SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
Quarterly Report
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 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 November 1,
2006: 2,717,604 shares.
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements.
FNB BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Dollars in thousands)
ASSETS
September 30, December 31,
2006 2005
------------ ------------
Cash and due from banks $ 16,675 $ 19,068
Federal funds sold -- 16,230
------------ ------------
Cash and cash equivalents 16,675 35,298
Securities available-for-sale 136,133 113,463
Loans, net 393,839 380,051
Bank premises, equipment, and leasehold improvements 13,300 12,028
Other real estate owned -- 2,600
Goodwill 1,841 1,841
Accrued interest receivable and other assets 24,191 23,860
------------ ------------
Total assets $ 585,979 $ 569,141
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand, noninterest bearing $ 121,005 $ 123,641
Demand, interest bearing 59,064 62,581
Savings and money market 170,378 180,489
Time 126,431 140,833
------------ ------------
Total deposits 476,878 507,544
Federal Home Loan Bank advances 30,000 --
Federal funds purchased 10,622 --
Accrued expenses and other liabilities 8,007 6,354
------------ ------------
Total liabilities 525,507 513,898
------------ ------------
Stockholders' equity:
Common stock, no par value, authorized 10,000,000 shares;
Issued and outstanding 2,718,000 shares at September 30, 2006
and 2,700,000 shares at December 31, 2005 35,144 34,793
Additional paid-in capital 50 19
Retained earnings 25,233 20,832
Accumulated other comprehensive income/(loss) 45 (401)
------------ ------------
Total stockholders' equity 60,472 55,243
------------ ------------
Total liabilities and stockholders' equity $ 585,979 $ 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 Nine months ended
September 30, September 30,
--------------------------- ---------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Interest income:
Interest and fees on loans $ 7,947 $ 6,972 $ 23,203 $ 19,255
Interest on securities 761 550 2,008 1,436
Interest on tax-exempt securities 538 397 1,464 1,056
Federal funds sold 256 114 592 256
------------ ------------ ------------ ------------
Total interest income 9,502 8,033 27,267 22,003
------------ ------------ ------------ ------------
Interest expense:
Interest on deposits 2,355 1,566 6,419 3,679
Federal Home Loan Bank advances 421 -- 458 --
Federal funds purchased 10 1 28 61
------------ ------------ ------------ ------------
Total interest expense 2,786 1,567 6,905 3,740
------------ ------------ ------------ ------------
Net interest income 6,716 6,466 20,362 18,263
Provision for loan losses 120 165 390 435
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 6,596 6,301 19,972 17,828
------------ ------------ ------------ ------------
Noninterest income:
Gain on sale of other equity securities 4 -- 1,352 --
Gain on sale of other real estate owned -- -- 756 --
Service charges 630 590 1,861 1,742
Credit card fees 193 218 602 651
Other income 219 185 618 512
------------ ------------ ------------ ------------
Total noninterest income 1,046 993 5,189 2,905
------------ ------------ ------------ ------------
Noninterest expense:
Salaries and employee benefits 3,005 2,823 9,209 8,435
Occupancy expense 440 400 1,276 1,058
Equipment expense 393 406 1,230 1,189
Professional fees 326 195 869 729
Telephone, postage and supplies 278 271 773 695
Bankcard expenses 189 205 576 608
Other expense 758 767 2,331 2,484
------------ ------------ ------------ ------------
Total noninterest expense 5,389 5,067 16,264 15,198
------------ ------------ ------------ ------------
Earnings before income tax expense 2,253 2,227 8,897 5,535
Income tax expense 787 674 2,874 1,684
------------ ------------ ------------ ------------
NET EARNINGS $ 1,466 $ 1,553 $ 6,023 $ 3,851
============ ============ ============ ============
Earnings per share data:
Basic $ 0.54 $ 0.58 $ 2.23 $ 1.43
Diluted $ 0.53 $ 0.57 $ 2.18 $ 1.40
Weighted average shares outstanding:
Basic 2,707,000 2,695,000 2,704,000 2,699,000
Diluted 2,766,000 2,736,000 2,765,000 2,746,000
See accompanying notes to consolidated financial statements.
3
- --------------------------------------------------------------------------------
FNB BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
Three months ended Nine months ended
September 30, September 30,
--------------------------- ---------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Net earnings $ 1,466 $ 1,553 $ 6,023 $ 3,851
Unrealized gain/(loss) on AFS securities 903 (270) 446 (631)
------------ ------------ ------------ ------------
Total comprehensive income $ 2,369 $ 1,283 $ 6,469 $ 3,220
============ ============ ============ ============
FNB BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in thousands)
Nine months ended
September 30,
----------------------------
2006 2005
------------ ------------
Cash flow from operating activities:
Net earnings $ 6,023 $ 3,851
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization 944 1,012
Stock-based compensation expense 31 7
Provision for loan losses 390 435
Securities write-down -- 66
Gain on sale of other equity securities (1,352) --
Gain-sale of other real estate owned (756) --
Changes in assets and liabilities:
Accrued interest receivable and other assets 1,021 (5,202)
Accrued expenses and other liabilities 1,343 2,105
------------ ------------
Net cash provided by operating activities 7,644 2,274
------------ ------------
Cash flows from investing activities:
Purchase of securities available-for-sale (45,105) (40,636)
Proceeds from matured/called/securities available-for-sale 23,135 23,022
Proceeds from sale of other real estate owned 3,356 --
Net (increase)/decrease in loans (14,178) 9,705
Proceeds from sale of bank premises, equipment and leasehold improvements 491 241
Purchase of bank premises, equipment and leasehold improvements (2,651) (1,430)
Cash and equivalents received in bank acquisition, net of cash paid -- 9,602
------------ ------------
Net cash (used)/provided by investing activities (34,952) 504
------------ ------------
Cash flows from financing activities:
Net decrease/(increase) in demand and savings deposits (16,264) 847
Net (decrease)/increase in time deposits (14,402) 22,787
Net decrease in federal funds purchased 10,622 (18,667)
Net increase in Federal Home Loan Bank advances 30,000 --
Net change in dividends declared (406) --
Dividends paid (1,217) (1,150)
Repurchase of common stock (73) (765)
Issuance of common stock 425 45
------------ ------------
Net cash provided by financing activities 8,685 3,097
------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (18,623) 5,875
Cash and cash equivalents at beginning of period 35,298 17,084
------------ ------------
Cash and cash equivalents at end of period $ 16,675 $ 22,959
============ ============
Additional cash flow information:
Interest paid $ 6,720 $ 3,335
Income taxes paid $ 3,185 $ 1,576
Non-cash investing and financing activity:
Accrued dividends 406 385
Change in unrealized gain on sale of AFS securities, net of $446,000 tax effect, was $310,000 in 2006, and
dividends accrued, unpaid, were $406,000. In 2005, the change in unrealized loss on sale of securities, net of of
$439,000 tax effect, was $631,000, and dividends accrued, unpaid, were $385,000.
See accompanying notes to consolidated financial statements.
4
FNB BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 September 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. Options vest over a five year period and have a life of
ten 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 September 30, 2006 and September 30 2005 was $8,000 and $5,000,
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 nine months ended September 30,
2006 and September 30 2005 was $31,000 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
September 30, 2006 was $41,000 under the 2002 Plan and $39,000 under the 1997
Plan. The total intrinsic value of options exercised during the nine months
ended September 30, 2006 was $60,000 under the 2002 Plan and $194,000 under the
1997 Plan.
The amount of total unrecognized compensation expense related to
non-vested options at September 30, 2006 was $99,000, and the weighted average
period it will be amortized over is 3.1 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
September 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 June 30, 2006 194,712 $ 28.12
Granted -- --
Exercised (4,852) $ 26.55
Forfeited or expired (735) $ 31.08
Outstanding at September 30, 2006 189,125 $ 28.15 7.8 $ 1,296
Exercisable at September 30, 2006 75,008 $ 25.08 6.9 $ 744
A summary of option activity under the 1997 FNB Bancorp Plan as of
September 30, 2006, and changes during the quarter then ended is presented
below:
1997 FNB Bancorp Plan Weighted-
Average
Weighted- Remaining Aggregate
Average Contractual Intrinsic
Exercise Term Value
Options Shares Price (in years) (000)
------------------------------------------------------------------------------------------------
Outstanding at June 30, 2006 58,596 $ 19.86
Granted -- --
Exercised (2,548) $ 19.76
Forfeited or expired --
Outstanding at September 30, 2006 56,048 $ 19.86 3.5 $ 849
Exercisable at September 30, 2006 56,048 $ 19.86 3.5 $ 849
7
A summary of option activity under the 2002 FNB Bancorp Plan as of
September 30, 2006 and changes during the nine 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 (6,679) $ 26.08
Forfeited or expired (2,145) $ 29.91
Outstanding at September 30, 2006 189,125 $ 28.15 7.8 $ 1,296
Exercisable at September 30, 2006 75,008 $ 25.08 6.9 $ 744
A summary of option activity under the 1997 FNB Bancorp Plan as of
September 30, 2006, and changes during the nine months then ended is presented
below:
1997 FNB Bancorp Plan Weighted-
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 (12,691) $ 19.74
Forfeited or expired -- --
Outstanding at September 30, 2006 56,048 $ 19.86 3.5 $ 849
Exercisable at September 30, 2006 56,048 $ 19.86 3.5 $ 849
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 Nine months ended
September 30, 2005 September 30, 2005
------------------ ------------------
Net income as reported $ 1,553 $ 3,851
Add: stock-based employee compensation
expense included in reported net income,
net of related tax effects 3 7
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 $ 1,553 $ 3,854
Earnings per share:
Basic - as reported $ 0.58 $ 1.43
Basic - pro forma $ 0.58 $ 1.43
Diluted - as reported $ 0.57 $ 1.40
Diluted - pro forma $ 0.57 $ 1.40
NOTE C - EARNINGS PER SHARE CALCULATION
Earnings per common share (EPS) are computed based on the weighted
average number of common shares outstanding during the period. Basic EPS
excludes dilution and is computed by dividing net earnings by the weighted
average of common shares outstanding. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock.
Earnings per share have been computed based on the following (dollars
in thousands):
Three months ended Nine months ended
September 30, September 30,
--------------------------- ---------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Net earnings $ 1,466 $ 1,553 $ 6,023 $ 3,851
Average number of shares outstanding 2,707,000 2,695,000 2,704,000 2,699,000
Effect of dilutive options 59,000 41,000 61,000 47,000
Average number of shares outstanding used
to calculate diluted earnings per share 2,766,000 2,736,000 2,765,000 2,746,000
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 September 30, 2006 was $2,369,000 compared to $1,283,000
for the three months ended September 30, 2005. Comprehensive income for the nine
months ended September 30, 2006 was $6,469,000 compared to $3,220,000 for the
nine months ended September 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 pre-tax 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.
Forward-Looking Information and Uncertainties Regarding Future
Financial Performance.
This report, including management's discussion below, 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
10
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.
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 policy requires significant judgments and estimates.
Allowance for Loan Losses
-------------------------
The allowance for loan losses is periodically evaluated for adequacy by
management. Factors considered include the Company's loan loss experience, known
and inherent risks in the portfolio, current economic conditions, known adverse
situations that may affect the borrower's ability to repay, regulatory policies,
11
and the estimated value of underlying collateral. The evaluation of the adequacy
of the allowance is based on the above factors along with prevailing and
anticipated economic conditions that may impact borrowers' ability to repay
loans. Determination of the allowance is in part objective and in part a
subjective judgment by management based on the information it currently has in
its possession. Adverse changes in any of these factors or the discovery of new
adverse information could result in higher than expected charge-offs and loan
loss provisions.
Earnings Analysis
-----------------
Net earnings for the quarter ended September 30, 2006 were $1,466,000,
compared to net earnings of $1,553,000 for the quarter ended September 30, 2005,
a decrease of $87,000, or 5.60%. Net earnings for the nine months ended
September 30, 2006 were $6,023,000 compared to $3,851,000 for the nine months
ended September 30, 2005, an increase of $2,172,000, or 56.40%. Earnings before
income tax expense for the quarter ended September 30, 2006 were $2,253,000,
compared to $2,227,000 for the quarter ended September 30, 2005, an increase of
$26,000, or 1.17%. Earnings before income tax were $8,897,000 for the nine
months ended September 30, 2006 compared to $5,535,000 for the nine months ended
September 30, 2005, an increase of $3,362,000, or 60.74%. 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 September 30, 2006 was
$6,716,000, compared to $6,466,000 for the quarter ended September 30, 2005, an
increase of $250,000, or 3.87%. Net interest income for the nine months ended
September 30, 2006 was $20,362,000 compared to $18,263,000 for the nine months
ended September 30, 2005, an increase of $2,099,000, or 11.50%. The prime
lending rate was 8.25% during the entire third quarter of 2006, compared to
6.25% on July 1, 2005, 6.50% on August 9, 2005 and 6.75% on September 30, 2005.
The Federal Home Loan Bank of San Francisco's Weighted Monthly Cost of Funds
Index for the three months ended September 2006 (based on the three Index Months
ended August 31), averaged 4.18%, compared to 2.77% for the three months ended
September 2005.
Basic earnings per share were $0.54 for the third quarter of 2006
compared to $0.58 for the third quarter of 2005. Diluted earnings per share were
$0.53 for the third quarter of 2006 compared to $0.57 for the third quarter of
2005. Basic earnings per share were $2.23 for the nine months ended September
30, 2006 compared to $1.43 for the nine months ended September 30, 2005. Diluted
earnings per share were $2.18 for the nine months ended September 30, 2006
compared to $1.40 for the nine months ended September 30, 2005.
The following table presents an analysis of net interest income and
average earning assets and liabilities for the three-and nine-month periods
ended September 30, 2006 compared to the three-and nine-month periods ended
September 30, 2005.
12
Table 1 NET INTEREST INCOME AND AVERAGE BALANCES
- ------- FNB BANCORP AND SUBSIDIARY
(Dollars in thousands)
Three months ended September 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 $ 382,337 $ 7,947 8.25% $ 370,481 $ 6,972 7.47%
Taxable securities 71,183 761 4.24 63,597 550 3.43
Nontaxable securities 59,195 538 3.61 46,140 397 3.41
Federal funds sold 19,583 256 5.19 13,280 114 3.41
------------ ---------- ------------ ------------
Total interest earning assets $ 532,298 $ 9,502 7.08 $ 493,498 $ 8,033 6.46
NONINTEREST EARNING ASSETS
Cash and due from banks $ 19,418 $ 19,690
Premises and equipment 13,241 12,096
Other assets 20,350 22,931
------------ ------------
Total noninterest earning assets $ 53,009 $ 54,717
------------ ------------
TOTAL ASSETS $ 585,307 $ 548,215
============ ============
INTEREST BEARING LIABILITIES
Deposits:
Demand, interest bearing $ 63,648 ($ 106) (0.66) $ 56,004 ($ 31) (0.22)
Money market 120,987 (961) (3.15) 114,481 (520) (1.80)
Savings 53,224 (72) (0.54) 58,169 (45) (0.31)
Time deposits 127,267 (1,216) (3.79) 140,072 (970) (2.75)
Federal Home Loan Bank advances 30,000 (421) (5.57) -- -- --
Federal funds purchased 496 (10) (8.00) 89 (1) (4.46)
------------ ---------- ------------ ------------
Total interest bearing liabilities $ 395,622 ($ 2,786) (2.79) $ 368,815 ($ 1,567) (1.69)
------------ ---------- ------------ ------------
NONINTEREST BEARING LIABILITIES
Demand deposits 122,163 119,219
Other liabilities 7,799 6,601
------------ ------------
Total noninterest bearing liabilities $ 129,962 $ 125,820
------------ ------------
TOTAL LIABILITIES $ 525,584 $ 494,635
Stockholders' equity $ 59,723 $ 53,580
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 585,307 $ 548,215
============ ============
NET INTEREST INCOME AND MARGIN
ON TOTAL EARNING ASSETS $ 6,716 5.01% $ 6,466 5.20%
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.
13
Table 2 NET INTEREST INCOME AND AVERAGE BALANCES
FNB BANCORP AND SUBSIDIARY
(Dollars in thousands)
Nine months ended September 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 $ 377,475 $ 23,203 8.22% $ 357,443 $ 19,255 7.20%
Taxable securities 66,326 2,008 4.05 59,203 1,436 3.24
Nontaxable securities 55,490 1,464 3.53 41,925 1,056 3.37
Federal funds sold 16,176 592 4.89 11,331 256 3.03
------------ ---------- ------------ ------------
Total interest earning assets $ 515,467 $ 27,267 7.07 $ 469,902 $ 22,003 6.26
NONINTEREST EARNING ASSETS
Cash and due from banks $ 19,521 $ 19,476
Premises and equipment 12,684 11,846
Other assets 22,047 19,408
------------ ------------
Total noninterest earning assets $ 54,252 $ 50,730
------------ ------------
TOTAL ASSETS $ 569,719 $ 520,632
============ ============
INTEREST BEARING LIABILITIES
Deposits:
Demand, interest bearing $ 62,453 ($ 247) (0.53) $ 56,620 ($ 109) (0.26)
Money market 120,729 (2,477) (2.74) 108,686 (1,286) (1.58)
Savings 54,662 (195) (0.48) 59,217 (128) (0.29)
Time deposits 134,270 (3,500) (3.49) 118,964 (2,156) (2.42)
Federal Home Loan Bank advances 11,099 (458) (5.52) -- -- --
Federal funds purchased (6.15) (61)
609 (28) 3,149 (2.59)
------------ ---------- ------------ ------------
Total interest bearing liabilities $ 383,822 ($ 6,905) (2.41) $ 346,636 ($ 3,740) (1.44)
------------ ---------- ------------ ------------
NONINTEREST BEARING LIABILITIES
Demand deposits 120,208 115,065
Other liabilities 7,613 6,072
------------ ------------
Total noninterest bearing liabilities $ 127,821 $ 121,137
------------ ------------
TOTAL LIABILITIES $ 511,643 $ 467,773
Stockholders' equity $ 58,076 $ 52,859
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 569,719 $ 520,632
============ ============
NET INTEREST INCOME AND MARGIN
ON TOTAL EARNING ASSETS $ 20,362 5.28% $ 18,263 5.20%
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 nine months ended September 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 September 30, 2006,
average loans outstanding represented 71.8% of average earning assets. For the
quarter ended September 30, 2005, they represented 75.1% of average earning
14
assets. For the nine months ended September 30, 2006 and 2005, average loans
outstanding represented 73.2% and 76.1%, respectively, of average earning
assets.
The yield on total interest earning assets for the quarter ended
September 30, 2006 compared to the quarter ended September 30, 2005 increased
from 6.46% to 7.08%, or 62 basis points. Contributing to this was a larger
volume invested in loans, which increased by $11,856,000 or 3.20% quarter to
quarter, with a yield increase of 78 basis points, or 10.44%. Interest income on
total interest earning assets increased $1,469,000 or 18.29%.
For the three months ended September 30, 2006 compared to the three
months ended September 30, 2005, the cost on total interest bearing liabilities
increased from 1.69% to 2.79%, an increase of 110 basis points. The most
expensive as well as principal source of interest bearing liabilities comes from
time deposits. Their average cost increased from 2.75% to 3.79%, and the expense
on these deposits increased $246,000 for the three months ended September 30,
2006 compared to 2005. However, their average volume decreased by $12,805,000,
or 9.14%. The other significant increase was in Federal Home Loan Bank advances,
which averaged $30,000,000 in the quarter ended September 30, 2006, at a rate of
5.57%. There were no advances during the same quarter of 2005.
For the nine months ended September 30, 2006 compared to the nine
months ended September 30, 2005, interest income on interest earning assets
increased $5,264,000 or 23.92%, and average earning assets increased
$45,565,000, or 9.70%. Average loans increased by $20,032,000, or 5.60%.
Interest on loans increased $3,948,000 or 20.50%. Their yield increased 102
basis points, or 14.17%. The cost on total interest bearing liabilities
increased from 1.44% to 2.41%. Time deposit averages increased $15,306,000 or
12.87%. Their cost increased 107 basis points, or 44.21%. Federal Home Loan Bank
advances averaged $11,099,000, at a cost of 5.52%. There were no Federal Home
Loan Bank advances in 2005.Money market deposit average balances increased
$12,043,000, or 11.08%, and their cost increased 116 basis points, or 73.42%.
For the three and nine month periods ended September 30, 2006 and
September 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.
15
Table 3 FNB BANCORP AND SUBSIDIARY
- ------- RATE/VOLUME VARIANCE ANALYSIS
Three Months Ended September 30,
(Dollars in thousands) 2006 Compared to 2005
Variance
Interest Attributable To
Income/Expense ---------------------------
Variance Rate Volume
------------ ------------ ------------
INTEREST EARNING ASSETS
Loans $ 975 $ 729 $ 246
Taxable securities 211 130 81
Nontaxable securities 141 22 119
Federal funds sold 142 88 54
------------ ------------ ------------
Total $ 1,469 969 $ 500
------------ ------------ ------------
INTEREST BEARING LIABILITIES
Demand deposits $ 75 $ 71 $ 4
Money market 441 389 52
Savings deposits 27 34 (7)
Time deposits 246 335 (89)
Federal Home Loan Bank advances 421 -- 421
Federal funds purchased 9 4 5
------------ ------------ ------------
Total $ 1,219 $ 833 $ 386
------------ ------------ ------------
NET INTEREST INCOME $ 250 $ 136 $ 114
============ ============ ============
Table 4 FNB BANCORP AND SUBSIDIARY
RATE/VOLUME VARIANCE ANALYSIS
Nine Months Ended September 30,
(Dollars in thousands) 2006 Compared To 2005
Variance
Interest Attributable To
Income/Expense ---------------------------
Variance Rate Volume
------------ ------------ ------------
INTEREST EARNING ASSETS
Loans $ 3,948 $ 2,869 $ 1,079
Taxable securities 572 399 173
Nontaxable securities 408 66 342
Federal funds sold 336 227 109
------------ ------------ ------------
Total $ 5,264 $ 3,561 $ 1,703
------------ ------------ ------------
INTEREST BEARING LIABILITIES
Demand deposits $ 138 $ 127 $ 11
Money market 1,191 1,048 143
Savings deposits 67 77 (10)
Time deposits 1,344 1,067 277
Federal Home Loan Bank advances 458 -- 458
Federal funds purchased (33) 16 (49)
------------ ------------ ------------
Total $ 3,165 $ 2,335 $ 830
------------ ------------ ------------
NET INTEREST INCOME $ 2,099 $ 1,226 $ 873
============ ============ ============
16
Noninterest income
- ------------------
The following table shows the principal components of noninterest
income for the periods indicated.
Table 5 NONINTEREST INCOME
Three months ended Nine months ended
September 30, September 30,
--------------------------- ---------------------------
(Dollars in thousands) 2006 2005 2006 2005
------------ ------------ ------------ ------------
Gain on sale of other equity securities $ 4 $ -- $ 1,352 $ --
Gain - sale of other real estate owned -- -- 756 --
Service charges 630 590 1,861 1,742
Credit card fees 193 218 602 651
Other income 219 185 618 512
------------ ------------ ------------ ------------
Total noninterest income $ 1,046 $ 993 $ 5,189 $ 2,905
============ ============ ============ ============
Noninterest income consists mainly of service charges on deposits,
credit card fees, and several other miscellaneous types of income. For the
quarter ended September 30, 2006 compared to September 30, 2005, there were no
significant changes. For the nine months ended September 30, 2006 and September
30, 2005, total noninterest income increased by $2,284,000, or 78.62%. The two
significant changes were the gain on sale of other equity securities for
$1,352,000, and the gain on sale of other real estate owned, for $756,000. These
two items accounted for 92.29% of the nine month change.
Noninterest expense
- -------------------
The following table shows the principal components of noninterest
expense for the periods indicated.
Table 6 NONINTEREST EXPENSE
(Dollars in thousands) Three months ended Nine months ended
September 30, September 30,
--------------------------- ---------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Salaries and employee benefits $ 3,005 $ 2,823 $ 9,209 $ 8,435
Occupancy expense 440 400 1,276 1,058
Equipment expense 393 406 1,230 1,189
Professional fees 326 195 869 729
Telephone, postage and supplies 278 271 773 695
Bankcard expense 189 205 576 608
Other expense 758 767 2,331 2,484
------------ ------------ ------------ ------------
Total noninterest expense $ 5,389 $ 5,067 $ 16,264 $ 15,198
============ ============ ============ ============
Noninterest expense consists mainly of salaries and employee benefits.
For the three months ended September 30, 2006 compared to three months ended
September 30, 2005, it represented 55.8% and 55.7% of total noninterest
expenses. For the nine months ended September 30, 2006 and 2005, it was 56.6%
and 55.5% respectively of total noninterest expense. For the nine months of
17
2006, the staff at the two former Sequoia National Bank branches are in the 2006
period for nine months, but only eight months in 2005. The same reason accounts
for occupancy expense increases of $218,000 for the nine months. The remaining
categories are less significant. Other expense decreased $9,000 in the quarter
ended September 30, 2006 over the quarter ended September 30, 2005. The
principal decrease was $41,000 in acquisition related expense, in connection
with Sequoia National Bank for the third quarter of 2005. This was offset by a
provision for losses on unfunded commitments of $15,000 in 2006, and $40,000
core deposit intangible premium amortization. Numerous smaller variances account
for the remainder. For the nine months ended September 30, 2006 and 2005, the
decrease in other expense was $153,000. The principal decrease was $349,000 in
acquisition related expense in 2005, partly offset by a $75,000 provision for
loan losses on unfunded commitments in 2006, and $119,000 in deposit premium
amortization.
Income Taxes
- ------------
The effective tax rate for the quarter ended September 30, 2006 was
34.9% compared to 30.3% for the quarter ended September 30, 2005. The effective
tax rate for the nine months ended September 30, 2006 and September 30, 2005,
respectively was 32.3% and 30.4%. 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 gain on sale of other real estate owned.
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 September 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
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.
18
The following table sets forth information concerning interest rate
sensitive assets and liabilities as of September 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 September 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 $ -- $ -- $ -- $ -- $ -- $ --
Securities available for sale 19,634 26,691 49,120 40,688 -- 136,133
Loans 244,681 15,574 93,762 44,743 3 398,763
---------- ---------- ---------- ---------- ---------- ----------
Total interest earning assets 264,315 42,265 142,882 85,431 3 534,896
Cash and due from banks -- -- -- -- 16,675 16,675
Allowance for loan losses -- -- -- -- (4,924) (4,924)
Other assets -- -- -- -- 39,332 39,332
---------- ---------- ---------- ---------- ---------- ----------
Total assets $ 264,315 $ 42,265 $ 142,882 $ 85,431 $ 51,086 $ 585,979
========== ========== ========== ========== ========== ==========
Interest bearing liabilities:
Demand, interest bearing $ 59,064 $ -- $ -- $ -- $ -- $ 59,064
Savings and money market 170,378 -- -- -- -- 170,378
Time deposits 49,749 60,980 15,702 -- -- 126,431
Federal Home Loan Bank advances -- 10,000 20,000 -- -- 30,000
Federal funds purchased 10,622 -- -- -- -- 10,622
---------- ---------- ---------- ---------- ---------- ----------
Total interest bearing liabilities 289,813 70,980 35,702 -- -- 396,495
---------- ---------- ---------- ---------- ---------- ----------
Noninterest demand deposits -- -- -- -- 121,005 121,005
Other liabilities -- -- -- -- 8,007 8,007
Stockholders' equity -- -- -- -- 60,472 60,472
---------- ---------- ---------- ---------- ---------- ----------
Total liabilities and stockholders' equity $ 289,813 $ 70,980 $ 35,702 $ -- $ 189,484 $ 585,979
========== ========== ========== ========== ========== ==========
Interest rate sensitivity gap ($ 25,498) ($ 28,715) $ 107,180 $ 85,431 ($ 138,398) $ --
========== ========== ========== ========== ========== ==========
Cumulative interest rate sensitivity gap ($ 25,498) ($ 54,213) $ 52,967 $ 138,398 $ -- $ --
Cumulative interest rate sensitivity gap ratio (9.65%) (17.68%) 11.78% 25.87% -- --
Financial Condition
- -------------------
Assets. Total assets increased to $585,979,000 at September 30, 2006
from $569,141,000 at December 31, 2005, an increase of $16,838,000. Most of this
increase was in securities available for sale, which increased $22,670,000, and
net loans, which increased $13,788,000. Federal funds sold decreased
$16,230,000, and other real estate owned decreased $2,600,000, and the remaining
categories increased by $790,000 net. Most of the increase in total assets was
funded by Federal Home Loan Bank borrowings of $30,000,000 and federal funds
purchased of $10,622,000, which also offset the decrease in deposits of
$30,666,000.
Loans. Gross loans at September 30, 2006 were $399,525,000, an increase
of $13,979,000 or 3.63% from December 31, 2005. Gross real estate loans
increased $1,355,000, construction loans increased $7,143,000, and commercial
loans increased $5,902,000, but consumer loans decreased by $421,000. The
portfolio breakdown was as follows.
19
Table 8 LOAN PORTFOLIO
- -------
September 30, December 31,
(In thousands) 2006 Percent 2005 Percent
------------ ---------- ------------ ----------
Real Estate $ 304,168 76.1% $ 302,813 78.5%
Construction 33,386 8.3 26,243 6.8
Commercial 58,972 14.8 53,070 13.8
Consumer 2,999 0.8 3,420 0.9
------------ ---------- ------------ ----------
Gross loans 399,525 100.0% 385,546 100.0%
========== ==========
Net deferred loan fees (762) (948)
Allowance for loan losses (4,924) (4,547)
------------ ------------
Net loans $ 393,839 $ 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 nine
months ended September 30, 2006 and the nine months ended September 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
- -------
Nine months ended Nine months ended
(In thousands) September 30, 2006 September 30, 2005
------------------ ------------------
Balance, beginning of period $ 4,547 $ 3,334
Provision for loan losses 390 435
Recoveries 2 23
Amounts charged off (15) (86)
Allowance acquired in business combination -- 700
------------------ ------------------
Balance, end of period $ 4,924 $ 4,406
================== ==================
In management's judgment, the allowance was adequate to absorb losses
currently inherent in the loan portfolio at September 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 September 30, 2006, there was
20
$3,000 in non-accrual loans, compared to $17,000 at December 31, 2005. There was
no Other Real Estate Owned at September 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 foreclosure
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 September 30, 2006 were $476,878,000
compared to $507,544,000 on December 31, 2005. Of these totals,
noninterest-bearing demand deposits were $121,005,000 or 25.4% of the total on
September 30, 2006 and $123,641,000 or 24.4% on December 31, 2005. Time deposits
were $126,431,000 on September 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 September 30, 2006:
Table 10
--------
(Dollars in thousands) Under $100,000
Maturities: $100,000 Or more Total
------------ ------------ ------------
Three months or less $ 18,558 $ 31,191 $ 49,749
Over three to six months 15,336 19,713 35,049
Over six through twelve months 13,542 12,389 25,931
Over twelve months 9,927 5,775 15,702
------------ ------------ ------------
Total $ 57,363 $ 69,068 $ 126,431
------------ ------------ ------------
The following table shows the risk-based capital ratios and leverage
ratios at September 30, 2006 and December 31, 2005 for the Bank:
Table 11
-------- Minimum "Well
September 30, December 31, Capitalized"
Risk-Based Capital Ratios 2006 2005 Requirements
--------------------------- ------------- ------------ ------------
Tier 1 Capital 11.14% 10.64% > 6.00%
-
Total Capital 12.11% 11.56% > 10.00%
-
Leverage Ratios 9.86% 9.47% > 5.00%
-
Liquidity. Liquidity is a measure of the Company's ability to convert
assets into cash with minimal loss. As of September 30, 2006, Liquid Assets were
$152,808,000, or 26.1% 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
21
income. On September 30, 2006 net loans were at 82.6% of deposits. On December
31, 2005 net loans were at 74.9% of deposits.
Off-Balance Sheet Items
The Company has certain ongoing commitments under operating leases.
These commitments do not significantly impact operating results. As of September
30, 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 $135,284,000 and $97,701,000 at September 30, 2006 and
December 31, 2005, respectively. As a percentage of net loans, these off-balance
sheet items represent 34.4% 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 September 30, 2006, the prime lending rate was unchanged
at 8.25%. For the quarter ended September 30, 2005, the prime lending rate
started at 6.25%, increased to 6.50% on August 9, 2005 and 6.75% on September
20, 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 September 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 September 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 Proceedings
There are no material legal proceedings currently pending against the
Company or 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 6. Exhibits
Exhibits
31: Rule 13a-14(a)/15d-14(a) Certifications
32: Section 1350 Certifications
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FNB BANCORP
(Registrant)
Dated:
November 9, 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)
24