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, 1998
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 18, 1999: $91,137,680.
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
SecuritiesExchange 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.
2,398,360 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, 1998 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 bank 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"). 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 -- the Main Office in
Dunmore, the downtown Scranton branch established in 1980, the Dickson City
branch opened in December 1984, the Fashion Mall office,
Scranton/Carbondale Highway opened in July 1988, the Wilkes-Barre branch
which opened in July 1993, the Pittston Plaza Office which opened in April,
1995, the Kingston Office which opened in August 1996 and the Exeter Office
which opened in November, 1998.
The Bank provides the usual commercial banking services to individuals
and businesses, including a wide variety of deposit instruments. Consumer
loans include both secured and unsecured installment loans, fixed and
variable rate mortgages, home equity term loans and Lines of Credit and
"Instant Money" overdraft protection loans. Additionally, the Bank is also
in the business of underwriting indirect auto loans which are originated
through various auto dealers in northeastern Pennsylvania and in 1999 began
to originate 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
a personal computer based, menu driven product that allows 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 representative. The Bank also
offers customers the convenience of 24-hour banking, seven days a week,
through its Money Access Center ("MAC") network. These automated teller
machines are available at the Dunmore, Dickson City, Fashion Mall,
Pittston, Kingston and Exeter community offices as well as a remote
facility in the C-Plus Mini Mart, 309 Main Street, Blakely. Additionally,
to further enhance 24-hour banking services, Telephone Banking (Account
Link), Loan by Phone, and Mortgage Link became available to customers
during 1997. 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, 1998, no material portion of the Bank's deposits has
been obtained from a single person or entity. An industry concentration
exists with regard to the restaurant industry. Loans and letters of credit
to the restaurant industry approximated $11.0 million as of December 31,
1998. A majority of these loans are secured by first mortgages on
commercial properties where third-party loan payments paid directly to the
Bank are the primary source of repayment.
COMPETITION
The Bank is one of two financial institutions with principal offices in
Dunmore. Primary competition in the Dunmore, Scranton and Mid Valley
markets comes from several commercial banks and savings and loan
associations operating in these areas. Our Luzerne County offices share
many of the same competitors we face in Lackawanna County as well as
several banks and savings & loans that are not in our Lackawanna County
market. Deposit deregulation has intensified the competition for deposits
among banks in recent years. Additional competition is derived from credit
unions, finance companies, brokerage firms, insurance companies and
retailers.
REGULATORY MATTERS
The Company is subject to certain annual reporting requirements
regarding its business operations. As a registered Company under the Bank
Holding Company Act of 1956, as amended, the Company is subject to the
supervision and examination by the Federal Reserve Board under the Act.
The Bank is subject to regulation and supervision by the Office of the
Comptroller of the Currency, which includes regular examinations of the
Bank's records and operations. As a member of the Federal Deposit Insurance
Corporation (FDIC), the Bank's depositors' accounts are insured up to
$100,000 per depositor. To obtain this protection for its depositors, the
Bank pays an assessment and is subject to the regulations of the FDIC. The
Bank is also a member of the Federal Reserve System and as such is subject
to the rules promulgated by the Federal Reserve Board. EMPLOYEES
As of December 31, 1998 the Bank employed 168 persons, including 35
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
9 200 S. Blakely Street
Dunmore, PA Lease Administrative Center
10 107-109 S. Blakely Street
Dunmore, PA Own Parking Lot
11 114-116 S. Blakely Street
Dunmore, PA Own Parking Lot
12 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. All prices and
dividends have been restated to reflect the retroactive effect of the 100%
stock dividend paid to shareholders in 1998 and the 10% stock dividend paid
in 1997.
MARKET PRICE DIVIDENDS PAID
HIGH LOW PER SHARE
QUARTER 1998
First $23.50 $19.00 $ .135
Second 23.75 21.19 .135
Third 23.75 23.75 .15
Fourth 32.00 24.25 .29
------
$ 0.71
QUARTER 1997
First $16.13 $15.63 $ .12
Second 17.50 16.25 .12
Third 18.00 16.75 .12
Fourth 19.81 17.38 .22
------
$ 0.58
MARKET MAKERS
Dean Witter Reynolds, Inc. INVEST Financial Corporation
415 Spruce Street 102 E. Drinker Street
Scranton, PA 18503 Dunmore, PA 18512
1-800-733-7096 1-888-845-3622
First Montauk Securities Legg Mason Wood Walker, Inc.
507 Linden Street 330 Montage Mountain Road
Scranton, PA 18503 Scranton, PA 18507
1-800-655-7162 1-800-346-4346
Hopper-Soliday & Co., Inc. Ryan, Beck and Co.
1703 Oregon Pike 80 Main Street
Lancaster, PA 17601 West Orange, NJ 07052
1-800-526-6371 1-800-325-7926
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,
1998 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
http://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,
------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------
Total assets 483,385 428,335 372,438 318,026 269,679
Interest-bearing balances
with financial institutions 2,478 1,586 2,771 775 2,754
Securities 131,830 121,367 82,476 69,408 55,403
Net loans 324,610 280,731 259,880 229,643 193,254
Total deposits 380,039 345,668 320,968 275,739 236,864
Stockholders' equity 34,679 31,580 27,631 25,547 17,117
Net interest income before
provision for credit losses 15,445 14,580 12,765 11,286 9,882
Provision for credit losses 920 1,110 820 796 700
Other income 1,583 1,628 1,099 921 925
Other expenses 9,423 8,839 7,904 7,097 6,369
Income before income taxes 6,685 6,259 5,140 4,314 3,738
Provision for income taxes 1,578 1,616 1,265 1,100 888
Net income 5,107 4,643 3,875 3,214 2,850
Cash dividends paid 1,703 1,396 1,178 887 780
Per share data:
Net income (1) 2.13 1.94 1.62 1.52 1.39
Cash dividends (2) 0.71 0.58 0.49 0.41 0.38
Book value (1)(3) 14.46 13.17 11.52 12.08 8.35
Weighted average number
of shares outstanding 2,398,360 2,398,360 2,398,360 2,114,192 2,050,960
(1) Earnings per share and book value per share are calculated based on the
weighted average number of shares outstanding during each year, after giving
retroactive effect to the 100% stock dividend declared in 1998 and the 10% stock
dividends declared in 1997 and 1996.
(2) Cash dividends per share have been restated to reflect the retroactive
effect of the 100% stock dividend declared in 1998 and the 10% stock dividends
declared in 1997 and 1996.
(3) Reflects the effect of SFAS No. 115 in the amount of $791,000 in 1998,
$1,097,000 in 1997, $384,000 in 1996, $991,000 in 1995 and $(1,558,000) in 1994.
Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following financial review of First National Community Bancorp,
Inc. (the "Company") is presented on a consolidated basis and is intended
to provide a comparison of the financial performance of the Company and its
wholly-owned subsidiary, First National Community Bank (the "Bank") for the
years ended December 31, 1998, 1997 and 1996. The information presented
below should be read in conjunction with the Company's consolidated
financial statements and accompanying notes appearing elsewhere in this
report. All share and per share data has been restated to reflect the 100%
stock dividend paid to shareholders on July 20, 1998 and the 10% stock
dividends paid December 31, 1997 and May 8, 1996.
RESULTS OF OPERATIONS
SUMMARY
Net income for 1998 amounted to $5,107,000, which was $464,000, or 10%,
higher than the 1997 level. In 1997, net income totaled $4,643,000 or
$768,000 over 1996. On a per share basis, net income was $2.13, $1.94 and
$1.62, respectively in 1998, 1997 and 1996. The weighted average number of
shares outstanding in 1998, 1997 and 1996 were 2,398,360 after giving
retroactive effect to the stock dividends paid in 1998, 1997 and 1996,
respectively.
The increase in net income recorded in 1998 can be attributed to the
$865,000, or 6%, improvement in net interest income combined with a reduced
provision for credit losses which more than offset the $585,000, or 7%,
increase in other expenses. Management's focus on improvement through
growth again proved successful as increased earnings due to volume
variances more than compensated for the negative impact of repricing
resulting from the reduction in interest rates during the fourth quarter.
The $768,000, or 20%, increase in 1997 over the 1996 earnings can be
attributed to the $1.8 million increase in net interest income and a
$529,000 improvement in non-interest income, offset partially by additional
non-interest expenses, credit loss provisions and applicable income taxes.
Return on assets for the years ended December 31, 1998, 1997 and 1996
was 1.13%, 1.16% and 1.13%, respectively while the return on equity
recorded during the same periods amounted to 15.29%, 15.85% and14.83%.
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 6% from the $14.6 million recorded in
1997 to $15.4 million in 1998. Changes in net interest income generally
occur due to fluctuations in the balances and/or mixes of interest-earning
assets and interest-bearing liabilities, and changes in their corresponding
interest yields and costs. Changes in 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.
Tax-equivalent net interest income increased $927,000, or 6%, from the
$15.8 million reported in 1997. Sound pricing policies, aggressive growth
strategies and effective asset-liability management techniques again
enabled the company to improve net interest income during this period of
declining interest rates.
Average loans increased $26 million, or 10%, in 1998 and contributed an
increase of $1.8 million of interest income over the 1997 level. Commercial
loans provided the majority of the growth in 1998 as average loan balances
increased $24 million and earnings on those balances improved by $1.8
million. Installment loans also provided significant increases in 1998
comprised of $15 million in average loan balances and $1.2 million of
interest income due primarily to growth in indirect auto loans. Mortgage
loans outstanding averaged $13 million lower in 1998 than in 1997 due to
the sale of almost $23 million of long-term, fixed rate assets in 1998. As
a result of the reduced level of average loans outstanding, interest income
on mortgage loans decreased $1.2 million in 1998. Repricing and new volume
resulted in the sixteen basis point reduction earned on average loan
balances in 1998 when compared to the prior period.
Average securities increased $24 million over the 1997 average balance
and generated $1.3 million of additional earnings. Declining rates impacted
securities yields through repricing, new volume and principal reductions,
resulting in a thirty-nine basis point decrease from the 1997 level. Money
market assets, which include interest-bearing deposits with banks and
federal funds sold, were $1.2 million less in 1998 than in 1997 and
earnings from these assets decreased $61,000.
Total interest-bearing deposits increased $22 million in 1998 comprised
of an $18 million increase in average certificates of deposit and a $4
million increase in low-cost deposits. Competition for deposits remained
fierce in local markets, resulting in an average cost of deposits which was
equal to the 1997 level. Borrowed funds and other interest-bearing
liabilities increased $20 million on the average due to additional Federal
Home Loan Bank advances but repricing and reduced costs on new borrowings
resulted in a twenty-five basis point reduction in the cost of these
liabilities.
As a result of the interest rate reductions in 1998 and the more
immediate impact on interest earning assets, the Company's net interest
margin decreased twenty-five basis points to 3.84% in 1998. Investment
leveraging transactions continue to add to the profitability of the
company, as evidenced by the $433,000 earned in 1998 from the transactions,
but also contribute to the reduction in the overall net interest margin.
Exclusive of the investment leveraging transactions, the 1998 net interest
margin would have been 4.15%, or seven basis points lower than the
comparable period of 1997.
During 1997, tax-equivalent net interest income increased $1.9 million,
or 14%, from the $13.9 million reported in 1996 to $15.8 million. Interest
rates continued the roller coaster ride experienced in 1996 and gradually
increased during the first quarter, with the long bond exceeding 7.00%.
During the second and third quarters of 1997, rates again fluctuated until
decreasing steadily through the fourth quarter as inflation fears subsided.
As of year end, the yield on the one-year Treasury Bill was three basis
points lower than it began the year while the thirty year bond had
decreased seventy-seven basis points to 5.96%. Yields earned on loans and
money market assets increased during 1997 from the prior year levels but a
three basis point decrease in the yield earned on securities resulted in a
yield on total earning assets which remained stable at 8.32%. During the
same period, however, competition for deposits remained fierce locally
resulting in a nine basis point increase in the cost of interest-bearing
deposits. Additionally, the cost of borrowed funds and other
interest-bearing liabilities increased during 1997, resulting in a decrease
in the net interest margin from the 4.25% recorded in 1996 to 4.09%. During
1997, the Company entered into several investment leveraging transactions
which resulted in $164,000 of pre-tax earnings, but the 1.06% spread earned
on the transactions had a negative impact on the overall net interest
margin. Excluding the effect of these transactions, the 1997 net interest
margin would have been 4.22% which is only slightly lower than the 4.25%
recorded in 1996. Growth in earning assets which represents 112% of the
growth in interest-bearing liabilities also contributed to the 1997 margin.
Yield Analysis
(dollars in thousands-taxable equivalent basis)(1)
1998 1997 1996
--------------------- --------------------- ----------------------
Int Avg Int Avg Int Avg
Average Income/ Int Average Income/ Int Average Income/ Int
Balance Expense Rate Balance Expense Rate Balance Expense Rate
--------------------- --------------------- ---------------------
ASSETS:
Earning Assets:(2)
Commercial loans-
taxable $161,839 $14,272 8.82 $138,214 $12,450 9.01 $116,851 $10,466 8.96
Commercial loans-
tax free 11,648 1,106 9.50 11,714 1,135 9.69 8,658 800 9.24
Mortgage loans 50,072 3,951 7.89 62,814 5,097 8.11 66,158 5,302 8.01
Installment loans 78,971 6,606 8.37 63,501 5,433 8.56 52,436 4,623 8.82
--------------------- --------------------- ---------------------
Total Loans 302,530 25,935 8.57 276,243 24,115 8.73 244,103 21,191 8.68
--------------------- --------------------- ---------------------
Securities-taxable 95,602 6,239 6.53 74,605 5,147 6.90 47,524 3,131 6.59
Securities-tax free 30,196 2,587 8.57 26,934 2,380 8.83 27,643 2,464 8.91
--------------------- --------------------- ---------------------
Total Securities 125,798 8,826 7.02 101,539 7,527 7.41 75,167 5,595 7.44
--------------------- --------------------- ---------------------
Interest-bearing
deposits with banks 2,918 177 6.07 2,839 170 6.00 1,738 101 5.81
Federal funds sold 4,007 222 5.54 5,251 290 5.52 5,483 293 5.34
--------------------- --------------------- ---------------------
Total Money
Market Assets 6,925 399 5.76 8,090 460 5.69 7,221 394 5.46
--------------------- --------------------- ---------------------
Total Earning
Assets 435,253 35,160 8.08 385,872 32,102 8.32 326,491 27,180 8.32
Non-earning assets 21,657 19,278 18,271
Allowance for
credit losses (3,932) (3,446) (3,105)
-------- -------- --------
Total Assets $452,978 $401,704 $341,657
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-Bearing
Liabilities:
Interest-bearing
demand deposits $50,504 $1,225 2.43 $45,682 $1,110 2.43 $38,637 $937 2.43
Savings deposits 41,983 1,001 2.38 42,482 1,038 2.44 45,257 1,163 2.57
Time deposits
over $100,000 61,618 3,265 5.30 53,784 2,827 5.26 46,261 2,421 5.23
Other time
deposits 171,147 9,764 5.71 161,331 9,253 5.74 136,460 7,750 5.68
-------------------- -------------------- ---------------------
Total Interest-
Bearing Deposits 325,252 15,255 4.69 303,279 14,228 4.69 266,615 12,271 4.60
-------------------- -------------------- ---------------------
Borrowed funds
and other
interest-bearing
liabilities 54,661 3,202 5.86 34,327 2,098 6.11 17,821 1,035 5.81
-------------------- -------------------- ----------------------
Total Interest-
Bearing Liab-
ilities 379,913 18,457 4.86 337,606 16,326 4.84 284,436 13,306 4.68
Demand deposits 35,887 31,707 28,116
Other liabilities 3,779 3,103 2,978
Stockholders'
equity 33,399 29,288 26,127
-------- -------- --------
Total Liabilities
and Stockholders'
Equity $452,978 $401,704 $341,657
======== ======== ========
Net Interest
Income Spread $16,703 3.22 $15,776 3.48 $13,874 3.64
============ ============ ============
Net Interest
Margin 3.84 4.09 4.25
==== ==== ====
(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.
The most significant impact on net income between periods is derived
from the interaction of changes in the volume of 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.
The following table shows the relative contribution of changes in
average volume and average interest rates to changes in net interest income
for the periods indicated. The change in interest income and interest
expense attributable to changes in both volume and rate, which cannot be
segregated, has been allocated proportionately to the change due to volume
and the change due to rate.
Rate/Volume Variance Report(1)
(dollars in thousands-taxable equivalent basis)
1998 vs 1997 1997 vs 1996
------------------------- ----------------------------
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 $1,822 $2,126 $(304) $1,984 $1,882 $102
Commercial loans-
tax free (29) (7) (22) 335 279 56
Mortgage loans (1,146) (1,032) (114) (205) (268) 63
Installment loans 1,173 1,332 (159) 810 934 (124)
------------------------ ---------------------------
Total Loans 1,820 2,419 (599) 2,924 2,827 97
------------------------ ---------------------------
Securities-taxable 1,092 1,430 (338) 2,016 1,787 229
Securities-tax free 207 288 (81) (84) (63) (21)
------------------------ ----------------------------
Total Securities 1,299 1,718 (419) 1,932 1,724 208
------------------------ ----------------------------
Interest-bearing
deposits with banks 7 5 2 69 63 6
Federal funds sold (68) (69) 1 (3) (15) 12
------------------------ ----------------------------
Total Money
Market Assets (61) (64) 3 66 48 18
------------------------ ----------------------------
Total Interest
Income 3,058 4,073 (1,015) 4,922 4,599 323
------------------------ ----------------------------
Interest Expense:
Interest-bearing
demand deposits 115 96 19 173 162 11
Savings deposits (37) (11) (26) (125) (72) (53)
Time deposits
over $100,000 438 412 26 406 386 20
Other time
deposits 511 563 (52) 1,503 1,390 113
------------------------ ----------------------------
Total Interest-
Bearing Deposits 1,027 1,060 (33) 1,957 1,866 91
------------------------ ----------------------------
Borrowed funds
and other
interest-bearing
liabilities 1,104 1,243 (139) 1,063 958 105
------------------------ ----------------------------
Total Interest
Expense 2,131 2,303 (172) 3,020 2,824 196
------------------------ ----------------------------
Net Interest Income $927 $1,770 $(843) $1,902 $1,775 $127
======================== ============================
(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 1998, tax-equivalent net interest income increased $927,000 over the
1997 level. Balance sheet growth again resulted in improved earnings as
evidenced by the $1.8 million increase in net interest income due to
volume. Loan growth added $2.4 million to interest income due to increases
in both commercial and installment loans outstanding. New securities
purchases, including those purchased in leveraging transactions, also
contributed to the improved earnings in the amount of $1.7 million. In
order to fund the growth in loans and investments, new deposits and
borrowed funds were added which resulted in a $2.3 million increase in
interest expense.
The negative impact of rate reductions can be seen in the $1.0 million
decrease in interest income due to rate which was only partially offset by
the $172,000 decrease in the cost of liabilities due to repricing. Variable
rate assets which reprice immediately were reduced by seventy-five basis
points during the fourth quarter as the Federal Reserve cut interest rates
three times in a seven week period. New volume at lower than historic
levels also contributed to the negative variance due to rate. During this
same period, the Company held rates steady on its low-cost deposit base
while the effect of repricing on certificates of deposit will materialize
over time.
PRIOR YEAR
In 1997, growth also lead to improved earnings. The $1.9 million
increase in net interest income includes $1,775,000 due to volume but also
includes $127,000 due to rate, reflecting a positive repricing impact. Loan
and investment portfolio growth added $4.5 million which was partially
offset by the $2.8 million increase in the cost of funds to support the
asset growth. Rate fluctuations on earning assets added over $300,000 which
includes an increase in commercial loans related to the twenty-five basis
point hike in the prime rate during the year and investment purchases at
increased yields. The cost of certificates of deposit increased as the
Company attempted to lengthen its portfolio for asset/liability purposes.
New borrowings and variable rate adjustments increased the cost of borrowed
funds.
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 $920,000 in 1998, $1,110,000 in 1997 and
$820,000 in 1996.
OTHER INCOME
Other Income 1998 1997 1996
- ---------- ---- ---- ----
(dollars in thousands)
Service charges $780 $759 $693
Net gain/(loss) on the sale of securities 125 (8) 130
Net gain on the sale of other real estate 47 377 1
Net gain on the sale of other assets 0 156 0
Other 631 344 275
------ ------ ------
Total Other Income $1,583 $1,628 $1,099
====== ====== ======
The company's other income category can be separated into three
distinct sub-categories; service charges make up the core component of this
area of earnings while net gains (losses) from the sale of assets and other
fee income comprise the balance.
In 1998, earnings from service charges were $21,000, or 3%, higher than
the 1997 total. Net gains from securities sales totaled $125,000 in 1998 as
management sold securities to minimize the risk from prepayments on
mortgage-backed securities. The $47,000 net gain from the sale of other
assets includes earnings generated from the Bank's real estate subsidiary,
FNCB Realty, Inc. During 1998, the Company continued to shed interest rate
risk through the sale of $22.8 million of fixed rate residential mortgage
loans. These loan sales, with rates ranging from 6.125% to 9.125%, added
$189,000 to 1998 earnings after accounting for fees associated with the
sale. As importantly, the servicing rights were retained thereby resulting
in no impact on our customers and improving future profits through
servicing fee income. It is management's intention to continue to shed
interest rate risk as opportunities present themselves in order to remain
competitive in this area of retail lending. Servicing fees collected on
mortgage loans which have been sold were $97,000 in 1998, or $43,000 higher
than the same period of 1997. All other fee income increased $81,000 over
the 1997 total including a $40,000 improvement in the earnings generated
through a partnership with INVEST Financial Services.
During 1997, service charges increased $66,000, or 10%. The majority of
this increase can be attributed to uncollected funds, although newly
initiated surcharge fees pertaining to automatic teller machines also
contributed $34,000 of additional income. The decrease in the area of net
gains or losses on the sale of securities also represents the Company's
efforts to improve future profits. During 1997, many of the lowest yielding
securities in the portfolio were sold as interest rates plummeted, thereby
enabling the Company to reposition the portfolio for future benefits.
Included in net gains on the sale of other assets is $524,000 recognized on
the sale of real estate and other assets by FNCB Realty, Inc. These assets
were transferred to the Bank's subsidiary through foreclosure action and
subsequently resold. Other income increased $69,000 in comparison to 1996
as letter of credit fees increased considerably and fee income from the
Bank's relationship with INVEST financial services also provided an
increase of $22,000 over the 1996 level. In 1997, residential mortgage
loans totaling $14.7 million were sold, resulting in a net gain of $66,000.
OTHER EXPENSES
Other Expenses 1998 1997 1996
---- ---- ----
(dollars in thousands)
Salary expense $3,772 $3,482 $3,176
Employee benefit expense 977 960 900
Occupancy expense 869 842 812
Equipment expense 677 610 484
Advertising expense 341 272 259
Data Processing expense 530 424 382
Other operating expenses 2,257 2,249 1,891
------ ------ ------
Total Other Expenses $9,423 $8,839 $7,904
====== ====== ======
Total other expenses increased $584,000, or 7%, in comparison to the prior
year. Employee costs accounted for $307,000, or 53%, of the increase while
occupancy and equipment costs rose $94,000, or 16% of the total. All other
expenses increased $183,000, or 31% of the total due primarily to increases
in advertising and data processing costs. The Company's overhead ratio,
which measures non-interest expenses in relation to average assets improved
from the 2.20% recorded in 1997 to 2.08%. In 1996, the overhead ratio was
2.31%.
Salary and benefits amount to 50% of the Company's total other
expenses. During 1998, salary expense increased $290,000, or 8%, due to
merit increases, and the addition of staff to meet the growing sales and
administrative needs of the company. Full-time equivalent employees at
December 31, 1998 were 168, an increase from the 151 reported as of the
same period last year. Employee benefit costs increased $17,000, or 2%, in
1998 due primarily to a $30,000 increase in the Company's contribution to a
defined contribution profit sharing plan. Hospitalization costs, payroll
taxes and other benefits decreased $13,000 in comparison to 1997.
Occupancy expenses increased $27,000, or 3%, in 1998 due primarily to
rental expense associated with a new community office. Increases in
maintenance expenses and depreciation on the new facilities were offset by
a reduced level of real estate taxes. Equipment costs increased $67,000, or
11%, due to depreciation expense on new equipment, including computers and
related technology.
All other operating expenses increased $183,000, or 6%, compared to
1997. Advertising costs increased $69,000 while data processing expenses
rose $106,000 in 1998 due to bank promotions and technological advances.
All other components of other operating expenses were limited to an $8,000
net increase.
In 1997, total other expenses increased $935,000, or 12%, in comparison
to 1996. During 1996 other expenses increased 11% from the prior period.
Employee costs accounted for 39% of the increase in 1997 while occupancy
and equipment costs rose by $156,000, or 17% of the total. All other
operating expenses increased $413,000, or 44% of the total increase.
Salary and benefit costs comprised the majority of total other expenses
in 1997 and increased 9% over the 1996 level. Salaries increased $306,000,
or 10%. Contributing to this increased cost are merit increases, as well as
the full year's effect of the Kingston Office which opened in August 1996.
Full-time equivalent employees at December 31, 1997 were 151, a decrease
from the 155 reported in 1996. Employee benefit costs increased $60,000, or
7%, in 1997 due primarily to rising health care costs and a $30,000
increase in the Company's contribution to a defined contribution profit
sharing plan. Increases in payroll taxes and other benefits amounted to
$5,000.
Occupancy expenses increased $30,000, or 4%, in 1997. The recognition
of a full year's effect from the Kingston Office which opened during 1996
accounts for the vast majority of the increase.
Equipment expenses increased $126,000, or 26%, during 1997.
Depreciation and maintenance on new equipment accounted for $108,000 of the
increase, including $23,000 from our newest office. This increased cost
reflects the Company's commitment to new technology, including a complete
upgrade to the retail delivery systems.
All other operating expenses increased $413,000 in 1997 from the prior
period. Non-controllable items such as FDIC Insurance, Bank Shares Tax and
examinations accounted for $97,000 of the increased cost. Also contributing
significantly to the increased cost was $169,000 of operating costs from
the Bank's subsidiary, FNCB Realty, Inc. The majority of these costs
reflect operating expenses associated with a single property which was
sold. All other components of other operating expenses increased $159,000,
or 7%.
PROVISION FOR INCOME TAXES
Federal income tax expense decreased $39,000 in 1998 in comparison to
the 1997 total in spite of the $426,000 improvement in income before taxes.
Tax benefits derived from an increased level of tax-exempt income had a
$40,000 positive effect while the effect of deferred taxes and other items
reduced the 1998 provision by $144,000. The Company's effective tax rate
for 1998 and 1997 was 23.6% and 25.8%, respectively.
During 1997, federal income tax expense increased $351,000 in
comparison to 1996. The majority of the increase was attributed to the
$1,119,000 improvement in pre-tax income as well as the effect of other
non-deductible and deferred tax items. Tax benefits related to non-taxable
interest income increased $57,000 over the 1996 total. The effective tax
rate for 1996 was 24.6%.
FINANCIAL CONDITION
Total assets increased $55 million, or 13%, in 1998 compared to a
similar $56 million increase in 1997. Total deposits provided $34 million
of new funds in 1998 while borrowed funds increased $17 million. This
available liquidity was utilized to fund the $44 million, or 16%, increase
in net loans as well as the $10 million growth in the Company's securities
portfolio.
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 1998, total securities increased $10 million, inclusive of a
$463,000 decrease in the fair value of the portfolio. During 1998, growth
was again concentrated in mortgage-backed securities including $15 million
which were purchased with structured borrowings from the Federal Home Loan
Bank of Pittsburgh, thereby allowing the Company to earn a favorable spread
between the rate earned on the securities and the cost of the borrowed
funds. Management remains committed to a strategy which limits 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 amount of securities at the
dates indicated:
December 31,
----------------------------------------
1998 1997 1996
(dollars in thousands)
U.S. Treasury securities
and obligations of
U.S. government agencies $ 13,109 $ 31,808 $27,946
Obligations of state
and political subdivisions 33,671 27,043 29,533
Mortgage-backed securities 77,590 56,615 22,544
Corporate debt securities 992 0 0
Equity securities 6,468 5,901 2,453
-------- -------- -------
Total $131,830 $121,367 $82,476
======== ======== =======
The following table sets forth the maturities of securities at December
31, 1998 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.
(dollars in thousands) Mortgage-
Within 2-5 6-10 Over Backed No Fixed
One Year Years Years 10 Years Securities Maturity Total
-------- ----- ----- -------- ---------- -------- -------
U.S. Treasury
securities $2,005 $ 0 $ 0 $ 0 $ 0 $ 0 $ 2,005
Yield 5.87% 5.87%
Obligations
of U.S.
government
agencies 500 7,115 3,457 11,072
Yield 6.03% 6.72% 5.46% 6.30%
Obligations
of state
and political
subdivisions(1) 1,732 7,315 23,406 32,453
Yield 6.11% 9.48% 7.66% 7.99%
Mortgage-backed
securities 77,632 77,632
Yield 5.80% 5.80%
Corporate debt
securities 504 497 1,001
Yield 6.25% 6.01% 6.13%
Equity
securities(2) 6,468 6,468
Yield - - - - - 6.48% 6.48%
------ ------ ------- ------- ------- ------ --------
Total maturities $2,005 $2,232 $14,934 $27,360 $77,632 $6,468 $130,631
====== ====== ======= ======= ======= ====== ========
Weighted yield 5.87% 6.10% 8.06% 7.35% 5.80% 6.48% 6.42%
===== ===== ===== ===== ===== ===== =====
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 1998 actual return.
LOANS
Total loans increased $45 million, or 16%, in 1998. Commercial loans
provided $30 million of the increase while installment lending also
contributed $26 million of growth since December 31, 1997. The commercial
growth includes $18 million secured by real estate while the growth in
installment loans includes $14 million of indirect auto loans and an
additional $14 million which is secured by real estate. Residential real
estate loans decreased $12 million in 1998 as the Company continued with
its strategy of reducing interest rate risk through the sale of long-term,
fixed-rate assets. During 1998, over $22 million of these long-term assets
were sold in the secondary market resulting in a reduced level of interest
rate risk and a net gain on the sales of approximately $189,000. The sale
of these assets provides liquidity for future growth and also allows the
Company to continue to provide competitive products during the current
low-rate environment.
Details regarding the loan portfolio for each of the last five years
are as follows:
Loans Outstanding
(dollars in thousands)
December 31
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Commercial and Financial $189,453 $159,644 $136,620 $120,560 $103,602
Real Estate 45,855 57,523 67,262 67,333 65,960
Installment 93,589 67,196 59,183 44,587 26,007
-------- -------- -------- -------- --------
Total Loans Gross 328,897 284,363 263,065 232,480 195,569
Unearned Discount (4) (10) (18) (37) (65)
-------- -------- -------- -------- --------
Total Loans 328,893 284,353 263,047 232,443 195,504
Reserve for Credit Losses (4,283) (3,623) (3,167) (2,800) (2,250)
-------- -------- -------- -------- --------
Net Loans $324,610 $280,730 $259,880 $229,643 $193,254
======== ======== ======== ======== ========
The following schedule shows the repricing distribution of loans
outstanding as of December 31, 1998. Also provided are these amounts
classified according to sensitivity to changes in interest rates.
Loans Outstanding - Repricing Distribution
(dollars in thousands)
Within One to Over Five
One Year Five Years Years Total
--------- ---------- --------- -----
Commercial and Financial $107,992 $ 60,028 21,433 $189,453
Real Estate 16,575 18,676 10,604 45,855
Installment 27,310 56,109 10,170 93,589
-------- -------- ------- --------
Total $151,877 $134,813 $42,207 $328,897
======== ======== ======= ========
Loans with predetermined
interest rates $ 34,041 $ 71,758 $33,232 $139,031
Loans with floating rates 117,836 63,055 8,975 189,866
-------- -------- ------- --------
Total $151,877 $134,813 $42,207 $328,897
======== ======== ======= ========
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:
(dollars in thousands)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Nonaccrual loans
(including impaired loans) $845 $207 $714 $1,629 $2,285
Loans past due 90 days
or more and still accruing 452 1,224 354 157 418
Other Real Estate Owned 0 0 337 25 75
------ ------ ------ ------ ------
Total Non-Performing Assets $1,297 $1,431 $1,405 $1,811 $2,778
====== ====== ====== ====== ======
During 1998, total non-performing assets decreased due to the $772,000
reduction in loans past due more than ninety days. Nonaccrual loans
increased $638,000 from the December 31, 1997 level and includes $660,000
that was transferred to non accrual status during 1998. The majority of the
increase is split between three credits which are substantially secured by
real estate. As of December 31, 1998, the Company's ratio of nonaccrual
loans to total loans was .26%, less than one-half of the national peer
banks reported ratio of .63%. The Company continues to acknowledge the
weakness in local real estate markets and in general economic conditions,
emphasizing strict underwriting standards to minimize the negative impact
of the current environment. Management remains ever conscious to avoid the
problems of over-lending experienced during the 1980's and expects future
efforts to reduce delinquency percentages during 1999.
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
(dollars in thousands)
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
----------------- ----------------- ---------------- ------------------ ------------------
% 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 $1,706 58% $1,340 56% $1,326 52% $1,094 52% $1,110 53%
Real Estate 117 14% 118 20% 98 26% 105 29% 121 34%
Installment 92 28% 69 24% 61 22% 38 19% 29 13%
Unallocated 2,368 - 2,096 - 1,682 - 1,563 - 990 -
----------------- ----------------- --------------- ------------------ ----------------
$4,283 100% $3,623 100% $3,167 100% $2,800 100% $2,250 100%
================= ================= ================ ================== ================
The following schedule presents an analysis of the allowance for credit
losses for each of the last five years:
(Dollars in thousands)
Years Ended December 31
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Balance, January 1 $3,623 $3,167 $2,800 $2,250 $2,027
Charge-Offs:
Commercial and Financial 77 547 420 449 495
Real Estate 50 9 20 97 60
Installment 180 141 141 59 38
----- ------ ------ ------ ------
Total Charge-Offs 307 697 581 605 593
----- ------ ------ ------ ------
Recoveries on Charged-Off
Loans:
Commercial and Financial 11 8 109 327 103
Real Estate 1 0 0 1 0
Installment 35 35 19 31 13
------ ------ ------ ------ ------
Total Recoveries 47 43 128 359 116
------ ------ ------ ------ ------
Net Charge-Offs 260 654 453 246 477
------ ------ ------ ------ ------
Provision for Credit Losses 920 1,110 820 796 700
------ ------ ------ ------ ------
Balance, December 31 $4,283 $3,623 $3,167 $2,800 $2,250
====== ====== ====== ====== ======
Net Charge-Offs during
the period as a
percentage of average
loans outstanding during
the period .09% .24% .18% .12% .28%
Allowance for credit
losses as a percentage
of net loans outstanding
at end of period 1.30% 1.27% 1.20% 1.20% 1.15%
During 1998, losses charged to the reserve declined considerably from prior
periods while recoveries were consistent with the 1997 total. During 1995,
payments approximating $300,000 were received from loans charged-off in 1991,
1992 and 1994.
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 $34 million in 1998 comprised primarily of growth in certificates
of deposit but also includes over $7 million in low-cost savings and demand
accounts.
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,
1998 1997 1996
---- ---- ----
Amount Rate Amount Rate Amount Rate
---------------- --------------- -----------------
(thousands of dollars)
Noninterest-bearing
demand deposits $ 35,887 $ 31,707 $ 28,116
Interest-bearing
demand deposits 50,504 2.43% 45,682 2.43% 38,637 2.43%
Savings deposits 41,983 2.38% 42,482 2.44% 45,257 2.57%
Time deposits 232,765 5.60% 215,115 5.62% 182,721 5.57%
-------- -------- --------
Total $361,139 $334,986 $294,731
======== ======== ========
Maturities of time certificates of deposit of $100,000 or more outstanding
at December 31, 1998, are summarized as follows:
Time Certificates of Deposit
(thousands of dollars)
3 months or less $45,474
Over 3 through 6 months 8,083
Over 6 through 12 months 10,818
Over 12 months 4,966
-------
Total $69,341
=======
CAPITAL
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 12 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,
144,000 shares of stock were offered and sold in 1995 resulting in an
increase of $3.6 million of Tier 1 capital. On May 15, 1996, stockholders
voted to increase the number of authorized shares from 1,500,000 to
5,000,000.
The following schedules present information regarding the Company's
risk-based capital at December 31, 1998, 1997 and 1996 and selected other
capital ratios.
CAPITAL ANALYSIS
(dollars in thousands)
December 31
-----------
1998 1997 1996
---- ---- ----
Tier I Capital:
Shareholders'equity $ 33,887 $ 30,483 $ 27,247
-------- -------- --------
Total Tier I Capital $ 33,887 $ 30,483 $ 27,247
-------- -------- --------
Tier II Capital:
Allowable portion of
allowance for credit losses $4,157 $3,483 $3,167
-------- -------- --------
Total Risk-Based Capital $ 38,044 $ 33,966 $ 30,414
-------- -------- --------
Total Risk-Weighted Assets $332,519 $278,680 $265,366
======== ======== ========
CAPITAL RATIOS
December 31
Regulatory
Minimum 1998 1997 1996
------- ---- ---- ----
Total Risk-Based Capital 8.00% 11.45% 12.19% 11.46%
Tier I Risk-Based Capital 4.00% 10.19% 10.94% 10.27%
Tier I Leverage Ratio 3.00% 7.10% 7.28% 7.41%
Return on Assets N/A 1.13% 1.16% 1.13%
Return on Equity* N/A 15.29% 15.85% 14.83%
Equity to Assets Ratio* N/A 7.17% 7.37% 7.42%
Dividend Payout Ratio N/A 33.35% 30.06% 30.40%
* Includes the effect of SFAS 115 in the amount of $791,000 in 1998,
$1,097,000 in 1997 and $384,000 in 1996.
It is the philosophy of Management and the Board of Directors to
increase capital primarily through the retention of earnings During 1995,
the Bank offered and sold 144,000 shares of stock increasing the number of
outstanding shares to 991,504. In 1996, the Board approved a 10% stock
dividend which resulted in the issuance of 98,920 new shares and which
increased the total number of shares outstanding to 1,090,424. During 1997,
the Board of Directors again approved the payment of a 10% stock dividend
adding 108,756 new shares and increasing the total number of shares
outstanding to 1,199,180. In 1998, shareholders received a 100% stock
dividend which doubled the outstanding shares to the current 2,398,360.
During 1998, regulatory capital increased $3.4 million due to the
retention of earnings after paying $1.7 million in cash dividends. As of
December 31, 1998, there were 2,601,640 shares of stock available for
future sale or stock dividends. The approximate number of stockholders of
record at December 31, 1998 was 900. 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 12 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.
When 1998 began, the Federal funds rate was 5.50%, the prime rate was
8.50%, and the thirty year Treasury bond was yielding 5.96%. At the same
time, inflationary fears and problems in Asia were sending mixed signals
but were providing upward pressure on interest rates as a majority of
economists were leaning toward a Fed tightening during the first half of
1998. As recent as July, the Federal Open Market Committee minutes reveal
that the risk of inflation was greater than the risk of weakness in the
economy, but any change in policy was deferred. During the third quarter,
foreign markets in Japan, Russia and Latin America were experiencing
further weakness and reduced the chances of inflationary pressure
domestically. In September, further pressures from abroad and the adverse
consequences on domestic activity resulted in the Fed reducing the federal
funds rate by 1/4 of a percentage point with a bias toward further easing.
During the next seven weeks, a second and third round of rate cuts followed
resulting in the current federal funds rate of 4.75% and the corresponding
reduction in the prime lending rate to 7.75%. As of year end, the yield on
the thirty year Treasury bond was down eighty-one basis points to 5.15%.
Economic forecasts point toward a continued slowing in the expansion of
economic activity during 1999 and the possibility of further rate cuts,
although underlying forces could affect interest rates in either direction.
With this in mind, management maintains a philosophy of not attempting to
predict future rate movements but rather on focusing efforts to maintain
earnings momentum in various rate environments.
The Company is currently working to address the potential impact of the
Year 2000 issue on the processing of date sensitive information. The Year
2000 issue is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two-digit year value to
00. The issue is whether computer systems will properly recognize
date-sensitive information when the year changes to 2000. Systems that do
not properly recognize such information could generate erroneous data or
cause a system to fail. In order to address the issues, the Company is
utilizing both internal and external resources to identify and modify where
necessary to ensure Year 2000 compliance. We believe that the risk lies in
the fact that if our customers and suppliers are not Year 2000 compliant,
it can cause our plan to fail. The Company's Year 2000 Committee has
conducted a comprehensive review of its computer systems and has adopted a
five-step approach to correct any potential problem: Awareness, Assessment,
Renovation, Validation and Implementation. We have conducted training
seminars for both our employees and our customers in order to raise
awareness for the project. We have analyzed all of our vendors, loan and
deposit customers, and computerized systems to determine those who are
mission critical to the success of our plan. Each vendor and customer has
been contacted to determine its state of Y2K compliance. Any vendor that
does not meet the Company's compliance standards will be addressed on an
individual basis. By the end of the second quarter of this year, all of our
critical systems will have been renovated for Year 2000 readiness and they
will have been put through extensive testing to prove compliance with the
century date change. Additionally, exhaustive contingency plans have been
formulated for both remediation concerns and for business resumption
efforts. The final phase in assuring compliance is comprised of the efforts
that we must take to ensure a smooth transition into 2000. In this phase,
liquidity, physical plant, and communications issues are addressed. The
Year 2000 Project Team has projected that the cost of Year 2000 compliance
would be minimal and would not have a negative impact on the earnings of
the Company. It is also not anticipated that the Year 2000 issue will have
a significant negative impact on the operations of the Company, but no
assurance can be made that the systems of others that the Company relies
upon will be compliant.
As of this writing, the Company 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. 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, 1998 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, 1998. At that date, the Company's cumulative
gap position at all intervals measured within one year were within internal
guidelines.
Interest Rate Sensitivity Analysis
as of December 31, 1998
(dollars 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 $93,150 $5,492 $10,606 $59,964 $21,343 $0 $190,555
Mortgage loans 3,244 2,803 8,504 18,679 10,604 0 43,834
Installment loans 9,993 5,898 11,324 56,104 10,170 0 93,489
---------------------------------------------------------------------------------------
Total Loans 106,387 14,193 30,434 134,747 42,117 0 327,878
---------------------------------------------------------------------------------------
Securities-taxable 21,116 5,960 9,026 31,404 23,700 8,172 99,378
Securities-tax free 1,410 0 300 13,658 17,084 0 32,452
---------------------------------------------------------------------------------------
Total Securities 22,526 5,960 9,326 45,062 40,784 8,172 131,830
---------------------------------------------------------------------------------------
Interest-bearing deposits with banks 1,487 198 496 297 0 0 2,478
Federal funds sold 3,400 0 0 0 0 0 3,400
---------------------------------------------------------------------------------------
Total Money Market Assets 4,887 198 496 297 0 0 5,878
---------------------------------------------------------------------------------------
Total Earning Assets 133,800 20,351 40,256 180,106 82,901 8,172 465,586
Non-earning assets 0 0 0 0 0 22,082 22,082
Allowance for credit losses 0 0 0 0 0 (4,283) (4,283)
---------------------------------------------------------------------------------------
Total Assets $133,800 $20,351 $40,256 $180,106 $82,901 $25,971 $483,385
=======================================================================================
Interest-bearing demand deposits $32,966 $0 $0 $18,274 $0 $0 $51,240
Savings deposits 0 463 688 40,866 0 0 42,017
Time deposits $100,000 and over 45,474 8,083 10,818 4,966 0 0 69,341
Other time deposits 38,526 27,332 50,215 61,941 0 0 178,014
---------------------------------------------------------------------------------------
Total Interest-Bearing Deposits 116,966 35,878 61,721 126,047 0 0 340,612
---------------------------------------------------------------------------------------
Borrowed funds and other
Interest-bearing liabilities 16,116 2,038 17,718 24,303 5,000 0 65,175
---------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities 133,082 37,916 79,439 150,350 5,000 0 405,787
Demand deposits 0 0 0 0 0 39,427 39,427
Other liabilities 0 0 0 0 0 3,492 3,492
Stockholders' equity 0 0 0 0 0 34,679 34,679
---------------------------------------------------------------------------------------
Total Liabilities and Stockholders'
Equity $133,082 $37,916 $79,439 $150,350 $5,000 $77,598 $483,385
=======================================================================================
Interest Rate Sensitivity gap 718 (17,565) (39,183) 29,756 77,901 (51,627)
============================================================================
Cumulative gap 718 (16,847) (56,030) (26,274) 51,627
=================================================================
The Company's computerized simulation modeling system also measures
exposure to interest rate risk, taking into account a growing balance sheet
under various interest rate scenarios. As of December 31, 1998, the
modeling system provided results which were within policy guidelines of
plus or minus ten percent assuming a 200 basis point shift in market
interest rates.
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, 1998 cash and cash equivalents totaled $13.4
million, compared to the December 31, 1997 level of $14.7 million.
Financing activities provided $50.0 million and operating activities
provided $6.8 million of cash and cash equivalents during the year while
investing activities utilized $58.0 million. The cash flow provided by
financing activities is due to deposit growth and an increase in borrowed
funds outstanding while the funds provided by operating activities pertains
to interest payments received on loans and investments. The cash used in
investing activities consists of loan proceeds and security purchases.
Core deposits, which represent the Company's primary source of
liquidity, averaged $299.5 million in 1998, an increase of $18.3 million,
or 7%, from the $281.2 million average in 1997. This increase in average
core deposits was supplemented with a $7.8 million increase in average
jumbo certificates and a $20.3 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, 1998.
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
Angelo F. Bistocchi Director 2001 1998/1971 79
Michael G. Cestone Director 2000 1998/1988 36
Michael J. Cestone, Jr. Director
Secretary
of the Board
of the Bank
since 1975 1999 1998/1969 67
Joseph Coccia Director 2001 1998/1998 44
William P. Conaboy Director 2001 1998/1998 40
Dominick L. DeNaples Director 2001 1998/1987 61
Louis A. DeNaples Director
Chairman of
the Board
since 1988 1999 1998/1972 58
Joseph J. Gentile Director 1999 1998/1989 68
Martin F. Gibbons Director 2000 1998/1979 83
Joseph O. Haggerty Director 1999 1998/1979 59
George N. Juba Director 2001 1998/1973 72
J. David Lombardi Director
President and
Chief
Executive
Officer
Since 1988 2000 1998/1986 50
John R. Thomas Director 2000 1998/1967 81
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 Feb 28, 1999
---- ---------------- ---------- --------- -------------
Louis A. DeNaples Chairman of the Board 1998 (1) 58
J. David Lombardi President & Chief
Executive Officer 1998 1981 50
Michael J. Cestone, Jr. Secretary 1998 (1) 67
William S. Lance Treasurer 1998 1991 39
(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 Employee
Held Since Since Age as of
Name Office/Position with Bank February 28, 1999
---- ------------------------- -----------------
Louis A. DeNaples Chairman of the Board 1988 (1) 58
J. David Lombardi President and Chief Executive Officer 1988 1981 50
Gerard A. Champi Executive Vice President
Retail Sales and Operations Division
Manager 1998 1991 38
Thomas P. Tulaney Executive Vice President
Commercial Sales Division Manager 1998 1994 39
Stephen J. Kavulich First Senior Vice President
Loan Administration/Compliance and
Bank Operations Division Manager 1998 1991 53
William S. Lance Senior Vice President
Finance Control Division Manager 1994 1991 39
Michael J. Cestone, Jr. Secretary 1988 (1) 67
(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:
Angelo F. Bistocchi Vice President of the Board of the Bank since 1978
Retired Restauranteur
Michael G. Cestone President, S. G. Mastriani Company
(General Contractor)
Michael J. Cestone, Jr. President, M. R. Co. (Real Estate Corporation)
C.E.O., S. G. Mastriani Company
Joseph Coccia President, Coccia Ford, Inc.
President, Coccia Lincoln Mercury, Inc.
William P. Conaboy Vice President, General Counsel, Allied Services
Dominick L. DeNaples President F & L Realty Corp.
Vice President, DeNaples Auto Parts, Inc.
Vice President, Keystone Landfill Inc.
Louis A. DeNaples President, DeNaples Auto Parts, Inc.
President, Keystone Landfill, Inc.
Vice President, F & L Realty Corp.
Joseph J. Gentile President, Dunmore Oil Co., Inc.
Martin F. Gibbons Partner, Gibbons Ford
Joseph O. Haggerty Retired Superintendent, Dunmore School District
George N. Juba Consultant to the Bank since 1988
William S. Lance Senior Vice President since 1994
Vice President and Comptroller -Finance/Control
Division Manager since 1991
J. David Lombardi President and Chief Executive Officer since 1988
John R. Thomas Chairman of the Board, Wesel Manufacturing Company
(design and manufacturing of precision machinery)
F. Involvement in Certain Legal Proceedings:
No officer or director is involved in legal proceedings pursuant to
this item.
G. Promoters and Control Persons:
NONE
Item 11 - Executive Compensation
Summary Compensation Table
The following table sets forth all cash compensation paid by the Company
for services rendered in all capacities during each of the last three
fiscal years to the Chief Executive Officer of the Company and to all
Executive Officers whose salary and bonus exceed $100,000.
SUMMARY COMPENSATION TABLE
Annual Compensation Long - Term Compensation
---------------------------------------- -----------------------------------
Awards Payouts
----------------------- ---------
Securities
Other Under- All
Name and Annual Restricted Lying Other
Principal Compen- Stock Options/ LTIP Compen-
Position Year Salary(1) Bonus(2) Sation(3) Award(s) SARs Payouts Sation(4)
($) ($) ($) ($) (#) ($) ($)
(a) (b) (c) (d) (e) (f) (g) (h) (i)
-------------------- ------ ------------ --------------- ------------- ------------ ------------- ------------- ==============
J. David Lombardi,
President and Chief
Executive Officer 1998 $179,000 $250,000 $- $ 0 0 $ 0 $25,979
of the Company and 1997 169,000 200,000 - 0 0 0 25,402
the Bank 1996 159,000 175,000 - 0 0 0 23,279
Thomas P. Tulaney,
Executive Vice 1998 $87,135 $40,000 - $ 0 0 $ 0 $12,538
President of the 1997 81,000 32,000 0 0 0 10,651
Bank 1996 78,000 25,000 - 0 0 0 9,427
Gerard A. Champi,
Executive Vice 1998 $79,634 $40,000 $ - $ 0 0 $ 0 $11,496
President of the 1997 72,492 32,000 - 0 0 0 9,645
Bank 1996 68,500 27,000 - 0 0 0 8,463
1 Includes directors' fees of $24,000 for 1996, 1997 and 1998 for Mr. Lombardi.
2 Cash bonuses are awarded at the conclusion of a fiscal year based upon
the Board of Directors' subjective assessment of the Company's performance
as compared to both budget and prior fiscal year performance, and the
individual contributions of the officers involved.
3 The named executive officers did not receive perquisites or other
personal benefits during 1998 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 Includes amounts contributed by the Bank on the employees' behalf to the
Employees' Profit Sharing Plan. Also included for Mr. Lombardi are premiums
paid to purchase additional life insurance which amounted to $2,008 in
1996, 1997 and 1998 and Director bonuses amounting to $7,500 in 1998, 1997,
and 1996, respectively.
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 $155,000 in 1998.
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;
(a) his monthly base salary payments from the Bank at the rate in effect on
the date of the termination; (b) his monthly Board of Directors fee; and
(c) 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 the 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: (a) three (3) times his then annual base salary which was in
effect as of the date of the change in control; (b) three (3) times his
then annual Board of Director's fee; and (c) 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 the rate of
$1,000 per 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 1998 was $284,000. Certain
directors also receive fees for additional services rendered. The aggregate
amount of such fees paid in 1998 was $31,500. All directors of the Bank
also received an additional fee of $7,500 in 1998.
Item 12- Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information, as of February 28,
1999, 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
Angelo F. Bistocchi 20,146 0.84
Michael G. Cestone 9,984 0.42
Michael J. Cestone, Jr. (2) 36,392 1.52
Joseph Coccia 11,890 0.50
William P. Conaboy 936 0.04
Dominick L. DeNaples (3) 162,856 6.79
Louis A. DeNaples (4) 174,422 7.27
Joseph J. Gentile (5) 106,346 4.43
Martin F. Gibbons 20,554 0.86
Joseph O. Haggerty 3,872 0.16
George N. Juba 14,644 0.61
J. David Lombardi (6) 27,720 1.15
John R. Thomas (7) 38,479 1.60
All directors and principal officers as a
group (14) 628,925 26.22
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,
1999. Beneficial ownership may be disclaimed as to certain of the
securities. Unless otherwise indicated, all shares are legally owned by the
reporting person individually or jointly with his spouse.
(2) Includes 8,090 shares owned individually by his spouse. (3)Includes 12,000
shares held jointly with his children.
(4) Includes 2,282 shares owned individually by his spouse and 7,462 shares
held jointly with his children.
(5) Includes 21,670 shares owned individually by his spouse. (6) Includes 144
shares held by his minor children. (7) Includes 5,400 shares owned individually
by his spouse.
Item 13 - Certain Relationships and Related Transactions
Some of the directors and officers of the Bank and the companies with
which they are associated were customers of, and had banking transactions
with, the Bank in the ordinary course of its business during 1997 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, 1998:
EXHIBIT A - Balance Sheet - December 31, 1998 and 1997
EXHIBIT B - Statement of Income - December 31, 1998, 1997 and 1996
EXHIBIT C - Statement of Cash Flows - December 31, 1998, 1997 and 1996
EXHIBIT D - Statement of Changes in Stockholders' Equity - December 31,
1998, 1997 and 1996
EXHIBIT E- Independent Auditor's Report
Notes to Consolidated Financial Statements
1 Summary of Significant Accounting Policies
2 Restricted Cash Balances
3 Investment Securities December 31, 1998 and 1997
4 Loans and Changes in Allowance for Loan Loss December 31, 1998 and
1997
5 Bank Premises and Equipment December 31, 1998 and 1997
6 Deposits
7 Borrowed Funds December 31, 1998 and 1997
8 Benefit Plans
9 Income Taxes
December 31, 1998, 1997 and 1996
10 Related Party Transactions
11 Commitments
12 Regulatory Matters December 31, 1998 and 1997
13 Disclosures about Fair Value of Financial Instruments December 31,
1998 and 1997
14 Condensed Financial Information - Parent Company Only
15 Selected Quarterly Financial Data
1998 and 1997
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 24, 1999
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/Joseph J. Gentile 3/24/99
- ------------------- -------- -------------------- --------
Angelo Bistocchi Date Joseph J. Gentile Date
/s/Michael G. Cestone 3/24/99 /s/Martin F. Gibbons 3/24/99
- ------------------- ------- -------------------- --------
Michael G. Cestone Date Martin F. Gibbons Date
/s/Joseph O. Haggerty 3/24/99
- ------------------- ------- -------------------- --------
Michael J. Cestone, Jr. Date Joseph O. Haggerty Date
/s/Joseph Coccia 3/24/99
- ------------------ ------- -------------------- --------
Joseph Coccia Date George N. Juba Date
/s/William P. Conaboy 3/24/99 /s/J. David Lombardi 3/24/99
- ------------------ ------- ------------------- --------
William P. Conaboy Date J. David Lombardi Date
/s/Dominick L. DeNaples 3/24/99
- ------------------ ------- ------------------ -------
Dominick L. DeNaples Date John R. Thomas Date
/s/Louis A. DeNaples 3/24/99
- ------------------ -------
Louis A. DeNaples Date
Exhibit A - Balance Sheet
FIRST NATIONAL COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
ASSETS 1998 1997
------------ ------------
Cash and cash equivalents:
Cash and due from banks $10,026,909 $9,231,033
Federal funds sold 3,400,000 5,450,000
------------ ------------
Total cash and cash equivalents 13,426,909 14,681,033
Interest-bearing balances with financial institutions 2,478,000 1,586,000
Securities:
Available-for-sale, at fair value 124,660,971 114,797,633
Held-to-maturity, at cost (fair value $714,061 and $680,135) 711,213 678,049
Federal Reserve Bank and FHLB stock, at cost 6,457,900 5,891,100
Net loans 324,609,886 280,730,567
Bank premises and equipment 4,812,507 4,095,717
Accrued interest receivable 2,656,614 3,006,367
Other assets 3,571,036 2,868,414
------------ ------------
TOTAL ASSETS $483,385,036 $428,334,880
============ ============
LIABILITIES
Deposits:
Demand $39,426,668 $34,994,825
Interest-bearing demand 51,239,606 50,702,813
Savings 42,017,322 39,700,320
Time ($100,000 and over) 69,341,302 53,757,354
Other time 178,013,890 166,512,287
------------ ------------
Total deposits 380,038,788 345,667,599
Borrowed funds 65,175,582 47,834,596
Accrued interest payable 2,587,081 2,199,618
Other liabilities 904,955 1,053,291
------------ ------------
Total liabilities $448,706,406 $396,755,104
------------ -------------
STOCKHOLDERS' EQUITY
Common Stock ($1.25 par)
Authorized: 5,000,000 shares
Issued and outstanding: 2,398,360 shares in 1998 and
1,199,180 shares in 1997 $2,997,950 $1,498,975
Additional paid-in capital 6,267,107 6,267,107
Retained earnings 24,622,218 22,716,763
Accumulated other comprehensive income 791,355 1,096,931
------------ ------------
Total stockholders' equity 34,678,630 31,579,776
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $483,385,036 $428,334,880
============ ============
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
For The Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
----------------------------------------------------
INTEREST INCOME
Interest and fees on loans $25,558,631 $23,728,649 $20,919,180
----------------------------------------------------
Interest and dividends on securities:
U.S. Treasury and government agencies 5,831,281 4,884,634 3,006,414
State and political subdivisions 1,707,443 1,570,552 1,625,971
Other securities 408,204 262,013 124,790
----------------------------------------------------
Total interest and dividends on securities 7,946,928 6,717,199 4,757,175
----------------------------------------------------
Interest on balances with financial institutions 178,439 170,395 100,590
Interest on federal funds sold 222,179 289,800 293,554
----------------------------------------------------
TOTAL INTEREST INCOME 33,906,177 30,906,043 26,070,499
----------------------------------------------------
INTEREST EXPENSE
Interest-bearing demand 1,225,361 1,110,095 937,285
Savings 1,000,539 1,038,157 1,162,953
Time ($100,000 and over) 3,264,981 2,826,583 2,420,743
Other time 9,763,746 9,252,860 7,750,313
Interest on borrowed funds 3,206,476 2,098,314 1,034,540
----------------------------------------------------
TOTAL INTEREST EXPENSE 18,461,103 16,326,009 13,305,834
----------------------------------------------------
Net interest income before provision for credit losses 15,445,074 14,580,034 12,764,665
Provision for credit losses 920,000 1,110,000 820,000
----------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 14,525,074 13,470,034 11,944,665
----------------------------------------------------
OTHER INCOME
Service charges 780,443 758,560 692,716
Net gain/(loss) on the sale of securities 124,908 (8,031) 130,023
Net gain on the sale of other real estate 46,522 377,192 1,025
Net gain on the sale of other assets 0 155,437 0
Other 631,005 344,394 274,987
----------------------------------------------------
TOTAL OTHER INCOME 1,582,878 1,627,552 1,098,751
----------------------------------------------------
OTHER EXPENSES
Salaries and employee benefits 4,749,016 4,441,399 4,076,192
Occupancy expense 869,112 841,644 811,979
Equipment expense 676,994 609,695 484,423
Other operating expenses 3,128,155 2,946,026 2,530,998
----------------------------------------------------
TOTAL OTHER EXPENSES 9,423,277 8,838,764 7,903,592
----------------------------------------------------
INCOME BEFORE INCOME TAXES 6,684,675 6,258,822 5,139,824
Provision for income taxes 1,577,408 1,615,850 1,265,214
----------------------------------------------------
NET INCOME $5,107,267 $4,642,972 $3,874,610
====================================================
NET INCOME PER SHARE $2.13 $1.94 $1.62
====================================================
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, 1998, 1997 and 1996
1998 1997 1996
----------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $34,494,684 $30,612,970 $25,723,197
Fees and commissions received 1,411,448 1,102,955 992,084
Interest paid (18,073,640) (16,153,652) (13,208,307)
Cash paid to suppliers and employees (9,087,534) (8,697,078) (7,834,212)
Income taxes paid (1,942,398) (1,608,001) (1,230,000)
----------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,802,560 5,257,194 4,442,762
----------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities available for sale:
Proceeds from maturities 1,500,000 0 0
Proceeds from sales prior to maturity 14,451,152 8,920,368 25,175,471
Proceeds from calls prior to maturity 46,533,293 17,251,245 6,941,547
Purchases (73,549,655) (63,401,519) (45,969,659)
Securities held to maturity:
Proceeds from calls prior to maturity 256,626 0 0
Purchases (231,559) (655,287) 0
Net (increase)/decrease in interest-bearing bank balances (892,000) 1,185,000 (1,996,000)
Net increase in loans to customers (44,752,797) (21,583,667) (31,030,999)
Capital expenditures (1,369,944) (684,379) (1,044,562)
---------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (58,054,884) (58,968,239) (47,924,202)
---------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, money market demand,
NOW accounts, and savings accounts 7,285,640 5,766,570 9,362,879
Net increase in certificates of deposit 27,085,551 18,932,575 35,866,961
Net increase in borrowed funds 18,180,986 26,655,537 7,065,285
Repayment of debt (851,140) (75,852) (71,483)
Cash dividends paid (1,702,837) (1,395,743) (1,177,704)
Cash paid in lieu of fractional shares in conjunction with
10% stock dividend 0 (11,132) (6,050)
---------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 49,998,200 49,871,955 51,039,888
---------------------------------------------------
NET INCREASE (DECREASE)IN CASH AND
CASH EQUIVALENTS (1,254,124) (3,839,090) 7,558,448
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 14,681,033 18,520,123 10,961,675
---------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $13,426,909 $14,681,033 $18,520,123
====================================================
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income $5,107,267 $4,642,972 $3,874,610
----------------------------------------------------
Adjustments to reconcile net income to net cash Provided by operating
activities:
Amortization and accretion, net 238,755 66,408 (4,622)
Depreciation and amortization 653,154 611,637 491,602
Provision for credit losses 920,000 1,110,000 820,000
Provision for deferred taxes (306,402) (46,495) 61,064
Loss/(Gain) on sale of securities (124,908) 8,031 (130,023)
Gain on sale of other real estate (46,522) (377,192) (1,025)
Gain on sale of other assets 0 (155,437) 0
Increase in interest payable 387,463 172,244 97,527
Increase in taxes payable (16,215) 16,215 0
Increase (decrease) in accrued expenses and other liabilities 128,145 231,801 174,875
Decrease (increase) in prepaid expenses and other assets (487,930) (663,509) (598,566)
Decrease (increase) in interest receivable 349,753 (359,481) (342,680)
----------------------------------------------------
Total adjustments 1,695,293 614,222 568,152
----------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $6,802,560 $5,257,194 $4,442,762
====================================================
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, 1998, 1997 and 1996
ACCUM-
ULATED
OTHER
COMP- COMP-
REHEN- COMMON STOCK ADD'L REHEN-
SIVE -------------------- PAID-IN RETAINED SIVE
INCOME SHARES AMOUNT CAPITAL EARNINGS INCOME TOTAL
----------- ---------- ----------- ---------- ----------- --------- -----------
BALANCES, DECEMBER 31, 1995 991,504 1,239,380 6,267,107 17,049,405 991,058 25,546,950
Comprehensive Income:
Net income for the year 3,874,610 3,874,610 3,874,610
Other comprehensive income, net of tax:
Unrealized loss on securities
available-for-sale, net of deferred
income tax benefit of $312,670 (476,925)
Reclassification adjustment (130,023)
----------
Total other comp. Income, net of tax (606,948) (606,948) (606,948)
----------
Comprehensive Income 3,267,662
==========
Cash dividends paid, $0.49 per share (1,177,704) (1,177,704)
10% stock dividend 98,920 123,650 (129,700) (6,050)
--------- ---------- ---------- ------------ -------- -----------
BALANCES, DECEMBER 31, 1996 1,090,424 1,363,030 6,267,107 19,616,611 384,110 27,630,858
Comprehensive Income:
Net income for the year 4,642,972 4,642,972 4,642,972
Other comprehensive income, net of tax:
Unrealized gain on securities
available-for-sale, net of
deferred income taxes of
$367,211 704,790
Reclassification adjustment 8,031
----------
Total other comp. Income, net of tax 712,821 712,821 712,821
----------
Comprehensive Income 5,355,793
==========
Cash dividends paid, $0.58 per share (1,395,743) (1,395,743)
10% stock dividend 108,756 135,945 (147,077) (11,132)
---------- ---------- ---------- ------------ --------- -----------
BALANCES, DECEMBER 31, 1997 1,199,180 1,498,975 6,267,107 22,716,763 1,096,931 31,579,776
Comprehensive Income:
Net income for the year 5,107,267 5,107,267 5,107,267
Other comprehensive income, net of tax:
Unrealized loss on securities
available-for-sale, net of
deferred income tax
benefit of $157,418 (180,668)
Reclassification adjustment (124,908)
----------
Total other comp. Income, net of tax (305,576) (305,576) (305,576)
-----------
Comprehensive Income 4,801,691
===========
Cash dividends paid, $0.71 per share (1,702,837) (1,702,837)
100% stock dividend 1,199,180 1,498,975 (1,498,975) 0
---------- ----------- ---------- ------------ -------- ------------
BALANCES, DECEMBER 31, 1998 2,398,360 2,997,950 6,267,107 24,622,218 791,355 34,678,630
========== =========== ========== ============ ======== ============
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
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, 1998 and 1997, and the related consolidated statements of
income, changes in stockholders' equity and cash flows for each of the
two years in the period ended December 31, 1998. 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. The consolidated statements
of income, changes in stockholders' equity and cash flows for the year
ended December 31, 1996, were audited by other auditors whose report
dated January 21, 1997, expressed an unqualified opinion on those
statements.
We conducted our audits, in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly in all material respects, the financial position of
First National Community Bancorp, Inc. and Subsidiaries as of December
31, 1998 and 1997, and the results of their operations and their cash
flows for each of the two years in the period ended December 31, 1998
in conformity with generally accepted accounting principles.
Demetrius & Company, L.L.C.
Wayne, New Jersey
January 19, 1999
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of First National Community
Bank and Subsidiary
We have audited the accompanying consolidated statements of income,
changes in stockholders' equity and cash flows of First National
Community Bank and Subsidiary for the year ended December 31, 1996.
These financial statements are the responsibility of management. Our
responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statements presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the results of operations and cash
flows of First National Community Bank and Subsidiary for the year
ended December 31, 1996, in conformity with generally accepted
accounting principles.
ROBERT ROSSI & CO.
Olyphant, PA
January 21, 1997
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 its wholly owned subsidiary FNCB
Realty, Inc.
The Bank provides a variety of financial services to individuals and
corporate customers through its eight banking locations located in northeastern
Pennsylvania. It provides a full range of commercial banking services which
includes commercial, residential and consumer lending. Additionally, the Bank
provides to it's customers a variety of deposit products, including demand
checking and interest-bearing deposit accounts.
FNCB Realty, Inc.'s operating activities include the acquisition,
holding, and disposition of certain real estate acquired in satisfaction of loan
commitments owed by third party debtors to First National Community Bank.
PRINCIPLES OF CONSOLIDATION
On July 1, 1998, the Company acquired First National Community Bank in
a business combination accounted for as a pooling of interests. The Bank became
the wholly owned subsidiary of the Company through the exchange of 1,199,180
shares of its common stock for all of the outstanding stock of the Bank.
The Company did not conduct business activities prior to the July 1,
1998 stock exchange. Accordingly, the Parent Company only financial information
included in Note 14 of these financial statements presents the Company's results
of operations and cash flows for its initial period of operations commencing
July 1, 1998 and ending on December 31, 1998.
The accompanying consolidated financial statements for 1998 are based
on the assumption that the companies were combined for the full year, and the
financial statements of prior years have been restated to give effect to the
combination. All significant intercompany transactions and balances have been
eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
SECURITIES
Debt securities that management has the ability and intent to hold to
maturity are classified as held-to-maturity and carried at cost, adjusted for
amortization of premium and accretion of discounts using methods approximating
the interest method. Other marketable securities are classified as
available-for-sale and are carried at fair value. Unrealized gains and losses on
securities available-for-sale are recognized as direct increases or decreases in
stockholders' equity. Cost of securities sold is recognized using the specific
identification method.
LOANS
Loans are stated at face value, net of unearned discount, unamortized
loan fees and costs and the allowance for credit losses. Unearned discount on
installment loans is recognized as income over the terms of the loans primarily
using the "actuarial method." Interest on all other loans is recognized on the
accrual basis, based upon the principal amount outstanding.
Loans are placed on nonaccrual when a loan is specifically determined
to be impaired or when management believes that the collection of interest or
principal is doubtful. This is generally when a default of interest or principal
has existed for 90 days or more, unless such loan is fully secured and in the
process of collection. When interest accrual is discontinued, interest credited
to income in the current year is reversed and interest income in prior years is
charged against the allowance for credit losses. Any payments received are
applied, first to the outstanding loan amounts, then to the recovery of any
charged-off loan amounts. Any excess is treated as a recovery of lost interest.
LOAN IMPAIRMENT
The Bank has adopted 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 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 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 $341,000, $272,000 and $259,000 in 1998, 1997 and 1996, 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.
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
Net income per share of common stock is computed using the weighted
average number of shares outstanding during the periods. Such shares amounted to
2,398,360 in 1998, 1997 and 1996 after giving retroactive effect to the 100%
stock dividend declared in 1998 and the 10% stock dividends declared in 1997 and
1996.
COMPREHENSIVE INCOME
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 establishes standards for reporting and display
of comprehensive income and its components in the financial statements. SFAS 130
is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The adoption of SFAS had no impact on the
Company's consolidated results of operations, financial position or cash flows.
NEW FINANCIAL ACCOUNTING STANDARDS
During 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which establishes accounting
and reporting standards for derivative instruments and for hedging activities.
The statement requires that all derivatives be recognized as either assets or
liabilities in the statement of financial position and be measured at fair
value. SFAS 133 is effective for fiscal quarters of all fiscal years beginning
after June 15, 1999; earlier application is permitted. The company does not hold
or issue derivative instruments as defined by SFAS 133; and accordingly, it is
the opinion of management that there will be no future impact from this recent
accounting standard.
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, 1998 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, 1998, the amount of these balances was $1,445,000.
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 at December 31 follow:
Available-for-sale Securities:
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
---------- ----------- ---------- ---------
December 31, 1998
-------------------
U.S. Treasury securities and
obligations of U.S. government
agencies $ 12,366,088 $ 46,851 $ 15,230 $ 12,397,709
Obligations of state and political
subdivisions 32,452,456 1,282,985 64,292 33,671,149
Mortgage-backed securities 77,632,136 223,008 265,218 77,589,926
Corporate debt securities 1,001,268 3,894 12,975 992,187
Equity securities 10,000 0 0 10,000
----------- ---------- -------- ------------
Total $123,461,948 $1,556,738 $357,715 $124,660,971
============ ========== ======== ============
December 31, 1997
-------------------
U.S. Treasury securities and
obligations of U.S. government
agencies $31,071,952 $ 93,955 $ 35,549 $ 31,130,358
Obligations of state and political
subdivisions 25,854,741 1,187,815 0 27,042,556
Mortgage-backed securities 56,198,923 602,305 186,509 56,614,719
Equity securities 10,000 0 0 10,000
------------ ----------- -------- ------------
Total $113,135,616 $1,884,075 $222,058 $114,797,633
============ ========== ======== ============
Held-to-maturity Securities:
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
---------- ---------- ------------ ----------
December 31, 1998
-------------------
U.S. Treasury securities and
obligations of U.S. government
agencies $711,213 $5,385 $2,537 $714,061
======== ====== ====== ========
December 31, 1997
-------------------
U.S. Treasury securities and
obligations of U.S. government
agencies $678,049 $3,793 $1,707 $680,135
======== ====== ====== ========
The following table shows the amortized cost and approximate fair value
of the Bank's debt securities at December 31, 1998 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
----------------------------- ----------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
----------- ----------- ---------- ----------
Amounts maturing in:
One Year or Less $ 2,005,168 $ 2,014,374 $ 0 $ 0
One Year through Five Years 2,232,273 2,300,203 0 0
After Five Years through Ten Years 14,934,112 15,343,980 0 0
After Ten Years 26,648,260 27,402,488 711,213 714,061
Mortgage-backed Securities 77,632,135 77,589,926 0 0
------------ ------------ -------- --------
Total $123,451,948 $124,650,971 $711,213 $714,061
============ ============ ======== ========
Gross proceeds from the sale of securities for the years ended December
31, 1998, 1997, and 1996 were $14,451,152, $8,920,368, and $25,175,471,
respectively with the gross realized gains being $153,290, $64,826 and $232,306,
respectively, and gross realized losses being $28,383, $72,857 and $102,283,
respectively.
At December 31, 1998 and 1997, securities with a carrying amount of
$73,195,096 and $51,207,254, respectively, were pledged as collateral to secure
public deposits and for other purposes.
4. LOANS:
Major classifications of loans are summarized as follows:
(dollars in thousands)
1998 1997
Real estate loans,
secured by residential properties $ 98,534 $96,030
Real estate loans, secured by nonfarm,
nonresidential properties 113,020 94,236
Commercial and industrial loans 49,796 36,790
Loans to individuals for household,
family and other personal expenditures 58,799 46,174
Loans to state and political subdivisions 8,570 10,938
All other loans, including overdrafts 178 195
-------- -------
Gross loans 328,897 284,363
Less: Unearned discount on loans (4) (10)
-------- -------
Total loans 328,893 284,353
Less: Allowance for credit losses (4,283) (3,623)
-------- --------
Net loans $324,610 $280,730
======== ========
Changes in the allowance for credit losses were as follows:
(dollars in thousands)
1998 1997 1996
---- ---- ----
Balance, beginning of year $ 3,623 $ 3,167 $ 2,800
Recoveries credited to allowance 47 43 128
Provision for credit losses 920 1,110 820
------- ------- -----
TOTAL 4,590 4,320 3,748
Losses charged to allowance 307 697 581
------- ------- -------
Balance, end of year $ 4,283 $ 3,623 $ 3,167
======= ======= =======
Information concerning the Company's recorded investment in nonaccrual and
restructured loans is as follows:
(dollars in thousands)
1998 1997
Nonaccrual loans
Impaired $ 0 $ 0
Other 845 207
Restructured loans 289 744
----- ----
Total $1,134 $951
====== ====
The interest income that would have been earned in 1998, 1997 and 1996
on nonaccrual and restructured loans outstanding at December 31, 1998, 1997 and
1996 in accordance with their original terms approximated $125,000, $99,000 and
$154,000. The interest income actually realized on such loans in 1998, 1997 and
1996 approximated $51,000, $85,000 and $37,000. As of December 31, 1998, 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:
1998 1997
----- ----
Land $783,150 $783,150
Buildings 2,268,485 2,236,630
Furniture, fixtures and equipment 3,889,518 3,149,059
Leasehold improvements 1,755,841 1,281,333
---------- ----------
Total 8,696,994 7,450,172
Less accumulated depreciation 3,884,487 3,354,455
---------- ----------
Net $4,812,507 $4,095,717
========== ==========
6. DEPOSITS:
At December 31, 1998, 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
--------- ----------- --------
1999 $ 64,374 $115,319 $179,693
2000 3,762 39,552 43,314
2001 100 13,771 13,871
2002 1,105 4,296 5,401
2003 and Thereafter 0 5,076 5,076
-------- -------- --------
Total $ 69,341 $178,014 $247,355
======== ======== ========
7. BORROWED FUNDS:
Borrowed funds at December 31, 1998 and 1997 include the following:
1998 1997
------- ------
Treasury Tax and Loan Demand Note $ 437,119 $ 306,948
Borrowings under Lines of Credit 64,738,463 47,527,648
----------- -----------
Total $65,175,582 $47,834,596
=========== ===========
The following table presents Federal Home Loan Bank of Pittsburgh ("FHLB of
Pittsburgh") advances at the earlier of the callable date or maturity date (in
thousands):
December 31, 1998
Weighted
Average
Amount Interest Rate
-------- ------------
Within one year $22,977 5.89%
After one year but within two years 13,178 5.89%
After two years but within three years 8,195 5.88%
After three years but within four years 388 6.42%
After four years but within five years 15,000 5.57%
After five years 5,000 5.15%
-------
$64,738
=======
The FHLB of Pittsburgh advances are comprised of $49,738,000 of fixed rate
advances and $15,000,000 of variable rate borrowings. All advances are
collateralized either under a blanket pledge agreement by one to four family
mortgage loans or with mortgage-backed securities.
At December 31, 1998, the Company had available from the FHLB of Pittsburgh an
open line of credit for $14,620,000 which expires on November 24, 1999. 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, 1998 and 1997, the
Company had no borrowings under this credit line. In addition, at December 31,
1998, the Company had available overnight repricing lines of credit with other
correspondent banks totaling $7,000,000. There were no borrowings under these
lines at December 31, 1998 or 1997.
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 1998, 1997 and 1996 amounted to $250,000, $220,000, and $190,000,
respectively.
The Bank also fully funded a non-qualified deferred compensation plan
in 1986 covering one of its former executive officers. The Bank is accruing the
present value of its obligation for deferred compensation benefits expected to
become payable under the terms of the plan. The provision for such benefits
amounted to $3,800 in 1998, $4,871 in 1997, and $5,835 in 1996. Benefits paid to
the former executive officer under the aforementioned non-qualified deferred
compensation plan amounted to $14,375 in 1998, 1997 and 1996. At December 31,
1998 and 1997, the present value of deferred compensation payable amounted to
$29,449 and $40,023 and is included in other liabilities in the accompanying
balance sheet.
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, 1998, elective deferred
compensation amounting to $488,410 plus $138,335 in accrued interest has been
recorded as other liabilities in the accompanying balance sheet.
9. INCOME TAXES:
The provision for income taxes included in the statement of income is comprised
of the following components:
1998 1997 1996
---- ---- ----
Current $1,883,810 $1,662,345 $1,204,150
Deferred (306,402) (46,495) 61,064
---------- ---------- ----------
TOTAL $1,577,408 $1,615,850 $1,265,214
========== ========== ==========
Deferred tax (liabilities) assets are comprised of the following at
December 31:
1998 1997
---- ----
Unrealized Holding Gains (Losses) on Securities
Available-for-Sale $(407,668) $(565,086)
Deferred Loan Origination Fees (157,105) (131,637)
Depreciation (133,665) (127,097)
Other (23,474) 0
---------- ----------
Gross Deferred Tax Liability $(721,912) $(823,820)
---------- ----------
Reserve for Credit Losses 1,261,338 1,011,022
Deferred Compensation 223,106 157,330
---------- ----------
Gross Deferred Tax Asset 1,484,444 $1,168,352
---------- ----------
Deferred Tax Asset Valuation Allowance (547,838) (593,658)
---------- -----------
Net Deferred Tax (Liabilities) Assets $214,694 $ (249,126)
========== ===========
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 1996
---- ---- ----
Provision at Statutory Tax Rates $2,272,790 $2,127,999 $1,747,540
Add (Deduct):
Tax Effects of Non-Taxable Interest
Income (828,624) (788,744) (732,248)
Non-Deductible Interest Expense 115,929 106,785 96,101
Other Items Net 17,313 169,810 153,821
---------- ---------- ----------
Provision for Income Taxes $1,577,408 $1,615,850 $1,265,214
========== ========== ==========
The net change in the valuation allowance for deferred tax asset was a
decrease of $45,820 in 1998. The change relates to a decrease in the provision
for income taxes to which this valuation relates.
10. RELATED PARTY TRANSACTIONS:
At December 31, 1998 and 1997, certain officers and directors and/or companies
in which they had 10% or more beneficial ownership were indebted to the Bank in
the aggregate amounts of $10,497,630 and $7,435,105. Such indebtedness was
incurred in the ordinary course of business on substantially the same terms as
those prevailing at the time for comparable transactions with other persons. The
Bank was also committed under standby letters of credit as described in Note 11.
During 1998, $5,679,303 of new loans were made and repayments totaled
$2,616,778.
11. COMMITMENTS:
(a) Leases:
The Bank conducts its Fashion Mall, Wilkes-Barre, Pittston Plaza,
Kingston and Exeter branch operations from leased facilities. The Fashion Mall
lease expires May 2003 and carries three additional renewal options of five
years each with specified increases at the beginning of each option period. The
Wilkes-Barre lease, which expires May 2003, carries three additional renewal
options of five years each with specified increases at the beginning of each
option period. The Pittston Plaza lease expires September 2008 and carries two
additional renewal options of five years each, with specified increases at the
beginning of each option period. The Kingston lease, which expires August 2006,
carries two additional options of five years each with specified increases at
the beginning of each option period. The Exeter lease expires August 2008 and
carries four additional options of five years each with specified increases at
the beginning of each option period.
The Bank also leases office space for certain administrative and
operational functions. Such lease, which expires in 1999, provides the bank the
option of renewal for five successive three year periods commencing January 1,
2000; and carries specified annual rental increases.
At December 31, 1998, the Bank was obligated under certain
noncancelable leases for equipment with terms expiring over the next five years.
The aforementioned leases have been treated as operating leases in the
accompanying financial statements. Minimum future obligations under
noncancelable operating leases in effect at December 31, 1998 are as follows:
FACILITIES EQUIPMENT
1999 $ 280,098 $ 70,962
2000 155,098 44,989
2001 155,781 26,765
2002 157,150 10,078
2003 and thereafter 569,056 2,793
---------- --------
Total $1,317,183 $155,587
========== ========
Total rental expense under operating leases amounted to $322,231 in 1998,
$295,168 in 1997, and $272,355 in 1996.
(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:
1998 1997
---- ----
Commitments to extend credit $48,566,776 $36,695,453
Standby letters of credit 11,203,184 8,717,944
Outstanding commitments to extend credit and standby letters of credit issued to
or on behalf of related parties amounted to $3,307,423 and $947,367 and
$5,653,691 and $5,461,081 at December 31, 1998 and 1997, 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
$3,400,000 and $5,450,000; and due from bank accounts in excess of the limit
covered by the Federal Deposit Insurance Corporation amounting to $5,442,038 and
$3,705,438 as of December 31, 1998 and 1997, respectively.
Loan Concentrations: At December 31, 1998, 22% of the Bank's commercial
loan portfolio was concentrated in loans in the restaurant industry.
Substantially all of these loans are secured by first mortgages on commercial
properties.
12. 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, 1998, that the Bank meets all capital
adequacy requirements to which it is subject.
As of December 31, 1998, 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, 1998:
Total Capital
(to Risk Weighted Assets) $38,044 11.45% >$26,592 >8.0% >$33,239 >10.0%
Tier I Capital
(to Risk Weighted Assets) $33,887 10.19% >$13,296 >4.0% >$19,944 >6.0%
Tier I Capital
(to Average Assets) $33,887 7.10% >$14,314 >3.0% >$23,856 >5.0%
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets) $33,966 12.19% >$22,294 >8.0% >$27,868 >10.0%
Tier I Capital
(to Risk Weighted Assets) $30,483 10.94% >$11,147 >4.0% >$16,721 >6.0%
Tier I Capital
(to Average Assets) $30,483 7.28% >$12,624 >3.0% >$21,040 >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 $11,051,000 at December 31, 1998, subject to
the minimum capital ratio
13. 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 are as follows:
December 31, 1998
Carrying Fair
Value Value
FINANCIAL ASSETS
Cash and short term investments $ 13,426,909 $13,426,909
Interest-bearing balances with
financial institutions 2,478,000 2,478,000
Securities 131,830,084 131,832,932
Gross Loans 328,893,297 328,626,736
FINANCIAL LIABILITIES
Deposits $380,038,788 $381,215,158
Borrowed funds 65,175,582 65,650,009
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Commitments to extend credit
and standby letters of credit $0 $68,068
December 31, 1997
Carrying Fair
Value Value
FINANCIAL ASSETS
Cash and short term investments $ 14,681,033 $14,681,033
Interest-bearing balances with
financial institutions 1,586,000 1,586,000
Securities 121,366,782 121,368,868
Gross Loans 284,353,338 285,206,610
FINANCIAL LIABILITIES
Deposits $345,667,579 $345,950,003
Borrowed funds 47,845,737 47,996,796
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Commitments to extend credit
and standby letters of credit $0 $71,126
14. CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
Condensed parent company only financial information is as follows (in
thousands):
Condensed Balance Sheet December 31, 1998
Assets:
Cash $ 32
Investment in Subsidiary (equity method) 34,595
Other assets 52
-------
Total Assets $34,679
=======
Liabilities and Stockholders' Equity:
Stockholders' equity $34,679
=======
Condensed Statement of Income for the initial period of operations
commencing July 1, 1998 and ending December 31, 1998 Income:
Dividends from Subsidiary $1,155
Other Income 2
Equity in Undistributed Income of Subsidiary 1,367
------
Total Income $2,524
------
Expenses 18
------
Net Income $2,506
======
Condensed Statement of Cash Flows for the initial period of operations
commencing July 1, 1998 and ending December 31, 1998
Cash Flows from Operating Activities:
Net income $2,506
Adjustments to reconcile net income
to net cash provided by operating activities:
Equity in undistributed income of subsidiary (1,367)
Increase in other assets (52)
-------
Net Cash Provided by Operating Activities $1,087
-------
Cash Flows from Financing Activities:
Cash dividends $(1,055)
Proceeds from borrowings 840
Repayment of borrowings (840)
Advances from subsidiary 82
Repayment of advances from subsidiary (82)
--------
Net cash used in financing activities $(1,055)
--------
Increase in Cash $ 32
Cash at Beginning of Period 0
-----
Cash at End of Year $ 32
=====
Non-cash investing and financing activities:
On July 1, 1998, the Company issued 1,199,180 shares of its common stock in
exchange for all of the outstanding shares of the Bank. The investment in
subsidiary was recorded at $33,550,000 which equaled the Stockholders' Equity of
the Bank at the time of the exchange.
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
In Thousands, Except Per Share Amount
Quarter Ending March 31, June 30, September 30, December 31,
1998
Interest income $8,093 $8,332 $8,704 $8,777
Interest expense 4,387 4,509 4,732 4,833
------ ------ ------ ------
Net interest income 3,706 3,823 3,972 3,944
Provision for credit losses 180 180 180 380
Other income 335 449 450 349
Other expenses 2,225 2,260 2,426 2,512
Provision for income taxes 394 473 431 280
------ ------ ------ ------
Net income $1,242 $1,359 $1,385 $1,121
====== ====== ====== ======
Net income per share* $0.52 $0.56 $0.58 $0.47
===== ===== ===== =====
1997
Interest income $7,282 $7,558 $7,975 $8,091
Interest expense 3,804 3,958 4,256 4,308
------ ------ ------ ------
Net interest income 3,478 3,600 3,719 3,783
Provision for credit losses 180 180 225 525
Other income 636 267 417 307
Other expenses 2,130 2,137 2,313 2,259
Provision for income taxes 466 383 428 338
------ ------ ------ ------
Net income $1,338 $1,167 $1,170 $ 968
====== ====== ====== ======
Net income per share* $0.56 $0.48 $0.49 $0.41
===== ===== ===== =====
o Per share data reflects the retroactive effect of the 100% stock dividend
issued in 1998 and the 10% stock dividend issued in 1997.