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FIRST NATIONAL BANCORP INC /IL/
10-Q, 1999-11-09
NATIONAL COMMERCIAL BANKS

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-Q

(Mark One)

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

For the period ended September 30, 1999

or

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

For the transition period from                to                

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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: 2,420,436 shares of the Company's Common Stock ($10.00 par value) were outstanding as of November 3, 1999.

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FIRST NATIONAL BANCORP, INC. AND SUBSIDIARY

CONTENTS

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
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
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		15

Part II. Other Information

Item 1.		Legal Proceedings		17
Item 2.		Changes in Securities		17
Item 3.		Defaults upon Senior Securities		17
Item 4.		Submission of Matters to a Vote of Security Holders		17
Item 5.		Other Information		17
Item 6.		Exhibits and Reports on Form 8-K		17
		Signature Page		18

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

FIRST NATIONAL BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)

		September 30, 1999 (Unaudited)			December 31, 1998
ASSETS
Cash and due from banks		$	55,459		$	39,710
Federal funds sold			26,700			31,000
Securities available-for-sale			69,871			66,927
Securities held-to-maturity (fair value of $205,703 at September 30, 1999 and $195,526 at December 31, 1998)			209,095			193,733
Loans, net of unearned discount			586,953			540,946
Allowance for loan losses			(5,777	)		(4,946	)
Loans, net			581,176			536,000
Premises and equipment, net			19,547			18,753
Accrued interest receivable and other assets			11,196			8,067
Intangibles, net			7,731			8,485
TOTAL ASSETS		$	980,775		$	902,675
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand, non-interest bearing		$	146,297		$	142,427
NOW accounts			97,605			87,611
Money market accounts			56,632			45,736
Savings			181,663			172,329
Time deposits, $100,000 and over			69,718			69,871
Other time deposits			249,195			228,342
Total deposits			801,110			746,316
Short-term borrowings			86,367			65,540
Long-term debt			1,259			3,059
Accrued interest and other liabilities			5,541			5,652
Total liabilities			894,277			820,567
STOCKHOLDERS' EQUITY
Preferred stock			—			—
Common stock			24,318			24,318
Additional paid-in capital			14			14
Retained earnings			64,206			58,578
Treasury stock			(750	)		(750	)
Unrealized loss on securities available-for-sale, net of tax			(1,290	)		(52	)
Total Stockholders' Equity			86,498			82,108
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	980,775		$	902,675

See Notes to Condensed Consolidated Financial Statements.

FIRST NATIONAL BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share data)

		Three Months Ended September 30,						Nine Months Ended September 30,
		1999			1998			1999			1998
INTEREST INCOME:
Loans		$	11,901		$	11,770		$	34,622		$	34,782
Securities:
Taxable			3,627			2,602			9,947			7,915
Tax-exempt			389			418			1,168			1,283
Federal funds sold			501			926			1,440			2,454
Total interest income			16,418			15,716			47,177			46,434
INTEREST EXPENSE:
Deposits			6,063			6,081			17,453			18,269
Short-term borrowings			842			785			1,976			1,914
Long-term debt			26			94			91			285
Total interest expense			6,931			6,960			19,520			20,468
Net interest income			9,487			8,756			27,657			25,966
Provision for loan losses			525			375			1,275			1,059
Net interest income after provision for loan losses			8,962			8,381			26,382			24,907
NONINTEREST INCOME:
Trust fees			321			287			1,004			876
Service charges on deposit accounts			1,026			979			2,925			2,891
Securities gains, net			—			20			15			94
Other income			456			488			1,438			1,347
Total noninterest income			1,803			1,774			5,382			5,208
NONINTEREST EXPENSES:
Salaries and employee benefits			3,414			3,243			10,023			9,835
Occupancy and equipment expense			840			816			2,380			2,461
Data processing expense			394			349			1,039			1,008
Amortization of intangibles			251			307			753			809
Other expenses			1,553			1,397			4,410			4,169
Total noninterest expenses			6,452			6,112			18,605			18,282
INCOME BEFORE INCOME TAXES			4,313			4,043			13,159			11,833
Income tax expense			1,440			1,356			4,445			3,970
NET INCOME		$	2,873		$	2,687		$	8,714		$	7,863
Earnings per common share		$	1.19		$	1.11		$	3.60		$	3.24
Weighted average number of shares outstanding			2,420,436			2,416,038			2,420,436			2,426,491

See Notes to Condensed Consolidated Financial Statements.

FIRST NATIONAL BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
(Dollars in thousands)

		Comprehensive Income Nine Months Ended September 30,						Stockholders' Equity Nine Months Ended September 30,
		1999			1998			1999			1998
COMMON STOCK:
Beginning and end of period								$	24,318		$	24,318
ADDITIONAL PAID-IN CAPITAL:
Beginning and end of period									14			—
RETAINED EARNINGS:
Beginning of period									58,578			52,607
Net income		$	8,714		$	7,863			8,714			7,863
Cash dividends declared									(3,086	)		(2,729	)
End of period									64,206			57,741
TREASURY STOCK (At Cost):
Beginning of period									(750	)		—
Stock purchase of 17,268 shares									—			(1,140	)
End of period									(750	)		(1,140	)
UNREALIZED GAIN (LOSS) ON SECURITIES AVAILABLE-FOR-SALE:
Beginning of period									(52	)		20
Unrealized gains (losses) on securities, net of reclassification adjustment			(1,238	)		44
Other comprehensive income			(1,238	)		44			(1,238	)		44
End of period									(1,290	)		64
Total comprehensive income		$	7,476		$	7,907
TOTAL STOCKHOLDERS' EQUITY								$	86,498		$	80,983

See Notes to Condensed Consolidated Financial Statements.

FIRST NATIONAL BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)

		Nine Months Ended September 30,
		1999			1998
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income		$	8,714		$	7,863
Adjustments to reconcile net income to net cash from operating activities:
Depreciation			1,324			1,276
Provision for loan losses			1,275			1,059
Amortization of securities premiums, net of accretion			16			43
Net securities gains			(15	)		(94	)
Net gains on sale of other real estate			—			(15	)
Amortization of intangibles			753			753
(Increase) decrease in accrued interest receivable and other assets			(2,314	)		(186	)
Increase (decrease) in accrued interest and other liabilities			(111	)		95
Net cash from operating activities			9,642			10,794
CASH FLOWS FROM INVESTING ACTIVITIES
Change in federal funds sold, net			4,300			31,800
Proceeds from maturities of securities			71,663			116,095
Proceeds from sale of securities			6,998			—
Purchase of securities			(99,020	)		(133,449	)
Loans made to customers, net of principal collections			(46,501	)		(19,645	)
Purchase of premises and equipment			(2,118	)		(1,493	)
Proceeds from sale of other real estate			50			121
Net cash from investing activities			(64,628	)		(6,571	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits			54,794			(7,143	)
Net increase in short-term borrowings			20,827			12,271
Principal paid on long-term debt			(1,800	)		(375	)
Purchase of treasury stock			—			(1,140	)
Dividends paid			(3,086	)		(2,729	)
Net cash from financing activities			70,735			884
Net change in cash and due from banks			15,749			5,107
CASH AND DUE FROM BANKS
Beginning			39,710			34,591
Ending		$	55,459		$	39,698
SUPPLEMENTAL DISCLOSURES
Cash payments for:
Interest paid		$	20,026		$	20,320
Income taxes			4,780			3,485

See Notes to Condensed Consolidated Financial Statements.

FIRST NATIONAL BANCORP, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(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.

    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 Company's 1998 Annual Report on Form 10-K filed with the Securities and Exchange Commission. The December 31, 1998 condensed balance sheet has been derived from the audited financial statements included in the Company's 1998 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, 1999. 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, 1999 and 1998 and the nine months ended September 30, 1999 and 1998 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.

NOTE 2 — SECURITIES

    The amortized cost and fair value of securities available-for-sale at September 30, 1999 and December 31, 1998 are as follows:

September 30, 1999		Amortized Cost			Fair Value
U. S. Treasury		$	—		$	—
U. S. Government agencies			69,982			67,874
Corporate			1,019			990
Federal Reserve Bank stock			1,007			1,007
		$	72,008		$	69,871

December 31, 1998		Amortized Cost			Fair Value
U. S. Treasury		$	5,998		$	6,048
U. S. Government agencies			58,985			58,845
Corporate			1,023			1,027
Federal Reserve Bank stock			1,007			1,007
		$	67,013		$	66,927

    The amortized cost and fair value of securities held-to-maturity at September 30, 1999 and December 31, 1998 are as follows:

September 30, 1999		Amortized Cost			Fair Value
U. S. Treasury		$	7,011		$	7,064
U. S. Government agencies			172,714			169,024
States and political subdivisions			29,370			29,615
		$	209,095		$	205,703

December 31, 1998		Amortized Cost			Fair Value
U. S. Treasury		$	16,021		$	16,250
U. S. Government agencies			147,673			148,235
States and political subdivisions			30,039			31,041
		$	193,733		$	195,526

    Securities with a carrying value of approximately $196,068,000 and $155,000,000 at September 30, 1999 and December 31, 1998, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase, and for other purposes required or permitted by law.

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, 1999 and December 31, 1998 were as follows:

		September 30, 1999			December 31, 1998
Commercial and commercial real estate		$	207,565		$	184,988
Residential real estate			130,093			136,894
Construction			13,211			15,624
Agricultural			11,111			9,763
Consumer			224,973			193,677
Total loans		$	586,953		$	540,946

    Impaired loans consist of commercial and commercial real estate loans. Impaired loans amounted to $1,188,000 at September 30, 1999 and $786,000 at December 31, 1998.

    Changes in the allowance for loan losses were as follows:

		1999			1998
Balance, beginning of year		$	4,946		$	4,437
Provision charged to operations			1,275			1,059
Loans charged-off			(1,168	)		(1,216	)
Recoveries			724			223
Balance, September 30, 1999 and 1998		$	5,777		$	4,503

NOTE 4 — COMMITMENTS AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET

    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.

    A summary of the contract amounts of the Bank's exposure to off-balance-sheet risk is as follows:

		September 30, 1999			December 31, 1998
Loan commitments		$	66,061		$	69,092
Standby letters of credit			8,605			16,833

    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.

    The Company and its subsidiary are involved in litigation arising in the ordinary course of business. The resolution of these matters is not expected, either individually or in the aggregate, to have a material effect on the Company's financial condition or results of operations.

NOTE 5 — 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 $7.5 million for the first nine months of 1999, compared to $7.9 million for the first nine months of 1998.

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.

    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.

FINANCIAL CONDITION

    Total assets increased $78,100,000 or 8.65% to $980,775,000 as of September 30, 1999, compared to December 31, 1998. During the first nine months of 1999, net loans increased $45,176,000, up 8.43% from December 31, 1998. Deposits increased $54,794,000 during the first nine months of 1999, up 7.34% from December 31, 1998. Stockholders' Equity increased $4,390,000, up 5.35% from December 31, 1998.

    At September 30, 1999, earning assets were $892,619,000, an increase of $60,013,000 or 7.21% from $832,606,000 at December 31, 1998. Average earning assets for the three months ended September 30, 1999 were $888,863,000, an increase of $81,340,000, or 10.07% from the same period in 1998, primarily due to an increase of $38,008,000 in the average loan portfolio and an increase of $68,332,000 in average investments offset by a decrease of $25,000,000 in average federal funds sold.

    Interest-bearing liabilities were $742,439,000 at September 30, 1999, an increase of $69,951,000 or 10.40%, from $672,488,000 at December 31, 1998. The increase was primarily due to an increase of 15.67% in NOW accounts and money market accounts from additional seasonal public funds, a 5.42% increase in savings accounts, a 6.94% increase in time deposits, and an increase of 31.78% in short-term borrowings as a result of fluctuations in the balances of seasonal public funds.

    Average interest-bearing liabilities for the three months ended September 30, 1999 were $731,226,000, an increase of $71,163,000, or 10.78% from the same period in 1998. The increase was primarily due to a 9.25% increase in interest-bearing deposits and a 27.91% increase in short-term borrowings.

RESULTS OF OPERATIONS

    For the three months ended September 30, 1999, the Company earned $2,873,000 or $1.19 per share as compared to $2,687,000 or $1.11 per share for the same period in 1998. On a percentage basis, net income for the third quarter of 1999 increased by 6.92% over that of the third quarter of 1998. The Company's annualized return on average assets for the three months ended September 30, 1999 was 1.18% versus 1.22% for the same period in 1998. Annualized return on average equity was 13.25% for the third quarter of 1999 compared to 13.23% for the third quarter of 1998.

    For the nine months ended September 30, 1999, the Company earned $8,714,000 or $3.60 per share as compared to $7,863,000 or $3.24 per share for the same period in 1998. During this period, net income increased 10.82% over the same period in 1998. The Company's annualized return on average assets for the nine months ended September 30, 1999 was 1.26% versus 1.21% for the same period in 1998. Annualized return on average equity was 13.78% for the nine months ended September 30, 1999 compared to 13.40% for the same period in 1998.

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 and monitoring interest rates offered to customers, 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 4.35% for the three months ended September 30, 1999, as compared to 4.43% for the same period in 1998.

    For the three months ending September 30, 1999, the yield on earning assets decreased 39 basis points to 7.33% and the cost of interest-bearing liabilities decreased 42 basis points to 3.76% as compared to the same period in 1998. The decrease in the yield on earning assets is due primarily to the decrease in loan and securities interest rates. The decrease in the cost of interest-bearing liabilities is due primarily to a combination of the increase in the volume of savings, money market, and time deposit accounts and the decrease in the interest rates paid on those funds.

    Tax equivalent net interest income for the three months ended September 30, 1999, increased $719,000 or 7.97% compared to the same period in 1998. The increase in the volume of earning assets net of interest-bearing liabilities produced $729,000 of the net interest income increase while changes in interest rates decreased income by $10,000.

    For the nine months ended September 30, 1999, on a tax equivalent basis, the Company's net interest income expressed as a percentage of average interest earning assets was 4.46% as compared to 4.51% for the same period in 1998. The yield on earning assets decreased 42 basis points to 7.41% and the cost of interest-bearing liabilities decreased 46 basis points to 3.76%. Tax equivalent net interest income for the nine months ended September 30, 1999 increased $1,685,000 or 6.30% compared to the same period in 1998. The increase in the volume of earning assets net of interest-bearing liabilities produced $1,714,000 of the net interest income increase while changes in interest rates decreased income by $29,000.

NONINTEREST INCOME

    Noninterest income consists primarily of service charges on deposit accounts and trust fees. Total noninterest income was $1,803,000 for the three months ended September 30, 1999, an increase of $29,000, or 1.63%, from the same period in 1998. The ratio of noninterest income to income before taxes was 41.80% and 43.88% for the three months ended September 30, 1999 and 1998, respectively.

    The noninterest income increase of $29,000 was primarily attributable to an increase of $27,000 in servicing fees on real estate mortgage loans sold, an increase of $34,000 in trust fees, an increase of $15,000 in ATM surcharge fees, and an increase of $47,000 in service charges on deposit accounts. These increases are offset in part by a decrease in net securities gains of $20,000 and a decrease of $69,000 in gains on the sale of loans.

    For the nine months ended September 30, 1999, the total noninterest income was $5,382,000 an increase of $174,000 or 3.34% from the same period in 1998. The increase included increases in trust fees of $128,000, servicing fees on real estate mortgage loans sold of $85,000, ATM surcharge fees of $50,000, and service charges on deposit accounts of $34,000. These increases are offset by decreases in gains on the sale of loans of $48,000 and net securities gains of $79,000.

NONINTEREST EXPENSE

    Noninterest expense increased $340,000, or 5.56%, to $6,452,000 for the three months ended September 30, 1999 as compared to $6,112,000 in the same period in 1998. For the nine months ended September 30, 1999, noninterest expense increased $323,000 or 1.77% to $18,605,000 as compared to $18,282,000 for the same period in 1998.

    Details of noninterest expenses for the three months ended September 30, 1999 and 1998 and the nine months ended September 30, 1999 and 1998, are presented in the following schedule:

		Three Months Ended September 30,						Nine Months Ended September 30,
		1999			1998			1999			1998
Salaries and employee benefits		$	3,414		$	3,243		$	10,023		$	9,835
Occupancy and equipment expense			840			816			2,380			2,461
Data processing			394			349			1,039			1,008
FDIC insurance and bank exam assessment			68			67			201			186
Printing, stationery, and supplies			160			143			409			461
Postage			115			119			306			372
Amortization of intangibles			251			251			753			753
All other expenses			1,210			1,124			3,494			3,206
Total noninterest expense		$	6,452		$	6,112		$	18,605		$	18,282

    Salaries and employee benefits represented the largest category of noninterest expense, accounting for 52.91% of total noninterest expense for the three months ended September 30, 1999 versus 53.06% in the same period in 1998. Salaries and benefits represented 53.87% of total noninterest expense for the nine months ended September 30, 1999 versus 53.80% in the same period in 1998. Compensation expense has been controlled through efficiencies resulting from merging all four of the Company's subsidiary banks together in March 1998. The Company's number of full-time equivalent employees at September 30, 1999 were 373, compared to 356 and 364 at December 31, 1998 and 1997, respectively.

    The year-to-date decrease in supplies, and postage expenses from 1998 to 1999 were primarily due to the increased expenses incurred in 1998 as a result of the merger of the subsidiary banks.

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, 1999, the Company's nonperforming loans were $3,943,000 or .67% of total loans compared to $3,164,000 or .58% of total loans at December 31, 1998. The increase is attributable to increases of $316,000 in nonperforming real estate loans, and $452,000 in nonperforming consumer loans. Impaired loans amounted to $1,188,000 at September 30, 1999, and $786,000 at December 31, 1998.

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 $831,000 for the nine month period ended September 30, 1999 to $5,777,000, which represented .98% of total loans. At December 31, 1998, the allowance for loan losses represented .91% of total loans.

CAPITAL RESOURCES

    Stockholders' equity was $86,498,000 at September 30, 1999, an increase of $4,390,000, or 5.35% over December 31, 1998. At September 30, 1999, stockholders' equity represented 8.82% of total assets compared to 9.10% at December 31, 1998.

    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 1 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, 1999 and December 31, 1998 are summarized below:

		September 30, 1999		December 31, 1998
Total Capital to risk-weighted assets		13.41	%	13.43	%
Tier I Capital to risk-weighted assets		12.52	%	12.59	%
Tier I Capital to average assets		8.44	%	8.43	%

NEW ACCOUNTING PRONOUNCEMENTS

    In 1999 and 2000, new accounting pronouncements that have been issued will take effect. These pronouncements and their expected effects on the Company, are summarized below.

    Statement of Financial Accounting Standards (Statement) 133 on derivatives will, in 2001, require all derivatives to be recorded at fair value in the balance sheet, with changes in fair value charged or credited to income. If derivatives are documented and effective as hedges, the change in the derivative fair value will be offset by an equal change in the fair value of the hedged item. Under the new standard, securities held-to-maturity can no longer be hedged, except for changes in the issuer's creditworthiness. Therefore, upon adoption of Statement 133, companies will have another one-time window of opportunity to reclassify held-to-maturity securities to either trading or available-for-sale, provided certain citeria are met. This Statement may be adopted early at the start of a calendar quarter. Since the Company has no significant derivative instruments or hedging activities, adoption of Statement 133 is not expected to have a material impact on the Company's financial statements. However, the Company may take advantage of the opportunity provided by Statement 133 to reclassify held-to-maturity securities to available-for-sale. Management has not decided whether to adopt Statement 133 early.

    Statement 134 on mortgage banking will, in 1999, allow mortgage loans that are securitized to be classified as trading, available-for-sale, or, in certain circumstances, held-to-maturity. Currently, these must be classified as trading. Since the Company has not securitized mortgage loans, Statement 134 is not expected to affect the Company.

    AICPA Statement of Position 98-1, effective in 1999, sets the accounting requirement to capitalize costs incurred to develop or obtain software that is to be used solely to meet internal needs. Costs to capitalize are those direct costs incurred after the preliminary project stage, up to the date when all testing has been completed and the software is substantially ready for use. All training costs, research and development costs, costs incurred to convert data, and all other general and administrative costs are to be expensed as incurred. The capitalized cost of internal-use software is amortized over its useful life and reviewed for impairment using the criteria in Statement 121. Statement of Position 98-1 has not had any impact on the Company.

    AICPA Statement of Position 98-5, also effective in 1999, requires all start-up, pre-opening, and organization costs to be expensed as incurred. Any such costs previously capitalized for financial reporting purposes must be written off to income at the start of the year. Statement 98-5 has not had any impact on the Company, since no such costs were capitalized at December 31, 1998.

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 the Currency, and their current review schedule will continue throughout 1999. The Company has also developed contingency plans for all critical systems and applications to deal with system failures should they occur internally or externally. During the third and fourth quarters, the Company will be testing these contingency plans.

    The Company's data processing provider and other vendors have been contacted and have indicated that their hardware and software is Year 2000 compliant. The Company has upgraded to those compliant software versions and completed the testing of these systems. In addition, alarms, heating and cooling systems, and other computer controlled mechanical devices which the Company relies on have been evaluated.

    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 communicated with key customers to ensure that they are aware of and are properly prepared for the Year 2000.

Recent Regulatory Development

    Pending Legislation.  On November 4, 1999, the United States Congress approved legislation that would allow bank holding companies to engage in a wider range of nonbanking activities, including greater authority to engage in securities and insurance activities. Under the Gramm-Leach-Bliley Act (the "Act"), a bank holding company that elects to become a financial holding company may engage in any activity that the Board of Governors of the Federal Reserve System (the "Federal Reserve"), in consultation with the Secretary of the Treasury, determines by regulation or order is (i) financial in nature, (ii) incidental to any such financial activity, or (iii) complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. The Act specifies certain activities that are deemed to be financial in nature, including lending, exchanging, transferring, investing for others, or safeguarding money or securities; underwriting and selling insurance; providing financial, investment, or economic advisory services; underwriting, dealing in or making a market in, securities; and any activity currently permitted for bank holding companies by the Federal Reserve under section 4(c)(8) of the Bank Holding Company Act. A bank holding company may elect to be treated as a financial holding company only if all depository institution subsidiaries of the holding company are well-capitalized, well-managed and have at least a satisfactory rating under the Community Reinvestment Act.

    National banks are also authorized by the Act to engage, through "financial subsidiaries," in any activity that is permissible for a financial holding company (as described above) and any activity that the Secretary of the Treasury, in consultation with the Federal Reserve, determines is financial in nature or incidental to any such financial activity, except (i) insurance underwriting, (ii) real estate development or real estate investment activities (unless otherwise permitted by law), (iii) insurance company portfolio investments and (iv)  merchant banking. The authority of a national bank to invest in a financial subsidiary is subject to a number of conditions, including, among other things, requirements that the bank must be well-managed and well-capitalized (after deducting from capital the bank's outstanding investments in financial subsidiaries). The Act provides that state banks may invest in financial subsidiaries (assuming they have the requisite investment authority under applicable state law) subject to the same conditions that apply to national bank investments in financial subsidiaries.

    The Act must be signed by the President before it will take effect. At this time, the Company is unable to predict the impact the Act may have on the Company and its subsidiary.

FIRST NATIONAL BANCORP, INC. AND SUBSIDIARY

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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 subsidiary. The Company's exposure to interest rate risk results primarily 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 tables present the interest rate sensitivity and expected maturities of securities, fixed rate loans, time deposits, short-term borrowings and long-term debt as of September 30, 1999 and December 31, 1998.

		Analysis as of September 30, 1999 Expected Maturity Amounts for Years Ending September 30,
		2000			2001			2002 Through 2004			After 2004			Total			Fair Value Total
Assets
Securities, fixed rate
Available-for-sale		$	—		$	2,999		$	58,010		$	10,999		$	72,008		$	69,871
Average interest rate			—			6.15	%		5.43	%		6.54	%		5.63	%
Held-to-maturity			8,999			21,508			149,322			29,266			209,095			205,703
Average interest rate			6.13	%		5.88	%		5.83	%		6.20	%		5.90	%
Loans, fixed rate (1)			101,457			58,709			210,754			88,051			458,971			458,087
Average interest rate			8.51	%		8.57	%		8.27	%		7.95	%		8.30	%
Liabilities
NOW, money market and savings deposits (2)		$	335,900		$	—		$	—		$	—		$	335,900		$	335,900
Average interest rate			2.54	%		—			—			—			2.54	%
Time deposits, fixed rate			291,876			15,384			11,653			—			318,913			318,897
Average interest rate			4.78	%		5.55	%		5.47	%		—			4.84	%
Short-term borrowings, fixed rate			86,367			—			—			—			86,367			86,367
Average interest rate			4.99	%		—			—			—			4.99	%
Long-term debt, variable rate			1,259			—			—			—			1,259			1,259
Average interest rate			8.25	%		—			—			—			8.25	%

---

(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, money market, and savings accounts are variable rate deposits. These deposit accounts, while shown as maturing in the year ending September 30, 2000, are considered by management as core deposits for asset/liability management purposes with account lives extending beyond one year.

		Analysis as of December 31, 1998 Expected Maturity Amounts for Years Ending December 31,
		1999			2000			2001 Through 2003			After 2003			Total			Fair Value Total
Assets
Securities, fixed rate
Available-for-sale		$	4,999		$	—		$	47,008		$	15,006		$	67,013		$	66,927
Average interest rate			6.05	%		—			5.35	%		6.04	%		5.55	%
Held-to-maturity			14,821			12,126			136,638			30,148			193,733			195,526
Average interest rate			5.85	%		6.09	%		5.90	%		5.78	%		5.89	%
Loans, fixed rate (1)			97,040			52,838			187,935			83,262			421,075			425,351
Average interest rate			8.63	%		8.74	%		8.46	%		8.07	%		8.46	%
Liabilities
NOW, money market and savings deposits (2)		$	305,676		$	—		$	—		$	—		$	305,676		$	305,676
Average interest rate			2.50	%		—			—			—			2.50	%
Time deposits, fixed rate			266,648			16,586			14,979			—			298,213			300,001
Average interest rate			4.98	%		5.68	%		5.77	%		—			5.06	%
Short-term borrowings, fixed rate			65,540			—			—			—			65,540			65,540
Average interest rate			4.92	%		—			—			—			4.92	%
Long-term debt, variable rate			3,059			—			—			—			3,059			3,059
Average interest rate			7.49	%		—			—			—			7.49	%

---

(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, money market, and savings accounts are variable rate deposits. These deposit accounts, while shown as maturing in the year ending December 31, 1999, are considered by management as core deposits for asset/liability management purposes with account lives extending beyond one year.

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.

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 5, 1999

/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

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