U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended March 31, 1999
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _____________ to
_____________
Commission File No.____________
First National Community Bancorp, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Pennsylvania 23-2900790
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
102 E. Drinker St. Dunmore, PA 18512
(Address of Principal Executive Offices)
(717) 346-7667
(Registrant's Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Common Stock, $1.25 par value
(Title of Class)
2,398,360 shares
(Outstanding at May 11, 1999)
FIRST NATIONAL COMMUNITY BANCORP, INC.
INDEX
Page No.
Part I - Consolidated Financial Statements
Item 1. Consolidated Financial Statements
Consolidated Statements of Financial Condition
March 31, 1999 and December 31, 1998 1
Consolidated Statements of Income
Three Months Ended March 31, 1999 and 1998
YTD Ended March 31, 1999 and 1998 2
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1999 and 1998 3-4
Consolidated Statements of Changes in Stockholders' Equity
Three Months Ended March 31, 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7-20
Part II - Other Information: 20
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures 21
(ii)
FIRST NATIONAL COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
March 31, Dec. 31,
1999 1998
(UNAUDITED) (AUDITED)
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 8,858 $ 10,027
Federal funds sold 1,975 3,400
-------- --------
Total cash and cash equivalents 10,833 13,427
Interest-bearing balances with financial institutions 2,478 2,478
Securities:
Available-for-sale, at fair value 126,299 124,661
Held-to-maturity, at cost
(fair value $2,058 on March 31, 1999 and
$714 on December 31, 1998) 2,100 711
Federal Reserve Bank and FHLB stock, at cost 7,617 6,458
Net loans 348,353 324,610
Bank premises and equipment 4,987 4,812
Other assets 7,222 6,228
-------- --------
Total Assets $509,889 $483,385
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand - non-interest bearing $ 40,293 $ 39,427
Interest bearing demand 59,425 51,240
Savings 45,551 42,017
Time ($100,000 and over) 65,210 69,341
Other time 183,260 178,014
-------- --------
Total deposits 393,739 380,039
Borrowed funds 77,079 65,175
Other liabilities 4,231 3,492
-------- --------
Total Liabilities $475,049 $448,706
Shareholders' equity:
Common Stock, $1.25 par value,
authorized 5,000,000 shares;
2,398,360 shares issued and outstanding $ 2,998 $ 2,998
Additional Paid-in Capital 6,267 6,267
Retained Earnings 25,579 24,623
Accumulated Other Comprehensive Income (4) 791
-------- --------
Total shareholders' equity $ 34,840 $ 34,679
-------- --------
Total Liabilities and Shareholders' Equity $509,889 $483,385
======== ========
Note: The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See notes to financial statements
(1)
FIRST NATIONAL COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollars in thousands, except per share amounts)
Three Months Ending Year-to-Date
March 31, March 31, March 31, March 31,
1999 1998 1999 1998
-------- -------- -------- --------
Interest Income:
Loans $ 6,794 $ 6,093 $ 6,794 $ 6,093
Balances with banks 33 41 33 41
Investments 1,964 1,896 1,964 1,896
Federal Funds Sold 69 63 69 63
-------- -------- -------- --------
Total interest income 8,860 8,093 8,860 8,093
-------- -------- -------- --------
Interest Expense:
Deposits 3,912 3,677 3,912 3,677
Borrowed Funds 966 710 966 710
-------- -------- -------- --------
Total interest expense 4,878 4,387 4,878 4,387
-------- -------- -------- --------
Net Interest Income
before Loan Loss Provision 3,982 3,706 3,982 3,706
Provision for loan losses 180 180 180 180
-------- -------- -------- --------
Net interest income 3,802 3,526 3,802 3,526
-------- -------- -------- --------
Other Income:
Service charges on deposits 193 190 193 190
Other Income 101 63 101 63
Gain (Loss) on sale of:
Securities 213 4 213 4
Loans 9 77 9 77
Other Assets 0 0 0 0
-------- ------- -------- --------
Total other income 516 334 516 334
-------- ------- -------- --------
Other expenses:
Salaries & benefits 1,323 1,154 1,323 1,154
Occupancy & equipment 436 370 436 370
Other 851 701 851 701
-------- ------- -------- -------
Total other expenses 2,610 2,225 2,610 2,225
-------- ------- -------- -------
Income before income taxes 1,709 1,635 1,709 1,635
Income tax expense 393 394 393 394
-------- ------- -------- -------
NET INCOME $ 1,316 $ 1,241 $ 1,316 $ 1,241
======== ======= ======== =======
Earnings per share (1) $ 0.55 $ 0.52 $ 0.55 $ 0.52
======== ======= ======= =======
Weighted average
number of shares (1) 2,398,360 2,398,360 2,398,360 2,398,360
========= ========= ========= =========
(1)Per share data reflects the retroactive effect of the 100% stock dividend
issued August 31, 1998.
See notes to financial statements
(2)
FIRST NATIONAL COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
March 31, March 31,
1999 1998
(Dollars in thousands)
INCREASE (DECREASE) IN CASH EQUIVALENTS:
Cash Flows From Operating Activities:
Interest Received $ 8,728 $ 8,446
Fees & Commissions Received 294 254
Interest Paid (4,865) (4,459)
Income Taxes Paid - (17)
Cash Paid to Suppliers & Employees (2,501) (2,045)
------- -------
Net Cash Provided (Used) by Operating
Activities $ 1,656 $ 2,179
------- -------
Cash Flows from Investing Activities:
Securities available for sale:
Proceeds from Maturities $ 500 $ 500
Proceeds from Sales prior to maturity 18,260 2,146
Proceeds from Calls prior to maturity 8,139 19,590
Purchases (30,743) (20,674)
Securities held to maturity:
Proceeds from Calls prior to maturity 249 0
Purchases (1,622) (232)
Net (Increase) Decrease in
Interest-Bearing Bank Balances - (1,387)
Net (Increase) Decrease in Loans to Customers (23,914) (10,580)
Capital Expenditures (363) (131)
------- --------
Net Cash Provided (Used) by Investing
Activities $(29,494) $(10,768)
-------- --------
Cash Flows from Financing Activities:
Net Increase (Decrease) in Demand Deposits,
Money Market Demand, NOW Accounts, and
Savings Accounts $ 12,553 $ 1,512
Net Increase in Certificates of Deposit 1,115 4,105
Net Increase in Borrowed Funds 11,903 4,258
Repayment of Long-Term Debt - (11)
Dividends Paid (359) (324)
-------- --------
Net Cash Provided (Used) by Financing
Activities $ 25,212 $ 9,540
-------- --------
Net Increase (Decrease) in Cash and
Cash Equivalents $ (2,626) $ 951
Cash & Cash Equivalents at Beginning of Year $ 13,459 $ 14,681
-------- --------
CASH & CASH EQUIVALENTS AT END OF PERIOD $ 10,833 $ 15,632
======== ========
(Continued)
(3)
FIRST NATIONAL COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
1999 1998
------- -------
(Dollars in thousands)
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net Income $ 1,316 $ 1,241
-------- --------
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating
Activities:
Amortization (Accretion), Net 38 77
Depreciation 188 162
Provision for Probable Credit Losses 180 180
Provision for Deferred Taxes - -
Gain on Sale of Investment Securities (213) (4)
Gain on Sale of Other Assets (9) (77)
Increase (Decrease) in Taxes Payable 393 376
Decrease (Increase) in Interest Receivable (170) 277
Increase (Decrease) in Interest Payable 12 (72)
Decrease (Increase) in Prepaid Expenses
and Other Assets (413) (288)
Increase (Decrease) in Accrued Expenses
and Other Liabilities 334 307
------- -------
Total Adjustments $ 340 $ 938
------- -------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES $ 1,656 $ 2,179
======= =======
See notes to financial statements
(4)
FIRST NATIONAL COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
For The Three Months Ended March 31, 1999
(Dollars in thousands)
(UNAUDITED)
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, 1998 2,398 $2,998 $6,267 $24,622 $791 $34,679
Comprehensive Income:
Net income for the period 1,316 1,316 1,316
Other comprehensive income, net
of tax:
Unrealized loss on securities
available-for-sale, net of
deferred income tax benefit
of $410 (582)
Reclassification adjustment (213)
------
Total other comprehensive
income, net of tax (795) (795) (795)
------
Comprehensive Income 521
======
Cash dividends paid, $0.15 per share (359) (359)
------ ------- ------ ------- ------ -------
BALANCES, MARCH 31, 1999 2,398 $2,998 $6,267 $25,579 $ (4) $34,840
====== ======= ====== ======= ====== =======
(5)
FIRST NATIONAL COMMUNITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) The accounting and financial reporting policies of First National Community
Bancorp, Inc. and its subsidiary conform to generally accepted accounting
principles and to general practice within the banking industry. The consolidated
statements include the accounts of First National Community Bancorp, Inc. and
its wholly owned subsidiary, First National Community Bank (Bank) including its
subsidiary, FNCB Realty, Inc. (collectively, Company). All material intercompany
accounts and transactions have been eliminated in consolidation. The
accompanying interim financial statements are unaudited. In management's
opinion, the consolidated financial statements reflect a fair presentation of
the consolidated financial position of First National Community Bancorp, Inc.
and subsidiary, and the results of its operations and its cash flows for the
interim periods presented, in conformity with generally accepted accounting
principles.
These interim financial statements should be read in conjunction with the
audited financial statements and footnote disclosures in the Bank's Annual
Report to Shareholders for the fiscal year ended December 31, 1998. (2) Earnings
per share were calculated by dividing the net income of the Company by the
weighted average number of shares of common stock outstanding of 2,398,360 for
the periods ending March 31, 1999 and 1998, respectively, after giving
retroactive effect for the 100% Stock Dividend issued August 31, 1998 and the
10% Stock Dividend issued December 31, 1997. (3) The Company adopted Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" (SFAS 115), as of December 31, 1993. Adoption of
SFAS 115 is required for fiscal years beginning after December 15, 1993, with
earlier adoption permitted. The adoption of this standard resulted in a decrease
in the carrying value of "Securities Available-For-Sale" of $6,117 at March 31,
1999, offset by a decrease in Retained Earnings of $4,037 and the related
deferred tax impact of $2,080. (4) During the year, the Company adopted FASB
Statement No. 130, "Reporting Comprehensive Income." Statement No. 130 requires
the reporting of comprehensive income in addition to net income from operations.
Comprehensive income is a more inclusive financial reporting methodology that
includes disclosure of certain financial information that historically has not
been recognized in the calculation of net income.
Reclassifications have been made to the prior period financial statements
for comparative purposes as are requested by FASB Statement No. 130. (5) During
June 1997, Financial Accounting Standards Boards issued FASB 131, "Disclosures
about Segments of an Enterprise and Related Information" which establishes
standards for all public entities to report financial and descriptive
information about its reportable operating segments, and certain other
enterprise-wide information relative to its products and service, geographic
area, and major customers. FASB 131 initially applies to annual financial
statements with years beginning after December 15, 1997. However, it is the
opinion of management that there is no future impact from this accounting
standard since the Company's organizational structure does not consist of
separately identifiable reportable operating segments.
(6)
FIRST NATIONAL COMMUNITY BANCORP, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The consolidated financial review of First National Community Bancorp, Inc. (the
"Company") provides a comparison of the performance of the Company for the
periods ended March 31, 1999 and 1998. The financial information presented
should be reviewed in conjunction with the consolidated financial statements and
accompanying notes appearing elsewhere in this report. All share and per share
data has been restated to reflect the 100% stock dividend issued August 31, 1998
and the 10% stock dividend issued December 31, 1997.
Background
On July 1, 1998, First National Community Bancorp, Inc. (the "Company")
became the holding company for First National Community Bank, a national banking
association (the "Bank"). Pursuant to the terms of the Plan of Reorganization,
dated as of March 13, 1997, among the Corporation, the Bank and First National
Community Interim Bank (the "Interim Bank"), a national banking association and
a wholly-owned subsidiary of the Corporation, the Bank merged with, into the
Interim Bank, under the charter of the Interim Bank and under the name "First
National Community Bank." The shareholders of the Bank became the shareholders
of the Corporation, and the Bank became the wholly-owned subsidiary of the
Corporation. Shares were exchanged on a one-for-one basis.
The Company is a one bank holding company whose principal subsidiary is
First National Community Bank. The Company operates 8 full-service branch
banking offices in its principal market area in Lackawanna and Luzerne Counties.
At March 31, 1999, the Company had 174 full-time equivalent employees.
First National Community Bank was established as a national banking
association in 1910 as "The First National Bank of Dunmore." Based upon
shareholder approval received at a Special Shareholders' Meeting held October
27, 1987, the Bank changed its name to "First National Community Bank" effective
March 1, 1988. The Bank's operations are conducted from offices located in
Lackawanna and Luzerne Counties, Pennsylvania - the Main Office in Dunmore, the
downtown Scranton branch established in 1980, the Dickson City branch opened in
December, 1984, the Fashion Mall, Scranton/Carbondale Highway branch opened in
July, 1988, the Wilkes-Barre office, at 23 West Market Street, Wilkes-Barre
which opened for business on July 30, 1993, the Pittston Plaza Office, which
opened on April 10, 1995, at 1700 North Township Boulevard, Pittston, and the
Kingston Office, at 754 Wyoming Ave., Kingston, which opened on August 30, 1996.
An eighth community office located in Exeter opened for business on November 2,
1998.
The Bank provides the usual commercial banking services to individuals and
businesses, including a wide variety of loan and deposit instruments.
Additionally, the Bank entered into a partnership with INVEST during 1997 in
order to provide alternative products such as mutual funds, bonds, equities and
annuities directly from its community offices.
During 1996, FNCB Realty Inc. was formed as a wholly owned subsidiary of
the Bank to manage, operate and liquidate properties acquired through
foreclosure.
(7)
Summary:
Net income for the three months ended March 31, 1999 amounted to
$1,316,000, an increase of $75,000 or 6% compared to the same period of the
previous year. This increase can be attributed to a $276,000 improvement in net
interest income and an increase in non-interest income. Earnings from asset
sales increased $141,000 due to an increase in the gain on the sale of
securities of $209,000. Non-interest expenses increased $385,000, or 17%, over
the same period of last year. Operating income for the same period, after
excluding the effect of asset sales and loan loss provisions, decreased $66,000
or 5%.
RESULTS OF OPERATIONS Net Interest Income:
The Company's primary source of revenue is net interest income which
totaled $3,982,000 and $3,706,000 for the first three months of 1999 and 1998,
respectively. Year to date net interest margins (tax equivalent) decreased from
3.86% in March 1998 to 3.58% for the same period of 1999 comprised of a
forty-four basis point decrease in the yield earned on earning assets and a
twenty-one basis point decrease in the cost of interest-bearing liabilities.
Interest rate reductions during the fourth quarter of 1998 have had a more
immediate impact on earning assets while deposit repricing occurs gradually.
Earning assets increased $27 million to $491 million during the first three
months of 1999 and now total 96.4% of total assets, comparable to the year-end
level of 96.1%.
(8)
Yield/Cost Analysis
The following tables set forth certain information relating to the
Company's Statement of Financial Condition and reflect the weighted average
yield on assets and weighted average costs of liabilities for the periods
indicated. Such yields and costs are derived by dividing the annualized income
or expense by the weighted average balance of assets or liabilities,
respectively, for the periods shown:
Three-months ended March 31,
1999
--------------------------------
Average Yield/
Balance Interest Cost
------- -------- ------
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans (taxable) $328,280 $ 6,605 8.08%
Loans (tax-free) (1) 12,758 189 8.97
Investment securities (taxable) 95,749 1,499 6.26
Investment securities (tax-free)(1) 33,970 465 8.30
Time deposits with banks and
federal funds sold 8,325 102 4.95
-------- ------ ----
Total interest-earning assets 479,082 8,860 7.70%
-------- ------ ----
Non-interest earning assets 20,292
--------
Total Assets $499,374
========
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
Deposits $351,348 $ 3,912 4.52%
Borrowed funds 69,303 966 5.57
-------- ------- ----
Total interest-bearing liabilities 420,651 4,878 4.69%
------- ----
Other liabilities and shareholders' equity 78,723
--------
Total Liabilities and Shareholders' Equity $499,374
========
Net interest income/rate spread 3.01%
Net yield on average interest-
earning assets 3.58%
Interest-earning assets as a
percentage of interest-
bearing liabilities 114%
(1) Yields on tax-exempt loans and investment securities have been computed on a
tax equivalent basis.
(9)
Three-months ended March 31,
1998
--------------------------------
Average Yield/
Balance Interest Cost
--------- -------- -------
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans (taxable) $273,273 $ 5,866 8.62%
Loans (tax-free) (1) 15,096 227 9.09
Investment securities (taxable) 91,420 1,509 6.60
Investment securities (tax-free) (1) 26,832 387 8.74
Time deposits with banks and
federal funds sold 7,378 105 5.71
-------- ------- -----
Total interest-earning assets 413,999 8,094 8.14%
------- -----
Non-interest earning assets 16,889
--------
Total Assets $430,888
========
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
Deposits $314,457 $ 3,677 4.74%
Borrowed funds 48,090 710 5.91
-------- ------- ----
Total interest-bearing liabilities 362,547 4,387 4.90%
------- ----
Other liabilities and shareholders' equity 68,341
--------
Total Liabilities and Shareholders' Equity $430,888
========
Net interest income/rate spread 3.24%
Net yield on average interest-
earning assets 3.86%
Interest-earning assets as a
percentage of interest-
bearing liabilities 114%
(1) Yields on tax-exempt loans and investment securities have been computed on a
tax equivalent basis.
(10)
Rate Volume Analysis
The table below sets forth certain information regarding the changes in the
components of net interest income for the periods indicated. For each category
of interest earning asset and interest bearing liability, information is
provided on changes attributed to: (1) changes in rate (change in rate
multiplied by current volume); (2) changes in volume (change in volume
multiplied by old rate); (3) the total. The net change attributable to the
combined impact of volume and rate has been allocated proportionately to the
change due to volume and the change due to rate.
Period Ended March 31,
(Dollars in thousands)
1999 vs 1998
Increase (Decrease)
Due to
Rate Volume Total
------ ------ -------
Loans (taxable) $(482) $1,221 $ 739
Loans (tax-free) (2) (36) (38)
Investment securities (taxable) (81) 71 (10)
Investment securities (tax-free) (25) 103 78
Time deposits with banks and federal funds sold (15) 13 (2)
----- ------ ------
Total interest income $(605) $1,372 $ 767
----- ------ ------
Deposits $(183) $ 418 $ 235
Borrowed funds (57) 313 256
----- ------ ------
Total interest-bearing liabilities $(240) $ 731 $ 491
----- ------ ------
Net change in net interest income $(365) $ 641 $ 276
===== ====== ======
Period Ended March 31,
(Dollars in thousands)
1998 vs 1997
Increase (Decrease)
Due to
Rate Volume Total
------ ------ -----
Loans (taxable) $ (7) $372 $365
Loans (tax-free) (6) 41 35
Investment securities (taxable) (79) 519 440
Investment securities (tax-free) (2) (28) (30)
Time deposits with banks and federal funds sold 4 (3) 1
----- ---- ----
Total interest income $ (90) $901 $811
----- ---- ----
Deposits $ 66 $235 $301
Borrowed funds (21) 303 282
----- ---- ----
Total interest-bearing liabilities $ 45 $538 $583
----- ---- ----
Net change in net interest income $(135) $363 $228
===== ==== ====
(11)
Non-Interest Income and Expenses:
Non-interest income in the first three months of 1999 increased $182,000 in
comparison to the same period of 1998. The majority of this increase can be
attributed to the $209,000 increase in the gain on the sale of securities. All
other components of non-interest income recorded an increase over the prior
period. Excluding income from asset sales, non-interest income increased $41,000
or 16%, during the first three months of 1999 as compared to the same period of
last year. Income from service charges on deposits increased $3,000, or 2%, in
comparison to the same period of last year while other fee income increased
$38,000, or 60%. Loan servicing fees and investment brokerage income comprise
the majority of this increase.
Non-interest expense increased $385,000 or 17% for the period ended March
31, 1999 compared to the same period of the previous year. Salaries and Benefits
costs account for most of the increase, adding $169,000, or 15% in comparison to
the first three months of 1998. Other operating expenses increased $150,000, or
21%. A new branch office which opened in the fourth quarter of 1998 contributed
to the increase.
Other Comprehensive Income:
The Company's other comprehensive income includes unrealized holding gains
(losses) on securities which it has classified as available-for-sale in
accordance with FASB 115, "Accounting for Certain Investments in Debt and Equity
Securities."
Provision for Income Taxes:
The provision for income taxes is calculated based on annualized taxable
income. The provision for income taxes differs from the amount of income tax
determined applying the applicable U.S. statutory federal income tax rate to
pre-tax income from continuing operations as a result of the following
differences:
1999 1998
------ ------
Provision at statutory rate $582 $556
Add (Deduct):
Tax effect of non-taxable interest income (222) (208)
Non-deductible interest expense 31 29
Other items, net 2 17
---- ----
Income tax expense $393 $394
==== ====
(12)
Securities:
Carrying amounts and approximate fair value of investment securities are
summarized as follows:
March 31, 1999 December 31, 1998
Carrying Fair Carrying Fair
Amount Value Amount Value
(Dollars in thousands)
U.S. Treasury securities and
obligations of U.S.
government agencies $ 13,171 $ 13,176 $ 13,109 $13,111
Obligations of state &
political subdivisions 35,273 35,226 33,671 33,671
Mortgage-backed securities 78,960 78,960 77,590 77,590
Corporate debt securities 986 986 992 992
Equity securities 7,627 7,627 6,468 6,468
-------- -------- -------- -------
Total $136,017 $135,975 $131,830 $131,832
======== ======== ======== ========
The following summarizes the amortized cost, approximate fair value, gross
unrealized holding gains, and gross unrealized holding losses at March 31, 1999
of the Company's Investment Securities classified as available-for-sale:
March 31, 1999
(Dollars in thousands)
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
U.S. Treasury securities and
obligations of U.S.
government agencies $ 12,255 $ 18 $ 82 $ 12,191
Obligations of state and
political subdivisions 33,445 937 229 34,153
Mortgage-backed securities 79,595 105 740 78,960
Corporate debt securities 1,001 0 15 986
Equity securities 7,627 0 0 7,627
-------- ------ ------ --------
Total $133,923 $1,060 $1,066 $133,917
======== ====== ====== ========
(13)
The following summarizes the amortized cost, approximate fair value, gross
unrealized holding gains, and gross unrealized holding losses at March 31, 1999
of the Company's Investment Securities classified as held-to-maturity:
March 31, 1999
(Dollars in thousands)
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
--------- ---------- ---------- ------
U.S. Treasury securities and
obligations of U.S.
government agencies: $ 980 $ 6 $ 1 $ 985
Obligations of state and
political subdivisions: 1,120 0 47 1,073
Mortgage-backed securities: 0 0 0 0
Corporate debt securities: 0 0 0 0
Equity securities: 0 0 0 0
------ --- ---- ------
Total $2,100 $ 6 $ 48 $2,058
====== === ==== ======
The following table shows the amortized cost and approximate fair value of
the Company's debt securities at March 31, 1999 using contractual maturities.
Expected maturities will differ from contractual maturity because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
Available-for sale Held-to-maturity
Amortized Fair Amortized Fair
Cost Value Cost Value
(Dollars in Thousands) (Dollars in Thousands)
Amounts maturing in:
One year or less $ 1,502 $ 1,506 $ 0 $ 0
After one year through
five years 1,670 1,721 0 0
After five years through
ten years 13,159 13,488 0 0
After ten years 30,371 30,617 2,100 2,058
Mortgage-backed securities 79,594 78,958 0 0
-------- -------- ------ ------
Total $126,296 $126,290 $2,100 $2,058
======== ======== ====== ======
Gross proceeds from the sale of investment securities for the periods ended
March 31, 1999 and 1998 were $18,259,633 and $2,145,660 respectively with the
gross realized gains being $219,060 and $11,354 respectively, and gross realized
losses being $5,869 and $7,796, respectively.
At March 31, 1999 and 1998, investment securities with a carrying amount of
$72,176,377 and $46,011,386 respectively, were pledged as collateral to secure
public deposits and for other purposes.
(14)
Loans:
The following table sets forth detailed information concerning the
composition of the Company's loan portfolio as of the dates specified:
March 31, 1999 December 31, 1998
Amount % Amount %
(Dollars in thousands)
Commercial & Financial $ 59,936 17.0 $ 49,796 15.1
Real Estate Construction 2,294 0.6 2,350 0.7
Real Estate Mortgage 216,021 61.3 209,204 63.6
Installment Loans to Individuals 61,090 17.3 58,799 17.9
Other Loans 13,331 3.8 8,748 2.7
Less: Unearned Discount (3) 0.0 (4) 0.0
-------- ----- -------- -----
Total Gross Loans $352,669 100.0 $328,893 100.0
----- -----
Less: Allow. for Loan Losses (4,316) (4,283)
-------- --------
Net Loans $348,353 $324,610
======== ========
The following table sets forth certain information with respect to the
Company's allowance for loan losses and charge-offs:
Period Ended March 31,
1999 1998
(Dollars in thousands)
Balance, January 1 $4,283 $3,623
Recoveries Credited 26 23
Losses Charged 173 48
Provision for Loan Losses 180 180
------ ------
Balance at End of Period $4,316 $3,778
====== ======
(15)
The following table presents information about the Company's non-performing
assets for the periods indicated:
March 31, 1999 March 31, 1998
(Dollars in thousands)
Nonaccrual loans $1,665 $ 208
Restructured loans 287 351
------ -----
Total non-performing loans 1,952 559
Other Real Estate Owned 0 0
------ -----
Total non-performing assets $1,952 $ 559
====== =====
March 31, 1999 March 31, 1998
Non-performing loans as a
percentage of gross loans 0.6% 0.2%
====== ======
Non-performing assets as a
percentage of total assets 0.4% 0.1%
====== ======
Non-performing assets are comprised of non-accrual and restructured loans,
and other real estate owned. Loans are placed in nonaccrual status when
management believes that the collection of interest or principal is doubtful, or
generally when a default of interest or principal has existed for 90 days or
more, unless such loan is fully secured and in the process of collection. When
interest accrual is discontinued, interest credited to income in the current
year is reversed and interest accrued in prior years is charged against the
allowance for credit losses. Any payments received are applied, first to the
outstanding loan amounts, then to the recovery of any charged-off loan amounts.
Any excess is treated as a recovery of lost interest. The increase recorded in
1999 can be attributed primarily to three credits which are substantially
secured by real estate.
Other real estate consists of property acquired through foreclosure. The
property is carried at the lower of cost or the estimated fair value based on an
independent appraisal.
Provision for Credit Losses:
The provision for credit losses varies from year to year based on
management's evaluation of the adequacy of the allowance for credit losses in
relation to the risks inherent in the loan portfolio. In its evaluation,
management considers credit quality, changes in loan volume, composition of the
loan portfolio, past experience, delinquency trends, and the economic condition.
Consideration is also given to examinations performed by regulatory authorities
and the Company's independent accountants. A monthly provision of $60,000 was
credited to the allowance for loan losses during the first quarters of 1999 and
1998, respectively. The ratio of the loan loss reserve to total loans at March
31, 1999 and 1998 was 1.22% and 1.20%, respectively.
(16)
Asset/Liability Management, Interest Rate Sensitivity and Inflation
The major objectives of the Company's asset and liability management are to
(1) manage exposure to changes in the interest rate environment to achieve a
neutral interest sensitivity position within reasonable ranges, (2) ensure
adequate liquidity and funding, (3) maintain a strong capital base, and (4)
maximize net interest income opportunities. First National Community Bank
manages these objectives through its Senior Management and Asset and Liability
Management Committees. Members of the committees meet regularly to develop
balance sheet strategies affecting the future level of net interest income,
liquidity and capital. Items that are considered in asset and liability
management include balance sheet forecasts, the economic environment, the
anticipated direction of interest rates and the Bank's earnings sensitivity to
changes in these rates.
The Company analyzes its interest sensitivity position to manage the risk
associated with interest rate movements through the use of "gap analysis" and
"simulation modeling." Because of the limitations of the gap reports, the Bank
uses simulation modeling to project future net interest income streams
incorporating the current "gap" position, the forecasted balance sheet mix, and
the anticipated spread relationships between market rates and bank products
under a variety of interest rate scenarios.
Economic conditions affect financial institutions, as they do other
businesses, in a number of ways. Rising inflation affects all businesses through
increased operating costs but affects banks primarily through the manner in
which they manage their interest sensitive assets and liabilities in a rising
rate environment. Economic recession can also have a material effect on
financial institutions as the assets and liabilities affected by a decrease in
interest rates must be managed in a way that will maximize the largest component
of a bank's income, that being net interest income. Recessionary periods may
also tend to decrease borrowing needs and increase the uncertainty inherent in
the borrowers' ability to pay previously advanced loans. Additionally,
reinvestment of investment portfolio maturities can pose a problem as attractive
rates are not as available. Management closely monitors the interest rate risk
of the balance sheet and the credit risk inherent in the loan portfolio in order
to minimize the effects of fluctuations caused by changes in general economic
conditions.
Liquidity
The term "liquidity" refers to the ability of the Company to generate
sufficient amounts of cash to meet its cash-flow needs. Liquidity is required to
fulfill the borrowing needs of the Bank's credit customers and the withdrawal
and maturity requirements of its deposit customers, as well as to meet other
financial commitments.
The short-term liquidity position of the Company is strong as evidenced by
$8,858,000 in cash and due from banks and $2,181,000 in interest-bearing
balances with banks maturing within one year. A secondary source of liquidity is
provided by the investment portfolio with $6,466,000 or 5% of the portfolio
maturing or expected to be called within one year and expected cash flow from
principal reductions approximating an additional $15,000,000.
(17)
The Company has relied primarily on its retail deposits as a source of
funds. The Bank is normally only a seller of Federal funds to invest excess
cash; however, the Bank can also borrow in the Federal Funds market to meet
temporary liquidity needs. Other sources of potential liquidity include
repurchase agreements, Federal Home Loan Bank advances and the Federal Reserve
Discount Window.
Capital Management
A strong capital base is essential to the continued growth and
profitability of the Company and in that regard the maintenance of appropriate
levels of capital is a management priority. The Company's principal capital
planning goals are to provide an adequate return to shareholders while retaining
a sufficient base from which to provide for future growth, while at the same
time complying with all regulatory standards. As more fully described in Note 13
to the financial statements, regulatory authorities have prescribed specified
minimum capital ratios as guidelines for determining capital adequacy to help
insure the safety and soundness of financial institutions.
Total stockholders' equity increased $161,000 or 0.5% during the first
quarter of 1999 comprised of an increase in retained earnings in the amount of
$956,000 after paying cash dividends offset by a $795,000 decrease in the market
value of our securities available-for-sale. During the same period of 1998,
total stockholders' equity increased $586,000, or 1.9%, comprised of an increase
in retained earnings of $917,000, after paying cash dividends offset by a
$331,000 increase in the market value of our securities available-for-sale. The
total dividend payout during the first three months of 1999 and 1998 represents
$.15 per share and $.135 per share, respectively. Excluding the impact due to
securities valuation, increases in core equity amounted to $956,000 and
$917,000, respectively.
The Board of Governors of the Federal Reserve System and other various
regulatory agencies have specified guidelines for purposes of evaluating a
bank's capital adequacy. Currently, banks must maintain a leverage ratio of core
capital to total assets at a prescribed level, namely 3%. In addition, bank
regulators have issued risk-based capital guidelines. Under such guidelines,
minimum ratios of core capital and total qualifying capital as a percentage of
risk-weighted assets and certain off-balance sheet items of 4% and 8% are
required. As of March 31, 1999, First National Community Bank met all capital
requirements with a leverage ratio of 6.97% and core capital and total
risk-based capital ratios of 9.59% and 10.78%, respectively.
YEAR 2000 COMPLIANCE: MANAGEMENT INFORMATION SYSTEMS
State of Readiness:
It is the policy of First National Community Bank (the "Bank") that all of
its automation systems shall be able to handle the change of the year from 1999
to 2000 without difficulty for the Bank. The Bank recognizes the fact that the
Year 2000 issue is an enterprise-wide challenge, involving more than just
technology and automation. The Board of Directors and Senior Management of the
Bank will actively manage the Bank's Year 2000 planning, allocation and
monitoring efforts, including measurements of risk, both internal and external.
(18)
The Bank has determined the need to involve officers and employees from
various areas of the Bank in our Year 2000 project. To this end, a Year 2000
Operations Committee has been formed to provide the manpower and knowledge to
tackle the Year 2000 project. This committee consists of officers and employees
from every area of the Bank in order to ensure that all mission-critical systems
and applications are identified and tested for Year 2000 compliance.
In addition, an Executive Committee has been formed consisting of Senior
Management and the Year 2000 project managers. This committee will review all
aspects of the Bank's Year 2000 project efforts to ensure that the century date
change is a smooth process for the Bank. The Executive committee also will
ensure that adequate resources are provided to assist in managing the Year 2000
project, provide guidance to the Operations Committee in its Year 2000 efforts,
and report to the Board of Directors regarding the status and any problems
encountered during the course of the Year 2000 project.
In addition to these committees, Market Partners, Inc., (MPI) was
contracted by the Bank to independently verify and validate the Bank's Year 2000
readiness program. In anticipation of what has been described as one of the most
monumental and critical project activities of all time, Market Partners
performed an independent assessment of First National Community Bank's Year 2000
project planning activities to date. The engagement performed an Independent
Verification & Validation review on First National Community Bank's Year 2000
plans, activities, and commitments and has identified both strengths and
opportunities for the Bank to act upon to further the Bank's Year 2000
readiness. The results of this independent review has enabled the Bank to focus
its efforts on the more critical areas of the plan.
It should be noted that each area of First National Community Bank's Year
2000 Plan is being addressed according to the guidelines that have been
established by the FFIEC and other regulatory agencies. These guidelines include
the five (5) phases of the Year 2000 problem resolution process as listed in the
May 16, 1997 OCC Advisory Letter AL 97-6 which is summarized below:
1) Awareness of the Problem
2) Assessment of Complexity
3) Renovation
4) Validation
5) Implementation
Costs:
The Bank has conducted a comprehensive review of its computer systems that could
be affected by the Year 2000 issue and does not believe the amounts to be
expended over the next two years will have a material impact on its earnings or
financial position
Risks:
The Bank has identified areas of risk in terms of Year 2000 vulnerability
such as 1) Host Processor, 2) 3rd Party Software, 3) Hardware, 4) Networks, 5)
Systems of Others, 6) Vendors, 7) Insurance, and 8) Credit Risk. Each area of
risk will be addressed separately by the appropriate committees. However, no
assurance can be made that the systems of others that the Bank relies upon will
be converted on a timely basis, or that their failure to be compliant would not
have an adverse effect on the Bank.
(19)
Contingency Plans:
The Bank recognizes the need to design Year 2000 contingency plans to
mitigate risk. The Bank will evaluate the risks associated with the failure of
core business processes including remediation contingency planning and business
resumption contingency plans. Periodic tests of contingency plans will be
scheduled to ensure that these changes are considered and that the level of
support for the core business process is adequate. Based on test results,
modifications will be made to ensure that the business continuity plan remains
valid.
Part II Other Information
Item 1 - Legal Proceeding
The Bank is not involved in any material pending legal proceedings, other
than routine litigation incidental to the business.
Item 2 - Changes in Securities
None
Item 3 - Defaults upon Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8 - K
(20)
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Registrant: FIRST NATIONAL COMMUNITY BANCORP, INC
Date: May 11, 1999 /s/ J. David Lombardi
J. David Lombardi, President/
Chief Executive Officer
Date: May 11, 1999 /s/ William Lance
William Lance, Treasurer/
Principal Financial Officer
(21)