Attached files
file | filename |
---|---|
EX-4.1 - FNCB Bancorp, Inc. | stockcertificate.pdf |
EX-99.1 - FNCB Bancorp, Inc. | graphproxy.pdf |
EX-21 - EXHIBIT 21 (SUBSIDIARIES) - FNCB Bancorp, Inc. | exhibit21.htm |
EX-13 - EXHIBIT 13 (ANNUAL REPORT) - FNCB Bancorp, Inc. | exhibit13.htm |
EX-31.2 - EXHIBIT 31.2 - FNCB Bancorp, Inc. | exhibit312.htm |
EX-10.5 - EXHIBIT 10.5 - FNCB Bancorp, Inc. | exhibit105.htm |
EX-99.1 - FNCB Bancorp, Inc. | graphproxy.htm |
EX-32.2 - EXHIBIT 32.2 - FNCB Bancorp, Inc. | exhibit322.htm |
EX-32.1 - EXHIBIT 32.1 - FNCB Bancorp, Inc. | exhibit321.htm |
EX-4.1 - FNCB Bancorp, Inc. | stockcertificate.htm |
EX-31.1 - EXHIBIT 31.1 - FNCB Bancorp, Inc. | exhibit311.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
[X]
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the fiscal year ended December 31,
2009
|
OR
[ ]
|
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. 000-53869
|
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
No.)
|
102 E. Drinker St., Dunmore,
PA
|
18512
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code (570)
346-7667
|
Securities
registered pursuant to Section 12(b) of the Act:
|
NONE
|
Securities
registered pursuant to Section 12(g) of the Act:
|
Common Stock, $1.25 par value
(Title
of Class)
|
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes
|__| No
| X |
|
Indicate
by check mark if the registrant is not required to file reports pursuant
to Section 13 or section 15(d) of the Act.Yes |__| No
| X
|
|
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.
Yes
| X
| No |__|
|
Indicate
by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such
files).
|
|
YES |___|
|
NO |__|
|
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. | X
|
|
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definition of “large accelerated filer",
"accelerated filer” and "smaller reporting company" in Rule 12b-2 of the
Exchange Act.(Check
one)
|
Large
Accelerated Filer | | Accelerated
Filer | X |
Non-Accelerated
Filer | | Smaller
reporting company | |
(Do
not check if a smaller reporting
company)
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).Yes | | No | X
|
|
The
aggregate market value of the voting and non-voting common stock of the
registrant, held by non-affiliates was approximately $141,571,176 at
June 30, 2009.
|
APPLICABLE
ONLY TO CORPORATE REGISTRANTS
|
State
the number of shares outstanding of each of the registrant’s classes of
common stock, as of the latest practicable date: 16,296,899 shares of
common stock as of March 12, 2010.
|
DOCUMENTS
INCORPORATED BY REFERENCE
|
Portions
of the Registrant’s Proxy Statement for the Annual Meeting of Shareholders
to be held May 19, 2010 are incorporated by reference into Part III of
this report.
|
FIRST
NATIONAL COMMUNITY BANCORP, INC.
PART
I
Item
1. Business.
CORPORATE
PROFILE
The
Business of First National Community Bancorp, Inc.
THE
COMPANY
First National Community Bancorp, Inc.
(the “company”) is a Pennsylvania business, 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 acquired 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 customary retail and commercial banking services to individuals and
businesses. The bank provides practically all of the company’s
earnings as a result of its banking services.
THE
BANK
The bank was established as a national
banking association in 1910 as "The First National Bank of
Dunmore." Based upon shareholder approval received at a Special
Shareholders' Meeting held October 27, 1987, the bank changed its name to "First
National Community Bank" effective March 1, 1988. The bank's
operations are conducted from offices located in Lackawanna, Luzerne, Wayne and
Monroe Counties, Pennsylvania:
Office
|
Date Opened
|
Main
|
October
1910
|
Scranton
|
September
1980
|
Dickson
City
|
December
1984
|
Keyser
Village
|
April
2008
|
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
|
Hazleton
|
October
2003
|
Route
315
|
February
2004
|
Honesdale
|
November
2006
|
Stroudsburg
|
May
2007
|
Honesdale
Route 6
|
October
2007
|
Marshalls
Creek
|
May
2008
|
Dunmore
– Wheeler Ave.
|
December
2009
|
The bank provides many banking services
to individuals and businesses including Image Checking and
E-Statement. Deposit products include standard checking, savings and
certificate of deposit products, as well as a variety of preferred products for
higher balance customers. The bank also participates in the
Certificate of Deposit Account Registry program which allows customers to secure
FDIC insurance on balances in excess of the standard
limitations. Consumer loans include both secured and unsecured
installment loans, fixed and variable rate mortgages, jumbo mortgages, home
equity term loans and lines of credit and "Instant Money" overdraft protection
loans. Additionally, the bank is also in the business of underwriting
indirect auto loans which are originated through various auto dealers in
northeastern Pennsylvania and dealer floor plan loans. VISA personal
credit cards are available through the bank, as
well as
the FNCB Check Card which allows customers to access their checking account at
any retail location that accepts VISA and serves the dual purpose of an ATM
card. In the commercial lending field, the bank offers demand and
term loans, either secured or unsecured, letters of credit, working capital
loans, accounts receivable, inventory or equipment financing loans, construction
loans, and commercial mortgages. In addition, the bank offers
MasterCard, VISA processing services and Remote Deposit Capture to its
commercial customers, as well as our Cash Management service which can be
accessed through FNCBusiness Online, which is Internet
based. FNCBusiness Online is a menu driven product that allows our
business customers to have direct access to their account information and the
ability to perform internal and external transfers and process Direct Deposit
payroll transactions for employees, 24 hours a day, 7 days a week, from their
place of business. Asset management services are conveniently
available at FNCB through FNCB Investment Services. As a result of
the bank’s partnership with FNCB Investment Services, our customers are able to
access alternative products such as mutual funds, annuities, stock and bond
purchases, etc. directly from our FNCB Investment Services
representatives. The bank also offers customers the convenience of
24-hour banking, seven days a week, through FNCB Online and its Bill Payment
service via the Internet and its ATM network. Automated teller
machines are available at the following locations:
Community Offices
|
Remote Locations
|
Dunmore
|
Petro
Truck Stop, 98 Grove St., Dupont
|
Scranton
|
Bill’s
Shoprite Supermarket, Rt. 502, Daleville
|
Dickson
City
|
Joe’s
Kwik Mart, 620 N. Blakely St., Dunmore
|
Keyser
Village
|
Joe’s
Kwik Mart, Rts 940 and I-380, Pocono Summit
|
Wilkes-Barre
|
Joe’s
Kwik Mart, 303 Route 315, Dupont
|
Pittston
|
107
Woodland Road, Mt. Pocono
|
Kingston
|
Bill’s
Shoprite Supermarket, Pocono Village Mall, Mt. Pocono
|
Exeter
|
Cooper's
Seafood, 701 N. Washington Ave., Scranton
|
Daleville
|
|
Plains
|
|
Back
Mountain
|
|
Clarks
Green
|
|
Hanover
Township
|
|
Nanticoke
|
|
Hazleton
|
|
Route
315
|
|
Honesdale
|
|
Stroudsburg
|
|
Honesdale
Route 6
|
|
Marshalls
Creek
|
|
Dunmore
– Wheeler Ave.
|
Additionally, to further enhance
24-hour banking services, Telephone Banking (Account Link), Loan by Phone, and
Mortgage Link are available to customers. These services provide
consumers the ability to access account information, perform related account
transfers, and apply for a loan through the use of a touch tone
telephone. Also, in our efforts to continually provide consumers the
best possible service, the bank implemented in 2004 a Bounce Protection service
which provides consumers with an added level of protection against unanticipated
cash flow emergencies and account reconciliation errors.
As of December 31, 2009 industry
concentrations exist within the following two industries. Loans and
lines of credit to each of these industries were as follows:
Amount
|
%
of
Regulatory
Capital
|
|||
Land
Subdivision
|
$74,959,000
|
51%
|
||
Solid
Waste Landfills Industry
|
$46,325,000
|
31%
|
All loans included in the Solid Waste
Landfills Industry are fully secured by cash collateral on deposit at the
bank.
COMPETITION
The bank is one of two financial
institutions with principal offices in Dunmore. Primary competition
in the Lackawanna County market comes from numerous commercial banks and savings
and loan associations operating in the area. Additional competition
is derived from credit unions, finance companies, brokerage firms, insurance
companies and retailers. Our Luzerne County offices share many of the
same competitors we face in Lackawanna County as well as several banks and
savings and loans that are not in our Lackawanna County market. In
2006, the bank entered the Wayne County market. Competition for loan
and deposit relationships is primarily with three banks headquartered in Wayne
County as well as other institutions located within the market. In
2007, the bank ventured into Monroe County with its first office in Stroudsburg
and added a second office in Marshalls Creek in 2008. Competition in
Monroe County comes from many of the same competitors we face in the other
markets as well as other institutions headquartered in that
area. Deposit deregulation has intensified the competition for
deposits among banks in recent years.
SUPERVISION
AND REGULATION
The company is subject to the
Securities Exchange Act of 1934 (“1934 Act”) and must file quarterly and annual
reports with the U.S. Securities and Exchange Commission regarding its business
operations. As a registered financial holding company under the Bank Holding
Company Act of 1956, as amended, the company is subject to the supervision and
examination by the Federal Reserve Board.
Financial Services Modernization
Legislation. - In November 1999, the Gramm-Leach-Bliley Act of 1999, or the GLB,
was enacted. The GLB repeals provisions of the Glass-Steagall Act which
restricted the affiliation of Federal Reserve member banks with firms “engaged
principally” in specified securities activities, and which restricted officer,
director or employee interlocks between a member bank and any company or person
“primarily engaged” in specified securities activities.
In
addition, the GLB also contains provisions that expressly preempt any state law
restricting the establishment of financial affiliations, primarily related to
insurance. The general effect of the law is to establish a comprehensive
framework to permit affiliations among commercial banks, insurance companies,
securities firms and other financial service providers by revising and expanding
the Bank Holding Company Act framework to permit a holding company to engage in
a full range of financial activities through a new entity known as a “financial
holding company.” “Financial activities” is broadly defined to include not only
banking, insurance and securities activities, but also merchant banking and
additional activities that the Federal Reserve Board, in consultation with the
Secretary of the Treasury, determines to be financial in nature, incidental to
such financial activities or complementary activities that do not pose a
substantial risk to the safety and soundness of depository institutions or the
financial system generally.
The GLB
also permits national banks to engage in expanded activities through the
formation of financial subsidiaries. A national bank may have a subsidiary
engaged in any activity authorized for national banks directly or any financial
activity, except for insurance underwriting, insurance investments, real estate
investment or development, or merchant banking, which may only be conducted
through a subsidiary of a financial holding company. Financial activities
include all activities permitted under new sections of the Bank Holding Company
Act or permitted by regulation.
To the
extent that the GLB permits banks, securities firms and insurance companies to
affiliate, the financial services industry may experience further consolidation.
The GLB is intended to grant to community banks certain powers as a matter of
right that larger institutions have accumulated on an ad hoc basis and which
unitary savings and loan holding companies already possess. Nevertheless, the
GLB may have the result of increasing the amount of competition that First
National Community Bancorp, Inc. faces from larger institutions and other types
of companies offering financial products, many of which may have substantially
more financial resources than First National Community Bancorp, Inc.
has.
USA Patriot Act of 2001 - In October 2001, the USA
Patriot Act of 2001 was enacted in response to the terrorist attacks in New
York, Pennsylvania and Washington D.C. which occurred on September 11, 2001. The
Patriot Act is intended to strengthen U.S. law enforcement’s and the
intelligence communities’ abilities to work cohesively to combat terrorism on a
variety of fronts. The potential impact of the Patriot Act on financial
institutions of all kinds is significant and wide ranging. The Patriot Act
contains sweeping anti-money laundering and financial transparency laws and
imposes various regulations, including standards for verifying client
identification at account opening, and rules to promote cooperation among
financial institutions, regulators and law enforcement entities in identifying
parties that may be involved in terrorism or money laundering.
IMLAFATA
- As part of the USA Patriot Act, Congress adopted the International Money
Laundering Abatement and Financial Anti-Terrorism Act of 2001 (IMLAFATA).
IMLAFATA amended the Bank Secrecy Act and adopted certain additional measures
that increase the obligation of financial institutions, including First National
Community Bancorp, Inc., to identify their customers, watch for and report upon
suspicious transactions, respond to requests for information by federal banking
regulatory authorities and law enforcement agencies, and share information with
other financial institutions. The Secretary of the Treasury has adopted several
regulations to implement these provisions. First National Community Bancorp,
Inc. is also barred from dealing with foreign “shell” banks. In addition,
IMLAFATA expands the circumstances under which funds in a bank account may be
forfeited. IMLAFATA also amended the BHC Act and the Bank Merger Act to require
the federal banking regulatory authorities to consider the effectiveness of a
financial institution’s anti-money laundering activities when reviewing an
application to expand operations. First National Community Bancorp, Inc. has in
place a Bank Secrecy Act compliance program.
Sarbanes-Oxley Act of 2002 - In 2002,
the Sarbanes-Oxley Act (the “Act”) became law. The stated goals of the Act are
to increase corporate responsibility, to provide for enhanced penalties for
accounting and auditing improprieties at publicly traded companies and to
protect investors by improving the accuracy and reliability of corporate
disclosures pursuant to the securities laws.
The Act is the most far-reaching U.S.
securities legislation enacted in decades. The Act generally applies to all
companies, both U.S. and non-U.S., that file or are required to file periodic
reports with the Securities and Exchange Commission (the “SEC”) under the
Securities Exchange Act of 1934. Due to the SEC’s extensive role in implementing
rules relating to many of the Act’s new requirements, the final scope of these
requirements remains to be determined.
The Act includes very specific
additional disclosure requirements and new corporate governance rules, requires
the SEC and securities exchanges to adopt extensive additional disclosure,
corporate governance and other related rules and mandates further studies of
certain issues by the SEC. The Act represents significant federal involvement in
matters traditionally left to state regulatory systems, such as the regulation
of the accounting profession, and to state corporate law, such as the
relationship between a board of directors and management and between a board of
directors and its committees.
The Act addresses, among other
matters:
•
|
audit
committees for all reporting companies;
|
•
|
certification
of financial statements by the chief executive officer and the chief
financial officer;
|
•
|
the
forfeiture of bonuses or other incentive-based compensation and profits
from the sale of an issuer’s securities by directors and senior officers
in the twelve month period following initial publication of any financial
statements that later require restatement;
|
•
|
a
prohibition on insider trading during pension plan black out
periods;
|
•
|
disclosure
of off-balance sheet transactions;
|
•
|
a
prohibition on personal loans to directors and officers; expedited filing
requirements for Form 4’s;
|
•
|
disclosure
of a code of ethics and filing a Form 8-K for a change or waiver of such
code;
|
•
|
“real
time” filing of periodic reports;
|
•
|
the
formation of a public accounting oversight board;
|
•
|
auditor
independence; and
|
•
|
various
increased criminal penalties for violations of securities
laws.
|
The SEC was delegated the task of
enacting rules to implement various provisions with respect to, among other
matters, disclosure in periodic filings pursuant to the Exchange
Act.
Regulation W - Transactions between a
bank and its “affiliates” are quantitatively and qualitatively restricted under
the Federal Reserve Act. The Federal Deposit Insurance Act applies Sections 23A
and 23B to insured nonmember banks in the same manner and to the same extent as
if they were members of the Federal Reserve System. The Federal Reserve Board
has also issued Regulation W, which codifies prior regulations under Sections
23A and 23B of the Federal Reserve Act and interpretative guidance with respect
to affiliate transactions. Regulation W incorporates the exemption from the
affiliate transaction rules but expands the exemption to cover the purchase of
any type of loan or extension of credit from an affiliate. Affiliates of a bank
include, among other entities, the bank’s holding company and companies that are
under common control with the bank. First National Community Bancorp, Inc. is
considered to be an affiliate of First National Community Bank. In general,
subject to certain specified exemptions, a bank or its subsidiaries are limited
in their ability to engage in “covered transactions” with
affiliates:
•
|
to
an amount equal to 10% of the bank’s capital and surplus, in the case of
covered transactions with any one affiliate; and
|
•
|
to
an amount equal to 20% of the bank’s capital and surplus, in the case of
covered transactions with all
affiliates.
|
In addition, a bank and its
subsidiaries may engage in covered transactions and other specified transactions
only on terms and under circumstances that are substantially the same, or at
least as favorable to the bank or its subsidiary, as those prevailing at the
time for comparable transactions with nonaffiliated companies. A “covered
transaction” includes:
•
|
a
loan or extension of credit to an affiliate;
|
•
|
a
purchase of, or an investment in, securities issued by an
affiliate;
|
•
|
a
purchase of assets from an affiliate, with some
exceptions;
|
•
|
the
acceptance of securities issued by an affiliate as collateral for a loan
or extension of credit to any party; and
|
•
|
the
issuance of a guarantee, acceptance or letter of credit on behalf of an
affiliate.
|
|
In
addition, under Regulation W:
|
•
|
a
bank and its subsidiaries may not purchase a low-quality asset from an
affiliate;
|
•
|
covered
transactions and other specified transactions between a bank or its
subsidiaries and an affiliate must be on terms and conditions that are
consistent with safe and sound banking practices; and
|
•
|
with
some exceptions, each loan or extension of credit by a bank to an
affiliate must be secured by collateral with a market value ranging from
100% to 130%, depending on the type of collateral, of the amount of the
loan or extension of credit.
|
Regulation W generally excludes all
non-bank and non-savings association subsidiaries of banks from treatment as
affiliates, except to the extent that the Federal Reserve Board decides to treat
these subsidiaries as affiliates.
Concurrently with the adoption of
Regulation W, the Federal Reserve Board has proposed a regulation which would
further limit the amount of loans that could be purchased by a bank from an
affiliate to not more than 100% of the bank’s capital and surplus.
In
response to the financial crises affecting the banking system and financial
markets and going concern threats to investment banks and other financial
institutions, on October 3, 2008, the Emergency Economic Stabilization Act of
2008 (the “EESA”) was signed into law and subsequently amended by the American
Recovery and Reinvestment Act of 2009 on February 17, 2009. Under the authority
of the EESA, as amended, the United States Department of the Treasury (the
“Treasury”) created the Troubled Asset Relief Program (“TARP”) Capital Purchase
Program and through this program invested in financial institutions by
purchasing preferred stock and warrants to purchase either common stock or
additional shares of preferred stock. As of December 31, 2009, the Treasury will
not make additional investments under the TARP Capital Purchase Program but is
considering continuing a similar program for banks under $10 billion in assets
under a different program. The Company did not participate
in the TARP Capital Purchase Program.
The EESA,
as amended, also included a provision for a temporary increase in FDIC insurance
coverage from $100,000 to $250,000 per depositor through December 31, 2009. In
May 2009, Congress extended the increased coverage until December 31, 2013.
After that time, the per depositor coverage will return to
$100,000.
EMPLOYEES
As of December 31, 2009 the bank
employed 326 persons, including 55 part-time employees.
AVAILABLE
INFORMATION
The
company files reports, proxy and information statements and other information
electronically with the Securities and Exchange Commission. You may read and
copy any materials that the company files with the SEC at the SEC’s Public
Reference Room at 100 #F Street, NE, Washington, DC 20549. You can obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy
and information statements, and other information regarding issuers that file
electronically with the SEC. The SEC’s website site address is http://www.sec.gov.
The company’s web site address is http://www.fncb.com.
The company makes available free of charge through our website, our annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the SEC. Further, we
will provide electronic or paper copies of the company’s filings free of charge
upon request. A copy of the company’s Annual Report on Form 10-K for
the year ended December 31, 2009 may be obtained without charge from our website
at www.fncb.com
or via email at fncb@fncb.com. Information
may also be obtained via written request to First National Community Bancorp,
Inc. Attention: Treasurer, 102 East Drinker Street, Dunmore,
PA 18512.
Item
1A.
Risk Factors.
The soundness of other financial
institutions may adversely affect us.
Financial
services institutions are interrelated as a result of trading, clearing,
counterparty, or other relationships. The Corporation has exposure to many
different industries and counterparties, and routinely executes transactions
with counterparties in the financial services industry, including commercial
banks, brokers and dealers, investment banks, and other institutional clients.
Many of these transactions expose the Corporation to credit risk in the event of
a default by a counterparty or client. In addition, the Corporation’s credit
risk may be exacerbated when the collateral held by the Corporation cannot be
realized upon or is liquidated at prices not sufficient to recover the full
amount of the credit or derivative exposure due to the Corporation. Any such
losses could have a material adverse affect on the Corporation’s financial
condition and results of operations.
Market
may have materially adverse effects on our liquidity and financial
condition.
Over the past two years, the capital and credit markets have been
experiencing extreme volatility and disruption. In some cases, the
markets have exerted downward pressure on stock prices, security prices and
credit capacity for certain issuers without regard to those issuers’ underlying
financial strength. If the market disruption and volatility returns,
there can be no assurance that we will not experience adverse effects, which may
be material, on our liquidity, financial condition and profitability.
The
Company Is Subject To Interest Rate Risk
The Company’s
earnings and cash flows are largely dependent upon its net interest income. Net
interest income is the difference between interest income earned on
interest-earning assets such as loans and securities and interest expense paid
on interest-bearing liabilities such as deposits and borrowed funds. Interest
rates are highly sensitive to many factors that are beyond the Company’s
control, including general economic conditions and policies of various
governmental and regulatory agencies and, in particular, the Board of Governors
of the Federal Reserve System. Changes in monetary policy, including changes in
interest rates, could influence not only the interest the Company receives on
loans and securities and the amount of interest it pays on deposits and
borrowings, but such changes could also affect (i) the Company’s ability to
originate loans and obtain deposits, (ii) the fair value of the Company’s
financial assets and liabilities, and (iii) the average duration of the
Company’s
mortgage-backed
securities portfolio. If the interest rates paid on deposits and other
borrowings increase at a faster rate than the interest rates received on loans
and other investments, the Company’s net interest income, and therefore
earnings, could be adversely affected. Earnings could also be adversely affected
if the interest rates received on loans and other investments fall more quickly
than the interest rates paid on deposits and other borrowings.
Although management believes it has
implemented effective asset and liability management strategies, to reduce the
potential effects of changes in interest rates on the Company’s results of
operations, any substantial, unexpected, prolonged change in market interest
rates could have a material adverse effect on the Company’s financial condition
and results of operations.
The
Company Is Subject To Lending Risk
As of December 31, 2009,
approximately 44% of the Company’s loan portfolio consisted of commercial real
estate loans. These types of loans are generally viewed as having more risk of
default than residential real estate loans or consumer loans. These types of
loans are also typically larger than residential real estate loans and consumer
loans. Because the Company’s loan portfolio contains a significant number of
commercial real estate loans with relatively large balances, the deterioration
of one or a few of these loans could cause a significant increase in
non-performing loans. An increase in non-performing loans could result in a net
loss of earnings from these loans, an increase in the provision for possible
loan losses and an increase in loan charge-offs, all of which could have a
material adverse effect on the Company’s financial condition and results of
operations.The
Corporation may need or be compelled to raise additional capital in the future,
but that capital may not be available when it is needed and on terms favorable
to current shareholders.
Federal banking regulators require the company and bank to
maintain adequate levels of capital to support their
operations. These capital levels are determined and dictated by law,
regulation and banking regulatory agencies. In addition, capital
levels are also determined by the company’s management and board of directors,
based on capital levels that they believe are necessary to support the company’s
business operations. The company is evaluating its present and future
capital requirements and needs and is also analyzing capital raising
alternatives and options. Even if the company succeeds in meeting the
current regulatory capital requirements, the company may need to raise
additional capital in the near future to support possible loan losses during
future periods or to meet future regulatory capital requirements.
Further,
the company’s regulators may require it to increase its capital levels. If the
Corporation raises capital through the issuance of additional shares of its
common stock or other securities, it would likely dilute the ownership interests
of current investors and would likely dilute the per share book value and
earnings per share of its common stock. Furthermore, it may have an
adverse impact on the company’s stock price. New investors may also have rights,
preferences, and privileges senior to the company’s current shareholders, which
may adversely impact its current shareholders. The company’s ability to raise
additional capital will depend on conditions in the capital markets at that
time, which are outside its control, and on its financial performance.
Accordingly, the company cannot assure you of its ability to raise additional
capital on terms and time frames acceptable to it or to raise additional capital
at all. If the company cannot raise additional capital in sufficient amounts
when needed, its ability to comply with regulatory capital requirements could be
materially impaired. Additionally, the inability to
raise
capital in sufficient amounts may adversely affect the company’s operations,
financial condition, and results of operations.
If
we conclude that the decline in value of any of our investment securities is
other than temporary, we are required to write down the value of that security
through a charge to earnings.
We review our investment securities portfolio at each quarter-end
reporting period to determine whether the fair value is below the current
carrying value. When the fair value of any of our investment securities has
declined below its carrying value, we are required to assess whether the decline
is other than temporary. If we conclude that the decline is other than
temporary, we are required to write down the value of that security through a
charge to earnings. As of December 31, 2009, our investment portfolio included
seven pooled trust preferred securities with an amortized cost of $30.2 million
and an estimated fair value of $10.8 million. Changes in the expected
cash flows of these securities and/or prolonged price declines have resulted and
may result in our concluding in future periods that there is additional
impairment of these securities that is other than temporary, which would require
a charge to earnings to write down theses securities to their fair value. Due to
the complexity of the calculations and assumptions used in determining whether
an asset, such as pooled trust preferred securities, is impaired, the impairment
disclosed may not accurately reflect the actual impairment in the future.
If
the Company’s allowance for loan losses is not sufficient to cover actual loan
losses, its earnings could decrease.
The Company’s loan
customers may not repay their loans according to the terms of their loans, and
the collateral securing the payment of their loans may be insufficient to assure
repayment. The Company may experience significant credit losses, which could
have a material adverse effect on its operating results. The Company makes
various assumptions and judgments about the collectability of its loan
portfolio, including the creditworthiness of its borrowers and the value of the
real estate and other assets serving as collateral for the repayment of many of
its loans. In determining the amount of the allowance for loan losses, the
Company reviews its loans and its loss and delinquency experience, and the
Company evaluates economic conditions. If its assumptions prove to be incorrect,
its allowance for loan losses may not cover inherent losses in its loan
portfolio at the date of its financial statements. Material additions to the
Company’s allowance would materially decrease its net income. At December 31,
2009, its allowance for loan losses totaled $22.5 million, representing 2.37% of
its total loans.Although the Company believes it has
underwriting standards to manage normal lending risks, it is difficult to assess
the future performance of its loan portfolio due to the relatively recent
origination of many of these loans. The Company can give you no assurance that
its non-performing loans will not increase or that its non-performing or
delinquent loans will not adversely affect its future performance.
In addition, federal and state
regulators periodically review the Company’s allowance for loan losses and may
require it to increase its allowance for loan losses or recognize further loan
charge-offs. Any increase in its allowance for loan losses or loan charge-offs
as required by these regulatory agencies could have a material adverse effect on
its results of operations and financial condition.
The
Company’s Profitability Depends Significantly On Economic Conditions In The
Commonwealth of Pennsylvania specifically in Lackawanna and Luzerne
County.
The Company’s success
depends primarily on the general economic conditions of the Commonwealth of
Pennsylvania and the specific local markets in which the Company operates.
Unlike larger national or other regional banks that are more geographically
diversified, the Company provides banking and financial services to customers
primarily in the Lackawanna and Luzerne County markets. The local economic
conditions in these areas have a significant impact on the demand for the
Company’s products and services as well as the ability of the Company’s
customers to repay loans, the value of the collateral securing loans and the
stability of the Company’s deposit funding sources. A significant decline in
general economic conditions, caused by inflation, recession, acts of terrorism,
outbreak of hostilities or other international or domestic occurrences,
unemployment, changes in securities markets or other factors could impact these
local economic conditions and, in turn, have a material adverse effect on the
Company’s financial condition and results of operations.There
is no assurance that the Company will be able to successfully compete with
others for business.
The Company competes
for loans, deposits and investment dollars with numerous regional and national
banks and other community banking institutions, as well as other kinds of
financial institutions and enterprises, such as securities firms, insurance
companies, savings associations, credit unions, mortgage brokers, and private
lenders. Many competitors have substantially greater resources than the Company
does, and operate under less stringent regulatory environments. The differences
in resources and regulations may make it harder for the Company to compete
profitably, reduce the rates that it can earn on loans and investments, increase
the rates it must offer on deposits and other funds, and adversely affect its
overall financial condition and earnings.The
Company’s Controls and Procedures May Fail or Be Circumvented
Management
regularly reviews and updates the Company’s internal controls, disclosure
controls and procedures, and corporate governance policies and procedures. Any
system of controls, however well designed and operated, is based in part on
certain assumptions and can provide only reasonable, not absolute, assurances
that the objectives of the system are met. Any failure or circumvention of the
Company’s controls and procedures or failure to comply with regulations related
to controls and procedures could have a material adverse effect on the Company’s
business, results of operations and financial condition.The
Company Relies On Dividends From Its Subsidiaries For Most Of Its
Revenue.
The Company is a
separate and distinct legal entity from its subsidiaries. It receives
substantially all of its revenue from dividends from its subsidiaries. These
dividends are the principal source of funds to pay dividends on the Company’s
common stock, interest and principal on debt when applicable, and normal
operating expenditures. Various federal and/or state laws and regulations limit
the amount of dividends that the Bank and certain non-bank subsidiaries may pay
to the Company. Also, its right to participate in a distribution of assets upon
a subsidiary’s liquidation or reorganization is subject to the prior claims of
the subsidiary’s creditors. In the event the Bank is unable to pay dividends to
the Company, it may not be able to service debt, pay obligations or pay
dividends on the Company’s common stock. The inability to receive dividends from
the Bank could have a material adverse effect on the Company’s business,
financial condition and results of operations.The
Company May Not Be Able To Attract and Retain Skilled People.
During
the first quarter of 2010 our President and Chief Executive Officer and
Principal Financial Officer resigned. As a result, we are currently
conducting a search for replacements. While we hope to recruit a new
CEO and Principal Financial Officer as soon as possible, we do not know how long
the process will take or when it will be concluded. Further, until we
find a permanent CEO and Principal Financial Officer, we may be unable to
successfully manage and grow the business; and, our business, financial
condition and profitability may suffer. We believe each member of our
senior management team is important to our success and the unexpected loss of
any of these persons could impair our day-to-day operations as well as our
strategic direction.The Company’s success depends, in large
part, on its ability to attract and retain key people. Competition for the best
people in most activities engaged in by the Company can be intense and the
Company may not be able to hire people or to retain them. The unexpected loss of
services of one or more of the Company’s key personnel could have a material
adverse impact on the Company’s business because of their skills, knowledge of
the Company’s market, years of industry experience and the difficulty of
promptly finding qualified replacement personnel. The Company does not currently
have employment agreements or non-competition agreements with any of its senior
officers.
The
Company Is Subject To Claims and Litigation Pertaining To Fiduciary
Responsibility.
From time to
time, customers make claims and take legal action pertaining to the Company’s
performance of its fiduciary responsibilities. Whether customer claims and legal
action related to the Company’s performance of its fiduciary responsibilities
are founded or unfounded, if such claims and legal actions are not resolved in a
manner favorable to the Company they may result in significant financial
liability and/or adversely affect the market perception of the Company and its
products and services as well as impact customer demand for those products and
services. Any financial liability or reputation damage could have a material
adverse effect on the Company’s business, which, in turn, could have a material
adverse effect on the Company’s financial condition and results of
operations.The
Trading Volume In The Company’s Common Stock Is Less Than That Of Other Larger
Financial Services Companies.
The Company’s common
stock is traded on the Over-the-Counter (OTC) Bulletin Board; the trading volume
in its common stock is less than that of other larger financial services
companies. A public trading market having the desired characteristics of depth,
liquidity and orderliness depends on the presence in the marketplace of willing
buyers and sellers of the Company’s common stock at any given time. This
presence depends on the individual decisions of investors and general economic
and market conditions over which the Company has no control. Given the lower
trading volume of the Company’s common stock, significant sales of the Company’s
common stock, or the expectation of these sales, could cause the Company’s stock
price to fall.
Bank Secrecy Act
and Related Laws and Regulations – These laws and regulations have
significant implications for all financial institutions. They
increase due diligence requirements and reporting obligations for financial
institutions, create new crimes and penalties, and require the federal banking
agencies, in reviewing merger and other acquisition transactions, to consider
the effectiveness of the parties to such transactions in combating money
laundering activities. Even innocent noncompliance and
inconsequential failure to follow the regulations could result in significant
fines or other penalties, which could have a material adverse impact on the
Corporation’s financial condition, results of operations or
liquidity.
Readers should review the risk factors described in other documents that we file or furnish, from time to time, with the Securities and Exchange Commission, including Annual Reports to Shareholders, Annual Reports filed on Form 10-K and other current reports filed or furnished on Form 8-K.
Item
1B. Unresolved
Staff Comments.
None
Item
2. Properties.
Property
|
Location
|
Ownership
|
Type of Use
|
1
|
102
East Drinker Street
|
||
Dunmore,
PA
|
Own
|
Main
Office
|
|
2
|
419-421
Spruce Street
|
||
Scranton,
PA
|
Own
|
Scranton
Branch
|
|
3
|
934
Main Street
|
||
Dickson
City, PA
|
Own
|
Dickson
City Branch
|
|
4
|
1743
North Keyser Avenue
|
||
Scranton,
PA
|
Lease
|
Keyser
Village Branch
|
|
5
|
23
West Market Street
|
||
Wilkes-Barre,
PA
|
Lease
|
Wilkes-Barre
Branch
|
|
6
|
1700
North Township Blvd.
|
||
Pittston,
PA
|
Lease
|
Pittston
Plaza Branch
|
|
7
|
754
Wyoming Avenue
|
||
Kingston,
PA
|
Lease
|
Kingston
Branch
|
|
8
|
1625
Wyoming Avenue
|
||
Exeter,
PA
|
Lease
|
Exeter
Branch
|
|
9
|
Route
502 & 435
|
||
Daleville,
PA
|
Lease
|
Daleville
Branch
|
|
10
|
27
North River Road
|
||
Plains,
PA
|
Lease
|
Plains
Branch
|
|
11
|
169
North Memorial Highway
|
||
Shavertown,
PA
|
Lease
|
Back
Mountain Branch
|
|
12
|
269
East Grove Street
|
||
Clarks
Green, PA
|
Own
|
Clarks
Green Branch
|
|
13
|
734
Sans Souci Parkway
|
||
Hanover
Township, PA
|
Lease
|
Hanover
Township Branch
|
|
14
|
194
South Market Street
|
||
Nanticoke,
PA
|
Own
|
Nanticoke
Branch
|
|
15
|
330-352
West Broad Street
|
||
Hazleton,
PA
|
Own
|
Hazleton
Branch
|
|
16
|
3
Old Boston Road
|
||
Pittston,
PA
|
Lease
|
Route
315 Branch
|
|
17
|
1001
Main Street
|
||
Honesdale, PA
|
Own
|
Honesdale
Branch
|
|
18
|
301
McConnell Street
|
||
Stroudsburg,
PA
|
Own
|
Stroudsburg
Branch
|
|
19
|
1127
Texas Palmyra Highway
|
||
Honesdale,
PA
|
Lease
|
Honesdale
Route 6 Branch
|
|
20
|
5120
Milford Road
|
||
East
Stroudsburg, PA
|
Own
|
Marshalls
Creek Branch
|
|
21
|
200
South Blakely Street
|
||
Dunmore,
PA
|
Lease
|
Administrative
Center
|
|
22
|
107-109
South Blakely Street
|
||
Dunmore,
PA
|
Own
|
Parking
Lot
|
|
23
|
114-116
South Blakely Street
|
||
Dunmore,
PA
|
Own
|
Parking
Lot
|
|
24
|
1708
Tripp Avenue
|
||
Dunmore,
PA
|
Own
|
Parking
Lot
|
|
25
|
119-123
South Blakely Street
|
||
Dunmore,
PA
|
Own
|
Parking
Lot
|
|
26
|
Rt.
940
|
||
Blakeslee,
PA
|
Own
|
Land
|
|
27
|
Route
611
|
||
Paradise
Township, PA
|
Own
|
Land
|
|
28
|
Main
Street
|
||
Taylor,
PA
|
Own
|
Land
|
|
29
|
Milford
Road
|
||
East
Stroudsburg, PA
|
Own
|
Land
|
|
30
|
1219
Wheeler Avenue
|
||
Dunmore,
PA
|
Lease
|
Wheeler
Ave. Branch
|
|
31
|
280
Mundy Street
|
||
Wilkes-Barre,
PA
|
Own
|
Future
bank offices
|
Item
3. Legal
Proceedings.
Neither the company nor its
subsidiaries are involved in any material pending legal proceedings, other than
routine litigation incidental to the business nor does the company know of any
proceedings contemplated by governmental authorities.
Item
4. (Removed
and Reserved.)
PART
II
Item
5. Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities.
INVESTOR
INFORMATION
MARKET
PRICES OF STOCK AND DIVIDENDS PAID
The company’s common stock is not
actively traded. The principal market area for the company’s stock is
northeastern Pennsylvania, although shares are held by residents of other states
across the country. First National Community Bancorp, Inc. is listed
in the Over-The-Counter Bulletin Board (OTCBB) Stocks under the symbol
“FNCB”. Quarterly market highs and lows and dividends paid for each
of the past two years are presented below. These prices represent
actual transactions. The company currently has suspended paying cash
dividends.
MARKET
PRICE
|
||||||
HIGH
|
LOW
|
DIVIDENDS
PAID PER SHARE
|
||||
QUARTER
|
2009
|
|||||
First
|
$11.90
|
$7.55
|
$ .11
|
|||
Second
|
13.00
|
8.70
|
.02
|
|||
Third
|
9.25
|
5.50
|
.02
|
|||
Fourth
|
6.85
|
4.90
|
.02
|
|||
$ 0.17
|
||||||
QUARTER
|
2008
|
|||||
First
|
$18.96
|
$12.98
|
$ .11
|
|||
Second
|
16.47
|
13.48
|
.11
|
|||
Third
|
15.27
|
11.87
|
.11
|
|||
Fourth
|
13.48
|
9.56
|
.13
|
|||
$
0.46
|
MARKET
MAKERS
The
following firms are known to make a market in the company’s stock:
Boenning
& Scattergood, Inc.
|
Ferris,
Baker Watts, Incorporated
|
Monroe
Securities
|
Stifel
Nicolaus & Co.
|
|||
4
Tower Bridge
|
100
Light Street
|
47
State Street
|
One
Financial Plaza
|
|||
200
Barr Harbor Drive, Suite 300
|
Baltimore,
MD 21202
|
Rochester,
NY 14614
|
501
North Broadway
|
|||
W.
Conshohocken, PA 19428-2979
|
(800)
638-7411
|
(800)
766-5560
|
St.
Louis, MO 63102-2102
|
|||
(610)
832-1212
|
(800)
776-6821
|
TRANSFER
AGENT
Registrar
and Transfer Company
10
Commerce Drive
Cranford,
NJ 07016-9982
Shareholder
questions regarding stock ownership should be directed to the Investor Relations
Department at Registrar and Transfer Company at 1-800-368-5948.
HOLDERS
As of March 12, 2010, there were
approximately 1,650 holders of the company's common stock.
DIVIDEND
CALENDAR
Dividends on the company’s common
stock, if approved by the Board of Directors, are customarily paid on or about
March 15, June 15, September 15 and December 15. Record dates for
dividends are customarily on or about March 1, June 1, September 1, and December
1. As of February 26, 2010, the company has suspended paying
dividends indefinitely.
EQUITY
COMPENSATION PLAN
Information regarding the company’s
compensation plans under which equity securities of the registrant are
authorized for issuance as of December 31, 2009 is set forth under the caption
“Equity Compensation Plan Information” in the Proxy Statement filed for the
annual meeting of shareholders to be held on May 19, 2010 and is incorporated by
reference.
PERFORMANCE
GRAPH
First
National Community Bancorp, Inc.
Total Return
Performance
Period Ending
|
||||||
INDEX
|
12/31/04
|
12/31/05
|
12/31/06
|
12/31/07
|
12/31/08
|
12/31/09
|
First
National Community Bancorp, Inc.
|
100.00
|
108.57
|
131.46
|
110.20
|
65.16
|
36.87
|
NASDAQ
Composite Index
|
100.00
|
101.37
|
111.03
|
121.92
|
72.49
|
104.31
|
SNL
$1B-$5B Bank Index
|
100.00
|
98.29
|
113.74
|
82.85
|
68.72
|
49.26
|
(*) Source: SNL
Financial LC, Charlottesville, VA © 2009
(**) SNL
Securities is a research and publishing firm specializing in the collection and
dissemination of data on the banking, thrift and financial services
industries.
Assumes a
$100 investment on December 31, 2004 and reinvestment of all
dividends.
PURCHASE
OF EQUITY SECURITIES BY THE ISSUER OR AFFILIATED PURCHASERS
None.
Item
6. Selected
Financial Data.
FIRST
NATIONAL COMMUNITY BANCORP, INC. AND SUBSIDIARIES
|
||||||
SELECTED
FINANCIAL DATA
|
||||||
(In
thousands, except per share data)
|
||||||
For
the Years Ended December 31,
|
||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||
Total
assets
|
$1,395,411
|
$1,313,759
|
$1,297,553
|
$1,186,327
|
$1,009,254
|
|
Interest-bearing
balances with financial institutions
|
0
|
0
|
0
|
0
|
2,178
|
|
Securities
|
273,633
|
258,795
|
306,530
|
270,433
|
238,223
|
|
Net
loans
|
927,324
|
956,674
|
897,665
|
829,121
|
707,248
|
|
Total
deposits
|
1,071,607
|
952,892
|
945,517
|
920,973
|
750,666
|
|
Long-Term
Debt
|
155,240
|
202,243
|
135,942
|
147,489
|
126,942
|
|
Stockholders'
equity
|
91,133
|
100,342
|
107,142
|
96,862
|
84,419
|
|
Net
interest income before provision for credit losses
|
39,510
|
40,209
|
39,314
|
35,482
|
30,950
|
|
Provision
for credit losses
|
31,950
|
1,804
|
2,200
|
2,080
|
1,860
|
|
Other
income
|
2,031
|
7,812
|
6,345
|
4,897
|
3,904
|
|
Other
expenses
|
30,998
|
26,530
|
23,797
|
20,773
|
18,943
|
|
Income
(loss) before income taxes
|
(21,407)
|
19,687
|
19,662
|
17,526
|
14,051
|
|
Provision
(credit) for income taxes
|
(10,107)
|
4,604
|
4,966
|
4,017
|
2,826
|
|
Net
income (loss)
|
(11,300)
|
15,083
|
14,696
|
13,509
|
11,225
|
|
Cash
dividends paid
|
2,738
|
7,294
|
6,614
|
5,776
|
4,513
|
|
Per
share data:
|
||||||
Net
income - basic (1)
|
$(0.70)
|
$0.95
|
$0.94
|
$0.88
|
$0.74
|
|
Net
income - diluted (1)
|
$(0.70)
|
$0.93
|
$0.92
|
$0.86
|
$0.72
|
|
Cash
dividends
(2)
|
$0.17
|
$0.46
|
$0.42
|
$0.38
|
$0.30
|
|
Book
value (1)
|
$5.64
|
$6.33
|
$6.87
|
$6.31
|
$5.58
|
|
Weighted
average number of shares outstanding–basic (1)
|
16,169,777
|
15,862,335
|
15,601,377
|
15,352,406
|
15,125,382
|
|
Weighted
average number of shares outstanding-diluted (1)
|
16,558,207
|
16,200,098
|
15,931,260
|
15,721,491
|
15,537,485
|
|
(1)
Earnings per share and book value per share are calculated based on the
weighted average number of shares outstanding during each year, after
giving retroactive effect to the 25% stock dividend paid December 27, 2007
and the 10% stock dividend paid March 31, 2006. Basic earnings
per common share is computed by dividing net income available to common
shareholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per common share is computed
by dividing net income available to common shareholders, adjusted for any
changes in income that would result from the assumed conversion of all
potential dilutive common shares, by the sum of the weighted average
number of common shares outstanding and the effect of all dilutive
potential common shares outstanding for the period.
|
||||||
(2)
Cash dividends per share have been restated to reflect to
retroactive effect of the 25% stock dividend paid December 27, 2007 and
the 10% stock dividend paid March 31,
2006.
|
Certain of the matters discussed in
this document and in documents incorporated by reference herein, including
matters discussed under the caption “Management’s Discussion and Analysis of
Financial Condition and Results of Operation,” may constitute forward-looking
statements for purposes of the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended, and as such may involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance, or achievements of the Company to be materially different
from future results, performance, or achievements expressed or implied by such
forward-looking statements. The words “expect,” “anticipate,” “intend,” “plan,”
“believe,” “seek,” “estimate,” and similar expressions are intended to identify
such forward-looking statements.
The Company’s actual results may differ
materially from the results anticipated in these forward-looking statements due
to a variety of factors, including, without limitation (a) the effects of future
economic conditions on the Company and its customers; (b) the costs and effects
of litigation and of unexpected or adverse outcomes in such litigation; (c)
governmental monetary and fiscal policies, as well as legislative and regulatory
changes; (d) the effect of changes in accounting policies and practices, as may
be adopted by the regulatory agencies, as well as the Financial Accounting
Standards Board and other accounting standard setters; (e) the risks of changes
in interest rates on the level and composition of deposits, loan demand, and the
values of loan collateral, securities and interest rate protection agreements,
as well as interest rate risks; (f) the effects of competition from other
commercial banks, thrifts, mortgage banking firms, consumer finance companies,
credit unions, securities brokerage firms, insurance companies, money market and
other mutual funds and other financial institutions operating in the Company’s
market area and elsewhere, including institutions operating locally, regionally,
nationally, and internationally, together with such competitors offering banking
products and services by mail, telephone, computer, and the Internet; (g)
technological changes; (h) acquisitions and integration of acquired businesses;
(i) the failure of assumptions underlying the establishment of reserves for loan
losses and estimations of values of collateral and various financial assets and
liabilities; (j) acts of war or terrorism and (k) volatilities in the
securities markets and in deteriorating economic conditions. All written or oral
forward-looking statements attributable to the Company are expressly qualified
in their entirety by these cautionary statements. The company
undertakes no obligation to publicly revise or update these forward-looking
statements to reflect events or circumstances that arise after the date of this
report. Readers should carefully review the risk factors described in
other documents that are filed periodically with the SEC.
The following financial review of First
National Community Bancorp, Inc. is presented on a consolidated basis and is
intended to provide a comparison of the financial performance of the company,
including its wholly-owned subsidiary, First National Community Bank for the
years ended December 31, 2009, 2008 and 2007. The information
presented below should be read in conjunction with the company’s consolidated
financial statements and accompanying notes appearing elsewhere in this
report. All share and per share information reflects the retroactive
effect of the 25% stock dividend paid December 27, 2007 and the 10% stock
dividend paid March 31, 2006.
SUMMARY
The company reported a net loss of
$11.3 million in 2009 compared to $15.1 million in net income for fiscal year
2008 and $14.7 million net income in 2007. Basic earnings/(loss) per
share decreased from the $0.95 per share reported in 2008 to $(0.70) in
2009. In 2007, basic earnings per share totaled $0.94. The
weighted average number of shares outstanding used to calculate basic earnings
per share was 16,169,777 in 2009, 15,862,335 in 2008, and 15,601,377 in
2007.
The deterioration in general economic
conditions and declining real estate values severely impacted borrowers’ ability
to make scheduled payments on their loans, resulting in the company allocating
almost $32 million of earnings to replenish the reserve for credit losses and to
strengthen its ability to absorb future losses. Other key items
contributing to the 2009 results included: credit losses incurred on
investment securities totaling $6.2 million; a $5.4 million increase
in operating expenses which includes a $2.1 million increase in FDIC insurance
premiums; a $700,000 increase in the provision for off-balance sheet
commitments; and a $1.2 million increase in the expenses of other real
estate.
The Company’s record earnings recorded
in 2008 included an $895,000, or 2%, increase in net interest income before
providing for credit losses due to the growth of the balance
sheet. In addition, other income increased $1.5 million over 2007 and
included a $430,000 increase from service charges and fees and a $1,037,000
increase in net gains from the sale of assets. Operating expenses
increased $1.8 million in comparison to 2007 which includes the costs associated
with the addition of a new community office and additional growth. In
2008, the annual provision for credit
losses
was $500,000 higher than in the prior period, while the federal income tax
expense decreased $362,000 due to a higher level of tax free income on loans and
securities.
The company’s return on assets for the
years ended December 31, 2009, 2008, and 2007 was (0.84)%, 1.17%, and
1.18%, respectively while the return on average equity was (11.62)%, 14.35%, and
14.32%.
NET
INTEREST INCOME
Net interest income, the difference
between interest income and fees on earning assets and interest expense on
deposits and borrowed funds, is the largest component of the company’s operating
income and as such is the primary determinant of profitability. Changes in net
interest income occur due to fluctuations in the balances and/or mixes of
interest-earning assets and interest-bearing liabilities, and changes in their
corresponding interest yields and costs. Before providing for future credit
losses, net interest income decreased $699,000 in 2009. Changes in
non-performing assets, together with interest lost and recovered on those
assets, impacted comparisons of net interest income. In the following
schedules, net interest income is analyzed on a tax-equivalent basis, thereby
increasing interest income on certain tax-exempt loans and investments by the
amount of federal income tax savings realized. In this manner, the
true economic impact on earnings from various assets and liabilities can be more
accurately compared.
In 2009, tax-equivalent net interest
income decreased $66,000 when compared to the prior year. Average
loans outstanding increased $12 million, or 1% in 2009. The average
yield earned on the loan portfolio decreased eighty four basis points due to the
low interest rate environment. Consumer lending provided the majority
of the growth, adding $35 million of balances on average and $1.2 million of
earnings improvement due to a $34 million increase in average indirect auto
loans. Average commercial loans outstanding decreased $21 million in
2009 primarily due to an average of $20.6 million being transferred to
nonaccrual status during the year.
Average securities decreased nearly $3
million in 2009 as the company sold some non-performing assets along with
writing down $4.7 million of pooled trust preferred collateralized debt
obligations and $1.5 million of private label mortgage-backed
securities. The lower balances combined with a .30% decrease in the
yield earned reduced interest income by $1 million from the 2008
level. Meanwhile, money market balances increased over $38 million on
average due to significant deposit growth, resulting in an $86,000 increase in
earnings.
Average interest bearing deposit
balances increased over $69 million during the year. Interest-bearing
demand deposits increased $24 million, average savings deposits increased $7
million and average time deposits increased $38 million.
Overall, growth of the balance sheet
combined with a one basis point decrease in the spread earned resulted in the
$66,000 decrease in tax-equivalent net interest income. The net
interest margin decreased from 3.59% in 2008 to 3.45% in
2009. Investment leveraging transactions continued to add to the
profitability of the company in 2009, contributing almost $1.9 million to
pre-tax earnings, but the average spread earned on the transactions was 2.25%
which negatively impacted the net interest margin. Exclusive of these
transactions, the company’s 2009 net interest margin would have been 3.54% which
is lower than the 3.73% recorded last year.
In 2008, tax-equivalent net interest
income improved $1.3 million, or 3%, when compared to the prior
year. Growth of the balance sheet, effective asset-liability
management strategies and the positive impact due to repricing all contributed
to earnings improvement.
Average loans outstanding increased $39
million, or 4% in 2008 compared to 2007. The average yield earned on
the loan portfolio decreased one hundred twenty one basis points as a result of
the Federal Reserve monetary policy which reduced the prime interest rate by
4.00% to help a struggling economy. This strategy had a significant
impact on our variable rate loans, resulting in an $8.2 million decrease in
income earned on total loans. Commercial loans were most severely
impacted by the lower interest rate environment due to the high volume of
variable rate credits. Interest income decreased $9.1 million on this
group of loans in spite of a $24 million increase in average loans
outstanding. Included in this total is over $16 million of commercial
loan balances which were transferred to nonaccrual status during 2008, and this
transfer combined with balances previously placed in this non-earning category,
resulted in a $1.2 million loss of earnings on those assets. Retail
loans outstanding grew $15.7 million on average due primarily to a $9.8 million
increase in average indirect auto loans. Earnings on those loans
improved $946,000 when compared to 2007.
Average securities decreased $3 million
in 2008 as liquidity was utilized to fund loan growth. Investment in
higher yielding mortgage-back securities and tax- free municipal bonds led to a
fourteen basis point improvement in the yield earned which resulted in an
additional $206,000 of interest income over the prior year. Money
market balances were limited to $717,000 on average as funds were utilized in
higher earning assets. Earnings on this category of assets decreased
$16,000 in 2008 due to the lower interest rate environment.
Average interest-bearing deposit
balances decreased $18 million in 2008 due to certificate of deposit maturities
that were not replaced. Interest-bearing demand deposits decreased $4
million during the year due to activity in large commercial accounts and
municipal relationships while average savings deposits increased $3
million. Average time deposits decreased $17 million as many
customers withdrew funds as interest rates paid on certificates of deposit
decreased. The average cost of interest-bearing deposits decreased
1.10% from the 2007 rate which helped to offset the earnings lost on
assets. Average borrowed funds outstanding increased $60 million in
2008 to offset the deposits lost, and the average rate paid on these borrowings
was ninety eight basis points lower than the rate paid in 2007.
Overall, growth of the balance sheet
combined with a fourteen basis point increase in the spread earned resulted in
the $1.3 million increase in tax-equivalent net interest income. The
net interest margin remained stable at 3.59%. Investment leveraging
transactions continued to add to the profitability of the company in 2008,
contributing almost $1.4 million to pre-tax earnings, but the average spread
earned on the transactions was 1.69% which negatively impacted the net interest
margin. Exclusive of these transactions, the company’s 2008 net
interest margin would have been 3.73% which equals the comparable 3.73% recorded
in 2007.
Yield
Analysis
|
||||||||||
(dollars
in thousands-taxable equivalent basis)(1)
|
||||||||||
2009
|
2008
|
2007
|
||||||||
Interest
|
Average
|
Interest
|
Average
|
Interest
|
Average
|
|||||
Average
|
Income/
|
Interest
|
Average
|
Income/
|
Interest
|
Average
|
Income/
|
Interest
|
||
Balance
|
Expense
|
Rate
|
Balance
|
Expense
|
Rate
|
Balance
|
Expense
|
Rate
|
||
ASSETS:
|
||||||||||
Earning
Assets:(2)
|
||||||||||
Commercial
loans-taxable
|
$640,296
|
$34,111
|
5.33%
|
$664,333
|
$42,523
|
6.40%
|
$650,679
|
$52,276
|
8.03%
|
|
Commercial
loans-tax free
|
51,206
|
3,520
|
6.87%
|
48,325
|
3,494
|
7.23%
|
38,229
|
2,874
|
7.52%
|
|
Mortgage
loans
|
34,369
|
2,576
|
7.50%
|
36,890
|
2,619
|
7.10%
|
34,695
|
2,352
|
6.78%
|
|
Installment
loans
|
212,501
|
12,494
|
5.88%
|
177,228
|
11,253
|
6.35%
|
163,729
|
10,574
|
6.46%
|
|
Total
Loans
|
938,372
|
52,701
|
5.62%
|
926,776
|
59,889
|
6.46%
|
887,332
|
68,076
|
7.67%
|
|
Securities-taxable
|
165,595
|
7,901
|
4.77%
|
194,162
|
11,020
|
5.68%
|
211,139
|
11,446
|
5.42%
|
|
Securities-tax
free
|
114,298
|
7,883
|
6.90%
|
88,376
|
5,774
|
6.53%
|
74,817
|
5,142
|
6.87%
|
|
Total
Securities
|
279,893
|
15,784
|
5.64%
|
282,538
|
16,794
|
5.94%
|
285,956
|
16,588
|
5.80%
|
|
Interest-bearing
deposits with banks
|
0
|
0
|
0.00%
|
0
|
0
|
0.00%
|
0
|
0
|
0.00%
|
|
Federal
funds sold
|
38,863
|
98
|
0.25%
|
717
|
12
|
1.67%
|
544
|
28
|
5.15%
|
|
Total
Money Market Assets
|
38,863
|
98
|
0.25%
|
717
|
12
|
1.67%
|
544
|
28
|
5.15%
|
|
Total
Earning Assets
|
1,257,128
|
68,583
|
5.46%
|
1,210,031
|
76,695
|
6.34%
|
1,173,832
|
84,692
|
7.22%
|
|
Non-earning
assets
|
106,336
|
90,921
|
81,529
|
|||||||
Allowance
for credit losses
|
(12,770)
|
(6,861)
|
(8,357)
|
|||||||
Total
Assets
|
$1,350,694
|
$1,294,091
|
$1,247,004
|
|||||||
LIABILITIES
AND STOCKHOLDERS' EQUITY:
|
||||||||||
Interest-Bearing
Liabilities:
|
||||||||||
Interest-bearing
demand deposits
|
$312,285
|
$3,725
|
1.19%
|
$288,226
|
$4,025
|
1.40%
|
$292,134
|
$8,064
|
2.76%
|
|
Savings
deposits
|
81,149
|
589
|
0.73%
|
74,349
|
692
|
0.93%
|
71,444
|
868
|
1.21%
|
|
Time
deposits over $100,000
|
258,275
|
5,097
|
1.97%
|
182,205
|
6,633
|
3.64%
|
193,834
|
9,271
|
4.78%
|
|
Other
time deposits
|
272,001
|
8,010
|
2.94%
|
309,585
|
12,239
|
3.95%
|
314,469
|
15,413
|
4.90%
|
|
Total
Interest-Bearing Deposits
|
923,710
|
17,421
|
1.89%
|
854,365
|
23,589
|
2.76%
|
871,881
|
33,616
|
3.86%
|
|
Borrowed
funds and other
|
||||||||||
Interest-bearing
liabilities
|
235,559
|
7,775
|
3.30%
|
237,631
|
9,653
|
4.06%
|
177,537
|
8,956
|
5.04%
|
|
Total
Interest-Bearing Liabilities
|
1,159,269
|
25,196
|
2.17%
|
1,091,996
|
33,242
|
3.04%
|
1,049,418
|
42,572
|
4.06%
|
|
Demand
deposits
|
81,081
|
81,772
|
80,515
|
|||||||
Other
liabilities
|
13,072
|
15,194
|
14,429
|
|||||||
|
Stockholders'
equity
|
97,272
|
105,129
|
102,642
|
||||||
Total
Liabilities and
|
||||||||||
Stockholders'
Equity
|
$1,350,694
|
$1,294,091
|
$1,247,004
|
|||||||
Net
Interest Income Spread
|
$43,387
|
3.29%
|
$43,453
|
3.30%
|
$42,120
|
3.16%
|
||||
Net
Interest Margin
|
3.45%
|
3.59%
|
3.59%
|
|||||||
(1) In
this schedule and other schedules presented on a tax-equivalent basis,
income that is exempt from federal income taxes, i.e. interest on state
and municipal securities, has been adjusted to a tax-equivalent
basis using a 34% federal income tax rate for 2009 and a 35% tax rate for
2008 and 2007.
|
||||||||||
(2) Excludes
non-performing loans.
|
RATE
VOLUME ANALYSIS
The most significant impact on net
income between periods is derived from the interaction of changes in the volume
and rates earned or paid on interest-earning assets and interest-bearing
liabilities. The volume of earning dollars in loans and investments,
compared to the volume of interest-bearing liabilities represented by deposits
and borrowings, combined with the spread, produces the changes in net interest
income between periods. Components of interest income and interest
expense are presented on a tax-equivalent basis using the statutory federal
income tax rate of 34% for 2009 and a 35% tax rate for 2008 and
2007.
The following table shows the effect of
changes in volume and interest rates on net interest income. The
variance in interest income or expense due to the combination of rate and volume
has been allocated proportionately.
(in
thousands-taxable equivalent basis)
|
||||||||||||||||||
2009
vs 2008
|
2008 vs 2007
|
|||||||||||||||||
Increase(Decrease)
|
Increase(Decrease)
|
|||||||||||||||||
Total
Change
|
Due
to Volume
|
Due
to Rate
|
Total
Change
|
Due
to Volume
|
Due
to Rate
|
|||||||||||||
Interest
Income:
|
||||||||||||||||||
Commercial
loans-taxable
|
$
|
(8,412)
|
$
|
(1,538)
|
$
|
(6,874)
|
$
|
(9,753)
|
$
|
1,807
|
$
|
(11,560)
|
||||||
Commercial
loans-tax free
|
26
|
152
|
(126)
|
620
|
771
|
(151)
|
||||||||||||
Mortgage
loans
|
(43)
|
(179)
|
136
|
267
|
147
|
120
|
||||||||||||
Installment
loans
|
1,241
|
2,059
|
(818)
|
679
|
847
|
(168)
|
||||||||||||
Total
Loans
|
(7,188)
|
494
|
(7,682)
|
(8,187)
|
3,572
|
(11,759)
|
||||||||||||
Securities-taxable
|
(3,119)
|
(1,699)
|
(1,420)
|
(426)
|
(1,245)
|
819
|
||||||||||||
Securities-tax
free
|
2,109
|
1,694
|
415
|
632
|
932
|
(300)
|
||||||||||||
Total
Securities
|
(1,010)
|
(5)
|
(1,005)
|
206
|
(313)
|
519
|
||||||||||||
Interest-bearing
deposits with banks
|
0
|
0
|
0
|
0
|
0
|
0
|
||||||||||||
Federal
funds sold
|
86
|
638
|
(552)
|
(16)
|
9
|
(25)
|
||||||||||||
Total
Money Market Assets
|
86
|
638
|
(552)
|
(16)
|
9
|
(25)
|
||||||||||||
Total
Interest Income
|
(8,112)
|
1,127
|
(9,239)
|
(7,997)
|
3,268
|
(11,265)
|
||||||||||||
Interest
Expense:
|
||||||||||||||||||
Interest-bearing
demand deposits
|
(300)
|
361
|
(661)
|
(4,039)
|
(130)
|
(3,909)
|
||||||||||||
Savings
deposits
|
(103)
|
65
|
(168)
|
(176)
|
29
|
(205)
|
||||||||||||
Time
deposits over $100,000
|
(1,536)
|
2,843
|
(4,379)
|
(2,638)
|
(600)
|
(2,038)
|
||||||||||||
Other
time deposits
|
(4,229)
|
(1,454)
|
(2,775)
|
(3,174)
|
(192)
|
(2,982)
|
||||||||||||
Total
Interest-Bearing Deposits
|
(6,168)
|
1,815
|
(7,983)
|
(10,027)
|
(893)
|
(9,134)
|
||||||||||||
Borrowed
funds and other interest-bearing liabilities
|
(1,878)
|
(84)
|
(1,794)
|
697
|
3,002
|
(2,305)
|
||||||||||||
Total
Interest Expense
|
(8,046)
|
1,731
|
(9,777)
|
(9,330)
|
2,109
|
(11,439)
|
||||||||||||
Net
Interest Income
|
$
|
(66)
|
$
|
(604)
|
$
|
538
|
$
|
1,333
|
$
|
1,159
|
$
|
174
|
||||||
(1) Changes
in interest income and interest expense attributable to changes in both
volume and rate have been allocated proportionately to changes due to
volume and changes due to rate.
|
CURRENT
YEAR
During 2009, tax-equivalent net
interest income decreased $66,000 over the prior year total. The
repricing of interest sensitive assets and liabilities combined with growth at
current market levels generated a positive variance due to rate in the amount of
$538,000.
Interest income recognized on loans
decreased $7.2 million in 2009. The $12 million increase in average
loans outstanding led to a $500,000 increase in interest income, but earnings
lost due to transferring loans to nonaccrual status led to a negative variance
due to rate.
Investment securities interest income
during 2009 decreased $1 million when compared to 2008 due primarily to a .30%
decrease in the yield earned and the addition of lower yielding securities to
help improve our risk based capital position. Earnings from money
market assets were $86,000 higher than the prior year as deposit growth
increased balances significantly.
Deposit
growth resulted in a $1.8 million increase in interest expense in 2009, however
declining interest rates led to an $8 million reduction of interest
expense. The $6.2 million decrease in the cost of deposits combined
with a $1.9 million decrease in the cost of borrowings resulted in an $8.1
million reduction in total interest expense which offset the $8.1 million
decrease in interest income for the year.
PRIOR
YEAR
During 2008, tax-equivalent net
interest income increased $1.3 million over the 2007 total. Balance
sheet growth was profitable as evidenced by the $1.1 million of improvement
related to volume. The repricing of interest sensitive assets and
liabilities combined with growth at current market levels contributed to a
positive variance due to rate in the amount of $174,000.
Interest income recognized on loans
decreased $8.2 million in 2008. The $39 million increase in average
loans outstanding led to a $3.6 million increase in interest income, but
repricing resulting from Federal Reserve interest rate cuts contributed to the
$11.8 million decrease due to rate. Included in the negative variance
due to rate is the $1.2 million of lost earnings on nonaccrual
loans. Investment securities added $200,000 more interest income in
2008 in spite of lower balances due to the repositioning of the securities
portfolio into higher earning assets. Earnings from money market
assets were $16,000 less than the prior year as funds were utilized in higher
earning asset categories.
Deposits runoff resulted in an $893,000
decrease in interest expense in 2008, while declining interest rates led to an
additional $9.1 million reduction of interest expense. The $10
million decrease in the cost of deposits combined with a $700,000 increase in
the cost of borrowings due to increased balances resulted in a $9.3 million
reduction in total interest expense which more than offset the $8.0 million
decrease in interest income, resulting in the $1.3 million improvement in net
interest income recorded for the year.
PROVISION
FOR CREDIT LOSSES
The provision for credit losses is
analyzed in accordance with GAAP and 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. During 2009,
the Allowance for Loan and Lease Losses (ALLL) methodology was revised to
include an enhanced impairment measurement process. Enhancements were also
made to the historical loss / migration analysis, including a more defined loan
pool analysis and detailed migration adjustment factors. By implementing
these enhancements, the company greatly improved its ALLL analysis and
methodology.
In its
evaluation, management considers changes in lending policies and procedures,
changes in concentrations of credit, changes in the nature and volume of the
portfolio, changes in the volume and severity of delinquencies, classified and
non accrual loans, changes in competition and legal and regulatory environments,
management capabilities, current local and national economic trends, peer group
information, changes in loan review methodology and Board of Directors
oversight, as well as various other factors. Consideration is also given to
examinations performed by regulatory authorities and the company’s independent
accountants.
The
downturn in the real estate market has resulted in increased loan delinquencies,
defaults and foreclosures, primarily in the commercial real estate
portfolio. During 2009, nonaccrual loans doubled from $17.3 million
at December 31, 2008 to $36.0 million at December 31, 2009. During
the year, several large commercial credits were reclassified to nonaccrual
status. Updated real estate appraisals are obtained on all
non-performing loans secured by real estate. The decline in real
estate markets was primarily responsible for over $17 million of net charge-offs
for the year. The company recorded a provision for loan losses of
$31.95 million for 2009 in order to adequately provide for potential losses,
compared to a provision of $1.8 million in 2008. The increase in the
provision for loan losses was primarily a result of the prolonged deterioration
in the economy along with a variety of other factors. These issues
directly caused an increase in non-performing assets and net charge-offs
primarily in the commercial real estate portfolio. The increase in
non-performing assets is primarily concentrated in land development
loans. Declines in real estate values, along with a decrease in
demand for new home construction have led to this increase. In
each case, real estate collateral provides for an alternate source of repayment
in the event of default by the borrower. Management continues
to monitor real estate values, which may deteriorate in this real estate market
and result in an increase in impaired loans.
The
majority of the charge-offs resulted from participations in a small number of
out of area real estate bridge loans made to Non-Bank related
customers. At the time these loans were issued, the Bank
was looking to expand into other market areas and spread
risk. The decision to participate in these credit facilities
was based upon very favorable market conditions, substantial equity positions,
excellent loan to value ratios, fee income, and above average interest rates at
the time these loans were approved. Management has since made a
decision to no longer participate in out of area loans.
The ratio
of the loan loss reserve to total loans at December 31, 2009 and 2008 was 2.37%
and 0.86%, respectively. Total gross loans fell slightly from $965
million at December 31, 2008 to $950 million at December 31,
2009. The loan loss reserve increased from $8.2 million at
December 31, 2008 to $22.5 million at December 31, 2009 due primarily to the
items noted above.
Management
is prepared for continued negative trends in this difficult economic environment
and real estate market. Management continues to aggressively manage
impaired loans in an effort to reduce loan balances through concerted efforts
with affected customers to develop strategies to resolve borrower issues,
through sale or liquidation of collateral, foreclosure, or other means to reduce
the bank's exposure to impaired loans. If real estate values continue
to decline, it is more likely that we would be required to further increase our
allowance for loan losses, which in turn, could result in reduced
earnings.
OTHER
INCOME
Other Income
|
2009
|
2008
|
2007
|
|||
(in
thousands)
|
||||||
Service
charges
|
$2,863
|
$3,118
|
$2,840
|
|||
Net
gain on the sale of securities
|
890
|
1,156
|
721
|
|||
Impairment
loss on securities
|
(6,199)
|
0
|
0
|
|||
Net
gain on the sale of loans
|
1,481
|
414
|
310
|
|||
Net
gain on the sale of other real estate
|
309
|
520
|
0
|
|||
Net
gain on the sale of other assets
|
0
|
3
|
26
|
|||
Other
|
2,687
|
2,601
|
2,448
|
|||
Total
Other Income
|
$2,031
|
$7,812
|
$6,345
|
The company’s other income category can
be separated into three distinct sub-categories; service charges make up the
core component of this area of earnings while net gains (losses) from the sale
of assets and other fee income comprise the balance.
During 2009, total other income
decreased $5.8 million, or 74%, over the 2008 total primarily due to the
recognition of other-than-temporary impairment charges on investment securities,
in the amount of $6.2 million. Gains from the sale of loans increased
$1.1 million over 2008 as residential mortgages were sold to reduce the
company’s exposure to interest rate risk.
The
credit loss component of an other-than-temporary impairment write-down is
recorded in earnings, while the remaining portion of the impairment loss is
recognized in other comprehensive income, provided the company does not intend
to sell the underlying debt security.
During
2009, the company recorded a $6.2 million other-than-temporary impairment (OTTI)
charge on debt securities. The charge includes $4,724,000 in credit
related OTTI on six pooled trust preferred collateralized debt obligations and
$1,476,000 on eight private label mortgage-backed securities. All of
the securities for which OTTI was recorded were classified as
available-for-sale. Additionally, $24.2 million in noncredit related
other-than-temporary impairment was recorded in other comprehensive income on
the fourteen securities which were classified as impaired.
During 2008, total other income
increased $1.5 million, or 23%, over the 2007 total due to improvement in all
three components. Service charges improved $278,000, or 10%, due to a
$293,000 increase in overdraft privilege fees. Income generated from
the sale of assets increased $1.0 million compared to
2007. Securities were sold to reposition the portfolio for future
benefits and residential mortgages were sold to reduce the company’s exposure to
interest rate risk. Additionally, a $520,000 gain was recognized from
the sale of several properties which were previously classified as Other Real
Estate Owned. Other fee income also increased $153,000, or 6%, due to
increased fees recognized on financial services and Bank Owned Life
Insurance.
OTHER
EXPENSES
Other
Expenses
|
2009
|
2008
|
2007
|
|||
(in
thousands)
|
||||||
Salary
expense
|
$9,888
|
$10,469
|
$ 9,628
|
|||
Employee
benefit expense
|
2,195
|
2,276
|
2,289
|
|||
Occupancy
expense
|
2,219
|
2,349
|
2,116
|
|||
Equipment
expense
|
1,829
|
1,811
|
1,577
|
|||
Advertising
expense
|
713
|
988
|
890
|
|||
Data
processing expense
|
1,928
|
1,610
|
1,682
|
|||
FDIC
assessment
|
2,782
|
720
|
375
|
|||
Bank
shares tax
|
898
|
643
|
677
|
|||
Expenses
of other real estate owned
|
1,250
|
(4)
|
1
|
|||
Provision
for off-balance sheet
|
1,634
|
896
|
0
|
|||
Other
operating expenses
|
5,662
|
4,772
|
4,562
|
|||
Total
Other Expenses
|
$30,998
|
$26,530
|
$23,797
|
In 2009, total other expenses increased
$4.5 million, or 17% from the 2008 total due to a $2.1 million, or 286.4%,
increase in FDIC insurance premiums. Also contributing significantly
to the increase were increases in the provision for off-balance sheet
commitments of $738,000 and expenses of other real estate owned of $1.25
million. Salary and benefit costs decreased $662,000, or 5%, during
2009 primarily due to a decrease in incentive compensation.
On
February 27, 2009, The Board of Directors of the FDIC voted to amend the
restoration plan for the Deposit Insurance Fund (“DIF”). Under the
current restoration plan, the FDIC Board set a rate schedule to raise the DIF
reserve ratio to 1.15 percent within seven years. The amended
restoration plan was accompanied by a final rule that sets assessment rates and
makes adjustments that improve how the assessment system differentiates for
risk.
Prior to
the final rule, most banks were in the best risk category and paid anywhere from
12 cents per $100 of deposits to 14 cents per $100 for insurance. On April 1,
2009, banks in this category will pay initial base rates ranging from 12 cents
per $100 to 16 cents per $100 on an annual basis. Changes to the
assessment system include higher rates for institutions that rely significantly
on secured liabilities, which may increase the FDIC's loss in the event of
failure without providing additional assessment revenue. Under the final rule,
assessments are higher for institutions that rely significantly on brokered
deposits but, for well-managed and well-capitalized institutions, only when
accompanied by rapid asset growth. Brokered deposits combined with rapid asset
growth have played a role in a number of costly failures, including recent
failures. The final rule also provided incentives in the form of a reduction in
assessment rates for institutions to hold long-term unsecured debt and, for
smaller institutions, high levels of Tier 1 capital.
The FDIC
Board also adopted a rule imposing a 5 basis point emergency special assessment
on the industry on June 30, 2009. The assessment was collected on September 30,
2009. For the bank, based upon our deposit levels at June 30, 2009, the
additional amount of 2009 FDIC insurance expense related to this special
assessment was $603,000. This adjustment was recognized during the
second quarter of 2009. On September 29, 2009, the FDIC Board adopted
a proposed rulemaking that would require banks to prepay, on December 30, 2009,
their estimated quarterly risk-based assessments for the fourth quarter of 2009
and for all of 2010, 2011 and 2012. Prepaid assessments for the
fourth quarter of 2009 amounted to $385,000, for 2010 - $1.6 million, for 2011 -
$2 million and for 2012 – $2.1 million. Under the new rule, banks
would be assessed through 2010 according to the risk-based premium schedule
adopted earlier this year. Beginning January 1, 2011, the base rate
will increase by 3 basis points.
Provision for off-balance sheet
commitments was reclassified to other expense for the years 2009 and
2008. In previous periods, it was included in the provision for
credit losses on the income statement.
Other
Real Estate (ORE) expenses totaled $1.2 million during 2009, which is a
substantial increase from a credit of $.4 million during 2008 and expense of $.1
million during 2007. This increase is a result of an increase in
other real estate owned from one (1) property as of December 31, 2008 to
fourteen (14) properties as of December 31, 2009. This category
included various expenses associated with the maintenance of these properties,
in addition to real estate taxes paid and other traditional real estate related
expenses.
Other operating expenses during 2009
increased $890,000, or 19%, primarily due to increases in legal expenses and
professional fees encountered during the year.
In 2008, total other expenses increased
$1.8 million, or 8%, from the prior year total. Employee costs rose
$828,000, which accounted for 45% of the increase, while occupancy and equipment
costs increased approximately $467,000. All other expenses increased
$542,000, or 7%. The company’s overhead ratio was 1.98% in 2008
compared to 1.91% in 2007.
Salary and benefit costs accounted for
50% of total operating expenses in 2008. The increase in employee
costs includes an $841,000 increase in salaries which reflects the cost of the
new Stroudsburg and Honesdale Route 6 offices that opened in 2007 and the new
Marshalls Creek office which opened in May, 2008. Employee benefit
costs decreased $13,000 in 2008 as earnings generated from Bank Owned Life
Insurance policies associated with the company’s deferred compensation plan
offset increases in other categories. As of December 31, 2008, the
company had 280 full-time equivalent employees on staff compared to the 276
reported on December 31, 2007.
Occupancy and equipment costs rose
$467,000 due to the addition of branch offices. The increase in all
other operating expenses includes a $346,000 increase in FDIC insurance due to
deposit growth and an increase in insurance premiums.
PROVISION
FOR INCOME TAXES
For the
year ended December 31, 2009, the company recorded an income tax benefit of
$(10.1) million, in contrast to an income tax expense of $4.6 million in 2008.
The income tax benefit is the result of net losses from operations in 2009,
primarily from the provision for credit losses. The effective tax rate for the
years ended December 31, 2009 and 2008 was (47.2)% and 23.4%,
respectively.
The
company calculates its current and deferred tax provision based on estimates and
assumptions that could differ from actual results reflected in income tax
returns filed during the subsequent year. Any adjustments required based on
filed returns are recorded when identified in the subsequent year.
Federal income tax expense decreased
$362,000 in 2008 due primarily to the benefits derived from tax-exempt
income. The company’s effective tax rate was 23.4% in 2008 and 25.3%
in 2007.
FINANCIAL
CONDITION
Total assets increased $81.7 million
during 2009, due to significant growth in deposits, while net loans decreased
$29.3 million as the company tightened credit standards in order to maintain
required capital levels. Cash dividends were reduced from 46 cents
per share to 17 cents per share to conserve capital and maintain regulatory
requirements.
SECURITIES
The primary objectives in managing the
company’s securities portfolio are to maintain the necessary flexibility to meet
liquidity and asset and liability management needs and to provide a stable
source of interest income.
Total securities increased $14.8
million in 2009 as the company added lower risk-weighted securities to help
improve our capital position along with providing protection during a rising
interest rate environment. The company also purchased municipal
securities to take advantage of the new tax laws for AMT purposes and to meet
collateral needs due to significant growth in municipal deposit
relationships. A large portion of the securities purchased were
funded by the sale of other bonds along with proceeds from bonds that were
called prior to maturity.
The following table sets forth the
carrying value of securities at the dates indicated:
December
31,
|
||||||
2009
|
2008
|
2007
|
||||
(in
thousands)
|
||||||
U.S.
Treasury securities and obligations of U.S. government
agencies
|
$27,089
|
$32,233
|
$52,504
|
|||
Obligations
of state and political subdivisions
|
120,569
|
101,451
|
74,627
|
|||
Collateralized
mortgage obligations:
|
||||||
Government
sponsored agency
|
53,495
|
29,223
|
43,251
|
|||
Private
label
|
21,059
|
31,840
|
35,620
|
|||
Residential
mortgage-backed securities
|
27,442
|
30,061
|
62,143
|
|||
Pooled
Trust Preferred Senior Class
|
2,639
|
2,775
|
0
|
|||
Pooled
Trust Preferred Mezzanine Class
|
8,180
|
14,877
|
22,436
|
|||
Corporate
debt securities
|
356
|
4,274
|
5,872
|
|||
Equity
securities
|
12,804
|
12,061
|
10,077
|
|||
Total
|
$273,633
|
$258,795
|
$306,530
|
The following table sets forth the
maturities of securities at December 31, 2009 (in thousands) and the weighted
average yields of such securities calculated on the basis of the cost and
effective yields weighted for the scheduled maturity of each
security. Tax-equivalent adjustments, using a 34% rate, have been
made in calculating yields on obligations of state and political
subdivisions.
Within
One
Year
|
2 -
5
Years
|
6 -
10
Years
|
Over
10
Years
|
Mortgage-
Backed
Securities
|
No
Fixed
Maturity
|
Total
|
||||||||
U.S.
Treasury securities
|
$ 0
|
$ 0
|
$ 0
|
$ 0
|
$ 0
|
$ 0
|
$ 0
|
|||||||
Yield
|
||||||||||||||
Obligations
of U.S. government agencies
|
28,734
|
28,734
|
||||||||||||
Yield
|
4.588
|
4.588
|
||||||||||||
Obligations
of state and political subdivisions (1)
|
4,404
|
5,440
|
114,107
|
123,951
|
||||||||||
Yield
|
5.784
|
6.291
|
6.849
|
6.787
|
||||||||||
Corporate
debt securities
|
500
|
500
|
||||||||||||
Yield
|
0.899
|
0.899
|
||||||||||||
CMOs:
|
||||||||||||||
Government
sponsored agencies
|
52,968
|
52,968
|
||||||||||||
Yield
|
4.066
|
4.066
|
||||||||||||
Private
label
|
24,939
|
24,939
|
||||||||||||
Yield
|
6.032
|
6.032
|
||||||||||||
Residential
mortgage-backed securities
|
26,152
|
26,152
|
||||||||||||
Yield
|
5.406
|
5.406
|
||||||||||||
Pooled
Trust Preferred Senior Class
|
3,848
|
3,848
|
||||||||||||
Yield
|
1.174
|
1.174
|
||||||||||||
Pooled
Trust Preferred Mezzanine Class
|
26,325
|
26,325
|
||||||||||||
Yield
|
1.571
|
1.571
|
||||||||||||
Equity
securities (2)
|
12,789
|
12,789
|
||||||||||||
Yield
|
0.743
|
0.743
|
||||||||||||
Total
maturities
|
$ 0
|
$4,404
|
$5,440
|
$173,514
|
$104,059
|
$12,789
|
$300,206
|
|||||||
Weighted
yield
|
0
|
5.784
|
6.291
|
5.531
|
4.874
|
0.743
|
5.117
|
(1) Yields
on state and municipal securities have been adjusted to a tax-equivalent basis
using a 34% federal income tax rate.
(2)
|
Yield
presented represents 2009 actual
return.
|
Impairment of Investment
Securities
Our
investment portfolio is reviewed on a quarterly basis for indications of
impairment. This review includes analyzing the length of time and the
extent to which the fair value has been lower than the cost, the financial
condition and near-term prospects of the issuer, including any specific events
which may influence the operations of the issuer and the intent and ability to
hold the investment for a period of time sufficient to allow for any anticipated
recovery in the market. We evaluate our intent and ability to hold
debt securities based upon our investment strategy for the particular type of
security and our cash flow needs, liquidity position, capital adequacy and
interest rate risk position. In addition, the risk of future
other-than-temporary impairment may be influenced by additional bank failures,
prolonged recession in the U.S. economy, changes in real estate values, interest
deferrals, and whether the federal government provides assistance to financial
institutions. Our pooled trust preferred collateralized debt
obligations are beneficial interests in
securitized
financial assets within the scope of current accounting guidance, and are
therefore evaluated for other-than-temporary impairment using management's best
estimate of future cash flows. If these estimated cash flows
determine that it is probable an adverse change in cash flows has occurred, then
other-than-temporary impairment would be recognized. There is a risk
that this quarterly review could result in First National Community Bank
recording additional other-than-temporary impairment charges in the
future.
As of
December 31, 2009, 26% of the total unrealized losses were comprised of fixed
income securities issued by U.S. Government agencies, U.S. Government-sponsored
enterprises and investment grade municipalities. Pooled trust
preferred collateralized debt obligations accounted for 62% of the total
unrealized losses and 12% came from private label mortgage-backed
securities.
As of
December 31, 2009, the amortized cost of our pooled trust preferred
collateralized debt obligations totaled $30.2 million with an estimated fair
value of $10.8 million. One of our pooled securities is a senior
tranch and the remainder are mezzanine tranches. During 2009, all of
the pooled issues were downgraded by Moody's Investor Services. At
the time of initial issue, no more than 5% of any pooled security consisted of a
security issued by any one institution.
Lack of
liquidity in the market for trust preferred collateralized debt obligations,
credit rating downgrades and market uncertainties related to the financial
industry are factors contributing to the temporary impairment on these
securities.
On a
quarterly basis we evaluate our debt securities for other-than-temporary
impairment. In 2009, $4.7 million in other-than-temporary impairment
charges were recognized on our pooled trust preferred collateralized debt
obligations. When evaluating these investments we determine a credit
related portion and a noncredit related portion of other-than-temporary
impairment. The credit related portion is recognized in earnings and
represents the expected shortfall in future cash flows. The noncredit
related portion is recognized in other comprehensive income and represents the
difference between the fair value of the security and the amount of credit
related impairment. A discounted cash flow analysis provides the best
estimate of credit related other-than-temporary impairment for these
securities.
Our
pooled trust preferred collateralized debt obligations are measured for
other-than-temporary impairment within the scope of current accounting guidance
by determining whether it is probable that an adverse change in estimated cash
flows has occurred. Determining whether there has been an adverse
change in estimated cash flows from the cash flows previously projected involves
comparing the present value of remaining cash flows previously projected against
the present value of the cash flows estimated at December 31,
2009. We consider the discounted cash flow analysis to be our primary
evidence when determining whether credit related other-than-temporary impairment
exists.
The
following table presents the gross unrealized losses and fair values at December
31, 2009 for both available for sale and held to maturity securities by
investment category and time frame for which the loss has been outstanding
(dollars in thousands):
Less
Than 12 Months
|
12
Months or Greater
|
Total
|
||||
Description of Securities
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
U.S.
Treasury securities and obligations of U.S. government
agencies
|
$12,527
|
$ 215
|
$
9,588
|
$
1,508
|
$
22,115
|
$
1,723
|
Obligation
of state and political subdivisions
|
30,266
|
1,274
|
18,692
|
4,810
|
48,958
|
6,084
|
Collateralized
mortgage obligations:
|
||||||
Government
sponsored agency
|
31,733
|
370
|
0
|
0
|
31,733
|
370
|
Private
Label
|
0
|
0
|
13,591
|
3,885
|
13,591
|
3,885
|
Residential
Mortgage-backed securities
|
3,585
|
31
|
0
|
0
|
3,585
|
31
|
Corporate
debt securities
|
0
|
0
|
356
|
144
|
356
|
144
|
Pooled
Trust Preferred Senior Class
|
0
|
0
|
2,639
|
1,209
|
2,639
|
1,209
|
Pooled
Trust Preferred Mezzanine Class
|
0
|
0
|
8,180
|
18,145
|
8,180
|
18,145
|
Mutual
Fund
|
0
|
0
|
0
|
0
|
0
|
0
|
$78,111
|
$1,890
|
$53,046
|
$29,701
|
$131,157
|
$31,591
|
Corporate
securities had a total unrealized loss of $19.5 million as of December 31,
2009. Almost $19.4 million of the unrealized losses were from pooled
trust preferred collateralized debt obligations.
The
following table presents the gross unrealized losses and fair values at December
31, 2008 for both available for sale and held to maturity securities by
investment category and time frame for which the loss has been outstanding
(dollars in thousands):
Less
Than 12 Months
|
12
Months or Greater
|
Total
|
||||
Description of Securities
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
U.S.
Treasury securities and obligations of U.S. government
agencies
|
$15,602
|
$718
|
$0
|
$0
|
$15,602
|
$718
|
Obligation
of state and political subdivisions
|
44,045
|
2,522
|
26,733
|
4,799
|
70,778
|
7,321
|
Collateralized
mortgage obligations
|
||||||
Government
sponsored agency
|
0
|
0
|
0
|
0
|
0
|
0
|
Private
Label
|
26,762
|
7,583
|
5,078
|
1,566
|
31,840
|
9,149
|
Residential
Mortgage-backed securities
|
0
|
0
|
0
|
0
|
0
|
0
|
Corporate
debt securities
|
0
|
0
|
690
|
560
|
690
|
560
|
Pooled
Trust Preferred Senior Class
|
2,775
|
1,189
|
0
|
0
|
2,775
|
1,189
|
Pooled
Trust Preferred Mezzanine Class
|
3,720
|
3,462
|
14,741
|
12,538
|
18,461
|
16,000
|
Mutual
Fund
|
0
|
0
|
964
|
36
|
964
|
36
|
$92,904
|
$15,474
|
$48,206
|
$19,499
|
$141,110
|
$34,973
|
The OTTI
analysis for the private label mortgage-backed securities relies on a review of
the individual loans that provide the collateral for each
security. This information is then used to develop default and
severity assumptions over a future horizon for each security. The
factors involved in constructing these assumptions are:
·
|
MSA
(metropolitan statistical area),
Geographics
|
·
|
HPI
(Home Price Index) of specific MSA
|
·
|
Loan
Balance
|
·
|
Rate
Premium
|
·
|
LTV
(both individual and combined if other
loans)
|
·
|
FICO
|
·
|
Loan
Purpose (cash-out versus purchase)
|
·
|
Documentation
|
·
|
Loan
Structure
|
·
|
Occupancy
Status
|
·
|
Property
Type
|
·
|
Borrower
Payment History
|
·
|
Historical
delinquency and roll/cure rates
|
Adjustments
are made to the default/severity vectors that may be warranted given the current
environment. We then apply a fairness check to each vector to review
whether future default/severity assumptions are “in line” with current
observable performance. The data used to perform this analysis is
provided by Performance Trust and the individual loan performance.
Once we
have default/severity assumptions on the underlying collateral (on a deal
specific basis), we then have to understand how the timing of losses impacts
each specific bond/tranche and how each cash flow changes over
time. The default and severity vectors are modeled using either Intex
or Bloomberg and both total collateral and tranche specific cash flows are
established. We can then compute various metrics based on the
resulting tranche cash flow:
·
|
Total
Collateral Principal Loss
|
·
|
Total
Tranche Loss
|
·
|
Lifetime
Tranche Yield
|
·
|
Tranche
Loss Timing
|
A
security is considered to be other-than-temporarily impaired if the analysis
results in a change of cash flows from the original expectation which indicates
that there is the potential that all principal and/or interest may not be
received.
Credit
ratings are one factor of the analysis utilized to determine OTTI. As
of December 31, 2009, the following private label CMO’s were determined to be
credit impaired resulting in a charge to earnings:
Description
|
S&P
Credit
Rating
|
Collateral
Type
|
Cumulative
Credit
Impairment
Recognized
|
RAST
2006 – A10 As
|
CCC
|
ALT-A30
|
$224,000
|
RAST
2006 – A8 2A2
|
CCC
|
ALT-A30
|
374,000
|
CWALT
2007 – 7T2 A12
|
CCC
|
ALT-A30
|
282,000
|
RALI
2006 – QS 16 A10
|
CCC
|
ALT-A30
|
199,000
|
RALI
2006 – QS4 A2
|
CCC
|
ALT-A30
|
202,000
|
HALO
2007 – 1 3A6
|
CCC
|
WH30
|
79,000
|
WMALT
2006 – 2 2CB
|
CCC
|
ALT-A30
|
74,000
|
PRIME
2006 – 1 1A1
|
CCC
|
WH30
|
41,522
|
$1,475,522
|
Information
affecting cash flows and the impact on the collectability of principal and
interest are evaluated on a monthly basis as received from service
providers. The results are recognized through earnings as they become
available.
The
credit impairment recognized as of the dates indicated represents an estimate of
uncollectable principal utilizing the factors referenced
previously.
The
following table provides additional information related to our corporate
securities as of December 31, 2009:
Name of Issuer
|
Name
of Issuer's Parent Company
|
Book
Value
|
Fair
Value
|
Unrealized
Gain/Loss
|
Current
Moody's /Fitch Issuer
Ratings
|
(dollars
in thousands)
|
|||||
Chase
Capital
|
JP
Morgan Chase & Co.
|
$500
|
$356
|
$(144)
|
A2
/ A+
|
As of
December 31, 2009, the book value of our pooled trust preferred collateralized
debt obligations totaled $30.2 million with an estimated fair value of $10.8
million, which includes securities comprised of 412 banks and other financial
institutions.
The
following table provides additional information related to our pooled trust
preferred collateralized debt obligations as of December 31, 2009:
Deal
|
Class
|
Book
Value
|
Fair
Value
|
Unrealized
Gain/Loss
|
Moody’s
/ Fitch Ratings
|
Current
Number of
Performing
Issuers
|
Actual
Deferrals / Defaults as a % of Current Collateral
|
(dollars
in thousands)
|
|||||||
PreTSL
VIII
|
Mezzanine
|
$1,091
|
$330
|
$(761)
|
C /
CC
|
23
|
43.7%
|
PreTSL
IX
|
Mezzanine
|
2,762
|
944
|
(1,818)
|
Ca
/ CC
|
36
|
28.1%
|
PreTSL
X
|
Mezzanine
|
1,920
|
469
|
(1,451)
|
Ca
/ CC
|
39
|
38.6%
|
PreTSL
XI
|
Mezzanine
|
5,000
|
1,930
|
(3,070)
|
Ca
/ CC
|
53
|
19.0%
|
PreTSL
XIX
|
Mezzanine
|
7,155
|
2,646
|
(4,509)
|
B3
/ B
|
60
|
16.4%
|
PreTSL
XXVI
|
Senior
|
3,848
|
2,639
|
(1,209)
|
B1
/ BBB
|
55
|
25.0%
|
PreTSL
XXVIII
|
Mezzanine
|
8,397
|
1,861
|
(6,536)
|
Ca
/ CC
|
45
|
16.1%
|
In
accordance with EITF 99-20 and FSP 115-2, each Trust Preferred Security owned is
evaluated for impairment after consideration of the specific collateral (banks)
underlying each individual security, actual defaults/deferrals previously
recorded on the underlying collateral, and future loss estimates.
While
variances in the level of future defaults/deferrals assumptions could result in
levels of stress that would be higher or lower than the base scenario, it should
be noted that only future assumptions have any impact on the results and that
actual credit events are recognized as losses on a timely basis.
Prepayments
can occur on scheduled call dates. The following list details
information for each of our securities:
First
Par
Call
Date
|
Original
Collateral
Balance
|
Collateral
Redemptions
to
date
|
|
PreTSL
VII
|
1/3/08
|
$508,550,000
|
$83,750,000
|
PreTSL
IX
|
4/3/08
|
504,030,000
|
54,000,000
|
PreTSL
X
|
7/3/08
|
550,645,000
|
43,500,000
|
PreTSL
XI
|
9/24/08
|
635,775,000
|
34,000,000
|
PreTSL
XIX
|
9/10
|
700,535,000
|
-
|
PreTSL
XXVI
|
6/12
|
964,200,000
|
-
|
PreTSL
XXVIII
|
12/12
|
360,850,000
|
-
|
During
the early years of PreTSL instruments, prepayments were common as issuers were
able to refinance into lower costing borrowings. Since the middle of
2007, however, this option has all but disappeared and we are operating in an
environment which makes early redemption of these instruments
unlikely.
Lack of
liquidity in the market for trust preferred collateralized debt obligations,
credit rating downgrades, and market uncertainties related to the financial
industry are factors contributing to the temporary impairment on these
securities.
On a
quarterly basis, we evaluate our trust preferred securities for
other-than-temporary impairment. In 2009, $4.7 million in credit
related OTTI charges were recognized on our pooled trust preferred
securities.
Our
pooled trust preferred collateralized debt obligations are measured for OTTI
within the scope of current accounting guidance by determining whether it is
probable that an adverse change in estimated cash flows has
occurred. Determining whether there has been an adverse change in
estimated cash flows from the cash flows previously projected involves comparing
the present value of remaining cash flows previously projected against the
present value of the cash flows estimated at December 31, 2009. We
consider the discounted cash flow analysis to be our primary evidence when
determining whether credit related other-than-temporary impairment
exists.
Estimate
of Future Cash Flows – Cash flows are constructed using an INTEX cash flow
model. INTEX is a proprietary cash flow model recognized as the
industry standard for analyzing all types of collateralized debt
obligations. It includes each deal’s structural features updated with
trustee information, including asset-by-asset detail, as it becomes
available. The modeled cash flows are then used to determine if all
the scheduled principal and interest payments of our investments will be
returned.
The table
below provides a cumulative roll forward of credit losses
recognized:
For
the Year Ended December 31, 2009
|
|
Beginning
Balance
|
$0
|
Credit
losses on debt securities for which other-than-temporary impairment was
not previously recognized.
|
6,199
|
Additional
credit losses on debt securities for which other-than temporary impairment
was previously recognized
|
0
|
Ending
Balance
|
$6,199
|
OTTI
analysis is derived from present value calculations which use Moody’s Analytics
as a source of data. The first step is to evaluate the credit quality
of the collateral and the deal structure. This process produces a set
of expected cash flows that have been adjusted for expected credit
events. These expected cash flows are compared to the carrying value
of the security to determine OTTI.
The discount rate used is determined
by adding the discount margin at the time of purchase (based on the original
purchase price) to the appropriate 3-month LIBOR forward rate obtained from the
forward LIBOR curve. In this manner, we are using the current yield
of the individual security in our OTTI analysis in accordance with EITF
99-20.
The
market rate for fair value measurement is provided by Moody’s Analytics using a
Level 3 approach. This methodology is in accordance with SFAS 157 due
to the presence of an inactive or distressed market for these types of
securities. The inactivity was evidenced first by a significant
widening of the bid-ask spread and then by a significant decrease in the volume
of trades relative to historic levels. The new issue market is also inactive as
no new trust preferred securities have been issued since
2007. Additionally, most (if not all) sellers of those securities
over the past year have been forced sellers due to forced liquidation or
bankruptcy.
The
discount rate for securities that were previously impaired is calculated similar
to the methodology stated above. The prior carrying value of the
security is adjusted for previous impairment charges, and the present value of
cash flows is used to determine additional impairment.
The
following list details information for each of our pooled trust preferred
securities as of December 31, 2009:
Deal
|
Class
|
Book
Value
|
Fair
Value
|
Unrealized
Gain/Loss
|
Moody’s
/
Fitch
Ratings
|
Current
Number of Performing Issuers
|
Actual
Deferrals / Defaults as a % of Current Collateral
|
(1)
Expected
Annual
Deferrals/
Defaults
as a % of
Performing
Collateral
|
(dollars
in thousands)
|
||||||||
PreTSL
VIII
|
Mezzanine
|
$1,091
|
$330
|
$(761)
|
C /
CC
|
23
|
43.7%
|
0.375%
|
PreTSL
IX
|
Mezzanine
|
2,762
|
944
|
(1,818)
|
Ca
/ CC
|
36
|
28.1%
|
0.375%
|
PreTSL
X
|
Mezzanine
|
1,920
|
469
|
(1,451)
|
Ca
/ CC
|
39
|
38.6%
|
0.375%
|
PreTSL
XI
|
Mezzanine
|
5,000
|
1,930
|
(3,070)
|
Ca
/ CC
|
53
|
19.0%
|
0.375%
|
PreTSL
XIX
|
Mezzanine
|
7,155
|
2,646
|
(4,509)
|
B3
/ B
|
60
|
16.4%
|
0.375%
|
PreTSL
XXVI
|
Senior
|
3,848
|
2,639
|
(1,209)
|
B1
/ BBB
|
55
|
25.0%
|
0.375%
|
PreTSL
XXVIII
|
Mezzanine
|
8,397
|
1,861
|
(6,536)
|
Ca
/ CC
|
45
|
16.1%
|
0.375%
|
|
(1)
Future deferrals/defaults are projected to approximate the
long-term performance of FDIC regulated banks. Actual
deferrals/defaults are recognized as a loss immediately. For
current deferrals, our projections incorporate a 50% anticipated recovery
with a two year lag. There are no recoveries projected on
defaults.
|
Subordination
represents the amount of performing collateral that is in excess of what is
needed to payoff a specified class of bonds and all classes senior to the
specified class. It can also be referred to as credit
enhancement. The coverage ratio, or overcollateralization, of a
specific security measures the rate of performing collateral to a given class of
notes. It is calculated by dividing the performing collateral in a
deal by the current balance of the class of notes plus all classes senior to
that class. In the table below, the information pertinent to the
excess subordination is disclosed along with historical credit related
impairment for each of our pooled trust preferred securities:
Deal
|
Performing
Collateral
|
Bonds
Outstanding
|
Excess
Collateral
|
Coverage
Ratio
|
Excess
Subord-ination
|
Credit
Impairment,
this
period
|
Credit
Impairment,
Cumulative
|
(dollars
in thousands)
|
|||||||
PreTSL
VIII
|
$241,050
|
$395,835
|
$(154,785)
|
60.9%
|
N/A
|
$1,953
|
$1,953
|
PreTSL
IX
|
327,827
|
422,443
|
(94,616)
|
77.6%
|
N/A
|
238
|
238
|
PreTSL
X
|
315,868
|
475,270
|
(159,402)
|
66.5%
|
N/A
|
1,107
|
1,107
|
PreTSL
XI
|
492,940
|
562,256
|
(69,316)
|
87.7%
|
N/A
|
0
|
0
|
PreTSL
XIX
|
588,253
|
553,623
|
34,630
|
106.3%
|
5.89%
|
76
|
76
|
PreTSL
XXIV
|
725,857
|
644,439
|
81,418
|
112.6%
|
11.22%
|
250
|
250
|
PreTSL
XXVII
|
303,751
|
318,258
|
(14,507)
|
95.4%
|
N/A
|
1,100
|
1,100
|
$4,724
|
$4,724
|
FHLB
Stock: As a member of the Federal Home Loan Bank of Pittsburgh
("FHLB"), First National Community Bank is required to purchase and hold stock
in the FHLB to satisfy membership and borrowing requirements. This
stock is restricted in that it can only be sold to the FHLB or to another member
institution, and all sales of FHLB stock must be at par. As a result
of these restrictions, FHLB stock is unlike other investment securities insofar
as there is no trading market for FHLB stock and the transfer price is
determined by FHLB membership rules and not by market
participants. As of December 31, 2009 and 2008, our FHLB stock
totaled $10.9 and $10.4 million, respectively.
In
December 2008, the FHLB voluntarily suspended dividend payments on its stock, as
well as the repurchase of excess stock from members. The FHLB cited a
significant reduction in the level of core earnings resulting from lower
short-term interest rates, the increased cost of liquidity, and constrained
access to the debt markets at attractive rates and maturities as the main
reasons for the decision to suspend dividends and the repurchase of excess
capital stock. The FHLB last paid a dividend in the third quarter of
2008.
FHLB
stock is held as a long-term investment and its value is determined based on the
ultimate recoverability of the par value. First National Community
Bancorp, Inc. evaluates impairment quarterly. The decision of whether
impairment exists is a matter of judgment that reflects our view of the FHLB's
long-term performance, which includes factors such as the
following:
·
|
its
operating performance
|
·
|
the
severity and duration of declines in the fair value of its net assets
related to its capital stock
amount;
|
·
|
its
commitment to make payments required by law or regulation and the level of
such payments in relation to its operating
performance;
|
·
|
the
impact of legislative and regulatory changes on the FHLB, and accordingly,
on the members of FHLB; and
|
·
|
its
liquidity and funding position.
|
After evaluating all of these
considerations, First National Community Bancorp, Inc. concluded that the par
value of its investment in FHLB stock will be recovered. Accordingly,
no impairment charge was recorded on these securities for the year ended
December 31, 2009. Our evaluation of the factors described above in
future periods could result in the recognition of impairment charges on FHLB
stock.
LOANS
As the economy continued to suffer
through a severe recession in 2009, individuals delayed major purchases and
businesses postponed investment and expansion activities which resulted in a
reduction in the demand for loans. As a result, net loans declined
$29 million, or 3%, from $956 million as of December 31, 2008 to $927 million as
of December 31, 2009. Net loans represented 66% of total assets as of
December 31, 2009, compared to 73% as of December 31, 2008. The
company noted increases in commercial and industrial loans, installment loans
and other loans. Increases in these categories were offset by a
decrease in commercial and residential real estate loans and an increase in the
allowance for credit losses. Historically, commercial lending
activities have represented a significant portion of the company’s loan
portfolio. This includes commercial and industrial loans and
commercial real estate loans. Total commercial loans as a percentage
of the total loan portfolio has remained relatively consistent during the
periods reviewed, ranging from 69% to 71% of the
portfolio. Furthermore, from a collateral standpoint, a majority of
the company’s loan portfolio consisted of loans secured by real
estate. However, real estate secured loans as of percentage of total
loans has declined steadily over the past few years from 68% as of December 31,
2008 to 60% of the loan portfolio as of December 31, 2009.
Commercial loans increased $11 million,
or 5%, during the year from $221 million as of December 31, 2008 to $232 million
as of December 31, 2009. Commercial loans consist primarily of
equipment loans, permanent working capital financing, revolving lines of credit
and loans secured by cash and marketable securities. The increase
recognized from new loans originated in this category was partially offset by a
reduction in borrowings under revolving line of credit facilities within the
portfolio. Loans secured by commercial real estate decreased $25
million, or 6%, from $441 million as of December 31, 2008 to $416 million as of
December 31, 2009. Commercial real estate loans include long-term
commercial mortgage financing, construction loans and land development loans,
and are primarily secured by first or second lien mortgages. The
decrease in commercial real estate loans is primarily attributable to some large
payoffs, along with significant charge-offs and transfers to other real
estate.
Residential real estate loans totaled
$137 million as of December 31, 2009. This represents a decrease of
$12 million, or 8%, from $149 million as of December 31, 2008. The
components of residential real estate loans include fixed rate mortgage loans
sold in the secondary market, and home equity loans and lines of
credit. The company continues to adhere to a philosophy of
underwriting fixed rate purchase and refinance residential mortgage loans that
are generally sold in the secondary market to reduce interest rate risk and
provide funding for additional loans. Installment loans increased $9
million during the year, or 7%, from $119 million as of December 31, 2008 to
$128 million as of December 31, 2009. The increase in installment
loans is due primarily to growth in the company’s indirect auto loan
portfolio. During the first half of 2009, a government sponsored
stimulus program led to increased auto sales. Additionally, many auto
manufacturers terminated the operations of their finance arms, or severely
limited the lending activity of these entities. These two factors led
to an increase in the demand for automobile financing from banks and other
traditional lending sources. All other loans, which includes
obligations of state and municipal governments, totaled $36 million as of
December 31, 2009, an increase of $2 million, or 6%, from $34 million as of
December 31, 2008.
Details regarding the loan portfolio
for each of the last five years ending December 31 are as follows:
Loans
Outstanding
(in
thousands)
|
||||||||||
December
31,
|
||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||
Commercial
and Industrial
|
$231,766
|
$221,026
|
$202,665
|
$157,837
|
$132,838
|
|||||
Commercial
Real Estate
|
415,940
|
441,131
|
437,065
|
419,068
|
369,605
|
|||||
Residential
Real Estate
|
137,409
|
149,210
|
142,786
|
147,962
|
108,977
|
|||||
Installment
|
128,392
|
119,501
|
91,052
|
80,770
|
73,217
|
|||||
Other
|
36,617
|
34,440
|
32,136
|
31,591
|
30,139
|
|||||
Total
Loans Gross
|
950,124
|
965,308
|
905,704
|
837,228
|
714,776
|
|||||
Unearned
Discount
|
(298)
|
(380)
|
(470)
|
(569)
|
0
|
|||||
Allowance
for Credit Losses
|
(22,502)
|
(8,254)
|
(7,569)
|
(7,538)
|
(7,528)
|
|||||
Net
Loans
|
$927,324
|
$956,674
|
$897,665
|
$829,121
|
$707,248
|
The
following schedule shows the repricing distribution of loans outstanding as of
December 31, 2009. Also provided are these amounts classified
according to sensitivity to changes in interest rates.
Loans
Outstanding – Repricing Distribution
(in
thousands)
|
||||||||
December
31,
|
||||||||
Within
One
Year
|
One
to
Five
Years
|
Over
Five
Years
|
Total
|
|||||
Commercial
and Industrial
|
$167,940
|
$55,048
|
$8,778
|
$231,766
|
||||
Commercial
Real Estate
|
312,855
|
93,905
|
9,180
|
415,940
|
||||
Residential
Real Estate
|
63,811
|
27,794
|
45,804
|
137,409
|
||||
Installment
|
2,555
|
108,091
|
17,746
|
128,392
|
||||
Other
|
7,560
|
4,097
|
24,960
|
36,617
|
||||
Total
|
$554,721
|
$288,935
|
$106,468
|
$950,124
|
||||
Loans
with predetermined interest rates
|
$22,836
|
$162,520
|
$100,422
|
$285,778
|
||||
Loans
with floating rates
|
531,885
|
126,415
|
6,046
|
664,346
|
||||
Total
|
$554,721
|
$288,935
|
$106,468
|
$950,124
|
ASSET
QUALITY
The company manages credit risk through
the efforts of loan officers, loan review personnel, loan quality and risk
management committees and oversight from the board of directors, along with the
application of policies and procedures designed to foster sound underwriting and
credit monitoring practices. The company continually evaluates this
process to ensure it is reacting to problems in the loan portfolio in a timely
manner. Although, as is the case with any financial institution, a
certain degree of credit risk is dependent in part on local and general economic
conditions that are beyond the company’s control.
Under the company’s grading system,
loans graded as special mention, substandard, doubtful or loss are reviewed
regularly as part of the company’s risk management practices. The
company's risk management committee meets quarterly or more often as required
and makes recommendations to the board of directors regarding provisions for
credit losses. The committee reviews individual problem credits and
ensures that ample reserves are established. The methodology utilized
for the provision for credit losses was enhanced during 2009 to include an
enhanced impairment measuring process.
Under
FASB 114, a loan is impaired when it is probable that the bank will be unable to
collect all amounts due (including principal and interest) according to the
contractual terms of the loan agreement. A loan is generally
considered to be impaired if it exhibits the same level of weaknesses and
probability of loss as loans classified doubtful or loss in the bank’s grading
system. For purposes of the company’s analysis, loans which are
doubtful are considered impaired. In addition, the company considers
loans which are rated substandard and on nonaccrual to be impaired.
All
impaired loans are analyzed individually for the amount of
impairment. FASB 114 allows several methods for the determination of
impairment. The Company generally utilizes the fair value of
collateral method, as this is the preferred method for collateral dependent
loans which make up the majority of the company’s impaired loans. A
loan is considered to be collateral dependent when repayment of the loan is
anticipated to come from the liquidation of the collateral held. To
determine the fair value of the collateral, external appraisals are
utilized. For loans that are recognized as impaired, external
appraisals are to be obtained at a minimum annually, or more frequently as
warranted, to ascertain a current market value so that the impairment analysis
can be updated.
Under the
fair value of collateral method, an allocation is made to the allowance for the
difference between the loan balance and the fair value of the collateral, less
the estimated costs to sell. For the Company’s calculations, a factor
of 10% is typically utilized to estimate costs to sell, which is based on
typical cost factors, such as a 6% broker commission, 2% transfer taxes, and
various other miscellaneous costs associated with the sales
process. For loans which are considered to be impaired, but for which
the appraised value (minus costs to sell) exceeds the loan value, the impairment
is considered to be zero.
The following schedule reflects various
non-performing categories as of December 31 for each of the last five
years:
December
31,
|
||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||
(in
thousands)
|
||||||||||
Impaired/Nonaccrual
loans
|
$36,048
|
$22,263
|
$3,106
|
$2,299
|
$ 70
|
|||||
Loans
past due 90 days or more and still accruing
|
646
|
1,151
|
904
|
412
|
721
|
|||||
Total
Non-Performing Loans
|
$36,694
|
$23,414
|
$4,010
|
$2,711
|
$791
|
|||||
Other
Real Estate Owned
|
11,184
|
2,308
|
2,588
|
2,188
|
0
|
|||||
Total
Non-Performing Assets
|
$47,878
|
$25,722
|
$6,598
|
$4,899
|
$791
|
|||||
Non-performing
loans as a percentage of gross loans
|
3.9%
|
2.4%
|
0.4%
|
0.3%
|
0.1%
|
|||||
Non-performing
assets as a percentage of total assets
|
3.4%
|
2.0%
|
0.5%
|
0.4%
|
0.1%
|
In 2009, total non-performing assets
increased $22.1 million, from $25.7 million as of December 31, 2008 to $47.8
million as of December 31, 2009, as the effects of the severe and prolonged
economic downturn continued to impact individual and business customers of the
company. Non-performing assets represented 31% of gross capital as of
December 31, 2009, as compared to 20% of gross capital as of December 31,
2008. Included in non-performing assets are nonaccrual loans,
including impaired loans, which increased $13.8 million during the
year. The increase in nonaccrual loans is primarily centered in
commercial real estate loans, including a concentration in land development and
construction loans. The company acknowledges that a continued
downturn in the real estate market could lead to additional increases in
impaired loans.
As of
December 31, 2009, the recorded investment in loans for which impairment has
been recognized totaled $36.0 million. The allowance for credit
losses related to these loans was $12.4 million. The amount of
impaired loans for which there is no related allowance for credit losses totaled
$11.5 million. The average total investment in impaired loans for
2009, 2008 and 2007 was $32.8 million, $885,000 and $0,
respectively.
Non-performing
assets are monitored on an ongoing basis as part of the company’s loan review
process and through the loan quality committee. Additionally,
work-out efforts continue and are actively monitored for non-performing
assets. Potential loss on non-performing assets is generally
evaluated by comparing the outstanding loan balance to the fair market value of
the pledged collateral.
The
company has historically participated in loans with other financial
institutions, the majority of which have been loans originated by financial
institutions located in the company’s general market area. Over the
past 6 years, the company has participated in seven (7) commercial real estate
loans with a financial institution that was headquartered in Minneapolis,
Minnesota. The majority of these loans were for out of market
commercial real estate projects. Two (2) projects were located in
Pennsylvania, one (1) project was located in New York and the remaining four (4)
projects were located in Florida. The company’s original aggregate
commitment for these various loans totaled approximately $34
million. Two of these loans, one local Pennsylvania project and the
New York project, have been paid in full. The remaining Pennsylvania
loan continues to pay as agreed but is rated as “Substandard”. During
2009, the company recognized charge offs in excess of $11.3 million against the
four Florida credits. This amount represents 63% of the company’s
total charge offs that were recognized in fiscal 2009. The remaining
outstanding balance under these Florida loan participations total $11.9
million. These credits are all classified as either non-performing or
other real estate owned. All of these credits have been written down
to amounts that are less than 90% of the current fair market value of each
respective property. Workout efforts continue on these
credits.
During
2009, non-performing loans increased $13.2 million from $23.4 million as of
12/31/08 to $36.7 million as of 12/31/09. This increase was primarily
the result of the re-classification of $31.5 million in loans, offset by $7.5
million in charge-offs and the transfer of $11.2 million in loans to other real
estate owned. The increase in non-performing loans is centered in a
few large credits, all of which are secured by real estate
collateral.
Six (6) credits totaling $27.8 million
represented the majority of loans re-classified during
2009. Additionally, these six (6) credits, plus three (3) other
credits reclassified in previous years, represent 88% of total non-performing
loans as of 12/31/2009. A majority of non-performing loans as of
12/31/09 are concentrated in land development loans. Four (4) of
these credits totaling $14.1 million are located outside of the company’s
primary market area. Two (2) of the credits in the combined amount of
$4.2 million are secured by real estate located in Florida.
The six (6) credits representing the
majority of loans re-classified during 2009 are:
·
|
$4,978,000
– This credit represents a land development loan secured by a residential
subdivision located outside of the company’s primary market area; $2.6
million of the allowance for loan losses is allocated to this
credit.
|
·
|
$4,835,000
– This credit represents a land development loan secured by a residential
subdivision located outside of the company’s general market area; $1.9
million of the allowance for loan losses is allocated to this
credit.
|
·
|
$11,113,000
– This credit represents a land development loan secured by a residential
subdivision; $6.6 million of the allowance for loan losses is allocated to
this credit.
|
·
|
$2,515,000
– This credit represents a participation in an out of area real estate
bridge loan made to a non-Bank related customer, secured by real estate;
due to sufficient collateral value, no allocation is provided for this
credit in the allowance for loan
losses.
|
·
|
$3,189,000
– This credit represents a commercial construction loan secured by real
estate; $319 thousand of the allowance for loan losses is allocated to
this credit.
|
·
|
$1,185,000
– This credit represents a commercial mortgage loan secured by commercial
real estate; due to sufficient collateral value, no allocation is provided
for this credit in the allowance for loan
losses.
|
The three
(3) remaining credits re-classified prior to 2009 are:
·
|
$1,194,000
– This credit represents a commercial mortgage loan secured by commercial
real estate; due to sufficient collateral value, no allocation is provided
for this credit in the allowance for loan
losses.
|
·
|
$1,726,000
– This credit represents a participation in an out of area real estate
bridge loan made to a non-Bank related customer, secured by real estate;
due to sufficient collateral value, no allocation is provided for this
credit in the allowance for loan
losses.
|
·
|
$1,600,000
– This credit represents a commercial mortgage loan secured by commercial
real estate; $160 thousand of the allowance for loan losses is allocated
to this credit.
|
During
2008, three (3) large credits totaling $14.1 million as of December 31, 2008,
were classified non-performing, which led to the increase for the
period. All three (3) credits represent shared participation loans in
Florida. The collateral securing the loan was a first lien mortgage
versus the property. As of December 31, 2007, non-performing loans
were comprised of four (4) credits.
A recap of delinquency within the
company’s loan portfolio is provided below.
2009
|
2008
|
2007
|
||||
30-59
days
|
.40%
|
.89%
|
.60%
|
|||
60-89
days
|
.05%
|
.64%
|
.61%
|
|||
90
+ days
|
.07%
|
.12%
|
.10%
|
|||
Non-Accrual
|
3.79%
|
1.79%
|
.34%
|
|||
Total
Delinquencies
|
4.31%
|
3.44%
|
1.65%
|
As previously indicated, the increase
in delinquencies in the periods reviewed is primarily related to the downturn in
the economy and its impact on the company’s borrowers.
In its evaluation for the allowance for
loan losses, management considers a variety of qualitative factors including
changes in the volume and severity of delinquencies.
Other Real Estate Owned totaled $11.2
million as of December 31, 2009, which is an increase of $8.9 million from $2.3
million as of December 31, 2008. As of December 31, 2009, other real
estate owned consists of fourteen (14) properties compared to one (1) property
as of December 31, 2008. Seven (7) of the properties held in other
real estate owned as of December 31, 2009 represent approximately 95% of the
total. Included in other real estate owned are two properties
totaling $3.1 million, or 28%, of other real estate owned, located outside of
the company’s general market area. Additionally, $7.6 million, or
68%, of other real estate owned is located in a specific region located within
the company’s primary market area that has been particularly hard hit during the
current economic recession.
The company is actively marketing these
properties for sale through a variety of channels including internal marketing
and the use of outside brokers/realtors. The carrying value of other
real estate owned is generally calculated at an amount not greater than 90% of
the most recent fair market appraised value. This market value is
updated on an annual basis. Further deterioration in the real estate
market could result in additional losses on these
properties. Recognition of the gain or loss from the sale of other
real estate owned is identified in a separate line item on the company’s income
statement. Additionally, expenses associated with other real estate
owned are listed as a separate category in other expenses on the company’s
income statement.
The following schedule reflects a
breakdown of other real estate owned for the periods reviewed.
December
31,
|
||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||
(in
thousands)
|
||||||||||
Land
/ Lots
|
$ 5,887
|
$ 0
|
$ 0
|
$ 0
|
$0
|
|||||
Commercial
Real Estate
|
4,852
|
2,308
|
2,588
|
2,188
|
0
|
|||||
Residential
Real Estate
|
445
|
0
|
0
|
0
|
0
|
|||||
Total
Other Real Estate Owned
|
$11,184
|
$2,308
|
$2,588
|
$2,188
|
$0
|
In 2008, total non-performing assets
increased $19.1 million as the effects of the economic crisis impacted
borrowers' ability to make scheduled payments and reduced the value of real
estate collateral securing many loans. Nonaccrual loans (including
impaired loans) increased $19.2 million during the year due primarily to the
addition of four credits which represent construction projects in which the bank
is a participant. Construction delays, declining real estate values,
and the inability of the borrowers to make scheduled payments have resulted in
these loan relationships being classified as impaired. Workout
efforts continue on each of these credits, but declining real estate values will
hamper the bank’s ability to receive full recovery on these
credits. As of December 31, 2008, the bank has evaluated the recovery
of its recorded investment in these impaired loans and has established a FAS 114
Valuation Allowance totaling $900,000 for potential losses on these
loans. This valuation allowance results from current market declines
in the underlying value of the collateral securing these loans.
Other
Real Estate Owned decreased $280,000 in 2008 and consists of one property on
which the bank had assumed title during 2008. During 2008, the
bargain lease obligation associated with the property was
fulfilled. The future use or disposition of the property is being
assessed. Current expenses associated with the property are being
recovered through a short-term occupancy arrangement at the present
time. During 2008, three properties which were carried as Other Real
Estate Owned on December 31, 2007 were sold. A gain of $520,000 was
recognized on the sales in 2008.
As of
December 31, 2009, the company’s ratio of nonaccrual and impaired loans to total
loans was 3.89% compared to the 2.33% reported as of December 31,
2008. The company continues to acknowledge the weakness in local real
estate markets, emphasizing strict underwriting standards to minimize the
negative impact of the current environment.
ALLOWANCE
FOR CREDIT LOSSES
In an effort to further improve risk
management practices, the Allowance for Loan and Lease Losses (ALLL) methodology
was revised during 2009 to include an enhanced impairment measurement
process. Enhancements were also made to the historical loss / migration
analysis, including a more defined loan pool analysis and detailed migration
adjustment factors. By implementing these enhancements, the company
greatly improved its ALLL analysis.
The following table presents an
allocation of the allowance for credit losses as of the end of each of the last
five years (in thousands):
Loan
Loss Reserve Allocation
|
|||||||||||||||
12/31/09
|
12/31/08
|
12/31/07
|
12/31/06
|
12/31/05
|
|||||||||||
Amount
|
Percentage
|
Amount
|
Percentage
|
Amount
|
Percentage
|
Amount
|
Percentage
|
Amount
|
Percentage
|
||||||
Commercial
and Industrial
|
$2,630
|
12%
|
$7,462
|
91%
|
$7,019
|
77%
|
$6,995
|
77%
|
$6,933
|
79%
|
|||||
Commercial
Real Estate*
|
17,486
|
78%
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||
Residential
Real Estate
|
765
|
3%
|
259
|
3%
|
91
|
4%
|
114
|
4%
|
55
|
4%
|
|||||
Installment
|
1,044
|
5%
|
481
|
6%
|
405
|
19%
|
377
|
19%
|
427
|
17%
|
|||||
Other
|
577
|
2%
|
52
|
-
|
54
|
-
|
52
|
-
|
113
|
-
|
|||||
Allowance
for credit losses
|
$22,502
|
100%
|
$8,254
|
100%
|
$7,569
|
100%
|
$7,538
|
100%
|
$7,528
|
100%
|
*The
current year allocation for credit losses includes commercial real estate loans
separately from commercial and industrial loans to give the reader a better
understanding of the composition of the loan portfolio.
All
doubtful and substandard, nonaccrual loans are considered to be impaired and are
analyzed individually to determine the amount of
impairment. Construction delays, declining real estate values, and
the inability of the borrowers to make scheduled payments have resulted in these
loan relationships being classified as impaired. The fair value of
collateral method is generally used to perform this
measurement. Appraisals are received annually to ensure adequate
impairment measurements reflect current market conditions. An
allocation of $12.4 million was determined for impaired loans under SFAS 114,
which accounted for 55.2% of the total allocation of $22.5 million at December
31, 2009.
In its historical loss / migration
analysis evaluation, loans are analyzed by industry concentration and loan
type. Management measures the effects of various qualitative factors
on each of these loan segments. The factors include changes in
lending policies and procedures, changes in concentrations of credit, changes in
the nature and volume of the portfolio, changes in the volume and severity of
delinquencies, classified and non accrual loans, changes in competition and
legal and regulatory environments, management capabilities, current local and
national economic trends, peer group information, changes in loan review
methodology and Board of Directors oversight, as well as various other factors.
Consideration is also given to examinations performed by regulatory authorities
and the company’s independent accountants. At December 31,
2009, an allocation of $10.1 million was established for loans analyzed under
SFAS 5, which accounted for 44.8% of the total allocation of $22.5
million.
These
evaluations are intrinsically subjective, as the results are estimated based on
management knowledge and experience and are subject to interpretation and
modification as information becomes available or as future events
occur. Management monitors the loan portfolio on an ongoing
basis. With current forces including real estate market declines and
a weakened economy affecting loan repayment, management is more diligently
focused on risk management. Adjustments to the allowance for loan and
lease losses are made based on management’s assessment of the factors noted
above.
Management
is prepared for continued negative trends in this difficult economic environment
and real estate market. Management continues to aggressively manage
impaired loans in an effort to reduce loan balances through concerted efforts
with affected customers to develop strategies to resolve borrower issues,
through sale or liquidation of collateral, foreclosure, or other means to reduce
the bank's exposure to impaired loans. If real estate values continue
to decline, it is more likely that we would be required to further increase our
allowance for loan losses, which in turn, could result in reduced
earnings.
The following schedule presents an
analysis of the allowance for credit losses for each of the last five years (in
thousands):
Years
Ended December 31,
|
||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||
Balance,
January 1
|
$8,254
|
$7,569
|
$7,538
|
$7,528
|
$7,100
|
|||||
Charge-Offs:
|
||||||||||
Commercial
and Industrial
|
2,049
|
466
|
329
|
83
|
64
|
|||||
Commercial
Real Estate
|
14,996
|
262
|
1,663
|
1,802
|
1,523
|
|||||
Residential
Real Estate
|
307
|
51
|
952
|
0
|
0
|
|||||
Installment
|
449
|
499
|
452
|
535
|
435
|
|||||
Other
Loans
|
34
|
49
|
0
|
0
|
0
|
|||||
Total
Charge-Offs
|
17,835
|
1,327
|
3,396
|
2,420
|
2,022
|
|||||
Recoveries
on Charged-Off Loans:
|
||||||||||
Commercial
and Industrial
|
22
|
6
|
6
|
8
|
257
|
|||||
Commercial
Real Estate
|
34
|
17
|
1,018
|
110
|
57
|
|||||
Residential
Real Estate
|
0
|
0
|
5
|
0
|
51
|
|||||
Installment
|
70
|
177
|
198
|
232
|
225
|
|||||
Other
Loans
|
7
|
8
|
0
|
0
|
0
|
|||||
Total
Recoveries
|
133
|
208
|
1,227
|
350
|
590
|
|||||
Net
Charge-Offs
|
17,702
|
1,119
|
2,169
|
2,070
|
1,432
|
|||||
Provision
for Credit Losses
|
31,950
|
1,804
|
2,200
|
2,080
|
1,860
|
|||||
Balance,
December 31
|
$22,502
|
$8,254
|
$7,569
|
$7,538
|
$7,528
|
|||||
Net
Charge-Offs during the period as a percentage of average loans outstanding
during the period
|
1.89%
|
.12%
|
.24%
|
.27%
|
.21%
|
|||||
Allowance
for credit losses as a percentage of loans outstanding at end of
period
|
2.37%
|
0.86%
|
0.69%
|
0.72%
|
0.89%
|
The ratio
of the loan loss reserve to total loans at December 31, 2009 and 2008 was 2.37%
and 0.86%, respectively. Total gross loans fell slightly from $965
million at December 31, 2008 to $950 million at December 31,
2009. The loan loss reserve increased from $8.2 million at
December 31, 2008 to $22.5 million at December 31, 2009. Net
charge-offs total $17.7 million in 2009. As a result of these
charge-offs, an increase in nonaccrual loans and the growth of the loan
portfolio, the company determined that additional provisions were necessary to
maintain the strength of the reserve and provided $31.95 million in
2009.
Charge-off
activity spiked in 2009 from $2 million in net charge offs in 2008 to $17.7
million in 2009. The majority of the charge-offs resulted from
participations in a small number of Out of Area real estate bridge loans made to
non-bank related customers. Severe real estate value declines
in the Florida markets necessitated these charge downs, which totaled $11.3
million or 63.8% of the year’s total charge offs. Another $3.6
million in charge-offs of real estate loans resulted from two local
borrowers. All other charge-off and recovery activity is consistent
with the normal course of business. Management is actively pursuing
work out and collections efforts to collect on these loans.
FUNDING
SOURCES
The
company utilizes traditional deposit products, such as demand, savings, NOW,
money market, and time, as its primary funding sources to support the earning
asset base and future growth. Other sources, such as short-term FHLB advances,
federal funds purchased, securities sold under agreements to repurchase,
brokered time deposits, and long-term FHLB borrowings are utilized as necessary
to support the Company’s growth in assets and to achieve interest rate
sensitivity objectives. The average balance of interest-bearing
liabilities increased $67.0 million, totaling $1.159 million in 2009 from $1.092
million in 2008. The rate paid on interest-bearing liabilities
decreased from 3.04% in 2008 to 2.17% in 2009. This decrease caused a
decrease in interest expense of $8.0 million, or 24%, from $33.2 million in 2008
to $25.2 million in 2009.
Deposits
Average interest-bearing deposits
increased $69.3 million, or 8.1% during 2009 compared to 2008. The
increase resulted primarily from increases in time deposits and interest-bearing
demand accounts. Average time deposits increased $38.5 million or
7.8% during 2009 as compared to 2008. Average interest-bearing demand
accounts increased $24.1 million or 8.4% during 2009 when compared to
2008. The increase in average interest-bearing demand deposits
resulted primarily from an increase in personal money market deposits and
municipal NOW accounts. The average balance of savings accounts
increased $6.8 million or 9.2% during 2009 when compared to 2008. The
rate paid on average interest-bearing demand deposits decreased from 1.40%
during 2008 to 1.19% in 2008. The decrease in the rate on
interest-bearing deposits was driven primarily by pricing decreases from money
markets and time deposits, which are sensitive to interest rate
changes. The pricing decreases for these products resulted from
decreases in short-term rates by the FRB during 2009 combined with an overall
decrease in market rates. The rate paid for savings deposits
decreased from 0.93% in 2008 to 0.73% in 2009 and the rate paid on time deposits
decreased from 3.84% during 2008 to 2.47% during 2009.
The average daily amount of deposits
and rates paid on such deposits is summarized for the periods indicated in the
following table (in thousands):
Year
Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Amount
|
Rate
|
Amount
|
Rate
|
Amount
|
Rate
|
|||||||
(dollars
in thousands)
|
||||||||||||
Noninterest-bearing
demand deposits
|
$
81,081
|
$
81,772
|
$
80,515
|
|||||||||
Interest-bearing
demand deposits
|
312,285
|
1.19%
|
288,226
|
1.40%
|
292,134
|
2.76%
|
||||||
Savings
deposits
|
81,149
|
0.73%
|
74,349
|
0.93%
|
71,444
|
1.21%
|
||||||
Time
deposits
|
530,276
|
2.47%
|
491,790
|
3.84%
|
508,303
|
4.86%
|
||||||
Total
|
$1,004,791
|
$936,137
|
$952,396
|
The
following table presents the maturity distribution of time deposits of $100,000
or more at December 31, 2009 and December 31, 2008 (in thousands):
December
31, 2009
|
December
31, 2008
|
|||
3
months or less
|
$136,948
|
$100,824
|
||
Over
3 through 6 months
|
23,624
|
23,589
|
||
Over
6 through 12 months
|
48,868
|
42,300
|
||
Over
12 months
|
29,399
|
24,339
|
||
Total
|
$238,839
|
$191,052
|
Borrowings
Average short-term borrowings decreased
$12.3 million to $6.8 million in 2009. The average rate paid on
short-term borrowings decreased from 2.63% in 2008 to 0.68% in 2009, which was
primarily driven by the FRB decreasing the Fed Funds target rate (which directly
impacts short-term borrowing rates) in 2008. Average long-term debt
increased from $202 million in 2008 to $210 million in 2009 which was primarily
due to the Company’s strategy of mitigating interest rate risk exposure by
securing long-term borrowings in the relatively low rate
environment.
The
average balance of trust preferred debentures remained at $10.3 million in 2009
compared to 2008. The average rate paid for trust preferred
debentures in 2009 was 2.69%, down from 4.97% in 2008. The decrease
in rate on the trust preferred debentures is due primarily to the previously
mentioned decrease in short-term rates during 2009.
Short-term
borrowings consist of Federal funds purchased and securities sold under
repurchase agreements, which generally represent overnight borrowing
transactions, and other short-term borrowings, primarily FHLB advances, with
original maturities of one year or less. The Company has unused lines
of credit and access to brokered deposits available for short-term financing of
approximately $148 million and $72 million at December 31, 2009 and 2008,
respectively. Securities collateralizing repurchase agreements are
held in safekeeping by non-affiliated financial institutions and are under the
Company’s control. Long-term debt, which is comprised primarily of
FHLB advances, are collateralized by the FHLB stock owned by the Company,
certain of its mortgage-backed securities and a blanket lien on its residential
real estate mortgage loans.
CAPITAL
A strong capital base is essential to
the continued growth and profitability of the company and is therefore 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 15 to
the financial statements, regulatory authorities have prescribed specified
minimum capital ratios as guidelines for determining capital adequacy to help
insure the safety and soundness of financial institutions.
The following schedules present
information regarding the company’s risk-based capital at December 31, 2009,
2008 and 2007 and selected other capital ratios.
CAPITAL
ANALYSIS
(in
thousands)
|
||||||
December
31
|
||||||
Corporation
|
2009
|
2008
|
2007
|
|||
Tier
I Capital:
|
||||||
Total
Tier I Capital
|
$109,840
|
$117,285
|
$109,732
|
|||
Tier
II Capital:
|
||||||
Subordinates
notes
|
$ 23,100
|
$ 0
|
$ 0
|
|||
Allowable
portion of allowance for credit losses
|
15,339
|
9,150
|
7,569
|
|||
Total
Tier II Capital
|
$ 38,439
|
$ 9,150
|
$ 7,569
|
|||
Total
Risk-Based Capital
|
$148,279
|
$126,435
|
$117,301
|
|||
Total
Risk-Weighted Assets
|
$1,217,380
|
$1,130,824
|
$1,045,008
|
|||
Bank
|
||||||
Tier
I Capital:
|
||||||
Total
Tier I Capital
|
$128,562
|
$117,069
|
$109,397
|
|||
Tier
II Capital:
|
||||||
Allowable
portion of allowance for credit losses
|
15,334
|
9,150
|
7,569
|
|||
Total
Tier II Capital
|
$ 15,334
|
$ 9,150
|
$ 7,569
|
|||
Total
Risk-Based Capital
|
$143,896
|
$126,219
|
$116,966
|
|||
Total
Risk-Weighted Assets
|
$1,217,038
|
$1,130,490
|
$1,044,676
|
Actual
|
For
Capital
Adequacy
Purposes
|
To
Be Well
Capitalized
Under
Prompt
Corrective
Action
Provision
|
||||||||||
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||
As
of December 31, 2009:
|
||||||||||||
Total
Capital
(to
Risk Weighted Assets)
|
||||||||||||
Corporation
|
$148,279
|
12.18%
|
>$97,390
|
>8.00%
|
>$121,738
|
>10.00%
|
||||||
Bank
|
$143,896
|
11.82%
|
>$97,363
|
>8.00%
|
>$121,704
|
>10.00%
|
||||||
Tier
I Capital
(to
Risk Weighted Assets)
|
||||||||||||
Corporation
|
$109,840
|
9.02%
|
>$48,695
|
>4.00%
|
>$73,043
|
>6.00%
|
||||||
Bank
|
$128,562
|
10.56%
|
>$48,682
|
>4.00%
|
>$73,022
|
>6.00%
|
||||||
Tier
I Capital
(to
Average Assets)
|
||||||||||||
Corporation
|
$109,840
|
7.77%
|
>$56,558
|
>4.00%
|
>$70,697
|
>5.00%
|
||||||
Bank
|
$128,562
|
9.09%
|
>$56,552
|
>4.00%
|
>$70,690
|
>5.00%
|
||||||
Actual
|
For
Capital
Adequacy
Purposes
|
To
Be Well
Capitalized
Under
Prompt
Corrective
Action
Provision
|
||||||||||
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||
As
of December 31, 2008:
|
||||||||||||
Total
Capital
(to
Risk Weighted Assets)
|
||||||||||||
Corporation
|
$126,435
|
11.18%
|
>$90,466
|
>8.00%
|
>$113,082
|
>10.00%
|
||||||
Bank
|
$126,219
|
11.17%
|
>$90,439
|
>8.00%
|
>$113,049
|
>10.00%
|
||||||
Tier
I Capital
(to
Risk Weighted Assets)
|
||||||||||||
Corporation
|
$117,285
|
10.37%
|
>$45,233
|
>4.00%
|
>$67,849
|
>6.00%
|
||||||
Bank
|
$117,069
|
10.36%
|
>$45,220
|
>4.00%
|
>$67,829
|
>6.00%
|
||||||
Tier
I Capital
(to
Average Assets)
|
||||||||||||
Corporation
|
$117,285
|
8.99%
|
>$52,184
|
>4.00%
|
>$65,230
|
>5.00%
|
||||||
Bank
|
$117,069
|
8.95%
|
>$52,340
|
>4.00%
|
>$65,425
|
>5.00%
|
December
31,
|
||||||
2009
|
2008
|
2007
|
||||
Return
on Assets
|
(0.84)%
|
1.17%
|
1.18%
|
|||
Return
on Equity
|
(11.62)%
|
14.35%
|
14.32%
|
|||
Equity
to Assets Ratio
|
7.77%
|
9.18%
|
8.43%
|
|||
Dividend
Payout Ratio
|
(24.23)%
|
48.36%
|
45.01%
|
During 1999, the company implemented a
Dividend Reinvestment Plan which has resulted in an influx to capital of $22.1
million to date. The company also adopted stock option plans for
directors and senior officers. New capital generated from the
exercise of stock options is $4.3 million at December 31, 2009. In
November 2007, the company declared a 5-for-4 stock split effected in the form
of a 25% stock dividend, payable December 27, 2007 resulting in the issuance of
3,149,133 new shares. In February 2006, the company declared a 10%
stock dividend payable March 31, 2006, resulting in the issuance of 1,391,085
new shares. The company has also paid 100% stock dividends on
September 30, 2004 and January 31, 2003 which resulted in 5,423,425 and
2,603,838 new shares, respectively. At the 2005 Annual Meeting,
shareholders approved management’s proposal to increase the number of authorized
shares of common stock from 20,000,000 to 50,000,000 shares.
In 2009, regulatory capital decreased
$12.1 million comprised of a $14.0 million decrease in retained earnings after
paying cash dividends of $2.7 million, a $1.7 million increase due to the
company’s dividend reinvestment plan and a $93,000 increase due to the issuance
of shares from the company’s stock option plans. As of December 31,
2009, there were 32,179,889 shares of stock available for future sale or stock
dividends. The number of shareholders of record at December 31, 2009 was
approximately 1,650. Quarterly market highs and lows, dividends paid and known
market makers are highlighted in the Investor Information section of this Annual
Report. Refer to Note 15 to the financial statements for further discussion of
capital requirements and dividend limitations.
The Board
of Directors has voted to suspend payment of the Company's quarterly dividend
indefinitely in an effort to conserve capital. The Board recognizes
the importance of preserving cash and, given the challenging economic conditions
that continue to impact the health and stability of many businesses within the
region we serve, believes dividends should be paid from current and anticipated
earnings to prudently fund fiscal 2010
operations. Suspending the $0.02 per share dividend will
save the Company approximately $1.3 million. The Board will
reevaluate the policy in the future on a quarter-by-quarter basis.
The
suspension is among several initiatives in place to conserve cash reserves
during the nation's protracted economic slump. The Company recently
announced it had raised more than $23 million through the sale of subordinated
notes which will mature on September 1, 2019. A substantial portion
of the net proceeds of the completed sale will be used to strengthen the
institution's capital position, improve liquidity, increase lending capacity and
support the company’s continuing growth objectives.
Item
7A. Quantitative
and Qualitative Disclosures About Market Risk.
ASSET AND
LIABILITY MANAGEMENT
The major objectives of the company’s
asset and liability management are to:
(1)
|
manage
exposure to changes in the interest rate environment to achieve a neutral
interest sensitivity position within reasonable ranges,
|
(2)
|
ensure
adequate liquidity and funding,
|
(3)
|
maintain
a strong capital base, and
|
(4)
|
maximize
net interest income opportunities.
|
The company manages these objectives
through its Senior Management and Asset and Liability Management Committees
(ALCO). Members of the committees meet regularly to develop balance
sheet strategies affecting the future level of net interest income, liquidity
and capital. Items that are considered in asset and liability
management include balance sheet forecasts, the economic environment, the
anticipated direction of interest rates and the company’s earnings sensitivity
to changes in these rates.
INTEREST
RATE SENSITIVITY
The company analyzes its interest
sensitivity position to manage the risk associated with interest rate movements
through the use of gap analysis and simulation modeling. Interest
rate risk arises from mismatches in the repricing of assets and liabilities
within a given time period. Gap analysis is an approach used to
quantify these differences. A positive gap results when the amount of
interest-sensitive assets exceeds that of interest-sensitive
liabilities
within a given time period. A negative gap results when the amount of
interest-sensitive liabilities exceeds that of interest-sensitive
assets.
While gap analysis is a general
indicator of the potential effect that changing interest rates may have on net
interest income, the gap report has some limitations and does not present a
complete picture of interest rate sensitivity. First, changes in the
general level of interest rates do not affect all categories of assets and
liabilities equally or simultaneously. Second, assumptions must be
made to construct a gap table. For example, non-maturity deposits are
assigned a repricing interval based on internal
assumptions. Management can influence the actual repricing of these
deposits independent of the gap assumption. Third, the gap table
represents a one-day position and cannot incorporate a changing mix of assets
and liabilities over time as interest rates change.
Because of the limitations of the gap
reports, the company uses simulation modeling to project future net interest
income streams incorporating the current gap position, the forecasted balance
sheet mix, and the anticipated spread relationships between market rates and
bank products under a variety of interest rate scenarios.
INTEREST
RATE GAP
The following schedule illustrates the
company’s interest rate gap position as of December 31, 2009 which measures
sensitivity to interest rate fluctuations for certain interest sensitivity
periods.
Interest
Rate Sensitivity Analysis
|
|||||||
as
of December 31, 2009
|
|||||||
(in
thousands)
|
|||||||
|
Rate
Sensitive
|
Not
|
|||||
1
to 90
|
91
to 180
|
181
to 365
|
1
to 5
|
Beyond
|
Rate
|
||
Days
|
Days
|
Days
|
Years
|
5
Years
|
Sensitive
|
Total
|
|
Commercial
loans
|
$446,509
|
$12,458
|
$23,213
|
$148,895
|
$40,164
|
$34,625
|
$705,864
|
Mortgage
loans
|
2,865
|
2,681
|
6,323
|
18,661
|
3,151
|
780
|
34,461
|
Installment
loans
|
40,572
|
11,047
|
21,655
|
109,726
|
25,985
|
516
|
209,501
|
Total
Loans
|
489,946
|
26,186
|
51,191
|
277,282
|
69,300
|
35,921
|
949,826
|
Securities-taxable
|
41,771
|
10,537
|
8,277
|
52,300
|
92,692
|
(53,566)
|
152,011
|
Securities-tax
free
|
830
|
360
|
715
|
9,840
|
196,270
|
(86,393)
|
121,622
|
Total
Securities
|
42,601
|
10,897
|
8,992
|
62,140
|
288,962
|
(139,959)
|
273,633
|
Federal
funds sold
|
62,175
|
0
|
0
|
0
|
0
|
0
|
62,175
|
Total
Money Market Assets
|
62,175
|
0
|
0
|
0
|
0
|
0
|
62,175
|
Total
Earning Assets
|
594,722
|
37,083
|
60,183
|
339,422
|
358,262
|
(104,036)
|
1,285,634
|
Non-earning
assets
|
0
|
0
|
0
|
0
|
0
|
132,279
|
132,279
|
Allowance
for credit losses
|
0
|
0
|
0
|
0
|
0
|
(22,502)
|
(22,502)
|
Total
Assets
|
$594,722
|
$37,083
|
$60,183
|
$339,422
|
$358,262
|
$5,739
|
$1,395,411
|
Interest-bearing
demand deposits
|
$352,631
|
$ 0
|
$ 0
|
$ 0
|
$ 0
|
$ 0
|
$352,631
|
Savings
deposits
|
85,115
|
0
|
1,340
|
0
|
0
|
0
|
86,455
|
Time
deposits $100,000 and over
|
142,809
|
22,399
|
47,285
|
23,342
|
3,004
|
0
|
238,839
|
Other
time deposits
|
77,279
|
44,670
|
86,566
|
90,271
|
9,527
|
0
|
308,313
|
Total
Interest-Bearing Deposits
|
657,834
|
67,069
|
135,191
|
113,613
|
12,531
|
0
|
986,238
|
Borrowed
funds and other interest-bearing liabilities
|
67,917
|
3,725
|
27,553
|
81,819
|
36,453
|
0
|
217,467
|
Total
Interest-Bearing Liabilities
|
725,751
|
70,794
|
162,744
|
195,432
|
48,984
|
0
|
1,203,705
|
Demand
deposits
|
0
|
0
|
0
|
0
|
0
|
85,370
|
85,370
|
Other
liabilities
|
0
|
0
|
0
|
0
|
0
|
15,203
|
15,203
|
Stockholders'
equity
|
0
|
0
|
0
|
0
|
0
|
91,133
|
91,133
|
Total
Liabilities and Stockholders' Equity
|
$725,751
|
$70,794
|
$162,744
|
$195,432
|
$48,984
|
$191,706
|
$1,395,411
|
Interest
Rate Sensitivity gap
|
$(131,029)
|
$(33,711)
|
$(102,561)
|
$143,990
|
$309,278
|
$(185,967)
|
|
Cumulative
gap
|
$(131,029)
|
$(164,740)
|
$(267,301)
|
$(123,311)
|
$185,967
|
The company’s interest sensitivity at
December 31, 2009 was essentially neutral within reasonable ranges and an
interest rate fluctuation of up or down 200 basis points would not be expected
to have a significant impact on net interest income. The negative
cumulative gap through one year would seem to indicate that the company would
benefit from a decrease in interest rates, but the timing and extent of such
changes could provide results which are inconsistent with the gap
statement.
EARNINGS
AT RISK AND ECOMONIC VALUE AT RISK SIMULATIONS
The company recognizes that more
sophisticated tools exist for measuring the interest rate risk in the balance
sheet beyond static gap analysis. Although it will continue to
measure its static gap position, the company utilizes additional modeling for
identifying and measuring the interest rate risk in the overall balance
sheet. The ALCO is responsible for focusing on “earnings at risk” and
“economic value at risk”, and how both relate to the risk-based capital position
when analyzing the interest rate risk.
EARNINGS
AT RISK
Earnings at risk simulation measures
the change in net interest income and net income should interest rates rise and
fall. The simulation recognizes that not all assets and liabilities
reprice equally and simultaneously with market rates (i.e., savings
rate). The ALCO looks at “earnings at risk” to determine income
changes from a base case scenario under an increase and decrease of 200 basis
points in the interest rate simulation model.
ECONOMIC
VALUE AT RISK
Earnings at risk simulation measures
the short-term risk in the balance sheet. Economic value (or
portfolio equity) at risk measures the long-term risk by finding the net present
value of the future cash flows from the company’s existing assets and
liabilities. The ALCO examines this ratio monthly utilizing a rate
shock of +200
basis points in the interest rate simulation model. The ALCO
recognizes that, in some instances, this ratio may contradict the “earnings at
risk” ratio.
The following table illustrates the
simulated impact of a 200 basis point upward or downward movement in interest
rates on net interest income, and the change in economic value. This
analysis assumed that interest-earning asset and interest-bearing liability
levels at December 31, 2009 remained constant. The impact of the rate
movements were developed by simulating the effect of rates changing over a
twelve-month period from the December 31, 2009 levels.
RATES
+ 200
|
RATES
- 200
|
|
Earnings
at risk:
|
||
Percent
change in net interest income
|
(4.60)%
|
(.24)%
|
Economic
value at risk:
|
||
Percent
change in economic value of equity
|
(38.69)%
|
17.97%
|
Economic value has the most meaning
when viewed within the context of risk-based capital. Therefore, the
economic value may change beyond the company’s policy guideline for a short
period of time as long as the risk-based capital ratio is greater than
10%.
LIQUIDITY
The term liquidity refers to the
ability of the company to generate sufficient amounts of cash to meet its
cash-flow needs. Liquidity is required to fulfill the borrowing needs
of the company’s credit customers and the withdrawal and maturity requirements
of its deposit customers, as well as to meet other financial
commitments. Cash and cash equivalents (cash and due from banks and
federal funds sold) are the company’s most liquid assets. At December
31, 2009 cash and cash equivalents totaled $86.4 million, compared to the
December 31, 2008 level of $18.2 million. Financing activities
provided $90 million and operating activities provided $3.6 million of cash and
cash equivalents during the year while investing activities utilized $25.4
million. The cash flows provided by financing activities is due
primarily to an increase in interest-bearing demand deposits and the issuance of
subordinated debentures offset by a decrease in borrowed funds, while the funds
provided by operating activities pertains to interest payments received on loans
and investments. The cash used in investing activities consists of
loan proceeds and security purchases.
Core deposits, which represent the
company’s primary source of liquidity, averaged $747 million in 2009, a decrease
of $7 million from the $754 million average in 2008.
The company has other potential sources
of liquidity, including repurchase agreements. Additionally, the
company can borrow on credit lines established at several correspondent banks,
the Federal Home Loan Bank of Pittsburgh and the Federal Reserve Discount
Window.
Item
8. Financial
Statements and Supplementary Data.
The information required by this item
is set forth on pages 26-45 of the Company’s 2009 Annual Report to Shareholders,
which pages are included as Exhibit 13 hereto, and incorporated herein by
reference.
Item
9. Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure.
Not
Applicable
Item
9A. Controls
and Procedures.
Conclusion Regarding the
Effectiveness of Disclosure 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 Principal Executive Officer along
with the company’s Principal 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 as of December 31, 2009 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.
Changes in Internal Controls over
Financial Reporting – There were no changes in our internal control over
financial reporting that occurred during the period covered by this annual
report that have materially affected, or are, reasonably likely to materially
affect, the company’s internal controls over financial
reporting.
Management’s
Report on Internal Control Over Financial Reporting
Management is responsible for
establishing and maintaining adequate internal control over financial reporting
for First National Community Bancorp, Inc. (the “Company”). Internal
control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles.
Internal control over financial
reporting includes those policies and procedures that pertain to the maintenance
of records that in reasonable detail accurately and fairly reflect the
transactions and dispositions of the assets of the Company; provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Company are only being
made in accordance with authorizations of management and directors of the
Company; and provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the Company's
assets that could have a material effect on the financial
statements.
Any control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. The design of a
control system inherently has limitations, and the benefits of controls must be
weighed against their costs. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the controls. Therefore, no
assessment of a cost-effective system of internal controls can provide absolute
assurance that all control issues and instances of fraud, if any, will be
detected.
As of December 31, 2009, 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 December 31, 2009.
Management’s assessment of the
effectiveness of the company’s internal control over financial reporting as of
December 31, 2009, has been audited by Demetrius and Company, L.L.C., the
independent registered public accounting firm that audited the company’s
financial statements for the period covered. A copy of the Demetrius
and Company, L.L.C. report is included in this annual report.
/s/ Gerard A.
Champi /s/ Linda A.
D’Amario
Gerard A.
Champi
Linda A. D’Amario
Interim
President and Chief Executive
Officer Interim
Principal Financial Officer
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and
Stockholders
of First National Community Bancorp, Inc.
We have
audited First National Community Bancorp, Inc.’s internal control over financial
reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). First National Community Bancorp, Inc.’s management
is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over
financial reporting included in the accompanying Management’s Report on Internal
Control over Financial Reporting. Our responsibility is to express an opinion on
the company’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, First National Community Bancorp, Inc. maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2009, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets and the related
consolidated statements of income, stockholders’ equity and comprehensive
income, and cash flows of First National Community Bancorp, Inc, and our report
dated March 10, 2010 expressed an unqualified opinion.
Demetrius
& Company, L.L.C.
|
|
Wayne,
New Jersey
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|
March
10, 2010
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Item
9B. Other
Information.
None
FIRST
NATIONAL COMMUNITY BANCORP, INC.
PART
III
Item
10. Directors,
Executive Officers and Corporate Governance.
Information
regarding directors, nominees, principal officers, audit committees and audit
committee financial experts required by this item is set forth under the
captions “Information as to Nominees and Directors”, “Principal Officers of the
Company”, “Principal Officers of the Bank”, “Information about the Company’s
Audit Committee and its Charter”, "Report of the Audit Committee", and “Section
16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement filed
for the annual meeting of shareholders to be held on May 19, 2010 and is
incorporated herein by reference.
The
company has adopted a Code of Ethics that applies to directors, officers and
employees of the company and the bank. A copy of the Code of Ethics
was included as an exhibit to the company’s Form 10-K for the year ended
December 31, 2005 and filed with the Securities and Exchange
Commission. A request for the Company’s Code of Ethics can be made
either in writing to Linda D'Amario, First National Community Bancorp, Inc., 102
East Drinker Street, Dunmore, Pennsylvania, 18512 or by email at
fncb@fncb.com.
Item
11. Executive
Compensation.
The information required by this item
is set forth under the captions “Executive Compensation”, "Compensation
Discussion and Analysis", “Option Grants in 2009”, "Equity Compensation Plan
Information", "Deferred Compensation Plan Information", “Compensation of
Directors”, “Potential Payments Upon Termination or Change-in-Control”,
“Compensation Committee Report”, and “Board of Directors Interlocks and Insider
Participation” in the Proxy Statement filed for the annual meeting of
shareholders to be held on May 19, 2010 and is incorporated herein by
reference.
Item
12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
The information required by this item
regarding security ownership of certain beneficial owners and management is set
forth under the caption “Principal Beneficial Owners of the Company’s Common
Stock” in the Proxy Statement filed for the annual meeting of shareholders to be
held on May 19, 2010 and is incorporated herein by reference.
Information regarding the Company’s
compensation plans under which equity securities of the registrant are
authorized for issuance as of December 31, 2009 is set forth under the caption
“Equity Compensation Plan Information” in the Proxy Statement filed for the
annual meeting of shareholders to be held on May 19, 2010 and is incorporated
herein by reference.
Item
13. Certain
Relationships and Related Transactions, and Director Independence.
The information required by this item
is set forth under the captions “Certain Relationships and Related Transactions”
and “Governance of the Company” in the Proxy Statement filed for the annual
meeting of shareholders to be held on May 19, 2010 and is incorporated herein by
reference.
Item
14. Principal
Accountant Fees and Services.
The information required by this item
is set forth under the caption “Independent Auditors” in the Proxy Statement
filed for the annual meeting of shareholders to be held on May 19, 2010 and is
incorporated herein by reference.
PART
IV
Item
15. Exhibits
and Financial Statement Schedules.
1. Financial
Statements
The following financial statements
are included by reference in Part II, Item 8 hereof:
Report of Independent Registered Public
Accounting Firm
Consolidated Balance Sheet
Consolidated Statement of
Income
Consolidated Statement of Stockholders’
Equity
Consolidated Statement of Cash
Flows
Notes to Consolidated Financial
Statements
2.
|
Financial
Statement Schedules
|
Financial Statement Schedules are
omitted because the required information is either not applicable, not required
or is shown in the respective financial statements or in the notes
thereto.
3.
|
The
following Exhibits are filed herewith or incorporated by
reference:
|
EXHIBIT
3.1
|
Articles
of Incorporation – filed as Exhibit 3.1 to the Company’s Form 10-K for the
year ended December 31, 2005 is hereby incorporated by
reference
|
EXHIBIT
3.2
|
By
–laws - filed as Exhibit 3(ii) to the Company’s current report on Form 8-K
filed on December 16, 2009 is hereby incorporated by
reference
|
EXHIBIT
4.1
|
Form
of Common Stock Certificate
|
EXHIBIT
4.2
|
Form
of Subordinated Note (incorporated by reference to Exhibit 4.1 to the
Company’s Current Report on Form 8-K dated August 28,
2009)
|
EXHIBIT
10.1
|
Dividend
Reinvestment Plan – filed as Exhibit 99.1 to the Company’s Amended
Registration Statement on Form S-3 as filed on July 19, 2009 is hereby
incorporated by reference
|
EXHIBIT
10.2
|
2000
Stock Incentive Plan - filed as Exhibit 10.2 to the Company’s Form 10-K
for the year ended December 31, 2004 is hereby incorporated by
reference
|
EXHIBIT
10.3
|
2000
Independent Directors Stock Option Plan - filed as Exhibit 10.3 to the
Company’s Form 10-K for the year ended December 31, 2004 is hereby
incorporated by reference
|
EXHIBIT
10.4
|
Directors’
and Officers’ Deferred Compensation Plan - filed as Exhibit 10.4 to the
Company’s Form 10-K for the year ended December 31, 2004 is hereby
incorporated by reference
|
EXHIBIT
10.5
|
Discretionary
Cash Bonus Plan Description
|
EXHIBIT
13
|
Annual
Report
|
EXHIBIT
14
|
Code
of Ethics - filed as Exhibit 14 to the Company’s Form 10-K for the year
ended December 31, 2005 is hereby incorporated by
reference
|
EXHIBIT
21
|
Subsidiaries
|
EXHIBIT
31.1
|
Certification
of Chief Executive Officer
|
EXHIBIT
31.2
|
Certification
of Chief Financial Officer
|
EXHIBIT
32.1
|
Section
1350 Certification – Chief Executive Officer
|
EXHIBIT
32.2
|
Section
1350 Certification – Chief Financial
Officer
|
Pursuant
to the requirements of Section 13 or 15(d) 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:
Registrant: FIRST
NATIONAL COMMUNITY BANCORP, INC.
/s/
Gerard A. Champi
|
||
Gerard
A. Champi
Interim
President/Chief Executive Officer
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||
/s/
Linda A. D’Amario
|
||
Linda
A. D’Amario
Interim
Principal Financial Officer
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||
Date: March 10, 2010
|
||
Pursuant
to the requirements of the Securities Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated:
Directors:
Michael
J. Cestone, Jr.
|
Date
|
Louis
A. DeNaples
|
Date
|
|||
/s/
Joseph Coccia
|
March
10, 2010
|
/s/
Louis A. DeNaples, Jr.
|
March
10, 2010
|
|||
Joseph
Coccia
|
Date
|
Louis
A. DeNaples, Jr.
|
Date
|
|||
/s/
William P. Conaboy
|
March
10, 2010
|
|||||
William
P. Conaboy
|
Date
|
Joseph
J. Gentile
|
Date
|
|||
/s/
Dominick L. DeNaples
|
March
10, 2010
|
/s/
John P. Moses
|
March
10, 2010
|
|||
Dominick
L. DeNaples
|
Date
|
John
P. Moses
|
Date
|
|||