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 September 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 November 7, 2003: 2,399,694 shares. PART I--FINANCIAL INFORMATION Item 1. Financial Statements. FNB BANCORP AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Dollars in thousands) ASSETS September 30 December 31 2003 2002 ------------ ----------- Cash and due from banks $ 17,665 $ 17,804 Federal funds sold 4,865 2,395 ------------ ----------- Cash and cash equivalents 22,530 20,199 Securities available-for-sale 77,774 75,963 Loans, net 300,280 284,889 Bank premises, equipment, and leasehold improvements 10,712 11,280 Accrued interest receivable and other assets 8,951 9,503 ------------ ----------- $ 420,247 $ 401,834 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Demand, noninterest bearing $ 95,742 $ 88,495 Demand, interest bearing 51,795 52,480 Savings and money market 128,010 116,879 Time 89,992 89,552 ------------ ----------- Total deposits 365,539 347,406 Accrued expenses and other liabilities 3,390 3,225 ------------ ----------- Total liabilities 368,929 350,631 ------------ ----------- Stockholders' equity Common stock, no par value, authorized 10,000,000 shares; issued and outstanding 2,403,000 shares at September 30, 2003 and 2,437,000 at December 31, 2002 25,503 26,492 Additional paid-in capital 2 -- Retained earnings 24,499 22,907 Accumulated other comprehensive income 1,314 1,804 ------------ ----------- Total stockholders' equity 51,318 51,203 ------------ ----------- Total liabilities and stockholders' equity $ 420,247 $ 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 Nine months ended September 30, September 30, 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Interest income: Interest and fees on loans $ 4,978 $ 5,614 $ 14,984 $ 16,957 Interest on securities 347 375 1,124 1,335 Interest on tax-exempt securities 358 435 1,022 1,099 Federal funds sold 12 92 62 208 ---------- ---------- ---------- ---------- Total interest income 5,695 6,516 17,192 19,599 Interest expense: Interest on deposits 626 1,089 2,088 3,387 Other 1 1 1 13 ---------- ---------- ---------- ---------- Total interest expense 627 1,090 2,089 3,400 ---------- ---------- ---------- ---------- Net interest income 5,068 5,426 15,103 16,199 Provision for loan losses 40 -- 780 150 ---------- ---------- ---------- ---------- Net interest income after provision for loan losses 5,028 5,426 14,323 16,049 Noninterest income: Service charges 668 480 1,997 1,333 Credit card fees 275 255 733 709 Gain on sale of securities -- 121 -- 121 Other income 61 49 212 218 ---------- ---------- ---------- ---------- Total noninterest income 1,004 905 2,942 2,381 Noninterest expense: Salaries and employee benefits 2,540 2,683 8,167 7,963 Occupancy expense 296 311 939 926 Equipment expense 398 374 1,171 1,594 Professional fees 183 241 592 915 Telephone, postage and supplies 227 249 675 835 Bankcard expenses 235 215 629 603 Other expense 489 441 1,430 1,352 ---------- ---------- ---------- ---------- Total noninterest expense 4,368 4,514 13,603 14,188 ---------- ---------- ---------- ---------- Earnings before income tax expense 1,664 1,817 3,662 4,242 Income tax expense 404 457 905 1,101 ---------- ---------- ---------- ---------- NET EARNINGS 1,260 $ 1,360 $ 2,757 $ 3,141 ========== ========== ========== ========== Earnings per share data: Basic $ 0.52 $ 0.56 $ 1.13 $ 1.29 Diluted $ 0.52 $ 0.56 $ 1.13 $ 1.28 Weighted average shares outstanding: Basic 2,427,000 2,437,000 2,433,000 2,437,000 Diluted 2,441,000 2,446,000 2,441,000 2,446,000 See accompanying notes to consolidated financial statements 3 FNB BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands) Nine months ended September 30 2003 2002 -------- -------- Cash flow from operating activities Net earnings $ 2,757 $ 3,141 Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation and amortization 1,428 1,282 Gain on sale of securities -- (121) Provision for loan losses 780 150 Changes in assets and liabilities Accrued interest receivable and other assets 552 630 Accrued expenses and other liabilities (69) (80) -------- -------- Net cash provided by operating activities 5,448 5,002 Cash flows from investing activities Purchase of securities available-for-sale (27,100) (38,614) Proceeds from matured/called/securities available-for-sale 24,619 24,740 Net (increase) decrease in loans (16,171) 5,998 Purchases of bank premises, equipment, leasehold improvements (368) (952) -------- -------- Net cash used in investing activities (19,020) (8,828) Cash flows from financing activities Net increase in demand and savings deposits 17,693 21,495 Net increase (decrease) in time deposits 440 (11,838) Net (decrease) in federal funds purchased -- (2,100) Payments on capital note payable (78) (75) Dividends paid (1,165) (2,041) Issuance of common stock -- 57 Stock options granted 2 -- Repurchase of FNB Bancorp securities (989) -- -------- -------- Net cash provided by financing activities 15,903 5,498 -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,331 1,672 Cash and cash equivalents at beginning of period 20,199 22,493 -------- -------- Cash and cash equivalents at end of period $ 22,530 $ 24,165 ======== ======== Additional cash flow information Interest paid $ 2,202 $ 3,816 Income taxes paid $ 657 $ 530 See accompanying notes to consolidated financial statements. 4 FNB BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 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 September 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 earnings, 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 5 five 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. Three months ended Nine months ended (In thousands, except per share) September 30 September 30 ------------------------ ------------------------ 2003 2002 2003 2002 ----------- ---------- ---------- ---------- Net income as reported $ 1,260 $ 1,360 $ 2,757 $ 3,141 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects 1 2 Deduct total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effect (3) (3) (9) (7) ----------- ---------- ---------- ---------- Pro forma net income $ 1,258 $ 1,357 $ 2,750 $ 3,134 Earnings per share: Basic - as reported $ 0.52 $ 0.56 $ 1.13 $ 1.29 Basic - pro forma $ 0.52 $ 0.55 $ 1.13 $ 1.29 Diluted - as reported $ 0.52 $ 0.56 $ 1.13 $ 1.28 Diluted - pro forma $ 0.52 $ 0.55 $ 1.13 $ 1.28 NOTE C - LOANS The loan portfolio consisted of the following at the dates indicated: September 30, December 31, (In thousands) 2003 2002 ------------- ------------- Real Estate $ 217,037 $ 211,473 Construction 44,925 32,947 Commercial 41,199 42,549 Consumer 2,188 2,956 ------------- ------------- Gross loans 305,349 289,925 Net deferred loan fees (1,769) (1,640) Allowance for loan losses (3,300) (3,396) ------------- ------------- Net loans $ 300,280 $ 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 6 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 Nine months ended (In thousands, except number of shares) September 30, September 30, ------------------------- ------------------------- 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Net earnings $ 1,260 $ 1,360 $ 2,757 $ 3,141 Average number of shares outstanding 2,427,000 2,437,000 2,433,000 2,437,000 Effect of dilutive options 14,000 9,000 8,000 9,000 ---------- ---------- ---------- ---------- Average number of shares outstanding used to calculate diluted earnings per share 2,441,000 2,446,000 2,441,000 2,446,000 ========== ========== ========== ========== Options to purchase 47,106 shares of common stock were not included in the computation of diluted EPS for nine months ended September 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 nine months ended September 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 September 30, 2003 was $984,000 compared to $2,437,000 for the three months ended September 30, 2002. Comprehensive income for the nine months ended September 30, 2003 was $2,267,000 compared to $4,570,000 for the nine months ended September 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 - STOCK REPURCHASE PROGRAM On July 25, 2003, the Board of Directors authorized a stock repurchase program, which calls for the repurchase of up to 5% of the Company's shares, which at that time represented 121,852 shares, based on approximately 2,437,043 shares outstanding at that date. A total of 34,284 shares of the Company's common stock had been repurchased as of September 30, 2003. 7 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 based on the information it currently has in its possession. Adverse changes in any of these factors or the discovery of new adverse information could result in higher charge-offs and loan loss provisions. Earnings Analysis ----------------- Net earnings for the quarter and nine months ended September 30, 2003 were $1,260,000 and $2,757,000, respectively, compared to net earnings of $1,360,000 and $3,141,000 for the quarter and nine months ended September 30, 2002. Net interest income for the quarter and nine months ended September 30, 2003 was $5,068,000 and $15,103,000, compared to $5,426,000 and $16,199,000 for the quarter and nine months ended September 30, 2002, a decrease of $358,000 or 6.60% for the quarter and a decrease of $1,096,000 or 6.77% for the year to date. This decline is due to the fact that the prime lending rate continued to drop at a faster pace than the cost of funds rate, which adjusts at a lagged rate. The prime lending rate was 4.25% from January 1 through June 26, 2003, and dropped to 4.00% from June 27 through September 30, 2003, compared to 4.75% during the first nine months of 2002. The Federal Home Loan Bank of San Francisco's Weighted Monthly Cost of Funds Index averaged 2.149% for the eight months ended August 2003, compared to 2.768% for eight months ended August 2002. Nevertheless, the effect of the rate 8 changes was reduced, due to the fact that that a significant amount of the Real Estate loan portfolio is subject to interest rate caps and floors. 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 nine-month periods ended September 30, 2003 compared to the three- and nine-month periods ended September 30, 2002. Table 1 NET INTEREST INCOME AND AVERAGE BALANCES - ------- FNB BANCORP AND SUBSIDIARY Three months ended September 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 $ 297,898 $ 4,978 6.63% $ 285,465 $ 5,614 7.80% Taxable securities 40,533 347 3.40 42,131 375 3.53 Nontaxable securities 39,158 358 3.63 31,643 435 5.45 Federal funds sold 5,137 12 0.93 22,694 92 1.61 --------- --------- --------- --------- Total interest earning assets $ 382,726 $ 5,695 5.90 $ 381,933 $ 6,516 6.77 NONINTEREST EARNING ASSETS Cash and due from banks $ 17,925 $ 17,387 Premises and equipment 10,749 11,522 Other assets 6,001 5,797 --------- --------- Total noninterest earning assets $ 34,675 $ 34,706 --------- --------- TOTAL ASSETS $ 417,401 $ 416,639 ========= ========= INTEREST BEARING LIABILITIES Deposits: Demand, interest bearing $ 52,877 $ (24) (0.18) $ 50,371 $ (64) (0.50) Money market 65,616 (124) (0.75) 77,919 (317) (1.61) Savings 57,275 (40) (0.28) 52,642 (79) (0.60) Time deposits 91,512 (438) (1.90) 93,688 (629) (2.66) Federal funds purchased and other Borrowings 345 (1) (1.15) 84 (1) (4.72) --------- --------- --------- --------- Total interest bearing liabilities $ 267,625 $ (627) (0.93) $ 274,704 $ (1,090) (1.57) --------- --------- --------- --------- NONINTEREST BEARING LIABILITIES Demand deposits 93,034 88,018 Other liabilities 5,095 4,989 --------- --------- Total noninterest bearing liabilities $ 98,129 $ 93,007 --------- --------- TOTAL LIABILITIES $ 365,754 $ 367,711 Stockholders' equity $ 51,647 $ 48,928 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 417,401 $ 416,639 ========= ========= NET INTEREST INCOME AND MARGIN ON TOTAL EARNING ASSETS $ 5,068 5.25% $ 5,426 5.64% 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 Nine months ended September 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 $ 291,566 $ 14,984 6.87% $ 289,739 $ 16,957 7.82% Taxable securities 41,202 1,124 3.65 37,373 1,335 4.78 Nontaxable securities 35,562 1,022 3.84 31,550 1,099 4.66 Federal funds sold 7,369 62 1.12 17,026 208 1.63 --------- --------- --------- --------- Total interest earning assets $ 375,699 $ 17,192 6.12 $ 375,688 $ 19,599 6.97 NONINTEREST EARNING ASSETS Cash and due from banks $ 17,975 $ 18,426 Premises and equipment 10,960 11,647 Other assets 5,877 5,897 --------- --------- Total noninterest earning assets $ 34,826 $ 35,970 --------- --------- TOTAL ASSETS $410,511 $411,658 ========= ========= INTEREST BEARING LIABILITIES Deposits: Demand, interest bearing $ 51,485 $ (85) (0.22) $ 53,229 $ (194) (0.49) Money market 65,088 (442) (0.91) 69,421 (866) (1.67) Savings 55,285 (147) (0.36) 51,829 (230) (0.59) Time deposits 90,642 (1,414) (2.09) 97,154 (2,097) (2.89) Federal funds purchased and other borrowings 151 (1) (0.89) 308 (13) (5.64) --------- --------- --------- --------- Total interest bearing liabilities $ 262,651 $ (2,089) (1.06) $ 271,941 $ (3,400) (1.67) --------- --------- --------- --------- NONINTEREST BEARING LIABILITIES Demand deposits 91,152 87,190 Other liabilities 5,010 4,564 --------- --------- Total noninterest bearing liabilities $ 96,162 $ 91,754 --------- --------- TOTAL LIABILITIES $ 358,813 $ 363,695 Stockholders' equity $ 51,698 $ 47,963 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 410,511 $ 411,658 ========= ========= NET INTEREST INCOME AND MARGIN ON TOTAL EARNING ASSETS $ 15,103 5.37% $ 16,199 5.76% Tables 1 and 2, above, show the various components that contributed to changes in net interest income for the two quarterly and nine month periods of 2002 and 2003. The principal earning assets are loans, from a volume perspective as well as from an earnings rate. For the quarter ended September 30, 2003, compared to the quarter ended September 30, 2002, interest on loans decreased $636,000 or 11.33%, while the yield decreased 117 basis points, and average loans outstanding increased $12,433,000. Average taxable securities decreased $1,598,000 in the same period. Yields on these securities decreased 13 basis points, and their income decreased $28,000. Average nontaxable securities increased $7,515,000, and their interest decreased $77,000, while the yield decreased 182 basis points. 10 Average federal funds sold decreased $17,557,000, and interest decreased $80,000, while yield decreased 68 basis points. Average total interest earning assets increased by $793,000, but their income decreased $821,000 and the yield decreased 87 basis points. For the quarter ended September 30, 2003, compared to the quarter ended September 30, 2002, interest on interest bearing demand deposits decreased $40,000 or 62.50%, but the average balance increased $2,506,000 or 4.98%, while the yield decreased 32 basis points. For the same periods, interest on money market deposits decreased by $193,000 or 60.88%, their average balance decreased by $12,303,000, and the yield decreased 86 basis points. Interest on savings for the same periods decreased $39,000, while savings volume increased $4,633,000 or 8.80%, and the yield decreased 32 basis points. Interest on time deposits decreased $191,000 or 30.37%, and volume decreased $2,176,000 or 2.32%, while yields decreased 76 basis points. Interest on federal funds purchased and other borrowings was unchanged, while volume increased by $261,000, but yields decreased 357 basis points. Finally, total interest on interest bearing liabilities decreased $463,000 quarter-to-quarter, volume decreased $7,079,000 or 2.58%, and the yield decreased 64 basis points. The net interest income and margin as a percent of total earning assets decreased by 39 basis points in the third quarter of 2003 compared to the third quarter of 2002. . . For the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002, interest on loans decreased $1,973,000 or 11.64%, while the yield decreased 95 basis points, and average loans outstanding increased $1,827,000. Average taxable securities increased $3,829,000. Yields on these securities decreased 113 basis points, and their income decreased $211,000. Average nontaxable securities increased $4,012,000, their income decreased $77,000 and the yield decreased 82 basis points. Average federal funds sold decreased $9,657,000, their income decreased $146,000 and the yield decreased 51 basis points. Total interest earning assets increased by $11,000, and their income decreased by $2,407,000, while yields decreased 85 basis points. For the nine months ended September 30, 2003 compared with the nine months ended September 30, 2002, average interest bearing demand deposits decreased $1,744,000 while the rate paid decreased 27 basis points, and the cost decreased $109,000. Average money market deposits decreased $4,333,000, while their rate decreased 76 basis points, and their cost decreased $424,000. Average savings accounts increased $3,456,000, but their rates decreased 23 basis points, and their cost decreased $83,000. Average time deposits decreased $6,512,000, while the rate decreased 80 basis points, and the cost decreased $683,000. Average federal funds purchased and other borrowed money decreased $157,000, interest decreased 475 basis points, and the cost decreased $12,000. Average total interest bearing liabilities decreased by $9,290,000, while the rate decreased 61 basis points, and costs decreased $1,311,000. The net interest income and margin as a percent of total earning assets for the nine month period ended September 30, 2003 compared to September 30, 2002 decreased 39 basis points. For the three and nine months ended September 30, 2003 compared to the three and nine months ended September 30, 2002, the following Tables show the dollar amount of change in interest income and expense and the dollar amounts attributable to: (a) changes in volume (changes in volume at the current year rate), 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 September 30, (In thousands) 2003 Compared To 2002 Increase (decrease) Interest Variance Income/Expense Attributable To Variance Rate Volume ------------- ------------- ------------- INTEREST EARNING ASSETS Loans $ (636) $ (881) $ 245 Taxable securities (28) (14) (14) Nontaxable securities (77) (146) 69 Federal funds sold (80) (9) (71) ------------- ------------- ------------- Total $ (821) $ (1,050) $ 229 ------------- ------------- ------------- INTEREST BEARING LIABILITIES Demand deposits $ (40) $ (43) $ 3 Money market (193) (170) (23) Savings deposits (39) (42) 3 Time deposits (191) (176) (15) Federal funds purchased and other borrowings 0 (3) 3 ------------- ------------- ------------- Total $ (463) $ (434) $ (29) ------------- ------------- ------------- NET INTEREST INCOME $ (358) $ (616) $ 258 ============= ============= ============= Table 4 FNB BANCORP AND SUBSIDIARY - ------- RATE/VOLUME VARIANCE ANALYSIS Nine Months Ended September 30, (In thousands) 2003 Compared To 2002 Increase (decrease) Interest Variance Income/Expense Attributable To Variance Rate Volume ------------- ------------- ------------- INTEREST EARNING ASSETS Loans $ (1,973) $ (2,080) $ 107 Taxable securities (211) (315) 104 Nontaxable securities (77) (192) 115 Federal funds sold (146) (28) (118) ------------- ------------- ------------- Total $ (2,407) $ (2,615) $ 208 ------------- ------------- ------------- INTEREST BEARING LIABILITIES Demand deposits $ (109) $ (103) $ (6) Money market (424) (395) (29) Savings deposits (83) (92) 9 Time deposits (683) (542) (141) Federal funds purchased and other borrowings (12) (5) (7) ------------- ------------- ------------- Total $ (1,311) $ (1,137) $ (174) ------------- ------------- ------------- NET INTEREST INCOME $ (1,096) $ (1,478) $ 382 ============= ============= ============= 12 Noninterest income - ------------------ The following table shows the principal components of noninterest income for the periods indicated. Table 5 NONINTEREST INCOME - ------- Three months Nine months ended September 30, ended September 30, (In thousands) 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Service charges $ 668 $ 480 $ 1,997 $ 1,333 Credit card fees 275 255 733 709 Gain on sales of securities -- 121 -- 121 Other income 61 49 212 218 ---------- ---------- ---------- ---------- Total noninterest income $ 1,004 $ 905 $ 2,942 $ 2,381 ========== ========== ========== ========== Noninterest income consists mainly of service charges on deposits and credit card fees, and other miscellaneous types of income. Service charges increased $188,000 or 39.2% in the quarter ended September 30, 2003 over the same quarter in 2002. Most of this was from an increase of $92,000 in charges for checks returned for insufficient funds (NSF). Service charges, per incident, in general, were increased in October 2002, including NSF charges. In addition, there were fewer waivers of NSF charges since the increase. There was a gain on sale of securities of $121,000 in the third quarter of 2002, but no sales in the corresponding period in 2003. Credit card fees and other income, increased by $32,000 or 10.5% for the quarter ended September 30, 2003 compared to the same quarter in 2002. For the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002, service charges increased by $664,000 or 49.8%. In addition to the increase in fees mentioned previously, Business Analysis charges had previously been done on a mostly manual basis, and not all the data was captured. Under the new ITI system, the process has become automated. Analysis charges involve the net effect of giving credit for collected funds available to the bank, minus various activity charges such as volume of checks and special services provided, which came into effect for all of 2003, but only part of 2002, and are contributing a considerable amount to noninterest income. Credit card and other income categories increased by $18,000 or 1.9%. For the nine months of 2002, there was a gain of $121,000 on sale of securities, with no sales in 2003. Noninterest expense - ------------------- The following table shows the principal components of noninterest expense for the periods indicated. Table 6 NONINTEREST EXPENSE - ------- Three months Nine months ended September 30, ended September 30, (In thousands) 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Salaries and employee benefits $ 2,540 $ 2,683 $ 8,167 $ 7,963 Occupancy expense 296 311 939 926 Equipment expense 398 374 1,171 1,594 Professional fees 183 241 592 915 Telephone, postage & supplies 227 249 675 835 Bankcard expenses 235 215 629 603 Other expense 489 441 1,430 1,352 ---------- ---------- ---------- ---------- Total noninterest expense $ 4,368 $ 4,514 $ 13,603 $ 14,188 ========== ========== ========== ========== 13 Noninterest expense consists of salaries and employee benefits representing more than half of the total, and various smaller categories. Salaries and employee benefits decreased by $143,000 or 5.3% in the quarter ended September 2003 compared to the same quarter of 2002. During August of 2003, the in-bank courier service was outsourced, and will start to reduce expenses for gasoline, maintenance, and automobile insurance as well as salaries. Year to date, salaries and employee benefits increased by only $204,000 or 2.6% over 2002. In the quarter ended September 30, 2003 compared to the same quarter in 2002, equipment expense and professional fees dropped $34,000 or 5.5% .However, year to date, these two expenses dropped $746,000 or 29.7%. 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 to the ITI accounting system in the first quarter of 2002. There were additional professional fees related to the activation of FNB Bancorp, which took place in the first quarter of 2002. The remaining three categories remained relatively stable. Income Taxes - ------------ The effective tax rate was 26.0% for the first nine 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 interest income for the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002. Consequently, the effective tax rate for the first nine months of 2003 decreased to 24.7%. Asset and Liability Management - ------------------------------ Ongoing management of the Company's interest rate sensitivity limits interest rate risk by managing the mix and maturity of loans and investments and deposits. Management regularly reviews the Company's position and evaluates alternative sources and uses of funds as well as changes in external factors. Various methods are used to achieve and maintain the desired rate sensitivity position including the sale or purchase of assets and product pricing. In order to ensure that sufficient funds are available for loan growth and deposit withdrawals, as well as to provide for general needs, the Company must maintain an adequate level of liquidity. Asset liquidity comes from the Company's ability to convert short-term investments into cash and from the maturity and repayment of loans and investment securities. Liability liquidity 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 September 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 liabilities as of September 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 September 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 $ 4,865 $ -- $ -- $ -- $ -- $ 4,865 Securities available for sale 2,593 10,606 38,754 25,821 -- 77,774 Loans 264,955 5,814 5,758 17,841 9,212 303,580 --------- --------- --------- --------- --------- --------- Total interest earning assets 272,413 16,420 44,512 43,662 9,212 386,219 Cash and due from banks -- -- -- -- 17,665 17,665 Allowance for loan losses -- -- -- -- (3,300) (3,300) Other assets -- -- -- -- 19,663 19,663 --------- --------- --------- --------- --------- --------- Total assets $ 272,413 $ 16,420 $ 44,512 $ 43,662 $ 43,240 $ 420,247 ========= ========= ========= ========= ========= ========= Interest bearing liabilities: Demand, interest bearing $ 51,795 $ -- $ -- $ -- $ -- $ 51,795 Savings and money market 128,010 -- -- -- -- 128,010 Time deposits 40,354 37,257 12,381 -- -- 89,992 Fed funds purchased -- -- -- -- -- -- --------- --------- --------- --------- --------- --------- Total interest bearing liabilities 220,159 37,257 12,381 -- -- 269,797 --------- --------- --------- --------- --------- --------- Noninterest demand deposits -- -- -- -- 95,742 95,742 Other liabilities -- -- -- -- 3,390 3,390 Stockholders' equity -- -- -- -- 51,318 51,318 --------- --------- --------- --------- --------- --------- Total liabilities and stockholders' equity $ 220,159 $ 37,257 $ 12,381 $ -- $ 150,450 $ 420,247 ========= ========= ========= ========= ========= ========= Interest rate sensitivity gap $ 52,254 $ (20,837) $ 32,131 $ 43,662 $(107,210) $ -- ========= ========= ========= ========= ========= ========= Cumulative interest rate sensitivity gap $ 52,254 $ 31,417 $ 63,548 $ 107,210 $ -- $ -- Cumulative interest rate sensitivity gap ratio 19.18% 10.88% 19.06% 28.44% -- -- Financial Condition - ------------------- Assets. Total assets increased to $420,247,000 at September 30, 2003 from $401,834,000 at December 31, 2002, an increase of $18,413,000. Most of this increase was in net loans, which increased $15,391,000 and securities available for sale, which increased $1,811,000. The increase in total assets and in net loans was funded mainly by an increase in deposits of $18,133,000. Loans. Net loans at September 30, 2003 were $300,280,000, an increase of $15,391,000 or 5.40% over December 31, 2002, which were $284,889,000. Real Estate and Construction loans increased $17,542,000, representing most of the increase, while Commercial loans decreased $1,350,000 and Consumer loans decreased $768,000. The portfolio breakdown was as follows. 15 Table 8 LOAN PORTFOLIO - ------- September 30, December 31, (In thousands) 2003 Percent 2002 Percent --------- --------- --------- --------- Real Estate $ 217,037 71.1% $ 211,473 72.9% Construction 44,925 14.7 32,947 11.4 Commercial 41,199 13.5 42,549 14.7 Consumer 2,188 0.7 2,956 1.0 --------- --------- --------- --------- Gross loans 305,349 100.0% 289,925 100.0% ========= ========= Net deferred loan fees (1,769) (1,640) Allowance for loan losses (3,300) (3,396) --------- --------- Net loans $ 300,280 $ 284,889 ========= ========= 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 an adequate allowance, identifying credit weaknesses by consistent review of loans, and maintaining the ratings and changing those ratings in a timely manner as circumstances change. In addition to the $739,000 charged to the allowance for loan losses for the two office building loans described under the heading "Nonperforming assets" (below), the Company maintains specific allowances for these loans These allowances are based on the value of the related collateral, which was obtained from the sales price in the case of the San Francisco property and a recent appraisal in the case of the Mountain View property, less all selling costs associated with the sale. Further, the Company has reserved for the unsecured portions of each of these loans. A summary of transactions in the allowance for loan losses for the nine months ended September 30, 2003 and the year ended December 31, 2002 is as follows: Table 9 ALLOWANCE FOR LOAN LOSSES - ------- Nine months ended Year ended September 30, December 31, (In thousands) 2003 2002 ----------------- ----------------- Balance, beginning of period $3,396 $3,543 Provision for loan losses 780 150 Recoveries 4 8 Amounts charged off (880) (305) ----------------- ----------------- Balance, end of period $3,300 $3,396 ================= ================= In management's judgment, the allowance was adequate to absorb losses currently inherent in the loan portfolio at September 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 September 30, 2003, there was $9,212,000 in non-accrual loans, compared to $2,161,000 at December 31, 2002 due to the two office building loans described below. There were no foreclosed assets or loans past due 90 days and still accruing on either date. 16 In the second quarter of 2003, a $4,409,000 term real estate loan secured by an office building located in the South of Market area of San Francisco was placed in non-accrual status due to a significant decline in value of the underlying collateral of the loan. The property was sold by the owner of the property in the third quarter of 2003 for $4,250,000. The Company recognized a $200,000 loss on the loan and the guarantor of the loan contributed the balance of funds necessary to close the transaction resulting in no further losses for the Company. In the second quarter of 2003, a $3,352,000 construction loan secured by an office 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 Company. The borrower has filed for bankruptcy. Under guidance from the bankruptcy court, the Company negotiated a settlement with the borrower where the borrower will resume payments beginning December 1, 2003 or the Company will be granted an automatic relief from stay from the court and can 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. Deposits. Total deposits at September 30, 2003 were $365,539,000 compared to $347,406,000 on December 31, 2002. Of these totals, noninterest-bearing demand deposits were $95,742,000 or 26.2% of the total on September 30, 2003 and $88,495,000 or 25.5% on December 31, 2002. Time deposits were $89,992,000 on September 30, 2003 and $89,552,000 on December 31, 2002. The following table sets forth the maturity schedule of the time certificates of deposit on September 30, 2003: Table 10 - -------- Under $100,000 (In thousands) $100,000 or more Total -------- -------- -------- Maturities: Three months or less $ 18,535 $ 21,818 $ 40,353 Over three to six months 12,782 10,638 23,420 Over six through twelve months 10,654 3,183 13,837 Over twelve months 8,829 3,553 12,382 -------- -------- -------- Total $ 50,800 $ 39,192 $ 89,992 -------- -------- ======== The following table shows the risk-based capital ratios and leverage ratios at September 30, 2003 and December 31, 2002: Table 11 - -------- Minimum "Well September 30, December 31, Capitalized" Risk-Based Capital Ratios 2003 2002 Requirements Tier 1 Capital 13.75% 13.92% > 6.00% - Total Capital 14.65% 14.87% > 10.00% - Leverage Ratios 12.07% 12.16% > 5.00% - Liquidity. Liquidity is a measure of the Company's ability to convert assets into cash with minimum loss. As of September 30, 2003, Liquid Assets were $100,304,000 or 23.9% of total assets. 17 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 September 30, 2003 net loans were at 82.1% 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. 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. 18 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 September 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 $63,880,000 and $61,470,000 at September 30, 2003 and December 31, 2002, respectively. As a percentage of net loans, these off-balance sheet items represent 21.3% 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 SEC has adopted a number of rule changes to implement the provisions of the Act. The SEC has also approved new rules proposed and adopted by the New York Stock Exchange and the Nasdaq Stock Market to strengthen corporate governance standards for listed companies. The Company does not currently anticipate that compliance with the Act (including the rules adopted pursuant to 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. From December 31, 2002 through June 26, 2003, the prime lending rate was 4.25%, and dropped to 4.00% from June 27 to the end of September 2003. During the nine months ended September 30, 2002, the rate was 4.75%. The effect of these rate changes was mitigated, because a significant amount of the Real Estate loan portfolio is subject to interest rate caps and floors. Consequently, this 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 September 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. 19 (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 September 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. PART II--OTHER INFORMATION Item 2. Use of Proceeds and Issuer Purchases of Equity Securities Issuer Purchases of Equity Securities - -------------------------- ---------------- ------------ ---------------- ------------------------ ----------------------------- Period (a) (b) (c) (d) (e) Total Number Average Identity of Number of Shares Maximum Number (or Of Shares (or Price Paid Broker-dealer (or Units) Purchased Approximate Dollar Value) Units) Per Share (s) Used to As Part of Publicly Of Shares (or Units) that Purchased Effect Announced Plans or May Yet Be Purchased Purchases Programs Under the Plans or Programs - -------------------------- ---------------- ------------ ---------------- ------------------------ ----------------------------- Month #1 July 25 None N/a N/a None 121,852 through July 31, 2003 - -------------------------- ---------------- ------------ ---------------- ------------------------ ----------------------------- Month #2 Seidler August 1 23,284 $28.50 Companies 23,284 98,568 through Wedbush, August 31, 2003 Morgan - -------------------------- ---------------- ------------ ---------------- ------------------------ ----------------------------- Month #3 Wedbush, September 1 11,000 $29.50 Morgan 11,000 87,568 through September 30, 2003 - -------------------------- ---------------- ------------ ---------------- ------------------------ ----------------------------- Total 34,284 34,284 - -------------------------- ---------------- ------------ ---------------- ------------------------ ----------------------------- Footnote: on July 25, 2003 the Board of Directors of the Company authorized a stock repurchase program which calls for the repurchase of up to five percent (5%) of the Company's then outstanding shares of common stock, or approximately 121,852 shares. The repurchases are to be made from time to time in the open market as conditions allow and will be structured to comply with Commission Rule 10b-18. All repurchased shares reflected in the table above were made in open market transactions and then retired. The Board of Directors has reserved the right to suspend, terminate, modify or cancel this repurchase program at any time for any reason. 20 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 The following report on Form 8-K has been filed during the quarter ended September 30, 2003: Filed July 28, 2003, announcing the stock repurchase program authorized by the Board of Directors on July 25, 2003. 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: November 7, 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