SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2005, or
[ ] Transition report pursuant to Section 13 or 15 (d) of Securities Exchange
Act of 1934
Commission File No. 000-49693
FNB BANCORP
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(Exact name of registrant as specified in its charter)
California 92-2115369
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(State or other jurisdiction of (IRS Employer ID Number)
incorporation or organization)
975 El Camino Real, South San Francisco, California 94080
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(Address of principal executive offices) (Zip code)
(650) 588-6800
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
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Title of Class: Common Stock,
no par value
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Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
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 if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this 10-K [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes [ ] No [X]
Aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant, computed by reference to the price at
which the common equity was last sold, or the average bid and asked price of
such common equity, as of the last business day of the registrant's most
recently completed second fiscal quarter: $70,158,997
Page 1 of 96 pages
Number of shares outstanding of each of the registrant's classes of common
stock, as of March 24, 2006
No par value Common Stock - 2,703,808 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE The following documents are incorporated by
reference into this Form 10-K: Part III, Items 10 through 14 from Registrant's
definitive proxy statement for the 2006 annual meeting of shareholders.
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TABLE OF CONTENTS
PAGE
PART I
Item 1 Business 4
Item 1A Risk Factors 22
Item 1B Unresolved Staff Comments 24
Item 2 Properties 25
Item 3 Legal Proceedings 26
Item 4 Submission of Matters to a Vote of Security Holders 26
PART II
Item 5 Market for the Registrant's Common Equity and Related
Stockholder Matters and Issuer Purchases of Equity
Securities 26
Item 6 Selected Financial Data 28
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 29
Item 7A Quantitative and Qualitative Disclosure About Market Risk 45
Item 8 Financial Statements and Supplementary Data 49
Item 9 Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure 86
Item 9A Controls and Procedures 86
Item 9B Other Information 86
PART III
Item 10 Directors and Executive Officers of the Registrant 86
Item 11 Executive Compensation 86
Item 12 Security Ownership of Certain Beneficial Owners and
Management and related Stockholder Matters 86
Item 13 Certain Relationships and Related Transactions 87
Item 14 Principal Accounting Fees and Services 87
PART IV
Item 15 Exhibits, Financial Statements, Statement Schedules 87
(a)(1) Financial statements. Listed and included in Part II,
Item 8 87
(2) Financial Statements Schedules. Not applicable 87
(3) Index to Exhibits 87 - 90
Signatures 91 - 92
Exhibit 31 - Rule 13a-14(a)/15d-14(a) Certifications
Exhibit 32 - Section 1350 Certifications
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PART I
ITEM 1. BUSINESS
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Forward-Looking Statements: Certain matters discussed or incorporated
by reference in this Annual Report on Form 10-K including, but not limited to,
matters described in "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations," are "forward-looking statements" within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
and Section 27A of the Securities Act of 1933, as amended. Such forward-looking
statements may contain words related to future projections including, but not
limited to, words such as "believe," "expect," "anticipate," "intend," "may,"
"will," "should," "could," "would," and variations of those words and similar
words that are subject to risks, uncertainties and other factors that could
cause actual results to differ materially from those projected. Factors that
could cause or contribute to such differences include, but are not limited to,
the following: (1) variances in the actual versus projected growth in assets;
(2) return on assets; (3) loan and lease losses; (4) expenses; (5) changes in
the interest rate environment including interest rates charged on loans, earned
on securities investments and paid on deposits; (6) competition effects; (7) fee
and other noninterest income earned; (8) general economic conditions nationally,
regionally, and in the operating market areas of the Company and its
subsidiaries; (9) changes in the regulatory environment; (10) changes in
business conditions and inflation; (11) changes in securities markets; (12) data
processing problems; (13 a decline in real estate values in the Company's
operating market areas; (14) the effects of terrorism, the threat of terrorism
or the impact of the current military conflict in Iraq and the conduct of the
war on terrorism by the United States and its allies, as well as other factors.
The factors set forth under "Item 1A - Risk Factors" in this report and other
cautionary statements and information set forth in this report should be read
carefully considered and understood as being applicable to all related
forward-looking statements contained in this report when evaluating the business
prospects of the Company and its subsidiary.
Forward-looking statements are not guarantees of performance. By their
nature, they involve risks, uncertainties and assumptions. Actual results and
shareholder values in the future may differ significantly from those expressed
in forward-looking statements. You are cautioned not to put undue reliance on
any forward-looking statement. Any such statement speaks only as of the date of
the report, and in the case of any documents that may be incorporated by
reference, as of the date of those documents. We do not undertake any obligation
to update or release any revisions to any forward-looking statements, or to
report any new information, future event or other circumstances after the date
of this report or to reflect the occurrence of unanticipated events, except as
required by law. However, your attention is directed to any further disclosures
made on related subjects in our subsequent reports filed with the Securities and
Exchange Commission on Forms 10-K, 10-Q and 8-K.
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General
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FNB Bancorp (sometimes referred to herein as 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. As a bank holding company, the Company is authorized to
engage in the activities permitted under the Bank Holding Company Act of 1956,
as amended, and regulations thereunder. Its principal office is located at 975
El Camino Real, South San Francisco, California 94080, and its telephone number
is (650) 588-6800.
The Company owns all of the issued and outstanding shares of common
stock of First National Bank of Northern California, a national banking
association ("First National Bank" or the "Bank"). The Company has no other
subsidiary.
The Bank was organized in 1963 as "First National Bank of Daly City."
In 1995, the shareholders approved a change in the name to "First National Bank
of Northern California." The administrative headquarters of the Bank is located
at 975 El Camino Real, South San Francisco, California. The Bank is locally
owned and presently operates eleven full service banking offices within its
primary service area of San Mateo County, in the cities of Colma, Daly City,
South San Francisco, Millbrae, Pacifica, Half Moon Bay, San Mateo, Redwood City
and Pescadero. The Bank also provides services since May 2005 for the City and
County of San Francisco through its Financial District and Portola offices in
San Francisco. The Bank's primary business is servicing the business or
commercial banking needs of individuals and small to mid-sized businesses within
San Mateo and San Francisco Counties.
The Bank is chartered under the laws of the United States and is
governed by the National Bank Act, and is a member of the Federal Reserve
System. The Federal Deposit Insurance Corporation insures the deposits of the
Bank up to the applicable legal limits. The Bank is subject to regulation,
supervision and regular examination by the Office of the Comptroller of the
Currency. The regulations of the Federal Deposit Insurance Corporation, the
Board of Governors of the Federal Reserve System, and the Office of the
Comptroller of the Currency govern many aspects of the Bank's business and
activities, including investments, loans, borrowings, branching, mergers and
acquisitions, reporting and numerous other areas. The Bank is also subject to
applicable provisions of California law to the extent those provisions are not
in conflict with or preempted by federal banking law. See "Supervision and
Regulation" below.
First National Bank offers a broad range of services to individuals and
businesses in its primary service area with an emphasis upon efficiency and
personalized attention. First National Bank provides a full line of business
financial products with specialized services such as courier, appointment
banking, and business Internet banking. The Bank offers personal and business
checking and savings accounts, including individual interest-bearing negotiable
orders of withdrawal ("NOW"), money market accounts and/or accounts combining
checking and savings accounts with automatic transfer capabilities, IRA
accounts, time certificates of deposit and direct deposit of social security,
pension and payroll checks and computer cash management with access through the
Internet. First National Bank also makes available commercial, standby letters
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of credit, construction, accounts receivable, inventory, automobile, home
improvement, residential real estate, commercial real estate, single family
mortgage, Small Business Administration, office equipment, leasehold improvement
and consumer loans as well as overdraft protection lines of credit. In addition,
the Bank sells travelers checks and cashiers checks, offers automated teller
machine (ATM) services tied in with major statewide and national networks and
offers other customary commercial banking services.
Most of First National Bank's deposits are obtained from commercial
businesses, professionals and individuals. As of December 31, 2005, First
National Bank had a total of 24,543 accounts. On occasion, the Bank has obtained
deposits through deposit brokers for which it pays a broker fee. As of December
31, 2005, First National Bank had no such deposits. There is no concentration of
deposits or any customer with 5% or more of First National Bank's deposits.
At December 31, 2005, the Company had total assets of $569,141,000, net
loans of $380,051,000, deposits of $507,544,000 and shareholders' equity of
$55,243,000. The Company competes with approximately 33 other banking or savings
institutions in its service areas. The Company's market share of Federal Deposit
Insurance Corporation insured deposits in the service area of San Mateo County
is approximately 2.45% (based upon the most recent information available by the
Federal Deposit Insurance Corporation through June 30, 2005). See "Competitive
Data" below.
Employees
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At December 31, 2005, The Company employed 176 persons on a full-time
basis. The Company believes its employee relations are good. The Company is not
a party to any collective bargaining agreement.
Available Information
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FNB Bancorp and First National Bank maintain an Internet website at
http://www.FNBNORCAL.com. The Company's annual report on form 10-K, quarterly
reports on Form 10-Q, current reports on 8-K and amendments to those reports,
filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange
Act of 1934, are made available free of charge on or through such website as
soon as reasonably practicable after such material is electronically filed with,
or furnished to, the Securities and Exchange Commission. Also made available on
or through such website are the Section 16 reports of ownership and changes in
ownership of the Company's common stock which are filed with the Securities and
Exchange Commission by the directors and executive officers of the Company and
by any persons who own more than 10 percent of the outstanding shares of such
stock. Information on such website is not incorporated by reference into this
report.
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SUPERVISION AND REGULATION
General
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FNB Bancorp. The common stock of FNB Bancorp is subject to the
registration requirements of the Securities Act of 1933, as amended, and the
qualification requirements of the California Corporate Securities Law of 1968,
as amended. FNB Bancorp has registered its common stock under Section 12 (g) of
the Securities Exchange Act of 1934, as amended. The Company is also subject to
the periodic reporting requirements of Section 13 of the Securities Exchange Act
of 1934, as amended, which include, but are not limited to, annual, quarterly
and other current reports with the Securities and Exchange Commission.
FNB Bancorp is a bank holding company within the meaning of the Bank
Holding Company Act of 1956, as amended (the "Bank Holding Company Act"), and is
registered as such with, and subject to the supervision of, the Board of
Governors of the Federal Reserve System (the "Board of Governors"). FNB Bancorp
is required to obtain the approval of the Board of Governors before it may
acquire all or substantially all of the assets of any bank, or ownership or
control of the voting shares of any bank if, after giving effect to such
acquisition of shares, FNB Bancorp would own or control more than 5% of the
voting shares of such bank. The Bank Holding Company Act prohibits FNB Bancorp
from acquiring any voting shares of, or interest in, all or substantially all of
the assets of, a bank located outside the State of California unless such an
acquisition is specifically authorized by the laws of the state in which such
bank is located. Any such interstate acquisition is also subject to the
provisions of the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994.
FNB Bancorp, and any subsidiary which it may acquire or organize, are
deemed to be "affiliates" of the Bank within the meaning of that term as defined
in the Federal Reserve Act. This means, for example, that there are limitations
(a) on loans by First National Bank to its affiliates, and (b) on investments by
First National Bank in affiliates' stock as collateral for loans to any
borrower. FNB Bancorp and First National Bank are also subject to certain
restrictions with respect to engaging in the underwriting, public sale and
distribution of securities.
In addition, regulations of the Board of Governors under the Federal
Reserve Act require that reserves be maintained by First National Bank in
conjunction with any liability of FNB Bancorp under any obligation (promissory
note, acknowledgment of advance, banker's acceptance or similar obligation) with
a weighted average maturity of less than seven (7) years to the extent that the
proceeds of such obligations are used for the purpose of supplying funds to
First National Bank for use in its banking business, or to maintain the
availability of such funds.
First National Bank of Northern California. As a national banking
association licensed under the national banking laws of the United States, First
National Bank is regularly examined by the Office of the Comptroller of the
Currency and is subject to supervision and regulation by the Federal Deposit
Insurance Corporation, the Board of Governors, and the Office of the Comptroller
of the Currency. This supervision and regulation includes comprehensive reviews
of all major aspects of First National Bank's business and condition, including
its capital ratios, allowance for possible loan losses and other factors.
However, no inference should be drawn that such authorities have approved any
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such factors. First National Bank is required to file reports with the Office of
the Comptroller of the Currency and the Federal Deposit Insurance Corporation.
First National Bank's deposits are insured by the Federal Deposit Insurance
Corporation up to the applicable legal limits.
Capital Standards.
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The Board of Governors, the Federal Deposit Insurance Corporation, and
the Office of the Comptroller of the Currency have adopted risk-based guidelines
for evaluating the capital adequacy of bank holding companies and banks. The
guidelines are designed to make capital requirements sensitive to differences in
risk profiles among banking organizations, to take into account off-balance
sheet exposures and to aid in making the definition of bank capital uniform
internationally. Under the guidelines, First National Bank is required to
maintain (and FNB Bancorp and First National Bank will be required to maintain)
capital equal to at least 8.0% of its assets and commitments to extend credit,
weighted by risk, of which at least 4.0% must consist primarily of common equity
(including retained earnings) and the remainder may consist of subordinated
debt, cumulative preferred stock, or a limited amount of loan loss reserves.
Assets, commitments to extend credit, and off-balance sheet items are
categorized according to risk and certain assets considered to present less risk
than others permit maintenance of capital at less than the 8% ratio. For
example, most home mortgage loans are placed in a 50% risk category and
therefore require maintenance of capital equal to 4% of those loans, while
commercial loans are placed in a 100% risk category and therefore require
maintenance of capital equal to 8% of those loans.
Under the risk-based capital guidelines, assets reported on an
institution's balance sheet and certain off-balance sheet items are assigned to
risk categories, each of which has an assigned risk weight. Capital ratios are
calculated by dividing the institution's qualifying capital by its period-end
risk-weighted assets. The guidelines establish two categories of qualifying
capital: Tier 1 capital (defined to include common shareholders' equity and
noncumulative perpetual preferred stock) and Tier 2 capital which includes,
among other items, limited life (and in the case of banks, cumulative) preferred
stock, mandatory convertible securities, subordinated debt and a limited amount
of reserve for credit losses. Tier 2 capital may also include up to 45% of the
pretax unrealized gains on certain available-for-sale equity securities having
readily determinable fair values (i.e. the excess, if any, of fair market value
over the book value or historical cost of the investment security). The federal
regulatory agencies reserve the right to exclude all or a portion of the
unrealized gains upon a determination that the equity securities are not
prudently valued. Unrealized gains and losses on other types of assets, such as
bank premises and available-for-sale debt securities, are not included in Tier 2
capital, but may be taken into account in the evaluation of overall capital
adequacy and net unrealized losses on available-for-sale equity securities will
continue to be deducted from Tier 1 capital as a cushion against risk. Each
institution is required to maintain a minimum risk-based capital ratio
(including Tier 1 and Tier 2 capital) of 8%, of which at least half must be Tier
1 capital.
A leverage capital standard was adopted as a supplement to the
risk-weighted capital guidelines. Under the leverage capital standard, an
institution is required to maintain a minimum ratio of Tier 1 capital to the sum
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of its quarterly average total assets and quarterly average reserve for loan
losses, less intangibles not included in Tier 1 capital. Period-end assets may
be used in place of quarterly average total assets on a case-by-case basis. The
Board of Governors and the Federal Deposit Insurance Corporation have also
adopted a minimum leverage ratio for bank holding companies as a supplement to
the risk-weighted capital guidelines. The leverage ratio establishes a minimum
Tier 1 ratio of 3% (Tier 1 capital to total assets) for the highest rated bank
holding companies or those that have implemented the risk-based capital market
risk measure. All other bank holding companies must maintain a minimum Tier 1
leverage ratio of 4% with higher leverage capital ratios required for bank
holding companies that have significant financial and/or operational weakness, a
high risk profile, or are undergoing or anticipating rapid growth.
At December 31, 2005, The Company was in compliance with the
risk-weighted capital and leverage ratios. See "Capital" under Item 7 below.
Prompt Corrective Action
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The Board of Governors, Federal Deposit Insurance Corporation, and
Office of the Comptroller of the Currency have adopted regulations implementing
a system of prompt corrective action pursuant to Section 38 of the Federal
Deposit Insurance Act and Section 131 of the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"). The regulations establish five
capital categories with the following characteristics: (1) "Well capitalized" -
consisting of institutions with a total risk-based capital ratio of 10% or
greater, a Tier 1 risk-based capital ratio of 6% or greater and a leverage ratio
of 5% or greater, and the institution is not subject to an order, written
agreement, capital directive or prompt corrective action directive; (2)
"Adequately capitalized" - consisting of institutions with a total risk-based
capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or
greater and a leverage ratio of 4% or greater, and the institution does not meet
the definition of a "well capitalized" institution; (3) "Undercapitalized" -
consisting of institutions with a total risk-based capital ratio less than 8%, a
Tier 1 risk-based capital ratio of les than 4%, or a leverage ratio of less than
4%; (4) "Significantly undercapitalized" - consisting of institutions with a
total risk-based capital ratio of less than 6%, a Tier 1 risk-based capital
ratio of less than 3%, or a leverage ratio of less than 3%; (5) "Critically
undercapitalized" - consisting of an institution with a ratio of tangible equity
to total assets that is equal to or less than 2%.
The regulations established procedures for classification of financial
institutions within the capital categories, filing and reviewing capital
restoration plans required under the regulations and procedures for issuance of
directives by the appropriate regulatory agency, among other matters. The
regulations impose restrictions upon all institutions to refrain from certain
actions which would cause an institution to be classified within any one of the
three "undercapitalized" categories, such as declaration of dividends or other
capital distributions or payment of management fees, if following the
distribution or payment the institution would be classified within one of the
"undercapitalized" categories. In addition, institutions that are classified in
one of the three "undercapitalized" categories are subject to certain mandatory
and discretionary supervisory actions. Mandatory supervisory actions include (1)
increased monitoring and review by the appropriate federal banking agency; (2)
implementation of a capital restoration plan; (3) total asset growth
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restrictions; and (4) limitation upon acquisitions, branch expansion, and new
business activities without prior approval of the appropriate federal banking
agency. Discretionary supervisory actions may include (1) requirements to
augment capital; (2) restrictions upon affiliate transactions; (3) restrictions
upon deposit gathering activities and interest rates paid; (4) replacement of
senior executive officers and directors; (5) restrictions upon activities of the
institution and its affiliates; (6) requiring divestiture or sale of the
institution; and (7) any other supervisory action that the appropriate federal
banking agency determines is necessary to further the purposes of the
regulations. Further, the federal banking agencies may not accept a capital
restoration plan without determining, among other things, that the plan is based
on realistic assumptions and is likely to succeed in restoring the depository
institution's capital. In addition, for a capital restoration plan to be
acceptable, the depository institution's parent holding company must guarantee
that the institution will comply with such capital restoration plan.
The aggregate liability of the parent holding company under the guaranty is
limited to the lesser of (i) an amount equal to 5 percent of the depository
institution's total assets at the time it became undercapitalized, and (ii) the
amount that is necessary (or would have been necessary) to bring the institution
into compliance with all capital standards applicable with respect to such
institution as of the time it fails to comply with the plan. If a depository
institution fails to submit an acceptable plan, it is treated as if it were
"significantly undercapitalized". FDICIA also restricts the solicitation and
acceptance of and interest rates payable on brokered deposits by insured
depository institutions that are not "well capitalized." An "undercapitalized"
institution is not allowed to solicit deposits by offering rates of interest
that are significantly higher than the prevailing rates of interest on insured
deposits in the particular institution's normal market areas or in the market
areas in which such deposits would otherwise be accepted.
Any financial institution which is classified as "critically
undercapitalized" must be placed in conservatorship or receivership within 90
days of such determination unless it is also determined that some other course
of action would better serve the purposes of the regulations. Critically
undercapitalized institutions are also prohibited from making (but not accruing)
any payment of principal or interest on subordinated debt without prior
regulatory approval and regulators must prohibit a critically undercapitalized
institution from taking certain other actions without prior approval, including
(1) entering into any material transaction other than in the usual course of
business, including investment expansion, acquisition, sale of assets or other
similar actions; (2) extending credit for any highly leveraged transaction; (3)
amending articles or bylaws unless required to do so to comply with any law,
regulation or order; (4) making any material change in accounting methods; (5)
engaging in certain affiliate transactions; (6) paying excessive compensation or
bonuses; and (7) paying interest on new or renewed liabilities at rates which
would increase the weighted average costs of funds beyond prevailing rates in
the institution's normal market areas.
Additional Regulations
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Under FDICIA, the federal financial institution agencies have adopted
regulations which require institutions to establish and maintain comprehensive
written real estate policies which address certain lending considerations,
including loan-to-value limits, loan administrative policies, portfolio
10
diversification standards, and documentation, approval and reporting
requirements. FDICIA further generally prohibits an insured bank from engaging
as a principal in any activity that is impermissible for a national bank, absent
Federal Deposit Insurance Corporation determination that the activity would not
pose a significant risk to the Bank Insurance Fund, and that such bank is, and
will continue to be, within applicable capital standards.
The Federal Financial Institutions Examination Council ("FFIEC")
utilizes the Uniform Institutions Rating System ("UFIRS"), commonly referred to
as "CAMELS," to classify and evaluate the soundness of financial institutions.
Bank examiners use the CAMELS measurements to evaluate capital adequacy, asset
quality, management, earnings, liquidity and sensitivity to market risk.
Effective January 1, 2005, bank holding companies such as the Company, became
subject to evaluation and examination under a revised bank holding company
rating system. This so-called BOPEC rating system, implemented in 1979, has been
focused primarily on financial condition, consolidated capital and consolidated
earnings. The new rating system reflects a change toward analysis of risk
management (as reflected in bank examination under the CAMELS measurements), in
addition to financial factors and the potential impact of nondepository
subsidiaries upon depository institution subsidiaries.
The federal financial institution agencies have established bases for
analysis and standards for assessing financial institution's capital adequacy in
conjunction with the risk-based capital guidelines including analysis of
interest rate risk, concentrations of credit risk, risk posed by non-traditional
activities, and factors affecting overall safety and soundness. The safety and
soundness standards for insured financial institutions include analysis of (1)
internal controls, information systems and internal audit systems; (2) loan
documentation; (3) credit underwriting; (4) interest rate exposure; (5) asset
growth; (6) compensation, fees and benefits; and (7) excessive compensation for
executive officers, directors or principal shareholders which could lead to
material financial loss. If an agency determines that an institution fails to
meet any standard, the agency may require the financial institution to submit to
the agency an acceptable plan to achieve compliance with the standard. If the
agency requires submission of a compliance plan and the institution fails to
timely submit an acceptable plan or to implement an accepted plan, the agency
must require the institution to correct the deficiency. The agencies may elect
to initiate enforcement action in certain cases rather than rely on an existing
plan particularly where failure to meet one or more of the standards could
threaten the safe and sound operation of the institution.
Community Reinvestment Act ("CRA") regulations evaluate banks' lending
to low and moderate income individuals and businesses across a four-point scale
from "outstanding" to "substantial noncompliance," and are a factor in
regulatory review of applications to merge, establish new branches or form bank
holding companies. In addition, any bank rated in "substantial noncompliance"
with the CRA regulations may be subject to enforcement proceedings. First
National Bank has a current rating of "satisfactory" for CRA compliance.
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Limitation on Dividends
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FNB Bancorp. The Company's ability to pay cash dividends is subject to
restrictions set forth in the California General Corporation Law. Funds for
payment of any cash dividends by the Company would be obtained from its
investments as well as dividends and/or management fees from First National
Bank. First National Bank's ability to pay cash dividends is subject to
restrictions imposed under the National Bank Act and regulations promulgated by
the Office of the Comptroller of the Currency.
FNB Bancorp has paid quarterly dividends for each quarter commencing
with the second quarter of 2002. Future dividends will continue to be determined
after consideration of the Company's earnings, financial condition, future
capital funds, regulatory requirements and other factors such as the Board of
Directors may deem relevant. It is the intention of the Company to pay cash
dividends, subject to legal restrictions on the payment of cash dividends and
depending upon the level of earnings, management's assessment of future capital
needs and other factors to be considered by the Board of Directors.
The California General Corporation Law provides that a corporation may
make a distribution to its shareholders if the corporation's retained earnings
equal at least the amount of the proposed distribution. The California General
Corporation Law further provides that, in the event sufficient retained earnings
are not available for the proposed distribution, a corporation may nevertheless
make a distribution to its shareholders if, after giving effect to the
distribution, it meets two conditions, which generally stated are as follows:
(i) the corporation's assets must equal at least 125% of its liabilities; and
(ii) the corporation's current assets must equal at least its current
liabilities or, if the average of the corporation's earnings before taxes on
income and before interest expense for the two preceding fiscal years was less
than the average of the corporation's interest expense for those fiscal years,
then the corporation's current assets must equal at least 125% of its current
liabilities.
The Board of Governors of the Federal Reserve System generally
prohibits a bank holding company from declaring or paying a cash dividend which
would impose undue pressure on the capital of subsidiary banks or would be
funded only through borrowing or other arrangements that might adversely affect
a bank holding company's financial position. The Federal Reserve Board policy is
that a bank holding company should not continue its existing rate of cash
dividends on its common stock unless its net income is sufficient to fully fund
each dividend and its prospective rate of earnings retention appears consistent
with its capital needs, asset quality and overall financial condition.
First National Bank of Northern California. First National Bank's
shareholder is entitled to receive dividends when and as declared by its Board
of Directors, out of funds legally available therefore, subject to the
restrictions set forth in the National Bank Act.
The payment of cash dividends by First National Bank may be subject to
the approval of the Office of the Comptroller of the Currency, as well as
restrictions established by federal banking law and the Federal Deposit
Insurance Corporation. Approval of the Office of the Comptroller of the Currency
is required if the total of all dividends declared by First National Bank's
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board of directors in any calendar year will exceed First National Bank's net
profits for that year combined with its retained net profits for the preceding
two years, less any required transfers to surplus or to a fund for the
retirement of preferred stock. Additionally, the Federal Deposit Insurance
Corporation and/or the Office of the Comptroller of the Currency, might, under
some circumstances, place restrictions on the ability of a bank to pay dividends
based upon peer group averages and the performance and maturity of that bank.
COMPETITION
Competitive Data
- ----------------
In its market area, First National Bank competes for deposit and loan
customers with other banks (including those with much greater resources),
thrifts and, to a lesser extent, credit unions, finance companies and other
financial service providers.
Larger banks may have a competitive advantage because of higher lending
limits and major advertising and marketing campaigns. They also perform
services, such as trust services, international banking, discount brokerage and
insurance services, which First National Bank is not authorized nor prepared to
offer currently. First National Bank has made arrangements with its
correspondent banks and with others to provide some of these services for its
customers. For borrowers requiring loans in excess of First National Bank's
legal lending limits, First National Bank has offered, and intends to offer in
the future, such loans on a participating basis with its correspondent banks and
with other independent banks, retaining the portion of such loans which is
within its lending limits. As of December 31, 2005, First National Bank's
aggregate legal lending limits to a single borrower and such borrower's related
parties were $8,557,000 on an unsecured basis and $14,261,000 on a fully secured
basis, based on regulatory capital of $57,045,000.
First National Bank's business is concentrated in its service area,
which primarily encompasses San Mateo County, but also includes portions of the
City and County of San Francisco. The economy of First National Bank's service
area is dependent upon government, manufacturing, tourism, retail sales,
population growth and smaller service oriented businesses.
Based upon the most recent information available by the Federal Deposit
Insurance Corporation at June 30, 2005, there were 33 commercial and savings
banking offices in San Mateo County with a total of $17,835,774,000 in deposits
at June 30, 2005. First National Bank had a total of 11 offices in the county
with total deposits of $436,868,000 at the same date, or 2.45% of the San Mateo
County totals. At June 30, 2004, there were 33 commercial and savings banking
offices in San Mateo County with total deposits of $17,013,242,000, while First
National Bank had $413,260,000, or 2.43% of the San Mateo County totals.
In 1996, pursuant to Congressional mandate, the Federal Deposit
Insurance Corporation reduced bank deposit insurance assessment rates to a range
from $0 to $0.27 per $100 of deposits, dependent upon a bank's risk. In 2005,
Congress adopted the Federal Deposit Insurance Reform Act of 2005, which will
have the effect of merging the Bank Insurance Fund and the Savings Association
Insurance Fund into a new Deposit Insurance Fund (which is anticipated to occur
13
on or before July 1, 2006). The FDIC has not yet released final regulations, but
it is anticipated that final regulations will be released not later than the
fourth quarter of 2006. When released, the final regulations are expected to
include, among other matters, (1) increased premium assessments to banks based
on a bank's risk assessment profile, subject to a one-time assessment credit for
banks that paid premiums prior to December 31, 1996 to offset premium
assessments; (2) a $100,000 deposit account insurance limit until January 1,
2012, subject to inflation indexing; and (3) increased retirement account
insurance limits to $250,000, until January 1, 2012, subject to inflation
indexing. The inflation indexing is expected to use 2005 as the base year and
adjust for inflation on April 1, 2010 and every five years thereafter on January
1 of the following year. Until final regulations are released by the FDIC and
banks are assigned to a risk category, the precise amount of premium assessment
increase cannot be determined, but it is expected that the expense for premium
assessments for First National Bank will not increase in an amount that will
have a material adverse effect on the Company's results of operations. Based
upon the current risk-based assessment rate schedule in effect since 1996, and
First National Bank's current capital ratios and level of deposits, First
National Bank does not anticipate a significant increase in operating expenses
due to changes in the assessment rate applicable to it during 2006 from that in
2005.
General Competitive Factors
- ---------------------------
In order to compete with the financial institutions in their primary
service areas, community banks such as First National Bank use to the fullest
extent possible, the flexibility which is accorded by their independent status.
This includes an emphasis on specialized services, local promotional activity,
and personal contacts by their respective officers, directors and employees.
They also seek to provide special services and programs for individuals in their
primary service area who are employed in the agricultural, professional and
business fields, such as loans for equipment, furniture and tools of the trade
or expansion of practices or businesses. In the event there are customers whose
loan demands exceed their respective lending limits, they seek to arrange for
such loans on a participation basis with other financial institutions. They also
assist those customers requiring services not offered by either bank to obtain
such services from correspondent banks.
Banking is a business that depends on interest rate differentials. In
general, the difference between the interest rate paid by a bank to obtain their
deposits and other borrowings and the interest rate received by a bank on loans
extended to customers and on securities held in a bank's portfolio comprise the
major portion of a bank's earnings. Commercial banks compete with savings and
loan associations, credit unions, other financial institutions and other
entities for funds. For instance, yields on corporate and government debt
securities and other commercial paper affect the ability of commercial banks to
attract and hold deposits. Commercial banks also compete for loans with savings
and loan associations, credit unions, consumer finance companies, mortgage
companies and other lending institutions.
The interest rate differentials of a bank, and therefore its earnings,
are affected not only by general economic conditions, both domestic and foreign,
but also by statutes and as implemented by federal agencies, particularly the
Federal Reserve Board. The Federal Reserve Board can and does implement national
monetary policy, such as seeking to curb inflation and combat recession, by its
14
open market operations in United States government securities, adjustments in
the amount of interest free reserves that banks and other financial institutions
are required to maintain, and adjustments to the discount rates applicable to
borrowing by banks from the Federal Reserve Board. These activities influence
the growth of bank loans, investments and deposits and also affect interest
rates charged on loans and paid on deposits. The nature and timing of any future
changes in monetary policies and their impact on First National Bank are not
predictable.
Legislative and Regulatory Impact
- ---------------------------------
Since 1996, California law implementing certain provisions of prior
federal law has (1) permitted interstate merger transactions; (2) prohibited
interstate branching through the acquisition of a branch business unit located
in California without acquisition of the whole business unit of the California
bank; and (3) prohibited interstate branching through de novo establishment of
California branch offices. Initial entry into California by an out-of-state
institution must be accomplished by acquisition or merger with an existing whole
bank, which has been in existence for at least five years.
The federal financial institution agencies, especially the Office of
the Comptroller of the Currency and the Board of Governors, have taken steps to
increase the types of activities in which national banks and bank holding
companies can engage, and to make it easier to engage in such activities. The
Office of the Comptroller of the Currency has issued regulations permitting
national banks to engage in a wider range of activities through subsidiaries.
"Eligible institutions" (those national banks that are well capitalized, have a
high overall rating and a satisfactory CRA rating, and are not subject to an
enforcement order) may engage in activities related to banking through operating
subsidiaries subject to an expedited application process. In addition, a
national bank may apply to the Office of the Comptroller of the Currency to
engage in an activity through a subsidiary in which First National Bank itself
may not engage.
The Gramm-Leach-Bliley Act (the "Act"), eliminated most of the
remaining depression-era "firewalls" between banks, securities firms and
insurance companies which was established by the Banking Act of 1933, also known
as the Glass-Steagall Act ("Glass-Steagall"). Glass-Steagall sought to insulate
banks as depository institutions from the perceived risks of securities dealing
and underwriting, and related activities. The Act repealed Section 20 of
Glass-Steagall, which prohibited banks from affiliating with securities firms.
Bank holding companies that can qualify as "financial holding companies" can
now, among other matters, acquire securities firms or create them as
subsidiaries, and securities firms can now acquire banks or start banking
activities through a financial holding company. The Act includes provisions
which permit national banks to conduct financial activities through a subsidiary
that are permissible for a national bank to engage in directly, as well as
certain activities authorized by statute, or that are financial in nature or
incidental to financial activities to the same extent as permitted to a
"financial holding company" or its affiliates. This liberalization of United
States banking and financial services regulation applies both to domestic
institutions and foreign institutions conducting business in the United States.
Consequently, the common ownership of banks, securities firms and insurance is
now possible, as is the conduct of commercial banking, merchant banking,
15
investment management, securities underwriting and insurance within a single
financial institution using a structure authorized by the Act.
Prior to the Act, significant restrictions existed on the affiliation
of banks with securities firms and related securities activities. Banks were
also (with minor exceptions) prohibited from engaging in insurance activities or
affiliating with insurers. The Act removed these restrictions and substantially
eliminated the prohibitions under the Bank Holding Company Act on affiliations
between banks and insurance companies. Bank holding companies which qualify as
financial holding companies can now, among other matters, insure, guarantee, or
indemnify against loss, harm, damage, illness, disability, or death; issue
annuities; and act as a principal, agent, or broker regarding such insurance
services.
In order for a commercial bank to affiliate with a securities firm or
an insurance company pursuant to the Act, its bank holding company must qualify
as a financial holding company. A bank holding company will qualify if (i) its
banking subsidiaries are "well capitalized" and "well managed" and (ii) it files
with the Board of Governors a certification to such an effect and a declaration
that it elects to become a financial holding company. The amendment of the Bank
Holding Company Act now permits financial holding companies to engage in
activities, and acquire companies engaged in activities, that are financial in
nature or incidental to such financial activities. Financial holding companies
are also permitted to engage in activities that are complementary to financial
activities if the Board of Governors determines that the activity does not pose
a substantial risk to the safety or soundness of depository institutions or the
financial system in general. These standards expand upon the list of activities
"closely related to banking" which have to date defined the permissible
activities of bank holding companies under the Bank Holding Company Act.
One further effect of the Act was to require that federal financial
institution and securities regulatory agencies prescribe regulation to implement
the policy that financial institutions must respect the privacy of their
customers and protect the security and confidentiality of customers' non-public
personal information. These regulations require, in general, that financial
institutions (1) may not disclose non-public information of customers to
non-affiliated third parties without notice to their customers, who must have an
opportunity to direct that such information not be disclosed; (2) may not
disclose customer account numbers except to consumer reporting agencies; and (3)
must give prior disclosure of their privacy policies before establishing new
customer relationships.
Neither the Company nor First National Bank has determined whether or
when it may seek to acquire and exercise new powers or activities under the Act,
and the extent to which competition will change among financial institutions
affected by the Act has not yet become clear.
RECENT LEGISLATION
The Patriot Act
- ---------------
On October 26, 2001, President Bush signed the USA Patriot Act (the
"Patriot Act"), which includes provisions pertaining to domestic security,
surveillance procedures, border protection, and terrorism laws to be
16
administered by the Secretary of the Treasury. Title III of the Patriot Act
entitled "International Money Laundering Abatement and Anti-Terrorist Financing
Act of 2001" includes amendments to the Bank Secrecy Act which expand the
responsibilities of financial institutions in regard to anti-money laundering
activities with particular emphasis upon international money laundering and
terrorism financing activities through designated correspondent and private
banking accounts. Certain surveillance provisions of the Patriot Act were
scheduled to expire on December 31, 2005, but the deadline was postponed to
allow time for evaluation of such provisions, and on March 9, 2006, President
Bush signed legislation to reauthorize the Patriot Act, incorporating certain
civil liberty protections approved by Congress.
Section 313 (a) of the Patriot Act prohibits any insured financial
institution such as First National Bank, from providing correspondent accounts
to foreign banks which do not have a physical presence in any country
(designated as "shell banks"), subject to certain exceptions for regulated
affiliates of foreign banks. Section 313 (a) also requires financial
institutions to take reasonable steps to ensure that foreign bank correspondent
accounts are not being used to indirectly provide banking services to foreign
shell banks, and Section 319 (b) requires financial institutions to maintain
records of the owners and agent for service of process of any such foreign banks
with whom correspondent accounts have been established.
Section 312 of the Patriot Act creates a requirement for special due
diligence for correspondent accounts and private banking accounts. Under Section
312, each financial institution that establishes, maintains, administers, or
manages a private banking account or a correspondent account in the United
States for a non-United States person, including a foreign individual visiting
the United States, or a representative of a non-United States person shall
establish appropriate, specific, and, where necessary, enhanced, due diligence
policies, procedures, and controls that are reasonably designed to detect and
record instances of money laundering through those accounts.
The Company and First National Bank are not currently aware of any
account relationships between the Bank and any foreign bank or other person or
entity as described above under Sections 313 (a) or 312 of the Patriot Act. The
terrorist attacks on September 11, 2001 have realigned national security
priorities of the United States and it is reasonable to anticipate that the
United States Congress may enact additional legislation in the future to combat
terrorism including modifications to existing laws such as the Patriot Act to
expand powers as deemed necessary. The effects which the Patriot Act and any
additional legislation enacted by Congress may have upon financial institutions
is uncertain; however, such legislation would likely increase compliance costs
and thereby potentially have an adverse effect upon the Company's results of
operations.
The Check Clearing for the 21st Century Act (commonly referred to as
"Check 21") was signed into law in 2003 and became effective on October 28,
2004. The law facilitates check truncation by creating a new negotiable
instrument called a "substitute check" which permits banks to truncate original
checks, to process check information electronically and to deliver "substitute
checks" to banks that want to continue receiving paper checks. Check 21 is
intended to reduce the dependence of the check payment system on physical
transportation networks (which can be disrupted by terrorist attacks of the type
which occurred on September 11, 2001) and to streamline the collection and
17
return process. The law does not require banks to accept checks in electronic
form nor does it require banks to use the new authority granted by the Act to
create "substitute checks." The Company and First National Bank do not currently
anticipate that compliance with the Act will have a material effect upon their
financial position or results of operations or cash flows.
Sarbanes-Oxley Act of 2002
- --------------------------
President George W. Bush signed the Sarbanes-Oxley Act of 2002 (the
"Act") on July 30, 2002, which addressed certain concerns regarding corporate
governance and accountability. Among other matters, key provisions of the Act
and rules promulgated by the Securities and Exchange Commission pursuant to the
Act include the following:
Expanded oversight of the accounting profession by creating a new
independent public company oversight board to be monitored by the SEC.
Revised rules on auditor independence to restrict the nature of
non-audit services provided to audit clients and to require such services to be
pre-approved by the audit committee.
Improved corporate responsibility through mandatory listing standards
relating to audit committees, certifications of periodic reports by the CEO and
CFO and making issuer interference with an audit a crime.
Enhanced financial disclosures, including periodic reviews for the
largest issuers and real time disclosure of material company information.
Enhanced criminal penalties for a broad array of white collar crimes
and increases in the statute of limitations for securities fraud lawsuits.
Disclosure of whether a company has adopted a code of ethics that
applies to the company's principal executive officer, principal financial
officer, principal accounting officer or controller, or persons performing
similar functions, and disclosure of any amendments or waivers to such code of
ethics. This disclosure obligation became effective for fiscal years ending on
or after July 15, 2003. The ethics code must contain written standards that are
reasonably designed to deter wrongdoing and to promote:
o Honest and ethical conduct, including the ethical handling of actual or
apparent conflicts of interest between personal and professional relationships;
o Full, fair, accurate, timely, and understandable disclosure in reports
and documents that a registrant files with, or submits to, the Securities and
Exchange Commission and in other public communications made by the registrant;
o Compliance with applicable governmental laws, rules and regulations;
o The prompt internal reporting to an appropriate person or persons
identified in the code, of violations of the code; and
18
o Accountability for adherence to the code.
o Disclosure of whether a company's audit committee of its board of
directors has a member of the audit committee who qualifies as an "audit
committee financial expert." The disclosure obligation became effective for
fiscal years ending on or after July 15, 2003. To qualify as an "audit committee
financial expert," a person must have:
o An understanding of generally accepted accounting principles and
financial statements;
o The ability to assess the general application of such principles in
connection with the accounting for estimates, accruals and reserves;
o Experience preparing, auditing, analyzing or evaluating financial
statements that present a breadth and level of complexity of accounting issues
that are generally comparable to the breadth and complexity of issues that can
reasonably be expected to be raised by the registrant's financial statements, or
experience actively supervising one or more persons engaged in such activities;
o An understanding of internal controls and procedures for financial
reporting; and
o An understanding of audit committee functions.
A person must have acquired the above listed attributes to be deemed to qualify
as an "audit committee financial expert" through any one or more of the
following:
o Education and experience as a principal financial officer, principal
accounting officer, controller, public accountant or auditor or experience in
one or more positions that involve the performance of similar functions;
o Experience actively supervising a principal financial officer,
principal accounting officer, controller, public accountant, auditor or person
performing similar functions;
o Experience overseeing or assessing the performance of companies or
public accountants with respect to the preparation, auditing or evaluation of
financial statements; or
o Other relevant experience.
The disclosure obligation contains a specific safe harbor provision to clarify
that the designation of a person as an "audit committee financial expert" does
not cause that person to be deemed to be an "expert" for any purpose under
Section 11 of the Securities Act of 1933, as amended, or impose on such person
any duties, obligations or liability greater that the duties, obligations and
liability imposed on such person as a member of the audit committee and the
board of directors, absent such designation. Such a designation also does not
affect the duties, obligations or liability of any other member of the audit
committee or board of directors.
19
o prohibition on insider trading during pension plan black-out periods.
o Disclosure of off-balance sheet transactions.
o A prohibition on personal loans to directors and officers.
o Conditions on the use of non-GAAP (generally accepted accounting
principles) financial measures.
o Standards on professional conduct for attorneys requiring attorneys
having an attorney-client relationship with a company, among other matters, to
report "up the ladder" to the audit committee, another board committee or the
entire board of directors certain material violations.
o Expedited filing requirements for Form 4 reports of changes in
beneficial ownership of securities reducing the filing deadline to within 2
business days of the date a transaction triggers an obligation to report.
o Accelerated filing requirements for Forms 10-K and 10-Q by public
companies which qualify as "large accelerated filers" or "accelerated filers."
Large accelerated filers are now required to file form 10-K within 75 days after
the fiscal year-end in 2005 and within 60 days in 2006. Accelerated filers are
required to file Form 10-K within 75 days after the fiscal year-end in both 2005
and 2006. Both large accelerated filers and accelerated filers must file Form
10-Q within 40 days after each fiscal quarter-end in 2005 and 2006. FNB Bancorp
is not currently defined as a "large accelerated filer" or an "accelerated
filer" and its deadlines to file Form 10-K and Form 10-Q remain at 90 days and
45 days after the fiscal year-end and each quarter-end, respectively, in 2005
and 2006.
o Disclosure concerning website access to reports on Forms 10-K, 10-Q and
8-K, and any amendments to those reports, by "accelerated filers" as soon as
reasonably practicable after such reports and material are filed with or
furnished to the Securities and Exchange Commission.
o Rules requiring national securities exchanges and national securities
associations to prohibit the listing of any security whose issuer does not meet
audit committee standards established pursuant to the Act, including:
o Independence standards for members;
o Responsibility for selecting and overseeing the issuer's independent
accountant;
o Responsibility for handling complaints regarding the issuer's
accounting practices;
o Authority to engage advisers; and
o Funding requirements for the independent auditor and outside advisers
engaged by the audit committee.
20
On November 4, 2003, the Securities and Exchange Commission adopted changes to
the standards for the listing of issuer securities by the New York Stock
Exchange and the Nasdaq Stock Market. The revised standards for listing conform
to and supplement Rule 10A-3 under the Securities Exchange Act of 1934, as
amended, which the Securities and Exchange Commission adopted in April 2003
pursuant to the Act. In the future, if the Company's common stock is listed on
the Nasdaq Stock Market, the Company would be required to comply with these
listing standards, as revised, in addition to the rules promulgated by the
Securities and Exchange Commission pursuant to the Act.
The effect of the Act upon the Company is uncertain; however, the Company will
incur increased costs to comply with the Act and the rules and regulations
promulgated pursuant to the Act by the Securities and Exchange Commission and
other regulatory agencies having jurisdiction over the Company. The Company does
not currently anticipate, however, that compliance with the Act and such rules
and regulations will have a material adverse effect upon its financial position
or results of its operations or its cash flows.
California Corporate Disclosure Act
- -----------------------------------
The California Corporate Disclosure Act (the "CCD Act"), became
effective January 1, 2003. The CCD Act requires publicly traded corporations
incorporated or qualified to do business in California to disclose information
about their past history, auditors, directors and officers. The CCD Act requires
the Company to disclose:
o The name of the company's independent auditor and a description of
services, if any, performed for the company during the previous 24 months;
o The annual compensation paid to each director and executive officer,
including stock or stock options not otherwise available to other company
employees;
o A description of any loans made to a director at a "preferential" loan
rate during the previous 24 months, including the amount and terms of the loans;
o Whether any bankruptcy was filed by a company or any of its directors
or executive officers within the previous 10 years;
o Whether any director or executive officer of a company has been
convicted of fraud during the previous 10 years; and
o Whether a company violated any federal securities laws or any
securities or banking provisions of California law during the previous 10 years
for which the company was found liable or fined more than $10,000.
The Company does not currently anticipate that compliance with the CCD Act will
have a material adverse effect upon its financial position or results of its
operations or its cash flows.
21
Future Legislation and Regulations
- ----------------------------------
Certain legislative and regulatory proposals that could affect FNB
Bancorp, First National Bank, and the banking business in general are
periodically introduced before the United States Congress, the California State
Legislature and Federal and state government agencies. It is not known to what
extent, if any, legislative proposals will be enacted and what effect such
legislation would have on the structure, regulation and competitive
relationships of financial institutions. It is likely, however, that such
legislation could subject FNB Bancorp and First National Bank to increased
regulation, disclosure and reporting requirements, competition, and costs of
doing business.
In addition to legislative changes, the various Federal and state
financial institution regulatory agencies frequently propose rules and
regulations to implement and enforce already existing legislation. It cannot be
predicted whether or in what form any such rules or regulations will be enacted
or the effect that such regulations may have on the Company and First National
Bank.
ITEM 1A. RISK FACTORS
- ---------------------
In addition to the risks associated with the business of banking generally, as
described above under Item 1 (Description of Business), the Company's business,
financial condition, operating results, future prospects and stock price can be
adversely impacted by certain risk factors, as set forth below, any of which
could cause the Company's actual results to vary materially from recent results
or from the Company's anticipated future results.
Dependence on Key Officers and Employees. We are dependent on the successful
recruitment and retention of highly qualified personnel. Our ability to
implement our business strategies is closely tied to the strengths of our
executive officers who have extensive experience in the banking industry but who
are not easily replaced. In addition, business banking, one of the Company's
principal lines of business, is dependent on relationship banking, in which
First National Bank personnel develop professional relationships with small
business owners and officers of larger business customers who are responsible
for the financial management of the companies they represent. If these employees
were to leave First National Bank and become employed by a local competing bank,
we could potentially lose business customers. In addition, we rely on our
customer service staff to effectively serve the needs of our consumer customers.
We actively recruit for all open positions and management believes that its
relations with employees are good.
Growth strategy. We have pursued and continue to pursue a growth strategy which
depends primarily on generating an increasing level of loans and deposits at
acceptable risk levels. We may not be able to sustain this growth strategy
without establishing new branches or new products. Therefore, we may expand in
our current market by opening or acquiring branch offices or other financial
institutions or branch offices. This expansion may require significant
investments in equipment, technology, personnel and site locations. We cannot
assure you of our success in implementing our growth strategy without
corresponding increases in our noninterest expenses.
22
Commercial loans. As of December 31, 2005, approximately 13.8% of our loan
portfolio consisted of commercial business loans, which have a higher degree of
risk than other types of loans. Commercial business loans generally involve a
greater degree of risk than residential mortgage loans and carry larger loan
balances. This increased credit risk is a result of several factors, including
the concentration of principal in a limited number of loans and borrowers, the
mobility of collateral, the effect of general economic conditions and the
increased difficulty of evaluating and monitoring these types of loans. In
addition, unlike residential mortgage loans, which generally are made on the
basis of the borrower's ability to make repayment from his or her employment and
other income and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans typically are made on the basis
of the borrower's ability to make repayment from the cash flow of the borrower's
business. As a result, the availability of funds for the repayment of commercial
business loans may be substantially dependent on the success of the business
itself and the general economic environment. If the cash flow from business
operations is reduced, the borrower's ability to repay the loan may be impaired.
Real Estate Values. A large portion of the loan portfolio of the Company is
dependent on real estate. At December 31, 2005, real estate served as the
principal source of collateral with respect to approximately 85.3% of the
Company's loan portfolio. A substantial decline in the economy in general, or a
decline in real estate values in the Company's primary operating market areas in
particular, could have an adverse effect on the demand for new loans, the
ability of borrowers to repay outstanding loans, the value of real estate and
other collateral securing loans and the value of the available-for-sale
investment portfolio, as well as the Company's financial condition and results
of operations in general and the market value for Company Common Stock. Acts of
nature, including fires, earthquakes and floods, which may cause uninsured
damage and other loss of value to real estate that secures these loans, may also
negatively impact the Company's financial condition.
Allowance for Loan and Lease Losses. Like all financial institutions, the
Company maintains an allowance for loan losses to provide for loan defaults and
non-performance, but its allowance for loan losses may not be adequate to cover
actual loan and lease losses. In addition, future provisions for loan and lease
losses could materially and adversely affect the Company and therefore the
Company's operating results. The Company's allowance for loan and lease losses
is based on prior experience, as well as an evaluation of the risks in the
current portfolio. The amount of future losses is susceptible to changes in
economic, operating and other conditions, including changes in interest rates
that may be beyond the Company's control, and these losses may exceed current
estimates. Federal regulatory agencies, as an integral part of their examination
process, review the Company's loans and allowance for loan and lease losses.
Although we believe that the Company's allowance for loan and lease losses is
adequate to cover current losses, we cannot assure you that it will not further
increase the allowance for loan and lease losses or that the regulators will not
require it to increase this allowance. Either of these occurrences could
materially and adversely affect the Company's earnings.
Environmental Liabilities. In the course of our business, we may foreclose and
take title to real estate, and could be subject to environmental liabilities
with respect to these properties. We may be held liable to a governmental entity
23
or third parties for property damage, personal injury, investigation and
clean-up costs incurred by these parties in connection with environmental
contamination, or may be required to investigate or clean up hazardous or toxic
substances, or chemical releases at a property. The costs associated with
investigations or remediation activities could be substantial. In addition, as
the owner or former owner of a contaminated site, we could become subject to
common law claims by third parties based on damages and costs resulting from
environmental contamination emanating from the property. If we ever become
subject to significant environmental liabilities, our business prospects,
financial condition, liquidity, results of operations and stock price could be
materially and adversely affected.
Dilution of Common Stock. Shares of the Company's common stock eligible for
future sale could have a dilutive effect on the market for common stock and
could adversely affect the market price. The Articles of Incorporation of the
Company authorize the issuance of 10,000,000 shares of common stock, of which
2,700,322 were outstanding at December 31, 2005. Pursuant to its 1997 and 2002
Stock Option Plans, at December 31, 2005, the Company had outstanding options to
purchase 223,638 shares of common stock. As of December 31, 2005, 125,359 shares
of common stock remained available for grants under the 2002 Stock Option Plan.
Sales of substantial amounts of the Company's common stock in the public market
could adversely affect the market price of common stock.
Operating Losses. The Company is subject to certain operations risks, including,
but not limited to, data processing system failures and errors and customer or
employee fraud. The Company maintains a system of internal controls to mitigate
against such occurrences and maintains insurance coverage for such risks, but
should such an event occur that is not prevented or detected by the Company's
internal controls, uninsured or in excess of applicable insurance limits, it
could have a significant adverse impact on the Company's business, financial
condition or results of operations.
Business Confidence Uncertainty. The terrorist actions on September 11, 2001,
and thereafter, plus military actions taken by the United States in Afghanistan,
Iraq and elsewhere, have had significant adverse effects upon the United States
economy. Whether terrorist activities in the future and the actions taken by the
United States and its allies in combating terrorism on a worldwide basis will
adversely impact the Company, and the extent of such impact, is uncertain.
However, such events have had and may continue to have an adverse effect on the
economy in the Company's market areas. Such continued economic deterioration
could adversely affect the Company's future results of operations by, among
other matters, reducing the demand for loans and the amounts required to be
reserved for loan losses, reducing the value of collateral held as security for
the Company's loans, and causing a decline in the Company's stock price.
ITEM 1B. UNRESOLVED STAFF COMMENTS
- ----------------------------------
Not applicable.
24
ITEM 2. PROPERTIES
- ------------------
FNB Bancorp does not own any real property. Since its incorporation on
February 28, 2001, FNB Bancorp has conducted its operations at the
administrative offices of First National Bank, located at 975 El Camino Real,
South San Francisco, California 94080.
First National Bank owns the land and building at 975 El Camino Real,
South San Francisco, California 94080. The premises consist of a modern,
three-story building of approximately 20,000 square feet and off-street parking
for employees and customers of approximately 45 vehicles. The Buri Buri Branch
Office of First National Bank is located on the ground floor of this three-story
building and administrative offices, including the offices of senior management,
occupy the second and third floors.
First National Bank owns the land and two-story building occupied by
the Daly City Branch Office (6600 Mission Street, Daly City, CA 94014); the land
and two-story building occupied by the Colma Branch Office (1300 El Camino Real,
Colma, CA 94014); the land and two-story building occupied by the South San
Francisco Branch Office (211 Airport Boulevard, South San Francisco, CA 94080);
the land and two-story building occupied by the Redwood City Branch Office (700
El Camino Real, Redwood City, CA 94063); the land and two-story building
occupied by the Millbrae Branch Office (1551 El Camino Real, Millbrae, CA
94030); the land and single-story building occupied by the Half Moon Bay Branch
Office (756 Main Street, Half Moon Bay, CA 94019); and the land and two-story
building occupied by the Pescadero Branch Office (239 Stage Road, Pescadero, CA
94060). All properties include adequate vehicle parking for customers and
employees.
First National Bank leases premises at 1450 Linda Mar Shopping Center,
Pacifica, California 94044, for its Linda Mar Branch Office. This ground floor
space of approximately 4,100 square feet is leased from Fifty Associates and
Demartini/Linda Mar, LLC. The lease term is 10 years and expires on September 1,
2009.
First National Bank leases premises at 210 Eureka Square, Pacifica,
California 94044, for its Eureka Square Branch Office. This ground floor space
of approximately 3,000 square feet is leased from Joseph A. Sorci and Eldiva
Sorci. The lease term is for 5 years, commencing January 1, 1995, with two
5-year options to extend the lease term, the second of which has been exercised
and expires on December 31, 2009.
The Flower Mart facility located at 640 Brannan Street, Suite 102, San
Francisco, California, 94107 was discontinued during 2005, and is now replaced
by two full-service branches, the Financial District Office at 65 Post Street,
San Francisco, and the Portola Office, at 699 Portola Drive, San Francisco.
First National Bank leases premises at 65 Post Street, San Francisco,
CA 94104, for its Financial District Office. The current lease term expires
April 30, 2008, with two 5-year options to extend the lease. The location
consists of approximately 2,826 square feet of street level, 1,322 square feet
of basement, and 1,077 square feet of mezzanine space.
25
First National Bank leases premises at 6599 Portola Drive, San
Francisco, CA 94127, for its Portola Office. The current lease expires June 30,
2009, and has a remaining 5-year option to extend the lease. The location
consists of approximately 1,325 square feet of street level space.
First National Bank leases premises at 150 East Third Avenue, San
Mateo, CA 94401, for its San Mateo Branch Office. The lease term is for 5 years,
which will expire July 31, 2008. The location consists of approximately 4,000
square feet of ground floor usable commercial space.
The foregoing summary descriptions of leased premises are qualified in
their entirety by reference to the full text of the lease agreements listed as
exhibits to this report.
ITEM 3. LEGAL PROCEEDINGS
- -------------------------
There are no material legal proceedings adverse to the Company or First
National Bank to which any director, officer, affiliate of the Company, or 5%
shareholder of the Company, or any associate of any such director, officer,
affiliate or 5% shareholder of the Company are a party, and none of the
foregoing persons has a material interest adverse to the Company or First
National Bank.
From time to time, the Company and/or First National Bank is a party to
claims and legal proceedings arising in the ordinary course of business. The
Company's management is not aware of any material pending legal proceedings to
which either it or First National Bank may be a party or has recently been a
party, which will have a material adverse effect on the financial condition or
results of operations of the Company and First National Bank, taken as a whole.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, AND RELATED STOCKHOLDER MATTERS
- ------------------------------------------------------------------------------
AND ISSUER PURCHASES OF EQUITY SECURITIES
- -----------------------------------------
Since March 18, 2002, the common stock of the Company has been quoted
on the OTC Bulletin Board under the trading symbol, "FNBG.OB." There has been
limited trading in the shares of common stock of the Company. On February 15,
2006, the Company had approximately 400 shareholders of common stock of record.
26
The following table summarizes sales of the common stock of FNB Bancorp
during the periods indicated of which management of the Bank has knowledge,
including the approximate high and low bid prices during such periods and the
per share cash dividends declared for the periods indicated. All information has
been adjusted to reflect 5% stock dividends effected on December 15, 2004 and on
December 16, 2005. The prices indicated below reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
Bid Price of FNB Bancorp
Common Stock
Cash
Dividends
Declared
High Low (1)
---------- ---------- ----------
2004
- --------------
First Quarter $ 33.6054 $ 27.3650 $ 0.12
Second Quarter $ 29.8412 $ 28.1179 0.12
Third Quarter 30.4309 29.0250 0.12
Fourth Quarter 34.7619 31.9524 0.12
0.12 Special
Dividend
2005
- --------------
First Quarter $ 35.2381 $ 31.9048 $ 0.15
Second Quarter 31.9048 28.0952 0.15
Third Quarter 30.2381 28.9524 0.15
Fourth Quarter 33.2500 30.7500 0.15
(1) See Item 1, "Limitations on Dividends," above, for a description of the
limitations applicable to the payment of dividends by FNB Bancorp.
27
ITEM 6. SELECTED FINANCIAL DATA
The following table presents a summary of selected financial
information that should be read in conjunction with the Company's financial
statements and notes thereto included under Item 8 - "FINANCIAL STATEMENTS AND
SUPPLEMENTAL DATA."
Dollars in thousands, except per
share amounts and ratios 2005 2004 2003 2002 2001
---------- ---------- ---------- ---------- ----------
STATEMENT OF INCOME DATA
Total interest income $ 30,732 $ 24,046 $ 22,867 $ 26,159 $ 30,844
Total interest expense 5,533 2,533 2,658 4,288 7,935
---------- ---------- ---------- ---------- ----------
Net interest income 25,199 21,513 20,209 21,871 22,909
Provision for loan losses 600 480 780 150 300
---------- ---------- ---------- ---------- ----------
Net interest income after provision for
loan losses 24,599 21,033 19,429 21,721 22,609
Total non interest income 3,841 3,787 4,026 3,308 3,007
Total non interest expenses 20,283 18,555 17,918 18,705 17,911
---------- ---------- ---------- ---------- ----------
Earnings before taxes 8,157 6,265 5,537 6,324 7,705
Income tax expense 2,429 1,577 1,396 1,510 2,468
---------- ---------- ---------- ---------- ----------
Net earnings $ 5,728 $ 4,688 $ 4,141 $ 4,814 $ 5,237
========== ========== ========== ========== ==========
PER SHARE DATA - see note
Net earnings per share:
Basic $ 2.12 $ 1.71 $ 1.48 $ 1.71 $ 1.87
Diluted $ 2.08 $ 1.67 $ 1.47 $ 1.71 $ 1.86
Cash dividends per share $ 0.60 $ 0.60 $ 0.60 $ 1.00 $ 1.23
Weighted average shares outstanding:
Basic 2,699,000 2,748,000 2,797,000 2,808,000 2,806,000
Diluted 2,758,000 2,799,000 2,824,000 2,817,000 2,812,000
Shares outstanding at period end 2,700,322 2,586,269 2,518,559 2,437,043 2,318,849
Book value per share $ 20.46 $ 20.35 $ 20.64 $ 21.01 $ 20.06
BALANCE SHEET DATA
Investment securities 113,463 102,823 63,692 75,963 65,311
Net loans 380,051 340,906 312,929 284,889 288,067
Allowance for loan losses 4,547 3,334 3,284 3,396 3,543
Total assets 569,141 490,054 429,448 401,834 397,388
Total deposits 507,544 413,253 374,214 347,406 344,079
Shareholders' equity 55,243 52,629 51,987 31,203 46,523
SELECTED PERFORMANCE DATA
Return on average assets 1.08% 1.02% 1.00% 1.17% 1.30%
Return on average equity 10.75% 8.94% 8.00% 9.87% 11.43%
Net interest margin 5.27% 5.14% 5.33% 5.83% 6.34%
Average loans as a percentage of
average deposits 77.80% 79.98% 82.93% 80.79% 77.67%
Average total stockholder's equity as
a percentage of average total assets 10.06% 11.37% 12.49% 11.86% 11.41%
Dividend payout ratio 26.92% 32.54% 35.63% 29.35% 43.38%
SELECTED ASSET QUALITY RATIOS
Net loan charge-offs to average loans 0.02% 0.13% 0.30% 0.10% 0.03%
Allowance for loan losses/Total Loans 1.18% 0.97% 1.04% 1.18% 1.21%
CAPITAL RATIOS
Tier 1 risk-based 10.67% 12.69% 13.29% 13.92% 12.98%
Total risk-based 11.59% 13.50% 14.15% 14.87% 13.98%
Leverage 9.50% 10.72% 12.06% 12.16% 11.41%
Note: per share data has been adjusted for stock dividends.
28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATIONS OF FNB BANCORP AND SUBSIDIARY
- -------------------------------------------
Forward-Looking Statements: Certain matters discussed or incorporated
by reference in this Annual Report on Form 10-K including, but not limited to,
matters described in "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations," are "forward-looking statements" within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
and Section 27A of the Securities Act of 1933, as amended. Such forward-looking
statements may contain words related to future projections including, but not
limited to, words such as "believe," "expect," "anticipate," "intend," "may,"
"will," "should," "could," "would," and variations of those words and similar
words that are subject to risks, uncertainties and other factors that could
cause actual results to differ materially from those projected. Factors that
could cause or contribute to such differences include, but are not limited to,
the following: (1) variances in the actual versus projected growth in assets;
(2) return on assets; (3) loan and lease losses; (4) expenses; (5) changes in
the interest rate environment including interest rates charged on loans, earned
on securities investments and paid on deposits; (6) competition effects; (7) fee
and other noninterest income earned; (8) general economic conditions nationally,
regionally, and in the operating market areas of the Company and its
subsidiaries; (9) changes in the regulatory environment; (10) changes in
business conditions and inflation; (11) changes in securities markets; (12) data
processing problems; (13) a decline in real estate values in the Company's
operating market areas; (14) the effects of terrorism, the threat of terrorism
or the impact of the current military conflict in Iraq and the conduct of the
war on terrorism by the United States and its allies, as well as other factors.
The factors set forth under "Item 1A - Risk Factors" in this report and other
cautionary statements and information set forth in this report should be read
carefully considered and understood as being applicable to all related
forward-looking statements contained in this report when evaluating the business
prospects of the Company and its subsidiary.
Forward-looking statements are not guarantees of performance. By their
nature, they involve risks, uncertainties and assumptions. Actual results and
shareholder values in the future may differ significantly from those expressed
in forward-looking statements. You are cautioned not to put undue reliance on
any forward-looking statement. Any such statement speaks only as of the date of
the report, and in the case of any documents that may be incorporated by
reference, as of the date of those documents. We do not undertake any obligation
to update or release any revisions to any forward-looking statements, or to
report any new information, future event or other circumstances after the date
of this report or to reflect the occurrence of unanticipated events, except as
required by law. However, your attention is directed to any further disclosures
made on related subjects in our subsequent reports filed with the Securities and
Exchange Commission on Forms 10-K, 10-Q and 8-K.
29
Critical Accounting Policies And Estimates
- ------------------------------------------
Management's discussion and analysis of its financial condition and
results of operations are based upon the Company's financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, the Company evaluates
its estimates, including those related to its loans and allowance for loan
losses. The Company bases its estimates on current market conditions, historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. The Company believes the
following critical accounting policy requires significant judgments and
estimates used in the preparation of its consolidated financial statements.
Allowance for Loan Losses. The allowance for loan losses is periodically
evaluated for adequacy by management. Factors considered include the Company's
loan loss experience, known and inherent risks in the portfolio, current
economic conditions, known adverse situations that may affect the borrower's
ability to repay, regulatory policies, and the estimated value of underlying
collateral. The evaluation of the adequacy of the allowance is based on the
above factors along with prevailing and anticipated economic conditions that may
impact borrowers' ability to repay loans. Determination of the allowance is in
part objective and in part a subjective judgment by management given the
information it currently has in its possession. Adverse changes in any of these
factors or the discovery of new adverse information could result in higher
charge-offs and loan loss provisions.
Recent Accounting Changes
- -------------------------
On December 12, 2003, AICPA issued Statement of Position 03-3 which
addresses accounting for differences between contractual cash flows and cash
flows expected to be collected from an investor's initial investment in loans or
debt securities (loans) acquired in a transfer if those differences are
attributable, at least in part, to credit quality. It includes loans with
evidence of deterioration of credit quality since origination acquired by
completion of a transfer, including such loans acquired in purchase business
combinations. SOP 03-3 is effective for loans acquired in fiscal years beginning
after December 15, 2004. The Company is prospectively adopting SOP 03-03
effective for loans acquired beginning January 1, 2005.
In December 2004, FASB issued SFAS No. 123 (revised 2004), Share-Based
Payment, which is a revision of SFAS No. 123 and supersedes APB No. 25. SFAS No.
123(R) requires the Company to measure the cost of employee services received in
exchange for an award of equity instruments using a fair-value method, and
record such expense in its financial statements, for annual reporting periods
beginning after June 15, 2005. The revised Statement eliminates an entity's
ability to account for share-based compensation transactions using the intrinsic
value method of accounting in APB Opinion No. 25, Accounting for Stock Issued to
30
Employees, which was permitted under Statement 123, as originally issued. In
addition, the adoption of SFAS No. 123(R) will require additional accounting
related to the income tax effects and additional disclosure regarding the cash
flow effects resulting from share-based payment arrangements. This accounting
change is not expected to have a material effect on the consolidated financial
statements.
Earnings Analysis
- -----------------
Net earnings in 2005 were $5,728,000, a 22.2% increase from 2004
earnings of $4,688,000. Earnings for the year 2004 increased $547,000 or 13.2%
from year 2003 earnings of $4,141,000. The principal source of earnings is
interest income on loans. In the year 2003, the prime lending rate started at
4.25%, and ended at 4.00%. In 2004, the rate rose from 4.00% to 5.25%. The year
2005 started at 5.25%, and rose eight times, ending at 7.25%.
Basic earnings per share were $2.12 in 2005; $1.71 in 2004 and $1.48 in
2003. Diluted earnings per share were $2.08 in 2005; $1.67 in 2004; and $1.47 in
2003.
Net interest income for 2005 was $25,199,000, an increase of $3,686,000
or 17.1% from 2004. Net interest income was $21,513,000 in 2004, an increase of
$1,304,000 or 6.5% from 2003. Interest income was $30,732,000 in 2005, an
increase of $6,686,000 or 27.8% over 2004. Interest income was $24,046,000 in
2004, an increase of $1,179,000, or 5.2% over 2003. Average interest earning
assets in 2005 were $477,833,000, an increase of $59,510,000 or 14.2% from 2004.
In 2004, they were $418,323,000, an increase of $39,054,000, or 10.3% over 2003.
The yield on interest earning assets increased 68 basis points in 2005 compared
to 2004. The yield on interest earning assets declined 28 basis points in 2004
compared to 2003. The principal earning assets were loans, and their average
increased $43,822,000 in 2005 versus 2004, while their yield increased 72 basis
points. Average loans were $319,577,000 in 2004, an increase of $23,250,000 over
2003, while their yield declined 11 basis points.
Interest expense for 2005 was $5,533,000 and $2,533,000 in 2004, an
increase of $3,000,000 or 118.4%. Interest expense was $2,533,000 in 2004, a
decrease of $125,000 compared to 2003, or 4.7%. Average interest bearing
liabilities were $353,857,000 in 2005, and $295,062,000 in 2004, an increase of
$58,795,000 or 19.9%. They were $295,062,000 in 2004, and $264,905,000 in 2003,
an increase of $30,157,000 or 11.4%. The cost of these liabilities increased 70
basis points in 2005 compared to 2004, and declined 14 basis points in 2004
compared to 2003. The principal cost was in time deposits, which increased 97
basis points in 2005 compared to 2004, but decreased 38 basis points in 2004
compared to 2003.
Net Interest Income
- -------------------
Net interest income is the difference between interest yield generated
by earning assets and the interest expense associated with the funding of those
assets. Net interest income is affected by the interest rate earned or paid and
by volume changes in loans, investment securities, deposits and borrowed funds.
31
TABLE 1 Net Interest Income and Average Balances
------------------------------------------------------------------------------------------------
(In thousands)
Year ended December 31
2005 2004 2003
------------------------------ ------------------------------ ------------------------------
Interest Average Interest Average Interest Average
Average Income Yield Average Income Yield Average Income Yield
Balance (Expense) (Cost) Balance (Expense) (Cost) Balance (Expense) (Cost)
-------- -------- -------- -------- -------- -------- -------- -------- --------
INTEREST EARNING ASSETS
Loans, gross $363,399 $ 26,754 7.36% $319,577 $ 21,226 6.64% $296,327 $ 19,990 6.75%
Taxable Securities 60,408 2,173 3.60% 48,536 1,418 2.92% 40,221 1,446 3.60%
Nontaxable Securities 44,628 1,512 3.39% 36,293 1,250 3.44% 36,012 1,358 3.77%
Federal funds sold 9,398 293 3.12% 13,917 152 1.09% 6,709 73 1.09%
------------------- ------------------- -------------------
Total interest earning assets $477,833 $ 30,732 6.43% $418,323 $ 24,046 5.75% $379,269 $ 22,867 6.03%
------------------- ------------------- -------------------
NONINTEREST EARNING ASSETS
Cash and due from banks $ 19,758 $ 19,106 $ 18,069
Premises and equipment 11,896 13,320 10,916
Other assets 20,254 10,342 6,155
-------- -------- --------
Total noninterest earning
assets $ 51,908 $ 42,768 $ 35,140
-------- -------- --------
TOTAL ASSETS $529,741 $461,091 $414,409
======== ======== ========
INTEREST BEARING
LIABILITIES
Deposits:
Demand, interest bearing $ 57,478 $ (168) (0.29%) $ 56,561 $ (113) (0.20%) $ 51,981 $ (105) (0.20%)
Money Market 110,488 (1,888) (1.71%) 86,598 (757) (0.87%) 66,189 (571) (0.86%)
Savings 58,820 (181) (0.31%) 60,040 (161) (0.27%) 56,281 (183) (0.33%)
Time deposits 124,004 (3,203) (2.58%) 88,627 (1,429) (1.61%) 90,280 (1,797) (1.99%)
Fed funds purchased
and other borrowings 3,067 (93) (3.03%) 3,236 (73) (2.26%) 174 (2) (1.15%)
------------------- ------------------- -------------------
Total interest bearing
liabilities $353,857 $ (5,533) (1.56%) $295,062 $ (2,533) (0.86%) $264,905 $ (2,658) (1.00%)
------------------- ------------------- -------------------
NONINTEREST BEARING
LIABILITIES:
Demand deposits 116,331 107,758 92,609
Other liabilities 6,284 5,833 5,148
-------- -------- --------
Total noninterest bearing
liabilities $122,615 $113,591 $ 97,757
-------- -------- --------
Total liabilities $476,472 $408,653 $362,662
Stockholders' equity $ 53,269 $ 52,438 $ 51,747
-------- -------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $529,741 $461,091 $414,409
======== ======== ========
NET INTEREST INCOME
AND MARGIN ON TOTAL
EARNING ASSETS $ 25,199 5.27% $ 21,513 5.14% $ 20,209 5.33%
======== ======== ========
Interest income is reflected on an actual basis, not on a fully taxable
equivalent basis. Yields on gross loans were not adjusted for nonaccrual loans,
as these were considered not material for this calculation.
The following table analyzes the dollar amount of change in interest income and
expense and the changes in 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 changes in volume). In this table, the dollar change in rate/volume
is prorated to volume and rate proportionately.
32
TABLE 2 Rate/Volume Variance Analysis
---------------------------------------------------------------------------
(In thousands)
Year Ended December 31
------------------------------------ ------------------------------------
2005 Compared to 2004 2004 Compared to 2003
Increase (decrease) Increase (decrease)
Interest Interest
Income/ Variance Income/ Variance
Expense Attributable To Expense Attributable To
Variance Rate Volume Variance Rate Volume
---------- ---------- ---------- ---------- ---------- ----------
INTEREST EARNING ASSETS:
Loans $ 5,528 $ 2,302 $ 3,226 $ 1,236 $ (308) $ 1,544
Taxable Securities 755 408 347 (28) (327) 299
Nontaxable Securities 262 (25) 287 (108) (119) 11
Federal Funds sold 141 282 (141) 79 -- 79
---------- ---------- ---------- ---------- ---------- ----------
Total $ 6,686 $ 2,967 $ 3,719 $ 1,179 $ (754) $ 1,933
---------- ---------- ---------- ---------- ---------- ----------
INTEREST BEARING
LIABILITIES:
Demand deposits $ 55 $ 53 $ 2 $ 8 $ (1) $ (9)
Money market 1,131 723 408 186 8 178
Savings deposits 20 24 (4) (22) (32) 10
Time deposits 1,774 1,204 570 (368) (335) (33)
Federal funds purchased
and other borrowings 20 25 (5) 71 2 69
---------- ---------- ---------- ---------- ---------- ----------
Total $ 3,000 $ 2,029 $ 971 $ (125) $ (358) $ 233
---------- ---------- ---------- ---------- ---------- ----------
NET INTEREST INCOME $ 3,686 $ 938 $ 2,748 $ 1,304 $ (396) $ 1,700
========== ========== ========== ========== ========== ==========
In 2005, net interest income represented 86.77% of net revenue (net
interest income plus non-interest income), compared to 85.28% in 2004 and 75.16%
in 2003. The net interest margin on average earning assets was 5.27% in 2005
compared to 5.14% in 2004 and 5.33% in 2003. The average rate earned on interest
earning assets was 6.43% in 2005, up from 5.75% in 2004, and 6.03% in 2003. The
average cost for interest-bearing liabilities was 1.56% in 2005, compared to
0.86% in 2004 and 1.00% in 2003. The net effect of the above changes resulted in
a 13 basis point increase in net interest margin for 2005.
As mentioned before under the heading "Earnings Analysis", there were
declines in the prime lending rate during 2003, finally followed by increases in
2004 and 2005, as a result of action by the Federal Open Market Committee of the
Federal Reserve, which affected interest-bearing assets and interest-bearing
liabilities.
Yield on average loans was 7.36% in 2005, increasing from 6.64% in 2004
and 6.75% in 2003. Interest on average taxable securities was 3.60% in 2005,
increasing from 2.92% in 2004, but the same as 3.60% in 2003. Interest on
33
average nontaxable securities was 3.39% in 2005, decreasing from 3.44% in 2004
and 3.77% in 2003. Interest on average federal funds sold was 3.12% in 2005, an
increase from 1.09% in 2004 and 2003. Interest on average total interest earning
assets was 6.43% in 2005, 5.75% in 2004 and 6.03% in 2003. On the expense side,
interest on average interest bearing demand deposits was 0.29% in 2005, an
increase from 0.20% in 2004 and 2003 . Interest on average money market accounts
was 1.71% in 2005, increasing from 0.87% in 2004, and 0.86% in 2003. Interest on
average savings accounts was 0.31% in 2005, an increase from 0.27% in 2004, but
decreasing from 0.33% in 2003. Interest on average time deposits was 2.58% in
2005, an increase from 1.61% in 2004 and 1.99% in 2003. Interest on average
federal funds purchased and other borrowings was 3.03% in 2005, an increase from
2.26% in 2004 and 1.15% in 2003. Interest on average total interest bearing
liabilities was 1.56% in 2005, an increase from 0.86% in 2004 and 1.00% in 2003.
Allowance For Loan Losses
- -------------------------
The Bank has the responsibility of assessing the overall risks in its
loan 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 Bank's market area, and considering the Bank's historical loan loss
experience. The Bank is committed to maintaining adequate reserves, identifying
credit weaknesses by consistent review of loans, and maintaining the ratings and
changing those ratings in a timely manner as circumstances change.
Real estate loans outstanding increased by $47,380,000 in 2005 compared
to 2004. They increased by $40,845,000 in 2004 compared to 2003. The proportion
of the Allowance for Loan Losses attributable to real estate loans was
$3,373,000 in 2005 compared to $1,589,000 in 2004 and $1,428,000 in 2003. As a
percentage of total loans, the amount allocated to these loans was 78.5% in
2005,73.9% in 2004, and 67.5% in 2003.
The allowance for loan losses totaled $4,547,000, $3,334,000 and
$3,284,000 at December 31, 2005, 2004 and 2003, respectively. This represented
1.18%, 0.97% and 1.04% of outstanding loans on those respective dates. The
balances reflect an amount that, in management's judgment, is adequate to
provide for probable loan losses based on the considerations listed above.
During 2005, the provision for loan losses was $600,000, while write-offs were
$110,000. In 2004, the provision for loan losses was $480,000, while write-offs
totaled $431,000. In 2003, the provision was $780,000, and total write-offs were
$896,000.
34
TABLE 3 Allocation of the Allowance for Loan Losses
(In thousands)
2005 2004 2003 2002 2001
Percent Percent Percent Percent Percent
in each in each in each in each In each
category category category Category category
to total to total to total to total To total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Real Estate $ 3,373 78.5% $ 1,589 73.9% $ 1,428 67.5% $ 2,008 72.9% $ 1,912 74.1%
Construction 365 6.8% 618 8.4% 1,087 15.3% 989 11.4% 504 11.6%
Commercial 611 13.8% 340 17.0% 158 16.4% 221 14.7% 387 13.4%
Consumer 25 0.9% 19 0.7% 22 0.8% 43 1.0% 226 0.9%
Unfunded
commitments 173 -- 201 -- 129 -- 135 -- 514 --
Unallocated -- -- 567 -- 460 -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total $ 4,547 100.0% $ 3,334 100.0% $ 3,284 100.0% $ 3,396 100.0% $ 3,543 100.0%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Table 4 summarizes transactions in the allowance for loan losses and
details the charge-offs, recoveries and net loan losses by loan category for
each of the last five fiscal years ended December 31, 2005. The amount added to
the provision and charged to operating expenses for each period is based on the
risk profile of the loan portfolio.
Charge-offs between 2001 and 2002 were very low. However, there were
partial charge-offs for two loans secured by office buildings for $200,000 and
$539,000 respectively in 2003, which, when taken into consideration in the
evaluation of the adequacy of the allowance for loan losses, resulted in an
increase in the provision for probable loan losses to $780,000 in 2003.
35
TABLE 4 Allowance for Loan
Losses
Historical Analysis
--------------------------------------------------------------
(In thousands)
For the year ended December 31
2005 2004 2003 2002 2001
---------- ---------- ---------- ---------- ----------
Balance at Beginning of Period $ 3,334 $ 3,284 $ 3,396 $ 3,543 $ 3,332
Provision for Loan Losses 600 480 780 150 300
Charge-offs:
Real Estate (70) (383) (739) (59) --
Commercial (34) (31) (110) (216) (22)
Consumer (6) (17) (47) (30) (72)
---------- ---------- ---------- ---------- ----------
Total (110) (431) (896) (305) (94)
Recoveries:
Commercial 22 -- 2 2 --
Consumer 1 1 2 6 5
---------- ---------- ---------- ---------- ----------
Total 23 1 4 8 5
Net charge-offs (87) (430) (892) (297) (89)
Allowance acquired in business
combination 700
Balance at End of Period $ 4,547 $ 3,334 $ 3,284 $ 3,396 $ 3,543
Percentages
Allowance for Loan Losses/Total Loans 1.18% 0.97% 1.04% 1.18% 1.21%
Net charge-offs/Real Estate Loans 0.27% 1.32% 1.52% 0.18% --
Net charge-offs//Commercial Loans 0.02% 0.05% 0.21% 0.50% 0.06%
Net charge-offs/Consumer Loans 0.15% 0.62% 1.76% 0.81% 2.58%
Net charge-offs/Total Loans 0.02% 0.12% 0.28% 0.10% 0.03%
Allowance for Loan
Losses/Non-performing Loans 26,747.06% 119.16% 36.15% 157.15% 180.86%
Non-performing Assets
- ---------------------
Non-performing assets consist of nonaccrual loans, foreclosed assets,
and loans that are 90 days or more past due but are still accruing interest. The
accrual of interest on non-accrual loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. For the
year ended December 31, 2005, had non-accrual loans performed as agreed,
approximately $2,000 in interest would have been accrued.
At December 31, 2005, nonaccrual loans totaled only $17,000. At
December 31, 2004, nonaccrual loans totaled $2,798,000, of which a loan secured
by an office building located in the Silicon Valley community of Mountain View,
represented $2,679,000. During 2005, this loan was foreclosed and is currently
classified as Other Real Estate Owned, with a balance of $2,600,000.
Table 5 provides a summary of contractually past due loans for the most
recent five years. Nonperforming loans were less than 0.01% of total loans at
December 31, 2005, compared to 0.8% of total loans at the end of 2004.
Nonperforming loans were 2.9% of total loans at the end of 2003. Management
believes the current list of past due loans are collectible and does not
anticipate significant losses. There were no foreclosed assets as of the periods
indicated.
36
TABLE 5 Analysis of Nonperforming Assets
----------------------------------------------------
(In thousands)
Year ended December 31,
----------------------------------------------------
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
Accruing loans 90 days
or more $ -- $ -- $ -- $ -- $ --
Nonaccrual loans 17 2,798 9,085 2,161 1,959
-------- -------- -------- -------- --------
Total $ 17 $ 2,798 $ 9,085 $ 2,161 $ 1,959
======== ======== ======== ======== ========
There was no commitment to lend additional funds to any customer whose loan was
classified nonperforming at December 31, 2005, 2004 and 2003.
Noninterest Income
- ------------------
The following table sets forth the principal components of noninterest
income:
TABLE 6 Noninterest Income
------------------------------
(Dollars in thousands)
Years Ended December 31,
------------------------------
2005 2004 2003
-------- -------- --------
Service charges $ 2,305 $ 2,500 $ 2,662
Credit card fees 856 886 946
Gain (loss) on write-down and sales of
investment securities (101) (31) 165
Other income 781 432 248
-------- -------- --------
Total noninterest income $ 3,841 $ 3,787 $ 4,021
======== ======== ========
Noninterest income for the year ended December 31, 2005 was $3,841,000 compared
to $3,787,000 for 2004 and $4,021,000 for 2003. Service charges and credit card
fees represented the major portion of noninterest income. In October of 2002,
service charges per incident, in general, were increased, including charges for
insufficient funds. Since the increase, fewer waivers have been allowed. The
increase in these charges discouraged those customers in the habit of using
insufficient funds, and other service charge originating activities also
declined. In 2005 and 2004, the Bank recognized impairment charges of $116,000
and $27,000, respectively, representing the other than temporary impaired value
of one security investment. The principal source of Other Income was Tax Free
Income on Officers' Life Insurance, which was $310,000, $269,000 and $148,000 in
the years 2005, 2004 and 2003, which reflected an increased investment in this
insurance.
Noninterest Expenses
- --------------------
The following table sets forth the various components of noninterest expense:
37
TABLE 7 Noninterest Expenses
-------------------------------
(Dollars in thousands)
Years Ended December 31,
-------------------------------
2005 2004 2003
-------- -------- --------
Salaries and employee
benefits $ 11,344 $ 10,521 $ 10,576
Occupancy expense 1,444 1,288 1,240
Equipment expense 1,624 1,662 1,582
Advertising expense 710 472 218
Data processing expense 416 344 394
Professional fees 952 1,086 914
Director expense 180 180 152
Surety insurance 555 479 493
Telephone, postage,
supplies 939 1,103 898
Bankcard expenses 802 803 818
Other 1,317 617 633
-------- -------- --------
Total noninterest
expense $ 20,283 $ 18,555 $ 17,918
======== ======== ========
Noninterest expenses for the year ended December 31, 2005 were
$20,283,000, an increase of $1,728,000 or 9.3% compared to 2004. For 2004, they
were $18,555,000, an increase of $637,000 or 3.6% over 2003. In 2005, Salaries
and employee benefits were $11,344,000 in 2005 compared to $10,521,000 in 2004.
The principal single item causing the increase was related to the acquisition of
two branches in San Francisco, which represented $318,000, and the remainder was
related to merit increases and promotional rewards. 2004 compared to 2003 showed
no significant change. Occupancy expense increased by $156,000 in 2005 over
2004. The addition of the two former Sequoia branches accounted for $210,000,
with some reductions, including the discontinuation of the Flower Mart facility
in San Francisco. Advertising expense continued to increase from $218,000 in
2003 to $710,000. In 2005, newspaper and community advertising represented
$280,000; in 2004 $103,000, and in 2003 it was $30,000. Contributions, public
relations/fund raising, marketing materials and giveaway items were $381,000 in
2005; $291,000 in 2004, and $112,000 in 2003. All other expense was $1,317,000
in 2005, $617,000 in 2004 and $633,000 in 2003. Of the $700,000 increase in
other expense during 2005, $339,000 was from acquisition related expense;
$106,000 deposit intangible amortization; $61,000 in Other Real Estate Owned
expense; and an impairment write-down of an equity security for $75,000. The
remainder is in numerous smaller accounts. 2004 and 2003 did not change
materially year over year.
Balance Sheet Analysis
- ----------------------
Total assets of the Company were $569,141,000 at December 31, 2005, an
increase of 16.1% over 2004. Total assets were $490,054,000 at December 31,
2004, an increase of 14.1% over 2003. Assets averaged $529.7 million in 2005,
compared to $461.1 million in 2004 and $414.4 million in 2003. Average earning
assets increased from $379.3 million in 2003 to $418.3 million in 2004 and
$477.8 million in 2005. Average earning assets represented 91.5% of total
average assets in 2003, 90.7% in 2004, and 90.2% in 2005. Interest-bearing
liabilities averaged $264.9 million in 2003, $295.1 million in 2004, and $353.9
million in 2005.
38
Loans
- -----
The loan portfolio is the principal earning asset of the Bank. Loans
outstanding at December 31, 2005 increased by $40.4 million or 11.7% compared to
December 31, 2004, while loans outstanding December 31, 2004 increased by $28.0
million or 8.9% compared to December 31, 2003.
Real Estate loans increased by $47.4 million or 18.5% in 2005 compared
to 2004, and Real Estate loans increased by $40.8 million or 19.0% in 2004
compared to 2003. Construction loans decreased by $2.8 million or 9.5% in 2005
compared to 2004, and decreased by $19.6 million or 40.3% in 2004 compared to
2003. Commercial loans decreased by $5.8 million or 9.8% in 2005 compared to
2004, and increased by $6.6 million or 12.6% in 2004 compared to 2003. Consumer
loans represent a nominal portion of total loans. They increased $0.8 million or
32.1% in 2005 compared to 2004, and increased by $0.04 million or 1.5% in 2004
compared to 2003.
Table 8 presents a detailed analysis of loans outstanding at December
31, 2001 through December 31, 2005.
TABLE 8 Loan Portfolio
--------------------------------------------------------------
(in thousands)
December 31,
--------------------------------------------------------------
2005 2004 2003 2002 2001
---------- ---------- ---------- ---------- ----------
Real Estate loans $ 302,813 $ 255,433 $ 214,588 $ 211,473 $ 217,650
Construction loans 26,243 28,997 48,610 32,947 34,016
Commercial loans 53,070 58,849 52,248 42,549 39,195
Consumer loans 3,420 2,589 2,551 2,956 2,600
---------- ---------- ---------- ---------- ----------
Sub total 385,546 345,868 317,997 289,925 293,461
Net deferred
loan fees (948) (1,628) (1,784) (1,640) (1,851)
---------- ---------- ---------- ---------- ----------
Total $ 384,598 $ 344,240 $ 316,213 $ 288,285 $ 291,610
========== ========== ========== ========== ==========
The following table shows the Bank's loan maturities and sensitivities
to changes in interest rates as of December 31, 2005.
Maturing
Maturing After One Maturing
Within One But Within After
Year Five Years Five Years Total
---------- ---------- ---------- ----------
Real Estate loans $ 246,114 $ 23,888 $ 32,811 $ 302,813
Construction loans 21,329 2,070 2,844 26,243
Commercial loans 43,133 4,187 5,750 53,070
Consumer loans 2,780 270 370 3,420
---------- ---------- ---------- ----------
Sub total 313,356 30,415 41,775 385,546
Net deferred loan fees (770) (75) (103) (948)
---------- ---------- ---------- ----------
Total $ 312,586 $ 30,340 $ 41,672 $ 384,598
========== ========== ========== ==========
With predetermined
interest rates $ 59,070 $ 5,733 $ 7,875 $ 72,678
With floating interest
rates $ 253,516 $ 24,607 $ 33,797 $ 311,920
---------- ---------- ---------- ----------
Total $ 312,586 $ 30,340 $ 41,672 $ 384,598
========== ========== ========== ==========
39
Investment Portfolio
- --------------------
Investments at December 31, 2005 were $113,463,000, an increase of
$10,640,000 or 10.3% over 2004. Investments at December 31, 2004 were
$102,823,000, an increase of $39,131,000 or 61.4% over 2003. The increase in
investments in 2005 was funded by increases in total deposits.
Available funds are first used for Loans, then Investments, and the
remainder is sold as Federal Funds. The primary source of funds is the deposit
base. If more funds are needed, the Investment Portfolio maturity may be used,
as well as sales and calls, which accounts for the volume variances in
Investments. The Bank's investment portfolio is concentrated in U. S. Government
Agencies and in obligations of States and their political subdivisions. The Bank
believes this provides for an appropriate liquidity level.
The following table sets forth the maturity distribution and interest rate
sensitivity of investment securities at December 31, 2005:
After After
One Five
Due Year Years Due
In One Through Through After Maturity
Year Five Ten Ten Fair In Average
Or Less Yield Years Yield Years Yield Years Yield Value Years Yield
-------- ------ -------- ------ -------- ------ -------- ------ -------- -------- --------
(Dollars in thousands)
U. S. Government
Agencies $ 29,641 4.42% $ 18,719 4.02% $ -- -- $ 1,766 5.49% $ 50,126 2.55 4.30%
States &
Political
Subdivisions 7,422 2.94% 23,403 3.51% 24,423 3.63% 780 3.76% 56,028 4.52 3.49%
Corporate Debt 4,853 3.64% 1,011 2.96% -- -- -- -- 5,864 0.82 3.52%
Other Securities -- -- -- -- 1,445 7.66% -- -- 1,445 9.83 7.66%
Total $ 41,916 4.07% $ 43,133 3.72% $ 25,868 3.85% $ 2,546 4.94% $113,463 3.52 3.91%
The following table shows the securities portfolio mix at December 31, 2005,
2004 and 2003.
Years Ended December 31,
2005 2004 2003
---------------------------------------------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
U. S. Government Agencies $ 50,571 50,126 54,779 54,697 23,688 23,855
States & Political Subdivisions 56,208 56,028 41,446 42,515 32,340 33,908
Corporate Debt 5,918 5,864 3,977 3,950 4,003 4,031
Other Securities 1,445 1,445 1,661 1,661 1,897 1,898
-------- -------- -------- -------- -------- --------
Total $114,142 113,463 101,863 102,823 61,928 63,692
-------- -------- -------- -------- -------- --------
Deposits
- --------
The increase in earning assets in 2005 was funded by the increase in
the deposit base. During 2005, average deposits were $467,121,000, an increase
of $67,537,000 or 16.9% over 2004. In 2004, average deposits were $399,584,000
an increase of $42,244,000 or 11.8% over 2003.. In 2005, average
interest-bearing deposits were $350,790,000, an increase of $58,964,000 or 20.2%
40
over 2004. In 2004, average interest-bearing deposits were $291,826,000, an
increase of $27,095,000 or 10.2% compared to 2003.
The series of declines in the prime rate during 2003 without any
increases in the same period resulted in decreased costs of all types of
interest-bearing deposits in that period. The prime lending rate rose from 4% at
the beginning of 2004 to 7.25% at the end of 2005. Time deposits lagged the
prime rate changes because their rates changed only as certificates matured or
new certificates were issued. Thus, interest-bearing demand costs averaged 0.3%
in 2005, and 0.2% in 2004 and 2003. Money market deposit costs averaged 1.7% in
2005, and 0.9% in 2004 and 2003. Savings rates averaged 0.3% in 2005, 2004 and
2003. Finally, average interest on time certificates of deposit of $100,000 or
more was 2.7% in 2005, 1.5% in 2004 and 1.7% in 2003. On certificates under
$100,000, average rates were 2.5% in 2005, 1.7% in 2004 and 2.2% in 2003.
The following table summarizes the distribution of average deposits and
the average rates paid for them in the periods indicated:
Average Deposits and Average Rates paid for the period ending December 31,
2005 2004 2003
--------------------------------- --------------------------------- ---------------------------------
% of % of % of
Average Average Total Average Average Total Average Average Total
Balance Rate Deposits Balance Rate Deposits Balance Rate Deposits
--------------------------------- --------------------------------- ---------------------------------
(in thousands)
Deposits:
Interest-bearing
demand $ 57,478 0.3% 12.3% $ 56,561 0.2% 14.1% $ 51,981 0.2% 14.6%
Money market 110,488 1.7% 23.7 86,598 0.9% 21.7 66,189 0.9% 18.5
Savings 58,820 0.3% 12.6 60,040 0.3% 15.0 56,281 0.3% 15.7
Time deposits $100,000
or more 59,447 2.7% 12.7 38,764 1.5% 9.7 38,593 1.7% 10.8
Time deposits under
$100,000 64,557 2.5% 13.8 49,863 1.7% 12.5 51,687 2.2% 14.5
--------------------------------- --------------------------------- ---------------------------------
Total interest
bearing deposits $ 350,790 1.6% 75.1 $ 291,826 0.8% 73.0 264,731 1.6% 74.1
Demand deposits 116,331 0.0% 24.9 107,758 0.0% 27.0 92,609 0.0% 25.9
--------------------------------- --------------------------------- ---------------------------------
Total deposits $ 467,121 1.2% 100.0% $ 399,584 0.6% 100.0% $ 357,340 1.2% 100.0%
================================= ================================= =================================
The following table indicates the maturity schedule of time deposits of
$100,000 or more:
Analysis of Time Deposits of $100,000 or more at December 31, 2005
(in thousands)
Total Over Over
Deposits Three Three Six To Over
$100,000 Months To Six Twelve Twelve
or More Or Less Months Months Months
---------- --------- --------- ---------- --------
$ 77,572 $ 28,506 $ 27,375 $ 14,871 $ 6,820
Capital
- -------
At December 31, 2005, shareholders' equity of the Company was
$55,243,000, an increase of $2,614,000 or 5.0%; at December 31, 2004
shareholders' equity was $52,629,000, an increase of $642,000 or 1.2% over 2003.
The increases were primarily attributable to retention of net income after
payment of cash dividends of $1,542,000 in 2005, $1,526,000 in 2004, and
$1,475,000 in 2003.
41
In 1989, the Federal Deposit Insurance Corporation (FDIC) established
risk-based capital guidelines requiring banks to maintain certain ratios of
"qualifying capital" to "risk-weighted assets". Under the guidelines, qualifying
capital is classified into two tiers, referred to as Tier 1 (core) and Tier 2
(supplementary) capital. Currently, the Company's Tier 1 capital consists of
common shareholders' equity, though other instruments such as certain types of
preferred stock can also be included in Tier 1 capital. Tier 2 capital consists
of eligible reserves for possible loan losses and qualifying subordinated notes
and debentures. Total capital is the sum of Tier 1 plus Tier 2 capital.
Risk-weighted assets are calculated by applying risk percentages specified by
the FDIC to categories of both balance sheet assets and off-balance sheet
obligations.
At year-end 1990, the FDIC also adopted a leverage ratio requirement.
This ratio supplements the risk-based capital ratios and is defined as Tier 1
capital divided by quarterly average assets during the reporting period. The
requirement established a minimum leverage ratio of 3.0% for the highest rated
banks and ratios of 100 to 200 basis points higher for most banks. Furthermore,
in 1993, the FDIC began assessing risk-based deposit insurance assessments based
on financial institutions' capital resources and "management strength", as
mandated by the FDIC Improvement Act of 1991. To qualify for the lowest
insurance premiums as indicated in the following table, "well-capitalized"
financial institutions must maintain risk-based Tier 1 and total capital ratios
of at least 6.0% and 10.0% respectively. "Well-capitalized financial
institutions must also maintain a leverage ratio equal to or exceeding 5.0%.
The following table shows the risk-based capital ratios and the leverage ratios
at December 31, 2005, 2004 and 2003 for the Bank.
Minimum "Well
Risk-Based Capitalized"
Capital Ratios 2005 2004 2003 Requirements
-------------- ---------------------------
Tier 1 Capital 10.64% 12.69% 13.29% > 6.00%
-
Total Capital 11.56% 13.50% 14.15% > 10.00%
-
Leverage Ratios 9.47% 10.71% 12.06% > 5.00%
-
Liquidity
- ---------
The Company's primary source of liquidity on a stand-alone basis is
dividends from the Bank. The payment of dividends by the Bank is subject to
regulatory restrictions. Liquidity is a measure of the Company's ability to
convert assets into cash with minimum loss. Liquidity consists of cash and due
from other banks accounts, including time deposits, Federal Funds sold, and
Securities Available-for-Sale . The Company's policy is to maintain a liquidity
ratio of 20% or greater of total assets. As of December 31, 2005, the Company's
primary liquidity was 26.14% compared to 24.47% in 2004 and 21.97% in 2003. The
ratio increased due to increases in Total Liquid Assets, which were $148,761,000
in 2005, $119,907,000 in 2004 and $94,336,000 in 2003. The objective of
liquidity management is to ensure that the Company has funds available to meet
all present and future financial obligations and to take advantage of business
opportunities as they occur. Financial obligations arise from withdrawals of
deposits, repayment on maturity of purchased funds, extension of loans or other
forms of credit, payment of operating expenses and payments of dividends.
42
Core deposits, which consist of all deposits other than time deposits,
have provided the Company with a sizable source of relatively stable low-cost
funds. The Company's average core deposits funded 64.8% of average total assets
of $529,741,000 for the year ended December 31, 2005; funded 67.4% of average
total assets of $461,091,000 for the year ended December 31, 2004, and funded
64.4% of average total assets of $414,409,000 for the year ended December 31,
2003.
As of December 31, 2005, the Company had contractual obligations and
other commercial commitments totaling approximately $99,204,000. The following
table sets forth the Company's contractual obligations and other commercial
commitments as of December 31, 2005. These obligations and commitments will be
funded primarily by loan repayments and the Company's liquidity sources, such as
cash and due from other banks, federal funds sold, securities available for
sale, as well as time deposits.
Payments Due by Period
(In thousands)
Contractual 1 year Over 1 to Over 3 to Over
Obligations Total or less 3 years 5 years 5 years
---------- ---------- ---------- ---------- ----------
Operating Leases $ 1,503 $ 491 $ 849 $ 163 $ --
Time deposits 140,833 120,412 20,141
Other Long-Term
Obligations -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total Contractual
Cash Obligations $ 142,336 $ 120,903 $ 20,990 $ 163 $ --
========== ========== ========== ========== ==========
Amount of Commitment
Expirations Per Period
(In thousands)
Total
Other Commercial Amounts 1 year Over 1 to Over 3 to Over
Commitments Committed or less 3 years 5 years 5 years
---------- ---------- ---------- ---------- ----------
Lines of Credit $ 53,326 $ 41,672 $ 1,864 $ 7,332 $ 2,458
Standby Letters of
Credit 7,768 7,768 -- -- --
Guarantees -- -- -- -- --
Other Commercial
Commitments 36,607 25,422 11,185 -- --
---------- ---------- ---------- ---------- ----------
Total Commercial
Commitments $ 97,701 $ 74,862 $ 13,049 $ 7,332 $ 2,458
========== ========== ========== ========== ==========
The largest component of the Company's earnings is net interest income,
which can fluctuate widely when significant interest rate movements occur. The
prime lending rate went from 4.25% at the beginning of 2003 to 5.25% at the end
of 2004, and 7.25% at the end of 2005. The Company's management is responsible
for minimizing the Bank's exposure to interest rate risk and assuring an
adequate level of liquidity. This is accomplished by developing objectives,
goals and strategies designed to enhance profitability and performance. Ongoing
management of the Company's interest rate sensitivity limits interest rate risk
by controlling the mix and maturity of assets and liabilities. Management
regularly reviews the Company's position and evaluates alternative sources and
uses of funds as well as changes in external factors. Various methods are used
to achieve and maintain the desired rate sensitivity position including the sale
or purchase of assets and product pricing.
43
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 provided by the Company's ability to attract deposits. The primary source of
liability liquidity is the Bank's customer base, which provides core deposit
growth. The overall liquidity position of the Company is closely monitored and
evaluated regularly. The Company has federal fund borrowing facilities for a
total of $50,000,000, a Federal Home Loan Bank line of up to 25% of total
assets, and a Federal Reserve Bank facility. Management believes the Company's
liquidity sources at December 31, 2005 are adequate to meet its operating needs
in 2006 and into the foreseeable future.
Effect of Changing Prices
- -------------------------
The results of operations and financial conditions presented in this
report are based on historical cost information and are not adjusted for the
effects of inflation.
Since the assets and liabilities of banks are primarily monetary in
nature (payable in fixed, determinable amounts), the performance of the Company
is affected more by changes in interest rates than by inflation. Interest rates
generally increase as the rate of inflation increases, but the magnitude of the
change in rates may not be the same.
The effect of inflation on banks is normally not as significant as its
influence on those businesses that have large investments in plant and
inventories. During periods of high inflation, there are normally corresponding
increases in the money supply, and banks will normally experience above average
growth in assets, loans and deposits. Also, increases in the price of goods and
services will result in increased operating expenses.
The following table includes key ratios, including returns on average
assets and equity.
Return on Equity and Assets
(Key financial ratios are
computed on average balances)
Year Ended December 31,
2005 2004 2003
----------- ---------- -----------
Return on average
assets 1.08% 1.02% 1.00%
Return on average
equity 10.75% 8.94% 8.00%
Dividend payout
ratio 26.92% 32.54% 35.63%
Average equity to
assets ratio 10.06% 11.37% 12.49%
44
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
Interest Rate Risk
- ------------------
Closely related to the concept of liquidity is the concept of interest
rate sensitivity (i. e., the extent to which assets and liabilities are
sensitive to changes in interest rates). Interest rate sensitivity is often
measured by the extent to which mismatches or "gaps" occur in the repricing of
assets and liabilities within a given time period. Gap analysis is used to
quantify such mismatches. A "positive" gap results when the amount of earning
assets repricing within a given time period exceeds the amount of
interest-bearing liabilities repricing within that time period. A "negative" gap
results when the amount of interest-bearing liabilities repricing within a given
time period exceeds the amount of earning assets repricing within such time
period.
In general, a financial institution with a positive gap in relevant
time periods will benefit from an increase in market interest rates and will
experience erosion in net interest income if such rates fall. Likewise, a
financial institution with a negative gap in relevant time periods will normally
benefit from a decrease in market interest rates and will be adversely affected
by an increase in rates. By maintaining a balanced interest rate sensitivity
position, where interest rate sensitive assets roughly equal interest sensitive
liabilities in relevant time periods, interest rate risk can be limited.
As a financial institution, the Company's potential interest rate
volatility is a primary component of its market risk. Fluctuations in interest
rates will ultimately impact the level of income and expense recorded on a large
portion of the Company's assets and liabilities, and the market value of all
interest-earning assets, other than those that possess a short-term maturity.
Based upon the nature of the Company's operations, the Company is not subject to
foreign currency or commodity price risk. The Company does not own any trading
assets and does not have any hedging transactions in place, such as interest
rate swaps and caps.
The Company's Board of Directors has adopted an Asset/Liability policy
designed to stabilize net interest income and preserve capital over a broad
range of interest rate movements. This policy outlines guidelines and ratios
dealing with, among others, liquidity, volatile liability dependence, investment
portfolio composition, loan portfolio composition, loan-to-deposit ratio and gap
analysis ratio. The Board of Directors monitors the Company's performance as
compared to Asset/Liability Policy. In addition, to effectively administer the
Asset/Liability Policy and to monitor exposure to fluctuations in interest
rates, the Company maintains an Asset/Liability Committee, consisting of the
Chief Executive Officer, Chief Financial Officer, Chief Lending Officer, Branch
Administrator, and Controller. This committee meets monthly to review the
Company's lending and deposit-gathering activities, to review competitive
interest rates, to develop strategies to implement the Asset/Liability Policy
and to respond to market conditions.
The Company monitors and controls interest rate risk through a variety
of techniques, including use of traditional interest rate sensitivity analysis
(also known as "gap analysis") and an interest rate risk management model. With
the interest rate risk management model, the Company projects future net
45
interest income, and then estimates the effect of various changes in interest
rates and balance sheet growth rates on that projected net interest income. The
Company also uses the interest rate risk management model to calculate the
change in net portfolio value over a range of interest rate change scenarios.
Traditional gap analysis involves arranging the Company's interest-earning
assets and interest-bearing liabilities by repricing periods and then computing
the difference (or "interest rate sensitivity gap") between the assets and
liabilities that are estimated to reprice during each time period and
cumulatively through the end of each time period.
Both interest rate sensitivity modeling and gap analysis are done at a
specific point in time and involve a variety of significant estimates and
assumptions. Interest rate sensitivity modeling requires, among other things,
estimates of how much and when yields and costs on individual categories of
interest-earning assets and interest-bearing liabilities will respond to general
changes in market rates, future cash flows and discount rates.
Gap analysis requires estimates as to when individual categories of
interest-sensitive assets and liabilities will reprice, and assumes that assets
and liabilities assigned to the same repricing period will reprice at the same
time and in the same amount. Gap analysis does not account for the fact that
repricing of assets and liabilities is discretionary and subject to competitive
and other pressures.
The following table sets forth the estimated maturity/repricing
structure of the Company's interest-bearing assets and interest-bearing
liabilities at December 31, 2005. Except as stated below, the amounts of assets
or liabilities shown which reprice or mature during a particular period were
determined in accordance with the contractual terms of each asset or liability.
The majority of interest-bearing demand deposits and savings deposits are
assumed to be "core" deposits, or deposits that will remain at the Company
regardless of market interest rates. The table does not assume any prepayment of
fixed-rate loans.
46
RATE SENSITIVE GAP ANALYSIS
As of December 31, 2005
------------------------------------------------------------------
Maturing or repricing
------------------------------------------------------------------
Three Over Three Over One Over Not
Months To Twelve Year Through Five Rate-
Or Less Months Five Years Years Sensitive Total
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Interest earning assets:
Federal funds sold $ 16,230 $ -- $ -- $ -- $ -- $ 16,230
Securities 6,257 35,659 43,132 28,415 -- 113,463
Loans 289,090 23,304 30,413 41,774 17 384,598
---------- ---------- ---------- ---------- ---------- ----------
Total interest earning assets 311,577 58,963 73,545 70,189 17 514,291
---------- ---------- ---------- ---------- ---------- ----------
Cash and due from banks -- -- -- -- 19,068 19,068
Allowance for loan losses -- -- -- -- (4,547) (4,547)
Other assets -- -- -- -- 40,329 40,329
---------- ---------- ---------- ---------- ---------- ----------
Total assets $ 311,577 $ 58,963 $ 73,545 $ 70,189 $ 54,867 $ 569,141
========== ========== ========== ========== ========== ==========
Interest bearing liabilities:
Demand, interest bearing $ 62,581 $ -- $ -- $ -- $ -- $ 62,581
Savings and money market 180,489 -- -- -- -- 180,489
Time deposits 48,106 72,306 20,421 -- -- 140,833
---------- ---------- ---------- ---------- ---------- ----------
Total interest bearing liabilities 291,176 72,306 20,421 -- -- 383,903
---------- ---------- ---------- ---------- ---------- ----------
Noninterest demand deposits -- -- -- -- 123,641 123,641
Federal funds purchased -- -- -- -- -- --
Other liabilities -- -- -- -- 6,354 6,354
Stockholders' equity -- -- -- -- 55,243 55,243
---------- ---------- ---------- ---------- ---------- ----------
Total liabilities and
Stockholders' equity $ 291,176 $ 72,306 $ 20,421 $ -- $ 185,238 $ 569,141
========== ========== ========== ========== ========== ==========
Interest rate sensitivity GAP $ 20,401 ($ 13,343) $ 53,124 $ 70,189 ($ 130,371) $ --
========== ========== ========== ========== ========== ==========
Cumulative interest rate
sensitivity GAP $ 20,401 $ 7,058 $ 60,182 $ 130,371 $ -- $ --
Cumulative interest rate
sensitivity GAP ratio 6.55% 1.90% 13.55% 25.35% -- --
Changes in estimates and assumptions made for interest rate sensitivity
modeling and gap analysis could have a significant impact on projected results
and conclusions. Therefore, these techniques may not accurately reflect the
impact of general interest rate movements on the Company's net interest income
or net portfolio value.
Because of the limitations in the gap analysis discussed above, members
of the Company's Asset/Liability Management Committee believe that the interest
sensitivity modeling more accurately reflects the effects and exposure to
changes in interest rates. Net interest income simulation considers the relative
sensitivities of the balance sheet, including the effect of interest rate caps
on adjustable rate mortgages and the relatively stable aspects of core deposits.
As such, net interest income simulation is designed to address the probability
of interest rate changes and behavioral response of the balance sheet to those
changes. Market Value of Portfolio Equity represents the fair value of the net
present value of assets, liabilities and off-balance sheet items. The starting
point (or "base case") for the following table is the Company's net portfolio at
December 31, 2005, using current discount rates, and an estimate of net interest
income for 2005 assuming that both interest rates and the Company's
interest-sensitive assets and liabilities remain at December 31, 2005 levels.
The "rate shock" information in the table shows estimates of net portfolio value
47
at December 31, 2005 and net interest income for 2005 assuming fluctuations or
"rate shocks" of minus 100 and 200 basis points and plus 100 and 200 basis
points. Rate shocks assume that current interest rates change immediately. The
information set forth in the following table is based on significant estimates
and assumptions, and constitutes a forward-looking statement within the meaning
of that term set forth in Rule 173 of the Securities Act of 1933 and Rule 3-6 of
the Securities Exchange Act of 1934.
Market Risk in Securities
(Amount in thousands) Interest Rate Shock
At December 31, 2005
Available for Sale
securities
Rates Decline Rates Increase
------------------------ ------------------------
Rate change (2%) (1%) Current +1% +2%
Unrealized gain (loss) $ 1,948 $ 634 $ (679) $ (2,764) $ (4,848)
Change from current $ 2,627 $ 1,313 $ (3,443) $ (5,527)
Market Risk on Net Interest Income
(Amounts in thousands) At December 31, 2005
Rates Decline Rates Increase
------------------------ ------------------------
Rate change (2%) (1%) Current +1% +2%
Net interest income $ 21,682 $ 23,444 $ 25,199 $ 26,715 $ 28,231
Change from current $ (3,517) $ (1,755) $ 1,516 $ 3,032
48
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------
INDEX TO FINANCIAL STATEMENTS Page
----
Report of Independent Registered Public Accounting Firms.................. 50
Consolidated Balance Sheets, December 31, 2005 and 2004................... 52
Consolidated Statements of Earnings for the years ended
December 31, 2005, 2004 and 2003.......................................... 53
Consolidated Statements of Stockholders' Equity and Comprehensive
Income for the years ended December 31, 2005, 2004 and 2003............... 54
Consolidated Statements of Cash Flows for the years ended
December 31, 2005, 2004 and 2003.......................................... 55
Notes to Consolidated Financial Statements................................ 56
49
[GRAPHIC LOGO OMITTED]
MOSS-ADAMS LLP
- -------------------------------------------------------------------------------
CERTIFIED PUBLIC ACCOUNTANTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Directors
FNB Bancorp
We have audited the accompanying consolidated balance sheet of FNB Bancorp and
subsidiary (the "Company") as of December 31, 2005 and the related consolidated
statements of earnings, stockholders' equity and comprehensive income and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FNB Bancorp and subsidiary as
of December 31, 2005 and the results of their operations and their cash flows
for the year ended December 31, 2005 in conformity with accounting principles
generally accepted in the United States of America.
/s/ Moss Adams LLP
- ---------------------------
Stockton, California
March 28, 2006
50
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
FNB Bancorp:
We have audited the accompanying consolidated balance sheet of FNB Bancorp and
subsidiary (the Company) as of December 31, 2004, and the related consolidated
statements of earnings, stockholders' equity and comprehensive income, and cash
flows for each of the years in the two-year period ending December 31, 2004.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2004, and the results of their operations and their cash flows for
each of the years in the two-year period ending December 31, 2004, in conformity
with U.S. generally accepted accounting principles.
/s/ KPMG LLP
- ---------------------------
San Francisco, California
March 3, 2005
51
FNB BANCORP AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2005 and 2004
Assets 2005 2004
------------ ------------
Cash and due from banks 19,068,000 17,084,000
Federal funds sold 16,230,000 --
------------ ------------
Cash and cash equivalents 35,298,000 17,084,000
Securities available-for-sale 113,463,000 102,823,000
Loans, net 380,051,000 340,906,000
Bank premises, equipment, and leasehold improvements 12,028,000 11,614,000
Other real estate owned 2,600,000 --
Goodwill 1,841,000 --
Accrued interest receivable and other assets 23,860,000 17,627,000
------------ ------------
Total Assets 569,141,000 490,054,000
============ ============
Liabilities and stockholders' equity
Deposits:
Demand, noninterest bearing 123,641,000 109,758,000
Demand, interest bearing 62,581,000 51,818,000
Savings 180,489,000 160,062,000
Time 140,833,000 91,615,000
------------ ------------
Total deposits 507,544,000 413,253,000
Federal funds purchased -- 19,172,000
Accrued expenses and other liabilities 6,354,000 5,000,000
------------ ------------
Total liabilities 513,898,000 437,425,000
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock, no par value; authorized 10,000,000 shares;
issued and outstanding 2,700,000 and 2,586,000 shares
on December 31, 2005 and 2004, respectively 34,793,000 31,365,000
Additional paid-in capital 19,000 9,000
Retained earnings 20,832,000 20,689,000
Accumulated other comprehensive income (401,000) 566,000
------------ ------------
Total stockholders' equity 55,243,000 52,629,000
------------ ------------
Total liabilities and stockholders' equity 569,141,000 490,054,000
============ ============
See accompanying notes to consolidated financial statements.
52
FNB BANCORP AND SUBSIDIARY
Consolidated Statements of Earnings
Years ended December 31, 2005, 2004 and 2003
2005 2004 2003
------------ ------------ ------------
Interest income:
Interest and fees on loans $ 26,754,000 21,226,000 19,990,000
Interest and dividends on securities 2,173,000 1,418,000 1,446,000
Interest on tax-exempt securities 1,512,000 1,250,000 1,358,000
Federal funds sold 293,000 152,000 73,000
------------ ------------ ------------
Total interest income 30,732,000 24,046,000 22,867,000
Interest expense:
Interest on deposits 5,440,000 2,460,000 2,656,000
Interest expense on other borrowings 93,000 73,000 2,000
------------ ------------ ------------
Total interest expense 5,533,000 2,533,000 2,658,000
------------ ------------ ------------
Net interest income 25,199,000 21,513,000 20,209,000
Provision for loan losses 600,000 480,000 780,000
------------ ------------ ------------
Net interest income after provision
for loan losses 24,599,000 21,033,000 19,429,000
------------ ------------ ------------
Noninterest income:
Service charges 2,305,000 2,500,000 2,662,000
Credit card fees 856,000 886,000 946,000
Gain (loss) on impairment and sale of investment securities (101,000) (31,000) 165,000
Other 781,000 432,000 253,000
------------ ------------ ------------
Total noninterest income 3,841,000 3,787,000 4,026,000
------------ ------------ ------------
Noninterest expense:
Salaries and employee benefits 11,344,000 10,521,000 10,576,000
Occupancy expense 1,444,000 1,288,000 1,240,000
Equipment expense 1,624,000 1,662,000 1,582,000
Advertising expense 710,000 472,000 218,000
Data processing expense 416,000 344,000 394,000
Professional fees 952,000 1,086,000 914,000
Director expense 180,000 180,000 152,000
Surety insurance 555,000 479,000 493,000
Telephone, postage, supplies 939,000 1,103,000 898,000
Bankcard expenses 802,000 803,000 818,000
Other 1,317,000 617,000 633,000
------------ ------------ ------------
Total noninterest expense 20,283,000 18,555,000 17,918,000
------------ ------------ ------------
Earnings before income tax expense 8,157,000 6,265,000 5,537,000
Income tax expense 2,429,000 1,577,000 1,396,000
------------ ------------ ------------
Net earnings $ 5,728,000 4,688,000 4,141,000
============ ============ ============
Earnings per share data:
Basic $ 2.12 $ 1.71 $ 1.48
Diluted $ 2.08 $ 1.67 $ 1.47
Weighted average shares outstanding:
Basic weighted average shares outstanding 2,699,000 2,748,000 2,797,000
Diluted weighted average shares outstanding 2,758,000 2,799,000 2,824,000
See accompanying notes to consolidated financial statements.
53
FNB BANCORP AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years ended December 31, 2005, 2004 and 2003
Accumulated
Common stock Additional other
--------------------------- paid-in Retained comprehensive Comprehensive
Shares Amount capital earnings income income Total
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2002 2,437,000 $ 26,492,000 -- 22,907,000 1,804,000 51,203,000
Net earnings -- -- -- 4,141,000 -- 4,141,000 4,141,000
Other comprehensive income:
Unrealized gain on
securities, net of
tax benefit of $121,000 -- -- -- -- (764,000) (764,000) (764,000)
------------
Comprehensive income $ 3,377,000
============
Cash dividends of $0.12
per share, quarterly -- -- -- (1,166,000) -- -- (1,166,000)
Special cash dividend of
$0.12 per share (302,000) (302,000)
Stock dividend of 5% 120,000 3,532,000 (3,532,000) --
Cash on fractional shares
Related to stock dividend (7,000) (7,000)
Stock-based compensation
Expense -- -- 3,000 -- -- 3,000
Stock repurchased and
retired (41,000) (1,177,000) -- -- -- (1,177,000)
Stock options exercised 3,000 56,000 -- -- -- 56,000
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2003 2,519,000 28,903,000 3,000 22,041,000 1,040,000 51,987,000
Net earnings -- -- -- 4,688,000 -- 4,688,000 4,688,000
Other comprehensive income:
Unrealized loss on
securities, net of
tax benefit of $330,000 -- -- -- -- (474,000) (474,000) (474,000)
------------
Comprehensive income $ 4,214,000
============
Cash dividends of $0.12
per share, quarterly -- -- -- (1,210,000) -- (1,210,000)
Special cash dividend of
$0.12 per share -- -- (316,000) -- (316,000)
Stock dividend of 5% 124,000 4,514,000 (4,514,000) --
Stock-based compensation
expense -- -- 6,000 -- -- 6,000
Stock repurchased and retired (69,000) (2,324,000) -- -- -- (2,324,000)
Stock options exercised 12,000 272,000 -- -- -- 272,000
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2004 2,586,000 31,365,000 9,000 20,689,000 566,000 52,629,000
Net earnings -- -- -- 5,728,000 -- 5,728,000 5,728,000
Other comprehensive income:
Unrealized loss on
securities, net of
tax benefit of $671,000 -- -- -- -- (967,000) (967,000) (967,000)
------------
Comprehensive income $ 4,761,000
============
Cash dividends of $0.15 per
share share, quarterly -- -- -- (1,535,000) -- (1,535,000)
Stock dividend of 5% 128,000 4,043,000 (4,043,000) --
Cash on fractional shares
related to stock dividend
Stock-based compensation (7,000) (7,000)
expense -- -- 10,000 -- -- 10,000
Stock repurchased and retired (21,000) (765,000) -- -- -- (765,000)
Stock options exercised 7,000 150,000 -- -- -- 150,000
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2005 2,700,000 $ 34,793,000 19,000 20,832,000 (401,000) 55,243,000
============ ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
54
FNB BANCORP AND SUBSIDIARY
Consolidated Statements of Cash Flows
December 31, 2005, 2004 and 2003
2005 2004 2003
------------ ------------ ------------
Cash flows from operating activities:
Net earnings $ 5,728,000 4,688,000 4,141,000
Adjustments to reconcile net earnings to cash
provided by operating activities:
Depreciation, amortization and accretion, net 1,594,000 1,790,000 1,971,000
(Gain) loss on sale of investment securities 101,000 31,000 (165,000)
Securities write-down 116,000 -- --
Stock-based compensation expense 10,000 6,000 3,000
(Gain)loss on sale of bank premises, equipment,
and leasehold improvements -- -- 5,000
Provision for loan losses 600,000 480,000 780,000
Deferred taxes (181,000) 74,000 (862,000)
Changes in assets and liabilities:
Accrued interest receivable and other assets (5,149,000) (6,422,000) (1,776,000)
Accrued expenses and other liabilities 1,720,000 2,083,000 834,000
------------ ------------ ------------
Net cash provided by operating activities 4,539,000 2,730,000 4,931,000
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from matured securities available-for-sale 31,207,000 34,203,000 30,099,000
Purchases of securities available-for-sale (43,386,000) (74,689,000) (28,059,000)
Proceeds from sale of securities available-for-sale -- -- 9,080,000
Net decrease (increase) in loans 892,000 (28,457,000) (28,820,000)
Proceeds from sales of bank premises, equipment, and
leasehold improvements 156,000 121,000 7,000
Purchases of bank premises, equipment, and leasehold
Improvements (1,733,000) (2,101,000) (927,000)
Cash and equivalents received in bank acquisition, net of cash paid 9,602,000 -- --
------------ ------------ ------------
Net cash used in investing activities (3,262,000) (70,923,000) (18,620,000)
------------ ------------ ------------
Cash flows from financing activities:
Net increase in demand and savings deposits 16,215,000 39,392,000 24,392,000
Net increase (decrease) in time deposits 22,051,000 (353,000) 2,416,000
Net increase (decrease) in federal funds purchased (19,172,000) 19,172,000 --
Cash dividends paid (1,542,000) (1,526,000) (1,475,000)
Repurchases of common stock (765,000) (2,324,000) (1,177,000)
Exercise of stock options 150,000 272,000 56,000
Payments on capital note payable -- -- (78,000)
------------ ------------ ------------
Net cash provided by
financing activities 16,937,000 54,633,000 24,134,000
------------ ------------ ------------
Net increase (decrease) in cash and cash
Equivalents 18,214,000 (13,560,000) 10,445,000
Cash and cash equivalents at beginning of year 17,084,000 30,644,000 20,199,000
------------ ------------ ------------
Cash and cash equivalents at end of year $ 35,298,000 17,084,000 30,644,000
============ ============ ============
Additional cash flow information:
Interest paid $ 4,980,000 2,467,000 2,785,000
Income taxes paid 2,224,000 1,691,000 872,000
Noncash - stock dividend 4,043,000 4,514,000 3,532,000
See accompanying notes to consolidated financial statements.
55
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
(1) The Company and Summary of Significant Accounting Policies
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 no par 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.
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the
financial statements and revenue and expenses during the reporting
period. Actual results could differ from those estimates. For the Bank,
the significant accounting estimate is the allowance for loan losses
(note 1f). A summary of the significant accounting policies applied in
the preparation of the accompanying consolidated financial statements
follows.
(a) Basis of Presentation
The accounting and reporting policies of the Company and its
wholly owned subsidiary are in accordance with accounting
principles generally accepted in the United States of America.
All intercompany balances and transactions have been
eliminated.
56
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
(b) Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts due
from banks, and federal funds sold. Generally, federal funds
are sold for one-day periods. The cash equivalents are readily
convertible to known amounts of cash and present insignificant
risk of changes in value due to original maturity dates of 90
days or less. Included in cash and cash equivalents are
amounts restricted for the Federal Reserve requirement of
approximately $2,358,000 and $1,087,000 at December 31, 2005
and 2004, respectively.
(c) Investment Securities
Investment securities consist of U.S. Treasury securities,
U.S. agency securities, obligations of states and political
subdivisions, obligations of U.S. corporations,
mortgage-backed securities and other securities. At the time
of purchase of a security, the Company designates the security
as held-to-maturity or available-for-sale, based on its
investment objectives, operational needs, and intent to hold.
The Company does not purchase securities with the intent to
engage in trading activity. Held to maturity securities are
recorded at amortized cost, adjusted for amortization of
premiums or accretion of discounts. The Company did not have
any investments in the held-to-maturity portfolio at December
31, 2005 or 2004. Available-for-sale securities are recorded
at fair value with unrealized holding gains or losses, net of
the related tax effect, reported as a separate component of
stockholders' equity until realized.
A decline in the market value of any available-for-sale or
held-to-maturity security below cost that is deemed other than
temporary results in a charge to earnings and the
corresponding establishment of a new cost basis for the
security. Amortization of premiums and accretion of discounts
on debt securities are included in interest income over the
life of the related held-to-maturity or available-for-sale
security using the effective interest method. Dividend and
interest income are recognized when earned. Realized gains and
losses for securities classified as available-for-sale and
held-to-maturity are included in earnings and are derived
using the specific identification method for determining the
cost of securities sold.
(d) Derivatives
All derivatives are recognized as either assets or liabilities
in the balance sheet
57
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
and measured at fair value. The Company did not hold any
derivatives at December 31, 2005 and 2004.
(e) Loans
Loans are reported at the principal amount outstanding, net of
deferred loan fees and the allowance for loan losses. A loan
is considered impaired when, based on current information and
events, it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of
the loan agreement, including scheduled interest payments. For
a loan that has been restructured, the contractual terms of
the loan agreement refer to the contractual terms specified by
the original loan agreement, not the contractual terms
specified by the restructuring agreement. An impaired loan is
measured based upon the present value of future cash flows
discounted at the loan's effective rate, the loan's observable
market price, or the fair value of collateral if the loan is
collateral dependent. Interest on impaired loans is recognized
on a cash basis. If the measurement of the impaired loan is
less than the recorded investment in the loan, an impairment
is recognized by a charge to the allowance for loan losses.
Unearned discount on installment loans is recognized as income
over the terms of the loans by the interest method. Interest
on other loans is calculated by using the simple interest
method on the daily balance of the principal amount
outstanding.
Loan fees net of certain direct costs of origination, which
represent an adjustment to interest yield, are deferred and
amortized over the contractual term of the loan using the
interest method.
Loans on which the accrual of interest has been discontinued
are designated as nonaccrual loans. Accrual of interest on
loans is discontinued either when reasonable doubt exists as
to the full and timely collection of interest or principal
when a loan becomes contractually past due by 90 days or more
with respect to interest or principal. When a loan is placed
on nonaccrual status, all interest previously accrued but not
collected is reversed against current period interest income.
Interest accruals are resumed on such loans only when they are
brought fully current with respect to interest and principal
and when, in the judgment of management, the loans are
estimated to be fully collectible as to both principal and
interest. Restructured loans are loans on which concessions in
terms have
58
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
been granted because of the borrowers' financial difficulties.
Interest is generally accrued on such loans in accordance with
the new terms. Net amount written off in 2005 was not
considered material (see Allowance for Loan Losses caption on
page 34 in the Management Discussion and Analysis section).
(f) Allowance for Loan Losses
The allowance for loan losses is established through a
provision for loan losses charged to expense. Loans are
charged off against the allowance for loan losses when
management believes that the collectibility of the principal
is unlikely. The allowance is an amount that management
believes will be adequate to absorb probable losses inherent
in existing loans, standby letters of credit, overdrafts, and
commitments to extend credit based on evaluations of
collectibility and prior loss experience. The evaluations take
into consideration such factors as changes in the nature and
volume of the portfolio, overall portfolio quality, loan
concentrations, specific problem loans, commitments, and
current and anticipated economic conditions that may affect
the borrowers' ability to pay. While management uses these
evaluations to determine the level of the allowance for loan
losses, future provisions may be necessary based on changes in
the factors used in the evaluations.
Material estimates relating to the determination of the
allowance for loan losses are particularly susceptible to
significant change in the near term. Management believes that
the allowance for loan losses is adequate. While management
uses available information to recognize losses on loans,
future additions to the allowance may be necessary based on
changes in economic conditions. In addition, the banking
regulators, as an integral part of its examination process,
periodically review the Bank's allowance for loan losses. The
banking regulators may require the Bank to recognize additions
to the allowance based on their judgment about information
available to them at the time of their examination.
(g) Premises and Equipment
Premises and equipment are reported at cost less accumulated
depreciation using the straight-line method over the estimated
service lives of related assets ranging from 2 to 25 years.
Leasehold improvements are amortized over the lives of the
respective leases or the service lives of the improvements,
whichever is shorter.
59
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
(h) Cash Dividends
The Company's ability to pay cash dividends is subject to
restrictions set forth in the California General Corporation
Law. Funds for payment of any cash dividends by the Company
would be obtained from its investments as well as dividends
and/or management fees from First National Bank. First
National Bank's ability to pay cash dividends is subject to
restrictions imposed under the National Bank Act and
regulations promulgated by the Office of the Comptroller of
the Currency.
(i) Stock Dividend
On October 28, 2005, the Company announced that its Board of
Directors has declared a stock dividend of approximately
128,341 shares, payable at the rate of one share of Common
Stock for every twenty (20) shares of Common Stock owned. The
stock dividend was paid on December 16, 2005, to shareholders
of record on November 30, 2005. The earnings per share data
presented have been adjusted for this stock dividend.
(j) Income Taxes
Deferred income taxes are determined using the assets and
liabilities method. Under this method, the net deferred tax
asset or liability is recognized for tax consequences of
temporary differences by applying current tax rates to
differences between the financial reporting and the tax basis
of existing assets and liabilities. Deferred tax assets and
liabilities are reflected at currently enacted income tax
rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled.
As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for
income taxes.
(k) Stock Option Plan
Beginning in fiscal 2003, the Company elected to adopt the
fair value method of accounting for stock-based compensation.
Historically, the Company applied the intrinsic value method
permitted under SFAS 123, as defined in APB 25 and related
interpretations, in accounting for its stock incentive plans
in the past.
60
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
All future employee stock option grants and other stock- based
compensation will be expensed over the vesting period, based
on the fair value at the time the stock-based compensation is
granted.
Had compensation cost related to the Company's stock option
awards to employees and directors been determined under the
fair value method prescribed under SFAS No. 123, the Company's
net income, basic earnings per share, and diluted earnings per
share would have been the pro-forma amounts below, for 2005,
2004, and 2003:
2005 2004 2003
------------ ------------ ------------
Net earnings As reported $ 5,728,000 4,688,000 4,141,000
Add stock-based employee
compensation expense
included in reported net
earnings, net of related
tax effects 10,000 6,000 3,000
Deduct total stock-based
Employee compensation
expense determined under
the fair value based
method for all awards,
net of related
tax effects (6,000) (10,000) (10,000)
------------ ------------ ------------
Net earnings Pro forma $ 5,732,000 4,684,000 4,134,000
============ ============ ============
Basic earnings per share As reported $ 2.12 1.71 1.48
Pro forma $ 2.12 1.70 1.48
Diluted earnings per share As reported $ 2.08 1.67 1.47
Pro forma $ 2.08 1.67 1.46
Earnings per share have been computed based on the following:
Year ended December 31
------------------------------------------
2005 2004 2003
------------ ------------ ------------
Net earnings $ 5,728,000 4,688,000 4,141,000
Weighted average number of
Shares outstanding 2,699,000 2,748,000 2,797,000
Effect of dilutive options 59,000 51,000 27,000
------------ ------------ ------------
Weighted average
number of shares
outstanding used to
calculate diluted
earnings per share 2,758,000 2,799,000 2,824,000
============ ============ ============
All outstanding options were included in the 2005, 2004 and
2003 computations.
61
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and 2003
(l) Fair Values of Financial Instruments
The notes to financial statements include various estimated
fair value information as of December 31, 2005 and 2004. Such
information, which pertains to the Company's financial
instruments, does not purport to represent the aggregate net
fair value of the Company. Further, the fair value estimates
are based on various assumptions, methodologies and subjective
consideration, which vary widely among different financial
institutions and which are subject to change.
(m) Income Tax Credits
At December 31, 2005, the Bank had a $1,445,000 equity
investment in three partnerships, which own low-income
affordable housing projects that generate tax benefits in the
form of federal and state housing tax credits. As a limited
partner investor in these partnerships, the Company receives
tax benefits in the form of tax deductions from partnership
operating losses and federal and state income tax credits. The
federal and state income tax credits are earned over a 10-year
period as a result of the investment properties meeting
certain criteria and are subject to recapture for
noncompliance with such criteria over a 15-year period. The
expected benefit resulting from the low-income housing tax
credits is recognized in the period for which the tax benefit
is recognized in the Company's consolidated tax returns. These
investments are accounted for using the effective yield method
and are recorded in other assets on the balance sheet. Under
the effective yield method, the Company recognizes tax credits
as they are allocated and amortizes the initial cost of the
investments to provide a constant effective yield over the
period that tax credits are allocated to the Company. The
effective yield is the internal rate of return on the
investment, based on the cost of the investment and the
guaranteed tax credits allocated to the Company. Any expected
residual value of the investment was excluded from the
effective yield calculation. Cash received from operations of
the limited partnership or sale of the properties, if any,
will be included in earnings when realized or realizable.
These investments are included in other securities in
securities available-for-sale.
(n) Reclassifications
Certain prior year information has been reclassified to
conform to current year presentation.
62
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
(o) Bank Owned Life Insurance
The Corporation purchased insurance on the lives of certain
employees. The policies accumulate asset values to meet future
liabilities including the payment of employee benefits such as
the deferred compensation plan. Increases in the cash
surrender value are recorded as other noninterest income in
the consolidated statements of income. The cash surrender
value of bank owned life insurance is reflected in other
assets on the consolidated balance sheets in the amount of
$7,011,000 and $6,773,000 at December 31, 2005 and 2004,
respectively.
(p) Acquisition
On May 2, 2005, the Company announced that its wholly owned
subsidiary, First National Bank of Northern California,
completed its acquisition of Sequoia National Bank, which had
two offices in San Francisco. Sequoia was consolidated with
and merged into First National Bank of Northern California
effective April 30, 2005. Sequoia had approximately
$62,000,000 in total assets on an historical cost basis. A
table showing the fair values of the assets acquired follows
this note. Under the terms of the Acquisition Agreement,
holders of Sequoia shares of common stock and options received
approximately $10,450,000 in cash, after adjustments for
certain contingencies specified in the Acquisition Agreement.
At closing of the transaction $9,350,000 was paid to the
former Sequoia National Bank shareholders, and on November 1,
2005, after submission and payment of all such claims and
expenses, the escrow was terminated and the approximately
$1,100,000, the balance of funds remaining in escrow, was
distributed to the former shareholders of Sequoia National
Bank in accordance with their interests. Effective April 30,
2005, the former banking offices of Sequoia National Bank
began operating as branch offices of First National Bank of
Northern California.
In accordance with SFAS No. 141 the Bank recorded the assets
acquired and liabilities assumed at their fair values at the
acquisition date. The total acquisition cost exceeded the fair
value of the new assets acquired by $4,781,000. This amount
was recognized at acquisition date as intangible assets
consisting of Goodwill of $3,235,000, Loan Premium of $271,000
and Core Deposit Intangibles of $1,275,000. Goodwill has been
adjusted for tax benefits of $1,394,000, net of deferred
income tax liability of $525,000, related to Sequoia National
Bank net operating losses that became available to the
Company, the Core Deposit Intangibles, and the book reserve
for possible loan losses. The tax benefits (Net deferred tax
assets) are included in Other Assets, and the Loan Premium
included in Net Loans in the table shown below.
63
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
The following table summarizes the estimated fair values of
the assets acquired and liabilities assumed by First National
Bank of Northern California at the date of the acquisition:
Assets:
Cash and due from banks $ 3,218,000
Federal funds sold 17,365,000
Securities available for sale 627,000
Loans, net 40,652,000
Other assets 2,210,000
Core deposit intangibles 1,275,000
Goodwill 1,841,000
------------
Total Assets 67,188,000
------------
Liabilities:
Deposits:
Noninterest-bearing 6,945,000
Interest-bearing 49,080,000
------------
Total deposits 56,025,000
Accrued interest payable and other liabilities 274,000
------------
Total Liabilities 56,299,000
------------
Net Assets $ 10,889,000
------------
The following table summarizes the carrying amount of goodwill:
Gross acquisition consideration in excess
of identifiable asset values $ 4,781,000
Less allocation to the following:
Core deposit premium 1,275,000
Loan premium 271,000
Deferred tax asset 1,394,000
Goodwill at December 31, 2005 $ 1,841,000
During 2005, Core Deposit Intangible and Loan Premium were
amortized $106,000 and $15,000, respectively.
64
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
In accordance with SFAS No. 142 "Goodwill and Other Intangible
Assets", goodwill will not be expensed over a fixed period of
time, but will be tested for impairment at least annually.
None of the goodwill is deductible for income tax purposes.
Identifiable intangible assets, namely core deposit
intangibles and premium on loans, are amortized over their
period of benefit. In the fourth quarter of 2005, the annual
review of goodwill for impairment was performed, and it was
determined that no adjustment was necessary. Additionally, the
core deposit intangible and loan premium were evaluated for
impairment at the end of each quarter, and no adjustments were
determined to be necessary.
The following table shows earnings proforma of FNB Bancorp and
its subsidiary combined with Sequoia National Bank as if the
acquisition had taken place as of January 1, 2004:
(thousands, except per share data) Consolidated Statements
of Earnings
Year ended December 31
---------------------------
2005 2004
------------ ------------
Interest income $ 31,858 $ 27,379
Interest expense 5,836 3,402
------------ ------------
Net interest income 26,022 23,977
Provision for loan losses 610 480
------------ ------------
Net interest income after
provision for loan losses 25,412 23,497
Noninterest income 3,938 4,136
Noninterest expense 21,860 21,310
------------ ------------
Earnings before income tax expense 7,490 6,323
Income tax expense 2,232 1,593
------------ ------------
Net earnings $ 5,258 $ 4,730
============ ============
Earnings per share data:
Basic $ 1.95 $ 1.72
Diluted $ 1.91 $ 1.69
Weighted average shares outstanding:
Basic 2,699,000 2,748,000
Diluted 2,758,000 2,799,000
65
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
(2) Restricted Cash Balance
Cash and due from banks includes balances with the Federal Reserve Bank
(the FRB). The Bank is required to maintain specified minimum average
balances with the FRB, based primarily upon the Bank's deposit
balances. As of December 31, 2005 and 2004, the Bank maintained
deposits in excess of the FRB reserve requirement.
(3) Securities Available-for-Sale
The amortized cost and carrying values of securities available-for-sale
are as follows:
Amortized Unrealized Unrealized Carrying
cost gains losses Value
------------ ------------ ------------ ------------
December 31, 2005:
Obligations of U.S.
Government agencies $ 50,571,000 65,000 (510,000) 50,126,000
Obligations of states
and political subdivisions 56,208,000 384,000 (564,000) 56,028,000
Corporate debt 5,918,000 8,000 (62,000) 5,864,000
Other securities 1,445,000 -- -- 1,445,000
------------ ------------ ------------ ------------
$114,142,000 457,000 (1,136,000) 113,463,000
============ ============ ============ ============
December 31, 2004:
Obligations of U.S.
Government agencies $ 54,779,000 85,000 (167,000) 54,697,000
Obligations of states
and political subdivisions 41,446,000 1,099,000 (30,000) 42,515,000
Corporate debt 3,977,000 -- (27,000) 3,950,000
Other securities 1,661,000 -- -- 1,661,000
------------ ------------ ------------ ------------
$101,863,000 1,184,000 (224,000) 102,823,000
============ ============ ============ ============
An analysis of gross unrealized losses of the available for sale
investment securities portfolio as of December 31, 2005 and December
31, 2004 follows.
Less than 12 12 Months or
Months Longer Total
December 31, 2005: Unrealized Unrealized Unrealized
(Dollars in thousands Fair Value Losses Fair Value Losses Fair Value Losses
-------------- -------------- -------------- -------------- -------------- --------------
Obligations of U.S.
government agencies $ 23,184,000 (212,000) 24,676,000 (298,000) 47,860,000 (510,000)
Obligations of states
and political
subdivisions 29,456,000 (463,000) 8,082,000 (101,000) 37,538,000 (564,000)
Corporate debt 4,019,000 (39,000) 1,011,000 (23,000) 5,030,000 (62,000)
Other securities -- -- -- -- -- --
-------------- -------------- -------------- -------------- -------------- --------------
Total 56,659,000 (714,000) 33,769,000 (422,000) 90,428,000 (1,136,000)
============== ============== ============== ============== ============== ==============
66
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
Less than 12 12 Months or
Months Longer Total
December 31, 2004: Unrealized Unrealized Unrealized
(Dollars in thousands Fair Value Losses Fair Value Losses Fair Value Losses
-------------- -------------- -------------- -------------- -------------- --------------
Obligations of U.S.
government agencies $ 41,442,000 (167,000) -- -- 41,442,000 (167,000)
Obligations of states
and political 12,327,000 (30,000) -- -- 12,327,000 (30,000)
Corporate debt 3,977,000 (27,000) -- -- 3,977,000 (27,000)
Other securities -- -- -- -- -- --
-------------- -------------- -------------- -------------- -------------- --------------
Total 57,746,000 (224,000) -- -- 57,746,000 (224,000)
============== ============== ============== ============== ============== ==============
A total of 48 securities make up the amount of securities in an
unrealized loss position for greater than 12 consecutive months.
Management periodically evaluates each security in an unrealized loss
position to determine if the impairment is temporary or
other-than-temporary. Management has determined that no investment
security is other-than-temporarily impaired. The unrealized losses are
due solely to interest rate changes and the Company has the ability and
intent to hold all investment securities with identified impairments
resulting from interest rate changes to the earliest of forecasted
recovery or the maturity of the underlying investment security.
The amortized cost and carrying value of debt securities as of December
31, 2005, by contractual maturity, are shown below. Expected maturities
may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
Amortized Carrying
Cost Value
------------ ------------
Available -for-sale:
Due in one year or less $ 42,180,000 41,916,000
Due after one year though five years 43,419,000 43,133,000
Due after five years through ten years 26,047,000 25,868,000
Due after ten years 2,496,000 2,546,000
------------ ------------
$114,142,000 113,463,000
============ ============
For the years ended December 31, 2005, 2004, and 2003, gross realized
gains amounted to $15,000, $4,000, and $238,000, respectively. For the
years ended December 31, 2005, 2004, and 2003, gross realized losses
amounted to $116,000, $35,000, and $73,000, respectively.
At December 31, 2005 and 2004, securities with an amortized cost of
$57,801,000 and $44,820,000 and fair value of $57,646,000 and
$45,807,000 , respectively, were pledged as collateral for public
deposits and for other purposes required by law.
67
BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
As of December 31, 2005 and 2004, the Bank had investments in Federal
Reserve Bank stock classified as other assets in the accompanying
balance sheets of $702,000 and $702,000, respectively. These
investments in Federal Reserve Bank stock are carried at cost, and
evaluated periodically for impairment.
In 2005, the Bank wrote down $116,000 representing the impaired value
of its investment in Federal National Mortgage Corp. securities.
(4) Loans, Net
Loans are summarized as follows at December 31:
2005 2004
------------- -------------
Real estate $ 302,813,000 255,433,000
Construction 26,243,000 28,997,000
Commercial 53,070,000 58,849,000
Consumer & other 3,420,000 2,589,000
------------- -------------
385,546,000 345,868,000
Allowance for loan losses (4,547,000) (3,334,000)
Net deferred loan fees (948,000) (1,628,000)
------------- -------------
$ 380,051,000 340,906,000
============= =============
The Bank had total impaired loans of $17,000 and $2,798,000 at December
31, 2005 and 2004, respectively. The allowance for loan losses related
to the impaired loans was $9,000 and $255,000 as of December 31, 2005
and 2004, respectively. The amount of the recorded investment in
impaired loans for which there is no related allowance is $8,000 and
$2,543,000 as of December 31, 2005 and 2004. During 2005 and 2004,
nonaccrual loans represented all impaired loans. The average recorded
investment in impaired loans during 2005, 2004 and 2003 was $1,205,000,
$4,010,000 and $8,552,000, respectively. Interest income on impaired
loans of $0, $4,800, and $0, was recognized for cash payments received
in 2005, 2004, and 2003, respectively. The amount of interest on
impaired loans not collected in 2005, 2004 and 2003, respectively was
$2,000, $255,000 and $757,000.
68
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
(5) Allowance for Loan Losses
Changes in the allowance for loan losses are summarized as follows for
the years ended December 31:
2005 2004 2003
------------ ------------ ------------
Balance, beginning of year $ 3,334,000 3,284,000 3,396,000
------------ ------------ ------------
Loans charged off (110,000) (431,000) (896,000)
Recoveries 23,000 1,000 4,000
------------ ------------ ------------
Net loans charged off (87,000) (430,000) (892,000)
Provision for loan losses 600,000 480,000 780,000
Allowance acquired in
business combination 700,000 -- --
------------ ------------ ------------
Balance, end of year $ 4,547,000 3,334,000 3,284,000
============ ============ ============
(6) Related Party Transactions
In the ordinary course of business, the Bank made loans and advances
under lines of credit to directors, officers, and their related
interests. The Bank's policies require that all such loans be made at
substantially the same terms as those prevailing at the time for
comparable transactions with unrelated parties and do not involve more
than normal risk or unfavorable features. The following summarizes
activities of loans to such parties in 2005 and 2004:
2005 2004
------------ ------------
Balance, beginning of year $ 3,376,000 7,202,000
Additions 5,673,000 138,000
Repayments 5,131,000 3,964,000
------------ ------------
Balance, end of year $ 3,918,000 3,376,000
============ ============
(7) Bank Premises, Equipment, and Leasehold Improvements
Bank premises, equipment and leasehold improvements are stated at cost,
less accu-mulated depreciation and amortization, and are summarized as
follows at December 31:
69
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
2005 2004
------------ ------------
Buildings $ 7,969,000 7,753,000
Equipment 8,642,000 7,924,000
Leasehold improvements 1,173,000 1,170,000
------------ ------------
17,784,000 16,847,000
Accumulated depreciation and amortization (9,817,000) (9,241,000)
------------ ------------
7,967,000 7,606,000
Land 4,061,000 4,008,000
------------ ------------
$ 12,028,000 11,614,000
============ ============
Depreciation expense for the years ended December 31, 2005, 2004, and
2003 was $1,163,000, $1,282,000 and $1,290,000, respectively.
(8) Deposits
The aggregate amount of jumbo time certificates, each with a minimum
denomination of $100,000 or more, was $77,572,000 and $42,402,000 at
December 31, 2005 and 2004, respectively.
At December 31, 2005, the scheduled maturities of time certificates are
as follows:
Year ending December 31:
2006 $ 120,412,000
2007 13,829,000
2008 6,312,000
2009 20,000
2010 260,000
--------------
$ 140,833,000
==============
(9) Commitments and Contingencies
The Bank leases a portion of its facilities and equipment under
noncancelable operating leases expiring at various dates through 2009.
Some of these leases provide that the Bank pay taxes, maintenance,
insurance, and other occupancy expenses applicable to leased premises.
Generally, the leases provide for renewal for various periods at
stipulated rates.
70
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
The minimum rental commitments under the operating leases as of
December 31, 2005 are as follows:
Year ending December 31:
2006 $ 491,000
2007 499,000
2008 350,000
2009 163,000
-------------
$ 1,503,000
=============
Total rent expense for operating leases was $401,000, $284,000, and
$361,000, in 2005, 2004, and 2003, respectively.
The Bank is engaged in various lawsuits either as plaintiff or
defendant in the ordinary course of business and in the opinion of
management, based upon the advice of counsel, the ultimate outcome of
these lawsuits will not have a material effect on the Bank's financial
statements.
(10) Bank Savings Plan
The Bank maintains a salary deferral 401(k) plan covering substantially
all employees, known as the First National Bank Savings Plan (the
Plan). The Plan allows employees to make contributions to the Plan up
to a maximum allowed by law and the Bank's contribution is
discretionary. The Plan expense for the years ended December 31, 2005,
2004, and 2003 was $626,000, $540,000 and $475,000, respectively.
(11) Salary Continuation and Deferred Compensation Plans
The Bank maintains a Salary Continuation Plan for certain Bank
officers. Officers participating in the Salary Continuation Plan are
entitled to receive a monthly payment for a period of fifteen to twenty
years upon retirement. The Company accrues such post-retirement
benefits over the individual's employment period. The Salary
Continuation Plan expense for the years ended December 31, 2005, 2004,
and 2003 was $325,000, $305,000, and $137,000 respectively. Accrued
compensation payable under the salary continuation plan totaled
$1,780,000 and $1,515,000 at December 31, 2005 and 2004, respectively.
71
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
The Deferred Compensation Plan allows eligible officers to defer
annually their compensation up to a maximum 80% of their base salary
and 100% of their cash bonus. The officer will be entitled to receive
distribution upon reaching a specified age, passage of at least five
years or termination of employment. As of December 31, 2005 and 2004,
the related liability included in accrued expenses and other
liabilities was $1,851,000 and $1,649,000, respectively.
(12) Income Taxes
The provision for income taxes for the years ended December 31,
consists of the following:
2005 2004 2003
------------ ------------ ------------
Current:
Federal $ 2,223,000 1,275,000 1,473,000
State 387,000 228,000 785,000
------------ ------------ ------------
2,610,000 1,503,000 2,258,000
------------ ------------ ------------
Deferred:
Federal (207,000) 62,000 (615,000)
State 26,000 12,000 (247,000)
------------ ------------ ------------
(181,000) 74,000 (862,000)
------------ ------------ ------------
$ 2,429,000 1,577,000 1,396,000
============ ============ ============
The reasons for the differences between the statutory federal income
tax rate and the effective tax rates for the years ended December 31,
are summarized as follows:
2005 2004 2003
-------- -------- --------
Statutory rate 34.0% 34.0% 34.0%
Increased (decrease ) resulting from:
Income tax exempt for federal purposes (7.1)% (8.0)% (8.7)%
State taxes on income net of federal benefit 3.3% 2.5% 6.4%
Benefits from low income housing credits (1.1)% (2.8)% (5.8)%
Adjustment to prior year accruals 0.0% (0.6)% 0.0%
Other, net 0.6% 0.1% (0.7)%
-------- -------- --------
Effective rate 29.7% 25.2% 25.2%
======== ======== ========
72
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
The tax effect of temporary differences giving rise to the Bank's net
deferred tax asset is as follows:
December 31
---------------------------
2005 2004
------------ ------------
Deferred tax assets:
Allowance for loan losses $ 1,857,000 1,307,000
Capitalized interest on buildings 29,000 32,000
Expenses accrued on books not yet deductible in tax return 1,720,000 1,787,000
Depreciation 497,000 169,000
Net operating loss carryforward 1,439,000 --
Unrealized loss on available-for-sale securities 280,000 --
------------ ------------
Total deferred tax assets 5,822,000 3,295,000
------------ ------------
Deferred tax liabilities:
State income taxes 312,000 303,000
Unrealized appreciation of available-for-sale securities -- 395,000
Core deposit intangible 524,000 --
Expenses and credits deducted on tax return, not books 42,000 115,000
------------ ------------
Total deferred tax liabilities 878,000 813,000
------------ ------------
Net deferred tax assets before valuation allowance 4,944,000 2,482,000
Valuation allowance -- (134,000)
------------ ------------
Net deferred tax asset (included in other assets) 4,944,000 2,348,000
============ ============
As of December 31, 2005, the Bank had no state tax credit carryforwards
for income tax purposes, as these were all used during 2005.
Accordingly, there is no valuation allowance as of December 31, 2005.
Additionally, management believes that it is more likely than not that
the deferred tax assets will be realized through recovery of taxes
previously paid and/or future taxable income. The Bank had net
operating loss carryforwards resulting from the acquisition of Sequoia
National Bank which expire from December 31, 2007 through December 31,
2020, for a total balance of $3,998,568.
(13) Financial Instruments
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to
extend credit in the form of loans or through standby letters of
credit. These instruments involve, to varying degrees, elements of
credit and interest-rate risk in excess of the amount recognized in the
balance sheet.
The Bank's exposure to credit loss is represented by the contractual
amount of those instruments and is usually limited to amounts funded or
drawn. The contract or notional
73
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005, and 2004 and 2003
amounts of these agreements, which are not included in the balance
sheets, are an indicator of the Bank's credit exposure. Commitments to
extend credit generally carry variable interest rates and are subject
to the same credit standards used in the lending process for
on-balance-sheet instruments. Additionally, the Bank periodically
reassesses the customer's creditworthiness through ongoing credit
reviews. The Bank generally requires collateral or other security to
support commitments to extend credit. The following table provides
summary information on financial institutions whose contract amounts
represent credit risk as of December 31:
2005 2004
------------ ------------
Financial instruments whose contract amounts represent
Credit risk:
Undisbursed loan commitments $ 36,607,000 33,629,000
Lines of credit 49,863,000 42,731,000
MasterCard lines 3,463,000 3,560,000
Standby letters of credit 7,768,000 3,158,000
------------ ------------
$ 97,701,000 83,078,000
============ ============
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on
management's credit evaluation. Collateral held varies but may include
accounts receivable, inventory, property, plant and equipment, and
income-producing commercial and residential properties.
Equity reserve and unused credit card lines are additional commitments
to extend credit. Many of these customers are not expected to draw down
their total lines of credit, and therefore, the total contract amount
of these lines does not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party. The
credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers.
74
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
The Bank issues both financial and performance standby letters of
credit. The financial standby letters of credit are primarily to
guarantee payment to third parties. As of December 31, 2005, there were
$7,488,000 issued in financial standby letters of credit. The
performance standby letters of credit are typically issued to
municipalities as specific performance bonds. As of December 31, 2005
there were $280,000 issued in performance standby letters of credit.
The terms of the guarantees will expire in 2006. The Bank has
experienced no draws on these letters of credit, and does not expect to
in the future; however, should a triggering event occur, the Bank
either has collateral in excess of the letters of credit or embedded
agreements of recourse from the customer.
The following methods and assumptions were used by the Company to
estimate the fair value of financial instruments.
(a) Cash and Cash Equivalents
The carrying amounts reported in the balance sheet for cash
and short-term instruments approximate those assets fair
values.
(b) Securities
Fair values for securities are based on quoted market prices,
where available. If quoted market prices are not available,
fair values are based on quoted market prices of comparable
instruments.
(c) Loans
Fair values for variable-rate loans that reprice frequently
and have no significant change in credit risk are based on
carrying values. The fair values for other loans are estimated
using discounted cash flow analyses, using interest rates
currently being offered for loans with similar terms to
borrowers of similar credit quality.
(d) Off-Balance Sheet Commitments
Fair values for the company's off-balance-sheet lending
commitments are based on fees currently charged to enter into
similar agreements, taking into account the remaining terms of
the agreements and the credit standing of the counterparties.
75
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
(e) Deposit Liabilities
The fair values estimated for demand deposits (interest and
noninterest checking, passbook savings, and certain types of
money market accounts) are, by definition, equal to the amount
payable on demand at the reporting date (i.e., their carrying
amounts). Fair values for fixed-rate certificates of deposit
are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on certificates
for a schedule of the aggregate expected monthly maturities on
time deposits.
(f) Federal Funds Sold/Purchased
The carrying amount of federal funds sold/purchased
approximates their fair values.
(g) Bank Owned Life Insurance
The carrying amount is the cash surrender value for all
policies.
The following table provides summary information on the
estimated fair value of financial instruments at December 31,
2005:
Carrying Fair
amount value
------------ ------------
Financial assets:
Cash and cash equivalents $ 35,298,000 35,298,000
Securities available for sale 113,463,000 113,463,000
Loans, net 380,051,000 387,199,000
Bank owned life insurance 7,011,000 7,011,000
Accrued interest receivable 3,437,000 3,437,000
Financial liabilities:
Deposits 507,544,000 507,604,000
Accrued interest payable 1,165,000 1,165,000
Off-balance-sheet commitments:
Undisbursed loan commitments, lines of credit,
Mastercard line, and standby letters of credit -- 833,000
76
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
The following table provides summary information on the estimated fair
value of financial instruments at December 31, 2004:
Carrying Fair
amount Value
------------ ------------
Financial assets:
Cash and cash equivalents $ 17,084,000 17,084,000
Securities available for sale 102,823,000 102,823,000
Loans, net 340,906,000 344,845,000
Bank owned life insurance 6,773,000 6,773,000
Accrued interest receivable 2,379,000 2,379,000
Financial liabilities:
Deposits 413,253,000 413,137,000
Federal funds purchased 19,172,000 19,172,000
Accrued interest payable 403,000 403,000
Off-balance-sheet commitments:
Undisbursed loan commitments, lines of credit,
Mastercard line, and standby letters of credit -- 800,000
The carrying amounts of loans include $17,000 and $2,798,000 of
nonaccrual loans (loans that are not accruing interest) at December 31,
2005 and 2004, respectively. Management has determined that primarily
because of the uncertainty of predicting an observable market interest
rate, excessive amounts of time and money would be incurred to estimate
the fair values of nonperforming loans. As such, these loans are
recorded at their carrying amount in the estimated fair value columns.
The following aggregate information is provided at December 31, about
the contractual provisions of these loans:
2005 2004
---------- ----------
Aggregate carrying amount $ 17,000 2,798,000
Effective rate 13.11% 6.98%
Average term to maturity 5 months 0 months
77
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
(14) Significant Group Concentrations of Credit Risk
Most of the Bank's business activity is with customers located within
San Mateo and San Francisco counties. Generally, the loans are secured
by assets of the borrowers. The loans are expected to be repaid from
cash flows or proceeds from the sale of selected assets of the
borrowers. The Bank does not have significant concentrations of loans
to any one industry.
The distribution of commitments to extend credit approximates the
distribution of loans outstanding. Commercial and standby letters of
credit were granted primarily to commercial borrowers.
The contractual amounts of credit-related financial instruments such as
commitments to extend credit, credit-card arrangements, and letters of
credit represent the amounts of potential accounting loss should the
contract be fully drawn upon, the customer default, and the value of
any existing collateral become worthless.
(15) Regulatory matters
The Company, as a bank holding company, is subject to regulation by the
Board of Governors of the Federal Reserve System under the Bank Holding
Company Act of 1956, as amended.
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Company's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and the Bank must
meet specific capital guidelines that involve quantitative measures of
the Company's and the Bank's assets, liabilities and certain off
balance-sheet items as calculated under regulatory accounting
practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts
and ratios (set forth in the table below) of total and Tier 1 capital
(as defined in the regulations) to risk-weighted assets (as defined),
and of Tier 1 capital (as defined) to average assets (as defined).
Management believes, as of December 31, 2005, that the Company and the
Bank have met all capital adequacy requirements to which they are
subject.
78
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
As of December 31, 2005, the most recent notification from the
regulatory agencies categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well capitalized the Bank must maintain minimum total risk-based, Tier
1 risk-based, and Tier 1 leverage ratios as set forth in the table.
There are no conditions or events since that notification that
management believes have changed the Bank's categories.
79
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
The consolidated actual capital amounts and ratios of FNB Bancorp and
Subsidiary are also presented in the following table:
To be well capitalized under
For capital prompt corrective action
Actual adequacy purposes provisions
----------------------- ----------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ -------- ------------ -------- ------------ --------
December 31, 2005:
Total risk-based capital
(to risk weighted assets)
Consolidated Company $ 57,181,000 11.59% 39,478,000 8.00% 49,347,000 n/a
Bank 57,045,000 11.56 39,478,000 8.00 49,347,000 10.00%
Tier 1 capital (to risk
Weighted assets)
Consolidated Company 52,634,000 10.67 19,739,000 4.00 29,608,000 n/a
Bank 52,498,000 10.64 19,739,000 4.00 29,608,000 6.00
Tier 1 capital (to average
assets)
Consolidated Company 52,634,000 9.50 22,172,000 4.00 27,715,000 n/a
Bank 52,498,000 9.47 22,172,000 4.00 27,715,000 5.00
To be well capitalized under
For capital prompt corrective action
Actual adequacy purposes provisions
----------------------- ----------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ -------- ------------ -------- ------------ --------
December 31, 2004:
Total risk-based capital
(to risk weighted assets)
Consolidated Company $ 55,397,000 13.50 32,815,000 8.00% 41,019,000 n/a
Bank 55,366,000 13.50 32,815,000 8.00 41,019,000 10.00%
Tier 1 capital (to risk
Weighted assets)
Consolidated Company 52,063,000 12.69 16,407,000 4.00 24,611,000 n/a
Bank 52,032,000 12.69 16,407,000 4.00 24,611,000 6.00
Tier 1 capital (to average
assets)
Consolidated Company 52,063,000 10.72 19,434,000 4.00 24,293,000 n/a
Bank 52,032,000 10.71 19,434,000 4.00 24,293,000 5.00
(16) Stock Option Plan
In 1997, the Company adopted an incentive employee stock option plan,
known as the 1997 FNB Bancorp Plan. In 2002, the Company adopted an
incentive employee option plan known as the 2002 FNB Bancorp Plan. The
Plans allow the Company to grant options to employees of up to 348,997
shares, which includes the effect of stock
80
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
dividends of common stock. Options currently outstanding become
exercisable in one to five years from the grant date, based on a
vesting schedule of 20% per year and expire 10 years after the grant
date. The options exercise price is the fair value of the options at
the grant date.
The fair value of each option granted is estimated on the date of grant
using the fair value method with the following weighted average
assumptions used for grants in 2005; dividend yield of 6.98% for the
year; risk-free interest rate of 3.91%; expected volatility of 10%;
expected life of 5.0 years; and weighted average fair value of $0.75.
The assumptions used for grants in 2004; dividend yield of 6.85% for
the year; risk-free interest rate of 3.73%; expected volatility of 10%;
expected life of 5.0 years; and weighted average fair value of $0.76.
The assumptions used for grants in 2003; dividend yield of 7% for the
year; risk-free interest rate of 4.2%; expected volatility of 12%;
expected life of 9.7 years; and weighted average fair value of $2.15.
A summary of the status of the Company's stock option plans as of
December 31, 2005, 2004 and 2003 is presented below:
Weighted
average
exercise
Shares price
---------- ----------
2002 FNB Bancorp plan:
Outstanding at December 31, 2002 36,801 22.62
Granted 46,255 22.55
Exercised (242) 22.62
Expired/forfeited (1,542) 22.16
---------- ----------
Outstanding at December 31, 2003 81,272 22.05
Granted 43,459 29.48
Exercised (1,296) 22.28
Expired/forfeited (7,053) 23.30
---------- ----------
Outstanding at December 31, 2004 116,382 $ 24.75
Granted 44,610 28.62
Exercised (1,620) 23.38
Expired/forfeited (4,473) 26.38
---------- ----------
Outstanding at December 31, 2005 154,899 25.83
========== ==========
Options exercisable at December 31, 2005 49,117 $ 23.99
Options exercisable at December 31, 2004 26,237 22.90
Options exercisable at December 31, 2003 10,540 22.42
81
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
The following information applies to options outstanding at December
31, 2005:
Range of exercise prices $21.60 - 29.48
Options outstanding 154,899
Weighted average remaining contractual life (years) 8.1
A summary of the status of the Company's stock option plans as of
December 31, 2005, 2004 and 2003 is presented below:
Weighted
Average
exercise
Shares Price
---------- ----------
1997 FNB Bancorp plan:
Outstanding at December 31, 2002 97,183 19.79
Exercised (2,550) 20.10
Expired/forfeited (4,462) 19.47
---------- ----------
Outstanding at December 31, 2003 90,171 19.80
Exercised (12,449) 19.61
Expired/forfeited (3,001) 19.37
---------- ----------
Outstanding at December 31, 2004 74,721 $ 19.85
Exercised (5,624) 19.95
Expired/forfeited (358) 19.51
---------- ----------
Outstanding at December 31, 2005 68,739 19.84
========== ==========
Options exercisable at December 31, 2005 64,006 $ 19.86
Options exercisable at December 31, 2004 60,148 19.96
Options exercisable at December 31, 2003 60,046 20.02
The following information applies to options outstanding at December
31, 2005:
Range of exercise prices $18.75 - 21.66
Options outstanding 68,739
Weighted average remaining contractual life (years) 4.2
82
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
(17) Quarterly Data (Unaudited)
First Second Third Fourth
---------- ---------- ---------- ----------
2005:
Interest income $6,515,000 7,455,000 8,033,000 8,729,000
Interest expense 965,000 1,208,000 1,567,000 1,793,000
---------- ---------- ---------- ----------
Net interest income 5,550,000 6,247,000 6,466,000 6,936,000
Provision for loan losses 120,000 150,000 165,000 165,000
---------- ---------- ---------- ----------
Net interest income,
after provision
for loan losses 5,430,000 6,097,000 6,301,000 6,771,000
Non-interest income 903,000 1,009,000 993,000 936,000
Non-interest expense 4,902,000 5,229,000 5,067,000 5,085,000
---------- ---------- ---------- ----------
Income before income taxes 1,431,000 1,877,000 2,227,000 2,622,000
Provision for income taxes 415,000 595,000 674,000 745,000
---------- ---------- ---------- ----------
Net earnings $1,016,000 1,282,000 1,553,000 1,877,000
========== ========== ========== ==========
Basic earnings per share $ 0.37 0.48 0.58 0.69
Diluted earnings per share 0.36 0.47 0.57 0.68
First Second Third Fourth
---------- ---------- ---------- ----------
2004:
Interest income $5,737,000 5,685,000 6,206,000 6,418,000
Interest expense 563,000 576,000 639,000 755,000
---------- ---------- ---------- ----------
Net interest income 5,174,000 5,109,000 5,567,000 5,663,000
Provision for loan losses 120,000 120,000 120,000 120,000
---------- ---------- ---------- ----------
Net interest income,
after provision
for loan losses 5,054,000 4,989,000 5,447,000 5,543,000
Non-interest income 923,000 958,000 956,000 950,000
Non-interest expense 4,745,000 4,743,000 4,624,000 4,443,000
---------- ---------- ---------- ----------
Income before income taxes 1,232,000 1,204,000 1,779,000 2,050,000
Provision for income taxes 329,000 241,000 437,000 570,000
---------- ---------- ---------- ----------
Net earnings $ 903,000 963,000 1,342,000 1,480,000
========== ========== ========== ==========
Basic earnings per share $ 0.33 0.35 0.49 0.54
Diluted earnings per share 0.32 0.34 0.48 0.53
(18) Recent Accounting Changes
On December 12, 2003, AICPA issued Statement of Position 03-3 which
addresses accounting for differences between contractual cash flows and cash
flows expected to be collected from an investor's initial investment in loans or
debt securities (loans) acquired in a transfer if those differences are
attributable, at least in part, to credit quality. It includes loans with
evidence of deterioration of credit quality since origination acquired by
completion of a transfer, including such loans acquired in purchase business
combinations. SOP 03-3 is effective prospectively for loans acquired beginning
January 1, 2005.
83
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
In December 2004, FASB issued SFAS No. 123 (revised 2004), Share-Based
Payment, which is a revision of SFAS No. 123 and supersedes APB No. 25. SFAS No.
123(R) requires the Company to measure the cost of employee services received in
exchange for an award of equity instruments using a fair-value method, and to
record such expense in its financial statements, for annual reporting periods
beginning after June 15, 2005. The revised Statement eliminates an entity's
ability to account for share-based compensation transactions using the intrinsic
value method of accounting in APB Opinion No. 25, Accounting for Stock Issued to
Employees, which was permitted under Statement 123, as originally issued. In
addition, the adoption of SFAS No. 123(R) will require additional accounting
related to the income tax effects and additional disclosure regarding the cash
flow effects resulting from share-based payment arrangements. This accounting
change is not expected to have a material effect on the consolidated financial
statements.
(19) Condensed Financial Information of Parent Company
The parent company-only condensed balance sheets, condensed statements
of income, and condensed statements of cash flows information are presented as
of and for the year ended December 31, as follows:
FNB Bancorp
Condensed balance sheets 2005 2004
------------ ------------
Assets:
Cash and due from banks $ 146,000 350,000
Investments in subsidiary 55,107,000 52,598,000
Other assets -- --
------------ ------------
Total assets $ 55,253,000 52,948,000
============ ============
Liabilities:
Other liabilities $ 10,000 319,000
Stockholders' equity 55,243,000 52,629,000
------------ ------------
Total liabilities and stockholders' equity $ 55,253,000 52,948,000
============ ============
84
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
FNB Bancorp
Condensed statements of income 2005 2004
---------------------------------------------------- ------------ ------------
Income:
Dividend from subsidiary $ 2,269,000 3,446,000
Other income -- 1,000
------------ ------------
Total income 2,269,000 3,447,000
------------ ------------
Expense:
Other expense 17,000 10,000
------------ ------------
Total expense 17,000 10,000
------------ ------------
Income before income taxes and equity
in undistributed earnings of subsidiary 2,252,000 3,437,000
Income tax expense (credit) -- (36,000)
------------ ------------
Income before equity in undistributed
earnings of subsidiary 2,252,000 3,473,000
Equity in undistributed earnings of subsidiary 3,476,000 1,215,000
------------ ------------
Net earnings $ 5,728,000 4,688,000
============ ============
FNB Bancorp
Condensed statements of cash flows 2005 2004
Net earnings $ 5,728,000 4,688,000
Change in other assets -- 403,000
Change in other liabilities (309,000) (19,000)
Undistributed earnings of subsidiary (3,476,000) (1,215,000)
Stock-based compensation expense 10,000 6,000
------------ ------------
Cash flows provided by operating activities 1,953,000 3,863,000
------------ ------------
Increase in investment to subsidiary -- --
------------ ------------
Cash flows used in investing activities -- --
------------ ------------
Proceeds from exercise of common stock 150,000 272,000
Dividends paid (1,542,000) (1,526,000)
Repurchases of common stock (765,000) (2,324,000)
------------ ------------
Cash flows provided by financing activities (2,157,000) (3,578,000)
------------ ------------
Net (decrease) increase in cash (204,000) 285,000
Cash, beginning of year 350,000 65,000
------------ ------------
Cash, end of year $ 146,000 350,000
============ ============
85
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -----------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
- --------------------------------
Disclosure Controls and Procedures. Disclosure controls and procedures
are designed with the objective of ensuring that information required to be
disclosed in reports filed by the Company under the Exchange Act, such as this
Annual Report, is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the Securities and Exchange
Commission. Disclosure controls and procedures are also designed with the
objective of ensuring that such information is accumulated and communicated to
management, including the Chief Executive Officer and the Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.
Evaluation of Disclosure Controls and Procedures and Internal Control
over Financial Reporting. The Company's management, including the Chief
Executive Officer and the Chief Financial Officer, evaluated the Company's
disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Exchange Act) as of December 31, 2005. Based on this evaluation, the Chief
Executive Officer and the Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective. There was no change in the
Company's internal control over financial reporting that occurred during the
quarter ended December 31, 2005 that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
ITEM 9B. OTHER INFORMATION
- --------------------------
Pursuant to policy, Director Daniel J. Modena retired from the Boards of
Directors of the Company and the Bank effective December 31, 2005.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------
The information required by Item 10 of Form 10-K is incorporated by reference to
the information contained in the Company's Proxy Statement for the 2006 Annual
Meeting of Shareholders which will be filed pursuant to Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------
The information required by Item 11 of Form 10-K is incorporated by reference to
the information contained in the Company's Proxy Statement for the 2006 Annual
Meeting of Shareholders which will be filed pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
The information required by Item 12 of Form 10-K is incorporated by reference to
the information contained in the Company's Proxy Statement for the 2006 Annual
Meeting of Shareholders which will be filed pursuant to Regulation 14A.
86
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
The information required by Item 13 of Form 10-K is incorporated by reference to
the information contained in the Company's Proxy Statement for the 2006 Annual
Meeting of Shareholders which will be filed pursuant to Regulation 14A.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
- -----------------------------------------------
The information required by Item 14 of Form 10-K is incorporated by reference to
the information contained in the Company's Proxy Statement for the 2006 Annual
Meeting of Shareholders which will be filed pursuant to Regulation 14A.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, STATEMENT SCHEDULES
- ------------------------------------------------------------
(a)(1) Financial Statements. Listed and included in Part II, Item 8.
(2) Financial Statement Schedules. All schedules have been omitted since
the required information is not present in amounts sufficient to
require submission of the schedule or because the information required
is included in the Financial Statements or notes thereto.
(3) Exhibits.
Exhibit
Number Document Description
------------- -----------------------------------------------------------
**2.1 (deleted)
2.2 Acquisition Agreement dated November 5, 2004, signed among
First National Bank of Northern California, Sequoia
National Bank and Hemisphere National Bank
(incorporated by reference from Exhibit 2.2 to the
Company's Current Report on Form 8-K filed with the
Commission on November 9, 2004)
2.3 First Addendum to Acquisition Agreement, dated December
13, 2004, signed among First National Bank of
Northern California, Sequoia National Bank,
Hemisphere National Bank and Privee Financial, Inc.
(incorporated by reference from Exhibit 2.5 to the
Company's Current Report on Form 8-K filed with the
Commission on December 17, 2004)
2.4 Second Addendum to Acquisition Agreement, dated as of
April 15, 2005, signed among First National Bank of
Northern California, Sequoia National Bank,
Hemisphere National Bank and Privee Financial, Inc.
(incorporated by Reference from Exhibit 2.4 to the
Company's Current Report on Form 8-K Filed with the
Commission on May 2, 2005)
87
**3.1 Articles of Incorporation of FNB Bancorp.
**3.2 Bylaws of FNB Bancorp.
**4.1 Specimen of the Registrant's common stock certificate.
**10.1 Lease agreement dated April 24, 1995, as amended, for
Eureka Square Branch Office of First National Bank of
Northern California at Eureka Square Shopping Center,
Pacifica, California.
**10.2 Lease agreement dated June 8, 1999, as amended, for Linda
Mar Branch Office of First National Bank of Northern
California at Linda Mar Shopping Center, Pacifica,
California.
**10.3 Lease agreement dated August 21, 1996, as amended, for the
Flower Mart facility of First National Bank of Northern
California at 640 Brannan Street, Suite 102, San
Francisco, California.
**10.4 (deleted)
**10.5 (deleted)
**10.6 First National Bank of Northern California 1997 Stock
Option Plan.*
**10.7 Form of Nonstatutory Stock Option Agreement under the
First National Bank of Northern California 1997 Stock
Option Plan.*
**10.8(a) Form of Incentive Stock Option Agreement under the First
National Bank of Northern California 1997 Stock Option
Plan.*
**10.8(b) Form of Incentive Stock Option Agreement (Standard
Provisions under the First National Bank of Northern
California 1997 Stock Option Plan.*
**10.9 First National Bank Profit Sharing and 401(k) Plan dated
August 26, 1969.*
**10.10 First National Bank Deferred Compensation Plan dated
November 1, 1997.*
**10.11 Salary Continuation Agreement between First National Bank
of Northern California And Michael R. Wyman, dated
December 20, 1996.*
**10.12 Salary Continuation Agreement between First National Bank
of Northern California And Paul B. Hogan dated December
20, 1996.*
**10.13 Salary Continuation Agreement between First National Bank
of Northern California And James B. Ramsey, dated December
23, 1999.*
**10.14 Form of Management Continuity Agreement signed on July 20,
2000, between First National Bank of Northern California
and Jim D. Black, Charles R. Key and Anthony J. Clifford.*
88
**10.15 (deleted)
**10.16 Communications Site Lease Agreement as amended dated March
30, 1999, between First National Bank of Northern
California, as Lessor and Nextel of California, Inc., as
Lessee, with respect to Redwood City Branch Office.
**10.17 (deleted)
**10.18 Separation Agreement between First National Bank of
Northern California and Paul B. Hogan, dated December 5,
2001.*
***10.19 First Amendment to Separation Agreement between First
National Bank of Northern California and Paul B. Hogan,
dated March 22, 2002.*
****10.20 FNB Bancorp Stock Option Plan (effective March 15, 2002).*
****10.21 FNB Bancorp Stock Option Plan, Form of Incentive Stock
Option Agreement.*
****10.22 FNB Bancorp Stock Option Plan, Form of Nonstatutory Stock
Option Agreement.*
*****10.23 FNB Bancorp 2002 Stock Option Plan (adopted June 28,
2002).*
*****10.24 FNB Bancorp 2002 Stock Option Plan, Form of Incentive
Stock Option Agreement.*
*****10.25 FNB Bancorp 2002 Stock Option Plan, Form of Nonstatutory
Stock Option Agreement.*
******10.26 Lease agreement dated August 13, 2003, for San Mateo
Branch Office of First National Bank of Northern
California, located at 150 East Third Avenue, San Mateo,
CA 94401.
10.27 Salary Continuation Agreement and Split-Dollar Agreement
for Jim D. Black (incorporated by reference from Exhibit
10.27 to the Company's Current Report on Form 8-K filed
with the Commission on September 10, 2004)*
10.28 Salary Continuation Agreement and Split-Dollar Agreement
for Anthony J. Clifford (incorporated by reference from
Exhibit 10.28 to the Company's Current Report on Form 8-K
filed with the Commission on September 10, 2004)*
10.29 Amended and Restated Salary Continuation Agreement and
Split-Dollar Agreement for James B. Ramsey (incorporated
by reference from Exhibit 10.29 to the Company's Current
Report on Form 8-K filed with the Commission on September
10, 2004)*
10.30 Lease Agreement dated May 1, 2003, as amended by
Assignment, Assumption and Consent Agreement for the
Financial District Branch Office of First National Bank of
Northern California located at 65 Post Street, San
Francisco, California.
10.31 Lease Agreement dated July 1, 1999, as amended by
Assignment, Assumption and Consent Agreement for the
Portola Branch Office of First National Bank of Northern
California located at 699 Portola Drive, San Francisco,
California.
89
******14.0 Code of Ethics
21.1 The Registrant has one subsidiary, First National Bank of
Northern California.
23.1 Consent of Moss Adams LLP
23.2 Consent of KPMG LLP
31.1 Rule 13a-14(a)/15d-14(a) Certification (principal
executive officer)
31.2 Rule 13a-14(a)/15d-14(a) Certification (principal
financial officer)
32.0 Section 1350 Certifications
- --------------------------------------------------------------------------------
* Denotes management contracts, compensatory plans or
arrangements.
** Incorporated by reference to registrant's Registration
Statement on Form S-4 (No. 333-74954) filed with the
Commission on December 12, 2001.
*** Incorporated by reference to registrant's Annual Report on
Form 10-K filed with the Commission on March 31, 2002.
**** Incorporated by reference to registrant's Statement on Form
S-8 (No. 333-91596) filed with the Commission on July 1, 2002.
***** Incorporated by reference to registrant's Registration
Statement on Form S-8 (No. 333-98293) filed with the
Commission on August 16, 2002.
****** Incorporated by reference to registrant's Annual Report on
Form 10-K filed with the Commission on March 30, 2003.
An Annual Report for the fiscal year ended December 31, 2005, and
Notice of Annual Meeting and Proxy Statement for the Company's 2006 Annual
Meeting will be mailed to security holders subsequent to the date of filing this
report. Copies of said materials will be furnished to the Commission in
accordance with the Commission's Rules and Regulations.
90
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
FNB BANCORP
Dated: March 24, 2006 By: /s/ THOMAS C. MCGRAW
-----------------------------------
Thomas C. McGraw
Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant in the capacities and on the dates indicated.
Signature Title Date
/s/ MICHAEL R. WYMAN Chairman of the Board March 24, 2006
- --------------------------- of Directors
Michael R. Wyman
/s/ THOMAS C. MCGRAW Director, Chief Executive March 24, 2006
- --------------------------- Officer and Secretary
Thomas C. McGraw
/s/ JAMES B. RAMSEY Senior Vice President and March 24, 2006
- --------------------------- Chief Financial Officer
James B. Ramsey (Principal Financial Officer
and Principal Accounting
Officer)
/s/ NEIL J. VANNUCCI Director March 24, 2006
- ---------------------------
Neil J. Vannucci
91
/s/ EDWARD J. WATSON Director March 24, 2006
- ---------------------------
Edward J. Watson
/s/ LISA ANGELOT Director March 24, 2006
- ---------------------------
Lisa Angelot
/s/ JIM D. BLACK Director and President March 24, 2006
- ---------------------------
Jim D. Black
/s/ ANTHONY J. CLIFFORD Director and Executive March 24, 2006
- --------------------------- Vice President and Chief
Anthony J. Clifford Operating Officer
/s/ R. ALBERT ROENSCH Director March 24, 2006
- ---------------------------
R. Albert Roensch
92