Back to GetFilings.com

U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

Commission File No.____________

        Indicate by check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES X       NO   

         Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES X       NO   

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:

FIRST NATIONAL COMMUNITY BANCORP, INC.

INDEX

(ii)

FIRST NATIONAL COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)

Note: The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

See notes to financial statements

(1)

FIRST NATIONAL COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollars in thousands, except per share amounts)

See notes to financial statements

(2)

FIRST NATIONAL COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)

(Continued)

(3)

FIRST NATIONAL COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)

See notes to financial statements

(4)

FIRST NATIONAL COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ EQUITY
For The Three Months Ended March 31, 2003
(In thousands, except share data)
(UNAUDITED)

See notes to financial statements

(5)

FIRST NATIONAL COMMUNITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

    (1)        The accounting and financial reporting policies of First National Community Bancorp, Inc. and its subsidiary conform to generally accepted accounting principles and to general practice within the banking industry. The consolidated statements include the accounts of First National Community Bancorp, Inc. and its wholly owned subsidiary, First National Community Bank (Bank) including its subsidiary, FNCB Realty, Inc. (collectively, Company). All material intercompany accounts and transactions have been eliminated in consolidation. The accompanying interim financial statements are unaudited. In management’s opinion, the consolidated financial statements reflect a fair presentation of the consolidated financial position of First National Community Bancorp, Inc. and subsidiary, and the results of its operations and its cash flows for the interim periods presented, in conformity with generally accepted accounting principles.

        These interim financial statements should be read in conjunction with the audited financial statements and footnote disclosures in the Bank’s Annual Report to Shareholders for the fiscal year ended December 31, 2002.

     (2)        Basic earnings per share have been computed by dividing net income (the numerator) by the weighted average number of common shares (the denominator) for the period. Such shares amounted to 5,210,960 and 5,113,923 for the periods ending March 31, 2003 and 2002, respectively.

        Diluted earnings per share have been computed by dividing net income (the numerator) by the weighted average number of common shares and options outstanding (the denominator) for the period. Such shares amounted to 5,469,204 and 5,290,790 for the periods ending March 31, 2003 and 2002, respectively.

    (3)        During the first quarter of calendar 2003, the company adopted the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, for stock-based employee compensation, effective as of January 1, 2003. Under the prospective method of adoption selected by the company, stock-based compensation cost will be recognized using the fair value method for all awards granted, modified or settled on or after that effective date. For the quarters ended March 31, 2003 and 2002 there was no activity in stock-based compensation, accordingly, the adoption of this method had no affect on net income as reported or pro forma net income.

(6)

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The consolidated financial review of First National Community Bancorp, Inc. (the “company”) provides a comparison of the performance of the company for the periods ended March 31, 2003 and 2002. The financial information presented should be reviewed in conjunction with the consolidated financial statements and accompanying notes appearing elsewhere in this report.

Background

        First National Community Bancorp, Inc. (the company) is a Pennsylvania Corporation, incorporated in 1997 and is registered as a financial holding company under the Bank Holding Company Act of 1956, as amended. The company became an active bank holding company on July 1, 1998 when it assumed ownership of First National Community Bank (the bank). On November 2, 2000, the Federal Reserve Bank of Philadelphia approved the company’s application to change its status to a financial holding company as a complement to the company’s strategic objective. The bank is a wholly-owned subsidiary of the company.

        The company’s primary activity consists of owning and operating the bank, which provides the customary retail and commercial banking services to individuals and businesses. The bank provides practically all of the company’s earnings as a result of its banking services. As of March 31, 2003, the company had 14 full-service branch banking offices in its principal market area in Lackawanna and Luzerne Counties, Pennsylvania. At March 31, 2003, the company had 202 full-time equivalent employees.

        The bank was established as a national banking association in 1910 as “The First National Bank of Dunmore.” Based upon shareholder approval received at a Special Shareholders’ Meeting held October 27, 1987, the bank changed its name to “First National Community Bank” effective March 1, 1988. The bank’s operations are conducted from offices located in Lackawanna and Luzerne Counties, Pennsylvania:

(7)

        The bank provides the usual commercial banking services to individuals and businesses, including a wide variety of loan and deposit instruments. As a result of the bank’s partnership with INVEST, our customers are able to access alternative products such as mutual funds, bonds, equities and annuities directly from our INVEST representatives.

        During 1996, FNCB Realty Inc. was formed as a wholly owned subsidiary of the Bank to manage, operate and liquidate properties acquired through foreclosure.

Summary:

        Net income for the three months ended March 31, 2003 amounted to $2,235,000, an increase of $227,000 or 11% compared to the same period of the previous year. This increase can be attributed to the $359,000 improvement in net interest income and the $115,000 increase in other income. Non-interest expenses increased $211,000, or 6%, over the same period of last year due primarily to an increase in Salaries & Benefits of $144,000.

RESULTS OF OPERATIONS
Net Interest Income:

        The Company’s primary source of revenue is net interest income which totaled $5,583,000 and $5,224,000 (before the provision for credit losses) during the first three months of 2003 and 2002, respectively. Year to date net interest margins (tax equivalent) increased slightly to 3.44% for 2003 compared to 3.42% in 2002 comprised of a sixty nine basis point decrease in the yield earned on earning assets and a seventy six basis point decrease in the cost of interest-bearing liabilities. Excluding investment leveraging transactions, the year-to-date margin increased seven basis points when compared to the same three month period of last year.

        Earning assets increased $27 million to $723 million during the first three months of 2003 and now total 94.6% of total assets, a slight decrease from the year-end level of 94.9%.

(8)

Yield/Cost Analysis

        The following tables set forth certain information relating to the Company’s Statement of Financial Condition and reflect the weighted average yield on assets and weighted average costs of liabilities for the periods indicated. Such yields and costs are derived by dividing the annualized income or expense by the weighted average balance of assets or liabilities, respectively, for the periods shown:

(1)     Yields on tax-exempt loans and investment securities have been computed on a tax equivalent basis.

(9)

(1)     Yields on tax-exempt loans and investment securities have been computed on a tax equivalent basis.

(10)

Rate Volume Analysis

        The table below sets forth certain information regarding the changes in the components of net interest income for the periods indicated. For each category of interest earning asset and interest bearing liability, information is provided on changes attributed to: (1) changes in rate (change in rate multiplied by current volume); (2) changes in volume (change in volume multiplied by old rate); (3) the total. The net change attributable to the combined impact of volume and rate has been allocated proportionately to the change due to volume and the change due to rate.

(11)

Other Income and Expenses:

        Other income in the first three months of 2003 increased $115,000 in comparison to the same period of 2002. Service charges and fees increased $62,000, or 11%, over the prior period. Income from service charges increased $48,000, or 16%, in comparison to the same period of last year while other fee income increased $14,000, or 6%. New products and a larger deposit base contributed to the increases. Net gains from the sale of assets increased $53,000 from last year.

        Other expenses increased $211,000 or 6% for the period ended March 31, 2003 compared to the same period of the previous year. Salaries and Benefits costs added $144,000, or 9% in comparison to the first three months of 2002. Occupancy and equipment costs rose 7%, advertising costs rose 5%, data processing costs rose 5% and other operating expenses increased $3,000.

Other Comprehensive Income:

        The Company’s other comprehensive income includes unrealized holding gains (losses) on securities which it has classified as available-for-sale in accordance with FASB 115, “Accounting for Certain Investments in Debt and Equity Securities.”

Provision for Income Taxes:

        The provision for income taxes is calculated based on annualized taxable income. The provision for income taxes differs from the amount of income tax determined applying the applicable U.S. statutory federal income tax rate to pre-tax income from continuing operations as a result of the following differences:

(12)

Securities:

        Carrying amounts and approximate fair value of investment securities are summarized as follows:

        The following summarizes the amortized cost, approximate fair value, gross unrealized holding gains, and gross unrealized holding losses at March 31, 2003 of the Company’s Investment Securities classified as available-for-sale:

(13)

        The following summarizes the amortized cost, approximate fair value, gross unrealized holding gains, and gross unrealized holding losses at March 31, 2003 of the Company’s Investment Securities classified as held-to-maturity:

        The following table shows the amortized cost and approximate fair value of the company’s debt securities at March 31, 2003 using contractual maturities. Expected maturities will differ from contractual maturity because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

        Gross proceeds from the sale of investment securities for the periods ended March 31, 2003 and 2002 were $4,699,566 and $15,092,457 respectively with the gross realized gains being $204,392 and $246,696 respectively, and gross realized losses being $0 and $10,802, respectively.

        At March 31, 2003 and 2002, investment securities with a carrying amount of $64,241,436 and $100,572,808 respectively, were pledged as collateral to secure public deposits and for other purposes.

(14)

Loans:

        The following table sets forth detailed information concerning the composition of the company’s loan portfolio as of the dates specified:

        The following table sets forth certain information with respect to the company’s allowance for loan losses and charge-offs:

(15)

        The following table presents information about the company’s non-performing assets for the periods indicated:

        Non-performing assets are comprised of non-accrual loans and loans past due 90 days or more and still accruing, and other real estate owned. Loans are placed in nonaccrual status when management believes that the collection of interest or principal is doubtful, or generally when a default of interest or principal has existed for 90 days or more, unless such loan is fully secured and in the process of collection. When interest accrual is discontinued, interest credited to income in the current year is reversed and interest accrued in prior years is charged against the allowance for credit losses. Any payments received are applied, first to the outstanding loan amounts, then to the recovery of any charged-off loan amounts. Any excess is treated as a recovery of lost interest. Nonaccrual loans are comprised of fourteen credits which are adequately secured by mortgages or UCC’s on the property. Any loss recognized on these loans is expected to be minimal.

Provision for Credit Losses:

        The provision for credit losses varies from year to year based on management’s evaluation of the adequacy of the allowance for credit losses in relation to the risks inherent in the loan portfolio. In its evaluation, management considers credit quality, changes in loan volume, composition of the loan portfolio, past experience, delinquency trends, and the economic condition. Consideration is also given to examinations performed by regulatory authorities and the Company’s independent accountants. A monthly provision of $75,000 was credited to the allowance for loan losses during the first three months of 2003 with an extra $100,000 provision in January. A monthly provision of $75,000 was credited to the allowance for loan losses during the first three months of 2002 with an extra $100,000 provision in March. The ratio of the loan loss reserve to total loans at March 31, 2003 and 2002 was 1.33% and 1.32%, respectively.

(16)

Asset/Liability Management, Interest Rate Sensitivity and Inflation

        The major objectives of the company’s asset and liability management are to (1) manage exposure to changes in the interest rate environment to achieve a neutral interest sensitivity position within reasonable ranges, (2) ensure adequate liquidity and funding, (3) maintain a strong capital base, and (4) maximize net interest income opportunities. First National Community Bank manages these objectives through its Senior Management and Asset and Liability Management Committees. Members of the committees meet regularly to develop balance sheet strategies affecting the future level of net interest income, liquidity and capital. Items that are considered in asset and liability management include balance sheet forecasts, the economic environment, the anticipated direction of interest rates and the Bank’s earnings sensitivity to changes in these rates.

        The company analyzes its interest sensitivity position to manage the risk associated with interest rate movements through the use of gap analysis and simulation modeling. Because of the limitations of the gap reports, the bank uses simulation modeling to project future net interest income streams incorporating the current “gap” position, the forecasted balance sheet mix, and the anticipated spread relationships between market rates and bank products under a variety of interest rate scenarios.

        Economic conditions affect financial institutions, as they do other businesses, in a number of ways. Rising inflation affects all businesses through increased operating costs but affects banks primarily through the manner in which they manage their interest sensitive assets and liabilities in a rising rate environment. Economic recession can also have a material effect on financial institutions as the assets and liabilities affected by a decrease in interest rates must be managed in a way that will maximize the largest component of a bank’s income, that being net interest income. Recessionary periods may also tend to decrease borrowing needs and increase the uncertainty inherent in the borrowers’ ability to pay previously advanced loans. Additionally, reinvestment of investment portfolio maturities can pose a problem as attractive rates are not as available. Management closely monitors the interest rate risk of the balance sheet and the credit risk inherent in the loan portfolio in order to minimize the effects of fluctuations caused by changes in general economic conditions.

Liquidity

        The term liquidity refers to the ability of the company to generate sufficient amounts of cash to meet its cash-flow needs. Liquidity is required to fulfill the borrowing needs of the bank’s credit customers and the withdrawal and maturity requirements of its deposit customers, as well as to meet other financial commitments.

        The short-term liquidity position of the company is strong as evidenced by $29,287,000 in cash and cash equivalents and $3,467,000 in interest-bearing balances with banks maturing within one year. A secondary source of liquidity is provided by the investment portfolio with $9,000,000 or 4% of the portfolio maturing or expected to be called within one year and expected cash flow from principal reductions approximating an additional $60 million.

        The company has relied primarily on its retail deposits as a source of funds. The bank is primarily 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.

(17)

Capital Management

        A strong capital base is essential to the continued growth and profitability of the company and in that regard the maintenance of appropriate levels of capital is a management priority. The company’s principal capital planning goals are to provide an adequate return to shareholders while retaining a sufficient base from which to provide for future growth, while at the same time complying with all regulatory standards. As more fully described in Note 13 to the year end audited financial statements, regulatory authorities have prescribed specified minimum capital ratios as guidelines for determining capital adequacy to help insure the safety and soundness of financial institutions.

        Total stockholders’ equity increased $1,327,000 or 2% during the first three months of 2003 comprised of an increase in retained earnings in the amount of $1,506,000 after paying cash dividends, $380,000 from stock issued through Dividend Reinvestment and Stock Option Plans offset by a $559,000 decrease in other comprehensive income. During the same period of 2002, total stockholders’ equity increased $1,131,000, or 2%, comprised of an increase in retained earnings of $1,368,000, after paying cash dividends and $395,000 from stock issued through Dividend Reinvestment offset by a $632,000 decrease in other comprehensive income. The total dividend payout during the first three months of 2003 and 2002 represents $.14 per share and $.125 per share, respectively. Excluding the impact due to securities valuation, increases in core equity amounted to $1,886,000 and $1,763,000, 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 March 31, 2003, First National Community Bank met all capital requirements with a leverage ratio of 8.08% and core capital and total risk-based capital ratios of 10.85% and 12.01%, respectively.

(18)

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        There has been no significant change in the Company’s exposure to market risk during the first nine months of 2002. For discussion of the Company’s exposure to market risk, refer to Item 7A, Quantitative and Qualitative Disclosure about Market Risk, contained in the Company’s Annual Report incorporated by reference in Form 10-K for the year ended December 31, 2001.

ITEM 4. – CONTROLS AND PROCEDURES

        Within 90 days prior to the date of this Form 10-Q, First National Community Bancorp, Inc. carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, First National Community Bancorp Inc.‘s disclosure controls and procedures are effective in timely alerting them to material information relating to First National Community Bancorp, Inc. (including its consolidated subsidiaries) required to be included in our periodic SEC filings. There have been no significant changes in First National Community Bancorp, Inc.‘s internal controls or, to its knowledge, in other factors that could significantly affect internal controls subsequent to the date First National Community Bancorp, Inc. carried out its evaluation.

        The Company’s management, including the CEO and CFO, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, provides reasonable, not absolute, assurance that the objectives of the control system are met. The design of a control system reflects resource constraints; the benefits of controls must be considered relative to their costs. Because there are inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been or will be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns occur because of simple error or mistake. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all future conditions; over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with the policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

(19)

Part II Other Information

Item 1 — Legal Proceeding

        The Bank is not involved in any material pending legal proceedings, other than routine litigation incidental to the business.

Item 2 — Changes in Securities

      None

Item 3 — Defaults upon Senior Securities

      None

Item 4 — Submission of Matters to a Vote of Security Holders

      None

Item 5 — Other Information

      None

Item 6 — Exhibits and Reports on Form 8 — K

(20)

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Registrant: FIRST NATIONAL COMMUNITY BANCORP, INC

Date: May 9, 2003

DATE: May 9, 2003

(21)

CERTIFICATION

I, J. David Lombardi, President and Chief Executive Officer, certify that:

(22)

Date: May 9, 2003

(23)

CERTIFICATION

I, William Lance, Principal Financial Officer, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of First National Community Bancorp, Inc.

2.     Based on my knowledge, the quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report.

3.     Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

4.     The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: