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

FORM 10-Q

(Mark One)

[X]  

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2003


[   ]   Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____________ to _____________

Commission File No.____________

First National Community Bancorp, Inc.
(Exact Name of Registrant as Specified in Its Charter)

Pennsylvania 23-2900790
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification Number)

102 E. Drinker St. Dunmore, PA 18512
(Address of Principal Executive Offices)

(570) 346-7667
(Registrant’s Telephone Number, Including Area Code)

                     
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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

         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:

Common Stock, $1.25 par value
(Title of Class)

5,227,718 shares
(Outstanding at July 17, 2003)

FIRST NATIONAL COMMUNITY BANCORP, INC.

INDEX

Page No.
Part I - Consolidated Financial Statements        
   Item 1. Consolidated Financial Statements  
            Consolidated Statements of Financial Condition  
              June 30, 2003 and December 31, 2002    1  
            Consolidated Statements of Income    
              Three Months Ended June 30, 2003 and 2002    
              YTD Ended June 30, 2003 and 2002    2  
            Consolidated Statements of Cash Flows  
              Six Months Ended June 30, 2003 and 2002    3-4  
            Consolidated Statements of Changes in Stockholders' Equity  
              Six Months Ended June 30, 2003    5  
            Notes to Consolidated Financial Statements    6-7  
   Item 2. Management's Discussion and Analysis of Financial Condition  
              and Results of Operations    7-18  
   Item 3. Quantitative and Qualitative Disclosures about Market Risk    19  
  Item 4. Controls and Procedures     19  
Part II - Other Information:    20  
   Item 1. Legal Proceedings  
   Item 2. Changes in Securities and Use of Proceeds  
   Item 3. Defaults Upon Senior Securities  
   Item 4. Submission of Matters to a Vote of Security Holders  
   Item 5. Other Information  
   Item 6. Exhibits and Reports on Form 8-K  
Signatures    21  
Certifications    22-25  
Exhibits    26-27  

(ii)


FIRST NATIONAL COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in thousands)

June 30,
2003
(UNAUDITED)

Dec. 31,
2002
(AUDITED)

ASSETS            
Cash and cash equivalents:  
         Cash and due from banks   $ 19,992   $ 15,498  
         Federal funds sold    0    0  


     Total cash and cash equivalents    19,992    15,498  
Interest-bearing balances with financial institutions    3,368    3,368  
Securities:  
         Available-for-sale, at fair value    220,959    197,405  
         Held-to-maturity, at cost  
              (fair value $1,415 on June 30, 2003 and  
              $1,306 on December 31, 2002)    1,381    1,347  
         Federal Reserve Bank and FHLB stock, at cost    7,037    6,740  
Net loans    500,928    487,976  
Bank premises and equipment    7,836    7,102  
Other assets    16,719    15,891  


         Total Assets   $ 778,220   $ 735,327  


LIABILITIES AND SHAREHOLDERS' EQUITY  
Liabilities:  
Deposits:  
         Demand - non-interest bearing   $ 67,006   $ 60,598  
         Interest bearing demand    116,394    105,142  
         Savings    66,832    58,850  
         Time ($100,000 and over)    91,984    82,988  
         Other time    231,611    232,897  


         Total deposits    573,827    540,475  
Borrowed funds    131,995    126,908  
Other liabilities    5,790    5,101  


         Total Liabilities   $ 711,612   $ 672,484  


Shareholders' equity:  
Common Stock, $1.25 par value,  
         Authorized: 20,000,000 shares  
         Issued and outstanding:  
          5,277,718 shares at June 30, 2003 and  
          5,207,676 shares at December 31, 2002   $ 6,597   $ 6,510  
Additional Paid-in Capital    14,328    13,065  
Retained Earnings    41,507    38,430  
Accumulated Other Comprehensive Income    4,176    4,838  


         Total shareholders' equity   $ 66,608   $ 62,843  


         Total Liabilities and Shareholders' Equity   $ 778,220   $ 735,327  


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)

Three Months Ended
Year-To-Date
June 30,
2003

June 30,
2002

June 30,
2003

June 30,
2002

Interest Income:                    
     Loans   $ 7,588   $ 7,919   $ 15,146   $ 15,631  
     Balances with banks    24    38    49    79  
     Investments    2,523    2,964    5,117    5,848  
     Federal Funds Sold    28    20    42    68  




         Total interest income    10,163    10,941    20,354    21,626  




Interest Expense:  
     Deposits    2,935    3,778    6,008    7,817  
     Borrowed Funds    1,531    1,545    3,066    2,967  




         Total interest expense    4,466    5,323    9,074    10,784  




Net Interest Income  
    before Loan Loss Provision    5,697    5,618    11,280    10,842  
Provision for loan losses    325    325    650    650  




         Net interest income    5,372    5,293    10,630    10,192  




Other Income:  
     Service charges    374    340    725    643  
     Other Income    276    214    540    504  
     Gain on sale of:  
         Loans    116    46    389    150  
         Securities    451    96    655    332  
         Other Real Estate    0    0    96    180  




         Total other income    1,217    696    2,405    1,809  




Other expenses:  
     Salaries & benefits    1,805    1,760    3,609    3,420  
     Occupancy & equipment    642    642    1,308    1,263  
     Advertising expense    135    120    270    248  
     Data processing expense    254    233    506    473  
     Other    829    695    1,597    1,500  




         Total other expenses    3,665    3,450    7,290    6,904  




Income before income taxes    2,924    2,539    5,745    5,097  
Income tax expense    618    525    1,204    1,075  




         NET INCOME   $ 2,306   $ 2,014   $ 4,541   $ 4,022  




Basic earnings per share   $ 0.44   $ 0.39   $ 0.87   $ 0.78  




Diluted earnings per share   $ 0.42   $ 0.38   $ 0.83   $ 0.76  




Weighted average number of  
   basic shares    5,244,435    5,136,974    5,227,790    5,125,512  




Weighted average number of  
    diluted shares    5,482,147    5,308,774    5,475,711    5,299,832  




See notes to financial statements

(2)


FIRST NATIONAL COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)

June 30,
2003

June 30,
2002

(Dollars in thousands)
INCREASE (DECREASE) IN CASH EQUIVALENTS:            
Cash Flows From Operating Activities:  
   Interest Received   $ 20,926   $ 21,977  
   Fees & Commissions Received    1,265    1,147  
   Interest Paid    (9,025 )  (11,474 )
   Income Taxes Paid    (1,359 )  (1,357 )
   Cash Paid to Suppliers & Employees    (6,311 )  (6,372 )


Net Cash Provided by Operating Activities   $ 5,496   $ 3,921  


Cash Flows from Investing Activities:  
   Securities available for sale:  
     Proceeds from Sales prior to maturity    30,220    33,975  
     Proceeds from Calls prior to maturity    35,534    19,244  
     Proceeds from Maturities    500    500  
     Purchases    (91,192 )  (60,164 )
   Net Increase in Interest-Bearing Bank Balances    0    (396 )
   Net Increase in Loans to Customers    (13,116 )  (20,053 )
   Capital Expenditures    (1,274 )  (925 )


Net Cash Used by Investing Activities   $ (39,328 ) $ (27,819 )


Cash Flows from Financing Activities:  
   Net Increase in Demand Deposits, Money Market  
     Demand, NOW Accounts, and Savings Accounts   $ 25,641   $ 8,471  
   Net Increase in Certificates of Deposit    7,711    9,959  
   Net Increase in Borrowed Funds    5,088    16,362  
   Net Proceeds from Issuance of Common Stock  
     Through Dividend Reinvestment    712    554  
   Net Proceeds from Issuance of Common Stock -  
     Stock Option Plans    638    124  
   Dividends Paid    (1,464 )  (1,282 )


Net Cash Provided by Financing Activities   $ 38,326   $ 34,188  


Net Increase in Cash and Cash Equivalents   $ 4,494   $ 10,290  
Cash & Cash Equivalents at Beginning of Year   $ 15,498   $ 15,652  


CASH & CASH EQUIVALENTS AT END OF PERIOD   $ 19,992   $ 25,942  


(Continued)

(3)


FIRST NATIONAL COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)

2003
2002
(Dollars in thousands)
RECONCILIATION OF NET INCOME TO NET CASH            
  PROVIDED BY OPERATING ACTIVITIES:  
Net Income   $ 4,540   $ 4,022  


Adjustments to Reconcile Net Income to  
   Net Cash Provided by Operating Activities:  
     Amortization (Accretion), Net    704    429  
     Depreciation    540    520  
     Provision for Probable Credit Losses    650    650  
     Provision for Deferred Taxes    (124 )  (90 )
     Gain on Sale of Loans    (390 )  (150 )
     Gain on Sale of Investment Securities    (655 )  (332 )
     Gain on Sale of Other Real Estate    (96 )  (180 )
     Increase in Taxes Payable    (140 )  (690 )
     Increase in Interest Receivable    (132 )  (78 )
     Increase (decrease) in Interest Payable    50    (300 )
     Increase in Prepaid Expenses and Other Assets    (543 )  (425 )
     Increase in Accrued Expenses and Other Liabilities    1,092    545  


Total Adjustments   $ 956   $ (101 )


NET CASH PROVIDED BY OPERATING  
     ACTIVITIES   $ 5,496   $ 3,921  


See notes to financial statements

(4)


FIRST NATIONAL COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ EQUITY
For The Six Months Ended June 30, 2003
(In thousands, except share data)
(UNAUDITED)

COMP-
REHEN-
SIVE
INCOME

COMMON STOCK
SHARES     AMOUNT

ADD'L
PAID-IN
CAPITAL

RETAINED
EARNINGS

ACCUM-
ULATED
OTHER
COMP-
REHEN-
SIVE
INCOME/
(LOSS)

TOTAL
BALANCES, DECEMBER 31, 2002           5,207,676   $ 6,510   $ 13,065   $ 38,430   $ 4,838   $ 62,843  
    Comprehensive Income:  
       Net income for the period     $ 4,541                       4,541           4,541  
       Other comprehensive income,    
        net of tax:    
          Unrealized loss on securities  
          available-for-sale, net of  
          deferred income tax benefit  
           of $288    (1,317 )
          Reclassification adjustment    655  

       Total other comprehensive   
       income, net of tax     (662 )                           (662 )   (662 )

    Comprehensive Income    3,879  

    Issuance of Common Stock -  
     Stock Option Plans             42,800     53     585                 638  
    Issuance of Common Stock    
     through Div. Reinvestment             27,242     34     678                 712  
    Cash dividends paid,    
      $0.28 per share                                  (1,464 )         (1,464 )






BALANCES, JUNE 30, 2003             5,277,718   $ 6,597   $ 14,328   $ 41,507   $ 4,176   $ 66,608  






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 5,227,790 and 5,125,512 for the periods ending June 30, 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 5,475,711 and 5,299,832 for the periods ending June 30, 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 June 30, 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 June 30, 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 June 30, 2003, the company had 14 full-service branch banking offices in its principal market area in Lackawanna and Luzerne Counties, Pennsylvania. At June 30, 2003, the company had 219 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:

Office     Date Opened    
Main   October 1910  
Scranton   September 1980  
Dickson City   December 1984  
Fashion Mall   July 1988  
Wilkes-Barre   July 1993  
Pittston Plaza   April 1995  
Kingston   August 1996  
Exeter   November 1998  
Daleville   April 2000  
Plains   June 2000  
Back Mountain   October 2000  
Clarks Green   October 2001  
Hanover Township   January 2002  
Nanticoke   April 2002  

(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 six months ended June 30, 2003 amounted to $4,541,000, an increase of $519,000 or 13% compared to the same period of the previous year. This increase can be attributed to the $438,000 improvement in net interest income and the $596,000 increase in other income. Non-interest expenses increased $386,000, or 6%, over the same period of last year due primarily to an increase in Salaries & Benefits of $189,000.

        Net income for the quarter ended June 30, 2003 amounted to $2,306,000, an increase of $292,000, or 15% compared to the same period of the previous year. This increase can be attributed to the $521,000 improvement in other income, which includes a $425,000 increase in gains from the sale of loans and investments. Non-interest expenses increased $215,000, or 6%, over the same period of last year due primarily to an increase in other expenses of $134,000.

RESULTS OF OPERATIONS

Net Interest Income:

        The Company’s primary source of revenue is net interest income which totaled $11,280,000 and $10,842,000 (before the provision for credit losses) during the first six months of 2003 and 2002, respectively. Net interest income for the quarters ended June 30, 2003 and June 30, 2002 amounted to $5,697,000 and $5,618,000, respectively. Year to date net interest margins (tax equivalent) decreased slightly to 3.41% for 2003 compared to 3.49% in 2002 comprised of a seventy six basis point decrease in the yield earned on earning assets and a seventy four basis point decrease in the cost of interest-bearing liabilities. Excluding investment leveraging transactions, the year-to-date margin decreased seven basis points when compared to the same six-month period of last year.

        Earning assets increased $38 million to $733 million during the first six months of 2003 and now total 94.2% 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:

Six-months ended June 30, 2003
Average Balance
Interest
Yield/
Cost

(Dollars in thousands)
Assets:                
Interest-earning assets:  
   Loans (taxable)   $ 470,259   $ 14,696    6.24 %
   Loans (tax-free) (1)    17,985    450    7.53
   Investment securities (taxable)    159,942    3,687    4.61
   Investment securities (tax-free)(1)    55,024    1,429    7.87
   Time deposits with banks and  
     federal funds sold    10,430    92    1.76



Total interest-earning assets    713,640    20,354    5.97 %


Non-interest earning assets    41,541  

     Total Assets   $ 755,181  

Liabilities and Shareholders' Equity:  
   Interest-bearing liabilities:  
   Deposits   $ 498,230   $ 6,008    2.43 %
   Borrowed funds    123,155    3,066    4.95



Total interest-bearing liabilities    621,385    9,074    2.93 %



Other liabilities and shareholders' equity    133,796  

     Total Liabilities and Shareholders' Equity   $ 755,181  

Net interest income/rate spread           $ 11,280     3.03 %
Net yield on average interest-  
     earning assets                   3.41 %
Interest-earning assets as a  
     percentage of interest-  
     bearing liabilities                 115 %
  

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

(9)


Six-months ended June 30, 2002
Average Balance
Interest
Yield/
Cost

(Dollars in thousands)
Assets:                
Interest-earning assets:  
   Loans (taxable)   $ 434,235   $ 15,157    6.97 %
   Loans (tax-free) (1)    17,458    474    8.18
   Investment securities (taxable)    155,449    4,506    5.80
   Investment securities (tax-free) (1)    51,027    1,342    7.97
   Time deposits with banks and  
     federal funds sold    11,219    147    2.63



Total interest-earning assets    669,388    21,626    6.73 %


Non-interest earning assets    36,080  

     Total Assets   $ 705,468  

Liabilities and Shareholders' Equity:  
Interest-bearing liabilities:  
   Deposits   $ 476,901   $ 7,817    3.31 %
   Borrowed funds    113,562    2,967    5.20



Total interest-bearing liabilities    590,463    10,784    3.67 %


Other liabilities and shareholders' equity    115,005  

     Total Liabilities and Shareholders' Equity   $ 705,468  

Net interest income/rate spread           $ 10,842     3.06 %
Net yield on average interest-    
     earning assets                   3.49 %
Interest-earning assets as a  
     percentage of interest-  
     bearing liabilities                 113 %

(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.

Period Ended June 30,
(Dollars in thousands)
2003 vs 2002
Increase (Decrease)
Due to
Rate
Volume
Total
Loans (taxable)     $ (1,560 ) $ 1,099   $ (461 )
Loans (tax-free)    (38 )  14    (24 )
Investment securities (taxable)    (941 )  122    (819 )
Investment securities (tax-free)    (18 )  105    87  
Time deposits with banks and federal funds sold    (51 )  (4 )  (55 )



Total interest income   $ (2,608 ) $ 1,336   $ (1,272 )



Deposits   $ (2,117 ) $ 308   $ (1,809 )
Borrowed funds    (151 )  250    99  



Total interest expense   $ (2,268 ) $ 558   $ (1,710 )



Net change in net interest income   $ (340 ) $ 778   $ 438  



Period Ended June 30,
(Dollars in thousands)
2002 vs 2001
Increase (Decrease)
Due to
Rate
Volume
Total
Loans (taxable)     $ (3,108 ) $ 1,908   $ (1,200 )
Loans (tax-free)    (98 )  4    (94 )
Investment securities (taxable)    (716 )  1,103    387  
Investment securities (tax-free)    (15 )  129    114  
Time deposits with banks and federal funds sold    (164 )  (46 )  (210 )



Total interest income   $ (4,101 ) $ 3,098   $ (1,003 )



Deposits   $ (3,844 ) $ 824   $ (3,020 )
Borrowed funds    (178 )  846    668  



Total interest expense   $ (4,022 ) $ 1,670   $ (2,352 )



Net change in net interest income   $ (79 ) $ 1,428   $ 1,349  



(11)


Other Income and Expenses:

        Other income in the first six months of 2003 increased $596,000 in comparison to the same period of 2002. Service charges and fees increased $118,000, or 10%, over the prior period. Income from service charges increased $82,000, or 13%, in comparison to the same period of last year while other fee income increased $36,000, or 7%. New products and a larger deposit base contributed to the increases. Net gains from the sale of assets increased $478,000 from last year.

        On a quarterly basis, other income for the second quarter of 2003 increased $521,000 in comparison to the same period of 2002. Service charges and fees increased $96,000, or 17%, over the prior period. Income from service charges increased $34,000, or 10%, in comparison to the same period of last year while other fee income increased $62,000, or 29%. Net gains from the sale of assets increased $425,000 over the second quarter of 2002.

        Other expenses increased $386,000 or 6% for the period ended June 30, 2003 compared to the same period of the previous year. Salaries and Benefits costs added $189,000, or 6% in comparison to the first six months of 2002. Occupancy and equipment costs rose 4%, advertising costs rose 9%, data processing costs rose 7% and other operating expenses increased $97,000, or 6%.

        Other expenses for the second quarter of 2003 increased $215,000 in comparison to the same period of 2002. Salaries and benefits costs added $45,000, or 3% in comparison to the second quarter of 2002. Advertising costs rose 13%, data processing costs rose 9% and other operating expenses increased 19% due primarily to increases in postage of $23,000 and state taxes paid of $42,000.

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:

2003
2002
Provision at statutory rate     $ 1,960   $ 1,739  
Add (Deduct):  
Tax effect of non-taxable interest income    (639 )  (617 )
Non-deductible interest expense    61    73  
Other items, net    (178 )  (120 )


Income tax expense   $ 1,204   $ 1,075  


(12)


Securities:

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

June 30, 2003
December 31, 2002
Carrying Amount
Fair Value
Carrying Amount
Fair Value
(Dollars in thousands)
U.S. Treasury securities and                    
   obligations of U.S.  
   government agencies   $ 16,408   $ 16,408   $ 13,029   $ 13,029  
Obligations of state &  
   political subdivisions    60,419    60,453    57,864    57,823  
Mortgage-backed securities    139,061    139,061    127,424    127,424  
Corporate debt securities    6,442    6,442    425    425  
Equity securities    10    10    10    10  




Total   $ 222,340   $ 222,374   $ 198,752   $ 198,711  




        The following summarizes the amortized cost, approximate fair value, gross unrealized holding gains, and gross unrealized holding losses at June 30, 2003 of the Company’s Investment Securities classified as available-for-sale:

June 30, 2003
(Dollars in thousands)
Amortized Cost
Gross Unrealized Holding Gains
Gross Unrealized Holding Losses
Fair Value
U.S. Treasury securities and                    
   obligations of U.S.  
   government agencies:   $ 16,074   $ 334   $ 0   $ 16,408  
Obligations of state and  
   political subdivisions:    54,776    4,272    10    59,038  
Mortgage-backed securities:    137,273    2,318    530    139,061  
Corporate debt securities:    6,500    0    58    6,442  
Equity securities:    10    0    0    10  




Total   $ 214,633   $ 6,924   $ 598   $ 220,959  




(13)


        The following summarizes the amortized cost, approximate fair value, gross unrealized holding gains, and gross unrealized holding losses at June 30, 2003 of the Company’s Investment Securities classified as held-to-maturity:

June 30, 2003
(Dollars in thousands)
Amortized Cost
Gross Unrealized Holding Gains
Gross Unrealized Holding Losses
Fair Value
Obligations of state and                    
   political subdivisions:   $ 1,381   $ 34   $ 0   $ 1,415  




Total   $ 1,381   $ 34   $ 0   $ 1,415  




        The following table shows the amortized cost and approximate fair value of the company’s debt securities at June 30, 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.

Available-for-sale
Held-to-maturity
Amortized Cost
Fair Value
Amortized Cost
Fair Value
(Dollars in Thousands) (Dollars in Thousands)
Amounts maturing in:                    
One year or less   $ 0   $ 0   $ 0   $ 0  
After one year through  
   five years    11,787    12,013    0    0  
After five years through  
   ten years    7,608    7,919    0    0  
After ten years    57,954    61,956    1,381    1,415  
Mortgage-backed securities    137,273    139,061    0    0  




Total   $ 214,622   $ 220,949   $ 1,381   $ 1,415  




        Gross proceeds from the sale of investment securities for the periods ended June 30, 2003 and 2002 were $30,219,548 and $33,974,698 respectively with the gross realized gains being $796,768 and $342,664 respectively, and gross realized losses being $142,115 and $11,097, respectively.

        At June 30, 2003 and 2002, investment securities with a carrying amount of $60,292,786 and $95,716,853 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:

June 30, 2003
December 31, 2002
Amount
%
Amount
%
(Dollars in thousands)
Real estate loans, secured by residential                    
   properties   $ 77,024    15.2 $ 78,575    15.9
Real estate loans, secured by nonfarm,  
   nonresidential properties    225,574    44.4  216,289    43.8
Commercial & industrial loans    122,550    24.1  115,651    23.4
Loans to individuals for household,  
   family and other personal expenditures    64,223    12.7  63,258    12.8
Loans to state and political subdivisions    18,126    3.6  20,256    4.1
All other loans, including overdrafts    90    0.0  87    0.0




Total Gross Loans   $ 507,587    100.0 $ 494,116    100.0


Less: Allow. for Loan Losses       (6,659 )       (6,140 )


Net Loans     $ 500,928       $ 487,976


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

Six months
Ended
June 30, 2003

Year to date Ended
Dec 31, 2002

(Dollars in thousands)
Balance, January 1     $ 6,140   $ 5,594  
Recoveries Credited    129    164  
Losses Charged    (260 )  (1,018 )
Provision for Loan Losses    650    1,400  


Balance at End of Period   $ 6,659   $ 6,140  


(15)


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

June 30, 2003
Dec 31, 2002
(Dollars in thousands)
Nonaccrual loans            
Impaired   $ 0   $ 0  
Other    539    37  
Loans past due 90 days or more  
   and still accruing    213    299  


Total non-performing loans    752    769  


Other Real Estate Owned    0    0  


Total non-performing assets   $ 752   $ 1,105  




June 30, 2003
Dec 31, 2002
Non-performing loans as a            
   percentage of gross loans    0.1%  0.2%


Non-performing assets as a  
   percentage of total assets    0.1%  0.2%


        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 seven 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 six months of 2003 with an extra $100,000 provision in January and April. A monthly provision of $75,000 was credited to the allowance for loan losses during the first six months of 2002 with an extra $100,000 provision in March and June. The ratio of the loan loss reserve to total loans at June 30, 2003 and 2002 was 1.31% and 1.27%, 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 $19,992,000 in cash and cash equivalents and $3,368,000 in interest-bearing balances with banks maturing within one year. A secondary source of liquidity is provided by the investment portfolio with $13.5 million or 6% of the portfolio maturing or expected to be called within one year and expected cash flow from principal reductions approximating an additional $40 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 $3,765,000 or 6% during the first six months of 2003 comprised of an increase in retained earnings in the amount of $3,077,000 after paying cash dividends, $1,350,000 from stock issued through Dividend Reinvestment and Stock Option Plans offset by a $662,000 decrease in other comprehensive income. During the same period of 2002, total stockholders’ equity increased $6,222,000, or 12%, comprised of an increase in retained earnings of $2,740,000, after paying cash dividends and $678,000 from stock issued through Dividend Reinvestment and a $2,804,000 increase 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 $4,427,000 and $3,418,000, 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, 2003, First National Community Bank met all capital requirements with a leverage ratio of 8.14% and core capital and total risk-based capital ratios of 10.60% and 11.73%, 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 six months of 2003. 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, 2002.

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

        The 2003 Annual Meeting of Shareholders of First National Community Bancorp, Inc. was held on May 14, 2003 at the Company’s Exeter Office, 1625 Wyoming Avenue, Exeter, Pennsylvania, for the purpose of electing four Class B Directors to serve for a three-year term.

        The following Class B directors were elected to serve until 2006:

           Michael G. Cestone
            Michael T. Conahan
           J. David Lombardi
           John R. Thomas

Item 5 — Other Information

      None

Item 6 — Exhibits and Reports on Form 8 — K

  Exhibit 99.1    Certification Pursuant to 18 U.S.C. Section 1350
                       As added by Section 906 of the Sarbanes-Oxley Act of 2002

  Exhibit 99.2    Certification Pursuant to 18 U.S.C. Section 1350
                       As added by Section 906 of the Sarbanes-Oxley Act of 2002

        Form 8-K was filed on April 14, 2003 regarding First National Community Bancorp, Inc. regarding the First Quarter Earnings

        Form 8-K was filed on May 21, 2003 regarding First National Community Bancorp, Inc. regarding the Second Quarter Dividend

(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

/s/ J. David Lombardi

J. David Lombardi, President and
Chief Executive Officer

Date: July 30, 2003

/s/ William Lance

William Lance, Treasurer
Principal Financial Officer and
Principal Accounting Officer

Date: July 30, 2003

(21)


CERTIFICATION

I, J. David Lombardi, President and Chief Executive 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:


(a)  

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;


(b)  

evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing of this quarterly report (the “Evaluation Date”); and


(c)  

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.


5.  

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):


(a)  

all significant deficiencies in the design or operation of the internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and


(22)


(b)  

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls.


6.  

The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that would significantly affect the internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


/s/ J. David Lombardi

J. David Lombardi, President and
Chief Executive Officer

DATE: July 30, 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:


(a)  

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;


(b)  

evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing of this quarterly report (the “Evaluation Date”); and


(c)  

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.


5.  

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):


(a)  

all significant deficiencies in the design or operation of the internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and


(24)


(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls.

6.  

The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that would significantly affect the internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


/s/ William Lance

William Lance, Treasurer
Principal Financial Officer and
Principal Accounting Officer

DATE: July 30, 2003

(25)


EXHIBIT 99.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADDED BY

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

        In connection with the Quarterly Report on Form 10-Q of First National Community Bancorp, Inc. (the “Company”) for the period ended June 30, 2003, as filed with the Securities and Exchange Commission (the “Report”), I, J. David Lombardi, President/Chief Executive Officer, of the Company, certify, pursuant to 18 U.S.C. Section 1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002, that:

    1.        The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

    2.     To my knowledge, the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report.

/s/ J. David Lombardi

J. David Lombardi, President and
Chief Executive Officer

Date: July 30, 2003

(26)


EXHIBIT 99.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADDED BY

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

        In connection with the Quarterly Report on Form 10-Q of First National Community Bancorp, Inc. (the “Company”) for the period ended June 30, 2003, as filed with the Securities and Exchange Commission (the “Report”), I, William Lance, Principal Financial Officer, of the Company, certify, pursuant to 18 U.S.C. Section 1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002, that:

    1.        The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

    2.     To my knowledge, the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report.

/s/ William Lance

William Lance, Treasurer
Principal Financial Officer and
Principal Accounting Officer

DATE: July 30, 2003

(27)