SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2006, or
[ ] Transition report pursuant to Section 13 or 15 (d) of Securities
Exchange Act of 1934
Commission File No. 000-49693
FNB BANCORP
(Exact name of registrant as specified in its charter)
California 92-2115369
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(State or other jurisdiction of (IRS Employer ID Number)
incorporation or organization)
975 El Camino Real, South San Francisco, California 94080
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(Address of principal executive offices) (Zip code)
(650) 588-6800
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
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Title of Class: Common Stock, no par value
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Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this 10-K [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes [ ] No [X]
Aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant, computed by reference to the price at which
the common equity was last sold, or the average bid and asked price of such
common equity, as of the last business day of the registrant's most recently
completed second fiscal quarter: $88,721,784
Number of shares outstanding of each of the registrant's classes of
common stock, as of March 9, 2007
No par value Common Stock - 2,852,765 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE The following documents are incorporated by
reference into this Form 10-K: Part III, Items 10 through 14 from Registrant's
definitive proxy statement for the 2007 annual meeting of shareholders.
TABLE OF CONTENTS
PAGE
PART I
Item 1 Business 3
Item 1A Risk Factors 20
Item 1B Unresolved Staff Comments 22
Item 2 Properties 22
Item 3 Legal Proceedings 24
Item 4 Submission of Matters to a Vote of Security Holders 24
PART II
Item 5 Market for the Registrant's Common Equity and Related
Stockholder Matters 24
Item 6 Selected Financial Data 27
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 28
Item 7A Quantitative and Qualitative Disclosures About
Market Risk 45
Item 8 Financial Statements and Supplementary Data 49
Item 9 Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure 87
Item 9A Controls and Procedures 87
Item 9B Other Information 89
PART III
Item 10 Directors, Executive Officers of the Registrant and Corporate
Governance 89
Item 11 Executive Compensation 89
Item 12 Security Ownership of Certain Beneficial Owners and
Management and related Stockholder Matters 89
Item 13 Certain Relationships and Related Transactions 90
Item 14 Principal Accounting Fees and Services 90
PART IV
Item 15 Exhibits, Financial Statements, Statement Schedules 90
(a)(1) Financial statements. Listed and included in Part II, Item 8 90
(2) Financial Statements Schedules. Not applicable 90
(3) Index to Exhibits 90 - 93
Signatures 94 - 95
Exhibit 31 - Rule 13a-14(a)/15d-14(a) Certifications 98
Exhibit 32 - Section 1350 Certifications 100
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PART I
ITEM 1. BUSINESS
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Forward-Looking Statements: Certain matters discussed or incorporated
by reference in this Annual Report on Form 10-K including, but not limited to,
matters described in "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations," are "forward-looking statements" within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
and Section 27A of the Securities Act of 1933, as amended. Such forward-looking
statements may contain words related to future projections including, but not
limited to, words such as "believe," "expect," "anticipate," "intend," "may,"
"will," "should," "could," "would," and variations of those words and similar
words that are subject to risks, uncertainties and other factors that could
cause actual results to differ materially from those projected. Factors that
could cause or contribute to such differences include, but are not limited to,
the following: (1) variances in the actual versus projected growth in assets;
(2) return on assets; (3) loan and lease losses; (4) expenses; (5) changes in
the interest rate environment including interest rates charged on loans, earned
on securities investments and paid on deposits; (6) competition effects; (7) fee
and other noninterest income earned; (8) general economic conditions nationally,
regionally, and in the operating market areas of the Company and its
subsidiaries; (9) changes in the regulatory environment; (10) changes in
business conditions and inflation; (11) changes in securities markets; (12) data
processing problems; (13) a decline in real estate values in the Company's
operating market areas; (14) the effects of terrorism, the threat of terrorism
or the impact of the current military conflict in Iraq and the conduct of the
war on terrorism by the United States and its allies, as well as other factors.
The factors set forth under "Item 1A - Risk Factors" in this report and other
cautionary statements and information set forth in this report should be read
carefully considered and understood as being applicable to all related
forward-looking statements contained in this report when evaluating the business
prospects of the Company and its subsidiary.
Forward-looking statements are not guarantees of performance. By their
nature, they involve risks, uncertainties and assumptions. Actual results and
shareholder values in the future may differ significantly from those expressed
in forward-looking statements. You are cautioned not to put undue reliance on
any forward-looking statement. Any such statement speaks only as of the date of
the report, and in the case of any documents that may be incorporated by
reference, as of the date of those documents. We do not undertake any obligation
to update or release any revisions to any forward-looking statements, or to
report any new information, future event or other circumstances after the date
of this report or to reflect the occurrence of unanticipated events, except as
required by law. However, your attention is directed to any further disclosures
made on related subjects in our subsequent reports filed with the Securities and
Exchange Commission on Forms 10-K, 10-Q and 8-K.
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General
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FNB Bancorp (sometimes referred to herein as the "Company") is a bank
holding company registered under the Bank Holding Company Act of 1956, as
amended. The Company was incorporated under the laws of the State of California
on February 28, 2001. As a bank holding company, the Company is authorized to
engage in the activities permitted under the Bank Holding Company Act of 1956,
as amended, and regulations thereunder. Its principal office is located at 975
El Camino Real, South San Francisco, California 94080, and its telephone number
is (650) 588-6800.
The Company owns all of the issued and outstanding shares of common
stock of First National Bank of Northern California, a national banking
association ("First National Bank" or the "Bank"). The Company has no other
subsidiary.
The Bank was organized in 1963 as "First National Bank of Daly City."
In 1995, the shareholders approved a change in the name to "First National Bank
of Northern California." The administrative headquarters of the Bank is located
at 975 El Camino Real, South San Francisco, California. The Bank is locally
owned and presently operates eleven full service banking offices within its
primary service area of San Mateo County, in the cities of Colma, Daly City,
South San Francisco, Millbrae, Pacifica, Half Moon Bay, San Mateo, Redwood City
and Pescadero. The Bank also provides services since May 2005 for the City and
County of San Francisco through its Financial District and Portola offices in
San Francisco. The Bank's primary business is servicing the business or
commercial banking needs of individuals and small to mid-sized businesses within
San Mateo and San Francisco Counties.
The Bank is chartered under the laws of the United States and is
governed by the National Bank Act, and is a member of the Federal Reserve
System. The Federal Deposit Insurance Corporation insures the deposits of the
Bank up to the applicable legal limits. The Bank is subject to regulation,
supervision and regular examination by the Office of the Comptroller of the
Currency. The regulations of the Federal Deposit Insurance Corporation, the
Board of Governors of the Federal Reserve System, and the Office of the
Comptroller of the Currency govern many aspects of the Bank's business and
activities, including investments, loans, borrowings, branching, mergers and
acquisitions, reporting and numerous other areas. The Bank is also subject to
applicable provisions of California law to the extent those provisions are not
in conflict with or preempted by federal banking law. See "Supervision and
Regulation" below.
First National Bank offers a broad range of services to individuals and
businesses in its primary service area with an emphasis upon efficiency and
personalized attention. First National Bank provides a full line of business
financial products with specialized services such as courier, appointment
banking, and business Internet banking. The Bank offers personal and business
checking and savings accounts, including individual interest-bearing negotiable
orders of withdrawal ("NOW"), money market accounts and/or accounts combining
checking and savings accounts with automatic transfer capabilities, IRA
accounts, time certificates of deposit and direct deposit of social security,
pension and payroll checks and computer cash management with access through the
Internet. First National Bank also makes available commercial loans and standby
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letters of credit and construction, accounts receivable, inventory, automobile,
home improvement, residential real estate, commercial real estate, single family
mortgage, Small Business Administration, office equipment, leasehold improvement
and consumer loans as well as overdraft protection lines of credit. In addition,
the Bank sells travelers checks and cashiers checks, offers automated teller
machine (ATM) services tied in with major statewide and national networks and
offers other customary commercial banking services.
Most of First National Bank's deposits are obtained from commercial
businesses, professionals and individuals. As of December 31, 2006, First
National Bank had a total of 23,964 accounts. On occasion, the Bank has obtained
deposits through deposit brokers for which it pays a broker fee. As of December
31, 2006, First National Bank had no such deposits. There is no concentration of
deposits or any customer with 5% or more of First National Bank's deposits.
At December 31, 2006, the Company had total assets of $581,270,000, net
loans of $419,437,000, deposits of $481,567,000 and shareholders' equity of
$62,063,000. The Company competes with approximately 33 other banking or savings
institutions in its service areas. The Company's market share of Federal Deposit
Insurance Corporation insured deposits in the service area of San Mateo County
is approximately 2.41% (based upon the most recent information available by the
Federal Deposit Insurance Corporation through June 30, 2006). See "Competitive
Data" below.
Employees
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At December 31, 2006, The Company employed 183 persons on a full-time
basis. The Company believes its employee relations are good. The Company is not
a party to any collective bargaining agreement.
Available Information
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FNB Bancorp and First National Bank of Northern California maintain an
Internet website at http://www.FNBNORCAL.com. The Company's annual report on
form 10-K, quarterly reports on Form 10-Q, current reports on 8-K and amendments
to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, are made available free of charge on or through
such website as soon as reasonably practicable after such material is
electronically filed with, or furnished to, the Securities and Exchange
Commission. Also made available on or through such website are the Section 16
reports of ownership and changes in ownership of the Company's common stock
which are filed with the Securities and Exchange Commission by the directors and
executive officers of the Company and by any persons who own more than 10
percent of the outstanding shares of such stock. Information on such website is
not incorporated by reference into this report.
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SUPERVISION AND REGULATION
General
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FNB Bancorp. The common stock of FNB Bancorp is subject to the
registration requirements of the Securities Act of 1933, as amended, and the
qualification requirements of the California Corporate Securities Law of 1968,
as amended. FNB Bancorp has registered its common stock under Section 12 (g) of
the Securities Exchange Act of 1934, as amended. The Company is also subject to
the periodic reporting requirements of Section 13 of the Securities Exchange Act
of 1934, as amended, which include, but are not limited to, annual, quarterly
and other current reports with the Securities and Exchange Commission.
FNB Bancorp is a bank holding company within the meaning of the Bank
Holding Company Act of 1956, as amended (the "Bank Holding Company Act"), and is
registered as such with, and subject to the supervision of, the Board of
Governors of the Federal Reserve System (the "Board of Governors"). FNB Bancorp
is required to obtain the approval of the Board of Governors before it may
acquire all or substantially all of the assets of any bank, or ownership or
control of the voting shares of any bank if, after giving effect to such
acquisition of shares, FNB Bancorp would own or control more than 5% of the
voting shares of such bank. The Bank Holding Company Act prohibits FNB Bancorp
from acquiring any voting shares of, or interest in, all or substantially all of
the assets of, a bank located outside the State of California unless such an
acquisition is specifically authorized by the laws of the state in which such
bank is located. Any such interstate acquisition is also subject to the
provisions of the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994.
FNB Bancorp, and any subsidiary which it may acquire or organize, are
deemed to be "affiliates" of the Bank within the meaning of that term as defined
in the Federal Reserve Act. This means, for example, that there are limitations
(a) on loans by First National Bank to its affiliates, and (b) on investments by
First National Bank in affiliates' stock as collateral for loans to any
borrower. FNB Bancorp and First National Bank are also subject to certain
restrictions with respect to engaging in the underwriting, public sale and
distribution of securities.
In addition, regulations of the Board of Governors under the Federal
Reserve Act require that reserves be maintained by First National Bank in
conjunction with any liability of FNB Bancorp under any obligation (promissory
note, acknowledgment of advance, banker's acceptance or similar obligation) with
a weighted average maturity of less than seven (7) years to the extent that the
proceeds of such obligations are used for the purpose of supplying funds to
First National Bank for use in its banking business, or to maintain the
availability of such funds.
First National Bank of Northern California. As a national banking
association licensed under the national banking laws of the United States, First
National Bank is regularly examined by the Office of the Comptroller of the
Currency and is subject to supervision and regulation by the Federal Deposit
Insurance Corporation, the Board of Governors, and the Office of the Comptroller
of the Currency. This supervision and regulation includes comprehensive reviews
of all major aspects of First National Bank's business and condition, including
its capital ratios, allowance for possible loan losses and other factors.
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However, no inference should be drawn that such authorities have approved any
such factors. First National Bank is required to file reports with the Office of
the Comptroller of the Currency and the Federal Deposit Insurance Corporation.
First National Bank's deposits are insured by the Federal Deposit Insurance
Corporation up to the applicable legal limits.
Capital Standards.
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The Board of Governors, the Federal Deposit Insurance Corporation, and
the Office of the Comptroller of the Currency have adopted risk-based guidelines
for evaluating the capital adequacy of bank holding companies and banks. The
guidelines are designed to make capital requirements sensitive to differences in
risk profiles among banking organizations, to take into account off-balance
sheet exposures and to aid in making the definition of bank capital uniform
internationally. Under the guidelines, First National Bank is required to
maintain (and FNB Bancorp and First National Bank will be required to maintain)
capital equal to at least 8.0% of its assets and commitments to extend credit,
weighted by risk, of which at least 4.0% must consist primarily of common equity
(including retained earnings) and the remainder may consist of subordinated
debt, cumulative preferred stock, or a limited amount of loan loss reserves.
Assets, commitments to extend credit, and off-balance sheet items are
categorized according to risk and certain assets considered to present less risk
than others permit maintenance of capital at less than the 8% ratio. For
example, most home mortgage loans are placed in a 50% risk category and
therefore require maintenance of capital equal to 4% of those loans, while
commercial loans are placed in a 100% risk category and therefore require
maintenance of capital equal to 8% of those loans.
Under the risk-based capital guidelines, assets reported on an
institution's balance sheet and certain off-balance sheet items are assigned to
risk categories, each of which has an assigned risk weight. Capital ratios are
calculated by dividing the institution's qualifying capital by its period-end
risk-weighted assets. The guidelines establish two categories of qualifying
capital: Tier 1 capital (defined to include common shareholders' equity and
noncumulative perpetual preferred stock) and Tier 2 capital which includes,
among other items, limited life (and in the case of banks, cumulative) preferred
stock, mandatory convertible securities, subordinated debt and a limited amount
of reserve for credit losses. Tier 2 capital may also include up to 45% of the
pretax unrealized gains on certain available-for-sale equity securities having
readily determinable fair values (i.e. the excess, if any, of fair market value
over the book value or historical cost of the investment security). The federal
regulatory agencies reserve the right to exclude all or a portion of the
unrealized gains upon a determination that the equity securities are not
prudently valued. Unrealized gains and losses on other types of assets, such as
bank premises and available-for-sale debt securities, are not included in Tier 2
capital, but may be taken into account in the evaluation of overall capital
adequacy and net unrealized losses on available-for-sale equity securities will
continue to be deducted from Tier 1 capital as a cushion against risk. Each
institution is required to maintain a minimum risk-based capital ratio
(including Tier 1 and Tier 2 capital) of 8%, of which at least half must be Tier
1 capital.
A leverage capital standard was adopted as a supplement to the
risk-weighted capital guidelines. Under the leverage capital standard, an
institution is required to maintain a minimum ratio of Tier 1 capital to the sum
of its quarterly average total assets and quarterly average reserve for loan
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losses, less intangibles not included in Tier 1 capital. Period-end assets may
be used in place of quarterly average total assets on a case-by-case basis. The
Board of Governors and the Federal Deposit Insurance Corporation have also
adopted a minimum leverage ratio for bank holding companies as a supplement to
the risk-weighted capital guidelines. The leverage ratio establishes a minimum
Tier 1 ratio of 3% (Tier 1 capital to total assets) for the highest rated bank
holding companies or those that have implemented the risk-based capital market
risk measure. All other bank holding companies must maintain a minimum Tier 1
leverage ratio of 4% with higher leverage capital ratios required for bank
holding companies that have significant financial and/or operational weakness, a
high risk profile, or are undergoing or anticipating rapid growth.
At December 31, 2006, The Company was in compliance with the
risk-weighted capital and leverage ratios. See "Capital" under Item 7 below.
Prompt Corrective Action
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The Board of Governors, Federal Deposit Insurance Corporation, and
Office of the Comptroller of the Currency have adopted regulations implementing
a system of prompt corrective action pursuant to Section 38 of the Federal
Deposit Insurance Act and Section 131 of the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"). The regulations establish five
capital categories with the following characteristics: (1) "Well capitalized" -
consisting of institutions with a total risk-based capital ratio of 10% or
greater, a Tier 1 risk-based capital ratio of 6% or greater and a leverage ratio
of 5% or greater, and the institution is not subject to an order, written
agreement, capital directive or prompt corrective action directive; (2)
"Adequately capitalized" - consisting of institutions with a total risk-based
capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or
greater and a leverage ratio of 4% or greater, and the institution does not meet
the definition of a "well capitalized" institution; (3) "Undercapitalized" -
consisting of institutions with a total risk-based capital ratio less than 8%, a
Tier 1 risk-based capital ratio of les than 4%, or a leverage ratio of less than
4%; (4) "Significantly undercapitalized" - consisting of institutions with a
total risk-based capital ratio of less than 6%, a Tier 1 risk-based capital
ratio of less than 3%, or a leverage ratio of less than 3%; (5) "Critically
undercapitalized" - consisting of an institution with a ratio of tangible equity
to total assets that is equal to or less than 2%.
The regulations established procedures for classification of financial
institutions within the capital categories, filing and reviewing capital
restoration plans required under the regulations and procedures for issuance of
directives by the appropriate regulatory agency, among other matters. The
regulations impose restrictions upon all institutions to refrain from certain
actions which would cause an institution to be classified within any one of the
three "undercapitalized" categories, such as declaration of dividends or other
capital distributions or payment of management fees, if following the
distribution or payment the institution would be classified within one of the
"undercapitalized" categories. In addition, institutions that are classified in
one of the three "undercapitalized" categories are subject to certain mandatory
and discretionary supervisory actions. Mandatory supervisory actions include (1)
increased monitoring and review by the appropriate federal banking agency; (2)
implementation of a capital restoration plan; (3) total asset growth
restrictions; and (4) limitation upon acquisitions, branch expansion, and new
8
business activities without prior approval of the appropriate federal banking
agency. Discretionary supervisory actions may include (1) requirements to
augment capital; (2) restrictions upon affiliate transactions; (3) restrictions
upon deposit gathering activities and interest rates paid; (4) replacement of
senior executive officers and directors; (5) restrictions upon activities of the
institution and its affiliates; (6) requiring divestiture or sale of the
institution; and (7) any other supervisory action that the appropriate federal
banking agency determines is necessary to further the purposes of the
regulations. Further, the federal banking agencies may not accept a capital
restoration plan without determining, among other things, that the plan is based
on realistic assumptions and is likely to succeed in restoring the depository
institution's capital. In addition, for a capital restoration plan to be
acceptable, the depository institution's parent holding company must guarantee
that the institution will comply with such capital restoration plan.
The aggregate liability of the parent holding company under the guaranty is
limited to the lesser of (i) an amount equal to 5 percent of the depository
institution's total assets at the time it became undercapitalized, and (ii) the
amount that is necessary (or would have been necessary) to bring the institution
into compliance with all capital standards applicable with respect to such
institution as of the time it fails to comply with the plan. If a depository
institution fails to submit an acceptable plan, it is treated as if it were
"significantly undercapitalized". FDICIA also restricts the solicitation and
acceptance of and interest rates payable on brokered deposits by insured
depository institutions that are not "well capitalized." An "undercapitalized"
institution is not allowed to solicit deposits by offering rates of interest
that are significantly higher than the prevailing rates of interest on insured
deposits in the particular institution's normal market areas or in the market
areas in which such deposits would otherwise be accepted.
Any financial institution which is classified as "critically
undercapitalized" must be placed in conservatorship or receivership within 90
days of such determination unless it is also determined that some other course
of action would better serve the purposes of the regulations. Critically
undercapitalized institutions are also prohibited from making (but not accruing)
any payment of principal or interest on subordinated debt without prior
regulatory approval and regulators must prohibit a critically undercapitalized
institution from taking certain other actions without prior approval, including
(1) entering into any material transaction other than in the usual course of
business, including investment expansion, acquisition, sale of assets or other
similar actions; (2) extending credit for any highly leveraged transaction; (3)
amending articles or bylaws unless required to do so to comply with any law,
regulation or order; (4) making any material change in accounting methods; (5)
engaging in certain affiliate transactions; (6) paying excessive compensation or
bonuses; and (7) paying interest on new or renewed liabilities at rates which
would increase the weighted average costs of funds beyond prevailing rates in
the institution's normal market areas.
Additional Regulations
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Under FDICIA, the federal financial institution agencies have adopted
regulations which require institutions to establish and maintain comprehensive
written real estate policies which address certain lending considerations,
including loan-to-value limits, loan administrative policies, portfolio
diversification standards, and documentation, approval and reporting
9
requirements. FDICIA further generally prohibits an insured bank from engaging
as a principal in any activity that is impermissible for a national bank, absent
Federal Deposit Insurance Corporation determination that the activity would not
pose a significant risk to the Bank Insurance Fund, and that such bank is, and
will continue to be, within applicable capital standards.
The Federal Financial Institutions Examination Council ("FFIEC")
utilizes the Uniform Institutions Rating System ("UFIRS"), commonly referred to
as "CAMELS," to classify and evaluate the soundness of financial institutions.
Bank examiners use the CAMELS measurements to evaluate capital adequacy, asset
quality, management, earnings, liquidity and sensitivity to market risk.
Effective January 1, 2005, bank holding companies such as the Company, became
subject to evaluation and examination under a revised bank holding company
rating system. This so-called BOPEC rating system, implemented in 1979, has been
focused primarily on financial condition, consolidated capital and consolidated
earnings. The new rating system reflects a change toward analysis of risk
management (as reflected in bank examination under the CAMELS measurements), in
addition to financial factors and the potential impact of nondepository
subsidiaries upon depository institution subsidiaries.
The federal financial institution agencies have established bases for
analysis and standards for assessing financial institution's capital adequacy in
conjunction with the risk-based capital guidelines including analysis of
interest rate risk, concentrations of credit risk, risk posed by non-traditional
activities, and factors affecting overall safety and soundness. The safety and
soundness standards for insured financial institutions include analysis of (1)
internal controls, information systems and internal audit systems; (2) loan
documentation; (3) credit underwriting; (4) interest rate exposure; (5) asset
growth; (6) compensation, fees and benefits; and (7) excessive compensation for
executive officers, directors or principal shareholders which could lead to
material financial loss. If an agency determines that an institution fails to
meet any standard, the agency may require the financial institution to submit to
the agency an acceptable plan to achieve compliance with the standard. If the
agency requires submission of a compliance plan and the institution fails to
timely submit an acceptable plan or to implement an accepted plan, the agency
must require the institution to correct the deficiency. The agencies may elect
to initiate enforcement action in certain cases rather than rely on an existing
plan particularly where failure to meet one or more of the standards could
threaten the safe and sound operation of the institution.
Community Reinvestment Act ("CRA") regulations evaluate banks' lending
to low and moderate income individuals and businesses across a four-point scale
from "outstanding" to "substantial noncompliance," and are a factor in
regulatory review of applications to merge, establish new branches or form bank
holding companies. In addition, any bank rated in "substantial noncompliance"
with the CRA regulations may be subject to enforcement proceedings. First
National Bank has a current rating of "satisfactory" for CRA compliance.
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Limitation on Dividends
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FNB Bancorp. The Company's ability to pay cash dividends is subject to
restrictions set forth in the California General Corporation Law. Funds for
payment of any cash dividends by the Company would be obtained from its
investments as well as dividends and/or management fees from First National
Bank. First National Bank's ability to pay cash dividends is subject to
restrictions imposed under the National Bank Act and regulations promulgated by
the Office of the Comptroller of the Currency.
FNB Bancorp has paid quarterly dividends for each quarter commencing
with the second quarter of 2002. Future dividends will continue to be determined
after consideration of the Company's earnings, financial condition, future
capital funds, regulatory requirements and other factors such as the Board of
Directors may deem relevant. It is the intention of the Company to continue to
pay cash dividends, subject to legal restrictions on the payment of cash
dividends and depending upon the level of earnings, management's assessment of
future capital needs and other factors to be considered by the Board of
Directors.
The California General Corporation Law provides that a corporation may
make a distribution to its shareholders if the corporation's retained earnings
equal at least the amount of the proposed distribution. The California General
Corporation Law further provides that, in the event sufficient retained earnings
are not available for the proposed distribution, a corporation may nevertheless
make a distribution to its shareholders if, after giving effect to the
distribution, it meets two conditions, which generally stated are as follows:
(i) the corporation's assets must equal at least 125% of its liabilities; and
(ii) the corporation's current assets must equal at least its current
liabilities or, if the average of the corporation's earnings before taxes on
income and before interest expense for the two preceding fiscal years was less
than the average of the corporation's interest expense for those fiscal years,
then the corporation's current assets must equal at least 125% of its current
liabilities.
The Board of Governors of the Federal Reserve System generally
prohibits a bank holding company from declaring or paying a cash dividend which
would impose undue pressure on the capital of subsidiary banks or would be
funded only through borrowing or other arrangements that might adversely affect
a bank holding company's financial position. The Federal Reserve Board policy is
that a bank holding company should not continue its existing rate of cash
dividends on its common stock unless its net income is sufficient to fully fund
each dividend and its prospective rate of earnings retention appears consistent
with its capital needs, asset quality and overall financial condition.
First National Bank of Northern California. As First National Bank's
sole shareholder, FNB Bancorp is entitled to receive dividends when and as
declared by its Board of Directors, out of funds legally available therefore,
subject to the restrictions set forth in the National Bank Act.
The payment of cash dividends by First National Bank may be subject to
the approval of the Office of the Comptroller of the Currency, as well as
restrictions established by federal banking law and the Federal Deposit
Insurance Corporation. Approval of the Office of the Comptroller of the Currency
is required if the total of all dividends declared by First National Bank's
11
board of directors in any calendar year will exceed First National Bank's net
profits for that year combined with its retained net profits for the preceding
two years, less any required transfers to surplus or to a fund for the
retirement of preferred stock. Additionally, the Federal Deposit Insurance
Corporation and/or the Office of the Comptroller of the Currency, might, under
some circumstances, place restrictions on the ability of a bank to pay dividends
based upon peer group averages and the performance and maturity of that bank.
COMPETITION
Competitive Data
- ----------------
In its market area, First National Bank competes for deposit and loan
customers with other banks (including those with much greater resources),
thrifts and, to a lesser extent, credit unions, finance companies and other
financial service providers.
Larger banks may have a competitive advantage because of higher lending
limits and major advertising and marketing campaigns. They also perform
services, such as trust services, international banking, discount brokerage and
insurance services, which First National Bank is not authorized nor prepared to
offer currently. First National Bank has made arrangements with its
correspondent banks and with others to provide some of these services for its
customers. For borrowers requiring loans in excess of First National Bank's
legal lending limits, First National Bank has offered, and intends to offer in
the future, such loans on a participating basis with its correspondent banks and
with other independent banks, retaining the portion of such loans which is
within its lending limits. As of December 31, 2006, First National Bank's
aggregate legal lending limits to a single borrower and such borrower's related
parties were $9,626,000 on an unsecured basis and $16,044,000 on a fully secured
basis, based on regulatory capital of $64,176,000.
First National Bank's business is concentrated in its service area,
which primarily encompasses San Mateo County, but also includes portions of the
City and County of San Francisco. The economy of First National Bank's service
area is dependent upon government, manufacturing, tourism, retail sales,
population growth and smaller service oriented businesses.
Based upon the most recent information made available by the Federal
Deposit Insurance Corporation, at June 30, 2006, there were 33 commercial and
savings banking institutions in San Mateo County with a total of $18,211,791,000
in deposits at June 30, 2006. First National Bank had a total of 11 offices with
total deposits of $438,557,000 at the same date, or 2.41% of the San Mateo
County totals. At June 30, 2005, there were 33 commercial and savings banking
offices in San Mateo County with total deposits of $17,835,774,000, while First
National Bank had $436,868,000, or 2.45% of the San Mateo County totals.
The Federal Deposit Insurance Reform Act of 2005 (the "Reform Act") had
the effect of merging the Bank Insurance Fund and the Savings Association
Insurance Fund into a new Deposit Insurance Fund ("DIF"). This change was made
effective on March 31, 2006. The FDIC released final regulations under the
Reform Act on November 2, 2006 that establish a revised risk-based deposit
insurance assessment rate system for members of the DIF to insure, among other
12
matters, that there will be sufficient assessment income for repayment of DIF
obligations and to further refine the differentiation of risk profiles among
institutions as a basis for assessments. Under the new assessment rate system,
the FDIC set the assessment rates (effective January 1, 2007) for most
institutions from $0.05 to $0.07 per $100 of insured deposits and established a
Designated Reserve Ratio ("DRR") for the DIF during 2007 of 1.25% of insured
deposits.
The new assessment rate system consolidates the nine categories of the
prior assessment system into four categories (Risk Categories I, II, III and IV)
and three Supervisory Groups (A, B and C) based upon institution's capital
levels and supervisory ratings. Risk Category I includes all well capitalized
institutions with the highest supervisory ratings. Risk Category II includes
adequately capitalized institutions that are assigned to Supervisory Groups A
and B. Risk Category III includes all undercapitalized institutions that are
assigned to Supervisory Groups A and B and institutions assigned to Supervisory
Group C that are not undercapitalized but have a low supervisory rating. Risk
Category IV includes all undercapitalized institutions that are assigned to
Supervisory Group C. At June 30, 2006, Risk Category I would have included
approximately 95% of all insured institutions. The Bank has not yet been
assigned to a particular Risk Category and has not been notified of a new
assessment rate, but based on its current capital and supervisory ratings, the
new assessment rate should not increase by an amount that would have a material
adverse effect on the Bank's operating results.
General Competitive Factors
- ---------------------------
In order to compete with the financial institutions in their primary
service areas, community banks such as First National Bank use to the fullest
extent possible, the flexibility which is accorded by their independent status.
This includes an emphasis on specialized services, local promotional activity,
and personal contacts by their respective officers, directors and employees.
They also seek to provide special services and programs for individuals in their
primary service area who are employed in the agricultural, professional and
business fields, such as loans for equipment, furniture and tools of the trade
or expansion of practices or businesses. In the event there are customers whose
loan demands exceed their respective lending limits, they seek to arrange for
such loans on a participation basis with other financial institutions. They also
assist those customers requiring services not offered by either bank to obtain
such services from correspondent banks.
Banking is a business that depends on interest rate differentials. In
general, the difference .between the interest rate paid by a bank to obtain
their deposits and other borrowings and the interest rate received by a bank on
loans extended to customers and on securities held in a bank's portfolio
comprise the major portion of a bank's earnings. Commercial banks compete with
savings and loan associations, credit unions, other financial institutions and
other entities for funds. For instance, yields on corporate and government debt
securities and other commercial paper affect the ability of commercial banks to
attract and hold deposits. Commercial banks also compete for loans with savings
and loan associations, credit unions, consumer finance companies, mortgage
companies and other lending institutions.
13
The interest rate differentials of a bank, and therefore its earnings,
are affected not only by general economic conditions, both domestic and foreign,
but also by statutes and as implemented by federal agencies, particularly the
Federal Reserve Board. The Federal Reserve Board can and does implement national
monetary policy, such as seeking to curb inflation and combat recession, by its
open market operations in United States government securities, adjustments in
the amount of interest free reserves that banks and other financial institutions
are required to maintain, and adjustments to the discount rates applicable to
borrowing by banks from the Federal Reserve Board. These activities influence
the growth of bank loans, investments and deposits and also affect interest
rates charged on loans and paid on deposits. The nature and timing of any future
changes in monetary policies and their impact on First National Bank are not
predictable.
Legislative and Regulatory Impact
- ---------------------------------
Since 1996, California law implementing certain provisions of prior
federal law has (1) permitted interstate merger transactions; (2) prohibited
interstate branching through the acquisition of a branch business unit located
in California without acquisition of the whole business unit of the California
bank; and (3) prohibited interstate branching through de novo establishment of
California branch offices. Initial entry into California by an out-of-state
institution must be accomplished by acquisition or merger with an existing whole
bank, which has been in existence for at least five years.
The federal financial institution agencies, especially the Office of
the Comptroller of the Currency and the Board of Governors, have taken steps to
increase the types of activities in which national banks and bank holding
companies can engage, and to make it easier to engage in such activities. The
Office of the Comptroller of the Currency has issued regulations permitting
national banks to engage in a wider range of activities through subsidiaries.
"Eligible institutions" (those national banks that are well capitalized, have a
high overall rating and a satisfactory CRA rating, and are not subject to an
enforcement order) may engage in activities related to banking through operating
subsidiaries subject to an expedited application process. In addition, a
national bank may apply to the Office of the Comptroller of the Currency to
engage in an activity through a subsidiary in which First National Bank itself
may not engage.
The Gramm-Leach-Bliley Act (the "Act"), eliminated most of the
remaining depression-era "firewalls" between banks, securities firms and
insurance companies which was established by the Banking Act of 1933, also known
as the Glass-Steagall Act ("Glass-Steagall"). Glass-Steagall sought to insulate
banks as depository institutions from the perceived risks of securities dealing
and underwriting, and related activities. The Act repealed Section 20 of
Glass-Steagall, which prohibited banks from affiliating with securities firms.
Bank holding companies that can qualify as "financial holding companies" can
now, among other matters, acquire securities firms or create them as
subsidiaries, and securities firms can now acquire banks or start banking
activities through a financial holding company. The Act includes provisions
which permit national banks to conduct financial activities through a subsidiary
that are permissible for a national bank to engage in directly, as well as
certain activities authorized by statute, or that are financial in nature or
incidental to financial activities to the same extent as permitted to a
"financial holding company" or its affiliates. This liberalization of United
14
States banking and financial services regulation applies both to domestic
institutions and foreign institutions conducting business in the United States.
Consequently, the common ownership of banks, securities firms and insurance is
now possible, as is the conduct of commercial banking, merchant banking,
investment management, securities underwriting and insurance within a single
financial institution using a structure authorized by the Act.
Prior to the Act, significant restrictions existed on the affiliation
of banks with securities firms and related securities activities. Banks were
also (with minor exceptions) prohibited from engaging in insurance activities or
affiliating with insurers. The Act removed these restrictions and substantially
eliminated the prohibitions under the Bank Holding Company Act on affiliations
between banks and insurance companies. Bank holding companies which qualify as
financial holding companies can now, among other matters, insure, guarantee, or
indemnify against loss, harm, damage, illness, disability, or death; issue
annuities; and act as a principal, agent, or broker regarding such insurance
services.
In order for a commercial bank to affiliate with a securities firm or
an insurance company pursuant to the Act, its bank holding company must qualify
as a financial holding company. A bank holding company will qualify if (i) its
banking subsidiaries are "well capitalized" and "well managed" and (ii) it files
with the Board of Governors a certification to such an effect and a declaration
that it elects to become a financial holding company. The amendment of the Bank
Holding Company Act now permits financial holding companies to engage in
activities, and acquire companies engaged in activities, that are financial in
nature or incidental to such financial activities. Financial holding companies
are also permitted to engage in activities that are complementary to financial
activities if the Board of Governors determines that the activity does not pose
a substantial risk to the safety or soundness of depository institutions or the
financial system in general. These standards expand upon the list of activities
"closely related to banking" which to date have defined the permissible
activities of bank holding companies under the Bank Holding Company Act.
One further effect of the Act was to require that federal financial
institution and securities regulatory agencies prescribe regulation to implement
the policy that financial institutions must respect the privacy of their
customers and protect the security and confidentiality of customers' non-public
personal information. These regulations require, in general, that financial
institutions (1) may not disclose non-public information of customers to
non-affiliated third parties without notice to their customers, who must have an
opportunity to direct that such information not be disclosed; (2) may not
disclose customer account numbers except to consumer reporting agencies; and (3)
must give prior disclosure of their privacy policies before establishing new
customer relationships.
Neither the Company nor First National Bank has determined whether or
when it may seek to acquire and exercise new powers or activities under the Act,
and the extent to which competition will change among financial institutions
affected by the Act has not yet become clear.
15
RECENT LEGISLATION
The Patriot Act
- ---------------
On October 26, 2001, President Bush signed the USA Patriot Act (the
"Patriot Act"), which includes provisions pertaining to domestic security,
surveillance procedures, border protection, and terrorism laws to be
administered by the Secretary of the Treasury. Title III of the Patriot Act
entitled, "International Money Laundering Abatement and Anti-Terrorist Financing
Act of 2001" includes amendments to the Bank Secrecy Act which expand the
responsibilities of financial institutions in regard to anti-money laundering
activities with particular emphasis upon international money laundering and
terrorism financing activities through designated correspondent and private
banking accounts.
Effective December 25, 2001, Section 313(a) of the Patriot Act
prohibits any insured financial institution such as First National Bank, from
providing correspondent accounts to foreign banks which do not have a physical
presence in any country (designated as "shell banks"), subject to certain
exceptions for regulated affiliates of foreign banks. Section 313(a) also
requires financial institutions to take reasonable steps to ensure that foreign
bank correspondent accounts are not being used to indirectly provide banking
services to foreign shell banks, and Section 319(b) requires financial
institutions to maintain records of the owners and agent for service of process
of any such foreign banks with whom correspondent accounts have been
established.
Effective July 23, 2002, Section 312 of the Patriot Act created a
requirement for special due diligence for correspondent accounts and private
banking accounts. Under Section 312, each financial institution that
establishes, maintains, administers, or manages a private banking account or a
correspondent account in the United States for a non-United States person,
including a foreign individual visiting the United States, or a representative
of a non-United States person shall establish appropriate, specific, and, where
necessary, enhanced, due diligence policies, procedures, and controls that are
reasonably designed to detect and record instances of money laundering through
those accounts.
The Patriot Act contains various provisions in addition to Sections
313(a) and 312 that affect the operations of financial institutions by
encouraging cooperation among financial institutions, regulatory authorities and
law enforcement authorities with respect to individuals, entities and
organizations engaged in, or reasonably suspected of engaging in, terrorist acts
or money laundering activities. The Company and First National Bank are not
currently aware of any account relationships between First National Bank and any
foreign bank or other person or entity as described above under Sections 313(a)
or 312 of the Patriot Act.
Certain surveillance provisions of the Patriot Act were scheduled to
expire on December 31, 2005, and actions to restrict the use of the Patriot Act
surveillance provisions were filed by the ACLU and other organizations. On March
2, 2006, after temporary extensions of the Patriot Act, Congress passed the "USA
Patriot Act Improvement and Reauthorization Act of 2005," which reauthorized all
expiring provisions of the Patriot Act by making permanent 14 of the 16
provisions and imposed a four-year expiration date in 2009 on the other two
provisions related to "roving surveillance" and production of business records.
16
The effects which the Patriot Act and any additional legislation
enacted by Congress may have upon financial institutions is uncertain; however,
such legislation could increase compliance costs and thereby potentially may
have an adverse effect upon the Company's results of operations.
The Check Clearing for the 21st Century Act
- -------------------------------------------
The Check Clearing for the 21st Century Act (commonly referred to as
"Check 21") was signed into law in 2003 and became effective on October 28,
2004. The law facilitates check truncation by creating a new negotiable
instrument called a "substitute check" which permits banks to truncate original
checks, to process check information electronically and to deliver "substitute
checks" to banks that want to continue receiving paper checks. Check 21 is
intended to reduce the dependence of the check payment system on physical
transportation networks (which can be disrupted by terrorist attacks of the type
which occurred on September 11, 2001) and to streamline the collection and
return process. The law does not require banks to accept checks in electronic
form nor does it require banks to use the new authority granted by the Act to
create "substitute checks." Compliance with the Act did not have a material
effect upon the financial position, results of operations or cash flows of the
Company and First National Bank.
Sarbanes-Oxley Act of 2002
- --------------------------
On July 30, 2002, President George W. Bush signed into law the Sarbanes-Oxley
Act of 2002 (the "Act"), legislation designed to address certain issues of
corporate governance and accountability. The key provisions of the Act and the
rules promulgated by the SEC pursuant to the Act include the following:
o Expanded oversight of the accounting profession by creating a new
independent public company oversight board to be monitored by the SEC.
o Revised rules on auditor independence to restrict the nature of
non-audit services provided to audit clients and to require such
services to be pre-approved by the audit committee.
o Improved corporate responsibility through mandatory listing standards
relating to audit committees, certifications of periodic reports by the
CEO and CFO and making issuer interference with an audit a crime.
o Enhanced financial disclosures, including periodic reviews for largest
issuers and real time disclosure of material company information.
o Enhanced criminal penalties for a broad array of white collar crimes
and increases in the statute of limitations for securities fraud
lawsuits.
o Disclosure of whether a company has adopted a code of ethics that
applies to the company's principal executive officer, principal
financial officer, principal accounting officer or controller, or
persons performing similar functions, and disclosure of any amendments
or waivers to such code of ethics.
17
o Disclosure of whether a company's audit committee of its board of
directors has a member of the audit committee who qualifies as an
"audit committee financial expert."
o A prohibition on insider trading during pension plan black-out periods.
o Disclosure of off-balance sheet transactions.
o A prohibition on personal loans to directors and officers.
o Conditions on the use of non-GAAP (generally accepted accounting
principles) financial measures.
o Standards of professional conduct for attorneys, requiring attorneys
having an attorney-client relationship with a company, among other
matters, to report "up the ladder" to the audit committee, to another
board committee or to the entire board of directors regarding certain
material violations.
o Expedited filing requirements for Form 4 reports of changes in
beneficial ownership of securities, reducing the filing deadline to
within 2 business days of the date on which an obligation to report is
triggered.
o Accelerated filing requirements for reports on Forms 10-K and 10-Q by
public companies which qualify as "accelerated filers," with a
phased-in reduction of the filing deadline for Form 10-K and Form 10-Q.
o Disclosure concerning website access to reports on Forms 10-K, 10-Q and
8-K, and any amendments to those reports, by "accelerated filers" as
soon as reasonably practicable after such reports and material are
filed with or furnished to the SEC.
o Rules requiring national securities exchanges and national securities
associations to prohibit the listing of any security whose issuer does
not meet audit committee standards established pursuant to the Act.
The Company's securities are not currently listed on the Nasdaq Stock Market. In
the event of such a listing in the future, in addition to the rules promulgated
by the SEC pursuant to the Act, the Company would be required to comply with the
listing standards applicable to all Nasdaq listed companies. Such Nasdaq listing
standards include standards related to (i) director independence, (ii) executive
session meetings of the board, (iii) requirements for audit, nominating and
compensation committee charters, membership qualifications and procedures, (iv)
shareholder approval of equity compensation arrangements, and (v) code of
conduct requirements that comply with the code of ethics under the Act.
The effect of the Act upon the Company is uncertain; however, the Company has
incurred and it is anticipated that it will continue to incur increased costs to
comply with the Act and the rules and regulations promulgated pursuant to the
Act by the Securities and Exchange Commission, Nasdaq and other regulatory
agencies having jurisdiction over the Company or the issuance and listing of its
18
securities. The Company does not currently anticipate, however, that Compliance
with the Act and such rules and regulations did not have a material adverse
effect upon the financial position, results of operations or the cash flows of
the Company..
California Corporate Disclosure Act
- -----------------------------------
Effective January 1, 2003, the California Corporate Disclosure Act (the
"CCD Act") required publicly traded corporations incorporated or qualified to do
business in California to disclose information about their past history,
auditors, directors and officers. Effective September 28, 2004, the CCD Act, as
currently in effect and codified at California Corporations Code Section 1502.1,
requires the Company to file with the California Secretary of State and disclose
within 150 days after the end of its fiscal year certain information including
the following:
o The name of the a company's independent auditor and a description of
services, if any, performed for a company during the previous two
fiscal years and the period from the end of the most recent fiscal year
to the date of filing;
o The annual compensation paid to each director and the five most highly
compensated non-director executive officers (including the CEO) during
the most recent fiscal year, including all plan and non-plan
compensation for all services rendered to a company as specified in
Item 402 of Regulation S-K such as grants, awards or issuance of stock,
stock options and similar equity-based compensation;
o A description of any loans made to a director or executive officer at a
"preferential" loan rate during the company's two most recent fiscal
years, including the amount and terms of the loans;
o Whether any bankruptcy was filed by a company or any of its directors
or executive officers within the previous 10 years;
o Whether any director or executive officer of a company has been
convicted of fraud during the previous 10 years; and
o A description of any material pending legal proceedings other than
ordinary routine litigation as specified in Item 103 of Regulation S-K
and a description of such litigation where the company was found
legally liable by a final judgment or order.
The Company does not currently anticipate that compliance with the CCD
Act will have a material adverse effect upon its financial position or results
of its operations or its cash flows.
Future Legislation and Regulations
- ----------------------------------
Certain legislative and regulatory proposals that could affect FNB
Bancorp, First National Bank, and the banking business in general are
periodically introduced before the United States Congress, the California State
Legislature and Federal and state government agencies. It is not known to what
extent, if any, legislative proposals will be enacted and what effect such
legislation would have on the structure, regulation and competitive
19
relationships of financial institutions. It is likely, however, that such
legislation could subject FNB Bancorp and First National Bank to increased
regulation, disclosure and reporting requirements, competition, and costs of
doing business.
In addition to legislative changes, the various Federal and state
financial institution regulatory agencies frequently propose rules and
regulations to implement and enforce already existing legislation. It cannot be
predicted whether or in what form any such rules or regulations will be enacted
or the effect that such regulations may have on the Company and First National
Bank.
ITEM 1A. RISK FACTORS
- ---------------------
In addition to the risks associated with the business of banking generally, as
described above under Item 1 (Description of Business), the Company's business,
financial condition, operating results, future prospects and stock price can be
adversely impacted by certain risk factors, as set forth below, any of which
could cause the Company's actual results to vary materially from recent results
or from the Company's anticipated future results.
Dependence on Key Officers and Employees. We are dependent on the successful
recruitment and retention of highly qualified personnel. Our ability to
implement our business strategies is closely tied to the strengths of our
executive officers who have extensive experience in the banking industry but who
are not easily replaced. In addition, business banking, one of the Company's
principal lines of business, is dependent on relationship banking, in which
First National Bank personnel develop professional relationships with small
business owners and officers of larger business customers who are responsible
for the financial management of the companies they represent. If these employees
were to leave First National Bank and become employed by a local competing bank,
we could potentially lose business customers. In addition, we rely on our
customer service staff to effectively serve the needs of our consumer customers.
We actively recruit for all open positions and management believes that its
relations with employees are good.
Growth strategy. We have pursued and continue to pursue a growth strategy which
depends primarily on generating an increasing level of loans and deposits at
acceptable risk levels. We may not be able to sustain this growth strategy
without establishing new branches or new products. Therefore, we may expand in
our current market by opening or acquiring branch offices or other financial
institutions or branch offices. This expansion may require significant
investments in equipment, technology, personnel and site locations. We cannot
assure you of our success in implementing our growth strategy without
corresponding increases in our noninterest expenses.
Commercial loans. As of December 31, 2006, approximately 15.6% of our loan
portfolio consisted of commercial business loans, which have a higher degree of
risk than other types of loans. Commercial business loans generally involve a
greater degree of risk than residential mortgage loans and carry larger loan
balances. This increased credit risk is a result of several factors, including
the concentration of principal in a limited number of loans and borrowers, the
mobility of collateral, the effect of general economic conditions and the
20
increased difficulty of evaluating and monitoring these types of loans. In
addition, unlike residential mortgage loans, which generally are made on the
basis of the borrower's ability to make repayment from his or her employment and
other income and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans typically are made on the basis
of the borrower's ability to make repayment from the cash flow of the borrower's
business. As a result, the availability of funds for the repayment of commercial
business loans may be substantially dependent on the success of the business
itself and the general economic environment. If the cash flow from business
operations is reduced, the borrower's ability to repay the loan may be impaired.
Real Estate Values. A large portion of the loan portfolio of the Company is
dependent on real estate. At December 31, 2006, real estate (including
construction loans) served as the principal source of collateral with respect to
approximately 83.7% of the Company's loan portfolio. A substantial decline in
the economy in general, or a decline in real estate values in the Company's
primary operating market areas in particular, could have an adverse effect on
the demand for new loans, the ability of borrowers to repay outstanding loans,
the value of real estate and other collateral securing loans and the value of
the available-for-sale investment portfolio, as well as the Company's financial
condition and results of operations in general and the market value for Company
Common Stock. Acts of nature, including fires, earthquakes and floods, which may
cause uninsured damage and other loss of value to real estate that secures these
loans, may also negatively impact the Company's financial condition.
Allowance for Loan and Lease Losses. Like all financial institutions, the
Company maintains an allowance for loan losses to provide for loan defaults and
non-performance, but its allowance for loan losses may not be adequate to cover
actual loan and lease losses. In addition, future provisions for loan and lease
losses could materially and adversely affect the Company and therefore the
Company's operating results. The Company's allowance for loan and lease losses
is based on prior experience, as well as an evaluation of the risks in the
current portfolio. The amount of future losses is susceptible to changes in
economic, operating and other conditions, including changes in interest rates
that may be beyond the Company's control, and these losses may exceed current
estimates. Federal regulatory agencies, as an integral part of their examination
process, review the Company's loans and allowance for loan and lease losses.
Although we believe that the Company's allowance for loan and lease losses is
adequate to cover current losses, we cannot assure you that it will not further
increase the allowance for loan and lease losses or that the regulators will not
require it to increase this allowance. Either of these occurrences could
materially and adversely affect the Company's earnings.
Environmental Liabilities. In the course of our business, we may foreclose and
take title to real estate, and could be subject to environmental liabilities
with respect to these properties. We may be held liable to a governmental entity
or third parties for property damage, personal injury, investigation and
clean-up costs incurred by these parties in connection with environmental
contamination, or may be required to investigate or clean up hazardous or toxic
substances, or chemical releases at a property. The costs associated with
investigations or remediation activities could be substantial. In addition, as
the owner or former owner of a contaminated site, we could become subject to
common law claims by third parties based on damages and costs resulting from
environmental contamination emanating from the property. If we ever become
21
subject to significant environmental liabilities, our business prospects,
financial condition, liquidity, results of operations and stock price could be
materially and adversely affected.
Dilution of Common Stock. Shares of the Company's common stock eligible for
future sale could have a dilutive effect on the market for common stock and
could adversely affect the market price. The Articles of Incorporation of the
Company authorize the issuance of 10,000,000 shares of common stock, of which
2,852,765 were outstanding at December 31, 2006. Pursuant to its 1997 and 2002
Stock Option Plans, at December 31, 2006, the Company had outstanding options to
purchase 254,915 shares of common stock. As of December 31, 2006, 36,705 shares
of common stock remained available for grants under the 2002 Stock Option Plan.
Sales of substantial amounts of the Company's common stock in the public market
could adversely affect the market price of common stock.
Operating Losses. The Company is subject to certain operations risks, including,
but not limited to, data processing system failures and errors and customer or
employee fraud. The Company maintains a system of internal controls to mitigate
against such occurrences and maintains insurance coverage for such risks, but
should such an event occur that is not prevented or detected by the Company's
internal controls, uninsured or in excess of applicable insurance limits, it
could have a significant adverse impact on the Company's business, financial
condition or results of operations.
Business Confidence Uncertainty. The terrorist actions on September 11, 2001,
and thereafter, plus military actions taken by the United States in Afghanistan,
Iraq and elsewhere, have had significant adverse effects upon the United States
economy. Whether terrorist activities in the future and the actions taken by the
United States and its allies in combating terrorism on a worldwide basis will
adversely impact the Company, and the extent of such impact, is uncertain.
However, such events have had and may continue to have an adverse effect on the
economy in the Company's market areas. Such continued economic deterioration
could adversely affect the Company's future results of operations by, among
other matters, reducing the demand for loans and the amounts required to be
reserved for loan losses, reducing the value of collateral held as security for
the Company's loans, and causing a decline in the Company's stock price.
ITEM 1B. UNRESOLVED STAFF COMMENTS
- ----------------------------------
None.
ITEM 2. PROPERTIES
- ------------------
FNB Bancorp does not own any real property. Since its incorporation on
February 28, 2001, FNB Bancorp has conducted its operations at the
administrative offices of First National Bank, located at 975 El Camino Real,
South San Francisco, California 94080.
22
First National Bank owns the land and building at 975 El Camino Real,
South San Francisco, California 94080. The premises consist of a modern,
three-story building of approximately 15,000 square feet and off-street parking
for employees and customers of approximately 45 vehicles. The Buri Buri Branch
Office of First National Bank is located on the ground floor of this three-story
building and administrative offices, including the offices of senior management,
occupy the second and third floors.
First National Bank owns the land and two-story building occupied by
the Daly City Branch Office (6600 Mission Street, Daly City, CA 94014); the land
and two-story building occupied by the Colma Branch Office (1300 El Camino Real,
Colma, CA 94014); the land and two-story building occupied by the South San
Francisco Branch Office (211 Airport Boulevard, South San Francisco, CA 94080);
the land and two-story building occupied by the Redwood City Branch Office (700
El Camino Real, Redwood City, CA 94063); the land and two-story building
occupied by the Millbrae Branch Office (1551 El Camino Real, Millbrae, CA
94030); the land and single-story building occupied by the Half Moon Bay Branch
Office (756 Main Street, Half Moon Bay, CA 94019); and the land and two-story
building occupied by the Pescadero Branch Office (239 Stage Road, Pescadero, CA
94060). All properties include adequate vehicle parking for customers and
employees.
First National Bank leases premises at 1450 Linda Mar Shopping Center,
Pacifica, California 94044, for its Linda Mar Branch Office. This ground floor
space of approximately 4,100 square feet is leased from Fifty Associates and
Demartini/Linda Mar, LLC. The lease term is 10 years and expires on September 1,
2009.
First National Bank leases premises at 210 Eureka Square, Pacifica,
California 94044, for its Eureka Square Branch Office. This ground floor space
of approximately 3,000 square feet is leased from Joseph A. Sorci and Eldiva
Sorci. The lease term is for 5 years, commencing January 1, 1995, with two
5-year options to extend the lease term, the second of which has been exercised
and expires on December 31, 2009.
First National Bank leases premises at 65 Post Street, San Francisco,
CA 94104, for its Financial District Office. The current lease term expires
April 30, 2008, with two 5-year options to extend the lease. The location
consists of approximately 2,826 square feet of street level, 1,322 square feet
of basement, and 1,077 square feet of mezzanine space.
First National Bank leases premises at 6599 Portola Drive, San
Francisco, CA 94127, for its Portola Office. The current lease expires June 30,
2009, and has a remaining 5-year option to extend the lease. The location
consists of approximately 1,325 square feet of street level space.
First National Bank leases premises at 150 East Third Avenue, San
Mateo, CA 94401, for its San Mateo Branch Office. The lease term is for 5 years,
which will expire July 31, 2008. The location consists of approximately 4,000
square feet of ground floor usable commercial space.
The foregoing summary descriptions of leased premises are qualified in
their entirety by reference to the full text of the lease agreements listed as
exhibits to this report.
23
ITEM 3. LEGAL PROCEEDINGS
- -------------------------
There are no material legal proceedings adverse to the Company or First
National Bank to which any director, officer, affiliate of the Company, or 5%
shareholder of the Company, or any associate of any such director, officer,
affiliate or 5% shareholder of the Company are a party, and none of the
foregoing persons has a material interest adverse to the Company or First
National Bank.
From time to time, the Company and/or First National Bank are a party
to claims and legal proceedings arising in the ordinary course of business. The
Company's management is not aware of any material pending legal proceedings to
which either it or First National Bank may be a party or has recently been a
party, which will have a material adverse effect on the financial condition or
results of operations of the Company and First National Bank, taken as a whole.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, AND RELATED STOCKHOLDER MATTERS
- -------------------------------------------------------------------------------
Since March 18, 2002, the common stock of the Company has been quoted
on the OTC Bulletin Board under the trading symbol, "FNBG.OB." There has been
limited trading in the shares of common stock of the Company. On February 15,
2007, the Company had approximately 400 shareholders of common stock of record.
The following table summarizes sales of the common stock of FNB Bancorp
during the periods indicated of which management of the Bank has knowledge,
including the approximate high and low bid prices during such periods and the
per share cash dividends declared for the periods indicated. All information has
been adjusted to reflect 5% stock dividends effected on December 16, 2005 and on
December 15, 2006. The prices indicated below reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
24
Bid Price of FNB Bancorp
Common Stock
Cash
Dividends
High Low Declared (1)
---- --- ------------
2005
----
First Quarter $33.5601 $30.3855 $0.15
Second Quarter $30.3855 $26.7573 0.15
Third Quarter 28.7982 27.5737 0.15
Fourth Quarter 31.6667 29.2857 0.15
2006
----
First Quarter $33.5619 $31.6667 $0.15
Second Quarter 34.2857 32.7619 0.15
Third Quarter 34.2857 32.8571 0.15
Fourth Quarter 34.6000 32.5000 0.15
(1) See Item 1, "Limitations on Dividends," above, for a description of the
limitations applicable to the payment of dividends by FNB Bancorp.
Comparison of First National Bank/FNB Bancorp Shareholder Return
Set forth below is a line graph comparing the annual percentage change
in the cumulative total return on First National Bank Commn Stock and FNB
Bancorp Common Stock with the cumulative total return of the SNL Securities
Index of Pink Banks (asset size of $100 million to $500 million and over $500
million) and the Russell 2000 Index as of the end of each of the last five
fiscal years. The SNL index for over $500 million was added because the Bank
exceeded $500 million during the year. Effective March 15, 2002, First National
Bank became the wholly owned subsidiary of FNB Bancorp. Thereafter, the common
stock of FNB Bancorp has been quoted on the OTC Bulletin Board under the symbol
"FNBG.OB."
The graph assumes that $100.00 was invested on December 31, 2001 in
First National Bank Common Stock and each index, and that all dividends were
reinvested. Returns have been adjusted for any stock dividends and stock splits
declared by First National Bank and FNB Bancorp. Shareholder returns over the
indicated period should not be considered indicative of future shareholder
returns.
25
- --------------------------------------------------------------------------------
FNB Bancorp
- --------------------------------------------------------------------------------
Total Return Peformance
[GRAPHIC OMITTED]
26
ITEM 6. SELECTED FINANCIAL DATA
The following table presents a summary of selected financial
information that should be read in conjunction with the Company's financial
statements and notes thereto included under Item 8 - "FINANCIAL STATEMENTS AND
SUPPLEMENTAL DATA."
Dollars in thousands, except per
share amounts and ratios 2006 2005 2004 2003 2002
STATEMENT OF INCOME DATA
Total interest income $ 37,196 $ 30,732 $ 24,046 $ 22,867 $ 26,159
Total interest expense 9,821 5,533 2,533 2,658 4,288
------------ ------------ ------------ ------------ ------------
Net interest income 27,375 25,199 21,513 20,209 21,871
Provision for loan losses 683 628 408 786 529
------------ ------------ ------------ ------------ ------------
Net interest income after provision for
loan losses 26,692 24,571 21,105 19,423 21,342
Total non interest income 6,259 3,841 3,787 4,021 3,308
Total non interest expenses 21,760 20,255 18,627 17,907 18,326
------------ ------------ ------------ ------------ ------------
Earnings before taxes 11,191 8,157 6,265 5,537 6,324
Income tax expense 3,609 2,429 1,577 1,396 1,510
------------ ------------ ------------ ------------ ------------
Net earnings $ 7,582 $ 5,728 $ 4,688 $ 4,141 $ 4,814
============ ============ ============ ============ ============
PER SHARE DATA - see note
Net earnings per share:
Basic $ 2.67 $ 2.02 $ 1.63 $ 1.41 $ 1.64
Diluted $ 2.60 $ 1.98 $ 1.60 $ 1.40 $ 1.63
Cash dividends per share $ 0.60 $ 0.60 $ 0.60 $ 0.60 $ 1.00
Weighted average shares outstanding:
Basic 2,845,000 2,834,000 2,883,000 0,000,000 0,000,000
Diluted 2,915,000 2,893,000 2,934,000 0,000,000 0,000,000
Shares outstanding at period end 2,853,000 2,700,000 2,586,000 2,519,000 2,437,000
Book value per share $ 21.75 $ 20.46 $ 20.35 $ 20.64 $ 21.01
BALANCE SHEET DATA
Investment securities 94,945 113,463 102 ,823 63,692 75,963
Net loans 419,437 380,224 341,107 313,058 285,024
Allowance for loan losses 5,002 4,374 3,133 3,155 3,261
Total assets 581,270 569,314 490,255 429,577 401,969
Total deposits 481,567 507,544 413,253 374,214 347,406
Shareholders' equity 62,063 55,243 52,629 51,987 51,203
SELECTED PERFORMANCE DATA
Return on average assets 1.32% 1.08% 1.02% 1.00% 1.17%
Return on average equity 12.86% 10.75% 8.94% 8.00% 9.87%
Net interest margin 5.26% 5.27% 5.14% 5.33% 5.83%
Average loans as a percentage of
average deposits 78.92% 77.80% 79.98% 82.93% 80.79%
Average total stockholder's equity as
a percentage of average total assets 10.25% 10.06% 11.37% 12.49% 11.86%
Dividend payout ratio 21.43% 26.92% 32.54% 35.63% 29.35%
SELECTED ASSET QUALITY RATIOS
Net loan charge-offs to average loans 0.01% 0.02% 0.13% 0.30% 0.10%
Allowance for loan losses/Total Loans 1.18% 1.14% 0.91% 1.00% 1.13%
CAPITAL RATIOS
Tier 1 risk-based 11.05% 10.67% 12.69% 13.29% 13.92%
Total risk-based 12.00% 11.59% 13.50% 14.15% 14.87%
Leverage 10.08% 9.50% 10.72% 12.06% 12.16%
Note: per share data has been adjusted for stock dividends.
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS OF FNB BANCORP AND SUBSIDIARY
- -------------------------------------------
Forward-Looking Statements: Certain matters discussed or incorporated
by reference in this Annual Report on Form 10-K including, but not limited to,
matters described in "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations," are "forward-looking statements" within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
and Section 27A of the Securities Act of 1933, as amended. Such forward-looking
statements may contain words related to future projections including, but not
limited to, words such as "believe," "expect," "anticipate," "intend," "may,"
"will," "should," "could," "would," and variations of those words and similar
words that are subject to risks, uncertainties and other factors that could
cause actual results to differ materially from those projected. Factors that
could cause or contribute to such differences include, but are not limited to,
the following: (1) variances in the actual versus projected growth in assets;
(2) return on assets; (3) loan and lease losses; (4) expenses; (5) changes in
the interest rate environment including interest rates charged on loans, earned
on securities investments and paid on deposits; (6) competition effects; (7) fee
and other noninterest income earned; (8) general economic conditions nationally,
regionally, and in the operating market areas of the Company and its
subsidiaries; (9) changes in the regulatory environment; (10) changes in
business conditions and inflation; (11) changes in securities markets; (12) data
processing problems; (13) a decline in real estate values in the Company's
operating market areas; (14) the effects of terrorism, the threat of terrorism
or the impact of the current military conflict in Iraq and the conduct of the
war on terrorism by the United States and its allies, as well as other factors.
The factors set forth under "Item 1A - Risk Factors" in this report and other
cautionary statements and information set forth in this report should be read
carefully considered and understood as being applicable to all related
forward-looking statements contained in this report when evaluating the business
prospects of the Company and its subsidiary.
Forward-looking statements are not guarantees of performance. By their
nature, they involve risks, uncertainties and assumptions. Actual results and
shareholder values in the future may differ significantly from those expressed
in forward-looking statements. You are cautioned not to put undue reliance on
any forward-looking statement. Any such statement speaks only as of the date of
the report, and in the case of any documents that may be incorporated by
reference, as of the date of those documents. We do not undertake any obligation
to update or release any revisions to any forward-looking statements, or to
report any new information, future event or other circumstances after the date
of this report or to reflect the occurrence of unanticipated events, except as
required by law. However, your attention is directed to any further disclosures
made on related subjects in our subsequent reports filed with the Securities and
Exchange Commission on Forms 10-K, 10-Q and 8-K.
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
28
in the United States of America. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, the Company evaluates
its estimates, including those related to its loans and allowance for loan
losses. The Company bases its estimates on current market conditions, historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. The Company believes the
following critical accounting policy requires significant judgments and
estimates used in the preparation of its consolidated financial statements.
Allowance for Loan Losses. The allowance for loan losses is periodically
evaluated for adequacy by management. Factors considered include the Company's
loan loss experience, known and inherent risks in the portfolio, current
economic conditions, known adverse situations that may affect the borrower's
ability to repay, regulatory policies, and the estimated value of underlying
collateral. The evaluation of the adequacy of the allowance is based on the
above factors along with prevailing and anticipated economic conditions that may
impact borrowers' ability to repay loans. Determination of the allowance is in
part objective and in part a subjective judgment by management given the
information it currently has in its possession. Adverse changes in any of these
factors or the discovery of new adverse information could result in higher
charge-offs and loan loss provisions.
Recent Accounting Changes
- -------------------------
In February, 2006, Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 155, "Accounting for Certain
Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140."
Statement 155 permits the revaluation of fair value for any hybrid financial
instrument that contains an embedded derivative that otherwise would require
bifurcation. It also clarifies which interest-only and principal-only strips are
not subject to the requirements of Statement 133. Statement 155 is effective for
all financial instruments acquired or issued after the beginning of an entity's
first fiscal year that begins after September 15, 2006. The adoption of this
standard is not expected to have a material impact on the Company's financial
statements.
In March, 2006, FASB issued Statement No. 156, "Accounting for
Servicing of Financial Assets- an amendment of FASB Statement No. 140."
Statement 156 requires an entity to recognize a servicing asset or servicing
liability each time it undertakes an obligation to service a financial asset by
entering into a qualifying servicing contract, including a transfer of loans
with servicing retained that meets the requirements for sale accounting
treatment. Statement 156 is effective as of the beginning of an entity's first
fiscal year that begins after September 15, 2006. The adoption of this standard
is not expected to have a material impact on the Company's financial statements.
In June 2006, FASB issued FASB Interpretation No. ("FIN") 48,
"Accounting for Uncertainty in Income Taxes." This Interpretation clarifies the
accounting for uncertainty in income taxes recognized in an enterprise's
29
financial statements. This Interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. This
Interpretation also provides guidance on recognition reversals, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. This Interpretation is effective for fiscal years beginning after
December 15, 2006. The adoption of this standard is not expected to have a
material impact on the Company's consolidated balance sheets or income
statements.
In September 2006, FASB issued Statement No. 157, "Fair Value
Measurements." This Statement defines fair value, establishes a framework for
measuring fair value in accordance with generally accepted accounting principles
("GAAP"), and expands disclosures about fair value measurements. This Statement
supplements other accounting pronouncements that require or permit fair value
measurements. This statement also expands disclosures using fair value to
measure assets and liabilities in interim and annual periods subsequent to the
period of initial recognition. This Statement is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. The adoption of this standard is not
expected to have a material impact on the Company's financial statements.
In September 2006, the Securities and Exchange Commission released
Staff Accounting Bulletin (SAB) No. 108. This SAB provides detailed guidance to
registrants in the determination of what is material to their financial
statements. SAB 108 is required to be applied to financial statements issued
after November 15, 2006. Upon adoption, the cumulative effect of applying the
new guidance is to be reflected as an adjustment to opening retained earnings as
of the beginning of the current fiscal year. The application of SAB 108 is not
expected to have a material impact on the Company's financial statements.
Earnings Analysis
- -----------------
Net earnings in 2006 were $7,582,000, a $1,854,000 or 32.4% increase
from 2005 earnings of $5,728,000. Earnings for the year 2005 increased
$1,040,000 or 22.2% from year 2004 earnings of $4,688,000. The primary reason
for this increase was a gain on sale of Pacific Coast Banker's Bank stock of
$1,352,000 recorded in the first quarter of 2006, and an increase in net
interest income. The principal source of earnings is interest income on loans.
In the year 2004, the prime lending rate rose from 4.00% to 5.25%. During 2005,
the prime lending rate rose eight times, ending at 7.25%. During the first half
of 2006, it continued to rise to 8.25%, where it ended the year.
Basic earnings per share were $2.67 in 2006, $2.02 in 2005 and $1.63 in
2004. Diluted earnings per share were $2.60 in 2006; $1.98 in 2005; and $1.60 in
2004.
Net interest income for 2006 was $27,375,000, an increase of $2,176,000
or 8.6% from 2005. Net interest income was $25,199,000 in 2005, an increase of
$3,686,000 or 17.1% from 2004. Interest income was $37,196,000 in 2006, an
increase of $6,464,000 or 21.0% over 2005. Interest income was $30,732,000 in
2005, an increase of $6,686,000, or 27.8% over 2004. The increase in net
interest income was caused by an increase in both the rate and volume of earning
assets generated through our existing branch network. Average interest earning
30
assets in 2006 were $520,930,000, an increase of $43,097,000 or 9.0% from 2005.
In 2005, they were $477,833,000, an increase of $59,510,000, or 14.2% over 2004.
The yield on interest earning assets increased 71 basis points in 2006 compared
to 2005. The yield on interest earning assets increased 68 basis points in 2005
compared to 2004. The principal earning assets were loans, and average loans
outstanding increased $23,764,000 in 2006 versus 2005, while their yield
increased 88 basis points in 2006 versus 2005. Average loans were $363,399,000
in 2005, an increase of $43,822,000 over 2004, while their yield increased 72
basis points.
Interest expense for 2006 was $9,821,000 compared to $5,533,000 in
2005, an increase of $4,288,000 or 77.5%. Interest expense was $5,533,000 in
2005, an increase of $3,000,000 compared to 2004, or 118.4%. The increase in
interest expense during 2006 was caused by both a volume and rate increase on
deposits obtained through our existing branch network. No new branches or
significant product lines were added during 2006. Average interest bearing
liabilities were $386,254,000 in 2006, and $353,857,000 in 2005, an increase of
$32,397,000 or 9.2%. Average interest bearing liabilities were $353,857,000 in
2005, and $295,062,000 in 2004, an increase of $58,795,000 or 19.9%. The cost of
these liabilities increased 98 basis points in 2006 compared to 2005, and
increased 70 basis points in 2005 compared to 2004. The principal cost was in
time deposits, which increased 105 basis points in 2006 compared to 2005, and
increased 97 basis points in 2005 compared to 2004.
Net Interest Income
- -------------------
Net interest income is the difference between interest yield generated
by earning assets and the interest expense associated with the funding of those
assets. Net interest income is affected by the interest rate earned or paid and
by volume changes in loans, investment securities, deposits and borrowed funds.
31
TABLE 1 Net Interest Income and Average Balances
------------------------------------------------------------------------------------------------
(In thousands)
Year ended December 31
2006 2005 2004
------------------------------ ----------------------------- -----------------------------
Interest Average Interest Average Interest Average
Average Income Yield Average Income Yield Average Income Yield
Balance (Expense) (Cost) Balance (Expense) (Cost) Balance (Expense) (Cost)
-------- -------- -------- -------- -------- -------- -------- -------- --------
INTEREST EARNING ASSETS
Loans, gross $387,163 $ 31,898 8.24% $363,399 $ 26,754 7.36% $319,577 $ 21,226 6.64%
Taxable securities 62,354 2,576 4.13% 60,408 2,173 3.60% 48,536 1,418 2.92%
Nontaxable securities 57,580 2,039 3.54% 44,628 1,512 3.39% 36,293 1,250 3.44%
Federal funds sold 13,833 683 4.94% 9,398 293 3.12% 13,917 152 1.09%
------------------- ------------------- -------------------
Total interest
earning assets $520,930 $ 37,196 7.14% $477,833 $ 30,732 6.43% $418,323 $ 24,046 5.75%
------------------- ------------------- -------------------
NONINTEREST EARNING ASSETS
Cash and due from banks $ 19,384 $ 19,758 $ 19,106
Premises and equipment 12,875 11,896 13,320
Other assets 21,927 20,254 10,342
-------- -------- --------
Total noninterest
earning assets $ 54,186 $ 51,908 $ 42,768
-------- -------- --------
TOTAL ASSETS $575,116 $529,741 $461,091
======== ======== ========
INTEREST BEARING LIABILITIES
Deposits:
Demand, interest bearing $ 62,382 ($ 338) (0.54%) $ 57,478 ($ 168) (0.29%) $ 56,561 ($ 113) (0.20%)
Money Market 119,779 (3,423) (2.86%) 110,488 (1,888) (1.71%) 86,598 (757) (0.87%)
Savings 53,965 (264) (0.49%) 58,820 (181) (0.31%) 60,040 (161) (0.27%)
Time deposits 132,497 (4,814) (3.63%) 124,004 (3,203) (2.58%) 88,627 (1,429) (1.61%)
Fed Home Loan Bank advances 15,863 (880) (5.55%) 1,644 (41) (2.49%) -- -- --
Fed funds purchased 1,768 (102) (5.77%) 1,423 (52) (3.03%) 3,236 (73) (2.26%)
------------------- ------------------- -------------------
Total interest
bearing liabilities $386,254 ($ 9,821) (2.54%) $353,857 ($ 5,533) (1.56%) $295,062 ($ 2,533) (0.86%)
------------------- ------------------- -------------------
NONINTEREST BEARING
LIABILITIES:
Demand deposits 121,957 116,331 107,758
Other liabilities 7,944 6,284 5,833
-------- -------- --------
Total noninterest bearing
liabilities $129,901 $122,615 $113,591
-------- -------- --------
Total liabilities $516,155 $476,472 $408,653
Stockholders' equity $ 58,961 $ 53,269 $ 52,438
-------- -------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $575,116 $529,741 $461,091
======== ======== ========
NET INTEREST INCOME
AND MARGIN ON TOTAL
EARNING ASSETS $ 27,375 5.26% $ 25,199 5.27% $ 21,513 5.14%
======== ======== ========
Interest income is reflected on an actual basis, not on a fully taxable
equivalent basis. Yields on gross loans were not adjusted for nonaccrual loans,
as these were considered not material for this calculation. Fee income included
in interest income was $1,445,000 in 2006, $1,318,000 in 2005 and $1,561,000 in
2004.
The following table analyzes the dollar amount of change in interest income and
expense and the changes in dollar amounts attributable to (a) changes in volume
(changes in volume at the current year rate), (b) changes in rate (changes in
rate times the prior year's volume) and (c) changes in rate/volume (changes in
rate times changes in volume). In this table, the dollar change in rate/volume
is prorated to volume and rate proportionately.
32
TABLE 2 Rate/Volume Variance Analysis
------------------------------------------------------------------------------------------
(In thousands)
Year Ended December 31
------------------------------------------------------------------------------------------
2006 Compared to 2005 2005 Compared to 2004
Increase (decrease) Increase (decrease)
Interest Interest
Income/ Variance Income/ Variance
Expense Attributable To Expense Attributable To
Variance Rate Volume Variance Rate Volume
INTEREST EARNING ASSETS:
Loans $ 5,144 $ 3,186 $ 1,958 $ 5,528 $ 2,302 $ 3,226
Taxable Securities 403 333 70 755 408 347
Nontaxable Securities 527 88 439 262 (25) 287
Federal Funds sold 390 171 219 141 282 (141)
------------ ------------ ------------ ------------ ------------ ------------
Total $ 6,464 $ 3,778 $ 2,686 $ 6,686 $ 2,967 $ 3,719
------------ ------------ ------------ ------------ ------------ ------------
INTEREST BEARING LIABILITIES:
Demand deposits $ 170 $ 156 $ 14 $ 55 $ 53 $ 2
Money market 1,535 1,269 266 1,131 723 408
Savings deposits 83 107 (24) 20 24 (4)
Time deposits 1,611 1,392 219 1,774 1,204 570
Federal Home Loan Bank advances 839 50 789 41 -- 41
Federal funds purchased 50 30 20 (21) 45 (66)
------------ ------------ ------------ ------------ ------------ ------------
Total $ 4,288 $ 3,004 $ 1,284 $ 3,000 $ 2,049 $ 951
------------ ------------ ------------ ------------ ------------ ------------
NET INTEREST INCOME $ 2,176 $ 774 $ 1,402 $ 3,686 $ 918 $ 2,768
============ ============ ============ ============ ============ ============
In 2006, net interest income represented 85.60% of net revenue (net
interest income plus non interest income), compared to 86.77% in 2005 and 85.28%
in 2004. The net interest margin on average earning assets was 5.26% in 2006
compared to 5.27% in 2005 and 5.14% in 2004. The average rate earned on interest
earning assets was 7.14% in 2006, up from 6.43% in 2005 and 5.75% in 2004. The
average cost for interest-bearing liabilities was 2.54% in 2006, compared to
1.56% in 2005 and 0.86% in 2004. The net effect of the above changes resulted in
a 1 basis point decrease in net interest margin for 2006 compared to 2005. Net
interest margin was positively affected by the Sequoia National Bank acquisition
that was effected April 30, 2005. As part of that acquisition, two full service
branch facilities located in San Francisco with approximately $56,000,000 in
deposits were added to the retail deposit branch network.
33
As mentioned above under the heading "Earnings Analysis", there were
increases in the prime lending rate during 2004, 2005 and 2006, as a result of
action by the Federal Open Market Committee of the Federal Reserve, which
affected interest-bearing assets and interest-bearing liabilities.
Yield on average loans was 8.24% in 2006, increasing from 7.36% in 2005
and 6.64% in 2004. Interest on average taxable securities was 4.13% in 2006,
increasing from 3.60% in 2005 and 2.92% in 2004. Interest on average nontaxable
securities was 3.54% in 2006, increasing from 3.39% in 2005 and 3.44% in 2004.
Interest on average federal funds sold was 4.94% in 2006, an increase from 3.12%
in 2005 and 1.09% in 2004. Interest on average total interest earning assets was
7.14% in 2006, 6.43% in 2005, and 5.75% in 2004. On the expense side, interest
on average interest bearing demand deposits was 0.54% in 2006, an increase from
0.29% in 2005 and 0.20% in 2004. Interest on average money market accounts was
2.86% in 2006, increasing from 1.71% in 2005 and 0.87% in 2004. Interest on
average savings accounts was 0.49% in 2006, an increase from 0.31% in 2005 and
0.27% in 2004. Interest on average time deposits was 3.63% in 2006, an increase
from 2.58% in 2005 and 1.61% in 2004. Interest on average Federal Home Loan Bank
advances was 5.55% in 2006, 2.49% in 2005, and no borrowings in 2004. Interest
on federal funds purchased was 5.77% in 2006, 3.03% in 2005, and 2.26% in 2004.
Interest on average total interest bearing liabilities was 2.54% in 2006, an
increase from 1.56% in 2005 and 0.86% in 2004. Yields on interest earning assets
and interest bearing liabilities increased in 2005 and 2006 as a result of
increased short term market interest rates. There were no new branches added in
2006.
Allowance For Loan Losses
- -------------------------
The Bank has the responsibility of assessing the overall risks in its
loan portfolio, assessing the specific loss expectancy, and determining the
adequacy of the loan loss reserve. The level of reserves is determined by
internally generating credit quality ratings, reviewing economic conditions in
the Bank's market area, and considering the Bank's historical loan loss
experience. The Bank is committed to maintaining adequate reserves, identifying
credit weaknesses by consistent review of loans, and maintaining the ratings and
changing those ratings in a timely manner as circumstances change.
Effective 2006, the Bank provides a reserve for unfunded loan
commitments in a separate account in Other Liabilities. The Allowance for Loan
Losses in Table 3 has been reclassified for prior years to agree with the
current year presentation.
Real estate loans outstanding increased by $15,842,000 in 2006 compared
to 2005. They increased by $47,380,000 in 2005 compared to 2004. The proportion
of the Allowance for Loan Losses attributable to real estate loans was
$3,864,000 in 2006 compared to $3,373,000 in 2005 and $1,940,000 in 2004. As a
percentage of total loans, the allowance allocated to these loans was 74.9% in
2006, 78.5% in 2005, and 73.9% in 2004. The growth in real estate loans in 2005
was primarily the result of the Sequoia National Bank acquisition. The growth in
2006 was primarily the result of increased market penetration within our
existing market area.
34
The allowance for loan losses totaled $5,002,000, $4,374,000 and
$3,133,000 at December 31, 2006, 2005 and 2004, respectively. This represented
1.18%, 1.14% and 0.91% of total loans outstanding on those dates. These balances
reflect amounts that, in management's judgment, are adequate to provide for
probable loan losses based on the considerations listed above. During 2006, the
provision for loan losses was $683,000, while charge-offs were $59,000. In 2005,
the provision for loan losses was $628,000, while charge-offs were $110,000. In
2004, the provision for loan losses was $408,000, while charge-offs were
$431,000.
TABLE 3 Allocation of the Allowance for Loan Losses
(In thousands)
2006 2005 2004 2003 2002
Percent Percent Percent Percent Percent
in each in each in each in each In each
category category category Category category
to total to total to total to total To total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
Real Estate $ 3,864 74.9% $ 3,373 78.5% $ 1,940 73.9% $ 1,672 67.5% $ 2,008 72.9%
Construction 539 8.7% 365 6.8% 755 8.4% 1,272 15.3% 989 11.4%
Commercial 582 15.6% 611 13.8% 415 17.0% 185 16.4% 221 14.7%
Consumer 17 0.8% 25 0.9% 23 0.7% 26 0.8% 43 1.0%
------------------- ------------------- ------------------- ------------------- -------------------
Total $ 5,002 100.0% $ 4,374 100.0% $ 3,133 100.0% $ 3,155 100.0% $ 3,261 100.0%
=================== =================== =================== =================== ===================
Table 4 summarizes transactions in the allowance for loan losses and
details the charge-offs, recoveries and net loan losses by loan category for
each of the last five fiscal years ended December 31, 2006. The amount added to
the provision and charged to operating expenses for each period is based on the
risk profile of the loan portfolio.
TABLE 4 Allowance for Loan Losses
Historical Analysis
----------------------------------------------------------------------
(In thousands)
For the year ended December 31
2006 2005 2004 2003 2002
---------- ---------- ---------- ---------- ----------
Balance at Beginning of Period $ 4,374 $ 3,133 $ 3,155 $ 3,261 $ 3,029
Provision for Loan Losses 683 628 408 786 529
Charge-offs:
Real Estate -- (70) (383) (739) (59)
Commercial (49) (34) (31) (110) (216)
Consumer (10) (6) (17) (47) (30)
---------- ---------- ---------- ---------- ----------
Total (59) (110) (431) (896) (305)
Recoveries:
Commercial 3 22 -- 2 2
Consumer 1 1 1 2 6
---------- ---------- ---------- ---------- ----------
Total 4 23 1 4 8
Net charge-offs (55) (87) (430) (892) (297)
Allowance acquired in business combination -- 700 -- -- --
Balance at End of Period $ 5,002 $ 4,374 $ 3,133 $ 3,155 $ 3,261
Percentages
Allowance for Loan Losses/Total Loans 1.18% 1.14% 0.91% 1.00% 1.13%
Net charge-offs/Real Estate Loans 0.00% 0.02% 0.34% 0.03%
0.15%
Net charge-offs//Commercial Loans 0.07% 0.02% 0.05% 0.21% 0.50%
Net charge-offs/Consumer Loans 0.27% 0.15% 0.62% 1.76% 0.81%
Net charge-offs/Total Loans 0.01% 0.02% 0.12% 0.28% 0.10%
Allowance for Loan Losses/Non-performing Loans 190.33% 25,729.41% 111.97% 34.73% 150.90%
35
Non-performing Assets
- ---------------------
Non-performing assets consist of nonaccrual loans, foreclosed assets,
and loans that are 90 days or more past due but are still accruing interest. The
accrual of interest on non-accrual loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. For the
year ended December 31, 2006, had non-accrual loans performed as agreed,
approximately $70,000 in additional interest would have been accrued.
At December 31, 2006, nonaccrual loans totaled $2,628,000, and
primarily consisted of one well-secured commercial real estate loan which was
brought current in the first quarter of 2007. At December 31, 2005, nonaccrual
loans totaled $17,000. At December 31, 2004, nonaccrual loans totaled
$2,798,000, of which a loan secured by an office building located in the Silicon
Valley community of Mountain View, represented $2,679,000. During 2005, this
loan was foreclosed and classified as Other Real Estate Owned, with a balance of
$2,600,000. The loan secured by this property had an original balance of
$3,592,000, was written down to the appraised value of the property in June
2003, March 2004 and March 2005. The property was sold in the second quarter of
2006 for $3,356,000, resulting in a net gain of $756,000.
Table 5 provides a summary of contractually past due loans for the most
recent five years. Nonperforming loans were 0.6% of total loans at December 31,
2006 and less than 0.01% at December 31, 2005, compared to 0.8% of total loans
at the end of 2004. Management believes the current list of past due loans are
collectible and does not anticipate significant losses. There were no foreclosed
assets as of December 31, 2006.
TABLE 5 Analysis of Nonperforming Assets
--------------------------------------------------------------
(In thousands)
Year ended December 31,
--------------------------------------------------------------
2006 2005 2004 2003 2002
---------- ---------- ---------- ---------- ----------
Accruing loans 90 days or more $ -- $ -- $ -- $ -- $ --
Nonaccrual loans 2,628 17 2,798 9,085 2,161
---------- ---------- ---------- ---------- ----------
Total $ 2,628 $ 17 $ 2,798 $ 9,085 $ 2,161
========== ========== ========== ========== ==========
There was no commitment to lend additional funds to any customer whose loan was
classified nonperforming at December 31, 2006, 2005 or 2004.
36
Noninterest Income
- ------------------
The following table sets forth the principal components of noninterest
income:
TABLE 6 Noninterest Income
--------------------------------------
(Dollars in thousands)
Years Ended December 31,
--------------------------------------
2006 2005 2004
---------- ---------- ----------
Gain on sale of other equity securities $ 1,352 $ -- $ --
Gain on sale of other real estate owned 756 -- --
Service charges 2,463 2,305 2,500
Credit card fees 839 856 886
Gain (loss) on write-down and sales of investment securities (11) (101) (31)
Other income 860 781 432
---------- ---------- ----------
Total noninterest income $ 6,259 $ 3,841 $ 3,787
========== ========== ==========
Noninterest income for the year ended December 31, 2006 was $6,259,000, compared
to $3,841,000 at December 31, 2005 and $3,787,000 for 2004. After a gain on sale
of other equity securities of $1,352,000 related to the sale of Pacific Coast
Banker's Bank stock and a gain of $756,000 on sale of other real estate owned in
2006, service charges and credit card fees represented the major portion of
noninterest income. In 2005 and 2004, the Bank recognized impairment charges of
$116,000 and $27,000, respectively, representing the other than temporary
impaired value of one security investment. The principal source of Other Income
was Tax Free Income on Officers' Life Insurance, which was $304,000, $310,000,
and $269,000 in the years 2006, 2005 and 2004, respectively, which reflected an
increased investment in this insurance. As to the $349,000 increase in Other
Income in 2005 over 2004, income on Officers' Life Insurance (already mentioned)
increased $41,000; letter of credit fees and SBA-related fees were $114,000 in
2005 (from the acquisition of Sequoia National Bank), but zero in 2004; and
dividends on equity securities increased $111,000. The remaining smaller
accounts increased a total of $83,000.
37
Noninterest Expenses
- --------------------
The following table sets forth the various components of noninterest
expense:
TABLE 7 Noninterest Expenses
------------------------------------
(Dollars in thousands)
Years Ended December 31,
------------------------------------
2006 2005 2004
---------- ---------- ----------
Salaries and employee benefits $ 12,300 $ 11,344 $ 10,521
Occupancy expense 1,728 1,444 1,288
Equipment expense 1,665 1,624 1,662
Advertising expense 770 710 472
Data processing expense 452 416 344
Professional fees 1,278 952 1,086
Director expense 207 180 180
Surety insurance 479 555 479
Telephone, postage, supplies 1,056 939 1,103
Bankcard expenses 797 802 803
Other 1,028 1,289 689
---------- ---------- ----------
Total noninterest expense $ 21,760 $ 20,255 $ 18,627
========== ========== ==========
Noninterest expenses for the year ended December 31, 2006 were
$21,760,000, compared to $20,255,000 for the year ended December 31, 2005, an
increase of $1,505,000 or 7.4%. For the year ended December 31, 2005 they were
$20,255,000, an increase of $1,628,000 or 8.7% compared to 2004. Increases in
Noninterest expenses in 2005 and 2006 were partially attributable to the
acquisition of Sequoia National Bank in the second quarter, 2005. In 2006,
salaries and employee benefits were $12,300,000 in 2006 and $11,344,000 in 2005,
compared to $10,521,000 in 2004. Salaries and employee benefits represent over
50% of noninterest expense. They increased by 8.4% in 2006 over 2005, and by
7.8% in 2005 over 2004. The principal single item causing the increase was
related to the acquisition of two branches in San Francisco, which represented
$522,000 in 2006 and $318,000 in 2005, while the remaining increase was related
to merit increases and promotional rewards. Occupancy expense increased by
$284,000 in 2006 compared to 2005, and increased by $156,000 in 2005 over 2004.
The addition of the two former Sequoia branches in May of 2005 accounted for
$269,000 in 2006 and $210,000 in 2005. Advertising expense continued to increase
from $472,000 in 2004 to $710,000 in 2005 to $770,000 in 2006. In 2006,
newspaper and community advertising represented $229,000; in 2005, $280,000; and
in 2004 it was $103,000. Contributions, public relations/fund raising, marketing
materials and giveaway items were $441,000 in 2006; $381,000 in 2005; and
$291,000 in 2004. All other expense was $1,028,000 in 2006, $1,289,000 in 2005,
and $689,000 in 2004. Of the $600,000 increase in Other Expense during 2005,
$339,000 was from acquisition related expense; $106,000 deposit intangible
amortization; $61,000 in Other Real Estate Owned expense; and an impairment
write-down of an equity security for $75,000. The remainder was in numerous
smaller accounts.
38
Balance Sheet Analysis
- ----------------------
Total assets of the Company were $581,270,000 at December 31, 2006, an
increase of 2.1% over 2005. Total assets were $569,314,000 at December 31, 2005,
an increase of 16.1% over 2004. Assets averaged $576.1 million in 2006, compared
to $529.7 million in 2005, and $461.1 million in 2004. Average earning assets
increased from $418.3 million in 2004 to $477.8 million in 2005 and $520.9
million in 2006. Average earning assets represented 90.7% of total average
assets in 2004, 90.2% in 2005 and 90.6% in 2006. Average interest-bearing
liabilities were $295.1 million in 2004, $353.9 million in 2005 and $386.3
million in 2006.
Loans
- -----
The loan portfolio is the principal earning asset of the Bank. Loans
outstanding at December 31, 2006 increased by $39.8 million or 10.4% over
December 31, 2005. Loans outstanding at December 31, 2005 increased by $40.4
million or 11.7% compared to December 31, 2004.
Real estate loans increased by $15.8 million or 5.2% in 2006 compared
to 2005, and by $47.4 million or 18.5%, in 2005 compared to 2004. Construction
loans increased by $10.9 million or 41.3% in 2006 compared to 2005, but
decreased by $2.8 million or 9.5% in 2005 compared to 2004. Commercial loans
increased by $13.1 million or 24.6% in 2006 compared to 2005, but decreased by
$5.8 million or 9.8% in 2005 compared to 2004. Consumer loans represent a
nominal portion of total loans. They decreased $0.1 million in 2006, while they
increased $0.8 million or 32.1% in 2005 compared to 2004. During 2006, the Bank
purchased single family loans totaling $15,147,000, of which $12,831,000 was
outstanding as of December 31, 2006.
Table 8 presents a detailed analysis of loans outstanding at December
31, 2002 through December 31, 2006.
TABLE 8 Loan Portfolio
------------------------------------------------------------------
(in thousands)
December 31,
------------------------------------------------------------------
2006 2005 2004 2003 2002
---------- ---------- ---------- ---------- ----------
Real Estate loans $ 318,655 $ 302,813 $ 255,433 $ 214,588 $ 211,473
Construction loans 37,094 26,243 28,997 48,610 32,947
Commercial loans 66,139 53,070 58,849 52,248 42,549
Consumer loans 3,279 3,420 2,589 2,551 2,956
---------- ---------- ---------- ---------- ----------
Sub total 425,167 385,546 345,868 317,997 289,925
Net deferred loan fees (728) (948) (1,628) (1,784) (1,640)
---------- ---------- ---------- ---------- ----------
Total $ 424,439 $ 384,598 $ 344,240 $ 316,213 $ 288,285
========== ========== ========== ========== ==========
The following table shows the Bank's loan maturities and sensitivities
to changes in interest rates as of December 31, 2006.
39
Maturing
Maturing After One Maturing
Within One But Within After Five
Year Five Years Years Total
------------ ------------ ------------ ------------
Real Estate loans $ 160,881 $ 116,474 $ 41,300 $ 318,655
Construction loans 18,727 13,559 4,807 37,093
Commercial loans 33,393 24,175 8,571 66,139
Consumer loans 1,656 1,199 425 3,280
------------ ------------ ------------ ------------
Sub total 214,657 155,407 55,103 425,167
Net deferred loan fees (368) (266) (94) (728)
------------ ------------ ------------ ------------
Total $ 214,289 $ 155,141 $ 55,009 $ 424,439
============ ============ ============ ============
With predetermined interest rates $ 55,569 $ 40,231 $ 14,265 $ 110,065
With floating interest rates $ 158,720 $ 114,910 $ 40,744 $ 314,374
------------ ------------ ------------ ------------
Total $ 214,289 $ 155,141 $ 55,009 $ 424,439
============ ============ ============ ============
Investment Portfolio
- --------------------
Investments at December 31, 2006 were $94,945,000, a decrease of
$18,518,000 or 16.3% over 2005. At December 31, 2005 they were $113,463,000, an
increase of $10,640,000 or 10.3% over 2004. The decrease in investments in 2006
was achieved primarily through the sale of approximately $20,984,000 of
investment securities during the fourth quarter of 2006. These proceeds were
used to repay short term borrowings and to fund part of the increase in loans.
Federal Home Loan Bank advances funded the remainder of the loan increase, and
helped offset the decrease in deposits.
Available funds are first used to fund Loans, then Investments, and the
remainder is sold as Federal Funds. The primary source of funds is the deposit
base. If more funds are needed, maturities from the Investment Portfolio
maturity may be used, as well as sales and calls, which accounts for the volume
variances in Investments. The Bank's investment portfolio is concentrated in U.
S. Government Agencies and in obligations of States and their political
subdivisions. The Bank believes this provides for an appropriate liquidity
level.
The following table sets forth the maturity distribution and interest rate
sensitivity of investment securities at December 31, 2006:
After After
One Five
Due Year Years Due
In One Through Through After Maturity
Year Five Ten Ten Fair In Average
Or Less Yield Years Yield Years Yield Years Yield Value Years Yield
-------- ------ -------- ------ -------- ------ -------- ------ -------- -------- --------
(Dollars in thousands)
U. S. Government
Agencies $ 19,892 4.56% $ 9,240 5.17% $ -- -- $ -- -- $ 29,132 0.81 4.75%
States &
Political
Subdivisions 7,664 3.01% 21,762 3.65% 28,002 3.74% 2,333 3.85% 59,761 5.35 3.62%
Corporate Debt 1,001 2.96% 2,973 5.21% -- -- -- -- 3,974 1.19 4.64%
Other Securities -- -- -- -- 1,208 7.70% 870 4.70% 2,078 9.46 6.45%
Total $ 28,557 4.09% $ 33,975 4.20% $ 29,210 3.91% $ 3,203 4.08% $ 94,945 3.62 4.07%
The following table shows the securities portfolio mix at December 31, 2006,
2005 and 2004.
40
Years Ended December 31,
2006 2005 2004
---------------------------------------------------------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
(Dollars in thousands)
U. S. Government Agencies $ 29,197 29,132 50,571 50,126 54,779 54,697
States & Political Subdivisions 59,693 59,761 56,208 56,028 41,446 42,515
Corporate Debt 3,984 3,974 5,918 5,864 3,977 3,950
Other Securities 2,078 2,078 1,445 1,445 1,661 1,661
---------- ---------- ---------- ---------- ---------- ----------
Total $ 94,952 94,945 114,142 113,463 101,863 102,823
---------- ---------- ---------- ---------- ---------- ----------
Deposits
- --------
The increase in average earning assets in 2006 was funded by increases
in average deposits and from the Federal Home Loan Bank advances. During 2006,
average deposits were $490,580,000, a increase of $23,459,000, or 5.0% over
2005. During 2005, average deposits were $467,121,000, an increase of
$67,537,000 or 16.9% over 2004. In 2006, average interest-bearing deposits were
$368,623,000, an increase of $17,833,000, or 5.1% over 2005. In 2005, average
interest-bearing deposits were $350,790,000, an increase of $58,964,000 or 20.2%
over 2004.
The prime lending rate rose from 4% at the beginning of 2004 to 7.25%
at the end of 2005 and 8.25% at the end of 2006. Time deposits lagged the prime
rate changes because their rates changed only as certificates matured or new
certificates were issued. Thus, interest-bearing demand costs averaged 0.2% in
2004, 0.3% in 2005 and 0.5% in 2006. Money market deposit costs averaged 0.9% in
2004, 1.7% in 2005, and 2.9% in 2006. Savings rates averaged 0.3% in 2004 and
2005, and 0.5% in 2006. Finally, average interest on time certificates of
deposit of $100,000 or more was 1.5% in 2004, 2.7% in 2005 and 4.0% in 2006. On
certificates under $100,000, average rates were 1.7% in 2004, 2.5% in 2005, and
3.1% in 2006.
The following table summarizes the distribution of average deposits and
the average rates paid for them in the periods indicated:
Average Deposits and Average Rates paid for the period ending December 31,
2006 2005 2004
--------------------------------- --------------------------------- ---------------------------------
% of % of % of
Average Average Total Average Average Total Average Average Total
Balance Rate Deposits Balance Rate Deposits Balance Rate Deposits
--------------------------------- --------------------------------- ---------------------------------
(in thousands)
Deposits:
Interest-bearing
demand $ 62,382 0.5% 12.7% $ 57,478 0.3% 12.3% $ 56,561 0.2% 14.1%
Money market 119,779 2.9% 24.4 110,488 1.7% 23.7 86,598 0.9% 21.7
Savings 53,965 0.5% 11.0 58,820 0.3% 12.6 60,040 0.3% 15.0
Time deposits
$100,000 or more 73,061 4.0% 14.9 59,447 2.7% 12.7 38,764 1.5% 9.7
Time deposits under
$100,000 59,436 3.1% 12.1 64,557 2.5% 13.8 49,863 1.7% 12.5
---------------------------------- ---------------------------------- ----------------------------------
Total interest
bearing deposits $ 368,623 2.4% 75.1 $ 350,790 1.6% 75.1 291,826 0.8% 73.0
Demand deposits 121,957 0.0% 24.9 116,331 0.0% 24.9 107,758 0.0% 27.0
---------------------------------- ---------------------------------- ----------------------------------
Total deposits $ 490,580 1.8% 100.0% $ 467,121 1.2% 100.0% $ 399,584 0.6% 100.0%
================================== ================================== ==================================
The following table indicates the maturity schedule of time deposits of $100,000
or more:
41
Analysis of Time Deposits of $100,000 or more at December 31, 2006
(in thousands)
Over Three Over Six Over
Total Deposits Three Months To Six To Twelve Twelve
$100,000 or More Or Less Months Months Months
------------------ -------------- ------------ ----------- ----------
$77,039 $34,889 $16,460 $20,591 $5,099
Capital
- -------
At December 31, 2006, shareholders' equity of the Company was
$62,063,000, an increase of $6,820,000 or 12.3% over 2005; at December 31, 2005
shareholders' equity was $55,243,000, an increase of $2,614,000 or 5.0% over
2004. The increases were primarily attributable to retention of net income after
payment of cash dividends of $1,625,000 in 2006, $1,542,000 in 2005, and
$1,526,000 in 2004.
In 1989, the Federal Deposit Insurance Corporation (FDIC) established
risk-based capital guidelines requiring banks to maintain certain ratios of
"qualifying capital" to "risk-weighted assets". Under the guidelines, qualifying
capital is classified into two tiers, referred to as Tier 1 (core) and Tier 2
(supplementary) capital. Currently, the Company's Tier 1 capital consists of
common shareholders' equity, though other instruments such as certain types of
preferred stock can also be included in Tier 1 capital. Tier 2 capital consists
of eligible reserves for possible loan losses and qualifying subordinated notes
and debentures. Total capital is the sum of Tier 1 plus Tier 2 capital.
Risk-weighted assets are calculated by applying risk percentages specified by
the FDIC to categories of both balance sheet assets and off-balance sheet
obligations.
At year-end 1990, the FDIC also adopted a leverage ratio requirement.
This ratio supplements the risk-based capital ratios and is defined as Tier 1
capital divided by quarterly average assets during the reporting period. This
requirement established a minimum leverage ratio of 3.0% for the highest rated
banks and ratios of 100 to 200 basis points higher for most other banks.
Furthermore, in 1993, the FDIC began assessing risk-based deposit insurance
assessments based on financial institutions' capital resources and "management
strength", as mandated by the FDIC Improvement Act of 1991. To qualify for the
lowest insurance premiums as indicated in the following table,
"well-capitalized" financial institutions must maintain risk-based Tier 1 and
total capital ratios of at least 6.0% and 10.0% respectively. "Well-capitalized
financial institutions must also maintain a leverage ratio equal to or exceeding
5.0%.
The following table shows the risk-based capital ratios and the leverage ratios
at December 31, 2006, 2005 and 2004 for the Bank.
Minimum "Well
Capitalized"
Risk-Based Capital Ratios 2006 2005 2004 Requirements
------------------------- ----------------------------
Tier 1 Capital 11.03% 10.64% 12.69% > 6.00%
-
Total Capital 11.98% 11.56% 13.50% > 10.00%
-
Leverage Ratios 10.06% 9.47% 10.71% > 5.00%
-
42
Liquidity
- ---------
The Company's primary source of liquidity on a stand-alone basis is
dividends from the Bank. The payment of dividends by the Bank is subject to
regulatory restrictions. Liquidity is a measure of the Company's ability to
convert assets into cash with minimum loss. Liquidity consists of cash and due
from other banks accounts, including time deposits, federal funds sold, and
Securities Available-for-Sale. The Company's policy is to maintain a liquidity
ratio of 20% or greater of total assets. As of December 31, 2006, the Company's
primary liquidity was 20.98%, compared to 26.14% in 2005 and 24.47% in 2004.
During the fourth quarter of 2006, management of the Bank sold investment
securities and used the sale proceeds to fund loan originations. This caused a
significant decrease in the liquidity ratio for 2006. Total Liquid Assets were
$121,967,000 in 2006, $148,761,000 in 2005, and $119,907,000 in 2004. The
objective of liquidity management is to ensure that the Company has funds
available to meet all present and future financial obligations and to take
advantage of business opportunities as they occur. Financial obligations arise
from withdrawals of deposits, repayment on maturity of purchased funds,
extension of loans or other forms of credit, payment of operating expenses and
payments of dividends.
Core deposits, which consist of all deposits other than time deposits,
have provided the Company with a sizable source of relatively stable low-cost
funds. The Company's average core deposits funded 62.3% of average total assets
of $575,116,000 for the year ended December 31, 2006, 64.8% of average total
assets of $529,741,000 for the year ended December 31, 2005; and funded 67.4% of
average total assets of $461,091,000 for the year ended December 31, 2004.
As of December 31, 2006, the Company had contractual obligations and
other commercial commitments totaling approximately $138,234,000. The following
table sets forth the Company's contractual obligations and other commercial
commitments as of December 31, 2006. These obligations and commitments will be
funded primarily by loan repayments and the Company's liquidity sources, such as
cash and due from other banks, federal funds sold, securities available for
sale, as well as time deposits.
43
Payments Due by Period
(In thousands)
1 year Over 1 to Over 3 to Over
Contractual Obligations Total or less 3 years 5 years 5 years
---------------------------------- ------------ ------------ ------------ ------------ ------------
Operating Leases $ 1,013 $ 499 $ 514 $ -- $ --
Time deposits 134,391 119,568 14,558 265 --
Other Long-Term Obligations -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Total Contractual Cash Obligations $ 135,404 $ 120,067 $ 15,072 $ 265 $ --
============ ============ ============ ============ ============
Amount of Commitment Expirations Per Period
(In thousands)
Total
Amounts 1 year Over 1 to Over 3 to Over
Other Commercial Commitments Committed or less 3 years 5 years 5 years
---------------------------------- ------------ ------------ ------------ ------------ ------------
Lines of Credit $ 72,311 $ 45,783 $ 12,855 $ 11,551 $ 2,122
Standby Letters of Credit 1,351 1,349 2 -- --
Guarantees -- -- -- -- --
Other Commercial Commitments 63,559 38,274 25,285 -- --
------------ ------------ ------------ ------------ ------------
Total Commercial Commitments $ 137,221 $ 85,406 $ 38,142 $ 11,551 $ 2,122
============ ============ ============ ============ ============
The largest component of the Company's earnings is net interest income,
which can fluctuate widely when significant interest rate movements occur. The
prime lending rate went from 5.25% at the end of 2004, to 7.25% at the end of
2005 and 8.25% at the end of 2006. The Company's management is responsible for
minimizing the Bank's exposure to interest rate risk and assuring an adequate
level of liquidity. This is accomplished by developing objectives, goals and
strategies designed to enhance profitability and performance.
Ongoing management of the Company's interest rate sensitivity limits
interest rate risk by controlling the mix and maturity of assets and
liabilities. Management regularly reviews the Company's position and evaluates
alternative sources and uses of funds as well as changes in external factors.
Various methods are used to achieve and maintain the desired rate sensitivity
position including the sale or purchase of assets and product pricing.
In order to ensure that sufficient funds are available for loan growth
and deposit withdrawals, as well as to provide for general needs, the Company
must maintain an adequate level of liquidity. Asset liquidity comes from the
Company's ability to convert short-term investments into cash and from the
maturity and repayment of loans and investment securities. Liability liquidity
is provided by the Company's ability to attract deposits. The primary source of
liability liquidity is the Bank's customer base, which provides core deposit
growth. The overall liquidity position of the Company is closely monitored and
evaluated regularly. The Company has federal fund borrowing facilities for a
total of $70,000,000, a Federal Home Loan Bank line of credit of up to 25% of
total assets, and a Federal Reserve Bank facility. Management believes the
44
Company's liquidity sources at December 31, 2006 are adequate to meet its
operating needs in 2007 and into the foreseeable future.
Effect of Changing Prices
- -------------------------
The results of operations and financial conditions presented in this
report are based on historical cost information and are not adjusted for the
effects of inflation.
Since the assets and liabilities of banks are primarily monetary in
nature (payable in fixed, determinable amounts), the performance of the Company
is affected more by changes in interest rates than by inflation. Interest rates
generally increase as the rate of inflation increases, but the magnitude of the
change in rates may not be the same.
The effect of inflation on banks is normally not as significant as its
influence on those businesses that have large investments in plant and
inventories. During periods of high inflation, there are normally corresponding
increases in the money supply, and banks will normally experience above average
growth in assets, loans and deposits. Also, increases in the price of goods and
services will result in increased operating expenses.
The following table includes key ratios, including returns on average
assets and equity.
Return on Equity and Assets
(Key financial ratios are computed on average balances)
Year Ended December 31,
2006 2005 2004
---------------- ---------------- ----------------
Return on average assets 1.32% 1.08% 1.02%
Return on average equity 12.86% 10.75% 8.94%
Dividend payout ratio 21.43% 26.92% 32.55%
Average equity to assets ratio 10.25% 10.06% 11.37%
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
Interest Rate Risk
- ------------------
Closely related to the concept of liquidity is the concept of interest
rate sensitivity (i. e., the extent to which assets and liabilities are
sensitive to changes in interest rates). Interest rate sensitivity is often
measured by the extent to which mismatches or "gaps" occur in the repricing of
assets and liabilities within a given time period. Gap analysis is used to
quantify such mismatches. A "positive" gap results when the amount of earning
assets repricing within a given time period exceeds the amount of
interest-bearing liabilities repricing within that time period. A "negative" gap
results when the amount of interest-bearing liabilities repricing within a given
time period exceeds the amount of earning assets repricing within such time
period.
45
In general, a financial institution with a positive gap in relevant
time periods will benefit from an increase in market interest rates and will
experience erosion in net interest income if such rates fall. Likewise, a
financial institution with a negative gap in relevant time periods will normally
benefit from a decrease in market interest rates and will be adversely affected
by an increase in rates. By maintaining a balanced interest rate sensitivity
position, where interest rate sensitive assets roughly equal interest sensitive
liabilities in relevant time periods, interest rate risk can be limited.
As a financial institution, the Company's potential interest rate
volatility is a primary component of its market risk. Fluctuations in interest
rates will ultimately impact the level of income and expense recorded on a large
portion of the Company's assets and liabilities, and the market value of all
interest-earning assets, other than those that possess a short-term maturity.
Based upon the nature of the Company's operations, the Company is not subject to
foreign currency or commodity price risk. The Company does not own any trading
assets and does not have any hedging transactions in place, such as interest
rate swaps and caps.
The Company's Board of Directors has adopted an Asset/Liability policy
designed to stabilize net interest income and preserve capital over a broad
range of interest rate movements. This policy outlines guidelines and ratios
dealing with, among others, liquidity, volatile liability dependence, investment
portfolio composition, loan portfolio composition, loan-to-deposit ratio and gap
analysis ratio. The Board of Directors monitors the Company's performance as
compared to Asset/Liability Policy. In addition, to effectively administer the
Asset/Liability Policy and to monitor exposure to fluctuations in interest
rates, the Company maintains an Asset/Liability Committee, consisting of the
Chief Executive Officer, Chief Financial Officer, Chief Lending Officer, Branch
Administrator, and Controller. This committee meets monthly to review the
Company's lending and deposit-gathering activities, to review competitive
interest rates, to develop strategies to implement the Asset/Liability Policy
and to respond to market conditions.
The Company monitors and controls interest rate risk through a variety
of techniques, including use of traditional interest rate sensitivity analysis
(also known as "gap analysis") and an interest rate risk management model. With
the interest rate risk management model, the Company projects future net
interest income, and then estimates the effect of various changes in interest
rates and balance sheet growth rates on that projected net interest income. The
Company also uses the interest rate risk management model to calculate the
change in net portfolio value over a range of interest rate change scenarios.
Traditional gap analysis involves arranging the Company's interest-earning
assets and interest-bearing liabilities by repricing periods and then computing
the difference (or "interest rate sensitivity gap") between the assets and
liabilities that are estimated to reprice during each time period and
cumulatively through the end of each time period.
Both interest rate sensitivity modeling and gap analysis are done at a
specific point in time and involve a variety of significant estimates and
assumptions. Interest rate sensitivity modeling requires, among other things,
estimates of how much and when yields and costs on individual categories of
interest-earning assets and interest-bearing liabilities will respond to general
changes in market rates, future cash flows and discount rates.
46
Gap analysis requires estimates as to when individual categories of
interest-sensitive assets and liabilities will reprice, and assumes that assets
and liabilities assigned to the same repricing period will reprice at the same
time and in the same amount. Gap analysis does not account for the fact that
repricing of assets and liabilities is discretionary and subject to competitive
and other pressures.
The following table sets forth the estimated maturity/repricing
structure of the Company's interest-bearing assets and interest-bearing
liabilities at December 31, 2006. Except as stated below, the amounts of assets
or liabilities shown which reprice or mature during a particular period were
determined in accordance with the contractual terms of each asset or liability.
The majority of interest-bearing demand deposits and savings deposits are
assumed to be "core" deposits, or deposits that will remain at the Company
regardless of market interest rates. The table does not assume any prepayment of
fixed-rate loans.
RATE SENSITIVE GAP ANALYSIS
As of December 31, 2006
-----------------------------------------------------------------------------
Maturing or repricing
-----------------------------------------------------------------------------
Three Over Three Over One Over Not
Months To Twelve Year Through Five Rate-
Or Less Months Five Years Years Sensitive Total
---------------------------------------------------------------------------------------------
(Dollars in thousands)
Interest earning assets:
Federal funds sold $ 8,725 $ -- $ -- $ -- $ -- $ 8,725
Securities 12,832 15,725 33,976 32,412 -- 94,945
Loans 154,664 57,937 154,446 54,764 2,628 424,439
------------ ------------ ------------ ------------ ------------ ------------
Total interest earning assets 176,221 73,662 188,422 87,176 2,628 528,109
------------ ------------ ------------ ------------ ------------ ------------
Cash and due from banks -- -- -- -- 18,297 18,297
Allowance for loan losses -- -- -- -- (5,002) (5,002)
Other assets -- -- -- -- 39,866 39,866
------------ ------------ ------------ ------------ ------------ ------------
Total assets $ 176,221 $ 73,662 $ 188,422 $ 87,176 $ 55,789 $ 581,270
============ ============ ============ ============ ============ ============
Interest bearing liabilities:
Demand, interest bearing $ 60,378 $ -- $ -- $ -- $ -- $ 60,378
Savings and money market 162,915 -- -- -- -- 162,915
Time deposits 56,419 63,148 14,823 -- -- 134,390
Federal Home Loan Bank advances -- 10,000 20,000 -- -- 30,000
Federal funds purchased -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Total interest bearing liabilities 279,712 73,148 34,823 -- -- 387,683
------------ ------------ ------------ ------------ ------------ ------------
Noninterest demand deposits -- -- -- -- 123,884 123,884
Other liabilities -- -- -- -- 7,640 7,640
Stockholders' equity -- -- -- -- 62,063 62,063
------------ ------------ ------------ ------------ ------------ ------------
Total liabilities and
Stockholders' equity $ 279,712 $ 73,148 $ 34,823 $ -- $ 193,587 $ 581,270
============ ============ ============ ============ ============ ============
Interest rate sensitivity GAP ($ 103,491) $ 514 $ 153,599 $ 87,176 ($ 137,798) $ --
============ ============ ============ ============ ============ ============
Cumulative interest rate
sensitivity GAP ($ 103,491) $ 514 $ 50,622 $ 137,798 $ -- $ --
Cumulative interest rate
sensitivity GAP ratio (58.73%) (41.21%) 11.55% 26.22% -- --
47
Changes in estimates and assumptions made for interest rate sensitivity
modeling and gap analysis could have a significant impact on projected results
and conclusions. Therefore, these techniques may not accurately reflect the
impact of general interest rate movements on the Company's net interest income
or net portfolio value.
Because of the limitations in the gap analysis discussed above, members
of the Company's Asset/Liability Management Committee believe that the interest
sensitivity modeling more accurately reflects the effects and exposure to
changes in interest rates. Net interest income simulation considers the relative
sensitivities of the balance sheet, including the effect of interest rate caps
on adjustable rate mortgages and the relatively stable aspects of core deposits.
As such, net interest income simulation is designed to address the probability
of interest rate changes and behavioral response of the balance sheet to those
changes. Market Value of Portfolio Equity represents the fair value of the net
present value of assets, liabilities and off-balance sheet items. The starting
point (or "base case") for the following table is the Company's net portfolio at
December 31, 2006, using current discount rates, and an estimate of net interest
income for 2006 assuming that both interest rates and the Company's
interest-sensitive assets and liabilities remain at December 31, 2006 levels.
The "rate shock" information in the table shows estimates of net portfolio value
at December 31, 2006 and net interest income for 2006 assuming fluctuations or
"rate shocks" of minus 100 and 200 basis points and plus 100 and 200 basis
points. Rate shocks assume that current interest rates change immediately. The
information set forth in the following table is based on significant estimates
and assumptions, and constitutes a forward-looking statement within the meaning
of that term set forth in Rule 175 under the Securities Act of 1933 and Rule
3b-6(c) of the Securities Exchange Act of 1934.
Market Risk in Securities
(Amount in thousands) Interest Rate Shock
At December 31, 2006
Available for Sale securities
Rates Decline Rates Increase
------------------------------------ ------------------------------------
Rate change (2%) (1%) Current +1% +2%
Unrealized gain (loss) $ 3,316 $1,655 ($7) ($2,058) ($4,110)
Change from current $ 3,323 $1,662 ($2,051) ($4,103)
Market Risk on Net Interest Income
(Amounts in thousands) At December 31, 2006
Rates Decline Rates Increase
------------------------------------ ------------------------------------
Rate change (2%) (1%) Current +1% +2%
Net interest income $25,440 $26,409 $27,375 $27,874 $28,372
Change from current ($1,935) ($966) $499 $997
48
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------
INDEX TO FINANCIAL STATEMENTS Page
----
Reports of Independent Registered Public Accounting Firms..................................... 50
Consolidated Balance Sheets, December 31, 2006 and 2005....................................... 53
Consolidated Statements of Earnings for the years ended December 31, 2006, 2005 and 2004...... 54
Consolidated Statements of Stockholders' Equity and Comprehensive Income for the years
ended December 31, 2006, 2005 and 2004........................................................ 55
Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005
and 2004...................................................................................... 56
Notes to Consolidated Financial Statements.................................................... 57
49
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Directors
FNB Bancorp
We have audited the accompanying consolidated balance sheets of FNB Bancorp and
subsidiary (the Company) as of December 31, 2006 and 2005 and the related
consolidated statements of earnings, stockholders' equity and comprehensive
income and cash flows for the two years ended December 31, 2006. We have also
audited management's assessment, included in the accompanying Management Report
on Internal Control over Financial Reporting, that the Company maintained
effective internal control over financial reporting as of December 31, 2006,
based on criteria established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Company's management is responsible for these financial statements,
maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on these financial statements, an
opinion on management's assessment, and an opinion on the effectiveness of the
Company's internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. An audit of internal control over financial
reporting includes obtaining an understanding of internal control over financial
reporting, evaluating management's assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing such other
procedures as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the company's
assets that could have a material effect on the financial statements.
50
Because of the inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
the effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with policies or procedures may deteriorate.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FNB Bancorp and subsidiary as
of December 31, 2006 and 2005 and the results of their operations and cash flows
for the two years ended December 31, 2006 in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion management's assessment that FNB Bancorp and subsidiary maintained
effective internal control over financial reporting as of December 31, 2006, is
fairly stated, in all material respects, based on criteria established in
Internal Control - Integrated Framework issued by the COSO. Furthermore, in our
opinion, FNB Bancorp and subsidiary maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2006,
based on criteria established in Internal Control - Integrated Framework issued
by the COSO.
As discussed in notes 1 and 16 to the financial statements, effective January 1,
2006, the Company changed its method of accounting for share-based payment
arrangements to conform to Statement of Financial Accounting Standard No.
123(R), "Share-Based Payment".
/s/ Moss Adams LLP
Stockton, California
March 14, 2007
51
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
FNB Bancorp:
We have audited the accompanying consolidated statements of earnings,
stockholders' equity and comprehensive income, and cash flows of FNB Bancorp and
Subsidiary for the year ended December 31, 2004. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and the cash flows
of FNB Bancorp and Subsidiary for the year ended December 31, 2004, in
conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Sacramento, California
March 3, 2005
52
FNB BANCORP AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2006 and 2005
Assets 2006 2005
------------ ------------
Cash and due from banks 18,297,000 19,068,000
Federal funds sold 8,725,000 16,230,000
------------ ------------
Cash and cash equivalents 27,022,000 35,298,000
Securities available-for-sale 94,945,000 113,463,000
Loans, net 419,437,000 380,224,000
Bank premises, equipment, and leasehold improvements 13,476,000 12,028,000
Other real estate owned -- 2,600,000
Goodwill 1,841,000 1,841,000
Accrued interest receivable and other assets 24,549,000 23,860,000
------------ ------------
Total Assets 581,270,000 569,314,000
============ ============
Liabilities and stockholders' equity
Deposits:
Demand, noninterest bearing 123,884,000 123,641,000
Demand, interest bearing 60,378,000 62,581,000
Savings 162,915,000 180,489,000
Time 134,390,000 140,833,000
------------ ------------
Total deposits 481,567,000 507,544,000
------------ ------------
Federal Home Loan Bank advances 30,000,000 --
Accrued expenses and other liabilities 7,640,000 6,527,000
------------ ------------
Total liabilities 519,207,000 514,071,000
------------ ------------
Commitments and contingencies (notes 9 and 13)
Stockholders' equity:
Common stock, no par value; authorized 10,000,000 shares;
issued and outstanding 2,853,000 and 2,700,000 shares
on December 31, 2006 and 2005, respectively 39,824,000 34,793,000
Additional paid-in capital 141,000 19,000
Retained earnings 22,102,000 20,832,000
Accumulated other comprehensive loss (4,000) (401,000)
------------ ------------
Total stockholders' equity 62,063,000 55,243,000
------------ ------------
Total liabilities and stockholders' equity 581,270,000 569,314,000
============ ============
See accompanying notes to consolidated financial statements.
53
FNB BANCORP AND SUBSIDIARY
Consolidated Statements of Earnings
Years ended December 31, 2006, 2005 and 2004
2006 2005 2004
------------ ------------ ------------
Interest income:
Interest and fees on loans $ 31,898,000 $ 26,754,000 21,226,000
Interest and dividends on securities 2,576,000 2,173,000 1,418,000
Interest on tax-exempt securities 2,039,000 1,512,000 1,250,000
Federal funds sold 683,000 293,000 152,000
------------ ------------ ------------
Total interest income 37,196,000 30,732,000 24,046,000
Interest expense:
Deposits 8,839,000 5,440,000 2,460,000
Federal Home Loan Bank advances 880,000 41,000 --
Federal funds purchased 102,000 52,000 73,000
------------ ------------ ------------
Total interest expense 9,821,000 5,533,000 2,533,000
------------ ------------ ------------
Net interest income 27,375,000 25,199,000 21,513,000
Provision for loan losses 683,000 628,000 408,000
------------ ------------ ------------
Net interest income after provision
for loan losses 26,692,000 24,571,000 21,105,000
------------ ------------ ------------
Noninterest income:
Gain on sale of other equity securities 1,352,000 -- --
Gain on sale of other real estate owned 756,000 -- --
Service charges 2,463,000 2,305,000 2,500,000
Credit card fees 839,000 856,000 886,000
Gain (loss) on impairment and sale of investment securities (11,000) (101,000) (31,000)
Other 860,000 781,000 432,000
------------ ------------ ------------
Total noninterest income 6,259,000 3,841,000 3,787,000
------------ ------------ ------------
Noninterest expense:
Salaries and employee benefits 12,300,000 11,344,000 10,521,000
Occupancy expense 1,728,000 1,444,000 1,288,000
Equipment expense 1,665,000 1,624,000 1,662,000
Advertising expense 770,000 710,000 472,000
Data processing expense 452,000 416,000 344,000
Professional fees 1,278,000 952,000 1,086,000
Director expense 207,000 180,000 180,000
Surety insurance 479,000 555,000 479,000
Telephone, postage, supplies 1,056,000 939,000 1,103,000
Bankcard expenses 797,000 802,000 803,000
Other 1,028,000 1,289,000 689,000
------------ ------------ ------------
Total noninterest expense 21,760,000 20,255,000 18,627,000
------------ ------------ ------------
Earnings before income tax expense 11,191,000 8,157,000 6,265,000
Income tax expense 3,609,000 2,429,000 1,577,000
------------ ------------ ------------
Net earnings $ 7,582,000 $ 5,728,000 4,688,000
============ ============ ============
Earnings per share data:
Basic $ 2.67 $ 2.02 $ 1.63
Diluted $ 2.60 $ 1.98 $ 1.60
Weighted average shares outstanding:
Basic weighted average shares outstanding 2,845,000 2,834,000 2,883,000
Diluted weighted average shares outstanding 2,915,000 2,893,000 2,934,000
See accompanying notes to consolidated financial statements.
54
FNB BANCORP AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years ended December 31, 2006, 2005 and 2004
Accumulated
Common stock Additional other
--------------------------- paid-in Retained comprehensive Comprehensive
Shares Amount capital earnings income income Total
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2003 2,519,000 $ 28,903,000 3,000 22,041,000 1,040,000 51,987,000
Net earnings -- -- -- 4,688,000 -- 4,688,000 4,688,000
Other comprehensive income:
Unrealized gain on
securities, net of
tax benefit of $330,000 -- -- -- -- (474,000) (474,000) (474,000)
------------
Comprehensive income $ 4,214,000
============
Cash dividends of $0.12
per share, quarterly -- -- -- (1,210,000) -- -- (1,210,000)
Special cash dividend of
$0.12 per share (316,000) (316,000)
Stock dividend of 5% 124,000 4,514,000 (4,514,000) --
Stock-based compensation
expense -- -- 6,000 -- -- 6,000
Stock repurchased and retired (69,000) (2,324,000) -- -- -- (2,324,000)
Stock options exercised 12,000 272,000 -- -- -- 272,000
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2004 2,586,000 31,365,000 9,000 20,689,000 566,000 52,629,000
Net earnings -- -- -- 5,728,000 -- 5,728,000 5,728,000
Other comprehensive income:
Unrealized loss on
securities, net of
tax benefit of $671,000 -- -- -- -- (967,000) (967,000) (967,000)
------------
Comprehensive income $ 4,761,000
============
Cash dividends of $0.15
per share, quarterly -- -- -- (1,535,000) -- (1,535,000)
Stock dividend of 5% 128,000 4,043,000 (4,043,000) --
Cash on fractional shares
related to stock dividend (7,000) (7,000)
Stock-based compensation
expense -- -- 10,000 -- -- 10,000
Stock repurchased and retired (21,000) (765,000) -- -- -- (765,000)
Stock options exercised 7,000 150,000 -- -- -- 150,000
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2005 2,700,000 34,793,000 19,000 20,832,000 (401,000) 55,243,000
Net earnings -- -- -- 7,582,000 -- 7,582,000 7,582,000
Other comprehensive income:
Unrealized gain on
securities, net of
tax provision of $276,000 -- -- -- -- 397,000 397,000 397,000
------------
Comprehensive income $ 7,979,000
============
Cash dividends of $0.15 per
share, quarterly -- -- -- (1,625,000) -- (1,625,000)
Stock dividend of 5% 136,000 4,679,000 (4,679,000) --
Stock-based compensation
expense 39,000 39,000
Cash on fractional shares
related To stock dividend
expense (8,000) (8,000)
Stock repurchased and retired (2,000) (73,000) -- -- -- (73,000)
Stock options exercised,
including tax benefit of
$83,000 19,000 425,000 83,000 -- -- 508,000
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2006 2,853,000 $ 39,824,000 141,000 22,102,000 (4,000) 62,063,000
============ ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
55
FNB BANCORP AND SUBSIDIARY
Consolidated Statements of Cash Flows
December 31, 2006, 2005 and 2004
2006 2005 2004
------------ ------------ ------------
Cash flows from operating activities:
Net earnings $ 7,582,000 5,728,000 4,688,000
Adjustments to reconcile net earnings to cash
provided by operating activities:
Depreciation, amortization and accretion, net 1,220,000 1,594,000 1,790,000
Loss on sale of investment securities 11,000 101,000 31,000
Gain on sale of other equity securities (1,352,000)
Securities write-down -- 116,000 --
Stock-based compensation expense 39,000 10,000 6,000
Gain on sale of other real estate owned (756,000)
Provision for loan losses 683,000 600,000 480,000
Deferred taxes (7,000) (181,000) 74,000
Changes in assets and liabilities:
Accrued interest receivable and other assets 669,000 (5,149,000) (6,422,000)
Accrued expenses and other liabilities 1,011,000 1,720,000 2,083,000
------------ ------------ ------------
Net cash provided by operating activities 9,100,000 4,539,000 2,730,000
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sold, matured, called securities available-for-sale 65,092,000 31,207,000 34,203,000
Purchases of securities available-for-sale (45,949,000) (43,386,000) (74,689,000)
Proceeds from sale of other real estate owned 3,356,000 -- --
Net decrease (increase) in loans (40,069,000) 892,000 (28,457,000)
Proceeds from sales of bank premises, equipment, and
leasehold improvements 541,000 156,000 121,000
Purchases of bank premises, equipment, and leasehold
Improvements (3,172,000) (1,733,000) (2,101,000)
Cash and equivalents received in bank acquisition, net of cash paid -- 9,602,000 --
------------ ------------ ------------
Net cash used in investing activities (20,201,000) (3,262,000) (70,923,000)
------------ ------------ ------------
Cash flows from financing activities:
Net increase (decrease) in demand and savings deposits (19,534,000) 16,215,000 39,392,000
Net increase (decrease) in time deposits (6,443,000) 22,051,000 (353,000)
Net increase in Federal Home Loan Bank advances 30,000,000
Net (decrease) increase in federal funds purchased -- (19,172,000) 19,172,000
Cash dividends paid (1,633,000) (1,542,000) (1,526,000)
Repurchases of common stock (73,000) (765,000) (2,324,000)
Exercise of stock options including tax benefit of $83,000 in 2006 508,000 150,000 272,000
------------ ------------ ------------
Net cash provided by
financing activities 2,825,000 16,937,000 54,633,000
------------ ------------ ------------
Net increase (decrease) in cash and cash
Equivalents (8,276,000) 18,214,000 (13,560,000)
Cash and cash equivalents at beginning of year 35,298,000 17,084,000 30,644,000
------------ ------------ ------------
Cash and cash equivalents at end of year $ 27,022,000 35,298,000 17,084,000
============ ============ ============
Additional cash flow information:
Interest paid $ 9,533,000 4,980,000 2,467,000
Income taxes paid 4,020,000 2,224,000 1,691,000
Noncash - stock dividend 4,679,000 4,043,000 4,514,000
See accompanying notes to consolidated financial statements.
56
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
(1) The Company and Summary of Significant Accounting Policies
FNB Bancorp (the Company) is a bank holding company registered under
the Bank Holding Company Act of 1956, as amended. The Company was
incorporated under the laws of the State of California on February 28,
2001. The consolidated financial statements include the accounts of FNB
Bancorp and its wholly owned subsidiary, First National Bank of
Northern California (the Bank). The Bank provides traditional banking
services in San Mateo and San Francisco counties.
The Bank and the Company entered into an Agreement and Plan of
Reorganization dated November 1, 2001 (the Plan of Reorganization), and
the shareholders of the Bank approved the Plan of Reorganization at a
Special Meeting of the Shareholders of the Bank held on February 27,
2002. The Plan of Reorganization was consummated on March 15, 2002.
Each outstanding share of the common stock, par value $1.25 per share,
of the Bank (other than any shares as to which dissenters' rights of
appraisal have been properly exercised) was converted into one share of
the no par common stock of the Company, and the former holders of Bank
common stock became the holders of all of the Company common stock. The
change in capital structure has been included for all periods
presented.
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the
financial statements and revenue and expenses during the reporting
period. Actual results could differ from those estimates. For the Bank,
the significant accounting estimate is the allowance for loan losses
(note 1f). A summary of the significant accounting policies applied in
the preparation of the accompanying consolidated financial statements
follows.
(a) Basis of Presentation
The accounting and reporting policies of the Company and its
wholly owned subsidiary are in accordance with accounting
principles generally accepted in the United States of America.
All intercompany balances and transactions have been
eliminated.
57
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
(b) Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts due
from banks, and federal funds sold. Generally, federal funds
are sold for one-day periods. The cash equivalents are readily
convertible to known amounts of cash and present insignificant
risk of changes in value due to original maturity dates of 90
days or less. Included in cash and cash equivalents are
amounts restricted for the Federal Reserve requirement of
approximately $1,219,000 and $2,358,000 at December 31, 2006
and 2005, respectively.
(c) Investment Securities
Investment securities consist of U.S. Treasury securities,
U.S. agency securities, obligations of states and political
subdivisions, obligations of U.S. corporations,
mortgage-backed securities and other securities. At the time
of purchase of a security, the Company designates the security
as held-to-maturity or available-for-sale, based on its
investment objectives, operational needs, and intent to hold.
The Company does not purchase securities with the intent to
engage in trading activity. Held to maturity securities are
recorded at amortized cost, adjusted for amortization of
premiums or accretion of discounts. The Company did not have
any investments in the held-to-maturity portfolio at December
31, 2006 or 2005. Available-for-sale securities are recorded
at fair value with unrealized holding gains or losses, net of
the related tax effect, reported as a separate component of
stockholders' equity until realized.
A decline in the market value of any available-for-sale or
held-to-maturity security below cost that is deemed other than
temporary results in a charge to earnings and the
corresponding establishment of a new cost basis for the
security. Amortization of premiums and accretion of discounts
on debt securities are included in interest income over the
life of the related held-to-maturity or available-for-sale
security using the effective interest method. Dividend and
interest income are recognized when earned. Realized gains and
losses for securities classified as available-for-sale and
held-to-maturity are included in earnings and are derived
using the specific identification method for determining the
cost of securities sold.
(d) Derivatives
All derivatives are recognized as either assets or liabilities
in the balance sheet and measured at fair value. The Company
did not hold any derivatives at December 31, 2006 and 2005.
58
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
(e) Loans
Loans are reported at the principal amount outstanding, net of
deferred loan fees and the allowance for loan losses. A loan
is considered impaired when, based on current information and
events, it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of
the loan agreement, including scheduled interest payments. For
a loan that has been restructured, the contractual terms of
the loan agreement refer to the contractual terms specified by
the original loan agreement, not the contractual terms
specified by the restructuring agreement. An impaired loan is
measured based upon the present value of future cash flows
discounted at the loan's effective rate, the loan's observable
market price, or the fair value of collateral if the loan is
collateral dependent. Interest on impaired loans is recognized
on a cash basis. If the measurement of the impaired loan is
less than the recorded investment in the loan, an impairment
is recognized by a charge to the allowance for loan losses.
Unearned discount on installment loans is recognized as income
over the terms of the loans by the interest method. Interest
on other loans is calculated by using the simple interest
method on the daily balance of the principal amount
outstanding.
Loan fees net of certain direct costs of origination, which
represent an adjustment to interest yield, are deferred and
amortized over the contractual term of the loan using the
interest method.
Loans on which the accrual of interest has been discontinued
are designated as nonaccrual loans. Accrual of interest on
loans is discontinued either when reasonable doubt exists as
to the full and timely collection of interest or principal
when a loan becomes contractually past due by 90 days or more
with respect to interest or principal. When a loan is placed
on nonaccrual status, all interest previously accrued but not
collected is reversed against current period interest income.
Interest accruals are resumed on such loans only when they are
brought fully current with respect to interest and principal
and when, in the judgment of management, the loans are
estimated to be fully collectible as to both principal and
interest. Restructured loans are loans on which concessions in
terms have been granted because of the borrowers' financial
difficulties. Interest is generally accrued on such loans in
accordance with the new terms. Net interest written off in
2006 was not considered material (see Allowance for Loan
Losses caption on page 34 in the Management Discussion and
Analysis section).
59
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
(f) Allowance for Loan Losses
The allowance for loan losses is established through a
provision for loan losses charged to expense. Loans are
charged off against the allowance for loan losses when
management believes that the collectibility of the principal
is unlikely. The allowance is an amount that management
believes will be adequate to absorb probable losses inherent
in existing loans, standby letters of credit, overdrafts, and
commitments to extend credit based on evaluations of
collectibility and prior loss experience. The evaluations take
into consideration such factors as changes in the nature and
volume of the portfolio, overall portfolio quality, loan
concentrations, specific problem loans and current and
anticipated economic conditions that may affect the borrowers'
ability to pay. While management uses these evaluations to
determine the level of the allowance for loan losses, future
provisions may be necessary based on changes in the factors
used in the evaluations.
Material estimates relating to the determination of the
allowance for loan losses are particularly susceptible to
significant change in the near term. Management believes that
the allowance for loan losses is adequate. While management
uses available information to recognize losses on loans,
future additions to the allowance may be necessary based on
changes in economic conditions. In addition, the banking
regulators, as an integral part of its examination process,
periodically review the Bank's allowance for loan losses. The
banking regulators may require the Bank to recognize additions
to the allowance based on their judgment about information
available to them at the time of their examination.
(g) Premises and Equipment
Premises and equipment are reported at cost less accumulated
depreciation using the straight-line method over the estimated
service lives of related assets ranging from 3 to 50 years
original life. Those set up for 50 years were before 1986,
when the IRS rules shortened the allowable lives for assets.
Leasehold improvements are amortized over the lives of the
respective leases or the service lives of the improvements,
whichever is shorter.
(h) Cash Dividends
The Company's ability to pay cash dividends is subject to
restrictions set forth in the California General Corporation
Law. Funds for payment of any cash
60
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
dividends by the Company would be obtained from its
investments as well as dividends and/or management fees from
First National Bank. First National Bank's ability to pay cash
dividends is subject to restrictions imposed under the
National Bank Act and regulations promulgated by the Office of
the Comptroller of the Currency.
(i) Stock Dividend
On October 27, 2006, the Company announced that its Board of
Directors had declared a stock dividend of approximately
135,947 shares, payable at the rate of one share of Common
Stock for every twenty (20) shares of Common Stock owned. The
stock dividend was paid on December 15, 2006, to shareholders
of record on December 1, 2006. The earnings per share data
presented have been adjusted for this stock dividend.
(j) Income Taxes
Deferred income taxes are determined using the assets and
liabilities method. Under this method, the net deferred tax
asset or liability is recognized for tax consequences of
temporary differences by applying current tax rates to
differences between the financial reporting and the tax basis
of existing assets and liabilities. Deferred tax assets and
liabilities are reflected at currently enacted income tax
rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled.
As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for
income taxes.
(k) Earnings per Share
Basic earnings per share is computed by dividing net income by
the weighted average common shares outstanding. Diluted
earnings per share reflects potential dilution from
outstanding stock options, using the treasury stock method.
There were no antidilutive shares in the years ended December
31, 2006, 2005 and 2004. For each of the years presented, net
income is the same for basic and diluted earnings per share.
Reconciliation of weighted average shares used in computing
basic and diluted earnings per share is as follows:
61
Year ended December 31,
------------------------------------------
2006 2005 2004
------------ ------------ ------------
Weighted average common shares outstanding-used
in computing basic earnings per share 2,845,000 2,834,000 2,883,000
Dilutive effect of stock options outstanding,
using the treasury stock method 70,000 59,000 51,000
Shares used in computing diluted earnings per share 2,915,000 2,893,000 2,934,000
(l) Stock Option Plans
In December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment". This Statement requires that
compensation costs related to share-based payment transactions
be recognized in the financial statements. Measurement of the
cost of stock options granted is based on the grant-date fair
value of each stock option granted using the Black-Scholes
valuation model. The cost is then amortized to expense ratably
over each option's five year vesting period. The amortized
expense of the stock option's fair value has been included in
salaries and employee benefits expense for the three years
ended December 31, 2006, 2005 and 2004. Net income and
earnings per share calculations include the amortized cost of
stock options that vested during each year.
Effective January 1, 2006, the Company adopted SFAS No. 123(R)
"Share-Based Payment", on a modified prospective basis.
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. FNB Bancorp stock has limited
liquidity and limited trading activity. Volatility was
calculated using historical price changes on a monthly basis
over the expected life of the option.
(m) Fair Values of Financial Instruments
The notes to financial statements include various estimated
fair value information as of December 31, 2006 and 2005. Such
information, which pertains to the Company's financial
instruments, does not purport to represent the aggregate net
fair value of the Company. Further, the fair value estimates
are based on various assumptions, methodologies and subjective
consideration, which vary widely among different financial
institutions and which are subject to change.
62
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
(n) Income Tax Credits
At December 31, 2006, the Bank had a $2,077,000 equity
investment in three partnerships, which own low-income
affordable housing projects that generate tax benefits in the
form of federal and state housing tax credits. As a limited
partner investor in these partnerships, the Company receives
tax benefits in the form of tax deductions from partnership
operating losses and federal and state income tax credits. The
federal and state income tax credits are earned over a 10-year
period as a result of the investment properties meeting
certain criteria and are subject to recapture for
noncompliance with such criteria over a 15-year period. The
expected benefit resulting from the low-income housing tax
credits is recognized in the period for which the tax benefit
is recognized in the Company's consolidated tax returns. These
investments are accounted for using the effective yield method
and are recorded in other assets on the balance sheet. Under
the effective yield method, the Company recognizes tax credits
as they are allocated and amortizes the initial cost of the
investments to provide a constant effective yield over the
period that tax credits are allocated to the Company. The
effective yield is the internal rate of return on the
investment, based on the cost of the investment and the
guaranteed tax credits allocated to the Company. Any
expected residual value of the investment was excluded from
the effective yield calculation. Cash received from operations
of the limited partnership or sale of the properties, if any,
will be included in earnings when realized or realizable.
These investments are included in other securities in
securities available-for-sale.
(o) Reclassifications
Certain prior year information has been reclassified to
conform to current year presentation.
(p) Bank Owned Life Insurance
63
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005, and 2004
The Corporation purchased insurance on the lives of certain
employees. The policies accumulate asset values to meet future
liabilities including the payment of employee benefits such as
the deferred compensation plan. Increases in the cash
surrender value are recorded as other noninterest income in
the consolidated statements of income. The cash surrender
value of bank owned life insurance is reflected in other
assets on the consolidated balance sheets in the amount of
$7,267,000 and $7,011,000 at December 31, 2006 and 2005,
respectively.
(q) Acquisition
On May 2, 2005, the Company announced that its wholly owned
subsidiary, First National Bank of Northern California,
completed its acquisition of Sequoia National Bank, which had
two offices in San Francisco. Sequoia was consolidated with
and merged into First National Bank of Northern California
effective April 30, 2005. Sequoia had approximately
$62,000,000 in total assets on an historical cost basis. A
table showing the fair values of the assets acquired follows
this note. Under the terms of the Acquisition Agreement,
holders of Sequoia shares of common stock and options received
approximately $10,450,000 in cash, after adjustments for
certain contingencies specified in the Acquisition Agreement.
At closing of the transaction $9,350,000 was paid to the
former Sequoia National Bank shareholders, and on November 1,
2005, after submission and payment of all such claims and
expenses, the escrow was terminated and the approximately
$1,100,000, the balance of funds remaining in escrow, was
distributed to the former shareholders of Sequoia National
Bank in accordance with their interests. Effective April 30,
2005, the former banking offices of Sequoia National Bank
began operating as branch offices of First National Bank of
Northern California. In accordance with SFAS No. 141 the Bank
recorded the assets acquired and liabilities assumed at their
fair values at the acquisition date. The total acquisition
cost exceeded the fair value of the new assets acquired by
$4,781,000. This amount was recognized at acquisition date as
intangible assets consisting of Goodwill of $3,235,000, Loan
Premium of $271,000 and Core Deposit intangibles of
$1,275,000. Goodwill has been adjusted for tax benefits of
$1,394,000, net of deferred income tax liability of $525,000,
related to Sequoia National Bank net operating losses that
became available to the Company, the Core Deposit Intangibles,
and the book reserve for possible loan losses. The tax
benefits (Net deferred tax assets) are included in Other
Assets, and the Loan Premium included in Net Loans in the
table shown below.
64
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
The following table summarizes the estimated fair values of
the assets acquired and liabilities assumed by First National
Bank of Northern California at the date of the acquisition:
Assets:
Cash and due from banks $ 3,218,000
Federal funds sold 17,365,000
Securities available for sale 627,000
Loans, net 40,652,000
Other assets 2,210,000
Core deposit intangibles 1,275,000
Goodwill 1,841,000
------------
Total Assets 67,188,000
------------
Liabilities:
Deposits:
Noninterest-bearing 6,945,000
Interest-bearing 49,080,000
------------
Total deposits 56,025,000
Accrued interest payable and other liabilities 274,000
------------
Total Liabilities 56,299,000
------------
Net Assets $ 10,889,000
------------
The following table summarizes the carrying amount of
goodwill:
Gross acquisition consideration in excess
of identifiable asset values $ 4,781,000
Less allocation to the following:
Core deposit premium 1,275,000
Loan premium 271,000
Deferred tax asset 1,394,000
Goodwill at December 31, 2005 $ 1,841,000
65
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
During 2006 and 2005, Core Deposit Intangible and Loan Premium
were amortized $106,000 and $15,000, respectively.
In accordance with SFAS No. 142 "Goodwill and Other Intangible
Assets", goodwill will not be expensed over a fixed period of
time, but will be tested for impairment at least annually.
None of the goodwill is deductible for income tax purposes.
Identifiable intangible assets, namely core deposit
intangibles and premium on loans, are amortized over their
period of benefit. In the fourth quarter of 2006, the annual
review of goodwill for impairment was performed, and it was
determined that no adjustment was necessary. Additionally, the
core deposit intangible and loan premium were evaluated for
impairment at the end of each quarter, and no adjustments were
determined to be necessary.
66
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
The following table shows proforma earnings of FNB Bancorp and its subsidiary
combined with Sequoia National Bank as if the acquisition had taken place as of
January 1, 2004:
(thousands, except per share data) Consolidated Statements of Earnings
Year ended December 31
2005 2004
------------ ------------
Interest income $ 31,858 $ 27,379
Interest expense 5,836 3,402
------------ ------------
Net interest income 26,022 23,977
Provision for loan losses 610 480
------------ ------------
Net interest income after
provision for loan losses 25,412 23,497
Noninterest income 3,938 4,136
Noninterest expense 21,860 21,310
------------ ------------
Earnings before income tax expense 7,490 6,323
Income tax expense 2,232 1,593
------------ ------------
Net earnings $ 5,258 $ 4,730
============ ============
Earnings per share data:
Basic $ 1.95 $ 1.72
Diluted $ 1.91 $ 1.69
Weighted average shares outstanding:
Basic 2,699,000 2,748,000
Diluted 2,758,000 2,799,000
(2) Restricted Cash Balance
Cash and due from banks includes balances with the Federal Reserve Bank
(the FRB). The Bank is required to maintain specified minimum average
balances with the FRB, based primarily upon the Bank's deposit
balances. As of December 31, 2006 and 2005, the Bank maintained
deposits in excess of the FRB reserve requirement.
67
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
(3) Securities Available-for-Sale
The amortized cost and carrying values of securities available-for-sale
are as follows:
Amortized Unrealized Unrealized Carrying
cost gains losses Value
December 31, 2006:
Obligations of U.S.
Government agencies $ 29,197,000 2,000 (67,000) 29,132,000
Obligations of states
and political subdivisions 59,693,000 297,000 (229,000) 59,761,000
Corporate debt 3,984,000 -- (10,000) 3,974,000
Other securities 2,078,000 -- -- 2,078,000
------------ ------------ ------------ ------------
$ 94,952,000 299,000 (306,000) 94,945,000
============ ============ ============ ============
December 31, 2005:
Obligations of U.S.
Government agencies $ 50,571,000 65,000 (510,000) 50,126,000
Obligations of states
and political subdivisions 56,208,000 384,000 (564,000) 56,028,000
Corporate debt 5,918,000 8,000 (62,000) 5,864,000
Other securities 1,445,000 -- -- 1,445,000
------------ ------------ ------------ ------------
$114,142,000 457,000 (1,136,000) 113,463,000
============ ============ ============ ============
An analysis of gross unrealized losses of the available for sale
investment securities portfolio as of December 31, 2006 and December
31, 2005 follows.
Less than 12 Months
12 Months or Longer Total
December 31, 2006: Unrealized Unrealized Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
Obligations of U.S.
government agencies $ 14,708,000 (10,000) 11,945,000 (57,000) 26,653,000 (67,000)
Obligations of states
and political subdivisions 7,053,000 (25,000) 22,009,000 (204,000) 29,062,000 (229,000)
Corporate debt 2,973,000 (3,000) 1,001,000 (7,000) 3,974,000 (10,000)
Other securities -- -- -- -- -- --
-----------------------------------------------------------------------------------------
Total 24,734,000 (38,000) 34,955,000 (268,000) 59,689,000 (306,000)
=========================================================================================
Less than 12 Months
12 Months or Longer Total
December 31, 2005: Unrealized Unrealized Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
Obligations of U.S.
government agencies $ 23,184,000 (212,000) 24,676,000 (298,000) 47,860,000 (510,000)
Obligations of states
and political subdivisions 29,456,000 (463,000) 8,082,000 (101,000) 37,538,000 (564,000)
Corporate debt 4,019,000 (39,000) 1,011,000 (23,000) 5,030,000 (62,000)
Other securities -- -- -- -- -- --
-----------------------------------------------------------------------------------------
Total 56,659,000 (714,000) 33,769,000 (422,000) 90,428,000 (1,136,000)
=========================================================================================
68
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
A total of 78 securities make up the amount of securities in an
unrealized loss position for greater than 12 consecutive months.
Management periodically evaluates each security in an unrealized loss
position to determine if the impairment is temporary or
other-than-temporary. Management has determined that no investment
security is other-than-temporarily impaired. The unrealized losses are
due solely to interest rate changes and the Company has the ability and
intent to hold all investment securities with identified impairments
resulting from interest rate changes to the earliest of forecasted
recovery or the maturity of the underlying investment security.
The amortized cost and carrying value of debt securities as of December
31, 2006, by contractual maturity, are shown below. Expected maturities
may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
Amortized Carrying
Cost Value
Available -for-sale:
Due in one year or less $ 28,628,000 28,557,000
Due after one year though five years 34,023,000 33,975,000
Due after five years through ten years 29,094,000 29,210,000
Due after ten years 3,207,000 3,203,000
------------ ------------
$ 94,952,000 94,945,000
============ ============
For the years ended December 31, 2006, 2005, and 2004, gross realized
gains amounted to $185,000, $15,000, and $4,000, respectively. For the
years ended December 31, 2006, 2005, and 2004, gross realized losses
amounted to $196,000, $116,000, and $35,000, respectively.
At December 31, 2006 and 2005, securities with an amortized cost of
$49,551,000 and $57,801,000 and fair value of $49,635,000 and
$57,646,000, respectively, were pledged as collateral for public
deposits and for other purposes required by law.
As of December 31, 2006 and 2005, the Bank had investments in Federal
Reserve Bank stock classified as other assets in the accompanying
balance sheets of $702,000. These investments in Federal Reserve Bank
stock are carried at cost, and evaluated periodically for impairment.
69
BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
(4) Loans, Net
Loans are summarized as follows at December 31:
2006 2005
-------------- --------------
Real estate $ 318,655,000 302,813,000
Construction 37,094,000 26,243,000
Commercial 66,139,000 53,070,000
Consumer & other 3,279,000 3,420,000
-------------- --------------
425,167,000 385,546,000
Allowance for loan losses (5,002,000) (4,374,000)
Net deferred loan fees (728,000) (948,000)
-------------- --------------
$ 419,437,000 380,224,000
============== ==============
The Bank had total impaired loans of $2,628,000 and$17,000 at December
31, 2006 and 2005, respectively. The allowance for loan losses related
to the impaired loans was $51,000 and $9,000 as of December 31, 2006
and 2005, respectively. The amount of the recorded investment in
impaired loans for which there is no related allowance is $2,577,000
and $8,000 as of December 31, 2006 and 2005. During 2006 and 2005,
nonaccrual loans represented all impaired loans. The average recorded
investment in impaired loans during 2006, 2005 and 2004 was $610,000,
$1,205,000 and $4,010,000, respectively. Interest income on impaired
loans of $3,000, $0, and $4,800, was recognized for cash payments
received in 2006, 2005, and 2004, respectively. The amount of interest
on impaired loans not collected in 2006, 2005 and 2004, respectively
was $70,000, $2,000 and $255,000.
70
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
(5) Allowance for Loan Losses
Changes in the allowance for loan losses are summarized as follows for
the years ended December 31:
2006 2005 2004
------------ ------------ ------------
Balance, beginning of year $ 4,374,000 3,133,000 3,155,000
------------ ------------ ------------
Loans charged off (59,000) (110,000) (431,000)
Recoveries 4,000 23,000 1,000
------------ ------------ ------------
Net loans charged off (55,000) (87,000) (430,000)
Provision for loan losses 683,000 628,000 408,000
Allowance acquired in
business combination -- 700,000 --
------------ ------------ ------------
Balance, end of year $ 5,002,000 4,374,000 3,133,000
============ ============ ============
(6) Related Party Transactions
In the ordinary course of business, the Bank made loans and advances
under lines of credit to directors, officers, and their related
interests. The Bank's policies require that all such loans be made at
substantially the same terms as those prevailing at the time for
comparable transactions with unrelated parties and do not involve more
than normal risk or unfavorable features. The following summarizes
activities of loans to such parties in 2006 and 2005:
2006 2005
------------ ------------
Balance, beginning of year $ 3,918,000 3,376,000
Additions 3,354,000 5,673,000
Repayments 3,751,000 5,131,000
------------ ------------
Balance, end of year $ 3,521,000 3,918,000
============ ============
(7) Bank Premises, Equipment, and Leasehold Improvements
Bank premises, equipment and leasehold improvements are stated at cost,
less accu-mulated depreciation and amortization, and are summarized as
follows at December 31:
2006 2005
------------ ------------
Buildings $ 8,619,000 7,969,000
Equipment 10,226,000 8,642,000
Leasehold improvements 1,093,000 1,173,000
------------ ------------
19,938,000 17,784,000
Accumulated depreciation and amortization (10,876,000) (9,817,000)
------------ ------------
9,062,000 7,967,000
Land 4,414,000 4,061,000
------------ ------------
$ 13,476,000 12,028,000
============ ============
71
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
Depreciation expense for the years ended December 31, 2006, 2005, and
2004 was $1,183,000, $1,163,000 and $1,282,000, respectively.
(8) Deposits
The aggregate amount of jumbo time certificates, each with a minimum
denomination of $100,000 or more, was $77,039,000 and $77,572,000 at
December 31, 2006 and 2005, respectively.
At December 31, 2006, the scheduled maturities of all time certificates
are as follows:
Year ending December 31:
2007 $ 119,567,000
2008 10,536,000
2009 4,022,000
2010 265,000
--------------
$ 134,390,000
==============
(9) Commitments and Contingencies
The Bank leases a portion of its facilities and equipment under
noncancelable operating leases expiring at various dates through 2009.
Some of these leases provide that the Bank pay taxes, maintenance,
insurance, and other occupancy expenses applicable to leased premises.
Generally, the leases provide for renewal for various periods at
stipulated rates.
The minimum rental commitments under the operating leases as of
December 31, 2006 are as follows:
Year ending December 31:
2007 $ 499,000
2008 351,000
2009 163,000
--------------
$ 1,013,000
==============
Total rent expense for operating leases was $554,000, $401,000 and
$284,000, in 2006, 2005, and 2004, respectively.
72
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
The Bank is engaged in various lawsuits either as plaintiff or
defendant in the ordinary course of business and in the opinion of
management, based upon the advice of counsel, the ultimate outcome of
these lawsuits will not have a material effect on the Bank's financial
statements.
(10) Bank Savings Plan
The Bank maintains a salary deferral 401(k) plan covering substantially
all employees, known as the First National Bank Savings Plan (the
Plan). The Plan allows employees to make contributions to the Plan up
to a maximum allowed by law and the Bank's contribution is
discretionary. The Plan expense for the years ended December 31, 2006,
2005, and 2004 was $600,000, $626,000 and $540,000, respectively.
(11) Salary Continuation and Deferred Compensation Plans
The Bank maintains a Salary Continuation Plan for certain Bank
officers. Officers participating in the Salary Continuation Plan are
entitled to receive a monthly payment for a period of fifteen to twenty
years upon retirement. The Company accrues such post-retirement
benefits over the individual's employment period. The Salary
Continuation Plan expense for the years ended December 31, 2006, 2005,
and 2004 was $239,000, $325,000 and $305,000, respectively. Accrued
compensation payable under the salary continuation plan totaled
$1,959,000 and $1,780,000 at December 31, 2006 and 2005, respectively.
The Deferred Compensation Plan allows eligible officers to defer
annually their compensation up to a maximum 80% of their base salary
and 100% of their cash bonus. The officer will be entitled to receive
distribution upon reaching a specified age, passage of at least five
years or termination of employment. As of December 31, 2006 and 2005,
the related liability included in accrued expenses and other
liabilities was $1,935,000 and $1,851,000, respectively.
73
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
(12) Income Taxes
The provision for income taxes for the years ended December 31,
consists of the following:
2006 2005 2004
------------ ------------ ------------
Current:
Federal $ 2,789,000 2,223,000 1,275,000
State 827,000 387,000 228,000
------------ ------------ ------------
3,616,000 2,610,000 1,503,000
------------ ------------ ------------
Deferred:
Federal (69,000) (207,000) 62,000
State 62,000 26,000 12,000
------------ ------------ ------------
(7,000) (181,000) 74,000
------------ ------------ ------------
$ 3,609,000 2,429,000 1,577,000
============ ============ ============
The reasons for the differences between the statutory federal income
tax rate and the effective tax rates for the years ended December 31,
are summarized as follows:
2006 2005 2004
------ ------ ------
Statutory rate 34.0% 34.0% 34.0%
Increased (decrease ) resulting from:
Income tax exempt for federal purposes (6.1)% (7.1)% (8.0)%
State taxes on income net of federal benefit 5.2% 3.3% 2.5%
Benefits from low income housing credits (1.3)% (1.1)% (2.8)%
Adjustment to prior year accruals 0.0% 0.0% (0.6)%
Other, net 0.4% 0.6% 0.1%
------ ------ ------
Effective rate 32.2% 29.7% 25.2%
====== ====== ======
74
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
The tax effect of temporary differences giving rise to the Bank's net
deferred tax asset is as follows:
December 31
---------------------------
2006 2005
------------ ------------
Deferred tax assets:
Allowance for loan losses $ 2,123,000 1,857,000
Capitalized interest on buildings 27,000 29,000
Expenses accrued on books not yet deductible in tax return 2,060,000 1,720,000
Depreciation 572,000 497,000
Net operating loss carryforward 1,236,000 1,439,000
Unrealized loss on available-for-sale securities 3,000 280,000
------------ ------------
Total deferred tax assets 6,021,000 5,822,000
------------ ------------
Deferred tax liabilities:
State income taxes 379,000 312,000
Core deposit intangible 453,000 524,000
Expenses and credits deducted on tax return, not books 37,000 42,000
------------ ------------
Total deferred tax liabilities 869,000 878,000
------------ ------------
Net deferred tax asset (included in other assets) 5,152,000 4,944,000
============ ============
As of December 31, 2006, the Bank had no state tax credit carryforwards
for income tax purposes as these were all used during 2005.
Accordingly, there is no valuation allowance as of December 31, 2006 or
2005. Additionally, management believes that it is more likely than not
that the deferred tax assets will be realized through recovery of taxes
previously paid and/or future taxable income. The Bank had net
operating loss carryforwards resulting from the acquisition of Sequoia
National Bank which expire from December 31, 2008 through December 31,
2020, for a total balance of $3,547,000.
(13) Financial Instruments
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to
extend credit in the form of loans or through standby letters of
credit. These instruments involve, to varying degrees, elements of
credit and interest-rate risk in excess of the amount recognized in the
balance sheet.
The Bank's exposure to credit loss is represented by the contractual
amount of those instruments and is usually limited to amounts funded or
drawn. The contract or notional amounts of these agreements, which are
not included in the balance sheets, are an indicator of the Bank's
credit exposure. Commitments to extend credit generally carry variable
interest rates and are subject to the same credit standards used in the
lending process for on-balance-sheet instruments. Additionally, the
Bank periodically reassesses the customer's creditworthiness through
ongoing credit reviews. The Bank generally
75
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, and 2005 and 2004
requires collateral or other security to support commitments to extend
credit. The following table provides summary information on financial
institutions whose contract amounts represent credit risk as of
December 31:
2006 2005
------------ ------------
Financial instruments whose contract amounts represent
credit risk:
Undisbursed loan commitments $ 60,591,000 36,607,000
Lines of credit 72,311,000 49,863,000
MasterCard lines 2,968,000 3,463,000
Standby letters of credit 1,351,000 7,768,000
------------ ------------
$137,221,000 97,701,000
============ ============
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on
management's credit evaluation. Collateral held varies but may include
accounts receivable, inventory, property, plant and equipment, and
income-producing commercial and residential properties.
Equity reserve and unused credit card lines are additional commitments
to extend credit. Many of these customers are not expected to draw down
their total lines of credit, and therefore, the total contract amount
of these lines does not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party. The
credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers. The
Bank issues both financial and performance standby letters of credit.
The financial standby letters of credit are primarily to guarantee
payment to third parties. As of December 31, 2006, there were
$1,223,000 issued in financial standby letters of credit. The
performance standby letters of credit are typically issued to
municipalities as specific performance bonds. As of December 31, 2006
there were $128,000 issued in performance standby letters of credit.
The terms of the guarantees will expire in 2006.
76
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
The Bank has experienced no draws on these letters of credit, and does
not expect to in the future; however, should a triggering event occur,
the Bank either has collateral in excess of the letters of credit or
embedded agreements of recourse from the customer.
The following methods and assumptions were used by the Company to
estimate the fair value of financial instruments.
(a) Cash and Cash Equivalents
The carrying amounts reported in the balance sheet for cash
and short-term instruments approximate those assets fair
values.
(b) Securities
Fair values for securities are based on quoted market prices,
where available. If quoted market prices are not available,
fair values are based on quoted market prices of comparable
instruments.
(c) Loans
Fair values for variable-rate loans that reprice frequently
and have no significant change in credit risk are based on
carrying values. The fair values for other loans are estimated
using discounted cash flow analyses, using interest rates
currently being offered for loans with similar terms to
borrowers of similar credit quality.
(d) Off-Balance Sheet Commitments
Fair values for the company's off-balance-sheet lending
commitments are based on fees currently charged to enter into
similar agreements, taking into account the remaining terms of
the agreements and the credit standing of the counterparties.
(e) Deposit Liabilities
The fair values estimated for demand deposits (interest and
noninterest checking, passbook savings, and certain types of
money market accounts) are, by definition, equal to the amount
payable on demand at the reporting date (i.e., their carrying
amounts). Fair values for fixed-rate certificates of deposit
are estimated using a discounted cash flow calculation that
applies interest rates currently being offered
77
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
on certificates for a schedule of the aggregate expected
monthly maturities on time deposits.
(f) Federal Funds Sold/Purchased
The carrying amount of federal funds sold/purchased
approximates their fair values.
(g) The carrying amount of Federal Home Loan Bank advances
approximates their fair values.
(h) Bank Owned Life Insurance
The carrying amount is the cash surrender value for all
policies.
The following table provides summary information on the
estimated fair value of financial instruments at December 31,
2006:
Carrying Fair
amount value
------------ ------------
Financial assets:
Cash and cash equivalents $ 27,022,000 27,022,000
Securities available for sale 94,945,000 94,945,000
Loans, net 419,437,000 428,195,000
Bank owned life insurance 7,267,000 7,267,000
Accrued interest receivable 3,723,000 3,723,000
Financial liabilities:
Deposits 481,567,000 481,785,000
Federal Home Loan Bank advances 30,000,000 30,323,000
Accrued interest payable 1,452,000 1,452,000
Off-balance-sheet commitments:
Undisbursed loan commitments, lines of credit,
Mastercard line, and standby letters of credit -- 936,000
78
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
The following table provides summary information on the
estimated fair value of financial instruments at December 31,
2005:
Carrying Fair
amount value
------------ ------------
Financial assets:
Cash and cash equivalents $ 35,298,000 35,298,000
Securities available for sale 113,463,000 113,463,000
Loans, net 380,224,000 387,372,000
Bank owned life insurance 7,011,000 7,011,000
Accrued interest receivable 3,437,000 3,437,000
Financial liabilities:
Deposits 507,544,000 507,604,000
Accrued interest payable 1,165,000 1,165,000
Off-balance-sheet commitments:
Undisbursed loan commitments, lines of credit,
Mastercard line, and standby letters of credit -- 833,000
The carrying amounts of loans include $2,628,000 and $17,000 of
nonaccrual loans (loans that are not accruing interest) at December 31,
2006 and 2005, respectively. Management has determined that primarily
because of the uncertainty of predicting an observable market interest
rate, excessive amounts of time and money would be incurred to estimate
the fair values of nonperforming loans. As such, these loans are
recorded at their carrying amount in the estimated fair value columns.
The following aggregate information is provided at December 31, about
the contractual provisions of these loans:
2006 2005
------------ ------------
Aggregate carrying amount $ 2,628,000 17,000
Effective rate 9.61% 13.11%
Average term to maturity 7 months 5 months
(14) Significant Group Concentrations of Credit Risk
Most of the Bank's business activity is with customers located within
San Mateo and San Francisco counties. Generally, the loans are secured
by assets of the borrowers. The loans are expected to be repaid from
cash flows or proceeds from the sale of selected assets of the
borrowers. The Bank does not have significant concentrations of loans
to any one industry.
79
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
The distribution of commitments to extend credit approximates the
distribution of loans outstanding. Commercial and standby letters of
credit were granted primarily to commercial borrowers.
The contractual amounts of credit-related financial instruments such as
commitments to extend credit, credit-card arrangements, and letters of
credit represent the amounts of potential accounting loss should the
contract be fully drawn upon, the customer default, and the value of
any existing collateral become worthless.
(15) Regulatory matters
The Company, as a bank holding company, is subject to regulation by the
Board of Governors of the Federal Reserve System under the Bank Holding
Company Act of 1956, as amended.
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Company's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and the Bank must
meet specific capital guidelines that involve quantitative measures of
the Company's and the Bank's assets, liabilities and certain off
balance-sheet items as calculated under regulatory accounting
practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts
and ratios (set forth in the table below) of total and Tier 1 capital
(as defined in the regulations) to risk-weighted assets (as defined),
and of Tier 1 capital (as defined) to average assets (as defined).
Management believes, as of December 31, 2006, that the Company and the
Bank have met all capital adequacy requirements to which they are
subject.
As of December 31, 2006, the most recent notification from the
regulatory agencies categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well capitalized the Bank must maintain minimum total risk-based, Tier
1 risk-based, and Tier 1 leverage ratios as set forth in the table.
There are no conditions or events since that notification that
management believes have changed the Bank's categories.
80
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
The consolidated actual capital amounts and ratios of FNB Bancorp and
Subsidiary are also presented in the following table:
To be well capitalized under
For capital prompt corrective action
Actual adequacy purposes provisions
--------------------------- --------------------------- ---------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ------------ ------------ ------------ ------------ ------------
December 31, 2006:
Total risk-based capital
(to risk weighted assets)
Consolidated Company $ 64,297,000 12.00% 42,855,000 8.00% 53,569,000 n/a
Bank 64,176,000 11.98 42,855,000 8.00 53,569,000 10.00%
Tier 1 capital (to risk
Weighted assets)
Consolidated Company 59,216,000 11.05 21,431,000 4.00 32,146,000 n/a
Bank 59,095,000 11.03 21,431,000 4.00 32,146,000 6.00
Tier 1 capital (to average
assets)
Consolidated Company 59,216,000 10.08 23,497,000 4.00 29,371,000 n/a
Bank 59,095,000 10.06 23,497,000 4.00 29,371,000 5.00
To be well capitalized under
For capital prompt corrective action
Actual adequacy purposes provisions
--------------------------- --------------------------- ---------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ------------ ------------ ------------ ------------ ------------
December 31, 2005:
Total risk-based capital
(to risk weighted assets)
Consolidated Company $ 57,181,000 11.59% 39,478,000 8.00% 49,347,000 n/a
Bank 57,045,000 11.56 39,478,000 8.00 49,347,000 10.00%
Tier 1 capital (to risk
Weighted assets)
Consolidated Company 52,634,000 10.67 19,739,000 4.00 29,608,000 n/a
Bank 52,498,000 10.64 19,739,000 4.00 29,608,000 6.00
Tier 1 capital (to average
assets)
Consolidated Company 52,634,000 9.50 22,172,000 4.00 27,715,000 n/a
Bank 52,498,000 9.47 22,172,000 4.00 27,715,000 5.00
(16) 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 option plan known as the 2002 FNB Bancorp Plan. The
Plans allow the Company to grant options to employees of up to 360,571
shares, which includes the effect of stock dividends of common stock.
Options currently outstanding become exercisable in one to
81
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
five years from the grant date, based on a vesting schedule of 20% per
year and expire 10 years after the grant date. The options exercise
price is the fair value of the options at the grant date.
The amount of compensation expense for options recorded in the years
ended December 31, 2006, December 31 2005 and December 31, 2004 was
$39,000, $10,000 and $6,000, respectively. The income tax benefit
recognized in the income statements for these amounts was under $1,000
for the same three periods.
The total intrinsic value of options exercised during the year ended
December 31, 2006 was $54,000 under the 2002 Plan and $39,000 under the
1997 Plan.
The amount of total unrecognized compensation expense related to
non-vested options at December 31, 2006 was $91,000, and the weighted
average period it will be amortized over is 2.9 years. The amount of
total unrecognized compensation expense related to non-vested options
at December 31, 2005 was $60,000, and the weighted average period it
will be amortized over is 2.5 years. The amount of total unrecognized
compensation expense related to non-vested options at December 31, 2004
was $46,000, and the weighted average period it will be amortized over
is 1.9 years.
The fair value of each option granted is estimated on the date of grant
using the fair value method with the following weighted average
assumptions used for grants in 2006; dividend yield of 6.66% for the
year; risk-free interest rate of 5.19%; expected volatility of 10.0%;
expected life of 6.5 years; and weighted average fair value of $1.50.
The assumptions for grants in 2005; dividend yield of 6.98% for the
year; risk-free interest rate of 3.91%; expected volatility of 10%;
expected life of 5.0 years; and weighted average fair value of $0.75.
The assumptions used for grants in 2004; dividend yield of 6.85% for
the year; risk-free interest rate of 3.73%; expected volatility of 10%;
expected life of 5.0 years; and weighted average fair value of $0.76.
82
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
A summary of option activity under the 2002 FNB Bancorp Plan as of
December 31, 2006 and changes during the year then ended is presented
below.
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 162,602 $24.60
Granted 45,206 $34.52
Exercised (7,014) $24.84
Forfeited or expired (4,728) $27.63
----------
Outstanding at December 31, 2006 196,066 $26.81 7.6 $1,116
Exercisable at December 31, 2006 77,784 $23.89 6.7 $670
A summary of option activity under the 1997 FNB Bancorp Plan as of
December 31, 2006, and changes during the year then ended is presented
below. No options have been granted under this plan since 2001.
The following supplemental information applies to the three years ended
December 31:
2006 2005 2004
---------------------------------------------
Options outstanding 196,066 162,602 122,204
Range of exercise prices $20.57-$34.52 $20.57-$28.07 $20.57-$28.07
Weighted average remaining
contractual life 7.6 8.0 8.1
Fully vested options 77,784 51,573 27,549
Weighted average exercise price $23.89 $22.85 $21.80
Aggregate intrinsic value $670,000 $1,177,000 $264,000
Weighted average remaining
contractual life (in years) 6.7 7.2 7.2
83
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
A summary of option activity under the 1997 FNB Bancorp Plan as of
December 31, 2006, and changes during the year then ended is presented
below. No options have been granted under this plan since 2001.
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 72,174 $18.89
Granted -- --
Exercised (13,325) $18.80
Forfeited or expired --
Outstanding at December 31, 2006 58,849 $18.92 3.2 $799
----------
Exercisable at December 31, 2006 58,849 $18.92 3.2 $799
The following supplemental information applies to the three years ended
December 31:
2006 2005 2004
---------------------------------------------
Options outstanding 58,849 72,174 78,455
Range of exercise prices $17.86-$20.63 $17.86-$20.63 $17.86-20.63
Weighted average remaining
contractual life 3.2 4.1 5.2
Fully vested options 58,849 67,205 63,162
Weighted average exercise price $18.92 $18.91 $19.00
Aggregate intrinsic value $799,000 $1,271,000 $781,000
Weighted average remaining
contractual life (in years) 3.2 4.0 4.9
The following is a summary of all options exercised
2006 2005 2004
-----------------------------------------------
Weighted average intrinsic value of options exercised $12.92 $9.75 $10.92
Weighted average of fair value of options exercised $33.80 $29.26 $29.85
84
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
(17) Quarterly Data (Unaudited)
First Second Third Fourth
---------- ---------- ---------- ----------
2006:
Interest income $8,837,000 8,928,000 9,502,000 9,929,000
Interest expense 1,951,000 2,168,000 2,786,000 2,916,000
---------- ---------- ---------- ----------
Net interest income 6,886,000 6,760,000 6,716,000 7,013,000
Provision for loan losses 193,000 163,000 163,000 164,000
---------- ---------- ---------- ----------
Net interest income,
after provision
for loan losses 6,693,000 6,597,000 6,553,000 6,849,000
Non-interest income 2,316,000 1,827,000 1,046,000 1,070,000
Non-interest expense 5,486,000 5,303,000 5,346,000 5,625,000
---------- ---------- ---------- ----------
Income before income taxes 3,523,000 3,121,000 2,253,000 2,294,000
Provision for income taxes 1,075,000 1,012,000 787,000 735,000
---------- ---------- ---------- ----------
Net earnings $2,448,000 2,109,000 1,466,000 1,559,000
========== ========== ========== ==========
Basic earnings per share $ 0.86 0.74 0.52 0.55
Diluted earnings per share 0.84 0.73 0.51 0.53
First Second Third Fourth
---------- ---------- ---------- ----------
2005:
Interest income $6,515,000 7,455,000 8,033,000 8,729,000
Interest expense 965,000 1,208,000 1,567,000 1,793,000
---------- ---------- ---------- ----------
Net interest income 5,550,000 6,247,000 6,466,000 6,936,000
Provision for loan losses 127,000 157,000 172,000 172,000
---------- ---------- ---------- ----------
Net interest income,
after provision
for loan losses 5,423,000 6,090,000 6,294,000 6,764,000
Non-interest income 903,000 1,009,000 993,000 936,000
Non-interest expense 4,895,000 5,222,000 5,060,000 5,078,000
---------- ---------- ---------- ----------
Income before income taxes 1,431,000 1,877,000 2,227,000 2,622,000
Provision for income taxes 415,000 595,000 674,000 745,000
---------- ---------- ---------- ----------
Net earnings $1,016,000 1,282,000 1,553,000 1,877,000
========== ========== ========== ==========
Basic earnings per share $ 0.36 0.45 0.55 0.66
Diluted earnings per share 0.35 0.45 0.54 0.64
85
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
(18) Condensed Financial Information of Parent Company
The parent company-only condensed balance sheets, condensed statements
of income, and condensed statements of cash flows information are presented as
of and for the year ended December 31, as follows:
FNB Bancorp
Condensed balance sheets 2006 2005
------------ ------------
Assets:
Cash and due from banks $ 37,000 146,000
Investments in subsidiary 61,942,000 55,107,000
Income tax receivable from subsidiary 83,000 --
Other assets 1,000 --
------------ ------------
Total assets $ 62,063,000 55,253,000
============ ============
Liabilities:
Other liabilities $ -- 10,000
Stockholders' equity 62,063,000 55,243,000
------------ ------------
Total liabilities and stockholders' equity $ 62,063,000 55,253,000
============ ============
FNB Bancorp
Condensed statements of income 2006 2005 2004
- ---------------------------------------------------- ------------ ------------ ------------
Income:
Dividend from subsidiary $ 1,172,000 2,269,000 3,446,000
Other income -- -- 1,000
------------ ------------ ------------
Total income 1,172,000 2,269,000 3,447,000
------------ ------------ ------------
Expense:
Other expense 27,000 17,000 10,000
------------ ------------ ------------
Total expense 27,000 17,000 10,000
------------ ------------ ------------
Income before income taxes and equity
in undistributed earnings of subsidiary 1,145,000 2,252,000 3,437,000
Income tax expense (credit) 1,000 -- (36,000)
------------ ------------ ------------
Income before equity in undistributed
earnings of subsidiary 1,144,000 2,252,000 3,473,000
Equity in undistributed earnings of subsidiary 6,438,000 3,476,000 1,215,000
------------ ------------ ------------
Net earnings $ 7,582,000 5,728,000 4,688,000
============ ============ ============
86
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
FNB Bancorp
Condensed statements of cash flows 2006 2005 2004
Net earnings $ 7,582,000 5,728,000 4,688,000
Income tax receivable-subsidiary (83,000) -- --
Change in other assets (1,000) -- 403,000
Change in other liabilities (10,000) (309,000) (19,000)
Undistributed earnings of subsidiary (6,438,000) (3,476,000) (1,215,000)
Stock-based compensation expense 122,000 10,000 6,000
------------ ------------ ------------
Cash flows provided by operating activities 1,172,000 1,953,000 3,863,000
------------ ------------ ------------
Increase in investment to subsidiary -- -- --
------------ ------------ ------------
Cash flows used in investing activities -- -- --
------------ ------------ ------------
Proceeds from exercise of common stock options 425,000 150,000 272,000
Dividends paid (1,633,000) (1,542,000) (1,526,000)
Repurchases of common stock (73,000) (765,000) (2,324,000)
------------ ------------ ------------
Cash flows provided by financing activities (1,281,000) (2,157,000) (3,578,000)
------------ ------------ ------------
Net (decrease) increase in cash (109,000) (204,000) 285,000
Cash, beginning of year 146,000 350,000 65,000
------------ ------------ ------------
Cash, end of year $ 37,000 146,000 350,000
============ ============ ============
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -----------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
- --------------------------------
Disclosure Controls and Procedures. Disclosure controls and procedures
are designed with the objective of ensuring that information required to be
disclosed in reports filed by the Company under the Exchange Act, such as this
Annual Report, is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the Securities and Exchange
Commission. Disclosure controls and procedures are also designed with the
objective of ensuring that such information is accumulated and communicated to
management, including the Chief Executive Officer and the Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.
Evaluation of Disclosure Controls and Procedures and Internal Control
over Financial Reporting. The Company's management, including the Chief
Executive Officer and the Chief Financial Officer, evaluated the Company's
disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Exchange Act) as of December 31, 2006. Based on this evaluation, the Chief
Executive Officer and the Chief Financial Officer concluded that the Company's
87
disclosure controls and procedures are effective. There was no change in the
Company's internal control over financial reporting that occurred during the
quarter ended December 31, 2006 that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
Management's Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting. As defined in Rule 13a-15(f)
under the Exchange Act, internal control over financial reporting is a process
designed by, or under the supervision of, a company's principal executive and
principal financial officers and effected by a company's board of directors,
management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. It includes those policies and procedures that:
a) Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the assets of
a company;
b) Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
a company are being made only in accordance with authorizations of management
and the board of directors of the company; and
c) Provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of a company's assets that could
have a material effect on its financial statements.
Because of the inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
The Company's management has used the criteria established in "Internal
Control-Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO") to evaluate the effectiveness
of the Company's internal control over financial reporting. Management has
selected the COSO framework for its evaluation as it is a control framework
recognized by the SEC and the Public Company Accounting Oversight Board, that is
free from bias, permits reasonably consistent qualitative and quantitative
measurement of the Company's internal controls, is sufficiently complete so that
relevant controls are not omitted and is relevant to an evaluation of internal
controls over financial reporting.
Based on our assessment, management has concluded that our internal control over
financial reporting, based on criteria established in "Internal
Control-Integrated Framework" issued by COSO was effective as of December 31,
2006.
Moss Adams LLP, the registered public accounting firm that audited the
consolidated financial statements included in this Annual Report under Item 8,
"Financial Statements and Supplementary Data," has issued a report with respect
to management's assessment of the effectiveness of the Company's internal
control over financial reporting. This report appears at page 51 of this Annual
Report and is incorporated here by reference.
88
Date: March 13, 2007
/s/ THOMAS C. MC GRAW /s/ DAVID A. CURTIS
- -------------------------- ------------------------
Thomas C. Mc Graw David A. Curtis
Chief Executive Officer Chief Financial Officer
Inherent Limitations on Effectiveness of Controls
- -------------------------------------------------
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, does not expect that our disclosure controls or our internal
control over financial reporting will prevent or detect all error and all fraud.
A control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the control system's objectives will be
met. The design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Further, because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that
misstatements due to error or fraud will not occur or that all control issues
and instances of fraud, if any, within the company have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty and that breakdowns can occur because of simple error or mistake.
Controls can also be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the controls. The
design of any system of controls is based in part on certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions. Projections of any evaluation of controls effectiveness to future
periods are subject to risks. Over time, controls may become inadequate because
of changes in conditions or deterioration in the degree of compliance with
policies or procedures.
ITEM 9B. OTHER INFORMATION
- --------------------------
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE
- ----------------------------------------------------------------------
GOVERNANCE
- ----------
The information required by Item 10 of Form 10-K is incorporated by reference to
the applicable information contained in the Company's Proxy Statement for the
2007 Annual Meeting of Shareholders which will be filed pursuant to Regulation
14A.
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------
The information required by Item 11 of Form 10-K is incorporated by reference to
the applicable information contained in the Company's Proxy Statement for the
2007 Annual Meeting of Shareholders which will be filed pursuant to Regulation
14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
The information required by Item 12 of Form 10-K is incorporated by reference to
the applicable information contained in the Company's Proxy Statement for the
2007 Annual Meeting of Shareholders which will be filed pursuant to Regulation
14A.
89
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
The information required by Item 13 of Form 10-K is incorporated by reference to
the applicable information contained in the Company's Proxy Statement for the
2007 Annual Meeting of Shareholders which will be filed pursuant to Regulation
14A.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
- -----------------------------------------------
The information required by Item 14 of Form 10-K is incorporated by reference to
the applicable information contained in the Company's Proxy Statement for the
2007 Annual Meeting of Shareholders which will be filed pursuant to Regulation
14A.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, STATEMENT SCHEDULES
- ------------------------------------------------------------
(a)(1) Financial Statements. Listed and included in Part II, Item 8.
(2) Financial Statement Schedules. All schedules have been omitted since
the required information is not present in amounts sufficient to
require submission of the schedule or because the information required
is included in the Financial Statements or notes thereto.
(3) Exhibits.
Exhibit
Number Document Description
-----------------------------------------------------------------------
**2.1 (deleted)
2.2 Acquisition Agreement dated November 5, 2004, signed among
First National Bank of Northern California, Sequoia
National Bank and Hemisphere National Bank (incorporated
by reference from Exhibit 2.2 to the Company's Current
Report on Form 8-K filed with the Commission on November
9, 2004)
2.3 First Addendum to Acquisition Agreement, dated December
13, 2004, signed among First National Bank of Northern
California, Sequoia National Bank, Hemisphere National
Bank and Privee Financial, Inc. (incorporated by reference
from Exhibit 2.5 to the Company's Current Report on Form
8-K filed with the Commission on December 17, 2004)
2.4 Second Addendum to Acquisition Agreement, dated as of
April 15, 2005, signed among First National Bank of
Northern California, Sequoia National Bank, Hemisphere
National Bank and Privee Financial, Inc. (incorporated by
Reference from Exhibit 2.4 to the Company's Current Report
on Form 8-K Filed with the Commission on May 2, 2005)
**3.1 Articles of Incorporation of FNB Bancorp.
90
**3.2 Bylaws of FNB Bancorp.
**4.1 Specimen of the Registrant's common stock certificate.
**10.1 Lease agreement dated April 24, 1995, as amended, for
Eureka Square Branch Office of First National Bank of
Northern California at Eureka Square Shopping Center,
Pacifica, California.
**10.2 Lease agreement dated June 8, 1999, as amended, for Linda
Mar Branch Office of First National Bank of Nortern
California at Linda Mar Shopping Center, Pacifica,
California.
**10.3 Lease agreement dated August 21, 1996, as amended, for the
Flower Mart facility of First National Bank of Northern
California at 640 Brannan Street, Suite 102, San
Francisco, California.
**10.4 (deleted)
**10.5 (deleted)
**10.6 First National Bank of Northern California 1997 Stock
Option Plan.*
**10.7 Form of Nonstatutory Stock Option Agreement under the
First National Bank of Northern California 1997 Stock
Option Plan.*
**10.8(a) Form of Incentive Stock Option Agreement under the First
National Bank of Northern California 1997 Stock Option
Plan.*
**10.8(b) Form of Incentive Stock Option Agreement (Standard
Provisions under the First National Bank of Northern
California 1997 Stock Option Plan.*
**10.9 First National Bank Profit Sharing and 401(k) Plan dated
August 26, 1969.*
**10.10 First National Bank Deferred Compensation Plan dated
November 1, 1997.*
**10.11 Salary Continuation Agreement between First National Bank
of Northern California And Michael R. Wyman, dated
December 20, 1996.*
**10.12 Salary Continuation Agreement between First National Bank
of Northern California And Paul B. Hogan dated December
20, 1996.*
**10.13 Salary Continuation Agreement between First National Bank
of Northern California And James B. Ramsey, dated December
23, 1999.*
**10.14 Form of Management Continuity Agreement signed on July 20,
2000, between First National Bank of Northern California
and Jim D. Black, Charles R. Key and Anthony J. Clifford.*
**10.15 (deleted)
91
**10.16 Communications Site Lease Agreement as amended dated March
30, 1999, between First National Bank of Northern
California, as Lessor and Nextel of California, Inc., as
Lessee, with respect to Redwood City Branch Office.
**10.17 (deleted)
**10.18 Separation Agreement between First National Bank of
Northern California and Paul B. Hogan, dated December 5,
2001.*
***10.19 First Amendment to Separation Agreement between First
National Bank of Northern California and Paul B. Hogan,
dated March 22, 2002.*
****10.20 FNB Bancorp Stock Option Plan (effective March 15, 2002).*
****10.21 FNB Bancorp Stock Option Plan, Form of Incentive Stock
Option Agreement.*
****10.22 FNB Bancorp Stock Option Plan, Form of Nonstatutory Stock
Option Agreement.*
*****10.23 FNB Bancorp 2002 Stock Option Plan (adopted June 28,
2002).*
*****10.24 FNB Bancorp 2002 Stock Option Plan, Form of Incentive
Stock Option Agreement.*
*****10.25 FNB Bancorp 2002 Stock Option Plan, Form of Nonstatutory
Stock Option Agreement.*
******10.26 Lease Agreement dated August 13, 2003, for San Mateo
Branch Office of First National Bank of Northern
California, located at 150 East Third Avenue, San Mateo,
CA 94401.
10.27 Salary Continuation Agreement and Split-Dollar Agreement
for Jim D. Black (incorporated by reference from Exhibit
10.27 to the Company's Current Report on Form 8-K filed
with the Commission on September 10, 2004)*
10.28 Salary Continuation Agreement and Split-Dollar Agreement
for Anthony J. Clifford (incorporated by reference from
Exhibit 10.28 to the Company's Current Report on Form 8-K
filed with the Commission on September 10, 2004)*
10.29 Amended and Restated Salary Continuation Agreement and
Split-Dollar Agreement for James B. Ramsey (incorporated
by reference from Exhibit 10.29 to the Company's Current
Report on Form 8-K filed with the Commission on September
10, 2004)*
*******10.30 Lease Agreement dated May 1, 2003, as amended by
Assignment, Assumption and Consent Agreement for the
Financial District Branch Office of First National Bank of
Northern California located at 65 Post Street, San
Francisco, California.
*******10.31 Lease Agreement dated July 1, 1999, as amended by
Assignment, Assumption and Consent Agreement for the
Portola Branch Office of First National Bank of Northern
California located at 699 Portola Drive, San Francisco,
California.
92
10.32 Amendment to Salary Continuation Agreement for Jim D.
Black (incorporated by reference from Exhibit 99.37 to the
Company's Current Report on 10-K filed with the Commission
on July 26, 2006)
10.33 Amendment to Salary Continuation Agreement for Anthony J.
Clifford (incorporated by reference from Exhibit 99.38 to
the Company's Current Report on Form 8-K filed with the
Commission on July 26, 2006)
10.34 Amendment to Amended and Restated Salary Continuation
Agreement for James B. Ramsey (incorporated by reference
from Exhibit 99.39 to the Company's Current Report on Form
8-K filed with the Commission on July 26, 2006)
******14.0 Code of Ethics
21.1 The Registrant has one subsidiary, First National Bank of
Northern California.
23.1 Consent of Moss Adams LLP
23.2 Consent of KPMG LLP
31.1 Rule 13a-14(a)/15d-14(a) Certification (principal
executive officer)
31.2 Rule 13a-14(a)/15d-14(a) Certification (principal
financial officer)
32.0 Section 1350 Certifications
- --------------------------------------------------------------------------------
* Denotes management contracts, compensatory plans or
arrangements.
** Incorporated by reference to registrant's Registration
Statement on Form S-4 (No. 333-74954) filed with the
Commission on December 12, 2001.
*** Incorporated by reference to registrant's Annual Report on
Form 10-K filed with the Commission on March 31, 2002.
**** Incorporated by reference to registrant's Statement on
Form S-8 (No. 333-91596) filed with the Commission on July
1, 2002.
***** Incorporated by reference to registrant's Registration
Statement on Form S-8 (No. 333-98293) filed with the
Commission on August 16, 2002.
****** Incorporated by reference to registrant's Annual Report on
Form 10-K filed with the Commission on March 30, 2003.
******* Incorporated by reference to registrant's Annual Report on
Form 10-K filed with the Commission on March 29, 2006.
An Annual Report for the fiscal year ended December 31, 2006, and
Notice of Annual Meeting and Proxy Statement for the Company's 2007 Annual
Meeting will be mailed to security holders subsequent to the date of filing this
report. Copies of said materials will be furnished to the Commission in
accordance with the Commission's Rules and Regulations
93
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
FNB BANCORP
Dated: March 13, 2007 By: /s/ THOMAS C. MCGRAW
----------------------------------
Thomas C. McGraw
Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant in the capacities and on the dates indicated.
Signature Title Date
/s/ MICHAEL R. WYMAN Chairman of the Board March 13, 2007
- --------------------------- of Directors
Michael R. Wyman
/s/ THOMAS C. MCGRAW Director, Chief Executive March 13, 2007
- --------------------------- Officer and Secretary
Thomas C. McGraw
/s/ DAVID A. CURTIS Senior Vice President and March 13, 2007
- --------------------------- Chief Financial Officer
David A. Curtis (Principal Financial Officer
and Principal Accounting
Officer)
/s/ MICHAEL PACELLI Director March 13, 2007
- ---------------------------
Michael Pacelli
94
/s/ NEIL J. VANNUCCI Director March 13, 2007
- ---------------------------
Neil J. Vannucci
/s/ EDWARD J. WATSON Director March 13, 2007
- ---------------------------
Edward J. Watson
/s/ LISA ANGELOT Director March 13, 2007
- ---------------------------
Lisa Angelot
/s/ JIM D. BLACK Director and President March 13, 2007
- ---------------------------
Jim D. Black
/s/ ANTHONY J. CLIFFORD Director and Executive March 13, 2007
- --------------------------- Vice President and Chief
Anthony J. Clifford Operating Officer
95