FNCB-BackCvr-FrtCvr.pdf 1 11/13/2013 11:53:19 AM
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F I R S T N A T I O N A L C O M M U N I T Y B A N C O R P, I N C .
2 0 1 2 A N N U A L R E P O R T
FIRST NATIONAL COMMUNITY BANCORP, INC.
102 East Drinker Street, Dunmore, PA 18512 | fncb.com
GROWTH & STRENGTH THROUGH STRATEGIC VISION
FNCB-InsideFrtCvr-InsideBckCvr.pdf 10 11/7/2013 12:25:53 PM
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progress.
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To Our Shareholders, Customers and Friends:
We are pleased to share the meaningful progress we have achieved in strengthening First National
Community Bancorp, Inc.’s (the Company) financial position, solidifying our leadership team,
developing and implementing more effective and efficient operating procedures, and returning First
National Community Bank (FNCB) to its long-held position of prominence as the premier community bank
in Northeastern Pennsylvania. Our goal over the last three years has been to make FNCB “Simply a Better
Bank”. We believe our improved results for the first six months of 2013 Illustrate FNCB’s progress in meeting
this important objective.
Our results for the first six months of 2013 include net income of $2.5 million, significant improvement in
FNCB’s asset quality, an improving expense base, and a considerably improved balance sheet funding
profile. These accomplishments reflect the tremendous efforts of our internal team along with the important
support provided by outside consultants in 2010, 2011 and 2012, as well as during the current year. More
work remains to be completed, but we believe that we are now able to focus on strategies for prudently
growing FNCB and further strengthening our franchise.
Continued Progress Meeting Regulatory Provisions
We continued to focus considerable effort on complying with the provisions of the Consent Order with the
Office of the Comptroller of the Currency (OCC), as well as the Written Agreement with the Federal
Reserve Bank of Philadelphia, both of which were entered into in the second half of 2010. We are
pleased to report that we believe that we have made substantial progress toward satisfying the
requirements contained in these documents. Our efforts to comply with the provisions have resulted in
implementation of organization-wide best practices, which enhanced our operational effectiveness and
helped us to regain a competitive posture across our Northeastern Pennsylvania franchise. As of the date
of this letter, we believe that we have met nearly all of the regulatory provisions of the Consent Order and
the Written Agreement, except for the capital requirement provisions, and we believe that our current
capital levels place us within striking distance of this final requirement. We strengthened our capital
position by reducing specific balance sheet components, primarily through aggressive management of
troubled credits and by changing the credit risk and deposit and leverage profiles of our balance sheet,
and by growing capital through improved earnings results. Our goal has been to return the Company and
FNCB back to normal regulatory status as quickly as possible. While we are unable to offer a definitive
time table outlining when this will be concluded, we believe that a very large part of the journey is now
behind us.
FIRST NATIONAL COMMUNITY BANCORP., INC. and SUBSIDIARIES
2012 ANNUAL REPORT | 1
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focus.
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Asset Quality Improved to Strongest Level in Five Years
As a result of successful execution on strategies to strengthen our balance sheet risk profile and lower
classified assets, FNCB’s asset quality metrics have improved to the strongest level in more than five years.
At June 30, 2013, total non-performing loans of $8.3 million were 14% lower than the amount in December
31, 2012, and measured 70% lower than the peak of $28.4 million in 2010. As a percentage of total loans,
non-performing loans fell to 1.30%, our lowest level in five years and 39 basis points lower than the average
for FDIC reporting commercial banks with assets between $300 million and $1 billion at June 30, 2013.
Likewise, the allowance for loan and lease losses as a percentage of non-accrual loans improved to 227%,
the highest level since 2005 and significantly higher than the average of 197% for the peer banks described
above. During the first six months of 2013 FNCB experienced net recoveries of 0.21% of average total
loans versus net charges-offs of 0.12% of average total loans in the same period in 2012. We are very
pleased with this progress and continue to focus on managing the risk in our balance sheet.
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3.74
4.43
4.03
2.93
2.77
3.16
1.30
1.62
2.13
1.78
06/13
12/12
12/11
12/10
12/09
06/13
12/12
12/11
12/10
12/09
Nonperforming loans/total loans
(percent)
Total deliquent loans/ total loans
(percent)
3.10
3.07
2.98
2.90
2.40
12/09
12/11
06/13
12/12
12/10
Allowance for loan and lease
losses / total loans (percent)
8
8
5
,
8
1
6
3
5
,
8
1
4
3
8
,
0
2
5
7
5
,
2
2
8
5
4
,
2
2
06/13
12/12
12/09
12/11
Allowance for loan and lease losses
(dollars)
12/10
FIRST NATIONAL COMMUNITY BANCORP., INC. and SUBSIDIARIES
2012 ANNUAL REPORT | 3
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strategy.
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Executing on our Strategic Priorities
Despite realizing considerable progress in strengthening FNCB’s financial position, we remain acutely
focused on addressing our balance sheet risk and further reducing the levels of classified assets,
maintaining effective cost control, implementing plans to attain long-term revenue growth and, importantly,
returning to a normal regulator-bank relationship.
In 2013, management implemented a proactive strategy and related task force to create process
efficiencies, cost containment and reduction, and revenue enhancement, all with a focus on improving
the customer experience while promoting a culture of constant improvement.
To reduce balance sheet risk and classified assets, we opted to sell certain higher-risk investment securities
in 2012. Further, as a result of the effectiveness of our credit management efforts we had fewer problem
credit foreclosures in 2012 and in the first six months of 2013 than in previous years. We are working
effectively to rebuild our loan portfolio with new originations, as illustrated by our annualized loan growth of
15.4% through the first six months of 2013, with strong activity in our residential, consumer, and commercial
real estate loan portfolios. On the other side of our balance sheet, we continue lowering the cost and
improving the mix of our core funding. We have replaced higher-cost non-core deposits and have
implemented a deposit growth strategy that concentrates on noninterest-bearing deposits. Combined with
a methodical reduction in FHLB borrowings, we are managing our liabilities to optimize our profitability in
this protracted low asset-growth environment. Our balance sheet and operations have become efficient and
profitable as exhibited by our net interest margin of 3.26% for the first six months of 2013, which is equal to
the average for all national commercial banks as reported by the FDIC in the statistics on depository
institutions report at June 30, 2013. These results reflect an ongoing commitment to manage our balance
sheet for the strongest possible long-term profitability.
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3.26
3.28
3.35
3.10
3.07
06/13
12/10
Net interest margin (percent)
12/12
12/11
12/09
FIRST NATIONAL COMMUNITY BANCORP., INC. and SUBSIDIARIES
2012 ANNUAL REPORT | 5
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strength.
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Return to Current SEC Reporting Marks Important Milestone
After identifying a material weakness in our financial close process in 2010, we moved immediately to
implement remediation efforts to address this issue. Our team worked closely with experienced consultants
to restate certain prior period Securities and Exchange Commission (SEC) filings and to meet reporting
requirements for periods which were delayed while we addressed the earlier period issues. In August
2012 we returned to current reporting status with the SEC when we filed our 2011 Form 10-K and the
Forms 10-Q for the first and second quarters of 2012. Since that time we have completed our scheduled
filings and released our financial results in the required timeframe for public companies of our size, and we
expect to continue this practice going forward. Our return to current SEC reporting status moved the active
trading of the Company’s shares back to the OTCQB, providing increased liquidity and visibility for our
common stock, as illustrated by the 2013 year-to-date average monthly trading volume of approximately
50,000 shares.
Bolstering our Financial Strength with Enhanced Capital
Through balance sheet risk management and improved operational performance in recent quarters,
FNCB's total risk-based capital ratio grew to 12.27% at June 30, 2013, up 244 basis points from our lowest
level of 9.83% at December 31, 2010, during a time of significant economic downturn. We presently
exceed the standard “well-capitalized” metrics established by the regulatory agencies, and each quarter
we have grown closer to attaining a risk-based capital level exceeding 13% as stipulated by the OCC, and
we believe we are positioning FNCB to return to normalized status with our industry regulators. We also
believe we are positioning FNCB to remain a strong and independent competitor within our Northeastern
Pennsylvania service area for many years to come. By maintaining the appropriate ratios of capital to
assets we hope to regain the ability to pay our shareholders a regular dividend, as well as remove barriers
to accessing additional outside capital for growth and expansion. Management and the Board of Directors
continue to evaluate the sources and timing of capital generation options.
8.01
7.20
7.20
12.27
7.28
11.79
11.73
6.06
10.20
9.83
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12/12
06/13
12/09
Tier I leverage ratio (percent) - Bank
12/10
12/11
06/13
12/12
12/11
12/10
12/09
Total risk-based capital to
risk-adjusted assets (percent) - Bank
FIRST NATIONAL COMMUNITY BANCORP., INC. and SUBSIDIARIES
2012 ANNUAL REPORT | 7
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presence.
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Our Retail Franchise – A Valuable Asset
Our organizational and financial improvements have been achieved without sacrificing our commitment to
our customers and communities. We have maintained a strong deposit share and competitive presence in
our primary markets, even while we implemented our deposit pricing and growth strategy. We believe our
success in retaining our loyal customer base is attributable to our reputation as a service-oriented, local
institution strongly committed to the communities that we serve.
In recent months, we have taken action to both strengthen and focus our retail banking presence. This
included a thorough analysis of our downtown Wilkes-Barre presence, resulting in action to enhance our
position in this important market. We announced plans in early 2013 to relocate our downtown Wilkes-Barre
branch in a move which better serves the area’s business and personal banking customers. Approximately
1,500 downtown businesses are now conveniently located within a one-mile radius of our new 3,500 square
foot downtown office. The new location at 1 North Main Street opened on April 29, 2013, and has been well
received by our customers who are responding to the improved access and enhanced banking experience.
Another element of our strategic plan involved a comprehensive evaluation of our retail banking activities
in Monroe County. In August 2013, we executed a “Branch Purchase and Deposit/Loan Assumption
Agreement” for the sale of our Monroe County retail banking activities to ESSA Bank & Trust. We are
currently working with ESSA to transfer this business and we expect to complete the conversion process
in the first quarter of 2014. Upon closing, this transaction will provide an immediate financial benefit while
further strengthening our capital position. We consider this a strategically sound move which improves
operating efficiency and profitability, and allows enhanced focus on our efforts within our core service areas
in Lackawanna, Luzerne and Wayne counties. We are committed to maintaining and growing the strong
competitive position which FNCB has historically enjoyed in Northeastern Pennsylvania and believe our
improved operational capabilities will support our planned growth over time.
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FIRST NATIONAL COMMUNITY BANCORP., INC. and SUBSIDIARIES
2012 ANNUAL REPORT | 9
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commitment.
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Commitment to our Employees, Customers and Communities
Employee professional development is a priority at FNCB. Over the last few years, we have significantly
enhanced our investment in training for employees at all levels. Executives and professionals regularly
attend seminars and conferences targeted to their areas of specialty. In addition, FNCB offers in-house
leadership training, sales training, product training and technical training on a regular basis. We’re
particularly proud of our annual “Emerging Leaders Program” offered to employees seeking to grow
into positions of greater responsibility.
Along with our commitment to make banking with FNCB the most convenient and rewarding experience
possible for our customers, we are also living our objective to be “Simply a Better Bank” through our
continuous dedication to the communities we serve. We provide ongoing support to many organizations
that work to improve the lives of our customers. In 2012, our employees volunteered more than 500 hours
to 35 local service organizations. They donated their time to local food banks, built homes with Habitat for
Humanity and participated in numerous community development and youth-focused programs. FNCB
fostered their involvement by providing paid time-off and encouraging our employees to make a difference.
In addition, FNCB has committed to promote financial literacy through its participation in the Teach Children
to Save and Get Smart About Credit programs as part of our commitment to promote financial literacy in the
classroom. Through these programs, FNCB employees visit area schools to deliver grade-appropriate
lessons on saving, budgeting and prioritizing by bringing together real life and classroom learning. Over
the past two school years, FNCB employee volunteers have visited more than 3,000 students in
Northeastern Pennsylvania.
We also provided financial support to a wide range of nonprofit organizations that address quality of
life issues with an emphasis on low-to-moderate income communities. This support included grants to
269 nonprofit organizations within our service area in 2012. Recognizing the ongoing importance of
education, FNCB contributes annually to fund scholarships, educational improvement and prekindergarten
organizations through more than 20 nonprofit organizations within our market area. Even during a
challenging economic period for FNCB, we continued to invest in programs that make a difference for
our communities and demonstrated our commitment to this region.
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FIRST NATIONAL COMMUNITY BANCORP., INC. and SUBSIDIARIES
2012 ANNUAL REPORT | 11
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growth.
FNCB-Page13.pdf 1 11/13/2013 11:48:38 AM
Looking Forward
While additional work remains to be done, despite a period of measurable progress, we’re energized by how
far we have come. We’re also encouraged by the strong support of our shareholders and customers, as well
as the dedication of our associates who remain committed to providing service that sets FNCB apart from the
competition. To recognize the importance of what our employees’ efforts mean to FNCB’s ongoing success,
the Board granted 50 shares of the Company’s common stock to each active full- and part-time employee on
December 17, 2012. The message communicated by this action was simple. Our Board believes that by
aligning the interests of all employees with the interests of shareholders we’ll continue to experience the level
of effort and dedication that has been so important to our turnaround.
Our priorities for the remainder of 2013 and for 2014 are:
Continue to add high-quality, profitable assets to our balance sheet;
Growth of noninterest income through better management of existing fees and service charges,
wealth management services revenue, and implementing new sources of revenue;
Organic growth in our deposit base, primarily demand deposit accounts, through
relationship building;
Investing in employee development through leadership and customer service training programs,
and providing growth through advancement opportunities and increased responsibilities;
Continued development of a culture of full customer service through training programs
concentrating on service qualities and sales activities; and,
Efficiency improvement, both operational and financial, through investment in our products, our
people and our franchise.
We are encouraged by FNCB’s improved prospects for 2014. We have an experienced and knowledgeable
management team that is now focused on advancing our market share. Our fully engaged directors provide a
wealth of business experience and institutional knowledge to the process of guiding the Company’s strategic
direction, and the Board is continually evaluating alternatives to further strengthen its oversight capabilities.
We thank you for your continued support of First National Community Bancorp, Inc., and we look forward to
brighter days ahead. Our results do not yet reflect the potential of our customer-focused franchise, but we
believe that the improvements which are now in place will translate into growth and increased value over the
longer term.
Yours truly,
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Dominick L. DeNaples
Chairman of the Board
Steven R. Tokach
President & CEO
FIRST NATIONAL COMMUNITY BANCORP., INC. and SUBSIDIARIES
2012 ANNUAL REPORT | 13
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First National Community Bancorp., Inc. | Officers & Directors
OFFICERS
DIRECTORS
Dominick L. DeNaples
Chairman of the Board
Steven R. Tokach
President & CEO
Michael J. Cestone, Jr.
Secretary
James M. Bone, Jr., CPA
Executive Vice President
Chief Financial Officer
Dominick L. DeNaples
Dr. Louis A. DeNaples, Jr.
Steven R. Tokach
Joseph J. Gentile
Michael J. Cestone, Jr.
Thomas J. Melone, CPA
Joseph Coccia
John P. Moses, Esquire
John R. Thomas - Director Emeritus
First National Community Bank | Directors
Dominick L. DeNaples
Chairman of the Board
Steven R. Tokach
President & CEO
Michael J. Cestone, Jr.
Secretary
Joseph Coccia
Joseph J. Gentile
Louis A. DeNaples (1)
Thomas J. Melone, CPA
Dr. Louis A. DeNaples, Jr.
John P. Moses, Esquire
John R. Thomas - Director Emeritus
(1)Not actively serving as a Director of the Bank since February 6, 2008.
First National Community Bank | Bank Officers
Steven R. Tokach
President & CEO
Gerard A. Champi
Chief Operating Officer
James M. Bone, Jr., CPA
Executive Vice President
Chief Financial Officer
Joseph J. Earyes, CPA
First Senior Vice President
Chief Retail Banking & Operations Officer
Brian C.Mahlstedt
First Senior Vice President
Chief Lending Officer
Donald H. Ryan
Senior Vice President
Human Resources Officer
Mary G. Cummings
Senior Vice President
General Counsel
Lisa L. Kinney
Senior Vice President
Retail Lending Officer
Richard F. Post, Jr.
Senior Vice President
Senior Special Assets Officer
Paul S. Dunda
Senior Vice President
Information Services & Operations Officer
Donna M. Czerw
Senior Vice President
Retail Banking Officer
Cathy J. Conrad
Senior Vice President
Chief Credit Administration Officer
Mary Ann Gardner
Vice President
Compliance Officer
Stephanie A. Westington, CPA
Senior Vice President
Controller
Ryan J. Barhight
Vice President
Credit Analyst Supervisor
Patrick J. Barrett
Senior Vice President
Regional Commercial Lending Mgr.
Philip E. Ogren
Vice President
Information Technology Officer
Joseph A. Castrogiovanni
Senior Vice President
Regional Commercial Lending Mgr.
Thomas C. Lunney
Vice President
Property Manager
FIRST NATIONAL COMMUNITY BANCORP., INC. and SUBSIDIARIES
2012 ANNUAL REPORT | 14
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First National Community Bank | Bank Officers (cont’d)
John N. Dorneman
Vice President
Commercial Lending Mgr/Business Development
Karen M. Smith
Assistant Vice President
Relationship Manager I
Lyn Bartorillo
Banking Officer
Mortgage Lending Coordinator
Theresa M. Surma
Vice President
Operations Officer
James S. Worobey
Vice President
Workout Officer II
Judith M. LaCouture
Vice President
Marketing Manager
Richard D. Padula
Assistant Vice President
Mortgage Origination Supervisor
Kelly Sukel
Banking Officer
Indirect/Consumer Lending Underwriter II
Jenny J. Severs
Assistant Vice President
Indirect/Consumer Lending Manager
Linda L. Matylewicz
Banking Officer
Employment Coordinator
Ashley M. Tomko
Assistant Vice President
Consumer/ Mortgage Processing Supervisor
Amy M. Kelley
Banking Officer
Accounting Manager
Joan M. Dwyer
Vice President
Organizational Development/Staffing Officer
Sharon A. Martin
Assistant Vice President
Loan Administration Supervisor
Christine E. Klime
Banking Officer
Credit Analyst III
Dawn D. Gronski
Vice President
Compensation/Benefits Officer
Joseph D. Angelella
Vice President
Relationship Manager III
Madolyn A. MacArthur
Vice President
Regional Manager II
Nancy A. Jeffers
Vice President
Relationship Manager III
Karen M. Weller
Vice President
Retail Banking Manager
Elizabeth M. Benkoski
Assistant Vice President
Retail Training Coordinator
Marilyn K. Dolphin
Assistant Vice President
Community Office Manager II
Eileen R. Farber-Bonk
Assistant Vice President
Regional Manager II
Christine A. Gresh
Assistant Vice President
Regional Manager I
Frank J. Kost
Assistant Vice President
Retail Systems Analyst
Larae L. Krushinski
Banking Officer
Credit Administration Supervisor
Tara A. Cobb
Banking Officer
Credit Analyst III
Marcella K. Miller
Banking Officer
BSA Manager
Amy L. Richards
Banking Officer
Relationship Manager I
Jennifer Jenner
Banking Officer
Bank Card Relationship Manager
Angelo Ambrosecchia
Assistant Vice President
Business Development Officer II
Eileen A. Sennett
Assistant Vice President
Deposit Operations Manager
Walter M. Jurgiewicz
Banking Officer
System Administrator
Roger R. Anderson
Assistant Vice President
Relationship Manager I
Helen L. Barosky
Assistant Vice President
Business Development Officer II
Domnick M. Pasqualichio
Assistant Vice President
Relationship Manager II
Bernice A. Shipp
Assistant Vice President
Regional Manager I
Lucy E. Singer
Assistant Vice President
Regional Manager II
Debra A. Skurkis
Assistant Vice President
Regional Manager II
Christopher P. Kunz
Banking Officer
Telecommunications Manager
Ronald S. Honick
Audit Manager
William A. McGuigan
Assistant Auditor
Germaine T. Helcoski
Assistant Auditor
FIRST NATIONAL COMMUNITY BANCORP., INC. and SUBSIDIARIES
2012 ANNUAL REPORT | 15
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O U R M I S S I O N
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Simply a better bank.TM
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
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
(State or Other Jurisdiction
of Incorporation or Organization)
102 E. Drinker St., Dunmore, PA
(Address of Principal Executive Offices)
23-2900790
(I.R.S. Employer
Identification No.)
18512
(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
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
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 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.
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
Non-Accelerated Filer
(Do not check if a smaller reporting company)
Accelerated Filer
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
The aggregate market value of the voting and non-voting common stock of the registrant, held by non-affiliates was $37,859,031 at June 30,
2012.
State the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 16,457,169 shares of
common stock as of March 27, 2013.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Contents
PART I ....................................................................................................................................................................... 3
Item 1. Business ..................................................................................................................................................... 3
Item 1A. Risk Factors. ............................................................................................................................................ 15
Item 1B. Unresolved Staff Comments. ................................................................................................................... 22
Item 2. Properties. ................................................................................................................................................. 23
Item 3. Legal Proceedings..................................................................................................................................... 26
Item 4. Mine Safety Disclosures. ......................................................................................................................... 26
PART II…………………………………………………………………………………………………………….26
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of
Equity Securities. ..................................................................................................................................... 26
Item 6. Selected Financial Data ............................................................................................................................ 29
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations .................. 30
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. ................................................................ 59
Item 8. Financial Statements and Supplementary Data. ....................................................................................... 62
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................ 115
Item 9A. Controls and Procedures……………………………………………………………………………….117
Item 9B. Other Information .................................................................................................................................. 116
PART III ................................................................................................................................................................ 117
Item 10. Directors, Executive Officers and Corporate Governance. ................................................................... 117
Item 11. Executive Compensation. ...................................................................................................................... 121
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters .................................................................................................................................................. 133
Item 13. Certain Relationships and Related Transactions, and Director Independence. ..................................... 136
Item 14. Principal Accounting Fees and Services. .............................................................................................. 138
PART IV ................................................................................................................................................................ 139
Item 15. Exhibits and Financial Statement Schedules ......................................................................................... 139
2
PART 1
Item 1. Business
Overview
The Company
First National Community Bancorp, Inc., incorporated in 1997, is a Pennsylvania business corporation and a registered bank holding
company headquartered in Dunmore, Pennsylvania. In this report the terms “Company,” “we,” “us,” and “our” refer to First National
Community Bancorp, Inc. and its subsidiaries, unless the context requires otherwise. In certain circumstances, however, First National
Community Bancorp, Inc. uses the term “Company” to refer to itself.
The Company became an active bank holding company on July 1, 1998 when it acquired ownership of First National Community Bank
(the “Bank”). The Bank is a wholly-owned subsidiary of the Company. The Company’s primary activity consists of owning and
operating the Bank, which provides practically all of the Company’s earnings as a result of its banking services.
As a result of criticism received from banking regulators in connection with their examination process during 2010, the Company has
taken steps to remediate and improve its lending policies and its credit administration function, including developing and implementing
new policies and procedures, particularly related to risk management. The Company has also been advised by its regulators that it must
increase its regulatory capital. For more information regarding the supervision and regulation of the Company, refer to the section
entitled “Supervision and Regulation – Supervisory Actions,” in this Item 1 to the Annual Report on Form 10-K.
The Bank
Established as a national banking association in 1910, the Bank operates 21 full-service branch offices within four contiguous counties,
Lackawanna, Luzerne, Wayne and Monroe, its primary market area located in the Northeast section of the state.
Retail Banking
The Bank provides a wide variety of retail banking products and services to individuals and businesses including Image Checking and E-
Statements. Deposit products include various checking, savings and certificate of deposit products, as well as a line of preferred
products for higher-balance customers. The Bank also participates in the Certificate of Deposit Account Registry program, which allows
customers to secure Federal Deposit Insurance Corporation (“FDIC”) insurance on balances in excess of the standard limitations.
The Bank also offers customers the convenience of 24-hour banking, seven days a week, through FNCB Online via a secure website
https://www.fncb.com. FNCB Online’s product suite includes Bill Payment, Finance Works, Funds Transfer and POP Money (person to
person transfers), and Purchase Rewards. FNCB Online can also be accessed through our mobile application. Customers can also use our
automated teller machines (“ATMs”) located in each of our 21 branch offices and 7 other locations.
Through FNCB Online, customers can directly access their accounts, open new accounts and apply for a mortgage through our
Mortgage Center. Telephone Banking (Account Link), a service that provides customers with the ability to access account information,
perform related account transfers, and apply for a loan through the use of a touch tone telephone, is also available. The Bank offers
overdraft Bounce Protection and Instant Money loans which provide customers with an added level of protection against unanticipated
cash flow emergencies and account reconciliation errors.
FNCB Business Online is a menu driven product that allows the Bank’s business customers 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. Remote Deposit Capture allows business customers the ability to process daily check deposits
to their accounts through an online image capture environment.
Lending Activities
The Bank offers a variety of loans, including residential real estate loans, construction, land acquisition and development loans,
commercial real estate loans, commercial and industrial loans, loans to state and political subdivisions, and consumer loans, generally to
individuals and businesses in its primary market area.
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Residential Mortgage Loans
The Bank offers fixed and variable rate one-to-four-family residential loans. The Bank also offers a rate lock product that allows the
borrower to lock in their interest rate at the time of application as well as at the time of commitment. During 2012 and 2011, the volume
of customers who exercised the option to lock the rate was minimal. At December 31, 2012, one-to-four family residential mortgage
loans totaled $90.2 million, or 15.1%, of our total loan portfolio.
One-to-four family mortgage loans are originated generally for sale in the secondary market. During the year ended December 31, 2012,
the Bank sold $26.2 million of one-to-four family mortgages. The Bank retains servicing rights on these mortgages.
Construction, Land Acquisition and Development Loans
The Bank offers interim construction financing secured by residential property for the purpose of constructing one-to-four family homes.
The Bank also offers interim construction financing for the purpose of constructing residential developments and various commercial
properties including shopping centers, office complexes and single purpose owner occupied structures and for land acquisition. At
December 31, 2012, construction, land acquisition and development loans of $32.5 million represented 5.4% of the total loan portfolio.
Commercial Real Estate Loans
At December 31, 2012, commercial real estate loans totaled $231.8 million, or 38.8%, of the Bank’s total loan portfolio. Commercial
real estate mortgage loans represent the largest portion of the Bank’s total loan portfolio and loans in this portfolio generally have larger
loan balances. The commercial real estate loan portfolio is secured by a broad range of real estate, including but not limited to, office
complexes, shopping centers, hotels, warehouses, gas stations, convenience markets, residential care facilities, nursing care facilities,
restaurants, multifamily housing, farms and land subdivisions.
Commercial and Industrial Loans
The Bank generally offers commercial loans to individuals and businesses located in our primary market area. The commercial loan
portfolio includes lines of credit, dealer floor plan lines, equipment loans, vehicle loans, improvement loans and term loans. These loans
are primarily secured by vehicles, machinery and equipment, inventory, accounts receivable, marketable securities, deposit accounts and
real estate. At December 31, 2012, commercial and industrial loans totaled $110.1 million, or 18.4%, of the Bank’s total loan portfolio.
Although the Bank believes its initial loan underwriting was sound, the Commercial Loan portfolio, and in particular, the commercial
real estate, and construction, land acquisition and development segments, were negatively impacted as a result of the recent recession.
Both the national and local economies experienced a prolonged severe economic downturn, with rising unemployment levels and
erosion in consumer confidence. These factors contributed to a number of loan defaults. Additionally, the related softening of the real
estate market resulted in a decline in the value of the real estate securing the loans in this portfolio. In particular, loans for land
development and subdivisions were substantially impacted and create greater risk of collectability than other types of commercial
mortgage loans.
Consumer Loans
Consumer loans include both secured and unsecured installment loans, lines of credit and overdraft protection loans. 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. Generally, the Bank also offers home equity loans and lines of credit with a maximum combined loan-to-value
ratio of 90%, based on the appraised value of the property. Home equity loans have fixed rates of interest and are for terms up to 15
years. Equity lines of credit have adjustable interest rates and are based upon the prime interest rate. At December 31, 2012, consumer
loans totaled $109.8 million, or 18.4%, of the total loan portfolio.
State and Political Subdivision Loans
The Bank originates loans to state and political subdivisions primarily to municipalities in the Bank’s market area. At December 31,
2012, state and political subdivision loans totaled $23.4 million, or 3.9%, of the Bank’s loan portfolio.
For more information regarding the Company’s loan portfolio and lending policies, please refer to Note 2 “Summary of Significant
Accounting Polices” to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.
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Wealth Management
Wealth management services are available at the Bank. Customers are able to access alternative deposit products such as mutual funds,
annuities, stocks, and bonds directly for purchase from an outside provider.
Deposit Activities
In general, deposits, borrowings and loan repayments are the major sources of our funds for lending and other investment purposes. The
Bank grows its deposits within our market area primarily by offering a wide selection of deposit accounts. Deposit account terms vary
according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors.
In determining the terms of our deposit accounts, the Bank considers the interest rates offered by the competition, the interest rates
available on borrowings, its liquidity needs and customer preferences. The Bank regularly reviews its deposit mix and deposit pricing.
The Bank’s deposit pricing strategy generally has been to remain competitive in its market area, and to offer special rates in order to
attract deposits of a specific type or term to satisfy the Bank’s asset and liability requirements.
Competition
The Company faces substantial competition in originating loans and in attracting deposits from a significant amount of financial
institutions operating in its market area, many with a statewide or regional presence, and in some cases, a national presence. The
competition comes principally from other banks, savings institutions, credit unions, mortgage banking companies and, with respect to
deposits, institutions offering investment alternatives, including money market funds. The increased competition has resulted from
changes in the legal and regulatory guidelines, as well as from economic conditions. The fixed cost of regulatory compliance remains
high for community banks as compared to their larger competitors that are able to achieve economies of scale. As discussed above and in
Note 7, “Regulatory Matters” to the consolidated financial statements included in Item 8 to this Annual Report on Form 10-K, the
Company and the Bank are subject to extensive regulation and supervision, including regulations that limit the type and scope of
activities, such as the Order and Agreement.
As a result of consolidation in the banking industry, some of the Bank’s competitors and their respective affiliates may enjoy advantages
such as greater financial resources, a wider geographic presence, a wider array of services, or more favorable pricing alternatives and
lower origination and operating costs. The Company considers its major competition to be local commercial banks as well as other
commercial banks with branches in the Company’s market area. Competitors may offer deposits at higher rates and loans with lower
fixed rates, more attractive terms and less stringent credit structures than the Company has been able to offer. The growth and
profitability of the Company depends on the continued ability to successfully compete.
Supervision and Regulation
We participate in a highly regulated industry and are subject to a variety of statutes, regulations and policies, as well as ongoing
regulatory supervision and review. These laws, regulations and policies are subject to frequent change and we take measures to comply
with applicable requirements.
Supervisory Actions
In 2010, the Company and the Bank entered into regulatory agreements with their respective federal regulators. Set forth below is a
summary description of the material terms of the regulatory agreements. The Company and the Bank have made significant efforts to
comply with each of the provisions of the Consent Order dated September 1, 2010 (the “Order”) issued by the Office of the Comptroller
of the Currency (the “OCC”) and the Written Agreement (the “Agreement”) with the Federal Reserve Bank of Philadelphia (the
“Reserve Bank”). Based on their discussions with the OCC and the Reserve Bank and their efforts to date, the Company and the Bank
believe they have made substantial progress towards compliance, with certain of the requirements of the Order and Agreement, but, as of
the date of this report, neither the Company nor the Bank is yet in full compliance with all of the requirements. Furthermore, there can
be no assurance that the OCC or the FRB will deem the Company’s and the Bank’s actions to be adequate, that further compliance
actions will not be required, or that the Company and the Bank will be able to satisfy all of the requirements.
OCC Consent Order. The Bank, pursuant to a Stipulation and Consent to the Issuance of a Consent Order dated September 1, 2010
without admitting or denying any wrongdoing, consented and agreed to the issuance of the Order by the OCC, the Bank’s primary
regulator. The Order requires the Bank to undertake certain actions within designated timeframes, and to operate in compliance with the
provisions thereof during its term. The Order is based on the results of an examination of the Bank as of March 31, 2009. Since the
examination, management has engaged in discussions with the OCC and has taken steps to improve the condition, policies and
procedures of the Bank. Compliance with the Order is monitored by a committee (the “Committee”) of at least three directors, none of
whom is an employee or controlling shareholder of the Bank or its affiliates or a family member of any such person. The Committee is
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required to submit written progress reports on a monthly basis and the Agreement requires the Bank to make periodic reports and filings
with the OCC. The members of the Committee are John P. Moses, Joseph Coccia, Joseph J. Gentile and Thomas J. Melone. The material
provisions of the Order are as follows:
(i) By October 31, 2010, the Board of Directors of the Bank (the “Board”) was 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 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 was 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 was 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 was required to review the Board and the Board’s committee structure; by November 30,
2010, the Board was required to 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 was required to 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 was required to develop, implement and ensure adherence to policies and procedures for Bank
Secrecy Act (“BSA”) compliance; and account opening and monitoring procedures compliance;
(viii) by October 31, 2010, the Board was required to 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 was 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 was required to take certain actions to resolve certain credit and collateral exceptions;
(xi) by October 31, 2010, the Board was 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 was required to 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 was required to adopt and ensure adherence to action plans for each piece of other real estate
owned;
(xiv) by November 30, 2010, the Board was required to develop, implement and ensure adherence to a policy for effective monitoring
and management of concentrations of credit;
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(xv) by October 31, 2010, the Board was required to revise and implement the Bank’s other than temporary impairment policy;
(xvi) by October 31, 2010, the Board was required to take action to maintain adequate sources of stable funding and liquidity and a
contingency funding plan; by October 31, 2010, the Board was 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
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 was required to 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 Federal Reserve Board;
(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;
(viii) the Company was required to 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 was required to 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 was required to 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 was required to 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.
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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 the years ended December 31, 2012 and 2011, the Company incurred approximately $0.6 million and $1.0 million, 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 may continue to experience increased costs related to compliance with
these regulatory agreements 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 from the 2012 level, 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 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 2013.
The Company
The Company is a bank holding company registered with, and subject to regulation by, the Reserve Bank and the Federal Reserve Board
(“FRB”). The Bank Holding Company Act of 1956, as amended (the “BHCA”) and other federal laws subject bank holding companies
to restrictions on the types of activities in which they may engage, and to a range of supervisory requirements and activities, including
regulatory enforcement actions for violations of laws and regulations and unsafe and unsound banking practices.
The BHCA requires approval of the FRB for, among other things, the acquisition by a proposed bank holding company of control of
more than five percent (5%) of the voting shares, or substantially all the assets, of any bank or the merger or consolidation by a bank
holding company with another bank holding company. The BHCA also generally permits the acquisition by a bank holding company of
control or substantially all the assets of any bank located in a state other than the home state of the bank holding company, except where
the bank has not been in existence for the minimum period of time required by state law; but if the bank is at least 5 years old, the FRB
may approve the acquisition.
With certain limited exceptions, a bank holding company is prohibited from acquiring control of any voting shares of any company
which is not a bank or bank holding company and from engaging directly or indirectly in any activity other than banking or managing or
controlling banks or furnishing services to or performing services for its authorized subsidiaries. A bank holding company may,
however, engage in, or acquire an interest in a company that engages in, activities that the FRB has determined by order or regulation to
be so closely related to banking or managing or controlling banks as to be properly incident thereto. In making such a determination, the
FRB is required to consider whether the performance of such activities can reasonably be expected to produce benefits to the public,
such as convenience, increased competition or gains in efficiency, which outweigh possible adverse effects, such as undue concentration
of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. The FRB is also empowered to
differentiate between activities commenced de novo and activities commenced by the acquisition, in whole or in part, of a going
concern. Some of the activities that the FRB has determined by regulation to be closely related to banking include making or servicing
loans, performing certain data processing services, acting as a fiduciary or investment or financial advisor, and making investments in
corporations or projects designed primarily to promote community welfare.
Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve Act on any extensions of
credit to the bank holding company or any of its subsidiaries, or investments in the stock or other securities thereof, and on the taking of
such stock or securities as collateral for loans to any borrower. Further, a holding company and any subsidiary bank are prohibited from
engaging in certain tie-in arrangements in connection with the extension of credit. A subsidiary bank may not extend credit, lease or sell
property, or furnish any services, or fix or vary the consideration for any of the foregoing on the condition that: (i) the customer obtain or
provide some additional credit, property or services from or to such bank other than a loan, discount, deposit or trust service; (ii) the
customer obtain or provide some additional credit, property or service from or to the bank holding company or any other subsidiary of
the bank holding company; or (iii) the customer not obtain some other credit, property or service from competitors, except for reasonable
requirements to assure the soundness of credit extended.
The Gramm Leach-Bliley Act of 1999 (the “GLB Act”) allows a bank holding company or other company to certify status as a financial
holding company, which allows such company to engage in activities that are financial in nature, that are incidental to such activities, or
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are complementary to such activities without further approval. The Company has not elected to become a financial holding company.
The GLB Act enumerates certain activities that are deemed financial in nature, such as underwriting insurance or acting as an insurance
principal, agent or broker, underwriting, dealing in or making markets in securities, and engaging in merchant banking under certain
restrictions. It also authorizes the FRB to determine by regulation what other activities are financial in nature, or incidental or
complementary thereto.
The Bank
The Bank, as a national bank, is a member of the Federal Reserve System and its accounts are insured up to the maximum legal limit by
the Deposit Insurance Fund of the Federal Deposit Insurance Corporation (“FDIC”). The Bank is subject to regulation, supervision and
regular examination by the OCC. The regulations of these agencies and the FDIC govern most aspects of the Bank’s business, including
required reserves against deposits, loans, investments, mergers and acquisitions, borrowing, dividends and location and number of
branch offices. State laws may also apply to the Bank to the extent that federal law does not preempt the state law. The laws and
regulations governing the Bank generally have been promulgated to protect depositors and the Deposit Insurance Fund, and not for the
purpose of protecting shareholders.
Branching and Interstate Banking. The federal banking agencies are authorized to approve interstate bank merger transactions without
regard to whether such transactions are prohibited by the law of any state, unless the home state of one of the banks has opted out of the
interstate bank merger provisions of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Riegle-Neal Act”)
by adopting a law after the date of enactment of the Riegle-Neal Act and before June 1, 1997 that applies equally to all out-of-state
banks and expressly prohibits merger transactions involving out-of-state banks. Interstate bank mergers are also subject to the
nationwide and statewide insured deposit concentration limitations described in the Riegle-Neal Act.
The Dodd-Frank Act authorizes national and state banks to establish de novo branches in other states to the same extent as a bank
chartered by that state would be so permitted. Previously, banks could only establish branches in other states if the host state expressly
permitted out-of-state banks to establish branches in that state. Pennsylvania law had previously permitted banks chartered in
Pennsylvania to branch in other states without limitation, thereby permitting national banks in Pennsylvania to establish branches
anywhere in the state, but only permitted out of state banks to branch in Pennsylvania if the home state of the out of state bank permits
Pennsylvania banks to establish de novo branches. The branching provisions of the Dodd-Frank Act could result in more banks from
other states establishing de novo branches in the Bank’s market area.
USA Patriot Act and Bank Secrecy Act (“BSA”). Under the BSA, a financial institution is required to have systems in place to detect
certain transactions, based on the size and nature of the transaction. Financial institutions are generally required to report cash
transactions involving more than $10,000 to the United States Treasury. In addition, financial institutions are required to file suspicious
activity reports for transactions that involve more than $5,000 and that the financial institution knows, suspects or has reason to suspect,
involves illegal funds, is designed to evade the requirements of the BSA or has no lawful purpose. Under the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act, commonly referred to as the “USA Patriot
Act” or the “Patriot Act,” financial institutions are subject to prohibitions against specified financial transactions and account
relationships, as well as enhanced due diligence standards intended to detect, and prevent, the use of the United States financial system
for money laundering and terrorist financing activities. The Patriot Act requires financial institutions, including banks, to establish anti-
money laundering programs, including employee training and independent audit requirements, meet minimum standards specified by the
act, follow minimum standards for customer identification and maintenance of customer identification records, and regularly compare
customer lists against lists of suspected terrorists, terrorist organizations and money launderers. The OCC has required the Bank to
strengthen its internal policies and procedures with respect to BSA compliance, and the Bank continues to develop and implement
policies designed to satisfy this requirement.
Capital Adequacy Guidelines. The FRB and OCC have adopted risk based capital adequacy guidelines pursuant to which they assess
the adequacy of capital in examining and supervising banks and bank holding companies and in analyzing bank regulatory applications.
Risk-based capital requirements determine the adequacy of capital based on the risk inherent in various classes of assets and off-balance
sheet items.
National banks are expected to meet a minimum ratio of total qualifying capital (the sum of core capital (Tier 1) and supplementary
capital (Tier 2)) to risk weighted assets of 8%. At least half of this amount (4%) must be core capital (Tier 1). Tier 1 Capital generally
consists of the sum of common shareholders’ equity and perpetual preferred stock (subject in the case of the latter to limitations on the
kind and amount of such stock which may be included as Tier 1 Capital), less goodwill, without adjustment for changes in the fair value
of securities classified as “available for sale” in accordance with Accounting Standards Codification (“ASC”) Topic 320, Investments-
Debt and Equity Securities. Tier 2 Capital consists of the following: hybrid capital instruments; perpetual preferred stock that is not
otherwise eligible to be included as Tier 1 Capital; term subordinated debt and intermediate-term preferred stock; and, subject to
limitations, general ALLL. Assets are adjusted under the risk-based guidelines to take into account different risk characteristics, with
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the categories ranging from 0% (requiring no risk-based capital) for assets such as cash, to 100% for the bulk of assets that are typically
held by a bank, including certain multi-family residential and commercial real estate loans, commercial business loans and consumer
loans. Residential first mortgage loans on one-to-four family residential real estate and certain seasoned multi-family residential real
estate loans, which are not 90 days or more past-due or non-performing and which have been made in accordance with prudent
underwriting standards are assigned a 50% level in the risk-weighing system, as are certain privately-issued mortgage-backed securities
representing indirect ownership of such loans. Off-balance sheet items also are adjusted to take into account certain risk characteristics.
In addition to the risk-based capital requirements, the OCC has established a minimum 3.0% leverage capital ratio (Tier 1 Capital to
total adjusted assets) requirement for the most highly-rated banks, with an additional cushion of at least 100 to 200 basis points for all
other banks, which effectively increases the minimum leverage capital ratio for such other banks to 4.0% - 5.0% or more. The highest-
rated banks are those that maintain a strong capital position and have well diversified risk, including no undue interest rate risk exposure,
excellent asset quality, high liquidity, good earnings and, in general, those which are considered a strong banking organization. A bank
having less than the minimum leverage capital ratio requirement is required, within 60 days of the date as of which it fails to comply
with such requirement, to submit a reasonable plan describing the means and timing by which the bank will achieve its minimum
leverage capital ratio requirement. A bank that fails to file such plan is deemed to be operating in an unsafe and unsound manner, and
could subject the bank to a cease-and-desist order. Any insured depository institution with a leverage capital ratio that is less than 2.0%
is deemed to be operating in an unsafe or unsound condition pursuant to Section 8(a) of the Federal Deposit Insurance Act (the “FDIA”)
and is subject to potential termination of deposit insurance. However, such an institution will not be subject to an enforcement
proceeding solely on account of its capital ratios, if it has entered into and is in compliance with a written agreement to increase its
leverage capital ratio and to take such other action as may be necessary for the institution to be operated in a safe and sound manner.
The capital regulations also provide, among other things, for the issuance of a capital directive, which is a final order issued to a bank
that fails to maintain minimum capital or to restore its capital to the minimum capital requirement within a specified time period. Such a
directive is enforceable in the same manner as a final cease-and-desist order.
The Bank’s total capital to risk weighted assets ratio at December 31, 2012 and 2011 was 11.79% and 11.73%, respectively. The Tier I
capital to risk weighted assets ratio at December 31, 2012 and 2011 was 10.52% and 10.46% respectively. The Tier I capital to average
assets ratio at December 31, 2012 and 2011 was unchanged at 7.20%. Under the Order, the Bank was required to achieve a total capital
ratio of 13% and a Tier I capital to average assets ratio of 9% by November 30, 2010. As of December 31, 2012, however, the Bank had
not achieved these ratios. The Company continues to explore various options to improve its regulatory capital ratios. The Company’s
total capital ratio at December 31, 2012 and 2011 was 10.20% and 11.35%, respectively. The Tier I capital to risk weighted assets at
December 31, 2012 and 2011 was 5.95% and 6.85%, respectively. The Tier I capital to average assets at December 31, 2012 and 2011
was 4.07% and 4.72%, respectively.
Proposed Changes in Capital Requirements. In December 2010, the Basel Committee on Banking Supervision released its final
framework for strengthening international capital and liquidity regulation (“Basel III”). Basel III, when implemented by the U.S. banking
agencies and fully phased-in, will require bank holding companies and their bank subsidiaries to maintain more capital, with a greater
emphasis on common equity. Implementation was to be phased in between 2013 and 2019, but has been delayed pending further review of
the proposed implementing regulations discussed below.
The Basel III final capital framework, among other things, (i) introduces as a new capital measure “Common Equity Tier 1” (“CET1”), (ii)
specifies that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) defines CET1
narrowly by requiring that most adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and
(iv) expands the scope of the adjustments as compared to existing regulations.
When fully phased-in, Basel III requires banks to maintain (i) as a newly adopted international standard, a minimum ratio of CET1 to risk-
weighted assets of at least 4.5%, plus a “capital conservation buffer” of 2.5 %; (ii) a minimum ratio of Tier 1 capital to risk-weighted assets
of at least 6.0%, plus the capital conservation buffer; (iii) a minimum ratio of Total (Tier 1 plus Tier 2) capital to risk-weighted assets of at
least 8.0% plus the capital conservation buffer and (iv) as a newly adopted international standard, a minimum leverage ratio of 3%,
calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures (computed as the average for
each quarter of the month-end ratios for the quarter).
Basel III also provides for a “countercyclical capital buffer,” generally to be imposed when national regulators determine that excess
aggregate credit growth becomes associated with a buildup of systemic risk that would be a CET1 add-on to the capital conservation buffer
in the range of 0% to 2.5% when fully implemented. The capital conservation buffer is designed to absorb losses during periods of
economic stress.
Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the conservation buffer (or below the
combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) may face constraints on dividends, equity
repurchases and compensation based on the amount of the shortfall.
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The Basel III final framework provides for a number of new deductions from and adjustments to CET1. These include, for example, the
requirement that mortgage servicing rights, deferred tax assets dependent upon future taxable income and significant investments in non-
consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories
in the aggregate exceed 15% of CET1.
The FRB, the FDIC and the OCC issued a joint Notice of Proposed Rulemaking in June 2012 (the “Basel III Notice”), which proposes to
implement Basel III under regulations substantially consistent with the above. One additional proposed change from current practice
proposed in the Basel III Notice, included as part of the definition of CET1 capital, would require banking institutions to generally include
the amount of Additional Other Comprehensive Income (which primarily consists of unrealized gains and losses on available for sale
securities which are not required to be treated as OTTI, net of tax) in calculating regulatory capital. The Basel III Notice also proposes a 4%
minimum leverage ratio.
Additionally, the FRB, the FDIC and the OCC issued a second Notice of Proposed Rulemaking in June 2012 (the “Standardized Approach
Notice”) which would change the manner of calculating risk weighted assets. Under this Notice, new methodologies for determining risk-
weighted assets in the general capital rules are proposed, including revisions to recognition of credit risk mitigation, including a greater
recognition of financial collateral and a wider range of eligible guarantors. They also include risk weighting of equity exposures and past
due loans, potential changes in the weighting of residential mortgage loans depending on the risk characteristics of the loan; and higher
(greater than 100%) risk weighting for certain commercial real estate exposures that have higher credit risk profiles, including higher
loan to value and equity components.
The components of the Basel III framework remain subject to revision or amendment, as are the rules proposed by the U.S. regulatory
agencies in the Basel III Notice and Standardized Approach Notice. Accordingly, the regulations ultimately applicable to us may be
substantially different from the Basel III final framework as published in December 2010, and as proposed in the Basel III Notice and
Standardized Approach Notice. Requirements to maintain higher levels of capital or to maintain higher levels of liquid assets, and changes
in the manner of calculating risk weighted assets, could adversely impact our net income and return on equity.
Prompt Corrective Action. Under Section 38 of the FDIA, each federal banking agency is required to implement a system of prompt
corrective action for institutions which it regulates. The federal banking agencies have promulgated substantially similar regulations to
implement the system of prompt corrective action established by Section 38 of the FDIA. Under the regulations, a bank will be deemed
to be: (i) “well capitalized” if it has a total risk based capital ratio of 10.0% or more, a Tier 1 risk based capital ratio of 6.0% or more, a
leverage capital ratio of 5.0% or more and is not subject to any written capital order or directive; (ii) “adequately capitalized” if it has a
total risk based capital ratio of 8.0% or more, a Tier 1 risk based capital ratio of 4.0% or more and a Tier 1 leverage capital ratio of 4.0%
or more (3.0% under certain circumstances) and does not meet the definition of “well capitalized;” (iii) “undercapitalized” if it has a
total risk based capital ratio that is less than 8.0%, a Tier 1 risk based capital ratio that is less than 4.0% or a leverage capital ratio that is
less than 4.0% (3.0% under certain circumstances); (iv) “significantly undercapitalized” if it has a total risk based capital ratio that is less
than 6.0%, a Tier 1 risk based capital ratio that is less than 3.0% or a leverage capital ratio that is less than 3.0%; and (v) “critically
undercapitalized” if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%.
The Basel III Notice also proposes a change in the prompt corrective action capital requirements, effective in 2015. Under the proposal,
an institution would be deemed to be: (i) “well capitalized” if it has a total risk based capital ratio of 10.0% or more, a Tier 1 risk based
capital ratio of 8.0% or more, a CET1 risk based capital ratio of 6.5% or more, and a leverage capital ratio of 5.0% or more; (ii)
“adequately capitalized” if it has a total risk based capital ratio of 8.0% or more, a Tier 1 risk based capital ratio of 6.0% or more, a
CET1 risk based capital ratio of 4.5% or more, and a leverage capital ratio of 4.0% or more; (iii) “undercapitalized” if it has a total risk
based capital ratio of less than 8.0%, a Tier 1 risk based capital ratio of less than 6.0%, a CET1 risk based capital ratio of less than 4.5%,
and a leverage capital ratio of less than 4.0%; (iv) “significantly undercapitalized” if it has a total risk based capital ratio of less than
6.0%, a Tier 1 risk based capital ratio of less than 4.0%, a CET1 risk based capital ratio of less than 3.0%, and a leverage capital ratio of
less than 3.0%; and (v) “critically undercapitalized” if it has a ratio of tangible equity to total assets that is less than or equal to 2.0%.
Tangible equity would be defined for this purpose as Tier 1 capital (common equity tier 1 capital plus any additional Tier 1 capital
elements) plus any outstanding perpetual preferred stock that is not already included in Tier 1 capital.
An institution generally must file a written capital restoration plan which meets specified requirements with an appropriate federal
banking agency within 45 days of the date the institution receives notice or is deemed to have notice that it is undercapitalized,
significantly undercapitalized or critically undercapitalized. A federal banking agency must provide the institution with written notice of
approval or disapproval within 60 days after receiving a capital restoration plan, subject to extensions by the applicable agency.
An institution that is required to submit a capital restoration plan must concurrently submit a performance guaranty by each company
that controls the institution. Such guaranty will be limited to the lesser of (i) an amount equal to 5.0% of the institution’s total assets at
the time the institution was notified or deemed to have notice that it was undercapitalized or (ii) the amount necessary at such time to
restore the relevant capital measures of the institution to the levels required for the institution to be classified as adequately capitalized.
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Such a guaranty will expire after the federal banking agency notifies the institution that it has remained adequately capitalized for each
of four consecutive calendar quarters. An institution that fails to submit a written capital restoration plan within the requisite period,
including any required performance guaranty, or fails in any material respect to implement a capital restoration plan, will be subject to
the restrictions in Section 38 of the FDIA applicable to significantly undercapitalized institutions.
A “critically undercapitalized institution” is to be placed in conservatorship or receivership within 90 days unless the FDIC formally
determines that forbearance from such action would better protect the deposit insurance fund. Unless the FDIC or other appropriate
federal banking regulatory agency makes specific further findings and certifies that the institution is viable and is not expected to fail, an
institution that remains critically undercapitalized on average during the fourth calendar quarter after the date it becomes critically
undercapitalized must be placed in receivership. The general rule is that the FDIC will be appointed as receiver within 90 days after a
bank becomes critically undercapitalized unless extremely good cause is shown and an extension is agreed to by the federal regulators.
In general, good cause is defined as capital which has been raised and is imminently available for infusion into the bank except for
certain technical requirements which may delay the infusion for a period of time beyond the 90 day time period.
Immediately upon becoming undercapitalized, an institution becomes subject to the provisions of Section 38 of the FDIA, which (i)
restrict payment of capital distributions and management fees; (ii) require that the appropriate federal banking agency monitor the
condition of the institution and its efforts to restore its capital; (iii) require submission of a capital restoration plan; (iv) restrict the
growth of the institution’s assets; and (v) require prior approval of certain expansion proposals. The appropriate federal banking agency
for an undercapitalized institution also may take any number of discretionary supervisory actions if the agency determines that any of
these actions is necessary to resolve the problems of the institution at the least possible long-term cost to the Deposit Insurance Fund,
subject in certain cases to specified procedures. These discretionary supervisory actions include: requiring the institution to raise
additional capital; restricting transactions with affiliates; requiring divestiture of the institution or the sale of the institution to a willing
purchaser; and any other supervisory action that the agency deems appropriate. These and additional mandatory and permissive
supervisory actions may be taken with respect to significantly undercapitalized and critically undercapitalized institutions.
Additionally, under Section 11(c)(5) of the FDIA, a conservator or receiver may be appointed for an institution if: (i) an institution’s
obligations exceed its assets; (ii) there is substantial dissipation of the institution’s assets or earnings as a result of any violation of law or
any unsafe or unsound practice; (iii) the institution is in an unsafe or unsound condition; (iv) there is a willful violation of a cease-and-
desist order; (v) the institution is unable to pay its obligations in the ordinary course of business; (vi) losses or threatened losses deplete
all or substantially all of an institution’s capital, and there is no reasonable prospect of becoming “adequately capitalized” without
assistance; (vii) there is any violation of law or unsafe or unsound practice or condition that is likely to cause insolvency or substantial
dissipation of assets or earnings, weaken the institution’s condition, or otherwise seriously prejudice the interests of depositors or the
insurance fund; (viii) an institution ceases to be insured; (ix) the institution is undercapitalized and has no reasonable prospect that it
will become adequately capitalized, fails to become adequately capitalized when required to do so, or fails to submit or materially
implement a capital restoration plan; or (x) the institution is critically undercapitalized or otherwise has substantially insufficient capital.
Regulatory Enforcement Authority. Federal banking law grants substantial enforcement powers to federal banking regulators. This
enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal
orders and to initiate injunctive actions against banking organizations and institution-affiliated parties. In general, these enforcement
actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide
the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities.
The Bank and its “institution-affiliated parties,” including its management, employees, agents, independent contractors, consultants such
as attorneys and accountants and others who participate in the conduct of the financial institution’s affairs, are subject to potential civil
and criminal penalties for violations of law, regulations or written orders of a governmental agency. In addition, regulators are provided
with greater flexibility to commence enforcement actions against institutions and institution-affiliated parties. Possible enforcement
actions include the termination of deposit insurance and cease-and-desist orders. Such orders may, among other things, require
affirmative action to correct any harm resulting from a violation or practice, including restitution, reimbursement, indemnifications or
guarantees against loss. A financial institution may also be ordered to restrict its growth, dispose of certain assets, rescind agreements or
contracts, or take other actions as determined by the ordering agency to be appropriate.
Under provisions of the federal securities laws, a determination by a court or regulatory agency that certain violations have occurred at a
company or its affiliates can result in fines, restitution, a limitation of permitted activities, disqualification to continue to conduct certain
activities and an inability to rely on certain favorable exemptions. Certain types of infractions and violations can also affect a public
company in its timing and ability to expeditiously issue new securities into the capital markets.
The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan
loss allowances for regulatory purposes.
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As a result of the volatility and instability in the financial system in recent years, Congress, the bank regulatory authorities and other
government agencies have called for or proposed additional regulation and restrictions on the activities, practices and operations of
banks and their holding companies. While many of these proposals relate to institutions that have accepted investments from, or sold
troubled assets to, the Department of the Treasury or other government agencies, or otherwise participate in government programs
intended to promote financial stabilization, Congress and the federal banking agencies have broad authority to require all banks and
holding companies to adhere to more rigorous or costly operating procedures, corporate governance procedures, or to engage in
activities or practices which they might not otherwise elect. Any such requirement could adversely affect the Company’s business and
results of operations. The Company did not accept an investment by the Treasury Department in its preferred stock or warrants to
purchase common stock, and except for the temporary increases in deposit insurance for customer accounts, has not participated in any
of the programs adopted by the Treasury Department, FDIC or Federal Reserve.
The Dodd-Frank Act. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) makes
significant changes to the current bank regulatory structure and affects the lending, deposit, investment, trading and operating activities
of financial institutions and their holding companies. The Dodd-Frank Act requires a number of federal agencies to adopt a broad range
of new rules and regulations, and to prepare various studies and reports for Congress. The federal agencies are given significant
discretion in drafting these rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act
may not be known for some time. Although it is not possible to determine the ultimate impact of this statute until the extensive
rulemaking is complete, the following provisions are considered to be of greatest significance to the Company:
•
Expands the authority of the FRB to examine bank holding companies and their subsidiaries, including insured depository
institutions;
• Requires a bank holding company to be well capitalized and well managed to receive approval of an interstate bank acquisition;
• Changes standards for federal preemption of state laws related to national banks and their subsidiaries;
•
Provides mortgage reform provisions regarding a customer’s ability to pay and making more loans subject to provisions for higher-
cost loans and new disclosures;
• Creates a new Bureau of Consumer Financial Protection that will have rulemaking authority for a wide range of consumer
protection laws that would apply to all banks and would have broad powers to supervise and enforce consumer protection laws;
• Creates the Financial Stability Oversight Council with authority to identify institutions and practices that might pose a systemic risk;
•
•
Introduces additional corporate governance and executive compensation requirements on companies subject to the Securities and
Exchange Act of 1934, as amended;
Permits FDIC-insured banks to pay interest on business demand deposits;
• Requires that holding companies and other companies that directly or indirectly control an insured depository institution to serve as
a source of financial strength;
• Makes permanent the $250 thousand limit for federal deposit insurance at all insured depository institutions; and
•
Permits national and state banks to establish interstate branches to the same extent as the branch host state allows establishment of
in-state branches.
Consumer Financial Protection Bureau. The Dodd-Frank Act created a new, independent federal agency within the Federal Reserve
System, the Consumer Financial Protection Bureau (“CFPB”) having broad rulemaking, supervisory and enforcement powers under
various federal consumer financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate
Settlement Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Practices Act, the consumer financial privacy provisions of
the Gramm-Leach-Bliley Act and certain other statutes. The CFPB, which began operations on July 21, 2011, has examination and
primary enforcement authority with respect to depository institutions with $10 billion or more in assets. Smaller institutions, including
the Bank, are be subject to rules promulgated by the CFPB but continue to be examined and supervised by federal banking regulators for
compliance with federal consumer protection laws and regulations. The CFPB also has authority to prevent unfair, deceptive or abusive
practices in connection with the offering of consumer financial products. The Dodd-Frank Act permits states to adopt consumer
13
protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state
attorneys general to enforce compliance with both the state and federal laws and regulations.
The CFPB has proposed or issued a number of important rules affecting a wide range of consumer financial products. Many of these
rules have not been implemented, which has created significant uncertainty for the Company and the financial services industry in
general. It is difficult to predict at this time the specific impact the Dodd-Frank Act and CFPB rulemakings will have on our business.
The changes resulting from the Dodd-Frank Act and CFPB rulemakings may impact the profitability of our business activities, limit our
ability to make, or the desirability of making, certain types of loans, including non-qualified mortgage loans, require us to change certain
of our business practices, impose upon us more stringent capital, liquidity and leverage ratio requirements or otherwise adversely affect
our business or profitability. The changes may also require us to dedicate significant management attention and resources to evaluate
and make necessary changes to comply with the new statutory and regulatory requirements.
FDIC Insurance Premiums. The FDIC maintains a risk-based assessment system for determining deposit insurance premiums. Four risk
categories (I-IV), each subject to different premium rates, are established based upon an institution’s status as well capitalized,
adequately capitalized or undercapitalized, and the institution’s supervisory rating.
The Dodd-Frank Act permanently increased the maximum deposit insurance amount for banks, savings institutions and credit unions to
$250,000 per depositor, and extended unlimited deposit insurance to non-interest bearing transaction accounts through December 31,
2012. The Dodd-Frank Act also broadened the base for FDIC insurance assessments. Assessments are now based on a financial
institution’s average consolidated total assets less tangible equity capital. The Dodd-Frank Act requires the FDIC to increase the reserve
ratio of the Deposit Insurance Fund from 1.15% to 1.35% of insured deposits by 2020 and eliminates the requirement that the FDIC pay
dividends to insured depository institutions when the reserve ratio exceeds certain thresholds. The Dodd-Frank Act eliminated the
statutory prohibition against the payment of interest on business checking accounts, effective in July 2011.
An insured institution is required to pay deposit insurance premiums on its assessment base in accordance with its risk category. There are
three adjustments that can be made to an institution’s initial base assessment rate: (1) a potential decrease for long-term unsecured debt,
including senior and subordinated debt and, for small institutions, a portion of Tier 1 capital; (2) a potential increase for secured liabilities
above a threshold amount; and (3) for non-Risk Category I institutions, a potential increase for brokered deposits above a threshold amount.
The FDIC may also impose special assessments from time to time.
Additionally, during 2012, the Bank elected to participate in the FDIC program whereby noninterest-bearing transaction account
deposits were insured without limitation. This program expired on December 31, 2012.
During the year ended December 31, 2012, the Bank was considered risk category III for deposit insurance assessments and paid an
annual assessment rate of 0.0023 basis points on the assessment base of average consolidated total assets less the average tangible equity
during the assessment period.
Dividend Restrictions
The Company is a legal entity separate and distinct from the Bank. The Company’s revenues (on a parent company only basis) result
almost entirely from dividends paid by its subsidiary, the Bank, to the Company. The right of the Company, and consequently the right
of creditors and shareholders of the Company, to participate in any distribution of the assets or earnings of any subsidiary through the
payment of such dividends or otherwise is necessarily subject to the prior claims of creditors of the subsidiary (including depositors)
except to the extent that claims of the Company, in its capacity as a creditor, may be recognized. Additionally, the ability of the Bank to
pay dividends to the Company is subject to various regulatory restrictions. The Order currently prohibits the Bank from paying
dividends to the Company and the Agreement further prohibits the Company from taking dividend payments from the Bank.
Federal and state laws regulate the payment of dividends by the Company. Federal banking regulators have the authority to prohibit
banks and bank holding companies from paying a dividend if the regulators deem such payment to be an unsafe or unsound practice.
Currently, the Agreement with the Federal Reserve Bank prohibits the Company from paying dividends without prior approval from the
Reserve Bank.
Employees
As of December 31, 2012, the Company and the Bank employed 298 persons, including 52 part-time employees.
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Available Information
The Company files reports, proxy and information statements and other information electronically with the SEC. 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. Information may be obtained 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 its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on
Form 8-K and amendments thereto available through its website at www.fncb.com. They may also be obtained free of charge as soon as
practicable after filing or furnishing them to the SEC upon request by sending an email to fncb@fncb.com. Further, the Company will
provide electronic or paper copies of the Company’s filings free of charge upon request. Information may also be obtained via written
request to First National Community Bancorp, Inc. Attention: Chief Financial Officer, 102 East Drinker Street, Dunmore, PA 18512.
Item 1A. Risk Factors.
We are subject to extensive government regulation, supervision and possible regulatory enforcement actions, which may subject
us to higher costs and lower shareholder returns.
The banking industry is subject to extensive regulation and supervision that govern almost all aspects of its operations. The extensive
regulatory framework is primarily intended to protect the federal deposit insurance fund and depositors, not shareholders. The Company
and Bank are regulated and supervised by the OCC and the FRB. Compliance with applicable laws and regulations can be difficult and
costly and puts banks at a competitive disadvantage compared to less regulated competitors such as finance companies, mortgage
banking companies and leasing companies. The Company’s regulatory authorities have extensive discretion in connection with their
supervisory and enforcement activities, including with respect to the imposition of restrictions on the operation of a bank or a bank
holding company, the imposition of significant fines, the ability to delay or deny merger or other regulatory applications, the
classification of assets by a bank, and the adequacy of a bank’s allowance for loan losses, among other matters. The Company’s industry
is facing increased regulation and scrutiny as a result of the financial crisis in the banking and financial markets; for instance, areas such
as BSA compliance and real estate-secured consumer lending are attracting heightened regulatory expectations and scrutiny.
Furthermore, the Company and the Bank are subject to the requirements of the Order and the Agreement, which regulatory agreements
require that they take extra actions and meet certain standards by the dates set forth in these agreements. Neither the Bank nor the
Company is yet in compliance with all of these requirements. Any failure to comply with the Order or the Agreement and any failure to
comply with, or any change in, any other applicable regulation and supervisory requirement, or change in regulation or enforcement by
such authorities, whether in the form of policies, regulations, legislation, rules, orders, enforcement actions, or decisions, could have a
material impact on the Company, the Bank and other affiliates, and its operations. Federal economic and monetary policy may also
affect our ability to attract deposits and other funding sources, make loans and investments, and achieve satisfactory interest spreads.
Any failure to comply with such regulation or supervision could result in sanctions by regulatory agencies, civil money penalties and/or
reputation damage, which could have a material adverse effect on the Company’s business, financial condition and results of operations.
The impact of recent legislation, proposed legislation, and government programs designed to stabilize the financial markets cannot be
predicted at this time, and such legislation is subject to change. In addition, the failure of financial markets to stabilize and a
continuation or worsening of current financial market conditions could materially and adversely affect the Company’s business, financial
condition, results of operations and access to capital.
New or changed legislation or regulation and regulatory initiatives could subject us to increased regulation, increase our costs of
doing business and adversely affect us.
Changes in federal and state legislation and regulation may affect our operations. New and modified regulation, such as the Dodd-Frank
Act and Basel III, may have unforeseen or unintended consequences on our industry. The Dodd-Frank Act has implemented, and is
expected to further implement, significant changes to the U.S. financial system, including the creation of new regulatory agencies (such
as the Financial Stability Oversight Council to oversee systemic risk and the Consumer Financial Protection Bureau (“CFPB”) to
develop and enforce rules for consumer financial products), changes in retail banking regulations, and changes to deposit insurance
assessments. Additionally, proposed rules to implement Basel III would revise risk-based and leverage capital requirements and also
limit capital distributions and certain discretionary bonuses if a banking organization does not hold a “capital conservation buffer.” This
additional regulation could increase our compliance costs and otherwise adversely affect our operations. The potential also exists for
additional federal or state laws or regulations, or changes in policy or interpretations, affecting many of our operations, including capital
levels, lending and funding practices, insurance assessments, and liquidity standards. The effect of any such changes and their
15
interpretation and application by regulatory authorities cannot be predicted, may increase the Company’s cost of doing business and
otherwise affect our operations, may significantly affect the markets in which the Company does business, and could have a materially
adverse effect on the Company.
The CFPB, which has now been in operation for over a year, has concentrated much of its rulemaking efforts on reforms related to
residential mortgage transactions. In 2013, the CFPB issued final rules related to a borrower’s ability to repay and qualified mortgage
standards, mortgage servicing standards, loan originator compensation standards, requirements for high-cost mortgages, appraisal and
escrow standards and requirements for higher-priced mortgages. Several of the CFPB’s rulemakings were issued in January 2013, and
we continue to analyze their requirements to determine the impact of the rules to our businesses. During 2013, we expect the CFPB to
focus its rulemaking efforts on integrating disclosure requirements for lenders and settlement agents and expanding the scope of
information lenders must report in connection with mortgage and other housing-related loan applications under the Home Mortgage
Disclosure Act. These rules include significant regulatory and compliance changes and are expected to have a broad impact on the
financial services industry.
On January 10, 2013, the CFPB issued a final rule to implement sections of the Dodd-Frank Act that will require lenders to determine
whether a consumer has the ability to repay a mortgage loan. The rule, which goes into effect on January 10, 2014, establishes certain
minimum requirements for creditors when making ability to pay determinations, and establishes certain protections from liability for
mortgages meeting the definition of “qualified mortgages”. The rule affords greater legal protections for lenders making qualified
mortgages that are not “higher priced.” Qualified mortgages must generally satisfy detailed requirements related to product features,
underwriting standards, and a points and fees requirement whereby the total points and fees on a mortgage loan cannot exceed specified
amounts or percentages of the total loan amount. Mandatory features of a qualified mortgage include: (1) a loan term not exceeding 30
years; and (2) regular periodic payments that do not result in negative amortization, deferral of principal repayment, or a balloon
payment. The rule creates a special category of qualified mortgages originated by certain smaller creditors that operate in
predominantly rural or underserved areas, as defined by the CFPB. Concurrently with the final “ability to repay” rule, the CFPB
released a proposal that, among other things, may define a separate category of qualified mortgages for certain smaller creditors . Our
business strategy, product offerings, and profitability may change as the rule become becomes effective and is interpreted by the
regulators and courts.
On January 17, 2013, the CFPB issued final rules containing new mortgage servicing standards which will take effect on January 10,
2014. The final rules impose new requirements regarding force-placed insurance, mandate certain notices prior to rate adjustments on
adjustable-rate mortgages, and establish requirements for periodic disclosures to borrowers. These requirements will affect notices to be
given to consumers as to delinquency, foreclosure alternatives, modification applications, interest rate adjustments and options for
avoiding “force-placed” insurance. Servicers will be prohibited from processing foreclosures when a loan modification is pending, and
must wait until a loan is more than 120 days delinquent before initiating a foreclosure action. Servicers must provide direct and ongoing
access to its personnel, and provide prompt review of any loss mitigation application. Servicers must maintain accurate and accessible
mortgage records for the life of a loan and until one year after the loan is paid off or transferred. These new standards are expected to
increase the cost and compliance risks of servicing mortgage loans. We cannot predict the ultimate outcome of these inquiries, actions,
or regulatory changes or the impact that they could have on our financial condition, results of operations, or business.
While the full impact of the Dodd-Frank Act and the CFPB rulemakings cannot be assessed until all implementing regulations are
released and become effective, the Dodd-Frank Act’s extensive requirements may have a significant effect on the financial markets, and
may affect the availability or terms of financing from our lender counterparties and the availability or terms of mortgage-backed
securities, both of which may have an adverse effect on our financial condition and results of operations. The CFPB’s rules are likely to
result in increased compliance costs and fees, along with possible restrictions on our operations, any of which may have a material
adverse effect on our operating results and financial condition.
We may not 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, online divisions of banks located in other markets 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. There is also
competition for banking business from competitors outside of its market area. As noted above, the Company and the Bank are subject to
extensive regulations and supervision, including, in many cases, regulations that limit the type and scope of activities. Many competitors
have substantially greater resources than the Company, may offer certain services that the Bank does not provide, and operate under less
stringent regulatory environments. The differences in available resources and applicable 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. For additional discussion of the Company’s
competitive environment, see the section entitled “Business – Competition” included in Item 1 of the Annual Report on Form 10-K.
16
The current economic environment poses significant challenges for us and could adversely affect our financial condition and
results of operations.
The Company is operating in a challenging and uncertain economic environment. Financial institutions continue to be affected by a
weak real estate market and constrained financial markets. Dramatic declines in the housing market since 2008, with falling home prices
and high levels of foreclosures and unemployment, have resulted in significant write-downs of asset values by financial institutions.
Continued declines in real estate values, home sales volumes, and financial stress on borrowers as a result of the uncertain economic
environment could have an adverse effect on our borrowers or their customers, which could adversely affect our financial condition and
results of operations. A worsening of these conditions would likely exacerbate the adverse effects on us and others in the financial
institutions industry. For example, non-performing assets, which are comprised of non-performing investments, non-performing loans
and other real estate owned, totaled $13.6 million and represented 37.1% of shareholders’ equity as of December 31, 2012, as compared
to $30.7 million and 76.9% of equity as of December 31, 2011. Although non-performing assets as a percentage of shareholders’ equity
decreased, the percentage remains elevated, and deterioration in economic conditions in our markets could drive loan losses beyond that
which is provided for in the Company’s allowance for loan and lease losses (“ALLL”), which would necessitate further increases in the
provision for loan and lease losses, and, in turn, reduce the Company’s earnings and capital. The Company may also face the following
risks in connection with the economic environment:
•
economic conditions that negatively affect housing prices and the job market have resulted, and may continue to result, in a
deterioration in credit quality of our loan portfolios, and such deterioration in credit quality has had, and could continue to
have, a negative impact on our business;
• market developments may affect consumer confidence levels and may reduce loan demand and cause adverse changes in
payment patterns, leading to a reduced asset base, as well as increases in delinquencies and default rates on loans and other
credit facilities;
the methodologies the Company uses to establish the ALLL rely on complex judgments, including forecasts of economic
conditions, that are inherently uncertain and may be inadequate;
low market interest rates, which have been projected to continue, may pressure our interest margins as interest-earning assets,
such as loans and investments, are reinvested or repriced at lower rates;
continued turmoil in the market, and loss of confidence in the banking system, could require the Bank to pay higher interest
rates to obtain deposits to meet the needs of its depositors and borrowers, resulting in reduced margin and net interest income.
If conditions worsen, it is possible that banks such as the Bank may be unable to meet the needs of their depositors and
borrowers, which could, in the worst case, result in the Bank being placed into receivership; and
compliance with increased regulation of the banking industry may increase our costs, limit our ability to pursue business
opportunities, and divert management efforts.
•
•
•
•
If these conditions or similar ones continue to exist or worsen, the Company could experience continuing or increased adverse effects on
its financial condition.
We have previously identified material weaknesses in our internal control over financial reporting.
Management determined that the Company’s internal control over financial reporting was not effective at December 31, 2011, and had
also previously determined that disclosure controls and procedures and internal control over financial reporting were not effective as of
December 31, 2010.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or
detected on a timely basis.
In 2011, management identified a material weakness with respect to the financial close process. Management detected errors with
respect to accounting for other real estate owned (“OREO”) property taxes and the evaluation of subsequent events related to OREO
valuation. Corrections for these errors resulted in adjustments to increase expenses by approximately $1.2 million. As a result of these
errors, management concluded that the Company did not maintain effective controls over the financial close process.
The Company has implemented remediation efforts with respect to the material weakness at December 31, 2011, and management
concluded that its new internal controls are operating effectively. Although the Company has not identified any additional material
weaknesses in 2012 and has taken steps to make the necessary improvements to remediate the material weaknesses it had identified, we
cannot be certain that other weaknesses will not be identified or that our remediation efforts will ensure that our management designs,
implements and maintains adequate controls over our financial processes and reporting in the future. Any additional deficiencies or
17
material weaknesses that may be identified in the future could, among other things, have a material adverse effect on our business,
results of operations and financial condition, as well as impair our ability to meet our quarterly, annual and other reporting requirements
under the 1934 Act in a timely manner, and require us to incur additional costs and to divert management resources.
Though we have remediated our prior material weaknesses, any further ineffective internal controls over financial reporting could result
in restatements in the future and further increased regulatory scrutiny as well as cause investors to lose confidence in our reported
financial information, which could have a negative effect on the trading value of our securities and our ability to raise capital.
The Company is subject to lending risk.
As of December 31, 2012, approximately 44.2% of the Company’s loan portfolio consisted of commercial real estate loans and
construction, land acquisition and development 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. All non-
performing loans totaled $9.7 million, or 1.6% of total gross loans, as of December 31, 2012, and $19.9 million, or 2.9% of total gross
loans, as of December 31, 2011. An increase in non-performing loans could result in an increase in the provision for loan and lease
losses and an increase in loan charge-offs, both of which could have a material adverse effect on the Company’s financial condition and
results of operations. The lending activities in which the Bank engages carry the risk that the borrowers will be unable to perform on
their obligations. As such, general economic conditions, nationally and in our primary market area, will have a significant impact on our
results of operations. To the extent that economic conditions deteriorate, business and individual borrowers may be less able to meet
their obligations to the Bank in full, in a timely manner, resulting in decreased earnings or losses to the Bank. To the extent that loans are
secured by real estate, adverse conditions in the real estate market may reduce the ability of the borrower to generate the necessary cash
flow for repayment of the loan, and reduce our ability to collect the full amount of the loan upon a default. To the extent that the Bank
makes fixed rate loans, general increases in interest rates will tend to reduce our spread as the interest rates the Company must pay for
deposits increase while interest income is flat. Economic conditions and interest rates may also adversely affect the value of property
pledged as security for loans.
Our concentrations of loans, including those to insiders and related parties, may create a greater risk of loan defaults and losses.
A substantial portion of our loans are secured by real estate in the Northeastern Pennsylvania market, and substantially all of our loans
are to borrowers in that area. The Company also has a significant amount of commercial real estate, commercial and industrial,
construction, land acquisition and development loans and land-related loans for residential and commercial developments. At December
31, 2012, $388.2 million, or 64.9%, of our gross loans were secured by real estate, primarily commercial real estate. Management has
taken steps to mitigate the Company’s commercial real estate concentration risk by diversification among the types and characteristics of
real estate collateral properties, sound underwriting practices, and ongoing portfolio monitoring and market analysis. Of total gross
loans, $32.5 million, or 5.4%, were construction, land acquisition and development loans. Construction, land acquisition and
development loans have the highest risk of uncollectability. An additional $110.1 million, or 18.4%, of portfolio loans were commercial
and industrial loans not secured by real estate. Historically, commercial and industrial loans generally have had a higher risk of default
than other categories of loans, such as single family residential mortgage loans. The repayments of these loans often depend on the
successful operation of a business and are more likely to be adversely affected by adverse economic conditions. While the Company
believes that our loan portfolio is well diversified in terms of borrowers and industries, these concentrations expose the Company to the
risk that adverse developments in the real estate market, or in the general economic conditions in the Company’s general market area,
could increase the levels of non-performing loans and charge-offs, and reduce loan demand. In that event, the Company would likely
experience lower earnings or losses. Additionally, if, for any reason, economic conditions in our market area deteriorate, or there is
significant volatility or weakness in the economy or any significant sector of the area’s economy, the Company’s ability to develop our
business relationships may be diminished, the quality and collectability of our loans may be adversely affected, the value of collateral
may decline and loan demand may be reduced.
Commercial real estate, commercial and industrial and construction, land acquisition and development loans tend to have larger balances
than single family mortgage loans and other consumer loans. Because the loan portfolio contains a significant number of commercial
and industrial loans, commercial real estate loans and construction, land acquisition and development loans with relatively large
balances, the deterioration of one or a few of these loans may cause a significant increase in non-performing assets. An increase in non-
performing loans could result in a loss of earnings from these loans, an increase in the provision for loan and lease losses, or an increase
in loan charge-offs, which could have an adverse impact on our results of operations and financial condition.
18
Guidance adopted by federal banking regulators provides that banks having concentrations in construction, land development or
commercial real estate loans are expected to have and maintain higher levels of risk management and, potentially, higher levels of
capital, which may adversely affect shareholder returns, or require us to obtain additional capital sooner than the Company otherwise
would. Excluded from the scope of this guidance are loans secured by non-farm nonresidential properties where the primary source of
repayment is the cash flow from the ongoing operations and activities conducted by the party, or affiliate of the party, who owns the
property.
Outstanding loans and line of credit balances to directors, officers and their related parties totaled $33.3 million as of December 31,
2012. Of those, loans in the amount of $196 thousand were not performing in accordance with the terms of the loan agreements. At
December 31, 2012, there were no other loans to directors, officers and their related parties that were categorized as criticized loans
within the Bank’s risk rating system, meaning they are considered to present a higher risk of collection than other loans. (For more
information regarding loans to officers and directors and/or their related parties, please refer to Note 14 — Related Party Transactions to
our consolidated financial statements included in Item 8 and Item 13, “Certain Relationships and Related Transactions, and Director
Independence” to this Annual Report on Form 10-K.)
Our financial condition and results of operations would be adversely affected if our ALLL is not sufficient to absorb actual
losses or if we are required to increase our ALLL.
The lending activities in which the Bank engages carry the risk that the borrowers will be unable to perform on their obligations, and that
the collateral securing the payment of their obligations 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, which it uses as a basis to estimate and establish its reserves
for losses. In determining the amount of the ALLL, the Company reviews its loans and its loss and delinquency experience, and the
Company evaluates economic conditions. If these assumptions prove to be incorrect, the ALLL may not cover inherent losses in its loan
portfolio at the date of its financial statements. Material additions to the Company’s allowance or extensive charge-offs would materially
decrease its net income. At December 31, 2012, the ALLL totaled $18.5 million, representing 3.1% of total loans.
Although the Company believes it has underwriting standards to manage normal lending risks, it is difficult to assess the future
performance of our loan portfolio due to the current economic environment and the state of the real estate market. The assessment of
future performance of the loan portfolio is inherently uncertain. The Company can give no assurance that non-performing loans will not
increase or that non-performing or delinquent loans will not adversely affect the Company’s future performance.
In addition, federal regulators periodically review the Company’s ALLL and may require increases to the ALLL or further loan charge-
offs. Any increase in ALLL or loan charge-offs as required by these regulatory agencies could have a material adverse effect on the
Company’s results of operations and financial condition.
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 security, to reflect credit-related impairments through a charge to earnings.
The Company reviews its 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 the Company’s investment securities has declined below its carrying
value, the Company is required to assess whether the decline is an other- than- temporary-impairment (“OTTI”). If the Company
concludes that the decline is other than temporary, it is required to write-down the value of that security to reflect the credit-related
impairments through a charge to earnings. During 2012, the Company’s investment portfolio included four pooled trust preferred
collateralized debt obligations (“PreTSLs”) on which the Company recognized total OTTI charges of $96 thousand primarily as a result
of market developments. Though the Company sold all of its remaining PreTSLs during 2012 and held no PreTSLs in its investment
portfolio as of December 31, 2012, changes in the expected cash flows of securities in its portfolio and/or prolonged price declines in
future periods may result in additional impairment of the Company’s investment securities that is other than temporary, which would
require a charge to earnings. Due to the complexity of the calculations and assumptions used in determining whether an asset is
impaired, the impairment disclosed may not accurately reflect the actual impairment in the future. In addition, to the extent that the value
of any of the Company’s investment securities is sensitive to fluctuations in interest rates, any increase in interest rates may result in a
decline in the value of such investment securities.
The Company holds approximately $6.0 million in capital stock of the Federal Home Loan of Pittsburgh (“FHLB”) as of December 31,
2012. The Company must own such capital stock to qualify for membership in the Federal Home Loan Bank system which enables it to
19
borrow funds under the FHLB advance program. If FHLB were to cease operations, the Company’s business, financial condition,
liquidity, capital and results of operations may be materially and adversely affected.
Changes in interest rates could reduce our income, cash flows and asset values.
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 FRB.
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
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 investments fall more quickly than the interest rates paid on deposits and other
borrowings. 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 may need 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.
Laws, regulations and banking regulators require the Company and Bank to maintain adequate levels of capital to support its operations.
In addition, capital levels are 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. Also, pursuant to the Order and the Agreement, the Company and the Bank
are required to maintain increased capital levels in compliance with the Company’s revised capital plan. The Company regularly
evaluates its present and future capital requirements and needs and analyzes capital raising alternatives and options. Even if the
Company succeeds in meeting its current regulatory capital requirements, it may need to raise additional capital in the future to support
possible loan losses during future periods, to meet future regulatory capital requirements or for other reasons.
The Board of Directors may determine from time to time that the Company needs to raise additional capital by issuing additional
common shares or other securities. The Company is not restricted from issuing additional common shares, including securities that are
convertible into or exchangeable for, or that represent the right to receive, common shares. Because the Company’s decision to issue
securities in any future offering will depend on market conditions and other factors beyond its control, the Company cannot predict or
estimate the amount, timing or nature of any future offerings, or the prices at which such offerings may be affected. Such offerings will
likely be dilutive to common shareholders from ownership, earnings and book value perspectives. New investors also may have rights,
preferences and privileges that are senior to, and that adversely affect, our then current common shareholders. Additionally, if the
Company raises additional capital by making additional offerings of debt or preferred equity securities, upon liquidation, holders of the
Company’s debt securities and shares of preferred shares, and lenders with respect to other borrowings, will receive distributions of the
Company’s available assets prior to the holders of the Company’s common shares. Additional equity offerings may dilute the holdings
of our existing shareholders or reduce the market price of the Company’s common shares, or both. Holders of the Company’s common
shares are not entitled to preemptive rights or other protections against dilution.
The Company cannot assure that additional capital will be available on acceptable terms or at all. Any occurrence that may limit the
Company’s access to the capital markets may adversely affect the Company’s capital costs and its ability to raise capital and, in turn, its
liquidity. Moreover, if the Company needs to raise capital, it may have to do so when many other financial institutions are also seeking
to raise capital and would have to compete with those institutions for investors. An inability to raise additional capital on acceptable
terms when needed could have a material adverse effect on our business, financial condition and results of operations.
Interruptions or security breaches of our information systems could negatively affect our financial performance or reputation.
In conducting its business, the Company relies heavily on its information systems. Maintaining and protecting those systems is difficult
and expensive, as is dealing with any failure, interruption or breach of those systems. Any damage, failure or breach could cause an
interruption in the Company’s operations. Computer break-ins, phishing and other disruptions could also jeopardize the security of
information stored in and transmitted through the Company’s computer systems and network infrastructure. The occurrence of any
failures, interruptions or breaches could damage the Company’s reputation, cause the Company to incur additional expenses, result in a
20
loss of customer business and data, or expose the Company to liability, any of which could have a material adverse effect on the
Company’s business, financial condition and results of operations.
If our information technology is unable to keep pace with our growth or industry developments, our financial performance may
suffer.
Effective and competitive delivery of the Company’s products and services increasingly depends on information technology resources
and processes, both those provided internally as well as those provided through third party vendors. In addition to better serving
customers, the effective use of technology can improve efficiency and help reduce costs. The Company’s future success will depend, in
part, upon its ability to address the needs of its customers by using technology to provide products and services to enhance customer
convenience, as well as to create efficiencies in its operations. Many of the Company’s competitors have greater resources to invest in
technological improvements. Additionally, as technology in the financial services industry changes and evolves, keeping pace becomes
increasingly complex and expensive. There can be no assurance that the Company will be able to effectively implement new technology-
driven products and services, which could reduce its ability to compete effectively.
As of the date of this report, we are not currently able to pay dividends on the common shares, or repurchase common shares.
The Company conducts its principal business operations through the Bank and the cash that it uses to pay dividends is derived from
dividends paid to the Company by the Bank; therefore, its ability to pay dividends is dependent on the performance of the Bank and on
the Bank’s capital requirements. The Bank’s ability to pay dividends to the Company and the Company’s ability to pay dividends to its
shareholders are also limited by certain legal and regulatory restrictions. In particular, pursuant to the supervisory agreements that the
Company and the Bank have entered into with their regulators, the Company and the Bank are prohibited from declaring or paying any
dividends and the Company is also prohibited from taking dividends or other payments representing a reduction of the Bank’s capital
without prior regulatory approval.
Our profitability depends significantly on economic conditions in the Commonwealth of Pennsylvania, specifically in
Lackawanna, Luzerne, Wayne and Monroe Counties.
The Company’s success depends primarily on the general economic conditions in 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, Luzerne, Wayne and Monroe 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.
We rely on our management and other key personnel and the loss of any of them and the increased turnover of management
may adversely affect our operations.
The Company hired its current President and Chief Executive Officer (“CEO”) in December 2011 and appointed its current Chief
Financial Officer (“CFO”) in August 2012. From the first quarter of 2010, when the Company’s President and CEO resigned, until
December 2011, the Company operated without a permanent CEO. In addition, since August 2010, the Company has experienced
turnover at the senior management level. The Company is currently searching for a new Chief Lending Officer and has added other key
personnel. As a result of this senior management turnover, until the Company integrates its new personnel, and such personnel are able
to perform successfully their designated functions, it may be unable to successfully manage and grow the business and its financial
condition and profitability may suffer. The Company believes each member of the senior management team is important to the
Company’s success and the unexpected loss of any of these persons could impair our day-to-day operations as well as its 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 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 due to
the loss of their skills, knowledge of the Company’s market, years of industry experience and to 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.
21
We are subject to claims and litigation pertaining to fiduciary responsibility.
From time to time, customers and shareholders make claims and take legal action pertaining to the Company’s performance of its
fiduciary responsibilities. Regardless of whether customer and shareholder claims and legal actions 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. Moreover, as a result of the
restatement of its financial statements and revisions to many of its policies made for the periods ended December 31, 2009, March 31,
2010 and June 30, 2010, the Company may be at increased risk for such litigation. For example, on May 24, 2012, a putative shareholder
by the name of Lori Gray filed a complaint in the Court of Common Pleas in Lackawanna County against certain present and former
directors of the Company (including all of the current directors except Steven R. Tokach and Thomas J. Melone) and Demetrius &
Company, LLC (“Demetrius”) alleging, inter alia, breach of fiduciary duty, abuse of control, corporate waste, unjust enrichment and, in
the case of Demetrius, professional negligence, negligent misrepresentation, breach of contract and aiding and abetting breach of
fiduciary duty. The Company has been named as a nominal defendant.
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. For additional discussion of the Company’s
current legal matters, refer to Item 3, “Legal Proceedings” to this Annual Report on Form 10-K.
The price of our common shares may fluctuate significantly, which may make it difficult for investors to resell common shares at
a time or price they find attractive.
The Company’s share price may fluctuate significantly as a result of a variety of factors, many of which are beyond our control. These
factors include, in addition to those described above:
•
•
•
•
•
•
•
•
•
•
actual or anticipated quarterly fluctuations in our operating results and financial condition;
changes in financial estimates or publication of research reports and recommendations by financial analysts or actions taken by
rating agencies with respect to the Company or other financial institutions;
speculation in the press or investment community generally or relating to the Company’s reputation or the financial services
industry;
strategic actions by the Company or its competitors, such as acquisitions, restructurings, dispositions or financings;
fluctuations in the stock price and operating results of the Company’s competitors;
future sales of the Company’s equity or equity-related securities;
proposed or adopted regulatory changes or developments;
anticipated or pending investigations, proceedings, audits or litigation that involve or affect us;
domestic and international economic factors unrelated to the Company’s performance; and
general market conditions and, in particular, developments related to market conditions for the financial services industry.
In addition, in recent years, the stock market in general has experienced extreme price and volume fluctuations. This volatility has had a
significant effect on the market price of securities issued by many companies, including for reasons unrelated to their operating
performance. These broad market fluctuations may adversely affect the Company’s share price, notwithstanding the Company’s
operating results. The Company expects that the market price of its common shares will continue to fluctuate and there can be no
assurances about the levels of the market prices for our common shares.
An active public market for our common stock does not currently exist. As a result, shareholders may not be able to quickly and
easily sell their common shares.
The Company’s common shares were quoted, through December 17, 2010, on the over the counter bulletin board market, and are
currently quoted on OTC Markets Group, Inc. During the year ended December 31, 2012, an average of 1,845 shares traded on a daily
basis. There can be no assurance that an active and liquid market for the Company’s common shares will develop, or if one develops that
it can be maintained. The absence of an active trading market may make it difficult to subsequently sell the Company’s common shares
at the prevailing price, particularly in large quantities. For a further discussion, see Item 5- “Market for Registrant’s Common Equity,
Related Shareholder Matters, and Issuer Purchases of Equity Securities” of this report.
Item 1B. Unresolved Staff Comments.
None.
22
Item 2. Properties.
The Company currently conducts business from its main office located at 102 East Drinker Street, Dunmore, Pennsylvania, 18512 and
from its additional 20 branches located throughout Lackawanna, Luzerne, Wayne and Monroe counties. At December 31, 2012,
aggregate net book value of premises and equipment was $18.9 million. With the exception of the anticipated relocation of our Wilkes-
Barre branch as described below and potential remodeling of certain facilities to provide for the efficient use of work space and/or to
maintain an appropriate appearance, each property is considered reasonably adequate for current and anticipated needs.
In January 2013, the Company received approval from the OCC to relocate its Wilkes-Barre, Pennsylvania branch office. The relocation
to the new site, which is less than one mile from the current site, is anticipated to occur by the end of the second quarter of 2013. The
lease obligation associated with the current site expires in May 2013. On February 11, 2013 the Company entered into a 12-year lease
agreement for the new location, which commences April 1, 2013.
23
Property
Location
Ownership
Type of Use
1
2
3
4
5
6
7
8
9
10
11
12
13
102 East Drinker Street
Dunmore, PA
419-421 Spruce Street
Scranton, PA
934 Main Street
Dickson City, PA
1743 North Keyser Avenue
Scranton, PA
23 West Market Street
Wilkes-Barre, PA
1700 North Township Blvd.
Pittston, PA
754 Wyoming Avenue
Kingston, PA
1625 Wyoming Avenue
Exeter, PA
Route 502 & 435
Daleville, PA
27 North River Road
Plains, PA
169 North Memorial Highway
Shavertown, PA
269 East Grove Street
Clarks Green, PA
734 Sans Souci Parkway
Hanover Township, PA
Own
Main Office/Branch
Own
Scranton Branch
Own
Dickson City Branch
Lease
Keyser Village Branch
Lease
Wilkes-Barre Branch
Lease
Pittston Plaza Branch
Lease
Kingston Branch
Lease
Exeter Branch
Lease
Daleville Branch
Lease
Plains Branch
Lease
Back Mountain Branch
Own
Clarks Green Branch
Lease
Hanover Township
Branch
24
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
18
301 McConnell Street
Own
Honesdale Branch
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
29
Milford Road
Own
Land
East Stroudsburg, PA
Own
Land
25
30
31
32
1219 Wheeler Avenue
Dunmore, PA
280 Mundy Street
Wilkes-Barre, PA
785 Keystone Industrial Park Road
Throop, PA
Lease
Wheeler Ave. Branch
Own
Bank offices
Lease
Bank Offices
Item 3. Legal Proceedings.
On August 8, 2011, the Company announced that it had 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 presently cooperating with
the SEC in this matter.
On May 24, 2012, a putative shareholder by the name of Lori Gray filed a complaint in the Court of Common Pleas in Lackawanna
County against certain present and former directors of the Company (including all of the current directors except Steven R. Tokach and
Thomas J. Melone) and Demetrius & Company, LLC (“Demetrius”) alleging, inter alia, breach of fiduciary duty, abuse of control,
corporate waste, unjust enrichment and, in the case of Demetrius, professional negligence, negligent misrepresentation, breach of
contract and aiding and abetting breach of fiduciary duty. The Company has been named as a nominal defendant. The Board had
appointed a special litigation committee in January 2012 to investigate the matters raised in the Gray complaint. The special litigation
committee has retained independent counsel to assist with its investigation. This matter is in a preliminary stage and the Company
cannot determine the outcome or potential range of loss at this time.
On September 5, 2012, Fidelity and Deposit Company of Maryland (“F&D”) filed an action against the Company and its subsidiary,
First National Community Bank, as well as several current and former officers and directors of the Company, in the United States
District Court for the Middle District of Pennsylvania. F&D has asserted a claim for the rescission of a directors’ and officers’ insurance
policy and a bond that it had issued to the Company. On November 9, 2012, the Company and the Bank answered the claim and asserted
counterclaims. The Company and the other defendants are defending the claims, specifically all parties have filed pre-discovery motions.
The motions have been fully briefed and the parties are awaiting the Judge’s rulings on the motions. At this time, the Company cannot
reasonably determine the outcome or potential range of loss.
The Company has been subject to tax audits and is also a party to routine litigation involving various aspects of its business, such as
claims to enforce liens, condemnation proceedings on properties in which the Company holds security interests, claims involving the
making and servicing of real property loans and other issues incident to its business, none of which is expected to have a material
adverse impact on the consolidated financial condition, results of operations or liquidity of the Company.
Item 4. Mine Safety Disclosures.
Not Applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.
Market Prices of Stock and Dividends Paid
The Company’s common shares returned to full quotation status on the OTCQB operated by the OTC Markets Group, Inc. on August
24, 2012 when the Company became fully compliant with regard to its regulatory reporting status. Previously, in the fourth quarter of
2010, the Company had been notified by the Financial Industry Regulatory Authority (“FINRA”) that the Company’s common shares
would cease to be eligible for continued quotation on the Over the Counter (“OTC”) Bulletin Board after December 17, 2010. This
determination was based on the Company’s delay in filing its quarterly report on Form 10-Q for the third quarter of 2010. The
Company’s common shares are currently quoted on the OTC Markets Group, Inc. (formerly referred to as the “Pink Sheets”) under the
symbol “FNCB”. The principal market area for the Company’s shares is northeastern Pennsylvania, although shares are held by
26
residents of other states across the country. Quarterly market highs and lows and dividends paid for each of the past two years are
presented below. These prices represent actual transactions.
QUARTER
First
Second
Third
Fourth
QUARTER
First
Second
Third
Fourth
Holders
MARKET PRICE
DIVIDENDS PAID PER
HIGH
LOW
$
$
4.35
3.85
4.00
4.00
2012
2011
4.74
3.99
3.50
2.99
$
$
SHARE
2012
2011
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
$
$
2.10
2.55
2.71
3.00
3.20
3.05
2.50
2.42
As of February 28, 2013 there were 1,926 holders of record of the Company’s common shares.
Dividends
As of February 26, 2010, as a result of the Order and Agreement, the Company has suspended paying dividends indefinitely and will not
resume paying dividends without prior permission from the OCC and the Reserve Bank.
Equity Compensation Plans
For more information regarding the Company’s equity compensation plans, see Part III, Item 12 “Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters” to this Annual Report on Form 10-K.
Performance Graph
The following graph compares the cumulative total shareholder return (i.e. price change, reinvestment of cash dividends and stock
dividends received) on our common shares against the cumulative total return of the NASDAQ Stock Market (U.S. Companies) Index,
the SNL Bank Index for banks with $500 million to $1 billion in assets and the SNL Bank Index for banks with $1 billion to $5 billion
in assets. The stock performance graph assumes that $100 was invested on December 31, 2007. The graph further assumes the
reinvestment of dividends into additional shares of the same class of equity securities at the frequency with which dividends are paid on
such securities during the relevant fiscal year. The yearly points marked on the horizontal axis correspond to December 31 of that year.
The Company calculates each of the referenced indices in the same manner. All are market-capitalization-weighted indices, so
companies judged by the market to be more important (i.e. more valuable) count for more in all indices.
27
First National Community Bancorp, Inc.
Total Return Performance
150
125
100
75
50
25
e
u
l
a
V
x
e
d
n
I
0
12/31/07
12/31/08
12/31/09
12/31/10
12/31/11
12/31/12
First National Community Bancorp, Inc.
NASDAQ Composite
SNL Bank $1B-$5B
SNL Bank $500M-$1B
Index
First National Community Bancorp, Inc.
NASDAQ Composite
SNL Bank $1B-$5B
SNL Bank $500M-$1B
12/31/07
100.00
100.00
100.00
100.00
12/31/08
59.13
60.02
82.94
64.08
12/31/09
33.46
87.24
59.45
61.03
12/31/10
16.76
103.08
67.39
66.62
12/31/11
13.92
102.26
61.46
58.61
12/31/12
16.87
120.42
75.78
75.14
Period Ending
(*)
Source: SNL Financial LC, Charlottesville, VA © 2011. SNL Securities is a research and publishing firm specializing in the
collection and dissemination of data on the banking, thrift and financial services industries.
Purchase of Equity Securities by the Issuer or Affiliates Purchasers
None.
Recent Sales of Unregistered Securities
On December 17, 2012, the Board of Directors granted 50 shares of the Company’s authorized but unissued common shares to each
active full and part-time employee in exchange for services provided during the fiscal year. There were 15,050 shares issued under this
grant at a cost per share of $3.05, with a total cost of $46 thousand included in salary expense in 2012. This share grant was effected
without registration under the Securities Act in reliance upon Section 2(3) of the Securities Act, as a non-sale distribution of securities
by the Company. These shares were given to all employees of the Company as a share bonus and not as individual incentive
compensation or in lieu of a cash payment, with no investment decision on the part of the recipients or receipt of value by the Company
in return. There were no underwriters employed in the issuance of the securities or in connection with this transaction, and no proceeds
were received by the Company for this stock grant. There have been no sales of unregistered securities during 2012.
28
Item 6. Selected Financial Data
The selected consolidated financial and other data and management’s discussion and analysis of financial condition and results of
operations set forth below and in Item 7 hereof is derived in part from, and should be read in conjunction with, the consolidated financial
statements and notes thereto contained elsewhere herein. Certain reclassifications have been made to prior years’ consolidated financial
statements to conform to the current year’s presentation. Those reclassifications did not impact net income.
Balance Sheet Data:
Total assets
Securities, available-for-sale
Securities, held-to-maturity
Net loans
Total deposits
Borrowed funds
Shareholders' equity
Income Statement Data:
Interest income
Interest expense
Net interest income before provision for loan and lease losses
Provision for loan and lease losses
Non-interest income (loss)
Non-interest expenses
Income (loss) before income taxes
Provision (credit) for income taxes
Net income (loss)
Earnings per share, basic and diluted
Capital and Related Ratios:
Cash dividends declared per share
Book value per share
Tier I leverage ratio
Total risk-based capital to risk-adjusted assets
Average equity to average total assets
Tangible equity to tangible assets
Selected Performance Ratios:
Return on average assets
Return on average equity
Net interest margin
Noninterest income/operating income (FTE)
Asset Quality Ratios:
Allowance for loan and lease losses/total loans
Nonperforming loans/total loans
Allowance for loan and lease losses/nonperforming loans
Net charge-offs/average loans
For the Years Ended December 31,
2012
2011
2010
2009
2008
$
968,274
$
1,102,639
$
1,167,298
$
1,366,332
$
1,313,759
185,361
2,198
579,396
854,613
53,903
36,925
185,475
2,094
659,044
957,136
83,571
39,925
251,072
1,994
735,813
982,436
137,604
32,055
252,946
1,899
917,516
1,071,608
217,467
63,084
245,900
1,808
956,674
952,892
245,197
100,342
$
37,027
$
42,936
$
55,471
$
64,398
$
73,451
9,218
27,809
4,065
4,283
41,738
(13,711)
-
(13,711)
(0.83)
13,867
29,069
523
12,949
41,830
(335)
-
(335)
(0.02)
21,868
33,603
25,041
1,282
41,564
(31,720)
-
(31,720)
(1.94)
25,196
39,202
42,089
(12,001)
38,022
(52,910)
(8,594)
(44,316)
(2.74)
33,242
40,209
1,804
7,812
26,530
19,687
4,604
15,083
0.95
$
-
$
-
$
-
$
0.17
$
0.46
2.24
4.07%
10.20%
3.97%
3.75%
(1.35%)
(34.09%)
3.28%
9.72%
3.10%
1.62%
190.92%
0.97%
2.43
4.72%
11.35%
3.04%
3.55%
(0.03%)
(0.98%)
3.10%
21.82%
3.07%
2.93%
104.60%
0.31%
1.95
4.27%
10.13%
4.10%
2.67%
(2.44%)
(59.44%)
3.07%
2.42%
2.98%
3.74%
79.58%
2.84%
3.87
5.94%
10.54%
6.89%
4.49%
(3.29%)
(47.78%)
3.35%
(21.00%)
2.40%
2.77%
86.44%
2.87%
5.59
8.99%
11.18%
8.12%
6.94%
1.17%
14.35%
3.57%
9.24%
0.86%
2.43%
35.25%
0.12%
Note: Average balances were calculated using average daily balances. Average balances for loans included nonaccrual loans. Tax-equivalent
adjustments were calculated using the prevailing statutory rate of 34.0 percent.
29
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis (“MD&A”) represents an overview of the financial condition and results of operations and
should be read in conjunction with our consolidated financial statements and notes thereto included in Item 8 of this report and Risk
Factors detailed in Item 1A of Part I of this report.
We are in the business of providing customary retail and commercial banking services to individuals and businesses. Our core market is
Northeastern Pennsylvania.
FORWARD-LOOKING STATEMENTS
The Company may from time to time make written or oral “forward-looking statements,” including statements contained in the
Company’s filings with the SEC, in its reports to shareholders, and in other communications by the Company, which are made in good
faith by the Company pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements include statements with respect to the Company’s beliefs, plans, objectives, goals, expectations,
anticipations, estimates and intentions, that are subject to significant risks and uncertainties, and are subject to change based on various
factors (some of which are beyond the Company’s control). The words “may,” “could,” “should,” “would,” “believe,” “anticipate,”
“estimate,” “expect,” “intend,” “plan” and similar expressions are intended to identify forward-looking statements. The following
factors, among others, could cause the Company’s financial performance to differ materially from the plans, objectives, expectations,
estimates and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the
strength of the local economies in the Company’s markets; the effects of, and changes in trade, monetary and fiscal policies and laws,
including interest rate policies of the Board of Governors of the Federal Reserve System; inflation, interest rate, market and monetary
fluctuations; the timely development of and acceptance of new products and services; the impact of the Company’s ability to comply
with its regulatory agreements and orders; the effectiveness of the Company’s revised system of internal controls; the ability of the
Company to attract additional capital investment; the impact of changes in financial services’ laws and regulations (including laws
concerning taxes, banking, securities and insurance); technological changes; changes in consumer spending and saving habits; the
nature, extent, and timing of governmental actions and reforms, and the success of the Company at managing the risks involved in the
foregoing.
The Company cautions that the foregoing list of important factors is not all inclusive. Readers are also cautioned not to place undue
reliance on any forward-looking statements, which reflect management’s analysis only as of the date of this report, even if subsequently
made available by the Company on its website or otherwise. The Company does not undertake to update any forward-looking statement,
whether written or oral, that may be made from time to time by or on behalf of the Company to reflect events or circumstances occurring
after the date of this report.
CRITICAL ACCOUNTING POLICIES
In preparing the consolidated financial statements, management has made estimates, judgments and assumptions that affect the reported
amounts of assets and liabilities as of the date of the consolidated statements of condition and results of operations for the periods
indicated. Actual results could differ significantly from those estimates.
The Company’s accounting policies are fundamental to understanding management’s discussion and analysis of its financial condition
and results of operations. The Company’s significant accounting policies are presented in Note 2 to the consolidated financial
statements. Management has identified the policies on the Allowance for Loan and Lease Losses (“ALLL”), securities valuation,
valuation of other real estate owned (OREO) and income taxes to be critical as management is required to make subjective and/or
complex judgments about matters that are inherently uncertain and could be most subject to revision as new information becomes
available.
The judgments used by management in applying the critical accounting policies discussed below may be affected by a further and
prolonged deterioration in the economic environment, which may result in changes to future financial results. Specifically, subsequent
evaluations of the loan portfolio, in light of the factors then prevailing, may result in significant changes in the ALLL in future periods,
and the inability to collect on outstanding loans could result in increased loan losses. In addition, the valuation of certain securities in the
Company’s investment portfolio could be negatively impacted by illiquidity or dislocation in marketplaces resulting in significantly
depressed market prices thus leading to further impairment losses.
30
Allowance for Loan and Lease Losses
Management continually evaluates the credit quality of the Company’s loan portfolio, and performs a formal review of the adequacy of
the ALLL on a quarterly basis. The ALLL is established through a provision for loan losses charged to earnings and is maintained at a
level management considers adequate to absorb estimated probable losses inherent in the loan portfolio as of the evaluation date. Loans,
or portions of loans, determined by management to be uncollectible are charged off against the ALLL, while recoveries of amounts
previously charged off are credited to the ALLL.
Determining the amount of the ALLL is considered a critical accounting estimate because it requires significant judgment and the use of
estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous
loans based on historical loss experience, qualitative factors, and consideration of current economic trends and conditions, all of which
may be susceptible to significant change. Various banking regulators, as an integral part of their examination of the Company, also
review the ALLL. Such regulators may require, based on their judgments about information available to them at the time of their
examination, that certain loan balances be charged off or require that adjustments be made to the ALLL. Additionally, the ALLL is
determined, in part, by the composition and size of the loan portfolio.
The ALLL consists of specific and general components. The specific component relates to loans that are classified as impaired. For
such loans an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan
is lower than the carrying value of that loan. The general component covers all other loans and is based on historical loss experience
adjusted by qualitative factors. The general reserve component of the ALLL is based on pools of unimpaired loans segregated generally
by loan segment and risk rating categories of “Pass”, “Special Mention” or “Substandard and Accruing,” and historical loss factors and
varied qualitative factor basis point allocations are applied based on the risk profile in each risk rating category to determine the
appropriate reserve related to those loans. Substandard loans on nonaccrual status are included in impaired loans.
See Note 2-“Summary of Significant Accounting Policies” and Note 5-“Loans” of the consolidated financial statements included in Item
8-“Financial Statements and Supplementary Data” for additional information about the ALLL.
Securities Valuation
Management utilizes various inputs to determine the fair value of its investment portfolio. To the extent they exist, unadjusted quoted
market prices in active markets (Level 1) or quoted prices on similar assets or models using inputs that are observable, either directly or
indirectly (Level 2) are utilized to determine the fair value of each investment in the portfolio. In the absence of observable inputs or if
markets are illiquid, valuation techniques are used to determine fair value of any investments that require inputs that are both
unobservable and significant to the fair value measurement (Level 3). For Level 3 inputs, valuation techniques are based on various
assumptions, including, but not limited to, cash flows, discount rates, adjustments for nonperformance and liquidity, and liquidation
values. A significant degree of judgment is involved in valuing investments using Level 3 inputs. The use of different assumptions
could have a positive or negative effect on the consolidated financial condition or results of operations. See Note 4-“Securities” and
Note 18-“Fair Value Measurements” of the consolidated financial statements included in Item 8 hereof for more information about the
Company’s securities valuation techniques.
On a quarterly basis, management evaluates individual investment securities classified as held-to-maturity or available-for-sale having
unrealized losses to determine whether or not the security is other-than-temporarily-impaired (“OTTI”). The analysis of OTTI requires
the use of various assumptions, including but not limited to, the length of time an investment’s fair value is less than book value, the
severity of the investment’s decline, any credit deterioration of the issuer, whether management intends to sell the security, and whether
it is more-likely-than-not that the Company will be required to sell the security prior to recovery of its amortized cost basis. Debt
investment securities deemed to be OTTI are written down by the impairment related to the estimated credit loss and the non-credit
related impairment loss is recognized in other comprehensive income. The Company recognized OTTI charges on investment securities
of $96 thousand, $798 thousand, and $4.3 million in 2012, 2011, and 2010, respectively, within the consolidated statements of
operations. For 2012, the OTTI charges relate to estimated credit losses on pooled trust preferred securities. See Note 4-“Securities”
included in Item 8-“Financial Statements and Supplementary Data” to the consolidated financial statements for additional information
about our OTTI charges.
Other Real Estate Owned
Other real estate owned (“OREO”) consists of property acquired by foreclosure, abandonment or conveyance of deed in-lieu of
foreclosure. It is held for sale and is initially recorded at fair value less cost to sell at the date of acquisition, which establishes a new cost
basis. Upon acquisition of the property, any write-down to fair value less estimated selling costs is charged to the ALLL. This
determination is made on an individual asset basis. Subsequent to acquisition, valuations are periodically performed by management
and the assets are carried at the lower of carrying amount or fair value less cost to sell. Fair value is determined through external
31
appraisals, current letters of intent, broker price opinions or executed agreements of sale. Costs relating to the development and
improvement of the OREO properties may be capitalized; holding period costs and subsequent changes to the valuation allowance are
charged to expense as incurred.
Income Taxes
The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and
deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements
or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in our consolidated
financial statements or tax returns. Fluctuations in the actual outcome of these future tax consequences could impact our consolidated
financial condition or results of operations.
The Company records an income tax provision or benefit based on the amount of tax currently payable or receivable and the change in
deferred tax assets and liabilities. Deferred income taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial and tax reporting purposes. Management conducts quarterly assessments of all available
evidence to determine the amount of deferred tax assets that will more-likely-than-not be realized. The available evidence used in
connection with these assessments includes taxable income in current and prior periods, cumulative losses in prior periods, projected
future taxable income, potential tax-planning strategies, and projected future reversals of deferred tax items. Management’s assumptions
and estimates take into consideration its interpretation of tax laws and possible outcomes of current and future audits conducted by tax
authorities. These assessments involve a certain degree of subjectivity which may change significantly depending on the related
circumstances.
In connection with determining the income tax provision or benefit, the Company considers maintaining liabilities for uncertain tax
positions and tax strategies that management believes contain an element of uncertainty. Periodically, the Company evaluates each of its
tax positions and strategies to determine whether a liability for uncertain tax benefits is required. As of December 31, 2012 and 2011, the
Company determined that it did not have any uncertain tax positions or tax strategies and that no liability was required to be recorded.
Note 2-“Summary of Significant Accounting Policies” and Note 13 - “Income Taxes” to the consolidated financial statements include
additional discussion on the accounting for income taxes.
New Authoritative Accounting Pronouncements
Accounting Standards Update (“ASU”) No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure
Requirements in U.S. GAAP and IFRS”, an update to ASC Topic 820 - Fair Value Measurement, results in common fair value
measurement and disclosure requirements in U.S. GAAP and IFRS. The amendments in ASU No. 2011-04 include clarifications about
the application of existing fair value measurement requirements and changes to principles for measuring fair value. ASU No. 2011-04
also requires additional disclosures about fair value measurements. ASU No. 2011-04 is required to be applied prospectively and is
effective for interim and annual periods beginning after December 15, 2011. The Company adopted this new guidance for the quarter
ended March 31, 2012. The adoption of this guidance did not have a material impact on the Company’s consolidated financial
statements; however, the adoption did have an impact on the Company’s fair value disclosures.
ASU No. 2011-05, “Presentation of Comprehensive Income, an update to ASC Topic 220 - Comprehensive Income,” was issued to
improve the comparability, consistency and transparency of financial reporting. The amendment provides the entity an option to present
the total of comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive
statements. The amendments do not change the items that must be reported in other comprehensive income. ASU No. 2011-05 is
required to be applied retrospectively and is effective for interim and annual periods beginning after December 15, 2011. The Company
adopted this new guidance for the quarter ended March 31, 2012. Accordingly, the Company presents comprehensive income in a
separate Statement of Comprehensive Income.
ASU No. 2011-11, Balance Sheet (Topic 210) - “Disclosures about Offsetting Assets and Liabilities” was issued in December 2011.
The objective of this update is to provide enhanced disclosures that will enable users of its financial statements to evaluate the effect or
potential effect of netting arrangements on an entity’s financial position. This includes the effect or potential effect of rights of setoff
associated with an entity’s recognized assets and recognized liabilities within the scope of this update. The amendments require
enhanced disclosures by requiring improved information about financial instruments and derivative instruments that are either (1) offset
in accordance with either ASC 210-20-45 or ASC 815-10-45 or (2) subject to an enforceable master netting arrangement or similar
agreement, irrespective of whether they are offset in accordance with either ASC 210-20-45 or ASC 815-10-45. An entity is required to
apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual
periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented.
The adoption of ASU 2011-11 on January 1, 2013 will not have an effect on the operating results or financial position of the Company.
32
ASU No. 2012-02 “Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment” was issued
in July 2012. This update simplifies the guidance for testing the decline in realizable value (impairment) of indefinite-lived intangible
assets other than goodwill. The amendment allows an entity the option to first assess qualitative factors to determine whether it is
necessary to perform the quantitative impairment test. An organization electing to perform a qualitative assessment is no longer required
to calculate the fair value of an indefinite-lived intangible asset unless the organization determines, based on a qualitative assessment,
that it is “more likely than not” that the asset is impaired. This amendment is effective for annual and interim impairment tests
performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The adoption of ASU 2012-02 on January 1,
2013 will not have an effect on the operating results or financial position of the Company.
ASU No. 2013-01 “Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities” was issued
in January 2013. This update clarifies the scope of transactions that are subject to the disclosures about offsetting, specifically that
ordinary trade receivables and receivables are not in the scope of ASU No. 2011-11. ASU No. 2011-11 applies only to derivatives,
repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are offset in
accordance with specific criteria contained in FASB Accounting Standards Codification or subject to a master netting arrangement or
similar agreement. ASU No. 2013-01 is effective for fiscal years beginning on or after January 1, 2013, and interim periods within those
annual periods. The adoption of ASU 2013-01 on January 1, 2013 will not have an effect on the operating results or financial position of
the Company.
ASU No. 2013-02 “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive
Income” was issued in February 2013. The objective of this update was to improve the transparency of reporting these reclassifications.
The new amendments will require an organization to: present either on the face of the statement where income is presented or in the
notes to the financial statements the effects on the line items of net income of significant amounts reclassified out of accumulated other
comprehensive income; or cross reference to other disclosures currently required under GAAP for other reclassification items to be
reclassified directly to income in their entirety in the same reporting period. The amendments apply to all public and private companies
that report other comprehensive income. Public companies are required to comply with these amendments for all reporting periods, both
interim and annual periods, beginning after December 15, 2012. The adoption of ASU 2013-02 on January 1, 2013 is not expected to
have a material effect on the operating results or financial position of the Company.
EXECUTIVE OVERVIEW
The following overview should be read in conjunction with the MD&A in its entirety.
The Company reached two very important milestones in 2012: (i) returning to current SEC reporting status with the timely filing of its
third quarter 2012 Quarterly Report on Form 10-Q; and (ii) its stock returned to open trading on the OTCQB. Reaching these milestones
allowed management to focus on strategies and take actions aimed at reducing balance sheet risk and the levels of classified assets, cost
control and revenue growth. These actions involved:
• Selling off higher-risk securities in its securities portfolio, including the Company’s entire holdings of Pooled Trust Preferred
securities (“PreTSLs”) and private label collateralized mortgage obligations (“PLCMOs”);
• Reducing levels of classified assets, including nonperforming loans and other real estate owned (“OREO”);
• Using excess liquidity to reduce borrowings at the Federal Home Loan Bank of Pittsburgh (“FHLB”); and
•
Implementing a Reduction in Force and Voluntary Separation Program. The purpose of these actions was to align the
Company’s staffing model with its current asset size and transaction volume.
The Company reported a net loss of $13.7 million in 2012 compared to a $0.3 million net loss in 2011. Basic and diluted losses per
share were $(0.83) per share in 2012 and $(0.02) per share in 2011. The increase in the net loss resulted primarily from a $8.7 million
reduction in non-interest income, a $3.5 million increase in the provision for loan and lease losses and a $1.3 million decrease in net
interest income. Non-interest expense decreased $92 thousand. Return on average assets and return on average equity were (1.35%) and
(34.09%) in 2012, and (0.03%) and (0.98%) in 2011, respectively.
Total assets decreased $134.4 million, or 12.2%, to $968.3 million, at December 31, 2012, as compared to $1.10 billion at December 31,
2011. The reduction in the balance sheet was driven by a $102.5 million, or 10.7%, decrease in total deposits. In addition, the Company
repaid FHLB advances totaling $29.7 million. Net loans decreased $79.6 million or 12.1%, while investment securities were unchanged.
These changes caused a $53.4 million or 31.7% reduction in cash and cash equivalents.
Total shareholders’ equity decreased $3.0 million to $36.9 million at December 31, 2012 from $39.9 million at the end of 2011. The
$13.7 million net loss was partially offset by a $10.7 million positive change in other comprehensive income. The total risk-based capital
ratios for the Company and the Bank were 10.20% and 11.79%, respectively at December 31, 2012, compared to 11.35% and 11.73%,
respectively at December 31, 2011.
33
Net Interest Income
2012 compared to 2011
Net interest income is the difference between interest revenue, interest and fees on interest-earning assets and interest expense, interest
paid to the Company’s depositors and interest paid on external borrowings. Net interest income represents the largest component of the
Company’s operating income and, as such, is the primary determinant of profitability. Net interest income is impacted by variations in
the volume, rate and composition of earning assets and interest-bearing liabilities, changes in general market rates and the level of
nonperforming assets. The tax-equivalent net interest margin is calculated by dividing tax-equivalent net interest income by average
interest-earning assets and is a key measurement used in the banking industry to measure income from earning assets. The Company’s
tax-equivalent net interest margin improved 18 basis points to 3.28% in 2012 from 3.10% in 2011. Rate spread, the difference between
the average yield on interest-earning assets and the average cost of interest-bearing liabilities shown on a fully tax-equivalent basis, was
3.15% in 2012, an increase of 15 basis points compared to 3.00% in 2011.
Net interest income on a tax-equivalent basis decreased $1.9 million to $30.6 million for 2012 compared with $32.5 million for 2011.
During 2012, lower average securities and loan balances and lower yields on interest-earning assets negatively impacted our net interest
income. The yield on average earning assets declined 16 basis points to 4.27% in 2012 from 4.43% in 2011, which primarily resulted
from a 24 basis point decrease in the tax-equivalent yield on the loan portfolio. The effects of the decreased yields were partially offset
by a 31 basis point decline in the cost of average interest-bearing liabilities and lower volume of average interest-bearing liabilities as
compared to the previous year. The Federal Reserve kept interest rates stable during 2012 leaving the Federal Funds rate at 25 basis
points. The Company’s floating rate loans are largely indexed to the national prime rate and many of these loans are now at their floors
and will remain there until the prime rate moves up enough for their rates to adjust upward. In addition, most of the time deposits in the
Company’s funding portfolio matured and continued to renew at lower market rates in 2012.
Average loans totaled $653.0 million for the year ended December 31, 2012, a decrease of $70.7 million, or 9.8%, compared to the same
period for 2011. The reduction is primarily due to the net pay downs of commercial and industrial loans and real estate loans of $64.2
million and $19.0 million, respectively. During 2012, loan satisfactions continued to outpace originations. Several large commercial loan
relationships were lost upon the sale of the businesses. In addition, approximately $56.6 million in commercial loans to a related party,
which were fully secured by deposit accounts, were paid off during 2012. Interest income on a tax-equivalent basis for loans decreased
$5.0 million due to the decrease in average loans and a 24 basis point decrease in the average loan yield as loans continued to reset at
lower rates. In addition, competition within the Company’s market area escalated, causing pricing pressures that led to new loans being
originated at lower rates as compared to 2011, and the reduction of rates on existing loans in order to retain business.
The interest income that would have been earned on non-accrual and restructured loans outstanding at December 31, 2012, 2011 and
2010 in accordance with their original terms approximated $1.4 million, $2.2 million, and $2.9 million, respectively. Interest income on
impaired loans of $376 thousand, $238 thousand, and $619 thousand was recognized based on payments received in 2012, 2011 and
2010.
Average investment securities totaled $199.2 million, a decrease of $33.6 million, or 14.4%, in 2012 compared to 2011. Interest income
on a tax equivalent basis for investment securities decreased $1.6 million, primarily due to reinvestment of pay downs and maturities
into more lower-yielding securities. Average interest-bearing deposits in other banks declined $12.4 million as the Company decreased
its holdings of liquid assets. Interest income on interest-bearing deposits in other banks increased $12 thousand as the 5 basis point
increase in the yield more than offset a $12.4 million decrease in volume.
Average interest-bearing liabilities totaled $822.2 million for the year ended December 31, 2012, a decrease of $147.5 million, or 15.2%,
during 2012 compared to the same period in 2011, due to a decrease in interest-bearing deposits of $108.3 million, or 12.6%, and a
decrease in borrowings of $39.1 million, or 35.0%.
The Company experienced reductions in the average balances for all major deposit categories. Specifically, average interest-bearing
demand deposits, savings deposits, time deposits over $100 thousand, and other time deposits decreased $35.3 million, $1.7 million,
$10.8 million and $60.6 million, respectively. During 2012, the Company continued its pricing strategy to reduce its cost of funds and to
direct deposit growth to short-term maturity products. The Company continued to reposition maturing longer term time deposits into
short-term products, whenever possible, and allowed the residual to run-off. The Company used a portion of the net proceeds received
from the loan and investment portfolios to fund deposit withdrawals and the maturities of the higher cost time deposits. The cost of
interest-bearing demand deposits, savings deposits, time deposits over $100 thousand, and other time deposits decreased 25, 14, 34, and
26 basis points respectively, from the same period in 2011. The average cost of interest-bearing deposits decreased by 30 basis points to
0.72% in 2012 from 1.02% in 2011. The decrease in the rate on interest-bearing deposits was driven primarily by the pricing decreases
that resulted from the Company’s pricing strategy. Average borrowed funds and other interest-bearing liabilities totaled $72.6 million
for the year ended December 31, 2012, a decrease of $39.1 million, or 35.0%, compared to 2011. During 2012, the Company continued
34
to employ its funds management plan implemented in 2010 and to pay off term borrowings. The Company used excess liquidity from
loan repayments and sales of investment securities to pay off a portion of its term borrowings. The Company did not enter into any new
term borrowings in 2012. The 71 basis point increase in the cost of borrowed funds for the year ended December 31, 2012 is primarily
attributable to the repayment during 2012 of maturing FHLB advances that were at lower rates, resulting in higher-rate borrowings
becoming a larger percentage of total borrowings and an increase in the related cost of borrowed funds.
2011 compared to 2010
Net interest income on a tax-equivalent basis decreased $5.2 million to $32.5 million for 2011 compared with $37.7 million for 2010.
During 2011, lower average securities and loan balances and lower yields on interest-earning assets negatively impacted our net interest
income. The yield on loans and investments declined 31 basis points and 21 basis points, respectively, partially offset by a 47 basis
point decline in the cost of average interest-bearing liabilities and lower average interest-bearing liabilities as compared to 2010. The
Federal Reserve kept interest rates stable during 2011 leaving the Federal Funds rate at an historic low of 25 basis points. The
Company’s floating rate loans are largely indexed to the national prime rate and many of these loans are now at their floors and will
remain there until the prime rate moves up enough for their rates to move above their floors. In addition, most of the time deposits in the
Company’s funding portfolio matured and renewed at lower market rates in 2011.
Average loans totaled $723.7 million for the year ended December 31, 2011, a decrease of $155.3 million, or 17.7%, compared to the
same period for 2010. The reduction is primarily due to the net pay downs of real estate loans and commercial and industrial loans of
$51.6 million and $23.5 million, respectively; the transfer of $4.0 million of foreclosed loans into OREO; and a smaller portfolio at the
onset of 2011. During 2011, loan satisfactions continued to outpace originations and the Company continued to focus its efforts on
reducing exposure to higher risk construction, land acquisition and development loans by allowing $43.9 million of this segment of the
portfolio to pay-off. Interest income on a tax equivalent basis for loans decreased $10.3 million due to the decrease in average loans
and a 31 basis point decrease in the average loan yield as loans continued to reset at lower rates and new business was originated at
lower market rates compared with 2010.
Average investment securities totaled $232.8 million, a decrease of $49.2 million, or 17.5%, in 2011 compared to 2010. Interest income
on a tax equivalent basis for investment securities decreased $2.9 million primarily due to reinvestment of pay downs and maturities into
more liquid lower yielding securities. Average interest-bearing deposits in other banks increased $23.0 million as the Company
increased its holdings of liquid assets. Interest income on interest-bearing deposits in other banks increased $17 thousand as the increase
in volume more than offset the 4 basis point decline in yield earned.
Average interest-bearing liabilities totaled $969.6 million for the year ended December 31, 2011, a decrease of $182.8 million, or 15.9%,
compared to the same period in 2010 primarily due to a decrease in interest-bearing deposits of $97.9 million, or 10.2%, and a decrease
in borrowed funds of $84.9 million or 43.2%.
Average interest-bearing demand deposits, savings deposits, time deposits over $100 thousand, and other time deposits decreased $18.4
million, $4.1 million, $44.3 million and $31.1 million, respectively. During 2011, the Company implemented a pricing strategy to reduce
its cost of funds and to concentrate deposit growth on short-term maturities. The Company repositioned maturing longer term time
deposits into short-term products, whenever possible, and allowed the residual to run-off. The Company used the net proceeds from the
sale of investment securities and a portion of the funds provided from loan repayments to fund deposit withdrawals and the maturities of
the higher cost time deposits. The cost of interest-bearing demand deposits, savings deposits, time deposits over $100 thousand, and
other time deposits decreased 49, 22, 31, and 56 basis points respectively, from the same period in 2010. The average cost of interest-
bearing deposits decreased by 46 basis points to 1.02% in 2011 from 1.48% in 2010. The decrease in the rate on interest-bearing
deposits was driven primarily by the pricing decreases that resulted from the Company’s pricing strategy and an overall decrease in
market rates. Average borrowed funds and other interest-bearing liabilities totaled $111.7 million for the year ended December 31, 2011,
a decrease of $84.9 million, or 43.2%, compared to 2010. During 2011, the Company continued to employ its funds management plan
implemented in 2010 and to pay off term borrowings. The Company used a portion of the funds provided from loan repayments to pay
off $53.6 million of term borrowings. The Company did not enter into any new term borrowings in 2011. The Company borrowed and
repaid short-term borrowings in the amount of $60.0 million during 2011. The 67 basis point increase in the cost of borrowed funds for
the year ended December 31, 2011 is primarily attributable to the repayment during 2011 of maturing FHLB advances that were at lower
rates, resulting in higher-rate borrowings becoming a larger percentage of total borrowings and an increase in the related cost of
borrowed funds.
35
The following table reflects the components of net interest income for each of the three years ended December 31, 2012, 2011 and 2010:
Year ended December 31,
Year ended December 31,
Year ended December 31,
Average
Balance
2012
Interest
Yield/
Cost
Average
Balance
2011
Interest
Yield/
Cost
Average
Balance
2010
Interest
Yield/
Cost
(dollars in thousands)
ASSETS
Earning Assets (2)(3)
Loans-taxable (4)
Loans-tax free (4)
Total Loans (1)(2)
Securities-taxable
Securities-tax free
Total Securities (1)(5)
Interest-bearing deposits in other
banks and federal funds sold
Total Earning Assets
$ 619,151
$ 28,153
33,863
2,174
653,014
30,327
117,800
3,318
81,368
5,956
199,168
9,274
79,571
190
931,753
39,791
Non-earning assets
Allowance for loan and lease losses
Total Assets
100,979
(20,526)
$ 1,012,206
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing Liabilities
Interest-bearing demand
deposits
Savings deposits
Time deposits over $100,000
Other time deposits
$ 299,938
699
87,818
161
170,356
1,476
191,462
3,048
Total Interest-bearing Deposits
749,574
5,384
Borrowed funds and other interest-
bearing liabilities
Total Interest-Bearing Liabilities
72,593
3,834
822,167
9,218
Demand deposits
Other liabilities
Shareholders' equity
Total Liabilities and
128,254
21,568
40,217
Shareholders Equity
$ 1,012,206
4.55%
6.42%
4.64%
2.82%
7.32%
4.66%
0.24%
4.27%
$ 688,546
$ 32,831
35,150
2,479
723,696
35,310
123,854
3,198
108,955
7,717
232,809
10,915
91,932
178
1,048,437
46,403
103,685
(24,108)
$ 1,128,014
4.77%
7.05%
4.88%
2.58%
7.08%
4.69%
0.19%
4.43%
$ 826,188
$ 42,016
52,794
3,582
878,982
45,598
160,690
5,340
121,367
8,470
282,057
13,810
68,949
161
1,229,988
59,569
97,793
(25,587)
$ 1,302,194
0.23%
0.18%
0.87%
1.59%
0.72%
5.28%
1.12%
$ 335,201
1,615
89,494
287
181,146
2,193
252,081
4,664
857,922
8,759
111,709
5,108
969,631
13,867
0.48%
0.32%
1.21%
1.85%
1.02%
4.57%
1.43%
$ 353,579
3,442
93,598
502
225,446
3,416
283,214
6,832
955,837
14,192
196,606
7,676
1,152,443
21,868
107,763
16,301
34,319
$ 1,128,014
82,400
13,982
53,369
$ 1,302,194
5.09%
6.78%
5.19%
3.32%
6.98%
4.90%
0.23%
4.84%
0.97%
0.54%
1.52%
2.41%
1.48%
3.90%
1.90%
Net Interest Income/Interest
Rate Spread (6)
Tax equivalent adjustment
Net interest income as reported
Net Interest Margin (7)
30,573
3.15%
32,536
3.00%
37,701
2.94%
(2,764)
$ 27,809
(3,467)
$ 29,069
(4,098)
$ 33,603
3.28%
3.10%
3.07%
Interest income is presented on a tax-equivalent basis using a 34% rate for 2012, 2011 and 2010.
(1)
(2) Loans are stated net of unearned income.
(3) Nonaccrual loans are included in loans within earning assets.
(4) Loan fees included in interest income are not significant.
(5) The yields for securities that are classified as available-for-sale is based on the average historical amortized cost.
(6)
Interest rate spread represents the difference between the average yield on interest earning assets and the cost of interest-bearing liabilities
and is presented on a tax-equivalent basis.
(7) Net interest income on a tax-equivalent basis as a percentage of total average interest-earning assets.
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 assets, specifically 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%.
36
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)
Interest Income:
Loans - taxable
Loans - tax free
T otal loans
Securities - taxable
Securities - tax free
T otal securities
Interest-bearing deposits in other banks and
federal funds sold
T otal interest income
Interest Expense:
Interest-bearing demand deposits
Savings deposits
T ime deposits over $100,000
Other time deposits
T otal interest-bearing deposits
Borrowed funds and other
interest-bearing liabilities
T otal interest expense
De ce mbe r 31,
2012 vs. 2011
De ce mbe r 31,
2011 vs. 2010
Incre ase (De cre ase )
Incre ase (De cre ase )
Due to
Volume
Due to
Rate
Total
C hange
Due to
Volume
Due to
Rate
Total
C hange
$
(3,204)
$
(1,474)
$
(4,678)
$
(6,682)
$
(2,503)
$
(9,185)
(88)
(3,292)
(161)
(2,012)
(2,173)
(26)
(5,491)
(155)
(5)
(124)
(1,023)
(1,307)
(1,981)
(3,288)
(217)
(1,691)
281
251
532
38
(305)
(4,983)
120
(1,761)
(1,641)
(1,239)
(7,921)
(1,086)
(877)
(1,963)
136
(2,367)
(1,056)
124
(932)
(1,103)
(10,288)
(2,142)
(753)
(2,895)
12
48
(31)
17
(1,121)
(6,612)
(9,836)
(3,330)
(13,166)
(761)
(121)
(593)
(593)
(2,068)
707
(1,361)
(916)
(126)
(717)
(1,616)
(3,375)
(1,274)
(4,649)
(4)
(21)
(605)
(695)
(1,325)
(3,721)
(5,046)
(1,823)
(194)
(618)
(1,473)
(4,108)
1,153
(2,955)
(1,827)
(215)
(1,223)
(2,168)
(5,433)
(2,568)
(8,001)
Net Interest Income
$
(2,203)
$
240
$
(1,963)
$
(4,790)
$
(375)
$
(5,165)
(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.
Provision for Loan and Lease Losses
Management closely monitors the loan portfolio and the adequacy of the ALLL considering underlying borrower financial performance
and collateral values and associated credit risks. Future material adjustments may be necessary to the provision for loan and lease losses
and the ALLL if economic conditions or loan performance differ substantially from the assumptions management used in making its
evaluation of the ALLL. The provision for loan and lease losses is an expense charged against net interest income to provide for
estimated losses attributable to uncollectible loans and is based on management’s analysis of the adequacy of the ALLL.
2012 compared to 2011
The provision for loan and lease losses was $4.1 million in 2012 as compared to $0.5 million in 2011. The increase primarily resulted
from an increase in charge-offs of classified credits, specifically one larger commercial credit totaling $3.1 million that was charged off
during the third quarter of 2012.
2011 compared to 2010
The provision for loan and lease losses was $0.5 million in 2011 as compared to $25.0 million in 2010. The decrease was primarily
related to (i) the substantial provision taken in 2010, (ii) the $78.4 million, or 10.3% reduction in gross loans, and (iii) a reduction in the
number and volume of adversely classified credits in 2011.
37
Non-Interest Income:
The following table lists the components of non-interest income for the years ended December 31, 2012, 2011 and 2010:
Non-Interest Income
(in thousands)
Deposit service charges
Net (loss) gain on the sale of securities
Other-than-temporary-impairment loss on securities
Net gain on the sale of loans held for sale
Net gain on the sale of other real estate owned
Net gain (loss) on the sale of other assets
Loan related fees
Income on bank-owned life insurance
Other
Total non-interest income
2012 compared to 2011
2012
$
2011
$
2010
$
2,985
(1,712)
(96)
859
305
-
514
692
736
4,283
3,105
5,114
(798)
755
2,528
20
673
787
765
12,949
3,274
(1,714)
(4,271)
1,198
403
(60)
1,009
740
703
1,282
$
$
$
Total non-interest income decreased $8.7 million to $4.3 million in 2012 from $12.9 million in 2011. The 66.9% decrease resulted
primarily from a $1.7 million loss on the sale of investment securities in 2012 compared to a $5.1 million gain on the sale of investment
securities in 2011, coupled with a $2.2 million reduction in net gains on the sale of OREO to $305 thousand in 2012 from $2.5 million in
2011.
During 2012, the Company recorded a $1.7 million net loss on the sale of investment securities with an amortized cost of $47.8 million.
Specifically, the Company sold its entire holdings of private label collateralized mortgage obligations (“PLCMOs”) with an amortized
cost of $37.5 million and pooled trust preferred collateralized debt obligation securities (“PreTSLs”) with an amortized cost of $10.3
million. Management decided to sell these securities as part of its strategy to reduce the amount of market risk and levels of classified
assets on the balance sheet.
The Company recorded a $305 thousand net gain on the sale of 17 OREO properties. The Company continues to aggressively seek
buyers for its OREO properties.
2011 compared to 2010
During 2011, total non-interest income increased by $11.6 million to $12.9 million from $1.3 million in 2010. The $11.6 million
increase in non-interest income primarily resulted from (i) a $5.1 million gain on the sale of investment securities in 2011 compared to
the $1.7 million loss on the sale of investment securities in 2010, (ii) a $3.5 million reduction in OTTI losses incurred on investment
securities to $0.8 million in 2011 from the $4.3 million the Company recorded in 2010, and (iii) a $2.1 million increase in net gains on
the sale of OREO to $2.5 million in 2011 from $0.4 million in 2010.
During 2011, the Company recorded a $5.1 million net gain on the sale of investment securities with an amortized cost of $117.5
million. The sale was comprised of mortgage-backed securities in the amount of $77.9 million, municipal securities in the amount of
$39.0 million and PreTSLs in the amount of $0.6 million. The Company sold these securities to improve the Bank’s capital ratios as
required by the Order and to reduce exposure to prepayment risk in the mortgage-backed securities portfolio and call risk in the
municipal securities portfolio.
During 2011, the Company recorded a $2.5 million net gain on the sale of 16 OREO properties. The net gain was primarily attributable
to a $1.8 million gain from the sale of a property in Florida as well as a $0.7 million gain resulting from the bulk sale of a 129-lot land
development property the Company acquired through foreclosure in 2010.
38
Non-Interest Expense
The following table lists the major components of non-interest expense for the years ended December 31, 2012, 2011 and 2010:
Non-Interest Expense
(in thousands)
Salaries and employee benefits
Occupancy expense
Equipment expense
Advertising expense
Data processing expense
FDIC assessment
Bank shares tax
Expense of other real estate
Provision (credit) for off-balance sheet commitments
Legal expense
Professional fees
Insurance expense
Loan collection expenses
Other operating expenses
Total non-interest expense
2012 compared to 2011
2012
2011
2010
$
$
$
14,702
2,225
1,723
614
2,141
2,216
882
2,027
358
4,233
4,385
896
765
4,571
41,738
14,117
2,508
1,654
629
2,036
2,657
1,103
3,720
(423)
2,716
5,413
685
780
4,235
41,830
13,077
3,228
1,763
712
2,023
2,828
1,020
7,521
(678)
1,075
2,066
362
647
5,920
41,564
$
$
$
Total non-interest expense decreased $92 thousand or 0.2%, to $41.7 million in 2012 as compared to 2011. The change in non-interest
expense resulted primarily from a $1.7 million decrease in OREO expense, a $1.0 million decrease in professional fees, a $0.4 million
decrease in the FDIC assessment, and a $0.3 million decrease in occupancy expense. These decreases were partially offset by increases
in legal expenses of $1.5 million, the provision for off-balance sheet commitments of $0.8 million and salaries and benefits expense of
$0.6 million.
Other real estate expense decreased by $1.7 million, or 45.5%, in 2012 as compared to 2011 primarily due to a $1.1 million reduction in
impairment charges. In addition, real estate taxes and legal expenses decreased $0.4 million and $0.2 million, respectively, comparing
2012 to 2011. The reduction in impairment is primarily attributable to the stabilization of real estate values and a reduction in the
number of properties held in OREO.
Professional fee expense decreased $1.0 million in 2012 as compared to 2011. Despite the decrease, professional fee expense remained
elevated for the majority of 2012. Upon returning to current SEC reporting status with the filing with the filing of its third quarter 2012
Form 10-Q, the Company began reducing its reliance on outside consulting and professional services and expects these costs to continue
to decline in 2013.
FDIC assessment expense decreased $0.4 million in 2012 as a result of the decline in the level of average assets. The Bank’s risk-profile
remained a Category III in 2012.
Occupancy expense decreased $0.3, or 11.3%, in 2012 as compared to 2011. The decrease was primarily attributable to reductions in
repairs and maintenance and utility costs.
Regulatory oversight, SEC compliance-related costs and other legal matters continued to impact legal fees in 2012 and resulted in a $1.5
million increase in legal expense as compared to 2011.
The provision for off-balance sheet commitments increased $0.8 million and resulted in the Company recording a $0.4 million charge in
2012, compared to a $0.4 million credit in 2011. The increase in the provision is primarily attributable to an increase in the Bank’s
construction loan commitments.
Salary and employee benefit costs, which accounted for 35.2% of total non-interest expense in 2012, increased $0.6 million or 4.1% to
$14.7 million in 2012 compared to $14.1 million in 2011. Salary expense increased $0.5 million, which was attributable to annual
39
employee merit increases, a separation agreement entered into with the Company’s former Chief Financial Officer, several program
initiatives implemented in 2012, and an employee stock grant. Employee benefits expense increased $0.1 million, due primarily to the
ratification of a 401 (k) feature to the Company’s profit sharing plan.
On August 24, 2012, the Bank entered into a Separation Agreement and Release with the former Chief Financial Officer upon his
resignation, which became effective August 31, 2012. Pursuant to the Separation Agreement, the Company agreed to pay his salary and
health insurance benefits through March 1, 2013. Salary and benefits expense of $91 thousand under this agreement were recognized in
2012.
In October 2012, the Company implemented a reduction in force, which eliminated nine positions, and a voluntary separation program
in an effort to better align the number of employees with the reduced asset size of the bank and transaction volumes. The voluntary
separation program was offered to full-time employees who have at least ten years of service and who have attained the age of 60 years
old by December 31, 2012. As of December 31, 2012, there were a total of 11 employees who had accepted the separation offer.
Employees affected by the reduction in force and employees opting for the voluntary separation program received separation packages
that included separation pay and medical benefit assistance for a period of time depending on their years of service. The Company
recognized $275 thousand in salaries and benefits expense in 2012 upon implementation of these programs. As of December 31, 2012,
the Company had 298 full-time equivalent employees on staff as compared to 336 on December 31, 2011.
On December 17, 2012, the Board of Directors granted 50 shares of the Company’s common stock to each active full and part time
employee. There were 15,050 shares issued under this grant at a cost per share of $3.05, with a total cost of $46 thousand included in
salary expense in 2012.
With regard to employee benefits expense, on April 25, 2012, the Board of Directors ratified an amendment to the defined contribution
profit sharing plan to include the provisions under section 401(k) of the Internal Revenue Code (“401(k)”). The 401(k) feature of the
plan, which became effective on September 1, 2012, permits employees to make voluntary salary deferrals, either pre-tax or Roth, up to
the dollar limit prescribed by law. The Company may make discretionary matching contributions equal to a uniform percentage of
employee salary deferrals. Company discretionary matching contributions are determined each year by management. For 2012, the
Company matched 50.0% of employee salary deferrals up to 4.0% for each employee. Company matching contributions to the 401(k)
Plan totaled $41 thousand in 2012.
2011 compared to 2010
During 2011, total non-interest expense increased by $0.3 million or 0.6%, from 2010 primarily due to a $3.8 million decrease in the
other real estate expense, and a $1.8 million decrease in other operating expenses. These decreases were offset by a $3.4 million
increase in professional fees, a $1.8 million increase in legal fees, and a $1.0 million increase in salaries and employee benefits. The
increase in professional and legal fees is primarily attributable to increased audit, regulatory compliance, and restatement expenses. The
increase in salary and employee benefits expense is primarily attributable to the hiring of new and replacement senior officers, merit
increases, and increased insurance costs.
Other real estate expense decreased by $3.8 million, or 50.5%, in 2011 as compared to 2010 primarily due to a $3.6 million reduction in
impairment charges and a $0.2 million reduction in property-related operating expenses. The reduction in impairment is primarily
attributable to the stabilization of real estate values and the sale of land development properties, which generally have a higher risk of
exposure to changes in market value.
Other operating expenses decreased by $1.8 million, or 29.6%, in 2011 as compared to 2010, primarily the result of the $1.2 million
fixed asset impairment charge that was recorded in 2010.
The above noted expense reductions were largely offset by the following expense increases:
• Professional fee expense increased $3.4 million in 2011 as compared to 2010. The increase is primarily attributable to the
expense incurred to complete the 2010 audit, the restatement of the Company’s annual report on Form 10-K for the year ended
December 31, 2009 and the Company’s quarterly reports on Form 10-Q for the quarterly periods ended March 31, 2010 and
June 30, 2010.
• Legal expense increased $1.8 million in 2011 as compared to 2010 primarily related to increased regulatory oversight and
compliance expenses.
• Salary and employee benefit costs accounted for 33.8% of total non-interest expenses in 2011 as compared to 31.5% in 2010.
The increase in employee costs included a $0.7 million increase in salaries expense primarily attributable to the hiring of new
40
and replacement senior officers and merit increases. Employee benefits expense increased by $0.2 million or 12.0% in 2011
compared to 2010 primarily due to the increased health, social security and unemployment insurance costs.
Provision for Income Taxes
The Company did not record a provision or benefit for income taxes for the years ended December 31, 2012, 2011 and 2010. In 2012,
the Company recorded a $6.7 million valuation charge against its deferred tax assets increasing the valuation allowance to $34.5 million
at December 31, 2012 from $27.8 million at December 31, 2011. In future periods, the Company anticipates that it will have a minimal
tax provision or benefit until such time as it is able to reverse the deferred tax asset valuation allowance.
In 2011, the Company recorded a $2.5 million valuation charge against its deferred tax assets increasing the valuation allowance to
$27.8 million at December 31, 2011 from $25.3 million at December 31, 2010.
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.
FINANCIAL CONDITION
Total assets decreased $134.4 million, or 12.2%, to $968.3 million, at December 31, 2012, as compared to $1.10 billion at December 31,
2011. The reduction in the balance sheet was driven by a $102.5 million or 10.7% decrease in total deposits. In addition, the Company
repaid FHLB advances totaling $29.7 million. Net loans decreased $79.6 million or 12.1%, while investment securities were unchanged.
The decline in deposits, partially offset by the decrease in loans resulted in a $53.4 million or 31.7% reduction in cash and cash
equivalents.
Total shareholders’ equity decreased $3.0 million to $36.9 million at December 31, 2012 from $39.9 million at the end of 2011. The
$13.7 million net loss was partially offset by a $10.7 million positive change in other comprehensive income. The Company did not pay
any dividends in 2012 or 2011. The Company suspended paying dividends in 2010 to conserve capital and comply with regulatory
requirements.
Securities
The Company’s investment securities portfolio provides a source of liquidity needed to meet expected loan demand and provides a
source of interest income to increase our profitability. Additionally, the Company utilizes the investment securities portfolio to meet
pledging requirements. Investment securities are classified as held-to-maturity and carried at amortized cost when the Company has the
positive intent and ability to hold them to maturity. Securities not classified as held-to-maturity are classified as available-for-sale and
are carried at fair value, with unrealized holding gains and losses reported as a component of shareholders’ equity in accumulated
comprehensive income, net of tax. The Company determines the appropriate classification of investment securities at the time of
purchase. The decision to purchase or sell investment securities is based upon the current assessment of long- and short-term economic
and financial conditions, including the interest rate environment and other statement of financial condition components. Investment
securities with limited marketability and/or restrictions, such as Federal Home Loan Bank and Federal Reserve Bank stocks, are carried
at cost. Federal Reserve Bank stock is included in other assets.
At December 31, 2012, the Company’s investment portfolio was comprised principally of taxable and tax-exempt obligations of states
and political subdivisions and obligations of U.S. government-sponsored agencies, including residential mortgage-backed securities and
collateralized mortgage obligations (“CMOs”). There was one security issuer, St. Clair County, IL School District, whose aggregate
carrying value exceeded 10.0% of Shareholders’ equity as of December 31, 2012. The aggregate carrying value of the securities of this
issuer was $4.0 million.
41
The following table sets forth the carrying value of available-for-sale securities, which are carried at fair value, and held-to-maturity
securities, which are carried at amortized cost, at the dates indicated:
(in thousands)
Available-for-sale
Obligations of U.S. government agencies
Obligations of state and political subdivisions
Collateralized mortgage obligations:
Government-sponsored agency
Private label
Residential mortgage-backed securities:
Government-sponsored agency
Pooled trust preferred senior class
Pooled trust preferred mezzanine class
Corporate debt securities
Equity securities
Total securities available-for-sale
Held-to-maturity
Obligations of state and political subdivisions
2012
December 31,
2011
2010
$
1,891
103,501
$
8,048
96,161
$
8,307
111,353
9,103
-
8,468
36,256
77,816
-
69,456
-
-
410
1,000
185,361
$
31,393
1,604
2,197
342
1,006
185,475
$
49,120
1,422
1,647
395
1,012
251,072
$
$
2,198
$
2,094
$
1,994
In 2011, the Company sold most of its holdings of U.S. Government agency CMOs and reinvested the proceeds in private label CMOs
(“PLCMOs”) to reduce its exposure to prepayments and improve yield. The Company also sold some of its obligations of state and
political subdivisions that were callable and reinvested a portion of the proceeds in taxable municipal securities to reduce its interest rate
risk.
However, during 2012, management aligned its investment strategy with the Company’s overall corporate strategy aimed at reducing
balance sheet risk and the levels of classified assets. As part of this shift in focus, management decided to sell the Company’s investment
securities that posed a higher market risk and/or were considered classified assets. Specifically, the Company sold its entire holdings of
both Pooled Trust Preferred securities (“PreTSLs”) and PLCMOs. Management reinvested a portion of the proceeds in pooled home
equity conversion mortgages of a U.S. Government agency, which are insured by the U.S. Federal Government.
42
The following table sets forth the maturities of available-for-sale securities and held-to-maturity securities, based on carrying value at
December 31, 2012 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.
Decmeber 31, 2012
(dollars in thousands)
Available-for-sale securities
Obligations of U.S. government agencies
Yield
Obligations of state and political subdivisions (1)
Yield
Corporate debt securities
Yield
Collateralized Mortgage Obligations:
Government-sponsored agencies
Yield
Residential mortgage-backed securities:
Government-sponsored agencies
Yield
Equity securities (2)
Yield
Total available-for-sale securities
Within
One Year
> 1 – 5
Years
6 - 10
Years
Over
10 Years
$
-
$
-
$
-
-
-
-
-
-
1,118
6.15%
-
31,613
5.03%
-
-
-
-
-
-
-
$
1,891
4.22%
70,770
7.26%
410
0.93%
-
-
-
Mortgage-
Backed Securities
and Collateralized
Mortgage
Obligations
No Fixed
Maturity
$
-
$
-
Total
$
1,891
4.22%
103,501
6.56%
410
0.93%
9,103
2.42%
69,456
1.92%
1,000
4.15%
185,361
$
-
-
9,103
2.42%
69,456
1.92%
-
-
-
-
-
1,000
4.15%
1,000
$
$
-
$
1,118
$
31,613
$
73,071
$
78,559
Weighted yield
0.00%
6.15%
5.03%
7.14%
1.98%
4.15%
4.57%
Held-to-maturity securities
Obligations of state and political subdivisions
Yield
Total held-to-maturity securities
$
-
$
-
$
-
$
-
$
$
2,198
7.33%
2,198
$
-
$
-
$
-
$
-
$
-
$
-
$
$
2,198
7.33%
2,198
Weighted yield
0.00%
0.00%
7.33%
0.00%
0.00%
0.00%
7.33%
(1) Yields on state and municipal securities have been adjusted to tax-equivalent yields using a 34.0% federal income tax rate.
(2) Yield represents 2012 actual return.
Other-Than-Temporary Impairment (“OTTI”)
Management tests the Company’s investment securities for OTTI following the guidance provided in ASC Topic 320, “Investments-
Debt and Equity Securities.” Under this guidance, if management has no intent to sell the security and it is not more likely than not that
the Company will be required to sell the security before recovery of its amortized cost, then other-than-temporary declines in the fair
value of the debt security that are related to credit losses must be recognized in earnings as realized losses and those that are related to
other factors are recognized in other comprehensive income. Numerous factors, including lack of liquidity for re-sales of certain
investment securities, absence of reliable pricing information for investment securities, adverse changes in business climate, adverse
actions by regulators, or unanticipated changes in the competitive environment could have a negative effect on our investment portfolio
and may result in OTTI on the Company’s investment securities in future periods.
On a quarterly basis, management evaluates its investment securities for OTTI. Unrealized losses on investment securities are considered
to be other-than-temporary when management believes the security’s impairment is due to factors that could include the issuer’s
inability to pay interest or dividends, its potential for default, and/or other factors. Based on current authoritative guidance, when a held-
to-maturity or available-for-sale debt security is assessed for OTTI, management must first consider (a) whether management intends to
sell the security and (b) whether it is more likely than not that the Company will be required to sell the security prior to recovery of its
amortized cost basis. If one of these circumstances applies to a security, an OTTI loss is recognized in the statement of operations equal
to the full amount of the decline in fair value below amortized cost. If neither of these circumstances applies to a security, but the
Company does not expect to recover the entire amortized cost basis, an OTTI loss has occurred that must be separated into two
categories: (a) the amount related to credit loss and (b) the amount related to other factors such as market risk. In assessing the level of
OTTI attributable to credit loss, management compares the present value of cash flows expected to be collected with the amortized cost
basis of the security. As discussed above, the portion of the total OTTI related to credit loss is recognized in earnings, while the amount
related to other factors is recognized in other comprehensive income. The total OTTI loss is presented in the statement of operations, less
the portion recognized in other comprehensive income. When a debt security becomes other-than-temporarily-impaired, its amortized
cost basis is reduced to reflect the portion of the total impairment related to credit loss.
43
To determine whether a security’s impairment is other-than-temporary, management considers factors that include:
•
•
•
•
The causes of the decline in fair value, such as credit problems, interest rate fluctuations, or market volatility;
The severity and duration of the decline;
The Company’s ability and intent to hold investments until they recover in value, as well as the likelihood of such a recovery
in the near term;
The Company’s intent to sell security investments, or if it is more likely than not that the Company will be required to sell
such securities before recovery of their individual amortized cost basis less any current-period credit loss.
For debt securities that the Company does not intend to sell or it does not expect it will be required to sell, the primary consideration in
determining whether impairment is other-than-temporary is whether or not the Company expects to receive all contractual cash flows.
Based on the management’s evaluation at December 31, 2012, management has determined that the decreases in estimated fair value of
the securities it holds in its portfolio are temporary.
OTTI of Pooled Trust Preferred Collateralized Debt Obligations:
At December 31, 2011, the Company’s PreTSLs were comprised of four securities that were collateralized by debt issued by bank
holding companies and insurance companies. The Company divested its holdings of PreTSLs during 2012 and held no such securities at
December 31, 2012. At December 31, 2011, the PreTSLs, which had an aggregate amortized cost of $10.6 million and an estimated fair
value of $3.8 million, had depreciated 81.7% and 64.0% from their current face values and amortized cost, respectively. The Company
held one senior tranche and three mezzanine tranches. All of the securities possessed credit ratings below investment grade. At the time
of initial issue, no more than 5% of any pooled security consisted of a security issued by any one institution. As of December 31, 2011,
three of these securities had no excess subordination and one had excess subordination equal to 12.09% of the current performing
collateral. Excess subordination is the amount by which the underlying performing collateral exceeds the outstanding bonds in the
current class plus all senior classes. It can also be referred to as credit enhancement. As deferrals and defaults of underlying issuers
occur, the excess subordination is reduced or eliminated, increasing the risk of the security experiencing principal or interest shortfalls.
Conversely, subordination can be increased as collateral transitions from non-performing to performing. 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 transaction by the current balance of the class of notes plus all classes senior to that class. At June
30, 2012, the Company had determined that the estimate of projected discounted cash flows it expected to receive on its PreTSLs was
less than the securities’ carrying value, and as a result an additional credit-related impairment charge to earnings of $96 thousand was
recorded, which was the total of OTTI charges recorded during 2012.
During the fourth quarter of 2012, the market for these securities began to improve as some of the bank holding companies and
insurance companies that had previously deferred payments had cured. As a result, the Company’s unrealized loss position related to
these securities improved. In an effort to reduce balance sheet risk and the levels of classified assets, management decided to sell all four
PreTSLs in the Company’s portfolio. The Company realized gross gains of $848 thousand on the sale of PreTSLs IX and XI and gross
losses of $3.0 million on the sale of PreTSLs XIX and XXVI. The $6.8 million that was identified as the non-credit portion of OTTI
recorded for PreTSLs in prior years was included in the determination of net income and was reversed from accumulated other
comprehensive income.
For the years ended December 31, 2011 and 2010, the Company had evaluated its PreTSLs considering all available evidence, including
information received after the statement of financial condition date but before the filing date and determined that the estimated projected
cash flows were less than the securities’ carrying value, resulting in impairment charges to earnings for the years ended December 31,
2011 and 2010, of $0.8 million and $4.3 million, respectively. The cumulative impairment charges at December 31, 2011 and 2010
amounted to $8.6 million and $22.6 million, respectively. The decrease in cumulative impairment charges in 2011 related to the sale of
four PreTSLs in 2011, on which OTTI had previously been recognized.
The table below provides a cumulative roll forward of credit losses recognized:
Rollforward of Cumulative Credit Loss
(in thousands)
Beginning Balance January 1
Credit losses on debt securities for which OT T I was not previously recognized
Additional credit losses on debt securities for which OT T I was previously recognized
Less: Sale of PLCMOs for which OT T I was previously recognized
Less: Sale of PreT SLs for which OT T I was previously recognized
Ending Balance, December 31
2012
$
8,619
-
96
-
(8,715)
$
-
44
2011
2010
$
$
22,598
-
798
-
(14,777)
8,619
20,649
-
4,271
(2,322)
-
22,598
$
$
Investments in FHLB and FRB stock, which have limited marketability, are carried at cost and totaled $7.3 million and $9.7 million at
December 31, 2012 and 2011, respectively. Management noted no indicators of impairment for the FHLB of Pittsburgh and the FRB
during 2012.
Loans
During 2012, loan payoffs exceeded loan originations, specifically for commercial and industrial and commercial real estate loans,
which resulted in a $79.6 million or 12.1% decrease in net loans to $579.4 million at December 31, 2012, from $659.0 million at
December 31, 2011. Despite the decrease, net loans represented 59.8% of total assets at December 31, 2012 compared to 59.7% at
December 31, 2011. Historically, commercial lending activities have represented a significant portion of the Company’s loan portfolio.
This includes commercial and industrial loans, commercial real estate loans and construction, land acquisition and development loans.
From a collateral standpoint, a majority of the Company’s loan portfolio consisted of loans secured by real estate. Real estate secured
loans, which include commercial real estate, construction, land acquisition and development, residential real estate loans and home
equity lines of credit (“HELOCs”), declined by $21.5 million, or 5.2%, to $388.2 million at December 31, 2012, from $409.7 million at
December 31, 2011. Despite the decrease, real estate secured loans as a percentage of total gross loans increased to 59.3% of the loan
portfolio at December 31, 2012 from 54.5% as of December 31, 2011.
Commercial and industrial loans decreased $64.1 million, or 36.8%, during the year to $110.1 million at December 31, 2012 from
$174.2 million at December 31, 2011. Loans secured by commercial real estate decreased $24.7 million, or 9.6%, to $231.8 million at
December 31, 2012 from $256.5 million at December 31, 2011. Commercial and industrial loans consist primarily of equipment loans,
working capital financing, revolving lines of credit and loans secured by cash and marketable securities. Commercial real estate loans
include long-term commercial mortgage financing and are primarily secured by first or second lien mortgages. During 2012,
approximately $56.6 million in commercial loans to a related party, which were fully secured by deposit accounts, were paid off. In
addition, at the end of 2012, two commercial customers with significant lending relationships sold their businesses. As a result, the loans
associated with these relationships were paid off. Construction, land acquisition and development loans decreased $1.0 million, or 3.0%,
during the year to $32.5 million at December 31, 2012 from $33.5 million at December 31, 2011. The Company continues to monitor its
exposure of this portfolio segment.
Residential real estate loans totaled $90.2 million at December 31, 2012, an increase of $10.2 million or 12.7% from $80.0 million at
December 31, 2011. The components of residential real estate loans include fixed rate mortgage loans and home equity loans. Home
equity lines of credit (“HELOCs”) are not included in this category but are included in consumer loans. The Company primarily
underwrites fixed-rate purchase and refinance of residential mortgage loans for sale in the secondary market to reduce interest rate risk
and provide funding for additional loans. However, during the third quarter of 2012, the Company began holding 15- and 20-year
mortgages in the loan portfolio rather than selling these loans in order to provide additional interest income based on underlying yields.
Consumer loans decreased $2.0 million, or 1.8%, during the year to $109.8 million at December 31, 2012 from $111.8 million at
December 31, 2011.
Loans to state and municipal governments remained relatively unchanged and totaled $23.4 million at December 31, 2012, compared to
$23.5 million at December 31, 2011.
45
Details regarding the loan portfolio for each of the last five years ended December 31 are as follows:
Loan Portfolio Detail
(in thousands)
Residential real estate
Commercial real estate
Construction, land acquisition and development
Commercial and industrial
Consumer
State and political subdivisions
Total loans, gross
Unearned discount
Net deferred loan fees and costs
Allowance for loan and lease losses
2012
2011
2010
2009
2008
$
90,228
$
80,056
$
87,925
$
98,517
$
140,067
December 31,
231,835
32,502
110,073
109,783
23,354
597,775
(103)
260
256,508
33,450
174,233
111,778
23,496
679,521
(159)
516
256,327
77,395
197,697
110,853
27,739
757,936
(225)
677
321,326
98,383
219,889
164,670
36,780
939,565
(298)
707
(18,536)
(20,834)
(22,575)
(22,458)
320,302
130,546
219,821
119,909
34,334
964,979
(380)
329
(8,254)
Loans, net
$
579,396
$
659,044
$
735,813
$
917,516
$
956,674
The following schedule shows the re-pricing distribution of loans outstanding as of December 31, 2012. Also provided are those
amounts classified according to sensitivity to changes in interest rates:
Loan Repricing Distribution
(in thousands)
Residential real estate
Commercial real estate
Construction, land acquisition and development
Commercial and industrial
Consumer
State and political subdivisions
Total
Loans with predetermined interest rates
Loans with floating rates
Total
December 31, 2012
Within One
Year
One to Five
Years
Over Five
Years
Total
$
$
$
$
17,772
21,022
3,730
50,819
35,476
79
128,898
15,189
34,415
15,511
34,888
69,232
4,527
173,762
57,267
176,398
13,261
24,366
5,075
18,748
295,115
90,228
231,835
32,502
110,073
109,783
23,354
597,775
$
$
$
$
$
10,312
118,586
128,898
$
$
$
107,085
66,677
173,762
$
81,846
213,269
295,115
$
$
$
199,243
398,532
597,775
Loan Concentrations: At December 31, 2012, 2011 and 2010, the Bank’s loan portfolio was concentrated in loans in the following
industries.
Loan Concentrations
(in thousands)
Land subdivision
Shopping centers/complexes
Gas stations
Office complexes/units
Solid waste landfills
Hotels
2012
Amount
$ 17,658
21,068
5,245
9,801
13,233
13,596
% of Gross
Loans
2.95%
3.52%
0.88%
1.64%
2.21%
2.27%
December 31,
2011
Amount
$ 19,626
18,722
17,118
16,091
42,270
13,771
% of Gross
Loans
2.89%
2.76%
2.52%
2.37%
6.22%
2.03%
2010
Amount
$ 29,518
26,298
18,289
16,842
52,270
15,357
% of Gross
Loans
3.89%
3.47%
2.41%
2.22%
6.90%
2.03%
46
Asset Quality
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the amount of
unpaid principal, net of unearned interest, deferred loan fees and costs, and reduced by the ALLL. The ALLL is established through a
provision for loan losses charged to earnings.
The Company manages credit risk through the efforts of loan officers, the loan review function, and the Loan Quality and the ALLL
management committees, as well as 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 risk rating system, loans rated pass/watch, special mention, substandard, doubtful, or loss are reviewed regularly
as part of the Company’s risk management practices. The Company’s Loan Quality Committee, which consists of key members of
senior management and credit administration, meets monthly or more often as necessary to review individual problem credits and
workout strategies and reports to the Board of Directors.
A loan is considered 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 note and loan agreement. For purposes of the Company’s analysis, loans that are
identified as troubled debt restructurings (“TDRs”), loans rated substandard and non-accrual, and loans that are identified as doubtful or
loss are considered impaired. Impaired loans are analyzed individually for impairment. The Company utilizes the fair value of
collateral 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 expected to be provided through the liquidation of the collateral held. For
impaired loans that are secured by real estate, external appraisals are obtained annually, or more frequently as warranted, to ascertain a
fair value so that the impairment analysis can be updated. Should a current appraisal not be available at the time of impairment analysis,
other sources of valuation such as current letters of intent, broker price opinions or executed agreements of sale may be used. For non-
collateral dependent loans, the Company measures impairment based on the present value of expected future cash flows, net of disposal
costs, discounted at the loan’s original effective interest rate.
Loans to borrowers that are experiencing financial difficulty that are modified and result in the Company granting concessions to the
borrower are classified as TDRs and are considered to be impaired. Concessions granted under a troubled debt restructuring generally
involve an extension of a loan’s stated maturity date, a reduction of the stated interest rate, payment modifications, or a combination of
these modifications. Non-accrual TDRs are returned to accrual status if principal and interest payments, under the modified terms, are
brought current, are performing under the modified terms for six consecutive months, and management believes that collection of the
remaining interest and principal is probable.
Non-performing loans are monitored on an ongoing basis as part of the Company’s loan review process. Additionally, work-out efforts
continue and are actively monitored for non-performing loans and OREO through the Loan Quality Committee. Potential loss on non-
performing assets is generally evaluated by comparing the outstanding loan balance to the fair market value of the pledged collateral.
Loans are placed on non-accrual when a loan is specifically determined to be impaired or when management believes that the collection
of interest or principal is doubtful. This generally occurs when a default of interest or principal has existed for 90 days or more, unless
such loan is well secured and in the process of collection, or when management becomes aware of facts or circumstances that the loan
would default before 90 days. The Company determines delinquency status based on the number of days since the date of the borrower’s
last required contractual loan payment. When the interest accrual is discontinued, all unpaid interest income is reversed and charged
back against current earnings. Any cash payments received are applied, first to the outstanding loan amounts, then to the recovery of
any charged-off loan amounts. Any excess is treated as a recovery of lost interest. A non-accrual loan is returned to accrual status when
the loan is current as to principal and interest payments, is performing according to contractual terms for six consecutive months and
future payments are reasonably assured.
Management actively manages impaired loans in an effort to reduce loan balances by working with customers to develop strategies to
resolve borrower difficulties, through sale or liquidation of collateral, foreclosure, and other appropriate means. Real estate values
appear to have stabilized. However, further real estate devaluations or weakening in economic conditions in our market area could
negatively impact asset quality, causing an increase in the provision for loan and lease losses.
Under the fair value of collateral method, the impaired amount of the loan is deemed to be the difference between the loan amount and
the fair value of the collateral, less the estimated costs to sell. For the Company’s calculations on real estate secured loans, a factor of
10% is generally utilized to estimate costs to sell, which is based on typical cost factors, such as a 6% broker commission, 1% transfer
taxes, and 3% various other miscellaneous costs associated with the sales process. If the valuation indicates that the fair value has
47
deteriorated below the carrying value of the loan, either the entire loan is written off or the difference between the fair value and the
principal balance is charged off. For impaired loans for which the value of the collateral less costs to sell exceeds the loan value, the
impairment is considered to be zero.
The following schedule reflects non-performing loans (including non-performing TDRs), OREO and performing TDRs as of December
31 for each of the last five years:
Non-performing Loans, OREO and Performing TDRs
(in thousands)
Non-accrual loans
Loans past due 90 days or more and still accruing
Total non-performing loans
Other real estate owned
2012
2011
2010
2009
2008
$
9,652
$
19,913
$
28,267
$
25,865
$
22,263
57
9,709
3,983
5
19,918
6,958
99
28,366
9,633
117
25,982
11,184
1,151
23,414
2,308
Total non-performing loans and OREO
$
13,692
$
26,876
$
37,999
$
37,166
$
25,722
December 31,
Performing TDRs
$
7,517
$
5,680
$
2,513
$
10,743
$
-
Non-performing loans as a percentage of gross loans
1.62%
2.93%
3.74%
2.77%
2.43%
Management continued to effectively manage problem credits through heightened work-out efforts on nonperforming loans and
disposing of its holdings of foreclosed properties. As a result, the Company’s asset quality improved significantly in 2012. Total non-
performing loans and OREO decreased $13.2 million, or 49.1%, to $13.7 million at December 31, 2012 from $26.9 million at December
31, 2011. At December 31, 2012, the Company’s ratio of non-performing loans to total gross loans was 1.62% compared to 2.93%
reported at December 31, 2011. Non-performing loans and OREO represented 37.1% of shareholders’ equity as of December 31, 2012,
as compared to 67.3% of shareholders’ equity as of December 31, 2011. The decrease in non-performing loans and OREO as a
percentage of shareholders’ equity was driven primarily by $8.3 million of charge-offs, the liquidation of several problem credits and the
sale of OREO properties. Though non-performing loans as a percentage of shareholders’ equity decreased, the percentage remains
elevated and further deterioration in economic conditions could lead to additional increases in impaired loans.
Changes in Non-performing Loans
The following table presents the changes in non-performing loans for the years ended December 31, 2012 and 2011:
(in thousands)
Balance at beginning of period
Newly placed on non-accrual
Loans past due 90 days or more and still accruing
Transferred to OREO
Returning to performing status
Additional charge-offs
Loan payments
Loans sold
Year ended December 31,
2012
2011
$
19,918
$
28,266
11,061
53
(1,586)
(405)
(8,273)
(4,223)
(6,836)
14,779
5
(3,995)
(2,991)
(6,648)
(9,497)
-
Balance at end of period
$
9,709
$
19,918
Reclassifications of performing loans to non-accrual during 2012 included one large commercial loan in the amount of $4.3 million. A
substantial portion of this loan, which is secured by commercial real estate, is guaranteed by a U.S. governmental agency. At December
31, 2012, a specific reserve of $37 thousand has been allocated to this credit in the ALLL.
In addition to this credit, two credits that were placed on non-accrual status prior to 2012, constituted approximately 57% of non-
performing loans at December 31, 2012. The two credits are:
48
•
•
$1.6 million – This credit represents a commercial loan secured by a residential real estate property. This credit was paid down to
$603 thousand as of December 31, 2012. Additionally, $2 thousand of the allowance for loan and lease losses is allocated to this
credit.
$1.4 million – This credit represents a residential mortgage loan and home equity loan secured by a personal residence. The
outstanding balance of this credit, which is also a TDR, was $624 thousand at December 31, 2012. This credit has been
performing according to the modified terms of the loan agreement. At December 31, 2012 management had specifically allocated
$22 thousand of the allowance for loan and lease losses to this credit.
In addition to the non-performing loans identified in the table above, the Bank had potential problem loans consisting of substandard and
accruing loans in the amount of $33.4 million at December 31, 2012. The volume of potential problem loans decreased $16.8 million or
33.5% from $50.2 million at December 31, 2011.
In the fourth quarter of 2012, the Company sold three nonperforming loans totaling $6.8 million to a third party. No gain or loss was
recognized upon the sale.
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. For the past eight 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 $34.0 million. Two of these loans, one local Pennsylvania project and the New York project, were paid in
full prior to 2011. During 2011, the two Florida credits rated “substandard” were paid off and one of the Florida properties held in
OREO was sold. The outstanding balance of the two remaining loans, one Florida property held in OREO and the Pennsylvania credit
rated “substandard,” had an aggregate balance of $4.6 million at December 31, 2012. The Florida credit has been written down to the
current fair value of the property and the Pennsylvania credit is currently performing.
The following table outlines accruing loan delinquencies and non-accrual loans as a percentage of gross loans at December 31, 2012,
2011 and 2010:
Accruing Loan Delinquencies and Non-accrual Loans
(in thousands)
Accruing:
30-59 days
60-89 days
90+ days
Non-accrual
Total Delinquencies
2012
December 31,
2011
2010
0.44%
0.06%
0.01%
1.61%
2.13%
0.83%
0.27%
0.00%
2.93%
4.03%
0.52%
0.16%
0.01%
3.74%
4.43%
Total delinquencies, as a percent of gross loans, improved substantially in 2012 and was primarily due to the sale of several non-
performing loans, the transfers of loans to OREO and more rigorous collection and work-out efforts directed at non-performing loans.
Delinquencies for accruing loans improved $4.4 million, or 58.7%, from $7.5 million at December 31, 2011 to $3.1 million at December
31, 2012, primarily due to decreases in residential and commercial real estate loans that were 30 – 89 days past due. In its evaluation of
the ALLL, management considers a variety of qualitative factors including changes in the volume and severity of delinquencies.
The Company continues to acknowledge some weakness in local real estate markets and the local economy in general. In addition, the
unemployment rate for the Scranton-Wilkes-Barre metropolitan area, the Company’s predominant market area, reached 9.5% in
December 2012, the highest rate among Pennsylvania’s 14 metropolitan areas. The Company tries to mitigate these factors by
emphasizing strict underwriting standards.
At December 31, 2012, there were 22 properties in OREO with an aggregate balance of $4.0 million, compared to 28 properties with an
aggregate balance of $7.0 million at December 31, 2011. At December 31, 2012, five properties held in OREO represented
approximately 61% of the total. Additionally, $2.6 million, or 65%, of OREO is located in the Pocono Mountains within the Company’s
primary market area. Property values in this area have been severely affected by the weakened economic environment. At December 31,
49
2012, there were three properties totaling $331 thousand or 8.3% or OREO that were located outside the Company’s general market
area.
The Company actively markets OREO properties for sale through a variety of channels including internal marketing and the use of
outside brokers/realtors. The carrying value of OREO is generally calculated at an amount not greater than 90% of the most recent fair
market appraised value. A 10% factor is generally used to estimate costs to sell, which is based on typical cost factors, such as 6%
broker commission, 1% transfer taxes, and 3% various other miscellaneous costs associated with the sales process. This fair value is
updated on an annual basis or more frequently if new valuation information is available. Further deterioration in the real estate market
could result in additional losses on these properties.
The Company foreclosed on nine properties with an aggregate carrying value of $1.6 million during the twelve months ended December
31, 2012. There were 15 properties with an aggregate carrying value of $3.1 million that were sold in 2012. In addition there were three
partial sales that occurred during 2012 that totaled $0.2 million. Pursuant to new valuation information received during the year, there
were subsequent write-downs of properties totaling $1.2 million.
The following schedule presents the activity in OREO:
Changes in OREO
(in thousands)
Balance, beginning of year
Additions
Write-downs
Carrying value of OREO sold
Balance, end of year
For the Years Ended December 31,
2012
2010
2011
$
$
$
6,958
1,586
(1,206)
(3,355)
3,983
9,633
3,995
(2,318)
(4,352)
6,958
11,184
9,928
(5,906)
(5,573)
9,633
$
$
$
The following schedule presents a distribution of OREO for the periods presented:
Distribution of OREO
(in thousands)
Land / Lots
Commercial Real Estate
Residential Real Estate
Total Other Real Estate Owned
2012
2011
December 31,
2010
2009
2008
$
$
$
$
$
2,929
1,054
-
3,983
4,443
1,695
820
6,958
8,357
1,086
190
9,633
5,887
4,852
445
11,184
$
$
$
$
$
2,308
-
-
2,308
The expenses related to maintaining OREO, including the subsequent write-downs of the properties related to declines in value since
foreclosure amounted to $2.0 million, $3.7 million, and $7.5 million for the years ended December 31, 2012, 2011, and 2010,
respectively.
Allowance for Loan and Lease Losses
The ALLL represents management’s estimate of probable loan losses inherent in the loan portfolio. The ALLL is analyzed in accordance
with GAAP and is maintained at a level that is based on management’s evaluation of the adequacy of the ALLL in relation to the risks
inherent in the loan portfolio.
As part of its evaluation management considers qualitative and environmental factors including but not limited to:
• Changes in national, local, and business economic conditions and developments, including the condition of various market
segments;
• Changes in the nature and volume of the Company’s loan portfolio;
• Changes in the Company’s lending policies and procedures, including underwriting standards, collection, charge-off and recovery
practices and results;
• Changes in the experience, ability and depth of the Company’s management and staff;
• Changes in the quality of the Company’s loan review system and the degree of oversight by the Company’s Board of Directors;
• Changes in the trend of the volume and severity of past due and classified loans, including trends in the volume of non-accrual
50
loans, troubled debt restructurings and other loan modifications;
• The existence and effect of any concentrations of credit and changes in the level of such concentrations;
• The effect of external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the
Company’s current loan portfolio; and
• Analysis of our customers’ credit quality, including knowledge of their operating environment and financial condition.
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 emphasis on weakness in both the real estate market and economy in general and its effect on repayment.
Adjustments to the ALLL are made based on management’s assessment of the factors noted above.
For purposes of its analysis, all loan relationships with an aggregate balance greater than $100 thousand that are rated substandard and
non-accrual, identified as doubtful or loss, and all TDRs are considered impaired and are analyzed individually to determine the amount
of impairment. Circumstances such as 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 Company utilizes the fair value of
collateral method for collateral-dependent loans and TDRs for which repayment depends on the sale of collateral. For non-collateral
dependent loans and TDRs, the Company measures impairment based on the present value of expected future cash flows discounted at
the loan’s original effective interest rate. With regard to collateral-dependent loans, appraisals are received at least annually to ensure
that impairment measurements reflect current market conditions. Should a current appraisal not be available at the time of impairment
analysis, other valuation sources including current letters of intent, broker price opinions or executed agreements of sale may be used.
Only downward adjustments are made based on these supporting values. Included in all impairment calculations is a cost to sell
adjustment of approximately 10%, which is based on typical cost factors, including a 6% broker commission, 1% transfer taxes and 3%
various other miscellaneous costs associated with the sales process. Sales costs are periodically revised based on actual experience. The
ALLL analysis is adjusted for subsequent events that may arise after the end of the reporting period but before the financial reports are
filed.
The Company’s ALLL consists of both specific and general components. At December 31, 2012, the ALLL that related to impaired
loans that are individually evaluated for impairment, the guidance for which is provided by ASC 310 “Impairment of a Loan” (“ASC
310”), was $310 thousand, or 1.7%, of the total ALLL. A general allocation of $18.2 million was calculated for loans analyzed
collectively under ASC 450 “Contingencies” (“ASC 450”), which represented 98.3% of the total ALLL of $18.5 million. The ratio of
the ALLL to total loans at December 31, 2012 and December 31, 2011 was 3.10% and 3.07%, respectively, based on total loans of
$597.8 million and $679.5 million, respectively.
The following table presents an allocation of the ALLL and percent of loans in each category as of December 31:
Allocation of the Allowance for Loan Losses
2012
2011
December 31,
2010
2009
2008
(in thousands)
Residential Real Estate
Commercial Real Estate (1)
Construction, Land Acquisition
and Development (2)
Commercial & Industrial
Consumer
State & Political
Total
Allowance
1,764
$
8,062
2,162
4,167
1,708
673
18,536
$
Percentage
of Loans in
Each
Category
to Total
Loans
15.09%
38.78%
5.44%
18.41%
18.37%
3.91%
100.00%
Percentage
of Loans in
Each
Category
to Total
Loans
11.78%
37.75%
4.92%
25.64%
16.45%
3.46%
100.00%
Percentage
of Loans in
Each
Category
to Total
Loans
11.60%
33.82%
10.21%
26.08%
14.63%
3.66%
100.00%
Allowance
2,176
$
9,640
4,170
4,850
1,173
566
22,575
$
Allowance
1,823
$
11,151
2,590
3,292
1,526
452
20,834
$
Percentage
of Loans in
Each
Category
to Total
Loans
10.49%
34.20%
10.47%
23.40%
17.53%
3.91%
100.00%
Percentage
of Loans in
Each
Category
to Total
Loans
15.47%
45.68%
0.00%
22.90%
12.38%
3.57%
100.00%
Allowance
259
$
-
-
7,462
481
52
8,254
$
Allowance
696
$
8,397
6,285
4,507
1,980
593
22,458
$
(1) Prior to December 31, 2009, the commercial real estate allowance for loan and lease losses was combined with commercial and industrial loans.
(2) Prior to December 31, 2009, the construction, land acquisition and development allowance for loan and lease losses was combined with commercial real estate loans.
51
The following table presents a reconciliation of the ALLL and an illustration of charge-offs and recoveries by major loan category for
each of the last five years:
Reconciliation of the ALLL
(in thousands)
Balance, January 1,
Charge-Offs:
Residential Real Estate
Commercial Real Estate
Construction, Land Acquisition
and Development
Commercial & Industrial
Consumer
State & Political Subdivision
Total Charge-offs
Recoveries of Charged-off Loans:
Residential Real Estate
Commercial Real Estate
Construction, Land Acquisition &
Development
Commercial & Industrial
Consumer
State & Political Subdivision
Total Recoveries
Net Charge-offs (1)
Provision for loan and lease losses
Balance, December 31
Ratios:
Net Charge-Offs as a percentage of
average loans outstanding
Allowance for loan and lease losses
as a percentage of gross loans
outstanding at end of period
2012
Year Ended December 31,
2010
2011
2009
2008
$
20,834
$
22,575
$
22,458
$
8,254
$
7,569
683
3,298
258
3,389
673
-
8,301
35
1,035
1,273
2,395
1,857
416
739
-
6,680
57
93
221
5,049
12,893
6,883
736
-
25,782
32
152
307
24,980
-
2,247
483
-
28,017
-
33
265
265
338
-
1,938
6,363
4,065
18,536
$
2,188
1,852
226
-
4,416
2,264
523
20,834
$
303
151
220
-
858
24,924
25,041
22,575
$
-
22
77
-
132
27,885
42,089
22,458
$
51
262
-
466
548
-
1,327
-
17
-
6
185
-
208
1,119
1,804
8,254
$
0.97%
0.31%
2.84%
2.87%
0.12%
3.10%
3.07%
2.98%
2.40%
0.86%
(1) Prior to December 31, 2009, the charge-offs and recoveries for construction, land acquisition and development
allowance for loan and lease losses were combined with commercial real estate loans.
The ALLL equaled $18.5 million at December 31, 2012, a decrease of $2.3 million from $20.8 million at December 31, 2011, as net
charge-offs of $6.4 million exceeded the provision for loan and lease losses of $4.0 million. The net decrease of $2.3 million was due
mainly to the decrease in total loans and problem loans in 2012 as compared to 2011.
Net charge-offs increased $4.1 million to $6.4 million in 2012 from $2.3 million in 2011. The increase was primarily attributable to one
commercial and industrial loan that was charged-off in the amount of $3.2 million. All other charge-off and recovery activity was
consistent with the normal course of business. Management is actively pursuing work out and collection efforts to collect on these
loans.
Funding Sources
The Company utilizes traditional deposit products, such as demand, savings, negotiable order of withdrawal (“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, brokered time deposits and long-term FHLB borrowings may be utilized as necessary to support the
asset growth and employ asset/liability management strategies. The average balance of interest-bearing liabilities decreased by $147.5
million, or 15.2%, to $822.2 million during 2012 from $969.6 million during 2011. The rate paid on interest-bearing liabilities
decreased 31 basis points to 1.12% in 2012 from 1.43% in 2011.
52
Deposits
Average interest-bearing deposits decreased $108.3 million, or 12.6%, during 2012 compared to 2011. Although the Company
experienced decreases in all major interest-bearing deposits categories, the most significant declines were in other time deposits with
balances less than $100 thousand and interest-bearing demand deposits. During 2012, other time deposits averaged $191.5 million, a
decrease of $60.6 million, or 24.0%, compared to $252.1 million during 2011. Average interest-bearing demand deposits, which include
interest-bearing checking accounts, NOW accounts and money market accounts, decreased $35.3 million, or 10.5%, to $299.9 million in
2012 from $335.2 million in 2011. Time deposits over $100 thousand and savings deposits decreased $10.8 million and $1.7 million,
respectively, comparing the years ended December 31, 2012 and 2011. The majority of the decrease in time deposits was attributable to
a related party withdrawing $40.6 million to pay off its cash-collateralized solid waste landfill loans.
The rate paid on average interest-bearing deposits decreased 30 basis points to 0.72% in 2012 from 1.02% in 2011. 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 Company elected to allow higher cost time deposits to mature and chose to be more conservative in setting
rates on new deposits and renewals. The pricing decreases for these products resulted from the Company’s implementation of
competitive rates. The rate paid on average interest-bearing demand deposits decreased 25 basis points to 0.23% in 2012 from 0.48%
during 2011. The rate paid on time deposits over $100 thousand decreased 34 basis points to 0.87%, while the rate paid on other time
deposits decreased 26 basis points to 1.59% during 2012. The rate paid for savings deposits decreased to 0.18% in 2012 from 0.32% in
2011. The decrease in average interest-bearing deposits was partially offset by a $20.5 million increase in non-interest-bearing demand
deposits.
The average amount of, and the rate paid on, the major classifications of deposits is summarized for the periods indicated in the
following table:
Deposit Distribution
(in thousands)
Inte re st-be aring de posits:
Interest-bearing demand
Savings
Time
Total interest-bearing deposits
2012
Ye ar Ende d De ce mbe r 31,
2011
2010
Amount
Rate
Amount
Rate
Amount
Rate
$
299,938
87,818
361,818
749,574
0.23%
0.18%
1.25%
0.72%
$
335,201
89,494
433,227
857,922
0.48%
0.32%
1.58%
1.02%
$
353,579
93,598
508,660
955,837
0.97%
0.54%
2.01%
1.48%
Non-interest-bearing deposits
128,254
107,763
82,400
Total deposits
$
877,828
$
965,685
$
1,038,237
The following table presents the maturity distribution of time deposits of $100,000 or more at December 31, 2012 and 2011:
Maturity Distribution of Time Deposits Greater Than $100,000
(in thousands)
3 months or less
Over 3 through 6 months
Over 6 though 12 months
Over 12 months
Total
December 31,
2012
2011
$
25,656
$
95,635
22,379
37,065
59,744
13,455
33,058
57,642
$
144,844
$
199,790
53
Borrowings
The following table presents the maximum amount of the Company's short-term borrowings that were outstanding at any month end
during the years ended December 31, 2012, 2011 and 2010:
Short-term Borrowings Outstanding
(in thousands)
Federal funds purchased
FHLB advances
FRB discount window borrowings
Total
For the Years Ended December 31,
2011
$
-
40,000
-
40,000
2010
-
$
-
-
$
-
2012
-
$
-
-
$
-
$
The Company did not have any outstanding short term borrowings at December 31, 2012, 2011, or 2010, respectively.
Average long-term debt decreased by $39.1 million, or 35.0%, to $72.6 million in 2012 from $111.7 million in 2011 which was due to
the maturity and repayments of several FHLB advances. The average rate paid for long term debt in 2012 was 5.28%, an increase from
4.57% in 2011. The increase in rate on the long term debt is due primarily to its subordinated debentures comprising a higher
percentage of total average long term debt in 2012 than in 2011. For further discussion of the Company’s borrowings, see Note 11-
“Borrowed Funds” to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.
The average balance of junior subordinated debentures, a component of long-term debt, was $10.3 million for 2012 and 2011. The
interest rate on these debentures, resets quarterly at a spread of 1.67% above the current 3-month Libor rate. The average rate paid for
junior subordinated debentures in 2012 was 2.18%, compared to 2.00% in 2011.
Short-term borrowings consist of Federal funds purchased which generally represent overnight borrowing transactions. The Company
did not have a Federal funds line of credit as of December 31, 2012 and 2011. Long-term debt, which is comprised primarily of FHLB
advances, is collateralized by the FHLB stock owned by the Company, certain mortgage-backed securities and a blanket lien on its
residential and commercial real estate mortgage loans.
The maximum amount of borrowings outstanding at any month end during the years ended December 31, 2012 and 2011 were $82.3
million and $127.7 million, respectively. Federal funds purchased represent overnight borrowings providing for the short-term funding
requirements of the Company’s banking subsidiary and generally mature within one business day of the transaction. Federal Reserve
Discount Window borrowings also represent overnight funding to meet the short-term liquidity requirements of the Bank and are fully
collateralized with investment securities. The Company did not utilize short-term FHLB advances or borrowings from the Discount
Window in 2012. During 2011 the average outstanding balance for short-term FHLB advances amounted to $6.6 million and the
weighted average rate paid in 2011 was 0.53%.
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. The Company’s liquidity position is impacted by several factors, which
include, among others, loan origination volumes, loan and investment maturity structure and cash flows, deposit demand and certificate
of deposit maturity structure and retention. Management monitors the Company’s liquidity position and fluctuations daily, so that the
Company can adapt accordingly to market influences and balance sheet trends. Management also forecasts liquidity needs and develops
strategies to ensure adequate liquidity at all times.
The Company’s statements of cash flows present the change in cash and cash equivalents from operating, investing and financing
activities. Cash and cash equivalents, cash and due from banks and interest-bearing deposits in other banks, are the Company’s most
liquid assets. At December 31, 2012, cash and cash equivalents totaled $115.3 million, a decrease of $53.3 million compared to $168.6
million at December 31, 2011. Cash flows from financing and operating activities used $132.2 million and $11.0 million, respectively,
in cash and cash equivalents in 2012. These outflows were only partially offset by net cash inflows from investing activities of $89.9
million.
The $132.1 million in cash flows used by financing activities reflected the $102.5 million decrease in total deposits. Total time deposits
decreased $90.3 million, while demand, interest-bearing demand and savings accounts in aggregate declined $12.2 million. In addition
the Company repaid $29.7 million of FHLB advances.
54
With regard to operating activities, the net cash and cash equivalents of $11.01 million used by operating activities primarily pertained
to the net loss of $13.7 million, adjusted for the effects of noncash transaction such as depreciation and the provision for loan and lease
losses.
Investing activities primarily include transactions related to the Company’s lending activities and securities portfolio. The net cash flows
of $89.9 million provided by investing activities were largely attributable to the proceeds from maturities, calls and principal payments
of investment securities totaling $79.3 million, partially offset by $63.3 million in purchases of investment securities, and a net decrease
in loans to customers totaling $67.7 million.
Core deposits, which represent the Company’s primary source of liquidity, averaged $688.4 million in 2012, a decrease of $55.8 million,
or 7.5%, compared to $744.2 million in 2011. Core deposits are comprised of total deposit liabilities less: brokered deposits, deposits
generated through the Certificate of Deposit Account Registry Service (“CDARs”) and all certificates of deposit accounts with balances
greater than $100 thousand.
The Company has other potential sources of liquidity including the ability to borrow on credit lines established at the Federal Home
Loan Bank of Pittsburgh and access to the Federal Reserve Discount Window. In addition, the Company has the ability to solicit
deposits, primarily certificates of deposit, through QwikRate, a non-brokered marketplace for funding and investing. The Company had
$74.1 million and $39.0 million in certificates originated through QwikRate at December 31, 2012 and 2011, respectively.
Financial instruments whose contract amounts represent credit risk at December 31 are as follows:
(in thousands)
Commitments to extend credit ............................................................................
Standby letters of credit ......................................................................................
2012
$
166,722
35,277
$
2011
138,715
36,286
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 17,
“Regulatory Matters” to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K, regulatory
authorities have prescribed specified minimum capital ratios as guidelines for determining capital adequacy to help assure the safety and
soundness of financial institutions.
55
The following schedules present information regarding the Company’s risk-based capital at December 31, 2012, 2011, and 2010 and
selected other capital ratios:
Capital Analysis
(in thousands)
Company
Tier I Capital:
Total Tier I Capital
Tier II Capital:
Subordinated notes
Allowable portion of allowance for loan losses
Total Tier II Capital
Total Risk-Based Capital
Total Risk Weighted Assets
Bank
Tier I Capital:
Total Tier I Capital
Tier II Capital:
2012
De ce mbe r 31,
2011
2010
$
39,587
$
53,059
$
53,297
19,796
8,452
28,248
67,835
25,000
9,823
34,823
87,882
25,000
11,201
36,201
89,498
$
665,323
$
774,452
$
883,887
$
69,963
$
80,976
$
75,659
Allowable portion of allowance for loan losses
Total Tier II Capital
Total Risk-Based Capital
Total Risk Weighted Assets
8,447
8,447
78,410
9,819
9,819
90,795
11,197
11,197
86,856
$
664,914
$
774,097
$
883,535
56
For Capital
To Be Well
Capitalized
Under Prompt
Corrective
Actual
Adequacy Purposes
Action Provision
Amount
Ratio
Amount
Ratio
Amount
Ratio
$
67,835
$
78,410
10.20%
11.79%
$
53,226
$
53,193
>8.00%
>8.00%
N/A
N/A
$
66,491
>10.00%
$
39,587
$
69,963
5.95%
10.52%
$
26,613
$
26,597
>4.00%
>4.00%
N/A
$
39,895
N/A
>6.00%
$
39,587
$
69,963
4.07%
7.20%
$
38,879
$
38,865
>4.00%
>4.00%
N/A
$
48,581
N/A
>5.00%
For Capital
To Be Well
Capitalized
Under Prompt
Corrective
Actual
Adequacy Purposes
Action Provision
Amount
Ratio
Amount
Ratio
Amount
Ratio
$
87,882
$
90,795
11.35%
11.73%
$
61,956
$
61,928
>8.00%
>8.00%
N/A
N/A
$
77,410
>10.00%
$
53,059
$
80,976
6.85%
10.46%
$
30,978
$
30,964
>4.00%
>4.00%
N/A
$
46,446
N/A
>6.00%
$
53,059
$
80,976
4.72%
7.20%
$
44,992
$
44,978
>4.00%
>4.00%
N/A
$
56,227
N/A
>5.00%
(dollars in thousands)
December 31, 2012
Total Capital
(to Risk Weighted Assets)
Company
Bank
Tier I Capital
(to Risk Weighted Assets)
Company
Bank
Tier I Capital
(to Average Assets)
Company
Bank
(dollars in thousands)
December 31, 2011
Total Capital
(to Risk Weighted Assets)
Company
Bank
Tier I Capital
(to Risk Weighted Assets)
Company
Bank
Tier I Capital
(to Average Assets)
Company
Bank
In 2012, the Company’s total regulatory capital decreased $20.0 million, primarily as a result of the $13.7 million net loss. Also
affecting total regulatory capital were reductions in the allowable portions of subordinated notes and the allowance for loan and lease
losses of $5.2 million and $1.4 million, respectively. As of December 31, 2012, there were 33,542,831 common shares available for
future sale or share dividends. The number of shareholders of record at December 31, 2012 was 1,920. Quarterly market highs and lows,
dividends paid and known market makers are highlighted in Part I, Item 5 of this report. Refer to Note 17, “Regulatory Matters,” to the
consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further discussion of our capital
requirements and dividend limitations. As a result of the Order, the Bank is required to achieve a total risk-based capital ratio of 13%
and Tier I capital to average assets ratio of 9% by November 30, 2010. As of December 31, 2012, the Bank has not yet achieved these
ratios. Furthermore, pursuant to the Order and the Agreement, the Bank and the Company are currently prohibited from declaring or
paying any dividends without prior regulatory approval.
Additionally, the Company has available 20,000,000 authorized shares of preferred stock. There were no preferred shares issued and
outstanding at December 31, 2012 and 2011.
57
During 1999, the Company implemented a Dividend Reinvestment Plan (“DRIP”) which permits participants to automatically reinvest
cash dividends on all of their shares and to make voluntary cash contributions under terms of the plan. Under the DRIP, participants
purchase, at a 10% discount to the 10-day trading average, common shares that are either newly-issued by the Company or acquired by
the plan administrator in the open market or privately.
The Company’s operation of the DRIP Plan was suspended in 2011. New capital generated from shares issued under the DRIP totaled
$29 thousand and $528 thousand during the years ended December 31, 2011 and 2010, respectively. There was no new capital issued
under the DRIP in 2012.
The Board of Directors (the “Board”) on February 26, 2010 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 not be paid
from current and anticipated earnings to prudently fund operations. Additionally, as a result of the Order and the Agreement, the
Company is prohibited from paying dividends without the prior approval of the OCC and the Reserve Bank.
Off-Balance Sheet Arrangements
In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with U.S. GAAP, are
not recorded in our consolidated financial statements, or are recorded in amounts that differ from the notional amounts. These
transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions may be used for general
corporate purposes or for customer needs. Corporate purpose transactions would be used to help manage credit, interest rate and liquidity
risk or to optimize capital. Customer transactions are used to manage customers' requests for funding.
For the year ended December 31, 2012, the Company did not engage in any off-balance sheet transactions that would have or would be
reasonably likely to have a material effect on its consolidated financial condition. For a further discussion of the Company’s off-balance
sheet arrangements, refer to Note 15, “Commitments, Contingencies, and Concentrations” to the consolidated financial statements
included in Item 8 of this Annual Report on Form 10-K.
Contractual Obligations
The following table details the Company’s contractual obligations and commercial commitments as of December 31, 2012. Payments
due by period in the following table are based on final maturity dates without consideration of early redemption.
Contraction Obligations and Commercial Commitments
(in thousands)
Total
Less Than
one Year
1-3 Years
3-5 Years
More Than 5
Years
Payments Due by Period
Federal Home Loan Bank advances
$ 18,593
$ 11,119
$ 5,000
$ -
$ 2,474
Subordinated debentures
Junior subordinated debt
Operating lease obligations
Total contractual cash obligations
25,000
-
5,000
10,000
10,000
10,310
-
-
-
10,310
2,175
$ 56,078
620
$ 11,739
729
$ 10,729
285
$ 10,285
541
$ 23,325
(in thousands)
Amount of Commitment Expirations by Period
Total
Amounts
Commited
Less Than
one Year
1-3 Years
3-5 Years
More Than 5
Years
Commitments to extend credit
$
166,722
$
149,096
$
5,234
$
1,998
$
10,394
Standby letters of credit
35,277
27,521
7,442
-
314
Total
$
201,999
$
176,617
$
12,676
$
1,998
$
10,708
The Company's Treasury unit proactively monitors the level of unused commitments against the Company’s available sources of
liquidity from its investment portfolio, from deposit gathering activities as well as available unused borrowing capacity from the FHLB
and the Federal Reserve. The Treasury unit regularly reports the results of its actions to two of our management committees, the
Asset/Liability Committee and the Senior Management Committee.
58
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)
(2)
(3)
(4)
Manage exposure to changes in the interest rate environment by limiting the changes in net interest margin to an acceptable
level within a reasonable range of interest rates;
Ensure adequate liquidity and funding;
Maintain a strong capital base; and
Maximize net interest income opportunities.
The Company manages these objectives through its Asset and Liability Management Committee (“ALCO”) and its Rate and Investment
Committee, which consist of the members of senior management and certain members of the finance department. 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, liquidity, the economic
environment, the anticipated direction of interest rates and the Company’s earnings sensitivity to changes in these rates.
Interest Rate Sensitivity
Market risk is the risk to earnings and/or financial position resulting from adverse changes in market rates or prices, such as interest
rates, foreign exchange rates or equity prices. The Company’s exposure to market risk is primarily interest rate risk associated with our
lending, investing and deposit gathering activities. Changes in interest rates affect earnings by changing net interest income and the level
of other interest-sensitive income and operating expenses. In addition, variations in interest rates affect the underlying economic value of
our assets, liabilities and off-balance sheet items. The Company analyzes its interest rate 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 re-pricing 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. A positive
gap implies that net interest income will be impacted favorably if interest rates rise and adversely if interest rates fall. A negative gap
implies an inverse correlation between net interest income and interest rate changes.
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 re-pricing interval based on internal assumptions. Management
can influence the actual re-pricing 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.
59
Interest Rate Gap
The following schedule illustrates the Company’s interest rate gap position as of December 31, 2012 which measures sensitivity to
interest rate fluctuations for certain interest sensitivity periods:
Interest Rate Sensitivity
(in thousands)
1 to 90
Days
91 to 180
181 to 365
Days
Days
1 to 5
Years
Beyond
5 Years
Not Rate
Sensitive
Total
Interest-bearing deposits in other banks
$
93,561
$
-
$
-
$
-
$
-
$
-
$
93,561
December 31, 2012
Performing loans, gross
Loans held for sale
Securities - taxable
Securities - tax free
Total securities
Total earning assets
Non-earning assets
Allowance for loan and lease losses
299,666
-
3,778
140
3,918
397,145
-
-
20,543
-
3,197
760
3,957
24,500
-
-
40,139
182,076
-
5,451
290
5,741
45,880
-
-
-
37,813
12,595
50,408
232,484
-
-
45,699
1,615
43,456
69,930
113,386
160,700
-
-
-
-
10,149
10,149
10,149
115,952
(18,536)
588,123
1,615
103,844
83,715
187,559
870,858
115,952
(18,536)
Total assets
$
397,145
$
24,500
$
45,880
$
232,484
$
160,700
$
107,565
$
968,274
Interest-bearing demand deposits
$
321,863
$
-
$
-
$
-
$
-
$
-
$
321,863
Savings deposits
Time deposits ($100,000 and over)
Other time deposits
Total interest-bearing deposits
FHLB advances
Subordinated debentures
Junior subordinated debt
Total borrowed funds
Total interest-bearing liabilities
Demand deposits
Other liabilities
Shareholders' equity
Total liabilities and shareholders' equity
81,770
28,252
36,140
468,025
6,204
-
10,310
16,514
484,539
-
-
-
706
22,275
28,793
51,774
86
-
-
86
51,860
-
-
-
625
37,064
36,011
73,700
5,175
-
-
5,175
78,875
-
-
-
-
57,150
71,386
128,536
6,527
15,000
-
21,527
150,063
-
-
-
-
103
999
1,102
601
10,000
-
10,601
11,703
-
-
-
-
-
-
-
-
-
-
-
-
131,476
22,833
36,925
83,101
144,844
173,329
723,137
18,593
25,000
10,310
53,903
777,040
131,476
22,833
36,925
$
484,539
$
51,860
$
78,875
$
150,063
$
11,703
$
191,234
$
968,274
INTEREST RATE SENSITIVITY GAP
$
(87,394)
$
(27,360)
$
(32,995)
$
82,421
$
148,997
CUMULATIVE GAP
$
(87,394)
$
(114,754)
$
(147,749)
$
(65,328)
$
83,669
The Company’s interest sensitivity was essentially negative at December 31, 2012. Rate-sensitive liabilities re-pricing within a one-year
time horizon exceeded rate sensitive assets re-pricing within the same timeframe by $147.7 million. A negative gap implies that net
interest income will react inversely to increases in interest rates.
Earnings at risk and economic 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. 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 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 re-price equally and simultaneously with market rates (i.e., savings rate). 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.
60
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. ALCO
examines this ratio regularly utilizing a rate shock of +/- 200 basis points in the interest rate simulation model. Management 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, 2012 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, 2012 levels.
Earnings at risk:
Percent change in net interest income ..............................................
RATES + 200
RATES – 200
5.26 %
(7.69 )%
Economic value at risk:
Percent change in economic value of equity ....................................
(5.70 )%
13.05 %
61
Item 8. Financial Statements and Supplementary Data.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
First National Community Bancorp, Inc. and Subsidiaries
We have audited the accompanying consolidated statements of financial condition of First National Community
Bancorp, Inc. and Subsidiaries (the “Company”) as of December 31, 2012 and 2011, and the related consolidated
statements of operations, comprehensive (loss) income, changes in shareholders’ equity, and cash flows for each of the
three years in the period ended December 31, 2012. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits 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 the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of First National Community Bancorp, Inc. and Subsidiaries as of December 31, 2012 and 2011, and
the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012,
in conformity with U.S. generally accepted accounting principles.
As explained in Note 17, the Company’s subsidiary bank (the “Bank”) is under a Consent Order from the Office of the
Comptroller of the Currency whereby the Bank is required to achieve and maintain certain minimum regulatory capital
ratios.
/s/ McGladrey LLP
New Haven, Connecticut
March 28, 2013
62
FIRST NATIONAL COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands, except share data)
Assets
Cash and cash equivalents:
Cash and due from banks
Interest-bearing deposits in other banks
Total cash and cash equivalents
Securities:
Available-for-sale, at fair value
Held-to-maturity, at amortized cost (fair value $2,483 and $2,245 )
Stock in Federal Home Loan Bank of Pittsburgh, at cost
Loans held for sale
December 31,
2012
2011
$
21,710
$
18,956
93,561
115,271
149,690
168,646
185,361
185,475
2,198
5,957
1,615
2,094
8,399
94
Loans, net of allowance for loan and lease losses of $18,536 and $20,834
579,396
659,044
Bank premises and equipment, net
Accrued interest receivable
Refundable federal income taxes
Intangible assets
Bank-owned life insurance
Other real estate owned
Other assets
Total Assets
Liabilities
Deposits:
Demand
Interest-bearing demand
Savings
Time ($100,000 and over)
Other time
Total deposits
Borrowed funds:
FHLB advances
Subordinated debentures
Junior subordinated debentures
Total borrowed funds
Accrued interest payable
Other liabilities
Total liabilities
Shareholders' Equity
Preferred Shares ($1.25 par)
Authorized: 20,000,000 shares as of December 31, 2012 and 2011
Issued and outstanding: 0 shares as of December 31, 2012 and 2011
Common Shares ($1.25 par)
Authorized: 50,000,000 shares as of December 31, 2012 and 2011
Issued and outstanding: 16,457,169 shares as of December 31, 2012 and 16,442,119 as of December 2011
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive income (loss):
Unrealized holding gain on available-for-sale securities, net of taxes
Unrealized non-credit holding loss on OTTI available-for-sale securities, net of taxes
Total accumulated other comprehensive income (loss), net of taxes
Total shareholders' equity
Total Liabilities and Shareholders’ Equity
18,937
2,199
11,637
632
27,461
3,983
13,627
18,846
2,552
11,612
797
26,769
6,958
11,353
$
968,274
$
1,102,639
$
131,476
$
124,733
321,863
83,101
144,844
173,329
854,613
18,593
25,000
10,310
53,903
6,427
16,406
336,182
87,712
199,790
208,719
957,136
48,261
25,000
10,310
83,571
4,301
17,706
931,349
1,062,714
-
-
20,571
61,584
(51,928)
6,698
-
6,698
36,925
20,552
61,557
(38,217)
497
(4,464)
(3,967)
39,925
$
968,274
$
1,102,639
The accompanying notes to consolidated financial statements are an integral part of these statements.
63
FIRST NATIONAL COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thous ands , except s hare data)
Interes t income
Interes t and fees on loans
Interes t and dividends on s ecurities
U.S. Treas ury and government agencies
State and political s ubdivis ions , tax-free
State and political s ubdivis ions , taxable
Other s ecurities
Total interes t and dividends on s ecurities
Interes t on interes t-bearing depos its and federal funds s old
Total interes t income
Interes t expens e
Depos its
Interes t-bearing demand
Savings
Time ($100,000 and over)
Other time
Total interes t on depos its
Interes t on borrowed funds
Interes t on FHLB advances
Interes t on s ubordinated debentures
Interes t on junior s ubordinated debentures
Interes t on other debt
Total interes t on borrowed funds
Total interes t expens e
Net interes t income before provis ion for loan and leas e los s es
Provis ion for loan and leas e los s es
Net interes t income after provis ion for loan and leas e los s es
Non-interes t income
Depos it s ervice charges
Net (los s ) gain on the s ale of s ecurities
Gros s other-than-temporary-impairment (los s es ) gains
Portion of (gain) los s recognized in OCI (before taxes )
Other-than-temporary-impairment los s es recognized in earnings
Net gain on the s ale of loans held for s ale
Net gain on the s ale of other real es tate owned
Net gain (los s ) on the s ale of other as s ets
Loan related fees
Income from bank owned life ins urance
Other
Total non-interes t income
Non-interes t expens e
Salaries and employee benefits
Occupancy expens e
Equipment expens e
Advertis ing expens e
Data proces s ing expens e
FDIC as s es sment
Bank s hares tax
Expens e of other real es tate owned
Provis ion (credit) for off-balance s heet commitments
Legal expens e
Profes s ional fees
Ins urance expens e
Loan collection expens es
Other operating expens es
Total non-interes t expens e
Los s before income taxes
Provis ion for income taxes
Net los s
Los s Per Share
Bas ic
Diluted
Year Ended December 31,
2012
2011
2010
$
29,588
$
34,467
$
44,380
1,352
3,931
482
1,484
7,249
190
37,027
699
161
1,476
3,048
5,384
1,322
2,288
224
-
3,834
9,218
27,809
4,065
23,744
2,985
(1,712)
(96)
-
(96)
859
305
-
514
692
736
4,283
14,702
2,225
1,723
614
2,141
2,216
882
2,027
358
4,233
4,385
896
765
4,571
41,738
(13,711)
-
2,852
5,093
112
234
8,291
178
42,936
1,615
287
2,193
4,664
8,759
2,621
2,281
206
-
5,108
13,867
29,069
523
28,546
3,105
5,114
751
(1,549)
(798)
755
2,528
20
673
787
765
12,949
14,117
2,508
1,654
629
2,036
2,657
1,103
3,720
(423)
2,716
5,413
685
780
4,235
41,830
(335)
-
4,223
5,590
58
1,059
10,930
161
55,471
3,442
502
3,416
6,832
14,192
5,208
2,257
210
1
7,676
21,868
33,603
25,041
8,562
3,274
(1,714)
(805)
(3,466)
(4,271)
1,198
403
(60)
1,009
740
703
1,282
13,077
3,228
1,763
712
2,023
2,828
1,020
7,521
(678)
1,075
2,066
362
647
5,920
41,564
(31,720)
-
$
(13,711)
$
(335)
$
(31,720)
$
(0.83)
$
(0.02)
$
(1.94)
$
(0.83)
$
(0.02)
$
(1.94)
Cas h Dividends Declared Per Common Share
$
-
$
-
$
-
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Bas ic
Diluted
16,442,160
16,442,160
16,439,508
16,439,508
16,354,245
16,354,245
The accompanying notes to cons olidated financial s tatements are an integral part of thes e s tatements .
64
FIRST NATIONAL COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in thousands)
Net loss
Other Comprehensive income:
Unrealized gains (losses) on securities available for sale
Taxes
Net of tax amount
Non-credit related gains on OTTI securities not expected to be sold
Taxes
Net of tax amount
Reclassification adjustment for losses (gains) included in net loss
Taxes
Net of tax amount
Year Ended December 31,
2012
2011
2010
$
(13,711)
$
(335)
$
(31,720)
14,351
(4,880)
9,471
-
-
-
1,808
(614)
1,194
15,050
(5,117)
9,933
1,655
(563)
1,092
(4,316)
1,467
(2,849)
(11,729)
3,988
(7,741)
5,991
(2,037)
3,954
5,985
(2,035)
3,950
Total other comprehensive income
10,665
8,176
163
Comprehensive (loss) income
$
(3,046)
$
7,841
$
(31,557)
The accompanying note to consolidated financial statements are an integral part of these financial statements
65
FIRST NATIONAL COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2012, 2011 and 2010
(in thousands, except share data)
Balances, December 31, 2009
Net loss for the year
Other comprehensive income, net of tax of $84
Proceeds from issuance of common shares through dividend
reinvestment plan
Balances, December 31, 2010
Net loss for the year
Other comprehensive income, net of tax of $4,213
Proceeds from issuance of common shares through dividend
reinvestment plan
Balances, December 31, 2011
Net loss for the year
Other comprehensive income, net of tax of $5,494
Stock-based compensation
Balances, December 31, 2012
Number
of Common
Shares
Common
Stock
Additional
Paid-in
Capital
Accumulated
Other
Total
Accumulated
Comprehensive
Shareholders'
Deficit
(Loss) Income
Equity
16,289,970
$
20,362
$
61,190
$
(6,162)
$
(12,306)
$
63,084
-
-
143,050
16,433,020
-
-
9,099
16,442,119
-
-
15,050
-
-
179
20,541
-
-
11
20,552
-
-
19
-
-
349
61,539
-
-
18
61,557
-
-
27
(31,720)
-
-
(37,882)
(335)
-
(38,217)
(13,711)
-
-
163
-
(12,143)
-
8,176
-
(3,967)
-
10,665
-
(31,720)
163
528
32,055
(335)
8,176
29
39,925
(13,711)
10,665
46
16,457,169
$
20,571
$
61,584
$
(51,928)
$
6,698
$
36,925
The accompanying notes to consolidated financial statements are an integral part of these statements.
66
FIRST NATIONAL COMMUNITY BANCORP, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash Flows from Operating activities:
Net loss
Adjustments to Reconcile Net Loss to Net Cash (Used) Provided by Operating Activities:
Investment securities accretion, net
Equity in trust
Depreciation and amortization
Provision for loan and lease losses
Provision (credit) for off balance sheet commitments
Provision for deferred taxes
Stock-based compensation expense
(Gain) loss on sale of investment securities
Other-than temporary impairment losses
Gain on the sale of loans held for sale
(Gain) loss on disposition of premises and equipment and other assets
Gain on the sale of other real estate owned
Write-down of other real estate owned
Write-down of premises and equipment
Income from bank owned life insurance
Proceeds from the sale of loans held for sale
Funds used to originate loans held for sale
Decrease in interest receivable
(Increase) decrease in refundable federal income taxes
(Increase) decrease in prepaid expenses and other assets
Increase (decrease) in interest payable
Increase in accrued expenses and other liabilities
Total adjustments
Net Cash (Used) Provided by Operating Activities
Cash Flows from Investing Activities:
Maturities, calls and principal payments of investment securities available-for-sale
Sales of securities available-for-sale
Purchases of securities available-for-sale
Purchases of Federal Reserve Bank stock
Redemption of Federal Home Loan Bank of Pittsburgh stock
Payment of liability for securities purchased not settled
Net decrease in loans to customers
Proceeds from the sale of non-performing loans
Proceeds from the sale of indirect loans
Proceeds from the sale of other real estate owned
Purchases of property and equipment
Proceeds from the sale of property and equipment
Net Cash Provided by Investing Activities
Cash Flows from Financing Activities:
Net (decrease) increase in demand deposits, interest-bearing demand and savingsaccounts
Net decrease in time deposits
Proceeds from issuance of subordinated debentures
Proceeds from FHLB advances
Repayment of FHLB advances
Proceeds from (repayment of) other borrowed funds
Proceeds from issuance of common shares, net of share issuance costs
Net Cash Used by Financing Activities
Net (Decrease) Increase in Cash and Cash Equivalents
Cash & Cash Equivalents at Beginning of Year
Cash & Cash Equivalents at End of Year
Supplemental Cash Flow Information
Cash paid (received) during the period for:
Interest
Income taxes
Other transactions:
Securities purchased but not settled
Principal balance of loans transferred to OREO
Transfer from loans held for sale to loans
Transfer from loans held for sale to other assets
For the Years Ended December,
2012
2011
2010
$ (13,711)
$ (335)
$ (31,720)
(1,628)
(1,293)
(2,365)
(7)
(4)
(6)
1,249
1,338
1,601
4,065
523
25,041
358
(423)
(678)
-
-
3,512
46
-
-
1,712
(5,114)
1,714
96
798
4,271
(859)
(755)
(1,198)
142
(20)
60
(305)
1,206
(2,528)
2,318
(403)
5,906
-
-
1,196
(692)
(787)
(740)
27,017
28,573
44,837
(27,679)
(26,638)
(46,754)
353
567
1,126
(25)
797
(4,520)
4,170
(187)
(1,129)
2,126
1,538
(117)
12
569
1,825
2,667
3,629
37,512
(11,044)
3,294
5,792
33,170
46,099
29,449
122,640
51,145
36,619
(63,279)
(63,409)
(89,442)
(90)
-
(336)
2,442
1,912
543
(5,120)
-
-
67,743
73,540
111,010
6,836
-
-
-
-
36,501
3,660
6,880
5,996
(1,601)
(893)
(1,239)
-
32
59
89,860
170,151
150,856
(12,187)
(90,336)
-
16,190
(41,490)
7,981
(97,153)
-
1,900
-
60,000
27,000
(29,668)
(113,626)
(108,943)
-
(407)
180
-
(132,191)
29
(79,304)
528
(168,507)
(53,375)
94,141
(11,859)
168,646
74,505
86,364
$ 115,271
$ 168,646
$ 74,505
$ 7,092
$ 12,329
$ 21,985
-
-
(800)
5,120
(3,324)
-
1,586
3,995
9,928
-
(1,289)
-
-
698
749
The accompanying notes to the consolidated financial statements are an integral part of these statements.
67
Notes to Consolidated Financial Statements
Note 1. Organization
First National Community Bancorp, Inc., is a registered bank holding company under the Bank Holding Company Act of 1956. It was
incorporated under the laws of the Commonwealth of Pennsylvania in 1997. It is the parent company of First National Community
Bank (the “Bank”) and the Bank’s wholly owned subsidiaries FNCB Realty Company, Inc., FNCB Realty Company I, LLC, and FNCB
Realty Company II, LLC. Unless the context otherwise requires, the term “Company” is used to refer to First National Community
Bancorp, Inc., and its subsidiaries. In certain circumstances, however, the term “Company” refers to First National Community
Bancorp, Inc., itself.
The Bank provides customary retail services to individuals and businesses through its twenty-one banking locations located in
northeastern Pennsylvania.
FNCB Realty Company, Inc., FNCB Realty Company I, LLC, and FNCB Realty Company II, LLC were formed to hold real estate
and/or operate businesses acquired in exchange for debt settlement or foreclosure.
During December 2006 the Bank created First National Community Statutory Trust I (“Issuing Trust”) which is wholly owned by the
Company. The Issuing Trust was formed to provide an additional funding source for the Company through the issuance of pooled trust
preferred securities. The Company has adopted Accounting Standards Codification 810-10, Consolidation, for the issuing trust.
Accordingly, this trust has not been consolidated with the accounts of the Company, because the Company is not the primary beneficiary
of the trust.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements of the Company include the accounts of First National Community Bancorp, Inc., the Bank, and
the Bank’s wholly-owned subsidiaries. All inter-company transactions and balances have been eliminated. The accounting and reporting
policies of the Company conform to accounting principles general accepted in the United States of America (“GAAP”) and general
practices within the financial services industry.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from these
estimates. Material estimates that are particularly susceptible to change are the allowance for loan and lease losses, investment security
valuations, the evaluation of investment securities and other real estate owned for impairment, and the evaluation of deferred income
taxes.
Cash Equivalents
For purposes of reporting cash flows, cash equivalents include cash on hand, amounts due from banks and federal funds sold. Generally,
federal funds are purchased and sold for one day periods.
Securities
The Company classifies investment securities as either held-to-maturity or available-for-sale at the time of purchase. Investment
securities that are classified as held-to-maturity are carried at amortized cost when management has the positive intent and ability to hold
them to maturity. Investment securities that are classified as available-for-sale are carried at fair value with unrealized gains and losses
recognized as a component of shareholders’ equity in accumulated other comprehensive income. Gains and losses on sales of
investment securities are recognized using the specific identification method on a trade date basis. Interest income on investments
includes amortization of premiums and accretion of discounts. Realized gains and losses are derived based on the amortized cost of the
security sold.
Quarterly, the Company evaluates its investment securities classified as held-to-maturity or available-for-sale for other-than-temporary-
impairment (“OTTI”). Unrealized losses on securities are considered to be other-than-temporarily- impaired when the Company believes
the security’s impairment is due to factors that could include the issuer’s inability to pay interest or dividends, the issuer’s potential for
default, and/or other factors. Based on current authoritative guidance, when a held-to-maturity or available-for-sale debt security is
assessed for OTTI, the Company must first consider (a) whether management intends to sell the security and (b) whether it is more
68
likely than not that the Company will be required to sell the security prior to recovery of its amortized cost basis. If one of these
circumstances applies to a security, an OTTI loss is recognized in the statement of operations equal to the full amount of the decline in
fair value below amortized cost. If neither of these circumstances applies to a security, but the Company does not expect to recover the
entire amortized cost basis, an OTTI loss has occurred that must be separated into two categories: (a) the amount related to credit loss
and (b) the amount related to other factors (such as market risk). In assessing the level of OTTI attributable to credit loss, the Company
compares the present value of cash flows expected to be collected with the amortized cost basis of the security. The portion of the total
OTTI related to credit loss is identified as the amount of principal cash flows not expected to be received over the remaining term of the
security as estimated based on cash flow projections discounted at the applicable original yield of the security, and is recognized in
earnings, while the amount related to other factors is recognized in other comprehensive income. The total OTTI loss is presented in the
statement of operations less the portion recognized in other comprehensive income. When a debt security becomes other-than-
temporarily impaired, its amortized cost basis is reduced to reflect the portion of the total impairment related to credit loss.
For equity securities, the entire decline in the value that is considered other-than-temporary is recognized in earnings.
Investments in the Federal Reserve Bank and Federal Home Loan Bank stock have limited marketability, are carried at cost and are
evaluated for impairment based on the Company’s determination of the ultimate recoverability of the par value of the stock. The
investment in the Federal Reserve Bank stock is included in other assets.
Loans and Loan Fees
Loans receivable, other than loans held for sale, are stated at the principal outstanding, net of unamortized loan fees and costs, partial
charge-offs and the allowance for loan and lease losses. Interest income on all loans is recognized using the effective interest method.
Loan origination and commitment fees, as well as certain direct loan origination costs, are deferred and the net amount is amortized as
an adjustment of the related loan’s yield. The Bank is generally amortizing these amounts over the life of the related loans except for
residential mortgage loans, where the timing and amount of prepayments can be reasonably estimated. For these mortgage loans, the net
deferred fees or costs are amortized over an estimated average life of five years. Amortization of deferred loan fees or costs is
discontinued when a loan is placed on non-accrual status.
Loans are placed on non-accrual status when a loan is specifically determined to be impaired or when management believes that the
collection of interest or principal is doubtful. This is generally when a default of interest or principal has existed for 90 days or more,
unless such loan is fully secured and in the process of collection, or when management becomes aware of facts or circumstances that the
loan would default before 90 days. The Company determines delinquency status based on the number of days since the date of the
borrower’s last required contractual loan payment. When the interest accrual is discontinued, the balance of any previously accrued but
unpaid interest is reversed and charged against interest income. Any cash payments subsequently received are applied, first to the
outstanding loan amounts, then to the recovery of any charged-off loan amounts. Any excess amount is treated as a recovery of lost
interest. A non-accrual loan is returned to accrual status when the loan is current as to principal and interest payments, is performing
according to contractual terms for six consecutive months and future payments are reasonably assured.
In underwriting a loan secured by real property (unless exempt based on legal requirements), the Company requires an appraisal of the
property by an independent licensed appraiser approved by the Bank’s Board of Directors. The appraisal is either reviewed internally or
by an independent third party hired by the Bank. Generally, management obtains updated appraisals when a loan is deemed impaired.
These appraisals may be more limited than those prepared for the underwriting of a new loan.
Troubled Debt Restructurings
A troubled debt restructuring (“TDR”) is a loan for which the Company, for legal or economic reasons related to a debtor’s financial
difficulties, has granted a concession to the debtor that it otherwise would not have considered. Such concessions granted generally
involve a reduction of the stated interest rate, an extension of a loan’s maturity date, or payment modifications. Non-accrual TDRs are
returned to accrual status if principal and interest payments, under the modified terms, are brought current, are performing under the
modified terms for six consecutive months and future payments are reasonably assured.
Loan Impairment
A loan is considered 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 note and loan agreement. For purposes of the Company’s analysis, TDRs, loans rated
substandard and on non-accrual status and loans that are identified as doubtful or loss are considered impaired. Impaired loans are
analyzed individually for impairment. The Company generally utilizes the fair value of collateral method for collateral dependent loans.
A loan is considered to be collateral dependent when repayment of the loan is expected to be provided through the liquidation of the
collateral held. For impaired loans that are secured by real estate, external appraisals are obtained annually, or more frequently as
warranted, to ascertain a fair value so that the impairment analysis can be updated. Should a current appraisal not be available at the
time of impairment analysis, other sources of valuation such as current letters of intent, broker price opinions or executed agreements of
69
sale may be used. For non-collateral dependent impaired loans and TDRs, the Company measures impairment based on the present
value of expected future cash flows, discounted at the loan’s original effective interest rate.
Generally all loans with balances of $100 thousand or less are considered within homogeneous pools and are not individually evaluated
for impairment. However, individual loans with balances of $100 thousand or less are individually evaluated for impairment if that loan
is part of a larger impaired loan relationship or the loan is considered a TDR.
Impaired loans or portions thereof are charged-off upon determination that all or a portion of the loan balance is uncollectible and
exceeds the fair value of the collateral. A loan is considered uncollectible when the borrower is delinquent with respect to principal or
interest repayment and it is unlikely that the borrower will have the ability to pay the debt in a timely manner, collateral value is
insufficient to cover the outstanding indebtedness and the guarantors (if applicable) do not provide adequate support for the loan.
Allowance for Loan and Lease Losses
Management continually evaluates the credit quality of the Company’s loan portfolio, and performs a formal review of the adequacy of
the allowance for loan and lease losses (“ALLL”) on a quarterly basis. Management establishes the ALLL through provisions for loan
losses charged to earnings and maintains the ALLL at a level it considers adequate to absorb probable losses inherent in the loan
portfolio as of the evaluation date. Loans, or portions of loans, determined by management to be uncollectable are charged off against
the ALLL, while recoveries of amounts previously charged off are credited to the ALLL.
Determining the amount of the ALLL is considered a critical accounting estimate because it requires significant judgment and the use of
estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous
loans based on historical loss experience and qualitative factors, and consideration of current economic trends and conditions, all of
which may be susceptible to significant change. Various banking regulators, as an integral part of their examinations of the Company,
also review the ALLL. Such regulators may require, based on their judgments about information available to them at the time of their
examination, that certain loan balances be charged off or require that adjustments be made to the ALLL. Additionally, the ALLL is
determined, in part, by the composition and size of the loan portfolio.
The ALLL consists of two components, a specific component and a general component. The specific component relates to loans that are
classified as impaired. For such loans an allowance is established when the discounted cash flows, collateral value or observable market
price of the impaired loan is lower than the carrying value of that loan. The general component covers all other loans and is based on
historical loss experience adjusted by qualitative factors. The general reserve component of the ALLL is based on pools of unimpaired
loans segregated by loan segment and risk rating categories of “Pass”, “Special Mention” or “Substandard and Accruing.” Historical loss
factors and various qualitative factors are applied based on the risk profile in each risk rating category to determine the appropriate
reserve related to those loans. As previously mentioned, substandard loans on nonaccrual status are included in impaired loans.
When establishing the ALLL, management categorizes loans into segments generally based on the nature of the collateral and basis of
repayment. These risk characteristics of the Company’s loan segments are as follows:
Construction, Land Acquisition and Development Loans - These loans consist of loans secured by real estate, with the purpose of
constructing one-to-four family homes, residential developments and various commercial properties including, shopping centers, office
complexes and single-purpose, owner-occupied structures. Additionally, loans in this category include loans for land acquisition,
secured by raw land. The Bank’s construction program offers either short-term, interest-only loans that require the borrower to pay
interest only during the construction phase with a balloon payment of the principal outstanding at the end of the construction period or
interest only during construction with a conversion to amortizing principal and interest when the construction is complete. Loans for
undeveloped real estate are subject to a loan-to-value ratio not to exceed 65%. Construction loans are treated similarly to the developed
real estate loans and are generally subject to an 80% loan to value ratio based upon an “as-completed” appraised value. Construction
loans generally yield a higher interest rate than other mortgage loans but also carry more risk.
Commercial Real Estate Loans - These loans represent the largest portion of the Bank’s total loan portfolio and loans in this portfolio
generally carry larger loan balances. The commercial real estate mortgage loan portfolio is secured by a broad range of real estate,
including but not limited to, office complexes, shopping centers, hotels, warehouses, gas stations/ convenience markets, residential care
facilities, nursing care facilities, restaurants and multifamily housing. The Bank’s commercial real estate portfolio consists of owner-
occupied properties and non-owner-occupied properties and includes the personal guarantees of the principals where deemed necessary.
The Bank offers various rates and terms for commercial mortgage loans secured by real estate. The interest rates associated with these
types of loans are primarily priced as adjustable-rate loans with re-pricing dates extending three through seven years or floating-rate
loans that adjust to a spread over the National Prime Rate (“NPR”) index. Loan pricing for most floating-rate commercial mortgage
loans generally has a minimum interest rate. The terms for commercial real estate loans typically do not exceed 20 years. Commercial
real estate mortgage loans are originated under a comprehensive lending policy. In particular, these types of loans are subject to specific
70
loan-to-value guidelines prior to the time of closing. The policy limits for developed real estate loans are subject to a maximum loan-to-
value ratio of 80%. Commercial mortgage loans must also meet specific criteria that include the capacity, capital, credit worthiness and
cash flow of the borrower and the project being financed. In order to make a decision on whether or not to make a commercial mortgage
loan, the borrower(s) and guarantor(s) must provide the Bank with historical and current financial data. The Bank performs a review of
the cash flow analysis of the borrower(s), guarantor(s) and the project. The Bank also considers the borrower’s expertise, credit history,
net worth and the value of the underlying property. The Bank generally requires that borrowers for loans secured by real estate maintain
a debt service coverage ratio of at least 1.20 times.
Commercial and Industrial Loans - The Bank offers commercial loans to individuals and businesses located in its primary market area.
The commercial loan portfolio includes lines of credit, dealer floor plan lines, equipment loans, vehicle loans, improvement loans and
term loans. These loans are primarily secured by vehicles, machinery and equipment, inventory, accounts receivable, marketable
securities, deposit accounts and real estate. The Bank offers various rates and terms for commercial loans. These loans also normally
require the personal guarantee of the principals where deemed necessary. Most lines of credit are primarily issued for one year time
periods and are renewable annually thereafter at the discretion of the Bank. Most other commercial loans range in terms from one to
seven years. The interest rates associated with these types of loans are primarily underwritten as fixed rate loans based upon the term of
the loan or floating rate loans that adjust to a spread over the NPR index. Loan pricing for most floating rate commercial loans generally
have a minimum interest rate floor. The interest rate for most lines of credit is issued on a floating rate basis. Finally, loans secured by
deposit accounts are primarily underwritten at a spread over the interest rate of the deposit instrument used as collateral for the loan.
State and Political Subdivision Loans - The Bank originates general obligation notes and tax anticipation loans to state and political
subdivisions, which are primarily municipalities in the Bank’s market area.
Residential Real Estate Loans - The Bank offers fixed and variable rate one-to-four-family residential loans. Residential first lien
mortgages are generally subject to an 80% loan to value ratio based on the appraised value of the property. The Bank will generally
require the mortgagee to purchase Private Mortgage Insurance (“PMI”) if the amount of the loan exceeds the 80% loan to value ratio.
The interest rates for the variable rate loans are adjusted to a percentage above the one year treasury rate. The Bank may sell loans and
retain servicing when warranted by market conditions. The Bank also offers a rate lock to customers that allow the borrowers to lock in
their interest rates at the time of application as well as at time of commitment. Residential mortgage loans are generally smaller in size
and are considered homogeneous as they exhibit similar characteristics.
Consumer Loans - Include both secured and unsecured installment loans, personal lines of credit and overdraft protection loans. 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. The Bank offers home equity loans and home equity lines of credit with a maximum combined
loan-to-value ratio of 90% based on the appraised value of the property. Home equity loans have fixed rates of interest and carry terms
up to 15 years. Home equity lines of credit have adjustable interest rates and are based upon the prime interest rate. Consumer loans are
generally smaller in size and exhibit homogeneous characteristics.
Liability for Off-Balance-Sheet Credit-Related Financial Instruments
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing need
of its customers. These financial instruments include commitments to extend credit, unused portions of lines of credit, including
revolving home equity lines of credit, and letters of credit. The Company’s exposure to credit loss in the event of nonperformance by the
other party to the financial instrument is represented by the contractual notional amount of these instruments. The Company uses the
same credit policies in making these commitments as it does for on-balance-sheet instruments. In order to provide for probable losses
inherent in these instruments, the Company records a reserve for unfunded commitments, included in other liabilities on the consolidated
balance sheet, with the offsetting expense recorded in other operating expenses in the consolidated statements of operations.
Mortgage Banking Activities
Mortgage loans originated by the Bank and intended for sale are carried at the lower of aggregate cost or fair value determined on an
individual loan basis. Net unrealized losses are recorded as a valuation allowance and charged to earnings. Gains and losses on sales of
mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold and include the value
assigned to the rights to service the loan. Gains on the sales of loans for the years ended December 31, 2012, 2011 and 2010 were $0.9
million, $0.8 million and $1.2 million, respectively. Loans held for sale are generally sold with loan servicing rights retained by the
Company. At December 31, 2012 and 2011, loans held for sale amounted to $1.6 million and $94 thousand, respectively.
71
Servicing
Servicing assets are reported in other assets and amortized in proportion to and over the period during which estimated servicing income
will be received. Servicing loans for others consists of collecting mortgage payments, maintaining escrow accounts, disbursing
payments to investors, and processing foreclosures. Loan servicing income is recorded when earned and represents servicing fees from
investors and certain charges collected from borrowers, such as late payment fees. The Company has fiduciary responsibility for related
escrow and custodial funds.
Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets.
Generally, purchased servicing rights are capitalized at the cost to acquire the rights. For sales of mortgage loans originated by the
Bank, a portion of the cost of originating the loan is allocated to the servicing retained right based on fair value. Fair value is based on
market prices for comparable mortgage servicing contracts, when available, or alternately, is based on a valuation model that calculates
the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants
would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation
rate, ancillary income, prepayment speeds and default rates and losses. Capitalized servicing rights are amortized into interest income in
proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets.
Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is
determined by stratifying rights into tranches based on predominant risk characteristics, such as interest rate, loan type and investor type.
Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the capitalized
amount for the tranche. If the Bank later determines that all or a portion of the impairment no longer exists for a particular tranche, a
reduction of the allowance may be recorded as an increase to income. Servicing fee income is recorded for fees earned for servicing
loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income
when earned.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred
assets is deemed to be surrendered when (1) the assets have been isolated from the Company — put presumptively beyond the reach of
the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that
constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the transferor does not maintain
effective control over the transferred assets through either (a) an agreement that both entitles and obligates the transferor to repurchase or
redeem the assets before maturity or (b) the ability to unilaterally cause the holder to return specific assets, other than through a cleanup
call.
Other Real Estate Owned
Other real estate owned (“OREO”) consists of property acquired by foreclosure, abandonment or conveyance of deed in-lieu of
foreclosure of a loan and is held for sale. OREO is initially recorded at fair value less costs to sell, which establishes a new cost basis.
OREO is subsequently carried on the consolidated statement of financial condition at the lower of cost or the estimated fair value of the
real estate less expected costs to sell at the reporting date. Any loss upon reclassification from loans to OREO is recognized as a charge
to the ALLL. Any subsequent decline in the value, prior to disposal of the property, is charged to operations. Valuations are determined
on an individual asset basis through external appraisals, current letters of intent, broker price opinions or executed agreements of sale.
Costs relating to the development and improvement of the OREO properties may be capitalized, while holding period costs are charged
to expense as incurred.
Bank Premises and Equipment
Land is stated at cost. Bank premises, equipment and leasehold improvements are stated at cost less accumulated depreciation. Costs for
routine maintenance and repair are expensed as incurred, while significant expenditures for improvements are capitalized. Depreciation
expense is computed generally using the straight-line method over the following ranges of estimated useful lives, or in the case of
leasehold improvements, to the expected terms of the leases, if shorter.
Buildings and improvements ...........................................................
Furniture, fixtures and equipment ...................................................
Leasehold improvements.................................................................
10 to 40 years
3 to 15 years
5 to 30 years
72
Intangible Assets
Intangible assets consist entirely of a core deposit intangible which arose in connection with the acquisition of the Bank’s Honesdale
branch. The core deposit intangible is amortized over an estimated useful life of 10 years.
Long-lived Assets
Intangible assets and bank premises and equipment are reviewed by management at least annually for potential impairment and
whenever events or circumstances indicate that carrying amounts may not be recoverable.
Income Taxes
The Bank recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets
are reduced by a valuation allowance when, in the opinion of management, it is more-likely-than-not that all or some portion of the
deferred tax assets will not be realized.
The Company files a consolidated Federal income tax return. Under tax sharing agreements, each subsidiary provides for and settles
income taxes with the Company as if it would have filed on a separate return basis.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities,
while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately
sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available
evidence, management believes it is more-likely-than-not that the position will be sustained upon examination, including the resolution
of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet
the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being
realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that
exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits along with any associated
interest and penalties that would be payable to the taxing authorities upon examination. The Company determined that it had no
liabilities for uncertain tax positions at December 31, 2012 and 2011.
Interest and penalties related to income taxes, if any, are presented within non-interest expense.
Earnings per Share
Earnings per share is calculated on the basis of the weighted-average number of common shares outstanding during the year. Basic
earnings per share excludes dilution and is computed by dividing net income available to common shareholders by the weighted-average
common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if
outstanding stock options were exercised and converted into common stock. The dilutive effect of stock options is calculated using the
treasury stock method.
Stock-Based Compensation
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. All options are
charged against income at their fair value. The entire expense of the award is recognized over the vesting period. Shares of stock granted
are recorded at the fair value of the shares at the grant date, over the vesting period.
73
Bank-Owned Life Insurance
Bank-owned life insurance (“BOLI”) represents the cash surrender value of life insurance policies on certain current and former
directors and officers of the Company. The Company purchased the insurance as a future source of funding for the Company’s
liabilities, including the payment of employee benefits such as health care. BOLI is carried in the consolidated statements of financial
condition at its cash surrender value. Increases in the cash value of the policies, as well as proceeds received, are recorded in non-interest
income, and are not subject to income taxes. Under some of these policies, the beneficiaries receive a portion of the death benefit. The
net present value of the future death benefits scheduled to be paid to the beneficiaries was $99 thousand and $93 thousand at December
31, 2012 and 2011, respectively, and is reflected in “Other Liabilities” on the consolidated statements of financial condition.
Fair Value Measurement
The Company uses fair value measurements to record fair value adjustments to certain financial assets and liabilities and to determine
fair value disclosures. Available-for-sale securities are recorded at fair value on a recurring basis. Additionally, from time to time, the
Company may be required to recognize adjustments to other assets at fair value on a nonrecurring basis, such as impaired loans, other
securities, and OREO.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in
an orderly transaction between market participants at the measurement date. An orderly transaction is a transaction that assumes
exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for
transactions involving such assets or liabilities: it is not a forced transaction.
Accounting standards define fair value, establish a framework for measuring fair value, establish a three-level hierarchy for disclosure of
fair value measurement and provide disclosure requirements about fair value measurements. The valuation hierarchy is based upon the
transparency of inputs to the valuation of an asset or liability as of the measurement date.
The three levels of the fair value hierarchy are:
•
•
•
Level 1 valuation is based upon unadjusted quoted market prices for identical instruments traded in active markets.
Level 2 valuation is based upon quoted market prices for similar instruments traded in active markets, quoted market prices for
identical or similar instruments traded in markets that are not active and model-based valuation techniques for which all significant
assumptions are observable in the market or can be corroborated by market data.
Level 3 valuation is derived from other valuation methodologies including discounted cash flow models and similar techniques that
use significant assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that
market participants would use in determining fair value.
Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income (loss). Although
certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate
component of the shareholders’ equity section of the statement of financial condition, such items, along with a net income (loss), are
components of comprehensive income (loss).
New Authoritative Accounting Guidance
Accounting Standards Update (“ASU”) No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure
Requirements in U.S. GAAP and IFRS”, an update to ASC Topic 820 - Fair Value Measurement, results in common fair value
measurement and disclosure requirements in U.S. GAAP and IFRS. The amendments in ASU No. 2011-04 include clarifications about
the application of existing fair value measurement requirements and changes to principles for measuring fair value. ASU No. 2011-04
also requires additional disclosures about fair value measurements. ASU No. 2011-04 is required to be applied prospectively and is
effective for interim and annual periods beginning after December 15, 2011. The Company adopted this new guidance for the quarter
ended March 31, 2012. The adoption of this guidance did not have a material impact on the Company’s consolidated financial
statements; however, the adoption did have an impact on the Company’s fair value disclosures. See Note 18 for the disclosures required
by the adoption of this new guidance.
ASU No. 2011-05, “Presentation of Comprehensive Income, an update to ASC Topic 220 - Comprehensive Income,” was issued to
improve the comparability, consistency and transparency of financial reporting. The amendment provides the entity an option to present
the total of comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive
74
statements. The amendments do not change the items that must be reported in other comprehensive income. ASU No. 2011-05 is
required to be applied retrospectively and is effective for interim and annual periods beginning after December 15, 2011. The Company
adopted this new guidance for the quarter ended March 31, 2012. Accordingly, the Company presents comprehensive income in a
separate Statement of Comprehensive Income.
Accounting Guidance to be Adopted In Future Periods
ASU No. 2011-11, Balance Sheet (Topic 210) - “Disclosures about Offsetting Assets and Liabilities” was issued in December 2011.
The objective of this update is to provide enhanced disclosures that will enable users of its financial statements to evaluate the effect or
potential effect of netting arrangements on an entity’s financial position. This includes the effect or potential effect of rights of setoff
associated with an entity’s recognized assets and recognized liabilities within the scope of this update. The amendments require
enhanced disclosures by requiring improved information about financial instruments and derivative instruments that are either (1) offset
in accordance with either ASC 210-20-45 or ASC 815-10-45 or (2) subject to an enforceable master netting arrangement or similar
agreement, irrespective of whether they are offset in accordance with either ASC 210-20-45 or ASC 815-10-45. An entity is required to
apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual
periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented.
The adoption of ASU 2011-11 on January 1, 2013 will not have an effect on the operating results or financial position of the Company.
ASU No. 2012-02 “Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment” was issued
in July 2012. This update simplifies the guidance for testing the decline in realizable value (impairment) of indefinite-lived intangible
assets other than goodwill. The amendment allows an entity the option to first assess qualitative factors to determine whether it is
necessary to perform the quantitative impairment test. An organization electing to perform a qualitative assessment is no longer required
to calculate the fair value of an indefinite-lived intangible asset unless the organization determines, based on a qualitative assessment,
that it is “more likely than not” that the asset is impaired. This amendment is effective for annual and interim impairment tests
performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The adoption of ASU 2012-02 on January 1,
2013 will not have an effect on the operating results or financial position of the Company.
ASU No. 2013-01 “Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities” was issued
in January 2013. This update clarifies the scope of transactions that are subject to the disclosures about offsetting, specifically that
ordinary trade receivables and receivables are not in the scope of ASU No. 2011-11. ASU No. 2011-11 applies only to derivatives,
repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are offset in
accordance with specific criteria contained in FASB Accounting Standards Codification or subject to a master netting arrangement or
similar agreement. ASU 2013-01 is effective for fiscal years beginning on or after January 1, 2013, and interim periods within those
annual periods. The adoption of ASU 2013-01 on January 1, 2013 will not have an effect on the operating results or financial position of
the Company.
ASU No. 2013-02 “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive
Income” was issued in February 2013. The objective of this update was to improve the transparency of reporting these reclassifications.
The new amendments will require an organization to: present either on the face of the statement where income is presented or in the
notes to the financial statements the effects on the line items of net income of significant amounts reclassified out of accumulated other
comprehensive income; or cross reference to other disclosures currently required under GAAP for other reclassification items to be
reclassified directly to income in their entirety in the same reporting period. The amendments apply to all public and private companies
that report other comprehensive income. Public companies are required to comply with these amendments for all reporting periods, both
interim and annual periods, beginning after December 15, 2012. The adoption of ASU 2013-02 on January 1, 2013 is not expected to
have a material effect on the operating results or financial position of the Company.
Reclassification of Prior Year Financial Statements
Certain reclassifications have been made to the prior year’s consolidated financial statements to conform to the current year’s
presentation. Such reclassifications had no impact on the Company’s results of operations.
Note 3. RESTRICTED CASH BALANCES
The Bank is required to maintain certain average reserve balances as established by the Federal Reserve Bank. The amount of those
reserve balances for the reserve computation period which included December 31, 2012 and 2011 was $1.4 million and $1.7 million,
respectively, which amount was satisfied through the restriction of vault cash and deposits maintained at the Federal Reserve Bank.
75
At December 31, 2011, the Bank was required to maintain a compensating balance at the Federal Home Loan Bank of Pittsburgh in the
amount of $30 million to collateralize a letter of credit which the Bank had pledged to collateralize certain municipal deposits. The Bank
was not required to maintain any such compensating balance at December 31, 2012.
In addition, the Bank maintains compensating balances at correspondent banks, most of which are not required, but are used to offset
specific charges for services. At December 31, 2012 and 2011, the amount of these balances was $378 thousand and $775 thousand,
respectively.
Note 4. SECURITIES
Securities have been classified in the consolidated financial statements according to management’s intent. The amortized cost, gross
unrealized gains and losses, and the fair value of the Company’s securities are as follows:
(in thousands)
Available-for-sale
Obligations of U.S. government agencies
Obligations of state and political subdivisions
Collateralized mortgage obligations:
Government-sponsored agency
Residential mortgage-backed securities:
Government-sponsored agency
Corporate debt securities
Equity securities
Total securities available-for-sale
Held-to-maturity
Obligations of state and political subdivisions
(in thousands)
Available-for-sale
Obligations of U.S. government agencies
Obligations of state and political subdivisions
Collateralized mortgage obligations:
Government-sponsored agency
Private label
Residential mortgage-backed securities:
Government-sponsored agency
Pooled trust preferred senior class
Pooled trust preferred mezzanine class
Corporate debt securities
Equity securities
Total securities available-for-sale
Held-to-maturity
Obligations of state and political subdivisions
December 31, 2012
Gross
unrealized
holding
gains
Gross
unrealized
holding
losses
Fair
value
Amortized
cost
$
1,821
95,312
$
70
8,922
$
-
733
$
1,891
103,501
8,805
311
13
9,103
67,765
500
1,010
175,213
$
1,920
-
-
11,223
$
229
90
10
1,075
$
69,456
410
1,000
185,361
$
$
2,198
$
285
$
-
$
2,483
December 31, 2011
Gross
unrealized
holding
gains
Gross
unrealized
holding
losses
Fair
value
Amortized
cost
$
7,893
96,392
$
155
3,767
-
$
3,998
$
8,048
96,161
8,093
36,607
380
13
5
364
8,468
36,256
30,426
3,833
6,732
500
1,010
191,486
$
967
-
-
-
-
5,282
$
-
2,229
4,535
158
4
11,293
$
31,393
1,604
2,197
342
1,006
185,475
$
$
2,094
$
151
$
-
$
2,245
At December 31, 2012 and 2011, securities with a carrying amount of $185.0 million and $150.8 million, respectively, were pledged as
collateral to secure public deposits.
76
The following table shows the approximate fair value of the Company’s debt securities at December 31, 2012 using contractual
maturities. Expected maturities will differ from contractual maturity because issuers may have the right to call or prepay obligations
with or without call or prepayment penalties. Because collateralized mortgage obligations and mortgage-backed securities are not due at
a single maturity date, they are not included in the maturity categories in the following maturity summary.
(in thousands)
Amounts maturing in:
One Year or Less
One Year through Five Years
After Five Years through Ten Years
After Ten Years
Collateralized mortgage obligations
Mortgage-backed securities
Total
December 31, 2012
Available-for-sale
Held-to-maturity
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
$
-
1,165
29,394
67,074
8,805
67,765
174,203
$
$
-
1,118
31,613
73,071
9,103
69,456
184,361
$
$
-
-
2,198
-
-
-
2,198
$
$
-
-
2,483
-
-
-
2,483
$
Gross proceeds from the sale of securities for the years ended December 31, 2012, 2011 and 2010 were $46.1 million, $122.6 million
and $36.6 million, respectively, with the gross realized gains being $1.4 million, $5.1 million and $1.2 million, respectively, and gross
realized losses being $3.1 million, $2 thousand and $2.9 million, respectively.
The tables below indicate the length of time that individual securities held-to-maturity and available-for-sale have been in a continuous
unrealized loss position at December 31, 2012 and 2011:
(in thousands)
Obligations of state and political subdivisions
Collateralized mortgage obligations:
Government-sponsored agency
Residential mortgage-backed securities:
Government-sponsored agency
Corporate debt securities
Equity Securities
Total
Less than 12 Months
Gross
Unrealized
Losses
$
Fair
Value
8,649
398
$
December 31, 2012
12 Months or Greater
Gross
Unrealized
Losses
$
Fair
Value
4,139
335
$
Total
Fair
Value
$
12,788
Gross
Unrealized
Losses
$
733
1,485
13
2
-
1,487
13
12,899
-
990
24,023
$
229
-
10
650
$
-
410
-
4,551
$
-
90
-
$
425
12,899
410
990
28,574
$
229
90
10
1,075
$
Less than 12 Months
(in thousands)
Obligations of state and political subdivisions
Collateralized mortgage obligations:
Government-sponsored agency
Private label
Pooled Trust Preferred Senior Class
Pooled Trust Preferred Mezzanine Class
Corporate debt securities
Equity Securities
Total
Fair
Value
$
11,129
1,028
30,459
-
-
-
996
43,612
$
Gross
Unrealized
Losses
$
241
5
364
-
-
-
4
614
$
77
December 31, 2011
12 Months or Greater
Gross
Unrealized
Losses
Fair
Value
Total
Fair
Value
$
25,910
$
3,757
$
37,039
-
-
1,604
2,197
342
-
30,053
$
-
-
2,229
4,535
158
-
10,679
$
1,028
30,459
1,604
2,197
342
996
73,665
$
Gross
Unrealized
Losses
$
3,998
5
364
2,229
4,535
158
4
11,293
$
The majority of the Company’s securities portfolio is comprised of obligations of states and political subdivisions, residential mortgage-
backed securities and collateralized mortgage obligations. The Company held 47 securities that were in an unrealized loss position at
December 31, 2012. Substantially all of the unrealized losses relate to debt securities.
In determining whether unrealized losses are other-than-temporary, management considers the following factors:
• The causes of the decline in fair value, such as credit problems, interest rate fluctuations, or market volatility;
• The severity and duration of the decline;
• The Company’s ability and intent to hold the security to allow for recovery in fair value, as well as the likelihood of such a
recovery in the near term;
• The Company’s intent to sell the security, or if it is more likely than not that the Company will be required to sell the security
before recovery of its amortized cost basis less any current-period credit loss.
Management performed a review of the fair values of all securities at December 31, 2012 and determined that movements in the values
of the securities were consistent with the change in market interest rates. As a result of its review and considering the attributes of these
debt securities, the Company concluded that OTTI did not exist at December 31, 2012. To date, the Company has received all scheduled
principal and interest payments and expects to fully collect all future contractual principal and interest payments. The Company does not
intend to sell the securities nor is it more likely than not that the Company will be required to sell the securities.
Management does not believe that any individual unrealized loss at December 31, 2012 represents OTTI. The unrealized losses reported
for residential mortgage-backed securities and collateralized mortgage obligations relate entirely to securities issued by GNMA,
FHLMC and FNMA that are currently rated AAA by Moody’s Investor Services or Aaa by Standard & Poor’s and are guaranteed by the
U.S. government. The obligations of states and political subdivisions are comprised entirely of general-purpose debt obligations. The
majority of these obligations have a credit quality rating of A or better and are secured by the unlimited taxing power of issuer. In
addition, the Company utilized a third party to perform an independent credit analysis of its state and political subdivision bonds that
were either nonrated or had a rating below A. There were two obligations of states and political subdivisions that were either nonrated or
had a rating below A. According to this analysis, these two bonds were considered investment grade.
OTTI of Pooled Trust Preferred Collateralized Debt Obligations (“PreTSLs”):
At December 31, 2011, the Company’s PreTSLs were comprised of four securities that were collateralized by debt issued by bank
holding companies and insurance companies. The Company divested its holdings of PreTSLs during 2012 and held no such securities at
December 31, 2012. At December 31, 2011, the PreTSLs, which had an aggregate amortized cost of $10.6 million and an estimated fair
value of $3.8 million, had depreciated 81.7% and 64.0% from their current face values and amortized cost, respectively. The Company
held one senior tranche and three mezzanine tranches. All of the securities possessed credit ratings below investment grade. At the time
of initial issue, no more than 5% of any pooled security consisted of a security issued by any one institution. As of December 31, 2011,
three of these securities had no excess subordination and one had excess subordination equal to 12.09% of the current performing
collateral. Excess subordination is the amount by which the underlying performing collateral exceeds the outstanding bonds in the
current class plus all senior classes. It can also be referred to as credit enhancement. As deferrals and defaults of underlying issuers
occur, the excess subordination is reduced or eliminated, increasing the risk of the security experiencing principal or interest shortfalls.
Conversely, subordination can be increased as collateral transitions from non-performing to performing. 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 transaction by the current balance of the class of notes plus all classes senior to that class. At June
30, 2012, the Company had determined that the estimate of projected discounted cash flows it expected to receive on its PreTSLs was
less than the securities’ carrying value, and as a result an additional credit-related impairment charge to earnings of $96 thousand was
recorded, which was the total of such impairment charge recorded in 2012.
During the fourth quarter of 2012, the market for these securities began to improve as some of the bank holding companies and
insurance companies that had previously deferred payments had cured. As a result, the Company’s unrealized loss position related to
these securities improved. In an effort to reduce balance sheet risk and the levels of classified assets, management decided to sell all four
PreTSLs in the Company’s portfolio. The Company realized gross gains of $848 thousand on the sale of PreTSLs IX and XI and gross
losses of $3.0 million on the sale of PreTSLs XIX and XXVI. The $6.8 million that was identified as the non-credit portion of OTTI
recorded for PreTSLs in prior years was included in the determination of net income and was reversed from accumulated other
comprehensive income.
78
The table below provides a cumulative roll forward of OTTI credit losses recognized:
(in thousands)
Beginning Balance, January 1
Credit losses on debt securities for which OT T I was not previously recognized
Additional credit losses on debt securities for which OT T I was previously recognized
Less: Sale of Private Label CMOs for which OT T I was previously recognized
Less: Sale of PreT SLs for which OT T I was previously recognized
Ending Balance, December 31
2012
$
8,619
-
96
-
(8,715)
$
-
2011
$
22,598
-
798
-
(14,777)
8,619
$
2010
20,649
-
4,271
(2,322)
-
22,598
$
$
Investments in FHLB and FRB stock, which have limited marketability, are carried at cost and totaled $7.3 million and $9.7 million at
December 31, 2012 and 2011, respectively. Management noted no indicators of impairment for the FHLB of Pittsburgh and the FRB of
Philadelphia during 2012.
Note 5. LOANS
Loans receivable, net, consists of the following at December 31, 2012 and 2011:
(in thousands)
Residential real estate
Commercial real estate
Construction, land acquisition and develop ment
Commercial and industrial
Consumer
State and p olitical subdivisions
Total loans, gross
Unearned discount
Net deferred loan fees and costs
Allowance for loan and lease losses
Loans, net
2012
2011
$ 90,228
$ 80,056
231,835
32,502
110,073
109,783
23,354
597,775
(103)
260
256,508
33,450
174,233
111,778
23,496
679,521
(159)
516
(18,536)
$ 579,396
(20,834)
$ 659,044
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 14 to these consolidated financial statements for more
information about related party transactions.
For information about credit concentrations within the Company’s loan portfolio, refer to Note 15 to these consolidated statements.
The Company originates one-to-four family mortgage loans for sale in the secondary market. During the years ended December 31,
2012, 2011 and 2010, the Company sold $26.2 million, $28.1 million and $43.9 million of one-to-four family mortgages, respectively.
The Company retains servicing rights on these mortgages.
The Company had $1.6 million and $94 thousand in loans held-for-sale at December 31, 2012 and 2011, respectively. All loans held for
sale are one-to-four family residential mortgage loans.
During the year ended December 31, 2010, the Company sold $36.7 million in loans from its Indirect Auto Loan Portfolio. The
Company retained the servicing rights to these loans. The Company did not sell any indirect auto loans in 2012 and 2011.
The Company sold three non-performing commercial real estate loans during the year ended December 31, 2012. The three loans had an
aggregate recorded investment of $6.8 million at the time of sale, after charge-offs recorded. No gain or loss was recognized upon the
sale of these loans.
The Company does not have any lending programs commonly referred to as subprime lending. Subprime lending generally targets
borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments,
bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios.
79
The Company provides for loan losses based on the consistent application of its documented ALLL methodology. Loan losses are
charged to the ALLL and recoveries are credited to it. Additions to the ALLL are provided by charges against income based on various
factors which, in our judgment, deserve current recognition of estimated probable losses. Loan losses are charged-off in the period the
loans, or portion thereof, are deemed uncollectible. Generally, the Company will record a loan charge-off (including a partial charge-off)
to reduce a loan to the estimated recoverable amount based on the methodology detailed below. The Company regularly reviews the loan
portfolio and makes adjustments for loan losses in order to maintain the ALLL in accordance with GAAP. The ALLL consists primarily
of the following two components:
(1)
(2)
Specific allowances are established for impaired loans, which are defined by the Company as all loan relationships with an
aggregate outstanding balance greater than $100 thousand that are rated substandard and on non-accrual status, rated doubtful or
loss, or are considered a TDR. The amount of impairment provided for as an allowance is represented by the deficiency, if any,
between the carrying value of the loan and either (a) the present value of expected future cash flows discounted at the loan’s
effective interest rate, (b) the loan’s observable market price, or (c) the fair value of the underlying collateral, less estimated
costs to sell, for collateral dependent loans. Impaired loans that have no impairment losses are not considered for general
valuation allowances described below. If the Company determines that collection of the impairment amount is remote, the
Company will record a charge-off.
General allowances are established for loan losses on a portfolio basis for loans that do not meet the definition of impaired. The
Company divides its portfolio into loan segments, with loans exhibiting similar characteristics. Loans rated special mention or
substandard and accruing which are embedded in these loan segments are then separated from these loan segments. These loans
are then subject to an analysis placing increased emphasis on the credit risk associated with these loans. The Company applies an
estimated loss rate to each loan group. The loss rates applied are based on the Company’s own historical loss experience based
on the loss rate for each segment of loans with similar risk characteristics in its portfolio. In addition management evaluates and
applies certain qualitative or environmental factors that are likely to cause estimated credit losses associated with the Company’s
existing portfolio that may differ from historical experience, which are discussed below. This evaluation is inherently subjective,
as it requires material estimates that may be susceptible to significant revisions based upon changes in economic and real estate
market conditions. Actual loan losses may be significantly more than the ALLL that is established, which could have a material
negative effect on the Company’s financial results.
Management makes adjustments for loan losses based on its evaluation of several qualitative and environmental factors, including but
not limited to:
•
•
•
•
•
•
•
•
•
Changes in national, local, and business economic conditions and developments, including the condition of various market
segments;
Changes in the nature and volume of the Company’s loan portfolio;
Changes in the Company’s lending policies and procedures, including underwriting standards, collection, charge-off and
recovery practices and results;
Changes in the experience, ability and depth of the Company’s lending management and staff;
Changes in the quality of the Company's loan review system and the degree of oversight by the Company’s Board of Directors;
Changes in the trend of the volume and severity of past due and classified loans, including trends in the volume of non-accrual
loans, troubled debt restructurings and other loan modifications;
The existence and effect of any concentrations of credit and changes in the level of such concentrations;
The effect of external factors such as competition and legal and regulatory requirements on the level of estimated credit losses
in the Company's current loan portfolio; and
Analysis of our customers’ credit quality, including knowledge of their operating environment and financial condition.
Management evaluates the ALLL based on the combined total of the specific and general components. Generally, when the loan
portfolio increases, absent other factors, the ALLL methodology results in a higher dollar amount of estimated probable losses.
Conversely, when the loan portfolio decreases, absent other factors, the ALLL methodology results in a lower dollar amount of
estimated probable losses.
Each quarter, management evaluates the ALLL and adjusts the ALLL as appropriate through a provision for loan losses. While the
Company uses the best information available to make evaluations, future adjustments to the ALLL may be necessary if conditions differ
substantially from the information used in making the evaluations. In addition, as an integral part of its examination process, the Office
of the Comptroller of the Currency (“OCC”) periodically reviews the Company’s ALLL. The OCC may require the Company to adjust
the ALLL based on its analysis of information available to it at the time of its examination.
80
In the fourth quarter of 2012, the Company changed its loan segment structure to combine the indirect auto loans and
installment/HELOC loans, which were previously considered separate classes of consumer loans. Management determined that both
loan classes exhibited similar risk characteristics and therefore did not need to be separately evaluated in the ALLL calculation. In
addition, the Company no longer segregates solid waste landfill loans from other commercial and industrial loans. During 2012, a
significant amount of the solid waste landfill loans were paid off. The remaining balance of these loans was not material to warrant
evaluation as a separate class at December 31, 2012.
The following tables present activity in the ALLL, by loan category, the amount of gross loans receivable that are evaluated individually
and collectively for impairment, and the related portion of the ALLL that is allocated to each loan portfolio segment for the years ended
December 31, 2012, 2011 and 2010:
Allowance for Loan and Lease Losses by Loan Category
December 31, 2012
Real Estate
Residential Real
Estate
Commercial
Real Estate
Construction,
Land
Acquisition and
Development
Commercial and
Industrial
Consumer
State and
Political
Subdivisions
Total
$
$
$
$
$
1,823
(683)
35
589
1,764
11,151
(3,298)
1,035
(826)
8,062
2,590
(258)
265
(435)
2,162
3,292
(3,389)
265
3,999
4,167
$
1,526
(673)
338
517
1,708
$
452
-
-
221
673
20,834
(8,301)
1,938
4,065
18,536
$
$
$
$
$
$
40
$
268
$
2
$
-
$
-
$
-
$
310
$
1,724
$
7,794
$
2,160
$
4,167
$
1,708
$
673
$
18,226
(in thousands)
Allowance for loan losses:
Beginning Balance, January 1, 2012
Charge-offs
Recoveries
Provisions
Ending Balance, December 31, 2012
Ending balance, December 31, 2012:
Individually evaluated for impairment
Ending balance, December 31, 2012:
Collectively evaluated for impairment
Loans receivable:
Ending balance, December 31, 2012
$
90,228
$
231,835
$
32,502
$
110,073
$
109,783
$
23,354
$
597,775
Ending balance, December 31, 2012:
Individually evaluated for impairment
Ending balance, December 31, 2012:
Collectively evaluated for impairment
$
2,773
$
11,459
$
993
$
-
$
-
$
-
$
15,225
$
87,455
$
220,376
$
31,509
$
110,073
$
109,783
$
23,354
$
582,550
81
Allowance for Loan and Lease Losses by Loan Category
December 31, 2011
Real Estate
Commercial and Industrial
Consumer
Residential
Real Estate
Commercial
Real Estate
Construction,
Land
Acquisition and
Development
Solid Waste
Landfills
Commercial
and Industrial
Indirect Auto
Installment/
HELOC
State and
Political
Subdivisions
Total
$
$
$
$
$
$
$
$
2,176
(1,273)
57
863
1,823
9,640
(2,395)
93
3,813
11,151
4,170
(1,857)
2,188
(1,911)
2,590
11
-
-
5
16
4,839
(416)
1,852
(2,999)
3,276
597
(530)
219
516
802
$
576
(209)
7
350
724
566
-
-
(114)
452
22,575
(6,680)
4,416
523
20,834
$
$
$
$
$
$
$
$
$
65
$
545
$
91
$
-
$
-
$
-
$
-
$
-
$
701
$
1,758
$
10,606
$
2,499
$
16
$
3,276
$
802
$
724
$
452
$
20,133
(in thousands)
Allowance for loan losses:
Beginning Balance, January 1, 2011
Charge-offs
Recoveries
Provisions
Ending Balance, December 31, 2011
Ending balance, December 31, 2011:
individually evaluated for impairment
Ending balance, December 31, 2011:
collectively evaluated for impairment
Loans receivable:
Ending balance, December 31, 2011
$
80,056
$
256,508
$
33,450
$
42,270
$
131,963
$
63,722
$
48,056
-
23,496
$
$
679,521
Ending balance, December 31, 2011:
individually evaluated for impairment
Ending balance, December 31, 2011:
collectively evaluated for impairment
$
3,615
13,012
2,979
-
4,066
-
31
-
$
23,703
$
76,441
$
243,496
$
30,471
$
42,270
$
127,897
$
63,722
$
48,025
$
23,496
$
655,818
Allowance for Loan and Lease Losses by Loan Category
December 31, 2010
Real Estate
Commercial & Industrial
Consumer
(in thousands)
Allowance for loan losses:
Residential
Real Estate
Commercial
Real Estate
Construction,
Land Acquisition
and Development
Solid Waste
Landfills
Other
Indirect Auto
Installment/
HELOC
State and
Political
Subdivisions
Total
Beginning Balance, January 1, 2010
$
696
$
8,397
$
6,285
Charge-offs
Recoveries
Provisions
(221)
32
1,669
(5,049)
152
6,140
(12,893)
303
10,475
-
-
-
11
$
4,507
(6,883)
151
7,064
938
(507)
189
(23)
$
1,069
$
566
$
22,458
(229)
31
(295)
-
-
-
(25,782)
858
25,041
Ending Balance, December 31, 2010
$
2,176
$
9,640
$
4,170
$
11
$
4,839
$
597
$
576
$
566
$
22,575
Ending balance, December 31, 2010:
individually evaluated for impairment
Ending balance, December 31, 2010:
collectively evaluated for impairment
Loans receivable:
$
785
372
310
-
339
-
-
-
$
1,806
$
1,391
$
9,268
$
3,860
$
11
$
4,500
$
597
$
576
$
566
$
20,769
Ending balance, December 31, 2010
$
87,925
$
256,327
$
77,395
$
52,270
$
145,427
$
63,509
$
47,344
$
27,739
$
757,936
Ending balance, December 31, 2010:
individually evaluated for impairment
Ending balance, December 31, 2010:
collectively evaluated for impairment
$
2,926
9,477
11,365
-
6,029
-
132
-
$
29,929
$
84,999
$
246,850
$
66,030
$
52,270
$
139,398
$
63,509
$
47,212
$
27,739
$
728,007
Credit Quality Indicators – Commercial Loans
The Company continuously monitors the credit quality of its commercial loans. Credit quality is monitored by reviewing certain credit
quality indicators. Management has determined that internally assigned credit risk ratings by loan type are the key credit quality
indicators that best help management monitor the credit quality of the Company’s loans.
The Bank’s commercial loan classification and credit grading processes are part of the lending, underwriting, and credit administration
functions to ensure an ongoing assessment of credit quality. Accurate and timely loan classification or credit grading is a critical
component of loan portfolio management. Loan officers are required to review their loan portfolio risk ratings regularly for accuracy.
The loan review function uses the same risk rating system in the loan review process. This allows an independent third party to assess
the quality of the portfolio and compare the accuracy of ratings with the loan officer’s and management’s assessment.
A formal loan classification and credit grading system reflects the risk of default and credit losses. A written description of the risk
ratings is maintained that includes a discussion of the factors used to assign appropriate classifications of credit grades to loans. The
82
process identifies groups of loans that warrant the special attention of management. The risk grade groupings provide a mechanism to
identify risk within the loan portfolio and provide management and the Board with periodic reports by risk category. The credit risk
ratings play an important role in the establishment and evaluation of the provision for loan and lease losses and the ALLL. After
determining the historical loss factor which is adjusted for qualitative and environmental factors for each portfolio segment, the portfolio
segment balances that have been collectively evaluated for impairment are multiplied by the general reserve loss factor for the respective
portfolio segments in order to determine the general reserve. Loans that have an internal credit rating of special mention or substandard
follow the same process; however, the qualitative and environmental factors are further adjusted for the increased risk.
The Company utilizes a loan rating system that assigns a degree of risk to commercial loans based on relevant information about the
ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation,
public information and current economic trends, among other factors. The Company analyzes these non-homogeneous loans
individually by grading the loans as to credit risk and probability of collection for each type of loan. Commercial loans include
commercial indirect auto loans which are not individually risk rated, and Construction, Land Acquisition and Development Loans
include residential construction loans which are also not individually risk rated. These loans are monitored on a pool basis due to their
homogeneous nature as described in “Credit Quality Indicators – Other Loans” below. The Company risk rates certain residential real
estate loans and consumer loans that are part of a larger commercial relationship using its credit grading system. These loans are
described in “Commercial Credit Quality Indicators.” The grading system contains the following basic risk categories:
1. Minimal Risk
2. Above Average Credit Quality
3. Average Risk
4. Acceptable Risk
5. Pass - Watch
6. Special Mention
7. Substandard - Accruing
8. Substandard - Non-Accrual
9. Doubtful
10. Loss
This analysis is performed on a quarterly basis using the following definitions for risk ratings:
Pass - Assets rated 1 through 5 are considered pass ratings. These assets show no current or potential problems and are considered fully
collectible. All such loans are considered collectively for ALLL calculation purposes. However, accruing TDRs that have been
performing for an extended period of time, do not represent a higher risk of loss, and have been upgraded to a pass rating are evaluated
individually for impairment.
Special Mention – Assets classified as special mention assets do not currently expose the Company to a sufficient degree of risk to
warrant an adverse classification but do possess credit deficiencies or potential weaknesses deserving close attention. Special Mention
assets have a potential weakness or pose an unwarranted financial risk which, if not corrected, could weaken the asset and increase risk
in the future.
Substandard - Assets classified as substandard have well defined weaknesses based on objective evidence, and are characterized by the
distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful - Assets classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic
that the weaknesses present make collection or liquidation in full highly questionable and improbable based on current circumstances.
Loss - Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets is not
warranted.
The following tables detail the recorded investment in loans receivable by loan type and credit quality indicator at December 31, 2012
and 2011:
83
Commercial Credit Quality Indicators
December 31, 2012
Real Estate
Residential Real
Estate
Commercial Real
Estate
Construction,
Land Acquisition
and Development
Commercial and
Industrial
Consumer
State and Political
Subdivisions
Total
$
$
$
$
$
$
$
17,138
564
2,309
-
-
20,011
200,147
8,587
23,101
-
-
231,835
23,052
57
7,395
-
-
30,504
93,864
7,437
3,395
-
-
104,696
3,324
-
143
-
-
3,467
17,580
849
4,925
-
-
23,354
355,105
17,494
41,268
-
-
413,867
$
$
$
$
$
$
$
Commercial Credit Quality Indicators
December 31, 2011
Real Estate
Commercial and Industrial
Residential Real
Estate
Commercial Real
Estate
Construction,
Land Acquisition
and Development
Solid Waste
Landfills
Other
Consumer
Installment/
HELOC
State and Political
Subdivisions
Total
$
$
$
$
$
$
$
$
19,267
313
3,906
-
-
23,486
198,730
12,908
44,870
-
-
256,508
15,924
256
14,090
-
-
30,270
42,270
-
-
-
-
42,270
117,104
3,690
5,532
-
-
126,326
2,489
288
144
-
-
2,921
23,464
-
32
-
-
23,496
419,248
17,455
68,574
-
-
505,277
$
$
$
$
$
$
$
$
(in thousands)
Internal Risk Rating
Pass
Special Mention
Substandard
Doubtful
Loss
Total
(in thousands)
Internal Risk Rating
Pass
Special Mention
Substandard
Doubtful
Loss
Total
Credit Quality Indicators – Other Loans
Residential, consumer, and commercial indirect auto loans are monitored on a pool basis due to their homogeneous nature. Loans that
are delinquent 90 days or more are placed on non-accrual status. The Company utilizes accruing vs. non-accruing status as the credit
quality indicator for these loan pools. The following tables present the recorded investment in residential, consumer and indirect auto
loans based on payment activity at December 31, 2012 and 2011:
Other Loans Credit Quality Indicators
December 31, 2012
(in thousands)
Residential real estate
Construction, land acquisition and development - residential
Commercial - indirect auto
Consumer
Total
Accruing
Loans
$
Non-accruing
Loans
$
Total
$
68,446
1,998
5,377
106,272
182,093
1,771
-
-
44
1,815
70,217
1,998
5,377
106,316
183,908
$
$
$
Other Loans Credit Quality Indicators
December 31, 2011
(in thousands)
Residential real estate
Construction, land acquisition and development - residential
Consumer - indirect auto
Commercial - indirect auto
Installment/HELOC
Total
Accruing
Loans
$
55,112
3,180
63,718
5,637
45,103
172,750
Non-accruing
Loans
$
1,458
-
4
-
32
1,494
$
Total
$
56,570
3,180
63,722
5,637
45,135
174,244
$
$
Included in loans receivable are loans for which the accrual of interest income has been discontinued due to deterioration in the financial
condition of the borrowers. The recorded investment of these non-accrual loans was $9.7 million and $19.9 million at December 31,
2012 and 2011, respectively. Generally, loans are placed on non-accruing status when they become 90 days or more delinquent, and
remain on non-accrual status until they are brought current, have six months of performance under the loan terms, and factors indicating
reasonable doubt about the timely collection of payments no longer exists. Therefore, loans may be current in accordance with their loan
84
terms, or may be less than 90 days delinquent and still be on a non-accruing status. Loans past due ninety days or more and still
accruing interest were $57 thousand and $5 thousand at December 31, 2012 and 2011, respectively, and consisted of loans that are well
secured and in the process of renewal.
The following tables set forth the detail, and payment status, of past due and non-accrual loans at December 31, 2012 and 2011:
(in thousands)
Performing (Accruing) Loans:
Real Estate:
Residential Real Estate
Commercial Real Estate
Construction, Land Acquisition and Development
Total Real Estate
Commercial and Industrial
Consumer
State and Political Subdivisions
Total Peforming (Accruing) Loans
Non-Accrual Loans:
Real Estate:
Residential Real Estate
Commercial Real Estate
Construction, Land Acquisition and Development
Total Real Estate
Commercial and Industrial
Consumer
State and Political Subdivisions
Total Non-Accrual Loans
Total Loans Receivable
Performing and Non-Performing Loan Delinquency Status
0-29 Days
Past Due
30-59 Days
Past Due
December 31, 2012
Delinquency Status
60-89 Days
Past Due
>/= 90 Days
Past Due
Total
$
86,301
226,344
31,899
344,544
$
422
194
29
645
$
31
-
-
31
$
30
-
-
30
$
86,784
226,538
31,928
345,250
109,312
107,821
23,354
585,031
953
250
446
1,649
61
2
-
1,712
517
1,489
-
2,651
105
121
-
226
30
-
-
256
20
333
-
384
230
4,352
-
4,582
11
2
-
4,595
27
-
-
57
2,156
574
128
2,858
95
136
-
3,089
109,876
109,643
23,354
588,123
3,444
5,297
574
9,315
197
140
-
9,652
$
586,743
$
2,907
$
4,979
$
3,146
$
597,775
85
Performing and Non-Performing Loan Delinquency Status
0-29 Days
Past Due
30-59 Days
Past Due
December 31, 2011
Delinquency Status
60-89 Days
Past Due
>/= 90 Days
Past Due
Total
$
74,379
243,873
30,945
349,197
$
1,293
2,381
241
3,915
$
248
1,235
-
1,483
-
$
-
-
-
$
75,920
247,489
31,186
354,595
42,270
126,774
169,044
62,753
47,617
110,370
23,464
652,075
1,994
291
426
2,711
-
4,114
4,114
-
-
-
-
6,825
-
667
667
845
244
1,089
-
5,671
964
220
-
1,184
-
4
4
-
-
-
-
1,188
-
91
91
120
163
283
-
1,857
94
-
-
94
-
126
126
-
-
-
-
220
-
5
5
-
-
-
-
5
1,084
8,508
1,838
11,430
-
182
182
4
32
36
32
11,680
42,270
127,537
169,807
63,718
48,024
111,742
23,464
659,608
4,136
9,019
2,264
15,419
-
4,426
4,426
4
32
36
32
19,913
$
658,900
$
6,859
$
2,077
$
11,685
$
679,521
(in thousands)
Performing (Accruing) Loans:
Real Estate:
Residential Real Estate
Commercial Real Estate
Construction, Land Acquisition and Development
Total Real Estate
Commercial and Industrial:
Solid Waste Landfills
Other
Total Commercial and Industrial
Consumer:
Indirect Auto
Installment/HELOC
Total Consumer
State and Political Subdivisions
Total Peforming (Accruing) Loans
Non-Accrual Loans:
Real Estate:
Residential Real Estate
Commercial Real Estate
Construction, Land Acquisition and Development
Total Real Estate
Commercial and Industrial:
Solid Waste Landfills
Other
Total Commercial and Industrial
Consumer:
Indirect Auto
Installment/HELOC
Total Consumer
State and Political Subdivisions
Total Non-Accrual Loans
Total Loans Receivable
Impaired Loans
The following tables provide a distribution of the recorded investment, unpaid principal balance and related allowance for the
Company’s impaired loans, which have been analyzed for impairment under ASC 310, at December 31, 2012 and 2011. Non-accrual
loans other than TDRs, with individual balances less than $100 thousand are not evaluated individually for impairment and are
accordingly not included in the following tables. However, these loans are evaluated collectively for impairment as homogenous pools in
the general allowance under ASC Topic 450. Total non-accrual loans, other than TDRs, with individual balances less than $100
thousand that were evaluated under ASC Topic 450 amounted to $1.9 million at both December 31, 2012 and 2011. At December 31,
2011 the Company held an impaired loan for which 70% of the principal balance outstanding was guaranteed by the U.S. Department of
86
Agriculture (“USDA”). The guaranteed portion is included in the loans with no recorded allowance at December 31, 2011, as the
Company believed it would be repaid in full from the USDA guarantee. This loan was sold in 2012.
(in thousands)
With No Allowance Recorded:
Real Estate:
Residential Real Estate
Commercial Real Estate
Construction, Land Acquisition and Development
Total Real Estate Loans
Commercial and Industrial
Consumer
State and Political Subdivisions
Total Impaired Loans with No Related Allowance Recorded
With a Related Allowance Recorded:
Real Estate:
Residential Real Estate
Commercial Real Estate
Construction, Land Acquisition and Development
Total Real Estate Loans
Commercial and Industrial
Consumer
State and Political Subdivisions
Total Impaired Loans with a Related Allowance Recorded
Total of impaired loans
Real Estate:
Residential Real Estate
Commercial Real Estate
Construction, Land Acquisition and Development
Total Real Estate Loans
Commercial and Industrial
Consumer
State and Political Subdivisions
Total Impaired Loans
December 31, 2012
Recorded
Investment
Unpaid Principal
Balance
Related
Allowance
$
1,276
389
709
2,374
$
1,378
665
804
2,847
-
$
-
-
-
-
-
-
2,374
-
-
-
-
2,847
-
-
-
-
1,498
11,069
285
12,852
-
-
-
12,852
2,773
11,459
993
15,225
-
-
1,512
11,069
285
12,866
40
268
2
310
-
-
-
12,866
2,890
11,734
1,088
15,712
-
-
-
-
-
310
40
268
2
310
-
-
$
-
15,225
$
-
15,712
$
-
310
87
(in thous ands )
With No Allowance Recorded:
Real Es tate:
Res idential Real Es tate
Commercial Real Es tate (2)
Cons truction, Land Acquis ition and Development
Total Real Es tate Loans
Commercial and Indus trial:
Solid Was te Landfills
Other
Total Commercial and Indus trial
Cons umer:
Indirect Auto
Ins tallment/HELOC
Total Cons umer
State and Political Subdivis ions
December 31, 2011
Recorded
Inves tment
Unpaid Principal
Balance
Related
Allowance
$
961
$
1,097
$
-
725
2,058
3,744
-
4,066
4,066
-
31
31
-
815
5,387
7,299
-
4,601
4,601
-
35
35
-
-
-
-
-
-
-
-
-
-
-
Total Impaired Loans with No Related Allowance Recorded
7,841
-
11,935
-
With a Related Allowance Recorded:
Real Es tate:
Res idential Real Es tate
Commercial Real Es tate
Cons truction, Land Acquis ition and Development
Total Real Es tate Loans
Commercial and Indus trial:
Solid Was te Landfills
Other
Total Commercial and Indus trial
Cons umer:
Indirect Auto
Ins tallment/HELOC
Total Cons umer
State and Political Subdivis ions
2,654
12,287
921
15,862
3,274
14,187
984
18,445
65
545
91
701
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Total Impaired Loans with a Related Allowance Recorded
15,862
18,445
701
Total of impaired loans
Real Es tate:
Res idential Real Es tate
Commercial Real Es tate
Cons truction, Land Acquis ition and Development
Total Real Es tate Loans
Commercial and Indus trial:
Solid Was te Landfills
Other
Total Commercial and Indus trial
Cons umer:
Indirect Auto
Ins tallment/HELOC
Total Cons umer
State and Political Subdivis ions
Total Impaired Loans
3,615
13,012
2,979
19,606
-
4,066
4,066
-
31
31
-
4,371
15,002
6,371
25,744
-
4,601
4,601
-
35
35
-
65
545
91
701
-
-
-
-
-
-
-
$
23,703
$
30,380
$
701
88
The total recorded investment in impaired loans, which consists of non-accrual loans with an aggregate loan relationship greater than
$100,000 and TDRs, amounted to $15.2 million and $23.7 million at December 31, 2012 and 2011, respectively. The related allowance
on impaired loans was $0.3 million and $0.7 million as of December 31, 2012 and 2011, respectively.
The following table presents the average balance and the interest income recognized on impaired loans for the years ended December 31,
2012, 2011, and 2010:
(in thousands)
Real Estate:
Residential Real Estate
Commercial Real Estate
Construction, Land Acquisition & Development
Total Real Estate
Commercial and Industrial:
Solid Waste Landfills
Other
Commercial and Industrial:
Consumer:
Indirect Auto
Installment/HELOC
Total Consumer
State and Political Subdivisions
Total Impaired Loans
2012
2011
2010
Average
Balance
Interest
Income (1)
Average
Balance
Interest
Income (1)
Average
Balance
Interest
Income (1)
Year Ended December 31,
$
3,882
$
11
$
2,834
$
7
$
2,491
$
13
14,196
2,340
20,418
-
2,521
2,521
-
232
232
157
328
37
376
-
-
-
-
-
-
-
12,827
6,445
22,106
-
4,971
4,971
-
58
58
-
184
38
229
9
9
-
-
-
-
-
13,456
21,707
37,654
-
4,081
4,081
85
280
365
1,105
393
53
459
-
160
160
-
-
-
-
$
23,328
$
376
$
27,135
$
238
$
43,205
$
619
(1) Interest income represents income recognized on performing TDRs.
Included in total impaired loans are performing TDRs of $7.5 million and $5.7 million as of December 31, 2012 and 2011, respectively.
The Bank was not committed to lend additional funds to loans classified as a TDR as of December 31, 2012.
The additional interest income that would have been earned on non-accrual and restructured loans for the years ended December 31,
2012, 2011, and 2010 had these loans performed in accordance with their original terms approximated $1.4 million, $2.2 million, and
$2.9 million, respectively.
Troubled Debt Restructured Loans
TDRs at December 31, 2012 and 2011 were $8.9 million and $10.8 million, respectively. The balances at December 31, 2012 included
approximately $1.4 million of TDRs in non-accrual status and $7.5 million of TDRs in accrual status compared to $5.1 million of TDRs
in non-accrual status and $5.7 million of TDRs in accrual status at December 31, 2011. Approximately $257 thousand and $156
thousand in specific reserves have been established for these loans as of December 31, 2012 and 2011, respectively.
The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the
loan, an extension of the maturity date, or a permanent reduction of the recorded investment in the loan.
89
The following tables show the pre- and post- modification recorded investment in loans modified as TDRs during the years ended
December 31, 2012 and 2011:
(dollars in thousands)
Troubled Debt Restructuring:
Residential Real Estate
Commercial Real Estate
Construction, Land Acquisition and Development
Commercial and Industrial
Total New Troubled Debt Restructuring
Year Ended December 31, 2012
Year Ended December 31, 2011
Pre-
Modification
Outstanding
Recorded
Investments
Post-
Modification
Outstanding
Recorded
Investments
Pre-
Modification
Outstanding
Recorded
Investments
Post-
Modification
Outstanding
Recorded
Investments
Number of
Contracts
Number of
Contracts
1
3
1
-
5
$
624
$ 624
2,428
2,428
39
-
39
-
6
-
6
1
$
537
$ 417
-
1,373
4,681
-
1,373
4,681
$
3,091
$
3,091
13
$
6,591
$
6,471
The TDRs described above increased the allowance for loan losses by $224 thousand and $95 thousand through allocation of a specific
reserve for the years ended December 31, 2012 and 2011, respectively, and resulted in charge-offs of $120 thousand during the year
ended December 31, 2011. There were no charge-offs that resulted from the TDRs described above during the year ended December 31,
2012.
The following table shows the types of modifications made during the years ended December 31, 2012 and 2011:
Year Ended December 31, 2012
(in thousands)
Type of modification
Extension of term
Extension of term and rate concession
Extension of term and principal forgiveness
Total TDRs
(in thousands)
Type of modification
Extension of term
Extension of term and rate concession
Extension of term and principal forgiveness
Total TDRs
Residential
Real Estate
Commercial
Real Estate
Construction
Land Acquisition
and
Development
$
$
$
624
$
-
624
432
1,996
-
2,428
$
$
Commercial
and
Industrial
-
$
-
-
$
-
Total
$
$
1,095
1,996
-
3,091
39
-
-
39
Residential
Real Estate
Commercial
Real Estate
Year Ended December 31, 2011
Construction
Land Acquisition
and
Development
Commercial
and
Industrial
Total
$
$
362
-
55
417
$
-
-
-
$
-
1,373
-
-
1,373
4,681
-
-
4,681
6,416
-
55
6,471
$
$
$
$
$
$
The following table summarizes TDRs which have re-defaulted (defined as past due 90 days) during the years ended December 31, 2012
and 2011 that were restructured within the twelve months prior to such re-default:
Year Ended December 31, 2012
Year Ended December 31, 2011
(dollars in thousands)
Residential real estate
Commercial real estate
Construction, land acquisition and development
Commercial and industrial
Total
Recorded
Investment
-
$
145
$
90
235
-
1
1
2
Number of
Contracts
Recorded
Investment
Number of
Contracts
$
196
-
408
-
604
$
2
-
1
-
3
90
Note 6. OTHER REAL ESTATE OWNED
The following schedule reflects the components of OREO at December 31, 2012 and 2011:
(in thous ands )
Land / Lots
Commercial Real Es tate
Res idential Real Es tate
Total Other Real Es tate Owned
December 31,
2012
2011
$
$
2,929
1,054
-
3,983
4,443
1,695
820
6,958
$
$
The following table reflects the activity in OREO for the years ended December 31, 2012, 2011 and 2010:
(in thousands)
Balance, beginning of year
Additions
Write-downs
Carrying value of OREO sold
Balance, end of year
For the Years Ended December 31,
2012
2011
2010
$
6,958
$
9,633
$
11,184
1,586
(1,206)
(3,355)
3,995
(2,318)
(4,352)
9,928
(5,906)
(5,573)
$
3,983
$
6,958
$
9,633
The following table details the components of net expense of OREO for the years ended December 31, 2012, 2011 and 2010:
For the Years Ended December 31,
$
$
$
2012
65
66
147
24
211
287
21
1,206
-
2,027
2011
58
235
63
22
250
724
48
2,318
2
3,720
2010
72
138
273
685
25
385
25
5,906
12
7,521
$
$
$
(in thousands)
Insurance
Legal fees
Maintenance
Losses from the operation of foreclosed properties
Professional Fees
Real estate taxes
Utilities
Impairment charges
Other
Total
91
Note 7. BANK PREMISES AND EQUIPMENT
The following table summarizes bank premises and equipment at December 31, 2012 and 2011:
December 31,
(in thousands)
Land
Buildings and improvements
Furniture, fixtures and equipment
Leasehold improvements
Total
Less accumulated depreciation
Net
2012
$
2011
$
6,779
10,612
12,106
4,689
34,186
15,249
18,937
$
$
$
$
6,779
10,519
11,357
5,169
33,824
14,978
18,846
Depreciation and amortization expense amounted to $1.4 million, $1.3 million and $1.4 million for the years ended December 31, 2012,
2011, and 2010, respectively.
Note 8. SERVICING
The Company originates one-to-four-family residential loans that it sells in the secondary market. Servicing of these loans is retained by
the Company. The Company also performs servicing for a pool of automobile loans sold in 2010. Loans serviced for others are not
included in the accompanying consolidated statements of financial condition, but the related servicing income and expenses are
recognized in the consolidated statements of operations. The unpaid balances of mortgage and other loans serviced for others were
$154.5 million, $180.0 million and $193.9 million at December 31, 2012, 2011, and 2010, respectively.
The one- to four-family residential mortgage real estate loans were underwritten to Freddie Mac guidelines and were subsequently
assigned and delivered to Freddie Mac. At December 31, 2012, substantially all of the loans serviced for others were performing in
accordance with their contractual terms.
The following table summarizes the activity pertaining to mortgage servicing rights for the years ended December 31, 2012 and 2011:
(in thousands)
Balance, beginning of year
Mortgage servicing rights capitalized
Amortization
Provision for loss in fair value
Balance, end of year
For the Years Ended December 31,
2012
2011
$
777
$
751
220
(322)
-
277
(251)
-
$
675
$
777
The fair value of all servicing assets was $884 thousand and $1.2 million at December 31, 2012 and 2011, respectively. Fair value has
been determined using discount rates ranging from 2.75% to 8.31% and prepayment speeds ranging from 241% to 550% PSA,
depending upon the stratification of the specific right. Based upon this fair value, management has determined that no valuation
allowance associated with these mortgage servicing rights is necessary at December 31, 2012 and 2011.
Note 9. INTANGIBLE ASSETS
Intangible assets consist entirely of a core deposit premium acquired in connection with the purchase of the Honesdale branch in
2006. The core deposit intangible is being amortized, using the straight-line method over the useful life of 10 years. Management
reviews the core deposit intangible at least annually for potential impairment. Management’s evaluation at December 31, 2012 and 2011
indicated that there was no impairment to the core deposit intangible.
92
The following table summarizes core deposit intangible assets at December 31, 2012 and 2011:
(in thousands)
Gross carrying amount
Less: accumulated amortization
Net carrying amount
December 31,
2012
2011
$
1,650
$
1,650
1,018
853
$
632
$
797
Amortization expense on core deposit intangible assets totaled $165 thousand in 2012, $166 thousand in 2011 and $165 thousand in
2010. Amortization expense on core deposit intangible assets with finite useful lives is expected to total $165 thousand for each of the
years 2013 through 2015, and $137 thousand for 2016.
Note 10. DEPOSITS
The following table summarizes deposits at December 31, 2012 and 2011:
(in thousands)
Demand
Interest-bearing demand
Savings
Time ($100,000 and over)
Other time
Total
December 31,
2012
2011
$
131,476
$
124,733
321,863
83,101
144,844
173,329
336,182
87,712
199,790
208,719
$
854,613
$
957,136
The Company had brokered deposits (classified as time and other time in the above table) of $15.7 million and $30.7 million, at
December 31, 2012 and 2011, respectively.
The following table summarizes scheduled maturities of time deposits, including certificates of deposit and individual retirement
accounts, at December 31, 2012:
(in thousands)
2013
2014
2015
2016
2017
2018 and Thereafter
Total
Time Deposits
$100,000
and Over
Other
Time Deposits
Total
$
85,100
$
89,392
$
174,492
32,475
21,914
4,133
1,119
103
25,854
22,596
19,206
5,782
10,499
58,329
44,510
23,339
6,901
10,602
$
144,844
$
173,329
$
318,173
Investment securities with a carrying value of $185.0 million and $150.8 million at December 31, 2012 and 2011, respectively, were
pledged to collateralize certain municipal deposits. At December 31, 2011, the Company had also pledged a $30 million letter of credit
to collateralize certain deposits. The Company had no letters of credit pledged at December 31, 2012.
93
Note 11. BORROWED FUNDS
The following table summarizes the components of borrowed funds at December 31, 2012 and 2011:
(in thousands)
FHLB advances
Subordinated debentures
Junior subordinated debentures
Total
December 31,
2012
2011
$
18,593
$
48,261
25,000
10,310
25,000
10,310
$
53,903
$
83,571
The Company also utilizes short-term Federal funds purchased which represent overnight borrowings providing for the short-term
funding requirements of the Bank and generally mature within one business day of the transaction. The Company did not purchase any
short-term Federal funds during the year ended December 31, 2012. Federal Reserve Discount Window borrowings also represent
overnight funding to meet the short-term liquidity requirements of the Bank and are fully collateralized with investment securities. The
Company did not borrow any Federal Reserve Discount Window funds during the year ended December 31, 2012.
The following table presents borrowed funds by their maturity dates at December 31, 2012:
Within one year
After one year but within two years
After two years but within three years
After three years but within four years
After four years but within five years
After five years
Total
December 31, 2012
Amount
Weighted
Average
Interest Rate
11,119
5,000
5,000
5,000
5,000
22,784
$
53,903
3.49%
3.47%
9.00%
9.00%
9.00%
5.27%
5.78%
The FHLB of Pittsburgh borrowings of $18.6 million are all fixed rate advances having maturities of more than 90 days. All advances
are collateralized either under a blanket pledge agreement for commercial real estate loans, one-to-four family mortgage loans, or
mortgage-backed securities. In addition, the Company is required to purchase FHLB stock based upon the amount of advances
outstanding. The Company was in compliance with this requirement, having a stock investment in FHLB of Pittsburgh of $6.0 million
at December 31, 2012. Loans of $118.9 million and $142.7 million, at December 31, 2012 and 2011, respectively, were pledged to
collateralize FHLB advances.
The maximum amount of borrowings outstanding at any month end during the years ended December 31, 2012 and 2011 were $82.3
million and $127.7 million, respectively.
On December 14, 2006, First National Community Statutory Trust I (the “Trust”), a trust formed under Delaware law that is an
unconsolidated subsidiary of the Company, issued $10.0 million of trust preferred securities (the “Trust Securities”) at a variable interest
rate of 7.02%, with a scheduled maturity of December 15, 2036. The Company owns all of the ownership interest in the Trust. The
proceeds from the issue were invested in $10.3 million, 7.02% Junior Subordinated Debentures (the “Debentures”) issued by the
Company. The interest rate on the Trust Securities and the Debentures resets quarterly at a spread of 1.67% above the current 3-month
Libor rate. The average interest rate paid on the Debentures was 2.18% in 2012, 2.00% in 2011, and 2.01% in 2010. The Debentures
are unsecured and rank subordinate and junior in right to all indebtedness, liabilities and obligations of the Company. The Debentures
represent the sole assets of the Trust. Interest on the Trust Securities is deferrable until a period of twenty consecutive quarters has
elapsed. The Company has the option, subject to required regulatory approval of the Federal Reserve, to prepay the trust securities
beginning December 15, 2011. The Company has, under the terms of the Debentures and the related Indenture, as well as the other
94
operative corporate documents, agreed to irrevocably and unconditionally guarantee the Trust’s obligations under the Debentures. At
December 31, 2012 and 2011, accrued and unpaid interest associated with the Debentures amounted to $491 thousand and $267
thousand, respectively.
The Company has reflected this investment on a deconsolidated basis. As a result, the Debentures totaling $10.3 million, have been
reflected in Borrowed Funds in the consolidated statements of financial condition at December 31, 2012 and 2011 under the caption
“Junior Subordinated Debentures”. The Company records interest expense on the Debentures in its consolidated statement of
operations. The Company also records its common stock investment issued by First National Community Statutory Trust I in “Other
Assets” in its consolidated statements of financial condition at December 31, 2012 and 2011.
On September 1, 2009, the Company offered only to accredited investors up to $25.0 million principal amount of unsecured
Subordinated Notes Due September 1, 2019 at a fixed interest rate of 9% per annum (the “Notes”) in denominations of $100 thousand
and integral multiples of $100 thousand in excess thereof. The Notes mature on September 1, 2019. For the first five years from
issuance, the Company will pay interest only on the Notes. Commencing September 1, 2015, the Company is required to pay both
interest and a portion of the principal calculated to return the entire principal amount of the Notes at maturity subject to deferral.
Payments of interest are payable to registered holders of the Notes (the “Noteholders”) quarterly on the first of every third month,
subject to deferral. Payments of principal will be payable to the Noteholders annually beginning on September 1, 2015. The principal
balance outstanding for these notes was $25.0 million at both December 31, 2012 and 2011. At December 31, 2012 and 2011, accrued
and unpaid interest associated with the Notes amounted to $5.3 million and $3.0 million, respectively.
Pursuant to the November 24, 2010 Written Agreement (the “Agreement”) with the Federal Reserve Bank of Philadelphia (the “Reserve
Bank”), 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. For more
information refer to Note 17, “Regulatory Matters” to these consolidated financial statements.
The Company is currently deferring interest payments on the Company’s Debentures and Notes. The last payment made on the
Debentures was the payment due on September 14, 2010 and the last payment made on the Notes was the payment due on September 1,
2010.
Note 12. BENEFIT PLANS
The Bank has a defined contribution profit sharing plan which covers all eligible employees. The Bank’s contribution to the plan is
determined at management’s discretion at the end of each year and funded. On April 25, 2012, the Board of Directors ratified an
amendment to the defined contribution profit sharing plan to include the provisions under section 401(k) of the Internal Revenue Code
(“401(k) ”). The 401(k) feature of the plan, which became effective on September 1, 2012, permits employees to make voluntary salary
deferrals, either pre-tax or Roth, up to the dollar limit prescribed by law. The Company may make discretionary matching contributions
equal to a uniform percentage of employee salary deferrals. Company discretionary matching contributions are determined each year by
management. For 2012, the Company matched 50.0% of employee salary deferrals up to 4.0% for each employee. Company matching
contributions to the 401(k) Plan are funded bi-weekly and are included in salaries and employee benefits expense. Employee salary
deferrals vest immediately, while Company discretionary contributions begin vesting 20.0% each year after two years of credited
service. Employee participants are 100.0% vested after six years of credited service.
There were no discretionary annual contributions made to the profit sharing plan in 2012 and 2011. A discretionary contribution to the
plan of $375 thousand was made in 2010. Discretionary matching contributions under the 401(k) feature of the plan totaled $41
thousand in 2012.
The Bank has an unfunded non-qualified deferred compensation plan covering all eligible Bank officers and directors as defined by the
plan. This plan permits eligible participants to elect to defer a portion of their compensation. Elective deferred compensation and
accrued earnings, included in other liabilities in the accompanying statements of financial condition, aggregated $7.4 million and $7.3
million, at December 31, 2012 and 2011, respectively. The Bank had not funded the deferred compensation plan as of December 31,
2012 or 2011.
95
Note 13. INCOME TAXES
The following table summarizes the provision for income taxes included in the statement of operations for the years ended December 31,
2012, 2011 and 2010:
(in thousands)
Current
Deferred
Total
Year Ended December 31,
2012
2011
2010
$
-
$
-
$
(3,512)
-
-
3,512
$
-
$
-
$
-
The following table presents a reconciliation between the effective income tax expense (benefit) and the income tax expense (benefit)
that would have been provided at the federal statutory tax rate of 34.0% for each of the years ended December 31, 2012, 2011 and 2010:
(in thousands)
Benefit at statutory tax rates
Add (deduct):
Tax effects of non-taxable income
Non-deductible interest expense
Bank owned life insurance
Change in valuation allowance
Other items, net
Provision for income taxes
Year Ended December 31,
2012
$ (4,662)
2011
$ (114)
2010
$ (10,785)
(1,824)
(2,288)
(2,704)
65
98
170
(235)
(268)
(252)
6,637
2,568
13,165
19
4
406
$
-
$
-
$
-
96
The following table summarizes the components of the net deferred tax liability included in other liabilities at December 31, 2012, and
the net deferred tax asset included in other assets at December 31, 2011:
(in thousands)
Allowance for loan and lease losses
Deferred compensation
Unrealized holding losses on securities available-for-sale
Other-than-temporary impairment
Other real estate owned valuation
Deferred intangible assets
Employee benefits
Accrued interest
AMT tax credits
Fixed asset valuation
Charitable contribution carryover
Accrued rent expense
Accrued vacation
Accrued real estate taxes
Depreciation
Net operating loss carryover
Gross deferred tax assets
Deferred loan origination fees
Unrealized holding gains on securities available-for-sale
Depreciation
Gross deferred tax liabilities
Net deferred asset before valuation allowance
Valuation allowance
Net deferred tax (liabilities) assets
December 31,
2012
$ 6,603
2011
$ 7,299
2,517
2,497
-
2,044
-
577
932
1,308
1,602
1,735
41
39
1,441
1,126
2,215
2,215
407
407
312
217
213
210
51
-
14
175
-
13
18,422
10,104
34,770
29,966
(34)
(77)
(3,451)
-
(254)
-
(3,739)
(77)
31,031
29,889
(34,482)
(27,845)
$ (3,451)
$ 2,044
At December 31, 2012 and 2011, the Company had recognized $11.6 million of refundable federal income taxes associated with its net
operating losses incurred in 2010 and 2009.
As of December 31, 2012 and 2011, the Company has established a valuation allowance of $34.5 million and $27.8 million,
respectively, related to net deferred tax assets that would be realizable based only on future taxable income. At December 31, 2011, no
valuation allowance was recorded for the deferred tax asset related to the unrealized holding losses on securities available-for-sale
because the Company had the intent and ability to hold these securities until recovery of the unrealized losses, which may be at maturity.
The Company will continue to monitor its deferred tax position and may make changes to the valuation allowance recorded as
circumstances change.
As of December 31, 2012, the Company had $54.2 million of net operating loss carryovers resulting in a deferred tax asset of $18.4
million. Beginning in 2031, these net operating loss carryovers will expire if not utilized. As of December 31, 2012, the Company also
had $917 thousand of charitable contribution carryovers resulting in gross deferred tax assets of $312 thousand. These charitable
contribution carryovers will expire after December 31, 2015 if not utilized. In addition, the Company had alternative minimum tax
credit carryovers of $2.2 million as of December 31, 2012 that have an indefinite life.
The Company records interest and penalties on potential income tax deficiencies as part of non-interest expense. Tax years 2009
through 2011 remain subject to examination by the Federal government and state taxing jurisdictions. In May 2012, the Company was
contacted by the Internal Revenue Service (IRS) for examination of its 2010 and 2009 income tax returns. In February of 2013, the
97
Company was notified by the IRS that the examinations were in the review stage. The Company can provide no assurance as to how
these audits will be resolved.
Note 14. RELATED PARTY TRANSACTIONS
The Company and the Bank have engaged in and intend to continue to engage in banking and financial transactions in the conduct of its
business with directors and executive officers of the Company and the Bank and their related parties.
The Bank has granted loans, letters of credit and lines of credit to directors, executive officers and their related parties. The following
table summarizes the changes in the total amounts of such outstanding loans, advances under lines of credit as well as repayments during
the years ended December 31, 2012 and 2011:
(in thousands)
Balance January 1,
New loans and advances
Repayments
Other (1)
Balance December 31,
2012
2011
$
87,442
$
92,217
64,509
(118,655)
-
68,288
(72,365)
(698)
$
33,296
$
87,442
(1) Other represents loans to related parties that ceased being related parties during the year
At December 31, 2012, loans in the amount of $196 thousand made to directors, executive officers and their related parties were not
performing in accordance with the terms of the loan agreements.
Included in related party loans is a commercial line of credit with a company owned by a director with a total aggregate balance
outstanding of $8.0 million. The Company also sold a participation interest in this line to the same director in the amount of $5.2
million, of which $3.2 million is outstanding. The Bank receives a 25 basis point annual servicing fee from this director on the
participation balance. At December 31, 2011, the aggregate amount outstanding under the line was $7.4 million and the participation
interest sold under this line was $3.0 million.
Deposits from directors, executive officers and their related parties held by the Bank at December 31, 2012 and 2011 amounted to $66.7
million and $146.8 million, respectively. Interest paid on the deposits amounted to $139 thousand, $446 thousand, and $862 thousand
for the years ended December 31, 2012, 2011, and 2010, respectively.
In the course of its operations, the Company acquires goods and services from and transacts business with various companies of related
parties. The Company recorded payments for these services of $1.6 million, $1.8 million, and $1.1 million in 2012, 2011, and 2010,
respectively.
Subordinated notes held by officers and directors and/or their related parties totaled $10 million at December 31, 2012 and 2011. There
was no interest payments made to directors and/or their related parties in 2012 and 2011. Interest paid to directors on the notes totaled
$685 thousand in 2010. Interest accrued and unpaid on the notes totaled $2.1 million and $1.2 million at December 31, 2012 and 2011,
respectively.
The Company leases its Honesdale Route 6 branch location from a related party. Total lease payments were $9 thousand for each of the
years ended December 31, 2012, 2011, and 2010.
During the year ended December 31, 2012, the Company sold an OREO property to a related party for $202 thousand, with a gain of
$41 thousand recognized on the sale.
98
Note 15. COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS
Leases
At December 31, 2012, the Company was obligated under certain non-cancelable leases with initial or remaining terms of one year or
more. Minimum future obligations under non-cancelable leases in effect at December 31, 2012 are as follows:
(in thousands)
Facilities
Equipment
Total
Minimum Future Lease Payments
2013
2014
2015
2016
2017
2018 and thereafter
$
564
$
56
$
620
485
196
161
124
541
31
17
-
-
-
516
213
161
124
541
Total
$
2,071
$
104
$
2,175
Total rental expense under leases amounted to $734 thousand, $725 thousand and $636 thousand in 2012, 2011 and 2010, respectively.
In January of 2013, the Company received approval from the OCC to relocate its Wilkes-Barre, Pennsylvania branch office. The
relocation to the new site, which is less than one mile from the current site, is anticipated to occur by the end of the second quarter of
2013. The lease obligation associated with the current site expires in May 2013. On February 11, 2013, the Company entered into a 12-
year lease agreement for the new location, which commences April 1, 2013. Minimum future obligations under this new non-cancelable
lease are included in the above table.
Financial Instruments with off-balance sheet commitments
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs
of its customers. These financial instruments include commitments to extend credit and standby letters of credit that involve varying
degrees of credit, interest rate or liquidity risk in excess of the amount recognized in the balance sheet. The Company’s exposure to
credit loss from nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of
credit is represented by the contractual amount of those instruments.
Financial instruments whose contract amounts represent credit risk at December 31 are as follows:
(in thousands)
December 31,
2012
2011
Commitments to extend credit
$ 166,722
$ 138,715
Standby letters of credit
35,277
36,286
Commitments to extend credit are agreements to lend to customers in accordance with contractual provisions. These commitments
usually are for specific periods or contain termination clauses and may require the payment of a fee. The total amounts of unused
commitments do not necessarily represent future cash requirements, in that commitments often expire without being drawn upon.
Letters of credit and financial guarantees are agreements whereby the Company guarantees the performance of a customer to a third
party. Collateral may be required to support letters of credit in accordance with management’s evaluation of the creditworthiness of
each customer. The credit exposure assumed in issuing letters of credit is essentially equal to that in other lending activities.
Federal Home Loan Bank — Mortgage Partnership Finance Program
Under a secondary market loan servicing program with the FHLB, the Company, in exchange for a monthly fee, provides a credit
enhancement guarantee to the FHLB for foreclosure losses in excess of 1% of original loan principal sold to the FHLB. At
99
December 31, 2012, the Company serviced payments on $13.5 million of first lien residential loan principal under these terms for the
FHLB. At December 31, 2012, the maximum obligation for such guarantees by the Company would be approximately $1.5 million if
total foreclosure losses on the entire pool of loans exceed approximately $77 thousand. Management believes the likelihood of a
reimbursement for loss payable to the FHLB beyond the monthly credit enhancement fee is remote.
Concentrations of Credit Risk
Cash Concentrations: The Bank maintains cash balances at several correspondent banks. The Company did not maintain any due from
bank accounts in excess of the $250 thousand limit covered by the Federal Deposit Insurance Corporation as of December 31, 2012 or
2011.
Loan Concentrations: 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 construction, land acquisition and development
portfolios comprise $264.3 million, or 44.2% of gross loans at December 31, 2012. Geographic concentrations exist because the
Company provides its services in its primary market area of Northeastern Pennsylvania and conducts limited activities outside of that
area. The Company had commercial real estate and construction, land acquisition and development loans of $29.3 million, or 4.9%, of
gross loans to customers outside of its primary market area.
At December 31, 2012 and 2011, the Bank’s loan portfolio was concentrated in loans in the following industries. At December 31, 2011,
approximately ninety-seven percent of loans included in the Solid Waste Landfills were fully secured by cash collateral on deposit at the
Bank. These loans were included in the aggregate of the $118.7 million of loans to related parties that were repaid during 2012.
(in thousands)
Land subdivision
Shopping centers/complexes
Gas stations
Office complexes/units
Solid waste landfills
Hotels
Litigation
December 31, 2012
December 31, 2011
Amount
% of gross
loans
Amount
% of gross
loans
17,658
21,068
5,245
9,801
13,233
13,596
2.95%
3.52%
0.88%
1.64%
2.21%
2.27%
19,626
18,722
17,118
16,091
42,270
13,771
2.89%
2.76%
2.52%
2.37%
6.22%
2.03%
On May 24, 2012, a putative shareholder by the name of Lori Gray filed a complaint in the Court of Common Pleas in Lackawanna
County against certain present and former directors of the Company (including all of the current directors except Steven R. Tokach and
Thomas J. Melone) and Demetrius & Company, LLC (“Demetrius”) alleging, inter alia, breach of fiduciary duty, abuse of control,
corporate waste, unjust enrichment and, in the case of Demetrius, professional negligence, negligent misrepresentation, breach of
contract and aiding and abetting breach of fiduciary duty. The Company has been named as a nominal defendant. This matter is in a
preliminary stage and the Company cannot determine the outcome or potential range of loss at this time.
On September 5, 2012, Fidelity and Deposit Company of Maryland (“F&D”) filed an action against the Company and its subsidiary,
First National Community Bank, as well as several current and former officers and directors of the Company, in the United States
District Court for the Middle District of Pennsylvania. F&D has asserted a claim for the rescission of a directors’ and officers’ insurance
policy and a bond that it had issued to the Company. On November 9, 2012, the Company and the Bank answered the claim and asserted
counterclaims. The Company and the other defendants are defending the claims, but the matter is in a very preliminary stage and the
Company cannot reasonably determine the outcome or potential range of loss at this time.
The Company is also a party to routine litigation involving various aspects of its business, none of which, in the opinion of management
and its legal counsel, is expected to have a material adverse impact on the consolidated financial condition, results of operations or
liquidity of the Company.
100
Note 16. STOCK COMPENSATION PLANS
On August 30, 2000, the Company’s Board adopted the 2000 Employee Stock Incentive Plan (the “Stock Incentive Plan”) in which
options may be granted to key officers and other employees of the Company. The aggregate number of shares which may be issued
upon exercise of the options under the plan cannot exceed 1,100,000 shares. Options and rights granted under the Stock Incentive Plan
become exercisable six months after the date the options are awarded and expire ten years after the award date. Upon exercise, the
shares are issued from the Company’s authorized but unissued stock. The Stock Incentive Plan expired on August 30, 2010 and from
and after that date no further grants have been or will be made under the plan.
The Board also adopted on August 30, 2000, the 2000 Independent Directors Stock Option Plan (the “Directors’ Stock Plan”) for
directors who are not officers or employees of the Company. The aggregate number of shares issuable under the Directors’ Stock Plan
cannot exceed 550,000 shares and are exercisable six months from the date the awards are granted and expire three years after the award
date. Upon exercise, the shares are issued from the Company’s authorized but unissued shares. The Directors’ Stock Plan expired on
August 30, 2010 and from and after that date no further grants have been or will be made under the plan.
No compensation expense related to options under either the Stock Incentive Plan or the Directors’ Stock Plan was required to be
recorded in each of the years ended December 31, 2012, 2011, and 2010.
A summary of the status of the Company’s stock option plans is presented below:
Outstanding at the beginning of the year
Granted
Exercised
Forfeited
Outstanding at the end of the year
Options exercisable at year end
Weighted average fair value of options granted
during the year
Stock-Based Compensation Expense
2012
2011
2010
Shares
188,193
-
-
(59,023)
129,170
129,170
Weighted
Average
Exercise
Price
12.62
-
-
9.03
14.26
14.26
$
$
$
-
$
-
Shares
222,616
-
-
(34,423)
188,193
188,193
Weighted
Average
Exercise
Price
12.58
-
-
12.37
12.62
12.62
$
$
$
-
$
-
Shares
366,248
-
-
(143,632)
222,616
222,616
Weighted
Average
Exercise
Price
$
12.18
$
$
$
11.55
12.58
12.58
$
-
$
-
At December 31, 2012, 2011 and 2010 the exercisable options had no total intrinsic value and there was no unrecognized compensation
expense.
Information pertaining to options outstanding at December 31, 2012 is as follows:
Weighted
Average
Weighted
Remaining
Number
Contractual
Average
Exercise
Number
Weighted
Average
Exercise
Range of Exercise Price
Outstanding
Life
Price
Exercisable
Price
$10.01 - $23.13
129,170
3.5
$
14.26
129,170
$
14.26
On November 28, 2012, the Board of Directors adopted the 2012 Employee Stock Grant Plan under which 16,000 shares of common
stock were authorized to be granted to employees. On December 17, 2012, the Company granted 50 shares of the Company’s common
stock to each active full and part time employee. There were 15,050 shares issued under this grant at a cost of $3.05 per share. The total
cost of this grant was $46 thousand, which was included in salary expense in 2012. At December 31, 2012, there were 950 shares of the
Company’s common stock reserved for future grants under this plan.
101
Note 17. REGULATORY MATTERS
The Bank is under a Consent Order (the “Order”) from the Office of the Comptroller of the Currency (“OCC”) dated September 1, 2010.
The Company is also subject to a Written Agreement (the “Agreement”) with the Federal Reserve Bank of Philadelphia (the “Reserve
Bank”) dated November 24, 2010.
OCC Consent Order. The Bank, pursuant to a Stipulation and Consent to the Issuance of a Consent Order dated September 1, 2010
without admitting or denying any wrongdoing, consented and agreed to the issuance of the Order by the OCC, the Bank’s primary
regulator. The Order requires the Bank to undertake certain actions within designated timeframes, and to operate in compliance with the
provisions thereof during its term. The Order is based on the results of an examination of the Bank as of March 31, 2009. Since the
examination, management has engaged in discussions with the OCC and has taken steps to improve the condition, policies and
procedures of the Bank. Compliance with the Order is monitored by a committee (the “Committee”) of at least three directors, none of
whom is an employee or controlling shareholder of the Bank or its affiliates or a family member of any such person. The Committee is
required to submit written progress reports on a monthly basis to the OCC and the Agreement requires the Bank to make periodic reports
and filings with the Federal Reserve Bank. The members of the Committee are John P. Moses, Joseph Coccia, Joseph J. Gentile and
Thomas J. Melone. The material provisions of the Order are as follows:
(i) By October 31, 2010, the Board of Directors of the Bank (the “Board”) was 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 was 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 was 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 have reviewed the Board and the Board’s committee structure; by November 30, 2010,
the Board was required to 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 was required to 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, was required to 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 was required to develop, implement and ensure adherence to policies and procedures for Bank
Secrecy Act (“BSA”) compliance; and account opening and monitoring procedures compliance;
(viii) by October 31, 2010, the Board was required to 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 was 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 was required to take certain actions to resolve certain credit and collateral exceptions;
102
(xi) by October 31, 2010, the Board was 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 ALLL, and to review the adequacy of the Bank’s
ALLL at least quarterly;
(xii) by October 31, 2010, the Board was required to 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 was required to adopt and ensure adherence to action plans for each piece of other real estate
owned;
(xiv) by November 30, 2010, the Board was 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 was required to revise and implement the Bank’s other than temporary impairment policy;
(xvi) by October 31, 2010, the Board was required to take action to maintain adequate sources of stable funding and liquidity and a
contingency funding plan; by October 31, 2010, the Board was 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 was required to 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 Federal Reserve Board;
(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;
(viii) the Company was required to 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;
103
(x) the Company was required to 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 was required to 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.
Banking regulations also limit the amount of dividends that may be paid without prior approval of the Bank’s regulatory agency. At
December 31, 2012, the Company and the Bank are restricted from paying any dividends, without regulatory approval.
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.
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).
104
In accordance with the Order, 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. As of December 31, 2012, the Bank did not meet
these requirements. The minimum capital requirements under the Order take precedence over the standard regulatory capital adequacy
definitions described in the tables below. The Company’s and the Bank’s actual capital positions and ratios as of December 31, 2012,
2011 and 2010 are presented in the following table:
(in thousands)
Company
Tier I Capital:
Total Tier I Capital
Tier II Capital:
Subordinated notes
Allowable portion of allowance for loan losses
Total Tier II Capital
Total Risk-Based Capital
Total Risk Weighted Assets
Bank
Tier I Capital:
Total Tier I Capital
Tier II Capital:
2012
De ce mbe r 31,
2011
2010
$
39,587
$
53,059
$
53,297
19,796
8,452
28,248
67,835
25,000
9,823
34,823
87,882
25,000
11,201
36,201
89,498
$
665,323
$
774,452
$
883,887
$
69,963
$
80,976
$
75,659
Allowable portion of allowance for loan losses
Total Tier II Capital
Total Risk-Based Capital
Total Risk Weighted Assets
8,447
8,447
78,410
9,819
9,819
90,795
11,197
11,197
86,856
$
664,914
$
774,097
$
883,535
105
The following schedules present information regarding the Company’s risk-based capital at December 31, 2012 and 2011, and selected
other capital ratios:
For Capital
To Be Well
Capitalized
Under Prompt
Corrective
Actual
Adequacy Purposes
Action Provision
Amount
Ratio
Amount
Ratio
Amount
Ratio
$
67,835
$
78,410
10.20%
11.79%
$
53,226
$
53,193
>8.00%
>8.00%
N/A
N/A
$
66,491
>10.00%
$
39,587
$
69,963
5.95%
10.52%
$
26,613
$
26,597
>4.00%
>4.00%
N/A
$
39,895
N/A
>6.00%
$
39,587
$
69,963
4.07%
7.20%
$
38,879
$
38,865
>4.00%
>4.00%
N/A
$
48,581
N/A
>5.00%
For Capital
To Be Well
Capitalized
Under Prompt
Corrective
Actual
Adequacy Purposes
Action Provision
Amount
Ratio
Amount
Ratio
Amount
Ratio
$
87,882
$
90,795
11.35%
11.73%
$
61,956
$
61,928
>8.00%
>8.00%
N/A
N/A
$
77,410
>10.00%
$
53,059
$
80,976
6.85%
10.46%
$
30,978
$
30,964
>4.00%
>4.00%
N/A
$
46,446
N/A
>6.00%
$
53,059
$
80,976
4.72%
7.20%
$
44,992
$
44,978
>4.00%
>4.00%
N/A
$
56,227
N/A
>5.00%
(dollars in thousands)
December 31, 2012
Total Capital
(to Risk Weighted Assets)
Company
Bank
Tier I Capital
(to Risk Weighted Assets)
Company
Bank
Tier I Capital
(to Average Assets)
Company
Bank
(dollars in thousands)
December 31, 2011
Total Capital
(to Risk Weighted Assets)
Company
Bank
Tier I Capital
(to Risk Weighted Assets)
Company
Bank
Tier I Capital
(to Average Assets)
Company
Bank
Note 18. FAIR VALUE MEASUREMENTS
In determining fair value, the Company uses various valuation approaches, including market, income and cost approaches. Accounting
standards established a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the
use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market
participants would use in pricing the asset or liability, which are developed based on market data obtained from sources independent of
the Company. Unobservable inputs reflects the Company’s assumptions about the assumptions the market participants would use in
pricing an asset or liability, which are developed based on the best information available in the circumstances.
The fair value hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities
(Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). A financial asset or liability’s level within
the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is
broken down into three levels based on the reliability of inputs as follows:
106
• Level 1 valuation is based upon unadjusted quoted market prices for identical instruments traded in active markets;
• Level 2 valuation is based upon quoted market prices for similar instruments traded in active markets, quoted market prices for
identical or similar instruments traded in markets that are not active and model-based valuation techniques for which all significant
assumptions are observable in the market or can be corroborated by market data; and
• Level 3 valuation is derived from other valuation methodologies including discounted cash flow models and similar techniques that
use significant assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market
participants would use in determining fair value.
A description of the valuation methodologies used for assets recorded at fair value, and for estimating fair value for financial instruments
not recorded at fair value, is set forth below.
Cash, Short-term Investments, Accrued Interest Receivable and Accrued Interest Payable
For these short-term instruments, the carrying amount is a reasonable estimate of fair value.
Securities
The estimated fair values of available-for-sale equity securities are determined by obtaining quoted prices on nationally recognized
exchanges (Level 1 inputs). The estimated fair values for the Company’s investments in obligations of U.S. government agencies,
obligations of state and political subdivisions, government sponsored agency collateralized mortgage obligations, government sponsored
agency residential mortgage-backed securities, and corporate debt securities are obtained by the Company from a nationally-recognized
pricing service. This pricing service develops estimated fair values by analyzing like securities and applying available market
information through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing (Level 2
inputs), to prepare valuations. Matrix pricing is a mathematical technique widely used in the industry to value debt securities without
relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark
quoted securities. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the
U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the
bond’s terms and conditions, among other things and are based on market data obtained from sources independent from the Company.
The Level 2 investments in the Company’s portfolio are priced using those inputs that, based on the analysis prepared by the pricing
service, reflect the assumptions that market participants would use to price the assets. The Company has determined that the Level 2
designation is appropriate for these securities because, as with most fixed-income securities, those in the Company’s portfolio are not
exchange-traded, and such non-exchange-traded fixed income securities are typically priced by correlation to observed market data. The
Company has reviewed the pricing service’s methodology to confirm its understanding that such methodology results in a valuation
based on quoted market prices for similar instruments traded in active markets, quoted markets for identical or similar instruments traded
in markets that are not active and model-based valuation techniques for which the significant assumptions can be corroborated by market
data as appropriate to a Level 2 designation.
For those securities for which the inputs used by an independent pricing service were derived from unobservable market information, the
Company evaluated the appropriateness and quality of each price. The Company reviewed the volume and level of activity for all
classes of securities and attempted to identify transactions which may not be orderly or reflective of a significant level of activity and
volume. For securities meeting these criteria, the quoted prices received from either market participants or an independent pricing
service may be adjusted, as necessary, to estimate fair value (fair values based on Level 3 inputs). If applicable, the adjustment to fair
value was derived based on present value cash flow model projections prepared by the Company or obtained from third party providers
utilizing assumptions similar to those incorporated by market participants. The estimated fair value of the PreTSLs and
Private Label Collateralized Mortgage Obligations in the Company’s securities portfolio were obtained from third-party service
providers that prepared the valuation using a discounted cash flow approach with inputs derived from unobservable market
information (Level 3 inputs). The valuation of PreTSLs is further described below.
At December 31, 2011, the Company owned four PreTSLs having an aggregate amortized cost of $10.6 million. The market for these
securities at December 31, 2011 was not active and markets for similar securities are also not active. PreTSLs were historically priced
using Level 2 inputs. However, the decline in the level of observable inputs and market activity in this class of investments had been
significant and resulted in unreliable external pricing. Broker pricing and bid/ask spreads, when available, varied widely. The once
active market had become comparatively inactive. Given these market conditions, the valuation of these investments was determined
using Level 3 inputs. The Company obtained the valuations from a third-party service provider that prepared the valuations using a
discounted cash flow approach. The Company took measures to validate the service provider’s analysis and was actively involved in the
valuation process, including review and verification of the assumptions used in the valuation calculations.
107
Results of a discounted cash flow test are significantly affected by variables such as the estimate of the probability of default, estimates
of future cash flows, discount rates, prepayment rates and the creditworthiness of the underlying issuers. The Company considers these
inputs to be unobservable Level 3 inputs because they are based on the Company’s estimates about the assumptions market participants
would use in pricing this type of asset and developed based on the best information available in the circumstances rather than on
observable inputs. As it related to fair value measurements, at December 31, 2011, once each issuer was categorized and the forecasted
default rates applied, the expected cash flows were modeled using the variables described above. The Company then applied a 10%
discount rate to PreTSL XXVI, a 12% discount rate to PreTSL XIX, and a 15% discount rate to PreTSL IX and PreTSL XI to the
expected cash flows to estimate fair value. The Company sold the four PreTSLs during the fourth quarter of 2012, and did not hold any
such securities at December 31, 2012.
The Company owned two securities issued by state and political subdivisions having an amortized cost of $1.8 million that are valued
using Level 3 inputs at December 31, 2012 and three such securities having an amortized cost of $2.8 million at December 31, 2011.
These securities had credit ratings that were either withdrawn or downgraded by nationally recognized credit rating agencies, and as a
result the market for these securities was inactive at December 31, 2012 and 2011. These securities were historically priced using Level
2 inputs. The credit ratings withdrawal and downgrade have resulted in a decline in the level of significant other observable inputs for
these investment securities at the measurement dates. Broker pricing and bid/ask spreads are very limited for these securities. At
December 31, 2012, the Company valued one security based on similar nonrated Pennsylvania Sewer bonds adjusted for coupon and
maturity. For the other security, the Company obtained a bid indication from a third-party municipal trading desk to determine the fair
value of this security.
At December 31, 2011, the Company owned investment grade Private Label Collateralized Mortgage Obligations, “(PLCMOs)”, having
an amortized cost of $36.6 million. PLCMOs are securitized products where payments from residential mortgage loans are pooled
together and passed on to different classes of owners in various tranches. The markets for such securities are generally characterized by a
limited number of new issuances, a significant reduction in trading volumes and wide bid-ask spreads, all driven by the lack of market
participants. Although estimated prices can generally be obtained for such securities, the level of market observable assumptions used is
severely limited in the valuation. Specifically, market assumptions regarding credit adjusted cash flows and liquidity influences on
discount rates were difficult to observe at the individual security level. Because of the inactivity in the markets and the lack of
observable valuation inputs, seven of the eight PLCMOs were valued by a third party specialist using a discounted cash flow approach
and proprietary pricing model. The model uses inputs such as estimated prepayment speeds, losses, recoveries, default rates that are
implied by the underlying performance of collateral in the structure or similar structures, and discount rates that are implied by market
prices for similar securities and collateral structure types. The eighth security with an amortized cost of $5.1 million was a new issue
purchased in December 2011 for settlement in January 2012. Because the security was a new issue, no data on the underlying collateral
was available to the third party valuation service. The Company used the purchase price as the fair value for this security at December
31, 2011. The Company sold the PLCMOs during the fourth quarter of 2012, and did not hold any such securities at December 31, 2012.
Loans
Except for collateral dependent impaired loans, fair values of loans are estimated by discounting the projected future cash flows using
market discount rates that reflect the credit, liquidity, and interest rate risk inherent in the loan. Projected future cash flows are
calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. The estimated fair value of
collateral dependent impaired loans is based on the appraised loan value or other reasonable offers less estimated costs to sell. The
Company does not record loans at fair value on a recurring basis. However from time to time, a loan is considered impaired and an
allowance for credit losses is established. The specific reserves for collateral dependent impaired loans are based on the fair value of the
collateral less estimated costs to sell. The fair value of the collateral is generally based on appraisals. In some cases, adjustments are
made to the appraised values due to various factors including age of the appraisal, age of comparables included in the appraisal, and
known changes in the market and in the collateral. When significant adjustments are based on unobservable inputs, the resulting fair
value measurement is categorized as a Level 3 measurement. See also, Note 2 “Summary of Significant Accounting Policies-Loan
Impairment” and Note 5-“Loans.”
Loans Held For Sale
Fair values of mortgage loans held for sale are based on commitments on hand from investors or prevailing market prices.
108
Mortgage Servicing Rights
The fair value of mortgage servicing rights is estimated using a discounted cash flow model that applies current estimated prepayments
derived from the mortgage-backed securities market and utilizes a current market discount rate for observable credit spreads. The Bank
does not record mortgage servicing rights at fair value on a recurring basis.
Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) Stock
Ownership in equity securities of FHLB of Pittsburgh and the FRB is restricted and there is no established market for their resale. The
carrying amount is a reasonable estimate of fair value.
Deposits
The fair value of demand deposits, savings deposits, and certain money market deposits is the amount payable on demand at the
reporting date. The fair value of fixed-maturity certificates of deposit is estimated based on discounted cash flows using the rates
currently offered for deposits of similar remaining maturities.
Borrowed funds
The Bank uses discounted cash flows using rates currently available for debt with similar terms and remaining maturities are used to
estimate fair value.
Commitments to extend credit and standby letters of credit
The fair value of commitments to extend credit and standby letters of credit are estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For
fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.
The fair value of off-balance sheet commitments is insignificant and therefore not included in the table for non-recurring assets and
liabilities.
109
Assets Measured at Fair Value on a Recurring Basis
The following tables detail the financial asset amounts that are carried at fair value and measured at fair value on a recurring basis at
December 31, 2012 and 2011, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine the
fair value:
(in thousands)
Available-for-sale securities:
Fair value measurements at December 31, 2012
Significant
Quoted prices
other
Significant
in active markets
observable
unobservable
for identical
Fair value
assets (Level 1)
inputs
(Level 2)
inputs
(Level 3)
Obligations of U.S. government agencies
$ 1,891
$ -
$ 1,891
$ -
Obligations of state and political subdivisions
103,501
-
101,762
1,739
Government sponsored agency CMOs
9,103
-
9,103
-
Residential mortgage-backed securities
69,456
-
69,456
-
Corporate debt securities
Equity securities
410
-
410
-
1,000
1,000
-
-
Total securities available-for-sale
$ 185,361
$ 1,000
$ 182,622
$ 1,739
(in thousands)
Available-for-sale securities:
Fair value measurements at December 31, 2011
Significant
Quoted prices
other
Significant
in active markets
observable
unobservable
for identical
Fair value
assets (Level 1)
inputs
(Level 2)
inputs
(Level 3)
Obligations of U.S. government agencies
$ 8,048
$ -
$ 8,048
$ -
Obligations of state and political subdivisions
96,161
-
93,350
2,811
Government sponsored agency CMOs
8,468
-
8,468
-
Private label CMOs
36,256
-
-
36,256
Residential mortgage-backed securities
31,393
-
31,393
-
Pooled trust preferred Senior Class
1,604
-
-
1,604
Pooled trust preferred Mezzanine Class
2,197
-
-
2,197
Corporate debt securities
Equity securities
342
-
342
-
1,006
1,006
-
-
Total securities available-for-sale
$ 185,475
$ 1,006
$ 141,601
$ 42,868
110
The table below presents reconciliation and statement of operations classifications of gains and losses for all assets measured at fair
value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2012 and 2011:
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
(in thousands)
Balance at December 31, 2010
Amortization
Accretion
Purchases
Paydowns
Sales and calls
Transfers in and out of Level 3
Total gains or losses (realized/unrealized):
Included in earnings
Included in other comprehensive income
Balance at December 31, 2011
Amortization
Accretion
Purchases
Paydowns
Sales and calls
Total gains or losses (realized/unrealized):
Included in earnings
Included in other comprehensive income
Balance at December 30, 2012
PreTSLs
$
3,069
-
-
-
(106)
(19)
-
$
(798)
1,655
3,801
-
-
-
(172)
(3,629)
State and
Political
Subdivisions
$
2,245
-
-
-
(530)
-
1,182
$
-
(86)
2,811
-
-
-
(550)
(585)
Private Label
CMOs
-
$
-
-
36,256
-
-
-
$
-
-
36,256
(395)
101
14,691
(13,478)
(37,175)
Total
$
5,314
-
-
36,256
(636)
(19)
1,182
$
(798)
1,569
42,868
(395)
101
14,691
(14,200)
(41,389)
-
-
$
-
-
63
1,739
$
-
-
$
-
-
63
1,739
$
Assets Measured at Fair Value on a Non-Recurring Basis
Assets measured at fair value on a non-recurring basis are summarized below:
Fair value measurements at December 31, 2012
Significant
Significant
Quoted prices
other
other
in active markets
observable
unobservable
(in thousands)
Collateral-dependent impaired loans
Other real estate owned
Fair value (1)
$ 7,816
$ 2,455
for identical
assets (Level 1)
inputs
(Level 2)
inputs
(Level 3)
$ 7,816
$ 2,455
Fair value measurements at December 31, 2011
Significant
Significant
Quoted prices
other
other
in active markets
observable
unobservable
(in thousands)
Collateral-dependent impaired loans
Other real estate owned
Fair value (1)
$ 12,555
$ 5,212
for identical
assets (Level 1)
inputs
(Level 2)
inputs
(Level 3)
$ 12,555
$ 5,212
1) Represents carrying value and related write-downs for which adjustments are based on appraised value. Management makes adjustments to the appraised values as
necessary to consider declines in real estate values since the time of the appraisal. Such adjustments are based on management’s knowledge of the local real estate
markets.
Collateral-dependent impaired loans are classified as Level 3 assets and the estimated fair value of the collateral is based on the
appraised loan value or other reasonable offers less estimated costs to sell. When the measure of the impaired loan is less than the
111
recorded investment in the loan, the impairment is recorded through a valuation allowance or is charged off. The amount shown is the
balance of impaired loans, net of any charge-offs and the related allowance for loan losses.
OREO properties are recorded at fair value less the estimated cost to sell at the date of acquisition. Subsequent to acquisition, the
balance might be written down further. It is the Company’s policy to obtain certified external appraisals of real estate collateral
underlying impaired loans, including OREO, and it estimates fair value using those appraisals. Other valuation sources may be used,
including broker price opinions, letters of intent and executed sale agreements.
The Company discloses fair value information about financial instruments, whether or not recognized in the Statement of Financial
Condition, for which it is practicable to estimate that value. The following estimated fair value amounts have been determined by the
Company using available market information and appropriate valuation methodologies. However, management judgment is required to
interpret data and develop fair value estimates. Accordingly, the estimates below are not necessarily indicative of the amounts the
Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may
have a material effect on the estimated fair value amounts.
The following table summarizes the estimated fair values of the Company’s financial instruments at December 31, 2012 and 2011:
(in thousands)
Financial assets
Fair Value
December 31, 2012
December 31, 2011
Measurement
Carrying Value
Fair Value
Carrying Value
Fair Value
Cash and short term investments
Level 1
$
115,271
$
115,271
$
168,646
$
168,646
Securities
FHLB and FRB Stock
Loans held for sale
Loans, net
Accrued interest receivable
Mortgage servicing rights
Financial liabilities
Deposits
Borrowed funds
Accrued interest payable
Note 19. EARNINGS PER SHARE
See previous table
Level 2
Level 2
Level 3
Level 2
Level 3
Level 2
Level 2
Level 2
187,559
7,308
1,615
579,396
2,199
675
854,613
53,903
6,427
187,844
7,308
1,615
592,504
2,199
884
858,970
59,021
6,427
187,569
9,659
94
659,044
2,552
777
957,136
83,571
4,301
187,720
9,659
94
661,833
2,552
1,185
964,238
89,628
4,301
The following table shows the calculation of both basic and diluted earnings per common share for the years ended December 31, 2012,
2011 and 2010:
(in thousands, except share data)
Net loss
Year Ended December 31,
2012
2011
2010
$
(13,711)
$
(335)
$
(31,720)
Basic weighted-average number of common shares outstanding
16,442,160
16,439,508
16,354,245
Plus: Common share equivalents
-
-
-
Diluted weighted-average number of common shares outstanding
16,442,160
16,439,508
16,354,245
Loss per common share:
Basic
Diluted
$
(0.83)
$
(0.02)
$
(1.94)
$
(0.83)
$
(0.02)
$
(1.94)
Common share equivalents, in the table above, exclude stock options with exercise prices that exceed the average market price of the
Company’s common shares during the periods presented. Inclusion of these stock options would be anti-dilutive to the diluted earnings
per common share calculation. Antidilutive stock options equaled 129,170 shares, 188,193 shares, and 222,616 shares for the years
ended December 31, 2012, 2011, and 2010, respectively.
112
Note 20. CONDENSED FINANCIAL INFORMATION — PARENT COMPANY ONLY
Condensed parent company only financial information is as follows:
Condensed Statements of Condition
(in thousands)
Assets
Cash
Investment in statutory trust
Investment in subsidiary (equity method)
Other assets
Total assets
Liabilities and Shareholders’ Equity
Junior subordinated debentures
Subordinated debentures
Accrued interest payable
Other liabilities
Shareholders’ equity
December 31,
2012
2011
$
355
$
353
358
77,301
46
351
77,842
-
$
78,060
$
78,546
$
10,310
$
10,310
25,000
5,822
3
36,925
25,000
3,310
1
39,925
Total liabilities and shareholders’ equity
$
78,060
$
78,546
Condensed Statements of Operations
(in thousands)
Income
Year Ended December 31,
2012
2011
2010
Equity in undistributed (loss) income of subsidiary
$
(11,206)
$
2,248
$
(29,076)
Equity in trust
Total (loss) income
Expense
Net loss
7
(11,199)
2,512
4
2,252
2,587
6
(29,070)
2,650
$
(13,711)
$
(335)
$
(31,720)
113
Condensed Statements of Cash Flows
(in thousands)
Cash Flows from Operating Activities:
Net loss
Adjustments to reconcile net loss to net cash provided (used) by operating activities:
Equity in undistributed loss (income) of subsidiary
Equity in trust
Stock-based compensation
Increase in other assets
Increase in accrued interest payable
Increase in other liabilities
Net cash used by operating activities
Cash Flows from Investing Activities:
Investment in capital of subsidiary
Net cash used by investing activities
Cash Flows from Financing Activities:
Increase in borrowed funds
Cash dividends
Proceeds from issuance of common stock, net of stock issuance costs
Net cash provided by financing activities
Increase (decrease) in cash
Cash at beginning of year
Cash at end of year
Note 21. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Year Ended December 31,
2012
2011
2010
$
(13,711)
$
(335)
$
(31,720)
11,206
(7)
46
(46)
2,512
2
2
-
-
-
-
-
-
2
353
(2,248)
29,076
(4)
-
-
2,486
-
(101)
(3,000)
(3,000)
-
-
29
29
(3,072)
3,425
(6)
-
-
628
-
(2,022)
(1,520)
(1,520)
1,900
-
528
2,428
(1,114)
4,539
$
355
$
353
$
3,425
(in thousands, except share data)
Interest income
Interest expense
Net interest income
Provision (credit) for loan and lease losses
Net interest income after provision (credit) for loan and lease losses
Non-interest income
Non-interest expense
Loss before income tax expense
Provision for income taxes
Net loss
Loss per share:
Basic
Diluted
(in thousands, except share data)
Interest income
Interest expense
Net interest income
Provision (credit) for loan and lease losses
Net interest income after provision (credit) for loan and lease losses
Non-interest income
Non-interest expense
(Loss) income before income tax expense
Provision for income taxes
Net (loss) income
(Loss) earnings per share:
Basic
Diluted
114
Quarter Ending
2012
March 31,
June 30,
September 30, December 31,
$
9,744
$
9,424
$
8,985
$
8,874
2,573
7,171
(136)
7,307
1,450
9,922
(1,165)
-
2,343
7,081
(280)
7,361
1,544
9,872
(967)
-
2,206
6,779
3,792
2,987
1,659
11,167
(6,521)
-
2,096
6,778
689
6,089
(370)
10,777
(5,058)
-
$
(1,165)
$
(967)
$
(6,521)
$
(5,058)
$
(0.07)
$
(0.06)
$
(0.40)
$
(0.30)
$
(0.07)
$
(0.06)
$
(0.40)
$
(0.30)
Quarter Ending
2011
March 31,
June 30,
September 30, December 31,
$
11,508
$
11,283
$
10,483
$
9,662
4,128
7,380
1,744
5,636
3,982
10,144
(526)
-
3,874
7,409
765
6,644
3,457
9,912
189
-
3,059
7,424
(462)
7,886
2,340
10,660
(434)
-
2,806
6,856
(1,524)
8,380
3,170
11,114
436
-
$
(526)
$
189
$
(434)
$
436
$
(0.03)
$
0.01
$
(0.03)
$
0.03
$
(0.03)
$
0.01
$
(0.03)
$
0.03
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
The Company’s management has evaluated 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, as of
December 31, 2012.
Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded the Company’s disclosure
controls and procedures were effective as of December 31, 2012.
The Company continually seeks to improve the effectiveness and efficiency of its internal control over financial reporting, resulting in
frequent process refinement. There have been no changes to the Company’s internal control over financial reporting during the
Company’s fourth quarter of 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
As a result of a provision of the Dodd-Frank Act, which, among other things, permanently exempted non-accelerated filers such as the
Company, from complying with the requirements of Section 404(b) of Sarbanes-Oxley, which requires an issuer to include an attestation
report from an issuer’s independent registered public accounting firm on the issuer’s control over financial reporting, this Annual Report
on From 10-K does not include an attestation report of the Company’s registered public accounting firm regarding the Company’s
internal control over financial reporting.
115
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 U.S. generally accepted accounting principles and is not intended to provide absolute assurance that a misstatement of our financial
statements would be prevented or detected.
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, 2012, 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 (the “Framework”) issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation under the criteria in the Framework,
management determined that internal control over financial reporting was effective at December 31, 2012.
/s/ Steven R. Tokach
Steven R. Tokach
President and Chief Executive Officer
Item 9B. Other Information
Amendment to the Company’s Bylaws
/s/ James M. Bone, Jr., CPA
James M. Bone, Jr., CPA
Executive Vice President and
Chief Financial Officer
On March 27, 2013, the Board of Directors (the “Board”) of First National Community Bancorp, Inc. (the “Company”) approved and
adopted Amended and Restated Bylaws of the Company (the “Amended and Restated Bylaws”). The Amended and Restated Bylaws,
effective March 27, 2013, include new provisions applicable when the Company fails to hold an Annual Meeting of Shareholders to
establish (a) the notice requirement to be given by shareholders who seek to nominate directors or propose business to be brought before
a shareholder meeting, and (b) the terms for each class of directors to be elected at the next annual meeting.
The Company’s Amended and Restated Bylaws are set forth as Exhibit 3.2 to this Annual Report on Form 10-K.
Adoption of Compensation Plans
On November 28, 2012, the Board of Directors adopted the 2012 Employee Stock Grant Plan (the “2012 Grant Plan”), which became
effective upon implementation on December 17, 2012, pursuant to which the Board authorized the grant of up to 16,000 common shares
in order to make one-time grants of 50 common shares (plus a one-time payment of $25 to partially offset such employee’s 2012 tax
obligations in connection with the grant) to each active full and part-time employee of the Company, including executive officers. The
Board of Directors granted 50 shares to each eligible employee of the Company, including executive officers, in exchange for services
provided during the fiscal year.
On December 19, 2012, the Board of Directors approved three new non-equity incentive plans, a Staff Incentive Plan (the “SIP”), a
Commercial Unit Incentive Plan (the “CIP”) and an Executive Incentive Plan (the “EIP”), each to be effective on January 1, 2013.
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Under the SIP, all regular employees meeting certain criteria are eligible for participation in the plan, including executive officers.
Awards under the plan will be based on overall Company performance assessed against pre-defined performance factors, which includes
a discretionary component based on individual employee performance. Participation, performance factors, thresholds, targets,
maximums and other participation features are established each plan year and may change based on the objectives of the Company.
Under the CIP, all regular regional managers, business development officers and corresponding managers meeting certain criteria are
eligible for participation in the plan, including executive officers. Awards under the plan will be based on individual and team
performance assessed against pre-defined performance factors, which includes a discretionary component based on individual employee
performance. Participation, performance factors, thresholds, targets, maximums and other participation features are established each
plan year and may change based on the objectives of the Company.
Under the EIP, executives of the Company are eligible for participation in the plan (as determined by the President and Chief Executive
Officer or the Board, as applicable). Awards under the plan will be based on overall Company financial performance assessed against
predetermined performance factors, as well as unit, team, functional area and/or individual metrics which are determined by
management at the beginning of each year.
Item 10. Directors, Executive Officers and Corporate Governance.
Director Information
PART III
Each person serving on our Board of Directors must possess the individual qualities of competence, collegiality, integrity, accountability
and high performance standards. Directors are expected to devote the time and effort necessary to be productive members of the Board,
including learning the Company’s business and doing all that is necessary to attend and actively participate in meetings. Information
about each director of the Company, including such person’s specific experience, qualifications and skills, can be found in the
biographical information below.
Michael J. Cestone, Jr. (Director of the Company since 1998)
Mr. Cestone, 81, has been CEO of Mastriani Realty Co., a company that he also owns, since 1959. Mr. Cestone has served as the
Secretary of the Board of Directors of the Company since 1998, as Secretary of the Board of Directors of the Bank since 1971, and as a
director of the Bank since 1969. He has intimate knowledge of the Company through his years of experience with the Company. Mr.
Cestone’s experience in the land development and the building industry, involvement in the community and service as a director of the
Bank for over 42 years qualifies him to serve as a director of the Company. Mr. Cestone is a Class A director whose term was to expire
at the 2011 annual meeting of shareholders which has not yet been held.
Joseph Coccia (Director of the Company since 1998)
Mr. Coccia, 58, is President of Coccia Ford, Inc. (doing business as Coccia Ford Lincoln), a car dealership in Wilkes-Barre,
Pennsylvania, and President of Eastern Auto Exchange, Inc. He has served as director of the Company and the Bank since 1998. Mr.
Coccia’s strong business background and knowledge of owning and operating a large local business, his broad community involvement,
and his service as a director of the Company and Bank for over 14 years qualifies him to serve as a director of the Company. Mr. Coccia
is a Class C director whose term expires at the 2013 annual meeting of shareholders.
Dominick L. DeNaples (Director of the Company since 1998)
Mr. Dominick L. DeNaples, 75, the Chairman of the Board of Directors of the Company and Bank since 2010, is President of Rail
Realty Corp., Vice President of DeNaples Auto Parts Inc., and Vice President of Keystone Landfill, Inc., each of which he is also co-
owner with his brother Louis A. DeNaples, has been a director of the Bank since 1987, and previously served as Vice Chairman of the
Board of Directors of the Company from December 2009 until he was elected Chairman in May 2010. Mr. DeNaples’ extensive business
background, years of community and charitable involvement, including serving on the Boards of St. Joseph’s Foundation and Center,
Red Cross, Lackawanna College, Geisinger, and serving as President of the Boy Scouts of America Northeast Pennsylvania Council, and
service as a director of the Company and Bank for over 25 years qualifies him to serve as a director of the Company. Mr. DeNaples is
the brother of director Louis A. DeNaples and the uncle of director Louis A. DeNaples, Jr. Mr. DeNaples is a Class C director whose
term expires at the 2013 annual meeting of shareholders.
Louis A. DeNaples, Jr. (Director of the Company since 2008)
Dr. DeNaples, Jr., 45, is a licensed physician and Medical Director of the Geisinger Community Medical Center Emergency Department
in Scranton, Pennsylvania and also has served as a director on the Geisinger Community Medical Center’s Board since 2005. He has
served as director of the Company and the Bank since 2008. Dr. DeNaples serves as Director and Vice Chairman for The Community’s
Bank of Bridgeport Connecticut since 2001. Dr. DeNaples’ understanding of the banking industry, service as a bank director for more
than eleven years and considerable community and charitable involvement qualifies him to serve as a director of the Company. Dr.
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DeNaples is the son of former director, Louis A. DeNaples and the nephew of director, Dominick L. DeNaples. Dr. DeNaples is a Class
B director whose term was to expire at the 2012 annual meeting of shareholders, which has not yet been held.
Joseph J. Gentile (Director of the Company since 1998)
Mr. Gentile, 82, retired in 2010 as President of Dunmore Oil Company, Inc., a fuel distributor, after 30 years with that company. He
also has been a director of Five Star Equipment, Inc., an industrial equipment dealer, since 1989. Mr. Gentile has served on the Board of
Directors of the Bank since 1989. Mr. Gentile’s strong business background, understanding of the local business and social community,
community and charitable involvement and service as a director of the Bank for over 23 years qualifies him to serve as a director of the
Company. Mr. Gentile is a Class A director whose term was to expire at the 2011 annual meeting of shareholders, which has not yet
been held.
Thomas J. Melone (Director of the Company since 2011)
Thomas J. Melone, 54, was appointed as a Director of the Company in May 2011. Mr. Melone is a Partner at the Albert B. Melone
Company where he has worked as a certified public accountant since 1984. He has served as director of the Company and the Bank
since 2011. Mr. Melone is also an owner of Pro-Data Processing, Inc. Mr. Melone brings extensive accounting experience and expertise
with respect to reviewing financial statements and materials. Mr. Melone is a graduate of King’s College, Wilkes-Barre, Pennsylvania.
Mr. Melone’s business and accounting experience qualify him to serve as a director of the Company. Mr. Melone is a Class B director
whose term was to expire at the 2012 annual meeting of shareholders, which has not yet been held.
John P. Moses (Director of the Company since 1999)
Mr. Moses, 66, has served as the Chairman of Blue Cross of Northeastern Pennsylvania since 1997, and as an attorney in private practice
since 1971, including as Of Counsel at the law firm of Cozen & O’Connor since 2009. Mr. Moses has been a director of the Company
and the Bank since 1999. During his career, he also has served as chair of the Northeast Pennsylvania Heart Association and as
Chairman and President of the Board of Governors of St. Jude Children’s Research Hospital (“St. Jude”), and as Chief Executive Officer
for ALSAC, the fundraising arm of St. Jude. Mr. Moses also has had a distinguished career in public service, having served as a
member of state commissions and as counsel to various state and local judicial, executive, legislative and administrative offices and non-
profit organizations. He has received numerous awards for his contributions in public service, business, the law and charitable causes,
most recently in 2009 as recipient of the Hope Award from the American Cancer Society. He also serves on the boards of Villanova
University School of Law, Wilkes Law School Initiative and The Commonwealth Medical College. Admitted to practice law in
Pennsylvania and before the U.S. Supreme Court, he is a graduate of the Villanova University School of Law. Mr. Moses’ extensive
business and legal background, community and charitable involvement and service as a director of the Company and Bank for over 13
years qualifies him to serve as a director of the Company. Mr. Moses is a Class C director whose term expires at the 2013 annual
meeting of shareholders.
Steven R. Tokach (Director of the Company since 2011)
Steven R. Tokach, 66, has served as the President and Chief Executive Officer of the Company and the Bank since December 5, 2011.
Mr. Tokach also serves as a director of the Company and the Bank. Previously, Mr. Tokach was retired from banking since 2006. Prior
to that, he was Senior Vice President and Chief Credit Administrator for Community Bank, N.A., a multi-billion dollar bank with
locations in upstate New York and Northeastern Pennsylvania, from 2004 to 2006. Mr. Tokach served as Regional President of First
Liberty Bank & Trust, N.A., the Pennsylvania bank division of Community Bank, N.A, from 2001 to 2004. He served as President of
First Liberty Bank in Jermyn, Pennsylvania from 1996 to 2001 and as Executive Vice President and Chief Operating Officer from 1991
to 1996. Prior to that, Mr. Tokach worked for three other banks located in Pennsylvania, serving as Vice President of First Eastern Bank
from 1989 to 1991, as Vice President of Guaranty Bank, N.A. from 1986 to 1989 and as Vice President of The First National Bank of
Jermyn from 1982 to 1986. Prior to his banking career, Mr. Tokach was a Bank Examiner with the Office of the Comptroller of the
Currency (the “OCC”) from 1968 to 1982, supervising or assisting in the examination of national banks. Mr. Tokach is a graduate of
King’s College, Wilkes-Barre, Pennsylvania, where he earned his bachelor’s degree in accounting. He is a former member of the boards
of directors of the Scranton Chamber of Commerce and the United One Credit Bureau. Mr. Tokach’s extensive banking experience,
knowledge of bank regulatory matters from his time with the OCC and accounting and financial background qualify him to serve as a
director of the Company. Mr. Tokach is a Class B director whose term was to expire at the 2012 annual meeting of shareholders, which
has not yet been held.
Directors during 2012 Who Are Not Currently Directors
Mr. Louis A. DeNaples, 72, has been a director of the Bank from 1972 and had served as Chairman of the Board of Directors of the
Company from 1998 until he took a leave of absence from involvement with the Company and the Bank in February 2008. Shortly
thereafter, the Federal Reserve Bank of Philadelphia (the “FRB”) and the OCC suspended Mr. DeNaples from office and prohibited him
from any participation in the affairs of the Company or the Bank. Mr. DeNaples resigned as a director of the Company, effective May
12, 2012, however he remains a director of the Bank. (Mr. DeNaples appealed the suspension and on January 29, 2013 the United States
Court of Appeals for the District of Columbia ruled in his favor and issued a decision vacating the agencies’ suspension orders and
remanding on certain other matters. Prior to the court’s decision, Mr. DeNaples did not actively serve as a director at any time during
2012.
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Executive Officers Who Are Not Directors
Information regarding persons who are executive officers of the Company or the Bank and who are not directors of the Company is set
forth below. Except as otherwise indicated, the occupation listed has been such person’s principal occupation for at least the last five
years.
James M. Bone, Jr.
Mr. Bone, 51, is Executive Vice President and Chief Financial Officer of the Bank, a position he has held since September 2012. Mr.
Bone has been an employee of the Bank since 1986, serving as Executive Vice President and Chief Information Officer from May 2010
to August 2012; First Senior Vice President and Administrative Services Division Manager from July 2000 to April 2010; as Senior
Vice President and Branch Administrator from January 1995 to June 2000; Vice President and Community Office Manager/Commercial
Loan Officer from May 1992 to December 1994; Vice President and Loan Administration/Compliance Division Manager from January
1989 to May 1992; and Internal Auditor from July 1986 to December 1988. Mr. Bone is a licensed Certified Public Accountant. In
addition, Mr. Bone owns a limited liability company (“LLC”) through which he provides tax and consulting services to various
individual clients and small businesses.
Gerard A. Champi
Mr. Champi, 52, is Chief Operating Officer of the Bank since March 2011. Prior to holding this position, he served as Interim President
and Chief Executive Officer of the Company and the Bank and as a director of the Bank from March 2010 until February 2011. Mr.
Champi has been with the Bank since 1991 and has served in various leadership roles in the Retail and Commercial Sales Divisions. He
also currently serves on the Boards of the Greater Pittston Chamber of Commerce, the Greater Scranton Chamber of Commerce and the
Lackawanna branch of the Blind Association. Mr. Champi also serves as member of the Advisory Board of Penn State Worthington
Scranton, a campus of the Pennsylvania State University.
Joseph J. Earyes
Mr. Earyes, 56, is First Senior Vice President and Chief Retail Banking and Operations Officer of the Bank, a position he has held since
March 2013. Prior to holding this position, he served as First Senior Vice President and Retail Banking Officer of the Bank from
February 2011 to February 2013 and Senior Vice President and Retail Banking Officer of the Bank since December 2008. Mr. Earyes,
who has FINRA Series 7 and 63 licenses, also is a financial services representative of Invest Financial Corporation through that entity’s
third party brokerage arrangement with the Bank. Prior to joining the Bank, Mr. Earyes was Chief Financial Officer of State Petroleum
Distributors LLC, a wholesale fuel distributor from February 2006 to August 2008. Mr. Earyes has previous banking experience from
his time as Executive Vice President and Chief Executive Officer of Fidelity Deposit and Discount Bancorp, Inc. of Dunmore,
Pennsylvania, the holding company for The Fidelity Deposit and Discount Bank, from April 2001 to April 2004. Mr. Earyes is a
licensed Certified Public Accountant and worked as a Partner in the Earyes/Alu LLP CPA firm that he co-owned from July 2004 to
January 2006.
Lisa L. Kinney
Ms. Kinney, 43, is Senior Vice President and Retail Lending Officer & Consumer Lending Manager of the Bank, a position she has held
since September 2008. Ms. Kinney has been an employee of the Bank since 1994, with her previous roles including Vice President and
Indirect Lending Manager from January 2007 to September 2008; Vice President and Indirect Lending Officer from December 2005 to
December 2006; and Assistant Cashier and Indirect Lending Officer from May 1998 to November 2005.
Donald H. Ryan
Mr. Ryan, 60, is the Human Resources Officer and Senior Vice President of the Bank since November 2011. Before joining the
Company, Mr. Ryan was the Operations Director at Johnson College from June 2009 until September 2011 with responsibility for
human resources, information technology and facilities. From 1997 to 2009, he was President and principal of The Ryan Group, a
Northeastern Pennsylvania based human resources consulting firm. Prior thereto, Mr. Ryan held senior human resources positions at
National Westminster Bancorp, U.S. Trust Company of New York and The Federal Reserve Bank of New York.
Executive Officers during 2012 Who Are Not Currently Executive Officers
David D. Keim served as the Chief Credit Officer of the Bank from August 2010 until his resignation in September 2012.
Sandra E. Laughlin served as Executive Vice President and Chief Risk Officer of the Bank from January 2011 until her resignation in
October 2012.
Edward J. Lipkus, III served as Executive Vice President and Chief Financial Officer of the Bank from September 2010 until his
resignation in August 2012.
Robert J. Mancuso served as First Senior Vice President and Chief Administrative Officer of the Bank from June 2010 until his
resignation in December 2012.
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Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s officers and directors, and persons who own more than ten
percent of a registered class of the Company’s equity securities (“10% Shareholders”) to file reports of ownership and changes in
ownership with the SEC. Officers, directors and 10% Shareholders are required to furnish the Company with copies of all Section 16(a)
forms they file.
Based solely on the Company’s review of the copies of such forms received and a written representation from certain reporting persons
that no Forms 5 were required for those persons, the Company believes that, during the year ended December 31, 2012 all filing
requirements applicable to its officers, directors and 10% Shareholders under Section 16(a) were complied with on a timely basis, with
the following exceptions.
The Company’s executive officers (James M. Bone, Jr., Gerard A. Champi, Joseph J. Earyes, Lisa L. Kinney, Donald H. Ryan and
Steven R. Tokach) inadvertently failed to file Forms 4 reflecting the grant of 50 shares to each of them in connection with the
Company’s employee stock grant on December 17, 2012. All required Form 4 filings have subsequently been made with the SEC.
Corporate Governance
General
The Board has an Audit Committee, Compensation Committee and Corporate Governance Committee, which also makes nominating
decisions. The charters of these committees have been approved by the Board and are available on our corporate website at
(www.fncb.com/InvestorRelations/).
Submission of Shareholder Proposals and Director Nominations
The Company has not yet held its 2011 and 2012 Annual Meetings of Shareholders and presently intends to hold an annual meeting in
2013. The Company intends to promptly notify shareholders when a date is set for the Annual Meeting of Shareholders. In order for a
shareholder proposal or director nomination to be considered for inclusion in the Company’s proxy statement for the Annual Meeting,
the written proposal must be received a reasonable time before the Company begins to print and send its proxy materials.
In addition, the advance notice provisions in the Company’s Amended and Restated Bylaws, require that the following additional
information must be provided to the Company by a shareholder submitting a shareholder proposal: (i) the shareholder’s name and
address; (ii) a representation that the shareholder is a holder of record of shares of the Company and intends to appear in person or by
proxy at the meeting to make the proposal; (iii) the number of and class of shares owned by the shareholder and any Shareholder
Associated Person (as defined in the Bylaws), which information must be supplemented as of the record date; (iv) a description of any
agreement, arrangement or understandings between the shareholder or any other person or persons, pursuant to which the business is to
be proposed, which information must be supplemented as of the record date; (v) information regarding the shareholder’s, Shareholder
Associated Person’s or certain affiliated partnership’s ownership of derivative instruments (such as options, warrants, convertible
security, etc.) or any other opportunity of the shareholder or Shareholder Associated Person to profit from a change in the value of shares
of the Company and the existence of any hedging transactions, which information must be supplemented as of the record date; and (vi)
any other information regarding the proposal that would be required under the SEC’s proxy rules and regulations.
Director Independence
Currently, the Board of Directors has eight members. At the end of 2011, the Board had nine members, including Louis A. DeNaples,
who resigned effective May 12, 2012. The Company evaluates the independence of directors under the SEC and NASDAQ stock
market’s standards for independence. The NASDAQ standards require the Board of Directors to be comprised of a majority of
independent directors. The NASDAQ standards also require that, except for exceptional and limited circumstances, the Board of
Directors maintain an audit committee comprised only of independent directors and that compensation and nomination decisions must
be made only by independent directors.
Independence is reviewed at least annually to determine whether all existing and potential committee members are independent. For
2012, the Board of Directors determined that Louis A. DeNaples, Jr., Joseph J. Gentile, John P. Moses and Thomas J. Melone met the
standards for independence. Following an amendment to the Company’s Bylaws in April 2012, the Board of Directors determined that
Dominick L. DeNaples also meets the standards for independence.
The Board adopted charters for its Compensation Committee and for its Corporate Governance Committee, which also makes
nomination decisions. The Corporate Governance Committee and Compensation Committees are comprised of the following directors:
Louis A. DeNaples, Jr., Chairman, Joseph J. Gentile, Thomas J. Melone and John P. Moses, all of whom were determined to meet the
standards for independence.
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In making its independence determinations, the Board considered that in the ordinary course of business the Company and the Bank may
provide commercial banking and other services to some of the independent directors and to business organizations and to individuals
associated with them. The Board also considered that in the ordinary course of business some business organizations with which an
independent director is associated may provide products and services to the Company and the Bank. The Board has determined that,
based on the information available to the Board, none of these relationships were material.
Audit Committee
The Board of Directors has a standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act, which
is currently comprised of Thomas J. Melone, Audit Committee Chairman, John P. Moses and Joseph J. Gentile, all of whom are
considered independent, as that term is defined by the SEC and in the NASDAQ listing standard related to audit committees. The Audit
Committee met 10 times in 2012. The current Audit Committee charter, as amended and restated in 2012 is available on the Company’s
website at www.fncb.com/InvestorRelations/ under the heading “Audit Committee Charter.” The principal duties of the Audit
Committee, as set forth in its amended charter, include reviewing significant audit and accounting principles, policies and practices,
reviewing performance of internal auditing procedures, reviewing reports of examination received from regulatory authorities, and
recommending, annually, to the Board of Directors the engagement of an independent certified public accountant.
Currently, the Board has identified Thomas J. Melone and John P. Moses as the Audit Committee financial experts. Mr. Melone
qualifies as a financial expert based on his extensive accounting experience as a certified public accountant and as a partner of the Albert
B. Melone Company. Mr. Moses qualifies as the financial expert based on his knowledge of financial statements, internal controls, and
Audit Committee functions resulting from his prior role as Chief Executive Officer of ALSAC/St. Jude Children’s Research Hospital
and his current position as Chairman of BlueCross of Northeastern Pennsylvania.
Code of Business Conduct and Ethics
The Company has adopted a Code of Business Conduct and Ethics (the “Code”) that applies to the Company’s directors and employees,
including the President and Principal Executive Officer (“PEO”), Principal Financial Officer (“PFO”) and Principal Accounting Officer
(“PAO”). The Code includes guidelines relating to compliance with laws, the ethical handling of actual or potential conflicts of interest,
the use of corporate opportunities, protection and use of the Company’s confidential information, accepting gifts and business courtesies,
accurate financial and regulatory reporting, and procedures for promoting compliance with, and reporting violations of, the Code. The
Code of Business Conduct and Ethics is available on the Company’s website at www.fncb.com/InvestorRelations/ under the heading
“Code of Ethics.” The Company intends to post any amendments to its Code of Conduct and Ethics on its website and also to disclose
any waivers (to the extent applicable to the Company’s President, Principal Executive Officer, Principal Financial Officer or Principal
Accounting Officer) on a Form 8-K within the prescribed time period.
Item 11. Executive Compensation.
COMPENSATION DISCUSSION AND ANALYSIS
Executive Officer Compensation
Company Objectives
The Company is committed to responsible compensation practices and strives to balance sound risk management with the need to attract,
hire, motivate and retain executive team members who will maximize successful performance. FNCB intends to provide executives
with a balanced mix of fixed and variable pay. The purpose of all incentive plans is to motivate, reward and reinforce performance and
achievement of team and/or individual goals in support of FNCB’s strategic objectives for growth and profitability. They provide the
opportunity for reward for meeting and exceeding established financial goals as well as recognition of individual achievements.
Under the heading “Executive Compensation Tables,” you will find a series of tables containing specific information about the
compensation earned or paid in 2012 to Mr. Steven R. Tokach, the current President and Chief Executive Officer and PEO of the
Company, Mr. James M. Bone, Jr., the current Chief Financial Officer and PFO of the Company and Mr. Edward J. Lipkus, the former
Chief Financial Officer and PFO of the Company. Compensation information is also presented for Mr. Gerard A. Champi, the current
Chief Operating Officer of the Bank and former Interim Chief Executive Officer and President of the Company, Mr. Joseph J. Earyes,
the Chief Retail Banking and Operations Officer of the Bank and Lisa L. Kinney, the Retail Lending Officer and Consumer Lending
Manager of the Bank, the three most highly compensated executive officers of the Company (including officers of the Bank) who
received total compensation of $100,000 or more during the fiscal year ended December 31, 2012, referred to as our “named executive
officers” or “named executives.” In addition, compensation information is presented for the following former named executives, Mr.
Robert J. Mancuso, the former Chief Administrative Officer of the Bank and Ms. Sandra E. Laughlin, the former Chief Risk Officer of
the Bank.
The overall executive compensation philosophy and strategy and primary objective of the Board of Directors with respect to executive
compensation at FNCB is to provide a total compensation package that meets a number of interrelated goals. FNCB’s compensation
package is designed to:
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1. Be balanced and competitive in the external market in a manner consistent with the Company’s size and industry
2. Correlate with the Company’s strategic business plan
3. Align the interests of executives with those of shareholders
4. Drive superior performance and reward executives for achievement
5. Enable FNCB to attract, motivate, develop and retain key executives whose experience, expertise and abilities will maximize the
company’s performance for the benefit of its shareholders without encouraging undue risk-taking that could materially threaten the
safety and soundness of the Company
6. Achieve an appropriate mix of fixed and variable compensation
7. Equally support annual and long-term financial and strategic performance objectives as well as the stability of the organization
8. Ensure compliance with applicable regulations
9. Deliver executive compensation in a manner that is prudent and cost-effective
10. Support the mission, vision and values of the Company
Design of Compensation Program
In 2012, executive compensation decisions were made by the Compensation Committee of the Board of Directors. The Board of
Directors’ fundamental policy is to provide our executive officers with competitive compensation for their positions and to provide
opportunities based upon their contributions to the Company’s development and financial success as well as their personal performance
in accordance with the overall design of the Company’s compensation package.
The Role of Consultants
In 2012, the Company engaged Mosteller and Associates (Mosteller), a Pennsylvania-based human resources consulting firm, to conduct
an Executive Compensation Reviews (“the 2012 Report”). The 2012 Report included: (1) a market review of the Company’s executive
positions against compensation levels of other similar financial institutions; and (2) recommendations for enhancements to the
Company’s overall executive compensation programs. The Company intends to utilize the Report as a foundation for executive
compensation decisions during 2012 and 2013.
The Report included market data from proxy statement analysis of a peer group of banks as well as three published survey sources.
Specific analysis and comment was provided for each of the executive pay components (base, short term incentive, long-term incentive,
and all other) as well as total compensation, upon which the Board was able to base executive compensation decisions throughout the
year. The results of the study reflected in the 2012 Report provided the Board and management a solid base of relevant information
upon which to develop compensation strategy and to base compensation-related decisions.
The Company also engaged Mosteller to design Short Term and Long Term Incentive Compensation Plans to be used to attract,
motivate and retain the Company’s executives and employees.
On December 19, 2012, the Board of Directors approved three Short Term Incentive Plans to be effective for calendar year 2013. These
include an Executive Incentive Plan (the “EIP”), a Commercial Incentive Plan (the “CIP”) and a Staff Incentive Plan (the “SIP”). Each
of these plans are designed to link annual cash compensation awards to specific Bank financial targets and individual performance
metrics. According to the terms of these Incentive Plans, the Board of Directors are responsible for establishing the Bank-wide financial
targets that are utilized to trigger funding of the Plans. The Board of Directors determines the individual performance goals used to
evaluate the President. For all other executives and employees, management is responsible for establishing individual performance
goals which, in conjunction with achievement of Bank-wide financial goals, are used to determine individual awards. Each of the
incentive plans provides for a potential claw back of award payments if the relevant performance measures on which they are based are
restated or otherwise adjusted within a 36- month period following the public release of the financial information.
On January 24, 2013, the Board of Directors approved the design of a Long Term Incentive Plan (the “LTIP”) that it intends to present
to shareholders for approval in 2013. Upon obtaining shareholder approval, the Board intends to make initial awards in 2013 under the
terms of this Plan. The proposed LTIP is designed to reward executives and key employees for their contributions to the long term
success of the Company, primarily as measured by the increase in the Company’s stock price. The proposed LTIP plan design provides
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the Board with the authority to offer several different types of long term incentives including Stock Options, Stock Appreciation Rights,
Restricted Stock, Restricted Stock Units, Performance Units and Performance Shares.
In addition, the Company continues to engage Mosteller to provide consulting services on an ongoing basis, advising with regard to
executive and broad-based compensation matters as well as a variety of human resources topics. The Board chose Mosteller because of
its expertise in the field of Human Resources, the industry of financial services and the geographic footprint of the Bank and their base
of understanding of the organization.
The Role of Management
Input from senior management, including the Chief Executive Officer and the Human Resources Officer, along with our external
consultants was critical in order to permit the Board and Compensation Committee to make informed and appropriate decisions. Input
from senior management may include:
• Performance summaries for management team members and recommendations regarding compensation;
• Results from executive compensation studies and related recommendations and analysis; and
• Data and recommendations for changes necessary to ensure continued market competitive nature of FNCB’s overall
compensation package and/or the individual components of executive compensation.
Each member of senior management excuses himself or herself from all Board and Compensation Committee discussions of that
individual’s compensation level.
Benchmarking and Peer Group
During 2012, the Company utilized a peer group based on industry, asset size, organizational structure, performance levels and
geographic location. The Company has selected the peer group to provide comparative market data for executive compensation pay
levels.
This peer group reflects financial organizations from the Mid-Atlantic states with asset size ranging from approximately $580 million to
almost $2.3 billion as of December 31, 2011. We believe these companies are an appropriate group against which to benchmark our
compensation. This peer group was adjusted in conjunction with Mosteller’s 2012 Report to be more reflective of the Company’s
current asset size and current regional competitors.
Below is a listing of the peer group used by the Company to benchmark its executive compensation:
ACNB Corp.
Alliance Financial Corp.
AmeriServe Financial, Inc.
Bryn Mawr Bank Corp.
CNB Financial Corp.
Canandaigua National Corp.
Citizens & Northern Corp.
Codorus Valley Bancorp, Inc.
Dimeco, Inc
ESSA Bancorp, Inc.
Fidelity D&D Bancorp, Inc.
First United Corporation
Norwood Financial Corp.
Orrstown Financial Services Inc.
Penseco Financial Services Corp.
Republic First Bancorp, Inc.
Univest Corp of Pennsylvania
VIST Financial Corp.
Material Differences in Named Executive Officers’ Compensation
The overall factors that come into consideration when making executive compensation decisions include the following:
• Compensation philosophy and strategy;
Individual performance relative to goals;
•
• Corporate performance;
• Budgetary constraints;
• Regulatory requirements;
• Competitive market data received from external compensation consultant including best practices in the marketplace;
• Ability to retain and attract executive employees;
• External economic and industry environment; and
• Risk assessment considerations.
The named executive officers receive base salaries commensurate with their positions and responsibilities. In determining the
appropriate types and amounts of compensation for the President and Chief Executive Officer each year, the Board of Directors
evaluates both corporate and individual performance. The corporate factors include the financial performance of the Company,
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including return on stockholders’ equity, return on assets, asset quality and trends in the foregoing measures, the performance of the
Company’s stock price, comparative results achieved by the Company’s peer group institutions, and progress in realizing the Company’s
long-term business plan. The individual factors include initiation and implementation of successful business strategies, formation of an
effective management team and various personal qualities, including leadership. In determining the appropriate types and amounts of
compensation for the named executive officers, other than the President and Chief Executive Officer, the Board of Directors takes into
consideration the officer’s experience, expected personal performance and salary levels for comparable positions.
Compensation Components
The compensation package for each named executive officer is comprised primarily of base salary, short-term incentives in the form of
cash bonuses and long-term stock-based incentive awards. The Company also offers executives who meet the eligibility requirements
the opportunity to participate in a nonqualified deferred compensation plan, in addition to a 401(k) Profit Sharing Plan and health and
welfare benefits available to all of the Bank’s employees.
Base Salary
The Bank has established salary ranges that are competitive with our peer group and the banking industry in our local region. Each job
classification has been evaluated based upon the required skills, knowledge, responsibility and experience needed. Salary increases are
based upon merit, performance, quality of work, and other job related factors. Salary increases are not guaranteed and a satisfactory
performance review may not warrant an increase. The base salary for each named executive officer is determined based upon
experience, personal performance, salary levels in effect for comparable positions both in and outside of the banking industry, internal
base salary comparability considerations and the responsibilities assumed by the named executive officer. The weights given to these
factors differ from individual to individual as the Board determines is appropriate. Base salaries are reviewed annually and adjusted
from time to time, based on our review of market data and assessment of Company and individual executive performance.
Please refer to “Executive Compensation Tables” below for additional information on compensation of our named executive officers.
Short-Term Incentive Program/Cash Bonuses
In 2012, executives were eligible for annual short-term incentives through a discretionary program that was based upon the Board of
Directors’ subjective assessment of the Company’s performance as compared to both budget and prior fiscal year performance, as well
as the individual contributions of the executives. Though individual contributions are considered when awarding bonuses, if any, neither
the compensation committee nor the Board of Directors has established performance targets that, when reached, automatically provide a
bonus. The amount of each individual bonus is not affected by nor does it affect any other form of compensation. Based on the Bank’s
overall performance levels in 2012, the Board did not award any cash bonuses.
On December 19, 2012, the Board approved the new EIP to be effective during calendar year 2013. This Plan is designed to link annual
cash bonus awards to specific bank financial targets and individual performance metrics. According to the terms of the EIP, the Board
of Directors are responsible for establishing the bankwide financial targets which are utilized to trigger funding of the EIP. The Board of
Directors determines the individual performance goals used to evaluate the President. For all other executives, the President and Chief
Operating Officer are responsible for establishing individual performance goals which, in conjunction with achievement of bank-wide
financial goals, are used to determine individual awards. The EIP provides for a potential claw-back of award payments if the relevant
performance measures on which they are based are restated or otherwise adjusted with a 36-month period following the public release of
the financial information.
Long-Term Incentive Program
The Company believes that stock ownership by management and equity-based performance compensation arrangements are useful tools
to align the interests of management with those of the Company’s shareholders. Where executives are shareholders themselves, the
executives will realize a direct benefit by achieving the objective of maximizing shareholder value.
During 2012, the Company had in place two stock incentive plans: the 2000 Stock Incentive Plan (the “Stock Incentive Plan”) and the
2000 Independent Directors’ Stock Incentive Plan (the “Directors’ Stock Plan,” and together with the Stock Incentive Plan, the
“Company Plans”), each of which expired on August 30, 2010 and, as such, no additional awards have been granted from either plan,
though the expiration of these plans does not affect any awards outstanding as of the expiration date of the plan.
Prior to the expiration of the Company Plans, the Company’s executives were eligible to receive “qualified” stock options, “non-
qualified” stock options, stock appreciation rights and restricted stock under the Company Plans, which have each been approved by the
Company’s shareholders. Section 162(m) of the Internal Revenue Code of 1986, as amended, generally denies publicly-held
corporations a federal income tax deduction for compensation exceeding $1,000,000 paid to the Chief Executive Officer or any of the
four other highest paid executive officers, excluding performance-based compensation. The Stock Incentive Plan was designed and has
been administered in a manner to enable the Company to deduct compensation attributable to options and without regard to such
deduction limitation. The Company has outstanding awards of stock options issued under each of the Company Plans. During 2009, the
124
Company granted 74,600 shares worth of stock options. No stock options or other equity based awards were granted in 2010, 2011 or
2012. In February 2011, the Board dissolved the Stock Option Committee, which had previously been authorized to award grants of
stock options and other long-term incentives to key employees and officers, and the Compensation Committee assumed responsibility
for the administration of the Company Stock Plans.
Under the Stock Incentive Plan, shares of common stock are subject to issuance upon the exercise of incentive stock options (“ISOs”),
non-incentive stock options (“Non-ISOs”) and Stock Appreciation Rights (“SARs”), and the award of shares of restricted stock to such
key officers or other employees of the Company or the Bank as the Committee may designate. However, only incentive stock options
were ever awarded under the Stock Incentive Plan. The exercise price of qualified stock options under the Stock Incentive Plan was not
permitted to be less than 100% of the fair market value of the common stock on the date of grant, as determined in the Stock Incentive
Plan.
If a participant who was awarded a qualified incentive stock option ceases to be employed by the Company or the Bank for any reason
other than his or her death or disability, the participant may be permitted to exercise the option during its remaining term for a period of
not more than three (3) months after cessation of employment to the extent that the qualified option was then and remains exercisable.
The grants are to be exercised at a fixed price of fair market value on the date of grant. The grant dates are based on the last Company
meeting of the applicable year in which they were granted. The awards are not timed to the release of any information. Under the Stock
Incentive Plan, the time period during which any qualified incentive stock option is exercisable, as determined by the Committee, does
not commence before the expiration of six (6) months or continue beyond the expiration of ten (10) years after the date such option is
awarded. As incentive compensation, the granting of stock options was not taken into account when determining other factors of
compensation for the named executive officers.
The Company Plans provide that the aggregate number of shares of common stock remaining available for grant under the respective
Company Plan may be adjusted for certain events, such as mergers, consolidations, stock dividends, stock splits, continuation or similar
events in which the number or kind of shares is changed without receipt or payment of consideration by the Company.
On November 28, 2012, the Board of Directors adopted the 2012 Employee Stock Grant Plan (the “2012 Grant Plan”), which became
effective upon implementation on December 17, 2012, pursuant to which the Board authorized the grant of up to 16,000 common shares
in order to make one-time grants of 50 common shares (plus a one-time payment of $25 to partially offset such employee’s 2012 tax
obligations in connection with the grant) to each active full and part-time employee of the Company, including executive officers. This
one-time program was implemented to provide employees with a long term financial interest in the Company’s future growth and
profitability by providing them with Company ownership in the form of common shares.
On January 24, 2013, the Board of Directors approved the design of a new Long Term Incentive Plan (LTIP) that it intends to present to
shareholders for approval in 2013. Upon obtaining shareholder approval, the Board intends to make initial awards in 2013 under the
terms of this Plan. The proposed LTIP is designed to reward executives and key employees for their contributions to the long term
success of the Company, primarily as measured by the increase in the Company’s stock price. The proposed LTIP plan design provides
the Board with the authority to offer several different types of long term incentives including Stock Options, Stock Appreciation Rights,
Restricted Stock, Restricted Stock Units, Performance Units and Performance Shares.
Profit Sharing and 401(k) Plan
Supplemental compensation is provided in the forms of a profit sharing plan and a 401(k) plan. These items are structured to be
moderately competitive within the peer market. The amount of money which the Bank contributed to the profit sharing and 401(k) plans
is not taken into account when determining the amounts of other forms of compensation.
The Bank has adopted the First National Community Bank 401(k) Profit Sharing Plan (the “401(k) Profit Sharing Plan”), a tax qualified
retirement savings plan pursuant to which our employees, including the named executive officers, are able to make pre-tax or Roth
contributions from their cash compensation. The 401(k) Profit Sharing Plan provides for a discretionary employer contribution, which is
determined each year by the Board of Directors, in the form of profit sharing. For the year 2012, the Board of Directors did not declare a
profit sharing contribution. In 2011 and until August 31, 2012, the plan did not allow matching contributions to the 401(k) plan.
Effective as of September 1, 2012, the Board of Directors amended the Profit Sharing and 401(k) Plan to permit a Bank provided match
to employee 401(k) contributions. The Board of Directors has approved a 50% match to an employee’s first 4% of payroll contribution.
The match is subject to amendment at the Board of Director’s discretion. Additionally, as of September 1, 2012, the eligibility
requirements for the Profit Sharing and 401(k) Plan were amended by the Board of Directors. As of that date, employees who have
attained the age of 21 are eligible to participate on the first day of the month following their day of hire.
125
Deferred Compensation Plan
All officers of the Bank employed at the beginning of a year for at least two (2) years with earnings in excess of $40,000 annually are
entitled to participate in the Bank’s Director’s and Officer’s Deferred Compensation Plan, as amended (“Deferred Compensation Plan”).
The Deferred Compensation Plan allows named executive officers who have been employed by the Bank for ten or more years to defer
up to 25% of their compensation, including base salary and cash bonuses. All other eligible named executive officers may defer up to
15% of their compensation. The Deferred Compensation Plan is designed to provide a long-term incentive to remain in the employ of
the Bank.
An account for each participant is maintained and credited with deferred compensation on the date such compensation would have been
paid to a participant had no election to defer been made. The interest rate to be credited on account balances in the Deferred
Compensation Plan was reviewed by the Board during 2010 and the Deferred Compensation Plan was amended prior to December 31,
2010. The amendment provides for the interest rate to be determined each year based on the sum of 1% plus the average of the one-year
U.S. Treasury Bill rates in effect on and between December 1 and December 15 of the Plan Year to which it applies. There is no
minimum rate in this amendment. This amendment was adopted by the Board on December 29, 2010 and applied to accounts for the
December 31, 2010 interest crediting and thereafter.
The Bank’s obligation under the Deferred Compensation Plan is an unfunded and unsecured promise to pay. The Bank is not obligated
to fund any of such obligations, but it may, in its sole discretion, elect to fund the Deferred Compensation Plan in whole or in part. To
date, the Company has not funded any Deferred Compensation Plan obligations. As such, executive officer and other participant
account balances in the Deferred Compensation Plan are unsecured and at-risk, meaning the balances may be forfeited in the event of the
Company’s financial distress such as bankruptcy. The Bank does not match executive deferrals to the Deferred Compensation Plan.
Participants, including each of the named executive officers, are immediately vested in their account balance in the deferred
compensation plan. The benefit payments to be made to a participant under the Deferred Compensation Plan begin on the first business
day of the month after the participant’s “normal retirement date,” which is the date on which a participant reaches age 60, the date on
which he has been a participant for five years, or his or her termination of service, whichever is later. “Termination of service” means
the participant’s ceasing to serve as a Director or Officer of the Bank for any reason whatsoever, voluntary or involuntary, including by
reason of death or disability. The participant will receive equal monthly or annual installments over the period chosen, the amount of
such payments being determined by annuitizing the amount in his Deferred Compensation Plan account, plus interest.
Distributions are paid in a lump sum or in annual or monthly installments according to the participant’s designation, provided, however,
that the Bank may, subject to approval by the Board of Directors, pay the participant’s Deferred Compensation account in annual
payments upon such Participant’s termination of service. All distributions are also subject to any regulatory requirements, as in effect
from time to time.
Additional Employee Benefit Plans
The Bank also provides additional benefit programs to employees including health, vision and dental insurance, life and long-term and
short-term disability insurance.
Supplemental Life Insurance for Certain Executive Officers
Certain executive officers also participate in the Company’s supplemental executive life insurance plan which provides a split-dollar
share of death benefits to the executive’s beneficiary, depending upon the executive’s eligibility to receive payments. The plan is funded
with bank-owned life insurance and is used to provide an additional benefit to certain executives with a minimal cost to the Company.
Split-dollar life insurance plans are widely available in the banking industry, because it allows the employer to recover its plan costs
upon the death of the executive, and the executive’s beneficiary to receive a split of the insurance proceeds. This benefit provides
additional incentive for continued employment with the Company.
These benefits are provided to further incent longevity with the Company and also to provide an executive benefit package that is fully
competitive within our industry and market place. The costs of providing such benefits to all eligible employees are not considered
when determining specific salaries of the Named Executives Officers and are seen as a worthwhile investment in employees that will
help keep the employee productive and engaged.
Perquisites
The Company provides a Company-owned vehicle to several of the named executive officers, as their positions require travel offsite
frequently for Bank business. The provision of a Company vehicle to these individuals is viewed by the Board as a normal benefit in the
highly competitive financial services industry.
126
Country club memberships, the dues for which are paid by the Company, are provided to certain of our named executive officers and
used as a vehicle to attract, retain and expand customer relationships. They are viewed as an important resource for certain named
executive officers to further the business of the Bank.
Employment and Severance Arrangements
Other than as described below under the heading “Potential Payments Upon Termination or Change of Control,” none of the executive
officers or directors of the Company or the Bank is party to an individual employment contract or any other agreement with the
Company or the Bank containing severance and/or change in control arrangements with the Company or the Bank.
Inter-Relationship of Elements of Total Compensation
FNCB’s executive compensation philosophy and strategy is intended to be competitive in the marketplace and reward executives for
strong performance through multiple compensation vehicles and to not reward executives for weak performance. All of the components
are balanced, integrated, and designed to provide a total compensation environment which will enhance the executives’ relationship with
the Company and support the growth of overall shareholder value.
The various elements of the total compensation package are subtly interrelated based on a variety of factors. While there is not a direct
relationship between components, if in a given year the Board or Compensation Committee decides, for purposeful reasons, to
“overweight” one component of total compensation (as compared to the market) they may “underweight” another so that total
compensation remains competitive. The Company has not yet held its annual meeting for 2011, 2012 or 2013 and thus has not held or
considered the results of a shareholder advisory vote on executive compensation. The Company presently plans to hold an annual
meeting in 2013.
Equity Ownership Guidelines
We have no equity or security ownership requirements or guidelines for executive officers, however, all of the executive officers, except
those who joined the Bank since 2010 (other than Steven R. Tokach who is required to own shares of the Company as a director of the
Bank), own common stock or options to purchase common stock pursuant to our equity compensation plans. Pursuant to the Company’s
Bylaws, shareholders who submit proposals for inclusion in the Company’s proxy statement must disclose details regarding hedged
positions.
Risk Analysis of Incentive Compensation Programs
The Board of Directors evaluated the Company’s compensation policies and practices for its employees and concluded that our
compensation programs are appropriately structured to reward prudent risk taking, but do not encourage or promote inappropriate risk
taking and do not pose a material risk to the Company, and are not reasonably likely to have a material adverse effect on the Company.
127
EXECUTIVE COMPENSATION TABLES
The following table sets forth a comprehensive overview of the compensation for the Company’s named executive officers for 2012.
Summary Compensation Table
Salary
$
300,025
17,308
[4]
Stock
Awards
[1]
$
153
-
Change in pension
value and non-
qualified deferred
compensation
earnings [2]
$
-
-
All Other
Compensation
$
6,290
-
[3]
$
Total
306,468
17,308
$
173,267
148,000
132,239
$
153
-
-
$
476
456
-
$
1,516
91
341
[5]
[5]
[5]
$
175,412
148,547
132,580
$
120,260
165,000
45,692
[6]
[6]
-
$
-
-
-
$
-
-
$
66,317
819
15,000
$
230,463
223,500
216,300
$
153
-
-
$
3,766
3,607
-
$
76,877
11,339
7,421
[7]
[7]
[7]
[8]
[8]
[8]
$
186,577
165,819
60,692
$
311,259
238,446
223,721
Name and Principal Position
Steven R. Tokach, President
and Chief Executive
Officer of the Company
and the Bank
James M. Bone, Jr.,
Executive Vice President and
Chief Financial Officer of
the Company and the Bank
and former Chief Information
Officer of the Bank
Edward J. Lipkus, Executive
Vice President and Chief
Financial Officer of the
Company and the Bank
Gerard A. Champi, Chief
Operating Officer of the
Bank and former Interim
President and Chief
Executive Officer of the
Company and Bank
Year
2012
2011
2012
2011
2010
2012
2011
2010
2012
2011
2010
Joseph J. Earyes, First
2012
$
121,786
$
153
$
-
$
16,738
[9]
$
138,677
Senior Vice President and
Chief Administrative Officer
Lisa L. Kinney, Senior
2012
$
114,344
$
153
$
324
$
7,610
[10]
$
122,431
Vice President and Retail
Lending Officer
Sandra E. Laughlin,
Executive Vice President
and Chief Risk Officer
Robert J. Mancuso, First
Senior Vice President,
Chief Administrative Officer
2012
2011
2012
2011
2010
$
143,595
153,577
[11]
[11]
$
-
-
$
-
-
$
-
10,000
[12]
$
143,595
163,577
[13]
$
147,161
145,388
132,354
-
$
-
-
$
3,766
3,273
-
$
51,521
2,500
4,201
[14]
[14]
[14]
$
202,448
151,161
136,555
[1] The amounts listed represent the fair market value of the shares awarded on December 17, 2012, the date of the grant.
[2] The amounts listed represent the sum of the change in actuarial present value of the officer’s benefit under the plan from the 2011
measurement date to the 2012 measurement date and interest earned on the balances in the named executive officers non-qualified
deferred compensation plan accounts at rates that exceed 120% of the applicable federal long-term rate.
[3] For Mr. Tokach, for 2012 this amount represents country club dues in the amount of $3,075 and an automobile allowance in the
amount of $3,215.
[4] For Mr. Tokach, this amount represents the portion of his base salary earned from December 5, 2011, when he started with the
Company, until the end of the year.
[5] For Mr. Bone, this amount includes an employer match to the Bank’s 401(k) Profit Sharing Plan earned and accrued in the amounts
of $1,417, $0 and $0, premiums paid to purchase split-dollar life insurance in the amounts of $99, $91, and $86, and premiums paid to
purchase disability income insurance in the amounts of $0, $0, and $255, in each case, for 2012, 2011 and 2010, respectively.
128
[6] For Mr. Lipkus, for 2012 this amount represents the portion of his base salary through his termination date of August 31, 2012; for
2010 this amount represents the portion of his base salary earned from September 16, 2010, when he started with the Company, until the
end of the year.
[7] For Mr. Lipkus, for 2012 this amount includes severance payments of $50,769 and vacation payout of $15,548; for 2011, this amount
includes country club dues in the amount of $819; and for 2010 this amount includes $15,000 of relocation expenses.
[8] For Mr. Champi, includes contributions to the Bank’s 401(k) Profit Sharing Plan earned and accrued in the amounts of $1,417, $0
and $0, country club dues in the amounts of $12,430, $8,553 and $4,279, an automobile allowance of $2,750, $2,687, and $2,680,
premiums paid to purchase split-dollar life insurance in the amounts of $108, $99, and $91, and premiums paid to purchase disability
income insurance in the amounts of $0, $0, and $371, and a vacation payout in the amount of $60,172, $0, and $0 in each case, for 2012,
2011 and 2010, respectively.
[9] For Mr. Earyes, includes country club dues in the amount of $5,079, an automobile allowance in the amount of $2,313 and vacation
payout in the amount of $9,346 for 2012.
[10] For Ms. Kinney, includes an automobile allowance in the amount of $2,110 and a vacation payout in the amount of $5,500 for
2012.
[11] For Ms. Laughlin, for 2012, this amount represents the portion of her base salary through her termination date of October 26, 2012;
for 2011, this amount represents the portion of her base salary earned from January 20, 2011, when she started with the Company, until
the end of the year.
[12] For Ms. Laughlin, this amount represents $10,000 of relocation expenses.
[13] For Mr. Mancuso, for 2012, this amount represents the portion of his base salary through his termination date of December 17,
2012.
[14] For Mr. Mancuso, includes contributions to the Bank’s 401(k) Profit Sharing Plan earned and accrued in the amounts of $906, $0,
and $0, country club dues in the amounts of $0, $2,161, and $2,997, an automobile allowance of $0, $204, and $842, premiums paid to
purchase split-dollar life insurance in the amounts of $144, $135, and $127, premiums paid to purchase disability income insurance in
the amounts of $0, $0, and $235, and a vacation payout in the amounts of $50,471, $0 and $0 in each case, for 2012, 2011 and 2010,
respectively.
As reflected in the table above, in keeping with the compensation philosophy to provide executives with a balanced mix of
compensation components and to enable the Company to attract, retain and motivate key executives, base and bonus compensation
components were realigned during 2010. The Company’s compensation philosophy is to provide for base compensation levels that are
in line with the market together with a more conservative bonus opportunity also in alignment with the market. Where appropriate, base
salaries were increased to reflect market-competitive compensation levels and to recognize increased responsibilities and expectations.
As the Company’s performance did not warrant bonus payment with respect to 2012, 2011 or 2010, none were made. The Company
did, however, make one-time grants of 50 common shares of the Company pursuant to the 2012 Grant Plan (described below) to each
eligible employee, including executive officers in order to align the employees’ interest with the long-term financial interest of the
Company. A structured executive incentive compensation program that provides for market-competitive bonus awards for achievement
of defined corporate performance goals is under development for utilization in 2013 and future years, including the adoption of the SIP,
CIP and EIP and upon approval of the shareholders, the LTIP, each as described in this Item 11 under the heading “Compensation
Components.”
Grants of Plan-Based Awards
The Company’s equity compensation plans include the 2000 Independent Directors Stock Option Plan and the 2000 Stock Incentive
Plan which were approved by shareholders on May 16, 2001. Both of the Company Stock Plans expired on August 30, 2010. No stock
options were awarded in under either of the Company Stock Plans in 2011 or 2012.
On November 28, 2012, the Board of Directors adopted the 2012 Grant Plan pursuant to which the Board of Directors granted 50 shares
to each eligible employee of the Company, including executive officers, as described in this Item 11 under the heading “Compensation
Components.”
129
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth, on an award by award basis, information concerning all awards of stock options held by named executive
officers at December 31, 2012. All options were granted with an exercise or base price of 100% of market value as determined in
accordance with the applicable plan. The number of shares subject to each award as well as the exercise and/or base price has been
adjusted to reflect all stock dividends and stock splits effected after the date of such award but have not otherwise been modified.
Outstanding Equity Awards at Fiscal Year End
Option Awards
December 31, 2012
Number of Securities
Underlying Unexercised
Options Exercisable
Number of Securities
Underlying Unexercised
Options Unexercisable
Option Exercise Price
Option Expiration Date
-
4,125
1,375
1,650
1,650
2,500
4,000
-
5,500
1,925
2,337
2,337
3,500
5,600
-
687
687
1000
1600
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
10.01
16.71
19.31
23.13
16.90
10.81
-
$
10.01
16.71
19.31
23.13
16.90
10.81
-
$
19.31
23.13
16.90
10.81
-
-
-
11/26/2013
11/24/2014
11/23/2015
11/29/2016
11/13/2017
1/5/2019
-
11/26/2013
11/24/2014
11/23/2015
11/29/2016
11/13/2017
1/5/2019
-
11/23/2015
11/29/2016
11/13/2017
1/5/2019
-
-
Name
Steven R. Tokach
James M. Bone, Jr.
Edward J. Lipkus
Gerard A. Champi
Joseph J. Earyes
Lisa Kinney
Sandra E. Laughlin
Robert J. Mancuso
Options Exercised and Stock Vested
None of the named executive officers exercised any options during 2012. No awards other than stock options were outstanding under
the Company’s Stock Plans at December 31, 2012. The following table provides information as of and for the year ended December 31,
2012 for the named executive officers regarding their participation in the Officers’ Deferred Compensation Plan.
Non-Qualified Deferred Compensation Table
December 31, 2012
Name
Steven R. Tokach
James M. Bone, Jr.
Edward J. Lipkus
Gerard A. Champi
Joseph J. Earyes
Lisa Kinney
Sandra E. Laughlin
Robert J. Mancuso
Executive
Contributions
in Last FY
-
$
-
-
-
-
-
-
-
Registrant
Contributions
in Last FY
-
$
-
-
-
-
-
-
-
Aggregate
Earnings
in Last FY
-
$
476
-
3,766
-
324
-
3,766
Aggregate
Withdrawals/
Distributions
-
$
-
-
-
-
-
-
-
Aggregate
Balance at
Last FYE
$
-
42,092
-
332,909
-
28,636
-
302,056
The aggregate earnings listed in this table are included in the non-qualified deferred compensation earnings column of the Summary
Compensation Table. For a discussion of the types of compensation permitted to be deferred (and any limitations), the measures for
calculating interest and the material terms with respect to payouts, withdrawals and other distributions, see the above discussion under
the heading “Compensation Components—Deferred Compensation Plan.”
130
Potential Payments upon Termination or Change of Control
Directors’ and Officers’ Deferred Compensation Plan
The named executive officers and all other participants are vested in their account balance in the deferred compensation plan. As such,
upon ceasing to serve as an officer of the Bank for any reason whatsoever, voluntary or involuntary, including involuntary termination
for cause, termination on a change of control, voluntary termination, early retirement or by reason of death or disability, the amount of
the Deferred Compensation Plan account balance of such named executive officer will be payable pursuant to the terms of the Deferred
Compensation Plan. Amounts payable under the Deferred Compensation Plan are unsecured, unfunded, obligations of the Bank.
Information regarding amounts to which named executives would be entitled under any such termination scenario, in the event of a
termination as of December 31, 2012, are set forth in the table below. See the narrative detail above under “Compensation Disclosure
and Analysis — Deferred Compensation Plan Information” for additional information on the timing of such payments, which are subject
in part to an election by such officer, and the age and length of such officer’s service with the Bank.
In December 2012, Mr. Mancuso notified the Board of Directors that he was resigning from the Company and the Bank, effective
December 21, 2012. At this time, Mr. Mancuso had deferred $302,056 under the Deferred Compensation Plan which becomes payable,
with interest at the applicable plan rate, starting the month after he reaches the age of 60 in June 2017.
Deferred Compensation upon Severance
December 31, 2012
Name
Steven R. Tokach
Gerard A. Champi
James M. Bone Jr.
Joseph J. Earyes
Lisa Kinney
Amount Payable Upon
Termination Event (1)
-
$
332,909
42,092
-
28,636
(1) Represents the amount payable to the indicated named executive officer under the Deferred Compensation Plan upon the following
triggering events, assuming that such event occurred as of December 31, 2012: Voluntary Termination; Early Retirement; Normal
Retirement, Involuntary Termination — Not for Cause; Involuntary Termination - For Cause; Involuntary Termination - For Good
Reason (Change in Control); Disability; Death. Participants may elect to have their account paid commencing at the time prescribed
by the Plan, in equal annual payments beginning with five (5) years and increasing in five (5) year increments up to thirty (30)
years. Participants may also elect equal monthly payments which correspond to the annual yearly schedule.
Company Stock Plans
Options issued under the Company Stock Option Plans are subject to accelerated vesting and remain exercisable upon or in connection
with the occurrence of certain change of control events. In addition, any such stock option awards may remain exercisable for up to
three months (or longer in the case of death or disability) upon the termination of any of our named executive officers’ employment for
any reason. As of February 28, 2013 based on the closing market price of $3.45 per share, the exercise price of all options held by
executive officers is greater than the current market price per share. Therefore, we do not expect that the options would be exercised
upon a change in control or termination of employment.
The foregoing narrative regarding payments on a change in control or other termination of employment does not reflect payments that
would be provided to each named executive officer under the 401(k) Profit Sharing Plan following termination of employment, or under
the Company’s disability or life insurance plan in the event of death or disability, as applicable, on the last business day of the fiscal year
ended December 31, 2012 because these plans are generally available to all regular employees similarly situated in age, years of service
and date of hire and do not discriminate in favor of executive officers.
131
Director Compensation
The following table sets forth information regarding compensation paid to, or earned by, non-employee directors of the Company during
the fiscal year ended December 31, 2012 for service as members of the Company and Bank Boards of Directors.
DIRECTOR COMPENSATION TABLE
Director Compensation
December 31, 2012
Name
Michael J. Cestone
Joseph Coccia
Dominick L. DeNaples
Louis A. DeNaples, Jr.
Joseph J. Gentile
Thomas J. Melone
John P. Moses
Steven R. Tokach [2]
[1]
Fees Earned or
Paid in Cash
$
40,000
30,000
30,000
30,000
30,000
30,000
30,000
-
Stock
Awards
$
-
-
-
-
-
-
-
-
Option
Awards
$
-
-
-
-
-
-
-
-
Change in Pension
value and Non-
Qualified Deferred
Compensation
Earnings
$
-
-
-
-
-
-
4,386
-
All Other
Compensation
$
-
-
-
-
-
-
-
-
Total
$
40,000
30,000
30,000
30,000
30,000
30,000
34,386
-
[1] Includes a $30,000 director’s fee and $10,000 for service as Secretary of the Board of Directors.
[2] Mr. Tokach does not receive compensation as a member of the Board of Directors.
Directors received no remuneration for attendance at the Company’s board meetings. All nonemployee members of the Bank’s Board of
Directors receive an annual retainer of $30,000, payable at a rate of $2,500 per month, for each month or portion thereof that the director
serves as a director of the Bank. The aggregate amount of director fees paid in 2012 was $210 thousand. In 2012, Michael J.
Cestone, Jr. was compensated $10,000 for special services (Secretary of the Board of Directors) rendered to the Bank. Members of
committees of the Board of Directors of the Company or the Bank, as applicable, do not receive fees for attending meetings of those
committees.
Directors serving on the Board of the Bank are entitled to participate in the Bank’s Deferred Compensation Plan. Under the Deferred
Compensation Plan, directors may voluntarily defer up to 50% of the director fees paid to them for service on the Board of Directors of
the Bank. Prior to December 31, 2010, the Bank paid interest on deferred amounts on December 31 of each year at a rate equal to 200%
of the one-year Treasury Bill rate in effect not more than thirty (30) days nor less fifteen (15) days prior to the plan year to which the
rates apply, but in no case less than 8% (the rate determined as described, the “Plan Rate”). For all participants who have been in the
Plan for over five years there also was an enhanced interest rate 1% greater than Plan Rate, beginning with the sixth year of participation
in the Deferred Compensation Plan. An account for each participant is maintained and credited with deferred compensation on the date
such compensation would have been paid to a participant had no election to defer been made. The Deferred Compensation Plan was
amended on December 29, 2010 to provide for the interest rate to be determined each year based on the sum of 1% plus the average of
the one-year U.S. Treasury Bill rates in effect on and between December 1 and December 15 of the Plan Year to which it applies, with
no minimum rate. The amendment applied to accounts for December 31, 2010 and future interest crediting. For additional information
regarding the Deferred Compensation Plan, please refer to Executive Compensation — Compensation Disclosure and Analysis -
Deferred Compensation Plan.”
Directors’ Stock Plan
Directors who were not employees or officers of the Company were eligible to be granted options to purchase stock of the Company
under the Directors’ Stock Plan. No awards were made under the Director’s Stock Plan during 2012 and there were no awards
outstanding thereunder at December 31, 2012. The Director’s Stock Plan expired during 2010, and no additional awards may be made
thereunder.
Compensation Committee Interlocks and Insider Participation
In 2010 the Company established a Compensation Committee and Louis A. DeNaples, Jr., Joseph J. Gentile, Thomas J. Melone and
John P. Moses currently serve as its members. Certain employees of the Company, as discussed under the heading “Role of
Management,” participated in the deliberations of the Board concerning executive officer compensation. No executive officer of the
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Company served as a director or a member of the compensation committee of another company, one of whose executive officers serves
as a member of the Company’s Board of Directors or participates in the Company’s compensation decisions.
Compensation Committee Report
The following report is not deemed to be “filed” with the SEC or subject to the liabilities of Section 18 of the Exchange Act, and the
report shall not be deemed to be incorporated by reference into any prior or subsequent filing by the Company under the Securities Act
of 1933, as amended (the “Securities Act”), or the Exchange Act. The Compensation Committee of the Company’s Board of Directors
(collectively, the “Committee”) has submitted the following report for inclusion in this Annual Report on Form 10-K:
Our Committee has reviewed and discussed with management the Compensation Discussion and Analysis contained in this Annual
Report on Form 10-K. Based on our Committee’s review of and the discussions with management with respect to the Compensation
Discussion and Analysis, our Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be
included in this Annual Report on Form 10-K for filing with the SEC.
The foregoing report is provided by the following directors, who constitute the Compensation Committee as of February 28, 2013:
Louis A. DeNaples, Jr.
Joseph J. Gentile
Thomas J. Melone
John P. Moses
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Equity Compensation Plan Information
The equity compensation plans approved by our shareholders expired on August 30, 2010, and as such, no new grants of awards have
been or will be made pursuant to these plans. Options, however, can be exercised up to ten years following their date of grant;
accordingly, exercisable options remain outstanding. For more information regarding the 2013 Long-Term Incentive Plan, see Item 11,
“Executive Compensation.”
On November 28, 2012, the Board of Directors adopted the 2012 Employee Stock Grant Plan (the “2012 Grant Plan”), pursuant to
which the Board authorized the grant of up to 16,000 common shares in order to make one-time grants of 50 common shares (plus a one-
time payment of $25 to partially offset such employee’s 2012 tax obligations in connection with the grant) to each active full and part-
time employee of the Company, including executive officers.
The following table summarizes our equity compensation plan information as of December 31, 2012. Information is included for both
equity compensation plans approved by First National Community Bancorp, Inc. shareholders and equity compensation plans not
approved by First National Community Bancorp, Inc. shareholders.
Equity Compensation Plan Information
December 31, 2012
Number of Securities to be
Issued upon Exercise of
Outstanding Options, Warrants,
and Rights (1) (2)
(a)
Weighted Average
Exercise Price of
Outstanding Options,
Warrants, and Rights (1)
(2)
(b)
Number of Securities
Remainging Available for
Future Issuance Under Equity
Compensation Plans (Excluding
Securities in Column (a)) (2)
(c)
129,170
$
14.26
-
129,170
$
-
14.26
-
950
950
Plan Category
Equity compensation plans approved by
First National Community Bancorp, Inc. shareholders
Equity compensation plans not approved by
First National Community Bancorp, Inc. shareholders (3)
Total
(1) The number of shares to be issued upon exercise of outstanding options and the weighted average exercise price includes any
options that become exercisable within sixty (60) days after December 31, 2012.
133
(2) The Company’s equity compensation plans include the 2000 Independent Directors Stock Option Plan and the 2000 Employee
Stock Incentive Plan which were approved by shareholders on May 16, 2001. All share and per share information has been adjusted to
reflect prior stock dividends paid.
(3) On December 17, 2012, 15,050 common shares were issued under the 2012 Grant Plan. Recipients of grants made pursuant to the
2012 Grant Plan may not sell the shares granted under the Plan until after January 1, 2014. The Board of Directors authorized the grant
of up to 16,000 common shares, but the Company does not intend to issue any additional shares pursuant to the 2012 Grant Plan.
Securities Ownership of Directors, Nominees, Officers and Certain Beneficial Owners(1)
The following table sets forth certain information concerning the number and percentage of whole shares of the Company’s common
stock beneficially owned by its directors and executive officers whose compensation is disclosed in this Annual Report on Form 10-K,
its principal shareholders and by its directors, its principal shareholders and all executive officers as a group, as of February 28, 2013.
Except as otherwise indicated, all shares are owned directly, the named person possesses sole voting and sole investment power with
respect to all such shares, and none of such shares are pledged as security and the address of each of the beneficial owners identified is
102 E. Drinker Street, Dunmore, PA 18512. Except as set forth below, the Company knows of no other person or persons who
beneficially own in excess of five percent of the Company’s common stock. Further, the Company is not aware of any arrangement
which at a subsequent date may result in a change of control of the Company.
134
Name
Michael J. Cestone, Jr. (1)
Joseph Coccia (2)
Dominick L. DeNaples (3)
Louis A. DeNaples (4)
Louis A. DeNaples, Jr. (5)
Joseph J. Gentile (6)
Thomas J. Melone
John P. Moses (7)
Steven R. Tokach
James M. Bone, Jr. (8)
Edward J. Lipkus
Gerard A. Champi (9)
Joseph J. Earyes (10)
Lisa L. Kinney (11)
Sandra E. Laughlin
Robert J. Mancuso (12)
Position
Director of the Company and Bank;
Secretary of the Board of Directors
Director of the Company and Bank
Director, Chairman of the Boards of the
Company and Bank
Shareholder and Director of the Bank;
Former Chairman of the Boards of the
Company and the Bank
Director of the Company and Bank
Director of the Company and Bank
Director of the Company and Bank
Director of the Company and Bank
Director of Company and Bank;
President and Chief Executive Officer of
the Company and Bank
Executive Vice President and Chief
Financial Officer of the Company and
Bank
Former Executive Vice President and
Chief Financial Officer of the Company
and Bank
Chief Operating Officer of the Bank;
Former Interim President and Chief
Executive Officer of the Company and
Bank
First Senior Vice President and Chief
Retail Banking and Operations Officer
of the Bank
Senior Vice President and Retail
Lending Officer of the Bank
Former Executive Vice President and
Chief Risk Officer of the Bank
Former First Senior Vice President and
Chief Administrative Officer of the
Number of Shares
206,716
Percentage (11)
1.26%
181,820
44,824
1,620,600
79,736
444,794
800
84,877
850
22,057
-
27,536
2,991
4,193
-
69,862
1.10%
*
9.85%
*
2.70%
*
*
*
*
*
*
*
*
*
*
All current directors and executive
officers as a group (13 persons) (13)
2,721,794
16.54%
Total outstanding
Options
Total outstanding including all options
exercisable within 60 days
16,457,169
129,170
16,586,339
*Indicates ownership of less than 1%.
(1) Includes 37,047 held individually by Mr. Cestone, 4,918 jointly held with Mr. Cestone’s spouse, 44,495 shares held for the benefit of
Mr. Cestone’s spouse, 120,256 shares held by a family partnership.
(2) Includes 9,075 shares held individually by Mr. Coccia and 172,745 held by a limited family partnership.
(3) Includes 42,385 owned jointly with Mr. DeNaples’s spouse and 2,439 shares held by a business in which he is a 33.33% owner with
his brother, Louis A. DeNaples. Effective May 17, 2012, Dominick L. DeNaples and his spouse transferred 1,191,540 shares to their
135
children, reducing the shares they own jointly to 283,134. Effective September 13, 2012, Dominick DeNaples acquired 11,294 shares
co-owned with one of his children. Mr. DeNaples’s ownership interests in these 11,294 shares were transferred to one of his children on
December 17, 2012. Effective December 17, 2012, Dominick L. DeNaples and his spouse transferred 238,310 shares to one of their
children, reducing the shares jointly held with Mr. DeNaples’s spouse to 42,385.
(4) Includes 1,604,145 shares held individually by Louis A. DeNaples, 14,016 owned individually by his spouse and 2,439 shares held
by a business in which he is a 33.33% owner with his brother, Dominick L. DeNaples. Effective December 21, 2012, Louis A.
DeNaples transferred 26,640 to his children (of which 1,639 shares are co-owned by his son, Louis A. DeNaples, Jr. who is also a
director) and transferred custodial responsibility for 1,275 shares held in trust for his grandchild to his son Louis A. DeNaples, Jr. (who
is also a Director).
(5) Includes 53,244 shares held individually, 25,217 co-owned with Louis A. DeNaples, Jr.’s children and 1,275 shares held for the
benefit of a minor nephew. Louis A. DeNaples. Jr. acquired 33,885 shares on September 13, 2012 and assumed custodial responsibility
for 1,275 shares held in trust for his nephew on December 21, 2012. Louis A. DeNaples, Jr. is the son of Louis A. DeNaples, and the
nephew of Dominick L. DeNaples.
(6) Includes 342,621 shares held individually, 1,705 shares held for his benefit, 99,209 shares held individually by Mr. Gentile’s spouse,
and 1,259 shares held for the benefit of his spouse.
(7) Includes 2,673 shares held individually and 82,204 shares held jointly with Mr. Moses’ spouse.
(8) Includes 2,142 shares jointly held with Mr. Bone’s spouse, 50 shares held individually, 249 shares held for the benefit of minor
children, 4,316 shares co-owned with Mr. Bone’s father and three of his siblings, and exercisable options to purchase 15,300 shares.
(9) Includes 1,745 shares held by Mr. Champi, 2,857 shares jointly held with Mr. Champi’s spouse, 1,735 shares held for the benefit of a
minor, and presently exercisable options to purchase 21,199 shares.
(10) Includes 50 shares owned individually, 1,941 shares held in an individual retirement account and 1,000 shares held in an
irrevocable family trust , of which Mr. Earyes is the sole trustee and also a beneficiary along with two other siblings.
(11) Includes 50 shares owned individually, 169 shares held for the benefit of minor children and exercisable options to purchase 3,974
shares.
(12) Includes 59,237 shares jointly held with Mr. Mancuso’s spouse, 50 shares held individually and 10,575 shares co-owned with
Mr. Mancuso’s children.
(13) Represents percentage of 16,457,169 shares issued and outstanding as of February 28, 2013, except with respect to individuals
holding options exercisable within 60 days of that date, in which event, represents percentage of shares issued and outstanding plus the
number of shares for which that person holds options exercisable within 60 days of February 28, 2013, and except with respect to all
directors and executive officers of the Company as a group, in which case represents percentage of shares issued and outstanding plus
the number of shares for which those persons hold such options. Certain shares beneficially owned by the Company’s directors and
executive officers may be held in accounts with third-party firms, where such shares may from time to time be subject to a security
interest for margin credit provided in accordance with such firm’s policies.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The Company and the Bank have engaged in and intend to continue to engage in banking and financial transactions in the ordinary
course of business with directors and officers of the Company and the Bank and their affiliates on comparable terms and with similar
interest rates as those prevailing from time to time for other Bank customers not related to the Bank. Our Code applies to all directors,
officers and employees of the Company and provides guidelines for those covered persons who may have a potential or apparent conflict
of interest. Pursuant to the Code, a “conflict of interest” exists any time a covered person’s private interest interferes/conflicts, or even
appears to interfere/conflict, in any way with the interests of the Company. If a conflict of interest arises, it is important to act with great
care to avoid even the appearance that any actions were not in the best interest of the Company. The Code requires that if a covered
person finds himself or herself in a position where his or her objectivity may be questioned because of individual interest or family or
personal relationships that the person immediately notify the Company’s Compliance Officer.
Board of Directors approval is required for the Company to do business with a company in which a member of the Board of Directors,
an officer, an employee or a family member of a director, officer or employee owns, directly or indirectly, an interest. To identify
related party transactions, each year, we submit and require our directors and officers to complete Director and Officer Questionnaires
136
identifying any transaction with the Company or any of its subsidiaries in which the officer or director or their family members have an
interest. The Board of Directors reviews related party transactions due to the potential for a conflict of interest. Each year, our directors
and executive officers also review our Code.
Additionally, the Company has further obligations for the review and approval of loans that are made to directors and officers pursuant
to Regulation O (Loans to Executive Officers, Directors and Principal Shareholders of Member Banks) and the Company’s written Loan
Policy. Any business dealing, including extensions of credit, between the Company or the Bank and a director or officer of the
Company or the Bank, or with an affiliate of a director or officer, other than a deposit, trust service or other product or service provided
by a bank in the ordinary course of business, is required to be approved by a majority of disinterested directors. In considering a
proposed insider transaction, the disinterested directors are to reasonably determine whether the transaction would be in the best interest
of the Company or the Bank and on the terms and conditions, including price, substantially, the same as those prevailing at the time for
comparable transactions with non-insiders. The responsibility for monitoring compliance with Regulation O rests with the Bank’s
Credit Administration Unit and Internal Auditor as required by the Bank’s Loan Policy.
There have been no loan transactions originated during 2012 which were required to be reported under this Item 13 where such policy
and procedures were not followed. Except for those loans described in more detail below, loans to directors, executive officers and their
related parties (i) were made in the ordinary course of business, (ii) were made on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions with other persons not related to the Company or Bank and
(iii) did not involve more than the normal risk of collection or present other unfavorable features. Each of these transactions was made
in compliance with applicable law, including the Securities and Exchange Act of 1934 and the Federal Reserve Board Regulation O.
The Bank extended a line of credit (“line”) to a corporation wholly owned by Joseph Coccia, a director of the Company. The total
aggregate outstanding amount of this line as of December 31, 2012 was $8.0 million. Mr. Coccia has a participation agreement with the
Bank to purchase up to a maximum of a $5.2 million interest in this line from the Bank. The Bank does not have participation
agreements with any other similarly situated borrowers. This line bears interest at a rate of 4.75%. The largest aggregate outstanding
amount of principal outstanding under this line during 2012 was $8.5 million. Under the line, $41.2 million was advanced and $40.7
million in principal and $329 thousand in interest was paid during 2012. The total amount paid by the Bank to Mr. Coccia with respect
to his participation in this line during 2012 was $151 thousand. The Bank receives a 25 basis point annual servicing fee from
Mr. Coccia on the participation balance. This credit is performing in accordance with the terms of the agreement.
The Bank extended three (3) loans to an entity which were guaranteed by several individuals, including Michael Conahan and Michael
G. Cestone, both former directors of the Company. Mr. Cestone is the son of current Director Michael J. Cestone, Jr. The total
aggregate outstanding amount of these loans as of December 31, 2012 was $3.4 million. These loans bear interest at a rate of 4.25%. In
2012, the total amount of principal paid was $17 thousand and the total amount of interest paid was $11 thousand. The largest aggregate
amount of principal outstanding under these loans during 2012 was $3.4 million. As of March 15, 2013 the aggregate amount of
principal outstanding on these loans was $3.4 million.
The Bank extended loans to a limited liability company wholly owned by the daughter and son-in-law of Dominick DeNaples, a director
of the Company. As of December 31, 2012, these loans were paid in full. During 2012, the total amount of principal paid was $244
thousand and the total amount of interest paid was $11 thousand.
The Bank extended various loans to the brother-in-law of Jerry A. Champi, an executive officer of the Company and entities owned by
the same brother-in-law of Mr. Champi. The total aggregate outstanding amount of these loans as of December 31, 2012 was $198
thousand. These loans bear interest at rates ranging from 4.50%. In 2012, the total amount of principal paid was $2 thousand and the
total amount of interest paid was $5 thousand. The largest aggregate amount of principal outstanding under these loans during 2012 was
$200 thousand. As of March 28, 2013, the aggregate amount of principal outstanding on these loans was $198 thousand.
Subordinated notes held by officers and directors and/or their related parties totaled $10 million at December 31, 2012 and 2011.
Pursuant to the November 24, 2010 written Agreement (the “Agreement”) with the Federal Reserve Bank of Philadelphia (the “Reserve
Bank”) that the Company entered into, 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. Accordingly, no interest was paid to officers and directors and/or their related parties on these notes during the
years ended December 31, 2012 and 2011. Interest paid to officers and directors and/or their related parties totaled $685 thousand for the
year ended December 31, 2010. Interest accrued and unpaid on subordinated notes held by directors and/or their related parties totaled
$2.1 million and $1.2 million at December 31, 2012 and 2011, respectively.
During 2012, the Company sold its interest in buildings lots that it had held in OREO, to an entity owned by the son of Dominick L.
DeNaples, a director of the Company. The total consideration was $202 thousand, which was consistent with the market value of the
lots at the time of sale. The transaction was conducted within the normal course of business and on the terms and conditions, including
price, the same as those prevailing at the time for comparable transaction with non-insiders.
137
Certain Business Relationships
In the course of its operations, the Company acquires goods and services from and transacts business with various companies of related
parties. The Company believes these transactions were made on the same terms as those for comparable transactions. The Company
recorded aggregate payments for these services of $1.6 million, $1.8 million, and $1.1 million in 2012, 2011, and 2010, respectively.
None of these transactions exceeded $120 thousand, except as described below.
Louis A. DeNaples’ son-in-law is a principal owner of an insurance agency that provides services for the Company. In 2012, the total
amount paid by the Company for the services was approximately $576 thousand and represents premiums paid for insurance coverage.
Mr. DeNaples son-in-law acts as an agent and derives a commission on the placement of insurance coverage. These services were
awarded based on the results of a competitive bidding process.
Dominick L. DeNaples’ son is an attorney at a law firm that provides legal services to the Company. In 2012, the total amount paid by
the Company for these services was approximately $406 thousand. Mr. DeNaples’ son does not receive any direct payment for these
services. Additionally, he is not a partner in this firm and therefore, does not derive any interest in the law firm’s profit from these
payments.
For a discussion of director independence see “Item 10—Director Independence.”
Item 14. Principal Accounting Fees and Services.
Fees Paid to Independent Accounting Firm
We retained McGladrey LLP (“McGladrey”) to audit our consolidated financial statements for the years ended December 31, 2012,
2011 and 2010.
Audit Fees
The aggregate amount of fees billed or expected to be billed to the Company by McGladrey for services rendered for the audit of the
Company’s annual financial statements and review of financial statements included in the Company’s reports on Form 10-Q and for
services normally provided in connection with statutory and regulatory filings for the years ended December 31, 2012 and 2011 were
$484,717 and $610,000, respectively.
Audit-Related Fees
McGladrey did not perform or bill the Company for any audit-related fees for the years ended December 31, 2012 and 2011.
Tax Fees
The Company did not use McGladrey for tax advice, compliance or planning services for the years ended December 31, 2012 or 2011.
All Other Fees
McGladrey did not bill the Company any amounts for other services for the years ended December 31, 2012 or 2011.
Pre-approval Policies
The Audit Committee has the responsibility to pre-approve certain audit, audit-related, tax and other services up to specified aggregate
fee levels for each service. In addition, the Audit Committee may delegate pre-approval authority to one or more of its members, who
must report, for information purposes only, any pre-approval decisions to the Audit Committee at its next scheduled meeting. The Audit
Committee pre-approved all audit, audit-related and tax services provided by McGladrey for the years ended December 31, 2012 and
2011.
None of the engagements of McGladrey to provide services other than audit services was made pursuant to the de minimis exception to
the pre-approval requirement contained in the rules of the Securities and Exchange Commission and the Company’s audit charter.
138
Item 15. Exhibits and Financial Statement Schedules
1.
Financial Statements
PART IV
The following financial statements are included by reference in Part II, Item 8 hereof:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition
Consolidated Statements of Operations
Consolidated Statements of Comprehensive (Loss) Income
Consolidated Statements of Changes in Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
139
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
Amended and Restated Articles of Incorporation dated May 19, 2010 — filed as Exhibit 3.1 to the
Company’s Current Report on Form 8-K on May 19, 2010, is hereby incorporated by reference.
EXHIBIT 3.2*
Amended and Restated Bylaws
EXHIBIT 4.1
EXHIBIT 4.2
EXHIBIT 10.1
EXHIBIT 10.2
EXHIBIT 10.3
EXHIBIT 10.4
EXHIBIT 10.5
EXHIBIT 10.6
EXHIBIT 10.7
EXHIBIT 10.8
EXHIBIT 10.9
Form of Common Stock Certificate — filed as Exhibit 4.1 to the Company’s Form 10-K for the year
ended December 31, 2009, as filed on March 16, 2010, is hereby incorporated by reference.
Form of Subordinated Note — filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K dated
August 28, 2009, is hereby incorporated by reference.
Dividend Reinvestment Plan — filed as Exhibit 99.1 to the Company’s Amended Registration
Statement on Form S-3 as filed on July 16, 2009, is hereby incorporated by reference.
Amended and Restated Declaration of Trust by and among Wilmington Trust Company, First National
Community Bancorp, Inc., William Lance, Stephen J. Kavulich and Robert J. Mancuso dated as of
December 14, 2006, filed as Exhibit 10.1 to the Company’s 8-K on December 19, 2006 is hereby
incorporated by reference.
Guarantee Agreement by and between First National Community Bancorp, Inc. and Wilmington Trust
Company, dated as of December 14, 2006, filed as Exhibit 10.4 to the Company’s Current Report on
Form 8-K on December 19, 2006, SEC file number 333-24121, is hereby incorporated by reference.
Indenture by and between First National Community Bancorp, Inc. and Wilmington Trust Company,
dated as of December 14, 2006, filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K on
December 19, 2006, SEC file number 333-24121, is hereby incorporated by reference.
Treasury Tax and Loan Demand Note by and between First National Community Bank and the Federal
Reserve Bank of Philadelphia dated as of July 17, 1996, — filed as Exhibit 10.5 to the Company’s
Form 10-K/A as filed on December 2, 2011, is hereby incorporated by reference.
Credit Facility by and between First National Community Bancorp, Inc. and Federal Home Loan Bank
of Pittsburgh, dated as of September 22, 1993, — filed as Exhibit 10.6 to the Company’s Form 10-K/A
as filed on December 2, 2011, is hereby incorporated by reference.
2000 Stock Incentive Plan-filed as Exhibit 10.2 to the Company’s Form 10-K for the year ended
December 31, 2004, SEC file number 333-24121, as filed on March 16, 2005, is hereby incorporated by
reference.
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, SEC file number 333-24121, as filed on March 16, 2005, is hereby
incorporated by reference.
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, as filed on March 16, 2005, is hereby incorporated by
reference.
EXHIBIT 10.10
Discretionary Cash Bonus Plan Description— filed as Exhibit 10.5 to the Company’s Form 10-K for the
year ended December 31, 2009, as filed on March 16, 2010, is hereby incorporated by reference.
140
EXHIBIT 10.11
EXHIBIT 10.12
EXHIBIT 10.13
Consent Order - filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K on September 7,
2010 is hereby incorporated by reference.
Agreement with Federal Reserve Bank of Philadelphia — filed as Exhibit 10.1 to the Company’s
Current Report on Form 8-K on December 1, 2010.
Professional Services Agreement dated April 5, 2010 by and between the Company and Eugene T.
Subol — filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K on April 5, 2010, is
hereby incorporated by reference.
EXHIBIT 10.14*
Executive Incentive Plan
EXHIBIT 10.15*
2012 Employee Stock Grant Plan
EXHIBIT 14
EXHIBIT 21
Code of Business Conducts and Ethics – filed as Exhibit 14 to the Company’s Form 10-K as filed on
April 6, 2012 is hereby incorporated by reference.
Subsidiaries— filed as Exhibit 21 to the Company’s Form 10-K for the year ended December 31, 2009,
as filed on March 16, 2010, is hereby incorporated by reference.
EXHIBIT 31.1*
Certification of Chief Executive Officer
EXHIBIT 31.2*
Certification of Chief Financial Officer
EXHIBIT 32**
Section 1350 Certification — Chief Executive Officer and Chief Financial Officer
EXHIBIT 101.INS
XBRL INSTANCE DOCUMENT
EXHIBIT 101.SCH
XBRL TAXONOMY EXTENSION SCHEMA
EXHIBIT 101.CAL
XBRL TAXONOMY EXTENSION CALCULATION LINKBASE
EXHIBIT 101.DEF
XBRL TAXONOMY EXTENSION DEFINITION LINKBASE
EXHIBIT 101.LAB
XBRL TAXONOMY EXTENSION LABEL LINKBASE
EXHIBIT 101.PRE
XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE
_____________________________
* Filed herewith
** Furnished herewith
141
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/ Steven R. Tokach
Steven R. Tokach
President and Chief Executive Officer
/s/ James M. Bone, Jr.
James M. Bone, Jr., CPA
Executive Vice President and Chief Financial Officer
Principal Financial Officer
/s/ Stephanie A. Westington
Stephanie A. Westington, CPA
Vice President and Controller
Principal Accounting Officer
Date: March 28, 2013
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:
/s/ Michael J. Cestone, Jr.
Michael J. Cestone, Jr.
March 28, 2013
Date
/s/ Joseph Coccia
Joseph Coccia
March 28, 2013
Date
/s/ Louis A. DeNaples, Jr.
Louis A. DeNaples, Jr.
March 28, 2013
Date
/s/ Dominick L. DeNaples
Dominick L. DeNaples
March 28, 2013
Date
/s/ Joseph J. Gentile
Joseph J. Gentile
March 28, 2013
Date
/s/ Thomas J. Melone
Thomas J. Melone
/s/ Steven R. Tokach
Steven R. Tokach
March 28, 2013
Date
March 28, 2013
Date
/s/ John P. Moses
John P. Moses
March 28, 2013
Date
142
EXHIBIT 3.2
AMENDED AND RESTATED
BY-LAWS
of
FIRST NATIONAL COMMUNITY BANCORP, INC.
(A Pennsylvania Business Corporation)
ARTICLE 1. MEETINGS OF SHAREHOLDERS
Section 1.01
Place of Meeting. Meetings of shareholders of the Corporation shall be held at such place, within the
Commonwealth of Pennsylvania or elsewhere, as may be fixed from time to time by the Board of Directors. If no place is so fixed for
a meeting, it shall be held at the Corporation’s then principal executive office.
Section 1.02
Annual Meeting. There shall be an annual meeting of shareholders that shall be held at such time and place
as the Board may determine, at which the shareholders shall elect directors and transact such other business as may properly be
brought before the meeting.
Section 1.03
Special Meetings. Special meetings of the shareholders may be called at any time by the Board of
Directors, the Executive Committee, the Chairman of the Board or the President. Business transacted at all special meetings shall be
confined to the objects stated in the call and matters germane thereto.
Section 1.04
Notice of Meetings. Except as provided in Section 1707 of the Pennsylvania Business Corporation Law of
1988, written notice of every meeting of shareholders shall be given in any manner permitted by law by or at the direction of the
Secretary or such other person as is authorized by the Board of Directors to each shareholder of record entitled to receipt thereof, at
least five days prior to the day named for the meeting, unless a greater period of notice is required by law in a particular case.
Section 1.05
Organization. At every meeting of the shareholders, the Chairman of the Board, or in his absence, the
President, or in their absence, a chairman chosen by the shareholders, shall act as chairman; and the Secretary, or in his absence, a
person appointed by the chairman, shall act as secretary.
Section 1.06
Voting. Except as otherwise specified herein or in the Articles of Incorporation or provided by law,
whenever any corporate action is to be taken by vote of shareholders, it shall be authorized by a majority of the votes cast, in person or
by proxy, at a duly organized meeting of shareholders by the holders of shares entitled to vote thereon.
Section 1.07
Notifications of Nominations and Proposed Business.
(a) Required Procedures. Subject to the rights of holders of any class or series of preferred shares, (a) nominations for
the election of directors, and (b) business to be brought before any shareholder meeting may be made or proposed by
or at the direction of the Chairman of the Board, the President or by the Board of Directors or a proxy committee
appointed by the Board of Directors, or by any shareholder entitled to vote in the election of directors generally.
However, any such shareholder may nominate one or more persons for election as directors at a meeting or propose
business to be brought before a meeting, only if such shareholder has given timely notice in proper written form of
intent to make such nomination or nominations or to propose such business. To be timely, a shareholder’s notice
must be received by the Corporation not less than 70 days nor more than 90 days prior to the first anniversary of the
previous year’s annual meeting (or, if the Company failed to hold an annual meeting the previous year or, in the case
of a special meeting, not earlier than the 90th day before such meeting and not later than the later of (i) the 70th day
prior to such meeting and (ii) the 10th day following the day on which notice of the meeting was mailed or public
announcement of the date of such meeting was made, whichever first occurs). To be in proper written form, a
shareholder’s notice to the Corporation shall set forth:
(i)
the name and address of the shareholder who intends to make the nominations or propose the business and,
as the case may be, of the person or persons to be nominated or of the business to be proposed;
a representation that the shareholder is a holder of record of shares of the Corporation entitled to vote at
such meeting and, if applicable, intends to appear in person or by proxy at the meeting to nominate the
person or persons specified in the notice or to make the proposal to the meeting;
(ii)
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(iii)
(iv)
(v)
(vi)
(vii)
a representation that the shareholder will notify the Corporation in writing of the number and class of
shares owned beneficially or of record by the shareholder and any Shareholder Associated Person as of the
close of business on the record date for the meeting promptly, and in no event later than 10 days, following
the later of the record date or the date notice of the record date is first publicly disclosed;
a description of all agreements, arrangements or understandings between the shareholder and each nominee
and any other person or persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the shareholder, or the business is to be proposed, and a representation that
the shareholder will notify the Corporation in writing of any such agreement, arrangement or understanding
in effect as of the close of business on the record date for the meeting promptly, and in no event later than
10 days, following the later of the record date or the date notice of the record date is first publicly
disclosed;
such other information regarding each nominee or each matter of business to be proposed by such
shareholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission had the nominee been nominated, or intended to be nominated, or the
matter been proposed, or intended to be proposed by the Board of Directors;
if applicable, the consent of each nominee to serve as a director of the Corporation if so elected; and
the information required by Section 1.08, and a representation that the shareholder will notify the
Corporation in writing of any changes in that information as of the close of business on the record date for
the meeting promptly, and in no event later than 10 days, following the later of the record date or the date
notice of the record date is first publicly disclosed.
(b) Effect of Failure to Comply. The chairman of the meeting shall refuse to acknowledge the nomination of any person
or the proposal of any business not made in compliance with the foregoing procedures.
Section 1.08
Disclosure by Shareholders of Hedged Positions.
(a) Required Disclosures. A notice submitted by a shareholder under Section 1.07 must describe in reasonable detail,
(ii)
(iii)
with respect to the shareholder and any Shareholder Associated Person:
(i)
any Derivative Instrument directly or indirectly beneficially owned by the shareholder or a Shareholder
Associated Person, or any other direct or indirect opportunity for the shareholder or Shareholder Associated
Person to profit or share in any profit derived from any increase or decrease in the value of shares of the
Corporation;
any interest in shares of the Corporation or Derivative Instruments held, directly or indirectly, by a general
or limited partnership in which the shareholder or Shareholder Associated Person is a general partner or,
directly or indirectly, beneficially owns an interest in a general partner; and
any hedging or other transaction or series of transactions that has been entered into by or on behalf of, or
any other agreement, arrangement or understanding (including, without limitation, any put, short position
or any borrowing or lending of shares) that has been made by or on behalf of, a shareholder or any
Shareholder Associated Person, the effect or intent of which is to mitigate loss to, or manage risk or benefit
of share price changes for, or to increase or decrease the voting power of, the shareholder or any
Shareholder Associated Person with respect to any share of the Corporation.
(b) Definitions. As used in Section 1.07 and this Section 1.08, the following terms have the meanings indicated:
“Derivative Instrument” means an option, warrant, convertible security, stock appreciation right, or other right with an
exercise or conversion privilege or a settlement payment or mechanism at a price related to the value of any class or series of shares of
the Corporation or with a value derived in whole or in part from the value of any class or series of shares of the Corporation, whether
or not such instrument or right is subject to settlement in the underlying class or series of shares of the Corporation or otherwise.
“Shareholder Associated Person” of a shareholder means (i) any person controlling, controlled by, under common control
with, or acting in concert with, the shareholder, (ii) any beneficial owner of shares of the Corporation owned of record or beneficially
by the shareholder, (iii) any entity of which the shareholder is an employee, officer, member, partner, trustee, director or, except for
entities the shares of which are registered under the Securities Exchange Act of 1934, a shareholder, and (iv) any person controlling,
controlled by or under common control with, the Shareholder Associated Person.
Section 1.09
Determination of Shareholders of Record.
(a) Record Date for Meetings. The Board of Directors may fix a time prior to the date of any meeting of shareholders
as a record date for the determination of the shareholders entitled to notice of, or to vote at, the meeting, which time,
except in the case of an adjourned meeting, shall be not more than 90 days prior to the date of the meeting of
shareholders. Only shareholders of record on the date fixed shall be so entitled notwithstanding any transfer of
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shares on the books of the Corporation after any record date fixed as provided in this subsection. When a
determination of shareholders of record has been made as provided in this subsection for purposes of a meeting, the
determination shall apply to any adjournment thereof unless the Board of Directors fixes a new record date for the
adjourned meeting.
(b) Fixing Record Date for Purpose of Distributions. The Board of Directors of the Corporation may fix a time prior to
the date of payment of a distribution as a record date for the determination of the shareholders entitled to be paid the
distribution, which time shall be not more than 90 days prior to the date of payment. Only shareholders of record on
the date fixed shall be so entitled notwithstanding any transfer of shares on the books of the Corporation after any
record date fixed as provided in this subsection.
(c) Record Date for Action by Written Consent. Before a shareholder may seek to have the shareholders authorize or
take corporate action by written consent without a meeting, the shareholder must, by written notice to the Secretary
of the Corporation, request the Board of Directors to fix a record date for such consent. The request must include a
brief description of the action proposed to be taken. The Board of Directors shall, within twenty days after the date
on which such request is received, adopt a resolution fixing the record date. The record date shall not precede the
date upon which the resolution fixing the record date is adopted by the Board of Directors, and shall not be more
than twenty days after the date on which the resolution fixing the record date is adopted by the Board of Directors.
(d) Fixing Record Date for Other Purposes. The Board of Directors of the Corporation may fix a time prior to an event
or action other than a meeting of shareholders or payment of a distribution as a record date for the determination of
shareholders with respect thereto, which time shall be not more than 90 days prior to the date of the event or action.
(e) Determination When a Record Date is Not Fixed. If a record date is not fixed:
(i)
(ii)
The record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders
shall be at the close of business on the day next preceding the day on which notice is given.
The record date for determining shareholders for any other purpose shall be at the close of business on the
day on which the Board of Directors adopts the resolution relating thereto.
(f) Certification by Nominee. The Board of Directors may adopt a procedure whereby a shareholder of the Corporation
may certify in writing to the Corporation that all or a portion of the shares registered in the name of the shareholder
are held for the account of a specified person or persons. Upon receipt by the Corporation of a certification
complying with the procedure, the persons specified in the certification shall be deemed, for the purposes set forth in
the certification, to be the holders of record of the number of shares specified in place of the shareholder making the
certification.
ARTICLE 2.
DIRECTORS
Section 2.01
Number. The number of directors of the Corporation shall be such number, not less than three, as shall be
designated from time to time by resolution of the Board of Directors.
Section 2.02
Classes and Term of Office. The directors of the Corporation shall be divided into three classes as nearly
equal in size as is practicable. At each annual meeting, directors who are elected at such annual meeting shall be elected to hold office
until the third succeeding annual meeting. Each director shall serve until his successor is elected and qualified or until his earlier
death, resignation or removal. In the event the Corporation fails to hold an annual meeting in any year at which the term of office of a
class of directors is to expire (“Regularly Scheduled Annual Meeting”), then in any succeeding year in which an annual meeting of
shareholders is held and such class of directors is elected, the term of such class shall expire as if such class had been elected at the
Regularly Scheduled Annual Meeting. If the number of directors is hereafter changed, then any newly created directorships or
decrease in directorships shall be so apportioned among the classes as to make all classes as nearly equal in number as is practicable,
but in no case will a decrease in the number of directors constituting the whole Board of Directors or any class of directors have the
effect of removing or shortening the term of any incumbent director.
Section 2.03
Resignations. Any director may resign at any time by giving written notice to the Board of Directors, the
President or the Secretary. The resignation shall be effective upon receipt thereof or at such subsequent time as may be specified in
the notice of resignation. Unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it
effective.
Section 2.04
Annual Meeting. Immediately after each annual election of directors, the Board of Directors shall meet for
the purpose of organization, election of officers, and the transaction of other business, at the place where such election of directors was
held. Notice of such meeting need not be given. In the absence of a quorum at said meeting, the same may be held at any other time
and place which shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors.
Section 2.05
Regular Meetings. Regular meetings of the Board of Directors shall be held not less often than semi-
annually at a time and place determined by the Board of Directors at the preceding meeting. Notice of such meetings need not be
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given. If the date fixed for any such regular meeting be a legal holiday under the laws of the State where such meeting is to be held,
then the same shall be held on the next succeeding secular day not a legal holiday under the laws of said State, or at such other time as
may be determined by resolution of the Board. At such meetings the directors may transact such business as may be brought before
the meeting.
Section 2.06
Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board,
by the President or by two or more of the directors, and shall be held at such time and place as shall be designated in the call for the
meeting. Notice of each special meeting shall be given by or at the direction of the person or persons authorized to call such meeting
to each director at least one day prior to the day named for the meeting.
Section 2.07
Organization. Every meeting of the Board of Directors shall be presided over by the Chairman of the
Board, if present, and, if not, the President, or in the absence of the Chairman of the Board and the President, a chairman chosen by a
majority of the directors present. The Secretary, or in his absence, a person appointed by the chairman, shall act as secretary.
ARTICLE 3.
COMMITTEES
Section 3.01
The Board of Directors may establish one or more committees to consist of one or more directors of the
Corporation. Any committee, to the extent provided by the Board of Directors, shall have and may exercise all of the powers and
authority of the Board of Directors except that a committee shall not have any power or authority as to the following: (i) the
submission to shareholders of any action requiring approval of shareholders under the Pennsylvania Business Corporation Law of
1988; (ii) the creation or filling of vacancies in the Board of Directors; (iii) the adoption, amendment or repeal of the bylaws; (iv) the
amendment or repeal of any resolution of the Board that by its terms is amendable or repealable only by the Board; (v) action on
matters committed by the bylaws or resolution of the Board of Directors to another committee of the Board.
ARTICLE 4.
OFFICERS
Section 4.01
Number. The officers of the Corporation shall be a President, a Secretary and a Treasurer, and may include
one or more Vice Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers, and such other officers as the Board
of Directors may authorize from time to time; provided, however, that the Chairman of the Board shall not be an officer of the
Corporation.
Section 4.02
Qualifications. The President and Secretary shall be natural persons of full age. The Treasurer may be a
corporation, but if a natural person shall be of full age.
Section 4.03
Election and Term of Office. The officers of the Corporation shall be elected or appointed by the Board of
Directors and each shall serve at the pleasure of the Board.
Section 4.04
Resignations. Any officer may resign at any time by giving written notice to the Board of Directors, the
President or the Secretary. The resignation shall be effective upon receipt thereof or at such subsequent time as may be specified in
the notice of resignation. Unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it
effective.
Section 4.05
Chairman of the Board. If there is a Chairman of the Board, he shall preside at the meetings of the Board
and at meetings of shareholders. Such Chairman of the Board shall also perform such other duties as may be specified by the Board
from time to time and as do not conflict with the duties of the President.
Section 4.06
The President. The President shall be the chief executive officer of the Corporation and shall have general
supervision over the business and operations of the Corporation with all such powers with respect to such business and operations as
may be reasonably incident to such responsibilities, subject, however, to the control of the Board of Directors. He shall sign, execute,
and acknowledge, in the name of the Corporation, deeds, mortgages, bonds, contracts, and other instruments authorized by the Board,
except in cases where the signing and execution thereof shall be expressly delegated by the Board to some other officer or agent of the
Corporation; and, in general, he shall perform all duties incident to the office of President, and such other duties as from time to time
may be assigned to him by the Board. In addition, the President shall preside at meetings of shareholders in the absence of the
Chairman of the Board and shall preside at meetings of the Board of Directors in the absence of the Chairman of the Board.
Section 4.07
The Vice Presidents. In the absence or disability of the President or when so directed by the President, any
Vice President designated by the Board of Directors may perform all the duties of the President, and, when so acting, shall have all the
powers of, and be subject to all the restrictions upon, the President; provided, however, that no Vice President shall act as a member of
146
or as chairman of any committee of the Board of which the President is a member or chairman by designation or ex-officio, unless
such Vice President is a member of the Board of Directors and has been designated expressly by the Board as the alternate to the
President for purposes of service on such committee. The Vice Presidents shall perform such other duties as from time to time may be
assigned to them respectively by the Board of Directors or the President.
Section 4.08
The Secretary. The Secretary shall record all the votes of the shareholders and of the directors and the
minutes of the meetings of the shareholders and of the Board of Directors in a book or books to be kept for that purpose; he shall see
that notices of meetings of the Board and shareholders are given and that all records and reports are properly kept and filed by the
Corporation as required by law; he shall be the custodian of the seal of the Corporation and shall see that it is affixed to all documents
to be executed on behalf of the Corporation under its seal; and, in general, he shall perform all duties incident to the office of
Secretary, and such other duties as may from time to time be assigned to him by the Board of Directors or the President.
Section 4.09
Assistant Secretaries. In the absence or disability of the Secretary or when so directed by the Secretary,
any Assistant Secretary may perform all the duties of the Secretary, and, when so acting, shall have all the powers of, and be subject to
all the restrictions upon, the Secretary. The Assistant Secretaries shall perform such other duties as from time to time may be assigned
to them respectively by the Board of Directors, the President, or the Secretary.
Section 4.10
The Treasurer. The Chief Financial Officer shall perform all the duties of Treasurer if a separate Treasurer
has not been designated. The Treasurer shall have charge of all receipts and disbursements of the Corporation and shall have or
provide for the custody of its funds and securities; he shall have full authority to receive and give receipts for all money due and
payable to the Corporation, and to endorse checks, drafts, and warrants in its name and on its behalf and to give full discharge for the
same; he shall deposit all funds of the Corporation, except such as may be required for current use, in such banks or other places of
deposit as the Board of Directors may from time to time designate; and, in general, he shall perform all duties incident to the office of
Treasurer and such other duties as may from time to time be assigned to him by the Board of Directors or the President.
Section 4.11
Assistant Treasurers. In the absence or disability of the Treasurer or when so directed by the Treasurer, any
Assistant Treasurer may perform all the duties of the Treasurer, and, when so acting, shall have all the powers of, and be subject to all
the restrictions upon, the Treasurer. The Assistant Treasurers shall perform such other duties as from time to time may be assigned to
them respectively by the Board of Directors, the President, or the Treasurer.
ARTICLE 5.
POWERS OF BOARD OF DIRECTORS
Section 5.01
The business and affairs of the Corporation shall be managed by its Board of Directors, which may exercise
all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Articles of Incorporation or by
these By-laws directed or required to be exercised and done by the shareholders.
Section 5.02
A director shall stand in a fiduciary relation to the Corporation and shall perform his duties as a director,
including his duties as a member of any committee of the Board of Directors upon which he may serve, in good faith, in a manner he
reasonably believes to be in the best interests of the Corporation and with such care, including reasonable inquiry, skill and diligence,
as a person of ordinary prudence would use under similar circumstances. In performing his duties, a director shall be entitled to rely
in good faith on information, opinions, reports or statements, including financial statements and other financial data, in each case
prepared or presented by any of the following:
(a) One or more officers or employees of the Corporation whom the director reasonably believes to be reliable and
competent in the matters presented.
(b) Counsel, public accountants or other persons as to matters which the director reasonably believes to be within the
professional or expert competence of such persons.
(c) A committee of the Board of Directors upon which he does not serve, duly designated in accordance with law, as to
matters within its designated authority, which committee the director reasonably believes to merit confidence.
A director shall not be considered to be acting in good faith if he has knowledge concerning the matter in question that would
cause his reliance to be unwarranted.
Section 5.03
In discharging the duties of their respective positions, the Board of Directors, committees of the Board of
Directors and individual directors may, in considering the best interests of the Corporation, consider the effects of any action upon
employees, upon suppliers and customers of the Corporation and upon communities in which offices or other establishments of the
Corporation are located, and all other pertinent factors. The consideration of those factors shall not constitute a violation of Section
5.02.
147
Section 5.04
Absent breach of fiduciary duty, lack of good faith or self-dealing, actions taken as a director or any failure
to take any action shall be presumed to be in the best interests of the Corporation.
Section 5.05
A director shall not be personally liable, as such, for monetary damages for any action taken, or any failure
to take any action, unless:
the director has breached or failed to perform the duties of his office under this Article 5; and
(a)
(b) the breach or failure to perform constitutes self-dealing, willful misconduct or recklessness.
The provisions of Section 5.05 shall not apply to:
the responsibility or liability of a director pursuant to any criminal statute; or
(a)
(b) the liability of a director for the payment of taxes pursuant to local, State or Federal law.
ARTICLE 6.
INDEMNIFICATION
Section 6.01
Indemnification. The Corporation shall indemnify any person who was or is a party to or witness in, or is
threatened to be made a party to or a witness in, any threatened, pending or completed action, suit or proceeding, including actions by
or in the right of the Corporation, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or
was a director or officer of the Corporation, or is or was serving while a director or officer of the Corporation at the request of the
Corporation as a director, officer, employee, agent, fiduciary or other representative of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise, against expenses (including attorneys’ fees), judgments, fines, excise taxes and
amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding unless
the act or failure to act giving rise to the claim for indemnification is determined by a court to have constituted self-dealing, willful
misconduct or recklessness, subject to any limitations prescribed by state or federal law, rule or regulation or interpretations thereof.
Section 6.02
Advancement of Expenses. Expenses incurred by an officer or director of the Corporation in connection
with participating in a civil or criminal action, suit or proceeding as described in Section 6.01 shall be paid by the Corporation in
advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such person to
repay such amount if it shall ultimately be determined that the person is not entitled to be indemnified by the Corporation, subject to
any limitations prescribed by state or federal law, rule or regulation or interpretations thereof.
Section 6.03
Other Rights. The indemnification and advancement of expenses provided by or pursuant to this Article
shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled
under the Corporation’s Articles of Incorporation, any insurance or other agreement, vote of shareholders or directors or otherwise,
both as to actions in their official capacity and as to actions in another capacity while holding an office, and shall continue as to a
person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors and administrators of such
person.
Section 6.04
Insurance. The Corporation shall have the power to purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as
a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such,
whether or not the Corporation would have the power to indemnify him against such liability under the provisions of these By-Laws.
Section 6.05
Security Fund; Indemnity Agreements. By action by the Board of Directors (notwithstanding their interest
in the transaction) the Corporation may create and fund a trust fund or fund of any nature, and may enter into agreements with its
directors, officers, employees and agents for the purpose of securing or insuring in any manner its obligation to indemnify or advance
expenses provided for in this Article.
Section 6.06
Modification. The duties of the Corporation to indemnify and to advance expenses to a director or officer
provided in this Article shall be in the nature of a contract between the Corporation and each such director or officer, and no
amendment or repeal of any provision of this Article, and no amendment or termination of any trust or other fund created pursuant to
Section 6.05, shall alter, to the detriment of such director or officer, the right of such person to the advance of expenses or
indemnification related to a claim based on an act or failure to act which took place prior to such amendment, repeal or termination.
Section 6.07
Exception. Notwithstanding anything in this Article 6 to the contrary, the Corporation shall not be
obligated to indemnify any person under Section 6.01 or advance expenses under Section 6.02 with respect to an action, suit or
148
proceeding commenced by such person, other than mandatory counterclaims, affirmative defenses or to enforce the right to
indemnification under Section 6.01 or advancement of expenses under Section 6.02.
ARTICLE 7.
BORROWING, DEPOSITS, PROXIES, ETC.
Section 7.01
Borrowing, etc. No officer, agent or employee of the Corporation shall have any power or authority to
borrow money on its behalf, to pledge its credit, or to mortgage or pledge its real or personal property, except within the scope and to
the extent of the authority delegated by resolution of the Board of Directors. Authority may be given by the Board for any of the
above purposes and may be general or limited to specific instances.
Section 7.02
Deposits and Investments. All funds of the Corporation shall be deposited from time to time to the credit
of the Corporation in such banks, trust companies, or other depositaries, or invested in such manner, as the Board of Directors may
approve or designate, and all such funds shall be withdrawn only upon checks signed by, and all such investments shall be disposed of
only by, such one or more officers or employees as the Board shall from time to time determine.
Section 7.03
Proxies. Unless otherwise ordered by the Board of Directors, any officer of the Corporation may appoint
an attorney or attorneys (who may be or include such officer himself), in the name and on behalf of the Corporation, to cast the votes
which the Corporation may be entitled to cast as a shareholder or otherwise in any other corporation or other entity, any of whose
shares or other securities are held by or for the Corporation, at meetings of the holders of the shares or other securities of such other
corporation or other entity, or, in connection with the ownership of such shares or other securities, to consent in writing to any action
by such other corporation or other entity, and may instruct the person or persons so appointed as to the manner of casting such votes or
giving such consent, and may execute or cause to be executed in the name and on behalf of the Corporation and under its seal such
written proxies or other instruments as the officer may deem necessary or proper in the premises.
ARTICLE 8.
SHARE CERTIFICATES; TRANSFER
Section 8.01
Share Certificates. Share certificates in the form prescribed by the Board of Directors, shall be signed by
the President or a Vice President and by the Secretary or the Treasurer or an Assistant Secretary or an Assistant Treasurer of the
Corporation, but such signatures may be facsimiles, engraved or printed. In case any officer who has signed, or whose facsimile
signature has been placed upon any share certificate shall have ceased to be such officer because of death, resignation, or otherwise,
before the certificate is issued, it may be issued by the Corporation with the same effect as if the officer had not ceased to be such at
the date of its issue.
Section 8.02
Transfer of Shares. The Corporation or a Registrar or Transfer Agent of the Corporation shall maintain
books in which the ownership and transfer of the Corporation’s shares shall be definitively registered. Transfer of share certificates
and the shares represented thereby shall be made only on the books of the Corporation by the owner thereof or by the owner’s
attorney thereunto authorized, by a power of attorney duly executed and filed with the Secretary or a Transfer Agent of the
Corporation, and on surrender of the share certificates.
Section 8.03
Transfer Agent and Registrar; Regulations. The Corporation may, if and whenever the Board of Directors
so determines, maintain, in the Commonwealth of Pennsylvania, or any other state of the United States, one or more transfer offices or
agencies, each in charge of a Transfer Agent designated by the Board, where the shares of the Corporation shall be transferable, and
also one or more registry offices, each in charge of a Registrar (which may also be a Transfer Agent) designated by the Board, where
such shares shall be registered; and no certificates for shares of the Corporation in respect of which a Transfer Agent shall have been
designated shall be valid unless countersigned by such Transfer Agent and no certificates for shares of the Corporation in respect of
which a Registrar shall have been designated shall be valid unless registered by such Registrar. The Board may also make such
additional rules and regulations as it may deem expedient concerning the issue, transfer and registration of its shares.
Section 8.04
Lost, Destroyed and Mutilated Certificates. The Board of Directors, by standing resolution or by
resolutions with respect to particular cases, may authorize the issue of new share certificates in lieu of share certificates lost, destroyed
or mutilated, upon such terms and conditions as the Board may direct.
ARTICLE 9.
MISCELLANEOUS
Section 9.01
Venue. Unless the Corporation consents in writing to the selection of an alternate forum, the state courts of
the Commonwealth of Pennsylvania in and for Lackawanna County shall be the sole and exclusive forum, to the fullest extent
permitted by law, for (a) any derivative action or proceeding brought on behalf of the Corporation; (b) any action asserting a claim of
a breach of fiduciary duty owed by any director or officer of the Corporation to the Corporation or the Corporation’s shareholders; (c)
any action asserting a claim against the Corporation arising pursuant to any provision of the Business Corporation Law of the
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Commonwealth of Pennsylvania, the Articles of Incorporation of the Corporation or these By-laws; (d) any action seeking to interpret,
apply, enforce or determine the validity of the Certificate of Incorporation or the By-laws of the Corporation; or (e) any action
asserting a claim against the Corporation governed by the internal affairs doctrine.
Section 9.02
Fiscal Year. The fiscal year of the Corporation shall be the calendar year.
Section 9.03
Application and Effect. The provisions of Article 6 of these bylaws shall not apply to any person who
ceased to be a director or officer of the Corporation prior to the adoption of these bylaws on April 5, 2012. Article 24 of the
Corporation’s bylaws as in effect immediately prior to April 5, 2012 shall continue to apply to any person entitled to indemnification
or advancement of expenses under Article 24 prior to April 5, 2012.
ARTICLE 10.
AMENDMENTS
Section 10.01
Except as otherwise provided by the Business Corporation Law of 1988, these By-laws may be altered,
amended or repealed by the affirmative vote of the holders of at least seventy-five percent (75%) of the outstanding Common Shares
at any regular or special meeting duly convened after notice to the shareholders of that purpose, or by a majority vote of the members
of the Board of Directors at any regular or special meeting thereof duly convened after notice to the directors of that purpose, subject
always to the power of the shareholders to change such action of the Board of Directors by the affirmative vote of the holders of
seventy-five percent (75%) of the outstanding Common Shares. No provision of these By-Laws shall vest any property right in any
shareholder as such.
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EXHIBIT 10.14
EXECUTIVE INCENTIVE PLAN
I. Introduction
A vital component of First National Community Bank’s (FNCB) success is the ability of the executive management team to meet and
exceed performance objectives consistent with the financial and strategic objectives of the bank and the best interests of the
shareholders. The compensation plans at FNCB are a critical component to ensuring the Bank’s ability to attract, hire, motivate and
retain executive team members who will maximize successful performance.
First National Community Bank intends to provide executives with a balanced mix of fixed and variable pay. The intention of all
incentive plans is to motivate, reward and reinforce performance and achievement of team and/or individual goals in support of
FNCB’s strategic objective for growth and profitability. They provide the opportunity for reward for meeting and exceeding
established financial goals as well as recognition of individual achievements.
While risk is an inherent aspect of business, our compensation plans are designed to reward employees for certain levels of
performance without encouraging undue risk-taking which could materially threaten the safety and soundness of the organization or
business unit.
The following Executive Annual Incentive Plan has been developed as a meaningful compensation tool to encourage the growth and
proper management of the Bank. The major purposes of the plan are:
To motivate and reward executives for positive Bank performance on an annual basis without encouraging undue risk-taking
To provide a form of variable compensation to executives, which is directly linked to their individual and collective
performance
To emphasize the growth and profitability of the Bank
The focus of this plan is to have the executive team achieve annual performance objectives which are coordinated with the long term
objectives of the Bank. This plan exists in conjunction with a long-term incentive plan which focuses on awards for performance
against defined performance objectives over a three-year period. The potential value of these plans at target performance levels is
50% short term (annual incentive plan) and 50% long term (long-term incentive plan.) These two incentive compensation components
work together to provide a balance of long-term and shorter-term awards, ensuring that executives are not focused on short-term
performance without the same time providing an equal focus on long-term performance.
II. Plan Year
The plan year for this program will be the calendar year. The effective date of the plan is January 1, 2013. The performance measures
for this plan will be determined, calculated and approved annually.
151
III. Participation
Participation in the plan will be determined at the beginning of each plan year by the President & CEO, and approved by the Board of
Directors. To participate, an executive must be a regular employee of the bank with ongoing position responsibilities, which are
executive in nature and have a meaningful impact on the Bank’s results. The President & CEO’s participation will be approved
annually by the Board of Directors. Generally, participants will include executive officers.
The Board of Directors will define the Plan’s participants each Plan year. For 2013, the participants include the President and Chief
Executive Officer, Chief Operating Officer, Chief Financial Officer, Chief Retail Banking and Operations Officer, Retail Lending
Officer, General Counsel, and Human Resources Officer.
An executive may become a new participant during the plan year if newly hired. Any awards are pro-rated for the portion of the year
in which participation occurs. The President & CEO makes final determination (with Board approval) of new participation during the
plan year for any non-CEO position.
A participant's eligibility ceases at termination of employment (other than death or disability) and the executive will not receive any
awards under the plan for the year of termination. Termination as a result of death or disability will provide pro-rated awards in the
plan through the last working date for the year in which termination occurred.
IV. Performance Factors
The annual portion of the plan is based upon company financial performance factors which may change from year to year. In general,
these factors may be measures such as return on assets, return on equity, net income, earnings per share or similar indicators. The
factors and weighing of the factors are determined at the beginning of each plan year. Each factor has quantifiable objectives
consisting of threshold, target and maximum goals. Additionally, a portion of each participant's award may be based on unit, team,
functional area, and/or individual performance objectives which are determined by management at the beginning of each year.
Generally, the President & CEO position may have most or all of his or her performance based on Bank performance and other
executives may have a proportionately greater level of their award based on functional area/individual performance.
The Board of Directors defines the Bank’s Performance Factors and Award Schedule for each year. Individual objectives are
established and recorded between the executive and the executive’s manager (usually the President & CEO).
The Board of Directors has the authority to modify the target goals used for the Bank’s Performance Factors when events occur during
that Plan year that the Board determines should be considered when evaluating incentive opportunities.
While every effort has been made to ensure that this and all FNCB incentive plans do not motivate or reward undue risk taking, any
results deemed to have been the result of inappropriate risk will be backed out of incentive payments. The Board of Directors has the
discretion to lever incentive payments down by as much as 100% if it is determined that excessive risk has been taken. This can be
done on an individual or overall basis, as appropriate.
152
V. Award Calculation and Distribution
Awards under the plan are calculated according to determination of the established performance factors at year end. Company
performance between the threshold and target, and target and maximum is interpolated. Unit, team, and/or functional area
performance, if applicable, is determined by management. Individual performance is determined by each participant's manager
according to the achievement of objectives and approved by successive levels of management. Individual employee performance
which is not meeting the position's requirements (an annual performance evaluation which is less than satisfactory) will result in no
award granted to that individual for that year even though Company performance is above threshold.
Performance above the defined maximum levels, while not necessarily undesirable or unrealistic, has the potential of requiring
increased risk, therefore incentive opportunity will not increase for performance above maximum.
All awards are paid through the payroll system less normal payroll tax withholding. Payment will be within 60 days after year end.
The Bank shall deduct from all payments under this Plan any federal, state or local taxes required by law to be withheld from such
payments. Income from this Plan is subject to the provisions of the 401(k) deferral plan if the Participant has elected to participate in
the 401(k) plan. As such, this income is subject to deferral, taxing and matching provisions. Beyond this, there is no deferral feature
nor is there any vesting feature of awards under this plan. Any participant terminating employment (except death or disability) prior
to actual payment of award will forfeit that award.
VI. Clawback
Awards will be recalculated if the relevant company performance measures upon which they are based are restated or otherwise
adjusted within the 36-month period following the public release of the financial information. Any material overpayments or
adjustments required by law will be owed back to the company.
VII. Administration
At least annually, the highest ranking risk officer will review this plan and provide a detailed report including a detailed assessment
regarding any risk issues inherent in the plan. This risk report and the plan document in full will be reviewed by the Compensation
Committee of the Board of Directors to ensure that the plan design is consistent with the compensation philosophy of FNCB and that
the plan does not motivate undue risk taking. The annual review will also include the market competitiveness of the plan, the plan’s
alignment with the bank’s strategic plan, an assessment of how the plan meets the objectives in the Introduction of this document, plus
the plan’s impact on the overall safety and soundness of the bank. The Compensation Committee will then provide a report and
recommendations to the full Board of Directors who are responsible to approve the plan. The Board of Directors of the bank may
amend the plan at any time.
Once established, performance factors are intended to remain in place for the year.
Participation, performance factors, thresholds, targets, maximums and any other participation features are established each plan year
153
and may change from year to year according to the strategic objectives of the company.
The plan does not constitute a contract of employment, and participation in the plan does not give any employee the right to be
retained in the service of the bank or any right or claim to an award under the plan unless specifically accrued under the terms of this
plan. Designation as a plan participant conveys the opportunity, but not the right, to any awards conferred under the Plan.
Any right of a participant or his or her beneficiary to the payment of an award under this plan may not be assigned, transferred,
pledged or encumbered.
Any adjustments to the financial performance results utilized in this plan because of events that occur during the Plan year must be
approved by the Board of Directors.
VIII. Governing Law
Except as preempted under federal law, the provisions of the Plan shall be construed, administered and enforced in accordance with
the domestic internal law of the Commonwealth of Pennsylvania.
IX. Plan Approval
This plan has been approved by the Board of Directors of First National Community Bank on _____________________.
By
_____________________________
Board of Directors
First National Community Bank
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EXHIBIT 10.15
2012 EMPLOYEE STOCK GRANT PLAN
First National Community Bancorp, Inc.
2012 Employee Stock Grant Plan
Purpose:
•
The purpose of the First National Community Bank (FNCB) 2012 Employee Stock Grant Plan (the Plan) is to provide
employees with a long term financial interest in FNCB’s future growth and profitability by providing them with company
ownership in the form of common stock.
Term:
•
The 2012 Employee Stock Grant Plan is intended to be a one-time program implemented in December, 2012.
Stock Subject to Plan:
•
The 2012 Employee Stock Grant Plan will utilize existing, authorized, but unissued FNCB common stock. The shares of
stock granted under this Plan will not exceed 16,000 shares.
Plan Approval and Administration:
•
•
The FNCB Board of Directors is responsible for authorizing this Plan. The Board of Directors authorized the implementation
of this Plan by Board resolution on November 28, 2012.
The Plan will be administered by Human Resources and Finance.
Awards:
• All eligible employees will be granted fifty (50) shares of FNCB common stock.
• Awards will be kept in book entry form using FNCB’s designated stock registration firm.
• All eligible employees will receive a one-time $25 payment through FNCB payroll for the purpose of partially offsetting the
employee’s 2012 tax obligations arising under this plan. The $25 payment will be allocated in entirety to federal, state and
local tax withholding.
Plan Eligibility: To be eligible to participate in the Plan, an employee must be:
• An active FNCB employee classified as Full Time or Part Time as of the date the program is announced to employees (the
“Effective Date”), including any individual who accepted FNCB’s 2012 Voluntary Separation Plan who has not yet
terminated active employment or started to receive separation payments as of the Effective Date; or
• All executive officers who are actively employed as of the date of the Plan announcement will be eligible to participate in the
Plan.
Stock Restrictions:
•
Stock Grant recipients may not sell the shares granted under the Plan until after January 1, 2014. FNCB’s designated stock
registration firm will be responsible for administering the terms of this Plan provision.
Plan Participant Responsibilities:
• Award recipients will be responsible for all costs and fees associated with the sale of their FNCB stock.
• Award recipients will be responsible for all tax obligations arising from the stock grant and ownership of stock under this
Plan.
Transfer of Shares:
•
•
Except as noted below, shares may not be transferred or sold to another party prior to January 1, 2014.
In the event of an employee’s death prior to the date that the one year prohibited sale restriction has been satisfied, the shares
will be transferred to the employee’s estate, for distribution pursuant to the employee’s will or applicable law. The shares
will then remain subject to the restriction on transfer.
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EXHIBIT 31.1
CERTIFICATION
I, Steven R. Tokach, Chief Executive Officer, certify that:
1.
I have reviewed this annual report on Form 10-K of First National Community Bancorp, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
3.
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
4.
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, 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;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based
on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
5.
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 28, 2013
By:
/s/ Steven R. Tokach
Steven R. Tokach
President and Chief Executive Officer
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EXHIBIT 31.2
CERTIFICATION
I, James M. Bone, Jr., Chief Financial Officer, certify that:
1.
I have reviewed this annual report on Form 10-K of First National Community Bancorp, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
3.
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
4.
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, 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;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based
on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
5.
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a.)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
(b.)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 28, 2013
By:
/s/ James M. Bone, Jr.
James M. Bone, Jr.
Executive Vice President and Chief Financial Officer
157
EXHIBIT 32
CERTIFICATION OF CEO AND CFO PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of the United States Code), I,
Steven R. Tokach, Chief Executive Officer of First National Community Bancorp, Inc. (the “Company”) and I, James M. Bone, Jr.,
Chief Financial Officer of the Company, hereby certify that the Company’s Annual Report on Form 10-K for the period ended
December 31, 2012 (the “Report”):
1.
78o (d)); and
Fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or
2.
operations of the Company for the year ended December 31, 2012.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
Date: March 28, 2013
Date: March 28, 2013
By:
/s/ Steven R. Tokach
Steven R. Tokach
President and Chief Executive Officer
By:
/s/ James M. Bone, Jr.
James M. Bone, Jr.
Executive Vice President and Chief Financial Officer
The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of
Chapter 63 of Title 18 of the United States Code) and is not being filed as part of the Report or as a separate disclosure document.
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102 East Drinker Street, Dunmore, PA 18512 | fncb.com
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GROWTH & STRENGTH THROUGH STRATEGIC VISION