As filed with the Securities and Exchange Commission on April 23, 1999
Registration No. 333-______
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
FIRST NATIONAL COMMUNITY BANCORP, INC.
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(Exact name of registrant as specified in its charter)
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Pennsylvania 6021 23-2900790
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(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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William S. Lance, Treasurer
First National FIRST NATIONAL COMMUNITY
Community Bancorp, Inc. BANCORP, INC.
102 East Drinker Street 102 East Drinker Street
Dunmore, Pennsylvania 18512 Dunmore, Pennsylvania 18512
(570) 346-7667 (570) 346-7667
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(Address, including ZIP Code, (Name, address, including ZIP Code,
and telephone number, including area and telephone number, including
code, of registrant's principal area code, of agent for service)
executive offices)
With A Copy To:
Nicholas Bybel, Jr., Esquire
B. Tyler Lincoln, Esquire
Shumaker Williams, P.C.
Post Office Box 88
Harrisburg, Pennsylvania 17108
Telephone: (717) 763-1121
Approximate date of commencement of the proposed sale of the securities to the
public: As soon as practicable after this Registration Statement become
effective.
If any the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
CALCULATION OF REGISTRATION FEE
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Title of Each Amount Proposed Maximum Proposed Maximum Amount of
Class of Securities to be Offering Price Aggregate Registration
Being Registered Registered Per Unit Offering Price Fee
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Common Stock, par value $1.25
per share....................... 250,000 $41.00(7) $10,250,000 $2,849.50
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(1) Computed in accordance with Rule 457(c), solely for the purpose of
calculating the registration fee.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until
the Registrant shall file a further amendment which specifically states that
this Registration Statement shall thereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933, as amended, or until
the Registration Statement shall become effective on such date as the
Commission, acting pursuant to such Section 8(a), may determine
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Information contained in this registration statement is subject to
completion or amendment. A registration statement relating to these securities
has been filed with the Securities and Exchange Commission. We may not sell or
accept offers to buy these securities prior to the time the registration
statement becomes effective. This prospectus does not constitute an offer to
sell or the solicitation of an offer to buy nor shall we sell these securities
in any State in which the offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of the State.
<PAGE>
Subject to Completion
Prospectus
FIRST NATIONAL COMMUNITY BANCORP, INC.
1999 Dividend Reinvestment and Stock Purchase Plan
250,000 Shares of Common Stock
Trading Symbol: FNCB
This Prospectus relates to 250,000 shares of common stock of First
National Community Bancorp, Inc., 102 East Drinker Street, Dunmore, Pennsylvania
18512, telephone number: (570) 346-7667 that the company may issue, from time to
time, under the First National Community Bancorp, Inc. 1999 Dividend
Reinvestment and Stock Purchase Plan. Please keep this proxy statement for
future use.
See "Risk Factors" beginning on page __ for information that
prospective participants in the Dividend Reinvestment Plan should consider
before joining the plan.
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 these securities or passed upon the accuracy or adequacy of this
proxy statement. Any representation to the contrary is a criminal offense.
The shares of common stock offered in this proxy statement 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.
No person has been authorized to give any information or to make any
representation not contained in this proxy statement, and if given or made, any
information or representation should not be relied upon as having been
authorized. This proxy statement 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 proxy statement, or the solicitation of
a proxy from any person, in any jurisdiction in which it is unlawful to make
such an offer or solicitation. Neither the delivery of this proxy statement nor
any distribution of the securities to which this proxy statement relates shall,
under any circumstances, create any implication that the information contained
herein is correct at any time subsequent to the date set forth below.
The date of this Prospectus is May __, 1999
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TABLE OF CONTENTS
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SUMMARY...........................................................................................................1
General..................................................................................................1
The Company..............................................................................................2
Administration of the Plan...............................................................................2
Eligibility..............................................................................................2
Purchases................................................................................................2
Reports..................................................................................................2
Withdrawal of Participation..............................................................................3
Withdrawal of Shares.....................................................................................3
RISK FACTORS......................................................................................................5
Limited History of Profitability; Dependence on Subsidiary Bank..........................................5
The Banking Industry is Highly Competitive...............................................................5
Sensitivity to General Economic Conditions and Other Similar Factors.....................................6
Potential Impact of Change in Interest Rates.............................................................6
Allowance for Loan Losses may not always be adequate.....................................................6
Changes in Real Estate Values may have adverse impact on Loans secured
by Real Estate.......................................................................................7
Regulations that protect Depositors may adversely affect Shareholders....................................7
Year 2000 Considerations.................................................................................7
Lack of Trading Market...................................................................................8
Limitations on Payment of Dividends......................................................................8
Anti-Takeover Measures...................................................................................8
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN.....................................................................9
Purpose ................................................................................................9
Advantages...............................................................................................9
Administration...........................................................................................9
Participation...........................................................................................10
Purchases...............................................................................................11
Voluntary Cash Payments.................................................................................12
Reports to Participants.................................................................................13
Share Certificates; Safekeeping.........................................................................14
Withdrawal of Shares in Plan Accounts...................................................................14
Termination of Participation in Dividend Reinvestment Plan..............................................15
Federal Tax Information.................................................................................16
Reinvestment Dividends.........................................................................16
Voluntary Cash Payments........................................................................16
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Brokerage Commissions..........................................................................16
Additional Information.........................................................................16
Other Information.......................................................................................17
MARKET PRICES AND DIVIDENDS......................................................................................19
USE OF PROCEEDS..................................................................................................20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATION............................................................................21
BUSINESS ........................................................................................................38
The Company.............................................................................................38
The Bank ...............................................................................................38
Competition.............................................................................................39
SUPERVISION AND REGULATION.......................................................................................40
Securities Regulation...................................................................................40
Adequacy Guidelines.....................................................................................41
Prompt Corrective Action Rules..........................................................................41
Regulatory Restrictions on Dividends....................................................................42
FDIC Insurance Assessments..............................................................................42
New Legislation.........................................................................................43
Interstate Banking......................................................................................43
Employees...............................................................................................43
Properties..............................................................................................44
Legal Proceedings.......................................................................................44
MANAGEMENT.......................................................................................................45
Family Relationships....................................................................................46
The Board of Directors..................................................................................47
Compensation of Directors...............................................................................47
Compensation Committee Interlocks and Insider Participation.............................................48
Employment Agreements...................................................................................48
COMPENSATION COMMITTEE REPORT....................................................................................49
Board of Directors Report on Executive Compensation.....................................................49
PERFORMANCE GRAPH................................................................................................52
BENEFICIAL OWNERSHIPS OF SHARES..................................................................................53
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................................................54
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Indebtedness of Management..............................................................................54
DESCRIPTION OF SECURITIES........................................................................................54
Common Stock............................................................................................54
Legal Opinion...........................................................................................55
Anti-Takeover Provision.................................................................................55
LEGAL MATTERS....................................................................................................61
EXPERTS ........................................................................................................61
AVAILABLE INFORMATION............................................................................................61
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SUMMARY
General
First National Community Bancorp, Inc. has filed a Registration
Statement on Form S-1 under the Securities Act of 1933 with the Securities and
Exchange Commission to register securities offered by this prospectus under the
terms of the company's 1999 Dividend Reinvestment and Stock Purchase Plan. The
plan offers the company's shareholders an opportunity to automatically reinvest
their cash dividends in shares of the company's common stock. The plan also
provides participating shareholders with a convenient and economical way to
voluntarily purchase additional shares of common stock through voluntary cash
payments of between $100 and $2,500 per calendar quarter.
The plan administrator will automatically reinvest cash dividends on
shares registered in a participant's name or that are kept in a participant's
account under the plan in additional shares of common stock. The administrator
will purchase shares directly from the company, in the open market, or in
negotiated transactions. Participating shareholders will receive a 5% discount
for shares they purchase through the plan. The purchase price of the shares
purchased from the company will be the fair market value per share on the date
of purchase, less the 5% discount. The purchase price of shares purchased in the
open market or in negotiated transactions will be the weighted average of the
prices actually paid for the shares, excluding all fees, brokerage commissions
and expenses, less the 5% discount. Shareholders who do not elect to participate
in the plan will receive dividends, as declared and paid, by check or advice of
credit to their account.
The plan does not represent a change in the company's dividend policy
or a guarantee of future dividends. The Board's declaration of dividends
continues to depend on earnings, financial requirements and other factors. Any
holder of record of common stock is eligible to participate in the plan. We
recommend that beneficial owners interested in participating in the plan
directly through brokers or nominee shareholders contact their brokers or
nominee holders to determine whether and to what extent indirect participation
is available to them.
An investment in common stock held in the plan account has the same
market risks as an investment in common stock held in certificate form.
Participants bear the risk of loss, and receive the benefit of gain, occurring
by reason of fluctuations in the market price of the common stock held in the
participants plan account. The following summary is qualified in its entirety
by, and subject to, the more detailed information and financial statements and
the notes the financial statements included in this prospectus. We encourage
each investor to read this entire prospectus. Investors should carefully
consider the information discussed under the caption "Risk Factors."
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The Company
First National Community Bancorp, Inc. is a one-bank holding company,
incorporated on February 4, 1997, and headquartered in Dunmore, Pennsylvania.
The company became a bank holding company on July 1, 1998, when it acquired all
of the outstanding shares of First National Community Bank. Through its sole,
wholly-owned subsidiary, First National Community Bank, the company is primarily
engaged in commercial and retail banking services and in related businesses.
The principal executive offices of the bank and First National
Community Bancorp, Inc. are located at 102 East Drinker Street, Dunmore,
Pennsylvania 18512-2491, and the telephone number is (570) 346-7667.
Administration of the Plan
Registrar and Transfer Company will administer the plan. Registrar and
Transfer Company is also First National Community's stock transfer agent. The
administrator, among other things, keeps the records and sends detailed
statements of account to participants.
Eligibility
Generally, all record and beneficial owners are eligible to participate
in the plan. An eligible shareholder may join the plan by completing and signing
an authorization form appointing Registrar and Transfer Company as his or her
agent to reinvest the dividends paid on some or on all shares of common stock.
Purchases
The number of shares purchased on each dividend payment date depends
upon a number of factors including:
o the amount of dividends payable on shares in the plan;
o voluntary cash investments made by investors; and
o the purchase price of the common stock for the payment period.
Reports
The administrator will send each participant a statement of account
after each dividend payment date. The statement will describe cash dividends and
voluntary cash investments received, the number of shares purchased, the price
per share and the total number of shares accumulated under the plan.
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Withdrawal of Participation
A participant may withdraw participation under the plan by sending
written notice to the administrator. The administrator will issue a certificate
for whole shares credited to the participant's account and a check representing
the value of any fractional shares based on the then current market value per
share of the company's common stock.
Withdrawal of Shares
A participant may withdraw some or all of the shares credited to his or
her account by completing a withdrawal notification specifying the number of
shares to be withdrawn. A participant may also request that the administrator
sell shares withdrawn from his or her account. If selling shares, participants
are responsible for fees, brokerage commissions, and service charges incurred in
connection with the sale.
END OF SUMMARY
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SELECTED FINANCIAL INFORMATION
Please read the following selected financial data in conjunction with the
company's 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)
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For Years Ended December 31, 1998 1997 1996 1995 1994
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Total assets $ 483,385 $ 428,335 $ 372,438 $ 318,026 $ 269,679
Interest-bearing balances
with financial institutions $ 2,478 $ 1,586 $ 2,771 $ 775 $ 2,754
Securities $ 131,830 $ 121,367 $ 82,476 $ 69,408 $ 55,403
Net loans $ 324,610 $ 280,731 $ 259,880 $ 229,643 $ 193,254
Total deposits $ 380,039 $ 345,668 $ 320,968 $ 275,739 $ 236,864
Stockholders' equity $ 34,679 $ 31,580 $ 27,631 $ 25,547 $ 17,117
Net interest income before
provision for credit losses $ 15,445 $ 14,580 $ 12,765 $ 11,286 $ 9,882
Provision for credit losses $ 920 $ 1,110 $ 820 $ 796 $ 700
Other income $ 1,583 $ 1,628 $ 1,099 $ 921 $ 925
Other expenses $ 9,423 $ 8,839 $ 7,904 $ 7,097 $ 6,369
Income before income taxes $ 6,685 $ 6,259 $ 5,140 $ 4,314 $ 3,738
Provision for income taxes $ 1,578 $ 1,616 $ 1,265 $ 1,100 $ 888
Net income $ 5,107 $ 4,643 $ 3,875 $ 3,214 $ 2,850
Cash dividends paid $ 1,703 $ 1,396 $ 1,178 $ 887 $ 780
Per share data:
Net income (1) $ 2.13 $ 1.94 $ 1.62 $ 1.52 $ 1.39
Cash dividends (2) $ 0.71 $ 0.58 $ 0.49 $ 0.41 $ 0.38
Book value (1)(3) $ 14.46 $ 13.17 $ 11.52 $ 12.08 $ 8.35
Weighted average number
of shares outstanding 2,398,360 2,398,360 2,398,360 2,114,192 2,050,960
PERFORMANCE RATIOS
Return on assets 1.13% 1.16% 1.13% 1.08% 1.16%
Return on equity 15.29% 15.85% 14.83% 16.29% 16.51%
Net interest margin on average
earning assets 3.84% 4.09% 4.25% 4.19% 4.48%
Efficiency (non-interest expense/net interest
income + non-interest income) 51.89% 50.77% 53.25% 54.76% 55.66%
LIQUIDITY AND CAPITAL RATIOS
Shareholders' equity (% assets) 7.17% 7.37% 7.42% 8.03% 6.35%
Risk based:
Tier I Capital 10.19% 10.94% 10.27% 10.88% 9.93%
Total Capital 11.45% 12.19% 11.46% 12.12% 11.13%
Dividends (% net income) 33.35% 30.06% 30.40% 27.60% 27.36%
Loans to deposits 85.41% 81.21% 80.97% 83.28% 81.59%
ASSETS QUALITY RATIOS
Allowance for credit losses to net loans 1.30% 1.27% 1.20% 1.20% 1.15%
Allowance for credit losses to non-performing
loans 330% 253% 297% 157% 83%
Net charge-offs to average total loans .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 $791,000 in 1998,
$1,097,000 in 1997, $384,000 in 1996, $991,000 in 1995 and $(1,558,000) in
1994.
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RISK FACTORS
In addition to certain historical information, the discussion in this
prospectus contains certain forward-looking statements that involve risks and
uncertainties, such as statements relating to the company's plans, objectives,
expectations and intentions. The company's actual results may differ materially
from those discussed.
Before you invest in First National Community's common stock or
participate in the dividend reinvestment plan, 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 whether to participate in the dividend reinvestment plan.
Limited History of Profitability; Dependence on Subsidiary Bank
First National Community's sole business activity for the foreseeable
future is to act as the holding company for First National Community Bank;
therefore, the profitability of First National Community is dependent on the
results of the operations of First National Community Bank. Adverse results or
events at the bank would have a significant impact on First National Community's
results of operations and financial condition. Although First National
Community's operations have been profitable, we can not assure you that the
company will be as profitable or profitable at all in the future. Among many
factors that could adversely affect First National Community's financial
performance are government regulation, increased competition, and unfavorable
economic conditions.
The Banking Industry is Highly Competitive
First National Community Bank competes with other banking institutions
on the basis of service, convenience and to some extent, price. Changes in laws
and regulations and consumer demands foster added competition for other
financial non-bank entities that are now offering products similar to those
traditionally offered by banks. In general, the banking industry is highly
competitive and competition from bank and nonbank organizations is expected to
continue. Our market is particularly competitive for both deposits and lending
opportunities. In our market area, we compete with other commercial banks,
savings and loan associations, credit unions, finance companies, mutual funds,
insurance companies, brokerage and investment banking firms and various other
nonbank competitors. As a result of this competition, we may have to increase
the rate of interest that we pay on deposits. This would increase the bank's
cost of money and our net earnings might be reduced. Some of our competitors
have greater financial and other resources and greater lending limits than we
have, and may offer services that we do not provide at this time. However, our
management believes that the market is rich with opportunity to provide
individualized, custom banking products and services that larger, impersonal
institutions cannot easily provide. Recent acquisitions of smaller banks by
larger institutions enhance this opportunity,
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as customers look for more personalized service. We call this concept "niche"
banking, and feel that it will enable us to capture our share of the
professional market, entrepreneur and small to medium size business commercial
businesses, while still providing banking services to all customers. Our
profitability depends upon our ability to compete in this market area. We cannot
now predict to what extent competition may adversely affect the company's
financial condition and operating results.
Sensitivity to General Economic Conditions and Other Similar Factors
In addition, general economic conditions impact the banking industry.
The credit quality of our loan portfolio necessarily reflects, among other
things, the general economic conditions in the area in which we conduct our
business. Our continued financial success depends somewhat on factors beyond our
control, including national and local economic conditions, the supply and demand
for investable funds, interest rates and federal, state and local laws affecting
these matters. Any substantial deterioration in any of the foregoing conditions
could have a material adverse effect on the company's financial condition and
results of operations, which, in all likelihood, would adversely affect the
market price of First National Community's common stock.
Potential Impact of Change in Interest Rates
Our profitability is dependant 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
rates 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 changes in interest
rates on our results of operations, any substantial and prolonged increase in
market interest rates could adversely affect our operating results.
Allowance for Loan Losses may not always be adequate
Experience in the banking industry indicates that a portion of our
loans will become delinquent. Some of these loans will require partial or entire
charge-off. Despite 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 problems affecting the
credit of the borrower. 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;
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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.
Despite these considerations, however, our allowance for loan losses may not be
adequate if delinquency levels increase as a result of adverse general economic
conditions. We cannot assure you that our allowance for loan losses will be
adequate to cover 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.
Changes in Real Estate Values may have adverse impact on Loans secured by Real
Estate
A significant portion of the company's 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 effected by, among other things, changes in
national, regional or local economic conditions, fluctuations in interest rates
and the availability of loan 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 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
nonperforming loans and could have a material negative impact on our financial
performance. Additionally, First National Community 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.
Regulations that protect Depositors may adversely affect Shareholders
A number of Federal and Pennsylvania statutes and regulations affecting
financial institutions apply to First National Community Bancorp, Inc. and First
National Community Bank. 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 regulation may have in the
future.
Year 2000 Considerations
Many businesses, including financial institutions like First National
Community Bancorp, Inc., would face potentially serious issues associated with
the inability of existing data processing hardware and software to appropriately
recognize calendar dates beginning in the Year 2000. The concern is that many
software programs, systems and embedded chips can only distinguish the final two
digits of the year entered and may read entries for the Year 2000 as the Year
1900, resulting in these automated systems malfunctioning or stopping
completely. Given our reliance on data
7
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processing systems to maintain customer balances, service customer accounts and
to perform other record keeping and service oriented functions associated with
our business, the occurrence of "Year 2000 Problems" if any were to develop,
could have a material impact on the company's results of operation, liquidity
and financial condition. We cannot assure you, however, that First National
Community Bancorp, Inc. and First National Community Bank will not be adversely
affected by the failure of third party vendors or significant customers to
become Year 2000 compliant.
Lack of Trading Market
There is a very limited public market for the common stock of First
National Community Bancorp, Inc. We cannot assure you that a more active trading
market will develop.
Limitations on Payment of Dividends
First National Community's principal business operations are conducted
through the bank and therefore, cash available to pay dividends or dividends
eligible for reinvestment under the plan are derived from dividends paid to the
holding company, by the bank. The bank's ability to pay dividends to First
National Community and First National Community's ability to pay dividends to
shareholders are also subject to and limited by certain legal and regulatory
restrictions.
Anti-Takeover Measures
The Articles of Incorporation and By-laws of First National Community
Bancorp, Inc. contain certain provisions that enhance the ability of the Board
of Directors to deal with attempts to acquire control of First National
Community. In addition, Pennsylvania law contains certain anti-takeover
provisions that apply to First National Community. While these provisions may
provide flexibility in connection with acquisitions and other corporate
purposes, 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 the common stock.
8
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DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
The First National Community Bancorp, Inc. 1999 Dividend Reinvestment
and Stock Purchase Plan follows. We present the plan in a question and answer
format. Shareholders who do not chose to participate in the plan will continue
to receive cash dividend payments, if and when dividends are declared and paid.
Purpose
1. What is the purpose of the plan?
The plan provides shareholders with a convenient and economical method
of investing cash dividends and voluntary cash payments to purchase additional
shares. Participants pay no brokerage commissions or service charges when they
acquire additional shares of common stock through the plan.
Advantages
2. What are the advantages of the Dividend Reinvestment Plan?
Shareholders may:
o Reinvest cash dividends and invest voluntary cash payments in
additional shares of common stock at a 5% discount, without
paying service charges or brokerage commissions;
o Invest the full amount of all dividends in shares of common stock
including fractional shares, which also earn dividends under the
plan;
o Avoid safekeeping and record keeping costs through the free
custodial and reporting services under the plan; and
o Regularly receive a detailed statement of account transactions in
book entry form.
Administration
3. Who administers the plan for participants?
Registrar and Transfer Company is the plan administrator and will act
as the agent for the participants. As agent for participants, the administrator
will:
o hold shares in the name of its nominee as agent for plan
participants;
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o keep and maintain records;
o provide detailed statements of account to participants; and
o perform other duties related to the plan.
Any notices, questions, or other communications relating to the plan
should include the participant's account number and tax identification number
and should be addressed to:
Registrar and Transfer Company
Attention: Dividend Reinvestment
10 Commerce Drive
Cranford, New Jersey 07016
(800) 368-5948
In the event that the plan administrator resigns or ceases to act as
the agent, First National Community will make other arrangements, as it deems
appropriate, for the administration of the plan. The company may replace the
administrator as the agent at any time.
Participation
4. Who is eligible to participate?
All common stock shareholders are eligible to participate in the plan.
Shareholders may participate in the plan with respect to all or any portion of
their shares. Record holders of common stock are eligible to participate in the
plan directly. Beneficial owners of the common stock, whose shares are
registered in names other than their own (e.g., in the name of a broker, bank
nominee or trustee), must either become shareholders of record by having all or
portion of their shares transferred into their own names. Shareholders will not
be eligible to participate in the plan if they reside in a jurisdiction in which
it is unlawful under state or local securities or "blue sky" laws for the
company to permit their participation.
5. How does an eligible shareholder become a participant?
All eligible shareholders may join the plan at any time by completing
and signing the accompanying authorization form and returning it to the
administrator. Additional authorization forms may be obtained from First
National Community Bancorp, Inc. or Registrar and Transfer Company.
6. What does the authorization form provide?
The authorization form appoints the administrator as the agent to
reinvest dividends on some or all shares registered under the plan, and to
purchase additional shares with voluntary cash investments.
10
<PAGE>
7. When may a shareholder join the plan?
A shareholder may join the plan at any time. If the administrator
receives a properly completed authorization form at least 5 business days before
a dividend record date, the administrator will reinvest the dividends payable on
that date. Historically, the Board of Directors has declared and paid dividends
on a quarterly basis. The Board of Directors reserves the right to change the
dividend record and payment dates.
8. Is partial participation possible under the plan?
Yes. Shareholders may register all or any portion of their shares in
the plan.
9. Is the right to participate in the plan transferable?
No. The right to participate in the plan is not transferable. A
shareholder, participating in the plan, continues as a participant until the
plan is terminated or until the shareholder gives notice of withdrawal or
termination to the administrator.
Purchases
10. What is the source for shares of common stock purchased under the plan?
The administrator purchases shares at the company's discretion,
directly from First National Community, in the open market, in negotiated
transactions, or using a combination of these methods.
11. How many shares of common stock will the administrator purchase for a
participant under the plan?
The number of shares depends on:
o the amount of dividends to be reinvested;
o the amount of any voluntary cash investment; and
o the applicable purchase price of the common stock.
The administrator will credit each participant's account with that
number of shares, including any fractional shares computed to four decimal
places, equal to the total amount to be invested divided by the applicable
purchase price. All dividends on shares held in a participant's account, whether
purchased through dividend reinvestment or voluntary cash investment, are
automatically reinvested in additional shares of common stock.
11
<PAGE>
12. When will shares of common stock be purchased for a participant under the
plan?
The administrator will use cash dividends and voluntary cash
investments to purchase common stock as soon as reasonably possible after the
applicable dividend payment date, but not more than 30 business days after the
payment date.
13. At what price will shares of Common Stock be purchased under the Plan?
When the administrator purchases shares of common stock from the
company, the purchase price will be the fair market value of the common stock on
the relevant date, less a 5% discount. The fair market value of the common stock
is determined by averaging the "daily average trades" for the 10 trading days
preceding the payment date, as reported by one or more brokerage firms selected
by First National Community that make a market in First National Community's
common stock.
In the event that there were no trades, or an insufficient number of
trades (generally less than 500 shares) upon which to form a basis to determine
fair market value within the 10 trading days, then the fair market value of the
common stock may be determined by reference to other factors that the Board of
First National Community deems appropriate. These factors may include, but are
not limited to, in First National Community's sole discretion:
o average trades reported by market makers on dates that are recent
but are prior to the 10 trading day period immediately preceding
the investment date;
o prices at which the stock is known to have been traded in recent
transactions;
o a multiple of First National Community's book value per share
that First National Community believes is consistent with the
multiple of trading prices of companies similar to First National
Community but whose stock is more readily traded and quoted in
the public markets; and
o a multiple of First National Community's annualized earnings per
share.
When the administrator purchases shares of common stock in the open market or in
negotiated transactions, the purchase price will be the weighted average of the
prices actually paid for shares purchased for the relevant date, excluding all
fees, brokerage commissions and expenses, less the 5% discount.
Voluntary Cash Payments
14. Who is eligible to make voluntary cash investments?
All shareholders who elect to have dividends reinvested under the plan
may also elect to make voluntary cash payments.
12
<PAGE>
15. What are the timing requirements and other limitations on voluntary cash
payments?
The plan administrator must receive voluntary cash payments not more
than 30 or less 5 business days prior to the dividend payment date. The
administrator will return voluntary cash payments received too early or too late
to the participant. Voluntary cash payments may not be less than $100 per
calendar quarter or total more than $2,500 in any calendar quarter. First
National Community reserves the right in its sole discretion to determine
whether voluntary cash payments are made on behalf of an eligible participant.
16. How does the voluntary cash payment option work?
To make a voluntary cash payment a participant encloses a check or
money order to the plan administrator with a completed payment form which is
sent with each statement of account. Participants make checks and money orders
payable to "Registrar and Transfer, Plan Administrator." Participants should
include their social security number or taxpayer identification number and
account number on the check.
The plan administrator will apply any voluntary cash payments received
within the permissible time period to the purchase of shares of common stock on
the upcoming investment date. The price is determined in accordance with
provisions of the plan. Voluntary cash payments made by check or other draft
must clear prior to the investment date. The plan administrator will promptly
send an acknowledgment to participants confirming that the plan administrator
has received the funds in time for investment on a particular investment date. A
participant may obtain the return of any voluntary cash payment, if the plan
administrator receives the request for return two business days prior to the
dividend payment date. We do not pay interest on voluntary cash payments.
Reports to Participants
17. What kind of reports will be sent to participants in the plan?
Each participant in the plan receives a statement of account subsequent
to each dividend payment date describing cash dividends and voluntary cash
investments received, the number of shares purchased, the price per share and
total shares accumulated under the plan. These statements will provide a record
of the dates and costs of purchases on a quarterly basis. Participants should
retain the statements for income tax purposes. Participants will also receive
First National Community's annual and quarterly reports to shareholders, notices
of shareholder meetings, proxy statements, and Internal Revenue Service
information for reporting dividends received and commission expenses paid on
their behalf.
13
<PAGE>
Share Certificates; Safekeeping
18. Will the plan administrator issue certificates for shares of common stock
purchased?
Unless requested in writing by a participant, the plan administrator
will not issue certificates for shares of common stock purchased under the plan.
The number of shares credited to a participant's account under the plan will be
shown on the participant's periodic statements of account. This safekeeping
feature protects against loss, theft or destruction of stock certificates. The
plan administrator will issue certificates for whole shares withdrawn from the
plan. All certificates delivered for safekeeping must be enrolled in the plan.
The plan administrator will cancel certificates delivered for safekeeping and
will issue new certificates in the name of the plan administrator; upon
withdrawal, the plan administrator will cancel the plan administrator's
certificates and issue new certificates in the name of the participant.
19. In whose name will certificates be registered when issued to participants?
Unless the participant directs otherwise, upon withdrawal from the
plan, the plan administrator will issue shares in the name in which the
participant maintains the dividend reinvestment account. If a participant
requests that a certificate be issued in a different name, the request must bear
the participant's own signature. If the account is registered in multiple names,
all signatures must appear on the request. In both cases, a financial
institution or broker or dealer must guarantee the signature(s). Upon a
participant's death, the plan administrator will follow the instructions of the
decedent's personal representative upon submission of appropriate proof of
authority.
Withdrawal of Shares in Plan Accounts
20. How may participants withdraw shares purchased under the plan?
Participants may withdraw all or any portion of the shares credited to
their account by completing the withdrawal notification information set forth on
the reverse side of their account statement and specifying the number of shares
to be withdrawn. The participant should mail the request for withdrawal to the
plan administrator at the address provided on the account statement. The plan
administrator will register certificates for whole shares so withdrawn in the
name of the participant. If the administrator receives any request for
withdrawal of shares credited to a participant's account less than 5 business
days before the record date, the administrator will not effect the withdrawal
until after the dividends are reinvested and the shares are credited to the
participant's account. The administrator will effect any other request for
withdrawal of a portion of the shares credited to a participant's account upon
receipt of the request by the plan administrator. The administrator will
continue to reinvest dividends on shares remaining in participants' account,
unless participant withdraws all of the whole and fractional shares from the
account, which will terminate participation in the plan.
14
<PAGE>
21. May participants elect to sell withdrawn shares?
Yes. Participants may request that the plan administrator sell
withdrawn shares. The plan administrator will not effect a request to sell all
shares credited to a participant's account received from a participant after the
ex-dividend date for a dividend until the plan administrator reinvests the
participant's dividends for the applicable record date and credits the shares to
the participant's account. Upon receipt, the plan administrator will declare a
request to sell a portion of the shares credited to a participant's account
effective. Participants should specify the number of shares to be sold in their
request for withdrawal.
The plan administrator will arrange for the sale of the shares within
10 business days after receipt of the notice, and deliver a check for the net
proceeds of the sale to the participant. The proceeds of the sale will be
applied first to pay fees, brokerage commissions, applicable withholding taxes
and transfer taxes, if any, incurred in connection with the sale. The plan
administrator charges a fee of $10 (but not more than the proceeds of the sale
of a fractional share) for the sale of shares held under the plan. All persons
in whose names the account appears must sign a request for shares to be sold.
The signatures must be guaranteed as specified in No. 19 above.
Termination of Participation in Dividend Reinvestment Plan
22. How does a participant withdraw from the Plan?
Participation in the plan is entirely voluntary. Participants may
terminate their participation at any time by sending written notice to the plan
administrator. When a participant terminates from the plan or upon termination
of the plan by First National Community, the plan administrator will deliver a
certificate for the number of whole shares credited to the participant's
account, and a check representing the value of any fractional shares, less the
applicable fee for the sale of the fractional share, based on the then current
market value per share to the participant. Thereafter, all dividends will be
paid in cash, or in stock dividends, if so declared by the Board of Directors,
to the shareholder who withdraws from the plan. Participants who elect to
discontinue participation in the plan are not eligible to make voluntary cash
payments.
Any notice of termination received less than 5 business days prior to
an investment date will not be effective until the administrator has reinvested
dividends and the shares have been credited to the participant's account. A
shareholder may elect to re-enroll in the plan at any time.
15
<PAGE>
Federal Tax Information
23. What are the federal income tax consequences of participation in the plan?
We summarize the general current federal income tax consequences of
participation in the plan in this response. Please consult your own tax advisor
as to the specific tax consequences of particular account transaction, including
the state tax consequences.
Reinvestment of Dividends. A participant in the plan is treated as
having received, with respect to the cash dividend and reinvestment, a
distribution to which Section 301 of the Internal Revenue Code applies. The
amount of the distribution is the fair market value of the stock received on the
date the stock is purchased. The amount of the distribution that the participant
includes in income, as a dividend, is the amount that is paid out of the
company's current and/or accumulated earnings and profits. Most regular
quarterly cash dividends paid from earnings will be treated as a contribution
subject to ordinary income. The distribution, to the extent it exceeds the
company's earnings and profits, is a return of capital and reduces the adjusted
basis of the stock. The portion of the distribution that exceeds the company's
earnings and profits and the adjusted basis of the stock is treated as gain from
the sale or exchange of property.
Voluntary Cash Payments. A participant who makes a voluntary cash
payment for the purchase of stock under the plan is treated as having received a
distribution to which Section 301 of the Code applies in an amount equal to the
excess of the fair market value of the stock received on the date of the
purchase over the amount of the voluntary cash payment made by the participant.
The federal income tax treatment of the distribution depends on the amount of
the company's current and/or accumulated earnings and profits as we discussed
above.
Brokerage Commissions. A participant who receives a distribution, as
discussed above, is also treated as receiving a distribution to which Section
301 of the Code applies in an amount equal to a pro rata share of any brokerage
commission or other related charges paid by the company in connection with the
purchase of stock on behalf of the shareholder. The federal income tax treatment
of any the distribution depends upon the amount of the company's current and/or
accumulated earnings and profits as discussed above. Most brokerage commissions
paid by the company will be treated as taxable ordinary income.
Additional Information. A participant's tax basis in the stock acquired
under the plan will generally equal the total amount of the distribution that
the shareholder is treated as receiving, as discussed above, plus, in the case
of a shareholder who makes a voluntary cash payment, the amount of the voluntary
payment. A shareholder's holding period in stock acquired under the plan
generally begins on the date following the date on which the stock is credited
to the participant's plan account. In the case of any shareholder as to whom
federal income tax withholding on distributions is required, and in the case of
any foreign shareholder whose taxable income under the plan is subject to
federal income tax withholding, dividends will be reinvested net of the required
amount of tax withheld.
16
<PAGE>
Other Information
24. What happens if First National Community declares a stock dividend or
effects a stock split?
The administrator adds any shares issued in connection with a stock
split or stock dividend on common stock held under the plan to the participant's
plan account. Stock dividends or split shares distributed on shares held
directly by a participant will be mailed to the participant in the same manner
as to shareholders who do not participate in the plan.
25. If First National Community has a rights offering, how will a
participant's entitlement be computed?
A participant's entitlement in a rights offering is based upon his or
her total holdings, in the same manner as dividends are computed currently. The
company will issue rights certificates for the number of whole shares only,
however, and sell rights based on the fractional shares held in a participant's
account. We will mail the proceeds of the sale of fractional certificates, less
commissions and taxes, if any, directly to the participant.
26. How are shares in a participant's account voted at a meeting of the
shareholders?
If, on a record date for a meeting of shareholders, there are shares in
a participant's plan account, the administrator will send proxy materials for
the meeting to the participant. A participant is entitled to vote all shares of
common stock credited to his or her account. The participant may also vote his
or her shares at the meeting in person or by proxy.
27. What are the responsibilities and liabilities of First National
Community and the plan administrator?
First National Community and the plan administrator shall not be liable
for any act taken in good faith or for any good faith omission to act, including
without limitation, any claims of liability:
o arising out of a failure to terminate a participant's account
upon his or her death;
o with respect to the prices at which shares of First National
Community's common stock are purchased or sold:
o the times when or the manner in which purchases or sales are
made;
o the decision whether to purchase shares of common stock on the
open market, from First National Community or in private
transactions; or
17
<PAGE>
o fluctuations in the market value of the Common Stock; and
o any matters relating to the operation or management of the plan.
First National Community cannot assure that participants will make a
profit on, or protect participants against a loss from, the common stock
purchased by or for participants under the plan.
All transactions in connection with the plan will be governed by the
laws of the Commonwealth of Pennsylvania, and are subject to all applicable
federal tax or securities laws.
28. May the plan be amended, modified or discontinued?
Yes. The Board of Directors of First National Community, at its
discretion, may amend, modify, suspend or terminate the plan and will endeavor
to notify participants of any amendment, modification, suspension or
termination. The Board of Directors may, for whatever reason, at any time, as it
may determine in its sole discretion, terminate a participant's participation in
the plan after mailing a notice of intention to terminate to the participant at
the participant's address as it appears on the plan administrator's records. In
addition, the Board of Directors of First National Community and the plan
administrator may each adopt reasonable procedures for the administration of the
plan. The Board of Directors has the sole authority to interpret the plan in the
manner that it deems appropriate in its absolute discretion.
29. Who will bear the costs of the purchases made under the plan?
First National Community will pay all costs of administration of the
plan. Participants will incur no brokerage commissions or other charges for
purchases made under the plan. A participant who requests that the plan
administrator sell shares of common stock held in the plan will incur brokerage
fees incurred in connection with the sale.
30. May a participant pledge shares purchased under the plan?
No. A participant who wishes to pledge shares credited to a plan
account must request the withdrawal of the shares in accordance with the
procedures outlined in response to Question No. 20, above.
18
<PAGE>
MARKET PRICES AND DIVIDENDS
The company's common stock is not actively traded. The principal market
area for the company's stock is northeastern Pennsylvania. First National
Community Bancorp, Inc. is listed in the Over-The-Counter Bulletin Board under
the symbol "FNCB." Quarterly market highs and lows and dividends paid for each
of the past two years are presented below. These prices do not necessarily
represent actual transactions. The company expects that comparable cash
dividends will be paid in the future. All prices and dividends have been
restated to reflect the retroactive effect of the 100% stock dividends paid to
shareholders in 1998 and the 10% stock dividend paid in 1997.
Market Price Dividends Paid
High Low Per Share
Quarter 1998
First $ 23.50 $ 19.00 $ .135
Second 23.75 21.19 .135
Third 23.75 23.75 .15
Fourth 32.00 24.25 .29
------
$0.71
Quarter 1997
First $ 16.13 15.63 $ .12
Second 17.50 16.25 .12
Third 18.00 16.75 .12
Fourth 19.81 17.38 .22
-----
$0.58
As of April 16, 1999, there were approximately 900 holders of record of
First National Community's common stock and 2,398,360 shares of common stock
were issued and outstanding.
The First National Community 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 the bank. First
National Community's ability to pay dividends is also subject to the
restrictions imposed by Pennsylvania law. Generally, Pennsylvania law prohibits
corporations from paying dividends if the corporation is insolvent or if the
dividend would cause a corporation to be unable to pay indebtedness of the
corporation as the indebtedness becomes due in the usual course of business or
the corporation's total assets would be less than the sum of its total
liabilities plus the amount that would be needed if the corporation 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 dividends will be declared
in the future or the rate of dividends, if any.
First National Community is also subject to the dividend restrictions
applicable to national banks because its only source of income is from the
dividends paid by the bank to First National Community. Under the National Bank
Act, the bank may pay dividends to the company only out of retained earnings as
defined in the statute. The approval of the OCC is required if dividends for any
year exceed the net profits, as defined, for that year plus the retained net
profits for the
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<PAGE>
preceding two years. In addition, unless a national bank's capital surplus
equals or exceeds the stated capital for its common stock, no dividends may be
declared unless the bank makes transfers from retained earnings to capital
surplus.
USE OF PROCEEDS
First National Community knows neither the number of shares that will
ultimately be purchased under the plan nor the prices at which the shares will
be purchased. The company intends to use the proceeds from purchases, when and
as received, for working capital and general corporate purposes, which may
include contributions to the bank to increase the bank's capital and to permit
additional growth in the bank's assets. A change in the use of proceeds or
timing of the use of proceeds will be at the company's discretion.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 the prospectus, the discussion in this prospectus
contains certain forward-looking statements that involve risks and
uncertainties, such as statements of First National Community's plans,
objectives, expectations and intentions. Please read the cautionary statements
made in this prospectus as being applicable to all related forward-looking
statements wherever they appear in the prospectus. First National Community's
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."
21
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following financial review of First National Community Bancorp,
Inc. (the Company") is presented on a consolidated basis and is intended to
provide a comparison of the financial performance of the Company and its
wholly-owned subsidiary, First National Community Bank (the Bank") for the years
ended December 31, 1998, 1997 and 1996. The information presented below should
be read in conjunction with the Company's consolidated financial statements and
accompanying notes appearing elsewhere in this report. All share and per share
data has been restated to reflect the 100% stock dividend paid to shareholders
on July 20, 1998 and the 10% stock dividends paid December 31, 1997 and May 8,
1996.
RESULTS OF OPERATIONS
SUMMARY
Net income for 1998 amounted to $5,107,000, which was $464,000, or 10%,
higher than the 1997 level. In 1997, net income totaled $4,643,000 or $768,000
over 1996. On a per share basis, net income was $2.13, $1.94 and $1.62,
respectively in 1998, 1997 and 1996. The weighted average number of shares
outstanding in 1998, 1997 and 1996 were 2,398,360 after giving retroactive
effect to the stock dividends paid in 1998, 1997 and 1996, respectively.
The increase in net income recorded in 1998 can be attributed to the
$865,000, or 6%, improvement in net interest income combined with a reduced
provision for credit losses which more than offset the $585,000, or 7%, increase
in other expenses. Management's focus on improvement through growth again proved
successful as increased earnings due to volume variances more than compensated
for the negative impact of repricing resulting from the reduction in interest
rates during the fourth quarter.
The $768,000, or 20%, increase in 1997 over the 1996 earnings can be
attributed to the $1.8 million increase in net interest income and a $529,000
improvement in non-interest income, offset partially by additional non-interest
expenses, credit loss provisions and applicable income taxes.
Return on assets for the years ended December 31, 1998, 1997 and 1996
was 1.13%, 1.16% and 1.13%, respectively while the return on equity recorded
during the same periods amounted to 15.29%, 15.85% 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 the Company's operating income and as such is the primary
determinant of profitability. Before providing for future credit losses, net
interest income increased 6% from the $14.6 million recorded in 1997 to $15.4
million in 1998. Changes in net interest income generally occur due to
fluctuations in the balances and/or mixes of interest-earning assets and
interest-bearing liabilities, and changes in their corresponding interest yields
and costs. Changes in non-performing assets, together with interest lost and
recovered on those assets, also impact comparisons of net interest income. In
the following schedules, net interest income is analyzed on a tax-equivalent
basis, thereby increasing interest income on certain tax-exempt loans and
investments by the amount of federal income tax savings realized. In this
manner, the true economic impact on earnings from various assets and liabilities
can be more accurately compared.
Tax-equivalent net interest income increased $927,000, or 6%, from the
$15.8 million reported in 1997. Sound pricing policies, aggressive growth
strategies and effective asset-liability management techniques again enabled the
company to improve net interest income during this period of declining interest
rates.
Average loans increased $26 million, or 10%, in 1998 and contributed an
increase of $1.8 million of interest income over the 1997 level. Commercial
loans provided the majority of the growth in 1998 as average loan balances
22
<PAGE>
increased $24 million and earnings on those balances improved by $1.8 million.
Installment loans also provided significant increases in 1998 comprised of $15
million in average loan balances and $1.2 million of interest income due
primarily to growth in indirect auto loans. Mortgage loans outstanding averaged
$13 million lower in 1998 than in 1997 due to the sale of almost $23 million of
long-term, fixed rate assets in 1998. As a result of the reduced level of
average loans outstanding, interest income on mortgage loans decreased $1.2
million in 1998. Repricing and new volume resulted in the sixteen basis point
reduction earned on average loan balances in 1998 when compared to the prior
period.
Average securities increased $24 million over the 1997 average balance
and generated $1.3 million of additional earnings. Declining rates impacted
securities yields through repricing, new volume and principal reductions,
resulting in a thirty-nine basis point decrease from the 1997 level. Money
market assets, which include interest-bearing deposits with banks and federal
funds sold, were $1.2 million less in 1998 than in 1997 and earnings from these
assets decreased $61,000.
Total interest-bearing deposits increased $22 million in 1998 comprised
of an $18 million increase in average certificates of deposit and a $4 million
increase in low-cost deposits. Competition for deposits remained fierce in local
markets, resulting in an average cost of deposits which was equal to the 1997
level. Borrowed funds and other interest-bearing liabilities increased $20
million on the average due to additional Federal Home Loan Bank advances but
repricing and reduced costs on new borrowings resulted in a twenty-five basis
point reduction in the cost of these liabilities.
As a result of the interest rate reductions in 1998 and the more
immediate impact on interest earning assets, the Company's net interest margin
decreased twenty-five basis points to 3.84% in 1998. Investment leveraging
transactions continue to add to the profitability of the company, as evidenced
by the $433,000 earned in 1998 from the transactions, but also contribute to the
reduction in the overall net interest margin. Exclusive of the investment
leveraging transactions, the 1998 net interest margin would have been 4.15%, or
seven basis points lower than the comparable period of 1997.
During 1997, tax-equivalent net interest income increased $1.9 million,
or 14%, from the $13.9 million reported in 1996 to $15.8 million. Interest rates
continued the roller coaster ride experienced in 1996 and gradually increased
during the first quarter, with the long bond exceeding 7.00%. During the second
and third quarters of 1997, rates again fluctuated until decreasing steadily
through the fourth quarter as inflation fears subsided. As of year end, the
yield on the one-year Treasury Bill was three basis points lower than it began
the year while the thirty year bond had decreased seventy-seven basis points to
5.96%. Yields earned on loans and money market assets increased during 1997 from
the prior year levels but a three basis point decrease in the yield earned on
securities resulted in a yield on total earning assets which remained stable at
8.32%. During the same period, however, competition for deposits remained fierce
locally resulting in a nine basis point increase in the cost of interest-bearing
deposits. Additionally, the cost of borrowed funds and other interest-bearing
liabilities increased during 1997, resulting in a decrease in the net interest
margin from the 4.25% recorded in 1996 to 4.09%. During 1997, the Company
entered into several investment leveraging transactions which resulted in
$164,000 of pre-tax earnings, but the 1.06% spread earned on the transactions
had a negative impact on the overall net interest margin. Excluding the effect
of these transactions, the 1997 net interest margin would have been 4.22% which
is only slightly lower than the 4.25% recorded in 1996. Growth in earning assets
which represents 112% of the growth in interest-bearing liabilities also
contributed to the 1997 margin.
23
<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 STOCK HOLDERS' 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 Deposits 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%
=========== ==========
<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 bank 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 STOCK HOLDERS' 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 Deposits 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.
The most significant impact on net income between periods is derived
from the interaction of changes in the volume of and rates earned or paid on
interest-earning assets and interest-bearing liabilities. The volume of earning
dollars in loans and investments, compared to the volume of interest-bearing
liabilities represented by deposits and borrowings, combined with the spread,
produces the changes in net interest income between periods.
The following table shows the relative contribution of changes in
average volume and average interest rates to changes in net interest income for
the periods indicated. The change in interest income and interest expense
attributable to changes in both volume and rate, which cannot be segregated, has
been allocated proportionately to the change due to volume and the change due to
rate.
24
<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.
25
<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, the
Company held rates steady on its low-cost deposit base while the effect of
repricing on certificates of deposit will materialize over time.
PRIOR YEAR
In 1997, growth also lead to improved earnings. The $1.9 million
increase in net interest income includes $1,775,000 due to volume but also
includes $127,000 due to rate, reflecting a positive repricing impact. Loan and
investment portfolio growth added $4.5 million which was partially offset by the
$2.8 million increase in the cost of funds to support the asset growth. Rate
fluctuations on earning assets added over $300,000 which includes an increase in
commercial loans related to the twenty-five basis point hike in the prime rate
during the year and investment purchases at increased yields. The cost of
certificates of deposit increased as the Company attempted to lengthen its
portfolio for asset/liability purposes. New borrowings and variable rate
adjustments increased the cost of borrowed funds.
PROVISION FOR CREDIT LOSSES
The provision for credit losses varies from year to year based on
management's evaluation of the adequacy of the allowance for credit losses in
relation to the risks inherent in the loan portfolio. In its evaluation,
management considers credit quality, changes in loan volume, composition of the
loan portfolio, past experience, delinquency trends, and the economic
conditions. Consideration is also given to examinations performed by regulatory
authorities and the Company's independent auditors. The provision for credit
losses was $920,000 in 1998, $1,110,000 in 1997 and $820,000 in 1996.
OTHER INCOME
Other Income 1998 1997 1996
- -------------------------------------------------------------------------------
(dollars in thousands)
- -------------------------------------------------------------------------------
Service charge $780 $759 $693
Net gain/(loss) on the sale of securities 125 (8) 130
Net gain on the sale of other real estate 47 377 1
Net gain on the sale of other assets 0 156 0
Other 631 344 275
------ ------ ------
Total Other Income $1,583 $1,628 $1,099
====== ====== ======
- -------------------------------------------------------------------------------
The company's other income category can be separated into three
distinct sub-categories; service charges make up the core component of this area
of earnings while net gains (losses) from the sale of assets and other fee
income comprise the balance.
In 1998, earnings from service charges were $21,000, or 3%, higher than
the 1997 total. Net gains from securities sales totaled $125,000 in 1998 as
management sold securities to minimize the risk from prepayments on
mortgage-backed securities. The $47,000 net gain from the sale of other assets
includes earnings generated from the Bank's real estate subsidiary, FNCB Realty,
Inc. During 1998, the Company continued to shed interest rate risk through the
sale of $22.8 million of fixed rate residential mortgage loans. These loan
sales, with rates ranging from 6.125% to 9.125%, added $189,000 to 1998 earnings
after accounting for fees associated with the sale. As importantly, the
26
<PAGE>
servicing rights were retained thereby resulting in no impact on our customers
and improving future profits through servicing fee income. It is management's
intention to continue to shed interest rate risk as opportunities present
themselves in order to remain competitive in this area of retail lending.
Servicing fees collected on mortgage loans which have been sold were $97,000 in
1998, or $43,000 higher than the same period of 1997. All other fee income
increased $81,000 over the 1997 total including a $40,000 improvement in the
earnings generated through a partnership with INVEST Financial Services.
During 1997, service charges increased $66,000, or 10%. The majority of
this increase can be attributed to uncollected funds, although newly initiated
surcharge fees pertaining to automatic teller machines also contributed $34,000
of additional income. The decrease in the area of net gains or losses on the
sale of securities also represents the Company's efforts to improve future
profits. During 1997, many of the lowest yielding securities in the portfolio
were sold as interest rates plummeted, thereby enabling the Company to
reposition the portfolio for future benefits. Included in net gains on the sale
of other assets is $524,000 recognized on the sale of real estate and other
assets by FNCB Realty, Inc. These assets were transferred to the Bank's
subsidiary through foreclosure action and subsequently resold. Other income
increased $69,000 in comparison to 1996 as letter of credit fees increased
considerably and fee income from the Bank's relationship with INVEST financial
services also provided an increase of $22,000 over the 1996 level. In 1997,
residential mortgage loans totaling $14.7 million were sold, resulting in a net
gain of $66,000.
OTHER EXPENSES
Other Expenses 1998 1997 1996
- ------------------------------------------------------------------------------
(dollars in thousands)
- ------------------------------------------------------------------------------
Salary expense $3,772 $3,482 $3,176
Employee benefit expense 977 960 900
Occupancy expense 869 842 812
Equipment expense 677 610 484
Advertising expense 341 272 259
Data Processing expense 530 424 382
Other operating expenses 2,257 2,249 1,891
----- ----- -----
Total Other Expenses $9,423 $8,839 $7,904
- ------------------------------------------------------------------------------
Total other expenses increased $584,000, or 7%, in comparison to the
prior year. Employee costs accounted for $307,000, or 53%, of the increase while
occupancy and equipment costs rose $94,000, or 16% of the total. All other
expenses increased $183,000, or 31% of the total due primarily to increases in
advertising and data processing costs. The Company's overhead ratio, which
measures non-interest expenses in relation to average assets improved from the
2.20% recorded in 1997 to 2.08%. In 1996, the overhead ratio was 2.31%.
Salary and benefits amount to 50% of the Company's total other
expenses. During 1998, salary expense increased $290,000, or 8%, due to merit
increases, and the addition of staff to meet the growing sales and
administrative needs of the company. Full-time equivalent employees at December
31, 1998 were 168, an increase from the 151 reported as of the same period last
year. Employee benefit costs increased $17,000, or 2%, in 1998 due primarily to
a $30,000 increase in the Company's contribution to a defined contribution
profit sharing plan. Hospitalization costs, payroll taxes and other benefits
decreased $13,000 in comparison to 1997.
Occupancy expenses increased $27,000, or 3%, in 1998 due primarily to
rental expense associated with a new community office. Increases in maintenance
expenses and depreciation on the new facilities were offset by a reduced level
of real estate taxes. Equipment costs increased $67,000, or 11%, due to
depreciation expense on new equipment, including computers and related
technology.
All other operating expenses increased $183,000, or 6%, compared to
1997. Advertising costs increased $69,000 while data processing expenses rose
$106,000 in 1998 due to bank promotions and technological advances. All other
components of other operating expenses were limited to an $8,000 net increase.
In 1997, total other expenses increased $935,000, or 12%, in comparison
to 1996. During 1996 other expenses increased 11% from the prior period.
Employee costs accounted for 39% of the increase in 1997 while occupancy and
equipment costs rose by $156,000, or 17% of the total. All other operating
expenses increased $413,000, or 44% of the total increase.
27
<PAGE>
Salary and benefit costs comprised the majority of total other expenses
in 1997 and increased 9% over the 1996 level. Salaries increased $306,000, or
10%. Contributing to this increased cost are merit increases, as well as the
full year's effect of the Kingston Office which opened in August 1996. Full-time
equivalent employees at December 31, 1997 were 151, a decrease from the 155
reported in 1996. Employee benefit costs increased $60,000, or 7%, in 1997 due
primarily to rising health care costs and a $30,000 increase in the Company's
contribution to a defined contribution profit sharing plan. Increases in payroll
taxes and other benefits amounted to $5,000.
Occupancy expenses increased $30,000, or 4%, in 1997. The recognition
of a full year's effect from the Kingston Office which opened during 1996
accounts for the vast majority of the increase.
Equipment expenses increased $126,000, or 26%, during 1997.
Depreciation and maintenance on new equipment accounted for $108,000 of the
increase, including $23,000 from our newest office. This increased cost reflects
the Company's commitment to new technology, including a complete upgrade to the
retail delivery systems.
All other operating expenses increased $413,000 in 1997 from the prior
period. Non-controllable items such as FDIC Insurance, Bank Shares Tax and
examinations accounted for $97,000 of the increased cost. Also contributing
significantly to the increased cost was $169,000 of operating costs from the
Bank's subsidiary, FNCB Realty, Inc. The majority of these costs reflect
operating expenses associated with a single property which was sold. All other
components of other operating expenses increased $159,000, or 7%.
PROVISION FOR INCOME TAXES
Federal income tax expense decreased $39,000 in 1998 in comparison to
the 1997 total in spite of the $426,000 improvement in income before taxes. Tax
benefits derived from an increased level of tax-exempt income had a $40,000
positive effect while the effect of deferred taxes and other items reduced the
1998 provision by $144,000. The Company's effective tax rate for 1998 and 1997
was 23.6% and 25.8%, respectively.
During 1997, federal income tax expense increased $351,000 in
comparison to 1996. The majority of the increase was attributed to the
$1,119,000 improvement in pre-tax income as well as the effect of other
non-deductible and deferred tax items. Tax benefits related to non-taxable
interest income increased $57,000 over the 1996 total. The effective tax rate
for 1996 was 24.6%.
FINANCIAL CONDITION
Total assets increased $55 million, or 13%, in 1998 compared to a
similar $56 million increase in 1997. Total deposits provided $34 million of new
funds in 1998 while borrowed funds increased $17 million. This available
liquidity was utilized to fund the $44 million, or 16%, increase in net loans as
well as the $10 million growth in the Company's securities portfolio.
SECURITIES
The primary objectives in managing the Company's securities portfolio
are to maintain the necessary flexibility to meet liquidity and asset and
liability management needs and to provide a stable source of interest income.
During 1998, total securities increased $10 million, inclusive of a
$463,000 decrease in the fair value of the portfolio. During 1998, growth was
again concentrated in mortgage-backed securities including $15 million which
were purchased with structured borrowings from the Federal Home Loan Bank of
Pittsburgh, thereby allowing the Company to earn a favorable spread between the
rate earned on the securities and the cost of the borrowed funds. Management
remains committed to a strategy which limits purchases to those that are
virtually free of credit risk and will help to meet the objectives of the
Company's Investment and Asset/Liability management policies.
28
<PAGE>
The following table sets forth the carrying amount of securities at the
dates indicated:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
December 31
- --------------------------------------------------------------------------------------------------------------
1998 1997 1996
(dollars in thousands)
<S> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government agencies $13,109 $31,808 $27,946
Obligations of state and political subdivisions 33,671 27,043 29,533
Mortgage-backed securities 77,590 56,615 22,544
Corporate debt securities 992 0 0
Equity securities 6,468 5,901 2,453
----- ----- -----
Total $131,830 $121,367 $82,476
======== ======== =======
- --------------------------------------------------------------------------------------------------------------
</TABLE>
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-
(dollars in thousands) Within 2-5 6-10 Over Backed No Fixed
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 $45 million, or 16%, in 1998. Commercial loans
provided $30 million of the increase while installment lending also contributed
$26 million of growth since December 31, 1997. The commercial growth includes
$18 million secured by real estate while the growth in installment loans
includes $14 million of indirect auto loans and an additional $14 million which
is secured by real estate. Residential real estate loans decreased $12 million
in 1998 as the Company continued with its strategy of reducing interest rate
risk through the sale of long-term, fixed-rate assets. During 1998, over $22
million of these long-term assets were sold in the secondary market resulting in
a reduced level of interest rate risk and a net gain on the sales of
approximately $189,000. The sale of these assets provides liquidity for future
growth and also allows the Company to continue to provide competitive products
during the current low-rate environment.
29
<PAGE>
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 Financial $ 189,453 $ 159,644 $ 136,620 $ 120,560 $ 103,602
Real Estate 45,855 57,523 67,262 67,333 65,960
Installment 93,589 67,196 59,183 44,587 26,007
--------- --------- --------- --------- ---------
Total Loans Gross 328,897 284,363 263,065 232,480 195,569
Unearned Discount (4) (10) (18) (37) (65)
--------- --------- --------- --------- ---------
Total Loans 328,893 284,353 263,047 232,443 195,504
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.
Loans Outstanding - Repricing Distribution
(dollars in thousands)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Within One to Over Five
One Year Five Years Years Total
-------- ---------- --------- -------
<S> <C> <C> <C> <C>
Commercial and Financial $107,992 $60,028 $21,433 $189,453
Real Estate 16,575 18,676 10,604 45,855
Installment 27,310 56,109 10,170 93,589
------ ------ ------ ------
Total $151,877 $134,813 $42,207 $328,897
======== ======== ======= ========
Loans with predetermined interest rates $34,041 $71,758 $33,232 $139,031
Loans with floating rates 117,836 63,055 8,975 189,866
------- ------ ----- -------
Total $151,877 $134,813 $42,207 $328,897
======== ======== ======= ========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
ASSET QUALITY
The Company manages credit risk through the application of policies and
procedures designed to foster sound underwriting and credit monitoring
practices, although, as is the case with any financial institution, a certain
degree of credit risk is dependent in part on local and general economic
conditions that are beyond the Company's control.
The Company's Risk Management Committee meets quarterly or more often
as required and makes recommendations to the Board of Directors regarding
provisions for credit losses. The Committee reviews individual problem credits
and ensures that ample reserves are established considering both general
allowances and specific allocations.
The following schedule reflects various non-performing categories as of
December 31 for each of the last five years:
<TABLE>
<CAPTION>
(dollars in thousands)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Nonaccrual loans (including impaired loans) $ 845 $ 207 $ 714 $1,629 $2,285
Loans past due 90 days or more and still
accruing 452 1,224 354 157 418
Other Real Estate Owned 0 0 337 25 75
------ ------ ------ ------ ------
Total Non-Performing Assets $1,297 $1,431 $1,405 $1,811 $2,778
====== ====== ====== ====== ======
</TABLE>
30
<PAGE>
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 between three credits which are substantially secured by real estate. As
of December 31, 1998, the Company's ratio of nonaccrual loans to total loans was
.26%, less than one-half of the national peer banks reported ratio of .63%. The
Company continues to acknowledge the weakness in local real estate markets and
in general economic conditions, emphasizing strict underwriting standards to
minimize the negative impact of the current environment. Management remains ever
conscious to avoid the problems of over-lending experienced during the 1980's
and expects future efforts to reduce delinquency percentages during 1999.
ALLOWANCE FOR CREDIT LOSSES
The following table presents an allocation of the allowance for credit
losses as of the end of each of the last five years:
Loan Loss Reserve Allocation
(dollars in thousands)
<TABLE>
<CAPTION>
12/31/98 12/31/97 12/31/96
Percentage Percentage Percentage
of of of
Loans in Loans in Loans in
Each Each Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------ --------- ------ ---------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Commercial
and Financial $1,706 58% $1,340 56% $1,326 52%
Real Estate 117 14% 118 20% 98 26%
Installment 92 28% 69 24% 61 22%
Unallocated 2,368 -- 2,096 -- 1,682 --
------ ------ ------ ------ ------ ------
$4,283 100% $3,623 100% $3,167 100%
====== ====== ====== ====== ====== ======
<CAPTION>
12/31/95 12/31/94
Percentage Percentage
of of
Loans in Loans in
Each Each
Category Category
to Total to Total
Amount Loans Amount Loans
------ ----------- ------ ----------
<S> <C> <C> <C> <C>
Commercial
and Financial $1,094 52% $1,110 53%
Real Estate 105 29% 121 34%
Installment 38 19% 29 13%
Unallocated 1,563 -- 990 --
------ ------ ------ ------
$2,800 100% $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>
(Dollars in thousands)
Years Ended December 31
1998 1997 1996 1995 1994
<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>
31
<PAGE>
During 1998, losses charged to the reserve declined considerably from
prior periods while recoveries were consistent with the 1997 total. During 1995,
payments approximating $300,000 were received from loans charged-off in 1991,
1992 and 1994.
DEPOSITS
The primary source of funds to support the Company's growth is its
deposit base, and emphasis has been placed on accumulating new deposits while
making every effort to retain current relationships. Total deposits increased
$34 million in 1998 comprised primarily of growth in certificates of deposit but
also includes over $7 million in low-cost savings and demand accounts.
The average daily amount of deposits and rates paid on such deposits is
summarized for the periods indicated in the following table:
<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
=======
ASSET AND LIABILITY MANAGEMENT
The major objectives of the Company's asset and liability management
are to (1) manage exposure to changes in the interest rate environment to
achieve a neutral interest sensitivity position within reasonable ranges, (2)
ensure adequate liquidity and funding, (3) maintain a strong capital base, and
(4) maximize net interest income opportunities. The Company manages these
objectives through its Senior Management and Asset and Liability Management
Committees. Members of the committees meet regularly to develop balance sheet
strategies affecting the future level of net interest income, liquidity and
capital. Items that are considered in asset and liability management include
balance sheet forecasts, the economic environment, the anticipated direction of
interest rates and the Company's earnings sensitivity to changes in these rates.
INTEREST RATE SENSITIVITY
The Company analyzes its interest sensitivity position to manage the
risk associated with interest rate movements through the use of gap analysis and
simulation modeling. Interest rate risk arises from mismatches in the repricing
of assets and liabilities within a given time period. Gap analysis is an
approach used to quantify these differences. A positive gap results when the
amount of interest-sensitive assets exceeds that of interest-sensitive
liabilities within a given time period. A negative gap results when the amount
of interest-sensitive liabilities exceeds that of interest-sensitive assets.
32
<PAGE>
While gap analysis is a general indicator of the potential effect that
changing interest rates may have on net interest income, the gap report has some
limitations and does not present a complete picture of interest rate
sensitivity. First, changes in the general level of interest rates do not affect
all categories of assets and liabilities equally or simultaneously. Second,
assumptions must be made to construct a gap table. For example, non-maturity
deposits are assigned a repricing interval based on internal assumptions.
Management can influence the actual repricing of these deposits independent of
the gap assumption. Third, the gap table represents a one-day position and
cannot incorporate a changing mix of assets and liabilities over time as
interest rates change.
Because of the limitations of the gap reports, the Company uses
simulation modeling to project future net interest income streams incorporating
the current gap position, the forecasted balance sheet mix, and the anticipated
spread relationships between market rates and bank products under a variety of
interest rate scenarios
The Company's interest sensitivity at December 31, 1998 was essentially
neutral within reasonable ranges; for example, an interest rate fluctuation of
up or down 200 basis points would not be expected to have a significant impact
on net interest income.
33
<PAGE>
INTEREST RATE GAP
The following schedule illustrates the Company's interest rate gap
position as of December 31, 1998. At that date, the Company's cumulative gap
position at all intervals measured within one year were within internal
guidelines.
Interest Rate Sensitivity Analysis
as of December 31, 1998
(dollars in thousand)
<TABLE>
<CAPTION>
Rate Sensitive
-------------------------------------------------------------------------
1 to 90 91 to 180 181 to 365 1 to 5 Beyond
Days Days Days Years 5 Years
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial loans $ 93,150 $ 5,492 $ 10,606 $ 59,964 $ 21,343
Mortgage loans 3,244 2,803 8,504 18,679 10,604
Installment loans 9,993 5,898 11,324 56,104 10,170
--------- --------- --------- --------- ---------
Total loans 106,387 14,193 30,434 134,747 42,117
--------- --------- --------- --------- ---------
Securities-taxable 21,116 5,960 9,026 31,404 23,700
Securities-tax free 1,410 0 300 13,658 17,084
--------- --------- --------- --------- ---------
Total Securities 22,526 5,960 9,326 45,062 40,784
--------- --------- --------- --------- ---------
Interest-bearing deposits with bank 1,487 198 496 297 0
Federal funds sold 3,400 0 0 0 0
--------- --------- --------- --------- ---------
Total Money Market Assets 4,887 198 496 297 0
--------- --------- --------- --------- ---------
Total Earning Assets 133,800 20,351 40,256 180,106 82,901
Non-earning assets 0 0 0 0 0
Allowance for credit losses 0 0 0 0 0
--------- --------- --------- --------- ---------
Total Assets $ 133,800 $ 20,351 $ 40,256 $ 180,106 $ 82,901
========= ========= ========= ========= =========
Interest-bearing demand deposits $ 32,966 $ 0 $ 0 $ 18,274 $ 0
Savings deposits 0 463 688 40,866 0
Time deposits $100,000 and over 45,474 8,083 10,818 4,966 0
Other time deposits 38,526 27,332 50,215 61,941 0
Total Interest-Bearing Deposits 116,966 35,878 61,721 126,047 0
--------- --------- --------- --------- ---------
Borrowed funds and other
Interest-bearing liabilities 16,116 2,038 17,718 24,303 5,000
--------- --------- --------- --------- ---------
Total Interest-Bearing Liabilities 133,082 37,916 79,439 150,350 5,000
Demand deposits 0 0 0 0 0
Other liabilities 0 0 0 0 0
Stockholders' equity 0 0 0 0 0
--------- --------- --------- --------- ---------
Total Liabilities and Stockholders'
Equity $ 133,082 $ 37,916 $ 79,439 $ 150,350 $ 5,000
========= ========= ========= ========= =========
Interest Rate Sensitivity gap 718 (17,565) (39,183) 29,756 77,901
========= ========= ========= ========= =========
Cumulative gap 718 (16,847) (56,030) (26,274) 51,627
========= ========= ========= ========= =========
<CAPTION>
Not
Rate
Sensitive Total
-------------------------
<S> <C> <C>
Commercial loans $ 0 $ 190,555
Mortgage loans 0 43,834
Installment loans 0 93,489
Total loans 0 327,878
--------- ---------
Securities-taxable 8,172 99,378
Securities-tax free 0 32,452
Total Securities 8,172 131,830
--------- ---------
Interest-bearing deposits with bank 0 2,478
Federal funds sold 0 3,400
Total Money Market Assets 0 5,878
--------- ---------
Total Earning Assets 8,172 465,586
Non-earning assets 22,082 22,082
Allowance for credit losses (4,283) (4,283)
--------- ---------
Total Assets $ 25,971 $ 483,385
========= =========
Interest-bearing demand deposits $ 0 $ 51,240
Savings deposits 0 42,017
Time deposits $100,000 and over 0 69,341
Other time deposits 0 178,014
Total Interest-Bearing Deposits 0 340,612
--------- ---------
Borrowed funds and other
Interest-bearing liabilities 0 65,175
--------- ---------
Total Interest-Bearing Liabilities 0 405,787
Demand deposits 39,427 39,427
Other liabilities 3,492 3,492
Stockholders' equity 34,679 34,679
--------- ---------
Total Liabilities and Stockholders'
Equity $ 77,598 $ 483,385
========= =========
Interest Rate Sensitivity gap (51,627)
=========
Cumulative gap
</TABLE>
34
<PAGE>
The Company's computerized simulation modeling system also measures
exposure to interest rate risk, taking into account a growing balance sheet
under various interest rate scenarios. As of December 31, 1998, the modeling
system provided results which were within policy guidelines of plus or minus ten
percent assuming a 200 basis point shift in market interest rates.
LIQUIDITY
The term "liquidity" refers to the ability of the Company to generate
sufficient amounts of cash to meet its cash-flow needs. Liquidity is required to
fulfill the borrowing needs of the Company's credit customers and the withdrawal
and maturity requirements of its deposit customers, as well as to meet other
financial commitments. Cash and cash equivalents (cash and due from banks and
federal funds sold) are the Company's most liquid assets. At December 31, 1998
cash and cash equivalents totaled $13.4 million, compared to the December 31,
1997 level of $14.7 million. Financing activities provided $50.0 million and
operating activities provided $6.8 million of cash and cash equivalents during
the year while investing activities utilized $58.0 million. The cash flow
provided by financing activities is due to deposit growth and an increase in
borrowed funds outstanding while the funds provided by operating activities
pertains to interest payments received on loans and investments. The cash used
in investing activities consists of loan proceeds and security purchases.
Core deposits, which represent the Company's primary source of
liquidity, averaged $299.5 million in 1998, an increase of $18.3 million, or 7%,
from the $281.2 million average in 1997. This increase in average core deposits
was supplemented with a $7.8 million increase in average jumbo certificates and
a $20.3 million increase in average borrowed funds and other interest-bearing
liabilities.
The Company has other potential sources of liquidity, including
repurchase agreements. Additionally, the Company can borrow on credit lines
established at several correspondent banks and at the Federal Home Loan Bank of
Pittsburgh. The Federal Reserve Discount Window also provides a funding source
of last resort.
CAPITAL
A strong capital base is essential to the continued growth and
profitability of the Company and in that regard the maintenance of appropriate
levels of capital is a management priority. The Company's principal capital
planning goals are to provide an adequate return to shareholders while retaining
a sufficient base from which to provide for future growth, while at the same
time complying with all regulatory standards. As more fully described in Note 12
to the financial statements, regulatory authorities have prescribed specified
minimum capital ratios as guidelines for determining capital adequacy to help
insure the safety and soundness of financial institutions.
As a result of the significant growth the Company has experienced in
recent years, capital ratios, although well above the regulatory minimums, had
been steadily decreasing. Based on management's intent to maintain a
well-capitalized status as well as a desire to attract new shareholders, 144,000
shares of stock were offered and sold in 1995 resulting in an increase of $3.6
million of Tier 1 capital. On May 15, 1996, stockholders voted to increase the
number of authorized shares from 1,500,000 to 5,000,000.
The following schedules present information regarding the Company's
risk-based capital at December 31, 1998, 1997 and 1996 and selected other
capital ratios.
CAPITAL ANALYSIS
(dollars in thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
December 31
1998 1997 1996
<S> <C> <C> <C>
Tier I Capital:
Shareholders' equity $ 33,887 $ 30,483 $ 27,247
-------- -------- --------
Total Tier I Capital $ 33,887 $ 30,483 $ 27,247
-------- -------- --------
Tier II Capital:
Allowable portion of allowance for
credit losses $ 4,157 $ 3,483 $ 3,167
-------- -------- --------
Total Risk-Based Capital $ 38,044 $ 33,966 $ 30,414
-------- -------- --------
Total Risk-Weighted Assets $332,519 $278,680 $265,366
======== ======== ========
- -----------------------------------------------------------------------------------------------
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
CAPITAL RATIOS
- ---------------------------------------------------------------------------------------------------------------------
December 31
Regulatory
Minimum 1998 1997 1996
<S> <C> <C> <C> <C>
Total Risk-Based Capital 8.00% 11.45% 12.19% 11.46%
Tier I Risk-Based Capital 4.00% 10.19% 10.94% 10.27%
Tier I Leverage Ratio 3.00% 7.10% 7.28% 7.41%
Return on Assets N/A 1.13% 1.16% 1.13%
Return on Equity * N/A 15.29% 15.85% 14.83%
Equity to Assets Ratio* N/A 7.17% 7.37% 7.42%
Dividend Payout Ratio N/A 33.35% 30.06% 30.40%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
*Includes the effect of SFAS 115 in the amount of $791,000 in 1998, $1,097,000
in 1997 and $384,000 in 1996.
It is the philosophy of Management and the Board of Directors to
increase capital primarily through the retention of earnings During 1995, the
Bank offered and sold 144,000 shares of stock increasing the number of
outstanding shares to 991,504. In 1996, the Board approved a 10% stock dividend
which resulted in the issuance of 98,920 new shares and which increased the
total number of shares outstanding to 1,090,424. During 1997, the Board of
Directors again approved the payment of a 10% stock dividend adding 108,756 new
shares and increasing the total number of shares outstanding to 1,199,180. In
1998, shareholders received a 100% stock dividend which doubled the outstanding
shares to the current 2,398,360.
During 1998, regulatory capital increased $3.4 million due to the
retention of earnings after paying $1.7 million in cash dividends. As of
December 31, 1998, there were 2,601,640 shares of stock available for future
sale or stock dividends. The approximate number of stockholders of record at
December 31, 1998 was 900. Quarterly market highs and lows, dividends paid and
known market makers are highlighted in the Investor Information section of this
Annual Report. Refer to Note 12 to the financial statements for further
discussion of capital requirements and dividend limitations.
ECONOMIC CONDITIONS AND FORWARD OUTLOOK
Economic conditions affect financial institutions, as they do other
businesses, in a number of ways. Rising inflation affects all businesses through
increased operating costs but affects banks primarily through the manner in
which they manage their interest sensitive assets and liabilities in a rising
rate environment. Economic recession can also have a material effect on
financial institutions as the assets and liabilities affected by a decrease in
interest rates must be managed in a way that will maximize the largest component
of a bank's income, that being net interest income. Recessionary periods may
also tend to decrease borrowing needs and increase the uncertainty inherent in
the borrowers' ability to pay previously advanced loans. Additionally,
reinvestment of investment portfolio maturities can pose a problem as attractive
rates are not as available. Management closely monitors the interest rate risk
of the balance sheet and the credit risk inherent in the loan portfolio in order
to minimize the effects of fluctuations caused by changes in general economic
conditions.
When 1998 began, the Federal funds rate was 5.50%, the prime rate was
8.50%, and the thirty year Treasury bond was yielding 5.96%. At the same time,
inflationary fears and problems in Asia were sending mixed signals but were
providing upward pressure on interest rates as a majority of economists were
leaning toward a Fed tightening during the first half of 1998. As recent as
July, the Federal Open Market Committee minutes reveal that the risk of
inflation was greater than the risk of weakness in the economy, but any change
in policy was deferred. During the third quarter, foreign markets in Japan,
Russia and Latin America were experiencing further weakness and reduced the
chances of inflationary pressure domestically. In September, further pressures
from abroad and the adverse consequences on domestic activity resulted in the
Fed reducing the federal funds rate by 1/4 of a percentage point with a bias
toward further easing. During the next seven weeks, a second and third round of
rate cuts followed resulting in the current federal funds rate of 4.75% and the
corresponding reduction in the prime lending rate to 7.75%. As of year end, the
yield on the thirty year Treasury bond was down eighty-one basis points to
5.15%. Economic forecasts point toward a continued slowing in the expansion of
economic activity during 1999 and the possibility of further rate cuts, although
underlying forces could affect interest rates in either direction. With this in
mind, management maintains a philosophy of not attempting to predict future rate
movements but rather on focusing efforts to maintain earnings momentum in
various rate environments.
The Company is currently working to address the potential impact of the
Year 2000 issue on the processing of date sensitive information. The Year 2000
issue is pervasive and complex as virtually every computer operation will be
affected in some way by the rollover
36
<PAGE>
of the two-digit year value to 00. The issue is whether computer systems will
properly recognize date-sensitive information when the year changes to 2000.
Systems that do not properly recognize such information could generate erroneous
data or cause a system to fail. In order to address the issues, the Company is
utilizing both internal and external resources to identify and modify where
necessary to ensure Year 2000 compliance. We believe that the risk lies in the
fact that if our customers and suppliers are not Year 2000 compliant, it can
cause our plan to fail. The Company's Year 2000 Committee has conducted a
comprehensive review of its computer systems and has adopted a five-step
approach to correct any potential problem: Awareness, Assessment, Renovation,
Validation and Implementation. We have conducted training seminars for both our
employees and our customers in order to raise awareness for the project. We have
analyzed all of our vendors, loan and deposit customers, and computerized
systems to determine those who are mission critical to the success of our plan.
Each vendor and customer has been contacted to determine its state of Y2K
compliance. Any vendor that does not meet the Company's compliance standards
will be addressed on an individual basis. By the end of the second quarter of
this year, all of our critical systems will have been renovated for Year 2000
readiness and they will have been put through extensive testing to prove
compliance with the century date change. Additionally, exhaustive contingency
plans have been formulated for both remediation concerns and for business
resumption efforts. The final phase in assuring compliance is comprised of the
efforts that we must take to ensure a smooth transition into 2000. In this
phase, liquidity, physical plant, and communications issues are addressed. The
Year 2000 Project Team has projected that the cost of Year 2000 compliance would
be minimal and would not have a negative impact on the earnings of the Company.
It is also not anticipated that the Year 2000 issue will have a significant
negative impact on the operations of the Company, but no assurance can be made
that the systems of others that the Company relies upon will be compliant.
As of this writing, the Company was not aware of any pronouncements or
legislation that would have a material impact on the results of operations.
37
<PAGE>
BUSINESS
The Company
First National Community Bancorp, Inc. is a Pennsylvania corporation,
incorporated in 1997. The company is registered as a bank holding company under
the Bank Holding Company Act of 1956. The company became an active bank holding
company on July 1, 1998, when it acquired all of the outstanding shares of First
National Community Bank. The bank is a wholly-owned subsidiary of the company.
The company's primary activity consists of owning and operating the
bank, which provides customary retail and commercial banking services to
individuals and businesses. The bank provides practically all of the company's
earnings as a result of its banking services.
The Bank
The bank was established as a national banking association in 1910 as
"The First National Bank of Dunmore." Based upon shareholder approval received
at a Special Shareholders' Meeting held October 27, 1987, the bank changed its
name to "First National Community Bank," effective March 1, 1988. The Bank's
operations are conducted from offices located in Lackawanna and Luzerne
Counties, Pennsylvania:
o the Main Office in Dunmore;
o the downtown Scranton branch (established 1980);
o the Dickson City branch (opened December 1984);
o the Fashion Mall office, Scranton/Carbondale Highway (opened July
1988);
o the Wilkes-Barre branch (opened July 1993);
o the Pittston Plaza Office (opened April 1995);
o the Kingston Office (opened August 1996); and
o the Exeter Office (opened November 1998).
The bank provides the usual commercial banking services to individuals and
businesses, including a wide variety of deposit instruments. Consumer loans
include both secured and unsecured installment loans, fixed and variable rate
mortgages, home equity term loans and Lines of Credit and "Instant Money"
overdraft protection loans. Additionally, the bank is 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
38
<PAGE>
customers, as well as Auto Cash Manager that is a personal computer-based,
menu-driven product that allows our business customers to have direct access to
their account information and the ability to perform certain daily transactions
from their place of business.
As a result of the bank's affiliation with INVEST, our customers are
able to access alternative products such as mutual funds, annuities, stock and
bond purchases, etc. directly from our INVEST representative. The bank also
offers customers the convenience of 24-hour banking, seven days a week, through
its Money Access Center ("MAC") network. These automated teller machines are
available at the following community offices:
o Dunmore;
o Dickson City;
o Fashion Mall;
o Pittston;
o Kingston; and
o Exeter;
as well as a remote facility in the C-Plus Mini Mart, 309 Main Street, Blakely.
Additionally, to further enhance 24-hour banking services, Telephone
Banking (Account Link), Loan by Phone, and Mortgage Link became available to
customers during 1997. These services provide consumers the ability to access
account information, perform related account transfers, and apply for a loan
through the use of a touch-tone telephone.
As of December 31, 1998, no material portion of the bank's deposits has
been obtained from a single person or entity. An industry concentration exists
with regard to the restaurant industry. Loans and letters of credit to the
restaurant industry approximated $11.0 million as of December 31, 1998. A
majority of these loans are secured by first mortgages on commercial properties
where third-party loan payments paid directly to the bank are the primary source
of repayment.
Competition
The bank is one of two financial institutions with principal offices in
Dunmore. Primary competition in the Dunmore, Scranton and Mid Valley markets
comes from several commercial banks and savings and loan associations operating
in these areas. Our Luzerne County offices share many of the same competitors we
face in Lackawanna County as well as several banks and savings & loans that are
not in our Lackawanna County market. Deposit deregulation has intensified the
competition for deposits among banks in recent years. Additional competition is
derived from credit unions, finance companies, brokerage firms, insurance
companies and retailers.
39
<PAGE>
SUPERVISION AND REGULATION
Securities Regulation
The company is under the jurisdiction of the Securities and Exchange
Commission and of state securities commission for matters relating to the
offering and sale of its securities. In addition, the company is subject to the
Securities and Exchange Commission's rules and regulations relating to periodic
reporting, proxy solicitation, and insider trading.
As a registered bank holding company, the company is subject to
supervision and regulation by the Board of Governors of the Federal Reserve
System under the Bank Holding Act of 1956. As a bank holding company, the
company's 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 the company stand ready to use its resources to provide adequate
capital funds to its bank subsidiary during periods of financial stress or
adversity.
The Bank Holding Company Act prohibits the company 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 the company 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 purpose of the Pennsylvania
Banking Code, the company is also subject to regulation and examination by the
Pennsylvania Department of Banking.
The bank is a national bank and a member of the Federal Reserve System
and 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 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
40
<PAGE>
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 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; and
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). The company and the
bank each satisfy the criteria to be classified as "well capitalized" within the
meaning of applicable regulations.
41
<PAGE>
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 to be
declared by the bank's Board of Directors 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 current 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 bad debts. The
Federal Reserve Board, the OCC and the FDIC have formal and informal policies
which provide that insured banks and bank holding companies should generally 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 which 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 such 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-rated premium schedule, the FDIC assigns, on a
semiannual basis, each depository institution to one of 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 purposed 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
42
<PAGE>
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 thrifts are subject for FICO bond payments
through 1999. Beginning in 2000, commercial banks and thrifts will be subject to
the same assessment for FICO bonds. The FICO assessment for the bank (and for
all commercial banks) for the first six months of 1999 is $.0063 for each $100
of deposits.
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 the company and the bank.
Interstate Banking
Prior to the passage of the Reigle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Interstate Banking Act"), 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 April 16, 1999, the bank had the equivalent of 174 full-time
employees. None of
43
<PAGE>
its employees is represented by a collective bargaining unit. The bank considers
relations with its employees to be good.
Properties
<TABLE>
<CAPTION>
Type of Use
Property Location Ownership
<S> <C> <C> <C>
1 102 East Drinker Street Own Main Office
Dunmore, PA
2 419-421 Spruce Street Own Scranton Branch
Scranton, PA
3 934 Main Avenue Own Dickson City Branch
Dickson City, PA
4 277 Scranton/Carbondale Lease Fashion Mall Branch
Highway
Scranton, PA
5 23 West Market Street Lease Wilkes-Barre Branch
Wilkes-Barre, PA
6 1700 N. Township Blvd. Lease Pittston Plaza Branch
Pittston, PA
7 754 Wyoming Avenue Lease Kingston Branch
Kingston, PA
8 1625 Wyoming Avenue Lease Exeter Branch
Exeter, PA
9 200 S. Blakely Street Lease Administrative Center
Dunmore, PA
10 107-109 S. Blakely Street Own Parking Lot
Dunmore, PA
11 114-116 S. Blakely Street Own Parking Lot
Dunmore, PA
12 1708 Tripp Avenue Own Parking Lot
Dunmore, PA
</TABLE>
Legal Proceedings
Neither the company nor the bank is a party to, nor is any of their
property the subject of, any material pending legal proceedings incidental to
the business of the company other than those arising in the ordinary course of
business. In the opinion of management, no such proceeding will have a material
adverse effect on the financial position or results of the company or the bank.
44
<PAGE>
MANAGEMENT
First National Community's Board of Directors presently consists of 13
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
executive officer and director of the company and the principal occupations of
these individuals during the past five years. The executive officers are
appointed to their respective offices annually. All directors of the company
also serve as directors of the 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 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 the company.
<TABLE>
<CAPTION>
Principal Occupations Director or
Name Age During Past Five Years Officer Since
<S> <C> <C> <C>
Angelo F. Bistocchi 79 Retired Restauranteur 1971
Vice President of the Board
of the Bank since 1978
Michael G. Cestone 36 President, 1988
S. G. Mastriani Company
(General Contractor)
Michael J. Cestone, Jr. 67 President, M. R. Co. 1969
CEO,
S. G. Mastriani Company
Secretary of the Board of
the Bank since 1971
Joseph Coccia 44 President, 1998
Coccia Ford, Inc. and
Coccia Lincoln Mercury,
Inc.
William P. Conaboy 40 Vice President, 1998
General Counsel
Allied Services
Dominick L. DeNaples 61 President, 1987
F & L Realty, Corp.
Vice President,
DeNaples Auto Parts, Inc.
and Keystone Landfill, Inc.
45
<PAGE>
<CAPTION>
<S> <C> <C> <C>
Louis A. DeNaples 58 President, 1972
DeNaples Auto Parts, Inc.
and Keystone Landfill, Inc.
Vice President,
F & L Realty Corp.
Chairman of the Board of
the Bank since 1988
Joseph J. Gentile 68 President, 1989
Dunmore Oil Co., Inc.
Martin F. Gibbons 83 Partner, 1988
Gibbons Ford
Joseph O. Haggerty 59 Retired Superintendent, 1987
Dunmore School District
George N. Juba 72 Consultant to the Bank 1973
William S. Lance 39 Senior Vice President since 1991
1994
J. David Lombardi 50 President and Chief 1986
Executive Officer since
1988
John R. Thomas 81 Chairman of the Board 1967
Wesel Manufacturing
Company (design and
manufacturing of precision
machinery)
</TABLE>
Family Relationships
Family relationships exist within the Bank between directors. Michael
J. Cestone, Jr., Secretary of the Board of Directors, is the father of Michael
G. Cestone. Dominick L. DeNaples is the brother of Louis A. DeNaples, Chairman
of the Board.
46
<PAGE>
The Board of Directors
During 1998, the Board of Directors of the Company held 5 meetings.
Directors received no remuneration for attendance at meetings of the Board of
Directors of the Company.
During 1998, the bank's Board of Directors held 23 meetings. Each of
the directors attended at least 75% of the meetings of the bank's board of
Directors for which they were scheduled, 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 the Company's 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 4 meetings of this type. All
non-management members attended at least 75% of the meetings for which they were
scheduled 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.)
In 1998, there were 12 meetings of the Senior Loan Committee. Each appointed
director was present for more than 75% of the meetings for which they were
scheduled except Mr. Michael J. Cestone, Jr., Mr. William P. Conaboy, Mr. John
R. Thomas and Mr. George N. Juba.
Compensation of Directors
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. The bank limits excused absences
to non-attendance 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 an additional fee of $7,500 in 1998.
47
<PAGE>
Compensation Committee Interlocks and Insider Participation
J. David Lombardi, President and Chief Executive Officer of the company
and the bank, is a member of the Board of Directors of the company and 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 the
company's compensation policies.
Employment Agreements
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, the Board of Directors of
the company approved and adopted an amendment to the employment agreement which
added the company as a party to the agreement. This agreement is designed to
assist the company and the bank in retaining a highly qualified executive and to
help insure that if the company is faced with an unsolicited tender offer
proposal, Mr. Lombardi will continue to manage the company without being unduly
distracted by the uncertainties of his personal affairs and thereby will be
better able to assist in evaluating such a proposal in an objective manner.
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 a director of the company and the bank and
receiving related fees.
The company 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 the company terminates 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 months, excluding bonuses or fringe or supplemental payments
previously authorized by the Board of Directors. In the event that the company
terminates him without just cause, Mr. Lombardi continues 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 the 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:
48
<PAGE>
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 in the "change of control."
Upon termination, the company is 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 for a period of 3 years, unless severance was made by the company
"without just cause."
COMPENSATION COMMITTEE REPORT
Board of Directors Report on Executive Compensation
The Board of Directors of First National Community Bancorp, Inc. is
responsible for the governance of the company and its subsidiary, First National
Community Bank. In fulfilling its fiduciary duties, the Board of Directors acts
in the best interests of the company's shareholders, customers and the
communities served by the company and the bank. To accomplish the company's
strategic goals and objectives, the Board of Directors engages competent persons
who undertake to accomplish these objectives with integrity and in a
cost-effective manner. The compensation of these individuals is part of the
Board of Directors' fulfillment of its duties to accomplish the company's
strategic mission. The bank provides compensation to the employees of the bank.
The company's employees receive no compensation.
The fundamental philosophy of the company's and the bank's compensation
program is to offer competitive compensation opportunities for all employees
based on the individual's contribution and personal performance. The
compensation program is administered by the Board of Directors, 12 of whom are
outside directors, and all of whom are listed below. The Board's objectives are
to establish a fair compensation policy to govern executive officers' base
salaries and incentive plans to attract and motivate competent, dedicated, and
ambitious managers, whose efforts will enhance the products and services of the
bank, the results of which will be improved profitability, increased dividends
to our shareholders and subsequent appreciation in the market value of our
shares.
49
<PAGE>
The compensation of the bank's top executives is reviewed and approved
annually by the Board of Directors. As a guideline for review in determining
base salaries, the Board uses a Regional National/Financial Industry Salary
Survey that covers financial institutions that are primarily in the Pennsylvania
marketplace, as well as institutions that are located outside of the
Commonwealth. This survey includes more institutions than are listed on the peer
group performance chart.
Under Section 162(m) of the Internal Revenue Code, the company may not
deduct certain forms of compensation in excess of $1,000,000 paid to a highly
compensated executive. Based upon a review of our current compensation plans and
practices, including the retirement plan and 401(k) plan, the Board concluded
that no action would be taken at this time and that further review would be made
during 1999.
The Board does not deem Section 162(m) of the Internal Revenue Code to
be applicable to the company at this time. The Board intends to monitor the
future application of Section 162(m) to the compensation paid to its executive
officers, and, in the event that this section becomes applicable, the Board
intends to amend the company's compensation plans to preserve the deductibility
of compensation payable under such plans.
The Board of Directors determined that the Chief Executive Officer's
1999 salary of $155,000 is appropriate. There is, however, no direct correlation
between the Chief Executive Officer's compensation, the Chief Executive
Officer's increase in compensation and the company's 1998 performance. The
increase in the Chief Executive's compensation was based on the Board's
subjective determination after review of all information that it deemed
relevant.
The Board of Directors established that the 1999 compensation of the
bank's executive officers increased by 5.87 % over 1998 compensation.
Compensation increases were determined by the Board based on its subjective
analysis of the individual's contribution to the company's strategic goals and
objectives. Although the performance and increases in compensation were measured
in light of these factors, there is no direct correlation between any specific
criterion and the employees compensation, nor is there any specific weight
provided to any such criteria in the Board's analysis. The determination by the
Board is subjective after review of all information that it deemed relevant.
General labor market conditions, the specific responsibilities of an
individual, and the individual's contributions to the company's success
influence total compensation opportunities available to the employees of the
bank. The Board reviews individuals annually on a calendar year basis. The bank
strives to offer compensation that is competitive with that offered by employers
of comparable size in the industry. Through these compensation policies, the
company strives to meet its strategic goals and objectives to its constituencies
and to provide compensation that is fair and meaningful to its employees.
50
<PAGE>
Submitted by the Board of Directors
Angelo Bistocchi Joseph J. Gentile
Michael G. Cestone Martin F. Gibbons
Michael J. Cestone, Jr. Joseph O. Haggerty
Joseph Coccia George N. Juba
William P. Conaboy J. David Lombardi
Dominick L. DeNaples John R. Thomas
Louis A. DeNaples
51
<PAGE>
PERFORMANCE GRAPH
[GRAPHIC]
In the printed document there appears a
line graph depicted by the following plot points:
<TABLE>
<CAPTION>
Period Ending
INDEX 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First National Community Bancorp, Inc. 100.00 104.78 142.17 201.18 256.66 468.50
NASDAQ-Total US 100.00 97.75 138.26 170.01 208.58 293.21
NASDAQ Bank Index 100.00 99.64 148.38 195.91 328.02 324.90
SNL < $500M Bank Asset-Size Index 100.00 107.55 147.13 189.37 322.82 294.76
</TABLE>
(1) SNL Securities is a research and publishing firm specializing in the
collection and dissemination of data on the banking, thrift and financial
services industries.
52
<PAGE>
BENEFICIAL OWNERSHIP OF SHARES
We set forth in the following table certain information, as of April
16, 1999, regarding the beneficial ownership of the company's common stock of
each director and nominee, all directors and principal officers as a group, and
all persons who own beneficially more than 5% of the outstanding common stock of
the company. Management knows of no persons, other than directors Louis A.
DeNaples and Dominick L. DeNaples, who own beneficially more than 5% of the
outstanding company 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 April 16, 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.
Beneficial Ownership Table
Shares
Beneficially
Owned Percent of Class
Angelo F. Bistocchi 20,146 0.84
Michael G. Cestone 9,984 0.42
Michael J. Cestone, Jr. (1) 36,392 1.52
Joseph Coccia 11,890 0.50
William P. Conaboy 936 0.04
Dominick L. DeNaples (2) 162,856 6.79
Louis A. DeNaples (3) 174,422 7.27
Joseph J. Gentile (4) 106,346 4.43
Martin F. Gibbons 20,554 0.86
Joseph O. Haggerty 3,872 0.16
George N. Juba 14,644 0.61
J. David Lombardi (5) 27,720 1.15
John R. Thomas (6) 38,479 1.60
All directors and executive officers as a
group (14) 628,925 26.22
53
<PAGE>
- ------------------------------------------
(1) Includes 8,090 shares owned individually by his spouse.
(2) Includes 12,000 shares held jointly with his children.
(3) Includes 2,282 shares owned individually by his spouse and 7,462 shares
held jointly with his children.
(4) Includes 21,670 shares owned individually by his spouse.
(5) Includes 144 shares held by his minor children. (6) Includes 5,400 shares
owned individually by his spouse.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Indebtedness of Management
Some of the directors and officers of the bank and the companies with
which they are associated were customers of, and had banking transactions with,
the bank in the ordinary course of its business during 1998 and the bank expects
to have such banking transactions in the future. All loans and commitments to
loan included in such transactions were made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons of similar creditworthiness and in
the opinion of the Board of Directors of the Bank, do not involve more than a
normal risk of collectibility or present other unfavorable features.
At March 31, 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 $17.3 million which represented
approximately 50% of the bank's equity capital accounts.
DESCRIPTION OF SECURITIES
Common Stock
The company is authorized to issue 5,000,000 shares of common stock,
par value $1.25 per share. At December 31, 1998, the company had 2,601,640
authorized but unissued shares. The Board of Directors may issue shares of
common stock without shareholder approval, as long as, there are authorized but
unissued shares available. Issuance of these shares could cause a dilution of
the book value of the stock and the voting power of shareholders. Shareholders
are entitled to 1 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.
54
<PAGE>
Legal Opinion
Shumaker Williams, P.C., 3425 Simpson Ferry Road, Camp Hill,
Pennsylvania, Special Counsel to the company and bank, has delivered an opinion
to the effect that the shares of common stock to be issued in connection with
the plan will be, when issued and delivered pursuant to the terms of the plan,
fully paid and non-assessable by the company.
Anti-Takeover Provisions
Under the Pennsylvania Business Corporation Law of 1988, the Articles
of Incorporation and the By-laws of the company, there are 12 provisions that
may be deemed to be "anti-takeover" in nature that are applicable to the
company. Two of these provisions are:
o the authorization of 5,000,000 shares of common stock; and
o the lack of preemptive rights for 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 the Board of Directors of the company 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 and
o other similar purposes.
However, these additional shares may also be used by the Board of Directors, if
consistent with its fiduciary responsibilities, to deter future attempts to gain
control over the company.
The company's By-Laws include provisions for a classified board. The
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 this may be considered desirable for them.
55
<PAGE>
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 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 the company has
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 the company's Articles of Incorporation and By-laws
require action by a majority of the Board of Directors, the Chairman, the
President or the Executive Committee of the company to call a Special Meeting of
Shareholders. The company's By-laws 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 By-laws
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 the company's Articles of Incorporation that:
o the affirmative vote of the holders of at least 75% of the
outstanding shares of the company's common stock is required to
approve any merger, consolidation, dissolution or liquidation of
the company or the sale of all or substantially all of its
assets; or
o the holders of at least 51% of the outstanding shares of common
stock of the company when at least a majority of Directors have
approved such transaction.
These provisions ensure that any extraordinary corporate transaction can be
effected only if it receives a clear mandate from the shareholders. These
provisions may give the company's management a veto power over certain
acquisitions regardless of whether the acquisition is desired by or beneficial
to a majority of the shareholders. The provisions assist management in retaining
their present positions. Also, these provisions may give the holders of a
minority of the company's outstanding shares a veto power over any merger,
consolidation, dissolution or liquidation of the company, and the sale of all or
substantially all of its 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 the company's
shares outstanding and entitled to vote would be required to approve any merger,
consolidation, dissolution, liquidation, and the sale of all of its assets.
56
<PAGE>
Another anti-takeover provision in the 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 the acquisition of the company would have on the
community;
o the effect the acquisition has on shareholders, employees,
depositors, suppliers and customers; and
o the reputation and business practices of the tender offeror.
This provision permits the Board of Directors to recognize the responsibilities
to these constituent groups and to the company and its subsidiaries and the
communities that they serve.
In addition to the provisions already described, under Pennsylvania
law, there are 4 additional provisions that may be deemed to be "anti-takeover"
in nature. These provisions apply to corporations that have their securities
registered with the Securities and Exchange Commission under Section 12 of the
Securities Exchange Act of 1934. The company's common stock is registered with
the SEC. As shareholders of a registered corporation, the company's shareholders
do not have a right to call a meeting of shareholders nor do they have a right
to propose an amendment to the company's 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 the company 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.
In the opinion of the Board of Directors, the elimination of these two
rights discourages attempts by shareholders to disrupt the business of the
company between annual meetings of the shareholders by calling a special
meeting. Furthermore, these provisions provide a greater time for consideration
of any shareholder proposal to the extent that the proposal must be deferred
until the next annual meeting of shareholders and must comply with certain
notice requirements and proxy solicitation rules in advance of the meeting.
These provisions do not affect the calling of a special meeting by the Chairman
of the Board or by a majority of the members of the Board of Directors or of its
Executive Committee if, in their judgment, there are matters to be acted upon
which are in the best interests of the company and its shareholders.
Another provision to which the company is subject, assures that 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 the company, that may not be
reflected in such price. "Control transaction" means the acquisition by a person
who has, or a group of persons acting
57
<PAGE>
in concert that has, voting power over voting shares of the company that would
entitle the holders thereof to cast at least 20% of the votes that all
shareholders would be entitled to cast in an election of directors of the
company. 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 the shares of the company for
payment in an amount equal to the fair value of each voting share as of the date
on which the control transaction occurs.
It has become a relatively common practice in corporate takeovers to
pay cash to acquire controlling equity in an company and, then, to acquire the
remaining equity interest in the company by paying a price for the remaining
shares that is lower than the price paid to acquire control or is in a less
desirable form of consideration. Frequently, these securities do not have an
established trading market at the time of issue. The Board of Directors
considers these "two-tier pricing" tactics to be unfair to the company's
shareholders. By their very nature, these tactics tend, and are designed, to
cause concern on the part of shareholders that if they do not act promptly, they
risk either:
o being relegated to the status of minority shareholders in a
controlled company; or
o being forced to accept a lower price for all of their shares.
Thus, two-tier pricing unduly pressures shareholders into selling their shares
as quickly as possible, either to the purchaser or in the open market, without
having a genuine opportunity to make a considered investment choice between:
o remaining a shareholder of the company; or
o disposing of their shares.
These sales facilitate the purchaser's acquisition of a sufficient interest in
the company and enable the purchaser to force the exchange of the remaining
shares for a lower price.
While legislators designed the fair price provision to help assure fair
treatment of all shareholder's 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 does not preclude the Board of Directors' opposition to future
takeover proposals that it believes are in the best interests of the company and
its shareholders, whether or not the proposals satisfy 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. Business combination means any one of the
following transactions involving an "interested shareholder":
58
<PAGE>
o a merger or consolidation of the company with an interested
shareholder or any other corporation which is, or after the
merger or consolidation would be, an affiliate or associate of
the interested shareholder;
o a sale, lease, exchange, mortgage, pledge, transfer or other
disposition to or with the interested shareholder or any
affiliate or associate of the interested shareholder of the
assets of the company or any subsidiary of the company having an
aggregate market value equal to 10% or more of the consolidated
assets, of all outstanding shares or of the consolidated earning
power and net income, of the company;
o the issuance or transfer by the company or any subsidiary of any
shares of the company or any subsidiary which has an aggregate
market value at least equal to 5% of the aggregate market value
of all outstanding shares to an interested shareholder or any
affiliate or associate;
o the adoption of any plan for the liquidation or dissolution of
the company proposed by, or under the terms of any agreement
with, the interested shareholder or any affiliate or associate;
o a reclassification of securities or recapitalization of the
company or any merger of consolidation of the company with any
subsidiary of the company or any other transaction proposed by,
or under the terms of any agreement with, the interested
shareholder or any affiliate or associate, which has the effect,
directly or indirectly, of increasing the proportionate share of
the outstanding shares of the company owned by the interested
shareholder; or
o the receipt by the interested shareholder or any affiliate or
associate of the benefit, directly or indirectly, of any loans,
advances, guarantees, pledges or other financial assistance or
any tax credits or other tax advantages provided by or through
the company.
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 company.
The company may not engage in a business combination with an interested
shareholder other than:
o a business combination approved by the Board of Directors prior
to the date on which the interested shareholder acquires at least
20% of the company's common stock or where the purchase of shares
by the interested shareholder has been approved by the Board of
Directors of the company;
o a business combination approved by a majority of the votes that
all shareholders would be entitled to cast, not including those
shares held by the interested shareholder, at a meeting called
for such purpose no earlier than three months after the
interested shareholder became, and if at the time of the meeting
the interested shareholder is, the beneficial owner, directly or
indirectly, of shares
59
<PAGE>
entitling the interested shareholder to cast at least 70% of
the votes that all shareholders would be entitled to cast in an
election of Directors of the company if the business
combination satisfies certain minimum conditions;
o a business combination approved by the affirmative vote of all of
the shareholders of the outstanding shares;
o a business combination approved by a majority of the votes that
all shareholders would be entitled to cast not including those
shares beneficially owned by the interested shareholder at a
meeting called for such purpose no earlier than 5 years after the
interested shareholder's share acquisition date; and
o a business combination approved at a shareholders' meeting called
for such purpose no earlier than 5 years after the interested
shareholder's share acquisition date and that meets certain
minimum conditions.
The provision relating to business combinations is designed to help
assure that if, despite the company's best efforts to remain independent, the
company is nevertheless taken over, each shareholder will be treated fairly
vis-a-vis every other shareholder and that arbitragers and professional
investors will not profit at the expense of the company's 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 premium price for their shares in a takeover. The
Board of Directors believes that the business combination provision would not
preclude the Board of Director's opposition to any future takeover proposal that
it believes not to be in the best interests of the company and its shareholders,
whether or not such a 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. Under Subchapter G, the acquisition of
shares that increase the acquiror'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 all disinterested shares of the corporation; and
o all voting shares of the corporation.
Voting rights that are restored by shareholder approval lapse if any proposed
control-share- acquisition that is approved is not consummated within 90 days
after shareholder approval. Furthermore, control-shares that are not accorded
voting rights or whose rights lapse regain voting rights on transfer to another
person who is not an affiliate of the acquiror. If they constitute
control-shares for the transferee, the transferee must comply with the
subchapter too. If the acquiror 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, the company may redeem the
control shares at the average of the high and low price on the date of
60
<PAGE>
the notice of redemption.
Subchapter H of Chapter 25 also applies to registered corporations.
Under Subchapter H, a control person, a person who owns shares with 20% or more
voting power, must disgorge any profits from the disposition of any equity
securities to the company, 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
or other merger or acquisition proposal that a majority of the shareholders
might view to be in their best interests as the offer might include a
substantial premium over the market price of the company's common stock at that
time. In addition, these provisions may have the effect of assisting the
company's 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 the company's business.
LEGAL MATTERS
The legality of the shares of First National common stock to be issued
in connection with the plan and certain other legal matters relating to the
transaction will be passed upon by the law firm of Shumaker Williams, P.C., Camp
Hill, Pennsylvania, Special Counsel to the company.
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 proxy
statement have been audited by Demetrius & Company, LLC., 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 for the year ended December 31,
1996, were audited by other auditors whose report, dated January 21, 1997,
expressed an unqualified opinion on those statements.
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 proxy statement have been audited by
Robert Rossi & Co., Olyphant, Pennsylvania, 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.
61
<PAGE>
AVAILABLE INFORMATION
First National Community is subject to the informational requirements
of the Securities Exchange Act of 1934, and in accordance therewith, files
reports, proxy statements and other information with the Securities and Exchange
Commission. The reports, proxy statements and other information filed by First
National Community can be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and at the Commission's Regional Offices at 7 World
Trade Center, 13th Floor, New York, New York 10048, and 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661, and copies may be obtained at the
prescribed rates from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549. The Commission also maintains a
web site that contains reports, proxy statements and other information regarding
registrants that file electronically with the Commission. The address of the
site is http:\\www.sec.gov.
First National Community has filed a Registration Statement on Form S-1
under the Securities Act of 1933 with the Commission, with respect to the
securities offered by this prospectus. This prospectus, which constitutes part
of the Registration Statement, omits certain of the information contained in the
Registration Statement and the exhibits to the Registration Statement on file
with the Commission pursuant to the Securities Act and the Commission's rules
and regulations.
62
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
First National Community Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of First National
Community Bancorp, Inc. and Subsidiaries (the "Company") as of December 31, 1998
and 1997, and the related consolidated statement of income, changes in
stockholders' equity and cash flows for each of the two years in the period
ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. The consolidated
statements of income, changes in stockholders' equity and cash flows for the
year ended December 31, 1996, were audited by other auditors whose report dated
January 21, 1997, expressed an unqualified opinion on those statements.
We conducted our audits, in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly in all material respects, the financial position of First National
Community Bancorp, Inc. and Subsidiaries as of December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the two years
in the period ended December 31, 1998 in conformity with generally accepted
accounting principles.
Demetrius & Company, L.L.P.
Wayne, New Jersey
January 19, 1999
F-1
<PAGE>
FIRST NATIONAL COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 10,026,909 $ 9,231,033
Federal funds sold 3,400,000 5,450,000
------------ ------------
Total cash and cash equivalents 13,426,909 14,681,033
Interest-bearing balances with financial institutions 2,478,000 1,586,000
Securities:
Available-for-sale, at fair value 124,660,971 114,797,633
Held-to-maturity, at cost (fair value $714,061 and $680,135) 711,213 678,049
Federal Reserve Bank and FHLB stock, at cost 6,457,900 5,891,100
Net loans 324,609,886 280,730,567
Bank premises and equipment 4,812,507 4,095,717
Accrued interest receivable 2,656,614 3,006,367
Other assets 3,571,036 2,868,414
------------ ------------
TOTAL ASSETS $483,385,036 $428,334,880
============ ============
LIABILITIES
Deposits:
Demand $ 39,426,668 $ 34,994,825
Interest-bearing demand 51,239,606 50,702,813
Savings 42,017,322 39,700,320
Time ($100,000 and over) 69,341,302 53,757,354
Other time 178,013,890 166,512,287
------------ ------------
Total deposits 380,038,788 345,667,599
Borrowed funds 65,175,582 47,834,596
Accrued interest payable 2,587,081 2,199,618
Other liabilities 904,955 1,053,291
------------ ------------
Total liabilities $448,706,406 $396,755,104
============ ============
STOCKHOLDERS' EQUITY
Common Stock ($1.25 par)
Authorized: 5,000,000 shares
Issued and outstanding: 2,398,360 shares in 1998 and
1,199,180 shares in 1997 $ 2,997,950 $ 1,498,975
Additional paid-in capital 6,267,107 6,267,107
Retained earnings 24,622,218 22,716,763
Accumulated other comprehensive income 791,355 1,096,931
------------ ------------
Total stockholders' equity 34,678,630 31,579,776
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $483,385,036 $428,334,880
============ ============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-2
<PAGE>
FIRST NATIONAL COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For The Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 25,558,631 $ 23,728,649 $ 20,919,180
------------ ------------ ------------
Interest and dividends on securities:
U.S. Treasury and government agencies 5,831,281 4,884,634 3,006,414
State and political subdivisions 1,707,443 1,570,552 1,625,971
Other securities 408,204 262,013 124,790
------------ ------------ ------------
Total interest and dividends on securities 7,946,928 6,717,199 4,757,175
------------ ------------ ------------
Interest on balances with financial institutions 178,439 170,395 100,590
Interest on federal funds sold 222,179 289,800 293,554
------------ ------------ ------------
TOTAL INTEREST INCOME 33,906,177 30,906,043 26,070,499
============ ============ ============
INTEREST EXPENSE
Interest-bearing demand 1,225,361 1,110,095 937,285
Savings 1,000,539 1,038,157 1,162,953
Time ($100,000 and over) 3,264,981 2,826,583 2,420,743
Other time 9,763,746 9,252,860 7,750,313
Interest on borrowed funds 3,206,476 2,098,314 1,034,540
------------ ------------ ------------
TOTAL INTEREST EXPENSE 18,461,103 16,326,009 13,305,834
============ ============ ============
Net interest income before provision for credit losses 15,445,074 14,580,034 12,764,665
Provision for credit losses 920,000 1,110,000 820,000
------------ ------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 14,525,074 13,470,034 11,944,665
------------ ------------ ------------
OTHER INCOME
Service charges 780,443 758,560 692,716
Net gain/(loss) on the sale of securities 124,908 (8,031) 130,023
Net gain on the sale of other real estate 46,522 377,192 1,025
Net gain on the sale of other assets 0 155,437 0
Other 631,005 344,394 274,987
------------ ------------ ------------
TOTAL OTHER INCOME 1,582,878 1,627,552 1,098,751
------------ ------------ ------------
OTHER EXPENSES
Salaries and employee benefits 4,749,016 4,441,399 4,076,192
Occupancy expense 869,112 841,644 811,979
Equipment expense 676,994 609,695 484,423
Other operating expense 3,128,155 2,946,026 2,530,998
------------ ------------ ------------
TOTAL OTHER EXPENSES 9,423,277 8,838,764 7,903,592
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 6,684,675 6,258,822 5,139,824
Provision for income taxes 1,577,408 1,615,850 1,265,214
------------ ------------ ------------
NET INCOME $ 5,107,267 $ 4,642,972 $ 3,874,610
============ ============ ============
NET INCOME PER SHARE $ 2.13 $ 1.94 $ 1.62
============ ============ ============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-3
<PAGE>
FIRST NATIONAL COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $ 34,494,684 $ 30,612,970 $ 25,723,197
Fees and commissions received 1,411,448 1,102,955 992,084
Interest paid (18,073,640) (16,153,652) (13,208,307)
Cash paid to suppliers and employees (9,087,534) (8,697,078) (7,834,212)
Income taxes paid (1,942,398) (1,608,001) (1,230,000)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,802,560 5,257,194 4,442,762
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities available for sale:
Proceeds from maturities 1,500,000 0 0
Proceeds from sales prior to maturity 14,451,152 8,920,368 25,175,471
Proceeds from calls prior to maturity 46,533,293 17,251,245 6,941,547
Purchases (73,549,655) (63,401,519) (45,969,659)
Securities held to maturity:
Proceeds from calls prior to maturity 256,626 0 0
Purchases (231,559) (655,287) 0
Net (increase)/decrease in interest-bearing bank balances (892,000) 1,185,000 (1,996,000)
Net increase in loans to customers (44,752,797) (21,583,667) (31,030,999)
Capital expenditures (1,369,944) (684,379) (1,044,562)
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (58,054,884) (58,968,239) (47,924,202)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, money market demand,
NOW accounts, and savings accounts 7,285,640 5,766,570 9,362,879
Net increase in certificates of deposit 27,085,551 18,932,575 35,866,961
Net increase in borrowed funds 18,180,986 26,655,537 7,065,285
Repayment of debt (851,140) (75,852) (71,483)
Cash dividends paid (1,702,837) (1,395,743) (1,177,704)
Cash paid in lieu of fractional shares in conjunction with
10% stock dividend 0 (11,132) (6,050)
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 49,998,200 49,871,955 51,039,888
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (1,254,124) (3,839,090) 7,558,448
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 14,681,033 18,520,123 10,961,675
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 13,426,909 $ 14,681,033 $ 18,520,123
============ ============ ============
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net Income $ 5,107,267 $ 4,642,972 $ 3,874,610
----------- ----------- -----------
Adjustments to reconcile net income to net cash Provided by operating
activities:
Amortization and accretion, net 238,755 66,408 (4,622)
Depreciation and amortization 653,154 611,637 491,602
Provision for credit losses 920,000 1,110,000 820,000
Provision for deferred taxes (306,402) (46,495) 61,064
Loss/(Gain) on sale of securities (124,908) 8,031 (130,023)
Gain on sale of other real estate (46,522) (377,192) (1,025)
Gain on sale of other assets 0 (155,437) 0
Increase in interest payable 387,463 172,244 97,527
Increase in taxes payable (16,215) 16,215 0
Increase (decrease) in accrued expenses and other liabilities 128,145 231,801 174,875
Decrease (increase) in prepaid expenses and other assets (487,930) (663,509) (598,566)
Decrease (increase) in interest receivable 349,753 (359,481) (342,680)
----------- ----------- -----------
Total adjustments 1,695,293 614,222 568,152
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 6,802,560 $ 5,257,194 $ 4,442,762
=========== =========== ===========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-5
<PAGE>
FIRST NATIONAL COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
For The Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
COMP-
REHEN- CONNON STOCK ADD'L
SIVE ------ ----- PAID-IN RETAINED
INCOME SHARES AMOUNT CAPITAL EARNINGS
--------------- -------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1995 991,504 $1,239,380 $6,267,107 $17,049,405
Comprehensive Income:
Net income for the year $3,874,610 3,874,610
Other comprehensive income, net of tax:
Unrealized loss on securities
available-for-sale, net of deferred
income tax benefit of $312,670 (476,925)
Reclassification adjustment (130,023)
Total other comprehensive income,
net of tax (606,948)
---------------
Comprehensive Income $3,267,662
===============
Cash dividends paid, $0.49 per share (1,177,704)
10% stock dividend 98,920 123,650 (129,700)
-------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1996 1,090,424 $1,363,030 $6,267,107 $19,616,611
Comprehensive Income:
Net income for the year $4,642,972 4,642,972
Other comprehensive income, net
of tax:
Unrealized gain on securities
available-for-sale, net of deferred
income taxes of $367,211 704,790
Reclassification adjustment 8,031
Total other comprehensive income, ---------------
net of tax 712,821
---------------
Comprehensive Income $5,355,793
===============
Cash dividends paid, $0.58 per share (1,395,743)
10% stock dividend 108,756 135,945 (147,077)
-------------- -------------- -------------- ----------------
BALANCES, DECEMBER 31, 1997 1,199,180 $1,498,975 $6,267,107 $22,716,763
Comprehensive Income:
Net income for the year $5,107,267 5,107,267
Other comprehensive income, net
of tax:
Unrealized loss on securities
available-for-sale, net of deferred
income tax benefit of $157,418 (180,668)
Reclassification adjustment (124,908)
---------------
Total other comprehensive income,
net of tax (305,576)
---------------
Comprehensive Income $4,801,691
===============
Cash dividends paid, $0.71 per share (1,702,837)
100% stock dividend 1,199,180 1,498,975 (1,498,975)
-------------- -------------- -------------- ----------------
BALANCES, DECEMBER 31, 1998 2,398,360 $2,997,950 $6,267,107 $24,622,218
============== ============== ============== ================
ACCUM-
ULATED
OTHER
COMP-
REHEN-
SIVE
INCOME TOTAL
-------------- ---------------
<S> <C> <C>
BALANCES, DECEMBER 31, 1995 $991,058 $25,546,950
Comprehensive Income:
Net income for the year 3,874,610
Other comprehensive income, net of tax:
Unrealized loss on securities
available-for-sale, net of deferred
income tax benefit of $312,670
Reclassification adjustment
Total other comprehensive income,
net of tax (606,948) (606,948)
Comprehensive Income
Cash dividends paid, $0.49 per share (1,177,704)
10% stock dividend (6,050)
-------------- ---------------
<S> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1996 $384,110 $27,630,858
Comprehensive Income:
Net income for the year 4,642,972
Other comprehensive income, net
of tax:
Unrealized gain on securities
available-for-sale, net of deferred
income taxes of $367,211
Reclassification adjustment
Total other comprehensive income,
net of tax 712,821 712,821
Comprehensive Income
Cash dividends paid, $0.58 per share (1,395,743)
10% stock dividend (11,132)
-------------- ---------------
BALANCES, DECEMBER 31, 1997 $1,096,931 $31,579,776
Comprehensive Income:
Net income for the year 5,107,267
Other comprehensive income, net
of tax:
Unrealized loss on securities
available-for-sale, net of deferred
income tax benefit of $157,418
Reclassification adjustment
Total other comprehensive income,
net of tax (305,576) (305,576)
Comprehensive Income
Cash dividends paid, $0.71 per share (1,702,837)
100% stock dividend 0
-------------- ---------------
BALANCES, DECEMBER 31, 1998 $791,355 $34,678,630
============== ===============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-6
<PAGE>
Notes to Consolidated Financial Statements:
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accounting and reporting policies that affect the more significant
elements of First National Community Bancorp, Inc.'s (the "Company") financial
statements are summarized below. They have been followed on a consistent basis
and are in accordance with generally accepted accounting principles and conform
to general practice within the banking industry.
NATURE OF OPERATIONS
The Company is a registered bank holding company, incorporated under the
laws of the state of Pennsylvania. It is the Parent Company of First National
Community Bank (the "Bank") and its wholly owned subsidiary FNCB Realty, Inc.
The Bank provides a variety of financial services to individuals and
corporate customers through its eight banking locations located in northeastern
Pennsylvania. It provides a full range of commercial banking services which
includes commercial, residential and consumer lending. Additionally, the Bank
provides to it's customers a variety of deposit products, including demand
checking and interest-bearing deposit accounts.
FNCB Realty, Inc.'s operating activities include the acquisition, holding,
and disposition of certain real estate acquired in satisfaction of loan
commitments owed by third party debtors to First National Community Bank.
PRINCIPLES OF CONSOLIDATION
On July 1, 1998, the Company acquired First National Community Bank in a
business combination accounted for as a pooling of interests. The Bank became
the wholly owned subsidiary of the Company through the exchange of 1,199,180
shares of its common stock for all of the outstanding stock of the Bank.
The Company did not conduct business activities prior to the July 1, 1998
stock exchange. Accordingly, the Parent Company Only financial information
included in Note 14 of these financial statements presents the Company's results
of operations and cash flows for its initial period of operations commencing
July 1, 1998 and ending on December 31, 1998.
The accompanying consolidated financial statements for 1998 are based on
the assumption that the companies were combined for the full year, and the
financial statements of prior years have been restated to give effect to the
combination. All significant intercompany transactions and balances have been
eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
SECURITIES
Debt securities that management has the ability and intent to hold to
maturity are classified as held-to-maturity and carried at cost, adjusted for
amortization of premium and accretion of discounts using methods approximating
the interest method. Other marketable securities are classified as
available-for-sale and are carried at fair value. Unrealized gains and losses on
securities available-for-sale are recognized as direct increases or decreases in
stockholders' equity. Cost of securities sold is recognized using the specific
identification method.
LOANS
Loans are stated at face value, net of unearned discount, unamortized loan
fees and costs and the allowance for credit losses. Unearned discount on
installment loans is recognized as income over the terms of the loans primarily
using the "actuarial method." Interest on all other loans is recognized on the
accrual basis, based upon the principal amount outstanding.
Loans are placed on nonaccrual when a loan is specifically determined to be
impaired or when management believes that the collection of interest or
principal is doubtful. This is generally when a default of interest or principal
has existed for 90 days or more, unless such loan is fully secured and in the
process of collection. When interest accrual is discontinued, interest credited
to income in the current year is reversed and interest income in prior years is
charged against the allowance for credit losses. Any payments received are
applied, first to the outstanding loan amounts, then to the recovery of any
charged-off loan amounts. Any excess is treated as a recovery of lost interest.
LOAN IMPAIRMENT
The Bank has adopted the provisions of SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures," in it's
evaluation of the loan portfolio. SFAS 114 requires that certain impaired loans
be measured based on the present value of expected future cash flows discounted
at the loan's original effective interest rate. As a practical expedient,
impairment may be measured based on the loan's observable market price or the
F-7
<PAGE>
fair value of the collateral if the loan is collateral dependent. When the
measure of the impaired loan is less than the recorded investment in the loan,
the impairment is recorded through a valuation allowance.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in the loan
portfolio. The amount of the allowance is based on management's evaluation of
the collectibility of the loan portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss experience, specific impaired
loans, and economic conditions. Allowances for impaired loans are generally
determined based on collateral values or the present value of estimated cash
flows. The allowance is increased by a provision for credit losses, which is
charged to expense, and reduced by charge-offs, net of recoveries. Changes in
the allowance relating to impaired loans are charged or credited to the
provision for credit losses.
LOAN FEES
Loan origination and commitment fees, as well as certain direct loan
origination costs are deferred and the net amount is amortized as an adjustment
of the related loan's yield. The Bank is generally amortizing these amounts over
the life of the related loans except for residential mortgage loans, where the
timing and amount of prepayments can be reasonably estimated. For these mortgage
loans, the net deferred fees are amortized over an estimated average life of 7.5
years. Amortization of deferred loan fees is discontinued when a loan is placed
on nonaccrual status.
OTHER REAL ESTATE (ORE)
Real estate acquired in satisfaction of a loan and in-substance
foreclosures are reported in other assets. In-substance foreclosures are
properties in which the borrower has little or no equity in collateral, where
repayment of the loan is expected only from the operation or sale of the
collateral, and the borrower either effectively abandons control of the property
or the borrower has retained control of the property but his ability to rebuild
equity based on current financial conditions is considered doubtful. Properties
acquired by foreclosure or deed in lieu of foreclosure and properties classified
as in-substance foreclosures are transferred to ORE and recorded at the lower of
cost or fair value (less estimated selling cost for disposal of real estate) at
the date actually or constructively received. Costs associated with the repair
or improvement of the real estate are capitalized when such costs significantly
increase the value of the asset, otherwise, such costs are expensed. An
allowance for losses on ORE is maintained for subsequent valuation adjustments
on a specific property basis.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost less accumulated
depreciation. Routine maintenance and repair expenditures are expensed as
incurred while significant expenditures are capitalized. Depreciation expense is
determined on the straight-line method over the following ranges of useful
lives:
Buildings and improvements 10 to 40 years
Furniture, fixtures and equipment 3 to 15 years
Leasehold improvements 5 to 30 years
ADVERTISING COSTS
Advertising costs are charged to operations in the year incurred and
totaled $341,000, $272,000 and $259,000 in 1998, 1997 and 1996, respectively.
INCOME TAXES
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
CASH EQUIVALENTS
For purposes of reporting cash flows, cash equivalents include cash on
hand, amounts due from banks, and federal funds sold. Generally, federal funds
are purchased and sold for one-day periods.
NET INCOME PER SHARE
Net income per share of common stock is computed using the weighted average
number of shares outstanding during the periods. Such shares amounted to
2,398,360 in 1998, 1997 and 1996 after giving retroactive effect to the 100%
stock dividend declared in 1998 and the 10% stock dividends declared in 1997 and
1996.
COMPREHENSIVE INCOME
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("SFAS 130"). SFAS 130 establishes standards for reporting and display of
comprehensive income and its components in the financial statements. SFAS 130 is
effective for fiscal years beginning after December 15, 1997. Reclassification
of financial statements for earlier periods provided for comparative purposes is
F-8
<PAGE>
required. The adoption of SFAS had no impact on the Company's consolidated
results of operations, financial position or cash flows.
NEW FINANCIAL ACCOUNTING STANDARDS
During 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which establishes accounting
and reporting standards for derivative instruments and for hedging activities.
The statement requires that all derivatives be recognized as either assets or
liabilities in the statement of financial position and be measured at fair
value. SFAS 133 is effective for fiscal quarters of all fiscal years beginning
after June 15, 1999; earlier application is permitted. The Company does not hold
or issue derivative instruments as defined by SFAS 133; and accordingly, it is
the opinion of management that there will be no future impact from this recent
accounting standard.
2. RESTRICTED CASH BALANCES:
The Bank is required to maintain certain average reserve balances as
established by the Federal Reserve Bank. The amount of those reserve balances
for the reserve computation period which included December 31, 1998 was $75,000,
which amount was satisfied through the restriction of vault cash.
In addition, the Bank maintains compensating balances at correspondent
banks, most of which are not required, but are used to offset specific charges
for services. At December 31, 1998, the amount of these balances was $1,445,000.
3. SECURITIES:
Securities have been classified in the consolidated financial statements
according to management's intent. The carrying amount of securities and their
approximate fair values at December 31 follow:
Available-for-sale Securities:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
December 31, 1998
-----------------
U.S. Treasury securities and
obligations of U.S. government
agencies $ 12,366,088 $ 46,851 $ 15,230 $ 12,397,709
Obligations of state and political
subdivisions 32,452,456 1,282,985 64,292 33,671,149
Mortgage-backed securities 77,632,136 223,008 265,218 77,589,926
Corporate debt securities 1,001,268 3,894 12,975 992,187
Equity securities 10,000 0 0 10,000
------------ ------------ ------------ ------------
Total $123,461,948 $ 1,556,738 $ 357,715 $124,660,971
============ ============ ============ ============
December 31, 1997
-----------------
U.S. Treasury securities and
obligations of U.S. government
agencies $ 31,071,952 $ 93,955 $ 35,549 $ 31,130,358
Obligations of state and political
subdivisions 25,854,741 1,187,815 0 27,042,556
Mortgage-backed securities 56,198,923 602,305 186,509 56,614,719
Equity securities 10,000 0 0 10,000
------------ ------------ ------------ ------------
Total $113,135,616 $ 1,884,075 $ 222,058 $114,797,633
============ ============ ============ ============
</TABLE>
F-9
<PAGE>
Held-to-maturity Securities:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
December 31, 1998
-----------------
U.S. Treasury securities and
obligations of U.S. government
agencies $711,213 $ 5,385 $ 2,537 $714,061
======== ======== ======== ========
December 31, 1997
-----------------
U.S. Treasury securities and
obligations of U.S. government
agencies $678,049 $ 3,793 $ 1,707 $680,135
======== ======== ======== ========
</TABLE>
The following table shows the amortized cost and approximate fair value of
the Bank's debt securities at December 31, 1998 using contracted maturities.
Expected maturities will differ from contractual maturity because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Available-for-sale Held-to-maturity
Amortized Fair Amortized Fair
Cost Value Cost Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Amounts maturing in:
One Year or Less $ 2,005,168 $ 2,014,374 $ 0 $ 0
One Year through Five Years 2,232,273 2,300,203 0 0
After Five Years through Ten 14,934,112 15,343,980 0 0
Years
After Ten Years 26,648,260 27,402,488 711,213 714,061
Mortgaged-backed Securities 77,632,135 77,589,926 0 0
------------ ------------ ------------ ------------
Total $123,451,948 $124,650,971 $ 711,213 $ 714,061
============ ============ ============ ============
</TABLE>
Gross proceeds from the sale of securities for the years ended December 31,
1998, 1997, and 1996 were $14,451,152, $8,920,368, and $25,175,471, respectively
with the gross realized gains being $153,291, $64,826 and $232,306,
respectively, and gross realized losses being $28,383, $72,857 and $102,283,
respectively.
At December 31, 1998 and 1997, securities with a carrying amount of
$73,195,096 and $51,207,254, respectively, were pledged as collateral to secure
public deposits and for other purposes.
4. LOANS:
Major classifications of loans are summarized as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
1998 1997
--------- ---------
<S> <C> <C>
Real estate loans, secured by residential properties $ 98,534 $ 96,030
Real estate loans, secured by nonfarm, nonresidential
properties 113,020 94,236
Commercial and industrial loans 49,796 36,790
Loans to individuals for household, family and other
personal expenditures 58,799 46,174
Loans to state and political subdivisions 8,570 10,938
All other loans, including overdrafts 178 195
--------- ---------
Gross loans 328,897 284,363
Less: Unearned discounts on loans (4) (10)
--------- ---------
Total loans 328,893 284,353
Less: Allowance for credit losses (4,283) (3,623)
--------- ---------
Net loans $ 324,610 $ 280,730
========= =========
</TABLE>
F-10
<PAGE>
Changes in the allowance for credit losses were as follows:
(dollars in thousands)
1998 1997 1996
------ ------ ------
Balance, beginning of year $3,623 $3,167 $2,800
Recoveries credited to allowance 47 43 128
Provision for credit losses 920 1,110 820
------ ------ ------
TOTAL 4,590 4,320 3,748
Losses charged to allowance 307 697 581
------ ------ ------
Balance, end of year $4,283 $3,623 $3,167
====== ====== ======
Information concerning the Company's recorded investment in nonaccrual and
restructured loans is as follows:
(dollars in thousands)
1998 1997
------ ------
Nonaccrual loans
Impaired $ 0 $ 0
Other 845 207
Restricted loans 289 744
------ ------
Total $1,134 $ 951
====== ======
The interest income that would have been earned in 1998, 1997 and 1996 on
nonaccrual and restructured loans outstanding at December 31, 1998, 1997 and
1996 in accordance with their original terms approximated $125,000, $99,000 and
$154,000. The interest income actually realized on such loans in 1998, 1997 and
1996 approximated $51,000, $85,000 and $37,000. As of December 31, 1998, there
were no outstanding commitments to lend additional funds to borrowers of
impaired, restructured or nonaccrual loans.
5. BANK PREMISES AND EQUIPMENT:
Bank premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land $ 783,150 $ 783,150
Buildings 2,268,485 2,236,630
Furniture, fixtures and equipment 3,889,518 3,149,059
Leasehold improvements 1,755,841 1,281,333
---------- ----------
Total 8,696,994 7,450,172
Less accumulated depreciation 3,884,487 3,354,455
---------- ----------
Net $4,812,507 $4,095,717
========== ==========
</TABLE>
F-11
<PAGE>
6. DEPOSITS:
At December 31, 1998, time deposits including certificates of deposit and
Individual Retirement Accounts have the scheduled maturities as follows:
(in thousands)
Time Deposits
$100,000 Other
and Over Time Deposits Total
-------- ------------- --------
1999 $ 64,374 $115,319 $179,693
2000 3,762 39,552 43,314
2001 100 13,771 13,871
2002 1,105 4,296 5,401
2003 and Thereafter 0 5,076 5,076
-------- -------- --------
Total $ 69,341 $178,014 $247,355
======== ======== ========
7. BORROWED FUNDS:
Borrowed funds at December 31, 1998 and 1997 include the following:
1998 1997
----------- -----------
Treasury Tax and Loan Demand Note $ 437,119 $ 306,948
Borrowings under Lines of Credit 64,738,463 47,527,648
----------- -----------
Total $65,175,582 $47,834,596
=========== ===========
The following table presents Federal Home Loan Bank of Pittsburgh ("FHLB of
Pittsburgh") advances at the earlier of the callable date or maturity date (in
thousands):
December 31, 1998
Weighted
Average
Amount Interest Rate
------- -------------
Within one year $22,977 5.89%
After one year but within two years 13,178 5.89%
After two years but within three years 8,195 5.88%
After three years but within four years 388 6.42%
After four years but within five years 15,000 5.57%
After five years 5,000 5.15%
-------
$64,738
-------
The FHLB of Pittsburgh advances are comprised of $49,738,000 of fixed rate
advances and $15,000,000 of variable rate borrowings. All advances are
collateralized either under a blanket pledge agreement by one to four family
mortgage loans or with mortgage-backed securities.
At December 31, 1998, the Company had available from the FHLB of Pittsburgh an
open line of credit for $14,620,000 which expires on November 24, 1999. The line
of credit may bear interest at either a fixed rate or a variable rate, such rate
being set at the time of the funding request. At December 31, 1998 and 1997, the
Company had no borrowings under this credit line. In addition, at December 31,
1998, the Company had available overnight repricing lines of credit with other
correspondent banks totaling $7,000,000. There were no borrowings under these
lines at December 31, 1998 or 1997.
F-12
<PAGE>
8. BENEFIT PLANS:
The Bank has a defined contribution profit sharing plan which covers all
eligible employees. The Bank's contribution to the plan is determined at
management's discretion at the end of each year and funded. Contributions to the
plan in 1998, 1997 and 1996 amounted to $250,000, $220,000, and $190,000,
respectively.
The Bank also fully funded a non-qualified deferred compensation plan in
1986 covering one of its former executive officers. The Bank is accruing the
present value of its obligation for deferred compensation benefits expected to
become payable under the terms of the plan. The provision for such benefits
amounted to $3,800 in 1998, $4,871 in 1997, and $5,835 in 1996. Benefits paid to
the former executive officer under the aforementioned non-qualified deferred
compensation plan amounted to $14,375 in 1998, 1997 and 1996. At December 31,
1998 and 1997, the present value of deferred compensation payable amounted to
$29,449 and $40,023 and is included in other liabilities in the accompanying
balance sheet.
During 1994, the Bank established an unfunded non-qualified deferred
compensation plan covering all eligible bank officers and directors as defined
by the plan. This plan provides eligible participants to elect to defer a
portion of their compensation. At December 31, 1998, elective deferred
compensation amounting to $488,410 plus $138,335 in accrued interest has been
recorded as other liabilities in the accompanying balance sheet.
9. INCOME TAXES:
The provision for income taxes included in the statement of income is
comprised of the following components:
1998 1997 1996
----------- ----------- -----------
Current $ 1,883,810 $ 1,662,345 $ 1,204,150
Deferred (306,402) (46,495) 61,064
----------- ----------- -----------
TOTAL $ 1,577,408 $ 1,615,850 $ 1,265,214
=========== =========== ===========
Deferred tax (liabilities) assets are comprised of the following at
December 31:
1998 1997
----------- -----------
Unrealized Holding Grains (Losses) on Securities
Available-for-Sale $ (407,668) $ (565,086)
Deferred Loan Organization Fees (157,105) (131,637)
Depreciation (133,665) (127,097)
Other (23,474) 0
----------- -----------
Gross Deferred Tax Liability $ (721,912) $ (823,820)
----------- -----------
Reserve for Credit Losses 1,261,338 1,011,022
Deferred Compensation 223,106 157,330
----------- -----------
Gross Deferred Tax Asset 1,484,444 $ 1,168,352
----------- -----------
Deferred Tax Asset Valuation Allowance (547,838) (593,658)
----------- -----------
Net Deferred Tax (Liabilities) Assets $ 214,694 $ (249,126)
=========== ===========
The provision for Income Taxes differs from the amount of income tax
determined applying the applicable U.S. Statutory Federal In come Tax Rate to
pre-tax income from continuing operations as a result of the following
differences:
1998 1997 1996
----------- ----------- -----------
Provision at Statutory Tax Rates $ 2,272,790 $ 2,127,999 $ 1,747,540
Add (Deduct):
Tax Effects of Non-Taxable Interest
Income (828,624) (788,744) (732,248)
Non-Deductible Interest Expense 115,929 106,785 96,101
Other Items Net 17,313 169,810 153,821
----------- ----------- -----------
Provision for Income Taxes $ 1,577,408 $ 1,615,850 $ 1,265,214
=========== =========== ===========
F-13
<PAGE>
The net change in the valuation allowance for deferred tax asset was a
decrease of $45,820 in 1998. The change relates to a decrease in the provision
for income taxes to which this valuation relates.
10. RELATED PARTY TRANSACTIONS:
At December 31, 1998 and 1997, certain officers and directors and/or companies
in which they had 10% or more beneficial ownership were indebted to the Bank in
the aggregate amounts of $10,497,630 and $7,435,105. Such indebtedness was
incurred in the ordinary course of business on substantially the same terms as
those prevailing at the time for comparable transactions with other persons. The
Bank was also committed under standby letters of credit as described in Note 11.
During 1998, $5,679,303 of new loans were made and repayments totaled
$2,616,778.
11. COMMITMENTS:
(a) Leases:
The Bank conducts its Fashion Mall, Wilkes-Barre, Pittston Plaza, Kingston
and Exeter branch operations from leased facilities. The Fashion Mall lease
expires May 2003 and carries three additional renewal options of five years each
with specified increases at the beginning of each option period. The
Wilkes-Barre lease, which expires May 2003, carries three additional renewal
options of five years each with specified increases at the beginning of each
option period. The Pittston Plaza lease expires September 2008 and carries two
additional renewal options of five years each, with specified increases at the
beginning of each option period. The Kingston lease, which expires August 2006,
carries two additional options of five years each with specified increases at
the beginning of each option period. The Exeter lease expires August 2008 and
carries four additional options of five years each with specified increases at
the beginning of each option period.
The Bank also leases office space for certain administrative and
operational functions. Such lease, which expires in 1999, provides the bank the
option of renewal for five successive three year periods commencing January 1,
2000; and carries specified annual rental increases.
At December 31, 1998, the Bank was obligated under certain noncancelable
leases for equipment with terms expiring over the next five years.
The aforementioned leases have been treated as operating leases in the
accompanying financial statements. Minimum future obligations under
noncancelable operating leases in effect at December 31, 1998 are as follows:
FACILITIES EQUIPMENT
---------- ---------
1999 $280,098 $70,962
2000 155,098 44,989
2001 155,781 26,765
2002 157,150 10,078
2003 and thereafter 569,056 2,793
---------- --------
Total $1,317,183 $155,587
========== ========
Total rental expense under operating leases amounted to $322,231 in 1998,
$295,168 in 1997, and $272,355 in 1996.
(b) Financial Instruments with Off-Balance Sheet Risk:
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers. Such
financial instruments include commitments to extend credit and standby letters
of credit which involve varying degrees of credit, interest rate or liquidity
risk in excess of the amount recognized in the balance sheet. The Bank's
exposure to credit loss from nonperformance by the other party to the financial
instruments for commitments to extend credit and standby letters of credit is
represented by the contractual amount of those instruments.
F-14
<PAGE>
The Bank does not require collateral or other security to support financial
instruments with off-balance sheet credit risk. Financial instruments whose
contract amounts represent credit risk at December 31 are as follows:
1998 1997
---- ----
Commitments to extend credit $48,566,776 $36,695,453
Standby letters of credit 11,203,184 8,717,944
Outstanding commitments to extend credit and standby letters of credit issued to
or on behalf of related parties amounted to $3,307,423 and $947,367 and
$5,653,691 and $5,461,081 at December 31, 1998 and 1997, respectively.
(c) Concentration of Credit Risk:
Cash Concentrations: The Bank maintains cash balances at several
correspondent banks. The aggregate cash balances represent federal funds sold of
$3,400,000 and $5,450,000; and due from bank accounts in excess of the limit
covered by the Federal Deposit Insurance Corporation amounting to $5,442,038 and
$3,705,438 as of December 31, 1998 and 1997, respectively.
Loan Concentrations: At December 31, 1998, 22% of the Bank's commercial
loan portfolio was concentrated in loans in the restaurant industry.
Substantially all of these loans are secured by first mortgages on commercial
properties.
12. REGULATORY MATTERS:
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory - and possibly additional discretionary - actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors. Quantitative measures established by regulation
to ensure capital adequacy require the Bank to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1998, that the Bank meets all capital adequacy requirements to which it is
subject.
As of December 31, 1998, the most recent notification from the Office of
the Comptroller of the Currency categorized the Bank as "Well Capitalized" under
the regulatory framework for prompt corrective action. To be categorized as
"Well Capitalized" the Bank must maintain minimum Total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category.
<TABLE>
<CAPTION>
(in thousands)
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
------ ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
Total Capital
(to Risk Weighted Assets) $38,044 11.45% >=$26,592 >=8.0% >=$33,239 >=10.0%
Tier I Capital
(to Risk Weighted Assets) $33,887 10.19% >=$13,296 >=4.0% >=$19,944 >=6.0%
Tier I Capital
(to Average Assets) $33,887 7.10% >=$14,314 >=3.0% >=$23,856 >=5.0%
As of December 31, 1997
Total Capital
(to Risk Weighted Assets) $33,966 12.19% >=22,294 >=8.0% >=$27,868 >=10.0%
Tier I Capital
(to Risk Weighted Assets) $30,483 10.94% >=11,147 >=4.0% >=$16,721 >=6.0%
Tier I Capital
(to Average Assets) $30,483 7.28% >=12,624 >=3.0% >=$21,040 >=5.0%
</TABLE>
F-15
<PAGE>
Banking Regulations also limit the amount of dividends that may be paid without
prior approval of the Bank's regulatory agency. Retained earnings against which
dividends may be paid without prior approval of the federal banking regulators
amounted to $11,051,000 at December 31, 1998, subject to the minimum capital
ratio requirements noted above.
13. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107 "Disclosures about Fair
Value of Financial Instruments", (SFAS 107) requires annual disclosure of
estimated fair value of on-and off-balance sheet financial instruments.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and short-term investments:
Cash and short-term investments include cash on hand, amounts due from
banks, and federal funds sold. For these short-term instruments, the carrying
amount is a reasonable estimate of fair value.
Interest-Bearing balances with financial institutions:
The fair value of these financial instruments is estimated using rates
currently available for investments of similar maturities.
Securities:
For securities held for investment purposes, the fair values have been
individually determined based on currently quoted market prices. If a quoted
market price is not available, fair value is estimated using quoted market
prices for similar securities.
Loans:
The fair value of loans has been estimated by discounting the future cash
flows using the current rates which similar loans would be made to borrowers
with similar credit ratings and for the same remaining maturities.
Deposits:
The fair value of demand deposits, savings deposits, and certain money
market deposits is the amount payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities.
Borrowed Funds:
Rates currently available to the Bank for debt with similar terms and
remaining maturities are used to estimate fair value of existing debt.
Commitments to extend credit and standby letters of credit:
The fair value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For
fixed-rate loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The fair value of
letters of credit is based on fees currently charged for similar agreements or
on the estimated cost to terminate them or otherwise settle the obligations with
the counterparties at the reporting date.
F-16
<PAGE>
The estimated fair values of the Bank's financial instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1998
Carrying Fair
Value Value
----- -----
<S> <C> <C>
FINANCIAL ASSETS
Cash and short term investments $ 13,426,909 $ 13,426,909
Interest-bearing balances with financial institutions 2,478,000 2,478,000
Securities 131,830,084 131,832,932
Gross Loans 328,893,297 328,626,736
FINANCIAL LIABILITIES
Deposits $380,038,788 $381,215,158
Borrowed funds 65,175,582 65,650,009
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Commitments to extend credit and standby letters of credit $0 $68,068
December 31, 1997
Carrying Fair
Value Value
----- -----
FINANCIAL ASSETS
Cash and short term investments $ 14,681,033 $ 14,681,033
Interest-bearing balances with financial institutions 1,586,000 1,586,000
Securities 121,366,782 121,368,868
Gross Loans 284,353,338 285,206,610
FINANCIAL LIABILITIES
Deposits $345,667,579 $345,950,003
Borrowed funds 47,845,737 47,996,796
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Commitments to extend credit and standby letters of credit $0 $71,126
</TABLE>
14. CONDENSED FINANCIAL INFORMATION -PARENT COMPANY ONLY
Condensed parent company only financial information is as follows (in
thousands):
Condensed Balance Sheet December 31, 1998
Assets:
Cash $ 32
Investment in Subsidiary (equity method) 34,595
Other Assets 52
-------
Total Assets $34,679
=======
Liabilities and Stockholders' Equity:
Stockholders' equity $34,679
=======
F-17
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Condensed Statement of Income for the initial period of operations commencing
July 1, 1998 and ending December 31, 1998 Income:
Dividends from Subsidiary $ 1,155
Other Income 2
Equity in Undistributed Income of Subsidiary 1,367
-------
Total Income 2,524
-------
Expenses 18
-------
Net Income $ 2,506
=======
Condensed Statement of Cash Flows for the initial period of operations
commencing July 1, 1998 and ending December 31, 1998 Cash Flows for Operating
Activities:
Net income $ 2,506
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed income of subsidiary (1,367)
Increase in other assets (52)
-------
Net Cash Provided by Operating Activities $ 1,087
-------
Cash Flows from Financing Activities:
Cash dividends $(1,055)
Proceeds from borrowings 840
Repayment of borrowings (840)
Advances from subsidiary 82
Repayment of advances from subsidiary (82)
-------
Net cash used in financing activities $(1,055)
-------
Increase in Cash $ 32
Cash at Beginning of Period 0
-------
Cash at End of Year $ 32
-------
</TABLE>
Non-cash investing and financing activities:
On July 1, 1998, the Company issued 1,199,180 shares of its common stock in
exchange for all of the outstanding shares of the Bank. The investment in
subsidiary was recorded at $33,550,000 which equaled the Stockholders' Equity of
the Bank at the time of the exchange.
F-18
<PAGE>
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
In Thousands, Except Per Share Amount
<TABLE>
<CAPTION>
Quarter Ending
1998 March 31, June 30, September 30, December 31,
<S> <C> <C> <C> <C>
Interest Income $8,093 $8,332 $8,704 $8,777
Interest expense 4,387 4,509 4,732 4,833
------ ------ ------ ------
Net interest income 3,706 3,823 3,972 3,944
Provision for credit losses 180 180 180 380
Other income 335 449 450 349
Other expenses 2,225 2,260 2,426 2,512
Provision for income taxes 394 473 431 280
------ ------ ------ ------
Net income $1,242 $1,359 $1,385 $1,121
====== ====== ====== ======
Net income per share* $ 0.52 $ 0.56 $ 0.58 $ 0.47
====== ====== ====== ======
1997
Interest Income $7,282 $7,558 7,975 $8,091
Interest expense 3,804 3,958 4,256 4,308
------ ------ ------ ------
Net interest income 3,478 3,600 3,719 3,783
Provision for credit losses 180 180 225 525
Other income 636 267 417 307
Other expenses 2,130 2,137 2,313 2,259
Provision for income taxes 466 383 428 338
------ ------ ------ ------
Net income $1,338 $1,167 $1,170 $ 968
====== ====== ====== ======
Net income per share* $ 0.56 $ 0.48 $ 0.49 $ 0.41
====== ====== ====== ======
</TABLE>
* Per share data reflects the retroactive effect of the 100% stock dividend paid
in 1998 and the 10% stock dividend paid in 1997.
F-19
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
Management estimates that the expenses payable by the company in connection
with the sale of securities registered on the Registration Statement will be as
follows:
Registration Fee $ 2,850
Accounting Fees and Expenses $ 1,500
Legal Fees and Expenses $12,000
Printing and EDGAR Filing Expenses $10,000
Miscellaneous $ 1,000
=======
TOTAL $27,350
Item 14. Indemnification of Directors and Officers.
Subchapter D of Chapter 17 of the Pennsylvania Business Corporation Law of
1988, as amended (15 Pa. C.S. Sections 1741-1750) provides that a business
corporation has the power under certain circumstances to indemnify directors,
officers, employees and agents against certain expenses incurred by them in
connection with any threatened, pending or completed action, suit or proceeding.
We qualify the following discussion, in its entirety, by the full text of
Subchapter D of Chapter 17 of the Pennsylvania Business Corporation Law of 1988,
as amended, is attached as Exhibit 99.
Section 1721 of the Pennsylvania Business Corporation Law of 1988, which
relates to the Board of Directors, declares that, unless otherwise provided by
statute or in a bylaw adopted by the shareholders, all powers enumerated in
section 1502, which relates to general powers, and elsewhere in the corporation
law or otherwise vested by law in a business corporation must be exercised by or
under the authority of, and the business and affairs of every business
corporation shall be managed under the direction of, a board of directors. If a
provision is made in the by-laws, the powers and duties conferred or imposed
upon the board of directors under the corporation law are exercised or performed
to the extent and by a person or persons as provided in the by-laws.
Section 1712 provides that a director of a business corporation stands in a
fiduciary relation to the corporation and must perform his duties as a director,
including his duties as a member of any committee of the board, in good faith,
in a manner he reasonably believes to be in the best interests of the
corporation and with the care, including reasonable inquiry, skill and
diligence, as a person of ordinary prudence would use under similar
circumstances. In performing his duties, a director is entitled to rely in good
faith on information, opinions, reports or statements, including financial
statements and other financial data, in each case prepared or presented by any
of the following:
II-1
<PAGE>
o one or more officers or employees of the corporation whom the director
reasonably believes to be reliable and competent in the matters
presented;
o counsel, public accountants or other persons as to matters which the
director reasonably believes to be within the professional or expert
competence of such person; or
o a committee of the board upon which he does not serve, duly designated
in accordance with law, as to matters within its designated authority,
which committee the director reasonably believes to merit confidence.
A director is not be considered to be acting in good faith, if he has
knowledge concerning the matter in question that would cause his reliance to be
unwarranted.
Section 1716 states that in discharging the duties of their respective
positions, the board of directors, committees of the board and individual
directors of a business corporation may, in considering the best interests of
the corporation, consider the effects of any action upon employees, upon
suppliers and customers of the corporation and upon communities in which offices
or other establishments of the corporation are located, and all other pertinent
factors. The consideration of those factors does not constitute a violation of
the preceding paragraph. In addition, absent breach of fiduciary duty, lack of
good faith or self-dealing, actions taken as a director or any failure to take
any action are presumed to be in the best interests of the corporation.
Moreover, Section 1721 addresses the personal liability of directors and
states that if a bylaw adopted by the shareholders so provides, a director is
not personally liable, as such, for monetary damages for any action taken, or
any failure to take any action, unless:
o the director has breached or failed to perform the duties of his
office under this section; and
o the breach or failure to perform constitutes self-dealing, willful
misconduct or recklessness.
The provisions discussed above shall not apply to:
o the responsibility or liability of a director pursuant to any criminal
statute; or
o the liability of a director for the payment of taxes pursuant to
local, state or federal law.
II-2
<PAGE>
Section 1714 states that a director of a business corporation who is
present at a meeting of its board of directors, or of a committee of the board,
at which action on any corporate matter is taken on which the director is
generally competent to act, is presumed to have assented to the action taken
unless his dissent is entered in the minutes of the meeting or unless he files
his written dissent to the action with the secretary of the meeting before the
adjournment of the meeting or transmits the dissent in writing to the secretary
of the corporation immediately after the adjournment of the meeting. The right
to dissent does not apply to a director who voted in favor of the action.
Nothing in Section 1714 bars a director from asserting that minutes of the
meeting incorrectly omitted his dissent if, promptly upon receipt of a copy of
the minutes, he notifies the secretary, in writing, of the asserted omission or
inaccuracy.
Section 1741 which relates to third party actions, provides that unless
otherwise restricted in its by-laws, a business corporation has the power to
indemnify any person who was or is a party, or is threatened to be made a party
to any threatened, pending or completed action or proceeding, whether civil,
criminal, administrative or investigative, other than an action by or in the
right of the corporation, by reason of the fact that the person is or was a
representative of the corporation, or is or was serving at the request of the
corporation as a representative of another domestic or foreign corporation for
profit or not-for-profit, partnership, joint venture, trust or other enterprise,
against expenses, including attorneys' fees, judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection with
the action or proceeding if such person acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
corporation, and, with respect to any criminal proceeding, had no reasonable
cause to believe his conduct was unlawful. The termination of any action or
proceeding by judgment, order, settlement or conviction or upon a plea of nolo
contendere or its equivalent shall not of itself create a presumption that the
person did not act in good faith and in a manner that he reasonably believed to
be in, or not opposed to, the best interests of the corporation, and with
respect to any criminal proceeding, had reasonable cause to believe that his
conduct was not unlawful.
Section 1742, which relates to derivative actions, provides that unless
otherwise restricted in its by-laws, a business corporation has the power to
indemnify any person who was or is a party, or is threatened to be made a party,
to any threatened, pending or completed action by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person is or was a representative of the corporation, or is or was serving at
the request of the corporation as a representative of another domestic or
foreign corporation for profit or not-for-profit, partnership, joint venture,
trust or other enterprise, against expenses, including attorneys' fees, actually
and reasonably incurred by the person in connection with the defense or
settlement of the action if the person acted in good faith and in a manner he
reasonably believed to be in, or not opposed to the best interests of the
corporation. Indemnification shall not be made under this section in respect of
any claim, issue or matter as to which the person has been adjudged to be liable
to the corporation unless, and only to the extent that, the court of common
pleas of the judicial district embracing the county in which the registered
office of the corporation is located or the court in which the action was
brought determines upon application
II-3
<PAGE>
that, despite the adjudication of liability but in view of all the circumstances
of the case, the person is fairly and reasonably entitled to indemnity for such
expenses which the court of common pleas or such other court shall deem proper.
Section 1743, which relates to mandatory indemnification, provides for
mandatory indemnification of directors and officers to the extent that a
representative of the business corporation has been successful on the merits or
otherwise in defense of any action or proceeding referred to in Sections 1741
(relating to third party actions) or 1742 (relating to derivative actions), or
in defense of any claim, issue or matter therein, the person is indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
such person in connection therewith.
Section 1744, which relates to procedure for effecting indemnification,
provides the procedure for effecting indemnification. Under this section unless
ordered by a court, any indemnification under Section 1741 (relating to third
party actions) or 1742 (relating to derivative actions) is made by the business
corporation only as authorized in the specific case upon a determination that
indemnification of the representative is proper in the circumstances because the
person has met the applicable standard of conduct set forth in those sections.
The determination shall be made:
o by the Board of Directors by a majority vote of a quorum consisting of
directors who were not parties to the action or proceeding;
o if a quorum is not obtainable, or, if obtainable and a majority vote
of a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion; or
o by the shareholders.
Section 1745, which relates to advancing expenses, provides that expenses,
including attorneys' fees, incurred in defending any action or proceeding
referred to above may be paid by the business corporation in advance of the
final disposition of the action or proceeding upon receipt of an undertaking by
or on behalf of the representative to repay such amount if it is ultimately
determined that the person is not entitled to be indemnified by the corporation
as authorized by Pennsylvania law or otherwise.
Section 1746, which relates to supplementary coverage, provides that the
indemnification and advancement of expenses provided by or granted pursuant to
the other sections of Pennsylvania law are not be deemed exclusive of any other
rights to which a person seeking indemnification or advancement of expenses may
be entitled under any other by-law, agreement, vote of shareholders or
disinterested directors or otherwise, both as to action in such person's
official capacity and as to action in another capacity while holding such
office.
II-4
<PAGE>
Section 1746 also provides that indemnification referred to above is not be
made in any case where the act or failure to act giving rise to the claim for
indemnification is determined by a court to have constituted willful misconduct
or recklessness.
Section 1746 further declares that indemnification under any bylaw,
agreement, vote of shareholders or directors or otherwise, may be granted for
any action taken or any failure to take any action and may be made whether or
not the corporation would have the power to indemnify the person under any other
provision of law except as provided in this section and whether or not the
indemnified liability arises or arose from any threatened, pending or completed
action by or in the right of the corporation. This indemnification is declared
to be consistent with the public policy of the Commonwealth of Pennsylvania.
Section 1747, which relates to the power to purchase insurance, provides
that unless otherwise restricted in its by-laws, a business corporation has the
power to purchase and maintain insurance on behalf of any person who is or was a
representative of the corporation or is or was serving at the request of the
corporation as a representative of another domestic or foreign corporation for
profit or not-for-profit, partnership, joint venture, trust or other enterprise
against any liability asserted against him and incurred by him in that capacity,
or arising out of his status as such, whether or not the corporation would have
the power to indemnify him against that liability under the provisions of the
corporation law. This insurance is declared to be consistent with the public
policy of the Commonwealth of Pennsylvania.
Section 1748, which relates to application to surviving or new
corporations, provides that for the purposes of Pennsylvania law, references to
"the corporation" include all constituent corporations absorbed in a
consolidation, merger or division, as well as the surviving or new corporations
surviving or resulting therefrom, so that any person who is or was a
representative of the constituent, surviving or new corporation, or is or was
serving at the request of the constituent, surviving or new corporation as a
representative of another domestic or foreign corporation for profit or
not-for-profit, partnership, joint venture, trust or other enterprise, shall
stand in the same position under the provisions of Pennsylvania law with respect
to the surviving or new corporation as he would if he had served the surviving
or new corporation in the same capacity.
Section 1749, which applies to employee benefit plans, states that for
the purposes of Pennsylvania law:
o references to "other enterprises" shall include employee benefit plans
and references to "serving at the request of the corporation" shall
include any service as a representative of the business corporation
that imposes duties on, or involves services by, the representative
with respect to an employee benefit plan, its participants or
beneficiaries;
II-5
<PAGE>
o excise taxes assessed on a person with respect to an employee benefit
plan pursuant to applicable law shall be deemed "fines"; and
o action with respect to an employee benefit plan taken or omitted in
good faith by a representative of the corporation in a manner he
reasonably believed to be in the interest of the participants and
beneficiaries of the plan shall be deemed to be action in a manner
that is not opposed to the best interests of the corporation.
Section 1750, which relates to duration and extent of coverage, declares
that the indemnification and advancement of expenses provided by, or granted
pursuant to Pennsylvania law, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a representative of the
corporation and inure to the benefit of the heirs and personal representative of
that person.
Article 23 of the company's By-laws provides for indemnification to the
full extent authorized by Pennsylvania law.
Insofar as indemnification for liabilities arising under the 1933 Act may
be permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the 1933 Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses incurred or
paid by a director, officer of controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by a director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the manner
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.
Item 15. Recent Sales of Unregistered Securities.
None.
Item 16. Exhibits and Financial Statement Schedules
-------- ------------------------------------------
(a) Exhibits:
---------
3(i) Registrant's Articles of
Incorporation. (Incorporated by
reference to Exhibit 3(i) to
Registrant's Registration Statement
No. 333-24121, filed with the
Commission on April 16, 1997, and as
amended in December 1, 1997, and June
1, 1998.)
II-6
<PAGE>
3(ii) Registrant's Bylaws. (Incorporated by
reference to Exhibit 3(ii) to
Registrant's Registration Statement
No. 333-24121, filed with the
Commission on April 16, 1997, and as
amended in December 1, 1997, and June
1, 1998.)
4 Registrant's 1999 Dividend Reinvestment and Stock
Purchase Plan. (Included in the Prospectus.)
5 Opinion of Shumaker Williams, P.C. re: Legality.
11 Statement re: Computation of Earnings Per Share.
(Included at page __ of the proxy
statement/prospectus contained
herein.)
12 Computation of Ratios. (Included at page __ of the proxy
statement/prospectus contained herein.)
21 Subsidiaries of Registrant.
23.1 Consent of Shumaker Williams, P.C. (Included as part of
Exhibit 5.)
23.2 Consent of Demetrius & Company, LLC.
23.3 Consent of Robert Rossi & Co.
24 Power of Attorney. (Included on Signature Page.)
99.1 Indemnification Provisions.
99.2 Independent Auditors Report, dated January 21, 1997, of
Robert Rossi & Co., Olyphant, Pennsylvania.
99.3 Enrollment Form.
99.4 Letter to Shareholders.
(b) Financial Statement Schedules:
------------------------------
None required.
Item 17. Undertakings.
-------------
(a)
1. The undersigned Registrant hereby undertakes:
II-7
<PAGE>
(A) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
o to include any prospectus required by Section 10(a)(3) of the
Securities Act;
o to reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; and
o to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(B) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(C) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of
expenses, incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, hereunto duly authorized, in the Borough of Dunmore, Commonwealth
of Pennsylvania on April 14, 1999.
FIRST NATIONAL COMMUNITY
BANCORP, INC.
By: /s/ J. David Lombardi
------------------------------------
J. David Lombardi
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints J. David Lombardi and William S. Lance, and each
of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this registration statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or either of them, or their or his substitutes, may
lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Capacity Date
-------- ----
/s/ J. David Lombardi President and Chief April 14, 1999
- --------------------------- Executive Officer
J. David Lombardi (Principal Executive
Officer)
Treasurer
/s/ William S. Lance (Principal Accounting or April 14, 1999
- --------------------------- Financial Officer)
William S. Lance
II-9
<PAGE>
/s/ Angelo Bistocchi Director April 14, 1999
- ---------------------------
Angelo Bistocchi
/s/ Michael G. Cestone Director April 14, 1999
- ---------------------------
Michael G. Cestone
/s/ Michael J. Cestone, Jr. Director April 14, 1999
- ---------------------------
Michael J. Cestone, Jr.
/s/ Joseph Coccia Director April 14, 1999
- ---------------------------
Joseph Coccia
/s/ William P. Conaboy Director April 14, 1999
- ---------------------------
William P. Conaboy
/s/ Dominick L. DeNaples Director April 14, 1999
- ---------------------------
Dominick L. DeNaples
/s/ Louis A. DeNaples Director April 14, 1999
- ---------------------------
Louis A. DeNaples
/s/ Joseph J. Gentile Director April 14, 1999
- ---------------------------
Joseph J. Gentile
/s/ Martin F. Gibbons Director April 14, 1999
- ---------------------------
Martin F. Gibbons
/s/ Joseph O. Haggerty Director April 14, 1999
- ---------------------------
Joseph O. Haggerty
Director April 14, 1999
- ---------------------------
George N. Juba
/s/ John R. Thomas Director April 14, 1999
- ---------------------------
John R. Thomas
II-10
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Page Number in
Sequential Number
Number Title System
------ ----- -----------------
<S> <C> <C>
3(i) Registrant's Articles of Incorporation. (Incorporated by
reference to Exhibit 3(i) to Registrant's Registration
Statement No. 333-24121, filed with the Commission on
April 16, 1997, and as amended on December 1, 1997, and
June 1, 1998.)
3(ii) Registrant's Bylaws. (Incorporated by reference to
Exhibit 3(ii) to Registrant's Registration Statement No.
333-24121, filed with the Commission on April 16, 1997,
and as amended on December 1, 1997, and June 1, 1998.)
4 Registrant's 1998 dividend Reinvestment and Stock
Purchase Plan. (Included in the Prospectus.)
5 Form Opinion of Shumaker Williams, P.C. re: Legality.
11 Statement re: Computation of Earnings Per Share.
(Included at page __ of the proxy statement/prospectus
contained herein.)
12 Computation of Ratios. (Included at page __ of the proxy
statement/prospectus contained herein.)
21 Subsidiaries of Registrant.
23.1 Consent of Shumaker Williams, P.C. (Included as part
of Exhibit 5.)
23.2 Consent of Demetrius & Company, LLC.
23.3 Consent of Robert Rossi & Co.
24 Power of Attorney. (Included on Signature Page.)
99.1 Indemnification Provisions.
99.2 Independent Auditors Report, dated January 27, 1997,
of Robert Rossi & Co., Olyphant, Pennsylvania.
99.3 Enrollment Form.
99.4 Letter to Shareholders.*
</TABLE>
- ------------------
*To be filed by amendment.
II-11
EXHIBIT 5
May __, 1999
J. David Lombardi
President
First National Community Bancorp, Inc.
102 E. Drinker Street
Dunmore, PA 18512-2491
RE: Our File No: 875-98
-------------------
Dear Mr. Lombardi:
We have acted as special counsel to the Company in connection with the
proposed issuance of up to 250,000 shares of the Company's common stock, from
time to time pursuant to the Company's 1999 dividend reinvestment and stock
purchase plan, covered by the company's Registration Statement on Form S-1,
filed on the date hereof with the Securities and Exchange Commission. We, as
special counsel to the company have reviewed:
1. Articles of Incorporation of the Company;
2. The Bylaws of the Company;
3. Resolutions adopted by the Board of Directors of the Company relating
to the Registration Statement, certified by the Secretary of the
Company; and
4. The Registration Statement.
Based on our review of the foregoing, it is our opinion that:
a. The Company has been duly incorporated under the laws of the
Commonwealth of Pennsylvania and is validly existing and in good
standing under the laws of the Commonwealth; and
b. The common stock covered by the Registration Statement has been
duly authorized and, when issued pursuant to the terms of the
plan, will be legally issued by the Company and fully paid and
non-assessable.
II-12
<PAGE>
We consent to the filing of this opinion as an exhibit to the Registration
Statement and the reference to us in the related Prospectus. In giving this
consent, we do not thereby admit that we come within the category of person
whose consent is required under Section 7 of the Securities Act of 1993, as
amended, or the rules and regulations of the Securities and Exchange Commission
thereunder.
Very truly yours,
SHUMAKER WILLIAMS, P.C.
II-13
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
FIRST NATIONAL COMMUNITY BANCORP, INC.
Name Date of Incorporation Incorporation
- ---- --------------------- -------------
First National Community October 10, 1910 United States of America
Bank
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-1 of
our report dated January 19, 1999, on our audits of the consolidated financial
statements of First National Community Bancorp, Inc. and Subsidiaries. We also
consent to the references to our firm under the caption "Experts".
/s/ Demetrius & Company, L.L.C.
-------------------------------
Wayne, New Jersey DEMETRIUS & COMPANY, L.L.C.
April 23, 1999
EXHIBIT 23.3
ROBERT ROSSI & CO.
CERTIFIED PUBLIC ACCOUNTANTS
299 MAIN STREET - STURGES
OLYPHANT, PA 18447-2319
(570) 876-2300
FAX (570) 876-5153
INDEPENDENT AUDITOR'S CONSENT
We have issued our report dated January 21, 1997, accompanying 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, which are included in the Registration Statement and
prospectus. We consent to the inclusion of the aforementioned report in the
Registration Statement and Prospectus and to the use of our name as it appears
under the caption "Experts."
/s/ Robert Rossi & Co.
----------------------
April 21, 1999 ROBERT ROSSI & CO.
Olyphant, Pennsylvania
EXHIBIT 99.1
STATUTES RELATING TO INDEMNIFICATION
Subchapter D of Chapter 17 of the Pennsylvania Business Corporation Law of 1988,
(15 Pa. C.S. Sections 1741-1750), as amended
Subchapter D. - Indemnification
ss.1741. Third party actions.
Unless otherwise restricted in its bylaws, a business corporation shall
have power to indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation), by reason of the fact that he is or was
a representative of the corporation, or is or was serving at the request of the
corporation as a representative of another domestic or foreign corporation for
profit or not-for-profit, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with the
action or proceeding if he acted in good faith and in a manner he reasonably
believed to be in, or not opposed to, the best interests of the corporation and,
with respect to any criminal proceeding, had no reasonable cause to believe his
conduct was unlawful. The termination of any action or proceeding by judgment,
order, settlement or conviction or upon a plea of nolo contendere or its
equivalent shall not of itself create a presumption that the person did not act
in good faith and in a manner that he reasonably believed to be in, or not
opposed to, the best interests of the corporation and, with respect to any
criminal proceeding, had reasonable cause to believe that his conduct was
unlawful.
ss.1742. Derivative actions.
Unless otherwise restricted in its bylaws, a business corporation shall
have power to indemnify any person who was or is a party, or is threatened to be
made a party, to any threatened, pending or completed action by or in the right
of the corporation to procure a judgment in its favor by reason of the fact that
he is or was a representative of the corporation or is or was serving at the
request of the corporation as a representative of another domestic or foreign
corporation for profit or not-for-profit, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection with the defense or settlement of the
action if he acted in good faith and in a manner he reasonably believed to be
in, or not opposed to, the best interests of the corporation. Indemnification
shall not be made under this section in respect of any claim, issue or matter as
to which the person has been adjudged to be liable to the corporation unless and
only to the extent that the court of common pleas of the judicial district
embracing the county in which the
<PAGE>
registered office of the corporation is located or the court in which the
action was brought determines upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, the person is fairly
and reasonably entitled to indemnity for the expenses that the court of common
pleas or other court deems proper.
ss.1743. Mandatory indemnification.
To the extent that a representative of a business corporation has been
successful on the merits or otherwise in defense of any action or proceeding
referred to in section 1741 (relating to third-party actions) or 1742 (relating
to derivative and corporate actions) or in defense of any claim, issue or matter
therein, he shall be indemnified against expenses (including attorney fees)
actually and reasonably incurred by him in connection therewith.
ss.1744. Procedure for effecting indemnification.
Unless ordered by a court, any indemnification under section 1741 (relating
to third-party actions) or 1742 (relating to derivative and corporate actions)
shall be made by the business corporation only as authorized in the specific
case upon a determination that indemnification of the representative is proper
in the circumstances because he has met the applicable standard of conduct set
forth in those sections. The determination shall be made:
(1) by the board of directors by a majority vote of a quorum consisting of
directors who were not parties to the action or proceedings;
(2) if such a quorum is not obtainable or if obtainable and a majority
vote of a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion; or
(3) by the shareholders.
ss.1745. Advancing expenses.
Expenses (including attorneys' fees) incurred in defending any action or
proceeding referred to in this subchapter may be paid by a business corporation
in advance of the final disposition of the action or proceeding upon receipt of
an undertaking by or on behalf of the representative to repay the amount if it
is ultimately determined that he is not entitled to be indemnified by the
corporation as authorized in this subchapter or otherwise.
ss.1746. Supplementary coverage.
(a) General rule - The indemnification and advancement of expenses provided
by, or granted pursuant to, the other section of this subchapter shall not be
deemed exclusive of any other rights which a person seeking indemnification or
advancement of expenses may be
<PAGE>
entitled under any bylaw, agreement, vote of shareholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding that office. Section 1728 (relating to
interested directors or officers; quorum) and, in the case of a registered
corporation, section 2538 relating to approval of transactions with interested
shareholders) shall be applicable to any bylaw, contract or transaction
authorized by the directors under this section. A corporation may create a fund
of any nature, which may, but need not be, under the control of a trustee, or to
otherwise secure or insure in any manner its indemnification obligations,
whether arising under or pursuant to this section or otherwise.
(b) When indemnification is not to be made - Indemnification pursuant to
subsection (a) shall not be made in any case where the act or failure to act
giving rise to the claim for indemnification is determined by a court to have
constituted willful misconduct or recklessness. The articles may not provide for
indemnification in the case of willful misconduct or recklessness.
(c) Grounds - Indemnification pursuant to subsection (a) under any bylaw,
agreement, vote of shareholders or directors or otherwise may be granted for any
action taken and may be made whether or not the corporation would have the power
to indemnify the person under any other provision of law except as provided in
this section and whether or not the indemnified liability arises or arose from
any threatened, pending or completed action by or in the right of the
corporation. Such indemnification is declared to be consistent with the public
policy of this Commonwealth.
ss.1747. Power to purchase insurance.
Unless otherwise restricted in its bylaws, a business corporation shall
have power to purchase and maintain insurance on behalf of any person who is or
was a representative of the corporation or is or was serving at the request of
the corporation as a representative of another domestic or foreign corporation
for profit or not-for-profit, partnership, joint venture, trust or other
enterprise against any liability asserted against him and incurred by him in any
such capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against that liability under
the provisions of this subchapter. Such insurance is declared to be consistent
with the public policy of this Commonwealth.
ss.1748. Application to surviving or new corporations.
For the purposes of this subchapter, references to the "corporation"
include all constituent corporations absorbed in a consolidation, merger or
division, as well as the surviving or new corporations surviving or resulting
therefrom, so that any person who is or was a representative of the constituent,
surviving or new corporation ,or is or was serving at the request of the
constituent, surviving or new corporation as a representative of another
domestic or foreign corporation for profit or not-for-profit, partnership, joint
venture, trust or other enterprise, shall stand in the same position under the
provisions of this subchapter with respect
<PAGE>
to the surviving or new corporation as he would if he had served the
surviving or new corporation in the same capacity.
ss.1749. Application to employee benefit plans.
For the purposes of this subchapter:
(1) References to "other enterprises" shall include employee benefit plans
and references to "serving at the request of the corporation" shall
include any service as a representative of the business corporation
that imposes duties on, or involves services by, the representative
with respect to an employee benefit plan, its participants or
beneficiaries.
(2) Excise taxes assessed on a person with respect to an employee benefit
plan pursuant to applicable law shall be deemed "fines".
(3) Action with respect to an employee benefit plan taken or omitted in
good faith by a representative of the corporation in a manner he
reasonably believed to be in the interest of the participants and
beneficiaries of the plan shall be deemed to be action in a manner
that is not opposed to the best interests of the corporation.
ss.1750. Duration and extent of coverage.
The indemnification and advancement of expenses provided by, or granted
pursuant to, this subchapter shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a representative of the
corporation and shall inure to the benefit of the heirs and personal
representative of that person.
EXHIBIT 99.2
ROBERT ROSSI & CO.
CERTIFIED PUBLIC ACCOUNTANTS
299 MAIN STREET - STURGES
OLYPHANT, PA 18447-2319
(570) 876-2300
FAX (570) 876-5153
INDEPENDENT AUDITOR'S REPORT
April 20, 1999
To the Board of Director and Stockholders of First National Community Bank
and Subsidiary
We have audited the accompanying consolidated statements of income, changes
in stockholders' equity and cash flows of First National Community Bank and
Subsidiary for the year ended December 31, 1996. These financial statements are
the responsibility of management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principals used an significant estimates made by
management, as well as evaluating the overall financial statements presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of First
National Community Bank and Subsidiary for the year ended December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ Robert Rossi & Co.
----------------------
January 21, 1997 ROBERT ROSSI & CO.
Olyphant, Pennsylvania
EXHIBIT 99.3
NOTE: This Is Not A Proxy BACK
Completion and return of this Authorization Form authorizes your enrollment
in the First National Community Bancorp, Inc. Dividend Reinvestment and
Stock Purchase Plan.
Do not return this form unless you wish to participate in the Plan.
|_| Full Common Stock Dividend Reinvestment and Optional Cash Purchases - If
you check this option, you authorize the purchase of additional shares of
common stock with the cash dividends on all shares of common stock
currently or subsequently registered in your name, as well as on the shares
of common stock credited to your Plan Account. In addition, cash payments
of not less than $100 per payment, up to a total of $2,500 per quarter will
be used to purchase additional shares of common stock.
|_| Partial Dividend Reinvestment and Optional Cash Purchases - If you check
this option, you authorize the purchase of additional shares of common
stock with the cash dividends on _______ shares of First National Community
Bancorp, Inc. common stock held by you in certificate form and to apply
these dividends, together with any voluntary cash payments that you may
make, to the purchase of First National Community Bancorp, Inc. common
stock. Optional Cash Payments range in amounts from $100 minimum to $2,500
maximum per quarter.
NOTE: Checks submitted for Optional Cash Purchases of stock must be
received not less than 5 days nor more than 30 days prior to
the Dividend Payment Date. (See Prospectus for details.)
I understand that the purchases will be made under the terms and conditions
of the Dividend Reinvestment Plan as described in the Plan Prospectus that
accompanied this Authorization Form and that I may revoke this
authorization at any time by notifying Registrar and Transfer Company, in
writing, of my desire to terminate my participation.
Please return this Authorization Form in the envelope provided to:
Registrar and Transfer Company, 10 Commerce Drive, Cranford, New Jersey
07016.
Sign here exactly as name(s) appear on stock certificate(s). If shares are
held jointly, all holders must sign.
StockholderX_________________________ Date_________
StockholderX_________________________ Date_________
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Dividend Reinvestment and Stock Purchase Plan FRONT
Authorization Form
- ---------------------------------------------
[Company Logo Please sign the authorization located on the
Name and address here] reverse side of this form and complete the
information below only if it has changed.
Name 1
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Name 2
--------------------------------------
Street Address
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City/State/Zip Code
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Home Telephone Number
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Business Telephone Number
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