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, 2003 -------------------------------------------- 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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] 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 August 11, 2003: 2,437,043 shares. PART I--FINANCIAL INFORMATION Item 1. Financial Statements. FNB BANCORP AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Dollars in thousands) ASSETS June 30 December 31 2003 2002 ----------- ----------- Cash and due from banks $ 18,272 $ 17,804 Federal funds sold -- 2,395 ----------- ----------- Cash and cash equivalents 18,272 20,199 Securities available-for-sale 79,336 75,963 Loans, net 292,832 284,889 Bank premises, equipment, and leasehold improvements 10,923 11,280 Accrued interest receivable and other assets 9,179 9,503 ----------- ----------- $ 410,542 $ 401,834 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Demand, noninterest bearing $ 92,261 $ 88,495 Demand, interest bearing 49,467 52,480 Savings and money market 119,261 116,879 Time 92,134 89,552 ----------- ----------- Total deposits 353,123 347,406 Federal funds purchased 2,452 -- Accrued expenses and other liabilities 3,358 3,225 ----------- ----------- Total liabilities 358,933 350,631 ----------- ----------- Stockholders' equity Common stock, no par value, authorized 10,000,000 shares; issued and outstanding 2,437,000 shares at June 30, 2003 and December 31, 2002 26,492 26,492 Additional paid-in capital 1 -- Retained earnings 23,526 22,907 Accumulated other comprehensive income 1,590 1,804 ----------- ----------- Total stockholders' equity 51,609 51,203 ----------- ----------- Total liabilities and stockholders' equity $ 410,542 $ 401,834 =========== =========== 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, 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Interest income: Interest and fees on loans $ 4,961 $ 5,653 $ 10,006 $ 11,343 Interest on securities 352 515 777 960 Interest on tax-exempt securities 344 323 664 664 Federal funds sold 28 64 50 116 ---------- ---------- ---------- ---------- Total interest income 5,685 6,555 11,497 13,083 Interest expense: Interest on deposits 712 1,140 1,462 2,298 Other -- 3 -- 12 ---------- ---------- ---------- ---------- Total interest expense 712 1,143 1,462 2,310 ---------- ---------- ---------- ---------- Net interest income 4,973 5,412 10,035 10,773 Provision for loan losses 120 75 740 150 ---------- ---------- ---------- ---------- Net interest income after provision for loan losses 4,853 5,337 9,295 10,623 Noninterest income: Service charges 649 446 1,329 853 Credit card fees 255 237 458 454 Other income 55 107 151 169 ---------- ---------- ---------- ---------- Total noninterest income 959 790 1,938 1,476 Noninterest expense: Salaries and employee benefits 2,796 2,637 5,627 5,280 Occupancy expense 320 289 643 615 Equipment expense 394 462 773 1,220 Professional fees 212 427 409 674 Telephone, postage and supplies 214 332 448 586 Bankcard expenses 208 203 394 388 Other expense 495 454 941 911 ---------- ---------- ---------- ---------- Total noninterest expense 4,639 4,804 9,235 9,674 ---------- ---------- ---------- ---------- Earnings before income tax expense 1,173 1,323 1,998 2,425 Income tax expense 294 308 501 644 ---------- ---------- ---------- ---------- NET EARNINGS 879 $ 1,015 $ 1,497 $ 1,781 ========== ========== ========== ========== Earnings per share data: Basic $ 0.36 $ 0.42 $ 0.61 $ 0.73 Diluted $ 0.36 $ 0.42 $ 0.61 $ 0.73 Weighted average shares outstanding: Basic 2,437,000 2,435,000 2,437,000 2,435,000 Diluted 2,442,000 2,444,000 2,442,000 2,444,000 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 2003 2002 -------- -------- Cash flow from operating activities Net earnings $ 1,497 $ 1,781 Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation and amortization 929 889 Provision for loan losses 740 150 Changes in assets and liabilities Accrued interest receivable and other assets 324 163 Accrued expenses and other liabilities (292) (119) -------- -------- Net cash provided by operating activities 3,198 2,864 Cash flows from investing activities Purchase of securities available-for-sale (23,362) (23,214) Proceeds from matured/called/securities available-for-sale 19,990 17,128 Net (increase) decrease in loans (8,683) 1,395 Purchases of bank premises, equipment, leasehold improvements (284) (742) -------- -------- Net cash used in investing activities (12,339) (5,433) Cash flows from financing activities Net increase in demand and savings deposits 3,135 24,843 Net increase (decrease) in time deposits 2,582 (5,742) Net (increase) decrease in federal funds purchased 2,452 (2,100) Dividends paid (878) (1,763) Issuance of common stock -- 57 Additional paid-in capital 1 -- Payments on capital note payable (78) (75) -------- -------- Net cash provided by financing activities 7,214 15,220 -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,927) 12,651 Cash and cash equivalents at beginning of period 20,199 22,493 -------- -------- Cash and cash equivalents at end of period $ 18,272 $ 35,144 ======== ======== Additional cash flow information Interest paid $ 1,521 $ 2,608 Income taxes paid $ 642 $ 530 See accompanying notes to consolidated financial statements. 4 FNB BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 (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, 2002. Results of operations for interim periods are not necessarily indicative of results for the full year. NOTE B - STOCK OPTION PLAN At June 30, 2003, the Company has one stock-based employee compensation plan. Prior to 2003, the Company accounted for the plan under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation cost is reflected in 2002 net income, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1, 2003, the Company adopted the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, prospectively to all employee awards granted, modified, or settled after January 1, 2003. Therefore, the cost related to stock-based employee compensation included in the determination of net income for 2003 is less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of Statement No. 123. Awards under the Company's plan vest over periods ranging from three to five 5 years. The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested awards in each period. (In thousands, except per share) Three months ended Six months ended June 30 June 30 -------------------- -------------------- 2003 2002 2003 2002 -------- -------- -------- -------- Net income as reported $ 879 $ 1,015 $ 1,497 $ 1,781 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects 1 1 Deduct total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effect (3) (2) (3) (4) -------- -------- -------- -------- Pro forma net income $ 877 $ 1,013 $ 1,495 $ 1,777 Earnings per share: Basic - as reported $ 0.36 $ 0.42 $ 0.61 $ 0.73 Basic - pro forma $ 0.36 $ 0.42 $ 0.61 $ 0.73 Diluted - as reported $ 0.36 $ 0.42 $ 0.61 $ 0.73 Diluted - pro forma $ 0.36 $ 0.41 $ 0.61 $ 0.73 NOTE C - LOANS The loan portfolio consisted of the following at the dates indicated: June 30, December 31, (In thousands) 2003 2002 ---------- ---------- Real Estate $ 222,264 $ 211,473 Construction 35,290 32,947 Commercial 38,029 42,549 Consumer 2,201 2,956 ---------- ---------- Gross loans 297,784 289,925 Net deferred loan fees (1,638) (1,640) Allowance for loan losses (3,314) (3,396) ---------- ---------- Net loans $ 292,832 $ 284,889 ========== ========== NOTE D - 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 6 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, ----------------------- ----------------------- 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Net earnings $ 879 $ 1,015 $ 1,497 $ 1,781 Average number of shares outstanding 2,437,000 2,435,000 2,437,000 2,435,000 Effect of dilutive options 5,000 9,000 5,000 9,000 ---------- ---------- ---------- ---------- Average number of shares outstanding used to calculate diluted earnings per share 2,442,000 2,444,000 2,442,000 2,444,000 ========== ========== ========== ========== Options to purchase 86,927 shares of common stock were not included in the computation of diluted EPS for six months ended June 30, 2003, because the options' exercise price was greater than the average market price of the common shares. 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 for the same reason. The options that expire on May 31, 2008 were still outstanding as of June 30, 2003. NOTE E - 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, 2003 was $ 1,076,000 compared to $1,511,000 for the three months ended June 30, 2002. Comprehensive income for the six months ended June 30, 2003 was $1,283,000 compared to $2,133,000 for the six months ended June 30, 2002. NOTE F - STATEMENT OF FINANCIAL ACCOUNTING STANDARDS No. 150 - ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset, in some circumstance). Many of those instruments were previously classified as equity. The Statement is effective for financial instruments entered into or modified after May 31, 2003. The Company does not issue the kinds of financial instruments to which this Statement refers. NOTE G - SUBSEQUENT EVENTS On July 25, 2003 the Company announced that the Board of Directors had authorized a stock repurchase program. The program calls for the repurchase of up to 5% of the Company's outstanding shares of common stock, or approximately 121,852 shares, based on approximately 2,437,043 shares outstanding at that date. The repurchases will be made from time to time by the Company in the open market as conditions allow. All such transactions will be structured to comply with Securities and Exchange Commission Rule 10b-18 and all shares repurchased 7 under this program will be retired. The number, price and timing of the repurchases will be at the Company's sole discretion and the program may be re-evaluated periodically, depending on market conditions, liquidity needs and other factors. The Board of Directors, based on such re-evaluations, may suspend, terminate, modify or cancel the program at any time, without notice. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 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. The Company believes the following critical accounting policy requires significant judgments and estimates used in the preparation of its consolidated financial statements. Allowance for Loan Losses ------------------------- The allowance for loan losses is periodically evaluated for adequacy by management. Factors considered include the Company's loan loss experience, known and inherent risks in the portfolio, current economic conditions, known adverse situations that may affect the borrower's ability to repay, regulatory policies, and the estimated value of underlying collateral. The evaluation of the adequacy of the allowance is based on the above factors along with prevailing and anticipated economic conditions that may impact borrowers' ability to repay loans. Determination of the allowance is in part objective and in part a subjective judgment by management given the information it currently has in its possession. Adverse changes in any of these factors or the discovery of new adverse information could result in higher charge-offs and loan loss provisions. Earnings Analysis ----------------- Net earnings for the quarter and six months ended June 30, 2003 were $879,000 and $1,497,000, respectively, compared to net earnings of $1,015,000 and $1,781,000 for the quarter and six months ended June 30, 2002. Net interest income for the quarter and six months ended June 30, 2003 was $4,973,000 and $10,035,000, compared to $5,412,000 and 10,773,000 for the quarter and six months ended June 30, 2002, a decrease of $439,000 or 8.11% for the quarter and a decrease of $738,000 or 6.85% for the six months.. The prime lending rate was 4.25% during the first six months of 2003, compared to 4.75% during the first six months of 2002, a decrease of 50 basis points or 10.53%. The Federal Home Loan Bank of San Francisco's Weighted Monthly Cost of Funds Index was 2.130% for May 2003, compared to 2.847% for June 2002. 8 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, 2003 compared to the three- and six-month periods ended June 30, 2002. Table 1 NET INTEREST INCOME AND AVERAGE BALANCES - ------- FNB BANCORP AND SUBSIDIARY Three months ended June 30, 2003 2002 ---- ---- Annualized Annualized Interest Average Interest Average Average Income Yield Average Income Yield INTEREST EARNING ASSETS Balance (Expense) (Cost) Balance (Expense) (Cost) ---------- ---------- ------- ---------- ---------- ------- Loans, gross $ 288,669 $ 4,961 6.89% $ 291,925 $ 5,653 7.77% Taxable securities 40,862 352 3.46 39,962 515 5.17 Nontaxable securities 36,554 344 3.77 30,016 323 4.32 Federal funds sold 9,388 28 1.20 15,766 64 1.63 ---------- ---------- ---------- ---------- Total interest earning assets $ 375,473 $ 5,685 6.07 $ 377,669 $ 6,555 6.96 NONINTEREST EARNING ASSETS Cash and due from banks $ 17,753 $ 18,674 Premises and equipment 10,994 11,698 Other assets 5,573 5,766 ---------- ---------- Total noninterest earning assets $ 34,320 $ 36,138 ---------- ---------- TOTAL ASSETS $ 409,793 $ 413,807 ========== ========== INTEREST BEARING LIABILITIES Deposits: Demand, interest bearing $ 51,597 ($ 33) (0.26) $ 50,711 ($ 67) (0.53) Money market 65,363 (153) (0.94) 72,750 (312) (1.72) Savings 54,681 (54) (0.40) 52,450 (77) (0.59) Time deposits 90,723 (472) (2.09) 97,274 (684) (2.82) Federal funds purchased and other Borrowings 63 -- -- 420 (3) (2.86) ---------- ---------- ---------- ---------- Total interest bearing liabilities $ 262,427 ($ 712) (1.09) $ 273,605 ($ 1,143) (1.68) ---------- ---------- ---------- ---------- NONINTEREST BEARING LIABILITIES Demand deposits 90,741 88,354 Other liabilities 4,990 4,391 ---------- ---------- Total noninterest bearing liabilities $ 95,731 $ 92,745 ---------- ---------- TOTAL LIABILITIES $ 358,158 $ 366,350 Stockholders' equity $ 51,635 $ 47,457 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 409,793 $ 413,807 ========== ========== NET INTEREST INCOME AND MARGIN ON TOTAL EARNING ASSETS $ 4,973 5.31% $ 5,412 5.75% 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. 9 Table 2 NET INTEREST INCOME AND AVERAGE BALANCES - ------- FNB BANCORP AND SUBSIDIARY Six months ended June 30, 2003 2002 ---- ---- Annualized Annualized Interest Average Interest Average Average Income Yield Average Income Yield INTEREST EARNING ASSETS Balance (Expense) (Cost) Balance (Expense) (Cost) ---------- ---------- ------- ---------- ---------- ------- Loans, gross $ 288,348 $ 10,006 7.00% $ 291,911 $ 11,343 7.84% Taxable securities 41,542 777 3.77 29,128 960 6.65 Nontaxable securities 33,734 664 3.97 37,329 664 3.59 Federal funds sold 8,503 50 1.19 14,145 116 1.65 ---------- ---------- ---------- ---------- Total interest earning assets $ 372,127 $ 11,497 6.23 $ 372,513 $ 13,083 7.08 NONINTEREST EARNING ASSETS Cash and due from banks $ 18,000 $ 18,954 Premises and equipment 11,067 11,711 Other assets 5,836 5,948 ---------- ---------- Total noninterest earning assets $ 34,903 $ 36,613 ---------- ---------- TOTAL ASSETS $ 407,030 $ 409,126 ========== ========== INTEREST BEARING LIABILITIES Deposits: Demand, interest bearing $ 50,778 ($ 61) (0.24) $ 54,681 ($ 131) (0.48) Money market 64,820 (318) (0.99) 65,102 (549) (1.70) Savings 54,273 (107) (0.40) 51,416 (150) (0.59) Time deposits 90,199 (976) (2.18) 98,916 (1,468) (2.99) Federal funds purchased and other borrowings 53 -- -- 423 (12) (5.72) ---------- ---------- ---------- ---------- Total interest bearing liabilities $ 260,123 ($ 1,462) (1.13) $ 270,538 ($ 2,310) (1.72) ---------- ---------- ---------- ---------- NONINTEREST BEARING LIABILITIES Demand deposits 90,195 86,769 Other liabilities 4,993 4,367 ---------- ---------- Total noninterest bearing liabilities $ 95,188 $ 91,136 ---------- ---------- TOTAL LIABILITIES $ 355,311 $ 361,674 Stockholders' equity $ 51,719 $ 47,452 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 407,030 $ 409,126 ========== ========== NET INTEREST INCOME AND MARGIN ON TOTAL EARNING ASSETS $ 10,035 5.44% $ 10,773 5.83% Tables 1and 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. For the quarter ended June 30, 2003, compared to the quarter ended June 30, 2002, interest on loans decreased $692,000 or 12.24%, while the yield decreased 88 basis points, and average loans outstanding decreased $3,256,000. Average taxable securities increased $900,000 in the same periods, as fewer callable issues remained, and reinvestment took place. Yields on these securities decreased 171 basis points, and their income decreased $163,000. Average nontaxable securities increased $6,538,000, and their interest increased $21,000, while the yield decreased 55 basis points. Average federal funds sold decreased $6,378,000, and interest decreased $36,000, while yield decreased 43 basis points. Average total interest earning assets decreased by $2,196,000, their income decreased $870,000 and the yield decreased 89 basis points. For the quarter ended June 30, 2003, compared to the quarter ended June 30, 2002, interest on interest bearing demand deposits decreased $34,000 or 50.75%, but the volume increased $886,000 or 1.75%, while the yield decreased 27 basis points. For the same periods, interest on money market deposits decreased by $159,000 or 50.96%, their volume decreased by $7,387,000, and the yield decreased 78 basis points. Interest on savings for the same periods decreased $23,000, while savings volume increased $2,231,000 or 4.25%, and the yield 10 decreased 19 basis points. Interest on time deposits decreased $212,000 or 30.99%, and volume decreased $6,551,000 or 6.73%, while yields decreased 73 basis points. Finally, total interest on interest bearing liabilities decreased $431,000 quarter-to-quarter, volume decreased $11,178,000 or 4.09%, and the yield decreased 59 basis points. The net interest income and margin as a percent of total earning assets decreased by 44 basis points for the second quarter of 2002 compared to the second quarter of 2003. . . For the six months ended June 30, 2003 compared to the six months ended June 30, 2002, interest on loans decreased $1,337,000 or 11.79%, while the yield decreased 84 basis points, and average loans outstanding decreased $3,563,000. Average taxable securities increased $12,414,000.Yields on these securities decreased 288 basis points, and their income decreased $183,000. Average nontaxable securities decreased $3,595,000, but the yield increased 38 basis points. Average federal funds sold decreased $5,642,000, and the yield decreased 46 basis points. Total interest earning assets decreased by $386,000, and their income decreased by $1,586,000, while yields decreased 85 basis points. For the six months ended June 30, 2003 compared with the six months ended June 30, 2002, average interest bearing demand deposits decreased $3,903,000 while the rate paid decreased 24 basis points, and the cost decreased $70,000. Average money market deposits decreased $282,000, while their rate decreased 71 basis points, and their cost decreased $231,000. Average savings accounts increased $2,857,000, but their rates decreased 19 basis points, and their cost decreased $43,000. Average time deposits decreased $8,717,000, while the rate decreased 81 basis points, and the cost decreased $492,000. Average federal funds purchased and other borrowed money decreased $370,000, interest decreased 572 basis points, and the cost decreased $12,000. The interest amount for 2003 was less than half of $1,000. Average total interest bearing liabilities decreased by $10,415,000, while the rate decreased 59 basis points, and costs decreased $848,000. The net interest income and margin as a percent of total earning assets for the six month period ended June 30, 2003 compared to June 30, 2002 decreased 39 basis points. For the three months and six months ended June 30, 2003 compared to the three months and six months ended June 30, 2002, the following Tables 3 and 4 show the dollar amount of change in interest income and expense and the dollar amounts attributable to: (a) changes in volume (changes in volume at the current year rate), b) changes in rate (changes in rate times the prior year's volume) and (c) changes in rate/volume (changes in rate times change in volume). In these tables, the dollar change in rate/volume is prorated to volume and rate proportionately. 11 Table 3 FNB BANCORP AND SUBSIDIARY ------- RATE/VOLUME VARIANCE ANALYSIS Three Months Ended June 30, (In thousands) 2003 Compared To 2002 Increase (decrease) Interest Variance Income/Expense Attributable To Variance Rate Volume -------- -------- -------- INTEREST EARNING ASSETS Loans ($ 692) ($ 629) ($ 63) Taxable securities (163) (171) 8 Nontaxable securities 21 (41) 62 Federal funds sold (36) (10) (26) -------- -------- -------- Total ($ 870) ($ 851) ($ 19) -------- -------- -------- INTEREST BEARING LIABILITIES Demand deposits ($ 34) ($ 35) $ 1 Money market (159) (142) (17) Savings deposits (23) (25) 2 Time deposits (212) (166) (46) Federal funds purchased and other borrowings (3) (0) (3) -------- -------- -------- Total ($ 431) ($ 368) ($ 63) -------- -------- -------- NET INTEREST INCOME ($ 439) ($ 483) $ 44 ======== ======== ======== Table 4 FNB BANCORP AND SUBSIDIARY ------- RATE/VOLUME VARIANCE ANALYSIS Six Months Ended June 30, (In thousands) 2003 Compared To 2002 Increase (decrease) Interest Variance Income/Expense Attributable To Variance Rate Volume -------- -------- -------- INTEREST EARNING ASSETS Loans ($ 1,337) ($ 1,199) ($ 138) Taxable securities (183) (415) 232 Nontaxable securities -- 71 (71) Federal funds sold (66) (20) (46) -------- -------- -------- Total ($ 1,586) ($ 1,563) ($ 23) -------- -------- -------- INTEREST BEARING LIABILITIES Demand deposits ($ 70) ($ 61) ($ 9) Money market (231) (230) (1) Savings deposits (43) (49) 6 Time deposits (492) (363) (129) Federal funds purchased and other borrowings (12) (2) (10) -------- -------- -------- Total ($ 848) ($ 705) ($ 143) -------- -------- -------- NET INTEREST INCOME ($ 738) ($ 858) $ 120 ======== ======== ======== Noninterest income - ------------------ The following table shows the principal components of noninterest income for the periods indicated. 12 Table 5 NONINTEREST INCOME ------- Three months Six months ended June 30, ended June 30, (In thousands) 2003 2002 2003 2002 -------- -------- -------- -------- Service charges $ 649 $ 446 $ 1,329 $ 853 Credit card fees 255 237 458 454 Other income 55 107 151 169 -------- -------- -------- -------- Total noninterest income $ 959 $ 790 $ 1,938 $ 1,476 ======== ======== ======== ======== Noninterest income consists mainly of service charges on deposits and credit card fees, and other miscellaneous types of income. Service charges increased $203,000 or 45.5% in the quarter ended June 30, 2003 over the same quarter in 2002. Most of this was from an increase of $98,000 in charges for checks returned for insufficient funds (NSF). The remaining categories, Credit card fees and Other income, decreased by $34,000 or 9.9% for the quarter ended June 30, 2003 compared to the same quarter in 2002. For the six months ended June 30, 2003 compared to the six months ended June 30, 2002, NSF charges increased by $278,000. The remaining Credit card and Other income categories decreased slightly by $14,000 or 2.2%. 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) 2003 2002 2003 2002 -------- -------- -------- -------- Salaries and employee benefits $ 2,796 $ 2,637 $ 5,627 $ 5,280 Occupancy expense 320 289 643 615 Equipment expense 394 462 773 1,220 Professional fees 212 427 409 674 Telephone, postage & supplies 214 332 448 586 Bankcard expenses 208 203 394 388 Other expense 495 454 941 911 -------- -------- -------- -------- Total noninterest expense $ 4,639 $ 4,804 $ 9,235 $ 9,674 ======== ======== ======== ======== Noninterest expense consists of salaries and employee benefits representing more than half of the total, and various smaller categories. The only significant variance in the latter was in equipment expense and professional fees, which decreased by $283,000 or 31.8% for the quarter ended June 30, 2003 compared to the quarter ended June 30, 2002 and decreased by $712,000 or 37.6% for the six months ended June 30, 2003 compared to the six months ended June 30, 2002.These decreases are largely attributable to the conversion to new application software and some equipment as well as consultants hired to help in the conversion process, in the first quarter of 2002 and some professional fees related to the activation of FNB Bancorp, which took place in the first quarter of 2002. Income Taxes - ------------ The effective tax rate was 26.6% for the first six months of 2002. Investment in tax-free securities and tax-favored Enterprise Zone loans generated a slightly higher proportion of tax-free interest income to total 13 interest income for the six months ended June 30, 2003 compared to the six months ended June 30, 2002. Consequently, the effective tax rate for the six months of 2003 decreased to 25.1%. 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, 2003 are adequate to meet its operating needs in 2003 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, 2003. 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. 14 Table 7 RATE SENSITIVE ASSETS/LIABILITIES ------- As of June 30, 2003 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 $ -- $ -- $ -- $ -- $ -- $ -- Securities available for sale 1,945 11,410 37,248 28,733 -- 79,336 Loans 239,950 24,185 6,722 10,846 14,443 296,146 --------- --------- --------- --------- --------- --------- Total interest earning assets 241,895 35,595 43,970 39,579 14,443 375,482 Cash and due from banks -- -- -- -- 18,272 18,272 Allowance for loan losses -- -- -- -- (3,314) (3,314) Other assets -- -- -- -- 20,102 20,102 --------- --------- --------- --------- --------- --------- Total assets $ 241,895 $ 35,595 $ 43,970 $ 39,579 $ 49,503 $ 410,542 ========= ========= ========= ========= ========= ========= Interest bearing liabilities: Demand, interest bearing $ 49,467 $ -- $ -- $ -- $ -- $ 49,467 Savings and money market 119,261 -- -- -- -- 119,261 Time deposits 40,252 38,978 12,904 -- -- 92,134 Fed funds purchased 2,452 -- -- -- -- 2,452 --------- --------- --------- --------- --------- --------- Total interest bearing liabilities 211,432 38,978 12,904 -- -- 263,314 --------- --------- --------- --------- --------- --------- Noninterest demand deposits -- -- -- -- 92,261 92,261 Other liabilities -- -- -- -- 3,358 3,358 Stockholders' equity -- -- -- -- 51,609 51,609 --------- --------- --------- --------- --------- --------- Total liabilities and stockholders' equity $ 211,432 $ 38,978 $ 12,904 $ -- $ 147,228 $ 410,542 ========= ========= ========= ========= ========= ========= Interest rate sensitivity gap $ 30,463 ($ 3,383) $ 31,066 $ 39,579 ($ 97,725) $ -- ========= ========= ========= ========= ========= ========= Cumulative interest rate sensitivity gap $ 30,463 $ 27,080 $ 58,146 $ 97,725 $ -- $ -- Cumulative interest rate sensitivity gap ratio 12.59% 9.76% 18.09% 27.07% -- -- Financial Condition - ------------------- Assets. Total assets increased to $410,542,000 at June 30, 2003 from $401,834,000 at December 31, 2002, an increase of $8,708,000. Most of this increase was in net loans, which increased $7,943,000 and securities available for sale, which increased $3,373,000.This was offset mainly by a $2,395,000 decrease in federal funds sold. Most of the increase in total assets was funded by an increase of $5,717,000 in total deposits and $2,452,000 in federal funds purchased. Loans. Net loans at June 30, 2003 were $292,832,000, an increase of $7,943,000 or 2.79% over December 31, 2002, which showed $284,889,000. Real Estate and Construction loans increased $13,134,000, representing most of the increase, while Commercial loans decreased $4,520,000 and Consumer loans decreased $755,000. The portfolio breakdown was as follows. Table 8 LOAN PORTFOLIO ------- June 30, December 31, (In thousands) 2003 Percent 2002 Percent --------- ------- --------- ------- Real Estate $ 222,264 74.6% $ 211,473 72.9% Construction 35,290 11.9 32,947 11.4 Commercial 38,029 12.8 42,549 14.7 Consumer 2,201 0.7 2,956 1.0 --------- ------- --------- ------- Gross loans 297,784 100.0% 289,925 100.0% ======= ======= Net deferred loan fees (1,638) (1,640) Allowance for loan losses (3,314) (3,396) --------- --------- Net loans $ 292,832 $ 284,889 ========= ========= 15 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. In addition to the $739,000 charged to the allowance for loan losses for the two office/R & D building loans described under the heading "Nonperforming assets" (below), the Company maintains specific reserves for estimated closing costs and the unsecured portions of the loans based on the sales price in the case of the San Francisco property and a recent appraisal in the case of the Mountain View property. A summary of transactions in the allowance for loan losses for the six months ended June 30, 2003 and the year ended December 31, 2002 is as follows: Table 9 ALLOWANCE FOR LOAN LOSSES ------- Six months ended Year ended (In thousands) June 30, 2003 December 31, 2002 ---------- ---------- Balance, beginning of period $ 3,396 $ 3,543 Provision for loan losses 740 150 Recoveries 4 8 Amounts charged off (826) (305) ---------- ---------- Balance, end of period $ 3,314 $ 3,396 ========== ========== In management's judgment, the allowance was adequate to absorb losses currently inherent in the loan portfolio at June 30, 2003. 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, 2003, there was $14,443,000 in non-accrual loans, compared to $2,161,000 at December 31, 2002. There were no foreclosed assets or loans past due 90 days and still accruing on either date. In the second quarter of 2003, a $4,409,000 term real estate loan secured by an office/R & D building located in the South of Market area of San Francisco was placed in nonaccrual status due to a significant decline in value of the underlying collateral of the loan. The real estate is currently in escrow to be sold for $4,250,000. The Company has recognized a $200,000 loss on the loan and the guarantor of the loan has agreed to contribute the balance of funds necessary to close the transaction. The loan is expected to be paid off in the third quarter. No additional losses on this loan are anticipated. In the second quarter of 2003 a $3,352,000 construction loan secured by an office/R & D building located in the Silicon Valley community of Mountain View was placed in nonaccrual status due to a significant decline in the value of the underlying collateral of the loan. The loan has been written down to its current market value. Despite the decline in the value of the collateral, the guarantors have continued to perform according to the contractual obligations of the loan documents. The Company has recognized a loss of $539,000, which represents an estimate of the unsecured portion of the loan. In the first quarter of 2003, a loan secured by a residential care facility, with a net loan balance of $5,828,000 was placed in nonaccrual status due to a payment default and subsequent foreclosure actions by the bank. While the borrower has filed for bankruptcy, the Company is confident it will be able to obtain relief from stay from the court and resume foreclosure. An independent appraiser determined the "as is" market value of the property as of May 20, 2003 was $7,300,000. This value provides adequate collateral coverage for the loan balance. 16 Deposits. Total deposits at June 30, 2003 were $353,123,000 compared to $347,406,000 on December 31, 2002. Of these totals, noninterest-bearing demand deposits were $92,261,000 or 26.1% of the total on June 30, 2003 and $88,495,000 or 25.5% on December 31, 2002. Time deposits were $92,134,000 on June 30, 2003 and $88,495,000 on December 31, 2002. The following table sets forth the maturity schedule of the time certificates of deposit on June 30, 2003: Table 10 -------- (In thousands) Under $100,000 Maturities: $100,000 or more Total -------- -------- -------- Three months or less $ 20,915 $ 19,337 $ 40,252 Over three to six months 11,041 9,886 20,927 Over six through twelve months 11,976 6,076 18,052 Over twelve months 8,499 4,404 12,903 -------- -------- -------- Total $ 52,431 $ 39,703 $ 92,134 -------- -------- ======== The following table shows the risk-based capital ratios and leverage ratios at June 30, 2003 and December 31, 2002: Table 11 -------- Minimum "Well June 30, December 31, Capitalized" Risk-Based Capital Ratios 2003 2002 Requirements Tier 1 Capital 14.06% 13.92% > 6.00% - Total Capital 14.99% 14.87% > 10.00% - Leverage Ratios 12.31% 12.16% > 5.00% - Liquidity. Liquidity is a measure of the Company's ability to convert assets into cash with minimum loss. As of June 30, 2003, Liquid Assets were $97,608,000 or 23.8% 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, 2003 net loans were at 82.9% 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 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. 17 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 Federal Reserve Board monetary policies that could reduce interest income or increase the cost of funds to the Company, either of which could result in reduced earnings. Changes in Regulatory Policies. Changes in federal and national bank regulatory policies, such as increases in capital requirements or in loan loss reserve or asset/liability ratio requirements, could adversely affect earnings by reducing yields on earning assets or increasing operating costs. Due to these and other possible uncertainties and risks, readers are cautioned not to place undue reliance on the forward-looking statements contained in this report, which speak only as of the date of this report, or to make predictions based solely on historical financial performance. The Company also disclaims any obligation to update forward-looking statements contained in this report. 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, 2003 and December 31, 2002, 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 $65,121,000 and $61,470,000 at June 30, 2003 and December 31, 2002, respectively. As a percentage of net loans, these off-balance sheet items represent 22.2% and 21.6% respectively. Corporate Reform Legislation President George W. Bush signed the "Public Company Accounting Reform and Investor Protection Act of 2002" (the "Act") on July 30, 2002, which responds to the recent corporate accounting scandals. Among other matters, the Act increases the penalties for securities fraud, establishes new rules for financial analysts to prevent conflicts of interest, creates a new independent oversight board for the accounting profession, imposes restrictions on the consulting activities of accounting firms that audit company records and requires certification of financial reports by corporate executives. 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 the results of operations. Statement of Financial Accounting Standards No. 149 - Amendment of Statement 133 on Derivative Instruments and Hedging Activities This Statement amends and clarifies financial and accounting reporting for derivative instruments and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. FASB No. 149 18 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The Company does not use derivative instruments nor does it engage in hedging activities. Statement of Financial Accounting Standards No. 150 - Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset, in some circumstances). Many of those instruments were previously classified as equity. The Statement is effective for financial instruments entered into or modified after May 31, 2003. The Company does not issue the kinds of financial instruments to which this Statement refers. 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. From December 31, 2002 through June 30, 2003, there was a 0.25 percent decline in the prime lending rate, which did not have a material effect on earnings. Item 4. Controls and Procedures. (a) Disclosure Controls and Procedures: An evaluation of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) was carried out under the supervision and with the participation of the Company's Chief Executive Officer, Chief Financial Officer and other members of the Company's senior management as of the end of the Company's fiscal quarter ended June 30, 2003. The Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures as currently in effect are effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) to allow timely decisions regarding required disclosure, and (ii) recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms. (b) Internal Control Over Financial Reporting: An evaluation of any changes in the Company's internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), that occurred during the Company's fiscal quarter ended June 30, 2003, 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. 19 PART II--OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Shareholders of FNB Bancorp was held on May 14, 2003. Three matters were voted on at the Annual Meeting: the election of Directors, a proposal to ratify and approve the FNB Bancorp 2002 Stock Option Plan, and a proposal to ratify the appointment of KPMG LLP as independent auditors of FNB Bancorp for the 2003 fiscal year. The eight nominees identified in the proxy statement for the Annual Meeting were elected as Directors; the FNB Bancorp 2002 Stock Option Plan was ratified and approved; and the appointment of KPMG LLP was approved. Set forth below is a summary of the voting: Election of Directors Votes For Votes Withheld --------------------- --------- -------------- Michael R. Wyman 2,161,923 2,001 Thomas C. McGraw 2,161,983 1,941 Neil J. Vannucci 2,161,975 1,949 Edward J. Watson 2,161,983 1,941 Daniel J. Modena 2,161,975 1,949 Lisa Angelot 2,161,983 1,941 Jim D. Black 2,161,923 2,001 Anthony J. Clifford 2,161,637 2,287 Approve 2003 Stock Option Plan For Against Abstain ------------------------------ --- ------- ------- 1,531,956 192,583 24,386 Appointment of KPMG LLP For Against Abstain ----------------------- --- ------- ------- 2,135,512 none 28,412 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 31: Rule 13a-14(a)/15d-14(a) Certifications 32: Section 1350 Certifications (b) Reports on Form 8-K No reports on Form 8-K have been filed during the quarter ended June 30, 2003. 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. FNB BANCORP (Registrant) Dated: August 11, 2003. 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) 21