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, 2004 ------------------------------------------------- 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 3, 2004: 2,482,594 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 2004 2003 ------------ ------------ Cash and due from banks $ 17,752 $ 22,764 Federal funds sold 11,100 7,880 ------------ ------------ Cash and cash equivalents 28,852 30,644 Securities available-for-sale 110,073 63,692 Loans, net 318,101 312,929 Bank premises, equipment, and leasehold improvements 11,722 10,904 Accrued interest receivable and other assets 16,639 11,279 ------------ ------------ Total assets $ 485,387 $ 429,448 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Demand, noninterest bearing $ 121,403 $ 96,567 Demand, interest bearing 50,744 62,974 Savings and money market 170,247 122,705 Time 84,771 91,968 ------------ ------------ Total deposits 427,165 374,214 Accrued expenses and other liabilities 5,567 3,247 ------------ ------------ Total liabilities 432,732 377,461 ------------ ------------ Stockholders' equity Common stock, no par value, authorized 10,000,000 shares; issued and outstanding 2,486,000 shares at September 30, 2004 and 2,519,000 shares at December 31, 2003 27,687 28,903 Additional paid-in capital 7 3 Retained earnings 24,047 22,041 Accumulated other comprehensive income 914 1,040 ------------ ------------ Total stockholders' equity 52,655 51,987 ------------ ------------ Total liabilities and stockholders' equity $ 485,387 $ 429,448 ============ ============ See accompanying notes to unaudited consolidated financial statements. 2 FNB BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED) (Dollars in thousands, except per share amounts) Three months ended Nine months ended September 30, September 30, --------------------------- --------------------------- 2004 2003 2004 2003 ------------ ------------ ------------ ------------ Interest income: Interest and fees on loans $ 5,320 $ 4,978 $ 15,602 $ 14,984 Interest on securities 511 347 977 1,124 Interest on tax-exempt securities 326 358 909 1,022 Federal funds sold 49 12 140 62 ------------ ------------ ------------ ------------ Total interest income 6,206 5,695 17,628 17,192 ------------ ------------ ------------ ------------ Interest expense: Interest on deposits 639 626 1,778 2,088 Other -- 1 -- 1 ------------ ------------ ------------ ------------ Total interest expense 639 627 1,778 2,089 ------------ ------------ ------------ ------------ Net interest income 5,567 5,068 15,850 15,103 ------------ ------------ ------------ ------------ Provision for loan losses 120 40 360 780 ------------ ------------ ------------ ------------ Net interest income after provision for loan losses 5,447 5,028 15,490 14,323 ------------ ------------ ------------ ------------ Noninterest income: Service charges 591 668 1,901 1,997 Credit card fees 241 275 681 733 Other income 124 61 255 212 ------------ ------------ ------------ ------------ Total noninterest income 956 1,004 2,837 2,942 ------------ ------------ ------------ ------------ Noninterest expense: Salaries and employee benefits 2,623 2,540 7,977 8,167 Occupancy expense 301 296 992 939 Equipment expense 425 398 1,265 1,171 Professional fees 267 183 847 592 Telephone, postage and supplies 271 227 849 675 Bankcard expenses 219 235 606 629 Other expense 518 489 1,576 1,430 ------------ ------------ ------------ ------------ Total noninterest expense 4,624 4,368 14,112 13,603 ------------ ------------ ------------ ------------ Earnings before income tax expense 1,779 1,664 4,215 3,662 Income tax expense 437 404 1,007 905 ------------ ------------ ------------ ------------ NET EARNINGS $ 1,342 $ 1,260 $ 3,208 $ 2,757 ============ ============ ============ ============ Earnings per share data: Basic $ 0.54 $ 0.49 $ 1.28 $ 1.08 Diluted $ 0.53 $ 0.49 $ 1.26 $ 1.08 Weighted average shares outstanding: Basic 2,490,000 2,546,000 2,503,000 2,553,000 Diluted 2,531,000 2,560,000 2,544,000 2,561,000 - --------------------------------------------------------------------------------------------------------------- See accompanying notes to unaudited consolidated financial statements 3 FNB BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Dollars in thousands) Three months ended Nine months ended September 30, September 30, --------------------------- ---------------------------- 2004 2003 2004 2003 ------------ ------------ ------------ ------------ Net earnings $ 1,342 $ 1,260 $ 3,208 $ 2,757 ------------ ------------ ------------ ------------ Change in unrealized gain (loss) on available-for-sale securities 460 (276) (126) (490) ------------ ------------ ------------ ------------ Total comprehensive income $ 1,802 $ 984 $ 3,082 $ 2,267 ============ ============ ============ ============ See accompanying notes to unaudited consolidated financial statements. FNB BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Dollars in thousands) Nine months ended September 30 ------------------------ 2004 2003 ---------- ---------- Cash flow from operating activities Net earnings $ 3,208 $ 2,757 Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation and amortization 1,365 1,428 Provision for loan losses 360 780 Stock based compensation expense 4 -- Changes in assets and liabilities: Accrued interest receivable and other assets (5,360) 552 Accrued expenses and other liabilities 2,408 (69) ---------- ---------- Net cash provided by operating activities 1,985 5,448 ---------- ---------- Cash flows from investing activities Purchase of securities available-for-sale (73,098) (27,100) Proceeds from matured/called/securities available-for-sale 26,101 24,619 Net increase in loans (5,532) (16,171) Proceeds from sale of bank premises, equipment and leasehold improvements 121 -- Purchases of bank premises, equipment, leasehold improvements (1,902) (368) ---------- ---------- Net cash used in investing activities (54,310) (19,020) ---------- ---------- Cash flows from financing activities Net increase in demand and savings deposits 60,148 17,693 Net (decrease) increase in time deposits (7,197) 440 Dividends paid (1,202) (1,165) Repurchase of common stock (1,489) (989) Issuance of common stock for exercise of stock options 273 2 Payments on capital note payable -- (78) ---------- ---------- Net cash provided by financing activities 50,533 15,903 ---------- ---------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,792) 2,331 Cash and cash equivalents at beginning of period 30,644 20,199 ---------- ---------- Cash and cash equivalents at end of period $ 28,852 $ 22,530 ========== ========== Additional cash flow information Interest paid $ 1,778 $ 2,202 Income taxes paid $ 1,226 $ 657 See accompanying notes to unaudited consolidated financial statements. 4 FNB BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 (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"), 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's common stock. The change in capital structure has been included for all periods presented. All intercompany transactions and balances have been eliminated in consolidation. The financial statements include all adjustments of a normal and recurring nature, which are, in the opinion of management, necessary for a fair presentation of the financial results for the interim periods. 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, 2003. Results of operations for interim periods are not necessarily indicative of results for the full year. NOTE B - STOCK OPTION PLANS At September 30, 2004, the Company has two stock-based employee compensation plans. Prior to 2003, the Company accounted for the plans under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Effective January 1, 2003, the Company adopted the fair value recognition provisions of FASB 5 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 and 2004 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 plans vest over periods ranging from three to 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. (Dollars in thousands, except per share) Three months ended Nine months ended September 30 September 30 ---------------------------- ---------------------------- 2004 2003 2004 2003 ------------ ------------ ------------ ------------ Net income as reported $ 1,342 $ 1,260 $ 3,208 $ 2,757 Add: stock-based employee compensation expense included in reported net income, net of related tax effects 2 1 4 2 Deduct: total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effect (3) (3) (4) (9) ------------ ------------ ------------ ------------ Pro forma net income $ 1,341 $ 1,258 $ 3,208 $ 2,750 Earnings per share: Basic - as reported $ 0.54 $ 0.49 $ 1.28 $ 1.08 Basic - pro forma $ 0.54 $ 0.49 $ 1.28 $ 1.07 Diluted - as reported $ 0.53 $ 0.49 $ 1.26 $ 1.08 Diluted - pro forma $ 0.53 $ 0.49 $ 1.26 $ 1.07 NOTE C - EARNINGS PER SHARE CALCULATION Earnings per common share (EPS) are computed based on the weighted average number of common shares outstanding during the period. Basic EPS excludes dilution and is computed by dividing net earnings by the weighted average of common shares outstanding. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Earnings per share have been computed based on the following (dollars in thousands): Three months ended Nine months ended September 30, September 30, ----------------------- ----------------------- 2004 2003 2004 2003 ---------- ---------- ---------- ---------- Net earnings $ 1,342 $ 1,260 $ 3,208 $ 2,757 Average number of shares outstanding 2,490,000 2,546,000 2,503,000 2,553,000 Effect of dilutive options 41,000 14,000 41,000 8,000 Average number of shares outstanding used to calculate diluted earnings per share 2,531,000 2,560,000 2,544,000 2,561,000 All outstanding options were included in the 2004 and 2003 computations. 6 NOTE D - COMPREHENSIVE INCOME Comprehensive income is the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Other comprehensive income consists of net unrealized gains and losses on investment securities available for sale. Comprehensive income for the three months ended September 30, 2004 was $1,802,000 compared to $984,000 for the three months ended September 30, 2003. Comprehensive income for the nine months ended September 30, 2004 was $3,082,000 compared to $2,267,000 for the nine months ended September 30, 2003. NOTE E - OTHER REAL ESTATE OWNED Loans that have become delinquent through non payment of scheduled principal and/or interest for 90 days are placed in nonaccrual and interest is no longer accrued. If a favorable restructuring cannot be made for the loan (provided the market value of the collateral is sufficient), or, if insufficient, or the borrower is unable to make further payments, foreclosure procedures are initiated. If there are no bidders, or if bids are made and are insufficient to cover the debt, the Bank will acquire the property at sale under judgments, decrees, or mortgages where the property was originally security for debts previously contracted. During the quarter ended March 31, 2004 the Company foreclosed on a loan secured by a residential care facility, and placed it in Other Real Estate Owned. It was sold in May and its cost was recovered. NOTE F - 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. On January 23, 2004 the Board of Directors of the registrant authorized an extension of the FNB Bancorp stock repurchase program previously adopted on July 25, 2003. Through September 30, 2004, a total of 85,004 shares, or approximately 3.32% of the shares outstanding on that date (adjusted for the stock dividend paid by the registrant on December 15, 2003, to shareholders of record on November 28, 2003) had been repurchased pursuant to the program. NOTE G - OTHER-THAN-TEMPORARY IMPAIRMENTS OF CERTAIN INVESTMENTS On March 31, 2004, the FASB ratified EITF Issue No. 03-01, which provides guidance on recognizing other-than-temporary impairments on certain investments. The issue is effective for other-than-temporary impairment evaluations for investments accounted for under SFAS No. 115, as well as non-marketable equity securities accounted for under the cost method and was originally scheduled to become effective for reporting periods beginning July 1, 2004. On September 30, 2004, the FASB delayed certain provisions of EITF 03-01. Its deliberation of EITF 03-01 is expected to resume sometime in November 2004. 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 policies require significant judgments and estimates. 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 than expected charge-offs and loan loss provisions. Earnings Analysis ----------------- Net earnings for the quarter ended September 30, 2004 were $1,342,000, compared to net earnings of $1,260,000 for the quarter ended September 30, 2003. Net earnings for the nine months ended September 30, 2004 were $3,208,000 compared to $2,757,000 for the nine months ended September 30, 2003. Earnings before income tax expense for the quarter ended September 30, 2004 were $1,779,000, compared to $1,664,000 for the quarter ended September 30, 2003. Earnings before income tax were $4,215,000 for the nine months ended September 30, 2004 compared to $3,662,000 for the nine months ended September 30, 2003. 8 Net interest income for the quarter ended September 30, 2004 was $5,567,000, compared to $5,068,000 for the quarter ended September 30, 2003. Net interest income for the nine months ended September 30, 2004 was $15,850,000 compared to $15,103,000 for the nine months ended September 30, 2003.The prime lending rate was 4.25% on July 1, 2004, 4.50% on August 11, 2004, and 4.75% on September 21, 2004, compared to 4.00% in the third quarter of 2003. The Federal Home Loan Bank of San Francisco's Weighted Monthly Cost of Funds Index announced for the three months ended September 2004 (based on the three Index Months ended August 31), averaged 1.82%, compared to 2.03% for the three months ended September 2003. Net interest income is the difference between interest yield generated by earning assets and the interest expense associated with the funding of those assets. Basic earnings per share were $0.54 for the third quarter of 2004 compared to $0.49 for the third quarter of 2003. Diluted earnings per share were $0.53 for the third quarter of 2004 compared to $0.49 for the third quarter of 2003. Basic earnings per share were $1.28 for the nine months ended September 30, 2004 compared to $1.08 for the nine months ended September 30, 2003. Diluted earnings per share were $1.26 for the nine months ended September 30, 2004 compared to $1.08 for the nine months ended September 30, 2003. The following table presents an analysis of net interest income and average earning assets and liabilities for the three-and nine-month periods ended September 30, 2004 compared to the three- and nine-month periods ended September 30, 2003. 9 Table 1 NET INTEREST INCOME AND AVERAGE BALANCES - ------- FNB BANCORP AND SUBSIDIARY (Dollars in thousands) Three months ended September 30, ------------------------------------------------------------------------------------------- 2004 2003 ------------------------------------------- ------------------------------------------- Annualized Annualized Interest Average Interest Average Average Income Yield Average Income Yield INTEREST EARNING ASSETS Balance (Expense) (Cost) Balance (Expense) (Cost) ------------ ------------ ------------ ------------ ------------ ------------ Loans, gross $ 315,430 $ 5,320 6.69% $ 297,898 $ 4,978 6.63% Taxable securities 67,938 511 2.98 40,533 347 3.40 Nontaxable securities 38,872 326 3.33 39,158 358 3.63 Federal funds sold 14,671 49 1.33 5,137 12 0.93 ------------ ------------ ------------ ------------ Total interest earning assets $ 436,911 $ 6,206 5.64 $ 382,726 $ 5,695 5.90 NONINTEREST EARNING ASSETS Cash and due from banks $ 19,432 $ 17,925 Premises and equipment 11,634 10,749 Other assets 11,365 6,001 ------------ ------------ Total noninterest earning assets $ 42,431 $ 34,675 ------------ ------------ TOTAL ASSETS $ 479,342 $ 417,401 ============ ============ INTEREST BEARING LIABILITIES Deposits: Demand, interest bearing $ 57,712 ($ 28) (0.19) $ 52,877 ($ 24) (0.18) Money market 104,579 (237) (0.90) 65,616 (124) (0.75) Savings 61,092 (41) (0.27) 57,275 (40) (0.28) Time deposits 84,619 (333) (1.56) 91,512 (438) (1.90) Federal funds purchased and other borrowings -- -- -- 345 (1) (1.15) ------------ ------------ ------------ ------------ Total interest bearing liabilities $ 308,002 ($ 639) (0.82) $ 267,625 ($ 627) (0.93) ------------ ------------ ------------ ------------ NONINTEREST BEARING LIABILITIES Demand deposits 113,259 93,034 Other liabilities 5,765 5,095 ------------ ------------ Total noninterest bearing liabilities $ 119,024 $ 98,129 ------------ ------------ TOTAL LIABILITIES $ 427,026 $ 365,754 Stockholders' equity $ 52,316 $ 51,647 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 479,342 $ 417,401 ============ ============ NET INTEREST INCOME AND MARGIN ON TOTAL EARNING ASSETS $ 5,567 5.06% $ 5,068 5.25% Interest income is reflected on an actual basis, not on a fully taxable basis due to immaterial effect. Yield on gross loans was not adjusted for nonaccrual loans, which were not considered material for this calculation. 10 Table 2 NET INTEREST INCOME AND AVERAGE BALANCES FNB BANCORP AND SUBSIDIARY (Dollars in thousands) Nine months ended September 30, ------------------------------------------------------------------------------------------- 2004 2003 ------------------------------------------- ------------------------------------------- Annualized Annualized Interest Average Interest Average Average Income Yield Average Income Yield INTEREST EARNING ASSETS Balance (Expense) (Cost) Balance (Expense) (Cost) ------------ ------------ ------------ ------------ ------------ ------------ Loans, gross $ 315,293 $ 15,602 6.62% $ 291,566 $ 14,984 6.87% Taxable securities 41,488 977 3.15 41,202 1,124 3.65 Nontaxable securities 34,750 909 3.50 35,562 1,022 3.84 Federal funds sold 17,856 140 1.05 7,369 62 1.12 ------------ ------------ ------------ ------------ Total interest earning assets $ 409,387 $ 17,628 5.76 $ 375,699 $ 17,192 6.12 NONINTEREST EARNING ASSETS Cash and due from banks $ 18,969 $ 17,975 Premises and equipment 13,863 10,960 Other assets 10,093 5,877 ------------ ------------ Total noninterest earning assets $ 42,925 $ 34,812 ------------ ------------ TOTAL ASSETS $ 452,312 $ 410,511 ============ ============ INTEREST BEARING LIABILITIES Deposits: Demand, interest bearing $ 57,347 ($ 88) (0.21) $ 51,485 ($ 85) (0.22) Money market 84,103 (533) (0.85) 65,088 (442) (0.91) Savings 59,822 (119) (0.27) 55,285 (147) (0.36) Time deposits 88,515 (1,038) (1.57) 90,642 (1,414) (2.09) Federal funds purchased and other borrowings -- -- -- 151 (1) (0.89) ------------ ------------ ------------ ------------ Total interest bearing liabilities $ 289,787 ($ 1,778) (0.82) $ 262,651 ($ 2,089) (1.06) ------------ ------------ ------------ ------------ NONINTEREST BEARING LIABILITIES Demand deposits 104,618 91,152 Other liabilities 5,666 5,010 ------------ ------------ Total noninterest bearing liabilities $ 110,284 $ 96,162 ------------ ------------ TOTAL LIABILITIES $ 400.071 $ 358,813 Stockholders' equity $ 52,241 $ 51,698 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 452,312 $ 410,511 ============ ============ NET INTEREST INCOME AND MARGIN ON TOTAL EARNING ASSETS $ 15,850 5.18% $ 15,103 5.37% Tables 1 and 2, above, shows the various components that contributed to changes in net interest income for the three and nine months ended September 30, 2004 and 2003. The principal interest earning assets are loans, from a volume perspective as well as from an earnings rate. For the quarter ended September 30, 2004, average loans outstanding represented 72.2% of average earning assets. For the quarter ended September 30, 2003, they represented 77.8% of average earning assets. For the nine months ended September 30, 2004 and 2003, average loans outstanding represented 77.0% and 77.5%, respectively, of average earning assets. 11 While the yield on total interest earning assets for the quarter ended September 30, 2004 compared to the quarter ended September 30, 2003 decreased from 5.90% to 5.64%, or 26 basis points, this was offset by the larger volume invested in loans, which resulted in a $511,000 increase in total interest income. Comparing the nine months ended September 30, 2004 to the nine months ended September 30, 2003, the yield on total interest earning assets decreased by 36 basis points. Again, this was offset by a larger volume invested in loans, producing an increase in total interest income of $436,000, or 2.54% For the three months ended September 30, 2004 compared to the three months ended September 30, 2003, the cost on total interest bearing liabilities decreased from 0.93% to 0.82%, a decrease of 11 basis points. The most expensive source of interest bearing liabilities are the time certificates of deposit. Their average cost decreased from 1.90% to 1.56%, and the expense on these deposits decreased $105,000 for the three months ended September 30, 2004 compared to 2003. Money market deposits increased $38,963,000 or 59.38%, causing total interest expense on interest bearing liabilities to increase by $12,000. For the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003, the cost on total interest bearing liabilities decreased from 1.06% to 0.82%. For the three and nine month periods ended September 30, 2004 and September 2003, respectively, the following tables show the dollar amount of change in interest income and expense and the dollar amounts attributable to: (a) changes in volume (changes in volume at the current year rate), b) changes in rate (changes in rate times the prior year's volume) and (c) changes in rate/volume (changes in rate times change in volume). In this table, the dollar change in rate/volume is prorated to volume and rate proportionately. For three months ended September 30, 2004 compared to three months ended September 30, 2003, the major contributors to change in interest income were average real estate and construction loans, which increased by $7,475,000, and average commercial loans, up by $9,743,000. For the nine months ended September 30, 2004 and September 30, 2003, average real estate and construction loans increased by $12,780,000 and average commercial loans increased by $10,939,000. For the two three month periods, interest rates on loans did not change significantly, but for the nine months, there was more of a decline in interest attributable to interest on loans. On the interest expense side, because of maturing time certificates, more of the interest decrease for the current quarter was attributable to changes in rate, and more so for the nine months of this year compared to last year. 12 Table 3 FNB BANCORP AND SUBSIDIARY - ------- RATE/VOLUME VARIANCE ANALYSIS Three Months Ended September 30, (Dollars in thousands) 2004 Compared to 2003 Interest Variance Income/Expense Attributable To Variance Rate Volume ------------ ------------ ------------ INTEREST EARNING ASSETS Loans $ 342 $ 46 $ 296 Taxable securities 164 (42) 206 Nontaxable securities (32) (29) (3) Federal funds sold 37 5 32 ------------ ------------ ------------ Total $ 511 ($ 20) $ 531 ------------ ------------ ------------ INTEREST BEARING LIABILITIES Demand deposits $ 4 $ 2 $ 2 Money market 113 25 88 Savings deposits 1 (2) 3 Time deposits (105) (72) (33) Fed funds purchased & other borrowings (1) -- (1) ------------ ------------ ------------ Total $ 12 ($ 47) $ 59 ------------ ------------ ------------ NET INTEREST INCOME $ 499 $ 27 $ 472 ============ ============ ============ Table 4 FNB BANCORP AND SUBSIDIARY RATE/VOLUME VARIANCE ANALYSIS Nine Months Ended September 30, (Dollars in thousands) 2004 Compared To 2003 Interest Variance Income/Expense Attributable To Variance Rate Volume ------------ ------------ ------------ INTEREST EARNING ASSETS Loans $ 618 ($ 601) $ 1,219 Taxable securities (147) (154) 7 Nontaxable securities (113) (92) (21) Federal funds sold 78 (10) 88 ------------ ------------ ------------ Total $ 436 ($ 857) $ 1,293 ------------ ------------ ------------ INTEREST BEARING LIABILITIES Demand deposits $ 3 ($ 7) $ 10 Money market 91 (30) 121 Savings deposits (28) (37) 9 Time deposits (376) (343) (33) Fed funds purchased & other borrowings (1) -- (1) ------------ ------------ ------------ Total ($ 311) ($ 417) $ 106 ------------ ------------ ------------ NET INTEREST INCOME $ 747 ($ 440) $ 1,187 ============ ============ ============ 13 Provision for loan losses - ------------------------- The level of the provision for loan losses during each of the periods presented reflects the Company's continued efforts to reduce credit costs by enforcing underwriting and administration procedures, as well as aggressively pursuing collection efforts with troubled debtors. The Company provided $120,000 and $40,000 for loan losses in the third quarter of 2004 and 2003, respectively. For the nine months ended September 30, 2004 and 2003, it provided $360,000 and $780,000. The provision reflects management's assessment of credit risk in the loan portfolio for each of the periods presented. Additional comments on the subject are mentioned on page 17, in the "Allowance for loan losses" section of this report. Noninterest income - ------------------ The following table shows the principal components of noninterest income for the periods indicated. Table 5 NONINTEREST INCOME Three months ended Nine months ended September 30, September 30, ----------------------- ----------------------- (Dollars in thousands) 2004 2003 2004 2003 ---------- ---------- ---------- ---------- Service charges $ 591 $ 668 $ 1,901 $ 1,997 Credit card fees 241 275 681 733 Other income 124 61 255 212 ---------- ---------- ---------- ---------- Total noninterest income $ 956 $ 1,004 $ 2,836 $ 2,942 ========== ========== ========== ========== Noninterest income consists mainly of service charges on deposits, credit card fees, and other miscellaneous types of income. For the quarter ended September 30, 2004 compared to September 30, 2003, total noninterest income decreased $48,000 or 4.78%. The major component, service charges, decreased $77,000 while other income increased $63,000. The main component of other income, tax free income on officer's life insurance, increased $67,000. For the nine months ended September 30, 2004 and September 30, 2003, total noninterest income declined by $106,000, or 3.60%. The major component, service charges, declined $96,000, or 4.81%. Noninterest expense - ------------------- The following table shows the principal components of noninterest expense for the periods indicated. 14 Table 6 NONINTEREST EXPENSE (Dollars in thousands) Three months ended Nine months ended September 30, September 30, ----------------------- ----------------------- 2004 2003 2004 2003 ---------- ---------- ---------- ---------- Salaries and employee benefits $ 2,623 $ 2,540 $ 7,977 $ 8,167 Occupancy expense 301 296 992 939 Equipment expense 425 398 1,265 1,171 Professional fees 267 183 847 592 Telephone, postage and supplies 271 227 849 675 Bankcard expense 219 235 606 629 Other expense 518 489 1,576 1,430 ---------- ---------- ---------- ---------- Total noninterest expense $ 4,624 $ 4,368 $ 14,112 $ 13,603 ========== ========== ========== ========== Noninterest expense consists mainly of salaries and employee benefits. For the three months ended September 30, 2004 compared to three months ended September 30, 2003, it represented 56.7% and 58.2% of total noninterest expenses. For the nine months ended September 30, 2004 and 2003, it was 56.5% and 60.0% of total noninterest expense. These decreases are attributable to outsourcing the bank's in-house courier service, and attrition, which saw full-time equivalent employees decline from 168 employees at September 30, 2003 to 161 employees at September 30, 2004. The remaining categories are less significant. However, professional fees increased by 45.9% in the quarter ended September 30, 2004 compared to the quarter ended September 30, 2003, and increased by 43.1% for the nine months ended September 30, 2004 compared to 2003. This reflects the increasing costs associated with compliance issues such as the Patriot Act, Sarbanes-Oxley, and the Gramm-Leach-Bliley Act. Telephone, postage and supplies increased 19.4% for the quarter ended September 30, 2004 compared to the same quarter in 2003, and increased 25.8% for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003. During 2004, an overhaul of the telephone and general telecommunications systems has been implemented, with some parallel billing accounting for the increase. Income Taxes - ------------ The effective tax rate for the quarter ended September 30, 2004 was 24.6% compared to 24.3% for the quarter ended September 30, 2003. The effective tax rate for the nine months ended September 30, 2004 and September 30, 2003, respectively was 23.9% and 24.7%. The primary difference between the statutory tax rate of 34% and the effective tax rate is due to a reduction due to tax-free municipal bond interest, a reduction due to Low Income Housing tax credits, and an increase in state taxes. The variance for each period reflects a greater or lesser proportion of income from investments in tax-free municipal securities, variable amounts of Low Income Housing tax credits, and variable increases in state taxes. Asset and Liability Management - ------------------------------ Ongoing management of the Company's interest rate sensitivity limits interest rate risk through monitoring the mix and maturity of loans, investments and deposits. Management regularly reviews the Company's position and evaluates 15 alternative sources and uses of funds as well as changes in external factors. Various methods are used to achieve and maintain the desired rate sensitivity position including the sale or purchase of assets and product pricing. In order to ensure that sufficient funds are available for loan growth and deposit withdrawals, as well as to provide for general needs, the Company must maintain an adequate level of liquidity. Asset liquidity comes from the Company's ability to convert short-term investments into cash and from the maturity and repayment of loans and investment securities. Liability liquidity comes from Company's customer base, which provides core deposit growth. The overall liquidity position of the Company is closely monitored and evaluated regularly. Management believes the Company's liquidity sources at September 30, 2004 are adequate to meet its operating needs in 2004 and going forward into the foreseeable future. The following table sets forth information concerning interest rate sensitive assets and liabilities as of September 30, 2004. The assets and liabilities are classified by the earlier of maturity or repricing date in accordance with their contractual terms. Since all interest rates and yields do not adjust at the same speed or magnitude, and since volatility is subject to change, the gap is only a general indicator of interest rate sensitivity. The Company's asset/liability gap is the difference between the cash flow amounts of interest-sensitive assets and liabilities that will be refinanced (or repriced) during a given period. For example, if the asset amount to be repriced exceeds the corresponding liability amount for a certain day, month, year or longer period, the institution is in an asset-sensitive gap position. In this situation, net interest income would increase if market interest rates rose or decrease if market interest rates fell. Alternatively, if more liabilities than assets will reprice, the institution is in a liability-sensitive position. Accordingly, net interest income would decline when rates rose and increase when rates fell. Table 7 RATE SENSITIVE ASSETS/LIABILITIES - ------- As of September 30, 2004 (Dollars in thousands) Three Over Three Over One Over Not Months To Twelve Through Five Rate- Or Less Months Five Years Years Sensitive Total ---------- ---------- ---------- ---------- ---------- ---------- Interest earning assets: Federal funds sold $ 11,100 $ -- $ -- $ -- $ -- $ 11,100 Securities available for sale 1,004 18,183 79,338 11,548 -- 110,073 Loans 275,258 11,233 9,138 22,968 2,732 321,329 ---------- ---------- ---------- ---------- ---------- ---------- Total interest earning assets 287,362 29,416 88,476 34,516 2,732 442,502 Cash and due from banks -- -- -- -- 17,752 17,752 Allowance for loan losses -- -- -- -- (3,228) (3,228) Other assets -- -- -- -- 28,361 28,361 ---------- ---------- ---------- ---------- ---------- ---------- Total assets $ 287,362 $ 29,416 $ 88,476 $ 34,516 $ 45,617 $ 485,387 ========== ========== ========== ========== ========== ========== Interest bearing liabilities: Demand, interest bearing $ 50,744 $ -- $ -- $ -- $ -- $ 50,744 Savings and money market 170,247 -- -- -- -- 170,247 Time deposits 84,771 -- -- -- -- 84,771 ---------- ---------- ---------- ---------- ---------- ---------- Total interest bearing liabilities 305,762 -- -- -- -- 305,762 ---------- ---------- ---------- ---------- ---------- ---------- Noninterest demand deposits -- -- -- -- 121,403 121,403 Other liabilities -- -- -- -- 5,444 5,444 Stockholders' equity -- -- -- -- 52,655 52,655 ---------- ---------- ---------- ---------- ---------- ---------- Total liabilities and stockholders' equity $ 305,762 $ -- $ -- $ -- $ 179,625 $ 485,387 ========== ========== ========== ========== ========== ========== Interest rate sensitivity gap ($ 18,400) $ 29,416 $ 88,476 $ 34,516 ($ 134,008) $ -- ========== ========== ========== ========== ========== ========== Cumulative interest rate sensitivity gap ($ 18,400) $ 11,016 $ 99,492 $ 134,008 $ -- $ -- Cumulative interest rate sensitivity gap ratio (6.40%) 3.48% 24.55% 30.47% -- -- 16 Financial Condition - ------------------- Assets. Total assets increased to $485,387,000 at September 30, 2004 from $429,448,000 at December 31, 2003, an increase of $55,939,000. Most of this increase was in securities available for sale, which increased $46,381,000, with loans, premises and other assets increasing by $11,287,000, offset by a decline of $1,792,000 in cash and due from banks. The increase in total assets was funded mainly by an increase in deposits of $52,950,000. Loans. Net loans at September 30, 2004 were $318,101,000, an increase of $5,172,000 or 1.65% over December 31, 2003. Construction loans decreased $16,037,000, representing most of the decrease, while real estate loans increased by $24,568,000. Construction loans outstanding can vary significantly, because the loans are funded gradually, but once completed, the amount paid off is large. The commercial and consumer loans decreased $3,557,000. The portfolio breakdown was as follows. Table 8 LOAN PORTFOLIO ------- September 30, December 31, (In thousands) 2004 Percent 2003 Percent ------------ ------------ ------------ ------------ Real Estate $ 239,156 74.1% $ 214,588 67.5% Construction 32,573 10.1 48,610 15.3 Commercial 49,194 15.2 52,248 16.4 Consumer 2,048 0.6 2,551 0.8 ------------ ------------ ------------ ------------ Gross loans 322,971 100.0% 317,997 100.0% ============ ============ Net deferred loan fees (1,642) (1,784) Allowance for loan losses (3,228) (3,284) ------------ ------------ Net loans $ 318,101 $ 312,929 ============ ============ 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 allowance for loan losses. The level of the allowance is determined by internally generating credit quality ratings, reviewing economic conditions in the Company's market area, and considering the Company's historical loan loss experience. The Company is committed to maintaining an adequate allowance, identifying credit weaknesses by consistent review of loans, and maintaining the ratings and changing those ratings in a timely manner as circumstances change. A summary of transactions in the allowance for loan losses for the nine months ended September 30, 2004 and the nine months ended December 31, 2003 is as follows: Table 9 ALLOWANCE FOR LOAN LOSSES ------- Nine months ended Nine months ended (In thousands) September 30, 2004 September 30, 2003 ------------------ ------------------ Balance, beginning of period $ 3,284 $ 3,396 Provision for loan losses 360 780 Recoveries 1 4 Amounts charged off (417) (880) ------------------ ------------------ Balance, end of period $ 3,228 $ 3,300 ================== ================== 17 In management's judgment, the allowance was adequate to absorb probable losses currently inherent in the loan portfolio at September 30, 2004. 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. At September 30, 2004, the allowance represented 1.00% of gross loans net of unearned loan fees, compared to September 30, 2003, where it represented 1.09% of gross loans net of unearned loan fees. At September 30, 2004, the allowance represented 118.6% of nonperforming loans, compared to September 30, 2003, where it represented 35.82% of nonperforming loans. 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, 2004, there was $2,732,000 in non-accrual loans, compared to $9,085,000 at December 31, 2003. One loan secured by an office building, and another to a residential care facility were the main portion of the December 31, 2003 nonaccrual loans. The first loan was secured by an office building in the Silicon Valley community of Mountain View, which was placed in nonaccrual status due to a significant decline in the underlying value of the collateral. At December 31, 2003, its balance was $3,128,000.The loan had been written down to its current market value and is at $2,670,000 on September 30, 2004. The guarantors continue to perform according to the contractual obligations of the documents. The other loan was to a residential care facility with a balance of $5,827,000, which was sold in May, 2004. There were no foreclosed assets or loans past due 90 days and still accruing on either date. In the first quarter of 2004, the Company foreclosed and took into Other Real Estate Owned, the loan secured by a residential care facility with a net loan balance of $5,827,000. This loan was previously in nonaccrual status due to a payment default, and ultimately a bankruptcy filed by the borrower. The loan was sold with no loss of principal in the second quarter of 2004. Deposits. Total deposits at September 30, 2004 were $427,165,000 compared to $374,214,000 on December 31, 2003. Of these totals, noninterest-bearing demand deposits were $121,403,000 or 28.4% of the total on September 30, 2004 and $96,567,000 or 25.8% on December 31, 2003. Savings and money market deposits were $170,247,000 on September 30, 2004, and $122,705,000 on December 31, 2003. Time deposits were $84,771,000 on September 30, 2004 and $91,968,000 on December 31, 2003. The following table sets forth the maturity schedule of the time certificates of deposit on September 30, 2004: Table 10 -------- (Dollars in thousands) Under $100,000 Maturities: $100,000 or more Total ---------- ---------- ---------- Three months or less $ 16,728 $ 16,488 $ 33,216 Over three to six months 11,655 8,127 19,782 Over six through twelve months 9,537 6,246 15,783 Over twelve months 11,207 4,783 15,990 ---------- ---------- ---------- Total $ 49,127 $ 35,644 $ 84,771 ========== ========== ========== The following table shows the risk-based capital ratios and leverage ratios at September 30, 2004 and December 31, 2003: 18 Table 11 -------- Minimum "Well September 30, December 31, Capitalized" Risk-Based Capital Ratios 2004 2003 Requirements Tier 1 Capital 13.23% 13.29% > 6.00% - Total Capital 14.04% 14.15% > 10.00% - Leverage Ratios 10.82% 12.06% > 5.00% - Liquidity. Liquidity is a measure of the Company's ability to convert assets into cash with minimum loss. As of September 30, 2004, Liquid Assets were $138,925,000, or 28.6% of total assets. As of December 31, 2003, Liquid Assets were $94,336,000, or 22.0% 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 interest earning assets. A lower loan to deposit ratio means lower potential income. On September 30, 2004 net loans were at 74.5% of deposits. On December 31, 2003 net loans were at 83.6%. 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 19 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 September 30, 2004 and December 31, 2003, 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 $91,332,000 and $56,888,000 at September 30, 2004 and December 31, 2003, respectively. As a percentage of net loans, these off-balance sheet items represent 28.7% and 18.2% respectively. Corporate Reform Legislation President George W. Bush signed the "Sarbanes-Oxley 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. Subsequent Event On November 5, 2004, the Bank entered into an Acquisition Agreement with Sequoia National Bank, based in San Francisco, California, and Hemisphere National Bank, based in Miami, Florida. Whereby the Bank proposes to acquire all of the assets and San Francisco-based banking operations of Sequoia National Bank. The all-cash purchase price to be paid by the Bank is valued at approximately $11.7 million or $2.45 per share. Under the terms of the Acquisition Agreement, Hemisphere National Bank proposes to simultaneously acquire the remaining national bank charter of Sequoia National Bank, including Sequoia's regulatory authority to establish branch offices in Los Angeles (and elsewhere in California), representing approximately $0.11 per share in additional consideration (after estimated corporate taxes and other transaction related expenses) to the Sequoia National Bank shareholders. The transaction will be taxable to shareholders of Sequoia National Bank. The Acquisition Agreement has been approved by the Boards of Directors of the Bank, Sequoia National Bank and Hemisphere National Bank. The closing of the transactions contemplated by the Acquisition Agreement is presently expected to occur during the first quarter of 2005, subject to the satisfaction of various conditions set forth in the Acquisition Agreement, including approval of the shareholders of Sequoia National Bank, the receipt of all necessary bank regulatory approvals, and other conditions customary for transactions of this type. 20 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. For the quarter ended September 30, 2004, the prime lending rate was raised to 4.25% on July 1, 2004, 4.50% on August 11, 2004, and to 4.75% on September 21, 2004. It had been 4.00% for the first half of the year. From January 1, 2003 through June 26, 2003, the prime lending rate was 4.25%, and dropped to 4.00% from June 27 to the end of December 2003. The changes were not as significant as in prior years. 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, 2004. 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 September 30, 2004, 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. 21 PART II--OTHER INFORMATION Item 2. Unregistered Sales of Equity Securities, and Use of Proceeds ISSUER PURCHASES OF EQUITY SECURITIES - ------------------------------------------------------------------------------------------------------------ Period (a) (b) (c) (d) Total Number Average Number of Shares Maximum Number (or Of Shares (or Price Paid (or Units) Purchased Approximate Dollar Value) Units) Per Share As Part of Publicly of Shares (or Units) that Purchased (or Unit) Announced Plans or May Yet Be Purchased Programs Under the Plans or Programs - ------------------------------------------------------------------------------------------------------------ Month #1 July 1 1,000 $32.50 1,000 60,891 through July 31, 2004 - ------------------------------------------------------------------------------------------------------------ Month #2 August 1 15,950 $33.00 15,950 44,941 Through August 31, 2004 - ------------------------------------------------------------------------------------------------------------ Month #3 September 1 2,000 $33.00 2,000 42,941 Through September 30, 2004 - ------------------------------------------------------------------------------------------------------------ Total 18,950 18,950 - ------------------------------------------------------------------------------------------------------------ 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. On January 23, 2004, the Board of Directors of the registrant authorized an extension of the FNB Bancorp stock repurchase program previously adopted on July 25, 2003. On September 30, 2004, a total of 85,004 shares, or approximately 3.32% of the shares outstanding on that date (adjusted for the stock dividend paid by the registrant on December 15, 2003, to shareholders of record on November 28, 2003) had been repurchased pursuant to the program. The program (as extended) calls for the further purchase of an additional 42,941 shares, subject to an aggregate limit of five percent of the registrant's common stock. All such transactions, including any block purchases, will be structured to comply with Commission Rule 10b-18 and all shares that are purchased under this program will be retired. The Board of Directors has reserved the right to suspend, terminate, modify or cancel the program at any time for any reason. 22 Item 6. Exhibits Exhibits 31: Rule 13a-14(a)/15d-14(a) Certifications 32: Section 1350 Certifications SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. FNB BANCORP (Registrant) Dated: November 9, 2004. By: /s/ THOMAS C. MC GRAW ---------------------------- Thomas C. Mc Graw Chief Executive Officer (Authorized Officer) By: /s/ JAMES B. RAMSEY ---------------------------- James B. Ramsey Senior Vice President Chief Financial Officer (Principal Financial Officer) 23