U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended September 30, 1999
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _____________ to
_____________
Commission File No.____________
First National Community Bancorp, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Pennsylvania 23-2900790
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
102 E. Drinker St. Dunmore, PA 18512
(Address of Principal Executive Offices)
(717) 346-7667
(Registrant's Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Common Stock, $1.25 par value
(Title of Class)
2,407,690 shares
(Outstanding at November 4, 1999)
<PAGE>
FIRST NATIONAL COMMUNITY BANCORP, INC.
INDEX
Page No.
Part I - Consolidated Financial Statements
Item 1. Consolidated Financial Statements
Consolidated Statements of Financial Condition
September 30, 1999 and December 31, 1998 1
Consolidated Statements of Income
Three Months Ended September 30, 1999 and 1998
YTD Ended September 30, 1999 and 1998 2
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1999 and 1998 3-4
Consolidated Statements of Changes in Stockholders' Equity
Nine Months Ended September 30, 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7-22
Part II - Other Information: 22
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures 23
(ii)
<PAGE>
FIRST NATIONAL COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
Sept. 30, Dec. 31,
1999 1998
--------- -------
(UNAUDITED) (AUDITED)
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 12,587 $ 10,027
Federal funds sold 0 3,400
-------- --------
Total cash and cash equivalents 12,587 13,427
Interest-bearing balances with financial institutions 2,774 2,478
Securities:
Available-for-sale, at fair value 132,684 124,661
Held-to-maturity, at cost
(fair value $1,873 on Sept. 30, 1999 and
$714 on December 31, 1998) 2,166 711
Federal Reserve Bank and FHLB stock, at cost 7,936 6,458
Net loans 358,316 324,610
Bank premises and equipment 4,960 4,812
Other assets 10,680 6,228
-------- --------
Total Assets $532,103 $483,385
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand - non-interest bearing $ 41,503 $ 39,427
Interest bearing demand 62,056 51,240
Savings 46,884 42,017
Time ($100,000 and over) 74,351 69,341
Other time 184,549 178,014
-------- --------
Total deposits 409,343 380,039
Borrowed funds 84,362 65,175
Other liabilities 4,211 3,492
-------- --------
Total Liabilities $497,916 $448,706
-------- --------
Shareholders' equity:
Common Stock, $1.25 par value,
authorized 5,000,000 shares;
2,407,690 shares issued and outstanding
at September 30, 1999 and 2,398,360 shares
issued and outstanding at December 31, 1998 $ 3,010 $ 2,998
Additional Paid-in Capital 6,619 6,267
Retained Earnings 27,821 24,623
Accumulated Other Comprehensive Income (3,263) 791
-------- --------
Total shareholders' equity $ 34,187 $ 34,679
-------- --------
Total Liabilities and Shareholders' Equity $532,103 $483,385
======== ========
Note: The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See notes to financial statements
(1)
<PAGE>
FIRST NATIONAL COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollars in thousands, except per share amounts)
Three Months Ending Year-to-Date
--------------------- -------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1999 1998 1999 1998
-------- -------- -------- -------
Interest Income:
Loans $ 7,287 $ 6,548 $ 21,492 $18,881
Balances with banks 36 51 103 137
Investments 2,122 2,018 6,223 5,902
Federal Funds Sold 22 87 98 210
------- ------- -------- -------
Total interest income 9,467 8,704 27,916 25,130
------- ------- -------- -------
Interest Expense:
Deposits 3,955 3,900 11,784 11,318
Borrowed Funds 1,028 832 3,068 2,310
------- ------- -------- -------
Total interest expense 4,983 4,732 14,852 13,628
------- ------- -------- -------
Net Interest Income
before Loan Loss Provision 4,484 3,972 13,064 11,502
Provision for loan losses 180 180 540 540
------- ------- -------- -------
Net interest income 4,304 3,792 12,524 10,962
------- ------- -------- -------
Other Income:
Service charges on deposits 220 204 618 595
Other Income 97 134 292 308
Gain (Loss) on sale of:
Securities (16) 77 197 128
Loans 3 35 47 165
Other Assets 0 0 0 38
------- ------- -------- -------
Total other income 304 450 1,154 1,234
------- ------- -------- -------
Other expenses:
Salaries & benefits 1,418 1,224 4,063 3,527
Occupancy & equipment 464 373 1,331 1,108
Other 895 829 2,563 2,277
------- ------- -------- -------
Total other expenses 2,777 2,426 7,957 6,912
------- ------- -------- -------
Income before income taxes 1,831 1,816 5,721 5,284
Income tax expense 454 430 1,394 1,298
------- ------- ------- -------
NET INCOME $ 1,377 $ 1,386 $ 4,327 $ 3,986
======= ======= ======= =======
Earnings per share (1) $ 0.57 $ 0.58 $ 1.80 $ 1.66
======= ======= ======= =======
Weighted average number
of shares (1) 2,402,809 2,398,360 2,399,872 2,398,360
========= ========= ========= =========
(1) Per share data reflects the retroactive effect of the 100% stock dividend
issued August 31, 1998.
See notes to financial statements
(2)
<PAGE>
FIRST NATIONAL COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
Sept. 30, Sept. 30,
1999 1998
-------- --------
(Dollars in thousands)
INCREASE (DECREASE) IN CASH EQUIVALENTS:
Cash Flows From Operating Activities:
Interest Received $ 27,416 $ 25,457
Fees & Commissions Received 910 1,068
Interest Paid (14,894) (13,580)
Income Taxes Paid (1,498) (1,417)
Cash Paid to Suppliers & Employees (8,406) (6,278)
-------- --------
Net Cash Provided (Used) by Operating
Activities $ 3,528 $ 5,250
-------- --------
Cash Flows from Investing Activities:
Securities available for sale:
Proceeds from Maturities $ 1,500 $ 1,000
Proceeds from Sales prior to maturity 20,306 13,696
Proceeds from Calls prior to maturity 15,117 37,417
Purchases (52,421) (65,364)
Securities held to maturity:
Proceeds from Calls prior to maturity 249 257
Purchases (1,622) (231)
Net (Increase) Decrease in Interest-Bearing
Bank Balances (296) (1,477)
Net (Increase) Decrease in Loans to Customers (34,199) (27,663)
Capital Expenditures (728) (811)
-------- --------
Net Cash Provided (Used) by Investing
Activities $(52,094) $(43,176)
-------- --------
Cash Flows from Financing Activities:
Net Increase (Decrease) in Demand Deposits,
Money Market Demand, NOW Accounts,
and Savings Accounts $ 17,727 $ 3,611
Net Increase in Certificates of Deposit 11,545 14,237
Net Increase in Borrowed Funds 19,186 17,669
Repayment of Long-Term Debt - (851)
Net Proceeds from Issuance of Common Stock
Through Dividend Reinvestment 364 0
Dividends Paid (1,128) (1,007)
-------- -------
Net Cash Provided (Used) by Financing
Activities $ 47,694 $33,659
-------- -------
Net Increase (Decrease) in Cash and
Cash Equivalents $ (872) $(4,267)
Cash & Cash Equivalents at Beginning of Year $ 13,459 $14,681
-------- -------
CASH & CASH EQUIVALENTS AT END OF PERIOD $ 12,587 $10,414
======== =======
(Continued)
(3)
<PAGE>
FIRST NATIONAL COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
1999 1998
-------- --------
(Dollars in thousands)
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net Income $ 4,327 $ 3,986
------- -------
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating
Activities:
Amortization (Accretion), Net (31) 163
Depreciation 581 478
Provision for Probable Credit Losses 540 540
Provision for Deferred Taxes - -
Gain on Sale of Investment Securities (197) (128)
Gain on Sale of Other Assets (47) (38)
Increase (Decrease) in Taxes Payable (104) (120)
Decrease (Increase) in Interest Receivable (469) 164
Increase (Decrease) in Interest Payable (42) 48
Decrease (Increase) in Prepaid Expenses
and Other Assets (1,895) (518)
Increase (Decrease) in Accrued Expenses
and Other Liabilities 865 675
------- -------
Total Adjustments $ (799) $ 1,264
------- -------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES $ 3,528 $ 5,250
======= =======
See notes to financial statements
(4)
<PAGE>
<TABLE>
FIRST NATIONAL COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
For The Nine Months Ended September 30, 1999
(Dollars in thousands)
(UNAUDITED)
<CAPTION>
ACCUM
-ULATED
OTHER
COMP- COMP-
REHEN- ADD'L REHEN-
SIVE COMMON STOCK PAID-IN RETAINED SIVE
INCOME SHARES AMOUNT CAPITAL EARNINGS INCOME TOTAL
------ --------- --------- ------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1998 2,398 $2,998 $6,267 $24,623 $ 791 $34,679
Comprehensive Income:
Net income for the period 4,327 4,327 4,327
Other comprehensive income, net
of tax:
Unrealized loss on securities
available-for-sale, net of
deferred income tax benefit
of $2,089 (3,857)
Reclassification adjustment (197)
-------
Total other comprehensive
income, net of tax (4,054) (4,054) (4,054)
-------
Comprehensive Income 273
Issuance of 3,422 shares of Common
Stock through Dividend
Reinvestment 9 12 352 364
Cash dividends paid, $0.47 per share (1,129) (1,129)
------- ------ ------ ------- ------- -------
BALANCES, SEPTEMBER 30, 1999 2,407 $3,010 $6,619 $27,821 $(3,263) $34,187
======= ====== ====== ======= ======= =======
</TABLE>
(5)
<PAGE>
FIRST NATIONAL COMMUNITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) The accounting and financial reporting policies of First National Community
Bancorp, Inc. and its subsidiary conform to generally accepted accounting
principles and to general practice within the banking industry. The
consolidated statements include the accounts of First National Community
Bancorp, Inc. and its wholly owned subsidiary, First National Community
Bank (Bank) including its subsidiary, FNCB Realty, Inc. (collectively,
Company). All material intercompany accounts and transactions have been
eliminated in consolidation. The accompanying interim financial statements
are unaudited. In management's opinion, the consolidated financial
statements reflect a fair presentation of the consolidated financial
position of First National Community Bancorp, Inc. and subsidiary, and the
results of its operations and its cash flows for the interim periods
presented, in conformity with generally accepted accounting principles.
These interim financial statements should be read in conjunction with the
audited financial statements and footnote disclosures in the Bank's Annual
Report to Shareholders for the fiscal year ended December 31, 1998.
(2)Earnings per share were calculated by dividing the net income of the Company
by the weighted average number of shares of common stock outstanding of
2,399,872 and 2,398,360 for the periods ending September 30, 1999 and 1998,
respectively.
(3) The Company adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" (SFAS
115), as of December 31, 1993. Adoption of SFAS 115 is required for fiscal
years beginning after December 15, 1993, with earlier adoption permitted.
The adoption of this standard resulted in a decrease in the carrying value
of "Securities Available-For-Sale" of $4,943,816 at September 30, 1999,
offset by a decrease in Retained Earnings of $3,262,919 and the related
deferred tax impact of $1,680,897.
(4) During June 1997, Financial Accounting Standards Boards issued FASB 131,
"Disclosures about Segments of an Enterprise and Related Information" which
establishes standards for all public entities to report financial and
descriptive information about its reportable operating segments, and
certain other enterprise-wide information relative to its products and
service, geographic area, and major customers. FASB 131 initially applies
to annual financial statements with years beginning after December 15,
1997. However, it is the opinion of management that there is no future
impact from this accounting standard since the Company's organizational
structure does not consist of separately identifiable reportable operating
segments.
(5) In 1998, the Company adopted FASB Statement No. 130, "Reporting
Comprehensive Income." Statement No. 130 requires the reporting of
comprehensive income in addition to net income from operations.
Comprehensive income is a more inclusive financial reporting methodology
that includes disclosure of certain financial information that historically
has not been recognized in the calculation of net income.
Reclassifications have been made to the prior period financial statements for
comparative purposes as are requested by FASB Statement No. 130.
(6)
<PAGE>
FIRST NATIONAL COMMUNITY BANCORP, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The consolidated financial review of First National Community Bancorp, Inc. (the
"Company") provides a comparison of the performance of the Company for the
periods ended September 30, 1999 and 1998. The financial information presented
should be reviewed in conjunction with the consolidated financial statements and
accompanying notes appearing elsewhere in this report.
Background
On July 1, 1998, First National Community Bancorp, Inc. (the "Company")
became the holding company for First National Community Bank, a national banking
association (the "Bank"). Pursuant to the terms of the Plan of Reorganization,
dated as of March 13, 1997, among the Corporation, the Bank and First National
Community Interim Bank (the "Interim Bank"), a national banking association and
a wholly-owned subsidiary of the Corporation, the Bank merged with, into the
Interim Bank, under the charter of the Interim Bank and under the name "First
National Community Bank." The shareholders of the Bank became the shareholders
of the Corporation, and the Bank became the wholly-owned subsidiary of the
Corporation. Shares were exchanged on a one-for-one basis.
The Company is a one bank holding company whose principal subsidiary is
First National Community Bank. The Company operates 8 full-service branch
banking offices in its principal market area in Lackawanna and Luzerne Counties.
At September 30, 1999, the Company had 165 full-time equivalent employees.
First National Community Bank was established as a national banking
association in 1910 as "The First National Bank of Dunmore." Based upon
shareholder approval received at a Special Shareholders' Meeting held October
27, 1987, the Bank changed its name to "First National Community Bank" effective
March 1, 1988. The Bank's operations are conducted from offices located in
Lackawanna and Luzerne Counties, Pennsylvania - the Main Office in Dunmore, the
downtown Scranton branch established in 1980, the Dickson City branch opened in
December, 1984, the Fashion Mall, Scranton/Carbondale Highway branch opened in
July, 1988, the Wilkes-Barre office, at 23 West Market Street, Wilkes-Barre
which opened for business on July 30, 1993, the Pittston Plaza Office, which
opened on April 10, 1995, at 1700 North Township Boulevard, Pittston, and the
Kingston Office, at 754 Wyoming Ave., Kingston, which opened on August 30, 1996.
An eighth community office located in Exeter opened for business on November 2,
1998.
The Bank provides the usual commercial banking services to individuals
and businesses, including a wide variety of loan and deposit instruments.
Additionally, the Bank entered into a partnership with INVEST during 1997 in
order to provide alternative products such as mutual funds, bonds, equities and
annuities directly from its community offices.
During 1996, FNCB Realty Inc. was formed as a wholly owned subsidiary of
the Bank to manage, operate and liquidate properties acquired through
foreclosure.
(7)
<PAGE>
Summary:
Net income for the nine months ended September 30, 1999 amounted to
$4,327,000, an increase of $341,000 or 9% compared to the same period of the
previous year. This increase can be attributed to a $1,562,000 improvement in
net interest income. Earnings from asset sales decreased $87,000 due to a
decrease in the gain on the sale of loans of $118,000. Non-interest expenses
increased $1,045,000, or 15%, over the same period of last year due partially to
costs associated with a new community office. Operating income for the same
period, after excluding the effect of asset sales and loan loss provisions,
increased $428,000 or 10%.
RESULTS OF OPERATIONS Net Interest Income:
The Company's primary source of revenue is net interest income which
totaled $13,064,000 and $11,502,000 for the first nine months of 1999 and 1998,
respectively. Year to date net interest margins (tax equivalent) decreased from
3.85% in September 1998 to 3.80% for the same period of 1999 comprised of a
twenty-six basis point decrease in the yield earned on earning assets and a
twenty-seven basis point decrease in the cost of interest-bearing liabilities.
Interest rate reductions during the fourth quarter of 1998 had a more immediate
impact on earning assets while deposit repricing occurs gradually. Rate
increases during the third quarter of 1999 have had a positive impact on margins
to date.
Earning assets increased $48 million to $512 million during the first nine
months of 1999 and now total 96.3% of total assets, a slight increase from the
year-end level of 96.1%.
(8)
<PAGE>
Yield/Cost Analysis
The following tables set forth certain information relating to the
Company's Statement of Financial Condition and reflect the weighted average
yield on assets and weighted average costs of liabilities for the periods
indicated. Such yields and costs are derived by dividing the annualized income
or expense by the weighted average balance of assets or liabilities,
respectively, for the periods shown:
Nine-months ended September 30,
1999
Average Yield/
Balance Interest Cost
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans (taxable) $337,998 $20,980 8.23%
Loans (tax-free) (1) 11,140 512 9.19
Investment securities (taxable) 98,728 4,740 6.40
Investment securities (tax-free)(1) 36,728 1,483 8.16
Time deposits with banks and
federal funds sold 5,162 201 5.17
-------- ------- ----
Total interest-earning assets 489,756 27,916 7.84%
------- ----
Non-interest earning assets 20,511
--------
Total Assets $510,267
========
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
Deposits $357,434 $11,784 4.41%
Borrowed funds 72,778 3,068 5.56
-------- ------- ----
Total interest-bearing liabilities 430,212 14,852 4.60%
------- ----
Other liabilities and shareholders' equity 80,055
--------
Total Liabilities and
Shareholders' Equity $510,267
========
Net interest income/rate spread $13,064 3.24%
Net yield on average interest-
earning assets 3.80%
Interest-earning assets as a
percentage of interest-
bearing liabilities 114%
(1) Yields on tax-exempt loans and investment securities have been computed on
a tax equivalent basis.
(9)
<PAGE>
Nine-months ended September 30,
1998
Average Yield/
Balance Interest Cost
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans (taxable) $283,432 $ 18,295 8.56%
Loans (tax-free) (1) 12,625 586 9.27
Investment securities (taxable) 93,628 4,636 6.60
Investment securities (tax-free) (1) 29,709 1,266 8.61
Time deposits with banks and
federal funds sold 8,006 345 5.71
-------- -------- ----
Total interest-earning assets 427,400 25,128 8.10%
-------- -------- ----
Non-interest earning assets 17,068
--------
Total Assets $444,468
========
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
Deposits $321,355 $11,318 4.76%
Borrowed funds 52,125 2,306 5.83
-------- ------- ----
Total interest-bearing liabilities 373,480 13,624 4.87%
------- ----
Other liabilities and shareholders' equity 70,988
--------
Total Liabilities and
Shareholders' Equity $444,468
========
Net interest income/rate spread $11,504 3.23%
Net yield on average interest-
earning assets 3.85%
Interest-earning assets as a
percentage of interest-
bearing liabilities 114%
(1) Yields on tax-exempt loans and investment securities have been computed on
a tax equivalent basis.
(10)
<PAGE>
Rate Volume Analysis
The table below sets forth certain information regarding the changes in the
components of net interest income for the periods indicated. For each category
of interest earning asset and interest bearing liability, information is
provided on changes attributed to: (1) changes in rate (change in rate
multiplied by current volume); (2) changes in volume (change in volume
multiplied by old rate); (3) the total. The net change attributable to the
combined impact of volume and rate has been allocated proportionately to the
change due to volume and the change due to rate.
Period Ended Sept 30,
(Dollars in thousands)
1999 vs 1998
-----------------------------------
Increase (Decrease)
Due to
---------------------
Rate Volume Total
------- ------- -------
Loans (taxable) $ (895) $3,579 $2,684
Loans (tax-free) (4) (69) (73)
Investment securities (taxable) (82) 299 217
Investment securities (tax-free) (149) 253 104
Time deposits with banks and federal
funds sold (23) (121) (144)
------- ------ ------
Total interest income $(1,153) $3,941 $2,788
------- ------ ------
Deposits $ (689) $1,155 $ 466
Borrowed funds (152) 914 762
------- ------ ------
Total interest expense $ (841) $2,069 $1,228
------- ------ ------
Net change in net interest income $ (312) $1,872 $1,560
======= ====== ======
Period Ended Sept 30,
(Dollars in thousands)
1998 vs 1997
-----------------------------------
Increase (Decrease)
Due to
----------------------
Rate Volume Total
------- ------ -------
Loans (taxable) $(221) $1,490 $1,269
Loans (tax-free) (13) 31 18
Investment securities (taxable) (244) 1,168 924
Investment securities (tax-free) (30) 103 73
Time deposits with banks and
federal funds sold 5 24 29
------- ------ ------
Total interest income $(503) $2,816 $2,313
------- ------ ------
Deposits $ 80 $ 732 $ 812
Borrowed funds (86) 880 794
------- ------ ------
Total interest expense $ (6) $1,612 $1,606
------- ------ ------
Net change in net interest income $(497) $1,204 $ 707
======= ====== ======
(11)
<PAGE>
Other Income and Expenses:
Other income in the first nine months of 1999 decreased $80,000 in
comparison to the same period of 1998. This decrease can be attributed to the
$118,000 decrease in the gain on the sale of loans, offset partially by an
increase in the gain on the sale of securities of $69,000.
Excluding income from asset sales, other income increased $7,000 or 1%,
during the first nine months of 1999 as compared to the same period of last
year. Income from service charges on deposits increased $23,000, or 4%, in
comparison to the same period of last year while other fee income decreased
$16,000, or 5%.
Other expenses increased $1,045,000 or 15% for the period ended September
30, 1999 compared to the same period of the previous year. Salaries and Benefits
costs account for a majority of the increase, adding $536,000, or 15% in
comparison to the first nine months of 1998. Other operating expenses increased
$286,000, or 13%. A new branch office which opened in the fourth quarter of 1998
contributed to the increase.
Other Comprehensive Income:
The Company's other comprehensive income includes unrealized holding gains
(losses) on securities which it has classified as available-for-sale in
accordance with FASB 115, "Accounting for Certain Investments in Debt and Equity
Securities."
Provision for Income Taxes:
The provision for income taxes is calculated based on annualized taxable
income. The provision for income taxes differs from the amount of income tax
determined applying the applicable U.S. statutory federal income tax rate to
pre-tax income from continuing operations as a result of the following
differences:
1999 1998
------ ------
Provision at statutory rate $1,970 $1,798
Add (Deduct):
Tax effect of non-taxable interest income (678) (629)
Non-deductible interest expense 94 88
Other items, net 8 41
------ ------
Income tax expense $1,394 $1,298
====== ======
(12)
<PAGE>
Securities:
Carrying amounts and approximate fair value of investment securities are
summarized as follows:
September 30, 1999 December 31, 1998
-------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------- -------- -------
(Dollars in thousands)
U.S. Treasury securities and
obligations of U.S.
government agencies $ 15,320 $ 15,219 $ 13,109 $ 13,111
Obligations of state &
political subdivisions 37,664 37,472 33,671 33,671
Mortgage-backed securities 80,906 80,906 77,590 77,590
Corporate debt securities 950 950 992 992
Equity securities 7,946 7,946 6,468 6,468
-------- -------- -------- --------
Total $142,786 $142,493 $131,830 $131,832
======== ======== ======== ========
The following summarizes the amortized cost, approximate fair value, gross
unrealized holding gains, and gross unrealized holding losses at September 30,
1999 of the Company's Investment Securities classified as available-for-sale:
September 30, 1999
------------------------------------------------
(Dollars in thousands)
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
--------- ---------- ----------- ------
U.S. Treasury securities and
obligations of U.S.
government agencies: $ 14,762 $ 0 $ 460 $ 14,302
Obligations of state and
political subdivisions 37,800 434 1,718 36,516
Mortgage-backed securities: 84,054 3 3,151 80,906
Corporate debt securities: 1,001 0 51 950
Equity securities: 7,946 0 0 7,946
-------- ---- ------ --------
Total $145,563 $437 $5,380 $140,620
======== ==== ====== ========
(13)
<PAGE>
The following summarizes the amortized cost, approximate fair value, gross
unrealized holding gains, and gross unrealized holding losses at September 30,
1999 of the Company's Investment Securities classified as held-to-maturity:
September 30, 1999
--------------------------------------------
(Dollars in thousands)
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
--------- ---------- ---------- ------
U.S. Treasury securities and
obligations of U.S.
government agencies: $1,018 $ 0 $ 101 $ 917
Obligations of state and
political subdivisions: 1,148 0 192 956
Mortgage-backed securities: 0 0 0 0
Corporate debt securities: 0 0 0 0
Equity securities: 0 0 0 0
------ --- ---- ------
Total $2,166 $ 0 $293 $1,873
====== === ==== ======
The following table shows the amortized cost and approximate fair value of
the Company's debt securities at September 30, 1999 using contractual
maturities. Expected maturities will differ from contractual maturity because
issuers may have the right to call or prepay obligations with or without call or
prepayment penalties.
Available-for-sale Held-to-maturity
-------------------- --------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ------ --------- -----
(Dollars in Thousands) (Dollars in Thousands)
Amounts maturing in:
One year or less $ 501 $ 500 $ 0 $ 0
After one year through
five years 4,237 4,281 0 0
After five years through
ten years 14,566 14,518 0 0
After ten years 34,260 32,469 2,166 1,873
Mortgage-backed securities 84,054 80,906 0 0
-------- -------- ------ ------
Total $137,618 $132,674 $2,166 $1,873
======== ======== ====== ======
Gross proceeds from the sale of investment securities for the periods ended
September 30, 1999 and 1998 were $20,305,784 and $13,695,910 respectively with
the gross realized gains being $253,641 and $153,290 respectively, and gross
realized losses being $56,982 and $24,952, respectively.
At September 30, 1999 and 1998, investment securities with a carrying
amount of $83,051,488 and $59,131,509 respectively, were pledged as collateral
to secure public deposits and for other purposes.
(14)
<PAGE>
Loans:
The following table sets forth detailed information concerning the
composition of the Company's loan portfolio as of the dates specified:
Sept 30, 1999 December 31, 1998
------------------ -------------------
Amount % Amount %
------- ----- ------ -----
(Dollars in thousands)
Commercial & Industrial $ 62,209 17.2 $ 49,796 15.1
Real Estate 227,789 62.8 211,554 64.3
Installment 64,633 17.8 58,799 17.9
Other Loans 7,979 2.2 8,748 2.7
Less: Unearned Discount (2) 0.0 (4) 0.0
-------- ----- -------- -----
Total Gross Loans $362,608 100.0 $328,893 100.0
----- -----
Less: Allow. for Loan Losses (4,292) (4,283)
-------- --------
Net Loans $358,316 $324,610
======== ========
The following table sets forth certain information with respect to the
Company's allowance for loan losses and charge-offs:
Period Ended
---------------------------------
Sept 30, Dec 31,
1999 1998
--------- --------
(Dollars in thousands)
Balance, January 1 $4,283 $3,623
Recoveries Credited 203 47
Losses Charged 734 307
Provision for Loan Losses 540 920
------ ------
Balance at End of Period $4,292 $4,283
====== ======
(15)
<PAGE>
The following table presents information about the Company's non-performing
assets for the periods indicated:
Sept 30, 1999 Dec 31, 1998
------------- ------------
(Dollars in thousands)
Nonaccrual loans $ 678 $ 845
Loans past due 90 days or more
and still accruing 503 452
------ ------
Total non-performing loans 1,181 1,297
Other Real Estate Owned 0 0
------ ------
Total non-performing assets $1,181 $1,297
====== ======
Sept 30, 1999 Dec 31, 1998
------------- ------------
Non-performing loans as a
percentage of gross loans 0.3% 0.4%
==== ====
Non-performing assets as a
percentage of total assets 0.2% 0.3%
==== ====
Non-performing assets are comprised of non-accrual loans and loans past due
90 days or more and still accruing, and other real estate owned. Loans are
placed in nonaccrual status when management believes that the collection of
interest or principal is doubtful, or generally when a default of interest or
principal has existed for 90 days or more, unless such loan is fully secured and
in the process of collection. When interest accrual is discontinued, interest
credited to income in the current year is reversed and interest accrued in prior
years is charged against the allowance for credit losses. Any payments received
are applied, first to the outstanding loan amounts, then to the recovery of any
charged-off loan amounts. Any excess is treated as a recovery of lost interest.
The increase recorded in 1999 can be attributed primarily to three credits which
are substantially secured by real estate.
Other real estate consists of property acquired through foreclosure. The
property is carried at the lower of cost or the estimated fair value based on an
independent appraisal.
Provision for Credit Losses:
The provision for credit losses varies from year to year based on
management's evaluation of the adequacy of the allowance for credit losses in
relation to the risks inherent in the loan portfolio. In its evaluation,
management considers credit quality, changes in loan volume, composition of the
loan portfolio, past experience, delinquency trends, and the economic condition.
Consideration is also given to examinations performed by regulatory authorities
and the Company's independent accountants. A monthly provision of $60,000 was
credited to the allowance for loan losses during the first nine months of 1999
and 1998, respectively. The ratio of the loan loss reserve to total loans at
September 30, 1999 and 1998 was 1.18% and 1.28%, respectively.
(16)
<PAGE>
Asset/Liability Management, Interest Rate Sensitivity and Inflation
The major objectives of the Company's asset and liability management are to
(1) manage exposure to changes in the interest rate environment to achieve a
neutral interest sensitivity position within reasonable ranges, (2) ensure
adequate liquidity and funding, (3) maintain a strong capital base, and (4)
maximize net interest income opportunities. First National Community Bank
manages these objectives through its Senior Management and Asset and Liability
Management Committees. Members of the committees meet regularly to develop
balance sheet strategies affecting the future level of net interest income,
liquidity and capital. Items that are considered in asset and liability
management include balance sheet forecasts, the economic environment, the
anticipated direction of interest rates and the Bank's earnings sensitivity to
changes in these rates.
The Company analyzes its interest sensitivity position to manage the risk
associated with interest rate movements through the use of "gap analysis" and
"simulation modeling." Because of the limitations of the gap reports, the Bank
uses simulation modeling to project future net interest income streams
incorporating the current "gap" position, the forecasted balance sheet mix, and
the anticipated spread relationships between market rates and bank products
under a variety of interest rate scenarios.
Economic conditions affect financial institutions, as they do other
businesses, in a number of ways. Rising inflation affects all businesses through
increased operating costs but affects banks primarily through the manner in
which they manage their interest sensitive assets and liabilities in a rising
rate environment. Economic recession can also have a material effect on
financial institutions as the assets and liabilities affected by a decrease in
interest rates must be managed in a way that will maximize the largest component
of a bank's income, that being net interest income. Recessionary periods may
also tend to decrease borrowing needs and increase the uncertainty inherent in
the borrowers' ability to pay previously advanced loans. Additionally,
reinvestment of investment portfolio maturities can pose a problem as attractive
rates are not as available. Management closely monitors the interest rate risk
of the balance sheet and the credit risk inherent in the loan portfolio in order
to minimize the effects of fluctuations caused by changes in general economic
conditions.
Liquidity
The term "liquidity" refers to the ability of the Company to generate
sufficient amounts of cash to meet its cash-flow needs. Liquidity is required to
fulfill the borrowing needs of the Bank's credit customers and the withdrawal
and maturity requirements of its deposit customers, as well as to meet other
financial commitments.
The short-term liquidity position of the Company is strong as evidenced by
$12,587,000 in cash and due from banks and $2,774,000 in interest-bearing
balances with banks maturing within one year. A secondary source of liquidity is
provided by the investment portfolio with $7,000,000 or 5% of the portfolio
maturing or expected to be called within one year and expected cash flow from
principal reductions approximating an additional $9,000,000.
(17)
<PAGE>
The Company has relied primarily on its retail deposits as a source of
funds. The Bank is normally only a seller of Federal funds to invest excess
cash; however, the Bank can also borrow in the Federal Funds market to meet
temporary liquidity needs. Other sources of potential liquidity include
repurchase agreements, Federal Home Loan Bank advances and the Federal Reserve
Discount Window.
Capital Management
A strong capital base is essential to the continued growth and
profitability of the Company and in that regard the maintenance of appropriate
levels of capital is a management priority. The Company's principal capital
planning goals are to provide an adequate return to shareholders while retaining
a sufficient base from which to provide for future growth, while at the same
time complying with all regulatory standards. As more fully described in Note 13
to the financial statements, regulatory authorities have prescribed specified
minimum capital ratios as guidelines for determining capital adequacy to help
insure the safety and soundness of financial institutions.
Total stockholders' equity decreased $492,000 or 1.4% during the first nine
months of 1999 comprised of an increase in retained earnings in the amount of
$3,198,000 after paying cash dividends and $364,000 from stock issued through
Dividend Reinvestment offset by a $4,054,000 decrease in the market value of our
securities available-for-sale. During the same period of 1998, total
stockholders' equity increased $3,262,000, or 10.3%, comprised of an increase in
retained earnings of $2,979,000, after paying cash dividends and a $283,000
increase in the market value of our securities available-for-sale. The total
dividend payout during the first nine months of 1999 and 1998 represents $.47
per share and $.42 per share, respectively. Excluding the impact due to
securities valuation, increases in core equity amounted to $3,562,000 and
$2,979,000, 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 7.20% and core capital and total
risk-based capital ratios of 9.83% and 10.96%, respectively.
YEAR 2000 COMPLIANCE: MANAGEMENT INFORMATION SYSTEMS
The Company is currently working to address the potential impact of the
Year 2000 issue on the processing of date sensitive information. The Year 2000
issue is pervasive and complex as virtually every computer operation will be
affected in some way by the rollover of the two-digit year value to 00. The
issue is whether computer systems will properly recognize date-sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. In order to address the issues, the Company is utilizing both internal and
external resources to identify and modify where necessary to ensure Year 2000
compliance.
(18)
<PAGE>
The Company has determined the need to involve officers and employees
from various areas in our Year 2000 project. To this end, a Year 2000 Operations
Committee has been formed to provide the manpower and knowledge to tackle the
Year 2000 project. This committee consists of officers and employees from every
area in order to ensure that all mission-critical systems and applications are
identified and tested for Year 2000 compliance. We believe that the risk lies in
the fact that if our customers and suppliers are not Year 2000 compliant, it can
cause our plan to fail.
In addition, an Executive Committee has been formed that consists of
Senior Management and the Year 2000 project managers. This committee will review
all aspects of the Company's Year 2000 project efforts to ensure that the
century date change is a smooth process. The Executive Committee also will
ensure that adequate resources are provided to assist in managing the Year 2000
project, provide guidance to the Operations Committee in its Year 2000 efforts,
and report to the Board of Directors regarding the status and any problems
encountered during the course of the Year 2000 project.
In addition to these committees, computer consultants to the banking
industry were contracted to independently verify and validate the Company'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 Company's Year 2000 project planning
activities to date. The engagement performed an independent verification and
validation review of the Company's Year 2000 plans, activities and commitments
and has identified both strengths and opportunities for the Company to act upon
to further its Year 2000 readiness. The results of this independent review has
enabled the Company to focus its efforts on the more critical areas of the plan.
First National Community Bank, the Company's sole subsidiary, is
subject to regulation and oversight by the FDIC and the OCC. Their regulatory
guidance requires First National Community Bank to comply with specific
timetables, programs and guidance regarding the Year 2000 issue. Regulators
examine the Company's progress on a regular basis. In addition, the Board of
Directors are provided with written progress reports on the Company's Year 2000
progress on a quarterly basis. Finally, the Bank's internal and external
auditors review our Year 2000 progress on an ongoing basis.
It should be noted that each area of First National's Year 2000 Plan is
being addressed according to the guidelines that have been established by the
FFIEC and its affiliated 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:
(19)
<PAGE>
% Completed Projected Completion
1) Awareness of the problem 100% Completed
2) Assessment of complexity 100% Completed
3) Renovation 100% Completed
4) Validation 100% Completed
5) Implementation 71% 12/01/99
6) 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 the Company's affirmative steps to remedy the Y2K 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
First National's business, financial condition, results of operations and
business prospects.
As a precaution, First National developed a Y2K contingency plan. The
plan provides operating procedures in the event that there is a partial or total
system interruption with respect to the century date change. While the
contingency plan is complete, it will be updated as necessary throughout 1999.
First National relies on third party vendors and service providers for
its data processing capabilities, and for maintenance of its computer systems.
The Company initiated formal communications with its 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. The Company is
monitoring their progress in meeting their targeted schedules for an indication
that they may not be able to address 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. First National has
identified and prioritized those systems deemed to be mission critical and those
that may have a significant impact on normal operations. First National
identified thirty-six mission critical vendors. These vendors have all responded
with favorable Y2K readiness status, and expressed with confidence that their
systems are Y2K compliant. However, First National can give no guarantee that
the service providers and vendors will timely renovate the systems on which
First National relies. If the service providers experience Y2K problems, the
Company cannot assure that the service providers can be held legally liable for
their problems.
In 1998, First National initiated communications with all of its
mission critical vendors, suppliers and large commercial customers to determine
the extent to which the Company is vulnerable to these third-parties' failure to
remedy their own Y2K problems.
(20)
<PAGE>
The following table summarizes the responses of First National's
mission critical customers, lenders and service providers:
Inquiry Responses Compliant
Number Number % Number %
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%
Management reviewed its material loan customers, vendors and service
providers through discussions and questionnaires for their Y2K preparedness. The
level of their Y2K compliance is a factor in evaluating First National Community
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 Y2K 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, the
Company can give no guarantee that the systems of these third parties will be
timely renovated. If any of these third parties experience Y2K problems, First
National 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 its major
vendors and service providers, management has determined that the Year 2000
issue will not pose significant operational problems for its 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
First National's systems rely. However, the Company can give no guarantee that
the systems of these third parties will be renovated in a timely manner.
(21)
<PAGE>
Contingency Plan
First National developed contingency plans for its 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 there is
a partial or total system interruption 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, the Company would maintain manual
accounting of its accounts until the main processing software is corrected.
First National is committed to making available the human resources necessary to
accommodate this temporary situation and will follow the steps outlined in the
Year 2000 Contingency Plan.
In that regard, First National will conduct training sessions on the
Company's Y2K Contingency Plan during the third and fourth quarters of 1999 to
ensure employees are familiar with procedures that might need to be implemented
in such a worst case scenario.
Part II Other Information
Item 1 - Legal Proceeding
The Bank is not involved in any material pending legal proceedings, other
than routine litigation incidental to the business.
Item 2 - Changes in Securities
None
Item 3 - Defaults upon Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8 - K
None
(22)
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Registrant: FIRST NATIONAL COMMUNITY BANCORP, INC
Date: November 4, 1999 /s/ J. David Lombardi
J. David Lombardi, President/
Chief Executive Officer
Date: November 4, 1999 /s/ William Lance
William Lance, Treasurer/
Principal Financial Officer
(23)
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<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 12,587
<INT-BEARING-DEPOSITS> 2,774
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<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 132,684
<INVESTMENTS-CARRYING> 2,166
<INVESTMENTS-MARKET> 1,873
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0
0
<COMMON> 3,010
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