As filed with the Securities and Exchange Commission on August 31, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
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William S. Lance, Treasurer
FIRST NATIONAL COMMUNITY
First National 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
- -------------------------------------- ---------------------------
(Address, including zip code, and (Name, address, including
telephone number, including area code, zip code, and telephone
of registrant's principal executive number, including area
offices) code, of agent for service)
With Copies To:
Nicholas Bybel, Jr., 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: October 1, 1999 or as soon as practicable after this Registration
Statement becomes 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. [ ]
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 this Form is a pre-effective amendment filed pursuant to Rule 462(d)
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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<CAPTION>
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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(1)
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<S> <C> <C> <C> <C>
Common Stock, par value $1.25
per share .................... 75,000 $40 $3,000,000 $834.00
- ----------------------------------------------------------------------------------------------------------
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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.
================================================================================
<PAGE>
Prospectus
FIRST NATIONAL COMMUNITY BANCORP, INC.
75,000 Shares of Common Stock
Price $40 per share
First National Community Bancorp, Inc. is offering shares of its common
stock. We are selling these shares directly on a best efforts basis and not
through underwriters, brokers or dealers. There is no minimum number of shares
which must be sold before we can use the proceeds. Our address is 102 East
Drinker Street, Dunmore, Pennsylvania 18512-2491, and our telephone number is
(570) 346-7667.
Our common stock trades on the OTC Bulletin Board under the symbol "FNCB".
This offering involves a degree of risk. See "Risk Factors" beginning on
page 5 for information that prospective purchasers should consider before
investing in our common stock.
Our shares of common stock are not savings accounts, deposits or other
obligations of a bank or savings association and are not insured by the FDIC or
any other governmental agency.
Neither the Securities and Exchange Commission, the Office of the
Comptroller of the Currency, the Federal Deposit Insurance Corporation, the
Board of Governors of the Federal Reserve System nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is August 31, 1999
<PAGE>
Anti-Takeover Provisions
First National Community Bancorp, Inc.'s articles of incorporation and
bylaws include certain provisions which may be considered to be "anti-takeover"
in nature, in that they may have the effect of discouraging or making more
difficult the acquisition of control over us by means of an unsolicited tender
or exchange offer, proxy contest or similar transaction. The provisions in our
articles of incorporation which may be considered anti-takeover in nature
include the following:
o a provision which provides for substantial authorized but unissued
capital stock,
o a provision which denies shareholders the right to cumulate their votes
in the election of directors,
o a provision which establishes criteria to be applied by the Board of
Directors in evaluating an acquisition proposal,
o a provision which denies shareholders preemptive rights to subscribe to
purchase additional shares of stock on a pro rata basis, and
o a provision which requires greater than majority vote to amend
certain provisions of our articles of incorporation.
The provisions of our bylaws which may be considered to be anti-takeover in
nature include the following:
o a provision which establishes a classified Board of Directors, and
o a provision which requires a greater than majority vote in order to
amend our bylaws.
The overall effect of these provisions may result in the entrenchment of
current management by enabling it to retain its current position and placing it
in a better position to resist changes that shareholders may want to make if
dissatisfied with the conduct of our management and business, regardless of
whether these changes are desired by or beneficial to a majority of the
shareholders. You may determine that these provisions are not in your best
interest inasmuch as they may substantially limit your voting power.
As a Pennsylvania business corporation, we are also subject to the
Pennsylvania Business Corporation Law of 1988, as amended, which includes
provisions applicable to us which may have similar effects. As stated above,
these provisions may have the effect of entrenching management against the
wishes of the shareholders. See "Risk Factors" and "Description of Securities --
Anti-Takeover Provisions".
<PAGE>
TABLE OF CONTENTS
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PAGE
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SUMMARY ..........................................................................................1
The Company...................................................................................1
The Offering..................................................................................1
SELECTED FINANCIAL DATA............................................................................3
FORWARD LOOKING STATEMENTS.........................................................................4
RISK FACTORS.......................................................................................5
Our profitability is dependent on the profitability of a subsidiary bank......................5
A downturn in the economic conditions in our market areas may adversely affect our
business.....,............................................................................5
You will have a minimal influence on shareholder decisions....................................5
Changes in interest rates could make us less profitable.......................................5
Our future success is dependent on our ability to compete effectively in
the highly competitive banking industry...................................................6
Our allowance for loan losses may prove to be insufficient to absorb
potential losses in our loan portfolio....................................................6
Changes in real estate values may adversely impact our loans that are
secured by real estate....................................................................7
Changes in the law and regulations may affect our ability to do business,
our costs, and our profits................................................................7
We do not currently have specific uses for the offering proceeds..............................7
We could incur significant costs or losses if our computer systems are unable to
handle the transition to the year 2000 or if our customers' or suppliers'
businesses are interrupted because of year 2000 issues....................................8
The trading market for our common stock is not active.........................................8
Regulatory restrictions on dividend payments from our subsidiary bank may affect
our ability to pay dividends to our shareholders..........................................8
Anti-takeover provisions in our articles of incorporation and bylaws and certain
provisions of Pennsylvania law may discourage or prevent a takeover of our
company and result in a lower market price for our common stock...........................8
STOCK PRICES, DIVIDENDS AND
RELATED SHAREHOLDER MATTERS...................................................................9
Dividend Policy..............................................................................10
DETERMINATION OF OFFERING PRICE...................................................................10
USE OF PROCEEDS...................................................................................10
PLAN OF DISTRIBUTION..............................................................................11
</TABLE>
i
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SUBSCRIPTION PROCEDURE............................................................................11
DESCRIPTION OF SECURITIES.........................................................................12
Common Stock.................................................................................12
Securities Laws..............................................................................12
Anti-Takeover Provisions.....................................................................13
BUSINESS AND PROPERTIES...........................................................................20
Properties...................................................................................20
Business.....................................................................................21
Competition..................................................................................22
SUPERVISION AND REGULATION........................................................................22
Adequacy Guidelines..........................................................................23
Prompt Corrective Action Rules...............................................................24
Regulatory Restrictions on Dividends.........................................................24
FDIC Insurance Assessments...................................................................25
New Legislation..............................................................................25
Interstate Banking...........................................................................25
Employees....................................................................................26
LEGAL PROCEEDINGS.................................................................................26
CAPITALIZATION....................................................................................27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...........................................28
YEAR 2000 COMPLIANCE..............................................................................56
DIRECTORS AND EXECUTIVE OFFICERS..................................................................60
Family Relationships.........................................................................61
EXECUTIVE COMPENSATION............................................................................62
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................................................63
Indebtedness of Management...................................................................63
The Board of Directors.......................................................................63
Compensation of Directors....................................................................64
Compensation Committee Interlocks and Insider Participation..................................64
Employment Agreements........................................................................64
BENEFICIAL OWNERSHIP OF SHARES....................................................................66
TRANSFER AGENT....................................................................................67
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ii
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EXPERTS .........................................................................................67
LEGAL MATTERS.....................................................................................67
WHERE YOU CAN FIND MORE INFORMATION...............................................................68
INDEX TO FINANCIAL STATEMENTS....................................................................F-1
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iii
<PAGE>
SUMMARY
The following summary highlights selected information from this prospectus
and may not contain all the information that is important to you. We encourage
you, as a prospective investor, to read this entire prospectus carefully,
including the financial statements and related notes beginning on page F-1,
before investing in the offered securities.
The Company
First National Community Bancorp, Inc. is a Pennsylvania business
corporation and a registered bank holding company incorporated in February,
1997. We engage in general commercial and retail banking services and in related
businesses through our sole, wholly-owned subsidiary, First National Community
Bank. First National Community Bank began operations in 1910 and became our
subsidiary in 1998.
Our principal executive offices and those of First National Community Bank
are located at 102 East Drinker Street, Dunmore, Pennsylvania 18512-2491, and
the telephone number is (570) 346-7667. See "Business."
The Offering
Common stock offered by us: 75,000 shares
Common stock to be outstanding 2,476,782
after the offering:
Price to the public: $40 per share
Estimated net proceeds to us: $2,939,666
Use of proceeds: We intend to use the net proceeds for
general corporate purposes including:
o investing in First National
Community Bank to increase
its capital position to
permit it to increase per
borrower lending limits, make
larger loans and increase its
lending activity; and
o expanding into related businesses.
OTC Bulletin Board symbol for
our common stock: FNCB
1
<PAGE>
Reason for the offering: We believe that current market conditions
present us with an ideal opportunity:
o to raise additional capital for the
purposes noted above under "Use of
Proceeds," and
o to broaden our shareholder base.
We based our calculation of the number of shares of our common stock
outstanding immediately after this offering on the assumption that all of the
shares being offered will be sold and that the number of shares outstanding
immediately prior to the offering will be the number of shares outstanding on
August 12, 1999.
We are offering the shares to the general public and to our current
shareholders in a direct community offering on a "best efforts" basis with no
required aggregate minimum, on the terms and conditions described in this
prospectus. If we do not sell all the shares that we are offering to the general
public, our directors and officers may purchase the remaining shares at the
offering price. See "Risk Factors - You will have a minimal influence on
shareholder decisions."
You may subscribe for no less than $1,000 of common stock and no more than
$250,000. You may not revoke your subscription once we have received it. We
reserve the right to reject any subscription in whole or in part, for any
reason, including for the reason that other subscribers will be more likely to
direct business to us.
We will begin the offering on October 1, 1999 or as soon as practical after
the registration statement of which this prospectus is a part becomes effective.
We will end the offering at 5:00 p.m. on November 12, 1999, or a later date if
we decide that a later ending date would be beneficial to us. In no event shall
we terminate this offering later than 5:00 p.m. on December 15, 1999. We reserve
the right to withdraw this offering at any time and to terminate this offering
at any time.
In the event that we withdraw or terminate the offering or reject your
subscription, we will return your money as promptly as possible after the
withdrawal, termination or rejection. We will not include interest earned on
your money or reduce your money to cover expenses or charges when we return your
money. We will issue your shares after December 1, 1999. We reserve the right,
in our sole discretion, to waive any of the limitations that we have placed in
the offering. See "Plan of Distribution."
END OF SUMMARY
2
<PAGE>
SELECTED FINANCIAL DATA
Please read the following selected financial data in conjunction with our
consolidated financial statements, related notes, other financial information
and Management's Discussion and Analysis of Financial Condition and Results of
Operations in this prospectus.
FIRST NATIONAL COMMUNITY BANCORP, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(In thousands, except per share data)
<TABLE>
<CAPTION>
As of and for the Six
Months Ended As of and for the Twelve Months ended
June 30 December 31
----------------------- ----------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
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<S> <C> <C> <C> <C> <C> <C> <C>
Total assets $ 508,268 $ 448,324 $ 483,385 $ 428,335 $ 372,438 $ 318,026 $ 269,679
Interest-bearing balances
with financial institutions $ 2,280 $ 3,162 $ 2,478 $ 1,586 $ 2,771 $ 775 $ 2,754
Securities $ 134,445 $ 125,932 $ 131,830 $ 121,367 $ 82,476 $ 69,408 $ 55,403
Net loans $ 344,457 $ 292,680 $ 324,610 $ 280,731 $ 259,880 $ 229,643 $ 193,254
Total deposits $ 395,584 $ 359,777 $ 380,039 $ 345,668 $ 320,968 $ 275,739 $ 236,864
Stockholders' equity $ 33,850 $ 33,550 $ 34,679 $ 31,580 $ 27,631 $ 25,547 $ 17,117
Net interest income before
provision for credit losses $ 8,580 $ 7,529 $ 15,445 $ 14,580 $ 12,765 $ 11,286 $ 9,882
Provision for credit losses $ 360 $ 360 $ 920 $ 1,110 $ 820 $ 796 $ 700
Other income $ 851 $ 784 $ 1,583 $ 1,628 $ 1,099 $ 921 $ 925
Other expenses $ 5,181 $ 4,485 $ 9,423 $ 8,839 $ 7,904 $ 7,097 $ 6,369
Income before income taxes $ 3,890 $ 3,468 $ 6,685 $ 6,259 $ 5,140 $ 4,314 $ 3,738
Provision for income taxes $ 940 $ 867 $ 1,578 $ 1,616 $ 1,265 $ 1,100 $ 888
Net income $ 2,950 $ 2,601 $ 5,107 $ 4,643 $ 3,875 $ 3,214 $ 2,850
Cash dividends paid $ 720 $ 648 $ 1,703 $ 1,396 $ 1,178 $ 887 $ 780
Per share data:
Net income (1) $ 1.23 $ 1.08 $ 2.13 $ 1.94 $ 1.62 $ 1.52 $ 1.39
Cash dividends (2) $ .30 $ .27 $ 0.71 $ 0.58 $ 0.49 $ 0.41 $ 0.38
Book value (1)(3) $ 14.09 $ 13.99 $ 14.46 $ 13.17 $ 11.52 $ 12.08 $ 8.35
Weighted average number
of shares outstanding 2,398,379 2,398,360 2,398,360 2,398,360 2,398,360 2,114,192 2,050,960
PERFORMANCE RATIOS
Return on assets 1.17% 1.20% 1.13% 1.16% 1.13% 1.08% 1.16%
Return on equity 16.97% 16.21% 15.29% 15.85% 14.83% 16.29% 16.51%
Net interest margin on average
earning assets 3.78% 3.87% 3.84% 4.09% 4.25% 4.19% 4.48%
Efficiency (non-interest expense/net
interest income + non-interest
income) 52.49% 51.27% 52.03% 52.37% 53.25% 54.76% 55.66%
LIQUIDITY AND CAPITAL RATIOS
Shareholders' equity (% assets) 6.66% 7.48% 7.17% 7.37% 7.42% 8.03% 6.35%
Risk based:
Tier I Capital 9.95% 10.98% 10.19% 10.94% 10.27% 10.88% 9.93%
Total Capital 11.19% 12.23% 11.45% 12.19% 11.46% 12.12% 11.13%
Dividends (% net income) 24.39% 24.90% 33.35% 30.06% 30.40% 27.60% 27.36%
Loans to deposits 87.08% 81.35% 85.41% 81.21% 80.97% 83.28% 81.59%
ASSETS QUALITY RATIOS
Allowance for credit losses to total
loans 1.30% 1.32% 1.30% 1.27% 1.20% 1.20% 1.15%
Allowance for credit losses to
non-performing loans 294% 259% 330% 253% 297% 157% 83%
Net charge-offs to average total loans .03% .02% .09% .24% .18% .12% .28%
</TABLE>
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(1) Earnings per share and book value per share are calculated based on the
weighted average number of shares outstanding during each year, after
giving retroactive effect to the 100% stock dividend declared in 1998 and
the 10% stock dividends declared in 1997 and 1996.
(2) Cash dividends per share have been restated to reflect the retroactive
effect of the 100% stock dividend declared in 1998 and the 10% stock
dividends declared in 1997 and 1996.
(3) Reflects the effect of SFAS No. 115 in the amount of ($2,403,000) at
June 30, 1999, $791,000 in 1998, $1,097,000 in 1997, $384,000 in 1996,
$991,000 in 1995 and ($1,558,000) in 1994.
3
<PAGE>
FORWARD LOOKING STATEMENTS
This prospectus contains and incorporates certain statements that
constitute "forward- looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements
include certain statements regarding intent, belief or current expectations
about matters (including statements as to "beliefs," "expectations,"
"anticipations," "intentions" or similar words). Forward-looking statements are
also statements that are not statements of historical fact. Forward-looking
statements are subject to risks, uncertainties and assumptions. These include:
o trends for the continued growth of our business;
o our ability to sell only a small amount of shares in the offering o
to sell no shares at all; and
o other risks and uncertainties.
If one or more of these risks or uncertainties occurs or if our underlying
assumptions prove incorrect, our actual results, performance or achievements in
1999 and beyond could differ materially from those expressed in, or implied by,
the forward-looking statements.
You should carefully consider the statements under "Risk Factors" and other
sections in this prospectus which address additional factors that could cause
our actual results to differ from those set forth in the forward-looking
statements.
4
<PAGE>
RISK FACTORS
Before you invest in our common stock, you should be aware that an
investment in our common stock involves a variety of risks, including those
described below. You should carefully read and consider these risks factors,
together with all the other information contained in this prospectus, before you
decide to invest in our common stock by subscribing to the offering.
Our profitability is dependent on the profitability of our subsidiary bank.
Our profitability is dependent on the financial results of our operating
subsidiary, First National Community Bank. Adverse results or events at the bank
would have a significant impact on our profitability. Although the bank's
operations have been profitable recently, we cannot assure you that the bank
will be as profitable or profitable at all in the future.
A downturn in the economic conditions in our market areas may adversely affect
our business.
Currently, our lending and deposit-gathering activities are concentrated
primarily in northeastern Pennsylvania. Our success depends in large part on
general economic conditions in northeastern Pennsylvania and its surrounding
areas. Adverse changes in the northeastern Pennsylvania economy could reduce our
growth rate, impair our ability to collect loans and generally affect our
financial condition and results of operations.
You will have a minimal influence on shareholder decisions.
Together, our directors and executive officers hold 633,018 shares,
representing 26.36% of the total number of shares outstanding as of August 12,
1999. Our directors and executive officers may purchase additional shares in
this offering, including any shares which have not been allocated to
subscriptions at the close of this offering. Mr. Dominick L. DeNaples, one of
our directors, and Mr. Louis A. DeNaples, the chairman of our Board of
Directors, currently hold 6.81% and 7.31% of our outstanding shares. On August
13, 1999, Messrs. DeNaples received permission from the Board of Governors of
the Federal Reserve System to increase the percentage of our shares that they
own to 25%. Messrs. DeNaples are brothers. See "Beneficial Ownership of Shares,"
and "Directors and Executive Officers." Our directors and officers are able to
significantly influence our management policies and decisions as well as issues
which require a shareholder vote. If our directors and executive officers vote
together, they could influence the outcome of certain corporate actions
requiring shareholder approval, including the election of directors and the
approval or non-approval of significant corporate transactions, such as the
merger or sale of all of substantially all of our assets. Their interests may
differ from the interests of other shareholders with respect to management
issues.
Changes in interest rates could make us less profitable.
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
rate levels, which are currently at relatively low levels, and by other economic
factors beyond our control. In addition, interest rate risks can result from
mismatches between
5
<PAGE>
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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Net Interest Income."
Our future success is dependent on our ability to compete effectively in the
highly competitive banking industry.
We face substantial competition in all phases of our operations from a
variety of different competitors. Our future growth and success will depend on
our ability to compete effectively in this highly competitive environment. We
compete for loans, deposits and other financial services in our geographic
market with other commercial banks, savings and loan associations, credit
unions, finance companies, mutual funds, insurance companies, brokerage and
investment banking firms and various other non-bank competitors. Many of our
competitors offer services which we do not, and many have substantially greater
resources, name recognition and market presence that benefit them in attracting
business. In addition, larger competitors may be able to price loans and
deposits more aggressively than we do. Some of the financial institutions and
financial services organizations with which we compete are not subject to the
same degree of regulation as is imposed on bank holding companies and federally
insured, state-chartered banks and national banks. As a result, these non-bank
competitors have advantages over us in providing certain services. See "Business
and Properties -- Competition."
Our allowance for loan losses may prove to be insufficient to absorb potential
losses in our loan portfolio.
Lending money is a substantial part of our business. However, every loan we
make carries a certain risk of non-payment. Our 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. Although we evaluate
every loan that we make against our underwriting criteria, we may experience
losses by reasons of factors beyond our control. Some of these factors include
changes in market conditions affecting the value of real estate and unexpected
problems affecting the creditworthiness of our borrowers.
We determine the adequacy of our allowance of loan losses by considering
various factors, including:
o an analysis of the risk characteristics of various classifications of
loans;
o previous loan loss experience;
o specific loans that would have loan loss potential;
o delinquency trends;
o estimated fair value of the underlying collateral;
o current economic conditions;
o the view of our regulators; and
o geographic and industry loan concentration.
6
<PAGE>
Although we believe our allowance for loan losses is adequate to absorb
probable losses in our loan portfolio, we cannot assure you that our allowance
will be adequate to cover actual loan losses. Our allowance may not be adequate
if delinquency levels on our outstanding loans increase as a result of adverse
economic conditions in northeastern Pennsylvania or in general. 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. Excess loan losses could have a material adverse effect on our financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Loans."
Changes in real estate values may adversely impact our loans that are secured by
real estate.
A significant portion of our loan portfolio consists of residential and
commercial mortgages secured by real estate. These properties are concentrated
in northeastern Pennsylvania. Real estate values and real estate markets
generally are affected by, among other things, changes in national, regional or
local economic conditions, fluctuations in interest rates and the availability
of loans to potential purchasers, changes in the tax laws and other governmental
statutes, regulations and policies, and acts of nature. If real estate prices
decline, particularly in northeastern Pennsylvania, the value of the real estate
collateral securing the bank's loans could be reduced. This reduction in the
value of the collateral would increase the number of non-performing loans and
could have a material negative impact on our financial performance.
Additionally, the bank has increased its level of commercial real estate loans,
which are considered to involve a higher degree of credit risk than that of the
one-to-four family residential loans. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Loans."
Changes in the law and regulations may affect our ability to do business, our
costs, and our profits.
We are subject to extensive state and federal supervision and regulation.
These laws and regulations are intended to protect depositors, not shareholders.
Any change in applicable laws or regulations may have a material effect on our
business and prospects. We cannot predict the nature or the extent of the effect
on our business or earnings that monetary policies, economic control, or new
federal or state regulations may have in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Economic Conditions and Forward Outlook," and "Supervision and Regulation."
We do not currently have specific uses for the offering proceeds.
We have no specific plans or allocations for the proceeds of this offering
other than for general corporate purposes, including increasing our capital
position and expanding into related businesses. We will have broad discretion
with respect to the expenditure of the proceeds of the offering. See "Use of
Proceeds."
We could incur significant costs or losses if our computer systems are unable to
handle the transition to the year 2000 or if our customers' or suppliers'
businesses are interrupted because of year 2000 issues.
7
<PAGE>
Many currently installed computer systems and software products are unable
to distinguish twenty-first century dates from twentieth century dates. As a
result, computer systems and/or software used by many companies and governmental
agencies may require upgrading to avoid system failure or miscalculations which
may cause disruptions of normal business activities. This problem is called the
"Year 2000" problem. If our computer systems, or the computer systems of our
customers and service providers, are not Year 2000 compliant by December 31,
1999, our business may be disrupted. Also, we may incur additional,
unanticipated costs to make our systems Year 2000 compliant. Any disruption and
additional costs could hurt our operating results. See "Year 2000 Compliance."
The trading market for our common stock is not active.
Trading in our common stock is very limited, although our common stock is
quoted on NASDAQ's OTC Bulletin Board. We cannot assure you that a more active
listed trading market will develop.
Regulatory restrictions on dividend payments from our subsidiary bank may affect
our ability to pay dividends to our shareholders.
We conduct our principle business operations through the bank, and the cash
that we use to pay dividends is derived from dividends paid to us by the bank.
The bank's ability to pay dividends to us and our ability to pay dividends to
our shareholders are also subject to and limited by certain legal and regulatory
restrictions. See "Supervision and Regulation -- Regulatory Restrictions on
Dividends."
Anti-takeover provisions in our articles of incorporation and bylaws and certain
provisions of Pennsylvania law may discourage or prevent a takeover of our
company and result in a lower market price for our common stock.
Our articles of incorporation and bylaws contain certain provisions that
enhance the ability of our Board of Directors to deal with attempts to acquire
control of our company. In addition, Pennsylvania law contains certain
anti-takeover provisions that apply to us. While these provisions may provide us
with flexibility in managing our business, they could discourage or make a
merger, tender offer or proxy contest more difficult, even though certain
shareholders may wish to participate in the transaction. These provisions could
also potentially adversely affect the market price of the common stock. See
"Description of Securities -- Anti-Takeover Provisions."
If any of the foregoing risks and uncertainties develop into actual events,
our business, financial condition and results of operations could be materially
adversely affected. In this case, the trading price of our common stock could
decline, and you may lose all or part of your investment.
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STOCK PRICES, DIVIDENDS AND
RELATED SHAREHOLDER MATTERS
Our common stock is quoted on the OTC Bulletin Board under the trading
symbol "FNCB." The principal market area for our stock is northeastern
Pennsylvania. Our common stock is not actively traded.
Quarterly market highs and lows for each of the past two years, the first
two quarters of 1999, and a portion of the third quarter of 1999 as well as cash
dividends declared per share, are presented below. These prices do not
necessarily represent actual transactions. All prices 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
Cash Dividends
1999 High Low Paid Per Share
---- ---- --- --------------
First Quarter $39.00 $32.00 $ .15
Second Quarter 42.00 39.50 .15
Third Quarter
(as of August 12, 41.00 40.25 .17
1999)
Cash Dividends
1998 High Low Paid Per Share
---- ---- --- --------------
First Quarter $23.50 $19.00 $.135
Second Quarter 23.75 21.19 .135
Third Quarter 23.75 23.75 .15
Fourth Quarter 32.00 24.25 .29
Cash Dividends
1997 High Low Paid Per Share
---- ---- --- --------------
First Quarter $16.13 $15.63 $ .12
Second Quarter 17.50 16.25 .12
Third Quarter 18.00 16.75 .12
Fourth Quarter 19.81 17.38 .22
On August 12, 1999, the closing bid and asked quotations for our common
stock as reported on the OTC Bulletin Board were, respectively, $39.00 and
$42.50. As of August 12, 1999, there were approximately 900 holders of record of
our common stock and 2,401,782 shares of common stock were issued and
outstanding. Dividends on our common stock, if approved by
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<PAGE>
our Board of Directors, are customarily paid on or about March 15, June 15,
September 15 and December 15 of each year.
Dividend Policy
Our Board of Directors reviews its dividend policy at least annually. The
amount of the dividend, while in the sole discretion of the Board, depends upon
the performance of First National Community Bank, our wholly-owned subsidiary.
Our ability to pay dividends is also subject to the restrictions imposed by
Pennsylvania law. Generally, Pennsylvania law prohibits a corporation from
paying dividends if the corporation is insolvent or if the dividend would cause
the corporation to be unable to pay its indebtedness of the corporation as the
indebtedness becomes due in the usual course of business or if the corporation's
total assets would be less than the sum of its total liabilities plus the amount
that would be needed if it were to be dissolved at the time of the distribution
to satisfy the preferential rights upon dissolution of shareholders whose
preferential rights are superior to those receiving the distribution. We cannot
assure you that dividends will be declared in the future nor can we make any
predictions as to the rate of dividend payments in the future, if any.
We are also subject to the dividend restrictions applicable to national
banks because our only source of income is from the dividends paid by the First
National Community Bank. Under the National Bank Act, the bank may pay dividends
to us only out of retained earnings as defined in the statute. The approval of
the Office of the Comptroller of the Currency is required if dividends for any
year exceed the net profits, as defined, for that year plus the retained net
profits for the preceding two years. In addition, unless a national bank's
capital surplus equals or exceeds the stated capital for its common stock, no
dividends may be declared unless the bank makes transfers from retained earnings
to capital surplus.
DETERMINATION OF OFFERING PRICE
Our Board of Directors set the per share price for the common stock to be
sold in this offering. The price is the same for our current shareholders, the
general public and any officers or directors who may purchase unsubscribed
shares. See "Plan of Distribution." In making its determination, our Board
considered recent market prices for our outstanding common stock, general market
trends and the purchase price of our common stock under our dividend
reinvestment plan. The Board did not engage an investment bank to establish a
fair value for the offering, nor did it consult with brokers, experts or other
professionals in setting the per share price for this offering.
USE OF PROCEEDS
We do not know the number of shares that will ultimately be purchased under
this offering. Although we have no specific plans for the net proceeds, we may
use the proceeds from the subscriptions, when and as accepted, for working
capital and general corporate purposes. These purposes may include contributions
to the bank's capital to allow the bank to provide for higher per borrower
lending limits, which will allow the bank to make larger loans, increase the
bank's lending activity and permit additional growth in the bank's assets. In
addition, we may
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<PAGE>
use the proceeds to expand into related businesses. We may change the use of
proceeds or the timing of the use of proceeds at our discretion.
We estimate our net proceeds, if the maximum number of shares are sold, to
be $2,939,666 after deducting estimated expenses incurred by us in preparing for
and conducting the offering, of $60,334.
PLAN OF DISTRIBUTION
We are offering the common stock through the efforts of our and First
National Community Bank's directors, officers and employees. None of those
individuals will be entitled to receive any discount, commission or additional
compensation for selling the common stock, but we may reimburse them for
reasonable expenses, if any, incurred in connection with the sale of the common
stock. We intend to satisfy the safe harbor provisions of Rule 3a4-1 of the
Securities Exchange Act of 1934 to ensure that our and First National Community
Bank's directors, officers and employees will not be deemed "brokers," as
defined in the Exchange Act, because of their actions in conducting the
offering.
We will begin the offering on October 1, 1999 or as soon as practical after
the registration statement, of which this prospectus is a part, becomes
effective. We will end the offering at 5:00 p.m. on November 12, 1999 or a later
date if we believe it is in our best interests to do so. In no event will this
offering end later than 5:00 p.m. on December 15, 1999. We reserve the right to
withdraw this offering at any time and to end this offering at any time.
SUBSCRIPTION PROCEDURE
You do not have the right to withdraw your subscription to this offering
once we have received it. Do not subscribe to this offering until you are sure
of your decision. Once we receive your subscription we will not refund your
money unless we reject your subscription, withdraw the offering or terminate the
offering before we accept your subscription.
We reserve the right to reject any subscription to this offering, in whole
or in part, for any reason. In determining which subscriptions to accept, we may
take into account your potential to do business with First National Community
Bank or to direct customers to the bank.
You may purchase as little as $1,000 worth of shares or as much as $250,000
worth of shares in this offering.
In order to subscribe for shares of common stock in this offering, you must
send to us the following items:
o completed subscription agreement (included in the same package as this
prospectus); and
o the full amount of the subscription price of $40 per share in
the form of a check, money order or authorization for
withdrawal from an account or deposit at First National
Community Bank.
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Our contact person and address is:
William S. Lance, Treasurer
First National Community Bancorp, Inc.
102 East Drinker Street
Dunmore, Pennsylvania 18512
We will only consider those subscription agreements that are:
o properly filled in;
o signed and dated;
o received before the expiration date of November 12, 1999; and
o which are accompanied by payment in full.
We will not deposit the money you send to us with your subscription
agreement until we accept your subscription.
DESCRIPTION OF SECURITIES
Common Stock
We are authorized to issue 5,000,000 shares of common stock, of which
2,401,782 shares were issued and outstanding as of August 12, 1999. The Board of
Directors may issue shares of common stock without shareholder approval, as long
as there are authorized but unissued shares available. Shareholders are entitled
to one vote per share on all matters presented to them and have no cumulative
voting rights in the election of directors.
The common stock has no preemptive, subscription, or conversion rights,
redemption or repurchase provisions. The shares are non-assessable and require
no sinking fund. Each shareholder is entitled to receive dividends as declared
by the Board of Directors and to share pro rata in the event of dissolution or
liquidation.
Securities Laws
We are subject to the registration and prospectus delivery requirements of
the Securities Act of 1933 and to similar requirements under state securities
laws. Our common stock is registered with the Commission under Section 12(g) of
the Securities Exchange Act of 1934, as amended, and we are subject to the
periodic reporting, proxy solicitation and insider trading requirements of the
Securities Exchange Act of 1934. Our executive officers, directors and those who
are beneficial owners of more than 10% of our issued and outstanding shares of
common stock are subject to restrictions affecting their right to sell their
shares of our common stock beneficially owned by them. Specifically, each such
person is subject to the beneficial ownership
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<PAGE>
reporting requirements under the short-swing profit recapture provisions of
Section 16 of the Securities Exchange Act of 1934 and may sell shares of our
common stock only:
o in compliance with the provisions of Commission Rule 144 or as is;
o in compliance with the provisions of another applicable exemption from
the registration requirements of the Securities Act of 1933; or
o pursuant to an effective registration statement filed with the
Commission under the Securities Act of 1933.
The Pennsylvania Business Corporation Law of 1988 and our articles of
incorporation and bylaws provide numerous provisions that may be deemed to be
anti-takeover in nature, both as to purpose and effect.
Anti-Takeover Provisions
The overall effect of the various anti-takeover provisions might be to
deter a tender offer that a majority of our shareholders might view to be in
their best interests. The offer could include, among other things, a substantial
premium over the market price at that time. In addition, anti-takeover
provisions may have the effect of assisting our current management in retaining
its position and placing it in a better position to resist changes that
shareholders want to make if they were dissatisfied with the conduct of our
business.
Articles of Incorporation and Bylaws
Our articles of incorporation and bylaws contain a number of provisions
that could be considered anti-takeover in purpose and effect. These provisions
include:
o the authorization of 5,000,000 shares of our common stock; and
o the lack of preemptive rights for our shareholders to subscribe to
purchase additional shares of stock on a pro rata basis.
The additional shares of common stock and the elimination of preemptive
rights to the stock provide our Board of Directors with as much flexibility as
possible to issue additional shares, without further shareholder approval, for
proper corporate purposes, including:
o financing
o acquisitions
o stock dividends
o stock splits
o employee incentive plans
o other similar purposes
However, these additional shares also may be used by the Board of
Directors, if consistent with its fiduciary responsibilities, to deter future
attempts to gain control over us.
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<PAGE>
Our bylaws include provisions for a classified board. Our Board of
Directors believes that a classified board helps to assure continuity and
stability of corporate leadership and policy. In addition, a classified board
helps to moderate the pace of any change in control of the Board of Directors by
extending the time required to elect a majority of the directors to at least two
successive annual meetings. However, this extension of time also tends to
discourage a tender offer or takeover bid and may also be "anti-takeover" in
nature. In addition, a classified board makes it more difficult for a majority
of the shareholders to change the composition of the Board of Directors even
though this may be considered desirable for them.
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 we have approximately 900 shareholders, the Board
of Directors recognizes that the absence of cumulative voting makes it more
difficult to gain representation on the Board of Directors.
Provisions in our articles of incorporation and bylaws require action by a
majority of the Board of Directors, the chairman, the president or the executive
committee to call a special meeting of shareholders. Our bylaws may be amended
by a majority vote of the members of the Board of Directors, subject to the
affirmative vote of at least 75% of the issued and outstanding shares to change
any amendment to the bylaws previously approved by the Board of Directors. These
provisions ensure that any extraordinary corporate transaction can be effected
only if it received a clear mandate from the shareholders and/or the directors.
Other provisions that may be considered "anti-takeover" are the
requirements in our articles of incorporation that:
o the affirmative vote of the holders of at least 75% of our
outstanding shares of common stock is required to approve any
merger, consolidation, dissolution or liquidation involving us
or the sale of all or substantially all of our assets; or
o the holders of at least 51% of the outstanding shares of our
common stock when at least a majority of Directors have
approved such transaction.
These provisions ensure that a corporation may effect extraordinary
transactions only if it receives a clear mandate from its shareholders. These
provisions may give our management a veto power over certain acquisitions
regardless of whether the acquisition is desired by or beneficial to a majority
of our shareholders. The provisions assist management in retaining their present
positions. Also, these provisions may give the holders of a minority of our
outstanding shares a veto power over any merger, consolidation, dissolution or
liquidation, and the sale of all or substantially all of our assets even if
management and/or a majority of the shareholders believes the transaction to be
desirable and beneficial. Without these provisions, the affirmative
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<PAGE>
vote of at least a majority of our shares outstanding and entitled to vote would
be required to approve any merger, consolidation, dissolution, liquidation, and
the sale of all of its assets.
Another anti-takeover provision in our articles of incorporation enables
the Board of Directors to oppose a tender offer on the basis of factors other
than economic benefit to shareholders, such as:
o the impact on the community if we were acquired by another financial
institution;
o the effect the acquisition would have on shareholders, employees,
depositors, suppliers and customers; and
o the reputation and business practices of the tender offeror.
This provision permits the Board of Directors to recognize the
responsibilities to these constituent groups and to us, the bank and the
communities that we serve.
Pennsylvania Law
In addition to the provisions already described, under Pennsylvania law,
there are four additional provisions that may be deemed to be "anti-takeover" in
nature. These provisions apply to us because our common stock is registered with
the Commission. As shareholders of a registered corporation, our shareholders do
not have a right to call a meeting of shareholders nor do they have a right to
propose an amendment to our articles of incorporation. These provisions prevent
the calling of a special meeting of shareholders for the purpose of considering
a merger, consolidation or other corporate combination that does not have the
approval of a majority of the members of the Board of Directors. The provision
may have the effect of making us less attractive as a potential takeover
candidate by depriving shareholders of the opportunity to initiate special
meetings at which a possible business combination might be proposed.
In the opinion of the Board of Directors, the elimination of these two
rights discourages attempts by shareholders to disrupt our business 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 our best
interests and those of our shareholders.
Another provision to which we are 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 us that may not be reflected in such price.
"Control transaction" means the acquisition by a person who has, or a group of
persons acting in concert that has, voting
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<PAGE>
power over our voting shares 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. After the occurrence of a control transaction, any
shareholder may, within a specified time period, make written demand on the
person or group controlling at least 20% of the voting power of our shares for
payment in an amount equal to the fair value of each voting share as of the date
on which the control transaction occurs.
It has become a relatively common practice in corporate takeovers to pay
cash to acquire controlling equity in a target company and then to acquire the
remaining equity interest in the target by paying a price for the remaining
shares that is lower than the price paid to acquire control or consists of a
less desirable form of payment. 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 target'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 the target; or
o disposing of their shares.
These sales would facilitate the purchaser's acquisition of a sufficient
interest in the target 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 shareholders vis-a-vis other shareholders in the event of a
takeover, the legislature did not enact the fair price provision to assure that
shareholders receive a premium price for their shares in a takeover. The fair
price provision would allow our Board of Directors to oppose any future takeover
proposal which it believes not to be in our best interests or those of our
shareholders, whether or not the proposal satisfies the minimum price, form of
consideration and procedural requirements of the fair price provision.
Another Pennsylvania provision relates to a "Business Combination"
involving a registered corporation like us. "Business combination" means any one
of the following transactions involving an "interested shareholder":
o a merger or consolidation of the target 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;
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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 target or any of its subsidiaries 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 target;
o the issuance or transfer by the target or any subsidiary of
any shares of the target of any of its subsidiaries 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
target 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
target or any merger of consolidation of the target with any
subsidiary of the target 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 target
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 target.
An "interested shareholder" is any person that is the beneficial owner,
directly or indirectly of shares entitling that person to cast at least 20% of
the votes that all shareholders would be entitled to cast in an election of
directors of the target company.
Under Pennsylvania law, if we were the target company, we could not engage
in a business combination with an interested shareholder other than:
o a business combination approved by our Board of Directors
prior to the date on which the interested shareholder acquires at least
20% of our common stock or where the purchase of shares by the
interested shareholder has been approved by our Board of Directors;
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 entitling the
interested shareholder to cast at least 70% of the votes that all
shareholders would be entitled to cast in an election of our Directors
if the business combination satisfies certain minimum conditions;
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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 our best efforts to remain independent, we were nevertheless
taken over, each of our shareholders would be treated fairly vis-a-vis every
other shareholder and that arbitragers and professional investors will not
profit at the expense of our long-term public shareholders. We note that while
the business combination provision is designed to help assure fair treatment of
all shareholders vis-a-vis other shareholders, in the event of a takeover, the
business combination provision does not assure that shareholders will receive a
premium price for their shares in a takeover. We believe that the business
combination provision would allow the Board of Director to oppose any future
takeover proposal that it believes not to be in our best interests or those of
our 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 like us. Under Subchapter G, the
acquisition of shares that increase the acquirer's control of the corporation
above 20%, 33 1/3% or 50% of the voting power able to elect the Board of
Directors cannot be voted until a majority of disinterested shareholders approve
the restoration of the voting rights of those shares in two separate votes:
o by all disinterested shares of the corporation; and
o by all voting shares of the corporation.
Voting rights that are restored by shareholder approval will lapse if any
proposed control- share-acquisition that is approved is not consummated within
90 days after shareholder approval is obtained. 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 acquirer. If they
constitute control-shares for the transferee, the transferee also must comply
with the subchapter. If the acquirer does not request a shareholder meeting to
approve restoration of voting rights within 30 days of the acquisition or if
shareholders deny voting rights or if they lapse, we may redeem the control
shares at the average of the high and low price on the date of the notice of
redemption.
Subchapter H of Chapter 25 also applies to registered corporations like us.
Under Subchapter H, a control person, a person who owns shares with 20% or more
voting power, must disgorge any profits from the disposition of any equity
securities to the corporation if the
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disposition occurs within 18 months of becoming a control person and the
security was acquired 24 months before to 18 months after becoming a control
person. This provision seeks to prevent speculative takeover attempts.
The overall effect of these provisions may be to deter a future offer,
other merger or acquisition proposal that a majority of our shareholders might
view to be in their best interests as the offer might include a substantial
premium over the market price of our common stock at that time. In addition,
these provisions may have the effect of assisting our current management in
retaining its position and placing it in a better position to resist changes
that the shareholders may want to make if dissatisfied with the conduct of our
business.
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BUSINESS AND PROPERTIES
We are a Pennsylvania bank holding company, incorporated in 1997 under the
Bank Holding Company Act of 1956. We became an active bank holding company on
July 1, 1998, when we acquired all of the outstanding shares of First National
Community Bank, thus making the bank our wholly-owned subsidiary. First National
Community Bank holds all of the outstanding stock of FNCB Realty, Inc. which
holds and disposes of real estate which the bank has foreclosed. Our principal
executive offices are located in Dunmore, Pennsylvania.
Our primary activity consists of owning and operating First National
Community Bank, which provides customary retail and commercial banking services
to individuals and businesses. The bank provides practically all of our earnings
as a result of its banking services.
The bank was established as a national banking association in 1910 as "The
First National Bank of Dunmore." Based upon shareholder approval received at a
Special Shareholders' Meeting held October 27, 1987, the bank changed its name
to "First National Community Bank," effective March 1, 1988.
Properties
Below is a schedule of all our properties, showing the location, whether
the property is owned or leased and its use:
<TABLE>
<CAPTION>
Type of
Property Location Ownership Use
<S> <C> <C> <C>
1 102 East Drinker Street Own Main Office
Dunmore, PA 18512
2 419-421 Spruce Street Own Scranton Branch
Scranton, PA 18503
3 934 Main Avenue Own Dickson City Branch
Dickson City, PA 18519
4 277 Scranton/Carbondale Highway Lease Fashion Mall Branch
Scranton, PA 18508
5 23 West Market Street Lease Wilkes-Barre Branch
Wilkes-Barre, PA 18701
6 1700 N. Township Blvd. Lease Pittston Plaza Branch
Pittston, PA 18640
7 754 Wyoming Avenue Lease Kingston Branch
Kingston, PA 18704
8 1625 Wyoming Avenue Lease Exeter Branch
Exeter, PA 18643
9 200 S. Blakely Street Lease Administrative Center
Dunmore, PA 18512
10 107-109 S. Blakely Street Own Parking Lot
Dunmore, PA 18512
</TABLE>
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<TABLE>
<CAPTION>
Type of
Property Location Ownership Use
<S> <C> <C> <C>
11 114-116 S. Blakely Street Own Parking Lot
Dunmore, PA 18512
12 1708 Tripp Avenue Own Parking Lot
Dunmore, PA 18512
</TABLE>
Business
First National Community Bank provides the usual commercial banking
services to individuals and businesses, including a wide variety of deposit
instruments. Consumer loans include both secured and unsecured installment
loans, fixed and variable rate mortgages, home equity term loans and Lines of
Credit and "Instant Money" overdraft protection loans. Additionally, the bank is
in the business of underwriting indirect auto loans that various auto dealers in
northeastern Pennsylvania originate and, in 1999, the bank began to originate
dealer floor plan loans. MasterCard and VISA personal credit cards are available
through the bank, as well as the FNCB Check Card which allows customers to
access their checking account at any retail location that accepts VISA and
serves the dual purpose of an ATM card. In the commercial lending field, the
bank offers demand and term loans, either secured or unsecured, letters of
credit, working capital loans, accounts receivable, inventory or equipment
financing loans, and commercial mortgages. In addition, the bank offers
MasterCard and VISA processing services to its commercial customers, as well as
Auto Cash Manager which is a personal computer-based, menu-driven software
product that allows business customers to access directly their account
information and perform certain daily transactions from their place of business.
As a result of the bank's affiliation with INVEST Financial Corporation,
our customers are able to purchase alternative investment products such as
mutual funds, annuities, stock and bond purchases, directly from our INVEST
representative. The bank also offers customers the convenience of 24-hour
banking, seven days a week, through its Money Access Center ("MAC") network.
These automated teller machines are available at the following community
offices:
o Dunmore
o Dickson City
o Fashion Mall
o Pittston
o Kingston
o Exeter
as well as remote facilities in the C-Plus Mini Mart, 309 Main Street, Blakely,
and the Petro Shopping Center, Big Ten Truck Stop, 98 Grove Street, Dupont.
Additionally, to further enhance our 24-hour banking services, we made
available to customers during 1997 our "Account Link" telephone banking, "Loan
by Phone", and "Mortgage Link" services. These services provide consumers the
ability to access account information, perform related account transfers, and
apply for a loan through the use of a touch-tone telephone.
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As of June 30, 1999, the bank had obtained no material portion of its
deposits from a single person or entity. However, the bank holds an industry
concentration in the hotel and automobile dealership industries. Loans and lines
of credit to the hotel industry approximated $12 million as of June 30, 1999.
These loans are secured by first mortgages on the commercial properties being
financed. Loans and lines of credit to the automobile dealership industry
approximated $14.7 million as of June 30, 1999. The bank believes that its risk
in this area is minimized because of the large number of borrowers and the
selective process utilized in soliciting new dealers.
Competition
The bank is one of two financial institutions with principal offices in
Dunmore. Primary competition in the Dunmore, Scranton and Mid Valley markets
comes from several commercial banks and savings and loan associations operating
in these areas. There are 13 commercial banks which are either headquartered or
have a presence in the Dunmore, Scranton and Mid Valley markets. Our Luzerne
County offices share many of the same competitors we face in Lackawanna County
as well as several banks and savings and loans that are not in our Lackawanna
County market. Deposit deregulation has intensified the competition for deposits
among banks in recent years. Additional competition is derived from credit
unions, finance companies, brokerage firms, insurance companies and retailers.
SUPERVISION AND REGULATION
We are under the jurisdiction of the Securities and Exchange Commission and
of state securities commission for matters relating to the offer and sale of its
securities. In addition, we are subject to the Securities and Exchange
Commission's rules and regulations relating to periodic reporting, proxy
solicitation, and insider trading. See "Description of Securities -- Securities
Laws."
As a registered bank holding company, we are subject to supervision and
regulation by the Board of Governors of the Federal Reserve System under the
Bank Holding Company Act of 1956. As a bank holding company, our activities and
those of the bank are limited to the business of banking and activities closely
related or incidental to banking. Bank holding companies are required to file
periodic reports with and are subject to examination by the Federal Reserve
Board. The Federal Reserve Board has issued regulations under the Bank Holding
Company Act that require a bank holding company to serve as a source of
financial and managerial strength to its subsidiary banks. As a result, the
Federal Reserve Board, by regulation, may require that we stand ready to use our
resources to provide adequate capital funds to First National Community Bank
during periods of financial stress or adversity.
22
<PAGE>
The Bank Holding Company Act prohibits us from acquiring direct or indirect
control of more than 5% of the outstanding shares of any class of voting stock,
or substantially all of the assets of, any bank, or from merging or
consolidating with another bank holding company, without prior approval of the
Federal Reserve Board. In addition, the Bank Holding Company Act prohibits us
from engaging in or acquiring ownership or control of more than 5% of the
outstanding shares of any class of voting stock of any company engaged in a
non-banking business, unless the business is determined by the Federal Reserve
Board to be so closely related to banking as to be a proper incident to banking.
As a Pennsylvania bank holding company for purposes of the Pennsylvania
Banking Code, we are also subject to regulation and examination by the
Pennsylvania Department of Banking.
First National Community Bank is a national bank and a member of the
Federal Reserve System 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 the FDIC. The bank is also
subject to requirements and restrictions under federal and state law, including
requirements to maintain reserves against deposits, restrictions on the types
and amounts of loans that may be granted and the interest that may be charged on
the loans, and limitation on the types of investments the bank may make and the
types of services the bank may offer. Various consumer loans regulations also
affect the operations of the bank. In addition to the impact of regulation,
commercial banks are affected significantly by the actions of the Federal
Reserve Board as it attempts to control the money supply and credit availability
in order to influence the economy.
Adequacy Guidelines
Bank holding companies are required to comply with the Federal Reserve
Board's risk- based capital guidelines. The required minimum ratio of total
capital to risk-weighted assets, including certain off-balance sheet activities,
such as standby letters of credit, is 8%. At least half 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.
23
<PAGE>
Prompt Corrective Action Rules
The federal banking agencies have regulations defining the levels at which
an insured institution would be considered:
o well capitalized
o adequately capitalized
o undercapitalized
o significantly undercapitalized
o critically undercapitalized.
The applicable federal bank regulator for a depository institution could,
under certain circumstances, reclassify a "well-capitalized" institution as
"adequately capitalized" or require an "adequately capitalized" or
"undercapitalized" institution to comply with supervisory actions as if it were
in the next lower category. A reclassification could be made if the regulatory
agency determines that the institution is in an unsafe or unsound condition
(which could include unsatisfactory examination ratings). We and the bank each
satisfy the criteria to be classified as "well capitalized" within the meaning
of applicable regulations.
Regulatory Restrictions on Dividends
The bank may not, under the National Bank Act, declare a dividend without
approval of the Comptroller of the Currency, unless the dividend 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.
24
<PAGE>
FDIC Insurance Assessments
The FDIC has implemented a risk-related premium schedule for all insured
depository institutions that results in the assessment of premiums based on
capital and supervisory measures.
Under the risk-related premium schedule, the FDIC assigns, on a semiannual
basis, each depository institution to one of three capital groups
(well-capitalized, adequately capitalized or undercapitalized) and further
assigns such institutions to one of three subgroups within a capital group. The
institution's subgroup assignment is based upon the FDIC's judgment of the
institution's strength in light of supervisory evaluations, including
examination reports, statistical analyses and other information relevant to
measuring the risk posed by the institution. Only institutions with a total
capital to risk-adjusted assets ratio of 10% or greater, a Tier I capital to
risk-based assets ratio of 6% or greater, and a Tier I leverage ratio of 5% or
greater, are assigned to the well-capitalized group. As December 31, 1998, the
bank was well capitalized for purposes of calculating insurance assessments.
The Bank Insurance Fund is presently fully funded at more than the minimum
amount required by law. Accordingly, the 1999 BIF assessment rates range from
zero for those institutions with the least risk, to $0.27 for every $100 of
insured deposits for institutions deemed to have the highest risk. The bank is
in the category of institutions that presently pay nothing for deposit
insurance. The FDIC adjusts the rates every six months.
While the bank presently pays no premiums for deposit insurance, it is
subject to assessments to pay the interest on bonds issued by the Financing
Corporation. FICO was created by Congress to issue bonds to finance the
resolution of failed thrift institutions. Prior to 1997, only thrift
institutions were subject to assessments to raise funds to pay the FICO bonds.
On September 30, 1996, as part of the omnibus budget act, Congress enacted
the Deposit Insurance Funds Act of 1996, which recapitalized the Savings
Association Insurance Fund and provided that commercial banks would be subject
to 1/5 of the assessment to which savings and loan associations are subject for
FICO bond payments through 1999. Beginning in 2000, commercial banks and savings
and loan associations will be subject to the same assessment for FICO bonds.
New Legislation
Proposed legislation is introduced in almost every legislative session that
would dramatically affect the regulation of the banking industry. At this time,
we cannot estimate whether or not legislation will be enacted and what effect
the legislation might have on us or the bank.
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
25
<PAGE>
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 August 12, 1999, we and the bank employ the equivalent of 177
full-time persons. None of our employees are represented by a collective
bargaining unit. We and the bank consider relations with our employees to be
good.
LEGAL PROCEEDINGS
Neither we nor the bank is a party to, nor is any of our or the bank's
property the subject of, any pending legal proceedings, other than those arising
in the ordinary course of business. In the opinion of our management, no such
proceeding will have a material adverse effect on our financial position or
results or those of the bank.
26
<PAGE>
CAPITALIZATION
The following table sets forth our total capitalization and capital ratios
as of June 30, 1999, and our total pro forma capitalization to show the effect
of the proposed sale of 75,000 shares of our common stock which we are offering
in this prospectus at an offering price of $40.00 per share.
<TABLE>
<CAPTION>
June 30, 1999
----------------------
(dollars in thousands)
Increase/ Adjusted
Actual Decrease(1)(2) Pro Forma
------- -------------- ----------
<S> <C> <C> <C>
Stockholders' Equity:
Common Stock, par value $1.25 per share,
5,000,000 shares authorized, 2,401,782 shares
issued and outstanding $ 3,002 $ 94 $ 3,096
Additional paid-in capital 6,398 2,856 9,254
Retained Earnings 26,853 26,853
Accumulated other comprehensive income, net of
tax effect (2,403) (2,403)
------- ------ -------
Total Stockholders' Equity $33,850 $2,950 $36,800
======= ====== =======
</TABLE>
- ---------------
(1) Gives effect to the completion of the proposed sale of 75,000 shares of
the company's common stock at an offering price of $40.00 per share.
(2) Additional paid-in capital has been adjusted to reflect the increase
due to the proposed sale, net of issuance costs approximating $50,000.
June 30, 1999
-------------
Capital Ratios (at end of period):
Total equity to total assets 6.66%
Total risk-based capital ratio 11.19%
Tier 1 risk-based capital ratio 9.95%
Leverage ratio 7.00%
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On the following pages we present management's discussion and analysis of
our financial condition and results of operations together with our wholly-owned
subsidiary, First National Community Bank. This discussion highlights the
significant changes in the results of operations, capital resources and
liquidity presented in our accompanying financial statements. Current
performance does not guarantee, assure, and may not be indicative of similar
performance in the future.
We qualify the following discussion in its entirety by the more detailed
information and the financial statements and notes to the financial statements
appearing elsewhere in this prospectus. In addition to the historical
information contained in this prospectus, the discussion in this prospectus
contains certain forward-looking statements that involve risks and
uncertainties, such as statements of our plans, objectives, expectations and
intentions. Please read the cautionary statements made in this prospectus as
being applicable to all related forward- looking statements wherever they appear
in the prospectus. Our actual results could differ materially from those
discussed here. Factors that could cause or contribute to these differences
include, but are not limited to, those discussed in this section and in "Risk
Factors."
We also caution you not to place undue reliance on forward-looking
statements in this section, as they reflect management's analysis only as of
this date. We undertake no obligation to publicly revise or update these
forward-looking statements to reflect subsequent events or circumstances.
The following financial review is presented on a consolidated basis and is
intended to provide a comparison of our financial performance and that of our
wholly-owned subsidiary, First National Community Bank for the years ended
December 31, 1998, 1997 and 1996. The information presented below should be read
in conjunction with our consolidated financial statements and accompanying notes
appearing elsewhere in this report. All share and per share data has been
restated to reflect the 100% stock dividend paid to shareholders on July 20,
1998 and the 10% stock dividends paid on December 31, 1997 and May 8, 1996.
28
<PAGE>
RESULTS OF OPERATIONS
Summary
Our net income for the six months ended June 30, 1999 amounted to
$2,950,000, an increase of $349,000 or 13% compared to the same period of the
previous year. This increase can be attributed to a $1,051,000 improvement in
net interest income and a 9% increase in non-interest income. On a per share
basis, net income for the six months ended June 30, 1999 and 1998 was $1.23 and
$1.08, respectively. The weighted average number of shares outstanding at June
30, 1999 and 1998 was 2,398,379 and 2,398,360, respectively.
Earnings from asset sales increased $38,000 in the first six months of 1999
over the same period in 1998 due to an increase in the gain on the sale of
securities of $162,000. Non-interest expenses increased $696,000, or 16% over
the same period in 1998 due partially to costs associated with a new community
office. Operating income for the same period, after excluding the effect of
asset sales and loan loss provisions, increased $384,000 or 11% over the first
six months of 1998.
Net income for 1998 amounted to $5,107,000, which was $464,000, or 10%,
higher than the 1997 level. In 1997, net income totaled $4,643,000 or $768,000
over 1996. On a per share basis, net income was $2.13, $1.94 and $1.62,
respectively in 1998, 1997 and 1996. The weighted average number of shares
outstanding in 1998, 1997 and 1996 was 2,398,360 after giving retroactive effect
to the stock dividends paid in 1998, 1997 and 1996, respectively.
The increase in net income recorded in 1998 can be attributed to the
$865,000, or 6%, improvement in net interest income combined with a reduced
provision for credit losses which more than offset the $585,000, or 7%, increase
in other expenses. Management's focus on improvement through growth again proved
successful as increased earnings due to volume variances more than compensated
for the negative impact of repricing resulting from the reduction in interest
rates during the fourth quarter.
The $768,000, or 20%, increase in 1997 over the 1996 earnings can be
attributed to the $1.8 million increase in net interest income and a $529,000
improvement in non-interest income, offset partially by additional non-interest
expenses, credit loss provisions and applicable income taxes.
Return on assets for the six month periods ending June 30, 1999 and 1998
was 1.17% and 1.20%, respectively, while the return on equity recorded during
the same period was 16.97% and 16.21%, respectively. Return on assets for the
years ended December 31, 1998, 1997 and 1996 was 1.13%, 1.16% and 1.13%,
respectively while the return on equity recorded during the same periods
amounted to 15.29%, 15.85% and 14.83%.
Net Interest Income
Net interest income, the difference between interest income and fees on
earning assets and interest expense on deposits and borrowed funds, is the
largest component of our operating income and determines our profitability.
29
<PAGE>
Before providing for future credit losses, net interest income increased
14% from $7.5 million for the first six months of 1998 to $8.6 million for the
first six months of 1999. Before providing for future credit losses, net
interest income increased 6% from the $14.6 million recorded in 1997 to $15.4
million in 1998 for the same period.
Changes in net interest income generally occur due to fluctuations in the
balances and/or mixes of interest-earning assets and interest-bearing
liabilities, and changes in their corresponding interest yields and costs.
Changes in non-performing assets, together with interest lost and recovered on
those assets, also impact comparisons of net interest income. In the following
schedules, net interest income is analyzed on a tax-equivalent basis, thereby
increasing interest income on certain tax-exempt loans and investments by the
amount of federal income tax savings realized. In this manner, the true economic
impact on earnings from various assets and liabilities can be more accurately
compared.
Tax-equivalent net interest income for the first six months of 1998
increased $1 million, or 11%, over the $9.5 million reported in the first six
months of 1998. Tax-equivalent net interest income in 1998 increased $927,000,
or 6%, from the $15.8 million reported in 1997. Sound pricing policies,
aggressive growth strategies and effective asset-liability management techniques
again enabled us to improve net interest income during this period of declining
interest rates.
Average loans increased $55 million, or 19%, over the same six-month period
of 1998, and contributed to an increase of $1.8 million of interest income over
the 1998 level. Commercial loans continue to provide the majority of our loan
growth as evidenced by the $40 million increase over the first half of 1998.
Installment loans also increased $26 million in the same period due primarily to
growth in indirect auto loans and installment loans secured by real estate.
Average mortgage loan balances were $10 million lower than during the first half
of last year due to sales of long-term assets in 1998 and 1999. Earning assets
increased by $24 million to $488 million during the first six months of 1999 and
now total 96.1% of total assets, equal to the 1998 year-end level.
Average loans increased $26 million, or 10%, in 1998 and contributed an
increase of $1.8 million of interest income over the 1997 level. Commercial
loans provided the majority of the growth in 1998 as average loan balances
increased $24 million and earnings on those balances improved by $1.8 million.
Installment loans also provided significant increases in 1998 comprised of $15
million in average loan balances and $1.2 million of interest income due
primarily to growth in indirect auto loans. Mortgage loans outstanding averaged
$13 million lower in 1998 than in 1997 due to the sale of almost $23 million of
long-term, fixed rate assets in 1998. As a result of the reduced level of
average loans outstanding, interest income on mortgage loans decreased $1.2
million in 1998. Repricing and new volume resulted in the sixteen basis point
reduction earned on average loan balances in 1998 when compared to the prior
period.
Average securities were $14 million higher during the first half of 1999
when compared to the same period in 1998. Interest income during the same period
improved by $217,000 due to the higher balances. Lower rates on new volume
resulted in a twenty-nine basis point reduction in yield when compared to the
same period of 1998. Average money market assets were $1.7 million lower than in
1998, resulting in a decrease in interest income of $66,000.
30
<PAGE>
Average securities increased $24 million over the 1997 average balance and
generated $1.3 million of additional earnings. Declining rates impacted
securities yields through repricing, new volume and principal reductions,
resulting in a thirty-nine basis point decrease from the 1997 level. Money
market assets, which include interest-bearing deposits with banks and federal
funds sold, were $1.2 million less in 1998 than in 1997 and earnings from these
assets decreased $61,000.
Average interest bearing deposits increased $38 million in the first half
of 1999 over the same period in 1998. Certificates of deposit again provided the
majority of the growth, increasing $24 million, but lower costing demand and
savings balances also increased $14 million over the prior year's levels.
Borrowed funds outstanding also average $23 million higher in the first half of
1999 than in 1998. Interest rate reductions and new volume resulted in a
twenty-seven basis point reduction in the cost of interest-bearing liabilities
from the first half of 1998 to the first half of 1999.
Total interest-bearing deposits increased $22 million in 1998 comprised of
an $18 million increase in average certificates of deposit and a $4 million
increase in low-cost deposits. Competition for deposits remained fierce in local
markets, resulting in an average cost of deposits which was equal to the 1997
level. Borrowed funds and other interest-bearing liabilities increased $20
million on the average due to additional Federal Home Loan Bank advances but
repricing and reduced costs on new borrowings resulted in a twenty-five basis
point reduction in the cost of these liabilities.
Year to date net interest margins (tax equivalent) decreased from 3.87% in
June 1998 to 3.78% for the same period of 1999 which was comprised of a
twenty-seven basis point decrease in the yield earned on earning assets and a
twenty-four basis point decrease in the cost of interest-bearing liabilities.
The drop resulted from interest rate reductions in 1998 which had an immediate
impact on interest earning assets but only a gradual impact on deposit
repricing.
As a result of the interest rate reductions in 1998 and the more immediate
impact on interest earning assets, our net interest margin decreased twenty-five
basis points to 3.84% in 1998. Investment leveraging transactions not only
continue to add to our profitability, as evidenced by the $433,000 earned in
1998 from the transactions, but also contribute to the reduction in the overall
net interest margin. Exclusive of the investment leveraging transactions, the
1998 net interest margin would have been 4.15%, or seven basis points lower than
the comparable period of 1997.
During 1997, tax-equivalent net interest income increased $1.9 million, or
14%, from the $13.9 million reported in 1996 to $15.8 million. Interest rates
continued the roller coaster ride experienced in 1996 and gradually increased
during the first quarter, with the long bond exceeding 7.00%. During the second
and third quarters of 1997, rates again fluctuated until decreasing steadily
through the fourth quarter as inflation fears subsided. As of year end, the
yield on the one-year Treasury Bill was three basis points lower than it began
the year while the thirty year bond had decreased seventy-seven basis points to
5.96%. Yields earned on loans and money market assets increased during 1997 from
the prior year levels but a three basis point decrease in the yield earned on
securities resulted in a yield on total earning assets which remained stable at
8.32%. During the same period, however, competition for deposits remained fierce
locally resulting in a nine basis point increase in the cost of interest-bearing
deposits.
31
<PAGE>
Additionally, the cost of borrowed funds and other interest-bearing
liabilities increased during 1997, resulting in a decrease in the net interest
margin from the 4.25% recorded in 1996 to 4.09%. During 1997, we entered into
several investment leveraging transactions which resulted in $164,000 of pre-tax
earnings, but the 1.06% spread earned on the transactions had a negative impact
on the overall net interest margin. Excluding the effect of these transactions,
the 1997 net interest margin would have been 4.22% which is only slightly lower
than the 4.25% recorded in 1996. Growth in earning assets which represents 112%
of the growth in interest-bearing liabilities also contributed to the 1997
margin.
32
<PAGE>
Yield/Cost Analysis
The following tables set forth certain information relating to our
statement of financial condition and reflect the weighted average yield on
assets and weighted average costs of liabilities for the periods indicated. Such
yields and costs are derived by dividing the annualized income or expense by the
weighted average balance of assets or liabilities, respectively, for the periods
shown:
<TABLE>
<CAPTION>
Six months ended June 30,
1999
------------------------------------------------
Average Yield/
Balance Interest Cost
--------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C>
Assets:
Interest-earning assets:
Loans (taxable) $333,802 $13,824 8.27%
Loans (tax-free) (1) 12,759 380 8.99
Investment securities (taxable) 98,403 3,129 6.36
Investment securities (tax-free) (1) 35,952 973 8.20
Time deposits with banks and federal funds sold 5,634 143 5.07
--------- --------- ----
Total interest-earning assets 486,550 18,449 7.86%
------- ----
Noninterest-earning assets 20,531
--------
Total Assets $507,081
========
Liabilities and Shareholders' Equity:
Interest-bearing Liabilities:
Deposits $354,647 $ 7,829 4.45%
Borrowed funds 73,105 2,040 5.55
-------- ------- ----
Total Interest-bearing Liabilities 427,752 9,869 4.64%
------- ----
Other Liabilities and Shareholders' Equity 79,329
--------
Total Liabilities and Shareholders' Equity $507,081
========
Net interest income/rate spread $ 8,580 3.22%
Net yield on average interest-earning assets 3.78%
Interest-earning assets as a percentage of interest-
bearing liabilities 114%
</TABLE>
- ----------------
(1) Yields on tax-exempt loans and investment securities have been computed on a
tax equivalent basis.
33
<PAGE>
<TABLE>
<CAPTION>
Six months ended June 30,
1998
------------------------------------------------
Average Yield/
Balance Interest Cost
------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C>
Assets:
Interest-earning assets:
Loans (taxable) $277,031 $11,892 8.58%
Loans (tax-free) (1) 14,617 441 9.08
Investment securities (taxable) 91,751 3,054 6.66
Investment securities (tax-free) (1) 29,026 830 8.67
Time deposits with banks and federal funds sold 7,308 208 5.71
-------- ------- ----
Total interest-earning assets 419,735 16,425 8.13%
------- ----
Noninterest-earning assets 16,581
-------
Total Assets $436,316
========
Liabilities and Shareholders' Equity:
Interest-bearing Liabilities:
Deposits $316,681 $ 7,418 4.72%
Borrowed funds 50,102 1,478 5.90
-------- ------- ----
Total Interest-bearing Liabilities 366,783 8,896 4.88%
------- ----
Other Liabilities and Shareholders' Equity 69,533
--------
Total Liabilities and Shareholders' Equity $436,316
========
Net interest income/rate spread $ 7,529 3.25%
Net yield on average interest-earning assets 3.87%
Interest-earning assets as a percentage of interest-
bearing liabilities 114%
</TABLE>
- -----------------
(1) Yields on tax-exempt loans and investment securities have been computed on a
tax equivalent basis.
34
<PAGE>
<TABLE>
<CAPTION>
Yield Analysis
(dollars in thousands-taxable equivalent basis)(1)
1998 1997
--------------------------------- --------------------------------
Interest Average Interest Average
Average Income/ Interest Average Income/ Interest
Balance Expense Rate Balance Expense Rate
--------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Earning Assets: (2)
Commercial loans-taxable $161,839 $14,272 8.82% $138,214 $12,450 9.01%
Commercial loans-tax free 11,648 1,106 9.50% 11,714 1,135 9.69%
Mortgage loans 50,072 3,951 7.89% 62,814 5,097 8.11%
Installment loans 78,971 6,606 8.37% 63,501 5,433 8.56%
-------- ------- -------- -------
Total Loans 302,530 25,935 8.57% 276,243 24,115 8.73%
-------- ------- -------- -------
Securities-taxable 95,602 6,239 6.53% 74,605 5,147 6.90%
Securities-tax free 30,196 2,587 8.57% 26,934 2,380 8.83%
-------- ------- -------- -------
Total Securities 125,798 8,826 7.02% 101,539 7,527 7.41%
-------- ------- -------- -------
Interest-bearing deposits with banks 2,918 177 6.07% 2,839 170 6.00%
Federal funds sold 4,007 222 5.54% 5,251 290 5.52%
-------- ------- -------- -------
Total Money Market Assets 6,925 399 5.76% 8,090 460 5.69%
-------- ------- -------- -------
Total Earning Assets 435,253 35,160 8.08% 385,872 32,102 8.32%
Non-earning assets 21,657 19,278
Allowance for credit losses (3,932) (3,446)
-------- --------
Total Assets $452,978 $401,704
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-Bearing Liabilities
Interest-bearing demand deposits $ 50,504 $ 1,225 2.43% $ 45,682 $ 1,110 2.43%
Savings deposits 41,983 1,001 2.38% 42,482 1,038 2.44%
Time deposits over $100,000 61,618 3,265 5.30% 53,784 2,827 5.26%
Other time deposits 171,147 9,764 5.71% 161,331 9,253 5.74%
-------- ------- -------- -------
Total Interest-Bearing Deposit 325,252 15,255 4.69% 303,279 14,228 4.69%
-------- ------- -------- -------
Borrowed funds and other interest-
bearing liabilities 54,661 3,202 5.86% 34,327 2,098 6.11%
-------- ------- -------- -------
Total Interest-Bearing Liabilities 379,913 18,457 4.86% 337,606 16,326 4.84%
Demand deposits 35,887 31,707
Other liabilities 3,779 3,103
Stockholders' equity 33,399 29,288
-------- --------
Total Liabilities and
Stockholders' Equity $452,978 $401,704
======== ========
Net Interest Income Spread $16,703 3.22% $15,776 3.48%
======= ===== ======= =====
Net Interest Margin 3.84% 4.09%
===== =====
</TABLE>
<TABLE>
<CAPTION>
1996
--------------------------------
Interest Average
Average Income/ Interest
Balance Expense Rate
-------- -------- --------
<S> <C> <C> <C>
ASSETS:
Earning Assets: (2)
Commercial loans-taxable $116,851 $10,466 8.96%
Commercial loans-tax free 8,658 800 9.24%
Mortgage loans 66,158 5,302 8.01%
Installment loans 52,436 4,623 8.82%
-------- -------
Total Loans 244,103 21,191 8.68%
-------- -------
Securities-taxable 47,524 3,131 6.59%
Securities-tax free 27,643 2,464 8.91%
-------- -------
Total Securities 75,167 5,595 7.44%
-------- -------
Interest-bearing deposits with banks 1,738 101 5.81%
Federal funds sold 5,483 293 5.34%
-------- -------
Total Money Market Assets 7,221 394 5.46%
-------- -------
Total Earning Assets 326,491 27,180 8.32%
Non-earning assets 18,271
Allowance for credit losses (3,105)
--------
Total Assets $341,657
========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-Bearing Liabilities
Interest-bearing demand deposits $38,637 $937 2.43%
Savings deposits 45,257 1,163 2.57%
Time deposits over $100,000 46,261 2,421 5.23%
Other time deposits 136,460 7,750 5.68%
-------- -------
Total Interest-Bearing Deposit 266,615 12,271 4.60%
-------- -------
Borrowed funds and other interest-
bearing liabilities 17,821 1,035 5.81%
-------- -------
Total Interest-Bearing Liabilities 284,436 13,306 4.68%
Demand deposits 28,116
Other liabilities 2,978
Stockholders' equity 26,127
--------
Total Liabilities and
Stockholders' Equity $341,657
========
Net Interest Income Spread $13,874 3.64%
======= =====
Net Interest Margin 4.25%
=====
</TABLE>
- ----------------------
(1) In this schedule and other schedules presented on a tax-equivalent basis,
income that is exempt from federal income taxes, i.e. interest on state and
municipal securities, has been adjusted to a taxable equivalent basis using
a 34% federal income tax rate.
(2) Excludes non-performing loans.
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
35
<PAGE>
cannot be segregated, has been allocated proportionately to the change due to
volume and the change due to rate.
Rate Volume Analysis
The table below sets forth certain information regarding the changes in the
components of net interest income for the periods indicated. For each category
of interest-earning asset and interest-bearing liability, information is
provided on changes attributed to: (1) changes in rate (change in rate
multiplied by current volume); (2) changes in volume (change in volume
multiplied by old rate); (3) the total. The net change attributable to the
combined impact of volume and rate has been allocated proportionately to the
change due to volume and the change due to rate.
Rate/Volume Variance Report
<TABLE>
<CAPTION>
Period Ended June 30
(Dollars in thousands)
1999 vs 1998
Increase (Decrease)
Due to
------------------------------------------
Rate Volume Total
------ ------ ------
<S> <C> <C> <C>
Loans (taxable) $(575) $2,507 $1,932
Loans (tax-free) (4) (56) (60)
Investment securities (taxable) (144) 219 75
Investment securities (tax-free) (56) 198 142
Time deposits with banks and federal funds sold (19) (47) (66)
----- ------ ------
Total interest income $(798) $2,821 $2,023
----- ------ ------
Deposits $(414) $ 825 $ 411
Borrowed funds (116) 678 562
----- ------ ------
Total Interest expense $(530) $1,503 $ 973
----- ------ ------
Net change in net interest income $(268) $1,318 $1,050
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Period Ended June 30
(Dollars in thousands)
1999 vs 1998
Increase (Decrease)
Due to
-------------------------------------------
Rate Volume Total
------ ------ ------
<S> <C> <C> <C>
Loans (taxable) $ (95) $ 793 $ 698
Loans (tax-free) (15) 62 47
Investment securities (taxable) (140) 922 782
Investment securities (tax-free) (12) 29 17
Time deposits with banks and federal funds sold 5 36 41
----- ------ ------
Total interest income $(257) $1,842 $1,585
----- ------ ------
Deposits $ 97 $ 476 $ 573
Borrowed funds (55) 616 561
----- ------ ------
Total Interest expense $ 42 $1,092 $1,134
----- ------ ------
Net change in net interest income $(299) $ 750 $ 451
===== ====== ======
</TABLE>
36
<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.
37
<PAGE>
Current Year
In 1998, tax-equivalent net interest income increased $927,000 over the
1997 level. Balance sheet growth again resulted in improved earnings as
evidenced by the $1.8 million increase in net interest income due to volume.
Loan growth added $2.4 million to interest income due to increases in both
commercial and installment loans outstanding. New securities purchases,
including those purchased in leveraging transactions, also contributed to the
improved earnings in the amount of $1.7 million. In order to fund the growth in
loans and investments, new deposits and borrowed funds were added which resulted
in a $2.3 million increase in interest expense.
The negative impact of rate reductions can be seen in the $1.0 million
decrease in interest income due to rate which was only partially offset by the
$172,000 decrease in the cost of liabilities due to repricing. Variable rate
assets which reprice immediately were reduced by seventy-five basis points
during the fourth quarter as the Federal Reserve cut interest rates three times
in a seven week period. New volume at lower than historic levels also
contributed to the negative variance due to rate. During this same period, we
held rates steady on our low-cost deposit base while the effect of repricing on
certificates of deposit will materialize over time.
Prior Year
In 1997, growth also lead to improved earnings. The $1.9 million increase
in net interest income includes $1,775,000 due to volume but also includes
$127,000 due to rate, reflecting a positive repricing impact. Loan and
investment portfolio growth added $4.5 million which was partially offset by the
$2.8 million increase in the cost of funds to support the asset growth. Rate
fluctuations on earning assets added over $300,000 which includes an increase in
commercial loans related to the twenty-five basis point hike in the prime rate
during the year and investment purchases at increased yields. The cost of
certificates of deposit increased as we attempted to lengthen our portfolio for
asset/liability purposes. New borrowings and variable rate adjustments increased
the cost of borrowed funds.
Provision for Credit Losses
The provision for credit losses varies from year to year based on
management's evaluation of the adequacy of the allowance for credit losses in
relation to the risks inherent in the loan portfolio. In its evaluation,
management considers credit quality, changes in loan volume, composition of the
loan portfolio, past experience, delinquency trends, and the economic
conditions. Consideration is also given to examinations performed by regulatory
authorities and our independent auditors. The provision for credit losses was
$920,000 in 1998, $1,110,000 in 1997 and $820,000 in 1996.
A monthly provision of $60,000 was credited to the allowance for loan
losses during the first half of 1999 and 1998, respectively. The ratio of the
loan loss reserve to total loans at June 30, 1999 and 1998 was 1.30% and 1.19%,
respectively.
38
<PAGE>
<TABLE>
<CAPTION>
Other Income
- ----------------------------------------------------------------------------------------------
For the Six Months Ended June 30, For the Years Ended
- ----------------------------------------------------------------------------------------------
Other Income 1999 1998 1998 1997 1996
- ----------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Service charge $398 $391 $ 780 $ 759 $ 693
Net gain/(loss) on the
sale of securities 213 51 125 (8) 130
Net gain on the sale of
other real estate 0 38 47 377 1
Net gain on the sale of
other assets 44 131 230 29 25
Other 196 173 401 315 250
--- --- ------ ------ ------
Total Other Income 851 784 $1,583 $1,628 $1,099
- ----------------------------------------------------------------------------------------------
</TABLE>
Our other income category can be separated into three distinct
sub-categories; service charges make up the core component of this area of
earnings while net gains (losses) from the sale of assets and other fee income
comprise the balance.
Non-interest income in the first six months of 1999 increased $67,000 in
comparison to the same period of 1998. The majority of this increase can be
attributed to the $162,000 increase in the gain on the sale of securities offset
by a decrease in the gain on the sale of loans of $86,000. Excluding income from
asset sales, non-interest income increased $29,000, or 5%, during the first six
months of 1999 as compared to the same period of last year.
Income from service charges on deposits for the six months ended June 30,
1999 increased $7,000, or 2%, in comparison to the same period of the previous
year, while other fee income increased $23,000, or 13%. Loan servicing fees and
investment brokerage income comprise the majority of this increase.
In 1998, earnings from service charges were $21,000, or 3%, higher than the
1997 total. Net gains from securities sales totaled $125,000 in 1998 as
management sold securities to minimize the risk from prepayments on
mortgage-backed securities. The $47,000 net gain from the sale of other assets
includes earnings generated from the bank's real estate subsidiary, FNCB Realty,
Inc. During 1998, we continued to shed interest rate risk through the sale of
$22.8 million of fixed rate residential mortgage loans. These loan sales, with
rates ranging from 6.125% to 9.125%, added $189,000 to 1998 earnings after
accounting for fees associated with the sale. As importantly, the servicing
rights were retained thereby resulting in no impact on our customers and
improving future profits through servicing fee income. It is management's
intention to continue to shed interest rate risk as opportunities present
themselves in order to remain competitive in this area of retail lending.
Servicing fees collected on mortgage loans which have been sold were $97,000 in
1998, or $43,000 higher than the same period of 1997. All other fee income
increased $81,000 over the 1997 total including a $40,000 improvement in the
earnings generated through a partnership with INVEST.
39
<PAGE>
During 1997, service charges increased $66,000, or 10%. The majority of
this increase can be attributed to uncollected funds, although newly initiated
surcharge fees pertaining to automatic teller machines also contributed $34,000
of additional income. The decrease in the area of net gains or losses on the
sale of securities also represents our efforts to improve future profits. During
1997, many of the lowest yielding securities in the portfolio were sold as
interest rates plummeted, thereby enabling us to reposition the portfolio for
future benefits. Included in net gains on the sale of other assets is $524,000
recognized on the sale of real estate and other assets by FNCB Realty, Inc.
These assets were transferred to the bank's subsidiary through foreclosure
action and subsequently resold. Other income increased $69,000 in comparison to
1996 as letter of credit fees increased considerably and fee income from the
bank's relationship with INVEST Financial Corporation also provided an increase
of $22,000 over the 1996 level. In 1997, residential mortgage loans totaling
$14.7 million were sold, resulting in a net gain of $66,000.
Other Expenses
<TABLE>
<CAPTION>
For the Six Months Ended For the Years Ended
- ----------------------------------------------------------------------------------------------------------
Other Expenses 1999 1998 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Salary expense $2,093 $1,808 $3,772 $3,482 $3,176
Employee benefit expense 552 495 977 960 900
Occupancy expense 492 412 869 842 812
Equipment expense 376 322 677 610 484
Advertising expense 175 150 341 272 259
Data Processing expense 304 253 530 424 382
Other operating expenses 1,189 1,045 2,257 2,249 1,891
------ ------ ------ ------ ------
Total Other Expenses $5,181 $4,485 $9,423 $8,839 $7,904
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Non-interest expense increased $696,000, or 16%, for the period ended June
30, 1999 compared to the same period of the previous year. Salaries and benefits
costs account for most of the increase, adding $342,000, or 15%, in comparison
to the first six months of 1998. Other operating expenses increased $220,000, or
15%. A new branch office which opened in the fourth quarter of 1998 contributed
to the increase. Our overhead ratio was 2.06% for the first six months of 1999
as compared to 2.07% for the same period in 1998.
Total other expenses increased $584,000, or 7%, in 1998 in comparison to
the prior year. Employee costs accounted for $307,000, or 53%, of the increase
while occupancy and equipment costs rose $94,000, or 16% of the total. All other
expenses increased $183,000, or 31% of the total due primarily to increases in
advertising and data processing costs. Our overhead ratio, which measures
non-interest expenses in relation to average assets improved from the 2.20%
recorded in 1997 to 2.08%. In 1996, the overhead ratio was 2.31%.
Salary and benefits amount to 50% of our total other expenses. During 1998,
salary expense increased $290,000, or 8%, due to merit increases and the
addition of staff to meet our growing sales and administrative needs. Full-time
equivalent employees at December 31, 1998 were 168, an increase from the 151
reported as of the same period last year. Employee benefit costs increased
$17,000, or 2%, in 1998 due primarily to a $30,000 increase in our contribution
40
<PAGE>
to a defined contribution profit sharing plan. Hospitalization costs, payroll
taxes and other benefits decreased $13,000 in comparison to 1997.
Occupancy expenses increased $27,000, or 3%, in 1998 due primarily to
rental expense associated with a new community office. Increases in maintenance
expenses and depreciation on the new facilities were offset by a reduced level
of real estate taxes. Equipment costs increased $67,000, or 11%, due to
depreciation expense on new equipment, including computers and related
technology.
All other operating expenses increased $183,000, or 6%, compared to 1997.
Advertising costs increased $69,000 while data processing expenses rose $106,000
in 1998 due to bank promotions and technological advances. All other components
of other operating expenses were limited to an $8,000 net increase.
In 1997, total other expenses increased $935,000, or 12%, in comparison to
1996. During 1996 other expenses increased 11% from the prior period. Employee
costs accounted for 39% of the increase in 1997 while occupancy and equipment
costs rose by $156,000, or 17% of the total. All other operating expenses
increased $413,000, or 44% of the total increase.
Salary and benefit costs comprised the majority of total other expenses in
1997 and increased 9% over the 1996 level. Salaries increased $306,000, or 10%.
Contributing to this increased cost are merit increases, as well as the full
year's effect of the Kingston Office which opened in August 1996. Full-time
equivalent employees at December 31, 1997 were 151, a decrease from the 155
reported in 1996. Employee benefit costs increased $60,000, or 7%, in 1997 due
primarily to rising health care costs and a $30,000 increase in our contribution
to a defined contribution profit sharing plan. Increases in payroll taxes and
other benefits amounted to $5,000.
Occupancy expenses increased $30,000, or 4%, in 1997. The recognition of a
full year's effect from the Kingston Office which opened during 1996 accounts
for the vast majority of the increase.
Equipment expenses increased $126,000, or 26%, during 1997. Depreciation
and maintenance on new equipment accounted for $108,000 of the increase,
including $23,000 from our newest office. This increased cost reflects our
commitment to new technology, including a complete upgrade to the retail
delivery systems.
All other operating expenses increased $413,000 in 1997 from the prior
period. Noncontrollable items such as FDIC Insurance, Bank Shares Tax and
examinations accounted for $97,000 of the increased cost. Also contributing
significantly to the increased cost was $169,000 of operating costs from the
bank's subsidiary, FNCB Realty, Inc. The majority of these costs reflect
operating expenses associated with a single property which was sold. All other
components of other operating expenses increased $159,000, or 7%.
41
<PAGE>
Provision for Income Taxes
During the first six months of 1999, income before taxes increased $422,000
over the same period in 1998. We anticipated an increase of $143,000 in tax
expense based on a statutory rate of 34%. Due to an increased level of
tax-exempt income and our deferred tax benefits, our provision for income taxes
increased only $73,000. Our effective tax rates for the six-month periods ended
June 30, 1999 and 1998 were 24.2% and 25.0%, respectively.
Federal income tax expense decreased $39,000 in 1998 in comparison to the
1997 total in spite of the $426,000 improvement in income before taxes. Tax
benefits derived from an increased level of tax-exempt income had a $40,000
positive effect while the effect of deferred taxes and other items reduced the
1998 provision by $144,000. Our effective tax rate for 1998 and 1997 was 23.6%
and 25.8%, respectively.
During 1997, federal income tax expense increased $351,000 in comparison to
1996. The majority of the increase was attributed to the $1,119,000 improvement
in pre-tax income as well as the effect of other non-deductible and deferred tax
items. Tax benefits related to non-taxable interest income increased $57,000
over the 1996 total. The effective tax rate for 1996 was 24.6%.
FINANCIAL CONDITION
During the first six months of 1999, total assets increased $25 million, or
10% on an annual basis. Our total deposits increased over $15 million during the
first six months of 1999 and we used this liquidity to fund over $20 million of
new loans.
Total assets increased $55 million, or 13%, in 1998 compared to a similar
$56 million increase in 1997. Total deposits provided $34 million of new funds
in 1998 while borrowed funds increased $17 million. This available liquidity was
utilized to fund the $44 million, or 16%, increase in net loans as well as the
$10 million growth in our securities portfolio.
Securities
Our primary objectives in managing our securities portfolio are to maintain
the necessary flexibility to meet liquidity and asset and liability management
needs and to provide a stable source of interest income.
Total securities increased $2.6 million at June 30, 1999 over December 31,
1998 and $8.5 over June 30, 1998. The growth over the past year was concentrated
in the securities of U.S. government agencies and tax-exempt municipal
securities.
During 1998, total securities increased $10 million over 1997, inclusive of
a $463,000 decrease in the fair value of the portfolio. During 1998, growth was
again concentrated in mortgage-backed securities including $15 million which
were purchased with structured borrowings from the Federal Home Loan Bank of
Pittsburgh, thereby allowing us to earn a favorable spread between the rate
earned on the securities and the cost of the borrowed funds.
Management remains committed to a strategy which limits purchases to those
that are
42
<PAGE>
virtually free of credit risk and will help to meet the objectives of our
investment and asset/liability management policies.
Gross proceeds from the sale of investment securities for the periods ended
June 30, 1999 and 1998 were $18,259,633 and $10,637,449, respectively, with the
gross realized gains being $219,060 and $76,209, respectively, and gross
realized losses being $5,869 and $24,952, respectively.
At June 30, 1999 and 1998, investment securities with a carrying amount of
$78,445,710 and $49,657,797, respectively, were pledged as collateral to secure
public deposits and for other purposes.
The following tables show the carrying amounts of securities for the
periods indicated:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
June 30 December 31
- ------------------------------------------------------------------------------------------------
1999 1998 1998 1997 1996
-------- -------- -------- -------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S.
government agencies $ 13,840 $ 19,738 $ 13,109 $ 31,808 27,946
Obligations of state and
political subdivisions 37,711 32,224 33,671 27,043 29,533
Mortgage-backed securities 74,201 68,069 77,590 56,615 22,544
Corporate debt securities 952 0 992 0 0
Equity securities 7,741 5,901 6,468 5,901 2,453
-------- -------- -------- -------- -------
Total $134,445 $125,932 $131,830 $121,367 $82,476
======== ======== ======== ======== =======
- ------------------------------------------------------------------------------------------------
</TABLE>
43
<PAGE>
The following table sets forth the maturities of securities at December 31,
1998 and the weighted average yields of such securities calculated on the basis
of the cost and effective yields weighted for the scheduled maturity of each
security. Tax-equivalent adjustments using a 34% rate have been made in
calculating yields on obligations of state and political subdivisions.
<TABLE>
<CAPTION>
Mortgage-
Within 2-5 6-10 Over Backed No Fixed
(dollars in thousands) One Year Years Years 10 Years Securities Maturity Total
-------- ------ ------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities $2,005 $ 0 $ 0 $ 0 $ 0 $ 0 $ 2,005
Yield 5.87% 5.87%
Obligations of U.S.
government agencies 500 7,115 3,457 11,072
Yield 6.03% 6.72% 5.46% 6.30%
Obligations of state and
political subdivisions (1) 1,732 7,315 23,406 32,453
Yield 6.11% 9.48% 7.66% 7.99%
Mortgage-backed
securities 77,632 77,632
Yield 5.80% 5.80%
Corporate debt
securities 504 497 1,001
Yield 6.25% 6.01% 6.13%
Equity securities (2) 6,468 6,468
Yield 6.48% 6.48%
------ ------ ------- ------- ------- ------ --------
Total maturities $2,005 $2,232 $14,934 $27,360 $77,632 $6,468 $130,631
====== ====== ======= ======= ======= ====== ========
Weighted yield 5.87% 6.10% 8.06% 7.35% 5.80% 6.48% 6.42%
====== ====== ======= ======= ======= ====== ========
</TABLE>
- ----------
(1) Yields on state and municipal securities have been adjusted to a
tax-equivalent basis using a 34% federal income tax rate.
(2) Yield presented represents 1998 actual return.
Loans
Total loans increased by $20 million, or 6.1%, at June 30, 1999 over
December 31, 1998, and $52 million, or 17.7%, over June 30, 1998. Commercial
loans increased $46 million during the year while growth in consumer loans was
minimized by the sale of over $22 million of residential mortgages.
Total loans increased $45 million, or 16%, in 1998. Commercial loans
provided $30 million of the increase while installment lending also contributed
$26 million of growth since December 31, 1997. The commercial growth includes
$18 million secured by real estate while the growth in installment loans
includes $14 million of indirect auto loans and an additional $14 million which
is secured by real estate. Residential real estate loans decreased $12 million
in 1998 as we continued with our strategy of reducing interest rate risk through
the sale of long-term, fixed-rate assets. During 1998, over $22 million of these
long-term assets were sold in the secondary market resulting in a reduced level
of interest rate risk and a net gain on the sales of approximately $189,000. The
sale of these assets provides liquidity for future growth and also allows us to
continue to provide competitive products during the current low-rate
environment.
44
<PAGE>
The following table sets forth detailed information concerning the
composition of our loan portfolio as of the dates specified:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------------- -------------------
Amount % Amount %
-------- ----- -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial & Financial $ 65,073 18.7 $ 49,796 15.1
Real Estate Construction 3,156 0.9 2,350 0.7
Real Estate Mortgage 219,573 62.9 209,204 63.6
Installment Loans to Individuals 53,135 15.2 58,799 17.9
Other Loans 8,051 2.3 8,748 2.7
Less: Unearned Discount (2) 0.0 (4) 0.0
-------- ----- -------- -----
Total Gross Loans $348,986 100.0 $328,893 100.0
----- -----
Less: Allowance for Loan Losses (4,529) (4,283)
-------- --------
Net Loans $344,457 $324,610
======== ========
</TABLE>
Details regarding the loan portfolio for each of the last five years are as
follows:
Loans Outstanding
(dollars in thousands)
<TABLE>
<CAPTION>
December 31
---------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Commercial and 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.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Loans Outstanding - Repricing Distribution
(dollars in thousands)
- ------------------------------------------------------------------------------------------------------
Within One to Over Five
One Year Five Years Years Total
-------- ---------- --------- --------
<S> <C> <C> <C> <C>
Commercial and 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>
45
<PAGE>
Asset Quality
We manage credit risk through the application of policies and
procedures designed to foster sound underwriting and credit monitoring
practices, although, as is the case with any financial institution, a certain
degree of credit risk is dependent in part on local and general economic
conditions that are beyond our control.
Our Risk Management Committee meets quarterly or more often as required and
makes recommendations to the Board of Directors regarding provisions for credit
losses. The Committee reviews individual problem credits and ensures that ample
reserves are established considering both general allowances and specific
allocations.
The following schedule reflects various non-performing categories for the
periods indicated:
<TABLE>
<CAPTION>
June 30, 1999 Dec. 31, 1998
------------- -------------
(Dollars in thousands)
<S> <C> <C>
Nonaccrual loans $1,086 $ 845
Loans past due 90 days or more and still accruing 452 452
------ ------
Total non-performing loans 1,538 1,297
------ ------
Other Real Estate Owned 0 0
------ ------
Total non-performing assets $1,538 $1,297
====== ======
Non-performing loans as a percentage of gross loans 0.4% 0.4%
====== ======
Non-performing assets as a percentage of total assets 0.3% 0.3%
====== ======
</TABLE>
The following schedule reflects various non-performing categories as of
December 31 for each of the last five years:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(Dollars in thousands)
<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>
During the first six months of 1999, total non-performing assets increased
due to the transfer of two loans to nonaccrual status. At June 30, 1999, our
ratio of nonaccrual loans to total loans was 0.4%
During 1998, total non-performing assets decreased due to the $772,000
reduction in loans past due more than ninety days. Nonaccrual loans increased
$638,000 from the December 31, 1997 level and includes $660,000 that was
transferred to nonaccrual status during 1998. The majority of the increase is
split among three credits which are substantially secured by real estate. As of
December 31, 1998, our ratio of nonaccrual loans to total loans was .26%, less
than one-half of the national peer banks reported ratio of .63%. We continue to
acknowledge the weakness in local real estate markets and in general economic
conditions, emphasizing strict underwriting standards to minimize the negative
impact of the current environment. Management remains ever conscious to avoid
the problems of over-lending experienced during the 1980's and expects future
efforts to reduce delinquency percentages during 1999.
46
<PAGE>
The following table presents an allocation of the allowance for credit
losses as of the end of each of the last five years:
Loan Loss Reserve Allocation
(dollars in thousands)
<TABLE>
<CAPTION>
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
--------------------- --------------------- --------------------- -------------------- ------------------
Percentage Percentage Percentage Percentage Percentage
of of of of of
Loans in Loans in Loans in Loans in Loans in
Each Each Each Each Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial
and Financial $1,706 58% $1,340 56% $1,326 52% $1,094 52% $1,110 53%
Real Estate 117 14% 118 20% 98 26% 105 29% 121 34%
Installment 92 28% 69 24% 61 22% 38 19% 29 13%
Unallocated 2,368 2,096 1,682 1,563 990
------ --- ------ --- ------ --- ------ --- ----- ---
$4,283 100% $3,623 100% $3,167 100% $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>
Years Ended December 31,
---------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance, January 1 $3,623 $3,167 $2,800 $2,250 $2,027
Charge-Offs:
Commercial and Financial 77 547 420 449 495
Real Estate 50 9 20 97 60
Installment 180 141 141 59 38
------ ------ ------ ------ ------
Total Charge-Offs 307 697 581 605 593
------ ------ ------ ------ ------
Recoveries on Charged-Off Loans:
Commercial and Financial 11 8 109 327 103
Real Estate 1 0 0 1 0
Installment 35 35 19 31 13
------ ------ ------ ------ ------
Total Recoveries 47 43 128 359 116
------ ------ ------ ------ ------
Net Charge-Offs 260 654 453 246 477
------ ------ ------ ------ ------
Provision for Credit Losses 920 1,110 820 796 700
------ ------ ------ ------ ------
Balance, December 31 $4,283 $3,623 $3,167 $2,800 $2,250
====== ====== ====== ====== ======
Net Charge-Offs during the period as a percentage
of average loans outstanding during the period .09% .24% .18% .12% .28%
Allowance for credit losses as a percentage of net
loans outstanding at end of period 1.30% 1.27% 1.20% 1.20% 1.15%
</TABLE>
During 1998, losses charged to the reserve declined considerably from prior
periods while recoveries were consistent with the 1997 total. During 1995,
payments approximating $300,000 were received from loans charged-off in 1991,
1992 and 1994.
47
<PAGE>
The following table sets forth certain information with respect to our
allowance for loan losses and charge-offs as of the dates specified:
Period Ended
---------------------------
June 30, Dec. 31,
1999 1998
-------- --------
(Dollars in thousands)
Balance, January 1 $4,283 $3,623
Recoveries Credited 161 47
Losses Charged 275 307
Provision for Loan Losses 360 920
------ ------
Balance at End of Period $4,529 $4,283
====== ======
Deposits
The primary source of funds to support our growth is our deposit base, and
emphasis has been placed on accumulating new deposits while making every effort
to retain current relationships. Total deposits increased $34 million in 1998
comprised primarily of growth in certificates of deposit but also includes over
$7 million in low-cost savings and demand accounts.
The average daily amount of deposits and rates paid on such deposits is
summarized for the periods indicated in the following table:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Year Ended December 31
------------------------------------------------------------------
1998 1997 1996
---------------- ---------------- -----------------
Amount Rate Amount Rate Amount Rate
-------- ---- -------- ---- -------- ----
(thousands of dollars)
<S> <C> <C> <C> <C> <C>
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
=======
48
<PAGE>
The average daily amount of deposits and rates paid on such deposits is
summarized for the periods indicated in the following table:
<TABLE>
<CAPTION>
Six Months Ended June 30
--------------------------------------------------
1999 1998
-------------------- ---------------------
Amount Rate Amount Rate
-------- ---- -------- -----
(thousands of dollars)
<S> <C> <C> <C> <C>
Noninterest-bearing demand deposits $ 40,273 $ 33,633
Interest-bearing demand deposits 59,629 2.47% 49,925 2.46%
Savings deposits 43,781 2.26% 39,667 2.43%
Time deposits 251,237 5.30% 227,089 5.62%
-------- --------
Total $394,920 $350,314
======== ========
</TABLE>
ASSET AND LIABILITY MANAGEMENT
The major objectives of our asset and liability management are to: (1)
manage exposure to changes in the interest rate environment to achieve a neutral
interest sensitivity position within reasonable ranges, (2) ensure adequate
liquidity and funding, (3) maintain a strong capital base, and (4) maximize net
interest income opportunities. We manage these objectives through our senior
management and Asset and Liability Management Committees. Members of the
committees meet regularly to develop balance sheet strategies affecting the
future level of net interest income, liquidity and capital. Items that are
considered in asset and liability management include balance sheet forecasts,
the economic environment, the anticipated direction of interest rates and our
earning's sensitivity to changes in these rates.
Interest Rate Sensitivity
We analyze our interest sensitivity position to manage the risk associated
with interest rate movements through the use of gap analysis and simulation
modeling. Interest rate risk arises from mismatches in the repricing of assets
and liabilities within a given time period. Gap analysis is an approach used to
quantify these differences. A positive gap results when the amount of
interest-sensitive assets exceeds that of interest-sensitive liabilities within
a given time period. A negative gap results when the amount of
interest-sensitive liabilities exceeds that of interest-sensitive assets.
While gap analysis is a general indicator of the potential effect that
changing interest rates may have on net interest income, the gap report has some
limitations and does not present a complete picture of interest rate
sensitivity. First, changes in the general level of interest rates do not affect
all categories of assets and liabilities equally or simultaneously. Second,
assumptions must be made to construct a gap table. For example, non-maturity
deposits are assigned a repricing interval based on internal assumptions.
Management can influence the actual repricing of these deposits independent of
the gap assumption. Third, the gap table represents a one-day position and
cannot incorporate a changing mix of assets and liabilities over time as
interest rates change.
Because of the limitations of the gap reports, we use simulation modeling
to project future net interest income streams incorporating the current gap
position, the forecasted balance sheet mix, and the anticipated spread
relationships between market rates and bank products under a variety of interest
rate scenarios.
49
<PAGE>
Our interest rate sensitivity at December 31, 1998, was essentially neutral
within reasonable ranges; for example, an interest rate fluctuation of up or
down 200 basis points would not be expected to have a significant impact on net
interest income.
50
<PAGE>
Interest Rate Gap
The following schedule illustrates our interest rate gap position as of
December 31, 1998. At that date, our cumulative gap position at all intervals
measured within one year were within internal guidelines.
Interest Rate Sensitivity Analysis
as of December 31, 1998
(dollars in thousand)
<TABLE>
<CAPTION>
Rate Sensitive
-------------------------------------------------------------
181 to Not
1 to 90 91 to 180 365 1 to 5 Beyond Rate
Days Days Days Years 5 Years Sensitive Total
-------- --------- -------- -------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial loans $ 93,150 $ 5,492 $ 10,606 $ 59,964 $21,343 $ 0 $ 190,555
Mortgage loans 3,244 2,803 8,504 18,679 10,604 0 43,834
Installment loans 9,993 5,898 11,324 56,104 10,170 0 93,489
-------- -------- -------- -------- ------- -------- ---------
Total loans 106,387 14,193 30,434 134,747 42,117 0 327,878
-------- -------- -------- -------- ------- -------- ---------
Securities-taxable 21,116 5,960 9,026 31,404 23,700 8,172 99,378
Securities-tax free 1,410 0 300 13,658 17,084 0 32,452
-------- -------- -------- -------- ------- -------- ---------
Total Securities 22,526 5,960 9,326 45,062 40,784 8,172 131,830
-------- -------- -------- -------- ------- -------- ---------
Interest-bearing deposits with banks 1,487 198 496 297 0 0 2,478
Federal funds sold 3,400 0 0 0 0 0 3,400
-------- -------- -------- -------- ------- -------- ---------
Total Money Market Assets 4,887 198 496 297 0 0 5,878
-------- -------- -------- -------- ------- -------- ---------
Total Earning Assets 133,800 20,351 40,256 180,106 82,901 8,172 465,586
Non-earning assets 0 0 0 0 0 22,082 22,082
Allowance for credit losses 0 0 0 0 0 (4,283) (4,283)
-------- -------- -------- -------- ------- -------- ---------
Total Assets $133,800 $ 20,351 $ 40,256 $180,106 $82,901 $ 25,971 $ 483,385
======== ======== ======== ======== ======= ======== =========
Interest-bearing demand deposits $ 32,966 $ 0 $ 0 $ 18,274 $ 0 $ 0 $ 51,240
Savings deposits 0 463 688 40,866 0 0 42,017
Time deposits $100,000 and over 45,474 8,083 10,818 4,966 0 0 69,341
Other time deposits 38,526 27,332 50,215 61,941 0 0 178,014
-------- -------- -------- -------- ------- -------- ---------
Total Interest-Bearing Deposits 116,966 35,878 61,721 126,047 0 0 340,612
-------- -------- -------- -------- ------- -------- ---------
Borrowed funds and other
interest-bearing liabilities 16,116 2,038 17,718 24,303 5,000 0 65,175
-------- -------- -------- -------- ------- -------- ---------
Total Interest-Bearing Liabilities 133,082 37,916 79,439 150,350 5,000 0 405,787
Demand deposits 0 0 0 0 0 39,427 39,427
Other liabilities 0 0 0 0 0 3,492 3,492
Stockholders' equity 0 0 0 0 0 34,679 34,679
-------- -------- -------- -------- ------- -------- ---------
Total Liabilities and Stockholders'
Equity $133,082 $ 37,916 $ 79,439 $150,350 $ 5,000 $ 77,598 $ 483,385
======== ======== ======== ======== ======= ======== =========
Interest Rate Sensitivity gap $ 718 $(17,565) $(39,183) $ 29,756 $77,901 $(51,627)
======== ======== ======== ======== ======= ========
Cumulative gap $ 718 $(16,847) $(56,030) $(26,274) $51,627
======== ======== ======== ======== =======
</TABLE>
51
<PAGE>
Our computerized simulation modeling system also measures exposure to
interest rate risk, taking into account a growing balance sheet under various
interest rate scenarios. As of December 31, 1998, the modeling system provided
results which were within policy guidelines of plus or minus ten percent
assuming a 200 basis point shift in market interest rates.
Liquidity
The term "liquidity" refers to our ability to generate sufficient amounts
of cash to meet our cash-flow needs. Liquidity is required to fulfill the
borrowing needs of our credit customers and the withdrawal and maturity
requirements of our deposit customers, as well as to meet other financial
commitments.
Our short-term liquidity position is strong as evidenced by $12,205,000 in
cash and due from banks and $2,280,000 in interest-bearing balances with banks
maturing within one year. A secondary source of liquidity is provided by the
investment portfolio with $13,489,000, or 10%, of the portfolio maturing or
expected to be called within one year and expected cash flow from principal
reductions approximating an additional $15,000,000.
We have relied primarily on our retail deposits as a source of funds. The
bank is normally only a seller of Federal Funds to invest excess cash; however,
the bank can also borrow in the Federal Funds market to meet temporary liquidity
needs. Other sources of potential liquidity include repurchase agreements,
Federal Home Loan Bank advances and the Federal Reserve Discount Window.
Cash and cash equivalents (cash and due from banks and federal funds sold)
are our most liquid assets. At December 31, 1998 cash and cash equivalents
totaled $13.4 million, compared to the December 31, 1997 level of $14.7 million.
Financing activities provided $50.0 million and operating activities provided
$6.8 million of cash and cash equivalents during the year while investing
activities utilized $58.0 million. The cash flow provided by financing
activities is due to deposit growth and an increase in borrowed funds
outstanding while the funds provided by operating activities pertains to
interest payments received on loans and investments. The cash used in investing
activities consists of loan proceeds and security purchases.
Core deposits, which represent our primary source of liquidity, averaged
$299.5 million in 1998, an increase of $18.3 million, or 7%, from the $281.2
million average in 1997. This increase in average core deposits was supplemented
with a $7.8 million increase in average jumbo certificates and a $20.3 million
increase in average borrowed funds and other interest-bearing liabilities.
During the first six months of 1999, core deposits averaged $327 million, or 12%
higher than the $293 million average recorded during the first half of 1998.
We have other potential sources of liquidity, including repurchase
agreements. Additionally, we can borrow on credit lines established at several
correspondent banks and at the Federal Home Loan Bank of Pittsburgh. The Federal
Reserve Discount Window also provides a funding source of last resort.
52
<PAGE>
Capital
A strong capital base is essential to our continued growth and
profitability and in that regard the maintenance of appropriate levels of
capital is a management priority. Our principal capital planning goals are to
provide an adequate return to shareholders while retaining a sufficient base
from which to provide for future growth, while at the same time complying with
all regulatory standards. As more fully described in Note 12 to the financial
statements, regulatory authorities have prescribed specified minimum capital
ratios as guidelines for determining capital adequacy to help insure the safety
and soundness of financial institutions.
As a result of the significant growth we have experienced in recent years,
capital ratios, although well above the regulatory minimums, had been steadily
decreasing. Based on management's intent to maintain a well-capitalized status
as well as a desire to attract new shareholders, 144,000 shares of stock were
offered and sold in 1995 resulting in an increase of $3.6 million of Tier 1
capital. On May 15, 1996, stockholders voted to increase the number of
authorized shares from 1,500,000 to 5,000,000.
Total stockholders' equity decreased $829,000, or 2.4%, during the first
half of 1999 comprised of an increase in retained earnings in the amount of
$2,230,000 after paying cash dividends and $135,000 from stock issued through
dividend reinvestment offset by a $3,194,000 decrease in the market value of our
securities available-for-sale. During the same period of 1998, total
stockholders' equity increased $1,971,000, or 6.2%, comprised of an increase in
retained earnings of $1,953,000, after paying cash dividends and an $18,000
increase in the market value of our securities available-for-sale. The total
dividend payout during the first six months of 1999 and 1998 represents $.30 per
share and $.27 per share respectively. Excluding the impact due to securities
valuation, increases in core equity amounted to $2,365,000 and $1,953,000,
respectively.
The Board of Governors of the Federal Reserve System and other various
regulatory agencies have specified guidelines for purposes of evaluating a
bank's capital adequacy. Currently, banks must maintain a leverage ratio of core
capital to total assets at a prescribed level, namely 3%. In addition, bank
regulators have issued risk-based capital guidelines. Under such guidelines,
minimum ratios of core capital and total qualifying capital as a percentage of
risk-weighted assets and certain off-balance sheet items of 4% and 8% are
required. As of June 30, 1999, First National Community Bank met all capital
requirements with a leverage ratio of 7.00% and core capital and total
risk-based capital ratios of 9.89% and 11.14%, respectively.
53
<PAGE>
The following schedules present information regarding risk-based capital
and selected other capital ratios at June 30, 1999 and 1998, and at December 31,
1998, 1997 and 1996.
- --------------------------------------------------------------------------------
CAPITAL ANALYSIS
(dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30 December 31
--------------------- ----------------------------------
1999 1998 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Tier I Capital:
Shareholders' equity $ 36,253 $ 32,435 $ 33,887 $ 30,483 $ 27,247
Total Tier I Capital $ 36,253 $ 32,435 $ 33,887 $ 30,483 $ 27,247
Tier II Capital:
Allowable portion of allowance for
credit losses $ 4,529 $ 3,679 $ 4,157 $ 3,483 $ 3,167
Total Risk-Based Capital $ 40,782 $ 36,114 $ 38,044 $ 33,966 $ 30,414
Total Risk-Weighted Assets $364,482 $295,354 $332,519 $278,680 $265,366
======== ======== ======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
CAPITAL RATIOS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30 December 31
--------------------- ----------------------------------------------------
Regulatory
1999 1998 1998 1997 1996 Minimum
------ ------ ------ ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Total Risk-Based Capital 11.19% 12.23% 11.45% 12.19% 11.46% 8.00%
Tier I Risk-Based Capital 9.95% 10.98% 10.19% 10.94% 10.27% 4.00%
Tier I Leverage Ratio 7.00% 7.36% 7.10% 7.28% 7.41% 3.00%
Return on Assets 1.17% 1.20% 1.13% 1.16% 1.13% N/A
Return on Equity* 16.97% 16.21% 15.29% 15.85% 14.83% N/A
Equity to Assets Ratio* 6.66% 7.48% 7.17% 7.37% 7.42% N/A
Dividend Payout Ratio 24.39% 24.90% 33.35% 30.06% 30.40% N/A
</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. Regulatory capital
increased by $2.4 million during the first six months of 1999 to $36.3 million.
As of June 30, 1999, there were 2,598,218 shares of stock available for future
sale or stock dividends. The approximate number of stockholders of record at
June 30, 1999 was 900.
54
<PAGE>
ECONOMIC CONDITIONS AND FORWARD OUTLOOK
Economic conditions affect financial institutions, as they do other
businesses, in a number of ways. Rising inflation affects all businesses through
increased operating costs but affects banks primarily through 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%.
During the first quarter of 1999, economic activity continued to expand
while tight labor markets presented a constant concern for rising inflation.
Consumer spending was particularly strong while business spending, although
slower than its fourth quarter surge, was still quite rapid. Despite these
signs, however, there was no evidence of rising price inflation. In the second
quarter, the Federal Reserve Policy Board shifted its bias toward tightening in
light of persistent strength in domestic demand and the reduced risk of economic
weakness abroad. While an upward trend in underlying inflation had not yet
materialized, members of the Federal Reserve's policy making board were
concerned that if recent developments continued, inflation was more likely to
rise over time. Throughout this period, U.S. Treasury rates began a steady climb
upwards, resulting in increases of over 1.00% in most terms and a yield on the
thirty-year Treasury of 6.06%. At its meeting of June 30, 1999, the Federal
Reserve increased rates by twenty-five basis points, the first increase in over
two years. Future increases appear likely as economic reports continue to show
an economy that is booming with no easing in the labor markets, although
underlying forces could affect interest rates in either direction. With this in
mind, management maintains a philosophy of not attempting to predict future rate
movements but rather on focusing efforts to maintain earnings momentum in
various rate environments.
55
<PAGE>
As of this writing, we are not aware of any pronouncements or legislation
that would have a material impact on the results of operations.
YEAR 2000 COMPLIANCE
We are currently working to address the potential impact of the Year 2000
issue on the processing of date sensitive information. The Year 2000 issue is
pervasive and complex as virtually every computer operation will be affected in
some way by the rollover of the two-digit year value to 00. The issue is whether
computer systems will properly recognize date-sensitive information when the
year changes to 2000. Systems that do not properly recognize such information
could generate erroneous data or fail. In order to address the issues, we are
utilizing both internal and external resources to identify and modify where
necessary to ensure Year 2000 compliance.
The bank formed a Year 2000 Operations Committee consisting of officers and
employees from every area of the bank. This committee provides the manpower and
knowledge to tackle the Year 2000 project in order to ensure that all
mission-critical systems and applications are identified and tested for Year
2000 compliance. We believe our greatest risk is that if our customers and
suppliers are not Year 2000 compliant, they can cause our plan to fail.
In addition, an Executive Committee has been formed consisting of senior
management and the Year 2000 project managers. This committee will review all
aspects of the bank's Year 2000 project efforts to ensure that the century date
change is a smooth process for the bank. The Executive Committee also will
ensure that adequate resources are provided to assist in managing the Year 2000
project, provide guidance to the Operations Committee in its Year 2000 efforts,
and report to the Board of Directors regarding the status and any problems
encountered during the course of the Year 2000 project.
In addition to these committees, a highly regarded computer consultant to
the banking industry was contracted by the bank to independently verify and
validate the bank's Year 2000 readiness program. In anticipation of what has
been described as one of the most monumental and critical project activities of
all time, the consultants performed an independent assessment of the bank's Year
2000 project planning activities to date. The engagement performed an
independent verification and validation review on the bank's Year 2000 plans,
activities and commitments and has identified both strengths and opportunities
for the bank to act upon to further the bank's Year 2000 readiness. The results
of this independent review has enabled the bank to focus its efforts on the more
critical areas of the plan.
56
<PAGE>
Each area of our Year 2000 Plan is being addressed according to the
guidelines that have been established by the FFIEC and other regulatory
agencies. These guidelines include the five phases of the Year 2000 problem
resolution process as listed in the May 16, 1997, OCC Advisory Letter AL 97-6
which is summarized below:
% Completed Projected Completion Date
----------- -------------------------
Awareness of the problem 100% Completed
Assessment of complexity 100% Completed
Renovation 100% Completed
Validation 100% Completed
Implementation 71% 12/01/99
Overall 94% 12/01/99
At present, management believes its progress in remedying systems, programs
and applications and installing Year 2000 compliant upgrades is complete.
Despite our affirmative steps to remedy the Year 2000 problem, we are not
certain that a partial or total systems interruption, or the cost necessary to
upgrade hardware or software, would not have a material effect on our business,
financial condition, results of operations and business prospects.
As a precaution, we developed a Year 2000 contingency plan. The plan
provides operating procedures in the event that there is a partial or total
system interruption with respect to the century date change. While the
contingency plan is complete, it will be updated as necessary throughout 1999.
We rely on third party vendors and service providers for our data
processing capabilities, and for maintenance of our computer systems. We
initiated formal communications with our providers of data processing services
and other external third parties in 1997 and 1998 to assess the Year 2000
readiness of their products and services. We are monitoring their progress in
meeting their targeted schedules for an indication that they may not be able to
correct the problems in time. Thus far, responses indicate that all of the
significant providers currently have compliant versions available or are well
into the renovation and testing phases. We have identified and prioritized those
systems deemed to be mission critical and those that may have significant impact
on normal operations. We identified 36 mission critical vendors. These vendors
have all responded with favorable Year 2000 readiness status, and expressed with
confidence that their systems are Year 2000 compliant. However, we can give no
guarantee that the service providers and vendors will timely renovate the
systems on which we rely. If the service providers experience Year 2000
problems, we cannot assure that the service providers can be held legally liable
for their problems.
In 1998, we initiated communications with all of our mission critical
vendors, suppliers and large commercial customers to determine the extent to
which we are vulnerable to these third-parties' failure to remedy their own Year
2000 problems.
The following table summarizes the responses of our mission critical
customers, lenders and service providers:
57
<PAGE>
Responses Compliant
Inquiry ------------- ---------------
Number Number % Number %
------- ------ --- ------ -------
Material Loan Customers 42 17 40% 17 100%
Lenders & Service Providers 555 353 64% 353 100%
Mission Critical 36 36 100% 36 100%
Non-Mission Critical 519 317 61% 317 100%
Management reviewed our material loan customers, vendors and service
providers through discussions and questionnaires regarding their Year 2000
preparedness. The level of their Year 2000 compliance is a factor in evaluating
the bank's loan portfolio. Management performed a risk assessment on material
loan customers, vendors and service providers who did not respond to the
questionnaire. Supporting collateral and other sources of repayment were
reviewed to ensure that a lack of Year 2000 preparedness will not create a loss
due to a business disruption. Management and the Board of Directors determined
that the amount of risk is acceptable. Management continues to monitor the
progress of its material loan customers and other significant third parties.
However, we can give no guarantee that the systems of these third parties will
be timely renovated. If any of these third parties experience Year 2000
problems, we cannot assure that the third parties can be held legally liable for
their problems.
Costs
We have conducted a comprehensive review of our computer systems that could
be affected by the Year 2000 issue and do not believe that amounts to be
expended as part of its Year 2000 plan will have a material impact on our
earnings or financial position.
Risk Assessment
Based upon current information related to the progress of our major vendors
and service providers, management has determined that the Year 2000 issue will
not pose significant operational problems for our computer systems. This
determination is based on the ability of those vendors and service providers to
renovate, in a timely manner, the products and services on which our systems
rely. However, we can give no guarantee that the systems of these third parties
will be renovated in a timely manner.
Contingency Plan
We developed a contingency plan for our mission critical systems in the
event that system disruption or failure occurs to one or more of those systems.
The plan provides operating procedures in the event that there is a partial or
total system interruption with respect to the century date change. While the
contingency plan is complete, it will be updated as necessary throughout 1999.
In a worst case scenario, the software that processes customer accounts would
fail. Should this occur, we would maintain manual accounting of our accounts
until the main processing software is corrected. We are committed to making
available the human resources necessary to accommodate this temporary situation
and will follow the steps outlined in our Year 2000 Contingency Plan.
58
<PAGE>
To that end, we will conduct training sessions on our Year 2000 Contingency
Plan during the third and fourth quarters of 1999 to ensure that employees are
familiar with procedures that may need to be implemented in such a worst case
scenario.
59
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
Our 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 of
our executive officers and directors and the principal occupations of these
individuals during the past five years. The executive officers are appointed to
their respective offices annually. All of our directors also serve as directors
of First National Community Bank and the terms for both expire at the same time.
Unless otherwise indicated, the principal occupation listed for a person has
been that person's occupation for at least the past five years. Because a
majority of persons listed served as officers or directors of the bank before
First National Community Bancorp, Inc. was formed as its holding company in
1998, the table indicates the earliest year a person became an officer or
director for the bank or for the holding company.
<TABLE>
<CAPTION>
Principal Occupations Director or Position with First
Name Age During Past Five Years Officer Since National Community
---- --- ---------------------- ------------- -------------------
<S> <C> <C> <C> <C>
Angelo F. Bistocchi 79 Retired Restauranteur 1971 Director;
Vice President of the
Board of the bank since
1978
Michael G. Cestone 36 President, 1988 Director
S. G. Mastriani Company
(General Contractor)
Michael J. Cestone, Jr. 67 President, M. R. Co. 1969 Director;
CEO, Secretary of the Board of
S. G. Mastriani Company the bank since 1971
Joseph Coccia 44 President, 1998 Director
Coccia Ford, Inc. and
Coccia Lincoln Mercury,
Inc.
William P. Conaboy 40 Vice President, 1998 Director
General Counsel
Allied Services
Dominick L. DeNaples 61 President, 1987 Director
F & L Realty, Corp.
Vice President,
DeNaples Auto Parts, Inc.
and Keystone Landfill, Inc.
Louis A. DeNaples 58 President, 1972 Director;
DeNaples Auto Parts, Inc. Chairman of the Board of
and Keystone Landfill, Inc. the bank since 1988
Vice President,
F & L Realty Corp.
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations Director or Position with First
Name Age During Past Five Years Officer Since National Community
---- --- ---------------------- ------------- -------------------
<S> <C> <C> <C> <C>
Joseph J. Gentile 68 President, 1989 Director
Dunmore Oil Co., Inc.
Martin F. Gibbons 83 Partner, 1979 Director
Gibbons Ford
Joseph O. Haggerty 59 Retired Superintendent, 1987 Director
Dunmore School District
George N. Juba 72 Consultant to the bank 1973 Director
William S. Lance 39 Senior Vice President since 1991 Officer
1994;
Treasurer since 1998
J. David Lombardi 50 President and Chief 1986 Officer
Executive Officer since
1988
John P. Moses 53 Partner, 1999 Director
Moses & Gelso, L.L.P.
John R. Thomas 81 Chairman of the Board 1967 Director
Wesel Manufacturing
Company (design and
manufacturing of precision
machinery)
</TABLE>
Our 1999 Annual Meeting of Shareholders was held on May 19, 1999. At this
meeting, Mr. Michael J. Cestone, Jr., Mr. Louis A. DeNaples, Mr. Joseph J.
Gentile and Mr. Joseph O. Haggerty were elected as directors of First National
Community Bancorp, Inc. and of the bank. Their terms expire in 2002.
Mr. John P. Moses was appointed to the Board of Directors of First National
Community Bancorp, Inc. and the bank effective July 14, 1999.
Family Relationships
Family relationships exist between the bank and our directors. Michael J.
Cestone, Jr., Secretary of the Board of Directors, is the father of Michael G.
Cestone. Dominick L. DeNaples is the brother of Louis A. DeNaples, Chairman of
the Board.
61
<PAGE>
EXECUTIVE COMPENSATION
The table below shows the annual and long-term compensation for services in
all capacities to us and to First National Community Bank for the fiscal years
ended December 31, 1998, 1997 and 1996 to those persons who were, at December
31, 1998:
o our Chief Executive Officer; and
o our other most highly compensated executive officers. The table shows
the information only for those executives whose annual salary and
bonus exceeded $100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
All Other
Name & Principal Position Year Salary(1) Bonus(2) Compensation(3)(4)
- ------------------------- ---- --------- --------- ------------------
<S> <C> <C> <C> <C>
J. David Lombardi(1) 1998 $179,000 $250,000 $25,979
Chairman of the Board, President & Chief 1997 169,000 200,000 25,402
Executive Officer of First National 1996 159,000 175,000 23,279
Community Bancorp, Inc. and First
National Community Bank
Thomas P. Tulaney 1998 $ 87,135 $ 40,000 12,538
Executive Vice President of First National 1997 81,000 32,000 10,651
Community Bank 1996 78,000 25,000 9,427
Gerard A. Champi 1998 $ 79,634 $ 40,000 11,496
Executive Vice President of First National 1997 72,492 32,000 9,645
Community Bank 1996 68,500 27,000 8,463
</TABLE>
- ----------
(1) Includes Directors' fees of $24,000 for 1996, 1997 and 1998 for Mr.
Lombardi.
(2) Cash bonuses are awarded at the conclusion of a fiscal year based upon the
Board of Directors' subjective assessment of our performance as compared to
both budget and prior fiscal year performance, and the individual
contributions of the officers involved.
(3) The named executive officers did not receive perquisites or other personal
benefits during 1998 which, in the aggregate, cost us the lesser of $50,000
or 10% of the named executive officers salary and bonus earned during the
year. Perquisites and other personal benefits which were received by the
named executives were valued based on their cost to us.
(4) Includes amounts contributed by the bank on the employees' behalf to the
Employees' Profit Sharing Plan. Also included for Mr. Lombardi are premiums
paid to purchase additional life insurance which amounted to $2,008 in
1996, 1997 and 1998 and Director bonuses amounting to $7,500 in 1996, 1997
and 1998, respectively.
62
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Indebtedness of Management
Some of our directors and officers and the companies with which they are
associated, were customers of and had banking transactions with the bank in the
ordinary course of its business during 1998 and the bank expects to continue
such banking transactions in the future. All loans and commitments to loan
included in such transactions were made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons of similar creditworthiness and in
the opinion of the Board of Directors, do not involve more than a normal risk of
collectibility or present other unfavorable features.
At June 30, 1999, the outstanding principal amount of indebtedness to the
bank owed by directors and executive officers and their associates, who were
indebted to the bank on that date, aggregated $10.1 million which represented
approximately 29.8% of our equity capital accounts.
The Board of Directors
During 1998, our Board of Directors held 5 meetings. Directors received no
remuneration for attendance at those meetings.
During 1998, the bank's Board of Directors held 23 meetings. Each of the
directors attended at least 75% of the scheduled meetings of the bank's Board of
Directors with the exception of Mr. George N. Juba.
The directors generally function as a full board. In lieu of a nominating
committee, the full Board nominates the slate for the election of the Board of
Directors. In lieu of a compensation committee, the full Board appoints and sets
compensation of officers and directors. In lieu of an audit committee, the full
board appoints the independent outside accountants to conduct external audits of
our books, records and procedures and meets with the outside accountants to
discuss the results of their audits. To assure maximum independence and candor
in the internal audit function, management director Lombardi, who serves as
President and Chief Executive Officer, does not participate in the board's
deliberations when the Board receives reports from its internal auditor. During
1998, the Board held four meetings of this type. All non-management members
attended at least 75% of the scheduled meetings except Mr. George N. Juba and
Mr. Joseph Coccia.
In 1993, the Board of Directors of the bank established a Senior Loan
Committee to meet on alternating weeks as deemed necessary. Membership on this
committee consists of:
o the Chairman, President and Chief Executive Officer of the bank
(permanent members); and
o other members of the Board of Directors (appointed on a rotating basis
quarterly, with no more than three members appointed from this group
at any one time.)
63
<PAGE>
In 1998, the Senior Loan Committee held 12 meetings. Each appointed
director was present for at least 75% of the scheduled meetings except Mr.
Michael J. Cestone, Jr., Mr. William P. Conaboy, Mr. John R. Thomas and Mr.
George N. Juba.
Compensation of Directors
Members of 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.
Compensation Committee Interlocks and Insider Participation
J. David Lombardi, our President and Chief Executive Officer and that of
the bank, is a member of our Board of Directors and also of the bank. Mr.
Lombardi makes recommendations to the Board of Directors regarding compensation
of employees. Mr. Lombardi does not participate in conducting his own review.
The entire Board of Directors votes to establish and approve our compensation
policies.
Employment 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, our Board of Directors approved and
adopted an amendment to the employment agreement which added us as a party to
the agreement. This agreement is designed to assist us and the bank in retaining
a highly qualified executive and to help ensure that if we are faced with an
unsolicited tender offer proposal, Mr. Lombardi will continue to manage us
without being unduly distracted by the uncertainties of his personal affairs and
thereby will be better able to assist in evaluating such a proposal in an
objective manner.
The agreement provided for a base annual salary of $155,000 in 1998. The
Board may establish additional compensation by way of salary increases, bonuses
or fringe benefits from time to time. The agreement does not preclude Mr.
Lombardi from serving as one of our directors and as one of the bank's and
receiving related fees.
We may terminate the agreement with or without "just cause," as defined in
the agreement, or upon death, permanent disability, or normal retirement of Mr.
Lombardi, or, upon the termination of Mr. Lombardi's employment by resignation
or otherwise. In the event we terminate his employment with "just cause," Mr.
Lombardi will receive a salary payment at his then effective base salary, as if
his employment had not been terminated, for a period of 3 months, excluding
bonuses or fringe or supplemental payments previously authorized by the Board of
Directors. In the event that we terminate him without just cause, Mr. Lombardi
will continue to receive, each month for a period of 2 years from the effective
date of termination:
64
<PAGE>
o his monthly base salary payments from the bank at the rate in effect
on the date of his termination;
o his Board of Directors fees; and
o 1/12th of the average of the bonuses paid to him over the preceding 3
years.
In the event that there is a "change in control," as defined in the
agreement, and as a result of the change in control:
o Mr. Lombardi's employment is terminated; or
o his duties or authority are substantially diminished; or
o he is removed from the office of Chief Executive Officer of the
reorganized employer;
then Mr. Lombardi may terminate his employment by giving notice to the bank
within 60 days of the occurrence of the "change in control."
Upon termination, we are obligated to pay Mr. Lombardi the following:
o 3 times his annual base salary as in effect on the date of the change
in control;
o 3 times his annual Board of Director's fee; and
o 3 times the average of his bonuses for the prior 3 years.
Subsequent to termination, Mr. Lombardi may not accept employment in any
office or branch of any financial institution or subsidiary in Lackawanna
County, Pennsylvania for a period of 3 years, unless we terminated his
employment "without just cause."
65
<PAGE>
BENEFICIAL OWNERSHIP OF SHARES
We set forth in the following table certain information, as of July 21,
1999, regarding the beneficial ownership of our common stock by each director
and nominee, all directors and executive officers as a group, and all persons
who own beneficially more than 5% of our outstanding common stock. Management
knows of no persons, other than directors Louis A. DeNaples and Dominick L.
DeNaples, who own beneficially more than 5% of the company's outstanding stock.
Unless otherwise listed, shares beneficially owned represent sole voting and
investment power of the individuals named.
We determine the securities "beneficially owned" by an individual in
accordance with the definitions of "beneficial ownership" in the regulations of
the Securities and Exchange Commission and may include securities owned by or
for the individual's spouse and minor children and any other relative who has
the same home, as well as securities to which the individual has or shares
voting or investment power or has the right to acquire beneficial ownership
within 60 days after July 21, 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 Percent
Owned of Class
------------ --------
Angelo F. Bistocchi 20,146 0.84
Michael G. Cestone 10,022 0.42
Michael J. Cestone, Jr. (1) 36,392 1.52
Joseph Coccia 11,999 0.50
William P. Conaboy 937 0.04
Dominick L. DeNaples (2) 163,502 6.81
Louis A. DeNaples (3) 175,686 7.31
Joseph J. Gentile (4) 106,346 4.43
Martin F. Gibbons 20,554 0.86
Joseph O. Haggerty 3,887 0.16
George N. Juba 14,644 0.61
J. David Lombardi (5) 27,825 1.16
John P. Moses 1,756 .07
John R. Thomas (6) 38,479 1.60
All directors and executive officers as a group (15) 633,018 26.36
- ----------
(1) Includes 8,090 shares owned individually by his spouse.
(2) Includes 12,046 shares held jointly with his children.
(3) Includes 2,291 shares owned individually by his spouse and 7,490 shares
held jointly with his children.
(4) Includes 21,670 shares owned individually by his spouse.
(5) Includes 145 shares held by his minor children.
(6) Includes 5,400 shares owned individually by his spouse.
66
<PAGE>
TRANSFER AGENT
Registrar and Transfer Company of Cranford, New Jersey, our stock transfer
agent, will act as registrar and transfer agent for the common stock offered
under this prospectus.
EXPERTS
The consolidated financial statements of First National Community Bancorp,
Inc. and subsidiary as of December 31, 1998, and 1997, and for each of the years
in the two-year period ended December 31, 1998, included in this prospectus have
been audited by Demetrius & Company, L.L.C., independent certified public
accountants, as indicated in its report with respect to the financial statements
and are included in reliance upon the authority of the firm as experts in
accounting and auditing. The consolidated statements of income, changes in
stockholders' equity and cash flows 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 prospectus have been audited by Robert Rossi
& Co., independent certified public accountants, as indicated in its report with
respect to the financial statements and are included in reliance upon the
authority of the firm as experts in accounting and auditing.
LEGAL MATTERS
The legality of our shares of common stock to be issued in connection with
this offering and certain other legal matters relating to the transaction will
be passed upon by the law firm of Shumaker Williams, P.C., our special counsel
for this matter.
67
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities Exchange
Act of 1934, and, accordingly, file reports, proxy statements and other
information with the Securities and Exchange Commission. The reports, proxy
statements and other information filed with the Commission are available for
inspection and copying at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the Commission's Regional Offices located at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and at World Trade Center,
Suite 1300, New York, New York 10048. Copies of these documents may also be
obtained from the Public Reference Section of the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. We are an
electronic filer with the Commission. The Commission maintains a web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The address
of the Commission's web site is: http://www.sec.gov.
No person has been authorized to give any information or to make any
representation not contained in this prospectus, and if given or made, any such
information or representation should not be relied upon as having been
authorized. This prospectus does not constitute an offer to any person to
exchange or sell, or a solicitation from any person of an offer to exchange or
purchase, the securities offered by this prospectus in any jurisdiction in which
it is unlawful to make such an offer or solicitation. Neither the delivery of
this prospectus nor any distribution of the securities to which this prospectus
relates shall, under any circumstances, create any implication that the
information contained herein is correct at any time subsequent to the date
hereof.
This prospectus forms a part of a registration statement that we have filed
with the Commission under the Securities Act of 1933, with respect to our common
stock that we intend to offer to the public. This prospectus does not contain
all of the information in the registration statement. The Commission's rules and
regulations permit omission of certain information. You may inspect and copy the
registration statement, including any amendments or exhibits at the locations
mentioned above. Statements contained in this prospectus as to the contents of
any contract or other document are not necessarily complete. We refer you to the
copy of the contract or other document, filed as an exhibit to the registration
statement. We also qualify our discussions by these documents.
68
<PAGE>
FIRST NATIONAL COMMUNITY BANCORP, INC.
INDEX TO FINANCIAL STATEMENTS
AND
SUPPLEMENTARY FINANCIAL INFORMATION
Page
----
Selected Financial Data 3
Management's Discussion and Analysis
of Financial Condition and Results of Operations 28
INDEPENDENT AUDITOR'S REPORT F-2
AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 (unaudited)
Consolidated Statement of Condition F-3
Consolidated Statement of Income F-4
Consolidated Statement of Cash Flows F-5
Consolidated Statement of Changes in Stockholders' Equity F-7
YEARS ENDED DECEMBER 31, 1998 AND 1997
Consolidated Statement of Condition F-8
Consolidated Statement of Income F-9
Consolidated Statement of Cash Flows F-10
Consolidated Statement of Changes in Stockholders' Equity F-12
F-1
<PAGE>
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 statements 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 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.C.
Wayne, New Jersey
January 19, 1999
F-2
<PAGE>
FIRST NATIONAL COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30, Dec.31,
1999 1998
--------- --------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 12,205 $ 10,027
Federal funds sold 0 3,400
--------- --------
Total cash and cash equivalents 12,205 13,427
Interest-bearing balances with financial institutions 2,280 2,478
Securities:
Available-for-sale, at fair value 124,572 124,661
Held-to-maturity, at cost
(fair value $1,952 on June 30, 1999 and $7l4 on December 31, 1998)
2,132 711
Federal Reserve Bank and FHLB stock, at cost 7,741 6,458
Net loans 344,457 324,610
Bank premises and equipment 4,933 4,812
Other assets 9,948 6,228
--------- --------
Total Assets $ 508,268 $483,385
--------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand-- non-interest bearing $ 39,304 $ 39,427
Interest bearing demand 60,943 51,240
Savings 47,430 42,017
Time ($100,000 and over) 64,132 69,341
Other time 183,775 178,014
--------- --------
Total Deposits 395,584 380,039
Borrowed funds 74,538 65,175
Other liabilities 4,296 3,492
--------- --------
Total Liabilities $ 474,418 $448,706
--------- --------
Shareholders' equity:
Common Stock, $1.25 par value, authorized 5,000,000 shares;
2,401,782 shares issued and outstanding at June 30, 1999 and 2,398,360 shares
issued and outstanding at December 31, 1998 $ 3,002 $ 2,998
Additional Paid-in Capital 6,398 6,267
Retained Earnings 26,853 24,623
Accumulated Other Comprehensive Income (2,403) 791
--------- --------
Total shareholders' equity $ 33,850 $ 34.679
--------- --------
Total Liabilities and Shareholders' Equity $ 508,268 $483,385
========= ========
</TABLE>
Note: The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
F-3
<PAGE>
FIRST NATIONAL COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ending Year-to-Date
-------------------------- --------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest Income:
Loans $ 7,411 $ 6,239 $ 14,205 $ 12,332
Balances with banks 33 45 66 86
Investments 2,138 1,989 4,102 3,884
Federal Funds Sold 7 59 76 123
---------- ---------- ---------- ----------
Total Interest Income 9,589 8,332 18,449 16,425
---------- ---------- ---------- ----------
Interest Expense:
Deposits 3,917 3,742 7,829 7,418
Borrowed Funds 1,074 767 2,040 1,478
---------- ---------- ---------- ----------
Total Interest Expense 4,991 4,509 9,869 8,896
---------- ---------- ---------- ----------
Net Interest Income:
Before Loan Loss Provision 4,598 3,823 8,580 7,529
Provision for loan losses 180 180 360 360
---------- ---------- ---------- ----------
Net interest income 4,418 3,643 8,220 7,169
---------- ---------- ---------- ----------
Other Income:
Service charges on deposits 205 201 398 391
Other Income 94 110 196 174
Gain (Loss) on sale of:
Securities 0 47 213 51
Loans 35 53 44 130
Other Assets 0 38 0 38
---------- ---------- ---------- ----------
Total Other Income 334 449 851 784
---------- ---------- ---------- ----------
Other Expenses:
Salaries & benefits 1,322 1,149 2,645 2,303
Occupancy & equipment 432 364 868 734
Other 817 747 1,668 1,448
---------- ---------- ---------- ----------
Total other expenses 2,571 2,260 5,181 4,485
---------- ---------- ---------- ----------
Income before income taxes 2,181 1,832 3,890 3,468
Income tax expense 547 473 940 867
---------- ---------- ---------- ----------
NET INCOME $ 1,634 $ 1,359 $ 2,950 $ 2,601
========== ========== ========== ==========
Earnings per share (1) $ 0.68 $ 0.57 $ 1.23 $ 1.08
========== ========== ========== ==========
Weighted average number of shares (1) 2,398,398 2,398,360 2,398,379 2,398,360
========== ========== ========== ==========
</TABLE>
- ----------
(1) Per share data reflects the retroactive effect of the 100% stock dividend
issued August 31, 1998.
F-4
<PAGE>
FIRST NATIONAL COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
June 30, June 30,
1999 1998
-------- --------
(Dollars in thousands)
<S> <C> <C>
INCREASE (DECREASE) IN CASH EQUIVALENTS:
Cash Flows From Operating Activities:
Interest Received $ 18,263 $ 16,813
Fees & Commissions Received 593 695
Interest Paid (9,718) (8,867)
Income Taxes Paid (804) (917)
Cash Paid to Suppliers & Employees (6,174) (4,186)
-------- --------
Net Cash Provided (Used) by Operating Activities $ 2,160 $ 3,538
-------- --------
Cash Flows from Investing Activities:
Securities available for sale:
Proceeds from Maturities $ 1,000 $ 500
Proceeds from Sales prior to maturity 18,260 10,638
Proceeds from Calls prior to maturity 12,045 28,113
Purchases (37,172) (43,603)
Securities held to maturity:
Proceeds from Calls prior to maturity 249 0
Purchases (1,622) (232)
Net (Increase) Decrease in Interest-Bearing Bank Balances 198 (1,576)
Net (Increase) Decrease in Loans to Customers (20,163) (12,272)
Capital Expenditures (500) (369)
-------- --------
Net Cash Provided (Used) by Investing Activities $(27,705) $(18,801)
-------- --------
Cash Flows from Financing Activities:
Net Increase (Decrease) in Demand Deposits, Money Market Demand,
NOW Accounts, and Savings Accounts $ 14,962 $ 2,940
Net Increase in Certificates of Deposit 552 11,170
Net Increase in Borrowed Funds 9,362 3,577
Repayment of Long-Term Debt -- (11)
Net Proceeds from Issuance of Common Stock Through Dividend
Reinvestment 135 0
Dividends Paid (720) (648)
-------- --------
Net Cash Provided (Used) by Financing Activities $ 24,291 $ 17,028
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents $ (1,254) $ 1,765
Cash & Cash Equivalents at Beginning of Year $ 13,459 $ 14,681
-------- --------
CASH & CASH EQUIVALENTS AT END OF PERIOD $ 12,205 $ 16,446
======== ========
</TABLE>
(Continued)
F-5
<PAGE>
FIRST NATIONAL COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the Six Months Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
June 30, June 30,
1999 1998
-------- --------
(Dollars in thousands)
<S> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Net Income $ 2,950 $ 2,601
-------- --------
Adjustments to Reconcile Net Income to Net Cash Provided by Operating
Activities:
Net Cash Provided by Operating Activities:
Amortization (Accretion), Net (3) 98
Depreciation 380 320
Provision for Probable Credit Losses 360 360
Provision for Deferred Taxes -- --
Gain on Sale of Investment Securities (213) (51)
Gain on Sale of Other Assets (44) (38)
Increase (Decrease) in Taxes Payable 137 (51)
Decrease (Increase) in Interest Receivable (184) 290
Increase (Decrease) in Interest Payable 151 29
Decrease (Increase) in Prepaid Expenses and Other Assets (1,891) (375)
Increase (Decrease) in Accrued Expenses and Other Liabilities 517 355
-------- --------
Total Adjustments $ (790) $ 937
-------- --------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $ 2,160 $ 3,538
======== ========
</TABLE>
F-6
<PAGE>
FIRST NATIONAL COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For The Six Months Ended June 30, 1999
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
ACCUMU-
LATED
OTHER
COMPRE- COMMON STOCK ADD'L COMPRE-
HENSIVE ----------------- PAID-IN RETAINED HENSIVE
INCOME SHARES AMOUNT CAPITAL EARNINGS INCOME TOTAL
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1998 2,398 $2,998 $6,267 $24,623 $ 791 $34,679
Comprehensive Income:
Net income for the period $ 2,950 2,950 2,950
Other comprehensive income, net of tax:
Unrealized loss on securities
available-for-sale, net of
deferred income tax
benefit of $1,646 (2,981)
Reclassification adjustment (213)
-------
Total other comprehensive income,
net of taxes (3,194) (3,194) (3,194)
-------
Comprehensive Income (244)
Issuance of 3,422 shares of
Common Stock through
Dividend Reinvestment 4 4 131 135
Cash dividends paid, $0.30 per share (720) (720)
----- ------ ------ ------- ------- ------
BALANCES, JUNE 30, 1999 2,402 $3,002 $6,398 $26,853 $(2,403) $33,850
===== ====== ====== ======= ======= =======
</TABLE>
F-7
<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-8
<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 expenses 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-9
<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>
(Continued)
F-10
<PAGE>
FIRST NATIONAL COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For The Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<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-11
<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>
ACCUMU-
LATED
OTHER
COMPRE- COMMON STOCK ADD'L COMPRE-
HENSIVE -------------- PAID-IN RETAINED HENSIVE
INCOME SHARES AMOUNT CAPITAL EARNINGS INCOME TOTAL
----------- ---------------------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1995 991,504 $1,239,380 $6,267,107 $17,049,405 $991,058 $25,546,950
Comprehensive Income:
Net income for the year $3,874,610 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) (606,948) (606,948)
-----------
Comprehensive Income $3,267,662
===========
Cash dividends paid, $0.49 per share (1,177,704) (1,177,704)
10% stock dividend 98,920 123,650 (129,700) (6,050)
---------- ----------- ---------- ----------- ----------- ------------
BALANCES, DECEMBER 31, 1996 1,090,424 $1,363,030 $6,267,107 $19,616,611 $384,110 $27,630,858
Comprehensive Income:
Net income for the year $4,642,972 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 712,821 712,821 712,821
-----------
Comprehensive Income $5,355,793
===========
Cash dividends paid, $0.58 per share (1,395,743) (1,395,743)
10% stock dividend 108,756 135,945 (147,077) (11,132)
---------- ----------- ---------- ----------- ----------- ------------
BALANCES, DECEMBER 31, 1997 1,199,180 $1,498,975 $6,267,107 $22,716,763 $1,096,931 $31,579,776
Comprehensive Income:
Net income for the year $5,107,267 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) (305,576) (305,576)
----------
Comprehensive Income $4,801,691
===========
Cash dividends paid, $0.71 per share (1,702,837) (1,702,837)
100% stock dividend 1,199,180 1,498,975 (1,498,975) 0
---------- ----------- ---------- ----------- ----------- ------------
BALANCES, DECEMBER 31, 1998 2,398,360 $2,997,950 $6,267,107 $24,622,218 $791,355 $34,678,630
========== =========== ========== =========== =========== ============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-12
<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
First National Community 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.
F-13
<PAGE>
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 its
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
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.
F-14
<PAGE>
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
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" ("SFA 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
Amortized Unrealized Unrealized
Cost Holding Gains Holding Losses Fair Value
---------- ------------- -------------- -----------
December 31, 1998
-----------------
<S> <C> <C> <C> <C>
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-15
<PAGE>
Held-to-maturity Securities:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Holding Gains Holding Losses Fair Value
--------- ------------- -------------- ----------
December 31, 1998
-----------------
<S> <C> <C> <C> <C>
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 Cost Fair Value Amortized Cost Fair 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 Years 14,934,112 15,343,980 0 0
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-16
<PAGE>
Changes in the allowance for credit losses were as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
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
Restructured 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:
1998 1997
--------- ----------
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
========== ==========
6. DEPOSITS:
At December 31, 1998, time deposits including certificates of deposit and
Individual Retirement Accounts have the scheduled maturities as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
Time Deposits Other
$100,000 and Over Time Deposits Total
----------------- ------------- -----
<S> <C> <C> <C>
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
======= ======== ========
</TABLE>
F-17
<PAGE>
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):
<TABLE>
<CAPTION>
December 31, 1998
-----------------
Weighted Average
Amount Interest Rate
------ ----------------
<S> <C> <C>
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
=======
</TABLE>
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.
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.
F-18
<PAGE>
9. INCOME TAXES:
The provision for income taxes included in the statement of income is
comprised of the following components:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
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
========== ========== ==========
</TABLE>
Deferred tax (liabilities) assets are comprised of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Unrealized Holding Gains (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)
========= ==========
</TABLE>
The provision for Income Taxes differs from the amount of income tax
determined applying the applicable U.S. Statutory Federal Income Tax Rate to
pre-tax income from continuing operations as a result of the following
differences:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
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
========== ========== ==========
</TABLE>
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
F-19
<PAGE>
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.
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
F-20
<PAGE>
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>
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.
F-21
<PAGE>
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.
The estimated fair values of the Bank's financial instruments are as
follows:
<TABLE>
<CAPTION>
December 31, 1998
Carrying Value Fair 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
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
Carrying Value Fair Value
-------------- ----------
<S> <C> <C>
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>
F-22
<PAGE>
14. CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
Condensed parent company only financial information is as follows (in
thousands):
<TABLE>
<S> <C>
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
=======
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 from 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 Period $ 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-23
<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-24
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
Management estimates that the expenses payable by First National Community
Bancorp, Inc. in connection with the sale of securities registered on the
Registration Statement will be as follows:
Registration Fee $ 834
Accounting Fees and Expenses $ 4,000
Legal Fees and Expenses $45,000
Printing and EDGAR Filing Expenses $ 7,000
Miscellaneous $ 3,500
-------
TOTAL $60,334
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, which is attached as Exhibit 99.1.
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 bylaws, 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 bylaws.
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 to 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.
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
II-2
<PAGE>
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 bylaws, 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 bylaws, 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 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.
II-3
<PAGE>
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 bylaw, 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.
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.
II-4
<PAGE>
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 bylaws, 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;
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
II-5
<PAGE>
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 First National Community's bylaws 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 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 1999 Dividend Reinvestment and Stock Purchase
Plan. (Incorporated by reference to Exhibit 4 to
Registrant's Registration Statement No. 333-76933 as filed
with the Commission on April 23, 1999.)
II-6
<PAGE>
5 Form of Opinion of Shumaker Williams, P.C. re: Legality.
21 Subsidiaries of Registrant.
23.1 Consent of Shumaker Williams, P.C. (Included as part of
Exhibit 5.)
23.2 Consent of Demetrius & Company, L.L.C.
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.
99.3 Form of Subscription Agreement.
(b) Financial Statement Schedules:
None required.
Item 17. Undertakings.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
II-7
<PAGE>
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) 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
(iii) 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.
(2) 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.
(3) 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.
(h) 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 August 11, 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.
<TABLE>
<CAPTION>
Capacity Date
-------- ----
<S> <C> <C>
/s/ J. David Lombardi President and Chief Executive August 11, 1999
- ----------------------------- Officer
J. David Lombardi (Principal Executive Officer)
/s/ William S. Lance Treasurer August 11, 1999
- ----------------------------- (Principal Accounting or Financial
William S. Lance Officer)
/s/ Angelo Bistocchi Director August 11, 1999
- -----------------------------
Angelo Bistocchi
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
/s/ Michael G. Cestone Director August 11, 1999
- -----------------------------
Michael G. Cestone
/s/ Michael J. Cestone, Jr. Director August 11, 1999
- -----------------------------
Michael J. Cestone, Jr.
/s/ Joseph Coccia Director August 11, 1999
- -----------------------------
Joseph Coccia
/s/ William P. Conaboy Director August 11, 1999
- -----------------------------
William P. Conaboy
/s/ Dominick L. DeNaples Director August 11, 1999
- -----------------------------
Dominick L. DeNaples
/s/ Louis A. DeNaples Director August 11, 1999
- -----------------------------
Louis A. DeNaples
/s/ Joseph J. Gentile Director August 11, 1999
- -----------------------------
Joseph J. Gentile
/s/ Martin F. Gibbons Director August 11, 1999
- -----------------------------
Martin F. Gibbons
/s/ Joseph O. Haggerty Director August 11, 1999
- -----------------------------
Joseph O. Haggerty
- ----------------------------- Director ___________, 1999
George N. Juba
/s/ John P. Moses Director August 11, 1999
- -----------------------------
John P. Moses
/s/ John R. Thomas Director August 11, 1999
- -----------------------------
John R. Thomas
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Page Number
in Sequential
Number Title Number 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 1999 Dividend Reinvestment and Stock Purchase Plan. *
(Incorporated by reference to Exhibit 4 to Registrant's Registration
Statement No. 333-76933, filed with the Commission on April 23,
1999.)
5 Form of Opinion of Shumaker Williams, P.C. re: Legality. 109
21 Subsidiaries of Registrant. 111
23.1 Consent of Shumaker Williams, P.C. (Included as part of Exhibit 5.) ---
23.2 Consent of Demetrius & Company, L.L.C. 112
23.3 Consent of Robert Rossi & Co. 113
24 Power of Attorney. (Included on Signature Page.) ---
99.1 Indemnification Provisions. 114
99.2 Independent Auditors Report, dated January 21, 1997, of Robert Rossi 118
& Co.
99.3 Form of Subscription Agreement. 120
</TABLE>
- -------------
* Incorporated by reference.
EXHIBIT 5
August 30, 1999
J. David Lombardi, President
First National Community Bancorp, Inc.
102 E. Drinker Street
Dunmore, PA 18512-2491
RE: Our File No: 668-98
Dear Mr. Lombardi:
We have acted as special counsel to First National Community Bancorp, Inc.
("First National Community") in connection with the proposed issuance of up to
75,000 shares of First National Community's common stock to the public, pursuant
to and covered by First National Community's Registration Statement on Form S-1,
filed on the date hereof with the Securities and Exchange Commission. We, as
special counsel to First National Community, have reviewed:
1. Articles of Incorporation of First National Community;
2. The Bylaws of First National Community;
3. Resolutions adopted by the Board of Directors of First National
Community relating to the Registration Statement, certified by the
Secretary of First National Community; and
4. The Registration Statement.
Based on our review of the foregoing, it is our opinion that:
a. First National Community 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
<PAGE>
b. The common stock covered by the Registration Statement has been duly
authorized and, when issued pursuant to the terms of the Registration
Statement and Subscription Agreement, will be legally issued by First
National Community and fully paid and non-assessable.
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 1933, as
amended, or the rules and regulations of the Securities and Exchange Commission
thereunder.
Very truly yours,
SHUMAKER WILLIAMS, P.C.
/s/ Nicholas Bybel, Jr.
-------------------------------
By Nicholas Bybel, Jr.
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
FIRST NATIONAL COMMUNITY BANCORP, INC.
<TABLE>
<CAPTION>
Name Date of Incorporation Incorporation
---- --------------------- -------------
<S> <C> <C>
First National Community Bank October 10, 1910 United States of America
</TABLE>
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.
-----------------------------------
DEMETRIUS & COMPANY, L.L.C.
Wayne, New Jersey
August 30, 1999
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
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.
-------------------------
ROBERT ROSSI & CO.
Olyphant, Pennsylvania
August 25, 1999
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 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
<PAGE>
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 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
<PAGE>
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 to the surviving or new corporation
as he would if he had served the surviving or new corporation in the same
capacity.
<PAGE>
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
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of First National Community Bank and Subsidiary
We have audited the accompanying consolidated statement of income, changes
in stockholder's 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 principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operation 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.
----------------------------
ROBERT ROSSI & CO.
Olyphant, Pennsylvania
January 21, 1997
EXHIBIT 99.3
FORM OF
SUBSCRIPTION AGREEMENT
<PAGE>
OFFERING SUBSCRIPTION AGREEMENT
FIRST NATIONAL COMMUNITY BANCORP, INC.
75,000 Shares
Common Stock
(Par value $1.25 Per Share)
Minimum Subscription: $1,000.00
Maximum Subscription: $250,000.00
Price Per Share: $40.00
First National Community Bancorp, Inc.
102 East Drinker Street
Dunmore, Pennsylvania 18512-2491
Attn: J. David Lombardi, President
Gentlemen:
1. I(We) (the "Undersigned") subscribe for and agree to purchase the number
of shares of common stock of First National Community Bancorp, Inc. (the
"Company") in connection with the offering, upon the terms and conditions
provided herein and in the Company's Prospectus dated August ___, 1999, and any
supplements thereto (the "Prospectus") (capitalized terms used but not defined
herein are defined in the Prospectus), as follows:
<TABLE>
<CAPTION>
No. of Shares Price Per Share Purchase Price
------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
($1,000.00 Minimum)
($250,000.00 Maximum)
x $40.00 = $
---------------- ---------
</TABLE>
2. Method of Payment (Check One)
______ Enclosed is the Undersigned's check, bank draft or money order
made payable, in United States currency, to the order of "First
National Community Bancorp, Inc.," for the amount of the Purchase
Price, as reflected in Paragraph 1.
______ The Undersigned authorizes withdrawal from this (these)
account(s) at First National Community Bank for the amount of the
Purchase Price, as reflected in Paragraph 1. (There is no penalty
for early withdrawal used for this payment.)
Account Number(s) Amount
================================================================================
$
- --------------------------------------------------------------------------------
$
- --------------------------------------------------------------------------------
$
- --------------------------------------------------------------------------------
Total Amount to be Withdrawn $
================================================================================
<PAGE>
3. Stock Registration (Please type or print the information requested
below.)
<TABLE>
<S> <C> <C> <C>
------------------------------------------
Name(s) in which stock is to be registered Day Phone (___) _______________
------------------------------------------
Name(s) in which stock is to be registered Evening Phone (___) _______________
The manner of ownership shall be (check one):
------------------------------------------ [ ] Individual
Title, if applicable, of Subscriber [ ] Tenants by the entireties (each must sign)
[ ] Joint Tenants with right of survivorship
(each must sign)
------------------------------------------ [ ] Tenants in Common (each must sign)
Title, if applicable, of Co-Subscriber [ ] In Partnership
[ ] As custodian, trustee or agent for _________
------------------------------------------ [ ] Corporation
Street Address of Subscribers
----------------------------------------------------------------------------------------------------------------
City County State Zip Code
------------------------------------------------------
Social Security or Tax I.D. Number of Subscriber
------------------------------------------------------
Social Security or Tax I.D. Number of Co-Subscriber
</TABLE>
4. The Company has the right to accept or reject shares subscribed for
herein, in whole or in part, for any reason whatsoever.
5. This agreement shall not be revoked by the Undersigned. The Undersigned
understands that there is no aggregate minimum number of shares of common stock
that the Company must sell pursuant to the offering. The Undersigned understands
and agrees that there shall be no refund of any portion of the Total Purchase
Price paid pursuant to this agreement unless and until the Company rejects the
Subscription, as described in paragraph 4, above.
6. Any refund checks shall be made payable to and sent to the Undersigned
at the address specified above. All shares of common stock shall be registered
in the name(s) of, and sent to the address specified above.
7. This agreement shall be accepted and become an agreement binding on the
Company, only if and when executed in the name and on behalf of the Company and
when notice of such execution and acceptance (which may be a copy or similar
counterpart hereof) is mailed to the Undersigned. This agreement is binding,
after acceptance by the Company, upon the heirs, estate, legal representatives,
assigns and successors of the Undersigned and shall survive the death,
disability or dissolution of the Undersigned.
<PAGE>
8. The Undersigned has/have received, read and understood the Company's
Prospectus dated August __, 1999, and any supplements thereto, and understands
that this representation does not constitute a waiver of any rights under the
Securities Act of 1933, the Securities Exchange Act of 1934 or under the
Pennsylvania Securities Act of 1972 and the rules and regulations adopted
thereunder. The Undersigned understand(s) that an investment in the common stock
includes certain risks, and the Undersigned has/have carefully read and
considered the matters set forth under the caption "Risk Factors" and elsewhere
in the Prospectus. No information or representation that is either inconsistent
with or undisclosed in the Prospectus has been received by the Undersigned from
representatives of the Company or anyone else. The Undersigned acknowledges and
understands that no federal or state agency has made any finding or
determination as to the fairness for public investment, nor any recommendation
or endorsement of the shares.
9. The Offering will terminate at 5:00 p.m. on November 12, 1999, or at
such later date as shall be determined by the Company, but in no event later
than 5:00 p.m. on December 15, 1999 (the "Offering Termination Date").
10. The Undersigned represent(s) that he/she/we is/are at least eighteen
(18) years of age.
11. The Undersigned agree(s) not to transfer or assign this agreement, or
any interest herein, including, but not limited to, the common stock purchased
hereunder, except in accordance with all applicable laws.
12. The Undersigned acknowledges that the shares of the Company's common
stock offered hereby are not deposits. These securities are not insured by the
Federal Deposit Insurance Corporation or any other governmental agency and are
subject to investment risk, including the possible loss of principal.
Furthermore, an investment in the shares of the Company's common stock hereby
offered is not guaranteed by the Company.
13. If this agreement is executed on behalf of a corporation, partnership,
trust or other entity, the Undersigned has/have been duly authorized to execute
this agreement and all other instruments in connection with the purchase of the
common stock, and the signature(s) of the Undersigned is/are binding upon such
corporation, partnership, trust or other entity. The Company retains the right
to request the production of an appropriate certification for said
authorization.
14. The provisions of this agreement shall be construed and enforced
according to the laws of the Commonwealth of Pennsylvania. In the event there is
any conflict between the Prospectus and this agreement, the terms set forth in
the Prospectus and any supplements thereto shall be controlling.
<PAGE>
15. This agreement constitutes the entire agreement among the parties
hereto with respect to the subject matter hereof and may be amended only by a
writing executed by the party to be bound thereby.
Dated:
----------------------------
----------------------------------
(Signature of Subscriber)
----------------------------------
(Print Name)
----------------------------------
(Signature of Co-Subscriber)
----------------------------------
(Print Name)
Accepted:
FIRST NATIONAL COMMUNITY BANCORP, INC.
By:
-----------------------------------
(Authorized Signature)
-----------------------------------
(Date of Execution)
