U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended September 30, 1998
[ ] 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 Number)
102 E. Drinker St. Dunmore, PA 18512
(Address of Principal Executive Offices)
(717) 346-7667
(Registrant's Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check 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 the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Common Stock, $1.25 par value
(Title of Class)
2,398,360 shares
(Outstanding at November 4, 1998)
FIRST NATIONAL COMMUNITY BANCORP, INC.
INDEX
Page No.
Part I - Consolidated Financial Statements
Item 1. Consolidated Financial Statements
Consolidated Statements of Financial Condition
September 30, 1998 and December 31, 1997 1
Consolidated Statements of Income
Three Months Ended September 30, 1998 and 1997
YTD Ended September 30, 1998 and 1997 2
Consolidated Statements of Comprehensive Income
Three Months Ended September 30, 1998 and 1997
YTD Ended September 30, 1998 and 1997 3
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1998 and 1997 4-5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7-20
Part II - Other Inf 21
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K 22
(ii)
FIRST NATIONAL COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
Sept 30, Dec. 31,
1998 1997
(UNAUDITED) (AUDITED)
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 10,414 $ 9,231
Federal funds sold 0 5,450
-------- -------
Total cash and cash equivalents 10,414 14,681
Interest-bearing balances with
financial institutions 3,063 1,586
Securities:
Available-for-sale, at fair value 134,288 120,689
Held-to-maturity, at cost
(fair value $712 on Sept 30, 1998 and
$680 on December 31, 1997) 698 678
Net loans 307,891 280,731
Bank premises and equipment 4,429 4,096
Other assets 6,229 5,874
-------- --------
Total Assets $467,012 $428,335
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand - non-interest bearing $ 36,318 $ 34,995
Interest bearing demand 48,720 50,703
Savings 40,840 39,700
Time ($100,000 and over) 62,123 53,757
Other time 175,514 166,512
-------- --------
Total deposits 363,515 345,667
Borrowed funds 64,664 47,846
Other liabilities 3,991 3,242
-------- --------
Total Liabilities $432,170 $396,755
-------- --------
Shareholders' equity:
Common Stock, $1.25 par value,
authorized 5,000,000 shares;
2,398,360 shares issued and
outstanding at September
30, 1998 and 1,199,180
shares issued and outstanding
at December 31, 1997 $ 2,998 $ 1,499
Additional Paid-in Capital 6,267 6,267
Retained Earnings 24,197 22,717
Accumulated Other Comprehensive Income 1,380 1,097
-------- -------
Total shareholders' equity $ 34,842 $ 31,580
-------- --------
Total Liabilities and Shareholders' Equity $467,012 $428,335
======== ========
Note: The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See notes to financial statements
(1)
FIRST NATIONAL COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollars in thousands, except per share amounts)
Three Months Ending Year-to-Date
Sept 30, Sept 30, Sept 30, Sept 30,
1998 1997 1998 1997
Interest Income:
Loans $ 6,548 $ 6,007 $ 18,881 $ 17,594
Balances with banks 51 48 137 126
Investments 2,018 1,819 5,902 4,905
Federal Funds Sold 87 101 210 190
-------- -------- --------- --------
Total interest income 8,704 7,975 25,130 22,815
-------- -------- --------- --------
Interest Expense:
Deposits 3,900 3,661 11,318 10,506
Borrowed Funds 832 595 2,310 1,512
-------- -------- --------- --------
Total interest expense 4,732 4,256 13,628 12,018
-------- -------- --------- --------
Net Interest Income
before Loan Loss Provision 3,972 3,719 11,502 10,797
Provision for loan losses 180 225 540 585
-------- -------- --------- --------
Net interest income 3,792 3,494 10,962 10,212
-------- -------- --------- --------
Other Income:
Service charges on deposits 204 185 595 566
Other Income 134 59 308 182
Gain (Loss) on sale of:
Securities 77 17 128 42
Mortgage Loans 35 16 165 14
Other Assets 0 140 38 516
-------- -------- --------- --------
Total other income 450 417 1,234 1,320
-------- -------- --------- --------
Other expenses:
Salaries & benefits 1,224 1,130 3,527 3,333
Occupancy & equipment 373 360 1,108 1,065
Other 829 823 2,277 2,181
-------- -------- --------- --------
Total other expenses 2,426 2,313 6,912 6,579
-------- -------- --------- --------
Income before income taxes 1,816 1,598 5,284 4,953
Income tax expense 430 428 1,298 1,278
--------- -------- --------- --------
NET INCOME $ 1,386 $ 1,170 $ 3,986 $ 3,675
========= ======== ========= ========
Earnings per share (1) $ 0.58 $ 0.49 $ 1.66 $ 1.53
========= ========= ========= ========
Weighted average number
of shares (1) 2,398,360 2,398,360 2,398,360 2,398,360
========= ========= ========= =========
(1) Per share data reflects the retroactive effect of the 100% stock dividend
issued August 31, 1998 and the 10% stock dividend issued December 31, 1997.
See notes to financial statements
(2)
FIRST NATIONAL COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Dollars in thousands)
(UNAUDITED)
Three Months Ending Year-to-Date
Sept 30, Sept 30, Sept 30, Sept 30,
1998 1997 1998 1997
--------- --------- --------- ---------
Net Income $ 1,386 $ 1,170 $ 3,986 $ 3,675
------- ------- ------- -------
Other Comprehensive Income,
net of tax:
Unrealized Gain (Loss)
on Securities:
Unrealized Holding Gains
arising during period 316 711 368 562
Reclassification adjustments
for (Gain) Loss
included in net income (51) (11) (85) (28)
------- ------- ------- -------
Other Comprehensive Income 265 700 283 534
------- ------- ------- -------
Comprehensive Income $ 1,651 $ 1,870 $ 4,269 $ 4,209
======= ======= ======= =======
(3)
FIRST NATIONAL COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
Sept 30, Sept 30,
1998 1997
(Dollars in thousands)
INCREASE (DECREASE) IN CASH EQUIVALENTS:
Cash Flows From Operating Activities:
Interest Received $ 25,457 $ 22,698
Fees & Commissions Received 1,068 901
Interest Paid (13,580) (12,034)
Income Taxes Paid (1,417) (1,298)
Cash Paid to Suppliers & Employees (6,278) (6,365)
-------- --------
Net Cash Provided (Used) by Operating
Activities $ 5,250 $ 3,902
-------- --------
Cash Flows from Investing Activities:
Securities available for sale:
Proceeds from Maturities $ 1,000 $ 9,702
Proceeds from Sales prior to maturity 13,696 3,406
Proceeds from Calls prior to maturity 37,417 0
Purchases (65,364) (40,915)
Securities held to maturity:
Proceeds from Calls prior to maturity 257 0
Purchases (231) (417)
Net (Increase) Decrease in
Interest-Bearing Bank Balances (1,477) (584)
Net (Increase) Decrease in Loans to Customers (27,663) (17,835)
Capital Expenditures (811) (452)
-------- -------
Net Cash Provided (Used) by Investing
Activities $(43,176) $(47,095)
-------- --------
Cash Flows from Financing Activities:
Net Increase (Decrease) in Demand Deposits,
Money Market Demand, NOW Accounts,
and Savings Accounts $ 3,611 $ 3,526
Net Increase in Certificates of Deposit 14,237 19,153
Net Increase in Borrowed Funds 17,669 17,274
Repayment of Long-Term Debt (851) (56)
Dividends Paid (1,007) (883)
-------- --------
Net Cash Provided (Used) by Financing
Activities $ 33,659 $ 39,014
-------- --------
Net Increase (Decrease) in Cash and
Cash Equivalents $ (4,267) $ (4,179)
Cash & Cash Equivalents at Beginning of Year $ 14,681 $ 18,520
-------- --------
CASH & CASH EQUIVALENTS AT END OF PERIOD $ 10,414 $ 14,341
======== ========
(Continued)
(4)
FIRST NATIONAL COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
1998 1997
--------- ---------
(Dollars in thousands)
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net Income $ 3,986 $ 3,675
-------- --------
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating
Activities:
Amortization (Accretion), Net 163 29
Depreciation 478 363
Provision for Probable Credit Losses 540 585
Provision for Deferred Taxes - -
Gain on Sale of Investment Securities (128) (42)
Gain on Sale of Other Assets (38) (377)
Increase (Decrease) in Taxes Payable (120) (58)
Decrease (Increase) in Interest Receivable 164 (147)
Increase (Decrease) in Interest Payable 48 (16)
Decrease (Increase) in Prepaid Expenses
and Other Assets (518) (1,097)
Increase (Decrease) in Accrued Expenses
and Other Liabilities 675 987
-------- --------
Total Adjustments $ 1,264 $ 227
-------- --------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES $ 5,250 $ 3,902
======== ========
See notes to financial statements
(5)
FIRST NATIONAL COMMUNITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) The accounting and financial reporting policies of First National
Community Bancorp, Inc. and its subsidiary conform to generally
accepted accounting principles and to general practice within the
banking industry. The consolidated statements include the accounts of
First National Community Bancorp, Inc. and its wholly owned
subsidiary, First National Community Bank (Bank) including its
subsidiary, FNCB Realty, Inc. (collectively, Company). All material
intercompany accounts and transactions have been eliminated in
consolidation. The accompanying interim financial statements are
unaudited. In management's opinion, the consolidated financial
statements reflect a fair presentation of the consolidated financial
position of First National Community Bancorp, Inc. and subsidiary, and
the results of its operations and its cash flows for the interim
periods presented, in conformity with generally accepted accounting
principles.
These interim financial statements should be read in conjunction
with the audited financial statements and footnote disclosures
in the Bank's Annual Report to Shareholders for the fiscal year ended
December 31, 1997.
(2) Earnings per share were calculated by dividing the net income of the
Company by the weighted average number of shares of common stock
outstanding of 2,398,360 for the periods ending September 30, 1998 and
1997, respectively, after giving retroactive effect for the 100% Stock
Dividend issued August 31, 1998 and the 10% Stock Dividend issued
December 31, 1997.
(3) The Company adopted Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity
Securities" (SFAS 115), as of December 31, 1993. Adoption of SFAS 115
is required for fiscal years beginning after December 15, 1993, with
earlier adoption permitted. The adoption of this standard resulted in
an increase in the carrying value of "Securities Available-For-Sale"
of $2,091,000 at September 30, 1998, offset by an increase in Retained
Earnings of $1,380,000 and the related deferred tax impact of
$711,000.
(4) During the year, the Company adopted FASB Statement No. 130,
"Reporting Comprehensive Income." Statement No. 130 requires the
reporting of comprehensive income in addition to net income from
operations. Comprehensive income is a more inclusive financial
reporting methodology that includes disclosure of certain financial
information that historically has not been recognized in the
calculation of net income.
Reclassifications have been made to the prior period financial
statements for comparative purposes as are requested by FASB Statement
No. 130.
(5) During June 1997, Financial Accounting Standards Boards issued FASB
131, "Disclosures about Segments of an Enterprise and Related
Information" which establishes standards for all public entities to
report financial and descriptive information about its reportable
operating segments, and certain other enterprise-wide information
relative to its products and service, geographic area, and major
customers. FASB 131 initially applies to annual financial statements
with years beginning after December 15, 1997. However, it is the
opinion of management that there is no future impact from this
accounting standard since the Company's organizational structure does
not consist of separately identifiable reportable operating segments.
(6)
FIRST NATIONAL COMMUNITY BANCORP, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The consolidated financial review of First National Community Bancorp, Inc. (the
"Company") provides a comparison of the performance of the Company for the
periods ended September 30, 1998 and 1997. The financial information presented
should be reviewed in conjunction with the consolidated financial statements and
accompanying notes appearing elsewhere in this report. All share and per share
data has been restated to reflect the 100% stock dividend issued August 31, 1998
and the 10% stock dividend issued December 31, 1997.
Background
On July 1, 1998, First National Community Bancorp, Inc. (the "Company")
became the holding company for First National Community Bank, a national banking
association (the "Bank"). Pursuant to the terms of the Plan of Reorganization,
dated as of March 13, 1997, among the Corporation, the Bank and First National
Community Interim Bank (the "Interim Bank"), a national banking association and
a wholly-owned subsidiary of the Corporation, the Bank merged with, into the
Interim Bank, under the charter of the Interim Bank and under the name "First
National Community Bank." The shareholders of the Bank became the shareholders
of the Corporation, and the Bank became the wholly-owned subsidiary of the
Corporation. Shares were exchanged on a one-for-one basis.
The Company is a one bank holding company whose principal subsidiary is
First National Community Bank. The Company operates 8 full-service branch
banking offices in its principal market area in Lackawanna and Luzerne Counties.
At September 30, 1998, the Company had 173 full-time equivalent employees.
First National Community 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 - the Main Office in Dunmore, the
downtown Scranton branch established in 1980, the Dickson City branch opened in
December, 1984, the Fashion Mall, Scranton/Carbondale Highway branch opened in
July, 1988, the Wilkes-Barre office, at 23 West Market Street, Wilkes-Barre
which opened for business on July 30, 1993, the Pittston Plaza Office, which
opened on April 10, 1995, at 1700 North Township Boulevard, Pittston, and the
Kingston Office, at 754 Wyoming Ave., Kingston, which opened on August 30, 1996.
An eighth community office located in Exeter opened for business on November 2,
1998.
The Bank provides the usual commercial banking services to individuals and
businesses, including a wide variety of loan and deposit instruments.
Additionally, the Bank entered into a partnership with INVEST during 1997 in
order to provide alternative products such as mutual funds, bonds, equities and
annuities directly from its community offices.
During 1996, FNCB Realty Inc. was formed as a wholly owned subsidiary of
the Bank to manage, operate and liquidate properties acquired through
foreclosure.
(7)
Summary:
Net income for the nine months ended September 30, 1998 amounted to
$3,986,000, an increase of $311,000 or 8% compared to the same period of the
previous year. This increase can be attributed to a $705,000 improvement in net
interest income offset by a reduced level of non-interest income. Service
charges and fees increased $155,000, or 21%, over the 1997 level but was offset
by a reduction in earnings from asset sales in the amount of $241,000 due to a
gain of $373,000 recorded during the first quarter of 1997 from the sale of
Other Real Estate Owned. Non-interest expenses increased $333,000, or 5%, over
the same period of last year. Operating income for the same period, before
recognizing the effect of asset sales, loan loss provisions and income taxes,
increased $527,000 or 11%.
RESULTS OF OPERATIONS
Net Interest Income:
The Company's primary source of revenue is net interest income which
totaled $11,502,000 and $10,797,000 for the first nine months of 1998 and 1997,
respectively. Year to date net interest margins (tax equivalent) decreased from
4.07% in September 1997 to 3.85% for the same period of 1998 comprised of a
nineteen basis point decrease in the yield earned on earning assets and a six
basis point increase in the cost of interest-bearing liabilities. This reduction
in the 1998 margin can also be attributed to $30 million of investment arbitrage
transactions originated since September 30, 1997. Excluding the effect of all
leverage transactions, the Company's net interest margin would have been 4.16%
for the first nine months of 1998.
Earning assets increased $36 million to $447 million during the first nine
months of 1998 and now total 95.8% of total assets, comparable to the year-end
level of 95.9%.
(8)
Yield/Cost Analysis
The following tables set forth certain information relating to the
Company's Statement of Financial Condition and reflect the weighted average
yield on assets and weighted average costs of liabilities for the periods
indicated. Such yields and costs are derived by dividing the annualized income
or expense by the weighted average balance of assets or liabilities,
respectively, for the periods shown:
Nine-months ended Sept 30,
1998
--------------------------
Average Yield/
Balance Interest Cost
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans (taxable) $283,432 $ 18,295 8.56%
Loans (tax-free) (1) 12,625 586 9.27
Investment securities (taxable) 93,628 4,636 6.60
Investment securities (tax-free)(1) 29,709 1,266 8.61
Time deposits with banks and
federal funds sold 8,006 345 5.71
------- ------- ----
Total interest-earning assets 427,400 25,128 8.10%
------- ----
Non-interest earning assets 17,068
-------
Total Assets $444,468
=======
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
Deposits $321,355 $ 11,318 4.76%
Borrowed funds 52,125 2,306 5.83
-------- ------- ----
Total interest-bearing liabilities 373,480 13,624 4.87%
------- ----
Other liabilities and
shareholders' equity 70,988
-------
Total Liabilities and
Shareholders' Equity $444,468
=======
Net interest income/rate spread 3.23%
Net yield on average interest-
earning assets 3.85%
Interest-earning assets as a
percentage of interest-
bearing liabilities 114%
(1) Yields on tax-exempt loans and investment securities have been computed on a
tax equivalent basis.
(9)
Nine-months ended Sept 30,
1997
---------------------------
Average Yield/
Balance Interest Cost
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans (taxable) $ 262,104 $ 17,026 8.62%
Loans (tax-free) (1) 11,967 568 9.48
Investment securities (taxable) 71,132 3,712 6.96
Investment securities (tax-free) (1) 27,344 1,193 8.81
Time deposits with banks and
federal funds sold 7,447 316 5.63
------- ------- ----
Total interest-earning assets 379,994 22,815 8.29%
------- ----
Non-interest earning assets 15,594
-------
Total Assets $395,588
=======
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
Deposits $300,273 $ 10,507 4.68%
Borrowed funds 32,948 1,512 6.05
-------- -------- ----
Total interest-bearing liabilities 333,221 12,019 4.81%
-------- ----
Other liabilities and
shareholders' equity 62,367
--------
Total Liabilities and
Shareholders' Equity $395,588
========
Net interest income/rate spread 3.48%
Net yield on average interest-
earning assets 4.07%
Interest-earning assets as a
percentage of interest-
bearing liabilities 114%
(1) Yields on tax-exempt loans and investment securities have been computed on a
tax equivalent basis.
(10)
Rate Volume Analysis
The table below sets forth certain information regarding the changes in the
components of net interest income for the periods indicated. For each category
of interest earning asset and interest bearing liability, information is
provided on changes attributed to: (1) changes in rate (change in rate
multiplied by current volume); (2) changes in volume (change in volume
multiplied by old rate); (3) the total. The net change attributable to the
combined impact of volume and rate has been allocated proportionately to the
change due to volume and the change due to rate.
Period Ended Sept 30,
1998 vs 1997
Increase (Decrease)
Due to
Rate Volume Total
--------- ---------- ----------
Loans (taxable) $(221,244) $1,490,263 $1,269,019
Loans (tax-free) (13,601) 31,202 17,601
Investment securities (taxable) (243,792) 1,167,878 924,086
Investment securities (tax-free) (29,878) 103,199 73,321
Time deposits with banks and
federal funds sold 5,154 23,496 28,650
--------- ---------- ----------
Total interest income $(503,361) $2,816,038 $2,312,677
--------- ---------- ----------
Deposits $ 80,138 $ 731,703 $ 811,841
Borrowed funds (86,060) 880,009 793,949
--------- ---------- ----------
Total interest-bearing liabilities $ (5,922) $1,611,712 $1,605,790
--------- ---------- ----------
Net change in net interest income $(497,439) $1,204,326 $ 706,887
========= ========== ==========
Period Ended Sept 30,
1997 vs 1996
Increase (Decrease)
Due to
Rate Volume Total
Loans (taxable) $ (26,328) $2,089,099 $2,062,771
Loans (tax-free) 26,685 141,910 168,595
Investment securities (taxable) 240,860 1,201,437 1,442,297
Investment securities (tax-free) (17,772) (1,933) (19,705)
Time deposits with banks and
federal funds sold 10,911 97,448 108,359
--------- ---------- ----------
Total interest income $ 234,356 $3,527,961 $3,762,317
--------- ---------- ----------
Deposits $ 10,579 $1,565,012 $1,575,591
Borrowed funds 92,447 704,896 797,343
--------- ---------- ----------
Total interest-bearing liabilities $ 103,026 $2,269,908 $2,372,934
--------- ---------- ----------
Net change in net interest income $ 131,330 $1,258,053 $1,389,383
========= ========== ==========
(11)
Non-Interest Income and Expenses:
Non-interest income in the first nine months of 1998 decreased $86,000 in
comparison to the same period of 1997. The majority of this decrease can be
attributed to the $373,000 recognized on the sale of a property carried as Other
Real Estate during 1997. All other components of non-interest income recorded an
increase over the prior period.
Excluding income from asset sales, non-interest income increased $155,000
or 21%, during the first nine months of 1998 as compared to the same period of
last year. Income from service charges on deposits increased $29,000, or 5%, in
comparison to the same period of last year while other fee income increased
$126,000, or 69%. Loan servicing fees and investment brokerage income comprise
the majority of this increase.
Non-interest expense increased $333,000 or 5% for the period ended
September 30, 1998 compared to the same period of the previous year. Salaries
and Benefits costs account for most of the increase, adding $194,000, or 6% in
comparison to the first nine months of 1997. Other operating expenses increased
$96,000, or 4%.
Other Comprehensive Income:
The Company's other comprehensive income includes unrealized holding gains
(losses) on securities which it has classified as available-for-sale in
accordance with FASB 115, "Accounting for Certain Investments in Debt and Equity
Securities."
The before tax and after tax amount of this category of other comprehensive
income, as well as its tax (expense) benefit, is summarized below:
For the Period Ended
September 30, 1998
-----------------------------------
Tax
Before (Expense) After
Tax Benefit Tax
------ -------- -----
Unrealized Gains on Securities:
Unrealized Holding Gains (Losses) arising
during the period $ 557 $(189) $368
Reclassification adjustments
for (Gains) Losses Included
in Net Income (128) 43 (85)
----- ----- ----
Other Comprehensive Income $ 429 $(146) $283
===== ===== ====
(12)
For the Period Ended
September 30, 1997
-------------------------------
Tax
Before (Expense) After
Tax Benefit Tax
------ ------- ------
Unrealized Gains on Securities:
Unrealized Holding Gains (Losses) arising
during the period $851 $(289) $562
Reclassification adjustments for
(Gains) Losses Included
in Net Income (42) 14 (28)
---- ----- ----
Other Comprehensive Income $809 $(275) $534
==== ====== ====
Provision for Income Taxes:
The provision for income taxes is calculated based on annualized taxable
income. 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:
1998 1997
------ ------
Provision at statutory rate $1,798 $1,684
Add (Deduct):
Tax effect of non-taxable interest income (629) (599)
Non-deductible interest expense 88 81
Other items, net 41 112
------ ------
Income tax expense $1,298 $1,278
====== ======
Securities:
Carrying amounts and approximate fair value of investment securities are
summarized as follows:
Sept 30, 1998 December 31, 1997
-------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
(Dollars in thousands)
U.S. Treasury securities and
obligations of U.S.
government agencies $ 16,406 $ 16,420 $31,808 $31,810
Obligations of state &
political subdivisions 32,532 32,532 27,043 27,043
Mortgage-backed securities 79,367 79,367 56,615 56,615
Corporate debt securities 488 488 0 0
Equity securities 6,193 6,193 5,901 5,901
------- ------- ------- -------
Total $134,986 $135,000 $121,367 $121,369
======== ======== ======== ========
(13)
The following summarizes the amortized cost, approximate fair value, gross
unrealized holding gains, and gross unrealized holding losses at September 30,
1998 of the Company's Investment Securities classified as available-for-sale:
September 30,
1998
(Dollars in thousands)
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
U.S. Treasury securities and
obligations of U.S.
government agencies: $ 15,543 $ 165 $ 0 $ 15,708
Obligations of state and
political subdivisions: 31,121 1,412 1 32,532
Mortgage-backed securities: 78,844 583 60 79,367
Corporate debt securities: 497 0 9 488
Equity securities: 6,193 0 0 6,193
-------- ----- ---- --------
Total $132,198 $2,160 $ 70 $134,288
======== ====== ==== ========
The following summarizes the amortized cost, approximate fair value, gross
unrealized holding gains, and gross unrealized holding losses at June 30, 1998
of the Company's Investment Securities classified as held-to-maturity:
September 30,
1998
(Dollars in thousands)
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
U.S. Treasury securities and
obligations of U.S.
government agencies: $ 698 $ 14 $ 0 $ 712
Obligations of state and
political subdivisions: 0 0 0 0
Mortgage-backed securities: 0 0 0 0
Corporate debt securities: 0 0 0 0
Equity securities: 0 0 0 0
----- ---- --- -----
Total $ 698 $ 14 $ 0 $ 712
===== ==== === =====
(14)
The following table shows the amortized cost and approximate fair value of
the Company's debt securities at September 30, 1998 using contractual
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
Amortized Fair Amortized Fair
Cost Value Cost Value
(Dollars in Thousands) (Dollars in Thousands)
Amounts maturing in:
One year or less $ 2,007 $ 2,019 $ 0 $ 0
After one year through
five years 2,735 2,824 0 0
After five years through
ten years 17,232 17,762 0 0
After ten years 25,187 26,122 698 712
Mortgage-backed securities 78,844 79,368 0 0
------- ------- ---- ----
Total $126,005 $128,095 $698 $712
======== ======== ==== ====
Gross proceeds from the sale of investment securities for the periods ended
September 30, 1998 and 1997 were $13,695,910 and $3,405,586 respectively with
the gross realized gains being $153,290 and $52,401 respectively, and gross
realized losses being $24,952 and $10,107, respectively.
At September 30, 1998 and 1997, investment securities with a carrying
amount of $59,131,509 and $45,988,517 respectively, were pledged as collateral
to secure public deposits and for other purposes.
Loans:
The following table sets forth detailed information concerning the
composition of the Company's loan portfolio as of the dates specified:
Sept 30, 1998 December 31, 1997
---------------------- -------------------
Amount % Amount %
-------- ----- -------- -----
(Dollars in thousands)
Commercial & Financial $ 45,232 14.5 $ 36,790 12.9
Real Estate Construction 2,294 0.7 1,372 0.5
Real Estate Mortgage 199,328 63.9 188,895 66.4
Installment Loans to Individuals 56,073 18.0 46,174 16.3
Other Loans 8,961 2.9 11,133 3.9
Less: Unearned Discount (5) 0.0 (10) 0.0
-------- ----- -------- -----
Total Gross Loans $311,883 100.0 $284,354 100.0
----- -----
Less: Allow. for Loan Losses (3,992) (3,623)
-------- --------
Net Loans $307,891 $280,731
======== ========
(15)
The following table sets forth certain information with respect to the
Company's allowance for loan losses and charge-offs:
Period Ended Sept 30,
1998 1997
(Dollars in thousands)
Balance, January 1 $ 3,623 $ 3,167
Recoveries Credited 41 33
Losses Charged 212 408
Provision for Loan Losses 540 585
------- -------
Balance at End of Period $ 3,992 $ 3,377
======= =======
The following table presents information about the Company's non-performing
assets for the periods indicated:
Sept 30, 1998 Sept 30, 1997
------------- -------------
(Dollars in thousands)
Nonaccrual loans $ 493 $ 187
Restructured loans 290 849
------- ------
Total non-performing loans 783 1,036
------- ------
Other Real Estate Owned 0 0
------- ------
Total non-performing assets $ 783 $ 1,036
======= =======
Sept 30, 1998 Sept 30, 1997
Non-performing loans as a
percentage of gross loans 0.3% 0.4%
===== =====
Non-performing assets as a
percentage of total assets 0.2% 0.2%
===== =====
Non-performing assets are comprised of non-accrual and restructured loans,
and other real estate owned. Loans are placed in nonaccrual status when
management believes that the collection of interest or principal is doubtful, or
generally when a default of interest or principal has existed for 90 days or
more, unless such loan is fully secured and in the process of collection. When
interest accrual is discontinued, interest credited to income in the current
year is reversed and interest accrued in prior years is charged against the
allowance for credit losses. Any payments received are applied, first to the
outstanding loan amounts, then to the recovery of any charged-off loan amounts.
Any excess is treated as a recovery of lost interest.
Other real estate consists of property acquired through foreclosure. The
property is carried at the lower of cost or the estimated fair value based on an
independent appraisal.
(16)
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 condition.
Consideration is also given to examinations performed by regulatory authorities
and the Company's independent accountants. A monthly provision of $60,000 and
$75,000 was credited to the allowance for loan losses during the third quarters
of 1998 and 1997, respectively. The ratio of the loan loss reserve to total
loans at September 30, 1998 and September 30, 1997 was 1.28% and 1.20%,
respectively.
Asset/Liability Management, Interest Rate Sensitivity and Inflation
The major objectives of the Company's asset and liability management are to
(1) manage exposure to changes in the interest rate environment to achieve a
neutral interest sensitivity position within reasonable ranges, (2) ensure
adequate liquidity and funding, (3) maintain a strong capital base, and (4)
maximize net interest income opportunities. First National Community Bank
manages these objectives through its Senior Management and Asset and Liability
Management Committees. Members of the committees meet regularly to develop
balance sheet strategies affecting the future level of net interest income,
liquidity and capital. Items that are considered in asset and liability
management include balance sheet forecasts, the economic environment, the
anticipated direction of interest rates and the Bank's earnings sensitivity to
changes in these rates.
The Company analyzes its interest sensitivity position to manage the risk
associated with interest rate movements through the use of "gap analysis" and
"simulation modeling." Because of the limitations of the gap reports, the Bank
uses simulation modeling to project future net interest income streams
incorporating the current "gap" position, the forecasted balance sheet mix, and
the anticipated spread relationships between market rates and bank products
under a variety of interest rate scenarios.
Economic conditions affect financial institutions, as they do other
businesses, in a number of ways. Rising inflation affects all businesses through
increased operating costs but affects banks primarily through the manner in
which they manage their interest sensitive assets and liabilities in a rising
rate environment. Economic recession can also have a material effect on
financial institutions as the assets and liabilities affected by a decrease in
interest rates must be managed in a way that will maximize the largest component
of a bank's income, that being net interest income. Recessionary periods may
also tend to decrease borrowing needs and increase the uncertainty inherent in
the borrowers' ability to pay previously advanced loans. Additionally,
reinvestment of investment portfolio maturities can pose a problem as attractive
rates are not as available. Management closely monitors the interest rate risk
of the balance sheet and the credit risk inherent in the loan portfolio in order
to minimize the effects of fluctuations caused by changes in general economic
conditions.
(17)
Liquidity
The term "liquidity" refers to the ability of the Company to generate
sufficient amounts of cash to meet its cash-flow needs. Liquidity is required to
fulfill the borrowing needs of the Bank's credit customers and the withdrawal
and maturity requirements of its deposit customers, as well as to meet other
financial commitments.
The short-term liquidity position of the Company is strong as evidenced by
$10,414,000 in cash and due from banks and $2,766,000 in interest-bearing
balances with banks maturing within one year. A secondary source of liquidity is
provided by the investment portfolio with $16,580,000 or 12% of the portfolio
maturing or expected to be called within one year and expected cash flow from
principal reductions approximating an additional $15,000,000.
The Company has relied primarily on its retail deposits as a source of
funds. The Bank is normally only a seller of Federal funds to invest excess
cash; however, the Bank can also borrow in the Federal Funds market to meet
temporary liquidity needs. Other sources of potential liquidity include
repurchase agreements, Federal Home Loan Bank advances and the Federal Reserve
Discount Window.
Capital Management
A strong capital base is essential to the continued growth and
profitability of the Company and in that regard the maintenance of appropriate
levels of capital is a management priority. The Company's principal capital
planning goals are to provide an adequate return to shareholders while retaining
a sufficient base from which to provide for future growth, while at the same
time complying with all regulatory standards. As more fully described in Note 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.
Total stockholders' equity increased $3,262,000 or 10.3% during the first
three quarters of 1998 comprised of an increase in retained earnings in the
amount of $2,979,000 after paying cash dividends and a $283,000 increase in the
market value of our securities available-for-sale. During the same period of
1997, total stockholders' equity increased $3,325,000, or 12.0%, comprised of an
increase in retained earnings of $2,791,000, after paying cash dividends and a
$534,000 increase in the market value of our securities available-for-sale. The
total dividend payout during the first nine months of 1998 and 1997 represents
$.42 per share and $.41 per share, respectively.
The Board of Governors of the Federal Reserve System and other various
regulatory agencies have specified guidelines for purposes of evaluating a
bank's capital adequacy. Currently, banks must maintain a leverage ratio of core
capital to total assets at a prescribed level, namely 3%. In addition, bank
regulators have issued risk-based capital guidelines. Under such guidelines,
minimum ratios of core capital and total qualifying capital as a percentage of
risk-weighted assets and certain off-balance sheet items of 4% and 8% are
required. As of September 30, 1998, First National Community Bank met all
capital requirements with a leverage ratio of 7.28% and core capital and total
risk-based capital ratios of 10.64% and 11.89%, respectively.
(18)
The following statement details activity in the Company's capital accounts
for the nine-month period ended September 30, 1998:
STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(Dollars in thousands)
Nine months ended September 30, 1998
Accumulated
Additional Other
Common Paid-in- Retained Comprehensive
Stock Capital Earnings Income Total
Balance, 12/31/97 $1,499 $ 6,267 $ 22,717 $ 1,097 $31,580
Net income for the nine
months ended 9/30/98 3,986 3,986
Cash dividend, $.42
per share (1,007) (1,007)
Other Comprehensive
Income, net of tax:
Unrealized gain (loss)
on securities
-available-for sale 283 283
------ ------- -------- ------- -------
Balance, 9/30/98 $1,499 $ 6,267 $ 25,696 $ 1,380 $34,842
====== ======= ======== ======= =======
YEAR 2000 COMPLIANCE: MANAGEMENT INFORMATION SYSTEMS
State of Readiness:
It is the policy of First National Community Bank (the "Bank") that all of
its automation systems shall be able to handle the change of the year from 1999
to 2000 without difficulty for the Bank. The Bank recognizes the fact that the
Year 2000 issue is an enterprise-wide challenge, involving more than just
technology and automation. The Board of Directors and Senior Management of the
Bank will actively manage the Bank's Year 2000 planning, allocation and
monitoring efforts, including measurements of risk, both internal and external.
The Bank has determined the need to involve officers and employees from
various areas of the Bank in our Year 2000 project. To this end, a Year 2000
Operations Committee has been formed to provide the manpower and knowledge to
tackle the Year 2000 project. This committee consists of officers and employees
from every area of the Bank in order to ensure that all mission-critical systems
and applications are identified and tested for Year 2000 compliance.
In addition, an Executive Committee has been formed consisting of Senior
Management and the Year 2000 project managers. This committee will review all
aspects of the Bank's Year 2000 project efforts to ensure that the century date
change is a smooth process for the Bank. The Executive committee also will
ensure that adequate resources are provided to assist in managing the Year 2000
project, provide guidance to the Operations Committee in its Year 2000 efforts,
and report to the Board of Directors regarding the status and any problems
encountered during the course of the Year 2000 project.
(19)
In addition to these committees, Market Partners, Inc., (MPI) was
contracted by the Bank to independently verify and validate the Bank's Year 2000
readiness program. In anticipation of what has been described as one of the most
monumental and critical project activities of all time, Market Partners
performed an independent assessment of First National Community Bank's Year 2000
project planning activities to date. The engagement performed an Independent
Verification & Validation review on First National Community Bank's Year 2000
plans, activities, and commitments and has identified both strengths and
opportunities for the Bank to act upon to further the Bank's Year 2000
readiness. The results of this independent review has enabled the Bank to focus
its efforts on the more critical areas of the plan.
It should be noted that each area of First National Community Bank's Year
2000 Plan is being addressed according to the guidelines that have been
established by the FFIEC and other regulatory agencies. These guidelines include
the five (5) phases of the Year 2000 problem resolution process as listed in the
May 16, 1997 OCC Advisory Letter AL 97-6 which is summarized below:
1) Awareness of the Problem
2) Assessment of Complexity
3) Renovation
4) Validation
5) Implementation
Costs:
The Bank has conducted a comprehensive review of its computer systems that
could be affected by the Year 2000 issue and does not believe the amounts to be
expended over the next two years will have a material impact on its earnings or
financial position
Risks:
The Bank has identified areas of risk in terms of Year 2000 vulnerability
such as 1) Host Processor, 2) 3rd Party Software, 3) Hardware, 4) Networks, 5)
Systems of Others, 6) Vendors, 7) Insurance, and 8) Credit Risk. Each area of
risk will be addressed separately by the appropriate committees. However, no
assurance can be made that the systems of others that the Bank relies upon will
be converted on a timely basis, or that their failure to be compliant would not
have an adverse effect on the Bank.
Contingency Plans:
The Bank recognizes the need to design Year 2000 contingency plans to
mitigate risk. The Bank will evaluate the risks associated with the failure of
core business processes including remediation contingency planning and business
resumption contingency plans. Periodic tests of contingency plans will be
scheduled to ensure that these changes are considered and that the level of
support for the core business process is adequate. Based on test results,
modifications will be made to ensure that the business continuity plan remains
valid.
(20)
Part II Other Information
Item 1 - Legal Proceeding
The Bank is not involved in any material pending legal proceedings, other
than routine litigation incidental to the business.
Item 2 - Changes in Securities
None
Item 3 - Defaults upon Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8 - K
On July 2, 1998, the Company filed a Report on Form 8-K pertaining to the
holding company formation. Details of the formation are as follows:
On July 1, 1998, First National Community Bancorp, Inc. (the "Registrant")
became the holding company for First National Community Bank, a national banking
association (the "Bank"). Pursuant to the terms of the Plan of Reorganization,
dated as of March 13, 1997, among the Registrant, the Bank and First National
Community Interim Bank (the "Interim Bank"), a national banking association and
a wholly-owned subsidiary of the Registrant, the Bank merged with, into the
Interim Bank, under the charter of the Interim Bank and under the name "First
National Community Bank." The shareholders of the Bank became the shareholders
of the Registrant, and the Bank became the wholly-owned subsidiary of the
Registrant.
A detailed description of the transaction is set forth in the Registrant's
Prospectus, which is included in the Registrant's Registration Statement No.
333-24121 on Form S-4, filed with the Securities and Exchange Commission on
March 12, 1997, and as amended on December 31, 1997, and June 2, 1998, which
description is incorporated herein by reference.
(21)
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Registrant: FIRST NATIONAL COMMUNITY BANCORP, INC
Date: November 9, 1998 /s/ J. David Lombardi
---------------- -----------------------------
J. David Lombardi, President/
Chief Executive Officer
Date: November 9, 1998 /s/ William Lance
---------------- ---------------------------
William Lance, Treasurer/
Principal Financial Officer
(22)