<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
--------------------
(X) Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the period ended September 30, 1998
or
( ) Transition Report Pursuant to Section 13 of 15(d) of
the Securities Exchange Act of 1934
For the transition period from ----- to -----
--------------------
Commission file number 0-15123
I.R.S. Employer Identification Number 31-1182986
FIRST NATIONAL BANCORP, INC.
(an Illinois Corporation)
78 N. Chicago St.
Joliet, Illinois 60432
Telephone: (815) 726-4371
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 2,414,537 shares of the
Company's Common Stock ($10.00 par value) were outstanding as of November 1,
1998.
<PAGE>
FIRST NATIONAL BANCORP, INC. AND SUBSIDIARY
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Part I. Financial Information Page
Item 1. Financial Statements
a. Condensed Consolidated Balance Sheets 1
b. Condensed Consolidated Statements of Income 2
c. Condensed Consolidated Statements of Stockholders' Equity 3
and Other Comprehensive Income
d. Condensed Consolidated Statements of Cash Flows 4
e. Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Part II. Other Information
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signature Page 17
</TABLE>
<PAGE>
Page 1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST NATIONAL BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30,
1998 December 31,
(Unaudited) 1997
------------ -----------
<S> <C> <C>
ASSETS
Cash and due from banks $ 39,698 $ 34,591
Federal funds sold 19,000 50,800
Securities available-for-sale 23,609 11,831
Securities held-to-maturity (Fair value of $212,651 at
September 30, 1998 and $206,269 at December 31, 1997) 210,572 204,870
Loans, net of unearned discount 544,931 526,380
Allowance for loan losses (4,503) (4,437)
-------- --------
Loans, net 540,428 521,943
Premises and equipment, net 19,057 18,840
Accrued interest and other assets 8,573 8,392
Intangibles, net 8,736 9,489
-------- --------
TOTAL ASSETS $869,673 $860,756
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand, non-interest bearing $123,450 $129,243
NOW accounts 94,113 78,660
Money Market accounts 40,007 37,086
Savings 170,991 165,341
Time deposits, $100,000 and over 67,361 70,472
Other time deposits 223,091 245,354
-------- --------
Total Deposits 719,013 726,156
Short-term borrowings 58,478 46,207
Long-term debt 4,442 4,817
Accrued interest and other liabilities 6,757 6,631
-------- --------
Total Liabilities 788,690 783,811
-------- --------
STOCKHOLDERS' EQUITY
Preferred stock -- --
Common stock 24,318 24,318
Retained earnings 57,741 52,607
Treasury stock (1,140) --
Accumulated other comprehensive income 64 20
-------- --------
Total Stockholders' Equity 80,983 76,945
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $869,673 $860,756
-------- --------
-------- --------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
Page 2
FIRST NATIONAL BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans $ 11,770 $ 11,279 $ 34,782 $ 32,075
Securities:
Taxable 2,602 3,206 7,915 9,640
Tax-exempt 418 465 1,283 1,433
Federal funds sold 926 193 2,454 942
------------------------ ------------------------
Total interest income 15,716 15,143 46,434 44,090
------------------------ ------------------------
INTEREST EXPENSE:
Deposits 6,081 5,986 18,269 17,494
Short-term borrowings 785 697 1,914 1,762
Long-term debt 94 63 285 395
------------------------ ------------------------
Total interest expense 6,960 6,746 20,468 19,651
------------------------ ------------------------
Net interest income 8,756 8,397 25,966 24,439
Provision for loan losses 375 229 1,059 659
------------------------ ------------------------
Net interest income after provision for loan losses 8,381 8,168 24,907 23,780
------------------------ ------------------------
NONINTEREST INCOME:
Trust department income and farm management income 287 244 876 778
Service fees 1,304 1,175 3,809 3,284
Securities gains, net 20 5 94 6
Other income 163 80 429 293
------------------------ ------------------------
Total noninterest income 1,774 1,504 5,208 4,361
------------------------ ------------------------
NONINTEREST EXPENSES:
Salaries and employee benefits 3,243 3,076 9,835 9,097
Occupancy and equipment expense 816 854 2,461 2,342
Data processing expense 349 324 1,008 766
Amortization of intangibles 307 218 809 737
Other expenses 1,397 1,526 4,169 4,010
------------------------ ------------------------
Total noninterest expenses 6,112 5,998 18,282 16,952
------------------------ ------------------------
INCOME BEFORE INCOME TAXES 4,043 3,674 11,833 11,189
Income tax expense 1,356 1,194 3,970 3,623
------------------------ ------------------------
NET INCOME $ 2,687 $ 2,480 $ 7,863 $ 7,566
------------------------ ------------------------
------------------------ ------------------------
Earnings per common share $ 1.11 $ 1.02 $ 3.24 $ 3.11
------------------------ ------------------------
------------------------ ------------------------
Weighted average number of shares outstanding 2,416,038 2,431,804 2,426,491 2,431,804
------------------------ ------------------------
------------------------ ------------------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
Page 3
FIRST NATIONAL BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND OTHER COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Comprehensive Income Stockholders' Equity
Nine Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
COMMON STOCK:
Beginning of period $24,318 $12,159
2-for-1 stock split effected in the form of a 100%
stock dividend - 12,159
------------------------
End of period 24,318 24,318
------------------------
ADDITIONAL PAID-IN CAPITAL:
Beginning of period - 8,846
2-for-1 stock split effected in the form of a 100%
stock dividend - (8,846)
------------------------
End of period - -
------------------------
RETAINED EARNINGS:
Beginning of period 52,607 50,394
Net income $7,863 $7,566 7,863 7,566
2-for-1 stock split effected in the form of a 100%
stock dividend - (3,313)
Cash dividends declared (2,729) (3,040)
------------------------
End of period 57,741 51,607
------------------------
TREASURY STOCK (AT COST):
Beginning of period - -
Stock purchase of 17,267 shares (1,140) -
------------------------
End of period (1,140) -
------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Beginning of period unrealized gains (losses)
on securities, net of income taxes 20 (8)
Unrealized holding gains (losses) on securities
arising during period, net of income taxes 45 22
Reclassification adjustment for gains (losses) on
securities and premiums/discounts included in net
income, net of income taxes (1) 2
---------------------
Other comprehensive income 44 24 44 24
---------------------
------------------------
End of period accumulated other comprehensive income 64 16
------------------------
COMPREHENSIVE INCOME $7,907 $7,590
---------------------
---------------------
TOTAL STOCKHOLDERS' EQUITY $80,983 $75,941
------------------------
------------------------
</TABLE>
<PAGE>
Page 4
FIRST NATIONAL BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 7,863 $ 7,566
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,276 1,122
Provision for loan losses 1,059 659
Amortization of securities premiums, net of accretion 43 45
Net securities gains (94) (6)
Net losses (gains) on sale of other real estate (15) 6
Amortization of intangibles 753 737
(Increase) in accrued interest and other assets (186) (1,035)
Increase in accrued interest and other liabilities 95 53
------------------------
Net cash from operating activities 10,794 9,147
------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Change in federal funds sold, net 31,800 23,841
Proceeds from maturities of securities 116,095 63,156
Proceeds from sale of securities -- --
Purchase of securities (133,449) (74,808)
Loans made to customers, net of principal collections (19,645) (47,685)
Purchase of premises and equipment (1,493) (2,116)
Proceeds from sale of other real estate 121 7
------------------------
Net cash from investing activities (6,571) (37,605)
------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (7,143) 29,006
Net increase in short-term borrowings 12,271 3,153
Principal paid on long-term debt (375) (750)
Purchase of treasury stock (1,140) --
Dividends paid (2,729) (3,040)
------------------------
Net cash from financing activities 884 28,369
------------------------
Net change in cash and due from banks 5,107 (89)
CASH AND DUE FROM BANKS
Beginning 34,591 35,785
------------------------
Ending $ 39,698 $ 35,696
------------------------
------------------------
SUPPLEMENTAL DISCLOSURES
Cash payments for:
Interest paid $ 20,320 $ 20,173
Income taxes 3,485 3,501
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
Page 5
FIRST NATIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(Unaudited)
(Table amounts in thousands of dollars, except per share data)
NOTE 1 - BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of First
National Bancorp, Inc. (the "Company") and its subsidiary, First National
Bank of Joliet, (the "Bank"). All material intercompany items and
transactions have been eliminated in consolidation.
During the first quarter 1998, the Company merged Bank of Lockport, Community
Bank of Plano, and Southwest Suburban Bank into the First National Bank of
Joliet.
The accompanying unaudited interim condensed consolidated financial
statements have been prepared pursuant to the rules and regulations for
reporting on Form 10-Q. Accordingly, certain disclosures required by
generally accepted accounting principles are not included herein. These
interim statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Compnany's 1997 Annual
Report on Form 10-K filed with the Securities and Exchange Commission. The
December 31, 1997 balance sheet has been derived from the audited financial
statements included in the Company's 1997 Annual Report on Form 10-K filed
with the Securities and Exchange Commission, but does not include all
disclosures required by generally accepted accounting principles.
Interim statements are subject to possible adjustment in connection with the
annual audit of the Company for the year ending December 31, 1998. In the
opinion of management of the Company, the accompanying unaudited interim
condensed consolidated financial statements reflect all adjustments
(consisting of normal recurring adjustments) necessary for a fair
presentation of the consolidated financial position and consolidated results
of operations for the periods presented.
The results of operations for the three months ended September 30, 1998 and
1997 and the nine months ended September 30, 1998 and 1997, are not
necessarily indicative of the results to be expected for the full year.
Earnings per share of common stock is based on weighted average number of
shares outstanding during the period.
<PAGE>
Page 6
NOTE 2 - SECURITIES
The amortized cost and fair value of securities available-for-sale at
September 30, 1998 and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
September 30, 1998
------------------
U. S. Treasury $ 6,496 $ 6,558
U. S. government agencies 15,998 16,044
Other 1,007 1,007
------- -------
$23,501 $23,609
------- -------
------- -------
Amortized Fair
Cost Value
---- -----
December 31, 1997
-----------------
U. S. Treasury $ 7,997 $ 8,029
U. S. government agencies 3,501 3,502
Other 300 300
------- -------
$11,798 $11,831
------- -------
------- -------
</TABLE>
The amortized cost and fair value of securities held-to-maturity at
September 30, 1998 and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
September 30, 1998
------------------
U. S. Treasury $ 18,020 $ 18,268
U. S. government agencies 160,439 161,243
States and political subdivisions 32,113 33,140
-------- --------
$210,572 $212,651
-------- --------
-------- --------
Amortized Fair
Cost Value
---- -----
December 31, 1997
-----------------
U. S. Treasury $ 24,509 $ 24,621
U. S. government agencies 147,373 147,628
States and political subdivisions 32,988 34,020
-------- --------
$204,870 $206,269
-------- --------
-------- --------
</TABLE>
Securities with a carrying value of $159,000,000 and $150,000,000 at
September 30, 1998 and December 31, 1997, respectively, were pledged to
secure public deposits, securities sold under agreements to repurchase, and
for other purposes required or permitted by law.
<PAGE>
Page 7
NOTE 3 - LOANS
The subsidiary bank makes loans to both individuals and commercial entities
in a wide variety of industries. Loan terms vary as to interest rate,
repayment period, and collateral requirements based on the type of loan
requested and the credit worthiness of the prospective borrower. Credit risk
tends to be geographically concentrated in that the majority of the loan
customers are located in the markets served by the subsidiary bank.
The components of loans at September 30, 1998 and December 31, 1997 were as
follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
<S> <C> <C>
Commercial and commercial real estate $176,541 $181,343
Residential real estate 141,649 147,625
Construction 18,054 14,106
Agricultural 10,474 10,769
Consumer 198,254 172,695
-------- --------
Total loans 544,972 526,538
Unearned discount (41) (158)
-------- --------
Loans, net of unearned discount $544,931 $526,380
-------- --------
-------- --------
</TABLE>
Impaired loans consist of commercial and commercial real estate loans.
Impaired loans amounted to $858,000 at September 30, 1998 and $876,000 at
December 31, 1997.
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Balance, beginning of year $ 4,437 $ 4,414
Provision charged to operations 1,059 659
Loans charged-off (1,216) (849)
Recoveries 223 105
------- -------
Balance, September 30, 1998 and 1997 $ 4,503 $ 4,329
------- -------
------- -------
</TABLE>
NOTE 4 - COMMITMENTS AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is 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 which, to varying degrees, involve elements of credit risk
in excess of the amount recognized in the balance sheet.
The Bank's exposure to credit loss on commitments to extend credit and
standby letters of credit in the event of nonperformance by the customer, is
represented by the contractual amount of those instruments. The Bank uses the
same credit policies in making commitments and conditional obligations as for
on-balance-sheet instruments.
<PAGE>
Page 8
A summary of the contract amounts of the Bank's exposure to off-balance-sheet
risk is as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
<S> <C> <C>
Loan commitments $75,136 $87,612
Standby letters of credit 17,055 16,629
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customer's credit worthiness on a case-by-case basis. The amount of
collateral obtained is based on management's credit evaluation of the
customer.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending loan commitments to customers. Most of the Bank's
standby letters of credit are expected to expire without being drawn upon.
NOTE 5 - COMPREHENSIVE INCOME
During the first quarter of 1998 the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income. Comprehensive
income is defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from nonowner
sources. It includes all changes in equity during a period except those
resulting from investments by owners and distributions to owners.
Specifically, the Company has reported the change in unrealized gains and
losses on securities available-for-sale as an addition to (deduction from)
net income to arrive at comprehensive income of $7.9 million for the first
nine months of 1998, compared to $7.6 million for the first nine months of
1997.
<PAGE>
Page 9
FIRST NATIONAL BANCORP, INC. AND SUBSIDIARY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following presents management's discussion and analysis of the results of
operations and financial condition of the First National Bancorp, Inc. (the
"Company") as of the dates and for the periods indicated. This discussion is
intended to be read in conjunction with the Company's interim condensed
consolidated financial statements and notes thereto.
FINANCIAL CONDITION
Total assets increased $8,917,000 or 1.04% to $869,673,000 as of September
30, 1998, compared to December 31, 1997. During the first nine months of
1998, net loans increased $18,485,000, up 3.54% from December 31, 1997.
Deposits decreased $7,143,000 during the first nine months of 1998, down .98%
from December 31, 1997. Stockholders' Equity increased $4,038,000, up 5.25%
from December 31, 1997.
At September 30, 1998, earning assets were $798,112,000, an increase of
$4,231,000 or .53% from $793,881,000 at December 31, 1997. Average earning
assets for the three months ended September 30, 1998 were $807,523,000, an
increase of $37,290,000, or 4.8% from the same period in 1997, primarily due
to an increase of $28,918,000 in the average loan portfolio.
Interest-bearing liabilities were $658,483,000 at September 30, 1998, an
increase of $10,546,000 or 1.6%, from $647,937,000 at December 31, 1997. The
increase was primarily due to an increase of 19.6% in NOW accounts and a
26.6% increase in short-term borrowings, both as a result of fluctuations in
the balances of seasonal public funds. These increases were offset in part by
a decrease of 8.0% in time deposits.
Average interest-bearing liabilities for the three months ended September 30,
1998 were $660,063,000, an increase of $23,380,000, or 3.7% from the same
period in 1997. The increase was primarily due to a 2.9% increase in
interest-bearing deposits and a 16.6% increase in short-term borrowings.
RESULTS OF OPERATIONS
For the three months ended September 30, 1998, the Company earned $2,687,000
or $1.11 per share as compared to $2,480,000 or $1.02 per share for the same
period in 1997. On a percentage basis, net income for the third quarter of
1998 increased by 8.8% over that of the third quarter of 1997. The Company's
annualized return on average assets for the three months ended September 30,
1998 was 1.23% versus 1.18% for the same period in 1997. Annualized return on
average equity was 13.4% for the third quarter of 1998 compared to 13.3% for
the third quarter of 1997.
For the nine months ended September 30, 1998, the Company earned $7,863,000
or $3.24 per share as compared to $7,566,000 or $3.11 per share for the same
period in 1997. During this period, net income increased 4.2% over the same
period in 1997. The Company's annualized return on average assets for the
nine months ended September 30, 1998 was 1.22% versus 1.23% for the same
period in 1997. Annualized return on average equity was 13.28% for the nine
months ended September 30, 1998 compared to 13.87% for the same period in
1997.
<PAGE>
Page 10
NET INTEREST INCOME
Net interest income, the difference between total interest earned on earning
assets and total interest expense on interest bearing liabilities, is the
Company's principal source of income. Net interest income is influenced by
changes in the volume and yield on earning assets as well as changes in the
volume and rates paid on interest bearing liabilities. The Company attempts
to favorably impact net interest income through investment decisions on
interest earning assets and monitoring the interest rates its banking
subsidiaries offer, particularly rates for time deposits and short-term
borrowings.
On a tax equivalent basis (35% income tax rate), the Company's net interest
income expressed as a percentage of average interest earning assets was 4.43%
for the three months ended September 30, 1998, as compared to 4.47% for the
same period in 1997.
The yield on earning assets decreased 8 basis points to 7.72% and the cost of
interest bearing liabilities decreased 2 basis points to 4.18%. The decrease
in the yield on earning assets is due primarily to the decrease in loan and
securities rates. The decrease in the cost of interest bearing liabilities is
due primarily to a combination of the increase in the volume of NOW public
accounts and repurchase agreements and the decrease in rates paid on those
funds.
Tax equivalent net interest income for the three months ended September 30,
1998, increased $361,000 or 4.2% compared to the same period in 1997. The
increase in the volume of earning assets net of interest bearing liabilities
produced $491,000 of the net interest income increase while changes in
interest rates decreased income by $130,000.
For the nine months ended September 30, 1998, on a tax equivalent basis, the
Company's net interest income expressed as a percentage of average interest
earning assets was 4.51% as compared to 4.45% for the same period in 1997.
The yield on earning assets increased 6 basis points to 7.83% and the cost of
interest bearing liabilities increased 2 basis points to 4.22%. Tax
equivalent net interest income for the nine months ended September 30, 1998
increased $1,478,000 or 5.9% compared to the same period in 1997. The
increase in the volume of earning assets net of interest bearing liabilities
produced $1,219,000 of the net interest income increase while changes in
interest rates increased income by $259,000.
NONINTEREST INCOME
Noninterest income consists primarily of service charges on customer deposit
accounts and fees earned on trust department services. Total noninterest
income was $1,774,000 for the three months ended September 30, 1998, an
increase of $270,000, or 18.0%, from the same period in 1997. The ratio of
noninterest income to income before taxes was 43.9% and 40.9% for the three
months ended September 30, 1998 and 1997, respectively.
The noninterest income increase of $270,000 was primarily attributable to an
increase of $87,000 in overdraft and demand deposit service charges as a
result of increases in the number of demand deposit accounts. Other increases
include $43,000 in trust fees, a $89,000 increase in net gains on the sale of
loans, net securities gains increase of $15,000, and an increase of $42,000
in ATM surcharge fees.
For the nine months ended September 30, 1998, total noninterest income was
$5,208,000 an increase of $847,000 or 19.4% from the same period in 1997. The
increase occurred primarily in overdraft and deposit sevice fees and
securities gains. The year-to-date ratio of noninterest income to income
before income taxes was 44.0% and 39.0% for 1998 and 1997 respectively.
<PAGE>
Page 11
NONINTEREST EXPENSE
Noninterest expense increased $114,000, or 1.9%, to $6,112,000 for the three
months ended September 30, 1998 as compared to $5,998,000 in the same period
in 1997.
Salaries and employee benefits represented the largest category of
noninterest expense, accounting for 53.1% of total noninterest expense for
the three months ended total September 30, 1998 total versus 51.3% in the
same period in 1997. Salaries and employee benefits increased $167,000, or
5.4%, for the three months ended September 30, 1998 over the same period in
1997. The increase is primarily due to general pay increases.
For the nine months ended September 30, 1998, noninterest expense increased
$1,330,000 or 7.8% to $18,282,000 as compared to $16,952,000 for the same
period in 1997. Year-to-date September 30, 1998 salaries and employee
benefits increased $738,000 or 8.1% over the same period in 1997. Salaries
and employee benefits represented 53.8% of the total noninterest expense for
the nine months ended September 30, 1998 versus 53.7% for the same period in
1997.
Details of noninterest expenses for the three months ended September 30, 1998
and 1997 and nine months ended September 30, 1998 and 1997 are presented in
the following schedule:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Salaries and employee benefits $3,243 $3,076 $ 9,835 $ 9,097
Occupancy and equipment expense 816 854 2,461 2,342
Data processing 349 324 1,008 766
FDIC insurance and bank exam assessment 67 62 186 181
Printing, stationery, and supplies 143 153 461 437
Postage 119 105 372 338
Amortization of intangibles 251 251 753 770
All other expenses 1,124 1,173 3,206 3,021
---------------- ------------------
Total noninterest expense $6,112 $5,998 $18,282 $16,952
---------------- ------------------
---------------- ------------------
</TABLE>
NONPERFORMING LOANS
Nonperforming loans are comprised of those loans on which interest income is
not being accrued and other loans which are contractually in arrears as to
principal or interest for ninety days or more.
As of September 30, 1998, the Company's nonperforming loans were $4,331,000
or .79% of total loans compared to $2,105,000 or .40% of total loans at
December 31, 1997. The increase is attributable to an increase of $895,000 in
nonperforming real estate loans, and an increase of $1,544,000 in
nonperforming consumer loans, offset by a decrease of $275,000 in
nonperforming commercial loans. Impaired loans amounted to $858,000 at
September 30, 1998, and $876,000 at December 31, 1997.
<PAGE>
Page 12
ALLOWANCE FOR LOAN LOSSES
The allowance is an amount that management believes will be adequate to
absorb possible losses on existing loans that may become uncollectible, based
on evaluations of the collectibility of loans and prior loan loss experience.
This evaluation also takes into consideration such factors as changes in the
nature and volume of the loan portfolio quality, review of specific problem
loans and current economic conditions that may affect the borrower's ability
to pay.
The allowance for loan losses increased $66,000 for the nine month period
ended September 30, 1998 to $4,503,000, which represented .83% of total
loans, net of unearned income. At December 31, 1997, the allowance for loan
losses represented .84% of such loan balances.
CAPITAL RESOURCES
Stockholders' equity was $80,983,000 at September 30, 1998, an increase of
$4,038,000, or 5.2% over December 31, 1997. At September 30, 1998,
stockholders' equity represented 9.31% of total assets compared to 8.94% at
December 31, 1997.
Under rules adopted by federal bank regulatory agencies, bank holding
companies and financial institutions are subject to "risk based" capital
measurements. These regulations establish minimum levels for risk-based Tier
I Capital and Total Capital ratios and the leverage ratio. The parent company
(on a consolidated basis) and its subsidiary bank currently are considered
"well capitalized" and exceed the capital requirements established by federal
bank regulatory agencies.
The Company's consolidated actual capital ratios at September 30, 1998 and
December 31, 1997 are summarized below:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
<S> <C> <C>
Total Capital to risk-weighted assets 13.28% 12.87%
Tier I Capital to risk-weighted assets 12.51% 12.09%
Tier I Capital to average assets 8.43% 8.01%
</TABLE>
ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures
about Segments of an Enterprise and Related Information." The statement
establishes standards for the way that public business enterprises report
information about operating segments and certain other information in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. The statement is effective for financial statements for periods
beginning after December 15, 1997. The Company adopted SFAS No. 131 on
January 1, 1998 and required disclosures will be included beginning with the
Company's 1998 Annual Report. The Company operates as a single segment.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." SFAS No. 132 amends the
disclosure requirements of SFAS No. 87, "Employers' Accounting for Pensions",
SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination of Benefits", and SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions."
This statement standardizes the disclosure requirements of SFAS No. 87 and
No. 106 to the extent practicable and recommends a parallel format for
presenting information about pensions and other postretirement benefits. The
statement does not change any of the measurement or recognition provisions
provided for in SFAS No. 87, No.88 or No. 106. This statement is effective
for fiscal years beginning after December 15, 1997. The Company adopted SFAS
No. 132 on January 1, 1998 and required disclosures will be included
beginning with the Company's 1998 Annual Report.
<PAGE>
Page 13
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 standardizes the accounting
for derivative instruments, including certain derivative instruments embedded
in other contracts. Under the standard, entities are required to carry all
derivative instruments in the statement of financial position at fair value.
The accounting for changes in the fair value (i.e. gains or losses) of a
derivative instrument depends on whether it has been designated and qualifies
as part of a hedging relationship and, if so, on the reason for holding it.
If certain conditions are met, entities may elect to designate a derivative
instrument as a hedge of exposures to changes in fair value, cash flows, or
foreign currencies. If the hedged exposure is a fair value exposure, the gain
or loss on the derivative instrument is recognized in earnings in the period
of change together with the offsetting loss or gain on the hedged item
attributable to the risk being hedged. If the hedged exposure is a cash flow
exposure, the effective portion of the gain or loss on the derivative
instrument is reported initially as a component of other comprehensive income
(outside earnings) and subsequently reclassified into earnings when the
forecasted transaction affects earnings. Any amounts excluded from the
assessment of hedge effectiveness as well as the ineffective portion of the
gain or loss is reported in earnings immediately. Accounting for foreign
currency hedges is similar to accounting for fair value and cash flow hedges.
If the derivative instrument is not designated as a hedge, the gain or loss
is recognized in earnings in the period of change. This Statement will have
no effect on the Company.
YEAR 2000
Many current computer programs use only two digits to identify the calendar
year in the date field. These programs were designed and developed with
little or no consideration of the upcoming change in the century. If not
rectified, many computer applications could fail or incur errors when the
Year 2000 arrives. The Year 2000 issue affects nearly all companies. The
federal banking regulators have issued several statements providing guidance
to financial institutions on steps the regulators expect financial
institutions to take to ensure Year 2000 compliance.
The Company is taking a proactive approach to this problem and is evaluating
the impact of the Year 2000 issue on its computer systems and software
applications. The Company utilizes and is dependent upon data processing
systems and software to conduct its business. The data processing systems and
software include those developed and maintained by the Company's data
processing provider and purchased software which is run on in-house computer
networks and workstations.
The Company has developed a strategic plan for Year 2000 compliance which is
being administered by a committee comprised of individuals from all
functional areas of the Company as well as being reviewed by senior
management and the board of directors. The plan follows guidelines set forth
by the Federal Financial Institutions Examinations Council (FFEIC). Our overall
readiness is reviewed quarterly by the Comptroller of Currency, their current
review schedule will continue throughout 1999. The Company has also developed
contingency plans to deal with system failures should they occur internally
or externally.
The Company's data processing provider and other vendors have been contacted
and have indicated that their hardware and software will be Year 2000
compliant by the first quarter of 1999. This will allow time for testing
compliance. In addition, alarms, heating and cooling systems, and other
computer controlled mechanical devices which the Company relies on will be
evaluated.
While there will be some expenses incurred during this process, a significant
portion of the costs associated with Year 2000 compliance will be met with
existing resources. The Company has not identified any situations that will
require material cost expenditures in order to become fully compliant. An
unknown element at this time is the impact of the Year 2000 on the Company's
borrowing customers. The Company has started a program to communicate with
key customers to ensure that they are aware of and are properly prepared for
the Year 2000.
<PAGE>
Page 14
MARKET RISK
The company does not engage in foreign currency transactions, forward
position or futures contracts, options, swaps or other types of complex
financial instruments, nor does it engage in trading account activities.
Thus, market risk is primarily limited to the interest rate risks associated
with the investing, lending, customer deposit taking and borrowing activities
of its banking subsidiaries. Except for a term note borrowing of $1.925
million payable to another financial institution that accrues interest based
on the London Interbank Offered Rate, the Company's exposure to interest rate
risk results from changes in either the short-term U.S. prime interest rate
or the rates offered for short and medium term bonds and notes of the U.S.
Treasury. The following table presents the interest rate sensitivity and
expected maturities of securities, fixed rate loans, time deposits,
short-term borrowings and long-term debt at September 30, 1998 fair value
amounts.
<TABLE>
<CAPTION>
Expected Maturity Amounts for Years Ending September 30,
----------------------------------------------------------------
2001 Fair
Through After Value
1999 2000 2003 2003 Total Total
---- ---- ---- ---- -------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Securities, fixed rate
Available-for-sale $ 5,497 -- $ 2,998 $15,006 $ 23,501 $ 23,609
Average interest rate 5.95% -- 6.49% 6.09% 6.11%
Held-to-maturity 29,488 $ 8,605 95,193 77,286 210,572 212,651
Average interest rate 5.55% 6.21% 6.12% 6.05% 6.02%
Loans, fixed rate (1) 102,584 53,129 180,045 85,591 421,349 422,738
Average interest rate 8.65% 8.79% 8.68% 8.15% 8.58%
LIABILITIES
NOW, money market and
savings deposits (2) 305,111 -- -- -- 305,111 305,111
Average interest rate 2.46% -- -- -- 2.46%
Time deposits, fixed rate 254,482 21,464 14,506 -- 290,452 291,859
Average interest rate 5.28% 5.83% 5.86% -- 5.35%
Short-term borrowings, fixed rate 58,478 -- -- -- 58,478 58,478
Average interest rate 5.32% -- -- -- 5.32%
Long-term debt, variable rate 1,634 2,808 -- -- 4,442 4,442
Average interest rate 8.03% 7.73% -- -- 7.84%
</TABLE>
(1)Information on variable rate loans by maturity period is not readily
available. Interest rate risk on loan commitments, unused lines of credit and
standby letters of credit is minimal since most are for terms of ninety days
or less and include variable rate features.
(2)NOW and savings accounts are fixed rates deposits whereas money market
accounts are variable rate deposits. These deposit accounts, while shown as
maturing in the year ending September 30, 1999, are considered by management
as core deposits for asset/liability management purposes with account lives
extending beyond one year.
<PAGE>
Page 15
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This report contains certain forward looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain
assumptions and describe future plans, strategies and expectations of the
Company, are generally identifiable by use of the words "believe," "expect,"
"intend," "anticipate," "estimate," "project" or similar expressions. The
Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material
adverse affect on the operations and future prospects of the Company and the
subsidiary include, but are not limited to, changes in: interest rates,
general economic conditions, legislative/regulatory changes, monetary and
fiscal policies of the U.S. Government, including policies of the U.S.
Treasury and the Federal Reserve Board, the quality or composition of the
loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the Company's market area and
accounting principles, policies and guidelines. These risks and uncertainties
should be considered in evaluating forward-looking statements and undue
reliance should not be placed on such statements. Further information
concerning the Company and its business, including additional factors that
could materially affect the Company's financial results, is included in the
Company's filings with the Securities and Exchange Commission.
SUPERVISION AND REGULATION
YEAR 2000
The federal banking regulators recently issued guidelines establishing
minimum safety and soundness standards for achieving Year 2000 compliance.
The guidelines, which took effect October 15, 1998 and apply to all
FDIC-insured depository institutions, establish standards for developing and
managing Year 2000 project plans, testing remediation efforts and planning
for contingencies. The guidelines are based upon guidance previously issued
by the agencies under the auspices of the Federal Financial Institutions
Examination Council (the "FFIEC"), but are not intended to replace or
supplant the FFIEC guidance which will continue to apply to all federally
insured depository institutions.
The guidelines were issued under section 39 of the Federal Deposit Insurance
Act, as amended (the "FDIA"), which requires the federal banking regulators
to establish standards for the safe and sound operation of federally insured
depository institutions. Under section 39 of the FDIA, if an institution
fails to meet any of the standards established in the guidelines, the
institution's primary federal regulator may require the institution to submit
a plan for achieving compliance. If an institution fails to submit an
acceptable compliance plan, or fails in any material respect to implement a
compliance plan that has been accepted by its primary federal regulator, the
regulator is required to issue an order directing the institution to cure the
deficiency. Such an order is enforceable in court in the same manner as a
cease and desist order. Until the deficiency cited in the regulator's order
is cured, the regulator may restrict the institution's rate of growth,
require the institution to increase its capital, restrict the rates the
institution pays on deposits or require the institution to take any action
the regulator deems appropriate under the circumstances. In addition to the
enforcement procedures established in section 39 of the FDIA, noncompliance
with the standards established by the guidelines may also be grounds for
other enforcement action by the federal banking regulators, including cease
and desist orders and civil money penalty assessments.
<PAGE>
Page 16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedngs to which the Company or its
subsidiary are a party other than ordinary routine litigation incidental to
their respective businesses.
ITEM 2. CHANGES IN SECURITIES
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
<PAGE>
Page 17
SIGNATURES
Pursuant to the Requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST NATIONAL BANCORP, INC.
(REGISTRANT)
DATE: NOVEMBER 3, 1998
/s/ Kevin T. Reardon /s/ Albert G. D'Ottavio
- ----------------------- -----------------------
Kevin T. Reardon Albert G. D'Ottavio
Chairman of the Board President
Chief Executive Officer Principal Accounting Officer
& Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> DEC-31-1997
<PERIOD-END> SEP-30-1998
<CASH> 39,698
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 19,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 23,609
<INVESTMENTS-CARRYING> 210,572
<INVESTMENTS-MARKET> 212,651
<LOANS> 544,931
<ALLOWANCE> 4,503
<TOTAL-ASSETS> 869,673
<DEPOSITS> 719,013
<SHORT-TERM> 58,478
<LIABILITIES-OTHER> 6,757
<LONG-TERM> 4,442
0
0
<COMMON> 24,318
<OTHER-SE> 56,665
<TOTAL-LIABILITIES-AND-EQUITY> 869,673
<INTEREST-LOAN> 34,782
<INTEREST-INVEST> 9,198
<INTEREST-OTHER> 2,454
<INTEREST-TOTAL> 46,434
<INTEREST-DEPOSIT> 18,269
<INTEREST-EXPENSE> 20,468
<INTEREST-INCOME-NET> 25,966
<LOAN-LOSSES> 1,059
<SECURITIES-GAINS> 94
<EXPENSE-OTHER> 18,282
<INCOME-PRETAX> 11,833
<INCOME-PRE-EXTRAORDINARY> 11,833
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,863
<EPS-PRIMARY> 3.24
<EPS-DILUTED> 3.24
<YIELD-ACTUAL> 4.38
<LOANS-NON> 1,599
<LOANS-PAST> 2,732
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,437
<CHARGE-OFFS> 1,216
<RECOVERIES> 223
<ALLOWANCE-CLOSE> 4,503
<ALLOWANCE-DOMESTIC> 4,503
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
