Filed pursuant to Rule 424(b)(3)
Registration Number 333-86249
Prospectus
FIRST NATIONAL COMMUNITY BANCORP, INC.
75,000 Shares of Common Stock
Price $40 per share
First National Community Bancorp, Inc. is offering shares of its common
stock. We are selling these shares directly on a best efforts basis and not
through underwriters, brokers or dealers. There is no minimum number of shares
that must be sold nor a minimum amount of subscriptions that we must accept
before we can use the proceeds. The offering will begin on October 15, 1999, or
as soon as practical after this registration statement becomes effective, and
will end on November 30, 1999, unless extended until December 22, 1999. The
minimum amount that you may subscribe for is $1,000.00 of common stock (25
shares) and the maximum amount is $250,000.00 (6,250 shares). Our address is 102
East Drinker Street, Dunmore, Pennsylvania 18512-2491, and our telephone number
is (570) 346-7667.
Our common stock trades on the OTC Bulletin Board under the symbol "FNCB".
This offering involves a degree of risk. See "Risk Factors" beginning on
page 3 for information that prospective purchasers should consider before
investing in our common stock.
Our shares of common stock are not savings accounts, deposits or other
obligations of a bank or savings association and are not insured by the FDIC or
any other governmental agency.
Neither the Securities and Exchange Commission, the Office of the
Comptroller of the Currency, the Federal Deposit Insurance Corporation, the
Board of Governors of the Federal Reserve System nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is October 22, 1999
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TABLE OF CONTENTS
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PROSPECTUS SUMMARY........................................................................................1
The Company......................................................................................1
The Offering.....................................................................................1
RISK FACTORS..............................................................................................3
Our profitability is dependent on the profitability of our subsidiary bank.......................3
A downturn in the economic conditions in our market areas may adversely affect our
business................................................................................3
You will have a minimal influence on shareholder decisions.......................................3
Possible future sales of our common stock by our directors and executive officers could
cause the market value of our common stock to decline...................................4
Regulatory restrictions on dividend payments from our subsidiary bank
may affect our ability to pay dividends to our shareholders.............................4
The trading market for our common stock is not active............................................4
We do not currently have specific uses for the offering proceeds.................................4
Anti-takeover provisions in our articles of incorporation and bylaws and certain
provisions of Pennsylvania law may discourage or prevent a takeover
of our company and result in a lower market price for our common stock..................4
Our future success is dependent on our ability to compete effectively in
the highly competitive banking industry.................................................5
Changes in the law and regulations may affect our ability to do business,
our costs, and our profits..............................................................5
Increases in interest rates could make us less profitable........................................6
Our allowance for loan losses may prove to be insufficient to absorb
potential losses in our loan portfolio..................................................6
Changes in real estate values may adversely impact our loans that are
secured by real estate..................................................................7
We could incur significant costs or losses if our computer systems are
unable to handle the transition to the year 2000 or if our customers'
or suppliers' businesses are interrupted because of year 2000 issues....................7
FORWARD-LOOKING STATEMENTS................................................................................7
CAPITALIZATION............................................................................................8
STOCK PRICES, DIVIDENDS AND RELATED SHAREHOLDER MATTERS...................................................9
Dividend Policy.................................................................................10
DETERMINATION OF OFFERING PRICE..........................................................................10
USE OF PROCEEDS..........................................................................................11
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PLAN OF DISTRIBUTION.....................................................................................11
SUBSCRIPTION PROCEDURE...................................................................................12
DESCRIPTION OF SECURITIES................................................................................13
Common Stock....................................................................................13
Securities Laws.................................................................................13
Anti-Takeover Provisions........................................................................13
BUSINESS AND PROPERTIES..................................................................................18
Properties......................................................................................18
Business........................................................................................19
Competition.....................................................................................20
SUPERVISION AND REGULATION...............................................................................20
Adequacy Guidelines.............................................................................21
Prompt Corrective Action Rules..................................................................22
Regulatory Restrictions on Dividends............................................................22
FDIC Insurance Assessments......................................................................23
New Legislation.................................................................................24
Interstate Banking..............................................................................24
Employees.......................................................................................24
LEGAL PROCEEDINGS........................................................................................24
SELECTED FINANCIAL DATA..................................................................................25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................................................26
YEAR 2000 COMPLIANCE.....................................................................................53
DIRECTORS AND EXECUTIVE OFFICERS.........................................................................56
Family Relationships............................................................................57
EXECUTIVE COMPENSATION...................................................................................58
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...........................................................59
Indebtedness of Management......................................................................59
The Board of Directors..........................................................................59
Compensation of Directors.......................................................................60
Compensation Committee Interlocks and Insider Participation.....................................60
Employment Agreement............................................................................60
BENEFICIAL OWNERSHIP OF SHARES...........................................................................62
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TRANSFER AGENT...........................................................................................63
EXPERTS ................................................................................................63
LEGAL MATTERS............................................................................................64
WHERE YOU CAN FIND MORE INFORMATION......................................................................64
INDEX TO FINANCIAL STATEMENTS...........................................................................F-1
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Anti-Takeover Provisions
First National Community Bancorp, Inc.'s articles of incorporation and
bylaws include certain provisions that may be considered "anti-takeover" in
nature. They may have the effect of discouraging or making the acquisition of
control over us more difficult by means of an unsolicited tender or exchange
offer, proxy contest or similar transaction. The provisions in our articles of
incorporation that may be considered anti-takeover in nature include the
following:
o a provision that provides for substantial authorized but unissued
capital stock,
o a provision that denies shareholders the right to cumulate their votes
in the election of directors,
o a provision that establishes criteria to be applied by the Board of
Directors in evaluating an acquisition proposal,
o a provision that denies shareholders preemptive rights to subscribe to
purchase additional shares of stock on a pro rata basis, and
o a provision that requires greater than a majority vote to amend certain
provisions of our articles of incorporation.
The provisions of our bylaws that may be considered to be anti-takeover in
nature include the following:
o a provision that establishes a classified Board of Directors, and
o a provision that requires greater than a majority vote in order to
amend our bylaws.
The overall effect of these provisions may result in the entrenchment of
current management by enabling it to retain its current position and placing it
in a better position to resist changes that shareholders may want to make if
dissatisfied with the conduct of our management and business, regardless of
whether these changes are desired by or are beneficial to a majority of the
shareholders. You may determine that these provisions are not in your best
interest inasmuch as they may substantially limit your voting power.
As a Pennsylvania business corporation, we are also subject to the
Pennsylvania Business Corporation Law of 1988, as amended, which includes
provisions applicable to us that may have similar effects. As stated above,
these provisions may have the effect of entrenching management against the
wishes of the shareholders. See "Risk Factors" and "Description of Securities --
Anti-Takeover Provisions."
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PROSPECTUS SUMMARY
The following summary highlights selected information from this prospectus
and may not contain all the information that is important to you. We encourage
you, as a prospective investor, to read this entire prospectus carefully,
including the financial statements and related notes beginning on page F-1,
before investing in the offered securities.
The Company
First National Community Bancorp, Inc. is a Pennsylvania business
corporation and a registered bank holding company incorporated in February,
1997. We engage in general commercial and retail banking services and in related
businesses through our sole, wholly-owned subsidiary, First National Community
Bank. First National Community Bank began operations in 1910 and became our
subsidiary in 1998.
Our principal executive offices and those of First National Community Bank
are located at 102 East Drinker Street, Dunmore, Pennsylvania 18512-2491, and
the telephone number is (570) 346-7667. See "Business and Properties -
Business."
The Offering
Common stock offered by us: 75,000 shares
Common stock to be outstanding 2,482,690 (1)
after the offering:
Price to the public: $40 per share
Minimum purchase requirement: $1,000 of common stock (25 shares)
Estimated net proceeds to us: $2,939,666
Use of proceeds: We intend to use the net proceeds for
general corporate purposes to support our
growth. This may include:
o investing in First National
Community Bank to increase
its capital position to
permit it to increase per
borrower lending limits, make
larger loans and increase its
lending activity; and
o expanding into related businesses.
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(1) We base our calculation of the number of shares of our common stock
outstanding immediately after this offering on the assumption that all of
the shares offered will be sold and that the number of shares outstanding
immediately prior to the offering will be the number of shares outstanding
on October 1, 1999.
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OTC Bulletin Board symbol for
our common stock: FNCB
Reason for the offering: We believe that current market conditions present us with
an ideal opportunity
o to raise additional capital for the purposes noted
under the section "Use of Proceeds," and
o to broaden our shareholder base.
Dates of the offering: We will begin the offering on October 22, 1999, or as
soon as practical after the registration statement of which
this prospectus is a part becomes effective. We will end
the offering at 5:00 p.m. on November 30, 1999, or a later
date if we decide that a later ending date would be
beneficial to us. In no event shall we terminate this
offering later than 5:00 p.m. on December 17, 1999. We
reserve the right to withdraw this offering or to terminate
this offering at any time.
Terms of the offering: We are offering the shares to the general public and to our
current shareholders in a direct community offering on a
"best efforts" basis on the terms and conditions described in
this prospectus. We do not have a minimum number of shares
that must be sold nor a minimum amount of subscriptions that
we must accept prior to using the proceeds. If we do not sell
all the shares that we are offering to the general public,
our directors and officers may purchase the remaining shares
at the offering price. See "Risk Factors - You will have a
minimal influence on shareholder decisions."
You may subscribe for no less than $1,000 of common stock and
no more than $250,000. You may not revoke your subscription
once we have received it. We reserve the right to reject
any subscription in whole or in part, for any reason,
including for the reason that other subscribers will be more
likely to direct business to us.
Rejection of subscriptions: In the event that we withdraw or terminate the offering or
reject your subscription, we will return your money as
promptly as possible after the withdrawal, termination or
rejection. We will not include interest earned on your
money or reduce your money to cover expenses or
charges when we return your money. We will issue your
shares after December 1, 1999, or December 17, 1999 if
we extend the offering. We reserve the right to waive any
of the limitations that we have placed in the offering. See
"Plan of Distribution."
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RISK FACTORS
Before you invest in our common stock, you should be aware that an
investment in our common stock involves a variety of risks, including those
described below. You should carefully read and consider these risks factors,
together with all the other information contained in this prospectus, before you
decide to invest in our common stock.
Our profitability is dependent on the profitability of our subsidiary bank.
Our profitability is dependent on the financial results of our operating
subsidiary, First National Community Bank. Adverse results or events at the bank
would have a significant impact on our profitability. Although the bank's
operations have been profitable recently, we cannot assure you that the bank
will be as profitable or profitable at all in the future.
A downturn in the economic conditions in our market areas may adversely affect
our business.
Currently, our lending and deposit-gathering activities are concentrated
primarily in northeastern Pennsylvania. Our success depends in large part on
general economic conditions in northeastern Pennsylvania and its surrounding
areas. Adverse changes in the northeastern Pennsylvania economy could reduce our
growth rate, impair our ability to collect loans and generally affect our
financial condition and results of operations.
You will have a minimal influence on shareholder decisions.
Together, our directors and executive officers hold 630,244 shares,
representing 26.18% of the total number of shares outstanding as of October 1,
1999. Our directors and executive officers may purchase additional shares in
this offering, including any shares which have not been allocated to
subscriptions at the close of this offering. Mr. Dominick L. DeNaples, one of
our directors, and Mr. Louis A. DeNaples, the chairman of our Board of
Directors, currently hold 6.83% and 7.34% of our outstanding shares. On August
10, 1999, Messrs. DeNaples received permission from the Pennsylvania Department
of Banking to increase the percentage of our shares that they collectively own
to 25%. Similarly, on August 13, 1999, Messrs. DeNaples received permission from
the Board of Governors of the Federal Reserve System to increase the percentage
of our shares that they collectively own to 25%. Messrs. DeNaples are brothers.
See "Beneficial Ownership of Shares," and "Directors and Executive Officers."
Our directors and officers are able to significantly influence our management
policies and decisions as well as issues that require a shareholder vote. If our
directors and executive officers vote together, they could influence the outcome
of certain corporate actions requiring shareholder approval, including the
election of directors and the approval or non-approval of significant corporate
transactions, such as the merger or sale of all of substantially all of our
assets. Their interests may differ from the interests of other shareholders with
respect to management issues.
Possible future sales of our common stock by our directors and executive
officers could cause the market value of our common stock to decline.
Sales of additional shares of our stock, or the perception that shares may
be sold, could negatively affect the market price of our stock. In addition, we
implemented a dividend reinvestment and stock purchase plan that permits us to
sell up to 250,000 shares of common stock to our shareholders. The potential
subsequent sale of these shares could reduce the market price for our common
stock and result in a dilution to our shareholders.
3
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Regulatory restrictions on dividend payments from our subsidiary bank may affect
our ability to pay dividends to our shareholders.
We conduct our principle business operations through the bank, and the cash
that we use to pay dividends is derived from dividends paid to us by the bank.
The bank's ability to pay dividends to us and our ability to pay dividends to
our shareholders are also subject to and limited by certain legal and regulatory
restrictions. As of October 1, 1999, the bank had $ 12,518,095 available to pay
dividends. See "Supervision and Regulation -- Regulatory Restrictions on
Dividends."
The trading market for our common stock is not active.
Trading in our common stock is very limited, although our common stock is
quoted on NASDAQ's OTC Bulletin Board and several brokers make a market in our
stock. We cannot assure you that a more active listed trading market will
develop or be maintained. A "thin" trading market can result in reduced
liquidity for shareholders' investments and reduced liquidity may negatively
affect stock prices.
We do not currently have specific uses for the offering proceeds.
We have no specific plans or allocations for the proceeds of this offering
other than for general corporate purposes. General corporate purposes includes
increasing our capital position and permitting us to expand into related
businesses, if we should determine to do so in the near future. We will have
broad discretion with respect to the expenditure of the proceeds of the
offering. See "Use of Proceeds."
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Anti-takeover provisions in our articles of incorporation and bylaws and certain
provisions of Pennsylvania law may discourage or prevent a takeover of our
company and result in a lower market price for our common stock.
Our articles of incorporation and bylaws contain certain provisions that
enhance the ability of our Board of Directors to deal with attempts to acquire
control of our company. In addition, Pennsylvania law contains certain
anti-takeover provisions that apply to us. While these provisions may provide us
with flexibility in managing our business, they could discourage or make a
merger, tender offer or proxy contest more difficult, even though certain
shareholders may wish to participate in the transaction. These provisions could
also potentially adversely affect the market price of our common stock. See
"Description of Securities -- Anti-Takeover Provisions."
Our future success is dependent on our ability to compete effectively in the
highly competitive banking industry.
We face substantial competition in all phases of our operations from a
variety of different competitors. Our future growth and success depends on our
ability to compete effectively in this highly competitive environment. We
compete for loans, deposits and other financial services in our geographic
market with other commercial banks, savings and loan associations, credit
unions, finance companies, mutual funds, insurance companies, brokerage and
investment banking firms and various other non-bank competitors. Within the
bank's Lackawanna and Luzerne County marketplace, the bank is 1 of 34 commercial
banks competing for customers. While 5 super regional banks currently control
60% of the deposit base, 29 community banks maintain the other 40% of the total
deposits. First National Community Bank ranks second in total deposits among all
community banks with 12% of all community bank deposits. Four savings banks also
compete for deposits within our primary market place. See "Business and
Properties -- Competition."
Changes in the law and regulations may affect our ability to do business, our
costs, and our profits.
We are subject to extensive state and federal supervision and regulation.
These laws and regulations are intended to protect depositors, not shareholders.
Any change in applicable laws or regulations may have a material effect on our
business and prospects. We cannot predict the nature or the extent of the effect
on our business or earnings that monetary policies, economic control, or new
federal or state regulations may have in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Economic Conditions and Forward Outlook," and "Supervision and Regulation."
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Increases in interest rates could make us less profitable.
Our profitability is dependent to a large extent on our net interest
income. Net interest income is the difference between interest income on
interest-earning assets and interest expense on interest-bearing liabilities.
Like most financial institutions, we are affected by changes in general interest
rate levels, which are currently at relatively low levels, and by other economic
factors beyond our control. In addition, interest rate risks can result from
mismatches between the dollar amount of repricing or maturing assets and
liabilities and is measured in terms of the ratio of the interest rate
sensitivity gap to total assets. Although our management believes it has
implemented strategies to reduce the potential effects of increases in interest
rates on our results of operations, any substantial and prolonged increase in
market interest rates could adversely affect our operating results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Net Interest Income."
Our allowance for loan losses may prove to be insufficient to absorb potential
losses in our loan portfolio.
Lending money is a substantial part of our business. However, every loan we
make carries a certain risk of non-payment. We cannot assure that our allowance
for loan losses will be sufficient to absorb actual loan losses. We also cannot
assure you that we will not experience significant losses in our loan portfolios
that may require significant increases to the allowance for loan losses in the
future. Although we evaluate every loan that we make against our underwriting
criteria, we may experience losses by reasons of factors beyond our control.
Some of these factors include changes in market conditions affecting the value
of real estate and unexpected problems affecting the creditworthiness of our
borrowers.
We determine the adequacy of our allowance of loan losses by considering
various factors, including:
o an analysis of the risk characteristics of various classifications of
loans;
o previous loan loss experience;
o specific loans that would have loan loss potential;
o delinquency trends;
o estimated fair value of the underlying collateral;
o current economic conditions;
o the view of our regulators; and
o geographic and industry loan concentration.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Loans."
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Changes in real estate values may adversely impact our loans that are secured by
real estate.
A significant portion of our loan portfolio consists of residential and
commercial mortgages secured by real estate. These properties are concentrated
in northeastern Pennsylvania. Real estate values and real estate markets
generally are affected by, among other things, changes in national, regional or
local economic conditions, fluctuations in interest rates and the availability
of loans to potential purchasers, changes in the tax laws and other governmental
statutes, regulations and policies, and acts of nature. If real estate prices
decline, particularly in northeastern Pennsylvania, the value of the real estate
collateral securing the bank's loans could be reduced. This reduction in the
value of the collateral would increase the number of non-performing loans and
could have a material negative impact on our financial performance.
Additionally, the bank has increased its level of commercial real estate loans,
which are considered to involve a higher degree of credit risk than that of the
one-to-four family residential loans. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Loans."
We could incur significant costs or losses if our computer systems are unable to
handle the transition to the year 2000 or if our customers' or suppliers'
businesses are interrupted because of year 2000 issues.
Many currently installed computer systems and software products are unable
to distinguish twenty-first century dates from twentieth century dates. As a
result, computer systems and/or software used by many companies and governmental
agencies may require upgrading to avoid system failure or miscalculations which
may cause disruptions of normal business activities. This problem is called the
"Year 2000" problem. If our computer systems, or the computer systems of our
customers and service providers, are not Year 2000 compliant by December 31,
1999, our business may be disrupted. Also, we may incur additional,
unanticipated costs to make our systems Year 2000 compliant. Any disruption and
additional costs could hurt our operating results. See "Year 2000 Compliance."
If any of the foregoing risks and uncertainties develop into actual events,
our business, financial condition and results of operations could be materially
adversely affected. In this case, the trading price of our common stock could
decline, and you may lose all or part of your investment.
FORWARD-LOOKING STATEMENTS
This prospectus contains and incorporates certain statements that
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements
include certain statements regarding intent, belief or current expectations
about matters (including statements as to "beliefs," "expectations,"
"anticipations," "intentions" or similar words). Forward-looking statements are
also statements that are not
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statements of historical fact. Forward-looking statements are subject to risks,
uncertainties and assumptions. These include:
o trends for the continued growth of our business;
o our ability to sell only a small amount of shares in the offering or to
sell no shares at all; and
o other risks and uncertainties.
If one or more of these risks or uncertainties occurs or if our underlying
assumptions prove incorrect, our actual results, performance or achievements in
1999 and beyond could differ materially from those expressed in, or implied by,
the forward-looking statements.
You should carefully consider the statements under "Risk Factors" and other
sections in this prospectus that address additional factors that could cause our
actual results to differ from those set forth in the forward-looking statements.
CAPITALIZATION
The following table sets forth our total capitalization and capital ratios
as of June 30, 1999, and our total pro forma capitalization to show the effect
of the proposed sale of 75,000 shares of our common stock which we are offering
in this prospectus at an offering price of $40.00 per share.
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June 30, 1999
(dollars in thousands)
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Increase/ Adjusted
Actual Decrease(1)(2) Pro Forma
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Stockholders' Equity:
Common Stock, par value $1.25 per share,
5,000,000 shares authorized, 2,401,782 shares
issued and outstanding $3,002 $ 94 $ 3,096
Additional paid-in capital 6,398 2,846 9,244
Retained Earnings 26,853 26,853
Accumulated other comprehensive income, net of
tax effect (2,403) (2,403)
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Total Stockholders' Equity $33,850 $2,940 $36,790
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(1) Gives effect to the completion of the proposed sale of 75,000 shares of
the company's common stock at an offering price of $40.00 per share.
(2) Additional paid-in capital has been adjusted to reflect the increase
due to the proposed sale, net of issuance costs of approximately
$60,000.
June 30, 1999
-------------------------
Actual Pro Forma
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Capital Ratios (at end of period):
Total equity to total assets 6.66% 7.20%
Total risk-based capital ratio 11.19% 12.00%
Tier 1 risk-based capital ratio 9.95% 10.75%
Leverage ratio 7.00% 7.61%
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STOCK PRICES, DIVIDENDS AND
RELATED SHAREHOLDER MATTERS
Our common stock is quoted on the OTC Bulletin Board under the trading
symbol "FNCB." The principal market area for our stock is northeastern
Pennsylvania. Our common stock is not actively traded.
We present the quarterly market highs and lows for each of the past two
years and the first three quarters of 1999, as well as cash dividends declared
per share, below. These prices do not necessarily represent actual transactions.
We have restated all prices 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
Cash Dividends
1999 High Low Paid Per Share
---- ---- --- --------------
First Quarter $39.00 $32.00 $ .15
Second Quarter 42.00 39.50 .15
Third Quarter 43.50 39.00 .17
Cash Dividends
1998 High Low Paid Per Share
---- ---- --- --------------
First Quarter $ 23.50 $ 19.00 $ .135
Second Quarter 23.75 21.19 .135
Third Quarter 23.75 23.75 .15
Fourth Quarter 32.00 24.25 .29
Cash Dividends
1997 High Low Paid Per Share
---- ---- --- --------------
First Quarter $ 16.13 $ 15.63 $ .12
Second Quarter 17.50 16.25 .12
Third Quarter 18.00 16.75 .12
Fourth Quarter 19.81 17.38 .22
On October 1, 1999, the closing bid and asked quotations for our common
stock as reported on the OTC Bulletin Board were, $41.00 and $41.00. As of
October 1, 1999, there were approximately 900 holders of record of our common
stock and 2,407,690 shares of common stock were issued and outstanding.
Dividends on our common stock, if approved by our Board of Directors, are
customarily paid on or about March 15, June 15, September 15 and December 15 of
each year.
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Dividend Policy
Our Board of Directors reviews its dividend policy at least annually. The
amount of the dividend, while in the sole discretion of the Board, depends upon
the performance of First National Community Bank, our wholly-owned subsidiary.
Our ability to pay dividends is also subject to the restrictions imposed by
Pennsylvania law. Generally, Pennsylvania law prohibits a corporation from
paying dividends if:
o the corporation is insolvent; or
o the dividend would cause the corporation to be unable to pay the debts
of the corporation as they become due in the usual course of business;
or
o the corporation's total assets would be less than the sum of
its total liabilities plus the amount that would be needed if
it were to be dissolved at the time of the distribution to
satisfy the preferential rights upon dissolution of
shareholders whose preferential rights are superior to those
receiving the distribution.
We cannot assure you that we will declare dividends in the future nor can
we make any predictions as to the rate of dividend payments in the future, if
any.
We are also subject to the dividend restrictions applicable to national
banks. Under the National Bank Act, the bank may pay dividends to us only out of
retained earnings as defined in the statute. The approval of the Office of the
Comptroller of the Currency is required if dividends for any year exceed the net
profits, as defined, for that year plus the retained net profits for the
preceding two years. In addition, unless a national bank's capital surplus
equals or exceeds the stated capital for its common stock, it may not declare
dividends unless the bank makes transfers from retained earnings to capital
surplus. As of October 1, 1999, we could declare, without prior regulatory
approval, aggregate dividends of approximately $12,518,095.
DETERMINATION OF OFFERING PRICE
Our Board of Directors set the per share price for the common stock to be
sold in this offering. The price is the same for our current shareholders, the
general public and any officers or directors who may purchase unsubscribed
shares. See "Plan of Distribution." In making its determination, our Board
considered recent market prices for our outstanding common stock, general market
trends and the purchase price of our common stock under our dividend
reinvestment plan. The Board did not engage an investment bank to establish a
fair value for the offering, nor did it consult with brokers, experts or other
professionals in setting the per share price for this offering.
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USE OF PROCEEDS
We do not know the number of shares that will ultimately be purchased under
this offering. Although we have no specific plans for the net proceeds, we may
use the proceeds from the subscriptions, when and as accepted, for working
capital and general corporate purposes. These purposes may include contributions
to the bank's capital to allow the bank to provide for higher per borrower
lending limits, which will allow the bank to make larger loans, increase the
bank's lending activity and permit additional growth in the bank's assets. In
addition, we may use the proceeds to expand into related businesses. At present,
we are not pursuing any acquisitions, however, we are constantly evaluating
potential targets, the acquisition of which would be consistent with our
strategic plan. Currently, we do not have a planned use for the proceeds other
than to provide overnight liquidity.
We believe that an opportunity exists as a result of the consolidation
in the banking industry. We believe this consolidation has created an attractive
market segment between the national and super regional banks, on the one hand
and community banks on the other hand. Larger financial institutions doe not
generally provide the personalized service expected or demanded by many small to
medium size businesses and their principals. Smaller community banks lack the
capital strength to provide larger credit facilities and the customer base to
support the delivery of technologically advanced services.
On a pro forma basis, our lending capacity to a single borrower, as of
September 30, 1999, would have been approximately $6.7 million. Further, the
additional $3 million of new capital will support the next $30 million of asset
growth without any negative impact to our total risk-based capital ratio.
We estimate our net proceeds, if the maximum number of shares are sold, to
be $2,939,666 after deducting estimated expenses incurred by us in preparing for
and conducting the offering, of $60,334.
PLAN OF DISTRIBUTION
We are offering the common stock through the efforts of our and First
National Community Bank's directors, officers and employees. None of those
individuals will be entitled to receive any discount, commission or additional
compensation for selling the common stock, but we may reimburse them for
reasonable expenses, if any, incurred in connection with the sale of the common
stock. We intend to satisfy the safe harbor provisions of Rule 3a4-1 of the
Securities Exchange Act of 1934 to ensure that these directors, officers and
employees will not be deemed "brokers," as defined in the Exchange Act, because
of their actions in conducting the offering.
We will begin the offering on October 22, 1999, or as soon as practical
after the registration statement, of which this prospectus is a part, becomes
effective. We will end the offering at 5:00 p.m. on November 30, 1999 or a later
date if we believe it is in our best interests to do so. In no event will this
offering end later than 5:00 p.m. on December 17, 1999. We reserve the right to
withdraw this offering or to end this offering at any time.
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SUBSCRIPTION PROCEDURE
You do not have the right to withdraw your subscription to this offering
once we have received it. Do not subscribe to this offering until you are sure
of your decision. Once we receive your subscription we will not refund your
money unless we reject your subscription, withdraw the offering or terminate the
offering before we accept your subscription.
We reserve the right to reject any subscription to this offering, in whole
or in part, for any reason. In determining which subscriptions to accept, we may
take into account your potential to do business with First National Community
Bank or to direct customers to the bank.
You may purchase as little as $1,000 of common stock (25 shares) or as much
as $250,000 of common stock (6,250 shares) in this offering.
In order to subscribe for shares of common stock in this offering, you must
send the following items to us:
o completed subscription agreement (included in the same package as this
prospectus); and
o the full amount of the subscription price of $40 per share in
the form of a check, money order or authorization for
withdrawal from an account or deposit at First National
Community Bank.
Our contact person and address is:
William S. Lance, Treasurer
First National Community Bancorp, Inc.
102 East Drinker Street
Dunmore, Pennsylvania 18512
We will only consider those subscription agreements that are:
o properly filled in;
o signed and dated;
o received before the expiration date of November 30, 1999, or
December 17, 1999, if the offering is extended; and
o which are accompanied by payment in full.
We will not deposit the money you send to us with your subscription
agreement until we accept your subscription. We will issue your shares after
December 1, 1999 or after December 17, 1999, if the offering is extended.
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DESCRIPTION OF SECURITIES
Common Stock
We are authorized to issue 5,000,000 shares of common stock, of which
2,407,690 shares were issued and outstanding as of October 1, 1999. The Board of
Directors may issue shares of common stock without shareholder approval, as long
as there are authorized but unissued shares available. Shareholders are entitled
to one vote per share on all matters presented to them and have no cumulative
voting rights in the election of directors.
The common stock has no preemptive, subscription, or conversion rights,
redemption or repurchase provisions. The shares are non-assessable and require
no sinking fund. Each shareholder is entitled to receive dividends as declared
by the Board of Directors and to share pro rata in the event of dissolution or
liquidation.
Securities Laws
We are subject to the registration and prospectus delivery requirements of
the Securities Act of 1933 and to similar requirements under state securities
laws. Our common stock is registered with the Commission under Section 12(g) of
the Securities Exchange Act of 1934, as amended, and we are subject to the
periodic reporting, proxy solicitation and insider trading requirements of the
Securities Exchange Act of 1934. Our executive officers, directors and those who
are beneficial owners of more than 10% of our issued and outstanding shares of
common stock are subject to restrictions affecting their right to sell their
shares of our common stock beneficially owned by them. Specifically, each of
these persons is subject to the beneficial ownership reporting requirements
under the short-swing profit recapture provisions of Section 16 of the
Securities Exchange Act of 1934 and may sell shares of our common stock only:
o in compliance with the provisions of Commission Rule 144;
o in compliance with the provisions of another applicable exemption from
the registration requirements of the Securities Act of 1933; or
o pursuant to an effective registration statement filed with the
Commission under the Securities Act of 1933.
Anti-Takeover Provisions
The Pennsylvania Business Corporation Law of 1988 and our articles of
incorporation and bylaws provide numerous provisions that may be deemed to be
anti-takeover in nature, both as to purpose and effect.
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The overall effect of the various anti-takeover provisions might be to
deter a tender offer that a majority of our shareholders might view to be in
their best interests. The offer could include, among other things, a substantial
premium over the market price at that time. In addition, anti-takeover
provisions may have the effect of assisting our current management in retaining
its position and placing it in a better position to resist changes that
shareholders want to make if they were dissatisfied with the conduct of our
business.
Articles of Incorporation and Bylaws
Our articles of incorporation and bylaws contain a number of provisions
that could be considered anti-takeover in purpose and effect. These provisions
include:
o the authorization of 5,000,000 shares of our common stock; and
o the lack of preemptive rights for our shareholders to subscribe to
purchase additional shares of stock on a pro rata basis.
The additional shares of common stock and the elimination of preemptive
rights to the stock provide our Board of Directors with as much flexibility as
possible to issue additional shares, without further shareholder approval, for
proper corporate purposes, including:
o financing
o acquisitions
o stock dividends
o stock splits
o employee incentive plans
o other similar purposes
However, these additional shares also may be used by the Board of
Directors, if consistent with its fiduciary responsibilities, to deter future
attempts to gain control over us.
Our bylaws include provisions for a classified board. Our Board of
Directors believes that a classified board helps to assure continuity and
stability of corporate leadership and policy. In addition, a classified board
helps to moderate the pace of any change in control of the Board of Directors by
extending the time required to elect a majority of the directors to at least two
successive annual meetings. However, this extension of time also tends to
discourage a tender offer or takeover bid and may also be "anti-takeover" in
nature. In addition, a classified board makes it more difficult for a majority
of the shareholders to change the composition of the Board of Directors even
though they may consider this desirable.
Another provision that could be considered "anti-takeover" in nature is the
elimination of cumulative voting. Cumulative voting entitles each shareholder to
as many votes as equal the number of shares owned by him multiplied by the
number of directors to be elected. A shareholder may cast all of these votes for
one candidate or distribute them among any two or
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more candidates. Cumulative voting is optional under the Pennsylvania law. The
Board of Directors believes that each director should represent and act in the
interest of all shareholders and not any special group of shareholders. The
absence of cumulative voting means that a majority of the outstanding shares can
elect all the members of the Board of Directors. Although we have approximately
900 shareholders, the Board of Directors recognizes that the absence of
cumulative voting makes it more difficult to gain representation on the Board of
Directors.
Provisions in our articles of incorporation and bylaws require action by a
majority of the Board of Directors, the chairman, the president or the executive
committee to call a special meeting of shareholders. Our bylaws may be amended
by a majority vote of the members of the Board of Directors, subject to the
affirmative vote of at least 75% of the issued and outstanding shares to change
any amendment to the bylaws previously approved by the Board of Directors. These
provisions ensure that any extraordinary corporate transaction can be effected
only if it received a clear mandate from the shareholders and/or the directors.
Other provisions that may be considered "anti-takeover" are the
requirements in our articles of incorporation that:
o the affirmative vote of the holders of at least 75% of our
outstanding shares of common stock is required to approve any
merger, consolidation, dissolution or liquidation involving us
or the sale of all or substantially all of our assets; or
o the holders of at least 51% of the outstanding shares of our
common stock when at least a majority of Directors have
approved such transaction.
These provisions ensure that a corporation may effect extraordinary
transactions only if it receives a clear mandate from its shareholders. These
provisions may give our management a veto power over certain acquisitions
regardless of whether the acquisition is desired by or beneficial to a majority
of our shareholders. The provisions assist management in retaining their present
positions. Also, these provisions may give the holders of a minority of our
outstanding shares a veto power over any merger, consolidation, dissolution or
liquidation, and the sale of all or substantially all of our assets even if
management and/or a majority of the shareholders believes the transaction to be
desirable and beneficial. Without these provisions, the affirmative vote of at
least a majority of our shares outstanding and entitled to vote would be
required to approve any merger, consolidation, dissolution, liquidation, and the
sale of all of its assets.
Another anti-takeover provision in our articles of incorporation enables
the Board of Directors to oppose a tender offer on the basis of factors other
than economic benefit to shareholders, such as:
o the impact on the community if we were acquired by another financial
institution;
o the effect the acquisition would have on shareholders, employees,
depositors, suppliers and customers; and
o the reputation and business practices of the tender offeror.
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This provision permits the Board of Directors to recognize its
responsibilities to these constituent groups and to us, the bank and the
communities that we serve.
Pennsylvania Law
In addition to the provisions already described, under Pennsylvania law,
there are four additional provisions that may be deemed to be "anti-takeover" in
nature. These provisions apply to us because our common stock is registered with
the Commission. As shareholders of a registered corporation, our shareholders do
not have a right to call a meeting of shareholders nor do they have a right to
propose an amendment to our articles of incorporation. These provisions prevent
the calling of a special meeting of shareholders for the purpose of considering
a merger, consolidation or other corporate combination that does not have the
approval of a majority of the members of the Board of Directors. The provision
may have the effect of making us less attractive as a potential takeover
candidate by depriving shareholders of the opportunity to initiate special
meetings at which a possible business combination might be proposed.
We are also subject to a Pennsylvania provision that assures all
shareholders will receive the "fair value" for their shares as the result of a
"control transaction." "Fair value" means not less than the highest price paid
per share by a controlling person or group at any time during the 90-day period
ending on and including the date of the control transaction plus an increment
representing any value, including, without limitation, any proportion of any
value payable for acquisition of control of us that may not be reflected in the
price. "Control transaction" means the acquisition by a person who has, or a
group of persons acting in concert that has, voting power over our voting shares
that would entitle the holders to cast at least 20% of the votes that all
shareholders would be entitled to cast in an election of directors. After the
occurrence of a control transaction, any shareholder may, within a specified
time period, make written demand on the person or group controlling at least 20%
of the voting power of our shares for payment in an amount equal to the fair
value of each voting share as of the date on which the control transaction
occurs.
While legislators designed the fair price provision to help assure fair
treatment of all shareholders vis-a-vis other shareholders in the event of a
takeover, the legislature did not enact the fair price provision to assure that
shareholders receive a premium price for their shares in a takeover. The fair
price provision allows our Board of Directors to oppose any future takeover
proposal that it believes not to be in our best interests or those of our
shareholders, whether or not the proposal satisfies the minimum price, form of
consideration and procedural requirements of the fair price provision.
Another Pennsylvania provision relates to a "Business Combination"
involving a registered corporation like us and an "interested shareholder." An
"interested shareholder" is any person that is the beneficial owner, directly or
indirectly of shares entitling that person to cast at least 20% of the votes
that all shareholders would be entitled to cast in an election of directors of
the target company.
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The provision relating to business combinations is designed to help assure
that if, despite our best efforts to remain independent, we were nevertheless
taken over, each of our shareholders would be treated fairly vis-a-vis every
other shareholder and that arbitragers and professional investors will not
profit at the expense of our long-term public shareholders. We note that while
the business combination provision is designed to help assure fair treatment of
all shareholders vis-a-vis other shareholders, in the event of a takeover, the
business combination provision does not assure that shareholders will receive a
premium price for their shares in a takeover. We believe that the business
combination provision would allow the Board of Directors to oppose any future
takeover proposal that it believes not to be in our best interests or those of
our shareholders, whether or not the proposal satisfies the requirements of the
business combination provision or fair price provision or both.
Subchapter G of Chapter 25 of the Pennsylvania Business Corporation Law
also applies to registered corporations like us. Under Subchapter G, the
acquisition of shares that increase the acquirer's control of the corporation
above 20%, 33 1/3% or 50% of the voting power able to elect the Board of
Directors cannot be voted until a majority of disinterested shareholders approve
the restoration of the voting rights of those shares in two separate votes:
o by all disinterested shares of the corporation; and
o by all voting shares of the corporation.
Voting rights that are restored by shareholder approval lapse if the
acquirer does not consummate the proposed control-share-acquisition within 90
days after receipt of shareholder approval. Control-shares that are not accorded
voting rights or whose rights lapse regain voting rights when transferred to
another person who is not an affiliate of the acquirer. If they constitute
control-shares for the transferee, the transferee also must comply with the
subchapter. If the acquirer does not request a shareholder meeting to approve
restoration of voting rights within 30 days of the acquisition or if
shareholders deny voting rights or if they lapse, we may redeem the control
shares at the average of the high and low price on the date of the notice of
redemption.
Subchapter H of Chapter 25 also applies to registered corporations like us.
Under Subchapter H, a control person, a person who owns shares with 20% or more
voting power, must disgorge any profits to us from the disposition of any equity
securities if the disposition occurs within 18 months of becoming a control
person and the security was acquired 24 months before to 18 months after
becoming a control person. This provision seeks to prevent speculative takeover
attempts.
The overall effect of these provisions may be to deter a future offer,
other merger or acquisition proposal that a majority of our shareholders might
view to be in their best interests because the offer might include a substantial
premium over the market price of our common stock at that time. In addition,
these provisions may have the effect of assisting our current management in
retaining its position and placing it in a better position to resist changes
that the shareholders may want to make if dissatisfied with the conduct of our
business.
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BUSINESS AND PROPERTIES
We are a Pennsylvania bank holding company, incorporated in 1997 under the
Bank Holding Company Act of 1956. We became an active bank holding company on
July 1, 1998, when we acquired all of the outstanding shares of First National
Community Bank, thus making the bank our wholly-owned subsidiary. First National
Community Bank holds all of the outstanding stock of FNCB Realty, Inc. which
holds and disposes of real estate that the bank has foreclosed. Our principal
executive offices are located in Dunmore, Pennsylvania.
Our primary activity consists of owning and operating First National
Community Bank, which provides customary retail and commercial banking services
to individuals and businesses. The bank provides practically all of our earnings
as a result of its banking services.
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.
Properties
Below is a schedule of all our properties, showing the location, whether
the property is owned or leased and its use:
<TABLE>
<CAPTION>
Type of
Property Location Ownership Use
- -------- -------- --------- ---
<S> <C> <C> <C>
1 102 East Drinker Street Own Main Office
Dunmore, PA 18512
2 419-421 Spruce Street Own Scranton Branch
Scranton, PA 18503
3 934 Main Avenue Own Dickson City Branch
Dickson City, PA 18519
4 277 Scranton/Carbondale Highway Lease Fashion Mall Branch
Scranton, PA 18508
5 23 West Market Street Lease Wilkes-Barre Branch
Wilkes-Barre, PA 18701
6 1700 N. Township Blvd. Lease Pittston Plaza Branch
Pittston, PA 18640
7 754 Wyoming Avenue Lease Kingston Branch
Kingston, PA 18704
8 1625 Wyoming Avenue Lease Exeter Branch
Exeter, PA 18643
9 200 S. Blakely Street Lease Administrative Center
Dunmore, PA 18512
</TABLE>
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<TABLE>
<CAPTION>
Type of
Property Location Ownership Use
- -------- -------- --------- ---
<S> <C> <C> <C>
10 107-109 S. Blakely Street Own Parking Lot
Dunmore, PA 18512
11 114-116 S. Blakely Street Own Parking Lot
Dunmore, PA 18512
12 1708 Tripp Avenue Own Parking Lot
Dunmore, PA 18512
</TABLE>
Business
First National Community 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
in the business of underwriting indirect auto loans that various auto dealers in
northeastern Pennsylvania originate and, in 1999, the bank 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 software
product that allows business customers to access directly their account
information and perform certain daily transactions from their place of business.
As a result of the bank's affiliation with INVEST Financial Corporation,
our customers are able to purchase alternative investment products such as
mutual funds, annuities, stock and bond purchases, directly from our INVEST
representative. The bank also offers customers the
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convenience of 24-hour banking, seven days a week, through its Money Access
Center ("MAC") network. These automated teller machines are available at the
following community offices:
o Dunmore
o Dickson City
o Fashion Mall
o Pittston
o Kingston
o Exeter
as well as remote facilities in the C-Plus Mini Mart, 309 Main Street, Blakely,
and the Petro Shopping Center, Big Ten Truck Stop, 98 Grove Street, Dupont.
To further enhance our 24-hour banking services, we made available to
customers during 1997 our "Account Link" telephone banking, "Loan by Phone", and
"Mortgage Link" services. These services provide consumers with 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 June 30, 1999, no one person or entity provided a material portion of
the bank's deposits. However, the bank holds an industry concentration in the
hotel and automobile dealership industries. Loans and lines of credit to the
hotel industry approximated $12 million as of June 30, 1999. These loans are
secured by first mortgages on the commercial properties being financed. Loans
and lines of credit to the automobile dealership industry approximated $14.7
million as of June 30, 1999. The bank believes that its risk in this area is
minimized because of the large number of borrowers and the selective process
utilized in soliciting new dealers.
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. There are 13 commercial banks which are either headquartered or
have a presence in the Dunmore, Scranton and Mid Valley markets. Our Luzerne
County offices share many of the same competitors we face in Lackawanna County
as well as several banks and savings and 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.
SUPERVISION AND REGULATION
We are under the jurisdiction of the United States Securities and Exchange
Commission and of the state securities commissions for matters relating to the
offer and sale of our securities. In addition, we are subject to the
Commission's rules and regulations relating to periodic
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reporting, proxy solicitation, and insider trading. See "Description of
Securities -- Securities Laws."
As a registered bank holding company, we are subject to supervision and
regulation by the Board of Governors of the Federal Reserve System under the
Bank Holding Company Act of 1956. As a bank holding company, our activities and
those of the bank are limited to the business of banking and activities closely
related or incidental to banking. Bank holding companies are required to file
periodic reports with and are subject to examination by the Federal Reserve
Board. The Federal Reserve Board has issued regulations under the Bank Holding
Company Act that require a bank holding company to serve as a source of
financial and managerial strength to its subsidiary banks. As a result, the
Federal Reserve Board, by regulation, may require that we stand ready to use our
resources to provide adequate capital funds to First National Community Bank
during periods of financial stress or adversity.
The Bank Holding Company Act prohibits us from acquiring direct or indirect
control of more than 5% of the outstanding shares of any class of voting stock,
or substantially all of the assets of, any bank, or from merging or
consolidating with another bank holding company, without prior approval of the
Federal Reserve Board. In addition, the Bank Holding Company Act prohibits us
from engaging in or acquiring ownership or control of more than 5% of the
outstanding shares of any class of voting stock of any company engaged in a
non-banking business, unless the business is determined by the Federal Reserve
Board to be so closely related to banking as to be a proper incident to banking.
As a Pennsylvania bank holding company for purposes of the Pennsylvania
Banking Code, we are also subject to regulation and examination by the
Pennsylvania Department of Banking.
First National Community Bank is a national bank and a member of the
Federal Reserve System. Its deposits are insured, up to the applicable limits,
by the Federal Deposit Insurance Corporation. The bank is subject to regulation
and examination by the Office of the Comptroller of the Currency, and to a
lesser extent, the Federal Reserve Board and the FDIC. The bank is also subject
to requirements and restrictions under federal and state law, including
requirements to maintain reserves against deposits, restrictions on the types
and amounts of loans that may be granted and the interest that may be charged on
the loans, and limitation on the types of investments the bank may make and the
types of services the bank may offer. Various consumer loans regulations also
affect the operations of the bank. In addition to the impact of regulation,
commercial banks are affected significantly by the actions of the Federal
Reserve Board as it attempts to control the money supply and credit availability
in order to influence the economy.
Adequacy Guidelines
Bank holding companies are required to comply with the Federal Reserve
Board's risk- based capital guidelines. The required minimum ratio of total
capital to risk-weighted assets, including certain off-balance sheet activities,
such as standby letters of credit, is 8%. At least half
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of the total capital is required to be "Tier I Capital," consisting principally
of common stockholders' equity, less certain intangible assets. The remainder,
"Tier II Capital," may consist of certain preferred stock, a limited amount of
subordinated debt, certain hybrid capital instruments and other debt securities,
and a limited amount of the general loan loss allowance. The risk-based capital
guidelines are required to take adequate account of interest rate risk,
concentration of credit risk, and risks of nontraditional activities.
In addition to the risk-based capital guidelines, the Federal Reserve Board
requires a banking holding company to maintain a leverage ratio of a minimum
level of Tier I capital (as determined under the risk-based capital guidelines)
equal to 3% of average total consolidated assets for those bank holding
companies that have the highest regulatory examination rating and are not
contemplating or experiencing significant growth or expansion. All other bank
holding companies are required to maintain a ratio of at least 1% to 2% above
the stated minimum. First National Community Bank is subject to almost identical
capital requirements adopted by the OCC.
Prompt Corrective Action Rules
The federal banking agencies have regulations defining the levels at which
an insured institution would be considered:
o "well-capitalized"
o "adequately capitalized"
o "undercapitalized"
o "significantly undercapitalized"
o "critically undercapitalized"
The applicable federal bank regulator for a depository institution could,
under certain circumstances, reclassify a "well-capitalized" institution as
"adequately capitalized" or require an "adequately capitalized" or
"undercapitalized" institution to comply with supervisory actions as if it were
in the next lower category. A reclassification could be made if the regulatory
agency determines that the institution is in an unsafe or unsound condition
(which could include unsatisfactory examination ratings). We and the bank each
satisfy the criteria for a "well-capitalized" institution within the meaning of
applicable regulations.
Regulatory Restrictions on Dividends
The bank may not, under the National Bank Act, declare a dividend without
approval of the Comptroller of the Currency, unless the dividend does not exceed
the total of:
o the bank's net profits for the current year to date; plus
o its retained net profits for the preceding two years, less any required
transfers to surplus.
In addition, the bank can only pay dividends to the extent that its
retained net profits (including the portion transferred to surplus) exceed its
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bad debts. The Federal Reserve Board, the OCC and the FDIC have formal and
informal policies providing that insured banks and bank holding companies should
pay dividends only out of current operating earnings, with some exceptions. The
Prompt Corrective Action Rules, described above, further limit the ability of
banks to pay dividends, because banks that are not classified as
"well-capitalized" or "adequately capitalized" may not pay dividends.
Under these policies and subject to the restrictions applicable to the
bank, the bank could declare, during 1999, without prior regulatory approval,
aggregate dividends of approximately $6.6 million, plus net profits earned to
the date of the dividend declaration.
FDIC Insurance Assessments
The FDIC has implemented a risk-related premium schedule for all insured
depository institutions that results in the assessment of premiums based on
capital and supervisory measures.
Under the risk-related premium schedule, the FDIC assigns, on a semiannual
basis, each depository institution to one of the three capital groups
("well-capitalized", "adequately capitalized" or "undercapitalized") and further
assigns such institutions to one of three subgroups within a capital group. The
institution's subgroup assignment is based upon the FDIC's judgment of the
institution's strength in light of supervisory evaluations, including
examination reports, statistical analyses and other information relevant to
measuring the risk posed by the institution. Only institutions with a total
capital to risk-adjusted assets ratio of 10% or greater, a Tier I capital to
risk-based assets ratio of 6% or greater, and a Tier I leverage ratio of 5% or
greater, are assigned to the "well-capitalized" group. As December 31, 1998, the
bank was "well-capitalized" for purposes of calculating insurance assessments.
The Bank Insurance Fund is presently fully funded at more than the minimum
amount required by law. Accordingly, the 1999 BIF assessment rates range from
zero for those institutions with the least risk, to $0.27 for every $100 of
insured deposits for institutions deemed to have the highest risk. The bank is
in the category of institutions that presently pay nothing for deposit
insurance. The FDIC adjusts the rates every six months.
While the bank presently pays no premiums for deposit insurance, it is
subject to assessments to pay the interest on bonds issued by the Financing
Corporation. FICO was created by Congress to issue bonds to finance the
resolution of failed thrift institutions. Prior to 1997, only thrift
institutions were subject to assessments to raise funds to pay the FICO bonds.
On September 30, 1996, as part of the Omnibus Budget Act, Congress enacted
the Deposit Insurance Funds Act of 1996, which recapitalized the Savings
Association Insurance Fund and provided that commercial banks would be subject
to 1/5 of the assessment to which savings and loan associations are subject for
FICO bond payments through 1999. Beginning in 2000, commercial banks and savings
and loan associations will be subject to the same assessment for FICO bonds.
New Legislation
Proposed legislation is introduced in almost every legislative session that
would dramatically affect the regulation of the banking industry. At this time,
we cannot estimate whether or not legislation will be enacted and what effect
the legislation might have on us or the bank.
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Interstate Banking
Prior to the passage of the Reigle-Neal Interstate Banking and Branching
Efficiency Act of 1994, the Bank Holding Company Act prohibited a bank holding
company located in one state from acquiring a bank located in another state,
unless the acquisition by the out-of-state bank holding company was specifically
authorized by the law of the state where the bank to be acquired was located.
Similarly, interstate branching by a single bank was generally prohibited by the
McFadden Act. The Interstate Banking Act permits an adequately capitalized and
adequately managed bank holding company to acquire a bank in another state
whether or not the law of that other state permits the acquisition, subject to
certain deposit concentration caps and approval by the Federal Reserve Board. In
addition, under the Interstate Banking Act, a bank can engage in interstate
expansion by merging with a bank in another state, unless the other state
affirmatively opted out of the legislation before June 1, 1997. The Interstate
Banking Act also permits de novo interstate branching, but only if a state
affirmatively opts in by adopting appropriate legislation. Pennsylvania,
Delaware, Maryland and New Jersey, as well as other states, have adopted "opt
in" legislation which allows these transactions.
Employees
As of October 1, 1999, both institutions employ the combined equivalent of
151 full-time persons. None of our employees are represented by a collective
bargaining unit. Management considers relations with our employees to be good.
LEGAL PROCEEDINGS
Neither we nor the bank is a party to, nor is any of our or the bank's
property the subject of, any pending legal proceedings, other than those arising
in the ordinary course of business. In the opinion of our management, no such
proceeding will have a material adverse effect on our financial position or
results or those of the bank.
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SELECTED FINANCIAL DATA
Please read the following selected financial data in conjunction with our
consolidated financial statements, related notes, other financial information
and Management's Discussion and Analysis of Financial Condition and Results of
Operations in this prospectus.
FIRST NATIONAL COMMUNITY BANCORP, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(In thousands, except per share data)
<TABLE>
<CAPTION>
As of and for the Six
Months Ended As of and for the Twelve Months ended
June 30 December 31
--------------------- ---------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets $508,268 $448,324 $483,385 $428,335 $372,438 $318,026 $269,679
Interest-bearing balances
with financial institutions $ 2,280 $ 3,162 $ 2,478 $ 1,586 $ 2,771 $ 775 $ 2,754
Securities $134,445 $125,932 $131,830 $121,367 $ 82,476 $ 69,408 $ 55,403
Net loans $344,457 $292,680 $324,610 $280,731 $259,880 $229,643 $193,254
Total deposits $395,584 $359,777 $380,039 $345,668 $320,968 $275,739 $236,864
Stockholders' equity $ 33,850 $ 33,550 $ 34,679 $ 31,580 $ 27,631 $ 25,547 $ 17,117
Net interest income before
provision for credit losses $ 8,580 $ 7,529 $ 15,445 $ 14,580 $ 12,765 $ 11,286 $ 9,882
Provision for credit losses $ 360 $ 360 $ 920 $ 1,110 $ 820 $ 796 $ 700
Other income $ 851 $ 784 $ 1,583 $ 1,628 $ 1,099 $ 921 $ 925
Other expenses $ 5,181 $ 4,485 $ 9,423 $ 8,839 $ 7,904 $ 7,097 $ 6,369
Income before income taxes $ 3,890 $ 3,468 $ 6,685 $ 6,259 $ 5,140 $ 4,314 $ 3,738
Provision for income taxes $ 940 $ 867 $ 1,578 $ 1,616 $ 1,265 $ 1,100 $ 888
Net income $ 2,950 $ 2,601 $ 5,107 $ 4,643 $ 3,875 $ 3,214 $ 2,850
Cash dividends paid $ 720 $ 648 $ 1,703 $ 1,396 $ 1,178 $ 887 $ 780
Per share data:
Net income (1) $ 1.23 $ 1.08 $ 2.13 $ 1.94 $ 1.62 $ 1.52 $ 1.39
Cash dividends (2) $ .30 $ .27 $ 0.71 $ 0.58 $ 0.49 $ 0.41 $ 0.38
Book value (1)(3) $ 14.09 $ 13.99 $ 14.46 $ 13.17 $ 11.52 $ 12.08 $ 8.35
Weighted average number
of shares outstanding 2,398,379 2,398,360 2,398,360 2,398,360 2,398,360 2,114,192 2,050,960
PERFORMANCE RATIOS
Return on assets 1.17% 1.20% 1.13% 1.16% 1.13% 1.08% 1.16%
Return on equity 16.97% 16.21% 15.29% 15.85% 14.83% 16.29% 16.51%
Net interest margin on average
earning assets 3.78% 3.87% 3.84% 4.09% 4.25% 4.19% 4.48%
Efficiency (non-interest expense/net
interest income + non-interest
income) 52.49% 51.27% 52.03% 52.37% 53.25% 54.76% 55.66%
LIQUIDITY AND CAPITAL RATIOS
Shareholders' equity (% assets) 6.66% 7.48% 7.17% 7.37% 7.42% 8.03% 6.35%
Risk based:
Tier I Capital 9.95% 10.98% 10.19% 10.94% 10.27% 10.88% 9.93%
Total Capital 11.19% 12.23% 11.45% 12.19% 11.46% 12.12% 11.13%
Dividends (% net income) 24.39% 24.90% 33.35% 30.06% 30.40% 27.60% 27.36%
Loans to deposits 87.08% 81.35% 85.41% 81.21% 80.97% 83.28% 81.59%
ASSETS QUALITY RATIOS
Allowance for credit losses to total
loans 1.30% 1.32% 1.30% 1.27% 1.20% 1.20% 1.15%
Allowance for credit losses to
non-performing loans 294% 259% 330% 253% 297% 157% 83%
Net charge-offs to average total loans .03% .02% .09% .24% .18% .12% .28%
</TABLE>
- -------------------
(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 ($2,403,000) at
June 30, 1999, $791,000 in 1998, $1,097,000 in 1997, $384,000 in 1996,
$991,000 in 1995 and ($1,558,000) in 1994.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On the following pages we present management's discussion and analysis of
our financial condition and results of operations together with our wholly-owned
subsidiary, First National Community Bank. This discussion highlights the
significant changes in the results of operations, capital resources and
liquidity presented in our accompanying financial statements. Current
performance does not guarantee and may not be indicative of similar performance
in the future.
We qualify the following discussion in its entirety by the more detailed
information and the financial statements and notes to the financial statements
appearing elsewhere in this prospectus. In addition to the historical
information contained in this prospectus, the discussion in this prospectus
contains certain forward-looking statements that involve risks and
uncertainties, such as statements of our plans, objectives, expectations and
intentions. Please note that the cautionary statements made in this prospectus
are applicable to all forward-looking statements in this prospectus. Our actual
results could differ materially from those discussed here. Factors that could
cause or contribute to these differences include, but are not limited to, those
discussed in this section and in "Risk Factors."
We also caution you not to place undue reliance on forward-looking
statements in this section, as they reflect management's analysis only as of
this date. We undertake no obligation to publicly revise or update these
forward-looking statements to reflect subsequent events or circumstances.
The following financial review is presented on a consolidated basis and is
intended to provide a comparison of our financial performance and that of our
wholly-owned subsidiary, First National Community Bank for the years ended
December 31, 1998, 1997 and 1996. The information presented below should be read
in conjunction with our 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 on December 31, 1997 and May 8, 1996.
26
<PAGE>
RESULTS OF OPERATIONS
Summary
Our 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. On a per share
basis, net income for the six months ended June 30, 1999 and 1998 was $1.23 and
$1.08, respectively. The weighted average number of shares outstanding at June
30, 1999 and 1998 was 2,398,379 and 2,398,360, respectively.
Earnings from asset sales increased $38,000 in the first six months of 1999
over the same period in 1998 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 in 1998 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% over the first
six months of 1998.
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 was 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 six month periods ending June 30, 1999 and 1998
was 1.17% and 1.20%, respectively, while the return on equity recorded during
the same period was 16.97% and 16.21%, respectively. 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% and 14.83%.
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 our operating income and determines our profitability.
27
<PAGE>
Before providing for future credit losses, net interest income increased
14% from $7.5 million for the first six months of 1998 to $8.6 million for the
first six months of 1999. 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 for the same period.
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 for the first six months of 1998
increased $1 million, or 11%, over the $9.5 million reported in the first six
months of 1998. Tax-equivalent net interest income in 1998 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 us to improve net interest income during this period of declining
interest rates.
Average loans increased $55 million, or 19%, over the same six-month period
of 1998, and contributed to an increase of $1.8 million of interest income over
the 1998 level. Commercial loans continue to provide the majority of our loan
growth as evidenced by the $40 million increase over the first half of 1998.
Installment loans also increased $26 million in the same period due primarily to
growth in indirect auto loans and installment loans secured by real estate.
Average mortgage loan balances were $10 million lower than during the first half
of last year due to sales of long-term assets in 1998 and 1999. Earning assets
increased by $24 million to $488 million during the first six months of 1999 and
now total 96.1% of total assets, equal to the 1998 year-end level.
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 were $14 million higher during the first half of 1999
when compared to the same period in 1998. Interest income during the same period
improved by $217,000 due to the higher balances. Lower rates on new volume
resulted in a twenty-nine basis point reduction in yield when compared to the
same period of 1998. Average money market assets were $1.7 million lower than in
1998, resulting in a decrease in interest income of $66,000.
28
<PAGE>
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.
Average interest bearing deposits increased $38 million in the first half
of 1999 over the same period in 1998. Certificates of deposit again provided the
majority of the growth, increasing $24 million, but lower costing demand and
savings balances also increased $14 million over the prior year's levels.
Borrowed funds outstanding also average $23 million higher in the first half of
1999 than in 1998. Interest rate reductions and new volume resulted in a
twenty-seven basis point reduction in the cost of interest-bearing liabilities
from the first half of 1998 to the first half of 1999.
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.
Year to date net interest margins (tax equivalent) decreased from 3.87% in
June 1998 to 3.78% for the same period of 1999 which was 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.
The drop resulted from interest rate reductions in 1998 which had an immediate
impact on interest earning assets but only a gradual impact on deposit
repricing.
As a result of the interest rate reductions in 1998 and the more immediate
impact on interest earning assets, our net interest margin decreased twenty-five
basis points to 3.84% in 1998. Investment leveraging transactions not only
continue to add to our profitability, 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.
29
<PAGE>
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, we 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/Cost Analysis
The following tables set forth certain information relating to our
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:
<TABLE>
<CAPTION>
Six months ended June 30,
1999
---------------------------------------
Average Yield/
Balance Interest Cost
-------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C>
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%
------- ----
Noninterest-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%
</TABLE>
- -----------------
(1) Yields on tax-exempt loans and investment securities have been computed on a
tax equivalent basis.
30
<PAGE>
<TABLE>
<CAPTION>
Six months ended June 30,
1998
-------------------------------------
Average Yield/
Balance Interest Cost
------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C>
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%
------- ----
Noninterest-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%
</TABLE>
- --------------
(1) Yields on tax-exempt loans and investment securities have been computed on a
tax equivalent basis.
31
<PAGE>
Yield Analysis
(dollars in thousands-taxable equivalent basis) (1)
<TABLE>
<CAPTION>
1998 1997
---------------------------------- --------------------------------
Interest Average Interest Average
Average Income/ Interest Average Income/ Interest
Balance Expense Rate Balance Expense Rate
-------- --------- -------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Earning Assets: (2)
Commercial loans-taxable $161,839 $14,272 8.82% $138,214 $12,450 9.01%
Commercial loans-tax free 11,648 1,106 9.50% 11,714 1,135 9.69%
Mortgage loans 50,072 3,951 7.89% 62,814 5,097 8.11%
Installment loans 78,971 6,606 8.37% 63,501 5,433 8.56%
-------- ------- -------- -------
Total Loans 302,530 25,935 8.57% 276,243 24,115 8.73%
-------- ------- -------- -------
Securities-taxable 95,602 6,239 6.53% 74,605 5,147 6.90%
Securities-tax free 30,196 2,587 8.57% 26,934 2,380 8.83%
-------- ------- -------- -------
Total Securities 125,798 8,826 7.02% 101,539 7,527 7.41%
-------- ------- -------- -------
Interest-bearing deposits with banks 2,918 177 6.07% 2,839 170 6.00%
Federal funds sold 4,007 222 5.54% 5,251 290 5.52%
-------- ------- -------- -------
Total Money Market Assets 6,925 399 5.76% 8,090 460 5.69%
-------- ------- -------- -------
Total Earning Assets 435,253 35,160 8.08% 385,872 32,102 8.32%
Non-earning assets 21,657 19,278
Allowance for credit losses (3,932) (3,446)
-------- --------
Total Assets $452,978 $401,704
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-Bearing Liabilities
Interest-bearing demand deposits $50,504 $ 1,225 2.43% $ 45,682 $ 1,110 2.43%
Savings deposits 41,983 1,001 2.38% 42,482 1,038 2.44%
Time deposits over $100,000 61,618 3,265 5.30% 53,784 2,827 5.26%
Other time deposits 171,147 9,764 5.71% 161,331 9,253 5.74%
-------- ------- -------- -------
Total Interest-Bearing Deposit 325,252 15,255 4.69% 303,279 14,228 4.69%
-------- ------- -------- -------
Borrowed funds and other interest-
bearing liabilities 54,661 3,202 5.86% 34,327 2,098 6.11%
-------- ------- -------- -------
Total Interest-Bearing Liabilities 379,913 18,457 4.86% 337,606 16,326 4.84%
Demand deposits 35,887 31,707
Other liabilities 3,779 3,103
Stockholders' equity 33,399 29,288
-------- --------
Total Liabilities and
Stockholders' Equity $452,978 $401,704
======== ========
Net Interest Income Spread $16,703 3.22% $15,776 3.48%
======= ===== ======= ====
Net Interest Margin 3.84% 4.09%
===== ====
</TABLE>
<TABLE>
<CAPTION>
1996
--------------------------------
Interest Average
Average Income/ Interest
Balance Expense Rate
-------- -------- -------
<S> <C> <C> <C>
ASSETS:
Earning Assets: (2)
Commercial loans-taxable $116,851 $10,466 8.96%
Commercial loans-tax free 8,658 800 9.24%
Mortgage loans 66,158 5,302 8.01%
Installment loans 52,436 4,623 8.82%
-------- -------
Total Loans 244,103 21,191 8.68%
-------- -------
Securities-taxable 47,524 3,131 6.59%
Securities-tax free 27,643 2,464 8.91%
-------- -------
Total Securities 75,167 5,595 7.44%
-------- -------
Interest-bearing deposits with banks 1,738 101 5.81%
Federal funds sold 5,483 293 5.34%
-------- -------
Total Money Market Assets 7,221 394 5.46%
-------- -------
Total Earning Assets 326,491 27,180 8.32%
Non-earning assets 18,271
Allowance for credit losses (3,105)
--------
Total Assets $341,657
========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-Bearing Liabilities
Interest-bearing demand deposits $ 38,637 $ 937 2.43%
Savings deposits 45,257 1,163 2.57%
Time deposits over $100,000 46,261 2,421 5.23%
Other time deposits 136,460 7,750 5.68%
-------- -------
Total Interest-Bearing Deposit 266,615 12,271 4.60%
-------- -------
Borrowed funds and other interest-
bearing liabilities 17,821 1,035 5.81%
-------- -------
Total Interest-Bearing Liabilities 284,436 13,306 4.68%
Demand deposits 28,116
Other liabilities 2,978
Stockholders' equity 26,127
--------
Total Liabilities and
Stockholders' Equity $341,657
========
Net Interest Income Spread $13,874 3.64%
======= ====
Net Interest Margin 4.25%
====
</TABLE>
- ---------------
(1) In this schedule and other schedules presented on a tax-equivalent basis,
income that is exempt from federal income taxes, i.e. interest on state and
municipal securities, has been adjusted to a taxable equivalent basis using
a 34% federal income tax rate.
(2) Excludes non-performing loans.
Rate Volume Analysis
The most significant impact on net income between periods is derived from
the interaction of changes in the volume 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.
32
<PAGE>
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.
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.
Rate/Volume Variance Report
<TABLE>
<CAPTION>
Period Ended June 30
(Dollars in thousands)
1999 vs 1998
Increase (Decrease)
Due to
----------------------------------------
Rate Volume Total
----- ------ ------
<S> <C> <C> <C>
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
===== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Period Ended June 30
(Dollars in thousands)
1999 vs 1998
Increase (Decrease)
Due to
----------------------------------------
Rate Volume Total
------ ------ ------
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
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
------- ------ ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
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
====== ====== ===== ====== ====== ====
</TABLE>
- -------------
(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.
34
<PAGE>
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, we
held rates steady on our 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 we attempted to lengthen our 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 our independent auditors. The provision for credit losses was
$920,000 in 1998, $1,110,000 in 1997 and $820,000 in 1996.
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.
35
<PAGE>
Other Income
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
For the Six Months Ended June 30, For the Years Ended
- -------------------------------------------------------------------------------------------------------------------
Other Income 1999 1998 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Service charge $398 $391 $ 780 $ 759 $ 693
Net gain/(loss) on the
sale of securities 213 51 125 (8) 130
Net gain on the sale of
other real estate 0 38 47 377 1
Net gain on the sale of
other assets 44 131 230 29 25
Other 196 173 401 315 250
--- ---- ------ ------ ------
Total Other Income 851 784 $1,583 $1,628 $1,099
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Our 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.
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 for the six months ended June 30,
1999 increased $7,000, or 2%, in comparison to the same period of the previous
year, while other fee income increased $23,000, or 13%. Loan servicing fees and
investment brokerage income comprise the majority of this increase.
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, we 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.
36
<PAGE>
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 our efforts to improve future profits. During
1997, many of the lowest yielding securities in the portfolio were sold as
interest rates plummeted, thereby enabling us 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 Corporation 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
<TABLE>
<CAPTION>
For the Six Months Ended For the Years Ended
- ---------------------------------------------------------------------------------------------------------------
Other Expenses 1999 1998 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Salary expense $2,093 $1,808 $3,772 $3,482 $3,176
Employee benefit expense 552 495 977 960 900
Occupancy expense 492 412 869 842 812
Equipment expense 376 322 677 610 484
Advertising expense 175 150 341 272 259
Data Processing expense 304 253 530 424 382
Other operating expenses 1,189 1,045 2,257 2,249 1,891
------ ------ ------ ------ ------
Total Other Expenses $5,181 $4,485 $9,423 $8,839 $7,904
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
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. Our overhead ratio was 2.06% for the first six months of 1999
as compared to 2.07% for the same period in 1998.
Total other expenses increased $584,000, or 7%, in 1998 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. Our 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 our total other expenses. During
1998, salary expense increased $290,000, or 8%, due to merit increases and the
addition of staff to meet our growing sales and administrative needs. 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
37
<PAGE>
$17,000, or 2%, in 1998 due primarily to a $30,000 increase in our 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 our 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 our
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. Noncontrollable 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%.
38
<PAGE>
Provision for Income Taxes
During the first six months of 1999, income before taxes increased $422,000
over the same period in 1998. We anticipated an increase of $143,000 in tax
expense based on a statutory rate of 34%. Due to an increased level of
tax-exempt income and our deferred tax benefits, our provision for income taxes
increased only $73,000. Our effective tax rates for the six-month periods ended
June 30, 1999 and 1998 were 24.2% and 25.0%, respectively.
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. Our 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
During the first six months of 1999, total assets increased $25 million, or
10% on an annual basis. Our total deposits increased over $15 million during the
first six months of 1999 and we used this liquidity to fund over $20 million of
new loans.
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 our securities portfolio.
Securities
Our primary objectives in managing our 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.
Total securities increased $2.6 million at June 30, 1999 over December 31,
1998 and $8.5 over June 30, 1998. The growth over the past year was concentrated
in the securities of U.S. government agencies and tax-exempt municipal
securities.
During 1998, total securities increased $10 million over 1997, 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 us to earn a favorable spread between the rate
earned on the securities and the cost of the borrowed funds.
39
<PAGE>
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
our investment and asset/liability management policies.
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.
The following tables show the carrying amounts of securities for the
periods indicated:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
June 30 December 31
- ---------------------------------------------------------------------------------------------------------------
1999 1998 1998 1997 1996
---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S.
government agencies $ 13,840 $ 19,738 $ 13,109 $ 31,808 $27,946
Obligations of state and
political subdivisions 37,711 32,224 33,671 27,043 29,533
Mortgage-backed securities 74,201 68,069 77,590 56,615 22,544
Corporate debt securities 952 0 992 0 0
Equity securities 7,741 5,901 6,468 5,901 2,453
-------- -------- -------- -------- -------
Total $134,445 $125,932 $131,830 $121,367 $82,476
======== ======== ======== ======== =======
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
40
<PAGE>
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.
<TABLE>
<CAPTION>
Mortgage-
Within 2-5 6-10 Over Backed No Fixed
(dollars in thousands) One Year Years Years 10 Years Securities Maturity Total
-------- ------ ------- -------- ---------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
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%
====== ====== ======= ======= ======= ====== ========
</TABLE>
- --------------
(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 by $20 million, or 6.1%, at June 30, 1999 over
December 31, 1998, and $52 million, or 17.7%, over June 30, 1998. Commercial
loans increased $46 million during the year while growth in consumer loans was
minimized by the sale of over $22 million of residential mortgages.
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 we continued with our 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 us to
continue to provide competitive products during the current low-rate
environment.
41
<PAGE>
The following table sets forth detailed information concerning the
composition of our loan portfolio as of the dates specified:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
-------------------------- ------------------------
Amount % Amount %
-------- ----- -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial and Industrial $ 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: Allowance for Loan Losses
(4,529) (4,283)
-------- --------
Net Loans $344,457 $324,610
======== =======
</TABLE>
Details regarding the loan portfolio for each of the last five years are as
follows:
Loans Outstanding
(dollars in thousands)
<TABLE>
<CAPTION>
December 31
-------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Commercial and Industrial $ 49,796 $ 36,790 $ 29,625 $ 26,987 $ 21,915
Real Estate 211,554 190,266 181,455 165,362 153,248
Installment 58,799 46,174 43,200 31,252 15,465
Other 8,748 11,133 8,785 8,879 4,941
----- ------ ----- ----- -----
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
Allowance 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
======== ======== ======== ======== ========
</TABLE>
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.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Loans Outstanding - Repricing Distribution
(dollars in thousands)
- -------------------------------------------------------------------------------------------------------------
Within One to Over Five
One Year Five Years Years Total
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Commercial and Industrial $ 35,453 $ 10,882 $ 3,461 $ 49,796
Real Estate 108,214 72,680 30,660 211,554
Installment 6,276 51,167 1,356 58,799
Other 1,934 84 6,730 8,748
-------- -------- ------- --------
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
======== ======== ======= ========
- -------------------------------------------------------------------------------------------------------------
</TABLE>
42
<PAGE>
Asset Quality
We manage 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 our control.
Our 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 for the
periods indicated:
<TABLE>
<CAPTION>
June 30, 1999 Dec. 31, 1998
------------- -------------
(Dollars in thousands)
<S> <C> <C>
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
====== ======
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%
=== ===
</TABLE>
The following schedule reflects various non-performing categories as of
December 31 for each of the last five years:
<TABLE>
<CAPTION>
(Dollars in thousands)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Nonaccrual loans
Impaired $ 0 $ 0 $ 447 $1,341 $1,869
Other 845 207 267 288 416
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
====== ====== ====== ====== ======
</TABLE>
During the first six months of 1999, total non-performing assets increased
due to the transfer of two loans to nonaccrual status. At June 30, 1999, our
ratio of nonaccrual loans to total loans was 0.4%
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 nonaccrual status during 1998. The majority of the increase is
split among three credits which are substantially secured by real estate. As of
December 31, 1998, our ratio of nonaccrual loans to total loans was .26%, less
than one-half of the national peer banks reported ratio of .63%. We continue 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.
43
<PAGE>
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)
<TABLE>
<CAPTION>
12/31/98 12/31/97 12/31/96 12/31/95
------------------------ ----------------------- ------------------------ ------------------------
Percentage Percentage Percentage Percentage
of of of of
Loans in Loans in Loans in Loans in
Each Each Each Each
Category Category Category Category
to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans
------- -------- ------- -------- ------ -------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial
and Financial $1,706 58% $1,340 56% $1,326 52% $1,094 52%
Real Estate 117 14% 118 20% 98 26% 105 29%
Installment 92 28% 69 24% 61 22% 38 19%
Unallocated 2,368 2,096 1,682 1,563
------ ---- ------ ---- ------ ---- ------ ----
$4,283 100% $3,623 100% $3,167 100% $2,800 100%
====== ==== ====== ==== ====== ==== ====== ====
</TABLE>
<TABLE>
<CAPTION>
12/31/94
------------------------
Percentage
of
Loans in
Each
Category
to Total
Amount Loans
------- --------
<S> <C> <C>
Commercial
and Financial $1,110 53%
Real Estate 121 34%
Installment 29 13%
Unallocated 990
------ ----
$2,250 100%
====== ====
</TABLE>
The following schedule presents an analysis of the allowance for credit
losses for each of the last five years:
<TABLE>
<CAPTION>
Years Ended December 31
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
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%
</TABLE>
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.
44
<PAGE>
The following table sets forth certain information with respect to our
allowance for loan losses and charge-offs as of the dates specified:
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
====== ======
Deposits
The primary source of funds to support our growth is our 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:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Year Ended December 31
- ----------------------------------------------------------------------------------------------------------------
1998 1997 1996
Amount Rate Amount Rate Amount Rate
-------- ----- -------- ---- --------- -----
(thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
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
======== ======== ========
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
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
=======
45
<PAGE>
The average daily amount of deposits and rates paid on such deposits is
summarized for the periods indicated in the following table:
<TABLE>
<CAPTION>
Six Months Ended June 30
-----------------------------------------------------
1999 1998
---------------------- ---------------------
Amount Rate Amount Rate
-------- ----- -------- ----
(thousands of dollars)
<S> <C> <C> <C> <C>
Noninterest-bearing demand deposits $ 40,273 $ 33,633
Interest-bearing demand deposits 59,629 2.47% 49,925 2.46%
Savings deposits 43,781 2.26% 39,667 2.43%
Time deposits 251,237 5.30% 227,089 5.62%
------- -------
Total $394,920 $350,314
======== ========
</TABLE>
ASSET AND LIABILITY MANAGEMENT
The major objectives of our 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. We manage these objectives through our 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 our
earning's sensitivity to changes in these rates.
Interest Rate Sensitivity
We analyze our 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, we use 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.
46
<PAGE>
Our interest rate 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.
47
<PAGE>
Interest Rate Gap
The following schedule illustrates our interest rate gap position as of
December 31, 1998. At that date, our 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 thousand)
<TABLE>
<CAPTION>
Rate Sensitive
-----------------------------------------------------------------
181 to Not
1 to 90 91 to 180 365 1 to 5 Beyond Rate
Days Days Days Years 5 Years Sensitive Total
-------- --------- --------- -------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
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 1,487 198 496 297 0 0 2,478
banks
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
======== ========= ========= ======== =======
</TABLE>
48
<PAGE>
Our 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 our ability to generate sufficient amounts
of cash to meet our cash-flow needs. Liquidity is required to fulfill the
borrowing needs of our credit customers and the withdrawal and maturity
requirements of our deposit customers, as well as to meet other financial
commitments.
Our short-term liquidity position 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.
We have relied primarily on our 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.
Cash and cash equivalents (cash and due from banks and federal funds sold)
are our 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 our 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.
During the first six months of 1999, core deposits averaged $327 million, or 12%
higher than the $293 million average recorded during the first half of 1998.
We have other potential sources of liquidity, including repurchase
agreements. Additionally, we 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.
49
<PAGE>
Capital
A strong capital base is essential to our continued growth and
profitability and in that regard the maintenance of appropriate levels of
capital is a management priority. Our 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 we have 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.
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.
50
<PAGE>
The following schedules present information regarding risk-based capital
and selected other capital ratios at June 30, 1999 and 1998, and at December 31,
1998, 1997 and 1996.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
CAPITAL ANALYSIS
(dollars in thousands)
- --------------------------------------------------------------------------------------------------------------------------
June 30 December 31
1999 1998 1998 1997 1996
-------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Tier I Capital:
Shareholders' equity $ 36,253 $ 32,435 $ 33,887 $ 30,483 $ 27,247
Total Tier I Capital $ 36,253 $ 32,435 $ 33,887 $ 30,483 $ 27,247
Tier II Capital:
Allowable portion of allowance for
credit losses $ 4,529 $ 3,679 $ 4,157 $ 3,483 $ 3,167
Total Risk-Based Capital $ 40,782 $ 36,114 $ 38,044 $ 33,966 $ 30,414
Total Risk-Weighted Assets $364,482 $295,354 $332,519 $278,680 $265,366
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CAPITAL RATIOS
- -------------------------------------------------------------------------------------------------------------------------
June 30 December 31
Regulatory
1999 1998 1998 1997 1996 Minimum
------ ------ ------ ------ ------ -----------
<S> <C> <C> <C> <C> <C> <C>
Total Risk-Based Capital 11.19% 12.23% 11.45% 12.19% 11.46% 8.00%
Tier I Risk-Based Capital 9.95% 10.98% 10.19% 10.94% 10.27% 4.00%
Tier I Leverage Ratio 7.00% 7.36% 7.10% 7.28% 7.41% 3.00%
Return on Assets 1.17% 1.20% 1.13% 1.16% 1.13% N/A
Return on Equity* 16.97% 16.21% 15.29% 15.85% 14.83% N/A
Equity to Assets Ratio* 6.66% 7.48% 7.17% 7.37% 7.42% N/A
Dividend Payout Ratio 24.39% 24.90% 33.35% 30.06% 30.40% N/A
* Includes the effect of SFAS 115 in the amount of $791,000 in 1998, $1,097,000 in 1997 and $384,000 in 1996.
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
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. Regulatory capital
increased by $2.4 million during the first six months of 1999 to $36.3 million.
As of June 30, 1999, there were 2,598,218 shares of stock available for future
sale or stock dividends. The approximate number of stockholders of record at
June 30, 1999 was 900.
51
<PAGE>
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 their management
of their interest sensitive assets and liabilities in the 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 - - net interest income. Recessionary periods 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 because 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 recently 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 7 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 81 basis points to 5.15%.
During the first quarter of 1999, economic activity continued to expand
while tight labor markets presented a constant concern for rising inflation.
Consumer spending was particularly strong while business spending, although
slower than its fourth quarter surge, was still quite rapid. Despite these
signs, however, there was no evidence of rising price inflation. In the second
quarter, the Federal Reserve Policy Board shifted its bias toward tightening in
light of persistent strength in domestic demand and the reduced risk of economic
weakness abroad. While an upward trend in underlying inflation had not yet
materialized, members of the Federal Reserve's policy making board were
concerned that if recent developments continued, inflation was more likely to
rise over time. Throughout this period, U.S. Treasury rates began a steady climb
upwards, resulting in increases of over 1.00% in most terms and a yield on the
thirty-year Treasury of 6.06%. At its meeting of June 30, 1999, the Federal
Reserve increased rates by twenty-five basis points, the first increase in over
two years. Future increases appear likely as economic reports continue to show
an economy that is booming with no easing in the labor markets, 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.
52
<PAGE>
As of this writing, we are not aware of any pronouncements or legislation
that would have a material impact on the results of operations.
YEAR 2000 COMPLIANCE
We continue 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 fail. In order to address the issues, we are utilizing both
internal and external resources to identify and modify where necessary to ensure
Year 2000 compliance.
The bank formed a Year 2000 Operations Committee consisting of officers and
employees from every area of the bank. This committee provides the manpower and
knowledge to tackle the Year 2000 project in order to ensure that all mission
critical systems and applications are identified and tested for Year 2000
compliance. We believe our greatest risk associated with the Year 2000 is if our
customers and suppliers are not Year 2000 compliant. Due to the interrelatedness
of our computer systems, they could cause our Year 2000 plan to fail.
In addition, an Executive Committee was formed consisting of senior
management and the Year 2000 project managers. This committee reviews 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 ensures
that adequate resources are provided to assist in managing the Year 2000
project, provides guidance to the Operations Committee in its Year 2000 efforts,
and reports 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, the bank contracted with a highly regarded
computer consultant to the banking industry 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, the consultants performed an independent assessment of the bank's Year
2000 project planning activities to date. The consultant performed an
independent verification and validation review on the bank's Year 2000 plans,
activities and commitments and identified both strengths and weaknesses 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.
53
<PAGE>
Each area of our Year 2000 plan is being addressed according to the
guidelines established by the FFIEC and other regulatory agencies. These
guidelines include the five 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:
% Completed Projected Completion Date
----------- -------------------------
Awareness of the problem 100% Completed
Assessment of complexity 100% Completed
Renovation 100% Completed
Validation 100% Completed
Implementation 71% 12/01/99
Overall 94% 12/01/99
At present, management believes its progress in remedying systems, programs
and applications and installing Year 2000 compliant upgrades is complete.
Despite our affirmative steps to remedy the Year 2000 problem, we are not
certain that a partial or total systems interruption, or the cost necessary to
upgrade hardware or software, would not have a material effect on our business,
financial condition, results of operations and business prospects.
We rely on third party vendors and service providers for our data
processing capabilities and for maintenance of our computer systems. We
initiated formal communications with our providers of data processing services
and other external third parties in 1997 and 1998 to assess the Year 2000
readiness of their products and services. We are monitoring their progress in
meeting their targeted schedules for an indication that they may not be able to
correct the problems in time. Thus far, responses indicate that all of the
significant providers currently have compliant versions available or are well
into the renovation and testing phases.
We have identified and prioritized those systems deemed to be mission
critical and those that may have a significant impact on normal operations. We
identified 36 mission critical vendors. These vendors have all responded with
favorable Year 2000 readiness status, and expressed with confidence that their
systems are Year 2000 compliant. However, we can give no guarantee that the
service providers and vendors will timely renovate the systems on which we rely.
If the service providers experience Year 2000 problems, we cannot assure that
the service providers can be held legally liable for their problems.
The following table summarizes the responses of our mission critical
customers, lenders and service providers:
<TABLE>
<CAPTION>
Inquiry Responses Compliant
Number Number % Number %
------ ------ ---- ------ ----
<S> <C> <C> <C> <C> <C>
Material Loan Customers 42 17 40% 17 100%
Lenders & Service Providers 555 353 64% 353 100%
Mission Critical 36 36 100% 36 100%
Non-Mission Critical 519 317 61% 317 100%
</TABLE>
Management reviewed our material loan customers, vendors and service
providers through discussions and questionnaires regarding their Year 2000
preparedness. The level of their Year 2000 compliance is a factor in evaluating
54
<PAGE>
the bank's loan portfolio. Management performed a risk assessment on material
loan customers, vendors and service providers who did not respond to the
questionnaire. Supporting collateral and other sources of repayment were
reviewed to ensure that a lack of Year 2000 preparedness will not create a loss
due to a business disruption. Management and the Board of Directors determined
that the amount of risk is acceptable. Management continues to monitor the
progress of its material loan customers and other significant third parties.
However, we can give no guarantee that the systems of these third parties will
be timely renovated. If any of these third parties experience Year 2000
problems, we cannot assure that the third parties can be held legally liable for
their problems.
Costs
We conducted a comprehensive review of our computer systems that may be
affected by the Year 2000 issue and took affirmative steps to remedy Year 2000
problems with our systems, programs and applications. In 1998 we spent $119,626
on renovations and upgrades. We budgeted $75,000 for 1999; and, as of September
30, 1999, we expended $44,896 for remedial measures. We have allotted an
additional $25,000 for 2000 should we experience a partial or total systems
interruption and we must implement our Year 2000 Contingency Plan.
Risk Assessment
Based upon current information related to the progress of our major vendors
and service providers, management has determined that the Year 2000 issue will
not pose significant operational problems for our computer systems. This
determination is based on the ability of those vendors and service providers to
renovate, in a timely manner, the products and services on which our systems
rely. However, we can give no guarantee that the systems of these third parties
will be renovated in a timely manner.
Contingency Plan
We developed a contingency plan for our mission critical systems in the
event that system disruption or failure occurs to one or more of those systems.
The plan provides operating procedures in the event that a partial or total
system interruption occurs with respect to the century date change. While the
contingency plan is complete, it will be updated as necessary throughout 1999.
In a worst case scenario, the software that processes customer accounts would
fail. Should this occur, we would maintain manual accounting of our accounts
until the main processing software is corrected. We are committed to making
available the human resources necessary to accommodate this temporary situation
and will follow the steps outlined in our Year 2000 Contingency Plan.
To that end, we will continue to conduct training sessions on our Year 2000
Contingency Plan during the fourth quarter of 1999 to ensure that employees are
familiar with the procedures that may need to be implemented in such a worst
case scenario.
55
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
Our Board of Directors presently consists of 14 members, one-third (as
nearly equal in number as possible) of whom are to be elected annually to serve
for a term of three years.
The following table sets forth the name, age and term of office of each of
our executive officers and directors and the principal occupations of these
individuals during the past five years. The executive officers are appointed to
their respective offices annually. All of our directors also serve as directors
of First National Community Bank and the terms for both expire at the same time.
Unless otherwise indicated, the principal occupation listed for a person has
been that person's occupation for at least the past five years. Because a
majority of persons listed served as officers or directors of the bank before
First National Community Bancorp, Inc. was formed as its holding company in
1998, the table indicates the earliest year a person became an officer or
director for the bank or for the holding company.
<TABLE>
<CAPTION>
Age as of Director
October 1, Principal Occupations During or Officer Position with First
Name 1999 Past Five Years Since National Community
---- ---------- ---------------------------- ---------- ------------------
<S> <C> <C> <C> <C>
Angelo F. Bistocchi 80 Retired Restauranteur 1971 Director;
Vice President of the
Board of the bank since
1978
Michael G. Cestone 37 President, 1988 Director
S. G. Mastriani Company
(General Contractor)
Michael J. Cestone, Jr. 67 President, M. R. Company 1969 Director;
(Real Estate Corporation) Secretary of the Board of
CEO, S. G. Mastriani Company the bank since 1971
(General Contractor)
Joseph Coccia 45 President, 1998 Director
Coccia Ford, Inc. and Coccia
Lincoln Mercury, Inc.
William P. Conaboy 41 Vice President, 1998 Director
General Counsel
Allied Services
Dominick L. DeNaples 62 President, 1987 Director
F & L Realty Corp.
Vice President,
DeNaples Auto Parts, Inc. and
Keystone Landfill, Inc.
Louis A. DeNaples 59 President, 1972 Director;
DeNaples Auto Parts, Inc. and Chairman of the Board of
Keystone Landfill, Inc. the bank since 1988; Chairman
Vice President, of the Board of First National
F & L Realty Corp. Community since 1998
Joseph J. Gentile 69 President, 1989 Director
Dunmore Oil Co., Inc.
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
Age as of Director
October 1, Principal Occupations During or Officer Position with First
Name 1999 Past Five Years Since National Community
---- ---------- ---------------------------- ---------- ------------------
<S> <C> <C> <C> <C>
Martin F. Gibbons 83 Partner, 1979 Director
Gibbons Ford
Joseph O. Haggerty 60 Retired Superintendent, 1987 Director
Dunmore School District
George N. Juba 73 Consultant to the bank 1973 Director
William S. Lance 40 Senior Vice President since 1991 Officer
1994;
Treasurer of First National
Community since 1998
J. David Lombardi 50 President and Chief Executive 1986 Director;
Officer of the bank since 1988 Officer
and of First National Community
since 1998
John P. Moses 53 Partner, 1999 Director
Moses & Gelso, L.L.P.
(Attorneys at Law)
John R. Thomas 81 Chairman of the Board of 1967 Director
Wesel Manufacturing Company
(design and manufacturing of
precision machinery company)
</TABLE>
We held our 1999 Annual Meeting of Shareholders on May 19, 1999. At this
meeting, Mr. Michael J. Cestone, Jr., Mr. Louis A. DeNaples, Mr. Joseph J.
Gentile and Mr. Joseph O. Haggerty were elected as directors of First National
Community Bancorp, Inc. and of the bank. Their terms expire in 2002.
Due to the expansion of the bank into the Luzerne County marketplace, the
Board of Directors believed it was appropriate to add an individual from Luzerne
County to the board to help promote the bank. Thus, Mr. John P. Moses was
appointed to the Board of Directors of the bank and First National Community
Bancorp, Inc. on July 14, 1999.
Family Relationships
Family relationships exist between the bank and our 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.
57
<PAGE>
EXECUTIVE COMPENSATION
The table below shows the annual and long-term compensation for services in
all capacities to us and to First National Community Bank for the fiscal years
ended December 31, 1998, 1997 and 1996 to those persons who were, at December
31, 1998:
o our Chief Executive Officer; and
o our other most highly compensated executive officers. The
table shows the information only for those executives whose
annual salary and bonus exceeded $100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
All Other
Name & Principal Position Year Salary(1) Bonus(2) Compensation(3)(4)
- ------------------------- ---- --------- -------- -------------------
<S> <C> <C> <C> <C>
J. David Lombardi(1) 1998 $179,000 $250,000 $25,979
President & Chief Executive Officer 1997 169,000 200,000 25,402
of First National Community 1996 159,000 175,000 23,279
Bancorp, Inc. and First
National Community Bank
Thomas P. Tulaney 1998 $ 87,135 $ 40,000 12,538
Executive Vice President of First National 1997 81,000 32,000 10,651
Community Bank 1996 78,000 25,000 9,427
Gerard A. Champi 1998 $ 79,634 $ 40,000 11,496
Executive Vice President of First National 1997 72,492 32,000 9,645
Community Bank 1996 68,500 27,000 8,463
</TABLE>
- -------------------
(1) Includes Directors' fees from the bank 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 our 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 us 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 us.
(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 1996, 1997
and 1998, respectively.
58
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Indebtedness of Management
Some of our directors and officers 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 1998 and the bank expects to continue
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, do not involve more than a normal risk of
collectibility or present other unfavorable features.
At June 30, 1999, the outstanding principal amount of indebtedness to the
bank owed by directors and executive officers and their associates, who were
indebted to the bank on that date, aggregated $10.1 million which represented
approximately 29.8% of our equity capital accounts.
The Board of Directors
During 1998, our Board of Directors held 5 meetings. Directors received no
remuneration for attendance at those meetings.
During 1998, the bank's Board of Directors held 23 meetings. Each of the
directors attended at least 75% of the scheduled meetings of the bank's Board of
Directors with the exception of Mr. George N. Juba.
The directors generally function as a full board. In lieu of a nominating
committee, the full Board nominates the slate for the election of the Board of
Directors. In lieu of a compensation committee, the full Board appoints and sets
compensation of officers and directors. In lieu of an audit committee, the full
board appoints the independent outside accountants to conduct external audits of
our books, records and procedures and meets with the outside accountants to
discuss the results of their audits. To assure maximum independence and candor
in the internal audit function, management director Lombardi, who serves as
President and Chief Executive Officer, does not participate in the board's
deliberations when the Board receives reports from its internal auditor. During
1998, the Board held four meetings of this type. All non-management members
attended at least 75% of the scheduled meetings except Mr. George N. Juba and
Mr. Joseph Coccia.
In 1993, the Board of Directors of the bank established a Senior Loan
Committee to meet on alternating weeks as deemed necessary. Membership on this
committee consists of:
o the Chairman, President and Chief Executive Officer of the bank
(permanent members); and
o other members of the Board of Directors (appointed on a rotating basis
quarterly, with no more than three members appointed from this group at
any one time.)
59
<PAGE>
In 1998, the Senior Loan Committee held 12 meetings. Each appointed
director was present for at least 75% of the scheduled meetings except Mr.
Michael J. Cestone, Jr., Mr. William P. Conaboy, Mr. John R. Thomas and Mr.
George N. Juba.
Compensation of Directors
Members of First National Community Bancorp, Inc.'s Board of Directors
receive no remuneration for attendance at meetings.
Members of the bank's Board of Directors are compensated at the rate of
$1,000 per meeting, including 4 compensated absences at full compensation, after
which members are not paid for any unexcused absence, except for Mr. George N.
Juba who is compensated for unlimited absences due to illness. The bank allows
excused absences due to other bank business. The aggregate amount of Board fees
paid in 1998 was $284,000. Certain directors also receive fees for additional
services rendered. The aggregate amount of these fees paid in 1998 was $31,500.
All directors of the bank also received a bonus of $7,500 in 1998.
Compensation Committee Interlocks and Insider Participation
J. David Lombardi, our President and Chief Executive Officer and that of
the bank, is a member of our Board of Directors and also of the bank. Mr.
Lombardi makes recommendations to the Board of Directors regarding compensation
of employees. Mr. Lombardi does not participate in conducting his own review.
The entire Board of Directors votes to establish and approve our compensation
policies.
Employment Agreement
The bank entered into an employment agreement with Mr. J. David Lombardi,
President and Chief Executive Officer, effective on January 1, 1990, and as
amended September 28, 1994. On July 8, 1998, our Board of Directors approved and
adopted an amendment to the employment agreement that added us as a party to the
agreement. This agreement is designed to assist us and the bank in retaining a
highly qualified executive and to help ensure that if we are faced with an
unsolicited tender offer proposal, Mr. Lombardi will continue to manage us
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.
The agreement provided for a base annual salary of $155,000 in 1998. The
Board may establish additional compensation by way of salary increases, bonuses
or fringe benefits from time to time. The agreement does not preclude Mr.
Lombardi from serving as one of our directors and as one of the bank's and
receiving related fees.
We may terminate the agreement with or without "just cause," as 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 we terminate his employment with "just cause," Mr.
Lombardi will receive a salary payment at his then effective base salary, as if
his employment had not been terminated, for a period of 3
60
<PAGE>
months, excluding bonuses or fringe or supplemental payments previously
authorized by the Board of Directors. In the event that we terminate him without
just cause, Mr. Lombardi will continue to receive, each month for a period of 2
years from the effective date of termination:
o his monthly base salary payments from the bank at the rate in effect on
the date of his termination;
o his Board of Directors fees; and
o 1/12th of the average of the bonuses paid to him over the preceding 3
years.
In the event that there is a "change in control," as defined in the
agreement, and as a result of the change in control:
o Mr. Lombardi's employment is terminated; or
o his duties or authority are substantially diminished; or
o he is removed from the office of Chief Executive Officer of the
reorganized employer;
then Mr. Lombardi may terminate his employment by giving notice to the bank
within 60 days of the occurrence of the "change in control."
Upon termination, we are obligated to pay Mr. Lombardi the following:
o 3 times his annual base salary as in effect on the date of the change
in control;
o 3 times his annual Board of Director's fee; and
o 3 times the average of his bonuses for the prior 3 years.
Subsequent to termination, Mr. Lombardi may not accept employment in any
office or branch of any financial institution or subsidiary in Lackawanna
County, Pennsylvania for a period of 3 years, unless we terminated his
employment "without just cause."
61
<PAGE>
BENEFICIAL OWNERSHIP OF SHARES
Principal Owners
We set forth in the following table, as of October 1, 1999, the name and
address of each person who owns of record or who is known by the Board of
Directors to be the beneficial owner of more than 5% of our outstanding common
stock, the number of shares beneficially owned by the person and the percentage
of our outstanding common stock so owned.
<TABLE>
<CAPTION>
Percentage of Outstanding
Common Stock
Name and Address Shares Beneficially Owned Beneficially Owned
- ---------------- ------------------------- --------------------------
<S> <C> <C>
Louis A. DeNaples 176,693 7.34%
400 Mill Street
Dunmore, PA 18512
Dominick L. DeNaples 164,454 6.83%
400 Mill Street
Dunmore, PA 18512
</TABLE>
Beneficial Ownership by Directors and Principal Officers
We set forth in the following table certain information, as of October 1,
1999, regarding the beneficial ownership of our common stock by each director
and nominee, all directors and executive officers as a group, and all persons
who own beneficially more than 5% of our outstanding common stock. Management
knows of no persons, other than directors Louis A. DeNaples and Dominick L.
DeNaples, who own beneficially more than 5% of the company's outstanding stock.
Unless otherwise listed, shares beneficially owned represent sole voting and
investment power of the individuals named.
We determine the securities "beneficially owned" by an individual in
accordance with the definitions of "beneficial ownership" 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 60 days after October 1, 1999. Individuals may disclaim beneficial
ownership as to certain of the securities. Unless otherwise indicated, all
shares are legally owned by the reporting person individually or jointly with
his spouse.
Shares Beneficially Percentage
Name of Individual Owned of Class
- ------------------ ------------------- --------
Angelo F. Bistocchi 20,207 0.84
Michael G. Cestone 10,066 0.42
Michael J. Cestone, Jr. (1) 36,392 1.51
Joseph Coccia 12,051 0.50
62
<PAGE>
Shares Beneficially Percentage
Name of Individual Owned of Class
- ------------------ ------------------- ----------
William P. Conaboy 937 0.04
Dominick L. DeNaples (2) 164,454 6.83
Louis A. DeNaples (3) 176,693 7.34
Joseph J. Gentile (4) 106,813 4.44
Martin F. Gibbons 15,378 0.64
Joseph O. Haggerty 3,904 0.16
George N. Juba 14,644 0.61
J. David Lombardi (5) 27,948 1.16
John P. Moses 1,770 0.07
John R. Thomas (6) 38,146 1.58
All directors and executive
officers as a group (15) 630,244 26.18
- -----------------
(1) Includes 8,090 shares owned individually by his spouse.
(2) Includes 12,099 shares held jointly with his children.
(3) Includes 2,301 shares owned individually by his spouse and 7,523 shares
held jointly with his children.
(4) Includes 21,765 shares owned individually by his spouse.
(5) Includes 145 shares held by his minor children.
(6) Includes 5,424 shares owned individually by his spouse.
TRANSFER AGENT
Registrar and Transfer Company of Cranford, New Jersey, our stock transfer
agent, will act as registrar and transfer agent for the common stock offered
under this prospectus.
EXPERTS
The consolidated financial statements of First National Community Bancorp,
Inc. and subsidiary as of December 31, 1998, and 1997, and for each of the years
in the two-year period ended December 31, 1998, included in this prospectus have
been audited by Demetrius & Company, L.L.C., independent certified public
accountants, as indicated in its report with respect to the financial statements
and are included in reliance upon the authority of the firm as experts in
accounting and auditing.
The 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, included in this prospectus have been audited by Robert Rossi
& Co., independent certified public accountants, as indicated in its report with
respect to the financial statements and are included in reliance upon the
authority of the firm as experts in accounting and auditing.
63
<PAGE>
LEGAL MATTERS
Shumaker Williams, P.C., our special counsel for this matter, will issue an
opinion on the legality of our shares of common stock to be issued in connection
with this offering and certain other legal matters relating to the transaction.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities Exchange
Act of 1934, and, accordingly, file reports, proxy statements and other
information with the Securities and Exchange Commission. The reports, proxy
statements and other information filed with the Commission are available for
inspection and copying at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the Commission's Regional Offices located at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and at World Trade Center,
Suite 1300, New York, New York 10048. Copies of these documents may also be
obtained from the Public Reference Section of the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. You may
obtain information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. We are an electronic filer with the Commission.
The Commission maintains a web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The address of the Commission's web site is:
http://www.sec.gov. Our web site address is: fncb.com.
No person has been authorized to give any information or to make any
representation not contained in this prospectus, and if given or made, any such
information or representation should not be relied upon as having been
authorized. This prospectus does not constitute an offer to any person to
exchange or sell, or a solicitation from any person of an offer to exchange or
purchase, the securities offered by this prospectus in any jurisdiction in which
it is unlawful to make such an offer or solicitation. Neither the delivery of
this prospectus nor any distribution of the securities to which this prospectus
relates shall, under any circumstances, create any implication that the
information contained herein is correct at any time subsequent to the date
hereof.
This prospectus forms a part of a registration statement that we have filed
with the Commission under the Securities Act of 1933, with respect to the common
stock that we intend to offer to the public. This prospectus does not contain
all of the information in the registration statement. The Commission's rules and
regulations permit omission of certain information. You may inspect and copy the
registration statement, including any amendments or exhibits at the locations
mentioned above. Statements contained in this prospectus as to the contents of
any contract or other document are not necessarily complete. We refer you to the
copy of the contract or other document, filed as an exhibit to the registration
statement. We also qualify our discussions by these documents.
64
<PAGE>
FIRST NATIONAL COMMUNITY BANCORP, INC.
INDEX TO FINANCIAL STATEMENTS
AND
SUPPLEMENTARY FINANCIAL INFORMATION
Page
----
Selected Financial Data 25
Management's Discussion and Analysis
of Financial Condition and Results of Operations 26
INDEPENDENT AUDITOR'S REPORT F-2
AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 (unaudited)
Consolidated Statement of Condition F-3
Consolidated Statement of Income F-4
Consolidated Statement of Cash Flows F-5
Consolidated Statement of Changes in Stockholders' Equity F-7
YEARS ENDED DECEMBER 31, 1998 AND 1997
Consolidated Statement of Condition F-8
Consolidated Statement of Income F-9
Consolidated Statement of Cash Flows F-10
Consolidated Statement of Changes in Stockholders' Equity F-12
F-1
<PAGE>
Intentionally Omitted
Previously Filed
F-2
