 1998
Amount Rate Amount Rate Amount Rate
------- ----- ------- ----- ------- ----
(in thousands)
Noninterest bearing
demand deposits $ 43,774 $ 41,810 $ 35,887
Interest-bearing
demand deposits 77,579 2.83% 62,183 2.40% 50,504 2.43%
Savings deposits 44,116 2.19% 45,716 2.23% 41,983 2.38%
Time deposits 270,928 5.97% 253,029 5.31% 232,765 5.60%
-------- -------- --------
Total $436,397 $402,738 $361,139
======== ======== ========
Maturities of time certificates of deposit of $100,000 or more
outstanding at December 31, 2000, are summarized as follows:
Time Certificates Of Deposit
(in thousands)
3 months or less $38,944
Over 3 through 6 months 17,098
Over 6 through 12 months 14,268
Over 12 months 5,514
-------
Total $75,824
=======
CAPITAL
A strong capital base is essential to the continued growth and
profitability of the company and is therefore 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 13 to the 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.
As a result of the significant growth the company has experienced in recent
years, capital ratios, although well above the regulatory minimums, had been
steadily decreasing. Based on management's intent to maintain a well-capitalized
status as well as a desire to attract new shareholders, the company sold 75,000
shares of stock in 1999 which resulted in an increase of $2.9 million of Tier 1
capital. On May 17, 2000, stockholders voted to increase the number of
authorized shares from 5,000,000 to 20,000,000 shares.
The following schedules present information regarding the company's
risk-based capital at December 31, 2000, 1999 and 1998 and selected other
capital ratios.
CAPITAL ANALYSIS
(in thousands)
December 31
---------------------------------------
2000 1999 1998
-------- -------- --------
Tier I Capital:
Shareholders' equity $45,804 $41,307 $33,887
------- ------- -------
Total Tier I Capital $45,804 $41,307 $33,887
------- ------- -------
Tier II Capital:
Allowable portion of allowance
for credit losses $ 5,250 $ 4,714 $ 4,157
------- ------- -------
Total Risk-Based Capital $51,054 $46,021 $38,044
------- ------- -------
Total Risk-Weighted Assets $431,150 $381,805 $332,519
======== ======== ========
CAPITAL RATIOS
December 31
--------------------------
Regulatory
Minimum 2000 1999 1998
---------- ------- ------- -------
Total Risk-Based Capital 8.00% 11.84% 12.05% 11.45%
Tier I Risk-Based Capital 4.00% 10.62% 0.82% 10.19%
Tier I Leverage Ratio 3.00% 7.92% 7.62% 7.10%
Return on Assets N/A 1.06% 1.09% 1.13%
Return on Equity* N/A 14.88% 16.26% 15.29%
Equity to Assets Ratio* N/A 8.00% 6.86% 7.17%
Dividend Payout Ratio N/A 36.58% 34.02% 33.35%
* Includes the effect of SFAS 115 in the amount of $880,000 in 2000,
$(4,252,000) in 1999 and $791,000 in 1998.
It is the philosophy of management and the board of directors to increase
capital primarily through the retention of earnings. During 1995, the Bank
offered and sold 144,000 shares of stock increasing the number of outstanding
shares to 991,504. In 1996, the Board approved a 10% stock dividend which
resulted in the issuance of 98,920 new shares and which increased the total
number of shares outstanding to 1,090,424. During 1997, the board of directors
again approved the payment of a 10% stock dividend adding 108,756 new shares and
increasing the total number of shares outstanding to 1,199,180. In 1998,
shareholders received a 100% stock dividend which doubled the outstanding shares
to 2,398,360 and in 1999, the company again sold stock in the form of a public
offering, resulting in the issuance of 75,000 new shares and a $2.9 million
increase in capital. During 1999, the company also implemented a Dividend
Reinvestment Plan which resulted in the issuance of over 20,000 shares and an
additional influx to capital of $763,000. The impact on capital in 2000 from the
dividend reinvestment plan was the issuance of over 23,000 shares and a $679,000
increase.
In 2000, regulatory capital increased $4.5 million comprised of a $3.8
million increase in retained earnings after paying cash dividends of $2.2
million and $679,000 from the company's dividend reinvestment plan. As of
December 31, 2000, there were 17,483,128 shares of stock available for future
sale or stock dividends. The approximate number of stockholders of record at
December 31, 2000 was 1,027. Quarterly market highs and lows, dividends paid and
known market makers are highlighted in the Investor Information section of this
Annual Report. Refer to Note 13 to the financial statements for further
discussion of capital requirements and dividend limitations.
ECONOMIC CONDITIONS AND FORWARD OUTLOOK
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.
While we are optimistic about the prospect of continued growth and
earnings improvement, any forward-looking statements by their nature are subject
to assumptions, risks and uncertainties. Actual results could vary from those
implied for a variety of reasons including:
o A change in interest rates which is more immediate or more significant than
anticipated.
o The demand for new loans and the ability of borrowers to repay outstanding
debt.
o The timing of expansion plans could be altered by forces beyond our
control such as weather or regulatory approvals.
o Our ability to continue to attract new deposits from our market place
to meet the daily liquidity needs of the company.
As of this writing, the Bank was not aware of any pronouncements or
legislation that would have a material impact on the results of operations.
Item 7A - Quantitative and Qualitative Disclosures About Market Risk
ASSET AND LIABILITY MANAGEMENT
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 company manages these objectives
through its Senior Management and Asset and Liability Management Committees
(ALCO). 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 company's earnings sensitivity to changes in these rates.
INTEREST RATE SENSITIVITY
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. Interest rate risk arises from mismatches in the repricing
of assets and liabilities within a given time period. Gap analysis is an
approach used to quantify these differences. A positive gap results when the
amount of interest-sensitive assets exceeds that of interest-sensitive
liabilities within a given time period. A negative gap results when the amount
of interest-sensitive liabilities exceeds that of interest-sensitive assets.
While gap analysis is a general indicator of the potential effect that
changing interest rates may have on net interest income, the gap report has some
limitations and does not present a complete picture of interest rate
sensitivity. First, changes in the general level of interest rates do not affect
all categories of assets and liabilities equally or simultaneously. Second,
assumptions must be made to construct a gap table. For example, non-maturity
deposits are assigned a repricing interval based on internal assumptions.
Management can influence the actual repricing of these deposits independent of
the gap assumption. Third, the gap table represents a one-day position and
cannot incorporate a changing mix of assets and liabilities over time as
interest rates change.
Because of the limitations of the gap reports, the company 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.
The company's interest sensitivity at December 31, 2000 was essentially
neutral within reasonable ranges; for example, an interest rate fluctuation of
up or down 200 basis points would not be expected to have a significant impact
on net interest income.
INTEREST RATE GAP
The following schedule illustrates the company's interest rate gap position
as of December 31, 2000 which measures sensitivity to interest rate fluctuations
for certain interest sensitivity periods.
Interest Rate Sensitivity Analysis
as of December 31, 2000
(in thousands)
Rate Sensitive
------------------------------------------------------------ Not
1 to 90 91 to 180 181 to 365 1 to 5 Beyond Rate
Days Days Days Years 5 Years Sensitive Total
-------- ---------- ---------- ------ -------- --------- -----
Commercial loans $119,737 $ 4,852 $18,962 $ 99,777 $ 22,520 $ 0 $265,848
Mortgage loans 2,035 1,426 6,060 20,038 11,282 0 40,841
Installment loans 10,314 6,081 11,875 55,054 6,821 0 90,145
-------- ------- ------- -------- -------- ------ --------
Total Loans 132,086 12,359 36,897 174,869 40,623 0 396,834
-------- ------- ------- -------- -------- ------ --------
Securities-taxable 4,028 1,390 5,135 27,916 62,975 6,366 107,810
Securities-tax free 645 195 250 5,670 37,746 0 44,506
-------- ------- ------- -------- -------- ------ --------
Total Securities 4,673 1,585 5,385 33,586 100,721 6,366 152,316
-------- ------- ------- -------- -------- ------ --------
Interest-bearing deposits
with banks 594 198 1,685 882 0 0 3,359
Federal funds sold 6,950 0 0 0 0 0 6,950
-------- ------- ------- -------- -------- ------ --------
Total Money Market Assets 7,544 198 1,685 882 0 0 10,309
-------- ------- ------- -------- -------- ------ --------
Total Earning Assets 144,303 14,142 43,967 209,337 141,344 6,366 559,459
Non-earning assets 0 0 0 0 0 29,643 29,643
Allowance for credit losses 0 0 0 0 0 (5,250) (5,250)
-------- ------- ------- -------- -------- ------- --------
Total Assets $144,303 $14,142 $43,967 $209,337 $141,344 $30,759 $583,852
======== ======= ======= ======== ======== ======= ========
Interest-bearing demand
deposits $58,096 $ 0 $ 0 $ 25,367 $0 $ 0 $ 83,463
Savings deposits 484 0 737 41,625 0 0 42,846
Time deposits $100,000
and over 38,944 17,098 14,268 5,195 319 0 75,824
Other time deposits 52,136 42,250 59,674 59,277 404 0 213,741
-------- ------- ------- --------- -------- ------- --------
Total Interest-Bearing
Deposits 149,660 59,348 74,679 131,464 723 0 415,874
-------- ------- ------- --------- -------- ------- --------
Borrowed funds and other
interest-bearing
liabilities 10,744 473 5,945 43,746 10,000 0 70,908
-------- ------- ------- --------- -------- ------- --------
Total Interest-Bearing
Liabilities 160,404 59,821 80,624 175,210 10,723 0 486,782
Demand deposits 0 0 0 0 0 44,544 44,544
Other liabilities 0 0 0 0 0 5,842 5,842
Stockholders' equity 0 0 0 0 0 46,684 46,684
-------- ------- ------- --------- -------- ------- --------
Total Liabilities and
Stockholders' Equity $160,404 $59,821 $80,624 $175,210 $ 10,723 $97,070 $583,852
======== ======= ======= ======== ======== ======= ========
Interest Rate Sensitivity gap(16,101) (45,679) (36,657) 34,127 130,621 (66,311)
========================================================================
Cumulative gap (16,101) (61,780) (98,437) (64,310) 66,311
=============================================================
EARNINGS AT RISK AND ECOMONIC VALUE AT RISK SIMULATIONS
The company recognizes that more sophisticated tools exist for measuring
the interest rate risk in the balance sheet beyond static gap analysis. Although
it will continue to measure its static gap position, the company utilizes
additional modeling for identifying and measuring the interest rate risk in the
overall balance sheet. The ALCO is responsible for focusing on "earnings at
risk" and "economic value at risk", and how both relate to the risk-based
capital position when analyzing the interest rate risk.
EARNINGS AT RISK
Earnings at risk simulation measures the change in net interest income and
net income should interest rates rise and fall. The simulation recognizes that
not all assets and liabilities reprice equally and simultaneously with market
rates (e.g., savings rate). The ALCO looks at "earnings at risk" to determine
income changes from a base case scenario under an increase and decrease of 200
basis points in the interest rate simulation model.
ECONOMIC VALUE AT RISK
Earnings at risk simulation measures the short-term risk in the balance
sheet. Economic value (or portfolio equity) at risk measures the long-term risk
by finding the net present value of the future cash flows from the company's
existing assets and liabilities. The ALCO examines this ratio monthly utilizing
an increase and decrease of 200 basis points in the interest rate simulation
model. The ALCO recognizes that, in some instances, this ratio may contradict
the "earnings at risk" ratio.
The following table illustrates the simulated impact of a 200 basis points
upward or downward movement in interest rates on net interest income, and the
change in economic value. This analysis assumed that interest-earning asset and
interest-bearing liability levels at December 31, 2000 remained constant. The
impact of the rate movements were developed by simulating the effect of rates
changing over a twelve-month period from the December 31, 2000 levels.
RATES + 200 RATES - 200
Earnings at risk:
Percent change in net interest income (1.51)% (2.76)%
Economic value at risk
Percent change in economic value of equity (28.51)% 31.51%
Economic value has the most meaning when viewed within the context of
risk-based capital. Therefore, the economic value may change beyond the
company's policy guideline for a short period of time as long as the risk-based
capital ratio is greater than 10%.
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 company's credit customers and the withdrawal
and maturity requirements of its deposit customers, as well as to meet other
financial commitments. Cash and cash equivalents (cash and due from banks and
federal funds sold) are the company's most liquid assets. At December 31, 2000
cash and cash equivalents totaled $19.8 million, compared to the December 31,
1999 level of $16.0 million. Financing activities provided $30.5 million and
operating activities provided $8.6 million of cash and cash equivalents during
the year while investing activities utilized $35.2 million. The cash flows
provided by financing activities includes deposit growth offset by a decrease in
borrowed funds outstanding while the funds provided by operating activities
pertains to interest payments received on loans and investments. The cash used
in investing activities consists of loan proceeds and security purchases.
Core deposits, which represent the company's primary source of liquidity,
averaged $361.1 million in 2000, an increase of $27.2 million, or 8%, from the
$333.9 million average in 1999. This increase in average core deposits was
supplemented with a $6.5 million increase in average jumbo certificates and an
$8.9 million increase in average borrowed funds and other interest-bearing
liabilities.
The company has other potential sources of liquidity, including repurchase
agreements. Additionally, the company can borrow on credit lines established at
several correspondent banks and at the Federal Home Loan Bank of Pittsburgh. The
Federal Reserve Discount Window also provides a funding source of last resort.
Item 8 - Financial Statements and Supplementary Data
The information required in Part II, Item 8 is incorporated by reference
from the Company's Annual Report to security holders for the fiscal year
ended December 31, 2000.
Balance Sheet Exhibit A
Statement of Income Exhibit B
Statement of Cash Flows Exhibit C
Statement of Changes in Equity Exhibit D
Additional references are made in Part IV, Item 14 of this Form 10-K.
Item 9- Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures
Not Applicable
FIRST NATIONAL COMMUNITY BANCORP, INC.
Part III.
Item 10 - Directors and Executive Officers of the Registrant
A. Identification of Directors of the Company:
Director Since
Name Title Term Expires Company/Bank Age
Michael G. Cestone Director 2003 1998/1988 38
Michael J. Cestone, Jr. Director
Secretary of
the Board
of the Company
since 1998 and
of the Bank
since 1971 2002 1998/1969 69
Joseph Coccia Director 2001 1998/1998 46
William P. Conaboy Director 2001 1998/1998 42
Dominick L. DeNaples Director 2001 1998/1987 63
Louis A. DeNaples Director
Chairman of
the Board
of the Company
since 1998 and
of the Bank
since 1988 2002 1998/1972 60
Joseph J. Gentile Director 2002 1998/1989 70
Martin F. Gibbons Director 2003 1998/1979 85
Joseph O. Haggerty Director 2002 1998/1987 61
George N. Juba (1) Director 2001 1998/1973 74
J. David Lombardi Director
President and
Chief Executive
Officer of the
Company since 1998
and of the Bank
since 1988 2003 1998/1986 52
John P. Moses Director 2001 1999/1999 54
John R. Thomas Director 2003 1998/1967 83
The company has a classified Board of Directors with staggered
three-year terms of office. In a classified board, the directors are
generally divided into separate classes of equal number. The terms of the
separate classes expire in successive years. At each Annual Meeting of
Shareholders, successors to the class of directors whose term shall then
expire shall be elected to hold office for a term of three (3) years, so
that the term of office of one class of directors shall expire in each
year. The Board of Directors shall have the sole discretion to increase the
number of Directors that shall constitute the whole Board of Directors;
provided however, that the total number of Directors in each class remains
relatively proportionate to the others.
(1) On February 28,2001, the Board of Directors of the company and the bank
approved and adopted resolutions which named Mr. George N. Juba a Director
Emeritus of both the company and the bank effective at the end of his
current board term which expires May 16, 2001. The title was bestowed upon
Mr. Juba in recognition of the valuable contributions he has made during
his forty-eight years of service. Mr Juba is not a nominee for director and
will not be standing for re-election at the 2001 annual meeting.
B. Identification of Executive Officers of the Company
The following table sets forth selected information about the executive
officers of the company, each of whom is elected by the Board of Directors
and each of whom holds office at the discretion of the Board of Directors:
Bank
Office and Position Employee Age as of
Name with the Company Held Since Since 2/28/01
- ------------------------ --------------------- ---------- -------- --------
Louis A. DeNaples Chairman of the Board 1998 (1) 60
J. David Lombardi President & Chief
Executive Officer 1998 1981 52
Michael J. Cestone, Jr. Secretary 1998 (1) 69
William S. Lance Treasurer 1998 1991 41
(1) Messrs. DeNaples and Cestone are non-management members of the Board of
Directors of the Company.
Identification of executive officers of the bank:
Bank Age
Employee as of
Name Office/Position with Bank Held Since Since 2/28/01
- -------------------- ---------------------------- ---------- ------- -------
Louis A. DeNaples Chairman of the Board 1988 (1) 60
J. David Lombardi President and Chief
Executive Officer 1988 1981 52
Gerard A. Champi Executive Vice President
Retail Sales and
Operations Division
Manager 1998 1991 40
Thomas P. Tulaney Executive Vice President
Commercial Sales Division
Manager 1998 1994 41
Stephen J. Kavulich First Senior Vice President
Loan Administration/
Compliance Division Manager 1998 1991 55
William S. Lance First Senior Vice President
Finance Control
Division Manager 1999 1991 41
Michael J. Cestone, Jr. Secretary 1988 (1) 69
(1) Messrs. DeNaples and Cestone are non-management members of the Board of
Directors of the Company.
C. Identification of Significant Employees:
NONE
D. Family Relationships:
Family relationships exist within the Bank between directors. Michael
J. Cestone, Jr., Secretary of the Board of Directors, is the father of
Michael G. Cestone. Dominick L. DeNaples is the brother of Louis A.
DeNaples, Chairman of the Board.
E. Business Experience:
Michael G. Cestone President, S. G. Mastriani Company
(General Contractor)
Michael J. Cestone, Jr. President, M. R. Co. (Real Estate Corporation)
C.E.O., S. G. Mastriani Company
Joseph Coccia President, Coccia Ford, Inc.
President, Coccia Lincoln Mercury, Inc.
William P. Conaboy Vice President, General Counsel, Allied Services
Dominick L. DeNaples President F & L Realty Corp.
Vice President, DeNaples Auto Parts, Inc.
Vice President, Keystone Landfill Inc.
Louis A. DeNaples President, DeNaples Auto Parts, Inc.
President, Keystone Landfill, Inc.
Vice President, F & L Realty Corp.
Joseph J. Gentile President, Dunmore Oil Co., Inc.
Martin F. Gibbons Partner, Gibbons Ford
Joseph O. Haggerty Retired Superintendent, Dunmore School District
George N. Juba Consultant to the Bank since 1988
William S. Lance First Senior Vice President since 1999
Senior Vice President since 1994
J. David Lombardi President and Chief Executive Officer since 1988
John P. Moses Partner, Moses & Gelso, L.L.P., Attorneys at Law
John R. Thomas Chairman of the Board, Wesel Manufacturing Company
(design and manufacturing of precision machinery)
F. Involvement in Certain Legal Proceedings:
No officer or director is involved in legal proceedings pursuant to
this item.
G. Promoters and Control Persons:
NONE
Item 11 - Executive Compensation
Summary Compensation Table
The following table sets forth all cash compensation paid by the company
for services rendered in all capacities during each of the last three
fiscal years to the Chief Executive Officer of the Company and to all
Executive Officers whose salary and bonus exceed $100,000.
SUMMARY COMPENSATION TABLE
Annual Compensation Long - Term Compensation
------------------------------ ---------------------------------------------------
Awards Payouts
---------------------- -------------------------
Securities
Other Under- All
Name and Annual Restricted Lying Other
Principal Compen- Stock Options/ LTIP Compen-
Position Year Salary(1) Bonus(2) sation(3) Award(s) SARs(4) Payouts sation(5)
($) ($) ($) ($) (#) ($) ($)
(a) (b) (c) (d) (e) (f) (g) (h) (i)
-------------------- ----- ---------- ---------- -------- ------------ --------- --------- --------
J. David Lombardi,
President and Chief
Executive Officer 2000 $199,000 $275,000 $- $0 3,000 $ 0 $28,868
of the Company and 1999 179,000 250,000 - 0 0 0 25,604
the Bank 1998 179,000 250,000 - 0 0 0 25,979
Thomas P. Tulaney,
Executive Vice 2000 $94,500 $60,000 $- $0 2,000 $ 0 $14,777
President of the 1999 92,000 50,000 - 0 0 0 14,164
Bank 1998 87,135 40,000 - 0 0 0 12,538
Gerard A. Champi,
Executive Vice 2000 $87,000 $60,000 $- $0 2,000 $ 0 $14,008
President of the 1999 84,500 50,000 - 0 0 0 13,359
Bank 1998 79,634 40,000 - 0 0 0 11,496
Stephen J.
Kavulich, First
Senior Vice 2000 $71,500 $30,000 $- $0 2,000 $0 $9,339
President of the 1999 69,000 27,000 - 0 0 0 9,228
Bank 1998 64,414 24,000 - 0 0 0 7,845
1 Includes directors' fees of $24,000 for 2000, 1999 and 1998 for Mr.
Lombardi.
2 Cash bonuses are awarded at the conclusion of a fiscal year based upon the
Board of Directors' subjective assessment of the Company's performance as
compared to both budget and prior fiscal year performance, and the
individual contributions of the officers involved.
3 The named executive officers did not receive perquisites or other personal
benefits during 1999 which, in the aggregate, cost the Company the lesser
of $50,000 or 10% of the named executive officers salary and bonus earned
during the year. Perquisites and other personal benefits which were
received by the named executives were valued based on their cost to the
Company.
4 The amounts listed represent stock options granted to the persons listed in
the form of qualified incentive stock options which were granted at the
fair market value on the date of grant. All options are exercisable upon
receipt of shareholder approval and expire ten years after the date on
which the award is granted. If the corporation or its shareholders execute
an agreement to dispose of all or substantially all of the corporation's
assets, resulting in a change of ownership then all outstanding awards
shall become immediately exercisable.
5 For Mr. Lombardi, includes $16,368, $16,096 and $16,471 contributed by the
company pursuant to the Employees' Profit Sharing Plan for 2000, 1999 and
1998, respectively and includes director's bonus of $7,500, in each of
2000, 1999 and 1998, respectively. Also includes premiums paid to purchase
additional life insurance in the amount of $5,000 in 2000 and $2,008 in
1999 and 1998. For Mr. Tulaney, Mr. Champi, and Mr. Kavulich, represents
amounts contributed by the company to the Employees' Profit Sharing Plan in
the years shown.
Option Grants in 2000
The following table shows the stock options granted to the company's
executive officers in 2000, and their potential value at the end of the option's
term, assuming certain levels of appreciation of the company's common stock.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Potential Realizable Value
At Assumed Annual Rates of
Stock Price Appreciation
Individual Grants For Option Term (1)
-------------------------------------------------------- ----------------------
Percent of
Number of Total
Securities Options/SARs
Underlying Granted To Exercise Of
Option/SARs Employees In Base Price Expiration
Name Granted(#)(2) Fiscal Year ($/Sh) Date 5% ($) 10% ($)
(a) (b) (c) (d) (e) (f) (g)
----------------- ------------- -------------- ----------- ----------- --------- --------
J. David Lombardi 3,000 12.00% $28.55 08/30/10 $53,850 $136,560
Thomas P. Tulaney 2,000 8.00% $28.55 08/30/10 $35,900 $91,040
Gerard A. Champi 2,000 8.00% $28.55 08/30/10 $35,900 $91,040
Stephen J. Kavulich 2,000 8.00% $28.55 08/30/10 $35,900 $91,040
(1) The dollar amounts under these columns are the result of calculations at
the 5% and the 10% annualized rates set by the Securities and Exchange
Commission and therefore are not intended to forecast possible future
appreciation, if any, of the company's common stock price.
(2) The stock options become exercisable upon receipt of shareholder approval.
All options outstanding become immediately exercisable in the event of a
change in control.
Stock Options and Stock Appreciation Rights Exercised in 2000 and Year-End
Values
The following table reflects the number of stock options and stock
appreciation rights exercised by the Named Executive Officers in 2000, the
total gain realized upon exercise, the number of stock options held at the
end of the year, and the realizable gain of the stock options that are
"in-the-money." In-the-money stock options are stock options with exercise
prices that are below the year-end stock price because the stock value
increased since the date of the grant.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
Number Of Securities
Underlying Unexercised Value of Unexercised
Options/SARs at Fiscal In-The-Money Options/SARs At
Year-End Fiscal Year-End (2)
# ($)
---------------------------- -------------------------------
Shares Value
Acquired On Realized
Name Exercise (#) ($) (1) Exercisable Unexercisable Exercisable Unexercisable
(a) (b) (c) (d) (e) (f) (g)
------------------ ------------ -------- ----------- ------------- ----------- -------------
J. David Lombardi 0 0 0 3,000 0 $3,600
Thomas P. Tulaney 0 0 0 2,000 0 $2,400
Gerard A. Champi 0 0 0 2,000 0 $2,400
Stephen J. Kavulich 0 0 0 2,000 0 $2,400
(1) Based upon the difference between the closing price of the Common Stock
on the date or dates of exercise and the exercise price or prices for
the stock options or stock appreciation rights.
(2) Based upon the closing price of the Common Stock on December 29, 2000
of $29.75 per share. As of December 31, 2000, no stock appreciation
rights were outstanding under the Plan.
Employment Agreements
The bank entered into an employment agreement with Mr. J. David
Lombardi, President and Chief Executive Officer effective on January 1,
1990 amended September 28, 1994. On July 8, 1998 the Board of Directors of
the corporation approved and adopted an amendment to the employment
agreement which added the corporation as a party to the agreement. This
agreement is designed to assist the company and the bank in retaining a
highly qualified executive and to help insure that if the company is faced
with an unsolicited tender offer proposal, Mr. Lombardi will continue to
manage the company without being unduly distracted by the uncertainties of
his personal affairs and thereby will be better able to assist in
evaluating such a proposal in an objective manner.
This agreement provided for a base annual salary of $175,000 in 2000.
Additional compensation by way of salary increases, bonuses or fringe
benefits may be established from time to time by appropriate board action.
The agreement does not preclude Mr. Lombardi from serving as a director of
the company and the bank and receiving related fees.
The Agreement may be terminated by the company with or without "just
cause" ("just cause" is defined in the agreement), or upon death, permanent
disability, or normal retirement of Mr. Lombardi, or, upon the termination
of Mr. Lombardi's employment by resignation or otherwise. In the event
employment is terminated with "just cause", Mr. Lombardi shall receive
salary payment at his then effective base salary as if his employment had
not been terminated for a period of three (3) months, excluding bonuses or
fringe or supplemental payments theretofore authorized by the Board of
Directors. In the event that the termination of employment is occasioned by
the company without just cause, Mr. Lombardi shall continue to receive each
month for a period of two (2) years from the effective date of termination;
(1) his monthly base salary payments from the bank at the rate in effect on
the date of the termination; (2) his monthly Board of Directors fee; and
(3) one (1/12th) twelfth of the average of the bonuses paid to him over the
preceding three (3) years; all computed as if his employment had not been
terminated.
In the event that there is a "change in control" (as defined in the
Agreement) and as a result thereof Mr. Lombardi's employment is terminated
or his duties or authority are substantially diminished or he is removed
from the office of Chief Executive Officer of the reorganized employer, Mr.
Lombardi may terminate his employment by giving notice to the bank within
sixty (60) days of the occurance in the "change of control". Upon such
termination, the company is obligated to pay Mr. Lombardi the total sum of
the following: (1) three (3) times his then annual base salary which was in
effect as of the date of the change in control; (2) three (3) times his
then annual Board of Director's fee; and (3) three (3) times the average of
his bonuses for the prior three (3) years.
Subsequent to termination, Mr. Lombardi shall not accept employment in
any office or branch of any financial institution or subsidiary in
Lackawanna County for a period of three (3) years, unless such severance
was made by the company "without just cause".
Compensation of Directors
During 2000, the company's Board of Directors held six meetings. Directors
received no additional remuneration for attendance at these board meetings.
Members of the bank's Board of Directors are compensated at a rate of $1,000 per
board meeting, including four (4) compensated absences at full compensation,
after which members are not paid for any unexcused absence, except for Mr.
George N. Juba who is compensated for unlimited absences. Excused absences are
limited to non-attendance due to other bank business. The aggregate amount of
such fees paid in 2000 was $308,000. In 2000, Michael J. Cestone, Jr., George N.
Juba and John R. Thomas were compensated $31,500, in the aggregate, for special
services (respectively Secretary, Special Consultant and Investment Advisor)
rendered to the bank. All directors of the bank also received a bonus of $7,500
in 2000. Members of the Bank's Senior Loan Committee do not receive a fee for
attendance at Senior Loan Committee meetings. Members of the Audit Committee of
both the company and the bank do not receive remuneration for attending Audit
Committee meetings.
Item 12- Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information, as of February 28,
2001, regarding the beneficial ownership of Company Stock of each director
and nominee, all directors and principal officers as a group, and all
persons who own beneficially more than five percent of the outstanding
common stock of the Company. Management knows of no persons, other than
directors Louis A. DeNaples and Dominick L. DeNaples, who own beneficially
more than five percent of the outstanding Company Stock. Unless otherwise
listed, shares beneficially owned represent sole voting and investment
power of the individuals named.
Shares
Beneficially
Owned (1) Percent of Class
Michael G. Cestone (2) 11,267 0.45%
Michael J. Cestone, Jr. (3) 36,392 1.45%
Joseph Coccia 17,674 0.70%
William P. Conaboy 2,280 0.09%
Dominick L. DeNaples (4) 188,326 7.48%
Louis A. DeNaples (5) 204,717 8.13%
Joseph J. Gentile (6) 104,590 4.16%
Martin F. Gibbons 12,615 0.50%
Joseph O. Haggerty 4,057 0.16%
George N. Juba 14,644 0.58%
William S. Lance 973 0.04%
J. David Lombardi (7) 28,864 1.15%
John P. Moses 3,075 0.12%
John R. Thomas (8) 38,605 1.53%
All directors and principal
officers as a group (14) 668,078 26.54%
Note:As used throughout, the term "principal officers" refers to Executive
Officers of the Company including President and Treasurer.
1. The securities "beneficially owned" by an individual are determined in
accordance with the definitions of "beneficial ownership" set forth in the
regulations of the Securities and Exchange Commission and may include
securities owned by or for the individual's spouse and minor children and
any other relative who has the same home, as well as securities to which
the individual has or shares voting or investment power or has the right to
acquire beneficial ownership within sixty (60) days after February 28,
2001. Beneficial ownership may be disclaimed as to certain of the
securities. Unless otherwise indicated, all shares are beneficially owned
by the reporting person individually or jointly with his spouse. All
numbers here have been rounded to the nearest whole number.
2. Includes 606 shares held in street name and 200 shares held jointly with
his children.
3. Includes 21,566 shares held in street name and 8,090 shares owned
individually by his spouse.
4. Includes 20,373 shares held jointly with his children.
5. Includes 2,301 shares owned individually by his spouse and 8,359 shares
held jointly with his children.
6. Includes 2,800 shares held in street name and 22,073 shares owned
individually by his spouse.
7. Includes 14,165 shares held in street name and 102 shares owned
individually by his spouse and 151 shares held by his minor children.
8. Includes 5,636 shares owned individually by his spouse.
Item 13 - Certain Relationships and Related Transactions
Some of the directors and officers of the bank and the companies with
which they are associated were customers of, and had banking transactions
with, the bank in the ordinary course of its business during 1999 and the
bank expects to have such banking transactions in the future. All loans and
commitments to loan included in such transactions were made on
substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with other persons
of similar creditworthiness and in the opinion of the Board of Directors of
the Bank, do not involve more than a normal risk of collectibility or
present other unfavorable features.
Insider Trading Matters
NONE
Part IV.
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
The information required in Item 14 is incorporated by reference from
the Company's Annual Report to security holders for the fiscal year ended
December 31, 2000:
EXHIBIT A - Balance Sheet - December 31, 2000 and 1999
EXHIBIT B - Statement of Income - December 31, 2000, 1999 and 1998
EXHIBIT C - Statement of Cash Flows - December 31, 2000, 1999 and 1998
EXHIBIT D - Statement of Changes in Stockholders' Equity - December 31,
2000, 1999 and 1998
Notes to Consolidated Financial Statements
1 Summary of Significant Accounting Policies
2 Restricted Cash Balances
3 Investment Securities
December 31, 2000 and 1999
4 Loans and Changes in Allowance for Loan Loss
December 31, 2000 and 1999
5 Bank Premises and Equipment
December 31, 2000 and 1999
6 Deposits
7 Borrowed Funds
December 31, 2000 and 1999
8 Benefit Plans
9 Income Taxes
December 31, 2000, 1999 and 1998
10 Related Party Transactions
11 Commitments
12 Stock Option Plans
13 Regulatory Matters
December 31, 2000 and 1999
14 Disclosures about Fair Value of Financial Instruments
December 31, 2000 and 1999
15 Condensed Financial Information - Parent Company Only
16 Selected Quarterly Financial Data
2000 and 1999
EXHIBIT E- Independent Auditor's Report
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:
Registrant: FIRST NATIONAL COMMUNITY BANCORP, INC.
/s/ J. David Lombardi
-------------------------
J. David Lombardi, President and
Chief Executive Officer
/s/ William Lance
-------------------------
William Lance, Treasurer
Principal Financial Officer
DATE: March 14, 2001
Pursuant to the requirements of the Securities 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:
Directors:
/s/ Michael G. Cestone 03/14/01 /s/ Martin F. Gibbons 03/14/01
----------------------- --------- ----------------------- --------
Michael G. Cestone Date Martin F. Gibbons Date
/s/ Michael J. Cestone 03/14/01 /s/ Joseph O. Hagerty 03/14/01
---------------------- --------- ------------------------ --------
Michael J. Cestone, Jr. Date Joseph O. Haggerty Date
/s/ Joseph Coccia 03/14/01
---------------------- -------- ------------------------ --------
Joseph Coccia Date George N. Juba Date
/s/ William P. Conaboy 03/14/01 /s/ J. David Lombardi 03/14/01
---------------------- -------- ------------------------ --------
William P. Conaboy Date J. David Lombardi Date
/s/ Dominick L. DeNaples 03/14/01 /s/ John P. Moses 03/14/01
------------------------ -------- ------------------------ --------
Dominick L. DeNaples Date John P. Moses Date
/s/ Louis A. DeNaples 03/14/01
-------------------- -------- ------------------------ --------
Louis A. DeNaples Date John R. Thomas Date
/s/ Joseph J. Gentile 03/14/01
---------------------- --------
Joseph J. Gentile Date
Exhibit A - Balance Sheet
FIRST NATIONAL COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, (in thousands, except share data) 2000 1999
---------- ----------
ASSETS Cash and cash equivalents:
Cash and due from banks $ 12,854 $ 15,971
Federal funds sold 6,950 0
-------- --------
Total cash and cash equivalents 19,804 15,971
Interest-bearing balances
with financial institutions 3,359 2,874
Securities:
Available-for-sale, at fair value 144,956 136,393
Held-to-maturity, at cost
(fair value $2,204 and $1,809) 2,337 2,199
Federal Reserve Bank and FHLB stock,
at cost 5,023 7,936
Net loans 393,125 359,244
Bank premises and equipment 5,905 4,825
Accrued interest receivable 3,467 2,937
Other assets 5,876 7,984
-------- --------
TOTAL ASSETS $583,852 $540,363
======== ========
LIABILITIES
Deposits:
Demand $ 44,544 $ 42,535
Interest-bearing demand 83,463 64,483
Savings 42,846 43,502
Time ($100,000 and over) 75,824 70,931
Other time 213,741 189,675
-------- --------
Total deposits 460,418 411,126
Borrowed funds 70,908 88,173
Accrued interest payable 4,326 2,696
Other liabilities 1,516 1,313
-------- --------
Total liabilities $537,168 $503,308
-------- --------
STOCKHOLDERS' EQUITY
Common Stock ($1.25 par)
Authorized: 20,000,000 shares
in 2000 and 5,000,000 shares in 1999
Issued and outstanding: 2,516,872 shares
in 2000 and 2,493,507 shares in 1999 $ 3,146 $ 3,117
Additional paid-in capital 10,491 9,841
Retained earnings 32,167 28,349
Accumulated other comprehensive income (loss) 880 (4,252)
-------- --------
Total stockholders' equity 46,684 37,055
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $583,852 $540,363
======== ========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
Exhibit B - Statements of Income
FIRST NATIONAL COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
(in thousands, except per share data) 2000 1999 1998
---------- ---------- ----------
INTEREST INCOME
Interest and fees on loans $32,870 $28,982 $25,559
------- ------- -------
Interest and dividends on securities:
U.S. Treasury and government agencies 7,207 6,048 5,831
State and political subdivisions 2,363 2,017 1,708
Other securities 522 561 408
------- ------- -------
Total interest and dividends
on securities 10,092 8,626 7,947
------- ------- -------
Interest on balances with
financial institutions 217 145 178
Interest on federal funds sold 212 115 222
------- ------- -------
TOTAL INTEREST INCOME 43,391 37,868 33,906
------- ------- -------
INTEREST EXPENSE
Interest-bearing demand 2,194 1,490 1,225
Savings 964 1,020 1,001
Time ($100,000 and over) 4,480 3,494 3,265
Other time 11,686 9,937 9,764
Interest on borrowed funds 5,046 4,284 3,206
------- ------- -------
TOTAL INTEREST EXPENSE 24,370 20,225 18,461
------- ------- -------
Net interest income before provision
for credit losses 19,021 17,643 15,445
Provision for credit losses 970 1,020 920
------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 18,051 16,623 14,525
------- ------- -------
OTHER INCOME
Service charges 1,023 845 780
Net gain/(loss) on the sale of securities (108) 197 125
Net gain on the sale of other real estate 0 23 47
Other 467 512 631
------- ------- -------
TOTAL OTHER INCOME 1,382 1,577 1,583
------- ------- -------
OTHER EXPENSES
Salaries and employee benefits 5,852 5,418 4,749
Occupancy expense 1,087 993 869
Equipment expense 908 781 677
Data processing expense 796 689 599
Other operating expenses 3,109 2,914 2,529
------- ------- -------
TOTAL OTHER EXPENSES 11,752 10,795 9,423
------- ------- -------
INCOME BEFORE INCOME TAXES 7,681 7,405 6,685
Provision for income taxes 1,661 1,756 1,578
------- ------- -------
NET INCOME $ 6,020 $ 5,649 $ 5,107
======= ======= =======
EARNINGS PER SHARE:
Basic $2.41 $2.35 $2.13
======= ======= =======
Diluted $2.39 $2.35 $2.13
======= ======= =======
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
Exhibit C - Statements of Cash Flows
FIRST NATIONAL COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, (in thousands) 2000 1999 1998
-------- -------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $42,663 $37,503 $34,495
Fees and commissions received 1,490 1,358 1,411
Interest paid (22,740) (20,116) (18,074)
Cash paid to suppliers and employees (10,671) (11,255) (9,087)
Income taxes paid (2,172) (1,908) (1,942)
------- -------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,570 5,582 6,803
------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities available for sale:
Proceeds from maturities 0 2,000 1,500
Proceeds from sales prior to maturity 49,347 28,903 14,451
Proceeds from calls prior to maturity 14,123 18,927 46,533
Purchases (61,393) (70,517) (73,550)
Securities held to maturity:
Proceeds from calls prior to maturity 0 249 257
Purchases 0 (1,622) (231)
Net (increase)/decrease in interest-
bearing bank balances (485) (396) (892)
Net increase in loans to customers (34,851) (35,631) (44,753)
Capital expenditures (1,983) (806) (1,370)
-------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES (35,242) (58,893) (58,055)
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits,
money market demand, NOW accounts,
and savings accounts 20,335 17,835 7,286
Net increase in certificates of deposit 28,959 13,251 27,085
Net increase in borrowed funds (17,266) 22,998 18,181
Repayment of debt 0 0 (851)
Proceeds from issuance of common stock
net of stock issuance costs 679 3,693 0
Cash dividends paid (2,202) (1,922) (1,703)
------- ------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 30,505 55,855 49,998
------- ------- -------
NET INCREASE (DECREASE)IN CASH AND
CASH EQUIVALENTS 3,833 2,544 (1,254)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 15,971 13,427 14,681
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $19,804 $15,971 $13,427
======= ======= =======
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income $6,020 $5,649 $5,107
------- ------- -------
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization and accretion, net (197) (84) 239
Depreciation and amortization 903 794 653
Provision for credit losses 970 1,020 920
Provision for deferred taxes (419) (218) (306)
Loss/(Gain) on sale of securities 108 (197) (125)
Gain on sale of other real estate 0 (23) (47)
Increase in interest payable 1,630 109 388
Increase in taxes payable (53) 53 (16)
Increase (decrease) in accrued expenses
and other liabilities 255 356 128
Decrease (increase) in prepaid expenses
and other assets (117) (1,597) (488)
Decrease (increase) in interest receivable (530) (280) 350
------ ------ ------
Total adjustments 2,550 (67) 1,696
------ ------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES $8,570 $5,582 $6,803
====== ====== ======
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
Exhibit D - Statements of Changes in Stockholders' Equity
FIRST NATIONAL COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
For the Years Ended December 31, 2000, 1999 and 1998 (in thousands, except share
data)
ACCUM-
ULATED
OTHER
COMP-
COMP- REHEN-
REHEN- COMMON STOCK ADD'L SIVE
SIVE ----------------- PAID-IN RETAINED INCOME/
INCOME SHARES AMOUNT CAPITAL EARNINGS (LOSS) TOTAL
------- -------- ------- --------- --------- -------- --------
BALANCES, DECEMBER 31, 1997 1,199,180 $1,499 $6,267 $22,717 $1,097 $31,580
Comprehensive Income:
Net income for the year $5,107 5,107 5,107
Other comprehensive income,
net of tax:
Unrealized loss on securities
available-for-sale, net
of deferred income tax
benefit of $157 (181)
Reclassification adjustment
for gain or loss included
in income (125)
------
Total other comp. loss,
net of tax (306) (306) (306)
------
Comprehensive Income $4,801
======
Cash dividends paid,
$0.71 per share (1,703) (1,703)
100% stock dividend 1,199,180 1,499 (1,499) 0
--------- ------ ------ ------- ------ -------
BALANCES, DECEMBER 31, 1998 2,398,360 $2,998 $6,267 $24,622 $ 791 $34,678
Comprehensive Income:
Net income for the year $5,649 5,649 5,649
Other comprehensive income,
net of tax:
Unrealized loss on securities
available-for-sale, net of
deferred income tax
benefit of $2,598 (5,240)
Reclassification adjustment
for gain or loss included
in income 197
------
Total other comp. loss,
net of tax (5,043) (5,043) (5,043)
------
Comprehensive Income $606
======
Cash dividends paid,
$0.80 per share (1,922) (1,922)
Proceeds from sale of
75,000 shares of Common Stock,
at $40.00, net of issuance
costs 75,000 94 2,836 2,930
Proceeds from issuance of Common Stock
through dividend reinvestment 20,147 25 738 763
---------- ------ ------ ------- ------- -------
BALANCES, DECEMBER 31, 1999 2,493,507 $3,117 $9,841 $28,349 $(4,252) $37,055
Comprehensive Income:
Net income for the year $6,020 6,020 6,020
Other comprehensive income,
net of tax:
Unrealized gain on securities
available-for-sale, net of
deferred income taxes
of $2,644 5,240
Reclassification adjustment
for gain or loss
included in income (108)
------
Total other comp. Gain,
net of tax 5,132 5,132 5,132
-------
Comprehensive Income $11,152
=======
Cash dividends paid,
$0.88 per share (2,202) (2,202)
Repurchase of shares for
reissuance through
dividend reinvestment (9,029) (11) (261) (272)
Proceeds from issuance of
Common Stock through
dividend reinvestment 32,394 40 911 951
--------- ------ ------- ------- ------- -------
BALANCES, DECEMBER 31, 2000 2,516,872 $3,146 $10,491 $32,167 $880 $46,684
========= ====== ======= ======= ======= =======
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 bank 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 eleven 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 First National Community Bank.
PRINCIPLES OF CONSOLIDATION
On July 1, 1998, the company acquired First National Community Bank in
a business combination accounted for as a pooling of interests. The bank became
the wholly owned subsidiary of the company through the exchange of 1,199,180
shares of its common stock for all of the outstanding stock of the bank.
The company did not conduct business activities prior to the July 1,
1998 stock exchange. Accordingly, the Parent Company Only financial information
included in Note 15 of these financial statements presents the company's results
of operations and cash flows for the years ended December 31, 2000 and 1999 and
for it's initial period of operations commencing July 1, 1998 and ending on
December 31, 1998.
The accompanying consolidated financial statements for 1998 are based
on the assumption that the companies were combined for the full year, and the
financial statements of prior years have been restated to give effect to the
combination. All significant intercompany transactions and balances have been
eliminated in consolidation.
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.
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 interest accrual is discontinued, interest credited
to income in the current year is reversed and interest income 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.
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 maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in the loan
portfolio. The amount of the allowance is based on management's evaluation of
the collectibility of the loan portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss experience, specific impaired
loans, and economic conditions. Allowances for impaired loans are generally
determined based on collateral values or the present value of estimated cash
flows. The allowance is increased by a provision for credit losses, which is
charged to expense, and reduced by charge-offs, net of recoveries. Changes in
the allowance relating to impaired loans are charged or credited to the
provision for credit losses.
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 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
ADVERTISING COSTS
Advertising costs are charged to operations in the year incurred and
totaled $507,000, $468,000 and $341,000 in 2000, 1999 and 1998, 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.
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 2,502,245 in 2000,
2,407,278 in 1999 and 2,398,360 in 1998 after giving retroactive effect to the
100% stock dividend declared in 1998.
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 2,518,846
in 2000, 2,407,278 in 1999 and 2,398,360 in 1998 after giving retroactive effect
to the 100% stock dividend declared in 1998.
STOCK-BASED COMPENSATION
The Company accounts for its stock option plan in accordance with
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" ("APB 25"). In accordance with APB 25, no compensation expense is
recognized for stock options issued to employees since the options have an
exercise price equal to the market value of the common stock on the day of the
grant. Refer to Note 12 to the financial statements for the fair market
disclosure required by Statement of Financial Accounting Standards ("SFAS") No.
123 "Accounting for Stock-based Compensation."
COMPREHENSIVE INCOME
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 established standards for reporting and display
of comprehensive income and its components in the financial statements. SFAS 130
applies to fiscal years beginning after December 15, 1997. Reclassification of
financial statements for earlier periods has been provided for comparative
purposes. The adoption of SFAS had no impact on the company's consolidated
results of operations, financial position or cash flows.
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. SFAS No. 131 applies to
fiscal years beginning after December 15, 1997.
First National Community Bancorp, Inc. is a one bank 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 and Luzerne counties. Each of the company's
entities are 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
During 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which establishes accounting
and reporting standards for derivative instruments and for hedging activities.
The statement requires that all derivatives be recognized as either assets or
liabilities in the statement of financial position and be measured at fair
value. SFAS 133 is effective for fiscal quarters of all fiscal years beginning
after June 15, 1999; earlier application is permitted. The company does not hold
or issue derivative instruments as defined by SFAS 133. The adoption of SFAS 133
had no impact on the company.
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, 2000 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, 2000, the amount of these balances was $1,135,000.
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, 2000
-------------------
U.S. Treasury securities
and obligations of U.S.
government agencies $ 16,341 $ 253 $ 99 $ 16,495
Obligations of state and
political subdivisions 44,759 1,066 270 45,555
Mortgage-backed securities 80,727 1,173 753 81,147
Corporate debt securities 1,787 17 55 1,749
Equity securities 10 0 0 10
--------- ------ ------ --------
Total $143,624 $2,509 $1,177 $144,956
========= ====== ====== ========
December 31, 1999
-------------------
U.S. Treasury securities
and obligations of U.S.
government agencies $20,479 $ 0 $ 731 $ 19,748
Obligations of state and
political subdivisions 39,785 298 2,148 37,935
Mortgage-backed securities 81,561 160 3,958 77,763
Corporate debt securities 1,001 0 64 937
Equity securities 10 0 0 10
-------- ---- ------ --------
Total $142,836 $458 $6,901 $136,393
======== ==== ====== ========
Held-to-maturity Securities:
Gross Gross
Net Unrealized Unrealized
Carrying Holding Holding Fair
Value Gains Losses Value
-------- ---------- ----------- --------
December 31, 2000
-------------------
U.S. Treasury securities
and obligations of U.S.
government agencies $1,116 $ 0 $67 $1,049
Obligations of state and
political subdivisions 1,221 0 66 1,155
------ --- ---- ------
Total $2,337 $ 0 $133 $2,204
====== === ==== ======
Gross Gross
Net Unrealized Unrealized
Carrying Holding Holding Fair
Value Gains Losses Value
-------- ---------- ---------- --------
December 31, 1999
-------------------
U.S. Treasury securities
and obligations of U.S.
government agencies $1,037 $ 0 $156 $ 881
Obligations of state and
political subdivisions 1,162 0 234 928
------ --- ---- -----
Total $2,199 $ 0 $390 $1,809
====== === ==== ======
The following table shows the amortized cost and approximate fair value of the
bank's debt securities (in thousands) at December 31, 2000 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 $ 499 $ 499 $ 0 $ 0
One Year through Five Years 1,499 1,516 0 0
After Five Years through Ten Years 13,449 13,609 0 0
After Ten Years 47,440 48,175 2,337 2,204
Mortgage-backed Securities 80,727 81,147 0 0
-------- -------- ------ ------
Total $143,614 $144,946 $2,337 $2,204
======== ======== ====== ======
Gross proceeds from the sale of securities for the years ended December
31, 2000, 1999, and 1998 were $49,347,000, $28,903,000, and $14,451,000,
respectively with the gross realized gains being $71,000, $254,000, and
$153,000, respectively, and gross realized losses being $179,000, $57,000, and
$28,000, respectively.
At December 31, 2000 and 1999, securities with a carrying amount of
$68,144,000 and $85,399,000, 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)
2000 1999
-------- --------
Real estate loans, secured by residential properties $ 89,827 $ 95,339
Real estate loans, secured by nonfarm, nonresidential
properties 156,234 134,690
Commercial and industrial loans 79,483 61,337
Loans to individuals for household, family and other
personal expenditures 62,504 65,075
Loans to state and political subdivisions 10,078 7,389
All other loans, including overdrafts 249 128
-------- --------
Gross loans 398,375 363,958
Less: Allowance for credit losses (5,250) (4,714)
-------- --------
Net loans $393,125 $359,244
======== ========
Changes in the allowance for credit losses were as follows:
(in thousands)
2000 1999 1998
Balance, beginning of year $4,714 $4,283 $3,623
Recoveries credited to allowance 259 267 47
Provision for credit losses 970 1,020 920
TOTAL 5,943 5,570 4,590
Losses charged to allowance 693 856 307
------ ------ ------
Balance, end of year $5,250 $4,714 $4,283
====== ====== ======
Information concerning the bank's recorded investment in nonaccrual and
restructured loans is as follows:
(in thousands)
2000 1999
---- ----
Nonaccrual loans
Impaired $ 0 $ 0
Other 645 288
Restructured loans 72 283
---- ----
Total $717 $571
==== ====
The interest income that would have been earned in 2000, 1999 and 1998
on nonaccrual and restructured loans outstanding at December 31, 2000, 1999 and
1998 in accordance with their original terms approximated $61,000, $50,000 and
$125,000. The interest income actually realized on such loans in 2000, 1999 and
1998 approximated $9,000, $23,000 and $51,000. As of December 31, 2000, 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)
2000 1999
------ ------
Land $ 1,036 $ 783
Buildings 2,315 2,278
Furniture, fixtures and equipment 5,194 4,366
Leasehold improvements 2,590 1,924
------- ------
Total 11,135 9,351
Less accumulated depreciation 5,230 4,526
------- ------
Net $ 5,905 $4,825
======= ======
6. DEPOSITS:
At December 31, 2000, time deposits including certificates of deposit and
Individual Retirement Accounts have the scheduled maturities as follows:
(in thousands)
Time Deposits
$100,000 Other
and Over Time Deposits Total
----------- ------------- ---------
2001 $70,311 $153,533 $223,844
2002 2,574 41,874 44,448
2003 118 9,593 9,711
2004 2,060 4,544 6,604
2005 and Thereafter 761 4,197 4,958
------- -------- --------
Total $75,824 $213,741 $289,565
======= ======== ========
7. BORROWED FUNDS:
Borrowed funds at December 31, 2000 and 1999 include the following (in
thousands):
2000 1999
------- --------
Treasury Tax and Loan Demand Note $ 271 $ 356
Federal Funds Purchased 0 4,845
Other Short-Term Borrowings 0 3,732
Borrowings under Lines of Credit 70,637 79,240
------- -------
Total $70,908 $88,173
======= =======
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. Other short-term
borrowings consist of transactions with maturities greater than one business
day.
The following table presents Federal Home Loan Bank of Pittsburgh ("FHLB of
Pittsburgh") advances at the earlier of the callable date or maturity date (in
thousands):
December 31, 2000
Weighted
Average
Amount Interest Rate
Within one year $35,955 6.15%
After one year but within two years 2,627 6.42
After two years but within three years 15,000 5.57
After three years but within four years 10,087 5.51
After four years but within five years 5,000 5.15
After five years 1,968 5.91
-------
$70,637
=======
The FHLB of Pittsburgh advances are comprised of $60,637,000 of fixed rate
advances and $10,000,000 of variable rate borrowings. All advances are
collateralized either under a blanket pledge agreement by one to four family
mortgage loans or with mortgage-backed securities.
At December 31, 2000, the company had available from the FHLB of Pittsburgh an
open line of credit for $51,540,000 which expires on October 18, 2001. 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. At December 31, 2000 and 1999, the
company had no borrowings under this credit line. In addition, at December 31,
2000, the company had available overnight repricing lines of credit with other
correspondent banks totaling $24,000,000. At December 31, 1999, the company had
$4,845,000 outstanding with correspondent banks. There were no borrowings under
these lines at December 31, 2000 and 1998.
The maximum amount of borrowings outstanding at any month end during the years
ended December 31, 2000 and 1999 were $96,565,000 and $87,818,000, respectively.
8. 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 2000, 1999 and 1998 amounted to $300,000, $275,000, and $250,000,
respectively.
During 1994, the bank established an unfunded non-qualified deferred
compensation plan covering all eligible bank officers and directors as defined
by the plan. This plan provides eligible participants to elect to defer a
portion of their compensation. At December 31, 2000, elective deferred
compensation amounting to $823,000 plus $373,000 in accrued interest has been
recorded as other liabilities in the accompanying balance sheet.
9. INCOME TAXES:
The provision for income taxes included in the statement of income is comprised
of the following components:
2000 1999 1998
------ ------ -------
Current $2,080 $1,974 $1,884
Deferred (419) (218) (306)
------ ------ ------
TOTAL $1,661 $1,756 $1,578
====== ====== ======
Deferred tax assets (liabilities) are comprised of the following at
December 31:
2000 1999
------ ------
Unrealized Holding Gains on Securities
Available-for-Sale $ 0 $2,191
Allowance for Credit Losses 1,648 1,427
Deferred Compensation 408 307
------ ------
Gross Deferred Tax Asset 2,056 3,925
------ ------
Unrealized Holding Losses on Securities
Available-for-Sale $ 453) $ 0
Deferred Loan Origination Fees (245) (206)
Depreciation (120) (131)
Other (11) (22)
------ ------
Gross Deferred Tax Liability $ (829) $ (359)
------ ------
Deferred Tax Asset Valuation Allowance (421) (535)
------ ------
Net Deferred Tax Assets $ 806 $3,031
====== ======
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):
2000 1999 1998
------- ------ -------
Provision at Statutory Tax Rates $ 2,612 $2,518 $2,273
Add (Deduct):
Tax Effects of Non-Taxable Interest Income (1,030) (902) (828)
Non-Deductible Interest Expense 163 127 116
Other Items Net (84) 13 17
------- ------ ------
Provision for Income Taxes $ 1,661 $1,756 $1,578
======= ====== ======
The net change in the valuation allowance for deferred tax asset was a
decrease of $114,000 in 2000. The change relates to a decrease in the provision
for income taxes to which this valuation relates.
10. RELATED PARTY TRANSACTIONS:
At December 31, 2000 and 1999, certain officers and directors and/or companies
were indebted to the bank in the aggregate amounts of $21,947,000 and
$15,349,000. 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. The bank was also committed under standby
letters of credit as described in Note 11.
During 2000, $9,621,000 of new loans were made and repayments totaled
$3,023,000.
11. COMMITMENTS:
(a) Leases:
The following table shows branch operations from leased facilities:
Date Lease Renewal
Branch Address Opened Expiration Option
- ------- ----------------------- --------- ----------- --------
Fashion Mall 277 Scranton/Carbondale
Highway, Scranton July 1988 May 2003 Three options of five
years each with
specified increases at
the beginning of each
option period
Wilkes-Barre 23 W. Market St., July 1993 May 2003 Three options of five
Wilkes-Barre years each with
specified increases at
the beginning of each
option period
Pittston Plaza 1700 N. Township Blvd.,
Pittston April 1995 September 2008 Two options of five
years each with
specified increases at
the beginning of each
option period
Kingston 754 Wyoming Ave.,
Kingston August 1996 August 2006 Two options of five
years each with
specified increases at
the beginning of each
option period
Exeter 1625 Wyoming Ave. November 1998 August 2008 Four options of five
Exeter years each with
specified increases at
the beginning of each
option period
Daleville Route 502 & 435, April 2000 December 2009 Four options of five
Daleville years each with
specified increases at
the beginning of each
option period
Plains 27 North River Road June 2000 October 2005 Four options of five
Plains years each with
specified increases at
the beginning of each
option period
Back Mountain 169 North Memorial
Highway October 2000 September 2010 Four options of five
Shavertown years each with
specified increases at
the beginning of each
option period
The bank also leases office space for certain administrative and
operational functions. Such lease, which expires in 2003, provides the bank the
option of renewal for four successive three year periods commencing January 1,
2004; and carries specified annual rental increases.
At December 31, 2000, the bank was obligated under certain
noncancelable leases for equipment with terms expiring over the next five years.
The aforementioned leases have been treated as operating leases in the
accompanying financial statements. Minimum future obligations under
noncancelable operating leases in effect at December 31, 2000 are as follows (in
thousands):
FACILITIES EQUIPMENT
2001 $ 338 $ 77
2002 342 36
2003 175 21
2004 156 10
2005 and thereafter 587 0
------ ----
Total $1,598 $144
====== ====
Total rental expense under operating leases amounted to $398,000 in 2000,
$361,000 in 1999, and $322,000 in 1998.
(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.
The bank does not require collateral or other security to support
financial instruments with off-balance sheet credit risk.
Financial instruments whose contract amounts represent credit risk at
December 31 are as follows (in thousands):
2000 1999
Commitments to extend credit $70,866 $53,022
Standby letters of credit 8,530 7,985
Outstanding commitments to extend credit and standby letters of credit issued to
or on behalf of related parties amounted to $5,310,000 and $10,274,000 and
$453,000 and $446,000 at December 31, 2000 and 1999, 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
$6,950,000 and $0; and due from bank accounts in excess of the limit covered by
the Federal Deposit Insurance Corporation amounting to $7,873,000 and $7,024,000
as of December 31, 2000 and 1999, respectively.
Loan Concentrations: At December 31, 2000, 19% of the bank's commercial
loan portfolio was concentrated in loans in the following four industries.
Substantially all of these loans are secured by first mortgages on commercial
properties. Floor plan loans to automobile dealers are secured by a first lien
security interest in the vehicle inventories of the dealer.
In thousands %
------------ ----
o Hotels $20,612 5.2%
o Automobile Dealers 17,937 4.6
o Shopping Centers/Retail Complexes 19,532 5.0
o Office Complex/Units 17,684 4.5
12. 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 200,000
shares. Options and rights granted under the plan may be exercised six months
after the date the options are awarded and expire ten years after the award
date. Options granted during the year 2000 are not exercisable before receipt of
shareholder approval and shall lapse upon failure to receive such approval.
Effective August 30, 2000, options to purchase 25,000 shares of stock were
granted under this plan and expire on August 30, 2010.
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. The
aggregate number of shares issuable under the plan cannot exceed 100,000 shares
and are exercisable from the date the awards are granted for a period of three
years. Options granted during the year 2000 are not exercisable before receipt
of shareholder approval and shall lapse upon failure to receive such approval.
Effective August 30, 2000, options to purchase 24,000 shares of stock were
granted under this plan and expire on August 30, 2003.
Weighted
Independent Average
Employee Director Exercise
Year ended December 31, 2000 Stock Options Stock Options Prices
- ---------------------------- ------------- ------------- --------
Granted 25,000 24,000 $28.55
------ ------ ------
Outstanding at December 31, 2000 25,000 24,000 $28.55
====== ====== ======
The company measures stock based compensation costs using the intrinsic
value based method of accounting prescribed by APB Opinion No. 25, "Accounting
for Stock Issued to Employees." The Company has adopted during the year, the
disclosure-only provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation." Accordingly, no compensation
cost has been recognized for these stock option plans. Had compensation cost for
the stock option plans been determined based on the fair value at the grant date
for awards made in the year 2000, consistent with the provisions of SFAS No.
123, the Company's net earnings and earnings per share would have been reduced
to the pro forma amounts indicated below:
2000
-----------
Net income
As Reported $6,020,000
Pro forma 5,612,000
Earnings per share
As Reported:
Basic 2.41
Diluted 2.39
Pro forma:
Basic 2.24
Diluted 2.23
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in the year 2000: dividend yield of 2.46 percent;
weighted-average risk-free interest rate of 6.32 percent; and expected
volatility of 33 percent. The effects of applying SFAS No. 123 on the pro forma
net income may not be representative of the effects on pro forma net income for
future years.
13. 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 - 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, 2000, that the bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 2000, 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)
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
----------------------- ---------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
------- -------- -------- ------- --------- -------
As of December 31, 2000:
Total Capital
(to Risk Weighted Assets) $51,055 11.84% >$34,492 >8.0% >$43,115 >10.0%
Tier I Capital
(to Risk Weighted Assets) $45,805 10.62% >$17,246 >4.0% >$25,869 >6.0%
Tier I Capital
(to Average Assets) $45,805 7.92% >$17,359 >3.0% >$28,931 >5.0%
As of December 31, 1999:
Total Capital
(to Risk Weighted Assets) $46,021 12.05% >$30,544 >8.0% >$38,181 >10.0%
Tier I Capital
(to Risk Weighted Assets) $41,307 10.82% >$15,272 >4.0% >$22,908 >6.0%
Tier I Capital
(to Average Assets) $41,307 7.62% >$16,264 >3.0% >$27,107 >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 $13,152,000 at December 31, 2000, subject to the minimum capital
ratio requirements noted above.
14. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107 "Disclosures about Fair
Value of Financial Instruments", (SFAS 107) requires 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.
Interest-bearing balances with financial institutions:
The fair value of these financial instruments is estimated using rates
currently available for investments of similar maturities.
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.
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 bank's financial instruments (in thousands) are
as follows:
December 31, 2000
-----------------------------
Carrying Fair
Value Value
-------- -------
FINANCIAL ASSETS
Cash and short term investments $ 19,804 $ 19,804
Interest-bearing balances with
financial institutions 3,359 3,387
Securities 152,316 152,184
Gross Loans 398,375 400,508
FINANCIAL LIABILITIES
Deposits $460,418 $460,416
Borrowed funds 70,908 71,903
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Commitments to extend credit
and standby letters of credit $0 $89
December 31, 1999
-----------------------------
Carrying Fair
Value Value
-------- --------
FINANCIAL ASSETS
Cash and short term investments $ 15,971 $15,971
Interest-bearing balances
with financial institutions 2,874 2,871
Securities 146,528 146,138
Gross Loans 363,958 364,767
FINANCIAL LIABILITIES
Deposits $411,126 $410,847
Borrowed funds 88,173 86,441
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Commitments to extend credit
and standby letters of credit $0 $129
15. CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY:
Condensed parent company only financial information is as follows (in
thousands):
Condensed Balance Sheet December 31, 2000 1999
------- -------
Assets:
Cash $ 309 $ 75
Investment in Subsidiary (equity method) 46,326 36,909
Other assets 49 71
------- -------
Total Assets $46,684 $37,055
======= =======
Liabilities and Stockholders' Equity:
Stockholders' equity $46,684 $37,055
======= =======
Condensed Statement of Income for the years ending December 31, 2000 and 1999
and for the initial period of operations commencing July 1, 1998 and ending
December 31, 1998 2000 1999 1998
------ ------ ------
Income:
Dividends from Subsidiary $1,775 $1,279 $1,155
Other Income 0 0 2
Equity in Undistributed Income of Subsidiary 4,285 4,429 1,367
------ ------ ------
Total Income $6,060 $5,708 $2,524
------ ------ ------
Expenses 40 59 18
------ ------ ------
Net Income $6,020 $5,649 $2,506
====== ====== ======
Condensed Statement of Cash Flows for the year ending December 31, 2000 and 1999
and for the initial period of operations commencing July 1, 1998 and ending
December 31, 1998
2000 1999 1998
------ ------ ------
Cash Flows from Operating Activities:
Net income $ 6,020 $ 5,649 $2,506
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed income of subsidiary (4,285) (4,429) (1,367)
Decrease (increase) in other assets 22 (18) (52)
------- ------- ------
Net Cash Provided by Operating Activities $ 1,757 $ 1,202 $1,087
Cash Flows from Investing Activities:
Investment in subsidiary $ 0 $(2,929) $ 0
------- ------- ------
Net Cash Used in Investing Activities $ 0 $(2,929) $ 0
------- ------- ------
Cash Flows from Financing Activities:
Cash dividends $(2,202) $(1,922) $(1,055)
Proceeds from borrowings 0 0 840
Repayment of borrowings 0 0 (840)
Advances from subsidiary 0 0 82
Repayment of advances from subsidiary 0 0 (82)
Payments to repurchase common stock (272) 0 0
Proceeds from issuance of common stock
net of stock issuance costs 951 3,692 0
------- ------- -------
Net Cash Used in Financing Activities $(1,523) $ 1,770 $(1,055)
Increase in Cash $ 234 $ 43 $ 32
Cash at Beginning of Period 75 32 0
------- ------- -------
Cash at End of Period $ 309 $ 75 $ 32
======= ======= =======
Non-cash investing and financing activities:
On July 1, 1998, the company issued 1,199,180 shares of its common
stock in exchange for all of the outstanding shares of the bank. The investment
in subsidiary was recorded at $33,550,000 which equaled the Stockholders' Equity
of the bank at the time of the exchange.
In 1999, the company adopted a dividend reinvestment plan. Shares of
stock issued in 2000 and 1999 were 23,365 shares and 20,147 shares,
respectively, in lieu of paying cash dividends of $679,000 in 2000 and $763,000
in 1999.
16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
In thousands, except per share amounts
Quarter Ending
March 31, June 30, September 30, December 31,
2000
Interest income $10,171 $10,826 $11,119 $11,275
Interest expense 5,572 6,026 6,346 6,426
------- ------- ------- -------
Net interest income 4,599 4,800 4,773 4,849
Provision for credit losses 180 180 180 430
Other income 326 398 383 275
Other expenses 2,808 2,879 2,942 3,123
Provision for income taxes 413 481 474 293
------- ------- ------- -------
Net income $ 1,524 $ 1,658 $ 1,560 $ 1,278
======= ======= ======= =======
Earnings per share:
Basic $0.61 $0.66 $0.62 $0.52
===== ===== ===== =====
Diluted $0.61 $0.66 $0.62 $0.50
===== ===== ===== =====
1999
Interest income $8,860 $9,589 $9,467 $9,952
Interest expense 4,877 4,991 4,983 5,374
------ ------ ------ ------
Net interest income 3,983 4,598 4,484 4,578
Provision for credit losses 180 180 180 480
Other income 516 334 303 424
Other expenses 2,610 2,571 2,776 2,838
Provision for income taxes 393 547 454 362
------ ------ ------ ------
Net income $1,316 $1,634 $1,377 $1,322
====== ====== ====== ======
Basic and diluted earnings per
share $0.55 $0.68 $0.57 $0.55
===== ===== ===== =====
Exhibit E - Independent Auditors' Report
INDEPENDENT AUDITORS' REPORT
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. and Subsidiaries (the "Company") as of
December 31, 2000 and 1999, and the related consolidated statements of
income, changes in stockholders' equity and cash flows for each of the
three years in the period ended December 31, 2000. These consolidated
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 generally accepted auditing
standards. 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, 2000 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2000
in conformity with generally accepted accounting principles.
Demetrius & Company, L.L.C.
Wayne, New Jersey
January 18, 2001