FNB Bancorp 10-Q 2011 Q1 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 March 31, 2011

FNB BANCORP

(Exact name of registrant as specified in its charter)

California

(State or other jurisdiction of incorporation)

000-49693	91-2115369
(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 No o

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 filer o	Accelerated filer o
Non-accelerated filer x	Smaller reporting company o

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

Yes o No x

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 May12, 2011: 3,341,994 shares.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

FNB BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

	March 31,		December 31,
(Dollar amounts in thousands)	2011		2010
ASSETS
Cash and due from banks	$	49,326	$	60,874
Securities available-for-sale, at fair value		131,861		126,189
Loans, net of allowance for loan losses of $9,784and $9,524 on March 31, 2011 and December 31, 2010, respectively		463,745		474,828
Bank premises, equipment, and leasehold improvements, net		13,535		13,535
Other real estate owned		5,612		6,680
Goodwill		1,841		1,841
Accrued interest receivable and other assets		30,670		30,692
Total assets	$	696,590	$	714,639
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Demand, noninterest bearing	$	134,446	$	137,237
Demand, interest bearing		54,950		60,413
Savings and money market		306,330		305,390
Time		113,716		125,400
Total deposits		609,442		628,440
Accrued expenses and other liabilities		5,395		5,275
Total liabilities		614,837		633,715
Stockholders’ equity:
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)		11,801		11,747
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)		612		615
Common stock, no par value, authorized 10,000,000 shares; issued and outstanding 3,341,994 shares at March 31, 2011 and December 31, 2010		46,638		46,565
Retained earnings		22,182		21,760
Accumulated other comprehensive income		520		237
Total stockholders’ equity		81,753		80,924
Total liabilities and stockholders’ equity	$	696,590	$	714,639

See accompanying notes to consolidated financial statements.

2

FNB BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF EARNINGS

(UNAUDITED)

	Three months ended
	March 31,
(Dollar amounts in thousands, except per share amounts)	2011			2010
Interest income:
Interest and fees on loans	$	7,438		$	7,982
Interest on taxable securities		404			437
Interest on tax-exempt securities		377			241
Total interest income		8,219			8,660
Interest expense:
Deposits		884			1,440
FHLB advances		—			260
Total interest expense		884			1,700
Net interest income		7,335			6,960
Provision for loan losses		450			250
Net interest income after provision for loan losses		6,885			6,710
Noninterest income:
Service charges		697			685
Credit card fees		150			152
Gain on sale of available-for-sale securities		22			108
Other income		144			131
Total noninterest income		1,013			1,076
Noninterest expense:
Salaries and employee benefits		3,486			3,502
Occupancy expense		556			512
Equipment expense		408			512
Professional fees		364			260
FDIC assessment		375			259
Telephone, postage and supplies		313			278
Operating losses		224			9
Other real estate owned expense		188			198
Bankcard expenses		136			139
Gain on sale of other real estate owned		(91	)		(24	)
Loss on impairment of other real estate owned		—			161
Other expense		789			708
Total noninterest expense		6,748			6,514
Earnings before income tax expense		1,150			1,272
Income tax expense		347			268
Net earnings		803			1,004
Dividends and discount accretion on preferred stock		(214	)		(212	)
Net earnings available to common stockholders	$	589		$	792
Earnings per share data:
Basic	$	0.18		$	0.24
Diluted	$	0.18		$	0.24
Weighted average shares outstanding:
Basic		3,341,000			3,341,000
Diluted		3,354,000			3,349,000

See accompanying notes to consolidated financial statements.

3

FNB BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

(UNAUDITED)

(Dollar amounts in thousands)	Three months ended
	March 31,
	2011			2010
Net earnings	$	803		$	1,004
Unrealized holding gain on available-for-sale securities		297			19
Reclassification adjustment for gain on available-for-sale securities sold, net of tax		(13	)		(64	)
Total comprehensive earnings	$	1,087		$	959

See accompanying notes to consolidated financial statements.

4

FNB BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(Dollar amounts in thousands)	Three months ended
	March 31
	2011			2010
Cash flow from operating activities:
Net earnings	$	803		$	1,004
Adjustments to reconcile net earnings to net cash provided by operating activities:
Gain on sale of securities available-for-sale		(22	)		(108	)
Depreciation, amortization and accretion		676			628
Gain on sale of other real estate owned		(91	)		(24	)
Stock-based compensation expense		73			42
Provision for loan losses		450			250
Decrease (increase) in interest receivable and other assets		22			(25	)
Valuation allowance on other real estate owned		—			161
Decrease in accrued expenses and other liabilities		(78	)		(13	)
Net cash provided by operating activities		1,833			1,915
Cash flows from investing activities:
Purchase of securities available-for-sale		(10,123	)		(37,825	)
Proceeds from matured/called/sold securities available-for-sale		4,642			20,205
Proceeds from sale of other real estate owned		1,159			1,472
Net investment in other real estate owned		—			(406	)
Net decrease in loans		10,633			7,270
Purchases of bank premises, equipment, leasehold improvements		(364	)		(413	)
Net cash (used in) provided by investing activities		5,947			(9,697	)
Cash flows from financing activities:
Net (decrease) increase in demand and savings deposits		(7,314	)		28,648
Net decrease in time deposits		(11,684	)		(4,026	)
Net decrease in Federal Home Loan Bank advances		—			(10,000	)
Dividends paid on common stock		(167	)		(159	)
Dividends paid on preferred stock series A and B		(163	)		(163	)
Net cash (used in) provided by financing activities		(19,328	)		14,300
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(11,548	)		6,518
Cash and cash equivalents at beginning of period		60,874			62,853
Cash and cash equivalents at end of period	$	49,326		$	69,371
Additional cash flow information
Interest paid		870			1,847
Income taxes paid		810			130
Non-cash investing and financing activities:
Accrued dividends		167			159
Change in fair value of available for-sale securities		284			(45	)
Loans transferred to other real estate owned		—			965

See accompanying notes to consolidated financial statements.

5

FNB BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011

(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 position and results of operations for the periods presented.

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 annual 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, 2010.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 March 31, 2011and 2010 was $73,000 and $42,000, respectively. The income tax benefit recognized in the statements of earnings for these amounts was$10,000 for the quarters ended March 31, 2011 and none for 2010.

6

There was no intrinsic value for options exercisable orexercised during the quarter ended March 31, 2011.

The amount of total unrecognized compensation expense related to non-vested options at March 31, 2011 was $180,000, and the weighted average period over which it will be amortized is1.9 years.

NOTE C – EARNINGSPER SHARE CALCULATION

Earnings 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(loss) 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.

Earningsper share have been computed based on the following:

(Dollar amounts in thousands)	Three months ended
	March 31,
	2011			2010
Net earnings	$	803		$	1,004
Dividends and discount accretion on preferred stock		(214	)		(212	)
Net earnings available to common shareholders	$	589		$	792
Average number of shares outstanding		3,341,000			3,341,000
Effect of dilutive options		13,000			8,000
Average number of shares outstanding used to calculate diluted earnings per share		3,354,000			3,349,000

Antidilutive options were excluded from the calculation totaled 399,033and 341,741 in 2011 and 2010, respectively.

NOTE D – SECURITIES AVAILABLE FOR SALE

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

(Dollar amounts in thousands)	Amortized		Unrealized		Unrealized			Carrying
	cost		gains		losses			value
March 31, 2011
U.S. Treasury securities	$	12,411	$	—	$	(114	)	$	12,297
Obligations of U.S. Government agencies		45,799		390		(280	)		45,909
Mortgage-backed securities		20,930		420		(48	)		21,302
Obligations of states and political subdivisions		44,701		781		(405	)		45,077
Corporate debt		7,138		145		(7	)		7,276
	$	130,979	$	1,736	$	(854	)	$	131,861

7

(Dollar amounts in thousands)	Amortized		Unrealized		Unrealized			Carrying
	cost		gains		losses			value
December 31, 2010:
U. S. Treasury securities	$	12,440	$	2	$	(97	)	$	12,345
Obligations of U.S. Government agencies		45,941		488		(315	)		46,114
Mortgage-backed securities		18,564		521		(17	)		19,068
Obligations of states and political subdivisions		42,738		582		(864	)		42,456
Corporate debt		6,105		109		(8	)		6,206
	$	125,788	$	1,702	$	(1,301	)	$	126,189

An analysis of gross unrealized losses of the available-for-sale investment securities portfolio as of March 31, 2011 and December 31, 2010, respectively, is as follows:

(Dollar amounts in thousands)			Less than					12 Months
	Total		12 Months			Total		or Longer		Total		Total
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
	Value		Losses			Value		Losses		Value		Losses
March 31,2011
U.S. Treasury securities	$	12,297	$	(114	)	$	—	$	—	$	12,297	$	(114	)
Obligations of U.S. Government agencies		21,971		(280	)		—		—		21,971		(280	)
Mortgage-backed securities		5,464		(48	)		—		—		5,464		(48	)
Obligations of states and political subdivisions		14,446		(405	)		—		—		14,446		(405	)
Corporate debt		1,537		(7	)		—		—		1,537		(7	)
Total	$	55,715	$	(854	)	$	—	$	—	$	55,715	$	(854	)

(Dollar amounts in thousands)	Total		< 12 Months			Total		12 Months or		Total		Total
	Fair		Unrealized			Fair		> Unrealized		Fair		Unrealized
	Value		Losses			Value		Losses		Value		Losses
December 31, 2010
U. S. Treasury securities	$	11,341	$	(97	)	$	—	$	—	$	11,341	$	(97	)
Obligations of U.S. Government agencies		19,983		(315	)		—		—		19,983		(315	)
Mortgage-backed securities		1,864		(17	)		—		—		1,864		(17	)
Obligations of states and political subdivisions		22,639		(864	)		—		—		22,639		(864	)
Corporate debt		1,437		(8	)		—		—		1,437		(8	)
Total	$	57,264	$	(1,301	)	$	—	$	—	$	57,264	$	(1,301	)

At March 31, 2011, there were no securities in an unrealized loss position for greater than 12 consecutive months. Managementperiodically evaluates each security in an unrealized loss position to determine if the impairment is temporary or other-than-temporary. The unrealized losses are due solely to interest rate changes and the Company does not intend to sell nor expect it will not be required to sell investment securities identified with impairments prior to the earliest of forecasted recovery or the maturity of the underlying investment security. Management has determined that no investment security is other-than-temporarily impaired at March 31, 2011.

8

The amortized cost and carrying value of debt securities as of March 31, 2011by 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.

March 31, 2011:

(Dollar amounts in thousands)	Amortized		Carrying
	Cost		Value
Available-for-sale:
Due in one year or less	$	7,595	$	7,695
Due after one through five years		73,492		74,113
Due after five years through ten years		19,723		19,712
Due after ten years		30,169		30,341
	$	130,979	$	131,861

For the three months ended March 31, 2011 and March 31, 2010, respectively, gross realized gains amounted to $22,000and $108,000, on securities sold or called of $2,680,000 and $13,969,000, respectively. For the three months ended March 31, 2011 and March 31, 2010, there were no realized gross losses.

At March 31, 2011, securities with an amortized cost of $86,076,000 and fair value of $86,746,000 were pledged as collateral for public deposits and for other purposes required by law.

NOTE E - LOANS

Loans are summarized as follows at March 31, 2011 and December 31, 2010:

	March 31,			December 31,
(Dollar amounts in thousands)	2011			2010
Commercial real estate	$	275,843		$	278,866
Real estate construction		31,128			27,577
Real estate multi-family		41,482			42,584
Real estate 1 to 4 family		77,688			71,463
Commercial & industrial		44,932			61,493
Consumer loans		2,737			2,689
Gross loans		473,810			484,672
Net deferred loan fees		(281	)		(320	)
Allowance for loan losses		(9,784	)		(9,524	)
Net loans	$	463,745		$	474,828

The Bank had total impaired loans of $28,727,000 at March 31, 2011 and $27,302,000 at December 31, 2010, respectively. The allowance for loan losses related to the impaired loans was $1,512,000 and $1,469,000 as of March 31, 2011 and December 31,2010, respectively. The amount of the recorded investment in impaired loans for which there is no related allowance is $8,509,000 and $8,949,000 as of March 31, 2011 and December 31, 2010. The average recorded investment in impaired loans during the quarter ended March 31, 2011 and the year ended December 31, 2010 was $29,303,000 and $24,481,000, respectively.

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	Impaired Loans
	For the Year Ended March 31, 2011
			Unpaid				Average
(Dollar amounts in thousands)	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded
Commercial & industrial	$	5,003	$	5,206	$	—	$	5,003	$	14
Commercial real estate		2,455		2,509		—		2,456		10
Residential - 1 to 4 family		1,051		1,144		—		1,114		12
Total		8,509		8,859		—		8,573		36
With an allowance recorded
Commercial	$	3,102		4,370	$	438	$	3,593	$	1
Commercial real estate construction		8,927		8,931		492		8,929		92
Commercial real estate		5,902		5,965		368		5,935		0
Residential- 1 to 4 family		2,257		2,259		198		2,257		22
Consumer		30		30		16		16		0
Total		20,218		21,555		1,512		20,730		115
Total
Commercial & industrial	$	8,105	$	9,576	$	438	$	8,596	$	15
Commercial real estate construction		8,927		8,931		492		8,929		92
Commercial real estate		8,357		8,474		368		8,391		10
Residential - 1 to 4 family		3,308		3,349		187		3,371		34
Consumer		30		30		16		16		0
Grand total	$	28,727	$	30,360	$	1,501	$	29,303	$	151

	Impaired Loans
	For the Year Ended December 31, 2010
			Unpaid				Average
(Dollar amounts in thousands)	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded
Commercial & industrial	$	4,743	$	4,841	$	—	$	4,801	$	74
Commercial real estate		4,206		4,206		—		4,323		131
Total		8,949		9,047		—		9,124		205
With an allowance recorded
Commercial	$	2,644		3,044	$	527	$	2,945	$	31
Commercial real estate construction		8,931		8,931		368		5,560		303
Commercial real estate		3,474		3,474		364		3,505		171
Residential- 1 to 4 family		3,304		3,349		210		3,347		100
Total		18,353		18,798		1,469		15,357		605
Total
Commercial & industrial	$	7,387	$	7,885	$	527	$	7,746	$	105
Commercial real estate construction		8,931		8,931		368		5,560		303
Commercial real estate		7,680		7,680		364		7,828		302
Residential - 1 to 4 family		3,304		3,349		210		3,347		100
Grand total	$	27,302	$	27,845	$	1,469	$	24,481	$	810

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Nonaccrual loans totaled $16,621,000 and $16,712,000 as of March 31, 2011 and December 31, 2010. The difference between impaired loans and nonaccrual loans represents loans that are restructured, are performing under modified agreements, and interest is accrued.

The carrying amounts of loans include $16,621,000 and $16,712,000 of nonaccrual loans (loans that are not accruing interest) at March 31, 2011 and December 31, 2010.

The following aggregate information is provided at March 31, 2011 and December 31, 2010, about the contractual provisions of these loans:

	March 31			December 31
(Dollars amounts in thousands)	2011			2010
Aggregate carrying amount	$	16,621		$	16,712
Effective rate		6.01	%		5.99	%
Average term to maturity	65 months			69 months

	Loans on Nonaccrual Status
	As of
(Dollar amounts in thousands)	March 31		December 31,
	2011		2010
Commercial & industrial	$	3,142	$	5,415
Real estate - construction		3,518		3,518
Commercial real estate		8,637		6,662
Real estate 1 to 4 family		1,323		1,117
Consumer		1		—
Total	$	16,621	$	16,712

Interest income on impaired loans of $151,000 and $810,000 was recognized for cash payments received during the quarter ended March 31, 2011 and the year ended December 31, 2010, respectively. The amount of interest on impaired loans not collected for the quarter ended 3/31/2011 was $240,000, and the year ended December 31, 2010 was $290,000, respectively. The cumulative amount of unpaid interest on impaired loans was $1,336,000 and $1,095,000 for the quarter ended March 31, 2011 and the year ended December 31, 2010, respectively. Total loan principal of troubled debt restructuring at March 31, 2011 was $11,088,000, of which $2,344,000 was commercial loans, $1,036,000 was residential loans, $4,297,000 was commercial real estate loans, and $3,411,000 was multi-family real estate loans. Total loan principal of troubled debt restructuring at December 31, 2010 was $19,409,000, of which $2,416,000 was commercial loans, $2,621,000 was residential loans, $4,598,000 was commercial real estate loans, and $9,774,000 was multi-family real estate loans.

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	Modifications
	As of March 31, 2011
			Pre-		Post-
			Modification		Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
	Contracts		Investment		Investment
Troubled Debt Restructurings
Commercial & industrial		3	$	2,344	$	2,344
Real estate 1 to 4 family		2		1,036		1,036
Commercial real estate		4		4,297		4,297
Real estate multi family		1		3,411		3,411
Total		10		11,088		11,088

	Modifications
	As of December 31, 2010
			Pre-		Post-
			Modification		Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
	Contracts		Investment		Investment
Troubled Debt Restructurings
Commercial & industrial		3	$	2,416	$	2,416
Real estate 1 to 4 family		4		2,621		2,621
Commercial real estate		4		4,598		4,598
Real estate multi family		2		9,774		9,774
Total		13		19,409		19,409

	Age Analysis of Past Due Loans As of March 31, 2011
(Dollar amounts in thousands)
	30-59 Days Past Due		60-89 Days Past Due		Over 90 Days		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days and Accruing
Commercial & industrial	$	916	$	49	$	788	$	1,753	$	43,179	$	44,932	$	—
Commercial real estate		1,542		1,303		7,023		9,868		307,457		317,325		—
Commercial real estate-construction		—		144		1,556		1,700		29,428		31,128		—
Residential		246		700		218		1,164		76,524		77,688		—
Consumer		—		1		1		2		2,735		2,737		—
Total	$	2,704	$	2,197	$	9,586	$	14,487	$	459,323	$	473,810	$	—

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	Age Analysis of Past Due Loans As of December 31, 2010
(Dollar amounts in thousands)
	30-59 Days Past Due		60-89 Days Past Due		Over 90 Days		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days and Accruing
Commercial & industrial	$	1,466	$	0	$	1	$	1,466	$	60,027	$	61,493	$	—
Commercial real estate		4,843		1,000		—		5,843		315,607		321,450		—
Commercial real estate - construction		0		0		—		—		27,577		27,577		—
Residential		153		99		—		252		71,211		71,463		—
Consumer		2,679		0		—		2,679		10		2,689		—
Total	$	9,141	$	1,099	$	—	$	10,240	$	474,432	$	484,672	$	—

Credit Quality Indicators As of March 31, 2011
(Dollar amounts in thousands)
			Special		Sub-				Total
	Pass		mention		standard		Doubtful		loans
Commercial & industrial	$	36,183	$	—	$	8,509	$	240	$	44,932
Real estate construction		19,014		—		12,114		—		31,128
Commercial real estate		306,525		1,020		9,427		353		317,325
Real estate 1 to 4 family		73,203		166		3,869		450		77,688
Consumer loans		2,737		—		—		—		2,737
Totals	$	437,662	$	1,186	$	33,919	$	1,043	$	473,810

Credit Quality Indicators As of December 31, 2010
(Dollar amounts in thousands)
			Special		Sub-				Pooled		Total
	Pass		mention		standard		Doubtful		loans		loans
Commercial & industrial	$	53,915	$	175	$	6,327	$	265	$	811	$	61,493
Real estate construction		15,464		—		12,113		—		—		27,577
Commercial real estate		304,151		3,913		12,668		—		718		321,450
Real estate 1 to 4 family		66,460		—		4,734		269		—		71,463
Consumer loans		2,689		—		—		—		—		2,689
Totals	$	439,990	$	4,088	$	35,842	$	534	$	1,529	$	484,672

Risk rating system

Loans to borrowers graded as pass or pooled loans represent loans to borrowers of acceptable or better credit quality. They demonstrate sound financial positions, repayment capacity and credit history. They have an identifiable and stable source of repayment.

13

Special mention loans have potential weaknesses that deserve management’s attention. If left uncorrected these potential weaknesses may result in a deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date. These assets are “not adversely classified” and do not expose the Bank to sufficient risk to warrant adverse classification.

Substandard loans are inadequately protected by current sound net worth, paying capacity of the borrower, or pledged collateral. Loans are normally classified as Substandard when there are unsatisfactory characteristics causing more than acceptable levels of risk. A substandard loan normally has one or more well-defined weakness that could jeopardize the repayment of the debt. For example, a) cash flow deficiency, which may jeopardize future payments; b) sale of non-collateral assets has become primary source of repayment; c) the borrower is bankrupt; or d) for any other reason, future repayment is dependent on court action.

Doubtful loans represent credits with weakness inherent in the Substandard classification and where collection or liquidation in full is highly questionable. To be classified Doubtful, there must be specific pending factors which prevent the Loan Review Officer from determining the amount of loss contained in the credit. When the amount of loss can be reasonably estimated, that amount is classified as “loss” and the remainder is classified as Substandard.

Commercial Real Estate Loans

Our commercial real estate loans are made primarily to investors or small businesses where our primary source of repayment is from cash flows generated by the properties, either through rent collection or business profits. The borrower’s promissory notes are secured with recorded liens on the underlying property. The borrowers would normally also be required to personally guarantee repayment of the loan. The bank uses conservative underwriting standards in reviewing applications for credit. Generally, our borrowers have multiple sources of income, so if cash flow generated from the property declines, at least in the short term, the borrowers can normally cover these short term cash flow deficiencies from their available cash reserves. Risk of loss to the Bank is increased when there are cash flow decreases sufficiently large and for such a prolonged period of time that loan payments can no longer be made by the borrowers.

Our real estate construction loans are generally made to borrowers who are rehabilitating a building, converting a building use from one type of use to another, or developing land and building residential or commercial structures for sale or lease. The borrower’s promissory notes are secured with recorded liens on the underlying property. The borrowers would normally also be required to personally guarantee repayment of the loan. The bank uses conservative underwriting standards in reviewing applications for credit. Generally, our borrowers have sufficient resources to make the required construction loan payments during the construction and absorption or lease-up period. After construction is complete, the loans are normally paid off from proceeds from the sale of the building or through a refinance to a commercial real estate loan. Risk of loss to the Bank is increased when there are material construction cost overruns, significant delays in the time to complete the project and/or there has been a material drop in the value of the projects in the marketplace since the inception of the loan.

Commercial and Industrial Loans

Our commercial and industrial loans are generally made to small businesses to provide them with at least some of the working capital necessary to fund their daily business operations. These loans are generally either unsecured or secured by fixed assets, accounts receivable and/or inventory. The borrowers would normally also be required to personally guarantee repayment of the loan. The Bank uses conservative underwriting standards in reviewing applications for credit. Risk of loss to the Bank is increased when our small business customers experience a significant business downturn, incur significant financial losses, or file for relief from creditors through bankruptcy proceedings.

14

Residential Real Estate Loans

Our residential real estate loans are generally made to borrowers who are buying or refinancing their primary personal residence or a rental property of 1-4 singe family residential units. The Bank uses conservative underwriting standards in reviewing applications for credit. Risk of loss to the Bank is increased when borrowers loose their primary source of income and/or property values decline significantly.

Consumer and installment Loans

Our consumer and installment loans generally consist of personal loans, credit card loans, automobile loans or other loans secured by personal property. The Bank uses conservative underwriting standards in reviewing applications for credit. Risk of loss to the Bank is increased when borrowers loose their primary source of income, or file for relief from creditors through bankruptcy proceedings.

NOTE F – FAIR VALUE MEASUREMENT

The following table presents information about the Company’s assets and liabilities measured at fair value as of March 31, 2011 and December 31, 2010, 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.

15

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

			Fair Value Measurements
(Dollar amounts in thousands)			at March 31, 2011, Using
			Quoted Prices
			in Active
			Markets		Other		Significant
			for Identical		Observable		Unobservable
	Fair Value		Assets		Inputs		Inputs
Description	3/31/2011		(Level 1)		(Level 2)		(Level 3)
U. S. Treasury securities	$	12,297	$	12,297	$	—	$	—
Obligations of U.S. Government agencies		45,909		—		45,909		—
Mortgage-backed securities		21,302		—		21,302		—
Obligations of states and political subdivisions		45,077		—		45,077		—
Corporate debt		7,276		—		7,276		—
Total assets measured at fair value	$	131,861	$	12,297	$	119,564	$	—

			Fair Value Measurements
(Dollar amounts in thousands)			at December 31, 2010, Using
			Quoted Prices
			in Active
			Markets		Other		Significant
			for Identical		Observable		Unobservable
	Fair Value		Assets		Inputs		Inputs
Description	12/31/2010		(Level 1)		(Level 2)		(Level 3)
U. S. Treasury securities	$	12,345	$	12,345	$	—	$	—
Obligations of U.S. Government agencies		46,114		—		46,114		—
Mortgage-backed securities		19,068		—		19,068
Obligations of states and political subdivisions		42,456		—		42,456		—
Corporate debt		6,206		—		6,206		—
Total assets measured at fair value	$	126,189	$	12,345	$	113,844	$	—

The following table representsimpaired loans and other real estate owned which had specific reserve changes during the quarter, or where new impairments were added during this quarter. In addition, this table presents the recorded amounts of assets measured at fair value on a non-recurring basis:

			Fair Value Measurements
(Dollar amounts in thousands)			at March 31, 2011, Using
			Quoted Prices
			in Active
			Markets		Other		Significant
			for Identical		Observable		Unobservable
	Fair Value		Assets		Inputs		Inputs		Total
Description	3/31/2011		(Level 1)		(Level 2)		(Level 3)		losses
Impaired loans	$	7,849	$	—	$	—	$	7,849	$	(123	)
Total impaired assets measured at fair value	$	7,849	$	—	$	—	$	7,849	$	(123	)

16

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

			Fair Value Measurements
(Dollar amounts in thousands)			at December 31, 2010, Using
			Quoted Prices in
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
	Fair Value		Assets		Inputs		Inputs		Total
Description	12/31/2010		(Level 1)		(Level 2)		(Level 3)		losses
Impaired loans	$	10,471	$	—	$	—	$	10,471	$	(1,069	)
Other real estate owned		6,680		—		—		6,680		—
Total impaired assets measured at fair value	$	17,151	$	—	$	—	$	17,151	$	(1,069	)

The Bank does not record loans at fair value. However, from time to time, if aloan is considered impaired, a specificallocation 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. 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. Impaired loans where an allowance is established based on the fair value of collateral or when the impaired loan has been written down to fair value 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 also records the impaired loans as nonrecurring Level 3.

Other real estate owned is carried at the lower of historical cost or fair market value less costs to sell. An appraisal (a Level 3 valuation) is obtained at the time the Bank acquires property through the foreclosure process. Any loan balance outstanding that exceeds the appraised value of theproperty 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 at least 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.

17

Federal Home Loan Bank and Federal Reserve Bank stock.

Federal Home Loan Bank and Federal Reserve Bank stock can only be issued and redeemed at par by these entities. These securities cannot be sold in open market transactions. Fair value is estimated to be their carrying value.

Loans Receivable.

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

Bank Owned Life Insurance.

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

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 the 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 are based on discounted cash flows. The discount rate is equal to the market rate currently offered on similar products.

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.

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The following table provides summary information on the estimated fair value of financial instruments at March 31, 2011:

(Dollar amounts in thousands)	Carrying		Fair
	amount		value
Financial assets:
Cash and cash equivalents	$	49,326	$	49,326
Securities available for sale		131,861		131,861
Loans, net		463,745		470,290
Bank owned life insurance		9,276		9,276
Federal home Loan Bank stock		3,783		3,783
Federal Reserve Bank stock		1,062		1,062
Financial liabilities:
Deposits		609,442		609,994
Off-balance-sheet liabilities:
Undisbursed loan commitments, lines of credit, Mastercard line and standby letters of credit		—		3,842

The carrying amount of loans include $16,621,000 of nonaccrual loans (loans that are not accruing interest) as of March 31, 2011. The fair value of nonaccrual loans is based on the collateral values that secure the loans or the cash flows expected to be received.

The following table provides summary information on the estimated fair value of financial instruments at December 31, 2010:

(Dollar amounts in thousands)	Carrying		Fair
	amount		value
Financial assets:
Cash and cash equivalents	$	60,874	$	60,874
Securities available for sale		126,189		126,189
Loans, net		474,828		466,007
Bank owned life insurance		9,195		9,195
Federal Home Loan Bank stock		3,939		3,939
Federal Reserve Bank stock		1,062		1,062
Financial liabilities:
Deposits		628,440		628,983
Off-balance-sheet liabilities:
Undisbursed loan commitments, lines of credit, Mastercard line and standby letters of credit		—		3,603

The carrying amount of loans include $16,712,000 of nonaccrual loans (loans that are not accruing interest) as of December 31, 2010. The fair value of nonaccrual loans is based on the collateral values that secure the loans or the cash flows expected to be received.

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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 in February, 2009. 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.In addition, beginning in the second quarter of 2010, the Company must obtain regulatory approval from the Office of the Comptroller of the Currency before TARP dividends can be paid. As of March 31, 2011, all dividend payments on our Preferred Stock have been paid in accordance with the Treasury’s Capital Purchase Program.

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 and competitive market pricing, which 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. These factors could reduce our ability to attract new deposits and loans and leases.

20

Liquidity Risk.The stability of funding sources and continued availability of borrowings; our ability to raise capital or incur debt on reasonable terms.

Possible Adverse Changes in Economic Conditions. Adverse changes in national or local economic conditions over an extended period of time 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 possible 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 and conditions, such as increases in inflation or declines in economic output often prompt changes in Federal Open Market Committee (“FOMC”) monetary policies that could reduce interest income or increase the cost of funds to the Company, either of which could result in reduced earnings. In addition, deterioration in economic conditions that could result in increased loan and lease losses.

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, liquidity requirements, and the risks associated with concentration in real estate related loans 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.

21

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 our borrowers’ ability to repay their loans. Determination of the allowance is based upon objective and subjective judgments by management from the information currently available. Adverse changes in information could result in higher than expected charge-offs and loan loss provisions.

Goodwill

Goodwill arises when the Company’s purchase price exceeds the fair value of the net assets of an acquired business. Goodwill represents the value attributable to intangible elements acquired. The value of 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 earnings. 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.

Other Than Temporary Impairment

Other than temporary impairment (“OTTI”) is triggered if the Company has the intent to sell the security, it is likely that it will be required to sell the security before recovery, or if the Company does not expect to recover the entire amortized cost basis of the security. If the Company intends to sell the security or it is likely it will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings as an OTTI. If the Company does not intend to sell the security and it is not likely that the Company will be required to sell the security but the Company does not expect to recover the entire amortized cost basis of the security, only the portion of the impairment loss representing credit losses would be recognized in earnings as an OTTI. The credit loss is measured as the difference between the amortized cost basis and the present value of the cash flows expected to be collected of a security. Projected cash flows are discounted by the original or current effective interest rate depending on the nature of the security being measured for potential OTTI. The remaining impairment loss related to all other factors, the difference between the present value of the cash flows expected to be collected and fair value, would be recognized as a charge to other comprehensive income (“OCI”). Impairment losses related to all other factors are to be presented as a separate category within OCI.

For investment securities held to maturity, this amount is accreted over the remaining life of the debt security prospectively based on the amount and timing of future estimated cash flows. The accretion of the OTTI amount recorded in OCI will increase the carrying value of the investment, and would not affect earnings. If there is an indication of additional credit losses the security is re-evaluated accordingly based on the procedures described above.

22

Provision for and Deferred Income Taxes

The Company is subject to income tax laws of the United States, its states, and the municipalities in which it operates. The Company considers its income tax provision methodology to be critical, as the determination of current and deferred taxes 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 tax authorities.

Recent Accounting Pronouncements

In January, 2011, the FASB issued ASU No. 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. The amendments in this Update temporarily delay the effective date of the disclosures about troubled debt restructurings in Update 2010-20 for public entities. The delay is intended to allow the Board time to complete its deliberations on what constitutes a troubled debt restructuring. Currently, the guidance is anticipated to be effective for interim and annual periods ending after June 15, 2011. As this ASU is disclosure-related only, the adoption of this ASU will not impact the Bank’s financial condition or results of operations.

In April, 2011, the FASB issued ASU No. 2011-02, A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.Given the recent economic downturn, the volume of debt restructured (modified) by creditors has increased. Several stakeholdersraised concerns about whether additional guidance or clarification is needed to help creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. Diversity in practice could adversely affect the comparability of information for users about restructurings of receivables. The amendments in this Update apply to all creditors, both public and nonpublic, that restructure receivables that fall within the scope of Subtopic 310-40, Receivables-Troubled Debt Restructurings by Creditors.

In evaluating whether a restructuring constitues a troubled debt restructuring, a creditor must separately conclude that both of the following exist:

1.	The restructuring constitutes a concession.
2.	The debtor is experiencing financial difficulties.

For public entities, the amendments in this Update are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied restrospectively to the beginning of the annual period of adoption. As this ASU is disclosure-related only, the adoption of this ASU will not impact the Bank’s financial condition or results of operations.

23

Earnings Analysis

Net earnings for the quarter ended March 31, 2011 were $803,000, compared to net earnings of $1,004,000 for the quarter ended March 31, 2010, a decrease of $201,000, or 20.0%. Earnings before income tax expense for the quarter ended March 31, 2011 were $1,150,000, compared to$1,272,000 for the quarter ended March 31, 2010, adecrease of $122,000, or 9.6%. Net earnings available to common stockholders for the quarter ended March 31, 2011 were $589,000, compared to net earnings available to common stockholders of $792,000 for the quarter ended March 31, 2010, a decrease of $203,000, or 25.6%.

Net interest income for the quarter ended March 31, 2011 was $7,335,000, compared to $6,960,000 for the quarter ended March 31, 2010, anincrease of $375,000, or 5.4%. This increase was possible due to rate declines in our interest-bearing liabilities that exceeded the rate declines in our interest earning assets on a year over year basis. Customer deposit rates are at or near historic lows for the Company.

Basic earnings per share were $0.18 for the first quarter of 2011 compared to $0.24 for the first quarter of 2010. Diluted earnings per share were $0.18 for the first quarter of 2011 compared to $0.24 for the first quarter of 2010.

The following table presents an analysis of net interest income and average earning assets and liabilities for the three-month period ended March 31, 2011 compared to the three-month period ended March 31, 2010.

24

TABLE 1	NET INTEREST INCOME AND AVERAGE BALANCES
	FNB BANCORP AND SUBSIDIARY
	Three months ended March 31,
	2011						2010
(Dollar amounts In thousands)					Annualized						Annualized
	Average				Average		Average				Average
	Balance		Interest		Yield		Balance		Interest		Yield
INTEREST EARNING ASSETS
Loans, gross (1) (2)	$	482,136	$	7,438	6.26	%	$	501,461	$	7,982	6.46	%
Taxable securities (3)		85,380		404	1.92	%		79,830		437	2.22	%
Nontaxable securities (3)		43,591		501	4.66	%		27,471		318	4.69	%
Federal funds sold		—		—	—			1		—	—
Total interest earning assets		611,107		8,343	5.54	%		608,763		8,737	5.82	%
NONINTEREST EARNING ASSETS:
Cash and due from banks		55,341						72,037
Premises and equipment		13,490						11,836
Other assets		30,923						34,486
Total noninterest earning assets		99,754						118,359
TOTAL ASSETS	$	710,861					$	727,122
INTEREST BEARING LIABILITIES:
Demand, interest bearing	$	60,689		34	0.23	%	$	58,449		51	0.35	%
Money market		257,921		543	0.85	%		265,518		910	1.39	%
Savings		45,870		28	0.25	%		42,084		26	0.25	%
Time deposits		118,095		279	0.96	%		126,659		453	1.45	%
FederalHome Loan Bank advances		—		—	—			24,889		260	4.24	%
Federal funds purchased		—		—	—			11		—	—
Total interest bearing liabilities		482,575		884	0.74	%		517,610		1,700	1.32	%
NONINTEREST BEARING LIABILITIES:
Demand deposits		139,638						122,631
Other liabilities		7,280						7,460
Total noninterest bearing liabilities		146,918						130,091
TOTAL LIABILITIES		629,493						647,701
Stockholders’ equity		81,368						79,421
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	710,861					$	727,122
NET INTEREST INCOME AND MARGIN ON TOTAL EARNING ASSETS (4)			$	7,459	4.95	%			$	7,037	4.69	%

1) Interest on non-accrual loans is recognized into income on a cash received basis if the loan has demonstrated performance and full collection is considered probable.

2) Amounts of interest earned included loan fees of $246,000 and $303,000 for the quarters ended March 31, 2011 and 2010, respectively.

3)Tax equivalent adjustments recorded at the statutory rate of 34% that are included in the nontaxable securities portfolio are $124,000 and $77,000 for the quarters ended March 31, 2011 and 2010, respectively, and were derived from nontaxable municipal interest income.

4) The annualized net interest margin is computed by dividing net interest income by total average interest earning assetsand multiplied by an annualization factor.

Table 1, above, shows the various components that contributed to changes in net interest income for the three months ended March 31, 2011 and 2010. The principal interest earning assets are loans, from a volume as well as from an earnings rate perspective. For the quarter ended March 31, 2011, average gross loans outstanding represented 78.9% of average earning assets. For the quarter ended March 31, 2010, they represented 82.4% of average earning assets.During the first quarter of 2011, the Bank’s loan portfolio decreased primarily due to a lack of demand for loans by qualified borrowers. Loan paydowns and payoffs exceeded new loan originations during the quarter.

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The taxable equivalent yield on average interest earning assets for the quarter ended March 31, 2011 compared to the quarter ended March 31, 2010decreased from 5.82% to 5.54%, or 28 basis points. Average loans decreased by $19,325,000, average interest on the loan portfolio decreased from 6.46% to 6.26%. Interest incomeon total interest earning assets decreased $394,000 or 4.51% on a tax equivalent basis.All excess cash positions during the first quarter of 2011, were invested in our interest earning Federal Reserve demand deposit account on a daily basis, earning interest at an annual yield of 0.25%.

For the three months ended March 31, 2011, compared to the three months ended March 31, 2010, the cost on total interest bearing liabilities decreased from 1.32% to 0.74%, adecrease of 58 basis points. The principal source of deposit liabilities comes from savings and money marketdeposits. Average money market deposits decreased from $265,518,000 in the first quarter of 2010 to $257,921,000during this same period during 2011, a decrease of$7,597,000, or 2.86%. Our average money market deposit cost decreased from 1.39% to 0.85%, and the expense on these deposits decreased $367,000 for the three months ended March 31, 2011 compared to the three months ended March 31, 2010.

TABLE 2	FNB BANCORP AND SUBSIDIARY
	RATE/VOLUME VARIANCE ANALYSIS
(Dollar amounts in thousands)	Three months ended March 31,
	2011 compared to 2010
	Increase(decrease) (2)
	Interest			Variance
	Income/expense			Attributable to
	Variance			Rate			Volume
INTEREST EARNING ASSETS
Loans	$	(545	)	$	(246	)	$	(299	)
Taxable securities		(33	)		(59	)		26
Nontaxable securities (1)		183			(2	)		185
Total		(395	)		(307	)		(88	)
INTEREST BEARING LIABILITIES
Demand deposits		17			19			(2	)
Money market		367			351			16
Savings		(2	)		—			(2	)
Time deposits		175			144			31
Federal Home Loan Bank advances		260			—			260
Total		817			514			303
NET INTEREST INCOME	$	422		$	207		$	215

(1)	Includes tax equivalent adjustments of $124,000 and $77,000 in the three months ended March 31, 2011, and March 31, 2010, respectively.
(2)	Increases (decreases) shown are in relation to their effect on net interest income.
	For the three month periods ended March 31, 2011 and March 31, 2010, respectively, the above table shows 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.

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Noninterest income

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

TABLE 3	NONINTEREST INCOME
(Dollar amounts in thousands)	Three months
	ended March 31,				Variance
	2011		2010		Amount			Percent
Service charges	$	697	$	685	$	12		1.8	%
Credit card fees		150		152		(2	)	-1.3	%
Gain on sale of available-for-sale securities		22		108		(86	)	-79.6	%
Other income		144		131		13		9.9	%
Total noninterest income	$	1,013		1,076	$	(63	)	-5.9	%

Noninterest income consists mainly of service charges on deposits, credit card fees, and several other miscellaneous types of income. The Bank service charges were up slightly during the first quarter of 2011 when compared to the same period during 2010 due to a small increase in our overdraft fees that was implemented during the first quarter of 2011.

Noninterest expense

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

(Dollar amounts in thousands)	Three months
	ended March 31,						Variance
	2011			2010			Amount			Percent
Salaries and employee benefits	$	3,486		$	3,502		$	(16	)	-0.5	%
Occupancy expense		556			512			44		8.6	%
Equipment expense		408			512			(104	)	-20.3	%
Professional fees		364			260			104		40.0	%
FDIC assessment		375			259			116		44.8	%
Telephone, postage & supplies		313			278			35		12.6	%
Operating losses		224			9			215		2388.9	%
Other real estate owned expense		188			198			(10	)	-5.1	%
Bankcard expenses		136			139			(3	)	-2.2	%
Gain on sale of other real estate owned		(91	)		(24	)		(67	)	279.2	%
Loss on impairment of other real estate owned		—			161			(161	)	-100.0	%
Other expense		789			708			81		11.4	%
Total noninterest expense	$	6,748		$	6,514		$	234		3.6	%

Noninterest expense consists mainly of salaries and employee benefits.For the three months ended March 31, 2011 compared to three months ended March 31, 2010, it represented 51.7% and 53.8% of total noninterest expenses. During the first quarter of 2011, the Bank experienced an operational loss of approximately $200,000 related to an unauthorized foreign wire transfer. The operational loss is is net of an expected $300,000 insurance reimbursement claim that has been filed with the Bank’s insurance carrier.

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Provision for Loan Losses

There was a provision for loan losses of $450,000 for the three-month period ended March 31, 2011 compared to a provision for loan losses of $250,000 for the same period in 2010. The allowance for loan losses was approximately $9,784,000 or 2.07% of total gross loans at March 31, 2011, compared to $9,524,000 or 1.97% of total gross loans at December 31, 2010. The allowance for loan losses is maintained at a level considered adequate for management to provide for probable loan losses inherent in the loan portfolio. Loans charged-off during the first quarter of 2011 were significantly lower than during the same time period during 2010, reflecting the improvement in the level of problem loans within our loan portfolio on a year over year basis.

Income Taxes

The effective tax rate for the quarter ended March 31, 2011 was a 30.2% tax expense compared to a 21.1% tax expensefor the quarter ended March 31, 2010.Tax preference items which usually affect our effective tax rate are changing amounts invested in tax-advantaged securities, available Low Income Housing Credits, and amounts of interest income on qualifying loans in California Enterprise Zones. Another significant reason for changes in the effective tax rate provision is the change in the relative proportion of tax advantaged income in comparison to fully taxable income period over period.

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 interest 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 the 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 March 31, 2011, are adequate to meet its operating needs in 2011 and our liquidity positions are sufficient to meet our liquidity needs in the near term.

Financial Condition

Assets. Total assets decreased to $696,590,000 at March 31, 2011 from $714,639,000 at December 31, 2010, a decrease of $18,049,000. The principal source of this decrease was the netpaydown and payoff of $10,633,000 in net loans and a reduction of $11,548,000 in our cash and due from banks, which was partiallyoffset by anincrease of $5,672,000 in securities available-for-sale.

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Loans. Gross loans (before loan fees (cost)) at March 31, 2011 were $473,810,000, adecrease of $10,862,000 or 2.24% from December 31, 2010. Gross commercial real estateloans decreased $3,023,000,real estate construction loans increased $3,551,000, real estate multi- family loans decreased $1,102,000, real estate loans secured by 1 to 4 family residences increased $6,225,000, commercial & industrial loans decreased $16,561,000, and consumer loans increased by $48,000. The loan portfolio breakdown was as follows:

TABLE 5	LOAN PORTFOLIO
	March 31					December 31
(Dollar amounts in thousands)	2011			Percent		2010			Percent
Commercial real estate	$	275,843		58	%	$	278,866		56	%
Real estate construction		31,128		7	%		27,577		6	%
Real estate multi family		41,482		9	%		42,584		9	%
Real estate 1 to 4 family		77,688		16	%		71,463		15	%
Commercial & industrial		44,932		9	%		61,493		13	%
Consumer loans		2,737		1	%		2,689		1	%
Gross loans		473,810		100	%		484,672		100	%
Net deferred loan (fees)		(281	)	0	%		(320	)	0	%
Total	$	473,529		100	%	$	484,352		100	%

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 deter-mined by internally generating credit quality ratings, reviewing economic conditions in the Company’s market area, and considering the Company’s historical loan loss experience. TheCompany’s management considers changes in national and local economic conditions, as well as the condition 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 transactions in the allowance for loan losses for the three months ended March 31, 2011, and the three months ended March 31, 2010 is as follows:

TABLE 6	ALLOWANCE FOR LOAN LOSSES
	Three months ended			Three months ended
(Dollar amounts in thousands)	March 31, 2011			March 31, 2010
Balance, beginning of period	$	9,524		$	9,829
Provision for loan losses		450			250
Recoveries		13			26
Amounts charged off		(203	)		(1,009	)
Balance, end of period	$	9,784		$	9,096

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During the first quarter of 2011, there was a provision of $450,000,compared to $250,000 in the first quarter of 2010. The increase in the provision was considered necessary given the existing risk levels within the Bank’s loan portfolio. Loan charge-off levels have declined year over year, yet remain above historic norms.

In management’s judgment, the allowance is adequate to absorb losses currently inherent in the loan portfolio at March 31, 2011. 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.

	Allowance for Credit Losses and Recorded Investment in Loans
	For the Year Ended March 31, 2011
(Dollar amounts in thousands)
								Real estate
	Commercial			Commercial		Real estate		1 to 4
	& industrial			Real Estate		Construction		family		Consumer			Total
Allowance for credit losses
Beginning balance	$	2,102		$	4,103	$	1,999	$	1,233	$	87		$	9,524
Charge-offs		(200	)		—		—		—		(3	)		(203	)
Recoveries		4			—		9		—		—			13
Provision		(301	)		257		97		372		25			450
Ending balance	$	1,605		$	4,360	$	2,105	$	1,605	$	109			9,784
Ending balance: individually evaluated for impairment	$	438		$	492	$	368	$	198	$	16			1,512
Ending balance: collectively evaluated for impairment	$	1,167		$	3,868	$	1,737	$	1,407	$	93			8,272
Loans:
Ending balance	$	44,932		$	317,325	$	31,128	$	77,688	$	2,737			473,810
Ending balance: individually evaluated for impairment	$	8,105		$	8,357	$	8,927	$	3,308	$	30			28,727
Ending balance: collectively evaluated for impairment	$	36,827		$	308,968	$	22,201	$	74,380	$	2,707			445,083

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 March 31, 2011, there was$22,233,000 in nonperforming assets,compared to $23,392,000 at December 31, 2010. Nonaccrual loans were $16,621,000 at March 31, 2011, compared to $16,712,000 at December 31, 2010. There were no loans past due 90 days and still accruing at either date.

There was $5,612,000 in Other Real Estate Owned at March 31, 2011, and $6,680,000 at December 31, 2010.During the first quarter of 2011 the Bank sold one property and did not foreclose on any new loans. Management intends to aggressively market these properties. While management believes these properties will sell, there can be no assurance that these properties 7will sell quickly given the current real estate market, nor can the expected sales price be accurately predicted.

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Deposits. Total deposits at March 31, 2011, were $609,442,000 compared to $628,440,000 on December 31, 2010. Of these totals, noninterest-bearing demand deposits were $134,446,000 or 22.1% of the total on March 31, 2011, and $137,237,000 or 21.8% on December 31, 2010. Time deposits were $113,716,000 on March 31, 2011, and $125,400,000 on December 31, 2010. The reduction in deposit balances during the first quarter of 2011, in the opinion of management, is related to our deposit customers de-leveraging their personal and business balance sheets.

The following table sets forth the maturity schedule of the time certificates of deposit on March31, 2011:

TABLE 7
(Dollar amounts in thousands)	Under		$100,000
Maturities	$100,000		or more		Total
Three months or less	$	14,263	$	25,791	$	40,054
Over three through six months		8,917		17,535		26,452
Over six through twelve months		8,687		20,055		28,742
Over twelve months		9,908		8,560		18,468
Total	$	41,775	$	71,941	$	113,716

Regulatory Capital.The following table shows the risk-based capital ratios and leverage ratios at March 31, 2011 and December 31, 2010 for the Bank:

TABLE 8						Minimum “Well
	March 31,		December 31,			Capitalized”
Regulatory Capital Ratios	2011		2010			Requirements
Total Regulatory Capital Ratio	15.22	%	14.85	%	≥	10.00	%
Tier 1 Capital Ratio	13.97	%	13.60	%	≥	6.00	%
Leverage Ratios	10.80	%	10.46	%	≥	5.00	%

As a result of a regularly scheduled Office of the Comptroller of the Currency (“OCC”) examination during 2010, management and the Board of Directors have informally agreed with the OCC totake actions to further strengthen and improve asset quality and capital adequacy, including, among other things, to: maintain a minimum leverage capital ratio of 9% and total risk-based capital ratio of 12%; seek OCC approval and concurrence before declaring any dividends on common or preferred shares; to reduce the level of risk in the commercial real estate (“CRE”) segment of our loan portfolio; and strengthen the documentation of our analysis and review of the adequacy of our allowance for loan losses.

Liquidity. Liquidity is a measure of the Company’s ability to convert assets into cash with minimal loss. As of March 31, 2011, liquid assets were $181,187,000, or 26.0% of total assets. As of December 31, 2010, liquid assets were $187,063,000, or 26.2% 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 Company also has federal funds borrowing facilities totaling $45,000,000, a Federal Home Loan Bank line up to 30% of total assets, and a Federal Reserve Bank borrowing facility.

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The relationship between total net loans and total deposits is a useful additional measure of liquidity.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 March 31, 2011,and December 31, 2010, respectively, net loans were at 76% 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 March 31, 2011 and December 31, 2010, 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 $102,450,000 and $96,083,000 at March 31, 2011 and December 31, 2010, respectively. As a percentage of net loans, these off-balance sheet items represent 22.1% and20.2% respectively.

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.

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 March 31, 2011. 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.

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(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 March 31, 2011, 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% stockholder of the Company, or any associate of any such director, officer, affiliate or 5% stockholder of the Company are a party, and none of the foregoing persons has a material interest adverse to the Company or First National Bank.

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

During the course of normal operations, the Bank and the Company manage a variety of risks including, but not limited to, credit risk, operational risk, interest rate risk and regulatory compliance risk. For a more complete discussion of the risk factors facing the Bank and the Company, please refer to the section entitled “Item 1A – Risk Factors” in the Company’s December 31, 2010 Form 10K.

On May 10, 2010, in connection with a regularly scheduled examination of the Bank by the OCC, the Bank entered into an informal Memorandum of Agreement (“Bank MOU”) with the OCC, covering actions to be taken by the Board of Directors and management to (i) reduce a high level of problem and non-performing assets, (ii) to enhance procedures for managing the risks associated with a concentration of credit in commercial real estate loans, and (iii) to maintain an adequate allowance for loan and lease losses. The Bank MOU also restricts the ability of the Bank to declare dividends and requires the formation of a Compliance Committee to monitor compliance with the MOU and submit quarterly progress reports to the OCC. Also, by letter dated June 9, 2010, the OCC notified the Board of Directors of its determination that the Bank must maintain, on an ongoing basis, a minimum ratio of Tier 1 capital to adjusted total assets of 9% and a minimum ratio of total risk-based capital to risk-weighted assets of 12%.

On June 23, 2010, the Company entered into a Memorandum of Understanding (“Company MOU”) with the Federal Reserve Bank of San Francisco (the “Reserve Bank”), agreeing that, without prior approval of the Reserve Bank, the Company would not (a) receive dividends or any other reduction of capital from the Bank; (b) pay any dividends (including TARP dividends) or make any other capital distributions; (c) incur, renew, increase or guarantee any debt; (d) issue any trust preferred securities; (e) purchase, redeem or otherwise acquire any of its stock; (f) appoint any new director or senior executive officer; or (g) make or agree to make any indemnification or severance payments in the nature of a “golden parachute.”

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On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”) was signed into law. The purpose of this legislation was to bring about regulatory changes and oversight that would help stop past abuses from recurring in the future. This legislation gives new powers to the FDIC and the Federal Reserve Bank that they may use in the execution of their duties as regulators and overseers of the banking industry. It also created a new federal consumer protection agency named the Consumer Financial Protection Bureau (“CFPB”). All existing consumer laws and regulations will be transferred to the CFPB. This Act is expected to enable regulators to issue numerous new banking regulations and requirements that have not yet been fully developed or promulgated. The ultimate effect the Act has on the Company’s operations will ultimately be determined by the significance of the new banking regulations that are issued as a result of the Act.

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 March 31, 2011. There were 10,457 shares remaining that may be repurchased under this Plan as of March 31, 2011. 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 6.Exhibits

Exhibits

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

32: Section 1350  Certifications

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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:
May 11, 2011.	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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