FNB Bancorp 10-Q 2009 Q2 Quarterly report

SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549

FORM 10-Q

Quarterly Report
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934

For the Quarterly Period Ended June 30, 2009

FNB BANCORP
(Exact name of registrant as specified in its charter)

California
(State or other jurisdiction of incorporation)

000-49693	92-2115369
(Commission File Number)	(IRS Employer Identification No.)
975 El Camino Real, South San Francisco, California	94080
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code:(650) 588-6800

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   Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).      o Yes   o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero	Accelerated filero
Non-accelerated filerx	Smaller reporting companyo

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      Yes o   Nox

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock as of August 3, 2009: 3,030,418 shares.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

FNB BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

(Dollar amounts in thousands)	June 30, 2009		December 31, 2008
ASSETS
Cash and due from banks	$	14,996	$	14,865
Federal funds sold		21,700		—
Cash and equivalents		36,696		14,865
Securities available-for-sale		89,556		99,221
Loans, net of allowance for loan losses of $9,095 and $7,075 on June 30, 2009 and December 31, 2008		487,312		497,984
Bank premises, equipment, and leasehold improvements		12,381		13,030
Other real estate owned		5,492		3,557
Goodwill		1,841		1,841
Accrued interest receivable and other assets		28,550		30,459
Total assets	$	661,828	$	660,957
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Demand, noninterest bearing		111,644		121,237
Demand, interest bearing		59,090		58,451
Savings and money market		233,951		179,382
Time		133,793		141,840
Total deposits		538,478		500,910
Federal Home Loan Bank advances		40,000		86,100
Accrued expenses and other liabilities		5,511		5,798
Total liabilities		583,989		592,808
Stockholders’ equity
Common stock, no par value, authorized 10,000,000 shares; issued and outstanding 3,030,000 shares at June 30, 2009 and December 31, 2008		43,885		43,827
Preferred stock - series A - no par value, authorized and outstanding 12,000 shares, issued on February 27, 2009 (liquidation preference of $1,000 per share plus accrued dividends)		11,429		—
Preferred stock - series B - no par value, authorized and outstanding 600 shares, issued on February 27, 2009 (liquidation preference of $1,000 per share plus accrued dividends)		636		—
Retained earnings		20,963		22,960
Accumulated other comprehensive income		926		1,362
Total stockholders’ equity		77,839		68,149
Total liabilities and stockholders’ equity	$	661,828	$	660,957

See accompanying notes to consolidated financial statements.

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FNB BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(Dollars in thousands, except per share amounts)

	Three months ended June 30,					Six months ended June 30,
	2009			2008		2009			2008
Interest income:
Interest and fees on loans	$	7,841		$	8,733	$	15,818		$	18,122
Interest on taxable securities		438			509		970			1,022
Interest on tax-exempt securities		354			387		706			815
Federal funds sold		10			28		60			69
Total interest income		8,643			9,657		17,554			20,028
Interest expense:
Deposits		1,729			2,055		3,387			4,511
Federal Home Loan Bank advances		633			782		1,294			1,634
Federal funds purchased		—			4		—			18
Total interest expense		2,362			2,841		4,681			6,163
Net interest income		6,281			6,816		12,873			13,865
Provision for loan losses		760			300		2,900			1,290
Net interest income after provision for loan losses		5,521			6,516		9,973			12,575
Noninterest income:
Service charges		699			709		1,427			1,411
Credit card fees		173			191		338			355
Gain on sale of securities		242			1		246			139
Other income		131			236		583			493
Total noninterest income		1,245			1,137		2,594			2,398
Noninterest expense:
Salaries and employee benefits		3,303			3,611		6,750			7,128
Loss on impairment of other real estate owned		163			—		1,363			—
Occupancy expense		523			508		1,035			1,023
Equipment expense		475			483		957			958
Professional fees		289			286		625			545
Telephone, postage and supplies		259			249		532			481
Bankcard expenses		163			180		317			333
Other expense		1,583			969		2,599			1,995
Total noninterest expense		6,758			6,286		14,178			12,463
Earnings before income tax expense		8			1,367		(1,611	)		2,510
Income tax expense		4			277		(426	)		533
Net earnings (loss)		4			1,090		(1,185	)		1,977
Dividends and discount accretion on preferred stock		189			—		205			—
Net (loss) earnings available to common shareholders	$	(185	)	$	1,090	$	(1,390	)	$	1,977
Earnings per share data:
Basic	$	(0.06	)	$	0.35	$	(0.46	)	$	0.64
Diluted	$	(0.06	)	$	0.35	$	(0.46	)	$	0.63
Weighted average shares outstanding:
Basic		3,030			3,111		3,030			3,111
Diluted		3,030			3,122		3,030			3,121

See accompanying notes to consolidated financial statements.

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FNB BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(UNAUDITED)

(Dollar amounts in thousands)	Three months ended June 30,						Six months ended Jun 30,
	2009			2008			2009			2008
Net earnings (loss)	$	4		$	1,090		$	(1,185	)	$	1,977
Unrealized loss on AFS securities		(341	)		(846	)		(436	)		(267	)
Total comprehensive (loss) income	$	(337	)	$	244		$	(1,621	)	$	1,710

See accompanying notes to consolidated financial statements.

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FNB BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

(Dollar amounts in thousands)	Six months ended June 30
	2009			2008
Cash flow from operating activities:
Net (loss) earnings	$	(1,185	)	$	1,977
Adjustments to reconcile net earnings to net cash provided by operating activities:
Gain on sale of securities available-for-sale		(246	)		(139	)
Depreciation, amortization and accretion		1,003			851
Stock-based compensation expense		58			56
Provision for loan losses		2,900			1,290
Decrease (Increase) in interest receivable and other assets		1,909			(518	)
Valuation allowance on other real estate owned		1,363			—
Increase in accrued expenses and other liabilities		319			212
Net cash provided by operating activities		6,121			3,729
Cash flows from investing activities
Purchase of securities available-for-sale		(23,579	)		(42,673	)
Proceeds from matured/called/sold securities available-for-sale		32,532			33,659
Net decrease (increase) in loans		4,474			(3,940	)
Purchases of bank premises, equipment, leasehold improvements		(135	)		(776	)
Net cash provided by investing activities		13,292			(13,730	)
Cash flows from financing activities
Net increase in demand and savings deposits		45,615			10,730
Net (decrease) increase in time deposits		(8,047	)		(2,509	)
Net (decrease) increase in Federal Home Loan Bank advances		(46,100	)		4,000
Net increase in federal funds purchased		—			1,735
Dividends paid on common stock		(909	)		(891	)
Dividends paid on preferred stock series A and B		(141	)		—
Issuance of preferred stock series A		11,360			—
Issuance of preferred stock series B		640			—
Issuance of common stock		—			216
Repurchases of common stock		—			(264	)
Net cash provided by financing activities		2,418			13,017
NET INCREASE IN CASH AND CASH EQUIVALENTS		21,831			3,016
Cash and cash equivalents at beginning of period		14,865			15,750
Cash and cash equivalents at end of period	$	36,696		$	18,766
Additional cash flow information:
Interest paid	$	4,961		$	6,356
Income taxes paid		123			860
Non-cash investing and financing activities:
Accrued dividends		152			445
Change in unrealized gain (loss) in available for-sale securities		(436	)		(267	)
Loans transferred to other real estate owned		3,298			3,515
Deemed dividends on preferred stock		65			—

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FNB BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2009

(UNAUDITED)

NOTE A – BASIS OF PRESENTATION

          FNB Bancorp (the “Company”) is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. The Company was incorporated under the laws of the State of California on February 28, 2001. The consolidated financial statements include the accounts of FNB Bancorp and its wholly owned subsidiary, First National Bank of Northern California (the “Bank”). The Bank provides traditional banking services in San Mateo and San Francisco counties.

          All intercompany transactions and balances have been eliminated in consolidation. The financial statements include all adjustments of a normal and recurring nature, which are, in the opinion of management, necessary for a fair presentation of the financial results for the interim periods, as required by Regulation S-X, Rule 10-01.

          The accompanying unaudited financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and footnotes normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America. Accordingly, these financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2008.

          Results of operations for interim periods are not necessarily indicative of results for the full year.

NOTE B – STOCK OPTION PLANS

          Stock option expense is recorded based on the fair value of option contracts issued. The fair value is determined by the expected contract term, the risk free interest rate, the volatility of the Company’s stock price and the level of dividends the Company is expected to pay.

          The expected term of options granted is derived from historical plan behavior and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U. S. Treasury yield curve in effect at the time of the grant.

          The amount of compensation expense for options recorded in the quarters ended June 30, 2009 and June 30, 2008 was $29,000 and $32,000, respectively. The income tax benefit recognized in the income statements for these amounts was $0 for the quarter ended June 30, 2009, and $5,000 for the quarter ended June 30, 2008. The amount of compensation expense for options recorded in the six months ended June 30, 2009 and June 30, 2008 was $58,000 and $56,000, respectively. The income tax benefit recognized in the income statements for these amounts was $0 and $6,000 for the six months ended June 2009 and 2008, respectively.

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          The intrinsic value of options exercised during the quarter ended June 30, 2009 was $0. The intrinsic value of options exercised during the six months ended June 30, 2009 was $0 under the 2008 Plan, $0 under the 2002 Plan and $0 under the 1997 Plan.

          The amount of total unrecognized compensation expense related to non-vested options at June 30, 2009 was $362,000, and the weighted average period it will be amortized over is 2.5 years.

NOTE C – EARNINGS (LOSS) PER SHARE CALCULATION

          Earnings (loss) per common share (EPS) are computed based on the weighted average number of common shares outstanding during the period. Basic EPS excludes dilution and is computed by dividing net earnings available to common stockholders (after deducting dividends and related accretion on preferred stock) by the weighted average of common shares outstanding. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. All common stock equivalents are anti-dilutive when a net loss occurs.

          Earnings per share have been computed based on the following:

(Dollar amounts in thousands)	Three months ended June 30,					Six months ended June 30,
	2009			2008		2009			2008
Net earnings (loss)	$	4		$	1,090	$	(1,185	)	$	1,977
Dividends and discount accretion on preferred stock		189			—		205			—
Net (loss) earnings available to common shareholders	$	(185	)	$	1,090	$	(1,390	)	$	1,977
Average number of shares outstanding		3,030,000			3,111,000		3,030,000			3,111,000
Effect of dilutive options		—			11,000		—			10,000
Average number of shares outstanding used to calculate diluted earnings per share		3,030,000			3,122,000		3,030,000			3,121,000
Anti-dilutive options not included		335,075			174,738		335,075			174,738

NOTE D – COMPREHENSIVE (LOSS) AND INCOME

          Comprehensive income is the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Other comprehensive income consists of net unrealized gains and losses on investment securities available-for-sale. Comprehensive income for the three months ended June 30, 2009 was a loss of ($337,000) compared to earnings of $244,000 for the three months ended June 30, 2008. Comprehensive income for the six months ended June 30, 2009 was a loss of ($1,621,000) compared to earnings of $1,710,000 for the six months ended June 30, 2008.

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NOTE E – SECURITIES AVAILABLE FOR SALE

The amortized cost and carrying values of securities available-for-sale are as follows:

(Dollar amounts in thousands)	Amortized cost		Unrealized gains		Unrealized losses			Carrying value
June 30, 2009
Obligations of U.S. Government agencies	$	51,105	$	822	$	(64	)	$	51,863
Obligations of states and political subdivisions		36,881		939		(127	)		37,693
	$	87,986	$	1,761	$	(191	)	$	89,556

An analysis of gross unralized losses of the available for sale investment securities portfolio as of June 30, 2009 follows.

(Dollar amounts in thousands)	Total Fair Value		Less than 12 Months Unrealized Losses			Total Fair Value		12 Months or Longer Unrealized Losses		Total Fair Value		Total Unrealized Losses
June 30, 2009
Obligations of U.S. Government agencies	$	8,020		(64	)	$	—		—		8,020		(64	)
Obligations of states and political subdivisions		4,311		(127	)		—		—		4,311		(127	)
Total	$	12,331	$	(191	)	$	—	$	—	$	12,331	$	(191	)

At June 30, 2009, there were no securities in an unrealized loss position for greater than 12 consecutive months. Management periodically evaluates each security in an unrealized loss position to determine if the impairment is temporary or other-than-temporary. Management has determined that no investment security is other-than-temporarily impaired at June 30, 2009. The unrealized losses are due solely to interest rate changes and the Company has the ability and intent to hold all investment securities identified impairments resulting from interest rate changes to the earliest of forecasted recovery or the maturity of the underlying investment security.

The amortized cost and carrying value of debt securities as of June 30, 2009, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

(Dollar amounts in thousands)	Amortized Cost		Carrying Value
Available-for-sale:
Due in one year or less	$	14,422	$	14,568
Due after one through five years		51,369		52,649
Due after five years through ten years		12,245		12,313
Due after ten years		9,950		10,026
	$	87,986	$	89,556

For the six months ended June 30, 2009, gross realized gains amounted to $246,000 on the sale of $8,881,000 in securities. For the six months ended June 30, 2009, there were no gross losses.

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At June 30, 2009, securities with an amortized cost of $85,842,000 and fair value of $88,274,000 were pledged as collateral for public deposits and for other purposes required by law.

At June 30, 2009,the Bank had investments in Federal Reserve Bank stock classified as other assets in the accompanying balance sheet of $1,062,000. These investments in Federal Bank stock are carried at cost, and evaluated periodically for impairment.

NOTE F – FAIR VALUE

          Effective January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements,” which requires enhanced disclosures about financial instruments carried at fair value. SFAS No. 157 establishes a disclosure framework that quantifies fair value estimates by the level of pricing precision. The degree of judgment utilized in measuring the fair value of assets generally correlates to the level of pricing precision. Financial instruments rarely traded or not quoted will generally have a higher degree of judgment utilized in measuring fair value. Pricing precision is impacted by a number of factors including the type of asset, the availability of the asset, the market demand for the asset, and other conditions that were considered at the time of the valuation. See “Fair Value Measurements” for additional information about the level of pricing transparency associated with the financial instruments carried at fair value.

          Fair Value Measurement. The following tables present information about the Company’s assets and liabilities measured at fair value as of June 30, 2009, and indicates the fair value techniques used by the Company to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

The following table presents the recorded amounts of assets measured at fair value on a recurring basis:

(Dollar amounts in thousands)			Fair Value Measurements at June 30, 2009, Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets		Other Observable Inputs		Significant Unobservable Inputs
Description	6/30/2009		(Level 1)		(Level 2)		(Level 3)
Available-for-sale securities	$	89,556	$	—	$	89,556	$	—
Total assets measured at fair value	$	89,556	$	—	$	89,556	$	—

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The following methods were used to estimate the fair value of each class of financial instrument above:

          Available-for-sale-securities. Fair values established for available-for-sale investment securities are based on estimates of fair values quoted for similar types of securities with similar maturities, risk and yield characteristics.

The following table presents the recorded amount of assets measured at fair value on a non-recurring basis:

(Dollar amounts in thousands)			Fair Value Measurements at June 30, 2009, Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets		Other Observable Inputs		Significant Unobservable Inputs		Total
Description	6/30/2009		(Level 1)		(Level 2)		(Level 3)		losses
Impaired loans	$	16,095	$	—	$	—	$	16,095	$	1,109
Other real estate owned		5,492		—		—		5,492		1,363
Total impaired assets measured at fair value	$	21,587	$	—	$	—	$	21,587	$	2,472

For assets measured at fair value on a nonrecurring basis using significant unobservable inputs (level 3) during the six month period, this Statement requires a reconciliation of the beginning and ending balances separately for each major category of assets, which may be presented as follows

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Impaired Loans			Other Real Estate Owned		Losses
Balance 12/31/2008	$	13,440		$	3,557	$	678
Additions		6,188			1,935		2,148
Deletions		(3,533	)				(354	)
Balance 6/30/2009	$	16,095		$	5,492	$	2,472

Net additions to losses related to the change in fair market value for the six months ended june 30, 2009 were $1,794,000.

          Impaired loans. The Bank does not record loans at fair value. However, from time to time, if a loan is considered impaired, a specific allocation within the allowance for loan losses may be required. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with SFAS No. 114, “Accounting by Creditors for Impairment of a Loan.” The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and cash flows. Those impaired loans not requiring an allowance represent loans for which the value of the expected repayments or collateral exceed the recorded investments in such loans. In accordance with SFAS No. 157, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. If the fair value of the collateral is based on an observable market price or a current appraised value, the Bank records the impaired loans as nonrecurring Level 3. When an appraised value is not available, or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Bank records the impaired loans as nonrecurring Level 3.

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          Goodwill and Premium on Purchased Deposits. Goodwill and premium on purchased deposits are subject to impairment testing. In evaluating the premium on purchased deposits, a projected cash flow valuation method is used in the completion of impairment testing. This valuation method requires a significant degree of management judgment. In the event the projected undiscounted net operating cash flows are less than the carrying value, the asset is recorded at fair value as determined by the valuation model. In evaluating goodwill, management initially uses a combination of discounted cash flows, capitalization rate, and recent merger and acquisition prices. If possible impairment is indicated, a second phase of impairment testing is performed, whereby all the Bank’s assets and liabilities are valued at fair value in a hypothetical sale situation. The Bank evaluates goodwill at one level below the Bank level which includes purchased branch offices operations. Goodwill valuation is highly subjective and therefore under FAS 157 would be valued as Level 3. As of June 30, 2009, there were no impairments of goodwill or the premium on purchased deposits.

          Other Real Estate Owned. Other real estate owned is carried at the lower of historical cost or fair market value. An appraisal (a level 3 valuation) is obtained at the time the Company acquires property through the foreclosure process. Any loan balance outstanding that exceeds the appraised value of the property is charged off against the allowance for loan loss at the time the property is acquired. Subsequent to acquisition, the Bank updates the property’s appraised value on an annual basis. If the value of the property has declined during the year, a loss due to valuation impairment charge is recorded along with a corresponding reduction in the book carrying value of the property.

          Fair Values of Financial Instruments.

The following methods and assumptions were used by the Company in estimating the fair value disclosures for financial instruments:

          Cash and Cash Equivalents.

          The carrying amounts reported in the balance sheet for cash and short-term instruments are a reasonable estimate of fair value, which will approximate their historical cost.

          Securities Available-for-Sale.

          Fair values for investment securities are based on quoted market prices, where available,. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.

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          Loans Receivable.

          For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. For fixed rate loans, fair values are based on discounted cash flows.

          Bank Owned Life Insurance.

          The fair value of bank owned life insurance is the cash surrender value of the policies.

          Deposit liabilities.

          The fair values disclosed for demand deposits e.g., interest and non-interest checking, savings, and money market accounts) are, by definition, equal to the amount payable on demand at reporting date (i.e., their carrying amounts). The fair values for fixed-rate certificates of deposit are based on discounted cash flows.

          Federal Home Loan Bank Advances.

          The fair values of Federal Home Loan Bank Advances were based on discounted cash flows.

          Undisbursed loan commitments, lines of credit, Mastercard line and standby letters of credit.

          The fair value of these off-balance sheet items are based on discounted cash flows of expected fundings.

The following table provides summary information on the estimated fair value of financial instruments at June 30, 2009:

(Dollar amounts in thousands)	Carrying amount		Fair value
Financial assets:
Cash and cash equivalents	$	36,696	$	36,696
Securities available for sale		89,556		89,556
Loans, net		487,317		535,597
Bank owned life insurance		8,708		8,708
Financial liabilities:
Deposits		538,546		539,392
Federal Home Loan Bank advances		40,000		40,617
Off-balance-sheet liabilities:
Undisbursed loan commitments, lines of credit, Mastercard line and standby letters of credit		—		3,722

The carrying amount of loans include $26,893,000 of nonaccrual loans (loans that are not accruing interest) as of June 30, 2009. Management has determined that primarily because of the uncertainty of predicting an observable market interest rate, excessive amounts of time and money would be incurred to estimate the fair values of nonperforming loans. As such, these loans are recorded at their carrying amount in te estimated fair value columns.

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NOTE G – PREFERRED STOCK

Preferred Stock was issued to the U. S. Treasury as part of the Treasury’s Capital Purchase Program. The Preferred Stock consists of two issues, Series A and Series B. The Series A and Series B Preferred Stock are both carried at liquidation value less discounts received plus premiums paid that are amortized over the expected timeframe that the Preferred Shares will be outstanding using the level yield method. The Series A and Series B Preferred Stock must be redeemed after ten years. The Series A Preferred Stock carries a dividend yield of 5% for the first five years. Beginning in year six, the dividend increases to 9% and continues at this rate until repaid. The Series B Preferred Stock pays a 9% dividend until repaid. Allocation of proceeds between the two issues was done in such a manner that the blended level yield of both issues would be 6.83% to the expected repayment date, which is currently anticipated to be three years from the date of issue. Operating restrictions related to the preferred stock are documented on the U. S. Department of the Treasury’s website and include restrictions on dividend payments and executive compensation, the establishment of the requirement that the Preferred Stock be repaid first with the proceeds from any future capital offering before any other use of the proceeds is allowed, establishment of additional reporting requirements related to lending activity of the Bank during the time the Preferred Stock is outstanding, and the execution of documents that allow the U. S. Department of the Treasury to add or change the conditions related to the issuance of the Preferred Stock unilaterally, at their discretion.          

NOTE H – DATE THROUGH WHICH SUBSEQUENT EVENTS HAVE BEEN EVALUATED

An entity shall disclose the date through which subsequent events have been evaluated, as well as whether that date is the date the financial statements were issued or the date that the financial statements were available to be issued. FNB Bancorp has evaluated subsequent events through August 11, 2009, the date the financial statements were issued.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

          Forward-Looking Information and Uncertainties Regarding Future Financial Performance.

          This report, including management’s discussion below, concerning earnings and financial condition, contains “forward-looking statements”. Forward-looking statements are estimates of or statements about expectations or beliefs regarding the Company’s future financial performance or anticipated future financial condition that are based on current information and that are subject to a number of risks and uncertainties that could cause actual operating results in the future to differ significantly from those expected at the current time. Those risks and uncertainties include, although they are not limited to, the following:

          Increased competition. Increased competition from other banks and financial service businesses, mutual funds and securities brokerage and investment banking firms that offer competitive loan and investment products could require us to reduce interest rates and loan fees to attract new loans or to increase interest rates that we offer on time deposits, either or both of which could, in turn, reduce interest income and net interest margins.

13

          Possible Adverse Changes in Economic Conditions. Adverse changes in national or local economic conditions could (i) reduce loan demand which could, in turn, reduce interest income and net interest margins; (ii) adversely affect the financial capability of borrowers to meet their loan obligations, which, in turn, could result in increases in loan losses and require increases in provisions for loan losses, thereby adversely affecting operating results; and (iii) lead to reductions in real property values that, due to the Company’s reliance on real property to secure many of its loans, could make it more difficult to prevent losses from being incurred on non-performing loans through the sale of such real properties.

          Possible Adverse Changes in National Economic Conditions and Federal Reserve Board Monetary Policies. Changes in national economic policies, such as increases in inflation or declines in economic output often prompt changes in Federal Reserve Board monetary policies that could reduce interest income or increase the cost of funds to the Company, either of which could result in reduced earnings.

          Changes in Regulatory Policies. Changes in federal and national bank regulatory policies, such as increases in capital requirements or in loan loss reserve or asset/liability ratio requirements, could adversely affect earnings by reducing yields on earning assets or increasing operating costs.

          Due to these and other possible uncertainties and risks, readers are cautioned not to place undue reliance on the forward-looking statements contained in this report, which speak only as of the date of this report, or to make predictions based solely on historical financial performance. The Company also disclaims any obligation to update forward-looking statements contained in this report.

          Critical Accounting Policies And Estimates

          Management’s discussion and analysis of its financial condition and results of operations are based upon the Company’s financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to its loans and allowance for loan losses. The Company bases its estimates on current market conditions, historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. All adjustments that, in the opinion of management, are necessary for a fair presentation for the periods presented have been reflected as required by Regulation S-X, Rule 10-01. The Company believes the following critical accounting policy requires significant judgments and estimates used in the preparation of the consolidated financial statements.

          Allowance for Loan Losses

          The allowance for loan losses is periodically evaluated for adequacy by management. Factors considered include the Company’s loan loss experience, known and inherent risks in the portfolio, current economic conditions, known adverse situations that may affect the borrower’s ability to repay, regulatory policies, and the estimated value of underlying collateral. The evaluation of the adequacy of the allowance is based on the above factors along with prevailing and anticipated economic conditions that may impact borrowers’ ability to repay loans.

14

          Determination of the allowance is in part objective and in part a subjective judgment by management based on the information it currently has in its possession. Adverse changes in any of these factors or the discovery of new adverse information could result in higher than expected charge-offs and loan loss provisions.

          Goodwill

          Goodwill arises from the Company’s purchase price exceeding the fair value of the net assets of an acquired business. Goodwill represents the value attributable to intangible elements acquired. The value of this goodwill is supported ultimately by profit from the acquired business. A decline in earnings could lead to impairment, which would be recorded as a write-down in the Company’s consolidated statements of income. Events that may indicate goodwill impairment include significant or adverse changes in results of operations of the acquired business or asset, economic or political climate; an adverse action or assessment by a regulator; unanticipated competition; and a more-likely-than-not expectation that a reporting unit will be sold or disposed of at a loss.

          Provision for and Deferred Income Taxes

          The Company is subject to income tax laws of the United States, California, and the municipalities in which it operates. The Company considers our income tax provision methodology to be critical to the reporting of current and deferred taxes. The provision for income taxes is based on complex analyses of many factors including interpretation of federal and state laws, the difference between tax and financial reporting bases of assets and liabilities (temporary differences), estimates of amounts due or owed, the timing of reversals of temporary differences and current financial standards. Actual results could differ significantly from the estimates due to tax law interpretations used in determining the current and deferred income tax liabilities. Additionally, there can be no assurances that estimates and interpretations used in determining income tax liabilities may not be challenged by federal and state taxing authorities.

          Recent Accounting Pronouncements

          In December 2007, the Financial Accounting Standards Board (“FASB”) announced that it had revised Statement 141, Business Combinations, with 141(R). The revised Statement No. 141 was written to improve the relevance, representational faithfulness and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. This Statement establishes principles and requirements for how the acquirer:

a.	Recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree.
b.	Recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase.
c.	Determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.

          This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company will adopt this Standard for any future acquisitions.

15

          In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement No. 160, “Noncontrolling Interest in Consolidated Financial Statements – an amendment of ARB No. 51.” Statement No. 160 clarifies reporting and disclosure requirements related to noncontrolling interests included in an entity’s consolidated financial statements. This Statement clarifies that noncontrolling interests are to be reported in the noncontrolling section of the balance sheet and requires net income to include amounts from both the parent and the noncontrolling interest. This Statement also requires the parent company to recognize a gain or loss in net income when a subsidiary is deconsolidated. This Statement is effective for fiscal years (and interim periods within those years), beginning on or after December 15, 2008. The Company will apply this Statement prospectively and does not expect the Statement to have a material impact on the Company’s financial statements.

          In March 2008, the Financial Accounting Standards Board (“FASB”) issued Statement No. 161 “Disclosures About Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133.” Statement No. 161 changes the disclosure requirements for derivative instruments and hedging activities by requiring enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. This statement is effective for fiscal years and interim periods beginning after November 15, 2008. This Standard did not have a material impact on the Company’s financial statements.

          In June 2008, the Financial Accounting Standards Board (“FASB”) issued Staff Position Emerging Issues Task Force (EITF) 03-06-1, “Determining whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (FSP EITF 03-6-1). FSP EITF 03-6-1- provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those years. Upon adoption, a company is required to retrospectively adjust its earnings per share data (including any amounts related to interim periods, summaries of earnings and selected financial data) to conform with the provisions in FSP EITF 03-6-1. Early application of FSP EITF 03-6-1 is prohibited. This Standard did not have a material impact on the Company’s financial statements.

          In April 2009, the Financial Accounting Standards Board (“FASB”) Staff Position FAS 107-1/APB 28-1 “Interim Disclosures about Fair Value of Financial Instruments” was issued. This Financial Staff Position (“FSP”) amends FASB No. 107, “Disclosures About Fair Value of Financial Instruments and APB Opinion No. 28, “Interim Financial Reporting” by requiring disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements and requiring disclosures in summarized financial information at interim reporting periods. This FSP is effective for interim reporting periods ending after June 15, 2009; early adoption is permitted for periods ending after March 15, 2009. This Standard did not have a material impact on the Company’s financial statements.

16

          In April 2009, the Financial Accounting Standards Board (“FASB”) Staff Position FAS 115-2 and FAS 124-2 amends the other-than-temporary impairment guidance in U. S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This FSP does not amend an existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. This Standard did not have a material impact on the Company’s financial statements.

          In April, 2009, the Financial Accounting Standards Board (“FASB”) Staff Position FAS 157-4 was adopted to provide additional guidance for estimating fair value in accordance with Statement 157, “Fair Value Measurements”, when the volume and level of activity for the asset or liability have significantly decreased. This Financial Standards Position (“FSP”) also includes guidance on identifying circumstances that indicate a transaction is not orderly. This Standard did not have a material impact on the Company’s financial statements.

               In May, 2009, the Financial Accounting Standards Board (“FASB”) issued Statement No.165 “Subsequent Events.” This Statement establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires an entity to recognize in the financial statements the effect of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Some unrecognized subsequent events may be of such a nature that they must be disclosed to keep the financial statements from being misleading. This Statement introduces the concept of financial statements beingavailable to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. This Statement became effective for interim or annual financial periods ending after June 15, 2009. This Standard did not have a material impact on the Company’s financial statements.

          In June, 2009, the Financial Accounting Standards Board (“FASB”) issued Statement No. 166 “Accounting for Transfers of Financial Assets.” This is a revision to Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” and will require more information about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures. This Statement becomes effective at the start of a company’s fiscal year after November 15, 2009. The Company does not expect this Statement to have a material impact on the Company’s financial statements.

          In June, 2009, the Financial Accounting Standards Board (“FASB”) issued Statement No. 167 “Amendments to FASB Interpretation No. 46 (R), Consolidation of Variable Interest Entities,” and changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. This Statement becomes effective at the start of a company’s fiscal year after November 15, 2009. The Company does not expect this Statement to have a material impact on the Company’s financial statements.

17

          Earnings Analysis

          Net losses for the quarter ended June 30, 2009 were $185,000, compared to net earnings of $1,090,000 for the quarter ended June 30, 2008, a decrease of $1,275,000, or 117%. Net income for the second quarter of 2009 was $4,000, before the payment of preferred stock dividends, which compares favorably to the net loss of $1,189,000 before the payment of preferred stock dividends recorded during the first quarter of 2009. The first cash dividend payments on the preferred shares outstanding were made as scheduled during the second quarter of 2009. Net losses for the six months ended June 30, 2009 were $1,390,000 compared to net earnings of $1,977,000 for the six months ended June 30, 2008, a decrease of $3,367,000, or 170%. Net earnings before income tax expense for the quarter ended June 30, 2009 were $8,000, compared to net earnings of $1,367,000 for the quarter ended June 30, 2008, a decrease of $1,359,000, or 99%. Losses before income tax were $1,611,000 for the six months ended June 30, 2009 compared to earnings of $2,510,000 for the six months ended June 30, 2008, a decrease of $4,121,000, or 164%. The losses for the three and six months ended June 30, 2009 were primarily the result of an increased provision for loan losses, a special FDIC assessment, and an increased cost of loan collections, when compared to the same periods in 2008. The increased provision is the result of loan charge-offs of $406,000 that have occurred during the second quarter of 2009 coupled with increased nonperforming loans.

          Net interest income for the quarter ended June 30, 2009 was $6,281,000, compared to $6,816,000 for the quarter ended June 30, 2008, a decrease of $535,000, or 8%. Net interest income for the six months ended June 30, 2009 was $12,873,000 compared to $13,865,000 for the six months ended June 30, 2008, a decrease of $992,000, or 7%. The Federal Open Market Committee made a series of significant reductions in the intended federal funds rate in 2008, starting with a 4.25% rate on January 1, 2008. By January 1, 2009, the target rate was 0% to 0.25% and remained unchanged to June 30, 2009. This significant reduction in short term rates has negatively affected the Company’s net interest margin. The rate of decrease in the rates paid for interest bearing liabilities has not kept pace with the decreasing rates earned on interest earning assets during the first two quarters of 2009, effectively causing a rate related drop in net interest income for the two quarters ended June 30, 2009, compared to the same period in 2008. An additional factor has been the increase in nonaccrual loans in 2009 compared to 2008. The increase in nonaccrual loans is related to declining property values and tenant rent in both the residential and commercial real estate markets we serve.

          Basic losses per share were $0.06 for the second quarter of 2009 compared to net earnings of $0.35 for the second quarter of 2008. Diluted earnings per share were a loss of $0.06 for the second quarter of 2009 compared to net earnings of $0.35 for the second quarter of 2008. The basic loss per share was $0.46 for the six months ended June 30, 2009 compared to basic earnings per share of $0.64 for the six months ended June 30, 2008. Diluted losses per share were $0.46 for the six months ended June 30, 2009 compared to diluted earnings per share of $0.63 for the six months ended June 30, 2008.

          The following table presents an analysis of net interest income and average earning assets and liabilities for the three-and six-month periods ended June 30, 2009 compared to the three-and six-month periods ended June 30, 2008.

18

TABLE 1 NET INTEREST INCOME AND AVERAGE BALANCES
FNB BANCORP AND SUBSIDIARY

	Three months ended June 30,
	2009						2008
(Dollar amounts in thousands)	Average Balance		Interest		Annualized Average Yield		Average Balance		Interest		Annualized Average Yield
INTEREST EARNING ASSETS
Loans, gross (1) (2)	$	495,546	$	7,841	6.35	%	$	495,845	$	8,733	7.06	%
Taxable securities (3)		52,011		438	3.38	%		45,889		512	4.48	%
Nontaxable securities (3)		39,114		462	4.74	%		43,169		506	4.70	%
Fed funds sold		21,385		10	0.19	%		5,744		28	1.96	%
Total interest earning assets	$	608,056	$	8,751	5.77	%	$	590,647	$	9,779	6.64	%
NONINTEREST EARNING ASSETS:
Cash and due	$	24,197					$	17,186
Premises		12,596						13,868
Other assets		28,212						29,960
Total noninterest earning assets	$	65,005					$	61,014
TOTAL ASSETS	$	673,061					$	651,661
INTEREST BEARING LIABILITIES:
Demand, int bearing	$	58,911	$	84	0.57	%	$	61,883	$	83	0.54	%
Money market		177,281		924	2.09	%		141,270		775	2.20	%
Savings		43,460		31	0.29	%		47,301		30	0.25	%
Time deposits		136,068		690	2.03	%		133,933		1,167	3.49	%
Federal Home Loan Bank advances		58,022		633	4.38	%		76,022		782	4.13	%
Federal funds purchased		—		—	n/a			497		4	3.23	%
Total interest bearing liabilities	$	473,742	$	2,362	2.00	%	$	460,906	$	2,841	2.47	%
NONINTEREST BEARING LIABILITIES:
Demand deposits		113,808						114,766
Other liabilities		6,686						8,235
Total noninterest bearing liabilities	$	120,494					$	123,001
TOTAL LIABILITIES		594,236						583,907
Stockholders’ equity		78,825						67,754
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	673,061					$	651,661
NET INTEREST INCOME AND MARGIN ON TOTAL EARNING ASSETS (4)			$	6,389	4.21	%			$	6,938	4.71	%

(1) Interest on non-accrual loans is recognized into income on a cash received basis.
(2) Amounts of interest earned included loan fees of $322,000 and $349,000 for the quarters ended June 30, 2009 and 2008, respectively.
(3) Tax equivalent adjustments recorded at the statutory rate of 34% that are included in the nontaxable securities portfolio are $108,000 and $119,000 for the quarters ended June 30, 2009 and 2008, respectively. Tax equivalent adjustments included in the nontaxable securities portfolio were derived from nontaxable municipal interest income.
Tax equivalent adjustments recorded at the statutory rate of 34% that are included in taxable securities portfolio were created by a dividends received deduction of $0 and $3,000 in the quarters ended June 30, 2009 and 2008, respectively. Tax equivalent adjustments recorded at the statutory rate of 34% that are included in the taxable investment securities portfolio were created by agency preferred stock dividends.
(4) Net interest margin is computed by dividing net interest income by total average interest earning assets.

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TABLE 2 NET INTEREST INCOME AND AVERAGE BALANCES
FNB BANCORP AND SUBSIDIARY

	Six months ended June 30,
	2009						2008
(Dollar amounts in thousands)	Average Balance		Interest		Annualized Average Yield		Average Balance		Interest		Annualized Average Yield
INTEREST EARNING ASSETS
Loans, gross (1) (2)	$	499,362	$	15,818	6.39	%	$	498,838	$	18,122	7.31	%
Taxable securities (3)		52,850		970	3.70	%		43,147		1,027	4.79	%
Nontaxable securities (3)		39,285		927	4.76	%		45,289		1,063	4.72	%
Fed funds sold		12,894		60	0.94	%		5,362		69	2.59	%
Tot int earn assets		604,391		17,775	5.93	%		592,636		20,281	6.88	%
NONINTEREST EARNING ASSETS:
Cash and due	$	19,850					$	17,054
Premises		12,762						13,898
Other assets		28,668						28,481
Tot nonint earning assets	$	61,280					$	59,433
TOTAL ASSETS	$	665,671					$	652,069
Demand, int bearing	$	57,911	$	156	0.54	%	$	61,019	$	182	0.60	%
Money market		163,029		1,709	2.11	%		139,695		1,736	2.50	%
Savings		43,655		64	0.30	%		46,508		61	0.26	%
Time deposits		137,523		1,458	2.14	%		134,206		2,532	3.79	%
FHLB advances		65,790		1,294	3.97	%		76,832		1,634	4.28	%
Fed funds purchased		3		—	n/a			983		18	3.68	%
Tot int bear liab	$	467,911	$	4,681	2.02	%	$	459,243	$	6,163	2.70	%
NONINTEREST BEARING LIABILITIES:
Demand deposits		115,002						116,509
Other liabilities		6,781						8,567
Tot nonint bear liabilities	$	121,783					$	125,076
TOTAL LIABILITIES	$	589,694					$	584,319
Stockholders’ equity	$	75,977					$	67,750
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	665,671					$	652,069
NET INTEREST INCOME AND MARGIN ON TOTAL EARNING ASSETS (4)			$	13,094	4.37	%			$	14,118	4.80	%

(1) Interest on non-accrual loans is recognized into income on a cash received basis.
(2) Amounts of interest earned included loan fees of $628,000 and $752,000 for the six months ended June 30, 2009 and 2008, respectively.
(3) Tax equivalent adjustments recorded at the statutory rate of 34% that are included in the nontaxable securities portfolio are $221,000 and $248,000 for the six months ended June 30, 2009 and 2008, respectively. Tax equivalent adjustments included in the nontaxable securities portfolio were derived from nontaxable municipal interest income. Tax equivalent adjustments recorded at the statutory rate of 34% that are included in taxable securities portfolio were created by a dividends received deduction of $0 and $5,000 in the six months ended June 30, 2009 and 2008, respectively.
(4) Net interest margin is computed by dividing net interest income by total average interest earning assets.

          Tables 1 and 2, above, show the various components that contributed to changes in net interest income for the three and six months ended June 30, 2009 and 2008. The principal interest earning assets are loans, from a volume as well as from an earnings perspective. For the quarter ended June 30, 2009, average loans outstanding represented 81.5% of average earning assets. For the quarter ended June 30, 2008, they represented 83.9% of average earning assets. For the six months ended June 30, 2009 and 2008, average loans outstanding represented 82.6% and 84.2%, respectively, of average earning assets.

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          The taxable equivalent yield on average interest earning assets for the quarter ended June 30, 2009 compared to the quarter ended June 30, 2008 decreased from 6.64% to 5.77%, or 87 basis points. Average loans decreased by $299,000, quarter to quarter, yield decreased from 7.06% to 6.35%, or 71 basis points. Interest income on total interest earning assets decreased $1,028,000 or 10.5% on a fully-taxable equivalent basis. The decrease in yield resulted from lower prevailing market rates on loans and increased nonaccrual loan volumes.

          Yield decreases have been more severe in our short term investment portfolio than in the lending portfolio due primarily to the short term maturities in the investment portfolio. Management uses the investment portfolio primarily for liquidity purposes and plans to keep the maturities short in the near term.

          For the three months ended June 30, 2009 compared to the three months ended June 30, 2008, the cost on total interest bearing liabilities decreased from 2.47% to 2.00%, a decrease of 47 basis points. The most expensive source of interest bearing liabilities comes from Federal Home Loan Bank advances. Their average cost increased from 4.13%to 4.38%, while their average balances outstanding decreased $18,000,000 and the expense on these advances decreased $149,000 for the three months ended June 30, 2009 compared to 2008. Time deposit interest cost decreased from 3.49% to 2.03%. Their average balance outstanding increased by $2,135,000, or 1.6%, while their expense decreased $477,000. Money market deposits average volume increased $36,011,000, or 25.5%, while their cost decreased 11 basis points, or 19.2%. The primary source of increase in money market funds is the Bank’s Money Market Maximizer account that pays a higher yield when customers utilize additional bank services.

          For the six months ended June 30, 2009 compared to the six months ended June 30, 2008, interest income on interest earning assets decreased $2,506,000 or 12.36% on a fully-taxable equivalent basis, while average earning assets increased $11,755,000, or 2.0%. Average loans increased by $524,000, or 0.1%. Interest on loans decreased $2,304,000 or 12.7%, while yield decreased 92 basis points, or 12.3%. The cost on total interest bearing liabilities decreased from 2.70% to 2.02%. Average Federal Home Loan Bank advances decreased $11,042,000 or 14.4%. Their yield decreased from 4.28% to 3.97%, and their cost decreased $340,000. Time deposit averages increased $3,317,000 or 2.5%. Their yield decreased 165 basis points, or 43.5%. Money market deposit average balances increased $23,334,000, or 16.7%, but their cost decreased $27,000, or 1.6%.

          For the three and six month periods ended June 30, 2009 and June 30, 2008, respectively, the following tables show the dollar amount of change in interest income and expense and the dollar amounts attributable to: (a) changes in volume (changes in volume at the current year rate), and b) changes in rate (changes in rate times the prior year’s volume). In this table, the dollar change in rate/volume is prorated to volume and rate proportionately.

21

Table 3 FNB BANCORP AND SUBSIDIARY
RATE/VOLUME VARIANCE ANALYSIS

(Dollar amounts in thousands)	Three Months Ended June 30, 2009 Compared to 2008
	Interest Income/Expense			Variance Attributable to
				Rate			Volume
INTEREST EARNING ASSETS
Loans	$	(892	)	$	(887	)	$	(5	)
Taxable securities		(74	)		(126	)		52
Nontaxable securities		(44	)		4			(48	)
Federal funds sold		(18	)		(94	)		76
Total	$	(1,028	)	$	(1,103	)	$	75
INTEREST BEARING LIABILITIES
Demand deposits	$	1		$	5		$	(4	)
Money market		149			(39	)		188
Savings deposits		1			4			(3	)
Time deposits		(477	)		(495	)		18
Federal Home Loan Bank advances		(149	)		36			(185	)
Federal funds purchased		(4	)		0			(4	)
Total	$	(479	)	$	(489	)	$	10
NET INTEREST INCOME	$	(549	)	$	(614	)	$	65

Table 4 FNB BANCORP AND SUBSIDIARY
RATE/VOLUME VARIANCE ANALYSIS

(Dollar amounts in thousands)	Six Months Ended June 30, 2009 Compared to 2008
	Interest Income/Expense			Variance Attributable to
				Rate			Volume
INTEREST EARNING ASSETS
Loans	$	(2,304	)	$	(2,323	)	$	19
Taxable securities		(57	)		(288	)		231
Nontaxable securities		(136	)		6			(142	)
Federal funds sold		(9	)		(106	)		97
Total	$	(2,506	)	$	(2,711	)	$	205
INTEREST BEARING LIABILITIES
Demand deposits	$	(26	)	$	(17	)	$	(9	)
Money market		(27	)		(317	)		290
Savings deposits		3			7			(4	)
Time deposits		(1,074	)		(1,137	)		63
Federal Home Loan Bank advances		(340	)		(105	)		(235	)
Federal funds purchased		(18	)		(18	)		—
Total	$	(1,482	)	$	(1,587	)	$	105
NET INTEREST INCOME	$	(1,024	)	$	(1,124	)	$	100

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Noninterest income

          The following table shows the principal components of noninterest income for the periods indicated.

Table 5 NONINTEREST INCOME

	Three months ended Jun 30,				Variance
(Dollar amounts in thousands)	2009		2008		Amount			Percent
Service charges	$	699	$	709	$	(10	)	-1.4	%
Credit card fees		173		191		(18	)	-9.4	%
Gain on sale of securities		242		1		241		24100.0	%
Other income		131		236		(105	)	-44.5	%
Total noninterest income	$	1,245	$	1,137	$	108		9.5	%

	Six months ended June 30,				Variance
(Dollars in thousands)	2009		2008		Amount			Percent
Service charges	$	1,427	$	1,411	$	16		1.1	%
Credit card fees		338		355		(17	)	-4.8	%
Gain on sale of securities		246		139		107		77.0	%
Other income		583		493		90		18.3	%
Total noninterest income	$	2,594	$	2,398	$	196		8.2	%

          Noninterest income consists mainly of service charges on deposits. For the quarter ended June 30, 2009 compared to June 30, 2008, total noninterest income increased by $108,000 or 9.5%. For the six months ended June 30, 2009 and June 30, 2008, total noninterest income increased by $196,000 or 8.2%. During the second quarter of 2009, the Company sold approximately $6,700,000 in mortgage-backed securities at a pretax gain of $242,000. These securities were sold in order to increase the Company’s liquid funds and to lock in gains during a time where the Federal Reserve Bank was actively purchasing significant volumes of these securities.

Noninterest expense

          The following table shows the principal components of noninterest expense for the periods indicated.

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Table 6 NONINTEREST EXPENSE

	Three months ended June 30,				Variance
(Dollar amounts in thousands)	2009		2008		Amount			Percent
Salaries and employee benefits	$	3,303	$	3,611	$	(308	)	-8.5	%
Loss on impairment of other real estate owned		163		—		163		—
Occupancy expense		523		508		15		3.0	%
Equipment expense		475		483		(8	)	-1.7	%
Professional fees		289		286		3		1.0	%
Telephone, postage & supplies		259		249		10		4.0	%
Bankcard expenses		163		180		(17	)	-9.4	%
Other expense		1,583		969		614		63.4	%
Total noninterest expense	$	6,758	$	6,286	$	472		7.5	%

	Six months ended June 30,				Variance
(Dollars in thousands)	2009		2008		Amount			Percent
Salaries and employee benefits	$	6,750	$	7,128	$	(378	)	-5.3	%
Loss on impairment of other real estate owned		1,363		—		1,363		—
Occupancy expense		1,035		1,023		12		1.2	%
Equipment expense		957		958		(1	)	-0.1	%
Professional fees		625		545		80		14.7	%
Telephone, postage & supplies		532		481		51		10.6	%
Bankcard expenses		317		333		(16	)	-4.8	%
Other expense		2,599		1,995		604		30.3	%
Total noninterest expense	$	14,178	$	12,463	$	1,715		13.8	%

          Noninterest expense consists mainly of salaries and employee benefits. For the three months ended June 30, 2009 compared to three months ended June 30, 2008, it represented 48.9% and 57.4% of total noninterest expenses. For the six months ended June 30, 2009 and 2008 it was 47.6% and 57.2% respectively of total noninterest expense increases. Decreases in salary and employee benefits expense quarter over quarter is directly related to a reduced number of full time equivalent employees. The Bank has reduced staff through the elimination of our Call Center, Construction Lending staff, and back office operations staff. The most significant increase was in other expense, which was caused by a special, one-time Federal Deposit Insurance Corp. assessment of approximately $298,000 designed to restore the insurance fund after incurring losses from so many failed banks within the last year, Other sources of increased other expense include credit collection expenses. This resulted in an increase of $387,000 or 347% for the quarter ended June 30, 2009 compared to the same quarter in 2008, and an increase of $436,000 or 198% for the six months ended June 30, 2009 compared to the same period in 2008. The other significant item was a $1,200,000 loss on impairment of other real estate owned that was recorded in the first quarter of 2009, and related to one land development foreclosure property.

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Income Taxes

          The effective tax rate for the quarter ended June 30, 2009 was a 50.0% tax expense compared to a 20.3% tax expense for the quarter ended June 30, 2008. The effective tax rate for the six months ended June 30, 2009 and June 30, 2008, respectively was a tax of 26.3% compared to a tax expense of 21.2%. Items which usually affect the rate are changing amounts invested in tax-free securities, available Low Income Housing Credits, amounts of interest income on qualifying loans in Enterprise Zones, and the non-taxable nature of municipal bond interest. Another significant reason for changes in the effective tax rate provisions is the change in the relative proportion of tax advantaged income in comparison to fully taxable income period over period. Alternative minimum tax calculations also have an increasing effect on the Company’s effective tax rate as net income falls and tax preference items lose some of their value.

Asset and Liability Management

          Ongoing management of the Company’s interest rate sensitivity limits interest rate risk through monitoring the mix and maturity of loans, investments and deposits. Management regularly reviews the Company’s position and evaluates alternative sources and uses of funds as well as changes in external factors. Various methods are used to achieve and maintain the desired rate sensitivity position including the sale or purchase of assets and product pricing.

          In order to ensure that sufficient funds are available for loan growth and deposit withdrawals, as well as to provide for general needs, the Company must maintain an adequate level of liquidity. Asset liquidity comes from the Company’s ability to convert short-term investments into cash and from the maturity and repayment of loans and investment securities. Liability liquidity comes from Company’s customer base, which provides core deposit growth. The overall liquidity position of the Company is closely monitored and evaluated regularly. Management believes the Company’s liquidity sources at June 30, 2009 are adequate to meet its operating needs in 2009 and our liquidity positions are sufficient to meet our liquidity needs in the near term.

Financial Condition

          Assets. Total assets increased to $661,828,000 at June 30, 2009 from $660,957,000 at December 31, 2008, an increase of $871,000. Most of this increase was in federal funds sold, which increased by $21,700,000; a decrease of $9,665,000 in securities available for sale; a decrease of $10,672,000 in net loans; and $1,363,000 in other smaller items. The decrease in loans was driven by tighter underwriting standards utilized by the Bank during 2009 and a decrease in the overall credit worthiness of these customers seeking loans.

          Loans. Gross loans at June 30, 2009 were $496,407,000, a decrease of $8,652,000 or 1.71% from December 31, 2008. Gross real estate loans increased $13,426,000, construction loans decreased $9,260,000, commercial loans decreased $12,147,000 and consumer loans decreased by $608,000. The portfolio breakdown was as follows.

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Table 7 LOAN PORTFOLIO

(Dollar amounts in thousands)	June 30, 2009			Percent			December 31 2008			Percent
Real Estate	$	366,437			73.8	%	$	353,011			69.9	%
Construction		56,387			11.4	%		65,647			13.0	%
Commercial		71,295			14.4	%		83,442			16.5	%
Consumer		2,528			0.5	%		3,136			0.6	%
Gross loans	$	496,647			100.0	%	$	505,236			100.0	%
Net deferred loan (fees) cost		(240	)					(177	)
Allowance for loan losses		(9,095	)					(7,075	)
Net loans	$	487,312					$	497,984

Management expects the construction loan segment of the portfolio to continue to decrease as existing projects are finished and few new construction loans are expected to be funded during the remainder of 2009.

          Allowance for loan losses. Management of the Company is responsible for assessing the overall risks within the Bank’s loan portfolio, assessing the specific loss expectancy, and determining the adequacy of the allowance for loan losses. The level of the allowance is determined by internally generating credit quality ratings, reviewing economic conditions in the Company’s market area, and considering the Company’s historical loan loss experience. The Company’s management considers changes in national and local economic conditions in the Company’s market area, and considering the Company’s historical loan loss experience. The Company’s management considers changes in national and local economic conditions, as well as the conditions of various market segments. It also reviews any changes in the nature and volume of the portfolio. Management watches for the existence and effect of any concentrations of credit, and changes in the level of such concentrations. It also reviews the effect of external factors, such as competition and legal and regulatory requirements. Finally, the Company is committed to maintaining an adequate allowance, identifying credit weaknesses by consistent review of loans, and maintaining the ratings and changing those ratings in a timely manner as circumstances change.

          A summary of activity in the allowance for loan losses for the six months ended June 30, 2009 and the six months ended June 30, 2008 is as follows.

TABLE 8 ALLOWANCE FOR LOAN LOSSES

	Six months ended
(Dollar amounts in thousands)	6-30-2009			6-30-2008
Balance, beginning of period	$	7,075		$	5,638
Provision for loan losses		2,900			1,290
Recoveries		30			24
Amounts charged off		(910	)		(1,152	)
Balance, end of period	$	9,095		$	5,800

          During the second quarter of 2009, an additional provision for loan losses of $760,000 was necessary due to increased expected losses within the Company’s single family mortgage portfolio and a second quarter increase in the volume of nonaccrual loans of $14,530,000.

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          In management’s judgment, the allowance was adequate to absorb losses currently inherent in the loan portfolio at June 30, 2009. However, changes in prevailing economic conditions in the Company’s markets or in the financial condition of its customers could result in changes in the level of nonperforming assets and charge-offs in the future and, accordingly, changes in the allowance.

          The allowance is affected by a number of factors, and does not necessarily move in tandem with the level of gross loans outstanding. Management continues to monitor the factors that affect the allowance, and is prepared to make adjustments as they become necessary.

          Nonperforming assets. Nonperforming assets consist of nonaccrual loans, loans that are 90 days or more past due but are still accruing interest and other real estate owned. At June 30, 2009, there was $32,385,000 in nonperforming assets, compared to $17,659,000 at December 31, 2008. Nonaccrual loans were $26,893,000 at June 30, 2009, compared to $14,102,000 at December 31, 2008. There was $5,492,000 in Other Real Estate Owned at June 30, 2009, and $3,557,000 at December 31, 2008. There were no loans past due 90 days and still accruing at either date. During the second quarter of 2009, the Bank did not foreclose on any properties. During the first quarter of 2008, the Bank obtained a land development property consisting of 20 residential lots, located in Martinez, California, that was recorded at the net realizable value of $3,200,000. This property was written down to $2,000,000 during the first quarter of 2009 based on an updated appraised property value. Also during the first quarter of 2009, the bank obtained title to two single family residences in San Anselmo, California that had a combined value of $3,298,000 at the time of foreclosure. During the first quarter of 2008, the Bank obtained through foreclosure a single family residence in San Jose valued at $357,000. Management intends to aggressively market these properties. While management believes these properties will sell, there can be no assurance that these properties will sell quickly given the current real estate market, nor can the expected sales price be accurately predicted.

          Deposits. Total deposits at June 30, 2009 were $538,478,000 compared to $500,910,000 on December 31, 2008. Of these totals, noninterest-bearing demand deposits were $111,644,000 or 20.7% of the total on June 30, 2009 and $121,237,000 or 24.2% on December 31, 2008. Time deposits were $133,793,000 on June 30, 2009 and $141,840,000 on December 31, 2008. During the first six months of 2009, compared to the same period in 2008, the deposit mix has changed to include a shift from demand and time deposits, which decreased $16,933,000, to an increase in savings and money market, which increased by $54,569,000. This shift is the result of some of our customers moving their funds into the Bank’s highest yielding deposit product. This product pays a higher interest rate if the customer has other deposit and loan products with the Bank.

The following table sets forth the maturity schedule of the time certificates of deposit on June 30, 2009:

TABLE 9

(Dollar amounts in thousands) Maturities	Under $100,000		$100,000 or more		Total
Three months or less	$	16,955	$	37,782	$	54,737
Over three through six months		11,857		17,094		28,951
Over six through twelve months		13,658		23,413		37,071
Over twelve months		7,326		5,708		13,034
Total	$	49,796	$	83,997	$	133,793

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          Federal Home Loan Bank advances. These advances declined by $46,100,000 or 53.5% on June 30, 2009 compared to December 31, 2008. The Bank has used some of the additional deposits raised to repay Federal Home Loan Bank advances during the quarter. To the extent additional deposit increases are realized during the remainder of 2009, additional advances will be repaid.

          The following table shows the risk-based capital ratios and leverage ratios at June 30, 2009 and December 31, 2008 for the Bank:

TABLE 10

Risk-Based Capital Ratios	June 30, 2009		December 31, 2008			Minimum “Well Capitalized” Requirements
Tier 1 Capital	12.67	%	11.84	%	≥	6.00	%
Total Capital	13.93	%	10.65	%	≥	10.00	%
Leverage Ratios	11.12	%	9.68	%	≥	5.00	%

          Liquidity. Liquidity is a measure of the Company’s ability to convert assets into cash with minimal loss. As of June 30, 2009, Liquid Assets were $126,252,000, or 19.1% of total assets. As of December 31, 2008, Liquid Assets were $114,086,000, or 17.3% of total assets. Liquidity consists of cash and due from banks, federal funds sold, and securities available-for-sale. The Company’s primary uses of funds are loans, and the primary sources of funds are deposits. The relationship between total net loans and total deposits is a useful additional measure of liquidity. The Company also has federal funds borrowing facilities totaling $25,000,000, a Federal Home Loan Bank line up to 30% of total assets, and a Federal Reserve Bank borrowing facility.

          A higher loan to deposit ratio may lead to a loss of liquid assets in the future. This must be balanced against the fact that loans represent the highest interest earning assets. A lower loan to deposit ratio means lower potential income. On June 30, 2009 net loans were at 90% of deposits. On December 31, 2008 net loans were at 99% of deposits.

          Off-Balance Sheet Items

          The Company has certain ongoing commitments under operating leases. These commitments do not significantly impact operating results. As of June 30, 2009 and December 31, 2008, commitments to extend credit and letters of credit were the only financial instruments with off-balance sheet risk. The Company has not entered into any contracts for financial derivative instruments such as futures, swaps, options or similar instruments. Loan commitments and letters of credit were $99,259,000 and $115,821,000 at June 30, 2009 and December 31, 2008, respectively. As a percentage of net loans, these off-balance sheet items represent 20.4% and 23.3% respectively.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

          Market risk is the risk of loss to future earnings, to fair values of assets or to future cash flows that may result from changes in the price or value of a financial instrument. The value of a financial instrument may change as a result of changes in interest rates and other market conditions. Market risk is attributed to all market risk sensitive financial instruments, including loans, investment securities, deposits and borrowings. The Company does not engage in trading activities or participate in foreign currency transactions for its own account. Accordingly, exposure to market risk is primarily a function of asset and liability management activities and of changes in market rates of interest. Changes in rates can cause or require increases in the rates paid on deposits that may take effect more rapidly or may be greater than the increases in the interest rates that the Company is able to charge on loans and the yields that it can realize on its investments. The extent of that market risk depends on a number of variables including the sensitivity to changes in market interest rates and the maturities of the Company’s interest earning assets and deposits (see discussion of comparative changes in the prime lending rate and the Federal Home Loan Bank of San Francisco’s Weighted Monthly Cost of Funds, in the second paragraph under Earnings Analysis section of this report).

Item 4T. Controls and Procedures.

          (a)Disclosure Controls and Procedures: An evaluation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and other members of the Company’s senior management as of the end of the Company’s fiscal quarter ended June 30, 2009. The Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as currently in effect are effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) to allow timely decisions regarding required disclosure, and (ii) recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.

          (b)Internal Control Over Financial Reporting: An evaluation of any changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), that occurred during the Company’s fiscal quarter ended June 30, 2009, was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and other members of the Company’s senior management. The Company’s Chief Executive Officer and Chief Financial Officer concluded that no change identified in connection with such evaluation has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

          There are no material legal proceedings adverse to the Company or First National Bank to which any director, officer, affiliate of the Company, or 5% shareholder of the Company, or any associate of any such director, officer, affiliate or 5% shareholder of the Company are a party, and none of the foregoing persons has a material interest adverse to the Company or First National Bank.

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          From time to time, the Company and/or First National Bank are a party to claims and legal proceedings arising in the ordinary course of business. The Company’s management is not aware of any material pending legal proceedings to which either it or First National Bank may be a party or has recently been a party, which will have a material adverse effect on the financial condition or results of operations of the Company and First National Bank, taken as a whole.

Item 1A. Risk Factors

          There have been no material changes from risk factors previously disclosed by the Company in response to Item 1A, Part 1 of Form 10-K as of December 31, 2008.

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
	c)     ISSUER PURCHASES OF EQUITY SECURITIES

On August 24, 2007, the Board of Directors of the Company authorized a stock repurchase program which calls for the repurchase of up to five percent (5%) of the Company’s then outstanding 2,863,635 shares of Common Stock, or 143,182 shares. There were no repurchases during the quarter ended June 30, 2009. There were 10,457 shares remaining that may be purchased under this Plan as of June 30, 2009. Effective February 27, 2009, based on the Purchase Agreement with the U. S. Treasury, the Company may not repurchase Company common stock so long as the Treasury’s Preferred Stock investment is outstanding.

Item 4. Submission of Matters to a Vote of Security Holders

          The Annual Meeting of Shareholders of FNB Bancorp was held on May 20, 2009. Four matters were voted on at the Annual Meeting: the election of Directors; a proposal to amend and approve Article III, Section 16 of the Company Bylaws to increase the minimum-maximum range of authorized directors to not less than six (6) nor more than eleven (11) directors; an Advisory Vote on Executive Compensation; and ratify and approve the appointment of Moss Adams LLP as independent auditors of FNB Bancorp for the 2009 fiscal year. The seven appointees identified in the proxy statement for the Annual Meeting were elected as Directors; the Amendment of the Company Bylaws was ratified and approved; the Advisory Vote on Executive Compensation was ratified and approved; and the appointment of Moss Adams LLP was approved. Set forth below is a summary of the voting:

Election of Directors		Votes For	Votes Withheld
	Michael R. Wyman	2,241,293	108,221
	Thomas C. McGraw	2,251,293	98,221
	Lisa Angelot	2,250,158	99,356
	Merrie Turner Lightner	2,251,293	98,221
	Michael Pacelli	2,250,539	98,975
	Edward J. Watson	2,249,446	100,068
	Anthony J. Clifford	2,240,581	108,933

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Amendment of the Bylaws	For	Against	Abstain
	2,286,479	28,836	34,199

Advisory Vote on Executive Compensation	For	Against	Abstain
	2,265,851	26,344	57,319

Appointment of Moss Adams LLP	For	Against	Abstain
	2,347,160	465	1,889

Item 6.	Exhibits
	Exhibits

31: Rule 13a-14(a)/15d-14(a) Certifications

32: Section 1350 Certifications

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 hereunto duly authorized.

	FNB BANCORP
	(Registrant)
Dated:
August 11, 2009.
	By: /s/ Thomas C. McGraw
		Thomas C. McGraw
		Chief Executive Officer
		(Authorized Officer)
	By: /s/ David A. Curtis
		David A. Curtis
		Senior Vice President
		Chief Financial Officer
		(Principal Financial Officer)

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