SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
Quarterly Report
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 2006
--------------------------------------------
FNB BANCORP
(Exact name of registrant as specified in its charter)
California
(State or other jurisdiction of incorporation)
000-49693 92-2115369
(Commission File Number) (IRS Employer Identification No.)
975 El Camino Real, South San Francisco, California 94080
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 588-6800
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark whether the registrant is 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 Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: Common Stock as of August 1,
2006: 2,712,912 shares.
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements.
FNB BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Dollars in thousands)
ASSETS
June 30, December 31,
2006 2005
------------ ------------
Cash and due from banks $ 22,753 $ 19,068
Federal funds sold 9,725 16,230
------------ ------------
Cash and cash equivalents 32,478 35,298
Securities available-for-sale 126,154 113,463
Loans, net 383,729 380,051
Bank premises, equipment, and leasehold improvements 12,979 12,028
Other real estate owned -- 2,600
Goodwill 1,841 1,841
Accrued interest receivable and other assets 24,086 23,860
------------ ------------
Total assets $ 581,267 $ 569,141
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand, noninterest bearing $ 122,425 $ 123,641
Demand, interest bearing 65,546 62,581
Savings and money market 168,521 180,489
Time 129,069 140,833
------------ ------------
Total deposits 485,561 507,544
Federal Home Loan Bank advances 30,000 --
Accrued expenses and other liabilities 7,320 6,354
------------ ------------
Total liabilities 522,881 513,898
------------ ------------
Stockholders' equity:
Common stock, no par value, authorized 10,000,000 shares;
issued and outstanding 2,712,000 shares at June 30, 2006
and 2,700,000 shares at December 31, 2005 35,028 34,793
Additional paid-in capital 42 19
Retained earnings 24,173 20,832
Accumulated other comprehensive loss (857) (401)
------------ ------------
Total stockholders' equity 58,386 55,243
------------ ------------
Total liabilities and stockholders' equity $ 581,267 $ 569,141
============ ============
See accompanying notes to consolidated financial statements.
2
FNB BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
(Dollars in thousands, except per share amounts)
Three months ended Six months ended
June 30, June 30,
--------------------------- ---------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Interest income:
Interest and fees on loans $ 7,596 $ 6,589 $ 15,256 $ 12,283
Interest on securities 687 445 1,247 886
Interest on tax-exempt securities 481 330 926 659
Federal funds sold 164 91 336 142
------------ ------------ ------------ ------------
Total interest income 8,928 7,455 17,765 13,970
------------ ------------ ------------ ------------
Interest expense:
Interest on deposits 2,113 1,204 4,064 2,113
Other 55 4 55 60
------------ ------------ ------------ ------------
Total interest expense 2,168 1,208 4,119 2,173
------------ ------------ ------------ ------------
Net interest income 6,760 6,247 13,646 11,797
Provision for loan losses 120 150 270 270
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 6,640 6,097 13,376 11,527
------------ ------------ ------------ ------------
Noninterest income:
Gain on sale of other equity securities -- _ 1,348 --
Gain on sale of other real estate owned 756 -- 756 --
Service charges 628 585 1,231 1,152
Credit card fees 216 217 409 433
Other income 227 207 399 327
------------ ------------ ------------ ------------
Total noninterest income 1,827 1,009 4,143 1,912
------------ ------------ ------------ ------------
Noninterest expense:
Salaries and employee benefits 3,025 2,807 6,204 5,612
Occupancy expense 420 343 836 658
Equipment expense 404 413 837 783
Professional fees 270 284 543 534
Telephone, postage and supplies 246 230 495 424
Bankcard expenses 203 204 387 403
Securities write-down -- -- -- 66
Other expense 778 948 1,573 1,651
------------ ------------ ------------ ------------
Total noninterest expense 5,346 5,229 10,875 10,131
------------ ------------ ------------ ------------
Earnings before income tax expense 3,121 1,877 6,644 3,308
Income tax expense 1,012 595 2,087 1,010
------------ ------------ ------------ ------------
NET EARNINGS $ 2,109 $ 1,282 $ 4,557 $ 2,298
============ ============ ============ ============
Earnings per share data:
Basic $ 0.78 $ 0.48 $ 1.69 $ 0.85
Diluted $ 0.76 $ 0.47 $ 1.65 $ 0.84
Weighted average shares outstanding:
Basic 2,704,000 2,695,000 2,703,000 2,701,000
Diluted 2,768,000 2,738,000 2,770,000 2,751,000
See accompanying notes to consolidated financial statements.
3
FNB BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
Three months ended Six months ended
June 30, June 30,
--------------------------- ---------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Net earnings $ 2,109 $ 1,282 $ 4,557 $ 2,298
Unrealized gain/(loss) on AFS securities (431) 202 (457) (361)
------------ ------------ ------------ ------------
Total comprehensive income $ 1,678 $ 1,484 $ 4,100 $ 1,937
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
FNB BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in thousands)
Six months ended
June 30,
---------------------------
2006 2005
------------ ------------
Cash flow from operating activities:
Net earnings $ 4,557 $ 2,298
Adjustments to reconcile net earnings to net cash provided
by operating activities
Depreciation and amortization 681 875
Stock-based compensation expense 23 4
Provision for loan losses 270 270
Securities write-down -- 66
Gain on sale of other equity securities (1,348) --
Gain-sale of other real estate owned 756 --
Changes in assets and liabilities:
Accrued interest receivable and other assets 2,966 (4,270)
Accrued expenses and other liabilities 878 915
------------ ------------
Net cash provided by operating activities 8,783 158
------------ ------------
Cash flows from investing activities:
Purchase of securities available-for-sale (25,549) (13,187)
Proceeds from matured/called/securities available-for-sale 12,014 17,818
Net (increase)/decrease in loans (3,948) 3,060
Proceeds from sale of bank premises, equipment and
leasehold improvements 491 --
Purchase of bank premises, equipment and leasehold improvements (2,053) (1,114)
Cash and equivalents received in bank acquisition, net of cash paid -- 9,602
------------ ------------
Net cash (used)/provided by investing activities (19,045) 16,179
------------ ------------
Cash flows from financing activities:
Net decrease in demand and savings deposits (10,219) (362)
Net (decrease)/increase in time deposits (11,764) 18,502
Net decrease in federal funds purchased -- (19,172)
Net increase in other borrowings 30,000 --
Dividends paid (811) (766)
Repurchase of common stock (10) (765)
Issuance of common stock 246 28
------------ ------------
Net cash provided (used) by financing activities 7,442 (2,535)
------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,820) 13,802
Cash and cash equivalents at beginning of period 35,298 17,084
------------ ------------
Cash and cash equivalents at end of period $ 32,478 $ 30,886
============ ============
Additional cash flow information:
Interest paid $ 4,031 $ 1,900
Income taxes paid $ 2,075 $ 1,077
Non-cash financing activity:
Accrued dividends 406 385
See accompanying notes to consolidated financial statements.
4
FNB BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
FNB Bancorp (the "Company") is a bank holding company registered under
the Bank Holding Company Act of 1956, as amended. The Company was incorporated
under the laws of the State of California on February 28, 2001. The consolidated
financial statements include the accounts of FNB Bancorp and its wholly owned
subsidiary, First National Bank of Northern California (the "Bank"). The Bank
provides traditional banking services in San Mateo and San Francisco counties.
All intercompany transactions and balances have been eliminated in
consolidation. The financial statements include all adjustments of a normal and
recurring nature, which are, in the opinion of management, necessary for a fair
presentation of the financial results for the interim periods.
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-Q and, therefore, do not include all
information and footnotes normally included in financial statements prepared in
conformity with accounting principles generally accepted in the United States of
America. Accordingly, these financial statements should be read in conjunction
with the audited financial statements and notes thereto for the year ended
December 31, 2005.
Results of operations for interim periods are not necessarily
indicative of results for the full year.
Sequoia National Bank was acquired and merged into the Bank effective
April 30, 2005. The estimated fair values of the assets acquired and liabilities
assumed by First National Bank of Northern California included Cash and
equivalents $20,583,000, Net loans $40,652,000, Core deposit intangibles and
goodwill $3,116,000, All other assets $2,837,000, Total deposits $56,025,000,
Other liabilities $274,000, or Total net assets of $10,889,000.
5
NOTE B - STOCK OPTION PLANS
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 stock 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 dividends of common stock.
At June 30, 2006, the Company has two stock-based employee compensation
plans. Prior to 2003, the Company accounted for the plan under the recognition
and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Effective January 1, 2003, the Company
adopted the fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation, prospectively to all employee awards
granted, modified, or settled after January 1, 2003. Therefore, the cost related
to stock-based employee compensation included in the determination of net income
for 2005 is less than that which would have been recognized if the fair value
based method had been applied to all awards since the original effective date of
Statement No. 123. Incentive stock options are granted to bank officers who have
been employed for at least one year at the time the options are granted.
Non-qualified options are granted to non-employee directors at the same time as
the bank officers, but do not require a minimum of one year service.
Awards under the Company's plan vest at a rate of 20 percent per year
over a period of five years for Incentive Options and vest immediately for
Nonstatutory Options. All Options are exercisable for a period of 10 years.
Options are granted at an exercise price equal to the market price of the
Company's stock at the date of grant. The expected life is the five-year vesting
period. The options granted are increased by the amount, if any, of stock
dividends granted annually.
The expected term of options granted is derived from the output of the
option valuation model and represents the period of time that options granted
are expected to be outstanding. The risk-free rate for periods within the
contractual life of the option is based on the U. S. Treasury yield curve in
effect at the time of the grant.
The following assumptions were used for options granted during 2006:
Expected volatility 10%
Weighted-average volatility 10%
Expected dividends 6.66%
Expected term (in years) 5
Risk-free rate 5.19%
The amount of compensation expense for options recorded in the quarters
ended June 30, 2006 and June 30 2005 was $6,000 and $4,000, respectively. The
income tax benefit recognized in the income statements for these amounts was
under $1,000 for the same two periods. The amount of compensation expense for
options recorded in the six months ended June 30, 2006 and June 30 2005 was
$23,000 and $7,000, respectively. The income tax benefit recognized in the
income statements for these amounts was under $1,000 for the same two periods.
6
The total intrinsic value of options exercised during the quarter ended
June 30, 2006 was $138,000 under the 1997 Plan. The total intrinsic value of
options exercised during the six months ended June 30, 2006 was $20,000 under
the 2002 Plan and $165,000 under the 1997 Plan.
The amount of total unrecognized compensation expense related to
non-vested options at June 30, 2006 was $106,000, and the weighted average
period it will be amortized over is 4.5 years.
Effective January 1, 2006, the Company adopted SFAS No. 123(R)
"Share-Based Payment", on a modified prospective basis.
A summary of option activity under the 2002 FNB Bancorp Plan as of June
30, 2006 and changes during the quarter then ended is presented below. The
weighted average fair value of the total options granted in June 2006 was $1.54.
Weighted-
2002 FNB Bancorp Plan Average
Weighted- Remaining Aggregate
Average Contractual Intrinsic
Exercise Term Value
Options Shares Price (in years) (000)
-----------------------------------------------------------------------------------------
Outstanding at April 1, 2006 153,072 $ 25.84
Granted 43,050 $ 36.25
Exercised -- --
Forfeited or expired 1,410 $ 29.31
Outstanding at June 30, 2006 194,712 $ 28.12 8.1 $ 1,534
Exercisable at June 30, 2006 74,032 $ 25.37 7.3 $ 787
A summary of option activity under the 1997 FNB Bancorp Plan as of June
30, 2006, and changes during the quarter then ended is presented below:
Weighted-
1997 FNB Bancorp Plan Average
Weighted- Remaining Aggregate
Average Contractual Intrinsic
Exercise Term Value
Options Shares Price (in years) (000)
-----------------------------------------------------------------------------------------
Outstanding at April 1, 2006 67,080 $ 19.84
Granted -- --
Exercised 8,484 $ 19.76
Forfeited or expired -- --
Outstanding at June 30, 2006 58,596 $ 19.86 3.7 $ 946
Exercisable at June 30, 2006 58,596 $ 19.86 3.7 $ 946
7
A summary of option activity under the 2002 FNB Bancorp Plan as of June
30, 2006 and changes during the six months then ended is presented below. The
weighted average fair value of the options granted in June 2006 was $1.54
Weighted-
2002 FNB Bancorp Plan Average
Weighted- Remaining Aggregate
Average Contractual Intrinsic
Exercise Term Value
Options Shares Price (in years) (000)
-----------------------------------------------------------------------------------------
Outstanding at January 1, 2006 154,899 $ 25.83
Granted 43,050 $ 36.25
Exercised 1,827 $ 24.85
Forfeited or expired 1,410 $ 29.31
Outstanding at June 30, 2006 194,712 $ 28.12 8.1 $ 1,534
Exercisable at June 30, 2006 74,032 $ 25.37 7.3 $ 787
A summary of option activity under the 1997 FNB Bancorp Plan as of June
30, 2006, and changes during the six months then ended is presented below:
Weighted-
1997 FNB Bancorp Plan Average
Weighted- Remaining Aggregate
Average Contractual Intrinsic
Exercise Term Value
Options Shares Price (in years) (000)
-----------------------------------------------------------------------------------------
Outstanding at January 1, 2006 68,739 $ 19.84
Granted -- --
Exercised 10,143 $ 19.74
Forfeited or expired -- --
Outstanding at June 30, 2006 58,596 $ 19.86 3.9 $ 946
Exercisable at June 30, 2006 58,596 $ 19.86 3.9 $ 946
8
The following table illustrates the effect on net income and earnings
per share if the fair value-based method had been applied to all outstanding and
unvested awards in each period in 2005.
(Dollars in thousands, except per share) Three months ended Six months ended
June 30, 2005 June 30, 2005
------------- -------------
Net income as reported $ 1,282 $ 2,298
Add: stock-based employee compensation
expense included in reported net income,
net of related tax effects 2 4
Deduct: total stock-based employee
compensation expense determined under
fair value method for all awards, net of
related tax effect (3) (4)
Pro forma net earnings $ 1,281 $ 2,298
Earnings per share:
Basic - as reported $ 0.48 $ 0.85
Basic - pro forma $ 0.48 $ 0.85
Diluted - as reported $ 0.47 $ 0.84
Diluted - pro forma $ 0.47 $ 0.84
NOTE C - EARNINGS PER SHARE CALCULATION
Earnings per common share (EPS) are computed based on the weighted
average number of common shares outstanding during the period. Basic EPS
excludes dilution and is computed by dividing net earnings by the weighted
average of common shares outstanding. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock.
Earnings per share have been computed based on the following (dollars
in thousands):
Three months ended Six months ended
June 30, June 30,
------------------------------ ------------------------------
2006 2005 2006 2005
------------- ------------- ------------- -------------
Net earnings $ 2,109 $ 1,282 $ 4,557 $ 2,298
Average number of shares outstanding 2,704,000 2,695,000 2,703,000 2,701,000
Effect of dilutive options 64,000 43,000 67,000 50,000
Average number of shares outstanding used
to calculate diluted earnings per share 2,768,000 2,738,000 2,770,000 2,751,000
All outstanding options were included in the 2006 and 2005
computations.
9
NOTE D - COMPREHENSIVE INCOME
Comprehensive income is the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources. Other comprehensive income consists of net unrealized gains
and losses on investment securities available-for-sale. Comprehensive income for
the three months ended June 30, 2006 was $1,678,000 compared to $1,484,000 for
the three months ended June 30, 2005. Comprehensive income for the six months
ended June 30, 2006 was $4,100,000 compared to $1,937,000 for the six months
ended June 30, 2005.
NOTE E - OTHER REAL ESTATE OWNED
Loans that have become delinquent through non payment of scheduled
principal and/or interest for 90 days are placed in nonaccrual and interest is
no longer accrued. If a favorable restructuring cannot be made for the loan
(provided the market value of the collateral is sufficient), or, if
insufficient, the borrower is unable to make further payments, foreclosure
procedures are initiated. If there are no bidders, or if bids are made and are
insufficient to cover the debt, the Bank will acquire the property at sale under
judgments, decrees, or mortgages where the property was originally security for
debts previously contracted. A property carried as Other Real Estate Owned for
$2,600,000 was disposed in the second quarter, with a net gain of $756,000.
NOTE F - SALE OF SHARES OF PACIFIC COAST BANKERS' BANCSHARES.
A sale of 3,950 shares of Pacific Coast Bankers' Bancshares was
arranged by Pacific Coast Bankers' Bancshares (PCBB) as part of its desire to
expand the number of PCBB shareholders. The Bank continues to hold a remaining
1,450 shares. The sale resulted in a gain on sale of equity securities of
$1,348,000 during the first quarter of 2006.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Critical Accounting Policies And Estimates
------------------------------------------
Management's discussion and analysis of its financial condition and
results of operations are based upon the Company's financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, the Company evaluates
its estimates, including those related to its loans and allowance for loan
losses. The Company bases its estimates on current market conditions, historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. The Company believes the
following policies require significant judgments and estimates.
10
Allowance for Loan Losses
-------------------------
The allowance for loan losses is periodically evaluated for adequacy by
management. Factors considered include the Company's loan loss experience, known
and inherent risks in the portfolio, current economic conditions, known adverse
situations that may affect the borrower's ability to repay, regulatory policies,
and the estimated value of underlying collateral. The evaluation of the adequacy
of the allowance is based on the above factors along with prevailing and
anticipated economic conditions that may impact borrowers' ability to repay
loans. Determination of the allowance is in part objective and in part a
subjective judgment by management based on the information it currently has in
its possession. Adverse changes in any of these factors or the discovery of new
adverse information could result in higher than expected charge-offs and loan
loss provisions.
Earnings Analysis
-----------------
Net earnings for the quarter ended June 30, 2006 were $2,109,000,
compared to net earnings of $1,282,000 for the quarter ended June 30, 2005, an
increase of $827,000, or 64.51%. Net earnings for the six months ended June 30,
2006 were $4,557,000 compared to $2,298,000 for the six months ended June 30,
2005, an increase of $2,259,000, or 98.30%. Earnings before income tax expense
for the quarter ended June 30, 2006 were $3,121,000, compared to $1,877,000 for
the quarter ended June 30, 2005, an increase of $1,244,000, or 66.28%. Earnings
before income tax were $6,644,000 for the six months ended June 30, 2006
compared to $3,308,000 for the six months ended June 30, 2005, an increase of
$3,336,000, or 100.85%. Two major contributors to the increased income were a
gain on sale of other equity securities (common stock of Pacific Coast
Bankshares), which resulted in a pre tax profit of $1,348,000 in the first
quarter of 2006, and a $756,000 pre tax gain on sale of Other Real Estate Owned
in the second quarter of 2006.
Net interest income for the quarter ended June 30, 2006 was $6,760,000,
compared to $6,247,000 for the quarter ended June 30, 2005, an increase of
$513,000, or 8.21%. Net interest income for the six months ended June 30, 2006
was $13,646,000 compared to $11,797,000 for the six months ended June 30, 2005,
an increase of $1,849,000, or 15.67%. The prime lending rate was 7.75% at the
beginning of the second quarter of 2006, and increased to 8.00% on May 10, 2006
and 8.25% on June 29, 2006, compared to 5.75% on April 1, 2005, 6.00% on May 3,
2005 and 6.25% on June 30, 2005. The Federal Home Loan Bank of San Francisco's
Weighted Monthly Cost of Funds Index for the three months ended June 2006 (based
on the three Index Months ended May 31), averaged 3.76%, compared to 2.51% for
the three months ended June 2005.
Basic earnings per share were $0.78 for the second quarter of 2006
compared to $0.48 for the second quarter of 2005. Diluted earnings per share
were $0.76 for the second quarter of 2006 compared to $0.47 for the second
quarter of 2005. Basic earnings per share were $1.69 for the six months ended
June 30, 2006 compared to $0.85 for the six months ended June 30, 2005. Diluted
earnings per share were $1.65 for the six months ended June 30, 2006 compared to
$0.84 for the six months ended June 30, 2005.
The following table presents an analysis of net interest income and
average earning assets and liabilities for the three-and six-month periods ended
June 30, 2006 compared to the three-and six-month periods ended June 30, 2005.
11
Table 1
- -------
NET INTEREST INCOME AND AVERAGE BALANCES
FNB BANCORP AND SUBSIDIARY
(Dollars in thousands)
Three months ended June 30,
---------------------------------------------------------------------------
2006 2005
------------------------------------ ------------------------------------
Annualized Annualized
Interest Average Interest Average
Average Income Yield Average Income Yield
INTEREST EARNING ASSETS Balance (Expense) (Cost) Balance (Expense) (Cost)
---------- ---------- ---------- ---------- ---------- ----------
Loans, gross $ 371,430 $ 7,596 8.20% $ 363,799 $ 6,589 7.26%
Taxable securities 67,162 687 4.10 55,156 445 3.24
Nontaxable securities 55,303 481 3.49 39,475 330 3.35
Federal funds sold 13,319 164 4.94 12,278 91 2.97
---------- ---------- ---------- ----------
Total interest earning assets $ 507,214 $ 8,928 7.06 $ 470,708 $ 7,455 6.35
NONINTEREST EARNING ASSETS
Cash and due from banks $ 19,824 $ 19,705
Premises and equipment 12,649 11,848
Other assets 22,348 20,591
---------- ----------
Total noninterest earning assets $ 54,821 $ 52,144
---------- ----------
TOTAL ASSETS $ 562,035 $ 522,852
========== ==========
INTEREST BEARING LIABILITIES
Deposits:
Demand, interest bearing $ 63,140 $ (81) (0.51) $ 59,940 $ (42) (0.28)
Money market 118,931 (803) (2.71) 108,488 (410) (1.52)
Savings 53,643 (66) (0.49) 60,138 (44) (0.29)
Time deposits 135,590 (1,163) (3.44) 119,039 (708) (2.39)
Federal funds purchased and other
borrowings 4,294 (55) (5.14) 505 (4) (3.18)
---------- ---------- ---------- ----------
Total interest bearing liabilities $ 375,598 $ (2,168) (2.32) $ 348,110 $ (1,208) (1.39)
---------- ---------- ---------- ----------
NONINTEREST BEARING LIABILITIES
Demand deposits 120,931 116,411
Other liabilities 7,621 5,991
---------- ----------
Total noninterest bearing liabilities $ 128,552 $ 122,402
---------- ----------
TOTAL LIABILITIES $ 504,150 $ 470,512
Stockholders' equity $ 57,885 $ 52,340
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 562,035 $ 522,852
========== ==========
NET INTEREST INCOME AND MARGIN
ON TOTAL EARNING ASSETS $ 6,760 5.35% $ 6,247 5.32%
Interest income is reflected on an actual basis, not on a fully taxable basis
due to immaterial effect. Yield on gross loans was not adjusted for nonaccrual
loans, which were not considered material for this calculation.
12
Table 2
- -------
NET INTEREST INCOME AND AVERAGE BALANCES
FNB BANCORP AND SUBSIDIARY
(Dollars in thousands)
Six months ended June 30,
---------------------------------------------------------------------------
2006 2005
------------------------------------ ------------------------------------
Annualized Annualized
Interest Average Interest Average
Average Income Yield Average Income Yield
INTEREST EARNING ASSETS Balance (Expense) (Cost) Balance (Expense) (Cost)
---------- ---------- ---------- ---------- ---------- ----------
Loans, gross $ 375,004 $ 15,256 8.20% $ 350,815 $ 12,283 7.06%
Taxable securities 63,857 1,247 3.94 56,970 886 3.14
Nontaxable securities 53,607 926 3.48 39,782 659 3.34
Federal funds sold 14,445 336 4.69 10,341 142 2.77
---------- ---------- ---------- ----------
Total interest earning assets $ 506,913 $ 17,765 7.07 $ 457,908 $ 13,970 6.15
NONINTEREST EARNING ASSETS
Cash and due from banks $ 19,573 $ 19,367
Premises and equipment 12,402 11,719
Other assets 22,908 17,618
---------- ----------
Total noninterest earning assets $ 54,883 $ 48,704
---------- ----------
TOTAL ASSETS $ 561,796 $ 506,612
========== ==========
INTEREST BEARING LIABILITIES
Deposits:
Demand, interest bearing $ 61,845 ($ 141) (0.46) $ 56,934 ($ 78) (0.28)
Money market 120,598 (1,516) (2.53) 105,741 (766) (1.46)
Savings 55,392 (123) (0.45) 59,750 (82) (0.28)
Time deposits 137,830 (2,284) (3.34) 108,234 (1,187) (2.21)
Federal funds purchased and other
Borrowings 2,159 (55) (5.14) 4,704 (60) (2.57)
---------- ---------- ---------- ----------
Total interest bearing liabilities $ 377,824 $ (4,119) (2.20) $ 335,363 $ (2,173) (1.31)
---------- ---------- ---------- ----------
NONINTEREST BEARING LIABILITIES
Demand deposits 119,215 112,953
Other liabilities 7,519 5,803
---------- ----------
Total noninterest bearing liabilities $ 126,734 $ 118,756
---------- ----------
TOTAL LIABILITIES $ 504,558 $ 454,119
Stockholders' equity $ 57,238 $ 52,493
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 561,796 $ 506,612
========== ==========
NET INTEREST INCOME AND MARGIN
ON TOTAL EARNING ASSETS $ 13,646 5.43% $ 11,797 5.20%
13
Net interest income is the difference between interest yield generated
by earning assets and the interest expense associated with the funding of those
assets.
Tables 1 and 2, above, show the various components that contributed to
changes in net interest income for the three and six months ended June 30, 2006
and 2005. The principal interest earning assets are loans, from a volume as well
as from an earnings perspective. For the quarter ended June 30, 2006, average
loans outstanding represented 73.2% of average earning assets. For the quarter
ended June 30, 2005, they represented 77.3% of average earning assets. For the
six months ended June 30, 2006 and 2005, average loans outstanding represented
74.0% and 76.6%, respectively, of average earning assets.
The yield on total interest earning assets for the quarter ended June
30, 2006 compared to the quarter ended June 30, 2005 increased from 6.35% to
7.06%, or 71 basis points. Contributing to this was a larger volume invested in
loans, which increased by $7,631,000 or 2.10% quarter to quarter, with a yield
increase of 94 basis points, or 12.95%. Interest income on total interest
earning assets increased $1,473,000 or 19.76%.
For the three months ended June 30, 2006 compared to the three months
ended June 30, 2005, the cost on total interest bearing liabilities increased
from 1.39% to 2.32%, an increase of 93 basis points. The most expensive as well
as principal source of interest bearing liabilities comes from time deposits.
Their average cost increased from 2.39% to 3.44%, and the expense on these
deposits increased $455,000 for the three months ended June 30, 2006 compared to
2005. Their average volume increased by $16,551,000, or 13.90%. The other
significant increase was in money market deposits. Comparing the two quarters
ended June 30, money market deposit average balances increased $10,443,000 or
9.63%, and their cost increased 119 basis points, or 78.29%, while the expense
increased $393,000 or 95.85%.
For the six months ended June 30, 2006 compared to the six months ended
June 30, 2005, interest income on interest earning assets increased $3,795,000
or 27.16%, and average earning assets increased $49,005,000, or 10.70%. Average
loans increased by $24,189,000, or 6.90%. Interest on loans increased $2,973,000
or 24.20%. Their yield increased 114 basis points, or 16.15%. The cost on total
interest bearing liabilities increased from 1.31% to 2.20%. Time deposit
averages increased $29,596,000 or 27.34%. Their cost increased 113 basis points,
or 51.13%. Money market deposit average balances increased $14,857,000, or
14.05%, and their cost increased 107 basis points, or 73.29%.
For the three and six month periods ended June 30, 2006 and June 30,
2005, respectively, the following tables show the dollar amount of change in
interest income and expense and the dollar amounts attributable to: (a) changes
in volume (changes in volume at the current year rate), and b) changes in rate
(changes in rate times the prior year's volume). In this table, the dollar
change in rate/volume is prorated to volume and rate proportionately.
At the end of April, 2005, total interest-bearing deposits outstanding
acquired from Sequoia National Bank were $49,080,000. They consisted of
$7,477,000 in interest-bearing demand deposits; $12,518,000 in money market
deposits; $1,917,000 in savings deposits; and $27,168,000 in time deposits.
14
Table 3
- -------
FNB BANCORP AND SUBSIDIARY
RATE/VOLUME VARIANCE ANALYSIS
Three Months Ended June 30,
(Dollars in thousands) 2006 Compared to 2005
Interest Variance
Income/Expense Attributable To
Variance Rate Volume
------------ ------------ ------------
INTEREST EARNING ASSETS
Loans $ 1,007 $ 851 $ 156
Taxable securities 242 119 123
Nontaxable securities 151 13 138
Federal funds sold 73 65 8
------------ ------------ ------------
Total $ 1,473 1,048 $ 425
------------ ------------ ------------
INTEREST BEARING LIABILITIES
Demand deposits $ 39 $ 37 $ 2
Money market 393 322 71
Savings deposits 22 30 (8)
Time deposits 455 357 98
Federal funds and other borrowings 51 2 49
------------ ------------ ------------
Total $ 960 $ 748 $ 212
------------ ------------ ------------
NET INTEREST INCOME $ 513 $ 300 $ 213
============ ============ ============
Table 4
- -------
FNB BANCORP AND SUBSIDIARY
RATE/VOLUME VARIANCE ANALYSIS
Six Months Ended June 30,
(Dollars in thousands) 2006 Compared To 2005
Interest Variance
Income/Expense Attributable To
Variance Rate Volume
------------ ------------ ------------
INTEREST EARNING ASSETS
Loans $ 2,973 $ 2,126 $ 847
Taxable securities 361 226 135
Nontaxable securities 267 28 239
Federal funds sold 194 138 56
------------ ------------ ------------
Total $ 3,795 $ 2,518 $ 1,277
------------ ------------ ------------
INTEREST BEARING LIABILITIES
Demand deposits $ 63 $ 56 $ 7
Money market 750 563 187
Savings deposits 41 51 (10)
Time deposits 1,097 772 325
Federal funds and other borrowings (5) 60 (65)
------------ ------------ ------------
Total $ 1,946 $ 1,502 $ 444
------------ ------------ ------------
NET INTEREST INCOME $ 1,849 $ 1,016 $ 833
============ ============ ============
15
Noninterest income
- ------------------
The following table shows the principal components of noninterest
income for the periods indicated.
Table 5
- -------
NONINTEREST INCOME
Three months ended Six months ended
June 30, June 30,
(Dollars in thousands) 2006 2005 2006 2005
------------ ------------ ------------ ------------
Gain on sale of other equity securities $ -- $ -- $ 1,348 $ --
Gain - sale of other real estate owned 756 -- 756 --
Service charges 628 585 1,231 1,152
Credit card fees 216 217 409 433
Other income 227 207 399 327
------------ ------------ ------------ ------------
Total noninterest income $ 1,827 $ 1,009 $ 4,143 $ 1,912
============ ============ ============ ============
Noninterest income consists mainly of service charges on deposits,
credit card fees, and several other miscellaneous types of income. For the
quarter ended June 30, 2006 compared to June 30, 2005, total noninterest income
increased by $818,000 or 81.07%. The second quarter of 2006 included a gain on
the sale of other real estate owned for $756,000. Service charges increased by
$43,000, credit card fees decreased $1,000, offset by an increase in other
income, which increased $20,000. For the six months ended June 30, 2006 and June
30, 2005, total noninterest income increased by $2,231,000, or 116.68%. The only
significant changes were the gain on sale of other equity securities for
$1,348,000, and the gain on sale of other real estate owned, for $756,000. These
two items accounted for 94.31% of the six month change.
Noninterest expense
- -------------------
The following table shows the principal components of noninterest
expense for the periods indicated.
Table 6
- -------
NONINTEREST EXPENSE
Three months ended Six months ended
June 30, June 30,
(Dollars in thousands) 2006 2005 2006 2005
------------ ------------ ------------ ------------
Salaries and employee benefits $ 3,025 $ 2,807 $ 6,204 $ 5,612
Occupancy expense 420 343 836 658
Equipment expense 404 413 837 783
Professional fees 270 284 543 534
Telephone, postage and supplies 246 230 495 424
Bankcard expense 203 204 387 403
Other expense 778 948 1,573 1,717
------------ ------------ ------------ ------------
Total noninterest expense $ 5,346 $ 5,229 $ 10,875 $ 10,131
============ ============ ============ ============
16
Noninterest expense consists mainly of salaries and employee benefits.
For the three months ended June 30, 2006 compared to three months ended June 30,
2005, it represented 56.6% and 53.7% of total noninterest expenses. For the six
months ended June 30, 2006 and 2005, it was 57.0% and 55.4% respectively of
total noninterest expense. The staff at the two former Sequoia National Bank
branches are in the 2006 quarter for three months, versus two months in 2005.
For the six months of 2006, they are in the 2006 period for six months, but only
two months in 2005. The same reason accounts for occupancy expense increases of
$77,000 for the quarter and $178,000 for the six months. The remaining
categories are less significant. Other expense decreased $170,000 in the quarter
ended June 30, 2006 over the quarter ended June 30, 2005. The principal decrease
was $308,000 in acquisition related expense, in connection with Sequoia National
Bank for the second quarter of 2005. This was offset by a provision for losses
on unfunded commitments of $45,000 in 2006, and $40,000 deposit premium
amortization. Numerous smaller variances account for the remainder. For the six
months ended June 30, 2006 and 2005, the decrease in other expense was $144,000.
The principal decrease was $308,000 in acquisition related expense in 2005,
partly offset by a $60,000 provision for loan losses on unfunded commitments in
2006, and $80,000 in deposit premium amortization. Other expenses for the
quarter of June 2006 decreased from the same quarter in 2005 by $170,000.
Income Taxes
- ------------
The effective tax rate for the quarter ended June 30, 2006 was 32.4%
compared to 31.7% for the quarter ended June 30, 2005. The effective tax rate
for the six months ended June 30, 2006 and June 30, 2005, respectively was 31.4%
and 30.5%. This is affected by changing amounts invested in tax-free securities,
by available Low Income Housing Credits, by amounts of interest income on
qualifying loans in Enterprise Zones, and by the effective state tax rate. 2006
was also affected by the gain on sale of equity securities and the sale of other
real estate owned. the gain on sale of equity securities
Asset and Liability Management
- ------------------------------
Ongoing management of the Company's interest rate sensitivity limits
interest rate risk through monitoring the mix and maturity of loans, investments
and deposits. Management regularly reviews the Company's position and evaluates
alternative sources and uses of funds as well as changes in external factors.
Various methods are used to achieve and maintain the desired rate sensitivity
position including the sale or purchase of assets and product pricing.
In order to ensure that sufficient funds are available for loan growth
and deposit withdrawals, as well as to provide for general needs, the Company
must maintain an adequate level of liquidity. Asset liquidity comes from the
Company's ability to convert short-term investments into cash and from the
maturity and repayment of loans and investment securities. Liability liquidity
comes from Company's customer base, which provides core deposit growth. The
overall liquidity position of the Company is closely monitored and evaluated
regularly. Management believes the Company's liquidity sources at June 30, 2006
are adequate to meet its operating needs in 2006 and going forward into the
foreseeable future.
The Company's asset/liability gap is the difference between the cash
flow amounts of interest-sensitive assets and liabilities that will be
refinanced (or repriced) during a given period. For example, if the asset amount
to be repriced exceeds the corresponding liability amount for a certain day,
month, year or longer period, the institution is in an asset-sensitive gap
position. In this situation, net interest income would increase if market
interest rates rose or decrease if market interest rates fell. Alternatively, if
17
more liabilities than assets will reprice, the institution is in a
liability-sensitive position. Accordingly, net interest income would decline
when rates rose and increase when rates fell.
The following table sets forth information concerning interest rate
sensitive assets and liabilities as of June 30, 2006. The assets and liabilities
are classified by the earlier of maturity or repricing date in accordance with
their contractual terms. Since all interest rates and yields do not adjust at
the same speed or magnitude, and since volatility is subject to change, the gap
is only a general indicator of interest rate sensitivity.
Table 7
- -------
RATE SENSITIVE ASSETS/LIABILITIES
As of June 30, 2006
(Dollars in thousands)
Over
Three Three To Over One Over Not
Months Twelve Through Five Rate-
Or Less Months Five Years Years Sensitive Total
--------- --------- --------- --------- --------- ---------
Interest earning assets:
Federal funds sold $ 9,725 $ -- $ -- $ -- $ -- $ 9,725
Securities available for sale 11,008 38,794 44,183 32,169 -- 126,154
Loans 252,061 16,615 67,367 52,237 261 388,541
-----------------------------------------------------------------------------
Total interest earning assets 272,794 55,409 111,550 84,406 261 524,420
Cash and due from banks -- -- -- -- 22,753 22,753
Allowance for loan losses -- -- -- -- (4,812) (4,812)
Other assets -- -- -- -- 38,906 38,906
-----------------------------------------------------------------------------
Total assets $ 272,794 $ 55,409 $ 111,550 $ 84,406 $ 57,108 $ 581,267
=============================================================================
Interest bearing liabilities:
Demand, interest bearing $ 65,546 $ -- $ -- $ -- $ -- $ 65,546
Savings and money market 168,521 -- -- -- -- 168,521
Time deposits 48,210 64,900 15,959 -- -- 129,069
Federal Home Loan Bank advances -- 10,000 20,000 -- -- 30,000
-----------------------------------------------------------------------------
Total interest bearing liabilities 282,277 74,900 35,959 -- -- 393,136
-----------------------------------------------------------------------------
Noninterest demand deposits -- -- -- -- 122,425 122,425
Other liabilities -- -- -- -- 7,320 7,320
Stockholders' equity -- -- -- -- 58,386 58,386
-----------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 282,277 $ 74,900 $ 35,959 $ -- $ 188,131 $ 581,267
=============================================================================
Interest rate sensitivity gap $ (9,483) $ (19,491) $ 75,591 $ 84,406 $(131,023) $ --
=============================================================================
Cumulative interest rate sensitivity gap $ (9,483) $ (28,974) $ 46,617 $ 131,023 $ -- $ --
Cumulative interest rate sensitivity gap ratio (3.48%) (8.83%) 10.60% 25.00% -- --
Financial Condition
- -------------------
Assets. Total assets increased to $581,267,000 at June 30, 2006 from
$569,141,000 at December 31, 2005, an increase of $12,126,000. Most of this
increase was in securities available for sale, which increased $12,691,000.
Other real estate owned decreased $2,600,000, and the remaining categories
increased by $2,035,000 net. Most of the increase in total assets was funded by
an Federal Home Loan Bank borrowings of $30,000,000, which also offset the
decrease in deposits of $21,983,000.
Loans. Gross loans at June 30, 2006 were $389,095,000, an increase of
$3,539,000 or 0.92% from December 31, 2005. Gross real estate loans increased
$2,393,000, construction loans increased $2,904,000, while the commercial and
consumer loans decreased by a total of $1,758,000. The portfolio breakdown was
as follows.
18
Table 8
- -------
LOAN PORTFOLIO
June 30, December 31,
(In thousands) 2006 Percent 2005 Percent
------------ ------------ ------------ ------------
Real Estate $ 305,206 78.4% $ 302,813 78.5%
Construction 29,147 7.5 26,243 6.8
Commercial 51,669 13.3 53,070 13.8
Consumer 3,063 0.8 3,420 0.9
------------ ------------ ------------ ------------
Gross loans 389,085 100.0% 385,546 100.0%
============ ============
Net deferred loan fees (544) (948)
Allowance for loan losses (4,812) (4,547)
------------ ------------
Net loans $ 383,729 $ 380,051
============ ============
Allowance for loan losses. The Company has the responsibility of
assessing the overall risks in its portfolio, assessing the specific loss
expectancy, and determining the adequacy of the allowance for loan losses. The
level of the allowance is determined by internally generating credit quality
ratings, reviewing economic conditions in the Company's market area, and
considering the Company's historical loan loss experience. The Company considers
changes in national and local economic conditions, as well as the condition of
various market segments. It also reviews any changes in the nature and volume of
the portfolio. It watches for the existence and effect of any concentrations of
credit, and changes in the level of such concentrations. The Company also
reviews the effect of external factors, such as competition and legal and
regulatory requirements. Finally, the Company is committed to maintaining an
adequate allowance, identifying credit weaknesses by consistent review of loans,
and maintaining the ratings and changing those ratings in a timely manner as
circumstances change.
A summary of transactions in the allowance for loan losses for the six
months ended June 30, 2006 and the six months ended June 30, 2005 is as follows.
During the quarter ended June 30, 2005, the $700,000 balance in Sequoia National
Bank's allowance for loan losses was added to the Bank's allowance as part of
the acquisition entries.
Table 9
- -------
ALLOWANCE FOR LOAN LOSSES
Six months ended Six months ended
(In thousands) June 30, 2006 June 30, 2005
------------- -------------
Balance, beginning of period $ 4,547 $ 3,334
Provision for loan losses 270 270
Recoveries 1 13
Amounts charged off (6) (85)
Allowance acquired in business combination -- 700
------------- -------------
Balance, end of period $ 4,812 $ 4,232
============= =============
In management's judgment, the allowance was adequate to absorb losses
currently inherent in the loan portfolio at June 30, 2006. However, changes in
prevailing economic conditions in the Company's markets or in the financial
condition of its customers could result in changes in the level of nonperforming
assets and charge-offs in the future and, accordingly, changes in the allowance.
Nonperforming assets. Nonperforming assets consist of nonaccrual loans,
foreclosed assets, and loans that are 90 days or more past due but are still
accruing interest and other real estate owned. At June 30, 2006, there were
$261,000 in non-accrual loans, compared to $17,000 at December 31, 2005. There
19
was no Other Real Estate Owned at June 30, 2006, and no loans past due 90 days
and still accruing. At December 31, 2005, there was $2,600,000 in Other Real
Estate Owned. This property secured a loan with an original balance of
$3,592,000. When borrowers were unable to make payments, the loan was written
down to its appraised value in June 2003, March 2004 and March 2005, leaving a
balance of $2,600,000. The property was taken back through trustee's sale on
April 1, 2005, and booked as Other Real Estate Owned for $2,600,000. It was sold
in the second quarter of 2006 for $3,356,000, resulting in a net gain of
$756,000. There were no foreclosed assets or loans past due 90 days and still
accruing at December 31, 2005.
Deposits. Total deposits at June 30, 2006 were $485,561,000 compared to
$507,544,000 on December 31, 2005. Of these totals, noninterest-bearing demand
deposits were $122,425,000 or 25.2% of the total on June 30, 2006 and
$123,641,000 or 24.4% on December 31, 2005. Time deposits were $129,069,000 on
June 30, 2006 and $140,833,000 on December 31, 2005.
The following table sets forth the maturity schedule of the time certificates of
deposit on June 30, 2006:
Table 10
--------
(Dollars in thousands) Under $100,000
Maturities: $100,000 Or more Total
------------ ------------ ------------
Three months or less $ 18,479 $ 29,731 $ 48,210
Over three to six months 14,177 23,235 37,412
Over six through twelve months 15,736 11,752 27,488
Over twelve months 10,270 5,689 15,959
------------ ------------ ------------
Total $ 58,662 $ 70,407 $ 129,069
------------ ------------ ------------
The following table shows the risk-based capital ratios and leverage
ratios at June 30, 2006 and December 31, 2005 for the Bank:
Table 11
-------- Minimum "Well
June 30, December 31, Capitalized"
Risk-Based Capital Ratios 2006 2005 Requirements
------------------------------ ----------- ------------ ------------
Tier 1 Capital 11.36% 10.64% > 6.00%
-
Total Capital 12.35% 11.56% > 10.00%
-
Leverage Ratios 10.06% 9.47% > 5.00%
-
Liquidity. Liquidity is a measure of the Company's ability to convert
assets into cash with minimal loss. As of June 30, 2006, Liquid Assets were
$158,632,000, or 27.3% of total assets. As of December 31, 2005, Liquid Assets
were $148,761,000, or 26.1% of total assets. Liquidity consists of cash and due
from other banks accounts, federal funds sold, and securities
available-for-sale. The Company's primary uses of funds are loans, and the
primary sources of funds are deposits. The relationship between total net loans
and total deposits is a useful additional measure of liquidity. The Company also
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.
A higher loan to deposit ratio means that assets will be less liquid.
This has to be balanced against the fact that loans represent the highest
interest earning assets. A lower loan to deposit ratio means lower potential
20
income. On June 30, 2006 net loans were at 79.0% of deposits. On December 31,
2005 net loans were at 74.9% of deposits.
Forward-Looking Information and Uncertainties Regarding Future
Financial Performance.
This report, including management's discussion above, concerning
earnings and financial condition, contains "forward-looking statements".
Forward-looking statements are estimates of or statements about expectations or
beliefs regarding the Company's future financial performance or anticipated
future financial condition that are based on current information and that are
subject to a number of risks and uncertainties that could cause actual operating
results in the future to differ significantly from those expected at the current
time. Those risks and uncertainties include, although they are not limited to,
the following:
Increased competition. Increased competition from other banks and
financial service businesses, mutual funds and securities brokerage and
investment banking firms that offer competitive loan and investment products
could require us to reduce interest rates and loan fees to attract new loans or
to increase interest rates that we offer on time deposits, either or both of
which could, in turn, reduce interest income and net interest margins.
Possible Adverse Changes in Economic Conditions. Adverse changes in
national or local economic conditions could (i) reduce loan demand which could,
in turn, reduce interest income and net interest margins; (ii) adversely affect
the financial capability of borrowers to meet their loan obligations, which, in
turn, could result in increases in loan losses and require increases in
provisions for possible loan losses, thereby adversely affecting operating
results; and (iii) lead to reductions in real property values that, due to the
Company's reliance on real property to secure many of its loans, could make it
more difficult to prevent losses from being incurred on non-performing loans
through the sale of such real properties.
Possible Adverse Changes in National Economic Conditions and Federal
Reserve Board Monetary Policies. Changes in national economic policies, such as
increases in inflation or declines in economic output often prompt changes in
Federal Reserve Board monetary policies that could reduce interest income or
increase the cost of funds to the Company, either of which could result in
reduced earnings.
Changes in Regulatory Policies. Changes in federal and national bank
regulatory policies, such as increases in capital requirements or in loan loss
reserve or asset/liability ratio requirements, could adversely affect earnings
by reducing yields on earning assets or increasing operating costs.
Due to these and other possible uncertainties and risks, readers are
cautioned not to place undue reliance on the forward-looking statements
contained in this report, which speak only as of the date of this report, or to
make predictions based solely on historical financial performance. The Company
also disclaims any obligation to update forward-looking statements contained in
this report.
21
Other Matters
Off-Balance Sheet Items
The Company has certain ongoing commitments under operating leases.
These commitments do not significantly impact operating results. As of June 30,
2006 and December 31, 2005, commitments to extend credit and letters of credit
were the only financial instruments with off-balance sheet risk. The Company has
not entered into any contracts for financial derivative instruments such as
futures, swaps, options or similar instruments. Loan commitments and letters of
credit were $110,517,000 and $97,701,000 at June 30, 2006 and December 31, 2005,
respectively. As a percentage of net loans, these off-balance sheet items
represent 28.8% and 25.7% respectively.
Corporate Reform Legislation
President George W. Bush signed the "Sarbanes-Oxley Act of 2002" (the
"Act") on July 30, 2002, which responds to the recent corporate accounting
scandals. Among other matters, the Act increases the penalties for securities
fraud, establishes new rules for financial analysts to prevent conflicts of
interest, creates a new independent oversight board for the accounting
profession, imposes restrictions on the consulting activities of accounting
firms that audit company records and requires certification of financial reports
by corporate executives. The SEC has adopted a number of rule changes to
implement the provisions of the Act. The SEC has also approved new rules
proposed and adopted by the New York Stock Exchange and the Nasdaq Stock Market
to strengthen corporate governance standards for listed companies. The Company
does not currently anticipate that compliance with the Act (including the rules
adopted pursuant to the Act) will have a material effect upon its financial
position or results of its operations or its cash flows.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market risk is the risk of loss to future earnings, to fair values of
assets or to future cash flows that may result from changes in the price or
value of a financial instrument. The value of a financial instrument may change
as a result of changes in interest rates and other market conditions. Market
risk is attributed to all market risk sensitive financial instruments, including
loans, investment securities, deposits and borrowings. The Company does not
engage in trading activities or participate in foreign currency transactions for
its own account. Accordingly, exposure to market risk is primarily a function of
asset and liability management activities and of changes in market rates of
interest. Changes in rates can cause or require increases in the rates paid on
deposits that may take effect more rapidly or may be greater than the increases
in the interest rates that the Company is able to charge on loans and the yields
that it can realize on its investments. The extent of that market risk depends
on a number of variables including the sensitivity to changes in market interest
rates and the maturities of the Company's interest earning assets and deposits.
For the quarter ended June 30, 2006, the prime lending rate started at 7.75%,
and increased to 8.00% on May 11, 2006 and 8.25% on June 29, 2006. For the
quarter ended June 30, 2005, the prime lending rate started at 5.75%, increased
to 6.00% on May 3, 2005 and 6.25% on June 30, 2005.
22
Item 4. Controls and Procedures.
(a) Disclosure Controls and Procedures: An evaluation of the
Company's disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) was carried out under the supervision and with the
participation of the Company's Chief Executive Officer, Chief Financial Officer
and other members of the Company's senior management as of the end of the
Company's fiscal quarter ended June 30, 2006. The Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures as currently in effect are effective in ensuring that
the information required to be disclosed by the Company in the reports it files
or submits under the Act is (i) accumulated and communicated to the Company's
management (including the Chief Executive Officer and Chief Financial Officer)
to allow timely decisions regarding required disclosure, and (ii) recorded,
processed, summarized and reported within the time periods specified in the
Commission's rules and forms.
(b) Internal Control Over Financial Reporting: An evaluation of
any changes in the Company's internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), that occurred during the
Company's fiscal quarter ended June 30, 2006, was carried out under the
supervision and with the participation of the Company's Chief Executive Officer,
Chief Financial Officer and other members of the Company's senior management.
The Company's Chief Executive Officer and Chief Financial Officer concluded that
no change identified in connection with such evaluation has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
PART II--OTHER INFORMATION
Item 1. Legal Procedures
There are no material legal proceedings currently pending against the
Company or the Bank, other than ordinary routine litigation incidental to their
business.
Item 1A. Risk Factors
There have been no material changes from risk factors
previously disclosed by the Company in response to Item 1A., Part 1 of Form 10-K
as of December 31, 2005.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
c) ISSUER PURCHASES OF EQUITY SECURITIES
On June 12, 2006, certain outstanding stock options were exercised by an
employee/optionee, and, in partial payment of the exercise price of such stock
options, 266 shares of the common stock of the Company already held by such
optionee were surrendered to the Company and canceled, all in accordance with
the terms of the Company's Stock Option Plans. The value of the 266 shares was
determined to be $36.50 per share.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of FNB Bancorp was held on May 17,
2006. Two matters were voted on at the Annual Meeting: the election of
Directors, and a proposal to ratify and approve the appointment of Moss Adams
LLP as independent auditors of FNB Bancorp for the 2006 fiscal year. The nine
23
appointees identified in the proxy statement for the Annual Meeting were elected
as Directors, and the appointment of Moss Adams LLP was approved. Set forth
below is a summary of the voting:
Election of Directors Votes For Votes Withheld
--------------------- --------- --------------
Michael R. Wyman 1,807,846 8,886
Thomas C. McGraw 1,807,846 8,886
Neil J. Vannucci 1,808,152 8,580
Edward W. Watson 1,807,754 8,978
Lisa Angelot 1,807,846 8,886
Jim D. Black 1,807,846 8,886
Anthony J. Clifford 1,807,448 9,284
R. Albert Roensch 1,807,448 9,284
Michael Pacelli 1,807,846 8,886
Appointment of Moss Adams LLP For Against Abstain
----------------------------- --- ------- -------
1,800,625 190 15,917
Item 6. Exhibits
Exhibits
31: Rule 13a-14(a)/15d-14(a) Certifications
32: Section 1350 Certifications
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FNB BANCORP
(Registrant)
Dated:
August 11, 2006. By: /s/ THOMAS C. MCGRAW
-------------------------------------
Thomas C. McGraw
Chief Executive Officer
(Authorized Officer)
By: /s/ JAMES B. RAMSEY
-------------------------------------
James B. Ramsey
Senior Vice President
Chief Financial Officer
(Principal Financial Officer)
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