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, 2001
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 25, 2002: $81,367,116.
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.
2,566,786 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, 2001 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
Clarks Green October 2001
Hanover Township January 2002
Nanticoke Opening April 2002
The bank provides many 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
Online, 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 FNCB Online via the internet and its ATM network.
Automated teller machines are available at the following locations:
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
Clarks Green
Hanover Township
Nanticoke
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.
As of December 31, 2001, industry concentrations exist within the
following six industries. Loans and lines of credit to each of these
industries were as follows:
o Hotels $23,839,000
o Automobile Dealers $24,314,000
o Gas Stations/Related $14,519,000
o Shopping Centers/Retail Complexes $32,262,000
o Office Complexes/Units $27,271,000
o Residential Subdivision/Related $16,325,000
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 Lackawanna County market comes from
numerous commercial banks and savings and loan associations operating in
the area. 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, 2001 the bank employed 228 persons, including 53
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 Clarks Green Branch
13 734 Sans Souci Parkway
Hanover Township, PA Lease Hanover Township Branch
14 194 South Market Street
Nanticoke, PA Lease Nanticoke Branch
15 200 S. Blakely Street
Dunmore, PA Lease Administrative Center
16 107-109 S. Blakely Street
Dunmore, PA Own Parking Lot
17 114-116 S. Blakely Street
Dunmore, PA Own Parking Lot
18 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 2001
First $33.00 $27.50 $ .21
Second 34.45 31.25 .21
Third 34.50 32.50 .23
Fourth 36.00 30.50 .32
-------
$ 0.97
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
MARKET MAKERS
F.J. Morrissey Ryan, Beck and Co.
1700 Market Street 220 South Orange Avenue
Suite 1420 Livingston, NJ 07039
Philadelphia, PA 19103 (973) 597-6000
(215) 563-8500
Monroe Securities RBC Dain Rauscher
47 State Street 3 Times Square
Rochester, NY 14614 24th Floor
(716) 546-5560 New York, NY 10036
(866) 835-1422
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, 2001 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,
--------------------------------
2001 2000 1999 1998 1997
-------------------------------------------------------------
Total assets 676,307 583,852 540,363 483,385 428,335
Interest-bearing balances
with financial institutions 3,161 3,359 2,874 2,478 1,586
Securities 194,109 152,316 146,528 131,830 121,367
Net loans 439,884 393,125 359,244 324,610 280,731
Total deposits 517,334 460,418 411,126 380,039 345,668
Stockholders' equity 51,786 46,684 37,055 34,679 31,580
Net interest income before
provision for credit losses 19,233 19,021 17,643 15,445 14,580
Provision for credit losses 1,220 970 1,020 920 1,110
Other income 3,151 1,382 1,577 1,583 1,628
Other expenses 12,683 11,752 10,795 9,423 8,839
Income before income taxes 8,481 7,681 7,405 6,685 6,259
Provision for income taxes 1,701 1,661 1,756 1,578 1,616
Net income 6,780 6,020 5,649 5,107 4,643
Cash dividends paid 2,455 2,202 1,922 1,703 1,396
Per share data:
Net income - basic (1) 2.68 2.41 2.35 2.13 1.94
Net income - diluted (1) 2.61 2.39 2.35 2.13 1.94
Cash dividends (2) 0.97 0.88 0.80 0.71 0.58
Book value (1)(3) 20.46 18.66 15.39 14.46 13.17
Weighted average number of
shares outstanding 2,530,998 2,502,245 2,407,278 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 dividend declared in 1997.
(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
dividend declared in 1997.
(3) Reflects the effect of SFAS No. 115 in the amount of $536,000 in 2001,
$880,000 in 2000, $(4,252,000) in 1999, $791,000 in 1998 and $1,097,000 in
1997.
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, 2001, 2000 and
1999. The information presented below should be read in conjunction with the
company's consolidated financial statements and accompanying notes appearing
elsewhere in this report.
SUMMARY
Net Income was $6,780,000 in 2001 which was $760,000, or 13%, higher than the
$6,020,000 earned in 2000. The 2000 earnings were $6,020,000 which was $371,000,
or 7%, higher than the $5,649,000 earned in 1999. Basic earnings per share were
$2.68, $2.41 and $2.35 in 2001, 2000 and 1999. The weighted average number of
shares outstanding in 2001 was 2,530,998 while the weighted average number of
shares in 2000 and 1999 were 2,502,245 and 2,407,278.
The increase over 2000 earnings was due primarily to the $ 1.8 million increase
in other income. Included in this component of earnings is $604,000 of gains on
the sale of securities, $315,000 from the disposition of other real estate and
$298,000 from the sale of residential mortgage loans. Net interest income also
improved over $200,000 in 2001 but these increases were partially offset by a
$931,000 increase in operating expenses and a $250,000 increase in the provision
for credit losses.
The improvement in earnings that was recognized in 2000 was 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 to improve net interest income through increased spread
while investment activity also contributed to the improvement.
Return on assets for the years ended December 31, 2001, 2000 and 1999 was 1.05%,
1.06% and 1.09%. Return on equity was 13.50% in 2001, 14.88% in 2000 and 16.26%
in 1999.
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 1% in 2001. This minimal increase was the result of
declining interest rates during the year and the resulting decrease in interest
income earned on variable rate loans and investments. Changes in net interest
income also 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 non-performing 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.
In 2001, tax-equivalent net interest income increased $427,000, or 2%. 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 $35 million, or 9%, over the 2000 balances, but the
improvement in income earned was limited to $414,000, or 1%, as the rates earned
on variable rate assets declined and new loans were added at historically low
levels. Commercial loan balances increased by $52 million, or 21%, but earnings
on these assets improved only 8% due to the high volume of variable rate loans.
Average consumer loan balances decreased $17 million in 2001 due to the sale of
almost $22 million of residential mortgages. The negative growth resulted in a
$1.3 million decrease in interest income in comparison to last year. Falling
interest rates contributed to the sixty-three basis point reduction in yields
earned on loans, including a one hundred four basis point decrease in commercial
loans.
Average securities increased $26 million, or 17%, from the 2000 total. A
forty-three basis point reduction in yield limited the improvement in earnings
to $1.1 million, or 10%. Average money market assets increased $6.5 million,
resulting in a $176,000 increase in interest income.
Average interest-bearing deposits increased $55 million, or 14%, in 2001.
Certificates of deposit increased $36 million while lower costing savings and
interest-bearing transaction accounts grew $19 million. While the cost of time
certificates were reduced forty-two basis points during the year, rate
reductions on savings and money market accounts were limited, resulting in a
thirty-three basis point reduction in the cost of deposits. Borrowed funds and
other interest-bearing liabilities were $7 million higher on average but lower
rates resulted in a forty-five basis point reduction in the overall cost of
these liabilities.
As a result of the growth of the balance sheet and the reduction in yields
earned and paid, the company's net interest margin decreased thirty-five basis
points to 3.42%. Investment leveraging transactions also added to the
profitability of the company in 2001, contributing over $1 million of pre-tax
earnings. These transactions, which match assets with liabilities at various
points of the interest rate cycle, provided a spread of approximately one
hundred twenty-one basis points, thereby reducing the company's net interest
margin. Exclusive of these transactions, the 2001 net interest margin would have
been 3.68% compared to 4.07% in 2000.
During 2000, tax-equivalent net interest income increased $1.6 million, or 8%.
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 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.
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 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.
Yield Analysis
(dollars in thousands-taxable equivalent basis)(1)
2001 2000 1999
----------------------------- ----------------------------- -------------------------------
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 $281,930 $22,293 7.91 $233,337 $20,888 8.95 $203,276 $17,311 8.52
Commercial loans-tax free 14,434 1,404 9.73 10,777 1,065 9.88 10,366 978 9.43
Mortgage loans 32,524 2,570 7.90 46,957 3,699 7.88 44,870 3,496 7.79
Installment loans 90,331 7,379 8.17 92,769 7,580 8.17 94,363 7,529 7.98
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total Loans 419,219 33,646 8.03 383,840 33,232 8.66 352,875 29,314 8.31
-------- ------- ----- -------- ------- ----- -------- ------- -----
Securities-taxable 134,503 8,567 6.37 112,851 7,765 6.88 102,035 6,619 6.49
Securities-tax free 47,492 3,819 8.04 42,998 3,525 8.20 37,342 3,040 8.14
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total Securities 181,995 12,386 6.81 155,849 11,290 7.24 139,377 9,659 6.93
-------- ------- ----- -------- ------- ----- -------- ------- -----
Interest-bearing deposits 3,494 228 6.53 3,202 217 6.78 2,553 145 5.68
with banks
Federal funds sold 9,517 377 3.96 3,262 212 6.49 2,346 115 4.90
-------- ------- ----- -------- ----- -------- ------- -----
Total Money Market Assets 13,011 605 4.65 6,464 429 6.63 4,899 260 5.31
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total Earning Assets 614,225 46,637 7.59 546,153 44,951 8.23 497,151 39,233 7.89
Non-earning assets 35,349 25,063 24,658
Allowance for credit losses (5,284) (4,935) (4,469)
-------- -------- --------
Total Assets $644,290 $566,281 $517,340
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-Bearing Liabilities:
Interest-bearing demand $ 93,583 $ 2,549 2.72 $ 77,579 $ 2,194 2.83 $ 62,183 $1,490 2.40
deposits
Savings deposits 46,892 951 2.03 44,116 964 2.19 45,716 1,020 2.23
Time deposits over $100,000 86,540 4,474 5.17 75,307 4,480 5.95 68,800 3,494 5.08
Other time deposits 220,940 12,594 5.70 195,621 11,686 5.97 184,229 9,937 5.39
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total Interest-Bearing 447,955 20,568 4.59 392,623 19,324 4.92 360,928 15,941 4.42
Deposits
Borrowed funds and other
Interest-bearing liabilities 91,793 5,061 5.51 84,682 5,046 5.96 75,803 4,284 5.65
-------- ------- ----- -------- ----- -------- -------- -----
Total Interest-Bearing 539,748 25,629 4.75 477,305 24,370 5.11 436,731 20,225 4.63
Liabilities
Demand deposits 48,104 43,774 41,810
Other liabilities 6,503 4,898 4,191
Stockholders' equity 49,935 40,304 34,608
-------- -------- --------
Total Liabilities and
Stockholders' Equity $644,290 $566,281 $517,340
======== ======== ========
------- ----- ------- ----- -------
Net Interest Income Spread $21,008 2.84 $20,581 3.12 $19,008 3.26
======= ===== ======= ===== ======= =====
Net Interest Margin 3.42 3.77 3.82
===== ===== =====
(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)
2001 vs 2000 2000 vs 1999
-------------------------- -------------------------
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 $1,405 $4,168 $(2,763) $3,577 $2,573 $1,004
Commercial loans-tax free 339 357 (18) 87 40 47
Mortgage loans (1,129) (1,137) 8 203 163 40
Installment loans (201) (189) (12) 51 (156) 207
------ ------ ------- ------ ------ ------
Total Loans 414 3,199 (2,785) 3,918 2,620 1,298
------ ------ ------- ------ ------ ------
Securities-taxable 802 1,492 (690) 1,146 700 446
Securities-tax free 294 368 (74) 485 461 24
------ ------ ------- ------ ------ ------
Total Securities 1,096 1,860 (764) 1,631 1,161 470
------ ------ ------- ------ ------ ------
Interest-bearing deposits
with banks 11 20 (9) 72 37 35
Federal funds sold 165 403 (238) 97 45 52
------ ------ ------- ------ ------ ------
Total Money Market Assets 176 423 (247) 169 82 87
------ ------ ------- ------ ------ ------
Total Interest Income 1,686 5,482 (3,796) 5,718 3,863 1,855
------ ------ ------- ------ ------ ------
Interest Expense:
Interest-bearing
demand deposits 355 449 (94) 704 369 335
Savings deposits (13) 61 (74) (56) (35) (21)
Time deposits over $100,000 (6) 669 (675) 986 330 656
Other time deposits 908 1,514 (606) 1,749 614 1,135
------ ------ ------- ------ ------ ------
Total Interest-Bearing
Deposits 1,244 2,693 (1,449) 3,383 1,278 2,105
Borrowed funds and other
interest-bearing
liabilities 15 423 (408) 762 502 260
------ ------ ------- ------ ------ ------
Total Interest Expense 1,259 3,116 (1,857) 4,145 1,780 2,365
------ ------ ------- ------ ------ ------
Net Interest Income $427 $2,366 $(1,939) $2,305 $1,573 $2,083
====== ====== ======= ====== ====== ======
(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 2001, tax-equivalent net interest income was $427,000 higher than the 2000
total. Growth of the balance sheet added $2.4 million to 2001 earnings as the
$5.5 million of income earned on new loans and securities more than offset the
$3.1 million cost of new deposits and borrowings. Loan growth added $3.2 million
of income while new investments provided an additional $1.9 million. Interest
expense due to new deposits increased $2.7 million. Declining interest rates
negatively impacted earnings in 2001 as the yield on variable rate assets was
reduced and new assets were added at historically low levels. Loan repricing
reduced earnings by $2.8 million while the effect of rates on investments and
money market assets resulted in $1 million of less income. The impact of falling
rates on deposits lead to a $1.4 million reduction in cost while borrowed funds
also cost $400,000 less than in 2000 due to rate reductions.
PRIOR 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 the 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 to
the remaining increase.
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 $1,220,000 in 2001,
$970,000 in 2000 and $1,020,000 in 1999. The ratio of the loan loss reserve to
total loans was 1.26% at December 31, 2001 and 1.32% at December 31, 2000.
OTHER INCOME
Other Income 2001 2000 1999
------------ ---- ---- ----
(in thousands)
Service charges $1,059 $1,023 $ 845
Net gain/(loss) on the sale of securities 604 (108) 197
Net gain on the sale of other real estate 91 0 23
Other 1,397 467 512
------ ------ ------
Total Other Income $3,151 $1,382 $1,577
====== ====== ======
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.
During 2001, other income increased $1.8 million over the 2000 total. Security
sales provided over $600,000 of net gains as management prepared for rising
rates by shedding bonds with extension risk. The company also continued to shed
interest rate risk through the sale of $22 million long-term, fixed-rate
residential mortgage loans. The sale of these loans at rates ranging from 5.50%
to 8.625% resulted in a gain of almost $300,000 in 2001.
Other income also improved due to earnings generated from the disposition of
properties carried as other real estate and from earnings generated from the
purchase of Bank Owned Life Insurance. The increase in service charges on
deposits can be attributed to fees associated with automatic teller machines.
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.
OTHER EXPENSES
Other Expenses 2001 2000 1999
---- ---- ----
(in thousands)
Salary expense $ 4,985 $ 4,975 $ 4,297
Employee benefit expense 1,171 1,177 1,121
Occupancy expense 1,178 1,087 993
Equipment expense 987 908 781
Advertising expense 491 507 468
Data processing expense 925 796 689
Other operating expense 2,946 2,602 2,446
------- ------- -------
Total Other Expenses $12,683 $11,752 $10,795
======= ======= =======
Total other expenses increased $931,000, or 8%, from the 2000 level. Employee
costs rose $304,000, or 33% of the total while occupancy and equipment expenses
increased $170,000. All other expenses increased $457,000, or 49% of the total
increase. The company's overhead ratio, which measures non-interest expenses as
a percentage of average assets, was reduced to 1.97% in 2001 compared to 2.08%
in the prior year.
Salary and benefit costs represent almost one half of the company's non-interest
expenses. Salaries increased $310,000, or 7%, in 2001 due to merit increases and
the additional costs associated with new offices opened in 2000 and 2001. At
December 31, 2001, the company had 201 full-time equivalent employees on staff
which is an 8% increase over the 186 reported last year.
Occupancy expenses rose 8% in 2001 due to costs associated with new community
offices. Equipment costs rose 9% due to depreciation and maintenance expense on
new purchases. All other operating expenses increased 12% during the year. Much
of the increase can be attributed to rising computer costs and expenses
associated with new offices including office supplies and bank courier expense.
In 2000, 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
8% over the 1999 total, half of which was due to rising advertising and data
processing costs. The company's overhead ratio was 2.08% in 2000 compared to
2.09% in 1999.
Salary and benefit costs comprised 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 was an 11%
increase from the 168 reported in 1999. 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 was attributed to the new offices while the
remaining increase was 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.
PROVISION FOR INCOME TAXES
In 2001, federal income tax expense increased $40,000 over the 2000 total. Tax
benefits derived from an increased level of tax-exempt income had a $142,000
positive effect while deferred tax items reduced the current year provision by
$185,000. The company's effective tax rate for 2001 was 20.1% compared to 21.6%
in 2000.
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. Benefits
received from 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.
FINANCIAL CONDITION
Total assets increased $92 million, or 16%, in 2001 compared to $43 million, or
8%, in 2000. Total deposits increased $57 million during the year and provided
the funds for $47 million of new loan growth. The majority of the $42 million
increase in securities was funded by a $31 million increase in borrowed funds.
Total stockholders' equity increased 11%.
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 2001 total securities increased $42 million. Purchases in 2001 included
$41 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, 2001, the company had $78 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,
------------
2001 2000 1999
--------- --------- ---------
(in thousands)
U.S. Treasury securities and
obligations of U.S. government agencies $ 10,453 $ 17,611 $ 20,785
Obligations of state and political
subdivisions 51,757 46,776 39,097
Mortgage-backed securities 125,240 81,147 77,763
Corporate debt securities 1,212 1,749 937
Equity securities 5,447 5,033 7,946
-------- -------- --------
Total $194,109 $152,316 $146,528
======== ======== ========
The following table sets forth the maturities of securities at December 31, 2001
(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 $1,507 $ 500 $ 0 $ 0 $ 0 $ 0 $ 2,007
Yield 5.30% 5.52% 5.35%
Obligations of U.S. government
agencies 1,500 1,486 5,343 8,329
Yield 5.23% 7.39% 5.89% 6.04%
Obligations of state and political
subdivisions (1) 340 4,498 46,721 51,559
Yield 9.51% 7.80% 7.55% 7.66%
Corporate debt securities 503 750 1,253
Yield 6.25% 4.56% 5.24%
Mortgage-backed securities 124,702 124,702
Yield 6.43% 6.43%
Equity securities (2) 5,447 5,447
Yield 6.43% 6.43%
------ ------ ------ ------- -------- ------ --------
Total maturities $1,507 $2,340 $6,487 $52,814 $124,702 $5,447 $193,297
====== ====== ====== ======= ======== ====== ========
Weighted yield 5.30% 5.92% 7.58% 7.34% 6.43% 6.45% 6.71%
===== ===== ===== ===== ===== ===== =====
(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 2001 actual return.
LOANS
Total loans increased $47 million, or 12%, in 2001. Real estate loans increased
$28 million comprised of a $40 million increase in commercial mortgages and a
$12 million reduction in residential mortgage loans. The decrease in residential
mortgage loans is due to the sale of over $22 million of loan balances in 2001
to reduce the company's interest rate risk exposure and to create liquidity for
future loan fundings. Commercial loans increased $15 million while the $4
million increase in other represents tax-free loans.
Details regarding the loan portfolio for each of the last five years ending
December 31 are as follows:
Loans Outstanding
(in thousands)
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Commercial and Financial $ 94,360 $ 79,483 $ 61,337 $ 49,796 $ 36,790
Real Estate 274,255 246,061 230,029 211,554 190,266
Installment 62,786 62,504 65,075 58,799 46,174
Other 14,077 10,327 7,517 8,748 11,133
-------- -------- -------- -------- --------
Total Loans Gross 445,478 398,375 363,958 328,897 284,363
Unearned Discount 0 0 0 (4) (10)
-------- -------- -------- -------- --------
Total Loans 445,478 398,375 363,958 328,893 284,353
Allowance for Credit Losses (5,594) (5,250) (4,714) (4,283) (3,623)
-------- -------- -------- -------- --------
Net Loans $439,884 $393,125 $359,244 $324,610 $280,730
======== ======== ======== ======== ========
The following schedule shows the repricing distribution of loans outstanding as
of December 31, 2001. 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 $ 62,505 $ 27,732 $ 4,123 $ 94,360
Real Estate 107,493 126,551 40,211 274,255
Installment 3,157 57,987 1,642 62,786
Other 2,420 4,749 6,908 14,077
-------- -------- ------- --------
Total $175,575 $217,019 $52,884 $445,478
======== ======== ======= ========
Loans with predetermined
interest rates $ 11,230 $ 95,297 $45,591 $152,118
Loans with floating rates 164,345 121,722 7,293 293,360
-------- -------- ------- --------
Total $175,575 $217,019 $52,884 $445,478
======== ======== ======= ========
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:
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(in thousands)
Nonaccrual:
Impaired $ 0 $ 0 $ 0 $ 0 $ 0
Other 343 645 288 845 207
Loans past due 90 days or more
and still accruing 426 224 498 452 1,224
Other Real Estate Owned 50 0 0 0 0
---- ---- ---- ------ -----
Total Non-Performing Assets $819 $869 $786 $1,297 $1,431
==== ==== ==== ====== ======
During 2001, total non-performing assets decreased $50,000. Nonaccrual loans
decreased $302,000 as two credits which amounted to $356,000 at December 31,
2000 were paid off during the year. Management believes that any losses from
loans currently carried as nonaccrual would be minimal. Loans past due over 90
days increased $202,000 from last year's low point and other real estate is
comprised of one credit on which management expects full recovery in 2002.
In 2000, total non-performing assets increased $83,000 comprised of a $357,000
increase in nonaccrual loans and a $274,000 decrease in past due loans. The
increase in nonaccrual loans was limited to three credits which were transferred
to nonaccrual status in 2000.
On December 31, 2001, the company's ratio of nonaccrual loans to total loans was
.08 % compared to the .16% reported in 2000. 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)
12/31/01 12/31/00 12/31/99 12/31/98 12/31/97
-------- -------- -------- -------- --------
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
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Commercial and
Financial $1,577 72% $2,483 67% $2,917 61% $1,706 58% $1,340 56%
Real Estate 138 7% 190 12% 89 13% 117 14% 118 20%
Installment 183 21% 98 21% 94 26% 92 28% 69 24%
Unallocated 3,696 - 2,479 - 1,614 - 2,368 - 2,096 -
---------------- --------------- --------------- ---------------- ---------------
$5,594 100% $5,250 100% $4,714 100% $4,283 100% $3,623 100%
================ =============== =============== ================ ===============
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
-----------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Balance, January 1 $5,250 $4,714 $4,283 $3,623 $3,167
Charge-Offs:
Commercial and Financial 233 70 123 77 547
Real Estate 474 268 462 50 9
Installment 360 355 271 180 141
------ ------ ------ ------ ------
Total Charge-Offs 1,067 693 856 307 697
------ ------ ------ ------ ------
Recoveries on Charged-Off Loans:
Commercial and Financial 6 10 23 11 8
Real Estate 20 122 154 1 0
Installment 165 127 90 35 35
------ ------ ------ ------ ------
Total Recoveries 191 259 267 47 43
------ ------ ------ ------ ------
Net Charge-Offs 876 434 589 260 654
------ ------ ------ ------ ------
Provision for Credit Losses 1,220 970 1,020 920 1,110
------ ------ ------ ------ ------
Balance, December 31 $5,594 $5,250 $4,714 $4,283 $3,623
====== ====== ====== ====== ======
Net Charge-Offs during the period
as a percentage of average loans
outstanding during the period .21% .11% .17% .09% .24%
Allowance for credit losses as a
percentage of net loans
outstanding at end of period 1.26% 1.32% 1.30% 1.30% 1.27%
Net charge-offs increased $442,000 in 2001 to .21% of average loans. The real
estate charge-off's included a $340,000 commercial mortgage which management
expects to partially recover in 2002. There were no losses realized in 2001 from
loans classified as nonaccrual on December 31, 2000.
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 $57 million in
2001 including over $34 million in low-cost savings and demand accounts and $23
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,
2001 2000 1999
---- ---- ----
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(in thousands)
Noninterest bearing
demand deposits $48,104 $43,774 $41,810
Interest-bearing
demand deposits 93,583 2.72% 77,579 2.83% 62,183 2.40%
Savings deposits 46,892 2.03% 44,116 2.19% 45,716 2.23%
Time deposits 307,480 5.55% 270,928 5.97% 253,029 5.31%
-------- -------- --------
Total $496,059 $436,397 $402,738
======== ======== ========
Maturities of time certificates of deposit of $100,000 or more outstanding at
December 31, 2001, are summarized as follows:
Time Certificates
Of Deposit
(in thousands)
3 months or less $51,605
Over 3 through 6 months 14,142
Over 6 through 12 months 11,061
Over 12 months 10,032
-------
Total $86,840
=======
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 to 5,000,000 to 20,000,000 shares.
The following schedules present information regarding the company's risk-based
capital at December 31, 2001, 2000 and 1999 and selected other capital ratios.
CAPITAL ANALYSIS
(in thousands)
2001 2000 1999
---- ---- ----
Tier I Capital:
Shareholders' equity $ 51,250 $ 45,805 $ 41,307
-------- -------- --------
Total Tier I Capital $ 51,250 $ 45,805 $ 41,307
-------- -------- --------
Tier II Capital:
Allowable portion of allowance
for credit losses $ 5,594 $ 5,250 $ 4,714
-------- -------- --------
Total Risk-Based Capital $ 56,844 $ 51,055 $ 46,021
======== ======== ========
Total Risk-Weighted Assets $505,946 $431,150 $381,805
======== ======== ========
CAPITAL RATIOS
Regulatory
Minimum 2001 2000 1999
------- ---- ---- ----
Total Risk-Based Capital 8.00% 11.24% 11.84% 12.05%
Tier I Risk-Based Capital 4.00% 10.13% 10.62% 10.82%
Tier I Leverage Ratio 3.00% 7.56% 7.92% 7.62%
Return on Assets N/A 1.05% 1.06% 1.09%
Return on Equity* N/A 13.50% 14.88% 16.26%
Equity to Assets Ratio* N/A 7.66% 8.00% 6.86%
Dividend Payout Ratio N/A 36.21% 36.58% 34.02%
* Includes the effect of SFAS 115 in the amount of $536,000 in 2001,$880,000
in 2000 and $(4,252,000) in 1999.
In 1999, the company 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
23,000 shares and a $679,000 increase, while the 2001 impact was 33,000 shares
and a $1 million increase. During 2001, there were also 4,100 new shares issued
as a result of plan participants exercising stock options. The increase in
capital due to the new shares was $117,000.
In 2001, regulatory capital increased $5.4 million comprised of a $4.3 million
increase in retained earnings after paying cash dividends of $2.5 million, a
$1.0 million increase due to the company's dividend reinvestment plan and a
$117,000 increase due to the issuance of shares from the company's stock option
plans. As of December 31, 2001, there were 17,446,203 shares of stock available
for future sale or stock dividends. The number of stockholders of record at
December 31, 2001 was 1,003. 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 marketplace 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, 2001 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, 2001 which measures sensitivity to interest rate fluctuations
for certain interest sensitivity periods.
Interest Rate Sensitivity Analysis
as of December 31, 2001
(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 $159,679 $ 5,501 $12,975 $130,254 $ 16,372 $ 0 $324,781
Mortgage loans 1,772 1,370 3,349 11,892 10,749 0 29,132
Installment loans 10,775 6,210 12,267 55,303 7,010 0 91,565
-------- -------- ------- -------- -------- --------- --------
Total Loans 172,226 13,081 28,591 197,449 34,131 0 445,478
-------- -------- ------- -------- -------- --------- --------
Securities-taxable 12,282 10,112 20,054 59,290 35,992 6,260 143,990
Securities-tax free 90 489 276 8,380 40,884 0 50,119
-------- -------- ------- -------- -------- --------- --------
Total Securities 12,372 10,601 20,330 67,670 76,876 6,260 194,109
-------- -------- ------- -------- -------- --------- --------
Interest-bearing
deposits with banks 792 198 2,171 0 0 0 3,161
Federal funds sold 0 0 0 0 0 0 0
-------- -------- ------- -------- -------- --------- -------
Total Money Market Assets 792 198 2,171 0 0 0 3,161
-------- -------- ------- -------- -------- --------- -------
Total Earning Assets 185,390 23,880 51,092 265,119 111,007 6,260 642,748
Non-earning assets 0 0 0 0 0 39,153 39,153
Allowance for credit losses 0 0 0 0 0 (5,594) (5,594)
-------- -------- ------- -------- -------- --------- --------
Total Assets $185,390 $23,880 $51,092 $265,119 $111,007 $ 39,819 $676,307
======== ======== ======== ======== ======== ========= ========
Interest-bearing
demand deposits $ 66,196 $ 0 $0 $ 33,861 $ 0 $ 0 $100,057
Savings deposits 553 0 793 50,078 0 0 51,424
Time deposits $100,000
and over 51,605 14,142 11,060 9,714 319 0 86,840
Other time deposits 46,485 43,894 66,416 68,882 418 0 226,095
-------- -------- -------- -------- -------- -------- ---------
Total Interest-Bearing
Deposits 164,839 58,036 78,269 162,535 737 0 464,416
-------- -------- -------- -------- -------- -------- ---------
Borrowed funds and other
interest-bearing
liabilities 2,417 579 11,181 19,933 67,500 0 101,610
-------- -------- -------- -------- -------- -------- ---------
Total Interest-Bearing
Liabilities 167,256 58,615 89,450 182,468 68,237 0 566,026
Demand deposits 0 0 0 0 0 52,918 52,918
Other liabilities 0 0 0 0 0 5,577 5,577
Stockholders' equity 0 0 0 0 0 51,786 51,786
-------- -------- -------- -------- -------- -------- --------
Total Liabilities and
Stockholders' Equity $167,256 $58,615 $89,450 $182,468 $68,237 $110,281 $676,307
======== ======== ======== ======== ======== ======== ========
Interest Rate
Sensitivity gap $ 18,134 $(34,735) $(38,358) $ 82,651 $42,770 $(70,462)
======== ======== ======== ======== ======== ========
Cumulative gap $ 18,134 $(16,601) $(54,959) $ 27,692 $70,462
======== ======== ======== ======== ========
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
(i.e., 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 point 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, 2001 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, 2001 levels.
RATES + 200 RATES -200
Earnings at risk:
Percent change in net interest income 4.67% (8.84)%
Economic value at risk
Percent change in economic value of equity (8.33)% (1.12)%
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, 2001
cash and cash equivalents totaled $15.7 million, compared to the December 31,
2000 level of $19.8 million. Financing activities provided $86.3 million and
operating activities provided $7.7 million of cash and cash equivalents during
the year while investing activities utilized $98.1 million. The cash flows
provided by financing activities includes deposit growth 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 $409.5 million in 2001, an increase of $48.4 million, or 13%, from the
$361.1 million average in 2000. This increase in average core deposits was
supplemented with an $11.2 million increase in average jumbo certificates and a
$7.1 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, 2001.
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 39
Michael J. Cestone, Jr. Director
Secretary of
the Board
Of the Company
since 1998 and
of the Bank
since 1971 2002 1998/1969 70
Joseph Coccia Director 2004 1998/1998 47
William P. Conaboy Director 2004 1998/1998 43
Dominick L. DeNaples Director 2004 1998/1987 64
Louis A. DeNaples Director
Chairman of
the Board
of the Company
since 1998 and
of the Bank
since 1988 2002 1998/1972 61
Joseph J. Gentile Director 2002 1998/1989 71
Joseph O. Haggerty Director 2002 1998/1987 62
J. David Lombardi Director
President and
Chief Executive
Officer of the
Company since 1998
and of the Bank
since 1988 2003 1998/1986 53
John P. Moses Director 2004 1999/1999 55
John R. Thomas Director 2003 1998/1967 84
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.
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 02/28/02
----------------------- ------------------- ---------- ------- --------
Louis A. DeNaples Chairman of the Board 1998 (1) 61
J. David Lombardi President & Chief
Executive Officer 1998 1981 53
Michael J. Cestone, Jr. Secretary 1998 (1) 70
William S. Lance Treasurer 1998 1991 42
(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 2/28/02
-------------------- ------------------------- ---------- -------- --------
Louis A. DeNaples Chairman of the Board 1988 (1) 61
J. David Lombardi President and Chief
Executive Officer 1988 1981 53
Gerard A. Champi Executive Vice President
Retail Sales Division
Manager 1998 1991 41
Thomas P. Tulaney Executive Vice President
Commercial Sales Division
Manager 1998 1994 42
Stephen J. Kavulich First Senior Vice President
Loan Administration/
Compliance Division Manager 1998 1991 56
William S. Lance First Senior Vice President
Finance Control
Division Manager 1999 1991 42
Michael J. Cestone, Jr. Secretary 1988 (1) 70
(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.
Joseph O. Haggerty Retired Superintendent, Dunmore School District
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 $100,000.
SUMMARY COMPENSATION TABLE
Annual Compensation Long - Term Compensation
--------------------------------- -------------------------- ---------------
Awards Payouts
--------------------- --------------------
Securities
Other Under- All
Annual Restricted Lying Other
Name and Compen- Stock Options/ LTIP Compen-
Principal Salary(1) Bonus(2) sation(3) Award(s) SARs(4) Payouts sation(5)
Position Year ($) ($) ($) ($) (#) ($) ($)
-------------------- ------ ----------- ---------- ---------- ------------ -------- --------- ----------
J. David Lombardi,
President and Chief
Executive Officer 2001 $199,000 $275,000 $- $ 0 5,000 $ 0 $29,820
of the Company and 2000 199,000 275,000 - 0 3,000 0 28,868
the Bank 1999 179,000 250,000 - 0 0 0 25,604
Thomas P. Tulaney,
Executive Vice 2001 $97,500 $70,000 $- $ 0 4,000 $ 0 $16,064
President of the 2000 94,500 60,000 - 0 2,000 0 14,777
Bank 1999 92,000 50,000 - 0 0 0 14,164
Gerard A. Champi,
Executive Vice 2001 $90,000 $70,000 $- $ 0 4,000 $ 0 $15,297
President of the 2000 87,000 60,000 - 0 2,000 0 14,008
Bank 1999 84,500 50,000 - 0 0 0 13,359
Stephen J.
Kavulich, First
Senior Vice 2001 $74,000 $32,000 $- $ 0 4,000 $ 0 $9,771
President of the 2000 71,500 30,000 - 0 2,000 0 9,339
Bank 1999 69,000 27,000 - 0 0 0 9,228
William S. Lance,
First Senior Vice 2001 $73,250 $30,000 $- $ 0 3,900 $ 0 $9,536
President of the 2000 70,750 27,000 - 0 2,000 0 8,954
Bank 1999 66,750 23,000 - 0 0 0 8,557
1 Includes directors' fees of $24,000 for 2001, 2000 and 1999 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 2001 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. As of February 28, 2002, all
options are exercisable and expire ten years after the date on which the
award is granted.
5 For Mr. Lombardi, includes $16,320, $16,368 and $16,096 contributed by the
company pursuant to the Employees' Profit Sharing Plan for 2001, 2000 and
1999, respectively and includes a director's bonus of $8,500 in 2001 and
$7,500 in each of 2000 and 1999, respectively. Also includes premiums paid
to purchase additional life insurance in the amount of $5,000 in 2001 and
2000 and $2,008 in 1999. For Mr. Tulaney, Mr. Champi, Mr. Kavulich, and Mr.
Lance, represents amounts contributed by the company to the Employees'
Profit Sharing Plan in the years shown.
Option Grants in 2001
The following table shows the stock options granted to the person listed in
2001, and their potential value at the end of the option's term, assuming
certain levels of appreciation of the company's common stock.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Potential Realizable Value
At Assumed Annual Rates of
Stock Price Appreciation
Individual Grants For Option Term (1)
------------------------------------------------------ ----------------------
Number of Percent
Securities of Total
Underlying Options/SARs
Option/SARs Granted To Exercise Of
Granted Employees In Base Price Expiration
Name (#) (2) Fiscal Year ($/Sh) Date 5% ($) 10% ($)
(a) (b) (c) (d) (e) (f) (g)
------------------- -------------- ------------- ------------ ----------- ---------- ----------
J. David Lombardi 3,000 11.11% $33.55 08/22/11 $63,300 $160,410
Thomas P. Tulaney 2,000 7.41% $33.55 08/22/11 $42,200 $106,940
Gerard A. Champi 2,000 7.41% $33.55 08/22/11 $42,200 $106,940
Stephen J. Kavulich 2,000 7.41% $33.55 08/22/11 $42,200 $106,940
William S. Lance 2,000 7.41% $33.55 08/22/11 $42,200 $106,940
(1) The dollar amounts under these columns are the result of calculations at
the 5% and the 10% rates set by the Securities and Exchange Commission and
therefore are not intended to forecast possible future appreciation, if
any, of the company's common stock price.
(2) All options outstanding become immediately exercisable in the event of a
change in control.
Stock Options and Stock Appreciation Rights Exercised in 2001 and Year-End
Values
The following table reflects the number of stock options and stock appreciation
rights exercised by the Named Executive Officers in 2001, the total gain
realized upon exercise, the number of stock options held at the end of the year,
and the realizable gain of the stock options that are "in-the-money."
In-the-money stock options are stock options with exercise prices that are below
the year-end stock price because the stock value increased since the date of the
grant.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
Number of Securities Value of Unexercised
Underlying Unexercised In-The-MoneyOptions/SARs
Options/SARs at Fiscal At Fiscal Year-End (2)
Year-End # ($)
--------------------------- ----------------------------
Shares Value
Acquired On Realized
Name Exercise (#) ($) (1) Exercisable Unexercisable Exercisable Unexercisable
(a) (b) (c) (d) (e) (f) (g)
- ---------------------- -------------- ------------ ------------ ------------- ------------ -------------
J. David Lombardi 1,000 $4,850 2,000 3,000 $8,200 $0
Thomas P. Tulaney 0 0 2,000 2,000 $8,200 $0
Gerard A. Champi 0 0 2,000 2,000 $8,200 $0
Stephen J. Kavulich 0 0 2,000 2,000 $8,200 $0
William S. Lance 100 470 1,900 2,000 $7,790 $0
(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 31, 2001 of
$32.65 per share. As of December 31, 2001, 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 $195,000 in 2002. 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
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. Excused absences are
limited to non-attendance due to other bank business. The aggregate amount of
such fees paid in 2001 was $275,000. In 2001, Michael J. Cestone, Jr. and John
R. Thomas were compensated $14,000, in the aggregate, for special services
(respectively Secretary and Investment Advisor) rendered to the bank. All
directors of the bank also received a bonus of $8,500 in 2001. During 2001, the
Board of Directors of the company held five (5) meetings. Directors received no
additional remuneration for attendance at meetings of the Board of Directors of
the company. 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, 2002,
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(2)
------------ -------------------
Michael G. Cestone (3) 15,902 0.60%
Michael J. Cestone, Jr. (4) 40,392 1.53%
Joseph Coccia (5) 22,241 0.84%
William P. Conaboy (6) 6,252 0.24%
Dominick L. DeNaples (7) 200,073 7.57%
Louis A. DeNaples (8) 231,441 9.05%
Joseph J. Gentile (9) 108,590 4.11%
Joseph O. Haggerty (10) 8,187 0.31%
William S. Lance (11) 4,904 0.19%
J. David Lombardi (12) 34,828 1.32%
John P. Moses (13) 7,354 0.28%
John R. Thomas (14) 40,896 1.55%
All directors and principal
officers as a group (12 persons) 721,060 27.59%
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,
2002. 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. Percentages assume that all options exercisable within sixty days of
February 28, 2002 have been exercised. Therefore, on a pro forma basis,
2,643,697 shares would be outstanding.
3. Includes 4,000 exercisable stock options, 906 shares held in street name
and 200 shares held jointly with his children.
4. Includes 21,566 shares held in street name, 8,090 shares held individually
by his spouse and 4,000 exercisable stock options.
5. Includes 4,000 exercisable stock options.
6. Includes 4,000 exercisable stock options and 1,676 shares held in street
name.
7. Includes 24,926 shares held jointly with his children and 4,000 exercisable
stock options.
8. Includes 10,083 shares held jointly with his children and 2,302 shares held
individually by his spouse.
9. Includes 38,523 shares held in street name, 22,073 shares held individually
by his spouse and 4,000 exercisable stock options.
10. Includes 4,000 exercisable stock options.
11. Includes 3,900 exercisable stock options.
12. Includes 29,565 shares held in street name, 5,000 exercisable stock options
and 105 shares held individually by his spouse.
13. Includes 4,956 shares held in street name and 2,000 exercisable stock
options.
14. Includes 5,817 shares held individually by his spouse and 4,000 exercisable
stock options.
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 2001 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, 2001:
EXHIBIT A - Balance Sheet - December 31, 2001 and 2000
EXHIBIT B - Statement of Income - December 31, 2001, 2000 and 1999
EXHIBIT C - Statement of Cash Flows - December 31, 2001, 2000 and 1999
EXHIBIT D - Statement of Changes in Stockholders' Equity - December 31,
2001, 2000 and 1999
Notes to Consolidated Financial Statements
1 Summary of Significant Accounting Policies
2 Restricted Cash Balances
3 Investment Securities
December 31, 2001 and 2000
4 Loans and Changes in Allowance for Loan Loss
December 31, 2001 and 2000
5 Bank Premises and Equipment
December 31, 2001 and 2000
6 Deposits
7 Borrowed Funds
December 31, 2001 and 2000
8 Benefit Plans
9 Income Taxes
December 31, 2001, 2000 and 1999
10 Related Party Transactions
11 Commitments
12 Stock Option Plans
13 Regulatory Matters
December 31, 2001 and 2000
14 Disclosures about Fair Value of Financial Instruments
December 31, 2001 and 2000
15 Condensed Financial Information - Parent Company Only
16 Selected Quarterly Financial Data
2001 and 2000
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 27, 2002
-------------------------
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 March 27, 2002 /s/Joseph J. Gentile March 27, 2002
- --------------------- -------------- -------------------- ---------------
Michael G. Cestone Date Joseph J. Gentile Date
/s/ Joseph O. Haggerty March 27, 2002
- --------------------- ------------ -------------------- ---------------
Michael J. Cestone, Jr. Date Joseph O. Haggerty Date
/s/Joseph Coccia March 27, 2002 /s/J. David Lombardi March 27, 2002
- --------------------- -------------- -------------------- ---------------
Joseph Coccia Date J. David Lombardi Date
/s/William P. Conaboy March 27, 2002 /s/John P. Moses March 27, 2002
- --------------------- -------------- -------------------- ---------------
William P. Conaboy Date John P. Moses Date
/s/Dominick L. DeNaples March 27, 2002 /s/John R. Thomas March 27, 2002
- ---------------------- -------------- ------------------- ---------------
Dominick L. DeNaples Date John R. Thomas Date
/s/Louis A. DeNaples March 27, 2002
- ----------------------- --------------
Louis A. DeNaples Date
Exhibit A - Balance Sheet
FIRST NATIONAL COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, (in thousands, except share data) 2001 2000
---------- ----------
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 15,652 $ 12,854
Federal funds sold 0 6,950
-------- --------
Total cash and cash equivalents 15,652 19,804
Interest-bearing balances
with financial institutions 3,161 3,359
Securities:
Available-for-sale, at fair value 186,777 144,956
Held-to-maturity, at cost
(fair value $1,757 and $2,204) 1,895 2,337
Federal Reserve Bank and FHLB stock, at cost 5,437 5,023
Net loans 439,884 393,125
Bank premises and equipment 6,599 5,905
Accrued interest receivable 3,365 3,467
Other assets 13,537 5,876
-------- --------
TOTAL ASSETS $676,307 $583,852
======== ========
LIABILITIES
Deposits:
Demand $ 52,918 $ 44,544
Interest-bearing demand 100,057 83,463
Savings 51,424 42,846
Time ($100,000 and over) 86,840 75,824
Other time 226,095 213,741
-------- --------
Total deposits 517,334 460,418
Borrowed funds 101,610 70,908
Accrued interest payable 3,563 4,326
Other liabilities 2,014 1,516
-------- --------
Total liabilities $624,521 $537,168
-------- --------
STOCKHOLDERS' EQUITY
Common Stock ($1.25 par)
Authorized: 20,000,000 shares
Issued and outstanding:
2,553,797 shares in 2001 and
2,516,872 shares in 2000 $ 3,192 $ 3,146
Additional paid-in capital 11,566 10,491
Retained earnings 36,492 32,167
Accumulated other comprehensive
income (loss) 536 880
-------- --------
Total stockholders' equity 51,786 46,684
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $676,307 $583,852
======== ========
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) 2001 2000 1999
------ ------ ------
INTEREST INCOME
Interest and fees on loans $33,169 $32,870 $28,982
------- ------- -------
Interest and dividends on securities:
U.S. Treasury and government agencies 8,021 7,207 6,048
State and political subdivisions 2,521 2,363 2,017
Other securities 546 522 561
------- ------- -------
Total interest and dividends
on securities 11,088 10,092 8,626
------- ------- -------
Interest on balances with
financial institutions 228 217 145
Interest on federal funds sold 377 212 115
------- ------- -------
TOTAL INTEREST INCOME 44,862 43,391 37,868
------- ------- -------
INTEREST EXPENSE
Interest-bearing demand 2,549 2,194 1,490
Savings 951 964 1,020
Time ($100,000 and over) 4,474 4,480 3,494
Other time 12,594 11,686 9,937
Interest on borrowed funds 5,061 5,046 4,284
------- ------- -------
TOTAL INTEREST EXPENSE 25,629 24,370 20,225
------- ------- -------
Net interest income before
provision for credit losses 19,233 19,021 17,643
Provision for credit losses 1,220 970 1,020
------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 18,013 18,051 16,623
------- ------- -------
OTHER INCOME
Service charges 1,059 1,023 845
Net gain/(loss) on the sale of securities 604 (108) 197
Net gain on the sale of other real estate 91 0 23
Other 1,397 467 512
------- ------- -------
TOTAL OTHER INCOME 3,151 1,382 1,577
------- ------- -------
OTHER EXPENSES
Salaries and employee benefits 6,156 5,852 5,418
Occupancy expense 1,178 1,087 993
Equipment expense 987 908 781
Data processing expense 925 796 689
Other operating expenses 3,437 3,109 2,914
------- ------- -------
TOTAL OTHER EXPENSES 12,683 11,752 10,795
------- ------- -------
INCOME BEFORE INCOME TAXES 8,481 7,681 7,405
Provision for income taxes 1,701 1,661 1,756
------- ------- -------
NET INCOME $ 6,780 $ 6,020 $ 5,649
======= ======= =======
EARNINGS PER SHARE:
Basic $2.68 $2.41 $2.35
======= ======= =======
Diluted $2.61 $2.39 $2.35
======= ======= =======
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) 2001 2000 1999
------ ------ ------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $45,456 $42,663 $37,503
Fees and commissions received 2,456 1,490 1,358
Interest paid (26,391) (22,740) (20,116)
Cash paid to suppliers and employees (11,710) (10,671) (9,755)
Income taxes paid (2,112) (2,172) (1,908)
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,699 8,570 7,082
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities available for sale:
Proceeds from maturities 500 0 2,000
Proceeds from sales prior to maturity 48,827 49,347 28,903
Proceeds from calls prior to maturity 38,306 14,123 18,927
Purchases (130,384) (61,393) (70,517)
Securities held to maturity:
Proceeds from calls prior to maturity 548 0 249
Purchases 0 0 (1,622)
Net (increase)/decrease in
interest-bearing bank balances 198 (485) (396)
Purchase of life insurance (6,500) 0 (1,500)
Net increase in loans to customers (47,938) (34,851) (35,631)
Capital expenditures (1,692) (1,983) (806)
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (98,135) (35,242) (60,393)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits,
money market demand, NOW accounts,
and savings accounts 33,545 20,335 17,835
Net increase in certificates of deposit 23,371 28,959 13,251
Net increase (decrease) in borrowed funds 30,702 17,266) 22,998
Proceeds from issuance of common stock
net of stock issuance costs 1,004 679 3,693
Proceeds from issuance of common stock
- Stock Option Plans 117 0 0
Cash dividends paid (2,455) (2,202) (1,922)
-------- ------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 86,284 30,505 55,855
-------- ------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (4,152) 3,833 2,544
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 19,804 15,971 13,427
-------- ------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $15,652 $19,804 $15,971
======== ======= ========
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income $6,780 $6,020 $5,649
-------- ------- -------
Adjustments to reconcile net income
to net cash Provided by operating
activities:
Amortization and accretion, net 492 (197) (84)
Depreciation and amortization 997 903 794
Provision for credit losses 1,220 970 1,020
Provision for deferred taxes (393) (419) (218)
Loss/(Gain) on sale of securities (604) 108 (197)
Gain on sale of other real estate (91) 0 (23)
Increase (decrease) in interest payable (762) 1,630 109
Increase (decrease) in taxes payable 0 (53) 53
Increase in accrued expenses
and other liabilities 498 255 356
(Increase) in prepaid expenses
and other assets (540) (117) (597)
Decrease (increase) in interest receivable 102 (530) (280)
-------- -------- -------
Total adjustments 919 2,550 1,433
-------- -------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES $7,699 $8,570 $7,082
======== ======== =======
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, 2001, 2000 and 1999 (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, 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 (5,240)
benefit of $2,598
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 5,240
taxes of $2,644
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
Comprehensive Income:
Net income for the year $ 6,780 6,780 6,780
Other comprehensive income, net of tax:
Unrealized loss on securities
available-for-sale, net of deferred income (948)
tax benefit of $177
Reclassification adjustment for gain or
loss included in income 604
-------
Total other comp. Gain, net of tax (344) (344) (344)
-------
Comprehensive Income $ 6,436
=======
Cash dividends paid, $0.97 per share (2,455) (2,455)
Proceeds from issuance of Common Stock-
Stock option plans 4,100 5 112 117
Proceeds from issuance of Common Stock through
dividend reinvestment 32,825 41 963 1,004
--------- ------- ------- ------- ----- -------
BALANCES, DECEMBER 31, 2001 2,553,797 $3,192 $11,566 $36,492 $536 $51,786
========= ======= ======= ======= ===== =======
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 twelve banking locations located in northeastern
Pennsylvania. It provides a full range of commercial banking services which
includes commercial, residential and consumer lending. Additionally, the bank
provides to it's customers a variety of deposit products, including demand
checking and interest-bearing deposit accounts.
FNCB Realty, Inc.'s operating activities include the acquisition, holding,
and disposition of certain real estate acquired in satisfaction of loan
commitments owed by third party debtors to the bank.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of First
National Community Bancorp, Inc., the bank and its wholly owned subsidiary FNCB
Realty, Inc.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
SECURITIES
Debt securities that management has the ability and intent to hold to
maturity are classified as held-to-maturity and carried at cost, adjusted for
amortization of premium and accretion of discounts using methods approximating
the interest method. Other marketable securities are classified as
available-for-sale and are carried at fair value. Unrealized gains and losses on
securities available-for-sale are recognized as direct increases or decreases in
stockholders' equity. Cost of securities sold is recognized using the specific
identification method.
Investments in the Federal Reserve Bank and FHLB stock are carried at cost
due to restrictions on their sale due to regulatory requirements.
LOANS
Loans are stated at face value, net of unamortized loan fees and costs and
the allowance for credit losses. Interest on all loans is recognized on the
accrual basis, based upon the principal amount outstanding.
Loans are placed on nonaccrual when a loan is specifically determined to be
impaired or when management believes that the collection of interest or
principal is doubtful. This is generally when a default of interest or principal
has existed for 90 days or more, unless such loan is fully secured and in the
process of collection. When the interest accrual is discontinued, interest
credited to income in the current year is reversed and the accrual of income
from prior years is charged against the allowance for credit losses. Any
payments received are applied, first to the outstanding loan amounts, then to
the recovery of any charged-off loan amounts. Any excess is treated as a
recovery of lost interest.
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 $491,000, $507,000 and $468,000 in 2001, 2000 and 1999, 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 2,530,998 in 2001,
2,502,245 in 2000 and 2,407,278 in 1999.
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 2,594,721
in 2001, 2,518,846 in 2000 and 2,407,278 in 1999.
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."
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.
DERIVATIVES
On January 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The Company, to date, has not engaged in derivative and hedging
activities and therefore, the adoption had no impact on the company's financial
statements.
NEW FINANCIAL ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 140 ("Statement 140"),
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," replaces Statement of Financial Accounting Standards No. 125
("Statement 125"), "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities," but carries over most of Statement 125's
provisions without change. Statement 140 elaborates on the qualifications
necessary for special-purpose entity, clarifies sales accounting criteria in
certain circumstances, refines accounting for collateral and adds disclosures
for collateral, securitizations and retained interests in securitized assets.
Statement 140 should be applied prospectively and is effective for transactions
occurring after March 31, 2001. Disclosure requirements of Statement 140 and any
changes in accounting for collateral became effective for fiscal years ending
after December 15, 2000, such requirements did not have a material impact on
First National Community Bancorp, Inc. as of December 31, 2001. The Company is
evaluating the impact, if any, Statement 140 may have on its future Consolidated
Financial Statements.
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 141 Business Combinations and Statement No. 142 Goodwill and Other
Intangible Assets. These statements are effective July 1, 2001 for business
combinations completed on or after that date. These statements become effective
for the Company on January 1, 2002 with respect to business combinations
completed on or before June 30, 2001. The company has not completed any business
combinations as of December 31, 2001 and, Management cannot currently assess
what effect the future adoption of these pronouncements will have on the
Company's financial statements.
In addition in June 2001, the FASB also issued Statement No. 143 Accounting
for Asset Retirement Obligations effective for years beginning after June 15,
2002, and in August 2001 Statement No. 144 Accounting for Impairment or Disposal
of Long-Lived Assets effective for years beginning after December 15, 2001.
Management has reviewed the conclusions of Statements 143 and 144 in connection
with the Company's current business plan and cannot currently assess what the
effect the future adoption of these pronouncements will have on the Company's
financial statements.
2. RESTRICTED CASH BALANCES:
The bank is required to maintain certain average reserve balances as
established by the Federal Reserve Bank. The amount of those reserve balances
for the reserve computation period which included December 31, 2001 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, 2001, the amount of these balances was $485,000.
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, 2001 --------- -------- --------- --------
-----------------
U.S. Treasury securities and
obligations of U.S. government
agencies $ 9,722 $ 120 $ 2 $ 9,840
Obligations of state and
political subdivisions 50,277 1,012 814 50,475
Mortgage-backed securities 124,702 1,454 916 125,240
Corporate debt securities 1,254 13 55 1,212
Equity securities 10 0 0 10
-------- ------ ------ --------
Total $185,965 $2,599 $1,787 $186,777
======== ====== ====== ========
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
======== ====== ====== ========
Held-to-maturity Securities:
Gross Gross
Net Unrealized Unrealized
Carrying Holding Holding Fair
Value Gains Losses Value
December 31, 2001 -------- --------- ---------- -------
-----------------
U.S. Treasury securities and
obligations of U.S. government
agencies $ 613 $0 $ 13 $ 600
Obligations of state and
political subdivisions 1,282 0 125 1,157
------ -- ---- ------
Total $1,895 $0 $138 $1,757
====== == ==== ======
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
====== === ==== ======
The following table shows the amortized cost and approximate fair value of
the bank's debt securities (in thousands) at December 31, 2001 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 $ 1,507 $ 1,537 $ 0 $ 0
One Year through Five Years 2,340 2,383 0 0
After Five Years through Ten Years 6,487 6,683 0 0
After Ten Years 50,919 50,924 1,895 1,757
Mortgage-backed Securities 124,702 125,240 0 0
-------- -------- ------ ------
Total $185,955 $186,767 $1,895 $1,757
======== ======== ====== ======
Gross proceeds from the sale of securities for the years ended December 31,
2001, 2000, and 1999 were $48,827,000, $49,347,000, and $28,903,000,
respectively with the gross realized gains being $796,000, $71,000, and
$254,000, respectively, and gross realized losses being $192,000, $179,000, and
$57,000, respectively.
At December 31, 2001 and 2000, securities with a carrying amount of
$87,977,000 and $68,144,000, 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)
2001 2000
---- ----
Real estate loans,
secured by residential properties $ 82,403 $ 89,827
Real estate loans,
secured by nonfarm,
nonresidential properties 191,852 156,234
Commercial and industrial loans 94,360 79,483
Loans to individuals for household,
family and other personal expenditures 62,786 62,504
Loans to state and political subdivisions 13,949 10,078
All other loans, including overdrafts 128 249
-------- --------
Gross loans 445,478 398,375
Less: Allowance for credit losses (5,594) (5,250)
-------- --------
Net loans $439,884 $393,125
======== ========
Changes in the allowance for credit losses were as follows:
(in thousands)
2001 2000 1999
---- ---- ----
Balance, beginning of year $5,250 $4,714 $4,283
Recoveries credited to allowance 191 259 267
Provision for credit losses 1,220 970 1,020
------ ------ ------
TOTAL 6,661 5,943 5,570
Losses charged to allowance 1,067 693 856
------ ------ ------
Balance, end of year $5,594 $5,250 $4,714
====== ====== ======
Information concerning the bank's recorded investment in nonaccrual and
restructured loans is as follows:
(in thousands)
2001 2000
---- ----
Nonaccrual loans
Impaired $ 0 $ 0
Other 343 645
Restructured loans 0 72
---- ----
Total $343 $717
==== ====
The interest income that would have been earned in 2001, 2000 and 1999 on
nonaccrual and restructured loans outstanding at December 31, 2001, 2000 and
1999 in accordance with their original terms approximated $43,000, $61,000 and
$50,000. The interest income actually realized on such loans in 2001, 2000 and
1999 approximated $6,000, $9,000 and $23,000. As of December 31, 2001, 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)
2001 2000
---- ----
Land $ 1,036 $ 1,036
Buildings 2,977 2,315
Furniture, fixtures and equipment 5,696 5,194
Leasehold improvements 2,609 2,590
------- -------
Total 12,318 11,135
Less accumulated depreciation 5,719 5,230
------- -------
Net $ 6,599 $ 5,905
======= =======
6. DEPOSITS:
At December 31, 2001 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
------------ ------------- ---------
2002 $76,808 $156,325 $233,133
2003 3,201 40,914 44,115
2004 4,953 13,903 18,856
2005 1,262 7,001 8,263
2006 and Thereafter 616 7,952 8,568
------- -------- --------
Total $86,840 $226,095 $312,935
======= ======== ========
7. BORROWED FUNDS:
Borrowed funds at December 31, 2001 and 2000 include the following (in
thousands):
2001 2000
------- -------
Treasury Tax and Loan Demand Note $ 287 $ 271
Federal Funds Purchased 1,170 0
Borrowings under Lines of Credit 100,153 70,637
-------- -------
Total $101,610 $70,908
======== =======
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.
The following table presents Federal Home Loan Bank of Pittsburgh ("FHLB of
Pittsburgh") advances at their maturity dates (in thousands):
December 31, 2001
Weighted
Average
Amount Interest Rate
------- -------------
Within one year $10,387 5.86%
After one year but within two years 0 -
After two years but within three years 6,666 5.09
After three years but within four years 5,000 5.46
After four years but within five years 10,600 5.26
After five years 67,500 5.42
--------
$100,153
========
All FHLB of Pittsburgh advances are fixed rate advances. 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, 2001, the company had available from the FHLB of Pittsburgh
an open line of credit for $88,412,000 which expires on December 30, 2002. 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, 2001 and
2000, the company had no borrowings under this credit line. In addition, at
December 31, 2001, the company had available overnight repricing lines of credit
with other correspondent banks totaling $24,000,000. At December 31, 2001, the
company had $1,170,000 outstanding with correspondent banks. There were no
borrowings under these lines at December 31, 2000.
The maximum amount of borrowings outstanding at any month end during the
years ended December 31, 2001 and 2000 were $103,495,000 and $96,565,000,
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 2001, 2000 and 1999 amounted to $330,000, $300,000, and $275,000,
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, 2001, elective deferred
compensation amounting to $1,025,000 plus $507,000 in accrued interest has been
included in 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:
2001 2000 1999
---- ---- ----
Current $2,094 $2,080 $1,974
Deferred (393) (419) (218)
------ ------ ------
TOTAL $1,701 $1,661 $1,756
====== ====== ======
Deferred tax assets (liabilities) are comprised of the following at
December 31:
2001 2000
---- ----
Allowance for Credit Losses $1,824 $1,648
Deferred Compensation 521 408
------ ------
Gross Deferred Tax Asset 2,345 2,056
------ ------
Unrealized Holding Gains on Securities
Available-for-Sale $ (276) $(453)
Deferred Loan Origination Fees (219) (245)
Depreciation (110) (120)
Other (12) (11)
------ -----
Gross Deferred Tax Liability $ (617) $(829)
------ -----
Deferred Tax Asset Valuation Allowance (351) (421)
------ -- -----
Net Deferred Tax Assets $1,377 $ 806
====== =====
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):
2001 2000 1999
---- ---- ----
Provision at Statutory Tax Rates $ 2,885 $ 2,612 $2,518
Add (Deduct):
Tax Effects of Non-Taxable Interest Income (1,172) (1,030) (902)
Non-Deductible Interest Expense 173 163 127
Other Items Net (185) (84) 13
------- ------- ------
Provision for Income Taxes $ 1,701 $ 1,661 $1,756
======= ======= ======
The net change in the valuation allowance for deferred tax asset was a
decrease of $70,000 in 2001 and $114,000 in 2000. The changes relate to a
decrease in the provision for income taxes to which this valuation relates.
10. RELATED PARTY TRANSACTIONS:
At December 31, 2001 and 2000, certain officers and directors and/or their
affiliates were indebted to the bank in the aggregate amounts of $13,516,000 and
$21,947,000. Such indebtedness was incurred in the ordinary course of business
on substantially the same terms as those prevailing at the time for comparable
transactions with other persons. During 2001, $13,973,000 of new loans were made
and repayments totaled $22,404,000. The bank was also committed under standby
letters of credit as described in Note 11.
Deposits from certain officers and directors and/or their affiliates held
by the bank at December 31, 2001 amounted to $54,786,000.
11. COMMITMENTS:
(a) Leases:
At December 31, 2001, the bank was obligated under certain noncancelable
operating leases with initial or remaining terms of one year or more. Minimum
future obligations under noncancelable operating leases in effect at December
31, 2001 are as follows (in thousands):
FACILITIES EQUIPMENT
2002 $ 386 $ 90
2003 203 64
2004 180 45
2005 178 11
2006 and thereafter 585 0
------ ----
Total $1,532 $210
====== ====
Total rental expense under operating leases amounted to $439,000 in 2001,
$398,000 in 2000, and $361,000 in 1999.
(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):
2001 2000
---- ----
Commitments to extend credit $95,373 $70,866
Standby letters of credit 13,313 8,530
Outstanding commitments to extend credit and standby letters of credit
issued to or on behalf of related parties amounted to $10,696,000 and $5,310,000
and $377,000 and $453,000 at December 31, 2001 and 2000, respectively.
(c) Concentration of Credit Risk:
Cash Concentrations: The bank maintains cash balances at several
correspondent banks. The aggregate cash balances represent federal funds sold of
$0 and $6,950,000; and due from bank accounts in excess of the limit covered by
the Federal Deposit Insurance Corporation amounting to $135,000 and $7,873,000
as of December 31, 2001 and 2000, respectively.
Loan Concentrations: At December 31, 2001, 31% of the bank's commercial
loan portfolio was concentrated in loans in the following six 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 $23,839 5.4%
o Automobile Dealers 24,314 5.5
o Gas Stations/Related 14,519 3.3
o Shopping Centers/Retail Complexes 32,262 7.3
o Office Complex/Units 27,271 6.2
o Residential Subdivision/Related 16,325 3.7
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.
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.
The Company measures stock compensation costs using the intrinsic value
method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees." The Company has adopted 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
years 2001 and 2000, consistent with the provisions of SFAS No. 123, the
Company's net earnings and earnings per share would have been to the pro forma
amounts indicated below:
Years Ended December 31,
----------------------------
2001 2000
---- ----
(in thousands,
except per share data)
Net Income As reported $6,780 $6,020
Pro forma 6,498 5,612
Basic Earnings per share As reported $2.68 $2.41
Pro forma 2.57 2.24
Diluted Earnings per share As reported $2.61 $2.39
Pro forma 2.50 2.23
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model average assumptions:
Years ended December 31,
------------------------
2001 2000
---- ----
Dividend yield 2.97% 2.46%
Expected life 6.17 years 5.17 years
Expected volatility 20% 33%
Risk-free interest rate 3.39% 6.32%
A summary of the status of the Corporation's stock option plans is
presented below:
2001 2000
---------------------- --------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----------- ------ ----------
Outstanding at the
beginning of the year 49,000 $28.55 0
Granted 47,000 33.55 49,000 $28.55
Exercised (4,100) 28.55 0
Forfeited (2,000) 28.55 0
------ ------ ------ ------
Outstanding at the
end of the year 89,900 $31.16 49,000 $28.55
------ ------ ------ ------
Options exercisable
at year end 42,900 $28.55 - -
Weighted average
fair value of options
granted during the year $9.07 $10.14
Information pertaining to options outstanding at December 31, 2001 is as
follows:
Options Outstanding Options Exercisable
------------------------------------- ----------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life Price Exercisable Price
- -------------- ----------- ----------- --------- ----------- --------
$28.55-$33.55 40,000 2.2 years $31.05 20,000 $28.55
$28.55-$33.55 49,900 9.2 years 31.25 22,900 28.55
------ ------
89,900 42,900
====== ======
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, 2001, that the bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 2001, the most recent notification from the Office of
the Comptroller of the Currency categorized the bank as "Well Capitalized" under
the regulatory framework for prompt corrective action. To be categorized as
"Well Capitalized" the bank must maintain minimum Total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category.
(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, 2001:
Total Capital
(to Risk Weighted Assets) $56,844 11.24% >$40,476 >8.0% >$50,595 >10.0%
Tier I Capital
(to Risk Weighted Assets) $51,250 10.13% >$20,238 >4.0% >$30,357 > 6.0%
Tier I Capital
(to Average Assets) $51,250 7.56% >$20,343 >3.0% >$33,905 > 5.0%
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%
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 $14,325,000 at December 31, 2001, 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, 2001
Carrying Fair
Value Value
FINANCIAL ASSETS
Cash and short term investments $15,652 $15,652
Interest-bearing balances with financial
institutions 3,161 3,197
Securities 194,109 193,971
Gross Loans 445,478 451,808
FINANCIAL LIABILITIES
Deposits $517,334 $523,354
Borrowed funds 101,610 107,813
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Commitments to extend credit and
standby letters of credit $0 $107
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
15. CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY:
Condensed parent company only financial information is as follows (in
thousands):
Condensed Balance Sheet December 31, 2001 2000
---- ----
Assets:
Cash $ 322 $ 309
Investment in Subsidiary (equity method) 51,427 46,326
Other assets 37 49
------- -------
Total Assets $51,786 $46,684
======= =======
Liabilities and Stockholders' Equity:
Stockholders' equity $51,786 $46,684
======= =======
Condensed Statement of Income for the
years ending December 31, 2001, 2000 and 1999 2001 2000 1999
---- ---- ----
Income:
Dividends from Subsidiary $1,375 $1,775 $1,279
Equity in Undistributed Income of Subsidiary 5,445 4,285 4,429
------ ------ ------
Total Income $6,820 $6,060 $5,708
------ ------ ------
Expenses 40 40 59
------ ------ ------
Net Income $6,780 $6,020 $5,649
====== ====== ======
Condensed Statement of Cash Flows for the
years ending December 31, 2001, 2000 and 1999
2001 2000 1999
---- ---- ----
Cash Flows from Operating Activities:
Net income $6,780 $6,020 $ 5,649
Adjustments to reconcile net income
to net cash provided by operating activities:
Equity in undistributed income of subsidiary (5,445) (4,285) (4,429)
Decrease (increase) in other assets 12 22 (18)
------ ------ -------
Net Cash Provided by Operating Activities $1,347 $1,757 $ 1,202
------ ------ -------
Cash Flows from Investing Activities:
Investment in subsidiary $ 0 $ 0 $(2,929)
------ ------ -------
Net Cash Used in Investing Activities $ 0 $ 0 $(2,929)
------ ------ -------
Cash Flows from Financing Activities:
Cash dividends $(2,455) $(2,202) $(1,922)
Payments to repurchase common stock 0 (272) 0
Proceeds from issuance of common stock
net of stock issuance costs 1,121 951 3,692
------- ------- -------
Net Cash Used in Financing Activities $(1,334) $(1,523) $ 1,770
------- ------- -------
Increase in Cash $ 13 $ 234 $ 43
Cash at Beginning of Year 309 75 32
------- ------- -------
Cash at End of Year $ 322 $ 309 $ 75
======= ======= =======
Non-cash investing and financing activities:
In 1999, the company adopted a dividend reinvestment plan. Shares of stock
issued in 2001, 2000 and 1999 were 32,825 shares, 23,365 shares and 20,147
shares, respectively, in lieu of paying cash dividends of $1,004,000 in 2001,
$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,
2001
Interest income $11,377 $11,252 $11,341 $10,892
Interest expense 6,637 6,498 6,477 6,017
------- ------- ------- -------
Net interest income 4,740 4,754 4,864 4,875
Provision for credit losses 180 180 180 680
Other income 662 799 859 831
Other expenses 3,125 3,103 3,086 3,369
Provision for income taxes 442 449 543 267
------- ------- ------- -------
Net income $ 1,655 $ 1,821 $ 1,914 $ 1,390
======= ======= ======= =======
Earnings per share:
Basic $0.66 $0.72 $0.76 $0.54
===== ===== ===== =====
Diluted $0.64 $0.71 $0.74 $0.52
===== ===== ===== =====
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
===== ===== ===== =====
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, 2001
and 2000, 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, 2001. 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 auditing standards generally
accepted in the United States of America. 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, 2001 and 2000, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America.
Demetrius & Company, L.L.C.
Wayne, New Jersey
January 18, 2002