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, 2002
--------------------------------------------
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] No [ ]
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 5,
2002: 2,321,236 shares.
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements
FNB BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
June 30 December 31
2002 2001
(UNAUDITED)
Cash and due from banks $ 18,779 $ 22,493
Federal funds sold 16,365 -
---------- ----------
Cash and cash equivalents 35,144 22,493
Securities available-for-sale 71,772 65,311
Loans, net 286,522 288,067
Premises and equipment, net 11,525 11,655
Accrued interest receivable and other assets 9,698 9,862
---------- ----------
$ 414,661 $ 397,388
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand, noninterest bearing $ 89,108 $ 87,982
Demand, interest bearing 51,021 55,357
Savings and money market 126,944 98,891
Time 96,107 101,849
---------- ----------
Total deposits 363,180 344,079
Federal funds purchased - 2,100
Accrued expenses and other liabilities 3,325 4,686
---------- ----------
Total liabilities 366,505 350,865
Stockholders' equity
Preferred stock, no par value, authorized 5,000,000 - -
shares; issued and outstanding - none
Common stock, no par value, authorized 10,000,000 shares;
issued and outstanding 2,321,236 shares at June 30, 2002
and 2,318,849 shares at December 31, 2001 23,452 23,396
Retained earnings 23,770 22,546
Accumulated other comprehensive income 934 581
---------- ----------
Total stockholders' equity 48,156 46,523
---------- ----------
Total liabilities and stockholders' equity $ 414,661 $ 397,388
========== ==========
See accompanying notes to consolidated financial statements.
2
FNB BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(In thousands, except per share amounts)
Three months ended Six months ended
June 30, June 30,
2002 2001 2002 2001
Interest income:
Interest and fees on loans $ 5,653 $ 6,860 $ 11,343 $ 13,387
Interest on securities 515 709 960 1,509
Interest on tax-exempt securities 323 383 664 780
Federal funds sold 64 167 116 495
------------ ------------ ------------ ------------
Total interest income 6,555 8,119 13,083 16,171
Interest expense:
Interest on deposits 1,140 2,237 2,298 4,527
Other 3 2 12 4
------------ ------------ ------------ ------------
Total interest expense 1,143 2,239 2,310 4,531
------------ ------------ ------------ ------------
Net interest income 5,412 5,880 10,773 11,640
Provision for loan losses 75 75 150 150
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 5,337 5,805 10,623 11,490
Noninterest income:
Service charges 446 381 853 796
Credit card fees 237 239 454 465
Gain (loss) on sales of securities - (17) - 35
Other income 107 109 169 263
------------ ------------ ------------ ------------
Total noninterest income 790 712 1,476 1,559
Noninterest expense:
Salaries and employee benefits 2,637 2,677 5,280 5,266
Occupancy expense 289 318 615 623
Equipment expense 462 390 1,220 739
Professional fees 427 132 674 255
Telephone, postage and supplies 332 288 586 511
Bankcard expenses 203 182 388 331
Other expense 454 518 911 1,019
------------ ------------ ------------ ------------
Total noninterest expense 4,804 4,505 9,674 8,744
------------ ------------ ------------ ------------
Earnings before income tax expense 1,323 2,012 2,425 4,305
Income tax expense 308 644 644 1,378
------------ ------------ ------------ ------------
NET EARNINGS $ 1,015 $ 1,368 $ 1,781 $ 2,927
============ ============ ============ ============
Earnings per share data:
Basic $ 0.44 $ 0.62 $ 0.77 $ 1.32
Diluted $ 0.44 $ 0.62 $ 0.76 $ 1.32
Weighted average shares outstanding:
Basic 2,318,928 2,214,092 2,318,889 2,214,092
Diluted 2,331,532 2,219,606 2,330,567 2,219,606
See accompanying notes to consolidated financial statements
3
FNB BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Six months ended
June 30
2002 2001
---------- ----------
Cash flow from operating activities
Net earnings $ 1,781 $ 2,927
Adjustments to reconcile net earnings to net cash provided by
operating activities
Depreciation and amortization 889 459
(Gain) on sale of securities - (35)
Provision for loan losses 150 150
Changes in assets and liabilities
Accrued interest receivable and other assets 163 (1,591)
Accrued expenses and other liabilities (119) 696
---------- ----------
Total adjustments 1,083 (321)
---------- ----------
Net cash provided by operating activities 2,864 2,606
Cash flows from investing activities
Purchase of securities available-for-sale (23,214) (12,899)
Proceeds from matured/called/securities available-for-sale 17,128 33,003
Net decrease (increase) in loans 1,395 (51,148)
Purchases of bank premises, equipment, leasehold improvements (742) (1,522)
---------- ----------
Net cash used in investing activities (5,433) (32,566)
Cash flows from financing activities
Net increase in demand and savings deposits 24,843 26,835
Net (decrease) increase in time deposits (5,742) 3,030
Net decrease in federal funds purchased (2,100) -
Dividends paid (1,763) (2,186)
Issuance of common stock 57 -
Payments on capital note payable (75) (71)
---------- ----------
Net cash provided by financing activities 15,220 27,608
---------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 12,651 (2,352)
Cash and cash equivalents at beginning of period 22,493 41,753
---------- ----------
Cash and cash equivalents at end of period $ 35,144 $ 39,401
========== ==========
Additional cash flow information
Interest paid $ 2,608 $ 4,432
Income taxes paid $ 530 $ 1,338
See accompanying notes to consolidated financial statements.
4
FNB BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(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.
The Bank and the Company entered into an Agreement and Plan of
Reorganization dated November 1, 2001 (the "Plan of Reorganization") for this
purpose, and the shareholders of the Bank approved the Plan of Reorganization at
a Special Meeting of the Shareholders of the Bank held on February 27, 2002. The
Plan of Reorganization was consummated on March 15, 2002. Each outstanding share
of the common stock, par value $1.25 per share, of the Bank (other than any
shares as to which dissenters' rights of appraisal have been properly exercised)
was converted into one share of the common stock of the Company, and the former
holders of Bank common stock became the holders of all of the Company common
stock. The change in capital structure has been included for all periods
presented.
Significant 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.
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, 2001.
Results of operations for interim periods are not necessarily
indicative of results for the full year.
NOTE B - LOANS
The loan portfolio consisted of the following at the dates indicated:
June 30, December 31,
(In thousands) 2002 2001
---------- ----------
Real Estate $ 223,457 $ 217,604
Construction 29,426 34,062
Commercial 36,964 39,195
Consumer 2,175 2,600
---------- ----------
Gross loans 292,022 293,461
Net deferred loan fees (1,826) (1,851)
Allowance for loan losses (3,674) (3,543)
---------- ----------
Net loans $ 286,522 $ 288,067
========== ==========
5
NOTE C - EARNINGS PER 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 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.
Earnings per share have been computed based on the following (dollars
in thousands):
Three months ended Six months ended
(In thousands, except number of shares) June 30, June 30,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net earnings $ 1,015 $ 1,368 $ 1,781 $ 2,927
Average number of shares outstanding 2,318,928 2,214,092 2,318,889 2,214,092
Effect of dilutive options 12,604 5,514 11,678 5,514
---------- ---------- ---------- ----------
Average number of shares outstanding used
to calculate diluted earnings per share 2,331,532 2,219,606 2,330,567 2,219,606
========== ========== ========== ==========
Options to purchase 15,336 shares of common stock were not included in
the computation of diluted EPS for six months ended June 30, 2002, because the
options' exercise price was greater than the average market price of the common
shares. Options to purchase 17,466 shares of common stock were not included in
the computation of diluted EPS for six months ended June 30, 2001 for the same
reason. The options that expire on May 31, 2008 were still outstanding as of
June 30, 2002.
NOTE D - COMPREHENSIVE 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
on investment securities available for sale. Comprehensive income for the three
months ended June 30, 2002 was $1,511,000 compared to $1,192,000 for the three
months ended June 30, 2001. Comprehensive income for the six months ended June
30, 2002 was $2,133,000 compared to $3,313,000 for the six months ended June 30,
2001.
6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's Discussion and Analysis of Financial Condition and Results
of Operations contains statements relating to future results of the Company
(including certain projections and business trends) that are considered
"forward-looking statements." Actual results may differ materially from those
projected as a result of certain risks and uncertainties including, but not
limited to, changes in political and economic conditions, interest rate
fluctuations, competitive product and pricing pressures within the Company's
market, equity and bond market fluctuations, personal and corporate customers'
bankruptcies and financial condition, inflation and results of litigation.
Accordingly, historical performance, as well as reasonably applied projections
and assumptions, may not be a reliable indicator of future earnings due to risks
and uncertainties.
As circumstances, conditions or events change that affect the Company's
assumptions and projections on which any of the statements are based, the
Company disclaims any obligation to issue any update or revision to any
forward-looking statement contained herein.
Earnings Analysis
-----------------
Net earnings for the quarter and six months ended June 30, 2002 were
$1,015,000 and $1,781,000 respectively, compared to net earnings of $1,368,000
and $2,927,000 respectively, for the quarter and six months ended June 30, 2001.
The year 2001 experienced a succession of 11 reductions in the prime
lending rate and the effects of the lower rate have continued through the second
quarter of 2002. As a result, net interest income for the quarter ended June 30,
2002 decreased $468,000 compared to the quarter ended June 30, 2001. Net
interest income for six months ended June 30, 2002 decreased $867,000 compared
to the six months ended June 30, 2001.
Net interest income is the difference between interest yield generated
by earning assets and the interest expense associated with the funding of those
assets.
The following tables present an analysis of net interest income and
average earning assets and liabilities for the three- and six-month periods
ended June 30, 2002 compared to the three- and six-month periods ended June 30,
2001.
7
Table 1 NET INTEREST INCOME AND AVERAGE BALANCES
- ------- FNB BANCORP AND SUBSIDIARY
Three months ended June 30
2002 2001
---- ----
Interest Average Interest Average
Average Income Yield Average Income Yield
INTEREST EARNING ASSETS Balance (Expense) (Cost) Balance (Expense) (Cost)
---------- ---------- ---------- ---------- ---------- ----------
Loans, gross $ 291,925 $ 5,653 7.77% $ 271,549 $ 6,860 10.13%
Taxable securities 39,962 515 5.17 46,381 709 6.13
Nontaxable securities 30,016 323 4.32 32,851 383 4.68
Federal funds sold 15,766 64 1.63 15,445 167 4.34
---------- ---------- ---------- ----------
Total interest earning assets $ 377,669 $ 6,555 6.96 $ 366,226 $ 8,119 8.89
NONINTEREST EARNING ASSETS
Cash and due from banks $ 18,674 $ 23,032
Premises and equipment 11,698 11,979
Other assets 5,843 6,153
---------- ----------
Total noninterest earning assets $ 36,215 $ 41,164
---------- ----------
TOTAL ASSETS $ 413,807 $ 407,390
========== ==========
INTEREST BEARING LIABILITIES
Deposits:
Demand, interest bearing $ 50,711 ($ 66) (0.52) $ 59,430 ($ 244) (1.65)
Money market 72,750 (312) (1.72) 55,972 (397) (2.84)
Savings 52,450 (77) (0.59) 45,809 (217) (1.90)
Time deposits 97,274 (684) (2.82) 107,106 (1,379) (5.16)
Federal funds purchased and other
borrowings 420 (3) (2.87) 234 (2) (3.43)
---------- ---------- ---------- ----------
Total interest bearing liabilities $ 273,605 ($ 1,142) (1.67) $ 268,551 ($ 2,239) (3.34)
---------- ---------- ---------- ----------
NONINTEREST BEARING LIABILITIES
Demand deposits 88,354 87,933
Other liabilities 4,391 5,751
---------- ----------
Total noninterest bearing liabilities $ 92,745 $ 93,684
---------- ----------
TOTAL LIABILITIES $ 366,350 $ 362,235
Stockholders' equity $ 47,457 $ 45,155
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 413,807 $ 407,390
========== ==========
NET INTEREST INCOME AND MARGIN
ON TOTAL EARNING ASSETS $ 5,413 5.75% $ 5,880 6.44%
Interest income is reflected on an actual basis, not on a fully taxable
basis. Yield on gross loans was not adjusted for nonaccrual loans, which were
not considered material for this calculation.
8
Table 2 NET INTEREST INCOME AND AVERAGE BALANCES
- ------- FNB BANCORP AND SUBSIDIARY
Six months ended June 30
2002 2001
---- ----
Interest Average Interest Average
Average Income Yield Average Income Yield
INTEREST EARNING ASSETS Balance (Expense) (Cost) Balance (Expense) (Cost)
---------- ---------- ---------- ---------- ---------- ----------
Loans, gross $ 291,911 $ 11,343 7.84% $ 256,449 $ 13,387 10.53%
Taxable securities 29,128 960 6.65 48,289 1,509 6.30
Nontaxable securities 37,329 664 3.59 33,745 780 4.66
Federal funds sold 14,145 116 1.65 19,733 495 5.06
---------- ---------- ---------- ----------
Total interest earning assets $ 372,513 $ 13,083 7.08 $ 358,216 $ 16,171 9.10
NONINTEREST EARNING ASSETS
Cash and due from banks $ 18,954 $ 22,409
Premises and equipment 11,711 11,642
Other assets 5,948 5,778
---------- ----------
Total noninterest earning assets $ 36,613 $ 39,829
---------- ----------
TOTAL ASSETS $ 409,126 $ 398,045
========== ==========
INTEREST BEARING LIABILITIES
Deposits:
Demand, interest bearing $ 54,681 ($ 130) (0.48) $ 56,253 ($ 459) (1.65)
Money market 65,102 (549) (1.70) 69,761 (807) (2.33)
Savings 51,416 (150) (0.59) 45,472 (438) (1.94)
Time deposits 98,916 (1,468) (2.99) 105,610 (2,823) (5.39)
Federal funds purchased and other
borrowings 423 (12) (5.72) 210 (4) (3.84)
---------- ---------- ---------- ----------
Total interest bearing liabilities $ 270,538 ($ 2,309) (1.72) $ 277,306 ($ 4,531) (3.30)
---------- ---------- ---------- ----------
NONINTEREST BEARING LIABILITIES
Demand deposits 86,769 70,744
Other liabilities 4,367 5,271
---------- ----------
Total noninterest bearing liabilities $ 91,136 $ 76,015
---------- ----------
TOTAL LIABILITIES $ 361,674 $ 353,321
Stockholders' equity $ 47,452 $ 44,724
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 409,126 $ 398,045
========== ==========
NET INTEREST INCOME AND MARGIN
ON TOTAL EARNING ASSETS $ 10,774 5.83% $ 11,640 6.55%
Interest income is reflected on an actual basis, not on a fully taxable
basis. Yield on gross loans was not adjusted for nonaccrual loans, which were
not considered material for this calculation.
Tables 1 and 2, above, show the various components that contributed to
changes in net interest income for the two quarterly and six month periods. The
principal earning assets are loans, from a volume perspective as well as from an
earnings rate. As mentioned earlier, there was a series of eleven declines in
the prime lending rate during 2001, which continues to affect net interest
income. For the quarter ended June 30, 2002, compared to the quarter ended June
9
30, 2001, interest on loans decreased $1,207,000 or 17.59%, while the yield
decreased 236 basis points, and average loans outstanding increased $20,376,000.
Average taxable securities decreased $6,419,000 in the same periods, as many
issues were called, responding to the prevailing decrease in interest rates.
Funds were invested in loans, which had higher yields. Yields on these
securities decreased 96 basis points, and their income decreased $194,000.
Average nontaxable securities decreased $2,835,000, and the yield decreased 36
basis points. Average federal funds sold increased $321,000,while their yield
decreased from 4.34% to 1.63 % Average total interest earning assets increased
by $11,443,000, but their income decreased by $1,564,000 and their yields
decreased 193 basis points.
For the quarter ended June 30, 2002 compared with the quarter ended
June 30, 2001, average interest bearing demand deposits decreased $8,719,000,
while the rate paid decreased 113 basis points, and the cost decreased $178,000.
Average money market deposits increased $16,778,000 but the rate decreased from
2.84% to 1.72%, and the cost decreased $85,000. Average savings accounts
increased $6,641,000, while their rate decreased 131 basis points, and the cost
decreased $140,000. Average time deposits decreased $9,832,000, as rates
decreased 234 basis points, and their cost decreased $695,000. Average federal
funds purchased and other borrowed money increased $186,000, interest decreased
56 basis points, and the cost increased $1,000. Average total interest bearing
liabilities increased by $5,054,000, while the overall rate decreased 167 basis
points, as costs decreased $1,097,000.
For the six months ended June 30, 2002, compared to the six months
ended June 30, 2001, interest on loans decreased $2,044,000 or 15.27%, while the
yield decreased 269 basis points, while average loans outstanding increased
$35,462,000. Average taxable securities decreased $19,161,000. Yields on these
securities increased 35 basis points, but their income decreased $549,000.
Average nontaxable securities increased $3,584,000, but the yield decreased 107
basis points. Average federal funds sold decreased $5,588,000, while their yield
decreased from 5.06% to 1.65%. Total interest earning assets increased by
$14,297,000 but their income decreased by $3,088,000 and their yields decreased
202 basis points.
For the six months ended June 30, 2002 compared with the six months
ended June 30, 2001, average interest bearing demand deposits decreased
$1,572,000 and the rate paid decreased 117 basis points, and the cost decreased
$329,000. Average money market deposits decreased $4,659,000, and the rate
decreased from 2.33% to 1.70%, while the cost decreased $258,000. Average
savings accounts increased $5,944,000, while their rate decreased 135 basis
points, and the cost decreased $288,000. Average time deposits decreased
$6,694,000, as rates decreased 240 basis points, and their cost decreased
$1,355,000. Average federal funds purchased and other borrowed money increased
$213,000, interest increased 188 basis points, and the cost increased $8,000.
Average total interest bearing liabilities decreased by $6,768,000, while the
overall rate decreased 158 basis points, as costs decreased $2,221,000.
For the three months and six months ended June 30, 2002 compared to the
three months and six months ended June 30, 2001, the following Tables 3 and 4
show the dollar amount of change in interest income and expense and the dollar
amounts attributable to: (a) changes in volume (changes in volume at the current
year rate), b) changes in rate (changes in rate times the prior year's volume)
and (c) changes in rate/volume (changes in rate times change in volume). In this
table, the dollar change in rate/volume is prorated to volume and rate
proportionately.
10
Table 3 FNB BANCORP AND SUBSIDIARY
RATE/VOLUME VARIANCE ANALYSIS
Three Months Ended June 30,
(In thousands) 2002 Compared To 2001
Increase (decrease)
Interest Variance
Income/Expense Attributable To
Variance Rate Volume
INTEREST EARNING ASSETS
Loans ($ 1,207) ($ 1,602) $ 395
Taxable securities (194) (96) (98)
Nontaxable securities (60) (27) (33)
Federal funds sold (103) (104) 1
---------- ---------- ----------
Total ($ 1,564) ($ 1,829) $ 265
---------- ---------- ----------
INTEREST BEARING LIABILITIES
Demand deposits ($ 178) ($ 142) ($ 36)
Money market (85) (157) 72
Savings deposits (140) (150) 10
Time deposits (694) (567) (127)
Federal funds purchased and other borrowings 1 - 1
---------- ---------- ----------
Total ($ 1,096) ($ 1,016) ($ 80)
---------- ---------- ----------
NET INTEREST INCOME ($ 468) ($ 813) $ 345
========== ========== ==========
Table 4 FNB BANCORP AND SUBSIDIARY
RATE/VOLUME VARIANCE ANALYSIS
Six Months Ended June 30,
(In thousands) 2002 Compared To 2001
Increase (decrease)
Interest Variance
Income/Expense Attributable To
Variance Rate Volume
INTEREST EARNING ASSETS
Loans ($ 2,044) ($ 3,422) $ 1,378
Taxable securities (549) 50 (599)
Nontaxable securities (116) (199) 83
Federal funds sold (379) (239) (140)
---------- ---------- ----------
Total ($ 3,088) ($ 3,810) $ 722
---------- ---------- ----------
INTEREST BEARING LIABILITIES
Demand deposits ($ 329) ($ 325) ($ 4)
Money market (258) (219) (39)
Savings deposits (288) (305) 17
Time deposits (1,354) (1,175) (179)
Federal funds purchased and other borrowings 8 2 6
---------- ---------- ----------
Total ($ 2,221) ($ 2,022) ($ 199)
---------- ---------- ----------
NET INTEREST INCOME ($ 867) ($ 1,788) $ 921
========== ========== ==========
11
Noninterest income
The following table shows the principal components of noninterest
income for the periods indicated.
Table 5
NONINTEREST INCOME
Three months Six months
ended June 30, ended June 30,
(In thousands) 2002 2001 2002 2001
------- ------- ------- -------
Service charges $ 446 $ 381 $ 853 $ 796
Credit card fees 237 239 454 465
Gain (loss) on sales of securities - (17) - 35
Other income 107 109 169 263
------- ------- ------- -------
Total noninterest income $ 790 $ 712 $ 1,476 $ 1,559
Noninterest income consists mainly of service charges on deposits and
credit card fees, gain on sale of securities, and other miscellaneous types of
income. Service charges and credit card fees increased to 10% in the quarter
ended June 30, 2002, over the same quarter in 2001, and increased 4% in the six
months ended June 30, 2002, compared to the same period in 2001. There were no
gains or losses on sales of securities for the three months and six months ended
June 30, 2002. There was a $17,000 loss on sale of securities in the quarter
ended June 30, 2001, and a gain of $35,000 for the six months ended June 30,
2001.
Noninterest expense
- -------------------
The following table shows the principal components of noninterest
expense for the periods indicated.
Table 6
NONINTEREST EXPENSE
Three months Six months
ended June 30, ended June 30,
(In thousands) 2002 2001 2002 2001
------- ------- ------- -------
Salaries and employee benefits $ 2,637 $ 2,677 $ 5,280 $ 5,266
Occupancy expense 289 318 615 623
Equipment expense 462 390 1,220 739
Professional fees 427 132 674 255
Telephone, postage & supplies 332 288 586 511
Bankcard expenses 203 182 388 331
Other expense 454 518 911 1,019
------- ------- ------- -------
Total noninterest expense $ 4,804 $ 4,505 $ 9,674 $ 8,744
Noninterest expense consists of salaries and employee benefits
representing more than half of the total, and various other categories. The only
significant variance was the equipment expense and professional fees, which
increased $367,000 for the quarter and $900,000 for the six months ended June
30, 2002. This increase is attributable to additional expenses incurred in the
final phase of the conversion of the Bank's accounting and related application
systems, which was substantially completed in March 2002. Included in
12
professional fees are legal and auditing fees incurred for the parent company,
mainly related to the review and preparation of reports for the Securities and
Exchange Commission, as well as proxies, which amounted to about $89,000 for the
three months and $133,000 for the six months ended June 30, 2002.
Income taxes The effective tax rate was 32% for the first six months of 2001.
Investment in tax-free securities and tax-favored Enterprise Zone loans
generated a higher proportion of tax-free interest income to total interest
income in 2002 than 2001. The effective tax rate for the six months of 2002 was
reduced to 26.5%.
Asset and Liability Management
Ongoing management of the Company's interest rate sensitivity limits
interest rate risk by controlling the mix and maturity of assets and
liabilities. 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
is 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 June 30, 2002 are
adequate to meet its operating needs in 2002 and going forward into the
foreseeable future.
The following table sets forth information concerning rate sensitive
assets and rate sensitive liabilities as of June 30, 2002. The assets and
liabilities are classified by the earlier of maturity or repricing date in
accordance with their contractual terms. Since all interest rates and yields do
not adjust at the same speed or magnitude, and since volatility is subject to
change, the gap is only a general indicator of interest rate sensitivity.
The Company's asset/liability gap is the difference between the cash
flow amounts of interest-sensitive assets and liabilities that will be
refinanced (or repriced) during a given period. For example, if the asset amount
to be repriced exceeds the corresponding liability amount for a certain day,
month, year or longer period, the institution is in an asset-sensitive gap
position. In this situation, net interest income would increase if market
interest rates rose or decrease if market interest rates fell. Alternatively, if
more liabilities than assets will reprice, the institution is in a
liability-sensitive position. Accordingly, net interest income would decline
when rates rose and increase when rates fell.
Table 7 RATE SENSITIVE ASSETS/LIABILITIES
As of June 30, 2002
Over
Three Three To Over One Over Not
Months Twelve Through Five Rate-
Or Less Months Five Years Years Sensitive Total
--------- --------- ---------- --------- --------- ---------
Interest earning assets:
Federal funds sold $ 16,365 $ - $ - $ - $ - $ 16,365
Securities available for sale 2,243 11,893 36,862 20,774 - 71,772
Loans 238,364 29,518 8,374 13,925 (3,659) 286,522
--------- --------- --------- --------- --------- ---------
Total interest earning assets 256,972 41,411 45,236 34,699 (3,659) 374,659
Noninterest earning assets - - - - 40,002 40,002
--------- --------- --------- --------- --------- ---------
Total assets $ 256,972 $ 41,411 $ 45,236 $ 34,699 $ 36,343 $ 414,661
========= ========= ========= ========= ========= =========
13
Over
Three Three To Over One Over Not
Months Twelve Through Five Rate-
Or Less Months Five Years Years Sensitive Total
--------- --------- ---------- --------- --------- ---------
Interest bearing liabilities:
Demand, interest bearing $ 51,021 $ - $ - $ - $- $ 51,021
Savings and money market 126,944 - - - - 126,944
Time deposits 45,963 34,521 15,623 - - 96,107
--------- --------- --------- --------- --------- ---------
Total interest bearing liabilities 223,928 34,521 15,623 - - 274,072
--------- --------- --------- --------- --------- ---------
Noninterest demand deposits - - - - 89,108 89,108
Other liabilities - - - - 3,325 3,325
Stockholders' equity - - - - 48,156 48,156
--------- --------- --------- --------- --------- ---------
Total liabilities and stockholders' equity $ 223,928 $ 34,521 $ 15,623 $ - $ 140,589 $ 414,661
========= ========= ========= ========= ========= =========
Interest rate sensitivity gap $ 33,044 6,890 $ 29,613 $ 34,699 ($104,246) $ -
Cumulative interest rate sensitivity gap $ 33,044 $ 39,934 $ 69,547 $ 104,246 $ - $ -
========= ========= ========= ========= ========= =========
Cumulative interest rate sensitivity gap ratio 12.86% 13.38% 20.24% 27.56%
Financial Condition
- -------------------
Assets. Total assets increased to $414,661,000 at June 30, 2002 from
$397,388,000 at December 31, 2001, an increase of $17,273,000. Most of this
increase was in Federal funds sold, which were $16,365,000 in 2002, compared to
none in 2001, and an increase in Securities available-for-sale, which increased
by $6,461,000. This was funded mainly by an increase in total deposits, which
increased by $19,101,000.
Loans. Net loans at June 30, 2002 were $286,522,000, a decrease of
$1,545,000 or 0.53% over December 31, 2001, which showed $288,067,000. The
portfolio breakdown was as follows.
Table 8 LOAN PORTFOLIO
June 30, December 31
(In thousands) 2002 Percent 2001 Percent
---------- ----------
Real Estate $ 223,457 76.5% $ 217,604 74.1%
Construction 29,426 10.1 34,062 11.6
Commercial 36,964 12.7 39,195 13.4
Consumer 2,175 0.7 2,600 0.9
---------- ---------- ---------- ----------
Gross loans 292,022 100.0% 293,461 100.0%
========== ==========
Net deferred loan fees (1,826) (1,851)
Allowance for loan losses (3,674) (3,543)
---------- ----------
Net loans $ 286,522 $ 288,067
========== ==========
Allowance for loan losses. The Company has the responsibility of
assessing the overall risks in its portfolio, assessing the specific loss
expectancy, and determining the adequacy of the loan loss reserve. The level of
reserves 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 is committed to
maintaining adequate reserves, identifying credit weaknesses by consistent
review of loans, and maintaining the ratings and changing those ratings in a
timely manner as circumstances change.
14
A summary of transactions in the allowance for loan losses for the six
months ended June 30, 2002 and the year ended December 31, 2001 is as follows:
Table 9 ALLOWANCE FOR LOAN LOSSES
Six months ended Year ended
(In thousands) June 30, 2002 December 31, 2001
Balance, beginning of period $ 3,543 $ 3,332
Provision for loan losses 150 300
Recoveries 6 5
Amounts charged off (25) (94)
---------- ----------
Balance, end of period $ 3,674 $ 3,543
========== ==========
In management's judgment, the allowance was adequate to absorb
potential losses currently inherent in the loan portfolio at June 30, 2002.
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.
Nonperforming assets. Nonperforming assets consist of nonaccrual loans,
foreclosed assets, and loans that are 90 days or more past due but are still
accruing interest. At June 30, 2002, there was $1,841,000 in nonaccrual loans,
compared to $1,964,000 at December 31, 2001. There were no foreclosed assets or
loans past due 90 days and still accruing on either date.
Deposits. Total deposits at June 30, 2002 were $363,180,000 compared to
$344,079,000 on December 31, 2001. Of these totals, noninterest-bearing demand
deposits were $89,108,000 or 24.5% of the total on June 30, 2002 and $87,982,000
or 25.6% on December 31, 2001. Time deposits were $96,107,000 on June 30, 2002
and $101,849,000 on December 31, 2001.
The following table sets forth the maturity schedule of the time certificates of
deposit on June 30, 2002:
Table 10
(In thousands) Under $100,000
Maturities: $100,000 or more Total
---------- ---------- ----------
Three months or less $ 20,460 $ 25,503 $ 45,963
Over three to six months 11,423 8,951 20,374
Over six through twelve months 8,982 5,165 14,147
Over twelve months 12,579 3,044 15,623
---------- ---------- ----------
Total $ 53,444 $ 42,663 $ 96,107
---------- ---------- ==========
15
The following table shows the risk-based capital ratios and leverage ratios at
June 30, 2002 and December 31, 2001:
Table 11 Minimum "Well
June 30, December 31, Capitalized"
Risk-Based Capital Ratios 2002 2001 Requirements
Tier 1 Capital 13.08% 12.98% > 6.00%
-
Total Capital 14.10% 13.98% > 10.00%
-
Leverage Ratios 11.46% 11.41% > 5.00%
-
Liquidity. Liquidity is a measure of the Company's ability to convert
assets into cash with minimum loss. As of June 30, 2002, Liquid Assets were
$106,916,000 or 25.8% of total assets. Liquidity consists of cash and due from
other banks accounts, 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.
A higher loan to deposit ratio means that assets will be less liquid.
This has to be balanced against the fact that loans represent the highest
earning assets, so that a lower loan to deposit ratio means lower potential
income. On June 30, 2002 net loans were at 78.9% of deposits.
Forward-Looking Information and Uncertainties Regarding Future
Financial Performance.
- ----------------------
This report, including management's discussion above, concerning
earnings and financial condition, contains "forward-looking statements".
Forward-looking statements are estimates of or statements about our 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.
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 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, such as
increases in inflation or declines in economic output often prompt changes in
16
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 the Quarterly
Report, or to make predictions based solely on historical financial performance.
We also disclaim any obligation to update forward-looking statements contained
in this Report, in our Prospectus, or in our Annual Report.
Other Matters
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,
2002 and December 31, 2001, 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 $74,627,000 and $67,983,000 at June 30, 2002 and December 31, 2001,
respectively. As a percentage of net loans, these off-balance sheet items
represent 26.0% and 23.6%, respectively.
Certain financial institutions have elected to use special purpose
vehicles ("SPV") to dispose of problem assets. A SPV is typically a subsidiary
company with an asset and liability structure and legal status that transfers
its obligations to a third party. Under the circumstances, these financial
institutions may exclude the problem assets from their reported impaired and
non-performing assets. The Company does not use SPV or other structures to
dispose of problem assets.
Subsequent Events
Corporate Reform Legislation
----------------------------
President George W. Bush signed the Sarbanes-Oxley Act of 2002 (the
"Act") on July 30, 2002, which responds to recent issues in corporate governance
and accountability. Among other matters, key provisions of the Act provide for:
o Expanded oversight of the Accounting Profession by creating a new
independent oversight board to be monitored by the SEC.
o Revised rules on auditor independence to restrict the nature of
non-audit services provided to audit clients and to require such
services to be pre-approved by the audit committee.
o Improved corporate responsibility through mandatory listing standards
relating to audit committees, certifications of periodic reports by the
CEO and CFO, and makes it a crime for an issuer to interfere with an
audit.
o Enhanced financial disclosures, including periodic reviews for largest
issuers and real time disclosure of material company information.
o Enhanced criminal penalties for a broad array of white collar crimes
and increases in the statute of limitations for securities fraud
lawsuits.
17
The effect of the Act upon corporations is uncertain; however, it is likely that
compliance costs may increase as corporations modify procedures if required to
conform to the provisions of the Act. The Company does not currently anticipate
that compliance with the Act will have a material effect upon its financial
position or results of its operations or its cash flows.
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.
PART II--Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.20 FNB Bancorp Stock Option Plan, effective March 15, 2002
(successor to First National Bank of Northern California
1997 Stock Option Plan), incorporated by reference to
Exhibit 99.1 to registrant's Registration Statement on
Form S-8 (No. 333-91596) filed with the Commission on July
1, 2002. *
10.21 Form of Incentive Stock Option Agreement under FNB Bancorp
Stock Option Plan, effective March 15, 2002, incorporated
by reference to Exhibit 99.2 to registrant's Registration
Statement on Form S-8 (No. 333-91596) filed with the
Commission on July 1, 2002. *
10.22 Form of Nonstatutory Stock Option Agreement under FNB
Bancorp Stock Option Plan, effective March 15, 2002,
incorporated by reference to Exhibit 99.3 to registrant's
Registration Statement on Form S-8 (No. 333-91596) filed
with the Commission on July 1, 2002. *
99.6 Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
-----------------------------------------------------------------
*Denotes management contracts, compensatory plans or
arrangements.
18
(b) Reports on Form 8-K
The following reports on Form 8-K have been filed during the
quarter ended June 30, 2002:
Filed April 29, 2002: earnings release for the quarter ended
March 31, 2002
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 5, 2002. By: /s/ THOMAS C. MCGRAW
-------------------------------------
Thomas C. McGraw
Chief Executive Officer
(Authorized Officer)
By: /s/ JAMES B. RAMSEY
-------------------------------------
James B. Ramsey
Senior Vice President
Chief Financial Officer
(Principal Financial Officer)
19