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 June 30, 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)
2,401,782 shares
(Outstanding at July 15, 1999)
FIRST NATIONAL COMMUNITY BANCORP, INC.
INDEX
Page No.
Part I - Consolidated Financial Statements
Item 1. Consolidated Financial Statements
Consolidated Statements of Financial Condition
June 30, 1999 and December 31, 1998 1
Consolidated Statements of Income
Three Months Ended June 30, 1999 and 1998
YTD Ended June 30, 1999 and 1998 2
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1999 and 1998 3-4
Consolidated Statements of Changes in Stockholders' Equity
Six Months Ended June 30, 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)
June 30, Dec. 31,
1999 1998
(UNAUDITED) (AUDITED)
----------- ---------
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 12,205 $ 10,027
Federal funds sold 0 3,400
-------- --------
Total cash and cash equivalents 12,205 13,427
Interest-bearing balances with financial institutions 2,280 2,478
Securities:
Available-for-sale, at fair value 124,572 124,661
Held-to-maturity, at cost
(fair value $1,952 on June 30, 1999 and
$714 on December 31, 1998) 2,132 711
Federal Reserve Bank and FHLB stock, at cost 7,741 6,458
Net loans 344,457 324,610
Bank premises and equipment 4,933 4,812
Other assets 9,948 6,228
-------- --------
Total Assets $508,268 $483,385
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand - non-interest bearing $ 39,304 $ 39,427
Interest bearing demand 60,943 51,240
Savings 47,430 42,017
Time ($100,000 and over) 64,132 69,341
Other time 183,775 178,014
-------- --------
Total deposits 395,584 380,039
Borrowed funds 74,538 65,175
Other liabilities 4,296 3,492
-------- --------
Total Liabilities $474,418 $448,706
-------- --------
Shareholders' equity:
Common Stock, $1.25 par value, authorized 5,000,000
shares; 2,401,782 shares issued and outstanding at
June 30, 1999 and 2,398,360 shares issued and
outstanding at December 31, 1998 $ 3,002 $ 2,998
Additional Paid-in Capital 6,398 6,267
Retained Earnings 26,853 24,623
Accumulated Other Comprehensive Income (2,403) 791
-------- --------
Total shareholders' equity $ 33,850 $ 34,679
-------- --------
Total Liabilities and Shareholders' Equity $508,268 $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
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
-------- -------- -------- --------
Interest Income:
Loans $ 7,411 $ 6,239 $ 14,205 $ 12,332
Balances with banks 33 45 66 86
Investments 2,138 1,989 4,102 3,884
Federal Funds Sold 7 59 76 123
-------- -------- -------- --------
Total interest income 9,589 8,332 18,449 16,425
-------- -------- -------- --------
Interest Expense:
Deposits 3,917 3,742 7,829 7,418
Borrowed Funds 1,074 767 2,040 1,478
-------- -------- -------- --------
Total interest expense 4,991 4,509 9,869 8,896
-------- -------- -------- --------
Net Interest Income
before Loan Loss Provision 4,598 3,823 8,580 7,529
Provision for loan losses 180 180 360 360
-------- -------- -------- -------
Net interest income 4,418 3,643 8,220 7,169
-------- -------- -------- -------
Other Income:
Service charges on deposits 205 201 398 391
Other Income 94 110 196 174
Gain (Loss) on sale of:
Securities 0 47 213 51
Loans 35 53 44 130
Other Assets 0 38 0 38
-------- -------- -------- -------
Total other income 334 449 851 784
-------- -------- -------- -------
Other expenses:
Salaries & benefits 1,322 1,149 2,645 2,303
Occupancy & equipment 432 364 868 734
Other 817 747 1,668 1,448
-------- -------- -------- -------
Total other expenses 2,571 2,260 5,181 4,485
-------- -------- -------- -------
Income before income taxes 2,181 1,832 3,890 3,468
Income tax expense 547 473 940 867
-------- -------- -------- -------
NET INCOME $ 1,634 $ 1,359 $ 2,950 $ 2,601
======== ======== ======== =======
Earnings per share (1) $ 0.68 $ 0.57 $ 1.23 $ 1.08
======== ======== ======== =======
Weighted average number
of shares (1) 2,398,398 2,398,360 2,398,379 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
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
June 30, June 30,
1999 1998
(Dollars in thousands)
INCREASE (DECREASE) IN CASH EQUIVALENTS:
Cash Flows From Operating Activities:
Interest Received $ 18,263 $ 16,813
Fees & Commissions Received 593 695
Interest Paid (9,718) (8,867)
Income Taxes Paid (804) (917)
Cash Paid to Suppliers & Employees (6,174) (4,186)
-------- --------
Net Cash Provided (Used) by Operating
Activities $ 2,160 $ 3,538
-------- --------
Cash Flows from Investing Activities:
Securities available for sale:
Proceeds from Maturities $ 1,000 $ 500
Proceeds from Sales prior to maturity 18,260 10,638
Proceeds from Calls prior to maturity 12,045 28,113
Purchases (37,172) (43,603)
Securities held to maturity:
Proceeds from Calls prior to maturity 249 0
Purchases (1,622) (232)
Net (Increase) Decrease in
Interest-Bearing Bank Balances 198 (1,576)
Net (Increase) Decrease in Loans to Customers (20,163) (12,272)
Capital Expenditures (500) (369)
-------- -------
Net Cash Provided (Used) by Investing
Activities $(27,705) $(18,801)
-------- --------
Cash Flows from Financing Activities:
Net Increase (Decrease) in Demand Deposits,
Money Market Demand, NOW Accounts,
and Savings Accounts $ 14,962 $ 2,940
Net Increase in Certificates of Deposit 552 11,170
Net Increase in Borrowed Funds 9,362 3,577
Repayment of Long-Term Debt - (11)
Net Proceeds from Issuance of Common Stock
Through Dividend Reinvestment 135 0
Dividends Paid (720) (648)
-------- --------
Net Cash Provided (Used) by Financing
Activities $ 24,291 $ 17,028
-------- --------
Net Increase (Decrease) in Cash and
Cash Equivalents $ (1,254) $ 1,765
Cash & Cash Equivalents at Beginning of Year $ 13,459 $ 14,681
-------- --------
CASH & CASH EQUIVALENTS AT END OF PERIOD $ 12,205 $ 16,446
======== ========
(Continued)
(3)
FIRST NATIONAL COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
1999 1998
------- -------
(Dollars in thousands)
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net Income $ 2,950 $ 2,601
-------- --------
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating
Activities:
Amortization (Accretion), Net (3) 98
Depreciation 380 320
Provision for Probable Credit Losses 360 360
Provision for Deferred Taxes - -
Gain on Sale of Investment Securities (213) (51)
Gain on Sale of Other Assets (44) (38)
Increase (Decrease) in Taxes Payable 137 (51)
Decrease (Increase) in Interest Receivable (184) 290
Increase (Decrease) in Interest Payable 151 29
Decrease (Increase) in Prepaid Expenses
and Other Assets (1,891) (375)
Increase (Decrease) in Accrued Expenses
and Other Liabilities 517 355
-------- -------
Total Adjustments $ (790) $ 937
-------- -------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES $ 2,160 $ 3,538
======== =======
See notes to financial statements
(4)
FIRST NATIONAL COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
For The Six Months Ended June 30, 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 $24,623 $ 791 $34,679
Comprehensive Income:
Net income for the period 2,950 2,950 2,950
Other comprehensive income, net
of tax:
Unrealized loss on securities
available-for-sale, net of
deferred income tax benefit
of $1,646 (2,981)
Reclassification adjustment (213)
------
Total other comprehensive
income, net of tax (3,194) (3,194) (3,194)
------
Comprehensive Income (244)
Issuance of 3,422 shares of Common
Stock through Dividend
Reinvestment 4 4 131 135
Cash dividends paid, $0.30 per share (720) (720)
----- ------ ------ ------- ------- -------
BALANCES, JUNE 30, 1999 2,402 $3,002 $6,398 $26,853 $(2,403) $33,850
===== ====== ====== ======= ======= =======
(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 2,398,379
and 2,398,360 for the periods ending June 30, 1999 and 1998, respectively, after
giving retroactive effect for the 100% Stock Dividend issued August 31, 1998.
(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 $3,640,709 at June 30, 1999, offset by a decrease in
Retained Earnings of $2,402,868 and the related deferred tax impact of
$1,237,841. (4) 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. (5) In 1998, 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.
(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 June 30, 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.
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 June 30, 1999, the Company had 177 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 six months ended June 30, 1999 amounted to $2,950,000,
an increase of $349,000 or 13% compared to the same period of the previous year.
This increase can be attributed to a $1,051,000 improvement in net interest
income and a 9% increase in non-interest income. Earnings from asset sales
increased $38,000 due to an increase in the gain on the sale of securities of
$162,000. Non-interest expenses increased $696,000, or 16%, over the same period
of last year due partially to costs associated with a new community office.
Operating income for the same period, after excluding the effect of asset sales
and loan loss provisions, increased $384,000 or 11%.
RESULTS OF OPERATIONS Net Interest Income:
The Company's primary source of revenue is net interest income which
totaled $8,580,000 and $7,529,000 for the first six months of 1999 and 1998,
respectively. Year to date net interest margins (tax equivalent) decreased from
3.87% in June 1998 to 3.78% for the same period of 1999 comprised of a
twenty-seven basis point decrease in the yield earned on earning assets and a
twenty-four 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 $24 million to $488 million during the first six
months of 1999 and now total 96.1% of total assets, equal to the year-end level.
(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:
Six-months ended June 30,
1999
---------------------------------
Average Yield/
Balance Interest Cost
-------- -------- ----
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans (taxable) $333,802 $13,824 8.27%
Loans (tax-free) (1) 12,759 380 8.99
Investment securities (taxable) 98,403 3,129 6.36
Investment securities (tax-free)(1) 35,952 973 8.20
Time deposits with banks and
federal funds sold 5,634 143 5.07
Total interest-earning assets 486,550 18,449 7.86%
------- ----
Non-interest earning assets 20,531
--------
Total Assets $507,081
========
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
Deposits $354,647 $ 7,829 4.45%
Borrowed funds 73,105 2,040 5.55
-------- ------- ----
Total interest-bearing liabilities 427,752 9,869 4.64%
------- ----
Other liabilities and shareholders' equity 79,329
--------
Total Liabilities and Shareholders' Equity $507,081
========
Net interest income/rate spread 8,580 3.22%
Net yield on average interest-
earning assets 3.78%
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)
Six-months ended June 30,
1998
-------------------------
Average Yield/
Balance Interest Cost
------- -------- ----
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans (taxable) $ 277,031 $ 11,892 8.58%
Loans (tax-free) (1) 14,617 441 9.08
Investment securities (taxable) 91,751 3,054 6.66
Investment securities (tax-free) (1) 29,026 830 8.67
Time deposits with banks and
federal funds sold 7,308 208 5.71
-------- ------- ----
Total interest-earning assets 419,735 16,425 8.13%
Non-interest earning assets 16,581
--------
Total Assets $436,316
========
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
Deposits $316,681 $ 7,418 4.72%
Borrowed funds 50,102 1,478 5.90
-------- ------- ----
Total interest-bearing liabilities 366,783 8,896 4.88%
Other liabilities and shareholders' equity 69,533
--------
Total Liabilities and Shareholders' Equity $436,316
========
Net interest income/rate spread 7,529 3.25%
Net yield on average interest-
earning assets 3.87%
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 June 30,
(Dollars in thousands)
1999 vs 1998
Increase (Decrease)
Due to
Rate Volume Total
----- ------ -----
Loans (taxable) $(575) $2,507 $1,932
Loans (tax-free) (4) (56) (60)
Investment securities (taxable) (144) 219 75
Investment securities (tax-free) (56) 198 142
Time deposits with banks and
federal funds sold (19) (47) (66)
----- ------ ------
Total interest income $(798) $2,821 $2,023
----- ------ ------
Deposits $(414) $ 825 $ 411
Borrowed funds (116) 678 562
----- ------ ------
Total interest expense $(530) $1,503 $ 973
----- ------ ------
Net change in net interest income $(268) $1,318 $1,050
===== ====== ======
Period Ended June 30,
(Dollars in thousands)
1998 vs 1997
Increase (Decrease)
Due to
Rate Volume Total
----- ------ -------
Loans (taxable) $ (95) $ 793 $ 698
Loans (tax-free) (15) 62 47
Investment securities (taxable) (140) 922 782
Investment securities (tax-free) (12) 29 17
Time deposits with banks
and federal funds sold 5 36 41
----- ------ ------
Total interest income $(257) $1,842 $1,585
----- ------ ------
Deposits $ 97 $ 476 $ 573
Borrowed funds (55) 616 561
----- ------ ------
Total interest expense $ 42 $1,092 $1,134
----- ------ ------
Net change in net interest income $(299) $ 750 $ 451
===== ====== ======
(11)
Non-Interest Income and Expenses:
Non-interest income in the first six months of 1999 increased $67,000 in
comparison to the same period of 1998. The majority of this increase can be
attributed to the $162,000 increase in the gain on the sale of securities,
offset by a decrease in the gain on the sale of loans of $86,000.
Excluding income from asset sales, non-interest income increased $29,000 or
5%, during the first six months of 1999 as compared to the same period of last
year. Income from service charges on deposits increased $7,000, or 2%, in
comparison to the same period of last year while other fee income increased
$22,000, or 13%. Loan servicing fees and investment brokerage income comprise
the majority of this increase.
Non-interest expense increased $696,000 or 16% for the period ended June
30, 1999 compared to the same period of the previous year. Salaries and Benefits
costs account for most of the increase, adding $342,000, or 15% in comparison to
the first six months of 1998. Other operating expenses increased $220,000, or
15%. 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 $1,330 $1,179
Add (Deduct):
Tax effect of non-taxable interest income (460) (432)
Non-deductible interest expense 64 61
Other items, net 6 59
------ ------
Income tax expense $ 940 $ 867
====== ======
(12)
Securities:
Carrying amounts and approximate fair value of investment securities are
summarized as follows:
June 30, 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 $ 13,840 $ 13,790 $ 13,109 $ 13,111
Obligations of state &
political subdivisions 37,711 37,581 33,671 33,671
Mortgage-backed securities 74,201 74,201 77,590 77,590
Corporate debt securities 952 952 992 992
Equity securities 7,741 7,741 6,468 6,468
-------- -------- -------- --------
Total $134,445 $134,265 $131,830 $131,832
======== ======== ======== ========
The following summarizes the amortized cost, approximate fair value, gross
unrealized holding gains, and gross unrealized holding losses at June 30, 1999
of the Company's Investment Securities classified as available-for-sale:
June 30, 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: $ 13,263 $ 1 $ 422 $ 12,842
Obligations of state and
political subdivisions: 37,098 538 1,059 36,577
Mortgage-backed securities: 76,850 54 2,703 74,201
Corporate debt securities: 1,001 0 49 952
Equity securities: 7,741 0 0 7,741
-------- ---- ------ --------
Total $135,953 $593 $4,233 $132,313
======== ==== ====== ========
(13)
The following summarizes the amortized cost, approximate fair value, gross
unrealized holding gains, and gross unrealized holding losses at June 30, 1999
of the Company's Investment Securities classified as held-to-maturity:
June 30, 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: $ 998 $ 0 $ 49 $ 949
Obligations of state and
political subdivisions: 1,134 0 131 1,003
Mortgage-backed securities: 0 0 0 0
Corporate debt securities: 0 0 0 0
Equity securities: 0 0 0 0
------ ----- ---- ------
Total $2,132 $ 0 $180 $1,952
====== ===== ==== ======
The following table shows the amortized cost and approximate fair value of
the Company's debt securities at June 30, 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 $ 1,001 $ 1,001 $ 0 $ 0
After one year through
five years 3,377 3,402 0 0
After five years through
ten years 13,698 13,258 0 0
After ten years 33,286 30,758 2,132 1,952
Mortgage-backed securities 76,850 74,201 0 0
-------- -------- ------ ------
Total $128,212 $124,572 $2,132 $1,952
======== ======== ====== ======
Gross proceeds from the sale of investment securities for the periods ended
June 30, 1999 and 1998 were $18,259,633 and $10,637,449 respectively with the
gross realized gains being $219,060 and $76,209 respectively, and gross realized
losses being $5,869 and $24,952, respectively.
At June 30, 1999 and 1998, investment securities with a carrying amount of
$78,445,710 and $49,657,797 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:
June 30, 1999 December 31, 1998
---------------- ----------------------
Amount % Amount %
-------- ------ -------- -----
(Dollars in thousands)
Commercial & Financial $ 65,073 18.7 $ 49,796 15.1
Real Estate Construction 3,156 0.9 2,350 0.7
Real Estate Mortgage 219,573 62.9 209,204 63.6
Installment Loans to Individuals 53,135 15.2 58,799 17.9
Other Loans 8,051 2.3 8,748 2.7
Less: Unearned Discount (2) 0.0 (4) 0.0
-------- ----- -------- -----
Total Gross Loans $348,986 100.0 $328,893 100.0
----- -----
Less: Allow. for Loan Losses (4,529) (4,283)
-------- --------
Net Loans $344,457 $324,610
======== ========
The following table sets forth certain information with respect to the
Company's allowance for loan losses and charge-offs:
Period Ended
June 30, Dec 31,
1999 1998
------- -------
(Dollars in thousands)
Balance, January 1 $4,283 $3,623
Recoveries Credited 161 47
Losses Charged 275 307
Provision for Loan Losses 360 920
------ ------
Balance at End of Period $4,529 $4,283
====== ======
(15)
The following table presents information about the Company's non-performing
assets for the periods indicated:
June 30, 1999 Dec 31, 1998
------------- ------------
(Dollars in thousands)
Nonaccrual loans $ 1,086 $ 845
Loans past due 90 days or more
and still accruing 452 452
------- ------
Total non-performing loans 1,538 1,297
------- ------
Other Real Estate Owned 0 0
------- ------
Total non-performing assets $ 1,538 $1,297
======= ======
June 30, 1999 Dec 31, 1998
Non-performing loans as a
percentage of gross loans 0.4% 0.4%
====== ======
Non-performing assets as a
percentage of total assets 0.3% 0.3%
====== ======
Non-performing assets are comprised of non-accrual loans and loans past due
90 days or more and still accruing, 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 half of 1999 and
1998, respectively. The ratio of the loan loss reserve to total loans at June
30, 1999 and 1998 was 1.30% and 1.19%, 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
$12,205,000 in cash and due from banks and $2,280,000 in interest-bearing
balances with banks maturing within one year. A secondary source of liquidity is
provided by the investment portfolio with $13,489,000 or 10% 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 decreased $829,000 or 2.4% during the first half
of 1999 comprised of an increase in retained earnings in the amount of
$2,230,000 after paying cash dividends and $135,000 from stock issued through
Dividend Reinvestment offset by a $3,194,000 decrease in the market value of our
securities available-for-sale. During the same period of 1998, total
stockholders' equity increased $1,971,000, or 6.2%, comprised of an increase in
retained earnings of $1,953,000, after paying cash dividends and an $18,000
increase in the market value of our securities available-for-sale. The total
dividend payout during the first six months of 1999 and 1998 represents $.30 per
share and $.27 per share, respectively. Excluding the impact due to securities
valuation, increases in core equity amounted to $2,365,000 and $1,953,000,
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 June 30, 1999, First National Community Bank met all capital
requirements with a leverage ratio of 7.00% and core capital and total
risk-based capital ratios of 9.89% and 11.14%, 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
The 1999 Annual Meeting of Shareholders of First National Community
Bancorp, Inc. was held on May 19, 1999 at the Company's Administrative Office,
102 East Drinker Street, Dunmore, Pennsylvania, for the purpose of electing four
Class A directors to serve for a three-year term and until their successors are
elected and have qualified. The following Class A directors were elected to
serve until 2002:
Michael J. Cestone, Jr.
Louis A. DeNaples
Joseph J. Gentile
Joseph O. Haggerty
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8 - K
None
(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: July 26, 1999 /s/ J. David Lombardi
------------- ----------------------
J. David Lombardi, President/
Chief Executive Officer
Date: July 26, 1999 /s/ William Lance
------------- ----------------------
William Lance, Treasurer/
Principal Financial Officer
(21)