Attached files

file filename
EX-32.1 - EX-32.1 - FNCB Bancorp, Inc.a11-23880_1ex32d1.htm
EX-31.1 - EX-31.1 - FNCB Bancorp, Inc.a11-23880_1ex31d1.htm
EX-31.2 - EX-31.2 - FNCB Bancorp, Inc.a11-23880_1ex31d2.htm

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

Amendment No. 1

 


 

FORM 10-Q/A

(Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended March 31, 2010

 

OR

 

o

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

 

 

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

 

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 o

 

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 o  NO o

 

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer o

 

Accelerated Filer x

 

 

 

Non-Accelerated Filer o

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o  NO x

 

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

 

Common Stock, $1.25 par value

 

16,441,319 shares

(Title of Class)

 

(Outstanding at November 29, 2011)

 

 

 



Table of Contents

 

FIRST NATIONAL COMMUNITY BANCORP, INC.

 

TABLE OF CONTENTS

 

 

 

 

Page
 No.

 

Explanatory Note

 

3

PART I
FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

Consolidated Balance Sheets as of March 31, 2010 and March 31, 2009 (unaudited)

 

4

 

 

 

 

 

Consolidated Statements of Operations for the Three Months Ended March 31, 2010 and 2009 (unaudited)

 

5

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009 (unaudited)

 

6

 

Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2010 and 2009 (unaudited)

 

7

 

Notes to Consolidated Financial Statements

 

8

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

35

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

57

 

 

 

 

Item 4.

Controls and Procedures

 

57

 

 

 

 

PART II
OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

 

58

 

 

 

 

Item 1A.

Risk Factors

 

58

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

58

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

58

 

 

 

 

Item 4.

[Removed and Reserved]

 

58

 

 

 

 

Item 5.

Other Information

 

58

 

 

 

 

Item 6.

Exhibits

 

58

 

 

 

 

Signatures

 

 

60

 

2



Table of Contents

 

EXPLANATORY NOTE

 

This Amendment No. 1 (“Amendment”) on Form 10-Q/A to the Quarterly Report on Form 10-Q of First National Community Bancorp, Inc.  (the “Company”) for the quarterly period ended March 31, 2010, filed with the Securities and Exchange Commission (“SEC”) on May 10, 2010 (the “Original Report”) is being filed to revise and restate the Company’s consolidated financial statements for the three-month period ended March 31, 2010 that were filed with the Original Report to correct certain information and to address the impact of such changes on other disclosures included in the Original Report.  The Company has previously advised that the financial statements for March 31, 2010 included in the Original Report should no longer be relied upon.

 

In particular, this Amendment:

 

·                  amends and restates in their entirety the consolidated financial statements of the Company, and the notes thereto, included in Item 1 hereof, to appropriately reflect (i) the accounting for and timing of charges related to other than temporary impairment (OTTI) of the collateralized debt obligations in the Company’s securities investment portfolio, (ii) the determination of the Company’s provision and allowance for loan and lease losses, (iii) the provision for off-balance sheet commitments, (iv) the accounting for deferred loan fees and costs, (v) the related effect on the Company’s deferred tax assets and  valuation allowance and (vi) other miscellaneous accounting issues;

·                  amends and revises Management’s Discussion and Analysis of Financial Condition and Results of Operations to reflect the restated consolidated financial statements;

·                  revises the disclosures regarding, and management’s assessment of, the Company’s disclosure controls and procedures and internal control over financial reporting to reflect current management’s determination that material weaknesses in such controls existed at March 31, 2010;

·                  provides additional disclosure regarding non-performing assets, including those loans extended to insiders or affiliates thereof;

·                  provides information relating to the Company’s and Bank’s regulatory orders entered into after the date of the Original Report to provide context for the amendments included in this document; and

·                  revises and corrects disclosure in response to comments from the SEC.

 

Other than as noted above, the Company is not required to and has not updated any forward-looking statements previously included in the Original Report. The Company has made no attempt in this Amendment to modify or update the disclosures presented in the Original Report other than as noted above.  Other than as noted above or reflected in this Explanatory Note, this Amendment does not reflect events occurring after the filing of the Original Report except to the extent information learned after the Original Report was filed relates to periods prior to March 31, 2010.  This Amendment is being filed in conjunction with amendments to the Company’s annual report on Form 10-K/A for the annual period ended December 31, 2009 and to its quarterly report on Form 10-Q/A for the quarterly period ended June 30, 2010.  The Company plans to file shortly its annual report on Form 10-K for the year ended December 31, 2010 and its quarterly reports on Form 10-Q for the quarterly periods ended September 30, 2010, March 31, 2011, June 30, 2011 and September 30, 2011.  This Amendment should be read in conjunction with all such filings and all such filings should be read in their entirety.

 

As indicated above, the Company has restated its financial statements for the quarter ended March 31, 2010.  The Company has also restated its financial statements for the year ended December 31, 2009.  Unless otherwise indicated, the discussion in this Amendment gives effect to these restatements of the Company’s financial statements.

 

In the first half of 2011, the Company received document subpoenas from the SEC.  The information requested generally relates to disclosure and financial reporting by the Company and the restatement of the Company’s financial statements for the year ended December 31, 2009, and the quarters ended March 31, 2010 and June 30, 2010.  The Company is cooperating with the SEC in this matter.

 

Readers should review the risk factors described in other documents that the Company files or furnishes, from time to time, with the SEC, including Annual Reports to Shareholders, Annual Reports filed on Form 10-K, Form 10-Q and other current reports filed or furnished on Form 8-K and any amendments to such reports.

 

3



Table of Contents

 

PART I Financial Information

 

Item 1 — Financial Statements

 

FIRST NATIONAL COMMUNITY BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (unaudited)

 

 

 

March 31, 2010

 

December 31, 2009

 

(in thousands, except for share data)

 

(as restated)

 

(as restated)

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

Cash and due from banks

 

$

19,177

 

$

24,189

 

Federal funds sold

 

61,050

 

62,175

 

Total cash and cash equivalents

 

80,227

 

86,364

 

Securities:

 

 

 

 

 

Available-for-sale, at fair value

 

240,092

 

252,946

 

Held-to-maturity, at cost (fair value $1,824 and $1,788)

 

1,922

 

1,899

 

Loans held for sale

 

384

 

442

 

Loans, net of allowance for loan and lease losses of $25,505 and $22,458

 

908,202

 

917,516

 

Bank premises and equipment

 

20,750

 

20,667

 

Accrued interest receivable

 

3,849

 

4,245

 

Intangible assets

 

1,780

 

1,794

 

Other assets

 

87,465

 

80,459

 

Total Assets

 

$

1,344,671

 

$

1,366,332

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Deposits:

 

 

 

 

 

Demand

 

$

79,267

 

$

85,370

 

Interest-bearing demand

 

344,055

 

352,631

 

Savings

 

93,663

 

86,455

 

Time ($100,000 and over)

 

236,540

 

238,839

 

Other time

 

299,959

 

308,313

 

Total deposits

 

1,053,484

 

1,071,608

 

FHLB advances

 

180,177

 

183,830

 

Subordinated debentures

 

25,000

 

23,100

 

Junior subordinated debentures

 

10,310

 

10,310

 

Other debt

 

209

 

227

 

Accrued interest payable

 

2,766

 

3,064

 

Other liabilities

 

10,821

 

11,109

 

Total liabilities

 

1,282,767

 

1,303,248

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

Common shares ($1.25 par)

 

 

 

 

 

Authorized: 50,000,000 shares as of March 31, 2010 and December 31, 2009

 

 

 

 

 

Issued and outstanding: 16,299,456 shares at March 31, 2010 and 16,289,970 shares at December 31, 2009

 

20,374

 

20,362

 

Additional paid-in capital

 

61,224

 

61,190

 

Retained earnings

 

(6,987

)

(6,162

)

Accumulated other comprehensive loss

 

(12,707

)

(12,306

)

Total shareholders’ equity

 

61,904

 

63,084

 

Total Liabilities and Shareholders’ Equity

 

$

1,344,671

 

$

1,366,332

 

 

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

4



Table of Contents

 

FIRST NATIONAL COMMUNITY BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

 

 

 

2010

 

 

 

For The Three Months Ended March 31, (in thousands, except share data)

 

(as restated)

 

2009

 

Interest income

 

 

 

 

 

Interest and fees on loans

 

$

12,132

 

$

13,358

 

Interest and dividends on securities:

 

 

 

 

 

U.S. Treasury and government agencies

 

1,492

 

1,805

 

State and political subdivisions

 

1,400

 

1,220

 

Other securities

 

99

 

467

 

Total interest and dividends on securities

 

2,991

 

3,492

 

Interest on federal funds sold

 

36

 

 

Total interest income

 

15,159

 

16,850

 

Interest expense

 

 

 

 

 

Interest-bearing demand

 

1,032

 

725

 

Savings

 

129

 

120

 

Time ($100,000 and over)

 

931

 

1,024

 

Other time

 

1,940

 

2,276

 

Interest on FHLB Advances

 

1,451

 

1,899

 

Interest on subordinated debentures

 

539

 

 

Interest on junior subordinated debentures

 

50

 

91

 

Interest on other debt

 

 

48

 

Total interest expense

 

6,072

 

6,183

 

Net interest income before provision for loan and lease losses

 

9,087

 

10,667

 

Provision for loan and lease losses

 

5,108

 

2,460

 

Net interest income after provision for loan and lease losses

 

3,979

 

8,207

 

Other income (loss)

 

 

 

 

 

Service charges

 

649

 

687

 

Net gain on the sale of securities

 

1,196

 

527

 

Gross other-than-temporary impairment (“OTTI”) losses

 

(8,235

)

 

Portion of loss recognized in OCI (before taxes)

 

7,889

 

 

Other-than-temporary impairment losses recognized in earnings

 

(346

)

 

Net gain on the sale of loans

 

248

 

546

 

Net gain on the sale of other real estate

 

 

 

Net gain on the sale of other assets

 

 

 

Other

 

834

 

663

 

Total other income

 

2,581

 

2,423

 

Other expenses

 

 

 

 

 

Salaries and employee benefits

 

3,108

 

3,332

 

Occupancy expense

 

647

 

615

 

Equipment expense

 

432

 

455

 

Advertising expense

 

119

 

240

 

Data processing expense

 

487

 

436

 

FDIC assessment

 

469

 

240

 

Bank shares tax

 

255

 

217

 

Expenses of other real estate

 

135

 

 

Legal expense

 

148

 

47

 

Other operating expenses

 

1,585

 

1,095

 

Total other expenses

 

7,385

 

6,677

 

Income (loss) before income taxes

 

(825

)

3,953

 

Provision (credit) for income taxes

 

 

715

 

Net income (loss)

 

$

(825

)

$

3,238

 

 

 

 

 

 

 

Earnings (Loss) Per Share:

 

 

 

 

 

Basic

 

$

(0.05

)

$

0.20

 

Diluted

 

$

(0.05

)

$

0.20

 

 

 

 

 

 

 

Cash Dividends Declared per Common Share

 

$

 

$

0.11

 

 

 

 

 

 

 

Weighted average number of outstanding shares:

 

 

 

 

 

Basic

 

16,294,291

 

16,064,455

 

Diluted

 

16,294,291

 

16,106,478

 

 

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

5



Table of Contents

 

FIRST NATIONAL COMMUNITY BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

 

 

 

2010

 

 

 

For The Three Months Ended March 31, (in thousands)

 

(as restated)

 

2009

 

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Interest received

 

$

14,799

 

$

16,544

 

Fees and commissions received

 

1,483

 

1,379

 

Interest paid

 

(6,369

)

(7,284

)

Cash paid to suppliers and employees

 

(9,371

)

(8,528

)

Income taxes (paid)

 

 

(1,132

)

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

542

 

979

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

Proceeds from sales

 

24,687

 

9,142

 

Proceeds from calls, paydowns and maturities

 

8,035

 

13,538

 

Purchases

 

(19,194

)

(8,354

)

Net (decrease)/increase in loans to customers

 

80

 

(19,878

)

Capital expenditures

 

(437

)

(283

)

NET CASH PROVIDED BY/(USED IN) INVESTING ACTIVITIES

 

13,171

 

(5,835

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Net decrease in demand deposits, money market demand, NOW accounts and savings accounts

 

(7,472

)

(10,764

)

Net decrease in certificates of deposit

 

(10,653

)

24,912

 

Proceeds from issuance of subordinated debentures

 

1,900

 

 

Net decrease in borrowed funds

 

(3,671

)

(9,050

)

Proceeds from issuance of common shares, net of share issuance costs

 

46

 

889

 

Cash dividends paid

 

 

(1,766

)

NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES

 

(19,850

)

4,221

 

 

 

 

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

 

(6,137

)

(635

)

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

86,364

 

18,171

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

80,227

 

$

35,636

 

 

 

 

 

 

 

RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES:

 

 

 

 

 

Net income (loss)

 

$

(825

)

$

17,536

 

 

 

 

 

 

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Amortization and accretion, net

 

(754

)

(952

)

Equity in trust

 

(1

)

(2

)

Depreciation and amortization

 

441

 

458

 

Provision for loan and lease losses

 

5,108

 

2,460

 

Provision/(benefit) for deferred taxes

 

 

(56

)

Gain on sale of securities

 

(1,196

)

(527

)

Increase/(decrease) in taxes payable

 

 

(505

)

Other-than-temporary impairment losses

 

346

 

 

Gain on sale of loans

 

(248

)

(546

)

Increase/(decrease) in interest payable

 

(298

)

(1,101

)

Decrease in accrued expenses and other liabilities

 

(123

)

(538

)

Increase in prepaid expenses and other assets

 

(2,304

)

(1,596

)

(Increase)/decrease increase in interest receivable

 

396

 

646

 

 

 

 

 

 

 

Total adjustments

 

1,367

 

(2,259

)

 

 

 

 

 

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

$

542

 

$

979

 

 

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

6



Table of Contents

 

FIRST NATIONAL COMMUNITY BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (unaudited)

For the three months ended March 31, 2010 and 2009 (in thousands, except for share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

ACCUMULATED

 

 

 

 

 

 

 

 

 

 

 

ADD’L

 

 

 

OTHER

 

 

 

 

 

COMPREHENSIVE

 

COMMON SHARES

 

PAID-IN

 

RETAINED

 

COMPREHENSIVE

 

 

 

 

 

INCOME (LOSS)

 

SHARES

 

AMOUNT

 

CAPITAL

 

EARNINGS

 

INCOME/(LOSS)

 

TOTAL

 

Balances, December 31, 2008

 

 

 

16,047,928

 

$

20,060

 

$

59,591

 

$

40,892

 

$

(20,201

)

$

100,342

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income for the period

 

$

3,238

 

 

 

 

 

 

 

3,238

 

 

 

3,238

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss on securities available-for-sale, net of deferred income tax benefit of $4,398

 

(8,169

)

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification adjustment for gain or loss included in income (tax effect of $184)

 

343

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive loss, net of tax

 

(7,826

)

 

 

 

 

 

 

 

 

(7,826

)

(7,826

)

Comprehensive loss

 

$

(4,588

)

 

 

 

 

 

 

 

 

(7,826

)

(4,588

)

Share-based compensation - Stock Option Plans

 

 

 

 

 

 

 

159

 

 

 

 

 

159

 

Issuance of common shares through dividend reinvestment

 

 

 

106,248

 

133

 

756

 

 

 

 

 

889

 

Cash dividends paid, $0.11 per share

 

 

 

 

 

 

 

 

 

(1,765

)

 

 

(1,765

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, March 31, 2009

 

 

 

16,154,176

 

$

20,193

 

$

60,506

 

$

42,365

 

$

(28,027

)

$

95,037

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, December 31, 2009 (as restated)

 

 

 

16,289,970

 

$

20,362

 

$

61,190

 

$

(6,162

)

$

(12,306

)

$

63,084

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income for the period

 

$

(825

)

 

 

 

 

 

 

(825

)

 

 

(825

)

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss on securities available for sale net of deferred tax benefit of $10,365

 

(19,245

)

 

 

 

 

 

 

 

 

 

 

 

 

Noncredit related gains on securities not expected to be sold, net of deferred taxes of $9,729

 

18,067

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification adjustment for gain or loss included in income (tax effect of $419)

 

777

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive loss, net of tax

 

(401

)

 

 

 

 

 

 

 

 

(401

)

(401

)

Comprehensive Loss

 

$

(1,226

)

 

 

 

 

 

 

 

 

(401

)

(1,226

)

Proceeds from issuance of Common Shares through dividend reinvestment

 

 

 

9,486

 

12

 

34

 

 

 

 

 

46

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, March 31, 2010 (as restated)

 

 

 

16,299,456

 

$

20,374

 

$

61,224

 

$

(6,987

)

$

(12,707

)

$

61,904

 

 

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

7



Table of Contents

 

FIRST NATIONAL COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Notes to Consolidated Financial Statements

 

Note 1.   Basis of Presentation

 

The consolidated financial statements of the Company include the accounts of its bank subsidiary, First National Community Bank and its wholly-owned subsidiaries. All inter-company transactions and balances have been eliminated. The accounting and reporting policies of the Company conform to U.S. Generally Accepted Accounting Principles (“GAAP”) and general practices within the financial services industry. Certain prior period amounts have been reclassified to conform to the current presentation. In accordance with current accounting guidance, the Company has evaluated subsequent events for potential recognition and/or disclosure in the consolidated financial statements and accompanying notes included thereto through the date the financial statements were filed.  In the opinion of management, all adjustments necessary to a fair statement of the results for the quarterly period ended March 31, 2010 have been included.

 

In preparing the consolidated financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheets and results of operations for the periods indicated. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to change are the allowance for loan and lease losses (“ALLL”), security valuations, the evaluation of deferred income taxes, and the evaluation of intangibles (which includes core deposits and loan servicing rights) and investment securities for impairment. The current economic environment has increased the degree of uncertainty inherent in these material estimates.

 

On July 1, 2009, the Accounting Standards Codification (“ASC”) became the Financial Accounting Standards Board’s (the “FASB”) officially recognized source of authoritative U.S. GAAP applicable to all public and non-public non-governmental entities, superseding all existing FASB, American Institute of Certified Public Accountants (“AICPA”), Emerging Issues Task Force (“EITF”) and related literature. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative guidance for SEC registrants. All other accounting literature is considered non-authoritative. The issuance of the ASC affects the way companies refer to U.S. GAAP in financial statements and other disclosures. See the “New Authoritative Accounting Guidance” section below for a description of recent accounting pronouncements including the dates of adoption and the effect on the results of operations and financial condition.

 

Certain reclassifications have been made to the prior year’s consolidated financial statements that conform to the current year’s presentation.  Such reclassifications had no impact on net income.

 

These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s December 31, 2009 audited financial statements filed on Form 10-K/A and the Company’s June 30, 2010 unaudited financial statements filed on Form 10-Q/A.  Additionally, the Company plans to file shortly its annual report on Form 10-K for the year ended December 31, 2010 and its quarterly reports on Form 10-Q for the quarterly periods ended September 30, 2010, March 31, 2011, June 30, 2011 and September 30, 2011.  This Amendment should also be read in conjunction with all such filings and all such filings should be read in their entirety.

 

Note 2.   Restatement of Consolidated Financial Statements

 

The Company concluded that it would revise its financial statements to properly account for its ALLL, the provision for off-balance sheet commitments, OTTI of the Company’s securities portfolio, deferred loan fees and costs, goodwill impairment charge and the accounting for the deferred tax asset.

 

The Company has revised its financial statements from those included in the Original Report as follows:

 

·                  Impaired loans, previously reflected as an increase to the specific component of the ALLL, have been charged off and the reserve reduced, resulting in a reduction in the loan balance and an increase to the provision for loan and lease losses. The general reserve component of the ALLL, previously based on one aggregated pool of unimpaired loans, was increased after assigning these loans to one of the three pools of “Pass,” “Special Mention” or “Accruing and Substandard” and applying  historical loss factors and varied qualitative factor basis point allocations based on the risk profile in each pool to determine the appropriate reserve related to those loans. The general reserve component of the ALLL also increased based on higher historical loss experience resulting from the increased loan charge offs for impaired loans.

·                  The reserve for off-balance sheet commitments was previously calculated using all commitments and assumed that these commitments would be fully funded. This methodology was revised to provide a reserve on letters of credit and construction commitments. In addition, individual analyses were performed on the aforementioned commitments to borrowers

 

8



Table of Contents

 

considered to be impaired. Based on these changes, the reserve for off-balance sheet commitments was reduced.

·                  OTTI with respect to our PreTSLs, previously calculated assuming that 50% of issuers who deferred would recover within two years and in reliance on one expected default rate for all issuers and on fair market value data obtained from two outside service providers, including a third party that had sold the Company the PreTSLs included in the securities portfolio, was recalculated using cash flow models assuming specific deferred issuers of securities default immediately, using default rates specific to each bank issuer based on an analysis of its financial trends, and employing certain assumptions in determining the fair value of the securities. The change in methodology resulted in additional impairment charges through earnings. As such, OTTI related to those impairments was reflected in the restated financial statements for the year ended December 31, 2009 in the Amended 2009 Form 10-K.

·                  A reduction in OTTI was recorded with respect to securities the issuers of which defaulted or deferred payments during the first quarter of 2010, after the Company reviewed its subsequent events analysis and determined that these events reflected issuer credit impairments that existed as of the fourth quarter of 2009. As such, OTTI related to those impairments was reflected in the restated financial statements for the year ended December 31, 2009 in the Amended 2009 Form 10-K.

·                  Additional loan fees and costs were capitalized and amortized after the Company determined that it had not capitalized a sufficient portion of loan fees and costs and had not done so consistently by loan type.

·                  In response to the significant loss reported by the Company in 2009 and the reduction in the market capitalization of the Company’s common shares, the Company’s goodwill was evaluated for impairment as of December 31, 2009 and, as a result of the analysis, $8.1 million of goodwill that arose in connection with the Company’s acquisition of its Honesdale, PA branch was charged off as of December 31, 2009.

·                  Recorded adjustments to the income tax benefit and the deferred tax asset and related reserve to reflect the changes to the financial statements.

 

The following table sets forth the consolidated restated financial statements for the quarterly period ended March 30, 2010 previously filed in its Original Report.

 

The following is a summary of the adjustments to the Company’s previously filed consolidated balance sheets as of March 31, 2010:

 

9



Table of Contents

 

FIRST NATIONAL COMMUNITY BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (unaudited)

 

 

 

March 31, 2010

 

Adjustments

 

Reclassifications

 

March 31, 2010

 

(in thousands)

 

As Reported

 

Increase (Decrease)

 

Increase (Decrease)

 

As Restated

 

Assets

 

 

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

19,177

 

$

 

$

 

$

19,177

 

Federal funds sold

 

61,050

 

 

 

61,050

 

Total cash and cash equivalents

 

80,227

 

 

 

80,227

 

Securities:

 

 

 

 

 

 

 

 

 

Available-for-sale, at fair value (b) (c) (i)

 

246,959

 

(6,867

)

 

240,092

 

Held-to-maturity, at cost (fair value $1,824)

 

1,922

 

 

 

1,922

 

Federal Reserve Bank and FHLB Stock, at cost (j)

 

12,069

 

 

(12,069

)

 

Loans held for sale (o)

 

 

384

 

 

384

 

Loans, net of allowance for loan and losses of $25,505 (originally reported at $23,322) (d) (e) (g) (h)

 

920,302

 

(12,100

)

 

908,202

 

Accrued interest receivable (c) (p)

 

 

59

 

3,790

 

3,849

 

Bank premises and equipment

 

20,750

 

 

 

20,750

 

Intangible assets (l)

 

9,914

 

(8,134

)

 

1,780

 

Other assets (j) (k) (p) (o)

 

83,450

 

(4,264

)

8,279

 

87,465

 

Total Assets

 

$

1,375,593

 

$

(30,922

)

$

 

$

1,344,671

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

Demand (q)

 

$

79,266

 

$

1

 

$

 

$

79,267

 

Interest-bearing demand

 

344,055

 

 

 

344,055

 

Savings

 

93,663

 

 

 

93,663

 

Time ($100,000 and over)

 

236,540

 

 

 

236,540

 

Other time

 

299,959

 

 

 

299,959

 

Total deposits

 

1,053,483

 

1

 

 

1,053,484

 

Borrowed funds (m)

 

190,696

 

 

(190,696

)

 

FHLB advances (m)

 

 

 

180,177

 

180,177

 

Subordinated debentures

 

25,000

 

 

 

25,000

 

Junior subordinated debentures (m)

 

 

 

10,310

 

10,310

 

Other debt (m)

 

 

 

 

209

 

209

 

Accrued interest payable (r)

 

 

 

2,766

 

2,766

 

Other liabilities (r) (a) (n)

 

13,723

 

(1,030

)

(1,872

)

10,821

 

Total Liabilities

 

1,282,902

 

(1,029

)

894

 

1,282,767

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

 

 

 

 

Common stock, ($1.25 par)

 

 

 

 

 

 

 

 

 

Authorized 50,000,000 shares as of March 31, 2010 Issued and outstanding: 16,299,456 shares at March 31, 2010

 

20,374

 

 

 

 

 

20,374

 

Additional paid-in capital

 

61,224

 

 

 

 

 

61,224

 

Retained earnings (f)

 

28,813

 

(34,906

)

(894

)

(6,987

)

Accumulated other comprehensive loss (i)

 

(17,720

)

5,013

 

 

 

(12,707

)

Total shareholders’ equity

 

92,691

 

(29,893

)

(894

)

61,904

 

Total Liabilities and Shareholders’ Equity

 

$

1,375,593

 

$

(30,922

)

$

 

$

1,344,671

 

 

10



Table of Contents

 


(a)          Change in reserve for off-balance sheet commitments after change in methodology.

(b)         Adjustment for OTTI recorded on available-for-sale securities.

(c)          Reversal of interest capitalized for payments in kind.

(d)         Allowance for impaired loan and lease losses booked after change in methodology.

(e)          Additional charge-offs recorded on loans.

(f)            Reduction in retained earnings as a result of the net loss in the restated 2009 results as well as various adjustment entries booked as a result of the prior year and current quarter restatements.

(g)         To record loan fees and costs in accordance with ASC 310 Receivables.

(h)         Amortization of loan fees and costs in accordance with ASC 310 Receivables.

(i)             Reversal of Other Comprehensive Income for those securities where additional OTTI was recognized.

(j)             Reclassification of FHLB and FRB stock from Securities to Other Assets.

(k)          Record benefit for income taxes.

(l)             Adjust for the write down of goodwill recorded for the restatement of 2009 results.

(m)       Reclassification of FHLB advances, junior subordinated debentures and other debt from borrowed funds.

(n)         Adjustment to accrued expenses.

(o)         Reclassification of loans held for sale from other assets to properly present loans held for sale.

(p)         Reclassification of accrued interest receivable from other assets.

(q)         Adjustment for rounding.

(r)            Reclassification of accrued interest payable from other liabilities.

 

The following is a summary of the adjustments to our previously issued consolidated statements of operations for the three months ended March 31, 2010:

 

11



Table of Contents

 

FIRST NATIONAL COMMUNITY BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

 

For the three months ended March 31, 2010 

 

March 31, 2010

 

Three months ended

 

March 31, 2010

 

(in thousands)

 

As reported

 

Adjustments

 

Reclassifications

 

As restated

 

Interest income

 

 

 

 

 

 

 

 

 

Interest and fees on loans (g) (h)

 

$

12,188

 

$

(56

)

$

 

$

12,132

 

Interest and dividends on securities:

 

 

 

 

 

 

 

U.S. Treasury and government agencies

 

1,492

 

 

 

1,492

 

State and political subdivisions

 

1,400

 

 

 

1,400

 

Other securities (q)

 

181

 

(82

)

 

99

 

Total interest and dividends on securities

 

3,073

 

(82

)

 

2,991

 

Interest on federal funds sold

 

36

 

 

 

 

 

36

 

Total interest income

 

15,297

 

(138

)

 

15,159

 

Interest expense

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

Interest-bearing demand

 

1,032

 

 

 

1,032

 

Savings

 

129

 

 

 

129

 

Time ($100,000 and over)

 

931

 

 

 

931

 

Other time

 

1,940

 

 

 

1,940

 

Total deposits

 

4,032

 

 

 

4,032

 

Borrowed funds interest expense (l)

 

1,501

 

 

(1,501

)

 

Interest on FHLB Advances (l)

 

 

 

1,451

 

1,451

 

Interest on subordinated debentures

 

539

 

 

 

539

 

Interest on junior subordinated debentures (l)

 

 

 

50

 

50

 

Interest on other debt (l)

 

 

 

 

 

Total interest expense

 

6,072

 

 

 

6,072

 

Net interest income before provision for credit losses

 

9,225

 

(138

)

 

9,087

 

Provision for loan and lease losses (d)

 

2,802

 

2,306

 

 

5,108

 

Net interest income after provision for loan and lease losses

 

6,423

 

(2,444

)

 

3,979

 

Other income

 

 

 

 

 

 

 

 

 

Service charges (e)

 

650

 

(1

)

 

 

649

 

Net gain on the sale of securities

 

1,196

 

 

 

 

1,196

 

Gross other-than-temporary impairment (“OTTI”) losses (b)

 

(31,428

)

(23,193

)

 

 

(8,235

)

Portion of loss recognized in other comprehensive income (before taxes) (b)

 

30,513

 

(22,624

)

 

 

7,889

 

Net impairment losses recognized in earnings (b)

 

(915

)

(569

)

 

(346

)

Net gain on the sale of loans (c)

 

273

 

(25

)

 

 

248

 

Other (f)

 

658

 

 

176

 

834

 

Total other income

 

1,862

 

(595

)

176

 

2,581

 

Other expenses

 

 

 

 

 

 

 

 

 

Salaries and employee benefits (f) (g) 

 

3,120

 

(142

)

130

 

3,108

 

Occupancy expense (i) (n)

 

1,067

 

12

 

(432

)

647

 

Equipment expense (i)

 

 

 

 

432

 

432

 

Advertising expense (m)

 

225

 

(106

)

 

119

 

Data processing expense

 

487

 

 

 

 

 

487

 

FDIC Assessment

 

469

 

 

 

 

 

469

 

Bank shares tax

 

255

 

 

 

 

 

255

 

Expense of other real estate (n)

 

120

 

15

 

 

 

135

 

Provision for off-balance sheet commitments (a) (p)

 

(1,031

)

 

 

1,031

 

 

Legal expense (k)

 

 

 

 

26

 

26

 

Other operating expenses (o) (p) (k)

 

1,670

 

1,094

 

(1,057

)

1,707

 

Total other expenses

 

6,382

 

873

 

130

 

7,385

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

1,903

 

(1,834

)

(894

)

(825

)

Provision (credit) for income taxes (j)

 

(56

)

56

 

 

 

 

Net income (loss)

 

$

1,959

 

$

(1,890

)

$

(894

)

$

(825

)

Loss Per Share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.12

 

$

(0.12

)

$

(0.05

)

$

(0.05

)

Diluted

 

$

0.12

 

$

(0.12

)

$

(0.05

)

$

(0.05

)

Weighted Average Number of Shares Outstanding

 

 

 

 

 

 

 

 

 

Basic

 

16,294,291

 

 

 

 

 

16,294,291

 

Diluted

 

16,658,009

 

(363,718

)

 

 

16,294,291

 

 


(a)          Change in reserve for off-balance sheet commitments after change in methodology.

(b)         Adjustment to reduce OTTI recorded on available-for-sale securities as losses recorded in the 1st quarter of 2010 were pushed back to 12/31/09 as part of the adjustments related to the restatement of the 2009 10K.

(c)          Adjustment to reverse the gain booked on Loans, held for sale.

 

12



Table of Contents

 

(d)         Provision for loan and lease losses adjusted after change in methodology.

(e)          Adjustment for rounding.

(f)            Reclassification of Bank Owned Life Insurance Income from expense to income.

(g)         To record loan fees and costs in accordance with ASC 310 Receivables.

(h)         Amortization of loan fees and costs in accordance with ASC 310 Receivables.

(i)             Reclassification of Equipment expense from being included in Occupancy expense.

(j)             Reverse income tax benefit.

(k)          Reclassification of Legal expense from being included in Other operating expenses.

(l)             Reclassification of interest on borrowed funds to interest on FHLB advances, interest on junior subordinated debentures and interest on other debt.

(m)       To adjust and reduce expense related to an over accrual.

(n)         To adjust and increase expense related to an under accrual.

(o)         Reclassification of mortgage servicing rights amortization expense from being netted against loan servicing fee income.

(p)         Reclassification of provision for off balance sheet commitments to other operating expenses.

(q)         Reversal of accrued interest on Pooled Trust Preferred Securities.

 

Note 3.   New Authoritative Accounting Guidance

 

On January 1, 2010, the Company adopted the provisions of the Accounting Standards Codification (“ASC”) Topic 860-10-50, Transfers and Servicing- Overall-Disclosures as updated by Accounting Standards Update (“ASU”) 2009-16, Accounting for Transfers of Financial Assets. The standard enhances the reporting for transfers of financial assets, including securitization transactions.  It also requires companies to report where they have continuing exposure to the risks related to transferred financial assets and eliminates the concept of a “qualifying special-purpose entity.”  In addition, it changes the requirements for derecognizing financial assets and requires additional disclosures about all continuing involvements with transferred financial assets, including information about gains and losses resulting from transfers during the period.  This standard also requires additional year-end and interim disclosures. The standard must be applied to transfers that occurred before and after its effective date. The adoption of ASC Topic 860-10-50 had no impact on the Company’s financial statements.

 

On January 1, 2010, the Company adopted ASC topic 810-10-50, Consolidation-Overall-Disclosures as amended by ASU 2009-17, Consolidation Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated.  The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance.  This standard also requires additional disclosures about the reporting entity’s involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its effect on the entity’s financial statements.  The standard also requires additional year-end and interim disclosures.  In February 2010, ASU 2010-10, Consolidation: Amendments for Certain Investment Funds was issued which provides an indefinite deferral of ASC topic 810-10 for certain entities.  Entities that meet the criteria for deferral of consolidation guidance are still required to provide disclosures required by the topic.  The update also clarifies how a related party’s interests in an entity should be considered when evaluating the criteria for determining whether a decision maker or service provider fee represents a variable interest.  It clarifies that a quantitative calculation should not be the only basis for evaluating whether a decision maker’s or service provider’s fee is a variable interest. The adoption of ASC Topic 810-10-50 had no impact on the Company’s financial statements.

 

In January 2010, a clarification ASU 2010-06, Fair Value and Disclosures, Improving Disclosures about Fair Value Measurements was issued for ASC topic 820-10-50, Fair Value Measurements and Disclosures.   The amendments in ASU 2010-06 require companies to provide a separate disclosure for transfers in and out of Levels 1 and 2, including a description of the reasons for the transfer.  The amendments also require companies to report activity in Level 3 fair value measurements on a gross basis, including information about purchases, sales, issuances and settlements.  The amendments also clarify existing disclosures related to disaggregated reporting, model inputs and valuation techniques.  The new disclosures are effective for the first quarter of 2010, except for the gross reporting of Level 3 activity, which is effective beginning the first quarter of 2011. These amendments resulted in additional disclosures in our interim and annual reports.  The applicable new disclosures have been included in Note 8.

 

Note 4.   Regulatory Matters

 

The Company is subject to various regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material adverse effect on the Company’s financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices must be met.  Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

 

13



Table of Contents

 

Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined).

 

Currently, the Company’s and the Bank’s actual capital positions and ratios as of March 31, 2010 and December 31, 2009 are presented in the following table :

 

CAPITAL ANALYSIS

(in thousands)

 

 

 

March 31,
2010
(as restated)

 

December 31,
2009
(as restated)

 

COMPANY

 

 

 

 

 

 

 

 

 

 

 

Tier I Capital:

 

 

 

 

 

Total Tier I Capital

 

$

84,435

 

$

84,365

 

Tier II Capital:

 

 

 

 

 

Subordinated notes

 

$

25,000

 

23,100

 

Allowable portion of allowance for loan and lease losses

 

14,342

 

14,594

 

Total Tier II Capital

 

$

39,342

 

37,694

 

Total Risk-Based Capital

 

$

123,777

 

122,059

 

Total Risk-Weighted Assets

 

$

1,134,722

 

$

1,158,157

 

 

 

 

 

 

 

BANK

 

 

 

 

 

 

 

 

 

 

 

Tier I Capital:

 

 

 

 

 

Total Tier I Capital

 

$

105,036

 

$

103,453

 

Tier II Capital:

 

 

 

 

 

Allowable portion of allowance for loan and lease losses

 

14,438

 

14,590

 

Total Tier II Capital

 

14,438

 

14,590

 

Total Risk-Based Capital

 

$

119,374

 

$

118,043

 

Total Risk-Weighted Assets

 

$

1,134,376

 

$

1,157,823

 

 

 

 

Actual

 

For Capital
 Adequacy Purposes

 

To Be Well
Capitalized
Under Prompt
Corrective
Action Provision

 

 

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

As of March 31, 2010: (as restated)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital
(to Risk Weighted Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$

123,777

 

10.91

%

$

 >90,778

 

>8.00

%

N/A

 

N/A

 

Bank

 

$

119,374

 

10.52

%

$

 >90,750

 

>8.00

%

$

 >113,438

 

>10.00

%

Tier I Capital
(to Risk Weighted Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$

84,435

 

7.44

%

$

 >45,389

 

>4.00

%

N/A

 

N/A

 

Bank

 

$

105,036

 

9.26

%

$

 >45,375

 

>4.00

%

$

 >68,063

 

>6.00

%

Tier I Capital
(to Average Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$

84,435

 

6.19

%

$

 >54,576

 

>4.00

%

N/A

 

N/A

 

Bank

 

$

105,036

 

7.68

%

$

 >54,704

 

>4.00

%

$

 >68,379

 

>5.00

%

 

14



Table of Contents

 

 

 

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 (as restated)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital
(to Risk Weighted Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$

122,059

 

10.54

%

$

 >92,653

 

>8.00

%

N/A

 

N/A

 

Bank

 

$

118,043

 

10.20

%

$

 >92,626

 

>8.00

%

$

 >115,782

 

>10.00

%

Tier I Capital
(to Risk Weighted Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$

84,365

 

7.28

%

$

 >46,326

 

>4.00

%

N/A

 

N/A

 

Bank

 

$

103,453

 

8.94

%

$

46,313

 

>4.00

%

$

>69,469

 

>6.00

%

Tier I Capital
(to Average Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$

84,365

 

5.94

%

$

 >56,853

 

>4.00

%

N/A

 

N/A

 

Bank

 

$

103,453

 

7.28

%

$

 >56,853

 

>4.00

%

$

 >71,067

 

>5.00

%

 

The Bank is under a Consent Order (“the Order”) from the Office of the Comptroller of the Currency (OCC) dated September 1, 2010.  The material provisions of the Order are as follows:

 

(i) By October 31, 2010, the Board of Directors of the Bank (the “Board”) is required to adopt and implement a three-year strategic plan which must be submitted to the OCC for review and prior determination of no supervisory objection; the strategic plan must establish objectives for the Bank’s overall risk profile, earnings performance, growth, balance sheet mix, off-balance sheet activities, liability structure, capital adequacy, reduction in the volume of nonperforming assets, product line development, and market segments that the Bank intends to promote or develop, and is to include strategies to achieve those objectives; if the strategic plan involves the sale or merger of the Bank, it must address the timeline and steps to be followed to provide for a definitive agreement within 90 days after the receipt of a determination of no supervisory objection;

 

(ii) by October 31, 2010, the Board is required to adopt and implement a three year capital plan, which must be submitted to the OCC for review and prior determination of no supervisory objection;

 

(iii) by November 30, 2010, the Bank is required to achieve and thereafter maintain a total risk-based capital equal to at least 13% of risk-weighted assets and a tier 1 capital equal to at least 9% of adjusted total assets;

 

(iv) the Bank may not pay any dividend or capital distribution unless it is in compliance with the higher capital requirements required by the Order, the Capital Plan, applicable legal requirements and, then only after receiving a determination of no supervisory objection from the OCC;

 

(v) by November 15, 2010, the Committee must review the Board and the Board’s committee structure; by November 30, 2010, the Board must prepare or cause to be prepared an assessment of the capabilities of the Bank’s executive officers to perform their past and current duties, including those required to respond to the most recent examination report, and to perform annual performance appraisals of each officer;

 

(vi) by October 31, 2010, the Board must adopt, implement and thereafter ensure compliance with a comprehensive conflict of interest policy applicable to the Bank’s and the Company’s directors, executive officers, principal shareholders and their affiliates and such person’s immediate family members and their related interests, employees, and by November 30, 2010, conduct a review of existing relationships with such persons to identify those, if any, not in compliance with the policy; and review all subsequent proposed transactions with such persons or modifications of transactions;

 

(vii) by October 31, 2010, the Board must develop, implement and ensure adherence to policies and procedures for Bank Secrecy Act (“BSA”) compliance; and account opening and monitoring procedures compliance;

 

15



Table of Contents

 

(viii) by October 31, 2010, the Board shall ensure the BSA audit function is supported by an adequately staffed department or third party firm; adopt implement and ensure compliance with an independent BSA audit; and assess the capabilities of the BSA officer and supporting staff to perform present and anticipated duties;

 

(ix) by October 31, 2010, the Board is required to adopt, implement and ensure adherence to a written credit policy, including specified features, to improve the Bank’s loan portfolio management;

 

(x) the Board is required to take certain actions to resolve certain credit and collateral exceptions;

 

(xi) by October 31, 2010, the Board is required to establish an effective, independent and ongoing loan review system to review, at least quarterly, the Bank’s loan and lease portfolios to assure the timely identification and categorization of problem credits; by October 31, 2010, to adopt and adhere to a program for the maintenance of an adequate allowance for loan and lease losses (“ALLL”), and to review the adequacy of the Bank’s ALLL at least quarterly;

 

(xii) by October 31, 2010, the Board must adopt and the Bank implement and adhere to a program to protect the Bank’s interest in criticized assets; and the Bank may only extend additional credit (including renewals) to a borrower whose loans are criticized under specified circumstances;

 

(xiii) by October 31, 2010, the Board must adopt and ensure adherence to action plans for each piece of other real estate owned;

 

(xiv) by November 30, 2010, the Board is required to develop, implement and ensure adherence to a policy for effective monitoring and management of concentrations of credit;

 

(xv) by October 31, 2010, the Board must revise and implement the Bank’s other-than-temporary impairment policy;

 

(xvi) by October 31, 2010, the Board must take action to maintain adequate sources of stable funding and liquidity and a contingency funding plan; by October 31, 2010, the Board is required to adopt, implement and ensure compliance with an independent, internal audit program; and

 

(xvii) take actions to correct cited violations of law; and adopt procedures to prevent future violations and address compliance management.

 

Federal Reserve Agreement On November 24, 2010, the Company entered into a written Agreement (the “Agreement”) with the Federal Reserve Bank of Philadelphia (the “Reserve Bank”). The Agreement requires the Company to undertake certain actions within designated timeframes, and to operate in compliance with the provisions thereof during its term. The material provisions of the Agreement include the following:

 

(i)            the Company’s Board must take appropriate steps to fully utilize the Company’s financial and managerial resources to serve as a source of strength to the Bank, including taking steps to ensure that the Bank complies with its Consent Order entered into with the OCC;

 

(ii)           the Company may not declare or pay any dividends without the prior written approval of the Reserve Bank and the Director of the Division of Banking Supervision and Regulation (the “Director”) of the FRB;

 

(iii)          the Company may not take dividends or other payments representing a reduction of the Bank’s capital without the prior written approval of the Reserve Bank;

 

(iv)          the Company and its nonbank subsidiary may not make any payment of interest, principal or other amounts on the Company’s subordinated debentures or trust preferred securities without the prior written approval of the Reserve Bank and the Director;

 

(v)           the Company may not make any payment of interest, principal or other amounts on debt owed to insiders of the Company without the prior written approval of the Reserve Bank and Director;

 

(vi)          the Company and its nonbank subsidiary may not incur, increase or guarantee any debt without the prior written approval of the Reserve Bank;

 

(vii)         the Company may not purchase or redeem any shares of its stock without the prior written approval of the Reserve Bank;

 

16



Table of Contents

 

(viii)        the Company must submit to the Reserve Bank, by January 23, 2011, an acceptable written plan to maintain sufficient capital at the Company on a consolidated basis.  Thereafter, the Company must notify the Reserve Bank within 45 days of the end of any quarter in which the Company’s capital ratios fall below the approved capital plan’s minimum ratios, and submit an acceptable written plan to increase the Company’s capital ratios above the capital plan’s minimums;

 

(ix)           the Company must immediately take all actions necessary to ensure that: (1) each regulatory report accurately reflects the Company’s condition on the date for which it is filed and all material transactions between the Company and its subsidiaries; (2) each such report is prepared in accordance with its instructions; and (3) all records indicating how the report was prepared are maintained for supervisory review;

 

(x)            the Company must submit to the Reserve Bank, by January 23, 2011, acceptable written procedures to strengthen and maintain internal controls to ensure all required regulatory reports and notices filed with the Board of Governors are accurate and filed in accordance with the instructions for preparation;

 

(xi)           the Company must submit to the Reserve Bank, by January 8, 2011, a cash flow projection for 2011, reflecting the Company’s planned sources and uses of cash, and submit a cash flow projection for each subsequent calendar year at least one month prior to the beginning of such year;

 

(xii)          the Company must comply with: (1) the notice provisions of Section 32 of the FDI Act and Subpart H of Regulation Y in appointing any new director or senior executive officer or changing the duties of any senior executive officer; and (2) the restrictions on indemnification and severance payments of Section 18(k) of the FDI Act and Part 359 of the FDIC’s regulations; and

 

(xiii)         the Board must submit written progress reports within 30 days of the end of each calendar quarter;

 

Since entering into the Order and the Agreement, the Company has incurred expenses in an effort to comply with the terms of these agreements.  In particular, the Company has incurred expenses in connection with developing and implementing policies and procedures and hiring additional personnel as required by the Order and the Agreement.  During 2010 and the first nine months of 2011, the Company incurred approximately $1.4 million and $851 thousand, respectively, of expenses related to entering into and complying with these regulatory agreements, consisting primarily of professional and consulting fees.  In addition, the Order and the Agreement place restrictions on the Company’s ability to borrow funds and to pay interest and dividends to its security holders.  In the future, the Company expects to continue to experience increased costs related to compliance with these regulatory agreements, primarily as a result of increased head count and also expects to face certain restrictions on its operations for as long as it continues to operate under the Order and the Agreement.  The Company expects, however, that future compliance expenses will decrease significantly from the 2010 and 2011 levels, because the majority of the expenses incurred to date are related to development and implementation of processes and policies that, once those policies and processes are finalized and implemented, are not expected to recur.

 

The Order and the Agreement have not and are not expected to have an impact on the Company’s ability to attract and maintain deposits or the Company’s cost of funds. In order to meet the increased capital requirements imposed under the Order and the Agreement, however, unless the Company is able to raise additional capital, the Company could be limited in the aggregate amount of loans it can have outstanding, which may constrain loan growth. While it is not anticipated that the Order and the Agreement will have an immediate impact on the Company’s net interest margin, the overall cost of compliance with the Order and the Agreement will continue to impact profitability at least through the end of 2012.

 

Note 5.   Loans

 

Major classifications of loans are summarized as follows (in thousands):

 

 

 

March 31,
2010

 

December 31,
2009

 

 

 

(as restated)

 

(as restated)

 

Residential real estate

 

$

142,146

 

$

137,520

 

Commercial real estate

 

309,252

 

317,408

 

Commercial and industrial loans

 

221,558

 

220,849

 

Construction Loans

 

89,855

 

98,383

 

Installment loans

 

123,131

 

128,392

 

Other loans

 

47,330

 

37,013

 

Gross loans

 

933,272

 

939,565

 

Less: Allowance for loan and lease losses

 

(25,505

)

(22,458

)

Unearned discount

 

(279

)

(298

)

Plus: Loan fees

 

714

 

707

 

Net loans

 

$

908,202

 

$

917,516

 

 

Changes in the allowance for loan and lease losses were as follows (in thousands):

 

 

 

Three months ended March 31

 

 

 

2010

 

2009

 

 

 

(as restated)

 

 

 

Balance, beginning of year

 

$

22,458

 

$

9,150

 

Recoveries credited to allowance

 

60

 

44

 

Provision for loan and lease losses

 

5,108

 

2,460

 

Total

 

27,626

 

11,654

 

Losses charged to allowance

 

(2,121

)

(376

)

Balance, end of period

 

$

25,505

 

$

11,278

 

 

Non-performing loans consist of nonaccrual loans and loans past due 90 days or more and still accruing.  At March 31, 2010 and

 

17



Table of Contents

 

December 31, 2009 the loans on nonaccrual totaled $29.5 million and $25.9 million, respectively.  OREO is included in other assets and totaled $15.1 million and $11.2 million at March 31, 2010 and December 31, 2009, respectively. The total recorded investment in loans past due ninety days or more and still accruing interest amounted to $1 thousand and $117 thousand at March 31, 2010 and December 31, 2009, respectively. At March 31, 2010, OREO consisted of sixteen properties with six of the properties comprising $14.5 million or 96% of the balance. Troubled debt restructurings were all performing in accordance with the restructured agreements as of March 31, 2010.  The total recorded investment in impaired loans, amounted to $44.9 million and $36.6 million at March 31, 2010 and December 31, 2009, respectively.

 

The additional interest income that would have been earned on nonaccrual and restructured loans outstanding at March 31, 2010 and March 31, 2009 in accordance with their original terms approximated $613 thousand and $611 thousand, respectively.  There was no interest income recognized on non-performing loans for cash payments received during the three months ended March 31, 2010 and March 31, 2009.

 

The following schedule reflects various non-performing lending categories as of the dates noted (in thousands):

 

 

 

March 31, 2010
(as restated)

 

December 31, 2009
(as restated)

 

Nonaccrual loans

 

$

29,465

 

$

25,865

 

Loans past due 90 days or more and still accruing

 

1

 

117

 

Total Non-Performing Loans

 

29,466

 

$

25,982

 

Other Real Estate Owned

 

15,100

 

11,184

 

Total Non-Performing Assets

 

$

44,566

 

$

37,166

 

Performing TDRs

 

$

15,435

 

$

10,743

 

ALLL related to impaired loans

 

$

7,587

 

$

3,982

 

 

 

 

March 31, 2010
(as restated)

 

December 31, 2009
(as restated)

 

Loans with no allocated allowance for loan and lease losses

 

$

11,955

 

$

11,348

 

Loans with allocated allowance for loan and lease losses

 

32,945

 

25,260

 

Total balance of loan considered impaired

 

$

44,900

 

$

36,608

 

 

The average balance of impaired loans was $39.8 million and $49.4 million for the three months ended March 31, 2010 and twelve months ended December 31, 2009, respectively.  The Company recorded $192 thousand and $188 thousand of interest income on impaired loans for the three months ended March 31, 2010 and 2009, respectively.

 

The Company attempts to limit its exposure to concentrations of credit risk by diversifying its loan portfolio and closely monitoring any concentrations of credit risk.  The commercial real estate and commercial construction portfolios comprise $396.2 million or 43.6% of net loans at March 31, 2010.  In addition, the Company had commercial real estate and commercial construction loans of $46.0 million or 5.0% of net loans to customers outside Pennsylvania.  Geographic concentrations exist because the Company provides a full range of banking services, including commercial, consumer and mortgage loans to individuals and corporate customers in its market areas in Pennsylvania. Management believes underwriting guidelines and ongoing review by loan review mitigates these risks.

 

The Company has granted loans, letters of credit and lines of credit to certain executive officers and directors of the Company as well as to certain related parties of executive officers and directors.  These loans, letters of credit and lines of credit were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and, when made, did not involve more than normal risk of collectability.  See Note 11 for more information on related party transactions.

 

Note 6.  Other Real Estate Owned

 

OREO totaled $15.1 million as of March 31, 2010, which is an increase of $3.9 million, from $11.2 million as of December 31, 2009.  As of March 31, 2010, OREO consists of sixteen properties compared to fourteen properties as of December 31, 2009. Six of the properties held in OREO as of March 31, 2010 represent approximately 96% of the total.

 

18



Table of Contents

 

The following schedule reflects a breakdown of OREO for the periods reviewed.

 

 

 

March 31,
2010

 

December 31,
2009

 

 

 

(as restated)

 

 

 

Land/Lots

 

$

9,746

 

$

5,887

 

Commercial Real Estate

 

4,908

 

4,852

 

Residential Real Estate

 

446

 

445

 

Total

 

$

15,100

 

$

11,184

 

 

The Company foreclosed on two properties during the three months ended March 31, 2010, one of which comprised substantially all of the $3.9 million increase in OREO (the other property comprised $56 thousand of the increase).  In connection with the transfer to OREO, the Company charged-off $96 thousand of the loan balances against the ALLL to bring the properties down to their carrying value of $3.9 million.

 

The expenses related to maintaining OREO amounted to $135 thousand for the three months ended March 31, 2010 compared to no expense for the same period in 2009.

 

Note 7.   Securities

 

Securities have been classified in the consolidated financial statements according to management’s intent.  The amortized cost, gross unrealized gains or losses and the fair value of the Company’s securities available for sale are as follows:

 

Available-for-sale securities (in thousands):

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

 

 

unrealized

 

unrealized

 

 

 

 

 

Amortized

 

holding

 

holding

 

 

 

 

 

cost

 

gains

 

losses

 

Fair value

 

March 31, 2010 (as restated)

 

 

 

 

 

 

 

 

 

U.S. Treasury securities and obligations of U.S. government agencies

 

$

30,860

 

$

180

 

$

1,474

 

$

29,566

 

Obligations of state and political subdivisions