UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________

FORM 10-Q

(Mark One)

 

 

 

Commission File No. 333-24121

 

 

Indicate by check mark 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b-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)

12,339,079 shares

(Outstanding at October 31, 2006)

 

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FIRST NATIONAL COMMUNITY BANCORP, INC.

 

 

 

(ii)

 

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FIRST NATIONAL COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in thousands)

 

 

Note: The balance sheet at December 31, 2005 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.

 

All share and per share information includes the retroactive effect of the 10% stock dividend paid March 31, 2006.

 

 

See notes to financial statements

(1)

 

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FIRST NATIONAL COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(Dollars in thousands, except per share amounts)

 

 

 

See notes to financial statements

(2)

 

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FIRST NATIONAL COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005

(UNAUDITED)

 

 

 

 

 

 

 

(Continued)

(3)

 

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(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

See notes to financial statements

(4)

 

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All share and per share information includes the retroactive effect of the 10% stock dividend paid March 31, 2006.

 

 

 

 

See notes to financial statements

(5)

 

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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 U.S. 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 the Company and subsidiary, and the results of its operations and its cash flows for the interim periods presented, in conformity with U.S. generally accepted accounting principles. Also in the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the Company’s financial position, results of operations and cash flows at September 30, 2006 and for all periods presented have been made.

These interim financial statements should be read in conjunction with the audited financial statements and footnote disclosures in the Company's Annual Report to Shareholders for the fiscal year ended December 31, 2005.

(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 12,258,698 and 12,079,924 for the periods ending September 30, 2006 and 2005, respectively, after giving retroactive effect to the 10% stock dividend paid March 31, 2006.

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 12,559,612 and 12,413,204 for the periods ending September 30, 2006 and 2005, respectively, after giving retroactive effect to the 10% stock dividend paid March 31, 2006.

(3)           On February 22, 2006, the Company’s Board of Directors declared a 10% stock dividend payable March 31, 2006 to shareholders of record on March 20, 2006. As a result of the announcement, the Company’s December 31, 2005 financial statements were adjusted to reflect the retroactive effect of the stock dividend based on the number of shares outstanding and the market value of the shares on December 31, 2005. The issuance of additional shares of stock through the exercise of stock options and the reinvestment of first quarter dividends necessitated an adjustment of capital based on the actual number of shares and the market value on March 20, 2006, the record date. This adjustment is reflected in the Consolidated Statement of Changes in Stockholders’ Equity included in this Form 10-Q for the period ended September 30, 2006.

(4)           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.

(5)          On July 26, 2006, the Company entered into an agreement with Harleysville National Bank and Trust Company to purchase a branch office located at 1001 Main Street, Honesdale, Pennsylvania 18431. Under the terms of the agreement, the Company will acquire the loans, deposits and other assets and liabilities of the branch. It is anticipated that the transaction will be completed in the fourth quarter of 2006.      

 

 

 

 

 

 

(6)

 

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A summary of the status of the Company’s stock option plans is presented below:

 

 

 

Information pertaining to options outstanding at September 30, 2006 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

(7)

 

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

 

The consolidated financial information of First National Community Bancorp, Inc. (the “company”) provides a comparison of the performance of the company for the periods ended September 30, 2006 and 2005. The financial information presented should be read in conjunction with the consolidated financial statements and accompanying notes appearing elsewhere in this report.

 

Background

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 which includes expansion into financial services activities. 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 September 30, 2006, the company had 16 full-service branch banking offices in its principal market area in Lackawanna and Luzerne Counties, Pennsylvania. At September 30, 2006, the company had 239 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:

 

 

 

 

 

 

 

(8)

 

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The bank provides the usual commercial banking services to individuals and businesses, including a wide variety of loan, deposit instruments and investment options. 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 the 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 nine months ended September 30, 2006 amounted to $10,258,000, an increase of $1,836,000 or 22% compared to the same period of the previous year. This increase can be attributed to the $3,444,000 improvement in net interest income which reflects the benefits derived from balance sheet growth and the repricing of interest-sensitive assets and liabilities. Other income increased $574,000 primarily due to an increase in service charges on deposits. Other expenses increased $1,065,000, or 8%, over the same period of last year due primarily to an increase in Salaries & Benefits of $644,000.

Net income for the three months ended September 30, 2006 amounted to $3,711,000, an increase of $675,000 or 22% compared to the same period of the previous year. This increase can be attributed to the $1,071,000 improvement in net interest income. Other income increased $291,000 due to an increase in service charges on deposits and a $75,000 gain on the sale of properties previously carried in Other Real Estate Owned. Other expenses increased $262,000, or 6%, over the same period of last year due primarily to an increase in Salaries & Benefits of $169,000.

 

RESULTS OF OPERATIONS

Net Interest Income:

 

The company’s primary source of revenue is net interest income which totaled $25,897,000 and $22,513,000 (before the provision for credit losses) during the first nine months of 2006 and 2005, respectively. The year to date net interest margin (tax equivalent) increased thirteen basis points to 3.69% in 2006 compared to 2005 comprised of a ninety-four basis point increase in the yield earned on earning assets and a ninety-two basis point increase in the cost of interest-bearing liabilities as the rate earned on interest sensitive assets such as loans and investments rose faster than the rates paid for interest sensitive deposits and other liabilities. Excluding investment leveraging transactions, the 2006 margin would be 3.84% which is eleven basis points higher than the 3.73% recorded during the first nine months of last year.

Earning assets increased $77 million to $1.033 billion during the first nine months of 2006 and total 95.3% of total assets, a slight increase from the 94.8% at year-end.

 

 

 

 

 

 

 

 

 

 

(9)

 

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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:

 

 

 

 

 

 

 

 

(10)

 

 

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(11)

 

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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 (in thousands).

 

 

 

 

 

 

 

 

(12)

 

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Other Income and Expenses:

Other income in the first nine months of 2006 increased $574,000 in comparison to the same period of 2005. Service charges and fees increased $481,000, or 17%, over the prior period. Income from service charges on deposits increased $350,000, or 21%, in comparison to the same period of last year while other fee income increased $131,000, or 11% due to an increase in letter of credit fees.

On a quarterly basis, other income for the third quarter of 2006 increased $291,000 in comparison to the same quarter of 2005. Service charges and fees increased $194,000, or 20%, over the prior period. Income from service charges increased $121,000, or 21%, in comparison to the same period of last year while other fee income increased $73,000, or 18%. Net gains from asset sales increased $97,000 when compared to the third quarter of 2005 due to the gain recorded on a property carried in Other Real Estate.

Other expenses increased $1,065,000 or 8% for the period ended September 30, 2006 compared to the same period of the previous year. Salaries and Benefits costs added $644,000, or 9% in comparison to the first nine months of 2005 due to additional staff and merit increases. Occupancy and equipment costs increased slightly, directors fees increased 28%, advertising costs rose 9%, data processing costs rose 2%, bank shares tax expense increased 4% and other operating expenses increased $226,000, or 10%.

Other expenses for the third quarter of 2006 increased $262,000, or 6% in comparison to the same period of 2005. Salaries and Benefits costs increased $169,000, or 7%. Occupancy and equipment costs increased slightly, directors fees increased $33,000, or 28%, advertising costs rose 9%, data processing costs decreased 4%, bank shares tax expense increased $23,000, or 19%, and other operating expenses increased $22,000, or 3%.

 

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:

 

 

 

 

 

 

 

 

(13)

 

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Securities:

Carrying amounts and approximate fair value of investment securities are summarized as follows (in thousands):

 

The following summarizes the amortized cost, approximate fair value, gross unrealized holding gains, and gross unrealized holding losses at September 30, 2006 of the company’s Investment Securities classified as available-for-sale (in thousands):

 

 

The following summarizes the amortized cost, approximate fair value, gross unrealized holding gains, and gross unrealized holding losses at September 30, 2006 of the company’s Investment Securities classified as held-to-maturity (dollars in thousands):

 

(14)

 

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The following table shows the amortized cost and approximate fair value of the company’s debt securities at September 30, 2006 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 (in thousands).

 

 

Gross proceeds from the sale of investment securities for the periods ended September 30, 2006 and 2005 were $6,398,475 and $19,810,349 respectively with the gross realized gains being $30,400 and $102,191 respectively, and gross realized losses being $30,936 and $226,897, respectively.

At September 30, 2006 and 2005, investment securities with a carrying amount of $210,182,431 and $168,996,262 respectively, were pledged as collateral to secure public deposits and for other purposes.

 

Loans:

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

 

 

 

 

 

 

 

(15)

 

 

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The following table sets forth certain information with respect to the company’s allowance for credit losses and charge-offs (in thousands)

 

 

 

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

 

 

 

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 at September 30, 2006 were comprised of four credits which are adequately secured by mortgages or UCC’s on the property. Any loss recognized on these loans is expected to be minimal. The increase in nonaccrual loans during the first nine months of 2006 is comprised of one credit on which the anticipated loss is 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 $90,000 was credited to the allowance during the first nine months of 2006. A monthly provision of $80,000 was credited to the allowance during the first nine months of 2005 with an extra $150,000 provision during July. The ratio of the loan loss reserve to total loans at September 30, 2006 and 2005 was 1.02% and 1.17%, respectively.

 

(16)

 

 

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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. The 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 $21,669,000 in cash and cash equivalents and $99,000 in interest-bearing balances with banks maturing within one year. A secondary source of liquidity is provided by the investment portfolio with $29 million or 12% of the portfolio maturing or expected to provide cash flow within one year through maturities, projected calls or principal reductions.

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, the Federal Reserve Discount Window and the Brokered CD market.

 

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 $9,465,000 or 11% during the first nine months of 2006 comprised of an increase in retained earnings in the amount of $6,207,000 before the 10% stock dividend and after paying cash dividends, $2,747,000 from stock issued through Dividend Reinvestment and Stock Option Plans and a $511,000 increase in other comprehensive income. During the same period of 2005, total stockholders' equity increased $7,033,000, or 9%, comprised of an increase in retained earnings of $5,346,000, after paying cash dividends and $2,493,000 from stock issued through Dividend Reinvestment and an $806,000 decrease in other comprehensive income. The total dividend payout during the first nine months of 2006 and 2005 represents $.34 per share and $.25 per share, respectively, after adjusting for the retroactive effect of the 10% stock dividend paid March 31, 2006. Excluding the impact due to securities valuation, increases in core equity amounted to $8,954,000 and $7,839,000, respectively.

(17)

 

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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 September 30, 2006, the bank met all capital requirements with a leverage ratio of 8.80% and core capital and total risk-based capital ratios of 10.28% and 11.15%, respectively.

 

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

There has been no material change in the company’s exposure to market risk during the first nine months of 2006. 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, 2005.

 

ITEM 4. – CONTROLS AND PROCEDURES

 

The company carried out an evaluation, under the supervision and with the participation of the company’s management, including the company’s Chief Executive Officer along with the company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as such term is defined under Rule 13a – 15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act). Based upon that evaluation, the company’s Chief Executive Officer along with the company’s Chief Financial Officer concluded that the company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the company (including its consolidated subsidiaries) required to be included in the company’s periodic SEC filings.

 

The management of the company is responsible for (1) the preparation of the accompanying financial statements; (2) establishing and maintaining internal controls over financial reporting; and (3) the assessment of the effectiveness of internal control over financial reporting. The Securities and Exchange Commission defines effective internal control over financial reporting as a process designed under the supervision of the company’s principal executive officer and principal financial officer, and implemented in conjunction with management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles.

 

The company’s internal control over financial reporting is supported by written policies and procedures. All internal control systems, no matter how well designed, have inherent limitations and provide only reasonable assurance that the objectives of the control system are met. Therefore, no evaluation of controls can provide absolute assurance that all control issues and misstatements due to error or fraud, if any, within the company have been detected. Additionally, any system of controls is subject to the risk that controls may become inadequate due to changes in conditions or that compliance with policies or procedures may deteriorate.

 

As of September 30, 2006, management of the company conducted an assessment of the effectiveness of the company’s internal control over financial reporting based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management has concluded that the company’s internal control over financial reporting was effective as of September 30, 2006.

 

There were no changes in our internal control over financial reporting that occurred during the period covered by this quarterly report that have materially affected, or are, reasonably likely to materially affect, the company’s internal controls over financial reporting.

 

(18)

 

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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 1A. – Risk Factors

 

No material changes in risk factors occurred from those previously disclosed in the company’s Form 10-K for the year ended December 31, 2005.

 

Item 2 – Unregistered Sales of Equity 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  

 

 

 

 

 

 

 

 

 

 

 

 

(19)

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(20)