A summary of the contract amounts of the Company's exposure to off-balance-sheet risk is as follows:
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 necessarilly represent future cash requirements. The Company 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 the Bank 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.
On March 1, 2001, the Company entered into an Agreement and Plan of Merger ("Merger Agreement") with Bank of Montreal, a chartered bank of Canada ("BMO"), and Bankmont Financial Corp., a Delaware corporation and wholly-owned subsidiary of BMO, providing for the merger of the Company with and into Bankmont Financial Corp. In connection with the merger, each share of the Company's $10 par value common stock will be converted at the time of the merger, at the election of each Company shareholder and subject to adjustment as provided below, into either:
The "BMO Share Price" means the average (weighted according to reported daily trading volume on the New York Stock Exchange and rounded to the nearest $.01) of the closing prices of the BMO no par value common shares on the ten trading days immediately prior to the fourth day preceding the closing of the merger.
Consummation of the merger is subject to various conditions, including (i) the approval of the Merger Agreement and merger by the holders of two-thirds of the outstanding Company no par value common stock, (ii) the receipt of the requisite regulatory approvals, and (iii) registration of the BMO no par value common shares to be issued in the merger under the Securities Act of 1933, as amended.
The following presents management's discussion and analysis of the results of operations and financial condition of 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.
The statements contained in this management's discussion and analysis that are not historical facts are forward-looking statements subject to the safe harbor created by the Private Securities Reform Act of 1995. 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 its subsidiary Bank include, but are not limited to, changes in: interest rates, general economic conditions, legislative and regulatory, 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 securities portfolios; demand for loan products; deposit flows; competition; demand for financial services in the Company's market area; accounting principles, policies and guidelines; implementation of new technologies; and the Company's ability to develop and maintain secure and reliable electronic systems. 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 $1,004,000 or .09% to $1,068,785,000 as of March 31, 2001, compared to December 31, 2000. During the first three months of 2001, net loans decreased $3,030,000, down .53% from December 31, 2000. Deposits decreased $6,085,000 during the first three months of 2001, down .72% from December 31, 2000. Stockholders' Equity increased $3,250,000 up 3.38% from December 31, 2000.
At March 31, 2001, earning assets were $983,919,000, an increase of $627,000 or .06% from $983,292,000 at December 31, 2000. Average earning assets for the three months ended March 31, 2001 were $965,565,000, an increase of $49,372,000 or 5.39% from the same period in 2000, primarily due to an increase of $72,080,000 in average securities, offset by a decrease of $8,836,000 in average federal funds sold and a decrease of $13,872,000 in the average loan portfolio.
Interest-bearing liabilities were $797,382,000 at March 31, 2001, a decrease of $2,948,000 or .37%, from $800,330,000 at December 31, 2000. The decrease was primarily due to a 5.08% decrease in NOW accounts as a result of fluctuations in the balances of seasonal public funds as well as a 2.12% decrease in time deposits. These decreases were offset by increases of 4.21% in savings deposits and 2.04% in short-term borrowings.
Average interest-bearing liabilities for the three months ended March 31, 2001 were $788,025,000, an increase of $36,678,000, or 4.88% from 2000. The increase was primarily due to a 14.79% increase in interest-bearing deposits and a 29.53% increase in short-term borrowings, primarily seasonal repurchase agreements of municipalities.
RESULTS OF OPERATIONS
For the three months ended March 31, 2001, the Company earned $3,187,000 or $1.05 per share as compared to $3,005,000 or $.99 per share for the same period in 2000. On a percentage basis, net income for the first quarter of 2001 increased by 6.06% over 2000. The Company's annualized return on average assets for the three months ended March 31, 2001 was 1.24% versus 1.23% for the same period in 2000. Annualized return on average equity was 13.25% for the first quarter of 2001 compared to 13.71% for the first quarter of 2000.
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 4.17% for the three months ended March 31, 2001, as compared to 4.27% for the same period in 2000.
For the three months ended March 31, 2001, the yield on earning assets increased 9 basis points to 7.57% and the cost of interest-bearing liabilities increased 30 basis points to 4.38% as compared to the same period in 2000. The increase in the cost of interest-bearing liabilities is due primarily to an increase in the volume of average short-term borrowings of $26,914,000.
Tax equivalent net interest income for the three months ended March 31, 2001, increased $205,000 or .21% compared to the same period in 2000. The increase in the volume of earning assets net of interest-bearing liabilities produced a $566,000 income increase while changes in interest rates decreased income by $361,000.
NONINTEREST INCOME
Noninterest income consists primarily of service charges on deposit accounts and trust fees. Total noninterest income was $2,281,000 for the three months ended March 31, 2001, an increase of $459,000, or 25.19%, from the same period in 2000. The ratio of noninterest income to income before income taxes was 49.01% and 40.31% for the three months ended March 31, 2001 and 2000, respectively.
The noninterest income increase of $459,000 was primarily attributable to increases of $31,000 in trust fees, $15,000 in gains on securities calls, $169,000 in service charges on deposit accounts due in part to various account fees raised in the first quarter, $72,000 in gains on the sale of loans, and $150,000 in mortgage loan servicing income.
NONINTEREST EXPENSE
Noninterest expense increased $622,000, or 10.03%, to $6,825,000 for the three months ended March 31, 2001 as compared to $6,203,000 in 2000.
Details of noninterest expense for the three months ended March 31, 2001 and 2000 are presented in the following schedule:
| | Three Months Ended
March 31,
|
| | 2001
| 2000
|
| Salaries and employee benefits | $3,593 | $3,517 |
| Occupancy and equipment expense | 977 | 860 |
| Data processing | 424 | 280 |
| FDIC insurance and bank examination assessments | 93 | 91 |
| Printing, stationery, and supplies | 85 | 104 |
| Postage | 63 | 81 |
| Advertising | 64 | 85 |
| Amortization of intangibles | 266 | 251 |
| All other expenses | 1,260
| 934
|
| Total noninterest expense | $6,825
| $6,203
|
Salaries and employee benefits increased by $76,000 or 2.16% for the three months ended March 31, 2001. The increase is attributable to general pay increases and an increase in retirement plan costs partially offset by reductions in health insurance costs and a lesser number of full-time equivalent employees. Salaries and benefits represented the largest category of noninterest expense accounting for 52.64% of total noninterest expense for the three months ended March 31, 2001 and 56.70% for the same period in 2000. The Company's number of full-time equivalent employees at March 31, 2001 was 360, compared to 366 at December 31, 2000 and 366 at March 31, 2000.
Occupancy and equipment expense increased 13.60% for the three months ended March 31, 2001 versus 2000. The 2001 increase is due to higher real estate taxes, maintenance expenses, and utility costs attributable in part to new branch locations. Growth in the volume of loan and deposit accounts contributed to higher data processing expense in 2001. Other expenses increased in part from $186,000 in merger related expenses.
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 March 31, 2001, the Company's nonperforming loans were $1,146,000 or .20% of total loans compared to $2,159,000 or .37% of total loans at December 31, 2000. The decrease is attributable to decreases of $313,000 in residential real estate, $173,000 in consumer, and $845,000 in commercial real estate nonperforming loans, offset by increases of $275,000 in construction and $43,000 in commercial loans. Impaired loans amounted to $870,000 at March 31, 2001 and $1,730,000 at December 31, 2000.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses decreased $52,000 for the three month period ended March 31, 2001 to $6,280,000, which represented 1.09% of total loans. At December 31, 2000, the allowance for loan losses also represented 1.09% of total loans.
CAPITAL RESOURCES
Stockholders' equity was $99,284,000 at March 31, 2001, an increase of $3,250,000, or 3.38% over December 31, 2000. The increase included $1,157,000 of unrealized gains attribuatable to the available for sale securities portfolio as a result of declines in market interest rates. At March 31, 2001, stockholders' equity represented 9.29% of total assets compared to 8.99% at December 31, 2000.
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 Company 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 March 31, 2001 and December 31, 2000 are summarized below:
| | March 31,
2001
| December 31,
2000
|
| Total Capital to risk-weighted assets | 14.52% | 14.62% |
| | | |
| Tier I Capital to risk-weighted assets | 13.60% | 13.66% |
| | | |
| Tier I Capital to average assets | 8.93% | 8.68% |
RECENT REGULATORY DEVELOPMENTS
The Gramm-Leach-Bliley Act (the "Act"), which was enacted in November, 1999, allows eligible bank holding companies to engage in a wider range of nonbanking activities, including greater authority to engage in securities and insurance activities. Under the Act, an eligible 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 financial in nature, incidental to any such financial activity, or 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. National banks are also authorized by the Act to engage, through "financial subsidiaries," in certain activity that is permissible for financial holding companies (as described above) and certain 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.
Although various bank regulatory agencies have issued regulations as mandated by the Act, except for the jointly issued privacy regulations, the Act and its implementing regulations have had little impact on the daily operations of the Company and the Bank and, at this time, it is not possible to predict the impact the Act and its implementing regulations may have on the Company or the Bank. As of the date of this filing, the Company has not applied for or received approval to operate as a financial holding company. In addition, the Bank has not applied for or received approval to establish any financial subsidiaries. Less than 10% of all bank holding companies have elected to become financial holding companies.
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 primarilly 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 and/or the rates offered for short and medium term notes of the U.S. Treasury. The following tables present the interest rate sensitivity and expected maturities of securities, fixed rate loans, time deposits and short-term borrowings as of March 31, 2001 and December 31, 2000.
| | Analysis as of March 31, 2001
Expected Maturity Amounts for Years Ending March 31,
| |
| | 2002
| 2003
| 2004
Through
2006
| After
2006
| Total
| Fair
Value
Total
|
| Assets | | | | | | |
| Securities, fixed rate | | | | | | |
| Available-for-sale | $28,164 | $30,504 | $68,596 | $84,830 | $212,094 | $213,341 |
| Average interest rate | 5.14% | 5.18% | 5.86% | 6.48% | 5.89% | |
| | | | | | | |
| Held-to-maturity | 24,324 | 35,205 | 50,270 | 41,727 | 151,526 | 154,472 |
| Average interest rate | 5.91% | 5.84% | 5.86% | 5.05% | 5.64% | |
| | | | | | | |
| Loans, fixed rate (1) | 107,467 | 57,081 | 191,072 | 96,995 | 452,615 | 455,293 |
| Average interest rate | 8.70% | 8.76% | 8.48% | 8.12% | 8.49% | |
| | | | | | | |
| Liabilities | | | | | | |
| NOW, money market and savings deposits (2) | $336,022 | $- | $- | $- | $336,022 | $336,022 |
| Average interest rate | 2.68% | - | - | - | 2.68% | |
| | | | | | | |
| Time deposits, fixed rate | 278,876 | 36,068 | 22,664 | - | 337,608 | 340,665 |
| Average interest rate | 5.42% | 5.83% | 5.36% | - | 5.46% | |
| | | | | | | |
| Short-term borrowings, fixed rate | 123,752 | - | - | - | 123,752 | 123,752 |
| Average interest rate | 5.26% | - | - | - | 5.26% | |
(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 March 31, 2002, are considered by management as core deposits for asset/liability management purposes with account lives extending beyond one year.
| | Analysis as of December 31, 2000
Expected Maturity Amounts for Years Ending December 31,
| |
| | 2001
| 2002
| 2003
Through
2005
| After
2005
| Total
| Fair
Value
Total
|
| Assets | | | | | | |
| Securities, fixed rate | | | | | | |
| Available-for-sale | $16,998 | $7,011 | $67,028 | $12,319 | $103,356 | $102,685 |
| Average interest rate | 5.43% | 6.21% | 6.04% | 6.82% | 5.98% | |
| | | | | | | |
| Held-to-maturity | 40,215 | 57,447 | 107,043 | 34,368 | 239,073 | 239,637 |
| Average interest rate | 5.87% | 5.83% | 5.98% | 5.17% | 5.81% | |
| | | | | | | |
| Loans, fixed rate (1) | 105,709 | 57,721 | 198,631 | 96,942 | 459,003 | 449,187 |
| Average interest rate | 8.78% | 8.72% | 8.48% | 8.13% | 8.51% | |
| | | | | | | |
| Liabilities | | | | | | |
NOW, money market and
savings deposits (2) | $334,130 | $- | $- | $- | $334,130 | $334,130 |
| Average interest rate | 2.92% | - | - | - | 2.92% | |
| | | | | | | |
| Time deposits, fixed rate | 285,558 | 36,630 | 22,740 | - | 344,928 | 343,749 |
| Average interest rate | 5.70% | 5.90% | 5.42% | - | 5.70% | |
| | | | | | | |
| Short-term borrowings, fixed rate | 121,272 | - | - | - | 121,272 | 121,272 |
| Average interest rate | 5.90% | - | - | - | 5.90% | |
(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, 2001, 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
On March 1, 2001, the Company entered into a definitive agreement with Bank of Montreal, parent of Harris Bank, pursuant to which Bank of Montreal will acquire the Company. The acquisition is subject to approval by the Company's shareholders and regulatory approval, and is described more fully in the Company's Form 8-K/A filed with the Securities and Exchange Commission on March 15, 2001.
In light of this development and of the need to hold a shareholders' meeting later in 2001 to vote on the acquisition, the Company adjourned its annual meeting of shareholders which had originally been scheduled for March 8, 2001 without conducting any business at the meeting.
Item 5. Other Information
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
| 10.1* | Employment Agreement, dated March 1, 2001, between Harris Bank Joliet and Kevin Reardon., subject to and effective only upon, the closing of Bank of Montreal's purchase of First National Bancorp, Inc. |
| | |
| 10.2* | Form of Employment Agreement, dated March 1, 2001, between Harris Bank Joliet and certain executive and senior officers of of First National Bank of Joliet, subject to and effective only upon, the closing of Bank of Montreal's purchase of First National Bancorp, Inc. |
| | |
| 10.3* | Director Agreement, dated March 1, 2001, between Harris Bank Joliet (Bankmont Financial Corp.) and the directors of First National Bank of Joliet. |
| | |
| 10.4* | Director Emeritus Agreement, dated March 1, 2001, between Harris Bank Joliet (Bankmont Financial Corp.) and the director emeritus of First National Bank of Joliet. |
| | |
| (b) | Reports on Form 8-K |
| | |
| | Current Report on Form 8-K, as amended, filed with the Securities and Exchange Commission on March 6, 2001, relating to the execution of an Agreement and Plan of Merger among the Company, Bank of Montreal and a subsidiary of Bank of Montreal pursuant to which the Bank of Montreal will acquire the Company. |
* Management contract or compensatory plan or arrangement of the Company
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: MAY 10, 2001
/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 |
