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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, 2002, or
[ ] Transition report pursuant to Section 13 or 15 (d) of Securities
Exchange Act of 1934
Commission File No. 000-49693
FNB BANCORP
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(Exact name of registrant as specified in its charter)
California 92-2115369
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(State or other jurisdiction of (IRS Employer ID Number)
incorporation or organization)
975 El Camino Real, South San Francisco, California 94080
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(Address of principal executive offices) (Zip code)
(650) 588-6800
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
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Title of Class: Common Stock, no par value
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
Indicate by check mark if disclosure of delinquent files pursuant to item 405 of
Regulation S-K (Section 229.405 of this chapter) 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 Form 10-K. [ ]
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: $62,032,880
Number of shares outstanding of each of the registrant's classes of
common stock, as of March 25, 2003
No par value Common Stock - 2,437,043 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into this
Form 10-K: Part III, Items 10 through 13 from Registrant's
definitive proxy statement for the 2003 annual meeting of shareholders.
Page 1 of 89 pages
The Index to the Exhibits is located at Page 86
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 that are
subject to risks and uncertainties that could cause actual results to differ
materially from those projected. Forward-looking statements are certain written
and oral statements made or incorporated by reference from time to time by FNB
Bancorp or its representatives in this document or other documents filed with
the Securities and Exchange Commission, press releases, conferences, or
otherwise that are not historical facts, or are preceded by, followed by or that
include words such as "anticipate," "believe," "plan," "estimate," "seek," and
"intend," and words of similar import are intended to identify forward-looking
statements. Changes to such risks and uncertainties, which could impact future
financial performance, include, among others, (1) competitive pressures in the
banking industry; (2) changes in the interest rate environment; (3) general
economic conditions, nationally, regionally and in operating market areas; (4)
changes in the regulatory environment; (5) changes in business conditions and
inflation; (6) changes in securities markets; (7) data processing problems; (8)
the California power crisis; and (9) the U. S. "war on terrorism" and any U.S.
military action in the Middle East. Therefore, the information set forth therein
should be carefully considered when evaluating the business prospects of FNB
Bancorp and its subsidiary, First National Bank of Northern California.
All forward-looking statements of FNB Bancorp are qualified by and
should be read in conjunction with such risk disclosure. FNB Bancorp undertakes
no obligation to publicly update or revise any forward-looking statements
whether as a result of new information, future events or otherwise.
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 Company was formed at the direction of the Board of Directors of
the Bank in order to reorganize the Bank into a holding company structure, with
the approval of the Office of the Comptroller of the Currency, pursuant to 12
U.S.C. 215a-2 and 12 CFRE 7.2000. The Bank and the Company entered into an
Agreement and Plan of Reorganization dated November 1, 2001 (the "Plan of
Reorganization") for this purpose, and the shareholders of the Bank approved the
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Plan of Reorganization at a Special Meeting of the shareholders of the Bank held
on February 27, 2002. The Plan of Reorganization was consummated on March 15,
2002. Each outstanding share of the common stock, par value $1.25 per share, of
the Bank (other than any shares as to which dissenters' rights of appraisal have
been properly exercised) was converted into one share of the common stock of the
Company, and the former holders of Bank common stock became the holders of all
of the Company common stock. As a subsidiary of the Company, the Bank continues
its business and operations as a national banking association, with the same
Board of Directors, officers and employees as existed prior to the
reorganization. Prior to consummation of the Plan of Reorganization, FNB Bancorp
had no significant assets or liabilities and its activities were limited to the
process of becoming a holding company for First National Bank. Consequently,
upon consummation of the Plan of Reorganization, the consolidated financial
statements of FNB Bancorp and First National Bank did not differ in any
significant respect from the historical financial statements of First National
Bank. The reorganization was accounted for in a manner similar to a pooling of
interests, using the historical costs of First National Bank Accordingly, the
historical financial position and results of operations of First National Bank
became those of FNB Bancorp. Prior to the reorganization, the common stock of
the Bank was quoted on the OTC Bulletin Board under the symbol "FNBD.OB."
Commencing on March 18, 2002, the common stock of the Company has been quoted on
the OTC Bulletin Board under the symbol "FNBG.OB."
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 twelve 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 serves the City and County of San Francisco through
its Flower Mart Branch 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
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banking, and business internet banking. The Bank offers personal and business
checking and savings accounts, including individual interest-bearing negotiable
orders of withdrawal ("NOW"), money market accounts and/or accounts combining
checking and savings accounts with automatic transfer capabilities, IRA
accounts, time certificates of deposit and direct deposit of social security,
pension and payroll checks and computer cash management with access through the
internet. First National Bank also makes available commercial, standby letters
of credit, construction, accounts receivable, inventory, automobile, home
improvement, residential real estate, commercial real estate, single family
mortgage, Small Business Administration, office equipment, leasehold improvement
and consumer loans as well as overdraft protection lines of credit. In addition,
the Bank sells travelers checks and cashiers checks, offers automated teller
machine (ATM) services tied in with major statewide and national networks and
offers other customary commercial banking services.
Most of First National Bank's deposits are obtained from commercial
businesses, professionals and individuals. As of December 31, 2002, First
National Bank had a total of 24,917 accounts. On occasion, the Bank has obtained
deposits through deposit brokers for which it pays a broker fee. As of December
31, 2002, 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, 2002, the Company had total assets of $401,834,000,
total net loans of $284,889,000, deposits of $347,406,000 and shareholders'
equity of $51,203,000. The Company competes with approximately 28 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, 2002).
See "Competitive Data" below.
Employees
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At December 31, 2002, The Company employed 196 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.
Other Matters
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Pursuant to Regulation S-K, Item 101, paragraphs (e) (3) and (4),
please be advised that the Bank's website address is www.FNBNC.com. The
Company's annual report on Form 10-K, quarterly reports on 10-Q, current reports
on 8-K and all amendments thereto will be made available 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.
4
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, 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 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 subsidiaries, which it may acquire or organize,
are deemed to be "affiliates" of The Company 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 the supervision of the Federal Deposit Insurance
Corporation, The Board of Governors, and the Office of the Comptroller of the
Currency. The supervision and regulation includes comprehensive reviews of all
major aspects of First National Bank's business and condition, including its
capital ratios, allowance for possible loan losses and other factors. However,
no inference should be drawn that such authorities have approved any such
factors. First National Bank is required to file reports with the Office of the
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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
6
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, 2002, The Company was in compliance with the
risk-weighted capital and leverage ratios. Upon consummation of the Plan of
Reorganization, FNB Bancorp and First National Bank were, and remain, 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)
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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
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 the 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,
8
portfolio diversification standards, and documentation, approval and reporting
requirements. The 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") on
December 16, 1996, approved an updated Uniform Financial Institutions Rating
System ("UFIRS"). In addition to the five components traditionally included in
the so-called "CAMEL" rating system which has been used by bank examiners for a
number of years to classify and evaluate the soundness of financial institutions
(including capital adequacy, asset quality, management, earnings and liquidity),
UFIRS includes for all bank regulatory examinations conducted on or after
January 1, 1997, a new rating for a sixth category identified as sensitivity to
market risk. Ratings in this category are intended to reflect the degree to
which changes in interest rates, foreign exchange rates, commodity prices or
equity prices may adversely affect an institution's earnings and capital. The
revised rating system is identified as the "CAMELS" system.
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.
Limitation on Dividends
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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
9
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. Prior to the reorganization, First National Bank has paid cash
dividends in each of the last 60 consecutive quarters.
FNB Bancorp. FNB Bancorp has paid quarterly dividends commencing with
the second quarter of 2002. Future dividends will continue to be determined
after consideration of FNB Bancorp'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 FNB Bancorp 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 FNB Bancorp board of directors.
The California General Corporation Law provides that a corporation may
make a distribution to its shareholders if the corporation's retained earnings
equal at least the amount of the proposed distribution. The California General
Corporation Law further provides that, in the event sufficient retained earnings
are not available for the proposed distribution, a corporation may nevertheless
make a distribution to its shareholders if, after giving effect to the
distribution, it meets two conditions, which generally stated are as follows:
(i) the corporation's assets must equal at least 125% of its liabilities; and
(ii) the corporation's current assets must equal at least its current
liabilities or, if the average of the corporation's earnings before taxes on
income and before interest expense for the two preceding fiscal years was less
than the average of the corporation's interest expense for those fiscal years,
then the corporation's current assets must equal at least 125% of its current
liabilities.
The Board of Governors of the Federal Reserve System generally
prohibits a bank holding company from declaring or paying a cash dividend which
would impose undue pressure on the capital of subsidiary banks or would be
funded only through borrowing or other arrangements that might adversely affect
a bank holding company's financial position. The Federal Reserve Board policy is
that a bank holding company should not continue its existing rate of cash
dividends on its common stock unless its net income is sufficient to fully fund
each dividend and its prospective rate of earnings retention appears consistent
with its capital needs, asset quality and overall financial condition.
First National Bank of Northern California. First National Bank's
shareholder is entitled to receive dividends when and as declared by its board
of directors, out of funds legally available therefore, subject to the
restrictions set forth in the National Bank Act.
The payment of cash dividends by First National Bank may be subject to
the approval of the Office of the Comptroller of the Currency, as well as
restrictions established by federal banking law and the Federal Deposit
Insurance Corporation. Approval of the Office of the Comptroller of the Currency
is required if the total of all dividends declared by First National Bank's
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
10
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
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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, 2002, First National Bank's
aggregate legal lending limits to a single borrower and such borrower's related
parties were $8,157,000 on an unsecured basis and $13,595,000 on a fully secured
basis, based on regulatory capital of $54,382,000.
First National Bank's business is concentrated in its service area,
which primarily encompasses San Mateo and San Francisco Counties. 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 June 2002 Deposit and Market Share Report prepared by
California Banksite Corporation, there were 152 commercial and savings banking
offices in San Mateo County with a total of $15,079,980,000 in deposits at June
30, 2002. First National Bank had a total of 12 offices with total deposits of
$362,890,000 at the same date, or 2.41% of the San Mateo County totals. At
December 31, 2001, there were 151 commercial and savings banking offices in San
Mateo County with total deposits of $14,324,430,000, while First National Bank
had $344,079,000, or 2.40% of the San Mateo County totals.
In 1996, pursuant to Congressional mandate, the Federal Deposit
Insurance Corporation reduced bank deposit insurance assessment rates to a range
from $0 to $0.27 per $100 of deposits, dependent upon a bank's risk. Based upon
the risk-based assessment rate schedule, First National Bank's current capital
ratios and level of deposits, First National Bank anticipates no change in the
assessment rate applicable to it during 2003 from that in 2002.
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,
11
and personal contacts by their respective officers, directors and employees.
They also seek to provide special services and programs for individuals in their
primary service area who are employed in the agricultural, professional and
business fields, such as loans for equipment, furniture and tools of the trade
or expansion of practices or businesses. In the event there are customers whose
loan demands exceed their respective lending limits, they seek to arrange for
such loans on a participation basis with other financial institutions. They also
assist those customers requiring services not offered by either bank to obtain
such services from correspondent banks.
Banking is a business that depends on interest rate differentials. In
general, the difference between the interest rate paid by a bank to obtain their
deposits and other borrowings and the interest rate received by a bank on loans
extended to customers and on securities held in a bank's portfolio comprise the
major portion of a bank's earnings.
Commercial banks compete with savings and loan associations, credit
unions, other financial institutions and other entities for funds. For instance,
yields on corporate and government debt securities and other commercial paper
affect the ability of commercial banks to attract and hold deposits. Commercial
banks also compete for loans with savings and loan associations, credit unions,
consumer finance companies, mortgage companies and other lending institutions.
The interest rate differentials of a bank, and therefore their
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
12
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.
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act (the "Act"), which is potentially the most significant
banking legislation in many years. The Act eliminates 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 repeals Section 20 of
Glass-Steagall, which prohibited banks from affiliating with securities firms.
Bank holding companies that can qualify as "financial holding companies" can
now, among other matters, acquire securities firms or create them as
subsidiaries, and securities firms can now acquire banks or start banking
activities through a financial holding company. The Act includes provisions
which permit national banks to conduct financial activities through a subsidiary
that are permissible for a national bank to engage in directly, as well as
certain activities authorized by statute, or that are financial in nature or
incidental to financial activities to the same extent as permitted to a
"financial holding company" or its affiliates. This liberalization of United
States banking and financial services regulation applies both to domestic
institutions and foreign institutions conducting business in the United States.
Consequently, the common ownership of banks, securities firms and insurance is
now possible, as is the conduct of commercial banking, merchant banking,
investment management, securities underwriting and insurance within a single
financial institution using a "financial holding company" 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 removes these restrictions and substantially
eliminates 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
13
nature or incidental to such financial activities. Financial holding companies
are also permitted to engage in activities that are complementary to financial
activities if the Board of Governors determines that the activity does not pose
a substantial risk to the safety or soundness of depository institutions or the
financial system in general. These standards expand upon the list of activities
"closely related to banking" which have to date defined the permissible
activities of bank holding companies under the Bank Holding Company Act.
One further effect of the Act is 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 FNB Bancorp or First National Bank have determined whether or
when they may seek to acquire and exercise new powers or activities under the
Act, and the extent to which competition will change among financial
institutions affected by the Act has not yet become clear.
RECENT LEGISLATION
The Patriot Act
- ---------------
On October 26, 2001, President Bush signed the USA Patriot Act (the
"Patriot Act"), which includes provisions pertaining to domestic security,
surveillance procedures, border protection, and terrorism laws to be
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 the 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 creates a
requirement for special due diligence for correspondent accounts and private
banking accounts. Under Section 312, each financial institution that
establishes, maintains, administers, or manages a private banking account or a
14
correspondent account in the United States for a non-United States person,
including a foreign individual visiting the United States, or a representative
of a non-United States person shall establish appropriate, specific, and, where
necessary, enhanced, due diligence policies, procedures, and controls that are
reasonably designed to detect and record instances of money laundering through
those accounts.
The Company and the Bank are not currently aware of any account
relationships between the Bank and any foreign bank or other person or entity as
described above under Sections 313 (a) or 312 of the Patriot Act. The terrorist
attacks on September 11, 2001 have realigned national security priorities of the
United States and it is reasonable to anticipate that the United States Congress
may enact additional legislation in the future to combat terrorism including
modifications to existing laws such as the Patriot Act to expand powers as
deemed necessary. The effects which the Patriot Act and any additional
legislation enacted by Congress may have upon financial institutions is
uncertain; however, such legislation would likely increase compliance costs and
thereby potentially have an adverse effect upon the Company's results of
operations.
Sarbanes-Oxley Act of 2002
- --------------------------
President George W. Bush signed the Sarbanes-Oxley Act of 2002 (the
"Act") on July 30, 2002, which responds to recent issues in corporate governance
and accountability. Among other matters, key provisions of the Act and rules
promulgated by the Securities and Exchange Commission pursuant to the Act
include the following:
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. The disclosure obligation becomes effective for fiscal years ending on
or after July 15, 2003. The ethics code must contain written standards that are
reasonably designed to deter wrongdoing and to promote:
15
o Honest and ethical conduct, including the ethical handling of actual or
apparent conflicts of interest between personal and professional relationships;
o Full, fair, accurate, timely, and understandable disclosure in reports
and documents that a registrant files with, or submits to, the Securities and
Exchange Commission and in other public communications made by the registrant;
o Compliance with applicable governmental laws, rules and regulations;
o The prompt internal reporting to an appropriate person or persons
identified in the code of violations of the code; and
o Accountability for adherence to the code.
o Disclosure of whether a company's audit committee of its board of
directors has a member of the audit committee who qualifies as an "audit
committee financial expert." The disclosure obligation becomes effective for
fiscal years ending on or after July 15, 2003. To qualify as an "audit committee
financial expert," a person must have:
o An understanding of generally accepted accounting principles and
financial statements;
o The ability to assess the general application of such principles in
connection with the accounting for estimates, accruals and reserves;
o Experience preparing, auditing, analyzing or evaluating financial
statements that present a breadth and level of complexity of accounting issues
that are generally comparable to the breadth and complexity of issues that can
reasonably be expected to be raised by the registrant's financial statements, or
experience actively supervising one or more persons engaged in such activities;
o An understanding of internal controls and procedures for financial
reporting; and
o An understanding of audit committee functions.
A person must have acquired the above listed attributes to be deemed to qualify
as an "audit committee financial expert" through any one or more of the
following:
o Education and experience as a principal financial officer, principal
accounting officer, controller, public accountant or auditor or experience in
one or more positions that involve the performance of similar functions;
o Experience actively supervising a principal financial officer,
principal accounting officer, controller, public accountant, auditor or person
performing similar functions;
o Experience overseeing or assessing the performance of companies or
public accountants with respect to the preparation, auditing or evaluation of
financial statements; or
16
o Other relevant experience.
The rule contains a specific safe harbor provision to clarify that the
designation of a person as an "audit committee financial expert" does not cause
that person to be deemed to be an "expert" for any purpose under Section 11 of
the Securities Act of 1933, as amended, or impose on such person any duties,
obligations or liability greater that the duties, obligations and liability
imposed on such person as a member of the audit committee and the board of
directors, absent such designation. Such a designation also does not affect the
duties, obligations or liability of any other member of the audit committee or
board of directors.
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 on professional conduct for attorneys requiring attorneys
having an attorney-client relationship with a company, among other matters, to
report "up the ladder" to the audit committee, another board committee or the
entire board of directors certain material violations.
o Expedited filing requirements for Form 4 reports of changes in
beneficial ownership of securities reducing the filing deadline to within 2
business days of the date a transaction triggers an obligation to report.
o Accelerated filing requirements for Forms 10-K and 10-Q by public
companies which qualify as "accelerated filers" to be phased-in over a four year
period reducing the filing deadline for Form 10-K reports from 90 days after the
fiscal year end to 60 days and Form 10-Q reports from 45 days after the fiscal
quarter end to 35 days.
o Disclosure concerning website access to reports on Forms 10-K, 10-Q and
8-K, and any amendments to those reports, by "accelerated filers" as soon as
reasonably practicable after such reports and material are filed with or
furnished to the Securities and Exchange Commission.
o Proposed 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. These
proposed rules would establish audit committee:
o Independence standards for members;
o Responsibility for selecting and overseeing the issuer's independent
accountant;
17
o Responsibility for handling complaints regarding the issuer's
accounting practices;
o Authority to engage advisers; and
o Funding requirements for the independent auditor and outside advisers
engaged by the audit committee.
The proposed audit committee rules provide a one-year phase-in period for
compliance. The Securities and Exchange Commission must adopt final rules by
April 26, 2003.
The effect of the Act upon the Company is uncertain; however, it is likely that
the Company will incur increased costs to comply with the Act and the rules and
regulations promulgated pursuant to the Act by the Securities and Exchange
Commission and other regulatory agencies having jurisdiction over the Company.
The Company does not currently anticipate, however, that compliance with the Act
and such rules and regulations will have a material adverse effect upon its
financial position or results of its operations or its cash flows.
California Corporate Disclosure Act
- -----------------------------------
On September 28, 2002, California Governor Gray Davis signed into law
the California Corporate Disclosure Act (the "CCD Act"), which became effective
January 1, 2003. The CCD Act requires publicly traded corporations incorporated
or qualified to do business in California to disclose information about their
past history, auditors, directors and officers. The CCD Act requires the Company
to disclose:
o The name of the a company's independent auditor and a description of
services, if any, performed for the company during the previous 24 months;
o The annual compensation paid to each director and executive officer,
including stock or stock options not otherwise available to other company
employees;
o A description of any loans made to a director at a "preferential" loan
rate during the previous 24 months, including the amount and terms of the loans;
o Whether any bankruptcy was filed by a company or any of its directors
or executive officers within the previous 10 years;
o Whether any director or executive officer of a company has been
convicted of fraud during the previous 10 years; and
o Whether a company violated any federal securities laws or any
securities or banking provisions of California law during the previous 10 years
for which the company was found liable or fined more than $10,000.
18
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
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 FNB Bancorp and First National
Bank.
ITEM 2. PROPERTIES
- -------------------
FNB Bancorp does not own any real property. FNB Bancorp has conducted
its operations since consummation of the Plan of Reorganization at the
administrative offices of First National Bank, located at 975 El Camino Real,
South San Francisco, California 94080.
First National Bank owns the land and building at 975 El Camino Real,
South San Francisco, California 94080. The premises consist of a modern,
three-story building of approximately 20,000 square feet and off-street parking
for employees and customers of approximately 45 vehicles. The Buri Buri Branch
Office of First National Bank is located on the ground floor of this three-story
building and administrative offices, including the offices of senior management,
occupy the second and third floors.
First National Bank owns the land and two-story building occupied by
the Daly City Branch Office (6600 Mission Street, Daly City, CA 94014); the land
and two-story building occupied by the Colma Branch Office (1300 El Camino Real,
Colma, CA 94014); the land and two-story building occupied by the South San
Francisco Branch Office (211 Airport Boulevard, South San Francisco, CA 94080);
the land and two-story building occupied by the Redwood City Branch Office (700
El Camino Real, Redwood City, CA 94063); the land and two-story building
occupied by the Millbrae Branch Office (1551 El Camino Real, Millbrae, CA
94030); the land and single-story building occupied by the Half Moon Bay Branch
Office (756 Main Street, Half Moon Bay, CA 94019); and the land and two-story
building occupied by the Pescadero Branch Office (239 Stage Road, Pescadero, CA
94060). All properties include adequate vehicle parking for customers and
employees.
19
All of the foregoing properties are owned by First National Bank, free
and clear of any mortgage lien or similar encumbrance, with the exception of
1300 El Camino Real, Colma, California, on which there is recorded a deed of
trust securing a note with a principal balance of approximately $78,000 as of
December 31, 2002.
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 first of which has been exercised
and expires on December 31, 2004.
First National Bank leases premises at 640 Brannan Street, Suite 102,
San Francisco, California, 94107, for its Flower Mart Branch Office. This ground
floor space of approximately 300 square feet is leased from California Flower
Market, Inc. The lease term is for 5 years, commencing September 1, 1996, with
two 5-year options to extend the lease term, the first of which has been
exercised and expires on September 1, 2006.
First National Bank leases premises at 491 El Camino Real, Suite B, San
Mateo, CA 94402, for its San Mateo Branch Office. Suite B is ground floor space
of approximately 3,349 square feet, and is subleased from Union Bank of
California N.A. under its master lease with Nikko Capital Corp. for the entire
building (Suites A and B) at that address, consisting of approximately 5,753
total square feet. The sublease is for 7 years and expires on January 31, 2004.
First National Bank leases approximately 2,242 square feet of office
space as an office building located at 520 South El Camino Real, San Mateo,
California. The Business Banking Division of First National Bank occupies Suite
430 at that address. The landlord is Westlake Development Company, Inc. The
lease is for 3 years, expiring June 15, 2003. There are no plans to renew the
lease, and the staff was relocated to the Redwood City Branch.
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.
20
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
There are no material legal proceedings adverse to the Company or First
National Bank to which any director, officer, affiliate of the Company, or 5%
shareholder of the Company, or any associate of any such director, officer,
affiliate or 5% shareholder of the Company are a party, and none of the
foregoing persons has a material interest adverse to the Company or First
National Bank.
From time to time, the Company and/or First National Bank is a party to
claims and legal proceedings arising in the ordinary course of business. The
Company's management is not aware of any material pending legal proceedings to
which either it or First National Bank may be a party or has recently been a
party, which will have a material adverse effect on the financial condition or
results of operations of the Company and First National Bank, taken as a whole.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
- -----------------------------------------------------------------------------
The Plan of Reorganization between FNB Bancorp and the Bank was
consummated on March 15, 2002. At the close of business on March 15, 2002, all
shares of the common stock of the Bank became owned by FNB Bancorp and ceased to
be quoted on the OTC Bulletin Board. Commencing at the opening of business on
March 18, 2002, and to the present, the common stock of FNB Bancorp has been
quoted on the OTC Bulletin Board under the trading symbol "FNBG.OB." On March
18, 2002, FNB Bancorp had approximately 465 shareholders of common stock of
record.
There has been limited trading in the shares of common stock of FNB
Bancorp.
21
The following table summarizes sales of the common stock of First
National Bank and 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 stock dividends effected
December 13, 2002. The prices indicated below reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
Bid Price of First National Bank
Common Stock (1) Cash
Dividends
2001 High Low Declared (2)
---- ---- --- ------------
First Quarter $26.7500 $25.5000 $0.12
Second Quarter 26.6250 25.0000 0.12
Third Quarter 26.5000 25.0000 0.12
Fourth Quarter 26.1000 25.0000 0.12
0.52 Special
Dividend
2002
----
First Quarter $29.9000 $25.2500 $0.12
Bid Price of FNB Bancorp
Common Stock (1) Cash
Dividends
High Low Declared (2)
---- --- ------------
2002
----
Second Quarter $31.0500 $27.5000 $0.12
Third Quarter 28.0000 27.5000 0.12
Fourth Quarter 27.5000 23.0000 0.12
0.12 Special
Dividend
(1) As estimated by First National Bank of Northern California, based upon
trades of which First National Bank of Northern California was aware.
(2) See Item 1, "Limitations on Dividends," for a discussion of the limitations
applicable to the payment of dividends by First National Bank and FNB
Bancorp.
22
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 2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
STATEMENT OF INCOME DATA
Total interest income $ 26,159 $ 30,844 $ 30,862 $ 27,586 $ 24,739
Total interest expense 4,288 7,935 8,191 6,998 6,877
---------- ---------- ---------- ---------- ----------
Net interest income 21,871 22,909 22,671 20,588 17,862
Provision for loan losses 150 300 425 750 750
---------- ---------- ---------- ---------- ----------
Net interest income after provision for
loan losses 21,721 22,609 22,246 19,838 17,112
Total non interest income 3,308 3,007 3,780 2,785 2,654
Total non interest expenses 18,705 17,911 15,977 14,519 14,215
---------- ---------- ---------- ---------- ----------
Earnings before taxes 6,324 7,705 10,049 8,104 5,551
Income tax expense 1,510 2,468 2,921 2,887 1,508
---------- ---------- ---------- ---------- ----------
Net earnings $ 4,814 $ 5,237 $ 7,128 $ 5,217 $ 4,043
========== ========== ========== ========== ==========
PER SHARE DATA Net earnings per share:
Basic $ 1.98 $ 2.15 $ 2.93 $ 2.23 $ 1.81
Diluted $ 1.97 $ 2.15 $ 2.92 $ 2.23 $ 1.81
Cash dividends per share $ 0.60 $ 1.00 $ 1.23 $ 1.00 $ 0.36
Weighted average shares outstanding:
Basic 2,436,000 2,435,000 2,435,000 2,335,000 2,239,000
Diluted 2,445,000 2,441,000 2,437,000 2,335,000 2,239,000
Shares outstanding at period end 2,437,043 2,318,849 2,208,658 2,103,694 2,003,759
Book value per share $ 21.01 $ 20.06 $ 19.52 $ 17.83 $ 17.85
BALANCE SHEET DATA
Investment securities 75,963 65,311 87,241 70,658 78,865
Net loans 284,889 288,067 229,669 237,062 203,884
Allowance for loan losses 3,396 3,543 3,332 2,920 2,224
Total assets 401,834 397,388 379,102 348,054 321,031
Total deposits 347,406 344,079 330,457 305,361 280,589
Shareholders' equity 51,203 46,523 43,128 37,507 35,761
SELECTED PERFORMANCE DATA
Return on average assets 1.17% 1.30% 1.97% 1.53% 1.33%
Return on average equity 9.87% 11.43% 17.42% 13.96% 11.31%
Net interest margin 5.83% 6.34% 6.97% 6.73% 6.61%
Average loans as a percentage of
average deposits 80.79% 77.67% 75.42% 75.02% 74.47%
Average total stockholder's equity as
a percentage of average total assets 11.86% 11.41% 11.31% 10.96% 11.72%
Dividend payout ratio 29.35% 43.38% 37.50% 38.55% 17.15%
SELECTED ASSET QUALITY RATIOS
Net loan charge-offs to average loans 0.10% 0.03% 0.01% 0.02% 0.10%
Allowance for loan losses/Total Loans 1.18% 1.21% 1.43% 1.22% 1.08%
CAPITAL RATIOS
Tier 1 risk-based 13.92% 12.98% 14.54% 13.18% 17.02%
Total risk-based 14.87% 13.98% 15.67% 14.18% 18.10%
Leverage 12.16% 11.41% 11.28% 11.00% 10.88%
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF FNB BANCORP AND SUBSIDIARY
- --------------------------------------------------------------------------------
Note: Certain matters discussed or incorporated by reference in this
Annual Report on Form 10-K including, but not limited to matters described in
this section are forward-looking statements that are subject to risks and
uncertainties that could cause actual results to differ materially from those
projected.
Critical Accounting Policies And Estimates
- ------------------------------------------
Management's discussion and analysis of its financial condition and
results of operations are based upon the Company's financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, the Company evaluates
its estimates, including those related to its loans and allowance for loan
losses. The Company bases its estimates on current market conditions, historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. The Company believes the
following critical accounting policy requires significant judgments and
estimates used in the preparation of its consolidated financial statements.
Allowance for Loan Losses. The allowance for loan losses is periodically
evaluated for adequacy by management. Factors considered include the Company's
loan loss experience, known and inherent risks in the portfolio, current
economic conditions, known adverse situations that may affect the borrower's
ability to repay, regulatory policies, and the estimated value of underlying
collateral. The evaluation of the adequacy of the allowance is based on the
above factors along with prevailing and anticipated economic conditions that may
impact borrowers' ability to repay loans Determination of the allowance is in
part objective and in part a subjective judgment by management given the
information it currently has in its possession. Adverse changes in any of these
factors or the discovery of new adverse information could result in higher
charge-offs and loan loss provisions.
Prospective Accounting Changes
- ------------------------------
FASB Statement No. 146, Accounting for Costs Associated with Exit or
Disposal Activities. The provisions of this Statement are effective for exit and
disposal activities that are initiated after December 31, 2002. This Statement
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. The Company does not
currently have plans to exit or dispose of activities.
FASB Interpretation No. 46, Consolidation of Variable Interest
Entities. This Interpretation addresses consolidation by business enterprises of
variable interest entities, which have one or both of the following
24
characteristics: 1) the equity investment at risk is not sufficient to permit
the entity to finance its activities without additional financial support from
other parties, or 2) the equity investors lack one or more of the following
essential characteristics of a controlling financial interest: a) the direct or
indirect ability to make decisions about the entity's activities through voting
or similar rights, b) the obligation to absorb the expected losses of the entity
if they occur, or c) the right to receive the expected residual returns of the
entity if they occur. The Interpretation requires existing variable interest
entities to be consolidated if those entities do not effectively disburse risks
among parties involved. The Company has determined that it has no ownership in
variable interest entities which would require consolidation.
Earnings Analysis
- -----------------
Net earnings in 2002 were $4,814,000, an 8.1% decrease from 2001
earnings of $5,237,000. Earnings for the year 2001 decreased $1,891,000 or 26.5%
from year 2000 earnings of $7,128,000. The principal source on earnings is
interest income on loans. The period from the year 2000 through 2002 saw a
series of decreases in the prime lending rate. At the beginning of 2000, the
rate was 8.50%, and the year ended at 9.50%. In the year 2001, the rate started
at 9.50%, and ended at 4.75%, after a succession of decreases between 0.50% and
0.25% at a time. The year 2002 remained flat at 4.75% until November 7, when it
was dropped to 4.25%. In addition to the rate changes, the year ended December
31, 2000 included a non-recurring pre-tax gain on sale of bank premises of
$701,000. The year 2000 also included an accrual for a tax receivable of
$342,000, representing a tax refund related primarily to the recapture of
certain tax credits earned in prior years, but received in January 2001.
Basic earnings per share were $1.98 in 2002; $2.15 in 2001 and $2.93 in
2000. Diluted earnings per share were $1.97 in 2002; $2.15 in 2001; and $2.92 in
2000.
Net interest income for 2002 was $21,871,000, a decrease of $1,038,000
or 4.5% from 2001. Interest income was $26,159,000 in 2002, a decrease of
$4,685,000 or 15.2% from 2001. Average interest earning assets in 2002 were
$375,288,000, an increase of $13,671,000 or 3.8% from 2001. The yield on
interest earning assets declined 156 basis points in 2002 compared to 2001. The
principal earning assets were loans, and their average increased $17,184,000 in
2002 versus 2001, while their yield declined 174 basis points. The declining
yield was from the succession of prime rate cuts by the Federal Reserve,
mentioned earlier, which did not increase in 2002. Net interest income was
$22,909,000 in 2001, an increase of $238,000 or 1.1% over 2000, which was
$22,671,000. Interest income was $30,844,000 in 2001, down $18,000 or 0.1% from
2000, which was $30,862,000. Average interest earning assets in 2001 were
$361,617,000, and $325,239,000 in 2000, an increase of $36,378,000 or 11.2%,
while the yield declined 96 basis points. Average loans were $271,449,000 in
2001, and $238,167,000 in 2000, an increase of $33,282,000, or 14.0%, but the
yield decreased 125 basis points.
Interest expense for 2002 was $4,288,000 and $7,935,000 in 2001, a
decrease of $3,647,000 or 46.0%. Average interest bearing liabilities were
$269,766,000 in 2002, and $262,019,000 in 2001, an increase of $7,747,000 or
3.0%. The cost of these liabilities declined 144 basis points, following the
further decline in the prime rate. Average time deposits were $95,286,000 in
25
2002, and $105,224,000 in 2001, a decrease of $9,938,000, or 9.4%, and costs
decreased 202 basis points.
Interest expense for 2001 was $7,935,000 and $8,191,000 in 2000, a
decrease of $256,000 or 3.1%. Average interest bearing liabilities were
$262,019,000 in 2001, and $231,948,000 in 2000, an increase of $30,071,000 or
13.0%. The cost of these liabilities declined 50 basis points, following the
declines in prime rate, but at a slower pace, as the rates paid on existing time
deposits did not change until renewal. Average time deposits were $105,224,000
in 2001, and $102,214,000 in 2000, an increase of $3,010,000, or 2.9%, but costs
decreased 44 basis points.
The provision for loan losses was $150,000 in 2002, and $300,000 in
2001. The provision was $425,000 in 2000. At the end of 2002, the allowance was
1.18% of gross loans outstanding; at the end of 2001, it was 1.21% of gross
loans outstanding; and at the end of 2000, it was 1.43%.
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.
TABLE 1 Net Interest Income and Average Balances
---------------------------------------------------------------------------------------------
(In thousands)
Year ended December 31
2002 2001 2000
---------------------------- ---------------------------- -----------------------------
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 $288,633 $ 22,664 7.85% $271,449 $ 26,024 9.59% $238,167 $ 25,811 10.84%
Taxable Securities 42,088 1,944 4.62% 45,650 2,630 5.76% 44,584 2,860 6.41%
Nontaxable Securities 29,526 1,311 4.44% 31,129 1,579 5.07% 32,120 1,524 4.74%
Federal funds sold 15,041 240 1.60% 13,389 611 4.56% 10,368 667 6.43%
-------- -------- -------- -------- -------- --------
Total interest earning
assets $375,288 $ 26,159 6.97% $361,617 $ 30,844 8.53% $325,239 $ 30,862 9.49%
-------- -------- -------- -------- -------- --------
NONINTEREST EARNING ASSETS
Cash and due from banks $ 18,303 $ 22,654 $ 20,782
Premises and equipment 11,573 11,728 10,730
Other assets 5,933 5,413 5,092
-------- -------- --------
Total noninterest earning
assets $ 35,809 $ 39,795 $ 36,604
-------- -------- --------
TOTAL ASSETS $411,097 $401,412 $361,843
======== ======== ========
INTEREST BEARING LIABILITIES
Deposits:
Demand, interest bearing $ 52,240 ($ 229) (0.44%) $ 54,539 ($ 653) (1.20%) $ 42,157 ($ 527) (1.25%)
Money Market 69,701 (1,096) (1.57%) 55,670 (1,490) (2.68%) 43,599 (1,438) (3.30%)
Savings 52,282 (295) (0.56%) 46,312 (727) (1.57%) 43,689 (851) (1.95%)
Time deposits 95,286 (2,653) (2.78%) 105,224 (5,054) (4.80%) 102,214 (5,353) (5.24%)
Fed funds purchased and other
Borrowings 257 (15) (5.84%) 274 (11) (4.01%) 289 (23) (7.96%)
-------- -------- -------- -------- -------- --------
Total interest bearing
liabilities $269,766 ($4,288) (1.59%) $262,019 ($ 7,935) (3.03%) $231,948 ($ 8,192) (3.53%)
-------- -------- -------- -------- -------- --------
26
NONINTEREST BEARING LIABILITIES:
Demand deposits 87,768 87,726 84,127
Other liabilities 4,792 5,859 4,848
-------- -------- --------
Total noninterest bearing
liabilities $ 92,560 $ 93,585 $ 88,975
-------- -------- --------
Total liabilities $362,326 $355,604 $320,923
Stockholders' equity $ 48,771 $ 45,808 $ 40,920
-------- -------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $411,097 $401,412 $361,843
======== ======== ========
NET INTEREST INCOME AND
MARGIN ON TOTAL EARNING
ASSETS $ 21,871 5.83% $ 22,909 6.34% $ 22,670 6.97%
======== ======== ========
Interest income is reflected on an actual basis, not on a fully taxable
equivalent basis. Yield on gross loans was not adjusted for nonaccrual loans, as
these were considered not material for this calculation.
The following table analyzes the dollar amount of change in interest income and
expense and the changes in dollar amounts attributable to (a) changes in volume
(changes in volume at the current year rate), (b) changes in rate (changes in
rate times the prior year's volume) and (c) changes in rate/volume (changes in
rate times changes in volume). In this table, the dollar change in rate/volume
is prorated to volume and rate proportionately.
TABLE 2 Rate/Volume Variance Analysis
--------------------------------------------------------------------------------
(In thousands)
Year Ended December 31
--------------------------------------------------------------------------------
2002 Compared To 2001 2001 Compared to 2000
Increase (decrease) Increase (decrease)
-------------------------------------- --------------------------------------
Interest Variance Interest Variance
Income/ Attributable To Income/ Attributable To
Expense ------------------------ Expense ------------------------
Variance Rate Volume Variance Rate Volume
---------- ---------- ---------- ---------- ---------- ----------
INTEREST EARNING ASSETS:
Loans ($ 3,360) ($ 4,709) $ 1,349 $ 213 ($ 2,978) $ 3,191
Taxable Securities (686) (481) (205) (230) (298) 68
Nontaxable Securities (268) (187) (81) 55 102 (47)
Federal Funds sold (371) (397) 26 (56) (194) 138
---------- ---------- ---------- ---------- ---------- ----------
Total ($ 4,685) ($ 5,774) $ 1,089 ($ 18) ($ 3,368) $ 3,350
---------- ---------- ---------- ---------- ---------- ----------
INTEREST BEARING LIABILITIES:
Demand deposits ($ 424) ($ 396) ($ 28) $ 126 ($ 29) $ 155
27
Money market (394) (615) 221 52 (271) 323
Savings deposits (432) (466) 34 (124) (165) 41
Time deposits (2,401) (1,924) (477) (299) (457) 158
Federal funds purchased and other
Borrowings 4 5 (1) (12) (11) (1)
---------- ---------- ---------- ---------- ---------- ----------
Total ($ 3,647) ($ 3,396) ($ 251) ($ 257) ($ 933) 676
---------- ---------- ---------- ---------- ---------- ----------
NET INTEREST INCOME ($ 1,038) ($ 2,378) $ 1,340 $ 239 (2,435) $ 2,674
========== ========== ========== ========== ========== ==========
In 2002, net interest income represented 86.86% of net revenue (net
interest income plus non-interest income, compared to 88.40% in 2001 and 85.71%
in 2000. The net yield on average earning assets was 5.83% in 2002 compared to
6.34% in 2001 and 6.97% in 2000. The average rate earned on interest earning
assets was 6.97% in 2002, down from 8.53% in 2001 and 9.49% in 2000. The average
cost for interest-bearing liabilities was 1.59% in 2002, compared to 3.03% in
2001 and 3.53% in 2000.
The decrease in net interest income in 2002 was due to the fact that
the prime rate remained steady at 4.75% until November 7, when it declined to
4.25%, compared to 2001, which saw the rate decline from a high of 9.50% at the
beginning of the year to a low of 4.75% at the end of the year. In the year
2000, the prime rate started at 8.00% and ended at 9.50%. The effect of these
declines was as follows.
Yield on average loans was 7.85% in 2002, decreasing from 9.59% in 2001
and 10.84% in 2000; interest on average taxable securities was 4.62% in 2002,
decreasing from 5.76% in 2001 and 6.41% in 2000; interest on average nontaxable
securities was 4.4% in 2002, decreasing from 5.07% in 2001 and 4.74% in 2000;
and interest on average federal funds sold was only 1.60% in 2002, decreasing
from 4.56% in 2001 and 6.43% in 2000; interest on average total interest earning
assets was 6.97% in 2002, decreasing from 8.53% in 2001 and 9.49% in 2000. On
the expense side, interest on average interest bearing demand deposits was 0.44%
in 2002, decreasing from 1.20% in 2001 and 1.25%; interest on average money
market accounts was 1.57% in 2002, decreasing from 2.68% in 2001 and 3.30% in
2000; interest on average savings accounts was 0.56% in 2002, decreasing from
1.57% in 2001 and 1.95% in 2000; interest on average time deposits was 2.78% in
2002, decreasing from 4.80% in 2001 and 5.24% in 2000; interest on average
federal funds purchased and other borrowings was 5.84% in 2002, increasing from
4.01% in 2001 but decreasing from 7.96% in 2000; interest on average total
interest bearing liabilities was 1.59%, decreasing from 3.03% in 2001 and 3.53%.
Provision and 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
28
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.
Based on a review of the five years ended December 31, 2002 the Bank
has had a very low loan loss experience, with only $59,000 in real estate loan
losses. Real estate loans outstanding declined about $6,176,000 in 2002 compared
to 2001. In 2001, they increased $70,529,000 over 2000. The proportion of the
Allowance for Loan Losses attributable to real estate loans was $955,000 in 2000
or 62.8%, and increased to $1,912,000 in 2001, or 74.1%, and was $2,008,000 or
72.9% in 2002. The increase in the proportion of the allowance from 2000 to 2001
took into account (a) the significant increase in real estate loans outstanding;
(b) the state of the economy; and (c) the increase in vacancy factors in the
current commercial real estate market. Net pay downs on real estate loans
resulted in a slight decline from 2001 to 2002.
The allowance for loan losses totaled $3,396,000, $3,543,000, and
$3,332,000 at December 31, 2002, 2001 and 2000, respectively. This represented
1.18%, 1.21% and 1.43% of outstanding loans on those respective dates. The
balances reflect an amount that, in management's judgment, is adequate to
provide for potential loan losses based on the considerations listed above.
During 2002, the provision for loan losses was $150,000, while write-offs
totaled $305,000, compared to a provision of $300,000 and total write-offs of
$94,000 in 2001, and a provision of $425,000 and total write-offs of $23,000.
There was no significant single loan write off in the periods mentioned.
TABLE 3 Allocation of the Allowance for Loan Losses
(In thousands)
2002 2001 2000 1999 1998
----------------- ----------------- ----------------- ----------------- -----------------
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 $ 2,008 72.9% $ 1,912 74.1% $ 955 62.8% $ 1,024 63.0% $ 795 68.7%
Construction 989 11.4% 504 11.6% 1,196 18.9% 566 18.3% 393 11.2%
Commercial 221 14.7% 387 13.4% 264 16.7% 415 17.1% 416 18.2%
Consumer 43 1.0% 226 0.9% 352 1.6% 526 1.6% 294 1.9%
Unfunded
Commitments 135 -- 514 -- 565 -- 389 -- 326 --
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Total $ 3,396 100.0% $ 3,543 100.0% $ 3,332 100.0% $ 2,920 100.0% $ 2,224 100.0%
========= ===== ========= ===== ========= ===== ========= ===== ========= =====
29
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, 2002. The amount added to
the provision and charged to operating expenses for each period is based on the
risk profile of the loan portfolio.
1998 and 1999 saw a change in the portfolio mix, with an increase in
loan size, and lending in Enterprise Zones, which implies a slightly higher
risk. Favorable payment histories for these loans indicated that the allowance
needed a smaller provision. Thus, the provision declined from 2000 onwards. Net
loan charge-offs throughout the 5-year period has been very low, and are only
nominal when compared to total loans.
TABLE 4 Allowance for Loan Losses
Historical Analysis
-------------------------------------------------------
(In thousands)
For the year ended December 31
-------------------------------------------------------
2002 2001 2000 1999 1998
------- ------- ------- ------- -------
Balance at Beginning of Period $ 3,543 $ 3,332 $ 2,920 $ 2,224 $ 1,666
Provision for Loan Losses 150 300 425 750 750
Charge-offs:
Real Estate (59) -- -- -- --
Commercial (216) (22) -- (51) (169)
Consumer (30) (72) (23) (19) (38)
------- ------- ------- ------- -------
Total (305) (94) (23) (70) (207)
Recoveries:
Commercial 2 -- 1 10 7
Consumer 6 5 9 6 8
------- ------- ------- ------- -------
Total 8 5 10 16 15
Net Charge-offs (297) (89) (13) (54) (192)
Balance at End of Period $ 3,396 $ 3,543 $ 3,332 $ 2,920 $ 2,224
Percentages
Allowance for Loan Losses/Total Loans 1.18% 1.21% 1.43% 1.22% 1.08%
Net charge-offs/Real Estate Loans 0.18% -- -- -- --
Net charge-offs//Commercial Loans 0.50% 0.06% 0.00% 0.10% 0.43%
Net charge-offs/Consumer Loans 0.81% 2.58% 0.36% 0.33% 0.76%
Net charge-offs/Total Loans 0.10% 0.03% 0.01% 0.02% 0.09%
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 became due. For the
year ended December 31, 2002 had nonaccrual loans performed as agreed,
approximately $75,000 in interest would have been accrued.
30
Table 5 provides a summary of contractually past due loans for the most
recent five years. Nonperforming loans were 0.7% of total loans at the end of
2002. Nonperforming loans were 0.7% of total loans at the end of 2001, and 0.5%
of total loans at the end of 2000. Management believes the current list of past
due loans are collectible and does not anticipate any losses. There were no
foreclosed assets as of the periods indicated.
TABLE 5 Analysis of Nonperforming Assets
------------------------------------------
(In thousands)
Year ended December 31,
------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
Accruing loans 90 days or more $ -- $ -- $ -- $ -- $ --
Nonaccrual loans 2,161 1,959 1,218 1,999 3,232
------ ------ ------ ------ ------
Total $2,161 $1,959 $1,218 $1,999 $3,232
====== ====== ====== ====== ======
There was no commitment to lend additional funds to any customer whose loan was
classified nonperforming at December 31, 2002, 2001 and 2000.
Noninterest Income
- ------------------
The following table sets forth the principal components of noninterest
income:
TABLE 6 Noninterest Income
-------------------------------
(Dollars in thousands)
Years Ended December 31
-------------------------------
2002 2001 2000
------- ------- -------
Service charges $ 1,989 $ 1,657 $ 1,661
Credit card fees 921 913 975
Gain on sale of premises, equipment
and leasehold improvements -- -- 701
Gain (loss) on sales of securities 121 58 (1)
Other income 277 379 444
------- ------- -------
Total noninterest income $ 3,308 $ 3,007 $ 3,782
======= ======= =======
Noninterest income for the year ended December 31, 2002 was $3,308,000 compared
to $3,007,000 for 2001 and $3,782,000 for 2000. Service charges represented the
major portion of noninterest income. 2000 and 2001 were essentially the same,
but a more accurate system to track and apply service charges was installed
during 2002, resulting in $332,000 or 20.0% more income for 2002 compared to
2001. The only other significant item was a non-recurring $701,000 gain on sale
of bank premises in 2000.
31
Noninterest Expenses
- --------------------
The following table sets forth the various components of noninterest
expense:
TABLE 7 Noninterest Expenses
(Dollars in thousands)
Years Ended December 31,
-------------------------------
2002 2001 2000
------- ------- -------
Salaries and employee benefits $10,604 $10,532 $ 9,453
Occupancy expense 1,246 1,290 1,122
Equipment expense 2,008 1,736 1,453
Advertising expense 324 384 428
Data processing expense 385 330 360
Professional fees 1,126 731 468
Director expense 150 150 132
Surety insurance 400 303 309
Telephone, postage, supplies 1,073 1,014 973
Bankcard expenses 787 735 693
Other 602 706 586
Total interest expense $18,705 $17,911 $15,977
Noninterest expenses for the year ended December 31, 2002 were
$18,705,000, an increase of $794,000 or 4.4% over 2001. For 2001, they were
$17,911,000, an increase of $1,934,000 or 12.1% over 2000. During 2001, the Bank
purchased computer hardware and software equipment to convert its accounting
system and related application systems. This resulted in increased costs arising
from overtime and additional staff working on the conversion of software
systems. Because of difficulties encountered upon conversion and lack of
functionality of the new software, the Bank evaluated these assets for
impairment. No impairment loss was recognized. However, the Bank revised the
estimated useful life of the software. Depreciation expense on the software with
an original purchase price of approximately $675,000 came to $336,000 for the
year ended December 31, 2001. The Bank converted back to its previous accounting
and related application systems by March 2002. An important part of the increase
in professional fees for 2001 was related to consultants hired to help with the
data conversion process. The additional increase in professional fees in 2002
over 2001 had to do with expenses related to the activation of FNB Bancorp.
Balance Sheet Analysis
- ----------------------
Total assets were $401,834,000 at December 31, 2002, which represented
a 1.1% increase over 2001. Total assets were $397,388,000 at December 31, 2001,
a 4.8% increase over 2000. Assets averaged $411.1 million in 2002, compared to
$401.4 million in 2001 and $361.8 million in 2000. Average earning assets
increased from $325.2 million in 2000 to $361.6 million in 2001 and $375.3
million in 2002. Average earning assets represented 89.9% of total average
assets in 2000, 90.1% in 2001, and 91.3% in 2002. Interest-bearing liabilities
averaged $269.8 million in 2002, $262.0 million in 2001, and $231.9 million in
2000.
32
Loans
- -----
The loan portfolio is the principal earning asset of the Bank. Loans
outstanding at December 31, 2002 decreased by $3.3 million or 1.1% compared to
2001, and loans outstanding at December 31, 2001 had increased $58.6 million or
25.2% over 2000.
Real Estate loans decreased by $6.2 or 2.8% in 2002 compared to 2001.
This followed an increase of $70.5 million or 47.9% in 2001 over 2000. A greater
emphasis was placed on developing new Commercial Real Estate business towards
the end of 2000. Some of the projects started in 2000 became fully funded in
2001, and although this business continued to increase during 2002, it did so at
a slower pace, following the current economic downturn. Construction loans
decreased by $1.1 million or 3.1% in 2002 compared to 2001. These loans had
declined $10.2 million or 23.1% in 2001 compared to 2000. Several construction
projects were completed and paid off in 2001. However, there was less new loan
activity in 2002, due to economic uncertainty, resulting in a further decline in
outstanding loans. Commercial loans increased by $3.4 million or 8.6% in 2002
over 2001. They were flat between 2001 and 1999. Consumer loans represent a
nominal portion of total loans. However, they increased by $0.4 million or 13.7%
in 2002 compared to 2001, after declining $1.3 million or 32.7% in 2001 compared
to 2000.
Table 8 presents a detailed analysis of loans outstanding at December
31, 1998 through December 31, 2002.
TABLE 8 Loan Portfolio
-------------------------------------------------------------
(in thousands)
December 31
-------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
Real Estate loans $ 211,473 $ 217,650 $ 147,121 $ 152,320 $ 142,916
Construction loans 32,947 34,016 44,245 44,208 23,188
Commercial loans 42,549 39,195 39,010 41,295 37,812
Consumer loans 2,956 2,600 3,861 3,911 3,942
--------- --------- --------- --------- ---------
Sub total 289,925 293,461 234,237 241,734 207,858
Net deferred loan fees (1,640) (1,851) (1,236) (1,752) (1,750)
--------- --------- --------- --------- ---------
Total $ 288,285 $ 291,610 $ 233,001 $ 239,982 $ 206,108
========= ========= ========= ========= =========
33
The following table shows the Bank's loan maturities and sensitivities
to changes in interest rates as of December 31, 2002.
Maturing
Maturing After One Maturing
Within One But Within After Five
Year Five Years Years Total
---------- ---------- ---------- ----------
Real Estate loans $ 197,792 $ 3,941 $ 9,741 $ 211,473
Construction loans 30,815 614 1,518 32,947
Commercial loans 39,795 793 1,960 42,549
Consumer loans 2,765 55 136 2,956
---------- ---------- ---------- ----------
Sub total 271,167 5,403 13,355 289,925
Net deferred loan fees (1,534) (30) (76) (1,640)
---------- ---------- ---------- ----------
Total $ 269,633 $ 5,373 $ 13,279 $ 288,285
========== ========== ========== ==========
With predetermined interest rates $ 156,934 $ 3,127 $ 7,729 $ 167,790
With floating interest rates $ 112,699 $ 2,246 $ 5,550 $ 120,495
---------- ---------- ---------- ----------
Total $ 269,633 $ 5,373 $ 13,279 $ 288,285
========== ========== ========== ==========
Average loans earned 7.85% in 2002, 174 basis points less than in 2001. Average
loans in 2001 earned 9.59%, 125 basis points less than 2000. The prime rate held
at 4.75% throughout 2002, ranged from 9.00% on January 4, 2001 to 4.75% on
December 12, 2001, and from 8.50% in January 2000, to 9.50% from May 17 through
the end of 2000. Loans averaged $288,633,000 in 2002, $17,184,000 or 6.3% above
2001. Loans averaged $271,449,000 in 2001, an increase of $33,282,000 or 14.0%
over 2000. Although volumes increased from 2000 through 2002, income did not
follow the volume increase. Interest income on loans in 2002 was $22,664,000, a
decrease of $3,360,000 or 12.9% compared to 2001. Interest income on loans in
2001 was $26,024,000, an increase of $213,000 or 0.8% over 2000.
Investment Portfolio
- --------------------
Investments at December 31, 2002 were $75,963,000, an increase of
$10,652,000 or 16.3% over 2001. Investments at December 31, 2001 were
$65,311,000, a decline of $21,930,000 or 25.1% compared to 2000.
Available funds are first used for Loans, then Investments, and the
remainder is sold as Federal Funds. The primary source of funds is the deposit
base,. If more funds are needed, the Investment Portfolio maturity may be used,
as well as sales and calls, which accounts for the volume variances in
Investments. The Bank's investment portfolio is concentrated in U. S. Government
Agencies and in obligations of States and their political subdivisions. The Bank
believes this provides for an appropriate liquidity level.
The following table sets forth the maturity distribution and interest rate
sensitivity of investment securities at December 31, 2002:
34
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 $ 8,056 4.27% $23,061 4.20% $ 1,033 5.81% $ -- --% $32,150 2.34 4.26%
States & Political
Subdivisions 2,342 4.62% 13,607 4.46% 14,357 4.49% 1,086 4.74% 31,392 4.86 4.50%
Corporate debt 4,091 4.03% 6,205 5.38% -- --% -- --% 10,296 1.07 4.83%
Other Securities -- -- -- --% -- --% 2,125 6.36% 2,125 13.68 6.36%
Total $14,489 4.26% $42,873 4.45% $15,390 4.59% $ 3,211 5.84% $75,963 3.51 4.50%
The following table shows the securities portfolio mix at December 31, 2002,
2001 and 2000.
Years Ended December 31,
---------------------------------------------------------------------
2002 2001 2000
--------------------- --------------------- ---------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- --------- --------- --------- --------- ---------
(Dollars in thousands)
U. S. Treasury $ -- $ -- $ 1,000 $ 1,029 $ 3,996 $ 4,017
U. S. Government Agencies 31,759 32,150 26,994 27,381 44,690 45,040
States & Political Subdivisions 29,595 31,392 29,119 29,461 36,651 36,537
Corporate Debt 10,078 10,296 5,049 5,144 -- --
Other Securities 2,125 2,125 2,296 2,296 1,647 1,647
--------- --------- --------- --------- --------- ---------
Total $ 73,557 $ 75,963 $ 64,458 $ 65,311 $ 86,984 $ 87,241
========= ========= ========= ========= ========= =========
Deposits
- --------
The increase in earning assets in 2002 was funded by the increase in
the deposit base. During 2002, average deposits were $357,277,000, an increase
of $7,806,000 or 2.2% over 2001. During 2001, average deposits were
$349,471,000, an increase of $33,685,000 or 10.7% over 2000. In 2002, average
interest-bearing deposits were $269,509,000, an increase of $7,764,000 or 3.0%
compared to 2001. In 2001, average interest-bearing deposits were $261,745,000,
an increase of $30,086,000 or 13.0% compared to 2000.
The Bank's cost of interest-bearing deposits was 1.6%, a decrease of
140 basis points compared to 2001. In 2001, the cost of interest-bearing
deposits was 3.0%, a decrease of 50 basis points compared to 2000. The series of
declines in the primary lending rate during 2001 without any increases in 2002
resulted in decreased costs of all types of interest-bearing deposits. 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 0.4% in 2002, 1.2% in 2001 and 1.3% in 2000. Money market
deposit costs averaged 1.6% in 2002, 2.7% in 2001 and 3.3% in 2000. Savings
rates averaged 0.6% in 2002, 1.6% in 2001, and 2.0% in 2000. Finally, average
interest on time certificates of deposit of $100,000 or more was 3.0% in 2002,
35
sharply down from 4.8% in 2001 and 5.7% in 2000. On certificates under $100,000,
average rates were 2.5% down from 4.8% in 2001 and 4.8% in 2000.
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,
------------------------------------------------------------------------------------
2002 2001 2000
-------------------------- -------------------------- --------------------------
% 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 $ 52,240 0.4% 14.6% $ 54,539 1.2% 15.6% $ 42,157 1.3% 13.3%
Money market 69,701 1.6% 19.5 55,670 2.7% 15.9 43,599 3.3% 13.8
Savings 52,282 0.6% 14.6 46,312 1.6% 13.3 43,689 2.0% 13.8
Time deposits $100,000 or more 54,388 3.0% 15.2 47,261 4.8% 13.5 51,444 5.7% 16.3
Time deposits under $100,000 40,898 2.5% 11.5 57,963 4.8% 16.6 50,770 4.8% 16.1
-------- ------- ------- -------- ------- ------- -------- ------- -------
Total interest bearing deposits $269,509 1.6% 75.4 $261,745 3.0% 74.9 231,659 3.5% 73.3
Demand deposits 87,768 0.0% 24.6 87,726 0.0% 25.1 84,127 0.0% 26.7
-------- ------- ------- -------- ------- ------- -------- ------- -------
Total deposits $357,277 1.2% 100.0% $349,471 2.3% 100.0% $315,786 2.6% 100.0%
======== ======= ======= ======== ======= ======= ======== ======= =======
The following table indicates the maturity schedule of time deposits of $100,000
or more:
Analysis of Time Deposits of $100,000 or more at December 31, 2002
(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
------------------ -------------- ------------ ----------- --------
$37,676 $18,403 $8,580 $6,610 $4,083
Capital
- -------
At December 31, 2002 shareholders' equity was $51,023,000, an increase
of $4,680,000 or 10.1% over 2001. Shareholders' equity was $46,523,000 in 2001,
an increase of $3,395,000 or 7.9% over 2000. The increases were primarily
attributable to retention of net income after payment of cash dividends of
$1,413,000 in 2002, $2,272,000 in 2001 and $2,673,000 in 2000.
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.
36
At year-end 1990, the FDIC also adopted a leverage ratio requirement.
This ratio supplements the risk-based capital ratios and is defined as Tier 1
capital divided by quarterly average assets during the reporting period. The
requirement established a minimum leverage ratio of 3.0% for the highest rated
banks and ratios of 100 to 200 basis points higher for most banks. Furthermore,
in 1993, the FDIC began assessing risk-based deposit insurance assessments based
on financial institutions' capital resources and "management strength", as
mandated by the FDIC Improvement Act of 1991. To qualify for the lowest
insurance premiums as indicated in the following table, "well-capitalized"
financial institutions must maintain risk-based Tier 1 and total capital ratios
of at least 6.0% and 10.0% respectively. "Well-capitalized financial
institutions must also maintain a leverage ratio equal to or exceeding 5.0%.
The following table shows the risk-based capital ratios and the leverage ratios
at December 31, 2002, 2001 and 2000.
Minimum "Well
Capitalized"
Risk-Based Capital Ratios 2002 2001 2000 Requirements
------------------------- ----------- ----------- ----------- ---------------
Tier 1 Capital 13.92% 12.98% 14.54% > 6.00%
-
Total Capital 14.87% 13.98% 15.67% > 10.00%
-
Leverage Ratios 12.16% 11.41% 11.28% > 5.00%
-
Liquidity
- ---------
The Company's primary source of liquidity on a stand-alone basis is
dividends from the Bank. The payment of dividends by the Bank is subject to
regulatory restrictions.
Liquidity is a measure of the Company's ability to convert assets into
cash with minimum loss. Liquidity consists of cash and due from other banks
accounts, including time deposits, Federal Funds sold, Securities
Available-for-Sale and Securities Held-to-Maturity. Securities Held-to-Maturity
are only included if they are within three months of maturity or most likely
call date. The Company's policy is to maintain a liquidity ratio of 20% or
greater of total assets. As of December 31, 2002, the Company's primary
liquidity was 23.93%, compared to 22.11% in 2001. The ratio increased primarily
from a $10,652,000 increase in Securities Available-for Sale. 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 64% of average total assets of
$411,097,000 for the year ended December 31, 2002, compared to 61% of total
average assets of $401,412,000 for the year ended December 31, 2001.
37
As of December 31, 2002, the Company had contractual obligations and
other commercial commitments totaling approximately $62,577,000. The following
table sets forth the Company's contractual obligations and other commercial
commitments as of December 31, 2002. These obligations and commitments will be
funded primarily by loan repayments and the Company's liquidity sources, such as
cash and due from other banks, federal funds sold, securities available for
sale, as well as time deposits.
Payments Due by Period
(In thousands)
1 year Over 1 to Over 3 to Over
Contractual Obligations Total or less 3 years 5 years 5 years
---------------------------------- -------- -------- -------- -------- --------
Operating Leases $ 1,029 $ 316 $ 301 $ 228 $ 184
Other Long-Term Obligations 78 78 -- -- --
-------- -------- -------- -------- --------
Total Contractual Cash Obligations $ 1,107 $ 394 $ 301 $ 228 $ 184
======== ======== ======== ======== ========
Amounts of Commitments Expiration 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 $ 30,966 $ 23,671 $ 2,081 $ 5,100 $ 114
Standby Letters of Credit 2,557 2,457 -- 100 --
Guarantees -- -- -- -- --
Other Commercial Commitments 27,947 27,947 -- -- --
-------- -------- -------- -------- --------
Total Commercial Commitments $ 61,470 $ 54,075 $ 2,081 $ 5,200 $ 114
======== ======== ======== ======== ========
The largest component of the Company's earnings is net income, which
can fluctuate widely when significant interest rates movements occur, as was the
case in 2001, with its succession of prime lending cuts. There was a further 50
basis point cut at the end of December 2002. 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
38
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. Management believes the Company's liquidity sources at
December 31, 2002 were adequate to meet its operating needs in 2003 and ongoing
forward 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, which show the effect of the significant series of interest
rate adjustments throughout 2001, and the further adjustment in 2002.
Return on Equity and Assets
(Key financial ratios are computed
on average balances)
Year Ended December 31,
------------------------------------
2002 2001 2000
---------- ---------- ----------
Return on average assets 1.17% 1.30% 1.97%
Return on average equity 9.87% 11.43% 17.42%
Dividend payout ratio 29.35% 43.38% 37.50%
Average equity to assets ratio 11.86% 11.41% 11.31%
39
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
Interest Rate Risk
- ------------------
Closely related to the concept of liquidity is the concept of interest
rate sensitivity (i. e., the extent to which assets and liabilities are
sensitive to changes in interest rates). Interest rate sensitivity is often
measured by the extent to which mismatches or "gaps" occur in the repricing of
assets and liabilities within a given time period. Gap analysis is used to
quantify such mismatches. A "positive" gap results when the amount of earning
assets repricing within a given time period exceeds the amount of
interest-bearing liabilities repricing within that time period. A "negative" gap
results when the amount of interest-bearing liabilities repricing within a given
time period exceeds the amount of earning assets repricing within such time
period.
In general, a financial institution with a positive gap in relevant
time periods will benefit from an increase in market interest rates and will
experience erosion in net interest income if such rates fall. Likewise, a
financial institution with a negative gap in relevant time periods will normally
benefit from a decrease in market interest rates and will be adversely affected
by an increase in rates. By maintaining a balanced interest rate sensitivity
position, where interest rate sensitive assets roughly equal interest sensitive
liabilities in relevant time periods, interest rate risk can be limited.
As a financial institution, the Company's potential interest rate
volatility is a primary component of its market risk. Fluctuations in interest
rates will ultimately impact the level of income and expense recorded on a large
portion of the Company's assets and liabilities, and the market value of all
interest-earning assets, other than those that possess a short-term maturity.
Based upon the nature of the Company's operations, the Company is not subject to
foreign currency or commodity price risk. The Company does not own any trading
assets and does not have any hedging transactions in place, such as interest
rate swaps and caps.
The Company's Board of Directors has adopted an Asset/Liability policy
designed to stabilize net interest income and preserve capital over a broad
range of interest rate movements. This policy outlines guidelines and ratios
dealing with, among others, liquidity, volatile liability dependence, investment
portfolio composition, loan portfolio composition, loan-to-deposit ratio and gap
analysis ratio. The Board of Directors monitors the Company's performance as
compared to Asset/Liability Policy. In addition, to effectively administer the
Asset/Liability Policy and to monitor exposure to fluctuations in interest
rates, the Company maintains an Asset/Liability Committee, consisting of the
Chief Executive Officer, Chief Financial Officer, Chief Lending Officer, Branch
Administrator, and Controller. This committee meets monthly to review the
Company's lending and deposit-gathering activities, to review competitive
interest rates, to develop strategies to implement the Asset/Liability Policy
and to respond to market conditions.
The Company monitors and controls interest rate risk through a variety
of techniques, including use of traditional interest rate sensitivity analysis
(also known as "gap analysis") and
40
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.
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, 2002. 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, 2002
---------------------------------------------------------------------------------------
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 $ 2,395 $ -- $ -- $ -- $ -- $ 2,395
Securities 5,128 9,362 42,872 18,601 -- 75,963
Loans 244,259 23,247 5,363 13,255 2,161 288,285
----------- ----------- ----------- ----------- ----------- -----------
Total interest earning assets 251,782 32,609 48,235 31,856 2,161 366,643
----------- ----------- ----------- ----------- ----------- -----------
Cash and due from banks -- -- -- -- 17,804 17,804
Allowance for loan losses -- -- -- -- (3,396) (3,396)
Other Assets -- -- -- -- 20,783 20,783
----------- ----------- ----------- ----------- ----------- -----------
Total assets $ 251,782 $ 32,609 $ 48,235 $ 31,856 $ 37,352 $ 401,834
=========== =========== =========== =========== =========== ===========
41
Interest bearing liabilities:
Demand, interest bearing $ 52,480 $ -- $ -- $ -- $ -- $ 52,480
Savings and money market 116,879 -- -- -- -- 116,879
Time deposits 37,318 36,394 15,840 -- -- 89,552
Fed funds purchased and
Other borrowed money 78 -- -- -- -- 78
----------- ----------- ----------- ----------- ----------- -----------
Total interest bearing liabilities 206,755 36,394 15,840 -- -- 258,989
----------- ----------- ----------- ----------- ----------- -----------
Noninterest demand deposits -- -- -- -- 88,495 88,495
Other liabilities -- -- -- -- 3,147 3,147
Stockholders' equity -- -- -- -- 51,203 51,203
----------- ----------- ----------- ----------- ----------- -----------
Total liabilities and
Stockholders' equity $ 206,755 $ 36,394 $ 15,840 $ -- $ 142,845 $ 401,834
=========== =========== =========== =========== =========== ===========
Interest rate sensitivity GAP $ 45,027 ($ 3,785) $ 32,395 $ 31,856 ($ 105,493) $ --
=========== =========== =========== =========== =========== ===========
Cumulative interest rate
sensitivity GAP $ 45,027 $ 41,242 $ 73,637 $ 105,493 $ -- $ --
Cumulative interest rate
sensitivity GAP ratio 17.88% 14.50% 22.14% 28.94% -- --
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 an estimate of the Company's
net portfolio at December 31, 2002, using current discount rates, and an
estimate of net interest income for 2003 assuming that both interest rates and
the Company's interest-sensitive assets and liabilities remain at December 31,
2002 levels. The "rate shock" information in the table shows estimates of net
portfolio value at December 31, 2002 and net interest income for 2002 assuming
fluctuations or "rate shocks" of minus 50 and 100 basis points and plus 100 and
200 basis points. Minus 200 basis points not used because it would be greater
than the Federal Funds rate. Rate shocks assume that current interest rates
change immediately. The information set forth in the following table is based on
significant estimates and assumptions, and constitutes a forward-looking
statement within the meaning of that term set forth in Rule 173 of the
Securities Act of 1933 and Rule 3-6 of the Securities Exchange Act of 1934.
42
Market Risk in Securities
(Amount in thousands) Interest Rate Shock
At December 31, 2002
Available for Sale securities
Rates Decline Rates Increase
------------------ --------------------
Rate change (0.5%) (1%) Current +1% +2%
Unrealized gain (loss) $ 3,162 $ 3,917 $ 2,406 $ 895 ($616)
Change from current $ 756 $ 1,511 ($1,511) ($3,022)
Market Risk on Net Interest Income
(Amounts in thousands) At December 31, 2002
Rates Decline Rates Increase
------------------ --------------------
Rate change (0.5%) (1%) Current +1% +2%
Change in net interest income $21,209 $20,431 $21,871 $22,890 $23,909
Change from current ($662) ($1,440) $ 1,019 $ 2,038
43
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
INDEX TO FINANCIAL STATEMENTS Page
----
Independent Auditors' Report................................................. 45
Consolidated Balance Sheets, December 31, 2002 and 2001...................... 46
Consolidated Statements of Earnings for the years ended
December 31, 2002, 2001 and 2000............................................. 47
Consolidated Statements of Stockholders' Equity and Comprehensive
Income for the years ended December 31, 2002, 2001 and 2000.................. 48
Consolidated Statements of Cash Flows for the years ended December 31,
2002, 2001 and 2000.......................................................... 49
Notes to Consolidated Financial Statements................................... 50
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.
44
Independent Auditors' Report
Board of Directors
FNB Bancorp:
We have audited the accompanying consolidated balance sheet of FNB Bancorp and
subsidiary as of December 31, 2002 and the related consolidated statements of
earnings, stockholders' equity and comprehensive income, and cash flows for the
year then ended. These financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 2002 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of FNB Bancorp
and subsidiary as of December 31, 2002 and the results of their operations and
their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
San Francisco, California
February 28, 2003
45
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
FNB Bancorp and Subsidiary
We have audited the accompanying balance sheet of FNB Bancorp and Subsidiary
(formerly First National Bank of Northern California) as of December 31, 2001,
and the related statements of earnings, stockholders' equity and comprehensive
income and cash flows for each of two years in the period ended December 31,
2001. These financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FNB Bancorp and Subsidiary as
of December 31, 2001, and the results of their operations and their cash flows
for each of the two years in the period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States of America.
/s/ Grant Thornton LLP
San Francisco, California
January 31, 2002
46
FNB BANCORP AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2002 and 2001
Assets 2002 2001
------------ ------------
Cash and due from banks $ 17,804,000 22,493,000
Federal funds sold 2,395,000 --
------------ ------------
Cash and cash equivalents 20,199,000 22,493,000
Securities available-for-sale 75,963,000 65,311,000
Loans, net 284,889,000 288,067,000
Bank premises, equipment, and leasehold improvements 11,280,000 11,655,000
Accrued interest receivable and other assets 9,503,000 9,862,000
------------ ------------
$401,834,000 397,388,000
============ ============
Liabilities and Stockholders' Equity
Deposits:
Demand, noninterest bearing $ 88,495,000 87,982,000
Demand, interest bearing 52,480,000 55,357,000
Savings 116,879,000 98,891,000
Time 89,552,000 101,849,000
------------ ------------
Total deposits 347,406,000 344,079,000
Federal funds purchased -- 2,100,000
Accrued expenses and other liabilities 3,225,000 4,686,000
------------ ------------
Total liabilities 350,631,000 350,865,000
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock, no par value; authorized 10,000,000 shares;
issued and outstanding 2,437,000 shares 26,492,000 --
Common stock, $1.25 par value; authorized 10,000,000 shares;
issued and outstanding 2,319,000 shares -- 2,899,000
Additional paid-in capital -- 20,497,000
Retained earnings 22,907,000 22,546,000
Accumulated other comprehensive income 1,804,000 581,000
------------ ------------
Total stockholders' equity 51,203,000 46,523,000
------------ ------------
$401,834,000 397,388,000
============ ============
See accompanying notes to consolidated financial statements
47
FNB BANCORP AND SUBSIDIARY
Consolidated Statements of Earnings
Years ended December 31, 2002, 2001, and 2000
2002 2001 2000
----------- ----------- -----------
Interest income:
Interest and fees on loans $22,664,000 26,024,000 25,811,000
Interest and dividends on securities 1,794,000 2,760,000 2,957,000
Interest on tax-exempt securities 1,461,000 1,449,000 1,427,000
Federal funds sold 240,000 611,000 667,000
----------- ----------- -----------
Total interest income 26,159,000 30,844,000 30,862,000
----------- ----------- -----------
Interest expense:
Interest on deposits and other 4,273,000 7,924,000 8,191,000
Interest expense on other borrowings 15,000 11,000 --
----------- ----------- -----------
Total interest expense 4,288,000 7,935,000 8,191,000
----------- ----------- -----------
Net interest income 21,871,000 22,909,000 22,671,000
Provision for loan losses 150,000 300,000 425,000
----------- ----------- -----------
Net interest income after provision
for loan losses 21,721,000 22,609,000 22,246,000
----------- ----------- -----------
Noninterest income:
Service charges 1,989,000 1,657,000 1,661,000
Credit card fees 921,000 913,000 975,000
Gain on sale of bank premises, equipment, and
leasehold improvements 14,000 -- 701,000
Gain (loss) on sales of securities 121,000 58,000 (1,000)
Other 263,000 379,000 444,000
----------- ----------- -----------
Total noninterest income 3,308,000 3,007,000 3,780,000
----------- ----------- -----------
Noninterest expense:
Salaries and employee benefits 10,604,000 10,532,000 9,453,000
Occupancy expense 1,246,000 1,290,000 1,122,000
Equipment expense 2,008,000 1,736,000 1,453,000
Advertising expense 324,000 384,000 428,000
Data processing expense 385,000 330,000 360,000
Professional fees 1,126,000 731,000 468,000
Director expense 150,000 150,000 132,000
Surety insurance 400,000 303,000 309,000
Telephone, postage, supplies 1,073,000 1,014,000 973,000
Bankcard expenses 787,000 735,000 693,000
Other 602,000 706,000 586,000
----------- ----------- -----------
Total noninterest expense 18,705,000 17,911,000 15,977,000
----------- ----------- -----------
Earnings before income tax expense 6,324,000 7,705,000 10,049,000
Income tax expense 1,510,000 2,468,000 2,921,000
----------- ----------- -----------
Net earnings $ 4,814,000 5,237,000 7,128,000
=========== =========== ===========
Earnings per share data:
Basic $ 1.98 2.15 2.93
Diluted 1.97 2.15 2.92
Weighted average shares outstanding:
Basic weighted average shares outstanding 2,436,000 2,435,000 2,435,000
Diluted weighted average shares outstanding 2,445,000 2,441,000 2,437,000
See accompanying notes to consolidated financial statements.
48
FNB BANCORP AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years ended December 31, 2002, 2001, and 2000
Accumulated
Common stock Additional other
------------------------ paid-in Retained comprehensive Comprehensive
Shares Amount capital earnings (loss ) income income Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999 2,104,000 $ 2,630,000 14,963,000 20,929,000 (1,015,000) 37,507,000
Comprehensive income:
Net earnings -- -- -- 7,128,000 -- 7,128,000 7,128,000
Other comprehensive income:
Unrealized gain on securities,
net of tax of $815,000 -- -- -- -- 1,166,000 1,166,000 1,166,000
-----------
Comprehensive income $ 8,294,000
===========
Cash dividends of $0.12 per share
quarterly -- -- -- (1,010,000) -- (1,010,000)
Cash dividends of $0.75 per share -- -- -- (1,657,000) -- (1,657,000)
Stock dividend of 5% 105,000 131,000 2,847,000 (2,978,000) -- --
Cash on fractional shares related
to stock dividend -- -- -- (7,000) -- (7,000)
Stock options exercised -- -- 1,000 -- -- 1,000
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2000 2,209,000 2,761,000 17,811,000 22,405,000 151,000 43,128,000
Comprehensive income:
Net earnings -- -- -- 5,237,000 -- 5,237,000 5,237,000
Other comprehensive income:
Unrealized gain on securities,
net of tax of $166,000 -- -- -- -- 430,000 430,000 430,000
-----------
Comprehensive income $ 5,667,000
===========
Cash dividends of $0.12 per share
quarterly -- -- -- (1,060,000) -- (1,060,000)
Cash dividends of $0.52 per share -- -- -- (1,206,000) -- (1,206,000)
Stock dividend of 5% 110,000 138,000 2,686,000 (2,824,000) -- --
Cash on fractional shares related
to stock dividend -- -- -- (6,000) -- (6,000)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2001 2,319,000 2,899,000 20,497,000 22,546,000 581,000 46,523,000
FNB Bancorp, 1-for-1 exchange
of Bank stock -- 20,497,000 (20,497,000) -- -- --
Comprehensive income:
Net earnings -- -- -- 4,814,000 -- 4,814,000 4,814,000
Other comprehensive income:
Unrealized gain on securities,
net of tax of $328,000 -- -- -- -- 1,223,000 1,223,000 1,223,000
-----------
Comprehensive income $ 6,037,000
===========
Cash dividends of $0.12 per share
quarterly -- -- -- (1,114,000) -- (1,114,000)
Cash dividends of $0.12 per share -- -- -- (292,000) -- (292,000)
Stock dividend of 5% 116,000 3,040,000 -- (3,040,000) -- --
Cash on fractional shares related
to stock dividend -- -- -- (7,000) -- (7,000)
Stock options exercised 2,000 56,000 -- -- -- 56,000
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2002 2,437,000 $26,492,000 -- 22,907,000 1,804,000 51,203,000
=========== =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
49
FNB BANCORP AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 2002, 2001, and 2000
2002 2001 2000
------------ ------------ ------------
Cash flows from operating activities:
Net earnings $ 4,814,000 5,237,000 7,128,000
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 1,735,000 1,557,000 1,169,000
(Gain) loss on sale of securities (121,000) (58,000) 1,000
Gain on sale of bank premises, equipment, and
leasehold improvements (14,000) -- (701,000)
Provision for loan losses 150,000 300,000 425,000
Deferred taxes 183,000 432,000 (365,000)
Changes in assets and liabilities:
Accrued interest receivable and other assets 176,000 (1,144,000) (2,005,000)
Accrued expenses and other liabilities (1,766,000) (683,000) 1,624,000
------------ ------------ ------------
Net cash provided by operating activities 5,157,000 5,641,000 7,276,000
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from matured securities available-for-sale 29,682,000 22,140,000 16,290,000
Purchases of securities available-for-sale (40,895,000) (23,784,000) (30,893,000)
Proceeds from sale of securities available-for-sale 2,078,000 24,236,000 --
Proceeds from matured securities held-to-maturity -- -- --
Net decrease (increase) in loans 3,028,000 (58,699,000) 6,968,000
Proceeds from sales of bank premises, equipment, and
leasehold improvements 14,000 8,000 1,006,000
Purchases of bank premises, equipment, and leasehold
improvements (1,153,000) (2,181,000) (1,415,000)
------------ ------------ ------------
Net cash used in investing activities (7,246,000) (38,280,000) (8,044,000)
------------ ------------ ------------
Cash flows from financing activities:
Net increase in demand and savings deposits 15,624,000 15,215,000 35,393,000
Net decrease in time deposits (12,297,000) (1,593,000) (10,297,000)
Net (decrease) increase in federal funds purchased (2,100,000) 2,100,000 --
Cash dividends paid (1,413,000) (2,272,000) (2,674,000)
Issuance of common stock 56,000 -- 1,000
Payments on capital note payable (75,000) (71,000) (76,000)
------------ ------------ ------------
Net cash (used in) provided by
financing activities (205,000) 13,379,000 22,347,000
------------ ------------ ------------
Net (decrease) increase in cash and cash
equivalents (2,294,000) (19,260,000) 21,579,000
Cash and cash equivalents at beginning of year 22,493,000 41,753,000 20,174,000
------------ ------------ ------------
Cash and cash equivalents at end of year $ 20,199,000 22,493,000 41,753,000
============ ============ ============
Additional cash flow information:
Interest paid $ 4,763,000 8,099,000 7,832,000
Income taxes paid 530,000 2,932,000 3,927,000
Noncash - stock dividend 3,040,000 2,824,000 2,978,000
See accompanying notes to consolidated financial statements
50
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(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.
In preparing financial statements in conformity with generally accepted
accounting principles, management is required 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 1(f)). 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
significant intercompany balances and transactions have been
eliminated.
(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. Included in cash and cash equivalents are
amounts restricted for the Federal Reserve requirement of
approximately $539,000 and $10,573,000 at December 31, 2002 and
2001, 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.
51 (Continued)
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
Held-to-maturity securities are recorded at amortized cost,
adjusted for amortization or accretion of premiums or discounts.
Available-for-sale securities are recorded at fair value with
unrealized holding gains and 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. Premiums and
discounts are amortized or accreted over the life of the related
held-to-maturity or available-for-sale security as an adjustment
to yield 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 does not
hold any derivatives at December 31, 2002 and 2001.
(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.
52 (Continued)
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
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 or 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.
(f) Allowance for Loan Losses
The allowance for loan losses is established through a provision
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 losses inherent in
existing loans, standby letters of credit, overdrafts and
commitments to extend credit based on evaluations of
collectibility and prior loss experience. The evaluations take
into consideration such factors as changes in the nature and
volume of the portfolio, overall portfolio quality, loan
concentrations, specific problem loans, commitments, and current
and anticipated economic conditions that may affect the borrowers'
ability to pay. While management uses these evaluations to
determine the level of the allowance for loan losses, future
provisions may be necessary based on changes in the factors used
in the evaluations.
Material estimates relating to the determination of the allowance
for loan losses are particularly susceptible to significant change
in the near term. Management believes that the allowance for loan
losses is adequate. While management uses available information to
recognize losses on loans, future additions to the allowance may
be necessary based on changes in economic conditions. In addition,
the banking regulators, as an integral part of its examination
process, periodically reviews 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) Depreciation and Amortization
Depreciation is provided by the straight-line method over the
estimated service lives of related assets ranging from 2 to 25
years. Leasehold improvements are amortized over the lives of the
respective leases or the service lives of the improvements,
whichever is shorter.
53 (Continued)
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(h) Cash Dividends
The Company's ability to pay cash dividends is subject to
restrictions set forth in the California General Corporation Law.
Funds for payment of any cash dividends by the Company would be
obtained from its investments as well as dividends and/or
management fees from First National Bank. First National Bank's
ability to pay cash dividends is subject to restrictions imposed
under the National Bank Act and regulations promulgated by the
Office of the Comptroller of the Currency.
(i) 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.
(j) Stock Option Plan
Stock options issued under the Company's stock option plan are
accounted for using the intrinsic value method at the grant date,
under which compensation expense is recorded on the date of grant
only if the current market price of the underlying stock exceeds
the exercise price, and no compensation cost is recognized for
them. The Bank has elected to continue with the accounting
methodology in Accounting Principles Board Opinion No. 25 and, as
a result, has provided pro forma disclosures of net earnings and
earnings per share and other disclosures, as if the fair value
based method of accounting had been applied as follows:
2002 2001 2000
------------ ------------ ------------
Net earnings As reported $ 4,814,000 5,237,000 7,128,000
Deduct: Total stock-based employee
compensation expense determined
under the fair value based
method for all awards, net of
related tax effects (10,000) (7,000) (6,000)
------------ ------------ ------------
Net earnings Pro forma $ 4,804,000 5,230,000 7,122,000
============ ============ ============
Basic earnings per share As reported 1.98 2.15 2.93
Pro forma 1.97 2.15 2.92
Diluted earnings per share As reported 1.97 2.15 2.92
Pro forma 1.96 2.14 2.92
54 (Continued)
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(k) Earnings Per Share
Earnings per common share (EPS) is computed based on the weighted
average number of common shares outstanding during the period.
Basic EPS excludes dilution and is computed by dividing net
earnings by the weighted average of common shares outstanding.
Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised
or converted into common stock. Retroactive recognition has been
given for all periods presented for the issuance of stock
dividends.
Earnings per share have been computed based on the following:
Year ended December 31
------------------------------------
2002 2001 2000
---------- ---------- ----------
Net earnings $4,814,000 5,237,000 7,128,000
Average number of shares outstanding 2,436,000 2,435,000 2,435,000
Effective of dilutive options 9,000 6,000 2,000
---------- ---------- ----------
Average number of shares outstanding used
to calculate diluted earnings per share 2,445,000 2,441,000 2,437,000
========== ========== ==========
Options to purchase 18,811 shares of common stock were not
included in the computation of diluted EPS because the options'
exercise price was greater than the average market price of the
common shares. The options, which expire on May 13, 2008, were
still outstanding at December 31, 2002.
(l) Fair Values of Financial Instruments
The notes to financial statements include various estimated fair
value information as of December 31, 2002 and 2001. 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
considerations, which vary widely among different financial
institutions and which are subject to change.
(m) Income Tax Credits
At December 31, 2002, the Bank had a $2,125,000 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
55 (Continued)
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
provide a constant effective yield over the period that tax
credits are allocated to the Company. The effective yield is the
internal rate of return on the investment, based on the cost of
the investment and the guaranteed tax credits allocated to the
Company. Any expected residual value of the investment was
excluded from the effective yield calculation. Cash received from
operations of the limited partnership or sale of the properties,
if any, will be included in earnings when realized or realizable.
These investments are included in other securities in securities
available-for-sale.
(n) Reclassifications
Certain prior year information has been reclassified to conform to
current year presentation.
(2) Restricted Cash Balance
Cash and due from banks include 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, 2002 and 2001, the Bank maintained deposits in excess
of the FRB reserve requirement.
(3) Securities Available-for-Sale
The amortized cost and fair value of securities available-for-sale are as
follows:
Amortized Unrealized Unrealized
cost gains losses Fair value
----------- ----------- ----------- -----------
December 31, 2002:
Obligations of U.S. Government
Agencies $31,759,000 391,000 -- 32,150,000
Obligations of states and
political subdivisions 29,595,000 1,799,000 (2,000) 31,392,000
Corporate debt 10,078,000 223,000 (5,000) 10,296,000
Other securities 2,125,000 -- -- 2,125,000
----------- ----------- ----------- -----------
$73,557,000 2,413,000 (7,000) 75,963,000
=========== =========== =========== ===========
56 (Continued)
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
Amortized Unrealized Unrealized
cost gains losses Fair value
----------- ----------- ----------- -----------
December 31, 2001:
U.S. Treasury Bonds $ 1,000,000 29,000 -- 1,029,000
Obligations of U.S. Government
Agencies 26,994,000 388,000 -- 27,382,000
Obligations of states and
political subdivisions 29,119,000 395,000 (53,000) 29,461,000
Corporate debt 5,049,000 97,000 (3,000) 5,143,000
Other securities 2,296,000 -- -- 2,296,000
----------- ----------- ----------- -----------
$64,458,000 909,000 (56,000) 65,311,000
=========== =========== =========== ===========
The amortized cost and fair value of debt securities at December 31,
2002, 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 Fair
cost value
----------- -----------
Available-for-sale:
Due in one year or less $14,345,000 14,489,000
Due after one year through five years 41,604,000 42,873,000
Due after five years through ten years 14,463,000 15,390,000
Due after ten years 3,145,000 3,211,000
----------- -----------
$73,557,000 75,963,000
=========== ===========
For the years ended December 31, 2002, 2001, and 2000, gross realized
gains amounted to $121,000, $284,000 and $20,000, respectively. For the
years ended December 31, 2002, 2001, and 2000, gross realized losses
amounted to $0, $226,000, and $21,000, respectively. The tax benefit
(provision) applicable to these net realized gains and losses amounted to
$(33,000), $(16,000) and $0, respectively in 2002, 2001, and 2000.
At December 31, 2002 and 2001, securities with an amortized cost and fair
value of $30,576,000 and $32,274,000 and $42,840,000 and $42,961,000,
respectively, were pledged as collateral for public deposits and for
other purposes as required by law.
As of December 31, 2002 and 2001, the Bank had investments in Federal
Reserve Bank stock classified as other assets in the accompanying balance
sheets of $702,000 and $617,000, respectively. These investments in
Federal Reserve Bank stock are carried at cost, and evaluated
periodically for impairment.
57 (Continued)
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(4) Loans, Net
Loans are summarized as follows at December 31:
2002 2001
------------- -------------
Real estate $ 211,473,000 217,650,000
Construction 32,947,000 34,016,000
Commercial 42,549,000 39,195,000
Consumer & other 2,956,000 2,600,000
------------- -------------
289,925,000 293,461,000
Allowance for loan losses (3,396,000) (3,543,000)
Net deferred loan fees (1,640,000) (1,851,000)
------------- -------------
$ 284,889,000 288,067,000
============= =============
The Bank had total impaired loans of $2,161,000 and $1,959,000 at
December 31, 2002 and 2001, respectively. The allowance for loan losses
related to the impaired loans was $2,114,000 and $225,000 as of December
31, 2002 and 2001 respectively. There were no impaired loans without a
valuation allowance as of December 31, 2002 and 2001. The average
recorded investment in impaired loans during 2002, 2001, and 2000 was
$2,063,000, $1,963,000 and $1,197,000, respectively. Interest income on
impaired loans of $379,000, $32,000, and $0 was recognized for cash
payments received in 2002, 2001, and 2000, respectively. The Bank has
nonaccrual loans of $2,161,000 and $1,964,000 at December 31, 2002 and
2001, respectively.
(5) Allowance for Loan Losses
Changes in the allowance for loan losses are summarized as follows for
the years ended December 31:
2002 2001 2000
----------- ----------- -----------
Balance, beginning of year $ 3,543,000 3,332,000 2,920,000
Loans charged off (305,000) (94,000) (23,000)
Recoveries 8,000 5,000 10,000
----------- ----------- -----------
Net loans charged off (297,000) (89,000) (13,000)
Provision for loan losses 150,000 300,000 425,000
----------- ----------- -----------
Balance, end of year $ 3,396,000 3,543,000 3,332,000
=========== =========== ===========
58 (Continued)
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(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 2002:
Balance, beginning of year $ 5,537,000
Additions 966,000
Repayments (4,768,000)
-------------
Balance, end of year $ 1,735,000
=============
(7) Bank Premises, Equipment, and Leasehold Improvements
Bank premises, equipment, and leasehold improvements are stated at cost,
less accumulated depreciation and amortization, and are summarized as
follows at December 31:
2002 2001
------------ ------------
Buildings $ 6,830,000 6,705,000
Equipment 6,809,000 5,992,000
Leasehold improvements 505,000 546,000
------------ ------------
14,144,000 13,243,000
Accumulated depreciation and amortization (6,853,000) (5,576,000)
------------ ------------
7,291,000 7,667,000
Land 3,989,000 3,988,000
------------ ------------
$ 11,280,000 11,655,000
============ ============
Depreciation expense for the years ended December 31, 2002, 2001, and
2000 was $1,354,000, $1,227,000, and $1,169,000, respectively.
59 (Continued)
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(8) Deposits
The aggregate amount of jumbo time certificates, each with a minimum
denomination of $100,000 or more, was $37,676,000 and $45,899,000 at
December 31, 2002 and 2001, respectively.
At December 31, 2002, the scheduled maturities of time certificates of
$100,000 and over are as follows:
Year ending December 31:
2003 $ 33,593,000
2004 3,033,000
2005 1,050,000
---------------
$ 37,676,000
===============
(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 operating leases provide that the Bank pay taxes,
maintenance, insurance, and other occupancy expense 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, 2002 are as follows:
Year ending December 31:
2003 $ 316,000
2004 180,000
2005 120,000
2006 117,000
2007 111,000
Thereafter 184,000
---------------
$ 1,028,000
===============
Total rent expense for operating leases was $373,000, $414,000, and
$316,000, in 2002, 2001, and 2000, respectively.
The Bank is engaged in various lawsuits either as plaintiff or defendant
in the ordinary course of business and in the opinion of management,
based upon the advice of counsel, the ultimate outcome of these lawsuits
will not have a material effect of 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, 2002, 2001, and 2000 was
$480,000, $524,000, and $750,000, respectively.
60 (Continued)
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(11) Salary Continuation and Deferred Compensation Plans
The Bank maintains a Salary Continuation Plan and Deferred Compensation
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 Salary Continuation Plan
expense for the years ended December 31, 2002, 2001, and 2000 was
$131,000, $216,000, and $221,000, 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, 2002 and 2001, the
liability included in accrued expenses and other liabilities was
$1,093,000 and $1,039,000, respectively. The Plan is a nonqualified plan
funded with bank owned life insurance policies taken on the life of the
officer. The Bank is the beneficiary and owner of the policies. The cash
surrender value of the related insurance polices as of December 31, 2002
and 2001 totaled $2,864,000 and $2,751,000, respectively.
(12) Income Taxes
The provision for income taxes for the years ended December 31, consists
of the following:
2002 2001 2000
---------- ---------- ----------
Current:
Federal $1,210,000 1,640,000 2,704,000
State 117,000 396,000 582,000
Deferred:
Federal 175,000 352,000 (369,000)
State 8,000 80,000 4,000
---------- ---------- ----------
$1,510,000 2,468,000 2,921,000
========== ========== ==========
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:
2002 2001 2000
------ ------ ------
Statutory rates 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
Tax-exempt income (11.5)% (6.1)% (4.7)%
State income taxes, net of federal
benefit 1.3% 4.4% 4.2%
Tax refund -- -- (3.9)%
Other, net (0.1)% (0.3)% (0.6)%
------ ------ ------
Effective rate 23.7% 32.0% 29.0%
====== ====== ======
61 (Continued)
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
The tax effect of temporary differences giving rise to the Bank's net
deferred tax asset is as follows:
December 31
-----------------------
2002 2001
---------- ----------
Deferred tax assets:
Allowance for loan losses $1,373,000 1,436,000
Capitalized interest on buildings 36,000 38,000
Various accruals 1,256,000 1,240,000
---------- ----------
Total deferred tax assets 2,665,000 2,714,000
---------- ----------
Deferred tax liabilities:
State income taxes 400,000 290,000
Unrealized appreciation of available-for-sale securities 602,000 351,000
Depreciation 306,000 282,000
---------- ----------
Total deferred tax liabilities 1,308,000 923,000
---------- ----------
Net deferred tax asset $1,357,000 1,791,000
========== ==========
Based upon projections for future taxable income over the next year in
which the deferred tax assets are deductible, management believes it is
more likely than not the Company will realize the benefits of these
deductible differences. There was no valuation allowance necessary at
December 31, 2002 or December 31, 2001.
(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.
62 (Continued)
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
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 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:
2002 2001
----------- -----------
Financial instruments whose contract amounts represent
credit risk:
Undisbursed loan commitments $27,947,000 34,872,000
Lines of credit 28,348,000 27,232,000
MasterCard lines 2,618,000 3,144,000
Standby letters of credit 2,557,000 2,736,000
----------- -----------
$61,470,000 67,984,000
=========== ===========
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, 2002, there were $2,170,000
issued in financial standby letters of credit and the Bank carried no
liability. The performance standby letters of credit are typically issued
to municipalities as specific performance bonds. As of December 31, 2002
there were $387,000 issued in performance standby letters of credit and
the Banks carried no liability. The terms of the guarantees will expire
primarily in 2003. The Banks have experienced no draws on these letters
of credit, and do not expect to in the future; however, should a
triggering event occur, the Banks either have collateral in excess of the
letter of credit or imbedded agreements of recourse from the customer.
63 (Continued)
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
The following methods and assumptions were used by the Company.
(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 Instruments
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).
The carrying amounts for variable-rate, fixed-term money market
accounts and certificates of deposit approximate their fair values
at the reporting date. Fair values for fixed-rate certificates of
deposit are estimated using a discounted cash flow calculation
that applies interest rates currently being offered on
certificates to 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.
64 (Continued)
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
The following table provides summary information on the estimated fair
value of financial instruments at December 31, 2002:
Carrying Fair
amount value
------------ ------------
Financial assets:
Cash and cash equivalents $ 20,199,000 20,199,000
Securities available for sale 75,963,000 75,963,000
Loans, net 284,889,000 288,346,000
Financial liabilities:
Deposits 347,406,000 348,315,000
Off-balance-sheet liabilities:
Undisbursed loan commitments, lines of credit, Mastercard
line, and standby letters of credit -- 750,000
The following table provides summary information on the estimated fair
value of financial instruments at December 31, 2001:
Carrying Fair
amount value
------------ ------------
Financial assets:
Cash and cash equivalents $ 22,493,000 22,493,000
Securities available for sale 65,311,000 65,311,000
Loans, net 288,067,000 287,250,000
Financial liabilities:
Deposits 344,079,000 343,996,000
Federal funds purchased 2,100,000 2,100,000
Off-balance-sheet liabilities:
Undisbursed loan commitments, lines of credit, Mastercard
line, and standby letters of credit -- 830,000
65 (Continued)
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
The carrying amounts include $2,161,000 of nonaccrual loans (loans that
are not accruing interest) at December 31, 2002 only. 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 assets. As such,
these assets 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 assets:
2002 2001
------------- -------------
Aggregate carrying amount $ 2,161,000 1,959,000
Effective rate 6.67% 8.07%
Average term to maturity 18 months 32 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.
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 consolidated 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.
66 (Continued)
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
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 I capital (as
defined in the regulations) to risk-weighted assets (as defined), and of
Tier I capital (as defined) to average assets (as defined). Management
believes, as of December 31, 2002, that the Company and the Bank have met
all capital adequacy requirements to which they are subject.
As of December 31, 2002, the most recent notification from the regulatory
agencies categorized the Company and each of the Banks as well
capitalized under the regulatory framework for prompt corrective action.
To be categorized as well capitalized the Company and the Banks must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the table. There are no conditions or events since
that notification that management believes have changed the Company's or
any of the Banks' categories.
The Company's actual capital amounts and ratios are also presented in the
following table:
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
-------------------------- --------------------------- ---------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ------------ ------------ ------------ ------------ ------------
December 31, 2002:
Total risk-based capital
(to Risk Weighted
Assets) $ 52,787,000 14.87% $ 28,391,000 > 8.0% $ 35,489,000 > 10.0%
- -
Tier I capital (to Risk
Weighted Assets) 49,391,000 13.92 14,195,000 4.0 21,293,000 6.0
Tier I capital
(to Average Assets) 49,391,000 12.16 16,247,000 4.0 20,309,000 5.0
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
--------------------------- --------------------------- ---------------------------
Amount Ratio Amount Ratio Amount Ratio
------------- ------------ ------------ ------------- ------------ -------------
December 31, 2001:
Total risk-based capital
(to Risk Weighted
Assets) $ 49,444,000 13.98% $ 28,271,000 > 8.0% $ 35,339,000 > 10.0%
Tier I capital (to Risk - -
Weighted Assets) 45,901,000 12.98 14,136,000 4.0 21,204,000 6.0
Tier I capital
(to Average Assets) 45,901,000 11.41 16,019,000 4.0 20,024,000 5.0
67 (Continued)
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(16) Stock Option Plan
In 1997, the Company adopted an incentive employee stock option plan,
known as the 1997 FNB Bancorp Plan. In 2002, the Company adopted an
incentive employee option plan, known as the 2002 FNB Bancorp Plan. The
plans allow the Company to grant options to employees of up to 255,256
shares, which includes effect of stock dividends, of common stock.
Options currently outstanding become exercisable in one to five years
from the grant date, based on a vesting schedule of 20% per year and
expire 10 years after the grant date. The options exercise price is the
fair value of the options at the grant date.
The fair value of each option granted is estimated on the date of grant
using the fair value method with the following weighted average
assumptions used for grants in 2002; dividend yield of 7.4% for the year;
risk-free interest rate of 3.8%; expected volatility of 12%; expected
life of 10 years; and weighted average fair value of $0.40. The
assumptions used for grants in 2001; dividend yield of 9% for the year;
risk-free interest rate of 5.4%; expected volatility of 6.8%; expected
life of 10 years; and weighted average fair value of $0.49. The
assumptions used for grants in 2000; dividend yield of 10% for the year;
risk-free interest rate of 6.1%; expected volatility of 11%; expected
life of 10 years; and weighted average fair value of $0.83.
Weighted
average
exercise
Shares price
---------- ----------
2002 FNB Bancorp Plan:
Outstanding at January 1, 2001 -- $ --
Granted 32,503 26.19
Expired/forfeited (367) 26.19
---------- ----------
Outstanding at December 31, 2002 32,136 $ 26.19
========== ==========
Options exercisable at December 31, 2002 1,572 $ 26.19
========== ==========
The following information applies to options outstanding at December 31,
2002:
Range of exercise prices $ 26.19
Options outstanding 32,136
Weighted average remaining contractual life (years) 9.6
68 (Continued)
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
A summary of the status of the Company's fixed stock option plans as of
December 31, 2002, 2001, 2000 is presented below:
Weighted
average
exercise
Shares price
---------- ----------
1997 FNB Bancorp Plan:
Outstanding at January 1, 2000 49,836 $ 24.05
Granted 34,728 21.65
Exercised (22) 22.99
Expired/forfeited (10,821) 23.76
---------- ----------
Outstanding at December 31, 2000 73,721 22.94
Granted 34,415 22.72
Expired/forfeited (3,511) 23.50
---------- ----------
Outstanding at December 31, 2001 104,625 22.91
Exercised (2,529) 22.46
Expired/forfeited (17,514) 23.17
---------- ----------
Outstanding at December 31, 2002 84,582 $ 22.91
========== ==========
Options exercisable at December 31, 2002 40,542 23.26
Options exercisable at December 31, 2001 29,199 23.54
Options exercisable at December 31, 2000 14,649 24.06
The following information applies to options outstanding at December 31,
2002:
Range of exercise prices $ 21.71 - 23.44
Options outstanding 84,582
Weighted average remaining contractual life (years) 7.1
69 (Continued)
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(17) Quarterly Data (Unaudited)
Quarterly
-------------------------------------------------
First Second Third Fourth
---------- ---------- ---------- ----------
2002:
Interest income $6,528,000 6,555,000 6,516,000 6,560,000
Interest expense 1,167,000 1,143,000 1,090,000 888,000
---------- ---------- ---------- ----------
Net interest income 5,361,000 5,412,000 5,426,000 5,672,000
Provision for loan losses 75,000 75,000 -- --
---------- ---------- ---------- ----------
Net interest income, after provision
for loan losses 5,286,000 5,337,000 5,426,000 5,672,000
Non-interest income 686,000 790,000 905,000 927,000
Non-interest expense 4,870,000 4,804,000 4,514,000 4,517,000
---------- ---------- ---------- ----------
Income before income taxes 1,102,000 1,323,000 1,817,000 2,082,000
Provision for income taxes 336,000 308,000 457,000 409,000
---------- ---------- ---------- ----------
Net earnings $ 766,000 1,015,000 1,360,000 1,673,000
========== ========== ========== ==========
Basic earnings per share $ 0.31 0.42 0.56 0.69
Diluted earnings per share 0.31 0.42 0.56 0.68
Quarterly
-------------------------------------------------
First Second Third Fourth
---------- ---------- ---------- ----------
2001:
Interest income $8,052,000 8,119,000 7,928,000 6,745,000
Interest expense 2,292,000 2,239,000 1,945,000 1,459,000
---------- ---------- ---------- ----------
Net interest income 5,760,000 5,880,000 5,983,000 5,286,000
Provision for loan losses 75,000 75,000 75,000 75,000
---------- ---------- ---------- ----------
Net interest income, after provision
for loan losses 5,685,000 5,805,000 5,908,000 5,211,000
Non-interest income 847,000 712,000 750,000 698,000
Non-interest expense 4,239,000 4,505,000 4,346,000 4,821,000
---------- ---------- ---------- ----------
Income before income taxes 2,293,000 2,012,000 2,312,000 1,088,000
Provision for income taxes 734,000 644,000 740,000 350,000
---------- ---------- ---------- ----------
Net earnings $1,559,000 1,368,000 1,572,000 738,000
========== ========== ========== ==========
Basic earnings per share $ 0.64 0.56 0.65 0.30
Diluted earnings per share 0.64 0.56 0.65 0.30
70 (Continued)
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(18) Recent Accounting Pronouncements
(a) SFAS No. 142, Goodwill and Other Intangible Assets
Financial Accounting Standards Board (FASB) Statement No. 142,
Goodwill and Other Intangible Assets. The Statement was adopted
effective January 1, 2002. Statement No. 142 requires that
goodwill and intangible assets with indefinite lives no longer be
amortized, but instead tested for impairment at least annually in
accordance with the provisions of Statement No. 142. Statement No.
142 also requires that intangible assets with definite useful
lives be amortized over their respective estimated useful lives to
their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The
Company does not have any goodwill and intangible assets acquired
in business combinations.
(b) SFAS 143, Accounting for Asset Retirement Obligations
FASB Statement No. 143, Accounting for Asset Retirement
Obligations. The Statement addresses the financial accounting and
reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement
costs. The Statement requires the Company to record the fair value
of an asset retirement obligation as a liability in the period in
which it incurs a legal obligation associated with the retirement
of a tangible long-lived asset. This Statement was adopted
effective June 15, 2002 and adoption is not expected to have a
material impact on the financial condition or operating results of
the Company.
(c) SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets
FASB Statement No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets. Statement No. 144 addresses financial
accounting and reporting for the impairment or disposal of
long-lived assets. The provisions of this Statement were adopted
effective January 1, 2002. Adoption did not have a material impact
on the financial condition or operating results of the Company.
(d) SFAS No. 145, Rescissions of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections.
The provisions of this Statement related to the rescission of
Statement 4 are applicable in fiscal years beginning after May 15,
2002. The provisions of this Statement related to Statement 13 are
effective for transactions occurring after May 15, 2002. All other
provisions of this Statement are effective for financial
statements issued on or after May 15, 2002. Adoption of the
provisions applicable to the year ended December 31, 2002 did not
have a material impact on the financial condition or operating
results of the Company.
(e) SFAS No. 146, Accounting for Costs Associated with Exit or
Disposed Activities
The provisions of this Statement are effective for exit and
disposal activities that are initiated after December 31, 2002.
This Statement requires that a liability for a cost associated
with an exit or disposal activity be recognized when the liability
is incurred. The Company does not currently have plans to exit or
dispose of activities.
71 (Continued)
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(f) SFAS No. 148, Accounting for Stock-Based Compensation - Transition
and Disclosure
The provisions of this Statement amend FASB Statement No. 123,
Accounting for Stock-Based Compensation, and provide alternative
methods of transition for enterprises that elect to change to the
Statement No. 123 fair value method of accounting for stock-based
employee compensation. The Statement also amends the disclosure
requirements of Statement No. 123 to require prominent disclosures
about the method of accounting for stock-based employee
compensation and the effect of the method used on reported
results. Effective January 1, 2003, the Company adopted the fair
value recognition provisions of Statement No. 123 prospectively
for all employee awards granted, modified, or settled after
January 1, 2003.
(g) FASB Interpretation No. 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (the Interpretation)
This Interpretation addresses the disclosure to be made by a
guarantor in its interim and annual financial statements about its
obligations under guarantees. These disclosure requirements are
included in note 13 to the consolidated financial statement. The
Interpretation also requires the recognition of a liability by a
guarantor at the inception of certain guarantees.
The Interpretation requires the guarantor to recognize a liability
for the noncontingent component of the guarantee, this is the
obligation to stand ready to perform in the event that specified
triggering events or conditions occur. The initial measurement of
this liability is the fair value of the guarantee at inception.
The recognition of the liability is required even it is not
probable that payments will be required under the guarantee or if
the guarantee was issued with a premium payment or as part of a
transaction with multiple elements.
As noted above the Company has adopted the disclosure requirement
of the Interpretation (note 13) and will apply the recognition and
measurement provisions for all guarantees entered into or modified
after December 31, 2002. To date, the Company has not entered into
guarantees but has modified guarantees in the amount of $10,000
pursuant to the provisions of the Interpretation.
(h) FASB Interpretation No. 46, Consolidation of Variable Interest
Entities
Interpretation No. 46 addresses consolidation by business
enterprises of variable interest entities, which have one or both
of the following characteristics: 1) the equity investment at risk
is not sufficient to permit the entity to finance its activities
without additional financial support from other parties, or 2) the
equity investors lack one or more of the following essential
characteristics of a controlling financial interest: a) the direct
or indirect ability to make decisions about the entity's
activities through voting or similar rights, b) the obligation to
absorb the expected losses of the entity if they occur, or c) the
right to receive the expected residual returns of the entity if
they occur. The Interpretation requires existing variable interest
entities to be consolidated if those entities do not effectively
disburse risks amount parties involved. Adoption of the provisions
applicable to the year ended December 31, 2002 did not have a
material impact on the financial condition or operating results of
the Company.
72 (Continued)
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(19) Condensed Financial Information of Parent Company
The parent company-only condensed balance sheets, condensed statements of
income, and condensed statements of cash flows information are presented
as of and for the year ended December 31, 2002 as follows:
Condensed balance sheet
----------------------------------------------------------------------
Assets:
Cash and due from banks $ 117,000
Investments in subsidiary 51,295,000
Other assets 392,000
-----------
Total assets
$51,804,000
===========
Liabilities:
Other liabilities $ 601,000
Stockholders' equity 51,203,000
-----------
Total liabilities and stockholders' equity
$51,804,000
===========
Condensed statement of income
----------------------------------------------------------------------
Income:
Dividend income from subsidiary $ 1,478,000
-----------
Total income 1,478,000
-----------
Expense:
Interest expense 6,000
Other expense 177,000
-----------
Total expense
183,000
-----------
Income before income taxes and equity in
undistributed earnings of subsidiary 1,295,000
Income tax expense 309,000
-----------
Income before equity in undistributed
earnings of subsidiary 986,000
Equity in undistributed earnings of subsidiary 3,828,000
-----------
Net earnings
$ 4,814,000
===========
73 (Continued)
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
Condensed statement of cash flows
-----------------------------------------------------------------------
Net earnings $ 4,814,000
Change in other assets (392,000)
Change in other liabilities 601,000
Undistributed earnings of subsidiary (3,828,000)
-----------
Cash flows provided by operating activities 1,195,000
-----------
Increase in investment to subsidiary
(13,000)
Capital expenditures (100,000)
-----------
Cash flows used in investing activities (113,000)
-----------
Proceeds from exercise of common stock options
56,000
Dividends paid (1,121,000)
-----------
Cash flows provided by financing activities (1,065,000)
-----------
Net increase in cash 117,000
Cash, beginning of period --
-----------
Cash, end of period
$ 117,000
===========
74
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- ------------------------------------------------------------------------
Not Applicable.
As previously reported by the Company, the Board of Directors of the Company, on
September 27, 2002, approved the recommendation of the Audit Committee of the
Board of Directors to change the Company's independent auditors. The firm of
Grant Thornton LLP served the Company as independent auditors for the 2001
fiscal year. On September 27, 2002, the Company notified Grant Thornton LLP of
their dismissal and termination as independent auditors for the Company,
effective September 30, 2002. Also as previously reported, the Company engaged
KPMG LLP as the Company's independent auditors for the 2002 fiscal year,
effective as of September 30, 2002.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------
The information required by Item 10 of Form 10-K is incorporated by reference to
the information contained in the Company's Proxy Statement for the 2003 Annual
Meeting of Shareholders which will be filed pursuant to Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------
The information required by Item 11 of Form 10-K is incorporated by reference to
the information contained in the Company's Proxy Statement for the 2003 Annual
Meeting of Shareholders which will be filed pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
The information required by Item 12 of Form 10-K is incorporated by reference to
the information contained in the Company's Proxy Statement for the 2003 Annual
Meeting of Shareholders which will be filed pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
The information required by Item 13 of Form 10-K is incorporated by reference to
the information contained in the Company's Proxy Statement for the 2003 Annual
Meeting of Shareholders which will be filed pursuant to Regulation 14A.
75
ITEM 14. CONTROLS AND PROCEDURES
- --------------------------------
Evaluation of Disclosure Controls and Internal Controls. Within the 90
days prior to the date of this Annual Report on Form 10-K, the Company evaluated
the effectiveness of the design and operation of its "disclosure controls and
procedures" (the "Disclosure Controls"), and its "internal controls and
procedures for financial reporting" (the "Internal Controls"). This evaluation
(the "Controls Evaluation") was done under the supervision and with the
participation of management, including the Chief Executive Officer (the "CEO")
and the Chief Financial Officer (the "CFO"). In this Item 14 are presented the
conclusions of the CEO and the CFO about the effectiveness of the Disclosure
Controls and the Internal Controls, based on and as of the date of the Controls
Evaluation.
CEO and CFO Certifications. Appearing immediately following the
signatures section of this Annual Report are two separate forms of
"Certifications" of the CEO and the CFO. The first form of certification is
required in accord with Section 302 of the Sarbanes-Oxley Act of 2002 (the
"Section 302 Certification"). The information set forth in this Item 14 concerns
the Controls Evaluation referred to in the Section 302 Certifications, and such
information should be read in conjunction with the Section 302 Certifications
for a more complete understanding of the topics presented.
Disclosure Controls and Internal Controls. Disclosure Controls are
procedures that are designed with the objective of ensuring that information
required to be disclosed in reports filed under the Securities Exchange Act of
1934 (the "Exchange Act"), such as this Annual Report, is recorded, processed,
summarized and reported within the time periods specified in the Commission's
rules and forms. Disclosure Controls are also designed with the objective of
ensuring that such information is accumulated and communicated to management,
including the CEO and the CFO, as appropriate to allow timely decisions
regarding required disclosure. Internal Controls are procedures which are
designed with the objective of providing reasonable assurance that (1)
transactions are properly authorized; (2) assets are safeguarded against
unauthorized or improper use; and (3) transactions are properly recorded and
reported, all to permit the preparation of the Company's financial statements in
conformity with generally accepted accounting principles.
Limitations on the Effectiveness of Controls. The Company's management
(including the CEO and the CFO) does not expect that Disclosure Controls or
Internal Controls will prevent all error and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
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. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance 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.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of any system of controls also is based in part upon certain
76
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; over time, control may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
Scope of the Controls Evaluation. The CEO and CFO evaluation of
Disclosure Controls and Internal Controls included a review of the controls'
objectives and design, the controls' implementation by the Company and the
effect of the controls on the information generated for use in this Annual
Report. In the course of the Controls Evaluation, management sought to identify
data errors, controls problems or acts of fraud and to confirm that appropriate
corrective action, including process improvements, were being undertaken.
Internal Controls are also evaluated on an ongoing basis as part of the
internal audits and reviews performed by outside consultants and by other
personnel in the Company. The overall goals of these various evaluation
activities are to monitor Disclosure Controls and Internal Controls and to make
modifications as necessary. It is expected that Disclosure Controls and Internal
Controls will be maintained as dynamic systems that change (including with
improvements and corrections) as conditions warrant.
Among other matters, management has sought in its evaluation to
determine whether there were any "significant deficiencies" or "material
weaknesses" in the Company's Internal Controls, or whether the Company had
identified any acts of fraud involving personnel who have a significant role in
the company's Internal Controls. This information is important both for the
Controls Evaluation generally and for purposes of the Section 302
Certifications. The term "significant deficiencies" generally means "reportable
conditions"; these are control issues that could have a significant adverse
effect on the ability to record, process, summarize and report financial data in
the financial statements. The term "material weakness" generally means a
particularly serious reportable condition where the internal control does not
reduce to a relatively low level the risk that misstatements caused by error or
fraud may occur in amounts that would be material in relation to the financial
statements and not be detected within a timely period by employees in the normal
course of performing their assigned functions. Management did not identify any
"significant deficiencies" or "material weakness." Management also sought to
deal with other controls matters in the Controls Evaluation and, in each case,
if a problem was identified, management considered whatever revision,
improvement and/or correction to make in accord with the Company's on-going
procedures.
In accord with requirements of the Commission, the CEO and the CFO have
concluded that, since the date of the Controls Evaluation to the date of this
Annual Report, there have been no significant changes in Internal Controls or in
other factors that could significantly affect Internal Controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Conclusions. Based upon the Controls Evaluation, the CEO and the CFO
have concluded that, subject to the limitations noted above, the Company's
Disclosure Controls are effective to ensure that material information relating
77
to the Company and its consolidated subsidiary is made known to management,
including the CEO and the CFO, particularly during the period when periodic
reports are being prepared, and that the Company's Internal Controls are
effective to provide reasonable assurance that our financial statements are
fairly presented in conformity with generally accepted accounting principles.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
(a)(1) Financial Statements. Listed and included in Part II, Item 8.
--------------------
(2) Financial Statement Schedules. Not applicable.
-----------------------------
(3) Exhibits.
--------
Exhibit
Number Document Description
---------- --------------------------------------------------------
**2.1 Agreement and Plan of Reorganization between the
Registrant and First National Bank of Northern
California, dated as of November 1, 2001 (included as
Annex A to the proxy statement/prospectus).
**3.1 Articles of Incorporation of FNB Bancorp.
**3.2 Bylaws of FNB Bancorp.
**4.1 Specimen of the Registrant's common stock certificate.
**10.1 Lease agreement dated April 24, 1995, as amended, for
Eureka Square Branch Office of First National Bank of
Northern California at Eureka Square Shopping Center,
Pacifica, California.
**10.2 Lease agreement dated June 8, 1999, as amended, for
Linda Mar Branch Office of First National Bank of
Northern California at Linda Mar Shopping Center,
Pacifica, California.
**10.3 Lease agreement dated August 21, 1996, as amended, for
Flower Mart Branch Office of First National Bank of
Northern California at 640 Brannon Street, Suite 102,
San Francisco, California.
**10.4 Sublease agreement dated February 10, 1997, for San
Mateo Branch Office of First National Bank of Northern
California at 491 El Camino Real, Suite B, San Mateo,
California.
**10.5 Lease Agreement dated April 13, 2000, for the Business
Banking Division of First National Bank of Northern
California at 520 South El Camino Real, Suite 430, San
Mateo, California.
**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.*
78
**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 Business Loan Agreement, dated August 15, 2001, between
FNB Bancorp, as Borrower, and Pacific Coast Bankers'
Bank, as Lender, with Promissory Note and related Loan
Documents.
**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 Note secured by Deed of Trust dated November 26, 1991,
and Modification Agreement dated September 1, 1999,
between First National Bank of Northern California, as
borrower, and Bertha Donati and Julio Donati, as
lenders, with respect to the Colma Branch Office of
First National Bank of Northern California.
**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*
21.1 The Registrant has one subsidiary, First National Bank
of Northern California.
23.1 Consent of KPMG LLP
23.2 Consent of Grant Thornton LLP
79
99.12 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
----------------------
* 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 Registration 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.
-------------------------------------------------------------------------
(b) Reports on Form 8-K. The following reports on Form 8-K were filed
by the Company during the last quarter of 2002:
Date of Report Date Filed Subject of Report
-------------- ---------- -----------------
September 27, 2002 October 4, 2002 Change in Certifying Accountant
(dismiss)
October 25, 2002 October 30, 2002 Declared Cash Dividend
November 4, 2002 November 6, 2002 Change in Certifying Accountant
(appoint)
An Annual Report for the fiscal year ended December 31, 2002, and
Notice of Annual Meeting and Proxy Statement for the Company's 2003 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.
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 28, 2003 By: /s/ THOMAS C. MCGRAW
------------------------------------
Thomas C. McGraw
Chief Executive Officer
(Principal Executive Officer)
80
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 of March 28, 2003
- ---------------------------- Directors
Michael R. Wyman
/s/ THOMAS C. MCGRAW Director, Chief Executive March 28, 2003
- ---------------------------- Officer and Secretary
Thomas C. McGraw
/s/ JAMES B. RAMSEY Senior Vice President and March 28, 2003
- ---------------------------- Chief Financial Officer
James B. Ramsey (Principal Financial Officer
and Principal Accounting Officer)
/s/ NEIL J. VANNUCCI Director March 28, 2003
- ----------------------------
Neil J. Vannucci
Director March 28, 2003
- ----------------------------
Edward J. Watson
/s/ DANIEL J. MODENA Director March 28, 2003
- ----------------------------
Daniel J. Modena
/s/ LISA ANGELOT Director March 28, 2003
- ----------------------------
Lisa Angelot
/s/ JIM D. BLACK Director and President March 28, 2003
- ----------------------------
Jim D. Black
/s/ ANTHONY J. CLIFFORD Director and Executive Vice March 28, 2003
- --------------------------- President and Chief Operating
Anthony J. Clifford Officer
81
CERTIFICATIONS
I, Thomas C. McGraw, Chief Executive Officer (Principal Executive
Officer) of the registrant, FNB Bancorp, certify that:
1. I have reviewed this annual report on Form 10-K of FNB Bancorp;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
82
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 28, 2003.
/s/ THOMAS C. MCGRAW
- ------------------------------
Thomas C. McGraw
Chief Executive Officer
(Principal Executive Officer)
83
I, James B. Ramsey, Senior Vice President and Chief Financial Officer
(Principal Financial Officer) of the registrant, FNB Bancorp, certify that:
1. I have reviewed this annual report on Form 10-K of FNB Bancorp;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
d) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
e) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
f) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
c) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
d) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
84
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 28, 2003.
/s/ JAMES B. RAMSEY
- -------------------------------------------------
James B. Ramsey
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
85
INDEX TO EXHIBITS
(FNB BANCORP Form 10-K for Year Ended December 31, 2002)
Exhibit Page
------- ----
23.1 Consent of KPMG LLP 87
23.2 Consent of Grant Thornton LLP 88
99.12 Certification pursuant to Section 906 89
of the Sarbanes-Oxley Act of 2002
86